[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]




                     RURAL HEALTH CARE IN MEDICARE

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 12, 2001

                               __________

                           Serial No. 107-33

                               __________

         Printed for the use of the Committee on Ways and Means

                               ----------

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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

               NANCY L. JOHNSON, Connecticut, Chairwoman

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

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


                            C O N T E N T S

                               __________
                                                                   Page
Advisory of June 5, 2001, announcing the hearing.................     2

                               WITNESSES

Medicare Payment Advisory Commission, Glenn M. Hackbarth, 
  Chairman.......................................................     9

                                 ______

Dalton, Kathleen, University of North Carolina at Chapel Hill....    35
Mueller, Curt D., Project HOPE...................................    41
Mueller, Keith J., University of Nebraska Medical Center, Rural 
  Policy Research Institute......................................    47

                                 ______

                       SUBMISSIONS FOR THE RECORD

American Association of Homes and Services for the Aging, 
  statement......................................................    56
Federation of American Hospitals, statement......................    60
Nussle, Hon. Jim, a Representative in Congress from the State of 
  Iowa, statement................................................    61
Volcano Press, Ruth Gottstein, letter and attachments............    62

 
                     RURAL HEALTH CARE IN MEDICARE

                              ----------                              


                         TUESDAY, JUNE 12, 2001

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

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
June 5, 2001
HL-8

                   Johnson Announces Hearing on Rural

                        Health Care in Medicare

    Congresswoman Nancy L. Johnson (R-CT), Chairwoman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on Rural Health Care: Provider and 
Beneficiary Issues. The hearing will take place on Tuesday, June 12, 
2001, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10:00 am.
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include the chairman of the Medicare Payment Advisory 
Commission (MedPAC) and rural health care experts. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Rural health policy has an important place on the agenda of this 
Committee. In recent years, Congress has acted to ensure that rural 
beneficiaries have access to needed health care services. In the 
Balanced Budget Act of 1997, Congress created a new class of 
providers--Critical Access Hospitals--to ensure that the capacity for 
emergency and ambulatory services are protected in the most isolated 
rural areas while retaining a limited capacity for inpatient care. In 
the Balanced Budget Refinement Act (BBRA) and the Beneficiary 
Improvement and Protection Act (BIPA), Congress moved further to 
protect the delivery of emergency care for Critical Access providers by 
improving ambulance service payment and covering the costs of retaining 
physicians to provide on-call services to emergency rooms.
    Further, the BBRA and BIPA increased Medicare payments for rural 
hospitals, above and beyond Balanced Budget Act corrections. Sole 
community hospitals will be paid based on updated information on the 
costs of providing services to patients in their community--the first 
significant change in the program since 1989. The eligibility for 
Medicare disproportionate share payments was equalized between urban 
and rural hospitals, correcting the disparity in who can receive these 
payments that has existed since 1990. Finally, the Medicare dependent 
hospital program was extended and the eligibility broadened to new 
hospitals.
    Regardless, the demographic, social, cultural, and economic changes 
that affect rural populations are different in many respects than those 
for urban populations. Rural America is growing more slowly and its 
population is older than the rest of the nation. In Rural Health in the 
United States, researchers report that despite these differences the 
overall health status indicators for rural residents is similar to that 
of urban residents. Chairman Johnson stated: ``Medicare policy must 
continue to ensure that the rural elderly and disabled have access to 
high quality care. The program should closely monitor their access and 
health status. Moreover, we may need to act to modernize the program 
when gaps are identified, for example, fewer rural beneficiaries have 
Medigap insurance and are more likely to have limited coverage.''
      

FOCUS OF THE HEARING:

      
    The hearing's first panel will report on the findings from the 
congressionally mandated MedPAC report on how Medicare is working for 
rural beneficiaries and recommendations for changes in Medicare. The 
second panel includes rural experts who will discuss access to services 
and the equity of the Medicare benefit structure. The panel will also 
discuss whether the many rural provider programs protect vulnerable 
rural communities.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
June 26, 2001, to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
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comments must conform to the guidelines listed below. Any statement or 
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but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
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will rely on electronic submissions for printing the official hearing 
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    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
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    3. A witness appearing at a public hearing, or submitting a 
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    4. A supplemental sheet must accompany each statement listing the 
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    Note: All Committee advisories and news releases are available on 
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    The Committee seeks to make its facilities accessible to persons 
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call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                


    Chairwoman Johnson. Good morning, everyone.
    Today will be our first Subcommittee hearing this session 
on rural health care. In earlier hearings, we looked for new 
ideas on Medicare reform. We asked hospitals and physicians and 
other providers how to reduce the regulatory burden. We 
examined the adequacy and usefulness of the current definition 
of Medicare solvency. We laid the groundwork for a prescription 
drug benefit and examined ideas to modernize the fee-for-
service program's beneficiary cost-sharing.
    As I read through today's testimony, it is clear that the 
earlier hearings were also about the issues that are critical 
to rural seniors. For example, in our hearing on cost sharing, 
we reported that the design of Medicare beneficiary cost 
sharing in the fee-for-service program reflects outdated 1965 
insurance practices. As such, more than 35 years later, 
beneficiaries are confronted with irrational and confusing cost 
sharing which does notreflect the current delivery of health 
care. Today, we will hear that as a result of this rural beneficiaries 
spend less but have higher cost sharing.
    Similarly, at our prescription drug hearing, we found that 
many of the current supplemental prescription drug plans, such 
as Medigap, are expensive and generally inadequate. We also 
found that those without coverage have the least bargaining 
power and are therefore often paying the highest prescription 
drug prices. At the hearing today, we will hear that too many 
of those individuals with the least protection live in rural 
America.
    Finally, we learned that health care providers spend a 
great deal of their time and energy on complying with Medicare 
rules. This Subcommittee will continue to work on easing these 
requirements so that these providers can once again focus on 
what is important to rural and urban beneficiaries alike, and 
that is patient care.
    To protect rural beneficiaries, we have acted to solidify 
access to services in isolated areas. In the Balanced Budget 
Act of 1997, Congress created a new class of providers, 
critical access hospitals, to ensure that emergency services 
are protected in the most isolated rural areas while retaining 
a limited capacity for in-patient care. Recently, we have made 
the qualifications for critical access hospital designation 
more flexible. And last year this Subcommittee acted in the 
Beneficiary Improvement and Protection Act to strengthen access 
to ambulance services and cover the costs of retaining 
physicians to provide on-call emergency services in the remote 
communities served by critical access providers.
    There is also a need to make sure that rural seniors have 
access to hospital services when needed. In the Balanced Budget 
Refinement Act and the Beneficiary Improvement and Protection 
Act, we increased Medicare payments for rural hospitals. Sole 
community hospitals will be able to be paid on their more 
recent information on cost, the first significant change in the 
program since 1989.
    Most important, by equalizing the eligibility for Medicare 
disproportionate share payments between urban and rural 
hospitals, we were able to pump more than a billion dollars 
over 5 years into rural hospitals, which were legally being 
discriminated against under the law. Yet the payment formulas 
still-for Disproportionate Share Hospital (DSH) payments still 
are not fully equalized, and more needs to be done.
    Additionally, rural hospitals are often dependent on 
outpatient skilled nursing and home health revenues. We added 
significant protections and additions to these services so that 
these services will continue to be available for seniors and 
rural hospitals are better shielded from any negative impact of 
the outpatient prospective payment system (PPS) until we can 
determine how they are affected by the PPS.
    Skilled nursing units in rural hospitals benefit from the 
add-on payments to the resource utilization groups and from the 
17-percent increase for the nursing component of the rate. The 
15-percent reduction in home health services has also been 
delayed. These changes equally aided free-standing home health 
agencies and skilled nursing facilities in rural areas.
    Finally, Congress made significant progress in eliminating 
the payment disparities in Medicare+Choice by enacting two 
payment floors, $475 for rural counties and $525 for counties 
with populations greater than 250,000.
    Our goal is to ensure that Medicare beneficiaries get the 
care they need. The dust has far from settled from the positive 
changes we have made. In fact, most of these policies are only 
beginning to go into effect, starting into effect in April, and 
the impact of most are yet to be realized.
    While we can count the dollars, it is too early to measure 
the differences we have made for rural providers. And while we 
have done much, I am still extremely concerned about the future 
of small providers in general and small rural providers in 
particular. In a joint letter to the Health Care Financing 
Administration, Mr. Stark and I have recommended a number of 
changes that should reduce the regulatory burden and put in 
place the technical assistance that small providers need to 
assure smooth cash flow in an extremely complicated billing 
system.
    Then, of course, there is the senior citizen needing care. 
As long as it will take us to evaluate the effects of the 
changes that we have made in the last year and the year before 
that to law and regulatory law, it is going to be even more 
difficult to evaluate its impact on rural beneficiaries, the 
senior citizens who live in rural areas. I am concerned that 
seniors in these areas will still find cost barriers and 
receive less preventive care for flu shots, pap smears, 
screening mammographies and so on. Clearly, we must act to 
modernize Medicare so that the inequities faced by rural 
beneficiaries do not continue.
    Today, we begin our examination of how rural beneficiaries 
as well as providers are surviving in the current distorted and 
complex Medicare Program. I am happy to host the first hearing 
in which our new chairman of MedPAC, the Medicare Payment 
Advisory Commission, will testify, Mr. Hackbarth; and I thank 
you for accepting this important job and being with us today. 
We are eager to hear what MedPAC's recommendations are to 
strengthen rural health care.
    I would also like to at the same time note for the record 
my thanks to Gail Wilensky for her long and distinguished 
service to MedPAC and in the many ways in which she has served 
both the House and Senate over many years. I am sure that we 
will not lose access to her experience and balanced analysis of 
problems, but I do here now recognize her extraordinary service 
to MedPAC.
    Thank you, Mr. Hackbarth; and before I recognize you, I 
will recognize my colleague, Mr. Stark.
    [The opening statement of Chairwoman Johnson follows:]

OPENING STATEMENT OF THE HON. NANCY L. JOHNSON, M.C., CONNECTICUT, AND 
                   CHAIRWOMAN, SUBCOMMITTEE ON HEALTH

    Today will be our first Subcommittee hearing this session on rural 
health care. In earlier hearings, we looked for new ideas on Medicare 
reform, we asked hospitals and physicians and other providers how to 
reduce regulatory burden, we examined the adequacy and usefulness of 
the current definition of Medicare solvency, we laid the ground work 
for a prescription drug benefit and examined ideas to modernize the 
fee-for-service program's beneficiary cost-sharing.
    As I read through today's testimony, it is clear that the earlier 
hearings were also about the issues that are critical to the rural 
seniors. For example, in our hearing on cost sharing, we reported that 
the design of Medicare beneficiary cost sharing in the fee-for-service 
program reflects outdated 1965 insurance practices. As such, more than 
35 years later, beneficiaries are confronted with irrational and 
confusing cost-sharing which does not reflect the current delivery of 
health care. Today, we will hear that as a result of this rural 
beneficiaries spend less but have higher cost sharing.
    Similarly, at our prescription drug hearing, we found that many of 
the current supplemental prescription drug plans, such as Medigap, are 
expensive and generally inadequate. We also found that those without 
coverage have the least bargaining power and are therefore often paying 
the highest prescription drug prices. At the hearing today, we will 
hear that too many of the individuals with the least protection are 
rural.
    Finally, we learned that health care providers spend a great deal 
of their time and energy on complying with Medicare rules. Earlier this 
Spring, Representative Stark and I sent HCFA a detailed list of 
recommendations to make Medicare more workable and to relieve the 
regulatory burden on the providers, particularly the small providers, 
that serve Medicare beneficiaries. Those recommendations, when 
implemented will create a more collaborative relationship between HCFA 
and providers and allow health care professionals to devote more time 
to patient care.
    Over the past several years we have acted to solidify access to 
services in isolated areas. In the Balanced Budget Act of 1997, 
Congress created a new class of providers, Critical Access Hospitals, 
to ensure that emergency services are protected in the most isolated 
rural areas while retaining a limited capacity for inpatient care. 
Recently, we have made the qualifications for Critical Access Hospital 
designation more flexible. And last year this subcommittee acted in the 
Beneficiary Improvement and Protection Act to strengthen access to 
ambulance services and cover the costs of retaining physicians to 
provide on-call emergency services in the remote communities served by 
Critical Access providers.
    There is also a need to make sure that rural seniors have access to 
hospital services when needed. In the Balanced Budget Refinement Act 
and the Beneficiary Improvement and Protection Act, we increased 
Medicare payments for rural hospitals. Sole Community hospitals will be 
able to be paid on their more recent information on costs--the first 
significant change in the program since 1989. Most important, by 
equalizing the eligibility for Medicare disproportionate share payments 
between urban and rural hospitals, we were able to pump more than $1 
billion over five years into rural hospitals, which were legally being 
discriminated against under the law. Yet the payment formulas for DSH 
payments still are not fully equalized and more needs to be done.
    Additionally, rural hospitals are often dependent on outpatient, 
skilled nursing and home health revenues. We added significant 
protections and additions for these services. So that these services 
will continue to be available for the seniors, rural hospitals are 
shielded from any negative impact of the outpatient prospective payment 
system, until we can determine how they are affected by the PPS. 
Skilled nursing units in rural hospitals benefit from the add-on 
payments to the resource utilization groups and from the 17 percent 
increase for the nursing component of the rate. The 15 percent 
reduction for home health services was also delayed. These changes 
equally aided free-standing home health agencies and skilled nursing 
facilities in rural areas.
    Finally, Congress made significant progress in eliminating the 
payment disparities in Medicare+Choice by enacting two payment floors: 
$475 for rural counties and $525 for counties with populations greater 
than 250,000.
    Our goal is to assure that all Medicare beneficiaries get the care 
they need. The dust has far from settled from the positive changes that 
we made--in fact some of these policies only began in April and others 
are to come. While we can count the dollars, it is too early to measure 
the difference we made for rural providers.
    And it is even more difficult to know if we made a difference for 
rural beneficiaries.
    I am concerned that the rural beneficiaries sometimes find cost a 
barrier and receive less preventive care such as pap smears and 
screening mammography. Clearly, we must act to modernize Medicare so 
that the inequities faced by rural beneficiaries do not continue. 
Today, we begin our examination of how rural beneficiaries as well as 
providers are surviving in the current disjointed and complex Medicare 
program.
    I am happy to host the first hearing in which our new chairman of 
the Medicare Payment Advisory Commission will testify. Mr. Hackbarth 
thank you for accepting this important job and for being here today. We 
are eager to hear from you MedPAC's recommendations to strengthen rural 
health care. I would also like to thank Gail Wilensky for her 
distinguished years of service and wish her best in her future 
endeavors.

                                


    Mr. Stark. Thank you, Madam Chair; and thank you for 
today's hearing.
    Addressing the concerns of rural communities is an 
important part of the Medicare system, and I think MedPAC's 
recent very good analysis of rural issues makes a contribution 
to understanding the Medicare payment system. Unfortunately, 
most of the legislation that we have passed for rural health 
care has been highly political and rarely evidenced-based. I 
look forward to hearing the findings and recommendations in the 
new MedPAC report.
    A brief review of the report confirms what I have always 
thought to be the case, and MedPAC has reported this in the 
past, that there is no systemic access problem in rural areas. 
In fact, the report released today shows that there is no real 
difference in access to Medicare services between urban and 
rural populations.
    We do, however, continue to hear anecdotal evidence of 
rural area providers holding on by the skin of their teeth; and 
to the extent there are access problems, in particular rural 
areas, we will need to refine the payment system to target 
these areas. But, it is very expensive to do across-the-board 
increases that boost all rural providers or all providers in 
general, if we are just trying to deal with a very small 
percentage of the smallest providers.
    The results of this MedPAC report also reinforce the 
reality that some areas are unlikely to ever be able to sustain 
managed care. I hope that Mr. Hackbarth will provide this 
information to the Health Care Finance Administration (HCFA) so 
that HCFA can take a careful look at this report when they 
develop their plans to increase the Medicare+Choice enrollment 
to 30 percent. I have trouble understanding why we would want 
to pour more money into managed care in rural areas, when there 
is little evidence that Medicare+Choice can even be sustained 
there.
    According to the report, in more than 300 rural counties, 
the 2001 floor payment rate exceeds the fee-for-service 
spending for the average beneficiary by 130 bucks a month or 
about 40 percent. There are simply not enough beneficiaries to 
spread risk and not enough providers to buildup a sufficient 
network for these plans to realize profits in isolated rural 
areas.
    The plight of rural providers is not solely a function of 
Medicare and Medicaid payments. There are market forces that 
disproportionately affect rural areas, and rural areas must 
work harder to recruit and retain providers. Medicare payments 
are only a small piece of the puzzle in creating an efficient 
health infrastructure, and I hope the speakers on the second 
panel will help us better understand the problems of rural 
communities and how Federal programs can be refined and 
coordinated with local programs to help those communities in 
need.
    I think that we should address, for example, the Medicare 
payment reforms as part of an overall strategy rather than in 
isolated area changes. MedPAC, I think, has advocated that 
Medicare payment policies be site neutral so that decisions on 
where a service is provided could be based on clinical factors 
rather than payment, and I hope the recommendations in this 
report further that policy approach.
    At some point, there is a major concern. I don't know 
whether it is at 10 beds or 20 beds, but it must be a matter of 
medical practice to suggest that at some small minimum--it just 
isn't practical or efficient to try and maintain acute care 
service. It is probably a lot cheaper to have a helicopter 
pilot and a heliport to replace that kind of a facility.
    And I think, politically, that is a terrible problem for 
us. Nobody on their watch wants to see the hospital in their 
hometown closed, particularly when it is named after your most 
substantial contributor to your campaign. It just is a very 
difficult thing. We have known that for years, and I hope that 
we can work together to find some way to build a statue to the 
contributors, convert the hospital to a useful purpose and 
perhaps make our whole system more efficient. I look forward to 
the witnesses' testimony to help us on that course. Thank you.
    [The opening statement of Mr. Stark follows:]

   OPENING STATEMENT OF THE HON. FORTNEY PETE STARK, M.C., CALIFORNIA

    Madame Chairwoman, thank you for having this hearing today. 
Addressing the concerns of rural communities is always an important 
part of Medicare legislation, and MedPAC 's impartial analysis of rural 
issues makes a great contribution to our understanding of the Medicare 
payment system. It is unfortunate, however, that rural legislation is 
often highly political and rarely evidence based. I look forward to 
hearing more about the findings and recommendations included in the new 
MedPAC report.
    My brief review of the report confirms what I have always thought 
to be the case--and what MedPAC has reported in the past--that there is 
no systemic access problem in rural areas. In fact, the report released 
today shows that there is no real difference in access to Medicare 
services between urban and rural populations. But, we continue to hear 
anecdotal evidence of rural area providers holding on by a thread and 
the potential negative impact on beneficiary access. To the extent that 
there are access problems in particular rural areas, we will need to 
continue refining the payment systems to better target these areas. 
But, we need to be careful not to put more money into boosting all 
rural providers--or providers across the board-- if there are more 
efficient ways to provide better quality care in those particular areas 
that are having trouble.
    The results of the MedPAC report also reinforce the reality that 
some areas are unlikely to ever be able to sustain managed care. I hope 
that the new administrator of HCFA, Tom Scully, takes a careful look at 
this report when he develops his plan to increase Medicare+Choice 
enrollment to 30 percent. I don't understand why we would want to pour 
more money into managed care in rural areas when there is little 
evidence that the M+C plans can even be maintained there. According to 
the report, in more than 300 rural counties the 2001 floor payment rate 
exceeds the fee-for-service spending for the average beneficiary by 
$130 per month--or about 40 percent! There are simply not enough 
beneficiaries to spread risk and not enough providers to build up a 
sufficient network for M+C plans to realize profits in isolated rural 
areas.
    The plight of rural providers is not solely a function of Medicare 
and Medicaid payments. There are market forces that disproportionally 
affect rural areas, and rural areas must work harder to recruit and 
retain providers. Medicare payments are only a piece of the puzzle in 
creating an efficient health infrastructure. I hope that the speakers 
on the second panel will help us better understand the problems of 
rural communities, and how federal programs can be refined and 
coordinated with local programs to help the communities in need.
    Thank you all for testifying before us today.

                                


    Chairwoman Johnson. I also want to welcome Jim Nussle 
especially to our Subcommittee hearing. He has long been very 
active in rural coalition and, of course, is the chairman of 
the budget Committee; and we appreciate his being here.
    Chairwoman Johnson. Mr. Hackbarth, would you like to 
proceed?

