[Senate Hearing 106-654]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 106-654

                      THE CRISIS IN RURAL AMERICA

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

                      COMMITTEE ON APPROPRIATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                               __________

         Printed for the use of the Committee on Appropriations




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

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
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                     COMMITTEE ON APPROPRIATIONS

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

  Subcommittee on Agriculture, Rural Development, and Related Agencies

                  THAD COCHRAN, Mississippi, Chairman
ARLEN SPECTER, Pennsylvania          HERB KOHL, Wisconsin
CHRISTOPHER S. BOND, Missouri        TOM HARKIN, Iowa
SLADE GORTON, Washington             BYRON L. DORGAN, North Dakota
MITCH McCONNELL, Kentucky            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                RICHARD J. DURBIN, Illinois
TED STEVENS, Alaska                  ROBERT C. BYRD, West Virginia
  (ex officio)                         (ex officio)
                           Professional Staff

                           Rebecca M. Davies
                        Martha Scott Poindexter
                              Hunt Shipman
                       Galen Fountain (Minority)

                         Administrative Support

                               Les Spivey
                   Carole Geagley (Minority)


                           C O N T E N T S

                              ----------                              
                                                                   Page

Statement of Senator Thad Cochran................................     5
Prepared statement of Senator Herb Kohl..........................     6
Statement of Senator Slade Gorton................................     6
Statement of Senator Dianne Feinstein............................     8
    Prepared statement...........................................     9
Prepared statement of Senator Conrad Burns.......................    11
Statement of Senator Chuck Hagel, U.S. Senator from Nebraska.....    12
    Prepared statement...........................................    15
Statement of Gail R. Wilensky, Ph.D., Chair, Medicare Payment 
  Advisory Commission............................................    17
    Prepared statement...........................................    19
What we know about rural hospitals' financial condition..........    20
Potential impact of policies in the BBA..........................    21
Other factors affecting rural hospitals' financial viability.....    22
Medicare's role in ensuring access to care for rural 
  beneficiaries..................................................    22
Statement of Claude Earl Fox, M.D., MPH, Administrator, Health 
  Resources and Services Administration, Department of Health and 
  Human Services.................................................    23
    Prepared statement...........................................    25
Statement of Robert A. Berenson, M.D., Director, Center for 
  Health Plans and Providers, Health Care Financing 
  Administration, Department of Health and Human Services........    27
    Prepared statement...........................................    28
Background.......................................................    29
President's proposal.............................................    30
Monitoring beneficiary access....................................    31
Statement of Senator Richard J. Durbin...........................    38
Statement of G. Douglas Higginbotham, Executive Director, South 
  Central Regional Medical Center, Laurel, Mississippi...........    41
    Prepared statement...........................................    45
Statement of Anne Klawiter, Chief Executive Officer, Southwest 
  Health Center, Platteville, Wisconsin..........................    47
    Prepared statement...........................................    50
Southwest Medical Center's story.................................    50
Rural snapshot...................................................    51
The BBA went too far--what should Congress fix?..................    51
Medicare reform..................................................    52
Statement of Debra L. Griffin, Administrator, Humphreys County 
  Memorial Hospital, Belzoni, Mississippi........................    53
    Prepared statement...........................................    55
Statement of Roland E. ``Guy'' King, Consulting Actuary, former 
  Chief Actuary, Health Care Financing Administration............    56
    Prepared statement...........................................    58

                               (iii)

 
                      THE CRISIS IN RURAL AMERICA

                              ----------                              


                        WEDNESDAY, JULY 14, 1999

                           U.S. Senate,    
         Subcommittee on Agriculture, Rural
                 Development, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:04 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Thad Cochran (chairman) presiding.
    Present: Senators Cochran, Gorton, Durbin, and Feinstein.


                   STATEMENT OF SENATOR THAD COCHRAN


    Senator Cochran. The subcommittee will please come to 
order.
    Today we are very pleased to convene a hearing to look into 
the effect of the Balanced Budget Act and the implementation of 
that act on the financial condition of rural hospitals and how 
that in turn affects our efforts to develop the economies of 
the small towns and rural communities throughout the United 
States.
    We all know that rural hospitals can be in some instances 
the most important economic activity in a small town or a rural 
community. I think one of our witnesses who will testify today 
points out that, second only to the local education system, the 
schools, the local hospitals are the largest employer of 
workers. So the effect of a rural hospital on the economy of a 
local area cannot be exaggerated in terms of its impact on the 
quality of life, first of all, the access to health care that 
it provides, and also the access to a job and a higher standard 
of living for the people who live in the area.
    So when hospitals are put under a lot of new economic 
pressures and are forced to close or to make changes that 
reduce the employment level in that community, it has a very 
serious economic consequence for the people, not only who work 
at the hospital or the clinic, but who live in the area.
    So our hearing today will look at this problem, which some 
are saying is a crisis in rural America, and try to determine 
what, if anything, the Congress should be doing to address this 
problem and what, if anything, the administration should be 
doing that it is not doing to deal with this problem.

                           PREPARED STATEMENT

    We are very pleased to have a talented group of witnesses 
to testify at our hearing today. We are going to be joined 
later by the distinguished ranking minority member of the 
committee, Senator Kohl of Wisconsin, and I will put an opening 
statement in the record in his behalf and call on him when he 
does arrive.
    [The statement follows:]

                Prepared Statement of Senator Herb Kohl

    Thank you, Mr. Chairman. Unfortunately, due to a conflict with a 
Judiciary Committee hearing, I could not be here for the first panel of 
this hearing. But I look forward to reviewing the first panel's 
testimony, and I plan to submit several questions for the Record.
    I especially want to welcome Anne Klawiter from Southwest Health 
Center in Platteville, Wisconsin. I know she will provide a clear 
picture of the critical challenges faced by rural hospitals in 
Wisconsin and across the nation.
    When we passed the Balanced Budget Act of 1997, we intended to 
achieve a certain level of savings for Medicare. We intended to 
eliminate wasteful spending. We intended to weed out unscrupulous, 
fraudulent providers. In short, we intended to save the Medicare 
program from bankruptcy. We all still support that goal.
    However, when we passed the BBA, we never intended to put good, 
efficient, hard-working health care providers out of business. And we 
certainly never intended to force rural providers to cut back on needed 
services or even worse--to force them out of business altogether.
    Unfortunately, some of the provisions of the BBA are causing 
disastrous consequences for rural hospitals. A recent study estimates 
that, once the BBA is fully implemented, profit margins for small, 
rural hospitals are expected to fall from 4.2 percent in 1998 to 
NEGATIVE 5.6 percent in 2002. These reductions will likely force rural 
hospitals to reduce services--leaving many residents in rural 
communities without the care they need.
    It is time for all of us--both in Congress and the Administration--
to take a hard look at the unintended effects of the BBA. And while we 
cannot and must not go back to the time when Medicare was close to 
bankruptcy, we do have to make sure that Medicare beneficiaries in 
rural communities have reliable access to quality health care.

    Senator Cochran. Our distinguished friend and colleague 
from the State of Washington, Senator Gorton, a member of the 
committee, is here as well.
    Our lead-off witness is going to be the Senator from 
Nebraska, Chuck Hagel, whom we appreciate very much being here. 
At this point I will yield to my friend from Washington for any 
comments or opening statement he might have. Senator Gorton.

                   STATEMENT OF SENATOR SLADE GORTON

    Senator Gorton. Mr. Chairman, focusing on the impact of the 
implementation of the Balanced Budget Act of 1997 on rural 
hospitals and access to care for seniors in rural areas is a 
vitally important task and one that I am grateful that you have 
asked this subcommittee to look into. Obviously, that Balanced 
Budget Act has been one of the amazing successes of American 
public policy and has had tremendously positive impacts on our 
economy taken as a whole. But as special provisions are 
implemented and as the administration develops payment systems, 
issues its regulations and guidance, I continually hear from 
providers in my State, and particularly those in rural areas, 
that the payment reductions and increased paperwork burden are 
simply untenable.
    The administrator at Sunnyside Community Hospital, for 
example, told me that in his 30 years of experience this is the 
worst ever for reimbursement cuts. Washington State has one of 
the most efficient health care systems in the Nation. Hospital 
inpatient costs are 31 percent in per patient episode costs on 
average than the national average. Despite these efficiencies, 
Washington's 92 hospitals, all of which, all except for six, 
are nonprofit, will bear $650 million of the payment reductions 
from the Balanced Budget Act.
    Audited data from our State's Department of Health show 
that in 1997 38 percent of our State's hospitals lost money on 
operations. This year that figure will be larger. This means 
that many hospitals will have to cut staffing levels, will lose 
much of their ability to finance hospital improvements, and may 
be forced to close some facilities.
    But hospitals represent only part of the crisis. Every 
county in Washington receives an adjusted average cost rate 
that is below the national average. In 1997 Washington health 
plans lost a combined $110 million. Nine of the ten largest 
plans experienced an operating loss and six of them had net 
losses even after factoring in investment gains obtained in one 
of the strongest markets in the history of our Nation.
    Those reimbursement rates are even lower in rural areas and 
are one of the reasons that a number of plans have decided that 
it was no longer good business to stay in eastern Washington. 
In fact, low reimbursement rates and the potential for more 
losses due to implementation of the risk adjustor was one 
reason that a number of insurance companies across Washington 
State dropped seniors in rural areas from their health plans. 
This has meant that in many counties in eastern Washington 
seniors have no other option than the more expensive fee for 
service plans.
    We know that rural hospitals face unique challenges in the 
delivery of health care. Typically, rural hospitals serve a 
higher percentage of Medicare and Medicaid patients than their 
urban and suburban counterparts. As many as 70 percent of the 
patients served at Sunnyside are Medicare or Medicaid patients. 
The administrator for Ferry County Hospital tells me that at 
least 50 percent of their patients are Medicare recipients and 
she estimates that they receive 51 cents for every dollar it 
costs to provide care.
    An efficient health care system combined with the 
challenges of health care in rural markets results in rural 
health systems that are extremely vulnerable to payment changes 
and increased bureaucracy that diverts staff time from patient 
care. Ultimately, it means that we are jeopardizing the quality 
of care for seniors and other Americans living in rural 
communities.
    I am frustrated by the response from the administration to 
these challenges. HCFA no doubt has a daunting challenge in 
front of it as it works to implement the many reforms in BBA 
1997. However, it seems that repeatedly the administration has 
ignored the needs of rural areas.
    For example, the proposed beneficiary copay for the 
outpatient prospective payment system means that outpatient 
reimbursements to hospitals will be reduced an additional 5.7 
percent across the board. Across the board Medicare cuts will 
only exacerbate the geographic inequities that currently plague 
the Medicare system and punish the Nation's more efficient 
providers. There are many other examples that will no doubt be 
raised in today's hearings.
    I hope we will have the opportunity to address the 
difficulty many rural hospitals have in recruiting and hiring 
doctors, nurses, and other health care professionals as well. I 
am proud to represent a State that includes a medical school, 
the University of Washington, that has an extremely strong 
program in rural medicine and encourages residents to practice 
in rural areas throughout Washington, Wyoming, Alaska, Montana, 
and Idaho.
    Preserving access to quality health care in rural areas for 
seniors and other Americans living in rural areas is a daunting 
challenge. I am committed to it, as you are, but future reforms 
must not solely be at the expense of providers and must not 
punish efficient practices, as is the case in the current 
system.
    I look forward to hearing from our colleague from Nebraska 
and from the panels.
    Senator Cochran. Thank you very much, Senator.
    Senator Feinstein, a member of our committee, has joined 
us. Senator, we will recognize you at this minute for any 
comments or opening statement that you would like to make.

                 STATEMENT OF SENATOR DIANNE FEINSTEIN

    Senator Feinstein. Well, thank you very much, Mr. Chairman. 
Let me thank you for holding this hearing, because the issue of 
the rural hospital in California is also a very big issue. We 
have had since 1996 37 hospital closures and 13 consolidations.
    If I may, I would like to submit a list of those hospital 
closures for the record, because the great bulk of them are 
really rural hospitals.
    Senator Cochran. We will make that a part of the record.
    Senator Feinstein. This is a map--I do not know if you can 
see it--put out by the Hospital Conference, that shows the 
rural hospitals in California. It points out that we have 72 
State-defined small and rural hospitals, plus 7 HCFA-defined, 
non-State-defined rural hospitals, located in non-MSA counties. 
They serve about 2.6 million rural residents. The non-MSA 
definition of ``rural'' benefits only 42 percent of the small 
and rural hospitals, and they serve about a million residents.
    The Office of Rural Health Planning definition of ``rural 
hospitals'' expands those to about 62 small and rural 
hospitals. But there is a real discrepancy there that I think 
needs to be remedied.
    Mr. President, or Mr. Chairman, I just came back from 
California and I met with a number of doctors and hospital 
administrators, patients, and others, and I come back to 
Washington this week with a very deep sense of concern. The 
California health service system is really stretched to the 
limit. We are a big State. We have the heaviest penetration of 
managed care in the Nation, with over 25 million people in some 
form of managed care.
    Doctors tell me that the HMO premiums in California are 40 
percent lower than any of the other States, which creates a 
situation of cost containment. That is the good news. The bad 
news is that it is pushing the system into self-destruct, in 
that hospitals are closing, medical practices are going out of 
business, there is an inability to recruit young doctors, and 
of course we all know the stories of the absence of patient 
care.
    The Medicaid rates paid to hospitals in our State 
unfortunately are among the lowest in the country, and that 
contributes to it. Medicare cuts have exacerbated our 
hospitals' difficulty. In California's rural hospitals, 40 
percent of the patients are Medicare and 20 percent are 
Medicaid. We have an uninsured rate of 22 percent, 6.5 million 
people, while the national rate is 15 percent. So we are 7 
percent above, and that puts a burden of uncompensated care on 
hospital emergency rooms.
    We have 40 percent of the Nation's immigrants. This adds to 
hospitals' burdens of uncompensated care because most of these 
immigrants are uninsured.
    And California's hospitals now must comply with heightened 
seismic safety requirements. This is going to cost hospitals 
$10 billion by 2008 and $20 billion by 2030.
    Again, we have had 37 hospitals close, most of them rural, 
13 consolidations. And the California Health Care Association 
predicts that 15 percent more of these hospitals will close by 
the year 2005, and they also predict that our public safety net 
hospitals will be caught in a major budget squeeze.
    As for rural hospitals, the association says that 69 
percent of the State's rural hospitals lost money in 1998 and 
that conversions and consolidations among them could eliminate 
a 15 percent additional number by 2005.
    So no wonder everybody is demoralized and dispirited about 
health care in California. We see HMO's interfere with medical 
decisionmaking, focus on cost-cutting at the expense of good 
health care. So I am very pleased to have this hearing.

                          PREPARED STATEMENTS

    I would like to ask, if you might, that the full text of my 
remarks and this chart defining rural hospitals in California 
be placed in the record.
    Senator Cochran. They will be made a part of the record 
without objection.
    Senator Feinstein. Thank you very much.
    Senator Cochran. Thank you, Senator. At this time I would 
also like to enter in the record a statement from Senator 
Burns.
    [The statements follow:]

             Prepared Statement of Senator Dianne Feinstein

    Thank you Mr. Chairman for holding this important hearing today.
    I have just returned from California where I met with a number of 
doctors, hospital administrators, patients and others and I have 
returned very concerned about the health care system in California. I 
think it is about to self destruct.
    California's health care system is stretched to the limit. We face 
a number of compelling problems:
  --First, we are a big state--33 million people.
  --We have the heaviest penetration of managed care in the nation. 
        Over 25 million Californians are in some form of managed care. 
        Managed care has shorter hospital lengths of stay than other 
        types of insurance and managed care plans contract only with 
        certain hospitals. Doctors say that HMO premium rates in 
        California are 40 percent lower than those in other states.
  --Medicaid rates paid to hospitals are among the lowest in the 
        country.
  --Medicare cuts have exacerbated our hospitals' difficulties. In 
        California's rural hospitals, 40 percent of patients are 
        Medicare and 20 percent are Medicaid.
  --We have an uninsured rate of 22 percent, 6.5 million people, while 
        the national rate is 15 percent. That puts a burden of 
        uncompensated care on hospital emergency rooms.
  --California has 40 percent of the nation's immigrants. This too adds 
        to hospitals' burdens of uncompensated care because many 
        immigrants are uninsured.
  --California's hospitals must comply with seismic safety 
        requirements. This will cost our hospitals $10 billion by 2008 
        and $20 billion by 2030.
  --In the last three years, we have had 37 hospitals close and we have 
        had 13 consolidations. The California Health Care Association 
        predicts that up to 15 percent more may close by 2005. They 
        also predict that our public safety-net hospitals will be 
        caught in a major budget squeeze.
  --As for rural hospitals, the Association says that 69 percent of the 
        state's rural hospitals lost money in 1998 and that conversions 
        and consolidations among rural hospitals could eliminate up to 
        15 percent of rural hospitals by 2005.
  --Doctors are dispirited and demoralized, as HMOs interfere with 
        medical decision making and focus on cost cutting, at the 
        expense of good health care.
    I am very glad we are having this hearing because many of the 
problems of our rural hospitals are also problems in other areas. In 
addition, in rural communities, rural hospitals are often the hub of 
health care services, providing a wide range of services to a broad 
population.
    I believe we, the Congress, must give priority attention to this 
crisis. I think we should re-examine the cuts of the Balanced Budget 
Act and their impact on our hospitals.
    In my state, the system is headed for meltdown and we must do 
something.
    Today's hearing is a good first start. I look forward to working 
with my colleagues to make whatever changes are necessary to insure a 
strong hospital and health care system for our citizens.
              California Hospital Closures From 1996-1999
Summary:
    Total closures from 1996-1999--37
    Total consolidations from 1996-1999--13
                                  1999
Closures
    Washington Hospital, Culver City, 2/20/99
    San Bernardino County Medical Center, San Bernardino, 3/29/99
    San Bernardino County Mental Health, San Bernardino, 3/29/99
    Valley Community Hospital, Santa Maria, 3/29/99
No consolidations to date
                                  1998
Closures
    Pacifica Hospital Care Center, Huntington Beach, 11/1/98
    North Hollywood Hospital, North Hollywood, 8/31/98
    Capistrano-by-the-Sea Hospital, Dana Point, 6/30/98
    Long Beach Doctors Hospital, Long Beach, 6/25/98
    Pacific Shores Hospital, Oxnard, 5/29/98
    Friendly Hills Regional Medical Center, La Habra, 5/15/98
    South Bay Medical Center, Redondo Beach, 5/31/98
    Del Puerto Hospital, Patterson 4/30/98
    Bloss Memorial District Hospital, Atwater, 3/31/98
    Calexico Hospital, Calexico, 1/15/98
Consolidations
    Chico Community Hospital, Chico consolidated with Enloe Medical 
Center, Cohasset Campus on 6/30/98
    Chico Community Rehabilitation Hospital, Chico consolidated with 
Enloe Rehabilitation Center on 6/30/98
    Davies Medical Center, San Francisco consolidated with California 
Pacific Medical Center, Davies Campus on 7/29/98
                                  1997
Closures
    Belmont Hills Hospital, Belmont, 12/30/97
    Newhall Community Hospital, Newhall, 12/29/97
    Woodruff Community Hospital, Long Beach, 11/29/97
    Monterey-Psychiatric Health Facility, Monterey, 5/23/97
    Shriners Hospital, San Francisco, 4/11/97
    Pioneer Hospital, Artesia, 9/4/97
    SHC Speciality Hospital, Westlake Village, 8/1/97
    East Bay Hospital, Richmond, 7/14/97
    Harbor View Medical Center, San Diego, 7/5/97
    Stanislaus Medical Center, Modesto, 11/30/97
    Tenet Health Corporation San Diego, San Diego, 12/31/97
    Thompson Memorial Medical Center, Burbank, 3/31/97
Consolidations
    Memorial Center, Bakersfield consolidated with Bakersfield Memorial 
on 6/30/97
    Encio-Tarzana Medical Center--Tarzana consolidated with Encino 
Tarzana-Encino on 1/15/97
    Speciality Hospital of Southern California--San Garbrial Valley, 
West Covina consolidated with Speciality Hospital of Southern 
California on 10/7/97
    Siskiyou General Hospital, Yreka consolidated with Fairchild 
Medical Center, Yreka on 6/30/97
                                  1996
Closures
    Westside Hospital, Los Angeles, 12/13/96
    Sun Ridge Hospital, Yuba City, 11/5/96
    Community Hospital and Sports Medical Center, Perris, 7/10/96
    Valley Medical Center of Fresno, Fresno, 10/4/96
    Charter Behavioral--Yorba Linda, 4/1/96
    Charter Behavioral--Thousand Oaks, 4/1/96
    Community Hospital Mental Health Oakcrest, Santa Rosa, 3/26/96
    Desert Palms Community Hospital, Palmdale, 3/15/96
    Sierra Hospital, Fresno, 2/15/96
    Stockton State Hospital, Stockton, 2/2/96
    Tustin Medical Center, Tustin closed on 3/30/96 but reopened on 2/
23/98 as Vencor-Burbank
Consolidations
    Kaiser Foundation Hospital, Martinez, consolidated with Kaiser 
Foundation Hospital, Walnut Creek on 7/1/96
    Sutter Memorial Hospital, Sacramento consolidated with Sutter 
General Hospital, Sacramento on 4/1/97
    Mills Memorial Hospital, San Mateo Consolidated with Peninsula 
Medical Center on 11/18/96
    Specialty Hospital of Southern California, Santa Anna consolidated 
with Specialty Hospital of Southern California, La Miranda on 11/22/96
    Visalia Community Hospital, Visalia consolidated with Kaweah Delta 
District Hospital on 2/1/96
    Bellwood General Hospital, Bellflower consolidated with Orange 
County Community Hospital, Buena Park on 6/17/96
                                 ______
                                 
               Prepared Statement of Senator Conrad Burns

    Mr. Chairman, thank you for allowing me to speak on behalf of the 
rural hospitals in Montana today. We are truly in a serious situation 
with our hospitals in Montana. Many of my constituents have to travel 
over 100 miles just to visit a hospital or health care center, but that 
is the least of their problems.
    Due to the reduction in Medicare reimbursement as a result of the 
Balanced Budget Act, we are receiving inadequate payment of the care 
that our patients require, for both in-patient and ambulatory care 
services. The Balanced Budget Act was projected to reduce overall 
Medicare spending by $116 billion over five years. It appears that 
these savings could be much greater. The American Hospital Association 
concluded that the actual savings in hospital spending will be about 
$17 billion to $18 billion more than projected. The underestimates for 
home health savings have been of a far greater magnitude.
    If this shortfall continues, it will result in serious limitations 
in services available to residents in small agricultural and commercial 
towns and those who live in the surrounding rural areas. The likely 
result will be the closure of several hospitals in rural Montana, 
requiring more patients to travel greater distances to obtain adequate 
care, including emergency care.
    Many of our hospitals in Montana are already scaling back services. 
Without an increase in Medicare reimbursements patients in Montana are 
at the crossroads of having to travel upwards of 100-200 miles to 
receive care for medical conditions as simple as acute appendicitis. 
Moreover, if rural communities lose their community hospitals, they are 
likely to experience difficulty in sustaining their commercial base.
    As Chairman of the Sub-committee on Telecommunications I have 
worked very hard on making sure that all people in my state in rural 
areas have access to hospital care either through tele-medicine or 
actually visiting a health care facility. For instance, Jordan, MT has 
not had access to a doctor for many years. Now a Physicians Assistant 
can live and work in Jordan and have most patients diagnosed by a 
doctor in Billings. I am very concerned that if something is not done 
about the Balanced Budget Act that facility in Jordan will not be able 
to stay open and continue to offer it's services.
    Recently, I have heard from senior citizens and nursing home and 
skilled nursing facility (SNF) operators in my district who are finding 
it extremely difficult to receive and provide care since the 
implementation of the SNF prospective payment system (PPS).
    Specifically, I have heard concerns in three major areas. First, 
the new Congressional Budget Office (CBO) estimates show that the cuts 
to the SNF industry will be $7.1 billion more that Congress intended. 
This is having an impact on facilities being able to retain staff and 
provide services. The excessive cuts could force providers in my 
district to leave the Medicare program altogether, which will create 
access problems for seniors needing skilled care services. Congress 
must work with the Administration to restore funding back into the 
system.
    Second, the new SNF PPS fails to account for medically complex 
patients needing non-therapy ancillary services, such as prescriptions 
and respiratory care. We need to take steps to immediately address this 
flaw in the system. Otherwise, these patients will back up into 
hospitals, which may not be the most appropriate setting for their care 
needs, and they will be farther from their communities.
    Third, I have concerns regarding the $1500 cap on outpatient 
rehabilitation therapy. Already I have heard stories about resident 
exceeding the cap--and its only July. Congress must take steps to 
immediately provide relief to those seniors needing therapy. I 
understand this policy is most harmful to stroke, hip fracture, and 
Parkinson's disease patients. We must solve this problem.
    Mr. Chairman, I urge all members of the Senate to address these 
problems that pose access and quality risks to patients and seniors in 
my state. The economic viability of rural Montana depends upon basic 
health care services being located in the state's smaller commercial 
centers.

