[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
  BALANCED BUDGET ACT OF 1997: IMPACT ON COST SAVINGS AND PATIENT CARE

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                         HEALTH AND ENVIRONMENT

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 15, 1999

                               __________

                           Serial No. 106-67

                               __________

            Printed for the use of the Committee on Commerce

                    ------------------------------  



                     U.S. GOVERNMENT PRINTING OFFICE
59-990 CC                    WASHINGTON : 1999




                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Health and Environment

                  MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan                 SHERROD BROWN, Ohio
CLIFF STEARNS, Florida               HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 PETER DEUTSCH, Florida
RICHARD BURR, North Carolina         BART STUPAK, Michigan
BRIAN P. BILBRAY, California         GENE GREEN, Texas
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
CHARLIE NORWOOD, Georgia             THOMAS M. BARRETT, Wisconsin
TOM A. COBURN, Oklahoma              LOIS CAPPS, California
  Vice Chairman                      RALPH M. HALL, Texas
RICK LAZIO, New York                 EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN B. SHADEGG, Arizona             JOHN D. DINGELL, Michigan,
CHARLES W. ``CHIP'' PICKERING,         (Ex Officio)
Mississippi
ED BRYANT, Tennessee
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Corlin, Richard F., Speaker of the House of Delegates, 
      American Medical Association...............................   128
    Crippen, Dan L., Director, Congressional Budget Office.......    97
    Hash, Michael, Deputy Administrator, Health Care Financing 
      Administration.............................................    28
    Holveck, David P., CEO, Centocor, on behalf of Biotechnology 
      Industry Organization......................................   134
    Rapp, Sally, Independent Owner, Saint Francis Extended Care, 
      on behalf of American Health Care Association..............   114
    Roberts, Nancy, President and CEO, Kent County Visiting Nurse 
      Association, on behalf of Visiting Nurse Association of 
      America and National Association for Home Care.............   120
    Ross, Murray N., Executive Director, Medicare Payment 
      Advisory Commission........................................    80
    Scanlon, William J., Director, Health Financing and Public 
      Health, General Accounting Office..........................    89
    Warden, Gail L., President and CEO, Henry Ford Health System, 
      on behalf of American Hospital Association.................   149
Material submitted for the record by:
    American Academy of Family Physicians, prepared statement of.   172
    American Heart Association, prepared statement of............   174
    American Medical Group Association, letter dated September 
      14, 1999, enclosing statement for the record...............   166
    Hash, Michael, Deputy Administrator, Health Care Financing 
      Administration, letter dated November 16, 1999, enclosing 
      reponse for the record.....................................   174

                                 (iii)

  


  BALANCED BUDGET ACT OF 1997: IMPACT ON COST SAVINGS AND PATIENT CARE

                              ----------                              


                     WEDNESDAY, SEPTEMBER 15, 1999

                  House of Representatives,
                             Committee on Commerce,
                    Subcommittee on Health and Environment,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Upton, Stearns, 
Greenwood, Deal, Burr, Bilbray, Whitfield, Ganske, Norwood, 
Cubin, Shadegg, Pickering, Bryant, Bliley (ex officio), Brown, 
Pallone, Deutsch, Stupak, Green, Strickland, DeGette, Barrett, 
Capps, Hall, Towns, Eshoo, and Dingell (ex officio).
    Staff present: Tom Giles, majority counsel; Pat Morrissey, 
majority counsel; Robert Simison, legislative clerk; Bridgett 
Taylor, professional staff member; and Amy Droskowski, 
professional staff member.
    Mr. Bilirakis. Good morning. I am being accused of 
diverting the hurricane from Florida and sending it to Virginia 
and messing up Mr. Bliley's boat, the chairman's boat. So I had 
better get this hearing started.
    Well, I am pleased to convene this hearing on BBA 1997. It 
is time certainly for us to step back and review the impact of 
the BBA on providers and beneficiaries, and certainly we have 
been doing that for some time.
    Just over 2 years ago we enacted landmark changes to the 
Medicare program. Many of these changes were designed to 
provide for more beneficiary choice and to help guarantee the 
solvency of the Medicare program well into the next century.
    I am proud of that legislation and this committee's vital 
role in its creation. The BBA was enacted with bipartisan 
support and I believe it is critical that we work together in 
considering any changes to the law.
    I am pleased to report that we are achieving many of the 
objectives of the BBA. Wasteful spending is down; medical 
solvency has been extended and many seniors have increased 
access to health care services and providers. Also, the amount 
of money lost to the Medicare program through fraud and abuse 
has dropped considerably due to the new abilities of the 
Department of Health and Human Services' Inspector General and 
the Justice Department.
    However, as we all know, and the room is full, the BBA has 
also had some unfortunate unintended consequences. In some 
cases more savings were realized from providers than originally 
anticipated. In other cases, HCFA has failed to act in a manner 
consistent with beneficiaries' interests and congressional 
intent. We hope to address these problems through legislative 
action this year.
    Today we will hear from both providers and HCFA about the 
most recent problems facing the Medicare program. This 
subcommittee has already held two hearings on issues related to 
Medicare Plus Choice and I am committed to protecting seniors' 
health care options under that program.
    This hearing will focus on a multitude of other areas 
affected by the BBA. As we begin crafting legislation to 
correct some of these unintended consequences, the testimony 
from this hearing will help us make informed decisions about 
the scope of any legislation.
    I am very interested in hearing from our distinguished 
panels today and obviously am grateful to them for taking time 
away from their schedules to be here. Each witness can provide 
valuable insight into the effects of the BBA on providers and 
on beneficiaries' access to health care services. With the 
imminent implementation of a prospective payment system for 
hospital out-patient departments and home health agencies, we 
hope to hear some constructive suggestions about how these 
regulations can best be refined.
    However, I would caution that the days of runaway Medicare 
spending are over. While we work to ensure patients' access to 
necessary services we must remain vigilant guardians of public 
funds. As we draft legislation to amend BBA, we certainly will 
not be reopening every provision.
    Funds must go to those areas of demonstrated and compelling 
need. HCFA, however, must also be sensitive to the legitimate 
issues raised by many of the provider groups here today. Many 
of these concerns can, and should, be resolved 
administratively, and I would like to emphasize that. Many can 
and should be resolved administratively, and we will get into 
that later with our witnesses.
    One particular area is the plight of the cancer hospitals. 
I ask HCFA to work with this committee to revise the ambulatory 
patient classification, APC system, in a manner consistent with 
statutory intent. The proposed APC system will erode patient 
quality and access to needed services. If the current proposal 
becomes effective, many procedures will simply migrate to the 
more expensive in-patient settings, thus ultimately increasing 
costs to the Medicare program. Site of service recommendations 
by providers will be made with an eye toward reimbursement 
levels rather than focussing on patient access and convenience.
    This is just one issue that I hope we can address today. 
Obviously there are many.
    Again I would like to thank our witnesses who will testify 
and I particularly appreciate, and I want to accent this, 
appreciate HCFA's agreement to have a high-level official 
present for the duration of the hearing to better understand 
and take notes and share back with his or her HCFA personnel 
the stakeholder issues. I look forward to productive dialog and 
I recognize Mr. Brown for an opening statement.
    Mr. Brown. Thank you, Mr. Chairman.
    I am glad, Mike, you could join us today and I would like 
to welcome other distinguished witnesses to the three panels.
    Mr. Chairman, I want to commend you for arranging this 
hearing. Our subcommittee surely has a lead role in addressing 
concerns related to the Medicare provisions of BBA, and this 
hearing is timely and appropriate.
    Our focus today reflects the subcommittee's jurisdiction 
over Medicare Part B. We cannot appreciate the impact of the 
Part B changes unless they are viewed in the context of the 
entire package of cuts. Providers have surely been hit from all 
sides.
    I am sure all of my colleagues, like me, have received 
hundreds of letters and postcards, faxes and phone calls in the 
aftermath of BBA. Health care administrators and providers whom 
I have known for years and whose counsel I value very highly 
say the BBA cuts are jeopardizing their financial viability and 
compromising access to care.
    These are serious issues. Congress must address them. 
Access, quality and universality are the foundations of 
Medicare and BBA cuts have potentially placed two of those 
three at risk. I cannot emphasize strongly enough that we need 
to assess the BBA concerns now because what providers are 
telling us is that if the damage is being done now, much of it 
will be irreversible.
    I also cannot emphasize strongly enough to those of you who 
are living with the BBA changes the importance of providing 
Congress with information that can help us determine what the 
next steps actually are. We need to know specifics. We need to 
get a sense of how BBA is affecting health care on a day to day 
basis, to the greatest extent possible see analysis and data 
that target the worst trouble spots.
    This information is critically important because we cannot 
turn back the clock. One of the reasons we cannot turn back the 
clock relates to the three foundations of Medicare that I 
mentioned a moment ago: quality, access and universality. As 
the premium support campaign clearly illustrates, any changes 
we make in Medicare can be coopted for purposes that could 
ultimately undermine all three objectives.
    When we lose BBA savings we are not only accelerating 
Medicare insolvency; we're risking the consequences of making 
Medicare a more expensive program to run. What I mean by this 
is every step we take that weighs Medicare down provides fodder 
for privatization--the ``Medicare is too expensive, managed 
care plans can do it better'' rhetoric. And that is a big price 
to pay. If providers think it is an uphill battle with 
Medicare, just wait until managed care gets hold of it. If we 
are worried about access and quality now, wait until Medicare 
beneficiaries' only choice is a managed care plan.
    Mr. Chairman, I want to raise one more issue that I believe 
is inexorably linked and tied to any discussion of BBA fixes--
tax cuts. If your representative tells you that he favors or 
she favors BBA fixes and also says that she favors or he favors 
a tax cut, let's say in the $600 billion, $700 billion, $800 
billion range, they are either being disingenuous or they are 
looking at a very, very different Federal budget.
    Tax cuts anywhere near that size would not only obliterate 
any flexibility to restore BBA funding; the BBA cuts would 
pale, the BBA cuts that many providers have received, have been 
hit by, would pale in comparison to what providers would face 
in the years ahead if a large tax cut goes forward.
    This is not a threat; it is a fact. The $792 billion 
majority tax cut proposal assumes one, favorable economic 
conditions will be locked into place for a decade. Two, it 
assumes no emergency spending during those 10 years. Three, it 
would require a 10 to 12 percent reduction in every Federal 
program. Think about that. Medicare Part B comes out of general 
revenues. If there is a $790 billion tax cut, austerity, severe 
cuts would be our only option.
    We have been through this before. I think many of us in 
this room recall the original BBA envisioned cutting Medicare 
and Medicaid by $270 billion. Against the odds, we defeated 
that. But as we look at the pain caused by BBA savings so far, 
I urge you to keep in mind what we could be facing if our 
resources now and in the future, even the resources we need to 
support current Medicare spending, if our resources now and in 
the future are instead channeled into tax cuts. Beware. Thank 
you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Bliley, chairman of the full committee, for an opening 
statement.
    Chairman Bliley. Thank you, Mr. Chairman. I would ask 
unanimous consent to put my full statement in the record.
    Mr. Bilirakis. Without objection, the statement of all 
members of the panel will be made a part of the record.
    Chairman Bliley. Mr. Chairman, I thank you for having this 
hearing. I did not know that there were so many providers of 
health care in Virginia until we did the BBA but I think I have 
seen them all and the story is pretty much the same, that we 
have gone too far with these cuts, that hospitals are 
hemorrhaging, that HCFA promised that if the hospitals did due 
diligence on trying to collect bills, that they would reimburse 
them 100 percent for their losses. Now they have cut it to 50 
percent.
    The DRG, which says that if a procedure calls for a 3-day 
stay in a hospital and if the hospital is efficient and gets 
the patient out in 2 days and they go to a skilled nursing 
home, HCFA cuts back on the reimbursement. However, if the 
patient has to stay longer, they do not get any extra for that. 
The same is true for home health. The same is true for out-
patient.
    I want to thank the administration for having your staff 
here to hear all the witnesses and I would like for the 
administration to submit in writing for the record a list of 
all the concerns you hear today that seek a change in policy. 
Please let us know what you feel you have the authority to fix 
and what you feel needs congressional action. To the extent you 
can provide as extensive a rationale for your decision would be 
helpful. I look forward to reviewing your responses.
    I thank you, Mr. Chairman, and I am going to be in and out 
because there is another hearing downstairs in the 
Telecommunications Subcommittee that I need to make an 
appearance at.
    [The prepared statement of Hon. Tom Bliley follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you, Mr. Chairman.
    I am pleased that the Health and Environment Subcommittee is 
holding this hearing today. This Committee made some very important 
changes to the Medicare program two years ago, and it is important to 
monitor the impact those decisions have on our health care delivery 
system. In particular, I am most interested in knowing of any 
unintended consequences that may have an adverse affect on access to 
care.
    In the Balanced Budget Act of 1997, this Committee made some 
difficult decisions in how best to address the concern of the Nation 
that the Medicare program was facing financial ruin, and changes needed 
to be made. Some significant changes were enacted. Moving to a 
prospective payment system for hospital outpatient department services, 
skilled nursing facility services and home health services helped 
reduce federal spending by $115 billion over 5 years, and created new 
efficiencies within the Medicare program. I am proud of the BBA 97 for 
that reason.
    Now there has been much discussion about revisiting some of those 
tough policy decisions we made two years ago. As this Committee 
considers BBA 97 refinements, I hope we learn today from our witnesses 
that the Administration has done all it can within the law to foster 
the best, most efficient patient care.
    This Committee takes a dim view of regulations that exceed their 
statutory basis, or when the Administration doesn't do enough within 
its administrative authority to meet the legitimate concerns of the 
American people. That is why I hope we will continue this series of 
formal inquiries by this Committee into this important program and its 
implementation.
    I look forward to hearing from our witnesses today. In addition, I 
am hopeful that representatives from the Health Care Financing 
Administration are able to comply with the request Mr. Bilirakis made 
when he invited you to this hearing, that you will be able to stay to 
listen to all of the witnesses before us today. At previous hearings, 
we have heard concerns some witnesses have raised regarding HCFA's 
implementation of laws affecting the health care industry. I think it 
would be valuable for HCFA to stay to hear those concerns first hand.
    Again, Mr. Chairman, thank you for convening this hearing today.

    Mr. Bilirakis. Thank you, Mr. Chairman. Thanks for being 
here.
    Mr. Pallone for an opening statement.
    Mr. Pallone. I want to thank the chairman for holding this 
hearing. The Balanced Budget Act's impact on the hospitals in 
my home State of New Jersey has been severe and unfortunately 
is getting worse.
    The situation is so bad in New Jersey that hospitals are 
starting to close. Memorial Medical Center at South Amboy in my 
district recently closed its doors to new patients during the 
break. And just last Friday, St. Clair's Hospital in Dover, New 
Jersey announced its closure as an acute care facility.
    I have been working, Mr. Chairman, with the New Jersey 
Hospital Association to identify the worst of the problems 
affecting New Jersey's hospitals and I would just like to 
briefly run through them.
    The first I want to mention is the out-patient prospective 
payment system, PPS. HCFA's interpretation, which exceeds 
congressional intent, would reduce hospital out-patient 
payments by 5.7 percent nationwide. In New Jersey, however, 
this view of the BBA will cost hospitals 16.6 percent on 
average and 40 percent of New Jersey's 85 acute care hospitals 
have a negative Medicare operating margin. This is unacceptably 
low and unfair, in my opinion.
    Accordingly, while I am not opposed to an equitable PPS 
system, I am opposed to the one HCFA has proposed. An 
appropriate remedy to this problem would be either to try a 
demonstration project first or to postpone the implementation 
of the PPS system altogether until a better one can be 
developed.
    Second, Mr. Chairman, graduate medical education payments 
needs to be rebased on data more current than 1984. New Jersey 
was under a Federal waiver from 1983 to 1989 and was not 
required to file Federal Medicare cost reports. Consequently, 
the data from which the New Jersey teaching hospitals are paid 
does not adequately reflect New Jersey's teaching costs. A 
targeted rebasing plan for those States that are reimbursed 
less than 70 percent of their costs based on 1996 data would 
benefit hard-hitting teaching hospitals.
    Third, Mr. Chairman, the Medicare transfer policy is 
flawed. The expansion of the definition to include Medicare 
patients who are sent from an acute care hospital to any 
postacute setting inhibits a hospital's ability to seek patient 
treatment in an appropriate setting. The BBA moreover, allowed 
for this expanded definition to be applied to further patient 
treatments, and this is having or will have a devastating 
effect on New Jersey's hospitals.
    More than 24 percent of New Jersey's seniors seek 
additional care after a hospital stay and the cost to New 
Jersey's hospitals will be $18 million a year. The transfer 
provision penalizes efficient hospitals. The expansion of the 
transfer provision to other patients is also a problem.
    Fourth, the skilled nursing facilities, PPS, is also 
flawed. It is inadequate for individuals with complex medical 
needs. Because of the poor reimbursement rates for patients in 
skilled nursing facilities, patients are increasingly seeking 
placement in hospitals instead of in the most appropriate 
settings. This, in turn, increases the length of hospital 
stays, leaving hospitals susceptible to criticism for not 
discharging patients fast enough. And this cycle could and 
should be changed. In my view, HCFA needs to accurately 
recognize the added costs of nontherapy ancillary services for 
skilled nursing facility patients.
    And fifth and finally with regard to the hospital concerns, 
while Congress alleviated some of the financial burdens 
associated with the interim payment system for home health care 
providers, with regard to home health care now, more needs to 
be done. The 15 percent across-the-board reduction in payment 
rates that will take effect on October 1, 2000 if a PPS system 
is not implemented will crush New Jersey's home health 
providers who provide the care at rates well below the national 
average of home care spending per patient and the 15 percent 
across-the-board reduction obviously is a problem.
    Mr. Chairman, I just want to say that because New Jersey's 
hospitals cannot afford to wait, I am working on legislation 
that would correct these problems. But before closing, I wanted 
to mention two more concerns arising from the BBA.
    Earlier this year I joined my colleague from North 
Carolina, Mr. Burr, in introducing the Medicare Rehabilitation 
Benefit Improvement Act. This bipartisan effort would amend the 
$1,500 caps imposed by the BBA on physical and speech therapy 
and occupational therapy. Specifically it would provide for 
exceptions, allowing certain Medicare beneficiaries to obtain 
services beyond the $1,500 caps. These caps are denying some of 
the most vulnerable seniors, particularly stroke victims and 
those with multiple injuries or diseases in a single year, 
much-needed therapy, and exceptions need to be made.
    And last, Mr. Chairman, I wanted to mention the impact on 
Medicare Plus Choice. I know we had hearings on this and that 
is not the topic today but over the August recess I heard from 
many frightened seniors who were concerned about Medicare Plus 
Choice providers pulling out of their service areas and I have 
come to the conclusion that the cuts in payments to Medicare 
Plus Choice providers are too steep. Providers that are paid 
well do not leave the program, in my opinion, or scale back 
benefits. One legislative option I am considering would 
increase the payment floor for Medicare Plus Choice providers 
relative to the fee-for-service payments.
    I know that my colleagues, and I think rightly so--I 
listened to what Mr. Brown said in particular--we all realize 
that we cannot make every change and increase everything with 
regard to the BBA but I do think that we are starting to see 
some major problems now, particularly with regard to hospitals. 
And my response, particularly with regard to New Jersey's 
hospitals, is based on the concerns that I saw, the actual 
closings of hospitals that have occurred within the last month 
or 2.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman and I would suggest to 
the gentleman that the scope of this hearing is intended to 
include the impact on cost savings and patient care regarding 
not only how the Balanced Budget Act was crafted but also how 
it is being interpreted by HCFA. So the points that you make 
are clearly intended to be a part of this hearing.
    Mr. Greenwood for an opening statement.
    Mr. Greenwood. Thank you, Mr. Chairman. I will be brief.
    This is a very, very important hearing and I thank the 
chairman for holding it. Whatever metaphors we use to describe 
the unintended consequences of the Balanced Budget Act of 1997, 
throwing the wheat out with the chaff or the baby out with the 
bathwater, cutting bone when we were trying to cut fat, the 
fact of the matter is that the corrections were too severe.
    When you are in this business any amount of time, I think 
you can judge sincerity and when I meet with my hospital 
representatives, my home health care agencies, when I meet with 
my skilled nursing facilities, I can sense the sincerity of 
their dilemma. It is real.
    But it is also important that we correct our course here 
and that we not back-track. The worst that we could do is be 
sitting around in 2001 having a hearing about how we 
overreacted in 1999 to the way that we overreacted in 1997, and 
keep the yo-yo going up and down. So we need to find the right 
course here and I am confident that with these hearings we will 
begin that process.
    I yield back, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman, for holding this very 
important hearing and good morning to you, to all my colleagues 
and to the distinguished individuals that are here today to 
offer their testimony for us.
    Like so many of my colleagues, I too have heard the 
complaints--I think that they are legitimate; I think that they 
are real--from my health care providers in my wonderful 
congressional district and they are all about what we did in 
the Balanced Budget Act of 1997.
    Hospitals, home health agencies and nursing homes across 
our country say they cannot live within the budget cuts we 
enacted just 2 short years ago.
    A recent Lewin Group study found that payments to health 
care providers are already $40 billion lower than we 
anticipated when we passed the BBA. The study conducted by the 
American Hospital Association warns that the BBA cuts could 
leave seven out of 10 hospitals to operate with negative 
Medicare margins within 3 years.
    Before coming to the House, I served as the chair of a 
county hospital board of directors for almost 10 years. I was 
very, very involved in the day-to-day operations, in the 
overall health care for 650,000 people in San Mateo County, 
California. So I know that a hospital cannot continue to offer 
services on a negative margin.
    So something obviously has to give. And what I fear is that 
the thing that is actually giving is patient care. There are 
the providers but the real face to all of this are the people 
that receive the care. Without relief, hospitals, home health 
agencies and nursing homes are faced with two options. They 
either cut back services or withdraw from the Medicare program 
altogether.
    And it is already happening in many quarters across the 
country. In the first year following enactment of the BBA, 
nearly 25 percent of home health agencies in our country closed 
their doors. The result: over 500,000 fewer seniors received 
home health services in 1998 than in 1996. I think for a great 
Nation obviously we can do much better than this.
    The $1,500 annual cap on physical and speech therapy is 
forcing some beneficiaries recuperating from strokes, suffering 
from Parkinson's disease and multiple sclerosis to prematurely 
end needed therapy.
    So it is my sincere hope, Mr. Chairman, that this hearing 
is just the first step in a very real serious examination of 
not only the issues that each one of us is outlining as we make 
our opening statement but that out of this will come an 
insurance policy, so to speak, to those that participate in 
these programs, that need to participate in these programs, 
that they will continue to have access to solid, good quality 
health care in the greatest country on the face of this earth.
    I understand that the leadership not only of this committee 
but of Ways and Means, and I think that you touched on this in 
your opening statement, Mr. Chairman, are working on a BBA fix 
bill. I look forward to that. I will roll my sleeves up and 
work with you.
    I just want to add a footnote to this. I know that our 
ranking member talked about the tax cuts. I think that it is 
very important for Members of Congress to have credibility 
obviously with the American people. From the earliest days of 
this nation, Congress, of course, by poets and writers has 
always been the brunt end of jokes. But we have an opportunity 
here. We know what the truth is, what is going on, because we 
go to our districts every week. The chairman of the Commerce 
Committee stated that he never realized that there were so many 
providers in his State and he has met with every single one of 
them.
    So we have our finger on the pulse of what is going on. We 
know this. We are going to hear it in a much clearer way and 
hear from professionals today.
    It is very important for the Congress and the majority 
party, who are in charge of governing here, that we tell the 
truth about the caps. No. 1, caps have worked. That is why we 
continue to accrue the benefits in terms of our Nation's 
budget.
    But we also have to tell the truth about the caps that were 
set and maybe were not set right a few years ago. We should 
have the courage of our convictions to reset those caps, and we 
can do this. We can still be fiscally responsible and be 
responsible to the people of our Nation in the area of health 
care that they need the most.
    This is not something that you can say, ``Take it or leave 
it.'' Ask a Member of Congress if they are willing to take it 
or leave it in terms of their own health care or our children's 
or our spouse's or our parents'. We would say no to that. The 
same thing with the family of the American people.
    So thank you for holding this hearing. I look forward to 
not only the testimony but the outcomes that I am very sure 
that we can not only grapple with but on a very fair and honest 
basis, do something about it. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentlelady.
    Dr. Ganske for an opening statement.
    Mr. Ganske. Thank you, Mr. Chairman. I appreciate your 
having the hearing and I am sure that you are concerned about 
what is going on with Hurricane Floyd and have important things 
on your mind, but this is important, too.
    I have rural hospitals in my district that are on schedule 
to lose $1 to $2 million in Medicare reimbursement over the 
next 3 or 4 years. These are hospitals in small towns of 3,000 
to 5,000 that are situated at some considerable distance from 
major metropolitan areas. If you do not have hospitals in those 
towns, you will not have physicians practicing in those towns 
and it is a matter of economic survival to those communities. 
It would be equivalent to losing your school.
    So we are not talking just about reductions in the rate of 
growth. We are talking about actual cuts. For instance, the 
remuneration for a cataract operation in those hospitals 
currently is about $1,300. I think they are scheduled to go 
down to $980, as sort of an average.
    The University of Iowa, a teaching hospital, is scheduled 
to lose $65 million under BBA. It is clear in my mind that we 
need to make an adjustment for rural hospitals and for the 
teaching hospitals from BBA.
    Just to go back historically, I remember in 1995 the Budget 
Committee came out with a proposal to cut Medicare by $285 
billion. Mr. Chairman, can you imagine what we would be dealing 
with today had that become law? And I remember sitting down 
with the Budget chairman, with the Speaker of the House and 
many others and saying, ``If you do this, you are going to be 
significantly hurting patient care,'' and I just could not get 
anywhere.
    So finally, as you well remember, Mr. Chairman, in a 
hearing of this subcommittee in 1995 I became the first 
Republican to speak out against that budget as it related to 
Medicare and if looks could kill, I would be dead today. But 
fortunately, we were able to reduce that to $115 billion and I 
voted for that bill, but on the proviso to my leadership that 
we would look at the results of that bill and if necessary, we 
would come back and do an adjustment.
    For 6 months I have been trying to get our leadership in 
the House to deal with this issue and it does fit into the 
issue of our total overall budget, whether we are talking about 
tax cuts or reducing the debt or finishing up our 
appropriations bills.
    And so I am very glad that we are having this hearing. I 
can tell you that my State of Iowa, the hospitals and the 
providers are 24th in the country in terms of their overhead. 
They are 48th in the country in terms of their reimbursement. 
And if you add BBA to that with consequences that are growing 
way beyond what we envisioned when we passed the bill, then it 
is a prescription for some real trouble with patient care that 
we are going to hear about today.
    So I believe that this Congress needs to get a move on on 
this issue and I look forward to the testimony. Thank you, Mr. 
Chairman.
    Mr. Bilirakis. Mr. Green for an opening statement.
    Mr. Green. Thank you, Mr. Chairman, and I would like to, 
like my colleagues, thank you for scheduling this important 
hearing and associate myself with the remarks of my colleague 
Ms. Eshoo and particularly Mr. Greenwood on the all the 
unintended consequences and the response we have.
    When Congress passed the Balanced Budget Act of 1997, the 
Medicare spending was firing out of control. Something needed 
to be done to slow the growth and stabilize the Medicare 
program until a long-term solution could be found. However, the 
state of Medicare, along with the rest of the Federal budget, 
has improved much quicker than any of us anticipated. The fact 
is the Medicare spending rate has been significantly lower than 
anticipated and while this is good for the long-term stability, 
I am concerned about the negative impact it is having on the 
beneficiaries.
    Almost since the day it passed, providers have been warning 
us about the effects the cuts will have. And while much of the 
BBA is yet to be implemented, we already are seeing some of the 
worst case scenarios come true.
    Home health care agencies around the country are closing, 
leaving hundreds of counties without any provider. And this 
week Vencor, which operates nursing homes and hospitals all 
over the country, including in Pasadena, Texas in my district, 
filed for bankruptcy. And this may be just the beginning. As 
the PPS for skilled nursing facilities is fully implemented, 
there is a widespread concern that the sickest and the most 
frail beneficiaries will be unable to receive all the care they 
need once they reach their therapy caps.
    And finally I would like to address the potential negative 
impact the hospital out-patient prospective payment system 
could have, particularly on patients with cancer. Under the 
proposed rule, HCFA proposes to bundle the cost of all cancer 
drugs into a small number of ambulatory payment categories, 
APCs, and pay hospitals only the average cost of these 
services. The main problem with this proposal is that it fails 
to recognize the complexities of cancer treatments and the wide 
range of individual needs of each patient with cancer.
    As a result, the payment system could threaten the quality 
and availability of cancer treatment for Medicare 
beneficiaries. In fact, under HCFA's proposed plan, the lowest 
reimbursement rate for some cancer treatments would be under 
$60, which is expected to include supportive care. Moreover 
under the proposal, new drugs, which are defined as anything 
after 1996, would be reimbursed at the lowest rate. This policy 
would create an overall reduction in the quality of patient 
care, since hospitals would be pressured to provide the least 
expensive rather than the most effective treatment.
    Moreover, research and development for new drug therapies 
may be diminished and delayed, ultimately denying the patients 
of today in those future generations access to more effective 
treatments. How can HCFA expect hospitals to prescribe the 
newest and in some cases the most effective drugs, many of 
which cost hundreds if not thousands of dollars, if they are 
reimbursed less than $60?
    I have introduced H.R. 1090, the Medicare Full Access to 
Cancer Treatment Act. This bill already has 55 bipartisan 
cosponsors and it carves out cancer treatment from the out-
patient PPS. This simple yet sensible action would fully 
protect Medicare beneficiaries' continued access to the best 
and most effective cancer care.
    I know HCFA has received numerous comments on this issue 
and I hope their final rulemakes our legislation unnecessary. 
However, if their proposal is implemented as originally 
proposed, the recent advances in cancer treatment and the 
billions of taxpayer dollars dedicated to finding cures for 
cancer will be wasted.
    Again Mr. Chairman, I thank you for scheduling this hearing 
and look forward to discussing these issues with our panels.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Bryant?
    Mr. Bryant. Thank you, Mr. Chairman.
    I, too, as every Member of Congress, not just on this 
subcommittee, heard during our August recess complaints from 
hospitals and home health care agencies and nursing homes and 
I, too, think they are legitimate.
    I thank the chairman for convening this hearing. I thank 
the numerous very competent and qualified people we have here 
to testify today. And in the interest of somewhat speeding this 
along, I will yield back my time. Thank you.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Stupak for an opening statement.
    Mr. Stupak. Yes, Mr. Chairman, and thank you for holding 
this hearing. I, like many of my colleagues, have heard from 
health care providers about the problems that the Balanced 
Budget Act of 1997 has been causing them.
    I am especially concerned about the effects of the BBA on 
rural areas. I know my friend Dr. Ganske pointed out some of 
these things. I think even the administration recognizes this 
fact. If I can quote Dr. Robert Marinson. He's the director of 
the Center for Health Plans and Providers of HCFA.
    He testified earlier this year and he said, and I quote, 
``About one in four Medicare beneficiaries live in rural 
America and rural hospitals serve a critical role in areas 
where the next nearest hospital may be hours away. Yet rural 
hospitals face special challenges. They have a higher per unit 
cost, difficulty maintaining enough patients to break even, and 
difficulty recruiting physicians. Medicare has made exceptions 
and special arrangements to address the unique needs of rural 
areas and strengthen these vital facilities. Even before the 
BBA, Medicare provided special payment support to more than 
half of all rural hospitals.'' That is the end of his quote.
    The special challenges and concerns are why the BBA has had 
a disproportionate impact on rural areas. The administration 
understands the concerns of rural areas and has proposed a 
number of steps to begin to remedy these conditions.
    As our chairman Mr. Bliley pointed out, he wanted to know 
some things that could be done. I would ask that he and all of 
us take a look at the President's Medicare plan, which adjusts 
the wage index in rural areas, the new out-patient PPS system 
to increase payments to low-volume rural hospitals, the 
transition to PPS to allow for a budget-neutral impact, the 
timeframe for implementing the volume control mechanisms on the 
system that were called for in the BBA, which also will give 
hospitals extra time and money to adjust, and finally, increase 
the rates for in-patient rural hospitals to larger than they 
would receive under a straight-line extension of the BBA from 
203 to 209.
    I appreciate the President's proposals and I hope we would 
all look at them and his desire, the President's desire, to 
improve rural health. However, I believe that we do need to go 
further. I would urge HCFA to listen to the rural providers in 
my district and all around the country about their financial 
condition. Unlike areas where the country where a number of 
providers compete to provide health care services, in my 
district there is only one hospital servicing one or more 
counties. There is a limited number of nursing homes and home 
health agencies. If any one of these facilities failed 
financially, residents may be forced to drive hundreds of miles 
to the nearest surviving health care facility.
    I know many of my providers, and I believe them when they 
tell me that these cuts, especially to the out-patient 
department, are injuring and damaging their financial bottom 
line.
    Mr. Chairman, it is crucial for Congress to enact these 
issues. I support the President's plan to increase funding for 
rural hospitals. I think it can be improved and I urge my 
colleagues to sit down and start discussing these issues. We 
can and we must ensure our constituents have access to 
affordable health care.
    Mr. Chairman, thank you again for holding this hearing. I 
look forward to working with you. I will be in and out all day 
as we have an amendment or two on the floor. Thank you, Mr. 
Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Burr for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman. Welcome, Mike.
    Mr. Chairman, it is evident as I look out at this audience, 
I see something significantly different than I have seen at 
health care hearings before. There is a fear in everybody's 
eyes. It is the same fear that I have seen at hospitals and 
doctors' office but more importantly, it is the same fear and 
question mark that exists in the public across the country.
    And I think the real challenge and the real answer that we 
need to find out today is not the short-term and the long-term 
solutions to these problems but it is a question of can 
Congress and HCFA work together to, in fact, identify the 
problems and come up with real solutions that address them for 
the short-term benefit and for the long-term benefit?
    Short term, we have some financial crises that have to be 
addressed. They will be addressed hopefully through legislation 
that we, in a cooperative way, try to address before the end of 
this calendar year. And it will enable providers to deliver 
care that we would consider to be basic care in many cases.
    But I think that there is a long-term crisis that many of 
us do not have on our chart yet. That long-term crisis is the 
way that financial markets look at the health care industry 
today, look at providers all across this country and the fear 
that they have to make an investment. Somebody, I think Mr. 
Green, alluded to Vencor's most recent problems. Vencor is not 
the first and they will not be the last to experience the 
shortage of capital needs to meet current debt but in their 
particular case, they can no longer think about future needs.
    Mr. Chairman, we have to be as concerned with today's 
crisis as we are with tomorrow's needs. And I think for that 
reason I am hopeful that this will be the start of a process 
that brings not only the short-term benefits that are needed 
within this industry but also some sense of confidence that 
long-term, this will be predictable. And I think that we both 
share blame, HCFA and Congress, about the unpredictability of, 
in fact, where we are.
    Mr. Chairman, this is an opportunity to get the policy 
right if, and I say that in a big way, if we can keep politics 
out of this issue. I am confident with the efforts that I have 
seen from HCFA, with the work that I have seen from my friends 
on the other side of the aisle but, more importantly, the 
interests of the American people, that we will keep politics 
out of it and we will, in fact, find the right balance.
    Mr. Chairman, every member on this committee probably has 
one special interest that they have been counseled aggressively 
over the August break, whether it is a hospital or a long-term 
care facility, whether it is a specific service, and they all 
have merit. There is no question.
    I am hopeful that this committee and HCFA will understand 
that we cannot respond to every need tomorrow, but our job is 
like it was 2 years ago when we started on this, to try to find 
the right balance. I have always suggested, since I have been 
in Congress, never to judge Members of Congress on what we did 
but to judge us on our ability to identify our mistakes and how 
quickly we go and fix them.
    We work within the confines of a lot of different 
constraints. I am confident that we can design a better 
delivery system, one that fairly reimburses, one that delivers 
the same quality of care that we are all after. But I would 
challenge my friends on this committee that it will demand a 
tremendous amount of work in the next several months to start 
that process and to hold the type of control that we need to 
make sure that we do not end up with the same product that we 
started with several years ago.
    I thank the chairman and I yield back.
    Mr. Bilirakis. I thank the gentleman. Well said.
    Ms. Capps?
    Ms. Capps. Thank you, Mr. Chairman, for holding this very 
important hearing.
    The Balanced Budget Act of 1997 enacted some far-reaching 
changes in the way Medicare pays health care providers. These 
changes were intended to both modernize Medicare and save some 
$115 billion over 5 years.
    Today there is growing debate about whether the savings are 
actually much larger than Congress had anticipated and how 
those changes could be affecting services. The provider groups 
say that they are larger than expected and that delivery of 
care could be compromised. MedPAC, GAO and HCFA seem to be 
saying it is too early to tell but that we should be watchful.
    Like so many members, I have been hearing some health care 
providers in my district regarding these cuts in the BBA and 
how they are affecting and may affect in the future the ability 
of providers to provide quality health care to our seniors and 
to others in our communities and I take these concerns very 
seriously.
    There are a number of issues which I hope the subcommittee 
can explore this morning and I really stress the timeliness of 
this hearing and thank the leadership for providing it. For 
example, according to MedPAC, the cuts to hospitals are 
expected to have the most dramatic effect in small, rural 
hospitals and cancer hospitals and my colleagues Green and 
Stupak have addressed these issues and I underscore their 
comments in this area. I want to hear from HCFA what steps it 
plans on taking to ensure the viability of these critically 
important institutions.
    I also would like to explore the effects of the $1,500 
therapy cap. Are beneficiaries losing access to critical care 
under the cap? And if so, is this what the intention of the cap 
was?
    And that is what this hearing is really all about. How are 
these changes affecting the delivery of care to seniors and 
others in our communities? I am heartened by the fact that many 
we have checked with seem to be saying that quality of care has 
not been affected yet, but I am also very worried because I 
know, as you all know, that the most dramatic changes are still 
to come.
    I am also concerned that the numbers we are seeing are not 
reflecting the whole story, that if we have shorter numbers of 
days in hospitals, if we have fewer home health care visits, 
does this really mean that we have healthier citizens? I do not 
think it necessarily does translate that way and that is why I 
am concerned about the numbers.
    And that is why I am particularly looking forward to our 
witnesses today on these and other critical issues and I 
particularly look forward to panel three when we can hear from 
people who are out in the field. I want to pay special 
attention to what, for example, Miss Nancy Roberts will be 
saying from Kent County Visiting Nurses Association in Rhode 
Island. Earlier in my career I was a visiting nurse in Hamden, 
Connecticut and I trust that these providers have their pulse 
on real health care in our country today. And I want to make 
sure that when we talk about marketplace numbers and how this 
translates that we do not forget that it is patients and people 
receiving care that are the bottom line of what our business of 
health care is all about. And I yield back the balance of my 
time.
    Mr. Bilirakis. I thank the gentlelady.
    Dr. Norwood, an opening statement?
    Mr. Norwood. Thank you very much, Mr. Chairman. I will 
submit for the record but let me just briefly say that we have 
for a long time tried to understand how to pay for a 
government-run health care system, which basically Medicare is, 
and the American people clearly want all of the health care we 
possibly can afford them and Congress seems to want to give 
them all of the health care that they want. It is a continuing 
and ongoing problem, however, as to how to pay for that.
    Now some of us who have a bias, such as myself, want to put 
money into health care. However, I do not want to do so to the 
extent that my grandchildren pay for the benefits that patients 
today receive. And part of our problem is in prioritizing our 
expenditures is that if you want to put more into the Medicare 
system, you have to find somewhere else to take the money out 
because there is a limitation on the number of funds.
    Now I have heard 2 or 3 members here act so surprised that 
providers are dropping out of Medicare Plus. Well, of course 
they are dropping out of Medicare Plus. It is a very simple 
principle. When you will not pay people the cost of doing 
business, they go out of business. They cannot continue in a 
program where they continually take a loss, particularly in 
this day of managed care where there is not that old cost-
shifting going on because that is not possible anymore.
    We look at our rural hospitals and we wonder what is 
happening. Well, of course they are going to close. Medicare 
and Medicaid are the only thing most of them can depend on 
because they are never one of the discounted hospitals in 
managed care. They never do anymore have patients coming into 
their hospitals that have good insurance plans, indemnity plans 
or fee-for-service. They are dependent on Medicare and 
Medicaid.
    Well, if you are not going to pay them the cost or less 
than cost, which is exactly what we are doing, they are going 
to close.
    Our teaching hospitals are in a great deal of trouble in 
terms of the lack of dollars that are going to the teaching 
hospitals and you are going to find that we are going to suffer 
greatly in the 21st century if we allow our teaching hospitals 
to continue to go down because we cannot cut funds somewhere 
else to put it into this vital issue of health care.
    And I would say to you, you wonder why home care agencies 
are closing in your district? Of course they are closing. We 
will not pay them the cost of being in business and they cannot 
cost-shift anymore.
    So Mr. Chairman, the question here is in my mind, do we 
need to put more money into this? Yes, we do. Do we need to 
offset that spending somewhere else so we do not charge this 
ticket to our grandchildren? Yes, we do. And it would be very 
helpful if, on a bipartisan basis, we would be willing to 
prioritize our spending and recognize as a Congress that we 
have to take this out of other places if we think health care 
is a vital interest to the people of this country, which I am 
fairly sure, listening to the members here today, they were 
told while they were home on August break that yes, it is a 
vital interest and no, we do not want our home health closing; 
no, we do not want our rural hospital closing.
    We are disappointed that providers are dropping out of 
Medicare Plus and the answer is not real difficult. We have 
overdone it. We need to put more money back into it. And, by 
the same token, we do not need to go back to years gone by and 
keep adding to the $5.5 trillion debt to push this.
    So I hope the members on the other side of the aisle, and 
they seem to say so, recognize the importance of this and the 
importance of determining where else in this large Federal 
budget we must slow down spending there in order to get the 
spending level back to the right level in health care.
    With that, Mr. Chairman, I will yield back and I thank you 
very much for this hearing.
    Mr. Bilirakis. I thank Dr. Norwood.
    Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. Mr. Chairman, I think 
this hearing today is really timely and I appreciate you 
holding it. I think that the Balanced Budget Act needs to be 
examined to see if it is achieving its intended results in a 
lot of areas and I have a couple of specific examples of areas 
that I want to talk about today.
    I think that the substantive policy changes implemented 
have resulted in significant savings and in many ways have 
streamlined both Medicare and Medicaid in positive ways. For 
example, the Medicare Trust Fund has been strengthened and also 
as co-chair of the Congressional Diabetes Caucus, I point to 
the positive step of the implementation of critical 
preventative health benefits like coverage for blood glucose 
test strips for diabetes.
    However, the frugality that we have achieved only helps 
beneficiaries if it is coupled with policies that ensure those 
beneficiaries to have access to the necessary care in the 
appropriate setting. And I am hoping today's hearing will shed 
some light on the reforms that have helped beneficiary care and 
which ones are hurting the very people that they are intended 
to help.
    And let me give you an example. In an effort to tighten 
eligibility rules for home health care, I am concerned that 
HCFA has unintentionally prevented beneficiaries from accessing 
the services they need. I have a constituent, for example, who 
has gone blind from diabetes. Well, we will give her the blood 
glucose test strips but the problem is since she is blind, she 
cannot measure out the correct dosage of her insulin to prevent 
further onset of the complications of the disease.
    Now she used to have her home health visits covered by 
Medicare when someone came once a week to fill the insulin 
syringes that she would need for the whole week. But because 
that is the only service she needs--she does not need blood 
drawn; she does not need tests done--Medicare no longer covers 
these visits.
    And so we are really not doing much by denying this benefit 
to help this constituent improve her health and keep it solid 
as we go along.
    The other issue, which several other members have alluded 
to, is that the Medicare and Medicaid savings for hospital 
costs have been greater than anyone predicted, which has 
particularly impacted our Nation's critical safety nets, like 
the graduate medical education program and disproportionate 
share hospitals.
    As a result of these dramatic cuts in payments, hospitals 
nationwide are reeling and hospitals in my district are the 
same as in Congresswoman Capps' and many other districts. 
University Hospital, Colorado's public teaching hospital, has 
seen a $6 million loss of revenue this year alone and these 
losses are only predicted to grow.
    Coincidentally, they were in talking to me about this 
yesterday, Mr. Chairman, and they provided me with this chart 
which dramatically shows how these losses are going to grow 
through the year 2002.
    Mr. Chairman, I would ask unanimous consent to include this 
chart for the record, if possible.
    Mr. Bilirakis. By all means, without objection.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T1694.001
    
    [GRAPHIC] [TIFF OMITTED] T1694.002
    
    [GRAPHIC] [TIFF OMITTED] T1694.003
    
    Ms. DeGette. Now University Hospital is putting a plan in 
place to reduce the number of resident positions, which will 
impact the future number of doctors we have in Colorado just as 
our population is growing. And then, as a result of that 
cutback, the hospital is being forced to cap indigent care, 
which is a step in the wrong direction at a time when the 
uninsured numbers are growing at an unprecedented rate.
    And so I think these are some of the results of the 
balanced budget agreement that have to be reversed.
    Mr. Chairman, because of my deep concern about these issues 
and because of the need to protect the Nation's safety nets, I 
am going to be introducing legislation called the Medicaid 
Safety Net Preservation Act of 1999. This legislation 
recognizes that if we make further cuts to the safety 
hospitals, we are going to have terrible problems.
    In the State of Florida, safety net hospitals like Jackson 
Memorial in Miami and Tampa General Hospital in Tampa are 
facing an 18.8 percent reduction in Medicaid DSH payments 
between fiscal year 2000 and 2002.
    The bill I am introducing would freeze Medicaid DSH 
payments at the fiscal year 2000 level through 2002 to ensure 
that the hospitals who serve our most vulnerable populations 
may continue to do so. This is only a stop-gap measure and I am 
hoping that we can look more broadly, Mr. Chairman, on 
equalizing these disproportionate impacts as we move forward 
into the next millennium.
    Thank you and I will yield back the balance of my time.
    Mr. Bilirakis. I thank the gentlelady.
    Mr. Deal for an opening statement.
    Mr. Deal. Thank you, Mr. Chairman.
    I have reviewed the statements here today, I have listened 
to the opening statements, and there appears to be one missing 
ingredient that has not been addressed and I hope that the 
panelists will do so. That is the motivation for the Balanced 
Budget Act changes that we made.
    My recollection is that the reason that we did that was 
that for 30 years since 1965, when Medicare when into place, 
the system of FICA withholdings into the trust fund had been 
sufficient and, in fact, had accumulated a surplus. And then, 
at the end of that 30-year period, suddenly the process began 
to reverse itself to the point that in 1997, my recollection is 
that the Medicare Trust Fund was expending something in the 
neighborhood of $40 million more every day than it was taking 
in from the FICA tax, which was its sole funding source for 
Medicare Part A, and that that was the motivation for these 
changes.
    Therefore, if that is the motivation, I think we ought to 
ask the question: What will the proposals that we are going to 
hear today do in terms of impacting the financial solvency of 
the Medicare Trust Fund? We were told in 1997 it had a life 
expectancy of only about 4 years and without significant 
changes, maybe even shorter than that.
    So to talk about proposals to the Balanced Budget Act 
changes without understanding the reason for those changes to 
begin with and without answering the question of what will 
these new proposals do in terms of the solvency of the Medicare 
Trust Fund, I think is being disingenuous. It is not addressing 
the real concern here.
    Now if we are going to continue to move in the direction of 
moving proposals out of Medicare Part A into Part B, as we did 
with home health care, then we run into the continued criticism 
that we are moving it from a dedicated revenue source as its 
sole funding source into more of a welfare system, and 
everybody says we do no want to move in that direction.
    So if that is not where we want to go, then what are we 
going to do in terms of the financial solvency of Medicare, the 
trust fund and where is that trust fund right now in terms of 
is it still continuing to lose, which I think it is, continuing 
to drain the trust fund even now, and if we make changes to the 
Balanced Budget Act provisions, will it accelerate that 
continued draining of the trust fund, and what then will be the 
life expectancy of that trust fund with these proposals? I 
think that is a challenge that we all have to face and if we do 
not understand that as the premise that underlies what was done 
in 1997, then I think we have missed the point.
    Mr. Chairman, I hate to make an opening statement that 
seems somewhat confrontational and then have to leave but I do 
have a mark-up in another committee, but I will be back. Thank 
you.
    Mr. Bilirakis. Thank you, Mr. Deal.
    Mr. Barrett for an opening statement.
    Mr. Barrett. Thank you, Mr. Chairman.
    Like many other members of the committee, during the August 
recess I met with providers in my district, virtually all of 
whom obviously were unhappy with the direction that we are 
headed and are very concerned about the impact of the Balanced 
Budget Act on them. I heard from physical therapists; I heard 
for occupational therapists, home health care providers, 
nursing home executives, hospital executives and physicians.
    Every single group that I talked to, I had to bring in sort 
of the subject du jour, which is also the subject today of 
President Clinton's action, and that is the tax bill, the $792 
billion tax cut. And as I explained to each and every one of 
those groups, they were, in fact, paying for this tax cut 
proposal because just like Willie Sutton robbed banks because 
that is where the money was, a lot of the cuts are coming in 
health care because that is where the money is.
    So for us to sit here today and say well, this is a 
problem; we have to make cuts in other areas, makes me question 
what planet I am on because I know earlier this year we as a 
Congress decided well, we do not want to make cuts in defense 
spending; we will spend more money in defense spending than we 
agreed to in the Balanced Budget Amendments. We do not want to 
make cuts in transportation; in fact, we will spend more money 
than we agreed to in the Balanced Budget Act.
    So we are going to have these magical cuts that are going 
to occur and that are going to allow us to make everybody in 
this room happy. I do not think everybody in this room is 
stupid and I think people recognize that if we are going to 
provide relief for health care providers, that means that we 
are going to have to make some basic changes here. That means 
all this talk about a tax cut is pure folly because we do not 
have a surplus right now. In fact, with the spending that we 
have done on the census, on the emergency spending bills, on 
defense, on transportation, we have basically gotten rid of the 
surplus for this year.
    So we are dealing with a situation now where we are going 
to have to decide whether we are going to pose for political 
holy pictures or whether we are going to deal with health care 
in a serious way. And it is my hope that we are going to be 
able to work together to fashion some relief for those who need 
care; for example, those who have come up against the $1,500 
cap, to make sure that people are not hamstrung when they are 
moving from a hospital to a nursing home. And I think to do 
that is going to take some honest discussion, not only by this 
panel and this committee but by all of Congress.
    So I hope we are up to that task because I think that this 
issue is far too important not just to providers--providers are 
big boys and girls and they can basically lobby for themselves 
and take care of themselves but I am concerned about that 
person who is confined in a home and has someone who comes in 
to give them home care and is not going to be able to receive 
that home care because of the actions that this Congress has 
taken over the last several years.
    I hope we have a productive hearing today and with that, I 
yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Shadegg for an opening statement.
    Mr. Shadegg. Thank you, Mr. Chairman. I want to commend you 
for holding this extremely important hearing.
    Although I think in opening statements we are quickly 
approaching the point where everything has been said but not 
everyone has said it, let me briefly comment that I too, like 
many of my colleagues, went home over the August break and met 
with various providers--hospital operators, home health care 
operators, nursing home facility operators--and heard poignant 
stories about the difficulties they are facing.
    We clearly have to look at the circumstances that BBA 1997 
has created and the numbers speak for themselves. They show 
that we have achieved a level of reduction in spending far 
beyond that which we originally anticipated. So I commend you 
for holding these hearings.
    I would like to associate myself with the remarks of Mr. 
Greenwood, who said that if, in fact, we overreacted in BBA 
1997, I hope we do not sit here 2 years from now in 2001 and 
say we then overreacted to that overreaction in 1999.
    So I think it is very important that we strike a balance. I 
think it is critically important that we ensure that the funds 
are there to provide the necessary care for those in America's 
facilities and that we ensure that those that operate them have 
the financial incentive to continue to do so, and that is an 
obligation that we owe to the American people. I think it is a 
fiduciary obligation that we owe to the American people.
    I look forward to hearing the testimony of the witnesses 
and to their educating us as to how we can best solve this 
problem and strike what would be an appropriate balance for 
providing the kind of health care that needs to be provided.
    And with that, Mr. Chairman, I yield back the balance of my 
time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Bilbray.
    Mr. Bilbray. Mr. Chairman, I was not planning on giving an 
opening statement but I just want to say, as someone who has 
had the privilege, and I think that Ms. Eshoo of California 
probably did, too, or the challenge of operating public 
facilities, nursing homes, I would just ask us all to consider 
the fact that this is not a Democrat or Republican issue.
    And I just ask my colleagues, we talk about tax reduction 
and tax fairness and the other side can turn around and say 
every time the administration goes on a trip they promise 
another $100 million for somebody. We can use this as a vehicle 
to beat and bash at each other for political advantage, but I 
think it is totally not only inappropriate; I think it is 
immoral when we talk about we care about this crisis but then 
we are going to take the time to take a shot across the aisle.
    And I would ask us not to do that. We are in this together. 
Like it or not, we are going to be judged by the American 
people together, Democrat or Republican. And I think the 
challenge here is to find answers rather than finding fault, 
and let's move forward.
    I yield back, Mr. Chairman.
    Mr. Bilirakis. Thank you. Mrs. Cubin.
    Mrs. Cubin. Thank you, Mr. Chairman, and thank you for 
holding this hearing today.
    Undoubtedly we all have heard the same information. In 
fact, obviously we have all heard the same information when we 
went home and came back with a message from our constituents 
and from our health care providers that simply it is not 
working.
    I think anyone who thought that the Balanced Budget 
Amendment would be just fine as it was, that it would not need 
some fine-tuning and would not need some adjustment was naive. 
And hopefully we will hear from you how we can make some of 
those adjustments to solve some of the problems that all of us 
are aware of.
    The Balanced Budget Amendment, as we all know, was designed 
to save money within the Medicare program by slowing the rate 
of growth in payments to hospitals and health care providers, 
physicians, and so on, and by establishing new payment 
methodologies. And while Medicare has saved money as a result 
of the BBA, it has also caused some of what I truly believe to 
be unintended consequences that are quite negative.
    I have heard from so many people in my home State about the 
financial burden that has been placed on physicians, hospitals 
and health agencies and I want you to understand something 
about my State. It is almost 100,000 square miles. It takes 
8\1/2\ to 9 hours to drive from corner to corner in my State. 
The largest city is 60,000 people. There is another city of 
50,000 and then it drops down to one city of 20,000 and then 
12,000 and then 3,000, 150.
    So when I tell you that what is happening with the 
reimbursement schedule and the reimbursement practices now will 
close the only health care facilities that there are in 
communities for hundreds of miles around, I am not 
exaggerating. So we have to do something to stop this.
    Now that brings me to another thing that I will be asking 
and hoping I can get some information on today and that is I 
want someone to justify for me the difference in the 
reimbursement. For example, a regular routine office visit in 
Wyoming paid to a physician, the reimbursement is approximately 
$33. In New York it is $64. A regular routine EKG in Wyoming, 
the reimbursement is $20; in New York, $47.
    I use New York because I did not have time to get Florida, 
Pennsylvania and other highly populated areas, also California.
    Gall bladder removal in Wyoming, $461; $601 in New York. 
Colonoscopy, $199 in Wyoming, $301 in New York.
    Now this is part of the problem that is causing Wyoming 
health care providers to leave the State, to close the 
institutions that we have.
    So in addition to dealing with the methodology, I want 
someone to explain to me why these reimbursements are so 
different, especially when you take into consideration the 
average price home in Jackson Hole, Wyoming is $657,000 and the 
commercial property is proportionately as high. Residences are 
proportionately as high.
    When students graduate from medical school they have the 
same loans that they have to pay back. The equipment costs the 
same to them, no matter where they practice. They have to pay 
employees. The costs are not that different. Please somebody 
explain to me why there is such a huge discrepancy in these 
reimbursement levels.
    Truly these effects and the effects of the BBA are having a 
disastrous effect on Wyoming.
    I am also concerned, as is Congresswoman Capps, about the 
$1,500 cap on rehabilitation services. As a patient who 
received extensive physical therapy myself and only because of 
that am I walking today, I know that $1,500 can be used up in a 
month or less.
    So I look forward to understanding why some of these things 
are being promoted and I thank the chairman for having the 
hearing today.
    [The prepared statement of Hon. Barbara Cubin follows:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming
    I would like to thank Chairman Bilirakis for holding this 
educational hearing on the implications of the Balanced Budget Act of 
1997. Anyone who thought the BBA would not need fine tuning and 
adjustment was naive. Hopefully, we will hear how to make some of those 
adjustments during our discussion today.
    I have heard from so many people all across my home state of 
Wyoming regarding the extreme financial burden placed on physicians, 
hospitals and home health agencies because of the BBA. While Medicare 
has saved money as a result of the BBA, it has also produced, what I 
truly believe to be, unintended consequences.
    Let me tell you a little about my state of Wyoming and how the 
health care system works in a rural area. It takes 8 to 9 hours to 
travel from one corner of the state to another. There are hospitals of 
minimal size that are hundreds of miles apart that have to serve a 
population of 250,000. The few doctors we have serve many Medicare 
patients without receiving adequate reimbursement, and are coming 
dangerously close to being forced to opt out of the Medicare program. 
For example, the reimbursement rate for a regular office visit in 
Wyoming is $33 but in New York it is $64; for an EKG in Wyoming it is 
$20 but in New York it is $47; for a gallbladder removal in Wyoming it 
is $461 but in New York it is $601. Can somebody please explain to me 
why that is?
    So I'm not exaggerating when I say that this has truly devastating 
effects on a rural state like Wyoming that has very different health 
care needs. We cannot afford to have health agencies closing and 
Medicare beneficiaries losing their providers because Wyoming does not 
have an abundance of these health care services.
    I'm also concerned about the $1500 annual cap on rehabilitation 
services. Patients can easily exhaust this sum on routine therapy in a 
few months, and the rest of the year these poor patients are struggling 
to make ends meet. Often times, they even have to forgo therapy because 
they can't afford it.
    I really would like to understand this reimbursement schedule, but 
I also know that many people simply do not realize that these rates and 
these cuts are very disproportionate between rural and urban 
communities.
    I look forward to hearing your comments in this regard. Thank you.

    Mr. Bilirakis. I thank the gentlelady.
    I believe that all of the opening statements finally have 
been completed.
    Mr. Brown?
    Mr. Brown. Mr. Chairman, can I ask unanimous consent to 
enter Mr. Dingell's comments in the record and any other member 
that has additional comments?
    Mr. Bilirakis. Without objection, that will be the case.
    [Additional statements submitted for the record follow:]
  Prepared Statement of Hon. Fred Upton, a Representative in Congress 
                       from the State of Michigan
    Mr. Chairman, thank you for holding today's hearing. The Balanced 
Budget Act made the most sweeping changes in the Medicare program since 
its inception. It is vital that we in Congress closely monitor those 
changes and their impact on beneficiaries' access to care and the 
quality of care they are receiving.
    In a sense, the Balanced Budget Act completed--or at least brought 
closer to completion--work Congress began back in 1983 with the 
enactment of a prospective payment system for Medicare hospital 
reimbursement. At that time, we were facing a crisis. The Medicare 
hospital trust fund was being drained dry by double-digit growth in 
spending. We had to act to save it. When we looked at the roots of the 
crisis, we realized that the way we were paying for hospital services 
was a very large part of the problem. We were paying on a per-service 
basis--the more admissions, the more services, and the longer the stay, 
the higher the reimbursement. We replaced this inherently inflationary 
system that did nothing to encourage efficiency with a prospective 
payment system. It took a lot of getting used to, on the part of 
hospitals and beneficiaries alike. It needed some adjustments, 
particularly for rural providers. And we also found out rather quickly 
that we needed to have in place a system to ensure that beneficiaries 
weren't being discharged prematurely or otherwise receiving less-than-
appropriate, high-quality care. But the system fundamentally worked. We 
were ``buying a lot smarter'' when it came to inpatient care, and the 
trust fund crisis was averted.
    In 1997, we were again facing a crisis. The trust fund was again 
racing toward empty. Home health care, skilled nursing care, and 
outpatient costs were exploding. We had to act to rein in these costs--
and to address one of the major factors fueling this explosion--again, 
cost-based reimbursement systems that rewarded over-utilization and 
outright fraud and abuse. We replaced these with prospective systems, 
which are now being phased in, and some interim provisions until the 
systems were fully operational.
    I think we did the right thing in 1997. But just as we learned in 
the 1980s as the hospital prospective payment system was implemented, 
we need to be very vigilant in ensuring that these new systems do not 
adversely affect beneficiaries' access to care and the quality of the 
care they receive. And that means being sensitive, as well, to what 
Medicare hospitals, nursing homes, home health agencies, therapists, 
and others are telling us about the impact the new systems are having 
on them. We need to be open to suggestions for refinements.
                                 ______
                                 
Prepared Statement of Hon. Ted Strickland, a Representative in Congress 
                         from the State of Ohio
    Mr. Chairman, I want to thank you for convening this hearing today 
so that we might learn more about the effects of the Balanced Budget 
Act of 1997 on patient care and access. I am sure that every Member of 
Congress has heard concerns about the BBA from constituents and health 
care providers.
    In my rural Ohio district, which is medically underserved, access 
to adequate care is a great concern. In the past year, the communities 
I represent have lost ground in their struggle to provide care, 
especially for those with little or no insurance. Home health agencies 
have closed and one of the largest communities in southern Ohio has 
lost the supervising physician who provided family practice care for 
the uninsured and underinsured. The rural health clinics are fearing 
that they will have to use the grant funds that are intended to help 
them treat the uninsured to make up for the losses in Medicaid 
reimbursements. I have visited with each of the hospital administrators 
in my district, who tell me that their hospitals are losing money at 
such an alarming rate that they will soon be forced to reduce services 
like hospice, home health care and skilled nursing care. Many of these 
hardships are a direct result of changes made in the Balanced Budget 
Act of 1997, including caps on DSH payments and the implementation of 
the inpatient and outpatient prospective payment systems.
    Clearly, the hospitals, clinics and home health agencies in my 
district are being affected by changes that are not part of the 
Medicare fee-for-service program. In addition to fee-for-service 
changes, they are adjusting for the BBA's changes to Medicare+Choice 
and Medicaid. So the emergencies in funding they face in many cases 
cannot be traced to a single change in statute. Rather it is the 
confluence of BBA changes that is forcing health care providers to 
reduce services or close their doors.
    In rural areas like southern Ohio, the loss of a single provider 
can be devastating to the community . Our duty is to work with HCFA to 
provide relief to these providers so that they can continue to care for 
our constituents in an adequate and efficient manner. This relief needs 
to be delivered quickly, before we see an even greater drop off in 
services and providers.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    I am pleased that Chairman Bilirakis has called this hearing to 
assess the overall effects of the 1997 Balanced Budget Act on the 
Medicare program and patient care. In 1997, the Republican-led Congress 
cut $115 billion from the Medicare program and made substantial changes 
in provider payment policies to do so. While all of the provisions in 
the Balanced Budget Act are not yet fully implemented, the Health Care 
Financing Administration has done a commendable job in implementing the 
more than half of the 300 or so provisions that we passed two years 
ago.
    At this juncture in implementation many of us are hearing 
complaints about certain provisions in the BBA. Some of the BBA 
policies were necessary improvements in the program to improve 
beneficiary care, and some were initiatives to reduce fraud and abuse. 
However, in some areas, the BBA may be having unintended adverse 
consequences for the Medicare program. Changes of such great magnitude 
do not come easily, without some degree of market upheaval and 
complications for those involved.
    I have heard a great many protestations from provider 
organizations, and good friends in the provider community back home, 
that the Balanced Budget Act is having unintended effects on their 
ability to continue to serve seniors and maintain a viable practice. I 
am very concerned about these reports, and I am pleased to see that 
this Committee is taking an opportunity to explore some of these 
issues. Because we must preserve the integrity of the Medicare program 
for those who depend on it, America's seniors and disabled, the 
Committee should hear from beneficiary groups on this matter in the 
future.
    This hearing is a first step in identifying potential problems that 
could have a negative impact on patient care. As a Congress, we must 
work together in a bipartisan manner to rectify any troublesome issues 
that arise.
    I welcome the testimony of today's witnesses and I look forward to 
future Committee action on this topic.

    Mr. Bilirakis. Panel one consists of Mr. Mike Hash, Deputy 
Administrator and Acting Administrator of Health Care Financing 
Administration.
    Michael, you have always been considered a member of this 
family up here as you worked on this committee for quite some 
time. You have sat there and heard all these opening 
statements. I know we are all on pins and needles just awaiting 
your responses to all of these.
    Please proceed, sir. You have 10 minutes.

