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



 
                MEDICARE BALANCED BUDGET ACT REFINEMENTS

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 1, 1999

                               __________

                             Serial 106-66

                               __________

         Printed for the use of the Committee on Ways and Means


                    U.S. GOVERNMENT PRINTING OFFICE
65-699 CC                   WASHINGTON : 2000
_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

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

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois            JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania

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



                            C O N T E N T S

                               __________

                                                                   Page

Advisory of September 24, 1999, announcing the hearing...........     2

                               WITNESSES

Health Care Financing Administration, Michael Hash, Deputy 
  Administrator..................................................     9
Medicare Payment Advisory Commission, Hon. Gail R. Wilensky, 
  Ph.D., Chair...................................................    49
U.S. General Accounting Office, William J. Scanlon, Ph.D., 
  Director, Health Financing and Public Health Issues............    58

                                 ______

American Association of Health Plans, and Group Health 
  Cooperative of Puget Sound, Maribeth Capeloto..................   103
American Health Care Association, and Legacy Health Care, Blaine 
  Hendrickson....................................................   112
American Hospital Association, and Providence Hospital, Sister 
  Carol Keehan...................................................    87
American Medical Association House of Delegates, Richard F. 
  Corlin.........................................................    95
American Speech-Language-Hearing Association, and Swigert and 
  Associates, Nancy B. Swigert...................................   124
Visiting Nurse Associations of America, and Visiting Nurse 
  Association of the Midlands, Pamela Bataillon..................   119

                       SUBMISSIONS FOR THE RECORD

American Academy of Family Physicians, statement.................   132
American Association of Diabetes Educators, Chicago, IL, David S. 
  Holtzman, letter...............................................   134
American Association of Homes and Services for the Aging, Len 
  Fishman, statement.............................................   136
American Clinical Laboratory Association, statement..............   141
American College of Physicians-American Society of Internal 
  Medicine, statement............................................   143
American Medical Group Association, Alexandria, VA, statement and 
  attachments....................................................   148
American Medical Rehabilitation Providers Association, Englewood, 
  CO, Dennis O'Malley, statement.................................   152
American Nurses Association, statement...........................   155
American Osteopathic Association, statement and attachments......   156
American Physical Therapy Association, Alexandria, VA, statement.   157
American Society for Gastrointestinal Endoscopy, Manchester, MA, 
  statement......................................................   164
Association of American Medical Colleges, statement and 
  attachments....................................................   168
Association of Community Cancer Centers, Rockville, MD, statement   178
Boulter, Beau, United Seniors Association, Fairfax, VA, joint 
  letter and attachment (see listing for Seniors Coalition)......   215
Center for Patient Advocacy, McLean, VA, statement...............   180
Christian Senior Alliance, Robert C. Conover, joint letter and 
  attachment (see listing for Seniors Coalition).................   215
Council for Affordable Health Insurance, Alexandria, VA, Nona 
  Bear Wegner, joint letter and attachment (see listing for 
  Seniors Coalition).............................................   215
Elderplan, Inc., Brooklyn, NY, SCAN, Long Beach, CA, and Sierra 
  Health Services/Health Plan of Nevada, Las Vegas, NV, joint 
  statement and attachments......................................   181
Exact Laboratories, Inc., Maynard, MA, Stanley N. Lapidus, 
  statement......................................................   186
Fishmen, Len, American Association for Homes and Services for the 
  Aging, statement...............................................   136
Holtzman, David S., American Association of Diabetes Educators, 
  Chicago, IL, letter............................................   134
Home Health Services & Staffing Association, statement...........   188
House Rural Health Care Coalition, et al, joint statement and 
  attachment.....................................................   191
Lapidus, Stanley N., Exact Laboratories, Inc., Maynard, MA, 
  statement......................................................   186
Martin, Jim, 60 Plus Association, Inc., Arlington, VA, joint 
  letter and attachment (see listing for Seniors Coalition)......   215
Mayo Foundation, Rochester, MN, Michael B. Wood, letter 
  (forwarded by the Hon. Gil Gutknecht, a Representative in 
  Congress from the State of Minnesota)..........................   195
Medical Device Manufacturers Association, statement..............   196
Murray, Major General Richard D., National Association for 
  Uniformed Services, Springfield, VA, joint letter and 
  attachment (see listing for Seniors Coalition).................   215
National Association for Home Care, statement....................   197
National Association for Uniformed Services, Springfield, VA, 
  Major General Richard D. Murray, joint letter and attachment 
  (see listing for Seniors Coalition)............................   215
National Association of Psychiatric Health Systems, statement....   202
National Grange, Kermit N. Richardson, joint letter and 
  attachment (see listing for Seniors Coalition).................   215
National Rural Health Association, statement.....................   203
O'Malley, Dennis, American Medical Rehabilitation Providers 
  Association, Englewood, CO, statement..........................   152
Organizations of Academic Family Medicine, statement.............   209
Powell, John J., Seniors Coalition, Fairfax, VA, joint letter and 
  attachment (see listing for Seniors Coalition).................   215
Richardson, Kermit N., National Grange, joint letter and 
  attachment (see listing for Seniors Coalition).................   215
Riley, Hon. Bob, a Representatives in Congress from the State of 
  Alabama, letter and attachment.................................   211
SCAN, Long Beach, CA, joint statement and attachments (see 
  listing for Elderplan, Inc.)...................................   181
Seniors Coalition, Fairfax, VA, John J. Powell; Council for 
  Affordable Health Insurance, Alexandria, VA, Nona Bear Wegner; 
  Christian Senior Alliance, Robert C. Conover; 60 Plus 
  Association, Inc., Arlington, VA, Jim Martin; National 
  Association for Uniformed Services, Springfield, VA, Major 
  General Richard D. Murray; TREA Senior Citizens, League, 
  Alexandria, VA, Mike Zabco; United Seniors Association, 
  Fairfax, VA, Beau Boulter; and National Grange, Kermit N. 
  Richardson, joint letter and attachment........................   215
Sierra Health Services/Health Plan of Nevada, joint statement and 
  attachments (see listing for Elderplan, Inc.)..................   181
60 Plus Association, Inc., Arlington, VA, Jim Martin, joint 
  letter and attachment (see listing for Seniors Coalition)......   215
TREA Senior Citizens League, Alexandria, VA, Mike Zabco, joint 
  letter and attachment (see listing for Seniors Coalition)......   215
United Seniors Association, Fairfax, VA, Beau Boulter, joint 
  letter and attachment (see listing for Seniors Coalition)......   215
Wegner, Nona Bear, Council for Affordable Health Insurance, 
  Alexandria, VA, joint letter and attachment (see listing for 
  Seniors Coalition).............................................   215
Wood, Michael B., Mayo Foundation, Rochester, MN, letter 
  (forwarded by the Hon. Gil Gutknecht, a Representative in 
  Congress from the State of Minnesota)..........................   195
Zabco, Mike, TREA Senior Citizens League, Alexandria, VA, joint 
  letter and attachment (see listing for Seniors Coalition)......   215



                MEDICARE BALANCED BUDGET ACT REFINEMENTS

                              ----------                              


                        FRIDAY, OCTOBER 1, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:05 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

September 24, 1999

No. HL-10

                      Thomas Announces Hearing on

                Medicare Balanced Budget Act Refinements

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on refinements to the Medicare provisions included 
in the Balanced Budget Act of 1997 (P.L. 105-33). The hearing will take 
place on Friday, October 1, 1999, in the main Committee hearing room, 
1100 Longworth House Office Building, beginning at 10 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Medicare provisions in the Balanced Budget Act of 1997 (BBA) 
contained more than 300 provisions related to the programs administered 
by the Health Care Financing Administration (HCFA), and represented the 
most extensive Medicare reforms since the enactment of the program in 
1965. Among the positive changes were Medicare's expanded coverage of 
preventive benefits, additional choices for seniors through the new 
Medicare+Choice program, new tools to combat health care waste, fraud 
and abuse, and many initiatives to modernize and strengthen Medicare's 
fee-for-service payment systems. New payment methodologies were 
established affecting virtually every segment of the health care 
industry including managed care plans, hospitals, skilled nursing 
facilities, and home health agencies.
      
    In many cases, however, HCFA has missed deadlines for implementing 
policies or developed policies in need of refinement. In addition, 
meeting the year 2000 computer challenges has continued to create a 
series of delays for HCFA in implementing the remaining major payment 
systems and changes required by the BBA.
      
    In announcing the hearing, Chairman Thomas stated: ``When this 
landmark legislation was adopted in 1997, Congress relied on the data 
and estimates available at the time, and expected the Administration to 
provide us with the necessary monitoring and feedback on the operation 
of these reforms. Not unexpectedly, with sweeping legislation that 
makes major revisions in Medicare payment policies, some refinements 
are needed. This refinement process should be a shared responsibility 
between the Administration and Congress. Where changes can be made 
through administrative action, the Administration should make them. 
Where it is necessary to make legislative changes, Congress should 
certainly do its part to make sure beneficiaries receive the health 
care services they depend on.''

FOCUS OF THE HEARING:

      
    The hearing will provide the opportunity to hear from the 
Administration, Congressional advisory bodies, and providers about the 
implementation, impact, and proposed refinements to BBA policies.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Friday, 
October 15, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways 
and Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.

    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

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

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

                                


    Chairman Thomas. Good morning. A little over 2 years ago, 
the Congress and the Administration reached agreement on the 
most extensive changes to the Medicare program since its 
inception in 1965. Among the improvements were Medicare's 
expanded coverage of preventative benefits, additional choices 
for seniors through the new Medicare+Choice program, new tools 
to combat healthcare waste, fraud, and abuse and initiatives to 
modernize the future of the fee-for-service portion of the 
program.
    When we crafted this legislation, Congress relied on the 
data in the estimates available at the time. We expected the 
administration to provide us with the necessary monitoring and 
feedback on the operation of these reforms and the measuring 
tools that were to be provided. Since August 1997, the 
administration has implemented many of the more than 300 
changes to the Medicare program. In some cases, however, the 
Health Care Financing Administration has missed deadlines for 
implementation or has developed policies, but some of those 
policies we now are coming to realize lack the necessary 
refinement.
    In addition, their stated Year 2000 computer problem has 
produced a series of delays for HCFA in implementing the 
remaining major payment systems and changes that we agreed upon 
in the Balanced Budget Act. Not surprisingly, when legislation 
makes sweeping changes in payment policy, we need to go back 
and make corrections and refinements.
    Today we are going to explore the impact to date of the 
Balanced Budget Act on health care providers and, ultimately, 
beneficiaries in an attempt to identify any refinements that 
need to be made to the Balanced Budget Act so that seniors 
continue to receive the highest quality health care and 
taxpayers get value for their tax dollars.
    The goal of this hearing is to examine reforms, not repeal 
of the landmark Balanced Budget Act of 1997. The adjustment and 
refinement process should be, in my opinion, a shared 
responsibility between the administration and Congress. After 
all, both Congress and the President worked together to enact 
this historic legislation. It is only right that we now work 
together to perfect, to refine it and modify it. Where changes 
can be made through administrative action, we would hope that 
the administration would make them. Where it is necessary to 
make legislative changes, then Congress should certainly do its 
part.
    This morning I am anxious to hear what steps the Health 
Care Financing Administration specifically has in mind to 
address those Medicare payment areas where they can act 
administratively. Today, I want to hear what the administration 
can do, and probably more importantly, what it is willing to 
do. Hopefully, they are one and the same so that we can ensure 
a vibrant health care system for all of our Medicare 
beneficiaries. Clearly, our Nation's seniors should get no 
less.
    This morning we have witnesses from the administration, our 
policy experts from the Medicare Payment Advisory Commission, 
the General Accounting Office, and we will hear from a group of 
providers who wish to discuss from their particular point of 
view the Balanced Budget Act and how it has had an impact on 
their particular area of the health care delivery service to 
seniors. I look forward to a full and spirited exchange on 
suggested refinements. And prior to that, I would call on my 
colleague from California, the Ranking Minority Member, Mr. 
Stark.
    Mr. Stark. Well, thank you, Mr. Chairman, thank you for 
holding this hearing. You are quite correct, there is much to 
be actually proud of in the Balanced Budget Act. It did away 
with a lot of fraud, it extended the life of the medicare trust 
fund to 2015 from 2001--the second longest extension of 
solvency in the program's history--and it showed that HCFA (or 
Medicare) could be a good purchaser.
    Now, while it did a lot to stop unfettered growth in 
certain areas, there are places--I think we all agree--where 
there were excessive or unwise cuts. The $1,500 cap for 
rehabilitation has resulted in patients' care being underpaid. 
That is one of the problems I think we all agree need to be 
fixed.
    On the other hand, I think we have to be careful about 
give-backs and not get panicked into trying to douse this 
conflagration with buckets of money. Every dollar that we give 
back raises the Part B premiums on seniors or reduces the 
solvency of the trust fund. And unless we pay for the Part B 
give-backs, we are dipping into the Social Security surplus. So 
we just don't have a lot of funds available to us and we have 
to be very careful to see that this package is paid for.
    Over the next 30 years, as the Chair knows, we are going to 
need to make a combination of providers' cuts, beneficiary 
cuts, and/or increased taxes. There is no other way. So I hope 
that we will be prepared as we go along in making our 
corrections to the Balanced Budget Act to suggest how we 
anticipate paying for them, either now or in the future.
    Now, finally, we as legislators always have to get grumpy 
with the executive, whether it is our executive or it is the 
opposition's executive department. But a lot of Members today 
are blaming HCFA for basically enforcing laws that we wrote. 
And I don't think we can say, ``Hey, I wrote the law, but you 
guys ignore it''. I think that we have to be willing to not 
play Pontius Pilate and pretend that we had nothing to do with 
this. I would like to go back to my old school of goose and 
gander, what-is-sauce-for-one-is-sauce-for-the-other school of 
politics, and say I too would like to hear from the 
administration exactly what they intend to do and what they 
recommend be done: No. 1, what they are going to do 
administratively, what they think they can do? No. 2, what they 
would like us to do in the way of making legislative changes?
    But I would also ask the Chair if he would care to inform 
us about the upcoming schedule. I understand we are going to 
mark up something, sometime next week, and I wonder if the 
Chair could give us some idea of when that is scheduled. The 
rumors are coming that we are going to markup on Monday. When 
we might expect to see what our part of the bargain is going to 
be? If we get the administration to come up today with what 
they want, when are we going to do our part and what are we 
going to do? I yield to the Chair.
    [The opening statements of the Hon. Fortney Pete Stark and 
Hon. Jim Ramstad follow:]

Statement of Hon. Fortney Pete Stark, a Representative in Congress from 
the State of California

    Mr. Chairman: Thank you for holding this hearing. There is 
much to be proud of in the Balanced Budget Act. It created new 
prospective payment systems, fought fraud, and helped extend 
the life of the Part A Trust Fund from 2001 to 2015--the second 
longest extension of solvency in the program's history. The BBA 
showed that Medicare could be a good buyer.
    Pre-BBA, costs were clearly out of control and everyone was 
saying ``what a terrible buyer Medicare is compared to the 
private sector.'' Home health spending was going up $2 billion 
a year, even though the number of Medicare beneficiaries was 
fairly flat. CBO predicted that between 1996 and 2003, home 
health spending would double from about $16 billion to about 
$32 billion. Between 1994 and 1997, 883 new home health 
agencies opened in the State of Texas alone--an 85% increase--
and those receiving home health care were getting an average of 
134 visits, compared to a national average of 69 and 30 in the 
State of Washington.
    Same in nursing homes. Payments were going up $2 billion a 
year, quadrupling from about $3 billion in 1990 to $12 billion 
in 1997--and predicted to double to $24 billion by 2007.
    These growth rates were simply unsustainable--especially 
since we have not even begun to deal with the impact of the 
retirement of the Baby Boomers.
    We cannot return to those rates of inflation--and even with 
the new, March, 1999 CBO baseline, Medicare spending will 
double over the next ten years, although there will be little 
growth in the number of beneficiaries.
    As for hospitals, many of them are losing money on managed 
care contracts and are asking Medicare to bail them out of bad 
contracts. Is it Medicare and the taxpayers' job to make 
hospitals whole on below cost private sector deals driven by 
the excess bed capacity in most markets?
    While BBA did much to stem unfettered growth in certain 
sectors, there are places where the BBA made excessive or 
unwise cuts. The $1500 cap on rehab comes to mind. Care for 
some of the sickest SNF patients is underpaid. These problems 
need to be fixed.
    But we need to be careful about the give-backs. The GAO and 
MedPAC will report that there is little hard evidence that the 
sky is falling or that we should be panicked into dousing 
providers with new buckets of money.
    Every dollar we give back will raise Part B premiums on 
seniors or reduce the solvency of the Part A Trust Fund. And 
unless we pay for the Part B give-backs, we will hurt the 
Social Security surplus, that we are all pledging not to spend.
    In the next 30 years the number of people on Medicare will 
double. To fund the program, we will need to make a combination 
of provider cuts, beneficiary cuts, and increased taxes. There 
is no other way. So, Mr. Chairman, as we proceed to ``give 
back'' some of the BBA, we make meeting the future challenges 
more difficult. Therefore, I hope the Members will be prepared 
to suggest ways to pay for the future of the program.
    Finally, as legislators, we are often grumpy when Executive 
Branch agencies do not follow the laws we write. There are a 
lot of Members blaming HCFA for enforcing the laws we have 
written--and that's kind of strange: Members are saying ``I 
didn't mean it; please ignore the law.'' If we don't like what 
HCFA is doing, let's change the law, and be willing to pay for 
it. But let's don't play Pontius Pilate and pretend we had 
nothing to do with the BBA and extending the life of Medicare 
Part A to 2015.

                                


Statement of Hon. Jim Ramstad, a Representative in Congress from the 
State of Minnesota

    Mr. Chairman, thank you for calling this important hearing 
to discuss changes to the Medicare provisions in the Balanced 
Budget Act.
    As I stated on the House floor on Wednesday, I am really 
looking forward to this hearing today so that we might flush 
out some of the problems currently facing Medicare providers 
and beneficiaries.
    As we all know, whenever you pass legislation of the 
historic magnitude of the Balanced Budget Act, there are bound 
to be unintended problems that will need to be addressed. 
Certainly, any problematic situations that have arisen due to 
the actual bill language we passed should be addressed with 
new, better bill language.
    But Mr. Chairman, complications that are a result of the 
way in which the Administration has chosen to implement the 
laws we passed should and must be fixed by the Administration.
    I consider myself a reasonable Minnesotan, and I can 
understand that HCFA may have trouble dealing with the massive 
legislation we passed. But that really isn't the major concern 
I have today. Today, I am frustrated with the way in which HCFA 
bureaucrats are handling things--the way in which they 
obfuscate the laws we pass and slough off responsibility on 
Congress whenever they feel like it.
    Mr. Chairman, I plan to ask HCFA some tough questions today 
on behalf of all the Medicare beneficiaries in my State. I 
don't want to hear excuses about ``prescriptive'' bill language 
or evasive responses.
    Thanks again, Mr. Chairman, for calling this important 
hearing. I invite the Administration to join me and the Members 
of this Subcommittee, for the sake of seniors across our great 
nation, in seriously and responsibly addressing the concerns 
and problems that are occurring in the Medicare program.

                                


    Chairman Thomas. I thank the gentleman. Operative word in 
all of this is ``if.'' clearly, as I indicated in my opening 
statement, that we went into this together, I think positively, 
and we ought to continue to work together. What the 
administration can do means it is something that Congress 
doesn't have to do. There may be a difference between what the 
administration can do and what the administration will do. To 
the degree that they believe that there is any statutory 
provision which is unclear and which they wish clarified in 
terms of their responsibilities, I think it is also incumbent 
upon us to perhaps indicate that we think they have the 
ability, that congressional intent can be conveyed so they 
could again make adjustments.
    One of the key abilities that the administration would have 
would be to soften the impact of some policies which in the 
abstract we believe to be appropriate, but perhaps the time 
lines are not appropriate, and you could stretch out some time 
lines, you could make some adjustments. You could take some 
payments that would otherwise be removal of money from a 
particular area and create a budget-neutral payment structure.
    I believe the administration in their testimony will 
indicate that they believe they can do in this particular 
areas. We probably believe they can do it in more areas than 
they indicate, and where we need to clarify that we would 
clarify it.
    Let me explain to the gentleman and others what I consider 
to be our basic rules in approaching what are to be adjustments 
in the Balanced Budget Act of 1997. So when you say 
adjustments, what we really mean are refinements, not repeal. I 
am frankly interested in our MedPAC testimony and our GAO 
testimony which continues, as did the Inspector General of the 
General Accounting Office last week in essence, to pat us on 
the back for sticking to the program that we think as we make 
these refinements is a significant improvement over the old 
Medicare system. So we are not looking for repeals, we are 
looking for refinements.
    In addition to that, although anecdotes are useful to 
illustrate some difficulties in particular areas, data is much 
better. We do think if you are going to get adjustments in 
particular areas you need to show costs, that there is a need. 
Pleading this probably isn't sufficient for us to make 
adjustments.
    And then finally, we do need to look at this in terms of 
the immediacy of some of the changes that are necessary. A lot 
of times Congress looks at 5-year windows, the Senate and the 
administration sometimes looks at 10-year windows. I am more 
concerned with the impact over the next 6 to 9 to 12 months 
than I am over some indication that there may be an adjustment 
in the 2003, 2004 outyear period. So time lines that matter, I 
think, are critical as we make refinements; not repealing BBA 
1997 based upon showing cost. Those will be the kinds of 
principles that we will be operating on.
    I will tell the gentleman that I have asked the 
Congressional Budget Office to ``score,'' as we say, a number 
of adjustments. There have been no lack of suggestions from 
this room and beyond as to changes that might be made. It is no 
secret, not difficult to compile a list of suggested changes. 
We are trying to get dollar amounts as best we are able and 
impact circumstances for those. We then kind of lay them out 
and look at what appears to be those changes that fit the 
criteria here, principles that I outlined.
    I know that time is short. But the longer we have waited, 
the better information we have available, the better decision 
that we can make. The dollar amounts that the Congress would be 
responsible for will be in large part based upon the 
administrative adjustments the administration believes it can 
make. As we look at the burden between the both of us, I think 
we can make some useful and significant changes without a 
significant burden on the Congress in terms of actual dollars.
    Let me also say to the gentleman that he mentioned the 
Social Security fund, or dipping into it. It seems to me that 
most people and the congressional statements that have been 
passed in regard to retirement security mentioned both Social 
Security and Medicare. I think most people believe that in 
making adjustments to these long-term security interests of 
seniors, that if it is necessary to spend some money in the 
adjustments of the Balanced Budget Act of 1997 in the area of 
Medicare, utilizing surplus monies for retirement security has 
a higher calling than most of the other demands that we have 
heard recently on those funds. That will be a decision that we 
will perhaps face. Our hope is that we would not have to face 
that decision, but it ought to be laid on the table at this 
time.
    Mr. Kleczka. Will the Chairman yield further?
    Chairman Thomas. Very briefly.
    Mr. Kleczka. The question from Mr. Stark was whether or not 
we were going to have a markup on some type of refinement bill 
next week.
    Chairman Thomas. I indicated I am waiting for the 
Congressional Budget Office to supply us with some numbers so 
we can actually have a decision matrix in front of us. I am not 
interested in making decisions on anecdotes; I am interested in 
making decisions on data. I cannot tell you when the markup 
will be because the Congressional Budget Office hasn't given me 
the information yet. I would have preferred to have done it 
last week, I would have preferred to do it this week, I prefer 
to do it next week.
    Mr. Kleczka. Is there a dollar amount that the House is 
working under or--the administration is talking about a $7 
billion refinement; the Senate's Minority talk about 20. Do we 
have some type of a ballpark figure?
    Chairman Thomas. I would tell the gentleman the 
administration's number, as I understand it, is $7\1/2\ billion 
over 10 years. The Minority leader, since he isn't responsible 
for any of that, 20 billion over 5. I would tell the gentleman 
that somewhere between those two numbers is an appropriate 
amount and we will arrive at that in due time.
    Mr. Kleczka. Super. Thank you.
    Chairman Thomas. I thank the gentleman. As is usually the 
case, if any member has written testimony, it will be made a 
part of the record.
    And with that, Mr. Hash, the Acting Administrator of the 
Health Care Financing Administration, at the request of both 
the Chairman and the Ranking Member, and your testimony--if at 
all possible you could outline for us what the administration 
can do and what the administration will do, your written 
testimony will be made a part of the record. You may address us 
in any way you see fit in the time you have.

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

    Mr. Hash. Thank you, Mr. Chairman. Chairman Thomas, 
Congressman Stark and other distinguished members of the Health 
Subcommittee, we want to thank you for inviting us today to 
discuss refinements to the Balanced Budget Act. The BBA 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 in 1993, 
is now projected to be solvent through 2015.
    It is clear that the BBA is succeeding in promoting 
efficiency and slowing the growth of Medicare expenditures and 
extending the life of the Medicare Trust Fund. We view that 
when we worked to develop the BBA, that we were partners with 
you, Mr. Chairman, and the rest of the committee. And as we 
observe any unintended consequences that require changes to the 
BBA, we want to call on and work together with you as partners.
    We believe that it is important to recognize that the BBA 
is only one factor contributing to changes in Medicare 
spending. The Congressional Budget Office and our own actuaries 
have stated that substantial strides in fighting fraud, waste, 
and abuse in the Medicare program have reduced significantly 
the growth in outlays. In addition, low inflation from a strong 
economy is having an effect on Medicare spending rates. And 
slower claims processing during the transition to new payment 
systems is contributing to what we believe is a temporary 
slowdown in spending.
    We are concerned about reports of the financial condition 
of some providers. But it is essential, I think, as we look at 
these reports to distinguish the BBA's impact from the effects 
of things like excess capacity in the system, discounted rates 
to other payers, aggressive competition in the health care 
system, in some cases imprudent business decisions and other 
factors not caused by the BBA.
    And it is essential that we focus the impact on 
beneficiaries, ensuring that they continue to enjoy access to 
high-quality health care services.
    Changes of the magnitude included in the Balanced Budget 
Act always require adjustments. We have been proactively 
monitoring the impact of the BBA on beneficiaries to determine 
what changes may need to be made to ensure continued access to 
high-quality services. 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 Balanced Budget Act's $1,500 annual caps on certain 
rehabilitation therapeutic services.
    We will continue working with beneficiaries, providers, the 
Congress, and other interested parties to closely monitor the 
performance of providers to evaluate the evidence of problems 
and access to quality care and to develop appropriate and 
fiscally responsible solutions.
    Because of our concerns, as many of you know, the 
President's comprehensive Medicare reform plan sets aside a 
quality assurance fund of $7.5 billion over the next 10 years 
to smooth out the implementation of the Balanced budget payment 
reforms that may be adversely affecting beneficiary access to 
quality care. We would like to work with the Congress to make 
appropriate adjustments where there is evidence that 
adjustments are needed. The President's plan also includes 
administrative actions to assure a smooth implementation 
process that we have already taken, or that we are considering 
currently, in the context of pending rules.
    We are working with Congress to identify appropriate and 
prudent legislative solutions. We are also taking several 
initiatives in our administrative discretion to help hospitals 
and home health agencies and other providers adjust to the 
changes in the BBA. For example, we are delaying the extension 
of hospital inpatient transfer policies to other diagnoses for 
a 2-year period.
    We are considering, in the context of our rule on the 
outpatient hospital PPS system, delaying the volume control 
mechanism for the first few years of the new outpatient 
protective payment system. We are also considering a 3-year 
transition to the new hospital outpatient payment system by 
making budget-neutral adjustments to increase payments to 
hospitals that would otherwise receive large reductions, such 
as low-volume rural and urban hospitals, teaching hospitals, 
and cancer hospitals.
    We are proposing to use the same wage index for calculating 
hospital outpatient PPS payments that is used for the inpatient 
protective payment system. And finally we are trying to make it 
easier for rural hospitals whose patients now are based on 
lower rural average wages to be reclassified and receive 
payments based on higher average wages in nearby urban areas 
and thus receive higher PPS payments.
    To help home health agencies, we are increasing the time 
for repayment of overpayments related to the interim payment 
system from 1 year to 3 years, with 1 year interest free. We 
are also following the recommendations of the General 
Accounting Office by requiring all home health agencies to 
obtain surety bonds of only $50,000, not 15 percent of their 
annual Medicare revenues as was proposed earlier.
    We have eliminated the sequential billing requirement that 
many home health agencies indicated was contributing to cash 
flow problems, and we are phasing in our instructions to 
implement the requirement for home health agencies to report 
their services in 15-minute increments. We are also phasing in 
risk-adjustment for Medicare+Choice plans. And we have made 
several other refinements to the Medicare+Choice regulations 
that strengthen protections for beneficiaries while making it 
easier for plans to participate. We are actively looking to see 
where we might be able to make additional accommodations to 
help plans and providers adjust to the BBA.
    Let me say again, Mr. Chairman, that when we worked to 
develop the BBA, we viewed ourselves as partners with you and 
this committee. As issues arise that need to be addressed, we 
want to work together with you again as partners and we look 
forward to going forward to that task together.
    I thank you for inviting us today and for holding this 
hearing. I would be happy to respond to questions that you or 
other Members of the Subcommittee may have. Thank you.
    Chairman Thomas. Thank you very much, Mike. I appreciate 
the spirit with which we are approaching this effort. I hope it 
remains through the entire process.
    [The prepared statement follows:]

Statement of Hon. Michael Hash, Deputy Administrator, Health Care 
Financing Administration

    Chairman Thomas, Congressman Stark, distinguished 
Subcommittee Members, thank you for inviting us to discuss 
refinements to the Balanced Budget Act. 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.
    The BBA made substantial changes to the way Medicare 
reimburses providers in the fee-for-service program by:
     modifying inpatient hospital payment rules;
     establishing a prospective per diem payment system 
for skilled nursing facilities to encourage facilities to 
provide care that is both efficient and appropriate;
     refining the physician payment system to more 
accurately reflect practice expenses;
     initiating 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,
     authorizing an important test of whether market 
competition can help Medicare and its beneficiaries save money 
on durable medical equipment and supplies.
    And the BBA created the Medicare+Choice program, which 
allows private plans to offer beneficiaries a wide range of 
options, similar to what is available in the private sector 
today. It has initiated a new beneficiary education campaign to 
inform beneficiaries about these options. It includes important 
new protections for patients and providers, as well as 
statutory requirements for quality assessment and improvement. 
And it initiates a transition to risk adjustment, which will 
make the payment system fairer and more accurate.
    We have fully implemented the majority of the BBA's more 
than 300 provisions affecting our programs and made substantial 
progress on the remainder. 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 the 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 (CBO), the BBA is only one factor contributing to 
changes in Medicare spending. We have made substantial strides 
in fighting fraud, waste and abuse that have significantly 
decreased 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. Low inflation from a strong economy is 
having an impact on total spending. And slower claims 
processing during the transition to new payment systems is 
contributing to a temporary slow-down in spending. Backlogged 
claims are expected to be paid by fiscal 2000.
    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.
    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. But 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 factors not caused by 
the BBA. And it is essential that we focus on the impact on 
beneficiary access to high quality patient care.
    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.
    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 quality care. We want 
to work with the Congress to make appropriate adjustments where 
there is evidence that adjustments are needed. 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 doubles over the next 30 years, since 
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 (PPS), similar to what is used to 
pay for hospital inpatient care. This new system is schedule to 
go into effect in July 2000. 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 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. 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 agencies. 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 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 (GAO) by requiring all agencies to obtain bonds of only 
$50,000, not 15 percent of annual agency Medicare revenues as 
was proposed earlier. We also have eliminated the sequential 
billing rule that some agencies said was adversely affecting 
cash flow. And we are phasing-in our instructions implementing 
the requirement that home health agencies report their services 
in 15-minute increments.

                           Monitoring Access

    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 from several sources to look for 
objective information and evidence of the impact of BBA changes on 
access to quality care. These data sources include:
     beneficiary advocacy groups;
     health 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, continuing lines of business as well as those 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 (IG) office has interviewed hospital 
discharge planners and nursing home administrators about the BBA's 
impact on patient care. The IG 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. We have 
several industry-sponsored analyses from different sources of 1996 
claims data indicated 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.
    Skilled Nursing Facilities. We implemented the new prospective 
payment system (PPS) 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 PPS 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 budget neutral 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. The 
Inspector General found in its interviews of 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. 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 Agencies. 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 publish a proposed 
regulation this fall and to have the prospective payment system in 
place by the October 1, 2000 statutory deadline.
    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 the steps discussed above 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.
    To date, evaluations by the GAO and HHS have not found that BBA 
changes are causing significant quality or access problems. Our 
monitoring of employment data shows that free standing home health 
agencies have made small reductions in their workforce, back to the 
level seen in 1996. 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.
    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 settings 
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).
    We expect to implement the prospective payment system for 
outpatient care 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. And we are continuing to develop 
modifications to the system for inclusion in the final rule.
    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, according to the 
Medicare Payment Advisory Commission (MedPAC), Medicare costs per case 
have declined for an unprecedented fifth year in a row. However, MedPAC 
also notes that while rural hospitals have generally posted healthy 
margins, many small rural hospitals appear to be in especially poor 
financial condition.
    We continue to hear reports of financial distress, and we 
understand the challenge hospitals are facing in today's changing 
health care marketplace. We are reviewing the data as it comes in, and 
we will continue to monitor this situation closely.
    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 is stable. 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. The President's budget proposal 
addresses both of these concerns.
    Medicare+Choice. Successfully implementing this program is a high 
priority for us. Medicare managed care enrollment has tripled under the 
Clinton Administration, and there are now 6.48 million beneficiaries 
enrolled in Medicare+Choice plans. We meet regularly with beneficiary 
advocates, industry representatives, and others to discuss ways to 
improve the program. We launched a national education campaign and 
participated in more than 1,000 events around the country to help 
beneficiaries understand it. And we are establishing a federal advisory 
committee to help us better inform beneficiaries.
    We have taken steps to assist plans and encourage plan 
participation in Medicare+Choice. We worked with Congress to give plans 
two more months to file the information used to approve benefit and 
premium structures so plans were able to use more current experience 
when designing benefit packages and setting cost sharing levels. We 
also published refinements to Medicare+Choice regulation that improve 
beneficiary protections and access to information while making it 
easier for health plans to offer more options. The new rule:
     clarifies that beneficiaries in a plan that leaves the 
program are entitled to enroll in remaining locally available plans;
     specifies that changes in plan rules must be made by 
October 15 so beneficiaries have information they need to make an 
informed choice during the November open enrollment;
     allows plans to choose how to conduct the initial health 
assessment;
     waives the mandatory health assessment within 90 days of 
enrollment for commercial enrollees who choose the same insurer's 
Medicare+Choice plan when they turn 65, and for enrollees who keep the 
same primary care provider when switching plans;
     stipulates that the coordination of care function can be 
performed by a range of qualified health care professionals, and is not 
limited to primary care providers;
     limits the applicability of provider participation 
requirements to physicians; and,
     allows plans to terminate specialists with the same 
process for terminating other providers.
    We intend to publish a comprehensive final rule with further 
refinements this fall.
    We have also undertaken a comprehensive beneficiary education 
program. We launched the National Medicare Education Program to make 
sure beneficiaries receive accurate, unbiased information about their 
benefits, rights, and options. The campaign includes:
     mailing a Medicare & You handbook to explain health plan 
options;
     a toll-free ``1-800-MEDICARE'' [1-800-633-4227] call 
center with live operators to answer questions, and provide detailed 
plan-level information;
     a consumer-friendly Internet site, www.medicare.gov, which 
includes comparisons of benefits, costs, quality, and satisfaction 
ratings for plans available in each zip code;
     working with more than 120 national aging, consumer, 
provider, employer, union, and other organizations who help disseminate 
information to their constituencies;
     beneficiary counseling from State Health Insurance 
Assistance Programs;
     a national publicity campaign;
     a Regional Education About Choices in Healthcare (REACH) 
campaign that will conduct State and local outreach activities 
nationwide; and,
     a comprehensive assessment of these efforts.
    We tested the system in five States in 1998 and learned how to 
improve efforts for this November's open enrollment period. For 
example, we have made the Medicare & You handbook easier to use and 
improve the accuracy of information about plans that are withdrawing. 
We have added new links on our Medicare Compare website at 
www.medicare.gov to help users find information faster. We are 
standardizing plan marketing materials that summarize benefits so 
beneficiaries can more easily make apples-to-apples comparisons among 
plans in this November's open enrollment period. And we have added 
information on managed care plan withdrawals to the Important Notes 
section of the 1999 plan information on our Medicare Compare website.
    To help us continually improve our education efforts, we are 
establishing the Citizens' Advisory Panel on Medicare Education, under 
the Federal Advisory Committee Act. The panel will help enhance our 
effectiveness in informing beneficiaries through use of public-private 
partnerships, expand outreach to vulnerable and underserved 
communities, and assemble an information base of ``best practices'' for 
helping beneficiaries evaluate plan options and strengthening community 
assistance infrastructure. Panel members will include representatives 
from the general public, older Americans, specific disease and 
disability groups, minority communities, health communicators, 
researchers, plans, providers, and other groups.
    The BBA also initiated important payment reforms that begin to 
correct for historical overpayment. It established a competitive 
pricing demonstration in which plan payment rates will be set through a 
bidding process, similar to what most employers and unions use to 
decide how much to pay plans. And, starting in January, the BBA 
mandates that we ``risk adjust'' payments to account for the health 
status of each enrollee. Studies by the Congressional Budget Office, 
Physician Payment Review Commission, and many others have shown that we 
overpay plans in part because Medicare fails to adjust payments for the 
health of enrollees.
    That is why risk adjustment cannot be budget neutral. The vast 
majority of beneficiaries enrolled in Medicare+Choice cost far less 
than what Medicare pays plans for each enrollee. Budget neutral risk 
adjustment would mean Medicare and the taxpayers who fund it would 
continue to lose billions of dollars each year on Medicare+Choice. 
Budget neutral risk adjustment would cost taxpayers an estimated $11.2 
billion over the five years that we are phasing it in if health plans 
maintain their current, mostly healthy beneficiary mix.
    We are concerned about disruptions to beneficiaries caused by plan 
decisions to trim participation in Medicare+Choice. The GAO reported in 
April that many factors contribute to such decisions. For instance, 
plans may have trouble establishing adequate provider networks, 
enrolling enough beneficiaries to support fixed costs, or otherwise 
competing in a given market.
    However, inadequate reimbursement to plans does not fully explain 
these plan decisions. Payment is rising in all counties this coming 
year by an average of 5 percent. In fact, despite BBA reforms, 
aggregate payment to plans continues to be excessive, according to 
another GAO report released in June, because of a forecasting error 
that the BBA locked into the statutory payment formula. The result is 
that plans are being paid an additional excess amount that totaled $1.3 
billion in 1998 and will increase each year.
    BBA reforms may, however, mean that payments in some counties no 
longer include enough excess to cover losses in other areas or to 
subsidize extra benefits that fee-for-service Medicare does not 
currently cover, such as prescription drugs.
    Clearly all beneficiaries need a more stable and reliable source of 
prescription drug coverage. And, if plans' primary problem is paying 
for benefits beyond the Medicare benefit package, the best solution is 
to improve the benefit package by providing all beneficiaries with 
access to an affordable prescription drug benefit, and paying plans 
explicitly for providing it.
    The President's Medicare reform plan gives all beneficiaries the 
option to pay a modest premium for a prescription drug benefit that 
will cover half of all prescription drug costs up to $5,000 when fully 
phased in, with no deductible. Medicare+Choice plans would be 
explicitly paid for providing a drug benefit, and would no longer have 
to depend on what the rate is in a given area to determine whether they 
can afford to do so.
    The President's plan also will modernize the way Medicare pays 
managed care plans. Rates would be set through competition among plans 
rather than through a complicated statutory formula. All plans would be 
paid their full price through a combination of government and 
beneficiary payments. The lower the price, the less beneficiaries pay. 
And the President's plan also includes several provisions to preserve 
beneficiary options and strengthen protections when plans withdraw from 
Medicare.

                               Conclusion

    The BBA made important changes to the 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. The President's plan also includes 
administrative adjustments to help in the transition to new payment 
systems. 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.
    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 also are committed to working with Congress to enact bipartisan 
Medicare reform this year that makes a prescription drug benefit 
available and affordable for all beneficiaries, dedicates a significant 
portion of the budget surplus to Medicare, and sets aside funding 
specifically for smoothing out BBA payment reforms.
    I thank you for holding this hearing, and I am happy to answer your 
questions.

                                

    Chairman Thomas. In reading the testimony there are some 
concerns, and I know that you could not be as explicit as you 
might want to be, but you have clearly pointed out some areas 
that we need to address. There is no question that, for 
example, on page 7 of your testimony, we need to deal with the 
therapy caps, whether we decouple the speech and physical and 
the dollar amounts themselves or whether we talk about focusing 
on extremely high-cost activities, although relatively few, 
that would be very damaging to any structure of the total cost.
    We believe that that would require legislative action, and 
are ready and willing, I think you will find this committee, to 
address that.
    Additionally on page 8, although you did move forward with 
the prospective payment system for skilled nursing facilities, 
the so-called resource utilization groups, they are clearly not 
sophisticated enough to deal with acuity questions, and those 
are some of the data that Congress is interested in. And 
although you suggest you can make some adjustments on a budget-
neutral basis, I believe we are going to have to sit down and 
talk about providing some additional dollars. Given your Y2K 
problems you are not going to be able refigure the RUGs, I 
understand, but we could at least use some surrogates for 
acuity in replacing some appropriate additional amounts in 
appropriate categories. I think you will find this committee 
will be willing to work with you in that area.
    One of the questions that is constantly asked: How much 
money are we talking about? Everybody wants to know the bottom 
line before you get there. I do have some concern about your 
statement in terms of the President's willingness to commit to 
$7\1/2\ billion over 10 years to making some of these 
adjustments. I believe on page 3, you indicate that the 
President has set aside those kinds of funds. Is it not 
accurate that in the President's budget, had he had his way 
beyond the adjustments in the Balanced Budget Act, over a 5-
year period there would have been more than $12 billion in 
additional Medicare reductions, more than $28 billion over 10 
years? Is that accurate or approximately accurate? Did the 
President's budget plan additional reductions in the Medicare 
area?
    Mr. Hash. The President's budget for 2000 did include 
proposed reductions in Medicare outlays; that is correct, Mr. 
Chairman. I do believe that in the context of the reform plan 
that he announced this summer, the assumption is that the 
proposals in the reform plan relating to Medicare are the ones 
which are in place and the ones we are trying to talk about 
together today.
    Chairman Thomas. I understand. But that leads me to another 
concern on that same page 3; for example, the final sentence in 
the third paragraph that said in terms of the adjustments that 
you have offered on the President's reform plan this will help 
prevent, ``excessive cuts in provider payments that otherwise 
would be necessary in the future as Medicare enrollment doubles 
over the next 30 years.''
    To some people, that says volumes about where you are 
suggesting reforms would be coming from, just as the $28 
billion over 10-year additional reductions in the President's 
plan indicated, that the adjustments probably should come from 
additional ratcheting down of providers. You show no indication 
in this sentence or paragraph, or to my ability to find it 
anywhere else, a discussion of whether or not millionaires are 
going to continue to receive benefits across the board or other 
suggested changes that the Medicare commission spent more than 
a year examining and offered up as suggested proposals. My 
assumption is that you--this was simply one of those lines that 
you placed in there and that you are not opposing, looking at 
additional changes other than cuts in provider payments.
    Mr. Hash. No, Mr. Chairman, we are not opposed to looking 
at other things. And in fact in the President's proposal, there 
are details that involve not only changes in Medicare payment 
policies but importantly, as we all know, if we are going to 
extend the life of the Medicare program beyond 2015, given the 
increase in the number of beneficiaries, it is going to take 
additional revenues. And a significant portion of the 
President's proposal is the dedication of 15 percent of the on-
budget surplus over the next 10 years to extend the life of the 
program and to mitigate the need for additional provider and 
beneficiary cost-sharing changes.
    Chairman Thomas. Did the President's plan include an 
income-relating provision?
    Mr. Hash. No, Mr. Chairman, it does not. It does include 
changes in the Part B deductible and in cost sharing for 
beneficiaries.
    Chairman Thomas. Thank you. On page 10, again as I 
indicated in my opening statement, that there have been some 
difficulties because of the Y2K computer adjustment. You have 
not been able to meet some of the deadlines that we thought 
were appropriate. One of the areas that I am most concerned 
about is in adjustments for the outpatient prospective payment 
system, because for some time now, beneficiaries have because 
of the way in which the payment structure is determined, have 
been paying more than their fair share, is the way I think you 
could state it. Now, when we had the administrator--and I 
understand she is still on maternity leave and things are going 
well with Nicholas and we are all very pleased for her.
    Mr. Hash. Yes, sir.
    Chairman Thomas. The delay from January to April, a 3-month 
delay, was going to cost about $570 million. Is that roughly 
the correct amount?
    Mr. Hash. I believe that is the figure that has been put 
forth by the CBO.
    Chairman Thomas. Do you have a quarrel with that figure?
    Mr. Hash. I do not, Mr. Chairman.
    Chairman Thomas. So that is additional overcharge to the 
beneficiaries. If we are going to extend that now from April, 
if you are not going to be able to make that time line, when do 
you think you are now going to be able to have it still up and 
running?
    Mr. Hash. Mr. Chairman, our intention is as soon as we pass 
the Y2K window at the end of March, we will bring up the 
hospital prospective payment system as soon as possible, after 
giving providers sufficient notice and contractors sufficient 
notice to prepare for it, and I think that would be by the 
middle of the summer.
    Chairman Thomas. Middle of summer. July sound good?
    Mr. Hash. Yes, sir.
    Chairman Thomas. From January to April was 3 months; from 
April to July is 3 months. That is 6 months. And if, in fact, 
the first 3 months was 570 million and the second 3 months is 
somewhere in that same ballpark, there is $1 billion. And I 
counted more than a dozen specific areas that we need to look 
at and make adjustments in the Balanced Budget Act, and in this 
one minor area under the general category of hospitals--and I 
have 3 or 4 additional suggestions for hospitals--that 6-month 
delay is costing $1 billion. And yet the President has decided 
that he is going to set aside $7-\1/2\ billion for 10 years. 
Obviously the point I am underscoring is when we make mistakes, 
when we miss deadlines and when we have to make adjustments, 
dollar amounts, although they may seem significant, looking at 
them in making a balanced structure for beneficiaries, here is 
$1 billion that they are going to be overcharged in just a 6-
month period, which I have some concern about and need to talk 
to some folks about how we make sure that they don't continue 
to carry more than their fair share.
    Mr. Hash. If I may, Mr. Chairman, comment on that. We share 
your concern about the impact of this delay on the 
beneficiaries' out-of-pocket expenses. And one of the aspects 
of this, which we have tried to address in the implementation 
plan, is when the cost sharing begins in July 1 of next year, 
it will begin at a point that it would have been had the 
payment system been put into place on January 1, 1999.
    Chairman Thomas. And I would just tell you, Michael, that 
that is the kind of cooperation and thinking we need, because 
some of these adjustments that are overdue need to be done in a 
budget-neutral way, so that time lines can pick up from the 
time that we begin. Where you think you can do it, I would like 
to know. Where you are unwilling to do it, we absolutely need 
to know. And where you are willing to do it but don't believe 
you have the ability, I believe you will find Congress more 
than willing to clarify when you are going to stretch out, make 
adjustments, and appropriately soften deadlines. I appreciate 
working with you.
    Does the gentleman from California wish to inquire?
    Mr. Stark. Thank you, Mr. Chairman. Just two issues Mike, 
on the outpatient prospective payment. It is my understanding 
that you do not have the authority to offset those payment 
reductions. There are some advertisements being run hither and 
yon that it was the legislative intent that those payments did 
not cause reductions to the hospitals. Now, CBO did not score 
that as a cost of Medicare as they would of had to do. They 
didn't accidentally overlook the $2 billion of cost. I just 
wanted to set the record straight that the law was not intended 
to offset the costs to hospitals of the reduction in the 
outpatient prospective payment; is that correct?
    Mr. Hash. I believe you are correct, Mr. Stark. Bringing 
into line the co-insurance amounts by beneficiaries to equal 20 
percent of the outpatient charge is a cost that is being borne 
by the hospitals in the form of payments that would otherwise 
have been made.
    Mr. Stark. Just to set the record straight, our intention 
was to save the beneficiaries that excessive out-of-pocket 
cost. We did not intend to charge it to the taxpayers, but 
indeed to see that it came out--as easy as we could make it--
out of the hospitals.
    The other issue that you raise in your testimony deals with 
reimbursement for managed care. You suggest that inadequate 
reimbursement to those plans does not explain the decisions for 
plans to stop providing service. I think that you indicate that 
in many areas the plans just couldn't find a big enough patient 
base to make them viable at any cost. In other words, you need 
a certain minimum number of people to sign up to be able to 
keep surgeons and other providers on call. Second, you also 
suggest that we are for the most part overpaying the managed 
care plans, absent any risk adjustment. Is that a fair 
assessment of your testimony?
    Mr. Hash. I believe it is, Mr. Stark, and it I believe has 
been the testimony of others, GAO and the Congressional Budget 
Office and the Prospective Payment Assessment Commission, the 
predecessor to MedPAC.
    Mr. Stark. Now, I have often suggested the following to 
hospitals and laid down a challenge to them, but to my 
knowledge I haven't heard back from one hospital. Medicare is 
no longer the lowest payer for any particular DRG that a 
particular hospital is receiving. Aetna or Pacific Care or 
other of the managed care plans have negotiated contracts with 
those hospitals and indeed are paying far less than the 
Medicare system pays them. There is no question that the 
hospitals were good sports in previous years and cost-shifted 
onto these private insurance companies when Medicare was a 
lower payer.
    But what is your assessment--and I know we don't have a 
database, so absent the hospital saying anything, and you can 
figure if they had the figures they would show them to us? My 
sense is they are silent because they know very well that what 
they are attempting to do is get the taxpayers to raise the 
payments to the hospitals in order to make up for poor 
management decisions in underpricing the services to managed 
care plans. I can't find any reason why I should go back to my 
taxpayers and say you guys should bail out these hospitals. 
They should go back and raise the prices to the managed care 
plans and then come back. Can you comment on that and do you 
have any statistics that would support my theory or prove or 
disprove it?
    Mr. Hash. What we have seen in looking at the data over the 
last 5 years is that hospitals have been under significant 
pressure to discount for purposes of contracts with organized 
delivery systems. And that is pretty well established in the 
literature. I think what has happened is that as the rate of 
growth in Medicare payments, particularly as a result of the 
BBA, has slowed compared to what it was in the past, that has 
put increased pressure on hospitals because of their inability 
to subsidize those losses on the private side with Medicare 
payments.
    Mr. Stark. But just if I could repeat, would it be your 
opinion that on average, or for the most part, that Medicare is 
paying a higher DRG rate than managed care plans?
    Mr. Hash. You know, as you said, Mr. Stark, I don't have an 
empirical basis to make that statement. I am sure it varies 
across the country, but I do believe that in some areas the DRG 
payments under Medicare would be higher than comparable private 
sector payers.
    Mr. Stark. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you. The gentlewoman from 
Connecticut wish to inquire?
    Mrs. Johnson of Connecticut. Thank you very much. It is a 
pleasure to have you here at this hearing. I consider this one 
of the most important hearings we have had in the whole year in 
this session.
    There are many, many areas that need to have our attention 
as well as yours. Let me just go to one in the area of nursing 
homes. You do say in your testimony that the Inspector General 
found in its interviews of possible discharge planners or 
nursing home administrators, that less than 1 percent of 
nursing home administrators say the prospective payment system 
is causing access problems. You do go on then to other data 
that suggests the problem is much more serious than that.
    I would suggest to you that in testimony today that we are 
going to hear that the problem is really much more serious than 
that: that 58 percent of discharge planners identified patients 
who required excessive services have become more difficult to 
place in SNF since Medicare cuts. This is a very serious 
problem. The only reason beneficiaries aren't feeling it more 
keenly in my estimation is that nursing homes are compelled by 
law, at least in Connecticut, to participate in both Medicare 
and Medicaid. Most of them in Connecticut at least are 
nonprofits and they care a lot about their patients and they 
are not about to not take them even though they lose money on 
them. So I don't think whether they are getting placed should 
be our concern. Whether they are having a harder time to get 
placed, whether the nursing homes are asking for more 
information, which they clearly are, should very much be our 
concern. And I know it is the Chairman's and I know it is 
yours. I hope that we can accelerate your timetable a good 
deal, because I think a year from now is much too late to be 
able to implement something that will do something about this.
    But as important as the RUGs are, you have by 
administrative action excluded a number of things that you 
considered not common nursing home responsibilities from the 
RUGs. And I would ask you, I have been asking for months for 
you to look at exclusion of prosthetic devices, because if you 
bill prosthetic devices into RUGs and you reimburse every 
nursing home across the country a little tiny bit, and they 
never have anyone who needs a $7,000 prosthetic device, then 
the small nursing home, especially a very little one, can't 
absorb that $7,000 cost on a reimbursement rate of $200.
    So are you looking at excluding prosthetic devices and are 
you looking at excluding ambulance services for dialysis? In my 
district, rural hospitals, those ambulance costs are $800 a 
time. If you get someone who needs then dialysis, you simply 
can't do this. We can't impose on these institutions automatic 
losses for things that are clearly a public responsibility to 
pay for. So on exclusion of those issues which I think we need 
to do in addition to adjusting the RUGs, where is the 
administration?
    Mr. Hash. Mrs. Johnson, we too are concerned not only about 
admission and access to nursing facilities, but also that 
patients who are residents in nursing facilities are getting 
the care that they need. That is why, as you noted, we have 
identified a number of services that we think don't fall within 
the responsibilities of the nursing home to provide to their 
patients. In other words, it is not in the plan of care--for 
example, they have a heart attack or they have some need for a 
hospital-based service that was clearly not anticipated and for 
which the nursing home is not able to provide. Those are the 
kinds of things that we carved out.
    When it comes to issues that are actually part of the 
nursing home plan of care, I think our reading is that the 
statute is very clear about not unbundling things from the PPS 
rate in SNFs that are normally associated with care provided in 
that organization. But it doesn't mean that we aren't looking, 
as you know, at those RUGs that involve care for patients with 
high----.
    Mrs. Johnson of Connecticut. So am I to conclude from your 
answer that you are not considering any further exclusions?
    Mr. Hash. I think there are various ways to deal with the 
specific problem that you brought up.
    Mrs. Johnson of Connecticut. I have had no response to my 
letter from Dr. Berenson. I mean through the staff we have, but 
no final response. I need to know before this markup. Are you 
willing to deal with--we deal with transportation for dialysis 
in certain situations and not in others. This definitely has to 
affect a nursing home's consideration because they have a 
fiduciary responsibility to stay alive to serve the rest of 
their patients.
    So prosthetic devices, transportation for dialysis, 
transportation for radiation therapy, and clearing up who pays 
for chemotherapy are just fringe issues that we have got to 
deal with before we get to this markup, because it is 
imperative that we remove the threat of high--of some of the 
definable high cost. Medication is more difficult. But at least 
some of these are clear, succinct. We got to act.
    Mr. Hash. We definitely want to work with you in the 
context of the legislation, and I will get a response to you 
prior to your markup, and I apologize.
    Mrs. Johnson of Connecticut. Would you also update me at 
the same time as to where the administration's thinking is on a 
small provider exception? Because the little small nursing 
homes with 60 beds and 2 Medicare patients cannot carry the 
administrative burden. They only have bookkeepers, they don't 
have Arthur Andersen people.
    Mr. Hash. I want to make a point about the dialysis 
example, because we too are concerned about that, and what we 
are trying to do is to work with nursing homes and State 
licensing authorities to make sure that nursing homes can 
provide the dialysis service on the premises, making an 
ambulance trip unnecessary.
    Mrs. Johnson of Connecticut. We will discuss that. Thank 
you.
    Chairman Thomas. The gentleman from Wisconsin wish to 
inquire?
    Mr. Kleczka. Thank you, Mr. Chairman.
    Mr. Hash, if, in fact, HCFA would go forward and 
administratively make some of the changes necessary to provide 
some refinements, how would that be treated for budget 
purposes?
    Mr. Hash. I don't believe for your purposes here in the 
Congress that those are considered, that Congress is scored for 
those, and those are considered to be program expenditures 
under the existing law and therefore not counted as new 
spending.
    Mr. Kleczka. Will it come out of trust fund?
    Mr. Hash. Yes.
    Mr. Kleczka. So it would be like emergency spending in 
Congress. If we term it emergency spending, be it the census or 
whatever, then it is a free pass for us. So it is incumbent 
upon us in Congress to try to have you do it, but the fiscal 
effect is still there.
    Mr. Hash. The fiscal effect is still there but the 
rationale, if you will, Mr. Kleczka, is this is what was 
intended in the law and therefore it obligates those 
expenditures appropriately from the trust funds.
    Mr. Kleczka. But a readjustment of the trust fund would 
have to happen at some point. We have all heard from various 
interests who have been adversely affected by the Balanced 
Budget Act of 1997.
    Let me just broach two areas real quickly. The family 
medicine training programs have been affected adversely by the 
changes. There is a fear there that some of these programs will 
be forced to close and there will be a shortage of family 
physicians. I am assuming that HCFA has tracked this and other 
areas. What is your reaction to that contention?
    Mr. Hash. We definitely recognize that the BBA provisions 
for graduate medical education limit, by capping, the number of 
new residencies, and they do not allow for any growth unless 
institutions actually reduce training programs, say, in 
speciality areas in order to allow for increases in things like 
family medicine. The statute is very explicit in this area. But 
we would certainly be willing to work with you with respect to 
legislative considerations on that issue.
    Mr. Kleczka. Do you have any fear if we do not address this 
area we could be facing shortages in this area in the future?
    Mr. Hash. I am not aware of any data yet. That is not to 
say it may not turn out that we are facing a shortage in that 
regard. But again, I think we should look into this and work 
with you to identify if some modification of those limits on 
residents in training should be made.
    Mr. Kleczka. Also, yesterday I had the occasion to meet 
with some cardiologists from my district. And they have voiced 
concern about the way the practice expense components were 
developed and they said that if you continue the phase-in, the 
problems will only be exacerbated. Is there any interest on the 
part of HCFA either to delay the phase-in or to provide some 
adjustments in that area?
    Mr. Hash. At the moment, we are continuing our phase-in 
which concludes in 2004, I believe. What we have done, though, 
to address the issue of practice expense was to work with the 
American Medical Association and use their practice expense 
data that they collect on an annual basis as the basis for 
establishing relative practice value weights. We think that 
more accurately includes the cost of practice as reported by 
physicians themselves.
    Mr. Kleczka. We have all heard much concern about the 
therapy caps. I think you have addressed this earlier in your 
testimony but could you restate the HCFA position on the 
therapy caps?
    Mr. Hash. Our view is there is significant evidence that 
some patients are not getting access to an adequate amount of 
therapies and we would like to work with the Congress to make 
some adjustments to those limits.
    Mr. Kleczka. Now that particular adjustment, would that 
have to be legislative or could that be administrative?
    Mr. Hash. That would have to be legislative, I believe.
    Chairman Thomas. Would the gentleman yield on that point 
briefly? I think we do have to put it in the context of the 
fact that therapy capabilities from a hospital-based structure 
are not limited.
    Mr. Hash. That is correct.
    Chairman Thomas. And that given your inability to keep the 
records as appropriately as they should be, someone can receive 
therapy even to a $1,500 cap in different locations and you are 
not now able to determine that. Is that correct?
    Mr. Hash. That is correct, Mr. Chairman.
    Chairman Thomas. So we want to put the concern in its 
proper context that it is causing some concerns, but that what 
we want to look for is evidence that people are being denied 
cold, hard therapy where they absolutely need it, and that in 
fact there needs to be some corrections to the structure as 
well. But I want to underscore I agree there needs to be an 
examination of this area, but let's not leave the belief that 
it is $1,500 for everyone in every instance, with no 
opportunity to do anything else.
    Mr. Kleczka. Let me ask the Chair a quick question. Is it 
your contention that once the cap is attained in one particular 
treatment area, that patient can then be moved to another to 
start the 1,500 over again?
    Chairman Thomas. No I am just telling you that is reality, 
because HCFA cannot monitor that kind of activity. I don't 
think that should be the basis for receiving more than the cap 
amount. I think we need to look at an appropriate amount. This 
area was increasing at 18 percent a year when we did not see an 
increased need at that percentage. What we can do is create an 
outlier payment structure for the needed prosthetic, let's say, 
or for brain damage which clearly over a period of time takes 
enormous investment, far beyond that amount for therapy, but 
over the life of that individual a significant return to 
society, if we are in fact able to rehabilitate them, beyond 
the condition that they are in, there is good reason to make 
some adjustments.
    But I just didn't want to leave the impression that it is a 
hard and fast $1,500 cap for every person in America and that 
is what we are dealing with. That is not the case, but we are 
going to make some adjustments.
    Mr. Kleczka. Well, when we take the Chairman's mark to a 
markup, I am assuming we will have a lot more discussion on 
this particular area.
    Thank you, Mr. Hash.
    Chairman Thomas. The Chairman took some of your time. You 
want to spend a few minutes?
    Mr. Kleczka. Well, maybe we will come back.
    Chairman Thomas. Does the gentleman from Texas wish to 
inquire?
    Mr. Johnson of Texas. Yes. Thank you. I agree with you, Mr. 
Kleczka; that point is something I want to bring up too. I 
would like to know why you guys keep leaning on Y2K and saying 
that it is the reason you can't do something. Is that the 
reason or is it because you just haven't gotten your act 
together?
    Mr. Hash. Well, Mr. Johnson, it is the reason. We have had 
a very significant challenge in making sure that all of our 
computer systems that process Medicare claims and our other 
information systems were in fact Y2K compliant. We felt that 
that was our No. 1 priority.
    Mr. Johnson of Texas. Are they now?
    Mr. Hash. We believe they are now. As you know, what we are 
concerned about today is the provider and health plan 
community, and making sure that they have taken the steps to be 
ready.
    Mr. Johnson of Texas. That is true. But why can't you work 
on implementing the Balanced Budget Act now?
    Mr. Hash. Because our internal and external advisors on Y2K 
compliance advised us that during the period October 1 through 
March 31, 2000 that we should not make any systems changes 
because those could, in some unintended way, affect our Y2K 
readiness. So we are not making any changes in our systems 
through our contractors until we pass through the Millennium.
    Mr. Johnson of Texas. It seems to me if the Federal Reserve 
and banks and other organizations can do it now, make changes, 
that you ought to be able to as well. And I don't understand 
after Y2K occurs, which is the first of the year, and you have 
no problems, presumably, why you can't get on with it. Why do 
you have to wait until March?
    Mr. Hash. If we do not have any problems that require 
remediation, we expect to accelerate our return to regular 
changes in our claims processing systems.
    Mr. Johnson of Texas. I wish you guys would get with it.
    Let me ask another question. As you continue to do your 
risk adjustor phase-in, are you worried about the possibility 
of Medicare+Choice plans continuing to pull out of the markets, 
presuming they are?
    Mr. Hash. Mr. Johnson, as I think Mr. Stark alluded to in 
his statements a moment ago, we believe that the decisions 
about plans staying or leaving the program are related to a 
variety of factors in the marketplace, and, in fact, the coming 
in and leaving Medicare+Choice is still going on and I think it 
is reflective of larger changes in the health insurance 
marketplace.
    We don't think that the risk adjustment is a significant 
factor in the decision whether or not a plan will contract or 
continue to contract with the Medicare program.
    Mr. Johnson of Texas. OK. Let me ask you, in 1989, Congress 
codified that the 10 freestanding designated cancer centers 
were to be exempt from inpatient PPS. Now, why are these 10 
hospitals not exempt from outpatient PPS as well and given some 
kind of relief?
    Mr. Hash. We have met with them and are considering very 
carefully a large number of concerns from cancer centers about 
our proposed outpatient PPS system. As a result, we expect when 
we publish our final rule to make a number of changes, taking 
into account what the Congress said in the BBA, which gave us 
discretion with respect to a number of items in the hospital 
PPS payment system as it affects cancer hospitals.
    We intend to exercise the discretion in the law, and we 
intend to address the concerns that have been raised by the 
cancer centers when we publish our final rule.
    Mr. Johnson of Texas. You more or less answered it, but why 
did you decide not to exempt the outpatient PPS?
    Mr. Hash. We don't believe that the Balanced Budget Act 
actually provides for an exemption. It provides for special 
consideration of cancer hospitals. That is what we intend to 
do.
    Mr. Johnson of Texas. The bulk of their business, as you 
know, is Medicare-Medicaid.
    Mr. Hash. Yes, sir.
    Mr. Johnson of Texas. I think we need to take care of them.
    I would just like to make one more statement, if I could.
    I would say to Mr. Stark, I think he slammed the hospital 
systems a little bit. I would like to say that I have been 
dealing with them for a long time, and I don't think that they 
are fraudulent or attempting to harm the patient population in 
any way. They are hurting for dollars. I think that we need to 
get out there and figure out where the costs really are and 
make adjustments.
    Mr. Stark. If the gentleman from Texas would yield, I 
agree. I just wanted to suggest that the tables have turned in 
recent years, and the fees that we pay the hospitals with the 
taxpayers' money are higher than they are getting from many of 
the private insurance plans. Perhaps we ought to see the 
private insurance plans pay a little more before we use the 
taxpayers' money.
    That may or may not be the hospital's fault. I am just 
suggesting we don't have that data, and I think we could be 
more fair if we had it.
    Mr. Johnson of Texas. Thank you for the clarification.
    Chairman Thomas. I would tell the gentleman from Texas, my 
recollection is that the Balanced Budget Act indicated there 
could be a 1-year delay in implementing the outpatient PPS, 
clearly to examine whether or not it is appropriate and what 
changes might need to be made; not that the exemption would not 
be an ultimate decision that may be made, but it would be 
premature. We should look at it.
    I hope that, notwithstanding the delay on the outpatient 
PPS, that the administration intends to carry forward whatever 
delays were attached to the original date in a systematic and 
uniform way.
    Can you make a quick comment on that?
    Mr. Hash. Mr. Chairman, as you know, we are in the process 
of putting together the final rule on this.
    Chairman Thomas. That was not my question. If you don't 
want to answer it, just say you can't answer it at this time.
    Mr. Hash. I can't answer it at this time definitively.
    Chairman Thomas. Then we will deal with it. But you should 
not require everyone to meet a timetable when the BBA said 
there was a 1-year delay, and just because you failed to meet 
the timetable, other people have to suffer for it. That is not 
the way, in a mutual spirit of cooperation, we ought to carry 
out that.
    Mr. Hash. I understand, Mr. Chairman.
    Chairman Thomas. If you need some legislative statement to 
that effect, which I hope you don't, because it will open up 
the other question, that is what we are going to have to talk 
about.
    Does the gentleman from Georgia wish to inquire?
    Mr. Lewis. Thank you very much, Mr. Chairman.
    Thank you, Mr. Hash, for being here.
    Chairman Thomas. If the gentleman will yield just briefly, 
it is the chairman's intention not to recess for this vote. So 
those of you who have already had your opportunity, if you 
would go on over, we are going to try to keep this rolling so 
we don't unnecessarily delay individuals.
    I thank the gentleman.
    Mr. Lewis. Thank you, Mr. Chairman. I will be very brief.
    Thank you, Mr. Hash, for being here.
    Mr. Hash, this subcommittee is likely to hold a markup of 
legislation to fix some of the impact of the BBA. If we don't 
find an offset to pay for such fixes, will we be spending from 
the Social Security surplus? Could you tell me about that?
    Mr. Hash. Mr. Lewis, I don't have all the details on the 
available on-budget surplus for this and future years, so it 
would depend on whether that money has already been exhausted. 
And if it has been because it is committed to other uses, then 
anything spent beyond that would come from the off-budget 
surplus, which would be the Social Security surpluses.
    Mr. Lewis. Could you please describe for me and other 
Members of the Committee the effect that the House HHS 
appropriation bill will have on your agency?
    Mr. Hash. Yes, sir, Mr. Lewis, I would. I think it would be 
devastating for us.
    Mr. Lewis. Could you go into detail and just describe to 
Members of the Committee how devastating would the 
appropriation impact be?
    Mr. Hash. It would affect us across all of our business and 
programmatic activities, including very substantial reductions, 
in fact, the virtual elimination of our education campaign for 
Medicare beneficiaries. It would definitely cripple our 
initiative with respect to insuring the quality of care in 
nursing homes and our oversight of nursing homes. It would 
significantly impact our ability to continue making changes in 
payment systems and the workload that is associated with that.
    We have, as you know, Mr. Lewis, one of the very smallest 
budgets in relation to the programmatic dollars that we are 
responsible for. Less than 2 percent of our administrative 
budget, less than 2 percent of Medicare's expenditures are 
consumed by our administrative budget. So cuts of the magnitude 
proposed by that Subcommittee mark would definitely be 
devastating for our agency.
    Mr. Lewis. What would be the effect on fraud and abuse 
enforcement?
    Mr. Hash. That is another area where the proposed mark 
reduces substantially the funds that Congress set aside in a 
special, dedicated fund for this purpose and reduces them, as I 
understand, by $70 million. That would be a very substantial 
reduction in our effort to continue our aggressive oversight of 
waste, fraud, and abuse in our programs, which has been so 
important in returning multiple dollars for every Federal 
dollar invested in this effort, to return those dollars 
several-fold to the trust funds.
    Mr. Lewis. Thank you very much, Mr. Hash.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank you.
    Does the gentleman from Michigan wish to inquire?
    Mr. Camp. Yes, thank you, Mr. Chairman.
    My question is regarding the critical access hospital 
program. The Balanced Budget Act created this new designation 
for certain rural hospitals to be designated as critical access 
hospitals. Many have said this program is an attractive program 
because it would allow them to serve their communities better 
and meet their needs better. But some hospital groups have 
complained that this is not being implemented properly. I would 
like to hear what HCFA's plans are to improve this program.
    Mr. Hash. One of the issues that has been raised, Mr. Camp, 
is the time required for physicians to respond to a critical 
access hospital. There was an early proposal for a 30-minute 
response time. We ended up actually permitting a response time 
for these critical access hospitals providers of up to an hour. 
I think that has gone a long way to addressing the major 
concern that I believe was raised with respect to how we were 
implementing the critical access hospital program.
    If there are other areas that you are aware of that I have 
not mentioned, then we should look at them and try to address 
them.
    Mr. Camp. Well, specifically, the education and training 
that has been provided, or may not have been provided, to 
fiscal intermediaries to implement this program, what plans do 
you have for education and training?
    Mr. Hash. I believe we have been working with the States 
through those contractors. A key component of this, as you may 
know, is that each State has to establish a State-critical 
access hospital plan. Once having established that plan, and I 
think not all States have completed that work yet, then in fact 
the institution can be designated and paid according to the 
rules for critical access hospitals.
    If there is some confusion about the role of the 
contractors, the fiscal intermediaries, I would like to work 
with you and your staff to get clarifying information out 
there.
    Mr. Camp. Thank you.
    My second question is really regarding visiting nurse 
associations and home care providers. I have been hearing from 
some very reputable home care providers in mid-Michigan, the 
area I represent, who have been responsible--and I understand 
the fraud and abuse problems we have been trying to address, 
but who have been responsible providers.
    They have had a history of compliance, they have done well 
in their businesses, their denial rates are very low, but they 
are being crushed by the regulatory and administrative burden 
and the cost of responding to numerous audits and the paperwork 
they receive.
    What can you tell me about what I can say to these 
responsible home care providers that are really burdened? And 
there are many other factors that are burdening them, but 
particularly this regulatory burden.
    Mr. Hash. I would say that we, too, have been trying to 
work closely with the home health agencies, including the 
Visiting Nurse Association, throughout the country. We 
recognize that for many of them the changes included in the BBA 
have been difficult to adjust to. That is why, as I mentioned 
in my testimony, we have tried to be very lenient with respect 
to repayment plans associated with interim payment system 
overpayments.
    We have also tried to scale back, or phase in more slowly, 
some of the other requirements that are imposed through the 
BBA. For example, we have cut back on the time for implementing 
the surety bond requirement and have reduced the level of that 
requirement. We have eliminated sequential billing, which was a 
procedure that was causing cash flow problems. We are phasing 
in a billing requirement related to 15-minute increments of 
home health visit times.
    We have tried to take a number of steps to, in effect, 
address those kinds of problems that have slowed down either 
their cash flow or, in cases where they have found there is a 
substantial overpayment, that they need to repay.
    Mr. Camp. OK. Thank you for your comments.
    Thank you, Mr. Chairman.
    Chairman Thomas. The gentleman from Louisiana, if you have 
not voted, you are probably going to be pressured for time.
    The gentlewoman from Connecticut has already inquired. If 
you want to continue the questioning, and then as soon as 
someone else comes who has not, you will recognize them. I 
appreciate that.
    Mrs. Johnson of Connecticut [presiding]. Yes, sir. Trust 
me, Mr. Chairman.
    I am pleased to have this opportunity to visit with you, 
Mr. Hash.
    On the hospital outpatient payments, first of all, you do 
recognize the need to implement this change in a more gradual 
fashion. I appreciate that. Of course, as you increase benefits 
payments for some hospitals, you decrease payments benefits for 
other hospitals. Can you tell me which groups of hospitals are 
going to be hurt by your adjustment?
    Mr. Hash. One thing to say at the outset, all of the 
estimates people are talking about now are related to our 
proposed rule. We got a very large number of comments, and we 
are in the process of substantially revising that proposed 
rule, so the impact statements and analyses will all be very 
different, I can assure you, than they are now.
    But, based on the impact analysis that we did on the 
proposed rule, the most heavily impacted institutions from the 
scheme we laid out in the proposed rule were low-volume rural 
and urban hospitals, teaching hospitals, and cancer hospitals.
    Mrs. Johnson of Connecticut. Those are the ones you are 
going to help?
    Mr. Hash. That is our intention, that is correct.
    Mrs. Johnson of Connecticut. My concern is that, coming 
from a State that has no rural hospitals, because we realized 
early on we could not tolerate that designation, and most of my 
hospitals in smaller communities are not teaching hospitals, 
are they going to be further cut then? Because what I am saying 
is it does not fall rationally, it does not fall by category of 
hospital, necessarily.
    I have seen numbers that show that some people are going to 
experience a 50-percent cut in reimbursements and some a 3 
percent or 5-percent cut. I think instead of categories of 
hospitals, we should be looking at hospital impact.
    Mr. Hash. We will, Mrs. Johnson. That is why I said, on the 
low-volume problem, which I think may be a problem for many of 
your own institutions, they are not necessarily rural but they 
are small and they have low volume, that is why we need to 
address the impact specifically on an institution that has a 
relatively small number of cases.
    Mrs. Johnson of Connecticut. Good. I look forward to 
working with you on the details.
    I assume, as you work on this PPS for outpatient, you are 
going to recognize the extraordinary cost of drugs associated 
with outpatient care. In just my home town hospital, the cost 
of drugs over the last 2 years has increased 43 percent. If we 
fail to acknowledge that in the outpatient PPS we will truly 
damage our health care system.
    Mr. Hash. We, too, have heard that and looked at the data 
and recognize that our own data for the original proposal was 
not adequate in terms of a reflection of the prices of many 
important drugs that are provided in the hospital outpatient 
setting. We have hired an outside contractor to gather data on 
prices and use. We want to use that to refine our final rule.
    Mrs. Johnson of Connecticut. That is good. Thank you.
    I assume Mr. Cardin has not had a chance to question. I now 
recognize Mr. Cardin.
    Mr. Cardin. Thank you, Madam Chairman.
    Let me welcome Mr. Hash to the committee.
    Mr. Hash. Thank you.
    Mr. Cardin. Let me just express my first concern. That is, 
I think the circumstances on access are very serious in some 
areas that need addressing by this Congress if it cannot be 
done administratively. I certainly hope many of these issues 
can be done administratively. To the extent that we can be 
helpful in accomplishing those objectives I agree with the 
Chair we should work together.
    If there are areas, and I know there are, that require 
legislative assistance, we need to act in this Congress. 
Circumstances are getting very serious I know in my State of 
Maryland and I think around the Nation.
    I am glad to hear you mention the therapy cap and the need 
for relief. That will require legislative attention, since it 
is established by law. I think the impact that the therapy cap 
is having, along with the changes that we have made in the 
skilled nursing facility reimbursements, is having a 
compounding impact on high acuity patients particularly that 
need nursing services.
    For the life of me, I cannot understand why we impose the 
therapy cap, to start off with, other than to save money. I 
cannot think of a policy reason for it.
    Second, it is unfair in the way it is implemented. The 
Chair pointed out that, because of your ability to track these 
expenses, there are some beneficiaries that are exceeding the 
cap, and you cannot determine that, but yet, a beneficiary that 
is in a nursing facility cannot escape the cap. That is not 
fair to, again, a high acuity patient.
    I think it really cries out for relief now. I hope we will 
all work together to figure out a way to deal with that in a 
way that is fair, and I can give you the names of people in my 
congressional district that, as early as March of this year, 
were up against the cap. That is not right. I think that is one 
area we truly need to work together on.
    Mr. Hash. We definitely join you in that concern.
    Of the settings where we are particularly concerned about 
access to therapy services, it is those patients who are in 
nursing homes where we want to focus our attention.
    Mr. Cardin. Good. I am glad to hear that.
    Let me also, please, raise a different view on the HMO 
problems on Medicare+Choice. Last year in Maryland, before we 
had the Medicare+Choice, we had eight HMOs that were providing 
coverage to seniors in our State. We are now down to four HMOs. 
We used to have HMO coverage in every county in our State. Now 
in most of the counties of Maryland you cannot get--a senior 
won't be able to get an HMO effective January 1.
    Then in our more populous areas, the most popular HMOs 
requested--and today is October 1, so it is a day of decision, 
and I assume they will be able to charge our seniors now $50 a 
month for the services that were without additional fee in the 
current year.
    All that is happening, and I don't think it is fair to say 
that what we did in the Balanced Budget Act has not had an 
impact on that. In our State, we don't have a problem of 
network. There are plenty of networks in those lower counties. 
It is the fact those reimbursement levels are not allowing 
those HMOs to continue. I do think we have a problem, and it is 
affecting access.
    As you and I both know, the real service area that is going 
to be impacted the most is the lack of coverage for 
prescription drugs.
    Mr. Hash. Absolutely, Mr. Cardin. I didn't mean to say that 
the BBA changes are not related at all to these decisions. I 
just wanted to suggest that, for many organizations, there are 
a multitude of factors that went into their decisions about 
whether to drop their contract or to reduce their service area.
    But you are absolutely right. The consequence, from the 
beneficiary point of view, is loss of access in most cases to 
additional benefits or savings from out-of-pocket expenses 
associated with joining an HMO. That is a serious issue and one 
that we are very concerned about.
    I think, in the case of Maryland, that you and I have 
talked about, it is a situation in which the growth rate in the 
payments to managed care plans in those areas was growing much, 
much less rapidly than it had before the BBA came into place. 
If those organizations were going to continue to offer, both in 
urban and rural areas, the extra benefits they wanted to offer, 
they were finding difficulty financing those extra benefits 
based on the payments they were receiving. I think, in those 
cases, payments played a significant role. But, as you know, 
there have been other factors where they pulled out of their 
commercial business as well as their Medicare business in the 
same areas.
    Mr. Cardin. My time has expired. There are many other areas 
we have dealt with in the BBA Act. I want to thank you for your 
cooperation in looking at each one of those.
    Mr. Hash. Thank you.
    Mrs. Johnson of Connecticut. Mr. Ramstad.
    Mr. Ramstad. Thank you, Madam Chair.
    Mr. Hash, I would like to address a question, some 
questions related to the Maron Act. I want to specifically 
address an issue that I know is important to many, many seniors 
in Minnesota and across the Nation. That is, ensuring that 
frail, elderly seniors maintain access to the critical 
comprehensive health care they are currently receiving.
    I know HCFA recognizes how successful and popular the 
EverCare program is with current enrolled beneficiaries. I am 
not sure some of your colleagues at HCFA have recognized the 
significant cost savings of this program to the Medicare 
system. Trust me, they are real. I have all the empirical data 
in the world to support this. EverCare I think shows that the 
market does react to and can react to provide not only quality 
health care but can save money and certainly reduce 
hospitalizations. That is exactly what EverCare has done.
    Do you agree with that?
    Mr. Hash. As you may know, I have been working closely with 
folks at EverCare about their concerns, and we want to move 
forward with them.
    The issue that I think we have still--definitely are 
devoting a lot of energy and resources to is designing a 
payment system that appropriately accounts for the kind of 
patients or the kind of individuals they are enrolling there. 
That is our joint call.
    We are committed to doing the necessary work to ensure 
their payments are appropriate for the health status of frail 
elderly enrollees in Medicare+Choice plans.
    Mr. Ramstad. I certainly appreciate that spirit of 
cooperation that you are displaying today. Certainly you do 
understand the grave impact that the interim risk adjustor will 
have?
    Mr. Hash. That is why we have delayed it for them. Our 
intention is to examine a risk adjustor that better reflects 
the functional status of the individuals enrolled as well as 
the health status indicators. For that kind of population, you 
may need to take into account both their ability to carryout 
the activities of daily living as well as what their health 
status is. That is a key part of what we are addressing and 
analyzing in our ongoing work.
    Mr. Ramstad. Is it your intent to exempt it beyond one 
year?
    Mr. Hash. We want to see if we can come to an agreement on 
a risk adjustment methodology that appropriately recognizes the 
health care needs of their enrollees.
    Mr. Ramstad. You are willing to work with Mr. Cardin? You 
are aware of the legislation Mr. Cardin and I have introduced 
concerning the EverCare program?
    Mr. Hash. Yes, I am. Our view is that we have a great deal 
of optimism about being able to work out a risk adjustment 
methodology that should be satisfactory to them and to us as 
well.
    Mr. Ramstad. Are you talking about all EverCare or just 
demos?
    Mr. Hash. It would obviously be for the frail elderly 
programs around the country, of which EverCare is one.
    Mr. Ramstad. So you are willing to work with us to resolve 
the problems to take care of all the frail elderly seniors?
    Mr. Hash. We definitely want to do that. As I say, I think 
a key issue, unless I have misunderstood it, is making sure 
that we properly analyze adjusting their capitation rates to 
reflect their functional status as well as their health status.
    Mr. Ramstad. Again, I appreciate your willingness to work 
specifically with reference to EverCare, because that is so 
important to many, many elderly frail seniors in Minnesota. 
They just--it would be a real shame, a real crime, if they were 
to lose this health care option that they really like, that 
they have chosen, that they have come to rely upon. So you will 
work with us to save this health care option?
    Mr. Hash. Yes, sir.
    Mr. Ramstad. I yield to Mr. Cardin.
    Mr. Cardin. I appreciate that. My time had run out. I was 
going to bring up that issue.
    I very much appreciate your response, Mr. Hash. It is not a 
Minnesota problem or a Maryland problem. It is a problem in 
many parts of the country. We are saving money for the system 
in these programs dealing with our frail elderly.
    Mr. Hash. Yes.
    Mr. Ramstad. Thank you again, Mr. Hash. I am looking 
forward to getting this done in the next couple of weeks before 
we go home.
    I also want to, in the remaining seconds, ask you a 
question on inherent reasonableness authority.
    By the way, I assume I can submit these questions and you 
will answer them in writing?
    [The following questions submitted by the Hon. Jim Ramstad 
and the Hon. Michael Hash's responses are as follows:]

