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



   THE BALANCED BUDGET ACT OF 1997: A LOOK AT THE CURRENT IMPACT ON 
                         PROVIDERS AND PATIENTS

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                         HEALTH AND ENVIRONMENT

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 19, 2000

                               __________

                           Serial No. 106-145

                               __________

            Printed for the use of the Committee on Commerce

65-915              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2000

____________________________________________________________________________
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                    ------------------------------  

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

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

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

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

                                 ______

                 Subcommittee on Health and Environment

                  MICHAEL BILIRAKIS, Florida, Chairman

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

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Connolly, Mary Lou, Administrator, UCSD Home care, on behalf 
      of the National Association of Home Care...................    90
    Coughlin, Karen, Chief Executive Officer, Physicians Health 
      Services Health Plans, on behalf of the American 
      Association of Health Plans................................    60
    Hancock, Juliet, Program Consultant, Rehabcare Group, 
      Incorporated, on behalf of the National Association for the 
      Support of Long Term Care..................................    77
    Hawkins, Daniel R., Jr., Vice President, Federal and State 
      Affairs, National Association of Community Health Centers..    81
    Richtman, Max, Executive Vice President, National Committee 
      to Preserve Social Security and Medicare...................    74
    Scanlon, William J., Director, Health Financing and Public 
      Health Issues, U.S. General Accounting Office..............    23
    Tavenner, Marilyn, Chief Executive Officer, Richmond Market 
      President, HCA-The Healthcare Company, Johnston-Willis and 
      Chippenham Medical Centers, on behalf of the Federation of 
      American Health Systems....................................    56
    Wilensky, Gail R., Chair, Medicare Payment Advisory 
      Commission.................................................    15
    Williams, David T., Director of Government Relations, 
      Invacare Corporation, on behalf of the American Association 
      for Homecare and the Home Medical Equipment Services 
      Industry...................................................    96
    Zetterman, Rowen K., President Elect, American College of 
      Gastroenterology, on behalf of the American College of 
      Physicians-American Society of Internal Medicine...........    65
Material submitted for the record by:
    Agency for Health Care Administration, letter dated July 17, 
      2000, to Hon. Michael Bilirakis............................   115
    American Association for Homecare, prepared statement of.....   115
    American Hospital Association, prepared statement of.........   117
    American Medical Association, prepared statement of..........   120
    American Medical Rehabilitation Providers Association, 
      prepared statement of......................................   122
    American Physical Therapy Association, prepared statement of.   125
    Association of periOperative Registered Nurses, prepared 
      statement of...............................................   126
    California Association of Public Hospitals and Health 
      Systems, letter dated July 31, 2000, to Hon. Michael 
      Bilirakis..................................................   129
    Florida Hospital Association, prepared statement of..........   137
    Hawkins, Daniel R., Jr., Vice President, Federal and State 
      Affairs, National Association of Community Health Centers, 
      Inc., letter dated August 31, 2000, enclosing response for 
      the record.................................................   139
    Health Industry Distributors Association, prepared statement 
      of.........................................................   131
    McAndrews, Lawrence A., President and CEO, National 
      Association of Children's Hospitals, prepared statement of.   132
    Meijer, Mark, President, American Ambulance Association, 
      prepared statement of......................................   133
    Practice Expense Fairness Coalition, letter dated July 31, 
      2000, to Hon. Michael Bilirakis............................   134
    Rural Hospital Coalition, prepared statement of..............   135

                                 (iii)

  

 
   THE BALANCED BUDGET ACT OF 1997: A LOOK AT THE CURRENT IMPACT ON 
                         PROVIDERS AND PATIENTS

                              ----------                              


                        WEDNESDAY, JULY 19, 2000

                  House of Representatives,
                             Committee on Commerce,
                    Subcommittee on Health and Environment,
                                                    Washington, DC.

    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Upton, 
Greenwood, Deal, Burr, Bilbray, Whitfield, Ganske, Coburn, 
Shadegg, Bryant, Bliley (ex officio), Brown, Pallone, Stupak, 
Green, Strickland, DeGette, Barrett, Capps, Towns, and Eshoo.
    Also present: Representative Fossella.
    Staff present: Tom Giles, majority counsel: Carrie Gavora, 
majority counsel; Robert Simison, legislative clerk; Amy 
Drowskoski, minority professional staff; Karen Folk, 
Presidential Management Intern; and Bridgett taylor, minority 
professional staff.
    Mr. Bilirakis. If we can have order, please, we will get 
started. I am pleased to convene this hearing to review the 
impact of the Balanced Budget Act of 1997, or as we fondly 
refer to it, BBA. Last September, we held a similar hearing to 
examine the effect of this law on the quality of care for 
patients across the country. Congress subsequently passed 
legislation to rectify some of the unintended consequences of 
the Balanced Budget Act and restored roughly $16 billion in 
funding over 5 years. This was a necessary first step to 
stabilize affected health care programs while we continue our 
efforts to ensure their future viability.
    This week, the Congressional Budget Office released its 
mid-session numbers, which project a significant budget surplus 
for fiscal year 2001. We should all be very pleased that our 
belt-tightening has paid off and we are no longer increasing 
the national debt. However, the savings from the BBA have been 
far greater than Congress anticipated when the law was enacted. 
For that reason, it is important that we hold this hearing 
today. It is time for us to step back and to review the 
continued impact of the BBA on providers and the patients they 
serve.
    Just over 2 years ago, we enacted landmark changes to the 
Medicare program. Many of these changes were designed to 
provide for more beneficiary choice and to help guarantee the 
solvency of the Medicare program well into the 21st century. 
Those objectives have been met. But as we know, and as often is 
the case, some unintended consequences ensued.
    Today, we will hear from both the Medicare Payment Advisory 
Commission and the General Accounting Office about challenges 
facing the Medicare program, and I would like to welcome Dr. 
Gail Wilensky and Dr. Bill Scanlon. Their objective testimony 
will help us target areas of greatest need.
    Other witnesses will focus on a multitude of areas affected 
by the BBA. As we begin crafting legislation to correct some of 
these unintended consequences, the testimony from this hearing 
will help us make informed decisions about the scope of any 
legislation. Each witness can provide valuable insight into the 
effects of the BBA on providers and on patients' access to 
health care services.
    For example, the Nation's hospitals, including public, non-
profit, for-profit, teaching, and children's hospitals, have 
waged a very public campaign to remind Congress that the BBA is 
continuing to have very real consequences for patients every 
day. Data from the Florida Hospital Association shows that 
Shands Jacksonville Hospital in Florida will lose almost $32 
million, in total, because of changes under the BBA. Last 
year's relief measure diminished those losses, but only by 
roughly $1.3 million. The hospital will soon be bankrupt unless 
the necessary assistance is received. I think that these 
effects are being felt by hospitals around the country and 
certainly not just in Florida.
    I would caution, however, that the days of runaway Federal 
spending are over. While we work to ensure patients' access to 
necessary services, we must remain vigilant guardians of 
taxpayers' dollars. And as we draft legislation to further 
refine the BBA, we certainly will not be reopening every 
provision. Relief must go to those areas of demonstrated and 
compelling need.
    This hearing will focus on issues within the jurisdiction 
of the Commerce Committee and this subcommittee in particular. 
However, any legislation that ultimately moves forward will 
address the issues of all relevant providers and patient 
advocates, and to that end, we do welcome comments on any and 
all of the unintended consequences of the BBA.
    I want to again thank all of our witnesses who have taken 
the time to testify today. I know we all look forward to 
productive dialog. I would, before yielding to the ranking 
member, ask unanimous consent that the opening statements of 
all members of the subcommittee may be made a part of the 
record. Without objection, that will be the case.
    Now I will yield to Mr. Brown of Ohio.
    Mr. Brown. Mr. Chairman, thank you, and thank you very much 
for holding this hearing and getting us back in the middle of 
this very, very important issue.
    I would like to thank our witnesses for joining us this 
morning and extend a special welcome to Dave Williams from 
Amherst, Ohio. Dave is the Director of Government Relations for 
Invacare, the Nation's leading provider of durable medical 
equipment for post-acute care. He is a nationally respected 
expert in health and disability issues. Closer to home, he is a 
member of the Amherst, Ohio, City Council.
    In anticipation of this hearing, I spoke with 
administrators in several health care systems in and around my 
district in Northeast Ohio. Two themes emerged from this 
discussion. First, BBA cuts are not only too deep, they are 
also too steep. No provider can be expected to absorb cuts of 
this magnitude in this kind of timeframe that is laid out in 
the BBA.
    Second, the Medicare and Medicaid cuts obviously do not 
exist in a vacuum. Health care providers are not contending 
with one cut to one service one time. They are contending with 
multiple cuts to multiple services over multiple years. They 
are not contending with Medicare cuts only. They are contending 
with Medicare cuts, with Medicaid cuts, with private sector 
managed care cuts. Unlike Medicaid and Medicare, managed care 
plans can negotiate bare-bones payments by shifting blocks of 
patients from one provider to another, something we are seeing 
all too often. Some providers have virtually no leverage. That 
is just the way it is.
    Providers are not contending with flat costs, they are 
contending with growing costs, tight labor markets, 
skyrocketing prescription drug prices, the imperative to 
embrace new technology, new treatments. These costs are not 
exactly discretionary.
    Finally, providers are not contending with lower 
reimbursement, they are contending with both lower 
reimbursement and often no reimbursement. The Nation's 
uninsured population is 44 million strong and is growing. The 
uncompensated care burden is not spread evenly over health care 
providers, but many of the BBA cuts are. In its March report, 
MedPAC asserted that Medicare is not required to cover the 
shortfalls created by inadequate private sector payments, 
understandably. But I also understand where Ms. Wilensky and 
the MedPAC Commission are coming from. But if the public sector 
does not acknowledge the collective threat to health care 
providers and to their patients, who will? What about our 
safety net providers, especially our big inner-city hospitals? 
Where is their safety net?
    Congress may not be required to look at the larger picture 
when we consider Medicare payments, but we cannot ignore the 
larger picture and then still claim that Medicare is fulfilling 
its mission. If a provider has to cut service or close its 
doors, it does not matter where the payment shortfall came 
from. All patients suffer.
    If we were to privatize Medicare, it would be a different 
story. Congress would pass the buck. Let the HMOs deal with 
provider payments. Let HMOs deal with beneficiary quality and 
beneficiary access. Then providers could compete with 
shareholders for adequate payments, beneficiaries could call 
HMO customer service lines when they have access problems or 
quality problems, and Congress could get out from under all 
this pressure.
    Fortunately, Medicare is still a public program. Its 
mission is still to serve the public good and we are still 
directly accountable, and this subcommittee especially and in 
this Congress for that mission. In that context, I hope we will 
take action this year to restore needed funding to Medicare 
providers, paying particular attention to the Nation's safety 
net providers. In the absence of universal coverage, in a 
wealthy Nation riddled with medically underserved areas, we 
simply must ensure adequate payment to public hospitals, 
especially, community health centers and other safety net 
providers. Realistically, Medicare and Medicaid payments must 
reflect that fundamental goal.
    Mr. Chairman, thank you.
    Mr. Bilirakis. I thank the gentleman.
    I would ask that other opening statements be held as close 
to 3 minutes as possible, and I now recognize Mr. Whitfield of 
Kentucky.
    Mr. Whitfield. Mr. Chairman, I cannot think of a more 
timely or important subject for us to be discussing today than 
what we are discussing. The focus of this hearing is to 
consider the programs which have been disproportionately 
affected as a result of changes made in reimbursement under the 
BBA Act of 1997 and whether Congress should restore monies to 
the Medicare and Medicaid programs.
    I think each Member of Congress will be focusing on 
different areas, but I, for one, want to focus on the DSH 
proportionate payment problem. For the first time, the BBA Act 
of 1997 imposed an annual cap on the Federal Medicaid DSH 
dollars a State could receive. Many of these caps deserve a 
decrease over the fiscal year 1998-2002 window, and today, 
almost 33 percent of all hospitals will operate at a loss this 
year, the highest number ever.
    In Kentucky, the fiscal year runs from July 1 through June 
30. This year, 6 months into the fiscal year, all DSH monies 
had been exhausted to pay indigent care that hospitals had to 
render through June of 2000. This last year, Kentucky's 
hospitals provided indigent care at a cost of $231 million and 
received only $159 million in DSH payments, a payment of 69 
cents for every dollar of indigent costs incurred. This left a 
$72 million shortfall of unreimbursed indigent care that 
hospitals were required to absorb.
    At a time when the number of people without insurance 
continues to rise and hospitals are losing billions of dollars 
caring for low-income patients, further reductions in DSH 
payments are ill-advised, at best. For that reason, Ms. DeGette 
of Colorado, Brian Bilbray of California, and I have introduced 
legislation to freeze any further reduction in DSH payments to 
hospitals. This legislation must be passed before the most 
severe BBA cuts in DSH take effect and strangle hospitals even 
more than they are today.
    We all know that BBA has reduced payments to hospitals at a 
far greater degree than was ever anticipated by Congress, and 
all of us are committed to take steps necessary to restore some 
of this funding, certainly to reduce any further reductions, 
and I look forward to working with this committee and other 
Members of the Congress as we make efforts to address these 
problems.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Pallone, for as close to 3 minutes as you possibly can 
do.
    Mr. Pallone. Thank you, Mr. Chairman. I have already 
shortened it. I want to focus on my home State of New Jersey, 
but obviously I think that this needs to be addressed on a 
national level and that the problems with the BBA cuts are 
having a national impact.
    The Balanced Budget Act of 1997 had a severe impact on New 
Jersey's hospitals. The cuts the BBA imposed have turned out to 
be far greater than Congress intended and hospitals throughout 
New Jersey and the patients they serve are suffering as a 
result. Although last year's Balanced Budget Refinement Act 
helped, it was not nearly enough. Overall, the BBRA restored 
less than 10 percent of the cuts imposed by the BBA. The $123 
million New Jersey hospitals actually received under the BBRA 
is just 6 percent of the total Medicare reductions imposed by 
the Balanced Budget Agreement.
    These reductions have helped bring New Jersey's hospitals 
to the worst financial state in decades. Their average margin 
of profitability is negative 1.6 percent and Medicare margins 
are below the national average. With the majority of BBA 
mandated cuts still to come, New Jersey's hospitals need 
Congress to take advantage of the larger-than-expected budget 
surplus and pass a comprehensive and significant refinement act 
this year.
    Mr. Chairman, I just wanted to point out that the President 
and the Democrats have put forward a, over 10 years, a $50 
billion give-back plan which so far has met with total 
resistance from the Republicans. We tried to include this plan 
with the Medicare prescription drug plan before the Rules 
Committee when the Republican prescription drug proposal came 
to the floor and it was blocked in the Rules Committee. We 
tried again to include this last week, attach it as a motion to 
recommit to the marriage penalty bill that the Republicans 
proposed, and again, that was rejected by the Republicans. So 
we are out there trying to bring this to the floor and we are 
getting resistance from the other party.
    Let me just mention a few issues that directly impact New 
Jersey. The inpatient payment reduction scheduled for fiscal 
year 2001 and 2002 should be repealed. Over the last 3 years, 
hospital inflation has been around 7 percent, yet the increase 
in payment has been below 2 percent. The BBRA provided no 
inpatient payment relief to New Jersey hospitals.
    The funding levels for indirect medical education should be 
maintained at 6.5 percent. If Congress wants to ensure we have 
adequate teaching facilities for health professionals, Congress 
must provide an adequate level of funding. The reductions in 
IME funding scheduled for fiscal years 2001 and 2002 will place 
a heavy and unnecessary burden on the teaching hospitals in my 
State and should be scrapped.
    The transfer provisions in the BBA should be repealed. 
Currently, hospitals actually receive a lower reimbursement 
when some patients are moved more quickly to more appropriate, 
less expensive settings. The expanded transfer definition is 
especially harmful to the delivery system in New Jersey, where 
24 percent of seniors seek additional care after they leave the 
hospital.
    I also support, Mr. Chairman, repealing the 15 percent cut 
in home health payments. This has had a major impact in New 
Jersey. And I also support inclusion of the safety net 
provisions in H.R. 2341 our colleagues Mr. Burr and Mr. Towns 
have introduced to strengthen community health centers.
    But last, Mr. Chairman, I want to stress again that the 
Democrats have been out there. The President and the Democratic 
leadership have talked about this $50 billion plan over 10 
years. We should be allowed to bring this up. We have been 
trying to address it and we are getting nowhere. This needs to 
be addressed in a bipartisan manner.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Pallone. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Bryant?
    Mr. Bryant. Thank you, Mr. Chairman. Thank you for holding 
this hearing. I wake up every morning and come in here bright 
and cheery-eyed and then consistently I hear from my good 
friend from New Jersey how evil the Republicans are, and I do 
not like them either. It makes me mad, those Republicans that 
do not like clean air and clean water and want to throw senior 
citizens out on the street and want to close all the hospitals 
out there so that nobody can get medical care to help our rich 
friends. Everything up here seems to boil down to that type of 
sentiment.
    As a lot of us continue to try to preach up here, there is 
a way to go about doing things and I think our chairman has set 
the right course for us here. We are at a time now when all of 
us agree, we have agreed almost since day one that, as the 
numbers began to come in, that the cuts were too deep. There is 
no question about that. We have been trying to, since, I know 
the 6 years I have been in Congress, we have been trying to 
practice some discipline and balance the budget and get a 
surplus going, things that everybody now is claiming credit 
for, but it did not happen until about 1995, when the change of 
Congress took place, if you want to get partisan about it.
    We are trying to do all that in that environment of keeping 
a balanced budget and being fiscally responsible on all these 
other issues. We have got a surplus now, and because of these 
good practices we have put into play, we have got anticipated 
projected even a bigger surplus than we thought.
    So we are here today to talk about where and how do we 
address those needs of restoring money back to the health care 
providers to try to bring this more into line, and I think 
consistent with a resolution that was passed that was 
sponsored, I think, by Representatives Wilson and Bilbray, 
overwhelmingly that we need to find ways to capture parts of 
this money, not all of it because we have got other 
responsibilities, too, but to again lessen some of these cuts 
and to restore money.
    This is not a Republican issue. It is not a Democratic 
issue. It is not an Independent issue. We all agree that we 
want to do it, but we have to do it in a fair, balanced, 
disciplined way as we are trying to learn to do in Washington, 
something that has not gone on for a number of years before we 
came up here and took control of the Congress. So it is a hard 
lesson to learn, but we are trying to stay that course and be 
responsible, yes, to the medical providers, but also to the 
senior citizens and to the young people out there and to 
education and to the environment and anything else you can name 
out there. It is not an easy task, but if we can continue to 
work together and not practice a politics of division that so 
often happens up here, I think we have a better chance of doing 
it.
    With that, I will yield back my time.
    Mr. Bilirakis. I thank the gentleman.
    Ms. DeGette for her opening statement.
    Ms. DeGette. Thank you, Mr. Chairman. I will add my thanks 
for holding this hearing.
    I want to emphasize that Medicaid and the CHIP program were 
also included in the Balanced Budget Act of 1997 and I want to 
do that because so often we forget that they are the forgotten 
sister health programs to Medicare. But we need to remember 
these programs are both solely in our jurisdiction and I hope 
that we will address issues that have arisen in them as well as 
Medicare in this hearing and as we move forward.
    I have sort of a smorgasbord of issues this morning, so I 
will try to move as quickly as I can through them. The first 
one, I understand, has been mentioned, is this issue of the 
disproportionate share program which is causing our Nation's 
safety net hospitals to absorb $10.4 billion in reductions. 
Safety net hospitals like Denver Health, Virginia Commonwealth, 
Los Angeles Children's Hospitals, and even for-profit hospitals 
are suffering tremendously under these cuts.
    As you have heard, Representative Whitfield, Representative 
Bilbray, and I have been working assiduously on this issue for 
the last number of months. Between our two bills, we now have 
60 percent of the Commerce Committee as cosponsors and over 215 
total cosponsors in the House. I think this is an issue with 
significant grassroots and bipartisan support and I believe we 
need to address it with passage of legislation this year.
    Second, I think the Commerce Committee needs to address 
some issues on the children's health insurance program. We 
talked about this in full committee markup last week, and I 
would also like to note a majority of the members of this 
committee are cosponsors of bipartisan legislation that would 
grant States the option of providing coverage to pregnant women 
through the CHIP program, as well as my bill, H.R. 827. Similar 
language is included in bills by Representatives Emerson, 
Ganske, and Hyde, and Senator Bond has introduced identical 
language that has been cosponsored by Majority Leader Trent 
Lott and Senator McCain.
    I am listening to my colleague across the aisle. I am 
really trying to be bipartisan here, because I think these are 
bipartisan issues that we need to address. There are a lot of 
other issues with the CHIP program that I think can be fixed, 
as well.
    A couple of other issues that I want to talk about, with 
regard to Medicare, the Balanced Budget Act established a self-
management education benefit for diabetics, for Medicare 
beneficiaries. However, HCFA has failed to issue a final rule 
on this provision, and what is more, it allowed the interim 
guidance to expire. As a result, the availability of diabetes 
self-management education is not increasing as intended by the 
BBA. As co-chair of the Diabetes Caucus, with over 280 members, 
I think HCFA needs to act quickly to revise the interim 
guidelines and complete its rulemaking. If we can have adequate 
diabetes health management, we will avoid many of the side 
effects that this disease can bear upon people.
    Mr. Bilirakis. Will the gentlelady please finish up?
    Ms. DeGette. Yes. I would just like to highlight one more 
concern I do not think we will hear about from anybody else, 
and that is access to ambulance services. The BBA required HCFA 
to place ambulance service providers on a Medicare fee schedule 
through a negotiating rulemaking process. The problem is the 
BBA requires the process to be conducted in a budget-neutral 
fashion, so HCFA cannot actually talk about the costs. 
Unfortunately, there is a recent study that shows ambulance 
service providers may face a profound shortfall, so I hope we 
will address this, too, Mr. Chairman.
    Once again, thanks for your consideration.
    Mr. Bilirakis. I thank the gentlelady.
    Now, in the interest of time here, we have a lot of hearing 
ahead of us. I have asked members to keep their remarks to 
within 3 minutes. We have that prerogative. Dr. Ganske?
    Mr. Ganske. Thanks, Mr. Chairman. I will stay within 3 
minutes.
    I chose to sit in this spot because this is where I sat 5 
years ago, in 1995, and I very well remember one hearing that 
we had in which I had the temerity to suggest that a tourniquet 
could staunch hemorrhage, but applied too tightly could cause 
gangrene, in more or less those words. Well, so here we are 
today and we are looking again at some adjustment.
    I would say the No. 1 problem in my district is the issue 
of rural hospital reimbursement, and I think we need an across-
the-board inflationary adjustment for those hospitals because 
they have cost increases that are beyond their control, for 
instance, their pharmacy and their drug costs, which we have 
debated a lot on that issue in the last several weeks. 
Basically, we need to increase the DRGs for those hospitals. I 
mean, it will not do my senior citizens any good to have a 
prescription drug benefit if they do not have a hospital to go 
to any more in their town.
    So I look forward to this hearing and the testimony that we 
are going to have from the panels and I hope we have enough 
chairs for the second panel. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Ms. Capps?
    Ms. Capps. Thank you, Mr. Chairman, for holding this 
important hearing. It could not be more timely.
    As we know, the Balanced Budget Act of 1997 enacted some 
far-reaching changes in the way Medicare pays health care 
providers. These changes were intended to modernize and save 
money, some $115 billion. Today, we know that the actual 
savings are much larger than Congress had anticipated and that 
those changes are affecting services. Providers say that 
delivery of care could be compromised. Many say that it already 
has become such.
    The Balanced Budget Refinement Act, which passed last year 
and restored $16 billion, was certainly a step in the right 
direction. I was glad to strongly support that effort, but 
there is still so much more to be done to bring relief to the 
hardest-hit providers. Like many members, I hear again and 
again in my district regarding these cuts in the BBA and how 
they are affecting quality health care. I take these concerns 
very seriously. We are going to hear more personal stories 
today, I know, and I want to give one of my own, if I may.
    Just recently, I met with the Santa Barbara Rehabilitation 
Institute, where my husband, Walter, received multi-
disciplinary treatment after a serious car accident in 1996. 
This is the only free-standing non-profit rehabilitation center 
between Los Angeles and San Francisco. Approximately 70 percent 
of their patient care is paid by Medicare or Medicaid. They 
have been devastated by the 1997 BBA cuts.
    If these cuts continue, the Santa Barbara Rehabilitation 
Institute estimates that they will have to shut their doors in 
2 years, this in the face of a huge public outpouring of 
support to the tune of raising money to build a new facility. 
This institution saved my husband's life. The accident happened 
a few short months before his election, to which he was elected 
to Congress. He would never have been elected if it were not 
for this wonderful facility, non-profit facility in my 
community. Soberly, they told me a month ago that they have cut 
to the point where they know in 2 years, despite public 
outpouring for a new facility, they will close their doors 
because they cannot provide service.
    The other large hospital in our community is Cottage 
Hospital, a medical staff of more than 500, including a wide 
range of adult and pediatric services. My constituents rely on 
it. They will experience a $23 million reduction in Medicare 
reimbursement from fiscal year 1998 to 2002. The largest losses 
have occurred in graduate medical education, with almost half 
of their GME costs not being reimbursed. In addition, the 
reimbursement for Medicare patients to Cottage has dropped 
significantly since 1997, is continuing to drop. They know that 
the most severe drops are in the next 2 years. I am very deeply 
concerned that the ultimate quality of care is being affected 
now and that unless something pretty dramatic happens, that the 
worst is yet to come because many of these institutions have 
already pared as much as they can.
    So I am looking forward to hearing from our witnesses today 
on these and other critical issues. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentlelady.
    The chairman of the full committee, Mr. Bliley. Chairman 
Bliley?
    Chairman Bliley. Thank you, Mr. Chairman. I am please that 
the Health and Environment Subcommittee is holding this 
important and timely hearing today. This committee made 
important changes to the Medicare-Medicaid programs 2\1/2\ 
years ago. In addition, we created the State Children's Health 
Insurance Program. It is good to continuously monitor thee 
programs and the impact policy decisions have on the health 
care system. In particular, the committee should know of any 
unintended consequences that may have an adverse effect on 
access to care.
    In the Balanced Budget Act of 1997, this committee made 
some difficult decisions on how best to address the financial 
concern of the Medicare program. Changes needed to be made and 
we made them. The committee made tough choices. Moving to a 
prospective payment system for hospital outpatient department 
services, skilled nursing facility services, and home health 
services were just some of the revisions. These were to achieve 
savings of $103 billion over 5 years.
    CBO continues to revise their estimates of spending in the 
Medicare program. It seems every revision they have released 
since passage of BBA 1997 shows that spending is less than 
originally anticipated. In addition, spending in 1999 was 
actually less than it was in 1998. Just yesterday, the CBO 
released its mid-session review of its budget estimates, which 
showed that Medicare spending is again lower than projected. At 
the same time, we are enjoying a greater-than-expected budget 
surplus.
    A resolution was offered by two members of this committee 
late last month, Mr. Bilbray and Ms. Wilson, which declared it 
was the sense of Congress that if CBO's estimates showed a 
greater-than-expected non-Social Security surplus, then we 
should consider further refinements to the changes enacted in 
BBA 1997. CBO now estimates that this fiscal year 2000, non-
Social Security surplus is $84 billion, compared with an 
estimate of $26 billion just 3 months ago, for an increase of 
$58 billion.
    It is very timely that this hearing today considers how 
best to refine even further the policies we enacted 2\1/2\ 
years ago in BBA 1997. In doing so, however, we must be mindful 
that last November, Congress responded to problems some 
providers were facing in the Medicare program due to changes 
made in BBA 1997 by restoring nearly $16 billion over 5 years 
to the Medicare, Medicaid, and SCHIP programs. We worked on a 
bipartisan, bicameral basis with the White House in refining 
the policies established in BBA 1997.
    As further refinements are considered, it is important to 
recognize that it is hard to calculate the true impact of those 
recent changes. We must not rush to spend money or change 
policy too quickly.
    I look forward to the testimony from our first panel of 
expert witnesses, Dr. Wilensky from MedPAC and Dr. Scanlon from 
the General Accounting Office. I also want to thank our 
witnesses on today's second panel. I particularly want to 
welcome before the committee a constituent whom I consider a 
good friend, Ms. Marilyn Tavenner. Marilyn is a registered 
nurse and the CEO of the Johnson-Willis and Chippenham Medical 
Center in Richmond, where she also runs the Henrico Doctors' 
Hospital, the John Randolph Medical Center, and the Retreat 
Hospital.
    Again, Mr. Chairman, thank you for convening this hearing, 
and I yield back the balance of my time.
    Mr. Bilirakis. I thank you, Mr. Chairman.
    Mr. Stupak for an opening statement.
    Mr. Stupak. Thank you, Mr. Chairman. I will try to be 
brief.
    I am especially concerned about the effects of BBA on rural 
areas, especially like Northern Michigan, and let me just quote 
the Director of the Center for Health Plans and Providers of 
HCFA when he said, ``About one in four Medicare beneficiaries 
live in rural America and rural hospitals serve a critical role 
in areas where the next nearest hospital may be hours away. Yet 
rural hospitals face special challenges. They have a higher per 
unit cost, difficulty maintaining enough patients to break 
even, and difficulty recruiting physicians. Medicare has made 
exceptions and special arrangements to address the unique needs 
in rural areas and strengthen these vital facilities. Even 
before the BBA, Medicare provided special payment support to 
more than half of all rural hospitals.'' These special 
challenges and concerns are why the BBA has had a 
disproportionate effect in rural areas. The administration 
understands these concerns and has proposed a number of steps, 
including $1 billion over the next 10 years to address those 
concerns.
    But I know that my providers and I believe that the 
outpatient department and the cuts made there have really been 
detrimental to rural hospitals. We need to change the flawed 
Medicaid payment policy for community health centers, and that 
is why I strongly support the enactment of H.R. 2341, the 
Safety Net Preservation Act, and I join with a number of 
bipartisan members and urge the committee to include that in 
any BBA relief.
    With that, Mr. Chairman, I will yield back the balance of 
my time because I look forward to hearing from our witnesses.
    Mr. Bilirakis. I thank the gentlemen.
    Mr. Burr for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman. Mr. Chairman, for the 
entire time that I have been in Congress, I have gone home and 
suggested to my constituents that they not judge us on what we 
do but judge us on what we get wrong and how quickly we go back 
and fix it, because I think, clearly, 5\1/2\ years ago, we had 
a challenge in Washington, a fiscal challenge, a policy 
challenge, one that doing nothing was not an answer. We had to 
do something.
    You do not get 100 percent of the things right when you 
have got as big a task as we had, and with this, we did not get 
100 percent of the things right. Our target for health plans 
was intended cuts of $22 billion over 5 years. The actual is 
$30 billion. Hospitals, $53 billion was the target over 5 
years. Seventy-five is the actual. Home health was $16 billion 
over five and the actual is $69 billion. Nursing homes, $9.5 
billion and the actual is $16.6 billion.
    In my district, Baptist Hospital lost $90 million in 
inpatient and outpatient payments and $40 million in IME 
payments as a result of BBA. The BBRA only gave back $4 million 
to the Baptist Hospital.
    Last fall, this House passed the BBRA. Included in that was 
H.R. 2341, a bill sponsored by Mr. Towns and myself. It had 
overwhelming support in the House and I think it is safe to say 
that there was overwhelming support on the Hill. Unfortunately, 
in the conference with the Senate, it was not included in BBRA, 
but we did get some temporary relief. H.R. 2341 currently has 
226 cosponsors in the House. Seventy percent of the Commerce 
Committee cosponsors this bill. Seventy-seven percent of the 
Health and Environment Subcommittee are cosponsors of H.R. 
2341. The Senate companion bill has 54 cosponsors. This is the 
year to enact this legislation, yet even with this much 
support, there are still people that oppose this bill. For the 
life of me, I cannot understand why.
    Community health centers have two major sources of money. 
One pot of money is for Medicaid. The other pot of money is 
from the Federal Government for the uninsured. When we tighten 
one too much, the other has to pay out and there are losers, 
and in this case it is the uninsured throughout this country.
    Mr. Chairman, if we do not include H.R. 2341 in a final BBA 
refinement bill, community health centers and rural health 
clinics will lose $1.1 billion in the next 5 years. That will 
be 1.3 million uninsured that potentially go without coverage.
    Now is the time for us to do this. I thank the chairman for 
his holding this hearing and I look forward to this committee's 
work on a refinement bill.
    Mr. Bilirakis. Thank you, sir.
    Mr. Green for an opening statement.
    Mr. Green. Thank you, Mr. Chairman, and again, like my 
colleagues, I appreciate you calling this important hearing. I 
appreciate the opportunity to focus on the status of our health 
care providers, the impact of the BBA in 1997. I am 
disappointed that we do not have a representative from the 
public hospitals on our panel today. Public hospitals serve the 
poorest of the poor, particularly in Houston and other cities 
across the country. I know in Houston, our public hospitals are 
in a crisis due to the funding reductions. All hospitals have 
been devastated by the payment cuts in the Balanced Budget Act. 
Public as well as private hospitals need relief. Like my North 
Carolina colleague, I agree, and I supported the Balanced 
Budget Act of 1997, but also realize that it went much too far 
and hopefully this Congress will correct it.
    The Institute of Medicine, a nonpartisan advisory board, 
recently completed its study of ``America's Health Care Safety 
Net: Intact, Endangered.'' In this report, the IOM concluded 
that the urban safety net providers are in crisis. The 
increased number of uninsured, the growth of Medicaid, managed 
care, and reductions in Federal funding have hurt not only 
public hospitals but all providers. IOM concluded that the 
safety net providers in our country comprise a unique health 
care delivery system. They deserve stronger Federal tracking 
and targeted direct support, and I agree and I am hopeful that 
we will consider putting money back into our Medicare system 
and keep in mind those living and providing care in our urban 
areas.
    One of the most important things we can do this year is 
examine the impact of the BBA's freeze on the disproportionate 
share, or the DSH, funding. The Medicaid program is our 
Nation's primary source for the safety net hospitals that serve 
the most vulnerable Medicaid, uninsured, and under-insured 
patients. The Balanced Budget Act was supposed to cut $10.4 
billion from DSH expenditures to States over 5 years with the 
impact coming this year and next year. State DSH programs will 
receive a 30 percent reduction in fiscal year 2001 and a 37 
percent reduction in fiscal year 2002. While the legislation we 
passed last year provided some relief for hospitals, that 
relief was targeted primarily to the Medicare program. Fifteen 
percent of the BBA savings came from Medicaid, but less than 3 
percent of the funding we restored last year went to Medicaid. 
I commend my colleague, Diane DeGette, for her efforts on this 
issue, and her legislation to restore DSH funding should be 
part of any Medicare give-back legislation.
    Thank you, Mr. Chairman. I yield back my time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Greenwood?
    Mr. Greenwood. Thank you, Mr. Chairman, for holding the 
hearing. I am one who believes that managed care Medicare is a 
great idea. Done properly and funded appropriately, managed 
care as an option within Medicare stabilizes Medicare because 
it gives us a predictable cost per beneficiary per year. It 
saves the taxpayers money by providing Medicare benefits at 
less than the average cost. And for the beneficiary, it has 
offered the opportunity to have quality care without the cost 
of a medigap policy and with enhanced benefits, like 
prescription drugs.
    But we have not been handling and funding managed care and 
Medicare properly. We have been trying to buy it on the cheap, 
and additionally, HCFA has not been much help in the regulatory 
sphere. Last year, 41 plans terminated services to Medicare 
beneficiaries in 58 service areas and forced 327,000 seniors to 
choose a new plan or move back into fee-for-service and 79,000 
of them could not get back because there was not a managed plan 
option where they lived. Next year, 711,000 Medicare 
beneficiaries will lose access to health benefits and choices 
next year as a result of this underpayment.
    Today, I am introducing the Medicare Beneficiaries Choice 
Stabilization Act, which will be a bipartisan plan to put 
Medicare Plus Choice programs back on solid, stable financial 
ground. I hope, Mr. Chairman, that that legislation can be 
included in our BBA fixes.
    I also yesterday introduced a Hospital Indigent Care Relief 
Act of 2000 with Ms. DeGette which will help in that area. And 
finally, on Thursday of this week, I will introduce with Mr. 
Deutsch a bill to increase Medicare reimbursement for mental 
health services for low-income seniors.
    Mr. Chairman, I hope that each of these critical areas can 
be addressed in the legislation that we ultimately adopt and 
thank the chairman for the comments.
    Mr. Bilirakis. I thank the gentleman. I think that 
completes our opening statements.
    [Additional statements submitted for the record follow:]

  Prepared Statement of Hon. Fred Upton, a Representative in Congress 
                       from the State of Michigan

    Mr. Chairman, thank you for calling today's hearing to examine the 
impact that the Medicare and Medicaid provisions of the Balanced Budget 
Act of 1997 are having on patients and providers. The Balanced Budget 
Act made the most sweeping changes in the Medicare program since its 
inception. It is vital that we in Congress closely monitor the 
implementation of those changes and their impact on beneficiaries' 
access to care and quality of care.
    I meet very regularly with my health care community, and I can tell 
you that they are very concerned about the future of the health care 
delivery system in my district and state and across the nation. If 
Medicare payments fail to reflect the real costs of delivering quality 
health care and hospitals, home health agencies, nursing homes, 
emergency ambulance services, and rehabilitation practices close, not 
only Medicare beneficiaries but entire communities will suffer a loss 
of access to care. This is particularly true in our rural areas. When 
rural hospitals close, physicians and other health care providers may 
also be forced to leave the community as well.
    I'd like to highlight some specific areas of concern that my health 
care community has shared with me. First, there is a good deal of 
uncertainty and angst about the implementation of the hospital 
outpatient prospective payment system. I want us to take this 
opportunity today to determine whether the Health Care Financing 
Administration, hospitals across the nation, and the intermediaries are 
ready to implement the system in a way that will ensure fair and 
adequate payments reflecting the intensity of care that is needed in 
each case.
    Second, I hope we can revisit the issue of the caps on physical, 
occupational, and speech and language therapy. I know we have postponed 
the effective date for the caps, but I want us to focus on developing a 
more sensitive way than imposing arbitrary caps of ensuring that the 
care Medicare is paying for is necessary and appropriate.
    Similarly, I want to revisit the 15 percent across the board cut in 
home health care reimbursement. We have postponed the effective date of 
this cut, but I hope that we can eliminate this cut and instead 
continue work out a more refined reimbursement system for ensuring that 
Medicare payments reasonably reflect the true cost of providing 
necessary and appropriate care.
    Fourth, I am very concerned about the implementation of the BBA 
requirement of a fee schedule for ambulance services. It is my 
understanding from talking with my ambulance service providers that the 
system that HCFA may promulgate will not come close to reflecting the 
actual cost of providing these services. I want to encourage HCFA to 
continue to work with the ambulance community to get the system right 
before it is implemented.
    Fifth, I hope that we can revisit the community health center 
provisions of the Balanced Budget Act. I am concerned that the current 
provisions phasing down the percent of costs for which state Medicaid 
programs must reimburse the centers would, if further implemented, 
seriously undermine the survival of these safety net health care 
providers for the poor and the uninsured. I'd like us to look instead 
to implementing a prospective payment system that has incentives for 
efficiency but that will permit community health centers to continue to 
meet the needs of the poor and the uninsured with high-quality care and 
services.
    I look forward to working with you, Mr. Chairman, my colleagues on 
the Subcommittee, and providers and beneficiaries to ensure that we are 
strengthening, not threatening, access to care and quality of care.
                                 ______
                                 
Prepared Statement of Hon. Anna G. Eshoo, a Representative in Congress 
                      from the State of California

    Like so many of my colleagues, I hear every week from health care 
providers in my district that the cuts in the 1997 Balanced Budget Act 
are crippling them.
    Hospitals, home health agencies, and nursing homes across the 
country say they simply can't provide quality medical care within the 
budget cuts we enacted just three short years ago.
    Mr. Chairman, as a New Democrat, I know the importance of fiscal 
responsibility and budgetary constraint. However, I'm concerned that we 
may have gone too far.
    A Lewin Group study found that payments to health care providers 
are already $40 billion lower than we anticipated when we passed the 
BBA.
    While some of the savings may be the result of outside forces, 
particularly an aggressive crackdown on fraud and abuse, it's clear 
that the BBA cut deeper than Congress expected or intended.
    Before coming to Congress, I served as chair of the county hospital 
board in San Mateo County, California. I know that a hospital can't 
continue to offer services on a negative margin. Something has got to 
give.
    And I fear that the thing that will give is patient care. Without 
relief, hospitals, home health agencies and nursing homes are faced 
with two options: cut back services or withdraw from the Medicare 
program altogether.
    It's already happening.
    In the first year following enactment of the BBA, nearly 25% of 
home health agencies in the U.S. closed their doors, leaving over 
500,000 seniors without services.
    By the end of 1998, 400,000 beneficiaries were thrown out of their 
Medicare HMOs when their insurance company terminated their contracts 
with Medicare.
    We remedied some of these problems with last year's Refinement 
bill.
    The 15% across-the-board cut in home health services was delayed.
    A two-year moratorium was placed on implementation of the therapy 
caps.
    But there is much left to do. This is the second hearing we've held 
on this issue, Mr. Chairman. I hope that the next action that this 
Committee takes is to write a bill that takes care of these problems.
    And I hope that this year's bill includes Medicaid.
    Last year's BBRA did not include any money for Medicaid, leaving a 
large gap for the public hospitals in my congressional district who 
serve a disproportionate share of indigent clients.
    BBA reductions in Medicaid DSH spending have been particularly 
dramatic in California, where payments have declined more than $116 
million in the past two years.
    Without relief, California DSH hospitals stand to lose another $164 
million by 2002.
    I'm a cosponsor of Rep. DeGette's bill to eliminate any further 
cuts to Medicaid DSH hospitals. I urge this Committee to include the 
DSH freeze, and other fixes for Medicaid, in any givebacks bill we 
write this year.
    CBO has given us the good news--we now have a $2.2 TRILLION non-
Social Security surplus. The President has expressed his support for 
dedicating a large portion of this to BBA givebacks.
    Now is the time to shore up the Medicare and Medicaid systems and 
ensure that seniors continue to have access to good, quality 
healthcare.
    I look forward to a bill that provides needed relief while still 
remaining true to the BBA's goal of fiscal responsibility.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    Medicare is a good, solid program. For 35 years the program has 
ensured that America's seniors and disabled have dependable, affordable 
health care. Congress should take care to ensure that the program 
remains strong and that beneficiaries continue to have access to high 
quality health care.
    The Balanced Budget Act of 1997 (BBA) was an attempt to reduce 
costs in the Medicare program where there was evidence that the program 
was overpaying. Investigations by the Inspector General and the General 
Accounting Office and others indicated areas where the program could do 
better. But some other changes may have inflicted more harm than good.
    I agree that there are some areas where Congress should revisit 
some of the changes made in the Balanced Budget Act. I know that in my 
own district, hospitals have struggled, and some, like Mercy Hospital, 
a provider of care to many low-income and uninsured patients, have even 
closed their doors. Other hospital closures will follow. Community 
Health Centers, which are beginning to feel the effects of the phase-
out of cost-based reimbursement and the state Medicaid program's 
transition to managed care, are struggling as well. These are matters 
that concern me greatly.
    However, we must keep in mind that changes as sweeping as those 
enacted in the BBA take time to digest, and we must not act with haste. 
We should carefully explore the issues and the merits of the claims. We 
want to act judiciously.
    When contemplating program changes, we must keep our focus on the 
beneficiaries. There are a number of modifications that Congress could 
make that would improve the program for beneficiaries. The first step 
is adding a solid prescription drug benefit in the Medicare program 
that is meaningful and affordable. But, we should also consider adding 
preventive benefits, buying down the hospital outpatient department co-
payments, increasing enrollment of low-income beneficiaries in 
assistance programs and other options to improve the program for 
seniors and the disabled.
    In conclusion, I welcome this hearing as a first step in exploring 
the need for further modifications to the changes made in the Balanced 
Budget Act of 1997. I hope that our Committee will thoughtfully 
deliberate--and act--on this matter. I also ask my colleagues not to 
forget those who depend on the program for their care--the seniors and 
disabled. I hope that we will find it in our hearts to ensure they 
benefit directly, as well as indirectly, from additional Medicare 
spending this year.

    Mr. Bilirakis. I would now ask the distinguished panelists 
making up panel one to come forward. Dr. Gail Wilensky is the 
chair of the Medicare Payment Advisory Council. Bill Scanlon is 
the Director of Health Financing and Public Health of the 
General Accounting Office. Both have appeared before this 
committee countless times in the past and I expect countless 
times in the future.
    We will set the clock at 5 minutes, but by all means, if 
you have got to go over it, it will not be any problem in that 
regard. Dr. Wilensky, please proceed, ma'am.

    STATEMENTS OF GAIL R. WILENSKY, CHAIR, MEDICARE PAYMENT 
 ADVISORY COMMISSION; AND WILLIAM J. SCANLON, DIRECTOR, HEALTH 
  FINANCING AND PUBLIC HEALTH ISSUES, U.S. GENERAL ACCOUNTING 
                             OFFICE

    Ms. Wilensky. Thank you, Mr. Chairman and members of the 
subcommittee. I am pleased to be here representing the Medicare 
Payment Advisory Commission as its chair.
    As you have indicated, MedPAC appeared before you in the 
fall of 1999 indicating at that time, while we had some areas 
of concern, there was not clear evidence that wholesale changes 
needed to be made to the Balanced Budget Act. There were some 
specific areas of concern and Congress correctly took those up 
in the Balanced Budget Refinement Act. There are still issues 
that remain and we would like to indicate some areas where we 
as a commission have some concern, although we would again like 
to caution that this does not mean that you ought to undertake 
wholesale changes to the Balanced Budget Act.
    Its purpose, of course, was to moderate spending and also 
to introduce more choice, as we have just heard, and it is 
obvious that spending on Medicare has been moderated 
substantially. It was estimated that spending would increase at 
about 5.5 percent per year in the first fiscal year. It 
increased 1.5 percent. It declined slightly in the last fiscal 
year. It appears, as best we can tell through the first 8 
months, that Medicare spending is up about 3.5 percent over 
last year, still under the spending that was projected by the 
Balanced Budget Act, but it does appear that spending is 
increasing in this Medicare program.
    However, in looking at potential changes, we ought not just 
to look at spending patterns. They are important. They are 
important by specific services. But we ought to ultimately look 
at what we can tell in terms of what is happening to access. 
Ultimately, that is what the Medicare program is supposed to be 
about, making sure that our seniors get access to high-quality 
care.
    There is not very much, if any, systematic evidence that 
seniors are having difficulty receiving care under Medicare as 
a result of the Balanced Budget Act, but there are some areas, 
either because of what we can see going on in the spending 
patterns that have raised concerns in the minds of the MedPAC 
commissioners or because of some principles in terms of how the 
payment structures are laid out, that we think are appropriate 
for some further adjustment, and I would like to talk about the 
major areas of hospitals, home care physicians, and the 
Medicare Plus Choice.
    First, let me say once again that we continue to be plagued 
by data problems. We have difficulty getting timely data. 
MedPAC joined with HCFA to try to get an indicator survey going 
so we would get a little bit more timely hospital data. We are 
continuing to try to work on this. We are frustrated, we are 
sure you are frustrated, because it makes it difficult to make 
the best decisions.
    Let me talk first about the hospital payments. As you know, 
MedPAC in this year has recommended a substantially higher 
increase than is part of current law. We are recommending an 
increase that is about .5 to 1 percent above the market basket, 
and there were three reasons why we came to that conclusion.
    The first is that while we have gone to suggest take-back 
from site of care substitution, that is, hospitals having some 
of the care that used to be done inpatient being done more 
often in home care or in nursing homes over the last decade, 
that attempting to recoup for past movements did not seem 
prudent when we were observing the sharp declines in total 
margins that hospitals were reporting.
    Second of all, for the first time, there appears to be some 
down-coding. That is, in a systematic review of actual medical 
records, it appears that hospitals are billing for lower rather 
than higher or the right diagnoses for the patients that they 
have seen.
    And finally, we are a little concerned about what has been 
happening with some of the scientific and advancement areas and 
also the inpatient pharmaceutical costs that hospitals have to 
face. So, therefore, we have suggested that there be a 
consideration given to a higher update than is currently part 
of law.
    We do recognize that the BBRA did look to help the 
hospitals in a variety of ways last year, particularly in terms 
of softening the transition to the outpatient PPS, to putting a 
hold on continued downward payments in disproportionate share, 
and on the IME part of the medical education payment. 
Nonetheless, the sense of the commissioners was that for at 
least this one year, consideration be given to this increased 
payments for hospitals.
    With regard to home care, while we feel we know the least 
about what is going on, particularly to the patients who are 
receiving care, we are troubled by the very dramatic decline in 
spending that has occurred in the last 2 years, a decline of 45 
percent from spending in 1997. This is an area where we had 
seen very rapid growth in the 1990's, both in terms of the 
number of services and in terms of the number of people 
receiving services and in the number of agencies, but those 
numbers have declined sharply, closer to 1994 levels, and as I 
have indicated, a rather substantial decline in absolute 
spending.
    We believe that moving to the prospective payment system 
will help. We think that there are some issues that need to be 
monitored in terms of making sure that access continues to 
occur for people in home health. It is the sense of 
commissioners, although we have not made this a formal 
recommendation because of the timing, that the Congress would 
be wise to postpone the 15 percent reduction in payments that 
has been part of current legislation because of these very 
substantial declines in spending that we have seen. We think we 
will know more and the Congress will know more when data 
becomes available and we have a better sense about the clinical 
services provided to seniors as part of home care and what it 
may mean if they do not continue to have these services.
    With regard to physician care, there were a number of areas 
where we have raised some questions, some of which were 
addressed in BBRA. We had some concern about the oscillations, 
the swings in the sustainable growth rate, and the BBRA has 
moved to reduce those and also to take care of some of the 
errors in terms of the estimations that would occur, although 
they will be only in the future.
    And finally, we have encouraged further review about how 
HCFA makes its estimates for the number of people who will be 
served in the traditional fee-for-service program because that 
impacts the sustainable growth rate.
    And finally, let me say a word about the Medicare Plus 
Choice program. As I indicated, that was supposed to be, that 
is, giving more choices to seniors was supposed to be one of 
the objectives of the Balanced Budget Act. We clearly are 
seeing a troubled program. In part, we think it is because 
there is some inherent conflict with some of the goals that 
Congress has enunciated about what they want from that program, 
saving money and also providing either more benefits or more 
choices.
    We think regulatory burdens have been a problem. There has 
been some attempt in the BBRA to address some of them and I 
believe HCFA is now sounding as though they also agree that 
regulatory burdens may have had some negative effect. And I 
believe that the uncertainty about future payments has been a 
problem.
    I continue to believe that the idea of having Medicare 
replacements is an important strength of the Medicare program 
and hope that this committee and other committees of the 
Congress will look to find ways to produce a stable set of 
Medicare replacement programs in addition to strengthening the 
traditional Medicare program.
    Thank you, Mr. Chairman.
    [The prepared statement of Gail R. Wilensky follows:]

 Prepared Statement of Gail Wilensky, Chair, Medicare Payment Advisory 
                               Commission

    Good morning Chairman Bilirakis, Congressman Brown, members of the 
Subcommittee. I am Gail Wilensky, chair of the Medicare Payment 
Advisory Commission (MedPAC). I am pleased to participate in this 
hearing on the Balanced Budget Act (BBA) of 1997 and its impact on 
patients and providers.
    When MedPAC last appeared before this subcommittee in September 
1999, we testified that although there was no evidence in support of 
wholesale changes to the BBA, there were several areas in which 
specific steps could be taken to preserve access to high-quality care 
for Medicare beneficiaries. The Congress addressed--or began to 
address--some of the issues we raised when it enacted the Balanced 
Budget Refinement Act (BBRA) of 1999. Other issues remain unresolved 
and may warrant action. My testimony today discusses these unresolved 
issues and possible courses of action. It concludes that in considering 
alternatives, the Congress should take care not to oversolve problems. 
Changes as sweeping as those enacted in the BBA necessarily take time 
to digest, and the uncertainty caused by frequent changes in payment 
rates and systems may do more harm than good.

Introduction
    The BBA was enacted to control the growth of Medicare spending and 
to provide Medicare beneficiaries with additional choices for care 
through private health plans. To control spending on services already 
paid prospectively, such as the services provided by hospital inpatient 
departments, the Act reduced payment updates in relation to what they 
would have been. To control spending on services that had been 
reimbursed largely on the basis of costs or charges, such as those 
provided by hospital outpatient departments, skilled nursing 
facilities, and home health agencies, the Act established new 
prospective payment systems. To control spending and to expand 
beneficiaries' choices of private health plans, the law also created 
the Medicare+Choice program, which allows new types of plans to 
participate, and established new payment rules that raised payments to 
plans in some areas, lowered them in others, and capped the growth in 
payments at less than the growth in fee-for-service spending.
    Since enactment of the BBA in 1997, Medicare outlays have increased 
at a rate well below what was projected at the time. After flat or 
declining spending in fiscal years 1998 and 1999, outlays for Medicare 
are now growing slowly. Through the first eight months of fiscal 2000, 
spending has increased at only 3.5 percent, well below the 5.5 percent 
rate projected when the BBA was enacted. This continued slow growth in 
Medicare spending has raised concerns about whether the BBA may have 
compromised beneficiaries' access to high quality care. Much of this 
concern has come from health care providers and plans. Over the past 
two years, providers have asserted that the impact of the BBA has been 
harsher than was intended by Congress, that the law's intended effects 
have imposed undue burdens on them, and that there have been specific 
problems with the Health Care Financing Administration's (HCFA) 
implementation of the law.
    Measuring beneficiaries' access to care in traditional Medicare is 
a difficult exercise in the best of times. Because we cannot directly 
observe access on a timely basis, we must often rely on indirect 
measures that we believe indicate providers' ability and willingness to 
provide services. These indirect measures include trends in spending 
for specific services and in providers' financial performance. We also 
make analytical judgments to help us determine where problems are 
likely to arise. For example, we know payment systems that do not 
adequately account for variations in patients' resource needs are 
likely to be problematic for beneficiaries with the greatest need.
    Last fall, before this Subcommittee, MedPAC testified on the 
implications of the BBA for Medicare's fee-for-service sector. We noted 
then that our efforts to assess changes in access resulting from the 
BBA had been hampered by a paucity of data and by the difficulty of 
sorting out the effects of changes in Medicare payment policy from 
other policy changes and from developments in the broader health care 
market. In the case of hospital services, for example, we lacked 
systematic data on financial performance in the post-BBA period; the 
limited evidence we did have did not allow us to attribute observed 
changes to Medicare. In the case of home health care, we knew that 
spending and use had fallen, but we had no way to disentangle the 
effects of payment changes enacted in the BBA from concurrent policy 
changes intended to reduce fraud and abuse.
    We also indicated in our testimony areas in which we had reason to 
believe that technical aspects of Medicare's payment systems could lead 
to problems. For example, we noted that the absence of an adjustment 
for case mix in the interim payment system (IPS) for home health 
services could raise problems for patients with high resource needs. We 
noted a similar concern with respect to the newly implemented 
prospective payment system for skilled nursing facilities, which did 
not appear to account adequately for the needs of high-acuity patients. 
Finally, we noted technical difficulties with the sustainable growth 
rate (SGR) system used to update payments to physicians.
    A number of developments affecting fee-for-service Medicare have 
occurred since we testified last September. In some areas--such as 
hospitals' financial status--we now have data that allow us to make a 
better assessment of the BBA's implications. In other areas, changes 
enacted by the Congress in the BBRA have addressed the issues we 
raised.
    Gauging the success of the Medicare+Choice program is different 
than measuring access to specific services in traditional Medicare. 
Here, the appropriate measure is whether the program is meeting the 
Congress's goals of controlling program spending and increasing 
beneficiaries' choices of plan options. In our March 1999 report to the 
Congress, MedPAC noted specific changes in regulatory policy--such as 
how HCFA defined service areas and when the agency required submission 
of premium data--that could encourage plans to participate without 
compromising the objectives of the program. The BBRA codified these 
policies and made other changes intended to put the Medicare+Choice 
program on a more solid footing.
    The following sections provide more detail on what we know about 
the impact of the BBA and BBRA for hospital services, home health care, 
physicians' services and the Medicare+Choice program. They also suggest 
possible courses of action.