STATEMENT OF SENATOR CHUCK HAGEL, U.S. SENATOR FROM 
            NEBRASKA

    Senator Cochran. We are happy now to receive the testimony 
of our good friend and colleague from Nebraska, Senator Chuck 
Hagel. Senator, you may proceed.
    Senator Hagel. Mr. Chairman, thank you. To my friends and 
colleagues, Senators Feinstein and Gorton, I appreciate very 
much an opportunity to address some of the real issues and 
challenges of our time articulated very clearly by Senators 
Gorton and Feinstein's comments here in the past few minutes.
    I am here to talk a little bit about the impact of the 1997 
Balanced Budget Act on our Nation's rural hospitals. Recent 
studies indicate that when the BBA is fully implemented access 
to health care services in rural America, including my State of 
Nebraska, will be severely threatened. We see those threats 
currently, again as evidenced by some of the remarks made by 
Senators Gorton and Feinstein.
    I spent over the last few weeks, Mr. Chairman, some time in 
rural Nebraska visiting some of our hospitals. And not only are 
the rural hospitals and medical centers in America threatened, 
but teaching hospitals as well. In most cases rural hospitals, 
community health centers, and rural health clinics are the only 
source of primary health care services for hundreds of miles. 
When they are forced to close their doors, the impact on 
communities that they once served can be, will be, devastating, 
not only for the health and physical well-being of its 
citizens, but also for the community's economic growth and 
prosperity.
    As we all know, without ready access to quality primary 
health care for workers and their families, these communities 
will have a difficult time attracting new business, 
manufacturing, or just keeping their young people in their 
communities.
    The Balanced Budget Act was designed to reduce our Nation's 
deficit and achieve a balanced budget by the year 2002. Senator 
Gorton alluded to the fact, and I think we all have some sense 
of pride and accomplishment in what we did in 1997, that in 
fact it has worked pretty well. But in order to reach this goal 
Congress was required to restructure several Federal programs, 
including Medicare. The changes made to the Medicare program 
were also necessary in order to ensure its financial solvency 
through the year 2007.
    Unfortunately, most of the savings under Medicare were 
achieved by reducing payments to providers, by implementing new 
payment systems and methodologies. Although the BBA was 
supported--was supposed to reduce Medicare by $103 billion over 
5 years, it is now estimated spending will actually be reduced 
by over $220 billion over the 5-year period. This is more than 
Congress anticipated or intended and its impact on our Nation's 
rural hospitals will be very significant.
    According to a study conducted by the Nebraska Association 
of Hospitals and Health Systems, Nebraska is now expected to 
lose more than $375 million in Medicare payments over the next 
5 years. This loss is 45 percent greater than the $259 million 
reduction anticipated by the Congressional Budget Office in 
1997. Now, that for my State of Nebraska is rather severe. It 
will have immense consequences for the State of Nebraska.
    That is an average of $75.2 million a year that Nebraska's 
rural hospitals will lose. This is significant because payment 
changes in the Medicare program affect rural hospitals far more 
dramatically, as my colleagues all understand, representing the 
States that you do, than their urban counterparts, due to their 
size and lower operating margins. Senator Feinstein again 
mentioned some of the numbers.
    On average, for example, Nebraska's rural hospitals rely on 
Medicare for approximately 60 to 80 percent of their total 
income. According to the NAHHS study, the CBO failed to either 
include or accurately gauge the following factors in their 
calculations in 1997: First, additional administrative and 
operating expenses arising from the Health Care Financing 
Administration's new payment methodology and reporting 
requirements; two, the cost of purchasing, repairing, and 
maintaining state of the art medical technology, equipment and 
facilities.
    In May of this year, the HCFA released the methodology it 
intends to use in calculating Medicare hospital outpatient 
reimbursement rates. Should these rates go into effect in June 
2000, hospitals are expected to lose an additional 5.7 percent 
or $850 million a year. Small Nebraska rural hospitals in 
particular stand to lose an additional 9.2 percent or $6.2 
million additional a year in Medicare payments.
    According to HCFA, most hospitals will only experience a 4 
percent annual decline in reimbursement levels. But for rural 
and major teaching hospitals, however, Medicare reimbursement 
levels are expected to decline by an average of 17 percent. 
This reduction comes on the heels of other Medicare cuts, which 
all together will have a devastating, a devastating impact on 
rural hospitals in all our States.
    The fiscal year 2000 budget resolution contains a sense of 
the Senate directing Congress to review Medicare reimbursement 
levels to ensure that seniors have access to skilled nursing, 
home health, and inpatient and outpatient health services in 
rural areas. Health care experts both nationally and in the 
State of Nebraska have confirmed reports that payment levels 
are indeed beginning to impair access to quality health 
services.
    In fact, the BBA's Medicare reimbursement provisions have 
already claimed a number of casualties in Nebraska. To date, 
the Medicare payment reductions under the provision of the BBA 
1997 have played a role in the closure of two rural Nebraska 
hospitals and have driven seven other rural facilities to seek 
conversion to critical access hospital status. Another 15 rural 
facilities in Nebraska are now applying to convert to critical 
access hospital status before the end of the year, which would 
seriously limit the scope of community health services that 
they now presently provide.
    Hospitals and health plans exist to provide high quality, 
affordable health care to the communities they serve. But to do 
so, as we all understand, costs money. Our neighbors, our 
friends, our family members who are employed by these rural 
hospitals must be paid. This drastic reduction in Medicare 
reimbursement rates simply cannot be absorbed by our Nation's 
rural hospitals in such a short period of time.
    In the short term, the BBA must be amended in order to 
restore Medicare payments to the level Congress intended in 
1997. Looking ahead, we need to implement real structural 
reforms that will increase competition and encourage more 
providers and health plans to participate and practice in rural 
areas. This can be accomplished by some of the following:
    First, increasing Medicare reimbursement rates for rural 
hospitals and health clinics by making it easier for them to 
qualify for special designation.
    Second, changing the Medicare managed care reimbursement 
formula to ensure higher rates for rural and low-paid areas. 
This will attract more plans, as well as ensure that 
established plans to continue to remain viable in these rural 
areas.
    Third, require that more representatives from rural America 
are represented on the Medicare Payment Advisory Committee.
    Fourth, encourage physicians and other health providers to 
practice in rural areas by providing higher Medicare 
reimbursement rates.
    Fifth, expand the rate of services provided under Medicare 
by telemedicine, in which providers can treat patients from 
distant locations.
    Finally, as a function of size, Mr. Chairman, and 
dependency on Medicare revenues, changes in Medicare 
reimbursement can have a disproportionately negative impact, as 
we all understand, especially on rural hospitals. We must 
preserve, protect, and ensure the financial solvency of our 
Nation's rural hospitals by making the entire Medicare program 
more efficient, while at the same time providing adequate 
reimbursement to assure access to care, not only for our 
Medicare population but all citizens.

                           PREPARED STATEMENT

    Mr. Chairman and my colleagues, I look forward to 
continuing to work with you, the President, and our other 
Senate and House colleagues on developing meaningful reforms 
that will allow rural hospitals to continue to provide their 
communities with important and accessible affordable quality 
health care.
    Thank you very much, Mr. Chairman.
    [The statement follows:]

               Prepared Statement of Senator Chuck Hagel

    Chairman Cochran, Senator Kohl, distinguished committee members, 
thank you for inviting me here today to discuss the impact of the 1997 
Balanced Budget Act (BBA) on our nation's rural hospitals. To date, 
only 30 percent of the BBA has been implemented. Nevertheless, recent 
studies indicate that if the BBA is fully implemented in its current 
form, access to health care services in rural America, including my 
state of Nebraska, will be severely threatened.
    In most cases, rural hospitals, community health centers, and rural 
health clinics are the only source of primary health care services for 
hundreds of miles. When they are forced to close their doors, the 
impact on the community they once served can be devastating--not only 
on the health and physical well-being of its citizens--but also for the 
community's economic growth and prosperity. Without ready access to 
quality primary health care for workers and their families, these 
communities will have a difficult time attracting any new businesses or 
manufacturing, or keeping their young people in the community. In that 
regard, I commend the committee for its continued leadership in holding 
this hearing and ensuring access to quality health care services for 
all rural Americans.
    The Balanced Budget Act was designed to reduce our nation's deficit 
and achieve a balanced budget by 2002. In order to reach this goal, 
Congress was required to restructure several federal programs, 
including Medicare. The changes made to the Medicare program were also 
necessary in order to ensure its financial solvency through 2007. 
Unfortunately, most of the savings under Medicare were achieved by 
reducing payments to providers by implementing new payment systems and 
methodologies.
    Although the BBA was supposed to reduce Medicare spending by $103 
billion over five years, it is now estimated spending will actually be 
reduced by over $220 billion. This is more than Congress anticipated or 
intended, and its impact on our nation's rural hospitals will be 
significant.
    According to a study conducted by the Nebraska Association of 
Hospitals and Health Systems, Nebraska is now expected to lose more 
than $375 million in Medicare payments over five years.\1\ This loss is 
45 percent greater than the $259 million reduction anticipated by the 
Congressional Budget Office (CBO) in 1997. That is an average of $75.2 
million a year. This is significant, because payment changes in the 
Medicare program affect rural hospitals far more dramatically than 
their urban counterparts, due to their size and lower operating 
margins. On average, Nebraska's rural hospitals rely on Medicare for 
approximately 60 percent to 80 percent of their income.
---------------------------------------------------------------------------
    \1\ Source: Nebraska Association of Hospitals and Health Systems, 
April 1999. The impact was determined using a health industry 
forecasting model. The calculations compare the payment trends that 
would be expected under prior law with those estimated under the 1997 
BBA.
---------------------------------------------------------------------------
    According to the NAHHS study, the CBO failed to either include or 
accurately gauge the following factors in their calculation:
  --Additional administrative and operating expenses arising from the 
        Health Care Financing Administration's new payment methodology 
        and reporting requirements and;
  --The cost of purchasing, repairing, and maintaining state-of-the-art 
        medical technology, equipment, and facilities.
    In May, the HCFA released the methodology it intends to use in 
calculating Medicare hospital outpatient reimbursement rates. Should 
these rates go into effect in June of 2000, hospitals are expected to 
lose an additional 5.7 percent, or $850 million a year. Small Nebraska 
hospitals, in particular, stand to lose an additional 9.2 percent, or 
$6.2 million a year in Medicare payments.\2\
---------------------------------------------------------------------------
    \2\ Source: HCFA Impact File For Proposed Rule On Hospital 
Outpatients PPS, May 1999.
---------------------------------------------------------------------------
    According to HCFA, most hospitals will only experience a 4 percent 
annual decline in reimbursement levels. For rural and major teaching 
hospitals, however, Medicare reimbursement levels are expected to 
decline by an average of 17 percent. This reduction comes on the heels 
of other Medicare cuts, which together will have a devastating impact 
on rural hospitals.
    The fiscal year 2000 Budget Resolution contains a Sense of the 
Senate amendment directing Congress to review Medicare reimbursement 
levels to ensure that seniors have access to skilled nursing, home 
health, and inpatient and outpatient hospital services in rural areas. 
Health care experts, both nationally and in the state of Nebraska, have 
confirmed reports that payment levels are indeed beginning to impair 
access to services.
    In fact, the BBA's Medicare reimbursement provisions have already 
claimed a number of casualties in Nebraska. To date, the Medicare 
payment reductions under the provisions of the BBA have played a role 
in the closure of two small, rural Nebraska hospitals and have driven 
seven other rural facilities to seek conversion to ``critical access'' 
hospital status. Another fifteen rural facilities are applying to 
convert to ``critical access'' hospital status before the end of the 
year, which would seriously limit the scope of community health 
services that they presently provide.
    Hospitals and health plans exist to provide high quality, 
affordable health care to the communities they serve, but to do so 
costs money. Our neighbors, friends and family members, who are 
employed by these rural hospitals must be paid. This drastic reduction 
in Medicare reimbursement rates simply cannot be absorbed by our 
nation's rural hospitals in such a short period of time.
    In the short-term, the BBA must be amended in order to restore 
Medicare payments to the level Congress intended. Looking ahead, we 
need to implement real structural reforms that will increase 
competition and encourage more providers and health plans to practice 
in rural areas. This can be accomplished by:
  --Increasing Medicare reimbursement rates for rural hospitals and 
        health clinics by making it easier for them to qualify for 
        special designations.
  --Changing the Medicare managed care reimbursement formula to ensure 
        higher rates for rural and other low-paid areas. This will 
        attract more plans, as well as ensure that established plans 
        continue to remain viable.
  --Requiring that more representatives from rural America are 
        represented on the Medicare Payment Advisory Commission 
        (MedPAC).
  --Encouraging physicians and other health providers to practice in 
        rural areas by providing higher Medicare reimbursement rates.
  --Expanding the range of services provided under Medicare by 
        ``telemedicine,'' in which providers can treat patients from 
        distant locations.
    As a function of size and dependency on Medicare revenues, changes 
in Medicare reimbursement can have a disproportionately negative impact 
on rural hospitals. We must preserve, protect, and ensure the financial 
solvency of our nation's rural hospitals by making the entire Medicare 
program more efficient, while at the same time providing adequate 
reimbursement to assure access to care, not only for our Medicare 
population, but all citizens of rural America. I look forward to 
working with the President and our Senate and House colleagues on 
developing meaningful reforms that will allow rural hospitals to 
continue to provide their communities with important and accessible, 
affordable, quality care.

    Senator Cochran. Senator Hagel, thank you very much for 
your helpful testimony and the information you gave us as a 
result of your own personal observations and review of the 
situation in your State, and the suggestions for specific 
changes in the law and administration practices that will help 
improve the situation that rural hospitals are facing. We thank 
you very, very much.
    Senator Gorton, do you have any questions or comments?
    Senator Gorton. No. I echo your comments.
    Senator Cochran. Senator Feinstein.
    Senator Feinstein. No question. I was just thinking, you 
adequately and correctly stated the situation. Hopefully, we 
will be able to come together across both political parties and 
remedy it, because I think it is going to alter the delivery 
system in health care in a major way if we cannot keep these 
hospitals open and running.
    Senator Cochran. Thank you very much, Senator.
    Our next witnesses include--and I will call their names and 
ask you to please come to the witness table--Dr. Gail Wilensky, 
who chairs the Medicare Payment Advisory Commission; Dr. Claude 
Earl Fox, who is Administrator of the Health Resources and 
Services Administration; and Dr. Robert Berenson, who is 
Director of the Center for Health Plans and Providers of the 
Health Care Financing Administration.
    We appreciate very much your being available to our 
committee this morning. We thank you for the written statements 
which you have submitted to the committee. I have had the 
opportunity of reading your statements and I congratulate you 
on the quality of the effort you have put into preparing for 
the hearing and helping us understand the problem and what some 
of the options are for dealing with these serious problems.
    I am going to ask Dr. Wilensky to open the testimony and to 
be assured we will include your entire statement in the record 
as you have submitted it and encourage you to make any summary 
comments that you think would be helpful to us. Dr. Wilensky.

STATEMENT OF GAIL R. WILENSKY, PH.D., CHAIR, MEDICARE 
            PAYMENT ADVISORY COMMISSION

    Dr. Wilensky. Thank you very much. Mr. Chairman and members 
of the subcommittee, I am pleased to be here today to speak on 
behalf of the Medicare Payment Advisory Committee which I 
chair. As I think you know, I was also the Administrator of the 
Health Care Financing Administration in the early part of the 
1990's.
    I would like to use my few minutes to summarize what I 
think are the most important issues regarding the debate that 
has started on the fate of rural hospitals and to raise some 
particular areas that I think are appropriate for your 
consideration as the Congress considers whether, how, and how 
much to amend the Balanced Budget Act.
    First let me start and summarize what I see as the basic 
problems that rural hospitals are facing. In general, these are 
smaller hospitals. They are more Medicare-dependent hospitals, 
because many of the younger individuals have either moved out 
entirely or for purposes of their health care go elsewhere. 
Also, they are more dependent on the outpatient department, and 
I want to come back to that in particular with regard to some 
potential remedies.
    When the Balanced Budget Act was passed, it looked like 
rural hospitals in general were doing all right financially. 
Some, in fact more than is true for hospitals in general, had 
problems even at the start of the Balanced Budget Act. But in 
general, it looked like the financial status of rural hospitals 
was all right, particularly with regard to their total overall 
margins, that is the difference between their revenues and 
expenditures.
    One of the great problems, one of the great frustrations 
that we all have felt, is that we do not have good adequate 
systematic data that tells us what has happened since the 
introduction of the Balanced Budget Act. I know that you have 
heard reports. I think it is helpful for members to go around 
and to visit in their districts. But those of us who are 
responsible for making recommendations to the Congress are 
frustrated by not having good representative information. We 
are trying to work with some of the trade associations and 
others involved to see whether there might be a way to have 
some quicker response so that we can be more helpful in our 
recommendations.
    It does appear that one of the effects that has happened is 
that, because the Balanced Budget Act affected so many 
provisions of health care under Medicare, that the combined 
effect is greater than perhaps was anticipated. In addition, as 
you have already heard from Senator Hagel, the reduction in 
spending has also been greater than anticipated, perhaps 
because of the simultaneous very aggressive actions on the part 
of the Inspector General in the Department of Justice regarding 
fraud and abuse and some responses from providers as a result 
of these activities. But for whatever reasons, as you know, the 
reduction in spending has been greater than anticipated.
    In looking at what is happening for rural hospitals, as a 
Medicare person I urge you to think about those issues that are 
properly Medicare's responsibilities, which means if your 
seniors cannot get access to health care that is a proper 
Medicare responsibility, and those that may be more in the 
realm of economic development, which as an economist is 
something I believe is perfectly appropriate for the Congress 
to worry about, but I urge you not to necessarily put it on the 
back of Medicare, a program that is already very fragile.
    However, I do think there are areas that you may want to 
reconsider to the extent that you open up some provisions of 
the Balanced Budget Act for reconsideration, and let me just 
mention a few of these.
    The first and one that would be very helpful for rural 
hospitals has to do with the outpatient prospective payment 
system. As you have already heard, the reduction in spending 
appears as though it will be about 2 full percentage points 
greater, 5.7 percent rather than the 3.8 percent that was 
initially believed to be in the House and Senate bills. In 
addition, it is scheduled to go in at once in the year 2000. In 
general, both MedPAC and its predecessor commissions have 
recommended phased-in introductions of changes so that the 
Congress can look back and make some adjustments if appropriate 
and the providers can gradually phase into a new world. So both 
the amount of the reduction and the fact that it is not being 
phased in is something that you may want to reconsider.
    In addition, both this year and last year MedPAC has 
recommended that the way we define ``disproportionate share'' 
for purposes of Medicare be revised so that the rural hospitals 
are playing on a level playing field with the urban hospitals. 
The existing law requires a higher threshold to be reached for 
rural hospitals, as well as too narrow a definition of what 
gets counted in terms of the care that is being provided. Both 
of these changes we think are important and would help the 
rural hospitals. It is not technically a part of the Balanced 
Budget Act, however.
    Another area, however, that is a part of the Balanced 
Budget Act has to do with changes in the skilled nursing 
facility reimbursement. We are concerned, and I know that HCFA 
is also concerned, that the resources going for the sickest 
patients, the so-called high-acute patients, may not be great 
enough to reflect the additional costs that they are bearing, 
and that is another area, if you are going to put some 
additional resources back into the system, that we urge you to 
give serious consideration to.
    In addition, you may want to consider whether or not it is 
appropriate to have ambulance charges included in the 
prospective payment as long as there is not the same ownership 
between the skilled nursing facilities and the ambulance 
company. What I have heard from a number of members of Congress 
is that that charge can overwhelm the daily reimbursement rate 
for several days and that if there is not common ownership it 
is not clear why it ought to be a part of the daily payment, 
the prospective payment. So if you are going to make changes, 
that is yet another area that you may want to look at.
    Finally, I am going to emphasize the importance of the 
critical access hospital provisions. When I was at HCFA there 
was a move to go beyond what had started in Montana as the MAP 
program to make something that was called the Essential Access 
and Primary Care Access Programs, and that has now evolved into 
the critical access hospital designation.
    I think it is an important way for hospitals that may not 
be able to provide all services on a large bed scale to remain 
very important care facilities on a smaller basis, having 
important relationships with either rural referral centers or 
other hospitals that could provide the secondary, tertiary, and 
quaternary facilities that they may no longer be able to 
provide.
    It is an important aspect. It is one that I urge you to 
consider in those areas where hospitals may not be able to 
provide as they have been in the past, but still have both 
important development and, more importantly, important health 
care provisions that they can make to the community.
    I would be glad to answer any questions that you may have 
as well. Thank you.
    [The statement follows:]

                 Prepared Statement of Gail R. Wilensky

    Chairman Cochran, Senator Harkin, members of the Subcommittee, I am 
Gail Wilensky, Chair of the Medicare Payment Advisory Commission 
(MedPAC). I am pleased to participate in this hearing to examine the 
problems facing rural hospitals and their impact on rural economic 
development. My testimony today focuses on what we know about the 
financial health of rural hospitals, the effects of Medicare's payment 
policies and other factors on their financial viability, and Medicare's 
role in ensuring that rural beneficiaries will continue to have access 
to appropriate care.
    As you know, Mr. Chairman, rural hospitals often play a central 
role in sustaining both the physical and economic health of their local 
communities. Consequently, perceived threats to their financial 
vitality raise concerns from several perspectives.
    One concern relates to the effects that hospital failures or 
financial weakness may have on residents' access to care. Aside from 
their traditional role of providing timely access to emergency care and 
acute inpatient care, many rural hospitals also have taken 
responsibility for meeting their communities' needs for primary care 
and post-acute care services. Most rural hospitals operate outpatient 
care facilities, including outpatient departments and hospital-owned 
rural health clinics, and many operate skilled nursing facilities 
(either a distinct unit or swing-beds), home health agencies, or both. 
In addition, rural hospitals generally play an essential role in 
attracting primary care physicians to practice in their communities, 
and in organizing the provision of specialty services for patients. 
Thus, hospital failures could force local residents, including Medicare 
beneficiaries, to forgo many services or travel further to get them.
    Another concern is that declines in rural hospitals' financial 
health may seriously damage the local economy and its prospects for 
future development. In many rural communities, a hospital is the single 
largest employer, directly responsible for a substantial share of 
residents' earnings and indirectly responsible for an important part of 
the local tax base. Moreover, the presence of a hospital offering a 
broad array of services is generally considered critical to attracting 
new businesses to rural communities. As a result, hospital closures 
also could adversely affect the economic viability of their 
communities.