Questions from Hon. Jim Ramstad and Hon. Michael Hash's Responses

                        Inherent Reasonableness

    Question 1. It is my understanding that HCFA received numerous 
comments in the spring of 1998 on its interim final regulation setting 
forth its IR process and criteria. The comments raised substantive 
concerns about the rule, including concerns about HCFA's use of an 
interim final rule, adopted before the opportunity to comment, for such 
an important subject. In March, Chairman Thomas asked the GAO to 
examine HCFA's use of the IR authority. Why did HCFA decide to initiate 
a new IR action before responding to the important concerns raised 
about the 1998 interim final rule and before the GAO report?
    Answer. It was necessary and appropriate for us to issue the 
inherent reasonableness regulation in final with comment for several 
reasons. The new regulation was merely announcing what the statute 
authorized as a procedure change. It did not change the already 
existing regulation, except for certain provisions specifically 
provided for and clearly stated in the statute. The intent of these 
changes was to simplify the process for making inherent reasonableness 
determinations. And we believe it would have been irresponsible to 
delay implementing this statutory provision and to perpetuate grossly 
excessive or deficient Medicare payments.
    In response to Chairman Thomas' letter, in which he asked the GAO 
to examine HCFA's use of inherent reasonableness authority, we 
indicated that we would delay final action on the durable medical 
equipment inherent reasonableness proposal until we had the opportunity 
to review the GAO's report. As a result, all carrier proposed 
adjustments relating to inherent reasonableness have been put on hold. 
While we have issued a national proposal, we have no plans to issue any 
final determinations before we have reviewed the GAO report.

    Question 2. August of this year, HCFA proposed reductions in 
payments for certain durable medical equipment and prosthetic devices 
based on data obtained from the VA. In doing so, HCFA did not 
investigate the prices set through the marketplace.
    While an attempt was made to reconcile the differences between the 
VA system, a ``device wholesaler,'' and the Medicare program by 
applying an adjustment to the median VA price, there is concern that 
this approach is flawed. The concerns derive from the fact that the 
ways in which manufacturers participate in and sell to each program are 
significantly different.
    For example, a constituent medical device company has told me that 
the proposed markup does not adequately account for the high 
administrative costs associated with Medicare claims processing. Given 
the burdensome documentation requirements, they employ 26 full-time 
staff to process Medicare claims--but less than two employees handle 
sales to the VA program. This represents a 13-fold increase in 
administrative support per device sold. Other burdens that 
differentiate the two programs are: the average payment cycle, which is 
20-30 days for VA compared to 4-5 months for Medicare, and the 
mandatory rental program for Medicare patients.
    What specific considerations were used in applying the adjustments 
to the VA payments for determining the Medicare levels? Is it truly 
appropriate to use the VA system as a basis for making these 
determinations?
    Answer. The Veterans Administration (VA) pays for the same type of 
medical equipment used by Medicare beneficiaries. In many instances, 
the VA is able to purchase equipment for significantly less money than 
Medicare can because the VA uses a competitive bidding methodology. 
After considering the GAO's report comparing the oxygen payment rates 
of the VA and Medicare, Congress lowered Medicare's payment rates for 
home oxygen by 30 percent and, thus, gave support to the use of VA 
payment amounts as an tool for determining whether Medicare's fee 
schedule rates are reasonable. In the case of home oxygen, the VA's 
payment amounts were less than half of Medicare's rates. The GAO found 
that VA's use of competitive pricing, rather than differences in the 
cost of doing business, contributed significantly to the differences in 
VA and Medicare payment amounts for oxygen.
    For purposes of comparing VA and Medicare payment amounts, we 
proposed in our current national inherent reasonableness notice to 
increase the VA's median payment amounts by a mark-up factor of 67 
percent. The mark-up percentage is based on data furnished to us by 
manufacturers as part of our medical device coding process.
    In developing our current inherent reasonableness notice, we did 
consider suggested wholesale and retail price lists. However, because 
of Medicare's predominant role in purchasing health care items, these 
``marketplace'' prices may not necessarily be reflective of a 
competitive market, but rather how much Medicare is willing to pay 
under the fee schedule methodology that has been in place for over 10 
years.

    Question 3. The IR statute sets forth a more rigorous notice and 
comment procedure for adjustments over 15% to ensure that such 
significant adjustments are based on appropriate data and are 
thoughtfully considered. The statute states that such changes are 
measured over the course of a year to prevent HCFA from making multiple 
adjustments in a given year without following the more demanding 
process.
    The agency, however, has adopted a policy that allows it to avoid 
that more rigorous process merely by spreading out over successive 
years any adjustments of more than 15%. HCFA has employed that policy 
more than once in its IR actions to date. For example, in 1998, HCFA 
proposed reducing lancets by 20% through a 15% adjustment in the first 
year and 5% in the second.
    It appears as HCFA is violating the IR statute Congress 
established. Please respond.
    Answer. As we indicate in our interim final rule, the statute 
clearly provides two options for making inherent reasonableness 
adjustments. When an adjustment is greater than 15 percent in one year, 
procedures similar to those in place prior to the passage of the 
Balanced Budget Act (BBA) must be followed. If the adjustment is 15 
percent or less in a year, the BBA provided a more streamlined process 
and allows either the Secretary or the carriers to propose such a 
change. The BBA does not prohibit reductions of 15 percent or less in 
successive years.

                             Outpatient PPS

    The BBA requires HCFA to establish a prospective payment system for 
most hospital outpatient services furnished on or after January 1, 
1999. HCFA staff has indicated that new technology and medical 
procedures will be assigned to the lowest payment of the Ambulatory 
Payment Categories (APC) related to the treatment or condition.
    Question 4. Won't this practice create financial disincentives for 
both providers to make the latest medical technological advances 
available to their patients and for manufacturers to avoid and/or delay 
developing more innovative technical advances in general?
    Answer. We will be making significant changes in how we plan to 
categorize new technology and medical procedures under the outpatient 
department (OPD) prospective payment system (PPS). In cases where it is 
possible, if new technology items are similar clinically and in cost to 
existing items, a current appropriate APC can be used for placement of 
a new technology item. In instances where there is no match with an APC 
clinically and on the basis of cost, we expect to use a set of cost-
related APCs for new technology items. These APCs would initially 
contain only certain items that are new since 1996, and therefore not 
reflected in the 1996 bills used to develop the PPS.
    When a new item must be placed in an APC and there is not an 
appropriate existing APC, we will use one of the cost-related APCs to 
set the payment rate for a period of time (perhaps 2 to 3 year) while 
better data about actual costs is collected. Placement in the 
appropriate temporary APC would be based on the best available data, 
such as a percentage of AWP for drugs, or cost data supplied by device 
manufacturers for devices. After 2 to 3 years, the items would be moved 
to a permanent APC based on both cost and clinical considerations.

    Question 5. When the BBA was passed, 1996 data was the most recent 
available to use in calculating APC payment rates. We agreed to this 
year because we understood the new PPS system would be implemented in 
1999--approximately three years later. However, given HCFA's announced 
one-year implementation delay, there is now a four-year window between 
the actual year of the data and implementation. Will HCFA use more 
recent data--such as data acquired in 1997, or preferably 1998, if it 
is available--in refinements to the APC payment categories to more 
appropriately reflect advances in medical technology in recent years?
    Answer. The law requires the Secretary to use claims data from 1996 
and data from the most recent available cost reports in order to 
establish relative payment weights under the OPD PPS. In developing the 
PPS for implementation in 2000, we are continuing to use claims data 
from 1996, as stipulated by the law, but have used more recent 1997 
cost reports, if they are available.
    After the PPS is implemented, we are required annually to review 
and revise the groups and the relative payment weights on the basis of 
new cost data and other relevant information. When the new payment 
system is in place and hospitals begin to code for services furnished 
as required under the new system, more recent data will become a 
valuable tool that is used to complete this annual review and make 
necessary revisions.

    Question 6. The HCFA proposed regulation forces thousands of 
outpatient procedures into approximately 340 APC groups. With such a 
low number of APCs, it is virtually impossible to achieve comparability 
between clinical and relative resources within an APC group. I am told 
some procedures will see cuts of up to 56% under the proposed group 
compression. Does the BBA specify 340 APC groups, or does HCFA have the 
authority to increase the number of APC groupings so that procedures 
that are clinically similar and share similar resource costs are 
grouped together more comparably?
    Answer. The BBA did not specify 340 APC groups. The law allows the 
Secretary to establish groups of OPD services within a classification 
system so that services classified within each group are comparable 
clinically and with respect to the use of resources.
    A number of concerns have been raised regarding the variability 
within APCs as included in the proposed rule. In developing the final 
rule, we plan to make significant revisions to the APCs making them 
more homogeneous. We will shift procedures among APCs and create new 
APCs when warranted. These changes should reduce the impacts seen for 
many items and procedures.

                    Community Nursing Organizations

    Question 7. It is my understanding that HCFA's study only used data 
from the ``start up'' years, from 1994-1996. Why does HCFA refuse to 
use the data for years beyond 1996, and has HCFA made a copy of its 
final report on CNOs available for public review?
    Answer. The CNO demonstration project and evaluation were designed 
to randomly assign beneficiaries seeking enrollment in the 
demonstration project into one of two groups, a control group and a 
treatment group. The treatment group consisted of CNO enrollees, while 
the control group received care through the traditional fee-for-service 
Medicare program. The CNO sites provided data to us covering a 4-year 
period from 1993-1997. We believe this is a sufficient time period for 
collecting data and conducting a sound evaluation of the CNO 
demonstration
    In 1997, the CNO sites sought to transfer the control group members 
into the treatment group. We advised the CNO sites that doing so would 
invalidate any future data that might be collected because the control 
group would no longer be available for comparison purposes. Contrary to 
our recommendation, the CNO sites transferred the beneficiaries in the 
control group into the demonstration treatment group, thus nullifying 
the validity of any future data collection efforts.
    We expect to receive the final independent evaluation report of the 
CNO demonstration shortly. Once we receive it, we will provide a copy 
and a summary of the report to Congress and will make them available to 
the public.

    Question 8. As you know, the CNOs have concerns about the data set 
used in the HCFA study and conducted their own study, focusing on high 
cost and high volume services, including hospitalizations, ER 
utilization, SNF stays and outpatient/physician visits. Have you 
reviewed this study? Why does HCFA feel its approach was the 
preferential study design?
    Answer. We have reviewed the CNO's study design. Their study 
examined specific components of the demonstration project in isolation 
and did not evaluate the program-wide impact of the demonstration. We 
believe that our assessment is preferable to the CNO sponsored study. 
Our assessment examined the impact of the demonstration on the Medicare 
program as a whole and was performed by independent reviewers who were 
not biased towards a particular outcome.

    Question 9. HCFA staff has indicated that studies have not found 
that the CNOs improve quality of care or reduce health care costs for 
enrolled seniors. However, in two recent national studies, the CNOs 
have been nominated by experts in the field and selected as ``best 
practice'' programs for care of older adults and care coordination 
(Mathematica Medicare Coordinated Care Project, Best Practices 
Assessment and Demonstration Design, 1999, and the Robert Wood Johnson 
Foundation and Ross Laboratories Study of Innovative Programs, 
Innovative Healthcare for Chronically Ill Older Persons: Results of a 
National Survey, American Journal of Managed Care, 1999). I am also 
aware that the Arizona CNO has monitored the health status of new 
enrollees since 1998, finding that SF-36 Health Status Scores were 
significantly better after one year in all areas.
    On the issue of cost, I am aware that while the HCFA evaluation 
found that combined, the CNOs provide comparable quality services at a 
slightly higher cost than traditional Medicare, a closer look at the 
data found two locations yielded cost savings. The total cost of 
services per enrollee for the Arizona CNO treatment group was $151.13 
less than the control group, and the MN CNO cost Medicare $63.00 per 
member per month less than the control group for total hospital, ER, 
post-acute rehabilitation and outpatient services by the third year of 
the demonstration.
    The CNOs utilized their study results to identify ``best 
practices'' that can be adopted at all locations and reduce overall 
costs. Since the CNOs deliver quality care and can reduce costs, why 
does HCFA so strongly oppose this Medicare beneficiary option, 
especially since they are so popular with enrollees?
    Answer. According to its findings of our independent evaluator, the 
CNO model does not cost less than traditional Medicare and, in fact, 
increases Medicare trust fund outlays. In addition, our evaluator found 
the CNO program had little or no positive impact on the well being of 
beneficiaries. As a result of these findings, we do not believe the CNO 
model merits replication in the Medicare program as a whole.
    You mentioned the Mathematica Policy Research, Inc. (MPR) study. 
MPR reviewed best practices for coordinating care in the private 
sector. In order to identify as many successful programs as possible, 
they cast a wide net. They published announcements in journals and the 
Federal Register as well as sent letters to certain programs. MPR 
encouraged programs to submit information about their care coordination 
practices and any subsequent reductions in program costs.
    The MPR review was not a formal evaluation of the CNO program, 
however. It was a survey that relied entirely on self-reported 
information. MPR did not utilize a comparison group and did not perform 
any independent data collection or analysis. The MPR review simply 
described common features of successful programs, and did not identify 
specific programs as ``best practices.'' You also mentioned the Study 
of Innovative Programs, sponsored by The Robert Wood Johnson Foundation 
and Ross Laboratories. This study was also a survey and not a formal 
evaluation of the program.
    In contrast to these two surveys which relied on self-reported 
data, our evaluation was based on a carefully designed research 
protocol that involved random assignment of participants to treatment 
and comparison groups and collection and analysis of data by an 
independent third party. We believe our evaluation is the most 
appropriate vehicle for assessing the actual impact of the CNO 
demonstration.
    With respect to cost, our evaluation indicates that the treatment 
groups in the CNO demonstration were more costly than the comparison 
groups overall. The lower costs in selected areas, as cited by the 
American Nurses Association (ANA), were offset by higher costs in other 
areas that were not cited in the ANA's report.

                                

    Mr. Hash. That is correct. I will be happy to.
    Mr. Ramstad. I know a number of members have sent letters 
and I have had an HHS staff member in my office to talk about 
some of the things that HCFA is doing with the inherent 
reasonableness authority Congress gave it.
    I see my time has expired. I am very, very concerned about 
this authority. I will submit the questions in writing. Thank 
you, Mr. Hash.
    Mr. Hash. I would be happy to respond, Mr. Ramstad.
    Mrs. Johnson of Connecticut. Mr. McDermott.
    Mr. McDermott. Thank you, Madam Chair.
    Mr. Hash, to your knowledge, is there anything that HCFA 
does that is not authorized by law?
    Mr. Hash. I hope not.
    Mr. McDermott. Basically, everything you do is following 
laws that we wrote, right?
    Mr. Hash. To the best of our ability, yes, sir.
    Mr. McDermott. On the issue of unbundling or anything else, 
we are going to have to take the responsibility for unbundling 
and let that happen, whatever happens?
    Mr. Hash. We want to work with you and be a partner in 
addressing those kinds of issues, yes, sir.
    Mr. McDermott. If we unbundle in one area, do you think we 
will get a request to unbundle in other areas?
    Mr. Hash. I think the critical challenge here, Dr. 
McDermott, is in fact that we make the changes, whatever 
changes we make, on the basis of the best evidence that we have 
and we target those changes to where we think the need is 
greatest.
    Mr. McDermott. I have some concerns in that whole question 
of unbundling, having been through this fight a number of times 
both here and in the State legislatures.
    I was not here when Mr. Lewis asked his question about the 
issue of your appropriation, but I understand that the 
Appropriations Committee cut back by $70 million the dollars, 
the amount that was spent for anti-fraud adjustments. I have 
real concerns about this, if you are serious about saving money 
in the process.
    My understanding is that GAO says that about half the money 
that has been saved, actually more than we expected would be 
saved, has been from the anti-fraud activities. It is kind of 
across-the-board stuff, like coding up, those sorts of things. 
Tell me about what your feeling is about then turning around 
and giving the providers an increase, when most of the savings 
we have gotten has been from cutting out the fraud and the 
waste, fraud and abuse in the coding system, or other similar 
kinds of ways.
    Mr. Hash. I would agree with what you said, Dr. McDermott.
    As I said to Mr. Lewis earlier, these cuts are really 
devastating. They are, in my judgment, penny wise and pound 
foolish. There is abundant evidence that every Federal dollar 
invested in fraud and abuse is returned to the taxpayer in the 
form of recoveries in multiple amounts over what the investment 
is. When Congress set up the fund for fraud and abuse, they set 
it up in a special category, in a mandatory appropriation, and 
guaranteed stable funding for this important and critical 
activity. I think this would be definitely a serious step 
backward.
    Mr. McDermott. What possible explanation could one make for 
why the majority would want to cut a program that cuts out 
fraud and abuse and has been effective in more than dollar-for-
dollar numbers? What explanation could there be?
    Mr. Hash. I am sorry, Dr. McDermott, but I don't really 
have an explanation for you. I am just as shocked and 
disappointed about this as you are.
    Mr. McDermott. It would seem like they are letting the 
pressure off, would it not?
    Mr. Hash. I would think so. It would have that effect, yes, 
sir.
    Mr. McDermott. And so if people know that nobody is going 
to come around and look, they can go quite a ways until they 
figure, well, we had better tighten up a little?
    Mr. Hash. I would agree with that, Dr. McDermott.
    Mrs. Johnson of Connecticut. Would the gentleman yield on 
that?
    Mr. McDermott. Sure.
    Mrs. Johnson of Connecticut. One of the big problems is 
that the fraud and abuse people, the Inspector General, is 
totally ignoring directives from fiscal intermediaries to 
providers and charging them with fraud and abuse when they were 
acting in conformance, so there are some very serious problems 
in what the Inspector General is doing, I would maintain.
    Mr. McDermott. It is in our position then, as I hear that, 
that the money was unfairly taken from them?
    Mrs. Johnson of Connecticut. Absolutely. In some cases, no 
question about it.
    Mr. McDermott. So the answer to that is then to cut out the 
fraud and abuse program?
    Mrs. Johnson of Connecticut. That is not the answer, but to 
say that there are no problems with the fraud and abuse program 
would be really to close your eyes to some of the serious 
misactions of the Inspector General. We certainly needed it, we 
passed it, I am glad it is there, it is saving money, but there 
are serious problems in what the Inspector General is doing, in 
some instances.
    Mr. Lewis. Mr. McDermott, would you yield, sir?
    Mr. McDermott. Surely.
    Mr. Lewis. Mr. Hash, you are telling the Committee if you 
have this dramatic, unbelievable cut to be able to do something 
about abuse and fraud, you are not going to be able to do the 
job? It is not a case of the chicken and the egg or the egg and 
the chicken, is it?
    Mr. Hash. It would have a definite effect on reducing our 
efforts that have been very successful in combating fraud and 
abuse, no question about it.
    Mr. McDermott. So it is the end of your testimony. You 
would say you did not do anything that the law did not require 
you to do? You have been accused here of going beyond or 
somehow misapplying the law. Is that true?
    Mr. Hash. We have been trying to apply the law as best we 
could, Dr. McDermott.
    Mr. McDermott. Fine. Thank you.
    Chairman Thomas [presiding]. I believe the operative word 
is ``trying.''
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Thank you, Mr. Chairman.
    Mr. Hash, as you are well aware, the scientific community 
sometimes moves faster than the bureaucracy. They develop new 
treatments, new drugs, and we certainly all want for our 
Medicare recipients to have access to those in a timely 
fashion.
    Under the new APCs, what is your procedure, your process, 
and the timeline that you expect for making adjustments to the 
APC to take into account the introduction of new procedures, 
treatments, drugs?
    Mr. Hash. Mr. McCrery, that is an area that we are 
reviewing for the publication of our final rule. But I can tell 
you, based on the comments we have received and the folks we 
have met with on this very issue of getting advancements 
quickly to the bedside or to the clinic site for our 
beneficiaries, is a very high priority of ours. We are working 
to address that in the most timely way we can in our final 
rule.
    I will tell you that, as you would see from our proposed 
rule of last year, we would immediately allow the assignment of 
codes to new advancements, and then under the process that we 
use, it is basically to collect the data about the cost, the 
charges for new advancements and the use of them over a period 
of at least a year so then we can properly assign them, in the 
case of an inpatient DRG, to the proper DRG, or, in the case of 
the outpatient payments, to the proper APC category.
    We want to make sure that process is expeditious, but is 
also prudent that we do it on the basis of a database of 
charges have accrued over a year.
    Mr. McCrery. You expect sometime in the near future to 
publish some sort of regimen for that process?
    Mr. Hash. Yes, we will be. Our final rule to implement the 
hospital outpatient PPS will be coming out at the end of this 
year, and that will include specific procedures for how new 
things are coded and treated in our outpatient payment system.
    Mr. McCrery. OK. Thank you.
    Let's talk for a minute about this phenomenon that we have 
experienced with the savings in Medicare now projected to be 
roughly double what we estimated when we passed the BBA. You 
have said in your testimony that there are a lot of other 
factors that account for that. Have you been able to isolate 
those factors and quantify them?
    Mr. Hash. No, Mr. McCrery, we have not. But based on our 
own actuary's assessment of the changes in their estimates for 
Medicare outlays, and, as you know, based on reports from the 
CBO, both have attributed the slow-down in the growth of 
Medicare expenditures to fraud and abuse activities in 
particular, to changes or lower inflation because of a strong 
economy, and, to some degree, the changes of the BBA, which 
have slowed down, in some cases, payment processes because we 
have changed them a lot.
    All of those factors work together, plus the BBA policies 
themselves, and have had this combined effect of changing the 
rate of growth in Medicare expenditures.
    Mr. McCrery. The changes in the rate of payment would be 
anticipated now in the estimates for the next 4 years, the next 
3 years, I guess. So that really should not enter into the 
discussion of why the 5-year figure has doubled, basically.
    Of the other reasons, have you been able to come up with a 
percent of the total increase that they constitute?
    Mr. Hash. We have not, Mr. McCrery.
    Mr. McCrery. Don't you think that would be worthwhile for 
us to try to isolate what the changes in BBA account for in 
terms of that increase in savings, so that we would get a firm 
handle on how wrong we were in our estimates with respect to 
the spending cuts for Medicare?
    Mr. Hash. As you can appreciate, this is--and I am 
certainly not an actuary or estimator, but this is an 
exceedingly challenging area, and one, as I understand it, 
that--the estimates, for example, that were made about the 
impact of the BBA in August 1997 were the best estimates that 
could be made at that point in time. But as time goes on and 
data come in and more information is available, there are new 
point-in-time estimates. You cannot compare them in the sense 
of, oh, those very same BBA estimates are locked in for the 
full 5-year period and that anything else that occurs is 
outside of that.
    It is very difficult, and I think my colleagues who are 
following me on the next panel would be much more qualified to 
answer this question of how you distinguish the factors that 
account for decreases in Medicare expenditures.
    Mr. McCrery. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Mr. Hash, you may be acting administrator, 
but you are learning fast. You just pass that buck. We 
appreciate that.
    Does the gentlewoman from Florida wish to inquire?
    Mrs. Thurman. I do, Mr. Chairman. Thank you.
    I want to go back to the APC issue a little bit. Is it my 
understanding, then, that you actually can do these changes 
administratively?
    Mr. Hash. Are you referring to----.
    Mrs. Thurman. Drugs, new technologies?
    Mr. Hash. We have a great deal of discretion in the design 
of the outpatient payment system; and based on the comments we 
have gotten on our proposed rule, we are anticipating making 
significant changes in the design of the payment system when we 
publish it finally.
    Mrs. Thurman. You think you can take care of the issues 
where new drugs are coming on the market and are costing more 
than what they would be getting today under the old medicines?
    Mr. Hash. Right. I do believe we can, Mrs. Thurman. That is 
one of the reasons, I think, we felt that the proposed rule did 
not adequately reflect the cost of some new drugs, particularly 
those that have come on in recent years. It was our decision to 
hire an external contractor to go out and actually gather real 
prices in current time on selected drugs that are very 
important and are high-cost to Medicare beneficiaries.
    Mrs. Thurman. Then within the new technology area as well?
    Mr. Hash. That would be right. Similarly, there are 
important issues about how new devices, and those kinds of 
things, how they get coded and how quickly they get 
incorporated into the outpatient payment system.
    Mrs. Thurman. OK.
    Mr. Hash, in our GAO report we are going to be told that in 
the area of some of our home health care issues that they found 
little evidence that beneficiary access to services was 
inappropriately curtailed. Actually, that may not be--yes, GAO. 
We have a lot of home health care issues in our area. I have 
some questions to ask you. Has HCFA seen the higher-cost 
patients losing access to home health care?
    Mr. Hash. We don't have any systematic evidence about that, 
but of course we have received reports that those kinds of 
patients may be having some difficulty. In fact, we met with a 
number of advocacy groups on these home health access issues.
    One of the things that was reported to us time and time 
again was that home health agencies would tell beneficiaries 
that they could not get any additional services because they 
had reached their cap. There is no individual beneficiary cap. 
We have tried time and time again through communication with 
home health agencies and, of course, with beneficiaries, to the 
best we can, to impress upon them that no agency would be 
correct in telling a Medicare beneficiary that they have 
exceeded a cap that is a per person cap. That is just not 
correct or accurate.
    Mrs. Thurman. Have we noticed--I am concerned that we are 
cost-shifting now into a higher cost within nursing care 
admissions. Have we seen any evidence of more admissions into 
nursing care?
    Mr. Hash. Not yet. In fact, actually both the admissions to 
nursing homes and the days, the stays, are actually continuing 
to decline.
    Mrs. Thurman. OK. What about emergency admissions? Or 
rehospitalization?
    Mr. Hash. I don't have that data, but I would be happy to 
try to get something for you to address that.
    [The response follows:]

Response by Michael Hash to a Question from Hon. Karen L. Thurman

    Question. What about emergency admissions? Or 
rehospitalizations?
    Answer. We have asked the HHS Inspector General (IG) to 
conduct a study on emergency room use and hospital readmissions 
for home health patients following the passage of the Balanced 
Budget Act. We are working with the IG to provide the necessary 
data to determine if these patients are returning to the 
hospital more frequently than in the past.

                                


    We have looked at hospital discharge rates, and we have not 
noted that there has been a slowdown in the movement of 
patients out of the hospitals, either to nursing homes or to 
home health services, as opposed to a hospital.
    Mrs. Thurman. Besides just maybe the skilled nursing homes, 
what about those that would be long-term care?
    Mr. Hash. I think actually, because the standards for 
admission, if a patient doesn't need a skilled level of care, 
or are lower, then our expectation would be that those are 
patients that are probably not being as directly impacted by 
the BBA as those patients with a higher acuity level.
    Mrs. Thurman. I just want to add and echo the sentiments of 
many of my colleagues up here on the physical therapist issue, 
particularly with Mr. Cardin on this issue of outpatient 
hospitals getting it, and the nursing care. That is a very 
difficult situation. Is that something we need to do or, again, 
is that something you can do administratively?
    Mr. Hash. I believe that is a legislative issue, but one on 
which we want to work and provide help in identifying how to 
address that issue.
    Mrs. Thurman. Thank you.
    Chairman Thomas. The gentleman from Pennsylvania, does he 
wish to inquire?
    Mr. English. Thank you, Mr. Chairman.
    Welcome, Mr. Hash. I noticed on page 4 of your testimony 
that you extensively outlined what you have proposed to do as 
far as rural hospital reclassification, to address the fact 
that many rural areas have traditionally been poorly reimbursed 
for certain procedures.
    I noticed, however, in your discussion of the Medicare 
Medicare+Choice program you don't have a similar discussion of 
how Medicare+Choice reimbursements, based on some of those old, 
unilateral formulas, might be reconsidered.
    I note in your discussion and exchange with the Ranking 
Minority Member that you testified that low reimbursements do 
not account for managed care exiting certain markets, in your 
view. Yet our experience in northwestern Pennsylvania with a 
product called Security Blue--and I know you are very much 
aware of this because your staff has met with my office, and I 
appreciate that--our experience with Security Blue has been 
that the Blues have been obliged to dramatically truncate the 
prescription drug benefit that they offer to seniors and are 
able to point to huge differentials within our region, a huge 
differential in how Medicare+Choice is reimbursed in Erie, 
Pennsylvania, Meadville, Pennsylvania, Sharon, Pennsylvania, 
versus Butler, Pennsylvania, which just happens, although it is 
neighboring on those areas, to also be neighboring on a high-
cost area.
    So my question is, how are you adjusting or considering 
adjusting reimbursement levels for Medicare+Choice programs in 
historically-low reimbursement areas, like the bulk of my 
congressional district?
    Mr. Hash. I am glad you asked that question, Mr. English. A 
fundamental component of the President's Medicare reform plan 
is a very significant change in the way in which the Medicare 
program determines capitation payments for Medicare+Choice 
plans.
    In short order, what it does is provide the opportunity for 
health plans to bid to the Medicare program what they believe 
to be their costs for delivering the services, so that we move 
away from the administered pricing formula that is established 
in the statute now.
    In addition, I think, in the short run, the BBA itself 
intended, I believe, to narrow the range of disparity that was 
a reflection of those health care costs that produce such 
widely varying capitation rates under Medicare+Choice.
    There is beginning to be a significant narrowing of those 
rates under current law. But I think our view is that we really 
need to move to a system that is more market-based in the 
determination of those capitation rates, and that is what is 
called for in the President's reform proposal.
    Mr. English. I will examine your proposal carefully.
    Let me say, having, on a separate point, viewed your 
exchanges with the gentleman from Washington State and the 
gentlewoman from Connecticut, I wonder, how do you hold your 
fiscal intermediaries responsible for their actions when they 
make errors that have dramatic impact on providers, for 
example, a change in interpretation in a particular rule which 
has a dramatic impact on hospitals? You may even be aware of 
the one I am referring to. How do you hold the FIs responsible 
in cases like that?
    Mr. Hash. Mr. English, we do, in fact, have performance 
evaluation standards built into the contracts that we have with 
fiscal intermediaries and carriers under the Medicare program. 
We are in a position to use performance, for example, does the 
contractor meet standards or not, and to terminate those 
contracts and give the business to other contractors who can 
meet our standards.
    Mr. English. In the case of a State that is facing a ruling 
which is leading to a massive retroactive demand for 
reimbursement, does that mean you are reassessing the role of 
your fiscal intermediaries in that State, and is that part of 
your internal operation?
    Mr. Hash. The first step, in the particular case you are 
talking about, was to correct----
    Mr. McDermott. Mr. Chairman, could we have a clarification? 
We are having a discussion about something most of us don't 
know what you are talking about.
    Mr. English. This has to do with a ruling with respect to 
DSH payments and the inclusion of general assistance population 
in the formula.
    Mr. McDermott. All right. Thank you.
    Chairman Thomas. Let me clarify so you have a better 
understanding.
    In Pennsylvania, for sure, and perhaps in one or more other 
States, the States have a payment structure which does not 
differentiate between the seniors and the general assistance 
program, and that the numbers that were counted for fiscal 
intermediaries required the counting, and it created a payment 
disparity. It was the fiscal intermediary who created that 
payment disparity.
    HCFA is now indicating that particular States are 
responsible for what became overpayments because of the 
inclusion of people who would be on the ordinary Medicare count 
number.
    The gentleman from Pennsylvania quite properly, I think, is 
indicating that he believes that the fiscal intermediaries are 
employees, in essence, contractual, with HCFA. And whose 
responsibility is it? And if, in fact, there was an error made, 
does that error, amounting to millions of dollars, now laid at 
the feet of Pennsylvania, constitute sufficient grounds for 
HCFA to examine the fiscal intermediaries' competence in terms 
of carrying out the program? And probably more importantly, is 
Pennsylvania going to wind up holding the bag? Is that a fair 
assessment?
    Mr. English. Mr. Chairman, that is a marvelous summary.
    When you consider the retroactivity involved and the burden 
falling on providers that are the providers to some of the most 
indigent parts of our population, the finding of the fiscal 
intermediaries is truly extraordinary in this case.
    Chairman Thomas. And that in fact you believe you are not 
at fault, that it is the fiscal intermediaries--the fiscal 
intermediary who is at fault?
    Mr. English. Mr. Chairman, it was an established policy by 
which Pennsylvania was being reimbursed and other States.
    Chairman Thomas. That was the question.
    Mr. Hash.
    Mr. Hash. Yes. The situation in Pennsylvania, as I 
understand it, is, after an investigation of what had gone on 
there, it was ascertained that, in fact, the policy being 
applied, both in terms of what the State was reporting in terms 
of these days as well as what the intermediary was requiring in 
their audit of hospital cost reports, was not in conformance 
with the law. Under those circumstances, we don't have any 
other recourse other than to recover payments that are made 
that are not consistent with the authority in the law.
    Mr. English. Mr. Hash, as you know, in this case the law 
was not only established but had long been recognized as 
providing for this kind of reimbursement. That had been the 
existing policy. To change policy at some point and to go back 
in and retroactively impose an enormous financial burden on a 
particular set of providers is unconscionable. I think you 
would have trouble finding any legislative intent to support 
it.
    Mr. Hash. I can only say, in response, that it was never 
our stated policy. I agree with you that the intermediary 
contractor in this case improperly administered it. We never 
established a policy any different than the policy that is 
established in the law.
    Chairman Thomas. I would just tell the gentleman that his 
time has expired. I think we have laid it on the table 
sufficiently.
    The idea that at certain times fiscal intermediaries are at 
fault and other times they are not is a policy which makes it 
very difficult for us to really understand and appreciate.
    One of the reasons the gentleman from California and the 
chairman are cosponsoring a Medicare coverage and appeals bill 
which will, No. 1, shorten the time line so Medicare 
beneficiaries can have the same privileges most private health 
care plans have in adjudicating concerns, and that if, in fact, 
a fiscal intermediary conducts themselves in a particular way 
in a particular area and that problem is corrected, instead of 
just that individual in that area, as current law allows, 
getting that benefit, that benefit would then extend to all 
beneficiaries in all regions.
    The harmony and the need to carry out a universal decision-
making structure was the reason, and those people who follow 
this area fairly closely know that. If the gentleman from 
California and the gentleman from California cosponsor 
legislation, it is overdue and needed. That is sufficient in 
that area.
    One last point, and then I will let you go. Then we will go 
to those people that you passed the buck to.
    On page 14, you indicate that in the Medicare+Choice area 
that you cannot make the risk adjustment budget-neutral. You go 
on then to indicate the taxpayers who fund it would find this 
unacceptable, et cetera.
    I just have to tell you that the broad-based taxpayer 
funding base for this proposal, the general fund, is certainly 
a broader base, and the burden carried by each of those 
taxpayers is significantly less than the dollars the Medicare 
beneficiaries have been paying out of pocket for the outpatient 
payment overcharge, which has been going on for more than a 
decade, in which there seems to be some examination of the 
possibility of making it budget-neutral.
    In addition, the conclusion in that paragraph says that, 
``over the 5 years we are phasing it in, if health plans 
maintain their current mostly healthy beneficiary mix,'' my 
understanding is that the law requires these plans to sign up 
all comers. Are you suggesting there that the plans in some way 
screen so that they get a mostly healthy beneficiary mix? The 
``if '' really concerns me. ``if health plans maintain their 
current mostly healthy beneficiary mix,'' as though they have 
the ability to do that, did you intend that in terms of the way 
that was phrased?
    Mr. Hash. Not at all, Mr. Chairman. What is intended by the 
``if '' in that sentence is that if one is relying on the 
estimates of the impact of the risk adjustment on which the 
estimates are based, with no change in the composition of the 
enrollees in those health plans over the next 5 years, it could 
be that if that composition changes and there are, for example, 
beneficiaries with higher health care needs who enroll in 
larger numbers than Medicare+Choice plans and then that impact 
will be considerably lower.
    Chairman Thomas. My concern is that we ought to look at 
every possibility to make sure that we don't have disruptions 
of services, including an examination of a potential budget-
neutral adjustment for a short period of time.
    I appreciate the administration's concern about taxpayers 
on one page, and the total ignoring of the beneficiaries' out-
of-pocket costs that have gone on for more than a decade and 
very little sympathy for them, and the fact that perhaps this 
area might be budget-neutral as well. I am looking, as the 
gentleman from Pennsylvania is, for evenhandedness across the 
board in dealing with these problems.
    Mr. Hash. We are, too, Mr. Chairman. I would just like to 
say that we join you in every bit of concern that you expressed 
on behalf of the beneficiaries and their out-of-pocket expenses 
associated with outpatient payments. I would say that all of us 
who have been involved in public policy, in public life, both 
the administration and the Congress, on all sides, share a 
responsibility for not addressing this problem earlier.
    Chairman Thomas. Thank you for that statement. Thank you. 
Basically what you are saying is that what you have written is 
not necessarily what you mean, because sometimes there was a 
failure to go into the detail and sometimes too much detail. I 
understand that.
    The gentleman from California wants to make a point.
    Mr. Stark. Mr. Chairman, I would like to say, directed to 
you and Mike, that it was brought to my attention that we only 
have a growth of $5 billion that we can spend without 
triggering, under pay-go, a sequester. The limit is $2.78 
billion in 2000, and it drops $1 billion to $37,000,000.
    It is my further understanding that the first one to get in 
under the wire, will not be sequestered. If we got down to the 
White House with $5 million in paybacks, then, subsequently, 
the Defense Department came in later, ours stays in; their's 
goes out. I am just wondering if Mike's department has been in 
touch with CBO on this, or, I am sorry, OMB, whose numbers 
prevail in this instance?
    It seems to me we may be living here in a bit of a paradise 
which may not exist, unless the Chair knows some way out of 
that one. If we are sitting here, as we are sitting, if the 
Committee on Agriculture is up there spending an extra $5 
billion we are not looking for and they get to the White House 
first, we may be out of luck entirely.
    I just would ask either the chairman or Mr. Hash if they 
are familiar with this procedural roadblock we may be facing?
    Chairman Thomas. Would the administration like to respond 
in terms of where they place Medicare beneficiaries vis-a-vis 
other programs?
    Mr. Hash. We place them right where you do, Mr. Chairman, 
right at the forefront of our priority.
    I am not familiar with these numbers. I apologize, Mr. 
Stark. But I would be happy to follow up with a discussion 
about the implications of this. I am not prepared to at this 
point.
    Chairman Thomas. The Chair made an initial statement about 
the question of income security and the reconciliation plan 
that has been passed by the Congress, especially section 202, 
which refers to both Social Security and Medicare as part of 
that retirement security.
    There are accounting terms that are referred to, like FIFO, 
first in, first out, or LIFO, last in, first out. I think those 
are not appropriate in dealing with the problems that we face, 
where we identify needs. This chairman is much more concerned 
with the administration's willingness to carry on a shared 
responsibility.
    The gentleman mentioned a dollar amount. If the 
administration is willing to carry 50 cents on the dollar of 
that amount, we will carry 50 cents on the dollar, and 
combined, it could be a reasonable and appropriate adjustment. 
It is going to be difficult for the Congress to carry 100 cents 
on the dollar for a number of changes, especially where we 
believe the administration can make adjustments that would 
assist significantly in the total dollar amounts that needed to 
be found.
    This chairman is not operating on any timeline or felt need 
to beat somebody somewhere. The needs are going to be examined. 
The needs are going to be assessed and the needs are going to 
be taken care of, and I have full confidence that whatever 
dollar amount we find will be covered in whatever way it needs 
to be covered.
    Mr. McDermott. Mr. Chairman, may I ask one short question?
    Chairman Thomas. Yeah.
    Mr. McDermott. A yes or no question.
    Chairman Thomas. Yes or no question, oh, I love those. Go 
ahead.
    Mr. McDermott. Have you been consulted on any legislation 
to be presented to the Congress in this session at this point?
    Mr. Hash. Consulted by Members of Congress?
    Mr. McDermott. By this committee.
    Mr. Hash. We have been working with the staffs, staffs on 
both sides of the aisle, with regard to----.
    Mr. McDermott. But have you seen language is what I am 
talking about?
    Mr. Hash. I have not seen language yet.
    Mr. McDermott. OK. Thank you.
    Chairman Thomas. Thank you, Administrator.
    Mr. Hash. Thank you, Mr. Chairman.
    Chairman Thomas. Now if the folks the buck has been passed 
to would come forward. The chair of the Medicare Payment 
Advisory Commission. At least this time she appears before us 
in that capacity, Dr. Wilensky, and our friend from the General 
Accounting Office, the Director of the Health Financing and 
Public Health Issues area, Dr. Bill Scanlon.
    As is usually the case, any written testimony you have will 
be made a part of the record. You can address us in any way you 
see fit orally during the period that you have, and Gail, we 
will begin with you and then move to Bill. Thank you for being 
with us.

  STATEMENT OF HON. GAIL R. WILENSKY, PH.D., CHAIR, MEDICARE 
 PAYMENT ADVISORY COMMISSION AND FORMER ADMINISTRATOR, HEALTH 
                 CARE FINANCING ADMINISTRATION

    Ms. Wilensky. Thank you, Mr. Chairman and Members of the 
Committee. I am pleased to be here to talk about potential 
reasons to the Balanced Budget Act. I am here as chair of 
MedPAC, representing the Medicare Payment Advisory Commission.
    I want to spend the few minutes I have to talk about what 
we know and what we don't know, as of yet, about what has 
happened as a result of the Balanced Budget Act, both to the 
providers of services to seniors and to some of the health care 
plans. I would like to review some of the recommendations that 
MedPAC has made and also some of the options that you may want 
to consider as you go forward.
    As you know and as you heard again from Mike Hash, the 
actual spending under Medicare has been growing at a slower 
rate than was anticipated, substantially slower. There are at 
least three reasons for the slowdown.
    He mentioned the one that is probably the most important, 
that is, fraud and abuse. CBO has estimated as much as half of 
the slowdown has been because of behavior changes in billing as 
a response to very aggressive actions by the Inspector General 
and the Department of Justice on fraud and abuse. A second 
reason is the ``deer in the headlights'' phenomenon. We have 
seen this before, when DRGs were put in place in the eighties, 
where for the first year or two hospital spending slowed 
dramatically, they didn't replace people who had left, slowed 
down capital expenditures, etc. The slow down from this was 
probably temporary, and some of the slower processing of bills 
is also temporary, unlike the fraud and abuse response which 
may well persist.
    Having acknowledged the slowdown, we really don't know very 
much about what the slowdown has meant in the sense of what 
changes are from Medicare as opposed to changes that are coming 
from the rest of health care, such as aggressive pressure from 
managed care and other types of health care plans. You know we 
are frustrated by our lack of data. You may or may not know 
that HCFA and MedPAC are working together to try to resurrect 
something like the hospital panel data so that when we report 
to you in March, we will not only have the 1998 cost reports, 
but we will have some snapshot data that will be much more 
current. It won't be perfect but we are tired of saying we are 
only looking at 1997 data and are trying to actually do 
something about that.
    Let me mention home care. This is an area that has come up 
in a number of discussions. What we know is that homecare is an 
area where we saw very rapid growth for 10 years, from 1986 to 
1996. Since then, the spending has slowed down substantial. 
Some homecare agencies have closed. Fewer people are receiving 
services, but we really don't know very much about what these 
changes mean. This is because the data is unadequate and the 
guidelines for coverage are not very clear; all we can really 
say is that spending is somewhat slower than it was after a 
period of very rapid growth. I will come back to this in a 
minute.
    MedPAC is also concerned about the plan withdrawals from 
Medicare+Choice. This is a complicated area. The plans have 
raised some concerns about changes in regulations, the 
uncertainty about dealing with government as a business 
partner, the potential for yet more changes, as indicated by 
the President's proposal in June, which would completely revamp 
once again how at-risk plans would interact with the 
Government. They are also concerned about risk adjustment.
    The question now is what kind of changes to the BBA might 
make some sense. Let me offer some suggestions. There are three 
that I would put at the top of my list. In discussions with 
other commissioners, there seem to be widespread agreement that 
these three are the most important.
    The first concerns nursing homes. There is widespread 
belief that the payments for the sickest patients under the 
current medical classification system is too little. One of the 
members commented that there hasn't been an increase in nursing 
home admissions in the discussion about home care. I would say 
that this shouldn't necessarily be regarded as a good sign. The 
fact that there has not been increases in nursing home 
admissions or in the time that people are in nursing homes may 
suggest they are not getting pushed out of home care and into 
nursing homes, but it may also be reflective of problems in 
nursing homes. This is an area I would put high on my list, if 
you are going to make any change at all.
    A second area concerns about outpatient therapy caps. You 
have already heard about this. Let me remind the committee that 
there was a problem you were trying to fix. There was a concern 
that this was an abusive area in Medicare. The problem, as I 
see it, is that there is no relationship between the cap and 
the clinical indicators of the patient. This is what you ought 
to try to fix. To just dismiss the notion of a cap would be too 
extreme. It would be better to try to moderate how the therapy 
cap is implemented. Having the cap only effective for Part B 
covered people who are in nursing homes, after their Medicare 
coverage of a hundred days, is to hit the most vulnerable who 
have no other place to seek therapy option. This needs to be 
changed.
    The third are concerns about outpatient prospective 
payment. Payment to the outpatient part of hospitals was 
reduced in 1998. If the prospective payment system goes forward 
as now is scheduled in July, there will be a further reduction 
of some 5.7 percent. There is also no phase-in, to its 
implementation. MedPAC is also concerned about the aggregated 
nature of the classes that HCFA has proposed. Our 
recommendation is to reduce the hit on payments, if possible, 
and phase-in the prospective payment system. Phasing in is 
almost always our recommendation. As I've said, we are 
concerned that the classes are too large, which means HCFA will 
overpay some procedures or visits and you underpay others. That 
is an invitation to bad activities.
    There are a couple of other areas that we think should be 
changed if you can also accommodate these changes. The 
physician community has been concerned that there is no 
adjustment for projection errors in the calculation of the 
sustainable growth rate. That means any errors accumulate over 
time. We recommended in our 1999 report that this be changed. 
We have also been concerned that the GDP plus zero growth rate 
is quite low and have suggested that it be increased slightly 
to accommodate scientific advances. This is something you have 
heard from us in the past as well.
    And while I strongly support the notion of risk-adjusting 
plans, the rate at which you phase-in risk adjustment can be 
debated. HCFA picked 5 years. That was arbitrary. MedPAC has 
been concerned that the risk-adjustment strategy only relies on 
inpatient data. If a plan has expenses that keeps seniors out 
of the hospital, like some of the disease management 
activities, this increases plan expenses in the current year 
and then the plan gets reduced payment if seniors are kept out 
of the hospital because of actions the plans have undertaken. 
HCFA has indicated they will try to respond to this problem but 
as yet I haven't heard any response about what they are 
planning to do.
    Once again, let me say that partial capitation which blends 
fee for service and a capitation payment, might be an answer. 
It might reduce the plans' uneasiness that if they get some 
sicker patients, than is demonstrated by our very imperfect 
risk-adjustment mechanism, that they wouldn't get hit so hard. 
Partial capitation also encourages them not to skimp on 
services.
    In sum, I think there is a rationale for making some 
adjustments to the BBA. The first three I mentioned are the 
ones that are most compelling, but there are some others as 
well, depending on how much additional funding you think is 
appropriate. Thank you.
    [The prepared statement follows:]

Statement of Hon. Gail R. Wilensky, Ph.D., Chair, Medicare Payment 
Advisory Commission, and former Administrator, Health Care Financing 
Administration

    Good morning Chairman Thomas, Congressman Stark, members of 
the Committee. I am Gail Wilensky, chair of the Medicare 
Payment Advisory Commission (MedPAC), and I am pleased to 
participate in this hearing looking at refinements to the 
Medicare provisions in the Balanced Budget Act (BBA) of 1997. 
My testimony describes what we know and do not yet know about 
the implications of the BBA for Medicare beneficiaries, health 
care providers, and Medicare+Choice plans. I will also discuss 
recommendations that MedPAC has made 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 
for most providers and for Medicare+Choice plans in many areas. 
Not surprisingly, these changes have generated concerns among 
providers and health plans about their effects. Providers' and 
plans' 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, and that there are specific 
problems with how HCFA has implemented the law.

                                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 11 months of FY 1999, outlays ran 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. 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 in policy or market 
conditions. For example:
     Hospitals have argued that the changes in Medicare 
payments 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.
     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 and by the lack of clear eligibility and 
coverage guidelines for home health care.
     Widely publicized withdrawals of plans from the 
Medicare+Choice program suggest that the program is not achieving the 
goals its authors intended. But managed care enrollment has continued 
to grow--albeit at a slower rate--since the BBA was enacted. Moreover, 
the pattern of withdrawals suggests that factors in addition to 
Medicare's payment rates are playing a role.
    The BBA had ambitious objectives. For Medicare's fee-for-service 
program, it aimed to modernize payment systems and slow the growth in 
spending, while preserving Medicare beneficiaries' access to high-
quality health care. For Medicare's managed care program, the BBA 
allowed new types of plans to participate and instituted new 
requirements intended to enable beneficiaries to choose more 
effectively among their health plan options. To expect legislation this 
sweeping to achieve all of its objectives flawlessly is unrealistic. In 
some cases, targeted changes in statute or regulation could improve 
Medicare's payments and access to care for beneficiaries. But the 
complaints of providers and health plans 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. The law established, or directed to be established, 
new prospective payment systems for services provided by hospital 
outpatient departments, skilled nursing facilities, and home health 
agencies, and it revised the mechanism for updating fees for physician 
services. Finally, the BBA changed the way base payment rates are 
determined for health plans participating in the Medicare+Choice 
program and directed HCFA to implement a new system of risk adjustment 
that accounts for beneficiaries' health status.

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 from 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. Payment rates should begin to 
increase again in FY 1999, 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 PPS 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.

Physician 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.

Medicare+Choice plans

    Before enactment of the BBA, Medicare's payments to private 
health plans participating in the section 1876 risk contracting 
program were based on the average payments made on behalf of 
beneficiaries in its traditional fee-for-service program living 
in the same county. The BBA severed the link between county-
level trends in fee-for-service spending and payment updates to 
plans by instituting a floor under county payment rates, 
blending local and national payment rates (subject to a so-
called budget-neutrality provision), and removing the component 
of base rates attributable to spending for graduate medical 
education. Overall, the law limited updates to payment rates in 
all counties by slowing the rate of growth in national fee-for-
service spending and by subtracting a specified factor from 
that rate. The blending policy raised updates in some counties 
but reduced updates in others.
    In addition to changes in base payment rates, the BBA 
required HCFA to implement a new system of risk adjustment that 
takes into account the health status of the beneficiaries that 
plans enroll. The law laid out a very tight time schedule, 
requiring HCFA to implement the new system by January 1, 2000. 
The system that HCFA has proposed will raise payments for 
certain enrollees who were hospitalized in the year preceding 
the payment year and will reduce payments for other enrollees. 
The amount of the higher payments will depend on the principal 
diagnoses associated with hospital admissions. HCFA has 
proposed to phase in the new system over a five-year period and 
has estimated that other things being equal, the new system 
would reduce payment rates by 7.6 percent on average at the end 
of the phase-in.

           What has been the impact of these payment changes?

    Providers' and plans' 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 policies may 
interact to affect providers' ability and incentives to furnish care. 
Hospitals, for example, often furnish many types of services and must 
therefore face the combined effects of policy changes that have altered 
payments for virtually every service they provide. Medicare+Choice 
plans face changes in the way base payment rates are calculated, new 
requirements for participation, and future changes in payments arising 
from the introduction of a new risk adjustment system.
    A second 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 IPS for home 
health agencies and the prospective payment systems being developed for 
outpatient hospital services and being phased in for SNFs. Where 
predictable differences in costs are not taken into account, financial 
incentives are created for providers to deny access to care or under 
treat 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 
analyzes 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. The home health industry and its observers claim that the IPS 
caused declines in the number of agencies, 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 SNFs, the lack of case-mix 
adjustment in the IPS for home health agencies, and about the new 
system for determining physicians' fees. In the Medicare+Choice 
program, questions center around whether the lack of participation by 
new plans and withdrawals by existing plans reflect payment levels or 
other factors.
    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 to 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 the 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.
    Medicare+Choice plans. The Congress intended the Medicare+Choice 
program to expand beneficiaries' health plan options, but this has not 
occurred. Plan participation has decreased from a year ago: of 347 
contracts HCFA had with risk plans in 1998, 99 of those plans withdrew 
from serving at least one county, and many withdrew from the 
Medicare+Choice program altogether. This coming January, another 99 
contracts will either be canceled or modified to reduce service areas. 
At the same time, however, enrollment in Medicare+Choice plans has 
continued to grow. Despite a brief dip in growth earlier this year, 
enrollment in these plans has grown by 6.5 percent (about 400,000 
enrollees) since a year ago.
    Payment levels are ultimately an important determinant of plan 
participation. However, payment levels alone do not yet appear to have 
had much impact either in encouraging new plans to enter the market, or 
inducing existing plans to leave. For example, despite the introduction 
of the floor and blend payments, we have not seen plan participation 
expand significantly in counties that benefitted from those provisions. 
Similarly, plan withdrawals have been disproportionately lower in 
counties where payment growth has been most constrained. Instead, 
plans' reluctance to participate may stem from concerns about 
regulatory issues and about the anticipated impact of risk adjustment 
on payments in coming years.

                       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 collecting 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 SNFs 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.

Physician 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. Further, we recommend that the 
Congress revise the SGR to include an allowance for cost 
increases due to improvements in medical capabilities and 
advancements in scientific technology.

Medicare+Choice plans

    In our March report, MedPAC recommended that the Secretary 
work with organizations offering plans to identify specific 
regulations or program policies for which changes, delays in 
implementation, or administrative flexibility could reduce the 
burden of compliance without compromising the objectives of the 
Medicare+Choice program. Two specific changes that we noted--
moving back the deadline for filing adjusted community rate 
proposals and giving Medicare+Choice organizations the 
flexibility to tailor their benefit packages within their 
services--have already been done.
    The Commission also made recommendations concerning HCFA's 
proposed system of risk adjustment. Although the interim risk 
adjustment proposal has important shortcomings, we believe it 
represents a substantial improvement over the current method 
and that its benefits outweigh its costs. We support phasing in 
the new system because doing so will avoid large abrupt changes 
in payments to Medicare+Choice organizations and will give 
policymakers time to monitor and evaluate the interim system's 
effects on organizations and beneficiaries. Given its 
limitations, the interim risk adjustment method should be 
replaced as soon as possible by a comprehensive method based on 
enrollees' encounters in all settings, not just inpatient.

                                


    Chairman Thomas. Thank you, Gail. Go.

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

    Mr. Scanlon. Thank you very much, Mr. Chairman and Members 
of the Subcommittee. I am pleased to be here today as you 
discuss the issues that have arisen with respect to the program 
changes that were mandated by the Balanced Budget Act. As has 
been very clear from today's discussions, the BBA set into 
motion significant changes that both attempted to modernize 
Medicare payment methods and rein in spending.
    We have undertaken several studies to review BBA impacts on 
different types of services at the request of both this 
Subcommittee and others, and I will focus my remarks today on 
changes that have affected home health agencies, skilled 
nursing facilities, as well as Medicare+Choice plans. My 
written statement also describes changes affecting outpatient 
therapy services.
    Concerns by the industries involved have been raised about 
BBA's impacts on beneficiary access and on the financial 
viability of providers. The question is how valid are those 
concerns. The BBA made necessary and fundamental changes to 
Medicare's payment methods to slow spending growth while 
protecting appropriate beneficiary care. Prior to the Balanced 
Budget Act, spending on post-acute services, especially home 
health and skilled nursing facility care, was growing very 
rapidly. No analyses supported why the growth should be so 
high, and there was significant concerns that overutilization, 
inefficient delivery, and fraud and abuse played roles.
    Similarly, enrollment in Medicare managed care plans has 
been increasing significantly, but extensive research 
demonstrated that rather than saving money this enrollment 
actually cost the program more due to the poor risk adjustment 
of rates.
    While refinements are required to make the BBA payment 
systems more effective, their design intentionally makes 
inefficient providers change their practices to remain in the 
Medicare business. For Medicare managed care enrollees, BBA can 
also mean that enrollees may not be able to receive as many 
additional benefits--ones that are not offered by the 
traditional program--without paying premiums. Some may also not 
have access to a Medicare+Choice plan at all. Yet for others, 
joining a Medicare+Choice plan may still remain the 
beneficiary's best option for a broadened benefit package at an 
affordable price.
    The impacts of payment reform have been very noticeable. In 
the case of home health, we reported in May that the number of 
Medicare certified agencies had declined by 14 percent. A 
significant number of additional agencies have stopped 
participating since then, but because the number of agencies 
had virtually doubled between 1990 and 1997, beneficiaries are 
still served by more than 8,000 agencies.
    Home health use has also dropped, but the decline does not 
appear to be related to agency closures. It is consistent, 
however, with interim payment system incentives to control the 
volume of services provided to beneficiaries and to narrow the 
widely divergent and unexplained variation in use. While access 
does not seem to be generally impaired, there are indications 
that beneficiaries likely to be costlier than the average may 
have more difficulty than before in 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 should be ameliorated with the implementation of 
the prospective payment system. The challenges, though, of 
designing a home health prospective payment system are 
significant enough that we should be prepared to have to make 
refinements after we have implemented it.
    Turning to skilled nursing facilities, several factors 
might suggest that the prospective payment system's impact on 
the viability of skilled nursing facilities would be less 
severe than is being claimed by providers. Medicare is a small 
portion of most skilled nursing facilities' business, and 
furthermore, only one-quarter of Medicare's current 
reimbursement for most facilities is based on prospective 
payment. 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, recently one of the largest nursing home 
chains filed for Chapter 11 bankruptcy protection. We have been 
reviewing the difficulties of Vencor and other nursing home 
chains for the Senate Finance and Aging Committees. It appears 
that these companies' difficulties likely relate to much more 
than the Medicare prospective payment system.
    Overall, the SNF prospective rates may have been set too 
high on average and thus, over rather than under-compensate 
providers. Nevertheless, it seems certain that modifications to 
the prospective payment system are necessary to more 
appropriately target payments to patients who require costly 
care. As Dr. Wilensky indicated, the payments for the high 
acuity patients are potentially not covering the cost of 
serving such individuals. The access problems, though, that 
result from that underpaying for these high cost cases, at 
least for the short term, are likely to lead to some 
beneficiaries staying longer in acute care hospitals rather 
than necessarily foregoing care. HCFA, as you have heard, is 
aware of the situation and is working to address this problem.
    HMO withdrawals from the Medicare+Choice program have also 
attracted considerable attention, and approximately 100 plans 
last year and again this year either withdrew completely or 
reduced their service areas. Our report on last year's 
withdrawals and preliminary analysis of this year's indicate 
they were not driven by Medicare rates alone. Market share, 
enrollment, tenure in an area, and competition from other plans 
also played significant roles. Some sound business decisions 
made when Medicare was paying too much likely became 
problematic when payments were reduced.
    Plans are also reducing the additional benefits they offer 
and instituting or increasing premiums. As I noted earlier, 
Medicare+Choice though still may be the best option available 
for beneficiaries that want to augment the benefits available 
in a traditional package.
    We believe, in aggregate, Medicare+Choice rates remain 
sufficient. Last year on average, plans had to supply $54 per 
member per month in additional benefits because program 
payments exceeded the cost of their delivery in the Medicare 
payment benefit package. However, we are concerned that those 
resources are not necessarily targeted appropriately. Some 
plans may be underpaid even though average payments are more 
than adequate. Assuring that both the base rates and the risk 
adjustment process appropriately target funds is the critical 
challenge.
    In conclusion, I would note that the BBA made the necessary 
and fundamental changes to Medicare payment methods for many 
providers in order to slow payment growth while preserving 
appropriate beneficiary care. It is clear we now need 
refinements to make these systems more effective. It is 
important that we also, though, recognize as Dr. Wilensky 
indicated, that we all, GAO, MedPAC and HCFA, are struggling 
with limited information on the full impact of these changes 
and, therefore, how best to refine them is more difficult. We 
need to undertake a thorough and fair analysis and have a fair 
trial of these provisions over reasonable periods before we 
engage in fundamental modifications.
    Thank you very much, Mr. Chairman. I will be happy to 
answer any questions you or members of the committee may have.
    [The prepared statement follows:]

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

    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 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. Although some BBA provisions 
are in effect, data relevant to their impact are generally 
limited to date; other provisions have not yet been fully 
phased in. As a result, the act's full effects on providers, 
beneficiaries, and taxpayers will remain unknown for some time.
    BBA's Medicare provisions were enacted in response to rapid 
program spending growth 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 last week, the surpluses are 
merely projections that 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: Ensuring Fiscal Sustainability While 
Modernizing the Program Will Be Challenging (GAO/T-HEHS/AIMD-99-294, 
Sept. 22, 1999).
---------------------------------------------------------------------------
    My comments today focus on payment reforms affecting 
certain providers in Medicare's traditional fee-for-service 
program and providers in Medicare's managed care program. 
Specifically, I will discuss the effects on three providers of 
post-acute care services--home health agencies (HHA), skilled 
nursing facilities (SNF), and providers of outpatient 
rehabilitation therapy--and on the health plans participating 
in the Medicare+Choice program.
    In brief, some providers of post-acute care and health 
plans in the Medicare+Choice program may have to rethink their 
business strategies as a result of BBA payment reforms, which 
seek to make Medicare a more efficient and prudent purchaser. 
Imperfections in the design of BBA-mandated payment systems 
require attention, and better information can help policymakers 
distinguish between desirable and undesirable consequences. 
Based on such knowledge, refinements can help ensure that 
payments are not only adequate in the aggregate but are also 
fairly targeted to protect individual beneficiaries and 
providers. Our issued and ongoing studies of various payment 
methods are instructive in this regard, and a summary of our 
results to date follows.
     Home health care: Our work indicates that (1) the 
reductions in the number of HHAs and changes in utilization 
were consistent with the objectives of the interim payment 
system to control the rapid growth that had preceded BBA and 
(2) appropriate access to Medicare's home health benefit has 
not been impaired. However, the prospective payment system 
(PPS) is a more appropriate tool for the long term than the 
interim payment system, because it is intended to adjust 
payments for differences in beneficiary needs. As we examine 
the challenges of designing a PPS, we are finding that that the 
PPS will likely require further adjustments after it is 
implemented as more information on home health costs, 
utilization, and users becomes available.
     SNF care: A PPS was implemented beginning in July 
1998 with a 3-year transition to fully prospective rates, 
giving providers time to adjust to the new system. Our ongoing 
work suggests that factors in addition to the PPS have 
contributed to fiscal difficulties for some corporations 
operating SNFs. Nevertheless, certain modifications to the PPS 
may be appropriate to ensure that payments are targeted to 
patients who require more 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.
     Caps on coverage of outpatient rehabilitation 
therapy: In 1999, BBA established an annual $1,500 per-
beneficiary cap on payments for outpatient physical therapy and 
speech/language pathology services combined and a separate 
$1,500 cap on outpatient occupational therapy. The caps reflect 
a legitimate need to constrain service use. For the vast 
majority of outpatient therapy users, the caps are unlikely to 
curtail access to services. Only a small share of beneficiaries 
receiving therapy services are high users. Further, most 
outpatient therapy users 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, noninstitutionalized beneficiaries can 
avoid having the caps curtail service coverage by switching 
providers. Whether the caps restrict coverage for a small share 
of nursing home residents is less straightforward. A need-based 
payment system could help better target payments toward 
beneficiaries who genuinely require more services than allowed 
under the current dollar limits.
     Payments to Medicare+Choice health plans: Several 
BBA provisions address the long-recognized problem of excess 
payments to Medicare+Choice plans. Some provisions have begun 
to be phased in, such as reducing the annual rate updates; 
others have not yet become effective, such as the use of a risk 
adjustment method based on beneficiary health status. The net 
effect of the implemented revisions has been modest and, on 
average, has likely removed only a portion of excess payments 
built into the base rates. Moreover, the recent and upcoming 
rounds of plan withdrawals from Medicare are not, as the 
industry has argued, fully attributable to Medicare's lowered 
payment rates. The evidence emerging from recent rounds of 
withdrawals suggests that market share, enrollment size, and 
competition from other health plans factor into a plan's 
decision to participate in Medicare. Critical to making 
Medicare+Choice payment modifications are the establishment of 
an appropriate base rate and of a risk adjustment method that 
pays more for serving beneficiaries with serious health 
problems and less for serving relatively healthy individuals.