   STATEMENT OF GLENN M. HACKBARTH, J.D., CHAIRMAN, MEDICARE 
                  PAYMENT ADVISORY COMMISSION

    Mr. Hackbarth. Chairwoman Johnson, Mr. Stark, Members of 
the Subcommittee, thanks for the opportunity to discuss the 
Medicare Payment Advisory Commission recommendations.
    Our starting point in evaluating rural health care for 
Medicare beneficiaries was to look at the most important 
objective, which is to assure access to quality care. We did 
that by reviewing a number of different measures, including 
beneficiary satisfaction, performance on certain clinical 
quality indicators in use of services. Overall, we have found 
that the services used in volume and quality are very similar 
to those used by urban Medicare beneficiaries. There are some 
important exceptions to that that I would be glad to go into 
later on, but, overall, the numbers are quite comparable.
    Preserving access to quality care for the long run requires 
that we pay attention to the delivery system, includingits 
financial needs. Here there is some reason for concern. As you well 
know, a substantial gap has opened between the financial performance of 
rural hospitals under the Medicare Program and the financial 
performance of urban hospitals. That is a relatively new development. 
It has happened over the last 10 years, but now the gap is quite 
substantial. On average, rural hospitals are losing money on their 
overall Medicare business, inpatient and outpatient.
    As the chairman alluded to, Congress has already taken some 
steps to improve the financial performance of rural providers. 
For example, in the case of hospitals, a number of special 
payment categories have been adopted--rural referral centers, 
sole community hospitals, Medicare dependent hospitals and 
critical access hospitals.
    We do see some indications that these special categories 
may be having a desired effect. For example, totally rural 
hospitals, that is, hospitals far-removed from urban areas, 
have higher Medicare margins on average than any other category 
of rural hospitals at this point; and, also, fewer of them have 
negative margins.
    In addition, the critical access program, which is 
relatively new, appears to be restoring access to some 
communities that had lost it. In other words, hospitals had 
closed and now have reopened under the critical access program.
    We do have some concerns about the targeting of these 
special payment categories. In some cases, we think that the 
money is spread too broadly, benefiting hospitals that don't 
need the special assistance. Despite those concerns about 
targeting, though, we would continue the special payment 
categories until more targeted adjustments in the rates are 
developed and implemented and evaluated.
    As has been true in the past, the standard that MedPAC uses 
in evaluating payment systems is to try to get Medicare 
payments to match the cost of efficient providers. We believe 
that Medicare can and should do a better job of targeting than 
it has in the past in the case of rural hospitals. We believe 
there are four factors that can contribute significantly to the 
poorer financial performance of rural hospitals. They are small 
size, a longer average length of stay, inaccuracies in the wage 
index, and unequal access to disproportionate share payments.
    In developing the report to Congress, we examined 20 
different options for dealing with these four issues. In this 
report, we make a number of recommendations that will address 
them in the short run. We also reiterate our support for some 
measures that cannot be implemented immediately but are crucial 
to the well-being of rural providers. For example, fixing the 
occupational mix in the wage index and equalizing access to 
disproportionate share payments.
    Finally, we continue to study some other possible steps 
that could address the needs of rural providers, including an 
expanded transfer policy.
    Our recommendations as we see it are not designed as aid to 
rural hospitals in particular. Rather, they are designed to 
improve the payment system and better match Medicare payments 
to the cost of efficient providers, for urban and rural 
hospitals alike.
    As for the new prospective payment systems, those for 
outpatient services, home health services and skilled nursing 
services, there are a great many unanswered questions. As 
discussed in an earlier MedPAC report, this SNF, skilled 
nursing facility system, has troubling flaws for urban and 
rural providers alike.
    We believe that the new outpatient and home health systems 
can be made to work effectively for rural providers, but it may 
take some refinement. There are some meaningful differences 
between the situation of rural providers and urban providers in 
these areas. Unfortunately, right now we simply don't have the 
data to either evaluate the impact or develop new refinements.
    Fortunately, Congress included provisions in legislation 
that we think will buy us some time to do a proper evaluation. 
The outpatient system, as you know, includes a hold-harmless 
provision; and the home health system includes a special 10 
percent add-on for rural providers.
    Moving on now to the Medicare+Choice program, we believe 
that there are fundamental differences between urban and rural 
markets that make it unlikely that Medicare+Choice will work as 
well in rural areas as in urban areas. Moreover, we see some 
risk in the current efforts to try to make the Medicare+Choice 
program work in rural areas.
    One final point on rural health. Rural America is really 
very, very diverse. Generalizations are, therefore, risky. In 
order to have a reasonable discussion, we talk a lot about 
averages in the report, recognizing that there are always 
exceptions to those averages. So if we make a statement about 
an average or a typical hospital that may not match exactly 
what happens in your district, please bear with us.
    Finally, before closing, I would like to mention a non-
rural issue. We are required by statute to review HCFA's 
estimate of the update to physician payments for 2002. We have 
reviewed HCFA's estimate and found it reasonable based on the 
information currently available. We do note, however, that the 
actual update could prove to be substantially different and 
possibly lower than the current estimate of a negative 1/10th 
of 1 percent change; and that difference could be significant. 
It depends on what happens with the growth in the economy and 
expenditures in the past year under the Medicare Program for 
physician services.
    As you know, those are both factors in determining the 
Sustainable Growth Rate (SGR) cap. MedPAC has recommended 
eliminating the SGR system in the past out of concern that it 
could lead to a gap between the increase in cost that 
physicians experience and the payments they receive from 
Medicare. If that gap becomes large enough, it could threaten 
access to care.
    In addition, since the system applies only to physician 
payments and not to outpatient department services, for 
example, there could become an incentive to switch services 
from physician offices to outpatient departments solely for 
payment reasons, which we think would be highly undesirable.
    So that is my brief summary, and I would be happy to answer 
questions.
    [The prepared statement of Mr. Hackbarth follows:]

   STATEMENT OF GLENN M. HACKBARTH, J.D., CHAIRMAN, MEDICARE PAYMENT 
                          ADVISORY COMMISSION

    Chairman Johnson, Mr. Stark, Members of the Subcommittee. I am 
Glenn Hackbarth, chairman of the Medicare Payment Advisory Commission 
(MedPAC). I am pleased to be here this morning to discuss MedPAC's 
newly issued report on Medicare in rural America. This report responds 
to a set of requirements enacted in the Balanced Budget Refinement Act 
of 1999 directing MedPAC to assess Medicare's payment systems and 
policies in rural healthcare markets.

Bottom line
    Medicare's most important objective is to ensure that beneficiaries 
have access to high-quality care. Because some rural communities face 
adverse economic conditions that may limit the ability of local 
providers to furnisha broad array of needed services, policymakers have 
been concerned that rural beneficiaries may not get the care they need. 
We were reassured to find, therefore, that Medicare beneficiaries 
living in rural areas are not facing widespread serious problems; with 
a few exceptions, data indicate that beneficiaries' access to care, use 
of care, and satisfaction with care are similar in rural and urban 
areas. This does not mean, of course, that rural beneficiaries in every 
county always get all of the care they need or the most appropriate and 
effective care; looking at averages can mask deficiencies. It does mean 
that where problems exist, they may reflect something other than rural 
residence alone.
    Preserving access to high-quality care over the long run requires 
attention to the well-being of the delivery system. Here, there is some 
reason for concern: a substantial gap has opened over the past decade 
in the financial performance under Medicare between rural hospitals--
the locus of care in many communities--and urban hospitals. The 
Congress has already taken steps to shore up the rural delivery system 
and we see signs that some of those measures are making a difference. 
For example, the most isolated rural hospitals have higher Medicare 
margins than any other category of rural hospital and the critical 
access hospital (CAH) program even appears to be restoring access to 
some communities that had lost it. Other programs, such as the Medicare 
Incentive Program, which is intended to encourage physicians to 
practice in areas with limited numbers of primary care physicians, have 
been less effective.
    MedPAC sees opportunities to refine Medicare's prospective payment 
system (PPS) for inpatient hospital services in ways that will make it 
more fair to rural hospitals--especially small ones--while preserving 
incentives for the efficient delivery of services. In combination, 
these incremental steps will improve the Medicare margins of many rural 
hospitals.
    For example, implementing a low-volume adjustment, fully removing 
the salaries and hours of professionals paid under Medicare Part B from 
the wage index, and raising the cap on disproportionate share (DSH) 
payments would, on average, increase rural hospitals' inpatient 
payments by 1.8 percent. This increase would be on top of a 1.7 percent 
increase from the DSH payment changes enacted last year. In addition, 
although we did not quantify the impact, we can be reasonably sure that 
if the Health Care Financing Administration reviews the national labor 
share used in the wage index as we recommend, the resulting adjustment 
would on average modestly increase payments to rural hospitals and 
decrease them to urban hospitals.
    Unlike some proposals currently being discussed--such as those to 
have a single base payment rate or to implement a wage index floor--
MedPAC's proposals are targeted to take into account factors affecting 
rural hospitals' costs. Targeting payments allows the Congress to get 
dollars where they are needed most.
    For the prospective payment systems that are being phased in for 
services in hospital outpatient departments (OPDs), home health care, 
and skilled nursing facilities (SNFs), there are many unanswered 
questions. We believe the OPD PPS and the PPS for home care can be made 
to work for rural providers, but the available data are inadequate to 
assess their impact properly. Steps taken by the Congress--enacting 
hold-harmless provisions for the OPD PPS and temporary payment 
increases for rural home care agencies--give policymakers time to make 
an assessment. In the case of skilled nursing care, MedPAC has 
previously noted that the new prospective payment system has troubling 
flaws that affect urban and rural providers alike. Until these more 
fundamental difficulties are addressed, we cannot assess whether there 
are issues that affect rural SNFs separately.
    Because of differences between urban and rural health care markets, 
the Medicare+Choice program is unlikely to succeed in bringing 
coordinated care plans to rural areas. In our March report, MedPAC 
noted that efforts to overcome barriers to managed care, such as 
introducing floors under payment rates, may increase Medicare spending 
with no guarantee that the higher spending will yield additional 
benefits for Medicare beneficiaries. We recommended in that report that 
the Secretary examine variation in fee-for-service spending across the 
country to address the more fundamental problem.
    The diversity of rural America means that there will undoubtedly be 
exceptions to every generalization we make. Without some 
generalization, however, policymaking becomes almost impossible. MedPAC 
will continue to monitor how well the Medicare program works in rural 
areas generally, as well as to watch for specific problems.

Overview of rural health care markets
    Many rural communities face market conditions that may depress 
demand or supply and potentially decrease access to and use of health 
care services among Medicare beneficiaries and other residents. 
Depending on the community, these factors include:

           a small population,
           a declining and disproportionately older population,
           low household incomes, relatively high unemployment 
        rates, and high poverty rates,
           a high proportion of the population lacking health 
        insurance or with limited coverage,
           physical isolation, with long distances to urban 
        centers for specialty care, and
           weak or restrictive state polices (such as in 
        Medicaid eligibility and payment policies or certificate of 
        need laws).

    To examine where these factors operate and the extent to which they 
interact, MedPAC contracted with researchers at the Cecil G. Sheps 
Center for Health Services Research, UNC-Chapel Hill, who mapped 
demographic characteristics to hospital markets. Using the hospital 
market data, we analyzed the variation in many of these factors across 
market areas and geographic regions. We also explored the relationship 
between market characteristics and hospitals' financial performance. 
Although our analysis has only begun to scratch the surface, two 
preliminary conclusions emerge (see Table 1). First, economic 
conditions vary widely among rural markets. Second, rural markets in 
the West have different sets of risk factors than those in the East. 
For example, the main risk factors affecting rural Western hospital 
markets are small populations, declining populations, and 
disproportionate numbers of residents aged 65 and older. By contrast, 
the main risk factors affecting rural Eastern hospital markets are low 
household incomes, high unemployment rates, and disproportionate 
numbers of racial and ethnic minorities (who are more likely to lack 
health insurance).
    These risk factors raise three policy questions:

           Are these factors affecting access to, use of, or 
        quality of services?
           Can prospective payment work in rural areas?
           Can Medicare+Choice work in rural areas?

Access to care, use of services, and quality of care
    Rural areas of the country often have fewer providers and longer 
distances between beneficiaries and providers than do urban areas, 
potentially hindering access to care. Further, rural quality of care 
issues have received little attention in Medicare policymaking. Our 
research on access to care, use of services, and quality of care is 
largely reassuring. The experience of rural Medicare beneficiaries 
appears generally similar to that of urban beneficiaries, suggesting 
that they are largely able to overcome the risk factors noted 
previously.

Access to care
    Data from the Medicare Current Beneficiary Survey (MCBS) indicate 
that rural beneficiaries are generally satisfied with the availability 
of care, including specialty care; their satisfaction rates are 
generally similar to those of urban beneficiaries (see Table 2). This 
finding holds for rural areas in general as well as for the most remote 
rural areas.
    The MCBS data do show differences on questions relating to the 
affordability of health care. A smaller percentage of rural than urban 
beneficiaries reported being satisfied with the costs of medical care, 
and in the more remote rural areas a larger fraction reported delaying 
care because of cost considerations. Thesedifferences may reflect rural 
beneficiaries' lower likelihood of having supplemental coverage for 
cost-sharing and services not covered by Medicare. Accordingly, MedPAC 
recommends that the Secretary identify strategies to increase rural 
beneficiaries' participation in government programs that cover all or 
some of Medicare's cost-sharing requirements. These programs include 
Medicaid, the qualified Medicare beneficiary program, and the specified 
low-income beneficiary program.

Use of services
    Similarities in access are reflected in rural and urban 
beneficiaries' use of health care services. Although policymakers and 
rural health care advocates have often argued that rural residents are 
disadvantaged in obtaining needed care compared with urban residents, 
we found that urban and rural Medicare beneficiaries use similar 
amounts of care, on average, both nationally and within regions (see 
Figure 1).\1\ Similar rates of service use do not imply that all 
beneficiaries are equally well served. At the same time, we would 
expect serious access problems to show up in lower use.
---------------------------------------------------------------------------
    \1\ We measured per capita use of 11 type of services: short--and 
long-term hospital inpatient care, rehabilitation hospital, psychiatric 
hospital, skilled nursing facility, home health care, swing bed, 
outpatient hospital, physician, ambulatory surgical center, and rural 
health clinic.
---------------------------------------------------------------------------
    Although overall use was similar, the mix differed; rural 
beneficiaries used fewer physician and post-acute care services and 
more hospital inpatient and outpatient services than did their urban 
counterparts (see Table 3). Rural beneficiaries were about as likely as 
urban ones to have any physician visit, but had fewer total visits.

Quality of care
    Assessing differences in quality of care between rural and urban 
areas is difficult, but two measures we examined--use of recommended 
services for patients with particular conditions and satisfaction with 
care as reported by beneficiaries--are reassuring.
    Quality of care is often measured by the extent to which patients 
receive recommended services--including preventive services and 
services for acute and chronic illnesses--and the outcomes of that 
care. To compare quality in rural and urban areas, MedPAC contracted 
with Direct Research LLC to analyze Medicare claims data. The 
researchers examined two measures: 40 indicators of necessary care 
(which reflect minimum standards of recommended care) and 6 indicators 
of avoidable outcomes (which represent potentially avoidable emergency 
or urgent care). The results suggest that the provision of necessary 
care and the occurrence of potentially avoidable outcomes is roughly 
comparable between rural and urban beneficiaries. After weighting each 
of the indicators equally and adjusting for differences in the age and 
sex composition of rural and urban populations, researchers found that 
the receipt of necessary care varied from 72 to 74 percent of rural 
beneficiaries, compared with 73 percent of urban beneficiaries.
    These results are mirrored by the subjective assessment of Medicare 
beneficiaries. Among respondents to the MCBS, over 90 percent of rural 
beneficiaries reported agreeing or strongly agreeing that their 
physician checks everything and that they had great confidence in their 
physician. These responses are virtually identical to those of urban 
beneficiaries.
    Nonetheless, Medicare's systems for improving and assuring quality 
could be strengthened to deal more effectively with issues in rural 
areas, and we recommend that the Secretary include rural populations 
and providers when carrying out Medicare's quality improvement 
activities. We also recommend that the Secretary address a critical 
problem with Medicare's system for safeguarding quality in rural areas 
by requiring more frequent surveying of providers to ensure the care 
they deliver meets minimal standards for quality and safety.

Medicare's payments for services in the traditional program
    In the traditional fee-for-service program, Medicare generally 
relies on prospective payment systems. Two of these systems--the PPS 
for inpatient hospital care and the physician fee schedule--are mature 
(in the sense that they have been in place for over a decade). New 
systems are being phased in for outpatient hospital services, home 
health care, and SNFs.
    To ensure access to care for Medicare beneficiaries without 
imposing undue costs on taxpayers, Medicare's payments should 
approximate the costs that an efficient provider would incur in 
furnishing care. In general, this means accounting directly in the 
payment system for factors that are beyond the control of providers and 
that have substantial and systematic cost effects. Some factors can be 
easily identified and addressed (at least conceptually). For example, 
the diagnosis related groups (DRGs) that Medicare uses to pay for 
inpatient hospital services distinguishes cases according to their 
clinical similarity and resource cost, raising payments for relatively 
expensive cases and reducing them for relatively less expensive cases. 
Similarly, Medicare's application of a wage index adjustment to a 
portion of operating payments--raising payments in high-wage markets 
and lowering them in low-wage markets--allows the program to account 
for systematic differences among markets in the wages providers must 
pay to remain competitive.
    How to account for other factors is less clear. Prospective payment 
systems are based on averages, and some providers may be significantly 
different from average (and unable to do anything about it). For 
example, a hospital in a remote area with a small patient volume may 
not be able to achieve the same economies of scale and scope that a 
large hospital located in an urban area can. Hospitals may also face 
different kinds of costs depending on their location. For example, some 
people argue that travel costs are not properly taken into account for 
home care provided in rural areas where distances are long.
    These examples underlie the congressional interest in how well the 
current payment systems work in rural areas for inpatient hospital 
services and whether the new payment systems for hospital outpatient 
services and home care are likely to be appropriate.
Prospective payment for inpatient hospital services
    Rural hospitals had lower Medicare inpatient margins than urban 
hospitals throughout the 1990s, and the gap has been widening. By 1999, 
the disparity had grown to 10 percentage points (see Table 4). The 
growing imbalance in financial performance under Medicare has occurred 
despite special payment provisions for rural hospitals whose value is 
almost as high as that of provisions that primarily affect urban 
hospitals. Although some of the difference in performance may be within 
hospitals' control, the size of the gap suggests that the payment 
system does not recognize factors that have an important effect on the 
costs of rural hospitals.
    MedPAC identified four aspects of Medicare's inpatient payment 
system that may inhibit the appropriate distribution of payments and 
that together play a substantial role in rural hospitals' lower 
margins. They are:

           failure to account directly for small scale of 
        operation,
           failure to account for longer lengths of stay,
           limitations in the measurement of input prices, and
           unequal disproportionate share (DSH) payments.

    The first three issues concern systematic differences in costs; the 
fourth issue involves differences among hospitals in the volume of 
services they provide to low-income patients. In each case, Medicare's 
current payment system--together with a variety of special payment 
categories for rural referral centers, sole community hospitals, small 
rural Medicare-dependent hospitals and critical access hospitals--
either does not address the underlying differences or appears to 
address them in ways that work against rural hospitals. We therefore 
recommend changes, discussed below, that would make payments better 
targeted and preserve, as much as possible, the incentives for 
efficiency embodied in the PPS. We recommend retaining the special 
categories until the proposed changes are implemented and evaluated.

    Low volume.--Patient volume, particularly in small and isolated 
communities, is largely beyond hospitals' control and may cause their 
per-unit costs to be higher than average. The current PPS rates do not 
account directly for the relationship between cost and volume, 
potentially putting smaller providers at a financial disadvantage 
relative to other facilities. We found a statistically significant 
inverse relationship between discharge volume and Medicare costs per 
case (holding other factors recognized by the payment systemconstant). 
The volume and cost relationship was most pronounced for facilities 
with fewer than 200 discharges per year (see Figure 2).
    The current special payment categories do not target low-volume 
hospitals well. Although 10 percent of hospitals--most of them rural--
have fewer than 500 discharges, over one-third of low-volume hospitals 
are not in any of the categories. MedPAC recommends that the Congress 
direct the Secretary to develop a graduated adjustment to base payment 
rates for hospitals with few discharges. So as not to encourage more 
care in low-volume settings than is necessary, we recommend that in 
defining this adjustment, the distance between facilities providing 
inpatient care be taken into account.

    Longer length of stay.--Substitution of post-acute services for the 
latter days of inpatient stays was a key factor in reducing Medicare's 
acute care length of stay 33 percent since 1989. Length of stay fell 
less for rural providers generally (25 percent) and much less for the 
most rural providers (13 percent). As a result, rural hospitals have 
longer lengths of stay than urban hospitals given the mix of cases they 
receive, in part because they are less able to transfer patients to 
post-acute settings. MedPAC will continue to examine this issue and 
possible policy responses.

    Input prices.--Medicare's prospective payment systems for inpatient 
(and other facility) services include input-price adjustments that 
raise or lower payment rates to reflect the hourly wages of health care 
workers in each local market. Making accurate adjustments for 
differences in market wages is important for two reasons. First, 
problems could arise for beneficiaries and taxpayers if Medicare's 
payment rates differ from efficient providers' costs. Second, 
hospitals' reported wage rates vary substantially among labor market 
areas.
    MedPAC and others have identified four problems with the wage index 
Medicare uses to adjust for input prices. First is the so-called 
occupational mix problem, where differences among areas in the types of 
workers employed is confounded with differences in their wages. Second 
is that market areas as defined by Medicare often encompass distinct 
health care labor markets. Third, the wage data that underlie the 
adjustment are four years old. Finally, the share of the payment to 
which the input price adjustment is made--about 71 percent for 
inpatient hospital services--may include cost components that are not 
locally purchased (and therefore whose price should not vary with local 
market wages).
    Addressing the occupational mix problem directly will require data 
that HCFA has begun to collect only recently. In the meantime, MedPAC 
recommends that Secretary accelerate the planned phase-in of excluding 
from the hospital wage index the salaries and hours of teaching 
physicians, residents, and certified registered nurse anesthetists. 
Although the impact would not be large, the policy would improve the 
distribution of payments.
    We also recommend that the Secretary reevaluate current assumptions 
about the proportions of providers' costs that reflect resources 
purchased in local and national markets. Some rural health care 
advocates have argued that the current labor share overstates the 
proportion of costs that rural hospitals devote to labor and other 
locally purchased inputs. The inputs included in the labor share were 
originally designated in 1983, and many of these are still largely 
purchased in local markets. However, other inputs may be purchased 
wholly or partly in national markets; applying an input price 
adjustment to such inputs leads to underpayment in low-wage areas and 
over-payment in high-wage areas.
    The flaws associated with the hospital wage index have led some 
advocates to propose that a floor be put under the index. This would 
raise payments in market areas with low hospital wage rates (and, if 
done budget neutrally, lower them in areas with high wage rates), but 
it would do so in an arbitrary fashion. Moreover, if the objective is 
to help rural hospitals with poor financial performance, a wage index 
floor is a poor way to do so because it would raise payments to both 
low--and high-margin hospitals. Our analysis shows that there is no 
correlation between hospitals' Medicare inpatient margins and the wage 
index; hospitals with low margins are just as likely to be in areas 
with a high wage index as a low wage index.

    Disproportionate share payments.--Medicare's DSH adjustment for 
hospital inpatient services is designed to offset the financial 
pressure of uncompensated care and inadequate payment from Medicaid and 
other indigent care programs. However, despite improvement in the DSH 
payment system implemented through the Benefits Improvement and 
Protection Act of 2000 (BIPA), the current system still provides 
substantially smaller payment add-ons for rural facilities.
    The Commission believes that policy changes are needed to 
ameliorate two key problems inherent in the existing DSH payment 
system. First, the current measure of care provided to low-income 
patients excludes uncompensated care. The BBRA mandated that HCFA 
collect this information beginning in 2001.
    Second, the current system has separate payment rates for 10 
specific hospital groups, with the least favorable rates being given to 
most rural facilities and urban facilities with fewer than 100 beds. 
The BIPA improved the equity of DSH payments by applying to all 
hospitals the same minimum low-income share needed to qualify for an 
adjustment. However, the legislation capped the adjustment for rural 
hospitals at 5.25 percent; no such cap applies to urban hospitals. 
MedPAC recommends raising the cap to 10 percent to improve the equity 
of payments. However, we do not believe the cap should be eliminated, 
in part because that could lead to large increases in DSH payments now 
followed by reductions later if a new payment formula were enacted.

Physician fee schedule
    Although 20 percent of the U.S. population lives in rural areas, 
only about 10 percent of physicians practice in rural communities. 
Because of concerns that some areas were underserved, the Medicare 
Incentive Payment (MIP) program was enacted in 1989 in an effort to 
entice more physicians to Health Professional Shortage Areas (which 
include urban areas). The MIP pays a 10 percent bonus for physicians' 
services.
    The MIP program is limited in two ways. First, the bonus payments 
may be insufficient to attract physicians. Second, MIP payments may be 
inappropriately targeted. Nurse practitioners and physician 
assistants--who provide a significant share of primary care in rural 
areas--are not eligible for payments. In addition, payments may be 
inappropriately targeted because specialists and certain other health 
professionals are not counted when an area is designated as a shortage 
area.

Prospective payment for services in hospital outpatient departments
    In August 2000, HCFA implemented a new prospective payment system 
for hospital outpatient services. Rural hospitals have been concerned 
that the new payment system will not adequately cover their costs of 
providing care because it is based on median costs for all hospitals. 
Essentially, the question is the same as that discussed above for 
inpatient services: does a payment system based on averages penalize 
low-volume facilities? The OPD PPS may present additional risks for 
rural hospitals because of their greater dependence on Medicare--which 
accounted for 45 percent of total costs in rural hospitals, compared 
with 34 percent in urban hospitals--and on outpatient services.
    Our analysis suggests that rural hospitals, particularly small 
ones, may have higher unit costs, be more vulnerable to the financial 
risks inherent in prospective payment, and be less able to adapt to the 
new payment systems. However, our assessment of the applicability of 
the new PPS is hampered by a lack of experience and data under the new 
system. Fortunately, the current policy has a hold-harmless provision 
for rural hospitals with 100 or fewer beds. This provision protects 
more than 80 percent of rural hospitals and all of the small rural 
hospitals that appear to be most vulnerable, and provides time to 
gather data and undertake analyses that can better inform future policy 
decisions regarding the treatment of rural hospitals under the 
outpatient PPS.