Hospital services
    Hospitals have been among the most vocal providers in seeking 
relief from the BBA, in part because so many of their operations were 
affected by provisions of the law. For inpatient services covered by 
the prospective payment system, the BBA froze base payments in fiscal 
year 1998 and reduced updates in subsequent years, instituted a new 
policy for transfer cases, lowered the adjustment for indirect medical 
education (IME) to teaching hospitals, lowered the adjustment received 
by hospitals that treat a disproportionate share (DSH) of low-income 
patients, and reduced capital payment rates. For outpatient services, 
the BBA eliminated the so-called formula driven overpayment, extended 
reductions in payments for capital and services paid on a cost basis, 
and directed the Secretary to implement a prospective payment system 
for services still being paid at least partially on the basis of costs. 
Collectively, these provisions were intended to slow Medicare spending 
growth, bring inpatient payments in line with costs, and move payments 
for outpatient services from a cost-based system to a prospective one.
    In response to hospitals' concerns that the BBA had been too harsh, 
the BBRA increased IME and DSH payments for inpatient services and 
eased the transition to the outpatient prospective payment system. The 
law raised the payment base for outpatient services, provided partial 
protection against financial loss through 2003, added an outlier policy 
to compensate for extremely high-cost cases, and allowed additional 
payments for certain drugs, biologicals, and medical devices for three 
years.
    Hospitals' financial status deteriorated significantly in 1998 and 
1999. MedPAC estimates that on hospitals' largest lines of Medicare 
business--acute inpatient, outpatient, skilled nursing facility, home 
health, and inpatient rehabilitation and psychiatric--Medicare margins 
dropped from 9.8 percent in 1997 to 6.5 percent in 1998. Considering 
acute inpatient services alone--which account for three-quarters of 
hospitals' payments--hospitals' Medicare margin fell from an historic 
high of 17.0 percent in 1997 to 14.4 percent in 1998. Excluding 
payments for graduate medical education, the fraction of hospitals with 
negative inpatient margins rose from 23 percent in 1997 to 29 percent 
in 1998.
    To obtain more timely data, MedPAC is co-sponsoring with HCFA a new 
survey of hospitals. Although data from this survey cover fewer 
hospitals and do not allow us to break out margins on Medicare 
services, they are more current than the information on Medicare 
margins we obtain from cost reports. Based on this new survey, we 
estimate the aggregate total margin for hospitals covered by Medicare's 
inpatient prospective payment system to have been 2.7 percent in 1999, 
less than half its 1997 level.
    The drop in total and Medicare margins provides information we did 
not previously have, but two issues cloud interpretation of this 
information. First, while reduced Medicare payments played a role, 
lower private payments (relative to the cost of care) accounted for 
about three-quarters of the decline in total margin between 1997 and 
1998. Second, changes in margins do not translate directly into changes 
in access or quality; instead, they indicate the pressure that 
hospitals face.
    In assessing hospital inpatient payments, MedPAC relies on margin 
data for context, but we base our recommendations on updates to 
payments on a framework that examines factors influencing providers' 
costs or payments. Using this framework last year, we concluded that 
the update set in law for fiscal year 2000 was appropriate. This year, 
however, we recommended an update of 3.5 to 4.0 percent (0.6 to 1.1 
percentage points above market basket). Three factors guided our 
reasoning. First, in view of the financial stress that hospitals are 
experiencing, we elected to delay the phase-in of a downward adjustment 
for unbundling of services--shifting the latter days of inpatient stays 
to a post-acute setting--that we have previously recommended until we 
can revisit the issue next year. Second, a first-ever drop in the case-
mix index--possibly reflecting more cautious coding by hospitals in 
response to federal antifraud efforts--led us to recommend an upward 
adjustment to offset the decline. And third, we recommended an increase 
for the costs of scientific and technological advances, primarily in 
response to the impact of new drugs.
    With respect to outpatient services, some transitional problems are 
inevitable as Medicare moves from cost-based reimbursement to 
prospective payment; hospitals that cannot control costs adequately 
will face financial risk. However, the protections enacted in the BBRA 
make it unlikely that payment amounts will be too low; changes in 
payment rates are probably not warranted. In view of the significant 
change in payment policy that is being implemented, however, we do 
recommend monitoring implementation of the outpatient prospective 
payment system to ensure that it does not have unintended, adverse 
consequences on beneficiaries' access to care and that the quality of 
care delivered is not compromised.
    Another important issue with respect to outpatient services is the 
coinsurance paid by beneficiaries, which now averages almost 50 
percent. Although coinsurance amounts will remain fixed at their 
current dollar level until they are reduced to 20 percent of Medicare-
approved payment amounts, the process will take decades. MedPAC has 
twice recommended that the Congress enact legislation to accelerate the 
reduction to achieve a 20 percent coinsurance rate in a more reasonable 
time frame. By comparison, the most gradual phase-in Medicare has used 
to date for any payment system change is 10 years.

Home health care
    In response to extraordinarily rapid growth in spending for home 
care during the early to mid-1990s, the Congress enacted major changes 
in the BBA as to how home care agencies are paid. Prior to the BBA, 
agencies were paid on the basis of their costs, subject to agency-
specific limits based on per visit costs. The BBA imposed new agency-
specific limits based on average payments per beneficiary and average 
payments per visit. This interim payment system was intended to achieve 
savings until a prospective payment system could be put in place. The 
prospective payment system is now scheduled for implementation in 
October.
    Changes in home care have been the most pronounced of any sector of 
Medicare. Even with the increase in payment limits that was enacted in 
1998, Medicare spending for home health services fell 45 percent 
between 1997 and 1999 and the number of agencies has dropped from more 
than 10,500 to less than 8,000. By 1998, the number of home health 
users per fee-for-service beneficiary had returned to its 1994 level, 
and the average number of visits per user was below the 1994 level.
    Although these changes are dramatic, they cannot be completely 
attributed to the payment changes enacted in the BBA. Concurrent policy 
changes, including antifraud initiatives targeting home care agencies, 
eliminating venipuncture as a qualifying service for home health 
eligibility, and imposing sequential billing (since discontinued) have 
all been important. Moreover, dramatic as the changes in spending and 
use have been, interpreting what they mean for Medicare beneficiaries 
is not easy. Without clear coverage and eligibility guidelines that 
reflect the clinical characteristics of beneficiaries--which MedPAC has 
previously recommended be developed--it is difficult to know how much 
of the decline reflects less inappropriate care and how much reflects 
less appropriate care.
    In MedPAC's March report, we indicated our support of the 
prospective payment system for home health care that HCFA intends to 
put in place in October. Although the proposed system will need 
refinement over the longer run, it represents a substantial improvement 
over the IPS because it takes into account variation in resource needs 
among home care patients. The proposed system will also incorporate an 
outlier policy for beneficiaries with extraordinary costs.
    With a new payment system pending, MedPAC did not make formal 
recommendations in our reports to the Congress earlier this year with 
respect to payment rates for home health services. However, given the 
dramatic changes in use that have already occurred, and the changes yet 
to come with introduction of the PPS, the general sense of the 
Commission is that reducing payment rates by an additional 15 percent, 
as currently scheduled in law for next year, would not be prudent 
without additional evidence to justify such a reduction.

Physicians' services
    For physicians' services, the BBA required a phase-in of resource-
based payments for physicians' practice expenses. The law also created 
a sustainable growth rate system for annually updating payments to 
physicians.
    The transition to new payments for practice expenses started in 
1999 and will continue through 2002, as required by the BBA. During 
this transition, payments for some high-volume surgical services will 
fall sharply. For example, the payment rate for single coronary artery 
bypass graft will drop 19 percent and the payment rate for total knee 
replacement will fall 23 percent. Questions have been raised about the 
data and methods HCFA has used to determine changes in practice expense 
payments. The agency is working through these issues during a 
refinement process that includes contractor support and the involvement 
of the physician community.
    With respect to the SGR system, one issue that MedPAC identified 
last year--the potential for oscillation in updates--was resolved by 
the BBRA. The BBRA also directed the Secretary to correct estimates in 
previously issued SGRs to avoid by locking estimation errors into 
future spending targets. This happened in 1998 and in 1999, when 
underestimates of fee-for-service enrollment led to lower target levels 
of spending.
    MedPAC also recommended in March 1999 that the sustainable growth 
rate be revised to include measures of change in the composition of 
fee-for-service enrollment--much like demographic adjusters for 
payments to Medicare+Choice plans--and to include an allowance for cost 
increases due to improvements in medical capabilities and advances in 
scientific technology. The BBRA required the Secretary to study these 
issues and their effects on the use of physician services, and the 
Agency for Healthcare Research and Quality has begun this work.
    We have no evidence that beneficiaries are experiencing problems 
with access to physicians' services. As we testified last year, a 
survey undertaken in early 1999 by Project HOPE for MedPAC showed that 
among physicians accepting all or some new patients, more than 95 
percent were accepting new Medicare fee-for-service patients both in 
1997 before the BBA payment changes were introduced and in early 1999. 
Given that updates to the conversion factor were equal to or greater 
than increases in input costs in 1999 and in 2000, we would not expect 
to find different results today.

Medicare+Choice
    A key component of the BBA was the creation of the Medicare+Choice 
program, which the Congress intended to provide Medicare beneficiaries 
with choices of plan options and to help control the growth of Medicare 
spending. Some policymakers saw Medicare+Choice as a vehicle to provide 
Medicare beneficiaries with richer benefits--lower cost sharing and 
prescription drug coverage--than those available in the traditional 
fee-for-service program. And some policymakers wanted to see rapid 
growth in the Medicare+Choice program to help set the stage for future 
changes in the structure of Medicare.
    Progress toward these goals has been minimal. On the one hand, 
spending per enrollee in private plans has been controlled, primarily 
because of the slow growth in fee-for-service spending which is used to 
determine updates. (Compared with the previous payment rules, however, 
the Medicare+Choice program has probably increased spending, because 
the new rules have prevented the effects of the slow growth in fee-for-
service spending from being passed through fully.) On the other hand, 
the goals of increasing choice and expanding access to plans with 
richer benefits remain elusive. The range of plan options has not 
increased, most beneficiaries in rural areas still cannot enroll in 
Medicare+Choice plans, benefit packages have become less generous, and 
enrollment growth has been stagnant.
    Perhaps the most visible indicator of how the Medicare+Choice 
program is faring has been announcements by health plans of contract 
terminations and service area cutbacks. In January 1999, more than 
400,000 enrollees were affected by such changes; 50,000 lived in 
counties where no other plan was available. In January 2000, about 
330,000 enrollees' plans withdrew; 80,000 had no other plan available. 
Plan withdrawals are likely to have an even greater impact in January 
2001. In the past several weeks, plans have announced contract 
terminations and service area cutbacks indicating that nearly one 
million Medicare+Choice enrollees will be unable to remain in their 
current plans, and more than 150,000 enrollees will have no 
Medicare+Choice alternative in their county. About 70 percent of 
Medicare beneficiaries lived in counties that had a Medicare+Choice 
plan in 1999 and 2000. That fraction is unlikely to change next year, 
with fewer beneficiaries having access to health maintenance 
organizations (HMOs), and some beneficiaries newly having access to a 
private fee-for-service plan.
    Data on the availability of richer benefits tell the same story. 
The share of Medicare beneficiaries with access to a Medicare+Choice 
plan that did not charge a premium fell from 61 percent in 1999 to 53 
percent in 2000. The share of Medicare beneficiaries with access to a 
Medicare+Choice plan that offered prescription drug coverage and did 
not charge a premium fell from 54 percent in 1999 to 45 percent in 
2000. These declines occurred in both urban and rural counties, but 
were most pronounced in counties where the base payment was between 
$400 and $550 per month.
    Finally, there is the lack of new products. The BBA expanded 
Medicare's risk contracting program, which previously had been open 
only to HMOs, to allow participation by preferred provider 
organizations (PPOs), provider-sponsored organizations (PSOs), private 
fee-for-service plans, and high-deductible plans offered in conjunction 
with a medical savings account (MSA). To date, no PPOs, no MSAs, and 
only one private FFS plan have joined. The one PSO plan that joined is 
withdrawing.
    Three issues help explain why the Medicare+Choice program is not 
meeting expectations. First, the Congress's goals for the program are 
partially at odds with one another. For example, there is a basic 
conflict between controlling Medicare spending and providing richer 
benefits. The Congress wants to take advantage of the efficiencies 
associated with managed care, but it is still wrestling with how to do 
so in a way that both attracts beneficiaries to plans and allows 
Medicare to share the savings.
    Second, both regulatory and market barriers may have made plans 
reluctant to participate. An example of the former is the lack of 
participation by PPOs, which are a popular option for people with 
employer-sponsored insurance. Plans that offer a PPO option have argued 
that collecting the data and implementing the quality improvement 
programs required by HCFA would be prohibitively costly given their 
loose networks. An example of market barriers may be the case of rural 
areas, which are often characterized by low population density and few 
or monopoly providers. Under such conditions, plans find it difficult 
to establish networks.
    Finally, uncertainty about future payment streams may have made 
plans reluctant to participate. Under the old risk contracting program, 
plans could count on regular increases in premiums because updates were 
based on fee-for-service spending, which grew rapidly from the late 
1980s through the mid-1990s. Under the new rules, updates are dependent 
on a spending changes in a sector that has been undergoing significant 
changes. The new rules have also held down updates to plans in high-
payment areas to fund higher payments in the so-called blend counties. 
Finally, plans have had to face the prospect of lower payment growth as 
a new system of risk adjustment is phased in, with another new system 
scheduled to be implemented in 2004.The BBRA contained a number of 
provisions intended to push the Medicare+Choice program forward. It 
increased payment rates directly by further backloading the phase-in of 
risk adjustment, and indirectly by the pass-through effect of higher 
payments to fee-for-service providers. It provided for bonus payments--
5 percent the first year and 3 percent the second year--to plans 
entering areas with no existing Medicare+Choice plans. The law also 
changed requirements regarding the definition of service areas and the 
timing of premium submissions, which should make participation in the 
program more attractive.
    In our March 2000 report, we supported the BBRA provisions intended 
to provide Medicare beneficiaries with more coverage choices. Although 
the Commission made no specific recommendations, we continue to be 
concerned about the stability of the M+C program. For MedPAC to provide 
useful guidance on what to do next, Congress must make its priorities 
for the program clear. Maintaining access to richer benefit packages 
will likely entail increasing spending. Expanding access to rural areas 
may entail considering alternatives to requiring plans to assume full 
risk as they now must, such as some form of split capitation.

    Mr. Bilirakis. Thank you, Dr. Wilensky.
    Mr. Scanlon?

                 STATEMENT OF WILLIAM J. SCANLON

    Mr. Scanlon. Thank you very much, Mr. Chairman and members 
of the subcommittee. I am pleased to be here today to discuss 
the effects of the Medicare payment reforms that were in the 
BBA and potential modifications to them.
    These reforms were intended to institute strong financial 
incentives to providers to operate efficiently and to provide 
only needed services. Not surprisingly, the effects have been 
significant and you are hearing much about the need for 
modification. Much of that attention has been focused on the 
fact that Medicare spending growth has been much less than what 
CBO had predicted in 1997 that would occur with BBA changes. I 
think two points about that difference are notable.
    First of all, CBO's director has indicated in testimony 
that CBO does not believe its projections of the BBA impacts, 
with the exception of home health care, were understated. 
Rather, it believes that lower inflation and increased efforts 
to reduce fraud and abuse have contributed significantly to the 
lower growth.
    Second, I think as many of you indicated in your opening 
statements and as Dr. Wilensky indicated, our concern should 
not be focused only on spending less than the estimated 
baseline. Our litmus test should be whether or not payments are 
too low to provide necessary services to Medicare 
beneficiaries.
    I would like to comment on three areas where we have 
ongoing work with respect to BBA impacts that overlap somewhat 
with the areas that Dr. Wilensky has talked about. They are 
home health, skilled nursing facility care, and Medicare Plus 
Choice.
    First of all, with respect to home health, there is no 
question about the substantial drop in utilization in the last 
few years. Here, even CBO indicates that the decline exceeded 
what it expected. It also exceeded what would have been 
required to stay within the limits created by the interim 
payment system. Agencies could have provided more services, 
served more beneficiaries, and still be paid by Medicare. It is 
hard to determine to what extent beneficiaries did not receive 
needed services due to agencies' reaction to the interim 
payment system.
    Our ongoing work shows that the recent contractions in home 
health use are more concentrated in agencies and areas that had 
substantially higher use and growth in the years preceding the 
Balanced Budget Act. Significant concerns exist that all of 
that utilization might not have been justified.
    While this has been the experience under the interim 
payment system, the new home health prospective payment system 
to be implemented in October will fundamentally change the ways 
agencies are paid and provide a cushion to deliver necessary 
services. The episode rates in the PPS are based on prior, 
higher utilization levels rather than today's significantly 
lower levels. Agencies will be paid for all episodes of care 
provided, and as before, clear criteria to review the 
appropriateness of claims will not exist. We are concerned that 
we could easily be facing again a large and inexplicable growth 
in home health spending.
    Nursing homes are a second area where the BBA's impact on 
service seems profound. On the one hand, five large nursing 
home chains have entered bankruptcy since the PPS was 
implemented. On the other, when we look at the facts underlying 
these bankruptcies and beneficiaries' access to care, we do not 
see fundamental problems with the PPS. The financial woes of 
some nursing home chains stem from the incompatibility of some 
of their pre-BBA business strategies and the SNF PPS, which 
created strong incentives for efficiency. Prior to the Balanced 
Budget Act, these corporations invested heavily in both nursing 
homes and ancillary service businesses. The new PPS rates do 
not support disproportionate shares of nursing home revenue 
going to debt service and make other nursing homes who are 
buying these companies' ancillary services much more sensitive 
to the prices being charged.
    There also do not appear to be significant problems with 
access. Last year, we surveyed hospital discharge planners, who 
reported that problems placing patients were not different than 
before. Since that time, the use of skilled nursing facility 
care under Medicare has increased.
    We have noted, however, that the PPS system needed 
improvement. However, these improvements involve more 
appropriate targeting of the dollars to match patient needs. 
Given that the rate of increases in SNF spending prior to the 
Balanced Budget Act mirrored the inappropriate incentives of 
the old cost-based system, it would seem that the total dollars 
in the pool for SNF care are very likely sufficient to support 
that care.
    Finally, let me comment on our work on the Medicare Plus 
Choice program, another area of profound change, and our 
conclusions are very similar to those of Dr. Wilensky. Medicare 
Managed Care appears to be at a crossroads. Since the BBA's 
enactment, 168 plans have either left the program or reduced 
the geographic areas they serve and more plans are scheduled to 
follow in the year 2001. Plans have stated clearly that they 
are not being paid enough to stay in the Medicare program. 
However, our ongoing work shows clearly also that Medicare Plus 
Choice plans are continuing to get paid more than if their 
enrollees had remained in the fee-for-service Medicare program. 
Medicare loses money, on average, when each beneficiary joins a 
managed care plan.
    This paradox can be deciphered. Plans are paid too much for 
what was originally intended, funding a more efficient means of 
providing the package of Medicare coverage services. Plans are 
saying, however, that they are paid too little to do what they 
have been doing, competing for beneficiaries by offering 
additional uncovered benefits for little or no additional 
premiums. The paradox thus leaves you with a fundamental 
choice. Do you want to ensure that Medicare Plus Choice plans 
are widely available so that beneficiaries have a choice of who 
organizes the delivery of their care? If so, this may entail 
increasing the rates to those plans.
    This choice, while seemingly affordable today, may prove 
problematic for the future. The demographics of the baby boom 
generation already make the projections of Medicare spending 
foreboding. Preserving the program and its benefits will depend 
heavily on our finding the most efficient ways to deliver 
services for the long term.
    We have considerable work in progress on these and other 
issues related to the Balanced Budget Act and will be sharing 
some of the results of that work with your staff during the 
month of August so that you have as much information as 
possible as you consider changes to the BBA.
    Thanks very much, Mr. Chairman. This concludes my 
statement. I would be happy to answer any questions you or the 
members of the committee may have.
    [The statement of William J. Scanlon follows:]

 Prepared Statement of William J. Scanlon, Director, Health Financing 
    and Public Health Issues, health, Education, and Human Services 
                             Division, GAO

    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today as you discuss the effects of recent Medicare payment 
reforms and the potential need for additional refinements. The Medicare 
payment provisions in the Balanced Budget Act of 1997 (BBA) were 
enacted to control rapid spending growth in the traditional fee-for-
service program that was neither sustainable nor readily linked to 
demonstrated changes in beneficiary needs. Essentially, these reforms 
changed the financial incentives inherent in pre-BBA payment methods to 
more appropriately reward providers for delivering care efficiently. 
The BBA also created Medicare+Choice to expand beneficiaries' managed 
care options under Medicare and bring payments more in line with the 
costs of providing covered benefits in the traditional program.
    Since the BBA's enactment, the Congress has faced pressure from 
providers to undo the act's payment reforms. With changes so sweeping, 
achieving perfection in all the details at the outset is unrealistic. 
Accordingly, the Congress has monitored experience with these changes 
and made certain modifications. To date, some of the act's provisions 
have taken effect, some have been modified by the Balanced Budget 
Refinement Act of 1999 (BBRA), and others have just recently begun to 
be phased in.
    Calls for additional changes come at a time when federal budget 
surpluses and lower Medicare outlays could make it easier to consider 
accommodating enhanced Medicare payments. At the same time, however, 
the Congress is considering the addition of an expensive prescription 
drug benefit to the current program. In view of the coming upsurge in 
the Medicare-eligible population, the Comptroller General has cautioned 
repeatedly that, even before expanding benefits, projected Medicare 
spending threatens to absorb ever-increasing shares of the nation's 
budgetary and economic resources. Thus, without meaningful reform, 
demographic and cost trends will drive Medicare spending to levels that 
will prove unsustainable for future generations of 
taxpayers.1
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    \1\ Medicare Reform: Leading Proposals Lay Groundwork, While Design 
Decisions Lie Ahead (GAO/T-HEHS/AIMD-00-103, Feb. 24, 2000).
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    My comments today focus on the BBA's payment reforms affecting home 
health agencies, skilled nursing facilities (SNF), and the health plans 
in Medicare's managed care program, known as Medicare+Choice. My 
remarks are based on our extensive published and ongoing work in each 
of these areas.
    In brief, the reactions by providers serving Medicare beneficiaries 
to BBA and BBRA payment reforms share a similar scenario. Tightened 
payment policies have required many providers to adjust their 
operations. The adjustments have been particularly disruptive for 
providers that took advantage of Medicare's previous payment policies 
to finance inefficient and unnecessary care delivery. Industry 
representatives are advocating the partial restoration of payment cuts. 
Following are the recent developments that have ensued since the BBA's 
implementation in the areas of home health services, SNF services, and 
the Medicare+Choice program:

 Home health services: Home health utilization has dropped 
        substantially, well below what would have been required to 
        remain within the BBA-imposed payment limits. We expect the new 
        Medicare payment system for home health services, scheduled for 
        implementation in October, to generally provide agencies a 
        comfortable cushion to deliver necessary services.
 SNF services: Some corporate chains have declared bankruptcy. 
        The new Medicare payment system for SNF services adequately 
        covers the cost of beneficiaries' services but no longer 
        supports the extensive capital expansions or the ancillary 
        service business that corporate chains relied on to boost 
        revenues.
 Medicare+Choice program: Many plans are withdrawing from 
        Medicare. The withdrawals are tied to a combination of Medicare 
        program changes and plans' business decisions In addition, our 
        ongoing work shows that payments to plans for their Medicare 
        enrollees continue to exceed the expected fee-for-service costs 
        of these individuals. The significance of this finding is that 
        Medicare managed care, although originally expected to achieve 
        program savings, continues instead to add to program cost.
    In our view, the basis for potential changes to BBA reforms should 
be how they affect beneficiaries' access to necessary services and the 
long-term outlook for this program. Therefore, progress needs to 
continue to better align provider payments with the expected costs of 
the beneficiaries served and to bring about the fiscal discipline 
needed to contain Medicare spending in these areas over the longer 
term. We will continue to monitor the payment reforms' effects to help 
the Congress ensure that beneficiary access is protected, providers are 
fairly compensated, and taxpayers do not shoulder the burden of 
excessive program spending.

                               BACKGROUND

    Medicare's home health care benefit enables beneficiaries with 
post-acute-care needs and chronic conditions to receive certain skilled 
nursing, therapy, and aide services in their homes rather than in other 
settings. To qualify for Medicare's home health benefit, a beneficiary 
must be confined to his or her residence (``homebound'') and must 
require intermittent skilled nursing, physical therapy, or speech 
therapy. A beneficiary who needs only custodial or personal care does 
not qualify. Beneficiaries are not liable for any coinsurance or 
deductibles for these services and may receive an unlimited number of 
visits, provided the coverage criteria are met. Historically, Medicare 
has reimbursed home health agencies their costs, subject to limits, for 
services they provide to the program's beneficiaries. A prospective 
payment system (PPS) for home health services will go into effect 
October 1, 2000.
    The Medicare SNF benefit provides up to 100 days of post-acute care 
per spell of illness. To qualify for SNF services, a Medicare 
beneficiary must need daily skilled nursing or rehabilitative therapy 
services, or both, generally within 30 days of a hospital stay of at 
least 3 days in length, and must be admitted to a Medicare-certified 
SNF for a condition related to the hospitalization. When the 
beneficiary meets these conditions, Medicare covers all necessary 
services, including room and board; nursing care; and ancillary 
services such as drugs, laboratory tests, and physical therapy. 
Beginning on the 21st day of care, the beneficiary is responsible for a 
daily coinsurance payment, which equals $97 in 2000. Until 1998, 
Medicare reimbursed skilled nursing facilities on a cost basis. 
Payments for routine costs, such as room and board, were subject to 
cost limits, but payments for capital and ancillary costs were 
virtually unlimited. Medicare is phasing in a PPS for SNF services over 
a 3-year period that began in July 1998.
    Medicare managed care plans have provided beneficiaries an 
attractive alternative to the traditional fee-for-service program. In 
return for giving up the freedom to seek care from any provider, 
beneficiaries who enroll in plans typically receive coverage for 
benefits not offered by the traditional program (such as routine 
physical examinations and prescription drugs) and enjoy lower out-of-
pocket expenses. Medicare pays the plans a fixed monthly amount for 
each beneficiary, regardless of the actual costs of providing care to 
that individual. Previously, plan payment rates were tightly linked to 
average local spending in the traditional fee-for-service program and 
only adjusted for certain beneficiary characteristics such as age and 
sex. The BBA changed how plan payments were calculated beginning in 
1998 by weakening the linkage to fee-for-service spending and required 
that, beginning in 2000, payment rates reflect differences in 
beneficiary health status.

 PENDING HOME HEALTH PPS RATES LIKELY TO BE ADEQUATE, BUT ARE UNTESTED 
                                TO DATE

    To curb rampant spending growth, BBA overhauled the program's 
method of paying for home health services. Between 1990 and 1997, 
Medicare expenditures for home health services went up three times 
faster than spending for the program as a whole. This rapid rise has 
been attributed to many factors, including a loosened interpretation of 
the home health benefit criteria and few controls to protect the 
program from abusive billing practices at a time when Medicare paid for 
every home health visit with almost no scrutiny. In combination, these 
factors made conditions ripe for providers to deliver more services to 
more beneficiaries in order to increase their revenues.
    In response to these problems, the BBA required, by October 1, 
1999, the implementation of a new home health PPS, and until then, the 
implementation of an interim payment system (IPS) to slow spending 
growth.2 The IPS made the existing per visit cost limits 
more stringent and added an annual agency revenue cap to control the 
number of services provided to beneficiaries.
---------------------------------------------------------------------------
    \2\ The Omnibus Consolidated and Emergency Supplemental 
Appropriations Act, 1999, P.L. 105-277, delayed the implementation of 
the home health PPS until October 1, 2000.
---------------------------------------------------------------------------
    Between 1997 and 1998, Medicare home health spending fell by nearly 
15 percent, while total home health visits dropped an unprecedented 40 
percent. The Congressional Budget Office (CBO) attributes the decline 
to agencies' tighter compliance with benefit eligibility criteria and 
their cautious interpretation of IPS limits.3 Our ongoing 
work on home health spending shows that these declines continued in 
1999 and that the drop in utilization was most pronounced in areas 
where, pre-BBA, use had grown the most and beneficiary utilization was 
the highest.
---------------------------------------------------------------------------
    \3\ Impact of the Balanced Budget Act on the Medicare Fee-for-
Service Program, Statement of Dan L. Crippen, Director, Congressional 
Budget Office, before the House Committee on Commerce Sept. 15, 1999.
---------------------------------------------------------------------------
    These findings suggest that part of the contraction in service 
delivery since the BBA may be a correction of the excessive use when 
Medicare did little to control home health spending. However, it may 
also reflect an inappropriate response to the IPS by home health 
agencies. While remaining within IPS payment limits, all agencies could 
have served more beneficiaries and many agencies could have increased 
the services provided each beneficiary. Yet the number of beneficiaries 
receiving home health services declined 14 percent between 1997 and 
1998 and is continuing to fall. Because the payment limits under the 
IPS are not adjusted to reflect the needs of individual patients, 
agencies must maintain a balance high-cost and low-cost patients in 
order to keep their costs below the IPS revenue caps. Agencies that do 
not fully understand how these caps are applied may restrict their 
admissions or reduce care to current patients further than necessary.
    The home health PPS, which replaces the IPS on October 1 of this 
year, is a more appropriate payment tool than the IPS because it is 
designed to align payments with patient needs. Medicare will pay 
agencies a per-episode rate based on historical, national average 
utilization for each 60-day period during which a patient receives 
services. PPS rates are scheduled to be tightened a year later by 15 
percent. The per-episode payments are designed to control service 
provision during the episode, while giving home health agencies the 
flexibility to vary the intensity or mix of services delivered. Home 
health industry advocates generally support the PPS, but argue that the 
15-percent payment reduction is unnecessary.
    In our view, the new home health PPS rates overall are likely to 
provide agencies a comfortable cushion to deliver necessary services. 
These rates are based on pre-BBA beneficiary use levels, which are 
widely regarded as excessive. PPS rates will provide sufficient 
resources to restore a considerable portion of the service reductions 
of the past 3 years. They will not support, however, widely divergent 
levels of utilization where some agencies supplied many more services 
than others for comparable patients.
    Unfortunately, the new PPS has the potential to be advantageous to 
agencies at the expense of beneficiaries and taxpayers. Under the per-
episode method of payment, agencies can increase profits by skimping on 
the number of visits provided within the episode. Agencies can also 
inappropriately expand the number of episodes provided by protracting 
the delivery of care over a longer period. No standards exist for what 
the right amount of care is for specific types of patients, 
particularly the right amount of home health aide care, which composed 
almost half of all visits in 1997. Implementing safeguards to ensure 
Medicare payments are used to deliver services to meet beneficiaries' 
needs is a difficult task.
    The home health PPS, while having a design superior to the IPS, is 
largely untested. It is built on the concept of paying for episodes of 
care, yet there is no consensus on what an episode should entail. In 
addition, similar to other new PPSs, which vary payments according to 
patients' expected needs, the potential exists for payments to be too 
low for some episodes involving very sick patients and too high for 
others. To minimize the potential for adverse effects for the program 
and individual agencies, we recommended in April this year that HCFA 
implement a risk-sharing provision whereby the government shares in any 
home health agency's losses under the PPS but also protects the program 
from any agency's excessive gains.4
---------------------------------------------------------------------------
    \4\ A risk-sharing arrangement that limits the amount a home health 
agency can lose or gain would involve a year-end settlement that 
compares an agency's actual Medicare-allowed costs with its total 
Medicare payments. Payments above the costs would be constrained to a 
specific percentage, as would agency losses. For further detail, see 
Medicare Home Health: Prospective Payment System Will Need Refinement 
As Data Become Available (GAO/HEHS-00-9, Apr. 7, 2000).
---------------------------------------------------------------------------

               SNF PPS RATES COVER MEDICARE-RELATED COSTS

    Under Medicare's SNF PPS, facilities receive a payment for each day 
of covered care provided to a Medicare-eligible beneficiary. 
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.
    By establishing fixed per diem payments for all services provided 
to beneficiaries, the PPS attempts to provide incentives for SNFs to 
deliver care more efficiently. SNFs that previously boosted their 
Medicare revenue--by using more or higher-priced ancillary services--
will need to modify their practices more than others.
    Recent accounts of nursing home chain bankruptcies raise questions 
about the adequacy of Medicare's SNF payments under the PPS. Our 
published and ongoing work identifies several factors that contributed 
to the poor financial performance of these corporations.5 
Some corporations invested heavily in the nursing home and ancillary 
service businesses in the years immediately before the enactment of the 
PPS, both expanding their acquisitions and upgrading facilities to 
provide higher-intensity services. Under tighter payment constraints, 
these debt-laden enterprises are particularly challenged. The PPS not 
only puts a premium on operating their SNFs efficiently, it changes the 
market for their ancillary services business as well. It makes other 
SNF operators sensitive to the costs of ancillary services, so they are 
no longer willing to purchase them at high prices. Thus, while SNFs 
have to adapt to the PPS constraints, these large post-acute care 
providers may have greater adjustments to make as a result of the 
strategic decisions they made during a period when Medicare was 
exercising too little control over its payments.
---------------------------------------------------------------------------
    \5\ Skilled Nursing Facilities: Medicare Payment Changes Require 
Provider Adjustments But Maintain Access (GAO/HEHS-00-23, Dec. 14, 
1999).
---------------------------------------------------------------------------
    There are indications that SNF payment rates under the BBA are 
likely to provide sufficient--or, in some cases, even generous--
compensation for services provided to a facility's Medicare 
beneficiaries. Medicare's average daily rate under the SNF PPS in 
fiscal year 1999 was higher than the average daily SNF payment in 
fiscal year 1997. The significance of this comparison is that 1997 
payments were thought to be excessive because they reflected 7 years of 
cost increases of more than 14 percent per year. In fact, some 
providers have been eager to adopt the PPS rates well ahead of 
schedule. Currently, PPS rates are being phased in over a 3-year 
period, which began in July 1998. This transition period was designed 
to allow facilities time to adapt to the new payment system by 
continuing to tie a facility's payment rates to its historical costs. 
The BBRA gives SNFs the option of forgoing this transition period. 
Although a current tally is not available, HCFA estimates that about 
half of Medicare-certified SNFs will opt to forgo the transition period 
to receive fully prospective rates as soon as possible.
    Beneficiary access to SNFs, moreover, does not appear compromised 
under the new PPS. Utilization levels in 1999 were higher than those in 
1997. Hospital lengths of stay for admissions likely to lead to a SNF 
stay have continued to decline, suggesting that hospitalized patients 
continue to find SNF care.
    Nevertheless, the SNF PPS initially proposed by HCFA was not 
flawless. Last year, we testified before the full Committee about PPS 
design problems.6 A primary concern was the possibility that 
facilities treating a disproportionate number of high-cost cases might 
not receive adequate payments. HCFA is in the process of refining its 
method to account for patient needs in its payments. The goal is to 
redistribute payments across types of cases so that they more 
appropriately reflect each patient's expected costs. HCFA recently 
proposed such refinements to the case-mix adjustment system, which are 
scheduled to be implemented on October 1 of this year.7
---------------------------------------------------------------------------
    \6\ Medicare Post-Acute Care: Better Information Needed Before 
Modifying BBA Reforms (GAO/T-HEHS-99-192, Sept. 15, 1999).
    \7\ The proposed rule is contained in 65 Fed. Reg. 19188-19291 
(Apr. 10, 2000) (to be codified at 42 C.F.R. pts. 411 and 489).
---------------------------------------------------------------------------
    In the meantime, BBRA included a provision that temporarily boosts 
payments for certain cases by 20 percent, 8 which will add 
an estimated $200 million to Medicare SNF spending in fiscal year 2000. 
The provision is scheduled to expire on October 1, 2000, or when HCFA 
implements a refined case-mix adjustment system, whichever comes later. 
Industry advocates favor prolonging the life of the BBRA provision and 
delaying the implementation of HCFA's proposed payment modifications, 
which they assert are not sufficiently refined. CBO estimates that if 
the 20 percent payment increase remained in effect for 5 years, 
spending would increase by $1.4 billion. In our view, the BBRA increase 
was helpful as a stopgap measure, but fiscal prudence argues for 
implementing research-based improvements to the rates as soon as 
practicable. Such improvements aim to distribute existing payments more 
appropriately and thereby address the problem originally identified, 
while avoiding the unwarranted expenditure of an additional hundreds of 
millions of dollars each year.
---------------------------------------------------------------------------
    \8\ We could not determine what criteria were used to select these 
cases.
---------------------------------------------------------------------------
              MEDICARE+CHOICE PAYMENTS REMAIN PROBLEMATIC

    Although Medicare managed care plans have provided beneficiaries an 
attractive alternative to the traditional program, they have never been 
a bargain for taxpayers. Prior to the BBA, studies by us, other 
government agencies, and private researchers concluded that, instead of 
producing expected savings, Medicare's managed care option 
substantially increased program spending. Plans tended to attract 
relatively healthy, low-cost beneficiaries, while Medicare's payment 
rates reflected the expected costs of a beneficiary in average health 
with average health expenses. Consequently, plans received payments for 
their Medicare enrollees that well exceeded what Medicare would have 
paid had these individuals remained in the traditional fee-for-service 
program. Our study of Medicare plans in California showed that 
aggregate plan payments exceeded plan enrollees' estimated fee-for-
service costs by more than an estimated $1 billion in 1995. This 
finding suggests that many of the additional benefits enjoyed by plan 
enrollees were the direct result of Medicare's overly generous payment 
rates, not of efficiencies achieved under managed care.9
---------------------------------------------------------------------------
    \9\ Medicare HMOs: HCFA Can Promptly Eliminate Millions in Excess 
Payments (GAO/HEHS-97-16, Apr. 25, 1997).
---------------------------------------------------------------------------
    The BBA sought to improve Medicare's financial posture by changing 
the methodology used to establish managed care payment rates. 
Accordingly, the BBA slowed the growth in payment rates relative to the 
growth in per capita fee-for-service spending for 5 years and required 
HCFA to improve its risk adjustment of plan payments so that they more 
closely matched beneficiaries' expected health care costs. The BBA also 
included payment changes and other provisions to achieve a second goal: 
increase the availability of plans and allow new types of plans to 
participate in Medicare.
    The declining participation of health plans in the Medicare+Choice 
program suggests that the BBA's cost containment and expansion goals 
may be irreconcilable. Since the BBA's enactment, 168 plans have either 
left the program or reduced the geographic areas they served. Recently, 
more plans announced that they will terminate their contracts or reduce 
their service areas effective January 1, 2001. Industry representatives 
have largely attributed the withdrawals to the BBA's payment rate 
changes. The representatives contend that Medicare is no longer a 
sufficiently profitable line of business for some plans and that other 
plans have had to reduce the benefits they offer and raise beneficiary 
premiums. They warn that the Medicare+Choice program will continue to 
flounder unless payments are increased.
    Our published and ongoing work suggests that several factors 
influenced plans' decisions about whether to participate in 
Medicare+Choice or to participate only in certain areas. As we reported 
last year, the 1999 withdrawals represented plans that were recent 
market entrants, had enrolled few beneficiaries, or faced competitors 
that had substantially larger market shares, suggesting that plans made 
business decisions or used business strategies that could be sustained 
only in an era of more generous Medicare payments.10 We will 
issue a report soon on the withdrawals in 2000 and 2001. While 
information on the 2001 withdrawals has only been available for a few 
weeks, our analysis of the withdrawals in 2000 indicate a pattern 
similar to that found for 1999.
---------------------------------------------------------------------------
    \10\ Medicare Managed Care Plans: Many Factors Contribute to Recent 
Withdrawals; Plan Interest Continues (GAO/HEHS-99-91, Apr. 27, 1999).
---------------------------------------------------------------------------
    Some health plans may find the payment rates established by the BBA 
to be too low to warrant their future participation in Medicare+Choice. 
However, in our ongoing work, when we compared plan payments for 
enrolled beneficiaries in 1998 with the estimated Medicare fee-for-
service costs for these individuals, we found that plans received 
payments that substantially exceeded what Medicare would have paid for 
the plans' enrollees had they been covered under the fee-for-service 
program. This paradox stems from differences in the intent of 
Medicare+Choice and its evolution. On the one hand, Medicare+Choice 
plans are paid too much relative to the original intent of Medicare 
managed care--to provide beneficiaries the package of Medicare-covered 
services at less cost than the traditional fee-for-service program. On 
the other, the plans may be paid too little for what they have been 
offering to attract beneficiaries--a more comprehensive benefit package 
beyond that authorized for fee-for-service beneficiaries for only 
modest or no premiums.
    Efforts to expand the Medicare+Choice program, particularly one in 
which plans cover prescription drugs, have been important, because the 
traditional Medicare program has not provided such coverage, and this 
program alternative has provided an avenue for some beneficiaries to 
obtain drug coverage. However, if the Congress adopts a prescription 
drug benefit for the entire Medicare program, there may be less reason 
to have Medicare+Choice payments exceed the costs of providing services 
in the traditional program. The problem of excess payments can be 
addressed in part by better adjusting payments for the actual health 
status of enrollees. Such a step would also protect those plans that 
attract sicker-than-average enrollees.

                              CONCLUSIONS

    As anticipated, the BBA reforms have had significant effects on the 
delivery, cost, and use of Medicare services. Changes in providers' 
incomes and services to beneficiaries are becoming a reality. We have 
seen a rapid fall-off in home health use, the bankruptcies of several 
large SNF chains, and continued health plan withdrawals from the 
Medicare+Choice program. Although providers have been quick to 
attribute these changes to inadequate Medicare payments and call for 
extra federal dollars, careful analysis indicates that these responses 
are adaptations to appropriately tightened payments following a period 
of unchecked growth.
    Needed refinements to the BBA's new payment policies for home 
health, SNF, and managed care services are under development or are 
soon to be implemented. In assessing the merit of these refinements, 
prudence suggests that beneficiary needs and the program's prospects 
for long-term sustainability, not provider profitability, should be 
paramount. We have several studies under way to inform these decisions 
and we will continue to work with you to provide this important 
information.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions you or other Members of the Subcommittee may 
have.

                    GAO CONTACTS AND ACKNOWLEDGMENTS

    For future contacts regarding this testimony, please call William 
J. Scanlon at (202) 512-7114 or Laura A. Dummit at (202) 512-7118. 
Individuals making key contributions to this testimony included James 
C. Cosgrove, Hannah F. Fein, Dana K. Kelley, Erin M. Kuhls, and James 
E. Mathews.