 STATEMENT OF MICHAEL HASH, DEPUTY ADMINISTRATOR, HEALTH CARE 
                    FINANCING ADMINISTRATION

    Mr. Hash. Thank you, Mr. Chairman. Chairman Bilirakis, 
Congressman Brown and distinguished members of the Health and 
Environment Subcommittee, I want to thank you for inviting us 
to this very critical and important hearing and for the careful 
and thoughtful considerations that have been a part of 
everyone's opening statements.
    While I was not at home in your districts during the month 
of August, I, too, heard the same messages that you have been 
hearing because many of the folks that you have been hearing 
from have been coming to see us and importantly, sharing their 
concerns and experiences with the BBA and that is a significant 
part of the effort to evaluate all that we have tried to 
undertake.
    As you all know, the BBA includes reforms that are critical 
to strengthening and protecting the Medicare program for the 
future, including, of course, as has been noted, important new 
preventive benefits and important changes in the way in which 
we pay for services under the Medicare program.
    But with changes of the magnitude of those included in the 
BBA, some adjustments are clearly inevitable. We are concerned 
about the reports concerning the BBA changes, particularly as 
they may be related to problems of access or quality of care 
with respect to the services to which Medicare beneficiaries 
are entitled. That is why we have established a comprehensive 
plan to work with providers, beneficiaries and with the 
Congress to monitor the impact of the BBA.
    The President has acknowledged that the BBA also went too 
far and that is, in large part, the basis of his comprehensive 
Medicare reform plan that specifically has set aside a quality 
assurance fund in the amount of $7.5 billion over 10 years to 
smooth out the changes in the BBA in the remaining years that 
the BBA is effective for the purpose of ensuring that quality 
and access to Medicare services is not compromised.
    We are working with the Congress and others to identify 
appropriate and prudent legislative solutions. We have also 
taken a series, and some of you have alluded to this--Mr. 
Stupak, I believe, and others--that we have taken a series of 
administrative actions on our own initiative to help hospitals, 
home health agencies and other providers adjust to the changes 
that came along with the BBA.
    For example, we have delayed the extension of the hospital 
inpatient transfer policy beyond the 10 DRGs that were required 
in the BBA for an additional 2 years.
    Second, we are considering, in our regulatory work, 
delaying the volume control mechanism that again was included 
in the BBA with respect to the new hospital outpatient 
prospective payment system for the first few years of that 
system. We are further considering a 3-year transition to the 
new hospital outpatient payment system by making budget-neutral 
adjustments to increase payments to hospitals that otherwise 
would receive large payment reductions.
    And let me just say, parenthetically, we have looked at the 
impact data as well and we recognize that low-volume rural 
hospitals, low-volume urban hospitals, teaching hospitals and 
cancer hospitals are projected, under our proposed rule for 
hospital outpatient payments to be significantly affected.
    We are also proposing to use the same wage index that we 
now use for calculating or adjusting the inpatient PPS rates 
for the outpatient prospective payment rate.
    Finally, we are, I think, making it easier--that is our 
intention certainly--for rural hospitals, whose payments are 
now based on lower rural area average wages, to be qualified 
for reassignment to areas where they can benefit from a wage 
index in an adjacent metropolitan area and thus get higher 
reimbursements under the Medicare program.
    Finally, we also have tried to provide some assistance 
within our discretion for home health agencies. We have 
increased the terms of our extended repayment plans for home 
health agencies that have incurred overpayments. We have, in 
fact, for home health agencies delayed implementation of the 
surety bond requirement and have modified that requirement to 
be based not on 15 percent of their Medicare revenues but, 
rather, a flat $50,000 surety bond.
    And, finally, with respect to home health agencies, we 
have, with our discretion, eliminated a procedure that we refer 
to as ``sequential billing,'' which was an approach we took in 
order to be sure that we were properly allocating Part A and 
Part B expenditures for home health, given the changes the BBA 
made by shifting some of the coverage from Part A to Part B.
    But as a result of that sequential billing policy, we 
believe many home health agencies experienced cash-flow 
problems and therefore as of July 1, that sequential billing 
policy is no longer in place. And we have delayed the 
implementation of another BBA provision relating to the 
reporting of home health visits in 15-minute increments, again 
recognizing that new systems and new requirements to actually 
do this, on the part of home health agencies, need to be taken 
into account. So, we are taking a slower approach to that.
    And obviously we are continuing to look for further 
opportunities to exercise discretion within the intent and 
certainly the letter of the law in the BBA.
    And with respect to our monitoring efforts, as you all know 
and you can see from our prepared testimony, we have been 
working with the General Accounting Office and with our own 
Inspector General at HHS and with MedPAC and others to gather 
information about BBA impacts, particularly with respect to an 
issue that has been mentioned here a lot today, the impact of 
the BBA limitations on the provision of outpatient 
rehabilitation therapy services, the $1,500 cap.
    Several reports that we have assembled have indicated that 
the therapy caps have not allowed Medicare beneficiaries with 
multiple sclerosis or strokes or certain other serious 
diagnoses to get the care that they need in terms of 
rehabilitation therapy services.
    There are also issues with respect to the BBA impact on 
skilled nursing facility payment, particularly in the case of 
patients that we refer to as high-acuity patients, those 
patients who require a significant and above-average level of 
services to meet their health care needs.
    We are conducting research on how we can refine the 
prospective payment system for skilled nursing facilities in a 
way that patients who fall into the high-acuity category, that 
the payments for them will be enough to ensure that they are 
getting the kind of care their condition requires.
    Obviously we are continuing our monitoring efforts. I think 
it is fair to say that none of us is happy with the extent of 
data that we have about what is really going on currently in 
the health care provider world. Most of our data sources, in 
fact, lag significantly. So, it is difficult in the short-term 
to get a comprehensive assessment of exactly what the financial 
impacts are in the current timeframe.
    But we are, and I want to underscore this, we are anxious 
and ready to sit down with you and your staffs and with other 
Members of Congress to begin developing specific proposals as 
part of a comprehensive Medicare reform proposal, as the 
President has put forward. This would include, as a part of, I 
think, our consideration of smoothing out the BBA, dealing with 
the long-term financial solvency of the Medicare program and, 
in our view, that means dedicating a substantial portion of the 
estimated surplus to the Medicare program and importantly, 
adding a much-needed, very important prescription drug benefit 
to the basic Medicare benefit package.
    And frankly, it is hard to see, in our judgment, where the 
necessary resources would come from to adjust the kinds of BBA 
provisions that we have been talking about this morning without 
a comprehensive reform such as that put forward by the 
President.
    Mr. Chairman, we look forward to working with you in the 
cooperative bipartisan spirit that many of the members of your 
subcommittee have expressed this morning. I thank you for 
holding this hearing and giving us the opportunity to join with 
you in exploring these important issues. I can assure you that 
we will be paying careful attention and taking close notes with 
respect to the kinds of concerns that are raised by subsequent 
witnesses before you today. Thank you and I would be happy to 
respond to any questions you and other members of the committee 
may have.
    [The prepared statement of Michael Hash follows:]
 Prepared Statement of Michael Hash, Deputy Administrator, Health Care 
                        Financing Administration
    Chairman Bilirakis, Congressman Brown, distinguished Subcommittee 
members, thank you for inviting us to discuss possible necessary 
adjustments to the Balanced Budget Act Medicare fee-for-service 
reforms. The BBA includes important new preventive benefits and payment 
system reforms that promote access, efficiency, and prudent use of 
taxpayer dollars. These reforms are critical to strengthening and 
protecting Medicare for the future. The Medicare Trust Fund, which was 
projected to be insolvent by 1999 when President Clinton took office, 
is now projected to be solvent until 2015.
    Coverage of new preventive health benefits is among the BBA's most 
significant impacts on patient care. We have:

 expanded coverage for test strips and education programs to 
        help diabetics control their disease;
 begun covering bone density measurement for beneficiaries at 
        risk of osteoporosis;
 begun covering several colorectal cancer screening tests;
 expanded preventive benefits for women so Medicare now covers 
        a screening pap smear, pelvic exam and clinical breast exam 
        every three years for most women, and every year for women at 
        high risk for cervical or vaginal cancer; and,
 begun covering annual screening mammograms for women age 40 
        and over, and a one-time initial, or baseline, mammogram for 
        women ages 35-39, paying for these tests whether or not 
        beneficiaries have met their annual deductibles.
    And, as of January 1, 2000, we will begin to cover prostate 
screening, as well. These important additions to the Medicare benefits 
package will have a substantial impact on patient care by helping to 
prevent problems and identify them at earlier, more treatable stages.
    The BBA also made substantial changes to the way Medicare 
reimburses providers in the fee-for-service program. We have made solid 
progress in implementing these payment reforms. For example, we have:

 modified inpatient hospital payment rules;
 established a prospective per diem payment system for skilled 
        nursing facilities to encourage facilities to provide care that 
        is both efficient and appropriate;
 refined the physician payment system, as called for in the 
        BBA, to more accurately reflect practice expenses for primary 
        and specialty care physicians;
 initiated the development of prospective payment systems for 
        home health agencies, outpatient hospital care, and 
        rehabilitation hospitals that will be implemented once the Year 
        2000 computer challenge has been addressed; and,
 begun implementing an important test of whether market 
        competition can help Medicare and its beneficiaries save money 
        on durable medical equipment and supplies.
    We have fully implemented the majority of the BBA's more than 300 
provisions affecting our programs, including the Medicare+Choice 
program. While the statute generally prescribes in detail the changes 
we are required to make, we are committed to exercising the maximum 
flexibility within our limited discretion in our implementation of 
these provisions.
    It is clear that the BBA is succeeding in promoting efficiency, 
slowing growth of Medicare expenditures, and extending the life of the 
Medicare Trust Fund. However, according to both the HCFA actuaries and 
the Congressional Budget Office, the BBA is only one factor 
contributing to changes in Medicare spending. Low inflation from a 
strong economy is having an impact on total spending. Slower claims 
processing during the transition to new payment systems is contributing 
to a temporary slow-down in overall spending. And we have made 
substantial strides in fighting fraud, waste and abuse that have 
significantly decreased the amount of improper payments. For the first 
time ever, the hospital case mix index declined last year due to 
efforts to stop ``upcoding,'' or billing for more serious diagnoses 
than patients actually have in order to obtain higher reimbursement.
    Change of this magnitude always requires adjustment. It is not 
surprising that some market corrections would result from such 
significant legislation. We are proactively monitoring the impact of 
the BBA to ensure that beneficiary access to covered services is not 
compromised. We are evaluating this information to assess the impact of 
BBA changes on beneficiaries and to determine what changes may need to 
be made to ensure continued access to quality care.
    Thus far, our monitoring reveals evidence of isolated but 
significant problems. For example, there is reason to be concerned that 
some beneficiaries are not getting necessary care because of the BBA's 
$1500 caps on certain outpatient rehabilitation therapies. We want to 
continue working with beneficiaries, providers, and Congress to closely 
monitor the situation, evaluate any evidence of problems in access to 
quality care, and develop appropriate, fiscally responsible solutions.
    Because of our concerns, the President's Medicare reform plan sets 
aside $7.5 billion from fiscal 2000 to fiscal 2009 to smooth out 
implementation of BBA payment reforms that may be adversely affecting 
beneficiary access to high quality care. Where there is credible 
evidence that adjustments are necessary to protect access to care, we 
want to work with the Congress to make appropriate adjustments. The 
President's reform plan also dedicates a portion of the budget surplus 
to Medicare. This will help prevent excessive cuts in provider payment 
that otherwise would be necessary in the future as Medicare enrollment 
is expected to double over the next 30 years, and increased 
efficiencies alone will not be able to cover the increased costs.
    The President's plan also includes administrative actions to assure 
a smooth implementation process, and we are continuing to explore other 
actions. Those already underway address several key areas of concern:

 Inpatient hospital transfers. The BBA requires the Secretary 
        to reduce payments to hospitals when they transfer patients to 
        another hospital or unit, skilled nursing facility or home 
        health agency for care that is supposed to be included in acute 
        care payment rates for ten diagnoses. It also authorizes HCFA 
        to extend this ``transfer policy'' to additional diagnoses 
        after October 1, 2000. To minimize the impact on hospitals, we 
        are delaying extension of the transfer policy to additional 
        diagnoses for two years.
 Hospital outpatient payments. The BBA requires Medicare to 
        begin paying for hospital outpatient care under a prospective 
        payment system, similar to what is used to pay for hospital 
        inpatient care. To help all hospitals with the transition to 
        outpatient prospective payment, we are considering delaying a 
        ``volume control mechanism'' for the first few years of the new 
        payment system. The law requires Medicare to develop such a 
        mechanism because prospective payment includes incentives that 
        can lead to unnecessary increases in the volume of covered 
        services. The proposed prospective payment rule presented a 
        variety of options for controlling volume and solicited 
        comments on these options. Delaying their implementation would 
        provide an adjustment period for providers as they become 
        accustomed to the new system.
      We also are considering implementing a three-year transition to 
        this new PPS by making budget-neutral adjustments to increase 
        payments to hospitals that would otherwise receive large 
        payment reductions such as low-volume rural and urban 
        hospitals, teaching hospitals, and cancer hospitals. Without 
        these budget-neutral adjustments, these hospitals could 
        experience large reductions in payment under the outpatient 
        prospective payment system.
      And, to help hospitals under the outpatient prospective payment 
        system, we included a proposal in the proposed rule to use the 
        same wage index for calculating rates that is used to calculate 
        inpatient prospective payment rates. This index would take into 
        account the effect of hospital reclassifications and 
        redesignations. For all of these outpatient department reform 
        options, the rulemaking process precludes any definitive 
        statement on administrative actions until after the 
        implementing rule is published.
 Rural hospital reclassification. Hospital payments are based 
        in part on average wages where the hospital is located. We are 
        making it easier for rural hospitals whose payments now are 
        based on lower, rural area average wages to be reclassified and 
        receive payments based on higher average wages in nearby urban 
        areas and thus get higher reimbursement. Right now, facilities 
        can get such reclassifications if the wages they pay their 
        employees are at least 108 percent of average wages in their 
        rural area, and at least 84 percent of average wages in a 
        nearby urban area. We are changing those average wage threshold 
        percentages so more hospitals can be reclassified.
 Home health. The BBA significantly reformed payment and other 
        rules for home health agencies. We are taking several new steps 
        to help agencies adapt to these changes. We are increasing the 
        time for repayment of overpayments related to the interim 
        payment system from one year to three years, with one year 
        interest free. Currently, home health agencies are provided 
        with one year of interest free extended repayment schedules. We 
        are postponing the requirement for surety bonds until October 
        1, 2000, when we will implement the new home health prospective 
        payment system. This will help ensure that overpayments related 
        to the interim payment system will not be an obstacle to 
        agencies obtaining surety bonds.
      We also are following the recommendation of the General 
        Accounting Office by requiring all agencies to obtain bonds of 
        only $50,000, not 15 percent of annual agency Medicare revenues 
        as was proposed earlier. We are eliminating the sequential 
        billing rule as of July 1, 1999. Many home health agencies had 
        expressed concern about the impact of the implementation of 
        this requirement on their cash flows and this measure should 
        alleviate these problems to a large degree. And we are phasing-
        in our instructions implementing the requirement that home 
        health agencies report their services in 15-minute increments 
        in response to concerns that the demands of Y2K compliance were 
        competing with agency efforts to implement this BBA provisions. 
        Allowing this degree of flexibility for a temporary period will 
        prevent agency cash flow problems or returned claims.
    It is important to note that the BBA is only one factor 
contributing to challenges providers face in the rapidly evolving 
health care market place. Efforts to pay correctly and promote 
efficiency may mean that Medicare no longer makes up for losses or 
inefficiencies elsewhere. We are concerned about reports on the 
financial conditions of some individual and chain providers.
    It is essential that we try to delineate the BBA's impact from the 
effects of excess capacity, discounted rates to other payers, 
aggressive competition, imprudent business decisions, and other 
practices and market factors not caused by the BBA. And, as is 
underscored by the title of this hearing, it is essential that we focus 
on the impact on beneficiary access to high quality patient care.
Monitoring Access
    These payment reforms have created change for many of our 
providers. As mentioned above, our first and foremost concern continues 
to be the effect of policy changes on beneficiaries' access to 
affordable, quality health care. We are proactively monitoring the 
impact of the BBA to ensure that beneficiary access to covered services 
is not compromised. We are systematically gathering data several 
sources to look for objective information and evidence of the impact of 
BBA changes on access to quality care, including:

 beneficiary advocacy groups;
 healths plans and providers;
 Area Agencies on Aging;
 State Health Insurance Assistance Programs;
 claims processing contractors;
 State health officials; and
 media reports.
    We also are examining information from the Securities and Exchange 
Commission and Wall Street analysts on leading publicly traded health 
care corporations. This can help us understand trends and Medicare's 
role in net income, revenues and expenses, as well as provide 
indicators of liquidity and leverage, occupancy rates, states-of-
operation, lines of business exited or sold by the company, and other 
costs which may be related to discontinued operations.
    We are examining Census Bureau data, which allow us to gauge the 
importance of Medicare in each health service industry, looking at 
financial trends in revenue sources by major service sectors, and 
tracking margin trends for tax-exempt providers.
    We are monitoring the Bureau of Labor Statistics monthly employment 
statistics for employment trends in different parts of the health care 
industry. Such data show, for example, that the total number of hours 
worked by employees of independent home health agencies is at about the 
same level as in 1996. That provides a more useful indicator of actual 
home health care usage after the BBA than statistics on the number of 
agency closures and mergers. The data also show that nursing homes may 
be slightly reducing the number of employees and the hours that they 
work.
    The HHS Inspector General's office has interviewed hospital 
discharge planners and nursing home administrators about the BBA's 
impact on patient care. They found that the proportion of beneficiaries 
discharged to skilled nursing facilities is unchanged from 1998. 
Hospital lengths of stay have not increased. Less than 1 percent of 
nursing home administrators say the prospective payment system is 
causing access to care problems. However, about one in five discharge 
planners say it takes more time to place Medicare patients in nursing 
homes, while only 1 percent say it is ``very difficult'' to make such 
placements.
    The Inspector General's Office also found that both nursing home 
administrators and hospital discharge planners say nursing facilities 
are requesting more information before accepting patients. About half 
of the nursing home administrators say they are less likely to accept 
patients requiring expensive supplies or services such as ventilators 
or expensive medications, about half also say they are more likely to 
admit patients who require special rehabilitation services such as 
physical therapy following joint replacement surgery.
    The Inspector General's office also has agreed to interview 
discharge planners about access to home health care following BBA 
payment reforms, and the impact of the $1500 caps on outpatient 
therapy.
Specific BBA Provisions
    Outpatient Rehabilitation Therapy: The BBA imposed $1500 caps on 
the amount of outpatient rehabilitation therapy services that can be 
reimbursed, except in hospital outpatient clinics. However, these caps 
are not based on severity of illness or care needs, and they appear to 
be insufficient to cover necessary care for many beneficiaries. 
Beneficiary groups are reporting many instances of problems with this 
cap, and we are very concerned about their adverse impact, particularly 
on individuals in nursing homes. As mentioned above, our HHS Inspector 
General colleagues have agreed to study this problem. We are providing 
data to the Medicare Payment Advisory Commission so it can analyze 
patterns of therapy service usage. And we will continue to work with 
Congress and others to determine what adjustments to the cap should be 
made.
    Skilled Nursing Facilities: We implemented the new skilled nursing 
facility prospective payment system called for in the BBA on July 1, 
1998. The old payment system was based on actual costs, subject to 
certain limits, and included no incentives to provide care efficiently. 
The new system uses average prices adjusted for each patient's clinical 
condition and care needs, as well as geographic variation in wages. It 
creates incentives to provide care more efficiently by relating 
payments to patient need, and enables Medicare to be a more prudent 
purchaser of these services.
    The BBA mandated a per diem prospective payment system covering all 
routine, ancillary, and capital costs related to covered services 
provided to beneficiaries under Medicare Part A. The law requires use 
of 1995 costs as the base year, and implementation by July 1, 1998 with 
a three year transition blending facility-specific costs and 
prospective rates. It did not allow for exceptions to the transition, 
carving out of any service, or creation of an outlier policy. We are 
carefully reviewing the possibility of making administrative changes to 
the PPS.
    We held a town hall meeting earlier this year to hear a broad range 
of skilled nursing facility concerns, and we continue to meet with 
provider and beneficiary representatives. There are concerns that the 
prospective payment system does not adequately reflect the costs of 
non-therapy ancillaries such as drugs for high acuity patients.
    We are conducting research that will serve as the basis for 
refinements to the resource utilization groups that we expect to 
implement next year. We expect to have the research completed by the 
end of the year and to then develop refinements that we will be able to 
implement next October. Under the statute, we have the authority to 
refine these groups and redistribute money across categories in a 
budget neutral manner. We do not have discretion under the law to 
increase the overall level of payments to skilled nursing facilities. 
We fully expect that we will need to periodically evaluate the system 
to ensure that it appropriately reflects changes in both care practice 
and the Medicare population.
    Home Health: The BBA closed loopholes that had invited fraud, waste 
and abuse. For example, it stopped the practice of billing for care 
delivered in low cost, rural areas from urban offices at high urban-
area rates. It tightened eligibility rules so patients who only need 
blood drawn no longer qualify for the entire range of home health 
services. And it created an interim payment system to be used while we 
develop a prospective payment system. We expect to have the prospective 
payment system in place by the October 1, 2000 statutory deadline. We 
expect to publish a proposed regulation this fall so we can begin 
receiving and evaluating public comments, and publish a final rule in 
July 2000.
    The interim payment system is a first step toward giving home 
health agencies incentives to provide care efficiently. Before the BBA, 
reimbursement was based on the costs they incurred in providing care, 
subject to a per visit limit, and this encouraged agencies to provide 
more visits and to increase costs up to the limits. The interim system 
includes a new, aggregate per beneficiary limit designed to provide 
incentives for efficiency that will be continued under the episode-
based prospective payment system.
    Last year Congress increased the cost limits in an effort to help 
agencies during the transition to prospective payment. We are also 
taking steps to help agencies adjust to these changes, and in March we 
held a town hall meeting to hear directly from home health providers 
about their concerns. We are increasing the time for repayment of 
overpayments related to the interim payment system to three years, with 
one year interest free. And, effective July 1, we ended the sequential 
billing policy that had raised cash flow concerns for some agencies. 
Sequential billing was designed to ensure proper allocation of home 
health expenditures between Part A and Part B that is required by 
changes to financing of the benefit included in the BBA. We have 
determined we can accomplish this allocation through other means.
    At the same time, we are implementing the Outcome and Assessment 
Information Set (OASIS). OASIS fulfills a statutory mandate for a 
``standardized, reproducible'' home care assessment instrument. It will 
help home health agencies determine what care patients need. It will 
help improve the quality of care. And it is essential for accurate 
payment under prospective payment.
    To date, evaluations by us and the GAO have not found that reduced 
home health spending is causing significant quality or access problems. 
However, we have heard serious reports from beneficiary groups, our 
regional offices, and others regarding home health agencies that have 
inappropriately denied or curtailed care and incorrectly told 
beneficiaries that they are not eligible for continuing services. This 
may result from a misunderstanding of the new incentives to provide 
care efficiently, or from efforts to ``cherry pick'' low cost patients 
and game the system. The Congressional Budget Office attributes some of 
the lower health spending to the fact that agencies are incorrectly 
treating the new aggregate per beneficiary limit as though it applies 
to each individual patient.
    Recognizing this, we have therefore provided home health agencies 
with guidance on the new incentives and their obligation to serve all 
beneficiaries equitably. We have instructed our claims processing 
contractors to work with agencies to further help them understand how 
the limits work. Because home health beneficiaries are among the most 
vulnerable, we are continuing ongoing detailed monitoring of 
beneficiary access and agency closures. And, as mentioned above, we 
have taken several administrative steps to help home health agencies 
adjust to BBA changes, such as extending the time for them to repay 
overpayments.
    Hospitals: We have implemented the bulk of the inpatient hospital-
related changes included in the BBA in updated regulations. We have 
implemented substantial refinements to hospital Graduate Medical 
Education payments and policy to encourage training of primary care 
physicians, promote training in ambulatory and managed care where 
beneficiaries are receiving more and more services, curtail increases 
in the number of residents, and slow the rate of increase in spending. 
We have implemented provisions designed to strengthen rural health care 
systems. We have carved out graduate medical education payments from 
payments to managed care plans and instead are paying them directly to 
teaching hospitals (and are proposing in the President's Medicare 
reform plan to similarly carve out disproportionate share hospital 
payments).
    The BBA also called for a prospective payment system for outpatient 
care, which we expect to implement next year. The outpatient 
prospective payment system will include a gradual correction to the old 
payment system in which beneficiaries were paying their 20 percent 
copayment based on hospital charges, rather than on Medicare payment 
rates. Regrettably, implementation of the prospective payment system as 
originally scheduled would have required numerous complex systems 
changes that would have substantially jeopardized our Year 2000 
efforts. We are working to implement this system as quickly as the Year 
2000 challenge allows. We issued a Notice of Proposed Rule Making in 
September 1998 outlining plans for the new system so that hospitals and 
others can begin providing comments and suggestions. We are actively 
reviewing all of the comments from the industry and other interested 
parties that we received during the comment period, which we extended 
until July 30.
    We are focusing most of our continuing work on rural, inner city, 
cancer, and teaching hospitals because our analysis suggests that the 
outpatient prospective payment system will have a disproportionate 
impact on these facilities. We are reviewing the many comments we have 
received on the proposed regulation and we are continuing to develop 
modifications to the system for inclusion in the final rule.
    In addition to our work on the outpatient prospective payment 
system, we are proactively monitoring the impact of all Medicare 
payment changes on hospitals.
    Physicians: As directed by the BBA, we are on track in implementing 
the resource-based system for practice expenses under the physician fee 
schedule, with a transition to full implementation by 2002 in a budget-
neutral fashion that will raise payment for some physicians and lower 
it for others. The methodology we used addresses many concerns raised 
by physicians and meets the BBA requirements. We fully expect to update 
and refine the practice expense relative value units in our annual 
regulations revising the Medicare fee schedule. We included the BBA-
mandated resource-based system for malpractice relative value units in 
this year's proposed rule. We welcome and encourage the ongoing 
contributions of the medical community to this process, and we will 
continue to monitor beneficiary access to care and utilization of 
services as the new system is fully implemented.
    The President's fiscal 2000 budget contains a legislative proposal 
for a budget-neutral technical fix to ensure the BBA's sustainable 
growth rate (SGR) for physician payment. Medicare payments for 
physician services are annually updated for inflation and adjusted by 
comparing actual physician spending to a national target for physician 
spending. The BBA replaced the former physician spending target rate of 
growth, the Medicare Volume Performance Standard, with the SGR. The SGR 
takes into account price changes, fee-for-service enrollment changes, 
real gross domestic product per capita, and changes in law or 
regulation affecting the baseline.
    After BBA was enacted, HCFA actuaries discovered that the SGR 
system would result in unreasonable year-to-year fluctuations. Also, 
the SGR target cannot be revised to account for new data.
                               conclusion
    The BBA made important changes to the fee-for-service Medicare 
program to strengthen and protect it for the future. These changes, 
along with a strong economy and our increased efforts to combat fraud, 
waste, and abuse, have extended the life of the Trust Fund until 2015. 
With changes of the magnitude encompassed in the BBA, some issues have 
arisen that may require adjustment and fine tuning. The President's 
Medicare reform plan sets aside $7.5 billion to smooth out 
implementation of BBA reforms. It dedicates a portion of the budget 
surplus to Medicare, which will help protect against excessive provider 
payment reductions in the future as Medicare enrollment doubles over 
the next 30 years, and increased efficiencies alone will not be able to 
cover the increased costs. The President's plan also includes 
administrative adjustments to help in the transition to new payment 
systems.
    It is not surprising that necessary market corrections would result 
from such significant legislation. As always, we remain concerned about 
the effect of policy changes on beneficiaries' access to affordable, 
quality health care. We are proactively monitoring the impact of the 
BBA to ensure that beneficiary access to covered services is not 
compromised. We welcome the opportunity to look at any new information 
regarding beneficiary access to quality care. We are committed to 
continuing to look at refinements to the BBA that are within our 
administrative authority. We look forward to continuing to work with 
this Committee to identify concerns, and we will keep you up to date on 
the status our of implementation of the BBA.
    The President is committed to working with Congress to enact 
bipartisan Medicare reform this year that includes more competition in 
the program, a long over-due prescription drug benefit that is 
available and affordable for all beneficiaries, and that dedicates a 
significant portion of the budget surplus to Medicare, and sets aside 
funding specifically for smoothing out the transition to BBA payment 
reforms.
    I thank you for holding this hearing, and I am happy to answer your 
questions.

    Mr. Bilirakis. Thank you, Michael. Thank you, Mr. 
Administrator. And I also want to thank you for having members 
of your staff stay after your testimony. I know you have to go. 
In fact, we have run later than we expected in the opening 
statements and I appreciate your patience in that regard.
    And we will get together. I appreciate your offer. I know 
it was not necessary because we have sat around a table in the 
past and tried to work things out and hopefully we can do that 
on a bipartisan basis. I have already talked to Mr. Brown and 
hopefully we can do that sooner rather than later.
    You say that you are committed to exercising the maximum 
flexibility--I am putting words in your mouth, I suppose--
within your limited discretion to implement the provisions of 
BBA 1997. There has been, of course, a lot of controversy 
around what you, HCFA, can do administratively and what would 
require a legislative fix. I have always felt that handling 
things administratively, without going into legislative fixes, 
is certainly the best way to go.
    Hopefully, after taking notes here on some of these 
comments and the questioning that takes place, your personnel 
will get together with you and hopefully you can furnish in 
writing, possibly at the gathering that we will have, an idea 
of some of the things that you can do through administrative 
fixes.
    And I appreciate the fact that there has to be an 
admission--maybe that is the wrong word--that a fix is 
necessary. In other words, there is something wrong, whether it 
is the BBA specifically or whether it was the interpretation of 
BBA. We have talked about that in the past and certainly there 
has to be an acknowledgement that fixes are necessary because 
there is a wrong there somewhere.
    So I would appreciate it if you would listen to all of 
these things through your staff and address them and we can get 
these things worked out.
    Mr. Hash. Mr. Chairman, in relation to the request from 
Chairman Bliley, we will certainly furnish the committee our 
view of those areas that are within the discretion of the 
executive branch to have flexibility, and those areas in which 
we believe statutory provisions are at the root of the issue 
and need to be addressed.
    Mr. Bilirakis. Yes. I guess we are talking here now--would 
it be better if we waited until we got together with everybody 
to find out? Some of the areas of concern we will not have an 
opportunity to address in a formal hearing like this. So would 
you suggest you might do that prior to that gathering? What do 
you think?
    Mr. Hash. I believe we would be prepared to furnish--as you 
know, Mr. Chairman, this is, as you pointed out, not a new 
subject and we have been spending a lot of time, both within 
our own policy deliberations and also in consultation with the 
department's legal counsel, to investigate thoroughly those 
areas of the statute where discretion was given.
    I do not have to tell you, the BBA was, I think in most 
people's judgment, extraordinarily specific and prescriptive in 
its statutory provisions. In many areas, I believe that we do 
not have any discretion on the executive side to modify what is 
very clear and direct and explicit in the statute.
    And because we have spent a lot of time parsing that 
question, we are prepared to--in fact, many of the things I 
just went through in my opening statement reflecting steps we 
have taken in the hospital area, in the SNF area, in the home 
health area, are, in fact, a reflection of the judgments we 
have made about the flexibility that we have.
    Mr. Bilirakis. Well, I tend to agree. For instance, you 
have interpreted the outpatient statutory language in such a 
way that hospital outpatient payments are $900 million less per 
year or $4.5 billion over 5 years. This is due, I think you 
would agree, to your interpretation of the beneficiary 
coinsurance issue. And yet 253 members of the House, including 
23 members of this committee and 77 members of the Senate, have 
said through communications with you that this is not what 
Congress intended.
    So I do not know that I am asking you to respond to that at 
this point in time or whether we might be able to work this out 
later on.
    Mr. Hash. This is one of the issues, Mr. Chairman, which we 
have under active review now. We have been looking carefully 
and thoroughly at both the legislative history and the 
statutory provisions with respect to the outpatient hospital 
prospective payment system and we have asked the general 
counsel at HHS to give us advice about the extent to which we 
do have flexibility with regard to the interpretation of how we 
calculate those prospective rates, the conversion factor and so 
forth in the setting of the outpatient coinsurance amounts.
    We want to be responsive where we can. We have not come to 
a complete conclusion of that review, so that is an issue that 
we are actively reviewing right now.
    Mr. Bilirakis. Then I am going to yield to Mr. Brown in a 
moment. I just would want to alert you to the interim practice 
expense values--regarding cardiac surgery, etc.--which were 
done a while back and apparently HCFA is now issuing a new rule 
that is printed in the Federal Register. Not going into the 
merits of that or anything at this point in time but I would 
just really alert you to the fact that we probably would 
discuss that.
    I now yield to Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Hash, thank you again for joining us and for your 
always cooperative attitude in your work with us. I know it has 
not been an easy time for you as Congress and every provider in 
the country points the finger at you and you and HCFA overall. 
You have been an easy target, I guess, because you are the most 
logical and most obvious target.
    I think, first of all, that all of us bear some 
responsibility for this situation clearly. This Congress does. 
This committee does. HCFA does. And we also bear responsibility 
because Congress imposed some 300 modifications on HCFA and I 
applaud your work and my understanding already is that you have 
implemented more than half of those 300 provisions from the 
Balanced Budget Act. So for that, you should be congratulated 
and people should know that.
    I know that HCFA is looking at data from a wide variety of 
sources to monitor the effects of BBA implementation on 
beneficiaries and on providers. Elaborate if you would on some 
of those monitoring efforts and your findings to date, 
especially those that relate to seniors' access to care. How 
are you monitoring those changes? What have you found?
    Mr. Hash. Mr. Brown, as I said a moment ago, none of us is 
happy with the extent of information that is available on a 
timely basis to do the kind of comprehensive assessment that is 
called for here, but within those kinds of constraints, what we 
have been doing falls into several categories.
    One, we have been reviewing data that is provided routinely 
by the Bureau of Labor Statistics in the Department of Labor to 
assess changes in participation in the workforce of health care 
providers. They break out employment by health care provider 
type--hospitals, home health agencies and skilled nursing 
facilities--and we have been looking at those figures.
    For example, in the case of home health agencies, we have 
seen a decline in the participation in the workforce, but 
obviously from what we know about the mergers and voluntary 
withdrawals of home health agencies, one would expect that to 
be the case.
    In the case of employment in the hospital sector, it 
continues to increase on a monthly basis. It is not growing at 
the same rate that it had been growing, but there are clearly 
indications that the labor force in the hospital industry is 
continuing to grow.
    We also are reviewing as much information as we can get 
from other surveys and data sources, including AMA surveys and 
AHA panel surveys. There are a number of Wall Street analysts 
who examine sectors of the health care system that are publicly 
traded companies. And we have been doing monitoring through our 
regional offices, working with advocacy groups and with States 
and others to try to get a clearer picture of the impacts.
    I think as the GAO and the IG, with whom we have also been 
relying to help us with this monitoring, have tentatively 
summarized to this point is that we have not seen any 
systematic evidence that quality or access to Medicare-covered 
services has been compromised.
    Now that is not to say that there are not anecdotes and 
instances that people have brought to our attention that 
suggest that we need to make some changes, some midcourse 
corrections, but so far, we have not actually been able to 
determine that there is a body of evidence out there that 
suggests that across the board there are certain fixes that 
ought to be made.
    Again though, we continue to update this information and we 
are anxious, through whatever sources, and as you know, we have 
actually solicited pretty aggressively the provider 
organizations to help us collect and get information about BBA 
impacts and we are continuing to review that and are trying to 
put that into the mix for the kinds of proposals that we would 
like to suggest to implement the President's commitment to make 
some changes to the BBA for the remaining years covered by the 
act.
    Mr. Brown. Thank you.
    Let me shift gears for a moment. Several of us on this 
committee have worked on H.R. 1579, the Children's Hospital 
Education and Research Act. Mr. Dingell is a cosponsor. Mr. 
Bilirakis is a cosponsor.
    The Medicare Commission, if you remember, the instructions 
for it include a request to commissioners to look at GME for 
free-standing children's hospitals. Ms. DeGette has been 
involved in that and several others on this committee. I 
believe almost every member of the commission recommended doing 
something. The President has put some money, not as much as our 
legislation asks for but some money in his budget.
    As you know, they get very little Federal graduate medical 
education money because only end stage renal disease 
expenditures, the Medicare expenditures, go to those hospitals.
    Would you support some sort of children's hospital GME 
grant program?
    Mr. Hash. Yes, Mr. Brown, we would and have. Actually as a 
part of the President's proposal, it is a grant proposal that 
would be administered by another part of HHS, the Health 
Resources and Services Administration.
    We recognize that the formula Medicare uses to determine 
graduate medical education payments does not work in the 
children's hospital setting. And to ensure that children's 
hospitals that are engaged in graduate medical education for 
the next generation of pediatricians and subspecialties in 
children's care, we want to make sure that those graduate 
medical education programs are financed adequately and fairly 
and we would like to work with you to push that issue forward. 
The President and the administration strongly support a grant 
program to assist in the cost of graduate medical education for 
children's hospitals.
    Mr. Bilirakis. And I would lend my little bit of weight to 
that effort. Certainly I endorse it and we should work together 
on that.
    Let's see. Dr. Ganske?
    Mr. Ganske. Thank you. Thank you, Mr. Chairman. And thank 
you, Mr. Hash, for being here.
    In my opening statement I talked a little bit about 
hospitals and we have talked about unintended consequences but 
I want to focus a little bit on another provider group and 
specifically how well HCFA is following the law in terms of the 
BBA.
    You know, we have general practitioners, family 
practitioners and surgeons out in rural areas that because 
there is a very high percentage of elderly in those areas, 
really depend on Medicare to be fair.
    Now in the Balanced Budget Act we established a sustainable 
growth rate system or SGR to control spending growth under 
Medicare's physician fee-for-service schedule. For the 1998 
SGR, HCFA estimated that the gross domestic product would only 
grow at 1.1 percent, a projection that turned out to be one-
third of actual GDP growth.
    Then HCFA made an even more serious error in the 1999 SGR 
when it estimated that Medicare Plus Choice enrollment would 
grow by 29 percent. We know that that hasn't happened.
    Those estimates have already cost the physician payment 
system $3 billion. Yet to my knowledge, HCFA has done nothing 
to correct those errors. If they remain uncorrected, I am 
afraid we are going to see the physicians in those rural areas 
move into the cities and I think that they could lead to severe 
payment cuts to physicians in future years.
    Do you have any plans to address that problem? Do you have 
any plans to restore the money the physicians have lost to HCFA 
already?
    Mr. Hash. Dr. Ganske, I am glad you brought that up because 
we do have plans and we do, in fact, have a proposal that is 
pending before the Congress now to deal with two aspects of the 
sustainable growth rate procedure for physician service 
payments.
    The two changes that we are proposing in the statute are 
that the volatility of the factors that are used to calculate 
that limit be changed in a way that makes it more predictable. 
It is a more complicated way of making these changes than I can 
articulate here, but a lot of analysts who know more about this 
than I do have looked at the sustainable growth limit 
methodology and have found it to produce wide swings in terms 
of the estimates that come out of it or the targets that come 
out of it, I should say. And we have a proposal to fix that.
    Second, on the estimation errors, two of which you have 
just pointed to, we have a proposal that allows us to correct 
the sustainable growth rate limit for future years to reflect 
estimation errors.
    Under the current language in the BBA, we do not believe we 
have the authority to correct estimation errors and we would 
very much like to do that. We think that would be the fair and 
appropriate thing to do with respect to physician payments.
    Mr. Ganske. Let me just follow this up. The AMA and other 
specialty groups wrote the HCFA administrator about their 
concerns with projection errors in the sustainable growth rate 
on December 2, 1998 within the comment period of HCFA's 
November 2, 1998 SGR notice. Then they sent another letter to 
HCFA about this problem on May 21, 1999.
    Has HCFA ever responded to those letters from the physician 
community or at least let doctors know that the administration 
is concerned about this? Do you have any copies of replies to 
those letters?
    Mr. Hash. I do not have them with me, but I will be happy 
to furnish them. I am not aware of their status, but they 
should have been answered and, if not, they will be answered 
promptly, but I would expect they have been answered and I 
would be happy to furnish copies of the letters to you.
    [The following was received for the record:]

    Generally, we do not respond, in correspondence format, to 
letters submitted as comments on a proposed notice published in 
the Federal Register. We address comments in the final notice 
when it is published in the Federal Register. The comments you 
refer to were responded to in our final notice that was 
published on Friday, October 1, 1999. Attached is a copy of the 
notice for inclusion as part of the transcript (See page 53396, 
column 1, under Roman Numeral IV, Comment:). In addition, the 
May 21, 1999, letter you asked about was responded to on 
September 24, 1999. Copies of their May 21 letter and our 
September 24 response also are attached for inclusion as part 
of the transcript.
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    Mr. Ganske. So let's just be straight. You do not know 
whether they have been answered.
    Mr. Hash. I do not know the status of that correspondence. 
No, sir, I do not.
    Mr. Ganske. And if they had not been answered, would that 
be an egregious error?
    Mr. Hash. It would have been an inappropriate response 
definitely.
    Mr. Ganske. I mean this goes back to December 2, 1998, 
within the comment period.
    Mr. Hash. I cannot defend----
    Mr. Ganske. Let's just assume that they were not answered.
    Mr. Hash. I would prefer not to assume that, Dr. Ganske.
    Mr. Ganske. Okay. Well, we have no record that they were 
answered.
    Mr. Hash. I will be happy to furnish you a record as we 
have it and if we have not answered those letters, we will do 
so promptly.
    Mr. Bilirakis. The gentleman's time has expired.
    Michael, if the gentlelady who is next would be considerate 
here, let me ask you. A couple of times at least you have made 
the comments that there are certain things that BBA will now 
allow you to do. But I would think that for instance, the 
reimbursements to managed care--which has resulted in an awful 
lot of Medicare beneficiaries losing those options and that 
sort of thing, you know what the intent of the Congress was. 
You have interpreted it a different way. So maybe you had the 
right to do that.
    But the fact of the matter is we are all supposedly trying 
to get things worked out here. If there is certain language in 
BBA 1997 that needs to be changed in order to afford you the 
flexibility to be able to make some of these changes, why 
haven't you communicated that to us? I get the impression that 
HCFA is not trying to work with the Congress in terms of making 
some of these changes.
    Mr. Hash. Mr. Chairman, I regret that impression because 
the kinds of things I outlined in my opening statement are 
reflective of our attempt to respond in a constructive way.
    Mr. Bilirakis. I know but I mean in terms of what we can 
do. You have shared with us what your attempts are but in terms 
of what we can do in order to try to get these things worked 
out.
    Mr. Hash. I think that is part and parcel of our offer to 
sit down and there has not been an opportunity to actually 
legislate up until now. There have been no proposals moving 
forward that I am aware of, but we are certainly at a place 
where we would like to work with you to fashion proposals.
    And a part of that process would be the identification of 
statutory changes that would either extend greater flexibility 
to us so that we could exercise discretion and judgment or, in 
fact, if the agreement is that it needs to be more direct in 
terms of the statutory language, we also would be prepared to 
recommend where that should be the case.
    Mr. Bilirakis. Okay. Hopefully we can do that together on a 
bipartisan basis.
    Ms. Eshoo, thank you for your indulgence.
    Ms. Eshoo. Absolutely. You can count on it.
    Mr. Hash, it is always a privilege to have you here to give 
forthright, solid testimony. You take shots well and you do 
your best to answer our questions directly and I appreciate 
that. I think we should all acknowledge in this room that we 
all have kind of tough jobs but that we like them, too. No one 
twisted our arms off to do it, each one of us.
    Mr. Hash. Absolutely.
    Ms. Eshoo. So we are burdened but we are privileged, as 
well.
    As you know, in 1996 the Congress passed and the President 
signed into law the FDA Modernization Act to streamline the FDA 
approval process. I was very proud to be the Democratic sponsor 
of that bill. It was not an easy bill to get through the 
Congress but we did. And what I am really pleased about are the 
reports that I get from both the biotech and the medical device 
people, both in my district and across the country, telling me 
that FDA is approving the new technologies and the life-saving 
drugs and the devices that bring about the changes faster than 
ever before. So that is on the plus side.
    They also tell me that they still cannot get their products 
to patients and this is disturbing to me. People may be 
thinking, well, why is she raising this? It was her bill. That 
is why she is raising it during this hearing. But it was 
directed toward obviously both saving money with better 
technologies and saving money in areas that were invasive, 
longer stays, et cetera, et cetera. I wanted to get that down 
for the record.
    Now since there are these complaints about getting the 
products to patients and HCFA's role in this, can you tell me 
what you are doing administratively to streamline the process 
of assigning medical procedure codes and classifying new 
technologies and updating the payment levels?
    And as a follow-up question, it is also my understanding 
that because of Y2K concerns that HCFA has stopped assigning 
new procedure codes until after January 1. Is this so and if it 
is, what impact do you think this will have on Medicare 
beneficiaries' access to new technologies?
    Mr. Hash. Let me take the first part of that question, if I 
may.
    With respect to what we are doing to ensure that 
advancements in health care and certainly in pharmaceuticals 
and devices are brought to the bedside or the care side of our 
beneficiaries, we have launched a very bold, new coverage 
process, decisionmaking process at HCFA because we, too, have 
felt that the importance of these advancements being made 
available under our coverage policy as rapidly as possible is 
an extremely high priority for us.
    As a result, you may be aware we have instituted a new 
coverage decisionmaking process. It is actually modeled, in 
many respects, after the FDA process for approval. It has a 
very open and transparent and time-limited review cycle for 
applications for Medicare coverage. It involves the 
establishment----
    Ms. Eshoo. When was it launched?
    Mr. Hash. It was launched the first of July 1999. We 
published the process itself this spring in the Federal 
Register and it became effective on the first of July.
    And as a part of that, we put into place what we call a 
coverage advisory committee, which is composed of 125 imminent 
scientists and practitioners from around the country, to 
function in much the way that the FDA advisory councils 
function, where subsets of that advisory committee will be 
asked to----
    Ms. Eshoo. That is good news. There are many members of 
this subcommittee that worked on the FDA reform on both sides 
of the aisle.
    Let me ask you this. In what you have launched, and you 
term it as being bold, is there anything that is part of this 
policy or internal administratively where you are going to sit 
down and review the effectiveness of what you have launched?
    Mr. Hash. Absolutely.
    Ms. Eshoo. So that you can track these timeframes and maybe 
give a report back to us?
    Mr. Hash. Absolutely. In fact, we are putting up on our 
website the receipt date of applications for coverage process. 
People can track, on that website, where it has been assigned, 
what its due date is, what its status is, whether it has been 
referred to the advisory committee, or whether a decision can 
be made without that. In many cases, we expect to clear these 
applications within 90 days of the origination of the 
application.
    Ms. Eshoo. And the reimbursement codes are attached to 
this?
    Mr. Hash. Well, the first step is the coverage itself and 
then, as you know, we rely on the codes through a system that 
is established, in effect, by the AMA, the current procedural 
terminology.
    In some cases, a new code must be developed for something 
for which there is not an existing code that is appropriate. 
That process can take some time. It is not a process that we 
run. It is run by clinicians who run the CPT editorial panel.
    But nonetheless, we are definitely trying to work with them 
to make sure that our cycle gets the new coverage items into 
the CPT process as quickly as possible.
    Ms. Eshoo. Mr. Chairman, could I ask for your consideration 
for Mr. Hash to answer my second question if he can briefly?
    Mr. Bilirakis. Without objection.
    Ms. Eshoo. Thank you.
    Mr. Hash. Our outside contractors on Y2K advised us that in 
order to make sure we could do recertification of the readiness 
of our claims processing systems, that we should not make any 
systems changes between the period of October 1 until we can 
ensure our systems are compliant after the millennium rollover.
    Ms. Eshoo. So you have stopped issuing new procedure codes?
    Mr. Hash. Well, people can still get a new procedure code 
and bill but if it is not reflected in the current codes that 
are in our claims processing system, it would not be 
recognized.
    Ms. Eshoo. Does that have anything to do with the payment 
level, though, what you have just described?
    Mr. Hash. It could affect that but what I would like to do 
is if I may, I would like to have someone who could more 
knowledgeably explain exactly the relationship of our stand-
down with respect to changes in our claims processing and how 
that affects the recognition of new codes between now and after 
the new year.
    Ms. Eshoo. I think everyone is sufficiently Y2K'd out in 
the country. It is this term. My mother keeps saying to me, 
``What does that mean?'' But at any rate it does have something 
to do with the underlying, I think, the underlying reason for 
today's hearing. It is a contributor to it.
    So I will look forward to getting----
    Mr. Bilirakis. And we will continue to--believe me, this is 
not it. We will continue and hopefully----
    Mr. Hash. I would like to follow up with you, if I may.
    Ms. Eshoo. I would be delighted. Thank you very much.
    Mr. Bilirakis. Mr. Bryant will inquire.
    Mr. Bryant. Thank you, Mr. Chairman. Thank you, Mr. Hash, 
for being here. I have a number of questions so if you could 
keep your answers as brief as possible. And in the event I do 
not get as complete answers as you want to give or you do not 
respond to all of them, could you furnish me an answer in 
writing afterwards?
    Mr. Hash. I would be happy to.
    Mr. Bryant. Let me follow up very quickly with Dr. Ganske's 
question, an area that I have an interest in, about the SGRs. 
My understanding is that the BBA requires you to publish for 
the year 2000 this SGR for physician services by August 1, and 
we are beyond that now. I understand that has to be used in 
this next fiscal year.
    Where are we on that and when might we see this notice 
published?
    Mr. Hash. My understanding is I believe that that is a part 
of a regulation that we are publishing on the physician fee 
schedule, which is due out at the end of October, which again 
the statute requires publication 60 days in advance of the year 
in which it applies. That is my understanding.
    If I am not correct about that, I want to get back to you, 
but I think it is a part of that rulemaking that is going 
forward now.
    Mr. Bryant. It is not going to be ready, is it, by the 
beginning of----
    Mr. Hash. I am correct that it actually is going to be a 
separate notice from the October physician regulation and that 
it is currently in clearance in our department and we expect to 
publish it shortly, meaning within the next week or 2, I 
believe.
    Mr. Bryant. Let me move on. I am again bouncing from 
subject to subject here.
    In the area of what Medicare has traditionally covered, the 
administration of medications, infusions, injections in an 
office visit, Medicare, according to some sources, appears to 
be changing its policy so that none of the medications will be 
covered if there is a possibility that it could be self-
administered by a patient, regardless of how frail that patient 
might be.
    Is that true? Is Medicare changing its policy on covering 
these drugs that could be administered in a physician's office? 
And if so, briefly why?
    Mr. Hash. We are working on a regulation to clarify the 
statutory admonition, which is that outpatient drugs are 
excluded from Medicare coverage when they, in fact, are self-
administered.
    There is, we believe, reason to believe we have not been as 
clear or precise as we should be about what those conditions 
are and how we make those distinctions about what is self-
administered and what is not, and we expect to publish a 
regulation, a proposed regulation for comment this fall.
    Mr. Bryant. Okay, I think that will be sufficient.
    Regarding telemedicine, our Governors just had a conference 
of southern Governors in Tennessee and that has been one of the 
topics. Certainly I have seen some issues where HCFA has had, I 
believe, narrow interpretations that I believe in the long run 
are going to stifle or chill the growth of this technology, 
telemedicine, regarding the occurrence of consultation in real-
time, who is a presenting practitioner, the definition, and 
those kinds of things.
    And again I would urge HCFA to look at these issues so that 
we can, particularly in rural areas across the country, take 
advantage of this new technology.
    Mr. Hash. Let me assure you that we are doing that. You may 
recall that Secretary Shalala wrote a letter to the Congress in 
which she identified four issues that had been raised in the 
telemedicine arena, a couple of which you just mentioned, and 
that she directed the department to make a review of that and 
that basically has fallen to HCFA's responsibility.
    We are reviewing those issues and we are going to be 
issuing a report on our analysis and recommendations with 
regard to those four issues that are in the secretary's letter.
    Mr. Bryant. In regard to nursing homes, I had occasion to 
visit those, also, and one complaint was the $1,500 cap on 
therapy, as opposed to hospitals not having the cap. Do you see 
any change there? Do you think that might be appropriate to 
reconsider? That was a serious concern.
    Mr. Hash. I think it is fair to say that as we have looked 
across the issues that have been raised about BBA impacts, the 
therapy caps has been among those at the top of the list in 
terms of the evidence that is out there that there may be an 
inadequate opportunity for rehabilitation therapies in general 
to be made available to patients, particularly in the nursing 
home setting. And that is an issue that we want to work with 
you on in terms of a Medicare reform proposal.
    As you may know, this provision got added to the BBA at the 
very end. It was not one which we recommended. I think when it 
got extended to cover all settings except hospital outpatient 
departments, it took on a cast that perhaps has created 
unintended consequences and we would like to work with you on 
that.
    Mr. Bryant. If I might ask you quickly to respond in 
writing to one final question in terms of the winners and 
losers in any kind of implementation of a new payment system, 
we have heard a lot, and I know we heard a lot in the districts 
about people who perceive themselves as losing in this.
    On the other side, can you identify, again in late-filed 
testimony, the groups who will benefit from this new system and 
explain why their reimbursement rates would go up?
    Mr. Hash. Are you referring to hospital outpatient payments 
or all----
    Mr. Bryant. APCs.
    Mr. Hash. Right, yes, sir.
    Mr. Bryant. Thank you.
    Mr. Bilirakis. In the letter that you refer to from 
Secretary Shalala, would you please submit that as part of the 
record?
    Mr. Hash. I would be happy to, Mr. Chairman.
    Mr. Bilirakis. Without objection, it will be included in 
the record. Thank you very much.
    [The letter from Secretary Shalala follows:]

            Department of Health and Human Services
                 The Secretary of Health and Human Services
                                                   November 9, 1999
The Honorable Kent Conrad
United States Senate
Washington, D.C. 20510
    Dear Senator Conrad: I am pleased to inform you and the members of 
the Rural Health Care Coalition that the final rule implementing 
Medicare payment for teleconsultation in rural health professional 
shortage areas will be published on November 2. The Department of 
Health and Human Services believes that telemedicine has potential for 
extending access to medical care to beneficiaries located in rural and 
medically isolated areas and we are pleased that this rule, reflecting 
the statutory changes made by the Balanced Budget Act of 1997 (BBA), 
will expand coverage for telemedicine.
    Payment for teleconsultation represents a significant improvement 
over traditional Medicare policy for rural areas by allowing payment 
for a service that historically has required a face-to-face, ``hands 
on'' encounter. This rule is a first step in refining face-to-face 
requirements for a medical service under Medicare to accommodate 
telemedicine services. We are open to developing modifications to 
Medicare telemedicine coverage and payment policies as the law permits 
and as more program experience in this area is obtained. We have 
identified several issues related to teleconsulting that we will need 
to address further. We will send recommendations to Congress in a year.
    This final rule implements the changes in telemedicine eligibility, 
coverage, and conditions of Medicare payment made by the BBA. First, in 
accordance with the BBA, the rule implementing payment for 
teleconsultation specifies that eligibility for teleconsultation is 
limited to rural health professional shortage areas. We have 
interpreted the definition of a health professional shortage area 
broadly to include both full and partial county rural health 
professional shortage areas and to consider the site of presentation, 
that is, where the beneficiary is physically located during the 
consultation, in determining eligibility for teleconsultation.
    The rule also indicates that the scope of covered services is 
consultation services for which payment may be made under Medicare. 
These services include: office or other outpatient consultations; 
initial and follow-up inpatient consultations; and confirmatory 
consultations.
    The rule implements the statutory provision for Medicare payment 
for a consultation service that is delivered via telecommunications 
systems. As a condition of payment, the patient must be present and the 
teleconsultation must involve the participation of the referring 
practitioner, or a practitioner eligible to be a referring practitioner 
who is an employee of the actual referring practitioner, as appropriate 
to the medical needs of the beneficiary.
    Additionally, under the regulation, the technology used to deliver 
a teleconsultation must allow the consultant to conduct an examination 
of the patient in ``real time,'' using interactive audio and video 
telecommunications equipment. The requirement that the patient be 
present, a presentation practitioner participate, and interactive audio 
and video equipment be used is a substitute for a face-to-face 
examination which is a coverage requirement for consultation under 
Medicare. Note that the ``real time'' requirement, needed to permit 
interaction of patient and consultant, does not require use of high-
end, full motion interactive video equipment; less expensive 
technologies may permit ``real time'' examination. The requirement, 
however, would not allow payment for a teleconsultation when 
traditional store-and-forward technology is used.
    The rule also implements the statutory provision that the payment 
must be shared between the referring and consulting practitioner, and 
that payment must not exceed the current fee schedule of the 
consultant. The rule specifies that the consulting practitioner will 
receive 75 percent and the referring practitioner will receive 25 
percent of the consultant's fee schedule amount. The geographic 
practice cost index applicable to the location of the consulting 
practitioner will be used for pricing teleconsultation claims. By using 
the consultant's location for pricing claims, the payment amount for 
teleconsultation will be the highest allowed by the statute.
    We recognize that we will need to address certain issues you and 
your colleagues have raised as we move forward to further develop 
Medicare telemedicine policy. Congress and the Administration must have 
a clearer picture of the policy and financial implications of several 
issues related to teleconsultation including: (1) the use of store-and-
forward technologies used as a method for delivering medical services; 
92) the use of registered nurses and other medical professionals not 
recognized as practitioners under Medicare to present the patient to 
the consulting practitioner; and (3) the appropriateness of current 
consultation codes for reporting consultations delivered via 
communications systems. Below is a brief discussion of these issues:
 In exploring the use of store-and-forward technology, our 
        primary objective will be to determine if or when, store-and-
        forward technologies permit delivery of a medical service that 
        warrants a separate and distinct payment from Medicare. As 
        mentioned above, Medicare does not make separate payment for 
        the review of a previous medical examination. Program integrity 
        implications of moving in this direction may be significant. 
        Additionally, specific attention will be given to how store-
        and-forward technology is being used in dermatology.
 With regard to the practitioners who may be eligible to 
        present the patient to the consultant, we will examine the 
        circumstances in which a registered nurse, licensed practical 
        nurse, or other medical professional who is not recognized as a 
        practitioner under Medicare may have the qualifications to 
        present the patient to the consultant.
 Finally, we recognize that the current coding structure for 
        consultation services may not be appropriate for reporting some 
        forms of teleconsultation. We will examine the possibility of 
        expanding the scope of coverage under telemedicine to include 
        additional existing services that are consultive in nature, and 
        the development of new codes to identify services specific to 
        telehealth.
    In a year, we will send recommendations to Congress regarding these 
issues. We look forward to working with you in providing increased 
medical access for Medicare beneficiaries through the use of 
telemedicine. A similar letter has been sent to the other members who 
cosigned your letter.
            Sincerely,
                                                   Donna E. Shalala