                               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 health services and supplies.

Growth in Medicare Spending for Home Health Care

    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 also serves chronic, long-term-care 
patients.\2\ 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.
---------------------------------------------------------------------------
    \2\  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.\3\ Additional evidence indicates that at 
least some of the high use and the large variation in practice 
represented inappropriate billings and unnecessary care.\4\ 
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.\5\
---------------------------------------------------------------------------
    \3\ Medicare: Home Health Utilization Expands While Program 
Controls Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996).
    \4\ 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).
    \5\ BBA required the HHA PPS to be in place on October 1, 1999. 
Subsequent legislation delayed the implementation by 1 year, 
eliminating any transition period.

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Growth in Medicare Spending For SNF Care

    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.

Growth in Medicare Spending for Outpatient Rehabilitation 
Therapy Services

    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. Between 
1990 and 1996, payments for outpatient rehabilitation therapy 
alone rose at an average rate of 18 percent a year, compared to 
9.7 percent average growth rate for the same period for overall 
Medicare spending. BBA reforms were designed to control both 
the price and volume of therapy services provided in outpatient 
settings--the former by a fee schedule and the latter by per-
beneficiary coverage caps.\6\ Specifically, BBA limits coverage 
for outpatient therapy to $1,500 per beneficiary for physical 
therapy and speech/language pathology services, with a separate 
$1,500 per-beneficiary limit for occupational therapy. Hospital 
outpatient departments are exempt from these coverage limits.
---------------------------------------------------------------------------
    \6\ 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.

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Historical Overpayments to Medicare Health Plans

    BBA sought to moderate Medicare's payments to managed care 
plans because beneficiaries who joined Medicare managed care 
cost--not saved--the government money. That is, the government 
was paying more to cover beneficiaries in managed care--an 
estimated several billion dollars more--than it would have if 
these individuals had remained in the traditional fee-for-
service program. Medicare payments to managed care plans have 
been estimated to be too high by as much as 16 percent.\7\ 
Beginning in 1998, BBA made several changes to the method used 
to set Medicare+Choice plan payments, not all of which will 
reduce excess payments. Among other things, BBA required a new 
risk adjustment method--a mechanism for adjusting payment rates 
on the basis of a beneficiary's expected annual health care 
costs. It will be implemented in two stages. Beginning in 2000, 
HCFA plans to phase in an interim method based on inpatient 
hospital data; in 2004 it plans to implement a more 
comprehensive method incorporating additional medical data from 
other settings. The interim risk adjustment, if fully phased 
in, would reduce payments by 7 percent. BBA also reduced 
updates to health plan payment rates for a 5-year period ending 
2002, for a cumulative rate reduction of less than 3 percent. 
However, the effect of these reductions is substantially 
moderated because BBA used 1997 payment rates as the foundation 
for rates in 1998 and future years. According to HCFA 
actuaries, a forecast error caused the 1997 rates to be an 
estimated 4.2 percent too high and, consequently, aggregate 
plan payments in 1998 were $1.3 billion too high. The excess 
payments resulting from this forecast error will increase over 
time with managed care enrollment because it is built into the 
base rate.\8\
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    \7\ In a 1996 study, HCFA estimated that payments were too high by 
8 percent in 1994. [See Gerald Riley and others, ``Health Status of 
Medicare Enrollees in HMOs and the Fee-for-Service Sector in 1994, 
Health Care Financing Review, vol. 17, no 4 (Summer 1996)]. In a 1997 
study, we estimated that aggregate payments to California plans were 
too high by 16 percent. [See Medicare HMOs: HCFA Can Promptly Eliminate 
Hundreds of Millions in Excess Payments (GAO/HEHS-97-16, Apr. 25, 
1997)].
    \8\ BBA did not allow HCFA to adjust the 1997 rates for forecast 
errors, although such adjustments had been a critical component of the 
pre-BBA rate-setting process. BBA permits HCFA to correct forecasts in 
future years but did not include a provision to allow a correction of 
its 1997 forecast.
---------------------------------------------------------------------------

Little Evidence to Date of Impaired Access to Home Health Services, but 
             Future Payment System will Require Refinements

    BBA'S new payment policies addressing rapid spending growth for 
home health care included the establishment of an interim payment 
system, which is currently in effect, and a requirement to replace that 
system with a PPS by October 2000. Our published and ongoing studies 
discuss the effects of these BBA payment reforms and concerns about 
their design and implementation.
    Concerns have been raised about the effect of the interim system, 
but, as we reported in May 1999, there was little evidence that 
appropriate access to Medicare's home health benefit has been 
impaired.\9\ The pre-BBA payment system had controls for payments per 
visit but left volume unchecked. Since enactment of BBA, home health 
agencies have been paid under the interim payment system, which 
attempts to control the costs and total volume of services. Indeed, our 
work indicates that overall home health utilization in the first 3 
months of 1998 was below that in 1996 when Medicare spending for home 
health services nearly peaked. Moreover, the sizeable variation in 
utilization across counties has narrowed, a change consistent with the 
incentives of the interim payment system. 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.
---------------------------------------------------------------------------
    \9\ Medicare Home Health Agencies: Closures Continue With Little 
Evidence Beneficiary Access Is Impaired (GAO/HEHS-99-120, May 26, 
1999).
---------------------------------------------------------------------------
    Nevertheless, a home health PPS is a more appropriate payment tool 
because it can align payments with patient needs. Under PPS, payments 
will reflect the needs of the agencies' current beneficiaries 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 next year. It appears that HCFA intends to pay HHAs a 
per-episode rate for each 60-day period during which a patient receives 
services. 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 care 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 service needs, yet not overpay 
for others with lower needs. 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, will undoubtedly 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 
though such a mechanism would weaken HHAs' incentives to provide care 
more efficiently.

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, 
Medicare payment changes have been blamed for one corporation's filing 
for protection under bankruptcy law and the potential for another to 
similarly file. However, our ongoing work suggests that the PPS should 
not have an untoward impact on most SNFs and is only one of many 
factors contributing to the poor financial performance of these 
corporations. For most SNFs Medicare patients constitute a relatively 
small share of their business. In addition, 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. However, heavy investments in the nursing home and 
ancillary service businesses in the years immediately before the 
enactment of BBA, both to expand their acquisitions and upgrade 
facilities to provide higher-intensity services, has created 
difficulties for some corporations. Now under tighter payment 
constraints for both their SNF and ancillary service operations, these 
debt-laden enterprises will not be able to rely on overly generous 
Medicare payments. Thus, while PPS does represent a constraint on 
Medicare revenue and SNFs will have to adapt, 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.\10\
---------------------------------------------------------------------------
    \10\ 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 also concerned that payments for individual beneficiaries 
could be inappropriately too high or low because of certain PPS design 
problems. The first of these 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 variation 
in non-therapy ancillary services costs does not appear to 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 patient classification system and is working to 
refine the system to more accurately reflect patient differences.
    Another concern is that the current patient classification system 
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.

    Widespread 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 established an annual $1,500 per-
beneficiary cap on payments for outpatient physical therapy and speech/
language pathology services combined and a separate $1,500 per-
beneficiary cap on outpatient occupational therapy.\11\ Services 
provided by hospital outpatient departments are exempt from the per-
beneficiary caps.
---------------------------------------------------------------------------
    \11\ 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/language pathology 
services include the diagnosis and treatment of communication, 
swallowing, oral motor and related cognitive functions and their 
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 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 outpatient therapy providers be paid using Medicare's 
physician fee schedule--may not necessarily control Medicare 
expenditures if utilization rises. This is particularly likely, given 
the price and utilization controls established through PPSs 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 therapy and 
speech/language pathology services or for occupational therapy.\12\ 
Moreover, as the fee schedule likely reduces payments for many 
providers, 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.
---------------------------------------------------------------------------
    \12\ 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 their current provider.
    The effect of the per-beneficiary caps on nursing home residents is 
less clear. HCFA's policy explicitly states that the hospital 
outpatient department exemption does not apply to those therapy 
services furnished to nursing facility residents. Moreover, 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. For example, 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 period ends, 
nursing facility residents 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.

 Medicare+Choice Remains Relatively Inexpensive for Beneficiaries, but 
    Improved Risk Adjustment Needed to Target Payments Appropriately

    Developing appropriate refinements to BBA reforms affecting 
Medicare+Choice requires consideration of several aspects of Medicare's 
managed care program. At the moment, plan withdrawals from 
Medicare+Choice in 1999, and recent announcements that additional plans 
will withdraw in 2000, have prompted debate about whether BBA reforms 
have resulted in inadequate payment rates. At the same time, our 
published and ongoing work indicates that Medicare managed care 
payments to health plans likely continue to exceed the cost of 
providing Medicare-covered benefits.
    Our analysis of the 1999 withdrawals showed that payment rates 
alone could not explain plans' participation decisions. Withdrawals 
were not limited to low payment rate counties. The data suggested that 
local market conditions affected plans' participation in a county. A 
plan was more likely to withdraw from counties it had recently entered, 
where its enrollment was low, or where its market share was small 
relative to other plans serving the same county. Although our final 
analysis will not be available for a few weeks, our preliminary 
assessment suggests that similar factors help explain the pattern of 
the 2000 withdrawals.
    Plan withdrawals may well reflect a normal market correction 
spurred by a changing business environment. Prior to BBA, health plans 
could expand into new areas with relatively little risk because 
overgenerous Medicare rates provided protection from the ill 
consequences of small enrollment or large competitors. Between 1993 and 
1998, the number of plans and enrollees tripled. However, as BBA slowed 
payment growth, health plans may have reevaluated their expansion 
decisions, making such factors as potential enrollment, market share, 
and competition a key part of plans' decisions to withdraw from certain 
geographic areas.
    A local example illustrates the importance of nonpayment factors in 
plans' participation decisions. In 1996, Blue Cross' Free State health 
plan in Maryland--which until that time had served only some of the 
state's large urban counties--extended service statewide. Free State 
recently announced, however, that beginning in 2000 it would 
substantially reduce its geographic service area. The plan is 
withdrawing from 17 rural and small urban counties even though BBA will 
increase the average base rate in those counties by nearly 6 percent 
next year. In contrast, the large urban counties will receive only a 
2.4 percent average rate increase, but Free State will continue its 
Medicare participation in these counties.
    According to industry representatives, it is difficult for health 
plans to serve counties with few providers and enrollees because 
providers have little incentive to discount their fees and plans cannot 
spread risk over a large enrollment base. Although we cannot know with 
certainty, these factors may have influenced Free State's decision to 
discontinue service in Caroline County and 16 other rural and small 
urban Maryland counties. For example, in Caroline County Free State 
faced no competitors, had enrolled 19 percent of the beneficiaries, and 
would have received a 7.5 percent Medicare rate increase in 2000. 
However, less than 4,700 beneficiaries live in the county and Free 
State's 19 percent market share represented an enrollment of less than 
900 beneficiaries. In contrast, the plan will continue to serve seven 
counties where the number of beneficiaries ranges from about 15,200 to 
116,600.
    In addition to our work on plan withdrawals, our assessment of BBA 
payment changes indicates that, relative to the cost of providing the 
package of traditional Medicare benefits, payments to health plans 
remain excessive. For one thing, plans annually receive a billion-plus-
dollar overpayment in aggregate as a consequence of BBA's terms for 
setting the base payment rate. This problem, owing to an uncorrected 
forecast error, will be built into future base rates because BBA has 
not provided explicit authority for HCFA to correct the forecast error. 
In our June 1999 report, we suggested that the Congress consider 
certain modifications to Medicare's base payment rates to health plans 
to eliminate, among other things, the excess payments resulting from 
the 1997 uncorrected forecast error.
    Moreover, payments continue to exceed plans' costs of providing 
Medicare-covered services. In 1999, the average plan was required to 
provide $54 in extra benefits per member per month so that projected 
Medicare payments would not exceed the plan's projected costs and 
normal profits. In addition, the average plan voluntarily provided 
another $54 in benefits per member per month. The additional benefits 
can be reflected not only in coverage for services, but also in reduced 
beneficiary cost sharing. For example, in 1999 most plans did not 
charge a monthly premium and charged only a small copayment for 
outpatient services.
    In 2000, enrollment in a Medicare+Choice plan will remain a 
relatively inexpensive way for a beneficiary to obtain prescription 
drug coverage in many areas. On average, plans will charge 
beneficiaries $16 per month in premiums and most will offer 
prescription drug coverage. Beneficiaries will be charged a copay for 
prescription drugs that will average about $17 for brand name drugs and 
$7 for generic drugs. In contrast, the average monthly premium for 
private supplemental insurance policies (Medigap) offering, among other 
things, prescription drug coverage ranges from $136 to $194 per month 
in 1999. Moreover, those Medigap policies require a $250 deductible 
with a 50-percent copayment.
    Given that Medicare has spent more for the generally healthier 
beneficiaries enrolled in Medicare+Choice plans than for the generally 
sicker beneficiaries in traditional Medicare, the need to have payments 
better reflect beneficiaries' expected health care costs is critical. 
HCFA's new risk adjustment method, based on certain health status 
measures, is scheduled for phased implementation in 2000 and represents 
a major improvement over the current method. For the first time, 
Medicare managed care plans can expect to be paid more for serving 
beneficiaries with serious health problems and less for serving 
relatively healthy ones. The method scheduled for implementation in 
2004 will be an improvement over the method used in 2000 because it is 
intended to include better health status measures derived from more 
comprehensive data not currently available.
    HCFA's plan to phase in the 2000 risk adjustment method slowly is 
designed to balance the needs of taxpayers and beneficiaries. In 2000, 
only 10 percent of health plans' payments will be adjusted using the 
new method. This proportion will be increased each year until 2003, 
when 80 percent of plans' payments will be adjusted using the interim 
system. Although a gradual phase-in of the interim risk adjuster delays 
the full realization of Medicare savings, it also minimizes potential 
disruptions for both health plans and beneficiaries. In 2004, HCFA 
intends to implement a more finely tuned risk adjuster that uses 
medical data from physician offices, outpatient departments, and other 
health care settings and providers--in addition to the inpatient 
hospital data on which the interim adjuster is based. This more 
comprehensive risk adjustment system cannot be implemented currently 
because many plans say they do not have the capability to report such 
comprehensive information.

                               Conclusion

    In conclusion, BBA payment reforms seek to curb unnecessary 
Medicare spending. 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, 
it will be prudent to uphold 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.


                                

    Chairman Thomas. Thank you, Bill. I hope no-one assumed 
that once we began this process that we weren't just going to 
pass BBA '97, fire and fall back and not monitor. In fact, 
included in the legislation was the creation of a bipartisan 
Medicare reform commission to begin looking at the out years. 
The suggestions that that commission came up with, the 
recommendations, although falling short of the 11-vote super, 
super, super majority required will, I can assure everyone, 
surface in bipartisan legislation with additional refinements 
as we move forward.
    One of the more interesting areas we have been examining is 
the fact that Medicare has to go out and the plans under 
Medicare have to go find their beneficiaries one at a time, the 
most expensive way to get people covered, and that we might be 
able to be fairly creative in terms of a bidding process that 
produces the most cost effective plan being rewarded by some 
beneficiaries who have signed up, not knowing which plan they 
are going to, but with the promise that it would be a zero 
premium, and thereby at least mitigating some of the relatively 
high costs for marketing a product which under law doesn't have 
a whole lot of ability to be varied except for, as you 
indicated now, about $54 of additional benefits. That is just 
an aside in terms of some of the things that we are continuing 
to do.
    Thank you. And we are going to ask for MedPAC's additional 
recommendations. You have some included in here. The key here 
is for us to know as best you are able whether it is going to 
require legislation to make the change or whether you believe 
administratively the changes could be made. Then whether they 
will be made or not administratively is another question. I do 
think that the therapy cap is going to have to be legislated, 
especially if we create some kind of a pool as well as modify 
the caps.
    I think there is some room for budget neutral adjustment on 
the SNF drug structure but fundamental additional money for 
acuity I think also needs to come from us, and we are willing 
to do that.
    Are you comfortable or do you need some additional analysis 
to make some statement about the outpatient prospective payment 
capability of the administration in the basic form? Do you 
believe that they have the administrative ability to phase it 
in and/or make it budget neutral in that stretched out phase-in 
or do you want to take a look at it and come back with a 
recommendation?
    Ms. Wilensky. We will come back with a recommendation. The 
answer has to do with whether, if the statute doesn't 
explicitly say it can't be phased in, does that give HCFA the 
ability to do so, or if the legislation says these are the 
savings to be produced by introducing a prospective payment at 
a particular point in time, does that limit how it can be 
introduced. We will come back with an opinion from the 
attorneys on our staff.
    Chairman Thomas. I think it probably falls under the 
general category of affairs, if there is a will, there is a 
way, and hopefully we will be able to work our way through 
that.
    The concern that you have is a concern that I have, and 
this may be a legislative requirement, that notwithstanding the 
phasing in, and even if it were possible to make them budget 
neutral, there are still going to be significant differential 
payments, and perhaps we might think about building some 
corridors in terms of plus or minus percentages so that instead 
of one big river you can channel those payments where they 
might be most appropriate. If in fact we do do that, that is, a 
refinement that I think is going to require legislation, and in 
the short timeframe we are dealing with that may not be 
appropriate, but we are going to have to monitor that very 
carefully.
    Ms. Wilensky. It does, of course, not take effect until 
next summer, and so it gives you, an opportunity to revisit 
this issue, if you wanted to.
    Chairman Thomas. And while you are looking at the budget 
neutral aspect, we, probably in a very short timeframe, request 
you look at again the risk adjuster under Medicare+Choice, an 
objective analysis of whether they can. Whether they want to or 
not of course would be a different question, but whether you 
believe it would require legislation to make that change, and 
as is usually the case, we want all the answers to these on 
Monday morning, preferably before noon, if possible. Thank you 
very much.
    Ms. Wilensky. I understand. I trust the executive director 
will have no problem having that back to you.
    Chairman Thomas. And Michael Hash has learned, as have you, 
you just pass that baby on. We are getting from behind you.
    Ms. Wilensky. It was my years at HCFA that helped me learn 
this trick.
    Chairman Thomas. Exactly. We do need these in a relatively 
short period of time. Thank you.
    Does the gentleman from California wish to inquire?
    Mr. Stark. I would like to ask Gail, I just reviewed your 
career here for a minute. You used to run HCFA, didn't you?
    Ms. Wilensky. Indeed, I did.
    Mr. Stark. In those days, you were a Republican. Now, you 
have to be bipartisan, right, and nobody ever questioned your 
conservative philosophy, did they, when you were working for 
the Republicans?
    Ms. Wilensky. Not to my face. I don't know what they said 
otherwise.
    Mr. Stark. Now, the Democrats are running HCFA. You and Dr. 
Newhouse cosigned a letter recently talking about the operating 
budget of HCFA, and just if I can review for my colleagues, and 
I am sure you are aware of this, but basically HCFA had asked 
for a couple of percent increase in their operating budget, 
about $70 million. There were also some additional user fees 
that were scheduled to come on stream in their proposal. The 
Appropriations Committee, I guess, assumed that we would enact 
the user fees, and they cut HCFA's budget by 13 percent, or cut 
out $400 million. But, the fact is they are going to get cut 
$400 million and HCFA isn't getting the anticipated user fees.
    My sense is we added a lot to HCFA's plate with the 
balanced budget amendment, and we are complaining often that 
they are not done with those duties. But, I wonder if you could 
comment--even let us assume you were going to go back and run 
HCFA--what do you think about HCFA's administrative budget? 
Shouldn't we be passing the user fees or doing something? And I 
want to talk to Dr. Scanlon about this a minute, but could you, 
in a kind of bipartisan way, weigh in on that?
    Ms. Wilensky. As you noted, both as an individual and then 
again as a member of MedPAC, I think there has been a mismatch 
between the requirements and burdens that had been placed on 
the agency as a result of the Balanced Budget Act in turns of 
the resources that are available. I don't think it is 
appropriate and MedPAC has not looked at how the funding 
decision should be made, whether it should follow the normal 
course or an extraordinary course. MedPAC is concerned that 
there needs to be a decision either to lessen the activities 
that you assign HCFA or to provide more administrative support 
because otherwise you find, to the Congress' frustration, that 
some of the activities don't get done in a timely way. We 
realize this is a difficult discretionary spending year, but I 
am personally concerned about this as well.
    Mr. Stark. And I ask Dr. Scanlon, along the same line, 
though this may be going a little further. Could we fix it this 
year like we pay the PROs directly out of the trust fund, I 
believe. We changed the way. The Medicare integrity program is 
paid in Kennedy-Kassebaum Act. In your opinion, if this is a 
fair question, could we not pay the HCFA operating budget 
directly out of the Medicare trust fund and build in adequate 
safeguards for auditing and oversight?
    Mr. Scanlon. I think we see from the Medicare integrity 
program example under the Health Insurance Portability and 
Accountability Act the model in some respects for providing 
both the oversight, as well as the certainty about the funding 
that HCFA would have available. We have commented, in looking 
at HCFA's operations in the past, about the difficulties that 
are created by the appropriations cycle and the fact that 
appropriations are often delayed and that this delays the 
initiation of activities. This was particularly a problem in 
the fraud and abuse area. The contractors were not certain how 
much they were going to have, and therefore, a portion of the 
year would expire, and they really would not have begun the 
kinds of activities that would have produced positive results.
    Mr. Stark. And as an expert in government policy, if this 
Committee had oversight of HCFA's operating budget, wouldn't 
you think that HCFA would be far more responsive to the 
chairman's requests just as a matter of self-survival?
    Mr. Scanlon. My graduate degree was in economics, not in 
government policy.
    Mr. Stark. One further question. Gail, I have puzzled over 
this for years. For a while the California Hospital Association 
used to collect data on hospitals, showing all of their income 
and all of their expenses and showing their charitable 
contributions and all the rest. Now the hospitals say they 
don't want to tell us. Is there any reason that you can think 
of, even if it had to be sanitized so that we only had it by 
State and we didn't know the names of individual hospitals, 
that we should not, in this era of computers, be getting 
relatively detailed financial statements from every hospital, 
indeed every provider in a format that was at least the same 
for each institution so that we could begin to compare by area, 
by size of hospital, by all of these things where the problems 
are? Without that information it makes it very difficult for us 
to perhaps offer the best help to those institutions that need 
it most. Is there something that prevents that?
    Ms. Wilensky. I think I recall this discussion from 8 or 9 
years ago. We certainly have got to do better than we are doing 
now. It is ridiculous in an age of information that we are 
operating on old and, if not irrelevant, sufficiently dated 
information that we can't properly advise you and you have 
difficulty making the best decisions. Exactly how to put it in 
a common format so that the information is available with the 
privacy protection that is needed, I am sure would be subject 
to debate by the institutions affected. However, we clearly 
need to fix the problem we are now facing, and I think it is in 
the institution's interests right now to do so.
    Mr. Stark. Thank you.
    Chairman Thomas. Just let me briefly, before I recognize 
the gentlewoman from Connecticut, indicate that there is always 
a concern about bureaucracies and how much money they get and 
how much money they need. In the President's fiscal year 2000 
budget request, HCFA asked for over $50 million to develop a 
database for the risk adjuster. Some of us remember something 
called the Medicare transaction system, MTS. I believe Dr. 
Scanlan at GAO did a study on that. How much was spent on the 
Medicare transaction system before they canned it?
    Mr. Scanlon. As I remember, around $43 million was spent on 
that.
    Chairman Thomas. So one of the problems I would tell the 
gentleman is that notwithstanding their desire to get money, 
there is still in my opinion a significant unwillingness to 
face reality where they spend tens of millions of dollars on 
programs that aren't going anywhere without admitting that they 
aren't going anywhere until the cost is so high. I think you 
will find if you examine previous budgets it could have been as 
much as a hundred million that was focused there, and we never 
got a return on our investment.
    Then let me say that one of the things that we absolutely 
need, and you are absolutely right, we do need data and we need 
to collect it in a confidential way so that individual patient 
identity is not divulged, and the gentleman from Maryland and I 
have a bill that we are going to introduce on patient records 
confidentiality which will address that problem.
    Last, in your report, and I apologize for not asking you 
this earlier, you talked about the impact that PPS would have 
on particular types of hospitals, especially rural and cancer 
hospitals. In the BBA there was a requirement of a 1-year delay 
of the imposition of any prospective payment system, for 
example, on cancer hospitals. If we maintain the current law 
relationship of a 1-year delay between the introduction of a 
PPS system and an examination as to whether it should be 
applied to particular hospices, like cancer hospitals, do you 
think that is a sufficient safeguard to make sure we get the 
system right or do you think we should exempt them up front 
before we have any of the data and the 1-year delay to examine 
it? What would be the prudent approach in your opinion?
    Ms. Wilensky. I think we ought to have the 1-year delay. I 
don't think at this stage exempting them without further 
analysis is appropriate. I know there is concern about what 
happens in the cancer hospitals. I also know that some of the 
academic centers that provide major cancer care challenge that 
there is quite the difference that the cancer centers claim. We 
have heard that on the commission already. So I think that 
having an ability to look at this issue and try to decide how 
not to adversely affect these centers before we make a decision 
is better than simply exempting them.
    Chairman Thomas. While I certainly would not support a 
position of imposing a PPS on all hospitals at the same time 
and that I think was the reason we built the 1-year delay in, I 
still think it is the prudent approach, and I appreciate your 
testimony.
    Does the gentlewoman from Connecticut wish to inquire?
    Mrs. Johnson of Connecticut. I guess I am disappointed, Dr. 
Scanlon, in any sense of urgency in your testimony. I think we 
have been fortunate that we aren't seeing real access problems 
in the nursing home area, and I think it is because most of the 
nursing homes are really dedicated to their work and are trying 
hard to provide the same level of care they have always 
provided, but if we don't begin to take note of the fact that 
somebody with a $10,000 prosthetic device is different from 
somebody who doesn't have that need, then we are going to have 
serious problems. We don't begin to be able to have real-time, 
you know, real life recognition of drug costs. They are so much 
more a part of treatment, not just in an outpatient, but in 
nursing homes. We are going to have real problems, and I think 
if you listen to the testimony later on, you will hear that we 
are on the verge of that.
    The majority of people trying to discharge patients from 
hospitals are finding high cost patients hard to place, and I 
am tired of looking at the faces of very kindly people who run 
wonderful, quality care places, looking at me and saying how 
can I honestly, ethically, morally take into account whether 
this person is going to cost them a whole lot, but how can I 
not, in respect to the fiduciary responsibility I have to keep 
the home open.
    So I want to say I feel a sense of urgency to address some 
of the problems that the BBA has encountered and to address 
some of the problems that the administration has created by the 
way they have implemented it, and I think we are going to have 
to look at urging the administration to use their executive 
branch power to eliminate prosthetic devices from the average 
payment system, transportation for dialysis when it can't be 
delivered in the home. So it is not a big number of things, but 
there is some sense of urgency of what needs to be done now, 
and I really am disappointed. I don't get that sense of 
urgency.
    There is just simply too many questions to need to go into. 
So let me ask you both a general one that I think is extremely 
important. Hospitals are, in my estimation, really in a 
difficult situation, and we are going to erode institutions 
that are of extraordinary importance, not just to Medicare 
patients but to every American in their neighborhood and their 
community. I see my hospitals, the small hospitals beginning to 
dig into their endowments. This can't go on many years before 
you don't have a strong institution.
    So when you look at teaching hospitals, one way to 
alleviate the immediate stress, until we get a better handle on 
the complex variety of changes in the public and private sector 
that is impacting these institutions, would be to freeze IME 
payments for 2 years and DSH payments. The number of uninsured 
is going up. Their responsibilities for indigent care is not 
declining. Medicare managed care choice programs are the 
poorest payer of all of the managed care plans in my part of 
the country.
    Now, I may be feeling this more intensely than other 
members, because if you look at the study done by HCIA, they 
have a whole sort of section where they go into the fact that 
New England is more impacted by these decisions than other 
parts of the country because we have been officially run, I 
guess. I don't quite remember. I am sorry I didn't bring it. 
But I think we have to take the situation of the hospitals very 
seriously and at least protect them from further reductions in 
their inpatient reimbursement structure and particularly those 
reimbursement rates that have most to do with care for the poor 
and their unique role of training physicians and doing 
research. Many of them don't have the 25 percent match anymore 
for NIH clearance. So grants that they have traditionally had 
are beginning to be at risk.
    So, you know, what would you recommend about payment 
changes for hospitals in this bill that we are going to 
develop?
    Ms. Wilensky. I would strongly encourage you to do 
something on the outpatient department, as I have indicated, 
both to lower the reduction in payment, to phase it in and to 
look at how aggregated the payment is. This would especially 
help teaching hospitals and rural hospitals because of the very 
large and active outpatient areas. I would not halt the IME 
reduction. As you know, ProPAC before us and HCFA have 
indicated that the indirect medical education payments are 
substantially over the costs associated with the indirect 
medical education.
    I have personally--MedPAC has not taken a position on this. 
I personally have somewhat more sympathy on the DSH and the 
disproportionate share exactly because of the issue that you 
have raised. We know we have had an increased number of 
uninsured over the last several years, and while they are 
certainly not the sole providers of care and, in fact, have a 
mixed experience of how much all of the hospitals do, all the 
teaching hospitals do, I think if you have the funding, that to 
me would rank higher.
    We will be able to come back in January and provide you in 
our March report a little better sense of how much of the 
increase in costs that is being reported is actually available 
in numbers. I have not seen the HCIA report that you have 
referenced, but we will certainly be glad to look at it.
    Mrs. Johnson of Connecticut. Thank you. I hope you--I see 
my time has run out. I hope that you will, in your next round, 
look at what is happening to hospitals as a result of the 
increase in drugs. My community hospital in my own hometown has 
had a 43 percent increase in drug costs in the last 2 years. 
There is some drug they have to give every infant that is very 
expensive, but you know, their moral and ethical responsibility 
requires that they administer it, and nobody reimburses them. 
So I think we need more immediate information and we need to 
take into account some things that in the past we really 
haven't had to take into account.
    Are you concerned basically about the state of our teaching 
hospitals?
    Ms. Wilensky. I think they are certainly reporting that 
they are feeling pain. I have some question as to how much of 
it is related to Medicare to be very honest. I would like to 
have a better sense that these are BBA and Medicare issues. 
Otherwise, I think it is a much harder question. We have many 
academic health centers, and whether or not the whole 
configuration and the role of the Federal Government to the 
academic health centers, I am less convinced although the 
information, if it were to suggest otherwise would have me 
change my mind, that this is a Medicare payment problem. 
Although, as I say the outpatient change would help teaching 
hospitals a great deal. They have very active outpatient 
departments.
    Mrs. Johnson of Connecticut. Thank you.
    Mr. Scanlon. Mr. Chairman, if I might, I wanted to assure 
you, Mrs. Johnson, we do share your concern and your sense of 
urgency, even if our official language in the testimony does 
not convey that emotion.
    We have recommended that the PPS for skilled nursing 
facilities be revised to deal with exactly the problems you are 
talking about, the high acuity patient as well as the very 
unique type of services that very few individuals are going to 
require, which potentially could be taken outside of the 
prospective payment system. We provided some information to Mr. 
Thomas yesterday about this very issue, and so we do share your 
concern there.
    In terms of access to skilled nursing facilities, we are 
completing a survey very similar to the Inspector General's 
using another sample of hospital discharge plans. I am afraid 
our findings have been very similar to the Inspector General's 
in terms of not identifying significant problems. I am going to 
be very interested in looking at the testimony that is coming 
later to understand where their information fits relative to 
the information that we have, but again, we share the same 
urgency and concern.
    Mrs. Johnson of Connecticut. Thank you.
    Mr. Chairman, can I just make one comment to add to that?
    Chairman Thomas. Sure.
    Mrs. Johnson of Connecticut. It is not just the small, 
country hospitals. Hospitals in the city of Dallas and Fort 
Worth, which almost all of them have merged because of 
financial problems, are having the same, exact problem, and 
they have stopped all capital expansion, even though they are 
100 percent bed occupied because they are out of money, and 
they blame it on Medicare whether you want to realize it or 
not.
    Ms. Wilensky. I know and I actually just came this morning 
from Texas. I understand that they blame it. We need to be able 
to advise you to assure ourselves that it is actually Medicare 
and not other changes.
    Chairman Thomas. Unfortunately, one of the fundamental 
problems in America today is there are too many hospital beds. 
They may not be in the right places, but there are still too 
many hospital beds.
    The other concern I have is that this is the first round of 
significant adjustments. MedPAC recommended to us that the 7.7 
reimbursement rate on indirect medical was probably too 
generous. We are talking about going to 6.5. In fact, MedPAC 
has recommended a number perhaps below 5 as the appropriate 
amount. I think part of this is simply a test of wills. If some 
folks with significant leverage can hold the line now, we will 
not be able to go ahead and make the kind of reforms that are 
necessary over the long haul.
    What we need desperately is accurate information so that we 
can make the most reasonable decision. We will try to be as 
prudent as possible, but it seems to me that moving from 7.7 to 
6.5, when we are looking at a glide slope that will extend over 
several years, is simply an indication that the entire graduate 
medical education area needs to be reexamined, not just the 
modification in the current rates, and we intend to do just 
that.
    Does the gentleman from Wisconsin wish to inquire?
    Mr. Kleczka. Thank you, Mr. Chairman. We do have a couple 
of minutes before the vote. I have a question of Ms. Wilensky.
    You have indicated in your remarks that you believe the 
nursing home problems should be addressed in this, what we call 
refinement legislation. I happen to agree with the gentlelady 
from Connecticut on this subject. I hear stories from nursing 
homes and patients in my District where the high acuity 
patients are being left in the hospital because nursing homes 
are refusing admission. I can't fault the nursing home because 
they are not in the business to lose money or to harm the 
solvency of the home or to hurt other patients.
    They know that when a high acuity patient walks in the door 
they are going to be losing big, big dollars. There is no way 
that they can do that. So now they are advocating, the profits 
or nonprofits alike for some changes in the RUG rates. Can you 
give this Committee some specific advice and/or recommendations 
as to what adjustments should be had in that area? Some of the 
nonprofits homes are looking for relief in the extensive 
services and special care areas. Other nursing homes are 
looking for relief only in the rehab area. The Hatch bill I 
think for the most part deals with the rehab RUGs and slates 
them for increases. Give us some direction on this particular 
issue.
    Ms. Wilensky. The staff that have been working in this area 
in MedPAC I know have met with the committee staff on several 
occasions discussing the fact that some of the bills have many 
categories. Some of the bills are much more focused. We also 
have looked at the issue of keeping some potential areas 
outside of prospective payment, for example, ambulances. Mrs. 
Johnson identified a case with regard to dialysis. Perhaps if 
there is no financial relationship between the nursing home and 
the ambulance company, that there may be circumstances where 
the separation outside of prospective payment would be 
reasonable.
    We will make sure that there is----
    Mr. Kleczka. Do you have a list of those?
    Ms. Wilensky. We will make sure----
    Mr. Kleczka. What RUGs are you looking at? What RUGs would 
you suggest that we address?
    Ms. Wilensky. I am sorry?
    Chairman Thomas. If I can respond to the gentleman. His 
question was what RUGs to adjust. The difficulty is that the 
computers at HCFA won't allow us to adjust the RUGs. What we 
are going to have to do is find a surrogate for acuity and then 
create a multiplier for IVs, hospital beds. There are ways to 
create surrogates in the interim.
    Mr. Kleczka. The question is not how it is going to be 
done. The question is, could you identify for the Committee 
which areas you think should be given priority for adjustment. 
We will worry about how to do it.
    Ms. Wilensky. We will attempt to do so. I don't know 
whether the staff has already laid that out. I do know, because 
I was involved in some of the discussion, that we have met with 
committee staff on the general issue, but we will make sure 
that we have as much assistance on the specifics as we can.
    Mr. Scanlon. If I could add, I think one of the original 
difficulties----
    Mr. Kleczka. I am sorry.
    Mr. Scanlon. I was going to add to this. One of the 
original difficulties in setting up the RUGs was the very small 
sample of patients that was being used, and there is the strong 
potential that what happened is in the highest categories in 
terms of nursing need and in terms of rehabilitation need that 
there were too few patients, and therefore, the grouping is too 
gross, and what we need to do is think about dividing that 
group up. The problem that HCFA has faced is that they need 
more information about patients and the variation of needs, and 
they are going about trying to collect that. We really 
shouldn't make this decision based on intuition. We should be 
basing it on data they are trying to collect.
    Ms. Wilensky. My understanding is there is a contract out 
right now that is supposed to provide data back to HCFA by the 
end of the year. The question really is, is there something the 
Committee wishes to do in the interim in what is a widely 
agreed upon problem while HCFA gets more precise data to 
actually make an informed decision about which of those 
categories is underpaid and by how much. My understanding is 
that if you want to do something right now, it will be on 
limited information and HCFA will have a limited ability 
between now and next summer to implement something that is very 
sophisticated because of all the Y2K and payment issues. My 
personal opinion is it would be better to go ahead and do 
something now and something more refined next year.
    Mr. Kleczka. OK. Would you please share your specific 
recommendations with regard to short term changes with the 
minority staff?
    Ms. Wilensky. Yes, of course.
    Chairman Thomas. Thank you very much. I am informed that we 
are going to have another vote following this vote, and so it 
is going to be very difficult to try to continue the Committee. 
If I could ask you, is it going to be possible for the panel to 
come back so that other Members could quiz them, and that to 
give everyone some assurance and perhaps an opportunity for 
lunch, let us say that the Subcommittee will reconvene at 1:30. 
Thank you very much. The Committee stands in recess.
    [Whereupon, at 12:45 p.m., the Subcommittee was recessed, 
to reconvene at 1:35 p.m.]
    Chairman Thomas. The Subcommittee will reconvene.
    Does the gentlewoman from Florida wish to inquire?
    Mrs. Thurman. Thank you, Mr. Chairman. Dr. Scanlon, let me 
ask you, as you can tell from some of the conversations that we 
have had with the different witnesses, all of us have been 
asked to look at some of these issues and the impact of BBA, 
and yet we are hearing today that there doesn't seem to be all 
that many problems out there, everything is OK. But one of the 
things that I would like to ask you is, one of the concerns 
that I have is, things, as I think Mrs. Johnson mentioned and 
others have mentioned, that things may be not, you may not be 
able to identify potential problems in the future, and so one 
of my concerns is that if we don't do some of the things that 
are being asked by some of these providers, do you see in the 
future some real cuts in patient care?
    Mr. Scanlon. Let me start by saying I think we don't want 
our testimony to be interpreted as saying that everything is 
OK. I mean, we think that generally speaking there is still 
care being delivered to serve beneficiaries' needs, and we have 
identified some problems that exist, and in some instances, 
those problems relate to where a person receives care as 
opposed to whether they receive care, the example being the 
skilled nursing facilities. When people remain in the hospital, 
they are still being cared for, they still may be receiving 
therapy. We heard from discharge planners that sometimes their 
hospital stay is extended long enough that they are able to go 
home with home health care instead of going to a skilled 
nursing facility for a short stay.
    So we do think that those are things to be noted, and at 
the same time, we think that the issue is fixing or refining 
these various systems in terms of dealing with the problems 
that we have identified, which are, generally speaking dealing 
with higher-need beneficiaries. This is the case for problems 
related to home health, Medicare+Choice, skilled nursing 
facilities. How much those will become exacerbated over time, I 
mean that is a concern. So we do need to try to address those.
    Our other bottom line is we feel there are enough resources 
in the system, but, there is a targeting question because we 
can still identify areas of overpayment. So that in terms of 
trying to deal with the areas of underpayment, we need to think 
about some redistributions as well as potential infusions of 
new money.
    Mrs. Thurman. What about in the area of hospitals? Because 
we are hearing from our hospitals, and they are saying, look, 
we are holding on barely, and we think if this continues and we 
don't get any relief, that you really will see some patient--
and I am hearing that from private, from community, from not-
for-profit, and in particular, some of my teaching hospitals, 
the same kinds of things. What can you give us as some hope 
here?
    Mr. Scanlon. Maybe it is more information as opposed to 
hope. I think the issue is that we have not done nearly as much 
or really haven't looked into the hospitals per se, leaving 
that work to MedPAC, and I would ask Dr. Wilensky to comment on 
that.
    I do think the one area where the work that we have done 
indicates an impact on hospitals consists of those people who 
are staying longer and not being placed in skilled nursing 
facilities. Hospitals are in many instances not getting 
additional revenues to serve those longer-stay patients. But 
the whole issue of hospitals, as we talked about this morning, 
is tied to what other payers are doing and to the supply of 
hospitals we have relative to the need. There has been a 
dramatic change in the delivery of medical care and we use less 
inpatient hospital services. So it is a question of what is 
Medicare's role in resolving this more general set of problems 
that are affecting hospitals.
    Ms. Wilensky. I think your concern is well placed because I 
know you have been visited by representatives of the health 
care industry broadly defined, but you will have opportunities 
to make further corrections. Many of the statements relate to 
projections 3 and 4 years out. If they continue, this is what 
will happen. I do urge you to do some things this year, I don't 
want you to misunderstand me, but I think you ought to 
concentrate in the areas where it is clearer this is a problem 
right now, monitor what is going on. We come back to you with 
at least two reports a year. We will have more information on 
the hospitals. The outpatient we think we can see now coming as 
a problem. It is not clear that there is currently a problem on 
the inpatient, and I agree that there are probably more 
hospitals than we really need, and if we could have some 
selective closures, it would be helpful.
    Mrs. Thurman. And I do note that you do say that there are 
other indicators, pressures that are going on out there. What 
would be the kinds of questions that we should be asking for 
information from our hospitals to help us make this clearer and 
to identify those issues that we really need to be working on 
this year?
    Ms. Wilensky. The biggest thing that would be helpful would 
be to get information that separates out the effects from 
Medicare versus the effects that are going on from other payers 
in the hospital. We are also sometimes presented with data from 
individual hospitals. It is not showing that separation. It is 
unreasonable to ask a fiscally fragile program like Medicare to 
make up for pressures going on from other payers, and so that 
is really something that we need to know. We know that in the 
past few years hospitals have been very good at keeping their 
costs down. So although Medicare payments weren't rising that 
quickly, it allowed for a substantial inpatient margin to build 
up.
    We want to see what has happened with the costs, whether 
they have been able to keep them low. We know the revenue has 
been--was frozen and is now growing very, very slowly. My guess 
is, there are still, in the most part, Medicare margins 
inpatient. The outpatient is a different problem, but if there 
is something else, we need to be able to see it. We can't see 
it.
    Mrs. Thurman. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. I would tell the gentlewoman from Florida, 
one of our biggest problems is that we haven't had change in 
this area for such a long time.
    A piece of humor here is news from the 13th District in 
California. It is a press release. The headline is, Medicare 
vastly overcharged for infusion therapy provided in skilled 
nursing facilities prior to Balanced Budget Act. ``The IG's 
findings are a classic example of how Medicare was ripped off 
under the old cost-based system,'' Representative Stark said, 
chairman of this Committee for more than a decade in which, if 
he had been willing to make some of the changes that clearly 
needed to be made, especially in SNFs and in home health care, 
we would not see the growth that occurred and, therefore, the 
significant need to make dramatic adjustments that we are now 
faced with.
    Does the gentleman from Minnesota wish to inquire?
    Mr. Ramstad. Thank you, Mr. Chairman. Dr. Wilensky, Dr. 
Scanlon, good to see you both.
    Dr. Wilensky, let me ask you a question if I may. I was 
also glad to see in the most recent MedPAC report that the 
commission recommended that the Secretary should postpone by at 
least 1 year the application of the interim Medicare+Choice 
risk adjustment for specialized plans such as EverCare, and you 
were here for my line of questioning to the previous witness, 
and I am quoting now from your report:

    Plans should be paid using existing payment methods until a 
risk adjustment or other payment system is developed that 
adequately pays for care for frail Medicare beneficiaries.

    Now, my question is this, if plans should be paid under the 
current payment system until a special methodology is developed 
for these frail elderly programs, why didn't MedPAC go one step 
further to recommend that these programs should be completely 
exempted from the internal risk adjuster at least until the new 
methodology is implemented?
    Ms. Wilensky. It would be a better system if we could bring 
them into a single payment mechanism, and it is really a 
question of how long will it take until we are at that point. 
So we were trying to buy some time until--there is a current 
evaluation being done of the PACE, EverCare and Social HMO 
programs. We wanted to get more information back that shows the 
impacts of these programs. There is an outstanding study with 
regard to whether the for-profit, not-for-profit distinction is 
of any use. We decided to withhold further recommendations 
until these outstanding studies are done. We actually had 
considered making a stronger recommendation, but because there 
are several studies relating to these programs, we thought it 
was more prudent to wait until the information is back. We will 
be back next year and say something. So we brought what we 
thought was the most important point, which was don't do 
anything for now until we can come back next year and see if 
there is anything more specific to say.
    Mr. Ramstad. That data should be available, should be 
forthcoming by when, would you say, early next year?
    Ms. Wilensky. My understanding was in enough time so that 
when we came back in June 2000 we would have additional 
information. I will provide you that when the studies are 
supposed to be completed.
    Mr. Ramstad. OK. I certainly appreciate the commission's 
recognition of the importance of specialized plans, 
specifically EverCare. It affects so many of the frail elderly 
in Minnesota and Maryland, Mr. Cardin's State and district, 
across the Nation as well, as Mr. Cardin pointed out earlier.
    In the remaining couple of minutes I have got, I am also 
concerned that the annual lock-in requirement will be 
detrimental to these frail elderly programs. Thirty percent of 
the membership dies in any given year, and if members are only 
allowed to enroll once a year in these programs, obviously many 
of them won't have the opportunity to avail themselves of these 
high quality, innovative, cost-saving programs. What is 
MedPAC's position on the once a year annual enrollment 
requirement?
    Ms. Wilensky. We did have discussion concerning precisely 
about the issues you have just raised. I don't recall that we 
took a position specifically on that issue. I will go back to 
look and if we did, I will let you know. Prior to our report 
next year, I will make sure that we have looked at this issue.
    Mr. Ramstad. Now, it is my understanding that MedPAC 
recommended exempting the PACE program from the annual lock-in 
provision. Is that correct? I believe that was exempt.
    Ms. Wilensky. I believe that is correct. The issues that we 
were dealing with is that we had the outstanding study work was 
primarily to be done on the EverCare and the Social HMOs. Those 
are evaluations that had been requested and had not been 
completed. It was really waiting to that time.
    Mr. Ramstad. My point is, implicit in my question is, if 
the PACE program can be exempted from this annual requirement, 
couldn't this also be done for the EverCare program?
    Ms. Wilensky. Yes. Again, the point of our concern was we 
did not want to do harm to these programs. We think it prudent 
to get this additional information, but we agree this is 
something that if you undo the programs it will take a while to 
put them back together.
    Mr. Ramstad. Finally, Dr. Wilensky, just a footnote to my 
friend from Florida's statements. I was just at the Mayo 
Medical Center in Rochester, Minnesota, which operates, as you 
know, under one of the lowest profit margins of any provider in 
the world and also some of the highest quality health care of 
any provider in the world. They attribute to the BBA changes a 
loss over 5 years of $500 million, and they can't absorb $500 
million. So I think this problem is more widespread than some 
of us recognize.
    Mr. Ramstad. Or at least some of our friends at HCFA 
recognize. Thank you.
    Chairman Thomas. Thank the gentleman. The gentleman from 
Maryland wish to inquire?
    Mr. Cardin. Yes. Thank you, Mr. Chairman. I want to agree 
with the comments made by Mr. Ramstad. It looks like we don't 
have much of a disagreement that we need to make some changes 
as relates to the nursing home reimbursements, particularly as 
it relates to acuity of patients, and have to do something with 
the therapy cap, outpatient services. There is an area where 
there appears to be an agreement where there is--I guess the 
difference is and emphasis is that many of us think it is an 
urgent issue that we have to deal with immediately. Quite 
frankly, I find it somewhat disappointing that we don't make 
modifications in the program before we reach a crisis position. 
Before institutions go into bankruptcy or before patients are 
denied care, we should be looking at this and doing what is 
right before we reach a crisis position.
    Dr. Scanlon, I want to question you as to one statement you 
made in your written statement where you say 2000 enrollment in 
Medicare+Choice plans will remain a relatively inexpensive way 
for a beneficiary to obtain prescription drug coverage in many 
areas. I take it in making that statement you looked at what 
has happened in this round of contracts between HCFA and the 
HMOs?
    Mr. Scanlon. Yes, sir, we did look at that. And it is 
relatively inexpensive when one compares it to the Medigap 
policies that offer drug coverage. We have also been looking 
into that area in some other work and found the average 
premiums across the three different standard plans that offer 
drug coverage. They range from $1,600 to $2,800 a year. So that 
is the issue.
    Mr. Cardin. I appreciate the relative issue. But let me 
talk absolutes for one moment, if I might, and ask whether 
Maryland is an anomaly here or whether we are similar to other 
States; because when I see what will be available beginning 
January 1, 2000, in my State of Maryland, your statement even 
``relatively inexpensive'' is just not accurate. Fourteen of 
our twenty-four counties will have no options on HMOs, and 
Maryland is not a very rural State. We are a rather urban 
State. But yet 14 of our 24 jurisdictions will have no plans.
    In the 10 jurisdictions that will have plans, I am finding 
it difficult to find a plan available that doesn't have any 
very low cap unless you have a high premium. For example, in 
Harford County you can get into a plan without an additional 
premium, but the limit is $300 and the copayment for brands is 
$45, and $9 for generic. I wouldn't call that much of a drug 
coverage, would you?
    Mr. Scanlon. It is very limited drug coverage, but that is 
the same situation that exists under Medigap. The lowest 
benefit in the standard Medigap plans is the $1,250 cap. That 
is the plan that has a $1,600-a-year premium. So for the zero 
premium you are getting $300 coverage. Certainly it is not good 
coverage, but the issue is relative to your choices if you 
remain in the traditional program.
    We realize that before, 80 percent of the health 
maintenance organizations offering drug coverage were offering 
them at zero premiums. That was an incredible benefit for 
Medicare beneficiaries but at the same time the program was 
paying $54 a month above the cost of delivering the Medicare 
benefit package. That was an issue in terms of the overall 
sustainability of Medicare financing.
    So we recognize what you did in BBA in terms of trying to 
put Medicare on a surer footing has an impact on beneficiaries. 
You need--we can't make the decision as to where the balance 
should be.
    Mr. Cardin. I think I agree with your point. I still take 
issue with comparing it to the Medigap plans because the 
Medigap plans actually provide, at least in my State, greater 
coverage than the Medicare+Choice plans.
    Mr. Scanlon. Many Medicare+Choice plans----
    Mr. Cardin. I can't find a single plan in Maryland that 
doesn't have at least a $1,000 cap, and every one of those have 
pretty high premiums. So----
    Mr. Scanlon. It is definitely true. The benefit has changed 
and declined relative to what it was before.
    Mr. Cardin. That is the point I would make--my time is 
running out. The last point I would make is that the statements 
have been made that the changes we made in reimbursement in 
1997 is maybe one factor but maybe not even a significant 
factor in what the HMOs are doing. I take issue with that. I 
think that it is clear, I don't disagree with the fact that we 
ought to change the way that we reimburse Medicare HMOs, we 
certainly had to do that, but I think it is having a dramatic 
impact, at least on my State of Maryland, as to the plans that 
are available to our seniors, the affordability of those plans, 
and what it covers.
    Mr. Scanlon. We don't underestimate the impact of the 
changing rates. It is just trying to deal with anomalies that 
we find. When we looked at Maryland, we looked at the 
withdrawal of the Blue Cross plan from the rural counties. We 
found that in those rural counties, the rates were going to be 
going up 5, 6 percent, whereas Blue Cross was staying in 
counties where their rate was only going to go up 2 percent. 
There didn't seem to be that much of a difference in the rural 
counties versus the urban counties in Maryland.
    So how, when you get a more generous rate offer, you still 
withdraw and stay in an area where your rate increase is going 
to be lower, that is the thing that we haven't been able to 
explain just in terms of Medicare rates. We believe there are 
other factors that influence those as well.
    Mr. Cardin. There is a difference of $300 a month or more 
in what we pay the HMO plan between two counties that are next 
door to each other.
    Mr. Scanlon. Not in the data that we have from the State of 
Maryland.
    Mr. Cardin. Oh, yes. In Maryland? The difference between.
    Mr. Scanlon. In looking at counties that had rates of $480 
to $500 where Blue Cross was leaving--and then the counties 
where Blue Cross was staying--it was not much more, certainly 
not $300 more.
    Mr. Cardin. But there is clearly between the----
    Mr. Scanlon. I recognize that situation exists. It is just 
that it wasn't the case in terms of the Blue Cross decision in 
Maryland.
    Mr. Cardin. My time has run out. I disagree with that 
conclusion. Maybe we will have a chance later on to----
    Mr. Scanlon. I would be happy to bring the data and share 
it with you. Thank you.
    Chairman Thomas. I thank the gentleman for the discussion, 
although it doesn't really focus narrowly on the BBA, the 
concerns that we have in front of us. It is clear and opens up 
the opportunity to talk about the fact that we have a basic 
disconnect very often. The way you are going to get realistic 
prices as opposed to artificially developed formulas by 
bureaucrats is to allow plans to negotiate for a price with 
real-world costs. And of course, that was the premium support 
model that the Medicare commission offered. The difficulty with 
that is that if you want real-world prices, you have to accept 
real-world consequences. In terms of what happens in market 
situations, some people win, some people lose.
    The idea of plans leaving shouldn't necessarily be a 
negative. It depends on what are the conditions, are there 
additional plans in the area, is it a market that is paying a 
rate which is attractive and would also cover the costs are a 
whole series of questions that need to be asked; not just if 
plans are leaving.
    Mr. Cardin. Will the gentleman yield?
    Chairman Thomas. I will as soon as I finish. The difficulty 
is that we have gone kind of half way. We created the so-called 
Medicare+Choice but we maintained them on formulas which I 
think the gentleman made an excellent case for, the 
artificiality of the formulas, especially the bizarre payments 
between counties in a close proximity simply because there is a 
county line or there is a metropolitan statistical area. Those 
anomalies have to be removed.
    But if you are going to do that, you cannot then say that 
Medicare+Choice is a structure unto itself in which costs and 
quality will be judged and that dollars will be removed from 
that payment area and that you do not apply a cost and quality 
comparative to the fee-for-service entitlement program, because 
what you are doing is creating a shrinking pot guaranteed to 
have the Medicare+Choice program implode.
    You also talked about the question of pharmaceutical 
benefits. I was interested we didn't introduce the President's 
plan because if you look at that, it isn't a very good deal 
either. It isn't real insurance. It doesn't cover the real 
concerns in terms of stop-loss, and frankly if you don't, if 
you don't have better than $500 worth of costs, you ought not 
to buy that premium going in in the first place because it 
isn't a cost-effective way of covering yourself.
    What we did on the Medicare commission is say that 
prescription drugs ought to be an integrated part of the 
Medicare program and they ought to be handled in a particular 
way. What I find especially frustrating about the Medigap 
program is that, by law, the first dollar of every Medigap plan 
has to go for buying down co-pays and deductibles which produce 
overutilization in the system. That isn't a very smart way to 
operate either.
    We started the process, we are going to go through with 
additional changes. But at any point, you will find anomalies 
in terms of what used to be and where we are trying to go.
    Hopefully, as more and more Members grapple with this 
problem, they are going to have to realize there really isn't a 
halfway house. We are going to have to accept the changes that 
need to be made and make them without the politics that have 
been associated with it in the past, with the understanding 
that policy delivering benefits to beneficiaries has to be 
foremost in our decisions.
    The gentleman from Maryland.
    Mr. Cardin. I appreciate the comments. And there is not 
much I disagree with what you said. I agree with you, but today 
is October 1. Today is the day that HCFA has made its decisions 
or finished its negotiations with the Medicare+Choice options.
    I think there is a difference between what should work in 
theory and what has happened in reality. I would just be glad 
to share with my friend from California what has happened now 
in Maryland. These are the HMOs that are now available in 
Maryland. And it is clear that my seniors have less choice. And 
there are going to be less seniors enrolled in HMOs next year 
in Maryland than there are enrolled today. And I don't think 
that is what we intended for Medicare+Choice to do. We expected 
to have more choice for our seniors.
    I look over this list, seniors ask me all the time when I 
am at senior centers what they can do, I have a hard time 
recommending any of those plans from the point of view of what 
I know they are interested in. I appreciate it, but I do think 
what we did in Medicare+Choice was well intended as far as 
trying to modify the reimbursement structures for HMOs, but at 
least in my State this practice hasn't worked.
    Chairman Thomas. And I understand that. I will tell the 
gentleman I look forward to working with him to try to make 
some realistic decisions on the short time line that we face. 
For example, a number of plans began to prepare and make 
decisions prior to having all the information in front of them. 
In fact, if we do make an adjustment and it does trickle down, 
because there is clearly a relationship between what we do on 
fee for service in the Medicare+Choice, we ought to create an 
option for people to have another decision as to whether they 
want to get back in if something happens subsequent to a 
decision. And it is denying choice if you force them to stay 
with that decision. Some arbitrary 5-year rule for not getting 
back into an area when, in fact, the circumstances and the 
facts have changed in the area, is just punishing people.
    But that is what happens when you deal with a bureaucracy. 
They come up with these mindless decisions that make no sense 
whatsoever. If in fact the risk adjustment, not withstanding 
that there might be some slight overpayments, is, in fact, not 
right--it wasn't created in a day--maybe you need to create a 
glide slope that stretches out over a longer period of time so 
you don't have the disruption of the plans available for 
people. We will get the money. The key is to continue forward 
and make the changes so that the system works the way it really 
should.
    If what you want are realistic prices and a competitive 
model in which people get the kind of health care we think they 
deserve, integrated prescription drugs, you can't do it in some 
halfway house. Right now we are in a halfway house. And you are 
seeing the results of that halfway house. I don't think it is 
acceptable. I think the only direction is to continue to go 
forward.
    The gentlewoman from Florida.
    Mrs. Thurman. One of the things that I think is very 
concerning to us is that--and probably because there are 
discussions going on potentially because there could be a BBA 
fixed bill--is I have folks calling me, screaming about what is 
happening on HMO or Medicare choice coverage, saying, ``You 
know, everybody is pulling out''--and those kinds of things--
and it is your fault. You won't raise the rates on this. You 
won't give us the same rate of return.
    What I was interested in, Dr. Scanlon, and I think this is 
something that has also got to be talked about because what has 
happened right next door from Alachua County and Levy County 
and then above in the northern part in Colombia County, those--
all three of those get almost about the same rate. We have not 
pulled out of two of those counties, but we have pulled out of 
one of those counties.
    And one of the things that you mentioned in there is lack 
of providers, that they can, in fact, enroll into this and some 
other factors. And I think we have to address that, of how do 
we address that issue; because, quite frankly, the bottom line 
of all of this is that these are Medicare dollars coming out of 
the trust fund. And there are seniors in this country that are 
getting better care and better benefits than those in other 
parts of the country because they don't have that available to 
them.
    Chairman Thomas. There is no question--I tell the 
gentlewoman from Florida, there is no question that is the 
case. But it has built up over time. Remember any of those 
additional benefits beyond the basic package guaranteed in law 
were not designed into the managed care package. Those are the 
left-over dollars that are available. And when we are squeezing 
the cost factor, the left-over dollars are fewer, the 
``benefits are fewer.'' They are not necessarily intrinsically 
part of the plan. They are simply the left-over dollars.
    And when you take a look at the way in which the formulas 
are constructed, a significant factor is the way in which 
health care facilities are utilized in particular areas of the 
country. It is a simple fact that in certain areas of the 
country you don't have as much use of health care facilities as 
in other areas. That is built into the formula.
    It seems to me that if people want to use more, they ought 
to pay more. But that is not the current structure. What we 
have to do is address the fundamentals. We have not addressed 
the fundamentals. One of my worries is that arbitrarily and 
with fixed formula, and with fixed timeframes, we are going to 
create a system in which 10 years from now there will be no 
Medicare+Choice because we created a fixed pot of money out of 
which we remove money--and you heard the Deputy Administrator 
of HCFA say that they are going to forge ahead with the risk 
adjuster and it would not be budget neutral--we are going to 
take money out of this area at a time when the gentleman from 
Maryland is indicating there are fewer choices available, plans 
are withdrawing, and that probably doesn't seem to be a really 
smart decision. Unless of course, these people are committing 
hari-kari to show us that we are wrong. And that is probably 
not the case.
    I think somewhere there is a reasonable balance over a time 
line as we bring in additional changes so that we can keep as 
many plans in place. I think that we might be able to create a 
bonus payment for people to go into areas, provide a 3- to 5-
year bonus payment, because they are not going to go if they 
lose money. If we create a structure in which they can get to 
critical mass to be able to stay, a 3- to 5-year assistance so 
you can have that choice make some sense. Because frankly we 
are losing a lot of members on any of the changes we are going 
to go forward with if you get the discrepancies that you get 
between mostly the urban areas on the coasts and the interior 
in terms of choice. They are tired of voting for choice and not 
getting any.
    That has got to be one of the areas that we look at as soon 
as we make some of these adjustments on the Balanced Budget 
Act. That is one of the reasons I quizzed the Deputy 
Administrator. I believe they can make a number of 
administrative decisions which would assist in this area. I am 
afraid they are not going to, because they are going to force a 
crisis in the area of managed care so that they can say, ``See, 
we told you it won't work.'' I hope I am wrong.
    Thank you very much. Appreciate you hanging around so that 
we could get some additional whacks at you.
    And we would ask the next panel to come forward. I want to 
thank you for your patience. I can assure you that your 
testimony and your presentation are appreciated by this 
Committee. It will be listened to and we will react. This is a 
panel of, for want of a better term, providers; but clearly 
behind each of these providers are significant beneficiaries 
who receive the particular help that these various 
organizations represented by these individuals provide.
    Beginning on my left, your right, is Sister Carol Keehan, 
who is president and chief executive officer of Providence 
Hospital. She will be speaking on behalf of the American 
Hospital Association. Dr. Richard Corlin, gastroenterologist 
from Santa Monica, who will be speaking for the American 
Medical Association. Maribeth Capeloto who will be speaking on 
behalf of the American Association of Health Plans. Blaine 
Hendrickson from Rancho Mirage, California, American Health 
Care Association. Pamela D. Bataillon is from Omaha, Nebraska, 
the Visiting Nurse Association. And then Nancy B. Swigert, 
speaking on behalf of the American Speech-Language-Hearing 
Association.
    Each of you have written testimony. You can submit it for 
the record. And if you would address us in any way you see fit 
during the time that you have, given the size of the panel, I 
would be hopeful we will provide lights for you to monitor your 
oral testimony.
    Chairman Thomas. And, with that, Sister Carol.

STATEMENT OF SISTER CAROL KEEHAN, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, PROVIDENCE HOSPITAL, ON BEHALF OF AMERICAN HOSPITAL 
                          ASSOCIATION

    Sister Keehan. Thank you, Mr. Chairman.
    Chairman Thomas. These microphones are very unidirectional, 
and you need to speak directly into them. Thank you very much.
    Sister Keehan. Thank you, Mr. Chairman. I am Sister Carol 
Keehan, president and CEO of Providence Hospital here in 
Washington. I am here today representing the American Hospital 
Association and its 5,000 hospitals and health system members.
    I would like to begin by sharing some of the effects the 
BBA is having on my hospital. Our outside audit firm evaluated 
the effect of BBA on Providence. For a 5-year period it is $25 
million in reduced patient payments. It is not possible to deal 
with that and deliver the level of care that citizens of 
metropolitan Washington have associated with Providence since 
Abraham Lincoln signed our charter. We are not cutting the fat 
in our system, but literally the muscle, and indeed in some 
cases the heart of health care.
    What is worse, the national impact of the BBA was vastly 
underestimated. A study by the Lewin Group found that the 
originally estimated 5-year BBA hospital payment reduction of 
53 billion is in reality more in the range of 71 billion, an 
$18 billion increase. The administration can and must help ease 
the burdens of BBA.
    My written testimony has a list of changes that can be made 
without legislation. I will briefly outline four.
    HCFA should reverse its decision to cut outpatient payments 
an additional 5.7 percent. This would cost hospitals $900 
million each year. HCFA's decision is not consistent with the 
wishes of Congress, as 77 Senators and 252 Representatives 
noted in letters to the administration. They wrote that 
Congress in no way meant for these additional cuts to be made.
    HCFA should permanently delay any expansion of the number 
of DRGs subject to the transfer provision.
    HCFA should drop its volume cap on outpatient services.
    The BBA requires that HCFA develop methods for controlling 
unnecessary services, not create a formula-driven mechanism 
that would penalize hospitals for adopting new technologies and 
treatments.
    Given the fragile condition of Medicare+Choice, 
implementation of the risk-adjusted payments should be slowed 
further than the current 5 years. Too fast a pace can cause 
major disruptions for plans and enrollees.
    There are also steps that Congress can take, using the 
budget surplus to ease the effects of the BBA. Among those 
outlined in detail in my written testimony are these:
    The AHA urges your support for legislation that would 
provide a payment floor or some kind of stop-loss to protect 
hospitals from unreasonable losses during the transition to 
outpatient PPS. It is important that such protection not be 
done in a budget-neutral manner as additional losses of 3 to 8 
percent would be incurred by some hospitals to prevent losses 
by other hospitals of 20 to 40 percent. New money is needed so 
that the payments that are already inadequate are not 
exacerbated.
    AHA urges you to repeal the unnecessary and unwarranted 
transfer provision by adopting H.R. 405, the BBA's skilled 
nursing facility payments by $9 billion over 5 years. It also 
required HCFA to implement PPS for these services. But the new 
PPS fails to adequately account for the differences in the 
costs of caring for medically complex patients such as 
ventilator patients. The current payments for these Resource 
Utilization Groups or RUGs are below the cost of providing the 
services. Until HCFA can revise the case mix, a multiplier 
should be used to increase payments for extensive services and 
special care cases. When the case mix is revised, this 
additional payment can be used to fund the new format.
    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. AHA urges 
relief for rural health care providers, especially sole 
community providers, critical access hospitals, and Medicare-
dependent hospitals.
    America's medical schools are often cited 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 fiscal year 2001. 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. As I said, details are in my 
written statement.
    Here is the bottom line. Now is the time to repair the 
unintended consequences of the BBA. We look forward to working 
with Congress and HCFA to fix the problems I have outlined 
today. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you very much.
    [The prepared statement follows:]

Statement of Sister Carol Keehan, President and Chief Executive 
Officer, Providence Hospital, on behalf of American Hospital 
Association

    Mr. Chairman, I am Sister Carol Keehan, president and CEO of 
Providence Hospital in Washington, DC. I am here today representing the 
American Hospital Association (AHA) and its 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 on how relief from the BBA's Medicare 
spending reductions can be attained through both regulatory and 
legislative means. But first I'd like to share with you some of the 
effects of the BBA on my hospital, to make clear why immediate relief 
is so badly needed.

                     The BBA's Effect on Providence

    I manage a hospital and nursing home in northeast Washington, DC. 
Our outside audit firm independently evaluated and estimated the effect 
of the BBA just on Providence Hospital. For a five-year period, it is 
$25 million in reduced patient payment. It is not possible to deal with 
that and deliver the level of care that the citizens of metropolitan 
Washington have come to associate with Providence Hospital since 
Abraham Lincoln signed our charter.
    We are not cutting the fat in our system, but literally the muscle, 
and indeed in some cases the heart of health care. These deep 
reductions force choices to cut non-revenue-producing services like 
palliative care, and much of our patient education program. We also 
will see our quality evaluation programs and our quality improvement 
efforts cut, to name only a few areas where there will be an impact.
    These actions have real consequences for patients and families. 
Just ask any family what a good palliative care program has meant to 
pain control, emotional and spiritual support, as well as basic care 
for the terminally ill and their families. The list of compromises 
could go on and on, and we must not allow it. The unintended magnitude 
of BBA cuts must be addressed because they hurt patients. Even the 
best-managed hospitals cannot afford them and retain the level of 
service to patients that is required to meet our mission.

                       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 in 
Medicare spending.
    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.
    Balancing America's budget shouldn't deprive Americans of the 
health care they need and deserve, and that was clearly not Congress' 
intent. But that's exactly what's happening across the nation, even 
though two-thirds of the cuts have yet to take effect. Today's 
hospitals and health systems encompass all elements of health care 
delivery affected by the BBA: home health, skilled nursing, outpatient, 
inpatient, and health plans. This makes the BBA's changes particularly 
burdensome, and the worst is yet to come.
    The Lewin Group was asked by the AHA to forecast the BBA's impact 
through the year 2002 on payments for hospital services, including 
inpatient, outpatient, hospital-based home health, rehabilitation, 
long-term care, psychiatric and cancer services.
    Findings from the analysis show:
     For all hospitals, total Medicare margins are projected to 
be between negative 4.4 percent and negative 7.8 percent in 2002.
     Already in the red when treating Medicare patients, rural 
hospitals' total Medicare margins may plummet to between negative 7 
percent and negative 10.4 percent in 2002 as a result of BBA payment 
cuts. Urban hospitals' total Medicare margins in three years are 
predicted to range from negative 3.9 percent to negative 7.3 percent.
     Outpatient service margins also are expected to drop. 
Medicare outpatient margins--already negative in 1999--are estimated to 
drop to a negative 28.8 percent if costs increase at a more historical 
rate of growth; and negative 20.3 percent if hospital costs increase 
more slowly.
     In just one year, margins for hospital-based home health 
services are predicted to drop dramatically from negative 4 percent in 
year 2000, to negative 11.6 percent in 2001. Fifty percent of hospitals 
now provide home health care.
    Mr. Chairman, caregivers won't compromise quality. But they simply 
can't afford to continue providing services if their costs aren't even 
covered. How are they to survive? Communities already are losing access 
to vital health care services as Washington debates how to spend a 
federal budget surplus of billions of dollars. Hospitals are being 
forced to cut back or shut down services that affect not just the 
elderly who rely on Medicare, but all patients. When the government 
acted to reduce Medicare spending to help balance the budget, no one 
was certain what effect such enormous reductions would have. Now we 
know.
    It is critical that Congress and the Administration act now to 
alleviate these unintended consequences of the BBA. Here are the 
administrative and legislative solutions that we believe can ease the 
unintended consequences of the BBA.