    Mr. Bilirakis. Thank you very much, Mr. Scanlon.
    Dr. Wilensky, the last statement Dr. Scanlon made regarding 
the Medicare managed care plans, do you agree with his 
assessment?
    Ms. Wilensky. I agree in general. There is one small 
addition I would like to raise, and that is part of the problem 
has been inappropriate expectations on the part of seniors 
about how much they could get in the way of additional benefits 
for free in a managed care plan, that they could get some or 
that managed care plans could provide care somewhat more 
efficiently, I think was the correct assessment.
    What happened in the early years is that the amount that 
was being spent in traditional Medicare was so high in some 
areas, in the places where managed care plans were most likely 
to grow, that seniors got used to having an enormous amount of 
benefits provided for free. That expectation, even for those of 
us who believe that managed care can provide care more 
efficiently and frequently more effectively, is just out of 
whack with the reality, and it is that painful contraction of 
having some additional benefits but not what you have expected 
in the past.
    There also may be a question of whether or not, as Medicare 
spending gets back to a more normal level of growth, such as 
was envisioned in BBA, that will put a little less pressure. 
The fact that there has been such low growth has hit the 
managed care plans very hard. Not only have they got the impact 
of that low growth, but the high-care areas were under 
constraints, as well, and so they really have been operating in 
the last 2 years under a lot of constraints.
    Mr. Bilirakis. You, in your remarks, mentioned the reducing 
of regulatory burdens or the lack of reducing the regulatory 
burdens.
    Ms. Wilensky. Right.
    Mr. Bilirakis. When we held our hearings regarding these 
concerns that so many of these HMOs were dropping out of 
Medicare, we heard complaints that inadequate funding, 
particularly in some areas of the country, and the regulatory 
burdens, the paperwork, was also a very large part in forcing 
them out of the picture. That is happening all over. That is 
certainly happening in our area of Florida and it is just 
difficult to know exactly how to take care of that.
    Ms. Wilensky. We have heard that is especially a problem in 
some of the rural areas. We had some of the companies that 
provide in rural areas under the Federal Employees Health Care 
Plan talk to several of us at MedPAC about why they were able 
to do it there and not under Medicare and one of the responses 
was that if they stayed in traditional Medicare, the hospital 
had far fewer regulatory burdens than if that same hospital 
joined part of a Plus Choice program, that the regulatory 
burdens were substantially greater and that that was a major 
disincentive for both the physicians and the hospitals in some 
of the rural areas, along with other issues.
    Mr. Bilirakis. So even if we were to increase the 
reimbursements, if you will, the payments----
    Ms. Wilensky. These other problems need to be fixed.
    Mr. Bilirakis. [continuing] it may not solve the problem?
    Ms. Wilensky. Right. I believe that. I believe it is not 
just a payment issue.
    Mr. Bilirakis. That is an area that we have got to spend 
more time on, but let me get into the home health benefits with 
you. In your study of the impact of BBA 1997 on Medicare home 
health benefits, could you identify any type of patients that 
were being denied or had a hard time securing home health 
services?
    Ms. Wilensky. We did a study where we looked at--we went to 
survey some of the discharge planners and some of the advocates 
for home health to try to see whether we could discern a 
problem. We could not at that point document any particular 
access problem. What we were hearing anecdotally is that people 
with special needs, both for skilled nursing facilities prior 
to BBRA and also in home care that had high acuity, were having 
trouble getting the services or being accepted by home care. 
But we have not been able to document that in a systematic way. 
We are now sitting down to plan some additional surveys to see 
whether we can try to provide some information, although we 
will not have any of that available prior to August.
    Mr. Bilirakis. Is it just too early to tell?
    Ms. Wilensky. There is nothing we can see that provides any 
systematic evidence in the work that we have done thus far.
    Mr. Bilirakis. Mr. Scanlon?
    Mr. Scanlon. Mr. Chairman, I would note that in our survey 
of discharge planners, we found a very similar result, in fact, 
that the problems of some of these patients with more skilled 
needs, those problems predated the BBA and the problem, in 
part, relates to the lack of resources in communities to 
provide those skilled services.
    But what we are finding right now in terms of the latest 
changes in terms of utilization is a much sharper drop in terms 
of home health aide services than we are finding it in terms of 
skilled services, which would suggest that, in some respects, 
we are reverting to the type of home health benefit that we had 
more experience with in the more distant past, where it was a 
skilled benefit aimed at recuperation and rehabilitation 
following hospital stays and less the long-term custodial 
benefit that we experienced in the mid-1990's.
    Mr. Bilirakis. In your minds, and my time has expired so 
maybe I will ask the question but not expect an answer, is 
there a dollar figure that you feel would be necessary to give 
back to the providers to sort of get things back on the even 
keel? That is a question that I would ask you, and I do not 
know whether you have a quick answer to that or not.
    Mr. Scanlon. My quick response would be that the 
prospective payment system is already going to put dollars back 
into the system and that we actually will see an increase and 
should see a potentially significant increase in utilization 
because of the incentives.
    Mr. Bilirakis. So over a short period of time, you expect 
that this would take place----
    Mr. Scanlon. We do.
    Mr. Bilirakis. [continuing] without any necessarily 
additional dollars. Do you have an opinion, Ms. Wilensky?
    Ms. Wilensky. The biggest problem was we have so little 
idea about whether what we were doing before was anything like 
the right amount, but we would be glad to work with the 
committee and the committee staff in the next month or 2.
    Mr. Bilirakis. Thank you.
    Mr. Brown?
    Mr. Brown. Mr. Chairman, thank you. Mr. Scanlon, I 
appreciate your comments and want to pursue them on overpaying 
of managed care plans. The GAO has written a number of reports 
over the past few years about Medicare's payments to plans and 
Medicare Plus Choice and its predecessors. These reports have 
concluded that Medicare has consistently been overpaying 
managed care plans. Talk a little, if you would, about 
Medicare's historic overpayments to managed care plans, why are 
we overpaying, how much. Give us some of that.
    Mr. Scanlon. In the past, we had identified and other 
researchers had identified that Medicare was overpaying plans, 
principally because the payments to plans were adjusted for 
differences in beneficiaries' or enrollees' demographic status 
but not for differences in their health status, and that plans, 
on average, were attracting enrollees that were healthier than 
the average sort of Medicare beneficiary, not a surprise given 
that people with more significant illnesses may already have 
relationships with providers who are not part of plans' 
networks and, therefore, were reluctant to join with a managed 
care plan.
    That continues today. I mean, we are on the verge of 
improving our risk adjustment process but we are not there yet. 
While there were some people that hypothesized that as managed 
care grew, which it was doing before the BBA, that these 
overpayments would disappear because the population the managed 
care would sort of average out to be the same as the population 
in fee-for-service. What we found is that that is not the case. 
We will be issuing a report within about a month that has 
looked at much more recent data, looked at mature markets 
across the country, and found out that this factor of favorable 
selection with healthier enrollees entering managed care 
persists.
    Ms. Wilensky. I would like to point out, though, that the 
studies have focused on the entrants or those very small 
numbers of people who exit. One of the big questions that has 
been very difficult to look at is what happens as people stay 
in managed care plans for substantial periods of time, and 
because some managed care plans are made up of 70 percent of 
enrollees who have been there for 3 or more years and others 
are primarily new plans dominated by new enrollees, this 
information on self-selection either into or out of the plans 
really does not address, or has not in the past, the large 
numbers of people who may be in these plans over a substantial 
period of time.
    Mr. Scanlon. If I could add, we recognize that shortcoming 
of other studies and have attempted to take into account the 
distribution of enrollees in plans by the length of time they 
have been there. We recognize that people when going into plans 
have much lower utilization of services than other 
beneficiaries. That is on the average of about 35 percent 
lower. But we also have identified that there is likely to be 
an immediate increase in their utilization of services and that 
those increases will continue over time and we have 
incorporated those into our estimate.
    We have also tried to be very conservative about thinking 
about costs of dealing with people that die and costs of people 
that are leaving plans to make sure that if we are biasing 
results, we are biasing them in favor of the plans, not sort of 
an over-finding that there are excessive costs to the Medicare 
program.
    Mr. Brown. A couple of studies I have seen show how much 
costs increase when people leave plans later in life, when 
taxpayers are paying for their health care instead of managed 
care.
    Let me pursue one other part of that, Mr. Scanlon. You said 
people just sort of naturally, more healthy people more 
naturally gravitate toward managed care plans instead of 
traditional fee-for-service. What actions do the managed care 
companies take to encourage, to cream-skim, to encourage the 
healthiest people to go into managed care? I understand there 
is sort of that natural proclivity to do that. I also 
understand, I believe, that managed care companies try to 
encourage and increase that. What kinds of things do you see 
there?
    Mr. Scanlon. Mr. Brown, we have not looked at that in any 
systematic way. I think we probably have heard some of the same 
anecdotes that you have in terms of maybe structuring the 
benefits in a way that might attract healthier enrollees or in 
terms of where one markets. But again, we have not looked at 
that systematically. We know over time there has been probably 
much less of that that has gone on than occurred very early in 
the history of the program.
    Mr. Brown. But for a for-profit insurance company, is it 
not natural and expected and understandable and justifiable 
from the bottom-line standpoint behavior to try to recruit into 
managed care plans the lowest-cost beneficiaries?
    Mr. Scanlon. If you are lucky enough to get the lowest-cost 
beneficiaries, it certainly is good for the bottom line.
    Mr. Brown. I guess my time is about up. Thank you, Mr. 
Chairman.
    Mr. Bilirakis. Mr. Whitfield?
    Mr. Whitfield. Thank you. Ms. Wilensky, in the BBRA of last 
year, I believe a provision was put in establishing what they 
call a critical care access provision where certain rural 
hospitals of so many beds and below would be able to have a 
cost-plus basis for reimbursement. How significant do you think 
that will be in addressing some of the financial problems of 
the smaller rural hospitals?
    Ms. Wilensky. I think the critical care access program is 
potentially a very good program. I do not know that we have 
been able to see very much the results yet, just because it is 
so soon, but in principle, I believe it was a very good 
proposal.
    A number of you mentioned concerns about rural areas. Let 
me make two points. The first is, our June report for next year 
for MedPAC will entirely be focused on rural issues, much more 
than just BBA but providing health care in rural America and 
the interaction of Medicare and other issues. So we will be 
able to say much more.
    The second point is you have to be careful when you talk 
about rural hospitals. Our look in terms of the work we have 
done already suggests that rural hospitals are faring very 
differently depending on who they are. Rural referral centers 
and sole community hospitals have substantial margins. They 
have both substantial Medicare margins, but they actually have 
pretty reasonable overall margins, as well. Small Medicare-
dependent hospitals, some of which may become critical access 
hospitals depending on what happens or some of the under-50-bed 
other rural may become these, are having more difficulty. So we 
really--you have to be careful when you talk about rural as to 
not sweep too many different types. Some of the programs that 
we have had in effect already have done a good job.
    Mr. Whitfield. You had mentioned the report. When will this 
report be available?
    Ms. Wilensky. This is each year MedPAC has two reports, a 
March report and a June report. This will be our June report 
for next year, and this is as a result of the BBRA. Among the 
many requests that the Congress made was to have a major look 
at rural issues and we have decided to devote our June 2001 
report to health care in rural America.
    Mr. Whitfield. Okay. Mr. Chairman, I yield back the balance 
of my time.
    Mr. Bilirakis. I thank the gentleman.
    Ms. DeGette to inquire.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Scanlon, the GAO has issued reports for a number of 
years about the importance of health coverage for children and 
pregnant women, particularly in the Medicaid program. For 
example, I have an outstanding 1997 report here called ``Health 
Insurance Coverage Leads to Increased Health Care Access for 
Children,'' where the GAO found that health insurance coverage 
increases children's access to preventative, primary, and acute 
care. This improves a child's health and saves lives. The same 
report says that there are a number of studies that show access 
to care for pregnant women decreases infant and child 
mortality.
    I am wondering if you know whether anything has changed 
with respect to the importance of coverage for children and 
pregnant women since that report was issued in 1997.
    Mr. Scanlon. I have seen nothing that would suggest that 
changed. In fact, most of the studies continue to indicate that 
the uninsured use less care than the insured and there has been 
nothing to contradict the positive effect that preventive and 
primary care has for individuals, both children and pregnant 
women.
    Ms. DeGette. From a policy perspective, then, do you think 
that it would make sense to allow pregnant women to be covered 
by Medicaid if the goal of CHIP is to improve children's health 
care coverage, including infants?
    Mr. Scanlon. I think that represents a fundamental choice 
on your part in terms of expanding the program. Given that it 
has limited resources and even though we have not seen those 
resources being exhausted to this point, you have made a 
decision to provide them for children and you would be 
expanding sort of the pool that is going to be covered. 
Pregnant women are going to be expensive, and at some point, 
there could be a crowd-out effect for children given the limits 
on funding.
    Ms. DeGette. But as I look at this 1997 study, for example, 
of the top ten conditions that are treated in hospitals that 
have the highest hospital charges, four of them are infants. 
Respiratory distress syndrome is the most expensive of all of 
the ten conditions, even more expensive than spinal cord 
injury, heart valve disorders, leukemias, and so on. 
Prematurity, which is in many studies I have seen directly 
linked to lack of prenatal care, is the third highest, and low 
birthweight is included in there. So in some ways, if you gave 
coverage to pregnant women to have prenatal care, I would think 
that that would actually save some money on the other end for 
hospital costs for infants.
    Mr. Scanlon. I cannot at this point say that it would save 
money in the aggregate because while it would save money with 
respect to some individuals, whether or not the expansion of 
coverage would cost more, but maybe also produce many positive 
other benefits besides saving money. But at this point, we have 
not done any work to identify whether the net savings would 
exist.
    Ms. DeGette. Is that something that might be on your radar 
screen to do some analysis on?
    Mr. Scanlon. It will be on our radar screen.
    Ms. DeGette. I think that that is a good idea. Let me ask 
you about some other issues on Medicaid and, in particular, 
CHIP, on other related issues. You have also done some studies 
to the point that barriers that States impose that limit the 
access to coverage in the Children's Health Insurance Program. 
There was a 1996 report called ``Health Insurance for Children: 
State and Private Programs Create New Strategies to Ensure 
Children,'' which said, ``Simplified enrollment procedures and 
flexible eligibility documentation requirements minimized 
enrollment barriers and thus encouraged program 
participation.'' But then in 2000, GAO found in its April 2000 
report that some States are imposing significant barriers to 
coverage despite the fact that ``there is some flexibility 
under Federal law.''
    So, I mean, we have now had 4\1/2\ years of knowledge about 
what does and does not work with CHIP in the States. I am 
wondering if you have any views on what can be done by Congress 
to improve this program that many of us think is really 
important but is also a little bit flawed in its working.
    Mr. Scanlon. As we have looked at the CHIP program, we have 
found incredible variability across the States in terms of how 
they are approaching the outreach process and the enrollment 
process, and exactly as you have cited from our work, there are 
States in which there are more barriers to becoming a CHIP 
enrollee, or even if you have applied for CHIP and it is 
discovered that you are eligible for Medicaid, to then become 
Medicaid-enrolled.
    Efforts to reduce some of those barriers, or actions to 
reduce some of those barriers would certainly facilitate 
enrollment. We have not seen the kind of enrollment that we 
thought we might sort of in the program yet. Whether the 
impetus should come from the Congress or from individual 
States, I think that again is your choice.
    Ms. DeGette. Thank you. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Bryant to inquire.
    Mr. Bryant. Thank you, Mr. Chairman, and I want to thank 
the outstanding members of this panel and I know the second 
panel, also, for your patience in sitting through our opening 
statements and going through the questioning. We appreciate you 
being here.
    Mr. Scanlon, let me ask you about a concern that has been 
raised by members of this committee, including myself, about 
dollars that we have allocated to the States in the BBA 1997 to 
be used to ensure children under the SCHIP program. The States 
that did not spend all of their 1998 allotments are about to be 
forced to turn over to HCFA these unspent funds to be 
redistributed to the States who have spent their allocations. 
It is my understanding that only 12 States have spent all of 
their 1998 allotted amounts.
    These States would argue, including my State--well, the 
other 12 States would argue that they should be rewarded for 
moving quickly to implement the programs, knowing that unspent 
dollars would be lost. Conversely, the other side, which 
includes my State of Tennessee, will argue that, for whatever 
reason, it was difficult getting started. In Tennessee, we are 
enmeshed in this TENNCare. But the other States that did not 
are like us. They are facing this situation. But most, I think 
all, of their programs are now up and running, and since an 
overwhelming majority of the States have not spent their 1998 
allotments, they would like to have more time to be able to 
spend these dollars.
    Two quick questions. Do you think the States would spend 
down their allotments if given more time, and second, why were 
so many States unable to spend all their allotments?
    Mr. Scanlon. We do think that States would spend down their 
allotments if given more time, given that the spending more 
recently has been at a faster rate than it was in the early 
period of the program. However, having said that, I mean, to 
spend their 1998 allotments, about half the States that have 
not done that yet would only spend them in a year and the other 
half would probably take 2 years before they have fully 
expended their 1998 allotments.
    We think that the delays here are attributable to two 
things. One is the difficult in some States in getting the 
program sort of up and running, the combination of planning, 
the State's effort, and getting HCFA's approval of what a State 
was going to do. Some States were much better positioned to do 
that. They had ideas in terms of how they were going to cover 
children, and when the program passed, they were ready to make 
proposals.
    Other States, in order to get started, put into place what 
we call placeholder programs in which they did a Medicaid 
expansion because it was the easiest thing to do, but then they 
have come back subsequently and have set up a stand-alone 
program, which was their original intent, but they did not want 
to wait until they could put all of that into place. So I think 
that is one of the factors.
    The other factor, I think, why money has not been spent is 
the fact that we are in a good economy and, therefore, the pool 
of potential individuals, while large enough to absorb these 
funds if we could reach them, is not so big that we have enough 
people choosing to apply for the program and, therefore, using 
up some of the funds.
    Mr. Bryant. Does GAO have a position on whether these 38 
States, such as Tennessee, should be allowed some additional 
time or granted some mercy on this?
    Mr. Scanlon. We do not see a downside to granting them 
additional time in the sense that the money, if it was to be 
reallocated to the remaining States, that currently no State 
has actually spent its 1999 allocation and here we are almost 
at the end of fiscal year 2000. So it seems that the money in 
the SCHIP program at this point is adequate to allow the States 
that have not spent their money additional time to spend it.
    Mr. Bryant. On behalf of our Governor and the citizens of 
Tennessee, we appreciate your kind words.
    I would yield the balance of my time to Dr. Coburn.
    Mr. Coburn. Thank you. I just had a couple questions on 
rural hospitals and home care. Dr. Wilensky, do you have any 
data to say that if you exclude paybacks, which a lot of the 
home health firms have had to come up with, if you exclude 
those and those that remain, do you have any data to say that 
the profitability or capital structure of the home health 
agencies that are serving people in need in this country are in 
less good financial position than they were before?
    Ms. Wilensky. We do not have information that is at that 
level of detail.
    Mr. Coburn. Mr. Scanlon?
    Mr. Scanlon. No, Dr. Coburn, I think the only thing we can 
say is we have seen the loss of a significant number of home 
health agencies. But beyond that, the capacity of the remaining 
ones cannot be determined easily.
    Ms. Wilensky. One thing that we have noted in our 
discussions, and as I mentioned earlier, the commissioners are 
concerned about the substantial decline in absolute spending 
and the impact in terms of the number of services provided, is 
home health by its nature tends to be able to be expanded more 
rapidly and, therefore, some of the infrastructure concerns 
that may be raised with regard to hospitals or skilled nursing 
facilities, we believe, are less critical for home care. The 
question of whether they can get the adequate labor, 
particularly aides, or whether the prospective payment system 
will be at the right level are, of course, very important. But 
we are not quite as concerned about the actual infrastructure 
or capital structure because of the fact that it appears 
services can be expanded much more rapidly than in some areas.
    Mr. Bilirakis. The gentleman's time has expired.
    Ms. Capps?
    Ms. Capps. Thank you to our expert witnesses who have given 
us good testimony. I would like to ask Mr. Scanlon about safety 
in nursing homes. In the statement by Mr. Richtman, who is on 
the next panel, he expresses the senior community concerns 
about abuse and safety in nursing homes, patient safety, and I 
know that the GAO has done work looking into these conditions 
for residents in nursing homes and would love to hear briefly 
from you. I have two other questions, also.
    Mr. Scanlon. We have looked at the question of nursing home 
quality and what we have found is that there unfortunately is a 
significant number, about 15 percent, of homes in which 
residents have suffered actual harm, or it has been identified 
that residents have suffered actual harm when the homes were 
surveyed the last two times and a considerable number of these 
are due to issues of abuse.
    We have real concerns about sort of the system that we have 
in place to try and prevent this in terms of encouraging homes 
to remain of high quality and deficiency-free and we think that 
the Congress has provided HCFA the right tools in terms of 
statutory provisions to potentially influence the quality of 
care. We think that it is also important that HCFA have the 
resources to be able to implement that system. But at the same 
time, we think we have not yet given the system a chance to see 
whether or not it can improve quality of care.
    Ms. Capps. There is also a fear within the communities, my 
community particularly, that the problem of inadequate staffing 
may grow worse with the implementation of the Medicare 
prospective payment system, PPS, for nursing homes. We have a 
shortage of workers at this time and to face this looming 
issue, it seems to compound the concerns that people have. I am 
wanting to hear from you about what your recommendations are in 
terms of addressing this with the PPS.
    Mr. Scanlon. We also have heard many concerns about the 
issue of staffing in nursing homes and are looking at this from 
a broader perspective, in part because Medicare is a relatively 
small payer of nursing home care, on average constituting about 
10 percent. So it is very important what is happening in terms 
of the other payers, Medicaid and private patient.
    One of the problems with respect to staffing today is the 
fact that we have a good economy----
    Ms. Capps. Yes.
    Mr. Scanlon. [continuing] and traditionally, when we have 
had good economies, nursing homes have had more difficulty in 
attracting workers as well as retaining workers. The turnover 
rate is extremely high. We know that a number of States have 
put pass-throughs in their Medicaid reimbursement systems which 
target money directly on staffing and we think that is a 
positive thing to do when you find that you have a staffing 
problem.
    With respect to the Medicare PPS, we do not think there 
should be a profound impact or even a significant impact on the 
ability of a home to staff, both given the small share of 
dollars that come from Medicare as well as sort of the 
potential, I will call it cushion, that has been built into 
those rates by the fact that we saw such dramatic increases 
before the PPS was implemented.
    Ms. Capps. I know my time is up, but if I could just pose 
another concern that I have and it may be addressed now or 
later, is anyone looking at home health care declining 
services, the reasons for it, and the surprise number of 
additional dollars saved in the BBA cuts and what the reasons 
for some of this might be?
    Mr. Scanlon. We definitely are looking at the pattern of 
declines and trying to glean from the patterns of decline 
something about sort of the why and the consequences of those 
declines. I mean, one of the unfortunate things is that we do 
not have an expectation as to what home health care should be 
doing and do not have the kind of information that would allow 
us to develop a reasonable set of expectations for home health 
care and then to know whether we are meeting them or not.
    Ms. Wilensky. MedPAC will also be doing some further work 
in terms of these issues for home care. We will be glad to make 
it available when we have something.
    Ms. Capps. Excellent. Thank you very much.
    Mr. Bilirakis. I thank the gentlelady.
    Dr. Ganske?
    Mr. Ganske. I am concerned about kind of a yo-yo effect on 
home health care. The 1997 BBA basically addressed home health 
care's explosive growth. We have seen decrease in that. I am 
concerned that if we loosen up the PPS too much, then we will 
see a big upswing again, which leads me to my question.
    Dr. Wilensky, I thought a much better way of handling the 
home health care was to basically do what we do in other parts 
of Medicare, which was to have a copayment in terms of the 
utilization of services in home health care, and I believe that 
MedPAC in the past has thought that a copayment system would be 
a better way to go.
    Ms. Wilensky. Yes.
    Mr. Ganske. I mean, you could means-test that to help low-
income senior citizens. Can you comment on that?
    Ms. Wilensky. In our last report, we did recommend for the 
second year report in a row for MedPAC that a coinsurance, 
copayment system be devised. We suggested that people who are 
on the low-income support programs of QMB or SLMB be exempted 
from that, that it be a relatively small payment, about $5 a 
visit, and that there be a stop-loss provision. That is, that 
after some 60 visits, that there would be a reassessment about 
the need for home care as a clinical visit and that if there 
was further need, that the care be provided, of course, but 
there be no further copayments because we did not want to have 
it be a financial burden, and we thought that would be a way to 
balance making sure there was access and also to put in some 
cost restraints on the usage.
    The Congress obviously chose to go in a different direction 
as part of the Balanced Budget Act. We will have to wait to see 
what we can see after the implementation of the prospective 
payment. There was widespread belief that the interim payment 
system that was adopted was not a good system and so a sense 
that going the next step now will be better than where we just 
were, whether or not it will be as good or better than where 
you could have gone is a harder question.
    Mr. Ganske. Well, I will make a prediction. We will be 
dealing with this for some time.
    Dr. Wilensky, on the next panel we are going to hear from 
Dr. Zetterman on HCFA's site of service differential payment 
methodology. Basically, I have heard from different medical 
specialties--gastroenterologists, urologists, and others--about 
how HCFA is basically saying that if you do not do this type of 
procedure in your office, you are going to get paid less.
    Now, I have looked at some of those CPT codes, and as a 
surgeon, I think we are getting into an area where doing some 
of those procedures in an office could be dangerous to the 
patient. Would you care to comment on that?
    Ms. Wilensky. This is an issue, particularly looking at 
gastroenterology, that is part of our March report where we 
look at some of the differentials in payment per site and they 
clearly are substantial, sometimes half of what you would get 
in your office if you do it in a facility. The justification, 
at least initially, was that some of the physicians' direct 
costs or indirect costs that would have been absorbed in the 
office are being absorbed by the facility and therefore the 
actual payment to the physician should be less if that is the 
case.
    We have recommended that HCFA meet with the specialty 
groups to try to decide if there is a clinical preference area. 
It may well be that in areas, particularly some of the 
endoscopy differentials or other areas, that there ought to not 
be a higher payment in the physician's office because you do 
not want to encourage what is regarded as clinically 
inappropriate behavior. So we have basically recommended that 
in these areas where the site of care is substantially 
different, that there be more clinical dialog going on.
    MedPAC has also been concerned that the groupings are 
sometimes too aggregative in the new prospective payment system 
and that may also influence behavior. We do not actually 
believe that physicians will choose their site according to 
these payments, but we think it is not a good idea to put 
financial incentives to either underpay or overpay depending on 
whether you do a procedure in the outpatient or do a procedure 
in your office. So we are concerned.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Ganske. Mr. Chairman, I will provide you with some 
examples of the types of procedures that I do not think you 
would want to have done in a physician's office.
    Mr. Bilirakis. Great. That is what this is all about.
    Mr. Stupak?
    Mr. Stupak. Thank you, Mr. Chairman.
    Ms. Wilensky, in your testimony, you indicated that there 
has been a decline of 45 percent in home health reimbursements, 
is that correct?
    Ms. Wilensky. That is correct.
    Mr. Stupak. And I believe it is October 1 we are going to 
put in a prospective payment system for home health?
    Ms. Wilensky. October 1, the system is supposed to move to 
prospective payment instead of the interim payment system.
    Mr. Stupak. Do you believe that will happen, prospective 
payments starting October 1?
    Ms. Wilensky. It is looking better. I was less certain that 
it would, but HCFA has put out a rule that now has indicated 
the base payment, and although we had some concerns at MedPAC 
about the prospective payment system, our MedPAC commissioner 
who comes out of home care who heads the New York Voluntary 
Nursing Association had indicated that the sense was the 
interim payment system was so bad in terms of its actual 
implementation that an imperfect prospective payment system 
would be preferable.
    Mr. Stupak. It would still be preferable?
    Ms. Wilensky. It would still be preferable. That is now--
because we did have some concerns about the particulars of the 
prospective payment system. The rest of the commissioners were 
impressed by the pleas to go forward, because where we were 
right now was really not a good place.
    Mr. Stupak. Mr. Scanlon, do you care to comment on that at 
all, on prospective payment, any kind of a baseline we can 
expect coming out of that October 1?
    Mr. Scanlon. We do believe it will be in place on October 
1, given that HCFA has not issued the final rule on this, and I 
agree with Dr. Wilensky and her MedPAC commissioner from the 
VNS of New York that it is a major improvement over the interim 
payment system. The interim payment system just was not 
targeted enough to be able to support appropriate care.
    Mr. Stupak. Will venepuncture be back in for home health as 
a payment reimbursable?
    Ms. Wilensky. It as an event, my understanding, was 
reimbursable. It did not entitle the senior to the rest of home 
care services and I do not believe there is a change there, but 
I do not know.
    Mr. Scanlon. No, there will be no change. It cannot be the 
sole basis for qualifying for home health care. If you need 
another skilled service besides venepuncture----
    Mr. Stupak. But in rural areas where you have to travel so 
far just to get your blood checked, and that may be the only 
service you need, and that is ridiculous not to have it part of 
the system. To put it mildly, I mean, we would go 30, 40 miles 
to have a registered nurse do it or have the registered nurse 
come to our house, but if that does not happen, then we have to 
go to the emergency room or a physician's office and you will 
pay for it then. I think it would be much more efficient if we 
would allow it under home health.
    Mr. Scanlon. It would be more efficient in terms of the 
covering of that skilled service. The issue that I think was 
raised----
    Mr. Stupak. And also cost.
    Mr. Scanlon. Well, the issue that I think that was raised, 
though, that covering that one skilled service then entitled 
you to all the other services that home health provided meant 
that many people would receive a significant amount of aide 
care, as well.
    Mr. Stupak. So you can craft the rule that says 
venepuncture should be allowed and that is the only service 
granted? Any other services----
    Mr. Scanlon. You could treat it as a separate service.
    Ms. Wilensky. Right.
    Mr. Scanlon. It would be independent of the--it could be 
provided by home health agencies, but it would be independent 
of the home health benefit as we know it today.
    Ms. Wilensky. And it could be paid as it is currently paid.
    Mr. Stupak. For a couple of years, we have always had that 
trouble. You always cut us out, and in the rural areas, we have 
nowhere to go and it costs a heck of a lot more to have people 
go to emergency rooms every time to have it done.
    Ms. Wilensky. My sense is there has not been a question 
that that specific service should be paid. It is only a 
question of whether, if that is the only reason, that other 
services should be provided.
    Mr. Stupak. Then I cannot understand why we cannot draft a 
rule that says that service only is paid under home health and 
let the home health agencies do it, as opposed to make these 
patients travel.
    Let me go a little further. Dr. Wilensky, you mentioned 
hospitals and the PPS and increase the IMEs and things like 
that. One of the things I am hearing a lot from my hospitals is 
the cost of prescription drugs, especially in cancer-treating 
drugs. It has just gone outrageous, 35, 40 percent increase in 
the last year or 2 per year, and they just cannot pass all that 
cost on to the patient. Any thoughts on that?
    Ms. Wilensky. Well, in an inpatient setting, the increase 
of prescription drugs will get fed into the DRGs but there will 
be a delay of a couple of years because of how the data feeds 
in. It was one of the reasons we suggested that the Congress 
consider a higher than usual update this year because we know 
the last year or 2, before these have been fed in, there have 
been substantial increases in cancer drugs and other inpatient 
drugs.
    With regard to cancer drugs that are outside, some of the 
times they are covered through special provisions----
    Mr. Stupak. But most of the times, they are not.
    Ms. Wilensky. That is obviously then relating to the 
broader issue of prescription drugs and how you do it and when 
you do it.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Burr to inquire.
    Mr. Burr. Thank you, Mr. Chairman.
    Let me also deviate from the fixes for a second just to get 
a response from both of you. Would you agree that the cost of 
health care today is no longer separated rural and urban? Would 
you agree that the equipment costs the same?
    Ms. Wilensky. The equipment cost----
    Mr. Burr. If you buy an x-ray machine, it costs the same in 
New York City that it does in rural North Carolina?
    Mr. Scanlon. The machine itself costs the same. The issue 
is when we compute it on a per patient basis or per use basis, 
we may not have enough people in North Carolina. That, I think, 
is----
    Mr. Burr. I am talking about the raw cost of the machinery.
    Mr. Scanlon. The machine itself is the same price.
    Mr. Burr. And lab work, probably the same. I mean, there 
may be some variation, but in rural cases, they probably send 
it to an urban facility to be read and the fact is that the 
cost is the same. Would you agree that, really, the only 
difference is the real estate?
    Ms. Wilensky. Well, labor costs in some of the services can 
be different, including in lab services.
    Mr. Burr. But is MedPAC not seeing the same thing that I 
am, and that is that the urban centers are now recruiting in 
the rural areas, offering nurses and PAs unbelievable increases 
because they have a shortage in the urban areas, and this has 
caused not only a migration of the workforce, it has also 
caused the rural areas to raise their rates to a point that is 
not reflective in a lot of the data that we are picking up.
    Ms. Wilensky. Well, getting the right wage rate data is 
very important. Looking at labor costs is legitimate. You can 
certainly make arguments that in some cases, the labor costs 
may be greater because there is less competition in rural 
areas.
    Mr. Burr. I had a rural hospital that had to make a mid-
year adjustment in their nursing staff's pay because 30 miles 
away was Greensboro, North Carolina, and that $1 increase in 
their nursing staff was an unplanned adjustment to their annual 
budget of $260,000. There is no formula that we have got that 
will pick that up now. It may pick it up in the future, if it 
does, but the reality is that they are going to come up with a 
shortfall. That is inherent to the system, is it not?
    Ms. Wilensky. Yes.
    Mr. Burr. It is.
    Ms. Wilensky. Yes.
    Mr. Burr. Ms. Wilensky, let us go to home health for just a 
second, if we could. You mentioned that the board would propose 
a delay in the 15 percent----
    Ms. Wilensky. That is now current law.
    Mr. Burr. It is a temporary delay.
    Ms. Wilensky. Right.
    Mr. Burr. Do you perceive a permanent elimination of the 
proposed 15 percent?
    Ms. Wilensky. It is hard to tell because of the dramatic 
swings in spending that we have seen. It is certainly possible 
that we would say there is no further need to moderate spending 
if the slowdown persists. I think we are not sure what will 
happen when we go from one system, interim payment, where you 
have been doing a per visit for a daily charge to an episode 
payment, so we think it is prudent to say we ought to wait and 
see. I would not be surprised if that happened.
    Mr. Burr. What were the policy reasons for a 15 percent 
reduction in payment?
    Ms. Wilensky. It was not our policy. I do not know.
    Mr. Burr. It was not a policy. Do you know of any policy 
reasons, Mr. Scanlon?
    Mr. Scanlon. I do not think there was a reason in terms of 
the care being provided because we do not understand the home 
health benefit. I think it was more an issue of, we have had 
such excessive growth that we set a new target in terms of what 
we wanted to spend and it involved a 15 percent cut.
    Mr. Burr. Which is traditionally the way we do health care. 
We work within the framework of the dollars and not necessarily 
concentrate as much on the policy, which is the No. 1 mistake, 
I think, that this institution makes.
    I think Bruce Vladek, then-administrator of HCFA, put it 
best. When pressed, he said it makes the budget balance. That 
is how they came up with 15 percent. That is why it was not 
five, it was not ten. My only fear is that we fell into the 
same trap and adopted the same philosophy and proposed 
legislation that also had an arbitrary, pull it out of the sky, 
15 percent cut because it made the numbers work and I think----
    Mr. Scanlon. Mr. Burr, if I could add, at the same time, 
though, there was such variation across the country in terms of 
the use of home health care, if you took 15 percent off the 
areas that were at the extreme high end, you might find no 
impact on the care being provided and you would not disturb the 
areas that were providing much more modest levels of care.
    Mr. Burr. And in some cases, the reimbursements with the 
proposed 15 percent cut forced the capital that was financing 
those vital businesses in rural America to pull back, reduce 
services, or go out of business, which puts me into nursing 
homes just real quick. You mentioned them earlier. You said 
five firms had gone into bankruptcy. Do you know how much of 
the marketplace those five firms represented?
    Mr. Scanlon. They were about 15 percent of the market.
    Mr. Burr. Fifteen percent of the market? Did you look at 
the market capital of the industry sector itself, in other 
words, the stock price of the industry sector?
    Mr. Scanlon. We did and we know that there has been a 
substantial sort of drop in those, in part because the 
expectations that were built into the stock prices initially 
were expectations built upon significant growth over time and 
as that growth evaporated, so did the stock valuation.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Burr. Let me just add, Mr. Chairman----
    Mr. Bilirakis. Well, very quickly.
    Mr. Burr. [continuing] the stock devaluation of that 
industry sector was 75 percent of the entire sector after BBA 
1997 and I think that though we might not see short-term 
shortfalls, I would tell you that when we sit here and know 
that the senior population in America will double over the next 
20 years, the lack of investment in that single area of nursing 
home facilities is going to be a tremendous challenge for this 
country to address in the future.
    I thank the chairman.
    Mr. Bilirakis. Ms. Eshoo to inquire.
    Ms. Eshoo. Thank you, Mr. Chairman, for having this 
hearing, and welcome to our witnesses.
    I have a couple of questions that I would like to ask of 
you, Mr. Scanlon, and I will state my questions first and then 
you can answer them. I do not want to run out of time on the 
questions. I have not gotten this down pat yet, after all these 
years.
    Dr. Wilensky testified that managed care plans have cited 
Medicare's regulatory burden as a reason for leaving the 
Medicare Plus Choice program. It is my understanding that many 
of the regulations serve an important purpose. Regulation, of 
course, can be a blessing to some and a burden to others, a 
dirty word, or whatever. But I would like to think that there 
are regulations in this that serve the very important purpose 
of protecting seniors and their access to quality care.
    I know that the GAO issued a report last year about how 
greater Federal oversight is needed to protect seniors' rights 
in Medicare and its managed care. Could you just speak to 
HCFA's regulations and how they play an important role in 
protecting seniors' rights?
    My other question has to do with the attention that has 
been given to the effects of BBA cuts on hospitals, especially 
teaching hospitals and disproportionate share hospitals. I was 
very disappointed that we did not include anything in last 
year's refinement bill to restore cuts to Medicaid DSH 
hospitals. I have experienced that. I know something about it. 
I chaired a hospital board of directors of my county hospital 
before I came to the Congress, so I saw firsthand the faces of 
people that came in to that facility, shaping the kinds of 
services that they most needed, and how we filled that role as 
a disproportionate share hospital. Would you comment on the 
cuts endured by DSH hospitals under BBA and what you would 
suggest we do to alleviate them?
    So those are my two questions, and I thank you both for 
being here.
    Mr. Scanlon. With respect to the first question, in terms 
of HCFA's regulation of Medicare Plus Choice plans, we are very 
much in agreement with Dr. Wilensky that there needs to be a 
balance in those regulations. I mean, I also think you might 
want to--if you do not like the word ``regulation,'' you can 
think of them as purchasing specifications. We really want to 
sort of know what we are buying from these plans and make sure 
that we are getting what we paid for for the beneficiaries that 
are enrolling.
    At the same time, we want to make sure that the burden of 
those regulations on plans is minimized, and as Dr. Wilensky 
indicated, some of the smaller plans in rural areas may find 
the current regulations too burdensome and that may be a 
significant factor in their withdrawals.
    In the case of many other plans, what we are finding is 
that they are deciding to change service areas, meaning that 
they are complying with the regulations in some areas because 
they find the market attractive enough and pulling out of other 
areas where the market is not attractive enough.
    While we are certainly in favor of this, we also think that 
HCFA needs to be very efficient in terms of the burden they 
place on plans in applying the regulations, and in addition to 
finding that HCFA does not do a good job sometimes in applying 
the regulations----
    Ms. Eshoo. Can you give me an example of that, what you 
just mentioned?
    Mr. Scanlon. Well, the example I think that we had in the 
report you referred to is the issue of marketing to 
beneficiaries and telling beneficiaries what the plans are 
going to provide them, and what we discovered is that, one, 
poor information was being provided to beneficiaries in terms 
of not describing the benefits fully, and second, plans were 
encountering the difficult issue of having to deal with one 
regional office after another to get marketing materials 
approved and finding inconsistent application of the rules in 
those different regions. HCFA has taken some steps to improve 
that and we think that is very positive.
    With respect to the DSH hospitals and the changes in BBA 
with respect, and with BBRA with respect to the DSH payments, I 
mean, I think we need to recognize some of the concerns and 
problems we have had with DSH over the past, the fact that DSH 
dollars were not always targeted in the best way in all States. 
Therefore, as you look at the changes in BBA, you see a very 
great difference across States in terms of the amount of 
reductions.
    We have been looking at some of the States that are more 
significantly affected and trying to discover what is happening 
to the safety net hospitals in those States as opposed to other 
uses of the DSH dollars. At this point, while we recognize that 
it is preliminary, the impacts on many safety net hospitals are 
modest. The question is, what is modest for me may not be 
modest for those hospitals or in your eyes.
    Ms. Eshoo. If there is a misuse of DSH dollars, then I 
think that that needs to be identified. I do not think any one 
of us are going to defend something that is not defensible. But 
DSH entirely is another story. I mean, we have set up a policy 
in this country that recognizes those hospitals that take care 
of the poorest of the poor. To dance on the backs of the people 
that need this the most is just plain wrong.
    Mr. Bilirakis. The gentlelady's time has expired.
    Ms. Eshoo. I do not think we can afford to have it cloaked 
in one thing when it is another.
    Mr. Bilirakis. The gentlelady's time has expired.
    Ms. Eshoo. Thank you, Mr. Chairman.
    Mr. Bilirakis. Dr. Coburn will inquire.
    Mr. Coburn. Thank you, Mr. Chairman.
    I want to raise the level that Mr. Stupak raised on 
phlebotomy. All HCFA has to do is to pay an increased fee for 
phlebotomy and you will have the labs around this country 
coordinating rural phlebotomy. Make it where it is cost 
efficient for somebody to plan that and it can happen, and we 
do not have to pay $65 every time somebody goes out and draws 
somebody's blood. We can pay $20 or $25 and it can all be 
scheduled and be done and the labs would be more than happy to 
do it because they would get to run and bill Medicare for the 
lab.
    The second thing I wanted to address is we do have a 
problem in prenatal care in this country, but providing a 
mechanism for that does not necessarily solve it. In my 
hospital alone, we have 20 people a month drop in, no prenatal 
care. Ninety percent of them meet all the requirements for 
Medicaid or Title 19 and they know about it. They refuse to get 
it. So part of it is education, and we can throw all the money 
at that we want. Until we educate people about the need for 
prenatal care, we do not need to add another dollar for it. We 
need to utilize the services that are out there.
    I want to ask a question. Mr. Burr asked you about the 15 
percent. Is it your consensus--I think it is certainly the 
members of this committee--that that ought to go into oblivion 
as far as home health care? There is no need to have that 
number there now and we ought to eliminate that threat hanging 
over home health care so that we can plan for the future. Would 
you all agree with that?
    Ms. Wilensky. MedPAC has recently had a sense of the 
commission that we would at least not like to see it go into 
effect now. We did not take the position on ``ever.'' We just 
felt comfortable saying ``not now.'' I do understand the issue 
you are raising in terms of planning for the future and that is 
really a question for the Congress. But we do believe that 
given the sharp reduction in spending, it is inappropriate at 
the present time to go forward with yet another reduction.
    Mr. Coburn. Mr. Scanlon?
    Mr. Scanlon. I think we would not agree that it should be 
put off completely because of the fact that we expect the 
situation under the prospective payment to be so much different 
than under the IPS, that we really need to witness that 
experience and then make a decision about that.
    Mr. Coburn. What do you mean when you say that? Do you 
expect a significant increase in payments for home health care 
under the prospective payment versus the IPS?
    Mr. Scanlon. That is what we are anticipating today. For 
one thing----
    Mr. Coburn. What do you estimate?
    Mr. Scanlon. I beg your pardon?
    Mr. Coburn. What do you estimate the increase to be?
    Mr. Scanlon. We do not have an estimate of the increase 
because we have never had experience with a change that is this 
significant. One of the things that we are moving from is a 
per-visit to a per-episode payment. We are moving to a system 
where it is very hard to determine what is the appropriate 
number of episodes for an individual and we do not have very 
good criteria by which to review episodes to decide whether 
they should be paid for.
    Mr. Coburn. Has HCFA in their final ruling allowed for 
outliers on the prospective payment system?
    Mr. Scanlon. Yes, they have. Yes.
    Mr. Coburn. And will that not take care of--I do not 
understand why you cannot know that. You know the diagnosis 
codes on all these people that are under home health care now. 
Why can we not apply the data based on new rule to look at what 
is happening right now and look at what the costs are going to 
be?
    Mr. Scanlon. We do not know what the volume of 
beneficiaries are that are going to be using services.
    Mr. Coburn. What about the volume right today? What would 
be the comparison under the IPS versus the PPS for right now? 
Has nobody looked at that?
    Mr. Scanlon. They have, and there would be a likely 
increase in terms of----
    Mr. Coburn. How much?
    Mr. Scanlon. I can get you those data, but I do not have 
them here today.
    Mr. Coburn. Would you be so kind as to bring----
    Mr. Scanlon. I would be happy to do that.
    Ms. Wilensky. There is also the problem that you are now 
going to go to a system where having the right coding, having 
coding is going to make a big difference. One of the problems 
we have had in the past is that we have not required and we do 
not really have a good sense of what the diagnoses are that are 
requiring home care services, nor the services that are 
actually being provided. It is that dramatic a change that 
leads us not to know whether both the kinds of diagnoses that 
will be coded and the volume----
    Mr. Coburn. I want to get this next question in. I am very 
concerned about rural hospitals in this country. We have in my 
district alone, and even with the changes last year, we still 
have five rural hospitals that will probably not make it this 
year through the year and I want to know what you all see 
coming down the road in terms of the marked reduction in 
payments to the rural hospital, especially in Oklahoma. What 
needs to be done to revitalize and stabilize those hospitals so 
they are not bleeding?
    Ms. Wilensky. I indicated that MedPAC is going to focus its 
entire June report on health care in rural America. Our looking 
at the margins suggests that there are substantial differences 
in the financial well-being between the sole community rural 
referral centers being pretty financially robust and the small 
Medicare-dependent and under-50-bed hospitals that are not sole 
community hospitals which are more fragile.
    Mr. Coburn. Mr. Scanlon?
    Mr. Scanlon. We have left the work on hospitals largely to 
MedPAC, but I think that we are in total agreement in terms of 
the issue of targeting. I mean, in our mind, it is not 
necessary an issue of not having enough resources overall that 
Medicare is providing but in making sure that they go to the 
right places, and the issue of rural hospitals, as I am 
reminded on many occasions, the differences within rural 
communities, the fact that there is very rural and then there 
is rural, it is important to target sort of on each of those to 
make sure that there is adequate service----
    Mr. Bilirakis. The gentleman's time is long expired, but 
when would that report be available?
    Ms. Wilensky. Our report will be available next June. There 
may be some----
    Mr. Bilirakis. Next June? It will not do us very much good 
when it comes to----
    Ms. Wilensky. Not for your August decisions, but for your 
next year's decisions.
    Mr. Bilirakis. Mr. Strickland to inquire.
    Ms. Wilensky. Mr. Chairman, we can, however, provide you 
with the information we have to date in terms of what is going 
on in rural America.
    Mr. Bilirakis. Well, if you would, I am sure that would be 
very helpful.
    Ms. Wilensky. Yes.
    Mr. Strickland. Thank you, Mr. Chairman. I have two 
questions I would like to direct to Mr. Scanlon.
    Mr. Scanlon, as you know, before BBA, community health 
centers and rural health clinics received cost-based 
reimbursement from Medicare. The BBA instituted a phase-out of 
this cost-based reimbursement system so that eventually the 
States could determine their own payment systems for these 
services. Now, we passed a provision in the BBRA that would 
slow down this phase-out from occurring and would give these 
essential safety net providers more time to adjust, and this is 
my question. Based on your experience with community health 
centers and rural health clinics, what potential problems will 
these providers face if this cost-based reimbursement system 
continues to be phased out?
    Mr. Scanlon. As also part of the BBRA, there was a study 
that we were required to do in terms of looking at this 
question and we have a report that we will be providing you in, 
unfortunately, November of this year, which is also beyond your 
August decision point. But in doing prior work on community and 
migrant health centers, what we have found is that there is 
about half that the HRSA has found to be sort of suffering from 
either financial or management difficulties and another 10 
percent which they find to be highly vulnerable, potentially 
sort of going out of business.
    Mr. Strickland. We are talking about 60 percent?
    Mr. Scanlon. We are taking about 60 percent. Now, this is 
in a world in which most of them are still being paid full-cost 
reimbursement, because except for States, and there are about a 
dozen of those that have got 1115 waivers in their Medicare 
program to introduce some other form of reimbursement, and for 
six States that went to the 95 percent level. All the other 
States have stayed at 100 percent cost reimbursement.
    But what we have found is it is not only just an issue of 
revenues that puts the community health centers sort of in 
trouble. It is also an issue of management. As you move to 
different reimbursement systems in States with 1115 waivers, 
where some managed care plans are paying capitated amounts to 
the centers as opposed to full-cost fee-for-service 
reimbursement, centers can do well if they are well managed and 
they have enough other resources. We do not have at this point 
enough information to give you on the proportions of centers 
that are in different situations and how they would fare, but 
that is what we are trying to gather for you for November.
    In the interim, there is an issue of you have slowed this 
down and it is protective of the centers. This may be an area 
that you want to think about in terms of slowing down some more 
because of the role that these centers play. About 40 percent 
of their patients are the uninsured, and even though we have 
this good economy, we are seeing increases in the uninsured.
    Mr. Strickland. I guess it makes sense to me that if we do 
not have the data and we will not have it for several months 
and these are essential safety net providers, that we should, 
if possible, stop this process until we do know what we are 
facing, because, as you say, these centers do provide services 
to those who are least able to help themselves.
    Mr. Scanlon. I agree that it is important to have the 
information to understand this more fully. At the same time, 
though, I think we need to, for the longer term, be thinking 
hard about the appropriateness of full-cost reimbursement. We 
have moved away from cost reimbursement for virtually every 
other provider type because of the poor incentives that we know 
it creates, and so we need to think about how we can make these 
centers fully functioning without necessarily dependent upon 
cost reimbursement.
    Mr. Strickland. And I would agree with you, but I would 
reiterate my point, that until we have the essential 
information, we ought to protect these centers, it seems to me. 
If we have the information and it validates a conclusion that 
we can move to a different payment system without hurting 
people, then I would fully support that. But it seems as if we 
are moving forward without having the kind of information we 
need to make a rational judgment. That seems reasonable to me. 
I do not know if it seems reasonable to you or not, sir.
    Mr. Scanlon. It does seem reasonable and I wish we could 
provide you the information much sooner.
    Mr. Strickland. Could I have additional time, Mr. Chairman?
    Mr. Bilirakis. You have another few seconds.
    Mr. Strickland. I will yield back the balance of my time.
    Mr. Bilirakis. I appreciate that.
    I just want to announce for the benefit of the panelists 
and the second panel and the audience, we expect, in just a few 
minutes, a series of votes. There will be one vote, then there 
will be a 10-minute debate and a recommittal, and then another 
vote on the recommittal, and then a vote on final passage. We 
are probably talking 45 minutes to an hour. Right after we 
finish up with this panel, we will break. That way, people can 
have an opportunity to go get some lunch or whatever the case 
may be and then come back approximately in an hour's time, 
depending, of course, when the final passage takes place.
    Having said that, the Chair would now yield to Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman.
    I would like to follow up with Mr. Strickland's last 
questions about community health centers. As I understand it, 
you do not have any statistics for those States that have 
already begun to phaseout the cost-based reimbursement as to 
what effect that phase-out might be having on their delivery of 
services to their patients, is that what I understand?
    Mr. Scanlon. We do not at this point, no, sir.
    Mr. Deal. And that is what your November report----
    Mr. Scanlon. That is what our November report will deal 
with.
    Mr. Deal. As you are probably aware, we are receiving the 
same kind of complaints that I am sure you are receiving about 
the practice expense component and moving in that direction for 
reimbursement to physicians and specialties, in particular, and 
we are continuing to hear the complaints about the process 
whereby information is being gathered and the difficulty in 
arriving at a conclusion as to how this transition of 
reimbursement should be made. Would either of you care to 
enlighten us as to where this process is? As you know, there 
are some groups urging us to abandon it and go to a 50-50 
formula and forget about completing the process. Please bring 
us up to date, if you would.
    Ms. Wilensky. We are in the process of a transition as part 
of the BBA. Rather than go to a full adoption of the practice 
expense, the Congress put in a transition period. The 
transition and the practice expense relative value was an 
attempt to try to align on a relative basis practice costs 
across the different specialties and the different procedures 
that they do. The complaint has been raised as to whether or 
not that will mean that they cover absolute expenses in terms 
of practice costs and the answer is there is nothing in the 
provisions to assure they will cover absolute costs, but rather 
the allocation among the different specialties and the 
different procedures will make more sense. That is the relative 
issue.
    The problem you get into of simply abandoning the relative 
practice expense is that there is a belief that some procedures 
and specialties were being heavily overpaid or 
disproportionately paid and some procedures and specialties 
underpaid with regard to their practice expenses and that 
staying with historical values really builds in those 
inappropriate payments.
    HCFA has been urged to have more conversations with 
specialists. That was something MedPAC and others have urged. 
My sense is that is going on. But this question about absolute 
payments is one that I think needs to be clearly understood by 
the Congress. This is one of the many areas, as Mr. Scanlon 
just referenced, where there is movement away from cost-based 
reimbursement to try to move to a different type of 
reimbursement system and the main focus here is on the relative 
values, not the absolute costs.
    Mr. Deal. Thank you. I would yield back, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Barrett to inquire.
    Mr. Barrett. Thank you very much, Mr. Chairman. Thank you 
for holding this hearing.
    I have two questions. One relates to DSH, the other relates 
to occupational therapy. I would like to start with you, Mr. 
Scanlon, on DSH. I think a number of the speakers have talked 
about the DSH problems in their States and I know that Mr. 
Whitfield and Ms. DeGette have legislation to deal with the 
problems that have been created by BBA in their States.
    I represent Wisconsin, where the situation is a little 
different. We get so little DSH money that the fixes that have 
been proposed do not even touch us because they basically 
restore some of the cuts that were made to some of the other 
States. But when you have a State like Wisconsin that gets $7 
million, which is much lower than many of the States that are 
of comparable size, we are looking for a way in a State that 
has a below-average income but a significantly higher-than-
average taxation on State taxpayers to deal with this problem.
    In your analysis, or has there been anything done to sort 
of demonstrate the rhyme and reason for how States get money 
under the DSH formula?
    Mr. Scanlon. Mr. Barrett, I can say that there is, in terms 
of looking at the overall distribution. The focus really has 
been sort of on what the consequences of the changes in DSH 
levels are for sort of the hospitals in given States. We know 
that the changes are more pronounced for States that had high 
levels of DSH in the past and for States that had more of their 
DSH dollars going to institutions for mental disease. But that 
is the principal focus, is what those reductions have meant.
    I know your situation is very different in the sense that 
you are talking about a small amount of DSH money to begin 
with. The question for you would be sort of the adequacy of 
those dollars relative to the problem that you have.
    Mr. Barrett. Is there an analysis in existence that shows 
how different States got the money they are getting now? I am 
trying to decipher the code.
    Mr. Scanlon. In terms of the historical growth?
    Mr. Barrett. Yes.
    Mr. Scanlon. I think there are a number of analyses that 
address that issue. DSH was an uncontrolled expense until 1992, 
I think, at which point there were some restrictions placed on 
DSH expenditures by the Congress. At that point, it meant that 
some States' DSH dollars were frozen, could not increase over 
time, and other States had some room to grow but chose not to 
grow. The determinants of why States chose not to grow, that, I 
do not think, has been investigated.
    Mr. Barrett. From your standpoint, is there a policy 
correlation between the amounts States get and their need?
    Mr. Scanlon. There is more of a correlation after the 
changes that are in BBA sort of will have been implemented than 
there was before, because before, one of the concerns that we 
had about DSH dollars was that they were not solely being used 
to meet their original purpose but they were being used to fund 
other things and that was why the Congress initially acted in 
the early 1990's to put restrictions on that, in 1991.
    Mr. Barrett. Dr. Wilensky, occupational therapy, my 
understanding is that it is treated differently for home health 
than it is for Medicare, for SNF facilities. Would MedPAC 
support including occupational therapy in the eligibility 
criteria for home health?
    Ms. Wilensky. That is not an issue we have taken up. We can 
try to get back to you if we have any thinking on that subject.
    Mr. Barrett. What they are telling me is that the 
definition of what is included for rehabilitation services is 
different for home health than it is for some of the other 
services and that they are not included in home health. 
Obviously, home health has taken a huge beating since BBA and 
so it is maybe trying to, I do not want to say board the 
Titanic, but I think that those are two areas that need some 
further exploration.
    Ms. Wilensky. We will be glad to get back to you.
    Mr. Barrett. I would yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Towns, and my apologies to the gentleman. I did not 
realize that he had come in before at least Mr. Barrett.
    Mr. Towns. And also Mr. Strickland.
    Mr. Bilirakis. And also Mr. Strickland?
    Mr. Towns. Yes.
    Mr. Bilirakis. A double apology.
    Mr. Towns. Thank you very much, Mr. Chairman. I appreciate 
that because now I am sure you are going to give me 10 minutes.
    Mr. Chairman, one thing before I start my questioning, 
though, could you set a definite time for us to return?
    Mr. Bilirakis. No, I cannot because we do not know exactly 
when the vote on the final passage will be. We have the first 
vote at approximately 12:30 and then there will be a 10-minute 
debate on recommittal, then a vote on recommittal, and then a 
vote on final passage.
    Mr. Towns. Could we say 10 minutes after the final vote? I 
think we need a number.
    Mr. Bilirakis. We will say 10 minutes after the final vote.
    Mr. Towns. Thank you, Mr. Chairman.
    Mr. Bilirakis. Boy, you are really picking on me today.
    Mr. Towns. Thank you, Mr. Chairman.
    Let me begin by saying, first of all, thank you very much 
for the hearing and we thank the witnesses for being here. Of 
course, some of our teaching hospitals are having great 
difficulty. I noticed in the Balanced Budget Restoration Act we 
took the first step toward restoring the BBA cuts of teaching 
hospitals. Do you feel or do you agree that we need to restore 
even more of the cuts that we enacted in 1997 if our teaching 
hospitals are to remain vibrant?
    Ms. Wilensky. No, I do not, and I would like to explain 
why. We think that a number of steps were done to help teaching 
hospitals in BBA and others that we have recommended will also 
help teaching hospitals because of the kinds of work they do. 
The assistance with regard to the transition to the outpatient 
PPS and the corridors that were put around so that there would 
not be too disruptive a change, and the fact that there is no 
longer savings to be had from moving to an outpatient PPS was 
very important to the teaching hospitals. They do a large 
amount of outpatient work as part of their mission. There was a 
hold put on the reduction in IME and disproportionate share and 
there were also some small assistance to home care and skilled 
nursing facilities to the extent that they are involved.
    We are advocating an increase in the update factor for 
hospitals this year, substantially larger than we have in our 
history, but we think that in terms of the IME and DME change 
per se, that that is an amount that is above the empirical 
level of support still and that the specific way to deal with 
the higher costs of teaching hospitals could be better dealt 
with. We issued a report to Congress last year and we have some 
further updates, so while we think there are things that should 
be done to help hospitals to better differentiate their 
payments, to specifically go in and stop the reduction in IME 
payments that are now scheduled would not be a part of the 
recommendations, at least that MedPAC has made to the Congress.
    Mr. Towns. So I think we will have another Balanced Budget 
Restoration Act this year. So you would not support more 
permanent solutions to the plight facing the Nation's teaching 
hospital?
    Ms. Wilensky. We would support an increase in payments to 
hospitals this year which will obviously help the teaching 
hospitals and we think the Congress needs to relook at how 
payments to teaching hospitals are being made. We have issued 
now a separate report and separate chapters in this report 
about how best to help pay teaching hospitals. We think it is 
far more than just the level at which the IME payment is made, 
and we would be glad to work with you and your staffer about 
these issues. This is an area that MedPAC has devoted a lot of 
study to.
    Mr. Towns. Well, I sure would like to work with you on it, 
because let me just say right up front, the hospitals in New 
York City are having great difficulty, I mean, serious 
difficulty, and I would like to work with you in terms of 
seeing what we can do in terms of finding some way to bring 
about some relief.
    Thank you very much, Mr. Chairman. On that note, I yield 
back.
    Mr. Bilirakis. I thank the gentleman.
    Then we will go ahead and break until----
    Mr. Brown. Mr. Chairman, can I make an observation?
    Mr. Bilirakis. The gentleman is recognized for an 
observation.
    Mr. Brown. Taking the time of Mr. Towns.
    Mr. Bilirakis. Taking the time of Mr. Towns.
    Mr. Brown. Thank you, Mr. Chairman. Just a point of 
clarification. I hear our friend, Dr. Wilensky, refer to 
Medicare Plus Choice as Medicare replacement plans, and she 
mentioned that in her testimony. I do not know if that is 
focus-grouped or poll-tested, but I do not think it is the 
intent of anybody that I know in this Congress, certainly on 
this side of the aisle, and I do not know of anybody that 
really saw Medicare Plus Choice as a replacement for Medicare. 
It is listed under Medicare Part C.
    I bring that up only because I know there are efforts in 
this Congress to sort of back-door privatize Medicare, and to 
call that a Medicare replacement plan goes a bit beyond what I 
think there is any Congressional intent to do. Thank you.
    Mr. Bilirakis. I do not know of any efforts to back-door 
privatize Medicare, and I suppose I would probably know about 
it if there were.
    Mr. Brown. Mr. Chairman, they are so far in the back door 
that you may not have seen them.
    Mr. Bilirakis. Yes, they may be that far back.
    Ms. Wilensky. And that is my term and I do not know if 
anybody else is using it. It is a way that I have found for 
myself to distinguish between the traditional Medicare program 
and the other, and I regard these as traditional Medicare 
alternatives.
    Mr. Bilirakis. All right.
    Ms. Wilensky. So it is a way for me, but if you just use 
Medicare Plus Choice outside of Washington, it does not convey 
a sense of what you are talking about----
    Mr. Brown. And that, Mr. Chairman, is exactly the point. If 
you are outside Washington and talking about Medicare 
replacement plans, that sends a real message that privatization 
is around the corner and it is not around the corner. It is a 
long way off and a whole lot of us in this Congress do not want 
it privatized and a whole lot of people in this country, an 
overwhelming majority, do not want it privatized.
    Mr. Bilirakis. The gentleman has made his observation. That 
being the case, we will break for approximately an hour to an 
hour and 15 minutes. Thanks so much.
    [Brief recess.]
    Mr. Bilirakis. Let us get started. Again, we apologize, but 
those of you who have done this before know what it is like.
    This second panel consists of Ms. Marilyn Tavenner, 
Richmond Market President, HCA-The Healthcare Company, 
Richmond, Virginia. She has already been introduced by Mr. 
Bliley.
    We also have with us Ms. Karen Coughlin, Chief Executive 
Officer of Physicians Health Services out of Shelton, 
Connecticut; Dr. Rowen K. Zetterman, President Elect of the 
American College of Gastroenterology from Arlington, Virginia, 
on behalf of the American College of Physicians and the 
American Society of Internal Medicine; Mr. Max Richtman, 
Executive Vice President of the National Committee to Preserve 
Social Security and Medicare, except that I do not see him 
right here; Ms. Juliet Hancock, Program Consultant for the 
RehabCare Group out of Saint Louis, Missouri, on behalf of the 
National Association for the Support of Long Term Care; Mr. 
Daniel R. Hawkins, Junior, Vice President of Federal and State 
Affairs, National Association of Community Health Centers from 
here in Washington; Ms. Mary Lou Connolly, RN, MSN, 
Administrator of UCSD Home Care, San Diego, California, on 
behalf of the National Association of Home Care; and Mr. David 
T. Williams, Director of Government Relations at Invacare from 
Elyria, Ohio, the district of our ranking member.
    Max, you are now here, so we are missing Mr. Hawkins. I 
assume we can get started. Ms. Tavenner, why do we not kick it 
off with you. Your written statements, as per usual, are part 
of the record. We will set the clock at 5 minutes. Hopefully, 
you can confine your remarks in that category, and hopefully 
you will complement and supplement your remarks verbally rather 
than redo what is already in writing. Ms. Tavenner, please 
proceed.

    STATEMENTS OF MARILYN TAVENNER, CHIEF EXECUTIVE OFFICER, 
    RICHMOND MARKET PRESIDENT, HCA-THE HEALTHCARE COMPANY, 
 JOHNSTON-WILLIS AND CHIPPENHAM MEDICAL CENTERS, ON BEHALF OF 
  THE FEDERATION OF AMERICAN HEALTH SYSTEMS; KAREN COUGHLIN, 
  CHIEF EXECUTIVE OFFICER, PHYSICIANS HEALTH SERVICES HEALTH 
 PLANS, ON BEHALF OF THE AMERICAN ASSOCIATION OF HEALTH PLANS; 
   ROWEN K. ZETTERMAN, PRESIDENT ELECT, AMERICAN COLLEGE OF 
  GASTROENTEROLOGY, ALSO ON BEHALF OF THE AMERICAN COLLEGE OF 
PHYSICIANS-AMERICAN SOCIETY OF INTERNAL MEDICINE; MAX RICHTMAN, 
EXECUTIVE VICE PRESIDENT, NATIONAL COMMITTEE TO PRESERVE SOCIAL 
  SECURITY AND MEDICARE; JULIET HANCOCK, PROGRAM CONSULTANT, 
   REHABCARE GROUP, INCORPORATED, ON BEHALF OF THE NATIONAL 
   ASSOCIATION FOR THE SUPPORT OF LONG TERM CARE; DANIEL R. 
   HAWKINS, JR., VICE PRESIDENT, FEDERAL AND STATE AFFAIRS, 
  NATIONAL ASSOCIATION OF COMMUNITY HEALTH CENTERS; MARY LOU 
   CONNOLLY, ADMINISTRATOR, UCSD HOME CARE, ON BEHALF OF THE 
   NATIONAL ASSOCIATION OF HOME CARE; AND DAVID T. WILLIAMS, 
  DIRECTOR OF GOVERNMENT RELATIONS, INVACARE CORPORATION, ON 
 BEHALF OF THE AMERICAN ASSOCIATION FOR HOMECARE AND THE HOME 
              MEDICAL EQUIPMENT SERVICES INDUSTRY

    Ms. Tavenner. Thank you, Mr. Chairman. My name is Marilyn 
Tavenner, and as discussed before, I am CEO of Johnston-Willis 
and Chippenham Medical Centers, which are located in Richmond, 
Virginia. I also happen to be a registered nurse as well as a 
fellow with the American College of Healthcare Executives and I 
serve on the Board of Governors and the Legislative Committee 
for the Federation. In addition to Chippenham and Johnston-
Willis, I also am responsible for managing Henrico Doctors' 
Hospital, John Randolph Medical Center, and Retreat Hospital, 
all of which are located in Richmond, Virginia.
    Our doctors and our nurses are tireless advocates and 
committed advocates for health care. We have over 30 parish 
nurses who have created health ministries in their own 
congregations. We have a physician who has created Noah's 
Children, which is the only pediatric hospice program in the 
area, and we have many caregivers who are committed to the 
residents of Virginia. Many of these caregivers have expressed 
concerns to me about their ability to continue to provide the 
care that they feel their patients deserve in our current 
financially stressed environment.
    All hospitals, both urban and rural, have been seriously 
and negatively impacted by the BBA, which has had a far greater 
impact than anyone imagined when it was passed 2\1/2\ years 
ago. In 1997, Congress and the administration agreed to reduce 
Medicare spending by $103 billion. However, we now know today 
that these cuts may be more than $225 billion. Last November, 
the BBRA restored $1 billion in program spending for this year 
and $15.8 billion over a 5-year period and we are very thankful 
for that, and yet, still almost one-third of the Nation's 
hospitals will operate in the red this year, the highest number 
ever.
    Overall, hospitals are losing money on every Medicare 
beneficiary that walks through their door. Hospital margins are 
expected to drop by 55 percent in 2002. Congress cannot expect 
hospitals to operate with negligible margins, or in the red, 
and be able to maintain the quality of service.
    In my home State of Virginia, the BBA payment cuts are 
unprecedented. They are estimated at nearly $1.6 billion over a 
5-year period. Just the four hospitals that I am responsible 
for will see $70 million in cuts because of BBA. This has a 
potentially devastating effect on our ability to provide 
services and comes at a time when we find our costs to be 
soaring, particularly prescription costs and labor costs. 
Indeed, the number of uninsured even in our environment has 
increased by 13 percent from 1996 to 1998. It is clear that 
Virginia hospitals, which are already among the most efficient 
in the Nation, will be hard-pressed to achieve additional 
economies to weather the BBA storm.
    Congress must address this issue before it adjourns in the 
fall. Our recommendations include giving all hospitals a full 
market basket update, which is the hospital equivalent of the 
CPI. United States has recommended that Congress increase the 
inpatient update between 3.5 and 4 percent in 2001. The 
administration in its proposal released last month called for a 
full market basket update. The Hospital Preservation and Equity 
Act that would give hospitals a full market basket update 
currently has 291 cosponsors, including nearly 60 percent of 
the House Commerce Committee.
    Second, freeze the Medicaid DSH reduction at 2000 levels to 
help ensure quality, access to quality care for the vulnerable 
uninsured. We commend the leadership of Congressman Bilbray, 
Congresswoman DeGette, and Congressman Whitfield, who have 
introduced legislation that would accomplish this goal.
    The BBA slashed hospital reimbursement for bad debt. 
Hospitals incur bad debt when Medicare beneficiaries do not pay 
their share of the costs associated with hospital stays. These 
cuts in bad debt negatively impact hospitals that provide 
needed hospital care to these low-income seniors. That is why 
we are pleased that Congressman Greenwood and Congresswoman 
DeGette have recognized this problem and introduced legislation 
to restore hospitals' bad debt reimbursement.
    Third, the BBA reduced Medicare DSH payments by 5 percent, 
phased in over 5 years. The 1999 BBRA reversed a portion of 
this cut. Restoring this funding will help hospitals that 
provide care to low-income seniors remain viable. We understand 
that key committees, both in the House and Senate, including 
this committee, are also moving toward a comprehensive BBA 
relief package. The Nation's 39 million seniors who depend on 
America's hospitals to meet their daily health care needs 
desperately need this attention.
    Mr. Chairman, thank you again for inviting the Federation 
to testify, and as one of Chairman Bliley's constituents, I 
would also like to thank him for his long period of dedication 
to the people of Richmond and we will sorely miss him.
    [The prepared statement of Marilyn Tavenner follows:]

Prepared Statement of Marilyn Tavenner, CEO, Johnston-Willis Hospital & 
  Chippenham Medical Center, on Behalf of the Federation of American 
                             Health Systems

    Mr. Chairman, hello, I am Marilyn Tavenner, CEO of the Johnston-
Willis and Chippenham Medical Centers in Richmond, Virginia. I am a 
registered nurse, as well as a fellow of the American College of 
Healthcare Executives, and I serve on the Board of Governors and the 
Legislative Committee of the Federation of American Health Systems. The 
Federation represents nearly 1,700 privately owned and managed 
community hospitals across the United States. As I am sure you will 
hear from almost all of the witnesses today, the last few years have 
not been pleasant--or easy--for anyone involved in delivering 
healthcare to patients.
    In addition to Chippenham Medical Center and Johnston-Willis 
Medical Center, I am also responsible for managing Henrico Doctors' 
Hospital, John Randolph Medical Center, and Retreat Hospital, all in 
the Richmond, Virginia market. Together, these hospitals annually treat 
646,000 patients, 33% of which are Medicare and 19% of which are 
Medicaid. We provide care to 57,500 uninsured patients each year. Our 
doctors and nurses are tireless and committed advocates for their 
patients and their communities. From the 30 parish nurses who have 
established health ministries in their congregations, to the physician 
who created Noah's Hope--our area's only pediatric hospice, to the 
employees who serve as big buddies for Camp Comfort--a youth 
bereavement program, or who packed and delivered 3,000 emergency meals 
for the `Meals on Wheels' program, our caregivers are on the front line 
in caring for the residents of Virginia. Many of these caregivers have 
expressed concerns to me about their ability to continue to provide the 
care their patients deserve with the ongoing financial stress our 
hospitals are under.

