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




   ADDITIONAL MEDICARE REFINEMENTS TO THE BALANCED BUDGET ACT OF 1997

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 25, 2000

                               __________

                             Serial 106-112

                               __________

         Printed for the use of the Committee on Ways and Means




                    U.S. GOVERNMENT PRINTING OFFICE
71-743 DTP                  WASHINGTON : 2001
_______________________________________________________________________
            For sale by the U.S. Government Printing Office
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                                 20402




                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

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

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

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


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




                            C O N T E N T S

                               __________

                                                                   Page

Advisory of July 18, 2000, announcing the hearing................     2

                               WITNESSES

Health Care Financing Administration, Robert A. Berenson, M.D., 
  Director, Center for Health Plans & Providers..................     7

                                 ______

American Association of Health Plans, and Ochsner Health Plan, 
  George Renaudin................................................    67
American Health Care Association, and Genesis Health Ventures, 
  Inc., Michael R. Walker........................................    54
American Hospital Association, and Guadalupe Valley Hospital, Don 
  Richey.........................................................    45
American Medical Association, Richard F. Corlin, M.D.............    49
National Council on the Aging, Howard Bedlin.....................    72
Visiting Nurse Associations of America, and Visiting Nurse 
  Corporation of Colorado, Judith G. Sutherland..................    59

                       SUBMISSIONS FOR THE RECORD

American Association for Homecare, Alexandria, VA, statement.....    97
American Association of Blood Banks, Bethesda, MD; America's 
  Blood Centers; and American Red Cross, joint statement.........   101
American Association of Orthopaedic Surgeons, statement..........   102
American Medical Rehabilitation Providers Association, Edward A. 
  Eckenhof, statement............................................   105
American Red Cross, joint statement..............................   101
America's Blood Centers, joint statement.........................   101
Association of periOperative Registered Nurses, Denver, CO, 
  statement......................................................   108
Eckenhof, Edward A., American Medical Rehabilitation Providers 
  Association, statement.........................................   105
Falberg, Warren C., Visiting Nurse Association, Cincinnati, OH, 
  letter.........................................................   149
Fleetwood, Jim, Rural Hospital Coalition, statement..............   140
Florida Hospital Association, submitted by Hon. Karen Thurman, 
  Charles F. Pierce, Jr., statement and attachment...............   111
Franks, Hon. Bob, a Representative in Congress from the State of 
  New Jersey; Hon. Rodney P. Frelinghuysen, a Representative in 
  Congress from the State of New Jersey; Hon. Marge Roukema, a 
  Representative in Congress from the State of New Jersey; Hon. 
  Frank A. LoBiondo, a Representative in Congress from the State 
  of New Jersey; Hon. Jim Saxton, a Representative in Congress 
  from the State of New Jersey; and Hon. Christopher H. Smith, a 
  Representative in Congress from the State of New Jersey, 
  statment.......................................................   113
Frelinghuysen, Hon. Rodney P., a Representative in Congress from 
  the State of New Jersey, statement.............................   113
Gage, Larry S., National Association of Public Hospitals and 
  Health Systems, statement......................................   126
Kugler, Ellen J., National Association Urban Critical Access 
  Hospitals, statement...........................................   129
LoBiondo, Hon. Frank A., a Representative in Congress from the 
  State of New Jersey, statement.................................   113
Louisiana Association for Behavioral Healthcare, Crowley, LA, 
  letter and attachments.........................................   115
Mandel, JoAnne, Texas Association of Behavioral Healthcare, 
  Houston, TX, letter............................................   146
National Association for Home Care, statement....................   118
National Association of Long Term Hospitals, Stoughton, MA, 
  statement......................................................   123
National Association of Public Hospitals and Health Systems, 
  Larry S. Gage, statement.......................................   126
National Association Urban Critical Access Hospitals, Ellen J. 
  Kugler, statement..............................................   129
Ortho-Clinical Diagnostics, Johnson & Johnson statement and 
  attachment.....................................................   131
Pierce, Charles F., Jr., Florida Hospital Association, submitted 
  by Hon. Karen Thurman, statement and attachment................   111
Pitman, Richard A., Shore Health System, Somers Point, NJ, 
  statement......................................................   143
Practice Expense Coalition, et. al., letter and attachments......   136
Practice Expense Fairness Coalition, et. al., letter and 
  attachment.....................................................   134
Rash, Marty, Rural Hospital Coalition, statement.................   140
Roukema, Hon. Marge, a Representative in Congress from the State 
  of New Jersey, statement.......................................   113
Rural Hospital Coalition, Wayne T. Smith; Jim Fleetwood; and 
  Marty Rash, statement..........................................   140
Saxton, Hon. Jim, a Representative in Congress from the State of 
  New Jersey, statement..........................................   113
Shore Health System, Somers Point, NJ, Richard A. Pitman, 
  statement......................................................   143
Smith, Hon. Christopher H., a Representative in Congress from the 
  State of New Jersey, statement.................................   113
Smith, Wayne T., Rural Hospital Coalition, statement.............   140
Society of Thoracic Surgeons, and American Association for 
  Thoracic Surgery, joint statement..............................   144
Texas Association of Behavioral Healthcare, Houston, TX, JoAnne 
  Mandel, letter.................................................   146
Visiting Nurse Association, Cincinnati, OH, Warren C. Falberg, 
  letter.........................................................   149

 
   ADDITIONAL MEDICARE REFINEMENTS TO THE BALANCED BUDGET ACT OF 1997

                              ----------                              


                         TUESDAY, JULY 25, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 1:09 p.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                Contact: (202) 225-3943
FOR IMMEDIATE RELEASE

July 18, 2000

No. HL-15

                      Thomas Announces Hearing on

                    Additional Medicare Refinements

                   to the Balanced Budget Act of 1997

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on further refinements to the Medicare provisions 
in the Balanced Budget Act of 1997 (BBA) (P.L. 105-33). The hearing 
will take place on Tuesday, July 25, 2000, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 1:00 
p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    In 1997, Congress passed the BBA, which made the most extensive 
changes to the Medicare program since its inception in 1965. Among the 
300 Medicare provisions in the BBA were efforts to reduce waste, fraud 
and abuse, expand coverage of preventive benefits, establish new 
payment methodologies for different Medicare providers, and create the 
Medicare+Choice managed care risk program. When the bill was passed, 
the Congressional Budget Office (CBO) estimated Medicare savings of 
$112 billion over five years.
      
    As with any major legislation involving such sweeping fundamental 
change, there have been unanticipated and unintended consequences for 
health care providers and implementation delays and problems within the 
Health Care Financing Administration (HCFA) that have affected the 
delivery of services to seniors. Understanding the need for fine-
tuning, last year, Congress passed the Medicare, Medicaid, SCHIP 
Balanced Budget Refinement Act of 1999 (BBRA), as incorporated in the 
Consolidated Appropriations bill for fiscal year 2000 (P.L. 106-113) . 
The BBRA contained a number of provisions aimed at strengthening 
Medicare, including assistance for hospitals, particularly in rural 
areas, nursing homes, home health, and the Medicare+Choice program. 
Additionally, the BBRA provided and clarified beneficiary protection 
from high out-of-pocket copayments for certain health services. The CBO 
estimated that the BBRA provisions would increase Medicare spending by 
$16 billion over five years.
      
    Even with these Medicare program improvements, the Subcommittee 
continues to monitor the impact of the BBA on all types of providers 
and oversee the implementation of the BBA, including the prospective 
payment systems it established. The Subcommittee periodically assesses 
whether further refinement of the BBA is warranted and what types of 
changes may be appropriate.
      
    In announcing the hearing, Chairman Thomas stated: ``Both Congress 
and the Administration must remain vigilant. Problems continue to arise 
in the implementation of this landmark legislation. Last year, Congress 
responded to concerns in a bipartisan fashion, making meritorious 
refinements where necessary without threatening the achievements 
associated with the 1997 legislation. I have always said that where 
inequities still persist, we will examine the possibility of further 
refinements. I hope that Congress and the Administration will work 
together again to ensure seniors get the health care services they 
need.''
      

FOCUS OF THE HEARING:

      
    The hearing will provide the opportunity to hear from 
Administration officials and health care providers about the impact and 
implementation of the BBA and the BBRA.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
August 8, 2000 , to A.L. Singleton, Chief of Staff, Committee on Ways 
and Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

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

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov''.
      

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

                                


    Chairman Thomas. Please find your seats.
    Almost 3 years ago, Congress passed the Balanced Budget Act 
of 1997, which made Medicare payment and benefit reforms really 
unseen since the inception of the program. This landmark 
legislation has strengthened Medicare substantially. It 
expanded coverage of preventive benefits for seniors, including 
PAP smear tests, colorectal cancer screenings, osteoporosis and 
other much-needed preventive benefits.
    It injected much-needed new flexibility for seniors' 
different health care preferences by creating the Medicare Plus 
Choice program. It provided new tools to combat health care 
waste, fraud and abuse that has resulted in savings to the 
program, and it has helped improve its efficiency.
    Finally, the Balanced Budget Act adjusted payments to 
providers, and it introduced reforms in fee-for-service 
programs, such as the Prospective Payment Systems, that have 
resulted in more accurate payments and have contributed to the 
extended solvency of the part A trust fund.
    When we formulated and enacted the so-called BBA, Congress 
relied on the data and estimates available at the time, as we 
always do. The Health Care Financing Administration has 
implemented most of the more than 300 changes to Medicare that 
the law required. In some cases, HCFA has missed deadlines for 
implementation or has developed policies that, upon more recent 
data, require further refinement.
    Last year, Congress recognized that such sweeping changes 
in payment policy often require some degree of fine-tuning. In 
response to HCFA's delays, and implementation problems and 
financial data on the BBA's impact on providers, Congress, in 
cooperation with the administration, passed the Balanced Budget 
Refinement Act, which restored more than $16 billion to 
hospitals, nursing homes, home health care, Medicare Plus 
Choice and rural health programs.
    Perhaps most important, though, the Balanced Budget 
Refinement Act contained provisions that directly addressed the 
needs of seniors, limiting the outpatient hospital copayment, 
increasing payments for PAP smears, and extending benefits for 
immunosuppressive drugs.
    It is worth noting at the beginning of this hearing that 
the Balanced Budget Refinement Act's relief for providers, $10 
billion of the $16 billion is not scheduled to be paid to 
providers until fiscal year 2001 and fiscal year 2002. Those 
asking for additional relief should keep in mind this important 
fact. The request is for legislation to be laid on top of 
legislation. We have the Refinement Act, and we are talking 
about a further Refinement Act. One was a 5-year period. This 
one will be a 5-year period, running concurrently in certain 
fiscal years.
    As Congress evaluates the need for further refinements this 
fall, we will be factoring in the Balanced Budget Refinement 
Act payment schedule of funds that providers have yet to 
receive.
    That said, early this year I made the point that the 
Subcommittee would monitor the continued impact of the BBA on 
all types of providers. We are willing to consider limited 
changes to the BBA to address the remaining unanticipated or 
unintended consequences stemming from this historic 
legislation. Our goal is not to undo the legislation, it is to 
refine the legislation. And if refinements are necessary, I am 
hopeful that a bipartisan consensus can be achieved and that a 
cooperative working environment between the Congress and the 
administration will prevail. The time will be relatively short 
for us to respond, but as in the past, we have on these 
matters.
    I am pleased that HCFA here is to provide a progress report 
on BBA implementation and technical assistance on Medicare 
payment areas that need further improvement or of difficulties 
in implementing provisions that they have been entrusted to 
implement. And additionally, of course, we are going to hear 
from people who will tell us about the state of their delivery 
of health services in all parts of the country.
    I look forward to a productive dialog on what specific 
additional refinements are needed to improve the payment 
structures in the Medicare Program. And with that, I turn to my 
colleague from California for any opening remark he may have.
    Mr. Stark. Thank you, Mr. Chairman for this hearing.
    I would just like to remind our witnesses, and I am sure 
the members don't need this, but Medicare was a program set up 
in 1965 to help the Nation's seniors and disabled. It is not a 
provider welfare program, and it is not meant to be designed 
for the providers first and beneficiaries as a secondary 
afterthought.
    A second reminder, that the savings that we achieved under 
your leadership in 1997 were, and are, incredibly important in 
stopping outrageous and unnecessary inflation in the program. 
The savings extended the life of the program and saved 
beneficiaries and taxpayers hundreds of billions of dollars in 
the years to come.
    Many providers make the case that we ``saved more than CBO 
expected to,'' so we should give it back. A large part of the 
reduced Medicare spending was, in fact, due to lower general 
inflation rates and a renewed commitment by HCFA to antifraud 
efforts. And surely none of our witnesses today are going to 
advocate higher inflation or more fraud and abuse.
    It is important that we not casually throw away the gains 
made in the 1997 reforms. We should only restore spending where 
there is evidence that we need to do so to protect 
beneficiaries. Remember, that every dollar we give back in part 
A reduces the life of the trust fund. Every dollar we give back 
in part B increases beneficiaries' monthly premiums. Over the 
next 30 years, the number of people--and I don't have to remind 
the Committee--on Medicare will double, from 40 to 80 million, 
and the numbers of taxpayers we expect to decline.
    We face a long-run problem and we should ask whether a 
provider give back helps us with that long-run problem. If we 
give back money, we should use it to help beneficiaries deal 
with the shortfalls on their side of the program. We need a 
good prescription drug benefit. We should greatly improve the 
preventive care benefits and actually eliminate the need for 
co-pays and deductibles in the use of preventive benefits. We 
should accelerate the work started by you, Mr. Chairman, in 
lowering the hospital outpatient department co-pays. It is 
going to take 40 years to fix that problem. We should speed up 
the day that co-pays are all at 20 percent. We should 
presumptively now, I believe, enroll low-income seniors in QMB 
and SLMB programs to help the poorest seniors.
    I hope the witnesses will talk about some of these changes 
on behalf of the people the Medicare Program was meant to 
serve, and I hope today's witnesses will give us some hard 
empirical proof that they deserve help.
    A year ago we asked the General Accounting Office to study 
whether Medicare was paying hospitals more or less than managed 
care plans were paying hospitals for a similar case. The data 
is just coming in, and many hospitals fought this project and 
refused to cooperate. GAO went over to 100 hospitals for data, 
and they only got data from a sample of 51. Basically, the 
GAO's draft report finds that Medicare payments were 9 percent 
above Medicare costs. Managed care plans were 7 percent higher 
than costs. Since Medicare is paying more than cost-conscious 
managed care plans, the question comes up of why we should 
increase the annual update to Medicare hospitals.
    The GAO found that 41 percent of these hospitals had 
managed care plan payments less than costs; whereas, only 24 
percent of these hospitals had Medicare payments less than 
costs. That raises the key question: If we pay hospitals more 
with taxpayer dollars from Medicare, will they just keep 
signing low-ball contracts with the managed care plans? If the 
GAO's data is accurate, we might as well write our checks to 
Aetna and Pacific Care directly.
    Mr. Chairman, I look forward to the testimony.
    Chairman Thomas. Thank the gentleman.
    Any other comments members may have can be submitted for 
the record.

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

    Mr. Chairman, thank you for calling this hearing today to 
assess additional Medicare refinement requests to the Balanced 
Budget Act of 1997.
    Like all of my colleagues on this panel, I have been 
hearing a great deal from providers about the concerns they 
have about current payment policies. I take their pleas for 
changes, especially from those providers in Minnesota, under 
serious advisement.
    At the same time, however, I take the input from the 
General Accounting Office and MedPAC equally seriously. After 
all, they were established to provide us this independent, 
unbiased information to help us make our policy decisions. 
Input from these two groups has been pivotal to Congress long 
before I was elected.
    How is it that some providers claim need for assistance, 
while GAO and MedPAC have stated that, for some certain 
industries, there is little or no evidence that spending 
reductions have hurt beneficiary access to care?
    How can the numbers literally be black and red at the same 
time?
    That's why this hearing today is so crucial for helping us 
evaluate the implementation of the BBA and the BBRA. Why are we 
saving so much more than expected under the BBA? Why are some 
providers still not feeling the positive effects of the $16 
billion we put back into the system last year? Are there any 
health care services that seniors need to fear losing access to 
because of reimbursement levels? Are there rules, regulations 
and bureaucratic hurdles that are limiting access to care and/
or increasing provider costs unnecessarily?
    Mr. Chairman, thanks again for holding this hearing. I look 
forward to learning more from today's witnesses about what 
changes may need to be made to the Medicare system.

                                


    And I wanted, on the gentleman from California's comments 
about the Congressional Accounting Office, we purposefully did 
not have the GAO at this hearing because they were in 
attendance at the Health Subcommittee of the Commerce 
Committee, just as the Health Care Financing Administration was 
not at the Commerce Committee. It is not by accident, it is by 
intention that these two hearings, last week and this week, be 
complementary, giving us a broader coverage on this question.
    And with that, I would turn to Dr. Berenson, the director 
of the Center for Health Plans and Providers, indicating that 
your written testimony will be made a part of the record, and 
you may address us any way you see fit in the time that you 
have.
    Dr. Berenson, thanks for being with us.

  STATEMENT OF ROBERT A. BERENSON, M.D., DIRECTOR, CENTER FOR 
 HEALTH PLANS & PROVIDERS, HEALTH CARE FINANCING ADMINISTRATION

    Dr. Berenson. Distinguished Subcommittee members, thank you 
for inviting us to discuss further adjustments to the Balanced 
Budget Act. Congress and the administration worked together to 
enact this historic law. Many BBA payment changes were 
justified and have contributed to improved efficiency and the 
unprecedented fiscal health of the Medicare Trust Fund.
    The Prospective Payment Systems mandated by the BBA are 
particularly important because they create incentives to 
provide care more efficiently. However, these new payment 
systems mark a substantial departure from cost--and charge-
based reimbursement, and the transition can be challenging for 
providers.
    We have all heard reports from health care providers of 
financial difficulties, in part, related to BBA changes, and we 
are concerned about the potential for reduced access to quality 
care. To address this, the President worked with Congress to 
increase home health care payments in 1998. We worked together 
again last year on the Balanced Budget Refinement Act to make 
adjustments for several types of providers. And we have taken 
several administrative actions to smooth the transition to new 
policies and help health care providers adjust.
    It appears, however, that some problems persist. We believe 
further prudent adjustments are warranted to protect access to 
quality care, and we want to work with the Committee, as we 
have done in the past, on legislation to make needed 
adjustments.
    The President's mid-session budget proposal includes 
numerous adjustments to increase payments by $21 billion over 5 
years to hospitals, rural providers, teaching facilities, 
nursing homes, home health agencies, managed care plans and 
other providers. This includes $9 billion over 5 years to delay 
further BBA payment reductions, and it includes $11 billion 
over 5 years in unspecified funds for use in developing 
additional adjustments.
    The improved status of the trust fund and the growing 
budget surplus make it possible to pay for these adjustments 
while still achieving our goal of extending trust fund solvency 
through 2030 and making an affordable voluntary prescription 
drug benefit available to all beneficiaries.
    I want to spend a couple of moments on two particular 
programs that deserve special attention today. The first are 
nursing home payments. We are continuing to work to refine the 
payment classification system in a budget-neutral way to ensure 
adequate payment for medically complex patients in skilled 
nursing facilities, and particularly to account more 
specifically for the costs of drugs and other nontherapy 
ancillary services. To immediately address industry concerns, 
the BBRA provided for a 20-percent increase in the SNF 
prospective payments for 15 categories of patients to address 
perceived shortfalls in payments for such patients until we 
were able to determine the best way to make these changes. And 
those increased payments are now being received.
    Using the best data available in 1998, we developed two 
payment classification models we believed would ensure adequate 
payment for complex patients. We issued a proposed rule in 
April of this year which included refinements based on these 
models and solicited public comments. In addition, we 
contracted with outside experts to validate the models using 
more recent data.
    When we tested the models with nationwide data from 1999 
over the past few months, we found that the models were no 
longer statistically significant in identifying high-cost 
beneficiaries with complex needs and the ancillary services 
they use. Proceeding with implementation of these proposed 
refinements based on these models could have changed payment 
levels without any assurance that we were distributing funds 
more equitably, creating incentives for efficient care and 
minimizing the risk of negative financial consequences.
    Accordingly, today we put on display the final rule 
deferring the implementation of these refinements. We will 
shortly begin consulting with outside researchers and experts 
to begin further analysis using 1999 national data aimed at 
determining the feasibility of developing case-mix refinements 
that reflect current practice. Our goal is to include a 
proposal for such refinements, as soon as possible. However, 
until a feasibility study is completed, we will be unable to 
accurately forecast the potential and timing of such 
refinements. In the meantime, the 20-percent increase in 
payments included in the BBRA will remain in place until 
refinements of the system can be implemented, which will be in 
fiscal 2002 at the earliest. In addition to the 20-percent 
increase, the BBRA also provided a 4-percent increase in 
payments for all SNF beneficiaries, effective October 1 of 
2000.
    The other comment relates to the Medicare Plus Choice 
program, and we released the numbers just yesterday about the 
numbers of withdrawals. It exceeded 900,000 beneficiaries 
affected by withdrawals. In addition to the specific fee-for-
service provider payment adjustments listed above then, the 
President's plan would provide an estimated $25 billion over 5 
years to Medicare Plus Choice plans specifically for drug 
coverage. This is important because Medicare Plus Choice plans 
are finding it difficult to adjust to the BBA changes, while 
maintaining the extra services not available in the Medicare 
fee-for-service program and especially prescription drug 
coverage.
    Even with the BBA changes, payments to M Plus C plans 
continue to exceed what taxpayers would spend for enrollees if 
they had remained in the fee-for-service program, but lack of 
payment to support drug coverage has led plans to significantly 
reduce the scope of their prescription drug coverage. And it is 
the primary reason that some plans are leaving the program.
    The best way to ensure that the Medicare Plus Choice 
program is a strong part of Medicare is to ensure that all 
beneficiaries have access to affordable drug coverage and to 
pay plans directly for providing it. The President's proposal 
to create a voluntary, affordable prescription drug benefit for 
all beneficiaries would do just that. Plans would be paid 
directly $2 billion beginning in January of next year and $25 
billion over the next 5 years to provide the prescription drug 
coverage. This amount substantially exceeds the $15 billion 
over 5 years that representatives of the American Association 
of Health Plans have said they need to continue participating 
in M Plus C.
    Beneficiaries in fee-for-service Medicare would also be 
able to choose this benefit, regardless of whether they live in 
areas with managed care plans. And beneficiaries in plans all 
across the country would be assured of drug coverage rather 
than just those in areas where nontargeted assistance for plans 
would raise payment enough to support a drug benefit.
    While it is essential that we maintain the fiscal 
discipline embodied in the BBA, it is equally essential that we 
make adjustments where necessary to ensure continued access to 
quality care and provide access for all beneficiaries to an 
affordable and voluntary drug benefit.
    I thank you for holding this hearing, and I am happy to 
answer your questions. Thank you.
    [The prepared statement follows:]

Statement of Robert A. Berenson, M.D., Director, Center for Health 
Plans & Providers, Health Care Financing Administration

    Chairman Thomas, Congressman Stark, distinguished 
Subcommittee members, thank you for inviting us to discuss the 
need to make further adjustments to the Balanced Budget Act of 
1997 (BBA). Congress and the Administration worked together to 
make difficult decisions in enacting this historic law. The BBA 
helped to eliminate the deficit, created the State Children's 
Health Insurance Program, and reduced and restructured Medicare 
and Medicaid payments to health care providers. Many of the 
provider payment changes were justified and have contributed to 
improved efficiency and the unprecedented fiscal health of the 
Medicare Trust Fund.
    However, information gathered over the last three years 
suggests that some of the policies may have the potential to 
affect the quality of and access to health care services. To 
address this, the President worked with Congress to increase 
home health care payments in 1998. We worked together again 
last year in the Balanced Budget Refinement Act (BBRA) to make 
several necessary adjustments for several types of providers. 
And we have taken several administrative actions to smooth the 
transition to new policies and help health care providers 
adjust.
    It appears, however, that problems persist. We have all 
heard reports from health care providers of financial 
difficulties--in part related to BBA changes. We are concerned 
about the potential for reduced beneficiary access to quality 
care. We believe it is warranted to make further prudent 
adjustments to ensure that beneficiaries continue to have 
access to quality care. And we want to work with this 
Committee, as we have done in the past, on legislation to make 
needed adjustments.
    The President's Mid-session Review proposal includes 
numerous adjustments that would increase payments by $21 
billion over 5 years ($40 billion over 10 years) to hospitals, 
rural providers, teaching facilities, nursing homes, home 
health agencies, managed care plans, and other providers.
    The President's proposal includes $9 billion over five 
years ($19 billion over 10 years) to delay further BBA payment 
reductions, many of which are scheduled to occur on October 1, 
and includes $11 billion over five years ($21 billion over 10 
years) in unspecified funds for use in developing additional 
adjustments.

                 PRESIDENT'S MIDSESSION BUDGET PROPOSAL
                           Dollars in Billions
------------------------------------------------------------------------
                                 5 Years                 10 Years
------------------------------------------------------------------------
    HOSPITALS..........
 Full inpatient                    $4                      $8
 hospital market basket
              for `01
    Indirect                     $0.2                    $0.2
 Medical Education at
 6.5 percent for `01:
      Repeal                     $0.2                    $0.2
 Medicare DSH reduction
             for `01:
   Freeze in                     $0.3                    $0.3
         Medicaid DSH
  allotments for `01:
       Rural                     $0.5                    $1.0
          initiative:
   Adjusting                    $0.05                    $0.1
 Puerto Rico hospital
    payments to 75/25
               blend:
    Total:.............                    $5                     $10
HOME HEALTH
    Delay 15                       $1                      $1
  percent cut in `02:
 Full market                       $1                      $2
 basket update for `01:
    Total:.............                    $2                      $3
NURSING HOMES
 Full market                     $0.6                      $1
 basket update for `01:
 Delay therapy                     $1                      $1
   cap changes for an
     additional year:
    Total:.............                  $1.6                      $2
MEDICARE+CHOICE
    Indirect                       $1                      $3
  effect of specified
            policies:
OTHER
 ESRD composite rate                     $0.2                    $0.5
   update of 2.4% for
                 `01:
                TOTAL SPECIFIED POLICY     $9                     $19
               COSTS:
UNSPECIFIED PROVIDER                      $11                     $21
      RESTORATION POOL:
                TOTAL FUNDING:            $21                      40
------------------------------------------------------------------------
 AANOTE: Numbers may not add due to rounding. Ricky Ray and diabetes
  increases would be funded out of the unspecified pool.

    The BBA's fiscal discipline and our success in fighting 
fraud, waste, and abuse have greatly improved the status of the 
Medicare Trust Fund, which is now projected to remain solvent 
until 2025, 26 years beyond where it was just 8 years ago. The 
prospective payment systems mandated by the BBA are 
particularly important because they create incentives to 
provide care efficiently.
    However, these new payment systems mark a substantial 
departure from cost-and charge-based reimbursement, and the 
transition can be challenging for providers.
    The improved status of the Medicare Trust Fund and the 
growing budget surplus make it possible to pay for new BBA 
adjustments to help providers adjust to these changes while 
still achieving the President's goal of extending the Trust 
Fund to at least 2030 and adding an affordable, voluntary 
prescription drug benefit that is available to all 
beneficiaries. In addition to the specific fee-for-service 
provider payment adjustments listed above, the President's plan 
would provide an estimated $25 billion over five years to 
Medicare+Choice plans specifically for drug coverage.
MEDICARE+CHOICE

    Medicare+Choice (M+C) plans are finding it difficult to 
adjust to the BBA changes while maintaining the extra services 
they have provided to beneficiaries in the past. This is 
especially true for prescription drug coverage that is not 
available in the Medicare fee-for-service program and which 
many M+C plans offer, but for which they do not receive 
specific payment from Medicare. Many M+C plans were able to 
offer drug coverage and other extras because of excessive 
payments that were made to them before the BBA.
    However, since the BBA was enacted, costs of the extra 
benefits provided under many M+C plans--particularly 
prescription drugs that are not offered in the Medicare fee-
for-service program--have increased much faster than spending 
for services in the Medicare fee-for-service program. Our 
success in holding down fee-for-service costs is due in part to 
BBA provisions and our fraud, waste, and abuse efforts, as well 
as other factors. Because payments to M+C plans do not account 
for the costs of services which are not covered in the Medicare 
fee-for-service program, plans have significantly reduced the 
scope of their prescription drug coverage. For example, in the 
last two years, the proportion of plans that limit drug 
coverage to $500 or less has increased by 50 percent. In 2000, 
about 75 percent of plans limit drug coverage to $1,000 or 
less.
    Lack of payment to support drug coverage that is not 
available in fee-for-service Medicare is a primary reason that 
some M+C plans are again announcing that they will leave or 
reduce participation in the program, particularly those with 
smaller market shares and strong competition. Difficulty in 
maintaining provider networks is also a factor, as demonstrated 
by a recent Deloitte & Touche report showing that half of the 
nation's largest hospitals canceled an HMO contract in the past 
year. Because some M+C plans believe that they cannot be 
competitive if they charge a higher premium or reduce benefits, 
they have simply decided to withdraw from the program. We have 
no control over their actions. We do believe, however, that 
even with premiums, M+C plans still represent a valuable option 
for beneficiaries--particularly as an alternative to Medigap.
    For 2001, about 85 percent of current M+C enrollees will be 
able to continue with their current HMO. However, 65 M+C 
organizations have announced they will leave the program and 53 
will reduce their service areas, affecting a total of 934,000 
Medicare enrollees. More than 775,000 should have the 
opportunity to enroll in another M+C plan, but about 159,000 
will be left with no other managed care option and few, if any, 
options for affordable drug coverage.
    Nonetheless, payments to M+C plans continue to exceed what 
taxpayers would spend for enrollees if they had remained in the 
fee-for-service program. The General Accounting Office (GAO), 
in testimony before Congress last week, affirmed that this is 
still the case despite BBA payment changes and that ``Medicare 
managed care, although originally expected to achieve program 
savings, continues instead to add to program cost.''
    The best way to ensure that the M+C program is a strong 
part of Medicare and an important option for beneficiaries is 
to ensure that all beneficiaries have access to affordable drug 
coverage and to pay plans directly for providing it. The 
President's proposal to create a voluntary, affordable Medicare 
prescription drug benefit for all beneficiaries would do just 
that. Under the President's proposal, M+C plans would be paid 
through a competitive, market-based process in relation to 
their own costs, rather than through Congressionally mandated 
administrative prices that have resulted in wide variation in 
rates and beneficiary access to plans across the country.
    Also, plans would be paid $2 billion directly beginning in 
January and $25 billion over the next five years to provide the 
prescription drug coverage that most beneficiaries want from 
managed care. This amount substantially exceeds the $15 billion 
over five years that representatives of the American 
Association of Health Plans have said, in testimony before 
Congress, they need to continue participating in the M+C 
program. Beginning in 2002, beneficiaries in fee-for-service 
Medicare would also be able to choose this benefit, regardless 
of whether they live in areas where managed care plans have 
chosen to operate. And beneficiaries in M+C plans all across 
the country would be assured of drug coverage, rather than just 
those in areas where non-targeted assistance for M+C plans 
would raise payment enough to support a drug benefit.
    In addition, under the President's Mid-Session Review 
proposal, M+C plans would receive an additional $1 billion over 
five years through increases to the payment rates which are 
based on the fee-for-service Medicare system. We also announced 
on June 19 that we will work with the Medicare Payment Advisory 
Commission (MedPAC), plans, beneficiary groups and others to 
develop a slower phase-in of the current schedule for risk 
adjustment, administratively addressing the concerns about the 
current schedule, while maintaining our commitment to using 
comprehensive outpatient data beginning in 2004.
    Meanwhile, to make sure that Medicare is a fair business 
partner, we have been streamlining the requirements for M+C 
plans while making sure that beneficiaries who choose managed 
care receive the benefits, protections, and information they 
need and deserve. We have modified many requirements in our 
contracts and operations to be more consistent with private and 
other public purchasers, and we are implementing additional 
initiatives to further streamline administrative procedures and 
lead to more efficient and consistent oversight. Specifically, 
we are:
     Increasing flexibility in establishing a provider 
network, which will allow health plans greater opportunity to 
serve rural areas;
     Improving freedom of choice by allowing plans to 
offer beneficiaries a point of service option that broadens 
access to health care services from both in-network and out-of-
network providers; and
     Easing compliance plan reporting by eliminating 
the self-reporting requirement.
    Medicare beneficiaries should know that, regardless of the 
decisions made by private HMOs, they are still covered by a 
strong Medicare program. Their HMO is required to cover them 
until December 31, 2000. We are continuing to take strong steps 
to ensure that, no matter what decisions plans make about their 
participation in the program, Medicare beneficiaries affected 
by these changes have options. We are ensuring that 
beneficiaries who are being forced to change their health care 
coverage are guaranteed access to certain Medigap plans, 
regardless of any preexisting conditions, as the law requires. 
And, in order to make the transition easier for these 
beneficiaries and to help them make the right decisions about 
their health care coverage, we are providing them with clear 
information on their new options and requiring plans leaving 
the program to do the same.

HOSPITALS

    Most experts agree that hospitals' financial status has 
worsened recently, as a result of several factors. In large 
part, this results from private payment reductions. MedPAC has 
found that about three-quarters of the decline in total 
hospital margins between 1997 and 1998 is due to lower private 
payments. While Medicare hospital inpatient margins remain 
relatively healthy, more hospitals had negative margins in 1998 
than 1996.
    Rural hospital inpatient margins dropped by nearly twice as 
much as urban hospital margins did between 1997 and 1998. Rural 
hospitals face special challenges--they tend to be smaller and 
often cannot attract or keep health care professionals. They 
also are more dependent on Medicare patients and therefore 
disproportionately affected by Medicare payment reductions. The 
BBRA invested about $1 billion over 5 years to address many of 
these problems. However, additional increases appear to be 
warranted to help the long term viability of rural hospitals.
    Hospitals that serve large numbers of uninsured people also 
are strained by the increasing number of uninsured. Some 
uninsured use hospital emergency rooms for primary care while 
others delay care until problems become more severe and costly. 
While the number of uninsured has been rising, Federal payments 
to disproportionate share hospitals (DSH) were reduced by the 
BBA. This coincided with reductions in payments from private 
payers which traditionally had helped fund uncompensated care. 
And academic health centers, which play critical roles in 
making medical advances, caring for some of the most complex 
cases, and providing service to underserved populations, also 
have experienced a significant decline in total hospital 
margins.
    To mitigate these funding problems, allow for more time to 
assess the full impact of the BBA and BBRA, and to preserve 
beneficiaries' continued access to quality care, the 
President's plan would:
     Replace the BBA inpatient hospital update for 
inflation, the ``market basket'' (MB) minus 1.1 percentage 
points with a full MB update for FY 2001;
     Eliminate the BBRA indirect medical education 
payment reduction for FY 2001, maintaining the additional 
payments for IME at 6.5 percent;
     Eliminate BBRA DSH reduction of 3 percent for FY 
2001;
     Replace the BBA's Medicaid DSH reductions for 2001 
with a one-year freeze, so that the Federal share DSH limits 
for FY 2000 would also apply in 2001.
     Reserve about $1 billion over 10 years for rural 
provider policies. This will include policies to improve the 
sustainability of rural hospitals, similar to those in the 
bipartisan ``Health Care Access and Rural Equality Act of 
2000,'' introduced by Sens. Conrad, Daschle and Reps. Foley, 
Berry, McIntrye, Pomeroy, Stenholm, Tanner and others. We also 
will consider improving equity for rural hospitals in the 
Medicare DSH formula.
     Provide fairer payments for inpatient services in 
Puerto Rico by basing the payments more on the rates that apply 
everywhere else in the nation.
    The Mid-Session Review plan also modifies the President's 
budget savings policies by dropping the fiscal 2003 through 
2007 policies to reduce hospital market basket update and 
capital payment reductions and to further reduce hospital bad 
debt reimbursement. These hospital policies would have saved 
more than $25 billion over 10 years (before interactions).
    Meanwhile, we have taken steps to help hospitals adjust to 
BBA and BBRA changes. Most recently, we delayed implementation 
of the outpatient prospective payment system to give both us 
and hospitals more time to prepare. We are distressed about 
postponing the benefits of this new system for beneficiaries, 
but the delay is necessary to be fully prepared for this 
substantial change. We also are requesting that hospitals not 
collect deductibles or coinsurance from Medicare beneficiaries 
beginning August 1 until we notify them of the correct amount. 
And we will provide all hospitals with a ``plain language'' 
flyer to help explain the change to beneficiaries.
    To assure as smooth an implementation as possible, we have 
undertaken an unprecedented provider education campaign which 
has included:
     Allowing hospital representatives to attend our 
initial training session for intermediaries;
     Training sessions, town hall meetings and 
satellite broadcasts for providers to explain the new system 
and to answer questions;
     Use of the HCFA website to post the outpatient 
prospective payment system regulation, instructions, training 
materials and answers to questions received to date; and
     Weekly conference calls since April with provider 
associations to keep them apprised of the progress of 
implementation.
    In addition, we are committed to implementing changes 
included in the BBRA to accommodate new technology in the 
outpatient prospective payment system. We are expanding the 
number of medical devices for which ``pass-through'' payments 
will be made and continuing to work with the industry to 
determine additional devices for which these payments can be 
made. We also have committed to making unprecedented quarterly 
updates to the pass-through list to ensure that the outpatient 
prospective payment system does not inhibit development and use 
of new technologies.
    In other steps to help hospitals, we have postponed 
expansion of the BBA's ``transfer policy'' for all hospitals 
for a period of two years, through 2002. As a result, the 
transfer payment policy will apply only to the current 10 
Diagnosis Related Group (DRG) categories, as prescribed by the 
BBA. We are carefully considering whether further postponement 
of this policy is warranted.
    We have taken a number of specific administrative steps to 
assist rural hospitals. For example:
     We have made it easier for rural hospitals, whose 
payments are now based on lower, rural area average wages, to 
be reclassified and receive payments based on higher average 
wages in nearby urban areas.
     We are helping rural hospitals adjust to the new 
outpatient prospective payment system by using the same wage 
index for determining a facility's outpatient rates that is 
used to calculate inpatient rates.
     We also are working with colleagues at the GAO and 
MedPAC to review the impact and appropriateness of the wage 
index that is used to factor local health care wages into 
Medicare payment rates and generally results in lower payments 
to rural hospitals than their urban counterparts.
    We also are implementing BBRA provisions, including:
     Easing BBA DSH and IME reductions;
     Extending the Medicare Dependent Hospital program 
through 2005;
     Easing requirements for hospitals to qualify as 
Critical Access Hospitals;
     Allowing urban hospitals to reclassify to rural 
areas; and
    Allowing Sole Community Hospitals to have payments based on 
more recent hospital-specific costs.

HOME HEALTH

    There has been a significant decline in home health 
spending since the BBA. This is due in large part to 
elimination of overpayments, waste, and fraud, but we are 
concerned about the potential for access problems in some 
situations. GAO, MedPAC and the HHS Inspector General agree 
that there does not appear to be system-wide access problems. 
However, some studies have suggested that patients who have 
long-term conditions may have had increased difficulty in 
accessing home health services. The President's plan would:
     Replace the current law home health update of 
market basket minus 1.1 percentage points with a full market 
basket update for FY 2001; and
     Delay the BBA's 15 percent reduction for an 
additional year until FY 2003.
    Home health agencies will be greatly aided by the new home 
health prospective payment system that will take effect October 
1. There has been a very positive response to our regulation 
detailing how this system will work, and the GAO has stated 
that it will ``generally provide agencies a comfortable cushion 
to deliver necessary services.'' We also have taken steps to 
help home health agencies adjust to BBA changes, such as 
extending the time to repay overpayments and postponing the 
requirement for them to obtain surety bonds.

SKILLED NURSING FACILITIES

    The BBA created a new prospective payment system for 
skilled nursing facilities (SNFs) that went into effect in 
1998. This new system contributed to changes in the SNF market. 
Recent GAO and HHS Inspector General studies have found that 
SNFs were more cautious about admitting high-cost cases. An IG 
study found that 58 percent of hospital discharge planners 
reported that Medicare patients requiring extensive services 
such as intravenous medications have become more difficult to 
place in nursing homes. Additionally, several large private SNF 
chains have experienced financial problems that are primarily 
due to business practices unrelated to Medicare, but compounded 
by Medicare payment changes.
    The President's plan would:
     Replace the BBA's SNF update of market basket 
minus 1 percentage point with a full market basket update for 
FY 2001.
     Delay for an additional year (until FY 2002) the 
application of the therapy caps providing additional time for 
development of policies.
     Drop the nursing home bad debt reduction budget 
proposal.
    The BBA limited yearly payments for Part B physical/speech 
therapy and occupational therapy to $1,500 each per 
beneficiary. This limit meant that a large number of therapy 
patients had service use that exceeded the payment limits and 
thus paid for services out-of-pocket.
    The BBRA put a two-year moratorium on the caps while a 
study is being conducted to determine appropriate payment 
methodologies that reflect the differing therapy needs of 
patients. However, the moratorium may not be long enough to 
complete this complicated work.
    We are continuing to work to refine the payment 
classification system in a budget neutral way to ensure 
adequate payment for medically complex patients, and 
particularly to account more specifically for the cost of drugs 
and other ``non-therapy ancillary'' services. To immediately 
address some industry concerns, the BBRA provided for a 20 
percent increase in the SNF prospective payments for 15 
categories of patients to address perceived shortfalls in 
payments for such patients until we are able to determine the 
best way to make these changes. We implemented this BBRA 
provision in early June, and nursing homes should be receiving 
the increased payments for services delivered on or after July 
1.
    Using the best data available in 1998, we developed two 
payment classification models we believed would ensure adequate 
payment for complex patients. We issued a proposed rule in 
April 2000 which included refinements based on these models and 
solicited public comments. In addition, we contracted with 
outside experts to validate the models using more recent data. 
When we tested the models with nationwide data from 1999 over 
the past few months, we found that the models were no longer 
statistically significant in identifying high-cost 
beneficiaries with complex care needs and the ancillary 
services they use.
    Proceeding with implementation of the proposed refinements 
based on these models could have changed payment levels without 
any assurance that we were distributing funds more equitably, 
creating incentives for efficient care, and minimizing the risk 
of negative financial consequences. We therefore are deferring 
the implementation of the refinements.
    We will shortly begin consulting with outside researchers 
and experts to begin further analysis using the 1999 national 
data aimed at determining the feasibility of developing case-
mix refinements that reflect current practice. Our goal is to 
include a proposal for such refinements as soon as possible. 
However, until a feasibility study is completed, we will be 
unable to accurately forecast the potential and timing of such 
refinements.
    In the meantime, the 20 percent increase in payments 
included in the BBRA will remain in place until refinements of 
the system can be implemented, which will be in fiscal 2002 at 
the earliest. In addition to the 20 percent increase, the BBRA 
also provided for a 4 percent increase in payments for all SNF 
beneficiaries, effective October 1, 2000.

END-STAGE RENAL DISEASE

    Medicare covers about 300,000 people with end-stage renal 
disease (ESRD) -people who have diabetes, hypertension or other 
diseases that result in severe impairment of kidney function. 
Medicare's composite rate (payment rate for outpatient dialysis 
services) has not kept pace with the increasing acuity of 
patients and cost of services. For the past several years, 
MedPAC has recommended updating the payment rate to reflect 
these factors.
    The BBRA went part of the way to the MedPAC recommendation 
by updating it by 1.2 percent in 2000 and plans for another 1.2 
percent increase in 2001--the first increases since 1991. The 
President's plan would meet the full MedPAC recommendation and 
increase rates by 1.2 percent for CY 2001 in addition to the 
BBRA increase of 1.2 percent.

OTHER ADJUSTMENTS

    The President's plan also drops proposed payment reductions 
for laboratories, ambulances, durable medical equipment, 
parenteral and enteral nutrients, and prosthetic and orthotics 
for fiscal years 2003 through 2007, as well as bad debt 
reductions for non-hospital providers, repeal of the BBRA 
managed care risk adjustment policy, and the proposal for a 
preferred provider option.
    We also are continuing with development of additional 
prospective payment systems mandated by the BBA for inpatient 
rehabilitation facilities, and mandated by the BBRA for 
psychiatric hospitals, and long-term care hospitals.
    As mentioned earlier, the President's Mid-Session Review 
proposal includes $21 billion for unspecified policies. We look 
forward to working with Congress to develop additional policies 
to help providers adjust to the many BBA changes.

CONCLUSION

    While it is essential that we maintain the fiscal 
discipline embodied in the BBA, it is equally important that we 
make adjustments where necessary to ensure beneficiaries' 
continued access to quality care. The improved status of the 
Medicare Trust Fund, combined with current budget surplus 
projections, provides the flexibility to make the prudent 
adjustments we are proposing, as well as to make a voluntary, 
affordable Medicare prescription drug benefit available to all 
beneficiaries. Enactment of such a benefit is urgently needed 
to meet beneficiary needs. It also is the best way to ensure 
that M+C plans can provide drug coverage and give beneficiaries 
the options Congress intended in the BBA. I thank you for 
holding this hearing, and I am happy to answer your questions.

                                


    Chairman Thomas. Thank you very much, Dr. Berenson.
    Rather than begin the questioning and then come back, we 
have a series of votes, and let us say that if at all possible, 
the Subcommittee will reconvene at 1:45 or as soon thereafter 
as possible.
    The Subcommittee stands in recess.
    [Recess.]
    Chairman Thomas. Thank you very much.
    Dr. Berenson, in your testimony, which I note was modified 
from the other testimony with new information, we certainly 
appreciate the new information, although it is received with 
mixed feelings in that it means that another structure and 
another deadline has been missed. There may be some crocodile 
tears out in the audience based upon the Balanced Budget 
Refinement Act safety net, which has just been woven a little 
tighter for a little longer for some of these folk, and that 
isn't the case for a number of the time lines that need to be 
met.
    For example, I believe you stated in your testimony the 
administration will consider improving the equity for rural 
hospitals on the Medicare disproportionate share formula. I 
know that hospitals in different settings have different 
problems. But one of the concerns we faced for some time is 
that those hospitals in rural settings notwithstanding, the 
idea that you are supposed to be compensated for who is in the 
bed based upon their socioeconomic and age profile, that many 
of them, because of the formula, many of the rural hospitals, 
because of the formulas, are not getting the money.
    And you might recall that in the 1997 legislation, Congress 
directed the Secretary to submit a report to Congress by August 
5, 1998, on a new payment formula for DSH. Do you know if that 
report has been submitted and when, if it has not, it might be?
    Dr. Berenson. It has not been submitted. It is in final 
clearance at this point. It does deal with the issues of 
different thresholds for urban and rural hospitals, but it 
should be out very soon.
    Chairman Thomas. Okay. I am obviously anxious for that 
because that might be something--would it be in time for us to 
incorporate it if we were going to make some adjustments 
continuing to try to ease the pain in the rural area, that this 
formula might be something we could plug into this legislation?
    Dr. Berenson. Yes. I believe it should be in time for the 
fall's deliberations.
    Chairman Thomas. Yes, anything that you could put out in 
August we should be able to use for what is now----
    Dr. Berenson. I will take that back. I know it is in final 
clearance, and I will try to get that out.
    Chairman Thomas. Probably in September. That would be very 
helpful. I would hate to see it come out October 1, when we 
moved legislation in September.
    Dr. Berenson. Yes. And it addresses the issue that has come 
up about rural--different thresholds for rural and urban 
hospitals, so it would be germane.
    Chairman Thomas. And in the Balanced Budget Refinement Act, 
we directed the Secretary to collect data on compensated care 
starting October 1, 2001. Where are we in that process? Do we 
have any kind of a structure for collecting that data? Do we 
have a date on when that might be out? Again, this is the data 
collection on uncompensated care that was directed in the BBRA.
    [The following was subsequently received:]

    Per the BBRA, hospital data on uncompensated care will begin to be 
collected on hospital cost reports for cost reporting periods beginning 
on or after October 1, 2001. We currently are working to revise the 
claim form to accommodate this requirement. Hospitals will submit a 
revised report for data on the costs incurred by the hospital for 
providing inpatient and outpatient hospital services for which the 
hospital is not compensated, including non-Medicare bad debt, charity 
care, and charges for Medicaid and indigent care.
    In addition to revising the cost report, we are working to develop 
definitions of each type of uncompensated care for which the BBRA 
requires data be collected, since the current definitions can and do 
vary from state to state.
    By September 30, 2002, hospitals will have completed a cost report 
that includes these data. Within about six months of that date, we 
should have received the majority of these cost reports. By September 
30, 2003 most of them will be settled. As such, the earliest the data 
we are collecting will be available will be October 1, 2003.

    Dr. Berenson. Yes, I do not. I would have to get back to 
you on that.
    Chairman Thomas. No problem. You just need to get back on 
that. Because, again, that is something that we need to, if at 
all possible, look at in making adjustments in an area that 
rural hospitals do feel some pressure.
    On Page 8 of your testimony, you refer to the steps the 
Health Care Financing Administration has taken to ease the 
transition of the hospital outpatient PPS, and it appears that 
we are on the verge of getting that hospital outpatient. And 
interestingly enough, just on the verge of actually getting it 
done, we are getting some hospital groups indicating that maybe 
we need to delay the implementation of the Prospective Payment 
System on outpatient because they claim the operational and 
information systems needed to implement it aren't ready.
    So let me ask you a series of questions. If you have the 
responses verbally, I would appreciate them. But if not, we 
would like them in writing because this is going to be an area 
that we need to take a look at. So the question would go like 
this: Has HCFA tested the new system with fiscal intermediaries 
in actual hospitals?
    Dr. Berenson. Yes, but not a broad--I mean, most of the 
testing is happening with fiscal intermediaries. There was 
extensive testing this past weekend which went pretty well. 
There have been----
    Chairman Thomas. When did you start this testing?
    Dr. Berenson. Well, there have been a series of steps that 
occur first.
    Chairman Thomas. Okay.
    Dr. Berenson. The CELIP and then the OCE. There are a 
number of them. The full implementing system has been in 
testing in the recent past, and on a broad scale, on the last 
weekend.
    I would want to point out that we reluctantly postponed the 
effective date of the outpatient system from July 1 to August 
1. That is the effective date for date of service for the 
beneficiary, and we are pretty confident about that date. The 
actual implementation for the release to the fiscal 
intermediaries is actually scheduled for 2 weeks later because 
of the natural delay in claims submission, the 14-day floor on 
payment. So we actually have a few weeks to do that testing. 
But we have initiated that testing, and so far it has gone 
pretty well.
    Chairman Thomas. So you are in the field testing, and you 
will test right up to the implementation date or beyond the 
implementation date. My assumption is if something falls 
through the floor unexpectedly or things just don't work, would 
that affect the implementation date or would you anticipate 
going forward?
    Dr. Berenson. Absolutely. I mean, clearly, we don't want to 
postpone it again. For every month that goes by, beneficiary 
cost sharing increases about $100 million. We think we will 
make these dates. But if it is not working, if we cannot pay 
claims, we would postpone it. We also have contingency 
planning. If it looks like it is a short window of a few weeks 
that we would need, we have a mechanism for providing 
accelerated payments to hospitals, and that would be done on an 
automatic basis if it is our systems that are not functioning. 
So we have a couple of alternatives. I really don't think we 
will need to postpone the actual implementation date.
    Chairman Thomas. Okay, Doctor. One of the concerns I have 
is that as recent as 1 month before the postponement was 
announced, we had the administrator here saying that, yes, they 
were going to meet the deadline. And the answer, ``We hope we 
are going to meet the deadline,'' is okay for the first time 
around. This is not the first time around. So if it doesn't 
destroy any secret time table that you are working on, this 
Subcommittee would very much like to see what a go/no go looks 
like to you for the August 1 implementation.
    And just a little bit of gaming, and I am not interested in 
running this in the newspapers or releasing it, but I would 
like to have a comfort level that if, in fact, you decide not 
to go August 1, what is it that would determine that you don't 
go August 1? And if you do go August 1, what is it that gives 
you the confidence level that you can go forward? Because 
postponing it again is better than starting and stopping or 
forcing us to attach the legislation some time line or criteria 
that probably won't work. We will be pushing the string again.
    So to create a working environment and a comfort level a 
little higher than ``we hope it works this time, and we are 
shooting for an August 1 date,'' I would like to see some 
structure of a go/no go in the decisionmaking matrix that you 
folks are working on.
    Dr. Berenson. We can provide that for you, as well as some 
of the detail about our contingency planning, about what would 
trigger that. And we can provide that for you.
    Chairman Thomas. Part of the problem is this Subcommittee 
and the Congress has to get a confidence level, so that when 
people come to us and say, ``It isn't going to work,'' we have 
some substantive ability to say, ``In our opinion, it will, and 
if it doesn't, there are reasonable and appropriate fall-
backs.'' Because as you know, this season, for some reason, 
there is less oil between the moving parts, and the friction 
tends to generate a lot more heat than it should otherwise. And 
we will appreciate that kind of information.
    [The following was subsequently received:]

    The Outpatient Prospective Payment System was implemented by our 
revised August 1 deadline, and the majority of claims are being paid on 
time.