                          Regulatory Solutions

    In implementing parts of the BBA, the Health Care Financing 
Administration (HCFA) has, in some cases, interpreted the law in ways 
that we believe are contrary to congressional intent. There are several 
steps that HCFA can and must take to remedy this--and by doing so, 
these solutions can be achieved without the need for legislation.
    Outpatient PPS--One especially troubling area on the regulatory 
front for hospitals and health systems is HCFA's implementation of 
outpatient PPS. There are several concerns we have with the direction 
in which the agency seems to be headed.
    Once the new outpatient PPS system is implemented, HCFA plans to 
reduce hospital outpatient payments by an additional 5.7 percent to 
fund lower beneficiary outpatient copayments. This means that, on top 
of the $9 billion in five-year outpatient payment cuts already in the 
BBA, hospitals would suffer further cuts of $900 million annually. This 
is contrary to the wishes of more than 252 members of the House and 77 
members of the Senate, who signed recent letters to HCFA opposing this 
arbitrary, unfair, and uncalled for cut. They made it clear that 
Congress, in passing the BBA, in no way meant for additional spending 
cuts to be made to hospital outpatient payments beyond the PPS.
    According to the congressional letters, HCFA's decision is 
``inconsistent with Congress' intent,'' and would be ``inappropriate 
and unwise.'' In fact, when the BBA was being drafted, Congress, 
beneficiaries, hospitals and the Administration agreed that beneficiary 
coinsurance needed to be reduced, but that there would be no additional 
hospital payment reductions as a result. HCFA's interpretation of the 
BBA is inconsistent with that agreement, and with the law itself.
    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.
    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 to deliver care where it is needed.
    Unfortunately, HCFA threatens the existence of this important care 
by adding too-narrow requirements for determining what entities can be 
considered hospital outpatient departments. requirement for state 
licensure in the proposed rule is arbitrarily biased against providers 
in states where licensure does not even exist to cover off-campus 
facilities. 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 would discourage 
hospitals and health systems from reaching out and bringing high-
quality health care to underserved areas of their communities. We urge 
HCFA to use conditions of participation or accreditation where 
licensure is not available, and we urge the agency to significantly 
revise its too-narrow proposed requirements governing provider-based 
facilities.
    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 BBA requires that HCFA develop methods for controlling 
unnecessary services. Volume targets do not make this distinction and 
do not fulfill the statutory requirement to probe beyond the numbers. 
Moreover, physicians order services, not hospitals. As a result, HCFA's 
formula-driven targets would penalize all providers.
    Looking at unnecessary services requires HCFA to develop coverage 
criteria, monitor for medical necessity and reject claims where 
services are medically unnecessary. Peer review organizations (PROs) 
can review practice patterns and identify aberrant practices and 
practices of questionable medical utility.
    The President's Medicare reform proposal indicates that the 
administration is considering delaying implementation of this proposal. 
While we commend the administration for this delay, a delay of a 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 in Detroit would 
see an increase of almost $1 million in outpatient payments under PPS. 
However, Henry Ford's own analysis identified several discrepancies in 
HCFA's estimates. In fact, Henry Ford calculated that the system will 
actually see a decrease in payments of $9.6 million, or 21 percent of 
their total outpatient revenue. If a system like theirs, 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 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). A floor would protect hospitals 
from catastrophic losses if rates are set too low while HCFA makes the 
coding/reporting changes needed to ensure that accurate information is 
used to project the effects of outpatient PPS. At the same time, the 
floor would protect the government from too-high rates set for the same 
reason.
    In the President's Medicare reform proposal, the large losses 
created by the outpatient PPS are addressed through a budget neutral 
transition for groups of specified hospitals. The AHA does not support 
a budget neutral transition. Budget neutrality would actually increase 
losses of some hospitals during the transition to outpatient PPS. Money 
must be added so that the BBA's current underfunding of the system is 
not exacerbated.
    Therapy bad debt payments--We are concerned that HCFA may be 
interpreting the BBA in a too-narrow manner on the issue of payment for 
occupational, speech and physical therapy. Specifically, hospitals are 
currently reimbursed for the bad debt they incur when a beneficiary 
receiving such therapy cannot pay the coinsurance. Typically, these 
beneficiaries do not qualify for Medicaid but cannot afford Medigap 
coverage. However, in the implementation of the therapy fee schedule, 
HCFA has indicated that it may no longer reimburse hospitals for this 
bad debt. We strongly urge HCFA to retain the ability of hospitals to 
be reimbursed for therapy services provided to those elderly who cannot 
pay.
    Chemotherapy--The AHA believes that there are serious problems with 
the data HCFA is using to determine payment for chemotherapy services. 
For example, HCFA had to remove the most representative data--claims 
with multiple services that use multiple drugs in a single session--
because the costs are not separable. Since chemotherapy treatments 
generally involve the administration of multiple drugs, elimination of 
claims with multiple sessions and multiple drugs would appear to leave 
only claims that do not portray a true clinical picture of 
chemotherapy.
    As a transitional payment methodology, the AHA recommends that HCFA 
temporarily 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. Similarly, HCFA should evaluate how to pay 
for new technology in a timely and fair manner.
    We therefore urge HCFA through regulation to develop and propose 
methodologies to better recognize the costs of new technology. However, 
new and expensive drugs and technologies should not be paid separately 
from PPS, and we would oppose any legislation that would do so. Among 
other problems, paying these costs separately might lead to double 
counting of drug costs if some of the high-cost drugs were substitutes 
for lower-cost drugs.
    Medicare+Choice--HCFA estimates that, during the 5-year 
implementation of risk-adjusted Medicare+Choice rates, payments will 
stay the same or decrease for 95 percent of plans in the program, and 
increase for 5 percent of plans. Because so many more plans will 
receive less money, Medicare will accrue savings of more than $11 
billion.
    Given the fragile condition of Medicare+Choice, we believe 
implementation of risk-adjusted payment rates should be slowed even 
further than five years. Too fast a pace could cause major disruptions 
for plans and their enrollees. While a slower pace is necessary for 
most plans, HCFA should also have a means to more quickly recognize the 
higher costs of that 5 percent of plans who are serving higher-risk 
populations during this implementation period.
    In addition, the government must solve the practical problems that 
will ultimately determine the success of Medicare+Choice. For example, 
while we have recommended to Congress that it fund a blend of national 
and county rates to make Medicare managed care rates more equal across 
the country, during 1998 and 1999 these plans did not receive a blended 
rate, due to the way the BBA handles updates and budget neutrality 
adjustments. We urge HCFA to make recommendations to Congress on how to 
create more equitable updates between private market and 
Medicare+Choice plans across the country.
    HCFA also needs to look at ways to reduce administrative burden. 
Medicare+Choice plans must fund their administrative costs from their 
capitation rates. Any increase in administrative costs will reduce the 
dollars available for patient care. An example is NODMAR, the Notice of 
Discharge and Medicare Appeal Rights. This notice used to be given only 
to those beneficiaries who object to going home, but hospitals are now 
required to give it to all patients. This is unnecessary and costly, 
since general appeal rights notices are already provided at admission.
    Transfers--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.
    We appreciate the Administration's willingness to delay any 
expansion of the transfer provision beyond the current 10 DRGs for two 
years. However, we believe it must be delayed permanently, and we urge 
the administration to do so. While we will continue to urge Congress to 
repeal the provision legislatively (see below), the administration 
should, at a minimum, not expand this onerous and unfair provision.

                         Legislative Solutions

    In addition to changes that the administration can make to 
alleviate the unintended consequences of the BBA, there are several 
legislative steps that we urge Congress to take as well. Together, they 
make up a legislative package that can bring real relief to the 
nation's hospitals and the communities they serve. 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.
    Outpatient--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 just that 5.7 percent. Because of the huge 
redistributional effects of PPS, 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. 
Additional 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 
spending. Beneficiary spending would be unaffected. Under this 
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 cuts an 
additional 5.7 percent from hospitals under outpatient PPS, this 
proposal will require roughly $1.9 billion over five years in new 
funding. The AHA 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 78 co-
sponsors. We urge you to support it.
    Transfer policy--As mentioned above, we believe HCFA has the 
administrative capability to delay permanently the expansion of DRGs 
affected by this provision. However, a legislative solution to repeal 
this provision does exist. AHA urges you to repeal the unnecessary and 
unwarranted transfer provision by adopting H.R. 405.
    Inpatient--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 some of the 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 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 maintaining access to vital 
health care services for low-income individuals. AHA urges relief for 
hospitals serving the uninsured by adopting H.R. 1103, which carves out 
disproportionate share payments from Medicare managed care payments.
    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 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 a low of 62 percent of 
costs.
    A multiplier should 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 specific 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.

                               Conclusion

    Now is the time to repair the damage done by the BBA. We strongly 
urge you to act now, before you recess for this year, on these BBA 
relief measures. With a new century dawning, we must work together to 
ensure that the Americans we serve can achieve hospitals' vision of a 
healtheir America. We look forward to working with Congress and HCFA to 
fix the problems that we have outlined for you today.

                                

    Chairman Thomas. Dr. Corlin.

STATEMENT OF RICHARD F. CORLIN, M.D., GASTROENTEROLOGIST, SANTA 
 MONICA, CALIFORNIA, AND SPEAKER, AMERICAN MEDICAL ASSOCIATION 
                       HOUSE OF DELEGATES

    Dr. Corlin. Thank you, Mr. Chairman. My name is Richard 
Corlin. I am a gastroenterologist in private practice in Santa 
Monica, California. And I also serve as speaker of the AMA's 
House of Delegates.
    Mr. Chairman, we particularly appreciate your efforts to 
reform the Medicare program and look forward to working with 
you and each Member of this Subcommittee on comprehensive 
reform. Today, however, we ask the Subcommittee to focus on 
fixing the serious problems with Medicare sustainable growth 
rate system, the SGR.
    Mr. Chairman, we request that you direct HCFA to correct 
the $3 billion projection errors in the 1998 and 1999 SGR. We 
further request that you approve legislation this year to 
improve the SGR system. The SGR enacted under the BBA of 1997 
is intended to slow the projected rate of growth of physician 
services. It is calculated each year with a base level and then 
growth based on four factors: medical inflation, changes in 
Medicare fee-for-service enrollment, GDP growth per cap, and 
changes in spending due to law and regulations.
    MedPAC has recommended a series of improvements much of 
which Dr. Wilensky has underscored earlier today. Some of these 
are: (1) to require HCFA to correct its projection errors and 
restore the $3 billion SGR shortfall resulting from these 
errors--money that was intended to be there as part of the BBA; 
(2) to increase the SGR target to account for physician costs 
due to technological advances and an aging population; (3) to 
implement measures to curtail volatility in physician payment 
rates; and (4) require HCFA and MedPAC to provide information 
and data on payment updates.
    SGR projection errors are inevitable, since HCFA must use 
estimates to calculate the SGR at the beginning of each year. 
Thus, physician payment updates are not based on actual data 
but on projected data which has so far proven erroneous; and, 
worse than that, which HCFA refuses to correct.
    For the 1999 SGR, HCFA projected that Medicare-managed care 
enrollment would rise 29 percent. It actually increased only 11 
percent. This error led to a corresponding drop in projected 
fee-for-service enrollment and a negative 1999 SGR. As a result 
of this error, physicians are caring for more than 1 million 
patients, more in Medicare fee-for-service than are either 
accounted for or paid for at all by HCFA.
    For the 2000 SGR which is published in this morning's 
Federal Register, HCFA has projected Medicare-managed care 
enrollments again which are growing at a rate far steeper than 
that projected by the CBO. Although HCFA does not believe it 
has the legislative authority to correct its own projection 
errors, we strongly disagree. The AMA's Office of General 
Counsel has reviewed this matter and has advised that the 
statute, and its legislative history as well as long 
established rules of statutory construction, firmly store the 
view that HCFA can and must direct its own SGR projection 
errors.
    On October 27, 1997, the final notice signed by Nancy 
DeParle and Donna Shalala stated, ``Differences between 
projected and actual enrollment will be adjusted for in 
subsequent years.'' and again, ``Differences between actual and 
real gross domestic product per capita growth will be adjusted 
for in subsequent years.''.
    In addition, the SGR needs to be set at a GDP plus at least 
2 percentage points to take into account the two main factors 
responsible for increasing health care costs: advances in 
technology and aging population. And again, we need to make 
HCFA live up to its own commitment in adjusting estimated costs 
for real costs once the data is available.
    MedPAC has recommended that the SGR include a factor higher 
than GDP to account for, ``cost increases due to improvements 
in medical capabilities and advancements in scientific 
technology.'' We strongly agree with that as well.
    Physicians, regardless of our speciality, 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.
    Mr. McCrery [presiding]. Thank you, Dr. Corlin.
    [The prepared statement follows:]

Statement of Richard F. Corlin, M.D., Gastroenterologist, Santa Monica, 
California and Speaker, House of Delegates, 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, and urges the Subcommittee to request that HCFA 
immediately correct its 1998 and 1999 SGR projection errors.
    The SGR, enacted under the BBA, establishes a target growth 
rate for Medicare spending on physician services and is 
intended to slow the projected rate of growth in Medicare 
expenditures for physicians' services. Annual adjustments to 
physician payment rates are up or down, depending on whether 
actual spending on physician services is below or above the SGR 
target.
    Physicians are the only group subject to the SGR 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.
    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) has not revised its projections used in establishing the 
1998 SGR when data proved HCFA erroneous. Further, HCFA has 
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 Medicare Payment Advisory 
                       Commission Recommendations

    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 that is adjusted annually by 
the SGR.
    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.
    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 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 Sustainable Growth Rate 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 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.
    Finally, we note that, 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, 
regardless of medical specialty, 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 ask Congress to take the necessary steps 
to assure that we can continue to offer our Medicare patients the 
finest medical care in the world.

The Projection Error Problem

    HCFA's SGR Projection Errors Must Be Corrected. Two of the four 
factors used to calculate the SGR target each year are growth in U.S. 
GDP and Medicare 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. 
Specifically, the 1998 SGR projection error was $700 million, and the 
1999 SGR error was $2.5 billion. HCFA has not corrected these 
projection errors and does not plan to do so, without further 
legislative authority. One year after the 1997 notice, HCFA reneged on 
its pledge to correct SGR errors based on its newly-conceived assertion 
that the agency does not believe it has the proper legislative 
authority to correct such errors. (See below discussion of our strong 
belief that HCFA absolutely has the authority to correct its own 
projection errors.) HCFA then simultaneously issued its most egregious 
error by 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 table below shows the magnitude of the errors that HCFA has 
made to date in its estimates of GDP and enrollment growth:
[GRAPHIC] [TIFF OMITTED] T5699.001


    The 1998 and 1999 SGR projection errors are a serious problem. The 
SGR is a cumulative (as opposed to 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. Indeed, the 1999 SGR 
projection error alone will increase to $5 billion by the end of the 
year 2000 if left uncorrected. 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.
    HCFA Has The Legislative Authority to Correct Its SGR Projection 
Errors. As discussed above, HCFA presently is adopting the stance that 
it lacks the legislative authority to make annual corrections to SGR 
projection errors, yet we have never heard a clear explanation from 
HCFA as to the basis for its position.
    It would be an understatement to say that we strenuously disagree 
with HCFA's position. From our perspective, HCFA's professed lack of 
legislative authority is disingenuous--it flies in the face of clear 
legislative intent and well-established principles of statutory 
construction, not to mention common sense. Application of a statute by 
a regulatory agency certainly allows for reasonable interpretation.
    In adopting the SGR system, Congress replaced one Medicare 
physician payment update system with one that was thought to be 
improved. It would be ludicrous to construe the statute, as HCFA 
apparently now professes to do, to indicate that Congress intended the 
SGR to be a system based exclusively and perpetually on estimates, 
without any mechanism to tie physician payments to real data. The 
statute does not say this, and legislative intent does not support 
this.
    This logical construction of the statutory language is bolstered by 
the legislative history and HCFA's own prior regulatory acknowledgments 
of the propriety of these periodic reconciliations. Congress adopted 
the SGR language in response to PPRC recommendations contained in its 
1996 Report to Congress. This report clearly indicated that annual 
reconciliations should occur in order to mitigate the effects of 
projection errors. Moreover, HCFA itself has previously acknowledged in 
a 1997 regulatory notice that it would conduct reconciliations to 
correct SGR projection errors in future years.
    In short, the statute itself, and the clear legislative intent 
provide that HCFA has the statutory authority to implement annual 
reconciliations. In fact, we believe HCFA has the responsibility to 
exercise its rulemaking authority to carry out this legislative intent.
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 that 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 
continue to offer our Medicare patients the finest medical care 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. McCrery. Next we have Maribeth Capeloto, director, 
Federal Relations, Group Health Cooperative, from Seattle, 
Washington. Ms. Capeloto, did I pronounce your name correctly?
    Ms. Capeloto. Yes, you did.

 STATEMENT OF MARIBETH CAPELOTO, DIRECTOR, FEDERAL RELATIONS, 
 GROUP HEALTH COOPERATIVE OF PUGET SOUND, SEATTLE, WASHINGTON, 
     ON BEHALF OF THE AMERICAN ASSOCIATION OF HEALTH PLANS

    Ms. Capeloto. Thank you Mr. McCrery. Mr. Chairman and 
Members of the Subcommittee, thank you for the opportunity to 
comment on issues related to implementation of the 
Medicare+Choice program. I am Maribeth Capeloto, director of 
Federal Relations, and a former administrator of government 
programs for Group Health Cooperative based in Seattle, 
Washington. I am testifying today on behalf of the members of 
the American Association of Health Plans which represents more 
than 1,000 HMOs, PPOs and similar network health plans.
    Let me begin by saying, Mr. Chairman, that we still support 
the goals of the BBA to expand choices for seniors, to enhance 
benefits, integrate care and benchmark quality. We are 
suffering through some unintended consequences rights now of 
what was major structural change.
    It was with your leadership on the Bipartisan Commission on 
the Future of Medicare that a premium support model for 
Medicare was developed. If a premium support model for Medicare 
is to be successful in the future, it is imperative that the 
Medicare+Choice program be stabilized now. Beneficiaries 
deserve and are demanding a smoother transition of the 
Medicare+Choice program as envisioned by the Congress.
    Group Health is a not-for-profit company and is the 
Nation's largest consumer-governed health care organization. We 
signed our first Medicare HMO contract more than 20 years ago 
in 1976 and at present serve nearly 60,000 Medicare 
beneficiaries. I am sad to report that effective January 1st, 
2000 Group Health will withdraw from counties which will affect 
over 4,000 enrollees. In some of these counties there are no 
other health plan options for beneficiaries.
    It is indisputable that HCFA faces an enormous task in 
implementing the Medicare+Choice provisions of the BBA. The 
policy goals may be supportable but the time line that HCFA has 
set and the choices they have made have contributed to the 
program's instability. This has contributed to the unfortunate 
decisions made by plans including Group Health to curtail their 
participation in the Medicare+Choice program.
    As a consumer-governed HMO, decisions to leave markets are 
extremely painful for us, especially since, as I stated before, 
we have served beneficiaries for over 20 years as a risk 
contractor and have been in Washington State serving seniors 
since 1947.
    The approach HCFA took in designing the risk adjuster is 
perhaps the most visible example of a policy decision that has 
challenged the Medicare+Choice program. Rather than 
implementing the risk adjuster in a budget-neutral manner, 
which it has the administrative authority to do, HCFA's design 
will reduce payment by another 11.2 billion over the next 5 
years.
    While we support risk adjustment as a necessary goal, the 
reductions due to the risk adjuster as currently constructed 
diminish the effectiveness of the floor and blended payment 
methodology, central reforms approved by the Congress. Year 
2000 is the first year that any counties received blended 
payments. New data this week suggests that the blend will not 
be funded in 2001. Even in some blended counties like those we 
serve, the risk adjuster reduced payments, even when our rates 
are below the national average. For example, when fully 
implemented in 2004 in Seattle, the risk adjuster will decrease 
payments by 6 percent; and in Spokane, a more rural area, the 
risk adjuster would decrease payments by 8.8 percent.
    The impact of the risk adjuster in combination with the 
lack of predictability in the blend being implemented from year 
to year, creates massive instability in the program. The user 
fee for beneficiary education further erodes our already low 
payment rates.
    Group Health has partnered with HCFA for more than 20 
years. We disagree with HCFA's characterization that plans are 
unstable partners. The regulatory framework that HCFA has 
adopted since the BBA is far more onerous than anything we have 
experienced in the past 2 decades. The examples of burdensome 
and costly regulations are numerous: data collection, new 
reporting requirements, Y2K compliance. Also frustrating is the 
lack of clarity or completion of other regulations these 
delays, which are also expensive. The GME carveout regulations 
are an example here.
    Beneficiary education is something we take very seriously 
as a consumer-governed cooperative. Last week HCFA required us 
to send a HCFA-drafted 13-page letter to beneficiaries in 
counties we are exiting. The HCFA-drafted letters that we had 
to mail on our letterhead were confusing and contained, in our 
view, unnecessary language. Their letter to ESRD enrollees, 
some of our more vulnerable members, required us to inform 
these patients about ESRD demonstration projects that are 1,500 
miles away and that none of them could access.
    I can not emphasize enough how important it is to stabilize 
the Medicare+Choice program. Our beneficiaries, your 
constituents, deserve better. We stand ready to work with you, 
Mr. Chairman and members of the subcommittee, to address the 
current challenges facing the program and to honor the 
intention of the Congress when it approved the BBA.
    Chairman Thomas [presiding]. Thank you very much.
    [The prepared statement follows:]

Statement of Maribeth Capeloto, Director, Federal Relations, Group 
Health Corporative of Puget Sound, Seattle, Washington, on behalf of 
American Association of Health Plan

                            I. Introduction

    Mr. Chairman and members of the Subcommittee, thank you very much 
for the opportunity to comment on issues related to the Health Care 
Financing Administration's (HCFA) implementation of the Medicare+Choice 
program. I am Maribeth Capeloto, Director of Federal Relations and 
former Administrator of Government Programs for Group Health 
Cooperative, based in Seattle, Washington. Group Health is a not-for-
profit company and is the nation's largest consumer-governed health 
care organization. We signed our first Medicare HMO contract more than 
20 years ago in 1976 and at present serve nearly 60,000 Medicare 
beneficiaries.
    I am testifying today on behalf of the members of the American 
Association of Health Plans (AAHP), which represents more than 1,000 
HMOs, PPOs, and similar network health plans. AAHP's membership 
includes the majority of Medicare+ Choice organizations, which 
collectively serve more than 75 percent of beneficiaries in the 
Medicare+Choice program. Together, AAHP member plans provide care for 
more than 150 million Americans nationwide and have strongly supported 
efforts to modernize Medicare and give beneficiaries the same health 
care choices that are available to working Americans.
    AAHP's member plans have had a longstanding commitment to Medicare 
and to the mission of providing high-quality, comprehensive, cost-
effective services to beneficiaries. In fact, like Group Health, many 
of our fellow member plans have served beneficiaries since the 
inception of the Medicare HMO program fifteen years ago, if not before, 
when the program was offered as a demonstration. In establishing the 
Medicare HMO program, Congress and the Administration were seeking to 
offer beneficiaries more coverage choices--choices through which plans 
could offer beneficiaries additional benefits not available in fee-for-
service Medicare in exchange for a more limited provider panel. The new 
program was viewed as a milestone, holding both opportunities and 
challenges for the government, health plans, and beneficiaries. Over 
time, the number of Medicare HMOs steadily increased, reaching 346 in 
1998. More than 17 percent--or 6.2 million beneficiaries--have 
voluntarily chosen a health plan over fee-for-service Medicare, up from 
only six percent just five years ago.
    According to recent research, health plans are attracting an 
increasing number of older Medicare beneficiaries and beneficiaries are 
remaining in health plans longer. In addition, near-poor Medicare 
beneficiaries are more likely to enroll in health plans than higher-
income beneficiaries. An AAHP analysis of Medicare Current Beneficiary 
Survey (MCBS) data shows that minority beneficiaries are at least as 
likely to be in Medicare+Choice as in fee-for-service Medicare. These 
health plans offer Medicare beneficiaries numerous benefits that are 
not covered under fee-for-service Medicare, such as full year's 
hospitalization, lower copayments and deductibles, and prescription 
drug coverage (Figure 1).

  Figure 1: Comparison of Medicare+Choice and Fee-For-Service Benefits
------------------------------------------------------------------------
                                    Medicare+Choice     Fee-For-Service
------------------------------------------------------------------------
Outpatient Prescription Drug      Yes...............  No
 Coverage.
Deductible for Physician Visits.  No................  Yes, $100
Copayment for Physician Visit...  Nominal copayment.  20 percent
                                                       coinsurance after
                                                       $100 deductible
Hospital Inpatient Cost-Sharing.  Typically, No.....  Yes
Day Limit on Extended Hospital    Typically, No.....  Yes
 Coverage.
------------------------------------------------------------------------

    Recent studies also highlight Medicare beneficiaries' high levels 
of satisfaction with their Medicare health plans. HCFA data show that, 
among beneficiaries with strong preferences, HMOs have a larger 
proportion of very satisfied enrollees than fee-for-service Medicare. A 
July 1997 study by CareData in conjunction with Towers Perrin also 
revealed very high rates of enrollee satisfaction among retirees who 
joined Medicare HMOs offered by their employers. Overall, almost 70 
percent of retirees enrolled in an HMO that offered Medicare coverage 
were extremely or very satisfied with their HMOs.
    The strong and steady growth in the number of beneficiaries who 
chose a health plan over fee-for-service Medicare and plans that 
participate, along with the high-levels of satisfaction, signaled a 
program that was flourishing. In approving the Balanced Budget Act 
(BBA) two years ago, Congress sought to build on the success of the 
Medicare risk program and to expand coverage choices even further, 
while at the same time taking steps toward ensuring the solvency of the 
Medicare trust fund. The establishment of the Medicare+Choice program 
was supported by AAHP and regarded as the foundation for moving forward 
with a program design that can be sustained for future generations of 
Medicare beneficiaries. Without action this year, the promises made to 
beneficiaries with the passage of the BBA will remain unfulfilled, and 
of equal importance, prevent the successful implementation of virtually 
every long-term Medicare reform initiative that this Subcommittee might 
examine.

            II. Current State of the Medicare+Choice Program

    The Medicare HMO and Medicare+Choice programs share the fundamental 
goal of expanding availability of new Medicare coverage options. But 
rather than continuing to evolve and grow, the Medicare+Choice program 
is devolving and contracting. As members of the Subcommittee know, the 
first public sign of trouble in the Medicare+Choice program surfaced 
last fall when nearly one hundred health plans were forced to reduce or 
end their participation in the program, resulting in more than 400,000 
beneficiaries losing their health plan choice. Fifty thousand of these 
beneficiaries were left with no other health plan option. At that time, 
AAHP and others urged the Administration and Congress to make mid-
course corrections, arguing that if program problems were left 
unaddressed, more health plans, many of which have participated in the 
program for years, would face the same difficult decisions in 1999 and 
beyond. As members of the Subcommittee fully know, this concern became 
the unfortunate reality.
    In mid-July, HCFA announced that 327,000 beneficiaries in another 
ninety-nine health plans, including some enrollees in Group Health, 
would lose their health plan on January 1, 2000. Of the 327,000 
affected beneficiaries, 70,000 will have no choice but to return to the 
fee-for-service program because there is no other Medicare+Choice plan 
in their area. Although total enrollment in Medicare+Choice has 
increased, the year to date growth rate has fallen dramatically to 6.8 
percent for the first eight months of 1999. Growth between January and 
September in 1998 and 1997 was 11.1 percent and 17.4 percent, 
respectively. Between August and September 1999, fewer than 25,000 
beneficiaries joined Medicare+Choice plans, compared to the pre-BBA 
monthly average of approximately 100,000 beneficiaries.
    In addition to these sobering events, three months ago, on July 
1st, AAHP released results of a survey of its 26 largest members that 
participate in the Medicare+Choice program, which showed that among 
responding organizations, a substantial number of beneficiaries who 
will be able keep their plan next year will face increased out-of-
pocket costs and reductions in benefit levels. AAHP's survey results, 
which were independently collected and tabulated by Peter D. Hart 
Research, showed that premium changes to be instituted by 18 companies 
will affect nearly 1.5 million of the 3.86 million beneficiaries 
covered by the survey whose plans will remain in the program next year. 
Among these individuals, monthly premiums will increase by $20 or more 
for 926,009 persons and $40 or more for 400,757 of the 926,009 persons. 
Monthly premiums will decrease for just fewer than 12,000 individuals; 
in all instances, these decreases will be less than $20. More than 1.3 
million enrollees will face an increase in prescription drug 
copayments, while just 10,000 enrollees will have decreased 
prescription drug copayments next year. Additionally, about 600,000 
individuals covered by the survey will face hospital inpatient 
copayments averaging $275 next year.\1\ These results coincide with 
those of an Administration survey released less than two weeks ago.
---------------------------------------------------------------------------
    \1\ In responding to the survey, plans were asked to provide 
information on the benefit arrangement that presently applies to the 
largest share of their Medicare+Choice enrollees. Plans were asked to 
describe the 1999 benefit, any change in the benefit to become 
effective on January 1, 2000, and the number of enrollees covered under 
the benefit. Using this information, Peter D. Hart Research estimated 
the number of enrollees affected by benefit changes and the magnitude 
of these changes among the subset of enrollees covered by the most 
common benefit arrangement. Not all companies responded to each 
question.
---------------------------------------------------------------------------

          III. Sources of Medicare+Choice Program Instability

    The health plans that announced their decisions to leave the 
Medicare+Choice program or to reduce benefits did not make their 
decisions lightly. Many of these plans worked up to the July 1st 
deadline to devise strategies that would enable them to maintain their 
current service area, to stay in the program next year, or to minimize 
benefit reductions. But for many of these plans, current problems with 
the Medicare+Choice payments and increased regulatory burdens were too 
overwhelming, and they were forced to reduce their participation, to 
withdraw from the program or to scale-back benefits. Without a doubt, 
HCFA's approach to implementing policies and changes required by the 
BBA have influenced these decisions.

Medicare+Choice Payment

    HCFA Risk-Adjustment Approach Undermines BBA Medicare+Choice 
Payment Reforms Goals. The BBA limited the annual rate of growth in 
payments to health plans, producing $22.5 billion in savings from the 
Medicare+Choice program. The BBA also sought to reduce geographic 
variation in payments to encourage the development of coverage choices 
in areas of the country with lower payments. In 1998 and 1999, however, 
no counties received blended payment rates because of the low national 
growth percentage and the inability to achieve budget neutrality.
    AAHP and its member plans supported the passage of payment reforms 
in the BBA and understood the need to contribute our fair share toward 
the savings necessary to stabilize the Medicare Trust Fund. We are 
deeply concerned, however, that administrative actions taken by HCFA 
affecting Medicare+Choice payments do not serve the best interests of 
beneficiaries and were not anticipated by Congress. Together with 
unintended consequences of higher than anticipated inflation, HCFA's 
actions are contributing to a growing gap in funding between the 
Medicare+Choice and fee-for-service sides of the program, which is 
undermining the program's stability.
    As members of the Subcommittee know, Congress directed HCFA to 
establish a health-status based risk-adjustment methodology. HCFA has 
chosen to fulfill this requirement by implementing its new risk-
adjustment methodology in a manner that will cut aggregate payments to 
Medicare+Choice organizations by an estimated additional $11.2 billion 
over a five-year period beginning in 2000. This is an administratively 
imposed increase in the $22.5 billion savings Congress expected from 
the payment methodology as enacted in the BBA. This reduction reflects 
only the first stage of risk-adjustment. According to the 
Administration, the second stage, which will be based on utilization in 
all settings, is expected to reduce payments by another 7.5 percent 
beginning in 2004 resulting in a 15 percent total reduction.
    At the time of the BBA's approval, the Congressional Budget Office 
(CBO) did not score the new risk-adjuster as saving money. More 
recently, CBO stated that it had ``previously assumed'' that the health 
status-based risk-adjustment in the Medicare+Choice program would be 
budget neutral.\2\ There is no doubt that HCFA has the authority to 
implement the risk-adjuster on a budget-neutral basis. Sadly, we 
already have begun to see the effects of HCFA's decision not to take 
this approach, which has contributed to the recent decisions by health 
plans to curtail their participation or to reduce benefits next year.
---------------------------------------------------------------------------
    \2\ ``An Analysis of the President's Budgetary Proposals for FY 
2000,'' Congressional Budget Office.
---------------------------------------------------------------------------
    Short of any action--either administrative or legislative--the 
situation is not likely to improve. AAHP analyses of 
PricewaterhouseCoopers projections of Medicare+ Choice rates in each 
county over the next five years shows that a significant gap opens up 
between reimbursement under the fee-for-service program and 
reimbursement under the Medicare+Choice program.\3\ These analyses show 
that:
---------------------------------------------------------------------------
    \3\ AAHP calculation from PricewaterhouseCoopers (PWC) analysis 
prepared for AAHP, March 1999. AAHP's analysis produces conservative 
estimates of the Fairness Gap by assuming that county-level 
Medicare+Choice and FFS payments were equal in 1997, even though 
Medicare+Choice payments were actually lower than FFS per capita 
payments in 1997. PWC analysis based on first stage of risk adjustment. 
PWC analysis does not reflect second stage of risk adjustment, which 
HCFA expects to reduce payments by an additional 7.5 percent in 2004. 
The Fairness Gap represents growth between 1997 and 2004 in the 
projected difference between county-level aged Medicare+Choice risk-
adjusted per capita payments and FFS per capita payments. Top 100 
counties by enrollment account for 72 percent of enrollment.
---------------------------------------------------------------------------
     The Medicare+Choice Fairness Gap will be at least $1,000 
for two-thirds of Medicare+Choice enrollees living in the top 100 
counties, as ranked by Medicare+Choice enrollment (Figure 2).
     For nearly half of Medicare+Choice enrollees living in the 
top 100 counties, government payments to health plans on behalf of 
beneficiaries will be 85 percent or less of fee-for-service Medicare 
payments in 2004, significantly exceeding estimates of so-called 
overpayment due to favorable selection by plans (Figure 3).
     In the top 101 to 200 counties as ranked by enrollment, 
nearly half of Medicare+Choice enrollees live in areas where the 
Fairness Gap will be $1,000 or more in 2004. These counties include 
smaller markets in which plans were expected to expand into under the 
policy changes implemented by the BBA.
    Perhaps most importantly, AAHP found that a large percentage of the 
``Fairness Gap'' is attributable to HCFA's risk-adjuster, the design of 
which is severely flawed. Rather than measuring health-status, as 
required by the BBA statute, HCFA's risk-adjustment method measures 
inpatient hospital utilization. This design penalizes numerous health 
plans, which like Group Health, use disease management programs that 
are designed to reduce hospitalizations for chronically ill patients 
who would have otherwise been treated in inpatient settings. These 
programs are structured to prevent costly hospitalizations by treating 
patients in alternative settings. Contrary to ensuring predictability 
in the new Medicare+Choice program, the impact of this risk-adjustment 
methodology will be to restrict new market entrants and leave 
beneficiaries with fewer options, reduced benefits and higher out-of-
pocket costs. This result squarely contradicts Congress' goals in 
developing the Medicare+Choice payment reforms included in the BBA. 
AAHP has found, for example, that the impact of HCFA's risk-adjuster on 
Medicare+Choice payments to rural and urban counties is similar--rural 
areas with Medicare+Choice beneficiaries are cut by about 6 percent, 
while urban areas are cut by about 7 percent.
[GRAPHIC] [TIFF OMITTED] T5699.002

[GRAPHIC] [TIFF OMITTED] T5699.003

    Another AAHP analysis of PricewaterhouseCoopers projections that 
incorporates the effect of the risk-adjustment methodology when it is 
phased-in at 10 percent indicates that nearly half of current 
Medicare+Choice enrollees live in areas in which year 2000 payments 
will increase by 2 percent or less over 1999 payments. This situation 
will likely worsen in 2001 when HCFA will base 30 percent of 
Medicare+Choice payments on its risk-adjustment methodology. This means 
that payments in many parts of the country will fall below the two 
percent minimum update established by Congress. HCFA's risk-adjuster 
also will diminish the effectiveness of the blended payment methodology 
and payment floor in reducing geographic variation in Medicare+Choice 
payments.

Exclusion of Spending on Medicare-Eligible Retirees From 
Medicare+Choice Rate Calculation.

    Spending on medical services furnished to Medicare-eligible 
military retirees by Department of Veterans Affairs (VA) and Department 
of Defense (DoD) hospitals continues to be omitted from the calculation 
of Medicare+Choice rates. A few years ago, the Prospective Payment 
Advisory Commission (ProPAC) estimated that health care provided in DoD 
and VA facilities to Medicare beneficiaries accounts for 3.1 percent of 
the total resource costs of treating Medicare beneficiaries. ProPAC 
concludes from its findings that the omission of the cost of care 
provided in DoD and VA facilities to Medicare beneficiaries leads to 
systematic errors in both the level and distribution of Medicare 
managed care payments. H.R. 2447, introduced by Congressman McDermott, 
represents one approach that would help address this problem by 
including these amounts in Medicare+Choice rate calculations.

Plans Have Limited Ability to Reflect GME Carve-Out In Contracts with 
Teaching Facilities.

    In addition, the BBA sought to begin tackling some of the issues 
related to Graduate Medical Education (GME) reform by limiting the 
number of residents supported by the Medicare program and by providing 
incentives to hospitals to reduce the size of their training programs. 
However, a central BBA provision, the removal of GME funds from the 
calculation of payments to Medicare+Choice organizations, does not 
appear to address broader GME reform goals. Studies show that health 
plan members do use teaching facilities and that plan payments on 
behalf of a member receiving treatment in a teaching hospital greatly 
exceed payments for the same case in a non-teaching hospital. Although 
GME payments are being removed from Medicare+Choice payments, in many 
markets, the dominance of teaching hospitals limits health plans' 
ability to reflect the carve-out by making commensurate reductions in 
payments to teaching hospitals. Consequently, teaching hospitals are 
receiving GME payments from the Medicare program as well as higher 
payments from health plans. Ultimately, it is the Medicare beneficiary 
who bears the burden of these higher payments due to reductions in 
additional benefits that they otherwise would receive.

User Fee Further Erodes Medicare+Choice Payment Updates.

    AAHP also has significant concerns about the funding of the 
Medicare beneficiary information campaign. While it is reasonable for 
health plans and their enrollees to contribute to funding HCFA's 
education and information dissemination initiatives, their contribution 
should be in proportion to their participation in the Medicare program. 
On average, generating the $95 million will require a tax of $1.90 each 
month for each beneficiary enrolled in a Medicare+Choice plan (the tax 
is collected over only the first nine months of the year). This $1.90 
per month per beneficiary tax represents 18 percent of the average 
monthly 1998 to 1999 payment increase under the new BBA payment 
methodology.
    AAHP supports the goal of providing beneficiaries with accurate 
information that allows them to compare all options and select the one 
that best meets their needs. Thus far, however, the campaigns have not 
met expectations. Many beneficiaries received incorrect or confusing 
information and some plans were left out of the brochure altogether. 
AAHP urges Congress to ask HCFA for an accounting of its use of 
resources for educational purposes. We also urge Congress to adopt 
MedPAC's recommendation to fund this program through HCFA's operating 
funds rather than a tax on Medicare+Choice enrollees. AAHP continues to 
believe that the entire beneficiary information program should be 
reevaluated and streamlined.

Stabilizing Payment Will Help Stabilize the Medicare+Choice 
Program

    The present state of the Medicare+Choice program is not what 
Congress expected when the BBA was approved two years ago. Rather than 
having expanded coverage choices, beneficiaries face fewer coverage 
choices. Additional benefits offered by plans that are not available in 
the fee-for-service program are being jeopardized. Some have argued 
that HCFA overpays health plans and that plans withdrawing from the 
market are simply making ``business decisions.'' In response, first let 
me say this: overpaid health plans do not leave a market. Overpaid 
health plans do not reduce benefits. Second, payment and regulatory 
requirements dictate the type of environment in which health plans 
participate in the Medicare+Choice ``business.'' So yes, the current 
payment and regulatory environment is forcing plans to make difficult 
business decisions regarding their participation in the Medicare+Choice 
program.
    In the absence of an administrative action, H.R. 2419, introduced 
by Congressmen Bilirakis (R-FL) and Deutsch (D-FL), is one approach 
that would go a long way toward stabilizing the payment situation in 
both urban and rural areas by requiring that HCFA implement the new 
risk-adjuster on a budget-neutral basis, which is in keeping with 
Congressional intent. The bill also would ensure that national updates 
to government payments for beneficiaries choosing a Medicare+Choice 
plan grow at the same rate as government payments for beneficiaries 
choosing fee-for-service Medicare. H.R. 2419 represents one equitable 
approach to restoring funding by increasing the total dollars available 
in setting Medicare+Choice payment rates. This approach will help 
ensure that the BBA goal of expanding coverage choices for all 
beneficiaries is met.
    Another way that payments could be stabilized is through 
establishment of a true payment floor. As discussed earlier in this 
testimony, Medicare+Choice payments are falling drastically relative to 
fee-for-service Medicare payments--in many areas, payments are falling 
to 80 percent or less of fee-for-service payment. To prevent this, a 
true floor could be set such that Medicare+Choice payments would not 
fall below a specified percentage of fee-for-service per capita 
payments in a county.

Medicare+Choice Regulatory Environment Contributes to Program 
Volatility

    The challenges facing the Medicare+Choice program do not result 
from payment alone. HCFA's approach to overseeing the program and the 
structure of the Medicare+Choice program are contributing to the 
volatility in the program. Further complicating issues is the 
reorganization of HCFA, which has undermined communication between 
health plans and HCFA staff. Taken together, the issues of payment and 
regulation have challenged plans' abilities to maintain their health 
care networks. In an increasing number of cases, providers around the 
country simply have told health plans that given low payments and 
increased regulatory requirements on them, that they are better off 
just seeing beneficiaries under the fee-for-service program. Without an 
adequate provider network, health plans cannot meet HCFA's 
Medicare+Choice participation requirements leaving them with no other 
option but to exit the program.

HCFA Roles as Purchaser and Regulator in Conflict.

    HCFA's dual roles as purchaser and regulator are, at times, in 
conflict, and nowhere has this conflict been more evident than in 
HCFA's implementation of the BBA. These role conflicts remain 
unresolved, even largely unaddressed. Until ways are found to reconcile 
them, however, they will stand in the way of designing and delivering a 
Medicare+Choice program that really works for beneficiaries. 
Unfortunately, there are numerous examples that point to this inherent 
conflict between HCFA's roles.
    Request for Adjustments to ACRs. The circumstances that plans faced 
in the fall of 1998 perhaps best illustrate this situation. HCFA 
published the Medicare+Choice regulation, which was more burdensome 
than expected, nearly a month and a half after the date plans were 
required to file their 1999 adjusted community rate proposals (ACRs) 
last year. This situation and the unrealistic compliance deadlines, 
combined with the reduced rate of increase in payments and the 
uncertainty created by the new risk-adjustment model, were major 
factors in decisions by plans across the country and across model types 
to become deeply concerned last fall about the viability of the 
benefits and rates included in their ACRs on the originally mandated 
May 1st deadline. This led AAHP members to make an unprecedented 
request to HCFA to allow plans to resubmit parts of their ACRs. In some 
service areas, the ability to vary copayments--even minimally--meant 
the difference between a plan's ability to stay in the Medicare+Choice 
program or to pull out of a market.
    While this request presented HCFA with a complicated situation, 
AAHP strongly believes that an affirmative decision would have been 
better for beneficiaries. As a purchaser, HCFA had a strong motivation 
to maintain as many options as possible for beneficiaries by responding 
to health plans' concerns and adopting a more flexible approach to 
Medicare+Choice implementation. As a regulator, however, HCFA had 
concerns about criticism that could result from reopening benefit and 
rate proposals, and thus chose not to allow any opportunity for 
adjustment of ACRs. HCFA's decision in part contributed to the 
withdrawal of nearly 100 health plans from the program, affecting more 
than 400,000 beneficiaries. This unfortunately is not the only example 
of a policy decision made by HCFA that is undermining the fulfillment 
of the BBA goals.
    HCFA to Implement QISMC without Exercising Deeming Authority. The 
provisions of the BBA concerning quality oversight standards for 
Medicare and Medicaid participating health plans call for an 
implementation that builds upon the quality improvement standards of 
existing accreditation organizations and avoids duplicate reviews. AAHP 
has long advocated for coordination of quality standards for health 
plans in order to maximize the value of plan resources dedicated to 
quality improvement. In an effort to avoid duplication with other 
quality initiatives undertaken by plans, the BBA explicitly authorizes 
HCFA to develop a process through which health plans would be 
``deemed'' to meet quality-related requirements. Unfortunately, HCFA 
has chosen to begin implementation of its Quality Improvement System 
for Managed Care (QISMC) and it has done so without completing work 
that will permit Medicare+Choice plans to take advantage of the 
statutory authority for deeming.
    HCFA's Approval Process for Marketing Materials Creates Delays. 
HCFA recently issued a standard summary of benefits document to 
facilitate the comparison of benefits offered by health plans. AAHP 
supports the goal of this project, however, we believe it was completed 
on a timeframe that did not allow for the completion of necessary 
development work. As a result, HCFA made modifications to improve the 
document even after plans had been asked to submit compliant materials. 
The Agency now is in the process of revising its model evidence of 
coverage (EOC). Some HCFA regional offices are delaying approval of 
plans' EOCs pending their receipt of the new model EOC from the central 
office. These examples clearly indicate the need to devote adequate 
time to projects and the need for clear communication between central 
and regional HCFA offices on the effective date of new requirements, 
such as the use of the revised EOC.

      IV. Solving the Problems that Undermine the Success of the 
                        Medicare+Choice Program

    The Medicare+Choice program is critical to strengthening and 
stabilizing Medicare over the long term. There is no doubt that HCFA 
faces an enormous task in implementing the BBA. But as we have 
described in this testimony, we believe that HCFA has made decisions 
and taken approaches that clearly do not serve the best interests of 
beneficiaries. AAHP and its member plans stand ready to provide 
assistance as policymakers work to understand the combination of 
factors that threaten the success of the Medicare+Choice program. We 
emphasize that it is in everyone's interest--including beneficiaries, 
providers, health plans, HCFA and Congress--for the BBA to achieve its 
full promise. Our concern last year that without action, more 
beneficiaries would lose access to their plan and that others would 
face reductions in benefits has become a dismal reality. Further delay 
in instituting administrative and legislative remedies could render the 
Medicare+Choice program beyond repair or salvage. This outcome would be 
a loss not only for the beneficiaries who have chosen a Medicare+Choice 
plan, but also for future beneficiaries who would be denied the 
opportunity to do so.

                                

    Chairman Thomas. Mr. Hendrickson.

  STATEMENT OF BLAINE HENDRICKSON, INDEPENDENT OWNER, LEGACY 
   HEALTH CARE, RANCHO MIRAGE, CALIFORNIA, ON BEHALF OF THE 
                AMERICAN HEALTH CARE ASSOCIATION

    Mr. Hendrickson. Thank you, Mr. Chairman and Members of the 
Subcommittee. Thank you for allowing me the opportunity to 
appear before you today. I would like to take this opportunity 
to share the concerns of skilled nursing providers as we 
navigate our way through the recently implemented SNF 
protective payment system.
    My name is Blaine Hendrickson and I operate three 
independent nursing facilities in the Indio and San Bernadino 
areas of California. I speak today on behalf of the American 
Health Care Association. Because of the way the SNF PPS has 
been implemented, many Medicare beneficiaries are not gaining 
access to the skilled nursing care they need. Skilled nursing 
providers, particularly those who specialize in caring for the 
sickest Medicare patients, are facing a serious financial 
crisis. This is forcing many of us throughout the Nation to 
reexamine our ability to participate in the Medicare program.
    I am one of those facilities. I operate a facility in 
Indio, California, a small rural community. In 1997, because of 
our reputation of quality care-giving, we were asked to take 
over a small 68-bed facility. I agreed, and in my efforts I 
found that the facility was not meeting the needs of the 
community. As a result, we went from providing no Medicare to 
an average of 12 to 14 Medicare residents to respond to the 
community's need.
    However, with the new Medicare cuts, we have gone from an 
average reimbursement of $408 a day to an average of $231, 
which is impossible to do. I am talking about patients who need 
24-hour medical attention, extensive therapy, IV antibiotics 
and a host of medications, all for $231 a day, far less than 
our resources can provide.
    So in my community, Medicare patients now face the 
possibility of having to go hours away from family and friends. 
The problem is that simple and must be fixed now.
    Let me tell you what this means for Medicare's sickest 
beneficiaries. If Medicare funding levels are not restored, 
already reduced access to patient care will continue to erode. 
Already, availability of capital for facility improvement and 
nurse staffing has vanished and a growing number of skilled 
nursing facilities throughout the Nation will be forced to 
close their doors. This is not limited to just the large 
national companies but to small providers such as me.
    Small providers like me are finding it difficult to 
survive. We are struggling with a government asking us to do 
more with much less. It cannot be disputed that access problems 
exist for Medicare SNF patients. In fact, a recent OIG report 
showed that the majority of hospital discharge planners, 58 
percent in fact, identified patients who require extensive 
services have become more difficult to place in SNFs since 
Medicare cuts have been implemented.
    The Medicare cuts are affecting our employees as well. The 
bleak outlook for SNFs is creating an environment that will not 
allow us to attract and retain the high-quality professional 
staff. These deep cuts will have forced layoffs of tens of 
thousands of employees. That is a fact.
    Mr. Chairman, I have been blessed with a 14-year-old son 
named Ricky who was born with spina bifida. Medical 
professionals told our family he wouldn't survive for more than 
5 years. And they urged us to institutionalize Ricky because 
his condition required ongoing medical--complex medical 
attention. Only one facility in California was capable of 
caring for him and that facility was hundreds of miles away 
from our home and our community. I can't begin to describe the 
emotional turmoil our family experienced, feelings of 
overwhelming guilt, anxiety, hopelessness and questions about 
whether or not we would be abandoning our son. But our family 
was lucky. My wife was able to devote herself full time to 
being Ricky's caregiver. And so rather than send him hundreds 
of miles away to receive the care he needed, we cared for our 
son at home. But for many, caring for a loved one at home is 
not possible.
    Mr. Chairman, as my time runs down, I would like to propose 
four recommendations to improve access and to improve the 
program under Medicare PPS:
    No. 1, create payment add-ons for certain RUG categories 
effective October 1. HCA supports Senate bill 1500. Currently 
there is no House companion, but we hope the House will 
consider a similar proposal as you begin to markup. It is 
critical to identify where these patients with high-cost 
intense medical needs which are covered in the PAPS system make 
payment add-ons to address the disparity between the cost of 
providing these services and the resources Medicare currently 
provides.
    No. 2, update the current SNF market basket effective 
October 1, 1999. The current market basket grossly understates 
the actual market conditions for SNFs. Mr. Chairman, for some 
time you made it clear that the administration should do its 
part in refining the system. We agree. HCFA has a legal 
authority to address the inequities of the SNF market basket. 
In fact, at the request of the White House, we provided them 
with the legal opinion making clear their legal authority and 
we will submit that for the record.
    Mr. Hendrickson. No. 3, allow providers to transition to 
the Federal rate effective October 1, 1999. PPS rates are based 
on cost reports that date all the way back to 1995. This puts 
some providers at a disadvantage. Providers should have the 
option of electing to move to the full Federal rate immediately 
if they show they are disadvantaged by PPS.
    And finally, Medicare beneficiaries would achieve great 
relief if Congress would pass Mr. McCrery's and Mr. Cardin's 
H.R. 1837. Mr. Chairman, I thank you for the opportunity to be 
here today. The majority of my residents have served this 
country in extraordinary ways and it is a privilege to serve 
them today. Thank you.
    Chairman Thomas. I would just tell you, Mr. Hendrickson, 
your statement was superb timing on the one particular bill 
that you mentioned. We won't put that to a vote right now. We 
will wait until later.
    [The prepared statement follows:]

Statement of Blaine Hendrickson, Independent Owner, Legacy Health Care, 
Rancho Mirage, California, American Health Care Association

    Thank you, Chairman Thomas and Members of the Ways and Means Health 
Subcommittee, 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 SNF prospective payment system (PPS) and 
other issues brought about by the Balanced Budget Act of 1997 (BBA).
    My name is Blaine Hendrickson, and I operate three independent 
nursing facilities in the Indio and San Bernardino areas of 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, balancing the budget and controlling Medicare 
spending in an effort to save the program and ensure its financial 
viability for future generations is a laudable goal. In fact, our 
commitment to that goal was evident when AHCA voiced strong support for 
the development and implementation of a new prospective payment system 
(PPS) under Medicare. We understood that such a system would encourage 
operational efficiencies and ultimately reduce Medicare spending for 
patients needing skilled nursing care.
    However, because of the way the SNF PPS has been implemented, and 
to some extent because of language contained in the Balanced Budget Act 
itself, significant numbers of Medicare beneficiaries are not gaining 
access to the skilled nursing care they need. These beneficiaries need 
your help. Skilled nursing providers themselves, particularly those who 
have specialized in caring for the sickest Medicare patients, are 
facing a serious financial crisis, which is forcing many of us 
throughout the nation to re-examine our ability to participate in the 
Medicare program.
    The BBA intended to reduce Medicare payments in 1999 from $248 
billion to $232 billion. In September, however, the Congressional 
Budget Office estimated that actual payments will be only $210 billion. 
That $22 billion shortfall was not expected and has created chaos for 
providers and seniors.
    I must be honest with you: I'm not the least bit comfortable 
sitting in front of you here today discussing inadequate Medicare 
funding in the same sentence with providing care for our nation's most 
vulnerable citizens--the frail, sick, and elderly. But I am not going 
to hide behind rhetoric. People put their lives and the lives of their 
loved ones--our residents--in our hands--24 hours a day, truly a 
daunting responsibility that we take very seriously. It is a very 
difficult and challenging job, but we provide this skilled nursing care 
with dedication and compassion.
    The sheer numbers of Medicare patients are growing every day, and 
the demands put on us for quality skilled nursing care also grows with 
this increased need for care. Our nation's elderly are living longer, 
fuller lives. And the advanced skilled nursing care for supporting this 
gift of extended life and extended living through advanced medicine and 
technology requires ever-increasing, highly advanced skilled nursing 
care, additional therapies and life-enhancing medicines. Skilled 
nursing facilities simply cannot provide these services for the most 
medically complex and frail patients without a system in place that 
supports our patients' additional medical needs. I am one of those 
facilities.
    Mr. Chairman, I operate a facility in Indio, California--a small, 
rural community not unlike the community you come from. The state 
Department of Health approached me several years ago to take over a 
small, 68-bed facility because of my record in quality caregiving. In 
my efforts, I found that the facility was not meeting the needs of the 
community with regard to Medicare patients. Patients were having to 
leave our community to access facilities far away in order to get the 
care they needed. So we went from no Medicare beds to 12-14 beds out of 
the 68 beds we have.
    However, with the new Medicare cuts, we went from an average of 
$408 a day for reimbursement for medically complex patients to an 
average of $231, which is simply impossible to do. We're talking about 
patients who need 24-hour medical attention, extensive therapy, IV 
antibiotics, G-tubes, a host of medications, and other services, all 
for $231 day, significantly less than our resources can provide. So in 
my community, Medicare patients are now having to leave their 
communities to get care, sometimes hours away from family and friends. 
The problem is as simple and as complex as that. The problem is very 
real. And the problem must be fixed now.
    One important indicator of the urgency and severity of the problem 
is a capitalization of the health care sector. In the past 18 months, 
market capitalization for hospitals has dropped approximately 40%. The 
skilled nursing industry market capitalization has dropped by almost 
twice as much--nearly 75 percent. We--providers, policymakers, 
families, and Medicare beneficiaries themselves--are facing a crisis of 
incredibly significant proportions. Time is of the essence. The 
situation will worsen unless you take action.
    Just a few weeks ago, one large national provider of skilled 
nursing services, filed for chapter 11 bankruptcy protection. This is 
part of a growing national trend. This, I fear--I know--is just the tip 
of the iceberg. We are witnessing this dramatic impact only four months 
into full implementation of the new prospective payment system. 
Providers are struggling. Patients are being affected. And families are 
concerned.
    Let me tell you what this means for Medicare's sickest 
beneficiaries. If Medicare funding levels are not restored, already 
reduced access to patient care will continue to erode. Already, 
availability of capital for facility improvement and nursing staff will 
vanish, and growing numbers of skilled nursing facilities throughout 
this nation will be forced to close their doors. And this is not 
limited to just the large national companies that provide care to tens 
of thousands of elderly and disabled, but to regional providers, small 
providers such as me, both non-profit and for-profit facilities.
    I have had the opportunity to travel throughout the country to talk 
with other skilled nursing providers across the country. I can tell you 
from that experience, this is not a problem that affects only national 
companies, as you may have been led to believe. This problem is rampant 
among skilled nursing providers who care for the sickest Medicare 
beneficiaries. We are committed to continuing to provide the highest 
quality of care. And--so far--we are doing everything possible to 
refrain from laying off direct caregivers, the men and women on the 
front lines of health care, ensuring a high quality of clinical care 
and a high quality of life for our patients. These providers also are 
cautious about discussing the impact these cuts are having because, 
quite honestly, we do not want to create a sense of fear in the hearts 
of residents and families who depend on us. Right now, some of us are 
getting by with dramatically reduced resources. How much longer can we 
do this? Only time will tell. Small providers like me, who fly below 
your radar, are finding it very difficult to survive. We are struggling 
with a government asking us to do much more with much less--demanding 
higher levels of quality in the face of drastic cuts. It simply doesn't 
make sense. It's hurting America's elderly. And America's seniors 
deserve better.
    I have been a health care provider with an excellent record for 30 
years, and in that time, I have never been as concerned as I am now 
about our ability to continue serving seniors and the disabled. I am 
concerned about real people facing very real problems--problems of 
access to needed care.
    No one disputes that access problems exists for Medicare SNF 
patients. In fact, an OIG report, seeking to examine access problems to 
skilled nursing care, showed that the majority of hospital discharge 
planners (58%) identify patients who require extensive services have 
become more difficult to place in SNFs since Medicare cuts have been 
implemented. ``These types of patients typically require complex direct 
nursing care and expensive medications, and they include patients who 
require intravenous feedings, intravenous medications, tracheotomy care 
or ventilator care,'' the report says.
    Additionally, one-third of discharge planners said it was difficult 
to place Medicare patients in SNFs, and 65 percent said PPS has had an 
effect on their ability to place patients.
    The access problem is occurring because SNFs are being forced to 
reevaluate the extent to which Medicare will allow them to 
appropriately care for the sickest patients.
    The Medicare cuts that are denying beneficiaries access to care are 
not just affecting Medicare beneficiaries, but are affecting our 
employees as well. The bleak outlook for SNFs is creating an 
environment that will not allow us to attract and retain high quality 
professional staff. These deep cuts have forced layoffs of tens of 
thousands of employees. That is fact. 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.
    I have been blessed with a 14-year old son named Ricky, who was 
born with spina bifida and severe complications related to his 
condition. Medical professionals told our family that Ricky wouldn't 
survive for more than five years. And they urged us to institutionalize 
Ricky because his condition required ongoing complex medical attention. 
Only one facility in California was capable of caring for Ricky, and 
that facility was hundreds of miles away from our home and our 
community. I can't begin to describe the emotional turmoil our family 
experienced--feelings of overwhelming guilt, anxiety, hopelessness, and 
questions about whether or not we would be abandoning our son. I can 
tell you that without question, that was the most difficult time of my 
life. But our family was lucky. My wife was able to devote herself 
fulltime to being Ricky's caregiver. And so, rather than send him 
hundreds of miles away to receive the care he needed, we cared for our 
son at home. But for many families in America, caring for a loved one 
at home is simply not possible. And I know too well what it's like to 
be faced with the decision to move someone you love far from home--
simply to receive health care.
    These cuts have created another sad and difficult reality for 
patients and families: patients who are discharged from hospitals to 
skilled nursing facilities are being forced to use facilities far away 
from family and loved ones to receive the specialized care they need, 
because many facilities in their vicinity are no longer providing that 
level of skilled nursing care.
    You may ask why this is a problem. First, let me ask you, how would 
you like to face a very difficult and emotional decision of having to 
put a loved one in a facility because you can no longer care for them 
yourself? Those of you here today who have gone through that process 
know what I am saying, you know how difficult that decision is. Now, 
add to that the decision to place a loved one in a facility that is a 
hundred miles away from home, because skilled nursing care in your 
community isn't available. And forcing patients into health care 
settings far from home makes daily or even weekly visits impossible. 
This not only affects the family deeply, it also interferes with the 
patient's recovery and emotional well being. I count my blessings every 
day that I have not had to make that decision for Ricky.
    The other real problem that Medicare cuts are having on Medicare 
beneficiaries--one I know everyone sitting here has heard about--is the 
arbitrary cap imposed on nursing home residents for life-enhancing 
rehabilitation therapies. These caps on Part B therapies, which are set 
at $1500 per year, have had a terrible effect on certain residents 
across the country. 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. For example, 
this flawed policy is forcing patients--patients recovering from stroke 
and other serious conditions-to choose between therapy to enable them 
to either walk or talk because Medicare resources simply will not cover 
both. Imagine sitting with your family, trying to decide whether your 
mother or father should receive physical therapy after a stroke in 
order to walk again, or receive speech therapy in order to talk again, 
or even swallow appropriately. You might think I am being overly 
dramatic, but families are faced with this cruel and difficult 
decision--even as I sit before you right now. This tragedy is best 
illustrated by looking at a real life example of how a Medicare 
beneficiary's life has been changed.
    This 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 McCrery and Cardin for their leadership on addressing this 
problem. Medicare beneficiaries would benefit if Congress would pass HR 
1837, legislation introduced by Congressmen McCrery and Cardin. This 
legislation would address the arbitrary 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. McCrery 
and Mr. Cardin's legislation would create criteria to trigger 
exceptions to the caps for the sickest and most vulnerable Medicare 
beneficiaries. Pass the McCrery/Cardin bill (H.R. 1837) to allow for 
some exceptions for these caps. These caps have reduced a benefit to 
Medicare beneficiaries and any relief would go a long way to ensure 
them an appropriate level of benefits.
    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.

                            Recommendations

    1. Create payment add-ons for certain RUG categories effective 
October 1, 1999. Congress, HCFA and MedPAC all recognize that the new 
payment system for SNFs fails to account for the costs associated with 
caring for certain Medicare beneficiaries with medically complex 
conditions. That is especially true for patients with high utilization 
of non-therapy ancillary services, such as prescription drugs, 
respiratory care, IV antibiotics and chemotherapy. To help solve this 
problem, AHCA supports Senate Bill 1500, the Medicare Beneficiary 
Access to Quality Nursing Home Care Act. Currently, there is no House 
companion, but we hope the House will consider similar legislation. S. 
1500 would identify where there are patients with high-cost, intense 
Medicare needs, which are covered in the PPS system and make payment 
add-ons to address the disparity between the cost of providing those 
services and the resources Medicare currently provides. Let me briefly 
address an issue that has raised some questions among policy makers. 
The RUGs system for SNFs has never appropriately taken into account 
non-therapy ancillary services. There has been a great deal of 
discussion around the RUG categories which are creating the most 
significant problems. Our research shows that the elderly population we 
serve is likely to suffer from co-morbidities. In other words, although 
patients require rehabilitative therapy, it is highly possible--even 
likely--that many of those patients will have other medically complex 
needs in addition to that therapy. And that, Mr. Chairman, is the 
fundamental flaw of RUGs. In the hierarchical RUG system, a patient's 
rehabilitation needs are often the only criteria by which a patient is 
assigned a RUG category--often ignoring other expensive life-saving 
medical services. We recommend targeting a payment add-on to those RUG 
categories with the highest concentrations of high non-therapy 
ancillary users. And we recommend that the majority of these relief 
funds must come in the first couple years so that relief is immediate 
and lasting.
    2. Update the current SNF market basket effective October 1, 1999. 
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. Mr. 
Chairman, for some time you have made it clear that the Administration 
should do its part in refining the system. We have shown in two legal 
opinions, including one from a former HCFA general counsel, that HCFA 
has the legal authority to address the inequities of the SNF market 
basket. In fact, we did this at the request of the White House. I would 
like to submit both of these legal opinions as an addendum to my 
testimony.
    3. Allow providers to transition to the federal rate effective 
October 1, 1999. PPS rates are based on cost reports that date all the 
way back to 1995. We believe providers should have the option of 
electing to move to the full federal rate immediately if they can show 
they are disadvantaged by the transition. 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 may require Congress to act.
    4. Medicare beneficiaries would achieve great relief if Congress 
would pass H.R. 1837, legislation introduced by Congressmen McCrery and 
Cardin. Let me, again, express my sincere appreciation to them for 
their leadership on this.
    Mr. Chairman, as I conclude my remarks, I would like to convey to 
the Committee that we understand that we must work within 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 today 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.
    Mr. Chairman, I thank you for the opportunity to be here today. I 
proudly entered this noble profession 30 years ago. There are tens of 
thousands of people such as me out there, and they are hurting. I can 
honestly tell you--despite the sensationalistic and rare examples of 
poor performers you see in the media from time-to-time--that an 
overwhelming majority of my colleagues share the same passion and 
commitment to this profession, and provide good, quality care. The 
majority of my residents are rich with love of family, love of life, 
and have served this country in extraordinary ways throughout their 
lifetime. It is a privilege to serve them.
    On behalf of AHCA, I want to make clear our commitment to providing 
high quality care to America's frail and elderly. The situation we are 
facing is critical, but it will get worse unless Congress and the 
Administration work with providers to fix the system. You can make a 
very real difference for a population that expects--that deserves--no 
less. Only you have the power make a difference . . . to give voice to 
a population that needs your help . . . your nation's elderly, 
disabled, and the men and women who they rely on every day for their 
skilled nursing care.
    And thank you for the opportunity you have given me today.

                                

    Chairman Thomas. Ms. Bataillon.

    STATEMENT OF PAMELA BATAILLON, VICE PRESIDENT, BUSINESS 
DEVELOPMENT, VISITING NURSE ASSOCIATION OF THE MIDLANDS, OMAHA, 
 NEBRASKA, ON BEHALF OF VISITING NURSE ASSOCIATIONS OF AMERICA 

    Ms. Bataillon. Thank you, Mr. Chairman. My name is Pam 
Bataillon and I am vice president of the Visiting Nurse 
Association of the Midlands which is located in Omaha, 
Nebraska. The Visiting Nurse Associations of America are 
grateful to you and the Committee for your continued interest 
in refining provisions of the Balanced Budget Act of 1997.
    VNAs want to work with you to find administrative and 
legislative solutions to the problem areas such as the 
immediate need to address our cash flow crisis resulting from 
the multitude of Federal regulatory requirements that have been 
uniformly applied to all the providers, regardless of their 
history of compliance and responsibility in the Medicare 
program.
    Focused medical review, Operation Restore Trust and Wedge 
audits, increased technical denials, recoupment of overpayments 
made under the interim payment system, OASIS, 15-minute 
incremental reporting and subsequent changes in billing 
procedures, and now confusing advance beneficiary notices have 
all come into effect since the passage of the BBA.
    VNAA believes that implementation of many of these 
provisions has gone beyond congressional intent and made it 
difficult for VNAs and other home care providers to meet the 
health needs of eligible patients. The compounded effect of 
trying to simultaneously meet all of these regulatory mandates 
and survive under low IPS reimbursement rates has affected how 
we deliver care to patients, depleted our resources, and 
impacted our staff morale.
    Regarding the IPS cost caps, I want to address Mr. Hash's 
earlier statement today that providers do not understand the 
nature of the aggregate per-beneficiary cost limit. We clearly 
understand that the cap is not a per-patient cap and is applied 
in the aggregate. The problem in terms of meeting patients' 
needs is balancing all of their costs under the aggregate cap. 
It does not take very many high acuity patients to upset the 
apple cart.
    As cost-efficient providers, VNAs' aggregate caps are so 
low that we are finding it very difficult to serve the sickest 
of patients, which has been our mission for over 100 years.
    VNAA understands that Congress had to enact dramatic 
changes to the Medicare home health program in 1997, but now is 
the time to reassess and make adjustments so that responsible 
providers do not continue to be penalized by the IPS 
reimbursement structure and a one-size-fits-all Federal 
regulatory mandate process.
    We are at the point where we have to make sure that the 
baby is not thrown out with the bath water, which is why VNAA 
urges you to ensure that the BBA provision to reduce Medicare 
home health expenditures by 15 percent never goes into effect. 
The 15-percent cut is a significant threat to VNAs and to their 
ability to provide patient care. The average 25 percent budget 
cuts that VNAs have already made to survive under IPS is 
challenging our ability to provide the care that patients need 
to remain stable and at home. Many VNAs report that they cannot 
accept all eligible patients because of shortage of staff or 
anticipated costs. As a group of providers whose costs have 
been, by and large, under the national average, we have cut 
into the bone and can't cut any further.
    To understand the devastation to my agency from the 
combined effect of IPS and regulatory mandates, I have included 
specific information about our agency. Between August 1997 and 
August 1999, we have had to reduce our budget by $2,600,000, 
reduce our staff by 42 percent and reduce our total volume of 
visits by 32 percent.
    The result of these budget cuts has directly affected 
patient care. We have only been able to provide the bare 
minimum of service, barely getting them to a stable situation 
before we can dismiss them.
    Dismissing patients earlier: more and more we see evidence 
that this earlier discharge results in hospital readmissions. 
This creates increased costs for Medicare both at the hospital 
level and then when the patient is once again referred for 
post-acute hospital home care, often at a higher acuity level.
    The VNA has survived current cuts; however, we have 
exhausted our resources. A 15-percent cut in revenues would 
decimate the agency and preclude us from carrying on our 103-
year-old mission of providing home health care in our 
community.
    VNAA is certain that another 15-percent cut under IPS would 
be the straw that would break the camel's back. In response to 
a survey sent to VNA members earlier this month the vast 
majority of those VNAs who responded said they would seriously 
consider discontinuing participation in the Medicare program. 
Fourteen VNAs said they would definitely or likely close, in 
addition to the 10 that have already closed due to IPS. All who 
responded to surveys said they would eliminate or decrease all 
indigent care and completely deplete their reserves or charity 
funds and foundation resources.
    In most communities the VNA is the choice of last resort, 
the place that all other home care agencies refer their high 
acuity and highly complex hard-to-serve patients. Our 
recommendations are several. They are detailed in the submitted 
written testimony.
    One that would help us would be to ensure that the BBA 
provision of a 15-percent reduction in Medicare home health 
expenditures does not go into effect.
    Another would be to enable agencies to be reimbursed 
immediately through a pass-through on their cost reports for 
the cost of OASIS (which, by the way, has added 30 minutes to a 
home visit) and other regs.
    Another would be to pass legislation to extend the PIP 
system through at least the first year of PPS system.
    Another, exclude home health agencies in good standing from 
prepayment review and limit their post-payment review to no 
more than 10 percent of claims.
    Also, to increase the per-beneficiary cost limit and the 
per-visit cost limit to help offset the costs of OASIS 
implementation.
    To implement MedPAC's outlier recommendation under IPS and 
to enforce HCFA's statement that it will grant 3-year extended 
repayment plans on IPS-related overpayments to home health 
agencies.
    Thank you very much for allowing us to present this 
information and recommendations to you and your committee.
    Chairman Thomas. Thank you very much, Ms. Bataillon, and we 
appreciate the specificity and the reasonableness of your 
request.
    [The prepared statement follows:]

Statement of Pamela Bataillon, Vice President, Business Development, 
Visiting Nurse Association of the Midlands, Omaha, Nebraska, on behalf 
of Visiting Nurse Associations of America

                              Introduction

    Mr. Chairman and Members of the Subcommittee: My name is Pam 
Bataillon and I am Vice President of the Visiting Nurse Association 
(VNA) of the Midlands, which is located in Omaha, Nebraska. The VNA is 
an independent, Medicare-certified home health agency serving eastern 
Nebraska and Western Iowa. I am pleased to be here today to present the 
recommendations of the Visiting Nurse Associations of America (VNAA) 
regarding refinements to the Medicare home health provisions included 
in the Balanced Budget Act of 1997 (P.L. 105-33). VNAA is the national 
membership association for non-profit, community-based home health 
agencies.
    VNAA is grateful to you, Mr. Chairman and members of the 
Subcommittee, for your continued interest in refining provisions of the 
Balanced Budget Act of 1997 (BBA). We support your efforts to ensure 
that this landmark legislation accomplishes congressional intent and 
does not inadvertently create federal policies and requirements that 
are counterproductive to its goals.
    Visiting Nurse Agencies (VNAs) want to work with you to find 
administrative and legislative solutions to the problem areas, such as 
the multitude of federal regulatory/administrative requirements that 
have been uniformly applied to all providers regardless of their 
history of compliance, cost-consciousness and responsibility in the 
Medicare program. We think it is absurd that providers with nearly 35 
years of experience providing quality, cost-effective care in the 
Medicare program with 0-3% denial rates (and decades of experience 
before Medicare was established) have to spend more time now responding 
to the scrutiny of several government audits and complying with 
paperwork mandates than providing patient care, or filling out forms to 
account for every minute of in-home patient care, or spending tens to 
hundreds of thousands of dollars on software and training to meet OASIS 
requirements that are only reimbursed a fraction of the cost.
    Focused medical review, Operation Restore Trust (ORT) and Wedge 
audits, increased technical denials, sequential billing, recoupment of 
overpayments made under the Interim Payment System (IPS), OASIS, 15-
minute incremental reporting and subsequent changes in billing 
procedures, surety bonds, and now advance beneficiary notices, have all 
come into effect since the passage of the BBA. In addition, HCFA is 
redefining the benefit, which has created confusion regarding what is 
and what is not a covered service. For example, providers were given no 
notification that insulin-management for blind diabetic patients is no 
longer covered. We have received retroactive denials on such cases.
    VNAA believes that implementation of many of these provisions has 
gone beyond congressional intent and made it difficult for VNAs and 
other home care providers to meet the health care needs of eligible 
patients, primarily because of cost and cash flow issues. The 
compounded effect of trying to simultaneously meet all of these 
regulatory mandates and survive under low IPS reimbursement rates has 
depleted our resources and our staff morale. Because of our century-old 
mission to provide cost-efficient, compassionate care to all patients 
in need of home health care regardless of condition or ability to pay, 
we will not let this difficult regulatory period defeat our ability to 
care for patients--but we need your help.
    VNAA understands that Congress had to enact dramatic changes to the 
Medicare home health program in 1997 and that bold initiatives were 
required to rid the program of fraud and abuse, but now is the time to 
reassess and make adjustments so that the responsible providers do not 
continue to be penalized by the IPS reimbursement structure and one-
size-fits-all federal regulatory mandates. We believe that adjustments 
to the BBA can put us back on the right track before it is too late. We 
are at the point where we have to make sure that the ``baby is not 
thrown out with the bathwater,'' which is why VNAA urges you to ensure 
that the BBA provision to reduce Medicare home health expenditures by 
15 percent never goes into effect.
    Mr. Chairman, and members of the Subcommittee, you have taken the 
lead to ensure that the BBA is good, sound policy. We are grateful to 
you for spearheading legislation last year that made changes to the IPS 
reimbursement formula, which was the first step toward removing the IPS 
penalty on cost-efficiency. We know that you will continue to do the 
right thing by building on the Medicare home health improvements made 
by last year's Omnibus Appropriations Act. Please repeal the pending 15 
percent cut to Medicare home health expenditures, which is scheduled 
for October 1, 2000. It remains as a significant threat to VNA patient 
care. The average 25% budget cuts that VNAs have already made to 
survive under IPS is challenging our ability to provide the care that 
patients need to remain stable and at home. Many VNAs report that they 
must discharge patients earlier than the optimal time for discharge. 
Others report that they cannot accept all eligible patients because of 
shortage in staff or anticipated costs.
    Already, the number of patients who have had to remain in hospitals 
or nursing homes longer than necessary is increasing. The number of 
individuals who have had to go without care has also increased. Several 
VNAs no longer participate in the Medicare program; approximately 10 
VNAs have closed; and many have discontinued service in rural areas. 
Our experience closely parallels the findings of the Medicare Payment 
Advisory Commission (MedPAC). According to MedPAC's June 1999 report, 
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. 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.
    As a group of providers whose costs have been by and large under 
the national average, we have cut into the bone and we can't cut any 
further. To understand the devastation to the VNA of the Midlands from 
the combined effect of IPS and regulatory mandates, I have included 
specific information about our agency below.
    Between August 1997 and August 1999, we have had to:
     Reduce our budget by $2,600,000;
     Reduce our staff by 42%; and
     Reduce our total volume of visits by 32%.
    In 1997, we were 11% under our cost caps. In 1998, we were 12% over 
cost caps. These actions have resulted in a 32% drop in revenues and a 
42% drop in net assets (from $1,595,231 to $973,875). Regulatory 
mandates, including OASIS, ORT audits, and the 15-minute reporting and 
billing requirement, have simultaneously added to the pressure of 
keeping costs under the per-visit cost limits and have increased our 
average cost per visit from $62.50 to $68.98. This has been a common 
experience among VNAs, where they have historically kept costs 
significantly below the per-visit cost limits, and are for the first 
time just under, at, or above those limits. (Please see VNA of St. 
Lucie and Martin Counties' data sheet on such costs, which is attached 
to this testimony).
    The VNA of the Midlands was the target of a Operation Restore Trust 
(ORT) survey in 1999 because we are the biggest home care agency in 
Omaha. The results of the survey revealed that two nursing visits and 
one occupational therapy visit on two separate patients were determined 
to be technical denials because the physician did not date his 
signature and the date did not appear in locator 23 on the 
recertification form. Two nursing visits from two different patients 
were denied because the physician diagnosis of a legally blind diabetic 
was not deemed sufficient rationale for the VNA to prefill the insulin 
syringes for the patient. We were cited for not having documented that 
the family was unwilling to complete the task. The one occupational 
therapy sample was extrapolated to all the occupational therapy claims 
for that time period. This meant that the reviewer applied a 9.5% 
denial rate to all nursing claims a 100% denial rate to occupational 
therapy claims. Instead of having to repay $322.55 on the actual denied 
claims, we were subject to a projected overpayment of $24,255.76.
    The result of these budget cuts has directly affected patient care. 
We have only been able to provide the bare minimum service to each 
patient, dismissing them earlier. More and more, we see evidence that 
this earlier discharge results in hospital re-admissions. This creates 
increased costs for Medicare, both at the hospital level and then when 
the patient is (once again) referred for post-hospital home care, often 
at a higher acuity level.
    The VNA has survived the current cuts; however, we have exhausted 
our resources. A 15% cut in revenues would decimate the agency. We 
would seriously consider dropping out of the Medicare program because 
it could bankrupt the agency and prevent us from carrying out our 103-
year-old mission of serving the sick and the poor in Omaha.
    VNAA is certain that another 15% cut under IPS would be the straw 
that would break the camel's back. In response to a VNAA survey sent to 
member VNAs this month, the vast majority of those VNAs who responded 
said that they would seriously consider discontinuing participation in 
the Medicare program if a 15% cut were implemented on October 1, 2000.
    The following VNAs who have said they would definitely or likely 
close are:
    VNA of the Midlands in Omaha, Nebraska;
    VNA in Princeton, Illinois;
    VNA in Plainville, Connecticut;
    VNA in Manhattan, Kansas;
    VNA in Waterford, Michigan;
    VNA is Pittsburgh, Pennsylvania;
    VNA of South Portland, Maine;
    VNA in Atlanta, Georgia;
    VNA in Stuart, Florida;
    VNA in Columbus, Ohio;
    VNA in Ventura, California,
    Sun Home Health Services in Northumberland, Pennsylvania
    Home Nursing Agency in Altoona, Pennsylvania
    All who responded to the survey said they would eliminate or 
decrease all indigent care and completely deplete their reserves/
charity funds and foundation resources.