The Problem: The 1997 BBA
    All hospitals, urban and rural, have been seriously and negatively 
impacted by the Balanced Budget Act of 1997 (BBA), which has had a far 
greater impact than anyone could have imagined when it passed two-and-
a-half years ago. In 1997, Congress and the Administration agreed to 
reduce Medicare spending by $103 billion ('98-'02). However, we now 
know based on current projections that these cuts will be more than 
$225 billion. And, over $125 billion of this unexpected windfall is 
forever ``gone'' to the Medicare program towards the surplus and other 
discretionary spending.
    Last November, the Balanced Budget Refinement Act (BBRA), a.k.a. 
the BBA ``add back'' bill, restored $1 billion in program spending for 
FY '00, and $15.8 billion over 5 years. We were, and are, very grateful 
for Congress' thoughtful bipartisan response. This Committee's 
leadership was particularly helpful. However, between November 1999 and 
January 2000, Medicare spending estimates fell by $8 billion for FY '00 
alone, and by $73 billion over 5 years, wiping out--many times over--
the intended impact of the restoration package.
     Both Houses of Congress have considered Medicare ``lock box'' 
proposals that would ensure that any future unexpected savings would be 
reserved for Medicare. Plus, the Administration has suggested taking 
Medicare `off budget'. These would be enormous positive steps in 
strengthening the program.

The Impact of BBA on Hospitals
    Almost one-third of all hospitals will operate in the red this 
year--the highest number ever. No matter where you look, whether it is 
government reports or independent studies, hospital margins are sharply 
lower. The evidence is overwhelming:

 ``The financial crisis in health care has shifted from the 
        solvency of the Medicare Trust Fund, which now appears to be 
        intact until 2025, to the financial condition of the nation's 
        hospitals.'' [HCIA Sachs/Ernst & Young LLP, March 2000]
 ``The BBA's impact has shaken the confidence of the financial 
        markets in the health care industry. Moody's reported that the 
        credit deterioration for U.S. not-for-profit hospitals 
        continued throughout 1999. Therefore, as the need for capital 
        increases, hospitals may find it difficult to access financial 
        markets in order to maintain adequate capital levels, e.g., new 
        technologies.'' [HCIA Sachs/Ernst & Young LLP, March 20001
 The Ernst and Young study also found that ``hospitals with 
        less than 100 beds are hardest hit by the BBA: their margins 
        significantly decrease from positive 4.2 percent in FY 1998 to 
        negative 5.6 percent in FY 2002, a drop of 233 percent.''
 According to the Lewin Group, total hospital Medicare margins 
        are projected to be negative 2.5 in 2002, and stay negative 
        through 2004 despite passage of the BBRA.
    Overall, hospitals lose money on every Medicare beneficiary that 
walks through their door. Total hospital margins are projected to fall 
by 55% in 2002. Clearly, Congress cannot expect hospitals to operate 
with negligible margins, or in the red, and still maintain current 
services.

The Effect of BBA on Virginia's Hospitals
    In my home state of Virginia, the BBA payment cuts are 
unprecedented. According to the Lewin Group, these cuts will total 
nearly $1.6 billion over five years and will have had potentially 
devastating impact on all major services-inpatient, outpatient, and 
home health care. This comes at a time when hospital costs are 
skyrocketing-especially prescription drug costs and labor costs--and 
when the number of uninsured patients has increased dramatically--by 
13% from 1996 to 1998. So, while it is clear that Virginia hospitals--
which are already among the most efficient in the nation as measured by 
length-of-stay and case/mix data--will be hard pressed to achieve 
additional economies to weather the BBA storm.

The Best Remedy for Hospitals
    Congress must address this issue before it adjourns in the fall. To 
do so, Congress should:

 Give all hospitals a full market basket (MB) update, which is 
        the hospital equivalent of the Consumer Price Index (CPI). This 
        full inflation update should apply to both inpatient and 
        outpatient services. For the last three years, hospital cost 
        inflation rose a total of 8.2%. The inflation adjustment policy 
        from the BBA for the last three years has been a freeze (FY 
        '98); MB -1.8 (FY '99) and MB -1.8 (FY '00), substantially 
        below our costs increases. Labor costs, which account for 60% 
        of a hospital's budget, also continue to increase. Drug 
        inflation continues to rise at double-digit rates, and access 
        to new technology continues to drive up a hospital's costs. The 
        cumulative impact has been devastating.
      Even Congress' own Medicare Payment Advisory Committee (MedPac) 
        recently recommended that Congress increase the inpatient 
        update between 3.5 and 4.0% for FY '01. The Administration, in 
        its proposal released last month, also called for a full Market 
        Basket update. H.R. 3580, ``The Hospital Preservation and 
        Equity Act'' that would give hospitals a full Market Basket 
        update currently has nearly 300 co-sponsors, including close to 
        60% of the House Commerce Committee.
 Freeze the Medicaid DSH reduction at FY '00 levels to help 
        ensure access to quality care for the vulnerable uninsured. We 
        commend the leadership of Congressman Bilbray, Congresswoman 
        DeGette and Congressman Whitfield who have introduced 
        legislation that would accomplish this goal--H.R. 3710 and H.R. 
        3698. Between the two bills, this issue has attracted the 
        support of more than 200 Members of Congress, including nearly 
        60% of the House Commerce Committee. For instance in 
        California, absent Congressional action this year, the state 
        will see a devastating $164 million reduction in Medicaid 
        funding over the final two years of BBA '97.
 Restore Medicare Bad Debt/Indigent Care reimbursement. The BBA 
        reduced hospitals' reimbursement for bad debt/indigent care 
        from its pre-BBA level of 100% to 55%. This occurred at the 
        same time as the number of U.S. uninsured rose from 39 million 
        to better than 45 million. Hospitals incur bad debt when 
        Medicare beneficiaries do not pay their share of the costs 
        associated with hospital stays. While most seniors have 
        ``Medigap'' coverage for deductibles and co-pays, there remain 
        about 10% of ``near poor seniors'' who do not have Medigap and 
        do not qualify for Medicaid. Hospitals make every effort to 
        collect this money directly from the patient, but these are 
        seniors who just cannot afford to pay their portion of these 
        costs. So, this cut in bad debt directly negatively impacts 
        hospitals that provide needed hospital care to these low-income 
        seniors. This is why we are pleased that Congressman Greenwood 
        has recognized this problem, and introduced bipartisan 
        legislation to restore hospitals' bad debts reimbursement rate 
        to 100 %.
 Restore Medicare Disproportionate Share (DSH) payments. The 
        BBA reduced Medicare DSH payments by 5%, phased-in over five 
        years. The 1999 BBRA reversed a portion of this cut, but it is 
        still 3% in 2001 and 4% in 2002. DSH hospitals provide the 
        majority of care to Medicare beneficiaries, accounting for over 
        58% of Medicare PPS payment for services in FY '97. 
        Additionally, these hospitals are often the only source of 
        medical care for the poor. Rural facilities have been 
        particularly hard-hit by this cut. Restoring this funding, with 
        new money, will help hospitals that provide care to low-income 
        seniors to remain viable.
 Allow rehabilitation and long-term acute care (LTACs) 
        hospitals to move to PPS immediately. These facilities are a 
        class of specialty hospitals and units that were excluded from 
        the Medicare hospital inpatient prospective payment system 
        (PPS) when it was enacted in 1983. The BBRA requires a case-mix 
        adjusted, per discharge, inpatient PPS for LTACs by October 1, 
        2002. The issue at hand is that LTACs have been expecting a 
        prospective payment system with its own DRGs as an alternative 
        to the flawed cost-based TEFRA system since the middle of the 
        1980's when HCFA promised one, PROPAC recommended one, and 
        Congress mandated one. Instead, public policy has tended to 
        focus on treating the latest program aberration caused by 
        TEFRA, i.e., high target rates, inequitable target rates 
        between ``old'' and ``new'' hospitals, hospitals within 
        hospitals, transfer policies, etc. These tinkerings have 
        inflicted severe damage on long-term hospitals, which according 
        to the June 2000 MedPAC report, now have negative margins. The 
        hospital industry would like LTACs to go immediately to the 
        PPS, preferably through a bill introduced by Sen. Cochran (R-
        MS) and supported by virtually every one of the 150 long-term 
        acute care hospitals in the United States. For rehabilitation 
        hospitals, BBA'97 required the establishment of a case-mix 
        adjusted PPS effective FY2001, with full implementation by 
        October 1, 2002. Implementation has been delayed, and many 
        hospitals are anxious to move to the 100% PPS rates 
        immediately.

The Process for Relief
    The President recently offered a proposal, totaling more than $21 
billion in relief over the next five years. We understand that key 
Committees, in both the House and Senate--including this Committee, are 
also moving toward a comprehensive BBA relief package. The Federation 
hopes that these efforts move forward, and that these will serve as the 
basis for a serious, bipartisan and bicameral BBA restoration 
discussion.
    We certainly hope that this hearing will encourage the House to 
place BBA restoration on the ``must do'' list for the House before 
Congress adjourns. The nation's 39 million seniors, who depend on 
America's hospitals to meet their daily healthcare needs, desperately 
need this attention.
    Mr. Chairman, thank you again for inviting the Federation to 
testify. As one of Chairman Bliley's constituents, I would also like to 
take this opportunity to thank the Chairman for his years of dedication 
to the people of Richmond. Like all Virginians, we will certainly miss 
his leadership in the coming Congress.
    At this time, I look forward to answering any questions you may 
have for me.

    Mr. Bilirakis. Thank you, Ms. Tavenner. We will pass that 
along to him.
    Ms. Coughlin?

                   STATEMENT OF KAREN COUGHLIN

    Ms. Coughlin. Mr. Chairman and members of the committee, 
thank you for this opportunity to testify today. I am Karen 
Coughlin, the CEO of PHS Health Plans. I am testifying today on 
behalf of the American Association of Health Plans.
    Like Ms. Tavenner, I am also an RN and practiced at the 
bedside for 10 years, taking care of sick children and babies 
in intensive care units. I also ran nursing departments and 
hospitals over the years, and for the past several years have 
been running managed care plans. My focus when I get up and go 
to work every day is trying to keep high-quality health care 
affordable for people.
    The Medicare Plus Choice program offers important 
advantages to both the government and to Medicare 
beneficiaries. Fifteen years ago, the government made a compact 
with beneficiaries. By delivering care in a more efficient way, 
Medicare HMOs achieved cost savings that were then passed on to 
beneficiaries in the form of increased benefits and reduced 
out-of-pocket expenses.
    The success of the Medicare HMO program inspired Congress 
to establish the Medicare Plus Choice program in 1997. Three 
years later, however, the Medicare Plus Choice program has not 
fulfilled its progress of expanding health care choices for 
Medicare beneficiaries. Two major problems are responsible for 
this outcome. First, the Medicare Plus Choice program is 
significantly underfunded, and second, the Health Care 
Financing Administration has imposed excessive regulatory 
burdens on health plans participating in the program. The 
funding program has been caused by the unintended consequences 
of the Medicare Plus Choice payment formula.
    To illustrate this problem, please consider the following 
example. Total premiums collected by health plans from OPM and 
from enrollees participating in the Federal Employees Health 
Benefits Program, the FEHBP, have increased for the average 
beneficiary by a total of 29.1 percent between January 1997 and 
December of this year. During this same period, however, 
government payments to Medicare Plus Choice plans have 
increased for the average beneficiary by a total of only 8.6 
percent.
    In January 2001, at least 750,000 beneficiaries will be 
forced to change health plans or return to the Medicare fee-
for-service system. This number is more than the number who 
were similarly affected in the previous 2 years combined. 
Additionally, many other beneficiaries have lost important 
benefits and are paying higher out-of-pocket costs even though 
they are able to keep their health plan.
    To understand why beneficiaries are losing choices and 
benefits, please consider that in 1998, in Foundation's Eastern 
Region, for which I am responsible, we paid $1.10 in benefits 
for every $1 in premium we received. Even if we had incurred no 
administrative expenses, we could not survive while paying more 
in benefits than we received in payments.
    These disruptions have been particularly painful for low-
income Medicare beneficiaries, whose health security will be 
severely compromised if this program is not saved. Our plans 
have worked very hard to prevent this situation from happening.
    Despite our disappointment, this program has provided 
unprecedented value to Medicare beneficiaries and we are 
committed to working with all of you to save the Medicare Plus 
Choice program. We believe that $15 billion is needed over the 
next 5 years to stabilize this program on a long-term basis. A 
commitment of this magnitude is needed to assure that the 
Medicare Plus Choice program fulfills its promise of preserving 
and expanding health care choices for all Medicare 
beneficiaries.
    We also urge you to combine this additional funding with 
meaningful regulatory reforms so beneficiaries are receiving 
quality and value in their Medicare Plus Choice plans. It is 
critically important to ensure that the benefits of regulations 
outweigh their costs. Currently, while the figure of 2 percent 
is often used to describe administrative costs under Medicare, 
that figure reflects only HCFA's cost and does not reflect any 
of the cost of complying with the Medicare programs.
    Recognizing that more than 6 million beneficiaries are 
relying on the Medicare Plus Choice program to meet their 
health care needs, we believe this is one of the most important 
issues facing Congress. We look forward to working with the 
subcommittee to address this critically important issue in the 
remaining days of the 2000 session. Thank you, sir.
    [The prepared statement of Karen Coughlin follows:]

  Prepared Statement of Karen Coughlin, President and CEO, Foundation 
                    Health Systems' Eastern Division

    Mr. Chairman and members of the subcommittee, thank you for the 
opportunity to testify on the impact the Balanced Budget Act of 1997 
(BBA) has had on Medicare+Choice organizations and the beneficiaries 
they serve. I am Karen A. Coughlin, CEO of PHS Health Plans, an open-
access HMO serving 1.1 million members in New York, Connecticut, New 
Jersey and Pennsylvania. I also serve as the President and CEO of 
Foundation Health Systems' Eastern Division, responsible for the above 
named markets, as well as our operations in South Florida (Broward and 
Dade Counties). My undergraduate degree is in Nursing and I practiced 
as an RN at the bedside for the first ten years of my career, caring 
for infants and children in neonatal and pediatric intensive care 
units. I served several years as the Head Nurse of the Pediatric ICU at 
Loma Linda University Medical Center in California.
    Foundation is the sixth largest Medicare+Choice plan in the nation. 
When I started at PHS Health Plans in 1998, Foundation covered 290,000 
Medicare members in 12 states. By January 2001, due to the problems I 
will discuss in my testimony, we will have completely withdrawn from 
six states and terminated coverage for 57,000 Medicare members. 
Moreover, all of our remaining Medicare members have suffered either a 
loss of benefits or an increase in premiums since 1998.
    I am testifying today on behalf of the American Association of 
Health Plans (AAHP), which represents more than 1,000 health 
maintenance organizations (HMOs), preferred provider organizations 
(PPOs), and other similar health plans that provide health care 
coverage to more than 140 million Americans.
    AAHP's membership includes Medicare+Choice organizations that 
collectively serve more than 75 percent of those beneficiaries who have 
chosen Medicare managed care over the fee-for-service program. AAHP 
member plans have strongly supported efforts to modernize Medicare and 
give beneficiaries the same health care choices that are available to 
working Americans. AAHP member plans have had a longstanding commitment 
to Medicare and to the mission of providing high quality, cost 
effective services to beneficiaries.
    To fully understand the impact the BBA has had on Medicare+Choice 
plans and enrollees, I believe we should begin by briefly reviewing the 
Medicare HMO program that existed before Congress established the 
Medicare+Choice program in 1997. Under the original Medicare HMO 
program, the government paid health plans a set amount per month to 
cover the health benefits of each beneficiary. This amount was based on 
95 percent of the costs the government paid for beneficiaries served by 
the Medicare fee-for-service system.
    This Medicare HMO program offered important advantages to both the 
government and Medicare beneficiaries. The government paid less for 
beneficiaries who enrolled in Medicare HMOs; at the same time, 
beneficiaries were well-served by a system that allowed Medicare HMOs 
to provide high quality care while providing additional benefits--
beyond those covered by the fee-for-service program--often at no 
additional cost to beneficiaries. By delivering care in a more 
efficient way, Medicare HMOs achieved cost savings that were passed 
along to beneficiaries in the form of increased benefits and reduced 
out-of-pocket costs. As a result, beneficiaries in Medicare HMOs did 
not have to purchase costly Medigap coverage to protect themselves from 
health care expenses not covered by the old fee-for-service program.
    The success of the Medicare HMO program was evidenced by the fact 
that beneficiaries signed up for Medicare HMO coverage in large 
numbers. From December 1993 through December 1997, enrollment in 
Medicare HMOs increased at an average annual rate of 30 percent. In 
states such as Pennsylvania, Ohio, and Texas, enrollment in 
Medicare+Choice plans increased even more rapidly. In December 1997, 
shortly after the enactment of the BBA, Medicare HMO enrollment stood 
at 5.2 million, accounting for 14 percent of the total Medicare 
population--up from just 1.3 million enrollees and 3 percent of the 
Medicare population in December 1990.
    Beneficiaries valued this important health care choice under the 
original Medicare HMO program--and still value it today--because 
Medicare HMOs, when adequately funded, are able to provide a more 
comprehensive package of benefits and lower out-of-pocket costs than 
the old Medicare fee-for-service system. This is particularly important 
to low-income beneficiaries. For many seniors and persons with 
disabilities who live on fixed incomes, having access to a Medicare HMO 
means that they can spend their limited resources on groceries and 
other daily essentials--instead of ``going without.'' Beneficiaries 
also like Medicare HMOs because they provide coordinated care and place 
a strong emphasis on preventive services that help them to stay healthy 
and avoid preventable diseases. According to a survey conducted by 
HCFA, when Medicare managed care enrollees were asked to rate their 
plans on a scale of 1 to 10 (with 10 being the highest score), 50 
percent assigned a ``10'' rating to their plan and another 34 percent 
assigned an ``8'' or a ``9'' rating to their plan.
    The success of the Medicare HMO program inspired Congress to 
establish the Medicare+Choice program in 1997. The new program was 
intended to further expand beneficiaries' health care choices by 
establishing an even wider range of health plan options and by making 
such options available in areas where Medicare HMOs were not yet 
available. Three years later, however, the Medicare+Choice program has 
not fulfilled its promise of expanding health care choices for Medicare 
beneficiaries. Instead, a large number of beneficiaries have lost their 
Medicare+Choice plans or experienced an increase in out-of-pocket costs 
or a reduction in benefits.
    Two major problems are responsible for this outcome: (1) the 
Medicare+Choice program is significantly underfunded; and (2) the 
Health Care Financing Administration (HCFA) has imposed excessive 
regulatory burdens on health plans participating in the program. The 
funding problem has been caused by the unintended consequences of the 
Medicare+Choice payment formula that was established by the BBA, as 
well as the Administration's decision to implement risk adjustment of 
Medicare+Choice payments on a non-budget neutral basis. Under this 
formula, the vast majority of health plans have been receiving annual 
payment updates of only 2 percent in recent years--while the cost of 
caring for Medicare beneficiaries has been increasing at a much higher 
rate.
    To underscore the inadequacy of the government's payments to 
Medicare+Choice plans, I offer three examples for the subcommittee's 
consideration:

1. Total premiums collected by health plans (from OPM and from 
        enrollees) participating in the Federal Employees Health 
        Benefits Program (FEHBP) have increased, for the average 
        beneficiary, by a total of 29.1 percent between January 1997 
        and December 2000. During this same time period, government 
        payments to Medicare+Choice plans have increased, for the 
        average beneficiary, by a total of only 8.6 percent. In 2001, 
        government payments to Medicare+Choice plans will again 
        generally increase by just 2 percent--making this the third 
        time in four years that the annual update was 2 percent. In the 
        Northeast (Connecticut, New York and New Jersey), medical costs 
        per beneficiary have risen 12.5% since 1998, while Medicare 
        reimbursement has only risen by 4.1%. Our only options for 
        keeping up with these costs have been to limit benefits or 
        charge premiums to beneficiaries.
2. In many geographic areas where large numbers of Medicare 
        beneficiaries are enrolled in Medicare+Choice plans, government 
        payments for Medicare fee-for-service beneficiaries will exceed 
        government payments to plans on behalf of Medicare+Choice 
        beneficiaries by $1,000 or more per beneficiary in 2004. These 
        areas include--to name just a few--Los Angeles (which currently 
        has 314,000 Medicare+Choice enrollees); New York (174,000 
        Medicare+Choice enrollees); Miami (134,000 Medicare+Choice 
        enrollees); and Philadelphia (78,000 Medicare+Choice 
        enrollees). This payment differential has challenged the 
        ability of health plans to offer beneficiaries the quality 
        coverage they deserve and, additionally, to maintain provider 
        networks and expand into new geographic areas.
3. By establishing a blend of local and national rates, the BBA 
        intended to reduce the variation in Medicare+Choice payments 
        among counties. As noted above, however, the blend has been 
        funded in only one year and government payments to 
        Medicare+Choice plans continue to vary among geographic areas, 
        including neighboring geographic areas. For example, the 
        monthly payment from the government in 2000 is $485.76 in 
        Fairfield County, Connecticut and $679.10 in Richmond County, 
        New York--a difference of $193.34 even though these areas are 
        only 40 miles apart.
    These examples raise serious concerns about the adequacy of 
Medicare+Choice payments. However, to fully appreciate the crisis in 
the Medicare+Choice program, it is important for Congress to examine 
the impact it has had on Medicare beneficiaries.
    In January 1999, 407,000 beneficiaries were forced to change health 
plans or return to the Medicare fee-for-service system because many 
health plans--faced with inadequate government payments and excessively 
burdensome regulatory requirements--were forced to curtail their 
participation in the Medicare+Choice program. In January 2000, 327,000 
experienced similar disruptions in their health coverage. Additionally, 
many other beneficiaries have lost important benefits and are paying 
higher out-of-pocket costs even though they have been able to keep 
their Medicare+Choice plans. To understand why beneficiaries are losing 
choices and benefits, please consider that, in 1998, in Foundation's 
Eastern Region, the ratio of medical costs to total reimbursements was 
110% for our Medicare+Choice members. Even if we had incurred no 
administrative expenses, we could not survive while paying more in 
benefits than we receive in revenues.
    These disruptions have been particularly painful for low-income 
Medicare beneficiaries. A recent analysis by AAHP indicates that 
Medicare+Choice plans play an important role in providing supplemental 
coverage (i.e., coverage that pays for services not covered by Medicare 
Part A and Part B) to Medicare beneficiaries who are financially 
vulnerable. Our analysis indicated that a very large proportion of 
Medicare+Choice enrollees are ``unsubsidized''--meaning that they do 
not receive any third party assistance from, for example, a former 
employer or through Medicaid, in purchasing supplemental coverage for 
prescription drugs and protection against out-of-pocket expenses. For 
many of these individuals, affordable Medicare+Choice plans may be the 
only alternative to going without supplemental coverage.
    For many vulnerable beneficiaries, returning to the fee-for-service 
program, with its higher costs and reduced benefits, would result in 
serious hardships. Changing plans and health care providers--plus 
losing benefits such as prescription drug coverage and paying large 
supplemental coverage premiums--can be a highly traumatic and 
disruptive experience for low-income beneficiaries.
    In an effort to address the crisis in the Medicare+Choice program, 
Congress enacted the Balanced Budget Refinement Act of 1999 (BBRA). 
While this legislation was a step in the right direction, it provided 
only a small fraction of the resources that are needed to fully 
stabilize the program on a long-term basis. As a result, the 
Medicare+Choice program will experience further disruptions in January 
2001.
    As the subcommittee knows, July 3 was the deadline by which 
Medicare+Choice organizations were required to notify HCFA of their 
intention to participate in or withdraw from the Medicare+Choice 
program during the 2001 contract year and, additionally, submit any 
proposed changes affecting premiums or benefits. In the weeks leading 
up to this deadline, Medicare+Choice organizations were forced to make 
extremely difficult decisions on these matters. Those health plans that 
decided to curtail their participation in the program did so only as an 
option of last resort. In many cases, health plans reluctantly 
concluded that--because Medicare+Choice payments are inadequate and 
because the program's regulatory requirements are so burdensome--the 
Medicare+Choice program is not providing health plans a viable 
framework for serving Medicare beneficiaries.
    A survey recently commissioned by AAHP indicates that at least 
711,000 Medicare beneficiaries will suffer the loss of their current 
health coverage in January 2001 because Medicare+Choice organizations 
are being forced to exit the program. This survey was based on 
information provided by health plans covering 85 percent of 
beneficiaries currently enrolled in the Medicare+Choice program. When 
the decisions of the remaining Medicare+Choice organizations are known, 
it is likely that the total number of affected beneficiaries will be 
greater than the number who were similarly affected in the previous two 
years combined.
    This is unfortunate news for hundreds of thousands of Medicare 
beneficiaries and it is disappointing to Medicare+Choice plans that 
have done everything possible to avoid this unfortunate outcome. The 
reality is that these withdrawals could have been avoided. For two 
years, AAHP and our member plans have urged Congress and the 
Administration to take bold action to address the crisis in the 
Medicare+Choice program. Although Congress took an important first step 
to improve Medicare+Choice payments last year, the need for more 
meaningful changes has not been addressed. Beneficiaries are now paying 
a heavy price for this inaction.
    Despite our disappointment, we remain committed to the success of 
the Medicare+Choice program and we will continue to work with you to 
advance the changes that are clearly needed to put the program on sound 
footing. We are encouraged that there is bipartisan movement within 
Congress to enact such changes. We also appreciate Congressman 
Bilbray's resolution--approved by the House on June 29 by a strong 
bipartisan vote of 404 to 8--which acknowledged that ``inadequate 
reimbursement rates'' are a problem in the Medicare+Choice program and 
that action must be taken this year to address this critical issue. We 
thank the 28 members of this subcommittee who voted for this 
resolution.
    We now urge you to take action this year on specific legislation 
that follows through on the serious concerns you expressed when you 
voted for Congressman Bilbray's resolution. We believe Congress must 
provide $15 billion directly to Medicare+Choice plans over the next 
five years to stabilize the Medicare+Choice program on a long-term 
basis. A commitment of this magnitude is needed to assure that the 
Medicare+Choice program fulfills it promise of preserving and expanding 
health care choices for all Medicare beneficiaries. As you consider 
options for devoting more funds to the program, we urge you to assure 
that resources are allocated in such a way as to assure that the 
Medicare+Choice program is viable in areas where beneficiaries have 
already selected health plan options and that the program can expand in 
areas where such options are not yet widely available.
    We also urge you to combine this additional funding with meaningful 
regulatory reforms so beneficiaries are receiving quality and value in 
their Medicare+Choice plans. It is critically important to assure that 
the benefits of regulations outweigh their costs. Currently, 
Medicare+Choice plans are being forced to devote substantial human and 
financial resources toward compliance activities, thus leaving fewer 
resources available for providing health care services to 
beneficiaries. One example of a set of unnecessarily onerous 
requirements that merit immediate attention can be found in the 
physician encounter data requirements under the Medicare+Choice risk 
adjustment initiative. Preparations for their implementation are 
requiring an enormous commitment of resources by Medicare+Choice 
organizations, and this burden will spill over to require similar 
efforts by their network providers. However, less costly options are 
available that would meet HCFA's need for data for risk adjustment 
purposes. We believe beneficiaries will be better served by a 
regulatory environment that assures quality of care and, at the same 
time, assures that the costs associated with regulations do not 
unnecessarily divert resources away from patient care and benefits.
    Recognizing that more than 6 million Medicare beneficiaries are 
relying on the Medicare+Choice program to meet their health care needs, 
we believe this is one of the most important issues facing Congress. We 
look forward to working with the subcommittee to address this 
critically important issue in the remaining months of the 2000 
legislative session.

    Mr. Bilirakis. I guess you all know what the bell means, 
but we do have a few minutes yet. Dr. Zetterman, please 
proceed, sir.

                 STATEMENT OF ROWEN K. ZETTERMAN

    Mr. Zetterman. Thank you, Mr. Chairman. Thank you for the 
opportunity to testify. I am Dr. Rowen Zetterman and I appear 
here today in my capacities as the President Elect of the 
American College of Gastroenterology and as the Chair of the 
Board of Regents of the American College of Physicians-American 
Society of Internal Medicine.
    My oral testimony today will focus on three policies that 
have resulted from the Balanced Budget Act of 1997 and that are 
of particular concern to the specialty of internal medicine and 
to gastroenterologists. The first is HCFA's application of a 
site of service differential for certain endoscopic procedures 
that are provided less than 10 percent of the time in the 
office. The second is the reduction of overall Medicare 
payments to physicians. And the third is the reduction in 
payments to teaching institutions.
    Prior to 1997, Medicare applied a site of service 
differential that reduced the practice expense component of the 
physician's professional fee when an office procedure was 
performed in the hospital or in the ambulatory surgical center. 
Office procedures were defined as those services provided more 
than 50 percent of the time in the office. HCFA's 1997 proposal 
changed the site of service rule markedly and introduced two 
distinct fee structures for the same professional service. 
Typically, a physician is paid a lower fee for services 
provided in the hospital or ASC and a significantly higher fee 
where those services are provided in the office setting.
    ACG and other GI organizations immediately objected to this 
policy change. Nevertheless, in January 1998, HCFA implemented 
this bifurcated fee structure. This impact of the rule is 
particularly felt with respect to GI procedures. Many of these 
procedures require sedation of patients, and while very safe, 
especially for our older patients, it is still essential to 
ensure access to resuscitation equipment, facilities, and 
personnel for those rare events in which complications occur. 
Well over 90 percent of these services are being performed in 
the non-office setting. GI services make up a relatively major 
portion of the small number of HCFA procedures that are 
performed in the office less than 10 percent of the time, but 
are still subject to the bifurcated fee schedule based onsite 
of service.
    There are two key problems with HCFA's site of service 
policy. The first and larger problem is that the new policy 
creates incentives to treat patients in the office instead of a 
Medicare-certified hospital or ASC. Take, for example, 
colonoscopies. This is a major diagnostic tool in the fight 
against colorectal cancer. By fiscal year 2002, Medicare will 
pay physicians 39 percent more for performing diagnostic 
colonoscopy in the unregulated office environment than for 
performing the same service in a hospital or an ASC which is 
Medicare certified and meets criteria for quality and good 
training.
    Because HCFA has established the bifurcated fee structure 
for some but not all diagnostic and surgical procedures, there 
is a more immediate and narrower problem relating to the 
standard HCFA uses that identify those services appropriate for 
bifurcated fees. There must be a standard, but HCFA has not 
articulated the standard.
    The absence of any standard for the bifurcated fee 
structure is the issue which we today propose is appropriate 
for a modest legislative fix. Last year, the Commerce 
Committee's mark in the BBRA package included a provision which 
would have established a 10-percent threshold before HCFA could 
establish a bifurcated fee and would have remedied current and 
past economic inequities. At that time, concerns were expressed 
by other organizations and the specific legislative language 
that might inadvertently apply to a larger university of 
services and so it was dropped.
    Such concerns have been addressed in the current 
legislative proposal, which has the endorsement of all three GI 
organizations and ACP/ASIM has determined that it has no 
objection. ACG asks that the committee favorably consider 
incorporating this proposed legislative fix in legislation to 
restore inappropriate cuts mandated by BBA 1997.
    BBA also made a number of other significant changes in the 
way physicians were paid. This included replacing the volume 
performance standard with a sustainable growth rate system. 
However, HCFA's original method for estimating SGR was flawed, 
resulting in a $3 billion shortfall in physician payments 
during 1998 and 1999. This financial burden has strained 
physicians' abilities to adequately serve Medicare 
beneficiaries and led to a joint lawsuit against HCFA by the 
American Medical Association, ACPSIM, and other medical 
organizations. In addition, this distortion of the SGR will 
result in only a 1.8 percent net update. After inflation, this 
will be less than what we would have been reimbursed in 2000.
    Finally, we need to provide safety relief to the safety net 
of teaching hospitals and we would encourage you to look 
critically at disproportionate share payments.
    So in summary, ACG and ACP/ASIM recognize that at the time 
Congress enacted BBA 1997, it was doing so in an effort to 
control large Federal deficits. It has become evident, however, 
that some of these cuts, particularly relating to physicians' 
services and teaching institutions, went too far. We hope you 
will take the opportunity to restore some of these cuts. Thank 
you very much.
    [The prepared statement of Rowen K. Zetterman follows:]

  Prepared Statement of Rowen K. Zetterman, on Behalf of the American 
  College of Gastroenterology and the American College of Physicians-
                 American Society of Internal Medicine

    I am Dr. Rowen K. Zetterman, and I appear here today in my 
capacities as President-Elect of the American College of 
Gastroenterology (ACG), and as the Chair of the Board of Regents of the 
American College of Physicians-American Society of Internal Medicine. I 
am also one of the ACP-ASIM's representatives in the House of Delegates 
of the American Medical Association, but my testimony today is not on 
behalf of the AMA.
    In 1997, Congress enacted major reductions in Medicare spending as 
part of the Balanced Budget Act of 1997 (BBA 97). As a result of these 
reductions and inappropriate payment policies from the Health Care 
Financing Administration (HCFA), quality and access to care for 
millions of beneficiaries is being placed at risk. Today, my testimony 
will focus on three specific BBA-mandated reductions that are of 
particular concern to the specialty of internal medicine and to 
gastroenterologists:

 HCFA's inappropriate application of a site of service 
        differential for certain procedures done by gastroenterologists 
        that are provided less than 10 percent of the time in the 
        office.
 bbReductions in overall Medicare payments to physicians.
 Reduction in payments to teaching institutions.
Site of Service Differential for Certain Procedures Done By 
        Gastroenterologists
    HCFA's application of a site of service differential to endoscopic 
procedures done less than 10 percent of the time in the office is of 
great concern to gastroenterologists. My testimony on this issue 
reflects the particular concerns of the gastroenterology community, 
including ACG, about the site of service differential. As an umbrella 
organization representing all internists, subspecialists as well as 
generalists, ACP-ASIM is addressing broader issues relating to the 
impact of the BBA 97 cuts and HCFA's policies, rather than more 
narrowly focused issues like the site of service differential for 
certain GI procedures. However, as explained later, ACP-ASIM has no 
objections to the legislative remedy that the ACG has developed for the 
site of service problem for gastroenterology.
    HCFA has applied a ``site of service'' differential to physician 
payments for a number of years. Prior to HCFA's 1997 proposal, Medicare 
reduced the practice expense component of the physician's professional 
fee when an office procedure was performed in a hospital or in the 
ambulatory surgery center. ``Office procedures'' were those services 
provided more than 50 percent of the time in the office. This rule 
meant that diagnostic flexible sigmoidoscopy, which is performed more 
than 70 percent of the time in the office because no anesthesia is 
required, was subject to the site of service differential. Diagnostic 
colonoscopy, which does require anesthesia, is seldom performed in the 
office so the HCFA rule did not apply. HCFA's 1997 proposal changed the 
site of service rule markedly, and introduced two distinct fee 
structures for the same professional service. Typically, a lower fee is 
paid to the physician if a service is provided in the hospital or ASC, 
and a significantly higher reimbursement applies if the same procedure 
is provided in the office setting. This policy is not applied 
consistently across the family of GI endoscopy. ACG and other GI 
organizations immediately objected to this change in policy.
    Nevertheless, in January, 1998 HCFA implemented this bifurcated fee 
schedule and through a four-year phase-in, the spread between the 
higher (office) fee and the lower (hospital/ASC) fee has grown markedly 
with each successive year. (See Table I)
    Identified Codes Include Major Colorectal Cancer Screening 
Procedures--This Fix Would Help Remedy Underutilization of Medicare 
Colorectal Cancer Screening Benefit; HCFA's Site-of-Service Rule Has a 
Disproportionately Heavy Adverse Impact on Gastrointestinal Procedures
    The impact of this rule is particularly felt with respect to 
gastrointestinal procedures. These procedures require sedation of 
patients and, while very safe, particularly in older patients, it is 
essential to ensure access to resuscitation equipment, facilities and 
personnel for those rare events in which complications occur. 
Similarly, it is essential that there be some credentialling and review 
of adequacy of training. In all of these services, well over 90% are 
being done in non-office setting, i.e. hospitals or ASCs:GI services 
are the major portion of the small number of Medicare procedures which 
have fewer than 10% currently being performed in the office, but to 
which HCFA still has applied the bifurcated fee schedule of the site-
of-service rule. Included among these procedures are colonoscopies--the 
major diagnostic and treatment tool in the fight against colorectal 
cancer. The GAO recently reported to the Senate Aging Committee that 
despite the new Medicare colorectal cancer screening benefit, only 1% 
of Medicare beneficiaries are availing themselves of screening.
    When the phase-in is complete in 2002, Medicare will pay physicians 
39 percent more if he/she performs the diagnostic colonoscopy in the 
completely unregulated office environment, than provided for the same 
service performed in a hospital or ASC which is Medicare-certified and 
meets criteria for quality and minimal equipment, as well as the 
training/credentialling requirements that these facilities impose.
    The anomaly whereby HCFA maintains a mechanism and standards which 
must be met to qualify as a Medicare-certified ASC, and then implements 
a reimbursement system which pays physicians more if they perform cases 
in the office environment where none of the training, mandatory 
capacities to handle complications or other ASC-required standards 
apply is inexplicable. As much as HCFA articulates that the rationale 
for the higher physician payment for office-based services lies in the 
higher practice expenses, it would be naive not to consider that a 
substantial motivation is elimination of the Part A facility fee paid 
to those facilities that meet the requirements for Medicare 
certification.
    There are two key problems with HCFA's site-of-service policy. The 
first and larger problem is that the new policy creates incentives 
which can result in patients receiving treatment in the office instead 
of the Medicare-certified hospital or ASC. While some procedures can 
safely be performed in the right office setting--one with some of the 
same criteria that are mandated for Medicare certified facilities--the 
ultimate decision should not be based upon reasons other than what is 
best for the patient. We are very concerned about how minimal quality 
of patient care can be assured in the largely unregulated environment 
of the typical private physician's office.
    We are not here today to propose a solution to larger issues 
relating to site of service or practice expenses. Keeping in mind that 
HCFA has set up this bifurcated fee structure for some, but not all 
diagnostic and surgical procedures, there is a more immediate narrower, 
problem relating to the standard HCFA uses to identify those services 
appropriate for dual fees. There must be a standard, but HCFA has not 
articulated it. We assume that such a standard would be tied to the 
percentage of cases already being performed in the office, and also 
would take into account the safety of the office setting. For example, 
coronary artery bypass graft surgery retains a single fee, presumably 
because HCFA believes it is not and ought not be done in the office.
    At one point HCFA directed its clinical practice panels to use the 
10% threshold as a benchmark, meaning that if a procedure is done less 
than 10% of the time in office, then it would not be considered for the 
bifurcated fee. However, in response to ACG's comments and in meetings 
with ACG, HCFA has denied that this is their standard (See Secretary 
Shalala's Letter). This narrower problem--the absence of any 
articulated standard for the bifurcated fee structure, as well as the 
unfair results from HCFA's having reduced payments by 39 percent over 
the four-year phase in to the 90-95% of GI physicians who, despite the 
HCFA disincentives, still have declined to do these procedures in the 
unregulated office setting, but choose to take their patients to 
Medicare-certified facilities-is the issue which we today propose is 
appropriate for a modest legislative fix.
    Last year, the Commerce Committee's Mark in the Balanced Budget 
Relief Act (BBRA) package included a provision, then-labeled as section 
204(v), which would have established a 10% threshold before HCFA could 
establish a bifurcated fee, and would have remedied current and past 
economic inequities by instructing HCFA to revert to a single fee 
structure (i.e., number of relative value units, or RVUs, then proposed 
as the 1997 level that pre-dated HCFA's change). At that point, the 
ACP-ASIM criticized the specific language, expressing concern that it 
might inadvertently apply to a much larger universe of services than 
the ACG intended. In the interim, we have held frequent discussions 
among the ACP-ASIM and three major GI organizations, namely, the 
American Gastroenterological Association (AGA), American Society For 
Gastrointestinal Endoscopy (ASGE) and ACG. The current proposed 
legislative language has the endorsement of all three GI organizations; 
these changes also have prompted ACP-ASIM to withdraw its objections to 
this proposal.
    Attached to my written testimony is an addendum that refers to 
comments, meetings and discussions with HCFA officials about this 
problem. Several members of Congress from both parties have 
communicated their concerns about this policy to the Secretary of HHS 
as well as to the HCFA Administrator. In a recent response to one of 
these inquiries, Secretary Shalala addressed this issue in terms which 
demonstrate: (1) the current absence of any agency standard; (2) the 
prospects for creation of unintended financial incentives potentially 
steering where care is delivered; and (3) HCFA's economic objective of 
avoiding payment of the facility fee to those hospitals and ASCs that 
meet Medicare certification requirements. Her response, and ACG's 
comments on her response, are summarized in the addendum.
    A recent GAO report to the Senate Special Committee on Aging 
underscored that the colorectal cancer screening benefit has not been 
utilized very widely by Medicare beneficiaries--numbers were in the 
range of 1% uptake in 1998. While there are many reasons for this, the 
reimbursement inequities of the inappropriate site-of-service 
treatment, despite less than 10% office volume level must be considered 
as a contributing factor.
    Certainly, there is little logic in creating a national priority 
for colorectal cancer screening and then whittling the payment rates to 
such low levels as to make them a losing proposition for physicians. 
So, in the narrow fix to this site of service problem, Congress also 
would be making an important investment in favor of colorectal cancer 
screening.
    It is essential to recognize the proposed section 204(v) provision 
is not directed to resolving concerns about the larger site-of-service 
differential issue. It addresses solely an antecedent problem, the much 
smaller subset of services where the volume of services performed in 
the office setting have never reached the 10% threshold. This issue 
needs to be resolved distinctly from, and in advance of, any effort 
that may evolve to address broader concerns about the site of service 
differential.
    While we do not seek to address or solve the broader site-of-
service differential issue, we strongly oppose the solution to that 
issue which has been proposed by the Medicare Payment Advisory 
Commission (MEDPAC), which will only compound the problem, and further 
strip reimbursement rates.
    We ask that the Committee favorably consider incorporating this 
proposed legislative fix for this narrow problem by articulating the 
10% threshold, and requiring HCFA to revert to a single fee structure--
the fee currently being paid only for services provided in the office 
to be set at either the 2000 office fee, or the 2001 office fee, 
whichever is higher, as to a limited number of specific services where 
office volume falls well below the 10%.
Reversing Overall Cuts in Payments to Physicians
    The BBA made a number of significant changes in the way physicians 
were paid under Medicare fee-for-service. This included replacing the 
volume performance standard with the sustainable growth rate system 
(SGR) and phasing-in a new method of calculating practice expenses for 
physicians. 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.
    However, HCFA's original method of estimating the SGR was flawed 
and resulted in a $3 billion shortfall in payments to physicians during 
1998 and 1999. This financial burden has strained physicians' ability 
to adequately serve Medicare beneficiaries, and led to a joint lawsuit 
against HCFA by ACPASIM and 16 other medical organizations, which is 
still pending. Fortunately, the Balanced Budget Relief Act of 1998 
(BBRA) has corrected this technical flaw for the years 2000 and beyond.
    The BBA's new methods for establishing Medicare payment rates for 
physicians still present significant technical concerns for physician 
organizations, especially their potential for producing wide 
fluctuations in reimbursement rates from one year to the next. To 
ensure physicians are fairly compensated for their services, and in a 
manner that does not allow for precipitous fluctuations in income, 
MEDPAC, in its March 1999 Report to Congress, recommended the following 
SGR improvements:

 Revise the sustainable growth rate to include measures of 
        changes in the composition of Medicare fee-for-service 
        enrollment.
 Revise the sustainable growth rate 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.
 Amend a provision of the Balanced Budget Act of 1997 to 
        require the Secretary to publish an estimate of conversion 
        factor updates by March 31 of the year before their 
        implementation.
 Reduce time lags between sustainable growth rate measurement 
        periods by allowing calculation of the sustainable growth rate 
        and update adjustment factors on a calendar year basis.
 Require the Secretary to correct estimates used in sustainable 
        growth rate system calculations every year.
    The BBRA did produce some significant refinements to the SGR, 
primarily limiting oscillations in the annual update to the conversion 
factor, and requiring that the SGR be calculated on a calendar year 
basis. The BBRA did fail, however, to reinstate the $3 billion 
shortfall in 1998 and 1999 physician payments, and to ``increase the 
SGR to account for rising physician costs due to technological advances 
and an aging population,'' as noted in the November 22/29, 1999 issue 
of American Medical News.
    Though the SGR will be 5.8% for 2000, according to the April 24, 
2000 issue of American Medical News, the preliminary SGR estimate for 
2001 of 2.8% is considered ``too low'' according to the MedPAC, in its 
June 2000 Report to Congress. The MedPAC report explains that HCFA has 
underestimated the SGR by underestimating one of its key components, 
growth in traditional Medicare enrollment, by overestimating the number 
of beneficiaries who will join Medicare+Choice plans. This distortion 
of the SGR results in only a 1.8% net update to the Medicare 
physicians' conversion factor, meaning the pool of Medicare funds 
available to pay physicians in 2001 will be substantially less than in 
2000. This has led the MedPAC to recommend that, ``When preparing the 
final 2001 update to the physician fee schedule's conversion factor, 
the Secretary (of the Department of Health and Human Services) should 
review the data and methods used to project growth in enrollment in 
traditional Medicare and explain the methods used to project that 
growth.''
    In its March 2000 ``Report to the Congress: Medicare Payment 
Policy,'' the MedPAC shows that physicians display a serious erosion of 
their confidence in the ability of Medicare and managed care plans to 
pay them fairly for their services, as shown in survey findings:

 About 45% said that reimbursement levels for Medicare FFS 
        patients are a very serious problem, compared with 25% for 
        private FFS patients.
 A higher percentage of physicians--59%--reported that 
        reimbursement levels for FFS Medicaid patients are a very 
        serious problem.
 Physicians expressed the highest level of concern with the 
        reimbursement levels of health maintenance organizations and 
        other capitated plans--about 66% of the total surveyed.
    The underfunding of physician services is contributing to concerns 
that the medical community has about other Medicare payment issues. 
Although there are different views within the medical profession on 
specific Medicare reimbursement/payment policies, there is widespread 
agreement that Congress should address the underfunding of Medicare 
physician payments that was caused by the SGR and other budget cuts.
Cuts in Payments to Teaching Institutions
    The heart of the safety net are the nation's academic medical 
centers and large inner city hospitals. ACPASIM, in a October 1, 1999 
letter to the House of Representatives' Ways and Means Subcommittee on 
Health, was very vocal in expressing its concern about the BBA's impact 
on these vital institutions, seeking restoration and/or relief from BBA 
cuts--especially those related to indirect medical education and DSH 
payments. The letter noted that the cuts would be particularly harmful 
to teaching hospitals, which ``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.'' In the same letter, ACPASIM also 
warned Congress that ``The BBA cuts also jeopardize our nation's medial 
research enterprise . . . medical schools and teaching hospitals serve 
as the crucible for much of the nation's medical research . . . the 
Medicare BBA cuts undermine the ability of teaching hospitals to 
perform this vital mission.''
    The March 2000 MedPAC Report to Congress displayed great concern 
for the BBA's impact on access to hospital care, especially that 
obtained in public hospitals and academic medical centers: ``With the 
passage of the BBA, the Congress made several changes in hospital 
payments that have the potential to affect beneficiary access or reduce 
the quality of hospital care. These provisions included: no updates to 
inpatient operating payments for hospitals under the Medicare 
Prospective Payment System (PPS) in fiscal year 1998 and limited 
updates from 1999 to 2002; phased reductions in the per-case 
adjustments for the indirect costs of medical education (IME); 
temporary reductions for hospitals serving a disproportionate share 
(DSH) of low income patients; and a new transfer policy for 10 high 
volume diagnosis related groups (DRGs) that reduces payment rates when 
hospitals discharge patients in these DRGs to post-acute care 
facilities following unusually short stays.''
    A November 1999 study by the Commonwealth Fund showed just how 
vital Medicare and Medicaid DSH payments are to the survival of safety 
net hospitals: In 1996, the year before the BBA was passed, ``costs for 
uncompensated care at a sample of urban, safety net hospitals totaled 
$4 billion and represented 26 percent of total costs. These costs were 
financed through state and local government subsidies (59 percent), 
Medicaid DSH payments (29 percent), Medicare DSH payments (9 percent), 
and cost-shifting from privately insured patients (3 percent) . . . In 
1996, without DSH payments, these hospitals would have experienced an 
alarming negative 7 percent margin . . . BBA cuts in DSH payments will 
reduce by half the surpluses derived from Medicare and Medicaid 
payments (without accounting for the impact of any other BBA 
reductions). Coupled with declining local government appropriations and 
market forces that include managed care and an eroding Medicaid patient 
base, these cuts will severely undermine the ability of these hospitals 
to remain financially viable.''
    The most thorough analysis of the combined impact of the BBA and 
BBRA on academic medical centers is offered by the American Association 
of Medical Colleges, which concluded in its April 21, 2000 Issue Brief: 
``America's Teaching Hospitals Still Hurt from the BBA.'' The brief is 
quite critical of the BBA cuts, indicating that ``the BBA's significant 
Medicare and Medicaid payment reductions--along with a highly 
competitive marketplace that is reducing private payer reimbursements 
to teaching hospitals--will undermine the ability of teaching hospitals 
to support their education, patient care and research missions.'' The 
specific BBA cuts include $17 billion in reduced inflation updates for 
Medicare patient service payments and $10 billion in Medicaid DSH 
payment reductions from 1998 to 2002. Also, teaching hospitals' 
additional payment from Medicare for indirect medical education costs 
was being reduced from 7.7 percent in 1997 down to 5.5 percent in 2001, 
a $5.6 billion reduction.
    The AAMC Issue Brief also notes that the BBRA restored only about 6 
percent of the BBA cuts to teaching hospitals, giving back about $7 
billion of the BBA's reductions. This includes a one year delay in the 
schedule of reducing the IME to 5.5 percent, with the IME reduction 
``still representing the second largest inpatient payment cut for 
teaching hospitals after the reduction in inflation updates to patient 
service updates.'' Even with enactment of the BBRA, ``total hospital 
profit margins will continue to decline by over half from 4 percent in 
1998 to 1.6 percent in 2002.''
    AAMC President Jordan J. Cohen, M.D. called IME payments 
``absolutely critical for teaching hospitals to be able to 
appropriately care for the sickest patients, provide an environment in 
which clinical research can flourish, and train new physicians.'' These 
points are underscored by the following AAMC statistics: Though U.S. 
teaching hospitals represent 6% of all hospitals, that is where 44% of 
all indigent care in the country is provided (10), and where 75% of all 
residents are trained and a vast majority of the clinical research is 
performed.''
    The central, indispensable role academic medical centers play in 
medical research and serving the indigent is also the theme of a May 
10, 2000 article in the Journal of the American Medical Association 
entitled ``The Perilous State of Academic Medicine.'' The article warns 
. . . ``academic medicine is in serious danger . . . Without prompt 
action, the results could be devastating . . . The vitality of teaching 
hospitals and medical schools should be a primary concern of the 
president and congressional leadership . . . Reversals should be made 
of the BBA cuts for hospitals.''

                               CONCLUSION

    The ACG and ACP-ASIM recognize that at the time Congress enacted 
the BBA 97, it was doing so in an effort to control large federal 
budget deficits and restore solvency to the Medicare program. It has 
become apparent, however, that some of the cuts--particularly those 
relating to physician services and teaching institutions--went too far, 
and that access and quality are being placed at risk as a result. Now 
that the federal government is enjoying a large federal budget surplus, 
it is time for Congress to re-examine the BBA 97 cuts and related HCFA 
policies, including the site of service differential for endoscopic 
procedures performed less than 10 percent of the time in the hospital. 
Our organizations are committed to working with the Congress to restore 
adequate financing for all parts of the Medicare program and to correct 
HCFA policies that may endanger quality and access to care for millions 
of beneficiaries.

[GRAPHIC] [TIFF OMITTED] T5915.001

     ADDENDUM TO ACG TESTIMONY ON SITE OF SERVICE POLICYON CERTAIN 
                         ENDOSCOPIC PROCEDURES
   EXCERPTS FROM HHS' SECRETARY'S LETTER TO HOUSE MEMBER ON SITE-OF-
                                SERVICE

States 10% Not the Formal Standard, but No Standard Articulated
    ``Your letter states that HCFA has a national policy exempting 
procedures performed less frequently than 10 percent of the time in a 
particular setting from having a site-of-service payment differential 
for that setting. There is no such Medicare payment policy. Rather, in 
view of the volume of codes for which we had to develop resource-based 
practice expense RVUs, we did not generally ask our expert clinical 
panels to review practice expense inputs for services in a particular 
setting if our data showed the services were infrequently performed in 
that setting. Ten percent was used as a general guideline for 
establishing priorities for expert panel review. However, for services 
such as diagnostic colonoscopies, which while performed only about 5 
percent of the time in an office setting still represent over 40,000 
allowed services in the office, we believe it is consistent with the 
statute to establish a payment amount that reflects the resources 
utilized in the office.''

Site-Of-Service Policy May Implicitly Create Incentives, Even if 
        Unintended
    ``The relative values in our November 2, 1999, final rule are 
intended to reflect relative resource-cost differences that physicians 
incur for services they provide in different settings as required by 
law. These relative values are not intended to provide an incentive to 
furnish a service in a particular setting over another setting.''

HCFA Has Desire to Spare the Facility Fee Paid to Medicare-Certified 
        Facilities
    ``However, the total Medicare payment--physician professional fee 
and facility fee combined--is substantially higher when these 
procedures are performed in an ASC or in a hospital than when performed 
in a physician's office. For example, when the new practice expense 
RVUs are fully effective in 2002, physician payment will be about $160 
higher for a colonoscopy performed in an office than in an ASC. 
However, this is more than offset by the ASC facility fee payment of 
about $400, which is paid in addition to the physician fee.''

Patient Quality of Care Issues
    ``I assure you we are concerned about quality of care and patient 
safety. We are not aware of any studies showing adverse outcomes from 
endoscopies performed in the office setting. HCFA staff met with 
representatives of national physician gastroenterological organizations 
on this matter. We informed them that we would be happy to examine any 
data they might have concerning adverse outcomes from endoscopies 
performed in the office setting. To date, no such data has been 
provided.''