Prospective payment for home health services
    In October 2000, HCFA implemented a new prospective payment system 
for home health services. Movement to prospective payment has generally 
been viewed positively, but some advocates and policymakers have 
beenconcerned about access to home health services in rural areas. They 
are concerned about the effects of closures of home health agencies in 
rural areas and that the PPS may not adequately account for the costs 
of providing care in rural areas. MedPAC concludes that the new PPS 
should work equally well in rural and urban areas and that the Congress 
should not exempt rural home health services from the PPS.
    An appropriate payment amount should cover the costs that an 
efficient provider would incur in furnishing care. We identified two 
factors that could distinguish rural from urban areas: travel costs and 
volume of services. Traveling to serve sparse or remote populations may 
increase the costs (relative to urban settings) of providing services 
to rural patients. Rural providers may also be at a cost disadvantage 
if they have a low volume of services and cannot spread fixed costs 
over a large number of episodes.
    Significant data limitations restrict our ability to analyze the 
impact of these factors fully. The first cost reports under the new 
payment system will not be available until September 2003, and we are 
concerned that the quality of the information they provide may not be 
good. Accordingly, we recommend that the Secretary study a sample of 
home health providers to evaluate the impact of the new payment system, 
evaluate costs that may affect the adequacy of prospective payments, 
and find ways to improve all cost reports. As with outpatient services, 
legislative protections--in this case a 10 percent increase in payments 
for the next 2 years--should help to ensure access while we evaluate 
the system.

Will Medicare+Choice work in rural areas?
    Policymakers have sought to bring to rural areas the generous 
benefit packages and low premiums enjoyed by some beneficiaries in 
urban areas who have enrolled in Medicare managed care plans. Two 
aspects of the Medicare+Choice program were designed to help accomplish 
this. First, payments in lower-paid counties, which includes most rural 
areas, were increased by creating a floor rate. Second, plans other 
than health maintenance organizations (HMOs) were allowed to 
participate in the program.
    Even though the floor under payments has been increased 
substantially (to $475 monthly), coordinated care Medicare+Choice plans 
offering generous benefit packages at little or no cost have not 
entered rural areas. We see three reasons for this. First, coordinated 
care plans rely on provider networks, which are difficult to establish 
in rural areas. This difficulty arises because rural providers who face 
little competition have no incentive to accept reduced payments and 
because there are fewer so-called intermediate entities, such as 
independent practice associations, willing to accept financial risk. 
Second, the small populations in many rural areas provide too small an 
enrollment base over which to spread fixed costs. Third, because 
relatively few rural areas consume large amounts of health care, there 
is less scope to achieve efficiency gains.
    The floor payments have made entry attractive to private fee-for-
service plans. Under Medicare+Choice, such plans take full risk for 
beneficiaries' health care, but need not manage care or establish 
networks of providers. If Medicare+Choice payments were substantially 
equal to risk-adjusted spending in traditional Medicare (as MedPAC 
recommended in March), private fee-for-service plans could provide a 
desirable option to beneficiaries without presenting a financial 
quandary for the Medicare program. Under current law, however, Medicare 
spending will rise above what it would otherwise have been, and the 
increased spending will not necessarily yield extra benefits for 
beneficiaries. Instead, some of the higher spending may be used for 
additional profit, higher administrative costs, or higher payments to 
providers.
    What should policymakers do? The efficiency gains and provider 
discounts that Medicare HMOs in urban areas use to fund additional 
benefits are unlikely to be achievable in rural areas. Although other 
alternatives to the current system should be explored--such as risk 
sharing through partial capitation or split capitation--rural 
beneficiaries are unlikely to see more generous benefits without an 
explicit or implicit subsidy.
    1. We measured per capita use of 11 type of services: short- and 
long-term hospital inpatient care, rehabilitation hospital, psychiatric 
hospital, skilled nursing facility, home health care, swing bed, 
outpatient hospital, physician, ambulatory surgical center, and rural 
health clinic.

             Table 1.--Percentage Of Rural Hosptial Markets With Selected Characteristics, By Region
----------------------------------------------------------------------------------------------------------------
                                                          All markets             Markets with small population
        Market/hospital characteristic         -----------------------------------------------------------------
                                                   All        East       West       All        East       West
----------------------------------------------------------------------------------------------------------------
Small population..............................      25.0%       6.0%      40.0%     100.0%     100.0%     100.0%
Declining population..........................       24.3       14.6       32.1       49.6       28.3       52.1
Declining population and disproportionately          10.3        1.7       17.3       32.4        8.3       35.3
 aged.........................................
Low household income..........................       44.7       45.5       44.1       48.7       65.0       46.7
High unemployment.............................       30.2       35.1       26.2       21.1       55.0       17.0
Isolated location.............................       18.5        7.3       27.6       34.3       18.3       36.3
Low volume....................................       21.7        8.1       33.2       65.6       54.5       67.0
----------------------------------------------------------------------------------------------------------------
Note: East and West regions are divided by the Mississippi river; East includes New England, Middle Atlantic,
  South Atlantic, East South Central, and East North Central census divisions, while West includes West South
  Central, West North Central, Mountain, and Pacific Divisions. Small population = fewer than 11,900 people;
  declining population = average annual population change from 1990 to 1999 of at least &0.1 percent;
  disproportionately aged = at least 20 percent of the population in the market ZIP codes is age 65 or older;
  low household income = median household income of the market area is <$28,100; high unemployment = percent of
  workforce that is not employed is greater than 8.1 percent; isolated location = air-mile distance to nearest
  short-term acute care hospital is $ 25 miles; low volume = 500 or fewer acute inpatient discharges in 1997.
Source: Analysis of Claritas Corp. estimates based on 1990 census by Cecil G. Sheps Center for Health Services
  Research, University of North Carolina at Chapel Hill.


             Table 2.--Beneficiary Satisfaction With and Access to Care, by Location of County, 1999
----------------------------------------------------------------------------------------------------------------
                                                                       Adjacent to an MSA    Not adjacent to an
                                                                     ----------------------          MSA
                                                                                           ---------------------
                                                                       Includes   Does not              Does not
                                                                        a town   include a   Includes  include a
                                                 Urban in    Rural     with at   town with    a town   town with
                Characteristics                   an MSA     total      least     at last    with at    at least
                                                (UIC 1,2)               10,000     10,000     least      10,000
                                                                        people     people     10,000     people
                                                                       (UIC 3,    (UIC 4,     people     (UIC 8
                                                                          5)         6)      (UIC 7)    (UIC 8,
                                                                                                          9))
----------------------------------------------------------------------------------------------------------------
Very satisfied/satisfied
  Availability of medical care................      93.6%      93.6%      94.3%      93.0%      94.9%      92.9%
  Overall quality of care.....................       96.0       96.0       95.4       96.3       96.4       96.2
  Ease of getting to doctor...................       94.9       92.4       95.0     90.7**       94.6      90.3*
  Costs of medical care.......................       87.6      82.4*      83.3*     82.8**       82.7     79.6**
  Specialist care.............................       96.4       95.6       97.4       95.6       93.9       94.0
Had trouble getting care......................        4.0      3.3**      2.2**        4.1      2.0**        4.1
Delayed care due to cost......................        6.6        9.9        8.7     10.5**     11.3**      9.8**
No office visit this year \1\.................       18.3       20.2       16.1       20.5     12.4**     31.0**
----------------------------------------------------------------------------------------------------------------
Note: UIC (urban influence code, as defined by the U.S. Department of Agriculture), MSA (metropolitan
  statistical area, as defined by the U.S. Office of Management and budget).
\1\ Office visits only pertain to beneficiaries enrolled in traditional Medicare, and not Medicare+Choice. The
  Medicare Current Beneficiary Survey bases office visits on claims data, and providers do not submit claims for
  Medicare+Choice enrollees.
* Difference between urban and rural subgroups is statistically significant at the 0.05 level.
** Difference between urban and rural subgroups is statistically significant at the 0.01 level.
Source: MedPAC analysis of 1999 Medicare Current Beneficiary Survey Access to Care file.

Figure 1. Urban and rural beneficiaries use similar amounts of 
        services, but rates differ among regions
        [GRAPHIC] [TIFF OMITTED] T4411A.001
        

                                               Regional Use Rates
----------------------------------------------------------------------------------------------------------------
                                                                                   Region
----------------------------------------------------------------------------------------------------------------
                 Location of county (UIC)                    Nation   Northeast    South     Midwest      West
----------------------------------------------------------------------------------------------------------------
Urban, in an MSA (1, 2)..................................      4,828      4,650      5,092      4,827      4,532
Adjacent to an MSA and includes a town with at least          4,796*     4,396*      5,111      4,718      4,527
 10,000 people (3, 5)....................................
Not adjacent to an MSA but includes a town with at least      4,922*      4,339     5,395*      4,750      4,503
 10,000 people (7).......................................
Adjacent to an MSA but does not include a town with at        5,003*      4,541     5,213*      4,867      4,480
 least 10,000 people (4, 6)..............................
Not adjacent to an MSA but includes a town with between       5,073*      4,601     5,469*      4,787      4,688
 2,500 and 10,000 people (8).............................
Not adjacent to an MSA and does not include a town with       5,059*      5,504     5,372*      4,815      4,586
 at least 2,500 people (9)...............................
All beneficiaries........................................      4,864      4,627      5,156      4,813      4,537
----------------------------------------------------------------------------------------------------------------
Note: UIC (urban influence code, as defined by the U.S. Department of Agriculture), MSA (metropolitan
  statistical area, as defined by the U.S. Office of Management and budget). Use is the sum of the services from
  11 service types, evaluated at nationally standardized payment rates and adjusted for individual differences
  in health status. These results include beneficiaries in traditional Medicare and exclude beneficiaries in
  Medicare+Choice, who make up 21 percent of the Medicare population in urban counties and 4 percent of the
  population in the five non-urban categories. Northeast includes New England and Middle Atlantic census
  divisions; South includes South Atlantic, East South Central, and West South Central census divisions; Midwest
  includes East North Central and West North Central census divisions; West includes Mountain and Pacific census
  divisions.
* Indicates statistically different from urban value in same region (5 percent level).
Source: MedPAC analysis of claims from 1999 for a 5 percent random sample of Medicare Beneficiaries.


 Table 3.--Per Capita Use of Services by Beneficiaries in Traditional Medicare, by Type of Service and Location
                                                 of County, 1999
----------------------------------------------------------------------------------------------------------------
                                                                          Location of county (UIC)
----------------------------------------------------------------------------------------------------------------
                                                            Adjacent to an MSA        Not adjacent to an MSA
----------------------------------------------------------------------------------------------------------------
                                                                                             Includes
                                                            Includes   Does not   Includes    a town    Does not
                                                             a town   include a    a town      with    include a
                                               Urban, In    with at   town with   with at,   between   town with
                Service type                   an MSA (1,    least     at least    least    2,500 and   at least
                                                   2)        10,000     10,000     10,000     10,000     2,500
                                                           people(3,    people     people     people     people
                                                               5)       (4, 6)      (7)        (8)        (9)
----------------------------------------------------------------------------------------------------------------
Physician...................................       1,276      1,188*     1,186*     1,195*    1,139**     1,117*
Physician+RHC...............................       1,280      1,214*     1,246*     1,231*     1,212*     1,230*
Hospital outpatient.........................         541        616*       625*       642*       664*       690*
Hospital inpatient..........................       2,185      2,250*     2,363*     2,319*     2,473*     2,452*
Post acute**................................         684        602*       653*       628*       623*      593**
SNF+Home health.............................         502        461*       467*       478*       453*      426**
Swing beds..................................           1          8*        24*        13*        30*        49*
Other.......................................         138         114        116        103        101         94
Total.......................................       4,828       4,796     5,003*     4,922*     5,073*      5,059
----------------------------------------------------------------------------------------------------------------
Note: UIC (urban influence code, as defined by the U.S. Department of Agriculture, MSA (metropolitan statistical
  area, as defined by the U.S. Office of Management and budget), RHC (rural health clinic), SNF (skilled nursing
  facility). Hospital inpatient combines short-term and critical access hospitals. ``Other'' combines ambulatory
  surgical center and psychiatric hospital services. Use is services evaluated at nationally standardized
  payment rates and adjusted for individual differences in health status. These results include beneficiaries in
  traditional Medicare and exclude beneficiaries in Medicare+Choice, who make up 21 percent of the Medicare
  population urban counties and 4 percent of the population in the five non-urban categories.
* Indicates statistically different from urban value (5 percent level).
** Post acute also includes two categories (not shown) for rehabilitation and long-term hospital services.
Source: MedPAC analysis of claims from 1999 for a 5 percent random sample of Medicare Beneficiaries.


 Table 4.--Hospital Financial Performance, By Urban and Rural Location,
                                  1999
------------------------------------------------------------------------
                                          Medicare   Overall
        Hospital location (UIC)          inpatient   Medicare    Total
                                           margin     margin     margin
------------------------------------------------------------------------
Urban, in an MSA (1, 2)................      13.5%       6.9%       2.9%
Rural
  Adjacent to MSA and includes a town          3.1       -3.2        4.5
   with at least 10,000 people (3, 5)..
  Adjacent to an MSA but does not              6.0       -2.2        3.9
   include a town with at least 10,000
   people (4, 6).......................
  Not adjacent to an MSA but includes a        4.5       -2.7        5.3
   town with at least 2,500 people (7,
   8)..................................
Not adjacent to an MSA and does not            8.4       -0.1       -0.4
 include a town with at least 2,500
 people (9)............................
------------------------------------------------------------------------
Note: UIC (urban influence code, as defined by the U.S. Department of
  Agriculture), MSA (metropolitan statistical area, as defined by the
  U.S. Office of Management and budget). Data are preliminary; the
  inpatient and total (all sources of revenue) margins are based on two-
  thirds of hospitals covered by prospective payment, while the overall
  Medicare margin is based on one-half of hospitals covered by
  prospective payment.
Source: MedPAC analysis of Medicare Cost Report data from HCFA.

[GRAPHIC] [TIFF OMITTED] T4411A.002

                                