VNAA's Recommendations

    1. Ensure that the BBA provision of a 15% reduction in Medicare 
home health expenditures never goes into effect. We strongly oppose a 
reduction of the 15% to a lesser percentage, and recommend another 
delay if necessary before a full repeal can be accomplished.
    We understand that repeal of the 15% cut costs approximately $15 
billion over 10 years, according to the Congressional Budget Office 
(CBO). Because CBO anticipates that Medicare home health savings will 
be well above the $16.2 billion required by the BBA over a five year 
period (possibly three-times that number), the 15% cut is not necessary 
and, frankly, is overkill. If federal budgetary caps make it impossible 
to repeal the 15% in 1999, then a delay is essential so that the 15% 
doesn't take effect on the same date as the implementation of the 
Medicare Home Health Prospective Payment System (PPS)--October 1, 2000. 
VNAA believes that the PPS is our best hope for a fair and equitable 
reimbursement system, which will base payments based on the condition 
of the patient rather than on agencies' historical costs as is the case 
under the current IPS method. We know that this Subcommittee urgently 
waits for implementation of PPS. A 15% cut on the date of 
implementation may doom the plan before it even gets off the ground.
    2. Ensure that HCFA's PPS plan is implemented on time and without a 
transition period. We strongly support HCFA's proposed use of national 
cost averages in the determination of per-episode reimbursement rates; 
and urge you to oppose any attempt to transition in the plan using 
agency-specific historical costs.
    3. Pass legislation to extend the Periodic Interim Payment (PIP) 
system through at least the first year of prospective payment. 
Extension of PIP would ease the transition from IPS to PPS and has been 
proven to be critical in terms of cash flow for VNAs under the HCFA PPS 
Per-Episode Demonstration Project.
    4. Sunset the 15-minute increment reporting requirement. This 
activity has been expensive because of the change in forms and 
software, and is consuming of a clinician's time in a patient's home. 
It also does not account for off-site activities performed by the 
clinician that are directly related to patient care (e.g., physician 
consultation). An alternative approach that would provide more useful 
information regarding clinician time and patient outcomes would be to 
have agencies report ``time in'' and ``time out'' and link such 
information to the patient's OASIS data.
    5. Delay the implementation of the New Advance Beneficiary Notice. 
Although we are supportive of notices to beneficiaries, providers only 
received directions from HCFA on September 22 for an implementation 
date of October 1. In addition, the current notices supplied by fiscal 
intermediaries to providers are lengthy and confusing at best for 
beneficiaries.
    6. Repeal the BBA requirement to bundle durable medical equipment 
(DME) costs with other home health costs through consolidated billing 
under the Medicare home health prospective payment system. VNAs view 
the bundling of the DME into the home health billing process as one 
additional administrative burden for which there is no cost 
recognition.
    7. Enact a provision contained in H.R. 2456 that would: (1) exclude 
home health agencies with a finalized claim denial rate of less than 5 
percent (average of the three most recent cost reporting periods) from 
prepayment review and (2) limit their post-payment review to no more 
than 10 percent of claims. Conducting high cost, intense audits on all 
agencies, regardless of past practices by the agency, is expensive and 
unproductive. Matching the rate of review to the rate of denial would 
provide an incentive to agencies to submit ``good claims'' because it 
would result in less review.
    8. Enact a provision in H.R. 2240 that would further increase the 
per-beneficiary cost limit for home health agencies whose current PBLs 
are currently under the national average PBL. An increase in the PBL 
for these agencies would better enable them to serve the highest-cost 
patients and help offset the costs of OASIS implementation.
    9. Increase the per-visit cost limit to help offset the costs of 
OASIS implementation.
    10. Implement MedPAC's outlier recommendation under the Interim 
Payment System.

                               Conclusion

    VNAs' sole purpose for participating in Medicare is to provide 
compassionate, cost-effective care to patients. If regulations strangle 
our ability to meet patients needs and if low reimbursement does not 
cover the cost of care, more responsible providers will make the 
decision to drop out of the Medicare program. Mr. Chairman, the loss of 
good, responsible providers is not what the Medicare program needs. We 
have kept costs down. We are often the providers of last resort. We 
have helped families cope with disability and death in the comfort of 
their own homes for over 100 years. Please enact and enforce our 
recommendations to ensure that responsible home care providers can 
continue to serve Medicare beneficiaries for another 100 years. Thank 
you for allowing us this opportunity to provide our views and 
recommendations.

    [Attachments are being retained in the Committee files.]

                                

    Chairman Thomas. Ms. Swigert.

 STATEMENT OF NANCY B. SWIGERT, OWNER, SWIGERT AND ASSOCIATES, 
   INC., LEXINGTON, KENTUCKY; AND IMMEDIATE PAST PRESIDENT, 
          AMERICAN SPEECH-LANGUAGE-HEARING ASSOCIATION

    Ms. Swigert. Thank you, Chairman Thomas and Members of the 
Subcommittee, for allowing me to appear here today.
    My name is Nancy Swigert and I have a private practice in 
Kentucky. As a practicing speech-language pathologist, I teach 
people who have had a stroke to learn to swallow again. If they 
can't learn to swallow again, the consequences are for food and 
liquid to get in the lungs, causing pneumonia or death. In 
fact, more deaths result from asphyxiation following stroke 
than any other complications.
    I also work with patients who can't communicate, and teach 
them how to communicate again. Lack of communication skills 
results in patients needing more expensive, and more intensive 
levels of care.
    I am before you today as the immediate past president of 
the American Speech-Language-Hearing Association. We have close 
to 100,000 speech-language pathologists, audiologists, and 
speech-language-hearing scientists. We work very closely as 
well with other professional rehabilitation organizations like 
the American Occupational Therapy Association and the American 
Physical Therapy Association on issues that we are discussing 
in the hearing today. Therefore, I am here today representing a 
total of approximately 300,000 rehabilitation therapy 
professionals.
    As the Committee considers BBA refinements, ASHA urges the 
committee to include provisions that would relate to outpatient 
rehabilitation services. We ask that you consider both 
enactment of an exceptions process that retains the caps, 
except in those instances where the patient requires medically-
needed services, and incorporating three $1,500 caps by 
granting independent status for speech-language pathologists.
    As the cap is currently implemented by HCFA, the burden of 
the utilization policy is being borne chiefly by high acuity 
patients. It seems that the patients who are going to exceed 
the cap are those who have multiple diagnoses, or those who 
have multiple incidents within a year. And we have to remember 
as well, that patients in nursing homes can't switch providers 
when they have reached their cap.
    To make matters worse, in implementing this provision, the 
Health Care Finance Administration ruled that speech-language 
pathology and physical therapy share a $1,500 cap.
    Mr. Chairman, we have appreciated your personal efforts to 
try to correct that situation administratively, but in the 
absence of action by the agency, we urge the Committee to 
legislatively make the technical corrections necessary to 
resolve this unintended consequence of the BBA. While I can 
provide the committee with case after case of real-life 
examples even within my own family of how Medicare 
beneficiaries' lives have been changed negatively, I would like 
to share with you a summary of a recently completed randomized 
survey of speech-language pathologists who reside in Texas, 
North Carolina, Connecticut and California. In brief, 
clinicians estimated that 23 percent of patients covered by 
part A and 70 percent of patients covered by part B were 
expected to be denied speech-language pathology services due to 
restrictions directly resulting from the BBA policy changes.
    According to clinicians, the most frequently cited 
consequence of denied care was the potential for an increased 
risk of aspiration pneumonia, which is getting food and liquid 
in the lungs, and dehydration. Let me point out, by the way, 
that treatment of aspiration pneumonia costs on average about 
$15,000, so the therapy to prevent it is a real bargain.
    Mr. Chairman, I believe that this study confirms our most 
grave concerns about the negative impact and unintended 
consequences of some BBA policy decisions. We believe Congress 
needs to take action now to make reasonable refinements in 
these policies so that appropriate and necessary care to our 
seniors is not sacrificed. I would ask you, Mr. Chairman and 
Members of the Subcommittee, to consider two specific options 
that Congress can implement to that end.
    First, as sponsored by a number of Members of this 
Committee and specifically initial cosponsors Congressmen 
McCrery and Cardin, enact the Burr-Grassley legislation, H.R. 
1837, that retains the cap except in those instances where the 
patient requires medically-needed services.
    Second, recognize the independent services being provided 
by speech-language pathologists, thereby eliminating the shared 
cap between speech and physical therapy. Because of this 
misdirected interpretation of the BBA therapy cap provision, 
there needs to be a distinction made as a matter of law and 
public policy. I urge this Committee to distinguish these types 
of care and not force a patient to choose whether he or she 
will be able to walk or swallow again.
    Speech-language pathology services are a benefit under 
current law and have been since 1972. However, as a speech-
language pathologist in private practice, I cannot bill 
directly to Medicare. We are merely asking that you grant us 
the same level of billing authority as physical and 
occupational therapists. By function of law this would then 
extent the current two caps to three caps. We need both the 
exception process and a delinking of physical and speech 
therapy.
    Mr. Chairman and Members of the Committee, on behalf of 
ASHA and the other rehabilitation professional groups, we 
appreciate your efforts to rectify the problems presented by 
the current therapy caps as well as the opportunity to discuss 
our views on this critically important matter. We urge you to 
take action to remedy the unintended consequences caused by the 
implementation of these arbitrary caps and we look forward to 
working with Congress and HCFA to fix these problems. Thank 
you.
    [The prepared statement follows:]

Statement of Nancy B. Swigert, Owner, Swigert and Associates, Inc., 
Lexington, Kentucky, and Immediate Past President, American Speech-
Language-Hearing Association

    Thank you, Chairman Thomas and Members of the Committee, for 
allowing me to appear before you today. My name is Nancy Swigert, and I 
am the owner of a private practice in Kentucky. I personally provide 
speech-language pathology clinical services, and I am the immediate 
past president of the American Speech-Language-Hearing Association 
(ASHA), which represents nearly 100,000 speech-language pathologists, 
audiologists, and speech, language and hearing scientists. We also work 
closely with the other national rehabilitation professional 
organizations--the American Physical Therapy Association (APTA) and the 
American Occupational Therapy Association (AOTA)--on the issues related 
to todays hearing; in total representing some 300,000 rehabilitation 
therapy professionals.
    On behalf of these professionals and our patients, we appreciate 
the opportunity to present our views to this Subcommittee concerning 
problems in the implementation and refinements to the Medicare 
provisions in the Balanced Budget Act (BBA) of 1997 impacting services 
to outpatient rehabilitation beneficiaries. As Congress prepares to 
consider BBA refinements, ASHA urges inclusion of improvements that 
relate to outpatient rehabilitation services in any ``BBA fix'' 
legislation approved by the Subcommittee, specifically the $1500 
beneficiary cap on a combined speech language pathology/physical 
therapy benefit. This provision, which also includes a separate $1500 
cap on outpatient occupational therapy, was enacted to control 
``inappropriate'' utilization of outpatient rehabilitation services by 
requiring beneficiaries to pay for services that exceed the cap.
    However, what this provision has done is disrupt treatment for many 
and denied seniors, especially those who are the sickest, the necessary 
services they need so that they can return to functional levels in the 
most fundamentally human skills of swallowing, speaking and walking. As 
implemented, the burden of the utilization policy is being born chiefly 
by high-acuity patients, such as individuals recovering from stroke, 
hip injuries and medically-complex cases that result in multiple 
medical incidents within a single year.
    In testimony previously given before other congressional hearings 
on the impact of this policy from the BBA, we believe representatives 
from federal agencies have trivialized and underestimated the number of 
Medicare beneficiaries who will exceed the caps, and will consequently 
face either disrupted and costlier care or denied care. Moreover, it is 
our strong contention that government assessments about the impact of 
these caps is significantly under estimated due to the self-rationing 
by patients and their families, as well as widespread confusion about 
how this policy has been implemented. Mr. Chairman and Members of the 
Committee, I ask that you not to let them play down the severe impact 
of the caps are having on the hundreds of thousands of our sickest 
Medicare patients.
    To make matters worse, in implementing this provision, the Health 
Care Financing Administration (HCFA) ruled that the speech-language 
pathology and physical therapy were to share $1500 for those Medicare 
outpatients who required both, citing the BBA provision that included 
speech-language pathology services (SLP) with physical therapy (PT) 
services. This action set an ugly precedent, disregarding the whole of 
Medicare and Medicaid regulations developed since 1972, when ``speech 
pathology services'' were added as a benefit, as well as all clinical 
and practice standards that clearly recognize speech-language pathology 
and physical therapy as separate and very distinct services. 
Essentially, the 1972 amendment adding speech-language pathology 
services was re-interpreted to mean that Medicare outpatient speech-
language pathology is a part of Medicare outpatient physical therapy, 
even though there is a separate definition in the statute (Section 
1861(ll) of the Social Security Act) for speech-language pathology 
services. ASHA protested the interpretation and provided HCFA with a 
legal analysis that, we believe, gives the agency adequate flexibility 
in correcting this problem. While sympathetic with our case, HCFA has 
cited that it does not have the authority to make such a change. Mr. 
Chairman, we have appreciated your personal efforts to administratively 
correct this situation. But in the absence of action by the agency, we 
urge the Committee to legislatively make the technical corrections 
necessary to resolve this unintended consequence of the BBA.
    While I could provide the Committee with case after case of real 
life examples--even within my own family--of how Medicare 
beneficiaries' lives have been negatively changed, I would like to 
share with you a summary of a recently completed randomized survey of 
speech-language pathologists who reside in Texas, North Carolina, 
Connecticut, and California. The survey investigated the impact of 
recent changes in Medicare reimbursement policies on the access 
patients have to the care provided by speech-language pathologists, and 
the nature of the possible consequences to the well being of these 
patients if the care is not available.
    In brief, clinicians estimated that 23% of patients who were 
covered under Part A and 70% of the patients covered under Part B were 
expected to be denied speech-language pathology care due to 
restrictions directly resulting from BBA policy changes. According to 
the clinicians, the most frequently cited consequence of denied care 
was the potential for an increased risk of aspiration pneumonia and 
dehydration, while also noting that these patients would likely 
experience an inability to resume normal daily activities and would 
continue to rely on a caregiver. Mr. Chairman, I believe that this 
study reconfirms our most grave concerns about the negative impact and 
unintended consequences of some BBA policy decisions.
    We believe Congress needs to take action now to make reasonable 
refinements in these policies so that appropriate and necessary care to 
our seniors is not sacrificed. I would ask you, Mr. Chairman, and 
Members of the Committee, to consider two specific options that 
Congress can do to this end:
    First, as sponsored by a number of Members of the Committee, enact 
the Burr/Grassley legislation (H.R 1837 and S. 742) that retains the 
cap except in those instances where the patient needs the additional 
services. Specifically, if a patient has a dual diagnosis; has two 
episodes of illness in one year; or is at risk of hospitalization. We 
worked on this legislation because we understood Congressional wishes 
to control utilization of this benefit. However, this benefit is 
intended to improve patient care and exceptions should be made for 
those patients who need the services and avoid costly inpatient 
hospitalizations.
    Second, separate the shared cap between speech-language pathology 
and physical therapy services, and recognize in legislation the 
independent services being provided by speech-language pathologists. 
Because of misdirected interpretation of the BBA therapy cap provision, 
there needs to be a distinction made--as a matter of law and public 
policy--between the offering of speech-language pathology and physical 
therapy services. As a provider, I treat people who have had strokes 
relearn to swallow. More deaths result from asphyxiation following a 
stroke than any other complication. As a provider, I treat people who 
can not communicate. Relearning these skills is time consuming, 
especially for a patient who has had a massive stroke or who have 
Parkinson's Disease. These are services that are very different from 
physical therapy. I urge this Committee to distinguish these types of 
care and not force a patient to chose whether he or she will be able to 
swallow or walk again because of the unintended consequence of this 
combined cap on SLP and PT services.
    Under current law, a speech-language pathologist can provide 
services as an independent practitioner; however, they must send their 
bills through either a physical therapist or a physician. This benefit 
is in current law. We are merely asking that you establish us with the 
same level of billing authority as physical and occupational 
therapists. By function of law, this would then extend the current two 
caps to three caps. Combining this with the Burr/Grassley legislation 
allows for two important improvements:
    (1) when patients are seriously ill, their care can continue 
without the beneficiary having to pay out-of-pocket for services;
    (2) for other patients seeking therapy services that do not fall 
into this category, they would have $1500 cap in speech-language 
pathology services; $1500 in physical therapy services; and $1500 in 
occupational therapy services.
    Mr. Chairman and Members of the Committee, on behalf of ASHA and 
the other rehabilitation professional groups, we appreciate your 
efforts to rectify the problems presented by the current therapy caps, 
as well as the opportunity to discuss our views on this critically 
important matter. We urge you to take action to remedy the unintended 
consequences caused by the implementation of these arbitrary caps, and 
we look forward to working with Congress and HCFA to fix these 
problems.

                                

    Chairman Thomas. Thank you very much.
    The gentleman from Louisiana, does he wish to inquire? I 
know he has a time constraint.
    Mr. McCrery. Yes, thank you, Mr. Chairman. I am trying to 
catch a plane this afternoon.
    Sister Keehan, is that how you pronounce your name, Keehan?
    Sister Keehan. Yes.
    Mr. McCrery. I was pleased that you pointed out a number of 
areas where you thought the administration could provide some 
relief through administrative action. Do you know to what 
extent the American Hospital Association has pursued those 
areas with HCFA and what kind of response you have gotten from 
HCFA?
    Sister Keehan. I can say very candidly that we have made 
certain that HCFA and the administration know that these are 
the areas we want addressed. To my knowledge, we haven't gotten 
a formal response. I think all of them are under advisement, 
but we haven't gotten a formal response.
    We have made these known as an organization. We have made 
them known as individual providers. We would like a response, 
quite frankly. It is October 1.
    Mr. McCrery. We would, too. Thank you.
    Ms. Swigert or Mr. Hendrickson, with respect to the therapy 
caps, just to give the Subcommittee some sense of the problem, 
could one of you or both of you describe for us the kind of 
therapy that, say, a stroke patient would need, and how much 
that therapy would cost in relation to the caps?
    Ms. Swigert. I think I could do most of that, except I am 
not sure about the cost. I will see if somebody can help me.
    It is a very good diagnosis, as an example, because almost 
every patient who has a stroke needs all three therapies.
    Physical therapy works on bed mobility, helping the patient 
learn to sit, balance again, hopefully to walk, or at least be 
mobile in a wheelchair.
    Occupational therapy helps that patient learn to care for 
themselves again, to be able to brush their teeth, comb their 
hair, and dress, so they are not totally dependent on a 
caregiver.
    Of course, they are also going to need a lot of therapy for 
both swallowing and communication. They need a lot of intensive 
therapy, and certainly at least what the speech/language 
pathologist can address typically for a stroke patient is 
definitely going to exceed the $1,500 cap.
    Mr. McCrery. Would you like to add to that, Mr. Henderson?
    Mr. Hendrickson. I can add to that in that certainly stroke 
is a wonderful example of where patients are going to 
continually come up against the cap.
    The stay under A for a stroke is normally a short period of 
time, and normally the real rehabilitation time takes place 
under B. In the case of most stroke victims, they would cap 
without question under just simple rehabilitation of getting 
over the condition. So that is a very excellent choice of 
medical conditions, but most of them would be against the cap, 
almost without question.
    Mr. McCrery. Mr. Hendrickson, you noted that changes in 
Medicare cut your reimbursement for medically complex patients 
from $408 to $231 per day. Have you estimated your actual costs 
for providing the level of service necessary for those 
medically complex patients?
    Mr. Hendrickson. Certainly we have, and it is considerably 
higher than $231 a day, I will assure you of that.
    I am glad you asked me the question, because we in our case 
were affected by a double hit and probably an unintended 
consequence of BBA. Being a facility who took over in 1997 with 
no Medicare, the base period for that facility was very, very 
low, so we find ourselves providing services today under a 25 
percent implementation of PPS at $65 a day less than the 
national average PPS rate. So we not only have the problem of 
having high-intensity patients receive less money, but, because 
of the base period, we are disadvantaged with another $70 or 
$65 a day below the Federal rate.
    But our costs to provide care to a patient like that would 
be very, very comfortably in the range of about $300 to $310 a 
day.
    Mr. McCrery. Thank you, all of you, on the panel. I 
appreciate your testimony.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank you. I also thank you for your 
testimony.
    We have a relatively limited objective in the attempt to 
put this legislation together. I know it is a difficult job 
representing your own particular interests, notwithstanding the 
fact you are speaking for a larger group, and you have in front 
of you the statements that the larger group wants you to make. 
You are trying to get your position represented, as well. But 
it is not real helpful for us in the kind of decisions that we 
need to make when some of the testimony is reflected.
    For example, Mr. Hendrickson, and I am glad you got into 
that exchange with my colleague from Louisiana, I believe your 
statement was, if funding is not restored. We are not going 
back to pre-BBA. The idea that the position is to simply 
abolish provisions makes it very difficult, because, in 
essence, you are throwing yourself at the mercy of the Congress 
to pick what it is we are going to do for you.
    To the degree that you can, provide specific areas in which 
we can make some adjustments, or, as Dr. Corlin, utilize the 
Med-Pac recommendations, which I think go right to the 
particular subject matter. And we are going to be, obviously, 
looking at those very carefully. There may be some disagreement 
over percentages or timelines, but the areas that have been 
emphasized are areas that we can go to.
    Sister Keehan, in your testimony I heard that you wanted or 
you read that you wanted a floor or a stop loss. I don't recall 
the statement of a delay. That obviously would have an impact 
in which we don't impose it in the timeframe that was indicated 
and that we buy some time or we stretch it out.
    Sister Keehan. That was the opening sentence, Mr. Chairman.
    Chairman Thomas. I apologize, then.
    Sister Keehan. It should reverse its decisions to cut 
outpatient payments. That is, until it can get to--AHA has been 
supportive of a new method of payment, but even Med-Pac and 
everybody today has said how terrible the data is. You don't go 
to a new method of payment with such flawed data, and everybody 
admits it. We are saying hold it until you get good data.
    Chairman Thomas. The idea that it has to be a dollar amount 
may be difficult in certain instances. Your best chance is to 
give us as many specific items so we can kind of pick and 
choose.
    Ms. Bataillon, you did that, and I know that you emphasize, 
because it is a fairly large sword hanging over your head, the 
15 percent cut. But that is not scheduled to go in until 
October 1, 2000. That is, for us, a fiscal year away.
    You suggested a number of specifics. I am going to be 
looking at those, things such as we know there is an enormous 
disparity between States that get high payments and low 
payments. We have created a kind of a blend structure that will 
move to a national average.
    I think it would be beneficial, because you are one of 
those areas that have a low utilization, that you can, in fact, 
move to the national average immediately, rather than waiting 
for the phase-in.
    Obviously, those above the national average are going to 
want as long a glide slope as possible, but it seems to me 
that, for the dollar amounts and to get assistance where it is 
most needed, we ought to be able to allow those that are below 
the national average to move to the national average. Those are 
the kinds of things that we can do.
    Ms. Swigert, the idea of reopening, creating the three 
caps, makes some sense. I know my colleague from Maryland and 
my colleague from Louisiana are talking about a diagnosis-
related payment structure. We may, in the time we are dealing 
with it, instead of trying to create that structure, we might 
perhaps at least at this stage create an outlier for a 
percentage of the really high costs, whatever they may be, and 
rather than pinning them in particular categories, getting 
those out from under the cap, where they are relatively few and 
very expensive, and then take another look at it.
    As I had said earlier, and I know you folks have been kind 
enough to stay here all day, this is going to be something we 
are going to be doing periodically. It is especially difficult 
because HCFA, in its commitment to all these measuring tools, 
as soon as the law was passed, turned around and said, we 
cannot produce them in the timeframe that we need them.
    We plugged some numbers in. The $1,500 cap was an ASLHA 
number. Combining the cap was arbitrary. We were trying to get 
a handle on it. That may work for 6 or 9 months, certainly not 
for 2 or 3 years.
    So as you present information, go back over your testimony, 
talk to your principals, I would say that if you have a list of 
specific doables, and you believe them to be doable, fairly 
specific, you have a better chance of getting into the package 
that makes adjustments relatively quickly, rather than talking 
about long-term programs that will redirect the Balanced Budget 
Act. That will occur over time as the data comes in, but I will 
repeat myself, the more specific, the more easily we can make 
the change, the better chance you have.
    Obviously, you want to do some money adjustments. Those can 
be in there, but the dollar amount that we have, just look 
across the dais here in terms of the broad-based interests that 
you represent and the dollar amounts that we have available.
    That is why at the beginning of the hearing I said we 
needed to deal with real costs, where they need to go, and 
short time lines. It doesn't do any good for us to offer you 
some relief in 2004 if you are not going to be around. And, 
frankly, Ms. Bataillon, given the history of the VNA, your 
willingness to provide care for those who otherwise would not 
get it has a significant impact on me when your poll shows that 
people who are there because their heart and souls are there 
are not going to be able to continue.
    We need to make some immediate fixes and then pick up our 
heads and talk about where we need to go over the next several 
years, and we will walk ourselves through this adjustment 
period. There is no question that the regs do not reflect the 
acuity that we need. You have heard the testimony. HCFA said it 
cannot adjust, we cannot create new regs, but we are going to 
work on identifying the acuity areas so we can get money in 
those areas that most appropriately need it, so that patients 
do not get turned away or get denied needed coverage.
    But it is not especially helpful if the immediate response 
is, these are the resource utilization groups we want 
increased, and all of them are rehab. That does not necessarily 
reflect the acuity that we are looking for.
    You need to understand, we have a relatively short time 
line. The more specificity you give me, the more choices I have 
available, the better the opportunity we can provide you with 
immediate fixes to get us through this period so that HCFA 
computers are up and running again and that we are getting data 
coming in so we can make additional adjustments.
    This is an ongoing process which, hopefully, continues to 
lead upward, upward in terms of better programs, a little more 
money, better information and better utilization of taxpayers 
dollars.
    I want to thank you very much for your willingness to wait 
through the day and to provide us with excellent testimony, but 
as much specificity as you can give us would be much 
appreciated.
    Does the gentleman from Maryland wish to inquire?
    Mr. Cardin. Let me thank the panel for their testimony and 
for their patience.
    The issues that you have raised we have been questioning 
during the course of this hearing. I agree with the chairman. I 
hope we will be able to come up with some solutions during this 
session.
    Sister Keehan raised an issue I want to underscore, 
graduate medical education. We have not had too much discussion 
about that during this hearing. I would just remind the 
chairman that I do have a bill in on graduate medical education 
that not only deals with the problems our academic centers have 
but we give the chairman about $6 billion over 5 years that he 
could use if he needed some additional revenue.
    I also like to make--he asked for some specific 
suggestions. I thought we should put that one on the table.
    Thank you all again for your testimony.
    Chairman Thomas. I would tell the gentleman who represents 
Johns Hopkins----
    Mr. Cardin.  The University of Maryland, also.
    Chairman Thomas [continuing]. And the University of 
Maryland that the system that has historically sustained 
graduate medical education in this country simply on the backs 
of the hospitals, and especially the Medicare payments, is a 
system that cannot be sustained. You have been very creative in 
looking for additional ways to fund it. Unfortunately, some of 
those who are directly representative of those institutions 
have only recently begun to understand that they have to come 
forward, just as these individuals have, with very specific, 
programmatic changes. We need the doable and not the desirable. 
Hopefully, what you have given us is primarily doable and moves 
us in the direction of the desirable.
    Thank you very much. The hearing stands adjourned.
    [Whereupon, at 3:05 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

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 (HR 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 Ways and Means Subcommittee 
on Health is reviewing how this significant law is impacting important 
programs.

                               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.
    Following are recent data on how the BBA has affected family 
medicine residency programs. The information was obtained by the 
Academy and the Organizations of Academic Family Medicine.
     The BBA '97 is causing family medicine residency programs 
to reduce significantly their number of residents for the first time, 
and to force an unusually high number of programs to close.
    (According to the survey, 10% of all family medicine residency 
programs have been asked to reduce their number of residents due to the 
BBA, while 23% have been informed it is likely they will have to cut 
back. This is the first year that programs have been forced to reduce 
their number of residents; in 1990, there were 380 programs, a figure 
that increased to 470 in 1998. In addition, at least five programs are 
expected to close; the number is typically one or two per year. As a 
result, the BBA has had a serious impact on family medicine residency 
programs.)
     A major purpose of the BBA was to encourage the growth of 
rural training programs. Recent data indicates that family medicine 
rural training ``tracks,'' programs that require residents to spend one 
year in an urban facility and two years in a rural area, have an 
exceptional retention rate: 76% of their residents remain in rural 
areas.
    (According to the survey, 29 of the nation's 474 family medicine 
training programs (1999 figure) have established rural training tracks. 
Remarkably, every graduate of one-half of the reporting programs was 
practicing in a rural area, a 100% retention rate. Overall, 76% of the 
graduated residents were serving rural communities. As a result, these 
data indicate the success of these family medicine training programs, 
programs that should be expanded and continued in any BBA ``fix'' 
legislation.)
    In addition, other 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.
     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.

                             Recommendation

    Following are the Academy's four recommendations for solving these 
problems. These provisions are included in HR 1222.

Supporting Residency Training in Ambulatory Sites

    HR 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. This provision would halt the reduction in numbers in 
family medicine residencies and also stop the closure of these 
programs.
    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

    HR 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

    HR 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

    HR 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.) As 
referenced above, these programs have 76% retention rates.
    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.

                                

Statement of David S. Holtzman, Esq., Director of Government Affairs, 
American Association of Diabetes Educators, Chicago, IL

    Dear Mr. Chairman and Honorable Members of the Subcommittee: On 
behalf of the members of the American Association of Diabetes 
Educators, we appreciate the opportunity to share with you our concerns 
regarding implementation of the ``Expanded Coverage for Outpatient 
Diabetes Self-Management Training Services.'' In our view, the promise 
of substantial expansion of Medicare beneficiary access to outpatient 
diabetes education training services and the savings to Medicare that 
would result from reduced long term expenditures for medical care and 
hospitalizations have gone unfulfilled. Opportunities exist for 
legislative action by Congress as well as action by the Administration.
    The AADE is a professional association comprised of over 11,000 
health care professionals nationwide from a variety of disciplines who 
provide direct patient care to people with diabetes in a variety of 
settings.
    AADE was proud to play a leading role in the development of the 
landmark legislation directing the Health Care Financing Administration 
to provide expanded benefits for outpatient diabetes self-management 
training services through the Medicare program. This comprehensive 
improvement in access to diabetes self-management education could 
provide millions of dollars in long-term savings for Medicare and other 
federal health programs by providing people with diabetes the means and 
the knowledge to stay healthy and avoid medical complications.
    A General Accounting Office report found that at least 1 in 10 
Medicare beneficiaries is diagnosed with diabetes and that it is that 
up to 25 percent of all Medicare costs go to treat diabetes or its 
complications. [Medicare: Most Beneficiaries With Diabetes Do Not 
Receive Recommended Monitoring Services. GAO/HEHS-97-48, March 1997].
    Studies conducted in this country and abroad have shown that if 
people with diabetes manage their disease through keeping their blood 
glucose levels within acceptable ranges it can significantly reduce 
healthcare costs. People with diabetes establish good control over 
their diabetes by learning how to monitor their blood glucose levels 
and to lower or maintain good control through a combination of behavior 
modification, learning the principals of good nutrition, and often 
medication. People who establish good control over their diabetes can 
largely avoid the expensive hospitalizations that can result from 
uncontrolled diabetes and the life threatening complications that 
result if the disease is not well controlled.
    However, the expected savings to the Medicare program have not been 
realized because the road to implementation of the expanded benefits 
for the diabetes education benefit has largely gone unfulfilled. HCFA 
has largely failed to implement the benefit in a timely or coordinated 
manner. The BBA directed HCFA to implement the expansion of coverage 
for outpatient diabetes education and training services as of July 1, 
1998.
    Earlier this year the agency proposed rulemaking attempting to 
implement the expanded benefit. [Outpatient diabetes self-management 
training services; expanded coverage. Federal Register, Vol. 64, No. 
28, Feb.11, 1999 6827-6852] The proposal was highly controversial and 
met with almost universal condemnation by providers and patient groups 
in the diabetes community.
    The provisions of the proposed rule were widely criticized as 
establishing excessively restrictive eligibility qualifications on 
which seniors with diabetes could receive self-management education 
along with unrealistic limits on the type of services and the providers 
to be deemed qualified by HCFA.
    AADE is extremely concerned that HCFA's proposal to establish 
onerous requirements for HCFA-approved providers will dramatically 
reduce the number of diabetes education programs that are eligible to 
provide services to Medicare beneficiaries and severely limit access to 
diabetes education services. HCFA estimates that some 750 ``approved 
entities'' will be authorized to provide outpatient self-management 
training services once the final rule is in place. This is wholly 
inadequate. Far more diabetes educators will need to participate as 
Medicare providers in order to meet the goal of the legislation.
    The proposed limits on program length and format of the diabetes 
education also do not provide adequate flexibility to enable Medicare 
beneficiaries with diabetes to receive the full benefit of this 
program. HCFA's decision to set the maximum lifetime benefit at 10 
hours with a potential of one additional hour per year upon physician's 
order is inadequate. And, except in exceptional circumstances all 
patient education must be offered in a group setting. The HCFA proposed 
patient eligibility requirements for diabetes education fail to 
recognize that diabetes is a disease that requires constant monitoring 
and frequent alterations to a patient's treatment and education plan.
    Finally, the standards for diabetes education should be formed with 
the involvement of the diabetes community so that the means used to 
assure program quality does not become a barrier to access. HCFA's 
proposal would have the agency be the final arbiter of national 
standards that are developed by the leading organizations representing 
patients and providers in the diabetes community.
    This controversial HCFA proposal generated a firestorm of criticism 
including over 1350 comments to the agency during the proposal's 60 day 
review period letter. Additionally, a letter signed by 117 members of 
this House urged HCFA to make real and substantive changes to the 
agency proposal consistent with the concerns raised by AADE and other 
members of the diabetes community.
    In the absence of formal HCFA rulemaking determining the provisions 
and procedures of the new diabetes benefit, the agency has put into 
place national coverage policies to guide intermediaries and carriers 
who process claims submitted by patients and service providers for 
outpatient services under Part B of the Medicare Program. These 
``temporary'' policies have been in effect for over 15 months.
    The national coverage policies put into place are substantially 
similar to the plan subsequently proposed by HCFA in its February 1999 
proposal. As a result the intended expansion of access to quality 
diabetes self-management education has been stymied because prospective 
providers cannot meet HCFA's onerous requirements. Further, existing 
providers are threatened because they too will not be able to meet the 
burdensome standards proposed by the agency.
    The end result is that many Medicare beneficiaries have been 
blocked from access to the needed diabetes education services that 
Congress identified as being crucial in reducing the costly 
expenditures for diabetes and related complications because HCFA's 
policies have prevented qualified providers from participating in the 
Medicare program.
    Along with the challenges created by the Administration in 
implementation of the Expanded Coverage for Outpatient Diabetes Self-
Management Training Services, the text of the authorizing legislation 
has created an obstacle for diabetes educators seeking to provide 
services to Medicare beneficiaries, effectively preventing the 
providers uniquely qualified to provide diabetes education services 
from participating in the Medicare program. We urge the Congress to 
pass legislation which would permit Certified Diabetes Educators to be 
eligible as providers of diabetes self-management education and 
training services to Medicare beneficiaries.
    Section 4105 of the BBA expanded Medicare, Part ``B'' to include 
coverage for Diabetes Outpatient Self-Management Training Services 
furnished by a Certified Provider in an outpatient setting; and, by an 
individual or entity meeting the quality standards established by the 
Secretary of Health and Human Services.
    Section 4105 defines a Certified Provider to be a physician, or an 
individual or entity that in addition to providing diabetes outpatient 
self-management training services, provides other items or services 
payable under the Medicare program. However, very few diabetes 
educators provide any other service to Medicare. This definition of 
Certified Provider has effectively prevented diabetes educators from 
expanding their practices into facilities outside the hospital setting.
    The goal of the BBA was to encourage vital and lifesaving diabetes 
education services to be available to Medicare beneficiaries in 
delivery systems beyond the walls of the hospital. The tragedy is that 
the same educator who is providing the services to patients inside the 
hospital is prevented from participating in the Medicare program when 
moving the practice setting into the physician's office. While the BBA 
permits individuals and entities without any prior connection or 
experience treating people with diabetes to be reimbursed the 
healthcare professionals with the most expertise cannot be reimbursed.
    Including CDEs as a Certified Provider broadens access for Medicare 
beneficiaries to receive diabetes outpatient self-management training 
services through health professionals with demonstrated expertise to 
deliver quality diabetes education services. The health professional 
holding the CDE credential has met specific and rigorous eligibility 
criteria, including academic preparation, practice experience and 
passage of a written examination. There are approximately 10,500 CDEs 
in the United States, distributed throughout every state. As a group, 
CDEs are comprised of health professionals trained in many disciplines 
including registered nurses, registered dietitians, registered 
pharmacists and physicians. Recertification of the credential is 
required every 5 years. No other provider group, individual or entity 
currently recognized as a Certified Provider meets this standard.
    Our members respectfully urge the Committee to impress upon the 
Administration the need for swift and decisive action by HCFA to 
implement the Expanded Coverage for Outpatient Diabetes Self-Management 
Training Services consistent with the recommendations made by this 
organization and the other organizations within the diabetes community. 
Further, we urgently request that Congress pass corrective legislation 
to amend section 4105 of the BBA to permit Certified Diabetes Educators 
to participate as providers in the Medicare program.
    We thank Chairman Thomas and the members of the Subcommittee for 
their leadership and support of quality diabetes care. We look forward 
to working closely with the members and their staff in finding 
solutions to the serious challenges that face the Medicare Program.

                                


Statement of Len Fishman, President, American Association of Homes and 
Services for the Aging

    The American Association of Homes and Services for the 
Aging (AAHSA) is pleased to present written testimony to the 
House Ways and Means Health Subcommittee on the revisions that 
must be made in the 1997 Balanced Budget Act's provisions that 
apply to long-term care providers. As members of Congress are 
realizing, deep cuts in Medicare funding for skilled nursing 
facilities have had unintended consequences that are severely 
affecting vulnerable Americans residing in our nation's skilled 
nursing facilities. We welcome the opportunity to provide input 
and comments to the Subcommittee about how we can better serve 
the aging population.
    AAHSA is a national non-profit organization representing 
more than 5,300 not-for-profit nursing homes, continuing care 
retirement communities, assisted living and senior housing 
facilities, and community service organizations. More than half 
of AAHSA's members are religiously sponsored and all have a 
mission to provide quality care to those in need. Every day 
AAHSA members serve one million older persons across the 
country.
    The Balanced Budget Act of 1997 was intended to rein in the 
growth of Medicare expenditures on post-acute care by 
encouraging providers to become more efficient. However, the 
ways in which the new payment systems have been implemented 
have had unintended consequences for Medicare beneficiaries 
receiving care from skilled nursing facilities and home health 
agencies.

                       Skilled Nursing Facilities

    In 1997, the Balanced Budget Act was expected to save $9.5 billion 
over five years from Medicare funding of skilled nursing facilities by 
changing the payment system from a cost-based reimbursement to a 
prospective payment system that reimburses for care based on residents' 
needs. This new system reduced Medicare spending on skilled nursing 
facilities by 17 percent. The prospective payment system for skilled 
nursing facilities provided payment rates for the average cost of 
providing care to patients based on defined Resource Utilization Groups 
(RUG-IIIs). The system that went into effect July 1, 1998 is being 
phased into national rates over four years. Under prospective payment 
system rates, skilled nursing facilities are reimbursed for the bundle 
of all Medicare Part A and Part B services provided to residents 
covered under a Part A stay. This forces the skilled nursing facility 
to act as a prudent buyer of services and to provide cost effective 
care. The efficiency encouraged by the prospective payment system was 
expected to account for the 17 percent reduction in funds.
    In developing the prospective payment rates for the RUG 
classifications, non-therapy ancillary services such as prescription 
drugs, ventilator care, wound care and prosthetics represented 
approximately 43 percent of the nursing component. Whereas the nursing 
component costs were developed with staffing time measurements within 
the RUG-III classification system, non-therapy ancillary costs were 
lumped into the RUG-IIIs without regard to the type, amount, and cost 
of the services required and provided to patients within each grouping. 
HFCA has a contract for research to modify the RUG-III classification 
of non-therapy ancillary costs. However, the research is not expected 
to be completed until early 2000 for changes to be in effect by October 
2000.
    AAHSA does not oppose the prospective payment system, because we 
recognize the need to control the growth of Medicare costs. However, 
the RUG-III payment rates that HCFA developed do not accurately reflect 
some important costs involved in providing essential care to nursing 
facility residents. At the time the Balanced Budget Act was considered, 
Congress recognized that payment rates must be sufficient to meet the 
needs of nursing facility residents with complex conditions. The 
conference report on the Balanced Budget Act stated, ``It is the intent 
of the Conferees that the Secretary develop case mix adjusters that 
reflect the needs of such patients,'' (House Report 105-217, page 758). 
The RUG-III payment rates that are now in effect do not meet this 
criterion for medically-complex residents.
    As not-for-profit providers, AAHSA members are driven primarily by 
the goal of fulfilling their mission of providing high-quality medical 
care to their residents. Furthermore, nursing facilities, unlike all 
other health care providers, are subject to federal quality standards 
under the Omnibus Budget Reconciliation Act of 1987, which requires 
skilled nursing facilities to maintain every resident at his or her 
highest practicable level of functioning. This requirement limits the 
degree to which skilled nursing facilities can achieve efficiencies by 
cutting costs.
    Many AAHSA members now are in a difficult position. On the one 
hand, their mission and legal obligation is to provide as much care as 
is necessary to achieve and maintain a resident's highest level of 
functioning. On the other hand, there is a large discrepancy between 
the per diem rates that Medicare pays and the actual cost of caring for 
medically-complex residents. While AAHSA members do not have to show a 
profit, there is a limit to the amount of losses that they can absorb. 
Although the prospective payment system has been in effect for just 
over a year, we are hearing increasingly from skilled nursing 
facilities that have had to dip into endowments or step up charitable 
fundraising in order to subsidize the care of Medicare residents with 
complex needs. These funding sources generally have been reserved for 
other needy residents who have exhausted their personal financial 
resources, and to supplement reimbursements under the Medicaid program, 
which also does not pay its fair share of the cost of care. Having to 
use charitable funds to supplement inadequate Medicare reimbursement 
puts a severe strain on nursing facilities' ability to serve all of 
their residents.
    Because of the flaws in the way the RUG-III categories were 
designed, Medicare spending on skilled nursing care is falling below 
the levels that facilities can absorb by becoming more efficient. In 
fact, it appears that the way in which the prospective payment system 
has been implemented will cut the growth of Medicare spending far more 
than the $9.5 billion that originally was projected. Although the 
numbers are still being reviewed as to whether more money than expected 
have been removed from skilled nursing facility services, the fact 
remains that vulnerable residents in need of quality skilled care in 
nursing facilities are being hurt by the unintended consequences of the 
budget cuts.
    In addition to lower funding than is needed to provide quality 
care, the distribution of funds is also inequitable. The prospective 
payment system's payment rates according to RUG-III are averages. 
Individual residents of a skilled nursing facility rarely consume the 
average cost of nursing, therapy and non-therapy ancillary services. 
Some require less, others slightly more, which averages out. However, a 
few residents require substantially more care and services, and thus 
significantly higher costs, than ever expected for the average 
resident. Most of the excessive costs are for non-therapy ancillary 
services. Examples of medically complex patients requiring 
extraordinarily expensive non-therapy ancillary costs include the 
following:
     In Michigan, a skilled nursing facility provided over 
$80,000 in intravenous medications to a resident with cancer who was in 
the facility for 27 days. Of that amount, Medicare paid less than 
$10,000.
     A skilled nursing facility that treats residents with AIDS 
provides each of them with an extensive battery of medications whose 
daily cost exceeds $450; whereas the Medicare payment is less than $200 
per day for each resident.
     A skilled nursing facility in rural Wisconsin had to close 
down its ventilator care unit because Medicare reimbursement fell to 
half of the actual cost of providing the services. The facility could 
not refuse to provide the care just to Medicare patients, since that 
would have constituted illegal discrimination under federal law, so the 
facility was forced to stop providing ventilator care to anyone. This 
facility had been the only provider of ventilator care in a large 
geographic area that covered several counties and portions of three 
states. As a result, many patients who were ready to leave hospitals in 
the vicinity but who needed ventilator care had to remain in the 
hospital because they had no other access to the care they needed.
     After providing wound care at a cost of over $200 a day 
for a resident who had had an amputation, a skilled nursing facility 
provided him with a prosthetic device costing over $9,500 so that he 
could maintain the greatest degree of independence possible. Medicare 
reimbursed his care at less than $200 per day.
     A facility admitting a resident who needs renal dialysis 3 
to 4 times a week will incur ambulance costs for each trip and will 
receive only $145 per day.
    As indicated by these examples, the new reimbursement system 
imposes large shortfalls on skilled nursing facilities that serve 
patients needing expensive non-therapy ancillary services. Most 
facilities cannot absorb the large losses that the new reimbursement 
system imposes on an indefinite basis.

Recommendations

    Restore a limited amount of Medicare funding to skilled 
nursing facilities: As noted above, HCFA's implementation of 
the Balanced Budget Act is resulting in far greater spending 
cuts in skilled nursing than were projected when the law 
originally was passed. Excessive cuts in skilled nursing 
facility reimbursement should be mitigated by eliminating the 
minus one percent reduction in the market basket adjustment of 
the base year for the fiscal years after 1995.
    Add limited amounts of reimbursement, on a temporary basis, 
to the RUG III categories that represent medically-complex 
residents: For the most part, the reimbursement rates under the 
prospective payment system roughly equate to the actual cost of 
providing care, and modest shortfalls average out with 
correspondingly modest higher payments. In some RUG III 
categories, however, inadequate accounting for non-therapy 
ancillary costs has led to a severe discrepancy between 
reimbursement rates and the actual costs of care. These 
categories need a temporary adjustment for the next several 
months until HCFA's current research is completed and the 
agency is able to make a permanent revision in the rates to 
make a more appropriate allowance for non-therapy ancillary 
costs.
    Based on AAHSA's analysis of SNF PPS claims, medically 
complex residents are classified into a variety of RUG-III 
categories. All the residents classified into the extensive 
services and special care RUG-III categories are medically 
complex with very high non-therapy ancillary cost per day. This 
is supported by a study conducted by Abt and Associates that 
was funded by HCFA. The Health and Human Services Office of 
Inspector General recently reported that hospital patients in 
the extensive services and special care categories had 
difficulty gaining placement in skilled nursing facilities. In 
addition, medically complex residents who receive therapy often 
are classified into one of the rehabilitation RUG-III 
categories. According to AAHSA's research, most residents in 
the medium and high rehabilitation RUG-IIIs have non-therapy 
ancillary costs per day that exceed the amount reimbursed. The 
RUG-III groups deserving limited add-ons to the PPS rates 
include: SE3, SE2, SSC, SSB, SSA, RMC, RMB, RHC, RHB, RVC, RVB, 
RUB.
    Carve extraordinarily expensive services out of the 
prospective payment system: The majority of services that are 
extraordinarily costly, beyond the ability of a skilled nursing 
facility to average out under the prospective payment system, 
fall into three areas: infusion drugs, especially those used 
for chemotherapy; custom-fit, lower-limb prosthetics; and 
ambulance transportation for residents needing kidney dialysis. 
While the prospective payment system averages the cost of these 
services among all skilled nursing facilities, the individual 
facility that provides these services experiences catastrophic 
costs that the PPS rates based on average reimbursement cannot 
possibly cover. These services represent a small percentage of 
all skilled nursing care, but their costs are so high that they 
can adversely impact an individual facility or cause severe 
access problems to Medicare beneficiaries requiring these 
services.
    Include the Part B add-on in the facility-specific rate for 
facilities in states that participated in the case-mix 
demonstration: Under the Balanced Budget Act, Congress 
attempted to establish an equitable transition period for 
facilities in states that took part in the Multistate Nursing 
Home Case-Mix and Quality Demonstration project. During the 
demonstration, Medicare Part A residents received ancillary 
services billed to Medicare Part B that should have been 
reflected in the facility-specific rate under PPS. However, 
HCFA has interpreted the law to exclude these Part B costs from 
the facility-specific rate. As these cost are bundled into the 
PPS rates, excluding the Part B add-on from the facility 
specific rates means reimbursements that do not cover the cost 
of services for facilities in the demonstration states. In 
evaluating the comments that it received on various aspects of 
the prospective payment system, HCFA noted that, ``a Part B 
add-on to the facility-specific rate for providers 
participating in the NHCMQD in 1997 could well be an 
appropriate payment policy in light of the historical 
circumstances.'' HCFA has concluded, however, that the specific 
language of the BBA precludes the agency from implementing a 
reasonable treatment of Part B costs in the transition formula 
for facilities in the demonstration states. Congress must 
correct this inequity by including the Part-B add-on in the 
facility-specific rate for these nursing facilities.

                Skilled nursing facilities--therapy caps

    Effective January 1, 1999, the Balanced Budget Act limits Medicare 
beneficiaries to an annual beneficiary cap of $1,500 for physical 
therapy which includes speech-language pathology and a separate $1,500 
cap for occupational therapy. The only exception is unlimited 
rehabilitation services from an hospital outpatient facility.
    Beneficiaries living in the community have the option of switching 
from an independent therapist to a hospital outpatient facility. . 
Residents of a skilled nursing facility, on the other hand, may not 
receive therapy in any other setting or by another provider other than 
the skilled nursing facility. The therapy cap is a restriction based on 
where the Medicare beneficiary resides and receives rehabilitation 
services, and it therefore discriminates against residents of skilled 
nursing facilities.
    Medicare beneficiaries in skilled nursing facilities require 
rehabilitative services to restore and maintain functioning that might 
enable a return to the community or enhanced quality of life. Residents 
of a skilled nursing facility are limited as to where they may receive 
therapy by the very nature that they required placement in a skilled 
nursing facility. The Part B therapy caps place unfair and unrealistic 
limitations on services available to these Medicare beneficiaries. 
Nursing home residents often have multiple co-morbidities or multiple 
episodes that require more therapy than the cap allows.
    The therapy caps have imposed severe reimbursement shortfalls on 
nursing facilities that compound the problems resulting from the 
prospective payment system. Federal nursing home quality standards 
mandate that nursing facilities provide whatever therapies are 
medically necessary in order for residents to regain and maintain their 
highest practicable level of functioning. Nursing facilities therefore 
are forced to absorb the cost of providing medically-necessary therapy 
services that exceed the Medicare caps.

Recommendation

    AAHSA strongly urges Congress to pass S. 472 and H.R. 1837, 
legislation to ease the therapy caps for Medicare beneficiaries in 
nursing facilities who encounter multiple episodes or who have multiple 
conditions requiring physical, speech, or occupational therapy.

                       Home Health Reimbursement

    The combined effects of the Balanced Budget Act of 1997, Operation 
Restore Trust, and the Omnibus Reconciliation and Appropriations Act of 
1998 have left Medicare-certified home health services in turmoil. 
Reimbursement levels were severely cut by the interim payment system; 
numerous federal agencies are strongly scrutinizing the industry for 
fraud; and adjustments made last year to the interim payment system 
provide little relief to home health agencies, especially those that 
care for the sickest beneficiaries.
    The home health interim payment system that was included in the 
1997 Balanced Budget Act significantly lowered the reimbursement level 
for home health agencies for cost reporting periods beginning on or 
after October 1, 1997. At the time of its passage, Congress and the 
Administration calculated that the interim payment system would cut $16 
billion in home health expenditures over a five year time period. This 
past March, the Congressional Budget Office (CBO) determined that the 
savings will approximate $79.1 billion over five years. It therefore 
appears that home health savings over the 5-year period will far exceed 
the $16 billion target.
    Reimbursement was cut so low by the interim payment system that 
small, rural and/or traditionally cost-efficient agencies (those 
already providing the fewest visits and services that were medically 
necessary, most often not-for-profits) are being forced out of 
business. Furthermore, many agencies' ability to care for sicker 
patients in need of complex services or multiple visits have been 
severely restricted. Adjustments made to the interim payment system in 
1998 were too late to prevent the demise of approximately 14 percent 
(1,261) of the nation's home health agencies, as recently reported by 
the GAO (GAO/HEHS-99-120). More will fail this year without additional 
relief. HCFA's OSCAR data through mid-August of this year indicates 
that 2,486 home health agencies have closed, up from 554 agency 
closures in June 1998.
    While AAHSA appreciates the finding of the aforementioned GAO 
report, Medicare Home Health Agencies: Closures Continue, With Little 
Evidence Beneficiary Access Is Impaired: ``home health agency closures 
due to implementation of the interim payment system are consistent with 
interim payment system incentives to control utilization,'' AAHSA 
remains concerned that the data analyzed for the study does not reflect 
the current status of home health access. Unfortunately, this study 
used beneficiary utilization data from the first quarter of 1998 and 
compared it to similar data in 1994 and 1996. While this was the best 
available data at the time, we urge Congress to request further study 
as more reliable, up-to-date data becomes available. We also must 
recommend that Congress continue to hear from beneficiaries and their 
caregivers as to how all of these changes are affecting their access to 
home health services, keeping in mind that consumers may have a limited 
understanding of the Medicare home health benefit's eligibility and 
coverage guidelines.
    AAHSA members surveyed earlier this spring reported various effects 
of the implementation of the Balanced Budget Act across the continuum 
of care. Our members who provide home health services are experiencing 
declines in admissions either because hospitals with captive home 
health agencies are not referring patients to other home health 
agencies, or due to fears associated with inappropriate referrals from 
doctors, an outgrowth of the intensified scrutiny from Operation 
Restore Trust. Moreover, AAHSA home health members report decreases in 
their home health reimbursements under the interim payment system 
ranging from 10 to 33 percent.
    The home health interim payment system must be adjusted so that the 
medically complex, sickest beneficiaries do not lose access to care. At 
the same time, HCFA must work with home health providers to assure that 
their upcoming introduction of a home health prospective payment system 
is fair to all stakeholders including the beneficiaries and the federal 
budget. We must assure quick implementation of a new home health 
prospective payment system that does not penalize cost-efficient home 
health agencies or that creates competitive disparities among agencies.

Recommendations

    While the interim payment system is in effect, Congress must amend 
it to assure access to beneficiaries by providing relief to home health 
providers. AAHSA urges Congress to:
     1. Eliminate the additional 15% cut due in Oct. 2000
     2. Establish an outlier for medically complex beneficiaries
     3. Provide IPS overpayment relief
     4. Revise per visit limits to at least 108% of the national median
    While there are at least eight bills under consideration in the 
House addressing the home health interim payment system, AAHSA urges 
you to consider bills introduced which address these items including 
Rep. Emerson's H.R. 2744, Reps. Riley and Etheridge's H.R. 2546, Reps. 
McGovern, Coburn and Weygand's H.R. 1917, and Rep. Watts' H.R. 2628.

                               Conclusion

    In the long run, the new Medicare prospective payment systems for 
skilled nursing facilities and home health providers will help to slow 
the growth of Medicare spending by making post-acute care more 
efficient. The ways in which these systems have initially been 
implemented, however, have resulted in larger spending reductions than 
Congress intended and in sizeable discrepancies between Medicare 
reimbursement rates and the actual cost of providing care. These 
discrepancies pose serious difficulties for not-for-profit skilled 
nursing facilities and home health agencies that already have been 
providing high quality care in an efficient manner.
    Not-for-profits cannot provide services indefinitely when the 
reimbursement they receive falls far short of the actual cost of 
providing the care and results in significant financial losses to the 
provider. Medicare beneficiaries with complex needs already are having 
some difficulty in accessing care; these access problems are likely to 
worsen if changes are not made in the reimbursement rates. Some funding 
must be restored to Medicare post-acute care, and adjustments in the 
prospective payment rates must be made in order to ensure the continued 
availability of post-acute care not only to Medicare beneficiaries, but 
to the wider community as well.
    Finally, Congress must keep in mind that when the government does 
not pay its share of the cost of care, beneficiaries of government 
programs will not be the only ones to have difficulty obtaining 
services or to receive inferior care. Health care providers cannot 
discriminate against Medicare beneficiaries in either the nature or 
quality of services they provide. As reimbursement rates fall too far 
below the costs of providing care, providers are likely to drop out of 
the Medicare program or discontinue certain services for any patients, 
no matter what kind of insurance coverage they have. Evidence of this 
is occurring within the home health industry. If health care providers 
are forced to cut corners to keep their costs at levels that will be 
reimbursed, these quality reductions will affect all of their patients, 
not just those covered by Medicare. Unless the problems that have 
arisen under the Balanced Budget Act are corrected, the quality and 
availability of health care services for all consumers, not just 
Medicare beneficiaries, will be affected.

                                

Statement of American Clinical Laboratory Association

    The American Clinical Laboratory Association (``ACLA'') is 
pleased to have the opportunity to submit this statement with 
regard to the Subcommittee's consideration of issues related to 
the Health Care Financing Administration's (``HCFA'') 
implementation of the Balanced Budget Act of 1997 (``BBA''). 
ACLA is an association of independent clinical laboratories 
located throughout the United States, whose members account for 
over half the laboratory services furnished by independent 
laboratories. All ACLA members are directly affected by certain 
provisions of the BBA pertaining to coverage and payment for 
clinical diagnostic laboratory tests. In our statement, we will 
review the impact of various BBA provisions on clinical 
laboratories, including a key provision that has yet to be 
implemented; discuss the current status of BBA reforms as they 
apply to laboratory services; and provide ACLA's view on 
possible action.
    The BBA introduced sweeping changes to the Medicare 
program, representing some of the most extensive reforms since 
the enactment of Medicare in 1965. The BBA also recognized the 
importance of greater uniformity in regulations and payment 
policies applicable to laboratories. Policy differences among 
local carriers had created significant problems for 
laboratories, especially those that operated in more than one 
state. Because of these differing policies, Medicare may pay 
for testing in one state but not in another. In fact, two 
physicians practicing across the hall from one another could 
each order the same laboratory tests and put down the same 
information on the requisition; yet, one carrier would pay for 
the testing, while another would not. In some cases, this would 
result in one patient having to pay for testing that would be 
covered by Medicare somewhere else. Obviously, this is grossly 
unfair to Medicare beneficiaries.
    The BBA adopted a two-part strategy to remedy this problem. 
First, it required HCFA to develop uniform coverage and 
administrative policies for laboratory tests using a negotiated 
rulemaking process. Second, it proposed to reduce the number of 
carriers processing clinical laboratory claims in order to 
facilitate more uniform claims processing. While HCFA has acted 
to implement the negotiated rulemaking provisions, it has taken 
no action on the regional carrier requirements.
    HCFA convened the negotiated rulemaking committee required 
by the BBA in July 1998. This Committee, which included 
representatives of the laboratory and medical community and 
HCFA, was charged with developing uniform coverage, 
administration and payment policies for laboratory tests 
payable under Part B of the Program. The BBA required that 
these national policies be ``designed to promote program 
integrity and national uniformity and simplify administrative 
requirements with respect to clinical laboratory tests.''
    In August 1999, the negotiated rulemaking committee 
completed work on a draft notice of proposed rulemaking. That 
document will include over 20 national policies covering about 
half the volume of clinical laboratory tests, which will help 
reduce the disparity in the treatment of clinical laboratory 
tests. The negotiated rulemaking committee's work is a major 
step toward the goal of increasing uniformity. ACLA applauds 
HCFA and the other members of the committee for their hard work 
in completing this process.
    It will, however, be at least two years before the 
rulemaking is final and its policies are effective. In the 
interim, differences in carrier policies will continue to 
present inequities in the treatment of laboratories and 
Medicare beneficiaries. Even after the policies are effective, 
however, local carriers will have wide discretion in the 
development of payment and claims processing policies, so long 
as their local requirements do not conflict with national 
coverage policies. Disparities in how claims for laboratory 
testing are processed and reimbursed are, therefore, likely to 
continue. For example, ACLA is aware of a situation where one 
laboratory lost a significant contract to another laboratory 
because the first laboratory was in a jurisdiction where the 
carrier required significant documentation for all laboratory 
testing. The carrier for the jurisdiction where the other 
laboratory was located required less documentation. Because the 
laboratory has to obtain the documentation from the physicians 
ordering the tests, the physicians decided to switch to the 
other laboratory to avoid these more onerous documentation 
requirements.
    It was to resolve these types of differences that Congress 
included the second provision in the BBA--the regional carrier 
provision. The provision, section 4554(a) of the BBA, requires 
HCFA to reduce the number of carriers processing laboratory 
claims from the current 34 to no more than five. One carrier in 
each region would be responsible for processing laboratory 
claims under Part B of the Medicare program. The purpose of 
this provision was to reduce the differences in the various 
rules applicable to laboratory claims. The BBA called for this 
provision to be in place by July 1, 1999.
    Despite the statutory requirement, HCFA has failed even to 
initiate the process of designating regional carriers. 
Moreover, it has not provided any explanation or justification 
for the delay. In 1998, the Administration included a proposal 
to repeal the regional carrier provision. Congress, however, 
rejected the Administration's proposal to repeal the regional 
carrier provision. In fact, the House Appropriations Committee 
report specifically directed HCFA to recognize the 
establishment of regional carriers as a priority. Nonetheless, 
no action has been taken on this provision.
    The administrative simplification provisions of the BBA 
were designed to work in tandem to achieve greater uniformity 
in the process of clinical laboratory testing--a goal that 
would ultimately redound to the benefit of laboratories, 
physicians and most of all beneficiaries. Such a result would 
reduce the costs of claims processing, increase predictability 
concerning what testing would be paid for, and eliminate 
unnecessary regulatory burdens. Congress implemented a two part 
strategy to achieve this aim--uniform policies through 
negotiated rulemaking and regional carriers. While HCFA has 
almost completed work on the first piece, it has yet to start 
on the second. ACLA strongly urges the Subcommittee to direct 
HCFA to implement the regional carrier provision.
    ACLA appreciates the opportunity to comment on these 
issues. We would be happy to work with the Subcommittee on 
helping resolve any of these issues.

                                


Statement of American College of Physicians-American Society of 
Internal Medicine

    The American College of Physicians-American Society of 
Internal Medicine (ACP-ASIM), representing over 115,000 
internal medicine physicians and medical students, appreciates 
the opportunity to comment on needed refinements to the 
Medicare provisions of the Balanced Budget Act of 1997 (P.L. 
105-33). Our membership includes practicing physicians, 
teaching physicians, residents, students, researchers, and 
administrators who are directly affected by provisions of the 
BBA. We are particularly concerned about provisions that 
undermine the financial viability of our nation's teaching 
hospitals, imperil the educational mission of teaching 
hospitals, threaten the provision of care to underserved 
populations, and jeopardize our nation's medical research 
enterprise. This statement addresses three areas impacted by 
the BBA: cuts in Medicare payments for the indirect costs of 
graduate medical education (IME), refinements in calculations 
of physician payments for Resource-Based Practice Expenses 
(RBPE), and the Sustainable Growth Rate (SGR) System for 
Medicare Part B.

         Indirect Graduate Medical Education Payment Reductions

    Under the BBA, Medicare adjustments for indirect medical education 
expenses (IME) are scheduled to be reduced from the 1997 level of 7.7% 
for every 10 percent increment in a hospital's resident-to-beds ratio 
to 7.0% in FY 1998; 6.5% in FY 1999, 6.0% in FY 2000, and 5.5% in 
FY2001 and thereafter. Medicare IME payments were designed to reimburse 
teaching programs for the added costs of supervision, caring for 
indigent patients, overhead, and other costs associated with an 
educational environment. Teaching hospitals often serve as providers of 
health care for inner-city populations that otherwise are underserved. 
They provide substantial amounts of uncompensated care for poor and 
indigent patients. Graduate medical education is the linchpin for these 
inner-city ``safety net'' hospitals, and they cannot survive if their 
educational programs are not adequately funded.
    The BBA reductions in Medicare IME payments to teaching hospitals 
were originally estimated to save $5.6 billion between 1998 and 2000. 
However, indications are that the cuts from the BBA are much greater 
than anticipated. The BBA was expected to reduce payments by $103 
billion over five years (1998-2002). However, two years into BBA's 
implementation, estimates now place its impact at $191.5 billion, 86 
percent more than originally anticipated. These excessive cuts will 
further jeopardize the survival of teaching hospitals and their 
programs of graduate medical education.
    Cutbacks in Medicare funding and the growth of managed care in both 
the public and private sectors threaten the viability of many teaching 
hospitals. A recent study of the impact of Medicare BBA reductions by 
the Lewin Group indicates that hospitals will lose an average of 4.4 
percent on Medicare charges by 2002. Without relief from the BBA cuts, 
70 percent of all hospitals will lose money on Medicare charges by 
2002. The typical teaching institution will lose $47 million in 
Medicare reimbursements between 1998 and 2002. Without change the 
scheduled BBA reductions will cut funding for the typical teaching 
hospital by $12.6 million in the year 2002 alone. Urban hospitals 
typically lost money on Medicare charges in 1999, and will lose 4.0 
percent in 2002. Rural hospitals began losing money on Medicare charges 
as early as 1996, and without modification of BBA will lose 7.1 percent 
in 2002. In this increasingly competitive environment, academic health 
centers face decreased payment for services, decreased volumes of 
clinical services, and loss of market share. Meanwhile, they continue 
to treat the most severely ill patients and care for the poor and the 
indigent.
    The BBA cuts also jeopardize our nation's medical research 
enterprise. In addition to caring for patients and educating the next 
generation of physicians, medical schools and teaching hospitals serve 
as the crucible for much of the nation's medical research. By combining 
research with medical education and clinical care, teaching hospitals 
help translate the promise of scientific discovery into better health 
and improved quality of life for all Americans. Medicare BBA cuts 
undermine the ability of teaching hospitals to perform this vital 
mission.
    The American College of Physicians-American Society of Internal 
Medicine urges the Subcommittee to stop further implementation of the 
BBA reductions in Medicare IME adjustments. Freeze the cuts at the 
current level of 6.5 percent. Without such action, further 
implementation of the BBA will result in reductions in IME payments of 
28.57 percent over four years, reducing the IME adjustment from 7.7 
percent in FY 1997 to 5.5 percent in FY 2001.
    Specific legislative relief is necessary for hospitals that provide 
a disproportionate share of care to the indigent. The BBA provides for 
a 5 percent reduction in disproportionate share adjustments (DSH) over 
five years. Since the law was enacted two years ago, Medicare DSH 
payments have already been reduced by 2 percent.
    Accordingly, ACP-ASIM supports ``The Graduate Medical /Education 
Payment Restoration Act of 1999 (HR 1785/S 1023) introduced by 
Representative Charles Rangel (D-NY) and Senator Daniel P. Moynihan (D-
NY), which would freeze the reductions in the IME adjustment at 6.5 
percent. The College also supports ``The Medicare Hospital Emergency 
Assistance Legislation (HEAL) Act (HR 2266) sponsored by 
Representatives Nita Lowey (D-NY) and Jack Quinn (R-NY), which would 
freeze Medicare DSH cuts at FY 1999 levels and stop further cuts in IME 
payments.
    We further recommend support of other legislation that would help 
restore crucial funding required by the nation's teaching hospitals, 
including ``The Hospital Outpatient Preservation Act'' (HR 2241/S 
1263), sponsored by Representative Mark Foley (R-FL) and Senator James 
Jeffords (R-VT) and ``The Managed Care Fair Payment Act of 1999'' (HR 
1103/S 1024). HR 2241 would establish a payment floor to limit losses 
for hospitals that incur large payment reductions under BBA. HR 1103 
provides that DSH payments for Medicare+Choice enrollees should go 
directly to eligible hospitals.