        WHAT WE KNOW ABOUT RURAL HOSPITALS' FINANCIAL CONDITION

    Much of the recent concern about the financial problems of rural 
hospitals has been focused on the anticipated effects of Medicare 
policy changes enacted in the Balanced Budget Act of 1997 (BBA). 
However, the most recent available data on hospitals' financial 
condition are from their Medicare cost reports for accounting periods 
beginning during fiscal year 1997, the last year before the BBA's 
policies began to have much effect on hospitals' revenues.
    These data show that, on average, rural hospitals' inpatient 
margins under Medicare's inpatient prospective payment system (PPS)--
the difference between their Medicare PPS revenues and their 
corresponding allowable costs as a percentage of their PPS revenues--
were at or near historically high levels. The overall average inpatient 
margin stood at 9.5 percent for rural hospitals, while that for urban 
hospitals was 17.0 percent. Further, rural hospitals' average total 
margins--reflecting all revenues and expenses for inpatient care, 
outpatient care and all other hospital activities, as reported on the 
Medicare cost reports--also were at an historic high of 6.8 percent, 
and above that for urban hospitals (6.2 percent).
    Rural hospitals' inpatient PPS and total margins generally have 
been rising (as have those for urban hospitals) since 1991, primarily 
because they have successfully restrained the growth of their costs. 
But improvements in financial condition have not occurred uniformly for 
all rural hospitals. The overall proportion of rural hospitals with 
negative total margins increased between 1995 and 1997. And many small 
rural hospitals (those having fewer than 50 beds) appear to be in 
especially poor financial condition; 35 percent of these hospitals had 
negative total margins in 1997, up from 29.5 percent in 1995.
    Data from the American Hospital Association's (AHA) Annual Survey 
of Hospitals can be used to examine how well the payments hospitals 
receive from various payers cover the costs of furnishing care to their 
patients. The payment to cost ratios for payer groups, such as 
Medicare, Medicaid, and private payers, relate the payer's payments and 
costs for all patient care services, generally including inpatient, 
outpatient, skilled nursing, and home health care. Each payer's costs, 
however, include all expenses attributed to the payer's patients rather 
than only Medicare allowable costs. As a result, the Medicare payment 
to cost ratios from the AHA data are generally lower than similar 
figures computed from Medicare cost report data.
    AHA Medicare payment to cost ratios for 1997 show that urban 
hospitals' overall Medicare payments exceeded their costs (a ratio of 
102.2 percent), but rural hospitals' overall Medicare payments fell 
below their costs (a ratio of 96.1 percent). In addition, rural 
hospitals are more dependent on Medicare than are urban hospitals; 
services furnished to Medicare patients accounted for 47 percent of 
rural hospitals' total patient care expenses, but only 39 percent of 
patient care expenses in urban hospitals.
    Rural hospitals' Medicare payment to cost ratios generally have 
been rising since the early 1990s. The most recent data, however, 
suggest that rural facilities may be facing increased financial 
pressure from private payers. In the past, hospitals generally have 
been able to offset payment shortfalls from Medicare, Medicaid, and 
uncompensated care with extra revenues from private payers. Urban 
hospitals' payment to cost ratios for private payers have been 
declining during the 1990s, as private insurers and employers have 
resisted hospital rate increases. By contrast, rural hospitals' private 
payer payment to cost ratios generally exhibited little change from 
their levels in the early 1990s. Preliminary data for 1997, however, 
suggest that the national average private payer payment to cost ratio 
for rural hospitals dropped sharply to 134 percent from 139 percent in 
1996. It is not clear whether this decline is the beginning of a trend.

                POTENTIAL IMPACT OF POLICIES IN THE BBA

    Medicare policies enacted in the BBA created the Medicare+Choice 
program and required the Secretary of Health and Human Services to make 
major changes in the way many providers are paid under the traditional 
fee-for-service program. In enacting these policies, the Congress was 
pursuing several objectives: trying to make a wider array of private 
health plans available to beneficiaries; improving payment policies for 
many services furnished under the traditional program; and slowing the 
growth of program spending.
    To restrain spending, the Congress reduced the annual updates 
applied to the per case payment rates under the hospital inpatient 
prospective payment system and those applied to the target amounts that 
limit reimbursements to facilities exempt from the PPS. Further, the 
Secretary was charged with implementing new prospective payment systems 
for skilled nursing facility services, hospital outpatient services, 
home health care, and rehabilitation services. Adopting these new 
payment systems was intended, at least in part, to stem the 
extraordinary growth in the volume of, and payments for, these services 
that has occurred during this decade.
    The payment reductions anticipated from any one of these policies 
probably would have generated relatively little concern. In 
combination, however, these policy changes may result in a substantial 
decline in hospitals' Medicare revenues, especially for facilities that 
provide many of the affected services.
    The Health Care Financing Administration (HCFA) began applying 
reduced updates for PPS hospitals and exempt facilities in fiscal year 
1998. It also implemented a PPS for services furnished in skilled 
nursing facilities in July 1998.
    Regarding the skilled nursing facility PPS, MedPAC has raised 
concerns about the extent to which this system pays adequately for 
patients who require costly ancillary services. In addition, including 
costs for ambulance services furnished by an unrelated entity in 
skilled nursing facilities' per diem payment rates may create 
inappropriate financial burdens for some providers, especially those 
located in rural areas where travel distances are greater than average.
    In October 1998, HCFA implemented a BBA-mandated interim payment 
system (IPS), which set temporary limits on home health agencies' costs 
per visit and on their average costs per beneficiary. HCFA projected 
that these cost limits would reduce payments to hospital-based home 
health agencies in rural areas. The expected proportion of these 
facilities that would be affected and the extent of their payment 
reductions, however, were substantially smaller than those projected 
for other groups of urban and rural agencies. A prospective payment 
system for home health services is scheduled to replace the IPS in 
October of next year.
    HCFA also issued a proposed rule on a new prospective payment 
system for hospital outpatient services in September 1998, but has 
delayed implementing this system until the spring of 2000 to avoid year 
2000 computer problems. MedPAC has raised concerns about some of the 
payment system's features and about its disproportionately large 
projected effects on payments to teaching hospitals and small or low-
volume rural facilities.
    Two issues seem particularly important to consider before the 
payment system is implemented. One is whether to phase in the new 
system. A phase-in period would slow the new system's payment effects, 
thereby delaying any financial damage it might do.
    In addition, a phase-in would permit the Congress to monitor the 
actual effects on hospitals and identify any problems that need 
resolution before the new payment system is fully implemented.
    A second issue relates to the size of the overall projected 
reduction in hospitals' Medicare payments for outpatient services. The 
current estimate of a 5.8 percent drop in hospitals' Medicare 
outpatient revenues is substantially higher than earlier projections. 
Moreover, the estimated decline in revenues would expand the already 
large discrepancy between hospitals' Medicare revenues and costs for 
outpatient services furnished to program beneficiaries. Consequently, 
if the Congress is considering ways to reduce the financial impact of 
the BBA's hospital payment policies, it may be appropriate to focus 
some of that effort on payments for outpatient care.
    Some of the BBA policy changes already have reduced payments to 
hospitals compared with the amounts Medicare would have paid under 
prior law, and scheduled reductions for future years will continue to 
slow payment growth through 2002. Other policy changes that are not yet 
implemented, such as the outpatient PPS, are expected to reduce many 
hospitals' Medicare revenues further.
    Small rural hospitals and those that furnish a low volume of 
outpatient care may be particularly vulnerable to the financial impact 
of the BBA. As noted earlier, such hospitals were more likely to be in 
poor financial condition before the BBA policies were implemented. In 
addition, HCFA's analysis of the impact of the outpatient prospective 
payment system suggested that small and low-volume hospitals would be 
likely to experience substantially greater payment declines than most 
other hospital groups. Rural hospitals' actual financial outcomes, 
however, will depend strongly on the extent to which they are able to 
continue restraining their cost growth during the next few years.

      OTHER FACTORS AFFECTING RURAL HOSPITALS' FINANCIAL VIABILITY

    Many rural hospitals have long been facing difficult economic 
conditions in their local communities. Some areas have experienced both 
an absolute decline in their resident population and an increase in the 
proportion of elderly and disabled persons because younger residents 
have migrated elsewhere to find employment. Hospitals located in these 
areas are likely to be unusually dependent on Medicare revenues and 
receive relatively little support from private payers.
    Other rural communities have a stable population but high 
unemployment and poverty rates. Hospitals serving these areas are 
likely to have a large share of poor patients and a relatively large 
uncompensated care burden. Medicare makes extra payments to hospitals 
that serve a disproportionate share (DSH) of poor patients, but the 
formulas used to determine DSH payments differ between large urban 
hospitals and smaller ones located in urban and rural areas. For the 
last two years, MedPAC has recommended that the Congress change the 
method used to measure the extent of hospitals' service to the poor and 
apply a single DSH payment formula for all hospitals.
    These changes would put rural hospitals on an equal footing with 
urban ones, regardless of hospital size.
    Many remote rural areas, especially in western states, are only 
thinly populated. Hospitals located in such areas are unlikely to be 
able to operate at an efficient level of service volume. Consequently, 
their unit costs for many services may be well above average.
    Local conditions also differ among rural areas due to variations in 
the policies of state governments and private payers. Among states, for 
example, hospitals' average Medicaid payment to cost ratios in 1997 
ranged from a low of 71 percent to a high of 142 percent. Similarly, 
hospitals' statewide average private payer payment to cost ratios 
varied from 98 percent to 161 percent.
    At a broader level, many if not most rural hospitals have been 
struggling against two closely related long-term trends. One is the 
rapid pace of technological change in health care delivery. Rural 
hospitals often lack the financial resources and the skilled 
practitioners needed to adopt and efficiently use innovations as they 
become available. As a result, some health care innovations are not 
adopted by many rural facilities and others may be adopted much later 
than in urban hospitals. Partly related to the slower rate of 
technological innovation in rural hospitals is the willingness of rural 
residents to bypass rural facilities to obtain more sophisticated 
services in urban hospitals.
    Consequently, many rural hospitals are unable to achieve high 
enough volume levels to benefit from potential economies of scale, 
leaving them with relatively high unit costs for some services.

   MEDICARE'S ROLE IN ENSURING ACCESS TO CARE FOR RURAL BENEFICIARIES

    The Congress has enacted a variety of special provisions under 
Medicare that were intended to ensure that beneficiaries living in 
rural areas continue to have access to appropriate care. Many, but not 
all of these policies are directed at helping rural hospitals, 
especially small ones, cope with the wide variety of circumstances they 
face in their local markets. Specific policies apply for:
  --sole community hospitals--geographically isolated facilities that 
        are the only readily available source of inpatient care in an 
        area.
  --small rural Medicare-dependent hospitals--rural hospitals with 
        fewer than 100 beds and whose Medicare share of days or 
        discharges exceeds 60 percent for the cost reporting period 
        that began during fiscal year 1987, and
  --rural referral centers--generally larger rural hospitals that meet 
        criteria regarding number of beds, annual discharge volume, 
        case mix complexity, or proportion of care furnished to 
        patients referred from outside the local area.
    The special payment provisions under Medicare's hospital inpatient 
PPS for sole community hospitals and small rural Medicare-dependent 
hospitals, raise Medicare's inpatient payment rates for rural 
facilities facing particular circumstances. Rural referral centers face 
less stringent criteria under Medicare's geographic reclassification 
policies.
    Referral centers that qualify for reclassification as urban 
hospitals may receive higher inpatient PPS payments and higher DSH 
payments.
    Other policies exempt rural hospitals temporarily or permanently 
from requirements or payment policies that apply to most other 
hospitals. For example, rural hospitals that provide skilled nursing 
services to beneficiaries under the swing bed program are exempt from 
the new skilled nursing facility PPS during a three year transition 
period.
    The Congress also has enacted policies intended to help attract 
physicians and other health professionals to practice in rural areas. 
One example is the policy enabling communities or rural hospitals 
located in a Health Professional Shortage Area (HPSA) to establish 
rural health clinics. Another is the policy of granting bonus payments 
that raise Medicare payments under the physician fee schedule by 10 
percent for physicians practicing in designated HPSAs.
    In addition, the Congress has attempted to recognize that the 
financial distress facing many small rural hospitals primarily reflects 
the limitations of the local economy. To maintain access to care in 
rural areas served by small or low-volume hospitals, such facilities 
are permitted to apply for designation as a critical access hospital 
(CAH). A CAH must be located more than 35 miles from any other 
hospital, operate 15 or fewer acute care beds, limit acute care 
inpatient stays to 96 hours, have formal transfer arrangements with one 
or more other hospitals, and provide 24-hour emergency care services.
    Hospitals that receive CAH designation are exempt from Medicare's 
inpatient and outpatient prospective payment systems and are reimbursed 
based on their allowable incurred costs.
    The potential benefit of this program is that it may permit many 
small rural hospitals to continue providing local access to care for 
community residents while strengthening their financial viability by 
adjusting their capacity consistent with their communities' resources.

                              CONCLUSIONS

    Although rural hospitals in the aggregate appeared to be 
experiencing historically high levels of financial performance prior to 
the enactment of the BBA, the potential combined impact of its 
provisions has raised much concern about future financial stress. It is 
too soon to evaluate the extent to which these concerns will be 
realized. Nevertheless, many small rural hospitals may be especially 
vulnerable to the payment reductions anticipated from the BBA's 
policies. Once it is implemented, the outpatient prospective payment 
system could substantially lower Medicare payments to small rural and 
low-volume hospitals.
    It will be important for the Congress to monitor closely the 
effects of these policy changes on small rural hospitals because of 
their importance for access to care. In the longer-term, policies, such 
as the CAH program, may provide the best means of preserving access by 
helping rural hospitals to restructure their operations consistent with 
local economic conditions.

    Senator Cochran. Thank you, Dr. Wilensky. I think before 
asking questions of you we will hear from the other two members 
of this panel. If you will be able to remain, it would be 
appreciated.
    Dr. Fox, you may proceed.
STATEMENT OF CLAUDE EARL FOX, M.D., MPH, ADMINISTRATOR, 
            HEALTH RESOURCES AND SERVICES 
            ADMINISTRATION, DEPARTMENT OF HEALTH AND 
            HUMAN SERVICES
    Dr. Fox. Thank you, Senator Cochran. I would like to thank 
you and the panel, Senator Feinstein, for both having this 
hearing and inviting us here.
    The agency that I administer is the access agency for the 
Health and Human Services Department and we house the Office of 
Rural Health Policy, which is not just the policy office on 
rural health for us, for the agency, but for the Department. So 
from an agency standpoint I have an interest.
    From a personal standpoint, this issue is also very near 
and dear to my heart. I was born in a rural hospital, grew up 
in a rural community. My dad is 84 years old and still gets his 
care from a rural hospital in Mississippi. So this has a 
personal note for me as well.
    As has already been said, the rural hospitals are often the 
primary source of health care in the community. We think that 
they are a critical issue and a critical factor in attracting 
physicians. We have the National Health Service Corps. We also 
do health profession shortage area designations, and we think 
that it is more difficult to recruit physicians when you do not 
have a hospital in a community.
    They are also, if not the largest, usually one of the 
largest employers in the community. The data show that rural 
hospitals are responsible for probably some 10 to 15 percent of 
jobs in rural communities, as a spinoff are responsible for 
another 5 to 10 percent of other jobs within the community as 
well.
    We also know that, with the aging of the population, 
ideally rural communities should be a great place for our 
elderly to live. The cost of living is cheap. It is often much 
safer than other places. And yet if there is no rural hospital, 
are we going to be able to attract rural residents to rural 
communities and keep the ones there that we need? If you were 
elderly would you want to live in a community with no hospital? 
If you were in a nursing home or had a family member in a 
nursing home, would you want to have one in a nursing home in a 
community that had no hospital? I think you would not.
    We also know that hospitals operate on thin operating 
margins. We have already talked about that. But I would point 
out that when we talk about rural hospitals we need to draw a 
distinction. The very small rural hospitals, certainly the ones 
with under 100 beds, and particularly the ones with under 50 
beds, are in particular jeopardy. We know that their numbers 
are even worse than are stated for all rural hospitals.
    We know that a lot of hospitals closed their doors in the 
late eighties because of changes then. I actually chaired the 
Alabama Legislative Task Force on Rural Health, and we made a 
number of recommendations then. We told the hospitals to 
diversify, go out and do good, get into home health, get into 
extended care, get into other services, and they did. In fact, 
we know that now 100 percent of all rural hospitals provide 
some outpatient services, 60 percent provide home health, 72 
percent either have home health or skilled nursing facilities, 
and 20 percent have all of the above.
    So they have diversified. But the low-patient volumes and 
the fact that the BBA changes now are coming together in all of 
these areas, I think make them very vulnerable. We know that 
not only do all these changes come together in an economic way 
that really hits rural hospitals hard, but also the fact that 
the percent of Medicare and Medicaid in rural hospitals is 
often very great.
    I looked in Mississippi at a list of 28 rural hospitals 
that are among the smallest. In most of those hospitals, the 
combined Medicare and Medicaid admissions are over 70 percent. 
In my home hospital, Tallahassee General, the combined Medicare 
and Medicaid admissions are over 75 percent. So there is often 
very little, if any, private pay for hospitals to shift to. So 
we have a vulnerability for several reasons.
    My agency, HRSA, is the agency that is going to be 
administering the critical access hospital program. This year, 
thanks to Congress, we were able to put out $25 million, some 
$800,000 for each State, that will go through offices of rural 
health to try to help States look at what they can do to 
convert hospitals to critical access hospital programs. I think 
the jury is still out about how many hospitals are going to 
take advantage of that and what kind of issues we are going to 
have come up. But we will be, obviously, intimately involved in 
that.
    We are also working with HCFA. We have a team--in fact, it 
met recently with Nancy Min DeParle--and have for some time and 
are increasing our interface to work with them on the 
regulation development in any financing mechanisms that affect 
rural health. This is a joint agency activity.
    Also, finally, we fund a series of things that we think 
help strengthen rural communities. In addition to our community 
health centers, migrant health centers, and the National Health 
Service Corps, we fund rural health outreach grants, rural 
network development grants, and also we fund rural telehealth. 
I think one of the testifiers here today from a Mississippi is 
a recipient of one of our telemedicine grants.
    The Department, as you know, is involved in supporting 
rural hospitals and rural health systems in additional ways.
    Let me say finally that I think we do have a problem. I 
would suggest that we check the blood pressure before the 
patient goes into shock and not wait and count the death 
certificates. One of the things that we have to do here is make 
sure we monitor the situation very carefully. We have a number 
of grants out now that are going to give us some feedback, the 
earliest one coming in July, the end of July, that hopefully 
will tell us what is happening out there, and we look forward 
to providing that information to you and other members of 
Congress.
    Thank you for having me here today.
    [The statement follows:]

                 Prepared Statement of Claude Earl Fox

    Senator Cochran, Senator Kohl, members of the Subcommittee--thank 
you for inviting me to testify today about the current plight of rural 
hospitals and the impact this might have on our rural economies. This 
is a topic that is close to my heart. I was born in a rural hospital, 
grew up in a small rural town and have worked in and with rural 
communities most of my life. During my time as the State Health Officer 
in Alabama, I chaired the Alabama Task Force on Rural Hospitals and was 
part of an important effort there to help champion the critical role 
these facilities play in their communities.
    Rural hospitals are the anchors in our small towns and communities. 
First, these facilities are the primary source of health care in the 
community and can help attract the physicians and other health care 
providers that are often so difficult to find in rural areas. These 
facilities are often surviving on very thin operating margins and have 
had to diversify their services to survive. We know that:
  --100 percent of rural hospitals provide outpatient services
  --59 percent of rural hospitals operate home health agencies
  --72 percent of rural hospitals have either a home health agency or a 
        skilled nursing facility or both
  --21 percent of rural hospitals operate an outpatient center, a 
        skilled nursing facility and a home health agency.
    This diversification has helped rural hospitals to continue 
providing needed care to their communities. Unfortunately, given their 
low volume of patient visits and stays, these facilities are very 
dependent on each of these services to make ends meet.
    But rural hospitals play a much larger role in their local 
communities than simply providing health care services. They are often 
among the largest local employers and a bellwether of the economic 
health of a small town. Research shows that the health sector provides 
10 to 15 percent of the jobs in many rural counties, and that if the 
secondary benefits of those jobs are included, the health care sector 
accounts for 15 to 20 percent of all jobs. On an individual employer 
basis, hospitals are often second only to school systems as the largest 
employer in rural counties. Studies on industrial and business location 
also conclude that schools and health services are the most important 
quality-of-life variables in these decisions. A strong rural hospital 
can be a solid foundation for a strong small town with a diversified 
local economy and can serve as a magnet for other economic development. 
Conversely, a struggling rural hospital or the closure of a small rural 
hospital can often have the opposite impact on a small town through 
lost jobs and disincentives for businesses to locate and grow.
    When you look at all of these factors together, it's clear to see 
the importance of maintaining the economic health of our nation's rural 
hospitals. This is a growing concern in light of the many changes 
brought about by the Balanced Budget Act of 1997. Consider the 
following numbers:
  --A greater percentage of rural residents are Medicare beneficiaries, 
        compared to urban residents (18 percent vs 15 percent);
  --Medicare payments account for 39 percent of rural hospital 
        inpatient revenue and it can reach as high as 80 percent of 
        inpatient revenues for small rural hospitals;
  --50 percent of all patient days in rural hospitals are from Medicare 
        beneficiaries, compared to 37 percent in urban hospitals; and 
        finally,
  --Total Medicare payment per beneficiary is nearly $1,000 less for 
        rural beneficiaries than for urban beneficiaries.
    As you can see, changes in Medicare payments from the Balanced 
Budget Act could have a significant impact on the health care 
infrastructure of rural towns all across America. My colleague from the 
Health Care Financing Administration (HCFA) will describe some of these 
reforms in more detail, but I can assure you, however, that the 
Department is closely monitoring the impact of these changes. Further, 
there are a wide range of Federal programs that directly address the 
unique health care needs of rural hospitals and rural communities. For 
example:
    Starting this year, the Health Resources and Services 
Administration (HRSA)--through the Office of Rural Health Policy--will 
administer the new $25 million Rural Hospital Flexibility program. 
These grants, which will be given to the individual state offices of 
rural health, will provide states with up to $800,000 to support 
network development and stabilize their small rural hospitals by 
helping them consider, plan for, and obtain designation as a ``Critical 
Access Hospital.'' These CAHs can strengthen their outpatient, primary 
care and emergency services while maintaining a limited inpatient 
capacity. To help them financially, the Federal government will pay on 
a cost basis for care delivered to Medicare patients. It is our hope 
that these new CAHs can become the hub of a revitalized rural health 
system.
    The Office of Rural Health Policy is located in HRSA but has a 
Department-wide responsibility for advising the Secretary on the impact 
of Department's policies and regulations on rural communities. This 
office is working with HCFA and the rest of the Department to seek 
solutions to health care problems in rural communities by working with 
other Federal agencies, the states, national associations, foundations 
and the private sector. They are part of key regulation teams that are 
implementing the many provisions of the Balanced Budget Act of 1997 and 
their research centers provide valuable policy relevant rural research. 
In short, they are rural health advocates inside the beltway. The 
office also funds several grant programs that can help rural hospitals 
and other providers.
    HRSA also funds Rural Outreach and Network Development programs 
that help rural communities find innovative ways to stretch and 
coordinate their scarce health care dollars. There are also a number of 
other programs that are important supplements to rural hospitals. These 
programs, such as the Community Health Centers and the National Health 
Service Corps, help bring services and health care personnel to 
underserved rural areas. In addition, there also are now more than 
3,500 Rural Health Clinics that currently receive cost-based 
reimbursement from Medicare. Many of these clinics are affiliated with 
rural hospitals.
    HRSA also has been involved in the development of telehealth 
services for rural areas. This technology has been a real boon for 
rural hospitals. Through our rural telemedicine network grant program, 
we have funded the development of telehealth networks that have linked 
more than 100 rural hospitals with tertiary care centers to bring a 
wide range of specialized clinical care services to their communities 
while also increasing the range of education and professional 
interaction for their providers through distance learning. Last year, 
we created the Office for the Advancement of Telehealth to continue and 
expand these efforts.
    The Children's Health Insurance Program is another source of help 
in addressing health care needs for rural communities. This initiative, 
enacted in the BBA, is helping the states provide coverage to many of 
the 10 million children in families that work, but are still too poor 
to afford health insurance. It's our hope that by getting more children 
covered by health insurance, we can help reduce the amount of charity 
care that rural hospitals are now providing. That helps improve the 
bottom line for these hospitals while also getting kids the health care 
services they need.
    Beyond our agency, the Department also has a number of targeted 
reimbursement programs under Medicare and Medicaid to help rural 
hospitals. In fact, Medicare already provides special payment support 
to more than half of all rural hospitals through such designations as 
the Medicare dependent hospital or sole community hospital 
designations.
    In closing, I think it's important that we continue to monitor the 
status of rural hospitals as we work our way through the BBA and the 
other many changes taking place in the health care system. I believe 
the Department, through its policies and its grant programs, can work 
to mitigate many of the problems faced by rural hospitals and ensure 
their long-term viability. I want to thank you, Senator Cochran and 
Senator Kohl, for the opportunity to be here today, and I will be 
pleased to answer your questions you may have.