    Chairwoman Johnson. Thank you very much, Mr. Hackbarth.
    I thought your testimony was very useful in the way it went 
through kind of the unique aspects of reimbursing rural 
hospitals and the way common factors don't play out as clearly 
or as accurately for small hospitals that tend to have lower 
usage.
    You comment that patient volume, particularly in small and 
isolated communities, is largely beyond hospitals' control and 
may cause their per-unit costs to be higher than average. The 
current PPS rates do not account directly for the relationship 
between cost and volume, potentially putting smaller providers 
at a financial disadvantage relative to other facilities. I 
think that is a very significant problem. I don't know how we 
deal with it, but it is an equally significant problem at the 
other end.
    When you visit some of the big medical centers in the urban 
areas where they are running at a hundred percent of capacity 
and sometimes over a hundred percent and their hospitals are 
under this constant pressure of full usage and their staff are 
under that strain and their rest rooms and everything, we don't 
account well for that either. In fact, I am wondering if you 
are giving any thought at MedPAC to the fact that the PPS 
system worked very well when we brought the system of the 
seventies into the eighties and nineties but may not be working 
so well right now. In other words, it works well when there is 
fat in the system and there is flexibility. Now that we have 
pressed down on length of stay and that can't change much and 
costs stay about the same, I am finding that this concept of 
average payment is not as valid a concept as it was when we 
first adopted it in the eighties.
    I agree that it seems to work very directly against rural 
hospitals, because you allocate the overhead over fewer 
patients. So it works equally badly against the really hundred-
percent capacity hospitals, too.
    I would like you to comment on that, but also I would like 
you to take just a few minutes and go into a little further 
explanation of how the factors vary, that rural hospitals 
almost inevitably have a longer length of stay because of the 
dearth of other facilities and so on with the input prices. I 
thought that was very interesting, and I think you need to be 
on the record a little bit more specific about how the very 
formula that we rely on doesn't work when you apply it to the 
rural institutions.
    Mr. Hackbarth. OK.
    Chairwoman Johnson. Thank you.
    Mr. Hackbarth. Well, let me begin with the low volume 
issue. One of our recommendations is that we add a low volume 
adjustment to the prospective payment system, and it would 
apply to hospitals with fewer than 500 total discharges. We 
arrived at that figure by looking at the data and looking at 
the relationship between average cost per case and volume and 
found that, below the 500 level, there were significant 
increases in the cost per case.
    We think that volume is an issue that can be outside the 
control of a provider. I say ``can be'' because you wouldn't 
want to make payment adjustments for multiple low volume 
hospitals that are in close geographic proximity to one 
another. So, our proposal is to make an adjustment for 
hospitals that are further than some reasonable distance from 
other providers.
    Chairwoman Johnson. I do think the distance consideration 
is very important. Otherwise, we will be funding lots of little 
hospitals----
    Mr. Hackbarth. Exactly.
    Chairwoman Johnson. In every little town.
    Mr. Hackbarth. So, in our report, we did not choose a 
particular mileage figure. We have recommended that the 
Secretary look at that. The analysis that we did was based on 
the 15-mile distance. There obviously is no right answer to the 
exact distance, but that was how we did the analysis.
    Chairwoman Johnson. But when you say 10 percent of the 
hospitals, fewer than 500 discharges, that 10 percent was 
derived from hospitals that are--were less than 15 miles apart?
    Mr. Hackbarth. About 11 percent of the hospitals have fewer 
than 500 discharges. The number that are more than 15 miles 
apart will be somewhat lower than that. I don't know that 
number off the top of my head. Because we are talking about 
very small hospitals, the overall financial affect of this 
adjustment to Medicare as a whole is quite small, but for the 
individual hospital, it could be quite important.
    Chairwoman Johnson. And how much do we know about those 
hospitals in the sense that do they provide sort of a community 
clinic capability? Many of the small hospitals in my part of 
the country have done that. Where there are emergency rooms, 
they provide emergency care. But they also provide just sort 
of--like a general practice office.
    Mr. Hackbarth. Well, there is a fair amount of variability 
in terms of the services they provide. Obviously, a concern is 
that a very small hospital like that not try to provide 
services that are beyond the scope of what can be done well in 
a small institution.
    Chairwoman Johnson. How much of the reimbursement problem 
that we are seeing in rural America results from the fact that 
rural providers experienced only a 25 percent drop in length of 
stay, whereas on average in the Medicare system there was a 33 
percent drop since 1989? Certainly if you had a very much lower 
drop of length of stay, you would have higher costs for the 
same PPS.
    Mr. Hackbarth. Yes. In 1992, the average Medicare margins 
of rural hospitals were just about the same as urban hospitals. 
So the gap that exists today has opened up over the last 10 
years. A principal factor in the development of that gap is the 
fact that rural hospitals have not been able to reduce the 
average length of stay by the same amount as urban hospitals, 
and their cost per case increases have therefore been larger. 
We think that one factor of that is a lack of alternatives for 
post acute care and for sophisticated ambulatory care. And, 
therefore, since those factors are beyond the control of the 
individual rural hospital, we think that those are factors that 
ought to be taken into account.
    Chairwoman Johnson. Have you done any looking to see 
whether or not we could provide step-down beds, allow step-down 
beds in those rural facilities so we could reimburse them less, 
the patients would cost us less and the institution would be 
reimbursed more fairly in their acute bed section?
    Mr. Hackbarth. We did not look at step-down beds as a 
particular option, at least not since I have been on the 
Commission. That is something that we could take a look at.
    Chairwoman Johnson. Well, I just--I am going to move on, 
because I don't--there are plenty of questions that could be 
asked, but we have a lot of members here really interested in 
rural health.
    I would just say that I know there are a lot of barriers in 
looking at step-down beds. On the other hand, the whole world 
is looking at continuity of care and those issues much 
differently. So, that is one thing that I think we do need to 
look at with MedPAC. In some areas they have done it by 
integrating home health agencies in nursing homes with 
hospitals. But in rural areas we should be looking I think more 
seriously at what these relationships are and what they could 
provide us with.
    Mr. Stark.
    Mr. Stark. Thank you, Mr. Hackbarth, and congratulations.
    Mr. Hackbarth. Thank you.
    Mr. Stark. I hope you find this an exciting, challenging 
job.
    First, on this question of extra days, my guess would be 
that an extra day, if it is a 3-day Diagnosis Related Group 
(DRG), would have a lower marginal cost than the first couple 
of days. Is that a reasonable assumption?
    Mr. Hackbarth. Typically, the services provided on the 
later days are somewhat less expensive than the early days.
    Mr. Stark. And, second, most of these hospitals have swing 
beds?
    Mr. Hackbarth. Yes.
    Mr. Stark. So, they could move the beneficiaries within the 
hospital to a swing bed and get a second cut at the apple, 
couldn't they? I mean, they not only get the full DRG, but then 
they could hop over and get some money for transferring the 
patient into a swing bed. It would be in the hospital's 
interest to keep them and move them into swing bed status. It 
seems to me there is almost an incentive for the hospitals to 
keep them there, because they make a little extra money, but 
maybe I misread that.
    Mr. Hackbarth. Well, there is an opportunity to move 
patients from inpatient into swing beds.
    Mr. Stark. And get a second fee, which you wouldn't get if 
you just kept them in the extra day of the DRG.
    Mr. Hackbarth. That is correct. They have an incentive in 
the same sense that any provider has an incentive to use the 
facilities.
    Mr. Stark. And in a 10-bed hospital, that isn't a very big 
move. I mean, that is from one end of the hall to the other?
    Mr. Hackbarth. Right.
    Mr. Stark. A couple of things in your report. You recommend 
that the Secretary identify strategies to increase the 
enrollment of rural beneficiaries for Qualified Medicare 
Beneficiaries (QMB) and Specified Low-Income Medicare 
Beneficiary (SLMB) cost sharing.
    Mr. Hackbarth. Right.
    Mr. Stark. Would you have any objection or would you think 
it is a good idea for us to do that for all low-income 
beneficiaries everywhere? Would that be a fair request to ask 
about suggesting that?
    Mr. Hackbarth. Well, we certainly think that all 
beneficiaries ought to have access to what they are entitled to 
under the law.
    We focused on rural beneficiaries here for a couple 
reasons. One, we found that an important issue in rural 
beneficiaries is the cost of care. I say that at the outset 
that rural beneficiaries were generally as satisfied with their 
care as urban beneficiaries. One of the exceptions to that is 
around the cost of care.
    Mr. Stark. What about----
    Mr. Hackbarth. Oh, I am sorry----
    Mr. Stark. What about having the providers qualify people, 
particularly in rural communities where they may be farther 
away from the welfare office to provide information on QMB and 
SLMB, than they are from the hospital. Would you see anything 
wrong with letting the providers have a qualification program?
    Mr. Hackbarth. Mr. Stark, that is really beyond my personal 
knowledge and expertise.
    Mr. Stark. One other problem that I see coming up here, 
just recently the Secretary announced that HCFA would 
discontinue collecting encounter data from the Medicare+Choice 
plans. And I wonder about your thoughts on that. My thought is 
that MedPAC has always supported risk adjustment, and I presume 
MedPAC still does. It would seem to me that you need to have 
that encounter data to begin to get at any kind of basis for 
risk adjustment. Would you feel that it would be in the best 
interest of HCFA to continue collecting that encounter data, or 
do we have something that we can substitute for it?
    Mr. Hackbarth. Well, we believe that risk adjustment is 
critically important for the Medicare+Choice program, and the 
tool that has been under development for several years depends 
on that data. I have not had a chance to talk to Mr. Scully 
about what alternatives he sees, so I am not sure what his 
thinking is about.
    Mr. Stark. Would you have any source for data? I mean, 
wouldn't that hurt your studies if you didn't have this 
encounter data?
    Mr. Hackbarth. It is those data that allow us to evaluate 
what is going on. You may have an alternative I am not privy to 
at this point.
    Mr. Stark. I wanted to commend you. I know of nobody else 
in this town, except myself, who is diplomatic and gentle 
enough to suggest that the fee-for-service Medicare+Choice 
plans are like stealing money from Medicare. That is the kind 
of phrase I like. And how are you going to know if they are 
stealing money if you don't have the encounter data? So, thank 
you, and we will help you get the data.
    Mr. Hackbarth. OK. Could I just address that for a second?
    Chairwoman Johnson. If you could address that, Mr. 
Hackbarth.
    Mr. Hackbarth. I have real concerns about the use of floors 
in the Medicare+Choice program. The Medicare Payment Advisory 
Commission as a whole has concerns about that. And what I said 
in the comment that you referred to, Mr. Stark, is that by 
creating these floors--I fear we have given a license for 
people to steal from the Medicare Program. The problem is not 
with the insurers that are moving in, but I think with the 
policy--the underlying policy.
    For reasons that have to do with the nature of rural health 
care, I don't think managed care is going to work very well in 
rural America for Medicare. It hasn't on the private side. 
There isn't a lot of private managed care in rural America. And 
by artificially increasing the payment rates by the underlying 
fee-for-service costs, we create a substantial gap that could 
be used for higher profit, higher administrative costs, higher 
payment for providers, and I think it could be a very expensive 
way to try to get added benefits to rural beneficiaries. And 
that is my concern about it. Thank you.
    Mr. Stark. Thank you.
    Chairwoman Johnson. Just on the issue of the data, would 
you care to comment on MedPAC's position on aggregate data 
versus encounter data?
    Mr. Hackbarth. For Medicare+Choice?
    Chairwoman Johnson. Well, for risk adjusting.
    Mr. Hackbarth. Yes. For risk adjusting, we have not looked 
extensively at a proposal for use of aggregate data. Our 
analysis has been based on and favored the use of beneficiary-
specific data. I don't want to rule out that Mr. Scully has a 
better idea until I learn more about it, but all of our focus 
has been on beneficiary-specific adjustment.
    Chairwoman Johnson. We will be looking at that, because 
there are areas--there is some seasoned experience with 
aggregate data. Mr. Camp.
    Mr. Camp. Thank you, Madam Chairman. I have a couple of 
questions.
    I think most of the hospitals in my district are over 10 
beds but probably under a hundred and so would fit into a 
category of hospital that I think is essential in a rural area, 
and I have a question particularly about the financial 
performance. You mentioned the gap in your report, rural 
hospitals having about a 3.4 percent Medicare in-patient margin 
compared with 13.4 percent for urban hospitals; and you 
testified today that that gap has opened up over the last 10 
years, I believe. And one of the causes being length of stay. 
But my question is, do you think that rural hospitals then are 
being paid too little and that urban hospital margins are too 
high?
    Mr. Hackbarth. Well, the focus of this report has been on 
the adequacy of payment to rural hospitals, and we see areas 
where we don't think the payments are adequate. Specifically, 
we haven't adjusted for factors that are beyond the control of 
rural hospitals. So, yes, we think that that needs to be 
changed and would result, on average, in increased payments.
    Mr. Camp. Do you think the fact that rural hospitals are 
losing money overall in the Medicare system, and given your 
background at HCFA over the last few years, what do you think 
the intent of Congress was in creating the prospective payment 
system in relation to that problem?
    Mr. Hackbarth. Well, certainly the intent was not for any 
large category of hospitals to lose money continuously. That is 
a sign that we haven't properly matched payments to efficient 
costs. So that needs to be addressed.
    When the PPS system was developed in the early eighties, 
there was not a specific target rate of profitability that was 
set as a guide. That has always been a much looser discussion. 
There is not a specific number.
    Mr. Camp. On the disproportionate share payment issue, you 
know, it was created by Medicare to--by care of some 
uncompensated areas and the financial pressure that results 
from that. In your testimony you mention there is a couple of 
problems, one being that the specific hospital groups' ratings 
really gives the least favorable rate to rural hospitals.
    Mr. Hackbarth. Right.
    Mr. Camp. And how do you think--with fewer than a hundred 
beds. How do you think that could be improved?
    Mr. Hackbarth. Well, disproportionate share we believe 
should be equally available to urban and rural hospitals alike. 
It was initially developed with an eye toward inner city 
hospitals with a high share of low-income patients and often 
relatively low shares of Medicare patients. Now the rationale 
has been expanded, and we advocate taking into account all 
types of uncompensated care and expanding the eligibility 
equally to hospitals.
    In order to do that completely, we need to get some 
additional data, which is now being collected on uncompensated 
care burdens, and the information to make a uniform adjustment 
and recalculate the formula will be available in about 2 years. 
So what we have advocated as an interim step is to lift the cap 
that was imposed last year from 5.25 percent up to 10 percent, 
and that would substantially help many rural hospitals. We do 
not advocate removing the cap at this point, because using the 
old formula that was developed for urban hospitals, it would 
result in windfall payments for many rural hospitals. And 
rather than have a windfall that then has to be taken back when 
we have the right formula, we want to take an interim step and 
then implement the new formula.
    Mr. Camp. OK. Thank you very much. Thank you, Madam 
Chairman.
    Chairwoman Johnson. Thank you. Congresswoman Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    I want to go into a little bit of the disproportionate 
share, too, because that seems to be a real issue for some of 
our rural hospitals, and I think that something that--I would 
like to know if we have looked at any of this data. Since the 
welfare reform took place and as people got into the system and 
started coming off of the system, have you seen any increases, 
particularly in the rural areas where unemployment is higher, 
less opportunity for jobs, probably, you know, sort of issues 
going on there? Has that taken place when you look at the 
disproportionate share and why maybe some of this has gone up 
in these areas and why rural hospitals are concerned with it?
    Mr. Hackbarth. Well, certainly the overall economic 
conditions in rural communities are a factor in the financial 
problems facing rural hospitals. The nature of the problems 
vary a little bit as you move across the country, but there 
clearly are areas where there is just general economic distress 
that has an adverse impact.
    As to its effect specifically on the disproportionate share 
adjustment, I don't have any specific numbers to share with you 
there. But to the extent that there are more people without 
insurance and more uncompensated care, it would mean higher 
disproportionate share payments once we go to a new formula 
that is now under development.
    Mrs. Thurman. With that--I mean, in your recommendations 
you talked about there should be a 10 percent add-on for 
disproportionate share, if I read and understood that 
correctly. How did you get to that? What kind of data and what 
kind of analysis was done, or is it just kind of this is what 
we ought to do? I mean, why would we not put the same system in 
rural areas as we have in urban areas?
    Mr. Hackbarth. Right now the problem is that we don't have 
the data necessary to revamp the whole disproportionate share 
system. We strongly advocate that. The data to allow a 
revamping of the system are now being collected, and we hope 
that the new system can be in place in a couple years.
    Mrs. Thurman. But based on that recommendation, then, it is 
just kind of arbitrary 10 percent----
    Mr. Hackbarth. Yes. Elevating the cap from 5 and a quarter 
to 10 percent, there is no magic about 10 percent, but we 
wanted to take a meaningful step in the right direction without 
getting in a situation where we would have payments that have 
to be taken back when we have the new formula in place.
    Mrs. Thurman. OK. And then the standardized payment issue, 
because that is another issue that has been brought up with our 
rural hospitals about the base payment, at those over one 
million population would receive about 1.3 percent. Why 
wouldn't we equalize that for everybody?
    Mr. Hackbarth. When we analyzed that--again, what we try to 
do is compare payment rates to costs, and in fact the costs of 
rural providers on average are lower than urban providers. So 
increasing the payments by 1.6 percent across the board would 
not be a very targeted solution. It would go to hospitals that 
need it and don't need it alike. Our preference is always to 
identify particular problems with the payment system and 
address those through targeted adjustments, like low volume, 
for example.
    Mrs. Thurman. We are going to hear some testimony from 
rural hospitals in a little while, and one of my concerns in 
all of this and one of the things that they point out is that, 
you know, we keep talking about making these changes and these 
things are going to happen and this is what we did in BBA and 
this is what we did in 1999 and this is what we did in 2000, 
but the fact of the matter is money of this has been put in 
place, and so we have got some real lag time here. At the same 
time, as you have mentioned, we have got the disparity between 
the urban and rurals now. I mean, what comfort can you give to 
some of our rural institutions that these things absolutely are 
going to happen? Because they live from day-to-day thinking 
this is going to happen, and this is going to be put into 
place, and it is a real concern for them.
    Mr. Hackbarth. Yeah. Well, we share your sense of urgency 
about this. It is not enough to talk about possible solutions 
or future solutions. They need to come quickly.
    Some things have happened. For example, last year making 
rural hospitals eligible for disproportionate share payments 
even with the cap is a major step in the right direction. It 
will increase payments on average to rural hospitals by about 
1.4 percent. That is meaningful money.
    The steps that we advocate in this report, the low volume 
adjustment, lifting the cap on disproportionate share and so 
on, would on average increase payments to rural hospitals about 
1.8 percent on top of last year's.
    Mrs. Thurman. Because they have a larger indigent 
population?
    Mr. Hackbarth. Right, in terms of--not necessarily a larger 
but certainly they do have an indigent population that needs to 
be recognized. Then changes that are now under development 
having to do with disproportionate share still again and with 
the wage index would still further improve payments to rural 
hospitals and tend to increase their average margins. We 
absolutely share your sense of urgency and urge the Secretary 
to work as quickly as possible on these issues.
    Mrs. Thurman. Madam Chairman, will we have another round?
    Chairwoman Johnson. Probably not with Mr. Hackbarth, 
because we need to get to the next panel.
    Mrs. Thurman. Can I ask one more question, just based on a 
little of the conversation that was going on here as to access 
outside of the hospital setting? Because, as noted, we have 
this problem with the fact that we don't have potentially home 
health care as readily accessible. We don't have critical 
nursing, skilled nursing needs. And yet one of the things that 
is going to happen in October is we are actually going to lose 
this 15 percent that we have been given. We are going to 
actually lose that.
    Can you offer any suggestions? I mean, my feeling is that 
we should not do this until we get everything in place, because 
I think it is just going to exascerbate some of the situations 
that we have been talking about.
    Mr. Hackbarth. Well, the new prospective payment systems 
for home health and outpatient services are tricky. There are 
some differences--meaningful differences between rural 
providers and urban providers that need to be taken into 
account. We would not advocate a 15-percent reduction at this 
point in the home health payments. We think it is wise to keep 
that on hold.
    We also support the 10 percent add-ons for rural home 
health providers that were included in the legislation. We 
think that money buys us some time to evaluate the impact of 
the system and make appropriate adjustments. It is time that we 
need.
    Mrs. Thurman. Thank you.
    Chairwoman Johnson. Then to just clarify for the record 
from your earlier statements, that you do not support wage 
floors as a policy and you do not support the sort of arbitrary 
increase in the wage index that some are looking to strengthen 
rural providers but that you do support some adjustments that 
retain the relationship between costs and reimbursement----
    Mr. Hackbarth. Yes.
    Chairwoman Johnson. But will result in higher payments?
    Mr. Hackbarth. Yes.
    Chairwoman Johnson. Thank you.
    Mr. Hackbarth. On the wage index, what we support in this 
report is looking at the so-called labor share of the 
prospective payment rate. Currently, about 71 percent of the 
rate is adjusted for local wages. There has been concern among 
rural providers that that number is too high, and since their 
wage indexes are less than one, they lose money in the process.
    Chairwoman Johnson. In other words, many things that they 
buy that are called inputs they have to buy from the same 
general market that everybody buys.
    Mr. Hackbarth. Exactly.
    Chairwoman Johnson. And so they get penalized, I guess? 
Thank you.
    Mr. Hackbarth. Yeah. So the issue is, is 71 percent the 
right number or is it 69 or some other figure?
    Chairwoman Johnson. I do think that your testimony was very 
useful in going into some of those specifics. Let me move on to 
Mr. Nussle.
    Mr. Nussle. Thank you, Madam Chairwoman; and let me 
compliment you on calling this hearing and talking about this 
very important subject. I appreciate that. My constituents who 
live in very rural area appreciate that.
    I wanted to start off, Mr. Hackbarth. I am fascinated by 
your testimony in the way you begin on Page 1, and this is 
just--let me read this, and then I want to discuss this. It is 
fascinating.
    ``Medicare's most important objective is to ensure that 
beneficiaries have access to high-quality care. Because some 
rural communities face adverse economic conditions that may 
limit the ability of local providers to furnish the broad array 
of needed services, policymakers have been concerned that rural 
beneficiaries may not get the care they need.''
    Because some rural communities face adverse economic 
conditions that limit the ability to provide these services--
what economic conditions are you talking about?
    Mr. Hackbarth. There are two levels. One is that the 
general economic situation, which may be high rates of 
unemployment, a lot of people without health insurance, factors 
that are not specific to the Medicare Program, that can cause 
some financial distress for providers.
    Then there are factors obviously specific to the Medicare 
payment formulas and the like that we have been talking about 
that we have concerns are not appropriate for rural providers.
    Mr. Nussle. In your first part, you talk about many rural 
communities face these market conditions--this is on Page 4--
that may depress demand or supply, a small population, 
declining and disproportionately older population, low 
household incomes, high proportion lacking health insurance, 
physical isolation, weak and restrictive State policies, and so 
forth, and so forth.
    Basically, what I see you saying there are two things. One 
is that--and you said this--I believe you have said it a couple 
of times, although I can't find the quote--that there is an 
inadequacy between the payments to rural and urban areas. That 
is number one. And, number two, because of that they can't 
transfer those costs to anyplace else, which is really number 
two. Isn't that what you are getting at here, that Medicare 
payments are inadequate, number one? And because they are 
inadequate and they are inadequate for many hospitals, what 
they do is they look around and they say, where can I put these 
costs. And urban areas have the ability to transfer those costs 
to other places, but rural areas don't? Isn't that what you are 
basically saying?
    Mr. Hackbarth. Well, we are concerned about specific 
failures in the Medicare system, failures to account for 
differences in the situation that rural providers face.
    I would note, though, that if you look not just at the 
Medicare margins but the overall financial performance of rural 
hospitals versus urban hospitals, the average total margin--
which includes not just Medicare but all payers--is higher 
among rural hospitals on average than among urban hospitals. 
The reason for that, we believe, is that, yes, there are some 
specific rural hospitals in economically depressed communities 
that have problems. But in many rural communities there are 
relatively high levels of insurance, relatively good economic 
conditions, and there is not as much competition for those 
rural providers. Unlike an urban institution that faces lots of 
close-by competitors and has to deal with managed care plans 
trying to negotiate them all down, the rural providers have 
much more leverage in dealing with private payers. And so, as a 
result of that, we have this seemingly anomalous situation 
where rural providers have lower Medicare margins but higher 
total margins than urban providers.
    Mr. Nussle. Well, I don't know what hospitals you are 
talking about. I mean, I have gone and looked at the books in 
my district, in my rural area. And I know that you may be 
trapped in what you told me not to do, and that is, don't 
generalize. So, I am not going to hold you to that. But I will 
just tell you, I don't know what you are talking about. I don't 
know what hospitals you are looking at.
    Because the bottom line--I mean, how can you have on the 
one instance low health care coverage, high unemployment, all 
of those things you said and these hospitals are still able to 
provide a much higher margin? Now, part of it may be that they 
are more efficient. And if that is the case, that flies in the 
face of the other argument that was made, and that is that 
really you didn't see a difference between the efficiencies.
    Mr. Hackbarth. Well, Mr. Nussle, I really do think that the 
reconciliation of these statements is in the diversity. I 
happen to come from a rural community. I live in a rural 
community in Oregon, Bend Oregon. Our----
    Mr. Nussle. How many people?
    Mr. Hackbarth. Fifty thousand people.
    Mr. Nussle. Fifty thousand?
    Mr. Hackbarth. But we are rural.
    Mr. Nussle. Let me just share with you, Mr. Hackbarth, that 
that ain't rural--with all due respect. There are places that 
we are talking about that are rural, that 50,000 people--well, 
let me just close with something, because I--there is never 
enough time to discuss this. And I just--I am very frustrated 
about this. But I will ask you one thing that I think you can 
probably answer.
    The people in the rural areas pay the same taxes as the 
people in the urban areas. So people in your 50,000 town pay 
the same as my 5,000 town, don't they? I mean, why is it that 
one size does not fit all when you are talking about it from 
the analysis standpoint, but from the policy standpoint, we 
constantly try and find a one-size-fits-all solution to the 
Medicare reforms that we put in line, and it never treats any 
of these providers that you say is the--you know, the frontline 
of providing high-quality care. But we don't provide them the 
kind of fairness in the system that they deserve so that these 
taxpaying beneficiaries who have paid taxes into Medicare their 
entire life get the same kind of opportunities throughout the 
country. And let the market decide. If they want to buy a 
helicopter, buy a helicopter. If they don't, then name it after 
a big contributor and, yeah, build a hospital if that is what 
they want to do.
    But the folks--I will just tell you, and, you know, you can 
analyze this all you want, but the folks in my area are 
starting to see this as an issue of clout and who has had the 
clout to be able to get their voice across. And if it is a 
matter of clout, the rural areas will stand up and fight for 
it. We can do that. We have been trying to deal with it as best 
we can.
    But I am very frustrated that we are getting nickeled and 
dimed over this issue, and in your very first statement you say 
that they face adverse economic conditions. I will tell you, 
the mother of all adverse economic conditions in this is the 
fact that they don't get the same reimbursement. They don't 
even get anywhere close. That is totally and completely unfair, 
and we are going to have to change that system if we are going 
to get the kind of care that you say we deserve.
    I would be glad to have you come out to a rural area, which 
has a lot less than 50,000 people, so you can see what some of 
those bottom lines are all about.
    Mr. Hackbarth. Chairman Johnson, could I just spend 1 
minute on this? Because I think this is a really critical point 
in the discussion.
    Chairwoman Johnson. Yes, sir.
    Mr. Hackbarth. I recognize that the community that I live 
in is atypical, atypical in a lot of ways, and my point is not 
to hold it out as a typical rural community but in fact to 
emphasize that it is different. Yet the categories that we use 
in Medicare are so broad that my town is categorized as rural, 
just like some very small town in Iowa with very different 
economic resources and health care resources.
    To the extent that we use these big categories and say that 
we want to increase the base rate for every rural hospital, 
hospitals like the one in my community that may not need it are 
going to get money, just like everybody else. That is why we so 
strongly advocate targeted solutions and not across-the-board 
solutions. We want to identify particular problems and address 
those and not just spread money across the board to all rural 
hospitals. Rural America is too diverse for that to be a proper 
solution.
    Mr. Nussle. Well, I will just tell you, we will take the 
opposite deal. We will let you target the urban areas, and we 
will take the opposite deal. From a tax fairness, from a 
beneficiary standpoint, I don't know how you can advocate--I 
mean, I appreciate the fact that the news you have made today 
is that there is an inadequacy between urban and rural. I 
appreciate that. I am glad that MedPAC has finally come forward 
and made that kind a very grandiose statement. But I would 
suggest to you that your solutions lack a basis in reality that 
need to be there in order for us to solve this problem, and I 
would invite you out to real rural areas so that you can 
examine this further.
    Chairwoman Johnson. Mr. Hackbarth, I think that MedPAC 
needs to help us on this issue.
    Your testimony, I would point out to Mr. Nussle--I am going 
to recognize Mr. Pomeroy in a minute. But this issue of the 
impact of low volume on rates, the issue of the impact of the 
longer length of stay on costs in the face of rates, the impact 
of input prices are very significant, honest differences in the 
relationship between cost and payment, between cost--just a 
minute, Pete, let me just--very important and honest 
differences between the way our payment formula and the real 
cost of these small institutions that are interfaced--we need 
to look at that, and we need to look at how much of that--how 
much of correcting that problem so we have a more honest 
relationship between cost and payment, which is what Medicare 
ought to be able to do, and how much of the problem is the fact 
that the bigger issue that you mentioned under disproportionate 
share, that has to do with the fact that Medicare as matter of 
policy does not reimburse for disproportionate share for 
uncompensated care, unless it is an uncompensated care Medicaid 
person or Medicare.
    So there is a whole group of uncompensated care people, the 
uninsured, that tend to be a very big group. They are not as 
poor as Medicaid, and they are not in a public program, and 
they are not seniors. So to what extent are they the cause of 
the problems in the rural group?
    When you look at averages, I am glad to hear that, on 
average, totally, they are doing pretty well, but I face thisin 
the urban area, too. You know, on average doesn't help your hospital 
that is failing and it is failing because you are not reimbursing the 
costs.
    So we do need to look at the specific things, see how much 
of the problem that absorbs, that will address, and then we 
need to look at how much is the burden of uncompensated care 
that in the past the government hasn't paid for. Because you do 
recommend and you are collecting the data so that next year we 
would be able to make some specific response to that burden? In 
the urban areas we make a very, very small partial response 
under the medical education reimbursement rates, but even that 
really doesn't recognize the same problem in urban areas.
    So, I think if we can still continue to pursue costs and 
payments but also look at what is causing the disparities 
beyond that. So if you can give us back some better information 
about who is in that hundred-bed hospital group. You know, how 
many of the rural hospitals that are not showing healthy 
margins are in that hundred-bed group? How many are we not 
going to reach if we don't address that issue?
    So, we need more detailed data to see who is not doing 
well, what kind of institution they are and how much they would 
be affected by the specific cost items that you address. Mr.--
--
    Mr. Nussle. Would the Chairwoman yield?
    Chairwoman Johnson. Yes, I would be happy.
    Mr. Nussle. You were much more eloquent in saying what I 
was trying to say.
    Chairwoman Johnson. No, I appreciate your----
    Mr. Nussle. What I was trying to say is I don't see 
myself--I don't see my district or any of my facilities in the 
averages that are being discussed here. I just don't see it. 
And that is what concerns me, is that I don't know what you are 
describing as rural, because it ain't here. And when I don't 
see it, then I am worried about the results of the report. When 
you say there is a discrepancy or a disparity or whatever, 
irregularity, amen. Thank you.
    Mr. Nussle. But I don't see myself in the averages, and 
that is what really concerns me.
    Chairwoman Johnson. That is why I am very pleased that 
actually you do go into some of the specific ways in which the 
formula doesn't work in rural areas, because years ago in the 
eighties I went through this very same problem with hospitals 
in my district that are rural. You know, two-thirds of my towns 
have less than 3,000 population, so I have what are rural 
hospitals, but because of the nature of New England, they 
designated themselves as urban because they have to pay the 
same wages as the urban areas. Now they are suffering the 
problems of the rural hospital under an inappropriate payment 
system, and we did make some adjustment, very modest. There is 
a formula, and when you put this formula across the country, it 
was all in New England, Tennessee and southern Illinois.
    But the problem with a national formula is that it is very 
hard to make a national one-size-fits-all policy actually fit 
the extraordinary variety of institutions that not only our 
seniors depend on, but, remember, every age group depends on 
these institutions. So the--on average the policymaking process 
is a problem, which is exactly why we need to strengthen 
Managed Care+Choice because it has a different ability to 
negotiate with every single plan.
    But, I want to recognize Mr. Pomeroy. He has a deadline and 
wants to make a brief statement.
    Mr. Pomeroy. Madam Chair, thank you, and thank you for 
allowing me to sit in on part of this hearing. For 8 years I 
was the State's insurance commissioner and tracked the health 
of our rural hospitals very closely. For the last 8 years I 
have been in Congress, and I have continued to track. Over this 
period of time, I have seen substantial decline in the 
financial condition of these facilities.
    I guess I ascribe myself closely with the frustration 
voiced by Congressman Nussle, who has done excellent work in 
trying to get some of these reimbursement issues addressed, but 
we are not there yet.
    I am pleased with the forthright acknowledgment of some of 
the issues in the MedPAC report, but have concern that the 
prescription doesn't match the diagnosis. I mean, you diagnose, 
for example, relative to rural hospitals in the West. Where I 
come from, the main risk factors affecting Western hospital 
markets are small populations, declining populations, 
disproportionate numbers of residents age 65 and older. I would 
add to that two conditions that are really threatening 
facilities, and that is the ability to staff and ability to 
recover cost of providing services, as the Chairwoman just 
referenced.
    Again, back to this, you said that is the diagnosis, but 
your prescriptions in terms of a little more tinkering here and 
a little more tinkering there I am not sure is going to be 
aggressive enough without having the face of health care 
delivery change very significantly. You indicate that right now 
we are able to match services, and Medicare recipients are 
reasonably satisfied. I think you don't have to look forward 
very far and see a very different situation. It is kind of like 
someone with an internal hemorrhage have a doctor say, well, 
you look good now; your situation is about to change very 
significantly based on things that maybe aren't readily 
apparent or captured in a patient safety.
    That concludes my observation, Madam Chair, and I 
appreciate----
    Chairwoman Johnson. Well, I am appreciative of your 
attendance.
    Earl is a new Member of the Way and Means Committee. He is 
not a Member of this Subcommittee, but he and I have worked on 
a lot of issues together, and his experience in insurance will 
help us.
    But I do want you to go back in the detail of the testimony 
so that you can see how the factors in the formula just don't 
fit, and if we adjust that, we should at least be able to deal 
with it honestly, you know, and we need to try to stick to a 
formula that has a fact-based structure, the problem your 
hospitals face with getting properly reimbursed.
    I am very concerned about this nursing issue and the fact 
that it is going to hit very hard, very fast, and earlier in 
Mr. Hackbarth's testimony he mentioned that one of the problems 
in the wage area was that the data is 4 years old.
    So we will be working on those issues, but I hope we will 
have the benefit of your expertise in the details. Mrs. 
Thurman.
    Mrs. Thurman. Madam Chairman, just to the nursing issue and 
to some of the whole health care provider issues in rural, and 
something I know you and I have worked on, and certainly 
something we probably, and hopefully States, are working on as 
well, but what my students are telling me at the University of 
Florida is part of this is the whole issue on loans and what it 
costs them. They can't afford to go in many of these rural 
areas.
    Chairwoman Johnson. We do hope to get into another hearing 
on the nursing issue.
    Mrs. Thurman. And we have hospitals now going overseas 
looking for nurses.
    Chairwoman Johnson. Right, in large numbers.
    Thank you very much, Mr. Hackbarth. I didn't get a chance 
to ask you to comment on the presence of Sterling, which is a 
fee-for-service service Choice plan out there now in the rural 
communities. Just in a word, do you know much about it, and do 
you think it is doing well?
    Mr. Hackbarth. Well, I don't know much about Sterling in 
particular. I do have the concerns that I described earlier 
about the system of floors and Medicare+Choice and the 
opportunities they present.
    Chairwoman Johnson. We will be talking with you more about 
that because it is the first Choice plan that has penetrated 
the rural areas, and we need to know more about how it is doing 
and whether it is impacting some of these problems. Thank you 
very much, appreciate it.
    And would then the panel come forward. Kathleen Dalton and 
Curt Mueller and Keith Mueller. Kathleen Dalton is a Fellow at 
the Cecil Sheps Center for Health Services Research, University 
of North Carolina at Chapel Hill. Curt Mueller is with Project 
HOPE, the Walsh Center for Rural Health Analysis. And Keith 
Mueller is the director of RUPRI Center for Rural Health Policy 
Analysis in Omaha, Nebraska.
    We welcome you and appreciate your presence here and your 
help in understanding these issues. Dr. Dalton, if you will 
proceed.