    Mr. Bilirakis. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. Like everyone, I would 
like to thank Mr. Hash for being here.
    Under HCFA's proposed rule on hospital outpatient 
prospective payment system, you propose to reimburse new cancer 
drugs, which is anything after 1996, at the lowest APC rate, 
which is $59.13.
    In my opening statement I am sure you heard that I am 
concerned that if implemented, this proposal would have a 
crippling impact on cancer care and would essentially stop the 
development of new drugs. And what company would invest its 
resources in a drug that would be reimbursed at such a low 
level, especially when they take into consideration this lower 
reimbursement rate is locked in for well over half the cancer 
patients in the population?
    First of all, why was the decision made to place all new, 
innovative drugs in the lowest payment category?
    Mr. Hash. Well, let me just say the issue for us now, Mr. 
Green, is that we are equally concerned about the impact of the 
outpatient prospective payment system proposal on cancer drugs, 
or cancer therapy with chemotherapy agents. And as you know and 
have mentioned in your statement, we are actively engaged in 
reviewing the comments that we have received on this. We intend 
to address many of these issues in the final rule that we will 
publish at the end of this year.
    I want to assure you that it is also a serious concern of 
ours and our commitment is that we want to make sure that this 
system in no way presents any barriers for appropriate cancer 
care for any of our beneficiaries.
    With respect to the specifics in the proposed rule last 
September, I think all of us recognize that in the area of 
drugs that the data that were available to us to develop a 
hospital outpatient prospective payment system were not 
adequate. Therefore, we have contracted with an outside 
contractor for the purpose of surveying, in particular, cancer 
and other high-cost and often infrequently used drugs so that 
we have a much richer and better data base on the cost of drugs 
that are now on the market.
    We expect to use that information to inform the revisions 
to our process in the regulation.
    Mr. Green. The second part of that is what impact does HCFA 
believe placing these therapies in the lowest payment category 
have on utilization, as well as on future research and 
development? And also I guess these rates, the impact on the 10 
free-standing cancer centers we have in our country. One of 
them is in Houston but also Sloan-Kettering and the Cleveland 
Clinic.
    Mr. Hash. Well, let me again say the reason we publish 
proposed rules is so that we can get comment and advice about 
how we can make it better and, in this area, we intend to make 
it better. And I do not want to defend the particular aspects 
of the proposed rule because we put it out there to the best 
that we could, based on the data that we had, but we are 
struggling to get a better sense of this particular issue so 
that our final rule takes that into account.
    As you know, even in the proposed rule--and this is not 
widely understood--we are actually proposing to separate in 
this system the payment for the drug itself and the payment for 
the administration. So, if an individual comes in, is 
administered a chemotherapy agent in a hospital outpatient 
clinic, there is an administration APC for billing purposes.
    Depending on what the drug is, in the initial proposal we 
created four separate categories for chemotherapy drugs. We are 
obviously reviewing that issue based on the comments, to make 
sure that we adequately reflect the costs of the drugs that are 
now in use.
    Mr. Green. We know that a doctor's recommendation or 
opinion are the No. 1 reason why patients are seen and receive 
a certain type of treatment like cancer screening or a 
particular treatment or therapy. And while I think we all agree 
that reimbursement levels should never influence a provider's 
decision to recommend one treatment over another, I am 
concerned that if the hospital outpatient PPS is implemented as 
proposed, there will be no way that we can avoid this problem. 
Do you agree or do you have a comment?
    Mr. Hash. I think, in our final rule, we do not want that 
to be a consequence of the new payment system. What we are 
trying to do is to put together groupings of related services 
in order to create prospective payments that provide an 
incentive, not only for access to the best and most appropriate 
therapy, but for health care providers to provide their care in 
the most efficient and economical way possible.
    Obviously, as someone mentioned earlier, we are trying to 
find the right balance between incentives for efficiency and 
economy and the appropriate assurance of access to covered 
services for our beneficiaries.
    Mr. Green. I notice in your statement where you said HCFA, 
you are looking at the 3-year budget to make it budget-neutral. 
Does HCFA have the authority to phase the PPS in over 3 years 
and make it budget-neutral?
    Mr. Hash. We do believe that we could have a transition on 
a budget-neutral basis in implementing the hospital outpatient 
payment system.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Greenwood will inquire.
    Mr. Greenwood. Thank you, Mr. Chairman.
    I want to raise a question or an issue that is not directly 
related to the Balanced Budget Act which is crucial to 
Pennsylvania's hospitals, and that is the disproportionate 
share issue that is, I think, unique to Pennsylvania.
    Since 1986 Pennsylvania hospitals were able--in fact, the 
FIS, fiscal intermediaries, assembled the data to count general 
assistance days toward the DSH payments for Pennsylvania 
hospitals and, as you know, last year HCFA decided that not 
only was that not going to continue forward but that, in fact, 
HCFA was going to go back and collect from all of these 
hospitals. It was a tremendous blow. I think the number is on 
the order of magnitude of $200 million in Pennsylvania.
    Several of us, Chairman Thomas and myself, have raised this 
as an issue of concern and I would like to understand your 
position on that.
    Mr. Hash. Yes, sir. Mr. Greenwood, this has been an 
extraordinarily difficult issue for us. Obviously it, I 
believe, arises from a failure on the part of our contractor to 
apply appropriately the statute and regulations in this area. I 
believe that our review of the formula that is in the law for 
determining Medicare DSH payments makes it very clear that for 
purposes of hospital days that are to be included in this 
calculation, it is days associated with individuals entitled to 
benefits under Medicaid, Title XIX of the Social Security Act.
    Unfortunately, in the case of Pennsylvania, the State seems 
to be reporting to the fiscal intermediary data that put 
together not only Medicaid days but also days associated with 
patients that were eligible for a general assistance program in 
Pennsylvania. That comingling of the days produced a larger 
disproportionate share adjustment than would be authorized 
under the statute if it did not include those general 
assistance days.
    And under the law, we believe that we did not have any 
choice but to collect overpayments that were made in error in 
regard to the inclusion of these inappropriately covered days.
    Mr. Greenwood. Well, is that your conclusion? Is that 
HCFA's conclusion, that you do not have the statutory authority 
to----
    Mr. Hash. Yes, sir, that is our conclusion. And my 
understanding is the fiscal intermediaries that serve those 
hospitals have already initiated the process of recovery and 
that it is ongoing.
    Mr. Greenwood. That is very much the case, with devastating 
consequences. Do you have a position on whether you would like 
the statute changed so that you can right this wrong?
    Mr. Hash. I think actually that is a matter we should 
discuss. I think the reasons behind the statute having been 
written the way it was, presumably at some point people 
believed that the disproportionate share adjustment in Medicare 
should be limited to the fraction of days for low-income 
patients and the proxy for low income was Medicaid-eligible 
individuals. If people want to enlarge that proxy----
    Mr. Greenwood. No, I do not think that is the question, 
sir. Sorry for interrupting you. I think Pennsylvania hospitals 
are content with the notion that forward, looking forward, 
those days will not be counted anymore. The hard part is going 
back and hitting hospitals that are, in fact, very strapped 
because of BBA issues and hitting them again with this double 
whammy is tough. And we are going to pursue giving you the 
authority to at least not have to go back and get those 
payments.
    Let me quickly turn to an issue that is close to that 
raised by Mr. Green, and that is the exempt cancer centers, 
including Fox Chase, which is in my area, serves my area.
    Under the Balanced Budget Act, we directed HCFA to consider 
establishing a separate payment methodology that recognizes the 
special mission of these centers. My understanding is that HCFA 
has declined to do that, not to consider but to, in fact, come 
up with a separate payment methodology.
    And it is my belief that these cancer centers, including 
Fox Chase, are being hammered and are losing significant 
dollars and are threatened by this outcome. Could you discuss 
HCFA's thinking in this regard?
    Mr. Hash. We have not reached a final judgment on that 
question because that will be part of the final rulemaking for 
the hospital outpatient prospective payment system.
    We are very much aware of the concerns of cancer centers. 
There are 10 of them around the country. And obviously the 
Congress, as you pointed out, identified some special authority 
for treatment of them and we are continuing to review that 
question. We have not made our final decisions on it.
    One of the things, again, that may have been somewhat 
misleading is that the impact assessments that went out with 
the proposed rule indicated a very large impact on cancer 
hospitals. We think that, in part, stems, again, from data 
problems in that, in some cases, people may have billed for 
cancer treatments with the drug and the administrative costs 
together, as opposed to separately. The data we have may not 
have broken it out properly.
    Under the proposed rule, we, as I mentioned a moment ago, 
proposed to pay separately for administration and separately 
for the drug and separately for each dose of drug that is 
administered. We want to make sure, through additional efforts 
on the data side, that we, in fact, have a better assessment of 
the impact of this proposal on cancer centers.
    But I want you to know that we do not intend to 
disadvantage and cause those centers not to be able to provide 
the valuable service they are providing to patients who require 
cancer treatment.
    Mr. Greenwood. Thank you.
    Mr. Bilirakis. Miss Capps to inquire.
    Ms. Capps. Thank you. I want to thank Mr. Hash for being 
here today. I appreciate your testimony.
    You spoke earlier about some of the steps that HCFA has 
taken or will take to lessen the impact of the cuts on small 
rural hospitals and I am hoping that in the next couple of 
minutes you can elaborate a little bit on this.
    Most specifically, we have been hearing so many negative 
projections about the proposed hospital outpatient PPS, 
prospective payment system, that it is easy to forget that this 
change is a very pro-consumer provision. Under the current 
system, seniors end up paying about 50 percent of the total 
bill and for most other parts of the Part B benefits the co-pay 
is around 20 percent. And could you remind our committee of the 
disadvantages of this current system and how the proposed 
payment system will take effect?
    Mr. Hash. I would be happy to, Ms. Capps.
    Briefly, as many of you know, historically beneficiaries 
have paid coinsurance for their hospital outpatient services on 
the basis of the hospital charge, which was on a charge 
schedule at the time they received those services. That charge 
does not necessarily bear any relationship to what the program 
ultimately determines is the appropriate amount for the 
service.
    What the BBA changes enable us to do, is to bring those 
beneficiary coinsurance payments into line with 20 percent of 
the Medicare payment amount, which was the intention and 
certainly the statutory provision. Up until now, beneficiaries 
have been subject to a coinsurance that was based on hospital 
charges that were raised very dramatically over time. This 
resulted in some of those copayments equalling as much as 50 
percent or even more of the payment that was made to the 
hospital for those services. The BBA fixes that.
    Ms. Capps. And could I also mention that the AARP has 
written a letter to the speaker, which I would like to submit a 
copy of this letter for the record?
    Mr. Bilirakis. Without objection.
    [The letter follows:]
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    Ms. Capps. Thank you. Asking that the BBA reforms not delay 
this transition to 20 percent and maybe you could speak even 
further about how delaying it, how it is going to affect 
seniors.
    Mr. Hash. Well, I think it is clear that hospital charges 
for outpatient services are likely to continue to rise for a 
number of reasons that have been talked about already here 
today. So, as we continue to delay implementation, those 
coinsurance payments continue to go up. We would like to bring 
that into line as quickly as possible.
    Ms. Capps. And if I have a little bit more time, back to my 
original question. You, in a broad way, outlined some of the 
steps that you are taking to lessen the impact of cuts to 
small, rural hospitals. My district is going to be listening 
for your elaboration in the remaining time on how this is going 
to happen.
    Mr. Hash. Let me just quickly tick off the things I 
mentioned somewhat briefly earlier. We are delaying the 
expansion of the hospital transfer policy, which has been 
applied to 10 DRGs, but was scheduled to be applied more 
broadly. We have delayed that, which will be of benefit, I 
think, not only to rural but to other hospitals, we well.
    We talked about the transition, on a budget-neutral basis 
to the implementation of the hospital outpatient prospective 
payment system. We have talked about delaying what is called 
the ``volume control mechanism,'' which is referred to in the 
BBA as basically an annual target to be applied to the growth 
in hospital outpatient payments. We have decided to suspend 
imposing that target growth rate for the first few years of the 
PPS.
    We also have committed ourselves to changing the criteria 
that allows rural hospitals to qualify for use of the urban 
hospital index, which has the effect of increasing Medicare 
payments to those rural hospitals. And we have talked about 
using the hospital wage index to adjust payments under the 
hospital outpatient prospective payment system from year to 
year.
    I think those changes, combined with the President's 
setting aside of this fund, the $7.5 billion, to smooth out any 
unintended consequences of the BBA, represent real 
acknowledgement of the importance of supporting rural hospital 
providers and all providers who are low-volume providers.
    Ms. Capps. When I go back home, how soon can we begin to 
see this? I do not think it has registered yet, at least among 
the hospitals that I am in touch with.
    Mr. Hash. Well, many of the things I mentioned are 
associated with implementation of the outpatient prospective 
payment system, which, of course, has not occurred yet. So 
these will be associated with that process, which will come 
later next year. The wage index change is being put into place 
right away, so we are getting ready to publish the new criteria 
for that so that there will be an easier opportunity for 
hospitals in rural areas to qualify for a more favorable wage 
adjustment.
    Ms. Capps. Thank you.
    Mr. Bilirakis. Mr. Deal to inquire.
    Mr. Deal. Thank you, Mr. Chairman.
    In your prepared statement you indicate that the solvency 
for the Medicare Trust Fund is projected to be 2015, which is 
one of the more optimistic out-years that I have seen 
projected.
    You also indicate that the President's proposal in the 2000 
budget would ask for a $7.5 billion infusion of money from the 
surplus, the anticipated surplus. I have several questions in 
that regard.
    The 2015 insolvency date, is that the projected date 
without any other additional infusion and without any other 
statutory changes to the current system?
    Mr. Hash. Yes, sir. That is a projection actually that is 
made on behalf of the trustees of the Medicare Trust Fund. It 
is their estimate, which is calculated by the actuary, the 
Office of the Actuary at the Health Care Financing 
Administration.
    Mr. Deal. Do you know the either daily, monthly or annual 
deficit is at the current time?
    Mr. Hash. I do not have it with me, but I do know that it 
exists and is readily accessible and I would be happy to 
furnish it to you.
    Mr. Deal. And I believe that projection for that deficit 
will increase significantly after about the year 2010?
    Mr. Hash. I wish I had the figures here. My recollection is 
that the deficit does appear sometime, under current 
assumptions, after 2010. I just do not have the schedule in 
front of me.
    Mr. Deal. I recognize that questions about surplus have 
always been fluctuating figures. Is the $7.5 billion proposal a 
one-shot infusion out of anticipated surplus for the year 2000?
    Mr. Hash. I think the best way to answer that is that the 
$7.5 billion is part of a broader comprehensive proposal that 
the President has put forward that involves not only the 
smooth-out of the BBA issues that we have been talking about 
this morning, but also the structural reforms to the Medicare 
program and, very importantly, the dedication of a significant 
portion of the surplus to the Medicare Trust Fund.
    To answer it more specifically, the estimate of the $7.5 
billion was the effect of making changes that would actually 
affect years through 2001 to 2009. So it is an effect that is 
estimated over a 10-year period.
    Mr. Deal. So it is not just a one-shot infusion of 
supposedly surplus funds.
    Mr. Hash. As you think about changing BBA policies that 
result in payment changes, those have ripple effects that carry 
on beyond the year in which they are made. And the $7.5 billion 
is intended to be a fund that would cover the out-years, up to 
10 years worth of out-years costs associated with whatever 
package of smooth-out changes to the BBA are agreed to by the 
Congress.
    Mr. Deal. And would the surplus funds be surplus from the 
income tax general revenue stream or would it require using the 
surplus from the Social Security Trust Fund?
    Mr. Hash. These are actually--the $7.5 billion is 
anticipated to be from what we refer to, I believe, as on-
budget surpluses, which are surpluses generated without regard 
to surpluses in Social Security or Medicare trust funds.
    Mr. Deal. And that figure once again is over what period of 
time?
    Mr. Hash. Ten years.
    Mr. Deal. So it would be $7.5 billion over a 10-year period 
from anticipated surpluses.
    Mr. Hash. That is correct, on-budget surpluses.
    Mr. Deal. Mr. Chairman, I would like to yield the remainder 
of my time to my colleague, Dr. Ganske.
    Mr. Ganske. Mr. Hash, I am very disturbed with the gist of 
some of your comments as it relates to the SGR. Basically when 
you talk about the gross domestic product component of this, as 
well as the percentage of recipients, of beneficiaries who are 
in managed care, you admit that you were off.
    Mr. Hash. Those were errors.
    Mr. Ganske. Those were errors. I mean it is right there. 
You admit it. The facts are the facts.
    Mr. Hash. I do, Dr. Ganske.
    Mr. Ganske. But then what you say is well, but we made an 
error, but even though this is a method of calculation for 
payment that is cumulative--in other words, if you make an 
error now and if it is not corrected, that compounds--sort of 
like compound interest----
    Mr. Hash. That is correct.
    Mr. Ganske. That we are just going to let it go.
    You know, I was one of the authors of this bill and we are 
in the process, the staff and I, of looking up the pertinent 
sections for this bill.
    I believe you have the statutory authority to go back and 
fix that error, which you readily admit is an error. And we 
will provide you with the language on that. And I believe that 
this is more than just sloppy if you do not fix this.
    And I want you to take a message to Secretary Shalala on 
this, a strong one, okay? If you make a mistake, own up and fix 
it but do not compound over the next 5 years the error. You 
have got statutory authority to fix an error. There is nothing 
in that statute that I know of that fixes an error in stone, 
and it should be done.
    I do not think Congress has to pass a law on this. It is 
already in the statute.
    Mr. Bilirakis. A very short response.
    Mr. Hash. We intend to fix it and that is why the 
President's budget includes legislation to fix it. We do not 
want to leave it unaddressed and we intend to act on that, with 
the help of the Congress.
    Mr. Bilirakis. The gentleman's time has expired.
    Miss DeGette to inquire.
    Ms. DeGette. Thank you, Mr. Chairman.
    The first thing I want to talk to you about, Mr. Hash, is 
this example I used in my opening statement of the woman who is 
blind from diabetes and who is trying to keep her diabetes 
under control and now, under the Balanced Budget Act, she used 
to get home health care but now she cannot get someone to come 
and fill the syringes. She used to have a registered nurse and 
maybe she does not need a registered nurse but now she cannot 
get anybody.
    And this leads to the obvious tension that we are all 
trying to grapple with here, which is on the one hand, you do 
not want to provide services that are not needed or provide 
people who are more qualified than not. On the other hand, what 
do we do about people like this with a very real need for 
services who are slipping through the cracks?
    I know you addressed the rehabilitation issue but this is 
sort of a different issue.
    Mr. Hash. Well, the case you cited is an extraordinarily 
sympathetic one. I think all of us are struck by this. This is 
a situation that is most unfortunate and we should find a way 
to address it.
    I would say, as you know, it does beg this larger question 
of exactly what are the terms for covering home health 
services. And up until now, the law has been pretty explicit--
that it requires, among other things, that an individual needs 
a skilled level of service, and that has been defined as a 
registered nurse's skill level or a registered therapist's 
skill level.
    That is not to say that people do not need other kinds of 
services that do not require that level of skill, but the 
benefit design currently does not speak to unskilled services 
as a basis for home health coverage under Medicare.
    And it obviously, as we have looked at what has been going 
on in home care, one of the things that grew the most rapidly 
was the home health aide visits. It was not the RN visits or 
the therapist visits that were growing so rapidly. It was the 
home health aide visits. And the difficulty with that was that 
access to the aide coverage under the home health benefit is 
linked to the first-order question: Does the patient meet the 
need for a skilled level service? If they do, then they are 
also qualified for aide services, as well.
    Ms. DeGette. Right. But this is what drives my constituents 
crazy about the government, is because it is sort of like Alice 
in Wonderland to them. Well, I need this but not that.
    Now I understand that the home health care area was and 
still is probably the most rife area with fraud and abuse. On 
the other hand, in an effort to cut that down, what we are 
doing is for seemingly meaningless bureaucratic reasons to 
these constituents, we are cutting off very real services.
    I wonder if HCFA has given any thought to how we can 
balance this out. As I said, this is an extremely sympathetic 
case. But it is not the only case. There are other examples.
    Mr. Hash. I am sure you would appreciate that we are not in 
a position, I think, to say that we should supply aide services 
to people who could benefit from them, notwithstanding whether 
or not they qualify for a skilled service.
    Ms. DeGette. So you do not think there is any solution to 
situations like this.
    Mr. Hash. Well, I do not think within the current structure 
of the statute----
    Ms. DeGette. I understand but part of the context of this 
hearing is how can we fix things.
    Mr. Hash. Right. I think we could definitely talk about 
ways in which the statute might be changed.
    Ms. DeGette. And does HCFA have any ideas on that?
    Mr. Hash. Well, I do not have a proposal on that and, as 
you might know, there would be a significant cost associated 
with it and we would need to weigh that, along with the other 
priorities that need to be addressed or people want to address.
    So I think that is obviously what makes this undertaking 
extraordinarily challenging.
    Ms. DeGette. I agree.
    The second question that is sort of related is this 
streamlined inherent reasonableness test in the balanced budget 
agreement. I am wondering if HCFA has any kind of standard that 
it is using to make sure that beneficiary access and quality of 
care are not compromised with these IR payment adjustments.
    To give you an example, I have a letter from Congressman 
Weldon in front of me where he is talking about these diabetes 
strips, the reimbursement being cut by 10 percent and the 
effect that that has on patients.
    Mr. Hash. We are taking a very careful approach to the use 
of the authority in the BBA on inherent reasonableness and we 
recognize that as we use that authority to make changes 
nationally that we need to have firm market pricing data 
available to base those decisions on. We are not moving forward 
until we have a better sense of market prices on issues before 
we make any changes like this.
    But I would say to you that in many of these areas, and 
test strips is one of them, we had a report by the HHS 
Inspector General that we were significantly overpaying for 
those items. So, that is why it ended up being addressed as it 
did.
    But again, I hasten to add that in order to exercise this 
authority appropriately, we need to make sure we have the data 
base upon which to judge what things are reasonably available 
for in the marketplace.
    Ms. DeGette. Thank you.
    Mr. Bilirakis. Mrs. Cubin to inquire.
    Mrs. Cubin. Thank you, Mr. Chairman.
    I am somewhat confused but first I want to make the 
statement that I realize the focus of this hearing is on the 
Medicare fee-for-service policy changes that are contained in 
the BBA but since Wyoming even yet relies almost completely on 
fee-for-service, I think we have been affected in a much more 
devastating way than other States and other places with higher 
population.
    In my State, if we lose one single doctor, that means 
hundreds or thousands of people do not have any access to 
health care at all.
    I want to go back a little bit to--and by the way, thank 
you for all the cooperation that you have given us in working 
through these things and the questions you have answered so 
far.
    I want to go back to Dr. Ganske's line of questioning a 
little bit. I do not understand why you need help from Congress 
to fix the mistakes that were made with the real GDP and the 
fee-for-service enrollment because one of the four items that 
you are allowed to use in these adjustments is the impact of 
changes in legislative or regulatory initiatives.
    So it seems to me you have the ability to go back and 
correct the mistakes that have been made so this cumulative 
problem does not move forward. So please tell me why you think 
you need a legislative fix.
    Mr. Hash. I would be glad to, and I am glad you raised it 
again because I want to emphasize a point I did not make to Dr. 
Ganske, which is that the errors he is referring to are 
projection errors. They were made by the actuaries. I believe 
we have the finest, most professional, most independent 
actuaries and I know that these were errors that are attendant 
to the estimating process.
    So it is not a case of being sloppy or intentionally----
    Mrs. Cubin. Nobody has a crystal ball.
    Mr. Hash. Right. So I want to make it clear that I do not 
think there were intentional errors.
    Mrs. Cubin. I agree.
    Mr. Hash. They were associated with the estimating process.
    Second, we have carefully and thoroughly and, I would say, 
exhaustively tried to review the statute with our general 
counsel at HHS to determine whether or not the statutory 
language allows us to correct for projection errors. The 
opinion that we have been given is that the statute does not 
acknowledge the authority to make projection error corrections.
    We would like to have that authority and have recommended 
it in the President's budget proposals that are pending here in 
the Congress now.
    Mrs. Cubin. So you do not think that your regulatory 
allowance, if you will--I do not see why it would not because 
projections, making those projections are what is allowed 
through the regulations that you adopted, as I understand it.
    Mr. Hash. But the statute requires that projections be made 
by the actuary on the factors that Dr. Ganske raised and those 
are not a part of the rulemaking regulatory process. We have 
not promulgated a rule that projects either enrollment in 
managed care plans, which is one of the issues, or in the 
growth in the GDP, which is the other issue he cited.
    These are reserved to the province of the independent 
actuaries to make these projections. If they, in fact, make 
errors, we want to be able to correct them. And they are going 
to make errors and the errors are going to be in both 
directions, I might add. It is equally possible--in fact, it 
has occurred in the past where we have underestimated effects 
and that we have not gone back and tried to take money back 
from people as a result of that.
    But I think the important point here is that we want to 
make the change. We want to correct the error and not have it 
ripple forward to all the SGRs of the future.
    Mrs. Cubin. Well, thank you. At least now I understand what 
the thinking is and I did not understand that at all.
    Mr. Hash. We would welcome Dr. Ganske's support and your 
support to have the authority put into the law in upcoming 
legislation.
    Mrs. Cubin. I am glad that I am married to a doctor and not 
a lawyer because this just seems like such a nit-picky thing, 
that because this is projections, we cannot use the legislative 
language because I believe very strongly that was the 
legislative intent.
    Mr. Hash. I understand.
    Mrs. Cubin. Then I want to just ask another thing as far as 
implementation of this goes.
    Mr. Bilirakis. If you can do it really quickly.
    Mrs. Cubin. I can. It has to do with HCFA not yet having 
begun the refinement that was mandated by Congress on the 
practice expense values and the regulation or the proposed 
regulation not allowing staff of practitioners who provide the 
major part of their service in a hospital but the staff in 
their office, not allowing that to be included in the practice 
expense values.
    Mr. Bilirakis. That is an area--I am sorry; I did not mean 
to interrupt.
    Mrs. Cubin. Go ahead.
    Mr. Bilirakis. I was just going to say it is something we 
want to continue to look at. Do you have a very brief----
    Mr. Hash. I have a very short answer, which is that was in 
the proposed rule, Mrs. Cubin, and we are in the process of 
finalizing the rule. We have not made our final decisions and 
that is an issue we are familiar with and we have it under 
review and we intend to address it in the final rule.
    Mr. Bilirakis. But are you in the process of doing that, 
going to take into consideration the additional data that has 
been submitted by, I believe, the AMA? Because if they sent out 
a survey and gotten additional responses and my understanding 
is that you, HCFA, may not be planning to take into 
consideration----
    Mrs. Cubin. The policy was based on 34 responses and I 
believe there are 154 or something like that more now.
    Mr. Bilirakis. Right.
    Mr. Hash. Briefly, it is my understanding, and I would like 
to make sure that I could correct my statements if I am 
speaking in error--it would be unintentional--but what I 
understand is that we did not have sufficient data or time at 
the time we got some information. The data situation may be 
changing.
    It is important to recognize that in our evaluation of 
practice expense values for physician services, we are keeping 
open, during all 4 years of a transition to the new practice 
expense values, the opportunity to reweight or revise those 
practice expense values.
    So even if for some reason it was not included in this 
year's practice expense rule that is coming out later, it would 
not be precluded from being considered subsequently because all 
of the practice expense values that are in place now are 
considered interim and subject to change based on data.
    Mrs. Cubin. Dr. Ganske and I were on opposite sides of that 
issue last year, I believe it was, because I do think we need 
an equalization of fees that are paid to cognitive as well as 
procedural medicine.
    But my problem with this is that we settled on his way, on 
getting more information and new studies. So really I just 
think that the agency has to comply with what the Congress 
ordered and that is, in fact, what the Congress ordered--all 
the expenses to be considered.
    Mr. Bilirakis. That all practice costs be considered, and 
that is the significant thing here. I would probably tend to 
side more with Ms. Cubin's view, but the point of the matter is 
that we do not want to sway from the intent of the Congress, 
which I think is clear that all practice costs be considered.
    Mr. Hash. I understand, Mr. Chairman.
    Mr. Bilirakis. All right.
    Now the bell has gone off. We have a series of votes. There 
are four people over here who have not had an opportunity to 
talk with Mr. Hash and I do not want to take that opportunity 
away from them. So I guess we had better just go ahead and 
break.
    Mr. Towns. If I could just ask one quick question?
    Mr. Bilirakis. Well, I want to get you back here.
    Mr. Towns. I want to come back, especially after I read----
    Mr. Bilirakis. Go ahead with your one question.
    Mr. Towns. [continuing] that Mr. Hash was happy to be here.
    Mr. Bilirakis. But I want to hear that you are happy to be 
here.
    We are going to break for--we will let Mr. Towns ask his 
one question, if it is okay with Mr. Hash.
    Mr. Hash. Yes.
    Mr. Bilirakis. And then we are going to go ahead and break 
for a good half hour anyhow because we have a series of votes. 
I think it is only two, maybe more.
    Mr. Towns. Thank you, Mr. Chairman. I will be brief.
    Under the current projections, New York City Hospital 
stands to lose 40 percent of their revenue from outpatient 
reimbursement. We also have a major problem with reductions in 
indirect medical education.
    Given the financial constraints that we are facing, 
wouldn't it make a lot of sense for HHS to fix the outpatient 
problem administratively and the Congress to address the cuts 
in medical education payments? Wouldn't that make sense?
    Mr. Hash. We are working on that hospital outpatient rule 
and we obviously have not published our final rule and we 
expect to make a number of changes based on the kind of 
comments that we have been getting during the comment period.
    Mr. Towns. Let me say that during the break I had an 
opportunity to do a lot of things with hospitals involved. I 
even visited folks that were ill in the hospital, had an 
opportunity to be administrative shadow for a day, had an 
opportunity to attend several luncheons. I even attended a 
board meeting and I had an opportunity to talk to staff who 
have worked at the hospital for 25 and 30 years. I attended a 
ceremony where people have been working for 30 years in the 
hospital.
    And I must say to you that I am concerned in terms of the 
kind of service that is being rendered at some of these 
hospitals, the fact that the staff were complaining about 
excessive work and being stressed, and all these things affect 
patient care.
    I think we need to be very, very careful as we look at this 
and I think that maybe we need to be more involved in terms of 
the Congress sitting down and talking with you but to be honest 
with you, as I listened to patients in the hospital talking 
about the lack of service and listening to staff talking about 
they cannot provide any more, and then I think I heard you say 
something about the staffing and in all these hospitals, the 
staffing has gone down, there is reduced staff in major kinds 
of ways, to the point where some people are saying that there 
is nothing else to cut, there is nothing else they can take 
away. And, at the same time, we are talking about making 
further cuts in some instances.
    So I want to let you know I am very concerned about it and 
I think that, Mr. Chairman, maybe we need to, not only in this 
hearing but sit down and have some real dialog about this 
health care because this is a serious issue we are dealing 
with.
    Mr. Bilirakis. I have already made the statement and Mr. 
Hash has agreed that we are going to sit down with him and his 
people. And I know that at least one of his staff people here 
has already approached the staff with the idea of sitting down 
with them and we are going to do that.
    We are going to invite both sides of this entire 
subcommittee and I would hope that you would show up and make 
your points at that time so we can get something really----
    Mr. Towns. I would be delighted to participate. I am 
concerned.
    Mr. Bilirakis. And I have voiced the same concerns that you 
have, that I am sort of disappointed that HCFA has not seen fit 
to approach us and say hey, these are some of the things that 
need to be changed in the statute to allow us to do better.
    Mr. Hall. Mr. Chairman, under your leadership and with the 
enormity of the problem that we have and because we are in a 
different atmosphere than we were when we started the balanced 
budget approach in the 1980's and finally concluded it in the 
1990's, that we not adjourn when they set a date this year to 
adjourn, like October 15, that we not adjourn, that we stay 
here for another month and solve this problem.
    We are losing people. Folks are going bankrupt. People are 
going without treatment. It is a disaster and there is an 
answer and the answer is money and we have more money now than 
we had when we wrote the Balanced Budget Amendments.
    Mr. Bilirakis. October 29 was the target date which was set 
up earlier in the year. We have already been told that we will 
be fortunate to get out of here before Thanksgiving.
    The fact of the matter is we are planning to sit down with 
Mr. Hash----
    Mr. Hall. We really ought to stay and get our work done.
    Mr. Bilirakis. If we stay, we may be able to get at them.
    Michael, I cannot relieve you because apparently I do not 
want to keep anybody from inquiring.
    Mr. Hash. I understand.
    Mr. Bilirakis. So we will go in recess for a half hour.
    [Brief recess.]
    Mr. Bilirakis. This hearing is back in session and thank 
you, Michael, for being so patient with us.
    The Chair recognizes Mr. Burr to inquire.
    Mr. Burr. Mike, welcome, and my apologies for my absence. 
And if I cover anything that we have already been over, just 
let me know and I will read the testimony.
    Let me ask you, of the options that exist relative to the 
therapy cap that have been batted around, is there any 
suggestion or recommendation that HCFA has for us relative to 
legislative remedies?
    Mr. Hash. We are definitely looking at options with regard 
to this. We are going to meet. The chairman and I had a 
discussion earlier about meeting later this week to discuss 
specific kinds of proposals and options and I am actually not 
in a position today where I can lay all those options out for 
you, but we intend to do that with the committee and its staff. 
We want to explore that area in particular because, as I said 
earlier, we have reason to believe that in some settings, the 
therapy cap is really not adequate to meet the needs of certain 
kinds of patients, particularly patients in nursing home 
settings, and we want to see what can be done about that.
    Mr. Burr. You mentioned I think in your testimony or in 
some reference that you were examining information from Wall 
Street regarding trends in Medicare and I just wonder if you 
can tell us what type of information that is and what you are 
receiving and comment on investors as it relates to the 
attractiveness of this health care delivery system.
    Mr. Hash. The information we have been reviewing, Mr. Burr, 
has not been so much about the opinions of people who are in 
the investment business as much as it has been looking at SEC 
filings in which corporations obviously have to disclose 
material financial issues to their stockholders and to the 
public, and we have been looking at that as some kind of 
indication about the financial health or viability----
    Mr. Burr. When we see a 50 percent drop in the assets of 
long-term care facilities, should that be a sign that 
policymakers look at for health conditions?
    Mr. Hash. It should be, but as I know you know, as we have 
looked at the nursing home industry that you are referring to, 
we have come to the judgment, as has, I think, the GAO and IG, 
as well, that many factors have gone into the changing asset 
values of those companies. Medicare policy certainly may be one 
aspect of it, but clearly there are other business decisions, 
or market conditions, which have put some of these firms in 
financial jeopardy, that are unrelated to the Medicare payment 
system.
    Mr. Burr. But you would not object if the whole industry 
was affected from an asset value after BBA 1997? Granted there 
were some individual players that had business decisions that 
were evaluated differently but the industry was devalued in 
asset value based upon the changes.
    Mr. Hash. I honestly am not sufficiently familiar from an 
industry-wide basis. We have been concentrating on the 10 
largest national chain organizations to get a sense of, 
particularly those that are publicly traded, what has been 
happening in their filings. And, as some people have pointed 
out earlier, on Monday, Vencor Corporation filed for Chapter XI 
bankruptcy protection.
    Mr. Burr. The financial health of that industry, you would 
agree, has an effect on any long-term expansion plans that they 
might have?
    Mr. Hash. I am certain that it would, yes.
    Mr. Burr. Let me ask you and I was told that you went over 
this ground but I would like to give you one more opportunity 
to answer it for me. I think HCFA has interpreted the 
outpatient statutory language such that hospital outpatient 
payments are $900 million less per year.
    Now HCFA received a letter from quite a few members of this 
institution. I was one of those. And simply how would HCFA 
respond to that?
    Mr. Hash. What we have said, Mr. Burr, is that we recognize 
that this is a serious problem. It has been brought to our 
attention by all sorts of people. And we have asked our general 
counsel at HHS to review the statutory language closely and 
carefully to see if we have any basis for coming to a different 
conclusion----
    Mr. Burr. Was there something that was not clear in the 
letter from those Members of Congress that, in fact, the way 
HCFA interpreted was not the intent of Congress in the 
language?
    Mr. Hash. I think where we are, Mr. Burr, is that we have 
done the best job we have to read the actual language of the 
statute and when we have done that, we believe that the 
interpretation that we have applied to it is the appropriate 
one.
    We are still looking, however, to see if, in fact, there 
are alternative ways of evaluating the intent here. As I know 
you know----
    Mr. Burr. Not to be adversarial but what is a better way to 
interpret the intent than to ask the people who wrote it, which 
is, I think, what the letter confirmed?
    Mr. Hash. The letter does express that view and that is 
correct, Mr. Burr, but I think our judgment on this is that we 
are still trying to make sure that we are implementing the law 
as it was written. We have not come to a conclusion here in the 
end. That is what I said earlier. We are still reviewing this 
matter and we have not made a final judgment.
    Mr. Burr. Well, my only hope is that that letter has 
clarified in the minds of those at HCFA what the congressional 
intent of that legislation spelled out.
    Let me ask you very quickly on home health care, would HCFA 
recommend today that we delay the October 1, 2000 PPS plans and 
the 15 percent reduction?
    Mr. Hash. We would not, Mr. Burr.
    Mr. Burr. Will HCFA suggest or recommend any changes to the 
current reimbursement structure that we have for home health?
    Mr. Hash. Well, we are on the verge of publishing a 
proposed rule for the home health prospective payment system 
and I think people will see in that proposed rule the kinds of 
approaches that we have taken, trying again to follow the BBA 
admonition.
    Mr. Burr. But one could interpret that under the PPS it 
would meet the letter of the law, which is that there has to be 
at least a 15 percent reduction from where we started?
    Mr. Hash. Yes, sir. I believe our view is that the statute 
is extraordinarily explicit with regard to that issue.
    Mr. Burr. I realize my time has run out. I would remind the 
chairman and also for the purposes of HCFA that I remember 
sitting in the same room when the administration introduced 
this insane plan that had a 15 percent arbitrary cut at a 
predetermined date sometime in the future for home health. And 
when pressed, the then-administrator of HCFA said yes, it was a 
budget decision that stuck a number to meet a financial figure. 
And I said at that time I hope we are not crazy enough to adopt 
it, and I did.
    I came to Congress for one reason--to have a balanced 
budget. In 1997 that one issue forced me to vote no on BBA 
1997.
    Today I feel good about that but the reality is I think it 
was still arbitrary at the time. It is wrong today and I am 
hopeful, Mr. Chairman, that this committee will look at it, 
along with HCFA, to determine whether there is a better way to 
do it so that it is fairly applied and so that that specific 
industry, which we looked at a number of years ago as a 
significant piece of the cost savings picture for Medicare--if 
we can move patients out of hospitals faster because of care 
they can be given off-premise, that, in fact, we reach a more 
efficient and cost-effective system. And I think to some 
degree, they have now gotten hung up in everything else that is 
being squeezed.
    I thank you, Mike.
    Mr. Bilirakis. I thank the gentleman. I would just merely 
say that I think the BBA 1997 accomplished most of its 
objectives but, as I also said in my opening statement, there 
are a lot of unintended consequences, unforeseen problems. 
Bigness will do that and God knows we are talking about bigness 
here. It is up to us to try to correct those problems but first 
we have to admit that there are problems there.
    Mr. Burr. Let me acknowledge that the attempt was a very 
good attempt. It is just I was torn on just how bad that one 
provision smelled. Thank you.
    Mr. Bilirakis. Well, you were being ultra careful, I guess.
    Mr. Deutsch to inquire.
    Mr. Deutsch. Thank you, Mr. Chairman. I just mentioned to 
my staff that in the 12 steps, the first is an acknowledgement 
that there is a problem, so at least we are one step along the 
way.
    Particularly I guess this is a timely question. Could you 
explain to us the changes in nursing homes who are forced to 
evacuate residents, as some have, because of the impending 
hurricane throughout almost 1,000 miles of to East Coast of the 
United States, who would pay for this transportation, how has 
it changed under BBA when the patients are transferred, and 
what risks do patients face in that?
    It is my understanding that there is actually a BBA change 
regarding transportation factors in terms of nursing home 
residents, that it is a nonreimbursable expense at this point 
in time.
    Mr. Hash. I must say I am not sure I understand fully your 
question, or maybe I am not fully familiar with the facts here, 
but I am not aware that if a nursing home has to be evacuated 
because of a natural disaster or other reason that puts 
individuals in jeopardy of their safety or their health, that 
the cost of transferring those patients would likely be borne 
through costs that the program, on a proportionate basis, would 
incur because not all of the individuals would be individuals 
who are being paid for under Medicare, for example.
    Mr. Deutsch. Right. But my understanding is that that 
transportation, emergency transportation expense, there is no 
provision, and actually your staff is probably providing the 
answer at this point.
    Mr. Hash. Well, it is an answer I had actually sort of 
thought of, which was that there was a change in the BBA in the 
nursing home PPS system. The change requires that for 
individuals who are in a nursing home for what is called a 
Medicare Part A stay, a skilled stay, that ambulance services 
that are for services that should otherwise be covered by the 
nursing home because the person is a resident there, would not 
be covered.
    If there is an emergency however, like an individual has a 
heart attack or some emergency while they are in the nursing 
home in a Part A stay, the transportation to the emergency room 
and hospital would be a covered service. It is just that 
routine transportation, for purposes of services that could 
otherwise be provided in the nursing home, is not covered but 
an emergency case would be covered.
    Mr. Deutsch. So your explanation is that an evacuation in a 
pending hurricane would be covered?
    Mr. Hash. I would like to discuss that with you further. I 
am not sufficiently familiar----
    Mr. Deutsch. The good news is that it does not happen very 
often.
    Mr. Hash. Right.
    Mr. Deutsch. But my understanding is that it is 
unreimbursable.
    Mr. Hash. I would be happy----
    Mr. Deutsch. I am sure there is an answer but what nursing 
homes have told me is that----
    Mr. Hash. That is not reimbursable?
    Mr. Deutsch. That is correct, yes. And again obviously it 
does not make any sense. So it is just one of these unintended 
consequences.
    Let me follow up, and I know you have had some questions on 
this but not in the kind of detail hopefully we can get into.
    On the $1,500 cap, which I have heard your response to Mr. 
Burr, as well as earlier, and I think all of us acknowledge 
that there is a problem with that, how does HCFA reconcile the 
cap on the covered therapies with the skilled nursing facility 
OBRA requirements to require all care and services to enable 
the residents to attain, and both of us are aware of this, the 
highest practical level of physical and psychological and 
sociopsychological well-being?
    Do the nursing home surveys take this into consideration 
that services are not covered, for instance, when issuing 
citations? And specifically, has HCFA at this point stopped 
enforcement on these issues, with the acknowledgement of the 
problems related to the caps?
    Mr. Hash. Well, this is an important and complicated 
question, Mr. Deutsch. The first thing is that many nursing 
home residents are covered under Medicaid and therefore that 
program in most States, and I think this is the case in 
Florida, that program actually covers therapy services that are 
provided to nursing home residents under Medicaid.
    So with respect to medically necessary therapy services for 
an individual who has a nursing home stay that is being covered 
under Medicaid, it would be covered under that benefit.
    With respect to an individual who is in a Part A Medicare 
stay, that individual actually, the prospective payment rate 
includes an allowance for therapy services that is not related 
to the $1,500 cap. So there is no cap, dollar cap on therapy 
services to residents who are in a Part A stay.
    Mr. Deutsch. Right. But percentagewise, and you have 
probably and your staff I am sure has it far better than I do; 
my guess is we are talking in terms of Medicaid-eligible in a 
nursing home, we are talking less than 50 percent almost for 
sure. So we still have that gap issue.
    Mr. Hash. But the other 50 percent, I believe, is private 
pay.
    Mr. Deutsch. Right, but private pay in terms of the level 
of private pay out of pocket when you are hitting that $1,500 
becomes totally cost-prohibitive in terms of families, I mean 
in terms of middle class families. Private pay does not mean 
that people have millions of dollars to spend in terms of 
ancillary care.
    I guess I am just trying to--and unfortunately, that 5 
minutes goes pretty fast--I am really trying to get a sense, 
and your staff has actually met with me on this issue and 
talked about trying to get a fix on what really is going on in 
facilities and I have met and I am talking with nursing home 
operators about what is happening in the real world and talked 
we therapists, as well.
    And I do not think there is a question that people are 
falling through the cracks at this point in time. What is your 
best feel for how many people are falling through the cracks? I 
mean the typical person is the stroke victim who goes through 
their Part A but still is in the nursing home and needs clearly 
beyond the $1,500 cap of therapy. What a physician would 
normally recommend--that, I think, is just one category of 
patient that easily fits into that category.
    And I guess the reason why I ask the question the way I 
did, first of all, I had a concern that I have expressed to 
your staff that I think we really are in a conflict for the 
Medicare statute itself in terms of medically necessary 
services. But I think we are also in a conflict in terms of the 
OBRA requirements of the skilled nursing facilities in terms of 
treatment of patients.
    Mr. Bilirakis. A brief response to that, please, so we can 
let you go.
    Mr. Hash. I understand the problem and I think you are 
correct in saying there are individuals whose needs are not 
being met by this benefit because of the limit. That is why I 
said in my statement that this is one of the areas that we 
wanted to explore, to make sure that our beneficiaries were 
getting access to therapy services that they need. And we do 
need to fix that if we can and I think that is a part of our 
commitment to working with the Congress to address the therapy 
cap issue.
    Mr. Bilirakis. Okay. Now the gentleman's time, of course, 
has expired.
    There will be written questions submitted to you and 
because we trust and hope that with all of us working together, 
this is on a fast path, we would hope that those responses will 
be sooner rather than later.
    Mr. Hash. I understand, Mr. Chairman.
    Mr. Bilirakis. Additionally, I understand your staff is 
meeting with our staffs probably later on this week for sure, 
so hopefully next week we can sit down around a table and Mr. 
Deutsch should hear this--I am not sure whether you were here 
when we talked about this earlier but we are going to meet with 
Mr. Hash around the table here and try to work things out.
    Now prior to that, I wonder; you have admitted, I think, 
and I understand that others have been talking to the White 
House and they have admitted that there are areas where you can 
have administrative fixes.
    Mr. Hash. Yes, sir. And we have tried to take those 
actions.
    Mr. Bilirakis. Could you maybe share those with us at the 
gathering that we have hopefully next week?
    Mr. Hash. Yes, sir.
    Mr. Bilirakis. If you can, that way maybe we can put those 
aside and work on the areas that possibly we need to be further 
involved in.
    Mr. Hash. Yes, sir.
    Mr. Bilirakis. If there is nothing more, we very much 
appreciate your taking the time. I know you had something else 
to do and we kept you considerably longer than we had hoped to.
    Mr. Hash. I appreciate it. I am glad to have the 
opportunity and I think this was a very useful and valuable 
exchange. It helps to obviously form the basis for our working 
together to address this in the weeks ahead.
    Mr. Bilirakis. Thank you. Thank you very much.
    The next panel consists of Dr. Murray Ross, executive 
director of the Medicare Payment Advisory Counsel that we 
fondly refer to as MedPAC; Mr. Daniel L. Crippen, director of 
CBO; and Mr. William J. Scanlon, director of Health Financing 
and Public Health at GAO.
    Gentlemen, first I want to thank you for your patience and 
your consideration. I think all of you have gone through this 
before so you know what that can be like. I also apologize 
because we lost our panel, too, and that always is what 
happens. That is why I keep telling the staff that we should 
not have these large witness panels because invariably that is 
what happens. By the time the third panel gets up here, God 
only knows how many people will be here.
    So you have 5 minutes. Your written statement, of course as 
you know, is already a part of the record. We would hope that 
you would supplement and complement that. We will kick it off 
with Dr. Ross. Please proceed, sir.

   STATEMENTS OF MURRAY N. ROSS, EXECUTIVE DIRECTOR, MEDICARE 
  PAYMENT ADVISORY COMMISSION; WILLIAM J. SCANLON, DIRECTOR, 
HEALTH FINANCING AND PUBLIC HEALTH, GENERAL ACCOUNTING OFFICE; 
   AND DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET OFFICE

    Mr. Ross. Thank you. Good afternoon Mr. Chairman and Ms. 
DeGette.
    I am pleased to be here representing MedPAC to discuss what 
we know and do not know about the implications of the BBA for 
beneficiaries and providers in Medicare's traditional fee-for-
service program. I will also discuss very briefly some of our 
recommendations that we think would improve Medicare's payments 
and preserve access to care for beneficiaries.
    The BBA had an ambitious objective and to expect 
legislation so sweeping to achieve this objective flawlessly 
is, of course, unrealistic. But providers' complaints 
notwithstanding, we have no evidence that wholesale changes are 
either necessary or desirable.
    Now providers' concerns are clearly relevant to any 
assessment of the BBA but, at the same time, we must remember 
that Medicare's objective is to provide access to high quality 
care for beneficiaries. Assessing the implications of the BBA 
should therefore focus on whether access to or quality of care 
has been impaired and, if so, what can be done about it?
    Measuring access is difficult and attributing changes to 
access to specific changes in policy even more so. Therefore, 
policymakers often look at determinants of access, such as the 
financial measures that may affect the supply of providers and 
at their willingness to serve Medicare beneficiaries.
    During the past year, various indicators have been cited to 
demonstrate the impact that the BBA has had on providers. The 
hospital industry, for example, has issued several reports 
analyzing hospital revenues and margins. A second example is 
the closures of home health agencies since the IPS, the interim 
payment system, was put in place, and I think Bill Scanlon will 
talk to you about those.
    In the case of hospitals, MedPAC staff has analyzed the 
reports and we believe they somewhat overstate the impact of 
the BBA on margins, in some cases by overestimating what 
happened to costs in 1998. They do, however, correctly present 
its overall direction. Medicare payments are no longer rising 
more rapidly than costs.
    But what this means for Medicare policy is not yet clear. 
First, the pressures that hospitals are facing reflect not only 
Medicare's payment policies but also continued pressures on 
revenues from other payers.
    Second, because hospitals will respond to financial 
pressures by attempting to slow cost growth, projected margins 
serve only as a gauge of that pressure, not as a prediction of 
what will occur.
    Industry and policy analysts have expressed concerns that 
the new prospective payment system for nursing facilities and 
the IPS for home health agencies will make these providers 
unwilling to serve Medicare beneficiaries with extensive needs. 
Concerns have also been raised about the new system for 
determining physician fees. Three studies, one by the HHS 
inspector general, that looked at nursing facility access and 
two by MedPAC, indicate that these concerns have not yet 
generated widespread problems.
    To assess concerns about access under the interim payment 
system, MedPAC surveyed about 1,000 home health agencies 
earlier this year. Virtually all of the agencies we surveyed 
accept new patients but the number accepting all new Medicare 
patients is now about 75 percent; that is down from about 85 
percent before the IPS. About 40 percent of the agencies 
reported that they no longer accept certain patients that they 
accepted before IPS and 30 percent reported discharging 
patients because of the IPS. Agencies identified long-term or 
chronic care patients as the ones they no longer admitted or 
discharged.
    Now while these are consistent with the claim that the IPS 
has hampered access, these findings also do not tell the entire 
story. First, the changes in payment policy that were put in 
place were accompanied simultaneously by policies at HCFA to 
reduce fraud and abuse. HCFA, as you know, also adopted the 
sequential billing procedure for processing home health claims.
    And finally, assessing the impact on beneficiaries is 
confounded because we do not know whether the changes in the 
use of home health services are appropriate.
    Our second survey was intended to assess the effects of 
changes in how physicians are paid. The BBA introduced a single 
conversion factor that reduced payment rates for surgical 
services and generally increased them for other services.
    We surveyed 1,300 physicians on their willingness to serve 
Medicare beneficiaries and the results were reassuring. Among 
physicians accepting all or some new patients, 95 percent 
accepted new Medicare fee-for-service patients both in 1997 
before the changes were put in place and in early 1999.
    The vast number of changes to Medicare's payments make it 
essential to continue monitoring access. And MedPAC, along with 
GAO and HCFA, will do so. On the payment side, MedPAC's March 
and June reports note where we believe policy changes are not 
yet warranted and recommend specific targeted policies that 
could alleviate some of the concerns regarding access to care 
in the future. Let me highlight some of the latter.
    There has been a lot of discussion regarding the 
prospective payment system for outpatient hospital services 
this morning and MedPAC too is concerned with this system. We 
feel it is too aggregated, making it likely to overpay for some 
services in a group and underpay for others. This could lead to 
future access problems for beneficiaries needing services whose 
payments fall short of costs. MedPAC recommends that the PPS be 
based on the cost of individual services.
    And, as you heard, implementing the PPS will reduce 
payments for virtually all hospitals and significantly for 
specific types of hospitals. MedPAC recommends monitoring 
access closely to ensure that access to hospital outpatient 
services is not compromised. We also think that consideration 
should be given to phasing in the new payment system to help us 
detect any problems before they become severe.
    The OIG report provides some comfort that anecdotal reports 
of access problems for beneficiaries needing skilled nursing 
care do not indicate a widespread problem today, but MedPAC is 
concerned that the mismatch between payments and costs for some 
high acuity patients could cause problems in the future and we 
recommend refining the system to improve its ability to predict 
the use of nontherapy services and supplies.
    In the short run, a PPS for home health care that accounts 
for differences among beneficiaries will remedy some of the 
concerns about the IPS, but the timetable is very tight. So we 
recommended in June that Congress consider a progress for 
agencies to exclude a small share of their payments from the 
per-beneficiary limits.
    In the longer run, ensuring that Medicare beneficiaries 
have access to appropriate home health care requires clarifying 
the benefit and to that end, we recommend that the secretary 
speed development of regulations that would base eligibility 
and coverage for those services of clinical factors and 
recommend legislation to the Congress to enact them.
    Let me make one final recommendation concerning the 
physician payments. The problems with the sustainable growth 
rate system that updates payments for physicians have received 
less publicity than changes in facility payments. But as we 
heard earlier today, uncorrected projection errors and possible 
wide swings in payment updates raise questions about access 
problems in the future to physician services. MedPAC recommends 
that the Congress require the secretary to correct estimates 
used in the SGR calculations and enact legislation to modulate 
swings in those updates.
    That concludes my statement and I will be happy to answer 
any questions you have.
    [The prepared statement of Murray N. Ross follows:]
Prepared Statement of Murray Ross, Executive Director, Medicare Payment 
                          Advisory Commission
    Good morning Chairman Bilirakis, Congressman Brown, members of the 
Committee. I am Murray Ross, executive director of the Medicare Payment 
Advisory Commission (MedPAC), and I am pleased to be here to discuss 
what we know and do not know about the implications of the Balanced 
Budget Act (BBA) of 1997 for beneficiaries and providers in Medicare's 
traditional fee-for-service program. I will also discuss 
recommendations that MedPAC made in its two reports to the Congress 
earlier this year and other options you may wish to consider.
    The changes enacted in the BBA and implemented by the Health Care 
Financing Administration (HCFA) reduced Medicare payment rates relative 
to what they would have been otherwise and, not surprisingly, have 
generated concerns among providers about their effects. Providers' 
concerns frequently have been heightened by their perception that the 
effects have been more harsh than the Congress intended, or that the 
effects, while intended, have nonetheless imposed burdens on providers, 
and that there are specific problems with how HCFA has implemented the 
law. My testimony today focuses on five types of services--inpatient 
hospital, outpatient hospital, skilled nursing, home health, and 
physician--that have been the subject of much discussion this year.
Summary
    A greater than expected slowdown in Medicare spending began in 
fiscal year (FY) 1998 and has continued this year. Medicare spending 
rose only 1.5 percent last year, compared with a projection of 5.7 
percent by the Congressional Budget Office when BBA was enacted. 
Through the first 10 months of FY 1999, outlays are running about 1 
percent below the FY 1998 rate for the same period.
    Unfortunately, we cannot draw definitive conclusions about what the 
slowdown in spending means for providers and beneficiaries. Almost two 
years have gone by since the first BBA policies were put in place, but 
systematic data for this period are still extremely limited. Moreover, 
we cannot easily isolate the effects of the BBA from other changes. 
Hospitals, for example, have argued that the changes in Medicare 
payments stemming from the BBA are reducing their margins and impinging 
on their ability to provide quality care. But the most recent complete 
information we have for the Medicare program is from FY 1997, the year 
before the BBA took effect. And the limited data we have now do not let 
us separate out the effects of Medicare's policies from other changes. 
For home health services, we have seen lower than expected outlays, 
closures of home health agencies, and declines in the use of services. 
But our interpretation of these findings is clouded by other policy 
changes, notably efforts by HCFA and the Department of Justice to cut 
down fraud and abuse in the home care industry, and by the lack of 
clear eligibility and coverage guidelines for home health care.
    The BBA had an ambitious objective for Medicare's fee-for-service 
program: modernizing payment systems and slowing the growth in spending 
while preserving Medicare beneficiaries' access to high-quality health 
care. To expect legislation as sweeping as the BBA to achieve this 
objective flawlessly is unrealistic. In a number of instances, targeted 
changes in statute or in regulation could improve Medicare's payments 
and access to care for beneficiaries. But providers' complaints 
notwithstanding, we have no evidence that wholesale changes in the BBA 
are either necessary or desirable.
How did the BBA change payments to providers?
    The BBA enacted the most far-reaching changes to the Medicare 
program since its inception. The law reduced payment updates or 
otherwise slowed the growth in payments to virtually all fee-for-
service providers. It established, or directed to be established, new 
prospective payment systems for services provided by hospital 
outpatient departments, skilled nursing facilities, and home health 
agencies. Finally, the law revised the mechanism for updating fees for 
physician services.
Inpatient hospital services
    The BBA changed payments for inpatient hospital services in a 
number of ways. For hospitals under Medicare's prospective payment 
system (PPS), the law provided for no update to operating payments in 
FY 1998 and limited updates in FY 1999 through FY 2002. It required 
phased reductions in the per-case adjustments for the indirect costs of 
medical education (IME) and, temporarily, for hospitals serving a 
disproportionate share (DSH) of low-income patients. And it instituted 
a new transfer policy for 10 high-volume diagnosis related groups 
(DRGs), reducing the payment rates when hospitals discharge patients in 
these DRGs to post-acute care facilities following unusually short 
stays.
    By themselves, lower updates would have slowed the growth in 
payment rates to hospitals for inpatient services but would not have 
reduced them. In FY 1998, however, the combined effect of the freeze on 
payment rates, smaller IME and DSH payment adjustments, and a small 
decline in the case mix index reduced payment rates in absolute terms. 
In FY 1999 and later years, however, payment rates should begin to 
increase again, albeit at a slower rate than would have occurred in the 
absence of the BBA.
Outpatient hospital services
    In addition to changes in payments for inpatient services, the BBA 
also enacted major changes in Medicare's payments for services provided 
in hospital outpatient departments. It eliminated the so-called 
formula-driven overpayment under which Medicare's payments did not 
correctly account for beneficiaries' cost-sharing and extended the 
reduction in payments for services paid on a cost-related basis. The 
law also directed the Secretary to establish a prospective payment 
system for services that have been paid at least partially on the basis 
of incurred costs.
    Hospitals have not yet felt the full impact of the BBA provisions 
affecting outpatient services. MedPAC estimates that elimination of the 
formula-driven overpayment, which took effect in 1998, reduced payments 
by about 8 percent. However, the PPS that was to have gone into effect 
in January 1999 will not be put in place before next summer. HCFA 
originally estimated that the PPS would reduce payment rates by 3.8 
percent, on average, but has since revised its estimate of the 
reduction to 5.7 percent. These estimates likely overstate the ultimate 
reduction, however, as hospitals will have an incentive to code 
outpatient services more accurately than they do now.
Services in skilled nursing facilities
    The BBA enacted a prospective payment system for services provided 
in skilled nursing facilities (SNFs). These services had previously 
been paid on the basis of costs, subject to limits on routine services. 
Under the new system, payments are intended to cover the routine, 
ancillary, and capital costs incurred in treating a SNF patient, 
including most items and services for which payment was previously made 
under Part B of Medicare. Patients in SNFs are classified under the 
Resource Utilization Group system, version III (RUG-III), which groups 
patients by their clinical characteristics for determining per diem 
payments.
    The new payment system slows spending growth for SNF services by 
moving these facilities from cost-based reimbursement to federal rates 
that are based on average allowable per diem costs in FY 1995, trended 
forward using the increase in the SNF market basket index less 1 
percentage point. Because nursing home spending--particularly for 
ancillary services--grew rapidly between FY 1995 and FY 1997, using FY 
1995 as the base for payment purposes reduced payments for many nursing 
homes. The PPS is being phased in over a four-year period that began in 
1998. Payments in FY 1999 are based on a 50/50 blend of federal rates 
and facility-specific rates and will be based entirely on the federal 
rates beginning in FY 2001.
Home health services
    Before the BBA, home health agencies were paid on the basis of 
costs, subject to limits based on costs per visit. The BBA directed the 
Secretary to implement a prospective payment system effective October 
1999--since delayed by the Congress to October 2000--and established an 
interim payment system (IPS) intended to control the growth in spending 
until the PPS was in place. The IPS reduced the limits based on costs 
per visit and introduced agency-specific limits on average costs per 
beneficiary based on a blend of agency-specific costs and average per-
patient costs for agencies in the same region. Home health agencies are 
now paid the lower of their actual costs, the aggregate per-beneficiary 
limit, and the aggregate per-visit limit. Agencies' per-beneficiary 
limits are based on their average costs per beneficiary in FY 1994, 
trended forward using the home health market basket index. As with 
nursing homes, home health spending grew rapidly in the mid-1990s. For 
this reason, using FY 1994 as a base for payment led to substantial 
payment cuts for some home health agencies.
Physicians' services
    The BBA replaced the volume performance standard system that had 
been used to update physicians' fees with a new sustainable growth rate 
(SGR) system. It also introduced a single conversion factor for all 
physician services that reduced payments for some services while 
increasing them for others. Finally, the BBA established requirements 
for payments to physicians for their practice costs.
    Unlike some of the other provisions of the BBA, changes to 
Medicare's payments to physicians occurred almost immediately. Starting 
on January 1, 1998, the single conversion factor was implemented along 
with the first step toward revising practice cost payments. The effects 
of these changes were largest for some surgical procedures, such as 
cataract surgery and some orthopedic procedures, where payment rates 
fell by 13 percent or more. Payment rates for other services went up, 
however. Payments for office visits and some diagnostic services 
increased by at least 7 percent.
What has been the impact of these payment changes?
    Providers' concerns are clearly relevant to any assessment of the 
BBA. But at the same time, we must remember that the primary objective 
of the Medicare program is to maintain access to high-quality care for 
beneficiaries. Assessing the implications of the BBA should therefore 
focus on whether access to or quality of care has been hampered and, if 
so, what can be done about it.
    In evaluating the potential impact of the BBA on access and 
quality, two issues seem especially important. One is how payment 
policies for different services may interact to affect providers' 
ability and incentives to furnish care. Many hospitals, for example, 
furnish most types of services, including skilled nursing services and 
home health care. Consequently, they must face the combined effects of 
policy changes that have altered payments for virtually every service 
they provide.
    A second critical issue is whether the new payment systems 
adequately reflect predictable differences in patient care costs. 
Industry and other analysts have raised this issue with regard to the 
new payment system being developed for outpatient hospital services, 
the PPS being phased in for skilled nursing facilities, and the IPS for 
home health agencies. Where predictable differences in costs are not 
taken into account, financial incentives are created for providers to 
deny access to care or undertreat identifiable groups of patients.
    Sorting out the effects of multiple changes in payment policies and 
the introduction of new payment systems on beneficiaries' ability to 
obtain the medical services they need is challenging in two important 
respects. First, many BBA changes have not yet been fully phased in, 
and data to evaluate the impact of recent changes are in many cases not 
yet available. Second, measuring access to care is difficult. Because 
directly measuring appropriate beneficiary use of services is hard to 
do with existing data, policymakers often look at determinants of 
access, such as provider availability and willingness to serve Medicare 
beneficiaries, as well as the nature and extent of other barriers to 
access that beneficiaries face. Interpreting the findings of these 
analyses can be difficult, however, because we cannot isolate the 
effects of changes in Medicare policy from the effects of other changes 
in health care financing or delivery arrangements.
Financial impacts
    During the past year, various indicators have been cited as 
measuring the financial impact that the BBA is having on providers. The 
hospital industry, for example, has issued several reports analyzing 
the impact of the BBA on hospital revenues and margins. A second 
example is the closures of home health agencies since the IPS was put 
in place. Industry and other observers have cited declines in the 
number of agencies as putting beneficiaries' access to home health care 
services at risk.
    Hospitals. The reports issued by the hospital industry contain new 
projections, but they do not present new data. In response to 
congressional requests, MedPAC staff has analyzed these projections and 
found that all of them portray a more adverse impact of the BBA than we 
believe to be the case. Some present a particularly inaccurate picture 
of the impact in FY 1998 by assuming a rate of increase in costs that 
substantially exceeds what we already know to have occurred. Data from 
the American Hospital Association's National Hospital Panel Survey 
suggest that when complete Medicare cost report data become available 
later this year, we will again see a decline in Medicare cost per 
discharge for FY 1998, the fifth year in succession.
    Although we believe that industry reports somewhat overstate the 
impact of the BBA on hospital margins, they do correctly present its 
overall direction. As it was intended to do, the law has reversed a 
six-year trend of Medicare payments rising more rapidly than the costs 
of treating Medicare beneficiaries. Still, two reasons make it 
difficult to interpret what changes in total margins mean for Medicare 
policy. First, the financial pressure that hospitals are currently 
experiencing reflects both changes in Medicare's payment policies and 
continued strong downward pressure on revenues from private managed 
care plans and other payers. In FY 1997, private payers' payments 
dropped by 4 percentage points relative to the cost of treating their 
patients, while Medicare payments rose relative to costs. Data for FY 
1998 are not yet available, but we have every reason to believe that 
the downward pressure from private payers continued as Medicare reduced 
its payments. Second, because hospitals can be expected to continue 
responding to financial pressures by slowing cost growth--the overall 
increase in costs per case for all patients has been below 2.5 percent 
for five straight years--projected margins serve only as a gauge of 
financial pressure, not as a prediction of what will occur. MedPAC has 
seen no convincing evidence that the changes to date have affected 
either quality or access in the inpatient sector, but we will continue 
to monitor developments.
    Home health agencies. To examine whether the closures of home 
health agencies may have affected beneficiaries' access to services, 
the General Accounting Office (GAO) analyzed the distribution of 
closures across urban and rural counties. The agency also interviewed 
stakeholders' representatives of state agencies, beneficiary advocates, 
hospital discharge planners, and managers of home health agencies--in 
34 primarily rural counties that had experienced significant agency 
closures or declines in the use of services. GAO concluded that the 
closures have had little impact on Medicare beneficiaries to date. 
However, the agency noted that beneficiaries who are more costly than 
average may face difficulty in obtaining home health care in the future 
as agencies change their behavior in response to the IPS.
    The GAO study found that while about 14 percent of agencies had 
closed between October 1, 1997, and January 1, 1999, more home health 
agencies were in existence at the beginning of FY 1999 than at the 
beginning of FY 1996. The study found that most of the closures 
occurred in urban counties and that about 40 percent of the closures 
occurred in three states--Louisiana, Oklahoma, and Texas--that had seen 
a large expansion in the number of agencies and that had utilization 
rates well above the national average.
    Stakeholders interviewed by the GAO reported few access problems 
currently. State survey agency representatives, for example, indicated 
that adequate capacity continued to exist despite the closures and 
reported that they had received few complaints about access to Medicare 
home health care. Discharge planners and home health agency managers 
reported that beneficiaries living in counties that had lost agencies 
still had adequate access through agencies located in adjacent 
counties.
Willingness to serve beneficiaries
    Industry and policy analysts have expressed concerns about the 
case-mix adjuster used in the new PPS for skilled nursing facilities 
and the lack of case-mix adjustment in the IPS for home health 
agencies. Concerns have also been raised about the new system for 
determining physicians' fees.
    Skilled nursing facilities. In the case of SNFs, concerns have 
centered around the payment weights used in conjunction with the RUG-
III system. Although SNF patients can vary significantly in their use 
of ancillary services and supplies such drugs and biologicals, payments 
for patients in different RUG-III categories are based on estimates of 
the time providers's staff spent furnishing nursing and therapy 
services. SNFs may be unwilling to serve patients in some high-acuity 
RUG-III groups for whom the costs of services may exceed the payment 
rates.
    The Office of the Inspector General (OIG) of the Department of 
Health and Human Services has undertaken a study to assess these 
concerns. The OIG surveyed a random sample of 200 hospital discharge 
planners responsible for arranging nursing home care for patients being 
discharged from hospitals.
    The OIG report concluded that while serious problems in placing 
Medicare beneficiaries in nursing homes are not apparent, SNFs are 
changing their admitting practices in response to the new payment 
system. Two-thirds of discharge planners responding to the survey 
reported no difficulty in placing Medicare patients. At the same time, 
almost half of the discharge planners surveyed reported that nursing 
homes have begun requesting more detailed clinical information about 
patients and more often assessing patients directly before making 
admissions decisions.
    The survey found that some patients have become harder to place, 
including those who need extensive services, such as intravenous 
feedings or medications, tracheostomy care, or ventilator and 
respirator care. These findings are consistent with concerns that 
payment weights under the PPS do not account adequately for certain 
medically complex patients.
    Home health agencies. The IPS for home health agencies has been 
criticized because the aggregate per-beneficiary limit is based on 
historical patterns of use and does not account for changes in 
agencies' patient mix. Industry and beneficiary representatives have 
asserted that this limitation has made home health agencies unwilling 
to accept patients who are likely to need extensive services.
    To assess these concerns, MedPAC contracted with Abt Associates, 
Inc., to survey about 1,000 home health agencies in early 1999 on their 
experience under the IPS. We also convened a panel of experts familiar 
with beneficiaries' problems accessing home health services.
    The results of our survey of home health agencies are consistent 
with the preliminary information we have on utilization. The agencies 
we surveyed generally reported that their Medicare caseloads have 
fallen and that the number of visits per user they provide has 
decreased. Almost half reported that they had changed the mix of 
services they provide, with fewer aide visits being the most common 
response. While virtually all of the agencies we surveyed reported that 
they are accepting new patients, the share accepting all new Medicare 
patients was 75 percent, compared with 85 percent before the IPS was 
implemented. About 40 percent of agencies reported a change in 
admissions practices--refusing to admit patients that they would have 
accepted before the IPS--and 30 percent reported discharging patients 
because of the IPS. Agencies most frequently identified long-term or 
chronic care patients as those they no longer admitted or have 
discharged.
    These findings are consistent with the claim that the IPS has 
hampered access, but they do not tell the whole story because the 
change in payment policy occurred at the same time HCFA was 
implementing other policies intended to reduce fraud and abuse, 
including stepping up oversight of home health care providers and 
imposing a four-month moratorium on the certification of new agencies 
in early 1998. The agency also adopted a new procedure for processing 
claims for home health care services. Assessing the effect on 
beneficiaries of changes in home health agencies' willingness to serve 
them is further confounded because we cannot determine whether the 
changes in use of home health services observed during the past two 
years are appropriate. Medicare's standards for eligibility for and 
coverage of home health services are too loosely defined for us to do 
so.
    Physician services. Three aspects of the new mechanism for setting 
physicians' fees have raised questions regarding their impact on 
access. First, the introduction of a single conversion factor reduced 
payment rates for surgical services, while payment rates for primary 
care and other nonsurgical services generally increased. Second, the 
Secretary's lack of authority to correct for projection errors and the 
potential for oscillations in fee updates under the SGR system have 
raised questions about whether updates are appropriate. Because the SGR 
is cumulative, uncorrected projection errors affect all subsequent 
updates. This happened in 1999, when an unexpected slowdown in 
Medicare+Choice enrollment growth led to a smaller than projected 
decline in Part B fee-for-service enrollment. Third, the SGR system as 
currently designed has te potential for oscillation in fee updates 
because of problems with the data and methods used to calculate the 
updates. These problems are likely to lead to extreme positive and 
negative updates.
    To assess the effects of the payment changes introduced in 1998, 
MedPAC contracted with Project HOPE to survey 1,300 physicians on their 
willingness to serve Medicare beneficiaries. The survey data were 
reassuring. Among physicians accepting all or some new patients, over 
95 percent were accepting new Medicare fee-for-service patients both in 
1997, before the new payment policy changes were implemented, and in 
early 1999. The survey also found that only about 10 percent of 
physicians reported changing the priority given to Medicare 
beneficiaries seeking an appointment. Of those, the percentage giving 
Medicare patients a higher priority was almost the same as the 
percentage giving Medicare patients a lower priority.
Where do we go from here?
    Although there is no systematic evidence to date that 
beneficiaries' access to care has been impaired, the vast number of 
changes to Medicare payment policy introduced by the BBA make it more 
important than ever to monitor access. In our March and June reports to 
the Congress, MedPAC noted where we believe policy changes are not yet 
warranted and recommended specific targeted policies that could help to 
alleviate some of the concerns that have been raised regarding access 
to care in the future..
Hospital inpatient services
    In our March report, MedPAC concluded that the operating update for 
FY 2000 enacted in BBA--1.8 percentage points less than the increase in 
HCFA's operating market basket index or 1.1 percent--will provide 
reasonable rates. In formulating our recommendation, MedPAC took into 
account part, but not all, of the cumulative reduction in costs per 
case that has occurred. We noted that hospitals have responded to an 
increasingly competitive market by improving their productivity and by 
shifting services to other sites of care. At the same time, we 
recognized factors pointing to the need for caution in specifying 
future updates, including emerging evidence that the decade-long trend 
in rising case mix complexity, which automatically increases PPS 
payments, may be subsiding. We also questioned whether the unusually 
low rate of hospital cost growth observed in recent years can be 
sustained without adverse effects on quality of care.
Hospital outpatient services
    MedPAC has concerns about the PPS proposed by HCFA for hospital 
outpatient services. In basing payments on groups of services, instead 
of individual services, the system is likely to overpay for some 
services and underpay for others. This could lead to access problems in 
the future for beneficiaries needing services whose payments fall short 
of costs. In our March report, MedPAC recommended that the PPS be based 
on the costs of individual services. Since that recommendation was 
made, HCFA has been colleting comments on its PPS proposal, with the 
formal comment period ending July 30, 1999. HCFA will review the 
comments with the assistance of a private contractor, 3M Health 
Information Systems. HCFA then plans to issue a final regulation at 
least 90 days before the PPS is implemented.
    Implementing the outpatient PPS will reduce payments for virtually 
all hospitals but could have much larger effects on specific types of 
hospitals. For example, based on HCFA's original estimates--which do 
not take into account improvements in coding that will lead to smaller 
reductions--small rural hospitals would see a 17 percent decline in 
payment rates, and cancer hospitals would see a drop of more than 30 
percent. Given these changes, MedPAC recommended that the Secretary 
closely monitor the use of hospital outpatient services to ensure that 
beneficiaries' access to appropriate care is not compromised. 
Consideration should also be given to phasing in the new payment system 
to help us detect any problems before they become severe.
Skilled nursing facilities
    The OIG report on the willingness of skilled nursing facilities to 
continue accepting Medicare beneficiaries provides some comfort that 
early anecdotal reports of access problems do not indicate a widespread 
problem. Nonetheless, MedPAC remains concerned about the mismatch 
between payments and costs for patients who require relatively high 
levels of nontherapy ancillary services and supplies could hamper 
access in the future. In our March report, we recommended that the 
Secretary continue to refine the classification system to improve its 
ability to predict the use of nontherapy services and supplies. An 
improved classification system would match payments more closely to 
beneficiaries' needs for services and help to avoid access problems 
among medically complex patients. HCFA has indicated that it is 
researching the adequacy of payments under the PPS and will implement 
refinements next year if that research indicates changes are warranted.
Home health services
    Implementing a PPS for home health care services that accounts for 
differences among beneficiaries will help to ensure access for those 
who require extensive care. MedPAC is concerned, however, that the 
timetable for implementing the PPS is very tight. Accordingly, we 
recommended in our June report that the Congress explore the 
feasibility of establishing a process for agencies to exclude a small 
share of their patients--say 2 percent--from the aggregate per 
beneficiary limits. Under our recommendation, Medicare would reimburse 
care for excluded patients based on the lesser of actual costs or the 
aggregate per-visit limits. MedPAC believes that such a policy should 
be implemented in a budget-neutral manner.
    In the longer run, ensuring that Medicare beneficiaries have access 
to appropriate home health care services will require clarifying the 
benefit. To that end, MedPAC recommended that the Secretary speed the 
development of regulations that would outline home health care coverage 
and eligibility criteria based on the clinical characteristics of 
beneficiaries and that she recommend to the Congress the legislation 
needed to implement those regulations.
Physicians' services
    In part because of their technical nature, problems with the 
sustainable growth rate system that determines updates to payments for 
physicians' services have received less publicity than concerns about 
facility payments. But because uncorrected projection errors and wide 
swings in payment updates could raise access problems in the future, 
MedPAC recommends that the Congress require the Secretary to correct 
estimates used in SGR system calculations every year and that 
legislation be enacted to modulate swings in updates.