    Senator Cochran. Thank you, Dr. Fox, for your helpful 
testimony.
    We will now turn to Dr. Robert Berenson, who is Director of 
the Center for Health Plans and Providers of HCFA, Health Care 
Financing Administration. You may proceed.

STATEMENT OF ROBERT A. BERENSON, M.D., DIRECTOR, CENTER 
            FOR HEALTH PLANS AND PROVIDERS, HEALTH CARE 
            FINANCING ADMINISTRATION, DEPARTMENT OF 
            HEALTH AND HUMAN SERVICES
    Dr. Berenson. Thank you, Chairman Cochran and other 
distinguished subcommittee members. Thank you for inviting us 
to testify today. We are very grateful for this opportunity to 
discuss concerns facing rural hospitals and to explore how we 
might address them in a prompt and fiscally prudent manner.
    This hearing provides a timely focus as our monitoring and 
analyses suggest that some Balanced Budget Act payment reforms 
may have a disproportionate impact on rural America. Medicare 
has several policies in place to help rural providers and the 
BBA includes several new provisions to strengthen rural health 
care. Indeed, the last available data shows that the average 
Medicare payment for a rural patient in a hospital is rising 
relative to an urban patient. So some of these policies may be 
having some impact.
    But rural providers face special challenges and the BBA 
reforms that have a disproportionate impact on rural hospitals 
could well create problems for beneficiary access to quality 
health care, as you have heard from Dr. Fox. This is why the 
President's Medicare reform plan includes several provisions to 
help ensure that rural beneficiaries have access to quality 
health care. It makes it easier for rural hospitals to qualify 
for higher urban payment rates based on the way the wage index 
is constructed.
    The comment period is still open on the outpatient rule, so 
we cannot be definitive, but we are certainly looking at the 
option of providing a transition period to the new outpatient 
prospective payment system that would permit all hospitals, 
rural hospitals in particular, a transition period to adjust to 
the new system. It gives rural hospitals larger rate increases 
than urban hospitals from the years 2003 to 2009, for the first 
time identifying a differential payment rate, and it makes 
additional administrative adjustments that will increase 
funding for rural hospitals.
    The President's plan also includes $7.5 billion to smooth 
the transition to BBA reforms, and that money could well be 
used to address specific concerns raised at this hearing where 
beneficiary access to care may be jeopardized in rural areas.
    We are working very hard right now to, as Dr. Wilensky 
suggests, to really get some systematic information about the 
impacts of the BBA on access to care, to go beyond anecdotes, 
which are very important in themselves, but need to be put into 
a larger context. In that regard, we have started a 
relationship with the National Rural Health Association to 
evaluate rural access in particular. The association has sent a 
questionnaire to all its members on the impact of the BBA 
reforms and they expect to receive responses by the end of the 
month, which they will share with us.
    We are redoubling our efforts to address rural concerns by 
meeting with rural providers, visiting rural facilities, 
reviewing the impact of our regulations on rural health care, 
and conducting more research on rural health care issues. 
Within HCFA we have established a new internal work group to 
serve as a focal point for addressing rural concerns so that 
the providers, the National Rural Health Association, and other 
associations, HRSA, and other members, other parts of the 
Federal Government, have a place to work with within HCFA, 
where we will have people dedicated to trying to understand and 
work with special rural problems. As Dr. Fox mentioned, we have 
started a series of endeavors to try to coordinate our 
activities within the Department.
    I had already committed to make a trip to Texas and 
Oklahoma, before this hearing had been scheduled, to visit 
rural hospitals at the request of the regional administrator 
there. I am going to stay through the next panel and maybe 
extend, based on that, extend the trip to Mississippi or other 
locations. We are working very hard to try to understand these 
issues because, again, one of the real difficulties is to try 
to assess the combined impact of various rational BBA and other 
policies. Each one may make sense in itself, but one does not 
understand the sort of combined impact of these policies until 
you actually go in and visit with the providers and get it from 
their point of view. So we are going to be working very hard to 
do that.
    That is the end of my oral remarks, and I would be happy to 
participate in the discussion.
    [The statement follows:]

                Prepared Statement of Robert A. Berenson

    Chairman Cochran, Senator Kohl, distinguished Subcommittee members, 
thank you for inviting us to testify about our efforts to support 
America's rural health care providers.
    This hearing provides a timely focus, as our monitoring and 
analyses suggest that some Balanced Budget Act (BBA) payment reforms 
may be having a disproportionate affect on rural Medicare 
beneficiaries' access to care. The President's Medicare reform plan 
includes several provisions to help ensure that rural Medicare 
beneficiaries continue to have access to the quality care they need, 
and we look forward to working with you to enact these essential 
reforms.
    About one in four Medicare beneficiaries live in rural America, and 
rural hospitals serve a critical role in areas where the next nearest 
hospital may be hours away. Yet rural hospitals face special 
challenges. They have higher per unit costs, difficulty maintaining 
enough patients to break even, and difficulty recruiting physicians. 
Medicare has made exceptions and special arrangements to address the 
unique needs of rural areas and strengthen these vital facilities. Even 
before the BBA, Medicare provided special payment support to more than 
half of all rural hospitals.
    The BBA includes several new provisions to strengthen the rural 
health care infrastructure. It provides extra support for small 
critical access and other rural hospitals, and it authorizes payment 
for telemedicine to bring urban expertise to rural providers and their 
patients. As a result, average Medicare payment per rural patient is 
rising.
    However, because other BBA payment reforms may have a 
disproportionate impact on rural hospitals, and thus on beneficiary 
access to care, the President's Medicare reform plan includes 
provisions to:
  --make it easier for rural hospitals to qualify for higher urban 
        payment rates;
  --help rural hospitals adjust to the new outpatient prospective 
        payment system;
  --make additional administrative adjustments that will increase 
        funding for rural hospitals;
  --give rural hospitals larger rate increases than they would receive 
        under a straight extension of the BBA from 2003 to 2009; and
  --maintain the improvements in managed care payments built into the 
        BBA, which have an indirect effect on hospitals.
    The President's Medicare reform plan also sets aside $7.5 billion 
over 10 years to fund appropriate and justified modifications that may 
be necessary to smooth the transition to BBA reforms where beneficiary 
access to care is being compromised. That money could well be used to 
address specific concerns raised at this hearing. However, the BBA 
reforms are critical to strengthening and protecting Medicare. We are 
proactively monitoring the BBA's impact on beneficiary access to care. 
And we want to work with Congress, providers and beneficiary groups to 
determine how to address documented problems in the most carefully 
targeted and fiscally responsible way.
    Most importantly, for rural (and other) health care providers, the 
President's plan dedicates a portion of the surplus to strengthen 
Medicare. Combined with reforms, this surplus dedication secures the 
life of the Medicare Trust Fund for over the next quarter of a century. 
This averts the need for excessive provider payment reductions that 
would be inevitable without new financing as the baby Boom generation 
begins to retire.
    The President's plan also helps nearly half of rural Medicare 
beneficiaries who today do not have any coverage for prescription 
drugs. Rural beneficiaries have less access to employer-based retiree 
health insurance because of the job structure in rural areas. Also, 
three-quarters of rural beneficiaries do not have access to Medicare 
managed care, which typically offers free drug coverage to 
beneficiaries living in high-cost areas like Los Angeles or southern 
Florida--despite the fact that all beneficiaries pay the same premium. 
This leaves rural beneficiaries at greater risk of not being able to 
afford medications that are central to their health. The President's 
plan gives all beneficiaries the option to pay a modest premium for a 
prescription drug benefit. This benefit will cover half of all 
prescription drug costs up to $5,000 when fully phased in, with no 
deductible--all for a modest premium that will be less than half the 
price of the average private Medigap policy. As such, it provides an 
affordable choice for rural beneficiaries with unstable or expensive 
coverage, and a lifeline for those beneficiaries who simply have no 
options today.
    Even as this plan is being debated, we are redoubling our efforts 
to actively address the special circumstances of rural beneficiaries. 
We are meeting with rural providers, visiting rural facilities, 
reviewing regulations' impact on rural health care, and conducting more 
research on rural health care issues. And we are participating in a 
workgroup with the Health Resources and Services Administration's 
Office of Rural Health Policy to make sure that we stay abreast of 
rural issues.

                               BACKGROUND

    The BBA includes many provisions to aid rural hospitals and reform 
Medicare payment systems to promote efficiency and quality. We have 
implemented all of the provisions that provide assistance to rural 
facilities. These include:
  --allowing very small ``critical access'' rural hospitals, those with 
        no more than 15 inpatient beds that offer 24 hour emergency 
        care and are located more than a 35 mile drive from any other 
        hospital, to be reimbursed based on what they spend for each 
        patient, rather than on the average expected cost for specific 
        diagnoses that most hospitals are paid;
  --reinstating the ``Medicare dependent hospital'' designation, which 
        provides higher reimbursement for rural facilities with less 
        than 100 beds serving large numbers of Medicare beneficiaries;
  --permanently grandfathering special ``rural referral center'' status 
        for any hospitals designated as such in 1991, which provides 
        higher reimbursement to facilities with 275 or more beds that 
        serve large numbers of beneficiaries living more that 25 miles 
        away from the facility or referred from other hospitals;
  --allowing more rural hospitals to obtain special ``disproportionate 
        share'' payments available to hospitals serving large numbers 
        of low income patients; and
  --authorizing payment for telemedicine, in which medical 
        consultations are conducted via phones and computers, for 
        beneficiaries residing in rural areas that have a shortage of 
        health care professionals.
    We also have implemented several BBA payment reforms. For example, 
we have:
  --modified inpatient hospital payment rules;
  --established a prospective payment system for skilled nursing 
        facilities to encourage facilities to provide care that is both 
        efficient and appropriate;
  --refined the physician payment system, as called for in the BBA, to 
        more accurately reflect practice expenses for primary and 
        specialty care physicians;
  --implemented the Medicare+Choice program which increases payment 
        rates for rural health plans and allows beneficiaries to be 
        offered options such as provider sponsored organizations and 
        private fee-for-service plans;
  --established a National Medicare Competitive Pricing Advisory 
        Commission to design and implement an essential demonstration 
        project using competition to set rates for managed care plans;
  --begun implementing an important test of whether market forces can 
        help Medicare and its beneficiaries save money on durable 
        medical equipment; and
  --initiated the development of prospective payment systems for home 
        health agencies, outpatient hospital care, and rehabilitation 
        hospitals that will be implemented once the Year 2000 computer 
        challenge has been addressed.
    In most cases the BBA prescribes in great detail the changes we are 
required to make. However, we understand that rural providers may have 
more difficulty than others in adapting to some of these changes. We 
are committed to working with rural providers to help them adjust, and 
to affording maximum flexibility within our limited discretion as we 
implement BBA reforms.

                          PRESIDENT'S PROPOSAL

    The President's Medicare reform plan also recognizes rural 
beneficiaries' and providers' special circumstances and the 
disproportionate impact of BBA payment reforms on rural payments, and 
includes additional provisions targeted specifically to rural 
providers.
    The President's plan will make it easier for rural hospitals to 
receive higher urban payment rates. Right now, rural facilities can 
obtain urban rates if the wages they pay their employees are at least 
108 percent of average wages in their rural area, and at least 84 
percent of average wages in a nearby urban area. The President's plan 
will adjust those wage thresholds so more rural hospitals can be paid 
the same as their urban neighbors.
    The President's plan adjusts the BBA's new outpatient prospective 
payment system to increase payments to low-volume rural hospitals and 
other facilities that would otherwise be disproportionately affected by 
the new system, which we expect to implement next year. An analysis 
included in our Notice of Proposed Rule Making shows that rural 
hospitals would be disproportionately affected by the new system.
    We are therefore considering a budget-neutral three year transition 
to the new system that will limit the impact on rural hospitals. We are 
also delaying implementation of a volume control mechanism on the 
system that was called for in the BBA, which also will give hospitals 
extra time and money to adjust. And we may use the same wage index for 
calculating rates that is used to calculate inpatient prospective 
payment rates and take into account the effect of hospital rural/urban 
reclassifications and redesignations.
    The President's plan includes other administrative actions that 
will help many rural hospitals. It will postpone extension of limits on 
payment when hospitals transfer patients with specific diagnoses to 
skilled nursing facility beds, home health agencies, or another 
hospital or hospital unit. And it will provide relief to home health 
agencies, including those affiliated with rural hospitals. It extends 
the time for agencies to repay overpayment without interest from one 
year to three years. It also postpones the requirement for agencies to 
obtain surety bonds until October 1, 2000, and limits the amount of 
bonds to $50,000 rather than 15 percent of annual Medicare revenues as 
was proposed earlier.
    The President's plan further acknowledges the special circumstances 
many rural facilities face by giving rural hospitals larger rate 
increases than urban hospitals for inpatient care. Specifically, 
payment rate increases for inpatient rural hospitals would be larger 
than they would receive under a straight extension of the BBA from 2003 
to 2009. The difference in rate increases between rural and urban 
facilities will decrease by 0.1 percent each year until the same update 
applies for rural and urban hospitals in 2009. Although this update is 
less than the full market basket, which would be the update under 
current law, it is higher than anytime during the BBA (1998 to 2002), 
and in fact, most years since the prospective payment system has been 
in operation.
    And the President's plan includes $7.5 billion over 10 years to 
fund appropriate and justified modifications that may be necessary to 
smooth the transition to BBA reforms. That money could well be used to 
address specific access problems, such as those that may be developing 
in rural areas.
    The President called on Congress to work with him to reach a 
bipartisan consensus on needed reforms this year. Any action we take to 
smooth the transition to BBA payment reforms must be fiscally prudent 
and carefully targeted to address areas where there is clear evidence 
that beneficiary access to quality care is in jeopardy. BBA payment 
reforms are critical to strengthening and protecting Medicare, and it 
is clear that they are succeeding in promoting efficiency and extending 
the life of the Medicare Trust Fund.

                     MONITORING BENEFICIARY ACCESS

    We are therefore actively monitoring the impact of the BBA to 
ensure that beneficiary access to covered services is not compromised. 
Our regional offices are gathering information from around the country 
to help us determine whether specific corrective actions may be 
necessary. We are gathering data from media reports, beneficiary 
advocacy groups, providers, Area Agencies on Aging, State Health 
Insurance Assistance Programs, claims processing contractors, State 
health officials, and other sources to look for objective information 
and evidence of the impact of BBA changes on access to quality care.
    We are working with the National Rural Health Association to 
evaluate rural access to care. The Association has sent a questionnaire 
to all its members on the impact of BBA reforms on rural health 
services. They are asking for anecdotal descriptions of how services 
have been affected, and they expect to receive responses by the end of 
this month.
    We also are monitoring Census Bureau data, which allow us to gauge 
the importance of Medicare in each health service industry, looking at 
financial trends in revenue sources by major service sectors, and 
tracking profit margin trends for tax-exempt providers.
    We are monitoring the Bureau of Labor Statistics monthly employment 
statistics for employment trends in different parts of the health care 
industry. Such data show, for example, that the total number of hours 
worked by employees of independent home health agencies is at about the 
same level as in 1996. That provides a more useful indicator of actual 
home health care usage after the BBA than statistics on the number of 
agency closures and mergers.
    We are being assisted by our colleagues at the HHS Inspector 
General's office. They have agreed to study the impact of the BBA's 
$1500 limits on outpatient rehabilitation therapy. They have also 
agreed to interview hospital discharge planners as to whether they are 
having difficulty placing beneficiaries in home health care or skilled 
nursing facilities. Results of that study should help provide 
information in addition to surveys done for the General Accounting 
Office and the Medicare Payment Advisory Commission of home health 
agencies. And, because home health beneficiaries are among the most 
vulnerable, we have established a workgroup to develop an ongoing 
strategy for monitoring beneficiary access and agency closures.
    However, it is important to note that the BBA is only one factor 
contributing to changes in Medicare spending. We have significantly 
decreased the number of improper payments made by Medicare. And some 
payments have been slowed during the transition to new payment systems. 
The BBA also is only one factor contributing to provider challenges in 
the rapidly evolving health care market place. Efforts to pay right and 
promote efficiency may mean that Medicare no longer makes up for losses 
or inefficiencies elsewhere. Our first and foremost concern has always 
been, and will continue to be, the effect of policy changes on 
beneficiaries' access to affordable, quality health care.

                               CONCLUSION

    We are all committed to ensuring rural beneficiaries' continued 
access to quality care, and we are all concerned about the 
disproportionate impact of BBA reforms on rural health care providers. 
The President's Medicare reform plan addresses these concerns with 
specific proposals targeted to assist rural hospitals, and it provides 
funding to smooth the transition to BBA reforms which could well be 
used to address problems that may jeopardize rural beneficiaries' 
access to care. We are very grateful for the opportunity this hearing 
provides to discuss concerns facing rural hospitals and to explore how 
we might address them in a prompt and fiscally prudent manner. I thank 
you again for holding this hearing, and I am happy to answer your 
questions.