 STATEMENT OF KATHLEEN DALTON, PH.D., RESEARCH FACULTY MEMBER, 
CECIL G. SHEPS CENTER FOR HEALTH SERVICES RESEARCH, UNIVERSITY 
                OF NORTH CAROLINA AT CHAPEL HILL

    Dr. Dalton. Madam Chairman and members of the Committee, my 
name is Kathleen Dalton. I am a faculty member at the 
University of North Carolina where my field is health care 
finance. I have been asked to report on our research regarding 
specific Medicare prospective payment issues as they affect the 
rural hospitals.
    Medicare's inpatient payments historically have been more 
generous to urban than to rural hospitals. This is evident in 
the longstanding differences in their respective average 
payment-to-cost ratios. We find, however, that these 
differences are due primarily to the disproportionate share and 
the indirect medical education add-ons to the prospective 
payment rates rather than problems in the underlying rate 
structure. Among hospitals not eligible for either of these 
special adjustments, Medicare's inpatient payments average 
about 5 percent above cost for both the rural and the urban 
facilities.
    The wage index has often been identified as one of the 
chief problems facing rural hospitals under prospective 
payment, but our research thus far has found little evidence 
that the index is a contributing factor in poor rural margins. 
We have concluded that while the index is not perfect, it has 
improved over time, and it is an adequate instrument to 
accomplish the purpose for which it is designed. The rural 
labor markets as now defined actually serve to protect the 
margins of hospitals in the very smallest and most rural 
communities by grouping them with higher-wage facilities.
    The gap in the urban and rural PPS margins appears to be 
more a reflection of Federal policy, in this case one of 
directing additional resources to safety net and teaching 
providers, than an indication that rural hospitals as a group 
are unable to compete under the discipline of the prospective 
payment system.
    The disproportionate share adjustment, or DSH, is now 
recognized as the vehicle through which the Medicare Program 
shares in the cost of indigent care, just as other payers share 
when uncompensated care costs are factored into hospital price 
structures. DSH adjustments are an add-on to the payment rates. 
They are proportional to the hospital's share of low-income 
payments, but the formulas, as you have heard, are not equally 
applied across rural and urban hospitals. If we want to close 
the gap between rural and urban Medicare margins, then parity 
in the DSH formulas is the first change that should be 
considered rather than changes in the wage index or in the base 
payment rates.
    MedPAC has already recommended reducing the differences in 
the DSH formulas across hospitals. If their recommendations 
were implemented, the rural and urban Medicare margins would be 
closer, though the rurals margins would always be somewhat 
lower because the overall indigent care burden is not as high 
in rural areas. But if the objective of the DSH adjustment 
really is to allow Medicare to shoulder its share of indigent 
carecosts, then the DSH adjustment should be made available to 
all safety net providers, including critical access hospitals and other 
hospitals outside of the PPS system, and it should be made available 
for outpatient care.
    Our research does not show that special payment 
considerations need to be given to all small rural hospitals. 
Nevertheless, there are some groups of rural facilities, 
particularly very small, low-volume or isolated facilities, 
that struggle to cover their costs under the inpatient payment 
rates. Many of these already qualify for a variety of special 
payment exceptions or have opted for cost-based reimbursement 
as critical access hospitals. The newly converted cost-based 
hospitals are generally receiving much-needed increases to 
their reimbursement, but only at a price, by giving up a 
possibility that Medicare services will ever contribute to 
their needed reserves.
    An expanded disproportionate share adjustment will help 
many of these same hospitals by targeting assistance to rural 
safety net providers, but there may still be a class of 
vulnerable hospitals that are essential to their communities 
and that will need extra help if Congress wants to assure 
continued and stable access to services for all rural 
beneficiaries. For this class, perhaps a simpler and more 
effective way to address their payment problems might be by 
retaining their participation in prospective payment, but 
offering a cost-based payment floor. This would be a commitment 
that the Medicare program would never pay less than the 
essential providers' cost of delivering services.
    These hospitals have very small operations to begin with, 
so even if many facilities were deemed to be essential, the 
total budget impact would probably be very small. A cost floor, 
we believe, would be better suited than the current 
proliferation of special add-ons and permanent cost-based 
alternatives to target help only to those institutions that 
need it and only during those years when they need it, without 
losing the inherently beneficial incentives of a prospective 
payment system.
    This concludes my remarks. Thank you very much.
    Chairwoman Johnson. Thank you very much, Dr. Dalton.
    [The prepared statement of Dr. Dalton follows:]

STATEMENT OF KATHLEEN DALTON, PH.D., RESEARCH FACULTY MEMBER, CECIL G. 
SHEPS CENTER FOR HEALTH SERVICES RESEARCH, UNIVERSITY OF NORTH CAROLINA 
                             AT CHAPEL HILL

    Madame Chairman and members of the committee, thank you for 
inviting me to speak to you today. My name is Kathleen Dalton and I am 
a research faculty member at the University of North Carolina, where my 
field is health care finance. In recent years I have participated in 
several funded research projects that investigate rural hospital cost 
and reimbursement issues. I have been asked to describe some of our 
findings to you, focusing specifically on the role of Medicare payment 
policies in addressing special financial problems faced by rural health 
care institutions.
    Rural providers and constituent groups are alarmed at the 
deteriorating Medicare and overall financial margins of their health 
care providers over the past three years. Several advocacy groups are 
examining specific components of Medicare's prospective payment 
formulas to identify ways in which to obtain some regulatory or 
legislative relief. To help in assessing some of the specific issues 
with regard to Medicare's payments, my remarks will cover the following 
topics: (1) The hospital area wage index; (2) the Medicare 
disproportionate share adjustment to hospital prospective payment 
rates; (3) the gap between rural and urban Medicare payment ratios; and 
(4) special payments for categories of rural hospitals, particularly 
the expansion of cost-based reimbursement alternatives.
          Hospital Area Wage Index. The wage index is used to adjust 
        PPS rates for regional differences in the cost of labor. Many 
        rural providers and advocates believe that the wage index 
        penalizes rural hospitals because it overstates average wage 
        differences and is based on poorly defined labor markets. Our 
        studies have led us to conclude that the index does not 
        overstate regional differences in average labor costs. In our 
        research, in fact, we find little evidence that the wage index 
        contributes to low Medicare margins. The rural labor markets as 
        currently defined are too large and appear to incorporate 
        multiple market areas. Yet we found that this deficiency has 
        the effect of protecting hospitals in the very smallest and 
        most rural communities because they are grouped with higher-
        wage areas. In earlier years there was some evidence that 
        hospitals in the larger rural communities were penalized by the 
        broad rural market definitions, but by the mid-1990's many of 
        these hospitals were allowed to be reclassified into 
        neighboring urban labor markets, without bringing down the 
        index values of the markets from which they transferred.
          Any set of labor market boundaries will create individual 
        cases where there are arbitrary differences between facilities 
        on either side of a boundary. The existing exceptions process, 
        however, allows for geographic reclassification to regroup 
        cases to neighboring markets if they can meet certain criteria. 
        Reclassification cannot fix all boundary problems, but we 
        believe we have demonstrated that, for rural hospitals as a 
        group, the exceptions process has substantially improved the 
        equity of the wage index. Last year's legislative and 
        regulatory changes to the reclassification rules will improve 
        the index further.
          The hospital wage index is now used to adjust prospective 
        payment rates for home health and skill nursing services in 
        addition to hospitals, but without the benefit of the 
        geographic reclassification rules. The reclassification 
        provisions were critically important to our findings, and we 
        conclude that the wage index adjustments to these non-hospital 
        rates will not be equitable unless similar reclassification 
        provisions are available. If reclassification continues to be 
        decided at the individual institution level this process could 
        add considerable administrative burden to the new payment 
        systems. If this is unacceptable, it should be possible to 
        design a provision where the skilled nursing and home health 
        facilities in a given county are paid under the same 
        reclassified index values of that county's hospitals, wherever 
        a majority of its hospitals have already proven that the 
        reclassified labor market is more appropriate.
          Disproportionate Share Adjustments (DSH). The stated purpose 
        of Medicare's DSH adjustment has changed over the years since 
        it was first adopted. We now appear to have a consensus that 
        the DSH policy objective is to permit the Medicare program to 
        share in the cost of indigent care, similar to the way in which 
        other payers share when uncompensated care costs are factored 
        into hospital price structures. Under this approach, additional 
        DSH payments are not intended to reflect the higher costs of 
        delivering care to Medicare patients, but rather, the 
        distributed costs of delivering care to other, uninsured 
        patients. DSH is thus acknowledged as a policy-driven, rather 
        than a cost-driven, adjustment to the national standard rates 
        under PPS. This underlying premise has been the justification 
        for MedPAC's DSH-related recommendations over the past several 
        years. MedPAC has recommended parity in the DSH formulas across 
        all hospitals, and that HCFA should develop an improved measure 
        to use a proxy for each hospital's indigent care burden. The 
        Benefits Improvement and Protection Act of 2000 gave rural 
        hospitals parity in eligibility for DSH adjustments, but not in 
        the formulas that govern the size of the proportional 
        adjustment.
          If Congress accepts the premise that DSH adjustments should 
        underwrite Medicare's share of indigent care, then several 
        payment policy changes flow logically from this position that 
        go beyond MedPAC's recommendations for formula parity.
           DSH adjustments should be available regardless of 
        the particular Medicare payment system under which the facility 
        is paid. Under current law this adjustment applies only to 
        inpatient PPS services. Cost-based and exempt (TEFRA-based) 
        facilities also provide indigent care, and should be eligible 
        for similar policy adjustments based upon their individual 
        indigent care loads.
           DSH should be applicable to other hospital services, 
        clinics, if their indigent care needs are similar. HCFA's 
        proposed regulations for prospective inpatient rehab services 
        include DSH provisions, but hospital outpatient PPS and clinic 
        per-visit rates do not, even though indigent care burdens are 
        at least as great, or greater, in these settings.
           DSH adjustments should not be implemented as 
        ``budget neutral'' changes, where the extra payments are funded 
        by reducing the base rates for all providers. Budget neutral 
        DSH adjustments would redistribute the burden, but would not 
        allow the Medicare program to underwrite its share relative to 
        other payers.
          Medicare payment ratios. Medicare's inpatient payments 
        historically have been more generous to urban hospitals than to 
        rural hospitals. This is evident in the long-standing 
        differences in their respective average payment-to-cost ratios. 
        When we analyze payment ratios from recent years we find that 
        nearly all of the differential can be attributed to two of the 
        special policy adjustments that Congress has created--the 
        disproportionate share and the indirect medical education (IME) 
        add-ons to the per-case payment rates.\1\
---------------------------------------------------------------------------
    \1\ The IME adjustment is theoretically cost-based, but the formula 
intentionally computes an adjustment that is greater than the expected 
cost differences in teaching hospitals. The portion of the IME add-on 
rate that is attributable to this intentional increase (we estimate it 
at 30%--40% in the FY 1998 data) is viewed as a policy adjustment.
---------------------------------------------------------------------------
          In fiscal 1998, for example (the last year for which complete 
        hospital data were available from HCFA, and the first year in 
        which the effects of the Balanced Budget Act of 1997 were felt) 
        Medicare's inpatient PPS payments averaged 15.1% above costs 
        among urban hospitals, but 6.9% above costs among rural 
        hospitals. Among non-teaching hospitals the gap is much smaller 
        (10.4% compared to 6.8%). If we remove the DSH payments from 
        the calculation, the payment ratios are quite similar for both 
        groups (close to 5%, though actually slightly higher for 
        rural); if we look only at rural and urban hospitals that 
        qualify for neither adjustment, we find that their average 
        payment-to-cost ratios are also about 5%. Thus, the gap in 
        urban and rural PPS margins appears to be more a reflection of 
        federal policy than an indication that rural hospitals, as a 
        group, are unable to compete under the discipline of the 
        prospective payment system.

        [GRAPHIC] [TIFF OMITTED] T4411A.003
        

          Recent changes in the DSH policy will make more rural 
        hospitals eligible for these payments, which will reduce the 
        difference in margins between rural and urban non-teaching 
        facilities. If MedPAC's other recommendations regarding the DSH 
        formulas are implemented, the gap will narrow even further. We 
        could not expect the gap to be eliminated, however, because the 
        policy objectives being met by these two payments address needs 
        that are unequally distributed between rural and urban 
        communities. Teaching hospitals are predominantly located in 
        urban areas, andurban hospitals have proportionally higher 
        indigent care loads, so even under identical DSH formulas they 
        would tend to have higher DSH adjustment rates.
          Even without the effects of policy adjustments, similarities 
        in average payment-to-cost ratios across groups still mask real 
        differences in their distributions. The proportion of hospitals 
        receiving Medicare PPS payments that are below their cost of 
        delivering services is always greater for rural than for urban 
        facilities. A subgroup of very small rural facilities has 
        always struggled to cover costs under the PPS rate structure. 
        Many of these have adapted by becoming cost-based Critical 
        Access Hospitals (CAH). If the facilities that are struggling 
        are important to protect in order to maintain rural 
        beneficiaries' access to care, then the task of lawmakers is to 
        identify whether and how to address the problems of these sub-
        groups with further payment policy adjustments.
          Special rural payment exceptions and the expansion of cost-
        based alternatives. The various Medicare prospective payment 
        systems already define several categories of rural health care 
        providers that are eligible for special payments or exemptions 
        from rate limits. These categories target different groups of 
        facilities with varying levels of success. Some provide only 
        small supplemental payments to groups that are in need of 
        substantially more relief, while others provider substantial 
        payments to facilities that qualify on the basis of a 
        geographic characteristic, yet may not demonstrate any 
        financial need. Much attention recently has focused on Critical 
        Access Hospital (CAH) status, which allows very small, isolated 
        hospitals to withdraw from prospective payment systems 
        altogether for inpatient, outpatient and swing bed services, 
        and receive cost-based reimbursement. Proposals to expand cost-
        based alternatives to other rural hospitals have been 
        circulating among rural advocacy groups; at the same time, 
        MedPAC is proposing a new low-volume adjustment to the 
        inpatient PPS rates, in order to provide an alternative to 
        cost-based payments for the smallest providers.
          The proliferation of special exceptions and protected status 
        makes it difficult for providers, analysts and lawmakers alike, 
        to evaluate the adequacy of Medicare payments in rural 
        settings. Our analyses of the economic and related health-
        delivery problems of rural communities have revealed great 
        geographic variation. Severe isolation and sparse populations 
        predominate in the west, while low-volume but only moderately 
        isolated providers predominate in the mid-west. In the 
        southeast and Appalachian regions we find multiple proximate 
        hospitals, with low average census figures and very low average 
        occupancy, but they serve communities that have very low 
        incomes, poor employment and high levels of indigent care.
          When we examine the Medicare margins as well as the overall 
        finances of rural hospitals over periods of several years, we 
        are struck by two characteristics in particular. First, even 
        among those located in the most disadvantaged of rural markets, 
        some facilities manage to earn good margins on Medicare and/or 
        other patient services. Thus any Medicare policy offering 
        automatic payment adjustments based on geographic criteria 
        without a demonstration of financial need is potentially 
        misdirected. Second, the margins for any one institution are 
        unstable from year to year, particularly in the smaller 
        providers. Hospitals that opt for cost-based alternatives to 
        Medicare PPS are guaranteeing that they will not have to 
        deliver Medicare services at a loss during bad years, but they 
        are also giving up the possibility of ever earning a surplus 
        during better times. In an uncertain environment where many 
        providers are able to earn a surplus on some PPS services in 
        some years, the expansion of cost-based reimbursement should be 
        a last resort alternative.
          We think that a well-designed DSH policy can alleviate many 
        of the problems of rural providers located in very poor areas, 
        without over-committing Part A trust fund support. Many of 
        these communities may continue to need additional local and 
        state-level public support, or even a different level of 
        federal support, but those needs should be considered over and 
        above Medicare's share of the burden.
          Apart from the DSH adjustment, the underlying justification 
        for special exemptions, payment add-ons or other subsidies 
        should relate back to the Medicare beneficiaries and the need 
        to provide adequate access. There is a certain class of rural 
        provider that should be protected, if there is evidence that 
        the loss of these providers could jeopardize beneficiaries' 
        access to care. That class may be difficult to identify, but we 
        think that the criteria should relate to characteristics of the 
        community (or beneficiaries) rather than to the financial 
        condition of the individual institution. The class should 
        certainly include very isolated providers, but it may also 
        include providers that are not isolated, possibly are 
        underutilized, but that serve as an important focal point of a 
        poor community's health infrastructure (for example, where the 
        loss of the hospital would jeopardize the town's ability to 
        retain physicians, pharmacists or emergency medical personnel). 
        Even if the class is broadly defined in terms of the number of 
        qualifying providers, that group is not likely to represent a 
        very large share of total Medicare payments. Whether Congress 
        chooses a broad or narrow definition of the group, the question 
        remains, what is a better way for Medicare to support it that 
        would not overwhelm the system with multiple options, yet would 
        still target only those institutions in need??
          Many of the special payment provisions now in place could be 
        rationalized by simply making a single commitment to this class 
        of protected health care providers: that the Medicare program 
        will never pay less than cost for the care of its 
        beneficiaries, in any year. Paying everyone under the PPS rules 
        but setting a cost-based floor (while excluding the DSH 
        payments from the payment-to-cost ratio calculations) could 
        provide consistent help to marginal hospitals, periodic help to 
        providers suffering from temporary shifts in demand, and would 
        avoid unnecessary subsidies to providers that are able to 
        operate successfully within the discipline of the various PPS 
        systems. The incremental Medicare payments from such a policy 
        are likely to be very low (based on our historical estimates 
        from the inpatient component), and the administrative burdens 
        would probably be less than those required to support the 
        current system.
          In summary, my points are as follows:
           Our research indicates that the wage index is not a 
        contributing factor to the gap between rural and urban Medicare 
        payment margins. We find that the wage index does an adequate 
        job in adjusting hospital payments for regional wage 
        differences; however, opportunities for geographic 
        reclassification must be extended to the home health and 
        skilled nursing prospective payment system rules for the same 
        index to be equitable in these areas.
           If Congress' objective in designing the 
        disproportionate share adjustment is, in fact, to allow the 
        Medicare program to share in the costs of indigent care, then 
        the DSH adjustments as now computed are arbitrary and 
        incomplete. The formulas should be made consistent not only 
        across all types of PPS hospitals, but across non-PPS hospitals 
        as well. They should also be developed for outpatient services, 
        clinics, or other Medicare institutional providers that care 
        for significant numbers of poor or uninsured patients.
           If the DSH adjustments were to be modified in this 
        way, it is my opinion that the simplest way to address the 
        problems of communities and/or providers at risk under 
        prospective payment would be to pay all providers under the 
        appropriate PPS rules, but to promise a minimum cost ``floor'' 
        to those identified as essential institutions. The evidence 
        does not show that special payment considerations need to be 
        given to all small rural hospitals, but there is a class of 
        essential providers that should be protected. A cost floor 
        approach would target help where and when it is needed, without 
        disrupting the incentives for efficient care provision that are 
        built into all prospective payment systems.

                                


    Chairwoman Johnson. Dr. Mueller.