             AMERICAN COLLEGE OF GASTROENTEROLOGY COMMENTS

    We agree that the application of the site-of-service policy to 
services with volume under 10% in the office is, and always has been, 
improper. In this regard, there are several ethical considerations and 
principles which the ACG believes must underlie any resolution of this 
issue.
    1. Any steering of patients, or decisions on how or where patients 
are treated that is based on economics rather than what is best for the 
patient, is wrong.
    2. There are certain services which are not appropriate or safe to 
be performed in the office setting. There must be an objective standard 
to identify those procedures, rather than permitting HCFA to apply a 
purely subjective standard. We believe that the best objective standard 
is the percentage of services performed in the office, before HCFA 
considered utilizing different office-based and facility fees. A 10% 
threshold, i.e. where at least 10% of cases are being done in the 
office before a bifurcated fee would be considered, is probably as low 
as you reasonably could go with any vestige of safety. It also is 
essential to recognize the implication of certificate of need issues; 
there are many facilities which would qualify for Medicare-certified 
ASC status (and would merit a Medicare Part A facility fee), except for 
the state-level CON limitations--At present the profile of volume of 
services provided in the office includes all of these cases, despite 
the fact that these facilities often meet standards identical to the 
ASC. This tends to skew upward the number of services which appear to 
be rendered in a pure ``office'' setting. A 20% threshold would be 
wiser than 10%, but there is already some precedent from HCFA at the 
10% threshold. If a service was not already being performed at least 
10% of the time in the office before HCFA sought to institute the site-
of-service policy, that service should never have been considered for a 
bifurcated fee.
    3. The Medicare program must have a standard. HCFA initially 
referenced a 10% standard, but did not observe that standard in 
practice. At this point, either there is a 10% standard, and HCFA has 
violated it, or there is no objective standard whatsoever. An objective 
standard is required, not a subjective target that is very prone to 
inconsistent, or even arbitrary, application.
    The services with fewer than 10% office volume through 1996 (the 
last year before HCFA mandated its policy), have been compensated at 
inappropriate levels due to application of HCFA's site of service 
differential over the course of three years' fee schedules. To remedy 
this problem, the ACG's legislative proposal would establish payments 
for these procedures at the CY 2000 or 2001 levels, whichever is 
greater. GI procedures have seen fee reductions of over 65% since 1987, 
with still further reductions slated in 2000-02. At this point, these 
services are significantly undercompensated (See Annals of Internal 
Medicine 1999; 130-525-530, an article on ``Barriers to Office-Based 
Screening Sigmoidoscopy: Does Reimbursement Cover Costs?'' by James 
Lewis, MD and David Asch, MD), so any remedy to the site of service 
problem must be linked to establishing an adequate level of 
compensation.

    Mr. Bilirakis. Max and the rest of you, I guess we really 
ought to run and cast this vote. It is only one vote, so 
hopefully Mr. Brown and I can get right back and we can 
continue. Again, forgive us, but we will recess for a few 
minutes.
    [Brief recess.]
    Mr. Bilirakis. We will get right back into it, and again, 
our apologies.
    Max, please proceed, sir.

                    STATEMENT OF MAX RICHTMAN

    Mr. Richtman. Mr. Chairman, Ranking Member Brown, good 
afternoon. On behalf of the millions of members and supporters 
of the National Committee to Preserve Social Security and 
Medicare, I would like to thank you for the opportunity to 
discuss how we can strengthen the Medicare program for 
beneficiaries as well as providers.
    One of the most pressing issues facing Medicare 
beneficiaries today is the lack of affordable prescription drug 
coverage. The National Committee strongly supports the creation 
of a universal, voluntary, and affordable prescription drug 
benefit as part of the Medicare program.
    Second, Congress should expand Medicare to cover new 
preventive services based on the expert recommendations of the 
U.S. Preventive Services Task Force. Adding to the list of 
preventive services covered by Medicare will improve life 
expectancy, decrease disability, and enhance Medicare's 
financial stability. Waiving the coinsurance and deductible for 
all Medicare preventive services would encourage greater 
utilization.
    The National Committee, therefore, supports H.R. 3887, the 
Medicare Wellness Act of 2000. This bipartisan bill expands 
Medicare to cover screening and counseling for some of the most 
common conditions among seniors, including hypertension, 
glaucoma, osteoporosis, and high cholesterol. This legislation 
offers a cost-effective approach to disease management and 
injury prevention that also looks back at some of the lessons 
learned from the BBA.
    Third, the National Committee is concerned about the 
growing out-of-pocket costs that seniors must absorb. The 
average Medicare beneficiary spends nearly 20 percent of his or 
her income on health care expenses. Along with services not 
covered by Medicare, there are significant cost-sharing 
obligations, including a 20 percent coinsurance for hospital 
outpatient services. The creation of a prospective payment 
system for hospital outpatient services in the BBA addressed 
this issue by limiting beneficiary copayments to 20 percent of 
the Medicare allowable charge. To reduce the fiscal impact of 
these provisions, however, the Congress mandated a phase-in 
period of 40 years. We believe that Congress should reduce the 
phase-in period for Part B copayment to 10 years.
    Fourth, we support legislation to increase access to adult 
day care, which allows seniors to be in a community-based 
setting that promotes rehabilitation by providing social 
interaction, meals, and therapeutic services. Unfortunately, 
existing Medicare regulations require that seniors be homebound 
to receive home health care. This means that attending a 
privately funded adult day care program for medical treatment 
could result in a loss of eligibility for Medicare home health 
care. There are several bills that allow beneficiaries to use 
adult day care without losing their eligibility for home health 
care, including H.R. 4028, sponsored by Representatives Chris 
Smith and Ed Markey, and H.R. 745, sponsored by Representative 
Pete Stark.
    Finally, we are concerned about the growing problem of 
patient neglect at nursing homes. Studies and testimony show 
that increased staffing provides improved care. Yet many 
nursing homes fail to provide adequate staffing. Patient 
advocates fear that the problem of inadequate staffing may grow 
worse under the PPS, which has no safeguards to ensure that 
facilities provide the amount of nursing services that they are 
supposed to. We are concerned that nursing homes may be 
dangerous places for seniors and that taxpayers may not be 
getting their money's worth when it comes to nursing home care.
    To address this serious concern, we urge this subcommittee 
to include in any BBA revision the provisions of H.R. 4614, the 
Nurse Staff Accountability and Training Improvement Act of 
2000. This bill requires nursing facilities to report the 
aggregate amount of nursing hours provided and allows the 
Secretary to make a proportional reduction in future payments 
to a facility if it falls short. The legislation would also 
require nursing facilities reimbursed by Medicare and Medicaid 
to post the current number and ratio of licensed and unlicensed 
nurse staffing positions responsible for patient care.
    I would like to thank the chairman and the ranking member 
for asking for our views on these important issues and we would 
be pleased to assist the subcommittee with any additional 
information it may need to act on these recommendations, and 
Mr. Chairman, I still have 5 minutes, it seems.
    Mr. Bilirakis. You were not supposed to notice that.
    Mr. Richtman. Thank you very much.
    Mr. Bilirakis. Thank you.
    [The prepared statement of Max Richtman follows:]

Prepared Statement of Max Richtman, Executive Vice President, National 
           Committee to Preserve Social Security and Medicare

    Good morning. I am Max Richtman, Executive Vice President of the 
National Committee to Preserve Social Security and Medicare, a 
grassroots education and advocacy organization with millions of members 
and supporters around the country. Mr. Chairman, ranking member, thank 
you for this opportunity to share our views with the Subcommittee.
    With an expected non-Social Security budget surplus of $1.9 
trillion over the next ten years, this Congress has an historic 
opportunity to assist beneficiaries by expanding the current benefit 
package and reducing some of the cost-sharing features of the program.
    One of the most pressing issues facing seniors today is the lack of 
affordable prescription drug coverage. Prescription drugs have become 
as important today as hospital coverage was in 1965 when Medicare was 
created. So long as prescription drugs are available to some, but not 
all seniors, there will be a substantial barrier to necessary care for 
seniors. The National Committee strongly supports the creation of a 
universal, voluntary and affordable prescription drug benefit as part 
of the Medicare program
    Second, Congress should expand Medicare to cover new preventive 
services, based on the expert recommendations of the U.S. Preventive 
Services Task Force. New developments in science have shown that a 
decline in health status is not an inevitable part of the aging 
process. A healthier lifestyle, even one adopted later in life, can 
increase active life expectancy and decrease disability.
    Adding to the list of preventive services covered by Medicare would 
improve the quality of life for seniors and enhance Medicare's 
financial stability. Waiving the coinsurance and deductible for all 
Medicare preventive services would encourage greater utilization.
    The National Committee supports H.R. 3887, the Medicare Wellness 
Act of 2000. This bipartisan bill requires Medicare to pay for eight 
new services, including some of the most common conditions among 
seniors hypertension; glaucoma; vision and hearing loss; osteoporosis; 
and high cholesterol. The legislation offers a cost-effective approach 
to disease management and injury prevention that also looks back at 
some of the lessons learned from the BBA and addresses the 
underutilization of preventive services.
    The National Committee believes that changes in Medicare financing 
and benefits should protect all beneficiaries from burdensome out-of-
pocket costs. The average Medicare beneficiary spends nearly 20 percent 
of his or her income on out-of-pocket for health care expenses, 
excluding the costs of long-term care. In addition to items and 
services not covered by Medicare, beneficiaries have significant 
Medicare cost-sharing obligations, including 20 percent coinsurance for 
most Part B services and a substantially higher coinsurance for 
hospital outpatient services.
    This was partially addressed in the BBA. In creating the 
Prospective Payment System for hospital outpatient services, Congress 
limited beneficiary copayments to 20 percent of what Medicare would pay 
for the services in another setting. To reduce the cost of the PPS, 
however, Congress agreed to a lengthy phase-in period. For some 
services, the phase-in is forty years. We urge Congress to shorten that 
phase-in to a ten year period for the Part B deductible. It is our 
understanding that this would cost approximately $3-4 billion.
    Fourth, we support passage of legislation that would amend the 
definition of ``home bound'' so that Medicare beneficiaries can receive 
home health benefits and still attend adult day care programs. Home 
health services are essential for enabling Alzheimer's patients and 
other cognitively impaired adults who at great risk for 
institutionalized care to stay in their own homes.
    Unfortunately, existing Medicare regulations require beneficiaries 
to be homebound to receive such services. Attending a privately funded 
adult day care program for medical treatment can result in a loss of 
eligibility for home health care and more costly institutionalization 
of beneficiary. This legislation ends that threat and allows 
beneficiaries to receive home health care in a setting that promotes 
rehabilitation by providing social interaction, meals and therapeutic 
services beyond what is required by the home health. This legislation 
is a winner, for Medicare and for the beneficiary because it allows 
seniors to stay in a less costly and less restrictive setting.
    There are several bills that accomplish these needed reforms in 
home health care. Reps. Chris Smith (R-NJ) and Edward Markey (D-MA) 
have introduced H.R. 4028 that would lessen the definition of ``home 
bound'' for patients with Alzheimer's Disease, while H.R. 745 sponsored 
by Rep. Pete Stark (D-CA) would allow Medicare beneficiaries and their 
families to choose adult day care centers as alternative settings for 
the provision of home health care.
    Fourth, we are concerned about the growing problem of patient abuse 
and neglect in nursing homes. Most nursing home residents have impaired 
physical or mental function. Many are vulnerable to malnutrition, 
dehydration, injury, infection and other complications and therefore 
need competent professional care and observation. Studies and expert 
testimony show that increased staffing improves care. Yet, many nursing 
homes fail to provide adequate staffing.
    Patient advocates fear that the problem of inadequate staffing may 
grow worse with the implementation of the Medicare of a Prospective 
Payment System (PPS) for nursing facilities. The PPS provides homes 
with a capitated payment based on the average cost of caring for 
someone with a particular diagnosis. In the aggregate, the 
reimbursement a home receives may be adequate, but for the individual 
ward, there will be an incentive to reduce staffing levels and save 
money where possible. There are no safeguards to ensure that facilities 
provide the amount of nursing services that are attributed to the 
payment category for which they are reimbursed. We are concerned that 
taxpayers may not be getting their money's worth when it comes to 
nursing home care.
    We urge this committee to include in any BBA revision the 
provisions of H.R. 4614, the Nurse Staff Accountability and Training 
Improvement Act of 2000. This bill requires that Medicare-reimbursed 
skilled nursing facilities report the aggregate amount of nursing 
staffing hours provided for the care of nursing home residents every 32 
days or in a time period corresponding to the facility's regular 
billing cycle, whichever is less. In cases where the Secretary 
determines that staffing is inadequate, he or she shall have the 
authority to make a proportional reduction in future payments to the 
facility.
    This legislation would also provide the public with more 
information on staffing at nursing facilities. The legislation would 
require nursing facilities reimbursed by Medicare and Medicaid to post 
the current number and ratio of licensed and unlicensed nursing staff 
responsible for patient care. This information must be displayed in a 
uniform manner and in a place that is clearly visible to the public. 
Nursing facilities must also report average daily staffing ratios for 
the last cost reporting period in a place that is clearly visible to 
the public. The bill also requires the Secretary to disclose facility 
specific nurse staffing information on the Internet.
    I want thank the Chairman and the ranking member for soliciting our 
testimony. We stand ready to assist the Subcommittee with any 
additional information it may need to act on our recommendations.

    Mr. Bilirakis. Ms. Hancock?

                   STATEMENT OF JULIET HANCOCK

    Ms. Hancock. Good afternoon, Chairman Bilirakis and members 
of the committee. I appreciate the opportunity to address you 
today to discuss the Balanced Budget Act of 1997 and its 
current impact on providers, patients, and the Medicare 
program.
    My name is Julie Hancock and I am a program consultant for 
the RehabCare Group. I currently provide clinical oversight and 
therapist training in over 80 rehab programs in the nursing 
home setting across the country. I am here today on behalf of 
the National Association for the Support of Long Term Care, 
which is a trade association which represents over 150 
companies that provide products and supplies to skilled nursing 
home and home health care patients. I am also a member of the 
American Physical Therapy Association. I am a PT by background.
    We appreciate the opportunity to participate in today's 
hearing. We recognized that the Balanced Budget Act was passed 
with the goal of slowing the rate of growth in Medicare. 
However, there have been some unintended consequences. We are 
asking for your relief in three specific areas.
    First of all, the $1,500 cap on therapy services under Part 
B should be delayed for an additional 3 years.
    Second, the consolidated billing requirement that nursing 
homes bill for Part B services should, at a minimum, be delayed 
or repealed until further studies are conducted to understand 
the impact on the beneficiaries.
    Third, a separate transportation fee for portable EKG and 
ultrasound services should be established so that these 
services can be provided for nursing home residents onsite.
    First of all, on behalf of my sick and frail elderly 
patients that I see all over the country, thank you, Mr. 
Chairman and your colleagues, for providing a 2-year delay of 
the arbitrary $1,500 caps. These financial limitations cut back 
on benefits for seniors and harm those most in need of these 
services. The oldest and sickest patients were the most 
affected. Congress enacted a 2-year moratorium. This moratorium 
is due to expire at the end of next year.
    Mr. Chairman, I have attached to the handout a letter 
signed by 11 organizations urging your support for an 
additional 3-year extension, a 3-year extension to the 
moratorium on therapy caps which we believe will provide HCFA, 
Congress, and the providers necessary time to work 
cooperatively with consumers to effectively find some 
alternatives.
    The second issue is consolidated billing. This is a 
requirement that nursing facilities bill for all Part B 
services. NASL asks Congress to repeal or, at a minimum, delay 
this requirement. There are many rules that were passed by 
Congress to ensure the integrity of the program, but the 
nursing facilities do not have billing professionals who can 
manage these billing requirements. They are struggling now.
    Nursing facilities have improved accountability. HCFA can 
implement changes to eliminate errors and duplicate billing. 
Program integrity requirements enacted by Congress on rules for 
durable medical equipment products and supplies have reduced 
the ordering of unnecessary services. And even the Inspector 
General in a report has acknowledged DMERC success in 
addressing and correcting billing problems.
    We are concerned that consolidated billing requirements 
will cost nursing facilities money. Nursing homes will have to 
increase their accounting and billing staff to handle patient 
bills, certificates of medical necessity, and other 
requirements for appropriate billing. Given the limited 
resources of nursing homes today, coupled with the new PPS 
rules for Part A services just about to be implemented in 
October, consolidated billing for Part B will limit the 
resources available for patient care. It will hurt the 
patients. It is too much, too soon.
    The third point I want to discuss is Part B payment to 
ancillary providers who provide services to patients in nursing 
facilities. The benefit of bringing these services to the 
patients are twofold. The first, it avoids the cost of 
ambulance transport to the hospital. And second and most 
importantly, it eliminates the health risks of putting the 
frail elderly patients in ambulances.
    We believe that a transportation fee needs to be added to 
the basic fee. The OIG has estimated that over $100 million is 
spent each year on unnecessary ambulance trips due in large 
part to transporting SNF patients to diagnostic testing sites. 
Since HCFA lacks the statutory authority to pay a separate fee 
for transporting EKG and ultrasound equipment to the patient's 
bedside, we ask Congress to allow a separate fee for 
transportation.
    In summary, the $1,500 cap on therapy services should be 
delayed for an additional 3 years. The consolidated billing 
requirement that nursing homes bill for Part B services should 
be delayed or repealed. And third, a separate transportation 
fee for portable EKG and ultrasound services should be 
established so that these services can be provided for nursing 
home residents onsite.
    Mr. Chairman, this concludes my testimony. I will be glad 
to answer any questions or provide additional information. 
Thank you.
    [The prepared statement of Juliet Hancock follows:]

  Prepared Statement of Juliet Hancock, Program Consultant, RehabCare 
                              Group, Inc.

    Good morning Chairman Bilirakis and Members of the Committee. I 
appreciate the opportunity to address you today to discuss the Balanced 
Budget Act of 1997 (BBA) and its current impact on providers, patients, 
and the Medicare program.
    My name is Julie Hancock, and I am Program Consultant to RehabCare 
Group, Inc. I currently provide clinical oversight and therapist 
training in over eighty rehabilitation programs in the nursing home 
setting. Rehabilitation includes physical therapy, occupational 
therapy, and speech-language pathology services. I am here today on 
behalf of the National Association for the Support of Long Term Care 
(NASL), a trade association representing over 150 companies involved in 
the provision of ancillary services, products and supplies to skilled 
nursing home and home health care patients. I am also a member of the 
American Physical Therapy Association (APTA).
    We appreciate the opportunity to participate in today's hearing and 
your Committee's continuing efforts to monitor the impact of the 
comprehensive provisions of the BBA--particularly the impact on 
Medicare beneficiaries.
    We recognize that the BBA was passed with goals of slowing the rate 
of growth. However, there have been some unintended consequences. We 
are asking for your relief in three areas:

 First, the $1,500 cap on therapy services under Part B should 
        be delayed for an additional three years.
 Second, the requirement that nursing homes bill for Part B 
        services should at a minimum be delayed, or outright repealed, 
        until further studies are conducted to better assess its impact 
        on beneficiaries.
 Third, a separate transportation fee for portable EKG and 
        ultrasound services should be established so that these 
        services can be provided for nursing home residents on site.
    We will provide you some sound solutions to help ensure that 
Medicare beneficiaries continue to have access to quality services, and 
that program integrity is maintained. Last year, under your leadership, 
some modifications were made to these programs. Again, we are seeking 
your assistance.
Outpatient Therapy Caps
    First, on behalf of the sick and frail elderly patients I work with 
on a daily basis, thank you, Mr. Chairman and your colleagues, for 
providing a two-year delay in implementing the arbitrary $1,500 therapy 
caps imposed by the Balanced Budget Act. These financial limitations, 
intended as a cost savings measure, cut back on benefits for seniors 
and harmed those most in need of services. In recognition of the 
negative impact these caps had on the most vulnerable patients, 
Congress enacted a two-year moratorium in the Balanced Budget 
Refinement Act of 1999 (BBRA) effectively suspending the therapy caps 
for the years 2000 and 2001. This moratorium is due to expire at the 
end of next year.
    The BBRA provision also requires the Secretary of Health and Human 
Services to recommend to Congress, by January 1, 2001, a revised policy 
on payment for therapy services. Rather than using arbitrary dollar 
caps, this alternative payment methodology is to be based on the 
classification of patients by diagnostic category and use of services.
    Mr. Chairman, we have with us today a letter signed by eleven 
organizations respectfully urging your strong support for an additional 
three-year extension of the moratorium. It is our understanding that 
the Health Care Financing Administration (HCFA) is making every attempt 
to meet the statutory deadline to make recommendations. While we have 
met with HCFA and intend to provide them data, therapy services vary by 
patient. It is important to recognize that this is the first year that 
all Part B therapy services are under a fee schedule without the 
arbitrary therapy caps. Since the most current data available from HCFA 
is from 1998, we believe that an additional three-year moratorium is 
necessary to ensure that proper time and consideration is given to the 
establishment of a new payment methodology for Part B physical therapy, 
occupational therapy, and speech-language pathology services under the 
Medicare program. These provisions affect patients receiving services 
in nursing homes, outpatient clinics, comprehensive outpatient 
rehabilitation facilities (CORFs), and by independent practitioners.
    In addition, we believe that the types of savings sought under the 
BBA may have already been realized by the shift in 1998 from a cost 
based reimbursement system for outpatient therapy services to one based 
on a fee schedule. Extending the moratorium through 2004 will help 
determine whether the rehabilitation therapy payments under the fee 
schedule have been successful in providing the requisite savings sought 
under the BBA. Finally, therapy professionals and HCFA will need this 
period of time to devise a new methodology to assess utilization of 
therapy services.
    We respectfully ask for your support of a three-year extension to 
the moratorium on therapy caps, which we believe will provide HCFA the 
necessary time to work cooperatively with consumers and providers of 
care to effectively address this critical area of the Medicare program.

Consolidated Billing
    The second issue that I wish to discuss with you this morning is 
the requirement that skilled nursing facilities bill for all Part B 
services. Under the previous law, nursing homes have accountability for 
all services provided to residents; however, they could contract with 
providers to offer and bill the services. NASL thinks it is very 
important for the Congress to take a second look at the requirement for 
billing by skilled nursing facilities (SNFs) for Medicare Part B 
products and services that are provided to skilled nursing facility 
residents. There are many services with varying requirements. Many 
nursing homes do not know these rules--many of which were passed by 
Congress to ensure the integrity of the program--or have billing 
professionals who can manage these billing requirements. We recommend 
that you repeal or delay this requirement in order to conduct a study 
of the optimal degree of oversight necessary in order to ensure 
patients are receiving covered services that are medically necessary.
    Administrative action on this has improved accountability. For 
example, it is our understanding that HCFA has just begun implementing 
a number of internal standards that will eliminate errors and/or 
duplicate billing. Also, program integrity requirements enacted by 
Congress on rules governing durable medical equipment (DME) products 
and supplies have reduced unnecessary billing that has been perceived 
in ordering Part B products. Even the Inspector General has 
acknowledged DMERC success in addressing and correcting billing 
problems.
    However, our most serious objection to consolidated billing is the 
unreimbursed costs for the SNFs in implementing this requirement. 
Nursing homes will have to increase their staffs for accountants, 
bookkeepers, software, and financial systems in order to fully 
implement an accounting system that deals with patient records, 
certificates of medical necessity and other requirements for 
appropriate billing. Given the limited resources of nursing homes 
today, this new obligation will limit the resources available for 
patient care.
    Finally, skilled nursing facilities have had major challenges 
simply implementing the basic BBA requirements due to HCFA's 
inconsistent implementation of the new SNF payment system. This is 
compounded by a lack of intermediary preparedness. Additionally, on 
October 1, 2000 skilled nursing facilities must manage a five-fold 
increase in the number of patient classification categories for SNF 
patient care reimbursement. Almost simultaneously, the consolidated 
billing requirement is scheduled to go into effect on January 1, 2001--
this is simply too much, too soon! Accordingly, it is our 
recommendation that MedPAC conduct a thorough analysis of the 
appropriate level of accountability and oversight which should be 
required of SNFs for the products and services that they purchase under 
Medicare Part B for beneficiaries. We need much more precision in the 
type of standards and accountability to assure patient quality care and 
access to services. Simply stated, implementation of the consolidated 
billing requirements will hurt patient care.
    The following organizations concur with this position: The American 
Health Care Association (AHCA); The American Association of Homes and 
Services for the Aging (AAHSA); The Health Industry Distributors' 
Association (HIDA); and The National Alliance for Infusion Therapy 
(NAIT).

Transportation Fee for EKG and Ultrasound Services
    The third point that I want to discuss is Part B payment to 
ancillary providers who transport services to skilled nursing 
facilities so that medically necessary procedures can be conducted at 
the patient's bedside. The benefits of bringing the services to the 
patient are two-fold: it avoids the cost of ambulance transport to the 
hospital and, more importantly, it eliminates the health risk of 
transporting frail elderly patients whose condition could be 
compromised. The OIG has estimated that over $100 million is spent each 
year on unnecessary ambulance trips, due in large part to transporting 
SNF patients to diagnostic testing sites. Starting in 1996, Medicare 
began bundling the cost of the transport fee for the provision of 
portable EKG and ultrasound procedures. This has the effect of 
spreading the costs associated with one or two percent of the 
procedures over one hundred percent of the procedures. In other words, 
HCFA is paying ninety-eight percent of the providers for a service they 
are not providing. Since HCFA claims they lack the statutory authority 
to pay a separate fee for transporting EKG and ultrasound equipment to 
SNF bedsides, we are recommending that your Committee initiate 
legislation to allow for a separate fee for transportation. Since 
Medicare is already paying for the cost of transportation, this 
proposal is budget neutral. In fact, this proposal may actually save 
money since it eliminates unnecessary ambulance transportation, and 
will only pay the providers that actually incur the costs of 
transporting equipment and technicians.
    In summary:

 The $1,500 cap on therapy services under Part B should be 
        delayed for an additional three years.
 The requirement that nursing homes bill for Part B services 
        should at a minimum be delayed, or outright repealed, until 
        further studies are conducted to better assess its impact on 
        beneficiaries.
 A separate transportation fee for portable EKG and ultrasound 
        services should be established so that these services can be 
        provided for nursing home residents on site.
    Mr. Chairman, this concludes my testimony. I would be glad to 
answer any questions or provide additional information. Thank you.

    Mr. Bilirakis. Thank you very much, Ms. Hancock.
    Mr. Hawkins?

               STATEMENT OF DANIEL R. HAWKINS, JR.

    Mr. Hawkins. Thank you, Mr. Chairman. It is good to see you 
again. Mr. Chairman, Mr. Brown, and members of the 
subcommittee, on behalf of the National Association of 
Community Health Centers, the more than 1,000 federally 
qualified community migrant and homeless health centers 
nationwide and the 11 million people who rely on them for care, 
thank you for this opportunity to express our support for H.R. 
2341, the Safety Net Preservation Act, and to advocates for its 
inclusion in any BBA relief legislation considered by the 
Congress this year.
    Before I begin, let me express my sincere gratitude to you, 
Mr. Chairman, and to Mr. Brown for your support for increased 
funding for health centers to allow them to serve yet 
additional numbers of uninsured, and to Mr. Burr and his 
colleague Mr. Towns for their stalwart leadership and support 
in seeking to protect health centers from the devastating 
impact of the BBA.
    H.R. 2341, introduced by Mr. Burr and Mr. Towns and 
cosponsored by 24 of the 29 members of this subcommittee and 
224 of your House colleagues, is a common sense, fair, and 
long-term solution to the threat that a provision in the BBA 
poses to health centers and especially to the 4.5 million 
uninsured people that they serve.
    For 35 years, health centers have formed the backbone of 
America's preventive and primary health care safety net for 
millions of Americans who have difficulty accessing the 
traditional health care system. Under the jurisdiction of this 
subcommittee and as required under the Public Health Service 
Act, health centers are required to make their care available 
to everyone who walks through their doors, regardless of their 
health status, insurance coverage, or ability to pay. Because 
of this, health centers serve an overwhelmingly poor, 
uninsured, and medically underserved population.
    This patient mix makes health centers unique among all 
health care providers, but it also creates some unique problems 
for health centers. In particular because almost 40 percent of 
health center patients are on Medicaid, health centers are more 
vulnerable to Medicaid revenue losses than other providers. 
Because health centers do not have the option of withdrawing 
from Medicare or Medicaid, nor would they want to, if Medicaid 
payments do not at least cover the cost of serving Medicaid 
patients, health centers must cover those revenue losses from 
the only other major source of revenue they have, the Federal 
PHS Act grants they receive to cover the cost of caring for the 
uninsured.
    Some 10 years ago, this subcommittee recognized the threat 
and required health centers to be reimbursed on a reasonable 
cost basis by Medicaid agencies for the care they provide to 
Medicaid patients. Since that time, health centers have 
increased the capacity by over 4 million individuals 
nationally, including over 1.5 million people, or more than 50 
percent, who are uninsured, at a time when the nation's 
uninsured population grew by about half that rate, and despite 
the fact that the appropriated dollars for health centers 
remained stagnant over that period.
    However, in 1997, the BBA ordered the phase-out and 
eventual elimination of their Medicaid payment system. Under 
the BBA, the real losers will be the millions of uninsured 
families who today rely on health centers as their only source 
of locally available and affordable health care, people like 
the three families whose personal details are provided in 
attachments to my written testimony.
    While Congress eased the BBA's phase-out rates in last 
year's Balanced Budget Refinements Act, the BBRA necessarily, 
nevertheless, allowed the elimination of cost-based 
reimbursement to continue and did not establish a long-term 
solution. Under the current phase-out formula, health centers 
face an aggregate loss of $45 million this year alone, or 
equivalent to the cost of serving over 130,000 uninsured 
individuals. Based on our projections, in 2005 when the system 
is repealed, health centers Medicaid losses could cause nearly 
1.5 million uninsured people, one out of every three uninsured 
served by health centers today, to lose access to health center 
services. This would come at a time when the number of 
uninsured is growing by a million a year and studies are 
documenting that other providers of necessity are having to cut 
back on the charity care they provide.
    In order to avoid the devastating impact of this 
elimination of the payment system, a coalition of public 
officials, safety net providers, and health care advocates have 
endorsed the Safety Net Preservation Act to establish a minimum 
Medicaid payment floor with a prospective payment system for 
health centers and rural health clinics. This payment system is 
common sense and widely supported and will stave off the 
elimination of cost-based reimbursement. That is why a 
bipartisan majority in this body and in the Senate have 
cosponsored the bill.
    Some will argue there is no need for Congress to protect 
health centers from BBA cuts. I respectfully disagree with that 
statement. To date, only eight States have established a 
secure, long-term Medicaid payment system. We believe that 
Congress must safeguard the PHS Act dollars and establish a 
minimum Medicaid payment floor to protect those valuable 
resources and ensure access to care for the people who rely on 
them.
    That is why I am here to urge you, to plead with you on 
behalf of the Resnicks, the Owens, the Fernihoughs, and the 
millions of other Americans who rely on health centers today to 
include the common sense Safety Net Preservation Act's 
bipartisan and permanent payment system in any BBA relief 
legislation considered this year.
    Thank you, and I would be happy to answer any questions the 
committee may have.
    [The prepared statement of Daniel R. Hawkins, Jr. follows:]
 Prepared Statement of Daniel R. Hawkins, Jr., Vice President, Federal 
  and State Affairs, National Association of Community Health Centers
                              introduction
    Chairman Bilirakis, Representative Brown, and members of the 
Subcommittee: on behalf of the National Association of Community Health 
Centers and the over 1000 community, migrant, homeless, and public 
housing health centers nationwide, thank you for this opportunity to 
express our support for Balanced Budget Act (BBA) relief for health 
centers. Members of this Subcommittee have repeatedly reaffirmed their 
support for the crucial role that health centers have in providing a 
safety net to those who, for whatever reason, are unable to obtain 
health insurance but still need access to affordable primary and 
preventive health care services. Without question, this Subcommittee is 
comprised of members with the strongest commitment to the mission of 
health centers and a keen understanding of their need to remain viable 
sources of affordable health care services for everyone, regardless of 
their ability to pay for services.
    Let me begin by expressing my sincerest gratitude to Chairman 
Bilirakis, Representative Brown, Representative Burr, and 
Representative Towns for your leadership to ensure that the more than 
1000 health centers, which currently serve the 11 million people in 
over 3,000 communities across the country, remain viable as they 
struggle to meet the needs of medically underserved communities. 
Chairman Bilirakis and Representative Brown, thank you for leading the 
effort in the House to secure additional funding for health centers, 
allowing them to meet the ever-increasing needs of uninsured Americans 
that are relying on them for care. Representatives Burr and Towns, 
thank you for your leadership in introducing legislation to secure a 
permanent, fair, common-sense Medicaid payment system for health 
centers that will protect the grant funds invested by this Subcommittee 
in care for the uninsured. I hope that my testimony today will further 
strengthen the already strong support demonstrated by a significant 
majority of this Subcommittee, as well as of the full Commerce 
Committee, for BBA relief for health centers and provide a better 
understanding of the vital need to protect America's primary and 
preventive care safety net.

COMMUNITY HEALTH CENTERS: GUARANTEEING ACCESS TO AFFORDABLE HEALTH CARE 
                                SERVICES

    For thirty-five years, health centers, alongside public hospitals, 
public health departments and free clinics, have formed the backbone of 
America's health care safety net for millions of Americans who have 
difficulty accessing the traditional health care system. A simple 
examination of their patient population demonstrates the importance of 
health centers to those that rely on them for care. Of the 11 million 
health center patients:

--Every patient (a) lives in medically underserved rural, frontier, or 
        inner city community or (b) belongs to a medically underserved 
        population, including migrant farm workers, the homeless, and 
        those with linguistic or cultural barriers to care;
--40% lack health insurance coverage;
--34% rely on Medicaid for coverage; and
--85% are at or below 200% of the Federal poverty level (FPL).
    Under the jurisdiction of this Subcommittee and as required by the 
Public Health Service Act (PHSA), health centers are mandated to 
provide access to care for everyone that walks through our doors, 
regardless of their health status, insurance coverage, or ability to 
pay for services. Health centers proudly accept this responsibility in 
return for the investment made by the American taxpayers in the form of 
PHSA grants. However, this overwhelmingly poor, uninsured, and 
medically underserved patient mix creates unique difficulties for 
health centers that are not necessarily confronted by other health care 
providers.

Hurdles to Accessing Care
    Health center patients typically confront significant hurdles when 
accessing health care services, be they geographic, financial, 
linguistic, or cultural. Many of these patients have had a history of 
poor health and suffer from health and social problems that are seen 
much less frequently in insured, middle-class, or suburban populations. 
These problems include greater incidence of chronic disease, a poor 
history of health maintenance, and a significant lack of understanding 
of proper nutrition and health. Generally, health center patients have 
more health care problems and require greater chronic disease 
management and health education than the rest of the patient population 
in America.

Inability to Pay for Health Care Services
    Millions of health center patients have difficulty paying for 
health insurance or health care services. More than 1 of every 3 health 
center patients lacks the financial resources to pay for the full cost 
of the care provided to them or their families. To ensure access to 
care, health centers base their charges on a sliding fee scale that 
takes into account the financial resources of the patient. Patients 
with incomes over 200% of the FPL pay full price for services 
delivered. Everyone pays according to his or her means. In return for 
guaranteeing this access to care, Congress provides health centers with 
grants through the PHSA that help defray the costs of health care 
services provided to uninsured patients.

Underpayments by Public Programs Threaten Health Care Delivery to the 
        Uninsured
    Because of where they are located and whom they serve, 86% of 
health center patients are uninsured (40%) or covered by Medicaid 
(34%), Medicare (8%), or other public assistance (4%). As a result, 
health center patients do not have a payer mix that easily allows them 
to subsidize underpayments from public payers. In other words, if 
Medicaid is not reimbursing health centers for the cost of providing 
care to Medicaid patients, health centers are forced to look elsewhere 
to make up for the shortfall.
    The next portion of my testimony will examine in greater detail 
this crucial third issue and how Congress addressed these underpayments 
by public payers a decade ago.
    understanding the impact of low medicaid payments to safety net 
  providers: the history of reasonable cost payments to health centers

Threats to Care for the Uninsured
    Community health centers are not the only providers to feel the 
pressure of reduced payments by public and commercial payers. The rise 
of managed care in Medicare and Medicaid, and the reduced payment rates 
that follow, have forced all providers to reevaluate their 
participation in these programs. Indeed, we have just witnessed another 
massive withdrawal of managed care plans from the Medicare+Choice 
program, citing insufficient payments. In Tennessee, the State 
legislature recently passed a massive bailout subsidy for managed care 
organizations to keep them from completely withdrawing from the State's 
Medicaid managed care program, TennCare.
    I ask the members of the Subcommittee: if inadequate reimbursements 
are forcing insurance companies and managed care organizations to 
withdraw from Medicare and Medicaid managed care, what kind of strain 
must low payments be placing on not-for-profit community health 
centers?
    All health care providers must seek to cross-subsidize when 
payments from a third party source are insufficient. However, unlike 
most physician practices that have paid for indigent care services by 
cross-subsidies from their commercial payers, health centers do not 
have a substantial commercially insured patient base from which to draw 
(see Appendix 1). Evidence abounds that the traditional response of 
physicians and other providers to reduced Medicaid or Medicare payments 
has been to (1) reduce their levels of indigent care and/or (2) reduce 
services provided to publicly insured patients.
    Because of the shortage of commercial payments, health centers have 
three options if Medicaid, their largest third party payer, does not 
cover the cost of providing care to its beneficiaries. They can (1) 
reduce health care services or reduce the number of health care access 
points, (2) close their doors entirely, leaving whole communities with 
little or no access to primary health care services, or (3) cover 
Medicaid shortfalls with PHSA grants intended to defray the cost of 
caring for the uninsured.
    The Committee must understand that health centers do not have the 
option of withdrawing from Medicare or Medicaid--health centers are 
statutorily required to provide access to care to everyone who walks 
through their door. This makes health centers unique among all health 
care providers.

The Enactment of Medicaid Cost-Based Reimbursement for Health Centers
    If health centers are to fulfill their unique statutory role as 
core safety net providers, it is crucial that Congress recognizes and 
protects the PHSA-dictated mission of providing care to the uninsured. 
To do this, a ``budgetary firewall'' must be in place to protect the 
financial integrity of PHSA grants and ensure that Medicaid does not 
underpay health centers for services provided to Medicaid patients.
    Over ten years ago, this Subcommittee recognized the threat that 
low Medicaid payments pose to health centers' ability to care for 
uninsured patients, and included language in the Omnibus Budget 
Reconciliation Act of 1989 requiring Medicaid to reimburse health 
centers on a reasonable-cost basis for services provided to Medicaid 
beneficiaries. In its report on this provision, the Committee wrote . . .
          ``The Subcommittee on Health and the Environment heard 
        testimony that, on average, Medicaid payments to Federally-
        qualified health centers cover less than 70 percent of the 
        costs incurred by the centers in serving Medicaid patients. The 
        role of the programs funded under sections 329, 330, and 340 of 
        the PHS Act is to deliver comprehensive primary care services 
        to underserved populations or areas without regard to ability 
        to pay. To the extent that the Medicaid program is not covering 
        the cost of treating its own beneficiaries, it is compromising 
        the ability of the centers to meet the primary care needs of 
        those without any public or private coverage whatsoever.''. 
        House Report 101-247, September 20, 1989
    So in the ten years since its enactment, has cost-based 
reimbursement met its goal of ensuring ``that PHS grant funds are not 
used to subsidize health center or program services to Medicaid 
beneficiaries''?
    The answer to that question is an unequivocal, undeniable YES!!
    In the ten years since the enactment of cost-based reimbursement, 
health centers have been able to increase their capacity for uninsured 
care by 1.1 million people--more than 40%. And this increase occurred 
at a time when the appropriated dollars for the health center program 
were stagnant!
    In other words, Congress received a higher rate of return on its 
annual appropriations investment in health centers because Medicaid 
cost-based reimbursement was in place. Medicaid no longer underpaid for 
the care provided to Medicaid patients, and as a result, PHSA grants 
were able to be used for their intended purpose--care for the 
uninsured. One can only conclude that the phase-out and elimination of 
cost-based reimbursement under the BBA will again reduce the 
effectiveness of the PHSA grants, thereby reducing care for the 
uninsured at a time when their number and needs have never been 
greater. If this occurs, millions of families who use health centers--
like those from Indiana profiled in Appendix II--will lose their access 
to care.

The Balanced Budget Act of 1997 and the Elimination of Cost-Based 
        Reimbursement
    The BBA phased-out and ultimately eliminated the Medicaid 
reasonable cost reimbursement system for health centers and rural 
health clinics. We recognize the difficult choices that Congress had to 
make to balance the Federal budget in 1997. But we also believe that 
the elimination of Medicaid cost-based reimbursement did not take a 
holistic view of the interaction between Medicaid and other public 
health programs. Recognizing this, Congress provided some relief last 
year for health centers by slowing the BBA's phase-out rate. 
Unfortunately, the Balanced Budget Refinements Act (BBRA) did not 
establish a long-term payment system for health centers in the Medicaid 
program.
    Let me describe the BBA's phase-out methodology in this way. 
Imagine a grocery store buys a gallon of milk from their wholesaler for 
$4.00, but the law allows the purchaser to buy that same gallon of milk 
for $3.00. Does anyone believe that the purchaser won't buy the milk 
for $3.00? How long would that store sell milk? If they did decide to 
sell milk, how long would they stay in business?
    By eliminating the Medicaid cost-based reimbursement system and not 
replacing it with an alternative payment mechanism to protect the grant 
funds, the BBA threatens health centers' fundamental ability to 
continue to make health care affordable and accessible to millions of 
low-income, uninsured, and medically underserved Americans. Indeed, a 
recent report by the Institute of Medicine entitled, America's Safety 
Net: Intact but Endangered states . . .
          ``Failure to support these essential [safety net] providers 
        could have a devastating impact not only on the populations who 
        depend on them for care but also on other providers that rely 
        on the safety net to care for patients whom they are unable or 
        unwilling to serve . . .
          Over the years, Medicaid (and to a lesser extent Medicare) 
        has become the financial underpinning of the safety net. 
        Historically, Medicaid has provided the majority of insured 
        patients for most safety net providers and has subsidized a 
        substantial portion of care for the uninsured through such 
        programs as disproportionate share hospital (DSH) payments and 
        cost-based reimbursement for FQHCs [Federally qualified health 
        centers] . . .
          A major cause for concern is the [Institute of Medicine's] 
        committee's finding that Medicaid as well as other revenues and 
        subsidies that in the past have helped support care for the 
        uninsured and other vulnerable populations are becoming more 
        restricted at a time that the demand on the safety net is 
        rising.''
    In addition, in a special report issued in February 2000, the 
Kaiser Family Foundation's Commission on Medicaid and the Uninsured 
stated . . 
          ``Unless alternative support mechanisms [to the BBA's 
        elimination of cost-based reimbursement] are put in place, the 
        reductions and eventual loss of the FQHC payment system will 
        raise major issues for health centers. The FQHC system has 
        ensured that health centers can recover the reasonable cost of 
        covered services furnished to Medicaid patients . . .
          As a result, deep downward shifts in Medicaid financing have 
        significant implications for the ability of health centers to 
        sustain a level of care for the uninsured that they were able 
        to achieve over the last decade.''
    Despite the evidence, some remain skeptical that the BBA's phase-
out will have this dramatic impact on health centers. We respectfully 
disagree with that assessment. The best example of what happens when 
cost-based reimbursement is eliminated can be seen in those States that 
have already taken that step as part of a Section 1115 Medicaid waiver. 
In 1998, the certified public accounting firm of Goldstein, Golub, 
Kessler and Company (GGK) examined the impact of low-Medicaid payments 
on health centers in Tennessee under the TennCare program. In GGK's 
study they found that, while the number of TennCare visits to health 
centers increased, the gap between revenues and costs per TennCare 
visit widened, resulting in significant revenue losses for health 
centers.
    By 1996, Tennessee's health centers were losing almost $28 per 
TennCare patient visit. This created an unfunded gap in reimbursement 
that forced health centers to cover these losses out of PHSA grants. 
The result has been a reduction in the number of uninsured persons 
received care at Tennessee's health centers, and the virtual 
elimination of all ``supplemental'' services, including health and 
nutrition education, parenting classes and community outreach--all of 
which have been proven highly effective in improving the overall health 
of patients.
    Be assured that this is not an isolated incident--it has happened 
to health centers in several States across the country. In short, where 
the elimination of cost-based reimbursement has occurred, health 
centers are forced to eliminate health care services or close delivery 
sites for their patients. There is no reason to believe that this will 
not occur nationwide if BBA relief is not provided to health centers.

  THE SAFETY NET PRESERVATION ACT: STABILIZING AMERICA'S PRIMARY CARE 
                               SAFETY NET

    The payment system included in H.R.2341, the Safety Net 
Preservation Act, is a common-sense approach to protecting the 
significant Federal financial investment in health centers from the 
elimination of reasonable cost based reimbursement under the BBA. That 
is why the Safety Net Preservation Act is cosponsored by bipartisan 
majorities of the Commerce Committee (37 of 53 members) and the House 
of Representatives (224 Representatives). Its companion legislation in 
the Senate, S.1277, has garnered the bipartisan support of a majority 
of the Finance Committee (11 of 20) and the full Senate (54 Senators).
    This legislation accomplishes three fundamental goals:

(1) It ensures that health centers are not forced to eliminate health 
        care for their uninsured patients because Medicaid does not 
        adequately reimburse them.
(2) It addresses concerns about cost-based systems by creating 
        incentives for efficiency and cost-containment.
(3) It preserves State flexibility by establishing a minimum Medicaid 
        payment floor, not mandating a particular payment methodology, 
        and it also gives States the ability to continue reimbursing 
        health centers at 100% of their reasonable costs if they 
        choose.
    The next portion of my testimony will describe how the Safety Net 
Preservation Act's payment system works and address some outstanding 
concerns about this bill.

Stabilizing Payments and Establishing Incentives for Efficiency
    Over the last several years, Congress has enacted prospective 
payment reimbursement systems (PPSs) for hospitals, nursing homes, and 
home health agencies in the Medicare program. Through prospective 
payment methodologies, governments can predict and control the budgets 
of public insurance programs. Likewise, providers can predict their 
reimbursement rates for services provided and can plan their budgets 
accordingly.
    In short, the Safety Net Preservation Act brings health centers 
into parity with other providers participating in public insurance 
programs. In the initial year, health centers payments would be frozen 
at their previous year's per-visit payment. Every year thereafter, the 
per-visit rate would be increased by the rate of inflation calculated 
by the Medicare Economic Index (MEI) for primary care.\1\
---------------------------------------------------------------------------
    \1\ The MEI is also used to calculate annual payment changes in the 
physician fee schedule for the Medicare program.
---------------------------------------------------------------------------
    This methodology creates significant incentives for health centers 
to control costs and become more efficient. For example, if the per 
visit payment rate under the PPS is $80 and a health center has a per 
visit cost of $83, the health center can either (1) find ways to cut 
their costs and become more efficient or (2) lose revenues. Likewise, 
if a health center can reduce its cost per visit to $77 dollars, it 
would receive $3 that it could reinvest into expanding services or 
delivery sites. By creating a methodology in which health centers can 
be assured that Medicaid will cover the cost of care for its patients, 
the Safety Net Preservation Act ensures that PHSA grants can be used 
for their intended purpose--caring for the uninsured.

Protecting the Safety Net for the Long-Term
    The Safety Net Preservation Act would reimburse health centers at a 
rate that prevents the elimination of care for their uninsured 
patients. By filling this gap, Congress ensures that its significant 
annual investment under the PHSA goes to its intended purpose--
providing access to affordable health care services for uninsured 
people living in medically underserved areas.
    Some argue that the BBA currently allows States to continue to 
reimburse health centers at 100% of their reasonable cost based rates, 
thereby negating the need for the Safety Net Preservation Act. 
Unfortunately, there is little evidence that States will use this 
flexibility to establish long-term payment mechanisms to protect 
Federal PHSA grant dollars. For example:

--Of the 15 Section 1115 Medicaid waiver States, only two States
    (Massachusetts and Vermont) have continually paid health centers on 
a cost-based reimbursement methodology. The other 13 Section 1115 
Medicaid waiver States did not establish mechanisms at the outset to 
protect health centers from inadequate Medicaid payments and have 
forced health centers to dip into their PHSA grants to cover their 
Medicaid losses. Recognizing this, Maryland and Oklahoma have taken 
steps to reestablish sufficient Medicaid payments to these safety net 
providers, but only after the health centers suffered from years of 
Medicaid losses under the waiver.
--Only four non-1115 waiver States have enacted legislation to continue 
        adequate reimbursements to health centers permanently. Other 
        States have made only a one-year administrative commitment to 
        adequately reimburse health centers for Medicaid patients, 
        which can be changed or eliminated at any time. This creates 
        instability for health centers because they cannot develop 
        plans for expanding service delivery sites, hiring new 
        clinicians, or expanding health services, like pharmacy or 
        mental health services, to their patients (insured or 
        uninsured).
--In South Carolina, the State made a commitment to the health centers 
        to continue Medicaid cost-based payments. However, several 
        months later, South Carolina reversed its decision and began to 
        implement the cuts according to the BBA/BBRA phase-out 
        schedule. Health centers' patients in South Carolina are now 
        feeling the effects of that broken commitment through service 
        reductions.
    In short, only 8 States have established a long-term Medicaid 
payment system for health centers. We believe that this demonstrates 
the need for Congress to establish a minimum Medicaid payment floor to 
protect PHSA grant dollars.
    Thirty-five years ago, Congress established the health center 
program to ensure that a nationwide network of safety net providers 
would be there for everyone, regardless of where they lived. The 
Federal government wholly pays these PHSA grant dollars to health 
centers that in turn benefit people in every State in the country. We 
do not believe that the States should be allowed to take advantage of 
the significant Federal investment in health centers by reimbursing 
health centers at a rate that does not cover the cost of providing care 
to Medicaid patients. Rather, Federal and State governments should be 
partners in ensuring that people have access to health center services. 
The Safety Net Preservation Act would allow that partnership to 
flourish.

            CONCLUSION: NOW IS THE TIME FOR CONGRESS TO ACT

    Congress is again considering providing BBA relief to providers. 
The President has supported a package of $21 billion in relief for 
providers and members of the House and Senate have signaled their 
support for additional BBA relief.
    The Safety Net Preservation Act has wide, bipartisan support in 
both houses of Congress. In addition, the National Association of 
Mayors, the National Association of Counties, the National Rural Health 
Association, the National Association of Rural Health Clinics, the 
Health Care for the Homeless Coalition, and the National Center for 
Farm Worker Health have endorsed this legislation. It also has the 
support of the House and Senate Rural Health Care Caucuses.
    Last year, the Safety Net Preservation Act was included in 
H.R.3075, the House's version of the Balanced Budget Relief Act, which 
passed the House with 388 votes. Unfortunately, the Conference 
agreement did not adopt the House position. In the end, the Conference 
agreement reduced the BBA's phase-out rate but retained the elimination 
of the permanent Medicaid payment system.
    Given that this may be the last opportunity to revisit the policies 
of the BBA, health centers are calling on Congress to protect the 
struggling health care safety net in America. That is why I am here to 
urge this Subcommittee, the full Commerce Committee, this House, and 
this Congress to include the common sense, bipartis an, and permanent 
payment system included in the Safety Net Preservation Act in any BBRA 
legislation considered by Congress and to see that it becomes the law 
of the land before Congress adjourns this year.
    Thank you and I look forward to answering any questions the 
Committee may have.
[GRAPHIC] [TIFF OMITTED] T5915.002

    Mr. Bilirakis. Thank you so much, Mr. Hawkins.
    Ms. Connolly?

                 STATEMENT OF MARY LOU CONNOLLY

    Ms. Connolly. Thank you, Mr. Chairman and members of the 
subcommittee, for giving me the opportunity to testify on the 
impact of the BBA on the Medicare home health benefit. I am 
Mary Lou Connolly and I am Administrator of the Home Care 
Program at UCSD Health Care in San Diego. My remarks today are 
presented on behalf of the National Association of Home Care, 
NAHC. NAHC is the nation's largest home care organization, 
representing nearly 6,000 Medicare-participating home care 
providers, including nonprofit providers such as Visiting Nurse 
Association, for-profit chains, hospital-based and free-
standing providers, and government-run agencies.
    While we are greatly appreciative of efforts taken by you 
and your colleagues in 1998 and again in 1999 to mitigate some 
of the unintended damage to home care caused by the BBA, it is 
essential that further decisive action be taken this year to 
return the Medicare home care program to sound footing.
    The reductions in Medicare's home health benefit since 
enaction of BBA 1997 have been startling and unprecedented. 
Home care outlays have decreased from $18.3 billion in fiscal 
year 1997 to $9.5 billion in fiscal year 1999. From calendar 
year 1997 to 1999, the number of beneficiaries served dropped 
nearly 1 million, from 3.5 million to 2.6 million. Home health 
claims dropped almost 50 percent and the average payment per 
patient dropped by 38.5 percent. The Medicare home health 
benefit as a percent of the total Medicare program has 
decreased from 9 percent in fiscal year 1997 to just 4 percent 
in fiscal year 2000.
    The number of home health agencies has also taken a major 
hit, with over 3,000 net closures since 1997 nationwide. In 
California, my home State, there have been over 200 home health 
agency closures, and in San Diego, the city where my 
organization is, at least 15 agencies have closed or 
discontinued their Medicare businesses.
    Various studies have concluded that for certain groups of 
homebound beneficiaries, especially those with medically 
complex or longer-term care needs, access to the home health 
benefit has decreased. No further studies are necessary. Many 
agencies readily admit that they have instituted more rigorous 
screening measures upon intake to ensure that high-cost complex 
care admissions are controlled. Surviving agencies feel they 
must limit the number of such cases as they are certain to 
exhaust their already depleted human and financial resources.
    In addressing human resources, it should be recognized that 
home care agencies are also faced with decreased staffing due 
to cost reductions following BBA 1997. Staff who survived the 
BBA reductions are now voluntarily leaving home care, citing 
the impossibility of meeting increased regulatory mandates, 
such as OASIS, while being asked by administrators such as 
myself and nurse supervisors to care for more patients and to 
please do so more efficiently.
    Transitioning from IPS to an underfunded PPS program is 
simply not enough to restore and preserve the Medicare home 
health benefit. The five national home health associations have 
reached a consensus on the reforms necessary to protect the 
home health program and the beneficiaries it serves. The 
associations agree that Congress must take the following 
actions in this legislative session.
    First, eliminate the 15 percent cut scheduled to take 
effect October 1, 2001. I take issue with the statement made by 
GAO that there is a cushion perhaps in PPS payments. If this 15 
percent cost cut does go through on October 1, 2001, we will 
see more agency closures because agencies that have eliminated 
staff, reduced utilization, and cut costs to the bone to cope 
with IPS and whose PPS payments are based on the IPS budget 
simply are not likely to respond to a payment system that pays 
them 15 percent below the previous year's amount by increasing 
service and access to care.
    Second, restore access to care for high-need and vulnerable 
patients as follows. Allow an additional expenditure of $500 
million in each of the next 5 years to be used as outlier 
payments for services to the most medically complex and costly 
patients. Increase payments for home health services in rural 
areas by 10 percent, and remove medical supplies from the per 
episode payment under PPS.
    The five associations also ask that HCFA confine OASIS data 
collection and reporting requirements to only Medicare and 
Medicaid patients, and limit the items to the 20 elements which 
are actually needed to implement PPS and to provide for an 
emergency payment mechanism during at least the first 6 months 
of PPS to ensure there is no interruption in payments for 
services.
    In addition, though not related to this hearing, NAHC and 
the other associations encourage you to reject any efforts to 
impose a copay on the home health benefit, as that issue has 
recently surfaced in the context of the prescription drug 
benefit.
    Mr. Chairman and members, thank you for this opportunity. I 
will be happy to answer questions later.
    [The prepared statement of Mary Lou Connolly follows:]

 Prepared Statement of Mary Lou Connolly, Administrator, University of 
California at San Diego Home Care on Behalf of the National Association 
                             for Home Care

    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to testify on the impact of the Balanced Budget Act of 1997 
(BBA97) on the Medicare home health benefit. My name is Mary Lou 
Connolly, and I am Administrator of the home health division of the 
University of California at San Diego's health care system. My remarks 
today are presented on behalf of the National Association for Home Care 
(NAHC). NAHC is the nation's largest home care organization, 
representing nearly 6000 Medicare-participating home care providers, 
including non-profit providers like the visiting nurse associations, 
for-profit chains, hospital-based providers, government-run agencies, 
and freestanding providers.
    While we are greatly appreciative of efforts taken by you and your 
colleagues in 1998 and again in 1999 to mitigate some of the unintended 
damage to home care caused by BBA97, it is essential that further, 
decisive action be taken this year to return the Medicare home care 
program to a sound footing. Data recently provided by the Health Care 
Financing Administration (HCFA) provide a disturbing picture of the 
current state of the Medicare home health program. From calendar year 
1997 to 1999, the number of beneficiaries served dropped by nearly one 
million, from 3.5 million to 2.6 million, or by close to 25 percent. 
Total outlays for the same period dropped from $16.7 billion to $7.7 
billion. or nearly 54 percent. In those two years, home health claims 
dropped by almost 50 percent, and the average payment per patient 
dropped by 38.5 percent (source: preliminary 1999 HCFA/HICS data).
    Home health will transition to a prospective payment system (PPS) 
under Medicare on October 1 of this year. This new payment system is 
expected to be much more appropriate in design than the existing system 
that was imposed by the BBA97; however, because the global budget set 
for the PPS restricts outlays to what would have been spent if the 
current system were to continue, episode payment rates are expected to 
be inadequate and may perpetuate many of the access problems certain 
classes of patients (such as wound care patients) are experiencing 
today. The change in the home health payment system will not correct 
all of the problems in home health that have resulted from the BBA97.
    Recently, NAHC, along with the four other national home health 
associations, developed a unified legislative agenda designed to 
restore and preserve the Medicare home health benefit in light of the 
devastation wrought by the BBA97. The national associations are agreed 
that true relief for the home care program cannot be achieved without 
legislative action that encompasses both restoration of services to 
patients who have lost care, and the elimination of further threats to 
the stability of the Medicare home health program and our national home 
care infrastructure. I will elaborate on the national associations' 
unified position later in my testimony.