    Senator Cochran. Thank you very much, Dr. Berenson. We 
appreciate your willingness to remain here to hear the 
testimony that is going to be given by those who have the job 
of helping run the small town hospitals who are the subject of 
today's hearings.
    Dr. Wilensky, in your statement you talk some about the 
measurement that is used to gauge revenues and the comparison 
between revenues of hospitals and the costs that are required 
to deliver those services and what that means in terms of the 
economic well-being of the hospital. I am told that one study 
has been done, I think one of the national accounting firms has 
done it for the health care industry of America, that suggests 
that for the small rural hospitals the margin, the comparison 
between revenues and costs, for those hospitals will go from a 
positive 4.2 percent in fiscal year 1998 to a negative 5.6 
percent by fiscal year 2002.
    If that is correct, let me ask you what your assessment 
would be on the impact that that would have on hospitals 
throughout the country?
    Dr. Wilensky. If it turns out that that projection is 
correct, it would of course have very major impact on rural 
hospitals. That is a very significant change in terms of going 
from overall positive margins to overall negative margins.
    There are two points I would like to make in response to 
that. The first is, even in cases where you have overall on 
average negative margins, which has happened earlier in the 
1990's under Medicare, that does not mean that you do not have 
a substantial number of hospitals who continue to do 
financially all right, although it certainly is an area of 
concern when the average is now negative rather than positive.
    The biggest concern with regard to the estimates--and we of 
course have also seen this report--is that it is not based on 
new data. It is based, unfortunately, as all of us have our 
estimates based, on pre-Balanced Budget era numbers. It is 
using new assumptions. So our real concern is the one that Dr. 
Berenson has also raised, is that we do not have good, 
credible, systematic information about what has been happening 
since the Balanced Budget Act has been introduced.
    That is why MedPAC has been working with HCFA to try to see 
whether we cannot have a sample of hospitals reporting, subject 
to later audits, so that we can get a good credible early 
warning data. If it turns out that the assumptions in this 
report are correct, although we think there is some indication 
that their 1998 estimates may--or the 1998 assumptions may 
contain estimates that show greater cost increases than in fact 
actually occurred, it would in fact be very troubling.
    Our recommendation is monitor carefully, but be careful 
about making expenditures based on projections in 2002.
    Senator Cochran. There was a similar study that I have been 
told about for the American Hospital Association, which found 
that Medicare operating margins for the average rural hospital 
will fall to a negative 10.42 percent in fiscal year 2002 if 
the Medicare provisions of the BBA are fully implemented. That 
is another bit of evidence. It sounds scary.
    Dr. Wilensky. It does sound scary. Again, let me caution 
you these are new assumptions. They are not new data or 
information. It is why I think when you consider redoing some 
parts of the Balanced Budget Act you want to be cautious to 
change what we think may have already occurred, but I urge you 
not to undo the whole Balanced Budget Act. We do not know that 
what has happened in the first year or two will continue to 
play out this way.
    In the 1980's when the DRG's were introduced into your 
hospitals when Congress changed how Medicare reimbursed 
hospitals, the first year or two showed substantially greater 
reductions in spending by hospitals than occurred thereafter. 
Thereafter the projections were very close to CBO projections. 
So it is one thing to go in and to make some modest changes 
that reflect problems we know that already exist. It is 
something else to do a major redo of the Balanced Budget Act 
based on what may happen 4 years from now.
    Senator Cochran. Dr. Fox, you mentioned that some of the 
advice that the government has been giving to small hospitals 
has been to diversify, get into other areas, not just 
traditional hospital activity. Now we are hearing about nursing 
homes primarily and some other similar health service providers 
having to shut up shop and go out of business because of the 
collapse of the entire industry.
    I have heard about a company in Kentucky--this is 
anecdotal, but I just heard about it the other day from one of 
our Senate colleagues--where this company is going into 
bankruptcy that had been in the nursing care business. The 
assumptions are that it is directly related to the changes in 
Medicare reimbursement.
    Of course, all of those residents are elderly and are 
Medicare eligible. So the assumption is that the system is 
really in a serious state right now.
    So what do we do for those rural hospitals who have been 
encouraged to diversify in these ways and find themselves now 
really in dire financial straits?
    Dr. Fox. Well, I think the first thing we do, Senator, is 
we have to make sure we know what is going on. As I mentioned, 
we have four research grants out there right now, one with the 
University of Washington, one with the University of Minnesota, 
one with the University of North Carolina, one with Project 
Hope, that by this fall will give us some information on what 
is happening.
    The RUPRI, which is the Rural Policy Research Institute, 
that we also provide funding through, will provide a report on 
the 31st, I think it is around the 31st or so, 30th or 31st of 
July. So I think the first thing is to try to make sure that we 
can monitor the changes as early as possible.
    The second, we are working with hospitals on the critical 
access hospital program and we are doing this through the 
offices of rural health, and I might just say that that vehicle 
would not be there if it were not for you. I want to thank you 
for your support a number of years ago in setting up these 
offices of rural health, as well as your support of the 
critical access hospital program.
    I think at this point it is kind of dicey to say how this 
is going to play out. Some of the hospitals have already taken 
advantage of it, some of them have not. Others are looking at 
it. I know there is an issue of uncompensated care and how that 
plays out in hospitals that go to critical access hospital 
programs. So I think that is the second thing we have got to 
do, is again continue to work with States and offices of rural 
health on helping hospitals look at whether or not it is 
feasible for them to convert.
    The third thing I think is that we have to look at other 
ways of bringing together health care within the community. If 
I think about my own community, we have a hospital, we have a 
health department, we have--had a home health agency, private 
home health agency, I think that actually has gone out of 
business. Then we have a community health center, other types 
of health providers.
    We need to figure out ways, particularly in rural 
communities, to pull those together. Can they co-locate? Can we 
look at the things that we buy as a Federal Government, for 
instance through the Agency on Aging, Meals on Wheels, 
nutrition services? Can we encourage States to buy those 
through small hospitals? Respite care. We know the communities 
are getting older. What kind of additional services can these 
hospitals provide?
    So I think that what we are looking at, both in the 
critical access hospital program as well as the 
administration's proposal on the safety net, the program for 
the working uninsured, is to try to help bring together the 
entities that are there so that you have a critical mass and 
you do not end up with each one kind of working in their own 
corner and not working synergistically.
    So we are working on trying to look at these issues. We 
also are looking at funding for other kind of health care 
providers that can come in and work with the rural hospitals, 
National Health Service Corps being a prime example. About two-
thirds of all of our health profession shortage areas are in 
rural communities, and we only have 2,000 National Health 
Service Corps that we place out there. We estimate if we 
eliminated all of our health profession shortage areas we would 
need 13,000. So we are a long way from what we need to do 
there.
    I think it is the whole issue of monitoring, helping bring 
the system together, trying to look at best practices--models. 
We know there are communities that have actually recaptured 
some of their care that has gone off to other areas; and trying 
to help them look at strategies to pull that care that is 
practical for them to keep back in.
    It is a whole list of all of the above.
    Senator Cochran. I appreciate that. I know the hospital 
flexibility program is something that you have been advocating. 
Is this a program that will address some of these concerns?
    Dr. Fox. Definitely, Senator. I think that the rural 
hospital flexibility program, the Medicare cost reimbursement. 
I think that now that many Medicaid programs have the option of 
whether or not they are going to provide cost-based 
reimbursement for Medicaid to hospitals, we ought to encourage 
States to do that.
    Again, I come back to the fact that Tallahassee General 
Hospital has 65 percent Medicare, but they have 10 percent 
Medicaid, not much else, not much private pay. States have the 
opportunity to look at what they pay rural hospitals and 
Medicaid as well as Medicare both--together, they are generally 
the two major payers for rural communities, and we ought to be 
honing in on cost reimbursement and encouraging that in both of 
those realms.
    Senator Cochran. Dr. Berenson, I can remember one time when 
we were trying to do something about the disparity between 
reimbursement rates for rural hospitals as compared with those 
in urban areas. There were some categories that there was some 
flexibility on. I think legislatively we made some adjustments 
that benefited those community hospitals that served a broad 
geographical area and really had more physicians and health 
care professionals working there than some of the city 
hospitals did, and their costs were the same and in some cases 
even higher than the city costs.
    Is it unfair to continue to reimburse rural hospitals at a 
lower rate for the services they provide than we provide to the 
urban centers? Should we not make the reimbursement rates the 
same?
    Dr. Berenson. Well, approximately 50 percent or so of rural 
hospitals are in separate categories that in fact do get either 
cost-based reimbursement or some additional reimbursement. I 
think you are referring to rural referral centers, which are 
major cachement hospitals for a geographic area. A significant 
part of reimbursement has to do with the wage index. We make it 
easier for them to reclassify as urban in their reimbursement, 
in their designation of wage index.
    We are looking to extend that going forward. We need to 
have a rationale for paying differentially, but the BBA did 
some of that and we are looking to see if we can extend that 
administratively for a number of more hospitals, mostly through 
this mechanism of the wage index.
    Senator Cochran. You mentioned the President's proposal to 
increase funding and to provide some new ideas. Are there any 
specific changes in the BBA that have been submitted by the 
administration or assumptions made that legislation will be 
changed in any specific way to deal with these problems?
    Dr. Berenson. The President's proposal basically says he 
wants to work with the Congress. He has identified $7.5 billion 
to smooth out the BBA, identify areas that might need some 
additional funding, where things went perhaps a little too far.
    We are also looking to see what we can do administratively. 
Dr. Wilensky mentioned and you brought up the issue of 
hospitals getting into other areas. There seems to be a problem 
of underestimating the acuity of skilled nursing facility 
beneficiaries, those who may be receiving ventilator care or 
something like that. We now have a contract out to help us 
readjust our case mix index so that we could revisit that issue 
and provide additional payment to high acuity nursing homes.
    So there is sort of a combination. The President has 
basically committed to funding availability and wants to work 
with the Congress to really identify the most important areas 
that need some attention.
    Senator Cochran. I do not want to start an argument, but 
you heard Dr. Wilensky's suggestions for some specific changes 
to the BBA. I made some notes. There were four specific ones as 
I understand it: The outpatient prospective payment system, 
phasing in the changes rather than making an abrupt change; 
skilled nursing facility reimbursement payments are not keeping 
pace with costs in that area; ambulance charges could be 
included, for example, in those reimbursements and critical 
access hospital provisions. That is an important way for some 
hospitals to remain a part of the health care system.
    What is your reaction to those proposals?
    Dr. Berenson. Well, as I said earlier, the first two I 
think we have talked about together and I think we are quite 
sympathetic to a transition in outpatient, a phase-in of 
outpatient. Again, we are currently in a comment period; 
comments are coming in, so I cannot definitively tell you where 
we would be at this point, but we think there is likely to be 
merit in that suggestion.
    As I just said, on the skilled nursing facility, we think 
there is a problem with high acuity patients and are looking at 
how we might adjust the case mix to deal with that. In terms of 
critical access hospitals, there is actually a lot of work that 
we are doing with HRSA to identify the universe of hospitals 
that would be eligible. Earl knows a lot more about it than I 
do--in the area of the States' requirement to develop a plan. 
We would certainly be open and eager for a number of hospitals 
to qualify as critical access hospitals.
    I cannot comment specifically on the ambulance one, but we 
will look at that.
    Senator Cochran. Thank you.
    Senator Feinstein.
    Senator Feinstein. Thank you very much, Mr. Chairman. I 
feel very similarly to you, except perhaps maybe even more 
strongly, because I think we are on our way to a major 
disaster.
    Senator Cochran. We call it a crisis in the title of the 
hearing.
    Senator Feinstein. Well, I would certainly agree with that. 
I would certainly agree in California.
    If I understand correctly, the BBA of 1997 cut payments to 
all hospitals treating Medicare patients by $32.9 billion over 
5 years. That is huge by anybody's calculation. There are 
differing views here, but if there were an effort to restore--
you mentioned the President has put out there $7.5 billion--in 
each of your professional judgments, to prevent what is 
happening now, which is the tremendous stress on teaching 
hospitals, the closure of hospitals urban and rural all across 
the board, how much would have to be restored?
    Dr. Wilensky. I do not know the answer. I think that, as I 
understand, the $7.5 billion that was raised, it was raised 
over 10 years. That strikes me as a little smaller than what I 
had assumed Congress might consider in terms of replacing some 
of the unexpected savings that occurred with regard to the 
Balanced Budget Act.
    When you look at the projections of how much more savings 
will occur than was initially projected by the Congressional 
Budget Office, I urge you to think about it in terms of two 
pieces: The first, which is what has already occurred, and my 
understanding is that we are talking roughly about $20 or $22 
billion already of more savings than was thought to occur; and 
that the additional number that we heard referenced earlier is 
what may happen in the future.
    You will have to decide where the additional funds will 
come from, as you well know. But I urge you to be a little more 
cautious about trying to put money back in for savings that may 
be greater than you or the Congressional Budget Office thought 
would occur when they have not actually occurred. Our ability 
to correctly project exactly what spending will be in any year 
is a little shaky and, while I think there is good 
justification for putting back some money in the outpatient, I 
think the outpatient hospital has better justification than 
putting money back into the inpatient portion as of what we see 
now, although I would certainly urge additional reductions not 
be made until we know what we are doing more.
    So I think the $7.5 billion is an aggregate number over 10 
years, if that is the correct number as I recall it. It seemed 
a little less overall putting back in. But I would be careful 
about not thinking about the very large numbers of extra 
savings that had been reported earlier in this hearing.
    Senator Feinstein. Thank you, doctor.
    Dr. Berenson.
    Dr. Berenson. If I could comment----
    Senator Feinstein. I am asking for your best professional 
judgment now, not necessarily the position of the 
administration.
    Dr. Berenson. Oh, I understand, but that is somewhat 
difficult.
    I would just point out that the hospital inpatient margins 
pre-BBA, using data pre-BBA, were really at an unprecedented 
level, and their ability to control costs has developed such 
that costs actually have not gone up for 4 or 5 years in a row. 
So that was the sort of predicate, I think, on taking 
significant savings from the hospital industry.
    We have heard, just as you have now, from hospitals of 
different categories--teaching hospitals, rural hospitals, 
public hospitals--that the world is very different now, 18 
months later. We are working very hard to try to understand 
that.
    But there is this at least basis for believing that at 
least inpatient revenue, inpatient margins, were quite healthy. 
So I would I guess share a little bit the concern of Dr. 
Wilensky that we really identify the problems and maybe target 
a response, rather than come to a conclusion that we went too 
far overall.
    Some of the greater savings that are attributable to the 
BBA are actually attributable to general economic conditions. 
Inflation was not as high, so the baseline did not go up as 
much. Some of the different spending is because of our success 
actually in protecting against waste, fraud and abuse, where 
spending was lower than had been expected. So it's complex.
    We do not want to sit and be idle. We are working very hard 
to understand what has changed since that last data was 
published. We are working with MedPAC to try to quickly figure 
out how we can get updated information to get a much more 
current snapshot of what hospital margins are.
    We actually did have some concerns about the studies that 
the chairman referred to, about some of the methodology, and 
are not convinced that their predictions are as accurate or are 
accurate. But we are very concerned and clearly are working in 
this area.
    Senator Feinstein. But if we take too long, another 15 
percent of my State's hospitals are due to close. If we take 
too long, there will not be anything left. And you know, you 
now have two major teaching hospitals, the University of 
California and Stanford, in huge trouble, Mount Zion Hospital 
in San Francisco in huge trouble. So it is happening in a 
major, in a mega way.
    So you have no number to propose?
    Dr. Berenson. No, we do not. We again do not--there are a 
number of areas that have been identified--the teaching 
hospitals, rural hospitals, the sub-acute nursing homes. The 
therapy caps have been identified as an issue in the BBA, the 
implementation of outpatient PPS. And rather than the 
administration proposing specific fixes at this time, we 
actually want to work with the Congress to identify where 
relief is needed.
    Senator Feinstein. Dr. Fox.
    Dr. Fox. Senator, as a pediatrician I am not sure you want 
my professional judgment is on this issue. Let me say we are 
working with HCFA. We actually have offered our rural health 
research centers to HCFA for their use in answering some of 
these questions.
    I do not know that we have a number. We have not run the 
figures, and I would be strictly pulling it out of the dark if 
I were to give you a number today. But I would point out that 
the study that Leuwen did on the same issue, they estimated the 
negative hospital margins for rural hospitals by 2002, 2003, 
being minus 7 percent. So they are all somewhat in that same 
neighborhood.
    But again, we look forward to working with HCFA and making 
our resources available, our research sources available, to 
help answer some of these questions and provide the information 
back to them and to you.
    Senator Feinstein. Thank you very much.
    Thanks, Mr. Chairman. Thank you.
    Senator Cochran. Thank you.
    Senator Durbin.

                 STATEMENT OF SENATOR RICHARD J. DURBIN

    Senator Durbin. Thank you very much, Mr. Chairman.
    I apologize to the panel. I was on the floor in a debate 
involving the Patient's Bill of Rights. I think that might be 
relevant to this discussion to some extent, but I will not get 
into it.
    When it comes to rural hospitals in my State of Illinois, I 
think people are surprised to learn that an otherwise healthy 
national economy and an otherwise bustling economy in our State 
tends to conceal the fact that in rural Illinois things are not 
very good. Commodity prices have been plummeting and farmers 
are struggling, and as they struggle a lot of businesses fold, 
unable to sell them the equipment and other things necessary 
for their farm. These businesses close down and towns dry up, 
which puts a burden on the rural hospitals that, frankly, is 
aggravated by this economic situation across the country. There 
may be some exceptions, but for the most part I think Illinois 
mirrors what is happening across the country.
    It is very obvious as we take a look at the Balanced Budget 
Act that we went too far. We were trying to do everything we 
could to bring the budget into balance and it appears that we 
decided to put a number on a page and then say, well what 
policy changes do we have to make to reach that number. I think 
we were insensitive to the fact that many of these policy 
changes would be devastating to individuals and families and to 
rural hospitals. That is the reason we are here today.
    I would have to say by way of preface here that I am 
troubled by Washington's response to this crisis, both in the 
White House and in Capitol Hill. I have heard from the 
President's personal staff about their plans to rescue some of 
these extraordinary cuts in Medicare and their impact on rural 
hospitals and many inner city hospitals, I might add, as well. 
I think they are pitifully inadequate. They are just not 
responsive to the size of the problem.
    When you come to Capitol Hill, you kind of enter into 
fantasyland, because we happen to believe that, despite the 
crisis which has been described here, we can have with a 
straight face a press conference today and announce a one 
trillion dollar tax cut. It is as if we are not sensitive to 
the fact that many of the things that we have done are causing 
great havoc in the quality of life across America.
    I am for a tax cut once we have met our obligations, and 
our first obligation clearly is to Social Security and the 
Medicare, and we have not addressed it. We have not addressed 
it, neither in the budget resolution nor in the negotiations to 
date.
    Dr. Berenson notes in his testimony the administration's 
commitment to dedicating a portion of the surplus to Medicare. 
This is a one-way conversation so far. I hope that it becomes a 
bipartisan conversation, where we say that in order to deal 
with this problem in the long haul we cannot talk about 
trillion dollar tax cuts before we talk about putting Medicare 
on a sound footing, or by the time we get around to talking 
about tax cuts there will not be many rural hospitals left.
    I guess the bottom line question which I have to each of 
you is this. What have you seen in the changes in populations, 
in the medical facilities serving rural areas, evidencing these 
cutbacks in Medicare? Have we seen any kind of decline in those 
populations in nursing homes or in hospitals? Basically, the 
question is what kind of service cutbacks have we seen as a 
result of the Balanced Budget Amendment changes that can 
demonstrate that in fact we are no longer in an area of cutting 
back on the profitability of hospitals in rural areas, but 
frankly at a point where we may be threatening their existence?
    Dr. Wilensky.
    Dr. Wilensky. I do not think we have such information. I 
think it is important that we continue to monitor. There are 
some provisions that I think we can look at and say may not 
make sense in retrospect. Dr. Berenson referenced the $1,500 
rehabilitation cap that exists irrespective of the patient's 
condition; the fact that in the outpatient prospective payment 
the amount that is going to be reduced is greater than what the 
House and Senate bills had anticipated and will be introduced 
in full force rather than phased in.
    To the best of my knowledge, there is not information 
either with regard to skilled nursing facilities or home care 
or hospital care that documents access problems. MedPAC, at 
your instructions, at Congress' instructions, monitors this 
very closely. We are concerned. We think, as Mrs. Feinstein 
suggested, there are some areas where you ought not to wait 
until you have documentable problems, that there are problems 
in the policies per se that suggest rethinking them even before 
we have information.
    But to the best of my knowledge, we do not have 
documentable indications of access problems for seniors to 
date. But we are concerned, all of us here.
    Senator Durbin. Dr. Berenson.
    Dr. Berenson. I agree with that. What we are doing 
specifically with our colleagues at the Inspector General's 
Office in HHS is actually go out to discharge planners at 
hospitals, who are the people who actually have to find nursing 
homes or home health agencies, and specifically do a survey of 
randomly selected hospitals. And I have asked whether we can 
oversample rural facilities and we will try to do that also.
    Senator Durbin. What is the time frame on that?
    Dr. Berenson. Within the next couple of months. It is an 
urgent study that is going on right now. They are in a position 
to do it quickly and so we have asked them to do that.
    Our focus is really on beneficiary access. We are concerned 
about providers' health and well-being, but our primary concern 
is access for beneficiaries. We are doing a series of things, 
but that is one that I think might be most promising. We think 
at this moment, between the GAO study and MedPAC's study on 
home health care, that we have not documented access problems 
to home health care.
    There have been closures, but we now have about the same 
number of home health agencies today that we had in 1996. There 
was just a huge increase and now it is back to essentially 
where it was. We have not found, nor have the other agencies 
problems there.
    The IG is specifically looking at access to nursing homes, 
access to therapy caps--I mean, access to physical and 
occupational therapy and whether those caps have had impact, 
and it is a technique that we will use to try to understand 
other issues as well.
    Senator Durbin. I cannot remember where I read it, but I 
read recently that there was a decline in the population of 
nursing homes in our country. Do you recall reading anything 
along those lines, or am I wrong?
    Dr. Wilensky. I do not know. I do not recall reading that?
    Senator Durbin. Dr. Fox, do you have any comments?
    Dr. Fox. Senator, I would agree with Dr. Wilensky, that I 
think it is a little early to know. I mentioned earlier we have 
several research grants that are looking at this. I will give 
you an example of one instance that I know for sure where we 
have had an impact. When I was Commissioner of Health in 
Alabama, we ran a large home health program. We had about 
800,000 nursing visits a year. In the last 12 months that 
agency has had to lay off 600 people who are primarily 
providing home health care in rural areas.
    If we extrapolate that--and again, I commented in my 
statement that many hospitals run home health programs, and 
they are low volume, which is a problem to begin with, and you 
talk about a situation where you have that kind of effect with 
a huge agency that can adjust and can shift, the effect on 
rural hospitals I think is going to be dramatic, and I think we 
need to make sure we know it early.
    Senator Durbin. Thank you.
    Thank you, Mr. Chairman.
    Senator Cochran. Thank you, Senator Durbin.
    Thank you all for being here today and for your testimony.
    We have another panel now we will invite to come forward. 
It includes: Douglas Higginbotham, who is Executive Director of 
the South Central Regional Medical Center in Laurel, 
Mississippi; Anne Klawiter, who is Chief Executive Officer of 
the Southwest Health Center in Platteville, Wisconsin; Deborah 
Griffin, Administrator of the Humphreys County Memorial 
Hospital in Belzoni, Mississippi; and Roland E. King, who is 
the former Chief Actuary of the Health Care Financing 
Administration.
    We welcome each of you to the hearing and thank you for 
preparing testimony for us. We appreciate your submitting 
statements. We will include those statements in full as a part 
of the hearing record and encourage you to make any summary 
comments from those statements that you think will be helpful 
to the committee.
    I am going to start by calling on Douglas Higginbotham from 
Laurel, Mississippi, to tell us about the situation in his town 
of Laurel. He is Executive Director of a regional medical 
center there. Mr. Higginbotham.

STATEMENT OF G. DOUGLAS HIGGINBOTHAM, EXECUTIVE DIRECTOR, 
            SOUTH CENTRAL REGIONAL MEDICAL CENTER, LAUREL, 
            MISSISSIPPI