    Mr. Bilirakis. Thank you very much.
    Dr. Scanlon?

                 STATEMENT OF WILLIAM J. SCANLON

    Mr. Scanlon. Thank you very much, Mr. Chairman. I am very 
pleased to be here today as you discuss the issues that have 
arisen regarding the changes made to the fee-for-service 
Medicare program in the Balanced Budget Act.
    I will focus my remarks today on the changes affecting 
several of the postacute care providers, namely home health 
agencies, skilled nursing facilities, and outpatient 
therapists. We have undertaken several studies to review BBA 
impacts for these services at the request of this committee and 
others.
    Concerns, as you know, have been raised in the industries 
involved about the BBA's impacts on beneficiary access and on 
the financial viability of providers. The issue is how valid 
are these concerns.
    The BBA made necessary and fundamental changes, in our 
view, to Medicare's payment methods to slow spending growth 
while protecting appropriate beneficiary care. Prior to the 
BBA, spending for these services, especially home health and 
SNF care, was growing very rapidly. No analyses supported why 
the growth should be so high and there were significant 
concerns that overutilization, inefficient delivery and fraud 
and abuse played a role.
    While refinements may be required to make the BBA payment 
systems more effective, their design intentionally makes 
inefficient providers change their practice patterns to remain 
in the Medicare business.
    The impact of payment reforms on home health agencies has 
been very noticeable because Medicare is such a major share of 
agencies' business and the interim payment system was 
implemented without a transition.
    Our findings are very similar to those reported by Dr. Ross 
for MedPAC. We reported in May that the number of home health 
agencies certified for Medicare had declined 14 percent since 
the implementation of the interim payment system and that 
utilization had returned to 1994 levels. There has been an 
increase in the number of closures since then, though 
utilization measures have not been assembled.
    Despite this, because of the number of agencies had 
virtually doubled between 1990 and 1997, beneficiaries, when we 
reported, were still being served by over 9,000 agencies, 
approximately the same number that were available in 1996.
    Furthermore, the drop in utilization does not appear to be 
related to agency closures. Rather, it is consistent with the 
incentives that the interim payment system imposes to control 
the volume of services provided to beneficiaries and to narrow 
the widely divergent and unexplained variation in use.
    While access generally has not seemingly been impaired, 
there are indications, as Dr. Ross indicated, that some 
beneficiaries who are likely to be more costly than average may 
have more difficulty obtaining home health services. The 
revenue caps imposed by the interim payment system are not 
adjusted to reflect variations in patient needs, a problem that 
we need ameliorated and will be ameliorated with the 
implementation of the prospective payment system.
    Turning to skilled nursing facilities, there are several 
factors that might suggest that the PPS's impact on the 
viability of SNFs would be less severe than is being claimed by 
providers.
    First, Medicare is a small portion of most skilled nursing 
facilities' business. Furthermore, only a quarter of Medicare's 
current reimbursement for most facilities is based on the 
prospective rate. The remainder reflects the facility's own 
historical spending, spending that may be inflated due to the 
provision of excessive ancillary services in the past.
    Nevertheless, we are here today, 2 days after one of the 
largest nursing home chains filed for Chapter XI bankruptcy 
protection. We have been reviewing the difficulties of Vencor 
and other nursing home chains for the Senate Finance and Aging 
Committees. It would appear to us that Vencor and other 
companies' difficulties likely relate to much more than simply 
the prospective payment system for Medicare.
    Overall, the skilled nursing facility prospective rates may 
have actually been set too high on average and thus 
overcompensate rather than undercompensate providers. 
Nevertheless, it seems that certain modifications to 
prospective payment may be appropriate.
    As Dr. Ross also indicated, there is evidence the payments 
are not being appropriately targeted to patients who require 
costly care--in Mr. Hash's terms, the high acuity patient. The 
potential access problems that result for such patients if 
Medicare underpays for their care will likely lead to 
beneficiaries remaining in acute care hospitals longer rather 
than foregoing care, an important point to remember.
    HCFA is aware of the situation, as you have heard, and is 
working to address the problem.
    Finally, let me comment on where the BBA imposed a fee 
schedule on all outpatient therapy services and replaced the 
$900 cap on therapy provided by independent therapists with the 
$1,500 cap on outpatient physical and speech therapy and a 
separate $1,500 cap on occupational therapy.
    In our view, these caps represent a legitimate attempt to 
control service use to avoid utilization increases and avoid 
eliminating the savings to be generated from all the changes in 
provider fees that have been mandated by the BBA. The per-
beneficiary caps, furthermore, are unlikely to curtail services 
for the vast majority of outpatient therapy users, principally 
because the principal provider of outpatient therapy, hospital 
outpatient departments, are exempted from the cap.
    However, even though the caps may be important to generate 
some control over use, the caps do not take account the 
differences in patient needs, and restricting coverage for 
patients who have a genuine need for services is very 
problematic.
    Therefore, HCFA's efforts to try and design a needs-based 
payment system taking into account clinical factors, as 
mandated by the BBA, is critical.
    In conclusion, I would note that the BBA made necessary and 
fundamental changes to Medicare's payment methods for many 
providers in order to slow spending growth while preserving 
appropriate beneficiary care. Further refinements, as you have 
noted, are required to make these systems more effective. 
However, these systems' intent is to require inefficient 
providers to adjust their practice patterns to remain viable.
    It is important that all the changes that we consider and 
any change that is enacted be based upon the most complete and 
solid information that is available. To prematurely change this 
would undermine the intent and goal of BBA, which are essential 
to the long-term sustainability of the Medicare program. Thank 
you very much, Mr. Chairman. I would be happy to answer 
questions you may have.
    [The prepared statement of William J. Scanlon follows:]
 Prepared Statement of William J. Scanlon, Director, Health Financing 
    and Public Health Issues, Health, Education, and Human Services 
                             Division, GAO
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today as you discuss the effects of the Balanced Budget Act of 
1997 (BBA) on the Medicare fee-for-service program. BBA set into motion 
significant program changes to both modernize Medicare and rein in 
spending. The act's constraints on providers' fees, increases in 
beneficiary payments, and structural reforms together were projected to 
lower Medicare spending by $386 billion over the next 10 years. Because 
some BBA provisions have only recently been implemented or have not yet 
been phased in, the act's full effects on providers, beneficiaries, and 
taxpayers will remain unknown for some time.
    BBA was enacted in response to continuing rapid growth in Medicare 
spending that was neither sustainable nor readily linked to 
demonstrated changes in beneficiary needs. The act's payment reforms 
represented bold steps to control Medicare spending by changing the 
financial incentives inherent in payment methods that, prior to BBA, 
did not reward providers for delivering care efficiently. To date, the 
Congress has remained steadfast in the face of intense pressure to roll 
back certain BBA payment reforms while waiting for evidence that 
demonstrates the need for modifications. Calls for BBA changes come at 
a time when federal budget surpluses and lower-than-expected growth in 
Medicare outlays could make it easier to accommodate higher Medicare 
payments. However, as the Comptroller General cautioned in July, the 
surpluses are merely projections and could fall short of expectations 
and the imperative remains to find the reforms that will make Medicare 
sustainable and affordable for the longer term.1
---------------------------------------------------------------------------
    \1\ Medicare Reform: Observations on the President's July 1999 
Proposal (GAO/T-AIMD/HEHS-99-236, July 22, 1999).
---------------------------------------------------------------------------
    My comments today focus on the reforms governing payments to three 
providers of post-acute care services--home health agencies (HHA), 
skilled nursing facilities (SNF), and providers of outpatient 
rehabilitation therapy. Among BBA's changes affecting various 
providers, these reforms are farthest along in their implementation. 
Furthermore, it is important to consider the payment policies for these 
providers together because changes to payments for one of them could 
affect the costs and utilization of another.
    In brief, providers of such post-acute care services as home health 
care, SNF care, and rehabilitation therapy may have to change their 
service delivery practices as a result of BBA payment reforms, which 
seek to make Medicare a more efficient and prudent purchaser. Calls to 
amend or repeal these BBA changes may be premature until information is 
available to identify and distinguish between desirable and undesirable 
consequences. At the same time, imperfections in the design of BBA-
mandated payment systems require attention. The design details of these 
systems are key to ensuring that payments are not only adequate in the 
aggregate but are also fairly targeted to protect individual 
beneficiaries and providers.
    With regard to home health care, the effect of the interim payment 
system on HHAs has raised concerns. Our May 1999 analysis indicated, 
however, that the reductions in the number of HHAs and changes in home 
health utilization were consistent with the incentives of the interim 
payment system to control the rapid and unexplained growth that had 
preceded the BBA.2 Furthermore, we found little evidence 
that appropriate access to Medicare's home health benefit has been 
impaired. The interim payment system, however, is not an appropriate 
payment method for the long term because it does not adjust payments 
for differences in beneficiary needs. Therefore, it is important to 
implement the BBA-mandated prospective payment system (PPS), scheduled 
for October 1, 2000. In ongoing work, we are examining the formidable 
challenges of designing a PPS with the appropriate unit of payment, 
level of payment, case-mix adjustment method, and risk-sharing 
mechanism. Our work indicates that the PPS will likely require further 
adjustments after it is implemented as more information on home health 
costs, utilization, and users becomes available.
---------------------------------------------------------------------------
    \2\ Medicare Home Health Agencies: Closures Continue, With Little 
Evidence Beneficiary Access Is Impaired (GAO/HEHS-99-120, May 26, 
1999).
---------------------------------------------------------------------------
    The SNF PPS was implemented beginning July 1998 with a 3-year 
transition to fully prospective rates; thus, time for providers to 
adjust to the payment change has been built into the implementation 
schedule. Our ongoing work examining whether the PPS is causing 
financial problems for some SNFs suggests that factors in addition to 
the PPS have contributed to fiscal difficulties. Nevertheless, certain 
modifications to the PPS may be appropriate, as there is evidence that 
payments are not being adequately targeted to patients who require 
costly care. The potential access problems that may result if Medicare 
underpays for high-cost cases could lead to beneficiaries' staying in 
acute care hospitals longer, rather than foregoing care altogether. 
HCFA is aware of this potential targeting problem and is working to 
develop a solution.
    Beginning this year, BBA imposed an annual $1,500 per-beneficiary 
cap on payments for outpatient physical and speech therapy combined and 
a separate $1,500 cap on outpatient occupational therapy, while 
exempting hospital outpatient departments from these caps. The act also 
replaced reasonable cost reimbursement for these services with payment 
under a fee schedule. The caps reflect a legitimate need to constrain 
service use. While not calibrated to accommodate variation in 
beneficiary needs, the per-beneficiary caps are unlikely to curtail 
access to services for the vast majority of outpatient therapy users. 
Only a small share of beneficiaries receiving therapy services use 
outpatient therapy extensively. Further, most of those users with 
greater needs will likely have access to hospital outpatient 
departments, which are not subject to the $1,500 caps. In addition, 
owing to HCFA's partial approach to enforcing the caps while year 2000 
adjustments are made to Medicare's automated systems, 
noninstitutionalized beneficiaries can avoid having the caps curtail 
service coverage by switching providers. However, the caps may restrict 
coverage for some nursing home residents, resulting in their having to 
pay out-of-pocket or seek payment from other sources, such as Medicaid, 
for therapy services. Studies are under way or planned to better 
measure the effect of the caps and how they might be adjusted. BBA also 
required HCFA to recommend a need-based payment system, which could 
help better target payments toward beneficiaries who genuinely require 
more services than allowed under the current dollar limits.
                               background
    The Medicare program consists of two parts: ``hospital insurance,'' 
or part A, which covers inpatient hospital, skilled nursing facility, 
hospice, and certain home health care services, and ``supplementary 
medical insurance,'' or part B, which covers physician and outpatient 
hospital services, outpatient rehabilitation services, home health 
services under certain conditions, diagnostic tests, and ambulance and 
other medical services and supplies.
    Prior to BBA payment reforms, Medicare experienced rapid growth in 
the services beneficiaries receive after a hospitalization (also called 
post-acute-care services), primarily due to increased utilization. 
During much of the 1990s, home health care was one of Medicare's 
fastest growing benefits; between 1990 and 1997, Medicare spending for 
home health care rose at an annual rate of 25.2 percent. Several 
factors accounted for this spending growth, most notably the relaxation 
of coverage guidelines. In response to a 1988 court case, a change in 
the coverage guidelines essentially transformed the benefit from one 
that focused on patients needing short-term care after hospitalization 
to one that serves chronic, long-term-care patients as 
well.3 The loosening of coverage and eligibility criteria 
contributed to an increase in the number of beneficiaries receiving 
services and the volume of services they received. Associated with this 
rise in utilization was an almost doubling in the number of Medicare-
certified HHAs to 10,524 by 1997.
---------------------------------------------------------------------------
    \3\ Duggan v. Bowen, 691 F. Supp. 1487 (D.D.C. 1988).
---------------------------------------------------------------------------
    Also contributing to the historical rise in home health care 
spending were a payment system that provided few incentives to control 
how many visits beneficiaries received and lax Medicare oversight of 
claims. As we noted in a previous report, even when controlling for 
diagnoses, substantial geographic variation existed in the provision of 
home health care, with little evidence that the differences were 
warranted by patient care needs.4 Additional evidence 
indicates that at least some of the high use and the large variation in 
practice represented inappropriate billings and unnecessary 
care.5 Medicare oversight declined at the same time that 
spending mounted, contributing to the likelihood that inappropriate 
claims would be paid. To begin to control spending, BBA implemented an 
interim payment system for HHAs beginning October 1, 1997. A PPS is 
scheduled to be implemented for all HHAs on October 1, 
2000.6
---------------------------------------------------------------------------
    \4\ Medicare: Home Health Utilization Expands While Program 
Controls Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996).
    \5\ Medicare: Improper Activities by Mid-Delta Home Health (GAO/T-
OSI-98-6) and Office of the Inspector General, Department of Health and 
Human Services, Variation Among Home Health Agencies in Medicare 
Payment for Home Health Services (July 1995). Our 1997 analysis of a 
small sample of high-dollar claims found that over 40 percent of these 
claims should not have been paid by the program. See Medicare: Need to 
Hold Home Health Agencies More Accountable for Inappropriate Billings 
(GAO/HEHS-97-108, June 13, 1997).
    \6\ BBA required the HHA PPS to be in place in fiscal year 2000. 
Subsequent legislation delayed the implementation by 1 year and 
required that there be no transition to the PPS.
---------------------------------------------------------------------------
    As required by BBA, on July 1, 1998, SNFs began a 3-year transition 
to a PPS, under which providers are paid a prospective rate for each 
day of care. Previously, SNFs were paid the reasonable costs they 
incurred in providing Medicare-covered services. Although there were 
limits on the payments for the routine portion of care (that is, 
general nursing, room and board, and administrative overhead), payments 
for ancillary services, such as rehabilitative therapy, were virtually 
unlimited. Because higher ancillary service costs triggered higher 
payments, facilities had no incentive to provide these services 
efficiently or only when necessary. Thus, between 1992 and 1995, daily 
ancillary costs grew 18.5 percent a year, compared to 6.4 percent for 
routine service costs. Moreover, new providers were exempt from the 
caps on routine care payments for up to their first 4 years of 
operation, which encouraged greater participation in Medicare.
    Rehabilitation therapy comprises a substantial portion of the post-
acute-care services provided by SNFs and other providers, such as 
rehabilitation therapy agencies and comprehensive outpatient 
rehabilitation facilities. Under BBA, the prices of therapy services 
provided in outpatient settings are controlled by a fee 
schedule.7 Generally, when prices are fixed, providers can 
compensate by increasing the volume of services delivered. To control 
volume, coverage for outpatient therapy is now limited to $1,500 per 
beneficiary for physical and speech therapy, with a separate $1,500 
per-beneficiary limit for occupational therapy. Hospital outpatient 
departments are exempt from these coverage limits.
---------------------------------------------------------------------------
    \7\ Payments for inpatient rehabilitation therapy services, such as 
those provided by SNFs, HHAs, and rehabilitation facilities, are not 
subject to the fee schedule and are paid under other rules. In 
addition, outpatient therapy provided by critical access hospitals is 
not subject to the fee schedule.
---------------------------------------------------------------------------
little evidence to date of impaired access to home health services, but 
             future payment system will require refinements
    By October 2000, HCFA is required to establish a new PPS for home 
health care--with a fixed, predetermined payment per unit of service, 
adjusted for patient characteristics. Until that time, HHAs are paid 
under the BBA-mandated interim payment system. Although concerns have 
been raised about the effect of the interim system, our May 1999 
analysis showed little evidence that appropriate access to Medicare's 
home health benefit has been impaired under this payment method. 
Nevertheless, a home health PPS is a more appropriate payment tool 
because it can align payments with patient needs. Designing an adequate 
home health care PPS, however, poses substantial challenges.
    The pre-BBA payment system had controls for payments per visit but 
left volume unchecked. Since enactment of the BBA, home health agencies 
have been paid under the interim payment system, which attempts to 
control the costs and amount of services provided to each beneficiary. 
Indeed, our work indicates that overall home health utilization in the 
first 3 months of 1998 had declined since 1996, but utilization was 
about the same for a comparable period in 1994. Moreover, the sizeable 
variation in utilization between counties with high and low use has 
narrowed. Although these changes occurred at the time that about 14 
percent of HHAs closed their doors to Medicare business, we found 
little evidence that beneficiary access to services was inappropriately 
curtailed.
    The PPS should be a substantial improvement over the interim 
payment system because payments will reflect current beneficiaries and 
their needs rather than historical spending patterns. However, our 
ongoing work on this subject shows that a number of design issues 
remain and the payment system will likely require continued adjustments 
even after implementation of the PPS next year. HCFA will pay HHAs a 
per-episode rate for up to the first 60 days of services to a patient. 
Such per-episode payments are designed to balance competing goals of 
controlling service provision while giving HHAs flexibility to vary the 
intensity or mix of services delivered during the episode. Evidence 
indicates that HHAs do lower their costs in response to prospective 
payments for an episode of care. Whether they will inappropriately cut 
visits, which could reduce the quality of care and cause Medicare to 
pay for services that were not delivered, remains to be seen. Under 
this prospective payment approach, HHAs also have incentives to 
increase the number of episodes of care provided, which could escalate, 
rather than constrain, Medicare spending. HCFA will need to adequately 
monitor service provision to ensure that beneficiaries receive the care 
they need and the number of episodes are not inappropriately increased.
    The design of the case-mix adjustment mechanism is critical to 
adequately pay for patients with high services need, yet not overpay 
for others with lower requirements. Designing this mechanism requires 
detailed information about services and beneficiary characteristics, 
and such information is currently available only for a sample of users. 
Furthermore, the wide geographic and agency-level variation in service 
use indicates that standards of care are not well-defined, nor are the 
criteria for who should use the benefit. As a result, the factors that 
will be used under PPS for grouping patients with similar resource 
needs may not adequately distinguish among types of home health 
patients, and the PPS payment adjuster that will be associated with 
each patient group may not reflect appropriate cost differences. 
Systematic errors could result in overpayments for some beneficiaries 
and underpayments for others. Underpayments could lead to impaired 
access.
    Large variations in historic spending patterns mean that a PPS, 
which will be based on average payment amounts, may cause payment 
levels to rise for certain HHAs and fall for others. Although the PPS 
may incorporate an outlier policy--that is, extra payments for 
extremely costly cases--additional mechanisms to moderate payment 
changes may be appropriate. For example, an ``inlier'' policy to reduce 
the payment for a patient who receives few services may be warranted, 
particularly given the fact that multiple episode payments may be made 
for a single beneficiary. Policies addressing both extremes of service 
use could protect the access of beneficiaries with high needs and 
protect Medicare from overpaying for low-cost cases. A risk-sharing 
method, to account for cost differences across agencies, could provide 
further protection against underpayments or overpayments. Given the 
heterogeneous use of this benefit and the unresolved PPS design issues, 
moderating payments through risk-sharing might be warranted, even if 
such a mechanism would reduce HHAs' incentives to curtail providing 
unneeded care.
aggregate payments to snfs are adequate, but refinements needed to help 
               match payments to patients' service needs
    Despite industry charges to the contrary, SNF payment rates under 
BBA are likely to provide sufficient, or even generous, compensation 
for providers. Nevertheless, the distribution of these payments may be 
out of balance, because the current case-mix adjustment method may not 
adequately ensure that providers serving high-cost beneficiaries are 
paid enough and that those serving low-cost beneficiaries are not paid 
too much.
    Under the new PPS, SNFs receive a payment for each day of covered 
care provided to a Medicare-eligible beneficiary. By establishing fixed 
payments and including all services provided to beneficiaries under the 
per diem amount, the PPS attempts to provide incentives for SNFs to 
deliver care more efficiently. Under the PPS, SNFs that previously 
boosted their Medicare ancillary payments--either through higher use 
rates or higher costs--will need to modify their practices more than 
others. Scaling back the use of these services, however, may not 
necessarily affect the quality of care. There is little evidence to 
indicate that the rapid growth in Medicare spending was due to a 
commensurate increase in Medicare beneficiaries' need for services.
    Recent industry reports have questioned the ability of some 
organizations that operate SNF chains to adapt to the new PPS. Indeed, 
pending bankruptcies have been claimed to be the results of the 
Medicare payment changes. Our ongoing work suggests that PPS has been 
only one of many factors contributing to the poor financial performance 
of these corporations. For one thing, Medicare patients constitute a 
relatively small share of the business of most SNFs and for these 
corporations, SNFs are only a portion of their overall revenues. 
Moreover, the PPS rates are being phased in, to allow time for 
facilities to adapt to the new payment system, and most of the payments 
are still tied to each facility's historical costs. The reality is that 
some corporations invested heavily in the nursing home and ancillary 
service businesses in the years immediately before the enactment of the 
PPS, both expanding their acquisitions and upgrading facilities to 
provide higher-intensity services. Under tighter payment constraints, 
these debt-laden enterprises are particularly challenged. Thus, while 
SNFs will have to adapt to the PPS constraints, the performance of some 
large post-acute providers is a reflection of many Medicare payment 
policy changes and strategic decisions made during a period when 
Medicare was exercising too little control over its payments. We are 
gathering additional information and will report soon on the effect of 
the PPS on SNF solvency and beneficiary access to care.
    We believe that overall payments to SNFs are adequate. In fact, we 
and the Department of Health and Human Services Inspector General (HHS 
IG) are concerned that the PPS rates Medicare pays may be too generous. 
Most of the data used to establish these rates--from 1995 cost 
reports--have not been audited and are likely to include excessive 
ancillary costs due to the previous system's incentives and the lack of 
appropriate program oversight.8
---------------------------------------------------------------------------
    \8\ The HHS IG recently reported on the inappropriateness of the 
base year costs. See Physical And Occupational Therapy in Nursing 
Homes: Cost of Improper Billings to Medicare (HHS IG, OEI-09-97-00122, 
Aug. 1999).
---------------------------------------------------------------------------
    We are concerned, however, that payments for individual 
beneficiaries could be inappropriately high or low because of certain 
PPS design problems. The first of these problems involves the patient 
classification system. The classification system was based on a small 
sample of patients and, because of the age of the data, may not reflect 
current treatment patterns. As a result, it may aggregate patients with 
widely differing needs into too few payment groups that do not 
distinguish adequately among patients' resource needs. In addition, the 
cost variation for non-therapy ancillary services may not have been 
adequately accounted for in the payment rates, which may 
inappropriately compress the range in payments. Accordingly, access 
problems or inadequate care could result for some high-cost 
beneficiaries. Hospitals have reported an increase in placement 
problems due to the reluctance of some facilities to admit certain 
beneficiaries with high expected treatment costs, which will increase 
hospital lengths of stay for these patients. HCFA is aware of the 
limitations of the case-mix adjustment method and is working to refine 
this system to more accurately reflect patient differences.
    Another design problem is that the current case-mix adjustment 
method preserves the opportunity for SNFs to increase their 
compensation by supplying unnecessary services. A SNF can benefit by 
manipulating the services provided to beneficiaries, rather than 
increasing efficiency. For example, by providing certain patients an 
extra minute of therapy over a defined threshold, a facility could 
substantially increase its Medicare payments without a commensurate 
increase in its costs.
 adverse effect of outpatient therapy caps doubtful, but need-adjusted 
                     payment limits would be better
    Questions have been raised about a BBA coverage restriction for a 
third group of post-acute-care services--outpatient rehabilitation 
therapy. Together with a fee schedule that replaces reasonable cost 
reimbursement for these services, BBA imposed an annual $1,500 per-
beneficiary cap on payments for outpatient physical and speech therapy 
combined and a separate $1,500 per-beneficiary cap on outpatient 
occupational therapy.9 Services provided by hospital 
outpatient departments are exempt from the per-beneficiary caps.
---------------------------------------------------------------------------
    \9\ Physical therapy includes treatments--such as whirlpool baths, 
ultrasound, and therapeutic exercises--to relieve pain, improve 
mobility, maintain cardiopulmonary functioning, and limit the 
disability from an injury or disease. Speech therapy includes the 
diagnosis and treatment of speech, language, and swallowing disorders. 
Occupational therapy helps patients learn the skills necessary to 
perform daily tasks, diminish or correct pathology, and promote health.
---------------------------------------------------------------------------
    Rehabilitation therapy providers have raised concerns that the 
$1,500 limits will arbitrarily curtail necessary treatments for 
Medicare beneficiaries, particularly victims of stroke, hip injuries, 
or multiple medical incidents within a single year. These concerns have 
led to several legislative proposals to include various exceptions to 
the caps or eliminate them altogether.
    Our ongoing work on this topic for Members of this Subcommittee 
suggests that eliminating the caps without substituting other controls 
could undermine BBA's comprehensive strategy for restricting payments 
for outpatient therapy services. Controlling the price for each unit of 
service--as is done with the new requirement that that outpatient 
therapy providers bill Medicare according to the physician fee 
schedule--may not necessarily control Medicare expenditures if 
utilization rises. This is particularly likely, given the price and 
utilization controls imposed through PPS on other providers of 
rehabilitation therapy. Thus, the per-beneficiary caps serve to limit 
the volume of services provided.
    For the vast majority of beneficiaries, the coverage caps are 
unlikely to curtail access to needed services. An analysis by the 
Medicare Payment Advisory Commission shows that, in 1996, most users 
(86 percent) did not exceed $1,500 in payments for physical and speech 
therapy or for occupational therapy.10 Moreover, if the fee 
schedule constrains payments as expected, the proportion of 
beneficiaries that are unaffected by the caps could be even higher in 
1999, because beneficiaries could receive more services before reaching 
the per-beneficiary caps than under the former cost-based system.
---------------------------------------------------------------------------
    \10\ A July 1998 report sponsored by the National Association for 
the Support of Long-Term Care and NovaCare, a rehabilitation services 
company, projects that 87 percent of beneficiaries will not exceed the 
per-beneficiary cap.
---------------------------------------------------------------------------
    Even for beneficiaries exceeding $1,500 in payments under the fee 
schedule, mitigating factors exist. First, under the BBA exemption, 
Medicare beneficiaries have no limits on coverage for rehabilitation 
therapy provided by hospital outpatient departments, which are widely 
available nationwide. In addition, the caps will initially not be 
applied as specified in BBA. Implementing the caps involves many 
programming changes to Medicare's automated information systems that 
HCFA is unable to undertake concurrent with its year 2000 preparation 
efforts. As a result, HCFA's claims processing contractors will be 
unable to track therapy payments on a per-beneficiary basis. Instead, 
effective January 1, 1999, HCFA employed a transitional approach to 
implementing the caps. Under this approach, each provider of therapy 
services is responsible for tracking its billings for each Medicare 
patient and stopping them at the $1,500 threshold. The consequence of 
this partial implementation is that noninstitutionalized beneficiaries 
may switch to a new provider when they have reached the $1,500 limit 
under the current provider.
    The effect of the per-beneficiary caps on nursing home residents is 
less clear. The ability of beneficiaries to switch outpatient providers 
under HCFA's partial implementation approach is, practically speaking, 
not available to nursing facility residents. Under new billing 
requirements, the nursing facility in which the beneficiary resides is 
required to bill for outpatient therapy provided to the resident, 
regardless of the entity that actually delivered the service. 
Therefore, unlike their noninstitutionalized counterparts, nursing 
facility residents cannot switch providers to restart the $1,500 
coverage allowance. Under these circumstances, some nursing home 
residents--like those needing extensive rehabilitation therapy 
resulting from such conditions as stroke or hip fractures--could be 
vulnerable to out-of-pocket costs for therapy.
    Even the risk for these more vulnerable beneficiaries may be 
moderated, however, because nursing home residents seeking therapy for 
such conditions would likely receive a complement of rehabilitation 
services as a SNF inpatient--before the outpatient therapy coverage 
limit begins to apply. That is, individuals suffering a stroke or 
undergoing hip replacement would likely spend at least 3 days in an 
acute care hospital, which, combined with the need for daily skilled 
nursing care or therapy, would make them eligible for a Medicare-
covered SNF stay of up to 100 days, during which they would likely 
receive therapy services. After their Medicare coverage ends, a nursing 
facility resident can continue to receive outpatient therapy services 
under Medicare part B, subject to the coverage limits. BBA mandates 
that HCFA develop a classification system based on diagnosis to 
determine differences in patients' therapy needs and propose possible 
alternatives to the caps in a report due January 1, 2001. This report 
will be significant in that a need-based system could help ensure 
adequate coverage for those beneficiaries requiring an extraordinary 
level of services and prevent overprovision to those requiring only 
limited amounts.
                               conclusion
    In conclusion, the BBA payment reforms affecting providers of home 
health care, SNF care, and outpatient rehabilitation therapy are all 
intended to make these providers more efficient. As the reforms begin 
to have their intended effects, pressure is building to return to more 
generous payment policies. Evidence to date shows that BBA is moving 
Medicare in the right direction but that adjustments will be needed 
along the way. These adjustments should be based on thorough, 
quantitative assessments so that misdiagnosed problems do not lead to 
misguided solutions. With the health care of seniors and the tax 
dollars of all Americans at stake, policymakers must, in the face of 
pressure for increased payment rates, preserve new payment policies 
that exact efficiencies but make adaptations when substantiated 
evidence supports the need to do so.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions you or other Members of the Subcommittee might 
have.
                    gao contacts and acknowledgments
    For future contacts regarding this testimony, please call Laura A. 
Dummit at (202) 512-7114. Individuals who made key contributions to 
this statement include Carol L. Carter, Assistant Director; Hannah F. 
Fein; James E. Mathews; and Deborah Spielberg.

    Mr. Bilirakis. Mr. Crippen?

                   STATEMENT OF DAN L. CRIPPEN

    Mr. Crippen. Thank you, Mr. Chairman. Having listened to 
the opening statements by many of your colleagues, as well as 
the intense interest of the audience behind us, I have a 
feeling that this table is sitting at the eye of another 
hurricane.
    Mr. Bilirakis. As is this table.
    Mr. Crippen. I do not know how far out the clouds reach.
    I am pleased to represent the Congressional Budget Office 
here today, Mr. Chairman. We were here at the beginning, so it 
is only right that we return to the scene of the crime.
    My colleagues on the panel today are in a better position 
to comment on the actual outcomes in the sense of what is 
happening to health care delivery than we are. We do mostly the 
input side of this business. But we do have some observations 
to make, and my written statement generally reinforces what my 
colleagues here have said, so I will try not to be overly 
redundant in capturing some of it.
    I hope to make three points, Mr. Chairman. First, the 
greater-than-expected slowdown in the growth of Medicare 
spending stems largely from successful efforts to combat fraud 
and abuse and from delays in payments to health care providers. 
Second, with one exception, we believe that our estimates of 
the effects of the Medicare provisions of the Balanced Budget 
Act are still within reasonable ranges. CBO did not anticipate 
how home health agencies would implement the interim payment 
system for home health services, however, and may therefore 
have underestimated the savings of the provisions that apply to 
home health.
    Third, the factors that are holding down the growth of 
Medicare spending, finally, Mr. Chairman, will play themselves 
out in the near future, and more rapid growth will then resume. 
This is temporary.
    Just a quick context of where we are. Between 1980 and 
1997, Medicare spending increased at an average rate of 11 
percent a year and expanded from 5 percent of the budget to 12 
percent. Total outlays for Medicare rose by only 1.5 percent 
last year, however, and we may actually have the first absolute 
decline in spending this year.
    Part of that slowdown was anticipated. The Balanced Budget 
Act lowered the projected growth in Medicare spending by an 
estimated 4 percentage points in 1998. But the actual rate of 
spending growth is considerably slower than the BBA provisions 
alone were expected to produce. Other factors appear to have 
contributed to the sudden flattening of Medicare expenditures, 
including greater compliance with Medicare payment rules and a 
longer time for processing claims.
    Widely publicized efforts to clamp down on fraud and abuse 
in the program have resulted in greater compliance by 
providers. Although the total reduction in spending growth 
attributable to the improved compliance cannot be quantified 
completely, CBO estimates that one response alone to recent 
enforcement efforts--less aggressive billing by hospitals--
lowered growth in Medicare spending by 0.75 percentage points 
in 1998 alone. So just under one full percentage point by the 
coding in the hospitals.
    The assignment of patients with respiratory infections to 
diagnosis-related groups provides one example of the change in 
billing practices. Patients with respiratory infections 
generally are assigned to one of two DRGs: respiratory 
infections, for which the Medicare payment averaged $7,400 in 
1998; or simple pneumonia, for which payments averaged $4,900. 
From 1997 to 1998, the number of cases in the higher-paying 
DRG--respiratory infections--fell by 43,000 cases, while the 
number of cases assigned to the lower-paying DRG--simple 
pneumonia--increased by 42,000. That single change in coding 
reduced Medicare program spending by about $100 million in 1998 
alone.
    In addition to these behavioral changes, Mr. Chairman, the 
average time for processing Medicare claims rose dramatically 
in 1998. Expanded compliance activities, combined with major 
efforts to prepare computer systems for the year 2000 
contributed to longer payment lags, which can have a 
substantial effect on Medicare outlays. For example, an 
increase of 1 week in the average time for processing claims 
reduces Medicare outlays for the fiscal year by almost 2 
percent. That reduction obviously is only temporary because the 
delay merely moves outlays into the next fiscal year.
    Our observations, Mr. Chairman, on the specific services--
that is, postacute care, physicians' services and in-hospital 
care--are very close or the same as my colleagues. I would just 
say, as Mr. Scanlon did, to remind us all that when you changed 
the payment rules for postacute care in particular, skilled 
nursing facilities and home health services, those two elements 
of Medicare were growing at an annual rate of 38 percent and 25 
percent, respectively.
    Economists have a kit bag of trite phrases that they like 
to haul out but that are probably not very useful. One is 
``This can't go on forever.'' Clearly those kinds of increases 
of 40 percent and 30 percent in these two programs could not 
have gone on and this gives you some of the reason why the 
impacts are apparently as severe as they are.
    Let me skip to a final observation, Mr. Chairman, and we 
can move to your questions. Although Medicare spending has 
slowed dramatically in 1998 and 1999, CBO expects it to resume 
growth at an average rate of 7 to 8 percent in the decade after 
2000. In particular, spending for home health services is 
likely to rebound after 2000, when the prospective payment 
system replaces the interim payment system.
    Medicare spending is likely to grow even faster after 2010 
with the influx of the baby-boom generation into that program. 
That growth is due both to the unprecedented increase in 
program enrollment and continuing increases in spending per 
enrollee. Assuming no change in policy, as we discussed this 
morning, the trustees' report projects that Medicare spending 
will grow from 2.5 percent of gross domestic product to about 5 
percent of GDP in 2030. Such an expansion in program spending 
poses an unprecedented challenge to policymakers and to the 
country.
    Thank you, Mr. Chairman.
    [The prepared statement of Dan L. Crippen follows:]
 Prepared Statement of Dan L. Crippen, Director, Congressional Budget 
                                 Office
    Mr. Chairman and Members of the Committee, I am pleased to 
represent the Congressional Budget Office (CBO) at this hearing on the 
fee-for-service portion of the Medicare program. After many years of 
rapid increases, the growth of Medicare spending has slowed sharply in 
the past two years. My statement discusses the reasons for that 
slowdown and presents CBO's assessment of future trends. I will make 
three main points:

 The greater-than-expected slowdown in the growth of Medicare 
        spending stems mainly from successful efforts to combat fraud 
        and from delays in payments to health care providers.
 With one exception, CBO's estimates of the effects of the 
        Medicare provisions of the Balanced Budget Act (BBA) of 1997 
        still appear reasonable. CBO did not anticipate how home health 
        agencies would implement the interim payment system for home 
        health services, however, and may therefore have underestimated 
        its savings.
 The factors that are holding down the growth of Medicare 
        spending will play themselves out in the near future, and more 
        rapid growth will then resume.
                      trends in medicare spending
    Between 1980 and 1997, Medicare spending increased at an average 
rate of 11 percent a year and expanded from 5 percent to 12 percent of 
the federal budget. Total outlays for Medicare rose by only 1.5 percent 
in 1998, however, and are expected to decline in 1999. Part of that 
slowdown was anticipated; the Balanced Budget Act lowered the projected 
growth of Medicare spending by an estimated 4 percentage points in 
1998. The BBA reduced payment rates for many services and restrained 
the update factors for payments through 2002. Both fee-for-service 
providers and Medicare+Choice plans are experiencing lower increases in 
payments as a result.
    But the actual rate of spending growth is considerably slower than 
the BBA provisions alone were expected to produce. Other factors appear 
to have contributed to the sudden flattening of Medicare expenditures, 
including greater compliance with Medicare payment rules and a longer 
time for processing claims.
    Widely publicized efforts to clamp down on fraud and abuse in the 
program have resulted in greater compliance by providers with 
Medicare's payment rules. Those efforts include more rigorous screening 
of claims by Medicare contractors and tougher enforcement of Medicare 
laws by the Departments of Justice and Health and Human Services. 
Through investigations and lawsuits, those agencies have pursued a wide 
range of providers--including hospitals, teaching physicians, home 
health agencies, clinical laboratories, and providers of durable 
medical equipment--as well as Medicare contractors themselves. Although 
the total reduction in spending growth attributable to the improved 
compliance cannot be quantified, CBO estimates that one response alone 
to recent enforcement efforts--less aggressive billing by hospitals--
lowered growth in Medicare spending by 0.75 percentage points in 1998.
    The assignment of patients with respiratory infections to 
diagnosis-related groups (DRGs) provides one example of the change in 
billing patterns. Patients with respiratory infections generally are 
assigned to one of two DRGs: respiratory infections, for which the 
Medicare payment averaged $7,400 in 1998; or simple pneumonia, for 
which payments averaged $4,900. From 1997 to 1998, the number of cases 
in the higher-paying DRG (respiratory infections) fell by 43,000, while 
the number of cases assigned to the lower-paying DRG (simple pneumonia) 
increased by 42,000. That change in coding reduced Medicare program 
spending by about $100 million in 1998.
    In addition, the average time for processing Medicare claims rose 
dramatically in 1998. Expanded compliance activities, combined with 
major efforts to prepare computer systems for 2000, contributed to 
longer payment lags, which can have a substantial effect on Medicare 
outlays. An increase of one week, for example, in the average time for 
processing claims reduces Medicare outlays for the fiscal year by about 
2 percent. But that reduction is only temporary because the delay 
merely moves outlays into the next fiscal year.
    CBO expects that improved compliance with payment rules and longer 
claims-processing times will have little or no effect on the rate of 
growth of Medicare spending in the longer run. Our projections assume 
that payment lags will begin to return to more typical levels late in 
2000, with a catch-up in spending and a resumption of normal spending 
growth in 2001 and 2002. Most of the projected increase over the next 
few years reflects rising expenditures per enrollee. The leading edge 
of the postwar baby boom will not reach age 65 until after 2010.
    Medicare outlays to date for fiscal year 1999 are actually lower 
than they were for the same period last year (see Table 1). CBO's 
current projections of aggregate Medicare spending, as updated in July 
1999, reflect those lower-than- expected outlays and smaller-than-
expected adjustments of payment rates for inflation in 2000. CBO 
assumes that lower payments for home health services and a drop in the 
case-mix index (a measure of the relative costliness of the cases 
treated in hospitals paid under the prospective payment system) explain 
most of the shortfall in Medicare spending so far this year. However, 
CBO does not yet have the data needed to update the detailed 
projections of spending by category of service that were prepared in 
March 1999. Therefore, my discussion of service-specific spending will 
reflect the March projections.

        TABLE 1. Medicare Outlays Based on the July 1999 Baseline
                        (By selected fiscal year)
------------------------------------------------------------------------
                                   1990    1998    1999    2004    2009
------------------------------------------------------------------------

                         In Billions of Dollars

Gross Mandatory Outlays
  Benefits......................     107     210     208     297     440
  Mandatory administration and       \2\       1       1       1       1
 grants\1\......................
                                 ---------------------------------------
    Total.......................     107     211     210     298     442
Premiums........................     -12     -21     -22     -34     -53
                                 ---------------------------------------
Mandatory Outlays Net of              96     190     188     264     389
 Premiums.......................
Discretionary Outlays for              2       3       3       4       4
 Administration.................
                                 ---------------------------------------
All Medicare Outlays Net of           98     193     191     267     393
 Premiums.......................

      Average Annual Growth Rate from Previous Year Shown (Percent)

Gross Mandatory Outlays.........  ......     8.8    -0.7     7.3     8.2
Premiums........................  ......     7.5     3.9     9.6     9.3
Mandatory Outlays Net of          ......     9.0    -1.2     7.0     8.0
 Premiums.......................
Discretionary Outlays for         ......     1.5    -2.6     6.8     4.0
 Administration.................
All Medicare Outlays Net of       ......     8.8    -1.2     7.0     8.0
 Premiums.......................

------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: Numbers may not add up to totals because of rounding.
\1\ Mandatory outlays for administration support peer review
  organizations, certain activities against fraud and abuse, and grants
  to states for premium assistance.
\2\ Less than $500 million

Projections of Spending and Enrollment in the Medicare Fee-for-Service 
        Program
    CBO projects that spending in Medicare's fee-for-service program 
will increase from $178 billion in 1998 to $302 billion in 2009 (see 
Table 2). That growth will occur despite shrinkage in fee-for-service 
enrollment, which will decline by 1.5 million over the next decade, and 
cuts in the growth of payment rates for many services.
    Spending growth for different services will vary considerably over 
the same period. The extent of the recent slowdown in spending has also 
varied by type of service, although spending for all services has been 
affected by the 1.9 percent drop in fee-for-service enrollment that 
occurred in 1998 and the further 0.8 percent decline expected in 1999.
    Postacute Care Services. Payments for skilled nursing facility 
(SNF) and home health services grew very rapidly during the decade 
preceding passage of the Balanced Budget Act. Between 1988 and 1997, 
spending for skilled nursing services grew at an average annual rate of 
38 percent, while growth in spending for home health services averaged 
25 percent a year. That spending growth slowed significantly in 1998.

               TABLE 2. Outlays for Medicare Benefits, by Sector, Based on the March 1999 Baseline
                                                (By fiscal year)
----------------------------------------------------------------------------------------------------------------
           Sector              1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009
----------------------------------------------------------------------------------------------------------------
                                             In Billions of Dollars

Medicare+Choice\1\..........     32     37     41     49     48     60     70     88     88    108    124    141
Fee-for-Service
Skilled nursing facilities..     13     13     13     14     14     15     16     17     18     19     21     22
Home health.................     15     15     17     16     17     18     20     21     23     24     26     28
Hospice.....................      2      2      2      2      3      3      3      3      3      3      4      4
Hospital inpatient\2\.......     87     86     91     95     99    104    108    112    117    123    129    135
Physicians' services........     32     32     33     34     35     36     37     38     39     40     41     43
Outpatient facilities.......     17     16     17     18     20     21     23     25     26     28     30     33
Other professional and           12     12     14     15     17     20     22     25     28     31     34     38
 outpatient ancillary
 services...................
                             -----------------------------------------------------------------------------------
  Subtotal..................    178    175    186    194    205    217    228    241    255    269    285    302
Baseline Revision, July 1999   n.a.     -4     -4     -2     -2     -2     -2     -2     -2     -2     -2     -3
    Total...................    210    208    223    242    252    275    297    326    341    375    407    440

                                          Annual Growth Rate (Percent)

Medicare+Choice\1\..........   26.3   14.0   11.7   18.0   -1.3   25.0   16.7   24.7    0.8   22.8   14.6   13.4
Fee-for-Service
Skilled nursing facilities..    8.9   -3.8    1.7    5.3    5.1    6.4    6.0    6.4    6.5    6.4    6.4    6.4
Home health.................  -14.9    0.8   10.3   -5.8   10.1    6.6    7.2    7.9    7.8    7.4    6.8    6.6
Hospice.....................    1.0    2.5    8.6    6.3    4.6    5.7    5.3    5.7    5.8    5.7    5.8    5.8
Hospital inpatient\2\.......   -2.5   -1.5    5.7    4.7    4.5    4.7    3.9    4.1    4.5    4.6    4.9    4.8
Physicians' services........    3.0    0.6    4.2    2.3    2.4    3.4    2.6    2.8    3.0    3.0    3.3    3.5
Outpatient facilities.......   -5.5   -6.6    8.4    8.5    7.1    7.7    7.2    7.4    7.3    7.3    7.6    7.9
Other professional and          0.7    0.6   14.0   13.0   12.5   13.2   12.3   12.3   12.1   11.0   10.7   10.2
 outpatient ancillary
 services...................
  All Fee-for-Service.......   -2.1   -1.4    6.4    4.4    5.5    5.8    5.2    5.5    5.8    5.8    5.9    5.9
    All Medicare Benefits...    1.4   -0.8    7.2    8.1    4.1    9.5    7.7   10.0    4.4   10.2    8.4    8.2
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTES: Numbers may not add up to totals because of rounding. n.a. = not applicable.
\1\ Includes spending for health maintenance organizations paid on a cost basis, certain demonstrations, and
  health care prepayment plans, which are paid on a cost basis for Part B services.
\2\ Includes subsidies for medical education that are paid to hospitals that treat patients enrolled in
  Medicare+Choice plans.

    The most dramatic change was in spending for home health care, 
which actually fell by 14.9 percent in 1998. In March 1999, CBO 
projected that home health spending would increase slightly in 1999. 
However, it now appears that spending for home health care in 1999 and 
2000 will be several billion dollars lower than previously anticipated. 
The use of home health services seems to have dropped substantially, 
probably as a result of both antifraud activities and an unexpectedly 
cautious response by home health agencies to the limit on average 
payments per beneficiary under the interim payment system. That limit 
applies to aggregate payments: payments for individual beneficiaries 
may exceed the limit as long as the average payment for all 
beneficiaries served by an agency does not exceed the per-beneficiary 
limit. Some agencies, however, apparently believe that the limit 
applies to each beneficiary and are cutting off services to patients 
who have reached the per-beneficiary limit. Thus, the average payment 
per beneficiary is well below the allowable amount.
    Medicare will replace the interim payment system for home health 
services with a prospective payment system in 2001. That system will 
remove much of the uncertainty about payments that has contributed to 
the current apparent drop in use of services, so spending for home 
health services is expected to rebound in 2001 and later years.
    SNF expenditures, by contrast, continued to rise in 1998 but at 
less than half the rate of growth in 1997--8.9 percent compared with 
21.1 percent. The slowdown in spending reflects the implementation of 
new prospective payment systems and increases in the time for 
processing claims.
    The transition to prospective payment systems is expected to hold 
down the average annual rate of growth in these categories of spending 
through 2001. Spending is then projected to increase through 2009 at an 
average annual rate of 6.2 percent for SNF services and 7.5 percent for 
home health services.
    Inpatient Hospital Services. Medicare payments for inpatient 
hospital services fell 2.5 percent in 1998, to $87 billion. The factors 
contributing to that drop include a decline in the volume of services 
provided (reflecting the drop in fee-for-service enrollment) and 
several provisions in the BBA that froze payment rates for most 
operating costs, reduced capital-related payment rates by 17.8 percent, 
and cut subsidies for medical education. In addition, the case-mix 
index fell 0.5 percent in 1998. Preliminary data suggest that the case-
mix index is continuing to drop in 1999. Much of that unprecedented 
drop is probably attributable to widespread adoption by hospitals of 
less aggressive billing practices following antifraud initiatives that 
focused on those practices.
    For most hospitals, the BBA limits cumulative increases in payment 
rates for operating costs to about 6 percentage points below inflation 
in hospital input prices over the 1999-2002 period. CBO projects that 
the limit on rate increases, in combination with declining fee-for-
service enrollment, will result in a 1.5 percent drop in payments for 
hospital inpatient services in 1999. Those payments are projected to 
begin rising in 2000, with annual growth rates averaging 4.5 percent 
from 2000 through 2009.
    Physicians' Services. Medicare payments for physicians' services 
rose 3.0 percent in 1998, to $32 billion. Payments are projected to 
remain flat in 1999 and to grow at an average annual rate of 2.8 
percent over the next decade, reaching $43 billion in 2009. That growth 
rate is a result of payment formulas enacted in the BBA that tie the 
growth of per-enrollee expenditures for physicians' services to the 
growth of gross domestic product (GDP) per capita. Those formulas 
generate annual rate changes that oscillate widely around a smooth 
trend. CBO projects stable growth rates, however, because the timing of 
those oscillations is impossible to predict.
    Outpatient Services. Payments to outpatient facilities--such as 
hospital outpatient departments, dialysis facilities, and rural health 
clinics--fell by 5.5 percent in 1998 and are projected to decline 
another 6.6 percent in 1999. Those reductions result largely from lower 
payment rates accompanying the transition to a prospective payment 
system for hospital outpatient services. Outpatient payments are 
projected to rebound in 2000 and grow at annual rates of 7 percent or 
more for the rest of the decade.
    Spending for outpatient therapy services and other outpatient 
ancillary services--including pharmaceuticals, durable medical 
equipment, and chiropractic care--rose only 0.7 percent in 1998 as a 
result of reductions in payment rates and a cap on payments for therapy 
services performed outside hospitals. Projected payments for 
nonphysician professional services and outpatient ancillary services 
will grow only slightly in 1999 before taking off again in 2000. Annual 
spending growth is expected to average 11.3 percent from 1999 through 
2009.
                   effects of the balanced budget act
    In January 1997, CBO projected that net mandatory outlays for 
Medicare would grow from $189 billion in 1997 to $288 billion in 2002. 
That January 1997 baseline was the basis for CBO's estimate of the 
savings from the BBA. CBO estimated that the BBA would reduce net 
mandatory spending for Medicare by $6 billion in 1998, $41 billion in 
2002, and $112 billion over the 1998-2002 period. As a result, in its 
August 1997 analysis of the BBA, CBO projected that net mandatory 
outlays for Medicare would grow to $247 billion in 2002, rather than 
the $288 billion projected the previous January (see Table 3).

   TABLE 3. Comparison of August 1997 and July 1999 Projections of Net
                     Mandatory Outlays for Medicare
                (By fiscal year, in billions of dollars)
------------------------------------------------------------------------
                                 1997   1998   1999   2000   2001   2002
------------------------------------------------------------------------
January 1997 Projection.......    189    206    226    250    261    288
Minus Effects of Balanced           0     -6    -16    -29    -20    -41
 Budget Act...................
                               -----------------------------------------
August 1997 Projection........    189    200    210    220    241    247
July 1999 Projection..........    187    190    188    202    218    226
July 1999 Projection Minus         -1     -9    -22    -19    -23    -22
 August 1997 Projection.......
------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: Numbers may not add up to totals because of rounding.

    CBO's current baseline, prepared in July 1999, projects that net 
mandatory Medicare spending will grow from $188 billion in 1999 to $226 
billion in 2002. Those figures are $22 billion and $21 billion, 
respectively, below the levels projected in August 1997.
    Why have the projections changed? Each year CBO updates its budget 
projections to account for legislative changes, updated economic 
assumptions, and other new information. Since the enactment of the BBA, 
the only noticeable legislative effect on Medicare spending has been 
the modification of home health payment rates included in last year's 
omnibus appropriation bill (Public Law 105-277). CBO estimated that 
legislation will increase Medicare outlays by $2 billion in 2000 and 
reduce them by $1 billion in 2001. CBO's current projections of 
inflation rates are slightly lower than they were in January 1997. 
Those lower inflation rates account for about $3 billion to $4 billion 
of the annual differences between the August 1997 and July 1999 
projections.
    Much of the difference between the two sets of projections is 
attributable to new information--most notably the unanticipated slowing 
of spending growth in 1997 and 1998 resulting from improved compliance 
with Medicare payment rules. In essence, the 1997 projections were too 
high because CBO did not anticipate the full effects of Operation 
Restore Trust--Medicare's program to combat fraud. CBO also did not 
foresee the increasing lag in 1998 and 1999 between when services are 
furnished and when payment is made. In addition, CBO assumed that 
adjustments to Medicare+Choice payments to reflect the risks of plans' 
enrollees would be made in a budget-neutral way rather than in a manner 
that would reduce spending.
    CBO has not revised its estimates of the effect of the BBA on 
Medicare spending. With the possible exception of the projections of 
the interim payment system for home health agencies, CBO believes that 
its estimates of the Balanced Budget Act were reasonable.
                               conclusion
    Although Medicare spending has slowed dramatically in 1998 and 
1999, CBO expects it to resume growing at an average rate of 7 percent 
to 8 percent in the decade after 2000. In particular, spending for home 
health services is likely to rebound after 2000, when the prospective 
payment system replaces the interim payment system.
    Medicare spending is likely to grow even faster after 2010 with the 
influx of the baby-boom generation into the program. That growth is due 
both to the unprecedented increase in program enrollment and continuing 
increases in spending per enrollee. Assuming no change in policy, the 
Medicare trustees project that Medicare spending will grow from about 
2.5 percent of GDP in 1998 to 4.9 percent of GDP in 2030 as the last of 
the baby boomers enroll in the program. Such an expansion in program 
spending poses an unprecedented challenge to policymakers and to the 
country.