       IMPACT OF BBA97 ON HOME HEALTH BENEFICIARIES AND PROVIDERS

Balanced Budget Act Leads to Unprecedented Reductions in Home Health 
        Utilization and Spending
    The reductions in Medicare's home health benefit since enactment of 
the BBA97 are startling and unprecedented. Since fiscal year 1997 
program expenditures decreased 48 percent, from $18.3 billion in FY97 
to $9.5 billion in FY99 (Fig. 1).

[GRAPHIC] [TIFF OMITTED] T5915.003

    While other Medicare programs have seen reductions due to 
the BBA97, no other decrease has been close to what the home 
health benefit has experienced (Table 1). In fact, FY99 was the 
first year in the history of the home health benefit in which 
Medicare outlays for skilled nursing facility care exceeded 
those of home health. Less was spent on Medicare home health 
services in FY99 than was spent in FY94.

     Table 1. Medicare Program Benefits, Fiscal Years 1997,1998,1999
------------------------------------------------------------------------
                                             Amount ($billions)
           Benefit Type           --------------------------------------
                                       FY97         FY98         FY99
------------------------------------------------------------------------
Managed care.....................         25.0         31.9         37.4
Inpatient hospitals..............         88.3         87.0         85.3
Skilled nursing facilities.......         12.6         13.6         12.4
Home health......................         18.3         14.0          9.5
Hospice..........................          2.1          2.1          2.5
Physicians.......................         32.0         32.3         33.5
Outpatient hospitals.............         10.7         10.5          9.7
Durable medical equipment........          4.1          4.1          4.2
Other............................         14.0         14.6         13.8
  TOTAL MEDICARE.................        207.1        210.1        208.3
------------------------------------------------------------------------
Percentage Change by Benefit Type      FY97-98      FY98-99      FY97-99
------------------------------------------------------------------------
Managed care.....................       +27.6%       +17.2%       +49.6%
Inpatient hospitals..............         -1.5         -2.0         -3.4

Skilled nursing facilities.......         +7.9         -8.8         -1.6
Home health......................        -23.9        -32.1        -48.1
Hospice..........................          0.0        +19.0        +19.0
Physicians.......................         +1.1         +3.7         +4.8
Outpatient hospitals.............         -1.9         -7.6         -9.3
Durable medical equipment........          0.0         +2.4         +2.4
Other............................         +4.0         -5.5         -1.7
  TOTAL MEDICARE.................         +1.4         -0.9         +0.6
------------------------------------------------------------------------
Source: HCFA, Office of the Actuary unpublished estimates for the
  President's fiscal year 2001 budget.

    Home health spending as a percent of Medicare dropped precipitously 
from 9 percent of total Medicare outlays in FY97 to just 5 percent of 
total Medicare benefits in FY99. (Fig.2) HCFA's current projections for 
FY2000 indicate that home health will drop further, to 4 percent of 
total Medicare outlays.

[GRAPHIC] [TIFF OMITTED] T5915.004

    Every state has seen reductions in Medicare home health 
utilization and expenditures since 1997. In one year, 1997 to 
1998, visits decreased 40%, the average payment per patient 
decreased 29%, and the average number of visits per patient 
declined 30%.
    The Congressional Budget Office (CBO) originally 
anticipated a $16.1 billion reduction in projected home health 
spending over five years following enactment of BBA97. The most 
current CBO estimates and projections for home health show that 
spending was reduced by a total of $19.7 billion in just two 
years (FY98 and FY99) (Table 2). Based on the latest CBO 
projections, home care spending will be reduced by a total of 
$69 billion over five years (FY98-FY2002)--or, more than four 
times the intended reduction.

                        Table 2. Home Health Reductions Exceed $60 Billion Through FY2002
----------------------------------------------------------------------------------------------------------------
                                                                                                           FY98-
          CBO Home Health Baselines ($billions)            FY97    FY98    FY99    FY00    FY01    FY02     02
----------------------------------------------------------------------------------------------------------------
January 1997 Outlays....................................    19.0    21.1    23.2    25.3    27.5    29.9   127.0
BBA Target Outlays......................................    19.0    20.0    21.2    21.2    23.3    25.2   110.9
March 2000 Outlays......................................    17.5    14.9     9.7     9.8    11.1    12.5    58.0
Expected Reduction......................................    n.a.    -1.1    -2.0    -4.1    -4.2    -4.7   -16.1
Actual Reduction........................................    n.a.    -6.2   -13.6   -15.5   -16.4   -17.4   -69.0
----------------------------------------------------------------------------------------------------------------

Network of Agencies Severely Diminished
    Given the level of reductions, it is not surprising that home 
health agencies have been closing at a rate of more than 90 per month 
since October 1997, leading to a recorded net loss of over 3,000 
agencies nationwide as of July 2000. HCFA data, 
from which these figures are drawn, generally lags behind actual 
closures. These losses are particularly problematic in states with 
large portions of their elderly population living in rural areas. There 
are now fewer agencies serving Medicare patients than there were in 
1994.

Agencies Less Able to Provide Needed Care
    Staffing levels of home health agencies have also decreased. From 
1996 to 1999, over 133,000 full-time positions in Medicare-certified 
agencies were lost. This reduction in full-time equivalent (FTE) 
staffing includes 51,395 fewer nurses, and 54,426 fewer home health 
aides available to care for patients in 1999 than were employed by 
agencies in 1996.
    The employment reductions in Medicare are in sharp contrast to 
forecasts of continued growth in demand for home care personnel 
resulting from strong underlying demographic trends which include an 
aging population, increased availability of in-home medical technology, 
and consumer preference for avoiding institutionalization or delaying 
entrance to nursing homes. The Bureau of Labor Statistics forecasts an 
82 percent increase in the demand for key home health personnel for the 
period 1998 to 2008. Due to the severity of the payment reductions 
under the BBA97, agencies increasingly are unable to offer competitive 
wages and benefits to attract qualified staff, and labor shortages are 
developing across the country.

Agencies Must Subsidize Medicare to Provide Services
    Concern about the financial viability of home health agencies is 
growing as cost reports are settled and overpayment notices sent. One 
fiscal intermediary reported that 91 percent of home health agencies 
they oversee had overpayments in 1998, for a total of over one billion 
dollars. These figures give an indication of the extreme degree to 
which home health agencies are subsidizing the Medicare home health 
program.
    Further, agencies throughout the nation have reported using funds 
other than Medicare to help pay for the care they provide to Medicare 
patients. An informal survey conducted during 1999 by NAHC revealed 
that 93 percent of responding agencies must find other funding sources 
in order to maintain home health access for Medicare beneficiaries. The 
median subsidy was $165,000. Agencies are tapping funding sources such 
as state and local government monies, local community charitable 
funding, profits from other businesses or programs, personal lines of 
credit, bank loans, bequests, hospital systems, and financial reserves 
in order to continue providing care to needy and eligible Medicare 
beneficiaries. This continuing subsidization of the Medicare program 
means that agencies are less able to provide indigent care and other 
services that had been previously funded from some of these same 
sources. and is threatening the financial viability of many agencies

Diminished Capacity to Serve Medicare Home Health Beneficiaries Leads 
        to Access Problems
    Studies that have examined access to the home health benefit since 
1997 agree on one central point: for certain groups of beneficiaries, 
access to the home health benefit has decreased. For example, a study 
of the effects of the BBA97 on home health agencies conducted by The 
George Washington University (GWU) reported that agencies were finding 
it increasingly difficult to meet the needs of high-cost patients, 
particularly complex diabetics. Among hospital discharge planners 
surveyed as part of the GWU study, 68 percent reported it was 
increasingly difficult to obtain home health services for Medicare 
beneficiaries.
    Despite strong evidence that certain groups of eligible patients 
are in some cases unable to find home health care, The Medicare Payment 
Advisory Commission (MedPAC) in its March 2000 report to Congress 
equivocates on the issue of access. The following excerpt from the 
report is particularly suggestive:
          MedPAC sponsored a survey of home health agencies to examine 
        whether access has been compromised by the IPS (MedPAC 1999). 
        This research reveals that the broad impact of the IPS (interim 
        payment system] did not fulfill ``the worst predictions,'' but 
        has likely negatively affected beneficiaries (Abt Associates 
        1999). Results indicate that the new payment system has led 
        agencies to exercise cost-cutting measures, including refusing 
        services to Medicare patients who have chronic, long-term 
        conditions, especially diabetics. More than half of agencies 
        surveyed expected to exceed their per-beneficiary limits and 
        said that, as a result of the IPS, they would be more likely to 
        decrease their Medicare caseloads, deny admission to certain 
        types of patients, discharge certain types of patients, or 
        reduce clinical staff or hours. [emphasis added]
    In its summary of previous research about access, MedPAC's report 
states:
          The General Accounting Office (GAO) found that access 
        generally has not been impaired, despite the closure of 
        approximately 14 percent of home health agencies since 1997 
        (GAO 1999). But interviews with key stakeholders in areas with 
        higher frequencies of closures suggest that home health 
        agencies are asking more detailed information about potential 
        patients, and that patients who require costlier services are 
        facing difficulty in finding an agency willing to provide 
        visits. [emphasis added]
    The controversy over the impact on access to home health is focused 
on how much access has been compromised, not whether it has decreased. 
Several research institutes, including the Robert Wood Johnson 
Foundation, have funded studies to look at the impact of the BBA97 on 
home health beneficiaries.
    Media reports have also identified access problems due to the 
BBA97. An editorial in the April 25 edition of The New York Times notes 
that spending on home care services has dropped by over 45 percent 
since 1997. The Times editorial concludes by calling for the 
restoration of the Medicare home health benefit stating that, 
``Congress had reason to rein in ballooning Medicare costs in 1997. But 
the nation's oldest and most fragile citizens should not have to suffer 
for good intentions gone awry.''

The Move to Prospective Payment for Home Health: The Future of Home 
        Care Hangs in the Balance
    In the midst of the chaos that the BBA97 created, home health faces 
a major change in the Medicare payment system that is scheduled to take 
effect October 1, 2000. The IPS that began in October 1997 will be 
replaced by a PPS. The concept behind the new system is to encourage 
efficient provision of home health services by paying an amount based 
on the average national cost of treating a home health client for 60 
days. Final payments to agencies are based on the average base payment, 
and adjusted to take into account patient characteristics (case-mix) 
and labor market differences (wage index). An outlier payment is 
provided for cases that exceed the expected costs.
    The goal of the PPS for home health is to encourage efficient 
provision of services without compromising quality. Under a cost-based 
reimbursement system, there is no financial incentive to reduce 
utilization because providers are paid for each unit of service. The 
IPS introduced a per beneficiary limit, which discouraged agencies from 
providing care that costs more than their average cost of providing 
care in federal fiscal year 1994. There is no adjustment for patient 
need under IPS: therefore, agencies have a financial incentive to avoid 
high-cost patients who may cause the agency to exceed their aggregate 
per beneficiary limit. The PPS mitigates this financial incentive to 
avoid high-cost patients by paying greater amounts for higher need 
patients and by allowing agencies to be paid for multiple episodes as 
long as the patient continues to meet the Medicare home health coverage 
criteria.
    NAHC has reviewed, digested and analyzed the final PPS rule as 
published by HCFA on June 28. The final rule addresses many of the 
concerns voiced by NAHC and the home care community. There are notable 
``improvements'' in such areas as increases in low utilization payment 
adjustments (LUPA), per visit payment rates, billing and payment 
processes that enhance cash flow, and refinements to the case-mix 
adjuster. These changes, however, do not make up for the inadequacy of 
the overall funding of the home health benefit, which results in 
significant weaknesses in even the best PPS.
    In addition, the final rule leaves unresolved some of the conflicts 
and concerns expressed with the proposed PPS. Of particular concern is 
HCFA's position on medical supplies, which may mean a dramatically 
expanded responsibility for home health agencies. It is NAHC's position 
that an agency is only responsible for those medical supplies used to 
treat illness or injury that occasioned the need for services.

                            RECOMMENDATIONS

    As noted earlier, all five national home health associations--NAHC, 
the American Federation of HomeCare Providers, the Home Care 
Association of America, the American Association for Home Care, and the 
Visiting Nurse Associations of America--have reached a consensus on the 
reforms necessary to protect the Medicare home health program and the 
beneficiaries it serves. The associations have established two 
priorities of equal importance--to restore and to preserve the Medicare 
home health benefit. All five national home health associations agree 
that Congress must take the following action in this legislative 
session:
    Eliminate the 15 percent cut scheduled to take effect October 1, 
2001. Although federal budget projections show growth in home health 
following implementation of the PPS in October 2000, these projections 
are overly optimistic in accounting for the 15 percent reduction in 
payment rates scheduled for October 2001. Agencies that have eliminated 
staff, reduced utilization and cut costs to the bone to cope with the 
IPS, and whose PPS payments are based on the IPS budget, will not 
likely respond to a payment system that pays them 15 percent below 
their previous year's amounts by increasing services. It is much more 
likely that a 15 percent cut in payments and below-inflation update 
factor will translate into additional agency closures, layoffs and even 
greater access problems.
    Restore access to care for high needs and vulnerable patients. 
While outright elimination of the 15 percent will relieve the future 
threat or further devastation, an immediate infusion of dollars is 
necessary if access for certain hard to serve patients is to be 
restored. The following actions will help agencies throughout the 
country take on these patients with significantly reduced risk of 
financial devastation:

 Allow an additional expenditure of $500 million in each of the 
        next five years to be used as outlier payments for services to 
        the most medically complex and costly patients;
 Increase payments for home health services in rural areas by 
        10% to address the higher costs of delivering care in these 
        areas; and
 Remove medical supplies from the per episode payments under 
        the prospective payment system and make payments under a fee 
        schedule for only the supplies that are actually used. Such a 
        proposal should be fashioned so that it is budget neutral.
    It is also the consensus of the five national associations that 
Congress should direct HCFA to:

 Confine the OASIS data collection and reporting requirements 
        to only Medicare and Medicaid patients;
 Limit the OASIS assessment items to only the 20 questions 
        which are actually needed to implement the new PPS; and
 Provide for an emergency payment mechanism during at least the 
        first six months of the new payment system to ensure that there 
        is no interruption in payments for services.

Copayments
    While not a focus of this hearing, the issue of imposing copayments 
on home health services has recently surfaced in the context of a 
Medicare prescription drug benefit. NAHC and the other national 
associations take serious issue with any Medicare program ``reforms'' 
that restrict or eliminates any current benefits.
    Home care plays an important role in the American health care 
system. Home care patients tend to be older and poorer that the average 
Medicare beneficiary, and in greater need of care. Copays would 
penalize the most vulnerable Medicare beneficiaries because of their 
illness.
    NAHC urges Congress to reject any attempt to place a copayment on 
the Medicare home health benefit for the following reasons:

 Copays are regressive and tax the sick:
 The elderly already pay high out-of-pocket health care costs, 
        despite Medicare and Medicaid coverage;
 Copays represent an unfunded mandate to the states whose 
        Medicaid programs will be responsible for the copay if the 
        beneficiary is dually eligible for both Medicare and Medicaid 
        benefits;
 Copays would be another administrative burden on home health 
        providers;
 Copays discourage use of cost-effective home care services, 
        which may result in the need to use higher cost care. thereby 
        increasing Medicare outlays; and
 Copays may require further subsidization of the Medicare 
        program by financially ailing home health agencies since many 
        low-income beneficiaries will be unable to finance copays.

                               CONCLUSION

    Mr. Chairman and members of the Subcommittee, these legislative and 
regulatory changes would go a long way toward strengthening the home 
health infrastructure and restoring beneficiary access to quality home 
care services. We thank you for your sincere interest, and look forward 
to working with you and your colleagues as you draft legislation to 
further refine the BBA97 with respect to home care services. I am happy 
to answer any questions that you might have at this time.

    Mr. Bilirakis. Thank you very much, Ms. Connolly.
    Mr. Williams?

                 STATEMENT OF DAVID T. WILLIAMS

    Mr. Williams. I guess this is batting cleanup.
    Mr. Bilirakis. And that is a compliment, is it not?
    Mr. Williams. I do not know. Mr. Chairman, Congressman 
Brown, and members of the committee, thank you for having this 
hearing and providing me the opportunity to speak. In addition 
to my position at Invacare Corporation, I am also on the board 
of the American Association for Home Care, which is a national 
trade association representing home health agencies and HME 
providers.
    HME providers are Invacare's direct customers, so what I 
say here today really represents the issues important to our 
customers and to an industry which is really the complementary 
staff to the home health agency. We like to say that there 
would be no HME if there were home health agencies, and we know 
that home health agencies are able to serve folks in their home 
because of the HME we manufacture and provide.
    The challenge for me in the clean-up position today is to 
impress upon you the importance of a couple issues that are 
critical to our industry. We have been on a panel where we have 
talked about billions and billions and the need for restoration 
and regulatory relief, and I represent an industry that is a 
tiny fraction of the Medicare budget. So hopefully, I will be 
able to pull something off and at least impress you that there 
are two key issues that we would like this committee to 
address.
    Before I launch into that, I would really like to emphasize 
once again that the industry that I am part of, home care and 
the home medical equipment industry, is often cited by 
bureaucrats and regulators as needing to be reigned in because 
it is growing too fast, and I would challenge that position 
because growth in home care, growth in the HME industry, is 
good news for America. It is good news because what we are 
talking about is a cost-effective, clinically appropriate, and 
patient-preferred alternative to more costly options. This is 
an irrefutable fact.
    The Hudson Institute Study in 1998 showed two things about 
home care that were really important, and they included people 
with severe disabilities in that cohort of their study. They 
said by investing a little more money in home care, they were 
able to reduce the dependence on more costly facility-based 
care by 50 percent and that the people they diverted from 
facility-based care, the cost of serving their health needs was 
50 percent lower than in a facility setting. So it is cost 
effective.
    It is clinically appropriate. The best example that home 
care is clinically appropriate is the fact that every major 
heart transplant program in the country prepares their patients 
for surgery in their homes because they get better clinical 
outcomes. That is a fact.
    And patient preferred, the State of Ohio Department of 
Aging did a study a few years back where they interviewed 
10,000 Ohioans age 55 and older and they asked them, if they 
ever needed long-term acute care, what would they want. Ninety-
some percent of them said, in their home. So home care is 
patient preferred, and there are studies all over that 
duplicate that number.
    So I just ask you to keep that in mind as you are shaping 
some form of BBA relief. Now the two issues.
    The first issue that I would like to talk about is a cost 
of living adjustment for the HME services benefit. In the 
Balanced Budget Act, that was frozen through the year 2002. In 
BBRA in 1999, Congress acknowledged that maybe that was a 
little too much and they restored 0.3 percent in 2001 and 0.6 
in 2002. I do not think it takes a whole lot of insight to 
realize that the freeze of the Medicare fees has effectively 
reduced payments, because our customers, and indeed Invacare 
itself, we experience dramatic increases in the cost of raw 
material, fuel, and labor. And so, effectively, we are in a 
negative right now and it is continuing to go downhill and 0.3 
percent is not really going to make up very much of it.
    The effect has been really profound. Remember, the HME 
industry is largely made up of small entrepreneurial companies 
and they just cannot withstand this kind of onslaught, and 
large companies have been adversely hit, also. So full 
restoration of the cost-of-living adjustment is critically 
important.
    The other piece, quickly, is we would ask Congress to 
exercise a little more oversight as HCFA uses the new expedited 
inherent reasonableness authority that was contained in the 
BBA. HCFA has proven time and time again that they are 
incapable of promulgating rules around a program that is 
reasonable. They use flawed data and they use questionable 
practices. In fact, in the BBA, report language was included to 
require HCFA to use statistically valid and relevant data and a 
sound costing methodology. One would think that was a 
prerequisite for the program.
    So those are the two things our industry is asking for and 
I will stand for questions with the rest of the panel.
    [The prepared statement of David T. Williams follows:]

    Prepared Statement of David T. Williams, Director of Government 
 Relations, Invacare Corporation on Behalf of The American Association 
  for Homecare and the Home Medical Equipment (HME) Services Industry

    Mr. Chairman, Congressman Brown and Members of the Committee: my 
name is David T. Williams and I am the director of government relations 
for Invacare Corporation. I am pleased to be here to offer testimony on 
the impact of the Balanced Budget Act of 1997, as it pertains to home-
based health care and the home medical equipment services industry.
    Invacare Corporation is the world's leading manufacturer and 
distributor of medical equipment and supplies for use in post-acute 
care settings. The company employs more than 5,000 people and is 
headquartered in Elyria, Ohio. Invacare has domestic facilities in 
Ohio, Florida, Massachusetts, California, Maryland, Michigan, Missouri 
and Texas. Invacare also has manufacturing operations in Canada, 
Mexico, Australia, New Zealand, Denmark, the United Kingdom, France, 
Germany, Sweden, Switzerland and Portugal.
    I am also a member of the Board of Directors of the American 
Association for Homecare (AAH), a national trade association 
representing home health agencies and HME providers. AAH was formed 
earlier this year by the merger of the National Association for Medical 
Equipment Services, the Home Health Services and Staffing Association 
and HIDA Homecare. It is the only association representing the spectrum 
of providers committed to quality health outcomes in the home.
    With your indulgence, I will speak on behalf of both Invacare and 
the Association.
    In the course of this hearing, you have or will have heard 
compelling statements from a wide spectrum of health-care providers. 
Each witness will try to make a case for restoring some funding, 
correcting some error or eliminating a new regulatory burden. I am no 
different than those witnesses who have preceded me and those who will 
follow me. The purpose of my testimony is to bring to the attention of 
this Committee, three provisions of the BBA that deserve your immediate 
attention. However, before going into detail on these provisions, I 
would like to offer some observations about health care in the home.
    Let there be no mistake, home-based health care has grown faster 
than any other segment of the health care continuum. But, the growth in 
home care is not an indicator that something has gone wrong. The growth 
in home-based health services is good news for America.
    It is good news because homecare is a clinically appropriate, cost-
effective and patient-preferred alternative to facility-based health 
services. Please allow me to elaborate.
    A study conducted by the Hudson Institute in 1998 concluded that 
home-based health services are cheaper than and can reduce admissions 
to facility-based care. This study was an in-depth look at the State of 
Indiana's In-home/CHOICE program. A copy of this study will be 
forwarded to each member of this committee. For the purpose of this 
hearing, however, two of the study's conclusions are worth noting. 
First, the researchers noted that by placing increased emphasis and 
funding on home-based health services, they were able to reduce 
institutionalization of Indiana's frail elderly population by 50 
percent. Second, the Hudson Institute reported that home-based health 
services reduced spending for health care on this population by 50 
percent or more. Home care is cost effective!
    There are a variety of studies that talk about improved clinical 
outcomes obtained when a patient receives health services in the 
familiar surroundings of their home. In one study conducted by Tufts 
University, a small group of 100 patients, diagnosed as frail elderly, 
was divided into two groups. One group received their health care in a 
facility setting (a nursing home). The other group was provided with 
home-based health services. The mortality and morbidity statistics for 
the first group was dramatically higher than those served in their 
home. A less ``academic'' demonstration of the clinical appropriateness 
of homecare can be found in heart transplant centers across the 
country. In preparation for their surgeries, transplant patients go on 
strict regiments of pharmaceutical and dietary therapy. Virtually every 
major transplant center arranges for this therapy to take place in the 
home. Surgeons report that patients who come from a loving home 
environment are better prepared and yield better outcomes. Homecare is 
clinically appropriate!
    The Ohio Department of Aging surveyed a large number of adults over 
the age of 55 years. Ninety percent of the respondents said that if 
they ever needed long-term care, they wanted that care to be delivered 
in their home. Several other studies report similar results. Homecare 
is patient preferred!
    Yes, homecare has grown over the last two decades and it will 
continue to grow. Advances in medical technologies and changes in 
Medicare's payment structure have spurred a considerable growth in the 
use of home care. As in every other aspect of modern medicine, home 
health care has benefited from an explosion of new and emerging 
technologies. Things such as, the use of space-age materials to make 
wheelchairs and mobility aids lighter and the application of micro-chip 
computer technology in implantable devices used to dispense critical 
medication, make it possible for the care received in the home to equal 
or exceed that received in a hospital, at a fraction of the cost. 
Today, it is common for a Medicare beneficiary to undergo chemotherapy 
in the comfortable surroundings of his or her own home, a fete that was 
inconceivable just a few years ago. In the future, advances in tele-
medicine and similar technologies will make it possible to further 
reduce health care costs and improve the quality of health care 
provided in the home. None of these advances could have been envisioned 
at Medicare's inception in 1965.
    I ask that the Members of this Committee, as you go about 
fashioning legislation to refine the BBA, keep in mind the irrefutable 
fact that the growth in the utilization of homecare is good news for 
America.
    Congress can go a long way toward insuring that America has a 
strong and vibrant homecare system that is capable of meeting the 
growing healthcare needs of this country by addressing three provisions 
of the BBA. Our industry asks that this Committee address the pending 
15 percent reduction in payments to home health agencies, the freeze on 
the annual cost of living adjustments for home medical equipment and 
HCFA's use of inherent reasonableness in any Medicare provider ``give-
back'' legislation.
    Eliminate the pending 15 percent reduction in payments to home 
health agencies (HHA). The BBA included a congressional mandate to 
change the way payment is made for home health services from a ``cost 
plus'' methodology to a prospective payment system. Because so little 
was known about the level of savings that could be achieved under PPS, 
Congress included a provision to reduce payments to HHAs by an 
additional 15 percent, if saving targets were not hit. The 
Congressional Budget Office estimated the transition would save $16 to 
$19 billion over five years. The transition is not even complete and 
the savings to Medicare is conservatively estimated to exceed $45 
billion.
    But the threat of an additional 15 percent cut continues to hover 
over home health agencies and threatens the financial stability of 
these organizations. As you can well imagine it is difficult, if not 
impossible, to attract investors or secure loans when there's a 
potential for a devastating reduction in fees on the books. It is a 
matter of fundamental fairness that Congress acknowledge that home 
health agencies have done their part by permanently removing the 
proposed 15 percent reduction.
    Restore the annual Cost of Living Adjustments for HME services. The 
BBA included a freeze on the Medicare fee schedules for durable medical 
equipment for the years 1998 through 2002. This cut was in addition to 
a 30 percent reduction in the fees paid for home oxygen therapy. The 
impact of this combination, on an industry populated by many small 
entrepreneurial enterprises, has been devastating. Invacare is the 
largest creditor in the HME industry. Since 1997, there has been a 
dramatic increase in bad and unrecoverable debt. The number of 
customers who have filed for bankruptcy is unprecedented. Small 
providers are going out of business or being forced into consolidation 
at a record rate.
    Large/national HME providers have also been hit very hard. 
PriceWater-houseCoopers (PWC) has released some startling findings in 
an update of a 1999 survey of nine publicly held companies that provide 
home medical equipment and services. PWC observes that the nine 
companies were earning a positive net income in 1996, but three years 
later, two-thirds of them were losing money, bankrupt or out of 
existence. This occurred during a period in which U.S. corporate 
profits for all industries rose by 18 percent.
    The HME industry asks Congress to restore the Cost of Living 
Adjustment (COLA) for fiscal years 2001 and 2002. Income from Medicare, 
not only was cut 30 percent for home oxygen but, all income for 
Medicare home medical equipment and services has declined in real terms 
in the absence of a COLA, while costs to HME providers--particularly 
labor and fuel costs--have continued to increase. By restoring two 
years of the COLA, the industry can regroup and begin to rebuild so its 
members can be viable partners with Congress and HCFA in the mission to 
better serve Medicare beneficiaries.
    Note: Invacare and other vendors to the HME providers have done 
their best to help our customers survive perilous economic conditions. 
Our company has assiduously avoided price increases in deference to our 
customers. At the same time, the costs of raw materials, fuel and labor 
have continually increased and we can no longer ``subsidize'' the 
Medicare program with artificially low wholesale prices. On the first 
of October this year, Invacare will impose its first price increase 
since passage of the BBA.
    Congress must provide oversight as HCFA begins to use its 
``expedited inherent reasonableness authority.'' The BBA empowered HCFA 
to develop a process for reducing the Medicare fee schedules for 
durable medical equipment using an expedited process. The HME services 
industry acknowledges the fact that HCFA must be able to make 
reasonable adjustments in the fee schedules for the goods and services 
it purchases for beneficiaries. However, HCFA has repeatedly abused 
this authority and clearly demonstrated its inability to exercise it in 
a reasonable and rational manner.
    In the Balanced Budget Refinement Act of 1999 (BBRA), Congress 
acknowledged that HCFA was ``not playing fair'' with its IR procedures. 
Report language was included in the BBRA requiring the agency to 
develop and use a sound costing methodology based on statistically 
valid and relevant data. Notwithstanding this provision, HCFA appears 
to be ready to impose several reductions of significant consequence, 
ignoring the mandate contained in the BBRA.
    The attached table describes the potential consequences of this 
action, as they pertain to 3 specific products manufactured by 
Invacare. HCFA proposes reducing the Medicare fee schedule for these 
three products by an average of 38% (48% to 28%). If HCFA proceeds with 
this action, American businesses and Medicare beneficiaries will get 
hurt.
    To demonstrate this point, let's consider one product, a basic 
folding walker (HCPCS E0135). Invacare sells this product to its 
customers, HME providers, for $33.20. The provider must deliver the 
unit to the beneficiary's home, measure and adjust the unit for the 
individual, instruct the patient in its use and go through the 
laborious process of collecting the copayment and billing Medicare. 
Using the principles of Activity Base Costing, it is estimated that the 
additional cost of providing this product would be $55.91. Thus, the 
total retail cost--without any consideration for profit margin--is 
$89.11. The proposed new Medicare fee schedule is $50.50. This is 
neither reasonable nor rational.
    Providers will be unable to take assignment on this product and 
Medicare beneficiaries will have to pay the full retail cost out-of-
pocket and will have to have the provider submit unassigned claims for 
the allowable amount. This is an unreasonable economic hardship for 
beneficiaries.
    Equally important is the impact this kind of shortsighted policy 
has on American businesses. While it is doubtful that anyone can 
produce a folding walker that can yield profit at this price, some 
companies who have little interest in quality or effectiveness will 
enter the market. HCFA will price legitimate American companies out of 
the market opening the door to foreign products of dubious quality and 
questionable clinical effectiveness. The offshore products are not as 
durable, well engineered and, often, are not as clinically appropriate 
as those manufactured by American companies, like Invacare. Why should 
Medicare beneficiaries have to settle for less than America's best?
    An interesting side note: Many of the offshore products flooding 
the market do not even meet Medicare's definition of medical equipment. 
To be considered a medical device federal law requires that the 
manufacturing location be registered with the Food and Drug 
Administration. Registration with the FDA requires performance with 
that agency's good manufacturing practices (GMP). Many of these 
offshore companies are not known to, much less registered, with the 
FDA. Thus, Invacare and other American companies are placed at a 
competitive disadvantage by products that do not even meet the 
definition of medical equipment.
    Congress should mandate that HCFA promulgate final rules that 
demonstrate ``sound costing methodology'' and define what constitutes 
``statistically valid and relevant data.'' The development of these 
final rules should be done in conformance with the Administrative 
Procedures Act and incorporate the active and substantial input of the 
HME services industry.
    Conclusion: Home health care continues to evolve and expand to meet 
the increasingly complex needs of today's Medicare beneficiaries. By 
capitalizing on technical innovation, home care providers can conduct 
increasingly complex medical and therapeutic regimens in the comfort of 
beneficiary's own homes. In addition, recent studies have shown that an 
expanded home care benefit would reduce Medicare expenditures by 
avoiding costly institutionalization. We urge the Committee to 
recognize the many benefits of home care by strengthening Medicare's 
commitment to the home health benefit. You can do that by making sure 
that the following items are incorporated into any ``BBA Fixer'' or 
``Medicare Provider Give-back'' legislation.
    We ask that Congress acknowledge the contribution that home health 
agencies have made to Medicare cost containment and permanently 
eliminate the pending 15 percent cut. Further, Congress should restore 
the annual Costs Of Living Adjustment (COLA) for durable medical 
equipment. Finally, we believe that Congress must exercise its 
oversight responsibility and insist that final rules addressing IR be 
promulgated in full compliance with the Administrative Procedures Act 
and if the procedures outlined and that these rules reflect the a sound 
costing methodology that uses statistically valid and relevant data.
    I want to thank the Chairman and Congressman Brown for providing me 
with the opportunity to offer this testimony today. I would be happy to 
answer any questions you may have at this time. However, if any member 
of the Committee needs additional information on any of the points 
raised in this testimony, please feel free to contact me.

[GRAPHIC] [TIFF OMITTED] T5915.005

    Mr. Bilirakis. Thank you so much, Mr. Williams.
    Of course, my gratitude to all of you for your efforts to 
try to help us wade through this. I think I speak for all of us 
when I say that we wish we had a magic wand that we could wave 
to solve all of the problems. What we did in BBA 1997 had to be 
done. We thought it had to be done the way we did it, and, of 
course, it turned out that we did some bad in the process of 
the good.
    Mr. Williams, you did not go into the issue of copayments. 
Ms. Connolly did. Dr. Ganske earlier went into this in some 
detail. I, in the past, am on the record as opposing copayments 
on home health care. But taking a look at the real world today, 
an awful lot of these home health care centers are possibly 
going out of business--and you are not going to sit there and 
tell me you support copayments. Your job is probably every bit 
as political as ours.
    But taking all that into consideration in a process of 
wanting to save, or at least to keep the program from 
deteriorating any more, is the subject of $5 copayments. For 
instance, just using it as a figure, throwing that out there, 
is that really such a really terrible thing? Very quickly, 
because I do want to get into some of the other areas.
    Mr. Williams. I think the issue of copayments right now, to 
impose copayments at the time an industry is transitioning to a 
totally new payment system, that is just throwing gas onto the 
fire. And if you want to make it not work and come away with 
even less data to say whether or not PPS is the solution and if 
it needs further tweaking. If you throw copayments on there, it 
is like gas on the fire.
    Mr. Bilirakis. You probably would agree with that, Ms. 
Connolly.
    Ms. Connolly. Yes, I would agree. I think adding copayments 
adds still another administrative layer that a home care agency 
will have to deal with.
    Mr. Bilirakis. God knows we have got too many of them out 
there already, do we not?
    Ms. Connolly. We are going to add to our cost to collect a 
minimal amount of money that many people will not want to pay.
    Mr. Bilirakis. Ms. Tavenner, it seems almost like yesterday 
that you testified, we have dragged this thing out so much 
because of all these votes. I believe you said your four 
facilities would suffer $70 billion in cuts as a result of BBA 
1997, is that correct?
    Ms. Tavenner. Seventy million dollars.
    Mr. Bilirakis. Oh, million, not billion.
    Ms. Tavenner. Million, over a 5-year period.
    Mr. Bilirakis. That is better.
    All right. In any case, I will ask my question. That is as 
a result of BBA 1997. How much of those cuts are the result of 
overdoing BBA 1997? In other words, as you testified, the 
contemplation was that there would be a savings of, oh, I do 
not know, we have been throwing around, let us say, $100 
billion and it turns out there is a savings of double that. So 
are we saying that you would have contemplated half of those 
cuts as intended under BBA 1997 and could probably have lived 
with those cuts that were intended, although you cannot live 
with the cuts as it ultimately has turned out?
    Ms. Tavenner. I certainly think that in our original 
contemplation, going back to 1997, we were estimating about 
half of those cuts, and while we were not happy with that--I do 
not think anyone is happy to see the cuts----
    Mr. Bilirakis. Yes, of course.
    Ms. Tavenner. [continuing] we had made and started and 
continue to make a lot of aggressive cost-reduction activities, 
particularly in the non-clinical area. So, yes, that would have 
been a much better solution for us.
    What has, I think, compounded where we are today is the 
labor force issue and the drug issue, which I do not think any 
of us speculated. We thought we would have better control over 
the rate of increase in those two areas and they have been out 
of control.
    Mr. Bilirakis. I do not have that much time left and I 
trust that Mr. Burr will go into the community health centers 
in addition to so many other things that he is interested in. 
Being a strong supporter, as you know Mr. Hawkins, of community 
health centers and the wonderful proven work that they do, I am 
just so very grateful for his support and Mr. Brown's. They 
really have been leaders on the subject.
    But I would ask you just one quick question. Apparently, 
and your testimony supports this, the community health centers 
now serve approximately 4.5 million uninsured, and yet we have, 
depending on whose figure you accept, maybe up to 8 or 10 times 
that of uninsured. Could you do a better job with those 
uninsured, in other words, increasing the amount of uninsured 
you serve?
    Mr. Hawkins. Well, we could certainly do so with some 
increased resources. I mean, the cost of a year's worth of care 
at a health center for each one of the people served is about 
$325, and that is an average of four visits, including lab, x-
ray, pharmacy, health and nutrition education, et cetera.
    Mr. Bilirakis. As related to what?
    Mr. Hawkins. As compared with?
    Mr. Bilirakis. Yes.
    Mr. Hawkins. An average of about $450 on the average cost 
for you and me according to Health U.S. and other statistics. 
It is not all the care that they need. It is not the inpatient 
care. It is not the specialty care.
    Mr. Bilirakis. Right. Of course.
    Mr. Hawkins. But it is the primary and preventive health 
care. What we could do, though, and this is what is important, 
is if Medicaid continues to pay its fair share for its 
beneficiaries, then we can continue to grow and serve more.
    I might make one last point. Every dollar that this 
Congress appropriates for health centers generates another $3 
in State and local support for the health centers which they 
put together in a pool along with the payments made by the 
uninsured, because everybody pays something, at least a little 
something, a buck, two bucks for the cost of their care. But 
they put that all together to put a package together of 
resources to support care for those uninsured individuals.
    What we can do and what has grown even more rapidly than 
Federal grant support for health centers has been State, local, 
and private philanthropic support, and we can do more to secure 
yet additional resources from those. It is not just relying on 
Uncle Sam for every dollar needed. We do serve, health centers, 
this little small contingent of 1,000 providers, 1 out of every 
10 uninsured Americans today, but we want to serve more. We 
serve one out of every five low-income pregnant women who 
deliver every year.
    Mr. Bilirakis. If we could only get our legislation in the 
managed care bill enacted, being able to expand your managed 
care participation would be very helpful, but we are having 
some problems with that, as you know, over in the Senate.
    Mr. Brown to inquire. Thank you.
    Mr. Hawkins. Thank you, sir.
    Mr. Brown of Ohio. Thank you, Mr. Chairman.
    Mr. Richtman, all of us are concerned, I think all of us on 
this panel are concerned about provider payments and the impact 
that these cuts have on the beneficiaries and I think you have 
all laid that out very well, but I think there may be other 
ways we can adjust Medicare to help seniors. We have a 
patchwork of protections for low-income Medicare beneficiaries. 
Some are dually eligible, get Medicare and Medicaid. Others get 
assistance with premiums and cost sharing, others with just a 
portion of the premium.
    But even though this assistance is available, the number of 
beneficiaries enrolled is obviously much too low. What can we 
do to get more seniors enrolled in programs that provide this 
kind of assistance to them?
    Mr. Richtman. Congressman Brown, you are talking, I think, 
about the QMB program and the SLMB program, and as you know, we 
found it very difficult to get people who are eligible to 
enroll in these programs. Part of it is a lack of awareness. 
People not knowing the programs are there for them, and another 
part of it, frankly, is when the Medicaid program, I think, is 
involved in determining the eligibility, there is for some 
people a stigma associated with that part of the eligibility 
that might be considered welfare, Medicaid, as opposed to 
support for Medicare eligibility.
    We have talked with some of our members about, and the 
Social Security Administration about, having the Social 
Security Administration take a more active role in enrolling 
eligible beneficiaries for both of these programs and actually 
enrolling them through the Social Security Administration, and 
that would obviate the need to go to Medicare and to Medicaid.
    Mr. Brown of Ohio. Can HCFA do that or does that have to be 
done by Congress?
    Mr. Richtman. Well, we think the Social Security 
Administration could do that.
    Mr. Brown of Ohio. Thank you.
    Mr. Hawkins, thank you for the good work that community 
health centers do. I very much appreciate your work and the 
work of the people in Ohio, also.
    Mr. Williams, talk if you would, briefly, elaborate on the 
cost-of-living adjustment issue.
    Mr. Williams. Well, again, BBA froze the fee schedule for 
durable medical equipment at the same time that there was a 
major hit, a reduction in the fee paid for home oxygen therapy 
services, and that freeze was to go through the year 2002. Like 
I said, our costs continue to go up. We would like to have that 
restored to the full COLA, which is about 2.3 percent for the 
year 2001. Considering the numbers that have been discussed in 
this committee, that is really budget dust. I mean, we are 
talking about, it would scare me, but about $500 million to 
$700 million for those 2 years.
    But what our industry is looking for as much as anything is 
a period where we can be stable, where we know that there is 
nothing else going to happen, where there is enough money to 
get in there and to look at our inventories and to stabilize 
our businesses so that we can grow and be a good partner with 
Medicare. Right now, the HME industry is at a tremendous 
disadvantage and providers are constantly under attack with 
increased regulatory burdens and costs.
    It is important to remember that the HME benefit, which 
people have a tendency to look and see a wheelchair or a crutch 
or an oxygen concentrator and see it as a commodity, but the 
HME benefit is a service. Our customers deliver the product to 
the patient's home, so they have been experiencing first-hand 
the fuel cost thing. They have to measure the patient, adjust 
and fit. They have to educate the patient. And then they go 
through the Medicare billing process, which is a tremendously 
costly thing.
    Under activity-based costing principles, it was recently 
estimated that for a $30--the wholesale price is $30, $32 for 
just a basic walker--that the non-equipment acquisition cost to 
the provider are around $55. So the cost of our products are 
huge. All we are asking is to be able to keep up with those and 
the full restoration of the COLA would be a great step in the 
right direction.
    Mr. Brown of Ohio. Thank you.
    I just wanted to explain and sort of mention a frustration 
I think several of us feel. Ms. Coughlin, you mentioned that 
when you asked for $15 billion, the President's plan, in 5 
years, the President wants $21 billion, has asked Congress for 
$21 billion. Many think we will not get that much. You are 
asking for five-sevenths of that money, $15 billion over $21 
billion, for one-sixth, one-seventh of the beneficiaries.
    What a lot of us have a lot of frustration about what 
managed care has done in our districts, there are senior 
citizens in my district that 2 years ago were in United Health. 
They got cutoff last year, went into QualChoice. They got 
cutoff this year, went into Aetna. They got cutoff. They had to 
switch plans, switch doctors, switch providers three times.
    To come in here when GAO has said that you are overpaid and 
to ask for $15 billion out of $21 billion available seems to be 
a bit overkill, does it not?
    Ms. Coughlin. Well, Congressman, it may seem like overkill 
to individuals who are not involved directly in managed care. I 
am trying to help understand how managed care plans can deal 
more effectively and be more responsive to seniors and to 
individuals with disabilities.
    When you look at the painful decisions that we in our 
company go through in determining whether or not we can stay in 
a particular marketplace, for example, the example you just 
gave is a very vivid one, I think, because there are places 
where seniors have switched from one plan to another and then 
that plan has to pull out for that given year.
    And just making the decisions myself for the areas I am 
responsible for, is painful. That is the only way I can 
describe what you go through, because in order to become 
eligible to offer Medicare in a particular area, you go through 
a rather grueling process with HCFA. It is very expensive to 
sell the plan. And then when you realize that you lose 
significant amounts of money--the example I gave in my 
testimony is very real. When you pay out $1.10 in care for 
every $1 you bring in and you are not even counting any 
administrative costs, even a modest amount to administer the 
plan, there are tough decisions. But we would not pull out if 
we could make it work. It is sort of counter-intuitive.
    Mr. Brown of Ohio. You want us to believe that, and I have 
looked at the lists of executive salaries at Aetna and 
executive salaries in other for-profit managed care companies 
and you talk about the painful decisions that you make--I am 
not saying you are one of those executives that has those 
salaries, but I think that there is never acknowledgement of 
over-promises.
    I mean, managed care makes these promises to senior 
citizens. You are either over-promising on purpose or you are 
not very good at predicting any kind of future cost that most 
businesses in this society have to predict. And then 2,000 
seniors citizens and Dave Williams in my county pay for it year 
after year and counties all over the State and the country pay 
for those decisions that your very, very, very well-paid 
executives have made when they make these cuts and force these 
people into different decisions.
    Then you have the chutzpah to come into this committee and 
ask for 71 percent of the $15 billion that we may or may not 
give out when you see everyone sitting up here asking 
particularly for the safety net hospitals and the community 
health centers and the people that Mr. Richtman represents, 
when those are the people that are really hurting and your 
industry comes in here and asks for 71 percent of the $21 
billion that this Congress might vote?
    Ms. Coughlin. I think what----
    Mr. Bilirakis. A very, very brief response to it, please.
    Ms. Coughlin. Okay, I will. What I am trying to focus on is 
being able to accommodate the needs of the seniors and the 
individuals with disabilities on 2 percent increase per year, 
and I do not think there is anybody in the room that could 
believe that medical costs are only going up by 2 percent a 
year. That is the increase that we are getting at this point in 
time, compared to the Federal employees, who cover a lot of 
people in this room who have gotten 29 percent increase over 
the past same 3-year period that I am talking about we got 2 
percent a year.
    Mr. Brown of Ohio. And some hospitals in the inner city 
have less and the community health centers may have less. I 
think we have gone far enough.
    Mr. Bilirakis. Dr. Ganske to inquire.
    Mr. Ganske. Dr. Zetterman, you raised some important issues 
on the site of service differential issue and mentioned how 
this would affect gastroenterology services. Are there other 
services that Congress should consider if we address site of 
service differentials?
    Mr. Zetterman. I think there are a number of areas that 
could be considered, but, of course, at this moment, there are 
13 GI procedures that have been specifically affected by this 
bifurcated fee proposal that sits there and is in place, and 
therefore we would propose that those be the 13 that be 
initially dealt with in some sort of a legislative fix.
    Mr. Ganske. Can you mention some other specialty areas?
    Mr. Zetterman. I think that perhaps one of the issues would 
be to look at some sort of an articulated standard as to where 
this should be put into place. All those things that are 
affected right now in gastroenterology are things that occur 
less than 10 percent of the time. I think another standard is 
the one that you yourself raised earlier, and that is what can 
be appropriately and safely done in an office setting might 
additionally be one other factor, and you certainly raised that 
in earlier comments.
    Mr. Ganske. What would be your suggestions specifically for 
a broad rule, rather than dealing with specific codes?
    Mr. Zetterman. I think one thing to do would be to 
articulate or actually define a specific standard as to when 
that threshold should be crossed, and we initially proposed 
that that be for procedures that are done less than 10 percent 
of the time in the office would not be affected.
    Mr. Ganske. What would be your suggestions to this 
committee for GME changes?
    Mr. Zetterman. I think there is no question but what we 
need to protect the safety net hospitals. We have heard today 
much testimony about how the Balanced Budget Act affected 
particularly the large teaching hospitals. There have been a 
number of proposals out there as how to effectively deal with 
it. I can provide to the committee, if you wish, for example, a 
paper that is a physician paper of the American College of 
Physicians-American Society of Internal Medicine specifically 
on GME as a public good.
    These hospitals in which graduate medical education occur 
include those hospitals that have a disproportionate number of 
indigent or uninsured patients, have a large percentage of 
elderly patients, have the group of patients that clearly need 
access to care and sometimes have no other means to get it than 
through those teaching hospitals. As a consequence, it really 
can be a public good in how it provides care.
    Therefore, we need to, I think, continue where we are. 
Perhaps we should limit and stop progression of the indirect 
reductions that are occurring right now and at least put a 
moratorium on it until we can safely determine what those cuts 
and the impact of those cuts can be.
    Mr. Ganske. I thank you and I yield back, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Ms. DeGette?
    Ms. DeGette. Thank you, Mr. Chairman.
    Ms. Tavenner, I think that you have quite accurately 
described some of the issues that your group and others are 
facing, what with both increased numbers of uninsured and also 
some of the other measures that we have seen that affect 
institutions like the ones you manage and other 
disproportionate share hospitals, and also your answer to the 
question to the chairman about what kind of cuts you expected 
and then what kind of cuts you got.
    I wonder if you can expand on that answer a little bit and 
tell me what you think will happen if we do not give some 
relief under H.R. 3710, my legislation on DSH assisted by 
Congressman Bilbray, Whitfield, and others, and also 
Congressman Burr's bill, H.R. 2341, for the community-based 
institutions.
    Ms. Tavenner. I think that, again, going back to both DSH 
and community-based institutions, what we are seeing is the 
increase in the uninsured and the increase in folks who have 
inability----
    Ms. DeGette. If you can just move that microphone a little 
closer.
    Ms. Tavenner. We are seeing those numbers rise----
    Ms. DeGette. Right.
    Ms. Tavenner. [continuing] and we are seeing the cost of 
them rise. And what the hospital is left with is, I think, 
ethically, hospitals cannot put the patient, ethically and 
legally, back into the street. So we are a 24-hour-a-day, 7-
day-a-week operation, so we cannot control who comes into our 
organization and we are federally bound and State bound to care 
for those patients and we want to care for those patients.
    So what happens in a reimbursement situation where we 
continue to see decreases is that then we are forced to look at 
services that basically are on the fringe, or what I call not 
our core services, and make business decisions about whether or 
not we can continue those. Home health is one. Hospice is 
another. So you start to look at what services you can 
eliminate. Therefore, the patient ends up staying longer in 
acute care, so you kind of have a cyclical effect.
    Ms. DeGette. And that is more expensive, too, to you.
    Ms. Tavenner. Absolutely.
    Ms. DeGette. Is there going to come a point, do you think, 
without relief that your core services will begin to be 
affected?
    Ms. Tavenner. I think we have seen that in some communities 
already, and----
    Ms. DeGette. Could you give me a couple of examples?
    Ms. Tavenner. Yes. Rehab services would be an example. 
Skilled nursing units within hospitals, which in rural areas 
are frequently a safety net for patients. We have seen skilled 
nursing facilities within hospitals close. We have seen home 
health and hospice services close. We have seen rehab services 
close. Then I think once you eliminate those services, then you 
start to look at psychiatry and others where the payment 
mechanism just does not cover the cost.
    Ms. DeGette. Mr. Hawkins, would you like to talk a little 
bit about how you see some of those issues?
    Mr. Hawkins. Well, yes. If I could, although we are not 
bound by the Emergency Medical Treatment and Labor Act, EMTALA, 
which I think is being referred to here, and that refers to 
care to the individual until they are stabilized, okay, not 
necessarily inpatient care unless that is what is necessary to 
stabilize the individual's treatment, I think there is a little 
bit of a difference between that and the legal obligation to 
take anybody who walks in the door, regardless of their ability 
to pay.
    Ms. DeGette. Right.
    Mr. Hawkins. But much the same as has been alluded to with 
respect to the hospitals. As payment rates fall, the first 
thing to go typically are services, and the first services to 
go are those services that are either non-reimbursable and 
which are important to either help get the patient into care--
transportation, outreach, translation to help the care be 
meaningful--or the therapeutic regime, the care that the doctor 
recommends or the nurse practitioner recommends be useful, like 
health or nutrition education, taking a pregnant woman and 
saying, this is how you engage in good self-care, good 
nutrition during pregnancy.
    Ms. DeGette. Let me stop you right there.
    Mr. Hawkins. Yes.
    Ms. DeGette. About that pregnant women issue, you heard me 
ask that question before. Do you think that some of these 
problems I talked about with the last panel in terms of the 
most expensive infant care issues would be eliminated if we 
could somehow cover pregnant women under Medicaid and CHIP.
    Mr. Hawkins. Oh, sure. I mean, many of those issues we 
struggle with that every day in health centers. Trying to get 
individuals covered under Medicaid and CHIP, and I might add 
that for those who keep talking about the stigma associated 
with Medicaid and welfare, a study is about to be released 
which is going to essentially point to the fact that the so-
called stigma relates to where these people have to go to 
enroll and how they are treated. That stigma disappears when 
they can enroll at a provider site or at a community-based 
site, such as what your legislation is recommending, closer to 
home, that knows the individual, cares for them both in a 
medical sense but also in a personal sense.
    Ms. DeGette. Mr. Chairman, with your indulgence, would you 
mind if I asked Ms. Tavenner to also answer that question about 
the pregnant women?
    Mr. Bilirakis. As long as she does so in a brief manner, 
please.
    Ms. Tavenner. I can be brief. I certainly think that 
working with pregnant women, getting them in prenatal care and 
seeing them through their pregnancy would reduce the 
complications of newborns. So yes, I would support it.
    Ms. DeGette. Mr. Chairman, I would like to ask unanimous 
consent to enter into the record a letter dated July 18, 2000, 
from a number of groups, some who are here today, expressing 
support both for my legislation and also Congressman 
Whitfield's legislation.
    Mr. Bilirakis. Without objection.
    Ms. DeGette. Thank you.
    [The information referred to follows:]
                                                      July 18, 2000
Honorable Tom Bliley
Chairman
Committee on Commerce
U.S. House of Representatives
2125 Rayburn Building
Washington, DC 20515
    Dear Chairman Bliley: The Medicaid Disproportionate Share Hospital 
(DSH) program is our nation's primary source of financial support for 
safety net hospitals that serve the most vulnerable Medicaid, uninsured 
and underinsured patients. At a time when the number of people without 
insurance continues to rise, and hospitals are losing billions of 
dollars caring for low-income patients, further cuts in DSH are ill-
advised at best. That is why the undersigned hospital organizations 
strongly support legislation (H.R. 3698 and H.R. 3710) before the House 
Commerce Committee that would stop Medicaid DSH program cuts scheduled 
for 2001 and 2002.
    We are also writing to announce the results of a new analysis that 
finds hospitals lose $7.9 billion per year caring for Medicaid and 
uninsured patients. The analysis is based on the American Hospital 
Association survey data and was conducted by The Lewin Group. The new 
analysis highlights that despite the DSH program, significant Medicaid 
payment shortfalls exist for safety net hospitals serving Medicaid and 
uninsured patients.
    According to analysis:
 Hospitals lost $7.9 billion in 1998 on Medicaid and uninsured 
        patients (even factoring in state and/or local governments 
        appropriations that fund indigent care);
 Over five years, the estimated payment losses to hospitals 
        total almost $40 billion;
 In 1998, on average, hospitals received 84 cents in Medicaid 
        revenue and tax appropriations for every dollar it cost them to 
        care for Medicaid and charity care patients. This is the lowest 
        payment-to-cost ratio for any payer, including Medicare and . . 
        .
    Protecting federal DSH allotments from reductions beyond FY 2000 
levels, and permitting federal DSH growth, does not completely fill the 
payment gap between what Medicaid programs pay hospitals and the costs 
these hospitals bear caring for Medicaid and uninsured patients. 
However, it will provide substantial relief for many struggling safety 
net hospitals. We urge the House Commerce Committee to report 
legislation introduced by Congressmen Whitfield and Bilbray and 
Congresswoman DeGette to stop the scheduled reductions in FY 2001 and 
2002 in the Medicaid DSH program and prevent further losses for 
hospitals treating our most vulnerable Americans.
             Sincerely,
    American Hospital Association; Association of American Medical 
       Colleges; Catholic Health Association of the United States; 
    Federation of American Health Systems; National Association of 
Children's Hospitals; National Association of Public Hospitals and 
     Health Systems; National Association of Urban Critical Access 
                            Hospitals; Premier, Inc.; and VHA, Inc.