    Thank you.
    Chairman Thomas. Does the gentleman from California wish to 
inquire?
    Mr. Stark. Thank you for your testimony, Doctor.
    It is my understanding, just for the record, that you have 
more than just academic experience with managed care health 
plans, and indeed, started one, ran it efficiently and sold it 
at a huge profit. Is that a fair assumption or is that a fair 
characterization of your other career?
    Dr. Berenson. ``Huge'' is exaggerated.
    Mr. Stark. Large.
    Dr. Berenson. At a reasonable, yes.
    Mr. Stark. A reasonable profit. All right.
    Dr. Berenson. It was a----
    Mr. Stark. I very seldom hear ``reasonable'' from the 
Health Plan Association.
    Dr. Berenson. Preferred Provider Organization. It was not 
an HMO. It was a local PPO, which was pretty successful.
    Mr. Stark. So you understand the business side of----
    Chairman Thomas. Would the gentleman yield, briefly?
    Mr. Stark. Sure.
    Chairman Thomas. Is this line of questioning a positive or 
a negative, that someone was out in the real world and made 
money, and is now in government service? There have been others 
that it didn't tend to be a positive comment about. I am just 
curious.
    Thank the gentleman for yielding.
    Dr. Berenson. It was certainly less than Lynn Abramson or 
some of the others, in terms of what they were able to do.
    Mr. Stark. I basically have a couple of questions. I will 
just try and lay them out and let you deal with them as you 
choose.
    There have been a lot of Medicare Plus Choice withdrawals, 
reductions, reduction in benefits, complete withdrawal, so 
forth. Does this argue or does it not argue, one, for a drug 
benefit to everyone on Medicare?
    Two, the plans say they are underpaid. They are going to 
spend $60 million telling the public they are underpaid. Maybe 
if they just saved the $60 million they would be all right. The 
GAO, the Office of the Inspector General, the Medicare trustees 
all say that we are overpaying plans for the people they 
actually enroll. Perhaps you can enlighten us on those two 
issues.
    The third is that the American Association of Health Plans 
is lobbying relentlessly for relief from the so-called onerous 
burden of collecting physician encounter data, another report 
that is due Congress one of these days or may be past due.
    Chairman Thomas. Oh, it is past due.
    Mr. Stark. Is it past due? Okay.
    My question is how will we ever get a risk adjustment 
system if we don't get the data? And does it make any sense to 
just make risk adjustment revenue neutral? So those are a 
series of questions, but can you just comment on that in 
general in our time, and then perhaps enlighten us.
    Dr. Berenson. I think I would sort of echo the comments of 
Bill Scanlon of GAO at the hearing last week, that we pay 
health plans more than adequately to provide the statutory 
benefits, but perhaps not as much as they are accustomed to 
providing a generous level of additional benefits that most 
beneficiaries have become accustomed to. We actually have our 
own data suggesting that about 24 percent of the payment to 
plans is for additional benefits. And what is often not 
appreciated is a large part of that, about 15 percent that 
makes up the 24 percent is the buy-down cost sharing, and then 
the next piece of it goes to actual benefits like prescription 
drugs.
    So the plans, in aggregate, it is not true in all parts of 
the country, we think are being paid for the Medicare benefit, 
but need more to attract beneficiaries and are reluctant to ask 
beneficiaries to pay out of pocket. Some choose to and some 
really feel they can't market that kind of a product and don't 
do that.
    On the issue of risk adjustment, we actually spent a lot of 
time seeing if there was an alternative model of risk 
adjustment that did not depend on collecting encounter data 
from individual visits and really found flaws with the other 
approaches, like sampling or surveys. And really, the models 
that are out there really assume encounter data. We are right 
now doing a study that was mandated by the BBRA to assess the 
difficulties, and there are operational difficulties for plans, 
but there is also some lead time.
    We have asked plans to start providing encounter data for 
outpatient and physician visits this October and January. But 
they have about 9 months to actually work out the kinks on how 
that happens. It doesn't become the basis for formally 
establishing the model or determining their payment until the 
middle of next year. So we think we have got adequate lead time 
in the current system, but we are actively now assessing and 
talking to the plans about the encounter data burden.
    And again, finally, on the issue of doing it in a budget 
neutral fashion, we believe that plans are overpaid for having 
healthier beneficiaries, and it is in the interests of 
taxpayers and others to pay appropriately. That will also 
provide better incentives for the plans to try to attract 
sicker patients.
    Mr. Stark. Thank you very much.
    Chairman Thomas. Does the gentleman from Louisiana wish to 
inquire?
    Mr. McCrery. Yes. Thank you, Mr. Chairman.
    Dr. Berenson, as you know, the hospital outpatient 
regulations are supposed to be implemented on August 1st of 
this year. And as you probably also know, a number of hospitals 
have expressed concern, asking for another delay, because of 
the lack of appropriate software, and their ability to train 
personnel, and basically their ability to handle these new 
regulations.
    Do you have any plans right now to further delay the 
implementation of those rules?
    Dr. Berenson. We don't. As the chairman asked, he wants us 
to identify what our go/no-go criteria area, and we have those, 
which we will provide. At this point, we feel pretty confident 
that the effective date of August 1st can be met, and the 
implementation date, where actual transactions have to occur 
and be paid later in the month in August, can be met. We were 
late on some of the preliminary elements that make the system 
work, but the hospitals have now had many months to prepare for 
this. There has been extensive education. It is a major 
overhaul. It is probably the most complicated overhaul of a 
payment system that we have done.
    It, also, I think in retrospect, supports the decision last 
year to postpone this with Y2K looming, that this would have 
been too complicated to take on last year, as far as the 
original implementation date. But at this moment, and I cannot 
make an absolute guarantee, and we will provide information to 
the Committee about what could change, we are quite confident 
that we can make that date. We are in communication with the 
various associations who have raised these issues and are 
trying to understand their concerns and respond to them.
    Mr. McCrery. And in April of this year, HCFA adopted new 
regulations which deny a Medicare provider a provider number 
for satellite facilities not within the immediate vicinity of 
the main campus, so to speak, of a long-term care, acute-care 
hospital. And there are two different, and somewhat confusing, 
tests to determine whether the immediate vicinity standard is 
met.
    I have received a complaint from more than one hospital 
that has a long-term acute care hospital, and they express a 
lot of concern that this is going to really make it difficult 
for them to continue operating some of their facilities in 
underserved areas.
    Are you familiar with this problem? Are you working on it? 
We have sent a letter and haven't really gotten anything back 
yet. What is the status of that?
    Dr. Berenson. Yes, we are aware. This is referred to as the 
provider-based criteria in the outpatient rule. And, there is a 
reason for it because it is too easy, for example, to have 
physicians' offices that are bought by hospitals who really are 
not part of the hospital to get higher reimbursement by just 
being labeled as part of the hospital.
    There is a need to have criteria. One of those criteria was 
that the facility in question had to be in close proximity and 
serve the same population. Other criteria included that there 
is ownership, and joint control, and appropriate supervision 
and that they are clinically integrated. Those seem to be 
working very well. We have now heard of a number of situations 
where the first criterion on the close proximity and the 
serving the same population becomes a barrier to what are 
deserving satellites or extensions of the hospital. And we have 
had a number of conversations with individual hospitals, as 
well as trade associations and are relooking at that aspect.
    Whether we can, within the current construct of the 
regulation, provide some additional guidance or whether we 
actually have to do a revision at this moment, I don't know. 
But we are actively working on that issue. It is supposed to go 
into effect on October 10, and we also recognize that that is 
of concern to hospitals. So we are very actively looking at 
that particular aspect of the provider-based regulations.
    Mr. McCrery. Okay. Well, I am going to yield to Mr. 
Johnson. But just let me say that the part of the rule with the 
75 percent of people in the same Zip Code or, you know, that is 
not only confusing, but it won't work in some areas.
    Dr. Berenson. Yes. Well, there was a model for that. It is 
what we used for a sole community hospital designation. We 
thought it could extend here, but we are now hearing that there 
are problems, and we are revisiting that very issue right now.
    Mr. McCrery. I would be glad to yield.
    Mr. Johnson of Texas. Thank you.
    He just brought it up--75 percent of the patients in the 
two locations must reside in the same Zip Code area. Are you 
telling me that to get medical care now people have to figure 
out what their Zip Code is so they can go to the right 
hospital? I think that is crazy.
    And can you tell me how these tests got into the final rule 
without first appearing in the proposed rule?
    Dr. Berenson. There were similar, but not identical, 
criteria. What we are trying to do here is----
    Mr. Johnson of Texas. Well, similar, but not identical; 
what do you mean?
    Dr. Berenson. Well, there were tests to determine what 
proximity was. We really do need to determine that a clinic, as 
an example, which is getting the benefit of being a part of a 
hospital, meaning the higher payments, as one specific example, 
actually, is part of that hospital. One of those tests had to 
do with proximity, so that not anybody could just set up a 
clinic and say, ``Give me a hospital designation.''
    Mr. Johnson of Texas. Well, but how did you pick Zip Codes 
for crying out loud? They are crazy all over the country. And 
in Dallas, we have a great number of Zip Codes, and the 
hospitals concerned, Baylor, for example, is downtown Dallas. 
You have got another branch of theirs which sits on the county 
line in a different county, but it is on the county line, in a 
different Zip Code, and you prohibited them from going to those 
two hospitals because obviously the people don't live in that 
Zip Code. Now, that is an isolated case.
    There are also 50 counties in Texas that don't have HMOs, 
and how do you account for people wanting to come from one 
county to another to get to a branch? And are your statistics 
good? Because I am told they are 1992 statistics. Is that true 
or false?
    Dr. Berenson. 1992 what?
    Mr. Johnson of Texas. Statistics.
    Dr. Berenson. 1992.
    Mr. Johnson of Texas. 1992 statistics is what you are 
using.
    Dr. Berenson. I honestly don't know.
    Mr. Johnson of Texas. You don't know?
    Dr. Berenson. I do not.
    Mr. Johnson of Texas. What date are your statistics?
    Dr. Berenson. I don't know the date of these statistics. I 
am sorry, sir. But I have said----
    Mr. Johnson of Texas. You don't know the statistics you are 
basing your decisions on?
    Dr. Berenson. I don't personally know the answer to that. I 
am sure I can provide that answer for you.
    But I have commented that we are--it may well be that the 
criterion relating to proximity--I mean, it makes some sense 
that to be part of a hospital one would be geographically 
associated with the hospital. We are now finding examples where 
that creates a problem, and we are actively looking at that.
    Mr. Johnson of Texas. Well, I appreciate it. When are you 
going to make a decision? Because you know if you get rural 
hospitals, which have been deprived of HMO service, and they 
need to go somewhere else to get it, they are obviously going 
to be out of that Zip Code. And you know you need better----
    Dr. Berenson. We are looking at that. At the same time, we 
need to know that the clinic that is distant from the hospital 
actually is integrated with that hospital to get the benefits 
of the additional payment that occurs. There have been abuses 
in this area before. I mean, they are a provider, whether they 
should benefit from the level of compensation is really what 
is----
    Chairman Thomas. The gentleman from Texas is on a role. 
Does he want to take his own time now or is this still out of 
the gentleman from Louisiana's?
    Mr. Johnson of Texas. I will return my time to him. I think 
I have made the point. Thank you.
    Chairman Thomas. Does the gentleman from Illinois wish to 
inquire?
    Mr. Crane. Please. Thank you, Mr. Chairman.
    Dr. Berenson, Mr. George Renaudin, at the bottom of Page 6 
in his testimony for the AAHP states that, ``The actual payment 
from the government is $415 in Terrebone Parish, Louisiana, and 
is $574 in Orleans Parish.'' A check of HCFA published by 
Medicare Plus Choice rates for 2000, however, shows that the 
rate for Terrebone Parish is $570, rather than the $415 figure, 
and is $651 in Orleans Parish, in contrast to the $574 figure.
    Can you explain this discrepancy in rates?
    Dr. Berenson. Excuse me. What we publish in the rate book 
is based on a beneficiary who has average demography. We adjust 
the payment rates that go to the plan based on the age, sex and 
institutional status of the beneficiary, so that somebody 70 
years old would have a different payment than a beneficiary 85 
years old. So our number is based on sort of the county 
average. We are now going to factor in risk adjustment, but we 
don't have to go there for this discussion.
    I can only presume that the actual payment that this 
particular Medicare Plus Choice organization is receiving is 
because they have probably a younger population than the 
average in that county, and therefore their actual payment is 
lower. But the people who are younger presumably do have lower 
medical care costs, and so that is how I would reconcile those 
two numbers. I haven't had a chance to actually meet with the 
plan to see if that is the explanation. But that is what we 
believe is the likely explanation.
    Mr. Crane. That kind of spread can be 30 percent, 40 
percent. That is not unnatural.
    Dr. Berenson. We have just seen this testimony and actually 
have had a chance to briefly talk to our actuaries to see if 
they could understand what the difference would be. The one for 
Orleans is plausible to have that kind of spread. The one from 
Terrebone County seems awfully large, and I don't think it is 
easily explained. But we would be happy to sit down with the 
plan and see if we can't come up with an explanation. That is a 
very large spread to explain simply on gender and age 
differences.
    Mr. Crane. Very good. Thank you.
    I yield back the balance of my time.
    Chairman Thomas. Does the gentlewoman from Florida wish to 
inquire?
    Mrs. Thurman. Thank you, Mr. Chairman.
    Just an inquiry to the chair. Are we going to have more 
than one round or is this kind of our best shot?
    Chairman Thomas. I believe the gentlewoman should figure it 
her best shot.
    [Laughter.]
    Mrs. Thurman. Okay.
    Chairman Thomas. If you are going to give me a choice, you 
know the one I am going to take.
    Mrs. Thurman. Well, you know, I just wanted to know if I 
needed to bring my yellow flag out or not. But nonetheless, in 
saying that, because, as you can imagine with this hearing, we 
have----
    Chairman Thomas. Let me say this is on the chair's time, so 
don't keep her clock going right now.
    Mrs. Thurman. Thank you. I think the yellow flag worked.
    Chairman Thomas. Does that help a little bit? Keep going.
    Mrs. Thurman. I thank you, Mr. Chairman.
    Because, as you can imagine, this is such a big issue for 
so many of our constituencies that we serve and also with the 
providers. And as I am sure that has happened in all of our 
offices, there are several questions that we would like to be 
able to put on the record that we are not going to have time if 
this is the only thing. So I would hope that we would be able 
to submit questions.
    Chairman Thomas. No question. I would tell the gentlewoman 
from Florida this is the beginning of this process, not the end 
of the process, and that I know Dr. Berenson----
    Mrs. Thurman. And you will be with me until the bitter end 
of the process.
    Chairman Thomas. I will be here till the bitter end, as 
will Dr. Berenson. And he would be pleased to respond, but he 
may very well need to have written responses anyway. And there 
is no problem whatsoever in submitting additional questions 
because, frankly, we are going to be carrying this dialog along 
through August during the break. It does not need to occur 
right now. There is no window of supplying information that 
would be closed if you don't get it in right now.
    The primary focus would be, in my opinion, on getting the 
provider group up here, so they can spread on the record. They 
don't get nearly the opportunity to provide for the record 
their own particular concerns. They have avenues available to 
them, but not on the record. We will have an open dialog with 
the administration on where and how we need to make 
adjustments.
    Mrs. Thurman. I thank the chairman because, as you know, I 
have been very concerned about immunosuppressants. I have huge 
issues with hospitals in my district.
    Chairman Thomas. The gentlewoman's clock will begin.
    Mrs. Thurman. Okay.--with issues dealing with my hospitals, 
teaching hospitals, GME issues. Mr. Ramstad and I have a piece 
of legislation on technology that we are very concerned about, 
and streamlining a process. I mean, there are several things 
that are very concerned about and would like to have a dialog 
with you. And I do have lots of those questions.
    But like many of my colleagues up here, the July 1st 
deadline has come and gone, and we are now facing very angry 
people in our communities, and in some cases to the extent 
where our HMO Medicare Choice programs have now pulled out, and 
leaving no coverage. And some of us have already seen some 
meetings on this. I think we need some help here in how we go 
back to these folks that are losing their coverage, and if you 
saw the faces and the articles of people that ar 80-years-old, 
that all of a sudden--I mean, here is a great picture. You 
know, this woman is 80-years-old, and she is at the hearing of 
the discussion of the Medicare HMO pull-out. They are trying to 
ask us questions, and have chosen to use a couple of ideas.
    One that I might ask you about is--and I know we changed 
the law on this, but maybe you can give me some better reasons 
to tell them why we did not force HMOs to stay in an area for a 
period of time--once they go in, if they stayed in for 3 years 
or whatever--why they think the differential cost. And I have 
to tell you, the cost issue is not--or the reimbursement issue 
is not as big as the issue as why one area gets more benefits, 
less premium, and one area gets no benefits except for maybe 
prescription drug and pays a premium. They do not understand 
that, and quite frankly, I agree with them. I thought Medicare 
was Medicare and everybody was supposed to have the same 
benefit and that should be the premises on which we should work 
from first. Why is it that you can have HMOs in one area of the 
state, they pull out in another state? Why aren't they covering 
a whole state, cutting their risk or covering their risk across 
county lines? Because in this case and like in Hernando County, 
they could go--I mean one said they actually were going to go 
set up sets in Pasco County because Pasco County is not losing 
their Choice program, but the one next door is, and the 
differentiation in their ability for reimbursement is only 
maybe $20. To the south of them, they get less money.
    So there are all these questions that people are asking. 
And just as importantly, and the biggest concern I have in 
talking to some of the HMO providers, they have told me, ``It 
does not matter what Congress does at this point. We probably 
would never go back into those counties anyway.''
    But I think we need to tell the whole story around this. I 
mean, I think part of our problem is--and I think part of it is 
the BBA problem, particularly in Florida. We have now got a 
situation where BBA has cut into some of these hospitals. They 
can no longer shift their costs, so their contracts with their 
HMOs are not as good as they used to be, and they do not have 
an ability to cost shift. I mean, help me, because on the 4th 
of August, either I am going or you are going--I do not which--
about these 500 people that are going to be asking some very 
tough questions, and what I could take back to them in offering 
them some solutions.
    Dr. Berenson. Well, you have certainly--I think virtually 
everything you have said, I do not disagree with. I mean, the 
cost shifting clearly has happened. In fact, there was a recent 
report by Deloitte & Touche that documented that over--about 50 
percent of large hospitals had terminated an HMO contract, and 
we are certainly hearing that they are requesting higher 
payment rates, partly as a result from decreased Medicare 
margins, but the Medicare margins are still pretty healthy. So 
there had been, in essence, some cross-subsidization going on.
    This is a tough dilemma. I mean, the idea of keeping plans 
in for two or 3 years sounds attractive, but I have actually 
been dealing with some plans, who in the middle of a year, 
actually wanted to terminate a contract because they were 
beginning to hemorrhage financially. We would only do that in 
extreme circumstances because we feel that the contract year is 
a commitment, and that the plan should not be getting out 
within that year.
    I actually think--and this is not the time for the full 
discussion--we really need a fundamental restructuring of how 
these plans get paid. The President has one approach which 
would pay the plans more in relationship to their own costs. 
The plans would submit a bid for providing the services, rather 
than through this administrative formula, which for a number of 
reasons has problems. So I think that is one approach, 
certainly providing some additional support in the form of a 
subsidized prescription drug benefit is another approach. There 
is actually a provision in the BBA that permits Governors of 
states to either have a statewide service area or define a 
metropolitan service area and a non-metropolitan service area 
as a way to try prevent some of the segmenting of service areas 
that occurs, but plans have difficulty serving that whole area, 
given the differences in payment.
    So I do not have a simple solution within the current 
construct of how these payments occur, and I do think we need 
to be looking at perhaps some fundamental change in how the 
plans are paid, but I do not know that that helps for this 
August.
    The other thing I would say, that if the Congress is able 
to pass legislation this September with a prescription drug 
benefit and plans would wish to come back in, or existing plans 
would want to change their benefit packages, we are now doing 
contingency planning at HCFA to be able to handle the requests 
that would be coming to us to make that available. So we will 
be there if Congress does act this fall.
    Chairman Thomas. Subcommittee members, we have a non-
Subcommittee member with us, and he has a question that he 
would like to ask, and obviously, the rules are that the 
Subcommittee goes first. If it is okay for the other Members of 
the Subcommittee, we could call on the Chairman of the Social 
Security Subcommittee, because I know he has a question. Is 
that all right with the Members of the Subcommittee? And our 
friend, the gentleman from Maryland, who used to be on this 
Subcommittee--because of the rules, he is not, but you are a 
regular, so we are going to fold you in with the other members.
    Does the gentleman from Florida wish to inquire?
    Mr. Shaw. Yes, very briefly, and there is two areas that I 
would like to bring to the attention of the Committee and to 
the attention of the witness. And I very much appreciate your 
recognizing me and allowing me to sit with you these few 
minutes.
    I would like to have the Committee and the administration 
to consider my bills, which is H.R. 4571, which is a Pap Test 
to Save Women's Lives, a bill that I have introduced with Mrs. 
Thurman of this Subcommittee; and another bill that provides 
for digital testing for breast cancer.
    As you recall, Mr. Chairman, I offered and withdrew my 
bill, The Pap Test to Save Lives Act, as an amendment to the 
Medicare Prescription 2000 Act. I introduced it with Mrs. 
Thurman. At that time, Mr.Chairman, you suggested it would be 
more appropriate to be discussed in the context of the Balanced 
Budget Refinement Act.
    This act would provide for annual Pap tests for women under 
the Medicare. Under current law, the women are only allowed to 
have this done every 3 years as a payable expense unless they 
are determined to be high risk. I think that most of your 
doctors will recommend that women over a certain age have this 
done every year. The cost, I feel, is very minimal next to the 
dangers that are presented by not having it, and I would also 
point out that I believe that the prostate exams for men are 
permissible every year, so I find that there is a certain 
inequity there that I think that we ought to be addressing.
    I would hope also that we would make similar progress in 
detecting and curing breast cancer. The new bill that I am 
announcing today would be a positive step toward this goal. 
While mammographies are invaluable for screening for signs of 
breast cancer, the x-ray based technology that we are using 
today is 20 years or older. So when I had an opportunity to see 
a demonstration of new digital mammography equipment, which has 
been 11 years in the making, I immediately set out to work to 
make this technology available to women elsewhere. This bill 
would make sure that Medicare beneficiaries get these digital 
tests by making the necessary adjustment to the Medicare 
reimbursement policies.
    I will be sharing this information with you, Mr. Chairman, 
and with Members of the Subcommittee over the coming days in an 
effort to gain support for this. I have a keen personal 
interest in this. My wife lost both her sister and her mother 
to cancer, and both of them were victims of breast cancer. It 
seems today that we should, through our Medicare beneficiaries, 
make the very latest in technology available to them, so that 
we are doing everything we can to screen for cancer, and 
hopefully at an early date, that we will have some of the--we 
will be bragging about some of the results that we have from 
this new digital detection equipment that the Pap test has 
certainly shown in saving lives of women.
    And, doctor, if you would like to comment on that, or if 
you prefer to do it at a later date, put this out to you.
    Dr. Berenson. We will certainly look at that. I know the 
President's proposal for modernizing Medicare identifies a 
number of prevention screening tests that should now be done 
without any out-of-pocket expenses. I don't believe that 
proposal recommended changing the schedule of every 3 years, 
and we certainly want to look at that. I would also want to 
raise the issue of the thin prep that I know that has some 
interest here, that we are actively looking about being able to 
achieve administratively a proper reimbursement for that test 
within the current way we do gap filling, and then establish a 
national rate. And I have met with the company to try to make 
that particular Pap smear technology available at an 
appropriate cost.
    So we certainly share your interest, and look forward to 
seeing the details of your legislation.
    Mr. Shaw. Thank you, doctor. And thank you, Mr. Chairman.
    Chairman Thomas. Thank you, gentlemen. And with the passage 
of the bipartisan Thomas-Stark Coverage and Appeals Bill, any 
of these preventive measures can move rapidly to a national 
status.
    Does the gentleman from Texas wish to continue his zip code 
inquiry?
    Mr. Johnson of Texas. Well, thank you, Mr. Chairman. I 
think we have about exhausted zip codes. We figure people 
cannot define those.
    But let me switch to home health care, if I might, and ask 
you. In your testimony you indicated that there are some 
problems with access to home health service. You are forcing 
the closure of branch offices more than 70 miles from a parent 
agency, and in Texas, we have got 47 counties which have no 
home health care, and the branch offices were a key component 
of getting those services to Texans in those counties. But HCFA 
has come out with a rule that stipulates it cannot be more than 
70 miles from the parent facility.
    I might tell you, Texas has got--it is more than 1,000 
across from one end to the other, and a lot of those little 
counties our in West Texas do not have hospital facilities or 
home health care facilities. So could you tell me, first of 
all, does HCFA recognize branch facilities as an efficient and 
effective way of getting seniors the care they need?
    Dr. Berenson. Again, it is similar to the other situation. 
If in fact the branch office is truly part of the parent and 
the appropriate supervision and controls, and so forth, are 
there, then it would be appropriate. I believe in this area 
there were a number of examples where the branch office, the 
so-called branch office was able to achieve a higher 
reimbursement rate, but really was not functioning as part of 
the base office, and it was really not appropriate, and so that 
was the basis for setting up a criterion of 70 miles.
    Mr. Johnson of Texas. Well, how does HCFA determine whether 
it is an appropriate branch or not? Have you been out to West 
Texas and visited any of the docs out there and talk to them 
personally?
    Dr. Berenson. Actually it was in East Texas, but not West 
Texas. I visited hospitals in East Texas last year, but I have 
not been out to West Texas.
    Mr. Johnson of Texas. How do you determine whether a branch 
is appropriate or not from HCFA, sitting there in your office?
    Dr. Berenson. Well, that is why we come up with criteria 
that may sound arbitrary, but that is why we have them, so that 
is why 70 miles was selected, because we do not have the 
ability to be----
    Mr. Johnson of Texas. Well, who came up with 70 miles?
    Dr. Berenson [continuing]. In the field and then make that 
judgment on a case-by-case basis.
    Mr. Johnson of Texas. Where did you get 70 miles from if 
you do not have data, you do not know where the data comes 
from?
    Dr. Berenson. Again, on that particular issue, I cannot 
tell you the precise basis for why 70 miles and not 50 miles or 
90 miles, but I can certainly provide that information back to 
you, and look into that issue.
    [The following was subsequently received:]

    The State Survey Agencies and the HCFA Regional Offices review the 
Home Health Agency's (HHA) request for a branch office, consider all 
the national guidelines and communicate their final decision in writing 
to the HHA. Specifically, our Regional Offices examine how the branch 
office shares HHA administration, supervision, and services with the 
patent HHA; how the patent HHA supervises the branch staff and ability 
to provide quality care for patients; past compliance history of the 
parent and its current ability to meet the conditions of participation; 
any relevant State issues and recommendations; and mileage and travel 
times from the branch to the parent.
    In the following HCFA policy and guidelines on approving HHA 
branches, our Regional Offices do have the flexibility now to approve a 
branch that is capable of providing quality care, particularly when 
access to home health care may be an issue, especially in rural areas. 
And, while we consider all of the factors indicated above, each alone 
would not be a single issue in determining the appropriateness of a 
branch office, and each factor might vary from one area to the next. 
Further, we do believe that we allow for modern technological 
communication advances to be used between the parent and the branch, 
yet technology is not a substitute for the physical presence of a 
supervisor, overseeing the provision of quality care to all 
beneficiaries being served by a branch.
    We have continued to meet and work with industry groups to ensure 
that flexibility exists in our Regional Offices' determination of home 
health branches. When a remote site cannot qualify as a branch, the 
parent HHA must set-up a submit rather than a branch office. A submit 
is an entity that must have its own administrative and supervisory 
capacity, meeting the conditions of participation on its own, ensuring 
quality of care. HCFA's policy on branch offices is consistent with 
regulatory and statutory requirements and serves to promote quality 
patient care.

    Mr. Johnson of Texas. I wish you would. Let me ask you 
another question concerning ambulance services. What is HCFA's 
best estimate on the date which a proposed rule on Medicare 
ambulance fee schedule will be issued?
    Dr. Berenson. As you know, I am sure, the ambulance 
proposal was the result of negotiated rulemaking with the 
various parties. We are basically now taking the results of 
that rulemaking process, and it is in final clearance. We 
expect to have the proposed rule out within days, because it 
needs to be implemented on January 1st, and so the timing 
accomplishes that. And so----
    Mr. Johnson of Texas. So there is supposed to be a 60-day 
period for comment, and you anticipate getting the rule done by 
January the 1st anyway?
    Dr. Berenson. We do, because to a large extent we have 
benefited from the fact that this was negotiated rulemaking, 
most of the parties who have a stake in the result have already 
participated and have agreed to the rule. There have been some 
issues raised, rural again has come up. There have been a 
couple of states which have come in because of particular forms 
of ambulance services that they have, but we actually think 
because most of the stakeholders were already part of the 
process, the 60-day comment period, our review of comments, 
will permit us to make that January 1 timetable.
    Mr. Johnson of Texas. Okay. Your new date was put at August 
the 31st. It was supposed to be out in May or June. So you 
anticipate making that August 31st date
    Dr. Berenson. It will be out in August.
    Mr. Johnson of Texas. Okay. Yield back the balance.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from Minnesota wish to inquire?
    Mr. Ramstad. Thank you, Mr. Chairman.
    Dr. Berenson, as you know, the BBRA included provisions to 
establish a hospital outpatient pass-through payment system for 
new medical devices, new medical technologies that will help 
gather important data on these devices to insure adequate 
payment levels for them.
    While the initial list, I think everyone concurs, fell 
short of what was designed, HCFA has done a pretty good job of 
refining and expanding that list, and I thank you, 
Administrator Min DeParle and many others who worked on the 
list. I also appreciate your willingness to work with industry, 
to work with my staff and me on this critical issue, as well as 
with others on the House Medical Technology Caucus. I have been 
told that an additional list of items of inclusion in the pass-
through was to be released today, in fact, this morning. I was 
wondering if that list was in fact released, and I would 
appreciate an update on the status of the list and its 
contents.
    Dr. Berenson. My understanding is it will be released 
today. I do not know if it has yet. It will be today. I do not 
think it has happened. And this would be the list that would be 
included for payment effective August 1st. It essentially 
includes approximately 596 items, if I am reading correctly. We 
are also reviewing others that missed that deadline and are 
being reviewed right now for--I take it back--it was 443 that 
will be in the initial list, and we are reviewing a lot more 
for inclusion in October 1st. I can provide you the specific 
information about it, but essentially we are putting up today 
the list that will be effective for August 1st. We will, in the 
very near future, essentially over a period of the next few 
days into a week or so, be reviewing the next list. We approved 
most but not all. In some cases the devices are not eligible 
because they are pre-1997. In some cases they do not have the 
appropriate FDA or other approvals, but for the most part, we 
have found acceptable the requests. And I guess the final point 
to make is--we are committed to doing this on a quarterly 
basis. We are in the process of setting up a routine process, 
so all the manufacturers understand it, know what the 
timetables and deadlines are so that we can do our work.
    Mr. Ramstad. So this will be available after the hearing 
today?
    Dr. Berenson. Yes, I can provide that for you.
    [The information was subsequently received and is being 
retained in the Committee files.]
    Mr. Ramstad. Okay. I appreciate that. I know there are a 
lot of other people in this room and elsewhere awaiting 
anxiously this list. And I do appreciate the collaborative 
effort. I think that is so important, to work with industry 
instead of in an adversarial way. And I applaud you and your 
staff and the administrator for that.
    Also, I would like to say, Dr. Berenson, as co-chair of the 
House Medical Technology Caucus, that I appreciate HCFA's 
efforts to create what is really a more transparent and 
reasonable coverage decisionmaking process for Medicare. 
Certainly there is room for improvement, as everybody 
recognizes, but progress has been made. I must say that on June 
29th I sent Administrator Min DeParle, after meeting with her 
in my office, a letter about a pending coverage decision that 
is expected to be made soon, and I regret having to address 
this issue again, because I thought significant reforms had 
been made, but I am told that there are major problems in the 
process, especially regarding the initial operations of the new 
MCAC, the Medicare Coverage Advisory Committee, which recently 
reviewed two existing urinary incontinence treatments, 
biofeedback and pelvic floor electrical stimulation. And I know 
there are concerns that have been voiced about the appropriate 
use of the advisory panels and the consistency of evidentiary 
standards throughout the coverage process. It has also come to 
my attention from a number of sources that during the panel 
deliberations, both panel members and HCFA staff made troubling 
comments about the process itself, and I was wondering if you 
would care to comment?
    Dr. Berenson. I actually would probably not. Jeff Kang is 
the head of the Office of Clinical Standards and Quality and 
has direct jurisdiction over that, and I really do not, and so 
I think that it would be inappropriate for me to comment at 
this point, but----
    Mr. Johnson of Texas. Would you pass on, please, my 
concerns to Dr. Kang, and if he would call or respond, I would 
appreciate that.
    Dr. Berenson. Absolutely.
    Mr. Johnson of Texas. And I see that my time is up. Thank 
you again, Mr. Chairman.
    Dr. Berenson. And I would be happy to arrange a meeting so 
that--with Dr. Kang and appropriate staff with you.
    Mr. Johnson of Texas. That would be very appropriate and 
much appreciated. Well, let's do that, Dr. Berenson. Thank you 
again. Mr. Chairman.
    Chairman Thomas. Thank you. Does the gentlewoman from 
Connecticut with to inquire?
    Mrs. Johnson of Connecticut. Thank you, Mr. Chairman. 
Welcome, Dr. Berenson. I am going to state my question, then I 
want to give some background, but I thought if I just say the 
question first, it will be easier. I am going to ask you why is 
the administration choosing a full market basket increase 
rather than MedPAC's recommendation, which is market basket 
plus. Also, what do you think should happen in the out years? 
This is an extremely important question to me. All the 
hospitals in my district have negative margins. All but two 
hospitals in Connecticut have negative margins. They are 
eroding their endowments, and we are on the verge of creating 
big access problems. If a group of these slide into bankruptcy 
and close or limit their services in a state like Connecticut, 
which in the icy winters access is a real issue, we will 
materially alter the access of senior citizens to Medicare 
benefits.
    In your testimony you attribute the increasing difficulties 
faced by hospitals to reductions in private payments, and the 
date you are using is 1998. I would agree in '98 that one of 
the reason hospitals were having trouble was the sharp 
reduction of payments by managed care payers and the private 
market in general. But this is the year 2000, and it is not 
just the private sector. It is a catastrophic failure of 
Medicaid to keep abreast. It is an increase in the number of 
uninsured and uncompensated payments, and it is the fact that 
Medicare payments themselves, where they are adequate, are 
barely so, and in some cases they are inadequate. And in your 
testimony you mentioned that rural hospitals are having a 
problem because they are more Medicare-dependent, which 
indicates that Medicare is part of the problem, even according 
to the 1998 data. What I am telling you is that the year 2000 
data is far worse, and because we do not have it clearly under 
our old system, we really cannot avoid it. In other words, if 
you look at Connecticut, if you look at rural hospitals, if you 
look at teaching hospitals, if you look at hospitals with 
uncompensated tier, I believe many of our hospitals, enough of 
our hospitals, are in the same state that nursing homes were in 
2 years ago, that you are going to see the same level of 
bankruptcies out there that we have seen in the nursing home 
industry in the last year, if we are not more aggressive in 
addressing their problems. So when MedPAC says market basket 
plus 0.6 to 1.1, I think that is important.
    Let me add one other fact here. My own local hospital used 
to see drug costs increase at about 3 percent--this was the 
first half of the 'nineties. Then I have forgotten which year 
it was, about 4 years ago, drug prices went up 7 percent. Last 
year the drug costs for that hospital went up 40 percent. You 
know, we are not taking into account a lot of the costs that 
these institutions are facing, and I think we have to be far 
more aggressive this year. So I want to know why you do not 
support MedPAC's recommendation for next year, and whether you 
think that we should continue to give full market basket the 
whole 5 years?
    Dr. Berenson. I guess my----
    Mrs. Johnson of Connecticut. And I have two other 
questions, so I do want to move through----
    Dr. Berenson. I guess very quickly, in addition to 
recommending market basket, the administration has also 
recommended freezing the indirect medical education for the 
year, repealing the DSH reduction, freezing the DSH allotments 
in Medicaid, and it adds up to $5 billion over 5 years, and 
there is an additional amount that we want to work with the 
Congress and with this Committee to identify. At this point we 
have looked at least at the aggregate numbers from '98 that 
show that inpatient margins are still at 14 percent and that 
total margins are still at 6-1/2.
    Mrs. Johnson of Connecticut. And what year data is that 
based on, that 14 percent?
    Dr. Berenson. That is data that MedPAC published recently, 
that we have been a part of providing some support for, but it 
was basically a MedPAC report.
    Mrs. Johnson of Connecticut. I want to hear from you later 
after this hearing so we can take that apart.
    I know of no hospital that has a 14 percent margin on even 
Medicare, although Medicare fee-for-service is still the best 
payor. But you know, in Connecticut, where you had really big 
managed care participation recently, that is a problem.
    Dr. Berenson. Yes. Well, and again, that same report I was 
referring to earlier is suggesting that hospitals are 
renegotiating or changing their contracts with managed care. I 
am not sure we necessarily want to assume what the condition is 
going to be out 5 years. We are certainly committed for this 
year. Part of the data does show there are more hospitals than 
have been in a negative position, so there seems to be some 
distribution occurring, and it may well be that Connecticut is 
particularly hard hit, but I will be happy to share that 
information with you, and again, we want to work with you on 
that additional amount that has not been specifically allocated 
at this time.
    Mrs. Johnson of Connecticut. Okay. And I would just like to 
mention that we need to look also at the Medicaid DSH payment 
because that is not enough. If Connecticut is any indication, 
they are paying 20 cents on the dollar into Medicaid because 
their money is going into nursing home care. So I think we have 
to look at the hospital component of Medicaid and how adequate 
that is in the states. We may even need to change the law so 
they have to be more realistic.
    Chairman Thomas. What we are going to try to do though, is 
stay within our jurisdictional boundaries. The Health 
Subcommittee of Commerce has had its hearing, and I was very 
pleased with their staying within their boundaries, and I want 
to return the courtesy. Now it is time to--we have to look at 
it as a whole, we do have split jurisdiction in the House, 
which just means we have to double our efforts to coordinate. 
Thank the gentle lady.
    Does the gentleman from Michigan wish to inquire?
    Mr. Camp. Thank you, Mr. Chairman.
    Dr. Berenson, less than 6 months ago the administration 
proposed $70 billion in cuts over 10 years to the Medicare 
Program. That was 18.2 billion in fiscal year 2001 alone. Yet 
just a few days before our vote in the House on our Medicare 
Modernization and Prescription Drug Legislation, the 
administration did 180-degree reversal, suggesting that 
increasing Medicare payments by about $21 billion over 5 years 
would be appropriate. Do you think Congress made the right 
decision in rejecting the administration's initial suggestion 
to reduce Medicare? And what caused such a sudden change in 
your thinking?
    Dr. Berenson. I think the recommendation was done in the 
context of the mid-session budget review. I think it was, to 
some extent, the recognition of a general budget surplus, the 
increasing information, such as what Congresswoman Johnson has 
just reported, that the data that we had been basing our 
judgments on was perhaps not as timely as it might be, and even 
though we have been trying to understand specific situations or 
trying to understand whether beneficiaries are having 
difficulty getting access to quality care, I guess the judgment 
was made that in the absence of contemporary data, that the 
stories and arguments that we have been hearing from many 
providers were becoming compelling, and we wanted to take in a 
sense preventive action at this time. We do not think, 
actually, at this point beneficiaries do not have access to the 
important services they need, but we were beginning to hear 
from, for example, hospital discharge planners, that they were 
beginning to have difficulty placing patients in nursing home 
or in home health agencies. They were able to do it, but they 
were beginning to experience difficulty doing it. So I think it 
was a combination of factors that resulted in the proposal to 
head off what could be problems in the future.
    Mr. Camp. Doctor, you also state in your testimony that the 
administration will consider improving equity for rural 
hospitals in the Medicare disproportionate share formula. As I 
recall in 1997, BBA, the Secretary was directed to submit a 
report to Congress by August 5th, 1998 on the new payment 
formula for the disproportionate share. Do you know if that 
report has been submitted yet?
    Dr. Berenson. We have discussed that. I has not been. It is 
in, I believe, its final clearance at this point. It has been 
up a couple of times and back, and I believe you will see that 
report in time for your next deliberations.
    Mr. Camp. Will the report address the inequities in the 
formula?
    Dr. Berenson. The report will address the different 
thresholds that urban and rural hospitals have to meet to 
qualify. What we do not have at this point is an ability to 
identify those who really do not have any source of insurance 
at all, which is really what MedPAC has recommended as a basis 
for an overhaul of the DSH formula. In that area I promised the 
Chairman that we would get back to him with our current ability 
to get a data collection system going, but it will certainly 
address the issue of the current distribution amongst urban, 
rural and types of hospitals.
    Mr. Camp. All right, thank you. Thank you, Mr. Chairman.
    Chairman Thomas. Does the gentleman from Pennsylvania wish 
to inquire?
    Mr. English. Thank you, Mr. Chairman, I would.
    Dr. Berenson, in January HCFA published an interim final 
rule expanding its definition of days countable and the DSH 
formula effective on January 20th, but permitting only a narrow 
group of states to qualify. Hospitals in our bordering state, 
New York, and seven other states would be eligible to claim 
waiver days, and HCFA had--and that HCFA had previously said we 
are not allowable, as I understand it. Pennsylvania's general 
assistance recipients are part of its Medicaid state plan, and 
therefore, are not statutorily permissible--are statutorily 
permissible under any interpretation. However, Pennsylvania was 
not included as a qualifying state. I understand you may not be 
familiar with this issue, but I sent a letter to Administrator 
DeParle on May 25th, asking for clarification of HCFA's rule. 
Can you give me any indication when I might receive a response 
to that letter?
    Dr. Berenson. We will make sure you have it in the next 
couple of days. It really----
    Mr. English. Prior to the recess?
    Dr. Berenson. I think we can do that. We will certainly do 
that prior to the recess. And I really do think the 
interpretation does go to general assistance days being state 
days, and waiver days having a Federal Medicaid component, but 
we will try to clarify that and provide the basis for that 
judgment in that letter, and I will make sure you get it this 
week.
    [The information follows:]

    While we initially determined that states under a Medicaid 
expansion waiver could not include expansion waiver days as part of the 
Medicare disproportionate share adjustment calculation, we have since 
consulted extensively with Medicaid staff and have determined that 
section 1115 expansion waiver says are used by patients whose care is 
considered to be an approved expenditure under Medicaid (Title XIX). 
Therefore, patient days under a Section 115 waiver are considered to be 
Title XIX days by Medicaid. It contrast, In contrast, general 
assistance days continue to be considered days for patients covered 
under a state-only or county-only general assistance program, whether 
or not any payment is available for health care services under the 
program. These patients are not Medicaid-eligible under the state plan. 
Therefore, Pennsylvania, and other states that have erroneously 
included these days in the Medicare disproportionate share adjustment 
calculation in the past, will be precluded from including such days in 
the future.

    Mr. English. I am not sure I understand, but I certainly 
will await your response. Doctor, recent studies by George 
Washington University Project Hope, MedPAC and the GAO, all 
have found that sicker, more costly Medicare beneficiaries are 
having trouble gaining access to the home health benefit. Do 
you have any data that contradicts the findings in those 
studies?
    Dr. Berenson. Well, the Inspector General, in particular, 
has done a couple of surveys of discharge planners from 
hospitals in terms of their ability to locate appropriate 
sources of care for beneficiaries, and is beginning to find 
some difficulty placing the high acuity of the sicker home 
health patients, and so I guess what we are beginning to find 
is information that is consistent with what you have described, 
and it is one reason that we are recommending that we would not 
ask for that 15-percent reduction that is supposed to take 
place for home health agencies this year.
    We believe, very strongly, that the new prospective payment 
system that will go into effect on October 1st, very much will 
improve the situation, replacing the interim payment system, 
reward the home health agencies more appropriately, and it does 
have a case mix adjustment component. It does have an outliner 
component in that proposal. So we think the PPS, as well as not 
taking that 15-percent reduction for the year, should, we are 
hopeful, address the problem that you have raised.
    Mr. English. Do you see any public policy, or for that 
matter, clinical argument for an additional 15 percent across 
the board cut in the home health benefit?
    Dr. Berenson. For this year we are recommending that we 
would not take that cut, and I think we need to see--we need to 
hold judgment about the future. It depends a lot upon the 
success of the prospective payment system and whether it is 
able to adequately compensate agencies for taking care of 
higher acuity patients who they are treating at home.
    Mr. English. Can I be clear then, are you advocating simply 
delaying the 15 percent cut, or are you recommending that we 
act to eliminate it at this point?
    Dr. Berenson. We are recommending a 1-year deferral, so we 
would not eliminate it at this time.
    Mr. English. So you would retain it as part of the budget 
calculation and as part of our future policy at this stage?
    Dr. Berenson. At this stage we would.
    Mr. English. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you. Does my friend from Maryland 
wish to inquire?
    Mr. Cardin. Thank you, Mr. Chairman. I appreciate the 
courtesy of being permitted to ask some questions.
    Dr. Berenson, thank you very much for your testimony. It is 
interesting. We try to balance cost issues with quality issues, 
and I am going to ask you to get back to me on a matter that 
was brought to my attention on breast cancer, that deals with 
different procedures that are available, one that would permit 
the stereotactic breast biopsy versus the surgical biopsy, and 
that the methodology used to determine the reimbursement for 
the less intrusive treatment, stereotactic breast biopsy, 
appears to be inadequate to allow those procedures to go 
forward, which would be counter-intuitive to saving costs and 
being more convenient for the patient. And I am going to ask if 
you would take a look at that and get back to us by September, 
so that it could be useful in our Committee's deliberation.
    Dr. Berenson. That one clearly does fall under my 
jurisdiction. I do not know that issue right now, but I will, 
and will get back to you.
    Mr. Cardin. I appreciate that. And let me just also join 
many of my colleagues who have expressed concern about the 
health of the different communities, medical communities. Since 
the passage of the BBA Act in 1997, we have seen in the nursing 
industry, the collapse of stockholder values in nursing homes, 
and many of the nursing homes going into bankruptcy, and our 
hospitals, as my colleagues have pointed out, the margins are 
not acceptable for any long-term viability of our hospital 
community. When you take a look at the home health cares, so 
many of them that have closed in our community and around the 
nation, take a look at our academic centers, and the list goes 
on and on and on.
    And I appreciate the Chairman's comment that we have passed 
the Refinement Act, and we haven't fully seen the full 
implementation of that Refinement Act. But I must tell you, 
looking at is as a snapshot today, there is reason for all of 
us to concerned, and I appreciate the fact that the 
administration has put forward a proposal to try to deal with 
this, and I hope that we are able to come forward with 
legislation this year.
    Let me, in the time that I have, talk a little bit about 
the HMO issue, because I think it is--there are a couple 
philosophical issues here. And you have mentioned the 
geographical disparities with the formula that we have adopted, 
and perhaps we are going to have to change that philosophy or 
formula for reimbursing Medicare Plus Choice plans, but let me 
talk for a moment about what I think has been a philosophy 
since the beginning of Medicare Plus Choice, and that is that 
we reimburse HMOs of what we think the cost is for basic health 
care under Medicare under covered service, and we expect that 
they are going to perform--or reimburse more than just the 
covered services, and that they can do that by reigning in 
costs and saving money, which is no longer the case. And it 
seems to me that as we are looking at some type of refinement 
to that payment structure, the point that Mrs. Thurman pointed 
out, without putting something into the underlying wall that 
protects the system and the beneficiaries for the services that 
we expect HMOs to provide, we might very well be paying them a 
bonus, and find out that they are just going to continue to 
erode the extra services such as prescription medicines or the 
deductibles or co-pays or the other preventive health care and 
some of the other issues that are included in HMO coverage. 
They might just eliminate that, and what we thought we were 
doing in passing a bonus in fact has not become reality. So I 
do think if we are going to be looking at additional bonuses, 
we should be looking at additional responsibilities of Medicare 
Plus Choice plans, to either cover these services or to stay in 
the market for a longer period of time. And I would appreciate 
your comments on that.
    Dr. Berenson. Yes. I actually think it is worth saying, one 
point about the fact that--we tend to talk about the program as 
sort of a monolithic program, what the plans are doing. In 
fact, the experience of this year demonstrates that different 
companies have very different attitudes, and business sort of 
decisions in relationship to the Medicare Program. Of the 
900,000 plus beneficiaries who lost plans, nearly half of them 
were withdrawals from two companies, Aetna and Cigna, both of 
whom withdrew from--each of them, about 69 percent of their 
beneficiaries were affected, and in one case there was a court 
order that kept them in another area. Contrast that with 
Pacificare, which is the largest Medicare Plus Choice 
contractor, which serves nearly a million beneficiaries. About 
2 percent of their beneficiaries were affected by non-renewals. 
And Kaiser Permanente, which serves almost 800,000 
beneficiaries, 0.2 percent of their beneficiaries were affected 
by non-renewals.
    So what we have are very different business decisions. We 
have this tendency, again, to talk about what the HMOs are 
doing or what the payment rates are. There is a lot of 
different behavior. And clearly, one of the unfortunate 
realities is that HMOs, as opposed to hospitals or nursing 
homes, do not have bricks and mortar; they are not in the 
community. They can easily withdraw, and if they are losing 
money, some of them do so. Others seem to have much more of a 
commitment and seem to have been able to figure out how to make 
a decent business out of the Medicare business, and so we need 
to understand a little more why these companies have these 
different philosophies.
    Mr. Cardin. But if I understand you correctly, that if 
Congress passes a further refinement, you are prepared 
administratively to act on reinstatements so that effective 
January the 1st it is possible, if the legislation is framed 
correctly and there is HMO interest, that we could have some of 
these HMOs back in the market. At least you are prepared 
administratively to accommodate----
    Dr. Berenson. Clearly, we are talking about how to get the 
information to the beneficiaries. The handbooks will be 
outdated. We will figure out how to get them the appropriate 
information. We will short-circuit and do what we need to to 
review the ACRs. We are doing that kind of planning. We would 
want plans--if there was substantial action, plans that had 
withdrawn, we would have a window to let them back in, as well 
as plans that were already in should have the same opportunity. 
We would actually hope that the legislation itself would sort 
of provide the parameters of that, but we are working 
administratively to be able to do that if there is action this 
fall.
    Mr. Cardin. Thank you, Mr. Chairman.
    Chairman Thomas. The Chair just wants to caution that 
dialog a little bit. We did include provisions in the Balanced 
Budget Refinement Act for those plans that pulled out in terms 
of the times, the penalties and the rest. I would just tell you 
the Chair is going to be a little reluctant to create a ``come 
on back'' when plans left for business reasons if there were 
multiple plans in the area. Clearly, where beneficiaries do not 
have choice, where they did have choice, we may need to devise 
a set of rules which at least creates a hierarchy of who gets 
attracted back and under what circumstances. Ny goal is not to 
roll back the calendar and pretend that January 1 did not 
happen for some plans who make decisions based upon their 
refusal to change their plan to meet the needs of the 
beneficiaries. I just want that on the record.
    Dr. Berenson. I think that is a very good point. Clearly, 
that is what I wanted to emphasize, is the plans who stayed 
should not be in any way disadvantaged because some plans left 
and are afforded an opportunity to come back, and the point 
about maybe it should not be across the board is a good one, so 
I appreciate that.
    Mr. Cardin. And I basically asked the question, Mr. 
Chairman, for that same reason. I am concerned about those 
areas where there is no options and no competition today.
    Chairman Thomas. However, where clearly it may be a problem 
with the administration of the hokey AAPC with numbers that are 
not realistic or the failure of HCFA to meet a time line which 
is appropriate, we will deal with those issues as well since we 
have in the past repeatedly.
    Mrs. Thurman. Mr. Chairman?
    Chairman Thomas. The gentlewoman from----
    Mrs. Thurman. Just to follow up on that, let me ask this 
question then. With that 5 percent buy-back into areas that 
were under served, have we had any takers on that?
    Dr. Berenson. I do not believe--no, not so far.
    Mrs. Thurman. Thank you.
    Chairman Thomas. The gentlewoman from Connecticut, I think 
wants to be----
    Mrs. Johnson of Connecticut. On the preceding discussion, I 
would just be concerned that one of the reasons one could stay 
in the market was because the other two did leave, so that they 
gave them the option and could increase their premium base more 
rapidly.
    I just wanted to, before you left, make a statement, since 
there really is not any questioning further. But we did pass a 
requirement that the GAO conduct a study that looks at the 
practice expenses involved in the delivery of cancer treatment 
in the community-based centers, and I know you are well up on 
this problem, but 90 percent of cancer care takes place in 
outpatient settings, and I would hope that you would not make 
any change in the price of drugs to oncologists and that 
reimbursement structure until this report is concluded, because 
from it we think we will be able to do a more adequate and 
precise job, actually, on the reimbursement issues that lie 
with changing the reimbursement for the price, as opposed to 
the administration of the cancer drug.
    Dr. Berenson. I appreciate that. I have personally met with 
the Society of Clinical Oncology and have understood how we are 
reimbursing fairly generously for the prescription drugs, but 
probably we need to improve the way we are reimbursing for 
administration. And we have started looking at that, and we 
will work with the GAO for sure to see what they come up with.
    Mrs. Johnson of Connecticut. Thanks. I do have a couple of 
wonderful sites you could visit and would invite you back up to 
Connecticut to visit them.
    [Laughter.]
    Dr. Berenson. Okay.
    Mrs. Johnson of Connecticut. Thank you.
    Dr. Berenson. I would be happy to.
    Chairman Thomas. The gentlewoman from Florida has one 
additional question.
    Mrs. Thurman. Dr. Berenson, have you at HCFA looked at all, 
since we are talking about prescription drugs, of doing 
reimbursement for Hospice in some of the prescription drug 
areas, as well? They are really complaining about the cost of 
drugs now and their ability to be effective?
    Dr. Berenson. I will have to take that back and get back to 
you.
    [The information follows:]

    We currently are looking at Medicare reimbursement levels for for 
hospice-provided drugs, which are covered as a portion of the per diem 
rate paid to hospice providers. The Balanced Budget Act of 1997 
stipulated that hospices submit cost data to us so we can evaluate the 
adequacy of current levels of Medicare hospice reimbursement. We are 
now collecting and reviewing this cost data, and will have a better 
sense of whether payments to hospice are adequate later this year.