  STATEMENT OF CURT D. MUELLER, PH.D., DIRECTOR, PROJECT HOPE 
   WALSH CENTER FOR RURAL HEALTH ANALYSIS, BETHESDA, MARYLAND

    Dr. Curt Mueller. Good morning, Madam Chairwoman Johnson 
and other Members of the Subcommittee. I am Curt Mueller, and I 
direct the Project HOPE Walsh Center for Rural Health Analysis. 
I am very pleased to be here to discuss access to care issues 
pertaining to rural Medicare beneficiaries.
    My bottom line is that although there is some good news to 
report, recent evidence suggests that rural beneficiaries do 
face access problems, and equity of the Medicare Program is 
compromised. At the same time, there are policy approaches that 
would help address these problems.
    I will briefly summarize the written statement I have 
submitted. First let's turn to the evidence.
    The good news is that the access to care among rural and 
urban Medicare beneficiaries is comparable in many respects. 
This is true if you look both at a number of the traditional 
measures of access, and it is also true if you look at more 
sophisticated measures of access. Evidence from a recent 
analysis of more than a quarter of a million program 
beneficiaries indicates that rural residents are just as likely 
to receive much of the necessary care also received by urban 
beneficiaries.
    No important rural versus urban differences were found for 
27 of 46 necessary care indicators, but there are some 
differences between rural and urban areas. Some rural 
beneficiaries do face access problems as there were real 
deficiencies for 19 of the 46 necessary care indicators in the 
study I just referred to. According to the study, rural 
populations are significantly less likely to receive timely 
EKGs for congestive heart failure, follow-up care after 
hospitalization for diabetes, timely gall bladder removal for 
symptomatic gall stones, and screening mammography. It is also 
important to note that these access deficiencies are most 
severe in the most rural of rural areas.
    Rural access deficiencies are also important from the 
perspective of program equity. In spite of these access 
differences, medical care expenditures by urban beneficiaries 
are considerably greater than for rural beneficiaries. In 1996, 
per capita expenditures for the noninstitutionalized Medicare 
beneficiary without any supplemental coverage was 37 percent 
greater in urban areas than in rural areas. This difference is 
larger than what could be explained by differences in 
geographic--geographic differences in the cost of care alone.
    It is important to emphasize that equity with respect to 
rural versus urban residents does not necessarily require that 
per capita program expenditures be equal. Some of the 
expenditure differences may reflect differences in taste, 
differences in provider style, but there are program actions 
that--policy actions that could, by helping to eliminate these 
differentials, improve equity of the program.
    First, policies that increase the supply of health care 
resources in rural areas should improve access. I believe that 
access would be improved by work force policies that provide 
additional incentives for physicians to locate and maintain 
practices in rural areas and by payment policies that assist 
rural providers and help ensure their financial viability. An 
example is the new Rural Hospital Flexibility Program, which 
appears to be helping small rural hospitals overcome financial 
problems associated with low volume. In the same way, payments 
to physicians under traditional Medicare in historically low-
cost, underserved areas could be increased. This might be 
accomplished, for example, either through the current bonus 
payment mechanism or by increasing the work component of the 
Medicare fee schedule for these physicians. Over time such 
adjustments should improve access by helping to direct 
physicians to the areas of greatest need.
    Second, policies that improve rural beneficiaries' access 
to expanded benefits should help improve access in rural areas. 
Currently rural residents are less likely than their urban 
counterparts to have drug coverage, for example, because they 
have less access to employer-sponsored supplemental coverage, 
Medicare HMOs and Medicare Choice plans. I support additional 
attempts to improve choice in rural areas.
    In the short run cost-sharing under Medicare could be tied 
to the level of program expenditures per capita. For example, 
the Medicare premium could be reduced in areas with lower per 
capita program expenditures. Beneficiaries would be expected to 
pay a premium equal to 25 percent of program expenditures in 
rural areas of the State or region, for example. The difference 
between the national and local premiums could then be applied 
to subsidize the purchase of more benefits through a 
supplemental plan that offers additional benefits.
    One final note, although the primary focus of this 
statement is on access to care among rural beneficiaries, 
monetary barriers of access for the nonelderly are more severe 
in rural areas than in urban areas because of a lack of 
insurance. There is no Medicare for these people. Because the 
Medicare population is relatively larger in rural than in urban 
areas, policies designed to improve access to care among the 
elderly are likely to strengthen the rural health 
infrastructure as a whole, which in turn should improve access 
for the entire rural population. Thank you.
    Chairwoman Johnson. Thank you very much, Dr. Mueller.
    [The prepared statement of Dr. Curt Mueller follows:]

   STATEMENT OF CURT D. MUELLER, PH.D., DIRECTOR, PROJECT HOPE WALSH 
          CENTER FOR RURAL HEALTH ANALYSIS, BETHESDA, MARYLAND

    Good morning, Madam Chairwoman Johnson, Mr. Stark, and other 
members of the Subcommittee. I am Curt Mueller, Director of the Project 
HOPE Walsh Center for Rural Health Analysis. The Walsh Center is one of 
several research and policy centers funded in part by the federal 
Office of Rural Health Policy (ORHP). My testimony today reflects my 
views as an economist and health policy analyst; my views should not be 
regarded as representing the positions of Project HOPE, the Walsh 
Center, or ORHP.
    I am very pleased to be here to discuss access to care issues 
pertaining to Medicare beneficiaries. My bottom line is that although 
there is some good news to report, recent evidence suggests that rural 
residents face access to care problems. Equity of the Medicare program 
is compromised. At the same time, there are policy approaches that 
would help address these problems.

What Does ``Access'' Mean?
    Access to care refers to the potential and actual entry by an 
individual or population group into the health care system (Aday, 
Andersen, Fleming 1980). At the outset, it is important to recognize 
that access is not always realized: not every one, for various reasons, 
experiences actual access to care during a defined period of time. But 
access is difficult to measure when defined in this way. Among the most 
widely used measures of access are measures of actual use, or 
utilization. These include simple counts, e.g., the average, per capita 
number of physician visits per year, and the percent of the population 
with at least one hospital stay during the year. These measures, 
although frequently used, may not take into account differences in the 
clinical need for care or health status of the population that is being 
studied, differences in attitudes toward use of the medical care 
system, differences in practice style of providers, and other factors.
    With the recent availability of large, claims-and patient-level 
data bases and advances in data handling, more sophisticated measures 
of utilization that account for medical need can be studied for large 
populations. Examples include measures of the percent of the elderly, 
diabetic population receiving an annual eye exam, and the percent of 
women in various cohorts, e.g., defined by age and medical need, who 
have received a mammogram during the previous year.
    Finally, access has been measured in other ways, some of which were 
designed in attempts to measure the extent to which persons do not 
achieve access to services and reasons why. Survey respondents, for 
example, have been asked whether care was recently needed but not 
obtained due to cost or other reasons (Schur and Franco 1999; Mueller, 
Schur, Paramore 1998). Researchers have also studied satisfaction with 
various components of the health care delivery system, arguing that 
satisfaction is an important dimension of access. A battery of 
questions that separately assess satisfaction with cost, quality, and 
other dimensions of utilization are routinely asked as part of the 
HCFA-sponsored Medicare Current Beneficiary Survey.
    Factors that affect access to care--by affecting both whether any 
care is actually received, and the level or intensity of services 
received--include those that health services researchers refer to as 
determinants of ability-to-pay, need, and availability. For the 
Medicare beneficiary, these factors include: family income; whether the 
beneficiary has insurance that supplements Medicare and the nature of 
the supplemental coverage (e.g., benefits, cost-sharing); health 
status; attitudes regarding relationships between personal health and 
the health care delivery system; the supply of providers in the 
beneficiary's community; practice style of community providers; and the 
non-monetary ``costs'' of care, including travel time and expenses.
    It is often argued that rural beneficiaries tend to be poorer, 
which--by limiting ability to pay for care--reduces access. Relatively 
more persons in non-metropolitan areas have individually purchased 
supplemental coverage than in metropolitan areas where supplemental 
coverage is relatively more likely to be subsidized by a previous 
employer.\1\ Individually purchased coverage is often less generous 
with respect to benefits than employer-subsidized coverage. Beneficiary 
coverage of prescription drugs, for example, is more common in urban 
than in rural areas because employer subsidized coverage is more common 
and more likely to include a drug benefit (Mueller and Schur 2001). 
Finally, the importance of travel and time costs in rural areas should 
not be underestimated. The distance traveled to providers of care and 
associated time and travel costs can be very high in rural areas, which 
reduces access measures by reducing patient demand and utilization.
---------------------------------------------------------------------------
    \1\ Supplemental coverage comes from a variety of sources. Private 
supplemental, or Medigap coverage, is either purchased directly by the 
beneficiary or is obtained through an employer. The term, 
``supplemental coverage'' also includes Medicaid, for those Medicare 
beneficiaries who are eligible.
---------------------------------------------------------------------------

Access to care among rural and urban Medicare beneficiaries is 
        comparable in many respects.
    The good news is that access among rural and urban beneficiaries is 
comparable in many respects. Access indicators for rural and urban 
populations are similar for a number of dimensions of care. Rural 
beneficiaries are as likely to see a physician during the year as their 
urban counterparts (Mueller, Schoenman, Dorish 1999). Differences in 
the average annual number of physician visits between urban and rural 
beneficiaries exhibit some variation, depending on the definition of 
``rural,'' are usually small (NCHS, 2000b; Mueller, Schoenman, Dorosh 
1999; Coburn and Bolda 1999; Krauss, Machlin, Kass 1999; Clark and 
Dellasega 1998).
    Evidence from a recent analysis of Medicare claims submitted on 
behalf of more than a quarter million program beneficiaries indicates 
that rural residents are just as likely to receive much of the 
necessary care received by urban beneficiaries (Hogan 2001). The author 
of this analysis defines necessary care as care for which benefits are 
expected to be substantial and outweigh associated risks, and care, 
which if not provided, was viewed as inappropriate by a panel of 
physician experts. For example, one necessary care indicator is whether 
a mammogram is performed annually for patients with a history of breast 
cancer. The author examines to what extent 46 necessary care components 
are met in five different types of rural and in urban areas. With 
respect to mammography, the exam was received by 69 percent of the 
female population with a history of breast cancer in urban counties, 
and by between 68 and 69 percent of the populations in rural counties, 
depending on the extent of ``rurality.'' No important rural-versus-
urban differences were found for 27 of the 46 indicators studied, and 
``for the typical indicator, most geographic areas differ by just a few 
percentage points'' (Hogan 2001).\2\ Finally, rural access deficiencies 
tend to be most severe in the least populated, most-rural of rural 
areas.\3\
---------------------------------------------------------------------------
    \2\ Other examples of necessary care indicators are: 
gastrointestinal work-up for patients with iron deficiency anemia; 
follow-up visits for hospitalization within one week of initial 
diagnosis of unstable angina; chest x-ray within three months of 
initial diagnosis of congestive heart failure; and visit within two 
weeks following discharge of a patient hospitalized for depression.
    \3\ Rural deficiencies are statistically significant and the 
divergence from the corresponding urban value is 10 percent or greater 
in the most-rural areas for 15 of the 19 indicators for which rural 
deficiencies are observed.
---------------------------------------------------------------------------
    Data also suggest that Medicare beneficiaries in rural and urban 
areas are satisfied with certain dimensions of access to care. In 1996, 
most beneficiaries (96 percent) indicated satisfaction with the overall 
quality of care, and little variation existed within and across 
residents of rural and urban counties (Mueller, Schoenman, Dorosh 
1999). Contrary to expectations, rural beneficiaries are not less 
satisfied with the availability of care on nights and weekends. While 
fewer elderly in the most remote rural counties are satisfied with the 
ease of commuting (92 percent in remote counties, versus 94 percent in 
the largest metropolitan counties), the difference is small and not 
statistically significant (Mueller, Schoenman, Dorosh 1999).
But rural beneficiaries face access problems.
    The importance of rural deficiencies in access to necessary care 
identified by Hogan (2001) should not be understated. For example, 
rural populations are significantly less likely to receive timely EKGs 
for congestive heart failure and transient ischemic attack, follow-up 
care after hospitalizations for diabetes and gastrointestinal bleeding, 
timely gall bladder removal for symptomatic gallstones, and screening 
mammography (Hogan 2001). Once again, these deficiencies are for care 
deemed medically necessary.
    It is also important to observe that these access deficiencies are 
most severe in the most rural of rural areas. Although this is not 
surprising, given the lack of providers in these areas, this point is 
very important to emphasize because much of the research on access to 
date does not thoroughly address the extent to which access differences 
vary within rural areas. Part of the reason is that national databases 
that have traditionally been used to research access to care issues do 
not have enough data on rural populations to generate reliable 
estimates for the variety of rural settings that often get lumped 
together under the label, ``non-metropolitan.''
    Evidence from a number of other studies also indicates that rural 
beneficiaries have less access to care than their urban counterparts. 
Rural Medicare beneficiaries are less likely than urban beneficiaries 
to: receive pap smears (Stearns, Slifkin, Edin 2000); have an emergency 
department visit during the year (NCHS 2000a; Lishner, et al. 2000; 
Miller, Holahan, Welch 1995); and use auxiliary home health services, 
including physical therapy and medical social services (Sutton 2000; 
Kenney, 1993). Rural residents are less likely to have access to 
specialty physician services, and the average physician visit for rural 
residents is less resource-intensive than for metropolitan area 
beneficiaries (Sutton 2000; Miller, Holahan, Welch 1995).
    How access to care that requires an inpatient stay varies between 
rural and urban beneficiaries is unclear. Recent findings indicate that 
the rural elderly are slightly more likely to be hospitalized during 
the year and that their lengths of stay tend to be shorter than in 
urban areas (NCHS 2000a; Schur and Franco 1999; Krauss, Machlin, Kass 
1999). In thinking about what these findings say about access, it is 
important to remember that use of hospitals is not a ``complete'' 
picture of the illness episode. Payment system incentives often 
encourage shorter lengths of stay and discharge to a ``lower level'' of 
care. Complete episodes of illness for the elderly often involve 
skilled nursing care (either in a skilled nursing facility bed or at 
home), home health services, or both after the patient's discharge for 
an acute care hospital. We know that rural residents receive more 
skilled nursing facility care (Coward, Netzer, Mullens 1996; Coward, 
Horne, Peek 1995), that receipt of this care appears to vary indirectly 
with the availability of home health services (Dubay, 1993) and 
directly with the supply of skilled nursing facilities in rural areas 
(Coburn and Bolda, 1999). While these findings are consistent with the 
substitutability of certain kinds of services, currently available 
access measures do not address the mix of care received during the 
entire episode. Additional study on the use of post-acute care services 
in rural versus urban areas is needed before we can say more about 
access to care that requires an inpatient hospital stay.

Do these differences matter?
    The evidence cited above suggests that rural residents have less 
access to certain types of care than urban residents. These differences 
are important for at least two reasons. First, these differences are of 
at least someclinical significance. Although there is often 
disagreement among medical experts in defining medical need and exact 
prescriptions of what constitutes optimal levels of services for rural 
versus urban populations, some of the observed differences are large 
enough to be of concern to clinicians, e.g., the large differences in 
access to types of services that clinicians have deemed necessary.
    Second, these differences are important from an equity perspective. 
A basic objective of the Medicare program is that beneficiaries--
regardless of geographic location--should have equitable access to 
adequate medical care. Rural residents should have adequate access to 
basic preventive, primary care, and emergency medical services. But as 
access differentials do exist, especially for residents in the most 
rural of rural areas, medical care expenditures by urban beneficiaries 
are considerably greater than for rural beneficiaries. In 1996, per 
capita personal health care expenditures for non-institutionalized 
Medicare beneficiaries residing in metropolitan areas was $6,901 and 
$5,901 for non-metropolitan beneficiaries (Liu et al. 2000). 
Differences are even larger after controlling for differences in 
supplemental coverage across beneficiaries. Per capita expenditures for 
the populations of beneficiaries without any supplemental coverage--
that is, with only Medicare coverage--were $5,248 in metropolitan and 
$3,860 in non-metropolitan areas (Liu et al. 2000). This difference, 37 
percent, is an amount larger than could possibly be accounted for by 
geographic differences in the costs of providing care.
    It is important to emphasize that equity with respect to rural 
versus urban residence does not necessarily require that per capita 
program expenditures be equal. A variety of factors determine per 
capita expenditures on medical care, just as a variety of factors 
affect access. For example, expenditure differences reflect differences 
in practice style and in the prices of care. By definition, 
expenditures will be larger in areas with higher Medicare payment rates 
and in areas where service mix is relatively resource-intensive. Thus, 
because payments under the Medicare Fee Schedule have tended to be 
lower in rural areas and service mix tends to be less resource-
intensive, per capita expenditures will be greater in urban areas. On 
the other hand, removing access to care barriers faced by rural 
residents will certainly increase rural expenditures relative to urban 
expenditures, and improve equity of the Medicare program.

What policies might improve access among rural beneficiaries?
    Several policy responses might be considered as we think about 
Medicare reform and restructuring. First, policies that increase the 
supply of health care resources in rural areas should help improve 
access. At present, relative supplies of physicians and hospital 
resources are larger in urban than in rural areas because markets--in 
terms of numbers of people--are larger. The number of specialist 
physicians per capita is larger in urban areas, so access to specialty 
care is easier to obtain. A corollary is that certain ``fixed'' costs 
will be lower in more-populated markets, so hospitals will be 
relatively scarce and more costly to operate in rural areas. Personal 
preferences of providers also constrain supply in some areas. Some 
rural markets have difficulties attracting and retaining physicians and 
other providers. Access indicators for these areas will differ from 
measures for areas where effective supplies of providers are larger.
    Supply in rural areas would be enhanced by workforce policies that 
provide additional incentives for physicians to locate and maintain 
practices in rural areas, and by payment policies that assist rural 
providers and help ensure their financial viability in rural areas. An 
example is the Rural Hospital Flexibility Program, which has granted 
cost-based reimbursement to many of the smallest rural hospitals. This 
program appears to be helping these facilities overcome financial 
problems associated with low volume and allowing them to continue help 
meet community needs.
    Second, policies that improve rural beneficiaries' access to 
expanded benefits should help improve access in rural areas. For 
example, rural access will improve with a Medicare drug benefit so long 
as rural residents can obtain coverage from a plan that provide drug 
coverage. Currently, rural residents are less likely than their urban 
counterparts to have this coverage because they have less access to 
employer-sponsored private supplemental coverage, Medicare HMOs, and 
Medicare+Choice plans that offer a drug benefit. Furthermore, rural 
residents tend to be poorer and less able to afford an individually 
purchased supplemental plan with drug coverage. For these reasons, 
federal subsidization of a drug benefit based on income will likely 
improve access in rural relative to urban areas.
    To the extent that these policy approaches improve access in rural 
areas, equity of the program from the rural perspective would improve 
because real utilization in rural relative to urban areas would 
increase. In the short run, other policy options that would reduce 
rural inequity by reducing rural beneficiaries' share of program 
expenses might be studied. One approach is to tie cost sharing to 
program expenditures per capita. For example, the Medicare premium 
could be reduced in lower cost (mainly rural) areas. Beneficiaries 
would be expected to pay a premium equal to 25 percent of program 
expenditures in rural areas of the state or region, for example. 
Another possibility is to increase program payment rates to providers 
under traditional Medicare in historically low-cost, under-served 
areas. This might be accomplished, for example, either through the 
current bonus payment mechanism that targets the bonus to physicians in 
shortage-designated areas, or through the work component of the 
Medicare Fee Schedule. The premium adjustment would benefit rural 
beneficiaries directly, whereas adjustments in payment rates might 
affect improvements in access over time by helping to direct physicians 
to areas with the greatest need for physicians.
    One final note. Although the primary focus of this statement is on 
access to care among rural Medicare beneficiaries, it is important to 
note that the Medicare program has been very successful at reducing 
monetary barriers of access to care. Data indicate that access 
differentials, like those noted above, also distinguish the rural non-
elderly from the urban non-elderly, but that monetary barriers are more 
severe because of the lack of insurance among the non-elderly and that 
this problem is relatively more severe in rural than in urban areas. 
Because the Medicare population is relatively larger in rural than in 
urban areas, policies designed to improve access to care among the 
elderly are likely to strengthen the rural health infrastructure as a 
whole, which in turn should improve access for the entire rural 
population.
                               __________
References
    Aday L.A. Andersen R. Fleming G.V. Health Care in the U.S. Beverly 
Hills: Sage Publications. 1980.
    Clark D. Dellasega C. Unmet Health Care Needs: Comparison of Rural 
and Urban Senior Center Attendees. Journal of Gerontological Nursing; 
1998; 24(12):24-33.
    Coburn A. Bolda E. The Rural Elderly and Long-Term Care. In TC 
Ricketts, III, (ed.), Rural Health in the United States. New York: 
Oxford University Press. 1999.
    Coward R. Horne C. Peek C. Predicting Nursing Home Admissions Among 
Incontinent Older Adults: A Comparison of Residential Differences 
Across Six Years. The Gerontologist; 1995; 35(6):732-743.
    Coward R. Netzer J. Mullens R. Residential Differences in the 
Incidence of Nursing Home Admissions Across a Six-Year Period. Journal 
of Gerontology: Social Sciences; 1996; 51(5):S258-S267.
    Dubay L. Explaining Urban-Rural Differences in the Use of Skilled 
Nursing Facility Benefit. Medical Care; 1993; 31(2):111-129.
    Hogan C. Urban-Rural Differences in the Use of Needed Services: 
Analysis of the ACE-PRO Indicators Using 1998/1999 Data. Report 
prepared and presented to the Medicare Payment Advisory Commission, 
January 3, 2001.
    Kenney G. Is Access to Home Health Care a Problem in Rural Areas? 
American Journal of Public Health; 1993; 83(3):412-414.
    Krauss N. Machlin S. Kass B. Use of Health Care Services, 1996. 
Agency for Health Care Policy and Research; 1999; MEPS Research 
Findings No. 7. AHCPR Pub. No. 99-0018.
    Lishner D. Rosenblatt R. Baldwin L. Hart L. Emergency Department 
Use by the Rural Elderly. Journal of Emergency Medicine; 2000; 
18(3):289-297.
    Liu H. Ginsberg C. Olin G.L. Merriman B. Health & Health Care of 
the Medicare Population: Data from the 1996 Medicare Current 
Beneficiary Survey. Rockville, MD: Westat, 2000.
    Miller M. Holahan J. Welch W. Geographic Variations in Physician 
Service Utilization. Medical Care Research and Review; 1995; 52(2):252-
278.
    Mueller C.D. Schoenman J.A. Dorosh E. The Medicare Program in Rural 
Areas. In TC Ricketts, III, (ed.), Rural Health in the United States. 
New York: Oxford University Press. 1999.
    Mueller C.D. Schur C. Drug Coverage of the Rural Elderly and 
Implications for a Medicare Benefit. Paper presented at the annual 
meeting, National Rural Health Association, Dallas, May 2001.
    Mueller, C. Schur, C. Paramore, C. Unmet Dental Health Needs: 
Estimates from the Robert Wood Johnson Foundation Access to Care 
Survey, Journal of the American Dental Association 129 1998, 429-437.
    National Center for Health Statistics (NCHS). Health, United 
States, 2000. Hyattsville, MD. 2000a.
    National Center for Health Statistics (NCHS). NCHS Series 10, No. 
200. From NCHS publications CD, Vol. 1, No. 6; Hyattsville, MD. July 
2000b.
    Schur C. Franco S. Access to Health Care. In TC Ricketts, III, 
(ed.), Rural Health in the United States. New York: Oxford University 
Press. 1999.
    Stearns S. Slifkin R. Edin H. Access to Care for Rural Medicare 
Beneficiaries. The Journal of Rural Health; 2000; 16(1):31-42.
    Sutton J. Characteristics of Rural Home Health Users and 
Implications for Payment Reform. Project HOPE Walsh Center for Rural 
Health Analysis Working Paper, 2000.