    Mr. Bilirakis. I would like to say to the gentlelady here 
publicly that her legislation in this regard, who should 
quarrel against it? I should think none. But we are going to be 
faced with a limited amount of money to try to save what exists 
now and I am not sure that we are going to be looking at brand 
new types of benefits, that sort of thing, so----
    Ms. DeGette. If the gentleman will yield just for one 
moment, let me just assure you, my legislation is very fiscally 
conservative, even more fiscally conservative than some others, 
and I do not think it gives new benefits. I hope you will----
    Mr. Bilirakis. Well, from a preventative standpoint, I 
mean. I have made that argument many times in the past, and 
unfortunately, with CBO, it does not carry very far. But in any 
case, we will talk about that.
    Mr. Burr to inquire.
    Mr. Burr. Thank you, Mr. Chairman. I do not know whether to 
take a minute or to try to take 30 minutes because I think 
every member could go one way or the other. I think we all have 
a pretty good idea of what we need to do. The realities are, we 
do not have enough money to do it.
    But Mr. Brown raised a very good point, and I would tell 
you that my answer would be slightly different than his 
conclusion when he talked about the promises. What we have done 
is we have over-promised as a Congress. We made people believe 
that, in fact, we could produce a dollar's worth of services 
for 85 cents and this would be never ending, and the fact is 
that it cannot. We talked about it earlier in the first panel, 
that this insane health care system that we have got right now, 
its reimbursements are based upon historical cost.
    Well, you know, try to tell historical costs to the future 
of health care. We will all pay the same thing for what 
technology supplies us, and that is the reason that we cannot 
figure out this transition that we are going through. It is the 
reason that you cannot produce a formula that will take into 
account for home care the spike for 6 months of a 100 percent 
increase in gasoline costs and GAO will not figure that in when 
they try to figure out where the profit or loss is in a 
particular industry.
    And it is insane, but just think about it. We sit here and 
talk about GAO and CBO and PPS and IPO and IPS and HCFA and 
HHS. We just made it too damn complicated, and unfortunately, 
with every attempt to fix it, and they are all good 
intentions--mine are better, but Mr. Brown's are good, too--we 
are all well-intended, but you are exactly right. What we have 
a tendency of doing is moving a little further out the 
uncertainty that exists today. My hope, and I wish we could 
have gotten the first panel to say, yes, you should do away 
with the 15 percent for home health. It should not be there. 
There is no way for private sector companies to run with that 
type of knife hanging over their head if you expect anybody to 
invest today, much less in the future of businesses.
    Long-term care is the greatest example. I think it is the 
one area that this Congress has not paid enough attention to, 
because we know the demographics in this country. If you 
understand those demographics, we have to start today with the 
bricks and mortar to supply enough facilities to meet the need 
10 years down the road.
    Mr. Richtman, if you are talking about the preservation of 
Social Security and Medicare, then long-term care is in there 
somewhere with the people that you are here representing, and 
if you are not an advocate out there saying, we need to make 
long-term care predictable, we need to make sure that the 
financial markets look at this, not as a place to flee from but 
as a place to invest in, then we have made a real mistake and 
you have made a real mistake and your association has.
    Let me get to some specific questions, because I think I 
could keep this up really all day. I think our whole attempt is 
to try to address some short-term problems and to begin to 
bring some predictability to every one of the sectors that are 
represented here. I hope that when we complete it, we can look 
back and say, we are not there but we have accomplished a few 
things that we needed to accomplish.
    Let me go to you, Mr. Hawkins. GAO kept referring to the 
fact that we had to get away from cost-based reimbursements, 
and, in fact, the Safety Net Preservation Act is to move to a 
prospective pay system. Would you please elaborate on that just 
a little bit?
    Mr. Hawkins. That is right. I am so glad that you raised 
that, because as I heard that this morning, we have got to move 
away from cost-based, my reaction was, well, that is exactly 
what the Safety Net Preservation Act does. Not only does it do 
that, however, it also provides the stability that you just 
referred to and some equity in the form of a payment mechanism. 
It sets a floor. It allows State flexibility.
    And, by the way, it is amenable. If at some future point 
health centers are found to be overpaid, it is amenable to 
adjustment because it basically sets a rate for the first year 
and then calls for an adjustment thereafter based on a cost-of-
living adjustor, the Medicare Economic Index, which is in law. 
It is the same mechanism that is used to adjust other primary 
care payments, and when you look at other PPS systems, they can 
then be adjusted back downward for MEI minus 1 percent or minus 
2 percent, or perhaps the MEI is not going to be sufficient.
    I guess my thought was when I heard Mr. Scanlon say that 
this morning, but you can move to provide permanent, fair, 
stable, common sense relief through the Safety Net Preservation 
Act. You do not have to wait for that GAO report. First of all, 
you have three other reports out there on the street in the 
last 3 months alone, the Institute of Medicine, an earlier GAO 
report, and one by the Kaiser Commission on Medicaid and the 
Uninsured, all of which have said that cutbacks in Medicaid 
payments are hurting already and seriously and negatively 
affecting health centers' ability to care for the growing 
numbers of uninsured and relief is needed. The Safety Net 
Preservation Act does that without necessarily going back to 
100 percent cost-based reimbursement, and that is why it meets 
all those tests.
    Mr. Burr. I appreciate that. I will make sure to send that 
statement to Mr. Scanlon just to clarify it for him.
    Mr. Richtman, let me ask you something from the standpoint 
of who you represent and the interest that I think we would all 
agree with. Specifically as it relates to the outpatient PPS 
issue with hospitals, what effect would a delay have on the 
implementation of that, if any, on your beneficiaries?
    Mr. Richtman. Well, we feel, of course, our beneficiaries 
are already paying a lot of out-of-pocket costs and are not in 
a position to pay even more. One fact or figure that I heard 
recently was kind of astounding, that today, and this looks at 
a lot of out-of-pocket costs, but today, a Medicare beneficiary 
on average pays out-of-pocket health care costs as a percent of 
their income at a higher cost than before we even had Medicare. 
On average, a Medicare beneficiary is paying more for health 
care as a percent of his or her income out of pocket than 
before we had the Medicare program.
    Mr. Burr. I remember when I was sworn in as a Member of 
Congress just 6 long years ago that wonderful health care plan, 
Mr. Chairman, that I heard that all Members of Congress had 
was, in fact, the same one I had in Winston-Salem when I worked 
for a company with 50 employees. There was only one big 
difference, that the same family plan that I paid $72 for with 
the company paying 75 percent and me paying 25 percent for, 
when I became a Member of Congress it now cost me $142 for the 
same coverage.
    I very quickly called the president of the insurance 
company--I felt that as a Member of Congress, I could do that 
now--and I asked him, I said, you know, I am getting the same 
coverage and it went from $72 to $144 and he laughed and I 
said, what is so funny? He said, ``Congressman, never let the 
Federal Government negotiate your health care.''
    Now, I am proud to tell you that it has worked its way down 
over those 5\1/2\ years, but that statement has never left me.
    Mr. Chairman, if I could for just a second----
    Mr. Bilirakis. Well, you are already almost 4 minutes over.
    Mr. Burr. I appreciate the indulgence of the chair.
    Mr. Bilirakis. Without a unanimous consent request, I might 
add, but go ahead very quickly so we can finish.
    Mr. Burr. One of the challenges that we have is to make 
sure that we have a health care system in total that is ready 
to handle the great changes and the great opportunities that 
will come in pharmaceuticals, in devices, those that will be 
used every day at the hospitals, that will be used at the 
community health centers, they will be used in home care. One 
of the questions I had to ask, if there is not home care, where 
do these people go? They stay in the hospital. It is more 
expensive.
    I mean, we try to sort of hide our head in the sand and say 
we do not know the answer. We do know the answer. That is the 
reason that we created this segment of health care and now we 
sort of run from it because, gosh, people use it. It grows too 
fast. Well, whatever we create, there are going to be people 
there to game the system.
    I would only hope to say to each of you that as we begin to 
hopefully put some of these fixes back in, that you will work 
aggressively to make sure that we find the right balance, that 
we do not go too far, and that, in fact, you help us with the 
structure of it so that this system of health care in this 
country is able to handle the technological changes that come 
in devices and pharmaceuticals and in care, because if we 
cannot, then, in fact, we will flunk on that promise of 
supplying the best health care system available in the world.
    Mr. Bilirakis. And I would add to that, that we are really 
in an ivory tower. We make these decisions up here, and with 
the exception of a couple of physicians that we have on this 
subcommittee, we do not have the practical knowledge, practical 
experience. Unfortunately, that is when these unforseen 
consequences, unintended consequences take place.
    So your help, not only today but your continuing help is so 
important. We worked awfully hard on trying to undo somewhat 
BBA 1997. Did we get adequate support, adequate honest type of 
inputs from you all, from the industry? I am not sure. The 
industry would say, hey, do not cut us at all, in effect.
    So, basically, we are going to tie this all up now and 
thank you. I would ask you if you would be available to respond 
to written questions that might be submitted to you and do it 
within a relatively short period of time, because hopefully 
this is on a fast track. I know we all want to see that. And in 
the process, let us not approach it from the standpoint of, 
hey, we want all the money back, all right? It is not going to 
happen. It just is not going to happen. So approach it from a 
realistic, practical understanding that we have a tough job to 
do up here. It is a job that we created by virtue of the 
unintended consequences in BBA 1997. So, hopefully, we can do a 
little better this time around.
    Thanks so very much for being here. This hearing is 
adjourned.
    [Whereupon, at 3:47 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                                   State of Florida
                      Agency for Health Care Administration
                                                      July 17, 2000
The Honorable Michael Bilirakis
2369 Rayburn House Office Building
Washington, D.C. 20515

Re: Modifications to the Balanced Budget Act of 1997

    Dear Congressman Bilirakis: As Congress reviews various proposals 
to reverse certain restrictions on funding to hospitals, nursing home 
facilities and home health providers from the Balanced Budget Act of 
1997 (BBA), I would like to share with you our concerns in these areas 
and ask your support for certain important modifications this year. 
They include:

 Freezing Disproportionate Share Hospital (DSH) cuts at F/Y 
        2000 level;
 Restoring funding to skilled nursing facilities; and
 Increasing home health provider payments.
Freezing Disproportionate Share Hospital Cuts:
    Florida's safety net hospitals that provide critical in-patient 
care for the uninsured and under-insured have been particularly 
affected by BBA reductions. State disproportionate share hospitals have 
experienced significant cuts since fiscal year 1998. Additional cuts of 
$46 million are slated through fiscal year 2001, for a total Florida 
reduction of $80 million over five years. Freezing these DSH cuts at 
the fiscal year 2000 level, as proposed in various House and Senate 
bills, would preserve important health care delivery systems and 
maintain $46 million of critical funds within our communities.
    Three of Florida's teaching hospitals serving large populations of 
the poor ( Jackson Memorial in Miami, Shands Jacksonville, and Tampa 
General Hospital rely upon disproportionate share funding. These 
facilities are committed to a three-fold mission of patient care, 
medical education, and research. In addition, they are engaged in 
highly specialized, state-of-the-art care, which is delivered to 
residents from throughout the State. These hospitals provide trauma 
care, burn treatment, neonatal and family care, and organ 
transplantation services to all Floridians. Developed and delivered 
through these vital DSH funds, these services save lives, reduce 
traumatic injuries and complications from strokes, and return people to 
their lives sooner and healthier.
Skilled Nursing Facilities and Home health Providers Payments:
    Other critical health areas that are emerging as fragile systems 
requiring repair from the BBA include Florida's nursing homes and home 
health providers. As you know, concern for the viability of our nursing 
homes is the focus of a statewide review by a Long-term Care Task Force 
chaired by Lieutenant Governor Brogan. They will be considering issues 
related to our elderly in nursing homes and alternative care 
arrangements. Restoring funding to skilled nursing facilities, and 
increasing home health provider payments--providing home care choices 
for our elders--would offer some important assistance as we seek 
comprehensive solutions to address future viability of these critical 
industries.
    To avoid potential declines in access to health care and to address 
deteriorating financial conditions, which are accumulating in Florida's 
hospitals and nursing home, I urge your assistance in modifying the BBA 
before Congress adjourns. Thank you for all you do to strengthen our 
communities, and assure all Floridians quality of care.
    Please feel free to call on me, or our Florida/Washington office at 
(202) 624-5885, for any additional information on these timely and 
important issues.
            Sincerely,
                                    Ruben J. King-Shaw, Jr.
                                                          Secretary
                                 ______
                                 
      Prepared Statement of The American Association for Homecare

    The American Association for Homecare is pleased to submit the 
following statement to the Subcommittee on Health and Environment for 
House Commerce Committee. The American Association for Homecare is a 
new national association resulting from the merger of the Home Care 
Section of the Health Industry Distributors Association, the Home 
Health Services and Staffing Association and the National Association 
for Medical Equipment Services. The American Association for Homecare 
is the only association representing home care providers of all types: 
home health agencies and home medical equipment providers, be they not-
for-profit, proprietary, facility-based, freestanding or governmentally 
owned.

                     WHAT IS A HOME HEALTH AGENCY?

    Home Health Agencies provide skilled nursing care, therapy and home 
health aide services to individuals recovering from acute illnesses and 
living with chronic health care conditions. Health care services in the 
home setting provide a continuum of care for individuals who no longer 
require hospital or nursing home care, or seek to avoid hospital or 
nursing home admission. The range of home care services includes 
skilled nursing; respiratory, occupational, speech, and physical 
therapy; intravenous drug therapy; enteral feedings; hospice care; 
emotional, physical, and medical care; assistance in the activities of 
daily living; skilled assessments; and educational services.

                        WHAT IS AN HME PROVIDER?

    Home medical equipment (HME) providers supply medically necessary 
equipment and allied services that help beneficiaries meet their 
therapeutic goals. Pursuant to the physician's prescription, HME 
providers deliver medical equipment and supplies to a consumer's home, 
set it up, maintain it, educate and train the consumer and caregiver in 
its use, provide access to trained therapists, monitor patient 
compliance with a treatment regimen, and assemble and submit the 
considerable paperwork needed for third party reimbursement. HME 
providers also coordinate with physicians and other home care providers 
(e.g., home health agencies and family caregivers) as an integral piece 
of the home care delivery team. Specialized home infusion providers 
manage complex intravenous services in the home.

                      HOME CARE IS JUST BEGINNING

    Over the last two decades, advances in medical technologies and 
changes in Medicare's payment structure have spurred a considerable 
growth in the use of home care. As in every other aspect of modern 
medicine, home health care has benefited from an explosion of new and 
emerging technologies. From the use of space-age materials to make 
wheelchairs and mobility aids lighter, to the application of micro-chip 
computer technology in implantable devices used to dispense critical 
medication, technology makes it possible for the care received in the 
home to equal or exceed that received in a hospital, at a fraction of 
the cost. Today, it is common for a Medicare beneficiary to undergo 
chemotherapy in the comfortable surroundings of his or her own home, an 
advance that was inconceivable just a few years ago. In the future, 
advances in tele-medicine and similar technologies will make it 
possible to further reduce health care costs and improve the quality of 
health care provided in the home. None of these advances could have 
been envisioned at Medicare's inception in 1965.
    Recent changes to Medicare's payment system have also spurred a 
growth in home health utilization. In the late 1980's, the Health Care 
Financing Administration's (HCFA's) rigid definition of the coverage 
criteria for home health services was struck down by a United States 
District court, making it possible for more beneficiaries to access 
home health services. At roughly the same time, Medicare instituted a 
prospective payment system for hospital inpatient care, which 
reimbursed hospitals according to the patient's diagnosis regardless of 
the number of days spent in the institution.
    Together, these changes have resulted in a situation where more 
Medicare-eligible beneficiaries are arriving home ``quicker and 
sicker'' than ever before. In turn, these beneficiaries require 
increasingly complex health services. All indicators show that as the 
`baby-boomers' continue to age, this trend will continue. The American 
Association for Homecare believes that the increased utilization of 
home health care prompted by these changes should be seen as a rational 
response to the changing needs of Medicare beneficiaries and the 
increased ability of home health providers to meet these needs.

                        HOME CARE IS ECONOMICAL

    Importantly, home care is not only patient-preferred, it is also 
cost effective. Numerous studies have shown that home care providers 
are a cost-efficient component of the healthcare delivery system, as 
they help keep beneficiaries out of costly inpatient programs. One 
study, conducted by an independent research organization, particularly 
demonstrates these savings. This study, The Cost Effectiveness of Home 
Health Care, examines the highly successful In-Home/CHOICE program 
instituted by the State of Indiana in 1985. Indiana provides 100% of 
the funding for this program, which covers the costs of home health 
care for qualified residents in need of long term care in order to 
prevent institutionalizations.
    The authors of the Study note that the coming crisis in health care 
funding for America's rapidly growing elderly population could be 
alleviated by home health care programs such as Indiana's. By avoiding 
institutionalized care, Indiana was able to reduce inpatient caseload 
costs by 50% or more, while allowing patients to receive care in the 
comfort of their own homes. The cost savings associated with this 
increased reliance on home care were considerable. The study states 
that home care for the elderly in Indiana can be provided for one half 
the cost of skilled nursing facility care. Similar care for the 
disabled costs 1.5 times more in a skilled facility than in the home. 
In addition, the quality control and screening procedures used in the 
Indiana program have successfully avoided problems with fraud and 
abuse. The Hudson Institute Study concludes that ``Properly crafted and 
administered, home health care can play a critical role in helping 
society meet the looming health care needs of the `Baby Boom' 
generation.''

                               CONCLUSION

    Home health care continues to evolve and expand to meet the 
increasingly complex needs of today's Medicare beneficiaries. By 
capitalizing on technical innovation, home care providers can conduct 
increasingly complex medical and therapeutic regimens in the comfort of 
beneficiary's own homes. In addition, recent studies have shown that an 
expanded home care benefit would reduce Medicare expenditures by 
avoiding costly institutionalizations. We urge the Committee to 
recognize the many benefits of home care by strengthening Medicare's 
commitment to the home health benefit.
                                 ______
                                 
        Prepared Statement of the American Hospital Association

    The American Hospital Association (AHA), on behalf of our nearly 
5,000 member hospitals, health systems, networks, and other providers 
of care, appreciates this opportunity to tell you first hand the 
dramatic impact of the Balanced Budget Act of 1997 (BBA) on America's 
hospitals and health systems.
    In 1997, Congress and the White House faced a large and seemingly 
intractable federal budget deficit and projections that the Medicare 
Hospital Insurance Trust Fund would be bankrupt by 2002 unless 
Washington acted.
    Congress responded with the 1997 Balanced Budget Act. The 
Congressional Budget Office (CBO) estimated that the BBA would cut $116 
billion from 1998 to 2002 in projected Medicare spending. More than $50 
billion of these cuts were estimated to come from reduced payments to 
hospitals. An additional $10 billion was to be cut from Medicaid 
hospital payments.
    The intent of Congress and the White House was to save the Medicare 
program. The result, though, threatens the viability of America's 
hospitals and health systems.
    According to projections, the five-year impact of the BBA for 
hospitals and other Medicare providers is over $200 billion, partially 
due to larger than anticipated reductions to providers. This unintended 
and excessive reduction in Medicare spending is severely affecting 
hospitals' ability to provide vital patient care services.
    Rural hospitals have been especially victimized by BBA Medicare and 
Medicaid spending cuts. An independent analysis by the University of 
Washington's Rural Health Research Center in Seattle concluded that, 
for rural hospitals, the BBA's cut ``will sharply escalate in intensity 
and affect a wide range of the services they provide to Medicare 
beneficiaries. These hospitals will have to cut services to survive.''
    The study looked at six small, rural hospitals in separate states. 
The BBA's effect on them:

 Two rural health clinics had been closed.
 One that was scheduled to open never did.
 The hospitals' home health agencies can't take as many 
        patients because of payment limits.
 Access to physical, occupational and speech therapy has 
        declined at all the sites studied.
    Across the country, hospitals are struggling. Services are being 
cut and facilities are being impacted:

 For Wilkes-Barre General Hospital in Wilkes-Barre, 
        Pennsylvania, BBA Medicare and Medicaid spending cuts have 
        forced the hospital to make some tough decisions . . . like 
        eliminating a diabetes center; health promotion programs; 
        geriatric psychiatric inpatient services; a Women's Health 
        Network; the School of Anesthesia; and the ambulance service.
 In Arizona, BBA cuts have forced the John C. Lincoln Health 
        Network to discontinue its disease management programs for 
        patients with congestive heart failure and chronic pulmonary 
        disease. ``Health Source,'' a free health information service, 
        also was discontinued. And a busy skilled nursing care unit, 
        which averaged 20 patients a day, was closed. Why? Take for 
        example, one patient whose stay was 93 days. The facility's 
        costs per day were $650; Medicare reimbursed only $260, 
        resulting in losses of $36,270. Hospitals simply can't continue 
        to provide services their communities need if doing so 
        guarantees financial hemorrhage.
 BBA cuts are affecting more than just Medicare beneficiaries. 
        In Stuart, Florida, for example, Martin Memorial, a 336-bed 
        facility, will shut down its nurse midwife program in October. 
        The hospital is facing a $30 million decrease in Medicare 
        reimbursements over five years. Martin Memorial had no choice 
        but to close the 17-year program.
 In Massachusetts, the state is expected to lose close to 
        23,000 health services sector jobs by 2005, according to a 
        Standard & Poor's/DRI report. The BBA's five-year cuts of $1.7 
        billion for the state's hospitals are a significant cause of 
        the job hemorrhage.
    Last year, Congress and the White House recognized some of the 
BBA's ``unintended consequences'' on hospitals and the patients they 
serve, when they enacted the Balanced Budget Refinement Act of 1999 
(BBRA), which restored an estimated $16 billion of the BBA's Medicare 
reductions. While the BBRA marked an important first step to remedying 
the BBA's unintended consequences, America's hospitals need additional 
relief. And here's why.
                      the case for bba relief 2000
    When Congress passed the BBA, CBO estimated that hospitals would 
contribute $53 billion over five years toward deficit reduction. 
Estimates now put that number well over $75 billion. Congress should 
return, at a minimum, the excess funds it did not intend to cut to 
America's hospitals.
    The BBA reduces Medicare payments for hospital inpatient services 
by providing payment updates that are below the market basket index, 
which is Medicare's measure of inflation. This below-inflation update 
has seriously hampered hospitals' ability to keep pace and maintain 
access to services for Medicare beneficiaries. Over fiscal years 1998, 
1999 and 2000, hospital inflation rates rose a total of 8.2 percent, 
while the payment updates have totaled 1.6 percent.
    Compounding the effects of the BBA is a series of market pressures 
no one could have predicted in 1997. Labor, drug, blood, and technology 
costs are skyrocketing. The costs of caring for all of our patients, 
including Medicare beneficiaries are increasing rapidly.
    Since 1998, annual wages and benefits paid to registered nurses 
increased 6 percent, total employee benefits increased nearly 7 
percent, and pharmacists' wages increased more than 25 percent. As 
stated earlier, for the same period, hospitals' annual Medicare updates 
have totaled only 1.6 percent.
    The cost of prescription drugs has increased dramatically. The 
average price for new drugs is about $71, more than twice the average 
price for previously existing drugs. New and more expensive drugs are 
constantly emerging, replacing older drugs and increasing the overall 
use of drugs in patient care. Yet, only a fraction of the cost of new 
drugs is included in the inflation measurement the government uses to 
calculate hospital payment updates.
    The cost of blood also is on the rise. The Food and Drug 
Administration soon will approve new blood screening techniques to make 
our blood supply safer. But quality improvements will increase the cost 
of blood by $40 to $50 a pint, a 50 percent jump. New techniques, such 
as ``viral inactivation,'' are expected to double or triple the cost of 
blood. However, the cost of these new techniques is not included in 
today's measure of hospital inflation.
    In addition, providers will be required to make a major investment 
to comply with new federal administrative simplification standards and 
with new patient record privacy and security requirements. The White 
House estimates that new privacy requirements will increase the costs 
for providers and health plans by $1.2 billion for the first year 
alone, and $3.8 billion over five years. Other estimates, however, have 
put the cost as high as $43 billion. Current Medicare payment policies 
do not reimburse for these costs.
    The economic outlook is so grim, that financial experts are losing 
confidence in what has historically been a fairly stable industry. 
Moody's Investor Service reports that downgrades in bond ratings for 
hospitals were the most ever in 1999, outpacing upgrades 5-1. And this 
month, Moody's reported that the 2000 financial picture is not 
improving. In fact, the rating agency warned that the amount of debt 
affected by downgrades in 2000 may be on course to actually exceed the 
total amount of debt downgraded for 1999. A poor financial prognosis 
means it costs hospitals more to borrow and invest in the people, 
technology and infrastructure necessary to keep pace.
    At the same time, America's hospitals and health systems continue 
to serve as the nation's health care safety net . . . caring for those 
who have nowhere else to go for care. Current estimates put the number 
of Americans who lack health insurance at about 44 million. That number 
is projected to continue to increase, soaring to 55 million by 2010. 
Hospitals are America's safety net for caring for the uninsured, but at 
increasing costs. Government support makes up only a small portion of 
costs for treating the uninsured.
    The Medicaid DSH program is the primary source of financial support 
for safety net hospitals that serve the most vulnerable citizens. 
Without this important funding source, these hospitals would be 
incapable of providing adequate access to health care for many of these 
patients.
    BBA cuts . . . rising costs . . . a darkening financial horizon . . 
. the problems of the uninsured. Our ability to take care of our 
patients and communities is being seriously challenged. But it's not 
just hospitals that are saying America's health care providers are 
facing a financial crisis . . . outside experts confirm that we need a 
cost of caring adjustment.

                         WHAT OTHERS ARE SAYING

    Recently, the Medicare Payment Advisory Commission (MedPAC), 
Congress' advisor on Medicare payment issues, agreed that more needs to 
be done. The commission recommended that Congress increase the 
inpatient prospective payment system update by between 3.5 percent and 
4 percent--more than twice what is in current law. MedPAC's data 
analysis shows that nearly 35 percent of the nation's hospitals are 
operating in the red. This is due, in part, to the dramatic Medicare 
cuts contained in the BBA. MedPAC recognized the need for Medicare to 
keep pace with the high cost of providing health care today.
    In addition, two independent studies, one by the Lewin Group and 
another by Ernst & Young/HCIA-Sachs confirmed that hospitals are unable 
to cover their costs when treating Medicare patients. Lewin predicts 
that without further relief from the BBA, 60 percent of hospitals may 
lose money treating Medicare patients by the end of 2004. And the 
Ernest & Young study reinforces the Lewin results, by showing that 
total Medicare margins, which measures the operating margin on all 
hospital services to Medicare patients, continue to decline to 
dangerously negative levels.
    Also, a recent analysis of 1998 data from the American Hospital 
Association survey, by the Lewin Group, found that hospitals lost $7.9 
billion on Medicaid and uninsured patients. Over the next 5 years, the 
estimated payment losses to hospitals will total almost $40 billion. In 
1998, on average, hospitals received 84 cents in Medicaid revenue and 
tax appropriations for every dollar it cost them to care for Medicaid 
and charity care patients. This is the lowest payment-to-cost ratio for 
any payer, including Medicare and commercial insurers.
    No organization, including the nation's hospitals and health 
systems, can continue to serve if it gets paid less than the cost of 
providing services.
    Mr. Chairman, it's time for lawmakers to heed both the 
recommendations and the warnings of financial experts. Hospitals and 
health systems need a cost of caring adjustment.
    Last week, CBO announced new on-budget surplus estimates of $2.2 
trillion over 10 years--estimates that have more than doubled in four 
months. This is further proof of what we've known for a long time: 
Congress and the Administration have the resources to reverse the 
unintended consequences of the BBA. It's time for Washington to act.

                            BBA RELIEF 2000

    The BBA has hit hospitals hard in ways no one could have foreseen 
when the law was written. With today's booming economy, now is the time 
to remedy the flaws of the BBA.
    Indeed, Washington has taken notice and the momentum for BBA relief 
is growing. The AHA is pleased to cite that 217 representatives have 
cosponsored the Medicaid Preservation Act (H.R. 3698/3710), legislation 
to prevent further reductions in the Medicaid disproportionate share 
hospital (DSH) program. Similar legislation in the Senate is also 
gaining support with 24 senators cosponsoring Medicaid DSH relief (S. 
2299/2308).
    The AHA is also asking Congress for relief, including:

 For all hospitals, repeal of the last two year's of the BBA's 
        inpatient market basket reductions;
 For rural hospitals, a package of relief that would include: 
        equalizing the qualification threshold for payments to rural 
        hospitals under the Medicare disproportionate share (DSH) 
        program; improving flexibility for Medicare critical access 
        hospital program; updating current rural payment classification 
        systems; providing a payment adjustment for rural ambulance 
        providers; and several technical changes for rural hospital 
        services; and
 For teaching hospitals, continuation of the current adjustment 
        for indirect medical education of 6.5 percent;
    Mr. Chairman, we enjoy a booming national economy, which is fueling 
a federal budget surplus of billions of dollars. We can avert a health 
care crisis in our communities. We urge you and your colleagues to 
support our efforts to secure additional BBA relief now and help ensure 
that high-quality health care will be there when our communities need 
it.
    Thank you for providing me with the opportunity to address you 
today.
                                 ______
                                 
         Prepared Statement of the American Medical Association

    We appreciate the opportunity to provide this written statement to 
the Subcommittee concerning the American Medical Association's (AMA) 
recommendations as the Subcommittee moves forward in its consideration 
of amendments to the Balanced Budget Act of 1997 (BBA).
    The BBA imposed tremendous cuts in Medicare payments for various 
medical services. Although these provisions required regulatory 
implementation, the Health Care Financing Administration (HCFA) has 
imposed massive amounts of burdensome regulatory requirements on the 
physician, provider and beneficiary communities beyond what Congress 
had ever intended. Some of these BBA provisions or their implementing 
regulations have adversely impacted or threaten to have such impact on 
Medicare patient access to and quality of care. Thus, certain BBA 
``fixes'' are needed to ensure that these results do not continue to 
plague beneficiaries.
    Accordingly, the AMA recommends that the Subcommittee approve the 
following amendments to the BBA:
Health Care Financing Administration (HCFA) Reform
    The AMA recommends that the Subcommittee include in any BBA-reform 
package provisions to (1) ensure that HCFA and its carriers devote the 
proper level of resources to educating physicians concerning Medicare 
coding, billing and documentation requirements and (2) reform HCFA's 
post-payment audit process.
    As discussed above, HCFA, under the BBA, has imposed on physicians 
an overwhelming amount of burdensome regulatory requirements. As we 
recently testified before this Subcommittee, physicians must comply 
with over 100,000 pages of complex regulations. Although HCFA expects 
physicians to understand all of these regulations, notices, fraud 
alerts, and program memoranda, the agency does not adequately educate 
physicians, especially with regard to Medicare billing requirements. 
Indeed, physicians cannot receive written consistent and clear answers 
from their carriers regarding coding, documentation and coverage 
issues.
    Further, HCFA contractors have been sending post-payment review 
letters to physicians, which require the physician to submit to 
invasive, protracted and expensive government audits in order to 
preserve his or her due process rights. In these post-payment review 
letters, HCFA contractors are identifying possible billing errors from 
a small batch of claims and using these possible errors to 
``extrapolate'' enormous overpayment amounts from physicians, suppliers 
and providers. During this process, many HCFA contractors have no 
direct, face-to-face communication with the physician, supplier, or 
provider who frequently have difficulty obtaining answers from the 
carrier regarding their audit.
    Many physicians are opting to retire or to no longer see Medicare 
patients, rather than deal with the HCFA/carrier hassles and possibly 
undergo costly and lengthy post-payment audits. This threatens patient 
access to care--especially in rural areas--which, in turn, affects 
quality.
    Accordingly, we urge the Subcommittee to ensure that any BBA-reform 
legislation requires HCFA to remedy its over-zealous regulatory 
approach to implementation of the BBA, especially with respect to the 
agency's physician and provider education process as well as its post-
payment review enforcement activities.
HHS Accountability for Regulatory Costs
    The cost of the numerous BBA and other burdensome regulatory 
requirements discussed above impose tremendous costs on physicians' 
medical practices. Yet, much of these compliance costs must be absorbed 
by physicians' practices. Thus, the Secretary of the Department of 
Health and Human Services (HHS) and HCFA should be required to 
calculate the costs of new regulations and increase Medicare physician 
payment rates each year to account for these costs.
    HCFA annually updates Medicare payments to physicians to account 
for certain factors, including inflation and legislative and regulatory 
factors affecting physician expenditures. Yet, these updates do not 
take into account the costs of compliance with the continuing onslaught 
of costly BBA and other regulations.
    We urge the Subcommittee to pass legislation requiring the 
Secretary of HHS to determine the cost of each regulation (and not 
simply those affecting the physician payment schedule) on physicians' 
practices and annually take such costs into account when updating 
Medicare payments to physicians. Further, for oversight purposes, we 
recommend that the Secretary be required to report to the Medicare 
Payment Advisory Commission (MedPAC) and the General Accounting Office 
(GAO) on the costs imposed by all relevant regulations and to consult 
with organizations representing physicians concerning the methodology 
used in determining such impact. Finally, we recommend that the GAO 
advise Congress on improvements to the Secretary's methodology for 
calculating these regulatory costs.
Loan Deferment for Residents
    We further urge the Subcommittee to include in any BBA-reform 
package an amendment to improve the formula for determining whether 
medical residents can qualify for a student loan deferment during 
residency.
    The Medicare cuts imposed on the health care industry under the BBA 
have economically drained the system and have made it even more 
difficult on medical residents who generally are not paid enough to 
make ends meet, especially when they are required to re-pay enormous 
amounts on their student loans during their residency.
    Currently, under the Higher Education Act, there is a very strict 
formula based on ``economic hardship'' for determining whether a 
student can get a loan deferment. This formula is much too narrow to be 
effective, and many medical residents who legitimately need a loan 
deferment for economic reasons fail to qualify. By the time medical 
students begin their residency programs, which are generally four or 
more years in duration, they must begin to repay their medical school 
loans, yet they typically are not paid enough to make ends meet. Last 
year's national average gross annual salary for first-year residents 
was about $34,000.
    Based on national average figures (using full-time pay for first 
year residents and monthly housing payments) and a federal debt burden 
of $72,000, a typical resident would be left with less than $440 a 
month, after paying federal taxes, housing and loan payments. This 
amount must cover all other expenses such as food, insurance, 
utilities, telephone, state/local taxes, transportation, medical books, 
computer-related expenses, professional memberships, educational 
conferences, health care expenses, clothing, and entertainment/social 
activities. Yet, under current law, this resident would not qualify for 
a deferment and thus would have to begin repaying his or her loans.
    With a minor adjustment to the formula, residents with over $48,000 
in federal debt (rather than $72,000) could qualify for federal loan 
deferment during their residencies.
    Thus, we urge the Subcommittee to approve a BBA-reform provision 
that would permit residents, through a more realistic economic hardship 
formula, to obtain deferments for their full initial residency period 
if they continue their education through a medical internship or 
residency program.
    We thank the Subcommittee for the opportunity to provide our views 
concerning the foregoing matter, and appreciate the Subcommittee's 
efforts to provide relief under the BBA. We look forward to working 
with the Subcommittee to achieve reasonable remedies for hardships 
imposed by the BBA and related burdensome regulatory requirements on 
Medicare patients, physicians and the provider community.
                                 ______
                                 
  Prepared Statement of The American Medical Rehabilitation Providers 
                              Association

    Mr. Chairman: This statement is submitted on behalf of the American 
Medical Rehabilitation Providers Association (AMRPA). AMRPA is the 
national trade association representing approximately 325 freestanding 
rehabilitation hospitals, rehabilitation units in general hospitals, 
and other outpatient rehabilitation providers. The majority, if not 
all, of our members participate in the Medicare program. For 
rehabilitation hospitals and units, Medicare accounts for approximately 
70% of all discharges and revenues. Therefore, even temporary changes 
in Medicare reimbursement can threaten the security of a great number 
of facilities and consequently, the patients we serve.

                               BACKGROUND

    Rehabilitation hospitals and units provide medical care and various 
therapies to patients who, because of disease, injury, stroke or 
similar incidents, have impairments in their ability to function, 
either physically or cognitively. Our goals are to help them regain 
their maximum level of functional capability and to return them to 
independently living in their own homes. 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. 
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 patients admitted to such facilities were 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.
    Rehabilitation hospitals and units are currently reimbursed for 
providing Medicare services under a payment methodology mandated by the 
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). This 
arrangement, which was intended to be temporary, reimburses facilities 
on the basis of reasonable cost, subject to a payment ceiling (known as 
the ``TEFRA limit'').
    Over time, this system developed a number of negative incentives, 
which led the industry to advocate for implementation of a prospective 
payment system (PPS) for inpatient rehabilitation facilities. In 
recognition of the need to modify payment methodology , in the Balanced 
Budget Act of 1997 (BBA 97), Congress enacted a PPS for inpatient 
rehabilitation to be implemented over two years, starting with cost 
reporting periods beginning on or after October 1, 2000. BBA 97 calls 
for a 2% reduction in total expenditures for rehabilitation services 
from that which would have been spent absent the PPS. It also included 
several provisions aimed at reducing costs during the transition period 
until full PPS implementation. These included a 15% cut in inpatient 
capital reimbursement and reductions in bonus incentive payments and 
the TEFRA limits.
    These interim measures, imposed by the BBA and intended to reduce 
Medicare costs during the period prior to PPS implementation, now 
threaten the financial security of the nation's rehabilitation 
providers as well as the access to services relied upon by 
rehabilitation patients.
    Earlier this year, the Health Care Financing Administration (HCFA) 
announced that it is delaying the implementation of the rehabilitation 
inpatient PPS until cost reporting periods beginning on or after April 
1, 2001. Since HCFA has not yet promulgated the rehabilitation PPS 
rulemaking, this timeline is now highly questionable. These significant 
delays in the development of the PPS system render it unlikely that 
facilities will begin the transition to the PPS until the end of 2001, 
more than a year later than originally planned.
    Overall Medicare outlays for services delivered by rehabilitation 
hospitals or units have been reduced by more than $600 million over 
three years. And although rehabilitation spending comprises just 2.3% 
of total Medicare spending, rehabilitation hospitals and units have 
been forced to absorb almost 4.3% of BBA 97 spending reductions. 
Moreover, the sought-after cost reductions have already been realized. 
The Medicare Payment Advisory Commission's (MedPAC) June, 2000 Report 
to Congress, for example, noted that from 1997 to 1998, Medicare 
margins for rehabilitation facilities decreased from 6.3% to 1.8%.
    The financial impact of the delayed implementation of the PPS and 
the realization of Medicare cost savings that were the impetus for the 
reimbursement changes, as well as the creation of a national budget 
surplus, make imposition of further financial burdens on the 
rehabilitation sector both unnecessary and especially risky. Congress 
should take action to ensure both the short-term financial stability of 
the rehabilitation hospital industry prior to the implementation of the 
rehabilitation PPS and the long-term financial capability of 
rehabilitation providers to offer care to an aging population that will 
increasingly need its services.

I. Congress Should Ensure the Continuing Availability of Rehabilitation 
        Services Through Elimination of the 2% Reduction in Total 
        Payments and a Temporary 1% Increase in Incentive Payments.
    BBA 97 reduced both the total expenditures for inpatient 
rehabilitation services under the PPS and changed the current payment 
methodology, including the bonus incentives payments, that previously 
had been used to encourage and maintain the most efficient provision of 
services. As implementation of the rehabilitation PPS continues to be 
delayed, these changes to the TEFRA payment system continue to 
contribute to the overall decline in the financial stability of the 
rehabilitation hospital industry.
    Section 4421 of the BBA 97 mandated that, in setting the 
rehabilitation PPS payment rates, the HHS Secretary reduce total 
expenditures for inpatient rehabilitation services by 2% from what 
these would have been absent a PPS. Thus, in determining the rates to 
be paid under the rehabilitation PPS for FY 2001-02, only 98% of the 
total amount that otherwise would be paid under TEFRA is to be taken 
into account. In light of the significant reductions in Medicare 
spending for rehabilitation services since enactment of the BBA, the 
additional 2% reduction in FY 2001-2002 reimbursement could devastate 
an industry already trying to cope with the fiscal restraints resulting 
from BBA 97 initiatives.
    The long-term financial security of the rehabilitation hospital 
industry would be bolstered substantially by elimination of this 
reduction. The scheduled reduction was originally enacted as part of 
the overall BBA 97 effort to obtain savings under the Medicare program. 
Clearly, as demonstrated by Medicare reimbursement reductions for 
rehabilitation facilities, BBA 97 savings have already been achieved. 
Thus, there is no longer any reason for Congress to require this 
additional reduction in rehabilitation PPS reimbursement, particularly 
when one considers the additional hardship that it will induce.
    Additionally, the BBA 97 imposed several cost-savings measures. 
These included reduction of bonus incentive payments, the program under 
which PPS-exempt hospitals and units, including rehabilitation 
facilities, were eligible to obtain an incentive payment that was the 
lesser of 50% of the difference between their costs and the TEFRA 
limit, or 5% of the limit. Section 4415 of the BBA 97 reduced the 
applicable percentages to 15% and 2%, respectively. The negative effect 
of this provision was further compounded for facilities that had TEFRA 
caps lowered to the 75th percentile under another BBA 97 provision. The 
industry estimates that, as a result of these two provisions, the 
rehabilitation hospital industry lost approximately $144 million in 
payments in one year (based on FY 1997). A modest, yet significant, 
restoration in the form of a 1% increase in bonus payments until full 
implementation of the rehabilitation PPS would help to alleviate 
interim financial concerns and restore a more meaningful incentive to 
increase productivity.

II. Until the PPS System is Fully Implemented, Congress Should Restore 
        Full Capital Payments for PPS-Exempt Rehabilitation Hospitals 
        and Units.
    Because rehabilitation facilities and other PPS-exempt providers 
are reimbursed on a cost basis, Congress previously exempted them from 
capital cuts. The rationale for full reimbursement of capital for 
providers under cost reimbursement is that such providers have no 
opportunity to make up for the loss of capital payments through 
operating efficiencies. If costs go down, so does reimbursement. 
Section 4412 of the BBA changed this. It imposes a 15% reduction in 
capital payments for PPS-exempt (TEFRA) hospitals and units for FY 
1998-2002. This reduction in capital payments was not driven by policy 
considerations, but instead was implemented solely for budgetary 
reasons.
    As noted above, rehabilitation providers are heavily dependent on 
Medicare fee-for-service, which covers 70% of rehabilitation admissions 
and an equally high percentage of revenues. By comparison, other PPS-
exempt hospitals (e.g., psychiatric, children's) are far less Medicare-
dependent. As such, the capital payment reductions to PPS-exempt 
hospitals have a comparatively greater detrimental impact on the 
renovation of plants and the building of more modern facilities by 
rehabilitation hospitals than by other PPS-exempt hospitals.
    In terms of precedents, capital payments to acute care hospitals 
were decreased with implementation of the acute care PPS only after 
four full years, and only gradually over time. This progressive 
implementation initially included a 3.5% cut in FY 1987, with gradual 
increases to 15% in FY 1989. Rehabilitation providers are being forced 
to absorb capital reimbursement cuts much more quickly than were acute 
care hospitals.
    A 15% cut in capital reimbursement costs PPS-exempt providers at 
least $62 million in one year alone. If capital and bonus incentive 
payments are not restored in the short run, all rehabilitation 
providers will continue to receive payments below cost. Therefore, 
Congress should restore full capital payment for PPS-exempt 
rehabilitation hospitals and units.

III. Congress Should Permit an Early Opt-In to Inpatient Rehabilitation 
        PPS.
    Under BBA 97, the inpatient rehabilitation PPS will be implemented 
gradually over a two-year period. During the transition, facilities' 
payments will be calculated using a combination of TEFRA payments and 
new PPS payments. In year one, these payments will consist of the 
aggregate of two-thirds of a facility's TEFRA payments and one-third of 
its PPS payments; in year two, facilities will receive payments based 
on one-third TEFRA and two-thirds PPS. By the third year, all 
facilities will be paid 100% under the inpatient rehabilitation PPS.
    As noted above, the inpatient rehabilitation PPS was originally 
intended to go into effect for cost reporting years beginning on or 
after October 1, 2000. HCFA announced earlier this year that it is 
delaying implementation of the system until cost reporting periods 
beginning on or after April 1, 2001. Since HCFA has not yet promulgated 
the rehabilitation rulemaking, this timeline is now highly 
questionable. Because most facilities' cost years start later in the 
year, many facilities will not begin the transition until the end of 
2001 or even later, depending on the final implementation timeline.
    While the transition period remains extremely important for many 
rehabilitation facilities, some facilities believe that they can 
continue to provide high quality, cost-effective care while moving 
directly to full PPS in the first year. In fact, these facilities 
perceive that trying to live under two payment systems for two years--
TEFRA and PPS--could lead to conflicting payment and service delivery 
incentives. It is important to ensure, however, that rehabilitation 
facilities which are not interested in taking an early election to full 
PPS retain the ability to transition to full PPS over a two-year 
period.
    Permitting immediate movement to full PPS would reward facilities 
able to revise their costs and service delivery patterns quickly to 
meet or come in under their PPS limits. Congress provided such an 
election for the skilled nursing facility PPS, including necessary 
funding, in the Balanced Budget Refinement Act of 1999 (BBRA). Congress 
should look to this precedent and allow an early opt-in. This change 
would preserve facilities' continued financial viability, thereby 
furthering their capacity to carry out their primary mission, the 
delivery of care to persons with disabilities.

                               CONCLUSION

    AMRPA believes that patients' continuing access to quality 
rehabilitation services is currently at risk. The confluence of 
reductions in total payments for services, including reductions in 
bonus incentives and capital payments, coming on the heels of dramatic 
decreases in Medicare margins for rehabilitation services already have 
resulted in huge losses for the rehabilitation hospital industry. With 
the following actions, Congress can provide vital relief for 
rehabilitation facilities and preserve the ongoing availability of 
rehabilitation services for the nation's increasingly aging population:

1) Congress should ensure the short-term financial stability of the 
        rehabilitation hospital industry prior to the implementation of 
        the rehabilitation PPS by increasing the incentive payment by 
        1%, and ensure the industry's long-term financial stability by 
        eliminating the 2% reduction in the total amount to be paid 
        under the PPS for FY 2001-2002.
2) Congress should restore full capital payment for PPS-exempt 
        rehabilitation hospitals and units.
3) Congress should permit an early opt-in for those rehabilitation 
        facilities able to more quickly adopt Congress' plan.
    In addition to the above priorities, AMRPA supports a three-year 
extension of the moratorium on outpatient therapy caps. These caps, 
imposed by the BBA 97, bear no relationship to patients' clinical 
needs. The current moratorium, instituted by the BBRA in response to 
the expressed concerns of patients and providers, applies to calendar 
years 2000 and 2001. This, however, is unlikely to provide HCFA with 
sufficient time to adequately research and develop appropriate 
mechanisms to replace the arbitrarily derived limits on beneficiaries' 
access to needed rehabilitation services embodied in the cap. An 
extension of the moratorium should provide HCFA adequate time to 
complete its studies and to develop methodologies that will control 
costs, while protecting patients' treatment needs.
    We thank the Committee for this opportunity to submit testimony. 
AMRPA looks forward to working with Congress as we face the future.
                                 ______
                                 
    Prepared Statement of the American Physical Therapy Association

    Mr. Chairman, members of the Subcommittee on Health and 
Environment, on behalf of the more than 68,000 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 examine the impact 
of the Balanced Budget Act (BBA) of 1997 on providers of health care 
services and the patients they serve. For the purpose of this hearing, 
APTA's testimony will focus on the impact the BBA and the Balanced 
Budget Refinement Act (BBRA) of 1999 have had on the delivery of 
outpatient physical therapy services under Part B of the Medicare 
program.
    Many 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.
Recommendation
    Under the current law, passed as part of the BBRA, the $1,500 caps 
on outpatient rehabilitation services would be reimposed upon 
beneficiaries as of January 1, 2002, if Congress takes no action. This 
year, as Congress considers further legislation to address the impact 
of BBA provisions on providers and their patients, APTA strongly urges 
Congress to extend the moratorium on the $1,500 therapy caps for an 
additional three years.
    The Health Care Financing Administration (HCFA) has only just begun 
to collect data relating to the delivery of rehabilitation services in 
the various Part B practice settings. Given the move in January 1999, 
to the Resource-Based Relative Value Fee Schedule (RBRVS) for so many 
therapy providers and the imposition of the therapy cap moratorium in 
January 2000, APTA believes it would be wise for Congress to allow 
greater time for data collection and analysis of physical therapy 
utilization under Part B before new mechanisms to limit care are 
enacted into law.
Background
    Both the BBA and BBRA have significantly affected the delivery of 
physical therapy services to Medicare beneficiaries. Prior to the BBA 
of 1997, Medicare reimbursement for physical therapy services under 
Part B varied between practice settings. Outpatient services provided 
in skilled nursing facilities, rehabilitation hospitals/units, home 
health agencies, comprehensive outpatient rehabilitation facilities 
(CORF), and rehabilitation agencies were reimbursed under a 
retrospective cost-based system. Physical therapists in private 
practice and physician offices have billed therapy services to Medicare 
under the RBRVS since 1992. Physical therapists in private practice had 
also been restricted to billing only $900 of care per beneficiary in a 
given calendar year.
    The BBA made significant changes to Medicare payment policies for 
rehabilitation services. Under the BBA, as of January 1, 1999, annual 
$1,500 per beneficiary caps for physical therapy (including speech 
language pathology services) and for occupational therapy were imposed 
on Medicare beneficiaries requiring outpatient rehabilitation services. 
This represented a considerable reduction in reimbursement for all 
settings, except the private practice setting, that had been caring for 
those with the most serious conditions requiring long-term 
rehabilitation care (i.e. stroke, Parkinson's Disease, traumatic brain 
injury, hip replacement). At the same time, the BBA required all Part B 
providers to begin billing Medicare under the RBRVS system.
    These drastic changes sent shockwaves through the rehabilitation 
community, leaving providers confused on how to comply with the new law 
and how to instruct their patients to receive necessary care. The 
changes also left patients confused about what their Medicare benefits 
actually were.
    APTA has long opposed arbitrary limitations on care for 
beneficiaries. The Association challenged that the $1,500 caps would 
not allow some patients with significant rehabilitation needs to 
receive appropriate coverage for care. The ability of Medicare 
beneficiaries to receive the necessary physical therapy services under 
the $1,500 limit was further exacerbated by Congress' action to group 
speech-language pathology with physical therapy under one $1,500 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.'' The impact on 
patient care caused by combining physical therapy and speech therapy 
within one cap is self evident given these utilization numbers. 
Physical therapists were saddled with difficult decisions on how to 
treat a patient with significant rehabilitation needs under a payment 
policy that was inflexible.
    MedPAC analyzed the impact of the coverage limits and presented the 
results of its 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 $1,500 coverage 
limit. The Commission found that approximately \1/3\ of patients in 
rehabilitation agencies and CORFs exceeded either $1,500 of outpatient 
physical and speech therapy or $1,500 of occupational therapy. MedPAC 
also found that some types of patients were more likely to exceed the 
dollar limits. For example, half of the stroke patients served in these 
settings exceeded the $1,500 cap.
    During the 1997 Medicare debate, APTA argued that the caps would 
disrupt the continuum of care, particularly since Congress chose not to 
impose the therapy caps on outpatient hospital departments. APTA argued 
that patients would be forced to change treatment settings once the cap 
had been reached in a non-hospital setting and that it would disrupt 
their progress toward rehabilitation. In fact, APTA members made the 
Association aware of advertisements published by hospitals letting 
seniors know that only in their outpatient clinics could they be 
assured of receiving the necessary therapy they required, since other 
practice settings were capped at $1,500 per year.
    Rather than saving money for the Medicare program, the therapy caps 
merely redirected patients to receive care in an outpatient hospital 
department. APTA argued that the only money that is saved by this 
policy is for those beneficiaries who deny themselves appropriate care. 
In fact, this policy increases the cost of care to seniors by forcing 
them to pay for care out of pocket once the cap had been reached if 
they wished to stay with their chosen physical therapist.
    As was expected, some beneficiaries complained to their physical 
therapist that they experienced great difficulty obtaining access to 
needed services, because they did not live near a community with an 
outpatient hospital clinic that provided physical therapy care.
    APTA also argued that the $1,500 caps would be difficult to 
administer. Even before the Y2K problems of the Health Care Financing 
Administration (HCFA) became apparent, it was clear that tracking a 
beneficiary's care from practice setting to practice setting would be 
an impossible task. For example, a physical therapist in private 
practice would have difficulty determining whether a beneficiary has 
already received $1,500 of outpatient therapy services in another 
setting during a given calendar year. In addition, if the beneficiary 
resided in Michigan for part of the year and in Florida for the 
remainder, it would be difficult for either setting to know that the 
beneficiary had already received services in another state.
    In 1999, Congress took appropriate action as part of the BBRA to 
suspend the $1,500 caps on therapy services to ensure that 
beneficiaries have access to necessary physical therapy services. 
Today, all Part B physical therapy services are billed to Medicare 
under a common fee schedule system. This will allow HCFA the 
opportunity to analyze care being provided across practice settings. 
APTA believes HCFA will find that arbitrary limitations on care are 
unnecessary to control utilization of services. However, HCFA must have 
the time necessary to make a complete evaluation of the system.
    Thus, APTA strongly supports a three-year extension on the present 
moratorium and subsequent delay of pending reports to Congress relating 
to utilization of services and a potential new methodology for payment 
of rehabilitation services.
    Thank you for your consideration of these comments. Please feel 
free to contact Patrick Cooney at (703) 933-0020 should you have 
questions regarding this statement.
                                 ______
                                 
  Prepared Statement of Association of periOperative Registered Nurses

                                OVERVIEW

    AORN (the Association of periOperative Registered Nurses) is the 
professional association representing approximately 43,000 operating 
room nurses across the country. AORN applauds Chairman Bilirakis for 
his leadership in examining possible refinements to the Balanced Budget 
Act of 1997 (BBA). For the reasons outlined below, AORN respectfully 
requests the inclusion of H.R. 3911, the Medicare Certified Registered 
Nurse First Assistant Direct Reimbursement Act of 2000, in any BBA 
refinement package.

                               BACKGROUND
 
   The BBA confirmed and expanded the role of non-physician assistants 
at surgery. For example, the BBA increased the reimbursement rate 
received by Physician Assistants (PAs), Nurse Practitioners (NPs) and 
Clinical Nurse Specialists (CNSs) for assisting a surgeon at surgery. 
The BBA also removed restrictions on the type of areas and settings in 
which first assisting services of non-physician first assistants may be 
covered by Medicare. (See Sections 4511 and 4512.) Regretfully, the BBA 
failed to appropriately recognize the first assisting role of the 
certified Registered Nurse First Assistant (CRNFA).

    AORN URGES MEDICARE COVERAGE ELIGIBILITY FOR THE SURGICAL FIRST 
   ASSISTING SERVICES OF CERTIFIED REGISTERED NURSE FIRST ASSISTANTS

    As this Subcommittee examines possible Medicare refinements to the 
BBA, AORN respectfully requests the inclusion of H.R. 3911. This 
important legislation calls for Medicare reimbursement for the surgical 
first assisting services of Certified Registered Nurse First Assistants 
(CRNFAs) at a rate of 13.6% of the surgeon's fee. This is the same rate 
at which Medicare currently reimburses non-physician first assistants.
    As first assistants, CRNFAs provide high-quality cost-effective 
care and perform the same first assisting tasks and duties as surgeons, 
physicians, physician assistants, nurse practitioners and clinical 
nurse specialists who may currently receive Medicare reimbursement for 
first assisting services. Reimbursing CRNFAs for their surgical first 
assisting services would address this fundamental inequity while 
improving the quality and cost efficiency of the Medicare system.