    Chairman Thomas. Thank you very much. Just let me say that 
your comments to the gentleman from Pennsylvania, I would 
rather buy than rent. For the home health care 15 percent, we 
invested $2.5 billion to buy 12 months, and the administration 
is now advocating--excuse me, $1.5 billion for 12 months--and 
the administration is indicating they want to buy another 12 
months for a billion dollars, and that is $2.5 billion over 2 
years, to postpone a decision.
    I understand no-fault in the area of insurance. But it 
seems to me that partly, if you are so high on your October 1 
Prospective Payment System, that we might examine this 15 
percent. Because it seems to me the administration's position 
is hedging so that they have the ability to use that as a fall-
back or a no-fault arrangement. And I would be very concerned 
if we continued to invest money to delay a decision because 
there was not a high enough confidence level in the product 
that we were putting out. If there were other reasons, I would 
be interested, but right now I think that is the primary 
reason. You don't need to respond.
    In the BBRA, we thought we were creating a relatively clean 
short-term adjustment, which was a straight percentage 
adjustment on the RUGs, to modify the acuity within categories 
that we thought did not provide appropriate compensation. Those 
what we thought were straight arithmetical computer-adjusting 
decisions were supposed to go into effect April 1. They did 
not. You indicated in your opening statement that money is 
being received now. Do we know that for a fact? Because I am 
getting some comments still from plans that although you may 
have it in the pipeline, it hasn't started coming out the other 
end yet. Do we have any confirmation that people have actually 
received this money?
    Dr. Berenson. I can't tell you right now. Clearly, we 
didn't make April. June 5th is when--again, because of the 
backup from Y2K, we could not do it in April, and my 
understanding was that the payments were to begin on July 1st, 
and I have not heard that we have had problems.
    Chairman Thomas. My only concern is, as we plan here 
talking about making additional responses, especially with 
perhaps a bit more forward funding than in the previous piece 
of legislation, I have some concern that something as an 
arithmetical adjustment on an increased percentage, where the 
Health Care Finance Administration couldn't make the date, and 
that notwithstanding the argument that it has already been 
done, I am still not hearing from the field that it is there.
    If, in fact, we arrive at statutory dates for the 
implementation of programs, the model I would hope that we 
think about emulating are these envious presidential 
announcements of administrative initiatives from the Rose 
Garden. Because never once have I heard HCFA say they can't 
afford it, we need more money for the administration; number 
two, have I ever heard HCFA say to the President, we can't make 
that date.
    Somehow, every time there is an administrative request, 
HCFA is able to respond, and I look forward to the day that the 
same response and timeframe would be available for the 
statutorily agreed-upon changes.
    Dr. Berenson. Could I just add one thing, which is, again, 
I am not aware that we are not making the claims. But the plan 
is to provide the add-on for services back to April 1, even 
though we did miss the April 1 date. So----
    Chairman Thomas. So when they get it, they will get it.
    Dr. Berenson. Yes.
    Chairman Thomas. I appreciate that.
    I thank you very much. And, again, thank you for the 
administration's willingness, in an area where clearly it is 
the beneficiaries that are ill-served if we don't move 
solutions in a timely frame.
    Thank you very much.
    Dr. Berenson. Thank you. Thank you very much.
    [Questions submitted by Mrs. Thurman, and Dr. Berenson's 
responses, follow:]

    Q1. Please update me on the status of the rule regarding 
Medicare reimbursement for psychologists under GME and when we 
can expect it to be published.
    A1. We are actively proceeding with a proposed rule that 
addresses Medicare payment for training clinical psychology 
students. The document is currently going through the clearance 
process. As you know, the complete clearance process for any 
regulation requires time. However, we recognize that the 
development of this regulation took longer than anticipated, 
and we understand your concern over the delay. We are working 
very closely with our colleagues in the Department so that we 
can expedite this process as quickly as possible.

    Q2. In the BBA, Congress directed HCFA to bring ambulance 
services under the fee schedule. The rulemaking process has 
been completed. Do you believe the implementation of this rule 
will be in effect on 1/1/01 as Congress directed?
    A2. We expect to publish a proposed regulation based on the 
negotiated rulemaking committee's consensus agreement on 
September 12. Then there will be a 60-day comment period, 
followed by publication of a final rule. Our goal is to 
complete this process in time for the fee schedule to be 
effective on January 1, 2001 (with a four-year phase-in as 
developed by the negotiated rulemaking committee).

    Q3. A study was done by Project Hope for the Ambulance 
Association. Have you had a chance to review this study? If so, 
did you have any comments on the study and the impact on the 
cost to ambulance services?
    A3. We have not had an opportunity to review this study. 
Project Hope generated a smaller study that we examined as part 
of our negotiated rulemaking process; however, we understand 
the new study is expanded significantly. We would be happy to 
discuss this further with you or your staff.

    Q4. Last year, this Committee provided more than $1 billion 
for the managed care industry to lure them into areas that were 
not served by a Medicare HMO. Have any HMOs taken this offer? 
If not, where is this money? Do you think it would be a wise 
investment to increase payments, once again, to HMOs? Do you 
think more money would solve their problem? Or, do you think it 
would be a better investment to give that money to our 
providers who are providing the care that the HMOs do not want 
to pay for? Do you think this money would have been of a 
greater benefit to our seniors if it went towards a 
prescription drug benefit?
    A4. No Medicare+Choice plans (M+C) have taken advantage of 
this offer to come back into areas not served by a M+C plan, or 
enter the program for the first time in areas not served. 
However, some plans whose applications were pending at the time 
the Balanced Budget Refinement Act was passed, including our 
recently approved private fee-for-service plan, will see the 
benefit of this bonus program. It is unclear how much money 
will be spent on this bonus, which is tied to the number of 
beneficiaries enrolled in the eligible plans, because these 
plans only just recently began enrolling beneficiaries.

    We believe the best way to ensure that the M+C program 
remains a strong part of Medicare is to ensure that all 
beneficiaries have access to affordable drug coverage and to 
pay plans directly for providing it. The President's reform 
proposal to create a voluntary, affordable Medicare 
prescription drug benefit for all beneficiaries would do just 
that. Under the President's proposal, M+C plans would be paid 
through a competitive, market-based process in relation to 
their own costs, rather than through a statutory formula that 
has resulted in wide variation in rates and beneficiary access 
to plans across the country. Plans would be paid $2 billion 
directly beginning in January and $25 billion over the next 
five years to provide the prescription drug coverage that most 
beneficiaries want from managed care. This amount substantially 
exceeds the $15 billion over five years that representatives of 
the American Association of Health Plans, in testimony before 
Congress, have said they need to continue participating in the 
M+C program.
    Q5. Transplant recipients must take immunosuppressive 
medications every day for the life of their transplant. In most 
cases, Medicare limits coverage for these medications to 36 
months (the BBRA extended coverage for recipients who had a 
transplant after Dec. 31, 1996 or who are eligible for Medicare 
based on age or disability). For transplant recipients who do 
not have private health insurance benefits that include 
coverage of immunosuppressive drugs, paying for medications can 
be nearly impossible--at a cost of more than $11,000 per year. 
For a kidney transplant, the first year expenses with a 
transplant average more than $93,000, including follow-up care. 
Medicare spending for dialysis patients averages $52,000 a 
year. The IOM issued a report that supports Medicare coverage 
of immunosuppressive drugs. It just doesn't make sense that 
Medicare pays for the transplant but doesn't pay for the 
medications to prevent rejection. I have introduced 
legislation, HR 1115, with my colleague from Florida, Mr. 
Canady, which would eliminate the time limit on Medicare 
coverage of immunosuppressive drugs. This bill now has 272 
cosponsors. Could you discuss how important this coverage is, 
and how it could save Medicare dollars in the long-run, by 
reducing the number of re-transplantations, and reducing the 
dollars spent on dialysis because of organ rejection?
    A5. We, too, believe that the immunosuppressive drug 
benefit is a vital component of the overall Medicare benefit 
that covers organ transplants, I appreciate your leadership on 
this important issue. Unfortunately, we are unable to provide 
costs or savings projections on an indefinite extension of the 
immunosuppressive benefit.
    As you probably know, the President's 2001 budget proposal 
would permanently extend the immunosuppressive benefit by one 
year, bringing the total number of months of coverage up to 48. 
Also, the President has proposed a Medicare prescription drug 
benefit, which would provide the security of a prescription 
drug benefit for all Medicare beneficiaries.
    Under the President's proposal, Medicare would pay 50% of a 
beneficiary's prescription drug costs after benefits under 
Parts A and B expire. Additionally, catastrophic coverage would 
cover 100% of the beneficiary's costs after an out-of-pocket 
limit has been reached. In the first year of the benefit (2001/
2002) the out-of-pocket limit is $4,000. Thus, under the 
President's plan, beneficiaries would continue to receive Part 
B benefits until they expire. They would then be eligible for 
50% cost-sharing on their immunosuppressive drugs until they 
reach the catastrophic limit. Beyond the catastrophic limit, 
Medicare would pay 100% for their drugs.

    Q6. Cardiovascular disease is the leading cause of death of 
American women--killing more than half a million women each 
year. However, Medicare does not cover regular cholesterol 
screenings. Hospital charges for cardiovascular disease cost 
Medicare more than $26 billion in 1996. Yet, we know there are 
steps that can be taken to identify this disease earlier in 
order to treat the modifiable risk factors. I am a cosponsor of 
HR 3887, the Medicare Wellness Act, which would add several 
preventive benefits to the Medicare program, including 
cholesterol screening. What should Congress do to give 
beneficiaries the tools they need to fight against the nation's 
leading cause of death, cardiovascular disease? And, would you 
support legislation, such as HR 3887, to add preventive 
benefits to Medicare?
    A6. Although the Administration has not taken an official 
position on H.R. 3887, we strongly support increased attention 
to and coverage of preventive benefits. We have implemented the 
expanded preventive benefits authorized by BBA 97. 
Additionally, in his fiscal year 2001 budget, the President 
proposed further improvements to preventive benefits, including 
eliminating all beneficiary cost sharing for preventive 
benefits. We look forward to working with you ensure Medicare 
beneficiaries receive the most effective care possible.

    Q7. I have long been concerned that Medicare beneficiaries 
are not getting access to the best and most appropriate 
technologies and procedures. I understand that there are 
several processes that new technologies and procedures must go 
through in order to be made available to beneficiaries. The 
first process involves making specific coverage determinations 
about which medical procedures and products to make available 
to Medicare beneficiaries. However, I understand that simply 
covering a product or procedure doesn't mean that beneficiaries 
will actually have access to it, but that two other processes 
exist to establish a ``procedure code'' and then the 
appropriate payment category or level for the product. And even 
after coverage, coding and payment issues have been resolved, 
there still remain the basic mechanics of notifying fiscal 
intermediaries and carriers to go ahead and make payment.
    Q7: Please explain how coverage, payment, coding, and 
intermediary/carrier operations are currently organized in 
HCFA. Please explain how HCFA ensures that patients get timely 
access to appropriate technologies, and how management 
coordinates the various offices at HCFA, as well as the central 
and the local carriers who are also involved in many of these 
processes.
    A7: There are three levels of coverage and payment 
determination, each serving important functions in assuring 
that beneficiaries have access to appropriate technology. The 
vast majority of determinations are made on a case-by-case 
basis by our local contractors. Because most new technology 
involves only minor modifications to existing technology, these 
determinations are usually straight forward and rolled into 
existing coding and payment mechanisms. For new technology that 
is significantly different, our coding system includes generic 
A99'' codes in each benefit category which providers can use to 
file claims. Claims with these codes are manually reviewed and 
priced. For new diagnostic and surgical procedures provided by 
hospitals and other facilities paid through prospective payment 
systems (PPS), no coverage determination is generally necessary 
as new technology is automatically folded into the appropriate 
diagnostic related group (DRG) payment category. (There is one 
exception; the new hospital outpatient PPS system includes a 
pass through for new technology.) Under the hospital inpatient 
PPS system, the actual impact of innovations on costs are 
reflected through charges that the facility includes on its 
Medicare claims that drive future classification 
recalibrations. These charges often show that new innovations 
lower overall charges by, for example, decreasing the number of 
days patients must remain in the hospital, even if the new 
technology itself costs more than what it replaced.
    A second, formal level of coverage and payment 
determination is also carried out by local contractors when 
they develop Alocal medical review [email protected] These policies, 
developed by contractor medical directors, outline how 
contractors will review claims to ensure that they meet 
Medicare coverage requirements. We require that local policies 
be consistent with national guidance (although they can be more 
detailed or specific), developed with input from medical 
professionals (through advisory committees), and consistent 
with scientific evidence and clinical practice. The use of 
local medical review policy helps avoid situations in which 
claims are paid or denied without a full understanding of why. 
This resource-intensive process is typically reserved for high 
volume/high dollar items or services, and is generally 
conducted quarterly to facilitate orderly changes in systems. 
We expect to soon release guidance to the contractors designed 
to make development of local medical review policy parallel our 
new national coverage determination process, providing more 
notice and opportunity for providers and the public to have 
input and request policies on specific matters. Copies of every 
contractor's local medical review policy can be found at 
www.lmrp.net.
    We substantially improved the National Coverage 
Determinations (NCD) process last year to be much more open, 
accountable, and explicit in every respect, including the right 
of beneficiaries and other members of the public to request 
reconsideration of decisions. The new process establishes clear 
procedures for how national coverage policy decisions are made, 
allows any individual to submit a formal request for a national 
coverage decision or reconsideration, institutes timeliness 
standards and mechanisms for keeping the public informed about 
the status of national coverage issues, and guarantees 
beneficiary input through the open meetings of a new Medicare 
Coverage Advisory Committee. When an NCD is made, the decision 
is immediately posted on our web site and local contractors 
generally can immediately begin payment through mechanisms 
described above. In rare instances, when an NCD reverses an 
earlier national noncoverage policy and requires changes to 
claims processing computer systems, additional time may be 
necessary before payment can begin. We establish an effective 
date by which contractors must provide coverage. Time between 
an NCD and an effective date is used to establish new codes and 
national payment rates, make changes to claims processing 
computer systems, and provide explicit, written instructions on 
how the new policy is to be implemented. We have up to 180 days 
(tied to the next closest quarterly systems update) to complete 
systems changes from the time that instructions are generated, 
which can take up to an additional 60 days. However, we have 
completed this in less than 180 days for all NCDs under the new 
process, and we are continually working to further streamline 
this process. This 180 day time frame compares favorably to 
other businesses making orderly and efficient changes in 
electronic systems like our claims processing systems.
    Within HCFA, NCDs are under the purview of the Office of 
Clinical Standards and Quality. Payment and coding operations 
are the responsibility of the Center for Health Plans and 
Providers. Development of local medical review policy is under 
the direction of the Program Integrity Group in the Office of 
Financial Management. Intermediary and Carrier operations are 
overseen by the Center for Beneficiary Services. These offices 
work together through the Medicare Contractor Oversight Board 
to coordinate coverage and payment for new technologies and to 
ensure clear communication of policies to the contractors.

    Q8. I understand it can take up to 2 years for HCFA to 
change payment amounts or categories to a more appropriate 
reimbursement for a new technology. The first year is to 
evaluate a full year's worth of HCFA's internal data set--the 
Medicare Provider Analysis and Review (MedPAR) file and the 
second year to implement the change. Could you please explain 
why HCFA does not extrapolate from partial year MedPAR data or 
accept statistically valid, verifiable external data from 
willing companies?
    A8. Partial year MedPAR data or external data (used in 
setting inpatient hospital payments) do not take into account 
the impact of total costs on a treatment episode, which is how 
care is paid for under Medicare's prospective payment systems. 
New technologies that in and of themselves may be more 
expensive than what they replace often lower total costs once 
fully implemented into patient care. For example, laparoscopic 
surgical equipment for gall bladder surgery is more expensive 
than the traditional surgical equipment it replaced, but it 
substantially reduced the number of days patients were required 
to remain in the hospital, and thus lowered total costs for 
gall bladder surgery. An accurate assessment of the total 
impact would not have been feasible with only limited data on 
costs of the equipment itself.

    Q9. As you may know the FDA has specific statutory 
timeframes within which they are required to review and approve 
medical technology applications for safety and effectiveness. 
FDA is currently operating within its statutory review 
timeframes for 510(k)s and has made great strides with respect 
to PMAs, In fact, in its annual budget submissions, the agency 
submits information on how well it has performed and the 
resources needed to meets it review and approval performance 
goals. I understand that it can sometimes take years--four 
years or more--for a product to get covered, coded, and 
reimbursed appropriately. Does HCFA keep track of the 
timeframes involved in making coverage, coding, and 
reimbursement decisions on each of the technologies and 
procedure applications it receives? Can you please tell me how 
long it takes HCFA to make a coverage determination, coding 
decisions, and payment decisions?
    A9. The process for a national coverage determination (NCD) 
could take less than 90 days when evidence is clear and 
compelling. More complex determinations referred to Medicare 
Carrier Advisory Committee or outside technology assessment 
bodies can take longer, depending on the amount of research and 
deliberation these outside experts feel is appropriate to 
accurately assess whether the new product or procedure in fact 
meets the statutory requirement of being reasonable and 
necessary. Our limited experience to date suggests that the 
independent experts who, with industry and consumer 
representatives, make MCAC assessments, can take up to several 
months to make these determinations.
    However, it is important to stress that local claims 
processing contractors can generally make payment for newly 
approved products or procedures immediately after an NCD is 
announced, either through an existing code that may apply or 
through a miscellaneous code that can be used when no existing 
code is appropriate. Payment amounts for claims filed under the 
miscellaneous code are determined by these contractors until a 
new code and any necessary systems changes are implemented and 
a national payment rate is established. In rare instances, when 
an NCD reverses an earlier national noncoverage policy and 
requires changes to claims processing computer systems, 
additional time may be necessary before payment can begin. We 
establish an effective date by which contractors must provide 
coverage. Time between an NCD and an effective date is used to 
establish new codes and national payment rates, make changes to 
claims processing computer systems, and provide explicit, 
written instructions on how the new policy is to be 
implemented. We have up to 180 days (tied to the next closest 
quarterly systems update) to complete systems changes from the 
time that instructions are generated, which can take up to an 
additional 60 days. However, we have completed this in less 
than 180 days for all NCDs under the new process, and we are 
continually working to further streamline this process. This 
180 day time frame compares favorably to other businesses 
making orderly and efficient changes in electronic systems like 
our claims processing systems.
    Also, with regard to coding issues it is important to 
understand that many stakeholders are involved in the 
assignment of national codes and computing national payments.
     Providers, particularly hospitals and physician 
offices, seek stability in coding and payment. Frequent changes 
and updates disrupt claims processing systems, raise issues of 
compliance, and create uncertainty in payments;
     The medical community has an interest in assuring 
that coding systems are clinically coherent, and;
     Private and other public insurers often use the 
same coding and payment systems as HCFA.
    We cannot unilaterally assign codes without consulting all 
of these stakeholders, and that is why these processes take 
time. Moreover important changes stemming from the Health 
Insurance Portability and Accountability Act will require 
greater standardization and consultation across the industry. 
Yet we understand that the timeframes for assigning new 
national codes for breakthrough technologies can be longer than 
the manufacturing industry would like. As we have done in the 
past, we welcome the opportunity to meet with you and other 
stakeholders to examine potential ways to speed up this 
process.
    It also is important to note that the vast majority of 
determinations are made by our local contractors. There have 
only been approximately three hundred NCDs over the life of the 
Medicare program; 15 in the past 12 months. And we have 
substantially improved the NCD process to be more open, 
accountable, and explicit in every respect.

    Q10. In April 1999, HCFA published a notice announcing a 
new national coverage process including procedures for seeking 
reviews by the new Medicare Coverage Advisory Committee. In 
that notice, HCFA stated that after a coverage determination 
was made, HCFA expected ``to make a payment change effective 
within 180 calendar days of the first day of the next full 
calendar quarter that follows the date we issue the national 
coverage decision.'' Can you please help me understand that 
statement? Am I correct in interpreting this to mean that it 
will take HCFA 180 days to issue a code, even after the Agency 
has already affirmatively decided to cover a new technology or 
procedure? If so, do you believe that it might be of better 
service to our beneficiaries to reduce the number of days that 
it takes to issue a code?
    A10. Local contractors can generally begin payment 
immediately after a national coverage determination (NCD) is 
made, either through existing coding and payment mechanisms, or 
through generic A99'' codes in each benefit category which 
providers can use to file claims that are then manually 
reviewed and priced. In rare instances, when an NCD reverses an 
earlier national noncoverage policy and requires changes to 
claims processing computer systems, additional time may be 
necessary before payment can begin. We establish an effective 
date by which contractors must provide coverage. Time between 
an NCD and an effective date is used to establish new codes and 
national payment rates, make changes to claims processing 
computer systems, and provide explicit, written instructions on 
how the new policy is to be implemented. We have up to 180 days 
(tied to the next closest quarterly systems update) to complete 
systems changes from the time that instructions are generated, 
which can take up to an additional 60 days. However, we have 
completed this in less than 180 days for all NCDs under the new 
process, and we are continually working to further streamline 
this process. This 180 day time frame compares favorably to 
other businesses making orderly and efficient changes in 
electronic systems like our claims processing systems.

                                


    Chairman Thomas. And could we call the next panel in, 
please.
    We thank the second panel for their patience. Don Richey, 
who is the administrator of the Guadalupe Valley Hospital in, 
is it Seguin, Texas? Seguin; Dr. Richard Corlin, who is the 
president-elect of the American Medical Association; Michael R. 
Walker, chairman and chief executive officer of the Genesis 
Health Ventures, Kennett Square, Pennsylvania, here on behalf 
of the American Health Care Association; Judith G. Sutherland, 
president and chief executive officer, Visiting Nurse Corp. of 
Colorado, from Denver, Colorado, on behalf of the Visiting 
Nurse Associations of America; George Renaudin, II, senior vice 
president of administration at the Ochsner Health Plan of 
Louisiana in Metairie, Louisiana, on behalf of the American 
Association of Health Plans; and Howard Bedlin, who is the vice 
president for Policy and Advocacy of the National Council on 
Aging.
    Now that you are all seated, thank you very much. Any 
written testimony that you have will be made a part of the 
record, and you may, in the time that you have, address us in 
any way that you see fit. And why don't we just start over here 
with the gentleman from Texas, Mr. Richey, and then just move 
across the panel.
    Let me say, one, you need to turn on your mikes and, two, 
the mikes are very uni-directional, so you need to speak 
directly in them.
    Thank you.

   STATEMENT OF DON RICHEY, ADMINISTRATOR, GUADALUPE VALLEY 
  HOSPITAL, SEGUIN, TEXAS, ON BEHALF OF THE AMERICAN HOSPITAL 
                          ASSOCIATION

    Mr. Richey. Thank you very much, Mr. Chairman. My name is 
Don Richey. I am the administrator of Guadalupe Valley Hospital 
in Seguin, Texas. It is a pleasure for a country boy to be here 
in this august attendance today and appear before you on behalf 
of the American Hospital Association.
    As you know, the BBA resulted in some major cuts in 
hospital reimbursement, plus many unintended consequences, 
especially for rural hospitals. In fact, some of the changes 
were quite confusing and problematic. For instance, in Texas, 
we think hold harmless means hold harmless. It appeared that 
congressional intent was to make reimbursement to rural 
hospitals whole rather than a reduced amount. That would create 
some real problems in our cash flow.
    In our particular situation at Guadalupe Valley Hospital, a 
couple of years ago we had 18 home health agencies in our 
community. BBA cuts and changes in the programs eventually 
eliminated all but one. That was the hospital-based home health 
agency. It is, at this point, losing about $150,000 a year, but 
we consider it a necessary service for our patients, and 
therefore have continued to operate it.
    We also had a skilled nursing facility. It was a hospital-
based skilled nursing facility that was built from scratch and 
deemed by the Medicare Program as a model program and one of 
the best in the whole State of Texas. Seventy percent of the 
patients went home after their skilled nursing stay, and yet 
the BBA cuts eliminated that program, too, by cutting our 
reimbursement from $700 a day to about $250 a day. We had to 
shut the unit. Now, 250 patients instead end up going usually 
to a rehabilitation hospital at $1,500 a day for a 20-day stay 
and then off and on to a nursing home. So it is costing the 
government a lot more money, and the results aren't nearly as 
good as they would have been with our skilled nursing facility. 
That is just one hospital's story.
    I have got in front of me a red book that I would like to 
submit for your review. It is a story of 27 institutions in and 
around San Antonio who basically have bared their souls and 
talked about staff cuts, eliminating programs and services, and 
about losing, on average, a half-a-million dollars per month, 
per institution.
    We also have some new problems coming up. We've got 
employee shortages, particularly in the area of registered 
nurses and pharmacists. Prescription drug utilization is going 
up, and the new drugs are costing more. We have got new blood 
products coming out. They are better, but they are also more 
expensive, and we have got new technology which also costs 
more.
    I am asking you today to consider a 2-year full market-
basket update, H.R. 3580. Inflation from 1998, 1999, and 2000 
was up about 8.2 percent. Payments were only up about 1.6 
percent. We can't continue to operate in that kind of 
methodology.
    We are also encouraging you to adopt a rural relief agenda. 
Rural hospital closures are devastating to rural hospitals. And 
contrary to popular opinion, the closing of a rural hospital 
not only is hard for that community, but it is also hard on the 
urban hospitals who end up picking up that adverse case mix. So 
it doesn't help anybody. H.R. 4677, the Rural Hospital Closure 
Agenda, would help us very much.
    We would also ask you to cut further reductions in Medicare 
and Medicaid disproportionate share payments--H.R. 3698, and 
then, finally, to delay outpatient PPS until it is fully 
workable. We, at Guadalupe, anticipate benefiting under APCs. 
We think it is going to work for us. It is going to cost the 
patients more in Texas, and that has not been explained to 
them. But we think it is going to work to our benefit. But it 
only works where we get one payment from the government, not a 
partial payment, then a next payment and have to do all kind of 
billing gyrations with the rest of the secondary payers and the 
patients themselves.
    We support prevention in the form of screening mammograms, 
and stereotactic biopsies and PSA testing. Those are good 
programs. We agree that home health agencies should be spared 
the 15-percent cut, not just deferred, but completely have that 
cut eliminated. We support prescription programs for Medicare 
patients. We know that, and even in Medicaid in Texas, patients 
get their prescriptions. We want to see rural hospitals 
survive, and we want to have reasonable reimbursement for 
Medicare and Medicaid patients all across the Nation. We know 
that Medicare is Social Security.
    Mr. Chairman, we have a booming economy and a $2.2 trillion 
surplus. Soon we are going to have baby boomers joining the 
Medicare rolls. This is not the time to make cuts. This is the 
time to preserve the Medicare system. Let us keep Medicare 
secure.
    Thank you very much.
    [The prepared statement follows:]

Statement of Don Richey, Administrator, Guadalupe Valley Hospital, 
Seguin, Texas, on behalf of the American Hospital Association

    Mr. Chairman, I am Don Richey, administrator of Guadalupe 
Valley Hospital in Seguin, Texas. I appear today on behalf of 
the American Hospital Association's (AHA) nearly 5,000 member 
hospitals, health systems, networks, and other providers of 
care. We appreciate 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.
    BBA Medicare and Medicaid spending cuts have especially 
victimized rural hospitals. My hospital, Guadalupe Valley is a 
105-bed public hospital with a diverse patient population, 
serving residents of Seguin and Gonzales, Texas, as well as 
Mexico. While it located in a metropolitan statistical area, in 
reality, the hospital acts and serves as a rural provider. For 
instance, the two closest trauma care access points are each an 
hour away--University Hospital in San Antonio and Brackenridge 
Hospital in Austin.
    Prior to the BBA, the hospital opened a skilled nursing 
facility (SNF), which was ranked number one in the state by 
Medicare. However, the payment reductions forced us to close 
the unit. We operate the only home health agency in town. 
Before the BBA, there were 18 home health providers in the 
community. Since the BBA, they have all closed, leaving 
Guadalupe Valley as the sole furnisher of home health services.
    And Guadalupe Valley is just one example of the hardships 
caused by the BBA's cuts. 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 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.
    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 crisisa...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.
    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. And 
the best way is to provide relief to all hospitals by repealing 
the last two year's of the BBA's inpatient market basket 
reductions.
    Indeed, Washington has taken notice and the momentum for 
BBA relief is growing. The AHA is pleased to cite that 299 
representatives have cosponsored the Hospital Preservation and 
Equity Act (H.R. 3580), which would restore the last two year's 
of the BBA's inpatient market basket reductions. Similar 
legislation in the Senate is also gaining support with 55 
senators cosponsoring Medicare inpatient relief (S.2018).
    The AHA is also asking Congress for targeted relief, 
including:
     For outpatient services, provision of the full 
market basket update;
     For teaching hospitals, continuation of the 
current adjustment for indirect medical education of 6.5 
percent;
     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 America's safety net hospitals, repeal of 
the current state caps on Medicaid DSH payments.
    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.

                                


    Chairman Thomas. Thank you, Mr. Richey.
    Dr. Corlin?

STATEMENT OF RICHARD F. CORLIN, M.D., PRESIDENT-ELECT, AMERICAN 
                      MEDICAL ASSOCIATION

    Dr. Corlin. Thank you, Mr. Thomas. Good afternoon. I am 
Richard Corlin. I am a gastroenterologist in private practice 
in Santa Monica, California, and I am president-elect of the 
AMA. We appreciate the opportunity to appear before this 
Subcommittee to present our views about refining the Balanced 
Budget Act of 1997, the BBA. Today, I want to discuss four 
recommendations for providing needed relief under the BBA.
    First, savings from the BBA have far exceeded CBO 
forecasts. HCFA and the CBO have attributed this to their 
success in combatting so-called waste, fraud and abuse, yet 
this has come with a hefty price tag. HCFA, in its zeal to 
reduce waste, fraud and abuse, has imposed mountains of complex 
regulations that often interfere with the delivery of quality 
medical care.
    For instance, HCFA contractors subject many physicians to 
post-payment audits that egregiously interfere with physicians' 
medical practices. Carriers make inappropriate use of a 
technique called extrapolation to calculate alleged 
overpayments, and physicians are denied all due process rights 
to an appeal unless they agree to an extremely invasive and 
expensive carrier audit. Physicians often cannot get answers 
from carriers about routine billing questions and procedures, 
and indeed are not informed of a billing problem until there is 
a post-payment audit. To make matters worse, HCFA does not 
adequately educate physicians on coding, documentation and 
coverage issues.
    Physicians do not want to deal with the hassles any more. 
Some are retiring or leaving the Medicare Program. For example, 
a cardiologist in my, and the Chairman and the Ranking Member's 
home State of California has been repeatedly subject to carrier 
audits. The first few audits turned up a total clean bill of 
health. Even though there was no change in his billing 
practice, the carrier recently assessed that physician a 
$175,000 overpayment based on another audit done just 1 year 
later. He then had less than 30 days to repay the $175,000.
    We urge that the Subcommittee, number one, ensure that HCFA 
allocate enough resources for education purposes and, two, 
require HCFA to reform its post-payment audit process.
    Second, I would like to discuss regulatory costs imposed on 
physicians under the BBA. Despite that HCFA is required by law 
to take certain regulatory costs into account when updating the 
physician payment schedule, this does not occur. We recommend 
that HHS, including HCFA, be required to calculate the costs of 
new regulations and increase Medicare physician payments each 
year to account for these costs.
    Next, I would like to address physician practice expenses. 
We appreciate the Subcommittee's efforts under the BBA to 
correct HCFA's initial approach to establishing a new system of 
payment for physician practice expenses, yet more work is 
needed. HCFA's current practice expense methodology and data do 
not accurately reflect physicians' actual practice costs, and 
we are concerned that this will adversely impact patients, 
physicians and health care providers.
    Thus, we urge the Subcommittee to include in any BBA 
refinement legislation provisions that would maintain for the 
year 2000 and subsequent years the 50/50 formula for 
determining practice expense relative value units, with an 
exception for certain office visits and consultation services. 
This proposal is supported by 40 physicians offices, teaching 
hospitals, medical schools and clinics, and the AMA's House of 
Delegates recently voted to seek legislation to implement this 
proposal.
    The proposal strikes an appropriate balance by allowing 
increases in those services, while generally limiting large 
reductions in payments for other services. Thus, our support is 
predicated on the inclusion of the exception for office visits 
and consultations.
    And, finally, I would like to address deferment of student 
loans for residents. The downstream effects of Medicare cuts 
under the BBA, especially with respect to GME, are difficult 
for medical residents who are required to repay enormous 
amounts on their student loans while being paid a stipend that 
barely covers their ongoing expenses. Accordingly, we urge the 
Subcommittee to ensure that the BBA refinement package includes 
a provision making it easier for residents to qualify for a 
student loan economic hardship deferment during their medical 
residency.
    Thank you very much, and we would be pleased to respond to 
any questions.
    [The prepared statement follows:]

Statement of Richard F. Corlin, M.D., President-Elect, American Medical 
Association

    We appreciate the opportunity to provide our testimony to 
the Subcommittee concerning the American Medical Association's 
(AMA) recommendations as the Subcommittee moves forward in its 
consideration of further refinements to the Balanced Budget Act 
of 1997 (BBA).
    The AMA deeply appreciates the Chairman's and the 
Subcommittee's support of refinements of the Medicare physician 
payment system that were included in the Balanced Budget 
Refinement Act (BBRA) enacted last fall. Further refinements, 
however, are needed.
    The BBA imposed tremendous changes in the Medicare program. 
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 intended. Indeed, physicians are subject to over 
100,000 pages of Medicare regulations and policies, including 
preambles to the regulations, which, while attempting to 
explain the intent of the often convoluted and ambiguous 
regulations, often raise more questions than they answer. 
Further, in addition to new and existing regulations, 
physicians must be familiar with the volumes of ever-changing 
bulletins and carrier materials sent to their offices.
    The BBA and related implementing regulations have adversely 
impacted or threaten to have such impact on Medicare patients' 
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 refinements to the BBA:

Health Care Financing Administration (HCFA) Reform

    The AMA recommends that the Subcommittee include in any 
BBA-refinement 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 by (i) allowing physicians to maintain their due 
process rights; (ii) requiring ongoing communication between 
the carrier and physician during the audit; (iii) ensuring that 
physicians who voluntarily remit overpayments to HCFA will not 
be targeted for future audits; and (iv) curtailing HCFA's use 
of extrapolation for physicians' inadvertent bill errors.
    Actual savings from the BBA have far exceeded the amount 
that the Congressional Budget Office (CBO) had forecast when it 
``scored'' the legislation in 1997 as it was being considered 
prior to its enactment, and payment reductions to physicians 
and health care providers are steeper than anticipated by those 
forecasts. These cuts have impacted the entire industry, 
including patients.
    The CBO and HCFA often have alleged that this discrepancy 
between CBOs original savings forecast and reality is due, in 
large part, to HCFA's success in combating ``waste, fraud, and 
abuse.'' Yet, such ``success'' has come with a hefty price tag. 
In its zeal to reduce such ``waste, fraud, and abuse,'' HCFA 
has gone to the extreme by imposing mountains of needlessly 
complex regulations and violating physicians rights to due 
process and basic fairness.
    HCFA contractors are subjecting many physicians to post-
payment audits, which amount to egregious carrier interference 
in physicians' medical practices. During these audits, HCFA 
contractors identify possible billing errors from a small batch 
of claims and use these possible errors to ``extrapolate'' 
enormous overpayment amounts from physicians, suppliers and 
providers. Since the amount is determined through 
extrapolation, it can easily rise to tens of thousands of 
dollars. Once carriers arrive at this projected overpayment 
amount, carriers give physicians three options: (1) repay the 
extrapolated amount and waive their appeal rights; (2) repay 
the extrapolated amount and submit additional information while 
waiving their appeal rights; or (3) open up their practice to a 
statistically valid random sampling (SVRS) of claims during the 
same time period. HCFA's carrier manual options prevent 
physicians from retaining their due process rights unless they 
agree to open up their practices to a larger SVRS audit. During 
this process, many HCFA contractors have no direct 
communication with the physician, supplier, or provider, who 
frequently have difficulty obtaining answers from the carrier 
regarding the carrier's interpretation of correct billing 
procedures. Thus, physicians feel compelled to settle any 
assessed ``overpayment'' with the carrier in order to avoid an 
even more protracted, invasive and expensive carrier audit.
    HCFA's overzealous enforcement activities are forcing 
physicians to spend less time on patient care and too much time 
completing paperwork in order to avoid carrier hassles and the 
possibility of an unwarranted, costly and lengthy post-payment 
audit. Further, some physicians are retiring from medical 
practice or are leaving the Medicare program because they 
simply can not tolerate the hassle of participating in the 
program anymore. In addition, many physicians view billing 
Medicare as a legally treacherous endeavor, as the below 
examples demonstrate----
     In Idaho Falls, a family practice of three 
physicians recently left the Medicare program. Although they 
perceived their billing practices as meeting HCFA's confusing 
and massive regulatory requirements and never received any 
notification of billing problems from their carrier, the 
practice was subjected to a post-payment audit. As a result, 
the practice was deemed by the carrier to owe the Medicare 
program tens of thousands of dollars. The physicians agreed to 
settle with HCFA because they could not risk undergoing a more 
protracted and expensive audit. After the audit, each of these 
physicians dropped out of Medicare because they could not be 
certain they would be able to comply with Medicare's burdensome 
and confusing billing policies. The prospect of another onerous 
audit was daunting. Consequently, many patients in the Idaho 
Falls area were left without their family physician.
     In northern California, a cardiologist underwent a 
number of audits over the last few years, and during the first 
few audits the physician had a ``clean bill of health..'' 
Nevertheless, in the physician's last audit, the carrier 
assessed the physician $175,000, even though the physician 
continued to bill in the same manner as during the first few 
audits. The physician then had less than 30 days to payback the 
alleged $175,000 ``overpayment.''
     In Denver, Colorado, the ratio of Medicare 
patients to physicians who are willing to participate in the 
program no longer appears to be a sufficient to adequately 
treat these patients. Many Denver physicians attribute the 
situation to HCFA's current ``waste, fraud, and abuse'' 
initiatives.
    The BBA requirements and HCFA's subsequent regulatory 
burden threatens patient access to care--especially in rural 
areas--which, in turn, affects quality care.
    Finally, although HCFA expects physicians to understand all 
of its confusing and often inconsistent 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.
    Accordingly, as discussed above, we urge the Subcommittee 
to ensure that any BBA-refinement 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

    Last year, this Subcommittee ensured that provisions were 
included in the BBRA to clarify and correct certain fundamental 
flaws in the method by which physicians are paid under the 
Medicare physician payment schedule, and, specifically, under 
the sustainable growth rate system. We greatly appreciate the 
Chairman's and the Member's of this Subcommittee efforts in 
enacting these important refinements, and urge you to continue 
your efforts in this refinement process of the Medicare 
physician payment schedule.
    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' practice. We recommend 
that the Secretary of the Department of Health and Human 
Services (HHS) and HCFA 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.
    For example, HCFA recently proposed two new codes to cover 
certain services that HCFA requires physicians to provide for 
home health patients. HCFA has incredulously proposed to 
decrease Medicare payments to physicians overall to cover any 
additional costs billed under these new codes. HCFA alleges 
that such a decrease is justified because physicians are 
already paid under other codes for these home health services, 
and thus physicians should not be able to double bill for the 
same services. This is not the case. Physicians have never been 
paid for these services, yet HCFA is proposing to cut alleged 
``payments'' to physicians for services they are required to 
provide.
    We urge the Subcommittee to pass legislation requiring the 
Secretary of HHS to determine the cost of each regulation on 
physicians' practices (and not simply those regulations 
affecting the physician payment schedule) 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.

Physician Practice Expenses under the Medicare Physician 
Payment Schedule

    We urge the Subcommittee to include in any BBA-refinement 
package legislative provisions that would maintain for the year 
2000 and subsequent years the ``50/50'' formula for determining 
practice expense relative value units, with an exception for 
certain office visit and consultation services.
    In 1994, Congress directed HCFA to establish a new system 
for Medicare payment to physicians for their overhead practice 
expenses, which was to be based on the relative practice 
expense resources used in furnishing a service. As a result of 
concerns with HCFA's initial approach to establishing this new 
system, Congress, under the BBA, intervened and provided HCFA 
with specific instructions for developing new practice expense 
resource-based relative value units. Congress further directed 
that the new system be implemented under a four-year transition 
period, with full implementation in 2002.
    Although we are already half-way through the transition 
period, HCFA has failed to comply with most of the practice 
expense mandates under the BBA and the current methodology and 
data do not accurately reflect physicians' actual practice 
costs. Indeed, HCFA's Administrator Nancy Ann DeParle recently 
stated before the House Appropriations Committee that ``we do 
not believe that it is possible to determine actual physician 
expenses associated with providing services to Medicare 
patients.'' Further, previous budget constraints have made it 
even more difficult for HCFA to develop a system that fairly 
reflects physicians' practice costs. Consequently, we are 
concerned that the current plan will adversely impact 
physicians and many other health care providers, as well as 
patient access and quality of care. Thus, an immediate remedy 
is required.
    At the AMA's June meeting, our House of Delegates agreed 
that we should seek legislation that would maintain for 2000 
and subsequent years the 50/50 formula for determining practice 
expense relative value units for all services except for 
certain office visit and consultation services which would be 
based entirely on the relative practice expense resources 
involved in furnishing the service.
    This proposal, which is supported by 40 physician 
organizations, teaching hospitals, medical schools and clinics, 
would also allow the 50 percent of the relative value units 
that are based on resource costs to continue to be subject to 
review and refinement. We urge the Subcommittee to include this 
proposal in your BBA-refinement package.
    We emphasize that the AMA's support for this proposal is 
predicated on the inclusion of an exception for office visits 
and consultations. We believe that by allowing increases in 
these services while generally limiting large reductions in 
payments for other services, the proposal strikes an 
appropriate balance. Payments for primary care services would 
be increased to help protect Medicare patients' access to these 
services without the need for huge payment cuts that could 
jeopardize beneficiaries' access to needed procedures. We could 
not endorse a plan that does not have both of these key 
elements.

Loan Deferment for Residents

    We further urge the Subcommittee to include in any BBA-
refinement package an amendment to improve the formula for 
determining whether medical residents can qualify for a student 
loan deferment during residency.
    The downstream effects of Medicare cuts under the BBA, 
especially with respect to GME, are difficult for medical 
residents who are required to re-pay enormous amounts on their 
student loans during their residency while being paid a stipend 
that barely, if at all, covers their expenses.
    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.
    Based on a federal debt burden of $72,000 and national 
average figures (using full-time pay for first year residents 
and monthly housing payments), 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 and clothing. 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-refinement 
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 matters, 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.
      

                                


    Chairman Thomas. Thank you, Doctor.
    Mr. Walker?

 STATEMENT OF MICHAEL R. WALKER, CHAIRMAN AND CHIEF EXECUTIVE 
    OFFICER, GENESIS HEALTH VENTURES, INC., KENNETT SQUARE, 
PENNSYLVANIA, ON BEHALF OF THE AMERICAN HEALTH CARE ASSOCIATION

    Mr. Walker. Thank you. My name is Michael Walker. I am the 
chairman and founder and chief executive officer of Genesis 
Health Ventures, one of the largest elder care providers in the 
Nation, currently filed Chapter 11.
    Today, I speak on behalf of the American Health Care 
Association. Skilled nursing homes continue to struggle with 
the implementation of the Balanced Budget Act of 1997. These 
are very tough times for providers.
    Mr. Chairman, I would like to thank you and Members of the 
Committee. We are most appreciative of the leadership you 
provided last year in attempting to rectify the problems 
through the Balanced Budget Refinement Act. The rise of skilled 
nursing medical utilization during the past decade reflects the 
legitimate clinical efforts by providers to meet beneficiary 
needs.
    As envisioned by Congress in OBRA 87, skilled nursing 
facilities have become centers for post-hospital rehabilitation 
and restorative services. Today, more than half of the 
admissions, nearly 2 million beneficiaries annually, are 
Medicare-qualified. At Genesis, nearly 9 out of 10 skilled 
nursing home admissions are Medicare-qualified, and we are 
returning 50 percent of these individuals back to their 
communities.
    Earlier this year, the Lewin Group released an analysis of 
the effect of BBA and BBRA on Medicare payments to skilled 
nursing facilities. The analysis documents that Congress 
targeted to reduce Medicare SNF spending by $1 for every $6 
forecasted to be spent 1998 through 2004. As managed by HCFA, 
aggregate Medicare spending will fall by nearly twice the 
original estimate--nearly $1 out of every $3 expended. These 
financial challenges raise the most critical question before 
this Committee: Who will take care of this most vulnerable 
population if we continue to lose the infrastructure of our 
skilled nursing facilities at a time when demographics create 
an increased demand for care?
    The unintended consequences of these changes have been 
dramatic on the provider sector. Access to capital has been 
destroyed. You cannot get equity or mortgage loan. Eighty 
percent of marketed capitalization on Wall Street has been 
eliminated in the last 24 months. Twenty-five percent of 
freestanding proprietary Medicare-participating facilities have 
filed Chapter 11.
    In turn, as providers struggle to adjust, beneficiary 
services have been put at risk. Three out of four skilled 
nursing patient days are purchased by the government, Medicare 
or Medicaid. The financial consequences many of us are face 
with are beyond our control. The cost of care is rising, labor 
cost is rising, people are living longer with impairments that 
require professional intervention. Yet patients are going down. 
With average Medicaid rates of approximately $4 an hour and 
Medicare paying slightly less than $10 an hour for care, our 
hands are tied.
    Decisions are made by government entities that have 
profound effect on patient care. There is no doubt that the 
overall underspending has wreaked unwarranted havoc on skilled 
nursing providers and patients alike.
    AHCA recently submitted to you four specific 
recommendations to address Medicare underspending crisis. I 
will summarize them:
    First, adjust the SNF PPS base to account for the flawed 
update factor between 1995 and 1998. Specifically, we have 
documented the need for a one-time adjustment of 13.5 percent 
to the SNF PPS base to account for the forecast errors between 
1995 and 1998.
    We have spent the last several months analyzing this data 
with Muse and ex-HCFA actuary, King. Translated into per-diem 
calculation, the Muse analysis documents that skilled nursing 
facility costs, driven primarily by changes in labor and 
operating costs, increased by about $25 per day. The SNF market 
basket, reduced by the BBA formula of market minus one, 
adjusted average rates by $5.30 or a meager 22 cents per hour.
    We urge Congress to correct these forecast errors and 
compensate for the imprecision of its measurement of cost 
changes between the base year 1995 and the beginning of the SNF 
PPS cost report periods, July 1998.
    Second, delay the implementation of the proposed RUG 
Refinement Rules until HCFA can correct deficiencies and 
reissue the proposals for public comment.
    Third, develop a process for revising the SNF market 
basket. The current skilled nursing facility market basket 
index is an imprecise measure, and it is seriously flawed. It 
is not a specific measure of skilled nursing cost changes, nor 
does it accurately predict cost changes in a dynamically 
changing health care environment. We support a formal process 
by the administration to review the SNF market basket.
    And, fourth, Medicare reform should include an updating of 
the SNF benefit. We look forward to the opportunity in the 
coming Congress to sit down with this Committee to consider 
policies to ensure skilled nursing benefits provide the most 
effective and efficient service to the Medicare beneficiary. An 
$8,000 co-pay for a nursing home stay is woefully inadequate 
when a $500 co-pay or deductible exists in a hospital stay.
    In closing, Mr. Chairman, there are two key points that I 
emphasize:
    First, dollars spent on caring for patients on the front 
end of admission help to reduce their reliance on 
institutionalized care. Admissions and discharge statistics for 
the past decade demonstrate that nursing homes are returning a 
larger percentage of their patients to the community. Medicare 
fueled this transformation. That investment in intense skilled 
nursing care facilities serves as a win-win. Beneficiaries 
win--they will return to home. government wins--the burden of 
cost is reduced. Health care systems win--care is given in the 
most appropriate setting.
    The BBA and BBRA, as being implemented by HCFA, are 
unraveling the win-win and making it a lose-lose. Unless 
quickly addressed, the burden of care costs will rise, and 
there will be a backlog of patients, inappropriately placed 
patients. Medicare and Medicaid costs will explode.
    Second, demographic projections indicate that once the baby 
boom generation returns, retiring en masse in a few years, the 
burgeoning demand for skilled care and related services will 
exceed the available supply, and there will be nobody there to 
provide it.
    Thank you.
    [The prepared statement follows:]

Statement of Michael R. Walker, Chairman and Chief Executive Officer, 
Genesis Health Ventures, Inc., Kennett Square, Pennsylvania, on behalf 
of the American Health Care Association

    My name is Michael Walker, and I am the Chairman and CEO of 
Genesis Health Ventures, one of the largest eldercare providers 
in the United States. Today I speak on behalf of the American 
Health Care Association--a federation of affiliated 
associations representing over 12,000 non-profit and for-profit 
assisted living, nursing facility and subacute care providers, 
nationwide.
    Before I testify, Mr. Chairman, I'd like to thank you and 
members of the committee for recognizing the eldercare funding 
crisis caused by the flawed implementation of the 1997 Balanced 
Budget Act. We are most appreciative of the leadership you 
provided last year in attempting to rectify these problems 
through the Balanced Budget Refinement Act.
    The skilled nursing home sector continues to struggle with 
the implementation of the Balanced Budget Act of 1997. These 
are very tough times for providers. Companies, such as Genesis 
Health Ventures, that are attempting to pioneer creative 
strategies for improving both the efficiencies and 
effectiveness of delivery are confronting a hostile policy 
environment and threatening economics.
    Importance of Medicare:
    The rise of skilled nursing facility Medicare utilization 
during the past decade reflects legitimate clinical efforts by 
providers to meet beneficiary needs. As envisioned by the 
Congress in OBRA 87, skilled nursing facilities have become 
centers for post-hospital rehabilitation and restorative 
services. Meeting the needs of higher acuity, post-hospital 
discharge admissions have transformed facility roles and 
functions and cost structures. As facilities stepped up to 
these challenges, the number of patients qualifying for 
Medicare coverage grew. Today, more than half of skilled 
nursing admissions--nearly 2 million beneficiaries annually--
are Medicare qualified. In our case at Genesis, nearly nine out 
of ten skilled nursing admissions are Medicare qualified.
    Medicare Skilled Nursing Facility (SNF) Spending Spiraling 
Down:
    Earlier this year, the Lewin Group, a leading national 
policy research organization, released an analysis of the 
effect of the Balanced Budget Act of 1997 (BBA) and the 
Balanced Budget Refinement Act of 1999 (BBRA) on Medicare 
payments to skilled nursing facilities.\1\ The analysis 
documents that Medicare spending projections for SNF patients, 
inclusive of the changes enacted last fall by Congress, will be 
$15.8 billion less than Congress intended during the seven year 
budget period (1998-2004).
---------------------------------------------------------------------------
    \1\ Lewin Group, ``Briefing Chartbook on the Effect of the Balanced 
Budget Act of 1997 and the Balanced Budget Refinement Act of 1999 on 
Medicare Payments to Skilled Nursing Facilities,'' May, 2000.
---------------------------------------------------------------------------
    Put in perspective, Congress targeted to reduce Medicare 
SNF spending by $1 for every $6 forecast to be spent (1998-
2004). As managed by the Health Care Financing Administration, 
aggregate Medicare SNF spending will fall by nearly twice the 
original estimate--nearly $1 out of every $3 expended.
    Although Congress passed the BBRA to restore vital Medicare 
spending, Medicare SNF outlays continue to spiral down. The 
BBRA budgeted an increase of SNF spending in FY2000 to $13.3 
billion, but the Congressional Budget Office reports SNF care 
spending will actually come in $2 billion below estimates ($11 
billion in this fiscal year).