    Mr. Bilirakis. Thank you. Thank you, Mr. Crippen.
    Well, we have heard about the decrease in the rate of 
increases in Medicare spending. Waste, fraud and abuse. Ms. 
Eshoo certainly spoke regarding the area that you referred to, 
the coding.
    I might add that I have a son who is a primary care 
physician and when he opened up his practice he could not 
afford, as I was just telling Ms. DeGette, the computerized 
system. He had a manual system. So I spent probably the better 
part of a month in his office trying to work up that system. I 
thought it would be a great opportunity for me to learn, too, 
just the grassroots and that sort of thing. And there was 
really quite a range in the coding.
    As tempted as I was to try to say, ``Hey, this coding ought 
to be maybe something higher,'' he would not let me do it, and 
that is why he is struggling today.
    But there is quite a range there and you can see where 
there is an awful lot of room for people to take advantage of 
it, and I know that HCFA is aware of that.
    In any case, we have heard about the money in that area. 
Obviously we are all concerned. I know HCFA is concerned. We 
are all concerned with quality care and access to care.
    Let me just ask you if you know, and I know Dr. Ross, I 
think in your statement you made some sort of comment to the 
effect that there is really no evidence to date that 
beneficiaries' access to care has been impaired by the BBA. Is 
that correct, that you made that comment? At least it was in 
your written statement.
    Mr. Ross. Yes, yes.
    Mr. Bilirakis. Well, let me ask the three of you if you 
know, referring now to present access to care and quality of 
care as affected by BBA and, in addition to that, how you might 
forecast that in the near future. In other words, it might be 
good today but you expect that it might worsen or not change in 
any way whatsoever.
    Do you have comments, Dr. Ross?
    Mr. Ross. Well, I think I would like to pick up on one 
point that Dr. Scanlon made regarding care in skilled nursing 
facilities, which is to try and relate the claims that we have 
heard against the reality. MedPAC does not see an issue today, 
in part because the system is still being phased in. But we are 
concerned about problems that down the road as we go to 100 
percent, if we are not correctly matching costs and payments 
for the high-acuity groups.
    On something like hospital inpatient services, we have been 
very cautious. We have said for this year's operating update we 
think the current law is okay. We did not go beyond that 
because we are taking it, if you will, one step at a time.
    I think the thing that is frustrating for all of us, and 
Mr. Hash this morning alluded to it, is the absence of data to 
try and get a systematic assessment of what is going on out 
there.
    What we hear a lot about is what is happening to revenues. 
What we hear much less about is what are the responses to those 
revenue changes? What is that translating to in terms of lower 
cost growth, if at all? Are changes in cost growth coming from 
improved productivity and behavior changes we want or from 
avoiding certain kinds of beneficiaries?
    So our efforts, along with some of the other agencies, are 
to keep the feelers out, to try to get an assessment, 
sponsoring surveys, talking to providers, talking to 
beneficiary groups. I am not sure I want to make a prediction. 
What I am trying to say is that we are out there looking at it.
    Mr. Bilirakis. Dr. Scanlon?
    Mr. Scanlon. Our response has been that while access is not 
a widespread problem, the quality of information is such that 
we cannot be totally convinced that there are not instances 
where there is an access issue. So it has been always a 
qualified response.
    There is also the aspect of it which is that the systems 
themselves have not taken into account sufficiently the 
differences in patient needs and in particular, they have not 
accommodated the high-acuity patient. It applies to home 
health. It applies to the therapy caps. It applies to the 
skilled nursing facilities. Therefore it is very important that 
the systems be adjusted to try and serve those patients.
    Now we agree that as these systems are phased in, the 
continuing adequacy of resources is a critical issue. There is 
a question of how much have we built into the base that will 
allow us to feel confident about that foundation. And, as Mr. 
Crippen indicated, the rapid growth that was going on before 
BBA may suggest that we have built quite a bit into that base.
    Mr. Bilirakis. Mr. Crippen?
    Mr. Crippen. Mr. Chairman, just a moment because, as I said 
at the outset, CBO is less in the business than my colleagues 
here of looking at the outcomes of policy; we look at the 
inputs. But I would suggest you may have the most current data, 
both from being in the districts and listening to providers but 
also from whatever you are hearing from constituents.
    One thing that I have been trying to watch a little--just 
as an indicator--is how much constituent mail you are getting 
complaining about the inability to get care under these new 
rules? And I do not know where that is at the moment. Certainly 
earlier in the year it was not very prevalent.
    But you have so many indicators probably that we do not 
have. We are dismayed by the lags in the data collection, but 
you have some current data of your own.
    Mr. Bilirakis. Thank you. Thank you, Mr. Crippen.
    Miss DeGette.
    Ms. DeGette. Thank you.
    Mr. Crippen, following up on this data collection issue, I 
am wondering; I have heard all of you say we have inadequate 
data; we just have either one side or we have anecdotal 
evidence.
    What is the status of this data collection and what are we 
going to do in the meantime?
    Mr. Crippen. I will jump in here and tell you where we 
think it stands. There is always a lag in the data by a year or 
2--18 months. That lag is a little bit longer even now--
unfortunately at a critical time when these policies are going 
into effect--because of all of the other activity going on to 
get computers compliant and all of that, with the turn of the 
century.
    So it is worse than usual at a time when you would like it 
to be better than usual. So we are relying, in part, on 
anecdotal evidence, although we are getting bits and pieces of 
a larger picture.
    As I said, if you look at the instant data we can get on 
how hospitals are coding diseases as I suggested, it seems to 
be that there is now what is euphemistically is called 
downcoding or a reverse creep. Over the years, the case mix-
adjuster had been going up, and now it is going down. That is 
fairly contemporary data, so it suggests, as part of a larger 
picture, but it is not a complete picture.
    Ms. DeGette. Thank you.
    I want to, Dr. Ross, ask you a question because you talked 
about the hospitals and you were kind of lumping the hospitals 
together, talking about the effects on them. I guess I would 
note we have different kinds of hospitals. We have the for-
profit hospitals, we have the public hospitals, the children's 
hospitals, we have the rural hospitals, and it seems to me all 
of them probably have different impacts and they probably have 
different needs.
    Would that not be accurate?
    Mr. Ross. Absolutely, there are different classes of 
hospitals. We also pay them in a number of different ways--
operating capital, outpatient.
    Ms. DeGette. Okay, because one thing I have noted is that 
you folks say that implementing this outpatient prospective 
payment system is going to reduce payments for virtually all 
hospitals but it is going to have a much larger effect on 
specific kinds of hospitals.
    Is that accurate? And, if so, which kinds of hospitals?
    Mr. Ross. I am basing that statement on estimates that 
Health Care Financing has done in conjunction with its proposed 
rule on this, but it is on small, rural hospitals, it is on the 
cancer hospitals that you have heard about, it is on the 
teaching hospitals.
    Ms. DeGette. So would it not be fair to say, then, that the 
outpatient PPS is somewhat uncertain at this point, since it 
has not been implemented Mr. Ross. As we have learned with BBA 
in general, that is true of any prospective system coming on 
line. One of the impacts possibly of the outpatient system that 
contributes to the uncertainty is how hospitals will respond 
now that they need to code for the purposes of payment, which 
they have not before.
    There is some feeling that as hospitals learn to code 
appropriately for the new system, some of those estimates of 
the reductions may be a little overstated.
    Ms. DeGette. Now how is this data collection issue going to 
impact on our knowledge of the effect of the coding and how 
fast that is being implemented? I mean is there a lag there?
    Mr. Ross. There will be a lag there, as well.
    Ms. DeGette. How long is that lag?
    Mr. Ross. I cannot answer that but I presume it will be 
probably a couple of years, again depending on how much is done 
in terms of a phase-in and what that phase-in looks like.
    Ms. DeGette. See, the problem I have is here we are. We are 
trying to pass laws, the administration is trying to enact 
regulations and when we have these data lags, we are really 
legislating in a vacuum.
    I do not know if you are even the appropriate people to ask 
but do any of you have any thoughts how we could reduce this 
lag time?
    Mr. Scanlon. I think we have been trying, both MedPAC and 
GAO, in terms of looking at the outcomes of these policies to 
try and supplement the lack of data that comes from the 
administrative systems with the different surveys that we have 
done and the Inspector General has undertaken similar kinds of 
efforts.
    The problem in doing that is that those are labor-intensive 
activities in which we are able to contact relatively small 
numbers of providers.
    Now I hope, in some respects, you can think about these 
efforts as representative anecdotes. We go out and get random 
samples of anecdotes, but it does not guarantee for us that 
there are not other areas in which if we went there, we might 
identify a problem.
    This is the best information that we can provide you at 
this point in time.
    Ms. DeGette. Are you doing anything specifically to improve 
the data collection?
    Mr. Scanlon. Well, we are doing this type of survey effort. 
We have done it for home health agencies, which we finished in 
the early summer. We are doing it now for skilled nursing 
facilities. We are working to be able to use the information 
coming out of the administrative claims systems for home health 
as soon as it is available by processing the pre-BBA 
experience, rather than waiting until new data are available.
    We issued a report in May that used the most currently 
available data on home health and reported on the first quarter 
of 1998. So we are going to try to get you an update as soon as 
the data become available.
    Ms. DeGette. Maybe we will do the second quarter.
    Mr. Scanlon. Well, we like to aim higher than that.
    Ms. DeGette. Thank you. Thank you, Mr. Chairman.
    Mr. Bilirakis. Thank you. Mr. Burr?
    Mr. Burr. Let me ask all of you to comment on the general 
question of have our savings in Medicare been greater than 
those estimated when we passed BBA 1997?
    Mr. Crippen. I should probably take that one since we did 
the original estimates. Medicare spending is certainly lower 
than we anticipated, even after the BBA's passage and there is 
a table in my testimony, Table 3, that shows you what we 
thought would happen before and after BBA and what really did 
happen, at least up until this point. And the summary statement 
is that Medicare spending is about $20 billion lower a year 
than we anticipated post-BBA.
    But that does not necessarily say that there are more 
savings in the policy that you passed. It does turn out that 
Medicare spending is less than we expected, but as akin to in 
1997, as you know, we were not expecting post-BBA to have these 
kinds of surpluses facing us.
    So without a change in tax law, we are still getting a lot 
more revenue than we thought. What has changed is underlying 
behavior, not necessarily the policy change that you voted for 
in 1997 on this or anything else.
    Mr. Burr. Define ``underlying behavior'' to me.
    Mr. Crippen. Well, in the case of Medicare spending, we 
think--and again have some anecdotal evidence to suggest that--
the widespread and very public attacks on fraud--and again that 
is not to say that all of the change is because there was that 
much fraud but it is the reaction of providers to those efforts 
that have made people more cautious. It slowed down the 
processing, causing people to be more careful about the claims 
being filed. In the case of hospitals, it looks like there has 
been some diminution in the coding to less expensive treatments 
or less expensive DRGs.
    Mr. Burr. Utilization is up or utilization is down?
    Mr. Crippen. Of?
    Mr. Burr. Health care.
    Mr. Crippen. I am not quite sure. How one measures it is 
not quite clear to me.
    Mr. Ross. It is up in some areas and it is down in others. 
We have seen fewer claims, for example, for home health 
services; we know that. I believe physician services, that the 
volume is running about as one would project.
    Mr. Scanlon. One of the things that is very difficult to 
understand is that some of these patterns, if you look at the 
period before the Balanced Budget Act and you look at the home 
health, there were areas of the country in which the use of 
services was declining when there were no constraints on the 
system and there were other areas where it was growing rapidly 
and there was no sense that there were differences in the 
beneficiary populations in these different areas.
    So one of the things that we have not been able to do is 
explain why growth was going on before the Balanced Budget Act 
and what we have not been able to do for you yet is explain 
what has happened since then.
    What we have seen is a narrowing of the differences across 
those areas, which is consistent with what the Balanced Budget 
Act was attempting, but at the same time, we cannot tell you 
what is the right level and whether we are achieving it or not 
achieving it in particular areas.
    Mr. Burr. A reduction in home health could be because some 
people tightened their policies because of the fraud and abuse 
fear. It could be because some entities do not offer the 
services in the same way that they did before. It could be 
because seniors are not utilizing the services that are 
available to them at the same rate, correct?
    Mr. Scanlon. All those are possibilities.
    Mr. Burr. All those are possibilities and we do not know 
exactly the percentage each one plays, correct?
    Mr. Scanlon. That is correct.
    Mr. Burr. CBO did a reestimate in March on home care and 
found an additional $56 million of savings over and above what 
you had projected January 1998, which was $75 billion worth of 
savings.
    If you did a report January of the year 2000, what do you 
think that you would find?
    Mr. Crippen. At the moment it would appear that our 
estimates of home care spending that we made last spring appear 
to have been too high again and that they will be lower this 
year than we had projected back in the spring.
    Mr. Burr. And are you able to yet draw any conclusion as to 
why that spending would be less than what you projected?
    Mr. Crippen. We do not yet have good clear conclusions.
    Mr. Burr. But it would fall in the three categories that we 
just talked about?
    Mr. Crippen. Oh, yes. Part of this, too, is in the 
implementation. There are some agencies--and I cannot tell you 
exactly how widespread it is--maybe some of my colleagues can--
in which the constraint that is being asked of the home health 
industry is based on an average per-patient cost, and it is 
being applied to each patient, rather than on an average in 
some cases. So that obviously will give you a much lower 
average cost.
    So there are some implementation issues, as well, going on 
out there but clearly we got wrong in the case of home health 
how much the policy would produce in terms of savings. But, as 
I am suggesting, there are lots of other things going on out 
there, as well, in addition to BBA.
    Mr. Burr. Let me just ask the last question for all three 
of you to comment on.
    Is it important for an agency when they implement policy to 
have knowledge of what the congressional intent was and should 
that be included in their process of how they proceed on that 
legislation? Or is everything 100 percent left up to their 
interpretation?
    Mr. Ross. I am not sure you have the right panel here.
    Mr. Scanlon. I think you need our general counsel.
    Mr. Burr. You will be sufficient.
    Mr. Scanlon. My personal sense is that certainly an agency 
needs to take into account the sense of Congress in this. Now 
the issue, of course, is how to establish clearly the sense of 
Congress. And I do know that they attempt to be extremely 
faithful to the statutory language. At least in my mind it has 
an extreme weight attached to it.
    But I do think a response from the general counsel would be 
appropriate for you and we would be happy to get it for you.
    Mr. Burr. Thank you. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Bilirakis. Welcome back.
    Mr. Brown. I apologize for having to leave.
    There have been, I think perhaps in our districts, Mr. Burr 
has talked about being home and Mrs. Cubin and the chairman and 
all of us, about what we heard in the August recess and prior 
to that. At least in my case and I think in some others, we 
seem to hear perhaps the most from physical therapists and 
occupational therapists and speech therapists in what the caps, 
the $1,500 caps have meant to them.
    Some survey said that some 13 percent, one out of seven 
beneficiaries who need rehabilitative therapy will exceed the 
cap in a given year.
    Has GAO, Mr. Scanlon, examined the potential impact of the 
cap on beneficiaries, the $1,500, and the combining of speech 
and physical therapists and what that has meant?
    Mr. Scanlon. We looked at it but as in other issues, we 
have been handicapped by the lack of current information 
regarding users of the cap. But the study that you referred to 
was actually done by MedPAC and it did involve looking at who 
would exceed the cap.
    However, the cap does not apply to people who use 
outpatient departments. So a smaller share than 14 percent is 
actually going to be affected in terms of not being able to 
access coverage, since outpatient departments are the largest 
source of therapy services.
    It is only if you were to seek services from an independent 
therapist or agency that you would be affected by the cap.
    Furthermore, there is an issue that exists today, which is 
that HCFA has not been able to implement the cap as specified 
in the BBA in that because of the year 2000 computer problems, 
they have had to rely on voluntary compliance by providers. So 
it is providers' responsibility not to bill beyond $1,500. That 
does not mean that a beneficiary cannot go to another provider 
and have services billed for by that other provider.
    Mr. Brown. Do you have evidence that that is happening?
    Mrs. Cubin. If there is another provider.
    Mr. Scanlon. There is no information one way or the other 
on that.
    Mr. Brown. Do any of you have an opinion on aggregating the 
three and setting a figure so that there is more independence 
or more leeway in making rehabilitative decisions?
    Mr. Scanlon. I think our feeling is that the most important 
step here is to make this cap, if there is going to be a cap, 
based on clinical criteria so that differences in patient needs 
are taken into account. A cap that is generous enough to 
provide therapy to people with more extensive needs may be very 
much too generous for people with very minimal needs. It 
provides no control over utilization.
    One of the concerns about this service, as many other 
services, is that the pattern of growth before the Balanced 
Budget Act is inexplicable. The independent agencies that exist 
in providing therapy are overwhelmingly concentrated in very 
few areas of the country. Most of the rest of the country is 
relying upon outpatient departments and home health agencies 
for their services.
    Why there has been this concentration and why there was so 
much growth on the part of these agencies was something we did 
not understand but we were concerned about. So the idea of 
imposing some controls seems to make sense.
    Mr. Ross. If I could follow up on that, MedPAC does not 
have specific recommendations on the caps but I just wanted to 
sort of draw the parallel here with what has gone on in home 
health, where once again you implement a payment system. It was 
not an individual-specific cap but an agency-specific, per-
beneficiary cap, with no adjustment for case mix, for 
differences among individuals. And we see what we get there and 
you can anticipate similar situations here until you get the 
payments somehow or other to reflect differences in needs among 
the beneficiaries.
    So I think I can speak for the commission, saying that we 
are supportive of that in all instances, that we want to take 
health status into account.
    Mr. Brown. The home health IPS and the PPS for skilled 
nursing homes, I hear over and over seem not to adequately 
cover the cost of caring for the sickest patients. Is it wise 
to continue implementing these new payment systems, given that 
fact, the fact that the sickest seniors may not receive the 
care they need? So should we discontinue? Should we change? 
What should we do?
    Mr. Scanlon. I do not think we should discontinue. I think 
we should work very quickly to refine. HCFA is aware of the 
problem with the skilled nursing facility prospective payment 
system and has commissioned work in order to identify how to 
adjust the rates to deal with the higher acuity patient, and we 
think that that needs to be done as quickly as possible.
    And fortunately, the interim payment system is scheduled to 
be replaced by the prospective payment system for home health, 
which will be able to discriminate in terms of patient needs 
and to adjust rates.
    Now I will not add to that sentence at this point 
accordingly until we see the system and until we know that it 
is going to be able to deal with the differences in patient 
needs; until then we cannot be satisfied.
    Mr. Brown. Comments from the other two of you about that?
    Mr. Crippen. I would just say again that my colleagues know 
more about the outcomes than we do, but the payment system for 
the skilled nursing facilities, for example, is based on 1995 
data, although grown for other factors. But if the case mix of 
a particular provider has changed, particularly if the patient 
load has gotten more expensive, more expensive kinds of 
clientele, then the 1995 base will not represent adequately a 
payment structure for them.
    So again it is another way of saying what my colleagues 
have. We need to be able to apply a case mix adjuster in order 
to update a base year, whatever year we choose it to be.
    Mr. Ross. And just on the home health, on the IPS, we 
MedPAC has noted that the timetable is pretty tight for getting 
the prospective payment system in and as Dr. Scanlon says, we 
still have to wait and see what it is before we will know how 
well it is picking up on the high end. But our commission has 
recommended giving some kind of consideration to an outlyer 
system, at least under IPS, if for any reason it were to 
continue, and we have outlyers under PPS for inpatient 
hospital, too, for truly expensive cases that go beyond what 
you can get out of your case mix adjuster.
    Mr. Bilirakis. Ms. Cubin.
    Mrs. Cubin. Thank you, Mr. Chairman.
    First of all, I want all of you to know that I understand 
that the Congress passed a law that you have to implement. So 
please know that my frustration is not directed at you. I guess 
it is more directed at what I consider to be a lack of 
understanding of conditions in areas like the area that I live 
in.
    I wanted to ask Dr. Ross first of all, was your response to 
Congresswoman DeGette that the largest cuts would be made in 
rural hospitals and a couple others, but rural hospitals 
specifically?
    Mr. Ross. These are the HCFA projections for implementation 
of the PPS. Not the largest would be for small, rural hospitals 
but they would be only among the classes of facilities that 
have large reductions.
    Mrs. Cubin. Okay. And forgive me for skipping around. I 
have been scribbling these questions all over the place.
    The government has accepted the concept in other areas that 
every person in America is entitled to some services. Let's 
take the telephone, delivering the mail. We all pay the same 
for postage. Even though it costs more to deliver on postal 
routes in Wyoming where the route might be 150 miles, as 
opposed to a 20-block area, we all pay the same amount. 
Electricity, everyone is entitled to electricity, even though 
we have to have a universal service fund.
    What I am submitting to you is that I realize that costs in 
rural areas are higher because they are not as efficient as in 
urban areas and yet the policy that has been followed as far as 
health care is concerned does exactly the opposite. It cuts 
money from rural health care providers, whether it is an agency 
or a physician or whatever.
    Let me tell you what we do in exchange for that, by the 
way. Where do you put the nuclear waste that is generated? We 
do not get one kilowatt hour of electricity from nuclear power 
in Wyoming or in Idaho--I guess Idaho might get a little--but 
nonetheless, where do those spent rods go? They go to us.
    So it all balances out in the end. And I think in a lot of 
areas the government, the administration--not this 
administration, all administrations--have seen the light that 
it is not ever going to be as effective, as efficient to 
provide services in rural areas as it is in urban areas, but 
nonetheless, people in rural areas have the same right to 
quality medical care that they do in urban areas.
    I want you to know for a fact, one of the reasons--and Mr. 
Crippen, you said that one of the reasons you think that the 
Medicare expenditures are less is because there has been less 
fraud and abuse. Well, I am going to tell you what. The 
hospitals in Wyoming that are so small, when they get a letter 
from the Department of Justice or a doctor, they get a letter 
from the Department of Justice presuming they are guilty, 
saying, ``If you don't pay up front, then the consequences are 
going to be way worse than if you had if we find out that you 
were wrong.''
    In Wyoming I say it is probably the only place on earth 
where you can make a long distance call, get the wrong number, 
and not only will you know the person that you reached but they 
will be able to give you the right number.
    My point is in Wyoming I do not believe that there is very 
much fraud. I believe that there could be a small amount of 
abuse with certain providers but a small number. And I believe 
that there can be mistakes made, and yet we are literally 
facing closing of nursing homes, closing of day care centers 
for adults.
    Dr. Ross, when you said that your findings are that 
Medicare patients could find doctors, not in Wyoming. That is 
probably true--I believe you--in urban areas where there are 
plenty of doctors. But in Wyoming where there are not enough 
doctors, my husband is a primary care physician. He has not 
taken a single Medicare patient that he charges for--he has 
taken some that he takes care of for free--that he charges for 
for years.
    So I have questions that I am going to submit. One of them 
is I want you to justify for me the difference in the allowable 
Medicare charge between urban areas and rural areas. Maybe 
these are questions I should have asked Mr. Hash but I would 
really like to work with you to just explain the differences 
that there are between trying to provide health care in urban 
areas and rural areas.
    I do not think we need a hospital in every community, even 
though every community would like one, but we do need 
telemedicine. And now, with the cuts that are made in 
education, even the family practice centers that we have that 
take care of people who cannot get doctors otherwise are 
threatened with being closed.
    I do not think that it is in any way negligence on your 
part that you are not aware of these critical situations, but I 
do think you are not aware of them.
    So you can each say something because I waited all this 
time to have my say and I did not even ask one question. I have 
a bunch.
    Mr. Ross. I will just say you raise a lot of important 
issues and I will be happy to work with you on them.
    Mrs. Cubin. Thank you.
    Mr. Scanlon. We would be very happy to respond to your 
questions and also to provide you some of the work that we have 
done, which has--we have tried to take into account the 
particular circumstances, the unique circumstances of rural 
areas.
    In the work that I talked about with respect to home health 
care, our primary focus was on rural areas, feeling that in an 
area where there are either no agencies or one agency, that the 
impact of the BBA changes could have been extremely different 
than in an urban area.
    So we are sensitive to it but there certainly needs to be a 
lot more work done on the issue.
    Mrs. Cubin. One last thing I want to say. You talked about 
the $1,500 cap on physical therapy and occupational therapy, 
that it was per provider. In Wyoming sometimes there is only 
one provider in a county that is bigger than the size of 
Maryland and Pennsylvania put together. Only one provider.
    Mr. Scanlon. That is a reality. The hospital outpatient 
department is probably the major safety valve for rural areas 
because they are not affected by the cap.
    Mrs. Cubin. But our physical therapists in many cases are 
not affiliated with the hospital. But my time is up and the 
chairman is giving me this look.
    Mr. Bilirakis. It is up.
    Mrs. Cubin. Thank you very much.
    Mr. Bilirakis. That is the first time she has ever been 
concerned about the chairman's look.
    Dr. Scanlon, you referred to the increases in the past in 
Medicare costs and you used the word ``inexplicable.'' Can 
these fixes, the needed fixes, the fair fixes, take place 
without the concern, fear, risk, whatever the proper words 
might be, of going back to the inexplicable?
    Mr. Scanlon. I think they can. I mean I think it is 
important that we think about the structure that we have 
identified in the Balanced Budget Act and understand how to 
refine it so that it produces the desirable outcome. We do not 
want to go back to the structure that we had before the 
Balanced Budget Act, which were systems which had incentives in 
there to produce excessive spending and we saw the response 
being very consistent with those incentives, and we do not want 
to return to the pre-BBA days. We want to refine what we have 
now to make sure that the program works effectively.
    Mr. Bilirakis. Well, thank you. I know that everything goes 
through CBO up here. The power that you guys have is amazing. 
You know, we do these things, BBA 1997, feeling that we are 
doing the right thing and for the most part, I think it was, 
but there is an awful lot of unexpected harm that took place, 
too. So I would hope that you would be a part of anything that 
we might do can we can use your wisdom in that regard.
    As per usual, we will have a number of written questions to 
you. I know that you are wiling to respond to them. Again as 
you heard earlier, we are sort of on hopefully a fast path 
here, so obviously the quicker we get the responses, the more 
help they can be.
    And I would also say that Mr. Gustafson and others of HCFA 
are in the audience, have listened to your testimony. He has 
made an awful lot of notes back there, Tom has, so hopefully 
you will have been of even more help than ordinarily. Thank you 
very much for being here.
    The third panel, finally, and these people are always 
disadvantaged as the last panel because by then, half the 
audience is gone or more and hardly any members are here. You 
are very, very important people to what we are trying to 
accomplish nevertheless.
    Mr. Gail L. Warden, President and CEO of Henry Ford Health 
System, Detroit, Michigan. He is here on behalf of the American 
Hospital Association. I do not know whether Mr. Dingell--I know 
he is trying to get here. He is on his way and he would like to 
make his own introduction, I am sure.
    Miss Sally Rapp, independent owner of Saint Francis 
Extended Care, Pleasanton, California on behalf of the American 
Health Care Association. Miss Nancy Roberts, President and CEO 
of the Kent County Visiting Nurse Association, Warwick, Rhode 
Island on behalf of Visiting Nurse Association of America and 
National Association for Home Care.
    Dr. Richard F. Corlin, speaker of the House of Delegates, 
American Medical Association. And Mr. David P. Holveck, CEO of 
Centocor, Melvern, Pennsylvania on behalf of Biotechnology 
Industry Organization.
    Again your written statement is a part of the record. We 
will put the clock at 5 minutes. Hopefully you can stay within 
that. And again our apologies for your sitting in that audience 
so very long. But again HCFA is here and they will be listening 
to you, in addition to us.
    So I guess I am going to start with Miss Rapp if I may, 
because Mr. Dingell is not here please. Miss Rapp, if you would 
proceed, please.

  STATEMENTS OF SALLY RAPP, INDEPENDENT OWNER, SAINT FRANCIS 
 EXTENDED CARE, ON BEHALF OF AMERICAN HEALTH CARE ASSOCIATION; 
 NANCY ROBERTS, PRESIDENT AND CEO, KENT COUNTY VISITING NURSE 
ASSOCIATION, ON BEHALF OF VISITING NURSE ASSOCIATION OF AMERICA 
  AND NATIONAL ASSOCIATION FOR HOME CARE; RICHARD F. CORLIN, 
      SPEAKER OF THE HOUSE OF DELEGATES, AMERICAN MEDICAL 
  ASSOCIATION; DAVID P. HOLVECK, CEO, CENTOCOR, ON BEHALF OF 
   BIOTECHNOLOGY INDUSTRY ORGANIZATION; AND GAIL L. WARDEN, 
   PRESIDENT AND CEO, HENRY FORD HEALTH SYSTEM, ON BEHALF OF 
                 AMERICAN HOSPITAL ASSOCIATION

    Ms. Rapp. Thank you, Mr. Chairman and members of the 
committee for allowing me to appear here today. I would like to 
share with you concerns that I have about the impact of the 
1997 Medicare cuts on patients, their families and skilled 
nursing providers like myself.
    My name is Sally Rapp and I am the owner of an independent 
skilled nursing facility in Hayward, California. I am here 
today on behalf of the American Health Care Association, which 
represents 12,000 long-term care providers.
    Mr. Chairman, balancing the budget and controlling Medicare 
spending are laudable goals but we should not, we must not 
balance the budget on the backs of our Nation's frail and 
elderly citizens.
    As you already know, the unintended consequences of the 
1997 budget deal are being felt in every corner of America by 
Medicare beneficiaries, their families and caregivers. Studies 
show that Medicare cuts have been much deeper than Congress or 
the administration expected.
    As a result of these cuts, stroke patients are being forced 
to choose between learning to walk again or talk again. 
Amputees are being denied access to therapies that doctors 
consider essential to the rehab process and that these patients 
certainly consider essential to being able to simply walk 
again. And patients with the most medically intense needs are 
waiting in hospitals for days, sometimes weeks, to find a 
skilled nursing facility that can deliver necessary care. Often 
these patients are forced to use a facility far away from 
families or loved ones.
    Policymakers on both sides of the aisle agree that the 
Balanced Budget Act, in the way that it has been implemented, 
is a major and detrimental effect on Medicare beneficiaries. 
Sixty-five senators have written to President Clinton 
acknowledging the severity of these cuts. The well respected 
chairwoman of the Medicare Prospective Advisory Commission, 
Gail Wilensky, has said and I quote, ``Congress and Medicare 
officials should devise some way of increasing payments to 
nursing homes for patients who need the most costly and 
extensive care.'' I am here to urge you to take that action 
this year.
    I would like to give you just one example of how these cuts 
are affecting Medicare beneficiaries. Linda Jorgensen, who is 
in the audience today, is faced with the very real and painful 
effects of the arbitrary $1,500 therapy caps as she watches 
what they are doing to her father. Linda is from Springfield, 
Virginia. Linda's father Victor, a steelworker and a decorated 
war veteran, is battling Parkinson's disease, the effects of a 
major stroke, and an unsympathetic Medicare policy.
    Her father is a resident of Potomac Center, a skilled 
nursing facility in Arlington, Virginia. Before the Medicare 
cuts took effect, he had been on an intense regime of physical, 
occupational and speech therapy. But in February of this year 
Linda learned that he had already used two-thirds of his annual 
allotment of therapy under the new Medicare caps. Reluctantly, 
she and her father's neurologist agreed to stop the therapy to 
ensure that they did not exceed the caps too early in the year.
    In Linda's case, her foresight was extremely warranted. 
Just a couple of weeks ago in the beginning of September, her 
dad needed speech therapy for a swallowing problem. Ironically, 
Victor met his $1,500 cap just yesterday. Now Linda and her 
family are being forced to pay for his essential speech therapy 
out of their own pocket.
    Linda regards the caps as unfair and inhumane. I regard the 
caps as unfair and inhumane. How many Medicare beneficiaries 
like Linda's father are there across the country? How many 
people who expected Medicare to be there when they needed it 
have been let down, abandoned by the system that they have 
supported their entire lives since its inception? And for how 
long can we ask providers to continue providing uncompensated 
care?
    The other challenge we face is the new prospective payment 
system for skilled nursing care. Implementation is having a 
dramatic impact on patients and families, forcing lay-offs of 
tens of thousands of caregivers across the country. As you 
know, we are concerned that the situation has worsened to the 
point that many facilities will opt out of the Medicare 
program.
    I would like to comment briefly on the recent report from 
the Office of Inspector General that Mr. Hash commented on 
earlier this morning examining the issue of access to skilled 
nursing care.
    Despite the report's misleading headline, it shows quite 
dramatically that there is a serious problem with access to 
skilled nursing care. Perhaps most important is the report's 
finding that nearly 60 percent of hospital discharge planners 
agree that patients requiring extensive services have become 
more difficult to place in nursing homes in the past year.
    Our industry, like most industries, agrees to shoulder its 
fair share of cuts to help Congress achieve its goal to balance 
the budget. I do not think anyone on this panel this afternoon 
is asking that the $115 billion be restored to the system. 
However, the solutions I am proposing today are targeted to 
where the Balanced Budget Act has put patients at risk.
    The bottom line is that the deep cuts in Medicare create a 
clear and present danger to the Nation's elderly. The problems 
are critical and require immediate attention. Let me outline 
what we believe to be responsible solutions to these problems.
    Mr. Bilirakis. Can you----
    Ms. Rapp. Quickly, I will.
    First, Congress should pass H.R. 1837, legislation 
introduced by Congressmen Burr and Pallone, to trigger 
exceptions to the caps for those beneficiaries most at risk, 
like Victor. I would like to express my sincere appreciation to 
Congressman Burr and Congressman Pallone for their leadership 
on this.
    Second, Congress, HCFA and MedPAC all recognize the new 
payment system for SNFs fails to account for certain Medicare 
beneficiaries with high acuity conditions. Therefore Congress 
should enact Senate Bill 1500, which would address the 
disparity between the cost of providing medically complex 
services and funding Medicare currently provides.
    Finally, Congress and the administration should take steps 
to ensure that the transition to the new Medicare payment 
system does not unintentionally disadvantage providers or 
seniors. Simply put, providers should have the option to go to 
the Federal rate.
    Mr. Chairman and members of the committee, thank you for 
the opportunity to address you here today.
    [The prepared statement of Sally Rapp follows:]
Prepared Statement of Sally Rapp, Owner, St. Francis Extended Care, on 
             Behalf of the American Health Care Association
    Thank you, Chairman Bilirakis and Members of the House Committee on 
Commerce, for allowing me to appear before you today. I would like to 
use this opportunity to share the concerns of skilled nursing facility 
(SNF) providers as we navigate our way through the challenges of the 
recently implemented Part B therapy caps and the new SNF prospective 
payment system (PPS) brought about by the Balanced Budget Act of 1997 
(BBA).
    My name is Sally Rapp, and I'm the owner of an independent nursing 
facility called St. Francis Extended Care in Hayward, California. I 
speak today on behalf of the American Health Care Association (AHCA), a 
federation of 50 affiliated associations representing over 12,000 non-
profit and for-profit assisted living, nursing facility, and subacute 
care providers nationwide.
    Mr. Chairman, controlling Medicare spending is a laudable goal, but 
the unintended consequences of the most recent cuts in Medicare have 
been severe on patients, families and care providers. Two major policy 
changes have hit the skilled nursing facility community with a ``one-
two punch'' from which some providers may not recover. Even more 
important is that in many cases, Medicare beneficiaries who need care 
in nursing facilities are not getting access to that care.
    The arbitrary cap on Part B therapies set at $1500 per year has 
affected residents across the country in ways that clearly were not 
foreseen. The combined $1500 limit on speech therapy and physical 
therapy and the additional $1500 cap on occupational therapy are 
threatening patient access to life-enhancing care. This is best 
illustrated by looking at a real life examples of how a Medicare 
beneficiary's life has been changed.
    First, I'd like to recognize Linda Jorgensen, who is in the 
audience with us today (recognize). You may have seen Linda and her 
father on some recent television ads discussing the challenges patients 
and families are facing as a result of the deep1997 BBA cuts.
    Linda, a federal worker from Springfield, Va., has been forced to 
suspend rehabilitative therapy for her father, a retired steelworker 
and decorated war veteran. Linda's father is battling Parkinson's 
disease, the effects of a major stroke and an unsympathetic Medicare 
policy threatening the care he needs and deserves.A resident of Potomac 
Center, a skilled nursing facility in Arlington, Va., her father had 
been on an intense regime of speech, physical and occupational therapy. 
But, in February, Linda learned he had already used up two-thirds of 
his annual allotment under the new caps.
    Reluctantly, she and her father's neurologist agreed to stop the 
therapy for fear her father would need it more later in the year. She 
says she can't afford the therapy herself. Now, she says, her father's 
limbs are becoming more rigid and he is in danger of losing mobility.
    Linda regards the caps as inhumane. And she is on a personal 
campaign to let policymakers know.
    Another example involves an 85 year-old woman named Frances. 
Frances owned her own hat making shop here in Northwest Washington. 
Frances had a stroke early this year and suffered from right-side 
paralysis as a result. She could not walk, speak, or take care of 
herself in her activities of daily living such as bathing, eating, 
dressing, or toileting. She received physical therapy to teach her how 
to walk again, and was able to walk from her room to the TV room with a 
walker and a nurse aide behind her. Her speech therapy was helping her 
to relearn how to swallow and speak again. Unfortunately, she exceeded 
the $1500 cap on June 23rd, and now the facility provides care to her 
without reimbursement and tries to stretch its resources to prevent any 
decline. Frances also received occupational therapy which taught her 
how to take a bath by herself, get dressed by herself (with help in the 
room if needed), and toilet by herself. She had regained independence 
in her life. Unfortunately, Frances has also exceeded her occupational 
therapy cap and is now in danger of losing some of the skills and 
quality of life she had gained. The facility is doing the best it can 
to care for their residents, but 10% have exceeded the speech/physical 
cap and about 5% have met or will exceed the occupational therapy cap. 
Care for our nation's frail elderly is being rationed, and in many 
cases they are not getting the amount of therapy they need. If after 
meeting the cap, a resident falls, is hospitalized and needs skilled 
therapy in the same calendar year, he/she could face a serious access 
problem in finding a home that will care for them for free. Let me 
express my appreciation to Congressmen Burr and Pallone for their 
leadership on addressing this problem. Medicare beneficiaries would 
benefit if Congress would pass S. 1837, legislation introduced by 
Congressmen Burr and Pallone. This legislation would address the 
arbitrary and capricious nature of the $1,500 annual caps on Part B 
outpatient rehabilitation services imposed by the BBA. These caps were 
included without the benefit of data or hearings. Mr. Chairman, I 
assure you--speaking from the front lines of the skilled care 
community, no one who was part of this process could have intended this 
cap to create the kind of patient impact we're seeing. Mr. Burr and Mr. 
Pallone's legislation would create criteria to trigger exceptions to 
the caps for the sickest and most vulnerable Medicare beneficiaries. We 
implore you to pass the Burr/Pallone bill (H.R. 1837) to allow for some 
exceptions for these caps.
    The second blow of the one-two punch is the new prospective payment 
system (PPS) for SNFs. Implementation of the new PPS has had a dramatic 
impact on providers of skilled care. With a transformation of that 
magnitude, the need for corrective adjustments along the way is 
inevitable. I come before you today to relay our concerns--and more 
importantly, to propose solutions.
    Let me bring to your attention a recent report from the Office of 
Inspector General (OIG) examining the issue of access to skilled 
nursing care. Despite the reports misleading headline and 
unsubstantiated conclusions, the report shows fairly dramatically that 
there is a serious problem with access to skilled nursing home care 
caused by the 1997 Medicare cuts. Here are some facts from the report:

 ``When asked which types of patients have become more 
        difficult to place in nursing homes, the majority of discharge 
        planners (58%) identify patients who require extensive 
        services,'' according to the OIG. ``These types of patients 
        typically complex direct nursing care and expensive 
        medications. They include patients who require intravenous 
        feedings, intravenous medications, tracheostomy care or 
        ventilator care,'' the report says.
 One-third of all hospital discharge planners said it was 
        difficult to place Medicare patients in SNFs.
 Sixty-five percent of hospital discharge planners say PPS has 
        had an effect on their ability to place patients.
One thing is clear: nursing homes are reevaluating the extent to which 
Medicare resources will allow them to appropriately care for the 
sickest patients. The result is a very real access problem to skilled 
nursing services, specifically proven by the OIG's own report, which is 
causing backups in hospitals throughout the country. This squeeze has 
put SNFs in a difficult situation, and we are concerned about the 
impact it will have on Medicare beneficiaries--specifically high-acuity 
patients. Yet, Mr. Chairman, the OIG's release of their report is a 
significant development because they've served to prove the point that 
major dislocations have occurred as a result of the PPS and its 
subsequent implementation. Naturally, SNFs will be hard-pressed to 
continue to provide service when patients' costs of care exceed the 
resources available.
    I want to share with you a few examples of the difficulties SNFs 
are experiencing under PPS--reports from the front-lines, if you will, 
in the skilled nursing field--to illustrate the seriousness of the 
problems we face, and the real threat of reduced access to skilled 
care.
    In Florida, Mrs. Y (89 years of age) arrived at a Lakeland SNF on 
March 25th to recover from pneumonia and a chronic urinary tract 
infection. Due to her weakened condition she needed respiratory, 
physical, occupational and speech therapy plus IV antibiotics to gain 
the strength she needed to go home. Mrs. Y returned to her home on May 
17th thanks to the excellent care she received at the skilled nursing 
facility; however, the Medicare system failed to reimburse the skilled 
nursing facility $20,000 worth of direct and ancillary care that were 
provided to Mrs. Y, so that she could return to health. This included 
$3,000 of pharmacy costs alone. And even though Mrs. Y was in a high 
Medicare resource utilization group, she consumed over $350 more a day 
in respiratory, IV and other therapies than Medicare paid for. Yet, if 
she did not get that care, she would have used up her Medicare days, 
then been forced onto Medicaid and probably stayed in the home 
indefinitely. Staff at the center report that nearly half of their 
Medicare discharges in a typical month consume an average of $8,000 to 
$10,000 in uncompensated care. Since the facility's policy is to take 
all Medicare recipients regardless of acuity level, the center's 
viability is continuing to be severely impacted by the BBA.
    In Delaware, Mrs. D, an 85 year old woman, who was recently 
recovering from an infection and heart problems in a Delaware hospital. 
She was ready for nursing home placement but, because of Medicare cuts, 
she had difficulty locating a bed in a SNF, and, as a result, she was 
forced to stay in the hospital an extra two weeks. Eventually, a 
provider offered to take her to a center in neighboring Maryland 
despite the fact that she needed an expensive IV antibiotics at a cost 
of $410 a day. Her Medicare level dictated the center would only be 
compensated $260 a day for her care. Since then, her doctor has also 
prescribed a $1,700 knee brace for which the center will not be 
compensated.
    In the state of Washington, a locally owned and managed independent 
provider operates a 30-bed skilled nursing facility with a nearby 
hospital. The facility primarily serves short-term (usually less than 
20 days) high-acuity patients--many of whom were patients in the 
hospital's oncology department. The facility enabled patients to be 
treated by the hospital's doctors and eliminated the need for these 
very sick patients to travel between facilities.
    The result of PPS on this facility is unmanageable losses of 
between $20,000 and $40,000 per month. The unit is well-managed and has 
provided uninterrupted high quality care, but it cannot overcome the 
fact that so many of its patients are very high acuity and require, in 
many cases, expensive treatments and medications that are not 
compensated through the PPS rate. If Medicare cuts are not restored, 
the facility anticipates it will be left no choice but to close its 
doors, creating access problems for its local Medicare beneficiaries. 
Additionally, the facility's functions will have to be assumed by 
another facility several miles away.
    The Medicare cuts that are denying beneficiaries access to care are 
not just affecting Medicare beneficiaries, but also are affecting our 
employees as well. The bleak outlook for SNFs--the ``open-season on 
caregivers'' mentality that seems to prevail in some quarters--is 
turning away high quality professional staff. These deep cuts have 
forced layoffs of tens of thousands of employees. Mr. Chairman, the job 
of skilled care staff is challenging under any circumstances--but I can 
say with certainty that these dramatic reductions add a new degree of 
difficulty in providing access to high-quality care that Medicare 
beneficiaries expect and deserve.
    As you know, we are concerned that the situation has worsened to 
the point that many facilities will opt out of Medicare altogether. 
These cuts are forcing both independent providers and large national 
corporations to make difficult choices of whether to provide services 
in a system that does not provide adequate resources for care. This 
means that Medicare beneficiaries will have less access to needed care.
    Mr. Chairman, the bottom line is that the deep cuts in Medicare 
create a clear and present danger to the well-being of our nation's 
elderly. The problems are critical and require immediate attention. I 
would like to outline what we believe to be fair solutions to four 
critical challenges--solutions that take into account the constraints 
of Congress and HCFA in implementing change.
    First: Medicare beneficiaries would achieve great relief if 
Congress would pass S. 1837, legislation introduced by Congressmen Burr 
and Pallone. Let me, again, express my sincerest appreciation to 
Congressmen Burr and Pallone for their leadership on this.
    Second--Congress, HCFA and MedPAC all recognize that the new 
payment system for SNFs fails to account for certain Medicare 
beneficiaries with medically complex conditions. That is especially 
true for patients with high utilization of non-therapy ancillary 
services, such as prescriptions, respiratory care, IV antibiotics and 
chemotherapy. AHCA supports S. 1500, the Medicare Beneficiary Access to 
Quality Nursing Home Care Act. To date, there is no House companion, 
but we hope the House will follow the lead of Senators Hatch, Domenici, 
Kerrey, and Daschle, by supporting similar legislation. S. 1500 would 
identify where there are high-cost patients in the PPS system and make 
payment add-ons to address the disparity between the cost of providing 
medically complex services and the reimbursement Medicare currently 
provides.
    Third, and to a certain extent also addressed by S. 1500, is the 
fact that HCFA and Congress should replace the current inflation rate 
update factor for SNFs with a more accurate measurement of the cost of 
services they are required to provide. This current market basket 
grossly understates the actual market conditions for SNFs because it 
understates the annual change in the costs of providing an appropriate 
mix of goods and services produced by SNFs. SNFs have dramatically 
changed the services we provide and the acuity levels of the patients 
we care for. S. 1500 would restore to the SNF market basket the one 
percent that BBA cut in 1996 through 1998. This would serve as an 
inflation catch up for SNFs. The minus one-percent would continue 
through 2001.
    Fourth and finally, PPS rates are based on cost reports that date 
all the way back to 1995. We believe providers should have the option 
of maintaining the current blended rate for the second year of the PPS 
transition--currently 75% facility-specific/25% federal--or elect to 
move to the full federal rate immediately. This would prevent 
facilities that changed the type and volume of Medicare services after 
1995--the PPS base year--from being disadvantaged by the transition 
rate. Again, this is a matter of equity, and a means of easing the 
transition to PPS. We believe this can be done administratively by 
HCFA, however HCFA's intransigence requires Congress to act.
    Mr. Chairman, as I conclude my remarks, I would like to convey to 
the Committee that we know the constraints that exist. That is why 
we've worked so hard to put forward solutions that are realistic, 
reasonable, responsible and within reach. Each of the actions we 
recommend would restore funding that would ensure continued quality and 
access to care for Medicare beneficiaries. And that is why each of the 
actions we recommend should be adopted for the sake of the patients 
entrusted to our care. These solutions can only be achieved in a 
bipartisan fashion, and we look to your leadership. Our nation's 
seniors expect and deserve no less.
    Mr. Chairman and Members of the Committee, I thank you for the 
opportunity to be here today. On behalf of AHCA, I want to make clear 
our commitment to providing high quality care to America's frail and 
elderly. The situation is critical, but it will get worse unless 
Congress and the Administration work with providers to fix the system.

    Mr. Bilirakis. Thank you, Miss Rapp.
    Miss Roberts, please.

                   STATEMENT OF NANCY ROBERTS

    Ms. Roberts. Thank you. My name is Nancy Roberts and I am 
the chief executive officer of Care New England Home Health. 
Care New England Home Health Division consists of two home 
health providers, Kent County Visiting Nurse Association and 
Kent Hospital Home Care. Both organizations are Joint 
Commission-accredited, not-for-profit, Medicare-certified 
agencies located in Rhode Island. The agencies were officially 
linked in June of last year when the VNA joined Care New 
England Health System. Last year collectively the organizations 
provided visits to nearly 10,000 patients.
    Mr. Chairman and members of the subcommittee, I am pleased 
to be here today to present testimony on behalf of the Visiting 
Nurse Association of America and the National Association for 
Home Care. We are grateful for your holding these hearings and 
considering changes to the Balanced Budget Act of 1997 that 
would stop the hemorrhaging of responsible home health 
providers and the consequent adverse effects on patients.
    The intent of Congress when it passed the Medicare home 
health provision in the Balanced Budget Act was to decrease 
rising utilization and reduce the associated expenditure. The 
leadership and members of VNAA and NAHC both agree that the 
policy changes were in order. However, we believe that the 
steps taken by the BBA have inadvertently penalized cost-
efficient home health agencies and the patients they serve.
    According to HCFA's report in August 1999, nearly 25 
percent of all home care agencies in this Nation have closed 
since the balanced budget passed. The experience in Rhode 
Island is similar, where 20 percent of the Medicare certified 
agencies have closed or dropped out of the Medicare program. 
Nationally, 15 percent fewer Medicare beneficiaries are 
receiving home health care services. The reduction in Rhode 
Island is even greater, where 22 percent fewer Medicare 
beneficiaries are receiving care.
    To investigate the effect of the balanced budget on 
Medicare home health beneficiaries, Congress sought the input 
of both the GAO and MedPAC. In their reports to Congress in 
1999, both confirm that beneficiaries who are most costly to 
treat are those at risk of losing access to home health care.
    MedPAC found that nearly 40 percent of the agencies 
surveyed responded that because of IPS, they no longer admit 
all the Medicare patients who they previously would have 
admitted. Thirty percent of the agencies reported discharging 
certain Medicare patients because of IPS.
    While neither report concluded that access to home health 
care had become a crisis, I would note that the reports were 
based on data from the first quarter of 1998.
    A recent study conducted by VNAA of its member agencies 
paralleled MedPAC's findings. While VNAs have historically made 
every attempt to admit all eligible beneficiaries regardless of 
condition or ability to pay, many VNAs are now selectively 
admitting patients or must discharge patients earlier than the 
optimal time. Many VNAs have made the decision, a difficult 
decision, to discontinue their participation in the Medicare 
program, limit specialty programs or eliminate rural service 
areas.
    The VNA and the home care department that I represent has 
managed to survive these turbulent times, but just barely. We 
have reduced our costs by 25 percent. In order to achieve this 
level of reduction, clinical and administrative staff were cut, 
staff benefits and salaries were reduced, and some programs and 
patient services were eliminated.
    Despite these very, very deep cuts, the two organizations 
still lost over $1 million in fiscal year 1998. That 
represented 17 percent of the total budget. For these two not-
for-profit organizations that depend and rely on charitable 
contributions, this loss was significant and had direct 
negative impact on our communities and the patients we serve.
    As the number of home care providers diminishes, the access 
problem is exaggerated. It is not uncommon for a hospital 
discharge planner to call as many as a half a dozen home care 
providers in search of someone willing to take a patient. Under 
IPS, agencies are staffing, and I will put in quotes, ``just 
right.'' You may be familiar with the just-in-time method of 
inventory management. This is a tool where an organization 
wants to reliably get products in their plants just before the 
customer needs them in order to save inventory carrying costs. 
Well, to some degree home health agencies are being forced to 
employ just-in-time, just-right staffing.
    Because we are forced to employ this kind of method, just-
right, just-in-time, there are many days when we have limited 
staff capacity and have difficulty responding to the unexpected 
increases in services. Unfortunately, that leaves many patients 
underserved due to limited staffing ability, waiting for 
services that they desperately need.
    Mr. Bilirakis. Please summarize, Miss Roberts.
    Ms. Roberts. To help solve this dilemma, we find hospital 
discharge planners looking at reserving slots, scheduling 
patients in advance. Agencies establish cancellation lists.
    So when I hear that there is not an access problem, I have 
to wonder. I think it is easy to see that the real victims in 
this situation are our patients and the communities that they 
serve.
    In conclusion, I would offer the following recommendations 
on behalf of the Visiting Nurse Association and NAHC.
    First, to eliminate the scheduled 15 percent additional cut 
scheduled for October 1, 2000. Second, target specific 
resources through some sort of an outlyer provision to high-
cost, high-need patients to ensure that these eligible 
beneficiaries have access to needed home care services.
    Third, increase the IPS per-visit cost limit. And finally, 
provide relief from financially disabling overpayment.
    I thank you for this opportunity to offer this testimony.
    [The prepared statement of Nancy Roberts follows:]
  Prepared Statement of Nancy Roberts, President and CEO, Kent County 
Visiting Nurse Association on Behalf of the Visiting Nurse Associations 
         of America and the National Association for Home Care
Introduction
    Mr. Chairman and Members of the Subcommittee: My name is Nancy 
Roberts, and I am President and Chief Executive Officer of the Kent 
County Visiting Nurse Association (VNA), which is located in Warwick, 
Rhode Island.
    On behalf of the Visiting Nurse Associations of America (VNAA) and 
the National Association for Home Care (NAHC), I respectfully submit 
the following joint comments and recommendations for the public record.
    The Kent County VNA is an accredited, Medicarecertified, 
communitybased home health and hospice agency, which was founded in 
1908. Our staff of 175 consists of registered nurses; physical, 
occupational and speech therapists; home care aides; medical social 
workers; and clergy and volunteers. We often serve the most costly and 
chronically-ill patients in our community, regardless of their ability 
to pay. In 1998, we visited over 6,000 patients.
    Mr. Chairman and Members of the Subcommittee, the Kent County VNA 
is committed to providing quality home health care to all patients in 
the communities we serve. However, I am deeply concerned that the 
changes to the Medicare home health program made by the Balanced Budget 
Act of 1997 (BBA '97) threaten the viability of my agency and the cost-
efficient health care that we provide in our communities. I am grateful 
to you for your leadership in holding this hearing and for your 
consideration of legislation that would stop the hemorrhaging of 
responsible providers from the Medicare home health program and the 
consequent, adverse effect on patients.
    The following data illustrate the dramatic changes that have 
occurred to the Medicare home health program since the passage of 
BBA'97:

 According to HCFA data from its OSCAR files, as of August 18, 
        1999, there have been 2486 home health agency closures, nearly 
        25% of all home health agencies in the United States.
 Approximately 545,270 fewer Medicare beneficiaries received 
        home health services in 1998 than in 1996. The change 
        represents a 15.2% reduction in patients served.
 Home health reimbursement has decreased 29% since 1996.
 Medicare home health spending is now projected by the 
        Congressional Budget Office (CBO) to be reduced by $48 billion 
        over five years (FY 1998 2002), rather than by $16.1 billion as 
        initially projected at the time BBA'97 was passed.
 In 1997, home health care represented only 9% of Medicare but 
        was slated for about 14% of the reductions in Medicare 
        spending. Currently, the home health program comprises less 
        than 7% of the Medicare program and is now projected to absorb 
        24% of the Medicare cuts between FY 19982002.
What do these numbers mean in terms of beneficiaries' access to home 
        health care?
    Congress passed the BBA'97 Medicare home health provisions to 
control expenditures and utilization. VNAA and NAHC agree that policy 
changes were in order; however, we believe that the steps taken by 
BBA'97 inadvertently penalized cost-efficient home health agencies and 
patients.
    To investigate the effect of BBA'97 on Medicare home health 
beneficiaries, Congress sought the input of both the General Accounting 
Office (GAO) and the Medicare Payment Advisory Commission (MedPAC). In 
their 1999 reports to Congress, both the GAO and MedPAC confirm that 
the beneficiaries who are most costly to treat are at risk of losing 
access to home health care. While neither report concluded that access 
to home health care has become a crisis, it must be noted that the 
reports are based, for the most part, on data from the first quarter of 
calendar year 1998.
    MedPAC found that, ``Nearly 40 percent of agencies surveyed 
responded that because of the IPS, they no longer admit all Medicare 
patients whom they would have admitted previously, and about 30 percent 
of agencies reported discharging certain Medicare patients because of 
the IPS.'' Discharged patients were primarily those with chronic care 
needs who required a large number of visits and were expensive to 
serve.
    In its June 1999 report, MedPAC states, ``The case-mix adjusted PPS 
[prospective payment system] being developed will not take effect 
before October 2000. In the meantime, an exclusion policy for very 
expensive patients could be implemented.'' The Commission suggests 
allowing agencies to exclude a small portion of their patients from the 
aggregate per-beneficiary payment limits to ensure that these 
beneficiaries will have access to needed services.
    Two alarming outcomes of the IPS were revealed in a recent survey 
by VNAA of its members. While VNAs have historically made every attempt 
to admit all eligible beneficiaries regardless of condition or ability 
to pay, many VNAs are now selectively admitting patients or must 
discharge patients earlier than the optimal time for discharge. Many of 
the VNAs that responded to the survey made the difficult decision to 
discontinue participation in the Medicare program or eliminate rural 
service areas.
Recommendations:
    VNAA and NAHC understand the need for Congress to make prudent 
decisions with respect to changes in the Medicare program. We also 
believe that the highest priority must be to target resources to ensure 
that beneficiary access is protected, and that the vital home health 
infrastructure be stabilized so that it is positioned to respond to 
future needs of the disabled and elderly. For this reason, we have put 
a high priority on legislation that would:

1. Eliminate the 15% additional cut scheduled for October 1, 2000;
2. Target specific resources through some type of outlier provision to 
        high-cost, heavy needs patients to ensure that eligible 
        beneficiaries maintain access to needed home health services;
3. Increase the IPS per-visit cost limit; and
4. Provide relief from financially disabling overpayments.
    These proposals are in keeping with the concerns that the GAO and 
MedPAC have outlined and that led members of this Subcommittee and 
others in the House and Senate to reexamine the home health program 
changes. The following information provides more detail and rationale 
for each of these recommendations.
Recommendation #1: Eliminate the 15% payment cut, which is scheduled 
        for October 1, 2000.
    Under the BBA97, expenditures under a PPS were to be equal to an 
amount that would be reimbursed if the cost limits and per beneficiary 
limits were reduced 15%. Even if PPS was not ready to be implemented on 
October 1, 1999, the Secretary of Health and Human Services was 
required to reduce the cost limits and per beneficiary limits in effect 
on September 30, 1999, by 15%. The Omnibus Consolidated and Emergency 
Supplemental Appropriations Act (OCESAA) delayed the 15% reduction for 
all home health agencies until October 1, 2000.
    Congress, HCFA, and home health care providers have looked to PPS 
as a possible escape from the draconian changes imposed through IPS. 
However, the method for calculating PPS rates requires HCFA to set 
payment at levels that will lead to total home health expenditures that 
are 15% less than under IPS. This means that the PPS payment rates 
would exacerbate the growing access problems of today.
    NAHC and VNAA believe that the 15% expenditure cut to Medicare home 
health outlays on October 1, 2000, would close down a substantial 
percentage of home health agencies that have so far survived the IPS. 
HCFA's August 5 regulation on the new home health cost limits predicts 
that 93.5% of surviving home health agencies will exceed their FY 2000 
per-beneficiary cost limit or per-visit cost limit. In addition, the 
average agency will have to repay HCFA 12% of its Medicare costs.
    Home health providers--who have already experienced an average 29% 
reduction in reimbursement since the BBA'97 (even with the passage of 
OCESAA)--are struggling to keep costs under the per-visit and per-
beneficiary cost limits and repay IPS-related overpayments. With an 
additional 15% cut, beneficiaries in many areas of the country would 
lose access to home health services, and for beneficiaries in many 
rural counties, this loss would be the loss of any type of local health 
care.
    The 15% expenditure cut is not needed to meet BBA'97 savings goals; 
CBO estimates that reductions in home care through 2002 will exceed BBA 
'97 goals by $32 billion.
Recommendation #2: Target specific resources through some type of 
        outlier provision to high-cost, heavy needs patients to ensure 
        that eligible beneficiaries maintain access to needed home 
        health services.
    In addition to the 1999 GAO and MedPAC reports on beneficiary 
access, a 1998 study conducted by The Lewin Group entitled 
``Implications of the Medicare Home Health Interim Payment System (IPS) 
of the 1997 Balanced Budget Act,'' and a 1998 study by the Center for 
Health Policy Research of the George Washington University entitled 
``Medicare Home Health Services: An Analysis of the Implications of the 
Balanced Budget Act of 1997 for Access and Quality,'' both found that 
IPS curtails access to covered services for the sickest, most frail 
Medicare patients.
    The IPS aggregate per-beneficiary limits, based on 199394 data, 
clearly do not reflect the increase in severity of most home health 
agencies' case-mix populations since that base period. In addition, 
technological advances in recent years have vastly expanded the scope 
of services that can be provided to Medicare beneficiaries in their 
homes. Services such as parenteral and enteral nutrition, chemotherapy 
and care of ventilator/trach-dependent patients, which used to be 
provided only on an inpatient basis, can now be provided in the home, 
thus reducing the need for more costly hospitalization. These services 
are costly for the home health agency to provide. These services often 
require nursing staff who have had additional training in 
administration of drugs and procedures, as well as patient monitoring. 
In addition, such services require prolonged visits in the patients' 
homes, as well as high standby costs, extensive case management, 
transition discharge planning and other activities that add further to 
the cost per visit.
    Through an outlier payment, additional resources can be targeted to 
those providers that care for the high cost patient. An expenditure 
limit on outlier payments ensures fiscal soundness.
Recommendation #3: Increase the IPS per-visit cost limit.
    BBA'97 reduced the per visit cost limits from 112% of the mean to 
105% of the median per visit costs for free-standing agencies. IPS 
forces providers to reduce the total number of visits delivered by 
patients. However, as the number of visits decreases, costs per visit 
go up. Under the 1998 OCESAA, the per visit limits were raised from 
105% to 106% of the median. This 1% increase was insufficient to help 
HHAs who are operating under cost limits that have been reduced from 
14-22% under BBA97. The current cost limits are inadequate to cover the 
costs of providing care and to account for the increased administrative 
costs of participation in the Medicare program due to HCFA's regulatory 
initiatives. Agencies in rural areas and inner cities have been 
particularly hard hit by reductions. Their costs tend to exceed 
national averages because of longer travel times between visits, higher 
wages resulting from the lingering personnel shortages in rural areas, 
or security escorts and language translators in the cities.
Recommendation #4: Provide relief from financially disabling.
    BBA '97 did not require HCFA to publish information on calculating 
the per visit limits until January 1, 1998, even though the limits went 
into effect beginning October 1, 1997. Likewise, HCFA was not required 
to publish information related to calculation of agencies' annual 
aggregate per beneficiary limits until April 1, 1998, despite an 
October 1, 1997, start date. More than a year after IPS began, many 
agencies had not yet received notice from their fiscal intermediaries 
(FIs) providing the visit and per beneficiary limits under which they 
were expected to operate.
    The BBA '97 home health reductions were so deep and occurred so 
quickly that many agencies were not able to adjust to avoid 
overpayments. More importantly, overpayments developed because most 
agencies continued to provide medically necessary health care within 
the scope of the Medicare benefit rather than terminate care to 
patients.
    These overpayments are not the result of abuse or inefficiency. 
Rather, most overpayments have occurred because HHAs continue to serve 
high-cost patients within the scope of Medicare coverage and the 
payments have already been used to provide legitimate needed care to 
eligible beneficiaries. Without some relief from these overpayments, it 
can be expected that agency closures, and the attendant access 
problems, will accelerate.
Overpayment Relief
    HCFA maintains the authority to grant extended repayment plans to 
any provider receiving an overpayment from the Medicare program. 
However, the current state of determinations regarding eligibility for 
extended repayment plans is rife with inconsistency, subjectivity, and 
confusion. Recently, HCFA communicated to the Congress and the public 
that it had modified the extended repayment plan process to authorize 
automatic approval of three-year repayment plans. In fact, home health 
agencies have had great difficulty securing even 12-month repayment 
plans, let alone the newly authorized three-year repayment schedule. 
Further, the claimed interest free nature of the repayment plans has 
proven illusory as it has been afforded only to those few home health 
agencies where the overpayment has been determined prior to filing of 
the annual cost report. We ask the Subcommittee to ensure that HCFA 
immediately issue clarifying standards which specifically authorize 
automatic three-year repayment plans for all types of IPS-related 
overpayments and that repayment plans be made available on an interest 
free basis to the extent allowable under current law.
Overpayment Compromises
    HCFA has the authority to compromise the collection of Medicare 
overpayments. At no time in the Medicare program has there been a more 
appropriate circumstance for exercise of this compromise authority.
    HCFA has chosen not to process overpayment compromise requests at 
this point. The delay in processing these requests virtually guarantees 
that the requesting home health agency will be at high risk of closure. 
The Subcommittee should strongly recommend that HCFA utilize its 
overpayment compromise authority on an expedited basis in order to 
resolve the inequities created through the implementation of the IPS.
15-Minute Increment Reporting
    BBA97 required that claims for home health services on or after 
July 1, 1999, must contain a code that identifies the length of time 
for each service visit, measured in 15-minute increments. HCFA issued 
instructions to the FIs on February 18, 1999, directing them to 
initiate necessary steps to implement this new billing requirement for 
all HHAs participating in the Medicare/Medicaid programs (Transmittal 
No. A-99). HCFA has allowed for a grace period for compliance until 
September 30, 1997.
    This new administrative burden imposes a complex time-keeping 
requirement for agencies to stop the in-home clock when an interruption 
in active treatment occurs. The HCFA transmittal defines the ``time of 
service visit'' to begin at the beneficiary's place of residence, when 
delivery of services has actively begun. Agencies must count the number 
of 15-minute intervals.
    The time counted must be actual treatment time. However, in-home 
time represents only a portion of the total time invested by an agency 
in caring for a patient. Numerous activities required by the Medicare 
Home Health Conditions of Participation and needed to ensure effective 
patient care are often times performed outside the home, including 
communication with physicians and family members, coordination of 
services with other home health personnel and community agencies, care 
planning, and clinical documentation. In order for home care treatment 
time to be meaningfully quantified, visit time must be better defined 
and recognized as only part of the resource cost involved in providing 
home care services.
    Neither Congress nor HCFA has indicated how this information will 
be used. Its value is questionable in light of the ongoing move from a 
per-visit reimbursement system to prospectively set per-episode 
payments that are not tied to number of visits or visit length. In 
light of the substantial financial and administrative strains already 
being experience by agencies, we urge you to revisit this requirement.
    Thank you again, Mr. Chairman, for the opportunity to present our 
views. In closing, we urge the Subcommittee to recognize the 
seriousness of the situation and pass legislation this year. Last 
year's provisions that were included in OCESAA were helpful in that the 
15% cut was delayed for one year, the periodic interim payment (PIP) 
program was extended until October 1, 2000, and the cost limits 
received minor adjustments. However, we are now faced with the 
identical situation of having to face a 15% cut in reimbursement and a 
discontinuation of PIP one year from now. The cost limits are still 
severely low and do not enable the majority of agencies that have 
survived the IPS to care for the most chronically-ill patients. You and 
the Subcommittee have our gratitude for bringing home health issues to 
this level of consideration. We look forward to working closely with 
you to resolve these issues.
[GRAPHIC] [TIFF OMITTED] T1694.017

[GRAPHIC] [TIFF OMITTED] T1694.018

    Mr. Bilirakis. Thank you very much, Miss Roberts.
    Dr. Corlin.