    Mr. Higginbotham. Mr. Chairman, Senators, staff members, 
and guests of the committee: My name is Doug Higginbotham. I am 
the Executive Director of South Central Regional Medical Center 
in Laurel----
    Senator Cochran. Would you pull the mike just a little 
closer so we will not have any trouble hearing.
    Mr. Higginbotham. Can you hear me now?
    Senator Cochran. Yes.
    Mr. Higginbotham. All right. I am the Executive Director of 
South Central Regional Medical Center in Laurel, Mississippi. 
It is my honor to appear before you today to present testimony 
on the effect of the passage of the Balanced Budget Act of 1997 
on Mississippi's rural hospitals.
    I will begin with a brief overview of our hospital and our 
hospital's role in our community. Laurel is a small community 
in Jones County, which is located in southeast Mississippi. In 
the past we were designated as a rural referral center and we 
are a little larger than many rural facilities.
    Our services include general surgery, ophthalmology, 
obstetrics and gynecology, cardiology, emergency services, 
including the operation of an ambulance service. We have a full 
range of radiology services, including CAT scan, MRI, and 
interventional procedures. We operate a nursing home, a home 
health agency, hospice program, geriatric mental health 
program, a skilled nursing facility, a rural health clinic, and 
until recently an inpatient alcohol and chemical dependency 
unit.
    We are the only hospital for a 30-mile radius and we serve 
a four-county area. Last year we provided services to 47,000 
emergency room patients, 22,000 outpatients, and delivered more 
than 1,000 babies, and admitted over 9,000 patients.
    It is important in this debate to get an idea where we get 
our operating revenue and how that money is used. We get 55 
percent of our revenue from treating Medicare patients, 12 
percent from treating Medicaid patients. We get an additional 
25 percent of our revenue from various commercial and 
governmental sources. Of our revenue, 8 percent is attributable 
to bad debt or charity care.
    Salaries and benefits make up 50 percent of our expenses. 
We spent 22 percent of our revenue on medical supplies, 6 
percent on professional fees. Of our expenses, 22 percent 
represent maintenance and utilities, debt service, provision 
for bad debt, depreciation and amortization. We are left with a 
net income of about 3.5 cents on the dollar. These funds are 
reinvested in equipment, renovation, and building programs.
    Even though our facility is larger than most rural 
facilities, we still face the same threats that the other rural 
facilities throughout Mississippi and really throughout the 
country face. Like every other facility, we face declining 
reimbursement, an increasing load of charity and bad debt care, 
cost pressure from labor shortages and regulatory changes, 
enormous difficulty in recruiting and retaining physicians, and 
difficulty in gaining access to capital for reinvestment in our 
facilities and equipment.
    Before discussing these threats, I think it is important 
you understand the importance of our rural hospital to our 
community. A rural hospital is not just another hospital. South 
Central is typical of many of these rural facilities. We are 
the only hospital for a large geographic area and provide the 
backbone of health care delivery in our area. We are the ones 
that recruit physicians, nurses, nurse practitioners, 
therapists, both physical and occupational, and other health 
care professionals.
    We are the ones who provide vital services like emergency 
rooms, ambulances, home health, and clinics. Rural communities 
like Laurel do not have public transportation such as buses, 
taxis, subways, or rail. Patients often have no choice but to 
use our emergency rooms as their point of access for care. We 
are based in a town of 18,000 people. Yet we provided emergency 
room treatment to 47,000 patients last year. We are the primary 
source of medical care for a sizable portion of our population.
    South Central is not the only health care--not only the 
health care safety net of southeast Mississippi. It also 
contributes significantly to the area's economic well-being. We 
are one of the region's largest employers and one of the only 
employers of highly skilled workers. Our employees are actively 
involved in civic, social, and religious organizations in towns 
in which they are located. We are frequently large supporters 
of economic development. Our own economic development cites 
access to health care as a key factor in attracting business to 
locate in our area. Our employees are leaders in the community 
as well as a resource to others.
    For a long time we played a vital role in rural areas. Now 
for the first time in my memory, it is being seriously 
threatened, our survivability.
    One threat is declining reimbursement. As a rule, rural 
hospitals serve a greater proportion of Medicare cases than 
other hospitals. Small changes in reimbursement rates can have 
a devastating effect on these hospitals. Under the current BBA 
language, we will suffer an approximately $18 million loss of 
anticipated revenue over a 5-year period. Because of the BBA 
and other regulations, we have seen a 50 percent reduction in 
the volume of our home health services and a 50 percent 
reduction in hospice services. We have had a 55 percent 
reduction in the skilled nursing home--skilled nursing facility 
reimbursement, and that is forcing us to seriously evaluate the 
viability of that facility.
    We may--others have done it--we may have to soon eliminate 
skilled nursing services in our area of Mississippi.
    Prior to BBA, we were paid what amounted to an average per 
diem of about $600 in our skilled nursing facility. Today we 
are paid an average of $255. This $255 is supposed to provide 
all the necessary care to a patient. In short, we are to 
provide room, board, medicine, supplies, nursing staff, 
physical and occupational therapist, and all other services for 
the cost of a hotel room in Washington, DC.
    Along with the cuts we have already absorbed, we and other 
rural providers face proposed changes in the definition of 
hospital-based services that threaten to eliminate our rural 
health clinic. Changes in home health regulations and proposed 
changes in reimbursement severely threaten the viability of 
home health agencies and hospice services.
    While these services may evaporate, the needs of our 
patients do not. We are morally and legally responsible to our 
patients to provide care, but our alternatives are quickly 
disappearing.
    When you cut reimbursement, the cost of providing care to 
these patients is shifted to us. These are costs we cannot 
continue to absorb. We will not compromise on quality, but we 
may be soon forced to limit the level and type of services that 
we are able to provide to our patients.
    Staff availability is a second major threat. It is not only 
a financial concern, but it is a quality concern. Hospitals, 
just like any other business, are faced with decisions about 
the allocation of resources. We have to pick and choose how we 
spend our money, whether it is on property, plant, and 
equipment, how much we spend on maintenance, how much on 
staffing, and how much on professional services.
    We have cut to the bone the area of professional services. 
This summer we reduced staff on paper by reducing the number of 
hours our staff is required to work. This allowed us to avoid 
layoffs. We reduced retirement benefits, increased insurance 
deductibles, and delayed all raises by 2 months. Eventually we 
gave raises, but it was essential for us to do that to remain 
minimally competitive in salaries.
    The reductions still resulted in staff, mostly nursing 
staff, leaving to go to large cities to seek employment. New 
Orleans is about 2\1/2\ hours away. A nurse can go work one 
weekend in New Orleans and make more money there than we can 
afford to pay in a week. As a result, we faced a nursing 
shortage this winter when the patient volumes increased.
    Health care professionals do not just flock to rural 
communities like Laurel, Mississippi. They are very difficult 
to recruit and very difficult to retain. With the projections 
for Medicare cuts in our facilities, we are concerned about 
being able to make adjustments in salaries next year. In 
addition to nursing shortages, we have been faced with 
shortages in registered records administrators, respiratory 
technicians, medical laboratory technicians, physical 
therapists, radiology technicians, and other specialized staff. 
The care provided at a hospital is only as good as its staff. 
Shortages can and do threaten quality.
    Even more critical to rural hospital survivability is the 
availability of physicians. A significant portion of my time is 
spent trying to recruit and retain physicians. Physicians have 
numerous options available to them when they come out of 
school. Most do not include rural communities as their number 
one preference. In recruiting, you consider the spouse and 
their interests in skills, which may not match your community's 
resources.
    Without physicians, a hospital cannot exist. We have heard 
much about physician oversupply in our country. However, I am 
here to tell you we do not have an oversupply of physicians in 
rural America.
    A final significant threat is the availability of capital. 
Many rural facilities like ours were built under the Hill-
Burton program in the late 1940's and early 1950's and have not 
been significantly updated since that period. Changes in 
technology and the resulting structural demands on buildings to 
house new equipment and to meet changing needs of patients and 
physicians are always present.
    Again, our case is typical. We have limited borrowing 
capacity and do not have access to capital markets. This means 
that we have to update our facility through our net income or 
reserves. Reduced reimbursement makes this task far more 
difficult and ultimately will threaten our ability to survive. 
If you cannot update your facility and medical equipment, you 
cannot recruit physicians and you cannot provide the services 
that the community deserves.
    Mr. Chairman, this is my first brush with anything remotely 
like a Senate hearing and I know I have probably not said all 
that should be said. I have provided a brief view of rural 
hospitals and some of the threats they face. We are not 
perfect, but we have worked hard to improve our efficiency. I 
believe strongly that rural hospitals are an essential part of 
providing health care resources to all citizens in the country.
    To allow rural hospitals to fail reduces or in some cases 
will effectively eliminate access to health care for those who 
choose to live in rural areas. With the closure of a rural 
facility, not only do the residents of the community lose 
access to health care, they also lose a key component in their 
ability to grow in the future.
    I had the opportunity to visit Washington in January and 
was impressed with the seriousness with which individuals I met 
took their responsibility to their constituents. I know many 
issues occupy your time, but I encourage you to talk to your 
constituents, to nurses, nurse aides, therapists, and 
physicians, and to elderly members of your family. Ask them 
where they would go for health care if their local hospital 
closed or eliminated key services such as the emergency room. 
Ask your local business leaders if they can recruit staff to 
their businesses if they have no access to health care.
    I do not claim to be an expert on anything, but I am a 
person who has some experience in rural health care, and I am 
concerned about the future of our rural hospitals.

                           PREPARED STATEMENT

    Thank you for this opportunity to address the committee and 
for your patience and consideration of this important issue.
    [The statement follows:]

             Prepared Statement of G. Douglas Higginbotham

    Mr. Chairman, senators, staff members and guests of the committee, 
my name is Doug Higginbotham. I am the Executive Director of South 
Central Regional Medical Center, in Laurel, Mississippi.
    It is my honor to appear before you today to present testimony on 
the effect of the passage of the Balanced Budget Act of 1997 on 
Mississippi's rural hospitals.
    I will begin with a brief overview of our hospital's role in our 
community.
    Laurel is a small community in Jones County, which is located in 
southeast Mississippi. In the past were designated a Rural Referral 
Center and are a little larger than many rural facilities. Our services 
include: general surgery, ophthalmology, obstetrics and gynecology, 
cardiology, emergency services including the operation of an ambulance 
service, and a full range of radiology services including CAT scan, MRI 
and interventional procedures.
    We operate a nursing home, a home health agency, hospice program, 
geriatric mental health program, skilled nursing facility, a rural 
health clinic, and until recently, an inpatient alcohol and chemical 
dependency unit.
    We are the only hospital for a 30-mile radius and serve a four 
county area. Last year we provided services to 47,000 emergency room 
patients, 22,000 outpatients, delivered more than 1,000 babies and 
admitted over 9,000 patients.
    It is important in this debate to get an idea of where we get our 
operating revenue and how that money is used.
    We get fifty-five percent of our revenue from treating Medicare 
patients and twelve percent of our revenue from treating Medicaid 
patients. An additional twenty five percent of our revenue comes from 
various commercial and governmental sources. Eight percent is charity 
care and bad debt.
    Salaries and benefits make up fifty percent of our expenses. We 
spend twenty-two percent of our revenue on medical supplies, six 
percent on professional fees, and twenty two of our expenses represent 
percent on maintenance and utilities, debt service, provisions for bad 
debt, depreciation and amortization.
    We are left with a net income was about 3.5 cents on the dollar. 
These funds are reinvested in equipment, renovation, and building 
programs.
    Even though our facility is larger than most rural facilities, we 
still face the same threats as other rural facilities throughout 
Mississippi. Like every other facility in our area we face declining 
reimbursement, an increasing load of charity and bad debt, cost 
pressure from labor shortages and regulatory changes, enormous 
difficulty in recruiting and retaining physicians, and difficulty in 
gaining access to capital for investment in our facilities.
    Before discussing the threats, it is important to understand the 
importance of our rural hospital to our community. A rural hospital is 
not just another hospital. South Central Regional Medical Center is 
typical of many of these rural facilities.
    We are the only hospital for a large geographic area and provide 
the backbone of health care delivery in our area. We are the ones that 
recruit the physicians, nurses, nurse practitioners, therapists and 
other health care professionals.
    We are the ones who provide vital services like emergency rooms, 
ambulances, home health and clinics.
    Rural communities, like Laurel, do not have public transportation 
such as buses, taxi, subways, or rail. Patients often have no choice 
but to use our emergency rooms as their point of access for care. We 
are based in a town of 18,000 people, yet provided emergency room 
treatment to 47,000 patients last year. We are the primary source of 
medical care for a sizable portion of our population.
    South Central is not only the health care safety net of southeast 
Mississippi, it also contributes significantly to the areas economic 
well being.
    We are one of the region's largest employers and one of the only 
employers of highly skilled workers. Our employees are actively 
involved in civic, social, and religious organizations in the towns in 
which they are located. We are frequently large supporters of economic 
development. Our own Economic Development Authority cites access to 
health care as a key factor in attracting business to locate in our 
area. Our employees are leaders in the community as well as a resource 
to others.
    For a long time, hospitals have played a vital role in rural areas. 
Now, for the first time in my memory that role is being seriously 
threatened.
    One threat is declining reimbursement.
    As a rule, rural hospitals serve a greater proportion, as a 
percentage of revenue, of Medicare patients than other hospitals. Small 
changes in Medicare reimbursement can have a devastating effect on 
these hospitals. Under the current BBA language we will suffer an $18.0 
million loss of anticipated revenue over a five-year period. Because of 
the BBA, and other regulations we have seen a 50 percent volume 
reduction in our home health services and a 50 percent reduction in 
hospice services. A 55 percent reduction in skilled nursing 
reimbursement is forcing us to seriously evaluate the viability of our 
skilled nursing facility. We may have to soon eliminate skilled nursing 
services in our area of Mississippi.
    Prior to BBA we were paid what amounted to an average per diem of 
$600, today we are paid an average of $255. This is for all of the care 
we are expected to provide to a patient. In short, we are to provide 
room, board, medicine, supplies, nursing staff, physical and 
occupational therapist, and all other services for the cost of a hotel 
room in Washington D.C.
    Along with the cuts we have already absorbed, we, along with other 
rural providers, face proposed changes in the definition of hospital 
based services that threaten to eliminate our rural health clinic. 
Changes in the home health regulations and proposed changes in 
reimbursement severely threaten the viability of home health agencies 
and hospice services. While these services may evaporate, the needs of 
our patients will not. We are morally and legally responsible to our 
patients to provide care, but our alternatives are quickly 
disappearing. When you cut reimbursement the cost of providing care to 
these patients is shifted to us. These are costs we cannot continue to 
absorb. We will not compromise on quality, but we may soon be forced to 
limit the level and type of services we are able to provide our 
patients.
    Staff availability is a second major threat. It is not only a 
financial concern, it is a quality concern. Hospitals, like businesses 
are faced with decisions about the allocation of resources. We have to 
pick and choose how much to spend on property plant and equipment, how 
much on maintenance, how much on staffing and how much on professional 
services.
    We have cut to the bone in the area of professional services. This 
summer we reduced staff on paper by reducing the number of hours our 
staff is required to work. This allowed us to avoid layoffs. We reduced 
retirement benefits, increase insurance deductibles, and delayed all 
raises by two months. The raises eventually given were essential to put 
us in a position to be minimally competitive in salaries.
    The reductions still resulted in staff, mostly nursing staff, 
leaving to go to large cities to seek employment. New Orleans is about 
two and one half-hours away. A nurse can work one weekend in New 
Orleans and make more money there than we can afford to pay in one 
week. As a result we faced a nursing shortage this winter when the 
patient volumes increased. Health care professionals do not just flock 
to rural communities like Laurel, MS. They are very difficult to 
recruit and difficult to retain.
    With the projections for Medicare cuts in our facility, we are very 
concerned about being able to make any adjustments in salaries next 
year. In addition to nursing shortages, we have been faced with 
shortages in Registered Records Administrators, Respiratory 
Technicians, Medical Laboratory Technicians, Physical Therapists, 
Radiological Technicians and other specialized staff. The care provided 
at the hospital is only as good as its staff. Shortages can and do 
threaten quality.
    Even more critical to rural hospital survival is the availability 
of physicians. A significant portion of my time is spent trying to 
recruit and retain existing physicians. Physicians have numerous 
options available to them when they come out of school--most do not 
include rural communities as their number one preference. In recruiting 
you consider the spouse and their interests and skills which may not 
match your community's resources. Without physicians a hospital cannot 
exist. We have heard much about physician oversupply in our country, 
I'm here to tell you that we don't have an oversupply of doctors in 
rural America.
    A final significant threat is availability of capital. Many rural 
facilities, like ours were built under the Hill-Burton program in the 
late 1940's and early 1950's and have not been significantly updated 
since that period. Changes in technology and the resulting structural 
demands on buildings to house new equipment, and to meet changing needs 
of patients and physicians are always present.
    Again, our case is typical. We have limited borrowing capacity and 
do not have access to capital markets. This means we have to update our 
facility through our net income or reserves. Reduced reimbursement 
makes this task far more difficult and ultimately will threaten our 
ability to survive. If you cannot update your facility and medical 
equipment, you cannot recruit physicians and you cannot provide the 
services that the community deserves.
    Mr. Chairman, this is my first brush with anything remotely like a 
Senate hearing, and I know I have probably not said all that should be 
said. I have provided a very brief view of rural hospitals, and some of 
the threats they face. We are not perfect, but we have worked hard to 
improve our efficiency. I believe strongly that rural community 
hospitals are an essential part of providing health resources to all 
citizens in the country. To allow rural hospitals to fail reduces, or 
in some cases will effectively eliminate, access to health care for 
those who chose to live in rural areas. With the closure of a rural 
facility, not only do the residents of the community lose access to 
health care, they also lose a key component in their ability to grow in 
the future.
    I had the opportunity to visit Washington in January and was 
impressed with the seriousness in which the individuals I met take 
their responsibility to their constituents. I know a great many 
resources occupy your time, but I encourage you to talk to your 
constituents, to nurses, nurse aides, therapist, and physicians and to 
elderly members of your family. Ask them where would they go for 
healthcare if their local hospital closed or eliminated key services 
such as the emergency room. Ask your local business leaders if they can 
recruit staff to their business if they have no access to healthcare.
    I don't claim to be an expert in anything, but I am a person that 
has some experience in rural health care, and I am concerned about the 
future of our rural hospitals.
    Thank you for this opportunity to address this committee and for 
you patience and consideration of this important issue.

    Senator Cochran. Thank you, Mr. Higginbotham, for your 
excellent statement. It is very helpful to the hearing that we 
are having today.
    Ms. Klawiter, we appreciate your coming down from 
Wisconsin. You may proceed.

STATEMENT OF ANNE KLAWITER, CHIEF EXECUTIVE OFFICER, 
            SOUTHWEST HEALTH CENTER, PLATTEVILLE, 
            WISCONSIN

    Ms. Klawiter. Mr. Chairman, members of the committee, I am 
Anne Klawiter, Chief Executive Officer of Southwest Health in 
Platteville, Wisconsin. I am here today on behalf of the 
Federation of American Health Systems and its nearly 1,700 
privately owned and managed hospitals nationwide.
    Thank you for this opportunity to present to the committee 
our views on the impact of the Balanced Budget Act of 1997 and 
in particular the impact of those policies as they affect rural 
America.
    Southwest Health Center is a nonprofit health care 
organization located on three campuses in three communities. We 
operate a 35-bed acute care hospital, a 10-bed psychiatric 
facility for geriatric patients, a 94-bed skilled nursing 
facility, and a 16-bed community-based residential facility. 
These services as well as many outpatient services are typical 
of rural providers, who often are the sole source of primary 
health care in their communities.
    We employ 299 health care professionals dedicated to 
delivering quality patient care. Our center relies on Medicare 
for 69 percent of its gross inpatient revenues.
    The Balanced Budget Act offers many challenges for all of 
us. Myself and my colleagues as providers and you as Senators 
are faced with the tough decisions on how to best allocate our 
health care dollars. I personally am not afraid of challenge 
nor of change. Over the past 15 years we have eliminated 85 
acute care beds and consolidated hospital programs and services 
from three separate organizations encompassing three separate 
communities into one location.
    However, I have some grave concerns regarding the 
opportunity or the lack thereof for rural health providers to 
continue to offer quality patient care and services in light of 
the reimbursement changes. In fact, due in large part to the 
cuts from the Balanced Budget Act, Southwest Health Center's 
operating margin for current programs will decline over a 2-
year period of 92 percent.
    The transfer provision of the Balanced Budget Act is 
creating serious problems, especially for rural hospitals that 
typically care for a large percentage of Medicare patients. The 
transfer provision penalizes hospitals with shorter than 
national average lengths of stay and undercuts the basic 
principle and objective of the prospective payment system for 
inpatient care. Therefore, the provision unnecessarily and 
unreasonably penalizes hospitals for effective and efficient 
treatment and for moving post-acute care patients into the most 
appropriate setting to receive needed services to maintain 
their quality of life.
    The transfer provision is reportedly having a greater 
negative financial impact on hospitals than was originally 
estimated. I urge the Congress to act to repeal the transfer 
policy.
    Another area of significant concern is the proposed 
Medicare outpatient prospective payment system. The basics of 
the new payment system will reimburse hospitals for Medicare 
outpatient services according to ambulatory payment 
classifications, or APC's, at established rates which would be 
similar to inpatient DRG's. The Health Care Financing 
Administration has estimated that APC's will hit rural 
hospitals particularly hard, in part because rural hospitals 
are handicapped by lower volume and have greater difficulty 
spreading losses to other areas.
    In short, small rural hospitals with lower volumes are at a 
disadvantage. As a result, we may be forced to eliminate 
services that are unlikely to be provided elsewhere in the 
community, thus creating a potential access problem.
    To give you an example of the real world impact of BBA 
policies, when the elimination of the so-called formula-driven 
overpayment went into effect our hospital lost $60,000 in one 
year. This $60,000 is equal to 18 percent of our entire 
operating margin. In addition, I understand that if HCFA's 
proposed outpatient rule remains unchanged, hospitals will be 
asked to shoulder an additional $900 million a year, a cut 
through a formula design that alters its budget neutrality 
intention.
    There were 77 Senators, including the majority of this 
committee, who sent a letter to HCFA asking that the Department 
reflect Congressional intent in its final rule and ensure that 
this additional hit to hospitals is not implemented.
    All hospitals are concerned with the fact that under the 
BBA the hospital market basket index, which is a proxy for 
hospital inflation or the cost of goods and services used, does 
not keep pace with inflation. Congress has the power to do many 
things, but it cannot control inflation. This is important 
because some 70 percent of our operating costs are labor-
related. Particularly in rural areas, where labor markets are 
very tight and it is especially difficult to attract and retain 
adequately trained health professionals, Medicare payment 
updates must do a better job of recognizing the increasing 
costs of quality care.
    As noted previously, Southwest Health Center also operates 
a skilled nursing facility. Changes in the way nursing home 
care is reimbursed has created a significant administrative 
burden. The new prospective payment system for nursing home 
care and consolidated billing requirements have forced us to 
add at least one administrative employee just to administer the 
regulations. In fact, overload and ambiguity in Medicare 
regulations are an extreme burden for all health care 
facilities.
    Recently I had the privilege to participate in a study 
which was commissioned by the Wisconsin Department of Commerce 
and the Wisconsin Health and Education Facilities Authority. 
The study evaluated the importance of the health care sector on 
the overall economic well-being of Grant County, where 
Southwest Health Center resides. It found, first of all, every 
job lost in the health care industry causes a job to be lost in 
another local industry. Second, every dollar of revenue that 
was generated by the health care industry generated an 
additional $1.30 of revenue in other industries in Grant 
County.
    Rural communities are often interwoven in this way. When 
there are changes to health care delivery, they must certainly 
impact the quality and the quantity of services available to 
local residents. As this study underscores, these changes have 
serious economic implications for other industries in the 
county as well.
    Members of the committee, you should also know that rural 
Wisconsin already receives 33 percent less per Medicare 
beneficiary than the national average. With the costs of 
advances in such important areas as technology and drugs, it is 
imperative that hospitals have the financial ability to keep 
current with state of the art medicine.
    What to do? What do all of these changes mean for Southwest 
Health Center's ability to deliver quality patient care and 
contribute to the overall financial well-being of Grant County? 
With many BBA cuts yet to be implemented, coupled with the 
ever-increasing salary and supply expenses, it seems highly 
unlikely that Southwest Health Center will be able to sustain 
delivering quality patient care. The impact of Medicare 
reimbursement is far-reaching and deserves careful 
consideration.

                           PREPARED STATEMENT

    Thank you for the opportunity to share my experiences with 
you. I look forward to working with you to rebuild some of the 
Balanced Budget Act's damage for hospitals across the United 
States.
    [The statement follows:]

                  Prepared Statement of Anne Klawiter

    Mr. Chairman, I am Anne Klawiter, Chief Executive Officer of 
Southwest Health Center in Platteville, Wisconsin. I am here today on 
behalf of the Federation of American Health Systems and its nearly 
1,700 privately-owned and managed hospitals nationwide. Thank you for 
this opportunity to present to the Committee our views on the impact of 
the Balanced Budget Act of 1997, and in particular the devastating 
impact of these policies on rural America.
    Southwest Health Center is a nonprofit health care organization 
located on three campuses, in three communities. We operate a 35-bed 
acute care hospital, 10-bed psychiatric facility for geriatric 
services, a 94-bed long-term care facility, and a 16-bed community 
based residential facility. These services, as well as many outpatient 
services, are typical of rural providers who often are the sole source 
of primary healthcare in their communities. We employ 299 healthcare 
professionals dedicated to delivering quality patient care.
    I am told that recent federal analyses estimates that the Balanced 
Budget Act (BBA) of 1997 saved more than double its intended savings 
goal. This means that on top of implementing the most extensive reforms 
to the program since its inception, the BBA has asked providers to 
shoulder more than twice the reimbursement reductions voted on by 
Congress. I am sure I don't have to tell you that these kinds of cuts 
have serious consequences. I work in the real world of rural health 
care delivery, and I can testify that this major piece of legislation 
is resulting in significant changes for caregivers, and the patients we 
serve.
    I urge the Committee to seriously evaluate the consequences of the 
Balanced Budget Act and to protect the interest and the security of 
your rural constituents.
    Several respected research organizations have analyzed the impact 
of the BBA on hospitals, most recently the HCIA has published 
independent findings that reflect what I know to be happening in my 
state and in other rural regions of our country.
  --Hospitals Medicare margins have declined to .1 percent in 1999 \1\
---------------------------------------------------------------------------
    \1\ 1999 HCIA ``The BBA and a Guide to Hospital Performance.''
---------------------------------------------------------------------------
  --Once the BBA is fully implemented, the medical hospital margin is 
        expected to fall to negative .28 percent \2\
---------------------------------------------------------------------------
    \2\ 1999 HCIA ``The BBA and a Guide to Hospital Performance.''
---------------------------------------------------------------------------
  --Medicare outpatient margins are negative 17 percent today, and 
        declining to 28 percent by 2002. Note that this is BEFORE the 
        additional 5.7 percent unanticipated reduction in the new draft 
        Outpatient PPS regulation that has been circulated by the 
        Health Care Financing Administration. I commend Senator Cochran 
        for taking a leadership role in raising this issue with his 
        colleagues and HCFA.
  --Small, rural hospital margins are expected to fall a startling 233 
        percent over five years.\3\
---------------------------------------------------------------------------
    \3\ 1999 HCIA ``The BBA and a Guide to Hospital Performance.''
---------------------------------------------------------------------------

                    SOUTHWEST MEDICAL CENTER'S STORY

    At Southwest Health Center, we rely on Medicare for 69 percent of 
our gross inpatient revenue. This is a change from a few short years 
ago when Medicare made up 57 percent of our inpatient mix. However, as 
the population ages, and the nation's demographics shift to urban and 
suburban America, this kind of dependence on Medicare payment will 
continue, particularly in rural communities.
    In addition, nearly 52 percent of our total hospital revenue comes 
from providing outpatient services. Many people do not recognize that 
hospitals are already losing money by providing outpatient services. 
The BBA significantly reduced already inadequate outpatient payments. 
The viability of providing continued outpatient care clearly becomes an 
issue when this kind of reduction is implemented. How long can we 
continue to operate these necessary services in the red?
    To give you an example of a real-world impact of the BBA, recently 
I presented the corporate annual budget to the Board of Trustees. Along 
with the operational budget, the Board needed to consider capital 
expenditures. I presented a list capturing over $3 million dollars of 
requests for well-justified and necessary capital improvements. Due to 
expected revenue and cash flow expectations, almost half of the 
requests needed were denied. What does that mean for Southwest Health 
Center? It means that development of needed community healthcare 
programs have been denied, air handling equipment will not be replaced, 
sidewalks will not be repaired, and most importantly some patient care 
and safety items will be delayed. Many requests simply could not be 
denied, as they were essential to direct patient care. As a 
consequence, with this additional spending to maintain patient quality, 
my hospital will be forced to expend more for capital improvements that 
our operating cash flow can support. Where does the money come from in 
the future to satisfy growth and development of services and ensure 
quality patient care?