Impact:

    The unintended consequences of these changes have been 
dramatic on the provider sector--access to capital has been 
undermined (87% reduction in market capitalization between 
January 1998 and March 2000); providers have been thrust into 
bankruptcies--one in four (25%) of freestanding, proprietary, 
Medicare participating facilities are in financial 
restructuring. In turn, as providers struggle to adjust, 
beneficiary services have been put at risk.
    Rather than the rate of Medicare growth being slowed--as 
envisioned by this Committee and by Congress--actual cuts have 
affected care giving. For Genesis Health Ventures, the final 
SNF PPS rates translated into a reduction of 25% of our 
Medicare per diem rates. Medicare revenues account for 
approximately 25% of our total revenues. More importantly, the 
rate reduction affected the payments for 90% of our inpatient 
admissions. Virtually no business could survive with cuts that 
drastic.
    My company made a commitment to admit all patients 
regardless of reduced Medicare payments for services which 
averages about $100 a day reduction from our pre-SNF PPS rates. 
We are the most recent provider to succumb to bankruptcy. 
Bankruptcy is not just financial restructuring. Bankruptcy 
directly affects employee morale, recruitment and retention, 
care services available and investments toward future care and 
services. In reality it is a major distraction from care 
giving.
    These financial challenges raise the most critical question 
before this committee--who will take care of this most 
vulnerable population if we continue to lose the infrastructure 
of our skilled nursing facilities at a time when demographics 
create an increased demand for care? The consequences will be 
devastating. Patients will not be able to receive the care they 
need--if and when they need it. In no area do we feel this more 
strongly than in labor. We dedicate a tremendous amount of time 
and resources into recruiting high quality caregivers--the type 
of workers that you would trust with a loved one. Yet, in the 
current marketplace, they leave their nursing home jobs all too 
often for other employment that is not only much more lucrative 
but also less demanding.
    Three out of four skilled nursing facility patients' care 
is paid for by Medicare or Medicaid, both government programs. 
The financial consequences many of us are faced with are beyond 
our control. Cost of care is rising, costs associated with 
labor are rising, people are living longer--with impairments 
that require professional intervention--yet payments are going 
down. With average Medicaid rates of approximately $4 an hour 
and Medicare paying slightly more than $10 an hour for care on 
average, our hands are tied. Decisions made by government 
entities have a profound effect on patient care.
    If SNF PPS were implemented by HCFA to achieve the cost 
reductions originally targeted by the Congress, we wouldn't be 
here today. The GAO and others have recently testified that 
there is no crisis in long term care. This flies in the face of 
sound research and reality and is an irresponsible and 
questionable claim to make. The OMB's mid-summer review, the 
Lewin Group's independent study, 2000 SNF bankruptcies in less 
than a year, and concerns expressed by hundreds of thousands of 
caregivers on the front lines simply cannot be disregarded.
    While providers manage to continue providing the best 
possible quality of care to their patients--and while we've 
done our best to adjust to unexpected budgetary constrictions--
there is no doubt that the overall under-spending has wreaked 
unwarranted havoc on skilled care providers and patients alike.

Recommendations

    The American Health Care Association recently submitted to 
you four specific recommendations to address the Medicare 
under-spending crisis, Mr. Chairman, I will summarize them for 
the full subcommittee:
    First: Adjust the SNF PPS base to account for the flawed 
update factor between 1995 and 1998. Specifically, we have 
documented the need for a one-time upward adjustment of 13.5% 
to the SNF PPS base to account for forecast errors between 1995 
and 1998.
    We have spent the last several months analyzing this data 
with Muse and Associates, and Guy King, the former chief 
actuary at HCFA. The actual rates of cost changes incurred by 
Medicare participating skilled nursing facilities are 
substantially higher (affirmed by audited cost report, BLS 
labor data and independent wage and compensation studies) than 
those forecast by the current market basket. The resulting 
payment rates are artificially suppressed.
    Guy King reviewed real increases in the cost of delivering 
skilled care between 1995 and 1998. In his review he compared 
closed and audited HCFA cost reports against the SNF market 
basket update factor. The HCFA update factor raised Medicare 
SNF per diem rates by 8.2% between 1995 and 1998. King's review 
of research of audited SNF cost reports filed with HCFA shows 
that actual per diem costs incurred by SNFs increased by 27.4%. 
In other words, 19.2% should be added to HCFA's 8.2% increase. 
This 19.2% should be reduced to account for expectant increases 
in case-mix between 1995 -1998. This is how we empirically 
arrive at a one-time 13.5% upward adjustment.
    Translated into per diem calculations, the Muse/King 
analysis documents that skilled nursing facility costs--driven 
primarily by changes in labor costs and routine operating 
expenses--increased by about $25 per day, per annum. The SNF 
Medicare market basket reduced by the BBA formula of market 
basket minus 1% adjusted average rates only $5.30 per day, per 
annum, or a meager $.22 per hour.
    We urge Congress to correct these forecast errors and 
compensate for the imprecision of its measurement of cost 
changes between base year FY1995 and the beginning of SNF PPS 
for cost report periods on or after July 1,1998.
    Second: Delay the implementation of proposed RUG Refinement 
Rules until HCFA can correct deficiencies and reissue the 
proposals for public comment.
    The proposed rules should be withdrawn and reissued for 
comment only after HCFA has completed its analysis of the 
current national PPS data base and completed the recalculation 
of the observed weights and distributions based upon current 
beneficiary population. It would be an absolute disaster for 
participating providers if HCFA proceeds with this rule making 
on the basis of interim final rules while it tinkers with its 
calculations.
    These proposed rules are illustrative of how our hardships 
are being exacerbated by the actions of the Health Care 
Financing Administration. Congress mandated HCFA to fix the 
inadequate payment for non-therapy ancillaries. HCFA responded 
with these incomplete and flawed proposals.
    An independent analysis just completed by the Lewin Group, 
``Evaluation of the Proposed Refinements to RUG-III 
Classification System: Comments on the Abt Study and HCFA 
Proposed Regulation,'' documents HCFA has not learned from its 
past mistakes. The report concludes: ``...2However well-
executed, the Abt study and resulting refinement models are not 
sufficiently comprehensive for the design and/or calibration of 
a final payment system.'' \2\
---------------------------------------------------------------------------
    \2\ Lewin Group, ``Evaluation of the Proposed Refinements to RUG-
III Classification System: Comments on the Abt Study and HCFA Proposed 
Regulations, June 7, 2000, p. 4.
---------------------------------------------------------------------------
    The litany of methodological flaws parallel those observed 
in the initial rule-making process.
    Third: Develop a process for revising the SNF market 
basket.
    The current skilled nursing facility market basket index is 
an imprecise measure; it is seriously flawed. It is not a 
specific measure of skilled nursing cost changes, nor is it an 
accurate predictor of cost changes in a dynamically changing 
care environment. The market basket model used by HCFA offers a 
limited snapshot of cost changes, year-to-year, based upon 
historic patterns of spending across a broad array of long-term 
care setting. Over time, the inaccuracies of the market basket 
are amplified (compound effect), and the rate structures erode. 
The actual rates of cost changes incurred by Medicare 
participating skilled nursing facilities are substantially 
higher than those forecast by the current market basket.
    We strongly support a formal process by the Administration 
to review the SNF market basket to ensure it keeps pace with 
and fully accounts for the actual increases in costs incurred 
and reflects changes that will affect costs in the delivery of 
skilled nursing care.
    Fourth: Medicare reforms should include an updating of the 
SNF benefit.
    We look forward to the opportunity in the coming Congress 
to sit down with this committee to consider policies to ensure 
the skilled nursing benefit provides the most effective and 
efficient service to the Medicare beneficiary. We believe 
Congress must act to protect beneficiaries from excessive co-
payments, must act to eliminate outdated controls on access to 
the benefit and must act to remove barriers to care management. 
Today, only 2% of beneficiaries who enter a skilled nursing 
facility actually receive the 100 days of coverage promised by 
Medicare. To get the 100 days of SNF coverage a beneficiary 
must pay nearly $8,000 out-of-pocket (approximately a day after 
the 20th day).
    Summary
    In closing, Mr. Chairman, there are two key points that I 
emphasize.
    First, dollars spent on caring for patients on the front-
end help to reduce their reliance on institutional care. 
Admissions and discharge statistics for the past decade 
demonstrate that nursing homes are returning a larger 
percentage of their patients to the community. Medicare fueled 
this transformation. That investment in intense skilled nursing 
facility services is a win-win. Beneficiaries win--they are 
returned to their home setting; government wins--the burden of 
care costs are reduced, and the health system wins--care is 
given in the most appropriate settings. The BBA and BBRA as 
being implemented by HCFA, are unraveling that win-win, making 
it a lose-lose. Unless quickly addressed, the burden of care 
costs will rise, there will be a backlog of patients 
inappropriately placed, and Medicaid and Medicare costs will 
explode.
    Second, demographic projections indicate that once the 
baby-boom generation begins retiring en masse--in just a few 
years--the burgeoning demand for skilled nursing care and 
related health services will exceed the available supply. 
Unless we as a nation are willing to assume the full burden of 
caring for our grandparents, parents, and siblings, we need to 
fix the eldercare funding crisis immediately. If we don't, 
quality long-term care will not be there when you and your 
loved ones need it--no matter who pays for it. The federal 
government should provide a favorable environment encouraging 
providers to invest now to meet future needs--not wait until 
the level of problems threatens to overtake our ability to 
solve them.
    Thank you very much, Mr. Chairman, for this opportunity to 
express our deep concerns and frustrations with the current PPS 
system and its flawed implementation by the Health Care 
Financing Administration.

                                


    Chairman Thomas. Thank you very much, Mr. Walker.
    Ms. Sutherland?

    STATEMENT OF JUDITH G. SUTHERLAND, PRESIDENT AND CHIEF 
  EXECUTIVE OFFICER, VISITING NURSE CORPORATION OF COLORADO, 
  DENVER, COLORADO, AND, CHAIR, BOARD OF DIRECTORS, VISITING 
                 NURSE ASSOCIATIONS OF AMERICA

    Ms. Sutherland. Mr. Chairman and Members of the 
Subcommittee, as chair of the Visiting Nurse Associations of 
America board of directors, I would very much like to thank you 
for allowing us to present our views. I am also the chief 
executive officer of the Visiting Nurse Corp. of Colorado, 
which is the largest home care agency in the State.
    In 2 months, home health care will be reimbursed by a 
Prospective Pay System. We believe in this system. We believe 
that it will solve the current crisis in home health care. But 
we also believe that two actions must be taken. The first is to 
waive the BBA's budget neutrality restriction on PPS 
expenditures, so that the base-per-episode payment can be 
increased. And, second, we believe that the 15-percent cut must 
be repealed.
    We believe in these actions because PPS, while excellent, 
cannot succeed without sufficiently reimbursing providers for 
the cost of care and also removing the threat of the 15-percent 
cut.
    Mr. Chairman, under your leadership, this Subcommittee has 
taken the lead during the past 2 years by developing policies 
that reward cost efficiency. Under your guidance and watchful 
eye, Congress passed such legislation in 1998 and in 1999. VNAA 
has been grateful for your efforts. As the chief executive 
officer of an agency, I, too, have. We urge you to continue to 
go down this path.
    We realize that there is hesitancy on the part of the 
Health Subcommittee to place significant trust in the home 
health industry because of the overutilization that occurred in 
some parts of the country prior to BBA. It has been said, and 
we have heard it today, that some favor delaying the cut, so 
that it can be implemented in the future if the utilization of 
the benefit rapidly increases after PPS.
    VNAA opposes a delay in this. And primarily that is because 
it is another ``punish everyone for the bad behavior of some'' 
approach that VNAs and other cost-efficient agencies were 
subject to under the IPS. We believe that there are sufficient 
safety measures under PPS that will identify who is playing by 
the rules and who is not. Medical review will target areas for 
potential abuse and provide appropriate responses.
    On behalf of home health providers who want to provide 
cost-efficient and compassionate care to Medicare 
beneficiaries, VNAA asks you to please repeal the 15-percent 
cut. It, in fact, is no longer needed to achieve the BBA 
savings, which was its only purpose. The CBO's March 2000 
projection of home health savings is more than four times its 
original projection. Savings will now equal $69 billion, rather 
than the original projection of $16.1 billion. No other sector 
of health care has been as negatively impacted by the BBA as 
home health care. We represent 5-percent of Medicare spending, 
but we account for 60 percent of combined savings from home 
health, hospitals and skilled nursing facilities.
    Since fiscal year 1997, program expenditures decreased 48 
percent. From calendar year 1997 to 1999, the number of home 
health beneficiaries served by home care dropped by nearly 1 
million or 26 percent. According to several reports, patients 
are currently spending more time in hospitals and nursing homes 
than they need to because access to home health care has, 
indeed, become a nationwide problem.
    In Colorado, one-third of the agencies have closed, and 
their staffs, in large part, have transferred to other 
professions because home health salaries and benefits are no 
longer competitive. This is directly due to the budget cuts we 
have had to make under the IPS. We no longer have the staff to 
accept all hospital and physician referrals. Repeal of the 15-
percent would not add a dime to Medicare Home Health 
expenditures, but would help CBO's error.
    The 48-percent drop in Medicare Home Health expenditures 
during the last 2 years also forced HCFA to develop a PPS 
system under serious budget constraints. As a result, 
reimbursement is insufficient for many case-mix categories. 
VNAA's analysis of the PPS proposed rule, using a sample of 
VNA's recent data, reveals that reimbursement for 9 of 10 of 
our most prevalent case-mix categories will be less than the 
cost of care.
    To ensure sufficient reimbursement rates under PPS, we 
recommend a simple and direct method for appropriately linking 
reimbursement to the cost of care. We recommend waiving the BBA 
budget neutrality factor, which would allow the base 60-day-
per-episode rate to be raised by a certain percentage.
    Another way to more accurately link reimbursement to cost 
of care would be to improve the PPS outlier system. An example 
on HCFA's website for constructing an outlier payment 
demonstrates the disparity between cost of care and 
reimbursement, even with the outlier payment. To improve the 
outlier system, we recommend that you authorize $500 million in 
each of the next 5 years for outlier payments.
    Another change to BBA that VNAA believes is essential for 
PPS to succeed is to remove medical supplies from the per-
episode payments and create a budget-neutral fee schedule for 
only the supplies that are actually used by patients. The BBA's 
requirement to bundle the average cost of Medical supplies will 
underpay or overpay agencies, depending on the needs of their 
patients.
    Thank you for allowing us the opportunity to testify.
    [The prepared statement follows:]

Statement of Judith G. Sutherland, President, and Chief Executive 
Officer, Visiting Nurse Corporation of Colorado, Denver, Colorado, and, 
Chair, Board of Directors, Visiting Nurse Associations of America

I. Introduction

    Mr. Chairman and Members of the Subcommittee, thank you for 
the opportunity to testify on additional Medicare refinements 
to the Balanced Budget Act of 1997 (BBA97). My name is Judy 
Sutherland, and I am President and CEO of the Visiting Nurse 
Corporation of Colorado, which is the largest home care agency 
in the state of Colorado with 870 employees making 400,000 home 
care visits annually. I am also Chair of the Board of Directors 
of the Visiting Nurse Associations of America (VNAA), on whose 
behalf that I present these remarks today. VNAA is the national 
membership association for Visiting Nurse Agencies (VNAs), 
which are non-profit, charitable and community-based home 
health agencies. Having created home health care over 100 years 
ago, VNAs have a long history of delivering cost-effective and 
compassionate care to people in their communities.
    VNAA appreciates the opportunity to present our viewpoints 
during the first year of this new millennium, which we believe 
represents a turning point for the Medicare home health 
benefit. In two months, home health agencies will be reimbursed 
by a prospective payment system (PPS) under Medicare, which 
creates a reimbursement framework that is based on significant 
research and tested experience from two HCFA PPS Demonstration 
Projects and HCFA's Case-Mix Research Project. HCFA has 
constructed a well thought-out PPS design that uses the best 
data available to ensure that Medicare home health 
beneficiaries receive appropriate, medically-necessary care in 
the most cost-effective manner.
    The challenges presented by PPS in the year 2000 are 
parallel to the challenges that faced VNAs during the beginning 
of the 20th century. In 1900, VNAs were quietly revolutionizing 
health care in this country by providing medical and preventive 
services to those people who did not have access to such care. 
Visiting nurses brought health care to people's homes and 
community clinics to prevent unnecessary hospitalization, which 
was considered the health care of last resort because of 
hospitals' high costs. It is no different today. Compared to 
the average hospital inpatient operating cost per day of 
$1038*, a patient could receive health care at home at an 
average cost of $66.50 per-visit** or $133 per day for patients 
requiring two visits per day. Two visits per day is typically 
the maximum number of visits for newly discharged patients, 
which would equal 13% of the daily hospital inpatient operating 
cost. Following the first few days of home health admission, 
the number of visits per day and per week decrease as families 
learn patient care skills.
    Mr. Chairman and Subcommittee Members, Congress has the 
opportunity now to make the Medicare home health benefit the 
cornerstone of a more cost-efficient, more compassionate 
Medicare program. The Medicare population is estimated to 
double by the year 2015, which emphasizes the need to begin re-
prioritizing Medicare expenditures today to support innovative 
models of health care in the most cost-effective setting. There 
will be a stronger need to rely on family and community 
support. We believe that the public health model adopted by 
VNAs over 100 years ago will be the most cost-effective model 
for the future Medicare program. A February 17, 1999, 
publication of the Journal of the American Medical Association 
(JAMA) reported the findings of a study that showed that home 
health care for newly discharged, high-risk seniors saved 
Medicare an average $3,000 per patient on avoided hospital re-
admissions.
     Source: American Hospital Association's FY 1997 
data
     Source: VNAA's FY 1997 data

II. Current State of Home Health Care

    The Health Subcommittee's interest in providing additional 
refinements to the BBA97 will begin to lay the foundation for a 
stronger Medicare program. Home health PPS must begin on solid 
footing to achieve Congress' goals of cost-efficiency and 
appropriate patient care. Unfortunately, PPS is beginning when 
the home health industry is in a period of turbulence.
    HCFA's recent data reveals a disturbing picture of the 
current state of the Medicare home health program (please see 
Table 1, which is attached).
     Since fiscal year 1997, program expenditures 
decreased 48%, from $18.3 billion in FY 1997 to $9.5 billion in 
FY 1999.
     From calendar year 1997 to 1999, the number of 
home health beneficiaries served dropped by nearly one million, 
from 3.5 million to 2.6 million, or by 26%.
    (Source: Preliminary 1999 HCFA/HCIS data.)
    VNAA urges you to turn around the Medicare home health 
benefit by 180 degrees to prevent it from continuing its rapid 
downward spiral. If Medicare expenditures for home health care 
continue to decrease at the rate of the last two years, there 
will be no home health benefit in 2015.
    The drop in expenditures has directly affected beneficiary 
access to care. According to several reports, patients are 
currently spending more time in hospitals and nursing homes 
than they need to because access to home health care has become 
a nationwide problem.
     Researchers at George Washington University 
surveyed hospital discharge planners regarding their ability to 
find home health care for patients. According to the GWU, 68 
percent of the discharge planners reported that it is becoming 
increasingly difficult to obtain home health services for 
Medicare beneficiaries.
    In Colorado, one-third of the home health agencies have 
closed. This has had a tremendous effect on access to home 
health care in Colorado because my agency and the other 
existing agencies do not have the available clinical staff to 
accept the increased number of hospital referrals. This is due 
to a nationwide shortage of home health care personnel. The BBA 
Interim Payment System (IPS) has forced VNAs to cut their 
budgets by an average 25%. As a result, we are unable to offer 
competitive wages and benefits to attract qualified staff. 
However, demand is increasing for home care. The Bureau of 
Labor Statistics forecasts an 82 percent increase in the demand 
for key home health personnel for the period 1998 to 2002.
    We do not understand why the United States General 
Accounting Office (GAO) maintains that access to home health 
care is generally not a problem. Their findings are in direct 
contrast to HCFA's data showing a 25% reduction in beneficiary 
use of the home health benefit over two years and our day-to-
day experience in the field. We've offered to the GAO to 
discuss their research with them to find out why there is such 
a discrepancy.
    We realize there is hesitancy on the part of the Health 
Subcommittee to place significant trust in the home health 
industry because of the over-utilization and other abusive 
practices that occurred in some parts of the country prior to 
BBA97. It has been said that some favor delaying the 15% cut so 
that it can be implemented in the future if utilization of the 
benefit rapidly increases following the implementation of PPS. 
VNAA opposes a delay for such purposes because it is another 
``punish everyone for the bad behavior of some'' approach that 
VNAs and other cost-efficient agencies were subject to under 
the Interim Payment System (IPS). There's no other way to say 
it: It's not fair. There has to be a better way to achieve the 
same purpose. The BBA97 has more than corrected the fraud and 
abuse that had previously occurred. The GAO confirmed that the 
areas in the country that had the highest pre-BBA97 utilization 
are the areas with the highest number of home health agency 
closures.

III. Recommendations

    Mr. Chairman, under your leadership, this subcommittee has 
taken the lead during the past two years by developing policies 
that reward cost-efficiency and promote ethical behavior. Under 
your guidance and watchful eye, Congress passed such 
legislation in 1998 and 1999. VNAA has been grateful for your 
efforts. We urge you to continue to go down this path. PPS 
provides an excellent start. HCFA's medical review of home 
health care will be focused on potential areas of abuse with 
appropriate responses. Medical review using OASIS and normative 
standards data will identify who is playing by the system and 
who is not. VNAA would like to work with you to address any 
future problem areas through new legislation. On behalf of home 
health providers who want to provide cost-efficient and 
compassionate care to Medicare beneficiaries, VNAA asks you to 
please REPEAL THE 15% CUT.
    In addition, and of equal importance, we urge you to 
authorize immediate new expenditures to ensure the successful 
transition to prospective payment. HCFA has developed an 
outstanding system. VNAA believes that only a few systemic 
changes are necessary, which we will discuss later in our 
testimony. The only real obstacle for PPS is the constraint of 
the BBA that ties PPS expenditures to IPS expenditures (if IPS 
were to remain in effect). Because expenditures for home health 
care under IPS dropped 48% from FY 1997 to 1999, HCFA was 
forced to develop a PPS under serious budget constraints. Our 
analysis using a sample of VNAs' 1999-2000 data found that the 
cost of care for nine out of 10 of our most prevalent case-mix 
categories exceed reimbursement under the PPS proposed rule. 
The same data is currently being analyzed using the final rule 
reimbursement rates, which we would be pleased to share with 
the subcommittee. We are concerned that if Congress does not 
authorize additional expenditures for PPS, access to care will 
deteriorate.
    VNAA was amazed at GAO Director William Scanlon's following 
comment during last week's hearing of the Health and 
Environment Subcommittee: ``In our [GAO] view, the new home 
health PPS rates overall are likely to provide agencies a 
comfortable cushion to deliver necessary services.'' Again, the 
GAO's findings are in direct contrast to our data and HCFA's 
estimates for outlier payments (see ``Improve the PPS Outlier 
System'' below).
    The five national home health associations--VNAA, the 
American Association for Homecare, the American Federation of 
Home Care Providers, the Home Care Association of America, and 
the National Association for Home Care--jointly recommend that 
the subcommittee take the following legislative actions this 
year.

1. Repeal the 15 percent cut

    The 15% cut scheduled for October 1, 2001, is no longer 
needed to achieve BBA97 Medicare home health savings, which was 
its only purpose. The Congressional Budget Office's March 2000 
projection of such savings is more than four times its original 
projection (from $16.1 billion to $69 billion).
    No other sector of health care has been as negatively 
impacted by the BBA 97 as Medicare home health services (see 
the attached Table 1 and Charts 1 and 2). The Congressional 
Budget Office (CBO) recently reported that the ``larger than 
anticipated reduction in the use of home health services'' was 
the primary reason total Medicare spending fell 1 percent in 
fiscal year 1999. Likewise, according to the American Hospital 
Association's Year 2000 Lewin Study, BBA97 has reduced 
hospital-based home health services by 30.5%--the largest 
reduction of any hospital service affected by the BBA 97.
    Repeal of the 15% cut would not add a dime to Medicare home 
health expenditures, but would help correct CBO's error and 
partially restore congressional intent. We can assure you that 
home health care would generate more savings to Medicare than 
would a 15% cut if VNAs and other home health providers were 
allowed to provide sufficient services to patients.

2. Improve the PPS outlier system.

    A direct method for more appropriately linking 
reimbursement to cost of care would be improvement of the PPS 
outlier system. An example on HCFA's website for constructing 
an outlier payment demonstrates the disparity between HCFA's 
imputed cost for a 60-day episode of care (for case-mix 
category weighted 1.9532)--$6534.93--and the total payment for 
the episode (including the outlier supplement payment)--
$4214.65. In this example, reimbursement with the outlier 
payment is 64% of the total wage-adjusted imputed cost of care 
of the episode based on HCFA data.
    We recommend that the subcommittee authorize $500 million 
in each of the next five years to be used as outlier payments 
under the prospective payment system for services to the most 
medically-complex and costly patients. This funding level for 
outlier payments would be equivalent to 10% of the total 
payments projected or estimated to be made under the PPS each 
year. This would double the current BBA97 5% allocation 
requirement for outliers. Under this provision, the added 
portion of the outlier pool would not be subject to the budget 
neutrality factor and would not reduce the base episode 
payments.

3. Create a fee-schedule for non-routine medical supplies.

    Our recommendation is to remove medical supplies from the 
per-episode payments under the prospective payment system and 
create a budget-neutral fee schedule for only the supplies that 
are actually used by patients. Unbundling the average cost of 
the non-routine medical supplies from the base episode payment 
rate is essential because some agencies' patient populations 
have greater or lesser than average medical supply needs. The 
bundling of the average cost of non-routine medical supplies 
would underpay or overpay agencies depending on the needs of 
their patients.
    In addition, Medicare beneficiaries receiving home health 
agency (HHA) services for a specific illness or injury may have 
a preexisting need for medical supplies for a non-related 
chronic illness. In these cases, the beneficiary would have an 
established relationship with an HME provider. Under the PPS 
final rule, HHAs would be responsible for the supplies 
unrelated to the reason for home health admission. Therefore, 
an abrupt switch from the HME supplier to the HHA may leave 
beneficiaries vulnerable if there is a gap in services or 
confusion about a beneficiary's medical supply needs.
    4. The five national associations representing home health 
care also recommend that you instruct HCFA to
    Authorize emergency payments during the first six months of 
PPS, which would have minimal budget impact. We support the 
provision in S. 2835 (the ``Grassley-Feingold'' bill) that 
would provide one-time advance payments to providers during the 
transition from IPS to PPS to account for cash-flow crises as a 
result of the elimination of the Periodic Interim Payment (PIP) 
system. Payments would equal the average total Medicare costs 
incurred by an eligible agency in the most recent three-month 
period reported on the agency's most recently-settled cost 
report. Payments would be available for six months and be 
repaid within twelve months.
    PIP, which is primarily provided to non-profit, community-
based home health providers, will be discontinued as of October 
1, 2000. If PPS delays a substantial portion of payment until 
after termination of a patient episode, providers will have 
significant cash flow problems. Many agencies are unable to 
secure lines of credit or other loans because of the effect of 
the IPS on cash reserves.
    In addition, VNAA urges you to instruct HCFA to change the 
split payment ratio to 80/20 from the 60/40 in the final rule. 
The vast majority of our patient care is provided in the first 
30 days following patient admission. Reimbursement of 60% of 
the episode payment three weeks following the start-of-care 
will present significant cash flow problems for VNAs. A change 
in the split-payment ratio would be budget neutral.

Reimburse HHAs for OASIS-related costs

    Under the PPS final rule, agencies will be reimbursed $4.32 
per episode for ongoing OASIS adjustment costs and a one-time 
implementation cost for OASIS form changes of $5.50 per first 
year episodes.
    VNAA surveyed our members and asked the following question, 
``What is your best estimate of the average costs incurred 
during a 60-day episode of patient care by performing the OASIS 
survey (i.e. total costs for all assessments during the 60-day 
episode--start-of-care, discharge, and any other OASIS 
assessment during that timeframe)? Please estimate only the 
additional costs of doing OASIS vs. your previous patient 
assessment.''
    The results from our survey indicated that VNAs' average 
per 60-day episode cost for performing the OASIS assessment is 
$67, primarily due to labor costs that are not accounted for by 
HCFA. Based on this data, we believe that a significant amount 
of the OASIS costs will not be reimbursed under PPS. VNAA 
believes that OASIS data will provide invaluable patient 
outcomes and normative standards data. However, OASIS is overly 
burdensome and costly. We recommend additional per-episode 
reimbursement for OASIS to account for labor costs or 
instruction to HCFA to reduce the number of assessment 
questions to the 20 used for case-mix under PPS. We also 
recommend that the assessment be limited to Medicare and 
Medicaid patients only.
Clarify in the Medicare statute a uniform, reasonable, and up-
to-date definition of a Medicare home health agency branch 
office.

    This definition must focus on an agency's ability to 
provide quality care and positive patient outcomes rather than 
the current definition that imposes arbitrary and ineffective 
time and/or distance requirements between the parent office and 
the branch office. Medicare home health policy regarding branch 
offices must recognize that technological advances (e.g., 
communication tools that allow almost instantaneous information 
exchange) provide efficient and effective ways to ``distance 
manage'' branch offices and workstations.
    Increase payments for home health services in rural areas 
by 10 percent
    A 10% add-on to the episodic base payment for rural home 
health agencies would help address the 12-15% higher costs of 
delivering care in these areas.

IV. Conclusion

    Thank you again for the opportunity to present our views. 
We appreciate the fact that you are working with a finite set 
of funds and, therefore, have difficult choices to make. VNAA 
asks you to keep in mind the issues that we have raised in our 
testimony. Your support at this important time of transition to 
PPS is essential. Home health care has the potential to save 
the Medicare program millions (if not billions) of dollars. It 
should be a primary component of Medicare reform efforts to 
extend the life of the trust fund. Most importantly, home 
health care is the preferred choice of individuals with chronic 
illnesses or disabilities. It enables Americans to live 
independently and remain a part of their communities. I would 
be pleased to answer any questions about our testimony. We look 
forward to working with you this year and years to come.
      

                                



                        Table 1. Medicare Program Benefits, Fiscal Years 1997, 1998, 1999
----------------------------------------------------------------------------------------------------------------
        Benefit Type                     FY97               FY98 Amount  (billions)              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                      11 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                      FY97-98                     FY98-99                     FY97-99
           Benefit Type
          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
----------------------------------------------------------------------------------------------------------------
 AASource: HCFA, Office of the Actuary unpublished estimates for the President's fiscal year 2001 budget.

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    Chairman Thomas. Thank you, Ms. Sutherland.
    And before I turn it over to Mr. Renaudin, I want to let 
the gentleman from Louisiana chair because I know when I am 
out-classed. I have get to get two Louisianans going after each 
other, rather than someone from California in the middle of 
that.
    And I have read your testimony. And it seems to me that 
probably the most appropriate remark I could make--I apologize. 
I have got to go to a meeting the Speaker just called me to--is 
that this needs to be a joint effort. And probably the best way 
to make it a joint effort is that I would invite all of you to 
bring the numbers, and we will bring the decimal points.
    Ms. Sutherland. Fair enough.
    Mr. McCrery [presiding]. Please proceed.

    STATEMENT OF GEORGE RENAUDIN, SENIOR VICE PRESIDENT OF 
 ADMINISTRATION, OCHSNER HEALTH PLAN, METAIRIE, LOUISIANA, ON 
       BEHALF OF THE AMERICAN ASSOCIATION OF HEALTH PLANS

    Mr. Renaudin. Thank you. Mr. Chairman and Members of the 
Subcommittee, thank you for the opportunity to testify. I am 
George Renaudin, a senior vice president with Ochsner Health 
Plan. I am testifying today on behalf of the American 
Association of Health Plans.
    The Medicare Plus Choice program offers important 
advantages to both Medicare beneficiaries and the government. 
Fifteen years ago the government made a deal with Medicare 
beneficiaries. Medicare HMOs would achieve cost savings and 
pass along those savings to beneficiaries in the form of 
increased benefits and reduced out-of-pocket costs in exchange 
for the beneficiary's enrollment in an HMO. It is an important 
point that needs to be considered.
    The incredible success of the Medicare HMO program led 
Congress to establish the Medicare Plus Choice program in 1997 
to continue increasing the choices available to Medicare 
beneficiaries. Unfortunately, the Medicare Plus Choice program 
has not met this promise and has, in fact, led to fewer choices 
for many beneficiaries.
    There are a few major problems that have led us to this 
detrimental result:
    First and foremost, the Medicare Plus Choice program is 
significantly underfunded.
    Second, the Health Care Finance Administration has imposed, 
many times, excessive regulatory burdens on health plans 
participating in the program. Much of the funding problem has 
been caused by the unintended consequences of the Medicare Plus 
Choice payment formula. To demonstrate the issue, please 
consider the following facts:
    The total premiums collected by health plans participating 
in the Federal employee health benefits program for the average 
enrollee has increased 29.1 from 1997 through the end of 2000. 
During the same period, the government payments to Medicare 
Plus Choice plans has increased an average rate of only 8.6 
percent.
    In January 2001, as you have heard from Mr. Berenson, more 
than 900,000 beneficiaries will be forced to change health 
plans and return to the Medicare fee-for-service system. This 
number is greater than the number who were affected in the 
previous 2 years combined. Additionally, many other 
beneficiaries, including those in my plan, have lost important 
benefits and are paying much higher out-of-pocket costs, even 
though they are able to keep, in some instances, the Medicare 
Plus Choice plan.
    To understand why beneficiaries are losing choices of 
benefits, please consider that Ochsner's expected medical costs 
in 2001 will exceed our expected payment by 11 percent in the 
areas from which we are withdrawing. No health plan can survive 
while paying 11 percent more in health care benefits than it 
receives in payments. Keep in mind this 11-percent loss is 
before any administrative costs at all are incurred.
    In addition to the difficulties resulting from the 
program's inadequate funding and excessive regulations, you 
should also know about an additional problem in some parts of 
the country and in several parishes back home. Just so that you 
know, in Louisiana we call counties parishes.
    The problem facing some plans is the monopolistic behavior 
of a few providers who dictate payment rates to health plans 
that are at times higher than they would otherwise receive from 
participation in the Medicare fee-for-service program. The 
withdrawal decision is particularly difficult for a physician 
in hospital-owned health plans like mine. We did not take this 
action without much debate and discussion. We know and we 
regret that the disruption is particularly difficult for low-
income Medicare beneficiaries whose health security will be 
severely compromised if this program is not saved quickly.
    We realize that these disruptions are painful for our 
members and made every attempt to avoid causing such 
disruptions; changing benefit plans, trying to recontract with 
providers, cutting administrative costs, all of those factors 
were considered. Despite this, and with our regret, you should 
note that this program has, and does, provide unprecedented 
value to Medicare beneficiaries, and we are committed to 
working with you to save this program.
    We believe that approximately $15 billion in direct 
payments to the Medicare Plus Choice program 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, as promised when the BBA was enacted.
    We also urge you to combine this additional funding with 
meaningful regulatory reforms so beneficiaries are receiving 
quality and value in the Medicare Plus Choice plans. As a 
former regulator, I believe it is critically important to 
assure that the benefits of regulations outweigh the costs of 
those same regulations. Recognizing that more than 6 million 
Medicare beneficiaries are relying on the Medicare Plus Choice 
program to meet their health care needs, we believe this is one 
of the most pressing issues facing Congress.
    We look very much forward to working with the Subcommittee 
to address this seriously important issue in the remaining days 
of the 2000 legislative session.
    Thank you very much.
    [The prepared statement follows:]

Statement of George Renaudin, Senior Vice President of Administration, 
Ochsner Health Plan, Metairie, Louisiana, on behalf of the American 
Association of Health Plans

    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 George Renaudin, Senior Vice 
President of Administration for Ochsner Health Plan, which is 
the largest HMO in Louisiana and the fifth largest provider-
owned HMO in the nation. I oversee administrative functions at 
Ochsner Health Plan, including the management of our 
Medicare+Choice plan, Total Health 65, which currently serves 
36,572 Medicare beneficiaries. In January 2001, due to the 
problems I will discuss in my testimony, we will be forced to 
withdraw from six parishes in Louisiana and terminate coverage 
for 5,982 beneficiaries.
    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 Louisiana, Pennsylvania, Ohio, 
and Texas, enrollment in Medicare HMOs increased even more 
rapidly. In Louisiana, enrollment in Medicare HMOs increased 
from 2,344 in 1994 to 80,756 in 1997, reflecting a 33-fold 
increase. 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, including 
Ochsner Health Plan, 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 
Louisiana, our medical costs have increased at a rate of 5 to 7 
percent per year, while we have received than a two percent 
increase in payment per year because of the impact of the risk 
adjuster and because Medicare+Choice plans paid the entire cost 
of the Medicare Beneficiary Information Campaign for the first 
three years of the program. We have had to both withdraw from 
service areas and increase beneficiary out-of-pocket costs in 
order to sustain participation in the program.
    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--my home town of New Orleans 
(which currently has 26,532 Medicare+Choice enrollees); Los 
Angeles (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 actual payment from the government is $451 in 
Terrebonne parish, Louisiana and $574 in Orleans parish, 
Louisiana--a difference of $123 even though these areas are 
just a 40-minute drive 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 the six parishes from which we are being forced to 
withdraw in January 2001, the ratio of medical costs to total 
reimbursements is 111 percent for our Medicare+Choice members. 
No health plan can survive while paying 11 percent more in 
health care benefits than it receives in payments.
    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. I do not want to downplay 
the significance of the BBRA, however, because the small 
increase allowed us to stay in a parish--with 2,000 members--
from which we otherwise would have been forced to withdraw.
    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.
    The Health Care Financing Administration (HCFA) recently 
announced that 934,000 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 number is greater than the number who were 
similarly affected in the previous two years combined. 
Moreover, among the 934,000 beneficiaries who will lose their 
health plans in January 2001, approximately 159,000 will be 
left with no other Medicare+Choice HMO options in their area.
    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. I thank 
Congressmen McCrery and Jefferson and other members of the 
Louisiana delegation, as well as the 11 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 paying for health care services 
provided to beneficiaries--resulting in higher premiums and 
reduced benefits for 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. McCrery. Thank you, Mr. Renaudin.
    Mr. Bedlin?

 STATEMENT OF HOWARD BEDLIN, VICE PRESIDENT, PUBLIC POLICY AND 
            ADVOCACY, NATIONAL COUNCIL ON THE AGING

    Mr. Bedlin. Thank you, Mr. Chairman.
    Mr. Chairman, Representative Stark, Members of the 
Subcommittee, the National Council on the Aging, the Nation's 
first organization formed to represent older Americans and 
those who serve them, appreciates this opportunity to share our 
views on the need for further refinements to the BBA.
    Older Americans across the Nation hope that this will be 
the year to finally provide access to affordable, meaningful 
prescription drug coverage. Unfortunately, the prospects for a 
prescription drug bill becoming law this year are not good. 
Little time is left on the legislative calendar, and the 
Finance Committee is struggling with Chairman Roth's complex 
proposal.
    Seniors who have been counting on getting prescription drug 
coverage soon will be deeply disappointed. The public debate 
over prescription drugs has raised high expectations that 
something helping beneficiaries directly will be enacted into 
law. If all Congress does on Medicare this year is increase 
provider reimbursement rates, we suspect the beneficiaries' 
disappointment will turn to anger.
    Funding for BBA refinements must not diminish the resources 
committed to Medicare prescription drug coverage. In evaluating 
provider requests, we urge you to exercise caution and consider 
how much will give-backs increase beneficiary premiums, how 
will give-backs affect trust fund solvency, to what extent are 
providers' financial difficulties caused by non-Medicare 
payment sources, and what evidence indicates that beneficiaries 
are experiencing real access problems for Medicare services?
    In addition to considering the concerns of Medicare 
providers, NCOA strongly urges the Subcommittee to include 
provisions that would directly help beneficiaries. We 
appreciated, for example, the outpatient co-insurance, and 
immunosuppressive drug coverage improvements included last year 
in BBRA. However, these initiatives comprised only about 2.5 
percent of the $16 billion allocated. This year we must strike 
a more equitable balance between spending on provider and 
beneficiary concerns.
    My primary message today is that providers are not the only 
ones who can use some assistance this year. Medicare 
beneficiaries need help, too. For example, we urge the 
Subcommittee to lift the cap on immunosuppressive drug coverage 
by passing Representatives Canady's and Thurman's H.R. 1115 and 
to accelerate the phase-down of outpatient co-insurance to 10 
years. Other incremental prescription drug improvements that 
should be passed include Representative Dunn's H.R. 2892, which 
would cover certain self-injected drugs, and Representative 
Cardin's H.R. 634, which would improve access to Medigap drug 
coverage.
    Our written statement describes specific legislative 
recommendations that address serious beneficiary concerns. The 
proposals are generally noncontroversial and have or can gain 
strong bipartisan support.
    For example, we urge the Subcommittee to fix the Medicare 
Home Health homebound problem, which is forcing beneficiaries 
to be imprisoned within their own homes. The homebound 
provision in H.R. 2546 is endorsed by 46 national 
organizations, representing tens of millions of beneficiaries. 
Specific examples in our written statement vividly illustrate 
just inhumane and outmoded the current homebound policy is.
    We also urge the Subcommittee to pass Representative 
Stark's H.R. 745, which would give beneficiaries the option to 
receive Medicare Home Health in an adult day setting, 
modernizing the benefit by increasing choice, flexibility and 
competition. The bill is designed to be budget neutral, would 
enable family care givers to go to work and would increase 
social interaction in a less-isolated setting.
    NCOA also supports a complete repeal of the proposed 
additional 15-percent cut in Medicare Home Health. In the areas 
of health promotion and disease prevention, we urge the 
Subcommittee to continue the shift in Medicare from a sickness 
to a wellness program that began in BBA by passing 
Representative Levin's H.R. 3887.
    To improve Medicare Plus Choice for beneficiaries, we urge 
the Subcommittee to pass Representative Kelly's H.R. 4753, 
which would empower beneficiaries by creating Medicare consumer 
coalition demonstration projects to decentralize and improve 
education and information and negotiate for better benefits, 
lower premiums and multi-year contracts. Consumer coalitions 
could also help lower the cost of prescription drugs, Medigap 
and long-term care insurance and help beneficiaries choose 
among multiple PBMs
    Our written testimony also includes specific 
recommendations to improve Medicare for low-income and 
chronically ill beneficiaries.
    Last, but not least, we appreciate and support 
Representative Thomas's proposal to improve beneficiary 
coverage and appeals in Title II, Subtitle C of H.R. 4680.
    In conclusion, in crafting this year's Medicare refinement 
bill, we urge the Subcommittee to remember that beneficiaries 
need help too. Collectively, the proposals described in our 
written statement would significantly improve Medicare for 
beneficiaries at a relatively modest cost. We look forward to 
working with the Subcommittee to move forward on proposals that 
can achieve broad bipartisan support.
    Thank you.
    [The prepared statement follows:]

Statement of Howard Bedlin, Vice President, Public Policy and Advocacy, 
National Council on the Aging

    Chairman Thomas, Representatives Stark and members of the 
subcommittee, The National Council on the Aging (NCOA)--the 
nation's first organization formed to represent older Americans 
and those who serve them--appreciates the opportunity to share 
our views on the need for further refinements to the Medicare 
provisions of the Balanced Budget Act of 1997 (BBA).
    The National Council on the Aging is a private, nonprofit 
research, education, and advocacy organization. With over 7,500 
member and affiliated community service and consumer 
organizations, NCOA represents America's diverse aging network. 
We are proud of our 50-year history of innovation, including 
the development of: the Meals on Wheels program; the first 
national guidelines for geriatric care managers; the Foster 
Grandparents program; and the only accreditation program for 
adult day service providers. Members of our National Coalition 
of Consumer Organization on Aging--one of ten NCOA constituent 
units--represent over 1.5 million older consumers.
    Historically, NCOA has had a particular interest in the 
needs of disadvantaged, frail older persons. Therefore, as we 
look at the many issues facing Medicare beneficiaries today, we 
try to focus special attention on low-income chronically ill 
beneficiaries.
    Older Americans across the nation hope and expect that this 
will be the year to finally provide access to affordable, 
meaningful prescription drug coverage to all Medicare 
beneficiaries. NCOA is pleased that there is virtually 
unanimous bipartisan consensus that significant new resources 
must be devoted to providing such coverage. The debate is no 
longer about whether, but how.
    Unfortunately, it appears to us that the prospects for a 
prescription drug bill becoming law this year are not good. 
Little time is left on the legislative calendar and the Senate 
Finance Committee appears to be struggling with a proposal 
offered by Chairman Roth, which is significantly different from 
the bill passed by the House and adds major new elements to an 
already complicated debate. For example, NCOA strongly opposes 
a 20 percent copayment for Medicare Home Health services, as 
Chairman Roth has suggested.
    The issues involved in providing Medicare prescription 
drugs are extremely complex--both substantively and 
politically--and we are saddened to conclude that Medicare 
beneficiaries will most likely have to keep waiting for a bill 
to become law. We urge members of Congress to continue to 
explore areas for bipartisan compromise in hopes that a miracle 
can happen, but we expect that millions of seniors who have 
been counting on getting prescription drug coverage soon will 
be deeply disappointed.
    We acknowledge and are concerned that providers in many 
parts of the country are struggling, for reasons that may 
include, but certainly go beyond, the BBA. At the outset, we 
strongly urge that any funding for BBA refinements in no way 
diminish the resources committed to making prescription drug 
coverage available to all Medicare beneficiaries. In 
determining the degree to which specific provider requests 
merit action this year, we urge you to exercise caution and 
seriously consider how much provider give-backs under Part B 
would increase beneficiary premiums and the extent to which 
Part A give-backs would adversely affect trust fund solvency.
    We also suggest that attempts be made to analyze the extent 
to which Medicare payments are causing providers' financial 
difficulties, relative to payments from other sources, such as 
employer-based private insurance and Medicaid. More important, 
we urge you to closely examine what evidence exists that 
beneficiaries are experiencing real problems in accessing 
specific Medicare covered services. In conversations with our 
members in the field and with other national organizations 
representing Medicare beneficiaries, we have found little 
evidence to suggest that serious access problems exist, except 
in the home health area.
    Nonetheless, it appears that the most likely Medicare 
legislation to become law this year will address refinements to 
the BBA. However, no one should doubt that the very visible 
public debate over Medicare prescription drug coverage has 
raised high hopes and expectations that something helping 
beneficiaries directly will be enacted into law this year. If 
all Congress accomplishes on Medicare this year is to increase 
provider reimbursement rates, we strongly suspect that, for 
many beneficiaries, disappointment will turn to anger.
    In addition to considering the concerns of Medicare 
providers, we strongly urge the Ways and Means Committee to 
take the opportunity this year to include provisions that would 
directly help beneficiaries.
    We greatly appreciated, for example, the outpatient 
coinsurance and immunosuppressive drug improvements included in 
last year's Balanced Budget Refinement Act (BBRA). However, 
these initiatives comprised only a very small portion of the 
$16 billion allocated in the BBRA. This year, we should revisit 
these and other issues and go further, while striking a more 
equitable balance between new spending on provider and 
beneficiary concerns.
    Our testimony today is intended to make a number of 
specific recommendations that, we believe, combine good policy 
with good politics. We believe they can garner broad bipartisan 
support in Congress as well as strong support from Medicare 
beneficiaries. Some of our suggestions address clear, serious 
problem experienced by Medicare beneficiaries. Others would 
help beneficiaries by strengthening and modernizing the 
Medicare program. Collectively, the proposals would 
significantly improve Medicare at a relatively modest cost.
    A number of the recommendations we have included are 
directly related to specific BBA and BBRA provisions, such as:
     improving coverage for preventive care (BBA 
sections 4101 to 4108);
     fixing the Medicare Home Health ``homebound'' 
problem (BBA section 4613(a));
     improving Medicare+Choice (M+C) for beneficiaries 
(BBA section 4001);
     conducting further analysis on the impact of using 
lower Medicaid rates to determine provider payments for 
Qualified Medicare Beneficiaries (BBA section 4714);
     lifting the cap on immunosuppressive drug coverage 
(BBRA section 227); and
     accelerating the phase-in for hospital outpatient 
coinsurance (BBRA Title II, Subtitle A).
    NCOA recommends that the logical next steps be taken on 
these issues to better address the problems that were intended 
to be resolved.
    Our recommendations are divided into six sections: (1) 
Improving Medicare Prescription Drug Coverage for 
Beneficiaries; (2) Improving Medicare Home Health for 
Beneficiaries; (3) Improving Medicare Preventive Care Coverage 
for Beneficiaries, (4) Improving Medicare for Low-Income 
Beneficiaries; (5) Improving Medicare for Chronically Ill 
Beneficiaries; and (6) Other Medicare Improvements for 
Beneficiaries
    Many of the bills that we support in our testimony have not 
yet been scored by the Congressional Budget Office (CBO). If 
they had been scored, we believe that significantly more 
members of Congress would have signed on as cosponsors than at 
present. We request that the subcommittee ask CBO to score the 
bills described below over the next several weeks so that, come 
September, they will receive the informed consideration they 
deserve.