                 STATEMENT OF RICHARD F. CORLIN

    Mr. Corlin. Thank you very much, Mr. Chairman. My name is 
Richard Corlin. I am a gastroenterologist in private practice 
in Santa Monica, California and I am also speaker of the AMA's 
House of Delegates. We appreciate the opportunity to provide 
the subcommittee with our views on the needed improvements to 
the Medicare sustainable growth rate system, the SGR.
    The SGR, enacted under the Balanced Budget Act of 1997, is 
a target rate of spending growth for physicians' services. It 
is calculated each year on the basis of four factors: medical 
inflation, changes in Medicare fee-for-service enrollment, GDP 
growth per capita, and changes in spending due to law and 
regulation.
    There are serious problems with the SGR and MedPAC has 
recommended four areas of improvement. We urge Congress to 
enact these SGR refinement into law this year.
    The four improvements needed are, No. 1, there must be a 
requirement to correct HCFA's projection errors and restore the 
$3 billion SGR shortfall resulting from these errors. No. 2, 
the SGR must be increased to account for physician costs due to 
adoption of new technologies.
    No. 3, measures must be implemented to curtail volatility 
in physician payment rate and avoid steep cuts in the future. 
And No. 4, HCFA and MedPAC must be required to provide 
information and data on payment updates.
    Our testimony today will focus primarily on two of these 
four needed SGR refinements: HCFA's projection errors and the 
need to increase the target above GDR growth.
    HCFA must correct the projection errors in the 1998 and 
1999 SGR and should be required to correct projection errors 
each year as actual data becomes available. Our view is totally 
in accord with MedPAC's recommendation. We recognize that HCFA 
has to use estimates to calculate the SGR for the coming year 
and as a result, physician payment updates are not based on 
actual data but on projected data, which has so far proven to 
be erroneous.
    In the first 2 years of the SGR, erroneous HCFA projections 
have already short-changed physician payments by more than $3 
billion. For example, in establishing the 1999 SGR, HCFA 
projected that Medicare managed care enrollment would rise by 
29 percent in 1999. This error led to a projected drop in fee-
for-service enrollment and a negative 1999 SGR. Data now shows 
that managed care enrollment has increased only by 11 percent 
and this means that physicians are caring for over 1 million 
more patients in the Medicare fee-for-service system than are 
accounted for by the SGR statement by HCFA.
    The earlier statements, with all due respect, made by HCFA 
that they have the ability to erroneously make an estimate but 
do not have the legal right to correct their own estimates are 
simply beyond the limits of credulity. I might point out, Mr. 
Chairman, that the highest amount of shortfall in any State was 
to the State of Florida, whose beneficiaries' physicians had a 
shortfall of $285 million.
    In addition, the SGR needs to be set at GDP plus 2 
percentage points, the way it was originally intended to take 
into account two main factors responsible for increasing health 
care costs: advances in technology and an aging population.
    Under the Balanced Budget Act of 1997, the SGR limits 
growth in the use of health care services by the elderly and 
disabled patients to the rate of growth of the GDP. We know and 
CBO forecasts confirm that GDP growth in the next decade will 
lag behind growth in patient needs for health care services. 
Thus, no matter how cost-effective physicians are in our care 
for our beneficiaries, Medicare physician payment rates are 
virtually guaranteed to decline unless these corrections are 
made.
    MedPAC has recommended that the SGR include a factor higher 
than GDP to account for, and I quote, ``cost increases due to 
improvements in medical capability and advances in scientific 
technology.'' We strongly agree with MedPAC.
    We also urge Congress to consider a long-term approach to 
setting an appropriate growth target. For instance, Congress 
could require the Agency for Health Care Policy and Research to 
study the impact on utilization of No. 1, advances in 
technology, No. 2, aging and other changes in the 
characteristics of Medicare enrollees, and three, shifts in 
sites of service and a report be made on this study to MedPAC.
    Other serious problems with the SGR must also be addressed 
and they are explained in our written testimony.
    Physicians, regardless of our specialty, are unanimous in 
our concern that payment cuts due to flaws in the SGR, on top 
of more than a decade of previous cuts, could threaten our 
ability to continue to offer our Medicare patients the finest 
medical care in the world. Thus the SGR system must be fixed 
and it must be fixed this year. Thank you, and I yield the 
balance of my time.
    [The prepared statement of Richard F. Corlin follows:]
   Prepared Statement of Richard F. Corlin on Behalf of the American 
                          Medical Association
    The American Medical Association (AMA) appreciates the opportunity 
to present to this Subcommittee our views concerning improvements to 
the Medicare sustainable growth rate (SGR) system for physicians' 
services, and appreciates the Subcommittee's focus on this important 
issue. As Congress prepares to consider Balanced Budget Act (BBA) 
refinements and Medicare reforms, the AMA urges inclusion of 
improvements in Medicare's SGR system in any legislation approved by 
the Subcommittee.
    Enacted under the BBA, the SGR establishes a target growth rate for 
Medicare spending on physician services, then annually adjusts payments 
up or down, depending on whether actual spending is below or above the 
target. The SGR system was intended to slow the projected rate of 
growth in Medicare expenditures for physicians' services.
    Physicians are the only group subject to this target, despite the 
fact that Medicare spending on physician services has been growing more 
slowly than other Medicare benefits. Although the BBA included measures 
to slow projected growth in these other benefits, the Congressional 
Budget Office continues to forecast much higher average annual growth 
rates for other services than for physician services over the next 
decade. In contrast to annual growth in outlays of 4.6 percent for 
inpatient hospital services, 5.7 percent for skilled nursing 
facilities, 6.5 percent for home health, and 14.6 percent for 
Medicare+Choice plans, average annual growth in physician services is 
projected at only 3.1 percent from 2000-2009.
    Physicians were subject to significant and disproportionate 
Medicare payment cuts prior to the BBA, yet we have never abandoned our 
elderly and disabled patients. From 1991-97, physician payment updates 
already had slipped 10 percent below growth in medical practice costs.
    In its March 1999 Report to Congress, the Medicare Payment Advisory 
Commission (MedPAC) identified serious problems in the SGR system and 
recommended significant improvements to it. The AMA and the national 
medical specialty societies share MedPAC's concerns and believe that 
improving the SGR is a critical component of efforts to ensure that the 
85 percent of Medicare beneficiaries who are enrolled in the fee-for-
service program continue to receive the benefits to which they are 
entitled.
    Specifically, the physician community is concerned that the growth 
limits in the current SGR system are so stringent that they will have a 
chilling effect on the adoption and diffusion of innovations in medical 
practice and new medical technologies. In addition, we are concerned 
that the Health Care Financing Administration (HCFA) did not revise the 
projections it used in the 1998 SGR when data proved HCFA erroneous. 
Further, HCFA stated it will not correct 1999 SGR errors without a 
congressional mandate, despite that in the first two years of the SGR, 
erroneous HCFA estimates have already shortchanged the target by more 
than $3 billion. Finally, we are concerned that the SGR could also 
cause future payments to be highly volatile and fall well behind 
inflation in practice costs.
        medicare physician payments and the balanced budget act
    Medicare payments for physicians' services are updated annually by 
HCFA. Payment rates are based on a relative value scale system, enacted 
under OBRA 89, that reflects the physician work, practice expense and 
professional liability insurance costs involved in each service. The 
relative value for each service is multiplied by a dollar conversion 
factor to establish actual payment amounts. The conversion factor is 
required to be updated each calendar year, which involves, in part, 
establishing an update adjustment factor (UAF) that is adjusted 
annually by the SGR.
    MedPAC recommends, and the AMA agrees, that Congress revise the SGR 
system as follows--

 The SGR should include a factor of growth in real gross 
        domestic product per capita plus an allowance for cost 
        increases due to improvements in medical capabilities and 
        advancements in scientific technology,
 The Secretary should be required to publish an estimate of 
        conversion factor updates by March 31 of the year before their 
        implementation;
 The time lags between SGR measurement periods should be 
        reduced by allowing calculation of the SGR and update 
        adjustment factors on a calendar year basis;
 HCFA should be required to correct the estimates used in the 
        SGR calculations every year; and
 The SGR should reflect changes in the composition of Medicare 
        fee-for-service enrollment.
                   the sustainable growth rate system
    The SGR system was enacted under the BBA and replaces the Medicare 
Volume Performance Standard system, which had been the basis for 
setting Medicare conversion factor updates since 1992. The SGR sets a 
target rate of spending growth based on four factors: changes in 
payments for physician services before legislative adjustments 
(essentially inflation); changes in Medicare fee-for-service 
enrollment; changes in real per capita gross domestic product (GDP); 
and an allowance for legislative and regulatory factors affecting 
physician expenditures. Growth in real per capita GDP represents the 
formula's allowance for growth in the utilization of physician 
services.
    The target rate of spending growth is calculated each year and is 
designed to hold annual growth in utilization of services per 
beneficiary to the same level as annual GDP. Physician payment updates 
depend on whether utilization growth exceeds or falls short of the 
target rate. If utilization growth exceeds GDP, then payment updates 
are less than inflation. If utilization is less than GDP, payment 
updates are above inflation.
    Because of the serious problems with the SGR system, as discussed 
below, four improvements must be included in legislation to fix the 
SGR:

 There must be a requirement to correct HCFA's projection 
        errors and to restore the $3 billion SGR shortfall resulting 
        from these errors;
 The SGR must be increased to account for physician costs due 
        to adoption of new technology;
 Measures must be implemented to curtail volatility in 
        physician payment rates and avoid steep cuts in the future; and
 HCFA and MedPAC must be required to provide information and 
        data on payment updates.
                      problems with the sgr system
    Of the needed improvements listed above, we wish to focus on two 
major problems with the SGR. First, there is a ``projection error'' 
problem. Specifically, in determining the SGR each year, HCFA must 
estimate certain factors that are used to calculate the SGR. In the 
first two years of the SGR system, HCFA has seriously miscalculated 
these factors, and thus physicians have been shortchanged by several 
billion dollars. In addition, these projection errors will continue 
each year, and the resulting shortfalls will be compounded.
    The second major problem with the SGR system is that it does not 
allow growth in physician payments sufficient to account for 
physicians' costs due to technological innovations.
    In addition, as discussed above, there are other problems with the 
SGR system, which we have separately addressed below.
    Unlike some other Medicare payment issues, the problems with the 
SGR system and their solutions are a matter on which the physician 
community is unified. National organizations representing diverse 
medical specialties, including surgeons, primary care physicians and 
others, as well as organizations representing medical colleges and 
group practices, have been working closely together with the AMA to 
address these complex issues. On behalf of the entire physician 
community, we are asking Congress to take the necessary steps to assure 
that we can continue to afford to provide our Medicare patients with 
the best medical care available in the world.
The Projection Error Problem
    Two of the four factors used to calculate the SGR target each year 
are growth in U.S. GDP and fee-for-service enrollment growth. Because 
the target must be calculated before the year begins, HCFA can only 
speculate as to what GDP growth will be and how many people will enroll 
in fee-for-service versus managed care. Recognizing the need for such 
speculation, HCFA acknowledged in a 1997 physician rate update 
regulatory notice that the actual data for each year, once available, 
might reveal errors in its estimates of as much as 1 percent, or $400 
million. HCFA also promised that the difference between its projections 
and actual data would be corrected in future years.
    In the first two years of the SGR, erroneous HCFA estimates have 
already shortchanged physician payments by more than $3 billion. These 
projection errors have not been corrected and HCFA does not plan to do 
so. Specifically, one year after the 1997 notice, HCFA reneged on its 
pledge to correct SGR errors and simultaneously issued its most 
egregious error, projecting Medicare managed care enrollment would rise 
29 percent in 1999, despite the many HMOs abandoning Medicare in 1999. 
This error led, in turn, to a projected drop in fee-for-service 
enrollment and a negative 1999 SGR. Data now show that managed care 
enrollment has increased only 11 percent, a fraction of HCFA's 
projection, which means physicians are caring for 1 million more 
patients in Medicare fee-for-service than were forecast.
    The 1998 and 1999 SGR projection errors are a serious problem. The 
SGR is a cumulative (as opposed to an annual) system, and the 
cumulative SGR target is like a savings account for physician services. 
As discussed, HCFA's errors have left a $3 billion shortfall in this 
account, which, if not restored, will either produce unwarranted 
payment cuts or deficient payment increases. Although the President's 
2000 budget proposes to address the projection errors, we are concerned 
that HCFA may correct the errors in a way that will effectively cancel 
any benefit to payment rates from using accurate data.
    Physicians have faced a decade of payment cuts without ever 
abandoning Medicare patients. We have done our part to keep costs 
within the limits imposed by the BBA. Now, Congress must do its part by 
insisting that payment updates be based on correct SGR estimates.
The SGR Must Allow for Technological Innovations and Other Factors 
        Impacting Utilization of Health Care Services
    MedPAC has also recommended that Congress revise the SGR to include 
a factor of growth in real gross domestic product per capita plus an 
allowance for cost increases due to improvements in medical 
capabilities and advancements in scientific technology.
    The system is currently designed to hold annual utilization growth 
at or below annual GDP growth. A common method for policymakers to 
evaluate trends in national health expenditures is to look at growth in 
health spending as a percentage of GDP, but this approach is replete 
with problems. There is no true relationship between GDP growth and 
health care needs. Forecasts by Congressional Budget Office and the 
U.S. Census Bureau indicate that real per capita GDP growth will 
average about 1.5 percent per year over the next decade. This is far 
below historical rates of Medicare utilization growth. Indeed, at 5.9 
percent, average annual per beneficiary growth in utilization of 
physicians' services was three to four times higher than GDP growth 
from 1981-1996. Thus, if history is any guide, holding utilization 
growth to the level of GDP growth virtually guarantees that Medicare 
physician payments will decline.
    A primary reason for this lack of congruity between GDP and 
Medicare utilization is that GDP does not take into account health 
status trends nor site-of-service changes. Thus, if there were an 
economic downturn with negative GDP growth at the same time that a 
serious health threat struck a large proportion of Medicare 
beneficiaries, the consequences could be disastrous.
    Secondly, GDP does not take into account technological innovations. 
The only way for technological innovations in medical care to really 
take root and improve standards of care is for physicians to invest in 
those technologies and incorporate them into their regular clinical 
practice. The invention of a new medical device cannot, in and of 
itself, improve health care--physicians must take the time to learn 
about the equipment, practice using it, train their staff, integrate it 
into their diagnosis and treatment plans and invest significant capital 
in it. Yet physician spending is the only sector of Medicare that is 
held to as stringent a growth standard as GDP and that faces a real 
possibility of payment cuts of as much as 5 percent each year. Keeping 
utilization growth at GDP growth will hold total spending growth for 
physician services well below that of the total Medicare program and 
other service providers.
    To address this problem, as recommended by MedPAC, the factor of 
growth under the SGR relating to GDP must be adjusted to allow for 
innovation in medical technology. We believe to implement adequately 
MedPAC's recommendation, the SGR should be set at GDP + 2 percentage 
points to take into account technological innovation, as discussed 
further below.
    In addition, we urge that Congress consider a long-term approach to 
setting an appropriate growth target that takes into account site-of-
service changes, as well as health status and other differences between 
Medicare's fee-for-service and managed care populations that lead to 
differential utilization growth. Thus, we believe that the Agency for 
Health Care Policy and Research (AHCPR) should be directed to analyze 
and provide a report to MedPAC on one or more methods for accurately 
estimating the economic impact on Medicare expenditures for physician 
services resulting from improvements in medical capabilities and 
advancements in scientific technology, changes in the composition of 
enrollment of beneficiaries under the fee-for-service Medicare program 
and shifts in usage of sites-of-service.
Technological Innovation
    Congress has demonstrated its interest in fostering advances in 
medical technology and making these advances available to Medicare 
beneficiaries through FDA modernization, increases in the National 
Institutes of Health budget, and efforts to improve Medicare's coverage 
policy decision process. The benefits of these efforts could be 
seriously undermined if physicians face disincentives to invest in new 
medical technologies as a result of inadequate expenditure targets.
    As first envisioned by the PPRC, the SGR included a 1 to 2 
percentage point add-on to GDP for changes in medical technology. Ever-
improving diagnostic tools such as magnetic resonance imaging, new 
surgical techniques including laparoscopy and other minimally-invasive 
approaches, and new medical treatments have undoubtedly contributed to 
growth in utilization of physician services and the well-being of 
Medicare beneficiaries. For example, a recent paper published by the 
National Academy of Sciences indicated that from 1982-1994 the rates of 
chronic disability among the elderly declined 1.5 percent annually.
    With GDP projected to grow by 1.5 percent annually, the failure to 
allow an additional 1 to 2 percentage points to the SGR for 
technological innovation means that the utilization target is only half 
the rate that was originally planned. Technological change in medicine 
shows no sign of abating, and the SGR should include a technology add-
on to assure Medicare beneficiaries continued access to mainstream, 
state-of-the art quality medical care.
Site-of-Service Shifts
    Another concern that should be taken into account by the GDP growth 
factor is the effect of the shift in care from hospital inpatient 
settings to outpatient sites. As MedPAC has pointed out, hospitals have 
reduced the cost of inpatient care by reducing lengths-of-stay and 
staff and moving more services to outpatient sites, including physician 
offices. These declines in inpatient costs, however, are partially 
offset by increased costs in physician offices. Thus, an add-on to the 
SGR target is needed to allow for this trend.
Beneficiary Characteristics
    The SGR should also be adjusted for changes over time in the 
characteristics of patients enrolling the fee-for-service program. A 
MedPAC analysis has shown that the fee-for-service population is older, 
with proportions in the oldest age groups (aged 75 to 84 and those age 
85 and over) increasing, while proportions in the younger age group 
(aged 65-74) has decreased as a percent of total fee-for-service 
enrollment. Older beneficiaries likely require increased health care 
services, and in fact MedPAC reported a correlation between the 
foregoing change in composition of fee-for-service enrollment and 
increased spending on physician services. If those requiring a greater 
intensity of service remain in fee-for-service, the SGR utilization 
standard should be adjusted accordingly.
Other Problems with the SGR System
Stabilizing Payment Updates under the SGR System
    The AMA strongly agrees with MedPAC's further recommendation that 
Congress should stabilize the SGR system by calculating the SGR and the 
update adjustment factor on a calendar year basis.
    Instability in annual payment updates to physicians is another 
serious problem under the SGR system, as has been acknowledged by HCFA. 
Projections by the AMA, MedPAC and HCFA show the SGR formula producing 
alternating periods of maximum and minimum payment updates, from 
inflation plus 3 percent to inflation minus 7 percent. Assuming a 
constant inflation rate, these alternating periods could produce 
payment decreases of 5 percent or more for several consecutive years, 
followed by increases of similar magnitude for several years, only to 
shift back again. These projections are based on constant rates of 
inflation (2 percent), enrollment changes, GDP growth and utilization 
growth. There is a serious problem when constant, stable rates of 
change in the factors driving the targets lead to extreme volatility in 
payments that are entirely formula-driven.
    A primary reason for this instability is the fact that there is a 
time lag in measurement periods for the SGR. Specifically, while 
physician payment updates are established on a calendar year basis, SGR 
targets are established on a federal fiscal year basis (October 1 
through September 30) and cumulative spending (used to calculate the 
SGR) is established on an April 1 through March 31 basis. These time 
periods must all be consistent and calculated on a calendar year basis 
to attempt to restore some modicum of stability to the SGR system.
    Simulations by the AMA and MedPAC have also shown, however, that 
the change to a calendar year system will not, by itself, solve the 
instability problem. Additional steps would be needed. The wide range 
of updates that are possible under the current system, from inflation + 
3 percent to ``7 percent, is one reason for the instability. The lower 
limit is also unacceptably low, and, assuming an MEI of 2 percent, 
represents an actual 5 percent cut in the conversion factor in a single 
year. These levels of payment cuts would be highly disruptive to the 
market, and likely would have the ``domino effect'' of impacting the 
entire industry, not simply Medicare fee-for-service. Many managed care 
plans, including Medicare+Choice and state Medicaid plans, tie their 
physician payment updates to Medicare's rates. Thus, payment limits 
under current law must be modified to assist in stabilizing the SGR 
system. We recommend that the current limits on physician payment 
updates (MEI +3 percent to MEI -7 percent) be replaced with new, 
narrower limits set at MEI +2 percent and MEI -2 percent.
    Finally, use of the GDP itself also contributes to the instability 
of the payment updates since GDP growth fluctuates from year to year. 
Thus, we recommend measuring GDP growth on the basis of a rolling 5-
year average.
Payment Preview Reports
    Finally, MedPAC has also recommended that Congress should require 
the Secretary of the Department of Health and Human Services to publish 
an estimate of conversion factor updates prior to the year of 
implementation. We agree.
    When the SGR system was enacted to replace the previous Medicare 
Volume Performance Standards, the requirements for annual payment 
review reports from HCFA and the PPRC were eliminated along with the 
old system. Without these reports, it is impossible to predict what the 
payment update is likely to be in the coming year, and it is impossible 
for Congress to anticipate and respond to any potential problems that 
may ensue from an inappropriate update or a severe projection error.
    Changes in Medicare physician payment levels have consequences for 
access to and utilization of services, as well as physician practice 
management. These consequences are of sufficient importance that the 
system for determining Medicare fee-for-service payment levels should 
not be left unattended on a kind of ``cruise control'' status, with no 
``brake'' mechanism available to avoid a collision.
    The AMA, therefore, urges that the payment preview reports be 
reinstated. Specifically, we believe that HCFA should be required to 
provide to MedPAC, Congress and organizations representing physicians 
quarterly physician expenditure data and an estimate each spring of the 
next year's payment update. MedPAC could then review and analyze the 
expenditure data and update preview, and make recommendations to 
Congress, as appropriate.
                               conclusion
    Enactment of the SGR system improvements recommended by MedPAC are 
critical to the continued ability of our nation's physicians to be able 
to offer our Medicare patients the benefits of the finest medical care 
available in the world. If these improvements are not put in place, the 
SGR system could lead to severe payment cuts in the Medicare physician 
fee schedule and payments for services that do not accurately reflect 
their costs. The cuts resulting from both the statutory design of the 
SGR system and administration of the system by HCFA would be in 
addition to more than a decade of cuts in physician payments. For 
example, in the six years from 1991-1997, overall Medicare physician 
payment levels fell 10 percent behind the rate of growth in medical 
practice costs. Many individual services and procedures faced even 
deeper cuts.
    Recent survey data from the AMA's Socioeconomic Monitoring System 
indicates that these payment changes are having very significant 
effects on the practice of medicine. Of 2,450 randomly selected 
physicians that were surveyed from April-August 1998, 35 percent 
reported they are not renewing or updating equipment used in their 
office, are postponing or canceling purchasing equipment for promising 
new procedures and techniques, or are performing many procedures in 
hospitals that were formerly performed in the office. Three quarters of 
these physicians reported that Medicare payment cuts were an important 
factor in their decisions to defer or cancel these investments in 
capital.
    With these kinds of changes already taking place in response to 
previous payment changes, we have grave concerns about the effects of 
the further reductions that could take place due to the SGR or 
incorrect practice expense values. In order for the medical innovations 
that will come from Congress' enhanced funding of biomedical research, 
FDA modernization, and better Medicare coverage policies to translate 
into ever-improving standards of medical care, physicians must be able 
to adopt these innovations into their practices. It is already clear 
that Medicare payment cuts are threatening continued technological 
advancement in medicine, and this is a threat that affects all of us, 
not just Medicare beneficiaries. Clearly, reversal of the trend to move 
services away from inpatient sites into ambulatory settings could also 
have severe consequences for health care costs, as well as patient 
care.
    We appreciate the efforts of the members of the Subcommittee to 
explore the problems presented by the SGR system, as well as the 
opportunity to discuss our views on this extraordinarily important 
matter. We urge this Subcommittee and Congress to consider MedPAC's 
recommendations and the recommendations we have discussed today, and 
are prepared to engage fully in detailed discussions with the 
Subcommittee and Congress as we work to achieve a workable and 
reasonable solution.

    Mr. Bilirakis. Dr. Corlin has testified before.
    Mr. Holveck.

                  STATEMENT OF DAVID P. HOLVECK

    Mr. Holveck. Thank you, Mr. Chairman and committee members. 
I will forego a written statement and really take the 
opportunity, and I value this opportunity on behalf of the Bio 
Organization, to give a very specific and, I think, pointed 
comment relative to the proposed changes in the Balanced Budget 
Act, specifically on ambulatory payment classification.
    This particular classification, we believe, is a very 
simple solution to a very complex problem. I think what we all 
have realized in the development of new technologies in health 
care, and specifically biotechnology, is that these health care 
solutions are complex. I think we know from just the time it 
take to develop them, how we study them, the patient 
populations that we review, we do not do it with 10; we do it 
with 10,000. I think that should demonstrate the complexity of 
the human system, the heterogeneity of the system.
    For us to propose a policy for ambulatory infusion of 
therapeutics in a way that really classifies a single payment 
system for all is akin to giving everyone a size 5 narrow shoe. 
It does not work. I think you have to reflect on the complexity 
that we deal with and I think we have to move in a fashion that 
allows proper reimbursement for infused drugs and not penalize, 
most importantly, the patients, who are really the 
beneficiaries of this advanced technology.
    Let me give you an example of how a system could evolve. We 
all have heard today that there are sensitivities to cancer 
treatment and the proposed changes do recognize various 
classifications but I still think they are not divided enough 
to give the full complementary of the various treatments to 
various cancers. But outside of that, there is no recognition. 
There is a flat fee, at least being proposed.
    Centocor is an example of a company that last year received 
an approval for a drug for Crohn's disease, a devastating 
disease that is chronic and generally lasts for life. It is a 
drug that was the first approved under the Orphan Law and the 
first one approved in 30 years. The usefulness of this drug 
compared to the patient stay in the hospital, which generally 
averaged 8 days a year, $35,000 a year--surgery could average 
$47,000 a year--can be augmented by a $1,900 infusion.
    The flat rate that is being proposed is $99.24. I doubt 
seriously that the hospitals are going to eat that charge and 
what is going to happen is the patients are not going to get 
the treatment. Alternatively, they could turn to doctors or 
physicians' offices but they are not facilitated to implement 
that change.
    So I really believe that we are at a point where we have to 
recognize the complexity. I think we have to realize that you 
and Congress have primed the pump with FDAMA, with orphaned 
drug incentives, with NIH funding that has created a high-value 
technology that needs to now get into the hands of the public 
and the needed patient.
    I guess I would just close by leaving you a little imagery. 
I think we all see on the 6 news where we find that this Nation 
is quick to respond to the needs of many nations with national 
disasters or political upheaval that really disrupt the public 
quality of life. We load the transport planes. We get the 
supplies and the needed elements on the tarmac, only to see, in 
frustration, that we cannot move them off the tarmac because of 
either political instability or infrastructure.
    I think we sit here today and we have primed the pump, we 
have the needed technology on the tarmac. I challenge you to 
give us policies that will get it into the hands of the public. 
Thank you.
    [The prepared statement of David P. Holveck follows:]
 Prepared Statement of David P. Holveck on Behalf of the Biotechnology 
                         Industry Organization
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to testify today on the need to correct unanticipated 
consequences of the Balanced Budget Act of 1997.
    I am David Holveck, Chief Executive Officer of Centocor, a twenty-
year old biopharmaceutical company headquartered in Malvern, 
Pennsylvania. Centocor is a leading biopharmaceutical company that 
creates, acquires and markets cost-effective therapies that yield long-
term benefits for patients and the healthcare community. Developed 
through monoclonal antibody technology, Centocor's mission is to help 
physicians deliver innovative treatments to improve human health and 
restore patients' quality of life.
    This morning I am testifying on behalf of the Biotechnology 
Industry Organization (BIO), representing over 830 companies, 
universities, research institutions, state biotechnology centers and 
affiliates in 46 states.
    BIO asked me to testify to highlight a Balanced Budget Act of 1997 
issue that has not received much attention. I am here to talk about the 
devastating impact HCFA's proposed Ambulatory Payment Classification 
(APC) system would likely have on patients who benefit from 
biotechnology products and the research that makes new therapies and 
cures possible. HCFA has not issued the final APC rule to date, so the 
full impact has not yet been felt. This issue is a sleeping giant.
    To illustrate the biotech industry's concern, I will use my 
company's experience with patients suffering from Crohn's disease, an 
orphan disease. It is only one example of dozens our industry could 
present. The APC system, as proposed, will negatively affect patients 
suffering with cancer and its related side-effects, end-stage renal 
disease, hemophilia, and a host of orphan diseases.
    I would like you to consider two points as you discuss the 
unanticipated outcomes of the BBA and select which problems merit 
legislative correction.
    1) I am sure Congress' intent was not to establish a hospital 
outpatient prospective payment system that compromises quality of care 
and biomedical research, or that limits access to appropriate biologics 
and pharmaceutical products.
    2) If all drugs and biologics are bundled into the proposed APC 
system, it will:

 decrease patient access to current important and often life-
        saving therapies.
 create incentives for hospitals to use biotechnology products 
        and drugs in a less efficient manner.
 encourage the use of the cheapest drug or biologic rather than 
        the most effective one.
 create a potential shift of patient treatment to less 
        intensive settings, such as physician offices, even when it is 
        not clinically appropriate.
 significantly decrease incentives to develop new biotechnology 
        products targeted for indications that affect elderly 
        populations.
    Congress must get involved to ensure that a HCFA rule based on 
flawed data and unsound policy is not finalized. It is better to 
correct this problem before the damage is done.
                          i. brief background
    The Balanced Budget Act of 1997 (BBA) requires HCFA to establish a 
prospective payment system (PPS) to reimburse for care provided to 
Medicare beneficiaries in hospital outpatient departments. In addition, 
the BBA grants the Secretary of Health and Human Services authority to 
exempt certain products and services from the outpatient prospective 
payment system (PPS).
    Since the passage of BBA, HCFA, in consultation with a private 
contractor, created a hospital outpatient department bundling system 
and called each bundle an Ambulatory Payment Classification (APC). The 
proposed rule to establish 346 of these APCs was published in the 
Federal Register on September 8, 1998. Due to errors in data used to 
create some APCs and other delays, the comment period was extended 
numerous times from its initial end date of July 30, 1999. HCFA 
received thousands of comments to the proposed rule. As of today's 
hearing, the agency has not published a final rule, but all indications 
are that HCFA is unlikely to revise the proposed system in a 
significant enough way that our concerns would be addressed. Although I 
hope the agency proves us wrong, Congress must involve itself now to 
ensure that this proposed bundling system does not go into effect and 
harm the quality of patient care.
ii. the proposed rule's detrimental effects to patient care: treatment 
                   of crohn's disease as one example
    In 1998, Centocor began marketing Remicade, a breakthrough orphan 
drug product for Crohn's disease, a chronic inflammatory bowel disease. 
The symptoms include diarrhea, severe abdominal pain, fever, chills, 
nausea and fistulae (painful draining of abnormal passages between the 
bowel and surrounding skin), this is a painful, debilitating disease 
that until the introduction of Remicade could not be adequately treated 
without drugs that produce serious side-effects. Remicade was the first 
treatment specifically designed for Crohn's disease in more than 30 
years.
    A typical course of therapy for Remicade involves a two-hour 
infusion administered by a physician once every eight weeks. The 
infusion time and the potential complications that often come with the 
disease make the hospital outpatient department a very attractive 
setting for service. In fact, since its launch last year, 80 percent of 
the patients receiving Remicade have been treated in the hospital 
outpatient setting.
    A typical course of Remicade therapy costs $1,900, yet the APC 
reimbursement as proposed would equal only $99.24. To a hospital 
administrator responsible for keeping a hospital solvent, this APC 
underpayment means a loss of $1,726.00 for the treatment of one patient 
per infusion. This loss does not even factor in staff and site of 
service costs. Since Remicade is infused once every eight weeks, caring 
for one Crohn's patient would cost the hospital more than $11,705.00 
annually.
    Since there is great sensitivity toward drug pricing among members 
of Congress, let me emphasize that Remicade is a cost-effective product 
for those with Crohn's disease. Each year, approximately one in five 
patients with Crohn's disease requires hospitalization. In fiscal year 
1995, the mean hospital charge for these patients was $35,378. The mean 
length of stay in the hospital was 8.7 days. Of the patients requiring 
surgery, approximately 57 percent had a mean charge of $46,354. Common 
surgical procedures for patients with Crohn's disease include resection 
of the bowel, draining of abscesses and ileostomies. The use of 
Remicade can lower the number of hospitalizations as well as the need 
for expensive surgeries. Using the product also could capture savings 
by eliminating substantial health-care costs often associated with the 
long-term side effects of previous therapies used to treat Crohn's 
disease. There is no accurate way to put a number on improving quality 
of life; however, it is an important factor to consider. A $1,900 drug 
that must be taken every eight weeks may seem expensive, but, in the 
context of providing patients' treatments to avoid future health care 
costs and live a more normal life, this is a cost-effective 
intervention.
  iii. the impact the apc system will have on one orphan drug product 
 explains the concerns raised by bio on behalf of the biotech industry.
    While the above product is only one example, the problems raised 
apply broadly. Here are our industry's concerns with the APCs as they 
relate to drugs and biologics.
A. As proposed by HCFA, the APC system could penalize hospitals for 
        providing the most clinically appropriate therapies.
    As demonstrated in the Remicade example, the proposed APC system 
will threaten patients' access to important and often life-saving 
therapies because it does not allow adequate payment for most 
biotechnology products and drugs. For a variety of technical reasons 
involving the inadequacy of the database and its analysis, many 
biopharmaceuticals were not even included in the APC calculations. For 
example, HCFA excluded all products that received codes after 1996. A 
perfect example of this is Remicade. FDA did not approve the drug until 
1998, so the cost of Remicade was not factored into any APC. The 
inherent bias used in selecting claims for analysis, along with the 
absence of detailed coding data for drugs and biologics means the 
proposed APC system has no real basis in actual costs or patterns of 
care for biotechnology products or drugs.
    Medicare beneficiaries' access to biotechnology products and drugs 
should not be determined solely on the cost of a product. Nevertheless, 
the APC system creates incentives for hospital outpatient departments 
to make decisions primarily on this basis, potentially, denying 
Medicare beneficiaries access to high-cost, high-value products. 
Clearly, this was not the intent of Congress when it mandated a 
prospective payment system for hospital outpatient department services.
B. Clinicians may not be able to determine the most appropriate setting 
        of care for a given patient without being adversely influenced 
        by inappropriate payment
    The APCs as currently described will force a physician to prescribe 
an inexpensive drug in the hospital outpatient setting or look for an 
alternative site to administer the optimal therapy. This is because 
hospitals cannot sustain long-term underpayment and remain solvent. The 
APC system will create an incentive to shift care to other, potentially 
less-appropriate settings.
    Many patients may lose the option to receive their care in hospital 
outpatient departments. Physicians will be obligated to treat these 
patients at alternative sites, whether or not these alternatives are 
the best settings for the procedure involved. In the case of Remicade, 
theoretically, it could be clinically appropriate to administer the 
drug in a physician's office where reimbursement rates would cover the 
cost of the drug. However, as a practical matter, this option currently 
does not exist. Gastroenterologists are the specialists who typically 
treat patients with Crohn's disease. Because few other infused 
therapies exist for gastroenterological indications, these physicians 
traditionally do not have the facilities, equipment, and skilled 
personnel to administer prolonged infusions in the office. In addition, 
for some patients--typically those with serious complications and co-
morbidities or with a history of infusion reactions--it never may be 
clinically appropriate to receive a prolonged infusion in a physician's 
office.
C. Many are concerned that the proposed APC system would 
        disproportionately affect access to care in rural areas where 
        hospital outpatient departments are the exclusive providers of 
        technology-based services
    Because of the acquisition, storage and processing costs, only 
providers with substantial operating budgets can supply many 
biotechnology products and drugs. It simply is not realistic to expect 
physician offices in rural regions to provide the full range of 
biotechnology products and drugs currently available in hospital 
outpatient departments. Beneficiaries who lose access to appropriate 
outpatient care and subsequently go without therapy may suffer 
complications or a worsening of the disease that could otherwise have 
been avoided.
 iv. the proposed apc system may have a negative impact on development 
               of critical new technologies and therapies
    As a CEO of a company researching and developing new technologies, 
I am very concerned with how this new APC system would directly impede 
the research, development and adoption of new technologies.
    Under the proposed rule, a new technology's APC assignment will not 
reflect its true costs for several years after it is assigned a unique 
HCFA Common Procedure Coding System (HCPCS) billing code.
    First, the technology will be billed with a miscellaneous HCPCS 
code and will be assigned to the lowest paying APC available.
    Then, once a unique HCPCS code is assigned, HCFA proposes to 
determine which APC includes services that are most similar clinically 
and with respect to resources to the new technology.
    If several APCs are identified, HCFA will assign the new technology 
to the lowest paying option without adjusting the relative weight or 
payment amount of the recipient APC.
    Finally, only after an additional period of at least two years will 
the technology be eligible for assignment to the most appropriately 
paying APC 1. This will make it very difficult for hospitals 
to offer their patients early access to the breakthrough products 
because they won't be reimbursed adequately. This will lower the 
standard of care for Medicare beneficiaries.
---------------------------------------------------------------------------
    \1\ The preamble to the proposed rule states that HCFA will not 
create an APC for an entirely new code, but will assign it for at least 
two years to an existing group while accumulating data on its costs 
relative to the other codes in the APC (63 FR 47579).
---------------------------------------------------------------------------
    The proposed recalibration approach for updating APC weights may 
not allow hospitals to cover the cost of new technologies for several 
years. The inequity of purposely assigning new technologies to the 
lowest paying APCs is compounded by the fact that Medicare proposes to 
update APC assignments only after two or more years of data collection 
and only to recalibrate the payment levels of each APC infrequently. 
The result of HCFA's proposed updating methodology is that an APC that 
includes a new technology may not be assigned an appropriate weight for 
more than three years. This delay could have a chilling effect on the 
evolution of medical care.
    The proposed APC system also would create substantial disincentives 
to private sector development of such products. The development of 
life-saving therapies depends on the ability of biotechnology companies 
to achieve a rate of return on their investment of resources 
commensurate with the risk. Otherwise investors, who supply most of the 
capital for research and development, will not support biotechnology 
companies. It takes an average of eight years and more than $350 
million to bring a new drug to market. New biotechnology products and 
drugs often are breakthrough technologies that offer treatment to 
patients who have few options. HCFA has not taken this into 
consideration in developing its APC system. As a result, the proposed 
APC system is likely to severely underpay for biotech products, thereby 
significantly decreasing the incentives to develop new medicines 
targeted for indications that affect the elderly population. This 
result runs counter to Congress' many other efforts to speed the 
development of innovative products for the seriously ill, e.g. orphan 
tax credits, doubling of the NIH budget, and the Food and Drug 
Administration Modernization Act (FDAMA).
   v. categories of therapies at particular risk of underpayment and 
                     under-utilization due to apcs
    In an effort to identify which products would be most harmed by the 
APC system, BIO, in conjunction with the Pharmaceutical Research and 
Manufacturers Association (PhRMA) identified seven categories in 
particular jeopardy. Both trade groups urged HCFA to carve out the 
following:

1. ``New'' Drugs and Biological Products. New technologies are awaiting 
        proper code assignments. As explained above, to secure an 
        appropriate APC for a new technology could take over two and a 
        half years.
2. Orphan drugs. Statistically there is no way to account infrequently 
        used but higher-cost products in a prospective payment system.
3. Cancer treatments. The proposed rule specifies four different APCs 
        that include 69 different chemotherapy related codes. The APCs 
        do not account for the variances in dosing that occur in actual 
        chemotherapy administration.
4. Outlier drugs. Drugs and biologics are at high-risk of not being 
        provided to beneficiaries who need them most. HCFA acknowledges 
        in the preamble to its proposed rule that certain drug products 
        may not fall into any of the categories listed and may result 
        in disproportionate costs to hospitals.
5. Radiopharmaceutical drugs. Significant flaws in the data have 
        resulted in inappropriate low payment for procedures using 
        these products.
6. Plasma based therapies. BIO estimates there at 62 different types of 
        plasma based products or recombinantly produced substitutes in 
        the United States. With few exceptions, the APC system provides 
        no extra payment for these products.
7. Drugs for end-stage renal disease. Dialysis patients rely on a vast 
        array of pharmaceutical and biological products. Since some 
        products will not be covered under the composite rate, we 
        believe their access will be curtailed under the proposed APCs.
    A more detailed rationale for special treatment of each of these 
classifications is addressed in the attached BIO comments to HCFA's 
proposed rule.
                              conclusion:
    During the last several months we have all focused intently on the 
need for seniors to secure better access to prescription drugs. I find 
it ironic that the administration is proposing a new Medicare drug 
benefit while also, in effect, proposing to limit access to drugs that 
are already reimbursed under Medicare.
    Congress did not intend to decrease patient access to life-saving 
therapies, create incentives for hospitals to use biotech products in a 
less efficient manner, shift patient treatments to inappropriate 
settings or decrease incentives to develop new biotech products 
targeted for indications that affect elderly populations.
    I urge you to address this important issue on behalf of the biotech 
industry and its patients.
    Thank you for the invitation to testify. I would be happy to answer 
any questions.
                                 ______
                                 
Health Care Financing Administration
Department of Health and Human Services
Attention: HCFA-1005--P
P.O. Box 26688
Baltimore, MD 21207-0488
    Dear Sir or Madam: Thank you for the opportunity to comment on the 
Prospective Payment System for Hospital Outpatient Services Proposed 
Rule published in the Federal Register on September 8, 1998 (63 FR 
47552). The Biotechnology Industry Organization (BIO) is a industry 
organization representing 850 member companies that research and 
manufacture a diverse range of biotechnology-derived products, 
including drugs, vaccines, blood derivatives and related products, 
tissue-based products, and in vitro diagnostic products (hereinafter 
``biotechnology products and drugs'').
    After careful review and analysis of the proposed rule and in 
response to the Health Care Financing Administration's (HCFA's) request 
for comments, BIO is seriously concerned that the proposed Ambulatory 
Payment Classification (APC) system would disrupt access to quality 
health care and create severe underpayment for a broad range of 
biotechnology drugs and products. BIO believes that sufficient problems 
exist with respect to the methodologies used to compute APC payments as 
well as the concept of bundling drugs and biologics that we ask the 
HCFA administrator to urge the secretary of HHS to assert her authority 
and carve out several categories of drugs and biologics from the APCs.
    BIO believes that the result of bundling drugs and biologics into 
APCs will decrease Medicare patients' access to quality health care. 
The current proposed bundling of biotechnology products and drugs into 
the APC groupings would create a grossly inadequate payment for these 
products, which is likely to result in:

 decreased patient access to important and often life-saving 
        therapies
 incentives for hospitals to use biotechnology products and 
        drugs in a less efficient manner
 a potential shift of patient treatment to less intensive 
        settings, such as physician offices, even when it is not 
        clinically appropriate and
 significantly decreased incentives to develop new 
        biotechnology products targeted for indications that affect 
        elderly populations.
    We believe the rule's potential negative effects provide ample 
reason to question the proposed system's treatment of biotechnology 
products and drugs. When considered together, the threat of such 
disruptive and negative effects on health care makes it imperative that 
HCFA not bundle biotechnology products and drugs into the APCs.
    In these comments we ask the HCFA Administrator to urge the HHS 
secretary to exercise her exemption authority with regard to 
biotechnology products and drugs. The Balanced Budget Act (BBA) of 1997 
requires HCFA to establish groups of covered services that are 
comparable clinically and with respect to the use of 
resources.1 In addition, the BBA grants the secretary 
authority to exempt certain products or services from the outpatient 
PPS.2
---------------------------------------------------------------------------
    \1\ Social Security Act (SSA), as amended Sec. 1833(t)(2)(B).
    \2\ The BBA authorizes the secretary to designate the hospital 
outpatient services to be covered by the outpatient PPS, see SSA, as 
amended Sec. 1833(t)(1)(B)(i).
---------------------------------------------------------------------------
    As detailed below, it is readily apparent from HCFA's methodology 
that the costs of biotechnology products and drugs were not carefully 
considered and in some cases were specifically ignored, in the 
formulation of the APC system. In addition, we believe the underpayment 
for biotechnology products will lead to frequent substitution of less 
clinically appropriate therapies. Accordingly, we propose that HCFA 
exercise its discretion under the BBA to exempt certain classes of 
biotechnology products and drugs.
    In these comments BIO will explain: 1) our members' concerns with 
the flawed data collection process and data categories; 2) possible 
carve-outs that will mitigate the harm to patients who depend on the 
products they receive in the hospital outpatient setting; and 3) other 
issues of concern to the industry.
    Seven categories of possible carve-outs and examples are detailed 
in these comments: 1) ``New'' technologies; 2) ``Orphan'' drug 
products; 3) Chemotherapy agents and related supportive care drugs; 4) 
Biologics and drugs at high risk of not being provided to beneficiaries 
who need them; 5) Radiopharmaceuticals and other drugs required for 
nuclear medicine procedures; 6) Blood-derived products; 7) Drug 
products not covered by the ESRD composite rate.
    If there are any questions, BIO and its member companies will be 
pleased to work with HCFA to find a solution. If there are any 
questions about these comments, please call Nancy Bradish Myers at 
(202) 857-0244. Again, we appreciate the opportunity to comment on the 
proposed rule.
                                        Nancy Bradish Myers
                                          Healthcare Policy Counsel
                 major concerns wih the proposed rule:
    Given the serious underpayment that will occur under the proposed 
APCs, BIO does not believe that an adequate remedy exists to cover 
biotechnology drugs and vaccines within the APC framework.
    In May of 1998, we shared our early concerns on the prospective 
payment system (PPS) for hospital outpatient care with HCFA 
Administrator Nancy Ann Min De Parle. Although we were never granted a 
meeting with the administrator, our letter stressed our concerns that 
including biotechnology products in such a system would be 
inappropriate and could jeopardize the quality of care received by 
Medicare beneficiaries. Specifically, we were concerned that an 
outpatient PPS would lead to drastically reduced hospital payments, 
which would seriously inhibit the ability of hospitals to continue to 
provide high quality treatment and patient access to necessary health-
care services.
    We believe that these same issues are even more problematic in the 
proposed APC rule than we had anticipated in our earlier 
correspondence. Following the September 8 publication of the proposed 
rule, we analyzed the new PPS and held detailed discussions with our 
member companies on its potential impact. Many of our members conducted 
detailed analyses of payment levels under the proposed APC system, and 
found them to be woefully inadequate to cover the basic costs of care. 
In some cases the payment for services is inadequate even before the 
costs of biotechnology products are considered.
         the proposed rule's detrimental effects to health care
    As proposed by HCFA, the APC system could penalize hospitals for 
providing the most clinically appropriate therapies.
    The proposed APC system will threaten patients' access to important 
and often life-saving therapies because it does not allow adequate 
payment for most biotechnology products and drugs and their related 
services. Because HCFA's methodology in deriving APC payment weights 
excluded all products that received codes after 1996 as well as 
products judged to be extremely costly, APC payments do not accurately 
reflect the actualized costs of care. This underpayment--or lack of 
payment altogether--for biotechnology products and drugs would inhibit 
hospitals' ability to provide care that relies on these technologies. 
This would be the case particularly in hospitals that have case mixes 
requiring heavier utilization of biotechnology products and drugs.
    Medicare beneficiaries' access to biotechnology products and drugs 
should not be determined solely on cost. Nevertheless, the APC system 
may force outpatient departments to make decisions based primarily on 
economics and, consequently, deny Medicare beneficiaries access to 
medically necessary and appropriate care. Clearly, this was not the 
intent of Congress when it mandated a prospective payment system for 
hospital outpatient department services.3
---------------------------------------------------------------------------
    \3\ The BBA instructs HCFA to create a prospective payment system 
that ensures payment groupings for services that are ``comparable 
clinically and with respect to the use of resources.'' See Social 
Security Act, As Amended, Sec. 1833(t)(2)(E).
---------------------------------------------------------------------------
    Clinicians must be able to determine the most appropriate setting 
of care for a given patient without being adversely influenced by 
inappropriate payment.
    By not providing adequate payment to hospitals, the APC system will 
create an incentive to shift care to inappropriate settings.
    Since the proposed APC system would severely underpay hospital 
outpatient departments for a broad range of services that include 
biotechnology products and drugs, it is reasonable to expect that many 
patients will lose the option to receive their care in hospital 
outpatient departments. Physicians will be obligated to treat these 
patients in alternative sites, whether or not these alternatives are 
the best setting of care for the procedure involved.
    This shift in setting is a problem because hospital outpatient 
departments can provide a full range of outpatient services, including 
invasive procedures and expensive specialized care. At the same time, 
hospital outpatient departments offer a ``safety net'' through their 
immediate access to a broad range of clinical specialists and to 
inpatient services, if necessary. Because physician offices and other 
settings do not offer this safety net, many services cannot be safely 
shifted outside of the hospital outpatient setting.
    To treat all patients with the most effective, appropriate care, 
physicians need the flexibility to determine the best setting in which 
to treat each patient they serve. Many physician offices are not 
adequately staffed or equipped to provide prolonged infusions, do not 
have adequate storage and processing capabilities for biotechnology 
products, and lack the financial resources to maintain expensive 
capital equipment and other materials that are used concurrently with 
these products.
    If APCs prompt a shift in care settings, patients in rural areas 
may lose access to care completely.
    BIO is also concerned that the proposed APC system would 
disproportionately impact access to care in regions (particularly rural 
areas) where hospital outpatient departments are the exclusive 
providers of technology-based services. Because of the acquisition 
costs, storage and processing, many biotechnology products and drugs 
can only be supplied by providers that have substantial operating 
budgets. It simply is not realistic to expect that physician offices in 
these regions will be able to provide the full range of biotechnology 
products and drugs currently available in hospital outpatient 
departments. Accordingly, rural hospital outpatient departments either 
will have to discontinue stocking essential products and refer patients 
to larger urban hospitals or sustain substantial losses to provide 
immediate access to care.
    Because the proposed APC system could haphazardly shift patient 
care to inappropriate settings, it may actually increase costs for 
certain types of patients.
    The shifting of patients from hospital outpatient care departments 
to other health-care settings because economic constraints may lead to 
increased Medicare expenditures overall. Beneficiaries who lose access 
to appropriate outpatient care and subsequently go without therapy may 
suffer from complications that could otherwise have been avoided. 
Similarly, beneficiaries forced to receive care in inappropriate 
settings, such as a physician's office, or who do not receive the 
optimal therapy because of choice of setting also may suffer from 
preventable complications. In other cases, beneficiaries may be 
hospitalized simply because they cannot receive the therapy they need 
on an outpatient basis--which will increase Medicare costs.
    Clearly, the shifting of patient care appears reasonably likely 
because of the underpayment of APC groups in the hospital outpatient 
setting. This will reduce quality of care, endanger patient outcomes 
and, ultimately, lead to greater expense for Medicare.
 the proposed apc system's impact on development of critical therapies
    The APC system would directly impede the development and adoption 
of new technologies.
    Under the proposed rule, a new technology's APC assignment will not 
reflect its costs for several years after it is assigned a unique HCFA 
Common Procedure Coding System (HCPCS) billing code. First, the 
technology will be billed with a miscellaneous HCPCS code and will be 
assigned to the lowest paying APC available. Once a unique HCPCS code 
is assigned, HCFA proposes to determine which APC includes services 
that are most similar clinically and with respect to resources to the 
new technology. If several APCs are identified, HCFA will assign the 
new technology to the lowest paying option without adjusting the 
relative weight or payment amount of the recipient APC. Only after an 
additional period of at least two years will the technology be eligible 
for assignment to the most appropriately paying APC.4 
Therefore hospitals will not be able to offer their patients access to 
the breakthrough products of the day because of the financial risk to 
the hospital. This will lower the standard of care for Medicare 
beneficiaries.
---------------------------------------------------------------------------
    \4\ The preamble to the proposed rule states that HCFA will not 
create an APC for an entirely new code, but will assign it for at least 
two years to an existing group while accumulating data on its costs 
relative to the other codes in the APC (63 FR 47579).
---------------------------------------------------------------------------
    The proposed recalibration approach for updating APC weights may 
not allow hospitals to cover the cost of new technologies for several 
years.
    The inequity of purposely assigning new technologies to the lowest 
paying APCs is compounded by the fact that Medicare proposes to update 
APC assignments only after two or more years of data collection and to 
recalibrate the payment levels of each APC infrequently. The result of 
HCFA's proposed updating methodology is that an APC that includes a new 
technology may not be assigned an appropriate weight for more than 
three years. This delay could have a chilling effect on the evolution 
of medical care and therefore on the quality of care available to 
beneficiaries.
    Given that new technologies often drive rapid changes in medical 
practice, as has happened in the treatment of AIDS/HIV and 
cardiovascular medicine, BIO strongly believes that the APC system 
should not include drugs and biologics. In the unfortunate event that 
the APC system continues to house biologics and drugs, it must be 
recalibrated to establish a realistic baseline payment for each APC 
case that reflects all inputs including each drug and biotherapeutic 
and then recalibrated at least annually to reflect the current 
advancements in patient care.
    In addition to adversely affecting beneficiary care, the proposed 
recalibration methodology would harm small, innovative biotechnology 
companies because it would keep them from successful product 
commercialization.
    The development of life-saving therapies depends on the ability of 
biotechnology companies to achieve a return on their investment of 
resources. At present, we estimate that it takes our member firms an 
average of eight years and over $350 million to bring a novel 
biological product to market. Accordingly, it is critical that a new 
technology be assigned to a clinical and resource-appropriate APC 
immediately upon its market availability, and that the assignment not 
act as a disincentive to the product's use. To institute a system that 
does otherwise would threaten Medicare beneficiaries' access to 
medically appropriate care.
    The proposed APC system would create substantial disincentives to 
private sector development of such products.
    New biotechnology products and drugs often are breakthrough 
technologies that offer treatment to patients who have few other 
options. However, by their very nature, many are costly to develop and 
produce. HCFA has not taken this into consideration when developing its 
APC system. Instead, it insists on bundling biotechnology products and 
drugs into APC payments, thereby not allowing hospitals to adequately 
cover their costs. Not only will this hinder clinical adoption of 
biotechnology products and drugs, but it also will affect the 
advancement of these therapies into the standard clinical practice of 
medicine. As a result, the currently proposed APC system could 
significantly decrease the incentives to develop new biotechnology 
products and drugs targeted for indications that affect the elderly 
population. Clearly, this is not in the best interest of Medicare 
beneficiaries.
    The APC system is highly likely to affect access to new therapies 
for non-Medicare patients as well. This will occur for two reasons:
    First, it is widely anticipated that private payors will follow 
HCFA's lead and implement APCs, first in the hospital outpatient 
setting and quickly thereafter in the physician office setting. The 
consequence of rapid, all-payor implementation of APCs would inevitably 
be to skew drug development toward high-volume, low-cost products, the-
only ones for which APC-based reimbursement could possibly be adequate. 
Any incentive to develop innovative, potentially higher costs 
biotherapies would be gone.
    APCs also create a second, more subtle risk issue. To the extent 
that drug sales and revenues decrease lack of reimbursement under APCs 
for both Medicare and private payors, investors are unlikely to make 
funds available to develop and bring innovative yet costly drugs to 
market.
    Underpayment for new technologies under the proposed APC system 
flies in the face of other government programs specifically intended to 
accelerate the development and availability of life-saving therapies.
    As a result of federal technology transfer laws, in 1997 U.S. 
universities received approximately $338 million in gross license 
income for licensing out technologies in the life sciences to 
facilitate development of these technologies into drugs, biologics, 
vaccines or other products. In addition, with the implementation of 
FDAMA, signed by the president, the Food and Drug Administration has 
implemented numerous initiatives aimed at speeding new product reviews, 
in essence to allow patients faster access to new therapies. For 
example, under the Prescription Drug User Fee Act of 1992, FDA must 
complete its reviews of new biological product applications within 
strict, 12-month time frames. It would be a tragedy, now that we have 
begun to finally achieve faster FDA reviews of new biotechnology 
products and drugs, and substantial public support of biotechnology 
products and drugs research, to see these efforts negated by 
impediments created by a poorly designed APC system.
     major flaws in hcfa's methodology for analyzing claims data, 
       particularly in terms of biotechnology products and drugs
    We strongly believe that HCFA's data methods systematically 
underestimates the costs of providing biotechnology products and drugs. 
We reviewed the release of additional data in June 1999, a year and a 
half after the original proposed rule, and our concerns remain just as 
strong.
    Multiple procedure claims were excluded from the proposed APC 
weight-setting calculation despite that fact that these claims likely 
represent patients who are the least healthy and require more costly 
services.
    As described in the preamble of the proposed rule (63 FR 47573) and 
confirmed in subsequent meetings with HCFA, Its analysis for 
determining APC weights relied on only single-service claims. It did 
not analyze claims that represented multiple procedures. Clearly this 
fundamental flaw in the analysis skewed the APC weights, essentially to 
reflect care for only the healthiest patients. Patients requiring 
multiple outpatient services on the same date of service are likely to 
be the least healthy and are likely to require more costly care than 
patients who receive a single outpatient service.
    In addition, we believe the single-procedure focus HCFA used may 
have excluded a disproportionate number of biotechnology products and 
drugs, because many of these products are routinely used as part of 
multi procedure, combined-treatment regimens. By systematically 
eliminating these cases in its methodology, HCFA has inadvertently 
biased the APC system against biotechnology products and drugs and 
derived payment levels that do not reflect the true costs of care 
across the Medicare population.
    Dismissing ``outlier''claims in its calculation of APC weights also 
likely removed biotechnology products and drugs from the analysis and 
therefore under reimburses other categories.
    In calculating APC weights, HCFA disregarded claims for services 
with costs more than three standard deviations from the geometric mean. 
Although HCFA may have found a statistical basis for this exclusion, we 
believe that it systematically excluded biotechnology products and 
drugs that are often expensive, but vital, components of patient care. 
As a result, this procedure results in lowered payment levels that 
disproportionately affect biotechnology products and drugs.
    Because of inadequate coding practices, HCFA was unable to allocate 
the true costs of most drugs used for Medicare beneficiaries.
    In the preamble to the proposed rule, HCFA describes its inability 
to capture the costs of drugs, other than chemotherapeutic agents, 
because of inadequate coding practices, under the precursor Ambulatory 
Patient Group (APG) system. HCFA acknowledges that participating 
hospitals in the APG system were obliged to consistently use HCPCS 
codes only for chemotherapeutic agents. HCFA did not require detailed 
coding of other drugs and, as a result, ``cannot specifically identify 
the costs'' of these products.5 Further, HCFA requests 
comments on how to remedy this problem, recognizing that problems may 
exist for hospitals that treat patients with very costly drugs or 
biologicals.
---------------------------------------------------------------------------
    \5\ Preamble to the proposed rule (63 FR 47563).
---------------------------------------------------------------------------
    Although we credit HCFA for identifying this limitation, BIO 
believes that HCFA dramatically understates the degree to which it 
represents a critical flaw in the APC payment system. First, the APCs 
do not merely underpay ``a few'' hospitals that treat patients with 
``very costly'' drugs and biotechnology products--the system will 
underpay all hospitals for a vast range of routine infusion-based 
therapies and other drug-intensive care. While costly biotechnology 
products and drugs are disproportionately affected, we believe that 
treatment with nearly every biotechnology product produced by our 
members will be affected through the underpayment of the APC system.
    Second, HCFA reaches an unfounded conclusion that since drugs 
usually are provided in connection with other treatments or procedures, 
the costs of these products can be reasonably packaged into other 
procedure-based groups. BIO finds this assumption patently absurd. The 
aberrant and biased method of selecting single-service claims makes it 
extremely unlikely that the bulk of drug utilization patterns and costs 
have been captured in the APCs. In the case of the infusion APCs, it is 
reasonable to assume, based on HCFA's methodology, that the cost of 
most biotechnology drug products were not factored into the agency's 
analysis because of inadequate coding practices.
    HCFA should not extend a PPS system to services or products for 
which it has no basis to understand actual costs or utilization.
    The inherent bias used in selecting claims for analysis, along with 
the absence of detailed coding data for non-chemotherapeutic drugs and 
biologicals, essentially means that the proposed APC system has no real 
basis in actual costs or patterns of care for biotechnology products or 
drugs. BIO believes that this is the case for both procedure-based APCs 
as well as infusion-based therapies.
Solution:
THE HCFA ADMINISTRATOR SHOULD ASSERT HER EXEMPTION AUTHORITY TO NOT 
        INCLUDE DRUGS AND BIOLOGICS IN THE APCs.
    The Balanced Budget Act (BBA) of 1997 requires HCFA to establish 
groups of covered services that are comparable clinically and with 
respect to the use of resources.6 In addition, the BBA 
grants the secretary authority to exempt certain products or services 
from the outpatient PPS 7. The HCFA administrator should 
exercise her explicit exemption authority with regard to biotechnology 
products and drugs since it will seriously affect Medicare 
beneficiaries' access to several categories of products.
---------------------------------------------------------------------------
    \6\ Social Security Act (SSA), as amended 1833(t)(2)(B)
    \7\ The BBA authorizes the secretary to designate the hospital 
outpatient services to be covered by the outpatient PPS, see SSA, as 
amended Sec. 1833(t)(1)(B)(i).
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THE SECRETARY OF HHS SHOULD AT A MINIMUM CARVE OUT CERTAIN KEY PRODUCT 
        CATEGORIES FROM THE APCs.
    The HHS secretary has the authority to designate the services to be 
included or excluded from the outpatient PPS. Although we believe it is 
most appropriate for the secretary to carve out all drugs and biologics 
from the APC system, we have tried to identify more limited categories 
of products that would be disproportionately hurt under the proposed 
APC system. While BIO acknowledges that broader, systemic problems may 
still occur under the APC framework, we believe that it would be 
appropriate for seven types of products identified below to be carved 
out in order to address the most serious payment shortfalls in the 
proposed system. The seven categories are:
    1) ``New'' technologies should be paid separately from the APC 
system until adequate coding allows for proper reimbursement.
    As described above, new technologies will not experience 
appropriate levels of reimbursement for several years after they become 
available for use. This delay in adequate payment could artificially 
delay the full adoption of new technologies because hospital outpatient 
departments would lose money with each use. Clearly, such an approach 
does not adequately take into consideration the resources involved in 
developing new technologies and would impede their development and 
adoption.
    Accordingly, HCFA should automatically reimburse new therapies 
using the current payment mechanism during the entire period that the 
product awaits proper HCPCS and APC code assignment.
    CASE example: The I-131 Anti-B1 Antibody is a radiological 
monoclonal antibody that is expected to be approved for the treatment 
of non-Hodgkin's Lymphoma. This product is expected to be the first 
radioimmunotherapeutic product approved for the treatment of cancer and 
has been shown to produce remission of cancer of longer duration than 
standard chemotherapy. Unfortunately, this promising new product will 
be assigned a miscellaneous CPT (CPT code 7999, unlisted 
radiopharmaceutical therapeutic procedure) and placed in the lowest 
paying radiological APC (APC 791, $757.93). For a period of several 
years, this product would remain in APC 791 with no additional payment 
and then, if warranted, could be redesignated to a higher paying 
nuclear medicine APC.
    2) ``Orphan'' drug products should be paid separately from the APCs 
because the APCs will delay and possibly deny patients access to life-
saving products.
    The Orphan Drug Products Act provides for a special marketing 
approval status for certain products that treat life-threatening, rare 
diseases. Many of these products are the result of years of research, 
involving clinical trials with hundreds of patients. By definition, 
products afforded orphan approval status by the FDA offer patients with 
severe debilitating illness a chance for significant therapeutic 
benefit. Typically, these products are afforded special review status 
at the FDA in order to expedite review and approval, so that patient 
populations will not be denied a viable treatment.
    CASE EXAMPLE: A breakthrough orphan drug product, Infliximab; MAb, 
tumor necrosis factor alpha, is indicated for Crohn's disease, a 
chronic form of inflammatory bowel disease. At present, a supplemental 
indication is pending approval for rheumatoid arthritis. A typical 
course of therapy for Infliximab involves an infusion over a two-hour 
period once every eight weeks. The drug used in a typical infusion 
costs $1,800, yet APC reimbursement as proposed would equal only $73.98 
for infusion of the drug. If hospitals are obliged to absorb most of 
this drug cost because of the proposed APC system, it seems likely that 
far fewer providers will make Infliximab available to patients even 
though a provider might determine it to be the best treatment .
    BIO believes that the impact of the APC system, in delaying proper 
code assignment and providing severe underpayment for most orphan 
products, will essentially negate the valuable benefits of orphan 
status. In some cases, patients who cannot afford to supplement 
Medicare's underpayment will literally bankrupt themselves to gain 
coverage, or they may be forced to forgo these valuable therapies.
    3) Chemotherapy agents and related supportive care drugs should be 
paid separately from the APC system.
    The proposed rule specifies four different APCs that include 69 
different chemotherapy related HCPCS codes. For specific chemotherapy 
agents, providers would be able to bill for the appropriate code, along 
with an infusion procedure APC. Although a number of the chemotherapy 
agents are listed more than once in the different chemotherapy APCs to 
account for different dosage levels, the APCs do not nearly account for 
the variances in dosing that likely would occur in actual chemotherapy 
administration. In addition, some chemotherapy agents do not have HCPCS 
codes that specify dosing at all. As a result, payment for some 
chemotherapy agents may be inequitable, depending on the dosing used.
    In addition, the chemotherapy APCs do not account at all for the 
costs of biotechnology drugs and products that are used concurrently 
during chemotherapy. As proposed, the APC system would compensate 
hospitals for only a fraction of the costs incurred for chemotherapy 
patient care, through the billing of infusion codes for each hour of 
infusion time. Clearly, the APC system would have dramatic impact on 
the availability and quality of patient care for severe cancer cases. 
As such, it is important not only that all cancer-related drugs be paid 
separately, but that the payment for chemotherapy agents and those 
products used in relation to cancer care be reimbursed adequately.
    CASE EXAMPLE: Many patients undergoing chemotherapy for treatment 
of their cancers receive supportive care drugs to treat neurotropenia, 
anemia or nausea or vomiting. Myelosuppressive cancer patients receive 
erythropoietin injections from their physicians to treat their anemia 
secondary to their chemotherapy treatment and restore the hematocrit 
level. Patients may receive Filgrastim, a human colony granulocyte 
stimulating factor in order to restore neutriphol counts and treat 
their neutropenia. Under the APC system, these products and other 
growth factors are classified as incidental, so hospitals would be 
reimbursed only for their administration, as little as $38.05 if 
injected or $99.24 if infused intravenously, not covering the cost of 
either of these therapies. For example, a typical course of Filgrastim 
can cost $322 per day for up to two weeks. This reimbursement would not 
cover the cost of a routine course of therapy.
    4) Biologics and drugs at high risk of not being provided to 
beneficiaries who need them also should be paid separately from the APC 
system.
    As HCFA acknowledges in the preamble to the proposed rule, certain 
drug products that may not fall into any of the categories listed above 
may result in disproportionate costs to administering hospitals. While 
HCFA refers to the possibility of a fee schedule in the preamble, it 
also acknowledges that fee schedules create unnecessary administrative 
burdens for hospitals. BIO concurs that a fee schedule approach for 
costly drugs would not serve the provider community. BIO urges that 
HCFA continue to pay for these products as they are currently paid for.
    CASE EXAMPLE: Immune Globulin Intravenous (IGIV) is a solution of 
immune globulins containing human antibodies. This biologic product is 
used to treat a variety of patients who have deficient or dysfunctional 
immune systems. IGIV is a large protein molecule that when administered 
should be closely monitored for adverse reactions. Some patients, with 
a history of complications and transfusion reactions and those with 
comorbidities should receive their initial few months of infusion 
therapy in a hospital outpatient department where their condition can 
be closely monitored. The proposed APC payment of $99.00 would not be 
sufficient to cover the costs of IGIV therapy. If hospital outpatient 
departments are not reimbursed appropriately for IGIV infusions, the 
infusions may be shifted to other, maybe less clinically appropriate 
settings.
    5) Radiopharmaceuticals and other drugs required for nuclear 
medicine procedures will be disproportionately underpaid and should be 
paid separately from the APC system.
    BIO is concerned with the levels of payment for nuclear medicine, 
generally, and severe errors in the calculation of related APC weights. 
The proposed APC relative weights that would cover radiopharmaceuticals 
are clearly erroneous, as they would provide for higher payment for a 
standard therapeutic nuclear medicine procedure (APC 791--$757.93) than 
for a complex nuclear medicine procedure (APC 792--$247.33). Further 
examination of the baseline data used by HCFA to compute appropriate 
weights for APC 791 and APC 792 also suggests that a broad range of 
inappropriate or miscoded charges were included in HCFA's 
analysis.8
---------------------------------------------------------------------------
    \8\ According to public use data released by HCFA on its Internet 
web site, CPT 7999, one of the codes that maps to APC 791, the cost 
range of 175 sampled claims was $2.51 to $2,452.77. Similar cost ranges 
are found in the other CPT codes that map to APCs 791 and 792.
---------------------------------------------------------------------------
    BIO also is concerned that the proposed APC system would severely 
underpay certain radiopharmaceutical products.
    Accordingly, BIO is concerned that baseline payment levels for 
nuclear medicine APCs are inadequate, and that radiopharmaceuticals 
need to be reimbursed on a reasonable cost basis.
    6.) Blood-derived products should be paid separately from the APC 
system.
    The proposed APC system would systematically underpay a broad range 
of blood products and technology-intensive blood derivatives. At 
present, BIO estimates that there are 62 different types of blood-
derived products, or recombinantly produced substitutes, produced and 
sold in the United States. With few exceptions, the APC system provides 
no extra payment for these products, either because they are classified 
as incidental or because they do not have specific HCPCS codes.
    CASE EXAMPLE: Hemophilia A is an inherited, lifelong blood clotting 
disorder that is caused by a deficiency of a plasma protein called 
Factor VIII or Antihemophilic Factor (AHF). The mainstay of successful 
treatment and prevention of bleeding for patients with hemophilia A is 
a prompt and sufficient treatment with AHF concentrates. The typical 
hospital cost for a course of treatment with a recombinant form of AHF 
can range from $500 to well over $4,000 per intravenous injection. 
Under this current proposal, payment for this advanced biologic would 
be bundled into an injection APC of $43. By virtue of its expense, all 
claims for AHF and other coagulation concentrates were eliminated from 
APCs because they fell outside of the allowed standard deviations from 
the geometric mean. BIO believes that very few, if any, hospitals in 
the country could reasonably afford to suffer the recurrent losses they 
would incur by offering this therapy for each patient treated.
    As described above, underpayment for Factor VIII offers an example 
of how the proposed system would penalize hospitals for treating the 
most severely ill patients, and particularly discourages treatment with 
more costly, but clinically appropriate therapies. Accordingly, HCFA 
should pay for Factor VIII and all other blood-derived products on a 
reasonable cost basis.
    7) Drug products not covered by the ESRD composite rate should be 
paid separately from the APC system.
    In the proposed rule, HCFA indicated that it was exploring ways to 
accurately reimburse for drugs used outside the ERSD compensation rate. 
This is a complicated issue; however, BIO would recommend a carve-out 
similar to others we've proposed. Dialysis patients rely on a vast 
array of pharmaceutical and biological products targeted to the patient 
and his or her needs. Since some products will not be covered under the 
composite rate, we believe their access will be curtailed without a 
carve-out for those products used in the hospital-based dialysis 
facilities.
    general statement on implementation of the hosptial outpatient 
                          prospective system:
Phase-In Requirement:
    If there is no carve-out for all biologics and drugs, the 
outpatient must be phased-in.
    As stated in the preamble to the proposed rule, HCFA intends for 
the APC system to prompt hospitals to provide services in a more cost-
conscious manner, as was the case following implementation of the 
diagnosis-related group (DRG) system for inpatient care.9 We 
believe there are critical differences between the DRG and APC systems 
and the services they affect, particularly in the economics of patient 
care and the potential for savings. Where the DRGs realized substantial 
savings by reducing the lengths of inpatient hospital stays, no such 
savings are possible for outpatient services. Indeed, many services 
formerly provided in the inpatient setting are now provided outpatient, 
thanks to advances in biotherapy. In addition, it is likely that the 
costs of biotechnology products and drugs represent a greater 
proportion of outpatient care costs than they do of inpatient care 
costs. As a result, outpatient departments will face greater payment 
shortfalls than inpatient departments experienced with DRGs, but will 
have far less opportunity to reduce overall costs of care.
---------------------------------------------------------------------------
    \9\ The preamble to the proposed rule makes several references to 
the inpatient PPS, see 63 FR 47554, 47557.
---------------------------------------------------------------------------
    Another important difference between the DRG system and the 
proposed APCs is that the proposed APC system is largely untested, yet 
will not be phased in. This means that any defect in the APC system's 
design could significantly negatively hurt care with unknown and 
unpredictable consequences for millions of Medicare recipients.
    Finally, any disruption in patient care due to the APCs 
implementation will occur without the availability of viable 
alternative settings to absorb patients. When the DRG system was 
implemented, many hospitals were able to shift certain types of care to 
outpatient departments. Under the APCs, there will be no alternative 
hospital-based setting to absorb these outpatient cases.
    Accordingly, it is essential that economic constraints under a new 
outpatient PPS not force hospitals to choose between providing these 
services at a huge loss, shifting them to inappropriate less intensive 
care settings, admitting patients when it is not necessary, or not 
providing the service, at all.
Volume Control Measures:
    The proposed volume expenditure caps will exacerbate the access 
problems created by this proposed rule. These caps should be eliminated 
from the outpatient PPS.
    Volume expenditure caps, as included in this proposed rule, will 
force hospitals to bear the cost in changes in cost of care. Under the 
proposed caps, annual updates to hospitals could be reduced if Medicare 
spending for outpatient services exceeds HCFA estimates. This means 
that if overall outpatient costs increase, hospital reimbursement could 
be cut. This will have a great impact on a hospital's ability to 
utilize new technologies or even the most appropriate technologies for 
fear of hitting the volume expenditure caps. This will affect quality 
of care tremendously.
    We suggest HCFA explore other ways of controlling what it deems to 
be unnecessary volume. Arbitrary caps on the outpatient setting will 
slow down how and where new medical technology is used. Over the last 
several years, many procedures and much therapy delivery have migrated 
to the hospital outpatient setting because it was considered more 
appropriate and less costly. To put arbitrary volume caps on the 
outpatient setting could shift more care to the inpatient setting and 
therefore increase costs to the Medicare program.
                       summary of recommendations
    In view of the extensive and systemic problems in deriving APC 
weights and APC groups, BIO urges that the HCFA administrator carve out 
biologics and drugs from the proposed APCs. We recommend that HFCA 
carve out seven categories of products. It is reasonable to expect that 
any revised prospective payment method will not adequately reimburse 
providers for the use of products in these categories listed below:

1) ``New'' technologies that are awaiting proper HCPCS and APC code 
        assignment.
2) Orphan drug products.
3) Chemotherapy agents and related supportive care drugs.
4) Biologics and drugs at high risk of not being provided to 
        beneficiaries who need them most.
5) Radiopharmaceuticals and related drugs.
6) Blood-derived products.
7) ESRD-related products not paid under HCFA's composite rate.
    We also recommend that HCFA phase in this hospital outpatient PPS 
system gradually since much of the data necessary to establish a valid 
system has not been collected to date.
    We also urge HCFA to eliminate volume expenditure caps from the 
outpatient PPS.
    BIO looks forward to working collaboratively with HCFA in revising 
its proposed APC system, in order to better serve the needs for quality 
care of the Medicare population.
    Thank you for this opportunity to comment on this proposed rule. 
BIO and its member companies will be pleased to work with HCFA to find 
a solution. If there are any questions about these comments, please 
call Nancy Bradish Myers at (202) 857-0244. Again we appreciate the 
opportunity to comment on the proposed rule.
               biotechnology industry organization (bio)
    BIO is the largest industry organization to serve and represent the 
emerging biotechnology industry. Our membership comprises the world's 
leading producers of important medical innovations, including 
recombinant biotech products, blood products and related derivatives, 
and in vitro diagnostic tests. In total, BIO's membership includes 835 
companies, academic institutions, state biotechnology centers and 
related organizations located in 47 states and more than 20 nations. 
These member firms provide over 150,000 jobs in the United States, with 
over two-thirds of our members operating with fewer than 135 workers. 
At present biotech companies have over 300 drugs in human clinical 
trials and more in early stages of development.
    The products of our member firms span a broad range of life-saving 
therapies that often are the only treatment options available for 
patients suffering from life-threatening diseases. Currently, there are 
80 biotech drug products and vaccines on the market, many of which are 
provided in the hospital outpatient department.