                                


    Chairwoman Johnson. Dr. Mueller.
    Dr. Keith Mueller. Also Dr. Mueller.
    Chairwoman Johnson. Oh, is it also Dr. Mueller.

 STATEMENT OF KEITH J. MUELLER, PH.D., DIRECTOR, RURAL POLICY 
  RESEARCH INSTITUTE CENTER FOR RURAL HEALTH POLICY ANALYSIS, 
     UNIVERSITY OF NEBRASKA MEDICAL CENTER, OMAHA, NEBRASKA

    Dr. Keith Mueller. Thank you, Madam Chairwoman.
    The Rural Policy Research Institute Center for Rural Health 
Policy Analysis that I direct focuses its attention, analysis 
and research on the special circumstances of sustaining service 
delivery in rural communities. Why then the focus on Medicare 
policy?
    The current Medicare policies and payment are creating 
financial stress for many small rural hospitals. In 1998, the 
total Medicare margin for rural hospitals was a negative 2.1 
percent and in 1999 a negative 2.9 percent. In 1999, the small 
rural hospitals under 50 beds who were not already part of some 
special payment category experienced negative margins 
aggregating the 5.6 percent negative, and 54\1/2\ percent of 
them had negative margins.
    How do we change that situation in current Medicare 
policies? Medicare payment policies are designed for Medicare 
to be an efficient payer of efficient providers, as you heard 
earlier. Therefore, trying to address the needs, special needs, 
of small rural providers requires adjustments to formulas to 
try to increase the bottom line or maybe wrinkles in the 
system, such as a low-volume cost adjuster or perhaps what I 
call policies by exceptions, creating categories that would be 
deemed eligible for cost-based reimbursement.
    What are the results of that kind of an approach? One 
result is imperfect targeting. As you have heard throughout 
this morning's discussion already, each attempt to do this by 
adjusting a formula creates a payment bonus, if you will, for a 
broad category of providers, not necessarily those located in 
those small, isolated communities most in need of assistance. 
To reach them we end up reaching many. We also create a system 
of administrative complexity, because one has to turn, then, 
attention to, well, how do I adjust my cost reporting system to 
comply with the new payment system intended to benefit me.
    We also create a system with constantly changing 
regulations and all of the time lines that are associated with 
changing regulations, the publication of proposed rules, final 
rules, then the implementation of those rules. That combination 
of administrative complexity and constantly changing 
regulations can overwhelm the systems that we have in place. It 
certainly overwhelms those small rural hospitals like the 
critical access hospital I visited recently in northern 
California that is doing its best to take advantage of every 
single opportunity to enhance its bottom line, but has to add 
on administrative personnel in order to do that.
    It also overwhelms our own government administrative 
system, an issue that I know this Subcommittee has addressed in 
the recent letter Chairwoman Johnson mentioned earlier to the 
Health Care Financing Administration. Now, all of that can mean 
cash flow crises for the small rural hospitals that can't 
adjust quickly enough or have experienced regulations that 
aren't adjusted quickly enough to deal with changes that we 
intend to do in 1 month, but don't actually occur until 9 or 12 
months later.
    What is a better way out of this? What we are looking at 
now at the RUPRI Center as a way of identifying communities 
rather than focusing on providers. By using demographic, 
economic and geographic data, we are working on identifying 
those communities in which it would be nearly or absolutely 
impossible to sustain service delivery based on operating 
revenues alone, that some additional flow of dollars would be 
needed in those communities.
    If communities are identified, then we can look, as 
Representative Stark said earlier, a holistic view of what is 
the package of policies that we would use to help providers in 
those communities: National policies, including payment 
policies, but also including targeted technical assistance in 
grant programs; State policies, including the same combination; 
and local policies, including local tax revenues, local 
foundations. We could be looking at other provider-based and 
population-based programs to be serving those small 
communities. If we engage in that kind of a dialog, we may do a 
better job of sustaining those services in the rural 
communities where today they are experiencing a great deal of 
difficulty.
    Thank you.
    Chairwoman Johnson. Thank you very much, Dr. Mueller. I 
guess is it Mueller, or is it Mueller?
    Dr. Keith Mueller. Mueller.
    [The prepared statement of Dr. Keith Mueller follows:]

 STATEMENT OF KEITH J. MUELLER, PH.D., DIRECTOR, RURAL POLICY RESEARCH 
   INSTITUTE CENTER FOR RURAL HEALTH POLICY ANALYSIS, UNIVERSITY OF 
                NEBRASKA MEDICAL CENTER, OMAHA, NEBRASKA

    Chairwoman Johnson, Representative Stark, members of the 
Subcommittee, thank you for the opportunity to share some thinking 
about reasons to change Medicare payment policies and a new framework 
for making appropriate changes. The Rural Policy Research Institute is 
committed to completing analysis that helps develop policies that 
address the needs of people in the rural places where they live. This 
reflects a belief that there are differences in place that ought to be 
recognized in public policies, including Medicare, with policy choices 
directed to the places where people live. I will conclude this 
testimony describing a policy choice for Medicare payment policy that 
does just that. Before reaching that conclusion I will use the current 
conceptualization of policy to make three points: (1) health care 
providers in small, remote rural communities continue to struggle to 
survive financially; (2) the existing policy framework forces the use 
of incremental changes to payment formulas that were not designed to 
address the fundamental problem of delivering services where operating 
revenue will not sustain services; and (3) the approach of payment 
policies has led to accumulating technical changes that overwhelm the 
systems used in payment.

THE CURRENT FINANCIAL STRUGGLE OF RURAL PROVIDERS
    While not a perfect indicator of the financial condition of 
providers in the small, remote communities that are the focus of my 
testimony, the plight of small rural hospitals is a good proxy 
indicator. In its March, 2001 report, the Medicare Payment Advisory 
Commission (MedPAC) presented data showing that rural hospitals 
experienced negative margins on their total Medicare business,-2.1% in 
1998 and-2.9% in 1999 (Figure 5-8). The picture is especially bleak for 
rural hospitals with fewer than 50 beds that are not included in any 
special payment category, 54.5% of those institutions experienced 
negative margins in 1999 (Table B-5), and their aggregated overall 
Medicare margin was-5.6% (Table B-10). Losses generated in serving 
Medicare beneficiaries might be offset by other sources, including 
local taxes and foundations and/or payment from other insurers, but not 
in all of hospitals in this group. In the aggregate, the total margin 
reported by MedPAC for those hospitals in1999 was 2.1%, much less than 
the overall 4.9% reported for all hospitals (Table B-15). In its 
December 14, 2000 report of hospital margins, MedPAC presented data 
reflecting improvement in hospital margins, but even so, 34% of 
hospitals, mostly rural, had negative total Medicare margins.
    The National Advisory Committee on Rural Health, on which I serve, 
recently learned of the plight of small hospitals in some of the most 
remote territory I have seen, in Northern California. The 72 rural 
hospitals in that state averaged a-2.2% patient-operating margin in 
1999, and 74% of them lost money on their operations in 1999. We 
visited one rural hospital that recently converted to Critical Access 
status, after being very near bankruptcy. Its most recent fiscal year 
showed a slight loss on operations, but thanks to an aggressive plan to 
expand services available in the community, it is on a path to 
recovery, albeit with continued very narrow margins. Two images were 
burned in my mind in that visit. First, that hospital is only barely 
surviving financially, because even though it is doing everything a 
good consultant would recommend, it suffers the natural disadvantage of 
being located in a remote mountainous area. Second, as difficult as the 
struggle is for that hospital, it is planning to affiliate or merge 
with a neighboring (28 miles away in an area that can receive as much 
as 20 feet of snow in the winter) hospital that is literally bankrupt. 
This is a tale of difficulty about which aggregate data can only give 
us hints. For me, this demonstrated the value of combining case study 
data with aggregate data in our research, giving you a better sense of 
the range of circumstances that exist in rural America.
    The example of Northern California is repeated elsewhere in rural 
areas--providers that are in precarious financial condition but finding 
ways to continue providing services. The access to services they 
provide today is assured only if they are able to continue to balance 
operating losses with other sources of revenue, and doing everything 
possible to reduce those losses.

CURRENT POLICY FRAMEWORK
    Current policies present imperfect choices to address the needs of 
rural communities. Medicare payment policies are designed, as 
summarized by MedPAC, to create a system of efficient payment for 
services delivered to beneficiaries, not to recognize needs caused by 
environments in which providers cannot survive under financial models 
assuming constant gains in efficiency. Yet those policies are the tools 
available to address the needs of a unique group of providers serving 
the small, remote rural communities. Therefore, proposals such as 
setting a floor payment in the wage index, or equalizing the base 
payment in the prospective payment system, appeal to the providers and 
their associations who can calculate an improvement in revenue that may 
``stop the bleeding.'' Other suggestions, such as adjusting payment 
systems to increase per case payment in situations where the number of 
cases are few (low-volume adjustment) are intended to bring the 
operating margin closer to, if not in balance. But because there are 
multiple payment streams to multiple providers in the same communities, 
the incremental approach would need to apply to all of those payment 
systems. This is the nature of the segmentation inherent in decisions 
that track with the type of service and category of provider.
    It should not be surprising that another approach to this problem 
gains favor; that of creating a separate, cost-based payment system for 
vulnerable providers. This would seem to be the most certain means of 
meeting the needs of providers in target communities, since it would 
neutralize the effect of Medicare payment on the financial condition of 
those providers. However, two problems remain. First, even cost-based 
payment may not be sufficient if ``allowable'' costs are not inclusive 
and if there is no possibility to build up reserves needed to maintain 
quality services. Second, the policy is still linked to providers, 
which presents complications in trying to be sure the definition of 
provider matches with communities that need those particular providers 
(the concept of ``essential provider''). Despite these problems, this 
approach would appear to be succeeding, for the most part, in the 
designation of Critical Access Hospitals, 91% of which are located in 
counties designated as Health Profession Shortage or Medically 
Underserved Areas, 65% are the only hospital in their county, and 
nearly 83% are located in counties with higher than state averages of 
persons aged 65 or over.
    Assuming the special financial needs of certain rural providers are 
met, the remaining objective of payment systems fairness. No class of 
provider should be disadvantaged vis a vis another class because of 
differential payment. Any difference in payment must be related to a 
difference in the actual cost of the specific service.

UNINTENDED CONSEQUENCES OF MULTIPLE, SEGMENTED TECHNICAL SOLUTIONS
    The legacy of numerous incremental attempts to address the special 
financial circumstances of rural providers,combined with repeated 
efforts to refine and establish prospective payment systems, has 
overwhelmed the capacity of administrative systems. The numbers of 
providers in different categories is some indication of the complexity 
being created: as of 1997 there were 1804 independent rural health 
clinics (RHCs) and 1525 provider-based RHCs; the most recent PPS update 
identified 165 Rural Referral Centers, 667 Sole Community Hospitals, 
and 328 Medicare Dependent Hospitals. None of these classifications are 
necessarily inappropriate, but the mere existence of separate provider 
types necessitates at least different applications of payment systems 
and regulations, if not completely separate regulations.
    The inherent strain of multiple policies is most apparent when new 
policies are enacted. For example, not all provisions of the Balanced 
Budget Act of 1997 have been implemented through publication and 
application of final rules. Issues have arisen in the implementation of 
new systems to certify and reimburse Critical Access Hospitals, 
resulting in legislative amendment in 1999 and 2000. Implementation of 
prospective payment for outpatient services has been slow, affecting 
timely completion of cost reports and therefore delaying fiscal year 
end reconciliation, and forcing new policies based on cost report data 
to start late or use old data.
    Frequent and multiple ``fixes'' to payment systems can easily 
outpace the ability to use appropriate data, both for developing 
systems and for measuring their impacts. The delays in cost report data 
described earlier means wage data (including occupational mix) used in 
prospective payment formulas are reliable only as of some years prior 
to the payment. Recent increases in wage scales and mix of employees 
(due to changes in medical practice and/or new regulations) will not be 
reflected in the payment.
    Delays in implementing new systems might be only bumps in the road 
were it not for the effects on the small, financially vulnerable 
providers that are the focus of this testimony. A seven month delay in 
reconciliation based on the year-end cost report could result in a 
serious, even crippling, cash flow problem for a provider expecting a 
positive result. Problems in implementing legislation that initially 
does not include the specific authority intended (for example, cost-
based payment for lab services provided by CAHs) can be resolved, and 
retroactively (as was the case in CAH lab payment). But, again, that 
means a delay in receiving expected revenue.
    The resolution to this pattern of ever-increasing complexity is not 
``administrative simplification,'' since that only makes each 
regulation simpler and does not slow down the increase in volume every 
time a payment system is altered. A completely different approach would 
offer a better solution.

PAYMENT BASED ON COMMUNITY
    With access to locally-based services as an objective of public 
policy, a new framework would identify those communities within which 
any provider would be unable to sustain services based on operating 
revenue. The RUPRI Center is currently developing a means of 
designating ``vulnerable communities'' as an alternative to designating 
specific types of health care providers. Our aspiration is to use 
information that can be obtained from Census data and other public 
sources in a formula that accounts for low expected patient-based 
revenue. We have begun by mapping areas based on population 
aggregation, to at least 1500 persons in a ``community'' (town and 
surrounding census tracts). Within each community, in addition to total 
population, variables expected to be related to operating revenues are: 
household income, percent of population enrolled in Medicaid, percent 
of population enrolled in Medicare, percent of the population at or 
below federal poverty level in income; percent of workforce unemployed, 
and population per square mile. Population per square mile is one 
measure of isolation, but physical terrain will need to be 
operationalized and either incorporated into a formula or used as 
second-level criteria.
    By building the definition of community using census tracts rather 
than county boundaries, this approach can deal with the problems of 
having small isolated communities within very large counties that 
include areas that are well-served. This is a problem in western 
counties, like the ones the National Advisory Committee on Rural Health 
toured last week. We are currently testing the early phases of our 
modeling with data regarding communities in Nebraska, and so far our 
thinking passes the ``face validity test'' of identifying communities 
we know have difficulty recruiting and retaining health care 
practitioners and sustaining institutional providers.
    Once communities are identified as ``vulnerable'' policies devised 
at the federal, state, and local levels of government can be used to 
maintain the economic viability of providers based in those 
communities. For the federal government the policies can be a 
combination of payment from Medicare and availability of grant funding 
for special needs such as capital investment or conversion of 
information systems to develop new systems of quality improvement. From 
state governments the policies can include special payment from 
Medicaid and direct financial assistance. Local policies can include 
access to a tax base (which may be broader than the single community), 
direct assistance, and/or help in organizing community-based 
foundations.
    Hospital financial data indicate, to at least some degree, 
communities who are self-identified as ``vulnerable.'' Small rural 
hospitals (under 50 beds) with substantial income from government 
subsidies and non-patient revenue are financing care through these 
means. Of the types of hospitals as classified by MedPAC, the category 
with the highest percent gain from ``other government payers and 
subsidies'' are the small rural hospitals. For those hospitals, a loss 
of non-patient revenues would have resulted in net losses in 1999 
(Table B-15). Of course, those are aggregate numbers, and the reason to 
develop a community-based policy is target resources effectively within 
clusters of hospitals, or any other health care providers.
    If this or some other means of identifying communities is found to 
be effective, non-payment policies, including special grant programs 
and flexibility in meeting conditions of participation, can be targeted 
to specific places. The same is true for grant programs, including 
technical assistance and promoting innovative means of meeting local 
needs, such as developing networks.
    I am suggesting a framework for considering policies targeted to 
issues of access to care in rural areas. The focus of this framework is 
place, not provider. Short of finding acceptable means of imposing this 
framework, policies targeting providers should be based on underlying 
assumptions about the communities they serve.

                                


    Chairwoman Johnson. OK. Two questions, Dr. Mueller on my 
right. Do you support the wage base, just the arbitrary 
increase in the wage adjustment for rural hospitals?
    Dr. Keith Mueller. You are speaking about creating the 
floor payment of .9 or whatever it might be?
    Chairwoman Johnson. Yeah.
    Dr. Keith Mueller. That would be inconsistent with the idea 
of looking at a more holistic change. So, no, in an analytical 
sense, no, that can't be supported.
    Chairwoman Johnson. I do think your comments about a more 
holistic approach are very, very interesting. You heard the 
questions that I asked Mr. Hackbarth earlier, and any comments 
you may have in looking at those hundred-bed or, you know, the 
different categories of rural hospitals, which does go to the 
point you are raising about let's look at the community, would 
certainly be of interest to us. I would remark that it isn't 
just the small hospitals that are now having cash flow crises 
because the banking institutions are seeing the health 
providers as poor risks, and even larger hospitals are having 
great difficulty if the payment system breaks down, which it is 
now quite frequently.
    I did want to just ask Dr. Mueller in the center, your 
comment about reducing premiums where costs are lower and the 
barrier that income places on access to care in rural areas, is 
that an idea that you have developed to any degree?
    Dr. Curt Mueller. There is a considerable amount of health 
services research which indicates that income and insurance are 
significant determinants of access to care, both among--well, 
among the population in general, but also among Medicare 
beneficiaries.
    Chairwoman Johnson. Certainly access, those with Medigap 
insurance that covers much of the co-pay and deductible 
responsibility of seniors does make access much easier, and it 
is more difficult--is it difficult for seniors in rural areas 
to get because it is not available or because they can't afford 
it?
    Dr. Curt Mueller. My suspicion is that, well, fewer rural 
beneficiaries have Medicare supplemental coverage than 
beneficiaries that live in urban areas, and it is actually a 
combination of both. You can either obtain privately purchased 
supplemental coverage, which I think in rural areas it is about 
the percentage covered with privately purchased. It is about 
the same as in urban areas. The big differences, though, are 
that employer-subsidized supplemental insurance is much more 
common in urban areas than in rural areas.
    Chairwoman Johnson. And have you given any thought to going 
to a single deductible, a more sort of modern structure of 
Medicare, and whether that would increase access in rural 
areas?
    Dr. Curt Mueller. A single deductible?
    Chairwoman Johnson. Yes.
    Dr. Curt Mueller. Well, there has been a lot of interest in 
reforming the nature of supplemental insurance coverage. Right 
now the supplemental insurance--some of the supplemental 
insurance plans provide first dollar coverage, which has been 
criticized as encouraging more use than might otherwise be 
appropriate.
    Chairwoman Johnson. I guess let me take it from a little 
different angle. MedPAC testified that rural beneficiary cost-
sharing is higher, and you have testified that costs are an 
impediment to access. Could you walk us through policies--and 
you can all contribute to this if you want. What policies 
contribute to high cost-sharing, and what are the implications 
for cross-subsidies from the rural elderly to the urban 
elderly? Is there any difference? Is the urban elderly person 
with no Medigap insurance in exactly the same position as the 
rural elderly person with no Medigap insurance?
    Dr. Curt Mueller. No. Expenditures for the urban elderly 
with no Medigap, it is on a per capita basis, total 
expenditures are higher. In fact, in 1996, one of the 
statistics in my statement is that among those with no 
supplemental insurance at all, the urban expenditure per capita 
is 37 percent higher than in rural areas.
    Chairwoman Johnson. For the same income elderly?
    Dr. Curt Mueller. Well, for persons with Medicare only, 
with no supplemental coverage. I don't know what their income 
level is. My suspicion is it is lower since in general incomes 
tend to be lower in rural areas.
    Chairwoman Johnson. It would be helpful if you could look 
at that for us, because while certainly incomes tend to be 
lower in rural areas, the group that have no supplemental in 
the cities are often just above the Medicaid income levels 
also. So, I don't know whether they are getting more services 
because the urban institutions are more accustomed to providing 
services for uncompensated care, or they have access to a 
community health center that can provide those services at an 
income-related cost.
    So what I hear you saying, and I assume that you all agree 
on this, is that we don't know much about why seniors with no 
auxiliary insurance experience a 37 percent higher utilization 
rate than rural seniors. So we don't know how much of that is 
lack of availability of services and how much of that is 
availability of services at lower cost in the urban structure.
    Dr. Curt Mueller. Yes. It is important to emphasize you 
raise a very good point, that there are a number of factors 
that could explain parts of that difference. Income is 
certainly one of them.
    Chairwoman Johnson. Congresswoman Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    Dr. Curt Mueller, something else in your testimony, 
especially with the debate that is going on in Congress right 
now, that was kind of alarming to me, and I am just--maybe you 
can expand on it. Maybe I shouldn't ask this question because I 
may not know the answer, but you talked about the idea that 
Federal subsidization of drug benefit based on income will 
likely improve access in rural relative to urban areas. I mean, 
there is a large--high debate going on here about whether it 
should be under a helping hand or rather it should just be a 
Medicaid benefit, but just based on this exchange, with a lack 
of ability for insurance, the lack of Medicare+Choice programs, 
the lack of, you know, all of these things that rural areas 
can't get, why would you just do it to low-income and not to 
look at that whole population out there?
    Dr. Curt Mueller. I wouldn't necessarily limit it just to 
low-income Medicare beneficiaries, but that certainly is one of 
the options that is being considered. I personally--my personal 
view is that it should be offered to all Medicare 
beneficiaries.
    Mrs. Thurman. Thank you.
    And Dr. Keith Mueller then, let me--you know, we sometimes 
go into our districts, we bring our staffs, we have them go 
through the hospital, situation very similar to what you did in 
your study, and I was interested in your comment particularly 
on the administrative part of it because you talked about the 
lack of administration to handle some of the complicated 
issues, or even keeping up with what is going on. What we found 
in a small rural area of ours, there was about three people in 
the whole--two were consultants and one was actually staff--in 
trying to do this.
    What I am curious about is that as you know, our Chairwoman 
and Mr. Stark submitted to HCFA a letter that looked at some 
administrative procedures that could be put in place to try to 
get rid of some of this paperwork and cumbersome issues, and I 
am curious to know if you have had an opportunity to look at 
that, and if so, do you have any comment; and if not, I would 
love to give you a copy of it so that you could have an 
opportunity to review it and see if in any way that helps us in 
the rural areas.
    Dr. Keith Mueller. No. I have not had the opportunity to 
look at that letter and would welcome the opportunity to do so. 
I would like to comment, though, that it is a--when you talk 
about the administrative complexity and the burden that it 
imposes, it is a combination of two factors. One that you 
mentioned is trying to simplify the administrative rules that 
we have in place now and procedures that we have in place, but 
the other that I was also addressing in my testimony is that by 
trying to continue to resolve issues of payment and sustaining 
services by tweaking and changing payment formulas, we are 
structurally contributing to administrative complexities. So 
that is not under the control just of the administrative agency 
itself.
    Mrs. Thurman. Dr. Dalton, on the last page, on page 5 in 
your very last bullet point, you talk about DSH adjustments and 
saying that that would be certainly something that would be 
helpful to the rural health community. I understood that. But 
particularly after MedPAC testified, you actually talk about 
targeted help in those urban or those rural areas. Can you give 
us some idea of how you would target so that it didn't become 
unbalanced then or imbalanced with the rest of the community in 
the rural health? I am just interested in what kinds of things 
you would look at to make those targeted areas receive 
additional dollars.
    Dr. Dalton. Well, with respect to the disproportionate 
share expansion, I think by itself it targets it appropriately 
because it is related to indigent care, or should be. My 
thought about offering a cost floor was that this sort of 
arrangement would automatically target hospitals in bad years 
that are having difficulty if they qualify as an essential 
provider on the assumption that that definition of essential 
provider is something like Dr. Mueller's community-based 
characteristic. It is a community at risk for one reason or 
another.
    Not all hospitals in these communities at risk need the 
help. My thought was that a cost floor is able automatically to 
target the hospitals to help only those hospitals that do. We 
have also noticed that these very small hospitals are very--
their financial position is unstable. Some years they actually 
can do all right on a prospective payment, and then in other 
years they won't. It usually has to do with rapid changes in 
utilization. When you only have 10 beds, the difference between 
6 and 12 patients is rather large. The advantage of a cost 
floor would be that in a bad year it is there to help you, but 
in a good year you don't need any--you might not need any extra 
money, and in a good year you might be able to accumulate some 
surplus, put it away to your reserve, and be able to use that 
for the purposes to which all organizations need their 
reserves.
    Mrs. Thurman. Thank you.
    Chairwoman Johnson. Actually that is a very interesting 
point you made, Dr. Dalton, that even if we create new 
categories within those categories, there may not be a--sort of 
in a sense a stable demand. So what you are really suggesting 
is that we need--because we have tried to do this with sole 
providers, and we have categories that have gone directly to 
the issue we are discussing here, and what you are really 
suggesting is that we need a sort of a loose category through 
which hospitals can be heard.
    And we know this flies in the face of Dr. Keith Mueller's 
comments about the need for stability and predictability and 
simplicity, but I don't know how we match this need of small 
rural providers for exceptional consideration and communities 
that need an exceptional view with the need for the system to 
stop churning change.
    I did want to ask any of you if you know how the small 
providers deal with some of the--particularly the small 
hospitals--some of the extraordinarily complex changes we have 
sent down. I had one person who had a lot of experience in the 
rural areas say they just put the pile of the regulations in 
the corner, and, you know, when there is a hitch in their 
payment system, somebody tries to explain to them what the 
problem is, but they literally don't have the technical 
capability to review all that stuff, nor the time, nor the 
resources, nor the programs.
    What percentage of the situation--of the facilities deal 
with some of these--at least some of these administrative 
directives that way, or do they take everything we say to 
heart?
    Dr. Keith Mueller. The percentage that deal with it in the 
way you describe, Ms. Johnson, is probably higher than we would 
like to admit. A lot of the small rural hospitals, though, turn 
to either their association at the State level, especially if 
it is responsive in particular to rural hospitals, or to 
consultants, the accounting firm that may handle their books, 
other consultants that come out. That kind of technical 
assistance, though, doesn't take care of how do I maintain my 
records on a daily basis so that when the accountant comes in, 
the records are ready for he or she to deal with appropriately. 
And I think that is the level at which we have a real problem.
    Chairwoman Johnson. You will notice in the letter that 
Karen referred to is that one of the recommendations is that we 
be able to provide technical assistance. We do that in other 
sectors of the economy, and if you will look at that section, 
all three of you, and see if you have any suggestions for us, 
we will be interested in that.
    The goal is provide better tools to the small providers so 
that they aren't just trying to make it up as they go along, 
both in terms of technical advice on equipment and technical 
advice on systems management.
    Mr. English. No questions, OK.
    The last point I want to raise that--incidentally, I 
appreciate how detailed your testimony is and how much good 
information it does give us, and while we can't bring all of 
that out at the hearing, it will be very useful to us.
    On this last issue about the prescription drug bill, you 
know, the access--and that is why anything you can do to help 
us shed light on how much of the utilization rate, the very 
utilization rate between the urban uninsured that is to be on 
Medicare and the rural uninsured be on Medicare, would be very 
helpful, because if the barrier is primarily cost and the lack 
of available, you know, sort of subsidized facilities like 
community health centers, we need to know that. But also the 
prescription drug bills, and this is a nonpartisan statement, 
all of the prescription drug bills on the table involve an 
additional premium, and 50 percent of the cost of 
prescriptions. Now, they also are almost likely to be involved 
this year because of the increased projections in costs for a 
deductible. So how useful is this going to be to these rural 
seniors? Again, how do we look at that from a sort of community 
systems point of view?
    We need as much information as you can get us about the 
access issue, and try to break it down a little bit more and 
think it through as to whether we can even deal with it through 
a reimbursement mechanism that is institution-specific and 
cost-specific, or whether we really need to try to find a way 
to look more holistically.
    Well, thank you very much for your testimony here and for 
the thought and care you put into writing it, and if you have 
follow-up information you want to provide us with, we are 
always happy to receive it.
    Chairwoman Johnson. Thank you very much. The hearing is 
adjourned.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]
    [Submissions for the record follows:]