Improving Medicare Prescription Drug Coverage for Beneficiaries

    Improving access to prescription drug coverage is the 
number one concern for older Americans. It is clearly the 
biggest problem now facing beneficiaries. NCOA has been working 
closely with other organizations in the Leadership Council of 
Aging Organizations (LCAO) to move legislation consistent with 
principles we agreed upon early in the year. A Medicare 
prescription drug benefit should be accessible, voluntary, 
affordable, manageable and effective.
    As we have stated above, it appears that enactment of a 
Medicare prescription drug bill is not likely this year. 
However, that does not mean that Congress should do nothing in 
this area. We strongly urge that Congress take advantage of the 
unique opportunity and momentum that currently exists to do 
something this year to improve prescription drug coverage for 
Medicare beneficiaries.
    We believe that there are three incremental proposals that 
are straightforward and inexpensive, would help a significant 
number of beneficiaries in need, and could be passed with broad 
bipartisan support. The proposals would not impede more 
comprehensive reforms from occurring at a later date. Passage 
of the three proposals would acknowledge the clear public 
sentiment that this Congress should not respond to the urgent 
need for Medicare prescription drug coverage by doing nothing. 
Specifically, we urge the Ways and Means Committee to pass: (1) 
H.R. 1115, the Immunosuppressive Drug Coverage Extension Act, 
(2) H.R. 2892, the Access to Innovation for Medicare Patients 
Act, and (3) H.R. 634, the Medigap Access Protection for 
Seniors Act. We also urge the subcommittee to consider coverage 
of oral cancer drugs.
    H.R. 1115, the Immunosuppressive Drug Coverage Extension 
Act, would eliminate the time limitation on benefits for 
immunosuppressive drugs under Medicare. We are grateful for 
last year's BBRA improvement to extend coverage from 36 to 44 
months for individuals whose transplant occurred after December 
31, 1996. Representatives Canady and Thurman have introduced 
H.R. 1115 to eliminate the time limitation entirely for 
transplant recipients who are Medicare-eligible based on age or 
disability. The bill has 272 bipartisan cosponsors, including 
22 members of the Ways and Means Committee and 29 members of 
the Commerce Committee. President Clinton's budget also 
proposed to raise the current cap. In a December 1999 Institute 
of Medicine report (requested by Congress in the BBA), the IOM 
recommended that the rationale for eliminating the time 
limitation is strong, noting the positive economic, clinical 
and social implications of indefinite Medicare coverage.
    The current limit is arbitrary and costly. It makes no 
sense for Medicare to pay for the more expensive consequences 
of organ rejection, such as dialysis or a second transplant, 
but refuse to pay for the drugs to prevent the rejection of the 
initial transplanted organ beyond 44 months. This coverage can 
mean the difference between life and death for some and, for 
others, the difference between a transplant recipient having to 
experience the pain of an organ rejection, a return to 
dialysis--for kidney recipients--and the return to a long 
waiting list for another organ. We urge the Ways and Means 
Committee to pass H.R. 1115.
    H.R. 2892, the Access to Innovation for Medicare Patients 
Act, would expand Medicare coverage of certain self-injected 
biologicals. Sponsored by Representative Dunn the proposal has 
65 bipartisan cosponsors. Currently, Medicare will only cover 
drugs that are administered ``incident to'' a physician's 
service. These include injectables or infusion therapies 
administered in a physician's office or an outpatient setting. 
There is no good policy rationale for Medicare to cover 
intravenous drugs and physician-administered formulations, but 
to refuse to cover more patient-friendly, convenient 
alternatives. Refusing to cover biologicals that can be self-
administered is particularly harmful to beneficiaries in rural 
areas and disabled and lower income seniors that have 
difficulty getting to their physicians' offices. Almost 1.2 
million Medicare beneficiaries suffer from the four diseases 
that the biologicals under the bill could help with--Rheumatoid 
Arthritis, Multiple Sclerosis, Hepatitis C, and Deep Vein 
Thrombosis. We urge the Ways and Means Committee to pass H.R. 
2892.
    H.R. 634, the Medigap Access Protection for Seniors Act, 
would guarantee that Medicare beneficiaries enrolled in M+C 
plans offering prescription drug coverage have access to a 
Medigap policy that offers similar presciption drug coverage in 
the event the M+C plan terminates service in the area in which 
the beneficiary resides. The proposal is sponsored by 
Representative Cardin. By next January, approximately 1.5 
million Medicare beneficiaries will have been forced 
involuntarily to leave their M+C plan. Unfortunately, for those 
beneficiaries who have no choice but to enroll in the 
traditional fee-for-service program, only three of the ten 
Medigap policies are guaranteed issue, with no underwriting. 
Not one of these three policies covers prescription drugs. 
Medicare beneficiaries in these situations must have access to 
a Medigap policy with prescription drug coverage. We urge the 
Ways and Means Committee to pass H.R. 634.
    We also urge the Ways and Means Committee to analyze and 
consider extending Part B coverage to cancer drugs in oral 
forms. Currently, injectibles and IV chemotherapeutic agents 
are covered. Some limited oral chemotherapy drugs are covered 
only if they have an IV equivalent. Many of the newer 
chemotherapeutic agents will be in oral tablet form and will be 
easier for the patient to take. Since Medicare covers all IV 
and injectible cancer drugs now, serious consideration should 
be given to coverage of oral forms so that beneficiaries will 
have access to the most appropriate and effective cancer 
treatments.
    Finally, NCOA would like to suggest an area for further 
analysis and discussion in hopes of helping to bridge the 
divide and find some middle ground between Republican and 
Democratic prescription drug proposals. One of the primary 
disagreements has been over the respective roles of the public 
and private sectors in providing such coverage. We suggest that 
additional work be done to explore the feasibility of 
developing a competitive system in which both private insurers 
and the traditional fee-for-service program offer prescription 
drug coverage on a level playing field. Conceptually, this is 
consistent with the proposal considered by the National 
Bipartisan Commission on the Future of Medicare. Clearly, a 
variety of important issues would need to be worked out, 
foremost among them--how to craft subsidies to avoid adverse 
selection and ensure affordability for all beneficiaries. NCOA 
looks forward to working with members of the subcommittee to 
develop a compromise Medicare prescription drug proposal that 
can receive broad bipartisan support.

Improving Medicare Home Health (MHH) for Beneficiaries

    The MHH program is particularly important to lower income, 
frail beneficiaries. The typical home health user is widow over 
75 years of age with income below $20,000. If our most 
vulnerable older Americans are to live independent lives and 
avoid premature institutionalization, a number of critical 
improvements must be made to the program. We are specifically 
recommending that the Ways and Means Committee pass: (1) 
Section 5 of H.R. 2546, which would fix the ``homebound'' 
problem; (2) H.R. 745, which would give beneficiaries the 
choice to receive home health in an adult day setting; and (3) 
H.R. 4219, which would repeal the proposed additional 15 
percent MHH cut.
    H.R. 2546, the Preserve Access to Care in the Home (PATCH) 
Act, includes a provision that would fix the MHH homebound 
problem. The bill is sponsored by Representative Riley and 
includes several other home health provisions, some of which 
were addressed last year in BBRA. Section 5 of H.R. 2546 is 
identical to identical to S. 2298, sponsored by Senator 
Jeffords, cosponsored by Senators Helms, Snowe, Reed and Leahy, 
and endorsed by 46 national organizations represented millions 
of seniors and persons with disabilities. We are currently 
working with Rep. Markey to introduce a freestanding version of 
Section 5.
    Under current law, in order for Medicare beneficiaries to 
receive coverage for home health services they must be 
``confined to home.'' Current irrational and inconsistent 
policy interpretations by the Health Care Financing 
Administration and followed by fiscal intermediaries are 
causing substantial harm to Medicare beneficiaries by 
effectively forcing home health users to be imprisoned within 
their own homes. For example, these restrictions are 
inappropriately denying access to adult day services, which 
complement home health benefits, relieve caregiver burdens and 
delay nursing home placement, at no cost to the Medicare 
program.
    We recently heard of three homebound stories that help to 
illustrate the problem. First, a beneficiary with Alzheimer's 
disease in Vermont was denied home health coverage because, on 
a particular occasion, he wandered out of his home. Second, 
four beneficiaries in Illinois were not permitted to attend 
adult day care without losing home health coverage, even though 
the adult day center was in the same apartment building they 
lived in. Finally, a woman in Vermont never got to see her 
husband during the last two weeks of his life in a hospice, 
because she was afraid that a visit would result in her losing 
home health coverage. Current policy on the homebound 
requirement is inhumane and unnecessary.
    Section 5 of H.R. 2546 would clarify that, while 
beneficiaries still must have a normal inability to leave home 
in order to receive MHH coverage, periodic absences from home 
would be allowed, and attendance at adult day care centers 
would be permitted without losing home health benefits. We urge 
your support of the proposal for a number of reasons, 
including:
     Since Medicare home health only covers part-time 
or intermittent services, supplemental benefits such as adult 
day care can be critical to keeping families together in a home 
or community setting;
     Current law can be detrimental to the health of a 
beneficiary who, for example, has suffered a broken hip and 
should walk around the block as part of her therapy plan, but 
does not for fear of losing home health coverage;
     Current law is unenforceable because there is no 
way to effectively monitor the frequency and length of absences 
from the home; and
     It is irrational to deny home health services to a 
quadriplegic beneficiary who is lifted into a wheelchair and 
uses specially adapted transportation and is therefore not 
considered to be homebound.
    We strongly urge the Ways and Means Committee to pass 
section 5 of H.R. 2546.
    H.R. 745, the Medicare Substitute Adult Day Care Act, would 
give beneficiaries the option to receive some or all of their 
Medicare home health services in an adult day setting. The bill 
is sponsored by Representative Stark and has 39 bipartisan 
cosponsors. A companion bill--S. 2826--was recently introduced 
by Senator Santorum. Fundamentally, the proposal would 
modernize the MHH benefit by giving beneficiaries more choice, 
making the benefit more flexible and increasing competition. 
This would be a substitution, not an expansion, of services. 
The bill would not make new people eligible for Medicare home 
health benefits or expand the list of services paid for. In 
fact, in addition to home health benefits, transportation, 
meals and planned supervised activities would also be provided 
at no additional cost to Medicare. The bill is designed to be 
budget neutral but has not yet been scored by CBO.
    The primary difference from current law is where services 
would be provided. Giving beneficiaries and their families the 
choice to receive Medicare home health services in an adult day 
location has a number of important advantages, including:
     increasing social interaction in a less isolated 
setting, which will reduce depression and facilitate healing 
and rehabilitation;
     individualized therapeutic activities, nutrition, 
health monitoring and transportation for no additional cost to 
Medicare;
     improving providers' opportunities to monitor and 
observe the beneficiary's health status;
     enabling family caregivers to continue working, 
since the beneficiary would be cared for all day; and enhancing 
the ability to monitor and assure quality of care, since 
services would be delivered in one location in a group setting, 
rather than in numerous settings with only the beneficiary and 
provider present.
    We urge the Ways and Means Committee to pass H.R. 745.
    As the front page New York Times story indicated on April 
21st of this year, Medicare spending on home health has plunged 
over the past two years. The dramatic and unprecedented BBA 
cuts in home health have had a significant negative impact on 
beneficiaries. Over the past two years, we have heard from many 
beneficiaries about serious home health access problems. Recent 
estimates indicate that the cut was approximately 54 percent 
and that the number of beneficiaries served under the program 
has declined from about 3.5 million to 2.6 million. We were 
particularly pleased to see the steps taken last year to 
address the very serious problems in MHH caused by the BBA.
    It is shocking to think that current law includes an 
additional 15 percent cut in MHH, scheduled to take effect in 
October of next year. H.R. 4219, the Home Health Payment 
Fairness Act, the Home Health Payment Fairness Act, would 
repeal the scheduled 15 percent MHH cut. Sponsored by 
Representative Watkins, the bill has 119 bipartisan cosponsors. 
Senator Collins' companion bill--S. 2365--has 53 cosponsors. 
Another one-year delay merely postpones what clearly must be 
done. We urge the Ways and Means Committee to repeal the cut by 
passing H.R. 4219.

Improving Medicare Preventive Care Coverage for Beneficiaries

    We deeply appreciate the critical role subcommittee members 
played in including provisions in the BBA to improve coverage 
for preventive services for Medicare beneficiaries. However, 
the time has come to go further. It is often easier and less 
expensive to prevent disease than to cure it. Disease 
prevention must be an essential component of Medicare 
beneficiaries' continuum of care. Medicare still fails to cover 
a number of important preventive services, and those that are 
covered are underutilized. We, therefore, urge the Ways and 
Means Committee to pass H.R. 3887.
    H.R. 3887, the Medicare Wellness Act, would promote health 
promotion and disease prevention services and expands Medicare 
coverage of preventive benefits. Introduced by Representatives 
Levin and Foley, the proposal has 22 bipartisan cosponsors and 
is endorsed by 23 national organizations representing older 
Americans. H.R. 3887 would provide Medicare coverage for some 
of the most prominent, underlying risk factors for illness that 
face all Medicare beneficiaries, including: hypertension 
screening, tobacco cessation counseling, glaucoma screening, 
medical nutrition therapy, hormone replacement therapy 
counseling, vision and hearing loss screening, osteoporosis 
screening and counseling, and cholesterol screening. In 
addition, H.R. 3887 incorporates an aggressive applied and 
original research effort that will investigate ways to promote 
early detection and improve the utilization of current and new 
preventive benefits.
    The addition of these new benefits would accelerate the 
critical shift in Medicare that began in 1997 under the BBA, 
from a sickness program to a wellness program. The legislation 
offers a cost-effective approach to disease management and 
injury prevention that looks back at some of the lessons 
learned from the BBA and addresses the underutilization of 
preventive services.
    We also urge the Ways and Means Committee to consider the 
President's proposal to eliminate all coinsurance and 
deductibles for preventive services. According to recent 
studies, utilization of these critical services has been 
surprisingly low. We believe that by encouraging greater 
utilization of these services, beneficiaries' quality of life 
would be greatly enhanced and Medicare expenditures would 
decline over the long run.
    We recognize that it might not be feasible this year to 
cover all of the new preventive benefits included in H.R. 3887. 
We appreciate, for example, the leadership of Representative 
Johnson to extend Medicare coverage to nutrition therapy under 
H.R. 1187, the Medicare Medical Nutrition Therapy Act, which 
has 283 bipartisan cosponsors. We would encourage members of 
the subcommittee to evaluate those preventive benefits that 
would help the greatest number of older people and provide the 
greatest potential for long-run savings.

Improving Medicare+Choice for Beneficiairies

    Under Medicare today, beneficiaries are having an 
increasingly difficult time navigating their way through an 
unstable system that is growing more and more complex. Not only 
are beneficiaries having problems getting timely and accurate 
information about the new choices they face, but they cannot 
effectively exercise their clout in the marketplace. As we move 
toward a more competitive program, it is essential to test 
models designed to help competition work well for 
beneficiaries. NCOA has worked closely with Representative 
Kelly to craft H.R. 4753, the Seniors Health Care Empowerment 
Act, which would create six demonstrations to set up Medicare 
Consumer Coalitions (MCCs) to provide education and information 
and to negotiate for better benefits and lower premiums for 
Medicare beneficiaries.
    NCOA first testified on MCCs before the Senate Finance 
Committee in 1997 at hearing on FEHBP as a model for Medicare 
Reform. We also testified on MCCs last year before the National 
Bipartisan Commission on the Future of Medicare. NCOA completed 
a study in December on the feasibility of MCCs, funded with a 
grant from the Retirement Research Foundation. The study was 
authored by NCOA President and CEO James Firman; David Kendall 
from the Progressive Policy Institute; Jay Greenberg, who 
helped create the CALPERs insurance program; and Dwight McNeil, 
who has served for many years as a consultant to private, 
employer-based insurers. The study was assisted by a 
distinguished advisory panel composed of many Medicare 
researchers who have testified over the years before this 
subcommittee.
    MCCs would be non-profit, community-based organizations 
designed to empower Medicare beneficiaries to be informed 
consumers, help them get the most out of their healthcare 
dollars, and enhance consumer protections. MCCs would boost 
seniors' purchasing clout by aggregating individual buying 
behavior into group purchasing power. The coalitions would 
consist of existing local organizations such as grassroots 
seniors groups, union and employer retiree groups, senior 
centers, health insurance counseling programs, area agencies on 
aging, and faith congregations. A majority of MCC Board Members 
would be Medicare beneficiaries.
    Informed and empowered consumers are the key to any effort 
to reform and improve Medicare. MCCs would help to achieve this 
objective. H.R. 4753 would also permit MCCs to enter into 
multi-year contracts with M+C plans, which would add much-
needed stability to the market. The coalitions could help lower 
the cost of prescription drugs, as well as Medigap and long-
term care insurance. MCCs could also assist beneficiaries in 
negotiating with and choosing among multiple Pharmacy Benefit 
Managers.
    A survey of 2,000 older consumers commissioned by NCOA 
found that about four out of five (78 percent) would like to 
receive information and counseling from a Medicare information 
coalition. Fewer respondents (ranging from 25 to 35 percent) in 
the same survey said they would like to receive this 
information from the government, employers, or health plans. 
Fifty-seven percent of the seniors polled expressed interest in 
becoming a member of a Medicare purchasing coalition.
    Medicare information coalitions are included both in S. 
2807, the Medicare Prescription Drug and Modernization Act 
(introduced by Senators Breaux and Frist) and S. 2758, the 
Medicare Outpatient Drug Act (introduced by Senator Graham).
    MCCs appeal to the legislative need for bipartisanship and 
achievable progress to reform Medicare this year. Empowering 
seniors by building on what works in the private sector should 
attract support from both liberals and conservatives. We are 
not asking for authority to create MCCs nationwide, but to 
demonstrate the feasibility and efficacy of this promising 
innovation. We urge the Ways and Means Committee to pass H.R. 
4753.

Improving Medicare for Low-Income Beneficiaries

    Our current methods for protecting low-income Medicare 
beneficiaries against increasing out-of-pocket costs are simply 
abysmal. Low-income beneficiaries pay far too much out-of-
pocket for care. Those eligible for protection do not receive 
it, reliable data is severely lacking and the problems are only 
going to get worse (primarily because of a BBA provision that 
jeopardizes access by permitting states to pay for protections 
at Medicaid, rather than Medicare, rates). Current Medicare 
low-income protections are an embarrassment. Changes must be 
made.
    According to the Urban Institute, in 1996, only 63 percent 
of beneficiaries persons eligible for Qualified Medicare 
Beneficiary (QMB) protections received it (payment for 
premiums, coinsurance and deductibles for persons with incomes 
below 100 percent of poverty) and only 10 percent of those 
eligible for Specified Low-Income Medicare Beneficiary (SLMB) 
protections received it (premium payments for persons with 
incomes between 100 percent and 120 percent of poverty). Under 
BBA, premium protections were created under a block grant 
program for ``Qualified Individuals'' (QI-1s), persons with 
incomes between 120 percent and 135 percent of poverty. Some of 
the more obvious impediments to participation include: lack of 
outreach; a confusing, expensive application process; and a 
restrictive, burdensome asset eligibility test (less than 
$4,000 in non-housing assets for singles, $6,000 for couples).
    It makes no sense for Medicare protections to be the 
responsibility of states under Medicaid. States strongly resent 
these programs and do a poor job administering them. Ideally, 
the QMB program should be federalized, eligibility levels 
should be increased to 150 percent of poverty and the program's 
asset test should be eliminated. These three simple changes 
would solve the problem. The only issue is cost. We believe the 
changes would be well worth it.
    If the costs of these proposals are deemed prohibitive at 
this time, a far less expensive improvement would be to reform 
the SLMB and QI-1 programs in the following ways:
     Incorporate the QI-1 program into the SLMB program 
and make it federal--Unlike QMBs, most SLMBs and QI-1s are not 
Medicaid eligible. It makes no sense for these two programs to 
be separate.
     Eliminate the SLMB and QI-1 asset tests--This 
would reduce the cost of the application process by reducing 
the time spent on verification of information. We do not 
believe that this change would open the program up to a large 
number of new eligibles since there is a strong correlation 
between income and assets among older persons.
     Improve data collection--Reliable data on SLMBs is 
severely lacking. Federalization will help a great deal in this 
regard.
    We also suggest that Congress enact H.R. 854, the Low-
Income Medicare Beneficiary Assistance Act, which would amends 
Medicaid to provide for a presumptive eligibility period for 
the QMB and SLMB programs. This would provide significant help 
to those who are eligible for these benefits but do not receive 
them. Sponsored by Representative Bentsen, the bill has 25 
bipartisan cosponsors. The proposal is similar to H.R. 1455, 
the QMB Improvement Act, sponsored by Representative McDermott.
    Finally, BBA Section 4714 permitted states to pay providers 
serving QMBs the Medicaid rate rather than the typically higher 
Medicare rate. We understand that at least 33 states have taken 
advantage of this provision. We have received anecdotal reports 
that, not surprisingly, the change has resulted in reduced 
access to providers for QMBs. The problem is we do not have 
good data on what is happening. We suggest that GAO or MEDPAC 
be requested to analyze the problem and report on the degree to 
which QMBs are suffering from greater access problems, relative 
to other Medicare beneficiaries, as a direct result of this BBA 
provision.

Improving Medicare for Chronically Ill Beneficiaries

    NCOA also urges the Committee to incorporate in it's 
Medicare package several provisions proposed by members of the 
Chronic Care Coalition, a group of national organizations, 
including NCOA, working to find person-centered, systems-
oriented solutions to chronic care.
    Chronic conditions our leading cause of illness, disability 
and death. Yet our system continues to function around the 
needs of acute illness care. Chronic conditions represent the 
highest cost segment of health care, accounting for 70 percent 
of all personal health care expenditures and the major of all 
major spending categories financed by Medicare; e.g. an 
estimated 96 percent of home care visits and 83 percent of 
prescription drug use.
    The nature of chronic illness is out of sync with the way 
we administer, finance and deliver care. While chronic 
conditions require the support of multiple health care 
providers and disciplines that should be working 
collaboratively to meet the diverse needs of frail elders with 
multiple conditions, we have an archaic, fragmented health care 
system composed of multiple providers working independently. We 
need to begin devising systems approaches that promote 
integration of services, financing and care delivery. For 
example, we should refine Medicare and Medicaid waiver 
authority to enable unification of administrative and oversight 
functions and help facilitate integration of benefits and care 
delivery.
    In addition, BBA provisions changing the way fee-for-
service and M+C plans are financed discourage plans and 
providers from serving high-risk populations. While the 
prospective payment policies and M+C risk adjustment methods 
devised by HCFA are built around ``average costs'' of Medicare 
beneficiaries, the frail chronically ill are anything but 
average. In fact, their per capita medical expenditures are two 
to four times the average Medicare beneficiary.
    To address these issues, the Chronic Care Coalition has 
been working on legislation to improve chronic illness care in 
this country. NCOA urges members of this Committee to 
incorporate selected provisions from this proposed legislation 
into your Medicare package, including:
     Establish a National Commission on Improving 
Chronic Illness Care to create awareness of the problems the 
chronically ill face in receiving appropriate coordinated 
healthcare and supportive services. The Commission would be 
charged with examining barriers, developing a coherent national 
policy and establishing direction in reforming current 
approaches regarding chronic illness care.
     Consider the cost effectiveness of chronic illness 
prevention measures over time. The CBO should be required to 
submit to Congress a study describing methodologies for 
measuring the long-term cost effectiveness of covering certain 
preventive benefits under Medicare. Currently, CBO scores 
legislative proposals on the basis of expenditures and cost 
savings attributable to specific providers and specific 
programs for a specific budget cycle. Since coverage of 
preventive interventions can accrue across budget categories 
for specific providers and programs, and because some 
interventions do not produce short-term savings, we need to 
modify the way we evaluate public spending for the chronically 
ill.
     Establish a national database on chronic illness. 
In order to set national goals and targets regarding the 
reduction of chronic disease prevalence rates and reduce the 
growth of public and private expenditures for chronic illness 
care, we first need to establish a unified database on chronic 
care costs. Currently data is collected by provider type, by 
program type and by budget cycle. Chronic care expenditure data 
are not aggregated to show total system-wide expenditures over 
the expected lifetime of specific chronic conditions.
     Develop and implement a common patient assessment 
instrument across settings. A common assessment instrument 
would provide for comparability of information and reduce the 
need for repeated evaluations and data entry at each new site 
of service. It would dramatically reduce the amount of 
duplication of data collection required by current regulations 
and free up needed dollars for direct services.
     Develop a National Resource Center on the Internet 
for disabling chronic illness. The Agency for Healthcare 
Research and Quality should be directed to develop in 
electronic format an authoritative, reliable National Resource 
Center for disabling chronic illnesses, for use by patients and 
their families for education and self-management. The Center 
also would include information for patients and providers on 
current clinical guidelines that are currently available in the 
National Guidelines Clearinghouse maintained by the Agency.
    There is also great potential for community service 
organizations to work with Medicare providers to improve 
preventive health services and chronic illness care. 
Demonstrations should be designed and funded to test the 
efficacy of community service organizations to improve health 
outcomes and reduce costs for specific chronic conditions.
    Finally, we urge that the full Ways and Means Committee to 
pass H.R. 3872, the Long-Term Care and Retirement Security Act, 
which would provide a new $3,000 tax credit for individuals 
with long-term care needs or their caregivers and give 
individuals purchasing a qualified long-term care insurance 
policy an above-the-line tax deduction for the premiums paid. 
We deeply appreciate Representative Johnson's leadership on 
this bill, which has 46 bipartisan cosponsors.

Other Medicare Improvements for Beneficiaries

    Another very important issue for beneficiaries is the 
coinsurance paid for outpatient hospital services, which now 
averages almost 50 percent of costs. 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 up to 40 years for some 
services. By comparison, the most gradual phase-in Medicare has 
used to date for any payment system change is 10 years. We 
greatly appreciate last year's BBRA proposal under Title II, 
Subtitle A to cap the coinsurance amount at the inpatient 
hospital deductible. However, the current phase-in schedule is 
simply far too long. MedPAC has twice recommended that the 
reduction to achieve a 20 percent coinsurance rate be 
accomplished in a more reasonable time frame. We urge the Ways 
and Means Committee to accelerate the phase-in period on 
outpatient coinsurance to 10 years.
    NCOA deeply appreciates Chairman Thomas' efforts to improve 
beneficiary coverage and appeals procedures in Title II, 
Subtitle C of H.R. 4680, the Medicare Rx 2000 Act. These 
provisions would respond to serious concerns with current 
procedures. We urge the Ways and Means Committee to pass Title 
II, Subtitle C of H.R. 4680.
    H.R. 2870, the Medicare Vision Rehabilitation Coverage Act, 
would provide Medicare coverage for restorative services to 
promote the independence of beneficiaries diagnosed with a 
vision impairment. Sponsored by Representative Capuano, the 
bill has 101 bipartisan cosponsors. These specialized services 
help older persons with vision impairment to recover the 
ability to walk around safely, carry out regular daily 
activities, and learn new methods of reading and writing. They 
can restore a person's independence, prevent injuries, and 
improve quality of life. We urge the Ways and Means Committee 
to pass H.R. 2870.
    Finally, as we look at the future of the Medicare program 
as our population rapidly ages, we urge the Congress to take 
advantage of the historic opportunity to devote approximately 
15 percent of the non-Social Security surplus to extend 
Medicare solvency. It is important to remember that dedicating 
these dollars to the trust fund also counts toward debt 
reduction, thereby creating a double benefit.

Conclusion

    The very visible public debate over Medicare prescription 
drug coverage has raised high hopes and expectations that 
something to help beneficiaries directly will be enacted into 
law this year. But if Congress merely increases provider 
reimbursement rates, we suspect that many beneficiaries will be 
disappointed and angry.
    Funding for BBA refinements must in no way diminish the 
resources committed to making prescription drug coverage 
available to all Medicare beneficiaries. In evaluating provider 
requests, we urge you to exercise caution: seriously consider 
how much provider give-backs under Part B will increase 
beneficiary premiums and the extent to which Part A give-backs 
will adversely affect trust fund solvency. We suggest that 
attempts be made to analyze the extent to which Medicare 
payments are causing providers' financial difficulties, 
relative to payments from other sources, such as employer-based 
private insurance and Medicaid. We also urge you to closely 
examine what evidence exists that indicates that beneficiaries 
are experiencing real problems in accessing specific Medicare 
covered services.
    In addition to considering the concerns of Medicare 
providers, NCOA strongly urges the Ways and Means Committee to 
take the opportunity this year to include provisions that would 
directly help beneficiaries. Specifically, we urge the 
Committee to pass the following proposals this year:
     H.R. 1115, the Immunosuppressive Drug Coverage 
Extension Act;
     H.R. 2892, the Access to Innovation for Medicare 
Patients Act;
     H.R. 634, the Medigap Access Protection for 
Seniors Act;
     Consider extending coverage to oral cancer drugs;
     Section 5 of H.R. 2546, the Preserve Access to 
Care in the Home Act;
     H.R. 745, the Medicare Substitute Adult Day Care 
Act;
     H.R. 4219, the Home Health Payment Fairness Act;
     H.R. 3887, the Medicare Wellness Act;
     H.R. 1187, the Medicare Medical Nutrition Therapy 
Act;
     Eliminate all coinsurance and deductibles for 
preventive services;
     H.R. 4753, the Seniors Health Care Empowerment 
Act;
     H.R. 854, the Low-Income Medicare Beneficiary 
Assistance Act;
     Recommendations from the Chronic Care Coalition, 
including:
     Establish a National Commission on Improving 
Chronic Illness Care;
     Consider the cost effectiveness of chronic illness 
prevention measures over time;
     Establish a national database on chronic illness;
     Develop and implement a common patient assessment 
instruments across settings; and
     Develop National Resource Centers on the Internet 
for disabling chronic illness;
     H.R. 3872, the Long-Term Care and Retirement 
Security Act;
     Speed up the phase-in period on outpatient 
coinsurance to 10 years;
     Title II, Subtitle C of H.R. 4680, the Medicare Rx 
2000 Act; and
     H.R. 2870, the Medicare Vision Rehabilitation 
Coverage Act.

                                


    Mr. McCrery. Thank you, Mr. Bedlin, and thank you all for 
your testimony.
    And we will now proceed to questions from our panel. Mrs. 
Johnson is first.
    Mrs. Johnson of Connecticut. First of all, let me commend 
the panel on the specificity of their recommendations. We 
really appreciate that. At this time in the process, we need to 
know specifically what you thought was most important, and I 
think you ought to be thinking about priorities, as well.
    Second, let me say that I appreciated Mr. Renaudin laying 
out so clearly the fundamental problem with Medicare Plus 
Choice plans. This administration has starved those plans, and 
it is a tragedy. Because look at how the seniors feel about 
their choice between their managed care plan, their Medicare 
Plus Choice plan, and going back to Medicare. They aren't happy 
to go back to Medicare, and they wouldn't be having to go back 
to Medicare if this administration had, frankly, been fairer 
about reimbursements.
    You do, though, get to the regulatory reforms only at the 
end of your testimony. You mentioned the onerous and 
unnecessary requirements associated with the physician 
encounter data requirements. And so I just want to make sure 
that you line out the regulatory problems for us a little more 
clearly, as you have the reimbursement policies.
    Unfortunately, I only have 5 minutes, so I want to run 
through a couple of things that I need from people.
     Mr. Walker, I appreciate all you say, and again your 
specific recommendations. But one of the things that absolutely 
is driving nursing home providers in my district out of their 
minds and making it very hard for them to retain their very 
best employees is the administrative complexity associated with 
the current reimbursement system, and they were stunned to be 
confronted with additional layers of administrative complexity 
associated with the new payment system that is going to go into 
place.
    Now, I am not quite sure from today's testimony whether 
just the sheer increase in payment under the old system carries 
also that regulatory burden. But we have got to do something 
about the regulatory burden in the system. It certainly is 
affected Home Health, too. We are going to drive people out of 
the care-giving environment because they came there to give 
care, not to do paperwork.
    So any specific recommendations you can give us in this, 
and I am looking at several sets of eyes here for this bill, is 
important. Because you can talk about this system, you can tout 
the system politically, but we are going to destroy, 
particularly the small providers, but eventually force small 
providers into big systems if we don't do something about the 
enormity of the paperwork problem.
    And, Mr. Corlin, I did want to ask you a question. Your 
testimony, because--this is extremely important. I did not 
agree with you on the collective bargaining bill of my 
colleague from California, but I do agree with you that the 
problems in the system are extreme. We have included in our 
prescription drug bill, a reform of the appeal rights for 
patients in Medicare, because now they effectively have no 
appeal rights. But this issue of physicians getting no right to 
provide better information and being subject entirely to 
penalties and over payment judgments made by extrapolation, for 
the small family practitioner out there, this is devastating. 
They do not have the office staff. They cannot afford the legal 
staff. They cannot counter.
    And so I am very interested in completely altering the way 
we deal with physicians in this regard, because talk about no 
rights in a free society, this is a total abrogation of 
physician rights, far worse, than frankly, what is going on for 
them in the private sector, and I am an advocate of the right 
to sue, so I think there are a lot of problems in the private 
sector.
    So I hope you will think about what specifically could be 
done there,--because I am using up most of my questioning time 
to tell you what I need to know--because we really--there are 
administrative problems in the system that are so severe, that 
even if the reimbursements are adequate, and the most we are 
going to hope for in the next round is barely adequate, 
unfortunately, but we are now pushing people out of the system, 
and there is no question in my mind, but that seniors in my 
district are experiencing less access, not just as Medicare 
Plus Choice goes out, but in general. We are going to see it 
more in specialties and further on down. If the administration 
goes through with their proposal to change the reimbursements 
for cancer drugs, all of those community based cancer centers 
are going to fold up, and all of that is going to go to the 
hospital, less convenient and more costly to us. So 
reimbursement policies can either create access or they can 
destroy access, and some of the things that you pointed to here 
today that are not about money are very much about care. So 
please feel free to follow up with us on administrative issues 
as well, and this problem with the physicians and the 
extrapolation and the penalties is simply a very big one. You 
probably have 30 second, Dr. Corlin. The red light went on. You 
can come back to it later.
    Mr. McCrery. Mr. Stark.
    Mr. Stark. Thank you, Mr. Chairman. I just wanted to set 
the record straight a little bit before I inquire of Mr. 
Bedlin. I just want to suggest to you that the two complaints I 
am hearing are that HCFA has imposed excessive regulatory 
burdens, I talked to HCFA, and they suggest that they are 
getting a lot of vague whining from the managed care plans. 
Their most serious complaint is that the plans have to 
demonstrate how they improve the quality of care--and I suspect 
they cannot demonstrate it, which is why they do not like to 
fill out those reports--but HCFA also tells me because the 
managed care plans have been whining so much about it, they 
have stopped asking for it. And the second, of course, is the 
issue of physician encounters so that we can get some relative 
way to pay people for risk adjustment, which I am afraid the 
managed care people feel will cost them money, so they are not 
being very cooperative. But at any rate, HCFA has asked--and I 
will repeat the request--that you send us a letter, describing 
specific excessive regulatory burdens. I would just like it 
written out, please, so I can see. Send me the form. Show me 
what is excessive, and I certainly would be glad to go to bat.
    Now, the other problem is that Medicare is significantly 
underfunded. I would point out that according to MedPAC staff 
this morning, that the growth for Medicare fee-for-service, in 
contravention to some of the testimony that was presented, 
since `97 has been 5-\1/2\ percent, whereas the cumulative 
growth in the average Medicare Plus Choice payment has been 8.6 
percent, and since `97, all Medicare Plus Choice plans have 
received payment increases of at least 6 percent total. So that 
in fact the Medicare Plus Choice payment has gone up more than 
the Medicare fee-for-service. We should see that the record is 
clear on those issues.
    Mr. Bedlin, if we give relief to the providers, all those 
folks to your right there, would you think that it might make 
some sense to insure that the extra money we give them actually 
goes to providing services and just does not drop through the 
operation statement to the bottom line or to higher executive 
pay? For example, if we give more money to the SNFs, could we 
ask them to pass it on in higher or appropriate staffing 
ratios? If we give home health agencies more money, could we 
ask them to make available to the public how many visits per 
episode they actually provide? Would those sorts of things be 
fair exchange for giving more money to the managed care plans?
    Mr. Bedlin. I am not sure precisely how you would craft 
that or enforce it, but certainly we do believe that if 
providers are going to get increases in reimbursement, that 
that should inure to the benefit of the beneficiary population. 
So the ideas that you have articulated are certainly ones that 
I think should be seriously considered, particularly with 
regard to staffing. It is a huge problem right now, both within 
nursing homes and home health, and we really need to do 
something about that, and to the degree that we attempt to 
address those issues, I do think that we need to be very 
careful that the dollars go specifically to the people that 
they are hiring, those new staffers, yes.
    Mr. Stark. I agree. Let me toss a couple more at you, 
because I would like to encourage Chairman Thomas and my 
colleagues on the Subcommittee to have a little of however much 
goes back, go back to the beneficiaries. Let me give you a 
couple of ideas and see which ones sound good to you.
    Congresswoman Kelly has a bill to promote. Medicare 
Consumer Co-ops. I hope to introduce a bill this week requiring 
Medicare, or at least one of its carrier contractors, to 
establish a website, basically for the purchase of 
pharmaceuticals, either overseas or in this country to get some 
prices out to the seniors over the Internet so they can see 
what pharmaceuticals actually cost, whether they bring them in 
from Canada by mail or wherever.
    The other issue is the QMB and SLMB plans are under 
utilized, as we are all aware. Their outreach is bad, and Mr. 
Bentsen and Dr. McDermott have a presumptive enrollment bill, 
that just says, ``Look, let us presumptively enroll these 
people through a Social Security data match, and then they are 
in.'' I am not sure that the cost would be much greater, but we 
would at least then take care of some of the seniors who can 
least afford either co-pays or they would get help to pay the 
managed care plan.
    My third suggestion, again which might not cost much, is we 
are trying to introduce a bill to encourage coordination in the 
care of the chronically ill. You have talked about the 
problems, but we are wondering if we can carve out some easier 
parts of this coordination of chronic care. I wonder if you 
could elaborate on the need for that legislation or any other 
ideas you might suggest, the less costly the better, to see 
that some of this give-back finds its way to the beneficiaries.
    Mr. Bedlin. We would strongly support all three of the 
initiatives that you have described. Medicare consumer 
coalitions would help to empower beneficiaries in a marketplace 
where right now they have little or no clout. To lower the cost 
of prescriptions drugs, Medigap, long-term care insurance, help 
a great deal in terms of decentralizing the education and 
information, which is extraordinarily difficult in terms of 
navigating through a very complex system. QMBs and SLMBs, you 
are absolutely right. It is unbelievable how low the 
participation rates are. According to the Urban Institute, for 
example, in 1996, the SLMB rates--and that is premiums for 
people between 100 and 120 percent of poverty--only 10 percent 
who were eligible actually used that benefit. For QMBs, which 
includes co-payments and deductibles as well for less than 100, 
it was a little bit less than two-thirds. These are the most 
vulnerable beneficiaries out there. They clearly need a great 
deal more help than we are giving them now, and we would 
strongly support the legislation that you described in terms of 
presumptive eligibility, and would urge that we, frankly, go 
further than that.
    In terms of chronic illness, that is going to be a major, 
major crisis in our health care system, particularly with 
regard to Medicare over the next several decades. The fastest 
growing segment of our population is over age 85. These are 
individuals that have multiple chronic illnesses. The Medicare 
is not well suited to handle these kinds of problems, and they 
are the ones that these individuals are experiencing. In our 
testimony we specified some of the things that can be done to 
improve the care for people with chronic illness. My 
understanding is that you are going to be introducing a bill 
shortly that we are very interested in, in working with the 
National Chronic Care Consortium.
    Finally, there are some things in the Medicare home health 
benefit that we think could help to modernize it, help to 
address this homebound issue, which is very inhumane and is 
harming lots of beneficiaries. Those are chronic care issues as 
well that cry out for Congress to do something about.
    Mr. Stark. Thank you very much.
    Mr. McCrery. Mrs. Thurman.
    Mrs. Thurman. Thank you, Mr. Chairman. I first want to say 
something to this panel because I think this is very important. 
Even though we did some buy-backs last year, there were many of 
us up here--and particularly based on your testimony and the 
specificity that you put in your testimony, many of these are 
not issues that we have not heard about before; they were also 
brought up in last year's testimony and were asked to be acted 
upon. So just to say it is a blame here or a blame there, I 
think is not fair. That is not what we should be here, and what 
we should be here about for. We should be here because we need 
to fix this problem, and I think that is where you say 
``Amen.'' But none of this is new. I mean, I can remember RUGs, 
I remember bad debt, I remember DSH, I remember GME, I remember 
payments to HMOs. I mean, we have heard it. So I think we need 
to get beyond the blame game.
    But I have to go back to some issues though that I would 
like to talk to, in particular with my HMO person out here, 
Mr.--say your name for me.
    Mr. Renaudin. It is Renaudin. Just pretend like the ``U'' 
is not there.
    Mrs. Thurman. Renaudin, Okay. All right, I will try. Mr. 
Renaudin--and I appreciate what you have said about the fact 
that the HMO Medicare choices were out there on the idea that 
you could save money, so therefore you could provide better 
benefits. Here is a question or a couple of questions, and you 
heard a little of the line of this question in the last time, 
that I think is important. The money issue, for number one. 
Help me understand this. If I live in a certain part of 
Florida--you know, everybody talks about Miami getting $800--
but if I also live there, I also get a better prescription drug 
benefit, I get eyeglasses. I might get hearing aids, I might 
get these kinds of things. And I pay no premium. If I live in 
another part of the state, obviously, maybe the reimbursement 
is 500 and something. I am now getting fewer benefits. Probably 
mostly what I get is some kind of a prescription drug, and I 
pay a premium.
    Okay. So you can understand why seniors are a little 
concerned that their same Medicare tax that they paid all of 
their lives or through their working ages, has now provided 
them with a Medicare system that it off balance, or they are 
not getting the same thing as somebody else for the same amount 
of money that they put in.
    But here is the question that I do not understand, that in 
some parts of the State of Florida, in areas closely related--
let me just give you an example. In, say for example, in Citrus 
County right now we have no HMO. Hernando County just pulled 
out their last two. In Citrus--or in Hernando County, in 2001, 
they would receive $553.54, you know, and you know how that 
goes, it is on a per patient--that is not exactly correct, give 
or take this or that change in it. But in Hillsborough County, 
which is a county and a half below them, they receive $531.00 
in 2001. They stay there, but they pull out. So money cannot be 
the only action that is happening out here. So you need to help 
me understand, or more importantly, you need to help those 
people that you are trying to sell a program to, why this is 
happening, and particularly based upon what the Chairman said. 
He is not just going to put more money out there. He is going 
to require some issues to be looked at. How do I respond to 
that? How do I respond to them the Medicare Program works well 
because we put everybody in a risk pool, we spread the risk 
through 39 million people, therefore, we keep our cost lower 
than if--so why would we not do it on a state basis? And also 
then, why would we not ask--if we are giving you the money from 
the Medicare Trust Fund, why would we not be asking you to give 
a commitment to those folks? I mean, those are questions that 
are being asked by those beneficiaries who, quite frankly, are 
very concerned about what the next step is for them.
    And then the last question that I would you is this: even 
if we did the $25 billion on prescription drugs, even if we did 
some new dollars for reimbursement, would you be able to come 
back in to those counties? Do you think there would be a 
decision to come back into those counties now that they have 
left?
    Mr. Renaudin. Mrs. Thurman, let me try to address the 
issues one by one. Actually, the last issue you mentioned 
refers directly back to your beginning issue. I think that, as 
I said in my testimony, there are more than just payment 
factors, although payment factors are first and foremost, 
because if that is taken care of, then some of the other issues 
I will discuss in following up will also be addressed. But I 
will try to reach where you are going here.
    The fact that the difference that you just mentioned, where 
there is a plan in one area that is about 530, I think was the 
number you used, and not a plan where there is also a $530 
payment, there are many factors that can influence that. I 
discussed briefly one of those factors in my oral comments, 
which is the provider situation and the provider environment. 
That comes into play. And some of the things that affect the 
providers, the physicians and the hospitals, are not simply 
contracting with the plans. There are many other factors that 
impact them as well, some of the things you are hearing them 
discuss about the difference in Medicare payments, the fact 
that in many states Medicaid also has not kept up with 
inflation. So depending upon the payers, depending upon the 
designation of the hospital or physician, there may be external 
factors that are impacting the type of payment they will demand 
from us in order to provide the care.
    You have other factors besides just the payment that they 
are getting from Medicare, Medicaid, whether or not they are 
urban or rural. You have factors impacting them as well. Other 
factors beyond that may be competition. The parish where--the 
county, sorry--where you do have a plan at 530 may be one--and 
I have no idea of the Florida market, so excuse me--but may be 
one where you have a couple provider systems. The one where you 
said the same payment rate is out there, but you do not have a 
plan may be there is no competition among providers. That all 
filters through to us. We, as a plan, pull together all the 
different pieces of a health care system. So if there are 
factors that are impacting any of the people to my right all 
along the way, it also impacts us in our ability to contract 
with them, in our ability to provide the benefits and services.
    So, for example, one of the areas that I am withdrawing 
from, unfortunately, in my service area is a county that is 
fairly close--it is a little bit west--but fairly close to some 
of the counties where I am staying. The difference in that 
county is there is a particular provider in that one county 
that exhibit amazing monopolistic behavior, and this is not 
just shown to the Medicare Program. If you look at the way our 
state employee benefits program also, the people insured by 
state employees are insured, they actually, if they choose my 
health plan will pay somewhere between 30 and $45 more a month 
if they live in that particular part of our service area due to 
that one hospital.
    So there are many factors that--without knowing the Florida 
market in particular, that I cannot address all of those. But I 
can say in fairness also to my colleagues to my right, that 
some of their problems become our problems as well because we 
are just pulling it all together. So I do not know if that 
addresses the total reason for your situation that you just 
mentioned, but that may be part of it.
    Mrs. Thurman. If the Chairman will indulge me for just--as 
a kind of a response.
    Mr. McCrery. Sure.
    Mrs. Thurman. But I think that is part of the problem that 
we are having out there is, you know, we look at what we have 
got to spend on everything. We have been told that we are 
actually paying now more for a Medicare Choice than we are for 
fee-for-service. I mean, that is what the numbers are, and you 
kind of admitted that the numbers under Medicare Choice are 
going up at a higher percentage than what we are--at 5.5 for 
Medicare fee-for-service.
    But here is the problem. When we go to face these folks, 
you know, all they think is that you just have to give them 
money. It is all about just giving more money, when in fact, 
there is a whole lot of other--and it is a very multi-faceted 
kind of issue that is going on out there, and I would just beg 
of your organizations--and I will be glad to help you with some 
of the issues as it deals with regulation, although I think, 
quite frankly, we have probably created some of that because my 
guess is that HCFA does not write laws on its own, or rules. 
They are kind of supposed to follow what we pass up here, but 
if there are things that need to be done to get rid of some of 
that regulation that may seem nonsensical, that just is not 
working, then we need to know that.
    But on the other side of that, I really wish that some 
would start looking at the whole issue of Medicare Choice and 
not just pinning it on the one issue that seems the easiest. It 
is kind of like people have said, ``Oh, if you throw money at 
education, you can fix it'', and then you hear other people 
saying, ``Oh, no, we cannot do that. We have got to do some 
real reform up here to make it work.'' I mean I think we are 
still--this is applicable in these areas too, and I think we 
are just starting some fires out there with all these pullouts 
that are not really going to address the problems that are 
necessary.
    Mr. Renaudin. If I may also respond to the second part of 
your question in follow up. The payment differences between the 
parishes are the major reason for the withdrawals that I had--
that was one particular parish out of six that it was a 
provider issue. So I can tell you from my personal experience 
that 5 out of 6 counties it was payment was the issue, not the 
provider side.
    You also asked a question about the commitment. We would 
love--we would absolutely embrace being able to make the same 
kind of commitments to the Medicare Plus Choice program as far 
as long-term contracts as we do--in my particular state you can 
tell where I am going with this by the companies I mention--as 
we do with Exxon and Chevron and Shell and Texaco, and so 
forth. We have multi-year contracts with them. But what I get 
in exchange for those multi-year contracts is a commitment from 
them that they will not change the rules as we go through, that 
the payment will not be changed as we go through, that, you 
know, some of the extra things that would be nice for the 
beneficiaries in those plans are not going to happen if they 
result in higher cost.
    Let me give you a very specific--low-cost, but specific 
example of how this happens. I say ``low-cost'' as some 
relative terms. We now have to use a mandated schedule of 
benefits, and it is a great idea, so that when a senior is 
sitting down at the kitchen table, they unfold all the 
scheduled benefits among all the plans and they compare them. 
That sounds like a wonderful idea, and it is one that we 
support. The problem is, just in the past month, month and a 
half--I may be off by a couple weeks--there have been four 
different versions or editions to that schedule of benefits 
that we have had to deal with as HCFA keeps on revising it. 
That is something that Exxon or Chevron or Shell would not do. 
We would come to the table, we would agree on the schedule of 
benefits. It would not be continuously revised, reviewed and 
changed as we go forward. So we would, believe me, love to make 
the same sort of commitments to the Medicare Plus Choice 
program that we make to others. Provide our own plan, it is 
part of our mission to do so, but unfortunately, if the rules 
keep on changing, you cannot then criticize us for making 
changes in our decisions after you have changed the rules.
    Mr. Corlin. Ms. Thurman, may I add a response to that, 
please?
    Mrs. Thurman. You have to ask the chair.
    Mr. Corlin. Mr. Chair?
    Mr. McCrery. Sure, please.
    Mr. Corlin. Thank you. I feel compelled, on behalf of the 
AMA to comment on the last response that was made, and to say 
there is a bit of disingenuity there
    . Those same concerns about changes that go on, and the 
fact that they do not like bidding on a contract or making a 
long-term commitment to a contract where the clauses may be 
changed, that was stated by the representative of the industry 
that puts clauses in its contracts with physicians, saying, 
``If you want this contract, you must agree to take any 
contract we come up with, regardless of the terms, even those 
we have not come out with yet.'' So that does cut both ways.
    Mr. Renaudin. My plan does not do that, just for your 
information.
    Mr. McCrery. Thank you, Mrs. Thurman, and thank all of you. 
I now have a few questions, and Mr. Renaudin, I am going to 
give you a chance to rest for just a second, and go to Mr. 
Walker. As you probably know, the GAO testified last week, I 
believe, and his testimony, Mr. Scanlon of the GAO, said that 
the recent bankruptcies experienced in your industry are 
primarily due to poor business decisions, and not on Medicare 
and PPS implementation. He claimed that the new Medicare 
payment system for SNF services adequately covers the cost of 
services, but no longer supports the extensive capital 
expansions or the ancillary service business that corporate 
chains relied on to boost revenues. I assume you would like to 
respond to that assertion. I will give you the chance.
    Mr. Walker. Yes, I would. First of all, on the issue of 
poor decisions, it is important to understand how we got here. 
From 1990 through 1997, we went through demonstration projects 
with HCFA jointly throughout the United States. All of the 
details of prospective payment of substance were worked out 
through those demonstration projects. The industry, including 
my company, supported prospective payment. The one issue that 
was not worked out was the cost of the non-therapy ancillaries. 
Through the last demonstration project ending in 1997, HCFA 
said, ``When the final regs. come out, we will add a component 
to that payment for non-therapy ancillaries.'' That was as late 
as the summer of 1998. On publication that fall, there was no 
additional funds for non-therapy ancillaries in the proposed 
payment.
    Prior to that implementation, my companies and others made 
strategic plans on how to phase in business decisions into the 
prospective payment system. We looked at pharmacy. We looked at 
rehabilitation. We looked at long-term care. And we selectively 
built elder-care health care networks on the East Coast to the 
United States, eliminating excessive cost and reducing the cost 
of care to the payors.
    When those final regs. were published, there was a 25-
percent reduction in the payment rate. The expected reduction 
was less than 20 percent. The changes in utilization that 
occurred at the same time, because it changes to the hospital 
payment systems, penalties for early discharge, forcing 
hospitals to be afraid to discharge early, keeping people 
longer, caused occupancies to drop throughout the long-term 
care industry. So not only did you get a reduction in rate, you 
got a reduction in utilization. I think if you look throughout 
the country today, you will see occupancy rates down 3 to 5 
percentage points. That is because of the lower payment and 
because of the longer stays in hospitals. And if you go into my 
primary marketing areas, Southeastern Pennsylvania, Wilmington, 
Delaware, you will see hospitals have no beds available today.
    So I would tell you, we incurred the debt and raised the 
capital--and by the way, the capital we raised to do those 
things was 50 percent equity and 50 percent debt. We did not 
rely totally on debt capital. Our cash flow before PPS was over 
$400 million a year. It went down to 220. We cut over $100 
million in costs out of the system. Nobody expected the 
devastation created by the lack of full disclosure by HCFA. And 
you may think I am blaming somebody. I do not intend to. I am 
just stating the facts. That is what happened.
    You go back to Mr. Scanlon's comments about a fair payment. 
Well, I would like to--from memory, if I can do it, but I may 
have the piece of paper here--describe to you the payments and 
the use of the dollars, and I will try to make it as simple as 
possible. Nursing homes spend 80 percent of the revenue dollar 
before PPS on salaries, wages and supplies, 5 percent on 
overhead. That means filling out the cost reports, buying the 
goods and services, human resources, but administrative task. 
So we have 15 percent left of the payment rates to pay for 
everything else. The cost of working capital--in a nursing home 
you do not get paid for 90 days--$1.5 million on 120 beds. It 
costs 3 cents to finance the working capital if I can get 
somebody to lend me the money. The cost of reinvestment in the 
physical plant--I have to continue to restore the physical 
plant because it is used up--costs me about $500 a bed. Every 5 
years I have to put in a complete facility renovation on the 
interior. The total cost is about 2 cents. I am not down to 10 
cents left. If you built a $50,000 nursing home bed in this 
nation today, and you financed it 100 percent with debt 
capital--which is not possible--it would cost you 16 cents. If 
you add up those numbers, I am minus 6 cents before the 
implementation of prospective payment. Now, those providers who 
really serve the Medicare population--and I would include 
Genesis in that category--we have double and triple the amount 
of Medicare patients in our system that the industry does 
overall. 25 percent of our revenues come from Medicare. We 
receive a reduction of $400 to about $300 as a result of PPS. 
That is a 25 percent price reduction. A 25 percent price 
reduction on 25 percent of your revenues results in a 625 basis 
points reduction in your margin. So now I am losing well over 
10 cents.
    Mr. Scanlon, I do not truly believe, understands the 
financial implications of long-term care. Those providers who 
did not serve the Medicare population, who did not have 
distinct parts, who did not have the infrastructure in place, 
that price increases at one or two or three patients in a 
building. But those providers who really stepped up and built 
the infrastructure got whacked right across the side of the 
head. Over 200,000 Medicare beds are in bankruptcy today. That 
cannot be because five chief executive officers made bad 
decisions. Remember, I had a hundred bankers and a hundred 
credit staffs. Not only did I have bank lenders, but I had 
investment bankers. When we did those transactions, we were 
reviewed inside and outside by hundreds of Committees. They are 
not all dumb people. They all read the same information that I 
read and made the same decisions. The information was flawed.
    Mr. McCrery. Well, thank you. I thought you might want to 
have a few words in response.
    Mr. Walker. Thank you. You can ask a few more.
    Mr. McCrery. Mr. Richey, there seems to be a pretty general 
agreement that our rural hospitals, primarily I guess because 
they have fewer private pay patients, are most threatened by 
reductions in Medicare reimbursement. What specific proposals 
does AHA have to remedy the fragile condition of rural 
hospitals?
    Mr. Richey. Well, you are absolutely correct, sir, Mr. 
Chairman. One of the major problems in the rural sector is you 
do not have the number of commercial insurance payors that you 
would in an urban setting, and therefore, the reliance on the 
Medicare and Medicaid patients are significantly higher. We 
have a rural relief package that we would urgently suggest that 
this Subcommittee pass on. We would also ask for protection of 
Medicare, and particularly for the rural hospitals, Medicaid 
disproportionate share funds. They rely, in large parts on both 
Medicare and Medicaid disportionate share payments to make 
their entire bottom line. Then, likewise, the same issues that 
the urbans are seeing with home care are a major problem for 
them, and the SNFs. With fewer nursing homes available, the 
rural hospital tends to have to be the provider for the vast 
majority of services.
    Mr. McCrery. Unfortunately, Medicaid is not in the 
jurisdiction of this Committee, but we will pass your 
suggestion on. You did say you had a packet though of materials 
that I am sure you will share with us on specific 
recommendations for rural hospitals, and we appreciate that.
    Dr. Corlin, much of your testimony focused on HCFA's 
antifraud efforts, and while I sympathize with the thrust of 
your testimony along those lines, I am sure you sympathize with 
our concern about fraud in the Medicare system and ferreting 
out that fraud.
    Dr. Corlin. Absolutely.
    Mr. McCrery. So how can we best balance the public's 
interest in insuring the Medicare dollars are being spent 
wisely with a physician's right to privacy, and more important, 
to due process?
    Dr. Corlin. Thank you, sir. First of all, I agree very 
strongly that we have got to be as vigilant as we can in 
dealing with issues of fraud. In going through that whole 
process there are several points that I think can be improved. 
First of all, we are told as physicians and as medical 
associations that what physicians should do, is if there is a 
question about billing, to find out what is the right code for 
this? Forget for a moment the E&M guidelines that were 
disastrous that were put out--we will get to that in a moment--
if there is a question about billing, the physician or the 
physician's billing clerk should call the local intermediary 
for Medicare, the carrier, and ask for advice, and preferably 
try to get it in writing, and that if you get the advice at 
all, it will be helpful in guiding you. If you get it in 
writing from the carrier and you are then subsequently audited, 
you can use that written response from the carrier, if you are 
complying with it, as the standard to which you will be held. 
But, you cannot get written responses from the carriers. They 
will not provide them. Many times if you call them, they will 
not even tell you--the clerk you are speaking to will not even 
tell you their name in order to verify on July 23d I called and 
I spoke to Mary Smith, and she told me. You cannot get the 
clerk's name you are speaking to.
    So the issue of informing the physician to answer questions 
cannot be done. There is virtually no funding available and no 
programs available for physician education in proper billing 
and coding. The AMA would love to be involved in a HCFA-funded 
project for physician education in coding. There are a lot of 
private coding consultants out there whose total goal is to 
give a course, ``How can you maximize coding'', whether or not 
it is the right way of doing it. We would like to see education 
done properly. That is one issue.
    Second, a post payment audit, as I indicated in my 
testimony, is often the first indication that there is any 
problem at all, and the example I gave of the cardiologist in 
California is one. How can one doctor, one doctor, who gets a 
clean bill of health on an audit, 1 year later be told that he 
owes $175,000 when nothing is done differently at all? Once 
that statement for recapture of money comes out, if you want to 
deal with it and pay it to get rid of it administratively, the 
only way you can do it is to waive all your right to appeal. If 
you wish to appeal, you have to got to go through an extremely 
onerous process, and I would point to the results of that 
process as evidence of the fact that what HCFA is doing is 
wrong. Of those claims that go to the administrative law judge 
for hearing, 70 percent are found in favor of the physician 
that the intermediary has done the audit wrong.
    The entire process is flawed. We are not opposed to 
anything to detect fraud. We are not opposed to anything to 
detect abuse. We want to have more education in the system. But 
the specifics of the mechanics as to how we got there, as to 
how we get there in that system, are just plain wrong,and we 
want to have that corrected. The reason you have so much 
opposition from physicians is that we are frustrated. We are 
used to working off of a database in how we deal with our 
patients. It is a changing database to be sure, but it is a 
database. In dealing with HCFA about questions as to how do I 
bill, what is the right code, we cannot get the right answers 
to know how to do it up front.
    And one final point, sir, and this has to do with the E&M 
coding mess that HCFA is currently revisiting. You heard a lot 
of physicians and a lot of groups complaining about the amount 
of time that was necessary and the excess documentation that 
was necessary and how burdensome it was. That is one aspect of 
it. There is another aspect of it that concerns me more. I am a 
gastroenterologist. We have a high-intensity practice. We see a 
lot of acutely ill patients, many of whom are in intensive care 
units, treated by four or five different people, cardiologists, 
pulmonologists, infectious disease specialists and so on. The 
requirements for documentation are such that the standard 
shorthand that physicians always used is no longer considered 
acceptable. When I go into an intensive care unit and look at a 
patient's chart, the last 2 days' progress notes may be 12 
pages of notes, whereas they used to be 2-1/2 or 3 pages of 
notes. There is no more information in it; there is just the 
same information repeated redundantly by everyone over and over 
and over because it is a HCFA requirement. That impedes the 
delivery of good quality medical care, because if I get called 
in there and the patient started to hemorrhage and I need to 
assess things in a hurry, I cannot go through 12 and 15 and 20 
pages of notes. I need to be able to go through a couple of 
pages of notes and find out what is going on, particularly if 
those notes just repeat things.
    And I was at a meeting with Dr. Berenson last week. We 
discussed that. He acknowledged that HCFA is aware of it. We 
will wait to see if anything happens. Yes, documentation for 
the level of service billed for, that it was delivered, 
absolutely, but when that documentation gets to the point that 
the chart becomes virtually illegible based on its volume, the 
patients are being hurt, not helped.
    Mr. McCrery. Thank you. Mr. Renaudin, I appreciated your 
comments about the reimbursement rates and the way they vary 
from parish to parish or county to county, and I am not going 
to dwell on that, but suffice to say that I think the formula 
that is used is not the best we could come up with, and it does 
result in, I think, inequities. Certainly in my state we have 
seen those inequities very clearly, demonstrated by the fact 
that now in North Louisiana we do not have any Medicare HMOs. 
Ochsner was the only one, and it is gone. And you cannot 
convince me that in Shreveport, Louisiana it costs $100 or more 
less per patient to treat somebody than it does in Baton Rouge, 
Louisiana or even New Orleans, Louisiana. And yet, the 
methodology that we use to determine what a managed care plan 
gets reimbursed results in just that, and that is nuts. So, I 
appreciated your comments on that.
    Mr. Crane asked me to follow up with you, Mr. Renaudin, on 
a question that he asked Dr. Berenson earlier, and that is 
concerning the discrepancy between the published rate of 
reimbursement and the actual reimbursement. Would you have any 
idea as to why that discrepancy exists and expound upon it if 
you do?
    Mr. Renaudin. I can, and if I get too detailed, please let 
me know.
    There are large sets of charts that come out with that 
published rates, and those large sets of charts have to do with 
all the different factors that you then take away or sometimes 
add to that published rate. They vary from age, sex, 
institutional status, ESRD status, whether or not they are an 
institution, whether or not they are Medicaid dual eligible. 
There are--then there is a whole other set of facts for ESRD 
rates. So there are a large set of factors that come into play, 
and then you add on top of that some additional things that 
have happened since BBA. For example, the Community Education 
Assessment Fee, which the BBRA wanted to try to make some 
change to and has done so, but it is still there to some 
extent. So you have that fee that is added on to it. You have 
the automatic--you have some other adjustments that are added 
to it as we go forward. Also, those numbers that we give you, 
the actual payment rate that we receive, now, those payments 
change every month based on all sorts of dynamic things that go 
on.
    To give you an example of a huge change that can happen, 
and this happens sometimes going back years, up to 3 years, in 
August of last year, we had suddenly, almost--I believe it was 
2 million; don't hold me to the number, somewhere around 
there--taken away from what we normally expect to get that 
month. And the reason is, they took back that amount of money 
because of what they called a working aged adjustment. It 
appears to--in somewhere in one of the HCFA files that was out 
there, that we were getting paid more than we should have 
because we had a large number of people who were actually 
working age, and for your information, those are folks who 
still have insurance provided through an employer. So the 
theory behind it is since they have some insurance provided by 
employer, pay us less because they are getting some 
supplementary coverage elsewhere. And that is correct. The 
problem is, I believe there are three, maybe four different 
databases that HCFA uses to determine whether or not we have a 
working aged member. And what happened, a phenomenon that 
happened across the country, HCFA suddenly updated from some 
other database--we still do not know which one--that working 
aged adjustment. So they went back and took back money for 3 
years, for 3 years, from members that we did not think were 
working age, but they thought were. Now, what we found out 
since, and we spent a lot of money and consulting fees and 
other database fees to find out, that the vast majority of the 
take-back was not true.
    So there are all sorts of factors that come into play, but 
the major ones are the ones that Mr. Berenson did mention. The 
demographic adjustments and the risk adjustors are the big 
factors. But the idea that that is simply a fact of getting a 
healthier population may not necessarily be true. If the 
average age of a beneficiary in a particular parish is 75, and 
we are getting them at 72, by age alone you would say they are 
healthier, but that may not be true, because one of the things 
impacts--for instance, Ochsner is a large transplant facility. 
One of the things that impacts us to some extent is how many 
transplants we give, and the older you are generally--I am not 
a physician, so excuse me--you are not eligible for a 
transplant. So some of those younger members, who by age may 
look healthier, are actually possibly receiving much higher-
intensity care services, and because of Ochsner and our 
reputation as a coronary care facility, we do get a larger 
share of transplants than I believe most of my competing plans 
do, and in fact, I do have evidence, because the maid of honor 
in my wedding is a social worker in the transplant area at 
Ochsner, and they all automatically, if someone gets on the 
transplant list, try to get them eligible for Medicare to get 
them on my plan so they do not have to pay high deductibles and 
co-insurance. So the adverse selection does happen to us in 
some instances. Maybe we are a rare bird because of a 
transplant facility, but it does happen, and that is not taking 
into consideration when you hear the comments about, ``Oh, 
well, they are getting healthier populations.''
    Mr. McCrery. Thank you very much. Ms. Thurman?
    Mrs. Thurman. Okay. Actually, I just wanted to bring to 
your attention--because when you had talked to Mr. Richey about 
the hospitals and he said there was a package, I actually have 
submitted the Florida Hospital Association, and if you turn to 
page--let me see if I can find it--on page 4 they have actually 
put down ``action needed.'' And we also wanted to present this, 
particularly from a perspective of a high--and we heard some of 
this earlier from the panel--the high amount of Medicare 
beneficiaries that we have in the State of Florida, which is 
disproportionate to exactly what you had mentioned in coverage 
of spreading that risk out over private paid and other folks 
within a system, so I think you will find that very 
interesting, so I just wanted to let you know that we had 
submitted that or would like to submit that for the record 
along with the testimony from the other folks here today. And I 
just need to make----
    Mr. McCrery. Without objection.
    [The information was not received at the time of printing.]
    Mrs. Thurman. If I can say just one thing on this other--I 
want to tell you that my mother is under home health care right 
now through Medicare, and I have to tell you, it took me a 
while to get some kinks worked out, but in saying that, I think 
you do have some very caring people in your system, and I would 
hate to lose the ability for people to stay in their home, but 
I would like to talk to you about coordination of Medicare home 
health care, as well as with paid private, because I think 
there are some things that we could be doing for families out 
there if we could coordinate times for when they could come in, 
and juggling, and would save some money for families who are 
trying to provide that care, because there is some big overlap 
there, that I think if we could figure out a way to do it, that 
I would certainly like to sit down with somebody and work on 
that, because I have found that to be just so awkward, and my 
schedule is not easy. And I am trying to provide her 24-hour 
care, and it is very costly, and I do believe there are some 
things we could be doing that would offset a little bit of 
that.
    And, Mr. Bedlin, I actually turned to my staff when you 
talked about the homebound. I think that is absolutely crazy. 
Because if I take my mother out--and I can assure you, I cannot 
cut hair, nor would you want me to--but just to even take her 
to go to a place to have her hair cut could potentially put her 
Medicare benefit at home in jeopardy. And I have to tell you, 
for somebody who has gone through what she had gone through, 
and be told that she has to have her daughter cut her hair, and 
she just wants to look nice, you know, for her cousins that are 
coming to visit, and that could jeopardize her, I think we have 
done an awful, awful situation to our seniors who are put into 
that situation, so I tend to agree with you on your issue on 
homebound, and I will look forward to working, and maybe this 
year we will have a debate on these issues and not be told that 
if you talk about it, it will not get in the bill. Thank you.
    Mr. McCrery. Thank you all very much for your patience 
today and your excellent testimony and response to questions, 
and we look forward to working with you to further nurture this 
Medicare, this lovely government Medicare system that we have. 
Thank you. The hearing is adjourned.
    [Whereupon, at 5 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of American Association for Homecare, Alexandria, VA