   Implementation of Resource-Based Practice Expenses (RBPEs) to the 
                    Medicare Physician Fee Schedule

    Section 4505(d)(1)(C) of the Balanced Budget Act of 1997 (BBA 97) 
requires the Health Care Financing Administration (HCFA) to develop a 
refinement process to be used during each of the four years of the 
transition period to full resource-based practice expenses (RBPEs). In 
the November 2, 1998 final rule, HCFA outlined the steps it is 
undertaking to resolve the outstanding general methodological issues. 
These steps include: the establishment of a mechanism to receive 
additional technical advice for dealing with these broad practice 
expense relative value unit (RVU) methodological issues; evaluation of 
any additional recommendations from the U.S. General Accounting Office, 
MedPAC, and the Practicing Physicians Advisory Council; and 
consultation with physicians' and other groups about these issues.
    ACP-ASIM is pleased that the refinement process is well underway 
and we believe that it is progressing reasonably well considering the 
complexity of the issue. HCFA has awarded a contract beginning in May 
1999 to obtain assistance in evaluating various aspects of its practice 
expense methodology. HCFA believes that the awarding of the 
methodological support contract and the establishment of the Practice 
Expense Advisory Committee (PEAC) as a subcommittee of the AMA Relative 
Value System Update Committee (RUC) represent important steps in its 
refinement process. The RUC/PEAC is a multi-specialty group, chaired by 
the AMA, which provides recommendations to HCFA on refinement of work 
and practice expense RVUs. HCFA has stated that it intends to rely on 
the RUC/PEAC for advice on refinement of the direct practice expense 
inputs during the congressionally-mandated four-year refinement period.
    At a meeting last week in Seattle, the RUC/PEAC established a 
process and ground rules for refinement of direct practice expense 
inputs. This will allow the RUC/PEAC to provide HCFA with 
recommendations for correcting any errors in the direct practice 
expense inputs as RBPEs are phased in over calendar years 2001 and 
2002. In the meantime, the comment period on HCFA's notice of proposed 
rulemaking on the calendar year 2000 physician fee schedule provides an 
opportunity for interested parties to make recommendations on code-
level direct practice expense RVUs for calendar year 2000.
    The contractor providing HCFA with technical assistance is 
preparing recommendations on complex issues that HCFA is likely to 
thoroughly evaluate before making decisions. Some of the activities 
that HCFA has requested that the contractor undertake are:
     Evaluation of the validity and reliability of American 
Medical Association (AMA) Socioeconomic Monitoring Survey (SMS) data 
for the specialty groups.
     Identification and evaluation of alternative and 
supplementary data sources from specialty and multi-specialty 
societies.
     The development of options for validating the Harvard and 
RUC physician procedure time data.
     The evaluation of the indirect cost allocation 
methodology.
     The development of options for the five-year review of 
practice expense RVUs.
    Some specialties have expressed concern that HCFA intends to edit 
out certain clinical staff costs for services provided in a health care 
facility other than a physician's office. HCFA has stated, however, 
that it cannot pay for such services because they represent duplicate 
payments for services already paid under Medicare Part A; are not 
typical practice expenses incurred by physicians; and represent costs 
that are not payable under Medicare rules and payment policies. ACP-
ASIM agrees that it would be inappropriate for HCFA to pay for such 
costs at this time, since the evidence to date does not support a 
conclusion that such costs are typical. However, the RUC/PEAC has 
agreed to consider data from specialty societies that could support the 
inclusion of such costs for selected services. We agree that such 
issues should be addressed by the RUC/PEAC refinement process.
    We recognize that some are recommending that HCFA delay for one 
year its decision to edit out clinical staff in facility settings until 
the RUC/PEAC examines this issue. ACP-ASIM disagrees. A delay would 
mean that, in the meantime, such costs would be included in the 
practice expense RVUs for calendar year 2000 even though the RUC/PEAC 
has not had the opportunity to examine the data to support their 
inclusion. In our view, resource based practice expenses require that 
adequate data be presented, as validated by a peer group like the RUC/
PEAC, to support the inclusion of certain costs in the practice expense 
RVUs before it is assumed that they should be included--not the other 
way around.
    Given that calendar year 2000 transition payments will be based 50% 
on RBPEs and 50% on historical charges, no specialty will be subjected 
to extreme reductions next year as a result of requiring them to first 
present their data to the RUC/PEAC before a decision is made on 
recommending to HCFA that such costs be included in the practice 
expense RVUs. Since the impact of HCFA's decision to edit out the 
clinical staff time for facility services is less than two percent, 
plus or minus, for most specialties when RBPEs are fully implemented in 
2002, the impact of editing out these costs will be a change in 
payments of only one percent for most specialties in calendar year 
2000.
    To summarize, ACP-ASIM believes that substantial progress has been 
made on refining the practice expense RVUs as mandated by the Balanced 
Budget Act of 1997:
     HCFA has proposed improvements in its methodology as part 
of its notice of proposed rulemaking on CY 2000 fee schedule payments. 
This notice provides an opportunity for interested parties to recommend 
specific corrections in code level practice expense RVUs for 
consideration for CY 2000 payments.
     The RUC/PEAC has agreed to a process to consider data from 
specialties to refine direct PE-RVUs during the transition to RBPEs. 
The RUC/PEAC process will allow for consideration of data on 
controversial issues such as HCFA's proposal to eliminate payment for 
clinical staff costs of services in the facility setting.
     The fact that payments in calendar year 2000 will be based 
50% on RBPEs and 50% on historical charges will ease any adverse impact 
on physicians who may be disadvantaged during the time that the RUC/
PEAC is considering data on the code-level practice expense 
refinements, including data on clinical staff costs in the facility 
setting.
     HCFA's contractor will provide recommendations for further 
improvement in HCFA's data and methodology.
    Consequently, ACP-ASIM strongly believes that there is no need for 
Congress to amend the Balanced Budget Act of 1997 to mandate a further 
delay in the transition to RBPEs, to limit the amount of payment 
changes that may occur in each year of the transition, or to in other 
ways modify the BBA 97 provisions relating to practice expenses.
    The Ways and Means Committee should also be aware that one 
provision of the BBA 97 relating to practice expenses is currently 
being adjudicated. A United States Magistrate Judge in Illinois filed a 
report on September 8, 1999 in favor of the federal government in a 
lawsuit challenging how the Health Care Financing Administration 
calculates resource-based practice expenses for physician services.
    The lawsuit, which was filed on behalf of a group of surgical and 
medical specialty societies, argued that HCFA violated the law by using 
1998 practice expense relative value units (RVUs) in determining 
Medicare practice expense payments in 1999, 2000, and 2001. ACP-ASIM 
and several other medical societies had filed a ``friend of the court'' 
(amicus) brief supporting HCFA's interpretation of the law.
    The issue at stake in the case is whether or not HCFA was correct 
in using the practice expense relative value units (RVUs) that were in 
effect in 1998 as the base year for calculating practice expense 
payments during the transition to resource based practice expenses. 
(During the transition, practice expense payments in calendar years 
1999, 2000, and 2001 are a blend of historical charges and resource 
based practice expenses. The percentages of resource-based PE-RVUs to 
be used was 25% in 1999, 50% in 2000, 75% in 2001, and 100% for 2002). 
The 1998 practice expense RVUs included a ``down payment'' for office 
visits, as mandated by the Balanced Budget Act of 1997, which raised 
the PE-RVUs for office visits but lowered them for several hundred 
procedures. Specifically, the 1998 PE-RVUs for certain services were 
reduced to 110% of their work RVUs for the service, and the money would 
be reallocated to raise the PE-RVUs for office visit procedures. The 
amount of this reallocation was limited to $390,000,000 in 1998. The 
magistrate concluded that HCFA's decision to apply the 1998 ``down 
payment'' for office visits for the subsequent transition years is a 
reasonable interpretation of the law.
    ACP-ASIM expects that a final decision on the lawsuit will be 
forthcoming soon. The decision hopefully will put an end to the 
disagreement over the meaning of the Balanced Budget Act of 1997 in 
regard to the ``down payment'' for office visits and the subsequent 
transition to RBPEs. We do not believe that it will be necessary for 
Congress to intervene in this issue at this time, given that a 
resolution may soon be forthcoming through the judicial process. Any 
effort to amend the BBA 97 provisions on the ``down payment'' and 
subsequent transition will open up Congress to a very divisive and 
unnecessary debate over issues that may be close to being settled in 
the courts.

        Sustainable Growth Rate (SGR) System for Medicare Part B

    ACP-ASIM urges Congress to fix Medicare's Sustainable Growth Rate 
(SGR) system to ensure that the 84 percent of beneficiaries enrolled in 
fee-for-service under Medicare continue to receive the access and 
benefits to which they are entitled. Enacted in BBA 97, the SGR 
establishes a target growth rate for Medicare spending on physician 
services, then annually adjusts payments up or down, depending upon 
whether actual spending is below or above the target.
    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 BBA 97 included measures 
to slow projected growth in these other benefits, the Congressional 
Budget Office continues to forecast much higher than average annual 
growth rates for other services than for physician services over the 
next decade.
    To address this disparity, the Medicare Payment Advisory Commission 
(MedPAC) recommended in its March 1999 Report to Congress improvements 
to the SGR. These improvements included:
     Correcting HCFA's projection errors and restoring the $3 
billion SGR shortfall due to these errors;
     Enacting all measures necessary to curtail volatility in 
payment rates and avoid steep future cuts;
     Increasing the SGR to allow for physician costs due to 
adoption of new technology; and
     Requiring HCFA and MedPAC to provide information and data 
on payment updates.
    ACP-ASIM has discussed the improvements described above with HCFA 
officials, who generally agreed with our concerns, but noted that they 
did not have the authority to fix the problems described above. 
Accordingly, ACP-ASIM asks that Congress make legislative changes to 
eliminate errors in the SGR system.
    In its November 2, 1998 Federal Register notice, HCFA indicated, 
``We do not believe that the Congress, in enacting the SGR, 
contemplated such significant variances between estimates made at 
different points in time.'' In the notice, HCFA also states that, ``In 
the long term, [conversion factor] updates could oscillate between the 
maximum increase and decrease adjustments. . .'' This means, in 
essence, that conversion factor updates could alternate between periods 
of inflation plus 3% and inflation minus 7%. Such dramatic swings would 
be highly disruptive to the predictability of physician reimbursement, 
and will be a particular hardship when the conversion factor is set at 
inflation minus 7%. This inherent instability in the SGR system is a 
serious problem, which must be addressed by Congress before large 
unintended payment cuts occur.
    The disparity between Medicare's rates and physicians' practice 
costs will only become much wider if not fixed now. This will not only 
make it difficult for physicians to cover the costs of advances in 
technology but make it harder to provide the state-of-the-art medical 
care Medicare beneficiaries need and deserve.

                     Changes Requiring Legislation

    The SGR formula has several other shortcomings that will require 
legislative correction. First, Congress should create an add-on to the 
SGR formula to allow for technological changes in medicine that 
increase the demand for physician services. As first envisioned by the 
Physician Payment Review Commission (PPRC), the idea of a target tied 
to GDP included a 1 to 2 percentage point add-on for changes in medical 
technology. Ever-improving diagnostic tools and surgical techniques 
have undoubtedly contributed to growth in utilization of physician 
services, and to the well-being of Medicare beneficiaries. 
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 medical care.
    Second, Congress should create an add-on to the SGR formula to 
account for the rising cost of ambulatory care practice with 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 length of stay and scaling back on staff. Some inpatient staff 
and service reductions are offset by increased costs and services in 
physician offices and other outpatient sites.
    Third, Congress should instruct the administration to periodically 
adjust the SGR to allow for changes over time in the characteristics of 
patients enrolling in Medicare+Choice plans compared to those remaining 
in the fee-for-service program. HCFA has stated that Medicare 
beneficiaries who enroll in managed care plans may be healtheir than 
those who stay in the fee-for-service program. If the trend is for 
people who are older and/or sicker to remain in the fee-for-service 
program, there should be an adjustment to the SGR to account for such 
differences in the beneficiary population. Absent such corrections, if 
fee-for-service payments are slashed relative to Medicare+Choice 
payments, the Medicare fee-for-service program may effectively 
dissolve, leaving beneficiaries without a viable alternative to managed 
care.
    Fourth, Congress should raise the lower limit on SGR updates to 
provide a more acceptable floor on payment updates. Assuming a Medicare 
Economic Index of 2%, the lower limit of inflation minus 7% would imply 
a 5% actual cut in the conversion factor in a single year. The Medicare 
update formulae for other (non-physician) providers does not expose 
them to the degree of payment reductions that physicians are likely to 
experience under the SGR. Medicare+Choice payments are guaranteed 
annual increases of 2%. For the hospital update for a year to be 
analogous to the lowest potential physician update, it would have to be 
set at market basket minus 7%--an unlikely scenario at best.
    Fifth, Congress should eliminate SGR projection errors by either 
giving the administration the authority to change projections as new 
Gross Domestic Product (GDP) data becomes available or by requiring the 
administration to update the SGR using actual GDP data.

                              Conclusions

Indirect Graduate Medical Education payment reductions

    ACP-ASIM believes that Congress should:
    1. Stop further implementation of the BBA reductions in 
Medicare IME adjustments, and freeze the cuts at the current 
level of 6.5 percent.
    2. Limit reductions in disproportionate share adjustments 
(DSH) to the 2 percent already implemented by 1999 and prevent 
further cuts.
    3. Redirect DSH payments for Medicare+Choice enrollees from 
managed care plans directly to eligible hospitals.
    4. Establish a payment floor to limit losses for hospitals 
that incur large payment reductions under BBA.

Resource-Based Practice Expense (RBPE) Relative Value Units 
(RVU)/Refinement Process of the Medicare Physician Fee Schedule

    ACP-ASIM believes that:
    1. The RBPE refinement process is well underway and is progressing 
reasonably well considering the complexity of the issue. The 
administration has the authority and capability to continue the 
refinement process and that there is no need for Congress to change the 
rules or delay implementation.
    2. The refinement process established by HCFA is reasonable and 
consistent with the provisions of the Balanced Budget Act of 1997.
    3. The administration should exclude all clinical staff time 
allotted to the use of clinical staff in the facility setting from the 
raw Clinical Practice Expense Expert Panel data. However, HCFA should 
consider future recommendations that may be forthcoming from the 
American Medical Association Relative Value System Update Committee/
Practice Expense Advisory Committee during the refinement process that:
     Show that it is a typical practice to employ clinical 
staff for the procedure codes in question and
     Document what types of services the clinical staff are 
providing. Any recommendations for inclusion of clinical staff in the 
facility setting must differentiate between physician-substitutive 
services (which should be addressed through the work relative value 
units, not the practice expense relative value units), general 
administrative costs (an indirect cost) or specialized clinical 
assistance that may represent a legitimate practice expense that should 
be paid by Medicare.
    4. The administration should not delay for one year its decision to 
edit out clinical staff time in the facility setting. A delay would be 
contrary to the idea of a resource-based system, as it would require 
HCFA to continue paying for costs that have not been validated through 
the refinement process.

Sustainable Growth Rate (SGR) Formula

    To improve the Sustainable Growth Rate Formula, Congress should:
    1. Create an add-on to the SGR formula to allow for technological 
changes in medicine that increase the demand for physician services.
    2. Create an add-on to the SGR formula to account for the rising 
cost of ambulatory care practice with the shift in care from hospital 
inpatient settings to outpatient sites.
    3. Instruct the administration to periodically adjust the SGR to 
allow for changes over time in the characteristics of patients 
enrolling in Medicare+Choice plans compared to those remaining in the 
fee-for-service program.
    4. Raise the lower limit on SGR updates to provide a more 
acceptable floor on payment updates.
    5. Eliminate SGR projection errors by either giving the 
administration the authority to change projections as new Gross 
Domestic Product (GDP) data becomes available or by requiring the 
administration to update the SGR using actual GDP data.
    ACP-ASIM appreciates the attention that the Subcommittee is giving 
to refining and correcting Medicare provisions included in the BBA and 
the opportunity to submit testimony. We are prepared to work with the 
Congress and the Administration to enact legislation that will help 
maintain the fiscal solvency of the Medicare program without 
drastically curtailing services to Medicare beneficiaries, jeopardizing 
our nation's medical education and research capability, or further 
undermining the viability of our teaching hospitals and academic 
medical centers.

                                

Statement of American Medical Group Association, Alexandria, VA

    The American Medical Group Association appreciates the opportunity 
to present written testimony for the record to the House Ways and Means 
Health Subcommittee on refinements that we believe need to be made to 
the Balanced Budget Act of 1997. The AMGA commends Chairman Bill Thomas 
and the Committee for holding a hearing on this important subject and 
appreciates your efforts to remedy the unintended consequences caused 
by the BBA.
    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 97) was the most significant 
reform of the Medicare program since its inception in 1965. The BBA 97 
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 
they 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 97, 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.
    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 97 limits payments for IME, interfering with 
teaching hospitals' ability to provide quality care to the poorest and 
sickest individuals. Under the BBA 97, Medicare adjustments for IME are 
scheduled to be reduced from the 1997 level of 7.7% to 5.5% in FY 2001. 
These excessive cuts will further jeopardize the financial viability of 
teaching hospitals to provide patient care to under-served populations 
and conduct medical research. 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 97 cuts.
     Repeal the patient transfer provision. Under the expanded 
transfer definition, the government pays less for shorter stay payments 
but does not increase payment for longer-stay patients. Payments for 
cases shorter than average stays help defray the costs of caring for 
patients with longer-than-average stays. AMGA supports legislation 
proposed by Senator Grassley (S. 37) and Rep. Jim Nussle (H.R. 405) 
which would repeal this provision.

         LFix the way Medicare pays Medicare+Choice plans by:
         LRequiring 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.
         LSpeed 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 the 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, imposes a volume cap on payment updates if Medicare 
payments exceed HCFA projections, and uses a methodologies that do not 
accurately recognize the costs of technology and treatments. 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 $900 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.

                   Physician Self Referral Amendments

    As you continue your examination of the BBA 97 in order to evaluate 
whether or not legislative changes are necessary, the AMGA would urge 
you to include language that would clarify the physician self-referral 
law (otherwise known as the Stark law) and bring it more in line with 
Congress' original intent. AMGA supports fully the intent behind the 
self-referral law--to prevent physicians from ordering unnecessary 
services in order to profit from the Medicare and Medicaid laws. 
However, the self-referral law has gone far beyond the original intent 
and it now interferes with the delivery of efficient, quality health 
care. The law's provisions are so vague and open to misinterpretation 
that is virtually impossible to conclusively determine whether certain 
ancillary service arrangement are or are not in violation of the self-
referral law. In addition, the ``compensation arrangement'' provision 
of the law precludes many business activities which are essential to 
the successful operation of multi-faceted, integrated health care 
organizations.
    Section 4314 of the Balanced Budget Act of 1997 requires that the 
Secretary of Health and Human Services issue written advisory opinions 
to outside parties concerning whether the referral of a Medicare 
patient by a physician for a certain designated service is prohibited 
under the physician self-referral law. While Congress' intent was to 
help physicians better understand the law, advisory opinions have not 
had the desired overall effect. Instead, AMGA believes that legislative 
changes to the law are necessary to correct the unintended consequences 
of the self-referral law. AMGA supports the H.R. 2651, legislation 
introduced by Congressman Bill Thomas. This legislation would remove 
the barriers to integration and innovation, while still maintaining the 
original intent of the law.

Medicare Reform

    AMGA commends President Clinton for taking 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 BBA 97, 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 BBA 97. 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 
among providers in price, marketplace innovation, a defined role for 
the government, and should adopt marketplace innovations. We believe 
that Medicare restructuring should incorporate the innovative and cost-
reducing delivery system reforms that have emerged in the private 
sector. Continuing to reduce provider reimbursements as a part of 
reform is not a viable option.
    The AMGA understands the budget constraints Congress is working 
with and has worked hard to put forward solutions that are realistic 
and reasonable. However, without some relief, medical groups will find 
it increasingly difficult to provide access to quality care to Medicare 
beneficiaries. It is crucial that Congress acts now to make the 
necessary adjustment to the Balanced Budget Act of 1997 so that medical 
groups can continue to provide Medicare beneficiaries the health care 
services they deserve and depend on. We look forward to working with 
the Committee on this very important issue.

                            Mayo Foundation--Rochester, Jacksonville, and Scottsdale
----------------------------------------------------------------------------------------------------------------
 BBA Reductions  (in millions of
            dollars)                 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          5.1         5.6         6.0         6.5        6.7        6.8       31.7
                      payments
                Transfer DRGs          0.6         2.5         2.5         2.5        2.5        2.5       12.6
    Outpatient PPS (assume 5%          0.3         0.7         0.7         0.7        0.7        0.7        3.5
                    reduction)
    Outpatient formula-driven          1.1         1.7         1.8         1.9        2.0        2.1        9.4
                  overpayments
     Eliminate IME payment on          3.4         3.8         3.6         3.6        3.8        4.1       19.0
                      outliers
      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          0.5         0.5         0.5         0.5        0.5        0.5        2.5
                        PPS0.5
Medicare Part B physician fee            -         3.0         6.0         9.0       12.0       12.0       42.0
                      schedule
  Total Reductions..............      18.3        35.6        45.5        54.9       60.4       63.0      259.3
----------------------------------------------------------------------------------------------------------------


                                      Henry Ford Health System--Detroit, MI
----------------------------------------------------------------------------------------------------------------
 BBA Reductions  (in millions of
             dollars)                  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             1.0          1.0          1.0          1.0          1.0          5.0
                         Factor
Physician Practice Expense RVUs              -          0.6          1.0          1.4          1.8          4.8
   Home Health Interim Payment             1.0            -            -            -            -          1.0
                         System
            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 Reductions...............         19.9         32.9         39.3         49.8         52.6       195.5+
----------------------------------------------------------------------------------------------------------------



                                          Lahey Clinic--Burlington, MA
----------------------------------------------------------------------------------------------------------------
   BBA Reductions  (in millions of
               dollars)                   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             -           -   1,000,000    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 RVU             -     300,000     700,000    1,100,000    1,500,000    3,600,000
  Total Reductions...................   3,654,581   6,371,203   8,995,178   11,213,511   11,647,043   41,881,516
----------------------------------------------------------------------------------------------------------------


                                

Statement of American Medical Rehabilitation Providers Association

    The American Medical Rehabilitation Providers Association 
(AMRPA) is pleased to submit testimony today on the Balanced 
Budget Act's (BBA) requirements relating to the development of 
a prospective payment system (PPS) for rehabilitation 
providers. AMRPA is a membership organization representing 360 
freestanding rehabilitation hospitals and rehabilitation units. 
This is about 33% of such facilities recognized by the Medicare 
program.

                             I. Background

    Rehabilitation hospitals and units provide medical care and various 
therapies to patients who, because of disease, injury, stroke or 
similar incidents, have impairments of their abilities to function, 
either physically or cognitively. Our goal is to help them regain the 
maximum level of functional capability and return them to their homes 
and independent living patterns. More than 80% of patients admitted to 
rehabilitation hospitals and units return to their homes, in spite of 
the fact that many have experienced severe disabilities. Because many 
of the conditions producing the need for rehabilitation are associated 
with aging, a significantly high percentage of patients in 
rehabilitation hospitals and units are covered by the Medicare program. 
In 1997, over 70% of admissions to such facilities were patients 
covered by fee-for-service Medicare. Accordingly, the policies of the 
Medicare program largely determine the availability and quality of 
rehabilitation services. And there is little room for error.
    Prior to enactment of the BBA, rehabilitation hospitals and 
rehabilitation units in general hospitals were paid on a cost-based 
system (TEFRA) and were exempt from the PPS system that was designed 
for acute care hospitals. The TEFRA cost-based system distorted 
payments and services by discouraging treatment of complex patients and 
by creating an uneven playing field among providers.
    Our association and its predecessor strongly supported the idea of 
a rehabilitation prospective payment system (RPPS) to replace the 
flawed and inequitable system of TEFRA limits which have distorted care 
for Medicare beneficiaries for over 15 years. We were very pleased when 
an RPPS was included in the BBA of 1997.
    A rehab PPS can correct the mistakes created by the TEFRA system 
and better target Medicare funds to serve patients' needs. The Balanced 
Budget Act of 1997 (BBA) required the Health Care Financing 
Administration (HCFA) to develop a PPS for rehabilitation hospitals, 
and units referred to as rehabilitation facilities in the law. The BBA 
is completely adequate to support a rational, patient-oriented PPS. 
However, we believe that amendment of the law is needed to ensure 
adoption of a rehabilitation PPS without negative consequences, 
particularly for Medicare patients.
    The BBA requires that the Secretary set rates in the rehabilitation 
PPS to reduce total expenditures for inpatient rehabilitation services 
by 2% from what they would have been in the absence of a PPS. Any such 
calculation is subject to misjudgments about volume of services, but a 
per-episode payment system is much more predictable than a per-diem 
system. The former is subject to changes in total patient volume. The 
latter is subject to this factor, as well as the average number of days 
of care which can result in increased expenditures.

II. The PPS System Recommended by MEDPAC is Completely Sound and Should 
                          be Used for an RPPS

    The rehab PPS was addressed in depth in the March 1, 1999, 
report on the Medicare program submitted to Congress and the 
Administration by the Medicare Payment Advisory Commission 
(MedPAC). We support MedPAC's recommendations regarding a PPS 
for rehabilitation and related matters which parallel our 
views.
    In its report to Congress, MedPAC recommended that the 
Secretary of Health and Human Services develop a rehab PPS 
using a per-discharge approach and a patient classification 
system known as the Functional Independence Measure-Function 
Related Groups (FIM-FRG), a payment system designed for HCFA by 
the RAND Corporation. The FIM-FRG is based on a patient 
classification system developed by researchers at the 
University of Pennsylvania. In its work for HCFA, RAND 
evaluated this classification system and designed a PPS based 
on it. The result is a well-developed system based on data from 
a large number of rehabilitation hospitals and units. We 
believe it accurately measures patients' needs for treatment 
and will fairly match Medicare payments to relative needs for 
rehabilitation services.
    The system designed by RAND parallels the structure of the 
PPS used for general hospital care. Payment would be per-
discharge and case-mix groups would be determined by a 
combination of diagnosis, age, and functional ability of the 
patient. These factors are the basis for the patient 
classification system know as FRGs.
    The system designed by RAND is a per-episode system. 
Originally designed using data from 37,000 rehab patients in 
1990 and 1991, FRGs were further refined by Rand, in 1994, with 
data from over 90,000 Medicare patients. As such, the system 
well-represents a broad range of rehab patients. HCFA and RAND 
now have comparable data from 1997 for over 200,000 patients 
and will soon have similar data for 1998. Further, patient 
classification and weights under the FRG system can be easily 
updated before the implementation date of October 1, 2000. Such 
data is available annually, permitting regular review of 
payment classifications and weights.
    The FIM-FRG is a discharge-based classification system 
which sorts patients into 21 diagnostic categories, known as 
Rehabilitation Impairment Categories (RICs). MedPAC believes 
that a system based on FIM-FRG would be more reliable, because 
FIM-FRG is stable over time and predictive of length of stay 
and per-discharge resource use. It also contains the most 
complete compilation of data on rehab patients. With minor 
modifications, the FIM-FRG is ready to be implemented.
    Adoption of the FRG system also would allow assessment of 
the impact of the PPS on patient care, outcomes, and quality. 
Existing data on outcomes--the functional improvement of 
patients--go back a decade or more. These data can be used to 
examine patient outcomes before and after introduction of a 
PPS. In fact, the payment system could even reward the 
achievement of superior results for patients.

                III. Concerns About Alternative Approach

    AMRPA supports HCFA's implementation of MedPAC's recommendations. 
However, the Department's approach may not be fully clear until it 
publishes its methodology, which is not expected until December 1999.
    HCFA was previously developing a system similar to the PPS that was 
recently implemented for SNFs. The SNF PPS uses a classification system 
that relies on the MDS patient assessment tool designed for use in 
nursing facilities. HCFA was also inclined to create the rehab PPS 
using the analytic system known as Resource Utilization Groups (RUGS) 
combined with a per diem approach. However, because of the MedPAC 
recommendations, guidance from Members of Congress, and internal 
Departmental disagreements, HCFA recently announced it will follow the 
MedPAC recommendations. We strongly support this approach.

           IV. Why AMRPA Supports per Discharge With FIM-FRG

    One of the great defects of the TEFRA system is that the system 
strongly encouraged providers to treat patients with lesser medical 
complications and functional impairments and imposed a financial 
penalty for taking more disabled and medically complex patients. A 
primary goal of a PPS should be to match payment rates with varying 
treatment requirements so there is no financial incentive to treat one 
type of patient over another.
    The BBA requires that a PPS be developed with rates that will 
result in a 2% reduction in outlays from what would have been spent in 
the absence of a PPS. Based on FY 1996 data, it appears that this 
provision of the BBA will produce a budget for rehab PPS of about $4.4 
billion. The issue is how to most effectively use this amount of money 
to obtain the best possible rehab services for the approximately 
325,000 Medicare patients admitted to rehabilitation hospitals and 
units each year.
    Rehabilitation providers have operated under a construct that, in 
effect, reflects the per-episode payment system--namely, TEFRA limits--
for 16 years. Such limits have encouraged reductions in lengths of 
stay. Average Medicare length-of-stay in rehabilitation hospitals and 
units has declined from about 22.6 days in 1988 to just over 16 days in 
1997. A per-diem system would provide a huge incentive to reverse this 
trend. Based on 1997 data, a one-day increase in the average Medicare 
length of stay would, under a per-diem system, result in increased 
Medicare spending of about $240 million.
    Rehabilitation is a process, and the determination as to when a 
patient is ready for discharge involves a number of variables, 
including the patient's physical and cognitive progress, his or her 
medical condition, the level of support in the home and the patient's 
attitude. These and other social and clinical factors are weighed by 
the attending physician and other members of a rehabilitation team in 
determining when discharge is appropriate. For over 15 years, Medicare 
has encouraged shorter lengths of stay through the TEFRA system.
    Rehabilitation facilities exist to meet the needs of their 
patients. A payment system that discriminates against certain types of 
patients poses a serious problem to ethical people in the business of 
providing quality services and outcomes. Financial reality means that 
they can not treat large numbers of patients for whom the payment is 
inadequate. Matching services to an inadequate daily payment and 
keeping patients longer is a poor substitute for providing the optimum 
level of services and the earliest possible discharge. Providers want 
to be able to deliver the care that is in keeping with maximum progress 
for patients, and they do not want to operate under a system which 
chronically frustrates achieving that goal. For all the above reasons, 
AMRPA supports the MedPAC recommendation for a discharge based 
rehabilitation prospective payment system, based on FIM-FRG, and HCFA's 
announcement in July to pursue the FIM-FRG approach.

         V. What Needs to be Done to Implement the FIM-FRG RPPS

    As mentioned earlier, FRGs are currently based on 1994 data from 
over 90,000 patients. There are now data to support the creation of 
revised FRGs based on 1996 and 1997 data from over 200,000 patients. 
AMRPA supports updating the FRGs to a more recent year. To account for 
practice pattern evolution and patient mix, the FRGs could be 
recalculated every year, which would be a relatively easy exercise.
    Since the system is currently based on 1994 data, the system's 
accuracy could be improved by updating either a portion or the entire 
system to reflect 1997, or preferably 1998 data which will soon be 
available. RAND is using the 1997 data which is currently available. We 
envision the following steps:
    1. The FRGs are based on data which are currently collected 
voluntarily from about 80% of rehab providers. The financial data is 
collected by HCFA; the clinical data is gathered by UDSmr and 
Caredata.com (Medirisk). No site visits to hospitals are required.
    2. RAND matches the clinical and financial databases on a patient-
by-patient basis using sex, birth date, and admit date.
    3. The charge data collected off bills by HCFA is converted to cost 
through multiplication of the charge by the cost: charge ratios 
contained on the Medicare cost reports. This is done on a per cost 
center basis.
    4. New FRG algorithms could be calculated from the newer data. The 
FRG algorithms are the definitions by diagnosis, age and FIM scores 
which determine the break points between FRGs.
    5. Rand/HCFA would then account for the distribution of cases. This 
is fairly straightforward since a database of 66% (220,000 cases) of 
the patient population is assigned to the various FRGs.
    6. A high cost outlier should be developed to preserve access for 
unusually costly patients.
    At some point, the FRGs will have to be moved to be supported by 
MDS-PAC data. The Minimum Data Set for Post Acute Care (MDS-PAC) is a 
data tool HCFA is developing to use in several sites of care. It will 
be critical that the same score on an MDS-PAC functional motor item can 
be translated to the similar FIM item, or if there is a difference, 
that it is accounted for in the algorithms. To ensure that it is done 
correctly, we recommend that RAND conduct an empirical study of the use 
of the FIM and MDS-PAC. It should include data being collected on the 
same patients using the FIM and the MDS-PAC, then analyzed with respect 
to FRGs to assure the MDS-PAC collects the data necessary to categorize 
patients into the FRGs. RAND should independently validate HCFA's work 
as RAND was not involved in the developmental work on the MDS-PAC.

                             VI. Conclusion

    AMRPA believes the future of rehabilitation access is at stake in 
the design and implementation of the rehab PPS. We, like MedPAC, think 
the means are at hand to produce a sound, stable system which will 
provide open access and high quality service to all types of patients. 
However, we urge the Committee to take limited legislative action.
    To direct that HCFA adopt the RAND system as the basis for a 
rehabilitation PPS would require only two changes in the language of 
the BBA pertinent to this matter. First, the payment unit for a rehab 
PPS should be a discharge. Second, the factors used by the RAND patient 
classification system--impairment, age, co-morbidities, and functional 
capabilities of the patient--should be made mandatory and referenced 
explicitly.
    HCFA currently has the discretion to develop the PPS in whatever 
manner it prefers. This is the agency's opportunity to get the system 
right and avoid additional unintended consequences. We want to ensure 
that payment is as appropriate and accurate for each patient as 
possible so more complex patients continue to have access to the 
services they need.
    Therefore, we recommend the Committee amend the BBA to direct the 
Secretary of Health and Human Services to develop a rehab PPS based on 
a per-discharge payment unit utilizing the function related groups and 
the other adjustments MedPAC recommends. We thank the Committee for 
this opportunity to submit testimony. AMRPA looks forward to the future 
and our ongoing positive relationships with Congress and the 
Department.

                                

Statement of American Nurses Association

    The American Nurses Association (ANA) is pleased to submit 
this statement to the Committee on Ways and Means, Subcommittee 
on Health for the record of the October 1, 1999, hearing 
regarding refinements to the Medicare provisions included in 
the Balanced Budget Act of 1997 (BBA 97).
    ANA is the only full-service professional organization 
representing the nation's 2.6 million Registered Nurses through 
its 53 constituent associations. ANA advances the nursing 
profession by fostering high standards of nursing practice, 
promoting the economic and general welfare of nurses in the 
workplace, projecting a positive and realistic view of nursing, 
and by lobbying the Congress and regulatory agencies on health 
care issues affecting nurses and the public.
    ANA believes that there are many instances in which the BBA 
97 made cuts to Medicare programs that were too severe and have 
resulted in a reduction of quality of health care and a 
reduction in access to health care. It has also resulted in 
financial hardship to many who have dedicated their lives to 
caring for our nation's elderly and disabled. ANA calls on 
Congress and the Administration to take immediate action to 
remedy this situation.
    The legislation that most comprehensively addresses the 
multitude of problems caused by the BBA 97 is S. 1678, the 
``Medicare Beneficiary Access to Care Act.'' Although this is a 
Senate bill and not before this panel, ANA calls on this 
subcommittee to enact legislation similar to S. 1678.
    ANA believes that the underlying problem was a mind set 
that allowed arbitrary budgetary targets to override genuine 
health care considerations. In 1997, Congress established a 
goal of how much it wanted to cut from Medicare. Meeting these 
cuts was the overriding goal. Health care consequences were 
secondary. As it turned out, the cuts in the BBA 97 were more 
severe than anticipated. Some estimates project that the BBA 97 
has, in actuality, cut as much as twice as much as anticipated.
    Nurses all across the nation are seeing the consequences of 
these cuts in both acute care settings and post-acute care 
settings. Some of the chief areas of concern are outlined 
below.

                            Home Health Care

    The Interim Payment System (IPS) implemented by the BBA 97 has 
caused severe problems for home health providers and the patients they 
serve. Among the impacts of the IPS for home health care are: 
approximately 550,000 fewer Medicare beneficiaries receiving home 
health services in 1998 than in 1996; the closing of nearly 25 percent 
of all home health agencies in the United States; and average home 
health agency reimbursement decreasing 29 percent since 1996.
    ANA calls on Congress to take action to:
     Eliminate the 15 percent cut scheduled for October 1, 
2000;
     Provide resources for an outlier provision for high-cost 
patients;
     Increase the IPS per-visit cost; and provide relief from 
financially disabling overpayments; and
     Eliminate the 15-minute billing requirement.
    We believe these steps are the minimum necessary to ensure that the 
Medicare population has access to quality home health services.

                       Skilled Nursing Facilities

    The implementation of a prospective payment system (PPS) for 
skilled nursing facilities (SNFs) has resulted in greater reductions in 
payments than originally intended. While we do not argue that the SNF 
PPS needs to be eliminated altogether, we believe that it needs to be 
modified.
    The BBA 97 intended to reduce Medicare SNF payments from $248 
billion to $232 billion. It has been estimated by the Congressional 
Budget Office, however, that the reductions will be to $210 billion--a 
$22 billion shortfall.
    ANA calls on Congress to:
     Create payment add-ons for certain RUG categories; and
     Update the current SNF market basket; and allow providers 
to transition to the federal rate effective October 1, 1999.
    We believe action is necessary to reduce the burden being felt by 
some of Medicare's most vulnerable patients.

                               Acute Care

    The BBA 97 has had severe impacts on many hospitals. This has 
resulted in a decrease in both quality of care and access to care. In 
acute care, as in other areas, we see that the impact of the BBA 97 
cuts has been more severe than originally anticipated. While the BBA 97 
intended to cut hospital payments by $53 billion over five years, the 
actual cuts are $71 billion--an $18 billion shortfall.
    ANA calls on Congress to:
     Pass legislation that would limit payment losses created 
by the move to outpatient PPS;
     Adopt MedPAC's recommendation for a modest PPS update to 
compensate hospitals for Y2K readiness activities;
     Provide relief for rural health care providers--
particularly sole community providers, critical access hospitals, and 
Medicare-dependant hospitals;
     Provide relief for hospitals serving the uninsured by 
carving out disproportionate share payments from Medicare managed care 
payments; and
     Fully fund Medicare managed care payment blend to provide 
fair payment in all parts of the country.
    ANA believes this action is necessary to provide access to quality 
acute care for the elderly and disabled.

                               Conclusion

    ANA believes that Congress and the Administration need to take 
immediate action to reduce the harm done by BBA 97 by enacting S. 1678 
or similar legislation. We believe that future decisions about health 
care need to be made with the focus on health care needs rather than on 
arbitrary budgetary goals. We look forward to continuing to work with 
Congress and the Administration, as well as our colleagues in the 
health care community, as our nation deals with these issues.

                                

Statement of American Osteopathic Association

    The American Osteopathic Association, which represents 
43,500 physicians, appreciates the opportunity to provide 
testimony on refinements to the Medicare provisions of the 
Balanced Budget Act of 1997.
    This testimony addresses areas affected by the BBA: 
Graduate Medical Education; the Sustainable Growth Rate and 
refinement of the Resource-Based Practice Expense Relative 
Value Units.
    Graduate Medical Education: Osteopathic medicine is 
separate and distinct from allopathic medicine. Consequently, 
osteopathic residency programs are not interchangeable with 
allopathic training programs. The Balanced Budget Act of 1997 
and its attempts to constrain residency training programs have 
a much more significant impact on osteopathic medicine than on 
allopathic. A recent increase in the number of osteopathic 
students, combined with the BBA 97 provisions, means many of 
these students will be unable to train in osteopathic residency 
programs. [Attachments are being retained in the Committee 
files.]
    Osteopathic medicine has a long tradition of serving the 
under-served, of providing care in rural areas. If osteopathic 
residents are not able to train in osteopathic programs, the 
tradition of serving the under-served may be threatened. 
Although not its intent, BBA 97 has severely impaired the 
expansion of residency programs in rural and under-served 
areas. Relief wouldbe appreciated.
    The AOA endorses the ``Graduate Medical Education Technical 
Corrections Act of 1999'' (S.541/H.R. 1222) which was 
introduced by Sens. Susan Collins (R-ME) and Frank Murkowski 
(R-AK) in the Senate, and by Rep. John Baldacci (D-ME) in the 
House. This bill would rectify the unintended problems created 
by BBA 97 in regards to GME.
    The AOA also endorses two separate pieces of legislation 
which create all-payer GME trust funds: All-Payer Graduate 
Medical Education Act (H.R. 1224) introduced by Rep. Ben Cardin 
(D-MD); and Medical Education Trust Fund Act of 1999 (S-210) 
introduced by Sen. Daniel Patrick Moynihan (D-NY).
    The BBA reductions to Medicare adjustments in Indirect 
Graduate Medical Education to teaching hospitals were 
originally estimated to save $5.6 billion between 1998 and 
2000. However, it is the AOA's understanding that the cuts from 
the BBA are much greater than anticipated. Payments were 
expected to be reduced by $103 billion over 5 years, yet 
estimates are now 86% higher--$191.5 billion--than originally 
anticipated. Academic health centers treat the most severely 
ill patients and care for the poor. The AOA believes such cuts 
will threaten the survival of teaching hospitals and their 
programs of graduate medical education.
    Sustainable Growth Rate: The AOA urges Congress to fix the 
sustainable growth rate system. The AOA recently wrote to HCFA 
expressing our concerns about the instability of the current 
SGR system. We believe the following legislation action should 
be taken:
    (1) Congress should create an add-on to the SGR formula to 
allow for technological changes in medicine that increase the 
demand for physician services;
    (2) Congress should create an add-on to the SGR formula to 
account for the rising cost of ambulatory care practice with 
the shift in care from hospital inpatient settings to 
outpatient settings.
    (3) Congress should instruct the administration to 
periodically adjust the SGR to allow for changes over time in 
the characteristics of patients enrolling in Medicare+Choice 
plans compared with those remaining in the fee-for-service 
program.
    (4) Congress should raise the lower limit on SGR updates to 
provide a more acceptable payment floor for the updates.
    (5) Congress should eliminate SGR projection errors by 
either giving the administration the authority to change 
projections as new Gross Domestic Product data becomes 
available or by requiring the administration to update the SGR 
using actual GDP data.
    Resource-based Practice Expense: We are pleased with the 
progress that has been made on refining the Practice Expense 
Relative Value Units as mandated by BBA 97:
    In the Medicare physician fee schedule proposal, HCFA has 
made improvements in its methodology, providing an opportunity 
for commenters to recommend corrections in code level practice 
expense RVUs for the year 2000.
    HCFA should continue to work in cooperation with the RUC/
PEAC process to ensure that the most accurate data is available 
and used to refine the practice expense RVUs. The AOA strongly 
supports bringing specialties together to work on the 
refinement process.
    In addition, HCFA proposes to remove the physicians' 
clinical staff time in the facility setting from the raw CPEP 
data used in calculating the practice expense payment for any 
service. AOA agrees that Medicare should not pay twice for a 
service. However, we do believe staff time in the office--such 
as a nurse counseling a family; billing; time spent with 
managed care companies--should be recognized and accounted for 
in the practice expense. HCFA should establish a mechanism to 
recognize those costs related to staff time in the office. In 
addition, the AOA believes that further study may be necessary 
to resolve the issue of practice expense payment for the 
physicians' clinical staff time in a facility setting.
    The AOA appreciates the opportunity to submit testimony and 
the attention the Subcommittee is giving to the refinement and 
correction of Medicare provisions in BBA.
    [Attachments are being retained in the Committee files.]

                                


Statement of American Physical Therapy Association, Alexandria, VA

    Mr. Chairman and Members of the Subcommittee on Health, on 
behalf of the more than 70,000 member physical therapists, 
physical therapist assistants, and students of physical 
therapy, the American Physical Therapy Association (APTA) is 
pleased to submit this statement for your consideration as you 
re-examine Medicare provisions contained in the Balanced Budget 
Act of 1997. APTA commends the Committee on holding a hearing 
on this important subject and appreciates having the 
opportunity to comment.
    Most Americans will probably need physical therapy services 
at some time during their life. As people grow older, they may 
suffer a stroke, break a hip, or sustain other traumatic 
injury. Many of these illnesses and injuries occur unexpectedly 
and require physical therapy services, which enable people to 
return to home, to work, to school, or to an active retirement. 
If Medicare beneficiaries receive these services on a timely 
basis, they are able to obtain maximum independence and 
increase the quality of their life.
    The BBA significantly changed Medicare payment policies for 
rehabilitation services. These changes have had a detrimental 
impact on the ability of Medicare beneficiaries' access to 
quality physical therapy services. Ultimately, they could 
result in increased Medicare spending. This testimony will 
focus on three of the payment policy changes in the BBA, which 
have had a major impact on the ability of Medicare 
beneficiaries to receive quality physical therapy services. 
These include: (1) the $1500 cap on outpatient rehabilitation 
services; (2) the skilled nursing facility prospective payment 
system; and (3) the home health agency prospective payment 
system.

                               Background

    Prior to the BBA of 1997, Medicare reimbursement for physical 
therapy services varied, depending on whether the services were covered 
under Part A or Part B, and depending on the setting in which the 
services were furnished. Skilled nursing facilities, rehabilitation 
hospitals/units, home health agencies, CORFs, and rehabilitation 
agencies were reimbursed under a retrospective cost-based system. 
Physical therapists in private practice were reimbursed under the 
physician fee schedule.
    The BBA made significant changes to Medicare payment policies for 
rehabilitation services. Under the BBA, beginning January 1, 1999, an 
annual $1500 per beneficiary cap per year for physical therapy 
(including speech language pathology services) and for occupational 
therapy will be imposed on Medicare beneficiaries receiving outpatient 
rehabilitation services. In addition, skilled nursing facilities 
furnishing services under a Part A stay are reimbursed according to a 
new prospective payment system, beginning July 1998. CORFs, home health 
agencies (Part B), SNFs (Part B), rehabilitation agencies, and 
outpatient hospital departments are reimbursed under a fee schedule, 
beginning January 1, 1999.
    These drastic changes, which will be discussed in further detail in 
the paragraphs that follow, occurred at the same time. Thus, providers 
did not have much time to prepare for them. Further, there was no 
opportunity to determine whether any of these changes alone would have 
brought about the necessary reductions in Medicare payment. For 
example, changing from a cost-based system to a fee schedule for 
outpatient therapy servings may have resulted in considerable savings 
that would have made the $1500 cap unnecessary.

           $1500 Cap on Outpatient Physical Therapy Services

    The Balanced Budget Act (BBA) of 1997, amended section 1833(g) so 
that beginning January 1, 1999, an annual $1500 per beneficiary cap per 
year, per therapy will be imposed on Medicare beneficiaries receiving 
outpatient rehabilitation services furnished by physical therapists in 
independent practice (PTPPs), rehabilitation agencies, Comprehensive 
Outpatient Rehabilitation Facilities (CORFs), skilled nursing 
facilities (SNFs), and physicians' offices. The $1500 cap does not 
apply to physical therapy services furnished in outpatient hospital 
departments. In regulations issued by HCFA, two caps are established: 
(1) $1500 per beneficiary per year for physical therapy and speech 
therapy combined; and (2) $1500 per beneficiary per year for 
occupational therapy.

A. The Cap Is Insufficient to Cover the Costs of Therapy

    APTA strongly opposes the imposition of a $1500 cap on therapy 
services. APTA believes that this cap will have a detrimental impact on 
Medicare beneficiaries who need physical therapy services beyond the 
arbitrary $1500 limit. The ability of Medicare beneficiaries to receive 
the necessary physical therapy services under the $1500 limit is 
further exacerbated by grouping speech therapy and physical therapy 
together under one $1500 cap. In its June report to Congress, the 
Medicare Payment Advisory Commission (MedPAC) stated that in 1996 
``Physical therapy accounted for 70% of outpatient therapy payments. 
Occupational therapy and speech pathology made up 21% and 9% of 
payments, respectively.'' \1\
---------------------------------------------------------------------------
    \1\ Report to the Congress: Context for a Changing Medicare 
Program, Medicare Payment Advisory Commission, June 1998, p. 82.
---------------------------------------------------------------------------
    Documents produced by APTA and the Medicare Payment Advisory 
Commission (MedPAC) indicate that $1500 per beneficiary per year is 
insufficient to cover the costs of physical therapy for certain 
diagnoses. In November 1997, the APTA published The Guide to Physical 
Therapy Practice, Part II: Preferred Practice Patterns (hereinafter 
referred to as the ``Guide''), that shows the impact that the $1500 cap 
will have on beneficiaries in need of physical therapy. The Guide, 
which was developed by expert panels of physical therapists, contains 
preferred practice patterns describing common sets of management 
strategies used by physical therapists for selected patient/client 
diagnostic groups. The Guide classifies patients by impairments and 
diagnostic groups, identifies the range of current options for care, 
and approximates the expected range of number of visits per episode of 
care for these patient groups. The Guide shows which conditions require 
extensive physical therapy treatment. They include: individuals 
recovering from a stroke, lower extremity amputation, hip replacement, 
and Parkinson's disease to name a few. A chart, highlighting the mid-
range of physical therapy visits necessary per episode of care is 
attached.
    MedPAC analyzed the impact of the coverage limits and presented the 
results of this analysis in its June 1998 report to Congress. MedPAC 
examined the 1996 claims of patients treated in rehabilitation agencies 
and CORFs who incurred payments that exceeded the $1500 coverage limit. 
The Commission found that about 1/3 of patients in rehabilitation 
agencies and CORFs exceeded either $1500 of outpatient physical and 
speech therapy or $1500 of occupational therapy. MedPAC found that some 
types of patients were more likely to exceed the dollar limit than 
others. For example, half of the stroke patients served in these 
settings exceeded the cap.
    President Clinton, considerably younger than Medicare eligibility 
age, suffered a knee injury, had surgery and underwent extensive 
physical therapy for 3-4 months. Had he been a Medicare beneficiary, 
the President's care would have exceeded the $1500 cap after 2-3 weeks 
of care. As of result of his physical therapy, the President has 
resumed full functional activities.

B. The $1500 Cap will disrupt the Continuum of Care

    This payment policy will disrupt the continuum of care. Patients 
will be forced to change treatment settings to an outpatient hospital 
once the cap has been reached in a non-outpatient hospital setting. 
Rather than saving money for the Medicare program, this policy only 
redirects the patient to receive care in an outpatient hospital 
department. Many beneficiaries, particularly in rural areas, may have 
difficulty obtaining access to needed physical therapy services because 
they would have to travel a considerable distance to reach a hospital.
    Skilled nursing facilities will have two methods of reimbursement, 
depending on whether the patient's stay is being covered by Part A or 
Part B. If the patient is under Part A, therapy services will be 
reimbursed under a prospective payment system. Under this system, the 
SNF receives a per diem payment for each patient, which varies 
depending on which of the 44 resource utilization groups (RUG) the 
patient is classified. For Part B Medicare patients (when the patient 
has exceeded the 100 day part A stay), the skilled nursing facility 
will receive payment under the physician fee schedule for therapy 
services and the $1500 cap will apply. This system is confusing to the 
skilled nursing facility and the patient and disrupts patient care.
    Further, Medicare beneficiaries in skilled nursing facilities that 
are receiving Part B benefits will probably be unable to receive 
physical therapy services once the cap has been reached. In the SNF PPS 
regulations issued in July 1999, HCFA requires that SNFs bill for all 
therapy services and states that a SNF resident may not go to an 
outpatient hospital department to receive therapy services once the 
$1500 limit has been exceeded. Therefore, SNF residents will be unable 
to receive these services without paying out-of-pocket.

C. The $1500 cap will be difficult to administer

    In addition to having an adverse impact on Medicare beneficiaries, 
the $1500 cap will also be extremely difficult for HCFA to administer. 
It will be an administrative nightmare for HCFA to determine whether a 
Medicare beneficiary has exceeded the $1500 cap. For example, a 
physical therapist in private practice will have difficulty determining 
whether a beneficiary has already received $1500 of outpatient therapy 
services in a skilled nursing facility. In addition, if the beneficiary 
resides in New York for part of the year and Florida for the remainder 
of the year, it may be difficult for the therapist in Florida to know 
that the beneficiary had already received services in New York. The 
fact that skilled nursing facilities, CORFs, rehabilitation agencies, 
and private practitioners may submit different billing forms or have 
different timing for submission of their bills will also result in 
administrative problems in tracking whether the cap has been met.
    According to the BBA, HCFA shall ``submit by January 1, 2001 a 
report to Congress including recommendations on establishment of a 
revised coverage policy for therapy services based on classification of 
individuals by diagnostic category and prior use of services in place 
of the dollar limits.'' APTA supports a coverage policy based on 
patient resource utilization rather than caps.
    APTA recommends that Congress repeal the $1500 cap on outpatient 
therapy services. If the cap is not repealed, Congress should establish 
exceptions to the cap. A bill, titled, ``The Medicare Rehabilitation 
Benefit Improvement Act of 1999 (H.R. 1837 and S.427), which was 
introduced in Congress, gives the Secretary of the U.S. Department of 
Health And Human Services the authority to establish exceptions to the 
current cap. The bill would address some of the problems that have been 
caused by the $1500 cap by providing an exceptions process for the 
medically complex and frail patients. According to the legislation, a 
Medicare beneficiary would have to meet one of the following 
requirements to receive an exception to the cap: (1) Be subsequently 
diagnosed with an illness, injury or disability that requires 
additional medically necessary rehabilitation services; (2) need more 
extensive rehabilitative services due to an additional diagnosis or 
incident that worsens the beneficiary's condition; (3) be hospitalized 
if further rehabilitation services are not provided; or (4) meet other 
criteria determined by the secretary of HHS. APTA urges members of 
Congress to support this legislation. Passage of this legislation will 
help to ensure that patients who are in need of outpatient therapy 
services receive appropriate care.
    It is APTA's view that the amount of physical therapy that the 
patient receives should not be contingent upon the practice setting. 
Patients should receive the appropriate level of care at the 
appropriate site of services that is based on medical and functional 
need and not on economic incentives or disincentives.

          Skilled Nursing Facility Prospective Payment System

    The BBA reduced skilled nursing facility payments by $9.5 billion 
over five years and required the Health Care Financing Administration 
(HCFA) to implement a prospective payment system (PPS) by July 1, 1998, 
for skilled nursing facilities (SNF's). We believe that the prospective 
payment system can improve the cost efficiency of the Medicare program 
if implemented appropriately.
    Under the PPS, a per diem payment is made to the SNF to cover the 
routine, ancillary and capital costs incurred by the facility during 
the patient's stay. One of the most critical issues in developing a 
prospective payment system is developing a case-mix measure that will 
be used to ensure that a facility is paid sufficiently for the 
resources necessary to provide appropriate care. If appropriate payment 
rates are established, patients will have access to medically necessary 
care of high quality. If inadequate rates are established, patients 
will experience difficulties in obtaining services.
    In developing the per diem rates, HCFA included costs related to 
nursing and social services salaries and total costs of non-therapy 
ancillary services in the nursing case mix. Because the non-therapy 
ancillary services, such as wound care, enteral nutrition, and 
pharmaceuticals, were treated as a direct pass-through under the Multi-
State Case Mix and Quality Demonstration, HCFA did not have information 
on the amount of these services that a resident in a particular RUG-III 
group would receive. The case-mix weights only capture variations among 
RUGs groups in anticipated costs for nursing and therapy staff time. 
The differences in resource utilization for the other ancillaries are 
not reflected in the therapy or nursing case mix weights and are not 
captured in the non-case mix component of the payment. Therefore, the 
facility receives the same amount for the non-case mix component 
regardless of the RUGs-III grouping.
    The residents in the different groups may vary in their use of 
other ancillary services and supplies, such as wound care, lab tests 
and pharmaceuticals. Thus, the new PPS fails to adequately account for 
differences in costs associated with the care of medically complex 
patients. According to preliminary research from HCFA, 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 with MS or CP) have much higher non-
therapy ancillary costs than other patients.
    In our view, these issues can be addressed by revising current 
case-mix (Resource Utilization Groups) categories used in the new SNF 
PPS to account for these medically complex patients. Unfortunately, 
HCFA cannot make any changes to case-mix until after 2000 because of 
the year 2000 computer problems.
    Problems arise for Medicare patients, particularly those who have 
complex medical conditions requiring extensive nursing care, 
rehabilitation and respiratory therapy and substantial use of 
pharmaceuticals, specialized medical treatments and other non-therapy 
ancillaries. It is a serious problem if SNF PPS payment rates are 
insufficient to cover the costs of severe, medically complex patients 
who incur significantly higher costs. In addition, APTA is concerned 
that resources provided through the established RUG system for 
necessary physical therapy services are being utilized to offset losses 
relating to RUG payment for other services and items. APTA is wholly 
opposed to this practice.
    APTA supports utilizing a multiplier to increase the payments for 
the extensive services and special care RUGs groups, until the final 
case-mix improvements can be made by HCFA. It is clear that payment for 
these categories is inadequate related to the costs associated with 
treating these individuals. Once the Secretary refines case-mix and the 
funding, the multiplier may no longer be necessary.

                           Recent OIG Reports

    APTA supports the overall findings of the U.S. Health and Human 
Services' Office of the Inspector General (OIG) in reports issued 
recently regarding physical therapy and occupational therapy services 
provided in skilled nursing facilities (SNFs).
    In its report titled ``Physical Therapy and Occupational Therapy in 
Nursing Homes: Medical Necessity and Quality of Care,'' the OIG found 
that 83 percent of therapy provided in nursing homes was medically 
necessary and that most patients would not have achieved similar 
outcomes without therapy. However, 13 percent of therapy was billed 
improperly to Medicare because the therapy was not medically necessary 
or was provided by inappropriate staff. Another 4 percent of therapy 
was not documented in the patient's medical record. The OIG noted that 
some of these problems resulted from a lack of awareness and 
understanding of the Medicare coverage guidelines and criteria.
    The OIG recommended more training for skilled nursing facilities 
and therapy staff on guidelines, coverage criteria, local medical 
review policies, and monitoring procedures. APTA supports this OIG 
recommendation and is eager to work with the Health Care Financing 
Administration (HCFA) to provide such training.
    APTA has worked diligently to enhance the documentation skills of 
its members, an effort that has been commended by the Office of the 
Inspector General. Physical therapy documentation practices need to be 
improved in the skilled nursing home environment. Awareness and 
understanding of Medicare coverage guidelines is essential and it is 
the professional responsibility of physical therapists and physical 
therapist assistants in skilled nursing facilities to be aware of these 
guidelines.
    The OIG report titled ``Physical and Occupational Therapy in 
Nursing Homes: Cost of Improper Billings to the Medicare Program,'' it 
was reported that $145 million was spent on services provided by 
inappropriate personnel. The quality of care beneficiaries received 
from those individuals must be in question, and should be address by 
this Congress.
    The OIG study, which was conducted before the implementation of the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
also found that assistants and aides provided care that is above their 
level of expertise, education, and training. APTA has long opposed the 
use of inappropriate staff to provide services. The 1999 APTA House of 
Delegates reaffirmed that position in an action stating that, 
``Physical therapists are the only professionals and physical therapist 
assistants, under the direction of the physical therapist, are the only 
paraprofessionals who provide physical therapy interventions.''
    APTA cautions that the SNF PPS encourages facilities to provide 
care by the least expensive means. APTA is, therefore, concerned that 
the PPS may be facilitating, instead of correcting, this behavior. APTA 
is eager to address the issues brought forth in the OIG reports and to 
work with Congress and the HCFA to ensure that beneficiaries receive 
high quality care in skilled nursing facilities.

                            Home Health PPS

    The BBA required HCFA to establish a PPS for home health services 
and implement the system beginning October 1999. In addition, if the 
PPS is not implemented by that date, home health agency payments would 
be reduced by 15%. In the interim, home health agencies are reimbursed 
under an interim payment system established by the BBA. Because of 
problems associated with the IPS, Congress later passed legislation 
mandating that the home health agency PPS be implemented by October 1, 
2000 and delayed the 15% across the Board reductions until that date.
    APTA urges Congress to ensure that HCFA implements a PPS system by 
the deadline. Under the current interim payment system, HHAs are 
experiencing significant reductions in payment, which are impacting 
beneficiaries access to services. HCFA estimates that the IPS system 
will result in a decrease in payments to home health agencies of $1.06 
billion in 1998 and $2.14 billion in 1999 compared to payment that 
would have been made if it were not enacted. This is approximately a 9% 
reduction. In determining this reduction, HCFA accounts for changes in 
the HHAs behavior, which might include increasing the number of low 
cost beneficiaries served, decreasing the number of visits provided, 
and discharging patients earlier.
    APTA is concerned that due to the low reimbursement rates, home 
health agencies will be forced to cut costs by reducing the amount of 
therapy and other services that Medicare beneficiary receives, despite 
the fact that those services are medically necessary. In addition, it 
is difficult for HHAs to obtain physical therapists to furnish services 
in rural areas, and as a result, the HHA has to pay higher salaries to 
these therapies. Because the HHAs are receiving significantly lower 
reimbursement under the new IPS, they may have difficulty recruiting 
therapists in these rural areas. To further reduce the IPS system 
payments by an additional 15% would exacerbate the problems cause by 
the IPS and would prevent Medicare beneficiaries from receiving much 
needed rehabilitation services that would enable them to function 
independently.
    APTA urges Congress to ensure that the home health agency PPS is 
implemented as scheduled in October 1999 and that payment rates are set 
appropriately under the PPS. In addition, HCFA should consult the 
rehabilitation industry as they develop this system.

                           Home Health Oasis

    On January 25, 1999, the Health Care Financing Administration 
(HCFA) published an interim final rule titled: ``A Reporting Outcome 
and Assessment Information Set (OASIS) Data as Part of the Conditions 
of Participation for Home Health Agencies.'' This rule revises the 
existing conditions of participation for home health agencies. The rule 
requires that home health agency (HHA) health care providers complete a 
comprehensive assessment for each patient and that they incorporate the 
OASIS into the process.
    OASIS is a lengthy, complex assessment tool. APTA believes that 
these and other design flaws must be addressed in order for OASIS to be 
an affective assessment tool. APTA wishes to work with Congress and the 
HCFA in refining OASIS.

                Physical Therapists in Private Practice

    Another HCFA payment policy, which has further exacerbated the 
impact that the BBA has had on therapy services relates to supervision 
of physical therapists assistants, who render services in private 
practice settings. In the November 1998 final physician fee schedule 
rule, HCFA revises section 410.60 of the regulations to state that in 
private practice physical therapy office, assistants and aides would 
have to be personally supervised by the therapist and employed 
directly. HCFA further defines personal supervision to require that the 
therapist be in the room during the performance of the service.
    APTA believes that the supervision requirement of physical 
therapist assistants in the private practice setting should be direct 
supervision rather than personal supervision. Direct supervision 
requires that the physical therapist be on the premises when services 
are furnished by the assistants, but not in the room. It is not 
necessary for the physical therapist to be in the same room as the 
assistant for services to be safely and effectively delivered.
    Physical therapist assistants are recognized practitioners under 
Medicare and are defined in the regulations at 42 CFR Sec. 485.705(c). 
According to this provision, a physical therapist assistant is ``a 
person who is licensed as a physical therapist assistants by the State 
in which he is practicing, if the State licenses such assistants, and 
has graduated from a 2-year college-level program approved by the 
American Physical Therapy Association.'' APTA defines physical 
therapist assistants as a ``technically educated health care provider 
who assists the physical therapist in the provision of physical 
therapy. The physical therapist assistant is a graduate of a physical 
therapist assistant associate degree program accredited by an agency 
recognized by the Secretary of the United States Department of 
Education or the Council on Postsecondary Accreditation.'' Attached are 
APTA's Guidelines on Direction, Delegation, and Supervision in Physical 
Therapy Services, which provide these definitions.
    Physical therapist assistants have the education and training to 
perform services without a physical therapist being in the room. As 
stated earlier, for Medicare to reimburse for the services of a 
physical therapist assistant, the physical therapist assistant must 
have graduated from a school of physical therapy approved by the 
American Physical Therapy Association. To be accredited by APTA's 
Commission on Accreditation in Physical Therapy Education (CAPTE), 
programs must include a comprehensive curriculum, which makes the 
graduate competent to furnish services. Attached are the evaluative 
Criteria for Accreditation of Education Programs for the Preparation of 
Physical Therapist Assistants, which include a description of the 
curriculum for PTA schools.
    Requiring personal supervision of assistants, would also be 
contrary to state laws, which do not require that a physical therapist 
be present in the room when supervising a physical therapist assistant. 
In addition, in many other Medicare settings, such as SNFs, home health 
agencies, and rehabilitation agencies, the supervision requirement of 
PTAs is general supervision, meaning the physical therapist does not 
have to be on the premises when the PTA is furnishing services. 
Attached is a chart summarizing Medicare regulatory requirements for 
supervision of physical therapist assistants in rehabilitation 
agencies, CORFs, home health agencies, inpatient hospitals, outpatient 
hospitals, physical therapists in private practice, physician's 
offices, and skilled nursing facilities. A copy of Medicare regulations 
and laws related to supervision accompany the chart.
    Requiring direct supervision would be consistent with the 
supervision requirement for assistants that PTPPs were required to meet 
in the past under section 410.60(a)(3)(ii) of the Medicare regulations. 
Prior to January 1999, section 410.60(3)(ii) of the regulations stated 
that outpatient therapy services are covered if they are furnished, 
``by or under the direct supervision of a physical therapist in 
independent practice who is licensed by the State in which he or she 
practices. . . .'' Section 486.151 also reiterated that ``services must 
be furnished by or under the direct supervision of a qualified physical 
therapist in independent practice.'' Further, section 2215 of the 
carriers manual (Service Furnished by Physical or Occupational 
Therapist in Independent Practice) states the following:

          Nature of Covered Services: To be covered as physical 
        therapy, services must be the type and be rendered under the 
        conditions specified in section 2210. The services must be 
        provided either by or under the direct personal supervision of 
        the therapist in independent practice and the services of 
        support personnel must be included in the therapist's bill . . 
        .

    Section 2050.1 of the carriers manual, which relates to a physician 
billing services as incident to, states that ``coverage of services and 
supplies incident to the professional services of a physician in 
private practice is limited to situations in which there is direct 
personal physician supervision. It further defines the term direct 
personal supervision as follows:

          Direct personal supervision in the office setting does not 
        mean that the physician must be present in the same room with 
        his or her aide. However, the physician must be present in the 
        office suite and immediately available to provide assistance 
        and direction throughout the time the aide is performing 
        service.

    In response to APTA's comments regarding this issue, in the 
November 1998 final fee schedule rule, HCFA states ``We do not believe 
that we have the authority to modify the supervision requirements for 
therapy (physical, occupational or speech-language pathology) 
assistants and aides. Therefore, we are maintaining our current 
requirement that therapy assistants and aides have to be personally 
supervised by the therapist and employed directly by the therapist, by 
the partnership or group to which the therapist belongs.'' (63 Fed Reg 
58870). This provision clearly changes HCFA's policy with respect to 
supervision in the private practice setting. Furthermore, the language 
in the Federal Register, indicates that the decision to change the 
supervision requirement from direct personal supervision (as defined on 
the premises or in the suite) to personal supervision (in the room) was 
based upon inaccurate information.
    We request that you urge HCFA to clarify that the supervision 
requirement for physical therapist employed in private practice setting 
should be direct supervision. This would mean that the physical 
therapist must be present in the office suite and immediately available 
to provide assistance and direction throughout the time the assistant 
is performing the service.

                               Conclusion

    As your Committee examines the impact of the BBA on patient care, 
you should ensure that Medicare beneficiaries have access to the 
physical therapy services that they require. This can be accomplished 
by: (1) repealing the $1500 cap on therapy services; (2) ensuring 
appropriate payments rates under the SNF PPS for medically complex 
patients; and (3) establishing a home health PPS based on sufficient 
payment rates and case mix methodology. While we have only touched upon 
a few areas of concern, the APTA recommends that you strive to ensure 
that payment methodologies do not dictate patient care. It is our hope 
that any Medicare reforms will enable Medicare beneficiaries to receive 
necessary physical therapy services in an efficient, cost-effective 
manner.

                                

Statement of American Society for Gastrointestinal Endoscopy, 
Manchester, MA

    The American Society for Gastrointestinal Endoscopy (ASGE) 
is pleased to submit the following recommendations for the 
Subcommittee's consideration as it reviews possible 
modifications to Medicare provisions in the Balanced Budget Act 
of 1997 (BBA '97). ASGE represents the more than 6500 
physicians who specialize in the use of endoscopy to diagnose, 
treat and manage digestive diseases and conditions.
    These changes represented one of the most significant 
overhauls of the Medicare program in many years. Congress 
initiated major revisions in Medicare's structure and payment 
policies, including coverage of colorectal cancer screening and 
other preventive benefits, changes in payment for physicians' 
practice expenses, and establishment of a prospective payment 
system for hospital outpatient department services, along with 
many other provisions. The Subcommittee is to be commended for 
initiating this review of the impact of BBA '97 in order to 
evaluate whether or not the modifications are having negative 
impacts on health care delivery for Medicare beneficiaries. If 
the subcommittee determines that changes are required, ASGE 
urges quick action on them.
    ASGE has recommendations in three areas: colorectal cancer 
screening, practice expense payments and the rules governing 
payments for hospital outpatient departments and ambulatory 
surgery centers.

                      Colorectal Cancer Screening

    The preventive services provisions of BBA '97 represented a major 
step forward in Medicare coverage of preventive care. ASGE particularly 
supports the coverage of colorectal cancer screening because it is a 
proven service that saves lives. Public understanding of the importance 
of screening for this cancer has grown dramatically and physicians are 
receiving more and more requests from patients for the service. In 
fact, many practices have waiting lists of people who want to be 
screened for this cancer.
    Historically, many gastroenterologists and other physicians trained 
in endoscopy have taught their nurses how to perform simple colorectal 
cancer screening using a flexible sigmoidoscope. There is ample 
research showing that nurses can perform this service safely and 
effectively. However, under current Medicare law and regulation, there 
is no way to pay for this service when performed by a nurse. ASGE 
recommends that this situation should be changed to include trained 
registered nurses in the universe of providers eligible for Medicare 
reimbursement for flexible sigmoidoscopy for colorectal cancer 
screening.
    ASGE and representatives of the Society of Gastrointestinal Nurses 
and Associates met with HCFA to discuss this problem and presented the 
scientific data documenting the appropriateness and safety of nurses 
performing screening sigmoidos--copy. We were advised that the payment 
limitation was a function of the statutory language adopted in 1997 and 
that HCFA had no authority to allow reimbursement for this service when 
performed by nurses.
    This limitation has no relationship to the training and skills of 
nurses and is an artificial barrier to the most cost-effective 
provision of these crucial screening services. ASGE urges the 
Subcommittee to amend the BBA '97 colorectal cancer screening 
provisions to allow reimbursement when appropriately trained nurses 
perform flexible sigmoidoscopy for screening purposes.

                     Payment for Practice Expenses

    The move to resource based practice expense relative values in the 
Medicare physician fee schedule is having a significant impact on our 
members, and many other physicians, as we see a tremendous shift of 
reimbursement dollars from hospital and ambulatory surgery center 
services to services in the physician office setting.
    The implications of this transfer for our members and their 
patients are not completely clear, but they could be significant and 
possibly harmful to best medical practice. ASGE has for years 
recommended that all settings where GI endoscopy is performed meet 
equivalent safety standards. Few physicians' offices meet those 
criteria. There are many sound medical and safety reasons why GI 
endoscopy is not common in the physician office, and financial 
incentives that might change that situation should be viewed with 
caution.

Lack of Refinement as Required by BBA '97

    Any payment system that has the potential to reduce practice 
expense payment by nearly 70% for complex medical and surgical 
procedures performed in the hospital requires careful review and 
refinement. In fact, the BBA, which laid out the current framework for 
revising the calculation of practice expense relative values, requires 
HCFA to conduct a refinement of these values each year during the 
transition from the old values to the new ones. ASGE is very concerned 
that HCFA is not meeting that schedule and that the opportunities 
created by the statute for refinement and transition are being lost.
    In the fall of 1998 HCFA published its final rule implementing the 
first phase of the Balanced Budget Act practice expense provisions. The 
agency identified more than 25 issues of data and methodology that 
required further attention and indicated that it would deal with them 
in the refinement process. HCFA stated that it would hire a contractor 
to advise agency staff on the many complex questions that remained. 
Some of these, like the question of how new data would be entered into 
the system, are critical to the future use of resource based practice 
expense relative values.
    The proposed rule released in July does not address most of these 
matters. In fact, HCFA has only recently hired a contractor with 
expertise to assist the agency with refinement issues. The contractor 
is not expected to make a final report before May 2001. Thus, the 
earliest any significant refinement of the practice expense values 
could be achieved is 2002, after the transition has ended. It is quite 
possible the implementation of refinements could extend beyond that 
point. Therefore, we have urged HCFA to continue to consider all 
practice expense relative values as interim until all the refinements 
are complete, even beyond 2002.

Clinical Staff Time

    HCFA did attempt one refinement of significance in its recently 
proposed rule affecting the use of clinical staff when services are 
provided outside the physician office, but the controversy surrounding 
that proposal highlights the difficulties facing the agency as it tries 
to move forward.
    The issue of clinical staff time has its roots in the earliest 
efforts to capture data on physician practice expenses. Several 
specialties, including cardiothoracic surgeons, cardiologists and 
ophthalmologists, indicated that they frequently brought their own 
staff to the hospital to assist with surgery and patient rounds. They 
argued that these expenses needed to be included in HCFA's database 
that would be used to calculate the practice expense relative values.
    In the proposed rule, HCFA addressed this question again and 
eliminated these expenses. HCFA also published its estimates of the 
impact of this decision on the various specialties. Not surprisingly, 
the practice expense payments for cardiothoracic surgeons declined even 
more than was previously estimated. However, the GI community was 
stunned when HCFA estimated that its Medicare payments would drop 
another 2% as well. Since gastroenterologists have not argued that they 
take their own staff to the hospital, they could not understand why 
their payments would be reduced by HCFA's policy decision. It turns out 
that HCFA not only eliminated costs associated with clinical staff 
brought to hospitals, but also costs associated with clinical staff who 
support a hospital service from the office setting. This includes, for 
example, costs such as providing patient instructions for the 
procedure, providing the results to the patient and/or the family, and 
other similar clinical interactions.
    ASGE objects to this action. HCFA is required to ``recognize all 
staff, equipment, supplies, and expenses'' in developing new resource 
based practice expense relative value units. When HCFA began its data 
collection efforts, physicians were specifically asked to identify the 
amount of time that clinical staff spent on hospital based services. If 
HCFA disputes these answers now, then it should develop a process for 
reviewing that information with the physician community. The newly 
hired contractor should be asked to advise HCFA on how to address this 
question. Likewise the contractor should be directed to review the 
circumstances under which some physicians may bring their own staff to 
the hospital. This entire matter is clearly one that should be subject 
to the refinement process and not subject to a unilateral decision that 
further depresses payments for services performed in the hospital. We 
have urged HCFA to delay this action until input has been received on 
this issue from the American Medical Association's Relative Value 
Update Committee, the newly established multispecialty Practice Expense 
Advisory Committee and HCFA's own outside expert.

Site of Service Differential

    HCFA has for many years applied a site of service differential in 
Medicare physician payments, creating differing levels of payment for 
practice expenses when a service is performed in the physician's office 
and when the same service is delivered in a hospital or ambulatory 
surgery center. The theory is that a physician incurs greater practice 
expense when providing the service in the office where the physician 
must carry all the overhead costs compared to performing the same 
service in the hospital where the institution may bear some of these 
costs. Our concern is not with the theory, but with its application. 
The differential in payment between these settings is significant, and 
may be large enough to encourage physicians to perform more and more GI 
endoscopy in the unregulated office setting. Since all but the simplest 
endoscopic procedures require the use of anesthesia, usually conscious 
sedation, ASGE believes that the office is an inappropriate site of 
service unless the office demonstrates it meets the same standards as 
ambulatory surgery centers or hospital outpatient departments. Few 
physician offices can meet this standard, and we see no willingness by 
HCFA to begin requiring that physician offices meet these requirements.
    We are not alone in this concern. The Florida Board of Medicine is 
now reviewing a proposed rule that would require the presence of an 
anesthesia-trained third party to administer office-based anesthesia. 
California has acted legislatively to address this same problem. These 
states recognize that there is risk to patients in the unregulated use 
of anesthesia in the physician office and are taking steps to protect 
patients.
    ASGE believes that HCFA should do no less. HCFA's prior rules on 
the site of service differential required that a procedure be performed 
at least 50% of the time in the physician office setting before any 
payment differential would be applied. This simple formula assured that 
the use of a procedure in the office was well accepted before a payment 
differential was established. When HCFA used panels of experts to 
develop the original cost estimates for practice expenses, a 10% 
threshold was adopted. These panels would not consider costs in the 
office setting unless there was evidence that the procedure was 
performed in the office at least 10% of the time. HCFA's current rule 
has no explicit threshold. Most of the GI endoscopy procedures that are 
subject to the site of service differential are performed in the office 
10% or less on average, according to HCFA data.
    ASGE believes that HCFA's current application of a site of service 
differential sends the message that the federal government believes 
that these procedures are appropriately performed in the unregulated 
office setting. This is the wrong message.
    If HCFA does not want to set a simple threshold for the application 
of the site-of-service rule, such as 25%, then it may wish to consider 
the recommendation of the Medicare Payment Advisory Commission 
(MedPAC). In its report to Congress this year, MedPAC recommended that 
``decisions regarding the applicability of the site-of-service 
differential should reflect a clinical consensus about the settings in 
which specific services should be provided.'' That would also be a 
sensible way to resolve this issue, one that is consistent with the 
standard of care in each specialty. At the present time, the consensus 
among the national gastroenterology organizations is that HCFA's action 
is not correct. It would require little effort to work with the 
interested specialty societies to clear up this situation and would 
reduce the possibility of unintended consequences for patient care. 
ASGE has previously recommended that this site of service rule be 
changed to better reflect an appropriate standard of medical care. We 
have urged HCFA to either apply a reasonable threshold to the 
application of a site of service differential or adopt MedPAC's 
recommendation. HCFA should then recalculate the practice expense 
relative values based on this new standard.