                             RURAL SNAPSHOT

    It is important to understand that rural hospitals depend much more 
heavily on Medicare payments than do their urban counterparts. Consider 
the following:
  --Medicare is the most important source of payment for rural hospital 
        patients, comprising 47.2 percent of total payments versus 39.1 
        percent in urban areas.\4\
---------------------------------------------------------------------------
    \4\ 1999 Tiber Group ``New Rules, New Roles for Rural Healthcare 
Providers.''
---------------------------------------------------------------------------
  --In addition, rural residents are typically older, poorer and sicker 
        than non-rural populations.
  --Total margins for small, rural hospitals will fall from 4.2 percent 
        in 1998 to NEGATIVE 5.6 percent in 2002, largely due to the BBA 
        \5\
---------------------------------------------------------------------------
    \5\ 1999 HCIA ``The BBA and a Guide to Hospital Performance.''
---------------------------------------------------------------------------
  --Capital access tends to favor large institutions, yet rural capital 
        needs for equipment replacement, technology and programs remain 
        high.
  --Rural hospitals have less flexibility to reduce fixed and variable 
        costs.
    Given this snapshot, it should be clear that rural hospitals such 
as Southwest Health Center are more vulnerable to Medicare payment 
reforms and reductions.

            THE BBA WENT TOO FAR--WHAT SHOULD CONGRESS FIX?

    America's hospitals have given above and beyond the call of duty to 
the important goal of balancing our federal budget. It is now time to 
examine closely the impact of many of the unintended consequences of 
the BBA. Our nation's hospitals, and the patients and communities we 
serve need some relief from these drastic payment reductions.
    Specifically:

Repeal the Balanced Budget Agreement's Transfer Policy

    This policy cuts hospital payments for patients who are discharged 
to post-acute settings such as rehabilitation centers, nursing homes, 
or their home where they receive home health care. The transfer policy 
is inconsistent with the goals of the prospective payment system, and 
it turns its back on advances in patient care. One of the key advances 
of this decade with regard to patient care is the ability of hospitals 
to be responsive to each patient's medical needs and treat those needs 
in the most appropriate care setting. Clearly, it is in patients' 
interest to move them to less intensive care settings when appropriate.
    In addition, the transfer policy creates an administrative 
nightmare for hospitals. Hospitals are now required to keep track of 
what happens after a patient is discharged to another setting. An 
illustration: A patient is discharged with no plan for further 
treatment. Several days later the patient's physician decides that they 
should begin receiving home care, but does not notify the hospital. The 
hospital is now at financial and legal risk. The original payment must 
now be adjusted to reflect the per diem methodology rather than payment 
based on the DRG. This creates a near impossible situation for 
hospitals by requiring them to track patients post discharge and 
requiring hospitals to constantly go back and readjust charges.

Outpatient PPS

    Outpatient payment policy has been flawed for many years. The BBA 
included outpatient savings totaling $7.2 billion through a number of 
outpatient related provisions, including the elimination of the so-
called ``formula-driven overpayment.'' While these BBA payment 
reductions clearly have serious financial implications for hospitals, 
hospitals accepted those cuts in good faith, as a painful but necessary 
step toward a more rational prospective payment system.
    However, the Health Care Financing Administration has proposed in 
its implementing rule, a change to the PPS formula that would alter its 
original budget neutrality concept. The result: HCFA estimates that its 
interpretation of the statutory language will cost hospitals an 
additional $900 million per year or $4.5 billion over five years--this 
is an unexpected, and additional cut to an already vulnerable patient 
care arena. For rural hospitals this proposal is estimated to be even 
greater--an additional 7.4 percent cut.
    As mentioned earlier in my testimony, outpatient margins have been 
estimated to fall to a negative 28 percent by 2002, even without this 
additional cut. Adding this unanticipated reduction would push hospital 
reimbursement for outpatient services even further into the red. This 
is bad for hospitals and worse for patients.
    Hospitals and outside legal experts believe that HFCA is not 
required to follow its current narrow reading of the language of the 
statute. We believe it has the flexibility to adopt a rule reflecting 
Congress' clear intent, and we encourage HCFA to revisit its 
interpretation. A recent letter signed by 77 Senators, many of whom sit 
on this subcommittee, seeks to clarify Congress' intent. We hope that 
HCFA will listen to the vast majority of sitting Senators and not 
impose this additional cut on hospitals.

Medicare Bad Debt

    Under federal law, hospitals, as part of their contract with 
communities and patients, treat all patients, regardless of their 
ability to pay. Until the enactment of BBA, hospitals were fully 
reimbursed for Medicare-based bad debt, once a hospital could show they 
exercised due diligence to collect the unpaid bill from the patient. 
BBA cut that reimbursement to 55 percent.
    As you know, there is a hefty $768 deductible charged to Medicare 
beneficiaries for inpatient hospitalizations as part of the Medicare 
program. Almost 80 percent of seniors are covered by Medigap insurance, 
which helps defray the costs of the deductibles and copays. About 10 
percent of seniors are poor enough to qualify for Medicaid, which 
covers these costs. The remaining 10 percent of Medicare recipients--
the near poor--often cannot and do not pay their Medicare hospital 
deductible. It is this population that accounts for the bulk of 
Medicare bad debt, many of whom live in rural communities. The bottom 
line is these patients do not have the money to pay, no matter how much 
time and resources a hospital expends in attempting to collect the 
money.
    This is a government program--hospitals that care for near-poor 
seniors should not be financially disadvantaged for serving these 
deserving patients. Full Medicare reimbursement for bad debt is 
essential to the survival of many hospitals, particularly those with a 
high percentage of near poor Medicare patients. Without this 
reimbursement, areas with a high concentration of elderly poor 
patients, such as many rural areas, could be faced with reduced access 
to services.
    This funding is critical to the financial health of hospitals that 
provide quality care across this nation to low income seniors. 
Unfortunately, things seem to be moving in the wrong direction. Just 
before the July 4th recess, the Senate Finance Committee voted to fund 
a veterans' bill with a further cut to bad debt. While I certainly 
understand the notion of helping veterans, hospitals should not be hit 
again. This action sent chills down the spines of hospital 
administrators across this country.

                            MEDICARE REFORM

    The Federation has long been a supporter of comprehensive Medicare 
Reform. We submitted detailed recommendations nearly a year ago to the 
Medicare Commission led by Senator Breaux and Congressman Thomas. It is 
certainly time to give seniors the same choices of plans that we all 
have in the private sector. However, we are concerned that each of the 
current Medicare Reform packages has included cuts for providers to pay 
for policy changes. As the effects of the BBA should surely indicate, 
wholesale change in this provider cut approach is badly needed.
    For instance, the Clinton Medicare Reform plan, released just last 
week, contained an additional $39 billion in Medicare cuts. In most 
cases the plan extends cuts contained in BBA for an additional seven 
years, until 2009. Clearly, the Administration doesn't realize the 
impact these cuts have had on hospitals. Hospitals are reeling under 
what we have been faced with in BBA--seeing no light at the end of the 
tunnel will send a very unfortunate signal to hospitals across this 
county--that Washington just doesn't get it.
    The Administration did include a modicum of recognition for the 
circumstances many health care providers face--nursing homes, home 
health and hospitals. The plan does include a ``quality assurance 
fund'' of $7.5 billion over 10 years to assist with provider 
circumstances where substantial quality or access problems could be 
demonstrated. While we are grateful for this recognition, the cuts, 
just over the course of the BBA, through 2002, are now expected to be 
$206 billion, double the level voted on by the Senate in 1997. $7.5 
billion will not go far among all providers hit by the BBA.
    As I mentioned in my earlier testimony, one of the priorities for 
the industry has been repeal of the ill-advised transfer policy that 
was enacted as part of the BBA. The Secretary of HHS was given the 
authority under the BBA to expand transfer policy beyond the 10 DRGs it 
applies to, to all DRGs. The President's Medicare plan would delay this 
expansion to 2002; not much comfort for hospitals that strongly believe 
that the policy itself should be repealed. The message many hospitals 
are hearing is that we will only make the cuts worse later!

                               CONCLUSION

    The central question that the Administration and Congressional 
leaders must answer is ``How can we hope to ensure a sound future for 
Medicare if we are dangerously eroding the financial solvency of the 
nation's health care institutions?'' The Balanced Budget Agreement of 
1997 has caused real pain for our nation's hospitals and the 
communities they serve. The Congress is right to examine the 
repercussions of payment reductions that in the real world have 
translated into double their original intent. Members of the Committee, 
I run a hospital in rural America and I am here to tell you that we 
need your help in meeting our shared goal of continuing to provide the 
best quality health care in a fiscally prudent environment.
    Thank you for the opportunity to share my slice of America with you 
this morning. We look forward to working with you to rebuild some of 
the BBA's damage to hospitals across the U.S.
[GRAPHIC] [TIFF OMITTED] T01JY14.001


    Senator Cochran. Thank you, Ms. Klawiter, for your helpful 
statement.
    Our next witness is Ms. Deborah Griffin, who is 
Administrator of the Humphreys County Memorial Hospital in 
Belzoni, Mississippi. Thank you very much for being here. You 
may proceed.

STATEMENT OF DEBRA L. GRIFFIN, ADMINISTRATOR, HUMPHREYS 
            COUNTY MEMORIAL HOSPITAL, BELZONI, 
            MISSISSIPPI

    Mr. Griffin. Mr. Chairman, Senator Durbin, staff members 
and guests of the committee, I am Debra Griffin, Administrator 
of Humphreys County Memorial Hospital, a 28-bed small rural 
acute care hospital located in Belzoni, Mississippi. It is 
called the heart of the Mississippi Delta. It is my honor to 
appear before you today to present testimony on the effects of 
the passage of the Balanced Budget Act on rural hospitals in 
Mississippi.
    The Mississippi Delta is impoverished and underserved. 
Humphreys County, with a predominantly rural population and 
agricultural base, is characterized by high rates of poverty 
and unemployment and low levels of educational attainment. Two-
thirds of the children born each year are born to single or 
teen mothers and the majority of the children live in 
households with incomes below the poverty level. All available 
data indicate poor health outcomes.
    Humphreys County Memorial Hospital is a member of the Delta 
Rural Health Network. The Delta Rural Health Network is a 
network of 10 small rural hospitals that share a common vision, 
to improve the delivery of health care and financially 
strengthen each rural hospital. All of the participating 
network hospitals are at risk both financially and 
strategically. As stand-alone facilities, we are the true small 
rural hospitals.
    All of the network hospitals' percentage of total discharge 
paid by Medicare-Medicaid and charity bad debt services are 
above the national averages. Such losses and allowances for 
Medicare and Medicaid cannot be recouped from our extremely 
small private pay and insurance sector.
    Small rural hospitals have a large disproportionate share 
of Medicare and Medicaid patients. Conversely, we have a 
smaller private pay population. If a hospital is 70 percent 
Medicare and Medicaid and you have a 10 percent cut in 
reimbursement, that translates to a 7 percent reduction in 
total revenue. Small rural hospitals do not have the ability to 
increase revenues by increasing charges. This partly explains 
why initiatives such as the Balanced Budget Act are having such 
a devastating effect on our small hospitals.
    With the committee's indulgence, please allow me to outline 
four examples of the financial impact on small rural hospitals 
in Mississippi. South Panola Community Hospital in Batesville, 
Mississippi, is losing $1.4 million net for the period fiscal 
year 1998 to 2002. King's Daughters Hospital in Yazoo, 
Mississippi, is losing $2.6 million net for the same period. 
Montfort Jones Memorial Hospital in Kosciusko, Mississippi, is 
losing $2 million for the same period. And Humphreys County 
Memorial Hospital is losing $8.1 million net for the same 
period.
    These amounts might not seem alarming to you in itself. 
However, when you are a provider of health care services in a 
county without a strong economic tax base and when patient 
needs and vendors' costs are increasing, these numbers become a 
recipe for devastation.
    In this situation, your options are limited. You can reduce 
or eliminate services, triage patients and only treat the true 
emergency or acute, postpone capital purchases and, if you are 
lucky, building projects, or simply close the county's most 
valuable asset.
    True small rural hospitals need special legislation and 
policy consideration from decisionmakers regarding Medicare 
reimbursement. Just because we live in rural Mississippi does 
not mean that we should not enjoy the same benefits and access 
to health care as other Americans. The ever-changing rules for 
Medicare and Medicaid are overwhelming to our small facilities. 
Small and rural hospitals do not have the administrative staff 
to implement such changes at such rapid rates.
    Members of our network believe that HCFA should be required 
to do pilot projects at truly rural small primary care 
hospitals before they implement complete system changes. In 
addition, it should be noted that many of our facilities are 
Hill-Burton hospitals and have aged. The Hill-Burton program 
provides funding to build these rural hospitals, but made no 
provisions for capital to renovate and update them. With no 
access to capital, our aging buildings have become dinosaurs 
and, along with the Balanced Budget Act, our ability to provide 
adequate health care is limited.
    It is good, sound, economic policy to invest in rural 
health care. A healthy hospital can assist in making a 
community healthy and financially stronger.
    I am not a native Delta, I am a transplant. I love where I 
work and I love the people that I work with, and I also feel 
like the song ``Cheers,'' the comedy, that says ``Wouldn't you 
like to go to a place where everybody knows your name and 
they're glad that you came.'' That is how I feel about Belzoni 
and Humphreys County.

                           PREPARED STATEMENT

    I think that, instead of listening to the policy wonkers 
about the numbers and the percentages of operating margins and 
looking closely and studying the situation, that there are real 
issues that are really affecting rural people. Our hospital is 
a necessary entity to our community, and we are good stewards 
of the dollars that come in and we appreciate it. But we do 
need special consideration.
    [The statement follows:]

                 Prepared Statement of Debra L. Griffin

    Mr. Chairman, Senator, Staff members and guests of the committee, I 
am Debra L. Griffin, Administrator of Humphreys County Memorial 
Hospital, a 28 bed small rural acute care Hospital located in Belzoni, 
Mississippi in the heart of the Mississippi Delta. It is my honor to 
appear before you today to present testimony on the effect of the 
passage of the Balanced Budget Act of 1997 on rural hospitals in 
Mississippi.
    The Mississippi Delta is the most impoverished and under served 
region in the United States. Humphreys County, with a predominantly 
rural population and agricultural base is characterized by high rates 
of poverty and unemployment and low levels of educational attainment. 
Two thirds of the children born each year are born to single or teen 
mothers, and the majority of the children live in households with 
incomes below the poverty level. All available data indicate poor 
health outcomes.
    Humphreys County Memorial Hospital is a member of the Delta Rural 
Health Network. The Delta Rural Health Network is a network of ten 
small, rural hospitals that share a common vision to improve the 
delivery of healthcare and financially strengthen each hospital.
    All of the participating network hospitals are at risk both 
financially and strategically. As ``stand alone'' facilities, we are 
the true small rural hospitals.
    All of the network hospital's percentages of total discharges paid 
by Medicare, Medicaid and Charity Bad Debt services are above national 
averages. Such losses and the allowances from Medicare and Medicaid 
cannot be recouped from our extremely small private pay and insurance 
sector.
    Small rural hospitals have a large disproportionate share of 
Medicare and Medicaid patients; conversely, we have smaller private pay 
population.
    If a hospital is seventy percent Medicare and Medicaid and you have 
a 10 percent cut in reimbursement, that translates to a seven-percent 
reduction in total revenue. If a hospital is forty percent Medicare and 
Medicaid, a cut of 10 percent is only a 4 percent reduction in total 
revenue. A hospital with a patient population of 70 percent Medicare/
Medicaid (this is probably average for our facilities) will have only 5 
percent to 10 percent paying patients, with the remaining being charity 
or bad debt. In the situation described above our hospitals would face 
a reduction of $7.00 per $100.00 of revenue. With only 10 percent 
paying patients you must increase the charges that brought in the 
$100.00 in revenue by $70.00 to regain a net revenue of $100.00, as 
only 1 in 10 patients actually pay the increase--an increase of charges 
of $1.00 will only produce 10 cents in payments.
    Small rural hospitals do not have the ability to increase revenue 
by increasing charges. This partly explains why initiatives such as the 
Balanced Budget Act are having such a devastating effect on the small 
rural hospitals.
    With the committee's indulgence, please allow me to outline four 
examples of the financial impact of the Balanced Budget Act of 1997.
  --South Panola Community Hospital in Batesville, Mississippi is 
        losing 1.4 million net dollars for the period of fiscal year 
        1998 to 2002
  --King's Daughters Hospital in Yazoo City, Mississippi is losing 2.6 
        million net dollars for the period of fiscal year 1998 to 2002
  --Montfort Jones Memorial Hospital in Kosciusko, Mississippi is 
        losing 2 million net dollars for the period of fiscal year 1998 
        to 2002 and,
  --Humphreys County Memorial Hospital is losing 8.1 million net 
        dollars for the period of fiscal year 1998 to 2002
    These amounts might not seem alarming to you in itself, however, 
when you are a provider of health care service in a county without a 
strong economic tax base, and when patient needs and vendor costs are 
increasing, these numbers become a recipe for devastation.
    In this situation, your options become limited. You can reduce or 
eliminate services, triage patients and only treat true acute and 
emergencies, postpone capital purchases and if you're lucky building 
programs, or simply close the county's most valuable asset.
    True small rural hospitals need special legislation and policy 
consideration from decision makers regarding Medicare reimbursements. 
Just because we live in rural Mississippi, it does not mean that we 
should not enjoy the same benefits and access to health care as other 
Americans.
    The ever-changing rules from Medicare and Medicaid are overwhelming 
to our small facilities. Small and rural hospitals do not have the 
administrative staff to implement changes at such rapid rates.
    Members of our network believe HCFA should be required to do pilot 
projects at truly small rural primary care hospitals before issuing 
rules that require complete system changes.
    In addition, it should be noted that many of our facilities are 
Hill Burton hospitals and have aged. The Hill Burton program provided 
funding to build these rural hospitals but made no provision for 
capital to renovate and update them. With no access to capital, our 
aging buildings have become dinosaurs and along with the Balanced 
Budget Act, our ability to provide adequate health care is limited.
    It is good sound economic policy to invest in rural healthcare--a 
healthy hospital can assist in making a community healthy and 
financially stronger.

    Senator Cochran. Thank you very much, Ms. Griffin, for this 
information. We appreciate your being here.
    Mr. King, thank you for being a part of this panel. You may 
proceed with your testimony now.

STATEMENT OF ROLAND E. ``GUY'' KING, CONSULTING 
            ACTUARY, FORMER CHIEF ACTUARY, HEALTH CARE 
            FINANCING ADMINISTRATION

    Mr. King. Thank you, Mr. Chairman.
    Senator Cochran. Would you pull the microphone close to you 
so we can hear you.
    Mr. King. Certainly.
    Thank you, Mr. Chairman. I am a self-employed consulting 
actuary and I was the Chief Actuary of the Health Care 
Financing Administration from 1978 to 1994.
    The previous three witnesses have put a human face on the 
impact of the BBA. Let me give you a few of the numbers that 
are behind that human face. I recently participated in a study 
together with Ernst & Young and HCIA, a study that you referred 
to previously in this hearing, in which we studied the effect 
of the Balanced Budget Act on hospitals in general. Now, our 
purpose was not to dispute MedPAC's fine work. Our purpose was 
to supplement and extend MedPAC's work, and by and large what 
we did was consistent with what MedPAC has done.
    We felt that previously too much attention had been focused 
on inpatient hospital margins alone, and the reason that we 
felt that way is because the hospital industry has diversified, 
and as they have diversified into areas such as outpatient, 
skilled nursing facility, and home health agency services, it 
has allowed them to spread their fixed costs over these 
additional services in an accounting sense. That makes the 
inpatient hospital margin look artificially high. That is 
partially what is responsible for the reason why inpatient 
margins look so healthy up to now.
    Our study, as I said, wanted to present a more complete 
picture and we felt that we could do that by using more current 
cost report data than was used in the latest MedPAC study, 
projecting total Medicare margins, not just inpatient but total 
Medicare margins, and also assessing the impact of the BBA by 
modeling the effect of the BBA on actual hospital cost reports.
    Even though rural hospitals were not the primary focus of 
our study, using small hospitals with 99 beds or less, which 
these are predominantly rural hospitals, we found that the 
small hospitals are hardest hit by the BBA. Their margins are 
significantly decreased, from 4.2 percent in fiscal year 1998 
to negative 5.6 percent in fiscal year 2002. We felt that when 
hospitals--we also noted in our report that when hospitals 
begin taking the aggressive actions that are necessary to 
survive under the BBA, such as cutting services, reducing 
wages, and laying off employees, access to care will be more 
likely to suffer in rural areas.
    Because of the time constraints, let me summarize for you 
the key findings of our analyses. First, total hospital margins 
are expected to decline from 4.3 percent in fiscal year 1997 to 
only .1 percent in fiscal year 1999. Total hospital margins are 
projected to decline 48 percent in just 5 years, from 6.9 
percent in fiscal year 1998 to 3.6 percent in fiscal year 2002. 
Of course, I already mentioned that total hospital margins for 
small rural hospitals are expected to fall from 4.2 percent in 
fiscal year 1998 to 5.6 percent in 2002.
    I have mentioned that our findings are essentially 
consistent with the projections of MedPAC as far as MedPAC 
goes. It is just that we went a little further.
    Hospital outpatient margins, as has been mentioned 
previously in this hearing, are already negative 17 percent in 
fiscal year 1998, and they are projected to get substantially 
worse, dropping to negative 27.8 percent by 2002. The BBA has 
traditionally--has significantly reduced outpatient payments, 
payments that were already inadequate.
    Our analysis modeled the impact of the formula-driven 
overpayments, FDO or ``Fido,'' but it did not model the impact 
of the prospective payment system on outpatient services. But 
we note that PPS would reduce margins another 3.8 percent 
according to HCFA's impact analysis.
    The BBA's transfer policy reduces hospital inpatient 
payments by approximately two and a half times more than the 
original estimates. I think one thing that has come up is that 
the impact of the BBA underestimated and this is actual 
evidence that that problem occurred.
    The magnitude of these reductions in margins on Medicare 
payments should be considered in light of two other significant 
outcomes that are largely to the BBA. First, we note that CBO 
projected Medicare spending would be $191.5 billion lower than 
was anticipated when the BBA was enacted. CBO's estimate of 
Medicare spending reductions at the time of enactment was $103 
billion, so I think, although we do not know exactly how much 
of this reduction in expenditures is due to underestimates at 
the BBA and how much is due just to a change in baseline, I 
think that suggests that there was some underestimation of the 
BBA effects.
    The other point is that the BBA cuts have shaken confidence 
in the health care industry and have led to numerous downgrades 
in bond ratings for community hospitals. Once again, I would 
suspect that rural hospitals were especially hard hit and that 
their access to capital, already tougher than a community 
hospital in an urban area, is going to be even worse.