    The following statement is submitted to the House Ways and 
Means Subcommittee on Health on behalf of the American 
Association for Homecare. The American Association for Homecare 
(AAHomecare) is a new national association resulting from the 
merger of three national home health associations--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. AAHomecare 
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. AAHomecare is pleased 
that the Subcommittee is addressing the dramatic impact of the 
Balanced Budget Act of 1997 (BBA'97) on home health.

HOME CARE IS THE ANSWER

    Homecare is pleased to report that home health care has 
benefited from an explosion of new and emerging technologies. 
These breakthroughs are allowing Americans to receive a vast 
array of complex therapies in the setting that they most 
prefer--their own homes. 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 comfort of his or her own home, a feat 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 
care for people who receive care in the home. None of these 
advances could have been envisioned at Medicare's inception in 
1965.
    Not only is homecare patient-preferred, numerous studies 
\1\ have shown that home care providers are a cost-efficient 
component of the healthcare delivery system. One study 
conducted by the Hudson Institute, 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 unnecessary institutionalizations.
---------------------------------------------------------------------------
    \1\ For recent studies, please see:
---------------------------------------------------------------------------
     Styring, William & Duesterberg, Thomas, The Cost 
Effectiveness of Home Health Care: A Case Study on Indiana's In-Home/
CHOICE Program, (Vol. 1, No. 11), November 1997, (Hudson Institute, 
Indianapolis, IN).
     Mann, Williams C. et al, ``Effectiveness of Assistive 
Technology and Environmental Interventions in Maintaining Independence 
and Reducing Home Care Costs for the Frail Elderly,'' Archives of 
Family Medicine, May/June 1999 (Vol. 8, pp. 210-217).
    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 saving associated with this increased 
reliance on home care was 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. 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.''

ACCESS TO HOME HEALTH HAS BEEN SEVERELY COMPROMISED

    Unfortunately, as the possibilities for home care are 
advancing, access to the Medicare home health benefit has been 
severely compromised. No other health care provider group has 
been as negatively impacted by the BBA'97 as home health 
providers have. The Congressional Budget Office (CBO) 
originally estimated that the BBA'97 would reduce spending for 
the home health benefit by approximately $16.1 billion over 
five years. However, the actual impact of the BBA'97 was much 
more dramatic. CBO recently revised their estimate to a 
reduction of $70 billion over five years, more than four times 
the original estimate. In March 2000, the Congressional Budget 
Office (CBO) announced that home health services had a rate of 
growth of -35%, less than any other health care sector.
    The CBO recently stated that the ``larger-than-anticipated 
reduction in the use of home health services'' was the primary 
reason total Medicare spending fell 1% in fiscal year 1999. 
Likewise, according to the American Hospital Association's Year 
2000 Lewin Study, the BBA '97 has reduced hospital-based home 
health services by 30.5%--the largest reduction of any hospital 
service.
    Unfortunately, these dramatic reductions in reimbursements 
have an inevitable impact on the availability of the home 
health benefit. The George Washington University's Center for 
Health Services Research & Policy has released two studies 
reviewing the impact of BBA'97 on home health patients and 
providers. The studies show that the number of Medicare home 
health patients has declined by 50% from 1994 levels. Patients 
who were most likely to lose access to covered services 
included those suffering from chronic and complex conditions 
(e.g., diabetes, congestive heart failure, multiple sclerosis, 
and wound care patients). Sixty-eight percent of hospital 
discharge planners reported increased difficulty in obtaining 
home health services for Medicare beneficiaries. Fifty-six 
percent of the discharge planners reported increases in the 
number of beneficiaries requiring substitute placements, 
primarily in skilled nursing facilities, in lieu of home health 
services.

STOP FURTHER CUTS TO THE HOME HEALTH BENEFIT

    AAHomecare urges the Subcommittee to stop the decimation of 
the Medicare home health benefit by eliminating the additional 
15% payment cut scheduled to be implemented on October 1, 2001. 
This cut has no basis in public policy and was included in the 
BBA'97 as a scoring mechanism. Clearly, home health has 
contributed its fair share of Medicare cuts and the need for 
the 15% reduction no longer exists. However, the threat of the 
additional 15% reduction continues to exacerbate the access 
problems described above.
    The continued expectation of the 15% cut does not allow 
home care providers to begin to recover from the devastating 
impacts of the BBA'97. In fact, a mere delay will only prolong 
the existing access problems. Home health providers can not 
take the financial risk of accepting sicker, costlier patients 
or making home health services available in rural areas when 
they are planning for an additional cut in funding that is 
already inadequate. Additionally, home health agencies will not 
be able to expend the resources needed to sufficiently prepare 
for PPS while an additional dramatic reduction lurks in the 
future. Many agencies are finding that they can not secure 
loans needed for the transition to PPS because lending 
institutions are leery of the financial viability of home care 
providers. For these reasons, AAHomecare urges this 
Subcommittee to support the full repeal of the scheduled 15% 
cut and further funding for rural agencies and an increase in 
the outlier payment for high-acuity patients. All five national 
home health associations support these priorities.

HOME MEDICAL EQUIPMENT

    Home medical equipment (HME) providers supply medically 
necessary equipment and allied services that enable 
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. Specialized home infusion providers manage 
complex intravenous services such as chemotherapy in the home. 
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.
    The BBA'97 instituted a freeze on the annual inflation 
adjustment for Medicare's durable medical equipment (DME) fee 
schedules. In addition, the BBA'97 cut reimbursement for home 
oxygen therapy by 30%. These cuts have had a dramatic impact on 
a market dominated by small, mom-and-pop providers. AAHomecare 
members report that there has been a dramatic increase in bad 
debt and an unprecedented number of bankruptcies since 1997.
    The larger, national HME provider chains have also been 
reeling from the impacts of the BBA'97. PriceWaterhouseCoopers 
(PWC) recently updated a 1999 survey of nine publicly held HME 
companies. PWC observes that all nine companies were earning a 
positive net income in 1996, and by 1999 two-thirds of these 
companies were losing money, bankrupt or out of business. This 
dramatic reversal occurred during a period where the average US 
corporate profit margin rose by 18%. One national company laid 
off 1,471 out of 6,000 employees in the past 24 months and 
closed 30 branches that served Medicare beneficiaries. During 
this period, the equity value of this company's stock fell by 
nearly $1 billion. Another national HME provider laid off 350 
employees and closed 65 branch locations and its shareholder 
value fell $237 million. This company's stock fell so much the 
company was delisted from the NASDAQ stock exchange.
    At the same time that HME providers have been adjusting to 
the loss of the annual inflation adjustment, costs have been 
skyrocketing. Certainly, when the freeze in payments to HME 
providers was enacted, no one could have foreseen the recent 
dramatic rise in fuel prices. These increased costs 
disproportionately impact the HME industry whose main function 
is the delivery and in-home maintenance/refill of medical 
equipment. In addition, recent increases in labor prices have 
also impacted this staff-intensive health care sector.
    In order to recover from the destabilization caused by 
rapidly increasing costs and declining reimbursements, 
AAHomecare asks you to restore the full cost of living (COLA) 
adjustment for HME providers in fiscal years 2001 and 2002. By 
restoring the COLA, you will enable HME providers to begin to 
rebuild and continue to provide high quality in-home medical 
services.

INHERENTLY REASONABLE?

    AAHomecare remains concerned that the Health Care Financing 
Administration's (HCFA's) implementation of the expanded 
inherent reasonableness (IR) authority granted in the BBA has 
been based on shoddy research, superceded Congressional intent, 
and will ultimately threaten beneficiary access to quality 
medical equipment services. AAHomecare urges this Subcommittee 
to require a few budget-neutral changes to the expedited IR 
authority to make it viable.
    In 1985, HCFA was granted the authority to alter Medicare 
reimbursements for durable medical equipment, prosthetics, 
orthotics and supplies (DMEPOS) through the IR authority. This 
authority allowed HCFA to adjust reimbursements for individual 
items and services if the payments are found to be grossly 
deficient or excessive. A BBA'97 provision (Section 4316) 
granted HCFA a greatly expanded IR authority to adjust DMEPOS 
reimbursements by as much as 15% each year without industry 
consultation, publication in the Federal Register, or public 
comment. HCFA and the Durable Medical Equipment Regional 
Carriers (DMERCs) quickly announced planned IR reductions for a 
number of DMEPOS items. AAHomecare remains concerned about the 
arbitrary nature of these reductions, the lack of sound 
evidence for the reductions, and the apparent violation of the 
15% threshold established in the BBA'97.
    The Balanced Budget Refinement Act of 1999 (BBRA, P.L. 106-
113) contained a provision (Section 223) that required HCFA to: 
``(1) reevaluate the appropriateness of the criteria included 
in the interim regulationa... and (2) take appropriate steps to 
ensure the use of valid and reliable data when exercising the 
authority.'' In addition, the report language states that the 
IR authority should ``be administered judiciously and applied 
only after public concerns and suggestions about proposed 
administrative criteria have been openly addressed.''
    A recent General Accounting Office GAO report (GAO/HEHS-00-
79) has described the data collections techniques used by the 
DMERCs to support their proposed reductions as ``deficient,'' 
``inconsistent'' and ``inappropriate.'' In fact, the GAO 
confirms the industry contention that the DMERCs failed to 
determine what type of enteral formula is covered by the 
Medicare Program prior to announcing planned cuts based on 
faulty data. Not only did the carriers collect data on the 
wrong items, they failed to use a standard survey technique. 
The GAO dubbed the data collection efforts ``judgmental'' and 
``less rigorous,'' and listed a number of deficiencies in the 
survey process. For instance, the GAO states that the DMERCs:
     ``did not choose their sample in a consistent way, 
nor did they set sufficient criteria so that we [the GAO] could 
be assured that the locations sampled represented retail prices 
nationally.'' (p.21)
     ``did not follow a consistent methodology, leading 
to differences in how they collected an analyzed retail 
prices...'' (p.21)
     ``did not establish criteria to define populous 
state, less populous state, urban area, and rural area, and 
consequently each DMERC used different criteria in selecting 
locations.'' (p.22)
     ``did not develop a consistent set of survey 
questions to use when they requested prices from retail 
stores.'' (p.23)
     did not ``fully consider the geographic 
distribution of Medicare beneficiaries.'' (p.22)
     ``The DMERCs did not consider relative prices in 
the localities from which they sampled.'' (p.22)
    Despite these inadequacies, HCFA officials have indicated 
that they plan to move forward with IR reductions for a number 
of items of DMEPOS, regardless of the above mentioned problems 
with their data. AAHomecare urges Congress to insist that the 
Medicare Program go back to the drawing board. We hope that 
your Committee will again insist that reimbursement adjustments 
be based on consistent, reliable data.
    In addition, AAHomecare urges Congress to restrain HCFA 
from superceding the 15% authority granted in the BBA'97. As 
you are aware, the BBA outlined specific notice and comment 
guidelines for Medicare to follow when enacting payment 
adjustments over 15%. AAHomecare suggests that by including the 
legislative language addressing the process for implementing 
adjustments greater than 15%, Congress was expressing its 
intent for HCFA to follow this process. We are disappointed 
that HCFA has decided not to meet this requirement and ask this 
Subcommittee to reiterate its original intent.

MEDICAL SUPPLIES IN PPS

    AAHomecare is also concerned about the bundling of nearly 
200 supply codes into the home health agency (HHA) prospective 
payment system (PPS) base rate. AAHomecare maintains that the 
bundling of non-routine medical supplies into the HHA PPS rate 
and consolidated billing for medical supplies ignore the 
inherent complexities of the home health market and threaten 
the continuity of needed medical care. AAHomecare urges 
Congress to remove non-routine medical supplies from the home 
health PPS rates and to eliminate consolidated billing for 
these supplies. Importantly, this adjustment to the PPS would 
be completely budget neutral.
    To illustrate the problem with the supply issue, consider 
the case of a Medicare beneficiary with an ostomy for a urinary 
bypass who is receiving HHA services for a broken hip. The HHA 
would provide therapy and aide services for the hip while the 
beneficiary is self-sufficient in his/her ostomy management. 
The HHA plan of care may not address the beneficiary's need for 
supplies such as drainage bags, nighttime drainage bottles, 
tubing, adhesives and cleaners. In addition, the HHA 
professionals meeting the acute care needs of the beneficiary 
may not provide any services related to ostomy care. In this 
case, the chronic condition would be incidental to the HHA 
services required. However, bundling and consolidated billing 
would require the company providing the ostomy supplies to 
cease serving the beneficiary and make the HHA responsible for 
the supply function. This change in medical supply providers 
may be unnecessarily burdensome for the beneficiary--especially 
if the supplies offered by the HHA are substantially different 
or incompatible with the equipment and supplies provided by the 
existing supplier.
    In addition, the bundling of supplies into the PPS rate 
threatens to cause a great deal of confusion and a dramatic 
rise in billing errors. Currently, there is no way for a HME 
supplier to be notified when a beneficiary with chronic supply 
needs enters the plan of care of a HHA. However, if 
consolidated billing and bundling go into effect, any HME 
provider who submits a claim for supplies with a date of 
service coinciding with a HHA plan of care would violate the 
False Claims Act (FCA). An HME provider who runs afoul of the 
FCA is liable for treble damages and up to $10,000 in fines per 
improperly billed claim. Understandably, the inherent risks 
associated with bundling and consolidated billing may cause HME 
providers to become reluctant to serve beneficiaries with 
chronic supply needs.

CONCLUSION

    Home health care continues to evolve to meet the 
increasingly complex needs of today's Medicare beneficiaries. 
By capitalizing on technological advances, home care providers 
have the potential to conduct increasingly complex medical and 
therapeutic regimens in the comfort of beneficiaries' own 
homes. Not only will these advances serve the needs and 
preferences of the Medicare population; they will reduce 
Medicare expenditures by avoiding costly institutionalizations. 
We urge this Subcommittee to recognize the many benefits of 
home care by strengthening Medicare's commitment to home 
health.
    AAHomecare asks that you acknowledge the contribution that 
home health agencies have made to Medicare cost containment by 
permanently eliminating the pending 15% cut in reimbursement. 
Further, you should restore the annual cost of living 
adjustment for home medical equipment providers. In addition, 
we urge you to continue the needed oversight of the 
implementation of the IR authority granted in the BBA'97. You 
should insist that HCFA and its carriers implement a sound 
costing methodology that uses statistically reliable data. 
Finally, in order to ensure a continuity of patient care, avoid 
unnecessary billing confusion, and ease the transition to a PPS 
system, we urge this Committee to remove the requirement that 
non-routine medical supplies be included in the PPS rate and 
eliminate consolidated billing for these supplies.
    Again, thank you for the opportunity to provide this 
statement. Please feel free to contact Erin H. McKeon with any 
questions or comments regarding these issues.
      

                                


Statement of American Association of Blood Banks, America's Blood 
Centers, and the American Red Cross

Technological Advances Make Today's Blood Supply Safer than 
Ever

    Recognized by Congress, the American Public, the Federal 
government and the blood banking community, patient access to 
the safest possible blood supply is a national public health 
priority. The blood banking and transfusion medicine 
communities work diligently to assure that safety improvements 
are implemented in a timely manner. Two recent initiatives have 
been introduced to increase the safety of the blood supply. 
However, these measures significantly increase the cost of 
blood products and services for both the hospital and the blood 
bank. They are:
     New infectious disease testing: Nucleic acid 
(gene) amplification testing (NAT) allows for early detection 
of infectious diseases (such as HIV and hepatitis C (HCV)) in 
blood by detecting the genetic material of viruses. More than 
90 percent of all blood components in the United States are 
currently tested by NAT under an FDA-approved investigational 
new drug protocol (IND). In the first 15 months of 
implementation, NAT testing has detected and intercepted four 
HIV-positive donations and more than 57 HCV-positive donations. 
This means that roughly 150 potential HIV and HCV infections 
were prevented as a result of NAT.
     Leukoreduction technologies: Several studies have 
shown that removing the leukocytes or white cells from blood 
components can reduce the frequency and severity of 
complications from blood therapy. One process, known as 
leukoreduction, has the potential to shorten the duration of a 
hospital stay for patients who receive blood. FDA has indicated 
that it will require universal leukoreduction of all blood 
components in the near future.
    These important safety improvements are costly. Universal 
leukoreduction and NAT are estimated to add over 40 percent to 
the cost of blood. In the future, additional life-saving 
technologies, such as viral inactivation, are likely to add to 
the cost of transfusion therapies.

Not-for-profit Blood Centers and Transfusion Services Cannot 
Absorb Added Costs

    Not-for-profit blood collection centers operate in the same 
managed care environment as our hospital customers. As a 
result, blood centers must charge hospitals for the blood 
products and services we provide to recover the costs 
associated with collecting, testing, processing, storing and 
distributing blood for patients in need. Hospitals, in turn, 
must get timely reimbursement for these life-saving and life-
enhancing products and services. Currently, there is a lag of 
up to three years between the time that an FDA-recommended 
procedure is implemented and the time the hospital is 
adequately reimbursed.
    Legislation to Provide Fair Reimbursement Needed to Ensure 
Patient Access to Highest Quality Blood Therapies
    Fair and adequate Medicare reimbursement is necessary to 
ensure patient access to the safest possible blood. 
Unfortunately, the current system by which the Health Care 
Financing Administration (HCFA) determines inpatient 
reimbursement rates does not account for these safety 
improvements in a timely manner.
    In 1999, Congress and the Administration acknowledged the 
importance of supporting blood safety advancements through fair 
Medicare reimbursement in the outpatient setting. However, the 
vast majority of blood is supplied in the inpatient setting. 
Thus, it is critical that inpatient reimbursement policies also 
be adjusted to reflect increases in the cost of these products 
and services.
    LEGISLATIVE PROPOSAL: Recognizing the importance of patient 
access to a safe and adequate blood supply, Congress should 
enact legislation that assures fair Medicare payments for 
inpatient blood products and services. The American Association 
of Blood Banks, America's Blood Centers and the American Red 
Cross strongly urge Congress to adopt legislation that:
     Increases the Medicare hospital inpatient ``market 
basket'' by 0.45 percent to cover the added costs associated 
with recent blood safety enhancements that are FDA recommended 
and/or adopted as the standard of care. This increase should be 
provided on an annual basis until a longer-term remedy is 
implemented (see below); and
     Directs HCFA to develop a specific mechanism in 
the hospital market basket to account for changes in costs for 
blood and transfusion therapy-related products and services 
from year-to-year. HCFA should be directed to develop this 
mechanism within one year of the legislation's enactment.
    The American Association of Blood Banks, America's Blood 
Centers, the American Red Cross and the American Hospital 
Association support this legislative proposal, in addition to 
separate legislation (S. 2018 and H.R. 3580) to restore 
excessive Medicare inpatient payment reductions, as a means of 
ensuring hospitals have adequate resources to cover blood 
safety enhancements. Together, the market basket increases 
called for in these two legislative proposals are notably less 
than the market basket adjustments recently recommended by the 
Medicare Payment Advisory Commission (MedPAC). These increases 
are necessary to restore adequate payment to hospitals, which, 
in turn, will ensure patient access to state-of-the-art blood 
products and services and the safest possible blood supply.
      

                                


Statement of the American Association of Orthopaedic Surgeons (AAOS)

    The American Association of Orthopaedic Surgeons (AAOS), 
representing 16,000 Board certified orthopaedic surgeons, 
appreciates the Subcommittee on Health of the Committee on Ways 
and Means for holding hearings to address further refinements 
of the Medicare program. We would like to offer our perspective 
on select issues related to implementation of the many changes 
under the Balanced Budget Act of 1997 (BBA) and make specific 
recommendations for consideration as amendments.

Practice Expense Adjustments

    The Health Care Finance Administration's (HCFA) failure to 
comply with BBA mandates pertaining to the ``practice expense'' 
component of the Medicare Physician Fee Schedule has seriously 
impacted patient care. The current methodology and data does 
not accurately reflect physicians' actual practice costs. As a 
result, reimbursement rates are seriously distorted and 
fundamentally unfair.
    In 1994 Congress directed HCFA to change the way Medicare 
pays for physicians' practice expenses. Concerns with initial 
proposals presented by HCFA on how to proceed prompted Congress 
to intervene and include detailed instructions for developing 
practice expense relative value units (PE RVUs) in the BBA. Now 
at the halfway point, the new system is to be fully implemented 
in 2002.

Practice Expense Recommendations

    HCFA has acknowledged the difficulty in determining actual 
physician expenses associated with providing services to 
Medicare patients. Budgetary constraints have only compounded 
this problem. The AAOS believes that the budget surplus 
presents an opportunity to ensure mandatory obligations to 
increase reimbursement for primary care office services while 
ensuring appropriate payments for specialists. We support the 
Practice Expense Coalition's request to:
     Halt the transition at the current blend of 50% 
1998 PE RVU and 50% projected 2002 PE RVUs practice expense 
values; and
     Allow scheduled increases for certain office and 
consultation services to proceed immediately to their projected 
2002 amounts.

Fraud and Abuse

    Also among the extensive changes to the Medicare program in 
the BBA were efforts to reduce waste, fraud, and abuse. The 
AAOS shares the Federal government's concern about intentional 
acts to defraud the Medicare program. There is no question that 
every reasonable effort needs to be made to eliminate true 
waste, fraud and abuse from the Medicare program. However, 
fraud and abuse regulations should not be so complex and so 
difficult to follow that the vast majority of honest physicians 
wind-up making unintentional errors.
    More importantly, these regulations are threatening access 
to quality health care services for Medicare beneficiaries 
because physicians have less time to spend with patients. Time 
once spent treating patients is now being spent completing 
mandatory documentation and billing requirements, as well as 
other regulatory obligations. Not only are physicians spending 
more time away from treating patients, but also HCFA's 
burdensome and complex requirements are making it difficult and 
sometimes impossible for doctors to accept new Medicare 
patients. Moreover, physicians are spending more time second-
guessing the regulators and the enforcers about whether they 
should be providing a particular service, instead of-and 
without hesitation-doing what is in the best interest of the 
patient.
    The biggest problem in this area of Federal regulation is 
that there is no ``bright line'' as to what constitutes illegal 
or improper conduct. The presumption running through these 
regulations is that physicians are violating the law and are 
guilty of defrauding the government, unless they can document 
otherwise. We need rules and regulations that are 
understandable, fair and, most importantly, provide clear 
guidance about what constitutes proper and improper conduct. 
Instead, we find the current environment to be confusing and 
ambiguous-where law-abiding doctors are placed in an 
increasingly hostile and adversarial relationship with the 
government.
    In an effort to ensure that the regulatory requirements 
placed on physicians do not adversely affect access to quality 
patient care, the AAOS supports remedies that are consistent, 
predictable and clearly understood by physicians. The AAOS has 
identified a number of specific areas where Congressional 
changes are necessary.

Complex and Contradictory Regulations and Increased 
Documentation Requirements

    Many rules promulgated by HCFA are so confusing that they 
convey no clear indication of how the agency will deal with a 
particular practice, leading physicians to be unsure about 
their duties and liabilities. We need better guidance to 
negotiate the complex maze of regulatory requirements.
    For example, orthopaedic surgeons have been perplexed about 
the in-office ancillary service provisions of the physician 
self-referral law commonly known as ``Stark II'' (Section 1877 
of the Social Security Act) and HCFA's proposed rule requiring 
suppliers of durable medical equipment (DME) to obtain a surety 
bond. The proposed rule to ``Stark II'' excludes DME from the 
in-office ancillary service exemption, thus prohibiting the 
disbursement of DME in-office. Yet, under the surety bond 
proposed rule, HCFA states that physicians will not have to 
meet the DME surety bond requirement--if they are providing 
these items incident to patient care. It seems that HCFA is 
recognizing that DME is distributed by physicians in-office, 
even though the proposed rule to ``Stark II'' seems to prohibit 
it.
    Thus, it appears to the AAOS that HCFA has two proposed 
rules that have contradictory statements. Are physicians in the 
various practice arrangements allowed to disburse DME incident 
to patient care without violating the ``Stark II?'' Do 
physicians need a surety bond to disburse these items in 
office? If they have a surety bond, and are designated as 
suppliers by HCFA, then how is ``Stark II'' applicable?
    Since DME is such an integral, customary, and appropriate 
part of patient care, commonly provided to patients as an in-
office ancillary service, the blanket prohibition in ``Stark 
II'' makes little sense. The AAOS strongly urges the 
Subcommittee to revisit this issue, so physicians have clear 
guidance about the disbursement of DME.
    In addition to this DME issue, the AAOS is greatly 
concerned about the enormous complexity of the proposed rule 
related to the ``Stark II'' physician ownership and self-
referral statute. The AAOS maintains that HCFA's proposed rule 
issued in January 1998 does not provide clear, unambiguous 
guidance for compliance. Instead, it has added even more 
confusion to what activities are permissible with regard to the 
ban on physician self-referral. While the AAOS is hopeful that 
the final rule for ``Stark II'' will address many of these 
concerns, Congressional oversight is necessary and legislative 
remedies may be appropriate to achieve Congress' intent and to 
provide clear guidance to physicians.
    The AAOS also is concerned with HCFA's increased 
documentation requirements for physicians when they perform and 
bill for evaluation and management (E&M) services. There seems 
to be a presumption that physicians who make errors in coding 
these services on Medicare claim forms are guilty of defrauding 
the system-unless they can prove otherwise. Even though HCFA 
has attempted to ease these documentation requirements, 
physicians still can run afoul of the rules and regulations.
    For example, when coding modifier -25 is used with CPT 
codes for E&M services, they may trigger an audit even though 
their usage is perfectly legitimate, saves on paperwork, and 
reduces the administrative burden for both physicians and 
claims reviewers. Modifier -25 is used in billing when 
additional services are provided to beneficiaries beyond the 
services described by E&M codes. This modifier was intended to 
reduce the documentation requirements imposed on physicians. 
However, because their usage may trigger an audit, physicians 
are forced to submit claims for each additional service 
supported by separate documentation for each service in order 
to avoid triggering audits.
    In sum, complex and contradictory regulations and 
documentation requirements present the physician with a maze of 
nearly incomprehensible rules for which non-compliance may be 
inevitable even for those with the best of intentions of filing 
appropriate claims for services provided under the Medicare 
program.

Aggressive and Overreaching Authority by Federal Agencies

    We believe HCFA and the Department of Health and Human 
Services has overstepped their authority in their efforts to 
eliminate Medicare fraud and abuse by using aggressive and 
overzealous enforcement techniques against physicians without 
sufficient evidence of intentional wrongdoing.
    For example, the Anti-Kickback Statute was, in theory, 
intended to promote the integrity of the health care system. 
While it has achieved this goal in practice, the statute also 
has stifled innovative business practices that could have saved 
the government money. The 1972 statute was originally enacted 
to address bribes and kickback arrangements in the health care 
arena. Congress broadened its scope in 1977 to address ``any 
remuneration'' giving the Office of Inspector General of the 
Department of Health and Human Services (OIG) great latitude in 
interpreting its mandate and applying this law to business 
arrangements far beyond kickback and bribes. While 
Congressional intent was to prevent unscrupulous behavior, the 
statute has allowed the OIG to develop a confusing patchwork of 
complex regulations and advisory opinions concerning joint 
ventures, leases, discounted services and personal service 
contracts that significantly limit innovation in the integrated 
health care delivery marketplace.
    HCFA also has taken broad latitude in interpreting its 
authority by implementing initiatives such as the ``Who Pays? 
You Pay.'' campaign. This initiative attempts to enlist 
Medicare beneficiaries to inform on their physicians if they 
suspect their Medicare bill is fraudulent. Unfortunately, it 
has the serious potential to damage the physician/patient 
relationship by creating an atmosphere of distrust between the 
doctor and patient when an open and honest relationship is 
essential to effective care and treatment.
    The OIG also recently unveiled its ``Compliance Program 
Guidance for Individual and Small Group Physician Practices.'' 
This compliance program significantly raises the stakes for 
hardworking and honest physicians who currently make every 
attempt to comply with the law. Not only is the creation of a 
plan extremely labor intensive and expensive, it has the 
potential to shift the burden of proof to the physician.
    The OIG has stated that it only prosecutes offenses that 
are committed with actual knowledge of the falsity of a claim, 
reckless disregard or deliberate ignorance of the truth or 
falsity of a claim. However, by having an effective plan in 
place, virtually any innocent billing error could trigger OIG 
action or prosecution since a compliance plan in place will 
indicate that the physician knew or should have known that a 
certain activity violated the law. While OIG officials may 
claim that the presence of an effective compliance plan will be 
taken into consideration if punitive action is necessary due to 
alleged billing errors, evidence of a compliance plan could be 
interpreted to transform the knowingly and willfully standards 
of law into per se violations.

Limited Due Process

    Through pre-payment reviews and post-payment audits 
conducted by carriers, HCFA engages in audits of physicians on 
a random basis without probable cause. Even while HCFA 
acknowledges that much of what is uncovered in these reviews 
and audits are simple billing mistakes, lack of documentation 
or disagreement on treatment procedures, claims submission has 
become legally treacherous for physicians. Fear of triggering 
an audit has actually led to ``downcoding''-a practice of 
underbilling Medicare for services provided to Medicare 
beneficiaries-in order to reduce the chance of triggering an 
audit.
    Under the current scheme, physicians are exposed to purely 
random audits without probable cause and without knowing of the 
criteria used by HCFA or its carriers to make its 
determinations. And once an audit is triggered, physicians are 
subject to recoupment of alleged overpayment, penalties and 
interest through the use of extrapolation techniques. The only 
remedy for physicians once they receive an overpayment notice 
is to open their practice to a statistically valid random 
sampling of claims to contest HCFA's findings, which, by HCFA's 
own admission, is very disruptive to a health care practice. 
Physicians would like the government to define the rules, 
parameters and standards that outline the scope of these audits 
as well as clearly identify the criteria used to trigger 
audits.

Fraud and Abuse Recommendation

    The vast majority of physicians are honest and dedicated 
individuals who make every attempt to comply with Medicare's 
complex requirements. Their primary goal is to provide the 
highest quality care to their patients. Physicians understand 
the need for regulations in the health care system. However, 
the rules that they are being asked to comply with and support 
should be presented in a clear and precise manner so that they 
can practice their profession without fear of punishment 
because they could not understand what was expected of them.
    The AAOS is very pleased that the Subcommittee is taking an 
active role to ensure the Medicare program functions 
efficiently for all stakeholders. In considering further 
legislative changes to the Medicare program, the AAOS has 
several recommendations:
     Require HCFA to simplify and clarify regulations 
related to the Medicare program so that they are less 
burdensome and more easily understood by physicians 
particularly with regard to the use of DME as an in-office 
ancillary service;
     Recognize the costs incurred by physicians to 
comply with the numerous Medicare regulations;
     Establish adequate due process protections and a 
threshold requirement of probable cause when investigating 
health care professionals providing services under the Medicare 
program;
     Develop mechanisms to hold HCFA and other 
government agencies accountable for oversight and review 
activities;
     Delay when a law goes into effect, as well as all 
enforcement activities, until final regulations are issued;
     Eliminate the prohibition of administrative or 
judicial review of Medicare payment and review methodology; 
and,
     Eliminate the ``scoring'' of budget savings as a 
result of fraud and abuse activities. As long as the pursuit of 
fraud is viewed as a ``bounty'' or revenue raising activity, 
cost-containment measure, or a way to expand program benefits, 
overzealous investigations of physician coding and billing 
activities will continue.
    Again, we appreciate the opportunity to share with the 
Subcommittee our views concerning payment and fraud and abuse 
provisions of the BBA, and we look forward to working with you 
to ensure quality patient care under the Medicare program.

                                


Statement of Edward A. Eckenhof, 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, 
subject to a payment ceiling (known as the ``TEFRA limit'').
    Over time, this system developed a number of negative 
incentives, which led to the industry to advocate the 
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 a2% 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 HCRA has not yet 
promulgated the rehabilitation PPS rulemaking, this timeline is 
now highly questionable. These significantly delays in the 
development of the PPS system render it unlikely that 
facilities will begin the transitions 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 has 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 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 not longer any reason for Congress to 
require this additional reduction in rehabilitation PPS 
reimbursement, particularly when one considers the additional 
hardship that it will reduce.
    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 as was further compounded for facilities that has 
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 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 along. If capital 
and bonus incentive payments are not stored 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 an done-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 impatient 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 not 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.
    Whihle 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 the patients' continuing access to quality 
rehabilitation services is currently at risk. The confluences 
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 
rehabilitations 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 hospital 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 or 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.
      

                                


Statement on Association of periOperative Registered Nurses, Denver, CO

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 William M. Thomas 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. (SeeSections 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 
Thomas 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, prsuasively 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 that includes preoperative, intraoperative, and 
postoperative patient care;
    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 BBA Medicare refinements. Please contact our 
Washington Counsel, Karen S. Sealander of McDermott, Will & 
Emery, at 202/756-8024 at any time with questions.
    [An attachment is being retained in the Committee files.]
      

                                


Statement of Charles F. Pierce, Jr., 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-hospsital 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.
            Thank you.
                                             Charles F. Pierce, Jr.
    [An attachment is being retained in the Committee files.]
      

                                


Statement of Honorables Bob Franks, Rodney Frelinghuysen, Marge 
Roukema, Frank LoBiondo, Jim Saxton, and Chris Smith

    Mr. Chairman, thank you for providing us with an 
opportunity to describe the harsh impact of the Balanced Budget 
Act on the hospitals in our state and to suggest legislative 
remedies.
    New Jersey hospitals comprise an industry that generates 
more than $10 billion in yearly economic activity for the 
Garden State. Hospitals employ more than 150,000 individuals 
and return financial successes back to the community through 
such benefits as enhanced medical facilities, equipment, 
outreach programs, clinics, jobs and purchasing power. Monies 
are returned--not to Wall Street investors--but to the very 
heart of where care is delivered, the community.
    The Balanced Budget Act of 1997 (BBA) made the most 
sweeping changes in the Medicare program since its inception in 
1965. Realizing its impact on the economy, hospitals supported 
balancing our nation's federal budget. However, the Medicare 
changes contained in the BBA, payment reductions and program 
requirements went beyond initial intent. The fiscal assumptions 
used by the Congressional Budget Office (CBO) underestimated 
the financial impact of the reductions even in the first year.
    New estimates show that hospitals are slated for at least 
$76.7 billion in reductions compared to the expected $44 
billion when the law was enacted.
    The Balanced Budget Refinement Act of 1999 (BBRA) restored 
$17 billion of the estimated five year Medicare reductions, of 
which an estimated $123 million benefits hospitals in our 
state. However, the BBRA, with its significant slant toward 
rural areas, provided less than 10 percent of the total BBA 
reductions. In New Jersey, the BBRA represents an increase of 
just six percent over the original BBA cuts.
    Looking at the financial health of hospitals, one must 
examine hospitals' entire book of business. In New Jersey, 
hospitals are seeing increasing pharmaceutical and technology 
costs, increasing personnel costs, a nursing shortage, a rising 
number of uninsured and managed care payment delays and 
denials.
    With that said, our hospitals, are in their worst financial 
shape in decades. More than 60 percent of New Jersey hospitals 
are experiencing a loss on operations. On average, total 
margins or profitability is a negative 1.6 percent, and 
Medicare margins remain below the national average. Further, 
the most severe BBA reductions come in the remaining two years 
of the five-year plan, with 53 percent of the reductions yet to 
come. More must be done to address this unhealthy trend if New 
Jerseyans are to continue to have access to high quality 
healthcare services provided by hospitals, health systems and 
post acute care providers.
    MedPAC has also come to the same conclusion. In its report 
to Congress last month, MedPAC stated ``Hospitals' financial 
status has deteriorated significantly over the past two 
years.'' The report goes on to recommend increasing hospital 
inpatient payments between 3.5 and 4.0 percent.
    It has become apparent that the financial problems facing 
New Jersey hospitals are rooted in different areas and 
therefore require varied solutions. Our hospitals are working 
hard to do their part by implementing changes that will help 
them survive. Here are some of the things our hospitals have 
pursued during this crisis:
     To become more efficient, hospitals have decreased 
their Medicare length of stay from 11.1 days in 1993 to 7.2 
days in 1999, a reduction of 35 percent. The national Medicare 
length of stay has come down 21 percent.
     Through attrition and downsizing, hospitals have 
reduced staffing by nearly 1,800 employees in the last year.
     The number of New Jersey facilities has decreased 
by 11 percent. Since 1996, four hospitals have closed and 
another five facilities are in the process of closing.
     Due to these closures, hospitals are on target to 
reduce 2,371 beds. This directly addresses concerns of 
overbedding.
     Hospitals have reduced the average cost to treat 
Medicare patients in the hospital by $1,000 over the last 6 
years.
     Hospitals are educating caregivers on how to 
improve documentation skills to decrease the number of HMO 
claim denials.
     Hospitals are utilizing electronic filing to 
reduce mistakes and produce quicker payments. Cleaner claims 
means more efficiently processed payments.
    Even with these efforts by our hospitals, we believe there 
is still a federal responsibility to ease the pain from the 
overreaching BBA cuts. Be assured, we're proud of the first 
step Congress took last year to restore funding for hospitals 
in the Medicare, Medicaid and SCHIP Balanced Budget Restoration 
Act of 1999 (BBRA). The relief for outpatient prospective 
payment was by far the most helpful of the provisions included 
in this legislation. While New Jersey hospitals stood to lose 
$101 million in outpatient reductions, the refinement bill 
restored $71 million.
    Unfortunately, this relief does not go far enough. The 
numbers speak for themselves. In 1997, the hospitals in our 
state were asked to shoulder $1.8 billion in Medicare 
reductions over five years. Last year, Congress restored $100 
million to New Jersey hospitals over five years. On average, 
that's a yearly amount of $240,000 per hospital--not enough to 
even cover most hospitals' payroll for three months. In 
addition, the Congressional Budget Office (CBO) has 
acknowledged that the reductions have gone farther than 
economists predicted. Some are estimating that the reductions 
to hospitals nationally are actually closer to $200 billion 
over five years--instead of $116 billion.
    As Congress once again begins deliberations on restoring 
funds to Medicare providers, there are some specific steps that 
we believe Congress can take to help stabilize New Jersey 
hospitals:

Marketbasket Update

    One of the largest Medicare reductions in the BBA comes 
from reducing the update for inpatient care. HCFA has 
historically given hospitals an adjustment for the annual 
increase in the costs of goods and services. The BBA reduced 
this nationally by $5.3 billion. The BBA of 1997 instituted 
below-inflation updates, while hospitals continue to face, for 
example, rising pharmaceutical prices for new drugs, increased 
costs for patient record privacy and security requirements and 
a nursing shortage that requires extra training and recruitment 
resources. Restoring a full marketbasket adjustment for 
hospitals would help blunt the financial pain of the BBA.