What Should This Subcommittee Do?

    ASGE is presenting these detailed comments to the Subcommittee to 
demonstrate the complexity of the effort to develop practice expense 
payments that realistically address the true costs of medical practice. 
This issue has been debated since 1992 when the physician fee schedule 
went into effect. HCFA has already spent years examining this problem 
and trying to collect data upon which to act. Now we have learned that 
the transition will likely be over before HCFA is prepared to act on 
needed refinements to data and methodology. The investment of seven 
years and untold taxpayer dollars has produced little. Even if HCFA 
accepted the recommendations we have just outlined, significant 
problems remain with the entire enterprise.
    ASGE believes that the time has come to reexamine the decision to 
move to resource based practice expense relative values. We do not 
believe that HCFA has the resources to address refinement questions 
promptly. Given our present limited knowledge and federal resources, it 
is unlikely that we can ever develop real confidence in the practice 
expense relative values. If there is no shared confidence in the 
values, how can Congress or the public be assured that the massive 
changes in payment that are now underway are justified and will cause 
no harm? The reimbursement shifts now underway affect all medical 
services provided outside the physician office and particularly impact 
the nation's tertiary care and teaching hospitals which often 
specialize in the very kinds of medical and surgical procedures most 
hard hit by these changes.
    ASGE appreciates the leadership of the Subcommittee during the 
debate over practice expenses in 1997. The changes incorporated in the 
BBA were an honest attempt to clarify HCFA's instructions and get the 
entire process back on track. However, ASGE must ask this Subcommittee 
to act again on the practice expense issue. It is time to recognize the 
limitations of data and methodology that undermine confidence in the 
physician fee schedule and to place reasonable limits on the changes 
that will result from this exercise. Given the lack of data, no 
practice expense relative value should be reduced by more than 20 
percent from its 1997 level, the last year before the practice expense 
transition began. For the same reasons, no practice expense relative 
value should increase more than 200% over its 1997 level. This upper 
boundary still allows for significant adjustments in payments for 
evaluation and management codes, but eliminates some of the more 
inexplicable changes (like a more than 400% increase in the practice 
expense values for ear wax removal) that have been produced by this 
effort.
    Even with these limits, the values would still be more resource 
based than their predecessors would because HCFA has used the American 
Medical Association's survey data on physician practice costs as the 
starting point for its work. The policy of increasing payment for 
evaluation and management codes that were regarded as undervalued by 
many physicians would also be achieved.
    However, setting these limits would protect against unpredictable 
and undesirable shifts in physician and hospital behavior that could 
result from the dramatic reductions in payments for services provided 
in hospitals and other settings outside the physician office.

   Payments in the Hospital Outpatient Department and the Ambulatory 
                             Surgery Center

    Congress directed HCFA to develop a prospective payment system for 
the hospital outpatient department. A mechanism has been proposed, but 
it has raised substantial concerns among hospitals and physicians 
because of the reductions in payment that would result from its 
implementation. MedPAC has recommended that HCFA proceed with caution 
and evaluate alternative systems.
    As this process has been under development, HCFA has also announced 
a new payment methodology and rates for ambulatory surgery centers 
(ASCs). Using data from 1993 HCFA has proposed major revisions and 
reductions from current payment levels. We estimate that payments for 
centers that specialize in GI endoscopy would decline by 14%.
    Almost all complex GI endoscopic services are provided in either 
the hospital outpatient department or the ambulatory surgery center. 
ASGE is very concerned that the payment proposals now under review will 
significantly affect the ability of these facilities to provide the 
kinds of staff and technological support that are needed to assure the 
best outcome for the patient. We are particularly troubled that HCFA's 
data supporting the action on the ASCs are so flawed. Not only is it 
old, it is very incomplete. HCFA had to extrapolate more than half the 
payment rates because of inadequacies in the database.
    HCFA is now finalizing the 1999 ASC cost survey. ASGE has reviewed 
the document and finds it much improved over the earlier survey form. 
We believe that HCFA should delay action on the ASC proposed rule until 
the new data are available. Since there is no statutory mandate or 
deadline for action on ASC payments, there should be no reason not to 
delay the rule in order to get superior data.
    We urge this Subcommittee to direct HCFA to delay the ASC rule 
until the data from the 1999 cost survey are collected and analyzed.

                               Conclusion

    ASGE is encouraged by the Subcommittee's review of the Medicare 
provisions in the BBA '97. It is timely and appropriate. We urge 
careful consideration of our recommended changes as the Subcommittee 
continues its efforts.

                                

Statement of Association of American Medical Colleges

    The Association of American Medical Colleges (AAMC) is 
pleased to submit for the record testimony to the House Ways 
and Means Health Subcommittee on the need to provide teaching 
hospitals relief from further Balanced Budget Act of 1997 (BBA) 
Medicare reductions. The AAMC represents more than 300 of the 
nation's major teaching hospitals and health systems 
participating in the Medicare and Medicaid programs, including 
70 Department of Veterans Affairs medical centers; the nation's 
125 U.S. accredited allopathic medical schools; 16 accredited 
Canadian medical schools; nearly 90 academic and professional 
societies representing 75,000 faculty members; and the nation's 
medical students and residents.

     The Role of Teaching Hospitals in America's Health Care System

    Teaching hospitals have a unique role in our nation's health care 
system. In addition to providing basic health services to their 
communities, such as primary and secondary patient care, teaching 
hospitals have the additional societal responsibilities of providing: 
education for all types of health care professionals; an environment in 
which clinical research can flourish; and highly specialized tertiary 
patient care such as burn care, trauma and cardiac care, and transplant 
services. Teaching hospitals also provide a significant amount of 
indigent care. Because of their education and research missions, 
teaching hospitals offer the newest and most advanced services and 
equipment, and with residents and supervising physicians available 
around-the-clock, teaching hospitals care for the nation's sickest 
patients. (Attachments 1 and 2 provide detailed information on the 
special characteristics of teaching hospitals.)

                    The Balanced Budget Act of 1997

    The BBA made significant changes to the Medicare program, including 
major reductions in Medicare payments to hospitals. The BBA contains 
some of the most significant changes for teaching hospitals since the 
beginning of Medicare. Chief among the BBA's changes are Medicare 
reductions in special payments to teaching hospitals, known as the 
Indirect Medical Education (IME) adjustment and the Disproportionate 
Share Hospital (DSH) payment. DSH payments reimburse hospitals for 
caring and preserving access for low-income Medicare beneficiaries and 
indigent populations. While the IME payment carries a ``medical 
education'' label and reimburses teaching hospitals for the higher 
costs associated with physician training, the purpose of the IME 
payments is much broader:
     This adjustment is provided in light of doubts . . . about the 
ability of the DRG case classification system to account fully for 
factors such as severity of illness of patients requiring the 
specialized services and treatment programs provided by teaching 
institutions and the additional costs associated with the teaching of 
residents . . . The adjustment for indirect medical education costs is 
only a proxy to account for a number of factors which may legitimately 
increase costs in teaching hospitals (House Ways and Means Committee 
Rept, No. 98-25, March 4, 1983 and Senate Finance Committee Rept, No. 
98-23, March 11, 1983).
    In addition, the BBA makes significant changes to the outpatient 
payment system which will also significantly affect Medicare's support 
of teaching hospitals. The BBA's cuts to these three Medicare payment 
areas--IME, DSH, and outpatient--contribute to the disproportionate 
impact of the BBA on teaching hospitals (Attachment 3).

Medicare Indirect Medical Education Payments

    The BBA reduces the Medicare Indirect Medical Education 
(IME) adjustment by 29 percent over four years. Specifically, 
the BBA reduced the IME adjustment from 7.7 percent to 7.0 
percent in Fiscal Year (FY) 1998 and from 7.0 percent to 6.5 
percent for FY 1999, and will lower the adjustment further to 
6.0 percent in FY 2000 and 5.5 percent in FY 2001. This 
reduction represents an absolute cut in Medicare support rather 
than a reduction in the rate of growth. On average, the IME is 
the second largest inpatient payment loss for teaching 
hospitals. Only losses associated with the inflation update 
payment rates are higher. (Attachment 6). However, for many 
teaching hospitals, the IME represents the largest loss of 
dollars as a result of BBA reductions.
Medicare Disproportionate Share Payments

    The BBA also disproportionately affects teaching hospitals 
through Medicare's reduction in DSH payments because two-thirds 
of Medicare DSH payments are paid to teaching hospitals. The 
BBA reduces Medicare's DSH payments by five percent over five 
years (one percent increment per year). Thus far, a two percent 
reduction has been implemented.

Medicare Outpatient Prospective Payment System 

    The Health Care Financing Administration (HCFA) estimates 
that the BBA's authorization of an outpatient prospective 
payment system (PPS) will reduce per year outpatient payments 
to teaching hospitals by 10.6 percent compared to current 
payment levels. Such reductions will be more than double the 
estimated per year losses for non-teaching hospitals. This new 
system will further worsen the gap between costs and payments 
for hospital outpatient services to Medicare beneficiaries. The 
Medicare Payment Advisory Commission (MedPAC) estimates that 
outpatient payments for major teaching hospitals will fall to 
less than 70 percent of costs when the outpatient PPS goes into 
effect.

                 The BBA's Impact on Teaching Hospitals

    The AAMC has major concerns about the ability of teaching hospitals 
to support their education, patient care, and research missions in 
light of their current financial uncertainty. As the health care 
marketplace is becoming more price competitive, all payers--including 
private payers, Medicare and Medicaid--are reducing their payments to 
teaching hospitals. Teaching hospitals are no longer able to bill at 
rates that reflect the extra costs of their special missions and 
responsibilities. Such reduced rates have put the long-term viability 
of teaching hospitals and their special missions in jeopardy. Only two 
years into its five-year implementation, the BBA's damaging impact, 
coupled with current market place phenomenon, is causing an immediate 
financial crisis at many teaching hospitals across the country. 
Assuming the same inpatient volume and case mix of Medicare patients, 
the vast majority of AAMC-member teaching hospitals will receive less 
money from Medicare in FY 2000 than they did in FY 1997.
    Total margin is an important financial performance measure that 
reflects total hospital revenues and costs associated with all 
inpatient, outpatient and non-patient care activities.
    The AAMC has conducted an analysis of the BBA's current and 
projected financial impact on its members, known as the Council of 
Teaching Hospitals and Health Systems (COTH). The AAMC found that 
Medicare reductions resulting from the BBA could result in the median 
total margin for a typical major teaching hospital (defined as those 
that have 25 or more residents for every 100 beds) falling to zero by 
2002. In 1997, the median total margin for a typical major teaching 
hospital was 2.9 percent compared to margins of 5.4 and 6.1 percent for 
other teaching and non-teaching hospitals respectively. In 2002, the 
median total margin is projected to drop to zero (Attachment 5). Half 
of all major teaching hospitals could face negative total margins by 
2002 (Attachment 6).
    Moreover, AAMC's analysis found that by 2002, a typical major 
teaching hospital will cumulatively lose $41.1 million in Medicare 
payments (Attachment 4). However, many AAMC members across the country 
are slated to lose much more.
    The Lewin Group's analysis of total Medicare margins project 
similar, but sharper trends--a declining teaching hospital margin from 
1.1 percent in 1998 to -8.0 percent in 2002 (Attachment 7).
    As reported in newspapers across the country, many teaching 
hospitals have already reduced their work forces due to their dire 
financial circumstances. Left unchecked, the BBA's Medicare cuts to 
teaching hospitals could force some of the nation's teaching hospitals 
to reduce the scope of their special and unique community services. 
Teaching hospitals in every region of the nation are now considering 
scaling back such key community services as poison control centers, 
hospital services for the uninsured, clinical research activities and 
education and training for medical students and residents.

    Legislative Solutions Providing BBA Relief to Teaching Hospitals

    Because the future of these special missions is in jeopardy, the 
AAMC is asking Congress to provide financial relief from the BBA to 
teaching hospitals by changing the BBA's implementation of Medicare IME 
and DSH payment reductions and reforming the outpatient payment 
prospective system. Several bills granting BBA relief to teaching 
hospitals have been introduced in Congress. Specifically, the AAMC 
supports the following recommendations to provide financial relief to 
teaching hospitals:

(1) Halt the Implementation of IME and DSH Cuts

     Freeze the BBA's reductions in Medicare IME and 
DSH payments at current levels.

(2) Reform the proposed Medicare Outpatient PPS:

     Eliminate the 5.7 percent overall reduction due to 
the beneficiary co-insurance calculation. 252 Representatives 
and 77 Senators have written to HCFA Administrator Nancy-Ann 
Min deParle suggesting that HCFA's proposed rule is 
inconsistent with Congressional intent.
     Establish a payment floor to limit losses for 
hospitals that incur large payment reductions under the new 
PPS.
     Address other associated policy changes, such as 
establishing outpatient IME and DSH adjustments.

(3) Pay Teaching Hospitals 100 Percent of Special Payments 
Associated with Medicare Plus Choice Enrollees

     Currently, DSH hospitals do not receive these 
important payments when they care for Medicare managed care 
enrollees because the payment is included in the calculation of 
the payment to the managed care plan and managed care plans are 
not required to pass this special payment along to hospitals.
     The BBA's gradual phase-in payment of both Direct 
Graduate Medical Education (DGME) and IME payments to teaching 
hospitals when they care for Medicare+ Choice (Medicare managed 
care) enrollees should be accelerated to 100 percent starting 
in FY 2000. Currently, the phase-in schedule for these payments 
over five years pays teaching hospitals amounts equal to 60 
percent in FY 2000, 80 percent in FY 2001, and 100 percent in 
FY 2002.
    The AAMC would be pleased to work with the committee to 
ensure the future viability of teaching hospitals and their 
patient care, education and research missions.

                 Major Teaching Hospital Characteristics
            [Short-Term General, Non-Federal Hospitals, 1997]
------------------------------------------------------------------------
                                                       % of
                                                      Major     % of All
                                                     Teaching  Hospitals
------------------------------------------------------------------------
AIDS Inpatient or Outpatient Care.................         88         38
Cardiac Cath Lab..................................         94         36
Open Heart Surgery................................         82         21
MRI...............................................         85         49
Trauma Center.....................................         75         23
Psych Outpatient..................................         77         28
Organ Transplant..................................         65          9
------------------------------------------------------------------------
SOURCE: AAMC analysis of AHA Annual Survey of Hospitals, 1997 data.
NOTE: Major Teaching Hospitals are 277 members of the Council of
  Teaching Hospitals and Health Systems (COTH).


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Statement of Association of Community Cancer Centers, Rockville, MD

  New Studies Show All Hospital Outpatient Cancer Programs Will Face 
Losses of 32 to 51 Percent Under APCs--APC Methodology Causes Perverse 
                     Incentives to Use Older Drugs

    ROCKVILLE, MD--Two new studies released by the Association of 
Community Cancer Centers (ACCC) demonstrate that university and 
community hospital cancer programs will encounter huge losses under the 
Health Care Financing Administration's (HCFA) proposed Ambulatory 
Payment Classifications (APC) system. The studies show that if APCs 
were enacted as proposed, the loss to hospital cancer programs would be 
$202 million in 1998, or 51 percent of the actual cost of chemotherapy 
and supportive care drugs.
    The studies performed by The Lewin Group, ELM Services, Inc., and 
ACCC simulated the HCFA database that was used by the agency to produce 
the APC categories, then tracked the drugs in the database to see how 
reimbursement changed between 1996 (the year that HCFA used as its base 
year for calculations) and 1998 (the most recent year for which actual 
sales data to hospitals was available). A paper co-authored by members 
of the Lewin team and ACCC concludes that ``the APC system will not 
work for oncology drugs and rapid innovations.'' The authors noted that 
keeping oncology under APCs would ``threaten the quality of cancer care 
available to Medicare beneficiaries.''
    The studies also showed that the implementation of the Balanced 
Budget Act (BBA) would harm outpatient radiation oncology at U.S. 
hospitals, where 65 percent of all radiation oncology is currently 
conducted. Because of the structure of the formula-driven overpayment 
(FDO) implementation, radiation oncology is now reimbursed at $197 
million below its Medicare-allowed costs, a 32.7 percent loss.
    Outpatient cancer care services are delivered in community and 
university hospitals throughout the U.S. Community hospital-based 
cancer programs and centers treat 85 percent of all U.S. cancer 
patients. The top ten cancer centers see roughly 5 percent of all 
cancer patients, while other university cancer centers see another 10 
percent. The authors note, ``In the real world of hospital decision 
making, the inability to be directly compensated for this expensive 
group of drugs could quickly label the oncology area as a `loser.' ''
    ``The combined impact of losses for chemotherapy, supportive care 
drugs, radiation oncology, and chemotherapy administration is 
sufficient for many hospital administrators to question whether they 
can afford to suffer these levels of losses,'' said Dr. Lee E. 
Mortenson, ACCC's executive director and lead author on the paper. 
``APCs as proposed will mean that most university cancer centers will 
close their outpatient areas, many, if not all tertiary care community 
facilities will close, and many rural hospital cancer clinics will 
close. The implications are vast for both treatment and cancer 
research.''

APC Methodology Causes Perverse Incentives to Use Older Drugs

    The study notes that because the APC methodology lumps 
inexpensive drugs in with expensive drugs, ``older drugs are 
overcompensated and newer drugs, presumably more costly yet 
more effective, are undercompensated.'' The APCs put all 
chemotherapy drugs into four categories and reimburse them for 
an average cost of their 1996 values. This practice leads to 
some older drugs receiving compensation at 1,500 percent of 
their price, while most drugs approved since 1995 are 
compensated at just 58 percent of their cost.
    The Lewin-ACCC analysis notes that, ``These wide variations 
imply that HCFA's APC categories are not cost homogeneous and 
likely do not reflect comparable clinical meaning.'' The 
authors go on to conclude that, ``the economic incentives are 
strong and unbalanced. Payment systems should be incentive 
neutral across clinical options, and this is clearly not the 
case. This lack of balance can lead to perverse outcomes.''
    The analysis points out that while the four APC buckets 
HCFA devised for chemotherapeutic drugs were relatively 
balanced in 1996, by 1998 they are significantly unbalanced, 
causing hospitals to be reimbursed far below costs. This rapid 
change is central to the problem since older and less costly 
drugs saw utilization increase by 41 percent, while newer 
drugs, which were financial ``losers,'' increased in use by 311 
percent. One ACCC study shows that innovation in oncology drug 
use is extremely high: More than 40 new drugs have been 
introduced since 1992. These drugs have more than 220 new 
indications as documented in the peer-reviewed literature and/
or by the two national reference compendia, which Congress 
requires Medicare and Medicaid to use for reimbursement of 
patient care.

APC Methods Miss Supportive Care Drugs And Will Always Lag 
Behind

    To simplify its analysis, HCFA eliminated all bills with 
more than one procedure, lowering its original sample size to 
one-quarter of all 1996 claims. In oncology, however, this 
methodology had several perverse effects. Most oncology drug 
and radiation oncology treatments are given as a series and 
billed the same way, as a ``batch.'' In addition, most 
chemotherapy regimens are multi-drug regimens that have been 
found to be more effective than single drug regimens for many 
forms of the disease. But in this case, HCFA's methodology 
leads to the number of cancer claims being reduced to only one-
eighth of their original size. HCFA edits, which eliminated all 
claims with units of more than 50, reduced the sample size to 
just 6 percent. The authors note that, ``Most likely the bills 
remaining after excluding multiple procedure claims would be 
error correction bills, or an occasional drug not given as part 
of the more common multi-drug chemotherapeutic combinations.''
    Loss of the multiple procedure drugs might also explain the 
disappearance of another significant portion of cancer drug 
payments. HCFA could find just $2.8 million in supportive care 
drug payments for all Medicare patients in 1996! Because this 
number was insignificant, HCFA chose to ``bundle-in'' or not 
reimburse supportive care drugs.
    Using information from IMS Health, a national research firm 
that tracks direct sales to hospitals and hospital outpatient 
departments, the ACCC team was able to calculate that Medicare 
patients actually received $89 million in supportive care drugs 
in 1996. HCFA found just 3 percent of that number. Given the 
size of the missing pool of supportive care drug reimbursement, 
the researchers conclude, ``that the majority of supportive 
care cost claims were unaccounted for in the payment 
calculations because of the elimination of bills with multiple 
procedures.''
    The authors also note that ``since HCFA by necessity must 
continue to use data that are several years old to develop its 
APC relative prices, HCFA's approach to drug reimbursement will 
continually lag far behind the innovation curve.''

Researchers Conclude APCs Cannot Manage Innovation

    The authors note that APCs are unlike Diagnosis Related 
Groups (DRGs), the successful hospital inpatient prospective 
payment system. That system gives hospitals ``a payment for a 
clinically cohesive set of treatments that affect a patient 
with a specific diagnosis.'' While the authors note that DRGs 
give hospitals ``wide latitude'' and have encouraged the use of 
new treatment approaches, especially if these lowered other 
costs, they find that the APC system does not provide this 
latitude and is likely only ``to encourage the use of low-cost 
care.''
    The researchers conclude, ``Unlike the DRG system, the OPPS 
(outpatient prospective payment system) has little room for 
altering the pattern of care by using a high cost technology 
that lowers the overall cost of care. If the HCFA database 
cannot be altered to capture appropriate information, such as 
supportive care drugs, and if its methodologies cannot be 
altered to accommodate the wide variability of drug pricing, 
efficacy and use, there will be significant problems going 
forward for oncology drug delivery and other high technology 
areas.''
    Stating that recalculation of the existing APC payment 
system is not a workable solution given the 300 new drugs in 
the current research pipeline and other rapid innovations in 
oncology, the authors note that ``HCFA's data will always lag 
behind reality in significant ways.'' In the meantime, they 
suggest, ``Congress may have to take action to assure that 
Medicare patients receive adequate care in hospital outpatient 
settings. Certainly in a time of budget surpluses, this is no 
time to cut benefits to Medicare patients in critical areas 
such as oncology.''
    ACCC institutional and group practice members include more 
than 575 medical centers, hospitals, oncology practices, and 
cancer programs. This group of institutions now sees almost 40 
percent of all new cancer patients seen in the U.S. each year.
    The Association provides a national forum for addressing 
issues that affect community cancer programs, such as 
regulatory and legislative issues, measurements of the quality 
of care, and clinical research. Its unique membership includes 
all members of the cancer care team: medical and radiation 
oncologists, surgeons, cancer program administrators and 
medical directors, oncology nurses, radiation therapists, 
oncology social workers, and cancer program data managers.

                                


Statement of Center for Patient Advocacy, McLean, VA

    The Center for Patient Advocacy is pleased to submit 
written testimony to the Subcommittee on Health as it examines 
changes made to the Medicare program by the Balanced Budget Act 
of 1997 (BBA). We commend the Subcommittee for conducting this 
hearing and for its commitment to ensuring that our nation's 
seniors continue to have access to the quality health care the 
Medicare program was created to deliver.
    Founded in 1995, the Center for Patient Advocacy is a 
private, non-profit, grassroots organization representing the 
interests of patients nationwide and dedicated to ensuring that 
patients have timely access to quality health care. With a 
grassroots coalition of more than 60,000 ``citizen lobbyists'' 
across the country, the Center has brought the patient's 
perspective to several critical issues that have come before 
Congress in recent years, including managed care reform, FDA 
modernization and biomaterials reform. We have also launched a 
new division of the Center this year, the Access to Cancer Care 
Alliance (ACCA), which is actively addressing access and 
quality care issues for cancer patients. In all of our 
endeavors, our goal has been and continues to be to ensure that 
health care policymakers recognize the needs and concerns of 
patients and work to address them.
    As you know, the BBA made significant changes to the 
Medicare program, some of which may have unintended 
consequences. Of particular concern to the Center and ACCA is 
the Health Care Financing Administration's (HCFA) proposed rule 
to implement a prospective payment system (PPS) for hospital 
outpatient departments. We are very alarmed that, if 
implemented in its current form, the rule would severely limit 
patient access to needed cancer treatments and threaten the 
continued research and development of state-of-the-art cancer 
drugs and therapies.
    Under the current Medicare payment system, hospital 
outpatient departments are reimbursed for their services on a 
cost basis, providing physicians the ability to select the 
treatments they believe will most benefit their patients. This 
helps to ensure that cancer patients, more than half of whom 
are enrolled in the Medicare program, will receive the latest, 
most effective treatments. However, if HCFA's rule is 
finalized, this will no longer be the case.
    HCFA has proposed to lump all cancer treatments, including 
chemotherapy and radiation, into a small number of Ambulatory 
Payment Classifications (APCs), bundling the costs of drugs, 
biologics and supportive care services into a single payment. 
Such a payment system will create incentives for hospitals and 
health care providers to place financial considerations above 
the medical needs of cancer patients. In fact, the Medicare 
Payment Advisory Commission (MedPAC) raised this very concern 
in its June 1998 report to Congress stating that ``payment 
systems for ambulatory services should not engender financial 
incentives that could inappropriately influence clinical 
decisionmaking.'' However, this is exactly what the APC 
regulation would do.
    Due to the vast differences in the cost of certain cancer 
treatments and the reimbursement levels HCFA has proposed, 
patients inevitably will be denied access to many cancer 
treatments. This is especially of concern when it comes to the 
latest advancements in cancer care, which usually are more 
expensive. Under HCFA's proposal, treatments introduced later 
than 1996 are reimbursed at the lowest level--less than $60.00. 
As a result, outpatient centers will be forced to either stop 
providing cancer treatments, or incur significant financial 
losses for providing such care. Moreover, incentives would be 
created that would encourage providers to select only older, 
less effective cancer treatments for their patients. The impact 
on patients, particularly those is rural areas, is devastating, 
as patients would no longer have ready access to needed state-
of-the-art treatments.
    Also of significant concern is the issue of supportive care 
drugs. Supportive care drugs are used as part of comprehensive 
cancer treatment with the majority of patients with cancer and 
help them tolerate and survive their treatment. Without 
supportive care drugs, optimal cancer care is severely 
compromised. However, it appears that HCFA does not believe the 
use of supportive care drugs is common and therefore has 
proposed not to provide specific payments for them. Instead, 
the costs of supportive care drugs are ``bundled'' into the 
overall APC payment. As a result, patients will either be 
forced to endure cancer treatments without the benefit of 
needed supportive care services, or be denied access to cancer 
treatments altogether.
    Finally we are concerned that HCFA's APC proposal poses a 
significant threat to cancer care research and development. As 
new technologies increasingly become unavailable due to 
inadequate reimbursement, research and development could be 
discouraged or delayed, denying the patients of today and those 
of future generations access to more effective treatments.
    The Center for Patient Advocacy and our Access to Cancer 
Care Alliance believe that in order to preserve patient access 
to needed cancer services, including chemotherapy, radiation 
and supportive care drugs, such cancer services should be 
excluded from the proposed payment system. And we strongly 
support the Medicare Full Access to Cancer Treatment Act (H.R. 
1090), legislation introduced by Congressman Gene Green (D-TX), 
that would provide a ``carve-out'' for cancer care under the 
PPS.
    It is our understanding that one option being explored to 
address this issue is a limited carve-out, excluding the 10 
free-standing NCI designated cancer centers from the outpatient 
PPS. While we certainly agree that such a provision would 
benefit some cancer patients, much more needs to be done. The 
10 NCI designated centers represent only a small percentage, 
approximately 5%, of cancer patients affected by the outpatient 
PPS. Therefore, such a limited carve-out would not adequately 
address the underlying problems facing the 95% of cancer 
patients who would continue to be subjected to significant 
restrictions on their ability to access quality cancer care.
    The Center for Patient Advocacy agrees with Members of 
Congress that the Medicare program needs to be reformed to 
ensure that it will continue to benefit the nation's seniors as 
we move into the 21st century. But, we do not believe that HCFA 
should provide financial incentives that encourage providers 
and hospitals not to deliver quality patient care. This is 
especially troubling when we talk about Medicare patients who 
represent more than half of all cancer diagnoses and more than 
60% of all cancer deaths. And if we are to continue our efforts 
to find a cure and develop new treatments for cancer, it is 
critical that patients have access to the latest treatments the 
medical community has to offer.
    While the Center continues to work with HCFA, Members of 
Congress and other advocacy organizations to address this 
issue, we strongly believe that a legislative fix is needed to 
guarantee that Medicare patients with cancer will continue to 
have access to the quality care the Medicare program was 
created to help deliver.
    On behalf of cancer patients and their families nationwide, 
we appreciate your consideration of our concerns and look 
forward to working with the Subcommittee on this very important 
issue.

                                


Statement of Social HMO Demonstration Sites: Elderplan, Brooklyn, NY, 
SCAN, Long Beach, CA, Sierra Health Services/Health Plan of Nevada, Las 
Vegas, NV

    Elderplan, SCAN and Sierra Health Services/Health Plan of 
Nevada are Social HMO demonstration sites located in Brooklyn, 
NY, Long Beach, CA and Las Vegas, NV, respectively. We 
appreciate the opportunity to submit written testimony for this 
hearing focusing on refinements to the Balanced Budget Act of 
1997 (BBA).
    The Social HMO demonstration originally was established 
under the Deficit Reduction Act of 1984 to test innovative 
models for integrating acute and long-term care services for 
Medicare beneficiaries. The demonstration was expanded to 
include several additional ``second generation'' sites under 
the Omnibus Budget Reconciliation Act of 1990. Waiver authority 
for the first generation Social HMO sites was extended in 1987 
and 1990 and authority for first and second-generation sites 
was extended in 1993 and 1997 by Congress. Waiver authority 
currently is scheduled to expire December 31, 2000. The Social 
HMO demonstration emerged out of a recognition that the 
supportive care required by the frail elderly and disabled is 
not adequately covered by Medicare or Medicaid, leaving the 
burden of such care to fall most often on family members. In 
contrast to acute conditions, which can be effectively treated 
in clinic or inpatient hospital settings, chronic illnesses and 
severe disabilities require a ``systems'' approach to care. A 
central role of the Social HMO model--and one that 
distinguishes it from traditional M+C plans--is to provide and 
coordinate additional services as an extension of benefits 
covered by Medicare and Medicaid. These services go beyond the 
type of supplemental benefits often offered by traditional M+C 
plans and include prescription drugs, eyeglasses, hearing aids, 
dentures, foot care, mental health, nutritional services, care 
management and a wide range of home and community-based 
services. Coverage of additional chronic care services enables 
many frail elderly to live safely in their own homes and avoid 
or delay nursing home placement. Importantly, these additional 
services are provided in a budget neutral fashion; i.e., at a 
cost no greater than the equivalent of what Medicare would have 
paid for like beneficiaries receiving services under the 
original Medicare program.
    Elderplan, SCAN and Sierra seek the subcommittee's 
consideration of technical amendments to the Balanced Budget 
Act of 1997 (BBA) to extend our current legislative authority 
and to implement the recommendations made by MedPAC regarding 
M+C risk adjusted payments for the frail elderly. Below is a 
brief description and rationale for our proposed amendments. 
More detailed documentation is included in Attachment A.

                Extension of Social HMO Waiver Authority

    The BBA extended Social HMO waiver authority through December 31, 
2000. It also directed the Secretary to:
     submit to Congress, by not later than January 1, 1999, a 
plan for the integration of health plans offered by social health 
maintenance organizations (including Social HMO I and II sites) and 
similar plans as an option under the Medicare+Choice program;
     include in the plan a transition for social health 
maintenance organizations operating under demonstration project 
authority;
     include in the plan recommendations on appropriate payment 
levels for plans offered by such organizations, including an analysis 
of the application of risk adjustment factors appropriate to the 
population served by such organizations.
    HCFA has been unable to meet the specified timetable for submitting 
recommendations on permanency legislation. We understand that HCFA's 
Report is unlikely to be submitted to Congress before March 2000. 
Therefore, we seek Congressional support for a technical amendment to 
the BBA to extend our waiver authority until such time as Congress acts 
on legislation to make the Social HMO demonstration a permanent benefit 
option under the M+C program. Since the delay in HCFA's recommendations 
on permanency will prevent Congress from acting on legislation prior to 
2000, a technical amendment extending our waiver authority is needed to 
prevent disruption of services to the approximately 80,000 
beneficiaries served by Social HMOs until our program is made 
permanent. Keeping in mind that Social HMO waiver authority expires at 
the end of 2000, there are several reasons to take action this year:
    1. Since Congress appears poised to act on BBA refinements in 1999, 
the enactment of additional BBA amendments (including an extension of 
Social HMO waiver authority) during an election year could be difficult 
to achieve.
    2. Since it probably is unrealistic for Congress to enact major 
Medicare reforms during an election year, Social HMO permanency 
legislation is unlikely to be enacted before 2001.
    3. Since the Social HMOs are required to begin phasing down 
operations and notifying beneficiaries of the potential for closure at 
the end of the first quarter of the year in which waiver authority 
expires, if Congress does wait until 2000 to act on an extension, such 
legislation would need to be enacted by March 31, 2000.
    4. The Social HMOs and several other Medicare demonstrations have 
been exempted from the M+C risk adjustment through December 31, 2000 
while HCFA explores risk adjustment methods more appropriate to the 
frail elderly population. It is clear that HCFA will not have 
established an alternative payment structure for the frail elderly by 
early next year, however, to provide guidance to Congress on the 
payment provisions of permanency legislation for the Social HMOs. A 
delay in the development of an alternative to the current M+C risk 
adjustment methodology could further delay enactment of permanency 
legislation.
    5. Social HMOs, like other health plans, must submit to HCFA their 
ACR filing and proposed benefit packages by July 1 of the year prior to 
benefit offering. Absent an extension of waiver authority, the Social 
HMOs would be required to submit this data to HCFA without assurance of 
operating authority for 2001 and based on the assumption that the 
Social HMO payment structure would remain unchanged.
    HCFA has informed Congressional staff that the agency has the 
authority to extend the Social HMO waiver authority and, therefore, 
that Congress does not need to extend the waivers through statute. The 
Social HMOs are aware of HCFA's position on this matter but feel 
strongly that Congress extend our waiver authority through statute. 
First generation sites have never received an administrative waiver and 
have relied on Congress to extend our demonstration authority four 
times since our inception. While the BBA required HCFA to Report to 
Congress with a plan on how to integrate the Social HMOs into the M+C 
program as a standard benefit option, HCFA's focus appears to be on 
whether to make the Social HMOs a permanent benefit option. Further, 
while the States of Florida and Maryland both received planning grants 
to develop second generation Social HMO programs for the dually 
eligible in 1998, in recent months, HCFA has reminded these states 
repeatedly that the Social HMO waiver authority expires at the end of 
2000. This suggests that HCFA has doubts about the ability to implement 
these demonstrations as proposed by Maryland and Florida. Given the 
uncertainty of HCFA's approach toward Social HMO permanency, the Social 
HMO sites would feel more confident of our ability to survive the 
transition from demonstration status to permanency through an extension 
in law.

           Alternative M+C Risk Adjustment for Frail Elderly

    The Social HMOs urge the Subcommittee's serious consideration of 
MedPAC's recommendations to Congress on Medicare payment for the frail 
elderly, with some modifications. Attachment A lists several of 
MedPAC's recommendations, with our proposed changes and rationale for 
such changes. In general, MedPAC recommends that the Secretary study 
factors affecting the costs of care for the frail elderly to determine 
the need for an alternative to the current risk adjustment methodology. 
We strongly support the need for an alternative risk adjustment 
mechanism. Like several other Medicare demonstrations cited in MedPAC's 
report, the Social HMOs have been paid under a risk adjustment 
mechanism that accounts for the impact of functional impairments on 
medical costs for the frail elderly. Payment research regarding the 
frail elderly population shows that functional impairment status is 
among the most significant indicators of higher risk and costs. For 
example, several studies show that Medicare costs for frail elderly who 
are deemed nursing home certifiable, but who are receiving care in the 
community, are over three times higher than average Medicare per capita 
costs.
    While HCFA has begun to explore alternatives to the standard risk 
adjustment methodology, we understand that it has some concerns about 
the continued use of certain mechanisms in establishing payment rates 
for frail elderly programs such as the use of self-report health status 
measures as a risk identification tool and the use of functional 
impairment measures as part of a risk adjustment methodology. We 
understand that the basis for concern relates to administrative issues 
such as data collection. The Social HMOs and other demonstration 
programs have been collecting functional data for upwards of fifteen 
years through a combination of self-report health status tools that 
identify high-risk candidates, follow-up clinical assessments for those 
identified as high risk, and third party verification of assessments. 
Accordingly, we believe it would be inappropriate to discard these risk 
adjustment strategies. These and other issues are addressed by MedPAC's 
recommendations.

                           Enrollment Levels

    The Omnibus Reconciliation Act of 1990 codified minimum enrollment 
levels for the Social HMO demonstrations, providing that sites could 
enroll ``not less than'' 12,000 beneficiaries per site. This level was 
increased to 36,000 under the BBA. While the statutory language defines 
this enrollment threshold as a floor, HCFA began interpreting this 
threshold as a ceiling beginning in 1998. According to HCFA, an 
increase in enrollment beyond 36,000 ``would not be prudent until HCFA 
determines how it will risk adjustment payments and how Social HMOs 
will transition into the M+C environment.'' Treating the enrollment 
threshold as an upper limit instead of a floor has created enormous 
problems for several of the Social HMOs that are at or close to the 
limits. The Health Plan of Nevada (HPN) has reached it's enrollment 
limit and has been forced to wait list beneficiaries who wish who join 
the Social HMO. Since HPN has a standard M+C contract, it can enroll 
new members under their standard plan on an interim basis. 
Notwithstanding this advantage, however, the administrative process of 
wait listing is enormously burdensome to both the beneficiary and the 
plan. SCAN is within a few thousand members of reaching the limit and 
has been forced to substantially scale back marketing efforts. Last 
year, as SCAN began to approach the enrollment threshold, the company 
had to lay off half of its sales staff to slow enrollment growth. Since 
SCAN does not have a standard M+C contract, wait listing may not be a 
viable option since beneficiaries are likely to simply join another 
plan. Elderplan has received approval at the state level for expansion 
into three additional counties (Manhattan, Queens and Staten Island) 
that will substantially increase the potential pool of beneficiaries. 
The enrollment cap could begin to hinder Elderplan's expansion prior to 
the enactment of permanency legislation as well. Like SCAN, Elderplan 
does not have standard M+C contract as a fall back position.
    Elderplan, SCAN and Sierra request the Subcommittee's consideration 
of an increase in the enrollment threshold to help maintain plan 
viability until permanency legislation is enacted. While the enrollment 
cap of 36,000 assumed a transition to permanency by the end of 2000, 
the delay in HCFA's report to Congress until sometime next year will 
almost certainly delay permanency until 2001 at the earliest. It will 
be difficult for these plans to survive until permanency without relief 
from the enrollment cap. The enrollment cap makes it extremely 
difficult to offer competitive contracts to employees and providers and 
creates an environment of uncertainty for prospective enrollees. 
Providers are reluctant to contract with plans that provide limited 
access to clients while imposing special requirements relative to the 
terms and conditions of the demonstration. Opportunities for 
professional growth, advancement and compensation for employees also 
are limited for plans that are prevented from growing. SCAN lost 
several key employees last year when their enrollment growth was put on 
hold. Since the BBA scoring in 1997 assumed enrollment of 36,000 at 9 
demonstration sites, or a total of up to 324,000 enrollees, an increase 
in the enrollment threshold during the transition period should be cost 
neutral. There are currently only 4 Social HMOs operational and the 
earliest the Florida and Maryland sites could begin enrolling would be 
late in 2000 or early 2001.
          * * * * *
    We appreciate the Subcommittee's serious consideration of the 
attached amendments as part of a larger package of refinements to the 
BBA.
      

                                


Social HMO Proposed Medicare Amendments 1999

                                Summary

    Enact a technical amendment to Medicare to extend Social 
HMO demonstration authority until such time as Congress enacts 
legislation making the Social HMOs a permanent benefit option 
under M+C coordinated care plan options.
    Consistent with MedPAC's June Report to Congress, and with 
modifications proposed by the Social HMOs, direct the Secretary 
to examine and develop appropriate payment methodologies for 
health plans serving frail Medicare beneficiaries, as follows:
    Direct the Secretary to study factors affecting the costs 
of care for frail Medicare beneficiaries and develop an 
alternative risk adjustment methodology for M+C plans serving 
this population that includes functional impairment factors by 
January 1, 2001.
    Postpone application of the current M+C risk adjustment 
methodology to specialized plans until an appropriate payment 
methodology is established.
    In the long term, the Secretary should set capitation 
payments for traditional Medicare benefits for frail 
beneficiaries based on their characteristics, not on the type 
of plan to which they belong.
    Performance measures for programs for frail Medicare 
beneficiaries should reflect their health care needs, special 
practices of care, and the value of additional benefits 
provided under demonstration authority.
    Special measures for evaluating and monitoring care for 
frail Medicare beneficiaries should be included in the M+C plan 
quality measures and reporting requirements.
    Medicare demonstrations should have the option of 
maintaining continuous open enrollment or complying with 
standard M+C enrollment rules.

    Enact a technical amendment to Medicare to extend Social 
HMO demonstration authority until such times as Congress enacts 
legislation making the Social HMOs a permanent benefit option 
under M+C coordinated care plan options.

    Rationale: The BBA extended the Social HMO waiver authority 
through December 31, 2000. It directed the Secretary to report 
to Congress by January 1, 1999 regarding a plan for integrating 
the Social HMO demonstration into the M+C demonstration into 
the M+C program as a permanent benefit option. HCFA currently 
anticipates completing its Report to Congress by the end of 
1999. Had the report arrived on time, Congress would have had 
two full years to consider permanency legislation in the year 
waiver authority expires, which is an election year with a 
shortened legislative calendar. Further, an important component 
of the permanency legislation includes recommendations on an 
appropriate payment methodology. Given that HCFA is unlikely to 
have developed an alternative to the interim M+C risk 
adjustment methodology for the frail elderly by early 2000, 
Congress would be forced to develop permanency legislation 
without guidance from HCFA regarding an appropriate payment 
mechanism. An extension would protect Social HMO beneficiaries 
from disruption in services (or being forced to disenroll and 
find new coverage), provide HCFA the time needed to explore 
alternative risk adjustments, and give Congress time to 
evaluate options for permanency legislation.

    Modifications to MedPAC Recommendations on Managed Care for 
Frail Medicare Beneficiaries: Payment Methods and Program 
Standards

                       MedPAC Recommendations 5A:

    The Secretary should study factors affecting the costs of 
care of frail beneficiaries and all other Medicare 
beneficiaries to determine if changes are needed to improve 
Medicare+Choice risk adjustment system.

    Proposed Modifications:

    The Secretary should study factors affecting the costs of 
care for frail beneficiaries and all other Medicare 
beneficiaries including, but not limited to functional and 
cognitive impairments.
    The Secretary should develop a risk adjustment methodology 
the incorporates functional status factors, building upon the 
M+C claims-based risk adjustment, by January 1, 2001.
    This study should identify data needed to support 
improvements in the M+C risk adjustment system, including, but 
not limited to self-reported health status surveys, assessments 
of client health, functional and cognitive status and 
utilization data including such services as high risk 
screening, care management, home and community-based services 
and special interventions that may not be specified in the 
Medicare Part A and B benefit package.
    Rationale: Research conducted by the Long-Term Care Data 
Institute and others shows that the PIP and HCC risk adjustment 
methodologies dramatically underpay plans for frail 
beneficiaries with functional impairments due, in part, to the 
absence of functional impairment factors. The PIP methodology 
would result in underpayments of up to approximately 40% for 
nursing home certifiable enrollees living in the community. 
Therefore, Congress should direct HCFA to include, at a 
minimum, risk factors related to functional status factor in 
whatever alternative payment model it devises. Additionally, 
early indications from HCFA staff suggest that it is interested 
in identifying alternative frailty factors due to the costs of 
collecting functional data across the Medicare population and 
concerns with the validity of current data collection 
instruments. Since the Social HMOs and other Medicare 
demonstrations have been collecting this type of data 
successfully for upwards of 15 years, we do not believe the 
functional factors should be eliminated. Further, we are 
concerned about the potential impact of an alternative risk 
adjustment based on utilization factors such as home health 
care, given the dramatic cuts in Medicare fee-for-service 
payments under the BBA.

                       MedPAC Recommendations 5C:

    The Secretary should postpone by at least one year the 
application of the interim Medicare+Choice risk adjustment 
system to specialized plans. Plans should be paid using 
existing payment methods until a risk adjustment or other 
payment system is developed that adequately pays for care for 
frail Medicare beneficiaries.

    Proposed Modifications:

    The Secretary should postpone by at least one year the 
application of the interim Medicare+Choice risk adjustment 
system to specialized plans. Specialized plans should be paid 
using Their existing payment methods until a risk adjustment or 
other payment system is developed that adequately pays for care 
for frail Medicare beneficiaries. ``Specialized plans'' shall 
include the Social HMO, PACE, EverCare, and Minnesota Senior 
Health Options demonstrations and dual eligible demonstrations 
operating under waiver authority granted by HCFA prior to or 
subsequent to the enactment of this provision.

    Rationale:

    The inclusion of a one year exemption from the current M+C 
payment methodology assumes that an alternative methodology 
will be available within this timeframe. The period of the 
exemption for specialized plans should be linked to the 
availability of a new, more appropriate payment methodology to 
avoid the need for future legislative extension of the 
exemption.

                       MedPAC Recommendations 5E:

    Performance measures for programs for frail Medicare 
beneficiaries should reflect the beneficiaries' health care 
needs and special practices for their care.
    Performance measures for programs for frail Medicare 
beneficiaries should reflect the beneficiaries' health care 
needs, and special practices for their care, and the value of 
additional benefits provided under Social HMO demonstration 
authority.

    Rationale:

    The Social HMOs believe that it would be helpful to assess 
the benefits of additional services provided to beneficiaries 
under demonstration programs, such as the long-term care 
benefits provided by the Social HMOs.

                       MedPAC Recommendations 5F:

    The Secretary should include special measures for 
evaluating and monitoring care for frail Medicare beneficiaries 
in the Medicare+Choice plan quality measurement and reporting 
requirements.

    Proposed Modifications: None.

                       MedPAC Recommendations 5G:

    The Secretary should not now limit enrollment into the 
Program of All-Inclusive Care for the Elderly to a particular 
time of the year.

    Proposed Modifications:

    The Secretary should not now limit enrollment into the 
Program of all-Inclusive Care for the Elderly or other 
specialized plans for frail elderly operating under Medicare 
demonstration authority, to a particular time of the year. 
Medicare demonstrations should have the option of maintaining 
continuous open enrollment or complying with standard M+C 
enrollment rules.

    Rationale:

    The Social HMOs Believe that all of the Medicare 
demonstrations serving frail elderly should be accorded the 
benefit of greater flexibility in enrollment, due to the 
smaller size of our risk pools resulting from enrollment caps, 
and the need to maintain minimum enrollment to effectively 
manage risk. We also believe that continuous open enrollment 
should be permitted on a voluntary basis, since the larger 
Social HMOs the have standard M+C contracts in addition to 
Social HMO contracts may wish to employ a single approach to 
enrollment across all plans.

                                


Statement of Stanley N. Lapidus, President, Exact Laboratories, Inc., 
Maynard, MA

    Chairman Thomas, Congressman Stark, and Subcommittee 
members, I appreciate the opportunity to discuss the issue of 
refinements to the Balanced Budget Act (BBA) as they affect 
small biotechnology companies, like Exact Laboratories, which 
are working to develop cutting-edge life-saving technologies.
    The bottom line of my message is simple: The BBA wisely 
added important preventive screening benefits to Medicare, 
including screening for colorectal cancer. But because these 
technologies are specifically spelled out in the law, they may 
limit opportunity for new and improved technologies.
    But before I discuss the BBA further, let me first 
introduce you to the challenges of colorectal cancer and the 
innovative technology Exact Laboratories has developed in the 
fight against colorectal cancer.
    Colorectal cancer is the second leading cause of death from 
cancer in the United States. It appears frequently among both 
men and women of all races and is commonly seen in individuals 
sixty-five and older. Colorectal cancer is particularly deadly 
among African American men, who have approximately a 45 percent 
increased mortality rate in comparison to other groups.
    Colorectal cancer develops slowly from a pre-cancerous 
lesion commonly known as a ``polyp.'' It is curable if it is 
identified at its earliest stages when it can be completely 
removed, sometimes only with very minor surgery. Therefore, 
until there's a cure, the key to reducing mortality from 
colorectal cancer is early detection.
    There are currently three types of screening tests for 
colorectal cancer, each of which is mentioned in the BBA. The 
most common method, the stool blood test, only finds cancers 
and polyps if they bleed, which is not the case for most early 
cancers and polyps. A second test involves the examination of 
the left side of the colon by passing a flexible tube (flexible 
sigmoidoscope) from the anus through the rectum for a distance 
of about two feet. This allows the medical professional to 
directly see and remove or biopsy any suspicious areas. Doctors 
recommend a fecal blood test annually and the flexible 
sigmoidoscopy every five years for individuals with a family 
history of colorectal cancer or who are over the age of fifty.
    A third test can examine the entire colon by use of a 
special x-ray called a double contrast barium enema, which 
requires that the colon be completely emptied of stool. Because 
African Americans have a greater tendency to develop cancer on 
the right side of the colon, out of reach of the flexible 
sigmoidoscope, this test is more helpful for that constituency 
and was added to the recommended tests listed in the BBA 
through the good work of many of you on the committee and your 
colleagues who have a particular interest in this issue.
    A colonoscopy--which examines the entire colon using a 
longer scope than that used in the flexible sigmoidoscopy--is 
generally used only for individuals who have a high risk of 
developing colon cancer, although there has recently been some 
interest among professionals in using this as a screening test 
every ten years.
    All of these screening methods have their drawbacks. The 
stool blood test isn't very accurate; and I probably don't need 
to tell many of you on the panel that the flexible 
sigmoidoscopy, the double contrast barium enema, and the 
colonoscopy involve a great deal of discomfort and 
inconvenience. It therefore shouldn't come as a surprise that 
there are many compliance problems with each of these tests. 
And that means early detection doesn't happen as frequently as 
it should--in fact, we estimate that more than 75% of the at-
risk population (those age 50 and above) is non-compliant.
    We at Exact Laboratories believe we can change that 
problem.
    We are a small company based in Massachusetts dedicated to 
playing a leading role in the eradication of colorectal cancer 
through the development of an innovative, patient-friendly 
method for detecting early stage colorectal cancer and its 
precursor lesions. Under our system, the patient only needs to 
provide a stool sample through non-offensive collection and 
transport containers we have developed. The sample is then 
processed and examined by our labs for DNA from any 
abnormalities which indicate a development of colorectal 
cancer. Let me be clear: Because the DNA we examine is from the 
tumor or precancerous lesion itself, this is not a so-called 
``gene test'' to detect susceptibility to developing colon 
cancer.
    Our clinical tests at the Mayo Clinic thus far indicate a 
very high level of accuracy: Exact testing has found 90 percent 
of the cancers; 73 percent of the polyps, and no false positive 
results. We will soon embark on further, broader clinical 
trials.
    Because our test is extremely patient-friendly, we believe 
compliance will increase. And, as compliance increases, the 
incidence of mortality from colon cancer will decrease. It is 
worth repeating: Early detection saves lives.
    Mr. Chairman and distinguished Members of the Subcommittee, 
as I mentioned at the beginning of my testimony, Congress has 
wisely recognized the life-saving and cost-cutting benefits of 
screening for cancer by including coverage of these tests under 
the BBA. However, the current language in the BBA encompasses 
only the current tests described above and ``such other tests 
or procedures, and modifications to tests and procedures under 
this subsection, with such frequency and payment limits, as the 
Secretary deems appropriate, in consultation with appropriate 
organizations.'' Although this language does not preclude new 
technologies from consideration, we believe it places 
unnecessary hurdles before a small company with great promise 
like Exact Labs.
    We believe the current language of the BBA can be vastly 
improved by recognizing new technologies, and would recommend 
that Congress consider amending the BBA by changing the 
language to something similar to that found in HR 1816, the 
Eliminate Colorectal Cancer Act of 1999. That language requires 
that private health insurance plans ``shall cover the method 
and frequency of colorectal cancer screening deemed appropriate 
by a health care provider treating such participant or 
beneficiary, in consultation with the participant or 
beneficiary.'' In doing so, Congress will be accommodating the 
advent of new screening technology and returning the decision 
of what method of screening to where it belongs--the doctor, in 
consultation with the patient.
    Thank you once again, Mr. Chairman and Members of the 
Subcommittee, for the opportunity to speak to you today.

                                


Statement of Home Health Services & Staffing Association

    Thank you Chairman Thomas and members of the Subcommittee 
for holding this important hearing today to review the impact 
of the Balanced Budget Act of 1997 (BBA 97) on Medicare 
patients and providers. The hearing is extremely timely as 
Congress determines the legislative changes needed this year 
for Medicare providers.
    The Home Health Services & Staffing Association (HHSSA) is 
a non-profit association representing over 1,500 free-standing, 
proprietary home health companies in 48 states. The Association 
is primarily interested in ensuring a sound prospective payment 
system (PPS) is implemented on October 1, 2000. Recognizing 
that the interim payment system (IPS) is extremely flawed, and 
meant to be the reimbursement policy for a short period, we 
would strongly urge Congress to focus the debate on the 
prospective payment system being developed by the Health Care 
Financing Administration (HCFA). A proposed rule on the new 
system is scheduled for October of this year, and a final rule 
is to be announced in July 2000. At the end of this testimony, 
HHSSA has provided recommendations that will contribute to the 
success of a cost-effective, Medicare home health benefit for 
the growing aging population in the United States.

  George Washington University Announces Findings on Impact of BBA 97

    On September 14, George Washington University announced the 
findings of its study on the impact of BBA 97 on home health patients 
and providers. (An Examination of Medicare Home Health Services: A 
Descriptive Study of the Effects of the Balanced Budget Act Interim 
Payment System on Access to and Quality of Care, Center for Health 
Services Research & Policy, George Washington University, September 
1999) The study describes the status of the home health industry after 
patients and providers were under IPS for one full year. This differs 
in comparison to the studies conducted by the General Accounting Office 
(GAO) and the Medicare Payment Advisory Commission (MedPAC), which were 
completed before all home health agencies were on IPS a full year.
    Many of the findings of the George Washington University study are 
similar to the findings of GAO and MedPAC. For example, access to home 
health services for the sickest, most frail Medicare beneficiaries has 
been gravely impacted by the implementation of BBA 97, even though the 
eligibility for these services was not changed. The study also 
highlights other problems that need to be considered as the Medicare 
home health benefit moves to a PPS next year.
    Some of the significant findings were:
    1. Access to home health services for the sickest patients is being 
eliminated. Home health agencies of all auspices are being compelled by 
IPS to radically alter their case mixes by eliminating the most costly 
patients. Diagnoses being the most severely affected are diabetes, 
congestive heart failure, chronic obstructive pulmonary disease (COPD), 
and mental or emotional disorders. See Report at 20-21.
    2. Access to specialty care is being eliminated even for the 
beneficiaries who are still able to obtain services. Clinical staffing 
levels have declined 37% since 1994 with the greatest reductions being 
in specialty therapists and home health aides. See Report at 24-25.
    3. Access to medically necessary services is likely to deteriorate 
further because many agencies are subsidizing Medicare services with 
charitable and private funds, and HCFA has yet to implement the 
``proration'' requirement in BBA 97. See Report at 25-26.
    4. An additional reduction in reimbursement by 15%, as is scheduled 
for October 1, 2000, will exacerbate these already severe access 
problems. See Report at 36.
    5. Any PPS based on data generated under the interim payment system 
is likely to be flawed and will exclude the sicker patient population. 
See Report at 36.
    These findings come on the heels of HCFA's recent projection that, 
in fiscal year 2000, 93.5% of home health agencies participating in 
Medicare will have their cost reimbursement limited by either the per 
visit or the per beneficiary limit. (64 Fed. Reg. at 42780, August 5, 
1999) This means that in the coming fiscal year nearly 95% of home 
health agencies will be reimbursed at less than their actual costs even 
before the additional 15% cut.

       Statistics/Data Confirm George Washington University Study

    The findings of the study are reflected in the dramatic changes in 
the home health industry. The following list is not complete, but 
highlights the problems associated with the implementation of BBA 97 on 
Medicare home health services. This means that home health is not able 
to be a vital component to the health care delivery system at a time 
when it could be a cost-effective service for the growing elderly 
population.
    1. According to HCFA's most recent utilization data for home 
health, the total number of claims received in fiscal year 1997 was 
20,959,349 and the total number of claims received in fiscal year 1998 
was 16,880,856--about a 20% decrease in the number of claims received. 
(HCFA Contractor Reporting of Workload Data, February 1, 1999)
    2. 2,195 Medicare-certified home health agency offices have closed 
since January 1998, according to a survey of state health licensure 
departments. Hardest hit was Texas, where 352 agencies and another 438 
branch offices closed. Other states with large numbers of closures: 
Louisiana-250, California-153, Florida-97, Missouri-91, Oklahoma-87, 
Tennessee-67, and Indiana-60. (Eli's Home Care Week, Volume VIII, 
Number 6, February 8, 1999)
    3. Home care stocks dropped 43.8% in 1998 according to an annual 
survey by Hilton Head, South Carolina-based HealthCare Markets Group, 
Inc. (Eli's Home Care Week, Volume VIII, Number 2, January 11, 1999)
    4. Home care stocks dropped 55.8% between April 1, 1998 and March 
31, 1999 according to a financial analysis of home care public 
companies by Houlihan, Lokey, Howard & Zukin Investment Bankers. (March 
31, 1999)
    5. Home Health Corporation of America filed for Chapter 11 
bankruptcy protection on February 18, citing Medicare cutbacks as one 
cause of its mounting debt. HHCA will not go out of business, but will 
downsize by releasing 300, or about 10% of its employees. (HomeCare 
Monday, February 22, 1999)
    6. Employment at free-standing home health agencies declined by 
7,000 jobs in January 1999. Since September 1997, free-standing HHAs 
have lost 61,000, or 8.5%, according to the Bureau of Labor Statistics. 
(Eli's Home Care Week, Volume VIII, Number 7, February 15, 1999)
    7. In Home Health Inc. reported a loss of $132,000 on revenue of 
$18.6 million in the quarter ended December 31. That compares with net 
income of $186,000 on revenue of $27.9 million during the same period 
the year before. ( . . . home health line, February 15, 1999)
    8. Home care workers received only a .7% wage increase in 1997, 
while Americans as a whole saw a 3.4% increase, according to new Labor 
Department statistics. (The Washington Times, Eli's Home Care Week, 
Volume VIII, Number 6, February 8, 1999)
    9. A Visiting Nurses Association branch in Illinois found that 
Medicare payments are now so low that it made the painful decision to 
abandon 25 patients who needed the most expensive care, rather than 
face the possibility of having to go out of business in a few months 
and strand some 300 patients. (The Washington Post, A1, May 10, 1999)
    10. Medicaid is picking up the slack for Medicare caused by the 
BBA, Christine Ferguson, director of Rhode Island's Human Services 
Department testified at a May 12 Senate Finance Committee hearing on 
Medicare reform. ``There has been a widespread decrease in access to 
home care services,'' and increased hospitalizations have resulted, she 
said. (Eli's Home Care Week, Volume VIII, May 24, 1999)
    11. By 2002, hospital-based HHAs will have seen a payment reduction 
of over $5.5 billion--a 22% cut from pre-Balanced Budget Act levels, 
says a new study by the Lewin Group. (Eli's Home Care Week, Volume 
VIII, May 24, 1999)
    12. The Congressional Budget Office (CBO) projected the Medicare 
savings from the home health benefit to be $16.1 billion over five 
years. The CBO revised baseline in March 1999, showed a 300% higher 
savings than projected at $48.8 billion over five years. The rate of 
growth for home health services was significantly lower in 1998 than 
any other health care provider. (Congressional Budget Office, Revised 
Baseline Calculations on BBA 97, March 1999)

Recommendations

    HHSSA strongly urges Congress to review the Medicare home 
health benefit under the context of the new reimbursement 
system to be implemented on October 1, 2000. The Health Care 
Financing Administration (HCFA) is developing a PPS for home 
health and the proposed rule should be announced this month. As 
the aging population increases, HHSSA requests that Congress 
determine the role home health services should play and ensure 
that the proper reimbursement matches that role.
    As the home health industry moves to a PPS, we urge 
congressional consideration of the following:
     Development of the Prospective Payment System 
(PPS):
    Please note that a new, untested PPS will go into effect 
for all home health agencies on October 1, 2000, without any 
phase-in. The PPS rates will be reduced by a mandatory 15% cut 
at the same time.
    HHSSA urges Congress to ensure the home health PPS: 1) 
encompasses all eligible Medicare beneficiaries in an adequate 
reimbursement structure, 2) is simple for agencies and HCFA to 
administer, and 3) is easily monitored for quality of care 
delivered to the Medicare beneficiaries.
    If HCFA is unable to provide an adequate PPS, HHSSA would 
urge Congress to consider a model similar to the proposal 
introduced by Senator Connie Mack (S. 1414), which is based on 
data from a Kaiser Family Foundation study.
     Elimination of the 15% Cut Scheduled on October 1, 
2000:
    HHSSA urges Congress to act this session to eliminate the 
15% cut scheduled for implementation--regardless of whether PPS 
is implemented--on October 1, 2000.
    According to Congressional Budget Office projections, home 
health services will save the Medicare program 300% more than 
was projected at the time BBA 97 was passed. This decline can 
also be seen in the plummeting rate of growth for home health 
services and the significant decrease in claims submitted to 
the Medicare fiscal intermediaries.
    Any additional reductions will further increase the 
problems eligible Medicare beneficiaries are having gaining 
access to the home health benefit.
     Enact an Outlier Provision for the Sickest, Most 
Frail Medicare Beneficiaries:
    IPS severed the sickest, most frail Medicare beneficiaries 
from the Medicare home health benefit. Although these 
beneficiaries are still eligible to receive Medicare home 
health services, home health agencies no longer have the 
capacity to care for these patients.
    As observed in the George Washington University study, 
access to care for many patients has been jeopardized. Patients 
with conditions such as complex diabetes, MS, COPD and heart 
failure are having difficulty obtaining home health services.
    In order to reinstate the reimbursement for these patients, 
HHSSA urges Congress to support an outlier that may be used in 
the short term under IPS and can also be used under PPS.
    An important aspect to remember is that HCFA's PPS is being 
developed with post-BBA 97 data. The data obtained after the 
implementation of IPS is flawed because it does not include the 
sickest patients who are no longer receiving services. HHSSA 
urges Congress to ensure that proper data is used in the 
development of PPS.
     Require HCFA to Provide Home Health Agencies an 
Extended Repayment Schedule of Up to Five Years Interest-Free 
for IPS-Related Overpayments:
    BBA 97 was implemented on October 1, 1997. Many home health 
agencies were not informed of their per-beneficiary limit until 
long after they had been under the new reimbursement system. 
There was little opportunity for the fiscal intermediaries to 
provide agencies with their aggregate per-beneficiary limit.
    Several HHSSA members were under IPS for over a year before 
HCFA provided them with their actual per-beneficiary limit. 
This made budgeting difficult for agencies that did not know 
their limit in advance.
    At the end of 1998 and beginning of 1999, home health 
agencies began receiving notices of ``overpayments'' from HCFA. 
Many agencies had overwhelming amounts of money to be recouped 
from the federal government. In order to assist agencies with 
large overpayments, HHSSA urges Congress to support a five-year 
interest-free repayment plan. This is particularly important as 
the industry is moving to a completely new reimbursement system 
on October 1, 2000, and serious cash flow problems related to 
the change in reimbursement could occur.
    HHSSA would like to thank the Subcommittee on Health for 
your efforts in providing relief for home health patients and 
providers. If you should need further information or would like 
a complete copy of the George Washington University study, 
please contact us at (202) 296-3800.
    [An attachment is being retained in the Committee files.]

                                


Statement of House Rural Health Care Coalition

    As members of the House Rural Health Care Coalition, we 
appreciate the opportunity to address the Subcommittee 
regarding our concerns for the future of health care in rural 
America. The Balanced Budget Act (BBA) has led to many 
unintended consequences for health care in rural areas, while 
the Health Care Financing Administration's interpretation of 
the BBA has exacerbated many of these problems. As a result, 
numerous rural health care providers are teetering on the brink 
of reducing and eliminating essential services, and a vast 
number of citizens face the threat of being shut out from 
receiving vital health care.
    The House Rural Health Care Coalition urges you to include 
the rural specific provisions included in our bill, H.R. 1344--
the Triple-A Rural Health Improvement Act, in any Medicare 
reform proposals brought before the U.S. Congress, large or 
small. Introduced on March 25, 1999, this bill is designed to 
protect the rural health infrastructure, provide targeted BBA 
relief, improve access to Medicare health plan options, 
increase availability of telemedicine, and create common sense 
rural health tax policy.
    A summary of the provisions included in H.R. 1344 is 
attached. In particular, we would like to highlight the 
following key issues which are vital to ensuring access to 
health care services for rural Medicare and Medicaid 
beneficiaries:
    (1) Hospital Outpatient Prospective Payment System--We 
support exempting rural hospitals from the outpatient 
prospective payment system (PPS). The outpatient PPS is 
intended to cut the fat out of Medicare payments. Rural 
hospitals have always done more with less and have no fat to 
cut. Maintaining the PPS for rural hospitals will prove 
devastating to the rural health infrastructure. The outpatient 
PPS provision in H.R. 1344 directs HCFA to establish a 
methodology that guarantees health care services will continue 
to be available to beneficiaries in rural and frontier 
communities. This is accomplished by exempting Critical Access 
Hospitals, Medicare Dependent Hospitals, and Sole Community 
Hospitals from the outpatient PPS.
    (2) Hospital Transfer Penalty--We support repealing the 
hospital transfer penalty, a provision included in the BBA that 
requires hospitals to return a portion of the DRG payment if a 
patient is transferred to another care setting before the DRG 
payment period has expired. The transfer penalty 
disproportionately affects efficient rural providers because 
average lengths of stay for patients in rural hospitals are 
shorter than average lengths of stay in other hospitals. H.R. 
1344 repeals the hospital transfer penalty that is imposed on 
hospitals that transfer patients to other care settings before 
the DRG payment period has expired.
    (3) Critical Access Hospitals--Critical Access Hospitals 
(CAH) were established under the BBA to allow rural hospitals 
to convert to a limited service hospital status. These 
hospitals are given relief from certain Medicare regulations 
and are paid based on cost. Under the BBA, a closed or 
downsized hospital does not qualify for the program. H.R. 1344 
allows a hospital that has closed in the past five years to 
qualify for the CAH program. It also permits CAHs to be granted 
deemed status in order to gain accreditation by the Joint 
Commission of Healthcare Organizations. In addition, the bill 
allows any CAH to choose the all-inclusive rate payment option 
for its facilities and physician services. This reimbursement 
system was used by the Rural Primary Care Hospital program 
which was the demonstration project testing the feasibility of 
the CAH concept. Changing the reimbursement system has impacted 
the way CAHs contract with doctors and made the conversion to 
CAHs less appealing.
    (4) Medicare Dependent Small Rural Hospitals--Medicare 
Dependent Hospitals (MDHs) are hospitals in rural areas with 
100 beds or fewer whose patient load is 60% Medicare 
beneficiaries. The following changes contained in H.R. 1344 
will allow this program to benefit more rural hospitals. It (a) 
changes the base year for eligibility to the most recent 
hospital fiscal year ending in 1998; (b) lowers the Medicare 
patient load from 60% to 50% in order to qualify for the 
program; and (c) includes a hold harmless for the MDH rebasing 
so that any hospital which would lose this status from changes 
would be allowed to keep it.
    (5) Rural Impact Statements--We support establishing a 
mechanism to ensure that rural concerns are taken into account 
in federal health policy making. H.R. 1344 mandates that any 
legislative or regulatory proposal to change a federal program 
must contain a rural impact statement that--at a minimum--
includes an impact analysis on: (a) rural safety net providers; 
(b) rural primary care providers; (c) rural hospitals; (d) 
federally-qualified health clinics and rural health clinics; 
(e) local rural economies; and (f) where rural residents would 
be affected.
    In closing, we respectfully request that the Subcommittee 
consider these important rural specific provisions, as well as 
the other important provisions in H.R. 1344, in the context of 
any BBA relief legislation to be brought before Congress. Thank 
you for the opportunity to bring these important concerns that 
impact the health and well-being of residents living in rural 
America before you today.
            Sincerely,
    The Honorable Jim Nussle, Co-Chair
    The Honorable Mike McIntyre, Co-Chair
    The Honorable Doug Bereuter, Steering Committee Member
    The Honorable Marion Berry, Steering Committee Member
    The Honorable Henry Bonilla, Steering Committee Member
    The Honorable Larry Combest, Steering Committee Member
    The Honorable Peter DeFazio, Steering Committee Member
    The Honorable Jo Ann Emerson, Steering Committee Member
    The Honorable Rick Hill, Steering Committee Member
    The Honorable Ron Kind, Steering Committee Member
    The Honorable David Minge, Steering Committee Member
    The Honorable Jerry Moran, Steering Committee Member
    The Honorable James Oberstar, Steering Committee Member
    The Honorable John Peterson, Steering Committee Member
    The Honorable Earl Pomeroy, Steering Committee Member
    The Honorable Charles Stenholm, Steering Committee Member
    The Honorable Bart Stupak, Steering Committee Member
    The Honorable Mac Thornberry, Steering Committee Member

                                


Summary of the Triple-A Rural Health Improvement Act (H.R. 1344) 
Introduced by Congressmen Jim Nussle and Mike McIntyre

               Protecting the Rural Health Infrastructure

    Hospital Outpatient Prospective Payment System--Many hospitals in 
rural areas will be faced with extreme financial difficulties due to 
the new outpatient PPS. This provision of the bill directs HCFA to 
establish a methodology that guarantees health care services will 
continue to be available to beneficiaries in rural and frontier 
communities. This is accomplished by exempting Critical Access 
Hospitals, Medicare Dependent Hospitals and Sole Community Hospitals 
from the outpatient PPS system.
    Hospital Transfer Penalty--The Balanced Budget Act included a 
provision that requires hospitals to return a portion of the DRG 
payment if a patient is transferred to another care setting before the 
DRG payment period has expired. This provision has already created 
significant financial challenges for many rural hospitals. This 
provision repeals the hospital transfer penalty that is imposed on 
hospitals that transfer patients to other care settings before the DRG 
payment period has expired.
    Sole Community Hospital (SCH) payment update--These hospitals are 
considered the only source of inpatient services that are reasonably 
available within a geographic area. Many SCHs are effectively losing 
money because the Medicare reimbursement for these types of hospitals 
has not been updated to keep up with economic factors. This provision 
would update the base cost-reporting period from 1982 to the most 
recent audit year. This provision was included in the Senate-passed 
BBA, but dropped in conference.
    Critical Access Hospitals--Critical Access Hospitals (CAHs) were 
established under the BBA to allow rural hospitals to convert to a 
limited service hospital status. These hospitals are given relief from 
certain Medicare regulations and are paid based on cost. Under the BBA, 
a closed or downsized hospital does not qualify for the program.
    This provision allows a hospital that has closed in the past 5 
years to qualify for the CAH program. Additionally the provision allows 
Medicaid to reimburse CAHs for services provided to Medicaid 
recipients. Finally, the provision allows CAHs to be granted deemed 
status to allow them to be accredited by the Joint Commission on 
Accreditation of Healthcare Organizations.
    A second provision will allow any CAH to choose the all inclusive 
rate payment option for their facilities and physician services. This 
reimbursement system was used by the Rural Primary Care Hospital 
program which was the demonstration project testing the feasibility of 
the CAH concept. Changing the reimbursement system has impacted that 
way CAHS contract with doctors, and made the conversion to CAHs less 
appealing.
    Medicare Dependent Small Rural Hospitals--Medicare Dependent 
Hospitals are hospitals in rural areas with 100 beds or fewer whose 
patient load is 60% Medicare beneficiaries. The following changes 
contained in the bill will allow this program to benefit more rural 
hospitals. (1) The bill changes the base year for eligibility to the 
most recent hospital fiscal year ending in 1998. (2) The bill lowers 
the Medicare patient load from 60% to 50% in order to qualify for the 
program. Finally, there is a hold harmless for the Medicare Dependent 
Hospital rebasing so that any hospital which would lose MDH status from 
changes would be allowed to keep it.
    DSH Reclassification--This provision permanently extends the 
ability of hospitals to apply to the Medicare Geographic Classification 
Review Board for DSH payment reclassification. The provision also 
requires HCFA to develop new criteria for DSH applications by 1/1/2001.
    Medicare Wage Index--The Medicare Wage Index is a portion of the 
PPS payment formula. Hospitals that meet certain criteria can apply to 
have their wage index reclassified to a higher-paying geographic area. 
These provisions make it easier for rural hospitals to apply for wage 
index reclassification for the purposes of higher payment.
    The provisions also include a Sense of the Congress that the 
current Hospital Wage Index should only be used for Hospital inpatient 
PPS systems, and not applied to other Medicare payments.
    Medicare Wage Index and Geographic Reclassification--Under current 
law, hospitals are allowed to apply to the Medicare Geographic 
Classification Review Board to be geographically reclassified for 
higher inpatient payment rates. This provision deems that all hospitals 
that are geographically reclassified for the purposes of inpatient 
service wage index should be deemed reclassified for other services 
which are geographically adjusted using a wage index. (E.g., SNF, home 
health). (Never included for the summary for distribution).
    Graduate Medical Education--These provisions make technical changes 
to the Balanced Budget Act. The BBA limits the number of medical 
residents for which a hospital may be reimbursed to the number of 
residents on staff on 12/31/96. This ignores the many residents who 
spend time training outside a hospital, in rural health clinics, and 
who may have been approved for training, but not yet started their 
program by that date. The bill recalculates the cap to include the 
number of residents that may not have been in the hospital-proper and 
those that had been appointed, but had not yet started their training 
on the cut-off date.
    Medicare Fee Schedule--Under this provision, physician assistants, 
nurse practitioners, and clinical nurse specialists in underserved 
rural areas will be reimbursed with direct reimbursement at 100% of the 
fee schedule for similar services provided by primary care physicians.
    Coverage of Mental Health Services--This bill requires Medicare to 
reimburse services provided in a health professional shortage area by 
any state-licensed mental health practitioner. Currently, only certain 
professions can be reimbursed.
    Medicare Waivers for Providers in Rural Areas--This provision 
requires HCFA to establish a waiver mechanism that recognizes any 
counties defined as rural based on census tract data as rural for the 
purposes of Medicare reimbursements for hospitals and providers.
    Ambulance Restocking--This provision allows hospitals to restock 
ambulances with medical products used while treating patients without 
being in violation of the Stark anti-kickback law.
    Medicaid Reimbursement for FQHCs and RHCs--This provision repeals 
the phase-out of cost-based reimbursement by Medicaid for federally 
qualified health clinics and rural health clinics.
    Medicaid Reimbursement for Physicians' Assistants and Nurse 
Practitioners--This provision requires Medicaid to include Physicians' 
Assistants and Nurse Practitioners as covered providers.
    Access to Data--This provision requires the National Health Service 
Corps, Centers for Disease Control, and Census Bureau to negotiate 
inter-agency agreements with agencies and offices within the Department 
of Health and Human Services in order to provide access to agencies' 
data for research purposes.