                           PREPARED STATEMENT

    That concludes my formal testimony. I will be happy to 
answer any questions.
    [The statement follows:]

                     Prepared Statement of Guy King

    Mr. Chairman, my name is Guy King. I am a self-employed Consulting 
Actuary. I was the Chief Actuary for the Health Care Financing 
Administration from 1978 to 1994.
    I recently participated in a study, with Ernst & Young, LLP and 
HCIA, Inc., of the effect of the 1997 Balanced Budget Act (BBA) on the 
financial condition of the hospital industry. The purpose of this study 
is to supplement the efforts of Congress, MedPAC, and others attempting 
to assess the financial status of hospitals.
    Previously, attention has been focused on inpatient hospital 
margins. In today's environment, focusing exclusively on inpatient 
margins would be misleading. One factor that may have contributed to 
the increasing inpatient margins pre-BBA is the effect expanded service 
lines have had on the allocation of fixed costs. Many hospitals have 
diversified into other service lines, including expanded outpatient, 
skilled nursing facility (SNF), and home health agency (HHA) services. 
When these services are added or expanded, fixed costs are spread over 
not only inpatient care, but the other service lines as well. Spreading 
fixed costs over all service lines improves the inpatient margin, even 
when the overall margin is unaffected or getting worse. Stated another 
way, with revenue held constant, a hospital's inpatient margin improves 
simply because a smaller amount of fixed costs are allocated to 
inpatient services.
    This study is intended to produce a more complete and current 
picture of the industry's financial health and Medicare's contribution 
to hospitals' financial status by:
  --1. Projecting hospital Medicare inpatient margins using more 
        current cost report data;
  --2. Projecting total Medicare margins, including margins for all 
        service lines--e.g., outpatient, SNF, and HHA--not just 
        inpatient acute care; and
  --3. Assessing the impact of the BBA on total hospital margins 
        through modeling of actual hospital cost report data.
    Congressional decisions that could ultimately determine the 
financial fate of community hospitals across the country should be made 
with a thorough understanding of hospitals' financial health.
    Rural hospitals are not the primary focus of the study. However, 
when the results are stratified by bed size, the total margins for 
small hospitals with 99 beds or less, which are predominantly rural, 
are hardest hit by changes under the BBA. Their margins significantly 
decrease from 4.2 percent in fiscal year 1998 to negative 5.6 percent 
in fiscal year 2002. It is also noted that when hospitals begin taking 
the aggressive actions necessary to survive the impact of these revenue 
reductions, such as cutting services, reducing wages, and laying off 
employees, access to care will be more likely to suffer in rural areas.
    Key findings of these analyses are highlighted below.
    Toad hospital Medicare margins are expected to decline from 4.3 
percent in fiscal year 1997 to only 0.1 percent in fiscal year 1999. 
These margins are projected to remain below 3 percent through fiscal 
year 2002, the duration of the Balanced Budget Act (BBA) payment 
reduction provisions.
    Total hospital margins are projected to decline 48 percent in just 
five years, from 6.9 percent in fiscal year 1998 to 3.6 percent in 
fiscal year 2002. While total hospital margins for all hospitals would 
have decreased even if the BBA had not been enacted, these margins are 
significantly smaller under the BBA and decrease at a much faster rate 
during the five-year period.
    Total hospital margins for small, rural hospitals are expected to 
fall from 4.2 percent in fiscal year 1998 to negative 5.6 percent by 
fiscal year 2002.
    Findings on hospital Medicare inpatient margins are consistent with 
MedPAC. While these findings--which revealed that hospital Medicare 
inpatient margins decreased from 16.9 percent in fiscal year 1997 to 
16.5 percent in fiscal year 1998--are consistent with those of the 
Medicare Payment Advisory Commission (MedPAC), they represent only a 
portion of the overall fiscal picture for hospitals.
    Hospital outpatient margins are already negative 17 percent in 
fiscal year 1998, and are projected to get substantially worse, 
dropping to negative 27.8 percent by fiscal year 20O2. The BBA has 
significantly reduced outpatient payments, payments that were already 
inadequate. This analysis modeled the impact of the elimination of the 
formula-driven overpayment (FDO), but not the impact of the outpatient 
prospective payment system (PPS). The PPS would reduce margins another 
3.8 percent, according to HCFA's impact analysis that was published in 
a September 1998 proposed rule. As outpatient revenues continue to 
increase as a portion of total hospital revenues, the impact of these 
negative margins will be even more injurious to hospitals.
    The BBA's transfer payment policy reduces hospital inpatient 
payments by approximately two and a halftimes more than original 
estimates. The transfer policy reduced inpatient payments between $500 
and $800 million in fiscal year 1999, and by approximately $3 billion 
between fiscal years 1998 and 2002. The Congressional Budget Office 
(CBO) had estimated a $1.3 billion five-year budget impact when the BBA 
was enacted in 1997.
    The magnitude of these reductions in margins and Medicare payments 
must be considered in light of two other significant outcomes 
attributable largely to the BBA:
    The CBO projects Medicare spending will be $191.5 billion lower 
than was anticipated when the BBA was enacted. Recent CBO spending 
estimates for Medicare project total spending to be $191.5 billion less 
than original estimates for fiscal years 1998 through 2002. CBO's 
estimate of Medicare spending reductions at the time of BBA enactment 
was $103 billion.
    BBA cuts have shaken confidence in the health care industry and 
have lead to numerous downgrades in bond ratings for community 
hospitals. Many analysts are attributing much of the precipitous drop 
in health care bond ratings to the impact of the BBA. Lowered bond 
ratings ultimately impair a hospital's ability to access capital to 
finance technological and facility improvements which, in turn, 
negatively affect patient access to, and quality of, care.
    I will be pleased to try to answer any questions you may have.

    Senator Cochran. Thank you very much for your giving us 
this information and giving us the benefit of your study and 
review of the financial condition of rural hospitals, and 
particularly the impact that changes made under the Balanced 
Budget Act have caused.
    It appears from what you tell me that rural hospitals have 
been affected disproportionately by the unintended consequences 
of the Balanced Budget Act. Is that an accurate assessment?
    Mr. King. Yes, that is what it appears to be.
    Senator Cochran. We have an indication, and I think you 
referred to it in your statement, that the Congressional Budget 
Office anticipated that there would be less spending under the 
Medicare program as a result of the Balanced Budget Act, but 
their estimates were not nearly consistent with what the facts 
have turned out to be. Is that what you are telling us?
    Mr. King. Well, we know that the change in spending 
projections is $191 billion lower than what it was under the 
BBA. The CBO's estimate of savings under the BBA was $103 
billion. I think, although there have been things mentioned 
earlier in this hearing about what could be the causes of that 
change in projections--inflation being lower than projected, 
the fraud, abuse, and waste efforts--but I think there is also 
evidence that CBO underestimated the impact of the BBA, 
particularly, as Gail Wilensky mentioned, particularly when the 
combined impact of all the provisions of the BBA is taken into 
account.
    Senator Cochran. Well, since the savings have been much 
greater, whether they are due to the Balanced Budget Act and 
the implementation of that act or not, do you think this 
justifies the Congress and the administration getting together 
and trying to rectify the impact that those reduced spending 
levels have had on the financial condition of health care 
providers throughout the country?
    Mr. King. Yes, I think even the administration has 
acknowledged that if the BBA went too far, that there is a need 
to put money back into the system where the BBA went further 
than intended.
    Senator Cochran. Let me go now to the witnesses who talked 
about the practical consequences on their own hospitals and 
medical centers that they operate. Ms. Griffin talks about the 
Mississippi Delta and in particular the Humphreys County 
Hospital there and the network that you are a part of. Let me 
ask you this. I am told that there are six hospitals in 
Mississippi that will be closed by the end of the year or soon 
thereafter unless some changes are made in this Balanced Budget 
Act or some of the other Federal programs that provide 
reimbursements to hospitals.
    Are there any hospitals in your network that you know of 
that are a part of this group that are likely to be closed?
    Ms. Griffin. Senator, there are 10 hospitals in our network 
and there are two that are in weakened states, and there are 
others like myself that could be there if some relief does not 
come to fruition.
    The Delta Rural Health Network was organized because small 
rural hospitals wanted to try to control their own future. 
Peter Drucker says the best way to predict your future is to 
create it. HRSA under Dr. Fox gave us a network grant and we 
have had wonderful synergy in working together in trying to 
share our successes and talk through some of our failures or 
problems.
    I cannot speak to other hospitals and their specific 
financial state. I do know that, because my hospital is so 
small and we do provide other services and needs to the 
community, but our county is not able to subsidize us in any 
form. The services that we provide, we are either going to get 
the money from Medicare or the insurance payers or from no one, 
and we could be at risk if we do not have relief.
    I specifically want to talk with Brad afterwards about some 
concerns for our hospital or hospitals our size that I would 
like to see take place.
    Senator Cochran. You read off a list of hospitals and towns 
where they are located. Batesville is one that I remember.
    Ms. Griffin. South Panola.
    Senator Cochran. South Panola.
    Ms. Griffin. South Panola Hospital in Batesville, 
Mississippi; Yazoo City--excuse me, King's Daughters Hospital 
in Yazoo City, Mississippi, and Montfort General Memorial in 
Kosciusko. These hospitals are also part of our network.
    Senator Cochran. Those are hospitals where you can document 
or they have documented losses as compared to last year's 
revenues?
    Ms. Griffin. Yes, sir.
    Senator Cochran. These are dropoffs because of 
reimbursements from Federal programs?
    Ms. Griffin. Most definitely, and I have provided the 
support documentation to Mr. Pruitt.
    Senator Cochran. Well, we certainly do want to work with 
you and get your ideas for specific changes. Do you have any 
that you can mention to me at this point that you think would 
be helpful? There were some that were suggested by others. What 
are some of the proposals that you think have merit?
    Ms. Griffin. Well, I think the critical access hospital 
designation, I think they call it the Medicaid Rural 
Flexibility Act. I think the pilot was done in Kansas, Montana, 
and Colorado, and the final product that came out probably was 
good for those hospitals. In Mississippi, and more specifically 
in the Mississippi Delta, we looked at that critical access 
designation and thought this would be good for us.
    But we are 80 percent Medicare-Medicaid and about 2 to 5 
percent private pay, and that is probably being very generous, 
and the balance is indigent. There is no way if you convert can 
you have that indigent care population taken care of. We can 
get our Medicaid-Medicaid costs reimbursed, but then we have 
got this big gap, which makes the problem really worse.
    The other issue is that a couple of years ago a piece of 
legislation provided for small hospitals like myself to open 
distinct part PPS geriatric psych units. The thought behind 
that from the policymakers was that these units could be paid 
at cost because these acute elderly patients hit the emergency 
room and the acute side of the hospital not so much all the 
time because they have real acute care illnesses, but they have 
some mental illnesses or they have some social illness where 
they mixed up their medicines or they did not get their scrips.
    The psych unit was put in place the help these patients 
deal with onset of depression and issues such as that. So we 
opened the psych unit and we really saw a lot of decrease in 
our acute care admissions because we were really trying to make 
this program work and service these patients well. But a year 
or two after we got this unit open, we saw our inpatient 
admissions decrease by 150 actual admissions. Then a year 
later, then HCFA comes and changes how they reimburse that 
unit. So not only do we suffer on that side of the 
reimbursement, losing money from that unit, but from the acute 
care, because we were playing the game like we thought we 
needed to play it. So really, by being efficient we were 
punished.
    Senator Cochran. Is there any plan to make any other 
changes? You heard Dr. Fox, for example, talking about bringing 
together in the community at one site, maybe at the hospital 
site, some of the senior citizen benefit programs and other 
activities in the community to try to make more efficient the 
delivery of services, including health care services, to the 
people who live in the area.
    Has anything like that been tried or considered in Belzoni?
    Ms. Griffin. We have an old building and about 8 months ago 
I presented to the board of trustees and the board of 
supervisors a concept of a one-stop shop for health care in 
Humphreys County, and we did a rendering of a multiplex with a 
hospital, health department, human services, and mental health. 
Everybody was interested, but we had no way to get capital for 
that building, and then once we got capital to what margin 
could we repay that money back?
    But I think that that would be a more efficient use of 
resources in our county, because there are some duplications in 
those services. And in the rural you have transportation 
issues, so if someone is coming to get their economic 
assistance or coming to get their vaccinations they are already 
on the campus, so they can see the doctor and then they will 
get their care earlier and they will not have to be in the 
emergency room.
    Senator Cochran. Is there a WIC program center, clinic, or 
other facility there in Belzoni?
    Ms. Griffin. Yes, sir, there is a WIC distribution center.
    Senator Cochran. And it is not a part of the center where 
you are, though?
    Ms. Griffin. No, sir. Everything in our community--I hate 
to say this--is very fragmented. We are in different locations 
and different operations and, like everything else, there is 
turf issues.
    Senator Cochran. Well, we appreciate so much your being 
here and discussing these issues with us. We are going to work 
with you and others similarly situated to try to improve this 
situation and try to keep these hospitals open and providing 
services to the extent that it is possible to do so.
    Ms. Griffin. Thank you. I want to add that I appreciate 
your effort and concern in the issues that face us regarding 
the effect of the Balanced Budget Act. We appreciate that.
    Senator Cochran. Well, thank you very much.
    Ms. Klawiter, you talked about in Wisconsin that there have 
been some new requirements imposed on medical centers and 
hospitals under the Balanced Budget Act. The Health Care 
Financing Administration was required to do some of these. 
Others I think they had the flexibility to make decisions. But 
there is one example that I am told is the outcome and 
assessment information set, called OASIS. Are you familiar with 
that? Have you ever heard of that? It is for home health 
agencies.
    Ms. Klawiter. I have heard of it. Home health agencies, 
absolutely.
    Senator Cochran. Right.
    Ms. Klawiter. Southwest Health Center actually is a good 
example of working cooperatively with two surrounding 
communities to offer home health services. We knew that we 
needed for efficiencies and for quality of care to be delivered 
to the residents that live within our county, and actually two 
surrounding counties are served as well, that we cooperate and 
we work together on our efforts. We are seeing dramatic changes 
in the home health delivery of services.
    The staff--there is one facility who actually holds the 
license, if you will, and then there are two other hospitals 
that also have what are called branch offices. In Platteville, 
we have noticed that there is over a 50 percent decline in 
personnel available for that unit, simply because of 
reimbursement.
    If I had my physicians here with me, they would love to be 
able to expound on that because we have recently had several 
meetings on how on earth are we going to be able to take good 
care of the elderly and others that live in the community and 
need these services.
    Senator Cochran. Are the services being curtailed or 
reduced, or just unavailable, because of requirements under the 
new regulations?
    Ms. Klawiter. Well, I think one of the things that has 
happened is that the amount of visits that someone is eligible 
to receive has been dramatically changed. So that has been cut.
    I would like to believe that we are working extremely hard 
in terms of offering quality and maybe trying to put just as 
much into every one of those visits as you can. The point is 
you sometimes get to an irreducible minimum and you now have 
done everything that you can from an efficient standpoint, a 
cost effective standpoint, and there is nowhere else to go. I 
feel like that is where we are headed and where we actually 
are, but it appears as though things are going to get even 
worse.
    Senator Cochran. You heard Ms. Griffin talk about the 
hospitals and how much money they had lost really compared with 
previous years under these new requirements. Have you had 
similar experiences in Wisconsin?
    Ms. Klawiter. Actually, the Wisconsin Hospital Association 
has just conducted a study for us and it indicates that 
Southwest Health Center will lose $1.25 million between now and 
2002 just with the projected cuts. That is extremely 
significant when you take a facility of our size and trying to 
cover the area.
    Senator Cochran. Have you been able to identify any 
specific changes in the Federal requirements or Federal law, 
including the Balanced Budget Act, that could be made that 
would be helpful to you and to the facility that you represent 
here today?
    Ms. Klawiter. To name a few, probably I would certainly 
look for some changes with the transfer policy.
    Senator Cochran. Tell us about that. What is that transfer 
policy and what effect has that had? What does that mean?
    Ms. Klawiter. What has been happening, the government ended 
up expanding, if you will, the definition for transfer. Before 
the facility--if we transferred out a patient to a tertiary 
care facility, for instance, you would be paid a per diem rate 
for the number of days that someone was into the facility. Now 
they have expanded that definition to say that a transfer means 
indeed that patient may be sent to a skilled nursing facility, 
that patient may be sent to their own home and receive home 
health services.
    Now that is going to greatly reduce and put us back onto a 
per diem rate, even though we are being penalized, in my 
opinion, for having given that patient good, efficient, and 
cost effective care, now returning them to a more adequate 
setting to be able to take care of their extended needs and to 
preserve quality of life.
    I guess I thought that that was one of the things that 
hopefully was at the heart of what we were trying to do.
    Senator Cochran. Mr. Higginbotham, you have heard all of 
the witnesses testify today. One comment was made by our 
actuary here about the change in bond rating. Because of the 
Medicare reimbursement changes, you are no longer rated as a 
good enough credit risk for some rating agencies to get a high 
rating that would attract bond buyers.
    Have you to your knowledge known of any medical centers in 
our State or has yours had its bond rating changed as a result 
of these new regulations and laws?
    Mr. Higginbotham. I cannot address other hospitals. I can 
tell you what has happened with our facility. We issued some 
bonds to refinance some back in 1997, so we got our own credit 
at that point. Thus far we have been able to maintain our 
credit rating. But what has happened to us is our debt capacity 
is gone. We do not have the ability to go out and get 
additional or issue additional bonds. That means we have to go 
to local banks to meet our capital needs.
    What is happening to us is, since we do not have debt 
capacity and our margins are starting to shrink a little bit, 
just like any other creditor, a bank looks and says, well, am I 
going to be able to be repaid for the money I have lent to you? 
And if you start seeing your margins go from 4 percent to 1 
percent to a negative, the banks are not going to be too 
inclined to want to loan to you.
    You have got to understand for the capital needs, when you 
say access to capital, we talk sometimes about buildings. Those 
are essential. You have got to have roofs and that kind of 
thing to keep your equipment dry. But some examples of things 
that we need capital for: Just earlier this year we had one of 
our vendors, GE, tell us that they are no longer going to 
provide service or anything for a particular piece of equipment 
that we have. So we are faced with we have got to replace that 
piece of equipment. That is a $40,000 investment there.
    Just 2 weeks ago we were told by one of our vendors that 
they will no longer produce a particular piece of equipment in 
nuclear medicine. By the time we are all said and done, we are 
probably looking at $120,000 to replace that piece of 
equipment.
    These little things come up, and that is just to stay 
current. We are not even trying to get ahead. And if you cannot 
provide those services--access to capital eventually ties in to 
recruiting physicians, it ties into getting staff, it ties into 
the margins, it ties into the whole thing. You have got to have 
the equipment and facility there for the people to have 
confidence to come to your facility, for physicians to want to 
come and practice in your community.
    As far as bond ratings, I can't say we've had any impact 
yet. But I can tell you as far as access to capital, we are 
getting stretched.
    Senator Cochran. Do you know of any changes that you have 
made that are directly related to the provisions of the 
Balanced Budget Act or the implementation regulations that have 
been issued by the Health Care Finance Administration?
    Mr. Higginbotham. We have reduced, our volume is reduced in 
home health. We cut about 50 percent of our work force there. 
We had around 90 employees in our home health. We are down to 
about 50, right around 50 right now.
    Our skilled nursing facility, we have seen a decrease in 
the number of patients out there. We have, as I told you in my 
testimony, we have not made a decision what to do with it at 
this point. Those patients still need care, and we are not sure 
whether we should maintain them in the building. If we maintain 
them in the building we get absolutely nothing for them. If we 
can move them to a skilled nursing facility, at least we get 
something.
    The other thing that we are seeing is hospice, hospice has 
taken about a 50 percent hit, and we have reduced our staff 
there about 11, I believe it is. Last year also, during the 
summer, as I mentioned--and it is not entirely Balanced Budget 
Act--part of it was volume, but part of it was our concern 
about some of the cuts that were coming. We were able to, 
through hours reductions and reassignment of responsibilities, 
reduce our staff by about 86 employees.
    Senator Cochran. If you could pick out two or three changes 
that you could make in the regulations or the reimbursement 
rates, what would you emphasize as the most important for 
Congress and the administration to try to accomplish, that 
would help your center?
    Mr. Higginbotham. Help your senator. Well----
    Senator Cochran. Your medical center, not your Senator.
    Mr. Higginbotham. I am trying to help the Senator right 
now.
    Obviously, the transfer provision, that is a huge impact on 
our skilled nursing facility. I think you need to understand 
that these patients that go to the skilled nursing facilities 
in rural communities, we do not necessarily have a plethora of 
nursing homes or support services available for some of these 
patients. So they are too sick to go home. They need something, 
kind of an intermediate care, and they meet the qualifications 
for a skilled nursing facility.
    If you do not have that skilled nursing facility, you still 
do not have anywhere to send that patient yet. So you maintain 
them in the hospital at a much higher cost, and that hurts you 
in the long run.
    So the transfer provision is a large one. I have just got 
to come back, and I do not know all the mechanisms that are in 
this, but when I look at the Balanced Budget Act, and I heard 
some of this today, I think they originally said an impact of 
$103 billion. It is going to be now anywhere from--
    Senator Cochran. 191 or more.
    Mr. Higginbotham. Yes, as high as 220.
    Senator Cochran. Right.
    Mr. Higginbotham. And I found it fascinating that they are 
willing to give us back $7 billion over 10 years. They are 
willing to take $200 billion over 5 years, but give us back $7 
billion over 10.
    I think you just need to look at the overall level of 
reimbursement. I can give you examples. Cataract surgery, if 
you do that in our facility the physician gets paid more than 
the hospital does. I do not even remember. I think our 
reimbursement is about $330, $350 or something like that. Just 
the lens alone that goes into the key is right around $200, 
$170 to $200 for us. Then we have got to cover all the 
medications, all the nursing staff, or time, everything, with 
the rest of that. There is no way. We lose money on cataract 
surgery.
    So how long can we continue to do these type things? It is 
a need in our community. We have an elderly community. A large 
percentage of our population is over 65.
    I guess what I am getting to is more money in the system as 
a whole, to continue to provide access to the things that our 
people need.
    Senator Cochran. If you were entitled to the same kind of 
level of reimbursement as the New Orleans hospitals--you 
mentioned people who would be able to go down and work just for 
the weekend and make as much as they would make at your 
hospital or your medical center working a whole week--would 
that help solve a lot of problems, too?
    Mr. Higginbotham. It would certainly make my life a lot 
easier, yes, sir, it would.
    Senator Cochran. Well, I frankly think that is one area 
where we can really concentrate some effort and attention. I 
think the small towns and rural communities have been 
discriminated against long enough on the reimbursement rates. 
You try to recruit a physician or any other health care 
professional, you are competing against the salaries and the 
other things that are really so much more generous in the 
larger cities than they are in the small towns and rural 
communities. You just cannot continue to attract people to come 
work there or live there, and that is sad.
    That ties into rural development. We are talking about the 
economic well-being of these communities. They are going to 
continue to have a harder and harder time just surviving.
    So I think we have got a crisis on our hands and this 
Congress has got to get serious and get moving, and so has this 
administration. We have got to start working together. There is 
a big debate in the Senate right now on health care, but this 
is an area of health care concern to me that is just as 
important as what we are debating on the floor of the Senate 
today, maybe even more important, to be honest about it. We 
need to concentrate our efforts here, too.
    Your being here and your talking about your experiences and 
your knowledge of the problem has been very helpful to our 
committee's understanding of it. We will continue to work to 
identify the ways that we can be helpful to you and to the 
people who live in our small towns and rural communities in 
this country.

                         conclusion of hearing

    Thank you very much. The hearing is recessed.
    [Whereupon, at 12:13 p.m., Wednesday, July 14, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

                                   
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