    Mr. Bilirakis. Thank you very much, sir.
    Mr. Dingell to introduce Mr. Warden, who has not testified 
as yet. He has been sitting there very patiently waiting for 
your introduction.
    Mr. Dingell. It is a great kindness, Mr. Chairman, and I 
thank you for it.
    It is a great pleasure for me to welcome and introduce my 
good friend Gail Warden, who runs a very fine hospital back 
home, Henry Ford, and who is not only a distinguished 
practitioner in the business of hospital administration but 
also who is very active in all manner of community affairs back 
home. He is not only a respected citizen of our community but, 
as I say, runs a superb hospital and is a good friend of my 
wife Debra and I and Mr. Warden, we are happy to welcome you to 
the committee.
    Thank you for that courtesy, Mr. Chairman.
    Mr. Bilirakis. You are very welcome, sir.

                   STATEMENT OF GAIL L. WARDEN

    Mr. Warden. Thank you very much, Mr. Chairman and 
Congressman Dingell.
    I came to this hearing today prepared as a representative 
of the American Hospital Association and as one of its former 
chairmen, as well as a representative of my own institution, 
the Henry Ford Health System of Detroit. I had planned to make 
my oral testimony somewhat coincide with what was in the 
written testimony and to elucidate on it, but I must say that I 
have been very impressed with the knowledge of the issues of 
the members of the subcommittee, the homework that they have 
done and they know the studies that have been done and the 
discrepancies in those studies and the overshot that took place 
in the Balanced Budget Act. So I am not going to spend a lot of 
time talking about that again.
    Instead, I would like to take time to really talk about two 
things. I would like to, having heard that there had not been 
as much impact upon quality and access as might have been 
expected, give you two anecdotes, one about the city of Detroit 
and another about a hospital in Manistique, Michigan, and then 
I would like to finish by making some comments about the 
outpatient PPS.
    In the city of Detroit there really are three safety net 
hospitals: the Detroit Medical Center, the Henry Ford Hospital 
and a hospital named Mercy Hospital. The combined impact of the 
Balanced Budget Act and reductions in Medicaid payment upon 
those three institutions has been substantial. In each case 
there have been large financial losses and large lay-offs. The 
Detroit Medical Center has laid off over 2,000 people. Our 
organization has laid off 800 and will be laying off another 
1,000 people.
    We have closed clinics, consolidated clinics, reduced 
services in community-based programs. Generally the challenges 
continue to get greater and we are both experiencing continued 
increases in uncompensated care and the amount of uninsured, 
with the Detroit Medical Center having about $120 million in 
uninsured care and our organization about $60 million.
    The third institution, Mercy Hospital Detroit, has been 
similarly impacted but they do not have the resources or 
reserves to fall back on and there is a very good chance that 
they are going to close. What it is going to mean is that in 
order to maintain access to those institutions for the people 
in the city of Detroit is that our two institutions are going 
to have to come together and try to find some way to make that 
happen. So my point is that the urban safety net is being 
impacted by the Balanced Budget Act.
    Second, in the case of the hospital in Manistique, it is 
the sole provider within a 70-mile radius. The impact of the 
Balanced Budget Act on them was about 10 percent and the one 
program that is threatened right now is obstetrics. If they are 
to close their obstetrics unit, there will be no obstetrics and 
gynecology program for at least 70 miles in any direction. 
Again it is a product of the impact of the Balanced Budget Act 
on that particular institution.
    In relationship to the outpatient PPS, I would like to talk 
about three specific concerns. The first one obviously has been 
discussed on a couple of occasions today, that the original 
projection by the Medicare Payment Advisory Commission was that 
hospitals will currently pay 90 cents on the dollar and that 
under BBA they would be paid about 82 cents on the dollar. We 
also heard today about the additional 5.7 percent reduction 
that HCFA plans sometime in the near future.
    We also heard about the 255 members of the House and 77 
members of the Senate who have signed on to bring about some 
relief from that and we are particularly impressed with the 
bill that Representative Foley has introduced, which would cap 
outpatient losses at 5 percent at the current rate, 10 percent 
in the current year, 10 percent in the second year and 15 
percent in the third year.
    The second issue that we are concerned about relates to 
something that is kind of hidden in the regulation which 
relates to provider-based provisions. It impacts organizations 
like ours, the Cleveland Clinic and Johns Hopkins, 
organizations who, in an effort to try to bring care closest to 
the community in a fairly large service area, have developed 
ambulatory care centers. But the provision says that these must 
be licensed by the State and in most cases they are in States 
that do not license these facilities as outpatient facilities 
because they are extensions of the hospital. We believe that 
consideration should be given to a joint commission of 
accreditation as a proxy.
    The third consideration that we want to raise is about the 
data that HCFA used to calculate payment under outpatient PPS. 
In my own organization's case, the HCFA estimate was that we 
would have a $1 million increase in income. Our detailed 
analysis identified several discrepancies in the estimate which 
are related to the fact that the information did not dig down 
deep enough. Only about 30 percent of the services provided 
were not accounted for and we calculate the impact is going to 
be about a $9.6 million loss.
    If you combine that with the losses that we have already 
experienced in the Balanced Budget Act and the losses of $12-
$25 million that might result as a result of the provider 
payment provisions, it adds up to a substantial amount and will 
make our reduction in revenue for Medicare for a 5-year period 
somewhere in the neighborhood of $225 million, which seems just 
too much if we are going to continue to maintain our safety net 
provider role. I thank the committee very much for the 
opportunity to talk to you.
    [The prepared statement of Gail L. Warden follows:]
 Prepared Statement of gail Warden on Behalf of the American Hospital 
                              Association
    Mr. Chairman, I am Gail Warden, president and CEO of Henry Ford 
Health System in Detroit, and former chairman of the American Hospital 
Association (AHA). I am here today representing the AHA's nearly 5,000 
hospitals, health systems, networks, and other providers of care. We 
appreciate this opportunity to present our views on an issue that is 
dramatically affecting hospitals in communities across America: The 
Balanced Budget Act of 1997 (BBA). Our testimony focuses primarily on 
how the act is affecting Medicare payments for outpatient services. But 
first I'd like to review the overall effects of the BBA on hospitals 
and health systems.
                       overall effects of the bba
    For over a year, hospitals across the country have been sounding 
the alarm about problems associated with implementation of the BBA. In 
all parts of the country--urban as well as rural--we are documenting 
service closures and cutbacks as hospitals and other health care 
facilities attempt to wrestle with the BBA's dramatic reductions.
    The BBA mandated the largest changes in Medicare since the 
program's inception in 1965. In addition, the budgetary impact of these 
many changes were vastly underestimated. A study conducted by The Lewin 
Group found that the originally estimated five-year BBA hospital 
payment reduction of $53 billion is, in reality, more in the range of 
$71 billion--an $18 billion increase. And the Congressional Budget 
Office (CBO), in its July 1 estimate of federal revenues and spending, 
reported that the Medicare payments will total $206 billion less than 
CBO predicted when the act was adopted.
    Given this massive change and the disruption it is creating, we 
urge Congress to enact the following initiatives, funded through the 
budget surplus. These initiatives represent a broad-based relief 
effort--an effort that would provide effective relief not just for 
hospitals, but for a variety of health care providers who take care of 
Medicare beneficiaries in several different settings.
    Transfer policy--Medicare patients sent from one acute care 
hospital to another are defined as transfers. Under the BBA, HCFA 
defines transfers to include cases where a patient in one of 10 
diagnosis-related groups (DRG) chosen by HCFA, stays in the hospital at 
least one day less than the national average and then is sent to one of 
several post-acute care settings. In the past, hospitals received the 
full Medicare DRG payment for each discharge under PPS, regardless of 
the patient's length of stay. Payments for cases shorter than average 
stays help defray the costs of caring for patients with longer-than-
average stays. This rule of averaging is one of the fundamental 
principles upon which PPS was built. AHA urges you to repeal the 
unnecessary and unwarranted transfer provision by adopting H.R. 405.
    Advances in science and technology--the Medicare Payment Advisory 
Commission (MedPAC) has reported that hospitals will ``incur 
significant operating and capital costs in becoming year 2000 
compliant.'' As a result, MedPAC has recommended that a modest increase 
in hospital inpatient payments be made to help offset the costs of 
these improvements to medical devices and information systems. AHA 
urges adoption of MedPAC's recommendation for a modest PPS update to 
compensate hospitals for Y2K readiness activities, through the passage 
of H.R. 2266.
    Rural relief--Because of their small size, rural hospitals are 
often unable to absorb the impact of changes in payment and regulatory 
policies. With the mounting pressures of the BBA, these facilities 
warrant special consideration, especially considering their role as the 
hub of the local health care delivery system. AHA urges relief for 
rural health care providers--particularly sole community providers, 
critical access hospitals, and Medicare-dependent hospitals--through 
the adoption of provisions of H.R. 1344.
    Medical education--This nation's medical schools are often referred 
to as national treasures. Yet under the BBA, Medicare's indirect 
payment for medical education is scheduled to be reduced from 7.7 
percent to 5.5 percent by FY 2001. We all benefit from the research and 
medical education conducted in our medical schools and teaching 
hospitals, but this reduction is making it difficult for these 
institutions to maintain their cutting edge prominence. AHA urges 
relief for our nation's teaching hospitals by freezing the current 
schedule on further indirect medical education reductions through the 
adoption of H.R. 1785.
    Disproportionate share payments--The BBA took an important step by 
removing hospitals' clinical education payments from Medicare+Choice 
payments. This move was made to ensure that payments be made to those 
facilities actually incurring the added costs. Unfortunately, BBA did 
not remove the important disproportionate share (DSH) payment. This 
special payment is made to support the additional costs hospitals incur 
in treating large numbers of low-income individuals. Without this 
funding, these institutions will experience difficulty in maintaining 
access to vital health care services for low-income individuals. AHA 
urges relief for hospitals serving the uninsured by carving out the 
disproportionate share payments from the Medicare managed care payment 
by adopting H.R. 1103.
    Managed care--The BBA set in motion a long-overdue change to the 
Medicare program by reducing geographic variations in managed care 
payments. This equity update to Medicare+Choice payments would be 
accomplished by ``blending'' the county rate with a national rate, thus 
reducing the historic variation in Medicare health plan payments from 
county to county throughout the country. HCFA has had difficulty fully 
implementing this provision due to the way the law was drafted. AHA 
urges the full funding of the Medicare managed care payment blend to 
provide fair payment in all parts of the country by adopting H.R. 406.
    Long-term care--The BBA reduced skilled nursing facility (SNF) 
payments by $9 billion over five years. At the same time, it required 
HCFA to implement a prospective payment system (PPS) for these 
services. The new PPS is not refined enough, however, and therefore 
fails to adequately account for differences in costs associated with 
the care of medically complex patients. In particular, the payment for 
non-therapy ancillaries (pharmaceuticals, respiratory therapy and 
special equipment) is the same proportion across all the categories in 
the payment system, even though for some patients care costs are much 
higher.
    Both HCFA and providers believe these issues can ultimately be 
addressed by revising current case-mix categories (Resource Utilization 
Groups) used in the new SNF PPS to reflect these types of patients. 
However, HCFA cannot make any changes to case-mix until after 2000, and 
additional dollars are still needed to mitigate the consequences of the 
BBA. HCFA has also not completed its research on how to improve case-
mix. Based on preliminary research by HCFA contractors, patients in two 
RUGs categories--``extensive services,'' which includes patients who 
need IV feeding, IV medications, or require ventilators, and ``special 
care,'' which includes patients who have multiple sclerosis, cerebral 
palsy or require respiratory therapy seven days a week--have much 
higher non-therapy ancillary costs than other patients. The current 
payments for these RUGs are far below the costs of providing the 
services, ranging from a high of 81 percent to 62 percent of costs.
    A multiplier could be used to increase the payments for these 
groups--extensive services and special care--until the final case-mix 
improvements can be made by HCFA. The multiplier will no longer be 
necessary once the Secretary refines case-mix and the funding can then 
be used to fund the revised case-mix format. The multiplier can be 
implemented regardless of the Y2K restrictions since HCFA already plans 
on updating the RUG rates in October 1999.
    Psychiatric PPS--Cuts to psychiatric services were also included in 
the BBA. As a result, many hospitals serving the mentally ill will 
receive payments below previous levels--real cuts. AHA urges 
adjustments to payments to psychiatric hospitals in a budget-neutral 
manner by adopting H.R. 1006.
    Home health--BBA included a number of changes in payment, coverage, 
and administrative requirements for home health agencies. Until PPS 
could be implemented, BBA provided for an interim payment system (IPS) 
designed to reduce payments to home health agencies. The IPS was the 
first of the BBA's provisions to be implemented and created a number of 
disruptions in access to services in some areas of the country. AHA 
urges that additional funding be targeted to home health providers to 
minimize the ongoing inequities of the IPS, and lessen the 15 percent 
payment cut scheduled for the home health PPS in FY 2001.
                  limiting losses under outpatient pps
    According to a recent MedPAC report, Medicare reimbursed hospitals 
only 90 cents for each dollar of outpatient care provided prior to 
enactment of the BBA. Today, as a result of the BBA, hospitals are paid 
only 82 cents on the dollar. And after PPS is implemented, HCFA will 
reduce hospital outpatient payments by another 5.7 percent. However, 
according to HCFA's own estimates, many hospitals will lose much more 
than 5.7 percent. More than half of the nation's major teaching 
hospitals would lose more than 10 percent; nearly half of rural 
hospitals also would more than 10 percent.
    In addition, catastrophic losses would be experienced by some 
individual hospitals. For example, large hospitals in Iowa and New 
Hampshire will immediately lose almost 14 to 15 percent of their 
Medicare outpatient revenue. Other large urban hospitals in Missouri, 
Massachusetts, Wisconsin, Florida, and California stand to lose 20 
percent to 40 percent. Some New York City hospitals would lose more 
than 40 percent. Some small rural hospitals in Arkansas, Kansas, 
Mississippi, Washington, and Texas will lose more than 50 percent of 
their revenue.
    To prevent these precipitous drops in Medicare revenues from doing 
additional harm to hospitals and the Medicare beneficiaries who rely on 
them, we urge passage of legislation that would limit payment losses 
created by the move to outpatient PPS. However, the costs of financing 
this proposal should not be paid by the remaining hospitals, because 
most of them are also expected to lose under the outpatient PPS. 
Moreover, large new losses would have to be incurred by those 
hospitals, ranging from 3 to 8 percent, to protect other hospitals from 
losses of 5 to 15 percent. Instead, this change needs to be funded by 
additional Medicare program spending. Beneficiary spending would be 
unaffected.
    Under our proposal, until January 2002, each hospital's Medicare 
payments for outpatient PPS services would be adjusted so that the 
hospital's losses are limited to 5 percent of what the hospital would 
have been paid by Medicare under the current system. For calendar year 
2002, the payment losses would be limited to 10 percent. For CY 2003, 
the payment losses would be limited to 15 percent. No limit is set 
after 2003. Depending on whether HCFA changes its interpretation that 
unfairly shifts the 5.7 percent reduction in beneficiary copayments 
from the Medicare program to hospitals (see below), this proposal will 
require roughly $1.9 billion over five years in new funding.
    MedPAC chair Gail Wilensky recently supported phasing in the 
outpatient PPS, stating ``to mitigate unintended effects and help 
people adjust to the new system, it's wiser to phase in just about any 
big payment change.'' In addition, a June 2, 1999 New York Times 
article noted Dr. Wilensky's comment that ``Medicare is paying too 
little for outpatient services.'' The AHA agrees, and urges your 
support for legislation that would provide such a payment ``floor'' and 
protect hospitals from unreasonable losses during the transition to 
outpatient PPS. Such legislation (H.R. 2241) was introduced in June by 
Rep. Mark Foley (R-FL), and has 68 co-sponsors. We urge you to support 
it.
                           regulatory changes
    As HCFA works toward implementation of outpatient PPS, there are 
several areas of concern we have with the apparent direction in which 
the agency seems to be headed. Specifically:
    Provider-based outpatient facilities: Hospitals are no longer just 
buildings with four walls. Today, more than ever, advances in science 
and technology have allowed hospitals to reach out into their 
communities to bring care where it is needed. This is especially true 
of outpatient services. In community after community across America, 
hospitals are working with others in their communities to bring care 
where it is needed.
    Unfortunately, HCFA threatens this expansion of care by adding too-
narrow requirements for determining what entities can be considered 
hospital outpatient departments. While there are reasonable and 
important distinctions between hospital outpatient departments and 
physician offices, HCFA's requirement for state licensure is 
arbitrarily biased against providers in states where licensure does not 
even exist to cover off-campus facilities. Conditions of participation 
or accreditation should be used where licensure is not available. 
Moreover, the proposed requirement that Medicare should mirror how 
other payers view these facilities is one-sided, ignoring contractual 
arrangements between hospitals and private insurers that offset the 
lack of a facility fee. These requirements will discourage hospitals 
and health systems from reaching out and bringing high-quality health 
care to underserved areas of their communities.
    Volume cap: HCFA proposes to reduce future payment updates if 
Medicare payments for hospital outpatient services exceed the agency's 
projections. If this proposal is implemented, hospitals would be 
penalized for adopting new technologies and treatments that increase 
the volume of outpatient services while also enhancing the lives and 
comfort of beneficiaries.
    The President's Medicare reform proposal indicates that the 
administration is considering delaying implementation of this proposal. 
While we commend the administration, just a delay of bad policy is not 
sufficient. We strongly urge HCFA to exercise its option under the BBA 
to drop this provision altogether. Doing so will ensure that 
beneficiaries have continued access to new treatments and technologies 
in the outpatient setting.
    Accuracy of data: We are extremely concerned about the data with 
which HCFA is calculating its payment rates under outpatient PPS. For 
example, HCFA estimated that Henry Ford Health System would see an 
increase of almost $1 million in outpatient payments under PPS. 
However, our own analysis identified several discrepancies in HCFA's 
estimates. In fact, we calculate that Henry Ford will actually see a 
decrease in payments of $9.6 million, or 21 percent of our total 
outpatient revenue. If a hospital like ours, which was expected to see 
a slight increase in payments, actually experiences a 21 percent 
reduction, what will happen to those many hospitals projected to 
experience a 30 percent loss?
    The BBA requires that HCFA use a reliable payment methodology. The 
margin of error we have found clearly indicates HCFA's proposal does 
not meet this requirement. This is a key reason why a payment ``floor'' 
is needed, such as Rep. Foley's bill (H.R. 2241), which I mentioned 
earlier in this testimony. Such a floor would protect hospitals from 
catastrophic losses while HCFA makes the coding/reporting changes 
needed to provide HCFA with accurate information so the agency can in 
turn provide more accurate projections of the effects of outpatient 
PPS.
    One way to refine the data is to create a panel of hospital 
outpatient administrators and government staff who can work together to 
review the classifications.
    Chemotherapy: The AHA believes that there are serious problems with 
the data HCFA is using to determine payment for chemotherapy services. 
As a transitional payment methodology, the AHA recommends that HCFA 
carve out the costs for chemotherapy and chemotherapeutic agents and 
pay on a reasonable cost basis until the agency fixes the underlying 
coding problems, collects new data, and proposes new groups or rates. 
The results would then be included in a subsequent proposed rule. 
Otherwise, hospitals may be forced to close their cancer centers rather 
than provide lower quality or inappropriate care.
    In addition, HCFA's proposal to classify new agents in the lowest 
cost group does not reflect what we expect in the future for drug 
costs. According to the Bureau of Economic Analysis and other sources, 
most of the new drugs--especially new genetically engineered drugs--are 
more costly than prior drugs. Clearly, this proposal would penalize 
hospitals for using new pharmaceuticals. Moreover, it is incumbent on 
the agency to get the information it needs on drug prices to ensure 
that it can classify new drugs, or any new technology, into the most 
appropriate group from the standpoint of both clinical coherence and 
resource use. The AHA opposes HCFA's proposal to place new agents in 
the lowest payment group.
                   opposition to the 5.7 percent cut
    As mentioned earlier, once the new outpatient PPS system is 
implemented, HCFA plans to reduce hospital outpatient payments by 
another 5.7 percent. This means that, on top of the $9 billion in five-
year outpatient payment cuts already included in the BBA, hospitals 
would suffer another cut of $900 million annually. This is contrary to 
the wishes of more than 255 members of the House, and 77 members of the 
Senate, who signed recent letters to HCFA opposing this arbitrary, 
unfair, and uncalled for cut.
    According to the congressional letter, HCFA's proposal decision to 
cut an additional $900 million from Medicare outpatient payments is 
``inconsistent with Congress' intent,'' and would be ``inappropriate 
and unwise.'' The AHA believes that HCFA has the flexibility to 
interpret the law correctly, so that the proposed payment system does 
not extract another $900 million from hospitals.
                               conclusion
    The vision of America's hospitals and health systems is ``a society 
of healthy communities.'' High-quality outpatient care is a cornerstone 
of this vision, as more and more hospitals break down their figurative 
four walls and reach into the community to provide care where and when 
it is needed. The scientific and technological advances that allow us 
to do this reflect the kind of innovation that will serve Americans 
well into the next century.
    In order for hospitals and health systems to continue providing 
high-quality outpatient care, it is critical that outpatient PPS be 
implemented carefully. We look forward to working with Congress and 
HCFA to fix the problems that I have outlined.

    Mr. Bilirakis. Thank you, Mr. Warden. Hospitals in Florida 
certainly are closing left and right and others are threatening 
to close. I know those that we do not know about Mr. Koon, who 
is sitting behind you, tells us about that.
    So we hear you all, believe me. You have had the 
unfortunate problem of sitting in the audience since 10 this 
morning listening to all the other witnesses, so you know that 
we have basically heard it all, I think.
    Dr. Corlin, you stated the largest shortcoming in SGR 
payments due to incorrect estimates are felt in Florida.
    Mr. Corlin. Yes, sir.
    Mr. Bilirakis. Now HCFA claims that it does not have the 
legal authority to correct the estimate from year to year. You 
say--I think this is your word--incredulous. You say that that 
is incredulous.
    I wonder if you could have your legal experts at AMA 
substantiate your position for the record. We are meeting, as 
Mr. Brown and others know, we are all meeting together with Mr. 
Hash hopefully next week and staffs are meeting later this 
week, although I do not know with the hurricane coming up this 
way, I am not sure about that. By the way, this is the proposed 
path. It's not going to hit Michigan.
    But in any case, I do not know about the staffs' meeting 
later this week, I guess is what I mean. But we would like to 
have that information in case any problem develops. I mean as 
much as they can make administrative fixes, it would be so much 
easier for the overall effort.
    So if you could have your legal people furnish that to us, 
you say it is incredulous. I assume that that is based on 
probably what your legal people have said to you?
    Mr. Corlin. Yes. I obviously do not have that information 
on hand now.
    Mr. Bilirakis. No, of course.
    Mr. Corlin. I will see to it that the responses to your 
questions are faxed to both you and Mr. Brown before the end of 
the week.
    Mr. Bilirakis. Okay, great. And of course we will have 
plenty of questions for all of you in writing and we would ask 
for you to respond to them.
    As I said earlier, we hear you and I hope we are getting 
the message across to you that we are going to try to do 
something.
    Now Miss Roberts, I am just going to use you as a 
representative of all the provider organizations, not only 
those that are here but some who are not. You stated that there 
were 2,486 home health agency closures. I do not know over what 
period of time these took place. We do know that in the decade 
prior to 1997 the number of home health agencies almost doubled 
to 10,524, according to GAO.
    Now I am making these points just to show you all that 
everybody was imploring upon us to do everything we could, to 
basically try to save Medicare and that sort of thing. And you 
know this is what we were faced with. And unfortunately, what 
we did was we overdid it and we admit that unintended 
consequences took place.
    GAO told us that in 1989 there was an average of 27 visits 
per home health patient. By 1993, just 4 years later, the 
average had become 59 visits, a 118 percent increase since 
1989. By 1996 the average had risen to 79 visits, a further 34 
percent increase. 1997 data indicated there was a drop back to 
72, but still a 167 percent increase above the 1989 level.
    So this is the sort of thing, and obviously home health 
care is not the only problem out there but this is the sort of 
thing we were faced with in terms of trying to draft up that 
legislation. And, as I said earlier, this is big stuff. It was 
bigness and we are an ivory tower and we try to do the best 
that we can. In spite of the fact that we have 2 or 3 doctors 
on this committee now, which is something we did not have 
before, we did the best we could but we messed up in many areas 
and we are trying to fix it now.
    I do not know that I really have any more questions. I do 
want to thank you for being here and to apologize for the long 
delay.
    With Mr. Brown's permission I would like to recognize Mr. 
Dingell to inquire. Would you like to inquire?
    Mr. Dingell. Yes, if it is my turn, Mr. Chairman.
    Mr. Bilirakis. Mr. Brown yields to you.
    Mr. Dingell. Thank you. Mr. Brown, I thank you.
    Mr. Warden, let's talk about the situation in our area in 
Michigan. We are liable to lose four hospitals back there in 
the very immediate future; isn't that so?
    Mr. Warden. That is correct.
    Mr. Dingell. That will come about in good part because of 
the level of payments both for Medicare, Medicaid and other 
Federal services; is that right?
    Mr. Warden. Those are the primary reasons, yes, sir.
    Mr. Dingell. That could come as early, say, as January?
    Mr. Warden. All of them will happen between January and 
July of the year 2000.
    Mr. Dingell. What would the consequences be to the patient 
population back there in terms of what that would do? 
Significantly, the Medicare-Medicaid population would suffer 
significant loss of opportunity to get good treatment. It would 
mean also further declines in the level of service available to 
them. It would also mean waits and things of that kind. It 
would mean that all of the remaining hospitals would 
essentially be functioning at or above their level of capacity; 
isn't that so?
    Mr. Warden. That is correct. Actually in the case of the 
hospital in the city of Detroit, it would basically mean that 
there is no hospital on the east side of Detroit if that 
hospital closes. Closing with that will be several clinics that 
are operated by that institution. It will mean that the 
patients are going to have to go further to receive care. It 
will mean that more care will be delivered in the emergency 
room, which means delays in treatment, and it also will mean 
that it will have an impact, I think, upon the other services 
that are available in those communities because a lot of the 
other community services have been backed up by the hospitals.
    In the case of the other institutions that are threatened, 
it will mean that in most cases people will have to go further 
to get care and there will be some physicians who are somewhat 
displaced because they have been practicing in those 
institutions and will have to find another venue.
    Most importantly, it is going to mean delays in seeking 
care and the ability to get to the place to have care. One of 
the big problems in the city of Detroit is the lack of a good 
public transportation system that goes east and west in order 
to be able to bring those patients to where they need to be.
    Mr. Dingell. Now what will be the level of compensation to, 
for example, your hospital under the BBA for Medicare-based 
patients? What percentage of your actual bill will be 
compensated?
    Mr. Warden. Our percentage of Medicare is somewhere in the 
neighborhood of 33 percent.
    Mr. Dingell. Thirty-three percent?
    Mr. Warden. Thirty-three percent of our revenues.
    Mr. Dingell. Your actual costs.
    Mr. Warden. But the impact upon our revenues over a 5-year 
period, starting with about $19 million reduction in 1998 and a 
little more in 1999, about 38 in 1999 and it goes up to 40 
some.
    Mr. Dingell. Million.
    Mr. Warden. And it will level off, but it is well over $200 
million for a 5-year period.
    Mr. Dingell. I was over at another hospital and I asked 
them about what their level of compensation was at that time 
and it was 55 percent. I said, ``Now how do you folks make 
yourselves whole on this particular basis?'' I said, ``You must 
have a whale of a fundraising capability.'' They said, ``No, we 
are deferring capital investments.''
    How do you address this problem?
    Mr. Warden. Well, we are doing several things. Obviously, 
as I indicated, we have laid off a number of employees in the 
organization. We have taken our annual capital expenditures for 
something just under $100 million a year down to about $20-$25 
million, which basically is just maintenance kinds of 
expenditures.
    Mr. Dingell. No new----
    Mr. Warden. No new technology. No new information 
technology. No new facilities because we are dependent upon our 
bottom line to be able to fund capital.
    Mr. Dingell. Is that approximately the same situation other 
hospitals are confronting?
    Mr. Warden. Absolutely.
    Mr. Dingell. And they are doing it about the same way?
    Mr. Warden. Right.
    Mr. Dingell. As a matter of fact, I asked the hospital I 
was referring to, I said, ``Now, this means that you are not 
making investments very shortly in restoring your capital 
structure; you are shortly going to be out of business,'' and 
they said, ``That is right.'' And they are one of the hospitals 
I am worried about remaining in business.
    Now are there any other situations? You mentioned the 
hospital up in Manistique. Are there other hospitals in 
Michigan----
    Mr. Warden. There are other rural hospitals in Michigan.
    Mr. Dingell. Rural hospitals?
    Mr. Warden. Yes. There are other rural hospitals and there 
are urban hospitals, teaching hospitals in Flint and Muskegon 
and Grand Rapids and St. Joseph's Benton Harbor that are being 
impacted in a similar manner.
    Mr. Dingell. The hospitals which have been compensated 
under the Hospitals of Excellence or teaching hospitals and 
things of that kind, what is their situation?
    Mr. Warden. Well, the institutions that we are talking 
about are the ones that get recognized as centers of excellence 
but they also have the other mission of being the safety net 
for the State or for the city.
    And the University of Michigan--I failed to mention them--
they are also being impacted. They are the safety net pretty 
much for tertiary care for the rest of the State and they are 
also being similarly impacted.
    Mr. Dingell. This means that there will be less and less 
places available for residents of rural areas to get their 
health care treatment made available to them within the 
Medicare or Medicaid framework?
    Mr. Warden. Over time.
    Mr. Dingell. Or indeed to get it made available at all; 
isn't that right?
    Mr. Warden. Well, over time it would continue to erode and 
it is going to be a challenge, yes.
    Mr. Dingell. And the practical result of this is that when 
the Federal Government does not pay you fair costs for 
delivering services, you have to shift your costs to other 
payers, i.e., people who do not have insurance and who have to 
pay their bills directly; isn't that right?
    Mr. Warden. The major employers of Detroit are not into 
having anything shifted to them.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Dingell. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman.
    Miss Rapp, let me just ask you what happens when a patient 
reaches the PT cap in any 1 year?
    Ms. Rapp. Well, if the services are needed, we are kind of 
in a Catch-22 because OBRA mandates that we provide services 
that are necessary. So either the facility pays the bill or the 
family pays the bill.
    Mr. Burr. Is it safe to say that a long-term care facility 
today reaches a point that if a patient requires physical 
therapy that their choice is to pay for it themselves or break 
the law?
    Ms. Rapp. I would say so, yes.
    Mr. Burr. I mean that is the choice that you have, 
realistically.
    Ms. Rapp. Yes.
    Mr. Burr. Do you think that Congress or the Health Care 
Financing Administration understood the corner of the room they 
were placing the industry in with the cap?
    Ms. Rapp. I do not think they had any idea.
    Mr. Burr. Given that a facility chooses not to supply the 
service, and I am not suggesting that anybody does that but I 
think realistically we know that that economic decision is 
being made, what happens to the patient? What is the 
consequence of going without the therapy?
    Ms. Rapp. Depending upon the therapy, obviously they are 
receiving therapy because they have an opportunity to either 
walk, swallow so that they can feed themselves, et cetera. So 
whatever it is that the services were providing, they will not 
have that opportunity. They become more dependent.
    Mr. Burr. Mike started his statement today with the new 
benefits under Medicare that Congress and HCFA were able to 
implement over the last few years, the preventative things. And 
I remember through the process of selling those, part of the 
pitch we had to go through was to convince our colleagues up 
here that there were cost savings to supplying and expanding 
coverage in the prevention areas that allow individuals who 
were diabetic to have daily monitoring equipment paid for and 
covered, for women to have mammograms, men to have PSA, that 
early detection was, in fact, a cost savings.
    Why do you think it is so tough for us to realize that if 
we stop physical therapy before there has been a recovery that 
this would be a long-term cost to us in some other form of 
health care required?
    Ms. Rapp. You know, it would be easy to track those 
numbers. I understand data is a big, big issue here in this 
town.
    Mr. Burr. Is that an easy connection to make?
    Ms. Rapp. Oh, absolutely.
    Mr. Burr. Let me ask you what happens to an individual in 
the same year that they have reached the cap under current law 
if they experience another illness?
    Ms. Rapp. If they have reached their cap, either the 
facility pays for it or the family pays for it.
    Mr. Burr. So there are no conditions under existing law 
where multiple illnesses would retrigger any type of service 
supplied to them?
    Ms. Rapp. Not under Part B.
    Mr. Burr. Mr. Holveck, let me ask you just very quickly, as 
long as HCFA is responsible for Medicare it will take a long 
time to get new devices and drugs into the system under 
coverage from Medicare. How long does it take today?
    Mr. Holveck. Currently they rely on their own data and it 
could take 3 to 4 years. The average would probably be 3 years 
from the time the technology is introduced to the time it 
receives a reimbursement code. We have had this issue with one 
of our cardiovascular drugs.
    Mr. Burr. Now put it in context for me, if you will. Is 
this during the application process at FDA that they are 
looking at or is it after the approval by FDA?
    Mr. Holveck. Once it is approved and commercially 
available. Once it is commercially available, then they start--
you have to apply and then they will start to track the data 
and they will issue a code.
    Mr. Burr. So the individuals that are covered under their 
government health care plan--Medicare--could potentially have 
to wait up to 3 years before a new therapy or device might be 
eligible to be used on them?
    Mr. Holveck. That is correct. In the meantime the hospital 
is straddled with that extra charge or some way to fit it into 
their cost structure to accommodate the new technology. That is 
correct.
    Mr. Burr. From a policy standpoint, if we were to pass a 
law that said you can never use the new technology until there 
is a replacement for the new technology and then you can use 
that technology that was replaced, would we be accused of not 
being concerned with the quality of the care supplied to 
individuals?
    Mr. Holveck. I think you would.
    Mr. Burr. Under that scenario, aren't we using antiquated 
drugs or devices to supply service?
    Mr. Holveck. Well, I think the ability to use new 
technology I think is going to suffer in the interim.
    Mr. Burr. What is the determining factor based upon? As I 
understand it, the FDA determines the safety and efficacy of 
the drug or device.
    Mr. Holveck. That is correct.
    Mr. Burr. What takes 3 years for us to incorporate that 
into the Medicare system?
    Mr. Holveck. HCFA tracks data and sees what the incremental 
cost is that would allow them to shift a cost in the DRG.
    Mr. Burr. So their determination is not based upon the 
effectiveness or the quality of care? The safety and efficacy 
have already been determined.
    Mr. Holveck. That is correct. It is the incremental cost 
that would change the reimbursement rate.
    Mr. Burr. 100 percent cost?
    Mr. Holveck. Yes.
    Mr. Burr. Thank you. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Brown?
    Mr. Brown. Mr. Holveck, let's talk about costs for a 
moment. I visited this week, Monday morning actually, with 
Lorain Community Partners Hospital, the result of two hospitals 
that have merged, a public hospital and a Catholic hospital 
that have merged in the city of Lorain, where I live on Lake 
Erie in Ohio, a city of about 75,000 people, high numbers of 
low-income residents. This hospital has talked about a lot of 
the problems that Ms. Rapp mentioned and that all of you have 
mentioned.
    One of the problems, one of the largest and most rapid 
increases in terms of costs is the cost of drugs. If Medicare 
reimbursement would continue to fall there would be pressure on 
the drug manufacturers, I assume, to reduce the prices that 
they charge hospitals. In your view, do drug manufacturers have 
in flexibility in reducing prices to hospitals?
    Mr. Holveck. I refer to the fact that I am in biotechnology 
and I do not know that I have an insight on classical 
pharmaceutical drug development, but I think that from my 
vantage point, running a company, it is a very costly 
operation. We are 20 years in existence and only went 
profitable 2 years ago after $1.5 billion of public funding 
went into it.
    So when you talk about our abilities or abilities to reduce 
costs, I think you have to understand the infrastructure that 
we have to pay for up front in order to get that growth and get 
those investors to support our research.
    So I can speak for only my particular industry, if you 
would, biotechnology, or my particular company. I do not know 
that there is a lot of latitude certainly in my experience in 
terms of just arbitrarily reducing costs of a drug.
    Mr. Brown. Miss Roberts, I was struck by some of the 
differences between your testimony and the testimony of the 
General Accounting Office in the prior panel. You both agree 
that many home health care agencies have closed. It has 
happened in probably every district represented up here, I 
would guess. And you both agree that payments have decreased to 
home health agencies since the Balanced Budget Act of 1997.
    You also heard the numbers mentioned earlier by the 
chairman about the growth but GAO, where you and they parted, 
GAO did not find conclusive evidence that seniors' access to 
home health services had suffered as a result. That is their 
evidence.
    Anecdotally perhaps, in one county in my district a fairly 
large home health agency closed but others seemed to pick up 
the patient load that they had.
    What gives here? GAO is saying--help me understand this--
GAO is saying that seniors' access has not been compromised. 
You are saying it has.
    Ms. Roberts. The number of beneficiaries receiving services 
across the country are 15 percent less than they were pre-
balanced budget. Our State is greater than that.
    While certainly there has been consolidation of agencies, 
which always makes the number of agencies that have actually 
closed a moving target because, as you mentioned, agencies come 
together and they should have the same degree of capacity, but 
what we do know is that agencies do not have the same degree of 
reserve.
    I talk about just-in-time staffing. We are literally faced 
with agencies staffing themselves to the bare bones. As such, 
when unexpected increases in volume or patients needing greater 
than the average degree of services are presented, they are, in 
fact, not accepted by the organization. They literally do not 
have the staff or the resources to provide that care.
    We in the State of Rhode Island are tracking how many extra 
days people are staying in hospitals or long-term care 
facilities because they cannot get access to home care 
services. The cost-benefits seem very obvious but, by the same 
token, we have not been able to successfully make change on 
this policy.
    Mr. Brown. The 15 percent figure I would like to explore 
now. GAO surely has access to that figure. Why would they claim 
that seniors' access to home health services has not suffered?
    Ms. Roberts. I think one of the ongoing issues which has 
been discussed numerous times throughout today is data, and 
what I am talking about is real-time data, real stories that 
are happening in our communities. I think as HCFA presents 
their data, the information they present is consistently dated. 
Report after report that they cite goes back to 1998 when in 
many instances we were just beginning to feel the first impact 
of all of this.
    So I think there is a difference from being in the 
community, being in a real-life situation versus going on old 
information.
    Mr. Brown. One last question. So what happens to those 15 
percent that you say are underserved? Do they stay in hospitals 
a day longer, a week longer? Are they home with no assistance? 
Do they have to call on neighbors and friends and relatives 
that may or may not exist in each specific case? Do they get 
sicker and die sooner? What has happened to them?
    Ms. Roberts. I do not think there is any one single thing 
that happens to all those individuals. I certainly can provide 
information very specific from our own State. The people are 
staying in hospitals, staying in long-term care facilities. 
They are waiting several days at home without care. That is 
very apparent.
    Their general condition, I would suggest, would deteriorate 
as they wait. I do not know that I could give you any more 
specifics, though, in terms of what the outcomes are.
    Mr. Brown. Are you willing to claim that because they stay 
in hospitals longer, because they get sicker and need more 
Medicare services separate from home care, particularly those 
two things, do you claim that it costs Medicare more money in 
the end to do this?
    Ms. Roberts. Absolutely.
    Mr. Brown. Do you have evidence of that, other than that 
might follow some logic?
    Ms. Roberts. I think it is very simple. If you look at what 
the daily hospital rate is, for example, an average rate in the 
State of Rhode Island is $700 a day. If, in fact, someone could 
go home and have a home health visit at less than $85 a day, it 
seems to be evident that, in fact, that----
    Mr. Brown. If you want to play those numbers though, when 
you look at the incredibly rapid growth of home care, as the 
chairman pointed out in his statement earlier, and the larger 
and larger percentage of the Medicare budget that home care has 
taken, has used, has consumed, and, at the same time, you look 
at the growth in hospital costs, if home care had not grown so 
fast, hospital costs would have even gone more through the 
roof, and nursing home costs?
    Ms. Roberts. Well, certainly some people would draw those 
conclusions.
    Mr. Brown. Would you?
    Ms. Roberts. I think there is no question that prior to the 
balanced budget there did need to be some changes to many of 
the Medicare benefits, home health included. There was a 
deliberate intention to move patients out of the hospital to 
the community setting. In fact, the home care community 
responded to that and the industry grew, perhaps somewhat 
unchecked--I would not dispute that. But again, there was some 
cost-shifting that happened from inpatient care to home care 
service.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Bilirakis. Miss Rapp, before I go to Mr. Bryant, were 
you asked whether Medigap covers payment for therapy services 
once the cap is met?
    Ms. Rapp. It does not.
    Mr. Bilirakis. It does not. None of the Medigap plans do?
    Ms. Rapp. No.
    Mr. Bilirakis. Thank you.
    Mr. Bryant will inquire.
    Mr. Bryant. Thank you.
    Mr. Warden, let me open quickly with you. As the president 
of what I understand to be a major health care facility, a 
hospital there in Detroit, do you have any comments on Ms. 
Roberts' question? I know in your statement you made a comment 
about home health care perhaps needing more payments. Do you 
have a comment on this GAO issue of access?
    Mr. Warden. I would only say that in an integrated system 
like our organization is, which has home health as an integral 
part of what we do, home health is a strategy, very much a 
strategy for getting patients out of the hospital and reducing 
costs, the overall cost of caring for that patient in the 
episode of illness. It really is an expense in our 
organization, not a revenue-generator.
    So our perspective on home health, even though we have a 
huge home health operation, is a little bit different than it 
is in a lot of other organizations.
    Mr. Bryant. Certainly you view it not as a competitor but 
as a group that works together----
    Mr. Warden. No, we view it as very much an important part 
of the continuum of care. We use outside agencies as well as 
our own agency, but we view it as part of a continuum and try 
to provide the care at the right place and the right time.
    Mr. Bryant. You have testified on behalf of a very large 
urban hospital but are you aware of Michigan having rural 
hospitals that, because of the BBA, are facing extinction?
    Mr. Warden. Yes.
    Mr. Bryant. In essence, the same problem only multiplied 
greatly because of----
    Mr. Warden. Many of them are the sole provider in their 
community. I think one of the reasons I used the example is I 
think the problems for rural hospitals are equally as important 
or maybe more important in some cases than the challenges that 
we are facing in urban teaching hospitals.
    Mr. Bryant. Now that you mention urban teaching hospitals, 
my other question to you was I am not sure that has been 
discussed a great deal today but again I had people come up 
yesterday and talk to me about how important that was and how 
we must ensure that more than adequate funding is there for our 
teaching hospitals and your institution is a teaching hospital?
    Mr. Warden. Yes, a very big teaching hospital. As a matter 
of fact, of the $200 plus million that I described for a 5-year 
period, the largest ticket item is indirect medical education.
    Mr. Bryant. Dr. Corlin, from the perspective of a 
practicing physician, could you comment and on behalf of the 
AMA on this teaching hospital issue and the need to fund it?
    Mr. Corlin. From the standpoint of the AMA and also our 
group is on staff at a major teaching hospital, UCLA, and they 
are being terribly impacted. It is multi-factorial.
    Part of the problem has been that the teaching hospitals 
have come to rely enormously on the money that comes to them 
through the Medicare system and directly from other sources for 
teaching. In a way, these cut-backs are cuts of their last 
source of revenue because unfortunately, and I know this goes 
beyond the scope of this hearing but I know that Mr. Warden, I 
am sure, will agree with it, unfortunately, the private 
insurance companies, the for-profit HMOs and others, do not 
contribute their fair share to provide for the graduate medical 
education burden.
    We clearly need a continuing supply of young, very well 
trained and often trained in brand new procedures physicians in 
this country. We have come to rely for the costs of that 
training, both the direct costs and the indirect costs, which 
exceed the direct costs by orders of magnitude, on revenues 
that come from patient care increasingly and they are being cut 
back left, right and center.
    It is my personal belief, without being an administrator in 
a teaching setting, and I am not that--it is my personal belief 
that cuts of this magnitude will cause substantial reduction in 
the availability of graduate medical education positions 
because of the inability of hospitals to maintain them.
    Mr. Bryant. Thank you, Mr. Chairman.
    Before I yield back my nontime, I want to thank the panel 
for their patience. I know they have been here all day. Thank 
you.
    Mr. Bilirakis. Thank you for yielding back your nontime.
    Without objection, Mr. Burr has a quick one question.
    Mrs. Cubin. Mr. Chairman, I am back. I have two questions. 
I will make it very quick and then I will yield the balance of 
my time to Mr. Burr.
    Mr. Bilirakis. The gentlelady is recognized.
    Mrs. Cubin. Dr. Corlin, two things. You stated that Florida 
has lost the most money due to the BBA and I absolutely would 
expect that to be so because there are more senior citizens 
there.
    Do you have a per capita figure on that? And if you do not, 
maybe you could get one? If not, maybe I can get one.
    Mr. Corlin. I do not have a per capita figure. We took the 
$3 billion total loss; approximately 9.6 percent of the 
Medicare population resides in Florida, and that is how we 
arrived at that figure.
    With regard to Wyoming, the loss in Wyoming is probably in 
the range of between $3 million and $4 million, which is 
probably proportionately an enormous amount for the State of 
Wyoming.
    Mrs. Cubin. That is correct. It truly is.
    Now the chairman said that he did not want this hearing to 
turn into Medicare Choice, and I do not, either, but I have a 
question about the fairness gap that has been discussed. So I 
am just going to ask you this one question, Dr. Corlin, if you 
do not mind, and then I will yield to Mr. Burr.
    Under the Balanced Budget Act, Medicare Plus Choice 
payments are no longer based entirely on Medicare fee-for-
service rates and as a result, the health plans say that a few 
years from now most Medicare patients will live in areas where 
Medicare payments to managed care plans are about $1,000 less 
than fee-for-service payments. This is what is being called the 
fairness gap.
    And saying that Medicare Plus Choice payments should not be 
allowed to fall below 91 percent of fee-for-services in any 
county, what is your representative reaction to that proposal?
    Mr. Corlin. Well, that is an issue which cuts both ways. 
The data shows that about a third of the counties in the 
country are counties in which the reimbursement to managed care 
organizations will exceed the average for those of us who take 
care of fee-for-service patients. And I might say in my own 
practice, we do both. We have probably 60 or 70 percent managed 
care; the balance is fee-for-service. So I do not have a 
personal ax to grind.
    I am a bit rankled by their statements, particularly given 
the fact that many of the for-profit managed care organizations 
choose not to contribute to graduate medical education or to 
subsidizing uncompensated care for the poor. They do not take 
risk, yet they make profit, which in my little educational 
background about what capitalism is all about, making profit 
without taking risk is a rather unique situation.
    And what is more than that, despite the fact that they are 
being guaranteed 2 percent increases in reimbursement, many of 
them are dropping out of the Medicare program. I would not 
consider dropping out of the Medicare program. I consider it an 
obligation that I have as a professional, to take care of 
anybody who comes into my office.
    As of right now, the payment that we get is probably about 
50 percent of our billing. If it goes down, it is going to 
hurt. But I am not going to stop, like some of the HMOs are 
going to stop. If they want to talk about fairness, I am 
willing to sit here all day long and talk to them about 
fairness gaps.
    Let's have one of the CEOs of the biggest 25 HMOs in the 
country, whose average income last year was $21 million, let's 
have one of those 25 people come here and I am willing to 
debate fairness gap with them all day long.
    Mrs. Cubin. Thank you.
    Mr. Burr. I thank the gentlelady for yielding. I certainly 
will not try to determine who can holler the loudest.
    Dr. Corlin, let me just go to the heart of one thing that 
you mentioned, and that was technology. I would ask you how 
many times a day for a physician does a patient who walks in 
the door who you are treating ask you about a particular 
procedure or a particular medication versus you mentioning it?
    Mr. Corlin. Within the past 2 or 3 years, Mr. Burr, that is 
happening increasingly frequently. In my case it is more with 
medications than procedures. I can think of treatment for two 
things and I think one of them may be the medication Mr. 
Holveck was referring to, Enfleximed, which is a new medication 
for Crohn's disease, and the other is treatment for hepatitis 
C.
    An increasing number of patients come into my office for a 
consultation with a difficult problem with either of those two 
diseases, and after I have finished taking their history and 
examining them and I begin to talk about treatment options with 
them. The first thing they do is open their folder of 
everything that they have pulled down off the web on the 
treatment of one of those two conditions and embarrassingly, 
sometimes they are ahead of me on it.
    So I find that very good. We are seeing a better informed 
group of patients. Now all the information is not valid, to be 
sure, but a lot of it is and it is a sign, I believe, that the 
patients are taking more of--this may sound foolish--but a 
personal interest. Since they will have the feeling that they 
helped develop the treatment plan, I think they will be more 
complaint with the treatment. With a chronic disease such as 
that, that is a crucial point.
    Mr. Burr. Given that there is a significant difference in 
where we are on health care based upon all parties who have an 
opportunity to testify, just one closing comment.
    It seems irrational a lot of times until you realize that 
we are in a system where the two ends of the spectrum are like 
this. Every day at the NIH somebody wakes up, goes to work with 
one thing in mind: How can I take all the discoveries that were 
made yesterday and put them on the Internet so every researcher 
in the world can start at that point with that day's work?
    And at the FDA somebody wakes up every day and goes to work 
with one thought in mind: How can I make sure that no 
breakthrough from yesterday ever gets on the Internet until we 
have approved the safety and efficacy? Those are the two 
different ends of the spectrum and I think that tells you how 
we can have so many different policy debates as it relates to 
health care, as well.
    I thank the chairman. I also thank this panel for lasting 
out the other members of the committee.
    Mr. Bilirakis. Yes, I certainly endorse that. It is always 
terrible when you are the last, I feel, but you have done a 
terrific job and we appreciate it very much. You have been very 
helpful and honestly, we are going to do the best we possibly 
can. Thank you very much.
    Again you will respond to written questions.
    [Whereupon, at 3:55 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                         American Medical Group Association
                                                 September 14, 1999
Chairman Michael Bilirakis
Subcommittee on Health and Environment
2125 Rayburn
Washington, DC 20515
    Dear Chairman Bilirakis: The American Medical Group Association 
represents approximately 45,000 physicians in more than 250 medical 
groups from across 40 states. AMGA members are among the largest and 
most prestigious medical groups in the country and include such 
renowned organizations as the Mayo Foundation, the Palo Alto Medical 
Foundation, the Lahey Clinic, the Henry Ford Health System, the 
Cleveland Clinic, and the Permanente Federation, Inc. AMGA's mission is 
to shape the health care environment by advancing high quality, cost-
effective, patient-centered and physician-directed health care.
    The Balanced Budget Act of 1997 (BBA) was the most significant 
reform of the Medicare program since its inception in 1965. The BBA 
encompasses over 300 changes that have had, and continue to have, 
significant implications and consequences for medical groups and the 
patients we serve. Multi-specialty medical groups are unique in that 
are comprehensively involved in all aspects of health care delivery 
affected by the Balanced Budget Act: physician services, inpatient and 
outpatient hospital care, Medicare+Choice health plans, skilled nursing 
facilities, teaching hospitals, and home health care. Consequently, 
multi-specialty groups have sustained, and continue to sustain, 
dramatic revenue reductions which interfere with capital budgeting and 
patient care.
    AMGA understands the need to eliminate unnecessary and wasteful 
services and inefficiencies. However, the reimbursement reductions 
imposed in BBA '97 are having a significant negative impact on the 
ability of medical group practices to continue to deliver quality care 
to beneficiaries and are threatening the financial viability of many 
groups. AMGA members are struggling to make up for the shortfalls 
caused by the BBA, yet, rather than compromise the quality of services 
they provide, groups are finding it necessary to cut back on beneficial 
services and uncompensated care. For your review, we have attached a 
few real examples of the estimated net revenue impact of specific items 
in the BBA 97.
    It is our understanding that this fall Congress is likely to 
consider a package that would provide BBA relief to providers who have 
been severely hampered in their ability to serve Medicare patients. 
Medical groups need both administrative and legislative remedies if 
they are going to continue delivering quality care. Relief from the 
Balanced Budget Act should include:

 Relief from reductions for teaching hospitals and academic 
        medical centers. BBA limits payments for IME, interfering with 
        teaching hospitals' ability to provide quality care to the 
        poorest and sickest individuals. AMGA supports legislation 
        introduced by Rep. Charles Rangel (H.R. 1785) and Senators 
        Moynihan and Kerrey (S. 1023) that would freeze IME payments at 
        current levels and prevent future scheduled BBA cuts.
 Repeal the patient transfer provision. Under the expanded 
        transfer definition, the government pays less for the shorter 
        stay but does not increase payment for longer-stay patients. 
        AMGA supports legislation proposed by Senator Grassley (S. 37) 
        and Rep. Jim Nussle (H.R. 405) which would repeal this 
        provision.
 Fix the way Medicare pays Medicare+Choice plans by:
     Requiring HCFA to implement the risk adjustment process on 
            a budget neutral basis. The ``risk adjustment'' process was 
            intended to distribute funds based on the health status of 
            M+C enrollees, however, HCFA has proposed a model that 
            would impose deep spending cuts in the M+C program. AMGA 
            supports H.R. 2419, the ``Medicare+Choice Risk Adjustment 
            Amendments of 1999,'' introduced by Congressman Michael 
            Bilirakis.
     Speed up implementation of the risk adjustment mechanism, 
            permitted that it uses a reliable database that takes into 
            account the beneficiary' heath status and medical costs. 
            Many of our medical groups care for a disproportionate 
            number of the sicker Medicare population and have faced a 
            sharp reduction in Medicare payments.
 Require HCFA to modify the Sustainable Growth Rate (SGR) 
        expenditure target. Currently, there are significant flaws in 
        the formula that is used to calculate thie annual payment 
        update for physician services. Absent significant modifications 
        in the SGR, physicians face payment constraints that are far 
        more severe than Congress intended.
 Delay implementation of the prospective payment system for 
        outpatient departments so that HCFA can address and amend the 
        proposed rule. The proposed rule has numerous problems and 
        would severely impact medical groups across the country. As 
        proposed, the rule does not recognize that integrated systems 
        have moved many services to ambulatory sites. We support 
        legislation introduced by Senator Jeffords (S. 1263) and Rep. 
        Mark Foley (H.R. 2441) that would provide for a transition 
        period and limit payments reductions over three years.
 Restore the budget neutrality on the new prospective payment 
        system's reimbursement methodology. The 5.7% across the board 
        reduction in payment to outpatient departments imposes an $850 
        million per year reduction in payment to hospitals that was not 
        intended by Congress in the BBA. Congress intended that 
        payments to hospitals should remain budget neutral under the 
        new PPS system. We support the steps taken by Reps. Johnson and 
        Cardin, and Senators Cochran, Kerry, and Rockefeller urging 
        HCFA to restore the budget neutrality.
    In addition, AMGA commends President Clinton for taking the steps 
to introduce a Medicare reform proposal that seeks to modernize the 
program, introduce private sector innovations, and help seniors pay for 
prescription drugs. In particular, we strongly support the creation of 
a demonstration project of bonus payments for physician group practices 
who reduce excessive use of services and demonstrate positive medical 
outcomes for their patients. Based on our members' experience, medical 
group practices are leading the way to cost-effective, high quality 
health care through integrated financing and delivery of medical 
services. A shared commitment and an underlying patient care mission by 
all involved have produced superior results in quality health care 
service and satisfaction for both patients and providers. Through 
organized delivery systems, providers save time, money, and resources, 
and improve patient care.
    At the same time, we are disappointed that the President's proposal 
continues the pattern of cutting payments to providers as a way to 
maintain Medicare solvency. President Clinton's Medicare reform would 
cost hospitals and health plans $70 billion over 10 years. The 
potential for additional Medicare cuts to medical groups will be 
disastrous because, as integrated practices, they carry the burden of 
the full scope of reductions.
    While we recognize the need to eliminate inefficiencies and 
wasteful services, the Federal government cannot finance and expand the 
Medicare system by cutting provider reimbursements. The President's 
proposed reductions come on the heels of Medicare spending reductions 
contained in the Balanced Budget Act of 1997, and will reduce our 
ability to provide quality services that the elderly depend on. While 
the President's establishment of a $7.5 billion provider set-aside fund 
appears to recognize that the BBA 97 reductions were too harsh, this 
funding level is insufficient to address reimbursement inadequacies and 
does little to ensure that Medicare beneficiaries will continue to have 
stable access to health care providers. More importantly, the $7.5 
billion would result in battles among the provider community to 
determine who is most worthy of relief.
    Rather than implement further reductions at the expense of health 
care delivery, Congress needs to do two things: First, Congress needs 
to fix the unintended consequences of the Balanced Budget Act. This 
will ensure that Medicare beneficiaries will continue to receive 
quality and cost-effective care from providers and medical groups. 
Second, if solvency of the Medicare program is to be sustained, 
Congress needs to fundamentally restructure and modernize the Medicare 
program. Such a system should be based on the principles of patient 
choice, competition, innovation, a defined role for the government, and 
should adopt marketplace innovations. Continuing to reduce provider 
reimbursements as a part of reform is not a viable option.
    We appreciate your taking our views into consideration. We look 
forward to working with Congress on Medicare reform and adjustments to 
the Balanced Budget Act of 1997. Please do not hesitate to contact AMGA 
if you have any questions or concerns.
            Sincerely,
                               Donald W. Fisher, Ph.D., CAE
                                            Chief Executive Officer
Cc: Majority Leader Trent Lott, Minority Leader Tom Daschle, Speaker 
Dennis Hastert, Minority Leader Dick Gephardt, Majority Leader Dick 
Armey, Senator William V. Roth, Jr., Senator Daniel Patrick Moynihan, 
Congressman Tom Bliley, Congressman Bill Archer, Congressman Bill 
Thomas, Congressman Charles Rangel, Congressman Fortney Pete Stark, 
Senate Finance Committee, Commerce Committee, Ways and Means Committee, 
Administrator Nancy-Ann DeParle, Mr. Christopher Jennings, and Dr. 
Robert Berenson.