            Improving Access to Medicare Health Plan Options

    Medicare + Choice payment/AAPCC Reform--The AAPCC formula is how 
Medicare managed care payment rates are determined. These rates are 
determined on a county-by-county basis. The BBA made a number of 
changes to this formula in order to give higher payment rates to 
managed care plans in rural areas. However, the new formula has not 
been fully funded due to smaller than anticipated spending increases 
and the budget neutrality provision of the program. This provision 
eliminates the budget neutrality provision so that the blended rate 
will be fully funded and go into effect.
    Medicare Cost-Contracts--Medicare cost-contracts are a type of 
managed care in which HCFA reimburses cost-contractors on their costs 
as long as the costs meet HCFA standards of reasonableness. Cost-
contractors are required to accept all Part B beneficiaries. The 
Balanced Budget Act eliminates Medicare cost-contracts in 2003. These 
plans are overwhelmingly located in rural areas, and are the only type 
of managed care plans available in many rural areas. Due to the 
slowness of many managed care companies to enter the rural market, it 
is likely that the ban on the cost-contracting will result in the 
elimination of managed care as an option for many rural residents. This 
provision exempts all current cost-contractors from the sunset 
provision and allows them to continue to offer cost-contracts after 
2003.
    Medicare + Choice Rural Demonstration Project--Directs the 
Secretary to establish to promote the establishment and monitor the 
viability of provider sponsored organizations and other rural based 
managed care entities serving Medicare beneficiaries in rural and 
frontier areas.

                    Advancing Special Rural Concerns

    Rural Impact Statements--This provision mandates that any 
legislative or regulatory proposal to change a federal program must 
contain a rural impact statement that, at a minimum, includes an impact 
analysis on: (a) rural safety net providers; (b) rural primary care 
providers; (c) rural hospitals; (d) federally qualified health clinics 
and rural health clinics; (e) local rural economies; and (f) where 
rural residents would be affected.
    Health Professional Shortage Area Recruitment--Current law states 
that communities cannot receive federal recruitment assistance until 
they lose a provider. This provision allows pending retirements or 
resignations to be considered when a community applies for assistance.
    Underserved Area Designation by the Office of Personnel 
Management--OPM designates underserved areas by state for the purposes 
of reimbursement under the FEHBP. This provision requires OPM to use 
HHS's designation criteria for underserved areas and designate 
underserved areas on a county-by-county basis, not a state-by-state 
basis.
    Shortage Designations--This provision requires the Bureau of 
Primary Care to withdraw its proposed revision of the methodology for 
determining Health Professional Shortage Areas and Medically 
Underserved Areas. This definition would be detrimental to rural areas. 
Instead the Bureau will be required to initiate a negotiated rule-
making process to develop a new methodology that more appropriately 
recognizes medically underserved and health professional shortage areas 
in rural, frontier and urban areas.
    Establishment of an Office of Inactive Reserve for the Public 
Health Service Corps--Currently, there is no office to coordinate the 
call-up and deployment of inactive members of the PHSC reserve corps. 
This provision is a sense of the Congress that the Department of Health 
and Human Services should establish such an office. This is endorsed by 
the Public Service Corps.

            Increasing Availability of Telemedicine Services

    The legislation makes a number of changes to way that Telemedicine 
services are currently regulated and reimbursed.
    (1) Permits any currently covered Medicare service to be 
reimbursed. This includes coverage for all types of appropriate 
telemedicine interactions between patients and providers who are 
qualified to bill for similar types of in-person services. This 
provision would also authorize payment for store and forward 
telemedicine services in addition to the in-person presentation of 
services.
    (2) The legislation states that the referring physician need not be 
present at the time of the telehealth service, and that any health care 
practitioner can present the patient.
    (3) Requires HCFA to establish a telemedicine payment methodology 
that pays professional fees to both providers, and includes a technical 
fee to the facilities to cover the cost. Additionally, HCFA is required 
to establish a separate Medicare billing code for telemedicine in order 
to monitor the utilization of health services.
    (4) Requires HCFA to establish patient protection rules governing 
the assessment of the telemedicine copay. Specifically, HCFA must 
ensure that patients are informed of the co-pay in advance of the 
teleconsult and that patients must actually receive medical treatment 
or advice during the consult.
    (5) Availability of telemedicine reimbursement is expanded from 
only health professional shortage areas to all rural areas.
    (6) The legislation requires the Secretary of Health and Human 
Services to issue initial and subsequent reports on efforts to ease 
cross-state licensure barriers that may arise through the use of 
telemedicine services.
    (7) The legislation authorizes the development and administration 
of a grant/loan program for telemedicine activities in rural areas. It 
also authorizes appropriations for the program.
    (8) The legislation formally authorizes an existing group of 
Cabinet level and private sector members. This group is to focus on 
identifying, monitoring, and coordinating federal telehealth projects. 
The group will report each year to Congress.

             Creating Common Sense Rural Health Tax Policy

    100% tax-free scholarships for National Health Service Corps--The 
National Health Service Corps provides scholarships to individuals who 
commit to providing health care in underserved areas. Historically, 
these scholarships have been tax-free. However the IRS has recently 
begun taxing the scholarship as income. These scholarships should be 
returned to their tax-free status in order to prevent the undermining 
of the program.
    Emergency Medical Services Prevention Act--Many EMS units, 
especially in rural areas, do not have adequate funds to maintain 
infrastructure. This provision allows EMS units to issue tax exempt 
bonds for revenue purposes.
    Bank Deductibility--this provision increases access to tax exempt 
financing for small not-for-profit health care facilities through the 
States' Health and Education Facilities Authorities. There is a $5 
million borrowing cap.

                                

                                            Mayo Foundation
                                       Rochester, Minnesota
                                                 Septembet 24, 1999
The Honorable Gil Gutnecht
U.S. House of Representatiaves
Washington, DC 20515-2301

    Dear Representative Gutnecht:

    The Balanced Budget Act of 1997 was a landmark piece of legislation 
that appears to have helped move the federal budget from a pattern of 
chronic deficit to one of significant surplus. However, there is 
mounting evidence that the Medicare payment reductions included in the 
Balanced Budget Act are significantly greater than estimated at the 
time of its passage, and the reductions are causing major financial 
hardship for many health care providers. Congress is now considering 
legislation that may give some partial relief from the effects of BBA, 
and Mayo Foundation strongly supports this effort. As the legislative 
process moves forward, we want to set out our priorities for 
congressional consideration.
    The effects of the Balanced Budget Act have been extreme, and some 
of the major payments cuts are yet to be implemented. We estimate that 
the five-year cumulative impact on Mayo Foundation will be a reduction 
of $411.5 million. The largest portion of the reduction is a $177 
million reduction in funding for graduate medical education. As a major 
integrated healthcare delivery system, we have also felt the effects of 
virtually every category of payment reduction: hospital, physician, 
home health, skilled nursing, clinical lab, and others.
    While we believe many of these payments need to be corrected, we 
believe the greatest threat to the overall integrity of the health care 
system, and to Mayo Foundation, is the major reduction in the indirect 
medical education (IME) payments to teaching hospitals. There is sound 
evidence that the infrastructure of many of America' premier medical 
centers is already being significantly threatened by the IME reduction, 
and the full effect is yet to be felt. The IME reduction is phasing in 
over four years, and we are only in year two. Therefore, we strongly 
urge you to support, at a minimum, halting the IME reduction at the 
1999 level. We believe that IME payments are a critical element in 
supporting the education and research missions of Mayo and other 
academic health centers.
    We also would like to reiterate our position that the long run 
viability of Medicare requires more than these BBA ``fixes.'' The 
Medicare program needs fundamental restructuring. We have communicated 
to you in the past our position that Medicare should be based on 
patient choice, competition, and innovation.
    We support changing Medicare to a model similar to the Federal 
Employees Health Benefits Plan. Without such fundamental restructuring, 
the future will be a never ending succession of attempts to keep a 
flawed model afloat through bureaucratic micromanagement and price 
controls, thus undermining the viability of the entire health care 
system.
    Thank you for your efforts, and we look forward to working with you 
to create a better Medicare program.
            Sincerely yours,
                                              Michael B. Wood, M.D.

                                

Statement of Medical Device Manufacturers Association

    The Medical Device Manufacturers Association (MDMA) 
appreciates this opportunity to submit comments for the record 
of the subcommittee's October 1 hearing on Medicare Balanced 
Budget Act refinements. MDMA is a national trade association 
based in Washington, D.C. that represents nearly 130 
independent manufacturers of medical devices, diagnostic 
products and health care information systems. As the national 
voice for the innovators and entrepreneurs in the medical 
device industry, MDMA seeks to improve the quality of patient 
care by encouraging the development of new medical technology 
and fostering the availability of beneficial innovative 
products.
    MDMA would like to highlight briefly two important 
refinements for your subcommittee to consider as you develop 
legislation to refine the Balanced Budget Act of 1997 (BBA).

     Prospective Payment System for Hospital Outpatient Departments

    MDMA has a number of concerns with the Medicare prospective payment 
system (PPS) for hospital outpatient departments set forth by the BBA. 
We believe the Health Care Financing Administration's (HCFA's) proposal 
for creating the outpatient PPS would hinder the introduction and 
adoption of new medical technologies in the Medicare program. Health 
professionals should not be prevented from using the latest 
technologies on Medicare patients simply because Medicare's payment 
system cannot keep pace with medical innovation.
    To refine the outpatient PPS and to help Medicare keep up with 
technological advances, MDMA is a proud supporter of S. 1626, the 
Medicare Patient Access to Technology Act of 1999, introduced by Sen. 
Orrin Hatch and a bipartisan group of his colleagues. In addition to 
reforming Medicare's systems for coding and paying for medical 
technologies, S. 1626 would improve the outpatient PPS in three major 
ways:
     by restructuring the proposed classification system to 
create groups of procedures that are more similar in cost and more 
closely related clinically;
     by establishing a transition period for new technologies 
that will allow for the development of adequate outpatient cost data to 
ensure appropriate reimbursement; and
     by developing a process for updating classifications and 
payments annually to ensure appropriate utilization and reimbursement 
of the most appropriate services.
    MDMA encourages this subcommittee to include similar provisions in 
its package of BBA refinements.

                        Inherent Reasonableness

    MDMA believes that HCFA is attempting to evade the due-process 
requirements established in the BBA in cutting Medicare reimbursement 
levels for durable medical equipment.
    Section 4316 of the BBA gives the Health Care Financing 
Administration (HCFA) the authority to increase or decrease grossly 
deficient or excessive Medicare payments for durable medical equipment 
and other home health equipment. However, the BBA placed limits on 
HCFA's use of this so-called ``inherent reasonableness'' authority. 
Specifically, the BBA prohibits HCFA from reducing or increasing 
payments during any year by more than 15 percent without due process 
for suppliers of such equipment.
    However, HCFA proposed August 13 to use its ``inherent 
reasonableness'' authority to cut Medicare reimbursement for several 
categories of durable medical equipment by nearly 50 percent over the 
next few years. To MDMA, this action violates the intent and the spirit 
of the BBA.
    In our opinion, HCFA is clearly evading the law by phasing in these 
massive cuts over two- to five-year periods without giving suppliers 
their due-process rights as specifically provided by the BBA. While 
MDMA supports HCFA's efforts to purchase prudently, we believe HCFA 
must be fair to all parties and follow the intent of Congress in doing 
so.
    To remedy this situation, MDMA is asking Congress to prohibit HCFA 
from increasing or decreasing Medicare reimbursement for durable 
medical equipment by more than 15 percent in any five-year period 
without due process. MDMA is also requesting Congress to prevent HCFA 
from implementing such a change more than once in any five-year period.
    These changes will provide medical technology manufacturers and 
Medicare beneficiaries with adequate protection from capricious and 
drastic payment cuts that jeopardize patient access to quality medical 
products. These changes would not prevent HCFA from imposing major 
reimbursement cuts, but would clarify the intent of Congress that HCFA 
provide due process to medical technology manufacturers and other 
stakeholders before such cuts are made.
    Thank you for this opportunity to bring these two issues to the 
subcommittee's attention as you develop a legislative plan to refine 
the BBA.

                                

Statement of National Association for Home Care

                              Introduction

    Thank you for the opportunity to submit testimony for the record on 
issues relating to the impact of the Balanced Budget Act on the 
Medicare home health benefit. The National Association for Home Care 
(NAHC) is the largest national home health trade association 
representing nearly 6000 member organizations. Among our members are 
Medicare-participating home care providers, including non-profit 
providers like the visiting nurse associations, for-profit chains, 
hospital-based providers and freestanding providers. We also represent 
home care aide and hospice organizations.
    NAHC is deeply appreciative of the attention the Chairman and 
Members of the Subcommittee have shown regarding the problems created 
by the home health provisions of the Balanced Budget Act of 1997, P.L. 
105-33 (BBA). NAHC offers these comments and recommendations as 
proposed refinements to the BBA home care provisions.
    There are numerous refinements to BBA, and to the manner in which 
the Health Care Financing Administration (HCFA) is interpreting and 
implementing it, that the Committee could act upon which would provide 
significant relief to home care providers nationwide. Our 
recommendations are outlined below, and fall into four separate 
categories.
    First, legislative modifications to the home health interim payment 
system that would provide much-needed relief for the failing home care 
program.
    Second, clarification of Congressional intent and instruction to 
HCFA to correct faulty interpretations of some of the BBA home care 
provisions.
    Third, implementation of technical changes to the BBA that would 
ease financial and operational burdens on home health providers with 
little or no costs associated; and
    Fourth, implementation of general refinements to provide relief 
from financial and operational burdens imposed by HCFA-initiated 
regulatory requirements.

                       I. Legislative Initiatives

    A. The most devastating change for home health providers 
under the BBA has been the enactment and implementation of IPS. 
The payment reductions under IPS, coupled with HCFA's stringent 
interpretations, have had severe repercussions for both 
providers and beneficiaries. The following data illustrate the 
dramatic changes that have occurred to the Medicare home health 
program since the passage of BBA.
     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. Under current policies, this trend shows no leveling 
off, and access to care continues to be seriously compromised.
     Approximately 550,000 fewer Medicare beneficiaries 
received home health services in 1998 than in 1996. The change 
represents a 15.2% reduction in number of patients served.
     Average home health agency 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 the $16.1 
billion initially projected at the time BBA was passed.
     In 1997, home health care represented only 9% of 
Medicare but was slated for about 14% of the FY 1998-2002 
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 
1998-2002.
    NAHC understands 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 care 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 
legislative relief for the home health program that would:
     Eliminate the 15% additional cut scheduled for 
October 1, 2000;
     Target resources to an outlier provision for high-
cost patients;
     Increase the IPS per-visit cost limit; and
     Provide relief from financially disabling 
overpayments.

1. Eliminate The 15% Payment Cut Scheduled For October 1, 2000

    Under the BBA, 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.
    NAHC believes that the additional 15% 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 FY 2000 
home health cost limits estimates that 93.5% of surviving home 
health agencies will exceed their per-beneficiary cost limit or 
per-visit cost limit. In addition, HCFA conservatively 
estimates that the average agency will have to repay 12% of its 
Medicare reimbursement.
    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 their local health care.
    Congress included the additional 15% cut because CBO 
mistakenly projected it was needed to meet BBA savings goals; 
most recent CBO estimates that reductions in home care through 
2002 will exceed BBA goals by $32 billion.

2. Target Resources For An Outlier Provision For High-Cost 
Patients

    In their 1999 reports to Congress, the General Accounting 
Office and the Medicare Payment Advisory Commission 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 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, a time when many 
agencies had not yet transitioned to IPS, and no agencies had 
been notified of their per-beneficiary limits.
    The IPS aggregate per-beneficiary limits, based on 1993-94 
data, do not reflect the increased severity of most home health 
agencies' case-mix populations. Recent technological advances 
have expanded the scope of services provided to Medicare 
beneficiaries. Services such as parenteral and enteral 
nutrition, chemotherapy and ventilator care can now be provided 
in the home. These services require specialized nursing 
services as well as prolonged home visits, extensive case 
management, and discharge planning 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 would ensure 
fiscal soundness.

3. Increase The IPS Per Visit Limit

    BBA reduced the per visit cost limits from 112% of the mean 
to 105% of the median per visit costs for freestanding 
agencies. IPS forces providers to reduce the total number of 
visits delivered by patients. However, as the number of visits 
decreases, costs per visit increases. Under the 1998 OCESAA, 
the per visit limits were raised from 105% to 106% of the 
median. This 1% increase was insufficient to help providers who 
are operating under cost limits that have been reduced from 14-
22% under BBA. 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 and higher wages resulting from the 
lingering personnel shortages in rural areas, or the added 
costs of security escorts and language translators in the 
cities.

4. Provide Overpayment Relief

    Nationwide home health agencies are being charged with 
Medicare overpayments related to IPS. These overpayments have 
resulted from delayed notifications to agencies of their 
reimbursement limits under IPS, and in faulty calculation of 
the limits by Medicare's fiscal intermediaries. Because the IPS 
payment reductions were so deep, and implemented so quickly, 
agencies had little time to adjust to the changes. Agencies 
continued to serve eligible patients, spending payments for 
care that were later deemed ``overpayments.'' HCFA has not 
released nationwide statistics on overpayments, but one fiscal 
intermediary reports that for 1998, 84% of its $1 billion plus 
in overpayments are attributable to IPS. While the 
Administration has indicated it is providing three-year 
repayment plans to all agencies, with the first year interest 
free, this is not occurring. HCFA also has authority to 
establish ``compromise'' repayment amounts on overpayments due, 
but has refused to utilize this authority.
    Congress should, at a minimum, direct HCFA to immediately 
issue clarifying standards for repayments that reflect the 
Administration's earlier commitment (three years, first year 
interest free). Further, Congress should consider legislation 
waiving interest on overpayments for three years. Congress 
should also direct HCFA to utilize overpayment compromise 
authority on an expedited basis in order to resolve inequities 
created through implementation of IPS.

               II. Faulty Interpretations of BBA By HCFA

    B. Congress should clarify its intent regarding certain BBA 
provisions that HCFA has interpreted wrongly or too restrictively. As 
these are administrative refinements, they should have no impact on 
budget scoring.
    1. Inflation Rate in Payment Limits. HCFA went beyond the intent of 
Congress, further reducing the per beneficiary payment limits by about 
6 percent, by excluding the inflation updates for 1995 and 1996 from 
its calculation of the limits. This ``recapture'' provision in BBA was 
intended to apply only to the per visit limits, but was improperly 
applied to the per beneficiary limits as well. There were no savings to 
``recapture'' from the per beneficiary limit since it did not exist 
during 1995 and 1996.
    Recommendation: Congress should direct HCFA to restore the 1995 and 
1996 inflation updates for purposes of calculating the per beneficiary 
limits.
    2. Rate Calculation. To establish IPS payment rates, BBA required 
HCFA to calculate on an agency by agency basis the average cost of 
services for each Medicare home health beneficiary during federal 
fiscal year 1994. However, HCFA failed to take into account that during 
1994 there were patients who were served by more than one agency; 
therefore, the total number of beneficiaries for 1994 used to calculate 
the average annual cost per beneficiary was not an unduplicated count. 
As a result, the final average annual cost of services per patient was 
artificially lowered. It is estimated by Abt Associates that 
approximately 8 percent of all Medicare beneficiaries during the base 
period received care from more than one home health agency.
    Recommendation: Congress should direct HCFA to recalculate the per 
beneficiary limits in a manner which reflects the true average annual 
cost per beneficiary for the base year by using an unduplicated 
beneficiary count.
    3. Exceptions Process for Per-Beneficiary Limit. HCFA has refused 
to consider exceptions to the per beneficiary limits based on its 
narrow interpretation of the BBA which is silent on the issue of 
exceptions or exemptions to the cost limits. However, authorization for 
exceptions is found in existing law at Section 1861v(L)(ii) of the 
Social Security Act, 42 U.S.C. Sec. 1395x(v)(L)(ii). The amendment 
establishing the IPS is an amendment to existing law. The IPS amendment 
does not establish a wholly new provision; instead, it establishes a 
new clause, which modifies the general provision that Medicare 
reimbursement is subject to reasonable cost limits. Therefore, it is 
well within HCFA's regulatory authority to extend the process for 
requesting and granting exceptions to the cost limits to include per 
beneficiary limits.
    Recommendation: Congress should direct HCFA to provide agencies the 
right to request exceptions to the per beneficiary limit.

                     III. Technical Changes to BBA

    C. Congress should amend the BBA to ease burdens on home health 
agencies. These legislative changes would have little or no additional 
cost.
    1. Periodic Interim Payments. Periodic interim payments (PIP) are 
issued to a small number of home health agencies so as to provide a 
steady cash flow for services rendered to Medicare beneficiaries. PIP 
has provided some measure of relief to home health agencies without 
large cash reserves to support delays in payments from HCFA. PIP has 
been particularly important to agencies during IPS, as significant 
problems have arisen with respect to determinations of per beneficiary 
and per visit limits. It is anticipated that cash flow difficulties 
will be even more pronounced with implementation of the forthcoming 
PPS. Home health costs, like hospital costs, tend to be front-loaded 
(the majority of costs are incurred early in the episode). Under a 60-
day episodic payment cycle, agencies are likely to have expended most 
of the costs of providing care prior to receiving payment from HCFA. 
HCFA was forced to reinstate PIP for PPS demonstration agencies because 
they experienced such serious cash flow problems. Currently, PIP is set 
to expire on October 1, 2000.
    Recommendation: Congress should enact legislation to maintain PIP. 
At a minimum, PIP should be extended for at least one year beyond 
implementation of home health PPS, to allow for a smoother transition 
to the new payment system.
    2. Consolidated Billing. BBA required that, under PPS, payment for 
all services under the home health plan of care be reimbursed to the 
home health agency. This will require home health agencies caring for 
patients that are using home medical equipment to bill Medicare for the 
equipment and transmit the payment to the medical equipment supplier. 
Home health agencies would not be reimbursed any more than the rate 
allowed on the fee schedule for the equipment, but would be required to 
undertake considerable new responsibilities and liabilities. In 
addition, many beneficiaries will be seriously inconvenienced and 
deprived of agency choice in the process since they may be required to 
change suppliers. Requiring consolidated billing of home medical 
equipment results in no savings to the Medicare program.
    Recommendation: Congress should repeal the consolidated billing 
requirement in BBA related to home medical equipment.
    3. 15-Minute Visit Increment Billing. BBA requires that home health 
agencies bill for care based on the number of visits provided and on 
the number of 15-minute increments per visit. However, agencies are 
only reimbursed based on the number of visits provided. The 15-minute 
increment information has no particular use under the current, cost-
based system, nor under the forthcoming PPS. It is unclear what benefit 
collection of this 15-minute increment information will provide, since 
time in the home does not fully reflect the significant amounts of time 
agencies invest outside the home in caring for patients, including time 
spent communicating with physicians and family members, coordinating 
services with other home health personnel and community agencies, care 
planning, and clinical documentation. No evidence of a correlation 
between in-home time and quality of care has been established. However, 
billing of visits in 15-minute increments will require agencies to make 
significant systems changes and will impose substantial additional 
paperwork burdens on home care nurses and other staff. HCFA is 
implementing this requirement September 30, 1999.
    Recommendation: Congress should repeal the 15-minute visit 
increment billing requirement.
    4. Proration. BBA requires that the per beneficiary limit be 
prorated among agencies in cases where a patient received services from 
more than one agency in the same year. Currently agencies have no way 
of determining if a patient has been served by another agency during 
the same year. Implementation of the provision will require significant 
tracking efforts by home health agencies and by HCFA, and will be made 
more difficult by the fact that agencies have different limits and 
different fiscal years. Further, proration of the limits discourages 
agencies from taking patients that have been served by other agencies 
and interferes with a patient's right to choose the agency from which 
care will be received. HCFA has not yet implemented the proration 
policy.
    Recommendation: Congress should amend BBA to require that HCFA only 
use the proration provision in cases where an agency has transferred or 
prematurely discharged a patient in order to circumvent the payment 
limits. Congress should also prohibit retroactive application of the 
proration policy.

      IV. HCFA Initiated Regulatory Burdens on Home Care Providers

    D. Congress should provide relief from a number of regulatory 
burdens initiated by HCFA. These changes should have little or no 
budgetary impact.
    1. Home Health Advance Beneficiary Notice. HCFA recently issued 
Transmittal No. A-99-38, which sets out significant new instructions 
and requirements regarding home health advance beneficiary notices 
(HHABN). These notices must be provided by agencies to beneficiaries 
when care is ordered by a physician but determined by the agency to not 
be covered by Medicare. HCFA failed to follow legal requirements, such 
as the Administrative Procedures Act and the Paperwork Reduction Act, 
in issuing this new directive, and now has asked for emergency 
clearance by the Office of Management and Budget (OMB) so that the 
requirement may be implemented September 30. The timeframe for 
implementation of the requirement is inadequate, as the changes require 
home health agencies to update computer programs and information 
systems and create and reproduce forms, as well as train employees in 
the new notice requirement. Language experts have reviewed the notices 
and found them to be ambiguous and difficult to comprehend, increasing 
the likelihood of beneficiaries' confusion. While the home health 
community supports the general purpose of the new notices, the way they 
are written and the timeframe for implementation pose serious problems 
to beneficiaries and home care providers.
    Recommendation: Congress should direct HCFA to withdraw the 
transmittal and implement a new beneficiary notice requirement only 
after the content of the notices has been reviewed by consumer and 
provider groups. Subsequent release and implementation of the HHABN 
should occur within a reasonable timeframe enabling agencies to comply.
    2. Outcome and Assessment Information Set (OASIS). OASIS data 
collection and reporting is important to agency efforts to improve 
quality of care and to HCFA efforts to develop and refine the 
forthcoming home health PPS. OASIS data collection and reporting adds 
substantially to visit time, caregiver responsibilities, and 
administrative overhead. Among the problems related to the OASIS 
requirements are the following: 1.) HCFA intends to require collection 
and reporting on all home health clients, regardless of payer or health 
status; and 2.) HCFA has failed to provide adequate reimbursement to 
agencies for the significant costs associated with start-up and ongoing 
OASIS collection and reporting. The small reimbursement level allowed 
by HCFA is $0.13 per visit, and is only available to agencies that have 
not exceeded the per-beneficiary limit. As the result, only about 30 
percent of agencies will be eligible for any reimbursement. Agencies 
have reported that OASIS costs amount to between $1 and $3 per visit.
    Recommendation: Congress should direct HCFA to limit OASIS data 
collection and reporting to Medicare and Medicaid patients in need of 
intermittent skilled care. Additional study should be conducted to 
support the uses and usefulness of such data before HCFA considers 
mandating collection and transmission of OASIS data for private pay 
patients receiving skilled care or for any patients receiving personal 
care. Congress and HCFA should provide for reimbursement of the full 
costs associated with meeting OASIS requirements. HCFA should be 
directed to conduct further study regarding costs of OASIS and adapt 
its reimbursement structure to reflect the costs agencies are 
incurring. Home health PPS rates should reflect fully the costs of 
OASIS.
    3. Branch Offices. HCFA's central office has established new 
guidelines for regional offices to consider when approving branch 
offices. These guidelines include limiting driving time to one hour or 
not more than 50 miles from a parent agency which require daily on-site 
supervision of the branch office. HCFA's regional offices have been 
strictly interpreting and implementing these guidelines. This strict 
interpretation has created financial and operational hardship for many 
branch agencies, especially rural home care providers. Furthermore, 
branch agencies who are more than an hour away from their parent agency 
must establish a new subunit with a new Medicare provider number, 
undergo new Medicare certification, and hire new supervisory staff. 
Branch offices are a cost effective way to provide a home base for 
staff closer to the patients served while avoiding duplication of 
administrative positions and functions. HCFA's branch office policies 
differ from one region to another. These guidelines do not recognize 
home health staffing shortages or the use of modern methods of 
communication, including fax, telephone, pagers, and other 
telecommunications.
    Recommendation: Congress should direct HCFA to institute a new 
rulemaking procedure to establish a single set of national criteria for 
defining ``branch office'' under the Medicare home health program.
    4. Statistical Sampling Methodology for Post-Payment Review. HCFA's 
fiscal intermediaries review a small sample of agencies' claims for a 
period of time for medical necessity, then project the number of denied 
claims to the entire universe of an agency's claims. The intermediary 
then charges the agency to either return payments for the claims 
presumed to be denied, or submit to a 100% review of claims for the 
specified period. Agencies are required to repay the amount before 
having the opportunity to pursue legal appeal rights, despite the fact 
that reversals of claim denials on appeal have routinely exceeded 80%. 
Some of HCFA's own staff have protested the use of statistical sampling 
as invalid and irresponsible.
    Recommendation: Congress should direct HCFA to suspend fiscal 
intermediaries' use of statistical sampling for home health claims 
until appropriate modifications are made in policy.
    5. Medical Claims Review. Home health agencies are being subjected 
to increasing inappropriate and excessive random and focused medical 
reviews, medical review inconsistencies, and technical denials. As the 
result, thousands of Medicare claims are currently in dispute or on 
appeal, creating severe cash flow problems for many providers.
    Recommendation: Congress should direct HCFA to: establish minimum 
standards and training requirements for medical review staff; implement 
a systematic yet fair process for review of a minimum sampling of 
records and appropriately targeting problem agencies for in-depth 
review; allow for return of claims that fail review on technical 
grounds so that a provider may correct the claim, rather than outright 
rejection of the claim; initiate performance reviews of all 
intermediaries on an ongoing basis; evaluate local medical review 
policies on an ongoing basis; and assess medical review workloads of 
the intermediaries and their effect on consistency and quality.

                               Conclusion

    Thank you, Mr. Chairman, and Members of the Subcommittee, for the 
opportunity to present our views. We urge you, on behalf of home health 
patients and providers nationwide, to pass legislation this year 
eliminating the 15% payment reduction. Other BBA refinements, as 
outlined in our written testimony, will go far in alleviating the 
financial and operational burdens confronting home health providers. 
You and the Subcommittee have our thanks for bringing home health 
issues to this level of consideration. We look forward to working 
closely with you as you move toward refining some aspects of the 
Medicare home care provisions of BBA.

                                

Statement of National Association of Psychiatric Health Systems

    The National Association of Psychiatric Health Systems 
(NAPHS) is pleased to submit a statement for the hearing record 
addressing Medicare Balanced Budget Act refinements. NAPHS 
represents behavioral healthcare systems that are committed to 
the delivery of responsive, accountable, and clinically 
effective treatment and prevention programs for people with 
mental and substance abuse disorders. Its members are 
behavioral healthcare provider organizations, including 400 
specialty hospitals, general hospital psychiatric and addiction 
treatment units, residential treatment centers, youth services 
organizations, partial hospital services, behavioral group 
practices, and other providers of care.
    We urge the subcommittee to include in its Medicare package 
this year the provisions in H.R. 1006, the Medicare Psychiatric 
Hospital Prospective Payment System Act of 1999 introduced by 
Reps. Jim McCrery (R-LA) and Ben Cardin (D-MD). H.R. 1006 
proposes to improve Medicare inpatient psychiatric care by 
reforming how Medicare pays for services provided in free-
standing psychiatric hospitals and distinct-part psychiatric 
units of general hospitals. Specifically, H.R. 1006 would move 
reimbursement for psychiatric facilities to a prospective 
payment system (PPS) within two years, while phasing in payment 
cuts required in the Balanced Budget Act of 1997 (BBA) over the 
same period.
    Passage of the McCrery-Cardin PPS legislation would bring 
reimbursement for this specialty group in line with 
reimbursement systems for other TEFRA providers and would help 
to ensure that the sudden and severe cuts imposed by the BBA on 
psychiatric providers do not compromise patient care.
    As a result of the BBA, 84% of psychiatric facilities that 
are exempted from Medicare's prospective payment system 
suffered actual payment reductions in 1998 compared to 1997, 
not merely reductions in their growth rate or annual update. 
These reductions compound their already negative Medicare 
margins. The mean average profit margin declined from -3.0% in 
1995 to -8.7% under the BBA. In addition, 6% of facilities 
experienced cuts of over 20%.\1\ Moreover, the impact does not 
include the first-year effect of a 15% reduction in capital 
payments and a 25% reduction in bad debt payments, also enacted 
as part of the BBA.
---------------------------------------------------------------------------
    \1\ These and other data were the findings of a March 1998 study 
conducted by Health Economics Research for the National Association of 
Psychiatric Health Systems on the impact of the BBA changes on 
psychiatric facilities.
---------------------------------------------------------------------------
    H.R. 1006 would phase-in cuts required in the BBA, to be 
paid back within a prospective payment system. The purpose of 
H.R. 1006 is to ensure that those psychiatric facilities 
hardest hit by the BBA cuts are given a reasonable time period 
to adjust financially to the payment limits of the BBA while 
contributing to the BBA's Medicare savings goals.
    H.R. 1006 is budget neutral over four years. Whatever 
Medicare savings are foregone (as estimated by the 
Congressional Budget Office) as a result of the short-term 
payment relief will be re-captured in the first two years of 
the PPS, through an adjustment to the PPS rates.
    NAPHS believes it is time for psychiatric facilities to 
join other providers in the Medicare program that are paid on a 
prospective basis, but patient care in the interim should not 
be put at risk.
    Thank you for the opportunity to present our views. Again, 
we ask the Subcommittee to include H.R. 1006 in a larger 
Medicare bill aimed at addressing BBA issues. It is a fair and 
reasonable proposal that deserves full Congressional support.

                                


Statement of National Rural Health Association

    A real and imminent crisis is occurring in our country that 
threatens to shutout a vast number of our citizens from 
receiving health care as many rural and frontier providers are 
teetering on the brink of reducing and eliminating essential 
services. In that light, the National Rural Health Association 
(NRHA) would like to share its support for the rural targeted 
Balanced Budget Act of 1997 (BBA) relief priorities identified 
by our diverse, grassroots membership. We believe that 
collectively these priorities will secure access to vital 
health care services for rural Medicare and Medicaid 
beneficiaries and their families.
    A report authored by the non-partisan Rural Policy Research 
Institute states, ``Given low enrollment into managed care and 
limited use of any Medicare risk plans in rural areas for the 
foreseeable future, the impact of changes in traditional 
Medicare are of vital concern for the welfare of rural 
beneficiaries.'' Without rural targeted BBA reforms, the NRHA 
is gravely concerned that access to basic health care services 
will be jeopardized for those seniors living in rural and 
frontier America.
    Recognizing the need for rural targeted BBA relief, both 
the House Rural Health Care Coalition and the Senate Rural 
Health Caucus introduced omnibus rural health care bills 
earlier this year, H.R. 1344 and S. 980, which include a number 
of important BBA relief provisions. Currently 95 members of the 
House of Representatives and 31 members of the Senate have 
cosponsored these rural health bills--a clear indication of the 
bipartisan support for rural targeted BBA relief. The NRHA's 
BBA relief priorities were taken directly from provisions 
included in both H.R. 1344 and S. 980, and are supported by 
both the House Rural Health Care Coalition and the Senate Rural 
Health Caucus.
    In a recent letter to the Congress, thirty-nine of our 
nation's state office of rural health directors shared, ``Over 
the past 10 years state and federal programs have encouraged 
our rural health providers to integrate their services. For 
many rural communities, it is the hospital that provides not 
only inpatient and outpatient care, but also services such as 
skilled nursing, home health and ambulatory care. Because the 
BBA reduces payments in each of these areas, rural hospitals 
are being financially punished for having done exactly what 
state and federal governments asked them to do--integrate 
services. As a result, these hospitals are reducing and 
eliminating services that rural beneficiaries and their 
families depend on daily.''
    If the BBA is fully implemented and rural hospitals, 
clinics and health centers are forced to reduce services or in 
some instances, close their doors, hard-to-recruit physicians 
and other health care providers will leave these communities. 
To reopen a rural health clinic or to recruit a primary care 
practitioner back into a rural or frontier community is an 
almost impossible task. That is why the Ways and Means Health 
Subcommittee and the Congress must be proactive in ensuring 
access to health care is not jeopardized for rural Americans.
    Data from the Medicare Payment Advisory Commission 
illustrates that a greater percentage of rural hospitals 
experienced negative total Medicare operating margins in fiscal 
year 1995 than urban hospitals -15.9 percent vs. 9.8 percent. 
Of concern to the NRHA is that these numbers reflect the 
financial condition of small, rural hospitals before any 
portion of the payment reductions in the BBA had been enacted 
and implemented.
    The fact is rural hospitals and other providers depend more 
on Medicare reimbursement than their urban counterparts and are 
more vulnerable to payment reforms and reductions under the 
BBA, because rural America has a disproportionately higher 
percentage of Medicare beneficiaries. BBA relief targeted 
toward rural health care providers must be enacted this year so 
these providers can continue to ensure access to quality health 
care for the millions of Medicare and Medicaid beneficiaries 
living in rural and frontier America.
    Of equal concern is the Congressional Budget Office has 
projected that Medicare spending for fiscal year 1999 will be 
$88.5 billion less than was anticipated when the BBA was 
enacted. The result is our nation's rural hospitals, community 
health centers, rural health clinics and other providers are 
being asked to provide rural Medicare and Medicaid 
beneficiaries with a greater number of health care services and 
higher quality of care while their Medicare and Medicaid 
payments are being drastically reduced beyond what the Congress 
originally intended.
    Because of the cumulative negative impact that reforms 
contained in the BBA are beginning to have on the rural health 
care delivery system, it is imperative that the rural targeted 
priorities outlined below be included in any BBA relief measure 
considered by your Subcommittee and the Congress this year. The 
NRHA stands ready to assist and support the Ways and Means 
Health Subcommittee and the Congress in guaranteeing access to 
health care services for rural and frontier Americans. If you 
have questions about the NRHA's BBA relief priorities or if the 
association and its membership can be of further assistance to 
you, please contact Darin E. Johnson, Vice President for Policy 
and Public Affairs, at (202) 232-6200.

      The National Rural Health Association's Rural Targeted BBA 
                           Relief Priorities

1. Medicare Hospital Outpatient Prospective Payment System

    Exempt Medicare Dependent Small Rural Hospitals and Sole 
Community Hospitals from the proposed Medicare hospital 
outpatient PPS system or at a minimum, establish a stop loss 
measure to protect low-volume, rural providers from the 
disproportionate effects of the PPS system.
    The NRHA is deeply concerned with the Health Care Financing 
Administration's (HCFA) proposed rule implementing a Medicare 
prospective payment system (PPS) for hospital outpatient 
services as defined by the BBA New estimates prepared by HCFA 
demonstrate the grave impact the proposed PPS system will have 
on low-volume, rural hospitals.
    The NRHA understands Congress may be considering, as part 
of a larger BBA relief measure, a phase-in of the proposed PPS 
payment methodology as a means of protecting small, rural 
hospitals from the severe impact of the proposed PPS system. 
The NRHA strongly opposes a phase-in because the impact on 
rural hospitals will ultimately be the same--small, rural 
hospitals will be placed in a financially vulnerable situation. 
A phase-in of the PPS system for hospital outpatient services 
would be nothing more than a band-aid fix to a very serious 
problem which merits a more viable and long-term solution.
    HCFA's latest analysis on the impact of the proposed PPS 
system shows that Medicare payments for hospital outpatient 
services for small, rural hospitals with fewer than 50 beds 
would be reduced by 13.8 percent compared to 5.7 percent for 
all hospitals. In addition, total Medicare payments on average 
for rural hospitals would be reduced almost twice as much as 
for all hospitals (1.1 to 0.6 percent). The harsh reality is 
that access to care for Medicare beneficiaries in rural areas 
will be jeopardized as a result of this proposed PPS 
methodology, especially when combined with other payment 
reductions included in the BBA.
    For some rural hospitals (25-100 beds), outpatient services 
total 45 percent of total revenue compared to less than 33 
percent for their urban counterparts. Many of these hospitals 
already are experiencing negative operating margins, making 
them extremely vulnerable to the effects of outpatient payment 
reform. It appears the effect is greater on government owned 
hospitals and hospitals with less than 50 beds. It is these 
hospitals that are providing services to the most remote areas 
of our nation, and also generally serve communities with high 
Medicare populations.
2. Medicaid Reimbursement to Community Health Centers and Rural 
Health Clinics

    Repeal the phase-out of Medicaid cost-based reimbursement 
to Federally Qualified Health Centers (FQHCs) and Rural Health 
Clinics (RHCs) or as an alternative, implement a prospective 
payment system that guarantees rural centers and clinics 
receive equitable reimbursement.
    Beginning October 1, 1999 the BBA permits state Medicaid 
agencies to pay FQHCs and RHCs less than it actually costs the 
rural health care provider to care for their Medicaid patients. 
Moreover, the phase-out methodology used by the BBA is flawed 
in that it automatically reduces reimbursement below the cost 
of providing services no matter how reasonable they may be. 
Such a drastic move will threaten the existence of these safety 
net providers and the role they play in ensuring access to 
quality health care for rural Medicaid and Medicare 
beneficiaries and the uninsured.
    FQHCs and RHCs provide primary care services to our 
nation's most vulnerable and underserved rural populations. As 
a result, these providers are extremely dependent upon Medicaid 
payments to cover the cost of these services. The BBA forces 
community health centers to face revenue losses that are 
impossible to avoid or overcome through greater efficiencies or 
cost-cutting. In the year 2000 alone, these revenue losses will 
equal $100 million nationally.
    According to the HCFA's own analysis, the Medicaid per 
beneficiary cost is much lower in a RHC than in other provider 
settings by an average of $500 per beneficiary. Such a 
reduction in Medicaid reimbursement penalizes RHCs for their 
efficiency in providing primary care services to rural Medicaid 
beneficiaries.
    The House Rural Health Care Coalition's Triple-A Rural 
Health Improvement Act of 1999 (H.R. 1344) repeals the BBA's 
provision phasing-out reasonable cost reimbursement to FQHCs 
and RHCs. The Senate Rural Health Caucus' Promoting Health in 
Rural Areas Act of 1999 (S. 980) and two free-standing bills 
(S. 1277 and H.R. 2341) create an alternative Medicaid PPS 
system for FQHCs and RHCs.
    The PPS system provides Medicaid payments in fiscal year 
2000 that are equal to 100 percent of the per visit costs of 
furnishing services in 1999. Subsequent to 2000, the amount per 
visit would be increased by the percentage increase in the 
Medical Economic Index and adjusted for changes in scope of 
services. The Senate provision would also allow states to pay 
for services at rates above those provided by the Medicaid PPS 
system. The NRHA would support an alternative Medicaid PPS 
system if it is modified to reward cost efficient FQHCs and 
RHCs and contains a federal enhanced match to encourage states 
to continue paying cost-based reimbursement to these essential 
providers.

3. Health Professional Shortage Area and Medically Underserved 
Area Designations

    Legislate the following as the Bureau of Primary Health 
Care (BPHC) considers changes to the methodologies used to 
define Health Professional Shortage Areas (HPSAs) and Medically 
Underserved Areas (MUAs):
     Require consideration of pending physician 
retirements or resignations in designating HPSAs;
     Require revised standards for HPSA designation 
through expedited negotiated rule-making process;
     Require DHHS to consider the needs of medically 
underserved populations and individuals and the percentage of 
the population over age 65 in developing such standards; and
     Prohibit new methodology for HPSA designation if 
the methodology is detrimental to rural or frontier communities 
in that it results in the provision of fewer services.
    Given the dramatic impact the BPHC's proposed rule to 
establish a new designation methodology for Medically 
Underserved Populations (MUPs) and HPSAs would have had on 
federal and state programs to serve rural and frontier 
underserved populations, the BPHC was recently forced to 
withdraw its proposed revision to the methodology for 
designating these areas.
    While the current law establishing MUAs and HPSAs applies 
specifically to the National Health Service Corps and Federally 
Qualified Health Centers programs, a number of other important 
programs impacting underserved populations are affected by 
these designations. Federal programs impacted by changes in the 
designation methodology include eligibility for cost-based 
reimbursement to Rural Health Clinics, allocation of Health 
Professions Education and Training Grant programs (Titles VII 
and VIII) funding, Indian Health Professions Scholarship Grant 
program, Medicare bonus payments to physicians in underserved 
areas and eligibility for Medicare telehealth reimbursement. It 
is critically important to take into consideration the 
implication of any change in the MUA and HPSA methodologies on 
these programs, as well as state sponsored programs. The 
smallest change in these methodologies could put in jeopardy a 
number of federal and state programs and resources providing 
access to primary care services.
    The BPHC's proposed methodology did not give considerable 
weight to the additional needs of the nation's elderly and 
Medicare population, a disproportionate number of whom reside 
in rural and frontier communities. While the proposed rule 
included a method for age-adjusting, several states reported 
that under the proposed methodology areas with higher 
percentages of elderly residents actually were disadvantaged. 
Any final underserved area designation must give separate 
consideration to the elderly population.
    Additionally, the proposed designation did not take into 
account the special needs and characteristics of our nation's 
frontier population. It was likely that a number of frontier 
areas would not have met the requirements to be designated as a 
MUP, and therefore would not have been designated as a HPSA 
even though their population to primary care practitioner ratio 
was greater than 3000 to 1. The NRHA recommended in its formal 
comments to the BPHC that a separate frontier area designation 
process be established to take into account population density, 
distance in miles to the nearest service market and time in 
minutes to the nearest service market.
    Given the many barriers to health care services the 
proposed MUA and HPSA designation methodology may have caused 
rural and frontier underserved areas, the Congress must direct 
the BPHC to initiate a negotiated rule-making process to 
facilitate the design of a new underserved designation that 
more appropriately and effectively recognizes medically 
underserved and health professional shortages areas in rural, 
frontier and urban areas.

4. Critical Access Hospital Reforms

    Strengthen the Medicare Rural Hospital Flexibility Program 
by making the following important reforms to this program which 
is maintaining essential access to basic hospital and emergency 
room services for rural and frontier Americans:
     Allow hospitals that closed or downsized to a 
clinic within three years of enactment of this law to reopen as 
or convert to a Critical Access Hospital (CAH);
     Allow CAHs to choose between two options for 
payment for outpatient services: (1) reasonable costs for 
facility services, or (2) an all-inclusive rate which combines 
facility and professional services;
     Require Medicaid programs to reimburse for 
services in CAHs;
     Change the 96 hour length of stay limit to a 96 
hour average;
     Exempt CAH swing beds from PPS for skilled nursing 
facilities; and
     Grant CAHs deemed status that will allow for 
accreditation.
    The NRHA urges the Congress to adopt reforms to the 
Medicare Rural Hospital Flexibility program that will further 
strengthen our nation's rural health care delivery system. This 
program, established by the BBA, creates an important 
alternative for small, rural hospitals by providing regulatory 
relief and more equitable financing options by assisting states 
in proactively responding to market changes, removing 
restrictive regulatory standards, and supporting network 
development and regional approaches to health care. It is 
vitally important the Subcommittee include the NRHA's CAH 
reforms in its BBA relief legislation so this program is able 
to reach its full potential.
    To date, 36 state rural health plans have been approved by 
HCFA, and approximately half of the estimated 1,100 eligible 
small, rural hospitals nation-wide have indicated an interest 
in being designated a CAH.
    Extremely crucial to encouraging maximum participation in 
the program is allowing CAHs to choose between two options for 
payment for outpatient services: (1) reasonable costs for 
facility services, or (2) an all-inclusive rate which combines 
facility and professional services. The all-inclusive payment 
allows hospitals to bundle physician payments into their CAH 
cost-based reimbursement, which is a key financial incentive to 
recruiting physicians to practice in CAHs. This option was an 
important component of the successful demonstration projects 
that this program is based upon--the Montana Medical Assistance 
Facility program and the Essential Access Critical Hospitals/
Rural Primary Care Hospital program.
    Permitting hospitals that have recently closed or downsized 
to reopen or convert to a CAH is also vital to the ultimate 
success of the program. This provision would allow those 
facilities that have already succumbed to the overwhelming 
financial pressures created by decreasing Medicare and Medicaid 
reimbursement payments to continue providing essential primary 
and emergency care services to their communities. Changing the 
current 96 hour length of stay limitation to a 96 hour average 
will also provide CAHs flexibility in caring for their 
patients. In addition, it will save money from unnecessary and 
costly patient transfers when only an additional day or two of 
inpatient care is needed.

5. National Health Service Corps Scholarships

    Exempt the National Health Service Corps (NHSC) 
scholarships from federal taxation in any tax measure that 
moves through the Congress this year.
    This tax provision was included in the tax measure recently 
approved by the Congress, but subsequently vetoed by the 
President. It was also part of a broader education bill passed 
last year that was again vetoed by the President because of 
unrelated provisions. As demonstrated by its passage by the 
Congress on two occasions, wide bipartisan and bicameral 
support for this issue exists--which is vital to the NHSC's 
mission of providing quality health care services to our 
nation's most vulnerable populations.
    In testimony submitted earlier this year to the House Ways 
and Means Committee, a NHSC scholar and second year medical 
student spoke of how she was forced to take out two loans--one 
to cover a portion of her living expenses and the other to pay 
her federal taxes--because each month more than half of her 
stipend is withheld by the Internal Revenue Service (IRS) for 
tax purposes.
    The NHSC program plays a critical role in providing primary 
health care services to rural and urban underserved 
populations. The scholarship program is one of the few 
incentives the NHSC has to recruit new clinicians to rural and 
inner-city communities. Currently 2,400 NHSC clinicians, 
including physicians, dentists, nurse practitioners, physician 
assistants, nurse midwives, and mental and behavioral 
professionals, provide primary care services to over 4.6 
million Americans who would otherwise lack access to quality 
health care.

6. Rural Impact Statements

    Require the Department of Health and Human Services (DHHS), 
when promulgating or proposing a regulation related to a health 
care program, to include an analysis of the impact of 
implementation of the regulation on rural areas, including its 
impact on: (1) rural safety net providers; (2) rural primary 
care providers; (3) rural hospitals; (4) FQHCs and RHCs; (5) 
the economies in rural areas; and (6) rural residents.
    While the NRHA recognizes the enormous burden that has been 
placed upon the DHHS, specifically HCFA, as it implements the 
Medicare and Medicaid reforms contained in the BBA, the 
association remains extremely concerned that the Department 
continues to consider, draft and implement policies that will 
put access to health care in jeopardy for rural beneficiaries. 
Recent regulations proposed and implemented by HCFA have not 
recognized the unique needs of our nation's rural health care 
delivery system.
    On several occasions the BBA and members of the Senate 
Finance Committee and the House Ways and Means Committee were 
explicit in their intent to give special considerations to 
rural providers when implementing portions of the BBA. For 
example, the BBA gave specific instructions to the Secretary of 
HHS to give ``special considerations'' to rural residency 
programs when apply the BBA's Graduate Medical Education 
reforms. These special considerations were not included in the 
Department's final rule. On another occasion, members of the 
Senate Finance Committee responsible for drafting the 
telehealth portion of the BBA communicated that it was their 
intent that ``store and forward'' telemedicine be reimbursed by 
Medicare--yet the Department refused to follow these 
instructions. Most recently HCFA's own analysis shows that its 
proposed PPS system for Medicare hospital outpatient services 
will have a disproportionate impact on low-volume rural 
hospitals. However, the Administration recently proposed in its 
fiscal year 2000 budget to move forward with applying the PPS 
system to small, rural hospitals with a transition period.
    Given these reoccurring examples of how the interests of 
rural health care providers and beneficiaries are not being 
taken into consideration by the DHHS as important policies are 
developed, it is critical that Congress mandate that the 
implication of policies and rules on the rural health care 
delivery system be analyzed and receive the serious 
consideration they deserve by the Department.

7. Graduate Medical Education Reforms

    Legislate the following rural Graduate Medical Education 
reforms to promote residency opportunities in rural and 
frontier communities:
     Require the Department of Health and Human 
Services to provide special consideration in apply the BBA 
provisions that reduced IME payments to providers and placed a 
ceiling on the number of Medicare funded residencies to rural 
residency programs, as well as facilities that are not located 
in an underserved rural area but have established separately 
accredited rural training tracks;
     Increase indirect GME payments to some hospitals 
by changing the way interns and residents are counted, from 
including those who were in the hospital during the most recent 
cost reporting period ending on or before December 31, 1996, to 
those who were appointed by the hospital's medical residency 
training programs for the same time period; and
     Allow a hospital that sponsors only one residency 
program to count one additional intern/resident for each 
calendar year up to a maximum of three more than the limit 
otherwise determined under this provision.
    The BBA contained several Medicare GME provisions that were 
intended to promote residency opportunities in rural hospitals 
and ambulatory settings. The provisions were included by 
Congress because studies show that GME programs located in 
rural areas help to counteract persisting rural physician 
shortages by attracting medical residents and physicians to 
rural communities. Unfortunately, these rural specific GME 
provisions were not implemented by the Secretary of HHS in her 
final rule implementing the BBA.
    The BBA called for the gradual reduction of IME payments to 
facilities training residents, and a ceiling to be phased-in on 
the number of residents for which a GME program will receive 
Medicare funding. For the purpose of determining both IME and 
DME payments, existing programs may not exceed the number of 
resident FTEs reported in their teaching hospital on or before 
December 31, 1996.
    Understanding the cap on the number of residents would 
restrict new and expanded residency programs in general, the 
BBA recognized the importance of graduate medical training in 
rural areas by instructing the Secretary of HHS to ``give 
special consideration to facilities that meet the needs of 
underserved rural areas.'' In addition, the Secretary was also 
given discretion to modify the ceiling for new GME programs 
(those established on or after January 1, 1995). Despite the 
Congress' explicit guidance, the Secretary did not make any 
special considerations for facilities providing rural and 
frontier residency opportunities in her final rule implementing 
the GME provisions.

8. Wage Indices for Skilled Nursing Facilities and Home Health 
Agencies

    Require that area wage adjustments for the skilled nursing 
and home health care PPS systems be based on wage levels at 
Skilled Nursing Facilities and Home Health Agencies.
    As part of the current Medicare hospital inpatient PPS 
system, HCFA uses a complex formula to determine the amount it 
reimburses hospitals for providing inpatient services to 
Medicare beneficiaries. About three-quarters of that payment is 
increased or decreased by applying a hospital wage index which 
is intended to adjust for the fact that market wage rates for 
nurses and other hospital employees vary somewhat across the 
country.
    The current index actually goes well beyond its original 
intent in that it not only makes adjustments for differences in 
local wage rates, but it also rewards hospitals in areas, 
mostly urban, where a greater than average number of employees 
are hired. As a result of this methodology, the wage index 
varies greatly between urban and rural hospitals--the primary 
reason Medicare reimbursement to rural hospitals is lower and 
their resulting Medicare inpatient margins are less than half 
of urban hospitals (4.4 versus 9.7 percent in 1995).
    The BBA mandated that HCFA develop new PPS systems for 
hospital outpatient services, skilled nursing and home health 
care. HCFA has signaled that it plans to apply the currently 
flawed wage index, which was created specifically for the 
hospital inpatient PPS system, to the payment systems for 
hospital outpatient services, home health care, and skilled 
nursing. The NRHA believes only wage rates relevant to the 
specific services providing in these settings should be used. 
In addition, the hospital wage index, as well as the wage 
indices used by the new PPS systems for hospital outpatient 
services, home health care and skilled nursing, should be 
changed to reflect only legitimate differences in area wage 
rates, not average per employee expenditures that are biased 
toward facilities in urban areas.

9. Medicare Rural Waiver

    For purposes of Medicare payments, establish a waiver 
process to allow rural providers located in Metropolitan 
Statistical Areas (MSAs) to be classified as ``rural'' if they 
are located: (1) in a rural area as defined by the Goldsmith 
Modification published in the Federal Register on February 27, 
1992; (2) outside of an urbanized area as defined by the U.S. 
Census Bureau; or (3) in an area designated by a State as 
rural.
    The definition of a rural area currently used by HCFA for 
purposes of Medicare reimbursement does not recognize certain 
hospitals and other providers that are indeed located in rural 
and frontier areas. Because the federal definition of rural is 
based solely on whole-county urban or rural classification, 
some rural hospitals, community health centers and rural health 
clinics cannot participate in Medicare programs designed to 
help preserve access to care for rural Medicare beneficiaries 
and their families. These important programs include the 
Medicare Rural Hospital Flexibility/Critical Access Hospital 
program, the Medicare Dependent Hospital and Sole Community 
Hospital programs and the Rural Health Clinics program. The 
supplemental payments made to rural providers by these programs 
are frequently the primary reason for their continued viability 
and existence.
    As defined by law, the Medicare program currently defines 
``rural'' as any area that is outside of a Metropolitan 
Statistical Area (MSA) as defined by the Office of Management 
and Budget. MSAs are defined along county lines and may include 
one or more counties. This definition ignores such important 
factors as geography, demography, transportation, and economics 
in defining rural and urban areas.
    For purposes of determining eligibility for federal grant 
programs, the Federal Office of Rural Health Policy uses the 
Census Bureau's rural census tracts which recognize rural areas 
within MSA counties. In addition, both the Department of 
Agriculture and the Federal Communications Commission have 
adopted this rural definition for their rural-focused programs. 
Rural hospitals, health centers and clinics that are currently 
located in MSA counties do not have the ability to obtain 
reclassification from urban to rural status.

                                


Statement of Organizations of Academic Family Medicine

    Dear Mr. Chairman: The Organizations of Academic Family 
Medicine, on behalf of faculty, researchers, program directors, 
and chairs of departments of family medicine, appreciate the 
opportunity to provide input to this Committee in its current 
deliberations over the Balanced Budget Act (BBA) of 1997. You 
have heard from some major sectors of the provider community 
regarding problems or untoward effects of the BBA. We would 
like to address a small, but critically important piece of the 
BBA that has had an unintended consequence of 
disproportionately harming training of one specialty in 
particular, family practice.
    The Balanced Budget Act of 1997 (BBA) was intended, in 
part, to remove statutory impediments to ambulatory, non-
hospital based training. Although we support the intent of the 
provisions of the BBA, the reality of how they function has 
been detrimental to ambulatory training, particularly family 
medicine residencies, the very ones that historically have 
conducted ambulatory training. Implementation of the BBA also 
does not support production of rural physicians in a way that 
would be in keeping with the intent of the statute.

       Changes in the BBA Disproportionately Harm Production of 
                           Family Physicians

    Although ostensibly the BBA is supposed to have leveled the playing 
field and removed disincentives to ambulatory training, we find it to 
be just the opposite for family medicine graduate training. Many 
believe that the recent changes to Medicare graduate medical education 
funding (as passed in the Balanced Budget Act (BBA) of 1997), such as 
the capping of residency slots, will help reduce the nation's total 
production of physicians, while protecting the production of physicians 
who serve in rural areas. Unfortunately, this is not the case.
    While we wholeheartedly support the intent of the statutory 
changes, their implementation has had two unintended consequences: (1) 
penalizing family practice programs that have historically sent 
residents for training in non-hospital settings, including rural site 
rotations, while promoting such training for other specialties, and (2) 
restricting the growth of family practice programs, when 21 percent of 
family physicians serve in rural areas. Moreover, implementation of the 
BBA has prohibited payment of graduate medical education funds in the 
future to newly established, separately accredited rural training 
tracks. These programs, which of necessity are sponsored by non-rural 
institutions, have proven track records of producing graduates to serve 
in rural areas. These consequences are especially troubling since 
Congress intended support for production of rural physicians.

BBA Causes Reductions in Both Programs and Residents in Family Practice

    The Association of Family Practice Residency Directors (AFPRD) 
surveyed family practice residencies earlier this year. The evidence 
that family practice programs have been hurt by the BBA is compelling. 
Overall, 10 percent of programs have been told by their sponsoring 
institutions to decrease their number of residents (45 programs). 
Twenty-three percent have been told that it would be likely that they 
would be asked to reduce their number of residents in the future. 
Eleven percent have plans to increase the number of residents. In 
addition, the ACGME reports eleven programs have begun the process of 
closing down (since August, 1997), and two more have just announced 
their closure. Three of the thirteen programs that have closed or are 
closing are rural tracks. These figures do not include those closing 
due to mergers.
    It is important to note that this is the first year that programs 
have reduced their number of residents. There had been a net increase 
of 11 to 12 programs per year, between '90 and '97. Family practice 
residencies expanded by approximately 18-22\1/2\ percent during that 
time, from 380 programs to 470. Typically, 1 to 2 programs close each 
year. Thirteen programs closing in the three years since the BBA was 
passed is unusually high.

         Rural Programs Harmed, in Spite of Unqualified Success

    The impact is especially telling when one looks at rural training 
tracks. Not only have 20 percent of rural tracks stated that they plan 
to decrease their number of residents, but the BBA does not allow 
payment of GME funds to newly established training tracks.
    Among the 474 family medicine residency programs in this country, 
29 have made special provision to train family physicians for rural 
practice. They have established separately accredited rural training 
tracks. Our organizations recently collected information from these 
programs regarding the practice location of each program's graduates. 
(Data was unavailable from 7 programs--1 had closed, 5 were too new to 
have had any graduates yet, and 1 did not respond to our request for 
information.)
    These programs are a true success story. Over half of the programs 
had a 100 percent retention of graduates in rural (non-MSA) areas. 
Overall, 76.0 percent (136 of 179) of the graduated residents were 
serving rural communities, the majority of those in the state of 
residency training. Even more impressive, new programs had an even 
higher rate of success. Of programs begun within the last 10 years, 88 
percent (94 of 107) of graduates provided care in a rural, non-MSA 
county.
    This compelling data is even more striking when compared with the 
performance of other types of residency programs. According to the AAFP 
Center for Research in Family Practice and Primary Care, nationally, 
among all non-Federal allopathic family physicians actively providing 
patient care in 1997, 21.0 percent practiced in rural, non-MSA 
counties. For the other 2 primary care specialties, general internal 
medicine and pediatrics, the figures were much lower--just 8.0 percent 
and 7.4 percent in rural practice respectively.

                           What Can Be Done?

    There is legislation on hand that would correct these problems with 
minimal cost to the Medicare program. In the House, H.R. 1222, 
introduced by Rep. Baldacci, and a companion bill, S. 541, in the 
Senate, (introduced by Senators Collins (ME) and Murkowski (AK)) 
address these concerns. Moreover, the content of these bills has been 
incorporated into both the House and Senate omnibus rural health bills 
(H.R. 1344 and S. 980)
    These bills include technical legislative changes to alleviate some 
untoward effects of the Balanced Budget Act of 1997 that are beginning 
to have grave consequences for family medicine residency programs. As 
you know, the statute put in place hospital-specific caps on the 
numbers of full time equivalent residents Medicare would pay for under 
GME. It also finally allowed for the counting of residents who spend 
time training out of the hospital in ambulatory settings for the 
purposes of reimbursement by Medicare. The bill also directs the 
Secretary to give special consideration to facilities that meet the 
needs of underserved rural areas. These are all changes academic family 
medicine supports wholeheartedly.
    Unfortunately the language used in the BBA to carry out these GME 
changes has created disproportionate harmful effects on family practice 
residencies. The bills would solve these problems by:
    1. Recalculating the IME and DME caps based on the number of 
interns and residents who were appointed by the approved medical 
residency training programs for FY 1996, whether they were being 
trained in the hospital or in the community. Currently only programs 
prospectively introducing ambulatory training will be allowed to have 
those positions supported by Medicare.
    The impact has been disproportionately harmful to family practice 
programs because the hospitals in which they were located were not 
allowed to count the residents they had serving in community settings 
in the cap. Only family practice residents are trained extensively out 
of the hospital and only family practice residencies were significantly 
harmed by this provision in the BBA.
    2. Changing the cut-off date for adjusting the DME funding cap to 
September 30, 1999. Approximately 10 family medicine programs were ``in 
the pipeline'' for ACGME accreditation at the time of passage of the 
BBA. We believe that very few programs other than these would also fall 
into this window, since family medicine was one of very few specialties 
that were in a growth cycle.
    3. Expanding the exception to the funding caps to include programs 
with separately accredited rural training tracks even if the sponsoring 
hospital is not located in a rural area, and for residency programs 
which are the only one offered in a given hospital.
    The inability to initiate rural training tracks affects only family 
practice residencies. While these rural tracks require separate 
accreditation, they are sponsored by an existing, non-rural program and 
not allowed to expand because of the resident caps. This inhibits the 
ability to respond to the need for family practitioners in rural areas. 
The average rural training track has four residents, two in each of the 
2nd and 3rd years of training. Based on this, the number of residents 
that would be added with additional rural training tracks would be 
modest.
    The ACGME has indicated that only approximately 300 programs exist 
nationally as single programs within hospitals. Of this number 191 are 
family practice programs. The rest are exceptions across specialties, 
and most are extremely small. All other programs of any specialty would 
be able to grow to meet community needs based on a diminution of other 
specialty slots within the 1996 cap on FTE's. The cost of the exclusion 
from the cap of the hospitals that sponsor only one family practice 
residency should be minimal. Most of the family practice programs are 
located in small community hospitals. The programs are smaller than the 
national average, and we believe they cannot expand a great deal 
because the infrastructure needed to support larger programs is not 
available. For example, nationally, the average size of a family 
practice program is 27 residents; the average size of those family 
practice programs that are the sole program in its hospital is just 
under 21 residents.
    In conclusion, we are asking that as this committee puts together a 
package of ``fixes'' to the BBA of 1997, that you keep in mind the 
concerns we have raised in this statement. Changes in the BBA, which 
purportedly support training in the ambulatory setting, have had a 
negative effect on family medicine training programs, the very ones 
that historically have conducted ambulatory training. Implementation of 
the BBA also does not support production of rural physicians in a way 
that would be in keeping with the intent of the statute. We hope that 
the committee will choose to incorporate H.R. 1222, the GME technical 
amendments of 1999, into the ``BBA fix'' vehicle that will be passed, 
to correct these problems.
    We appreciate the opportunity to provide input and hope that you 
can support this legislation as you deliberate.

                                

                              Congress of the United States
                                   House of Representatives
                                                 September 30, 1999
The Honorable William M. Thomas
Chairman, Health Subcommittee
1136 Longworth HOB
Washington, DC 20515

    Dear Mr. Chairman:

    As you and the Health Subcommittee deliberate over possible 
Medicare refinement language to Balance Budget Act of 1997, I urge you 
to consider a proposal that will have an immediate and positive impact 
upon Medicare beneficiaries. This proposal will help ensure that 
seniors are not charged excessive coinsurance payments for hospital 
outpatient services provided under Medicare Part B.
    The BBA strengthened Medicare for our nation's seniors in many 
ways. One of these improvements was to ensure that beneficiaries pay a 
true 20% coinsurance payment for hospital outpatient services. However, 
beneficiaries are being charged 20% of the hospitals submitted charges, 
rather than 20% of the Medicare reimbursement rate which is a lower 
dollar amount. As a result, beneficiaries are paying as much as 50% of 
the total payment for services.
    As you are aware, Section 4523 of the BBA intended to correct this 
problem through a gradual reduction in Medicare beneficiaries' 
outpatient coinsurance payments. Unfortunately, the Medicare Payment 
Advisory Commission has estimated that this phase-in period may take as 
long as 40 years. I do not believe Congress intended that it take 40 
years to implement this policy to achieve fairness for our nation's 
Medicare beneficiaries. Our nation's Seniors should not have to 
continue to bear higher Medicare costs through high coinsurance 
payments and potential increases in Medigap insurance premiums.
    I have enclosed a proposal for your consideration, the Senior 
Citizens' Hospital Outpatient Coinsurance Relief Act, which will ensure 
that Congress fulfills its promise of fairer, more equitable 
coinsurance for Medicare hospital outpatient services. This proposal 
will phase in the true 20% coinsurance over a four-year period.
    I believe it is very important that we include this measure in any 
Medicare reform or BBA correction this year. I urge you to consider 
this proposal--we ow it to our senior citizens! Thank you for your 
consideration of this important issue.
            Sincerely,
                                                  Bob Riley
                                                 Member of Congress
[GRAPHIC] [TIFF OMITTED] T5699.011

[GRAPHIC] [TIFF OMITTED] T5699.012

      

                                

The Honorable William Thomas
Chairman, Subcommittee on Health
House Ways & Means Committee
U.S. House of Representatiaves
Washington, DC 20515

Dear Mr. Chairman:

    We are writing to express our concern with an issue of utmost 
importance to senior Medicare beneficiaries. This is the problem of 
excessive overcharges of hospital outpatient beneficiary co-payments.
    When it comes to most hospital outpatient services, Medicare 
beneficiaries pay significantly more than the usual 20% co-insurance 
that they assume they are being charged. In fact, in its March 1999 
report to Congress, the Medicare Payment Advisory Commission (MEDPAC) 
reported that ``beneficiaries are liable for nearly 50% of the total 
payment to hospitals for these services, compared with 20% for most 
other Medicare covered services.''
    The MEDPAC report also states that this disproportionate 
beneficiary share for hospital out-patient services stems from 
calculating coinsurance as 20% of the hospitals' charges, while the 
Medicare program share is calculated as the lesser of costs or charges 
net of the beneficiary co-payment. Since hospitals' charges are 
generally much higher than their costs, beneficiaries are responsible 
for a larger share for the total payment.
    This is unfair public deception and an abuse of senior 
beneficiaries! This problem needs to be fixed immediately. Medicare 
beneficiaries are being unduly charged these excessive co-payment 
amounts. Even if beneficiaries have supplemental insurance, they are 
feeling the effects of rising double-digit rate increases as a result 
of these excessive charges. We are very concerned about this trend.
    Congress has already acknowledged the inequity of this problem and 
attempted to correct it in the Balanced Budget Act of 1997 (BBA). That 
act includes a provision that, over time, would reduce the beneficiary 
co-payment by adjusting the shares of payment under the outpatient 
Prospective Payment System. However, the problem today is that this 
reduction of the co-payment amount to a true 20% could take decades to 
phase in completely. In some cases, it has been estimated that it will 
take 20 to 40 years to fully phase in. This is unacceptable. This co-
insurance reduction should occur at a much faster rate than currently 
established under the BBA. In its report to Congress, MEDPAC agrees 
with this.
    Attached is a draft bill that would have the effect of reducing the 
beneficiaries' co-payment to a true 20% over a four-year period. The 
bill would indeed provide faster relief to our senior Medicare 
beneficiaries. This bill is consistent with the original intent of 
Medicare in that beneficiaries would only share to the extent of 20% of 
the Medicare approved charges. It is also consistent with the intent of 
BBA '97 because it would reduce the co-payment share within a 
reasonable time.
    We ask that you include this bill in any Medicare legislation that 
is advanced in Congress this year, and specifically request that you 
include this proposal in the Finance Committee package. This is a fair 
solution to all interested parties. It merely provides a permanent 
solution to a problem that Congress has long recognized.

            Sincerely,

John J. Powell
Vice President for Government Relations
Seniors Coalition

Nona Bear Wegner
President
Council for Affordable Health Insurance

Robert C. Conover
President
Christian Senior Alliance

Jim Martin
President
60-Plus

Major General Richard D. Murray
USA (Ret.), President
National Association for Uniformed Services

Mike Zabco
Executive Director
TREA Senior Citizens League

Beau Boulter
Legislative Counsel
United Seniors Association

Kermit N. Richardson
National President
The National Grange
    [An attachment is being retained in the Committee files.]

                                
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