  MEDICARE REIMBURSEMENT FOR THE SURGICAL FIRST ASSISTING SERVICES OF 
 CRNFAS ALREADY ENJOYS BROAD BIPARTISAN SUPPORT ON THE WAYS AND MEANS 
                               COMMITTEE

    With strong bipartisan support from his colleagues on the Ways and 
Means Committee, Rep. Mac Collins (R-GA) introduced H.R. 3911, the 
Medicare Certified Registered Nurse First Assistant Direct 
Reimbursement Act of 2000, on March 14, 2000. This legislation would 
provide Medicare reimbursement for the surgical first assisting 
services of CRNFAs at 13.6% of the surgeon's fee. The principal sponsor 
(Representative Collins) and seven of the cosponsors (Representatives 
English, Foley, Johnson, Lewis, McDermott, Shaw and Thurman) serve on 
the Ways and Means Committee. Five of those cosponsors (Representatives 
English, Johnson, Lewis, McDermott and Thurman) serve on the Ways and 
Means Health Subcommittee.
    Cosponsors to date include Representatives Lois Capps (D-CA), John 
Cooksey (R-LA), Nathan Deal (R-GA), Diana DeGette (D-CO), Philip 
English (R-PA), Mark Foley (R-FL), Elton Gallegly (R-CA), Paul Gillmor 
(R-OH), Porter Goss (R-FL), Jim Greenwood (R-PA), Peter Hoekstra (R-
MI), Nancy Johnson (R-CT), Patrick J. Kennedy (D-RI), John Lewis (D-
GA), Jim McDermott (D-WA), Charlie Norwood (R-GA), Charles Pickering 
(R-MS), Clay Shaw (R-FL), Ted Strickland (D-OH), Mike Thompson (D-CA), 
Karen Thurman (D-FL), and Robert Wise (D-WV).
    Further, Representative Collins and eight of his colleagues joined 
together in a June 27, 2000 letter addressed to Chairman Bilirakis and 
others, which urged inclusion of H.R. 3911 in any appropriate 
legislative vehicle. Signatories included Representatives Capps, 
Collins, Deal, DeGette, English, Foley, Greenwood, Norwood and 
Pickering. The letter, a copy of which is attached, persuasively argues 
that:
          With respect to quality of care, CRNFAs provide a patient-
        centered continuum of care in the preoperative, intraoperative, 
        and postoperative phases of the patient's surgical experience. 
        CRNFAs often work in tandem with one or a small group of 
        surgeons; this maximizes communication and coordination and 
        minimizes the risk of medical error. In addition, in comparison 
        with other non-physicians who first assist, CRNFAs have 
        significantly more experience and expertise directly in first 
        assisting.
          As for cost-effectiveness, CRNFAs seek reimbursement for 
        first assisting at 13.6% of the surgeon's fee; this is the same 
        as currently is received by PAs and NPs who first assist. By 
        contrast, physicians who first assist receive 16% of the 
        surgeon's fee. Health claims data from the Health Care 
        Financing Administration (HCFA) reveal that physicians file 
        more than 90% of the first assistant at surgery claims for 
        Medicare reimbursement. Use of CRNFAs would therefore be a high 
        quality yet cost-effective alternative for the nation's health 
        care delivery system, affording additional flexibility to 
        surgeons, hospitals and ambulatory surgical centers.
          We feel strongly that increased use of CRNFAs in surgical 
        first assisting likely would result in positive patient 
        outcomes such as lower recidivism rates, decreased 
        complications from surgery, higher patient satisfaction levels, 
        and overall lower expected costs per patient.
          Many nurses, surgeons, and others in our districts have 
        expressed their support for H.R. 3911. Some of us have 
        witnessed CRNFAs first assist at surgery.
          In conclusion, we strongly support extending Medicare 
        coverage eligibility to CRNFAs for their surgical first 
        assisting services at a rate of 13.6% of the surgeon's fee and 
        we respectfully urge that you include this proposal in an 
        appropriate health legislative vehicle.

                            WHAT IS A CRNFA?

    A CRNFA is a registered nurse first assistant (RNFA) who obtains 
national certification, a voluntary process. An RNFA already is a 
technically skilled, highly educated nursing professional who renders 
direct patient care as part of the perioperative nursing process. The 
certification process raises an already high quality standard and 
recognizes those RNFAs who have achieved excellence in patient care. 
The RNFA seeking certification must meet rigid requirements before 
applying, including:

1. Current licensure as an RN, without provision or condition, in the 
        United States;
2. Certification in perioperative nursing (CNOR);
3. Completion of a minimum of 2000 hours of practice as an RNFA 
        1 that includes preoperative, intraoperative, and 
        postoperative patient care;
---------------------------------------------------------------------------
    \1\  There are approximately 4,000 RNFAs in the United States. 
According to a 1995 survey of the AORN Specialty Assembly, RNFAs are 
employed by hospitals and physicians, as well as being self-employed as 
independently contracted health care providers. In addition:
     The average age of an RNFA is 42 years old.
     The average length of time as an RN is 17 years.
     The average length of time in the operating room is 15 
years.
     The average length of time as an RNFA is 4.62 years.
     Thirty percent of RNFAs have CRNFA credentials.
---------------------------------------------------------------------------
4. Completion of a formal RNFA program that meets criteria established 
        by the Certification Board Perioperative Nursing including 
        training equivalent to a one-year comprehensive post-graduate 
        program involving both classroom and clinical studies in 
        anatomy and physiology, assessment skills, asepsis/infection 
        control, and an extensive surgical assisting curriculum. During 
        the required clinical internship, the prospective RNFA spends a 
        defined number of clinical hours under the supervision of a 
        surgeon preceptor; and
5. A Bachelor and/or a Master of Science Degree in Nursing.
    CRNFAs are recognized by the American College of Surgeons, the 
American Nurses Association, the National League of Nurses, the 
National Orthopedic Nurses Association, and the 50 State Boards of 
Nursing. Indeed, at their annual meeting in June 2000, the American 
Nurses Association House of Delegates adopted Policy Number 3.37, which 
supports federal recognition and reimbursement for CRNFAs as first 
assistants.

          HOW WOULD CRNFAS SAVE THE HEALTH CARE SYSTEM MONEY?

    Health claims data from the Health Care Financing Administration 
(HCFA) reveal that physicians file more than 90% of the first assistant 
at surgery claims for Medicare reimbursement. Physicians receive 16% of 
the surgeon's fee for first assisting. CRNFAs are requesting only 13.6% 
of the surgeon's fee for their first assisting services. Use of CRNFAs 
is a high quality yet cost-effective alternative for the nation's 
health care delivery system, affording additional flexibility to 
surgeons, hospitals and ambulatory surgery centers.
    CRNFAs are equally as cost-effective as other non-physician 
providers (PAs and some NPs) who currently are reimbursed at 13.6% of 
the surgeon's fee for first assisting. Moreover, CRNFAs receive more 
advanced education and training in first assisting than any other non-
physician provider who first assists. For example, PAs commonly 
complete much less than the 2,000 hours of surgical assisting currently 
required before RNFAs may take the CRNFA certification exam. NPs are 
not required to have any extensive training in first assisting and yet 
receive direct reimbursement.
    In addition, CRNFAs and RNFAs are the only providers--aside from 
the rare physician making house calls--who sometimes provide post-
operative care by actually visiting patients at home following surgery. 
The result is better continuity of care and positive patient outcomes 
such as lower recidivism rates, decreased complications from surgery, 
higher patient satisfaction levels and overall lower expected costs per 
patient. Until H.R. 3911 is enacted, enabling CRNFAs to receive direct 
reimbursement, there is no incentive to use these high quality, cost-
effective providers for first assisting in surgery.

                    WHO CURRENTLY REIMBURSES CRNFAS?

    Though some commercial insurers provide coverage for the services 
of CRNFAs, reimbursement is inconsistent and varies on a state-by-
state, case-by-case basis. Although payment by BlueCross/BlueShield 
plans differs by state; generally, if the CRNFA is not a contracted 
provider, BlueCross/BlueShield will pay the patient directly for CRNFA 
services. Many Medicaid plans also provide direct reimbursement.

                             COST ESTIMATE

    H.R. 3911 is currently being scored by the Congressional Budget 
Office. An independent cost estimate by Muse & Associates determined 
that coverage eligibility for CRNFAs under Part B of the Medicare 
program would cost $7.2 million in 2000, increasing to $25.1 million in 
2004 for a total cost over a five-year period of $84.6 million.

                                SUMMARY

    As BBA Medicare refinements are considered, AORN respectfully urges 
this Subcommittee to extend Medicare coverage eligibility to CRNFAs for 
their surgical first assisting services. Working in collaborative 
practice with surgeons, CRNFAs are cost-effective to the patient and to 
the health care delivery system Because CRNFAs would be reimbursed 
under Medicare at a lower rate than physicians who first assist, and 
because CRNFAs routinely provide much-needed patient assessment, 
education and counseling, inclusion of H.R. 3911 in any BBA refinement 
package could well decrease the frequency and length of hospital stays 
resulting in improved patient outcomes and net savings to the Medicare 
program.
    AORN appreciates this opportunity to submit its views with respect 
to the impact of the BBA. Please contact our Washington Counsel, Karen 
S. Sealander of McDermott, Will & Emery, at 202/756-8024 at any time 
with questions.
                                 ______
                                 
     California Association of Public Hospitals and Health 
                                                    Systems
                                                      July 31, 2000
The Honorable Michael Bilirakis
United States House of Representatives
Chair, House Commerce Subcommittee on Health & Environment
2125 RHOB
Washington D.C. 20515
    Dear Mr. Chairman and Members of the Subcommittee: On behalf of the 
California Association of Public Hospitals and Health Systems (CAPH), I 
respectfully submit the following written statement for the record of 
the subcommittee's July 19, 2000, hearing, ``BBA '97: A Look at the 
Current Impact on Providers and Patients.''
    CAPH is a trade association representing more than two-dozen 
hospitals, health care systems and academic medical centers in 18 
counties--accounting for 86% of the state's population--throughout 
California. The members of CAPH share a mission and mandate to provide 
care to all the residents of California, regardless of their ability to 
pay. Among the members of CAPH are county-owned and operated 
facilities, University of California medical centers, and private, not-
for-profit facilities sharing a common commitment to serving all 
people.
    The Balanced Budget Act of 1997 significantly impacted the public 
hospitals and health systems of California and the patients they serve. 
Specifically, BBA '97 mandated reductions in the Medicaid 
disproportionate share hospital (DSH) program--a critical source of 
funding for public hospitals and health systems in providing needed 
health care services for low-income and vulnerable populations. The 
Congressional Budget Office estimated in 1997 that the reductions to 
Medicaid DSH program payments imposed by the BBA would reduce 
expenditures by $10.4 billion over five years. The reductions were 
designed to be phased in over a five-year period, with the largest 
reductions in the final three years. For California, this has resulted 
in a decline of federal Medicaid DSH payments of more than $116 million 
over the past two years, with a further $164 million reduction, or 17 
percent more, slated over the next two years.
    The members of CAPH comprise a public health care safety net in 
California that serves the health care needs of the Medicaid, low-
income, uninsured, and vulnerable populations. These public health care 
systems form the core of the state's health care infrastructure. As 
open door providers that share a mission and a mandate to serve the 
health care needs of all Californians, regardless of their ability to 
pay, public hospitals and health systems are significant providers of 
inpatient, outpatient, and specialty health care services in their 
communities.
    These vital institutions serve the bulk of California's 7.3 million 
uninsured persons and are responsible for providing many critical 
health services in the community. Seventy percent of expenses at core 
open door providers are attributable to serving low-income populations, 
including Medicaid and uninsured patients. Core open door providers 
comprise six percent of hospitals statewide yet made up almost 40 
percent of all uninsured inpatient discharges in California in 1998. 
Public hospitals and health systems provided ten million outpatient 
visits in 1998, of which 3.7 million were to uninsured patients. 
Moreover, care for the uninsured is becoming increasingly concentrated 
at open door providers. While the total volume of patients at public 
hospitals and health systems has declined, the number of uninsured 
patients has grown 16% over the 5 years ending in 1998. These essential 
institutions also play a critical role delivering high-cost specialty 
services--such as burn and trauma services--and other public goods that 
benefit all members of the community. For example, public hospitals and 
health systems operate more than 60 percent of all Level 1 trauma 
centers statewide, train about half of California's medical residents 
and provide over 60 percent of the state's psychiatric emergency care.
    The Medicaid DSH program is one of the critical funding sources 
that has maintained the fiscal viability of open door providers and 
allowed them to continue their role at the heart of the state's public 
health care infrastructure. During the mid-1980s Congress recognized 
that a limited number of hospitals were shouldering a disproportionate 
share of the responsibility for providing care to low-income 
populations, These hospitals were generally located in poor urban 
communities, faced large uncompensated care burdens, did not serve many 
privately insured patients, and experienced above-average costs due to 
the medical complexity of patients. Believing that targeted assistance 
to these hospitals was needed in order to preserve access to care for 
low-income populations, Congress authorized disproportionate share 
payments for these hospitals through the Medicare and Medicaid 
programs.
    California's Medicaid DHS program was created in 1991 and generated 
new federal funding for hospitals that treat the greatest numbers of 
Medi-Cal and uninsured low-income patients. Medicaid DSH Program 
dollars are critical to the stability and viability of California's 
public health care systems and their ability to serve the Medicaid, 
low-income, and vulnerable populations in our state.
    Currently, public hospitals and Health care systems in California 
are facing increasing financial pressure. Despite the strong economy 
and budget surpluses at both the state and federal levels, many open 
door providers in California are facing budget deficits. This situation 
is the result of a growing uninsured population and an increasing 
concentration of uninsured patients at open door providers, the rise of 
Medicaid managed care, and declining patient revenues and subsidies, 
including reductions in the Medicaid DSH Program, that have 
historically supported these vital institutions. The loss of tens of 
millions of dollars in federal Medicaid DSH funds has impacted 
hospitals' ability to provide care to low-income populations, and 
continuation of the scheduled reductions imposed by the BBA may 
potentially jeopardize access to health care for low-income and 
uninsured Californians.
    When Congress deliberated the provisions of the Balanced Budget Act 
in 1997, it faced a large federal budget deficit. Today, we enjoy a 
national economy that continues to flourish and a federal budget 
surplus of billions of dollars. As a result, we can take steps to 
address the unintended consequences of BBA '97 and ensure that access 
to health care is preserved for low-income and vulnerable populations. 
The Balanced Budget Refinement Act (BBRA) of 1999 was an important 
first step toward remedying the unintended consequences of the BBA and 
we greatly appreciate the attention of Congress to these issues. 
However, while BBRA will help relieve some pressing Medicare issues, it 
did not address the substantial cuts to the Medicaid program.
    Prevention of the additional cuts to the Medicaid DSH program 
mandated by BBA '97 is critical if safety net providers are to continue 
to meet the health care needs of the communities they serve. Medicaid 
DSH payments help reimburse hospitals' costs of treating Medicaid and 
low-income patients, particularly those with complex medical needs and 
make it possible for communities to care for their uninsured. 
Eliminating future BBA-imposed reductions in the Medicaid DSH program 
would alleviate some of the financial pressures facing those hospitals 
treating a disproportionately large number of Medicaid and low-income 
patients and help preserve access to care for vulnerable populations.
    CAPH and its members urge your support for prevention of the 
additional cuts to the Medicaid DSH program mandated by BBA '97. Thank 
you for your consideration.
            Sincerely,
                                           Denise K. Martin
                                                    President & CEO
                                 ______
                                 
     Prepared Statement of Health Industry Distributors Association
                 repeal part b snf consolidated billing

    Position: HIDA favors repealing Part B consolidated billing 
scheduled to be implemented at skilled nursing facilities (SNFs) as 
early as January 1, 2001.
    SNF consolidated billing for Medicare Part B removes suppliers from 
the billing and payment cycle, delays payment to suppliers, and 
threatens the stability of the SNF supply chain. It also places new and 
considerable financial and administrative burdens to SNFs at a time 
when many are financially vulnerable and virtually none have the 
expertise to implement this provision of the 1997 Balanced Budget Act.
Justification:
    Suppliers have worked closely and successfully with the four 
Durable Medical Equipment Regional Councils (DMERCs) created by the 
Health Care Financing Administration (HCFA) to manage complex Part B 
claims arising from Medicare-covered stays in skilled nursing 
facilities (SNFs).
    Part B medical equipment suppliers have developed the expertise 
necessary to bill the DMERCs, including preparation and completion of 
signed Certificates of Medical Necessity (CMNs) for certain services, 
signed physician order statements, and other medical documentation 
deemed necessary by DMERCs. Under consolidated billing, these suppliers 
would be removed from the billing and payment cycle and their expertise 
essentially wasted.
    SNFs have no experience working with the DMERCs and are unfamiliar 
with the detailed billing procedures they have put in place. 
Furthermore, the prospective payment system (PPS) have left many SNFs 
financially strapped and ill-prepared to assume yet another 
administrative burden from the Medicare program.

Consolidated billing threatens the stability of SNF supply chain.
    It is not clear how and when suppliers can expect to be paid under 
this scenario.
    Few SNFs have the cashflow to pay suppliers up front. It is likely 
that a supplier would not be paid until a SNF has assembled a 
consolidated bill, submitted it to the DMERC, and received payment. 
This may well result in delayed payment to suppliers, many of whom rely 
on a relatively steady cashflow themselves in order to remain in 
business.
    Claims processing delays caused by incorrect submissions and other 
errors will ultimately delay payment to suppliers.

Consolidated billing threatens Medicare program integrity, which has 
        seen considerable improvements in recent years.
    A report released by the Office of the Inspector General (OIG) in 
February 2000 (OEI-04-97-00330; see www.dhhs.gov/progorg/oei/reports/
a431.pdf) praised the DMERCs for meeting HCFA's objectives to develop 
medical policies and an aggressive educational and fraud prevention 
program, and reduce claims processing costs. The OIG singled out the 
``excellent outcomes'' DMERCs have shown in combating fraud and 
decreasing claims processing costs.
    Clearly, the present system works well. The Medicare program would 
be harmed if suppliers are removed from their role as key DMERC 
partners and replaced with inexperienced SNF billing staff.
    Consolidated billing requires claims to be bundled, going against 
insurance industry practice to unbundle claims and examine each one for 
accuracy and appropriateness. This has saved private health plans 
millions of dollars each year by uncovering and correcting 
inappropriate billing practices.

Consolidated billing will be expensive to implement, breaching the 
        budget-neutrality of the 1997 Balanced Budget Act.
    HCFA must train SNF staff on DMERC policies and procedures, produce 
training materials, and update manuals.
    Claims processing costs will increase. We can expect a high 
incidence of denied claims submitted by inexperienced billing staff. 
These claims will have to be resubmitted by the SNFs and reexamined by 
the DMERCs, which will increase costs for both.
                                 ______
                                 
    Prepared Statement of Lawrence A. McAndrews, President and CEO, 
              National Association of Children's Hospitals

    The National Association of Children's Hospitals (N.A.C.H.) is 
pleased to submit for the hearing record this statement in strong 
support of House passage of ``Medicaid DSH restoration'' legislation, 
such as H.R. 3698, the ``Medicaid DSH Preservation Act of 2000,'' by 
Representatives Ed Whitfield (R-KY) and Brian Bilbray (R-CA), and H.R. 
3710, the ``Medicaid Safety Net Hospital Preservation Act of 2000,'' by 
Representatives Diana DeGette (D-CO) and Bilbray. The bills enjoy broad 
bipartisan support, both in the Commerce Committee and in the House.
    N.A.C.H. is a nonprofit trade association, representing more than 
100 children's hospitals across the country, including freestanding 
children's acute care hospitals, freestanding children's specialty and 
rehabilitation hospitals, and children's hospitals organized as part of 
larger hospital systems. They have missions of clinical care, 
education, research, and public health promotion for all of the 
children of their communities, regardless of their medical or economic 
need.

Background
    Since 1981, Congress has required states to make ``disproportionate 
share hospital'' (DSH) payment adjustments to hospitals serving 
disproportionately large numbers of low-income Medicaid-assisted and 
uninsured patients. This payment adjustment program was established 
because, historically, many states' Medicaid programs have reimbursed 
hospitals for less than the actual cost of provided care. As a result, 
much of the hospital care provided to Medicaid-covered individuals has 
come from ``safety net hospitals''--hospitals with missions of serving 
patients regardless of their ability to pay--such as children's 
hospitals, public hospitals and teaching hospitals. Over the years, 
Congress has rewritten DSH payment policy several times. In 1991, 
Congress capped the amount of federal DSH funds each state may receive. 
In 1993, Congress capped the amount of DSH payments an individual 
hospital may receive. As a consequence, the total amount of spending 
for DSH funds has been curtailed--it no longer experiences significant 
growth.
    However, in 1997, as a way to find savings in the Medicaid program 
and to redirect some funding for other purposes, Congress again rewrote 
DSH policy by reducing federal DSH spending by an estimated $10.4 
billion over the five year period (1998-2002), as part of the 
``Balanced Budget Act of 1997'' (BBA). Each state's reductions in 
federal DSH funding were written directly into the legislation. Some 
states received larger reductions than other states, and many states' 
reductions are largest in the last two years of the BBA's 
implementation.
    This massive reduction in DSH payments can make it increasingly 
difficult for safety net hospitals, such as children's hospitals, to 
continue providing quality health care to all individuals, regardless 
of income.
Children's Hospitals: Nation's Safety Net Providers for Children
    In many states, children's hospitals are among the leading 
recipients of states' DSH funds, in recognition of the fact that they 
are often the health care safety net for children of low-income 
families, providing the full spectrum of primary, acute, tertiary 
level, and post-acute care. Virtually all children's hospitals are 
designated by their states as ``disproportionate share hospitals' 
serving a disproportionate share of children assisted by Medicaid and 
children who are uninsured.
    Although they represent less than 30% of the nation's population, 
children account for approximately half of all recipients of Medicaid 
assistance. In fact, about one in five children and one in four infants 
in the United States rely on Medicaid to pay for their health care.
    Medicaid patients on average account for more than 45% of 
freestanding children's hospitals' inpatient days. It is not unusual 
for a children's hospital to devote 60% or even 70% of its care to 
Medicaid-covered children. In addition, on average, Medicaid patients 
and uninsured patients together account for almost 50% of children's 
hospital's total gross revenues.

Why Is Medicaid DSH Policy Vital to Children's Hospitals?
    DSH payment adjustments make a major financial difference to 
children's hospitals. Medicaid payment falls far short of the cost of 
inpatient care provided by children's hospitals. In 1998, the average 
Medicaid base payment was $0.75 for every $1.00 in inpatient care 
expenses a freestanding children's hospital incurred to care for a 
Medicaid-assisted child. Even with disproportionate share payment 
adjustments, children's hospitals received payments that on average 
amounted to $0.85 cents for every $1.00 of expense incurred for care.
    Without Medicaid DSH payments, some children's hospitals would end 
the financial year with operating losses that could jeopardize their 
survival. Some would be forced to curtail their outreach and community 
services for low-income families as well as high cost specialty 
services for all children. Some would be jeopardized in their ability 
to develop integrated networks capable of serving children enrolled in 
capitated managed care plans.
    Unless blocked, the BBA's FY 2001 and 2002 reductions in federal 
Medicaid DSH funds will threaten the health care safety net for all 
children and the ability of many individual children's hospitals to 
sustain financially their complex array of services for all children.

Recommendation
    N.A.C.H. strongly supports passage of Medicaid DSH restoration 
legislation, such as H.R. 3698 by Representatives Whitfield and 
Bilbray, and H.R. 3710 by Representative DeGette and Bilbray. These 
bills enjoy broad bipartisan support throughout the Commerce Committee 
and in the House. Currently, between the two bills, there are over 220 
cosponsors, including 32 members of the Commerce Committee. Passage of 
Medicaid DSH restoration legislation will help children's hospitals 
across the country to continue serving the health care needs of all 
children, regardless of their economic background.
                                 ______
                                 
   Prepared Statement of Mark Meijer, President, American Ambulance 
                              Association

    Chairman Bilirakis, Ranking Member Brown and distinguished members 
of the Subcommittee, on behalf of the American Ambulance Association 
(AAA), I thank you for this opportunity to submit written testimony on 
the impact that the Balanced Budget Act of 1997 (BBA) has had on 
ambulance service providers and the patients we serve. The ambulance 
industry is currently under enormous financial stress and, 
unfortunately, the worst is still yet to come.
    For years, ambulance service providers have been reimbursed for 
services rendered to Medicare patients at levels below their true 
operating costs. Ambulance providers have struggled to make this system 
work and still remain in operation, primarily by finding ways to pass 
on these costs to other payers as well as patients themselves. Due to 
the mandate to accept assignment in the BBA, ambulance providers can no 
longer pass on legitimate costs to Medigap insurers.
    A critical difference between ambulance operations and other health 
care providers, is that in most cases ambulance operations are required 
by law, most often through licensure by the State in which they 
operate, to treat and transport emergency ambulance patients without 
inquiring into a patient's ability to pay. All of us who operate 
ambulance response agencies are supportive of this concept, yet it 
creates additional financial pressures unmatched by other health care 
providers. Ironically, ambulance services are among the lowest 
reimbursed health care providers in most state Medicaid programs. This, 
combined with an increase in the number of uninsured Americans, results 
in a devastating financial impact on ambulance operations who are 
mandated to provide emergency medical care and around-the-clock 
coverage regardless of the ability to pay by those accessing this 
important service.
    Annual Medicare increases have not, and will not, keep up with 
costs to provide ambulance service.

 Patient care costs have increased as access to high quality, 
        advanced life support/paramedic ambulance services has grown to 
        meet community needs and expectations;
 Administrative costs have dramatically increased due to 
        increased paperwork burdens required by the Health Care 
        Financing Administration (HCFA) and carriers, and costly claims 
        appeals;
 Under the current reimbursement system, ambulance industry 
        rates have been artificially constrained since 1985 by the 
        inflationary index charge. This index limited annual Medicare 
        increases to an annual adjuster set by the HCFA regardless of 
        actual ambulance service cost increases;
 Exacerbating the above limits, a key BBA provision further 
        limits annual increases to one percent less than the national 
        inflation rate which has a compounding five-year effect (1997-
        2002).
    This is all happening at the same time that HCFA is about to issue 
a new Medicare ambulance fee schedule as authorized by Congress in the 
BBA. When ambulance service providers feel the full impact of the BBA 
with the implementation of the new Medicare ambulance fee schedule, the 
anticipated additional reduction in reimbursement will be too much for 
many ambulance providers to survive. Unfortunately, at that point, the 
Medicare patients that we serve and the millions of Americans who rely 
on the nation's 911 system will also feel the full impact of the BBA.
    America's ambulance providers are the backbone of the nation's 911 
emergency medical response system. Whatever weakens the ambulance 
operations weakens the 911 system's ability to respond to calls for 
medical help. Below cost reimbursement for Medicare ambulance services 
will seriously degrade the entire emergency response system. Fifty 
percent of the average ambulance operation's revenue comes from serving 
Medicare beneficiaries. Therefore, ambulance providers will be unable 
to operate, response times will increase and people confronting 
emergency medical situations will be put at risk. Available, quality 
emergency medical services are a critical access point and safety net 
for the poor and elderly needing emergency health care services.
    The same is true for nonemergency ambulance services provided to 
Medicare patients. With fewer ambulance service providers and below 
cost reimbursement for those still in operation, access to quality, 
timely care for the most vulnerable beneficiaries will be jeopardized. 
Requiring ambulance companies to provide below-cost services to 
Medicare undermines our ability to provide not only emergency and 
nonemergency ambulance services to Medicare patients, but to all 
Americans.
    Project Hope, a highly respected health care think tank, arrived at 
a reliable estimate for the cost of providing ambulance services 
throughout the U.S. Applying the Project Hope cost data to the current 
Medicare volumes and expenditures for ambulance transport services 
generates a total annual cost estimate of $3.74 billion to provide 
ambulance transport services to Medicare beneficiaries. The BBA, 
however, limits the Medicare reimbursement for ambulance services to 
just $2.65 billion, which according to Project Hope data, represents a 
shortfall of $1.1 billion in 2001 in the cost of providing service.
    In conclusion, the BBA will limit payments under the new ambulance 
fee schedule to a level that will make it impossible for many, if not 
most, ambulance operations to answer the call for help when it comes. 
In order to provide adequate ambulance services for Medicare 
beneficiaries who access care throughout the nationwide 911 emergency 
response system, Congress must ensure that ambulance providers are paid 
their true costs in providing services to Medicare beneficiaries. The 
safety net of the nation's health care system depends on it.
    Again, thank you for the opportunity to provide the Subcommittee 
with this written testimony.
                                 ______
                                 
                        Practice Expense Fairness Coalition
                                                      July 31, 2000
The Honorable Michael Bilirakis
Chairman
Subcommittee on Health and the Environment
House Commerce Committee
U.S. House of Representatives
Washington, D.C. 20515
    Dear Chairman Bilirakis: On behalf of the Practice Expense Fairness 
Coalition, which represents organizations with a combined membership of 
over 350,000 physicians, we are submitting this statement for the 
record of the hearing entitled BBA '97: A Look at the Current Impact on 
Providers and Patients, held by the Subcommittee on Health and the 
Environment on July 19, 2000.
    Specifically, we are contacting you to (1) express our strong 
opposition to a proposal by the Halt 2000 coalition to stop 
implementation of resource-based practice expense payments (RBPEs) this 
year as part of a Medicare giveback bill, and (2) offer an alternative 
that would address concerns about underfunding of physician services--
while preserving the mandate that payments for physician services be 
based on the relative costs of each service, based on the best 
available data.
    The Balanced Budget Act of 1997 mandated that implementation of 
RBPEs be phased in over four years, to allow for methodological 
refinements during each year of the phase in, following a one year 
delay in implementation. The Halt 2000 proposal would undo this 
carefully-crafted compromise by stopping the transition to RBPEs for 
all services, except office visits, at the current blend of 50% charge-
based, and 50% resource-based, practice expenses. The 50% charge-based 
portion would perpetuate the inequities in payment that Congress 
resolved to end when it enacted the BBA 97 compromise. Even if a few 
office visit services were exempted from the halt, the vast majority of 
physician services would continue to be paid in large part based on 
inaccurate historical charges, not on data on the costs of each 
service.
    Our coalition has a better alternative to Halt 2000. This 
alternative would address concerns about underfunding of physician 
services, due to past miscalculations of fee schedule updates, by 
mandating a 3% increase in the dollar conversion factor for the 
Medicare fee schedule. Unlike the Halt 2000 proposal, it would not 
abruptly withdraw support for the ongoing transition to a payment 
system that bases Medicare payments on the relative costs of each 
service, based on the best available data.
    The General Accounting Office in February 1999 reported ``HCFA's 
methodology uses what are generally recognized as the best available 
data on resource-based practice expense values'' (emphasis added). So 
the question is not if HCFA's methodology is fundamentally flawed--the 
GAO clearly said that it was not. The refinement process mandated by 
the BBA 97 is the way to get further improvements made in HCFA's data 
and methodology. In fact, HCFA's recently published proposed rule on 
the CY 2001 fee schedule includes numerous changes that directly 
respond to concerns expressed about its data, including restoring 
payments for non-physician clinical staff costs for certain services 
done in the hospital and incorporating more recent survey data into 
practice expense calculations.
    As Congress considers the Medicare giveback legislation, we urge 
you to support the Practice Expense Fairness Coalition's alternative 
proposal for a 3 percent increase in the dollar conversion factor for 
the Medicare fee schedule. Under our alternative, every physician and 
every specialty would be better off than under current law. By 
contrast, under the Halt 2000 plan, some physicians would be worse off 
and others better off than under current law. The 3 percent solution is 
simple and fair to all physicians. Further details are in the 
attachment.
            Sincerely,
                          American Academy of Dermatology; American
      Academy of Family Physicians; American Academy of Pediatrics;
                    American College of Physicians-American Society
  of Internal Medicine; American College of Rheumatology; American 
          Osteopathic Association; and Renal Physicians Association
                                 ______
                                 
             Prepared Statement of Rural Hospital Coalition

    Good morning Chairman Bilirakis; Ranking Member Brown and other 
distinguished members of the House Commerce Subcommittee on Health and 
Environment. We submit this testimony on behalf of the patients, 
providers and communities in which we own or operate a rural hospital. 
Collectively, Community Health Systems, Inc., LifePoint Hospitals, Inc. 
and Province Hospital Company, Inc. represent roughly 10 percent of the 
rural hospitals in the United States. In terms of number of facilities, 
Community Health Systems is the largest non-urban provider of general 
hospital services in the United States and is the second largest non-
urban provider in terms of revenues.
    We appreciate the opportunity to discuss the Balanced Budget Act of 
1997 (BBA) and its current impact on rural hospital providers, 
patients, and the Medicare program. As Congress considers reforms to 
grant necessary relief to rural providers, we urge the Congress to 
embrace broad reforms that give relief to the majority of the 2,100 
rural hospitals. These reforms should include:

 Equalizing Medicare disproportionate share (``DSH'') payments 
        between urban and rural hospitals;
 Providing a wage index floor;
 Eliminating market basket reduction for rural hospitals in FY 
        2001 and FY 2002; and
 Restructuring qualifying criteria for Medicare dependent 
        hospitals based on their past three cost report years and the 
        payment formula blend applicable to Sole Community Hospitals 
        and make the MDH program permanent.

Rural Health Care Market
    Rural hospitals remain the key to providing rural communities with 
both economic development and access to quality and affordable health 
care. The loss of a rural hospital to a community results in more than 
the loss of access to health care. The economic impact of a closing of 
rural hospital in a rural community cripples a community's ability to 
attract new doctors, jobs and industry. A recent study indicated that 
health care provides 10 percent to 15 percent of the jobs in many rural 
counties.1 When the secondary benefits of those jobs are 
included, health care accounts for 15 to 20 percent of the all jobs in 
rural communities.
---------------------------------------------------------------------------
    \1\  Statement by Dr. Mary Wakefield before the Senate Agriculture 
Appropriations Committee hearing on Rural Hospitals and Rural Economic 
Development
---------------------------------------------------------------------------
    Rural hospitals have been able to survive only because of a 
patchwork of ``special fixes'' enacted by Congress in the last decade. 
The Balanced Budget Refinement Act (BBRA) continued this pattern and 
provided relief for a small number of special rural hospitals--Sole 
Community Hospitals (``SCH''), Critical Access Hospitals (``CAH'') and 
Medicare Dependent Hospitals (``MDH'')--which represent less than 50 
percent of the rural hospitals. As a result, most rural hospitals 
remain in a market that is experiencing higher than expected payment 
reductions, a reduced number of providers and excessive regulations 
that are reducing access to care for Medicare beneficiaries in rural 
areas. The impact of these reductions and regulatory burden is 
evidenced by:

 The Congressional Budget Office (CBO) estimate that Medicare 
        spending fell by $8 billion dollars between November 1999 and 
        January 2000.
 The Medicare Payment Advisory Commission assessment that 
        ``rural hospitals have lower inpatient margins . . . and rural 
        hospitals were disproportionately harmed by the BBA.''
 The Health Care Financing Administration (HCFA) notation in 
        the most recent ``Inpatient Hospital Prospective Payment 
        System'' regulation that ``approximately one third of rural 
        hospitals continue to experience negative Medicare margins.'' 
        The rule further states that HCFA ``now believes that rural 
        hospitals merit special dispensation . . .''

Special Needs of Rural Hospitals
    Rural hospitals tend to be smaller, have difficulty attracting and 
keeping health care professionals and are more dependent on Medicare 
patients. In order to remain competitive, hospitals and the communities 
they serve must continue to be able to recruit additional primary 
physicians and expand the breadth of services offered in their 
hospital. To remain a vital part of the United State's health care 
delivery system, rural hospitals need fundamental payment reform that 
extends relief to all rural hospitals by improving wages, DSH payments 
and the hospital market basket update.
Medicare Disproportionate Share Payments
    Since 1986, the Medicare program has made special add-on payments 
to PPS hospitals that treat low income patients. Concern for specific 
groups of hospitals resulted in Congress creating 8 different DSH 
formulas. (See Table 1). Each includes a threshold for the low-income 
share needed to qualify. Medicare's proxy for low income patients is 
based on two factors:

 The percentage of Medicaid patient days (``Medicaid 
        Utilization''); plus
 The percentage of Medicare SSI patient days
    Charity, indigent care and bad debts are not considered in the DSH 
calculation. The current program applies a higher qualifying threshold 
for rural hospitals (30 percent for hospitals with greater than 100 
beds and 45 percent for hospitals with less than 101 beds, as compared 
to 15 percent for urban hospitals with greater than 99 beds and 40 
percent for urban hospitals with less than 100 beds) and 
disproportionately weights Medicaid utilization, despite the fact that 
Medicaid utilization is a poor measure of overall service to the poor.
    Consequently, more than 95 percent of all DSH payments go to urban 
hospitals and is highly concentrated in about 250 
hospitals.2
---------------------------------------------------------------------------
    \2\  According to the ProPAC 1997, the current formula weighs 
Medicaid patient days equally with patient days for Medicare 
beneficiaries who receive Supplemental Security Income (SSI) cash 
payments, despite the fact the former group accounts for four times as 
much hospital cost. Consequently, urban hospitals with at least 100 
beds benefit from a steeply graduated payment, while rural and small 
hospitals receive a lower fixed adjustment.
---------------------------------------------------------------------------
    Further, the BBA 1997 requires that HCFA recommend a new payment 
formula for DSH adjustments that treat all hospitals equally. Recent 
MedPAC reports on DSH funds found little evidence of any systematic 
relationship between the share of poor patients a hospital treats and a 
per-case cost. Low income seniors and the hospitals that serve them in 
rural areas deserve a more equitable system.
    We urge Congress to equalize DSH payments between urban and rural 
hospitals. Specifically, Congress should immediately equalize 
qualifying low income threshold between urban and rural hospitals and 
phase-in the sliding scale distribution formula used to calculate the 
DSH payment for urban hospitals over 99 beds. It is also our suggestion 
that urban hospitals be held harmless and that this proposal be 
implemented with surplus dollars. Notably, HFCA in recent testimony 
before the Senate Agriculture Appropriations Subcommittee noted that 
they would consider ``improving equity for rural hospitals in the 
Medicare DSH formula.'' In a recent budget analysis prepared by 
PriceWaterhouseCoopers, the transition to a uniform DSH payment for 
rural hospitals under 100 beds is estimated to cost $709 million over 
five years (2001-2005). Further, a transition into a uniform DSH 
payment and applying an urban distribution formula in 2001 is estimated 
to cost $2.95 billion over five years (2001-2005).

Market Basket (MB) For Rural Hospitals
    Rural hospitals have been doubly hurt by three consecutive years of 
below MB updates. Although hospitals have become more efficient, the 
industry may be running out of cost cutting initiatives. The problem is 
more pronounced for smaller hospitals which have less elasticity of 
cost to volume.
    We urge Congress to eliminate the market basket reduction for rural 
hospitals in FY 2001 and FY 2002. A budget estimate prepared by 
PriceWaterhouseCoopers estimated that a market basket update for rural 
hospitals for 2001 and 2002 would cost $748 million for rural hospitals 
under 100 beds and $8.73 billion for all hospitals over five years 
(2001-2005).

Wage Index Floor
    The current wage index reflects area differences in wage levels in 
the geographic area of the hospital as compared to the national average 
wage level. Most rural areas have a very low wage index because the 
index is based on a statewide average hourly wages for rural areas. The 
wage index formula, while recognizing hourly wage differences, does not 
take into account the greater number of hours per case that is required 
in a lower volume setting due to baseline staffing requirements and 
lower volume than urban hospitals. Thus, small rural hospitals may have 
a lower average hourly wage but will require, all things being equal, a 
greater number of hours spread over lower volumes to run their 
operations.
    We urge Congress to provide a national wage index floor of .8500 to 
.9000 that would provide a bottom end payment boost to the most 
disadvantaged rural hospitals. In a recent budget analysis prepared by 
PriceWaterhouseCoopers, a floor wage index of .90 for rural hospitals 
under 100 beds is estimated to cost $382 million over the next five 
years (2001-2005).
Update Criteria For Medicare Dependent Hospitals (``MDH'')
    A rural MDH is a hospital located in a rural area with 100 beds or 
less with at least 60 percent of all discharges or days attributable to 
Medicare. The criteria for the MDH program is based solely on a 
hospital's 1987 cost report. Facts have changed since then. Some 
current MDH's may no longer qualify and other hospitals that would 
otherwise qualify cannot because they did not qualify in 1987.
    We urge Congress to make the MDH program permanent and to revise 
the MDH criteria to (1) permit any three most audited years to be used 
to determine eligibility and, (2) that would include the current 1996 
blend-in afforded to Sole Community Hospitals. In a recent budget 
analysis prepared by PriceWaterhouseCoopers, the proposed definition 
change in the MDH criteria is estimated to cost $144 million over five 
years (2001-2005).
Conclusion
    The problems facing rural health care providers cannot likely be 
solved this year. It is critical, however, for Congress to enact 
legislation that will extend real relief to all rural hospitals by 
improving wages, equalizing DSH payments, revising the MDH program and 
providing for a fair hospital market basket update.
                                 ______
                                 
         Prepared Statement of the Florida Hospital Association

    Mr. Chairman and Members of the Subcommittee:
    My name is Charles F. Pierce, Jr., and I am President of the 
Florida Hospital Association, an association that represents 230 
Florida hospitals and health care systems with over 200,000 hospital 
employees.
    America's health care system sits at the crux of a great paradox. 
In the midst of a booming economy and escalating surplus, the 
facilities you and I and millions of others have come to rely on for 
our health care needs face unprecedented financial pressures and 
uncertainty about their future. Hospital leaders with as much as 20-30 
years of experience report they have never experienced anything like 
their current financial situations. A snapshot of hospitals in Florida 
following enactment of the Balanced Budget Act shows the magnitude of 
this somber reality:

 Reductions in Medicare payments to Florida hospitals are 
        estimated at $3.6 billion.
 Almost 32% of all Florida hospitals reported losses in 1998.
 Over half of all hospitals saw a drop in net income from the 
        previous year.
 Changes in bond ratings were dominated by five times as many 
        downgrades as upgrades.
    The Balanced Budget Act cut too deeply in hospitals across the 
nation. Because Florida has the highest percentage of Medicare 
beneficiaries in the nation, the impact is exceptionally severe and 
deeply disturbing. There are 2.8 million elderly in Florida and the 
numbers are growing. Patients are older and sicker, requiring more 
intensive services and support. Florida's hospitals are expected to 
meet the needs of these seniors despite BBA reductions amounting to $1 
billion in the first two years of its implementation and an additional 
$2.6 billion in the next three years--even after the BBRA of last year. 
Though hospitals continue to scrutinize and squeeze their budgets, the 
cost savings they realize do not begin to match the size of the 
mandated Medicare cuts. What does the additional reduction of $3.6 
billion mean to our hospitals?
    Even after the partial relief offered by the BBRA, Florida's 27 
rural hospitals, which serve over 500,000 citizens, are expected to 
lose $50.6 million. These cutbacks will have alarming consequences 
among communities solely dependent on the health care services these 
facilities provide. Without additional relief, how will our rural 
hospitals continue to serve these remote communities?
    A number of services, particularly outreach services that undergird 
the health needs of some of the most vulnerable in our society, have 
been closed. Martin Memorial Medical Center in Stuart, Florida, was 
forced to close an urgent care center for residents of the isolated 
community of Indiantown, many of whom are migrant and unskilled 
workers. The care center lost money every year, but Martin Memorial 
continued to support it as part of its community mission. This year, 
the hospital could no longer afford to absorb the cost of the center. 
``It was a heart-wrenching decision to announce we couldn't finance the 
center any more,'' Martin Memorial CEO Dick Harman reported.
    Bethesda Memorial Hospital in Boynton Beach had to make a similar, 
difficult decision when it closed its clinic for poor pregnant women in 
southern Palm Beach County.
    Mercy Hospital withdrew from the Dr. Rafael Penalver Clinic in 
Little Havana, Miami, after losing $3.6 million in three years.
    And Shands HealthCare, an eight-hospital system providing care to 
patients from each of Florida's 67 counties, has had to close all but 
two of its home health care units because it lost more than $20 million 
annually after the BBA was enacted.
    These are not isolated incidents. Over the last two years in 
Florida, 34 hospitals experienced the closing of 271 acute care beds, 5 
obstetrics programs, 295 psychiatric and substance abuse beds, and 122 
skilled nursing beds. Without relief, these kinds of safety net 
programs and--more importantly--the poor and needy people they serve, 
will suffer and their access to basic health care will be jeopardized.
    Of great and growing concern is the reality that the BBA has forced 
health care providers to reduce or eliminate other community and senior 
services. Nationally, over 3,000 independent home health agencies have 
closed their doors in the past three years. Already, 75 Florida 
communities have lost home health agencies, and now they have none. 
Baptist Health Care of Pensacola has had to close two rural health 
clinics and one home health agency. Memorial Healthcare System in 
Hollywood, Florida, could not expand its much-needed skilled nursing 
unit because the BBA reduced its funding by $623,000. These are just a 
few of the many examples of what is occurring in Florida. We are deeply 
concerned that almost 20% of all long-term beds in Florida belong to 
organizations that have filed for bankruptcy. ``We've seen some serious 
problems develop,'' said Jim Booth, CEO of Interim HealthCare, one of 
the largest home health agencies in South Florida. ``Due to cutbacks in 
reimbursement, some chronically ill patients are not getting the 
necessary care.'' If Congress does not intervene soon, where will our 
elderly seniors receive the care they need?
    Our hospitals are delaying the purchase of much-needed new and 
replacement equipment and postponing important renovations. For Baptist 
Health Systems of South Florida, the BBA delayed by one or more years a 
more accessible outpatient facility, which would enable more people in 
the local community to receive basic health care services. This major 
health care system also is concerned that its ability to invest in 
critical medical equipment will be significantly limited in the future. 
Without relief, how will our hospitals keep pace with the latest 
technology and treatment opportunities our citizens deserve and have 
come to rely on?
    As hospitals struggle with the severity of the BBA's impact, they 
are confronting other social and economic factors that also dangerously 
strain their ability to provide necessary health care services. For 
example:

 There are 2.5 million Floridians (44 million nationwide) who 
        have no health insurance. That number is growing. Crowded 
        emergency rooms provide their only medical recourse. Federal 
        law requires hospitals to stabilize and evaluate anyone who 
        comes into the emergency room, yet no reimbursement accompanies 
        this unfunded mandate. This means that hospitals must absorb 
        these costs. In 1998, Florida hospitals provided over $1.2 
        billion in uncompensated care.
 New drugs and medical technology result in higher costs for 
        patient care with no increased payment for them. As you have 
        heard in great detail, the average price for new drugs 
        continues to skyrocket and consumes an alarmingly higher 
        proportion of what it costs to treat patients.
 Severe shortages of nurses--currently Florida has over 4,800 
        open nursing positions--and shortages of other allied health 
        professionals are causing labor costs to spiral. Hospitals not 
        only pay higher wages, but also offer signing bonuses and 
        increased benefit packages. These costs are rising as Medicare 
        is reducing payments.
 New regulations initiate major, costly compliance issues. 
        Florida hospitals must comply with regulations from 26 federal, 
        11 state, and 6 voluntary agencies. For example, the estimated 
        nationwide cost of implementing HIPPA is $43 billion--dwarfing 
        Y2K compliance costs. Where will the funds come from?
    Indeed, Florida hospitals are facing unprecedented financial 
pressures and need your help. We support enactment of legislation 
(HR3580) that provides a full market basket update for fiscal years 
2001 and 2002 under Medicare. BBA set the update at market basket--a 
measure of hospital inflation--minus 1.1 percentage points for each 
year. Elimination of the remaining two years of the BBA-mandated market 
basket reductions provides an estimated $7 billion relief nationally, 
with $716 million for Florida hospitals. This bipartisan bill, which 
has been co-sponsored by 19 members of the Florida delegation, will 
simply re-establish a realistic link between cost increases and 
appropriate payment rates. Under BBA, hospitals have seen costs 
increase by seven percent while payments were updated by less than two 
percent. The scenario will worsen during the next two years if no 
action is taken.
    Additionally, we urge Congressional approval of legislation 
(HR3698, HR3710) to protect federal disproportionate share hospital 
(DSH) allotments from reductions beyond FY 2000 levels and allow 
payments for uncompensated care to grow at the rate of inflation. The 
Medicaid DSH program is the primary source of financial support for 
safety net hospitals that provide care to the underserved and our most 
needy citizens. HR3698 and HR3710 provide substantial relief for 
struggling safety net hospitals, while still achieving significant 
savings in the DSH program.
    Funding for these changes must come from the projected federal 
surplus and not from payment reductions to hospitals in other areas.
    Enactment of these bills provides a framework for Congress to 
remedy the damage caused by the Balanced Budget Act. Additional repairs 
will be necessary. There must be a balance between slowing Medicare's 
growth and responsible program financing. The Florida Hospital 
Association is encouraged that the Florida Delegation and their 
bipartisan colleagues in Congress, as well as MedPAC, health care 
providers, and citizens across the nation are aligned in their 
conviction that something must be done to reverse the devastating 
impact of the BBA on hospitals. In Florida, something must be done 
quickly.
    We look forward to working with you to strengthen our hospitals' 
ability to fulfill their mission--to provide quality care to the 
citizens in their communities.
                                 ______
                                 
           National Association of Community Health Centers
                                                    August 31, 2000
The Honorable Michael Bilirakis
Chairman, Health and the Environment Subcommittee
House Commerce Committee
2125 Rayburn House Office Building
Washington, DC 20515
    Dear Mr. Chairman: Thank you for giving the National Association of 
Community Health Centers the opportunity to testify before your 
subcommittee in support of H.R.2341, the Safety Net Preservation Act 
(SNPA), in July. Given the overwhelming support for this legislation 
among Commerce Committee members (as well as majority support in the 
House of Representatives and Senate), we are hopeful that Congress will 
recognize the importance of health centers and enact the common sense, 
long-term Medicaid payment system included in the SNPA.
    This letter reflects our written response to the questions 
submitted by Representative Towns to be included in the hearing record. 
It is my hope that these responses will further justify the importance 
of Congress' timely action to provide BBA relief for health centers.
    Question 1: If your centers are legally mandated to serve any 
patient that walks through the door, what services have your members 
had to reduce in order to honor that mandate?
    Health centers are unique providers because of their Congressional 
mandate, patient/payer population mix and the medically underserved 
areas they serve. In addition, centers provide more than just primary 
and preventive health care services. Unlike other providers, health 
centers are required to provide services that help their patients 
access the health care services they provide, such as translation 
services (for non-English speaking patients), transportation services 
(for elderly or other patients without access to their own vehicle or 
public transit), and case management services. Without these services, 
the health services they provide would not be nearly as effective or 
accessible to everyone in their communities.
    In addition, health centers also provide other social service and 
education services that give low-income people the tools they need to 
emerge out of poverty. These services include, but are not limited to, 
health education and nutrition. Likewise, health centers also provide 
services other than medical, including, in some cases, dental, mental 
health, and pharmacy services.
    Of course, as you understand, when health centers face financial 
pressure and begin to suffer losses, including losses from Medicaid, 
they will do everything they can to protect access to the basic primary 
and preventive health care services that keep their patients healthy. 
As a result, these vital ancillary and enabling services are among the 
first to be cut, leaving patients with greater barriers to accessing 
health care. If a Spanish-speaking patient no longer has the ability to 
communicate with a clinician, their access to care is severely 
impaired. Likewise, if a health center can no longer provide van 
service to the center, an elderly woman who has lost her eyesight loses 
her access to care. Eliminating these services fundamentally undermines 
a center's ability to provide the most needed care in the communities. 
This means that health care needs would go unmet.
    Of course, if a health center continues to lose money, it is forced 
to further restrict its services. Such means could include laying off 
clinicians or closing service delivery sites, like HIV/AIDS clinics, 
pediatrics clinics, or other satellite sites. Naturally, if revenue 
losses are too great, the health center closes, leaving its community 
without access to affordable health care. It is this result that the 
Safety Net Preservation Act is intended to avert.
    Question 2: In your opinion, why have only eight states implemented 
cost-based systems for health centers?
    Unfortunately, the Governors have consistently opposed Federal 
legislation ensuring adequate reimbursements to health centers designed 
to protect the integrity of the Public Health Service Act grants for 
care for the uninsured. While I cannot ascribe motives to particular 
States, I can draw some conclusions based on the attitudes expressed in 
the several letters written by the National Governors Association to 
Congress regarding the Safety Net Preservation Act.
    First, indicative of the attitude expressed by the NGA, I do not 
believe that many governors understand the unique role of community 
health centers. As you know, health centers are required by Federal law 
to make their care accessible to everyone in the medically underserved 
area they serve, without regard to insurance coverage or ability to 
pay. Sadly, by advocating for policies that undermine health centers 
and suggesting that there is no reason to treat health centers 
differently from other providers, the NGA demonstrates a fundamental 
lack of understanding of the crucial role of health centers.
    Second, the governors do not have a direct financial interest in 
protecting health centers, whereas the Federal government has a 
significant financial interest in doing so. In my opinion, if the 
governors were investing more than $1 billion of their own funding in 
health centers to provide care for the uninsured, they would not be 
opposing a permanent long-term Medicaid payment system that protects 
such an investment. Ultimately, because the grant dollars for the 
uninsured are not State money, the NGA does not have the financial 
incentive to protect the health center safety net.
    Because the NGA does not govern at the local level, it fails to 
appreciate how crucial these health resources are to the communities 
they serve. That is why the Safety Net Preservation Act has been 
endorsed by the United States Conference of Mayors and the National 
Association of Counties--they directly understand how the loss of a 
health center will impact their communities. Unfortunately, it appears 
that the NGA does not view centers in those terms and that is why I 
believe that so few States have established a long-term Medicaid 
payment systems.
    Question 3: Have community health centers benefited financially 
from their inclusion as network providers with Medicaid managed care 
plans?
    Health centers provide those services that ensure that Medicaid 
recipients remain healthy. In addition, centers provide services that 
provide them with the tools to overcome poverty. That makes them 
valuable resources to managed care plans. However, because most States 
have not moved to the widespread use of managed care in their Medicaid 
programs, it is difficult to get a true sense of the precise impact of 
Medicaid managed care on safety net providers. In addition, due to the 
BBA's requirement that health centers receive ``wrap around'' payments 
to make up the difference between managed care reimbursement and their 
reasonable costs, health centers have not suffered as they would have 
without that ``wrap around'' protection.
    While it is difficult to assess the impact of managed care on 
health centers in most cases, we do have examples of the impact when 
managed care is used without the protection of a long-term Medicaid 
payment system for health centers. In States that have received a 
waiver of Medicaid requirements through Section 1115 of the Social 
Security Act, we do have a better understanding of the impact of 
managed care on health centers. Despite the fact that each of the 1115 
States (except Oregon) are required, as part of the terms and 
conditions of the approval of their waiver, to reimburse health centers 
on a ``cost-related'' or ``risk-adjusted'' basis, few States are 
actually meeting these requirements. Indeed, health centers in these 
States are suffering severe losses because Medicaid managed care plans 
are only reimbursing providers at a fraction of their cost and there is 
no mechanism to protect health centers' ability to care for the 
uninsured. Health centers in Tennessee have lost millions of dollars 
under the State's TennCare program. Likewise, health centers in 
Oklahoma have been receiving only a fraction of their cost of providing 
care to Medicaid patients--placing them under severe financial pressure 
and forcing them to reduce services. In these instances (and throughout 
Section 1115 waiver States), States are de facto relying on the Federal 
grant dollars to keep health centers operational while only reimbursing 
centers at a fraction of their cost of providing care.
    I hope that my answers to these questions will provide some insight 
on the importance of community health centers and the need for a long-
term Medicaid payment system for health centers. Please let me know if 
I can be of any further assistance to you.
            Sincerely,
                                     Daniel R. Hawkins, Jr.
                        Vice President of Federal and State Affairs
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