Transfers

    The BBA expanded the definition of transfer cases to 
include patients who are sent from an acute care hospital to 
any post-acute setting: rehabilitation, psychiatric or skilled 
nursing facility or home health agency. Previously, only 
patients sent between acute care hospitals were defined as 
transfers. Now hospitals that transfer patients to a post-acute 
facility receive a lower Medicare reimbursement if the 
inpatient stay is shorter than the average length of stay.
    The expansion of the transfer definition to include post-
acute stays is particularly punitive in New Jersey. More than 
24 percent of New Jersey's seniors seek additional care after a 
hospital stay. Furthermore, in 1992, New Jersey hospitals' 
average length of stay for a Medicare beneficiary was 11.2 days 
but has now decreased to 7.2 days in 1999.
    The expansion of the transfer definition directly 
contradicts the basic premise of the prospective payment system 
(PPS) by eliminating the incentive to treat patients 
efficiently in the most cost-efficient setting.
    While the Department of Health and Human Services has 
agreed not to expand the number of cases subjected to the 
transfer provision until 2002, this misdirected policy should 
be repealed in its entirety. This provision runs counter to the 
incentives of the Medicare payment system by unfairly 
penalizing efficient providers. Furthermore, with post-acute 
care entities also paid on a PPS, financial benefits of 
transfer cases are eliminated.

Relaxation of Geographic Reclassifications

    The Health Care Financing Administration (HCFA) allows for 
counties to reclassify into neighboring metropolitan areas if 
hospitals meet a strict set of criteria and petition annually. 
Fewer counties have pursued this ability to reclassify because 
the criterion is no longer as relevant. In FY 1995, 23 counties 
reclassified, however last year, just five counties nationally 
were granted a county-wide reclassification. HCFA's criteria 
uses a ``rate proxy'' to determine comparable costs--mainly 
because when reclassification reviews were developed in 1989 
immediate cost comparison information was not readily 
available. Today, with the increased use of computers and 
electronic filing, cost information could easily be used. 
Rather than an outdated rate proxy, we urge an actual cost 
comparison be incorporated into the county-wide 
reclassification criteria.
    Mr. Chairman, as you know, the lastest CBO reports indicate 
that budget surpluses are likely to exceed $4 trillion over the 
next decade. Congress realized these extraordinary savings, in 
part, from reducing Medicare payments to hospitals nationwide. 
The provisions mentioned above, are just some examples of 
relief we would support in a second Balanced Budget Refinement 
Act.
    New Jersey is the densest state in the union and we are 
considered to be a wholly urban state. However, we have many 
areas that are far from urban. But, without federal rural 
designations, we were unable to take advantage of much of last 
year's relief that was intended to help rural areas.
    Moreover, our location impacts our competitiveness. Located 
as we are between two of the highest wage markets in the 
country, government reimbursement policy impacts our ability to 
attract the highly skilled and professional staff that our 
hospitals require.
    Mr. Chairman, as you craft legislation to ease the pain of 
Medicare providers across the nation, we hope that you will 
take into consideration the unique challenges we face in New 
Jersey in providing health care to our communities.
    We look forward to working with you in the upcoming months.
            Sincerely,

                                

Statement of Louisiana Association for Behavioral Healthcare, Crowley, 
LA

    Dear Healthcare Subcommittee Members,
    In several meetings between the Louisiana Association For 
Behavioral Healthcare (LABH) and HCFA over the past 12-18 
months, HCFA has assured Community Mental Health Centers 
(CMHC's) that OPPS would not put CMHC's out of business. They 
assured this association that transitional corridors and 
outlier payments would be provided to CMHC's to lessen the blow 
of OPPS. This statement was echoed by intermediaries in the 
training provided on implementation of OPPS. Over the past 
month, HCFA has changed their position and are not providing 
any relief to Community Mental Health Centers. In fact, 
multiple facilities have closed and are closing due to the 
severity of the impact of OPPS.
    Compounding the payment problems is the lack of clear 
guidelines for providers on issues related to service 
provision. For example, in Louisiana, Fiscal Intermediaries 
have yet to provide a Local Medical Review Policy (LMRP), which 
addressed the changes in the Final Rule. This association was 
assured by HCFA that a LMRP would be published prior to the 
implementation of OPPS.
    To expand on the problems mentioned above we are providing 
you with the following comments.
    1. HCFA fails to follow Federal Parity Legislation in the 
implementation of OPPS by allowing medical providers 
Transitional Corridor Payments and Outlier Payments and 
precluding CMHC's from qualifying for any additional payments. 
A default rate has been given to CMHC's which calculates to 
$0.00 in Transitional Corridor and Outlier Payments.
    2. Rural hospitals have been provided with relief from OPPS 
but rural CMHC's have been excluded.
    3. In Secretary Shalala's meeting with Congressman Nick 
Lampson on July 11, 2000, she states that the cost for PHP 
services is actually $350.00 per day based on 1996 hospital 
data, yet the reimbursement under OPPS is $202.00 per day in 
2000.
    4. HCFA publicly admitted on several occasions that no data 
from CMHC's was utilized in determining the daily rate.
    5. No impact studies were conducted regarding the impact of 
OPPS on access to care for the mentally ill. To date, Louisiana 
has experienced closures in excess of 50% on Partial 
Hospitalization Programs due to implementation of OPPS. This 
leaves entire parishes in this state with no access to 
Psychiatric Services for Medicare beneficiaries.
    6. The OIG Report on Community Mental Health Centers is 
inaccurate, as evidenced by statements in the GAO Report. (See 
attached statement of facts not included in the OIG Report.)
    In closing, we respectfully request immediate relief from 
the devastating and discriminatory effects of the 
implementation of OPPS.
    We have exhaustively worked to rectify these problems with 
HCFA over the past 18 months to no avail.
    The beneficiaries, already burdened with chronic mental 
illness, are the least able to advocate for themselves. The 
lack of access to mental health treatment is a real and 
immediate impact of OPPS.
    Please help restore this desperately needed benefit.
            Respectfully,
                                                               LABH

    Facts not accounted for in the OIG report:
    1. The five states mentioned in the report have the 
following three commonalties relevant to the OIG report: (from 
the December 1998 AABH newsletter)
     They have the highest geriatric populations;
     They have proportionately higher immigrant 
populations-many of whom qualify for Federal Medicare Health 
Insurance;
     there states have aggressively pushed to transfer 
medical insurance costs for its disabled populations, heavily 
represented by individuals with chronic mental illnesses from 
their Medicaid/Medical Assistance funds to the Federal Medicare 
System.
    2. The sharp rise in the utilization of outpatient mental 
health services funded by the Medicare program sharply rose at 
the same time Medicare capped the benefit for inpatient 
psychiatric hospitalization. This has resulted in a decrease in 
the length of stay of inpatient psychiatric hospitalization and 
increased utilization of partial hospitalization program. In 
1984 there were 130,411 state and county mental health 
hospitals throughout the country. By 1994 that number had 
dropped to 79,294. During that same time the number of total 
available inpatient psychiatric beds throughout the country 
dropped from 112.9 beds per 100,000 population to 97.5 beds per 
100,000. (Mental Health United States, DHHS 1996)
    3. The cost for services has risen as the acuity of 
patients has risen. As in all fields of Medicine, the sicker 
the patient, the more labor intensive the treatment. With 
sicker and sicker patients being treated on an outpatient 
basis, the need for increased care has risen. In 1975 48.5% of 
the total mental health expenditures in the United States went 
to State and County mental hospitals. By 1994 that number had 
dropped to 23.6%. During that same time, the expenditures for 
freestanding outpatient clinics, multiserve mental health 
organizations, other residential programs and freestanding day 
programs rose form 1.8% of the annual mental health 
expenditures in 1975 to 26.8% in 1994. (SAMHSA)
    4. There was a significant shift during the past 15 years 
within healthcare to increase utilization of outpatient 
services for the mentally ill. This trend is evidenced not only 
by the above-mentioned statistics, but also by the trend in 
expenditures for additions to programming. In 1983 there were 
146 additional beds added to state and county mental hospitals. 
In 1994 that number had dropped to 91.2. During that same time, 
the addition to available PHP services grew from 177 in 1983 to 
273 in 1994. (Mental Health United States, DHHS, 1996)
    5. The number of workers employed in the inpatient and 
outpatient areas from 1994 also demonstrates the shift from 
inpatient to outpatient treatment. In 1984 there were 117,630 
patient care employees in state and county mental hospitals. By 
1994 that number had shrunk to 102, 153. During that same time, 
the number of patient care staff employed by freestanding 
outpatient clinics, freestanding day-night organizations, 
multiservice organizations and other residential organizations 
grew from 71,161 in 1984 to 143,967 in 1994. (Mental Health 
United States, DHHS, 1996)
    6. HCFA failed to provide its contractors with timely and 
adequate guidance on the PHP benefit-it's scope, the type of 
patient's it covered, the types and duration of services it 
covers, and the services CMHC's are required to provide. In 
addition, neither HCFA not its contractors monitored the claims 
received for the new benefit (PHP), and, when improper payments 
were discovered, HCFA did not respond effectively. (GAO Report-
January 2000)
    7. HCFA's subcontractors were unclear how to effectively 
implement this benefit and struggled to understand the 
parameters of the partial hospitalization benefit. This created 
wide disparities between areas of the country on the 
interpretation of the benefit. Some contractors were allowing 
one type of patient to be appropriate for PHP services while 
another contractor would deem that patient ineligible for the 
benefit. (GAO Report-January 2000)
    8. The first program memorandum wasn't released by HCFA 
until June of 1995. Prior to that time, many programs were 
using the PHP benefit for maintenance programs where patients 
came for a few groups a day, a few days a week. This was the 
first step in clarifying the types of patients for admission.
    9. In July o9f 1996 Program Memorandum A-96-2 and A-96-8 
were released. These directives resulted int he provide 
requirements to increase the level of Services provided and 
increased the acuity level of the type of patient's appropriate 
for PHP programming. From the first 1995 memorandum on, the 
cost for services in PHP programs directly increased. These 
programs were now strictly a replacement for inpatient 
psychiatric services.
    10. The national population is turning 50 years old at a 
rate of 10,000 people per day.
    11. HCFA projection of a cost of $15 million dollars 
nationally was greatly underestimated. This would have only 
provided less than $300,000 per state and territory for care of 
an already underserved population.
    12. Patients denying they are mentally ill or saying they 
are attending a program for reasons other than psychiatric 
treatment is not all together rare. Many of the patients we 
treat are unable or unwilling to admit the severity of their 
illness. This is a problem that has been greatly appreciated in 
the Surgeon General's Report on Mental Health.
    13. The OIG report fails to provide statistics on the 
number of denied claims that were overturned. Approximately 50% 
of denied claims are overturned on first line review. Others 
may have been denied on technical grounds, which is not 
reflective of fraud and abuse but represents human or 
mechanical error.

                  REPORT ON PARTIAL HOSPITAL CLOSURES

    The following is a list on the closures of Partial 
Hospitalization Programs throughout the state of Louisiana. 
These are programs that have closed since 1997. Since there are 
no accurate or up to date records with the Department of Health 
and Hospitals or with the Health Care Finance Administration, 
this list was compiled by calling facilities, interviewing 
providers and meetings of the LABH.
    There are probably many other closures which have not been 
taken into account due to lack of available information.


----------------------------------------------------------------------------------------------------------------
            Facility                     City/Town                    Parish                      Type
----------------------------------------------------------------------------------------------------------------
                           Lake Charles Memorial HospiLake Charles      Calcasieu             Hospital Based
                           Lake Charles Memorial Welshtal         Jefferson Davis             Hospital Based
                           Lake Charles Memorial HIowatal               Calcasieu             Hospital Based
                           Lake Charles Memorial HospiLeesville            Vernon             Hospital Based
  Allen Parish Hospital PHP                     Kinder                      Allen             Hospital Based
Oakdale Community Hospital PHP                 Oakdale                      Allen             Hospital Based
 St. Patrick's Hospital PHP                           Lake Charles      Calcasieu             Hospital Based
   Calcasieu Oaks PHP South                           Lake Charles      Calcasieu             Hospital Based
                Cameron Hosp
                Charter PHP                           Lafayette                  Lafayette    Hospital Based
                           Link Care         Pineville                    Rapides                       CMHC
                     Phases                    Slidell                St. Tammany                       CMHC
                     Phases                Baton Rouge             E. Baton Rouge                       CMHC
   Savoy Medical Center PHP                      Mamou                 Evangeline             Hospital Based
         Senior Care Center                Arnaudville                       St. Landry       Hospital Based
               Nakatash PHP               Natchitoches               Natchitoches             Hospital Based
         The Helping Center                Baton Rouge                Baton Rouge                       CMHC
              Pointe Coupee                 Shreveport                      Caddo             Hospital Based
 Summitt Medical Center PHP                Baton Rouge                Baton Rouge             Hospital Based
                  Dixon PHP             Denham Springs                           Livingston   Hospital Based
                           Louisiana CMHC  Baton Rouge                Baton Rouge                       CMHC
             Community Care                    Hammond                       CMHC
    Avoyelles Comprehensive                 Marksville                  Avoyelles                       CMHC
                           Lake Hospital PHPMandeville                St. Tammany             Hospital Based
Comprehensive Mental Health                     Monroe                   Ouachita                       CMHC
                       CPHC                Baton Rouge             E. Baton Rouge                       CMHC
                           Louisiana CMHC      Slidell                St. Tammany                       CMHC
                           Louisiana CMHC  Baton Rouge             E. Baton Rouge                       CMHC
              Interventions                Baton Rouge             E. Baton Rouge                       CMHC
    Imperial Helping Center                       CMHC
             New Directions                       CMHC
             Opelousas CMHC                  Opelousas                       St. Landry                 CMHC
             Bonding Center                 Plaquemine                 Plaquemine                       CMHC
                  Care Team                     Monroe                   Ouachita                       CMHC
Moosa Memorial Hospital PHP                     Eunice                     Acadia             Hospital Based
                           Livingston CMDenham Springs                           Livingston    CMHC-(8-1-00)
  Comprehensive Health Care                Baton Rouge             E. Baton Rouge                       CMHC
----------------------------------------------------------------------------------------------------------------

      

                                


Statement of National Association for Home Care

    Mr. Chairman and Members of the Subcommittee, thank you for 
the opportunity to submit written testimony for the record on 
the impact of the Balanced Budget Act of 1997 (BBA97) on the 
Medicare home health benefit.
    Our remarks 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 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.
    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] T1743.003

    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
----------------------------------------------------------------------------------------------------------------
        Benefit Type                 FY97 Amount               FY98  ($billions)                 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                      FY97-98                     FY98-99                     FY97-99
           Benefit Type
          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
----------------------------------------------------------------------------------------------------------------
 AASource: 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] T1743.004

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


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.
      

                                


Statement of the National Association of Long Term Hospitals, 
Stoughton, MA

    The National Association of Long Term Hospitals (``NALTH'') 
submits this statement setting forth its views concerning 
appropriate additional refinements to the Balanced Budget Act 
of 1997 (``BBA'') (Public Law 105-33). NALTH wishes to thank 
the subcommittee for its willingness to consider further 
refinements to the BBA. NALTH prefaces its suggested 
refinements noted in this statement with a brief statement 
concerning the general condition of long term hospitals. Then 
NALTH offers its comments on two specific areas in which NALTH 
urges the subcommittee to provide further public policy 
direction. Specifically, NALTH's comments focus on the 
implementation of a prospective payment system (``PPS'') for 
long term hospitals, and changes to rules governing ``provider 
based'' designation which were adopted by the Health Care 
Financing Administration (``HCFA'') on April 7, 2000 and which 
become effective in October of this year.

1. Condition of Long Term Care Hospitals

    NALTH's hospital members are established in every region of 
the United States. They include a broad range of long term 
hospitals which are operated as independent, free standing 
institutions and which participate as components of hospital 
systems and multiple hospital organizations. NALTH's membership 
also includes hospitals which commenced operations prior to the 
inception of the Medicare program in 1966, as well as hospitals 
which were organized subsequent to the establishment of PPS in 
1983 and subsequent to the BBA. NALTH's membership also 
includes hospitals located in suburban, rural and urban 
centers, some of which operate as referral sources for a broad 
geographic patient population, including interstate and, in 
some cases, international referrals. The scope and range of 
services provided by NALTH to patients is not only reflective 
of the statutory requirement that long term care hospitals 
experience a 25-day average length of stay, but is more clearly 
defined by medically complex patients who require a specialized 
multidisciplinary team of medical professionals and the 
immediate availability of hospital resources and physicians.
    Prior to the BBA, MedPac as well as the subcommittee noted 
that older long term hospitals were treated differently and 
inequitably by the TEFRA payment system, due to older distorted 
cost bases. The BBA contained the following important 
provisions affecting long term hospitals.
    1) Providing older hospitals the opportunity to change 
their base year period to an average of three years' operating 
costs;
    2) Reducing the capital cost allowance by 15%;
    3) Reducing the allowance of bad debts related to Medicare 
beneficiaries for non-payment of Medicare co-insurance and 
deductible amounts;
    4) Allowing state Medicaid programs to ``reprice'' Medicare 
payments to, as a practical matter, avoid paying for Medicare 
co-insurance and deductible amounts related to Medicare. This 
allowed states to avoid making payments to hospitals where 
Medicaid payment levels were below Medicare payment levels to 
hospitals;
    5) Establishing two different limits on target amounts 
depending on whether a long term hospital was established 
before October 1, 1997, the effective date of the BBA;
    6) Reducing loss sharing for hospitals whose costs exceeded 
their TEFRA target amount.
    NALTH has recently competed a study of its membership which 
determined that 76% of their patients are admitted with 
Medicare benefits. A segment of these patients exhaust their 
Medicare day limit and ``cross-over'' to Medicaid self-pay or 
Medigap status. The Medicare program's utilization of long term 
hospitals (76%) is much higher than the approximate 39% 
Medicare utilization of short-term acute PPS hospitals. 
Accordingly, the above-referenced BBA provisions have a more 
profound effect on long term hospitals than other hospital 
provider types.
    As part of its June 2000 report to Congress, MedPac 
reported that during the first year of its implementation, 
Medicare margins declined from 4.9% to 1.8% (Report at pg. 
141). Since long term hospital financial performance is 
distributed in a binomial manner due to the inherent inequities 
of the TEFRA payment system, long term hospitals with 
historically distorted base year periods continue to be placed 
at the very bottom of Medicare TEFRA payments and remain in an 
inequitable payment position. Due to these circumstances and 
the BBA's requirement that virtually every long term hospital 
serve Medicare patients at a financial loss given reductions in 
allowable capital costs and bad debt allowance, NALTH believes 
it is crucial that Congress provide a refined payment structure 
and assurances that HCFA will phase in a long term hospital PPS 
commencing with cost reporting periods beginning on and after 
October 1, 2002 (consistent with Section 123 of the Balanced 
Budget Refinement Act of 1999 (``BBRA'') (Public Law 106-133)).

II. Prospective Payment System Issues

    It is beyond legitimate debate that a long term hospital 
PPS is long overdue. The current ``cost-based'' system is not 
case mix adjusted and is demonstrably unrelated to resource 
use. In the course of developing a long term hospital PPS, 
NALTH determined that the accuracy of the current TEFRA system 
as expressed by a relatively low correlation coefficient, (R2) 
a mere .19. This means that the current payment system is 
inherently wasteful of federal resources and has other 
consequences which are undesirable from a public policy 
perspective. For example, it is reasonable to expect that long 
term hospital growth should reflect of a system which pays for 
hospital resources based on case mix and particular resource 
use, rather than simply on any cost incurred up to and over all 
limits on spending.
    Over a 2\1/2\ year period which commenced in 1996, prior to 
the BBA, NALTH, in full consultation with HCFA, MedPac and this 
subcommittee as well as the Senate Finance Committee, developed 
a long term hospital PPS which reweighs current DRGs for long 
term hospital patient resource use. This system was developed 
for NALTH by the Lewin Group and includes provisions 
recommended by HCFA and MedPac such as a capital cost allowance 
and 10% outlier pool to reflect the special needs of the long-
term hospital patient population. The predictive accuracy of 
this payment system is an R of .61 which is comparable to the 
current short-term hospital PPS, and is clearly a better and 
more reliable choice for federal payments than the current 
TEFRA payment system.
    NALTH fully endorses the direction given to this issue by 
Section 123 of the BBRA which provides for a DRG-based long 
term hospital PPS commencing on or after October 1, 2002. 
Section 123 does not, however, authorize necessary PPS 
adjustments such as an outlier pool, area wage adjustments, 
payment updates, recalibration of DRGs or a disproportionate 
share policy. NALTH believes it is very important that Congress 
provide HCFA with legislative authorization and direction 
concerning these issues. NALTH urges the subcommittee to 
consider including standards in these areas in its further 
consideration of BBA revisions. In this connection, NALTH asks 
the subcommittee to consider legislation filed as S.1783.
    NALTH is aware that HCFA is in the process of conducting a 
study of long term hospital payment systems. HCFA hopes to use 
this study to report to Congress by October 1, 2001 consistent 
with Section 123 of the BBRA. NALTH notes that since OBRA 1990, 
HCFA has been requested to report to Congress on the 
implementation of a long term hospital PPS. The question of 
whether or not HCFA issues the report requested by Congress 
should not delay the subcommittee's consideration of the 
legislation requested by NALTH. MedPac found and stated to 
Congress concerning this payment system that its ``a design 
[is] as predictive of per discharge resource use as the acute 
care PPS. Main advantages of the design include its 
administrative simplicity and efficiency, its consistency with 
the discharge basis of the current long term hospital payment 
system, and its similarity to the DRG-based PPS for acute care 
hospitals. This proposal is the most developed of the long term 
hospital proposals and should be considered for its potential 
as a long term hospital PPS.'' March, 1999 MedPac Report, pg. 
96.
    NALTH is aware of recent communications with the 
subcommittee in which HCFA has indicated that the PPS system 
developed by NALTH should be based on a more recent year than 
the 1995 cost reporting period used in its validation study. 
NALTH fully agrees to do so and believes the most recent year's 
experience should be used as a PPS base year. NALTH also notes 
that the legislation it supports allows HCFA to adjust long 
term hospital DRGs on an annual basis consistent with the 
annual recalibration policy for PPS hospitals. Thus, should 
HCFA ever wish to revise DRG classifications or weighting 
factors if it finds it is appropriate to do so, it would have 
ample statutory authority to revise the long term hospital DRGs 
as well. NALTH therefore requests that the subcommittee 
consider legislation in this area.

III. Provider-Based Rules

    On April 7, 2000, HCFA for the first time adopted new rules 
governing ``provider-based'' status. The rules are effective on 
October 7, 2000. The rules regulate circumstances when a 
provider may operate at a location outside its main campus 
(i.e., more than 250 yards from its main campus). The 
``provider based'' rules are also applicable to any 
``facility'' or ``clinic'' a provider may operate on its campus 
which would increase operating costs by over 5%.
    In the absence of a rule in this area, HCFA established 
policy through program memoranda which were directed at 
assuring that a ``main'' hospital provider could exercise 
appropriate surveillance of conditions of participation and 
quality standards at an off campus location. The new rules, 
however, have other objectives. They require provider-based 
activities, with few exceptions \1\ , to be located in the 
``immediate vicinity'' of a ``main'' hospital provider. The 
term ``immediate vicinity'' requires that ``at least 75 percent 
of the patients served by the facility or organization reside 
in the same zip code areas as at least 75 percent of the 
patients served by the main provider'' or that 75% of the 
patients served at a provider based facility also receive 
services at the ``main'' provider. 42 C.F.R. Sec. 413.65(d)(7).
---------------------------------------------------------------------------
    \1\ Rural health clinics owned by rural hospitals with less than 50 
beds and certain outpatient activities which function like federal 
qualified health centers.
---------------------------------------------------------------------------
    The preamble to the rules states that HCFA's policy 
objective is the reverse of the long standing federal policy of 
encouraging providers to affiliate or find other ways to 
efficiently deliver services to a broad patient population. The 
preamble to the rule states: ``[B]efore implementation of the 
hospital inpatient PPS in 1983, there was little incentive for 
providers to affiliate with one another merely to increase 
Medicare revenues or to misrepresent themselves as being 
provider-based, because at that time each provider was paid 
primarily on a retrospective, cost-based system. At that time, 
it was in the best interest of both the Medicare program and 
the providers to allow the subordinate facilities to claim 
provider-based status, because the main providers achieved 
certain economies, primarily on overhead costs, due to the low 
incremental nature of the additional costs incurred.'' 65 Fed. 
Reg. 18,504 (April 7, 2000).
    The PPS system's goal of encouraging provider efficiency 
has included a broad range of socially productive activities. 
These include:
     Hospital systems supporting services in 
communities where smaller hospitals were in danger of closing 
due to a combination of governmental policies and market 
conditions;
     Redesignation of a hospital as a provider-based 
department of another hospital to potentially reduce costs by 
eliminating duplication of overhead and simplifying licensure 
and certification requirements; and
     Long term hospitals being able to provide 
specialized services without duplication of overhead in 
satellite facilities thereby actively reducing costs and 
providing for enhanced access to long term hospital services.
    The preamble to the rule goes on to suggest that a major 
reason for HCFA's policy change is to discourage excessive 
payments due to payments to provider-based facilities which, in 
part, may duplicate payments to physicians in the case of 
outpatient activity or PPS payments when patients are 
transferred to an inpatient PPS exempt provider. NALTH submits 
that the answer to HCFA's concerns are found in the PPS system 
HCFA is implementing for most classes of providers and the 
transfer rule it has already implemented.
    In NALTH's view, it is inappropriate that HCFA should undo 
by regulation provider relations which have been encouraged for 
over eighteen years. The rule at best will reverse cost savings 
achieved by providers at the behest of federal policy makers. 
The preamble to the rule extends to affected providers the 
proposition that they should ask states to license and certify 
provider-based activities as new health care providers which 
could seek a new Medicare certification. The problems with this 
approach are multiple. A number of states have certificate of 
need programs which take months or years to pursue. It is also 
inevitable that achieving new provider status will require a 
separate chief executive as well as other administration and 
clinical departments which are necessary for hospital 
certification. All of these functions, of course, result in 
additional costs. In the context of a new PPS excluded 
provider, those are all additional costs which must be paid for 
by the federal government.
    NALTH believes that this issue is an area in which the 
subcommittee should become involved, and NALTH urges the 
subcommittee to reverse the rule in favor of further policy 
making by Congress after conducting public hearings in this 
area.
      

                                


Statement of Larry S. Gage, President, National Association of Public 
Hospitals and Health Systems

    The National Association of Public Hospitals and Health 
Systems (NAPH) is pleased to submit testimony to the House Ways 
and Means Committee Subcommittee on Health in support of 
adopting amendments to the Balanced Budget Act of 1997 (BBA) 
(P.L. 105-33) to remedy its unintended impact on safety net 
hospitals and health systems.
    NAPH represents more than 100 of America's metropolitan 
area safety net hospitals and health systems. The mission of 
NAPH members is to provide health care services to all 
individuals, regardless of insurance status or ability to pay. 
More than 54 percent of the patients served by NAPH systems are 
either Medicaid recipients or Medicare beneficiaries; another 
28 percent are uninsured. NAPH members are uniquely reliant on 
governmental sources of financing to provide care for Medicare, 
Medicaid, and uninsured patients.
    The Medicaid and Medicare Disproportionate Share Hospital 
(DSH) programs are an important source of financing for 
uncompensated care in NAPH member hospitals. In 1998, Medicaid 
DSH payments covered 36 percent of the costs incurred in 
treating the uninsured and underinsured; Medicare DSH covered 
another ten percent of such costs for all NAPH members 
nationally. State and local subsidies made up most of the 
difference, accounting for 45 percent of total payments for 
unreimbursed care.
    As was recently reported by the prestigious Institute of 
Medicine (IOM) in its November 1999 report, ``America's Health 
Care Safety Net: Intact but Endangered,'' a number of factors 
are threatening the financial viability of core safety net 
providers, including the rising number of uninsured; the impact 
of Medicaid managed care; and the erosion of major direct and 
indirect subsidies for safety net providers. The cumulative 
financial pressure caused by factors could not have been 
anticipated by the BBA.
    We appreciate Congress' attention to this issue last 
November when it approved the Balanced Budget Refinement Act of 
1999 (BBRA) (P.L. 106-113). This legislation represented a 
significant first step toward easing the impact of the BBA on 
providers. As the Committee considers another round of BBA 
``givebacks,'' NAPH urges you to enact the top two priorities 
of the hospital industry: eliminating the Medicaid DSH payment 
reductions imposed by the BBA and repeal the reductions in the 
Medicare inpatient update. In particular, we ask you to 
consider the BBA's effect on safety net institutions and the 
care afforded our nation's poor and uninsured with a relief 
package that does the following:
     Eliminate Medicaid DSH payment reductions imposed 
by the BBA;
     Eliminate further cuts to the Medicare DSH 
program;
     Change the Medicare DSH payment formula to reflect 
uncompensated care;
     Freeze indirect medical education payments at the 
current level; and,
     Repeal the BBA's Medicare bad debt reimbursement 
payment reductions.
    Eliminate Medicaid DSH Payment Reductions Imposed by the 
BBA
    While we understand that the Medicaid program falls outside 
the jurisdiction of the Ways and Means Committee, we believe 
that it is critical that any legislation to quell the impact of 
the BBA include provisions to eliminate any further payment 
reductions to the Medicaid DSH program. Under the BBA, the 
Medicaid program absorbed significant cuts, particularly in the 
DSH program, which required substantial payment reductions at a 
time when our nation's uninsured rates and hospital Medicaid 
shortfalls are on the rise. These payments--payments by state 
Medicaid programs to hospitals that serve a disproportionate 
share of low-income individuals--provide critical support for 
safety net providers. Without the Medicaid DSH program, these 
providers would be incapable of offering appropriate access to 
health care for many low-income Americans.
    According to the BBA, a full $10.4 billion was to be cut 
from federal Medicaid DSH expenditures to states over the five 
years of the cuts, with most of the impact in FY 2000-2002. At 
the present time, state DSH programs are scheduled to 
experience a 30 percent reduction in FY 2001 and a 37 percent 
reduction in FY 2002. Hence, safety net hospitals across the 
nation are facing severe cuts in Medicaid DSH funding.
    NAPH urges the Congress to include Medicaid DSH relief in 
any BBA ``givebacks'' bill it considers.
    Legislation to eliminate additional Medicaid DSH reductions 
has been introduced in the House: the ``Medicaid DSH 
Preservation Act'' (H.R. 3698), a bill to repeal the Medicaid 
DSH reductions for FY 2001 and 2002 and allow for CPI-based 
increases beginning in 2001, introduced by Rep. Ed Whitfield 
(R-KY); and the ``Medicaid Safety Net Hospital Preservation 
Act'' (H.R. 3710), introduced by Reps. Diana DeGette (D-CO) and 
Brian Bilbray (R-CA), which also eliminates the allotment 
reductions imposed by the BBA. These bills enjoy widespread 
bipartisan support. Together the House bills have 224 
unduplicated cosponsors; similar legislation has been 
introduced in the Senate. Clearly, this legislation would 
provide substantial relief for already-distressed safety net 
providers.
    Eliminate Further Cuts to the Medicare DSH Program
    Cuts to the Medicare DSH program that were required by the 
BBA also have made it difficult for our members to continue to 
provide high-quality health care services to the patients they 
serve. According to the BBA, Medicare DSH payments were 
expected to be reduced by one percent in FY 1998, two percent 
in FY 1999, increasing to five percent in FY 2002. While we 
were grateful that Congress included a provision in the BBRA to 
provide a one-year freeze on the Medicare DSH reductions, the 
conditions that necessitated this ``fix'' last year--i.e., 
rising numbers of uninsured, increasing levels of uncompensated 
care, escalating hospital costs--continue to plague our 
members. Hence, we urge the committee to eliminate any further 
reductions to Medicare DSH payments and to restore DSH funding 
to pre-BBA levels. In 1998, Medicare DSH payments covered ten 
percent of our members' costs for treating the poor and 
uninsured in our communities. This funding stream is critical 
if our members are to continue to provide care for these 
populations.
    Change the Medicare DSH Payment Formula to Reflect 
Uncompensated Care
    In addition to eliminating further Medicare DSH cuts, we 
urge the Committee to change the Medicare DSH payment formula 
to better reflect the cost of uncompensated care. As you are 
aware, the current DSH formula is based on a hospital's 
``disproportionate share patient percentage,'' which is a 
measure of the proportion of care provided to Supplemental 
Security Income (SSI) and Medicaid patients. NAPH believes that 
there are a number of problems with this formula, including 
that it does not take into account the significant 
uncompensated patient care costs borne by some hospitals. The 
Medicare Payment Advisory Commission (MedPAC) has expressed 
similar concern with the accuracy of the current formula's 
underlying measure of care to the poor. A broader measure of 
care to the poor that includes uncompensated care is needed to 
target DSH payments to those hospitals most in need.
    Congress acknowledged the shortcomings of the current 
formula for calculating Medicare DSH payments in the BBA, which 
required the Health Care Financing Administration (HCFA) to 
submit a report to Congress proposing a new formula for making 
DSH payments more equitably. The Secretary's report, which was 
due to Congress by August 5, 1998, is now long overdue. We hope 
the report will be issued soon. In addition, the Committee 
required HCFA to begin collecting data on uncompensated care as 
part of the BBRA last fall.
    We understand that the Committee is considering changing 
the formula to eliminate discrepancies between urban and rural 
providers. For a number of years, the Prospective Payment 
Assessment Commission (ProPAC) and then its successor, MedPAC, 
have recommended changing the formula to eliminate urban/rural 
disparities and include uncompensated care. Both organizations 
have done extensive analyses of the DSH formula, which have 
been available to policymakers. The reasons for implementing 
change are more urgent than ever--Medicaid enrollment has been 
declining as a consequence of welfare reform, the number of 
uninsured continues to rise--making the current proxy for low 
income care inadequate and increasing the burden of 
uncompensated care on safety net providers. In this year's BBA 
relief package, NAPH strongly urges the Committee to consider 
implementing a two-phased formula change for Medicare DSH that 
includes uncompensated care in the formula in a second phase.
    Freeze Indirect Medical Education Payments at the Current 
Level
    As the committee considers legislation to alleviate the 
unintended consequences of the BBA, we urge you to prevent 
further cuts to Medicare's Indirect Medical Education (IME) 
payments and to provide relief for our members who serve as 
teaching hospitals.
    As you know, under the BBA, IME payments were scheduled to 
be reduced by 29 percent over four years for a total of $5.6 
billion. While the BBRA included some IME relief, it provided 
only a one-year delay of the full implementation of the 29 
percent cut. Hence, the BBA IME reduction continues to pose a 
significant threat for our members. With average total margins 
for teaching hospitals projected to be near zero, IME relief in 
this regard is critical. Without IME relief, safety net 
teaching institutions will be forced to cut the programs that 
provide training for our nation's physicians, nurses and other 
health professionals as well as essential research programs.
    In particular, we urge the committee's immediate 
consideration of the ``Teaching Hospital Preservation Act of 
2000'' (H.R. 4239, S. 2394), legislation would stabilize IME 
payments and protect Medicare beneficiaries' access to teaching 
hospitals.
    Repeal the BBA's Medicare Bad Debt Payment Reimbursement 
Reductions We urge the committee to repeal the BBA provision 
that significantly reduced payments to hospitals and other 
providers for bad debts incurred as a result on non-payment for 
covered services derived from deductibles and coinsurance left 
unpaid by Medicare beneficiaries. This provision has had a 
disproportionate effect on safety net providers, who, in 
abiding by their mission to provide care regardless of ability 
to pay, often fail to receive payment for the services they 
provide. Under the BBA, Medicare reimbursement for bad debt 
payments were cut by 25 percent in 1998; by 40 percent in FY 
1999, and from 2000 forward, these payments will be cut by 45 
percent. As the committee considers legislation to alleviate 
the impact of the BBA on providers, we urge you pay particular 
attention to the effect of payment cuts, such as the bad debt 
payment reductions, on safety net providers, who already are 
confronting a significant burden of uncompensated care.

* * * * * * * * * * * * * * * * * *

    We appreciate the opportunity to share our concerns and 
urge the committee to take action on these important issues. We 
look forward to working with you further to develop legislative 
solutions to the problems of our nation's poor and uninsured.
      

                                


Statement of Ellen J. Kugler, National Association of Urban Critical 
Access Hospitals

    Introduction of NAUCAH
    The National Association of Urban Critical Access Hospitals 
(NAUCAH) is a nation-wide coalition of hospitals that stand at 
the forefront of caring for the urban elderly and poor in the 
U.S. today. Established in 1993, NAUCAH defines ``urban 
critical access'' according to several key measures of the 
population and communities that its members serve.
    1. The hospital must be located in an urban area, which is 
defined by the census bureau as a Metropolitan Statistical Area 
(MSA).
    2. A minimum of sixty-five percent of the hospital's 
patients must have their health care paid by Medicare.
    3. A minimum of ten percent of the hospital's patients must 
have their health care paid by Medicaid.
    4. The hospital must be large and therefore vital to care 
in its community--at least 250 beds.
    5. The hospital must be private and non-profit.
    Approximately 275 hospitals in the U.S. today meet all of 
these criteria. Urban critical access hospitals are very much a 
part of the health care safety net in the U.S. today. In some 
of the communities in which they are located, they work 
alongside public hospitals in caring for the urban elderly and 
poor. In most communities in which urban critical access 
hospitals are located, they are the primary sources of care for 
the urban elderly and poor, if not the only source--their 
safety net. It is fair to say that without urban critical 
access hospitals, it would be difficult for many of the poor 
and elderly in these communities to find the health care 
services they need.
    We appreciate the Chairman's leadership in the assistance 
provided last year under the Balance Budget Refinement Act. 
However, because an overwhelming majority of care provided at 
NAUCAH hospitals is to elderly and low-income patients, and the 
Balanced Budget Act had a disproportionate impact on these 
facilities, there are a few issues for which we request 
additional assistance.

Restore Medicare Bad Debt to 100% for Medicare DSH Hospitals

    Historically, Medicare has reimbursed hospitals 100 percent 
of unpaid co-payments and deductibles. The Balanced Budget Act 
of 1997 (BBA) reduced this reimbursement percentage to 55 
percent. This reduction has had a significant impact on NAUCAH 
hospitals. NAUCAH hospitals, by definition, treat a large 
number of low-income seniors who are the poorest and often 
sickest of the elderly. Low-income seniors, at or near the 
poverty level, are most likely unable to pay their co-payments 
and deductibles.
    NAUCAH hospitals, therefore, have higher portions of 
Medicare bad debt than other hospitals, and reductions in these 
payments impact them to a greater degree.
    Another BBA provision, one that requires additional co-
payments on the part of beneficiaries, has increased Medicare 
bad debt costs. So, bad debt costs are increasing at the same 
time as Medicare's payments for these costs are decreasing. 
These reductions and others included in the BBA have negatively 
impacted the viability of NAUCAH hospitals throughout the 
country.
    NAUCAH hospitals rely on Medicare payments for their 
survival. These hospitals have few other payment sources to 
draw from to cover this Medicare shortfall. Bad debt payments 
help NAUCAH hospitals fulfill their missions--providing care to 
all, without regard for ability to pay--and at the same time 
help Medicare fulfill its goal--to not burden others with 
Medicare costs.
    Congress should restore Medicare bad debt payments for 
Medicare DSH hospitals
    Freeze Medicaid Disproportionate Share Reductions at FY 
2000 Levels
    When Congress modified the Medicaid program in 1984, it 
recognized that hospitals which serve unusually large numbers 
of Medicaid recipients and other low-income patients, including 
the uninsured and the underinsured, would be negatively 
impacted by these changes.
    To assist these hospitals, it mandated Medicaid 
Disproportionate Share Hospital (DSH) payments over and above 
fees for services provided to Medicaid recipients. Hospitals 
use these supplemental payments to help shoulder their 
disproportionate share of the financial burden of caring for 
poor, uninsured, and underinsured patients.
    In the Balanced Budget Act of 1997 (BBA), Congress cut 
$10.4 billion over five years from the federal Medicaid DSH 
program through a system of strict state DSH caps. Some State 
DSH allotments will be reduced by as much as 40 percent over 
this five-year time period.
    Cuts of this magnitude are extraordinarily difficult to 
absorb, and render monumental challenges for all critical 
access hospitals.
    At a time when our nation's uninsured rate has climbed 
above 43 million, and is rising at more than 100,000 people 
every month, it seems counterintuitive to reduce much needed 
Medicaid DSH payments to our nation's safety-net hospitals.
    NAUCAH supports the passage of H.R. 3710, H.R. 3698, S. 
2299 and S. 2308. All bills freeze Medicaid DSH cuts at fiscal 
year 2000 levels, thereby, mitigating the fiscal year 2001 and 
2002 reductions.
    Congress should freeze Medicaid DSH reductions at FY 2000 
levels
    Preserve Medicare Disproportionate Share for the Urban 
Safety Net
    Medicare Disproportionate Share Hospital (DSH) payments are 
an important part of the overall revenue of private safety-net 
hospitals. Disproportionate Share payments are made as part of 
the Medicare inpatient program and are intended to help ensure 
Medicare patients access to hospitals that also treat a 
significant number of low-income individuals.
    This program is especially important for private safety-net 
hospitals since they treat a significant number of both 
Medicare and low-income patients.
    The Medicare DSH program pays hospitals based on a formula 
that includes Medicare, SSI and Medicaid. The program pays 
about $4.7 billion to over 1,700 hospitals nationwide.
    In 1997, as part of the Balanced Budget Act (BBA), Congress 
required the Secretary of Health and Human Services to propose 
recommendations for a new Medicare DSH formula. Due to the lack 
of available and accurate data, however, HCFA had not made 
revisions to the DSH formula.
    In 1999, Congress revisited the DSH formula. As part of the 
Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA), Congress acknowledges that accurate data is not 
available and requires HCFA to begin collecting the data 
necessary to develop a new formula that takes into account the 
cost of serving uninsured and underinsured patients. Data will 
be collected on state and local indigent care programs, as well 
as uncompensated care (bad debt and charity care). It is 
expected that HCFA will devise a standard definition of 
uncompensated care before attempting to collect accurate and 
updated uncompensated care data. Data on offsetting revenue is 
also expected to be collected.

Recommendations

     No new DSH formula should be implemented until 
accurate data is available to measure the impact on hospitals.
     If the DSH thresholds are changed to add rural 
hospitals, new funding should be allocated to support the 
additional payments.
    Congress should preserve Medicare DSH payments at their 
current level for urban private safety net hospitals. Any 
change in thresholds for rural hospitals should be funded with 
new money so as not to impose additional reductions on private 
safety net providers.

Restore Medicare DSH Payments

    Under the Balance Budget Act, Medicare DSH payments were 
reduced by five percent over five years. As part of the Balance 
Budget Refinement Act, Congress froze one year of these 
reductions.
    By freezing the reductions, Congress has acknowledged that 
hospitals that treat a significant number of low-income and 
elderly patients are ill-equipped to deal with significant 
Medicare reductions.
    The Medicare and Medicaid program covers most of the 
patients treated at urban critical access hospitals. Because of 
the communities they serve, they treat very few patients 
covered by private insurance. Thus, the Balanced Budget Act 
reductions in Medicare and Medicaid have created severe 
financial hardships.
    NAUCAH requests restoration of full Medicare 
disproportionate share payments.
      

                                


Statement of Ortho-Clinical Diagnostics, Johnson & Johnson

    Thank you for providing the opportunity to submit a 
statement for the record on the important task before the 
Subcommittee of addressing refinements to the Balanced Budget 
Act of 1997 (BBA). We appreciate the Subcommittee's commitment 
to identify appropriate refinements to the major reimbursement 
changes wrought by the BBA--changes that have had an impact not 
only on the primary care providers but also on the entire 
supply chain that is so critical to quality patient care.
    We wish to express our support for additional funds for 
providers to assure patient access to the safest possible 
blood. We support the proposal of the American Association of 
Blood Banks (AABB), America's Blood Centers (ABC), and the 
American Red Cross. The proposal would (1) Increase the 
Medicare hospital inpatient ``market basket'' by approximately 
0.45% to cover the added costs associated with blood safety 
enhancements that are FDA recommended and/or adopted as the 
standard of care and (2) Direct HCFA to develop a specific 
mechanism in the hospital market basket to account for changes 
in costs for blood and transfusion therapy-related products and 
services from year to year.
    Ortho-Clinical Diagnostics has a rich history in and a deep 
commitment to blood research and technological advances to 
ensure blood safety. Led by pioneers such as Dr. Philip Levine, 
one of the discoverers of the Rh factor in blood, the Company 
has long provided the medical community and patients with 
important technology used in transfusion medicine. Our products 
span the transfusion medicine continuum, from infectious 
disease testing at donor screening centers to blood typing and 
crossmatching products used in hospitals. We are constantly 
striving to improve our products and to develop new technology 
to respond to patient needs. In addition, Johnson & Johnson is 
a major contributor to organizations and initiatives dedicated 
to increasing blood donations and maintains a program of 
regular on-site blood drives targeted to its employees. For the 
past four years, Johnson & Johnson has been #1 in corporate 
blood drives, and last year collected nearly 40,000 units of 
blood.
    We feel compelled to add our voice to those of the AABB, 
ABC, and ARC because, quite simply, blood is a critical public 
health issue whose infrastructure is fragile and vulnerable. 
Congress needs to step in and help strengthen that 
infrastructure through legislation that will inject a dose of 
financial assistance into an ailing system.
    The following are background points and underlying reasons 
for our support of this proposal:
     Patient access to the safest available blood 
supply is a national public health priority.

Current Requirements

     Americans deserve and demand access to the safest 
possible blood supply. In fact, safe blood is a national public 
health priority. Recognizing this health priority, the blood 
banking and transfusion medicine community, and federal 
government have adopted and continue to adopt incremental blood 
safety enhancements, including new infectious disease tests and 
other safety-related technologies.
     FDA currently requires the following tests be 
conducted on 100% of the nation's blood supply:
     Hepatitis B surface antigen (HBsAg)
     Hepatitis B core antibody (anti-HBc)
     Hepatitis C virus antibody (anti-HCV)
     HIV-1 and HIV-2 antibody (anti-HIV-1 and anti-HIV-
2)
     HIV p24 antigen
     HTLV-I and HTLV-II antibody (anti-HTLV-I and anti-
HTLV-II)
     Serologic test for syphilis
     Confirmatory tests if any of above are positive

Recent Developments

     Blood currently costs $80 to $120 per pint. New 
safety technology is expected to add $40-$50 per pint in the 
short term. This amount is likely to increase as new safety 
technology is adopted to make blood and blood products even 
safer. In testimony before this Committee, the American 
Hospital Association has identified increases in the cost of 
blood as an additional financial issue for their members.\1\
---------------------------------------------------------------------------
    \1\ ``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.'' Statement of Don Richey, 
Administrator, Guadalupe Valley Hospital, Seguin, Texas, on behalf of 
the American Hospital Association, July 25, 2000

---------------------------------------------------------------------------
Future Threats to the Blood Supply

     According to FDA, ``There are constantly emerging 
potential threats to the blood supply a Examples include new 
HIV variants; new hepatitis agents; human herpes virus type 8; 
Creutzfeld-Jakob Disease; human parvovirus B19; and bacterial 
contamination of blood products.'' (Source: www.fda.gov) FDA 
has indicated it will impose testing obligations as additional 
relevant communicable disease agents are identified and FDA 
approves tests for such agents.''

How Technology Creates Safer Blood

     For many years, Hepatitis C occurred among 5 
percent or more of all blood recipients. In 1991, the incidence 
of transfusion-related HCV occurred in 1 to 4 percent of 
transfusion recipients. Today, after more than seven years of 
testing for HCV, the risk of HCV transmission through 
transfusion is less than 1 per 100,000 screened units of blood. 
New technologies such as nucleic acid amplification (NAT) and 
Ortho-Clinical Diagnostic's HCV antigen test (not yet approved 
in the U.S.) may reduce the risk to 1 per 500,000 to 1 per 
1,000,000. (Source: www.aabb.org) Today, the risk of getting 
HIV from a single blood transfusion is about 1 in 676,000.
     New blood safety technology is routinely adopted 
in foreign countries sooner than it is available here. While 
there are a variety of reasons for this phenomenon, the 
reimbursement and regulatory environments are among the factors 
that contribute to lack of access to such technology for 
American patients. For example, we understand that 
leukoreduction is now mandated in at least 9 countries. Another 
example is our own company's HCV Core Antigen Test--one that we 
believe is substantially equivalent in performance to current 
NAT testing. The test is available outside the United States 
for single unit testing rather than as a pooled test, in an 
Elisa microwell plate format that is an established technology. 
Even the smallest of blood centers are familiar with this 
technology. France--a country well known for its blood safety 
vigilance--has recently approved this test for donor screening. 
We intend to submit an application to the FDA for U.S. 
approval.

    The Transfusion Process and the Potential for Errors and 
Accidents

     The transfusion process requires blood typing and 
crossmatching testing to ensure that the recipient's blood is 
compatible with the donor's blood. In addition, it requires 
processes, procedures, and trained personnel to ensure that the 
right unit of blood actually goes to the patient.
     There are only two suppliers of the important 
blood typing and crossmatching testing products that are so 
critical to a safe transfusion: our company, Ortho-Clinical 
Diagnostics and a small company called Immucor. Both companies 
are challenged by the dynamics of the marketplace. There is 
little financial incentive to continue to supply these products 
thus creating a precarious supply chain. Failure to supply the 
market with these products for whatever reason--financial, 
production, FDA--could cause major problems in the transfusion 
process.
     Errors and accidents in the transfusion process 
contribute to unacceptable mortality and morbidity. The risk of 
a fatal transfusion reaction caused by errors such as 
administration of an ABO-incompatible unit to a patient is 
estimated to be as high or higher than the risk of receiving 
HIV or HCV-infected blood. The recent Institute of Medicine 
study highlighted the need for the medical community to respond 
to medical errors and accidents. Insufficient hospital 
reimbursement for blood can result in staff and resource 
cutbacks that can increase the risk of errors and accidents in 
the blood transfusion process.