                            Mayo Foundation--Rochester, Jacksonville, and Scottsdale
                                            (in millions of dollars)
----------------------------------------------------------------------------------------------------------------
                  BBA Reductions                     1998     1999     2000     2001     2002     2003    Total
----------------------------------------------------------------------------------------------------------------
Reduction to IME payment Rate....................      6.4     13.9     20.5     26.5     28.5     30.7    120.1
PPS-exempt unit TEFRA rates......................       --      1.0      1.0      0.9      0.8      0.7      4.3
Reduction to Federal capital Payments............      5.1      5.6      6.0      6.5      6.7      6.8     31.7
Transfer DRGs....................................      0.6      2.5      2.5      2.5      2.5      2.5     12.6
Outpatient PPS (assume 5% reduction).............      0.3      0.7      0.7      0.7      0.7      0.7      3.5
Outpatient formula-driven overpayments...........      1.1      1.7      1.8      1.9      2.0      2.1      9.4
Eliminate IME payment on outliers................      3.4      3.8      3.6      3.6      3.8      4.1     19.0
SNF prospective payment..........................       --      3.0      6.0      9.0     12.0     12.0     42.0
Reduction to bad debts...........................       --      0.1      0.1      0.1      0.1      0.1      0.4
HHA reduction to limits and PPS0.5...............      0.5      0.5      0.5      0.5      0.5      0.5      2.5
Medicare Part B physician fee schedule...........       --      3.0      6.0      9.0     12.0     12.0     42.0
Total Reductions.................................     18.3     35.6     45.5     54.9     60.4     63.0    259.3
----------------------------------------------------------------------------------------------------------------


                                      Henry Ford Health System--Detroit, MI
                                            (in millions of dollars)
----------------------------------------------------------------------------------------------------------------
                   BBA Reductions                       1998      1999      2000      2001      2002      Total
----------------------------------------------------------------------------------------------------------------
PPS-Hospital Payment Update.........................       5.2       8.9      12.5      14.7      17.0      58.3
IME Adjustments.....................................       3.2       5.7       8.2      10.7      10.7      38.5
Capital Payment for PPS Hospitals...................       3.3       3.3       3.3       3.3       3.3      16.5
Transfer DRG Provision..............................        --       3.1       3.1       3.1       3.1      12.4
Disproportionate Share Payments.....................       0.1       0.2       0.2       0.3       0.4       1.2
Bad Debt Payments...................................       0.5       0.8       0.9       0.9       0.9       4.0
Formula Driver Overpayments.........................       2.9       2.9       2.9       2.9       2.9      14.5
Outpatient PPS......................................        --        --       4.8       9.6       9.6      24.0
Physicians Single Conversion Factor.................       1.0       1.0       1.0       1.0       1.0       5.0
Physician Practice Expense RVUs.....................        --       0.6       1.0       1.4       1.8       4.8
Home Health Interim Payment System..................       1.0        --        --        --        --       1.0
Sustainable Growth..................................        --       1.2       1.7       1.2       1.2       5.3
HMO 2% Cap..........................................       2.2       4.6       TBD       TBD       TBD      6.8+
Risk Adjusting Scheme...............................       N/A       N/A       TBD       TBD       TBD       TBD
User Fees...........................................   525,000   620,000   651,000   684,000   718,000       3.2

Total Reduction.....................................      19.9      32.9      39.3      49.8      52.6    195.5+
----------------------------------------------------------------------------------------------------------------


                                           Lahey Clinic--Burlington, MA
----------------------------------------------------------------------------------------------------------------
             BBA Cuts                   1998         1999         2000         2001         2002        Total
----------------------------------------------------------------------------------------------------------------
PPS Hospital Updates..............    1,295,081    2,466,203    3,379,178    3,964,511    4,578,043   15,683,016
Formula Driven Overpayment........      850,000      850,000      850,000      850,000      850,000    4,250,000
IME...............................    1,322,000    2,555,000    3,266,000    4,199,000    4,199,000   15,241,000
IME Managed Care..................      562,500    1,500,000    2,200,000    2,900,000    3,480,000   10,642,500
Transfer Policy...................           --    1,000,000    1,000,000    1,000,000    1,000,000    4,000,000
APC...............................           --           --     1,00,000    2,000,000    2,000,000    5,000,000
Single Conversion Factor..........      750,000    1,000,000    1,000,000    1,000,000    1,000,000    4,750,000
Resource-Based Practice Expense              --      300,000      700,000    1,100,000    1,500,000    3,600,000
 RVU..............................
Total Reduction...................    3,654,581    6,371,203    8,995,178   11,213,511   11,647,043   41,881,516
----------------------------------------------------------------------------------------------------------------

                                 ______
                                 
                         American Medical Group Association
                                                      July 30, 1999
Health Care Financing Administration
Department of Health and Human Services
Room 309-G Hubert Humphrey Building
200 Independence Avenue, SW
Washington, DC 20201

Re: HCFA-1005-P

    On behalf of the American Medical Group Association, I appreciate 
the opportunity to provide comments on the proposed rule that 
establishes a prospective payment (PPS) system for Medicare outpatient 
services, published September 8, 1998, in the Federal Register.
    AMGA represents over 250 physician-owned and managed group 
practices and multi-specialty medical groups. In direct response to 
market forces, physicians are increasingly joining or forming larger 
multi-specialty groups, and integrating with other health care entities 
such as hospitals, ambulatory care facilities, and insurers. The goal 
of group practices is to create seamless delivery systems to offer the 
full continuum of care under the same corporate umbrella. Many of our 
group practices are highly integrated health care delivery systems, 
with multiple facilities, programs and locations.
    We are very concerned that the proposed rule does not recognize an 
integrated delivery system organizational model in which there are 
multiple parts delivering medical care to a population. The rule 
appears to be modeled for smaller, less-integrated entities that are 
organized around one or two free-standing hospitals with ambulatory 
services directly flowing from the activities of a single hospital and 
private practice physicians. The proposed rule does not take into 
account the kinds of organizations structures that are common to larger 
delivery systems, such as the Palo Alto Medical Foundation, the 
Cleveland Clinic Foundation, and the Henry Ford Health System. We are 
concerned that the proposed rule, as drafted, will limit beneficial 
integration, will lead to unfair payment, and will adversely impact 
beneficiary access to service and quality of care.
    In a large integrated delivery system specialized administrative 
and clinical resources such as in-patient hospital, ambulatory care, 
home health care, durable medical equipment, etc. are organized under 
one overall umbrella, to provide seamless medical care to a community 
population. Under the Proposed Rule, the ``main provider'' which is 
likely to be a hospital, is required to exercise ultimate, total 
control over all the other parts of a system of care. However, in an 
integrated delivery system, it is not always the hospital which 
exercises such control but rather the system as a whole. The concept of 
one hospital with a discrete network of ambulatory sites does not hold 
in the case of larger systems. The history and culture of the physician 
group practices is to create coordination and collaboration across 
sites which results in a further blurring of lines between specialty 
and primary care, ambulatory and inpatient care. The result is a health 
care system that does not mimic the traditional patterns.
    A discussion of some of our main concerns with the proposed rule 
follows:
Line of Demarcation Between Procedures Covered Only in Inpatient 
        Settings and Those Covered in Outpatient Departments and 
        Ambulatory Surgery Centers
    We believe the attempt by HCFA to create a list of exclusively 
inpatient procedures is in error and should be withdrawn. Medicine is 
evolving too rapidly for such a list to ever be current. In a cursory 
review, we identified over 30 procedure codes that are on the 
inpatient-only list that currently are performed in both settings, 
depending on patient condition. At best, the list would have the effect 
of freezing in place inpatient procedures when they may be safely 
accomplished in the outpatient department or ambulatory surgery center. 
At worst, it would require care now safely provided in outpatient 
departments to be returned to the inpatient setting.
    This would have the unintended effect of adding costs unnecessarily 
to the Medicare Program. What is needed is not a rule that prescribes 
what may or may not be done in inpatient settings, but rather physician 
discretion, based on the patient's condition, to determine what site of 
care is most appropriate. Rather than attempting to list all inpatient 
procedures, patients and the Medicare Program would be better served by 
establishing some generic criteria related to patient care that would 
assure that care is safely provided in the appropriate setting. This 
approach would allow for the needed flexibility for the program to 
adapt to changing medical practice.
Treatment of Academic Health Centers
    We support an education adjustment to payments in hospital 
outpatient settings. As care is increasingly provided in hospital 
outpatient departments, so too has residency training with its 
attendant costs. Your own data show that care costs are more expensive 
for hospital outpatient departments of academic medical centers. It 
only makes sense that you honor what your own data analysis has 
demonstrated.
Definitions and Criteria for Hospital Based Entities
    While we understand and support the intent of your effort, we 
believe the proposed rule is far too administratively complex and 
detailed. The rules would have the effect of forcing many differing 
relationships, while provider based, into a single mold, which simply 
is in conflict with the many real world variations. It is not necessary 
to have such detailed regulatory requirements in order to define a 
provider based entity. Below is an itemization of our concerns.
    General Reporting Requirements to HCFA--In any acquisition or any 
material change in status related to provider based, the main provider 
is required to report to HCFA to obtain approval of provider based 
status. The main provider would be required to provide ``. . . all 
information needed for a determination . . .'' A careful reading of the 
details of this proposed rule find that the amount of information 
necessary could be exhaustive, depending on the level of ``proof'' 
required by the HCFA regional office. This will add a heavy burden to a 
system that already functions poorly. There are over 10,000 sites which 
providers believe should be treated as provider-based and which would 
require review and approval under HCFA's proposal. This number could be 
much greater depending on HCFA's interpretation of the scope of the 
rule.
    Furthermore, there is no requirement related to timely response by 
HCFA. If a provider is kept waiting months for approval of a site and 
is barred from billing until such approval is granted, HCFA is 
violating the statutory requirement to make timely interim payments. It 
is not fair to bar providers from billing and receiving payments while 
waiting for their requests to be approved.
    AMGA supports a requirement for a deadline for agency response 
after which, if not met, the affected parties can move ahead with a 
presumption of provider based status. Second, we support the creation 
of a basic form that specifies the types of documentation a provider 
needs to submit to obtain prior approval so that the provider is not 
left in the position of having to guess at what is needed and what will 
be satisfactory. The final rule needs to be extremely clear on 
precisely what documentation a provider needs to submit to obtain 
provider-based status for a site. Last, we believe that these 
provisions should not go into effect until the Agency is prepared to 
handle the requests. Otherwise, very quickly a significant backlog will 
result
    Ownership and Control--We believe the ownership and control 
requirement of 100% ownership by the provider is unduly restrictive. 
Majority ownership is far more reasonable and relevant to business 
relationships and still has main provider control.
Administration and Reporting
    We believe the requirement that ``. . . reporting relationship to 
the main provider that is characterized by the same frequency, 
intensity and level of accountability that exists in the relationship 
between the main provider and one of its departments . . .'' is 
unreasonable in that, depending on the particular entity in question, 
differing levels of reporting are more appropriate. Some department 
will receive greater attention because of the nature of the services 
furnished in them or because of problems or changes that arise. The 
degree of interrelationship on the part of the hospital outpatient 
department is by definition bound to be more extensive than it will be 
for a SNF or home health agency or ambulatory surgery center. To 
require the same detailed reporting level for entities which function 
in substantially different ways is too restrictive. Again, it gets into 
``level of proof'' arguments which can be subjective and take up an 
enormous amount of time in attempting to show equivalence. If HCFA 
maintains some specificity in the final rule, the language should be 
modified to state that communications between the site and the main 
provider should be of the same frequency and nature as between the main 
provider's administration and other similarly situated departments.
    We agree with the integration of certain basic functions, such as 
billing, records, human resources payroll, employee benefit packages, 
salary structure and purchasing. The integration of these functions, 
coupled with a simplified reporting requirement should suffice in 
demonstrating the provider-based relationship. A main provider and a 
site seeking provider-based status can be administratively integrated 
yet still maintain its own billing or conduct a number of 
administrative functions from the site.
Clinical Integration
    The clinical integration requirement is too prescriptive. We agree 
with the general mandate, but disagree with the amount of specificity 
you have. It does not allow for variation in arrangements in large, 
complex organizations. First of all, the proposed rule requires the 
site's medical director to have a ``day-to-day'' reporting relationship 
with the medical director of the main provider. However, there is often 
no need for daily contact and often the medical director works part-
time or only a few hours a day. In addition, there is a wide variety in 
titles and management structure from provider to provider. Second, we 
do not agree with the decision that the main provider must have an 
inpatient service in order to monitor and control an outpatient 
service. As medical science advances and providers become increasingly 
aware of how to treat patients more efficiently, more services are 
moving to the outpatient setting, leading to the elimination of the 
inpatient service. This practice is leading to better care and lower 
costs. Further, in your language you have a lot of ``. . . we would 
expect to see . . .'' Either it is a requirement or not.
    The ``same campus'' requirement is archaic. In today's world, 
providers sprawl across large geographic regions and are not single 
site. If one meets the other integration requirements, the special 
requirements for those not on campus are not necessary.
Specific Ambulatory Patient Classification Groups
    We are aware that you have received many comments from many 
specialties and associations concerning particular concerns with the 
proposed groupings and/or payment adequacy. Below are some particular 
areas where we have special concern.
APCs
    In defense of adopting the APC system, HCFA argues that development 
of individual payment rates would imply a level of precision that is 
inappropriate to the quality of available data. While the data on the 
costs of hospital outpatient services is imperfect, using the APC 
structure on data of questionable accuracy is not an appropriate 
solution. AMGA believes that using unreliable and questionable data as 
the basis of the APC system would simply introduce additional sources 
of error in the payment system.
    If HCFA is committed to using the APCs as the basis of payment for 
HOPD services, significant restructuring to create more homogeneous 
groupings will be necessary. Under the proposed rule, many HOPD 
services have not been assigned to an appropriate APC Group and thus 
the associated payment rate, which is based on the median costs of all 
procedures in the APC, is skewed and does not reflect the true costs of 
the services in that APC. Careful construction of the APCs is critical 
to the validity of HCFA's proposed payment system. Currently, APCs 
include very heterogeneous service groups that have payment rates that 
do not reimburse appropriately for many of the services they include. 
We strongly urge HCFA to construct APCs so that they are consistent in 
terms of the packaged services typically required for each procedure. 
APCs should be similarly homogeneous with respect to operating and 
recovery room use, observation care, specialized medical and surgical 
supplies and blood products.
    Even if HCFA succeeds in substantially improving the APCs, some 
procedures should be individually priced. Under the proposed rule, HCFA 
packages the costs of Medicare-covered pharmaceuticals in APC groups. 
AMGA is concerned that packaging all Medicare-covered drugs and 
biologicals in APC's may jeopardize patient access to innovative and 
important therapies. However, these APCs are especially undervalued and 
do not even come close to adequate reimbursement for today's therapies, 
especially their drug components. Given a substantial disparity between 
reimbursement and the cost of providing new drugs and therapies, 
hospitals may opt for less expensive, but less effective treatments to 
mitigate financial losses. Without adequate means for reimbursing the 
cost of certain drugs and therapies and an inability to keep pace with 
the rapid advances in this field, HCFA may unintentionally discourage 
use of some highly beneficial therapies. AMGA urges HCFA to continue to 
make separate payments for all Medicare-covered drugs because payment 
rates are often too low and do not take into account the higher costs 
of many newer drugs.
Anti-dumping requirements
    AMGA opposes the new requirement that hospital outpatient 
departments, on the main premises of the hospital, comply with the 
anti-dumping rules. No matter how fully integrated with a hospital an 
outpatient department may be, it does not provide the full range of 
services as a hospital, including emergency services. These facilities 
may be specialized clinics providing limited services, and may be 
several miles away from its parent hospital.
Physician Supervision
    This proposal ignores that some allied health practitioners are 
permitted by HCFA to practice without physician supervision such as 
nurse practitioners, physician assistants, etc. HCFA's regulations 
clearly extend Medicare Part B coverage to these services. It doesn't 
make sense to impose greater supervision requirements in a provider-
based setting than for the same services in other settings. This must 
be corrected in the final rule. In addition, most partial 
hospitalization services are furnished by clinical social workers or 
other licensed personnel who are working well within the scope of their 
licenses. Here again, the final rule should not require direct 
physician supervision.
Conclusion
    We appreciate the work the Agency has undertaken in an attempt to 
develop the Ambulatory Patient Classification system for hospital 
outpatient department and ambulatory surgery center payments. It is a 
difficult task and the NPRM has served as a useful platform for 
analysis and debate. However, the proposal is far from a completed 
product and needs still more analysis prior to implementation. It is 
for this reason that we recommend that it be re-proposed rather than 
moving to a final rule, or a final rule with comment. Either of the 
latter two alternatives will leave us with a badly distorted payment 
system with unknown consequences for both beneficiaries and providers.
            Sincerely,
                                    Donald W. Fisher, Ph.D.
                                            Chief Executive Officer
                                 ______
                                 
    Prepared Statement of the American Academy of Family Physicians
    The 88,000 members of the American Academy of Family Physicians 
would like to provide the following comments on the impact of the 
Balanced Budget Act of 1997 (BBA) on graduate medical education. 
Included in this statement are the specific problems with the Act and 
the Academy's recommendations for solving them. All of the relief the 
Academy seeks can be achieved in the provisions of the Graduate Medical 
Education Technical Amendments Act of 1998 (H.R. 1222), and we urge you 
to include this bill in any legislation you craft to remedy problems 
with the BBA. We are pleased that the House Commerce Subcommittee on 
Health is reviewing how this significant law is impacting cost savings 
and patient care.
                               background
    The Academy has had a long-standing interest in graduate medical 
education because of our commitment to a rational physician workforce 
policy that both discourages an oversupply of physicians, and 
encourages increased training of those physician specialties in short 
supply. Our organization has produced and updated regularly a number of 
policies on physician workforce issues, as well as specific GME 
recommendations. Recently, the Academy undertook a year long process to 
revise our physician workforce recommendations with the goal of 
supporting efforts to ensure that all Americans have access to primary 
care services; that the needs of underserved rural and urban 
populations are met; and that evolving managed care delivery systems 
have an adequate supply of an appropriate mix of primary care 
physicians.
    In addition, the Academy has long been concerned that graduate 
medical education in the US is currently financed by the Medicare 
program without sufficient incentives to reduce the oversupply of 
physicians or ensure appropriate distribution of physicians by 
geographic location and specialty. Although there are several harmful 
consequences as the result of this disconnect between Medicare policy 
and physician workforce needs, one of our primary concerns is the 
imbalance between primary care and subspecialist physicians in this 
country.
    changes necessary as a result of the balanced budget act of 1997
    In general, the Balanced Budget Act of 1997 contains several 
graduate medical education policies advocated by the Academy for years. 
The Academy supports a limit on the number of medical residents, and we 
also support GME payments for training in non-hospital sites and the 
carve-out of payments to teaching hospitals from the average adjusted 
per capita cost. However, we have supported these policies in 
conjunction with specific protections for needed primary care programs. 
Such protections are absent from the law and regulations. In fact, the 
only section of the Act that includes an acknowledgment of the 
importance of primary care training programs is the demonstration 
project, which allows incentive payments for voluntary reduction in 
residents. Unfortunately, the Act has had serious consequences for 
family medicine programs.
    Some of the harmful effects of the Act are demonstrated in the 
following results of a survey of family medicine training programs, 
which was conducted by the Organizations of Academic Family Medicine.

 56 percent of family medicine programs responding that were in 
        the process of developing new rural training sites have 
        indicated they will either not implement those plans, or are 
        unsure of their sponsoring institutions' continued support.
 21 percent of family medicine programs responding report 
        planning to decrease residency slots in the immediate future.
 The majority of those family medicine programs that are 
        planning to decrease residency slots are the sole residency 
        program in a teaching hospital. (This means these family 
        practice programs have no alternative way of achieving growth 
        such as decreasing other specialty slots within the 1996 cap on 
        positions.)
 Due to significant training out of the hospital, most family 
        medicine residency respondents did not have their full 
        residency positions captured in the 1996 cost reports upon 
        which the reimbursement is based, causing a loss of Medicare 
        revenue compared to most other specialties that train almost 
        exclusively in the hospital.
    Following are the Academy's four recommendations for solving these 
problems. These provisions are included in H.R. 1222.
Supporting Residency Training in Ambulatory Sites
    H.R. 1222 would treat all hospitals sponsoring residency programs 
fairly--not just those that were training residents in the hospital in 
1996--by including those residents who were training in the community 
in the cap. As you know, the BBA capped the number of residency slots 
in an institution, a number that determines the amount of indirect 
graduate medical education funding (IME) the institution receives. 
Without ``resetting'' the caps, the residency programs that were 
training residents in the community in 1996 will have their Medicare 
IME cap lowered and receive less funding in subsequent years. 
Ironically, while one intent of the Act was to encourage ambulatory 
training by providing IME support after 1998, the Act inadvertently did 
not account for those residents who were already training outside of 
the institution at the time, such as family medicine residents. The 
Academy supports Medicare funding for all residents training outside of 
the hospital.
Providing Limited Growth to Single Residency Program Hospitals
    H.R. 1222 would allow hospitals that sponsor only one residency 
program to increase their resident count by one per year, up to a 
maximum of three, to meet community needs for primary care physicians. 
Under the BBA, a hospital with several residency programs can move 
positions from less popular subspecialty programs to high-demand 
primary care programs, such as family medicine, to meet the residency 
caps. By contrast, a hospital with only one program does not have this 
option. Approximately 300 hospitals sponsor only one residency program; 
191 are in family medicine.
Supporting Residency Programs Under Development
    H.R. 1222 bill would allow a few, new, family medicine residency 
programs that have long been under development to be established by 
extending the cut-off date for new residencies. Specifically, any 
residency programs that were approved after January 1, 1995, and before 
September 30, 1999, could be set up. The BBA set August 5, 1997, as the 
cut-off date for new residencies, which had a disproportionate, 
negative effect on family medicine residency programs because of the 
growth in these training programs.
Meeting the Needs of Rural Communities
    H.R. 1222 would permit the establishment of new, rural training 
programs by allowing urban residency programs sponsoring these programs 
to receive an exception to the caps (for the rural programs only.) The 
BBA capped all residency programs, but strongly supported the 
establishment of rural programs. This provision clarifies the intent of 
the Act by supporting the growth of rural programs.
                               conclusion
    The American Academy of Family Physicians appreciates the 
opportunity to inform your deliberations on the impact of the BBA on 
graduate medical education system. Thank you for the opportunity to 
provide these comments.
                                 ______
                                 
          Prepared Statement of the American Heart Association
    The American Heart Association urges the House Commerce Committee's 
Subcommittee on Health and Environment to carefully consider the impact 
of the $1500 Medicare outpatient rehabilitation services cap on 
patients' ability to receive the services needed after a heart attack 
or stroke. The Association appreciates the Subcommittee's efforts to 
review the impact of the 1997 Balanced Budget Act on patient care and 
implores the Subcommittee to review the BBA provision establishing the 
cap and the negative impact it has had on patient care.
    Cardiac rehabilitation and stroke rehabilitation are fundamental to 
the recovery of many heart disease and stroke patients. Yet, the 
arbitrary $1500 Medicare cap on outpatient rehabilitation services 
hinders patients' ability to receive comprehensive care post-incident. 
In addition, the cap raises severe concerns for patients who suffer 
multiple cardiovascular events in a single year.
    Often cardiovascular events--stroke in particular--require 
extensive rehabilitative care including speech, physical and 
occupational therapy. This care can dramatically improve patients' 
ability to recover from a heart attack or stroke and can improve 
patients' chances of avoiding a future incident. As a result, access to 
proper and appropriate rehabilitative care after a heart attack or 
stroke is not only sound medical policy, it is also sound fiscal 
policy.
    The 4.2 million patients, families, caregivers, healthcare 
professionals and concerned citizens of the American Heart Association 
ask the Subcommittee to lift the arbitrary cap established by the BBA 
and give heart disease and stroke patients access to the care and 
benefits necessary for their recovery.
    Thank you for your consideration of our views. We appreciate the 
opportunity to share our concerns and look forward to working with the 
Subcommittee to remedy the situation that has arisen as a result of the 
rehabilitation cap.
                                 ______
                                 
              Department of Health & Human Services
                       Health Care Financing Administration
                                                  November 16, 1999
The Honorable Michael Bilirakis, Chairman
House Commerce Committee
Subcommittee on Health and Environment
2125 Rayburn House Office Building
Washington, DC 20515
    Dear Chairman Bilirakis: Thank you for the opportunity to testify 
before the House Commerce Committee, Subcommittee on Health and 
Environment on September 15, 1999, regarding the Balanced Budget Act of 
1997 and the impact on cost savings and patient care.
    Attached is a copy of the edited transcript, along with answers for 
the record, and responses to additional questions submitted after the 
hearing.
    If you need any additional information, please do not hesitate to 
contact me. It is essential that we work together for meaningful 
reform. Your continued interest and support are crucial to the success 
of the Medicare program and I look forward to continuing to work with 
you as we address all of these concerns.
            Sincerely,
                                            Michael M. Hash
                                               Deputy Administrator
Attachments

cc: The Honorable Thomas J. Bliley, Jr., Committee Chairman
   The Honorable Sherrod Brown, Subcommittee Ranking Member
   The Honorable Ted Strickland
         Questions for the Record Submitted by Chairman Bliley
    Question 1. In their testimony, MedPAC says that ``there is no 
systematic evidence to date that beneficiaries' access to care has been 
impaired'' by the BBA? Can you comment on that statement and discuss 
the access issues across various sites of services, including 
hospitals, home health agencies, skilled nursing facilities, physical 
and speech therapists, etc.?
    Answer 1. Thus far, our monitoring reveals evidence of isolated but 
significant problems. Although our analysis is not yet complete, we are 
concerned that some beneficiaries are not getting necessary care. For 
example, the BBA imposed $1500 caps on the amount of outpatient 
rehabilitation therapy services that can be reimbursed, except in 
hospital outpatient clinics. However, these caps are not based on 
severity of illness or care needs, and they appear to be insufficient 
to cover necessary care for many beneficiaries. We have several 
industry-sponsored analyses from different sources of 1996 claims data 
indicating that approximately 12 to 13 percent of therapy patients will 
exceed the caps. Beneficiary groups are reporting many instances of 
problems with this cap, and we are very concerned about their adverse 
impact, particularly on individuals in nursing homes. As mentioned 
above, our IG colleagues have agreed to study this problem. We are 
providing data to the Medicare Payment Advisory Commission so it can 
analyze patterns of therapy service usage. And we will continue to work 
with Congress and others to determine what adjustments to the cap 
should be made.
    We are also concerned that the new prospective payment system for 
skilled nursing facilities does not adequately reflect the costs of 
non-therapy ancillaries such as drugs for high acuity patients. The HHS 
Inspector General (IG) found, in interviews with hospital discharge 
planners and nursing home administrators, that less than 1 percent of 
nursing home administrators say the prospective payment system is 
causing access to care problems. The proportion of beneficiaries 
discharged to skilled nursing facilities is unchanged from 1998, and 
hospital lengths of stay have not increased. However, about one in five 
discharge planners say it takes more time to place Medicare patients in 
nursing homes. The IG also found that both nursing home administrators 
and hospital discharge planners say nursing facilities are requesting 
more information before accepting patients. About half of the nursing 
home administrators say they are less likely to accept patients 
requiring expensive supplies or services such as ventilators or 
expensive medications. About half also say they are more likely to 
admit patients who require special rehabilitation services such as 
physical therapy following joint replacement surgery. We are therefore 
conducting research that will serve as the basis for refinements to the 
resource utilization groups that we expect to implement next year. We 
expect to have the research completed by the end of the year and to 
then develop refinements that we will be able to implement next 
October. We believe these changes should be budget neutral. However, we 
are continuing to review whether we have additional administrative 
authority. We fully expect that we will need to periodically evaluate 
the system to ensure that it appropriately reflects changes in both 
care practice and the Medicare population.
    For home health care, evaluations by the GAO and HHS to date have 
not found that BBA changes are causing significant quality or access 
problems. However, we have heard reports from beneficiary groups, our 
regional offices, and others regarding home health agencies that have 
inappropriately denied or curtailed care, and incorrectly told 
beneficiaries that they are not eligible for services. We are also 
hearing reports from beneficiary advocates and others that some high 
cost patients are having trouble finding home health agencies to 
provide the care they need. This may result from a misunderstanding of 
the new incentives to provide care efficiently, or from efforts to 
``cherry pick'' low cost patients and game the system. The CBO 
attributes some of the lower health spending to the fact that agencies 
are incorrectly treating the new aggregate per beneficiary limit as 
though it applies to each individual patient. We have therefore 
provided home health agencies with guidance on the new incentives and 
their obligation to serve all beneficiaries equitably. We have 
instructed our claims processing contractors to work with agencies to 
further help them understand how the limits work. And, because home 
health beneficiaries are among the most vulnerable, we are continuing 
ongoing detailed monitoring of beneficiary access and agency closures.
    For hospitals, the hospital industry has submitted data projecting 
significant decreases in total Medicare margins. Our actuaries believe 
the methodology used to develop these projections understates base year 
total margins by approximately 7 percent. And, as the Medicare Payment 
Advisory Commission (MedPAC) has noted, Medicare costs per case have 
declined for an unprecedented fifth year in a row. Hospitals may be 
having financial difficulties because Medicare payments no longer 
include enough excess to make up for below-cost contracts with managed 
care companies or because of other market issues not directly related 
to Medicare payment. We do, however, share MedPAC's concern that many 
small rural hospitals appear to be in especially poor financial 
condition. We have taken administrative steps that will help many rural 
hospitals, and are continuing to monitor this situation closely, as 
well.
    Question 2. The President, in his Medicare reform plan released in 
June, said that he is considering delaying the outpatient volume cap 
for several years. Can you indicate whether HCFA will delay the volume 
cap?
    Answer 2. To help all hospitals with the transition to outpatient 
prospective payment, we intend to delay a ``volume control mechanism'' 
for the first few years of the new payment system. The law requires 
Medicare to develop such a mechanism because prospective payment 
includes incentives that can lead to unnecessary increases in the 
volume of covered services. The proposed prospective payment rule 
presented a variety of options for controlling volume and solicited 
comments on these options. Delaying their implementation would provide 
an adjustment period for providers as they become accustomed to the new 
system. We also are considering implementing a threeyear transition to 
this new PPS by making budgetneutral adjustments to increase payments 
to hospitals that would otherwise receive large payment reductions such 
as lowvolume rural and urban hospitals, teaching hospitals, and cancer 
hospitals. Without these budgetneutral adjustments, these hospitals 
could experience large reductions in payment under the outpatient 
prospective payment system. And, to help hospitals under the outpatient 
prospective payment system, we included a provision in the proposed 
rule to use the same wage index for calculating rates that is used to 
calculate inpatient prospective payment rates. This index would take 
into account the effect of hospital reclassifications and 
redesignations. We sent a letter to you on October 19, discussing our 
plans for the final rule in more detail.
    Question 3. In GAO's testimony, they indicate that the hospital 
industry overstates the impact of the BBA on hospital margins. Can you 
comment on that statement?
    Answer 3. Industry projections show significant deterioration in 
hospital margins. However, our actuaries believe the methodology used 
to develop these projections was flawed and understates base year total 
margins by approximately 7 percent in the base year. When adjusted for 
this error, alternative 2002 projections of total Medicare margins 
would range from 2.3 to 9.3 percent. It is important to note that the 
most recent MedPAC data show that hospitals' Medicare costs per case 
have declined for an unprecedented fifth year in a row, and that 
hospitals' average Medicare inpatient margin was a record 17.1 percent 
in 1997. So despite slower revenue growth, hospitals' aggregate total 
margins have increased steadily. We are, however, concerned about 
MedPAC data suggesting that many small rural hospitals appear to be in 
especially poor financial condition, and about the combined impact of 
all the various BBA payment changes on rural hospitals. The President's 
Medicare reform plan includes changes to regulations that would lessen 
the impact on these facilities.
    Question 4. The Medicare Payment Advisory Commission, the American 
Hospital Association, and the American Medical Association do not 
support the use of the ambulatory patient classification systems (APCs) 
and instead support payment on a service specific fee schedule. Would 
you support movement to a payment system that reimburses hospitals on a 
specific procedure basis?
    Answer 4. Our proposed prospective payment system for hospital 
outpatient departments (OPDs) does, in fact, define the unit of payment 
based on the individual service the hospital furnishes. It includes 
things furnished as an integral part of the procedure or visit such as 
supplies, anesthesia, drugs, blood, recovery room, etc. We do not 
propose to package payment for things that are related, but are not an 
integral part of the service, such as ancillary laboratory, or other 
diagnostic tests.
    Grouping services is separate from defining a unit of service. 
Although the payment is based on the individual unit of service, it is 
calculated by grouping services that are similar clinically, and with 
respect to resource use. The median cost for each service in a group is 
calculated and then the median cost of all services within the group is 
determined. This group median cost is then used to calculate a relative 
weight that applies to the individual services in the group. Although 
we group services to calculate a group payment amount, our proposed 
system also may be viewed as a fee schedule that applies the same 
payment to similar services.
    We received a number of comments and recommendations as a result of 
the comment period of the proposed rule and are in the process of 
analyzing them. We will respond to these recommendations in the final 
rule.
    Question 5. As we know, there are winners and losers with the 
implementation of every new payment system. We have heard a lot from 
providers who have complained about the APC system, but not from the 
ones that will benefit. Can you identify the groups who have benefited 
to us and explain why their reimbursement rates went up?
    Answer 5. Those providers with more positive impacts are hospitals 
that have lower than average costs, or who used more accurate procedure 
coding under the current system. However, these projections in the 
proposed rule are based on current medical and billing practices, which 
will likely change after the system is implemented. Past experience 
tells us that these changes tend to produce much better financial 
impacts on hospitals than were projected. Attached is a chart 
identifying the groups who have benefited.
    Question 6. There were considerable problems in implementing the 
SNF PPS and outpatient therapy fee schedule, resulting in delayed 
payment and providers having to reprocess bills for coinsurance 
changes. Given that HCFA will need to implement major software changes 
for SNF and home health payment systems, how do you propose to handle 
another major computer change in July 2000 when you implement the 
outpatient PPS? What are you doing to ensure that millions of 
beneficiaries do not end up paying higher coinsurance and that 
hospitals don't have to reprocess millions of bills if the system is 
only partially or incompletely installed by July 1?
    Answer 6. We implemented SNF PPS in July 1998 without major 
problems. There were implementation issues with SNF consolidated 
billing for Part B services; however, because we delayed implementation 
of this provision due to our Y2K systems priorities, these problems 
were put in abeyance. Since implementation of SNF PPS, we have gained 
valuable experience with implementing systems changes. We now have an 
Agencywide change management program that is designed to assure that 
instructions to Medicare contractors are thoroughly coordinated within 
HCFA and, because of rigid time frames, final instructions are 
communicated to contractors well in advance of implementation. We are 
more fully including our contractors and standard system maintainers in 
planning activities for implementing systems changes. In addition, our 
experience in managing contractor Y2K compliance has reinforced the 
importance of thorough testing of systems changes. That experience is 
being translated into additional testing of systems changes through the 
use of outside Beta testing contractors. We believe the lessons we have 
learned have been invaluable and will enable us to more smoothly 
implement systems changes like PPS in the future.
    Question 7. In developing the APC system, you utilized 1996 cost 
data. Given the speed at which new drug therapies are entering the 
marketplace, (many after 1996) how do you propose developing reasonable 
reimbursement rates for these new products? How long will it take you 
to develop payment rates for new products? Do you think that all drug 
therapies can be effectively captured within the APCs? Is it 
appropriate to include orphan drugs within an APC system?
    Answer 7. As will be specified by the final rule, we have responded 
to comments on these very important issues. Where drugs are not 
considered appropriate to package with another procedure in an APC, 
options for assigning separate APCs for that drug or drugs are being 
developed. The final rule will specify how new technologies will be 
priced for the system on a rapid turn around basis. All technologies 
that could not have been recognized in the 1996 data will be considered 
as new technologies for this policy. Prices for new technologies can be 
implemented with the quarterly updates to HCFA's contractor systems. We 
have further outlined our plans for the final rule in our October 19 
letter to you.
    Question 8. HCFA has stated that the therapy cap will be 
implemented on a per-provider basis due to your inability to track a 
beneficiary's use of services. Will you be able (and do you intend) to 
implement it as a per-beneficiary cap after Y2K?
    Answer 8. After Y2K, we intend to implement the therapy caps on a 
per beneficiary basis. However, we are concerned that the caps are 
adversely affecting beneficiaries' access to needed services. We want 
to work with Congress on legislation to make changes to the cap.
    Question 9. What is your opinion about the need for changing the 
reimbursement levels for home health agencies? Do you agree with GAO's 
analysis that access to home health services has not been harmed by the 
BBA?
    Answer 9. Our monitoring of the impact of BBA shows that overall 
there does not appear to be an access problem to home health services. 
We are concerned with access and will continue to monitor this closely. 
We will also continue to keep you posted on our monitoring and look 
forward to working with you on BBA refinement legislation to ensure 
access to care.
    Question 10. What are the pitfalls associated with raising the 
therapy cap from its current $1500 limit? Would it be wiser to move to 
one overall cap, say $3000, or have three separate caps, one each for 
PT, and ST, and OT?
    Answer 10. We continue to be concerned about these caps, and are 
troubled by anecdotal reports about the adverse impact of these limits. 
The HHS Inspector General (IG) has agreed to study the impact of the 
caps. The IG's initial analysis of 1998 data on SNF therapy services, 
under Medicare Part B, indicates that 29% of beneficiaries receiving 
services would have exceeded a joint physical/speech therapy cap of 
$1500; 26% would have exceeded a physical therapy-only cap of $1500; 
and, 22% would have exceeded a speech-only cap of $1500. Further study 
by the IG and others will help us determine whether, and how, any 
adjustments should be made. We will continue working with 
beneficiaries, providers, Congress, and other interested parties to 
closely monitor the situation, evaluate evidence of problems in access 
to quality care, and develop appropriate, fiscally responsible 
solutions. As follow-up to our round table discussion, I've provided 
the Committee with an analysis of various options for changing the 
caps.
    Question 11. Has HCFA determined or estimated the total number of 
SNF beneficiaries who will meet the caps this year or in any year? Do 
you know how many of these instances are secondary episodes of illness 
or accidents in one year?
    Answer 11. As mentioned above, the IG's initial analysis of 1998 
data on SNF therapy services, under Medicare Part B, indicates that 29% 
of beneficiaries receiving services would have exceeded a joint 
physical/speech therapy cap of $1500; 26% would have exceeded a 
physical therapy-only cap of $1500; and, 22% would have exceeded a 
speech-only cap of $1500. Further study by the IG and others will help 
us determine whether, and how, any adjustments should be made. However, 
at this time, we do not know how many instances are secondary episodes 
of illness or accidents in one year. Such a determination would require 
extensive data analysis and could not be completed in a short period of 
time.
    Question 12. What would it take for HCFA to speed up the creation 
of a less arbitrary, diagnosis-related coverage system? What is the 
earliest it could be implemented?
    Answer 12. We support establishing a payment system for outpatient 
therapy services tied to patient needs rather than defined by an 
arbitrary, uniform dollar limitation. However, our investigations and 
research thus far to determine the impact of the therapy caps required 
by the Balanced Budget Act of 1997 on patient access to outpatient 
rehabilitation services, have already revealed that patient diagnosis 
extracted from claims data may not be adequate to predict utilization. 
At a minimum, patient diagnosis is going to have to be supplemented by 
variables such as functional status and patient capacity for 
improvement.
    Unfortunately, calibrating a payment system that is attuned to, and 
responsive to, the outpatient therapy needs of Medicare beneficiaries, 
requires information that simply is not available at this time either 
within or outside of HCFA. There are no short cuts to setting up a 
good, comprehensive, flexible payment system. We have to collect a 
critical mass of data that accurately classify patient needs using 
stilltobecreated tools such as functional assessment measures; process 
these data; and, then design a payment methodology in a budget neutral 
manner. This process could take many years and would be resource 
intensive.
    In the meantime, the most expedient shortterm alternative to the 
longer-range development of a comprehensive payment system seems to lie 
with legislative changes to either raise or reconfigure the caps in 
some way.
    Question 13. Does HCFA have any data on the most common diagnosis 
groups that meet or exceed the caps? In your opinion, what Part B 
services are appropriate to exclude from a consolidated billing 
requirement?
    Answer 13. We are very concerned about the anecdotal reports 
regarding the adverse impacts of these caps. Data using specific 
procedure codes are just now becoming available. We will examine 
therapy claims data to determine which beneficiaries exceed the caps. 
However, we do not think that diagnosis accounts very well for levels 
of therapy utilization. Data on functional status may be very useful in 
this regard, but it is not currently collected.
    With respect to excluding services from consolidated billing 
requirements, using our limited discretion as afforded by the statute, 
we have administratively excluded certain types of exceptionally 
intensive outpatient hospital services that lie well beyond the scope 
of the care SNFs would traditionally furnish. Examples of these types 
of services include outpatient surgery, MRIs, radiation therapy, and 
emergency services. We are currently considering excluding additional 
outpatient hospital services such as certain chemotherapy services. 
Establishing exclusions in settings other than outpatient hospitals 
would require a change in statute.
    Question 14. What types of administrative changes are you 
considering to SNF PPS?
    Answer 14. We are carefully reviewing the possibility of making 
budget neutral administrative changes to the prospective payment system 
for skilled nursing facilities (SNF PPS).
    The BBA mandated a per diem SNF PPS covering all routine, 
ancillary, and capital costs related to covered services provided to 
beneficiaries under Medicare Part A. The law requires the use of 1995 
costs as the base year, and implementation by July 1, 1998, with a 
three-year transition blending facility-specific costs and prospective 
rates. It did not allow for exceptions to the transition, carving out 
of any service, or creation of an outlier policy.
    This past Spring, we held a town hall meeting to hear a broad range 
of skilled nursing facility concerns, and we continue to meet with 
provider and beneficiary representatives. We recognize there are 
concerns that the SNF PPS does not adequately reflect the costs of non-
therapy ancillaries such as drugs for high acuity patients.
    As mentioned previously, the HHS Inspector General survey does not 
suggest that the SNF PPS prospective payment system is causing access 
to care problems at this time. And the proportion of beneficiaries 
discharged to skilled nursing facilities is unchanged from 1998, and 
hospital lengths of stay have not increased. However, there is some 
indication from the survey that it does take more time to place 
Medicare patients in nursing homes, and facilities are requesting more 
information before accepting patients. About half of the nursing home 
administrators responding to the survey indicated they are less likely 
to accept patients requiring expensive supplies or services. About half 
say they are more likely to admit patients who require special 
rehabilitation services such as physical therapy following joint 
replacement surgery.
    We are conducting research that will serve as the basis for 
refinements to the resource utilization groups (RUGs) that we expect to 
implement next year. We expect the research to be completed by the end 
of 1999 and to then develop refinements for implementation in October 
2000. We believe these changes should be budget neutral. However, we 
are continuing to review whether we have additional administrative 
authority. We fully expect that we will need to periodically evaluate 
the system to ensure that it appropriately reflects changes in care 
practice and the Medicare population.
    Question 15. Do you believe that non-therapy ancillary services 
were under-accounted for in the final SNF PPS?
    Answer 15. Again, the HHS Inspector General survey indicates that 
about one in five discharge planners say it takes more time to place 
Medicare patients in nursing homes. And about half of the nursing home 
administrators indicated they are less likely to accept patients 
requiring expensive supplies or services, which may suggest that some 
refinements to the resource utilization groups (RUGs) are necessary.
    As mentioned above, we are currently conducting research in this 
area and our findings will serve as the basis for refinements that we 
expect to implement in October 2000. Again, we expect that we will need 
to evaluate the RUG periodically to ensure that it appropriately 
reflects changes in care practice and the Medicare population.
    Question 16. Do you believe that, due to increases in the acuity 
levels since 1985, many facilities will be severely disadvantaged by 
the transition period?
    Answer 16. We are concerned about paying SNFs appropriately for the 
care of patients. We do not believe that many facilities will be 
severely disadvantaged by the transition period due to increases in the 
acuity levels since 1995. First and foremost, under the PPS, SNFs have 
the ability to provide care more efficiently than in the past. It has 
been suggested by the OIG and GAO in several reports that the rates may 
be somewhat inflated as a result of being based on data from the prior 
costreimbursement system where incentives often directed providers to 
operate inefficiently. Secondly, the three-year transition period 
blends facilityspecific and Federal prospective rates. The Federal 
rates are casemix adjusted according to clinical and functional 
characteristics of SNF residents and will allow higher payments for 
higher acuity. We are currently doing research to refine the RUGs, 
which will make them even more sensitive to a patient's care needs. 
There are legislative proposals that allow SNFs to bypass the 
transition.
    Question 17. What other options has HCFA considered to deal with 
SNF residents with very high drug costs, ventilators, or other 
expensive care not taken into account by the PPS?
    Answer 17. The SNF PPS, through casemix classification and 
adjustment, currently reflect a full range of SNF patient types with 
varying characteristics and degrees of resource intensity. Through 
research and refinement to the PPS, we will try to ensure that the PPS 
not only continues to account for a high level of resource intensity, 
but improves in terms of its sensitivity to non-therapy ancillaries, 
highly complex cases and less common conditions or patient types. We 
engaged in research to determine the potential for making refinements 
to the current casemix model to improve accuracy of the payments. We 
note that the law does not give us the direction to adopt some of the 
options contained in the comments to the SNF PPS regulations such as 
creation of an outlier policy or cost-based payments for nontherapy 
ancillary services.
    Question 18. Do you have any figures on losses for different RUGs 
categories?
    Answer 18. Currently we have little data in this area. However, we 
have recently commissioned a research contractor to develop data and 
analysis as part of our overall effort to make refinements to the PPS. 
We plan to have this research completed and refine the system next 
year. We note that the OIG's recent report on access in SNFs noted that 
discharge planners were finding it easier to place rehabilitation 
patients in SNFs due to the relatively higher reimbursement rates for 
special rehabilitation. The majority of Medicare SNF patients fall 
within the rehabilitation RUGs.
    Question 19. Do you believe the new PPS has had an impact on the 
current spate of bankruptcies in the SNF community?
    Answer 19. We are concerned about the impact of the PPS on the 
industry. However, in our initial analysis, we have not found it to be 
a major contributor to the bankruptcy filings. According to a July 1, 
1999 Business Week article, financial analysts have been quoted as 
saying that the financial instability of the SNF community is primarily 
due to over leveraging when Congress cutback on Medicare and for high-
priced acquisitions at the wrong time.
    We are continuing to monitor the impact of PPS on various provider 
groups and will continue to keep you informed on our analysis.
    Question 20. Do you any idea how many residents are at risk due to 
closures of SNFs?
    Answer 20. We do not expect to be faced with the widespread closure 
of SNFs due to changes imposed by the BBA. Recently, we have seen 
activity by several large nursing homes of filing for bankruptcy. This 
filing is for Chapter 11 only, which primarily reorganizes the 
company's organization structure and does not affect patient care. We 
are working with States to closely monitor the quality of care in 
nursing homes belonging to a Chapter 11 chain. We also routinely work 
with the States in the event of a SNF closing ensuring the health and 
safety of the resident is not compromised.
    Question 21. In the July 1999 update for home health cost limits, 
HCFA reported that over 90 percent of all home health agencies will be 
over either the per-beneficiary or per-visit limits. Is this accurate? 
Please provide the appropriate back up data to support your answer.
    Answer 21. The August 5, 1999 Federal Register notice, indicating 
the per-beneficiary and per-visit limits under the IPS for FY2000, 
estimates that 15 percent of HHAs will be subject to the per-visit 
limitation while 79 percent will be subject to the per-beneficiary 
limitation. The remaining agencies will receive their actual costs. No 
one agency will be limited by more than one limit.
    The FY 2000 limits are applicable to cost reporting periods, or 
portions of cost reporting periods, beginning on or after October 1, 
1999. While the PPS is scheduled to be implemented on October 1, 2000, 
the estimates made in the August 5th regulation assume the continuation 
of IPS minus the statutory 15 percent cut in payment limits mandated 
for October 1, 2000, if the PPS does not go into effect. As such, for 
those agencies whose cost reporting periods end after October 1, 2000, 
the estimate reflects the 15 percent cut in payment limits that would 
take effect. We plan to implement the home health PPS on October 1, 
2000, and we published the notice of proposed rulemaking on October 28, 
1999.
    The Balanced Budget Act of 1997 required that the IPS be based on 
data from 12-month cost reporting periods ending during FY 1994 and 
updated to the current years. The attached table shows the estimated 
impact of the IPS on HHAs, effective October 1, 1999. Column one of 
this table divides HHAs by number of characteristics including their 
ownership, whether they are old or new agencies, whether they are 
located in an urban or rural area, and the region in which they are 
located. Column two shows the number of agencies that fall within each 
characteristic or group of characteristics. Column three shows the 
percent of HHAs within a group that are projected to exceed the per-
visit limitation (and therefore will not be affected by the per-
beneficiary limitation) before the behavioral offsets are taken into 
account. Column four shows the average percent of costs over the per-
visit limitation for an agency in that cell, including behavioral 
offsets. Column five shows the percent of HHAs within a group that are 
projected to exceed the per-beneficiary limitation (and therefore will 
not be affected by the per-visit limitation) before the behavioral 
offsets are taken into account. Column six shows the average percent of 
costs over the per-beneficiary limitation for an agency in that 
category, including behavioral offsets. It is important to note that in 
determining the expected percentage of an agency's costs exceeding the 
cost limitations, column four (percent of costs exceeding visit limits) 
and column six (percent of costs exceeding beneficiary limits) cannot 
to be added together. Either the per-visit limitation or the per-
beneficiary limitation is exceeded, but not both.
    Question 22. Can you assure us that the PPS for home health 
services will be ready to be implemented by October 1, 2000?
    Answer 22. Yes, we published the proposed rule for the home health 
prospective payment system on October 28, 1999, and we expect to have 
the system in place by the October 1, 2000 statutory deadline.
    Question 23. How are home health agencies coping with new 
regulatory changes such as OASIS, new billing requirements and the 15-
minute visit increment reporting?
    Answer 23. There have been a number of challenges that home health 
agencies have faced since the enactment of the BBA and we have worked 
to use administrative flexibility where possible under the law. This 
past July 19, agencies began collecting OASIS data. On August 24, 1999 
agencies began transmitting OASIS data to states. We have provided free 
software called HAVEN (Home Assessment Validation and Entry) that can 
be used for encoding and transmission. While we are just beginning the 
second month of receiving data, the early agency response is favorable. 
Currently, we have over 2 million records of completed OASIS 
assessments in the national repository.
    Early evidence suggests that providers are managing well with 
OASIS. Assessments, such as the OASIS are not a new requirement. It is 
important to realize the HHAs have been and will continue to do 
comprehensive assessments of their clients. Doctors, nurses, and 
therapists are trained to do such assessments as part of their routine 
care. Such assessments are critical for providers to know if patients' 
needs are being met or they are improving. OASIS merely standardizes 
such assessments. A motion study was performed by our contractor 
analyzing the initial assessment (time spent with patient and time 
spent on documentation). On average, by standardizing the assessment, 
total time spent is the same, but time spent on documentation 
decreased. This allows more time to be spent with the patient. Such 
standardization allows for efficiency in addition to accurate payment 
and quality oversight and improvement.
    Regarding the 15-minute increment, the BBA required that home 
health agencies report the number of 15-minute increments comprising 
each service, otherwise, ``. . . no claim for such services may be paid 
. . .'' The purpose of this provision is to obtain data that might be 
useful in developing or refining a home health prospective payment 
system (PPS). It will not affect the amount of payments to home health 
agencies under the IPS or the PPS. We have met with industry 
representative to clarify how the 15-minute reporting requirement 
should be implemented and have made this information available on our 
website. In order to allow agencies significant time to implement this 
requirement, we phased it in over a three-month period from July 1 to 
October 1, 1999. However, we continue to hear complaints from agencies 
about this requirement that range from the burden of recording and 
reporting this information to what activities should or should not be 
included in the reporting.
    Question 24. What type of guidance have you provided the industry 
and your own claims processors to ensure care is not inappropriately 
denied? Has any agency been sanctioned for denying access to care as a 
result of their misunderstanding of the new law?
    Answer 24. HHAs have been receiving guidance on the appropriate 
manner in which the per-visit and per-beneficiary limits under the IPS 
must be applied. When it became clear, shortly after the IPS began that 
some agencies may erroneously be applying the limits to individual 
beneficiaries, rather than applying the limits in the aggregate, the 
Administrator send a letter to all HHAs clarifying the issue. In her 
February 3, 1998 letter, the Administrator wrote, ``The new aggregate 
cap reflects the typical utilization of home health services for each 
HHA during the FY 1994 base period established by Congress. It allows 
HHAs to balance the cost of caring for any one patient against the cost 
of caring for all patients. We believe all Medicare enrollees can be 
safely and efficiently cared for under this payment system by HHAs that 
deliver quality care efficiently . . . Any reports of HHAs misinforming 
beneficiaries or inappropriately terminating care for Medicare 
enrollees will be considered the basis for a complaint survey that 
could lead to termination of the HHA from Medicare.''
    We continue to address the issue with our regional offices, who 
along with the states, are investigating complaints that we receive 
concerning inappropriate discharges or cutting back on covered 
services. Agencies found to have substantiated complaints made against 
them are required to submit an acceptable plan of correction to us or 
our agents. We and the state agency will resurvey the agency some time 
after the plan of correction is submitted to ensure that the agency has 
come into compliance. If the agency has not, it can be terminated.
    The five Medicare claims processors for home health have 
continually been performing provider education for HHA associations and 
individual agencies on the IPS, based upon HCFA program memorandum and 
notices describing how the IPS should be implemented.
    Question 25. Do you agree with GAO's analysis that access to home 
health services has not been harmed by the BBA?
    Answer 25. Home health beneficiaries are among the most vulnerable 
and we are closely monitoring the effects of the BBA changes on 
beneficiary access to home health care and agency closures. To date, 
evaluations by the GAO and HHS have not found that the changes are 
causing significant quality or access problems in the home health area.
    Our monitoring of employment data indicates that freestanding home 
health agencies have made small reductions in their workforce, back to 
the level seen in 1996. We have heard reports from beneficiary groups, 
our regional offices, and others regarding home health agencies that 
have inappropriately denied or curtailed care, and incorrectly told 
beneficiaries that they are not eligible for services. We are also 
hearing reports from beneficiary advocates and others that some high 
cost patients are having trouble finding home health agencies to 
provide the care they need. This may result from a misunderstanding of 
the new incentives to provide care efficiently, or from efforts to 
``cherry pick'' low-cost patients and game the system.
    In order to address this, we have provided home health agencies 
with guidance on the new incentives and their obligation to serve all 
beneficiaries equitably. We have instructed our claims processing 
contractors to work with agencies to further help agencies understand 
how the limits work. I assure you we will continue to monitor the 
situation closely.
    Question 26. How would you respond to agencies who claim that your 
own regulation of August 5 regarding cost limits predicts that 93.5% of 
surviving agencies will exceed their FY 2000 per-beneficiary cost limit 
or per-visit cost limit and that on average, agencies will have to 
repay HCFA 12% of its Medicare costs?
    Answer 26. The law requires that HHAs receive the lower of their 
actual costs or their actual costs up to the per visit limit or their 
actual costs up to the per beneficiary limit. The August 5, 1999 
Federal Register notice, which informs agencies about the per-
beneficiary and per-visit limits under the IPS for FY2000, estimates 
that 15 percent of HHAs will be limited by the per-visit limitation 
while 79 percent will be limited to the per-beneficiary limitation. The 
remaining agencies will be limited to their actual costs. For those 
agencies limited by the per-beneficiary limits, the average percent of 
the agency's costs exceeding the per-beneficiary limitation is 12.1 
percent. Those agencies limited by the pervisit limit will on average 
have 1.3 percent of their costs exceed the pervisit limit. Because the 
interim rates have been calculated to reflect the level of the limits, 
the amount of actual costs exceeding the applicable limit for any one 
agency will not be paid to the agency by Medicare. Medicare will pay 
only up to the applicable cap, not in excess of it.
    Because agencies have now had two years of experience under the IPS 
they are better able to perform efficiently. The data upon which the 
estimate of the percent of agency costs exceeding either limit predates 
the IPS. Therefore the estimates likely inflate the average percent of 
costs that agencies will incur above the limits.
    Question 27. Please respond to the following from the testimony of 
the American Medical Association. ``In the first two years of the SGR, 
erroneous HCFA estimates have already shortchanged physician payments 
by more than $3 billion. These projection errors have not been 
corrected and HCFA does not plan to do so. Specifically, one year after 
the 1997 notice, HCFA reneged on its pledge to correct SGR errors and 
simultaneously issued its moist egregious error projecting Medicare 
managed care enrollment would rise 29 percent in 1999, despite the many 
HMOs abandoning Medicare in 1999.''
    Answer 27. After BBA was enacted, our actuaries identified problems 
with the SGR target. Specifically, they found that once the SGR target 
is set for a year, it cannot be changed, even to correct for estimation 
errors and even if better data on elements in the SGR formula are 
subsequently available compared to when the SGR was set. This problem 
was discussed in the November 2, 1998 Federal Register notices on the 
FY 1999 SGR. While we had initially thought that this latter problem 
could be dealt with under current law, the HHS General Counsel has 
indicated current law will not permit us to fix the problem. In our 
September 30, 1999, Federal Register notice, we confirmed that we could 
not make adjustments for projection errors under existing authorities.
    The President's FY 2000 budget contains a legislative proposal for 
a budget-neutral technical fix to solve this problem. The proposal 
would correct projection errors automatically beginning with the CY 
2000 SGR. The proposal would also make adjustments for the two 
historical years of SGR (FY 1998 and FY 1999). However, this aspect of 
the provision would result in a cost to the program. Technical changes 
to the SGR system would offset some of the costs of correcting for 
projection errors. We have also proposed an adjustment to make the 
proposal budget neutral. If our legislative proposal only corrected for 
projection errors and did not also include other changes to make it 
budget neutral, it would provide physicians with additional payments 
relative to current law.
    Correcting for projection errors could work to either increase or 
decrease the physician fee schedule update. Under the SGR system to 
date, correcting for projection errors would have the effect of 
increasing the physician fee schedule update. However, under the prior 
Medicare Volume Performance Standard (MVPS) system, we also did not 
correct for projection errors. Those projection errors tended to 
overstate the MVPS and the subsequent updates. We would like to 
continue to work with the Congress and the AMA on a legislative 
solution that provides more stability to the system and requires the 
Secretary to correct estimation errors.
    Question 28. What authority do you believe you have to correct for 
inaccurate assumptions on the SGR, particularly in light of the 
cumulative effect of these calculations?
    Answer 28. According to the General Counsel's office, the language 
of the statute is clear: we do not believe that we have the authority 
to make adjustments. In our October 1, 1999, Federal Register final 
notice, we confirmed that we could not make adjustments for projection 
errors under existing authorities.
    Question 29. As we understand it, the American Medical Association 
and the specialty groups first wrote the HCFA Administrator about their 
concerns with the projection errors in the Sustainable Growth Rate on 
December 2, 1998 (within the comment period on HCFA's November 2, 1998 
SGR Notice). Then they sent another letter to HCFA about this problem 
on May 21, 1999. Has the HCFA Administrator responded to these letters 
from the physician community?
    Answer 29. Because of the volume of written comments on proposed 
rules, notices and regulations, we do not generally respond in writing 
to comments on proposed rules. We do try to address comments on any 
proposal notice or rule in the corresponding final versions, as 
appropriate. The December 2, 1998 letter was a comment on a final rule 
with comment period published in the Federal Register on November 2, 
1998. We specifically addressed the December 2, 1998 comment in the 
final notice published in the October 1, 1999 Federal Register (Vol. 
64, No. 190, page 53396).
    The March 21, 1999 letter addressed issues raised in the November 
2, 1998, final rule, but was not a public comment. We responded 
directly to the signers of that letter on September 24, 1999. A copy of 
our response is attached.
    Question 30. Can you tell us the status of your proposed rulemaking 
to change your policy on coverage of self-administered injectable drugs 
in a physician's office? Please provide us with the statutory and the 
policy rationale for this proposed change.
    Answer 30. By law, Medicare covers only those drugs approved by the 
Food and Drug Administration that are furnished incident to a 
physician's services and cannot be self-administered. There are a few 
exceptions that are explicitly provided in section 1861(s)(2) of the 
Social Security Act. Historically, we have interpreted this coverage 
restriction as it pertains to the characteristics of the drug, not to 
the capacity of a beneficiary's ability to self-administer any drug. 
Nevertheless, because of concerns expressed by Congress and others 
regarding the specific capacity of individual beneficiaries to self-
administer, and the recognition of the evolving state of medical 
practice, we have decided to review our current position. To 
appropriately elicit input and comment for relevant stakeholders on 
this issue, we intend to develop a proposed rule to better define the 
term ``self-administered.'' The development of a number of options for 
defining ``self-administered'' and the issuance of the proposed rule 
will be a high priority.
    Question 31. HCFA's final rule implementing BBA 97 denies payment 
for telemedicine store and forward applications. In the rule, HCFA said 
that in order to qualify as a ``consultation,'' all practitioner/
provider encounters had to occur in real time. Please provide an 
explanation for this decision and explain to us whether you believe you 
have the statutory authority to change this decision.
    Answer 31. Medicare payment for teleconsultation, as provided in 
the November 8, 1998 final rule, represents a significant improvement 
over traditional Medicare policy for rural areas by allowing payment 
for a service that historically has required a face-to-face, ``hands 
on'' encounter. Under the regulation, a teleconsultation is an 
interactive patient encounter that must meet criteria for a given 
consultation service included in the American Medical Association's 
Current Procedure Terminology. The technology used to deliver a 
teleconsultation must allow the consultant to conduct an examination in 
``real time'' using interactive audio and video equipment.
    This rule represents a first step in refining face-to-face 
requirements for a medical service under Medicare to accommodate 
telemedicine services. We are open to developing modifications to 
Medicare telemedicine coverage and payment policies as the law permits 
and as more program experience in this area is obtained. The Secretary 
has identified several issues related to teleconsulting, including the 
use of store-and-forward technologies for delivering medical services 
that need to be addressed further. The Secretary has directed us to 
specifically examine the policy and financial implications of these 
technologies, as well as the use of registered nurses and other medical 
professionals not recognized as practitioners under Medicare to present 
the patient to the consulting practitioner, and the appropriateness of 
current consultation codes for reporting consultations delivered via 
communications systems.
    Question 32. HCFA has interpreted the BBA97 telemedicine provisions 
to require the presence of a ``presenting practitioner'' in order for 
the encounter to qualify for telemedicine reimbursement. The presenting 
practitioner must be a health care provider eligible for Medicare 
reimbursement such as a physician, a nurse practitioner, or a physician 
assistant. Registered and licensed practical nurses are not permitted 
to serve as presenters. Please provide us with your rationale in 
limiting reimbursement to ``presenting practitioners.'' Also, do you 
believe that this decision will harm access to telemedicine for 
patients in rural areas? Do you have any plans to revisit this 
interpretation?
    Answer 32. Our decision to require the telepresenter to be a 
medical professional which is recognized as a practitioner under the 
Medicare program was determined by the BBA 1997. Section 4206(a) of BBA 
specifies that the individual physician or practitioner providing the 
professional consultation does not have to be at the same location as 
the physician or practitioner furnishing the service to the 
beneficiary. We believe this language is limiting and requires that a 
practitioner, as recognized under section--1842(b)(18)(C) of the Act, 
must be present with the patient during the teleconsultation. Since the 
same phrase describes the medical professional at both ends of the 
teleconsultation, we believe that it would be difficult to interpret 
the phrase to have one meaning for purposes of identifying the 
consultant and a different meaning for purposes of identifying who may 
be physically with the patient. Therefore, registered nurses, and other 
medical professionals not recognized as practitioners under section 
1842(b)(18)(C) cannot act as presenters during teleconsultations.
    This statutory language could place an additional barrier on 
Medicare beneficiaries to receiving teleconsultation; especially in 
areas where there is a shortage of health care practitioners. We have 
already made plans to revisit this issue and are currently evaluating 
the use of nurses as telepresenters.
    Question 33. HCFA has interpreted the BBA97 provisions to authorize 
Medicare payments only for those CPT codes which include the word 
``consultation.'' Please provide us with your rationale for this 
interpretation and include commentary about whether it is appropriate 
to include direct services provided by clinical psychologists, clinical 
social workers, and physical, occupational, and speech therapists 
within this definition.
    Answer 33. The BBA limits the scope of coverage to professional 
consultation for which payment is currently made under Medicare. We 
believe that a consultation is a specific service that meets the 
criteria specified for a consultation service in the AMA 1998 Current 
Procedure Terminology. BBA does not give authority to cover services 
beyond consultation under this provision.
    Under existing Medicare policy, clinical psychologists, clinical 
social workers, physical, speech and occupational therapists can not 
bill , nor receive payment, for consultation services under Medicare. 
Therefore, these practitioners are prohibited from billing a 
teleconsultation because under Medicare no payment would be made to 
these practitioners for providing a consultation service.
    We recognize that the teleconsultation rule is a first step in 
defining face-to-face ``hands on'' requirements for a medical service 
under Medicare to reflect a telemedicine service. We are not 
eliminating the possibility of the development of modifications to 
Medicare telemedicine coverage and payment policies as the law permits 
and as more program experience in this area is obtained. As previously 
mentioned, we are currently exploring several issues, including the use 
of store and forward technologies as a method for delivering medical 
services and the use of registered nurses and other medical 
professionals not recognized as a practitioner under the 
teleconsultation provision to present the patient to the consulting 
practitioner. Additionally, we are examining the appropriateness of 
current consultation codes for reporting consultations delivered via 
communications systems. We plan to provide the Secretary with policy 
recommendations regarding these issues.
    Question 34. On several occasions, we have orally asked for a copy 
of the contract HCFA signed with 3M when it decided to utilize 3M's 
services to review the comments and perform consulting work on the 
final hospital outpatient prospective payment system rule. Please 
provide us with a copy of this contract and any supporting memorandum 
which you used to justify your decision to hire 3M.
    Answer 34. We apologize for the delay in providing the 3M contract. 
Attached, to be included as part of the answers for the record, is a 
copy of the contract and supporting requisition justifying our decision 
for hiring 3M.
         Questions for the Record Submitted by Rep. Strickland
    Question 1. Mr. Hash, from your vantage point as the Deputy 
Director of the Health Care Financing Administration, you have heard 
complaints from Members of Congress and health care providers about the 
negative affects of the Balanced Budget Act. In your judgement, are 
there patients being denied necessary and vital care as a result of the 
BBA provisions enacted by Congress and carried out by HCFA?
    Answer 1. Thus far, our monitoring reveals evidence of isolated but 
significant problems. Although our analysis is not yet complete, we are 
concerned, for example, that some beneficiaries are not getting 
necessary care because of the BBA's $1500 caps on certain outpatient 
rehabilitation therapies. We will continue working with beneficiaries, 
providers, Congress, and other interested parties to closely monitor 
the situation, evaluate evidence of problems in access to quality care, 
and develop appropriate, fiscally responsible solutions.
    Question 2. Does HCFA believe that the crisis situation created by 
the Balanced Budget Act is of such a proportion that it warrants 
immediate action by Congress? And if so, would HCFA please relay to the 
Committee which BBA provisions it feels Congress should address in 
order to restore patients' access to quality of care?
    Answer 2. We are pleased that both the House and the Senate are 
considering legislation to address some of the unintended consequences 
of the Balanced Budget Act. The President is committed to ensuring 
enactment of such needed legislation this year. In 1997, we worked 
together to enact important reforms that contributed to extending the 
life of the Medicare trust fund to 2015. As with any major legislation, 
the BBA included some policies that are flawed or have unintended 
consequences. The Administration has taken numerous administrative 
actions to address these problems and provided funding for legislative 
fixes in the context of the President's comprehensive Medicare reform 
plan. We want to work together during the final days of this 
Congressional session to take action to moderate some of the policies 
included in the BBA.


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