The Need for Adequate Reimbursement

     Safety enhancements add to the cost of each blood 
component transfused in the United States. Adequate Medicare 
reimbursement is necessary to ensure patient access to new 
technologies that improve blood safety. Because the vast 
majority of blood products and services are provided in the 
inpatient setting, it is especially important that inpatient 
reimbursement rates accurately reflect increases in the cost of 
these products and services
     Inadequate reimbursement has an adverse impact on 
all parts of the blood continuum, including manufacturers. 
Economic factors affect decisions to develop new technology 
that may improve patient care, reduce error, and ensure the 
safest possible blood products and services. New threats to the 
blood supply will require new technology to address those 
threats. Without adequate reimbursement, the health and 
vitality of the innovators in this industry--who develop the 
new technology to make blood and blood transfusions safer--is 
jeopardized.
     Non-profit organizations dominate the blood 
collection industry. These organizations are well known for 
their ability to collect blood within local communities for 
both routine and emergency use, and for their community ties, 
name recognition, and a remarkable dedication to blood safety 
and availability goals. They are an important component in the 
blood supply chain. Many of these entities and hospital blood 
banks have suffered financially due to inadequate reimbursement 
and the effects of the Balanced Budget Act of 1997 and managed 
care cost-cutting measures.
     Additional costs of testing and other safety 
measures without concomitant reimbursement will adversely 
affect blood centers' other cost activities--such as donor 
recruitment--that could also adversely affect the blood supply.
     As the Department of Health and Human Services 
(HHS) stated in its ``Five Point Plan on Strategies to Increase 
the Blood Supply:'' ``The economic and competitive pressures of 
health care today make it nearly impossible for blood banks to 
recover the cost of new innovations, even when such measures 
are required. These economic limitations are a strong 
disincentive for change.''
     The Congress and the Administration has recognized 
the importance of appropriate blood reimbursement in the 
outpatient setting. (See Attachment.) This same rationale 
should be the basis for appropriate adjustments to 
reimbursement methodology for blood used in the inpatient 
setting.
    In conclusion, we urge the Congress to help providers 
achieve our common public health mission to ensure patient 
access to the safest possible blood. We urge enactment of a 
Balanced Budget Refinement Act--Part 2--that includes 
provisions to increase the market basket by approximately .45% 
and that directs HCFA to develop a mechanism for blood and 
transfusion-related products that would more accurately and 
specifically capture the increased costs of blood on an annual 
basis.
    Thank you for the opportunity to comment.

Attachment

     Recent Comments from Government Sources on Blood Reimbursement

    Whereas the Advisory Committee on Blood Safety and 
Availability is dedicated to insuring patient access to safe 
blood products and services, and whereas the Committee 
recognizes that fair, accurate, and timely reimbursement, 
including Medicare, for blood-related therapies is critical to 
insuring patient access to the safest possible blood, the 
Advisory Committee, consistent with its prior recommendations, 
recommends that the Secretary and Congress support legislation 
to insure fair and accurate reimbursement for inpatient blood-
related products and services. Such legislation should provide 
sufficient funding to account for increased blood-related 
costs, including those associated with new blood safety 
measures, and require that these costs be reflected in annual 
updates of inpatient diagnosis related groups.''(emphasis 
supplied)
    Letter from Michael Hash, Deputy Administrator, Health Care 
Financing Administration dated October 19, 1999 to Congressman 
Bill Thomas on the Administration's plans to adjust the 
Outpatient Prospective Payment System regulation to respond to 
concerns raised about blood
    ``We would also adjust the payment for blood and blood 
products to reflect blood testing requirements that have been 
mandated since 1996, and we would expect to make further 
adjustments in the future if additional testing requirements 
with significant costs are imposed.''
    Conference Report accompanying the Balanced Budget 
Refinement Act of 1999
    ``The parties to the agreement understand that the 
Secretary is committed to creating separate payment categories 
for blood, blood products and plasma-based and recombinant 
therapies. The parties to the agreement continue to be 
concerned that the inadequate payment for these products and 
therapies could represent a barrier to patient access. 
Accordingly, the parties to the agreement expect the Secretary 
to carefully analyze potential patient access issues and create 
sufficient payment categories to adequately differentiate these 
products.''
    ``Five Point Plan on Strategies to Increase the Blood 
Supply:'' The Department of Health and Human Services (HHS)
    ``The economic and competitive pressures of health care 
today make it nearly impossible for blood banks to recover the 
cost of new innovations, even when such measures are required. 
These economic limitations are a strong disincentive for 
change.''
      

                                

                                                      July 25, 2000

The Honorable Bill Thomas
Chairman
Subcommittee on Health
House Ways and Means Committee
1136 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas:

    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 today's 
hearing on additional Medicare refinements to the Balanced Budget Act 
of 1997 (Public Law 105-33).
    Specifically, we are contacting you to (1) express our strong 
opposition to a proposal by the Halt2000 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 the 
new practice expense payment method 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 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.
    Any questions that you or other members of the subcommittee may 
have about the coalition's 3 percent solution should be directed to Bob 
Doherty, American College of Physicians-American Society of Internal 
Medicine, 202/261-4530; Laura Saul Edwards, American Academy of 
Dermatology, 202/842-3555; or Jake Culp, American Academy of Family 
Physicians, 202/232-9033.
            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
                                       Renal Physicians Association
    A Proposal from the Practice Expense Fairness Coalition

    Increasing Medicare Payments to Physicians and Continuing 
the Transition to Resource-based Practice Expenses: A True 
``Win-Win'' Proposal for Medicine
    The Practice Expense Fairness Coalition (PEF Coalition) 
represents organizations with a combined membership of over 
350,000 physicians--a majority of physicians in the United 
States. The coalition's members include the American Academy of 
Dermatology, American Academy of Family Physicians, American 
Academy of Pediatrics, American Society of Clinical Oncology, 
American College of Physicians-American Society of Internal 
Medicine, American College of Rheumatology, American 
Osteopathic Association, and the Renal Physicians Association.
    In the Balanced Budget Act of 1997, Congress mandated that 
resource-based payments for physician practice expenses be 
phased in over a four-year period. During the transition, 
practice expense payments are a blend of historical charges--
which overvalued many hospital-based procedures compared to 
office-based services--and resource-based practice expenses 
(RBPEs). Under RBPEs, payments will be based on relative 
differences on the costs of providing services, based on the 
best available data.
    A coalition of other physicians organizations is now urging 
Congress to halt the transition to RBPEs--at the current blend 
of 50% charge-based and 50% resource--based amounts. A small 
number of office visit codes would be exempted from the halt; 
they would be allowed to increase to the full CY 2002 RBPE 
levels. The Halt 2000 coalition estimates that exempting office 
visits from the halt will cost $2 billion in CY 2001, and $8 
billion over five years. The Halt 2000 coalition estimates that 
average payments to physicians would increase by 3 percent 
under their proposal, although the impact on individual 
physicians would vary greatly depending on how much they stand 
to gain or lose under RBPEs. Some would do better, but other 
worse, under the Halt 2000 proposal.

    The PEC Fairness Coalition strongly urges Congress to 
reject the Halt 2000 proposal and instead support the following 
alternative:

    1. Increase the Medicare dollar conversion for factor by 3 
percent (the same amount of increased spending that would 
result from the Halt 2000 proposal). An increase in the 
Medicare conversion factor will benefit all physicians 
equally--a primary care physician and a surgeon will get 
exactly the same percentage increase. Unlike halt 2000, which 
asks Congress to choose sides between ``winners'' and 
``losers'' under RBPEs, every physician would be better off 
under a conversion factor increase that under current law; no 
one would be worse off. Further, a conversion factor increase 
would help restore cuts in the conversion factor that resulted 
from HCFA's mistakes in calculating the sustainable growth rate 
(SGR) in 1998 and 1999. Although Congress mandated last year 
that HCFA use more accurate data to correct the SGR, HCFA has 
refused to make physicians whole for the previous mistakes in 
calculating the SGR. Therefore, an across-the-board increase in 
the CF is fully consistent with Congress' desire to restore 
inappropriate cuts caused by policies that resulted from the 
BBA 97. Finally, a conversion factor increase is simple: 
Congress can simply direct HCFA to increase the conversion 
factor by a set percentage or dollar amount. By contrast, the 
Halt 2000 proposal would require that Congress consider very 
complex methodological issues and set fees for thousands of 
physician services.

    2. Consistent with practice expense legislation enacted by 
Congress in 1997 and 1999, continue to support the full RBPE 
transition for all services, with oversight of HCFA activities 
to assure that improvements are made as appropriate.
    Despite claims by the Halt 2000 campaign that HCFA's 
methodology is fundamental flawed, the General Accounting 
Office (GAO) found that ``HCFA's new methodology is an 
acceptable approach for revising Medicare's practice expense 
payments...HCFA's methodology uses values...believe that 
incurred costs [as proposed by HCFA] is consistent with 
traditional cost accounting practices'' (Source: GAO: Medicare 
Physician Payments: Need to Refine Practice Expense Values 
During Transition and Long Term, February, 1999). The GAO did 
not support a halt to the transition. Rather, the GAO 
concluded, ``Concerns about data and methodological issues can 
be addressed during the phase-in period.'' Further, the GAO 
found that a coalition consisting of the same groups that are 
now supporting a halt in the transition ``said they were 
pleased that we support HCFA's revision...they believe that the 
new methodology more effectively recognizes differences in 
practice expense payments among physicians specialties.''
    Last year, Congress mandated that HCFA consider additional 
data from medical specialty societies to supplement the survey 
data it is currently using. HCFA has published a proposed rule 
to accept such data, and has already agreed to use data from a 
survey conducted by an association representing thoracic 
surgeons. Other improvements can and should be made through the 
refinement process, with oversight by Congress as needed. HCFA 
should use more up-to-date survey data that is already 
available from the American Medical Association. The RVUs 
Update Committee (RUC), a multi-specialty committee chaired by 
the AMA, is making substantial progress on refining practice 
expense data for specific services. To illustrate, the RUC 
recently reached a multi-specialty consensus on the practice 
expenses of office based evaluation and management services--
the lynchpin of the entire Medicare fee schedule and the 
services that one might have expected would be the most 
difficult to resolve. If a consensus can be reached on F/M 
services, it should be possible to develop a consensus on 
refinements for other services. HCFA should also include the 
costs of non-physician clinical staff in the office for 
facility patients when supported by survey data and expert 
panels. Such improvements can be made under existing law and 
the existing process, with oversight by Congress, without 
Congress stepping in to halt the transition. By contrast, Halt 
2000 would forever lock practice expense payments at the CY 
2000 levels--precluding further refinement and improvement or 
updating of practice expense payments based on more recent 
data.
    Congress should support the only true ``win-win'' proposal 
on the gable: an increase in the dollar conversion factor for 
the Medicare fee schedule and support for continuing the 
transition to RBPEs. Every physicians would gain equally, 
Congress would not have to choose sides over practice expense 
allocations, a change in the conversion factor would be simple 
to mandate and implement, and Congress would not be forced 
again to deal with divisive and complex issues of re-allocating 
practice expense payments that it thought it has resolved for 
good in the BBA 97. For more information about the PEF 
Coalition's proposal, contact Laura Saul Edwards, American 
Academy of Dermatology, (202) 842-9033; or Bob Doherty, 
American College of Physicians-American Society of Internal 
Medicine (202) 261-4530.
      

                                


                                                      July 25, 2000

The Honorable William M. Thomas
Chairman
Health Subcommittee
House Ways and Means Committee
1136 Longworth House Office Building
Washington, DC 20515

Dear Chairman Thomas:

    The Practice Expense Coalition, representing 40 physician 
organizations, teaching hospitals, medical schools, and clinics, is 
pleased that the Subcommittee is considering legislation to provide 
health care providers relief from the Medicare provisions enacted in 
the Balanced Budget Act of 1997 (BBA 97). As the Subcommittee prepares 
for its July 25 hearing, we would like to bring to your attention one 
such provision which involves the ``practice expense'' component of the 
Medicare Physician Fee Schedule
    As you may recall, based on the belief that office-based 
specialties probably were not recouping their costs of practice, in 
1994 Congress directed the Health Care Financing Administration (HCFA) 
to change the way Medicare pays for physicians' practice expenses. 
After extensive criticism of HCFA's initial flawed proposal, Congress 
intervened and included detailed instructions for developing the new 
practice expense relative value units (PE RVUs) in the BBA 97. Because 
of the endless string of yearly budget deficits, the only feasible way 
to provide additional funds to primary care physicians was through this 
budget-neutral legislation.
    The transition is now at the halfway point, with the new system to 
be fully implemented in 2002. However, HCFA has failed to comply with 
nearly all the mandates of the BBA 97, and the current methodology and 
data do not (and likely will never) accurately reflect physicians' 
actual practice costs. As a result, practice expense payments have 
become seriously distorted, creating a system that lacks fundamental 
fairness and is having detrimental effects on our nation's physicians, 
hospitals, clinics and patients.
    Many believe it is therefore time to acknowledge that this task is 
far more complex than ever contemplated and may never be possible. For 
example, in a response to a question from Chairman Bill Young at a 
February 2000 House Appropriations Committee hearing, HCFA's 
Administrator Nancy Ann Min-DeParle stated that ``we do not believe 
that it is possible to determine actual physician expenses associated 
with providing services to Medicare patients.'' In addition, the 
previous budgetary constraints have made it even more difficult for 
HCFA to develop a system that fairly reflects physicians' practice 
costs.
    This problem can be fixed, however. To meet the goal of increasing 
reimbursement for primary care office services, while minimizing the 
detrimental effects for many specialists, the Practice Expense 
Coalition urges Congress to seize the opportunity presented by the 
budget surplus and amend the practice expense provisions of the 
Medicare law. Our proposal would:
     Halt the transition at the current blend of 50% 1998 PE 
RVUs and 50% projected 2002 PE RVUs practice expense values; and
     Allow scheduled increases for certain office and 
consultation services to proceed immediately to their projected 2002 
amounts.
    Under this proposal, the resource based practice expense values 
would be subject to refinement through the regular 5-year review 
process currently in place.
    As the Subcommittee moves forward with the development of its plan 
to provide BBA 97 relief for Medicare providers, we ask that you 
consider including our practice expense proposal in your legislative 
package. It is a win-win solution for all physicians.
    Thank you for considering our requests and for your assistance on 
this important issue.
            Sincerely,

     American Academy of Facial Plastic and Reconstructive Surgery,
                                 American Academy of Ophthalmology,
                           American Academy of Orthopedic Surgeons,
         American Academy of Otolaryngology--Head and Neck Surgery,
                         American Association for Thoracic Surgery,
                       American Association of Clinical Urologists,
                     American Association of Neurological Surgeons,
                                    American College of Cardiology,
                              American College of Gastroenterology,
                          American College of Osteopathic Surgeons,
                                     American College of Radiology,
                                      American College of Surgeons,
                          American Gastroenterological Association,
                                      American Medical Association,
                            American Society for Bariatric Surgery,
                   American Society for Gastrointestinal Endoscopy,
                             American Society of Anesthesiologists,
               American Society of Cataract and Refractive Surgery,
                              American Society of Echocardiography,
                              American Society of General Surgeons,
                            American Society of Nuclear Cardiology,
                              American Society of Plastic Surgeons,
           American Society for Therapeutic Radiology and Oncology,
                           American Society of Transplant Surgeons,
                                   American Urological Association,
                          Association of American Medical Colleges,
            Association of Freestanding Radiation Oncology Centers,
                                       Cleveland Clinic Foundation,

     
                                  Congress of Neurological Surgeons
  International Society for Cardiovascular Surgery, North American 
                                                            Chapter
           National Coalition of Quality Diagnostic Imaging Centers
             North American Society of Pacing and Electrophysiology
                                       North American Spine Society
                             Outpatient Ophthalmic Surgical Society
                                       Society for Vascular Surgery
           Society of American Gastrointestinal Endoscopic Surgeons
               Society of Cardiovascular & Interventional Radiology
                                 Society of Gynecologic Oncologists
                                       Society of Surgical Oncology
                                       Society of Thoracic Surgeons

Summary of Proposed Practice Expense Amendment

    Under current law, Medicare pays physicians on the basis of 
a resource-based relative value scale, which is divided into 
three components--physician work, malpractice and practice 
expenses. The practice expense relative value units currently 
are based on a percentage of physician charges and practice 
expense resource costs. For 2000, these units are based on 50 
percent of charges and 50 percent of practice expense resource 
costs involved in furnishing a service. By 2002, practice 
expense payments will be based 100 percent ``resource-based.''
    The proposed amendment would----
     Maintain for 2000 and subsequent years the 50/50 
formula for determining practice expense relative value units, 
which would also apply for purposes of adjustments to the 
conversion factor for anesthesia services. There would be 
exception for certain office visit and consultation services, 
which would be based entirely on the relative practice expense 
resources involved in furnishing the service.
     Prohibit the Secretary from reducing the 
conversion factors or relative value units for physicians' 
services to assure that Medicare Part B expenditures resulting 
from the foregoing amendment are budget neutral.
     Require the Secretary in consultation with MedPAC 
and physician organizations to conduct a five-year review of 
the relative value units, with necessary adjustments for 
changes in medical practice and new data on relative value 
components. With respect to practice expense relative value 
units, the five-year review would not begin sooner than 2005 
and would be limited to the portion of the values representing 
the relative practice expense resources.
     Require the Secretary in consultation with 
physicians to annually establish or adjust relative value units 
for new, revised and deleted codes, and publish an explanation 
of the basis for such adjustments.
     Allow the Secretary to use extrapolation and other 
techniques to determine relative practice expense resources to 
reflect coding changes, the addition of new procedures or where 
specific data are not available.

     Proposed Practice Expense Changes in Medicare Fee Schedule (assumes no changes in conversion factor or
                                                  utilization)
----------------------------------------------------------------------------------------------------------------
                                                                         2001 Medicare
                           1998 Medicare       Currently Projected     Payments with Halt     Change 1998-2001
      Specialty         Payments  (Millions)     Change 1998-2002     and Exemption of E&M      with Halt and
                                                                           (Millions)             Exemption
----------------------------------------------------------------------------------------------------------------
                  ALL             $44,100a                     0%                $45,410                    3%
     Anesthesiology                 $1,675                    -9%                 $1,606                   -4%
    Cardiac Surgery                   $328                   -17%                   $301                   -8%
         Cardiology                  $3931                   -12%                 $3,778                   -4%
            Clinics                 $1,428                    -4%                 $1,444                    1%
        Dermatology                 $1,091                    20%                  1,233                   13%
     Emergency Med.                   $850                   -12%                   $804                   -5%
    Family Practice                 $2,886                     8%                 $3,171                   10%
   Gastroenterology                 $1,211                   -18%                 $1,127                   -7%
   General Practice                   $976                     5%                 $1,048                    7%
    General Surgery                 $1,874                    -8%                 $1,833                   -2%
   Hermatology Onc.                   $583                     6%                   $629                    8%
  Internal Medicine                 $6,238                     2%                  6,564                    5%
         Nephrology                   $928                    -6%                   $909                   -2%
          Neurology                   $804                    -1%                   $826                    3%
       Neurosurgery                   $319                   -12%                   $306                   -4%
    Obstetrics/Gyn.                   $389                     6%                   $421                    8%
      Ophthalmology                 $3,399                     6%                 $3,694                    9%
   Orthopedic Surg.                 $2,000                     0%                 $2,050                    2%
     Otolaryngology                   $569                    11%                   $629                   11%
          Pathology                   $513                    -5%                   $500                   -3%
    Plastic Surgery                   $196                     4%                   $204                    4%
         Psychiatry                 $1,100                     0%                 $1,103                    0%
          Pulmonary                 $1,031                     -6                 $1,023                   -1%
     Radiation Onc.                   $619                    -6%                   $604                   -2%
          Radiology                 $2,976                   -12%                 $2,802                   -6%
         Rheumatogy                   $274                    19%                   $319                   16%
     Thoracic Surg.                   $545                   -16%                   $503                   -8%
            Urology                 $1,165                     6%                 $1,243                    7%
     Vascular Surg.                   $319                   -12%                   $304                   -5%
        Other Phys.                 $1,206                    -1%                 $1,247                    3%
       Chiropractor                   4417                    -8%                   $400                   -4%
     Nonphys Pract.                   $891                     2%                   $904                    1%
        Optometrist                   $347                    31%                   $453                   31%
           Podiatry                   $949                    11%                 $1,028                    8%
          Suppliers                   $379                    11%                   $400                    5%
----------------------------------------------------------------------------------------------------------------
 a: Numbers may not add due to rounding
 *% based on total payments (not just PE values)
 **Exempted codes include: 99201-99205, 99211-99215, 99241-99245, 92002, 92004, 92012, 92014. Calculators based
  on 1998 utilization


EXECUTIVE SUMMARY

    Since 1991, the Health Center Financing Administration 
(HCFA) of the U.S. Department of Health & Human Services has 
been in the process of implementing a transition to a new 
system of payment for physician services under Medicare--the 
Resource-Based Relative Value System (RBRVS). Initially, 
implementation of this system involved replacing the prior 
system of reimbursements were based, in part, on a fee schedule 
intended to reflect more closely the physician work effort 
involved in rendering specific services to patients.
    In 1994, the outgoing Congress directed HCFA to implement a 
further modification to the system, under which the portion of 
the historic fee base not paid under the work-based fee 
schedule--the so-called ``practice expense'' component of the 
schedule--would also be converted to a ``resource-based'' 
methodology.\1\ Since that time, HCFA has made a concerted 
effort to implement such a system.
---------------------------------------------------------------------------
    \1\ A third, smaller component of physician reimbursement--for 
malpractice expense--has also been implemented on a comparable basis.
---------------------------------------------------------------------------
    Its first effort in this direction, proposed for 
implementation in calendar year 1998, was stayed by 
Congressional action in the Balanced Budget Act of 1997, which 
also dictated standards HCFA must apply in modifying the 
approach it has previously proposed. Subsequently, HCFA has 
implemented, by regulation, a four-year transition to a 
resource-based practice expense payment methodology over the 
1999-2002 period. Because of ongoing controversies over the 
data HCFA is using, and the methodologies it is employing to 
determine payments under this system, HCFA is engaged in a 
``refinement'' process, under which the ``full implementation'' 
values for 2002 are being modified annually to reflect ongoing 
efforts to address these controversies.
    The Moran Company was engaged by the Practice Expense 
Coalition, a joint effort formed by a group of concerned 
medical specialty societies, to evaluate this history. The 
question we have been asked to address is whether the technical 
problems that have been raised about this methodology can, in 
fact, be ``fixed'' through technical changes to the system HCFA 
has implemented, either by HCFA, or by Congressional action to 
specify a new theory of resource-based practice expense.
    Our findings are as follows:
     The technical problems HCFA has faced in 
implementing this system are, in an important sense, inherent 
in the policy of ``resource-based practice expense,'' which 
requires HCFA to make detailed imputations of physicians 
overhead costs to over 7500 individual procedures \2\
---------------------------------------------------------------------------
    \2\ In the HCFA payment methodology, individual services and 
procedures are distinguished by use of the American Medical 
Association's Current Procedure Terminology (CPT), which is comprised 
of a set of five-digit numeric codes associated with each discrete 
service or procedure.
---------------------------------------------------------------------------
     The only data available to HCFA to evaluate 
physician practice expense costs--the results of the biennial 
Socieconomic Monitoring Survey (SMS) conducted by the American 
Medical Association (AMA)--are, for a variety of reasons we 
discuss in our report, seriously deficient as a source of data 
for the sort of analysis a resource-based practice expense cost 
imputation requires.
     While the methodology HCFA has elected to employ 
to make these cost imputations and compute a fee schedule 
represents a good-faith effort to implement the policy, the 
methodology raises a variety of policy concerns--for example, 
proper payment when clinical personnel employed by physicians 
perform work in the institutional setting--that HCFA is unable 
to address with its methodology.
     While it might be possible, in theory, to 
visualize methodological refinements to address some of these 
issues, it would not be possible for HCFA to make them, since 
the data required to support them do not exist, and would be 
difficult, expensive and time-consuming to generate.
     The combined effects of these data and methodology 
problems represent a serious policy concern, since the practice 
expense relative value weights computed by HCFA for full 
implementation produce very large swings in payment. The 
magnitude of these payment swings is particularly large between 
services rendered in a facility setting (e.g., a hospital), and 
services rendered outside the facility setting. When this 
system is fully implemented the practice expense weights HCFA 
has computed will sharply reduce payments to physicians for 
treating patients in institutions, and increase payments for 
procedures performed in the office setting.
     The magnitude of these swings, while a logical 
consequences of the data HCFA is employing and the methodology 
choices HCFA has made, are very difficult to explain in policy 
terms. Even if some variation in payment by site of service was 
intended by policymakers, the size of the payment differentials 
create the potential for troubling incentive effects.
     In our judgment, the problems with the resource-
based practice expense implementation cannot be ``fixed'' 
through the use of alternative sources of data (which don't 
exist) or the use of better methodologies (which would require 
non-existent data). Reversion to the prior policy, however, 
would reverse the stated intent of Congress to reallocate 
payments among professional specialties in order to enhance 
reimbursements for evaluation and management services policy--
to freeze the transition at calendar year 2000 levels except 
for a defined set of common routine codes--represents a 
reasonable balancing of the stated objectives.
    [An additional attachment is being retained in the 
Committee files.]
      

                                


Statment of Wayne T. Smith, Jim Fleetwood, and Marty Rash, Rural 
Hospital Coalition

    Good morning Chairman Thomas; Ranking Member Stark and 
other distinguished members of the House Ways and Means 
Subcommittee on Health. 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 marginsa 
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.
      

                                


Statement of Shore Health System, Somers Point, NJ

BACKGROUND:

    The Shore Health System is a free-standing, community based 
not-for-profit health delivery system serving the residents and 
visitors of Atlantic and Cape May Counties in New Jersey. We 
feel that it is instructive to demonstrate the impact of the 
Balanced Budget Act of 1997 (BBA), compounded by other negative 
revenue developments, on our system.

BBA:

    BBA had, and continues to have, a serious, deleterious 
effect on the System's ability to deliver quality health care 
to the community. Being comprised of the essentials of a well 
rounded continuum of care with an acute care hospital, a 
nursing home, and a home health agency, the System is subject 
to the `triple-witching' effect of BBA. Each of these key 
components of the System was adversely impacted by BBA cuts. 
Over the initial five (5) year time frame of BBA, the hospital 
faces revenue reductions of $15 million in Medicare 
reimbursement. The nursing home Medicare reductions are 
$110,000 annually, or $550,000 over 5 years. Home health agency 
reductions are, proportionately, the most onerous: $8.3 
million, or nearly 30% of expected revenues. Consequently, the 
System is challenged with aggregate revenue reductions of $23.9 
million over 5 years. This is approximately 5% of operating 
revenues over the same period. Compounding these BBA revenue 
reductions are severe cutbacks in New Jersey Medicaid, 
particularly hard hitting for the nursing home and home health 
agency, as well as dramatic increases in care rendered but not 
paid by managed care insurers and continual growth in 
uncompensated, but mandated, charity care and bad debts.

BBRA:

    The Balanced Budget Relief Act of 1999 (BBRA) offered 
welcome but scant relief to the System. Relief to the hospital 
amounts to approximately $700,000 over the five year period, or 
only 5% of the total $15 million in BBA reductions. Home health 
agency relief was granted for only one of the five years 
covered by BBA. This amounts to $56,000 on total cuts of $8 
million. Nursing home relief amounts to restoration of 20% in 
BBA cuts in only 14 of 44 patient classifications. The 
financial impact of this restoration is $10,000 per year based 
on the facility's case mix. To summarize, BBRA provides 
approximately $800,000 in relief on $23.9 million of BBA 
revenue cuts. It does not address New Jersey Medicaid 
reductions, managed care denials, or uncompensated care.

EFFECT ON OPERATIONS:

    The System, as a not-for-profit, community based provider, 
has historically reinvested its surpluses into delivery of 
quality health care services and medical equipment. 
Consequently, operating margins have traditionally been thin, 
running in the 0.5% to 3.0% range. Conventional financial 
wisdom holds that operating margins in the 5% to 7.5% range are 
essential to assure the continued viability of a health care 
provider. The Shore Health System has traditionally bridged 
this gap in margin with the contributions and volunteerism 
provided by the community.
    The effect of BBA on operating income of the system can be 
clearly demonstrated by the following:

Gain (Loss) From Operations*

    Pre-BBA: 1996 $3.6 Million
    1997 $0.9 Million
    BBA Years: 1998 ($3.9) Million
    1999 ($4.1) Million
    2000 Budget ($2.9) Million
    *Combined, audited results of hospital, home health agency 
and nursing home, excluding extraordinary items.
    Bleak as these figures are, they tell only part of the 
story. The most egregious revenue reductions of BBA fall in the 
fourth and fifth years (2001 and 2002 for the Shore System). 
Fully 55%, or approximately $13 million, of the reductions are 
yet to be realized by the System. BBRA relief measures will be 
barely perceptible in the face of these substantial cuts.
    The operating losses also tell a story of the System's 
rising to the challenge of BBA. A five (5) year turn-around 
plan has been implemented and is on target. Losses are being 
mitigated. This comes at a cost. The System, traditionally a 
lower compensation employer, has had to forego wage increases 
and cut benefits for several years. The first major layoff in a 
quarter century was implemented in 1998, followed up by a 
severe austerity program and downsizing of the executive team. 
Wage rates have slipped below competitive rates. Recruitment 
and retention in this full employment economy have become a 
daily challenge. Aggravated by a shortage of skilled nurses, 
the system has hit the ``quality wall,'' beyond which further 
staffing cutbacks result in inadequate patient care. The 
consequent stress level of dedicated staff is manifesting 
itself in labor unrest. In the face of these staff challenges, 
the ever increasing cost of necessary medical technology and 
out of control pharmaceutical pricing compete for the shrinking 
pool of revenues.

FURTHER RELIEF NEEDED:

    BBRA was intended to grant some relief of BBA cuts. It is 
not sufficient to sustain a complete recovery of America's 
health care system. If no further amelioration of the BBA cuts 
is granted, the System faces inevitable closure of both the 
nursing home and the home health agency, each of which are 
lower cost alternative means of health care delivery. More 
relief is needed now.
    While most observers can attest to excess capacity, over 
utilization and, in some cases, outright fraud in health care 
in the past, these first three (3) years under BBA have wrung 
most of these ills from the system. We are now at the point of 
doing serious harm to our health delivery system. The ironic 
tragedy is that, in this era of unprecedented economic 
expansion, budget surpluses and full employment, the United 
States is in the process of dismantling the highest quality 
health system in the world... without a replacement system in 
place. Our world leadership position will suffer as a 
consequence. Americans, and world citizens, deserve better.
    We request that the subcommittee support further meaningful 
financial relief of BBA and appropriate substantive funding to 
support this effort.
            Respectfully submitted,
                                          Richard A. Pitman
                                                          President
      

                                


Statement of Society of Thoracic Surgeons, and American Association for 
Thoracic Surgery

    The Society of Thoracic Surgeons and the American 
Association for Thoracic Surgery are pleased to submit this 
statement to the House Committee on Ways and Means Health 
Subcommittee for the record of the July 25th hearing on 
Medicare Refinements to the Balanced Budget Act. The Society of 
Thoracic Surgeons and the American Association for Thoracic 
Surgery are the primary medical specialty organizations 
representing essentially all board-certified cardiac and 
thoracic surgeons in the United States.
    As the Ways and Means Committee considers legislation 
making refinements to the Balanced Budget Act of 1997, The 
Society of Thoracic Surgeons and the American Association for 
Thoracic Surgery urge you to take action to mitigate the 
harmful impact of the Health Care Financing Administration's 
practice expense relative value rule on surgical care for 
Medicare patients with heart and lung disease.
    Fees for cardiac surgery for Medicare patients have been 
reduced by 40 percent since 1987. If the year 2002 fee schedule 
is implemented as proposed by HCFA, there will be another 
twelve percent (Cumulative reductions: from $3600 to $1700). 
This is before calculating the impact of changes in the cost of 
living. If these figures are adjusted by the Consumer Price 
Index, the reduction from 1987 to 2002 is 75 percent ($3600 to 
$850).
    The fee reductions from 1998 to 2002 are the consequence of 
decisions HCFA made in revising the ``practice expense'' 
component of the Medicare fee schedule. As you know, Congress 
ordered HCFA in 1995 to revise the fee schedule to accurately 
reflect expenses incurred, based on the belief that procedures 
performed in the office setting were undervalued. This was done 
during a time of yearly budget deficits. In order to increase 
payments for office-based procedures in a budget-neutral 
manner, reimbursement for procedures performed in the hospital 
setting, such as life-saving open-heart surgery, were reduced.
    In implementing this directive, HCFA's original work was so 
poor that Congress had to stop HCFA in its tracks and provide 
detailed instructions in the Balanced Budget Act of 1997 for 
developing the new system. In BBA '97, Congress specifically 
mandated that HCFA:
     Base the new practice expense methodology on 
generally accepted accounting principles and ``Recognize all 
staff, equipment, supplies, and expenses, not just those which 
can be tied to specific procedures,'' in determining practice 
expense reimbursement.
     Refine the interim Practice Expense Relative Value 
Unites (PERVUs) annually during this four-year refinement 
period.
     Consult with physician organizations regarding 
their data and methodology.
     Provide detailed impact analyses to test whether 
the new practice expense values reflect physicians' actual 
practices.
    For the 1999 fee schedule, HCFA did revise its methodology, 
developing new practice expense values using information from 
surveys of the American Medical Association. In its 2000 fee 
schedule, however, HCFA again revised its approach, arbitrarily 
deleting from practice expense the costs of staff on 
physicians' payrolls who assist them in the hospital. HCFA has 
estimated that this would shift $350 million a year, when fully 
implemented in 2002, from reimbursement for procedures done in 
hospitals to procedures done in offices. This has the effect of 
taking more than $40,000 of costs per physician away from 
thoracic surgeons and transferring these values to other 
specialties.
    This transfer violates the basic premise of the resource 
based relative value system and has reduced the practice 
expense reimbursement for cardiac surgery (as well as many 
other critical hospital procedures) by twenty percent. That 
translates into a further ten percent reduction in the total 
allowed fee--another five percent reduction in each of the next 
two years.
    STS and other specialties have provided HCFA with extensive 
evidence that surgeons and other specialists commonly bring 
their own staff to the hospital to assist in patient care. This 
practice is becoming more frequent as hospitals cut back their 
staffs and surgeons develop their own teams to make continued 
quality improvements.
    Separate reimbursement exists for some, but not all, of 
these physician staff. Even where reimbursement exists for 
services of some staff (physician assistants) the costs of 
these staff exceed offsetting income from fees for their work.
    In addition to this arbitrary deletion of costs, HCFA has 
failed to comply with nearly all of the other mandates of BBA 
'97. We are now halfway through the four-year transition 
process and it is clear that HCFA will not be able to make any 
refinements and accomplish the admittedly overwhelming task of 
accurately accounting for physician's practice expenses until 
well after the values are fully implemented.
    The consequence of continuing with this flawed system which 
has sharply reduced reimbursement for thoracic (cardiac) 
surgery is already becoming evident in reduced applications, 
particularly from graduates of American medical schools, for 
the seven years of advanced training required in this 
specialty. This year, eleven of the 139 residency training 
slots available in thoracic surgery went unfilled. And 
retirements of active surgeons are accelerating, even as the 
need for cardiac care of an aging population increases and 
training slots are unfilled.
    We ask that Congress take into account the cumulative 
impact of the policies of the last ten years, as implemented by 
HCFA on the future availability of the thoracic surgeons and 
other highly-advanced specialists. Advances in preventive 
medicine not withstanding, these specialists will be needed to 
care for our aging population. Sufficient incentives must be 
reestablished to encourage the best and brightest of our 
medical school graduates to come into these demanding 
professions.
    We further ask that Congress take action to correct the 
damage being done to thoracic surgery and other advanced, high 
technology medical services by HCFA's inability to follow 
Congress' BBA `97 directives. Specifically, in developing a 
Medicare refinement package, we ask that the Ways and Means 
Committee:
     Make clear to HCFA that Congress intends it to 
``recognize all expenses,'' not just those it arbitrarily 
selects, in determining practice expense reimbursement.
     In light of HCFA's inability to carry out the 
directive of Congress, support the Practice Expense Coalition's 
``Halt 2000'' initiative. This proposal, supported by our 
society and over 40 other provider organizations, would halt 
the transition at the current blend of 50% 1998 PE RVUs and 50% 
projected 2002 PE RVUs practice expense values and provide new 
money that would allow the increases currently scheduled for 
primary care to continue.
    We appreciate your consideration of our request.

                                


                                       Texas Association of
                                      Behavioral Healthcare
                                        Houston, Texas 7706
                                                     August 7, 2000

U.S. House of Representatives
Congressman Bill Thomas
House Ways and Means Committee
Subcommittee on Health
Washington, DC 20515

    Re: OFFICIAL COMMENTS REGARDING OUTPATIENT PROSPECTIVE 
PAYMENT SYSTEM (OPPS)
    Dear Congressman Thomas and Healthcare Subcommittee 
Members:
    As President of the Texas Association of Behavioral 
Healthcare (TABH), I represent the providers, employers, and 
employees of various types of psychiatric services throughout 
the state of Texas. The purpose of this testimony is to address 
the loss of mental health treatment options for patients who 
are living with a chronic and persistent mental illness, 
resulting in the current crisis in the treatment of mental 
illness. Additionally, I have outlined the steps that the 
providers of PHP services and Congressional Representatives 
have taken over the past two years in an attempt to avoid this 
crisis.
    A number of meetings were held over the past two years 
between Texas Representatives of Congress, the (TABH), 
providers of psychiatric Partial Hospital Programs (PHP), and 
Health Care Financing Administration (HCFA). The purpose for 
the meetings was 1) to bring to the attention of HCFA the 
potential crisis regarding the access to mental health care for 
patients as a result of unclear and inadequately and 
inconsistently interpreted regulations, and 2) the 
implementation of the Outpatient Prospective Pay System (OPPS), 
(which in the case of the PHP benefit was unjustly determined).
    During the meetings both TABH delegates and Texas 
Representatives ardently pointed out that the HCFA regulations 
that guide the delivery of the PHP benefit had been 
traditionally unclear, were not consistent, and were not fairly 
implemented by some Fiscal Intermediaries (FI). It was debated 
that HCFA revise their regulations, use recent information in 
which to base new decisions, revise the way in which PHP 
programs are reimbursed, and fairly assess the current use of 
the benefit by mentally ill beneficiaries. It was stated by 
Texas Representatives that if these suggestions were ignored, 
the PHP programs would begin to reject Medicare patients, and 
the benefit would be destroyed, leaving the mentally ill 
patient few options for their treatment.
    In addition, it was discussed that many of the Texas PHPs 
have already closed their programs to Medicare patients due to 
numerous new and overly burdensome regulations imposed by HCFA, 
and the lack of an appropriate per diem rate that was to be 
implemented with the Outpatient Prospective Pay System (OPPS) 
on August 1, 2000. This fact was supported by the January 2000, 
General Accounting Office's (GAO) report ``GAO/HEHS-00-31, 
Medicare--Lessons Learned From HCFA's Implementation of Changes 
to Benefits.'' The closure of PHP services has left many areas 
in Texas without treatment programs for the mentally ill. This 
is especially true for the rural areas, of which there are many 
in such a large state as Texas.
    In an effort to be more precise, I will state the 
situations that have occurred over the past two years in 
chronological order:
    1. In November 1998, the Subcommittee on Oversight and 
Investigation--Committee on Commerce--conducted a hearing where 
it was reported by HCFA that 91% of all PHP admissions were 
medically unnecessary. Although the TABH and other state 
organizations were able to show that this figure was based on 
one state (Florida) and five centers from that state, HCFA was 
never willing to rescind that original figure. It is the 
``fact'' that is still repeated throughout Congress, and one 
that is believed strongly by Congressional members.
    2. In 1999, as a result of the November 1998 hearing, the 
HCFA Office of Inspector General (OIG) swept through five 
states, including Texas and Florida, closing programs as they 
went. After bringing these reports to the attention of Texas 
Representatives, the Representatives began to intervene on our 
behalf. Since that time, it has been determined that a number 
of these programs were illegally closed. This information can 
be verified by the Texas Congressional offices whose districts 
were affected.
    3. In February 1999, a Townhall Meeting was held in 
Baytown, Texas sponsored by Texas Members of Congress. Over 300 
people from many states were in attendance. Mr. Robert 
Striemer, the HCFA representative, attended the meeting. 
Representatives from several state organizations gave testimony 
on the crisis that was already occurring in accessing 
psychiatric treatment for the mentally ill.
    4. Throughout 1999, a number of state organizations went to 
Washington, D. C. to bring this crisis to the attention of 
their Representatives. Congressman and Senators from Arizona, 
California, Connecticut, Colorado, Florida, Georgia, Iowa, 
Illinois, Kentucky, Louisiana, Main, Maryland, Missouri, North 
Carolina, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, 
Texas, Virginia, Washington, Wisconsin, and Wyoming were 
contacted by their sate organizations. The purpose of the 
meetings was to educate the representatives on the significance 
of the PHP programs, the statistics that were misrepresented by 
the 1998 hearing, and the unjust treatment by HCFA.
    5. In October through December of 1999, HCFA conducted a 
five state Local Medical Pre-Pay Review of all centers that 
provided PHP services. In January and February 2000, additional 
providers were forced to either close their centers or cease 
providing PHP services to Medicare patients. Again, it has been 
shown that many of these centers were penalized using methods 
of data collection and examination that did not follow the 
rules set forth by HCFA themselves in a September, 1999 
Memorandum. Texas Representatives were again contacted. Some 
cases are still under review with assistance from Texas 
Congressional offices.
    6. In May 2000, Congressman Nick Lampson hosted a meeting 
in his office with representatives from other Texas 
Congressional offices, representatives of the TABH and the HCFA 
administrator, Nancy Ann Min-DeParle and members of her staff. 
The purpose of the meeting was to inquire how the per diem rate 
that was set for the payment of PHP treatment under OPPS was 
determined. It was stated by Ms. DeParle that the rate was a 
``best guess estimate,'' and that ``no formal data was gathered 
or examined from outpatient, non-hospital based programs in 
setting the rate.''
    7. In July 2000 a meeting was held in the office of 
Secretary Donna Shalala, Department of Health and Human 
Services (DHHS). In attendance were Secretary Donna Shalala, 
Administrator Nancy Ann Min-DeParle, (HCFA) and Congressional 
Representatives Nick Lampson, Sheila Jackson-Lee, Ted 
Strickland, Ken Bentsen, Joe Barton, and Charles Rodriguez. The 
purpose of this meeting was to ask for the delay of the 
implementation of OPPS for PHP services (only) until such time 
that an adequate per diem rate could be established and other 
problems could be worked out between HCFA and providers of PHP 
services. Secretary Shalala and Ms. DeParle denied the request.
    Nationally, 65% to 80 % of the programs that were 
operational in 1998, and served chronically mentally ill 
patients, have closed. It is impossible to determine the exact 
number of closures, as ``active provider numbers'' are 
considered by HCFA as ``active centers providing services,'' 
however most centers that have closed or are no longer 
providing services to Medicare patients have not surrendered 
their provider number, giving an entirely false statistic. Most 
recently, the implementation of OPPS has made it necessary for 
additional programs in Texas, and around the nation to close or 
cease admitting Medicare patients, as it has become 
economically impracticable to provide the services at the per 
diem rate currently in effect.
    In addition, promises that were made by Ms. DeParle during 
the May meeting with Texas Representatives were breached. We 
were assured that the ``transitional corridors and outlier 
payments'' would be provided to PHP providers who did not have 
a 1996 Cost Report, ``to lessen the blow that OPPS would have 
on providers.'' This same statement was made by individual FIs 
in the training programs presented to providers on the 
implementation of OPPS. HCFA has now changed their position and 
are not providing the promised relief to PHP service providers 
without a 1996 Cost Report. The response to the new information 
has been that multiple facilities have closed or are planning 
to close due to the perceived severity of the financial impact 
of OPPS. Furthermore, Texas PHP providers have not yet received 
final word from our FIs on the financial implications of OPPS. 
This is the second week of the implementation of OPPS.
    Compounding the reimbursement situation is the continued 
lack of clear guidelines for PHP providers on issues related to 
service provision. For example, FIs in many regions have yet to 
provide a Local Medical Review Policy (LMRP), which addressed 
the changes in the ``Final HCFA Rule.'' We were assured by HCFA 
that a LMRP would be published prior to the implementation of 
OPPS. Again, we are being asked to provide adequate PHP 
services without the benefit of rules and guidelines.
    1. To expand on these comments, I am providing the 
following comments: HCFA failed to follow Federal Parity 
Legislation in the implementation of OPPS by allowing medical 
providers Transitional Corridor Payments and Outlier Payments 
and precluding PHP providers from qualifying for any additional 
payments. A default rate has been given which calculates to 
$0.00 in Transitional Corridor and Outlier Payments.
    2. Rural hospitals have been provided with relief from 
OPPS, but rural PHP providers have been excluded.
    3. HCFA publicly admitted on several occasions that no data 
from outpatient, non-hospital based PHP providers was 
considered in determining the daily rate.
    4. No impact studies were conducted regarding the impact of 
OPPS on access to care for the mentally ill. To date, Texas has 
experienced closures of PHP services in excess of 70% due to 
unjust treatment and illegal closures by HCFA, and the 
implementation of OPPS. These closures leave entire regions of 
the state with no access to psychiatric treatment programs for 
Medicare beneficiaries.
    5. The 1998 HCFA--OIG Report that Congress has used for the 
basis of many decisions regarding the future of the PHP and 
psychiatric services are inaccurate and have been 
misrepresented, as evidenced by statements in the GAO Report. 
In addition, other Committees who have held hearings regarding 
the 91% ``error rate'' report testimony to the contrary. It has 
been stated in a number of hearings that the method of data 
collection used by HCFA was flawed from the inception. Auditors 
were not trained or prepared, many had no experience in data 
collection, agencies that were contracted to collect the data 
were not trained, and the examination and documentation of the 
data was not standardized. Again, the result was a ``best 
guess'' resulting in an industry that has been unjustly 
punished and patients who now go without treatment. I would be 
glad to share with the Subcommittee my personal experience with 
the 1998 HCFA survey process!
    I want the subcommittee to know that the TABH is not 
denying the occurrence of fraud and abuse of the PHP benefit in 
some areas of the country. Several Texas providers were closed 
as a result of fraudulent activities. Others went on to other 
ventures that were not under such close scrutiny. Also, we are 
in favor of the OPPS if implemented fairly with a per diem rate 
that is representative of the cost of providing the PHP 
services nation wide. It should be noted that with the closure 
of hospital based psychiatric services nationally, PHP service 
providers are mandated (by HCFA rule) to provide intense 
programming to extremely ill patients. The cost of providing 
services through the outpatient PHP level of care has escalated 
800% since 1996 due to new HCFA rules and the acuity level of 
the patient served.
    The TABH is respectfully requesting that the Members of 
this Subcommittee consider this testimony and take steps toward 
correcting the devastating and discriminatory effects that the 
implementation of OPPS has had on PHP services and the mentally 
ill patient's access to appropriate care.
     The beneficiaries and their families, already burdened 
with chronic mental illness, are not in a position to advocate 
for themselves. The lack of access to mental health treatment 
is a real crisis that is now being felt throughout the country.
    The psychiatric community feels that we have been unjustly 
targeted by HCFA. We feel that it has been their intention to 
decertify all centers providing PHP services. We may be wrong 
in our assumption, but it has been a constant struggle for over 
two years to provide needed services for these chronically ill 
patients. At this point it is the patient who is suffering. The 
patient has little access anymore to the treatment programs 
that allow them to remain in the community environment and 
benefit from community based living. Community living is the 
reason that state mental hospitals and mental institutions were 
closed, and the mentally ill citizens returned to neighborhoods 
to live. This treatment crisis is making it impossible for them 
to maintain a sane lifestyle and remain living in their 
neighborhoods. Please consider the patient and their needs in 
this situaton.
            Respectfully,
                                        JoAnne Mandel, LMSW, RN, CS
      

                                


                                 Visiting Nurse Association
                                Cincinnati, Ohio 45202-1468
                                                      July 25, 2000

A.L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. house of Representatives
1102 Longworth House Office Building
Washington, DC 20515

    Dear Mr. Singleton:
    The Balanced Budget Act of 1997 had a devastating effect on 
the providers of home health services beginning in 1998. It is 
our understanding, based on a series of publications including 
commentary by NAHC (National Association for Home Care), that 
between 20-30% of home health agencies have gone out of 
business since the introduction of the BBA. This has been 
caused by:
    a. reduced levels of reimbursement
    b. a reduction in referrals to home health agencies caused 
by the actions taken by HCFA to reduce the utilization of home 
care and the concerns of fraud and abuse by physicians
    There are a number of continuing outstanding issues which 
we believe must be addressed by Congress if we are to preserve 
home care as an alternative to institutional care, i.e. nursing 
homes and hospitals. At the moment it is purely speculative as 
to the real impact of the Prospective Payment System (PPS), 
which will take effect October 1, 2000. Grave concern has been 
expressed by many that as a result of the changes for reporting 
the clinical assessment as well as the provision of new 
requirements through an information set required by HCFA, plus 
the level of reimbursement, that as much as an additional 10% 
of home health agencies may go under.
    In light of the above, we would recommend that your 
committee consider the following:

1. Reductions effective October 1, 2001

    Under the current legislation, we anticipate a further 
reduction in reimbursement of 15% effective October 1, 2001. 
Were this to be implemented, then it is likely that such action 
would represent the final nail in the coffin for most of the 
home health industry. We would strongly urge that this 
provision be eliminated and that an additional 15% be added 
back in the year 2001. As compared to hospitals where 60% of 
their expenses are spent in human resources, the same line item 
is 85% in home care organizations.
    It should be noted that a comprehensive cost effective 
study regarding home care was issued in November of 1999 
provided to the legislative body in British Columbia. The 
conclusion was that home care is in fact cost effective when 
compared to other forms of institutional care.

2. Benefits

    The benefit package in home care represents an enormous 
discrepancy as compared to other components of health care 
provided in hospitals and nursing homes. Payment by employees 
for health care family benefits frequently requires as much as 
60% of the premium costs by home care employees versus anywhere 
from 15-35% among nursing homes and hospitals for comparable 
packages. This puts a significant burden and a competitive 
disadvantage to retain and recruit at all levels within home 
care. It is not unusual that among the lowest category of 
employees, i.e. home health aides, that pension benefits are 
not provided. In part this state of affairs is a direct 
reflection of the inadequacies of reimbursement for services 
rendered for both Medicare as well as Medicaid.

3. Nursing Homes

    The press has indicated that a new report is on its way to 
HCFA concerning inadequacy of staffing in nursing homes. One of 
the responses in the nursing home industry predictably is that 
significant additional dollars will have to be paid by payor 
sources if new employees are to be hired. This not only affects 
the issue of quality of care, but will further impact the issue 
of levels of payment if the nursing homes are to successfully 
compete in the marketplace. From a compensation point of view, 
inclusive of fringe benefits, home care agencies often are the 
lowest paying organizations within health care. If in fact the 
additional dollars are paid to nursing homes, which sounds 
reasonable based upon the issues of adequate staffing, then 
without similar payments to home health agencies our industry 
will be unable to either recruit or retain its professional and 
non-professional staff.

4. Cash Flow

    Our organization has been a recipient of PIP (Periodic 
Interim Payment) which is now being eliminated under PPS. This 
will now provide us with a cash flow shortfall of approximately 
$225,000 for the federal fiscal year 2001. Our total budget is 
slightly in excess of $9 million with a marginal balance sheet 
and with no reserves. Our plight, we believe, is not unique and 
we would ask that either PIP be reinstated or some other 
mechanism be developed to ensure appropriate cash flow to meet 
the needs of our expense budget to pay our employees as well as 
our vendor obligations on a timely basis.
    Many thanks for the opportunity to comment.
            Cordially,
                                                  Warren C. Falberg

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