  STATEMENT OF THE AMERICAN ASSOCIATION OF HOMES AND SERVICES FOR THE 
                                 AGING

    The American Association of Homes and Services for the Aging 
(AAHSA) appreciates the opportunity to submit this statement for the 
record of the Subcommittee's hearing on June 12, 2001 on special issues 
confronting health care providers and consumers in rural areas.
    AAHSA is a national organization whose more than 5,600 not-for-
profit providers serve over 1,000,000 individuals on a daily basis. 
Approximately seventy-five percent of AAHSA members are affiliated with 
religious organizations; others are sponsored by private foundations, 
fraternal organizations, government agencies, and community groups. Our 
members include not only nursing facilities, but also independent 
senior housing, assisted living, continuing care retirement 
communities, and providers of home health care, adult day care, respite 
care, meals on wheels, and other services. AAHSA members are 
characterized by long-standing ties to their communities and a firm 
commitment to quality.
    Providing health care and social services in rural areas present 
special challenges. According to the Medicare Payment Advisory 
Commission (MedPAC)'s recent study, ``Medicare in Rural America'', 
rural communities share several factors that may affect the supply of 
medical services to their residents: small and disproportionately older 
populations, relatively low incomes and less health insurance coverage, 
physical isolation, and weak or restrictive state health policies.\1\ 
The report also noted that these problems are more severe for providers 
and consumers in rural areas that are farthest from an urban area.
---------------------------------------------------------------------------
    \1\ Medicare Payment Advisory Commission. Report to Congress: 
Medicare in Rural America. June 2001, p. 8.
---------------------------------------------------------------------------
    The rural populations AAHSA members serve are dispersed over large 
geographic areas, making travel time a significant factor in home- and 
community-based services. For example, one home care agency in a rural 
areaof New York State is the only health care provider within 5,000 
square miles. Its employees routinely travel a total of 7,000 miles 
every day to serve its widely scattered clientele. The recent 
escalation in gasoline prices has added enormously to the agency's cost 
of providing service, but these costs are not reflected in the 
reimbursement the agency receives, since the payment is based on the 
projected cost of a one-hour visit.
    Rural providers have difficulty attracting health professionals to 
serve in non-urban settings. In addition, local populations from which 
rural providers can recruit staff are much smaller than in urban areas, 
making it that much more difficult for them to recruit and retain the 
staff they need to provide high-quality care. Health care facilities in 
rural areas tend to be smaller than average and have less access to 
sophisticated computer equipment, which makes it more difficult for 
them to comply with rapidly multiplying federal regulations. Medicare 
policies do not always give adequate consideration to these factors, 
making it more difficult for rural providers to meet the needs of their 
elderly residents and clients.
    An overriding problem for health care providers in rural areas is 
that they simply do not have the volume of patients that can make 
prospective payment systems work. Prospective payment systems are based 
on the assumption that higher-than-average cost cases will be balanced 
by those costing less than the average, allowing the provider to at 
least break even. When a provider serves a low volume of patients, 
however, a few costly cases can completely overwhelm the provider's 
financial situation. In more urban areas, some small health care 
providers have been able to consolidate with other facilities in order 
to achieve economies of scale to cope with prospective payment systems. 
Rural health care providers most often do not have this option, since 
they frequently are the only health care facility in their region. If 
they close their doors, consumers have no alternative source of health 
care.
    Another factor to consider is that a rural health care provider 
frequently is not only the sole source of health care for consumers in 
the area, but often is the largest employer as well. Residents of rural 
areas typically have few employment alternatives. The closure of a 
local health care facility, besides throwing many people out of work, 
can have a major impact on other local businesses and on the local tax 
base.
    AAHSA supports legislation that has been introduced in the House 
and Senate to resolve Medicare payment inequities toward hospitals in 
rural areas. However, these measures do not take into account the 
problems that also face rural nursing homes and home care providers. 
AAHSA recommends the following additional initiatives to enhance long-
term care providers' ability to serve consumers in rural areas:
    Eliminate the impending 15% cut in Medicare spending on home 
health: Home health care fills an especially important place in rural 
areas, where it often is extremely difficult for consumers with 
disabilities to access other forms of health care. In addition, the 
MedPAC report on ``Medicare in Rural America'' points out two special 
challenges facing rural home care providers: travel time and low 
volume. MedPAC noted that ``Traveling to serve sparse or remote 
populations may increase the costs of providing services to rural 
beneficiaries.'' In addition, ``Because rural HHAs generally deliver 
fewer visits than their urban counterparts, their low volume could lead 
to higher per episode costs.'' The report went on to recommend that CMS 
study further the impact of the prospective payment system on rural 
home care providers.\2\
---------------------------------------------------------------------------
    \2\ Ibid, p. 107-110
---------------------------------------------------------------------------
    Home health agencies are trying to recover from the financial 
devastation of the Balanced Budget Act's interim payment system. The 
new prospective payment system has solved some reimbursement problems. 
However, an additional 15 percent reduction would cause many more home 
health agencies to close, which will cause serious access and 
availability problems for Medicare beneficiaries. Furthermore, the 
BBA's restrictions on eligibility for Medicare-covered home health 
services have caused total Medicare spending on home health to fall far 
below the levels that were projected in 1997, making the additional 15% 
cut unnecessary. The FY2002 budget resolution passed by Congress sets 
aside funding availability for the elimination of this spending cut, 
and AAHSA urges passage of the necessary legislation
    Incentives for recruitment and retention of staff: While staffing 
is a serious problem throughout the long-term care field, it is 
particularly urgent in rural areas, which have smaller and generally 
less-educated labor pools. AAHSA strongly supports legislation that has 
been introduced by Rep. Lois Capps, Senator John Kerry, and Senator Tim 
Hutchinson to provide a variety of incentives for the recruitment, 
training, and retention of nursing staff at all levels. These measures 
include a new program of scholarships for individuals to obtain nursing 
education in exchange for serving for at least two years in areas with 
nursing shortages, an enhanced federal Medicaid match for nursing 
homes' cost of training certified nursing assistants, and grants to 
meet the costs of child care and transportation for nursing students. 
It is particularly important that these bills cover staff recruitment, 
training, and retention for long-term care providers as well as for 
hospitals and that they provide these incentives for certified nursing 
assistants and other nursing staff as well as for registered nurses. 
This legislation would go a long way toward solving the health care 
staffing crisis, and we urge its passage by Congress.
    Single task workers: Because of the difficulty of hiring sufficient 
numbers of certified nursing assistants, nursing homes in many areas 
maximized the efficiency of their staffs by training non-nursing staff 
to help residents with specific tasks such as eating and drinking. Last 
year, the Health Care Financing Administration, now CMS, notified 
nursing homes that they would be cited for care deficiencies if they 
continued this practice. Current law defines a nursing assistant as 
``any individual providing nursing or nursing-related services to 
residents in a skilled nursing facility or a nursing facility.'' The 
statute requires that nurse aides successfully complete a training and 
competency evaluation program. The law does not define which specific 
tasks are considered to be ``nursing or nursing-related''; CMS has 
determined, under its State Operations Manual, which tasks should be so 
designated. According to the State Operations Manual, assisting 
residents with eating or drinking is considered to be a nursing-related 
task.
    In the nursing home environment, many employees who are neither 
nurse aides nor licensed health professionals also have frequent and 
regular contact with residents. Permitting these individuals to be 
trained to help residents at mealtime can offer partial relief to the 
nurse aide shortage and provide more individual attention to residents. 
Allowing specially trained non-nursing staff to assist residents who 
may need only a little help frees certified nursing assistants to help 
other residents who have more complex needs. This kind of relief is 
especially important in rural areas, where it is particularly difficult 
for nursing homes to hire sufficient staff.
    AAHSA strongly supports legislation that has been introduced by 
Rep. Paul Ryan and Senator Herb Kohl to permit nursing facilities to 
train non-nursing personnel to assist residents with eating and 
drinking. These employees would augment, but not replace existing staff 
and would be trained specifically to help with eating and drinking 
without having to complete the full nurse aide training and competency 
evaluation program. The interdisciplinary team responsible for the care 
of the resident would determine resident appropriateness and employee 
competence and ability to perform these tasks, and the training 
programs would be reviewed and approved by the state regulatory 
authority.
    Need for regulatory relief: Regulatory requirements that are costly 
for most long-term care providers become almost insurmountable burdens 
for providers in rural areas. For example, nursing homes now are 
supposed to have one full-time compliance officer to ensure that the 
facility is not violating Medicare payment policies and another full-
time employee to monitor the facility's compliance with the privacy 
requirements under the Health Insurance Portability and Accountability 
Act of 1996. For small facilities with few administrative staff, 
devoting two full-time positions to this kind of regulatory compliance 
is an inefficient use of scarce resources. AAHSA strongly supports the 
work your subcommittee is doing this year to review the regulatory 
requirements for health care providers and modify or eliminate those 
that are non-essential.
    Another example of unnecessary regulation that is particularly 
burdensome for rural nursing homes is the requirement in Section 941 of 
the Benefits Improvement and Protection Act, that nursing facilities 
post daily for each shift the current number of licensed and unlicensed 
nursing staff, in a uniform manner to be designated by HCFA and in a 
clearly visible place. Again, for nursing homes that have few 
administrative staff, little computerization, and a shortage of nursing 
staff, this requirement will take resources away from essential patient 
care. Furthermore, posting of staffing levels is of little value and is 
potentially misleading to consumers, since without any reference to the 
acuity of the residents being served, or an established criterion for 
appropriate staffing levels based on resident acuity, simple staff 
numbers are meaningless. AAHSA urges the repeal of this provision.
    Regulatory relief for ``swing beds'': Current law allows small, 
rural hospitals to enter into agreements under which the hospital can 
use its beds to provide either acute or skilled nursing care, according 
to patients' needs. A hospital bed becomes a swing bed when a patient 
no longer needs acute care but still needs subacute care. Rather than 
transferring the patient to a different facility, the hospital keeps 
the patient and is reimbursed at the subacute level. Swing beds may 
provide access to subacute care for Medicare beneficiaries in many 
rural areas where there are few other providers of this kind of care. 
Swing bed patients typically have relatively short stays, averaging 
approximately nine days.
    CMS is beginning to implement provisions of the Balanced Budget Act 
that will bring swing beds under the skilled nursing facility 
prospective payment system (SNF PPS). In turn, the SNF PPS is based on 
a full assessment of a skilled nursing facility resident's condition 
that is done upon entry and at specific intervals thereafter, recorded 
on the minimum data set (MDS). CMS has determined that the assessment 
for payment purposes must be done according to the full MDS, rather 
than just according to the specific treatments for which reimbursement 
is claimed.
    The full MDS is a detailed and time-consuming process, as it should 
be. The current requirements are such that skilled nursing facilities 
with average Medicare volume are forced, as a practical matter, to 
dedicate the equivalent of a full-time RN to completing assessments 
rather than providing care if the facilities are to get all of the 
paperwork completed and submitted on the time schedule required. This 
requirement is particularly onerous for rural hospitals, which have 
little experience with OBRA requirements for skilled nursing facilities 
and which have limited administrative and nursing staffs. It also makes 
little sense to require rural hospitals to complete the full MDS 
process for patients who generally will occupy a swing bed for only a 
few days.
    Last year's Medicare and Medicaid Benefits Improvement and 
Protection Act (BIPA) exempted critical care facilities in rural areas 
from the requirements of the prospective payment system. AAHSA 
recommends that a similar approach be taken toward swing beds in rural 
hospitals, exempting them from completing the full MDS and from the 
skilled nursing facility prospective payment system. Hospitals could 
then be reimbursed for care given to swing bed patients according to 
the current cost-related basis, which combines a calculated rate and a 
retrospective component.
    Nursing assistant training lockout: Medicare and Medicaid prohibit 
nurse aide training by or in a nursing facility if the facility within 
the last two years has: (1) operated under a (staffing) waiver; (2) has 
been subject to an extended or partial extended survey; (3) has been 
assessed a civil money penalty of $5000 or more; or (4) has been 
subject to certain remedies (i.e., denial of payment for new 
admissions, or temporary management, termination of provider agreement 
due to a finding of immediate jeopardy, and/or closure of a facility, 
transfer of residents, or both). These provisions are severely 
restricting the ability of nursing facilities to train nurse aides and 
have proved counterproductive to improving quality of care.
    There is little argument for approval of a nurse aide training 
program by a facility that is providing substandard quality of care. 
However, the prohibition on training once compliance has been achieved 
and demonstrated is completely arbitrary and poses problems for 
providers and residents alike. The two-year duration of the nurse aide 
training ``lock-out'' severely impedes the facility's ability to 
recruit and retain adequate and qualified staff, and to assure 
provision of quality care.
    Opportunities to access alternative training programs are 
frequently limited and many facilities, even after achieving and 
demonstrating compliance, find it difficult, if not impossible, to 
secure training for their aides. This problem is particularly severe in 
rural areas, where the nearest alternative training site may be at a 
great distance from the facility. The end result can be either new 
compromises to quality of care or a recurrence of the problems that 
caused the disqualification from training. The effect of this 
particular sanction is counterproductive to the improvement of quality, 
and to the intent of the law that facilities achieve and maintain 
sustained compliance.
    AAHSA urges the elimination of the present two-year prohibition on 
nurse aide training by or in nursing facilities that are found to be 
out of compliance with certain federal long term care requirements 
[Section(s) 1819 and 1919(f)(2)(B)(iii)(I)(b) of the Social Security 
Act]. Once facilities have corrected their deficiencies and 
demonstrated compliance, they should be permitted to resume their 
nurse-aide training programs.
    Medicare wage index: Hospitals in rural areas have the option of 
using the urban wage index in filing reimbursement claims if they can 
show that they must compete with urban areas in recruiting staff. This 
option should be extended to rural nursing homes, which also must often 
compete with urban facilities in recruiting staff.
    Telemedicine in long-term care: Telemedicine is a promising new use 
of technology that holds the potential for greatly improving access to 
quality health care in rural areas. Section 223 of last year's Benefit 
Improvement and Protection Act, which expanded Medicare payments for 
telehealth services provided to rural beneficiaries, did not authorize 
nursing homes as potential sites, although it did give CMS two years to 
study additional settings for telehealth services. Nursing homes 
located in rural areas are often central elements of their communities, 
familiar to and easily accessed by beneficiaries, and providing ready 
access to skilled professional services. Including nursing homes as 
originating sites for telehealth services will benefit not only the 
community at large, but also the frail elderly population residing in 
these facilities by improving the breadth and quality of medical 
services potentially available to them. AAHSA recommends that nursing 
homes be authorized as telemedicine sites without the additional delay 
of waiting for the CMS study.
    Conclusion: Medicare regulations and payment policies that are 
problematic for long-term care providers generally can become almost 
insurmountable for rural providers, who must cope with the special 
challenges of small patient populations and labor pools and lengthy 
travel times to serve home care clients. AAHSA looks forward to working 
with the subcommittee on reforms that will provide essential relief to 
rural nursing homes and home care agencies and enhance their ability to 
give the highest-quality health care.

                                


           STATEMENT OF THE FEDERATION OF AMERICAN HOSPITALS

    Madam Chairwoman,
    The Federation of American Hospitals would like to thank Chairwoman 
Nancy Johnson (R-CT), Ranking Member Pete Stark (D-CA), and other 
Members of the Subcommittee for their attention to rural health care. 
The House Ways and Means Committee, under your leadership, has remained 
committed to the needs of rural providers--recently helping to mitigate 
a number of rural reimbursement problems through the Balanced Budget 
Refinement Act of 1999 (BBRA) and the Medicare, Medicaid and SCHIP 
Benefits Improvements and Protection Act of 2000 (BIPA).
    The Federation of American Hospitals (FAH) represents nearly 1,700 
privately owned and managed community hospitals across the United 
States, including over 400 rural facilities. On a daily basis, our 
doctors and nurses face the daunting task of trying to provide the best 
and most affordable care to rural communities--all with fewer dollars. 
This is not a recent development. The communities in which we serve 
have historically suffered under inequitable Medicare reimbursement 
rates.
    Rural hospitals serve a critical role in the health and well-being 
of our nation's seniors. With nearly one-in-four Medicare beneficiaries 
living in rural America, the Federation believes it is vital that 
Congress more fully understand the unique challenges that these 
hospitals face. Specifically, hospitals in rural communities: (1) tend 
to have higher per unit costs; (2) are more dependent on Medicare 
revenues than are urban hospitals; (3) are often the only provider of 
the services they render (i.e., when such facilities close, it can 
affect beneficiaries for miles in all directions); and (4) often have 
difficulty recruiting physicians and nurses as well as maintaining 
their patient base.
    As you will hear from the Medicare Payment Advisory Commission 
(MedPAC) today, despite modest legislative adjustments over the past 
several years, Medicare continues to reimburse rural America far below 
their urban counterparts. This is despite the fact that rural providers 
are expected to provide the same standard and level of quality care to 
their community. The Federation is delighted that MedPAC has made some 
proactive recommendations, some of which would certainly improve the 
delivery of care in rural America. However, FAH is concerned that some 
of these provisions continue to remain too targeted.
    In fact, the Federation believes that Congress should look at 
broader solutions. In particular, we would like to see as part of any 
rural hospital legislation enacted this year: (1) full Medicare 
Disproportionate Share (DSH) equity and (2) a Medicare Hospital base 
payment increase, both with new monies.
    Medicare DSH payments are distributed through a hospital-specific 
percentage add-on applied to the basic DRG payments rates. The intent 
of these payments is to reimburse facilities for the high cost of 
treating poor patients. BIPA made some important changes to Medicare 
DSH payments; most notably, it extended the eligibility threshold of 
15% low income share (previously enjoyed by only urban hospitals with 
100 or more beds), and increased the DSH cap for rural or small urban 
to 5.25%
    While the Federation appreciates Congress' efforts last year to 
address the issue of Medicare DSH equity, we would like Congress to 
take another step forward in correcting this inequity and ensure full 
Medicare DSH equity. In short, a rural hospital or small urban 
currently receives a Medicare DSH add-on to each DRG payment--the add-
on is limited under current law to 5.25% above the DRG. FAH believes 
that the 5.25% is arbitrary and artificial, and if new money were to be 
used, the Federation would support eliminating the cap altogether.
    The Federation would also like to see Congress once and for all 
address the Medicare base payment rate--an unequal and inequitable 
payment difference with no justification in policy. Medicare payment 
for inpatient care in hospitals is determined by a formula based on a 
dollar amount known as the base payment. That amount is multiplied by 
the DRG to reflect the costs of the treatment the patient receives for 
a particular diagnosis, and adjusted by the relevant wage index, DSH, 
IME, transfer, etc. There are currently two separate base rates for 
inpatient payments--one for large urban areas with a population greater 
than one million ($4,197), and a second encompassing rural and urban 
areas less than one million ($4,130). The base payment for large urban 
areas is 1.6% higher. The intent of this rate is to reimburse for the 
cost of a typical Medicare patient.
    The Federation would like to establish one base payment rate at the 
level of large urban areas. We believe that increasing the standardized 
amount for the rural and small urban hospitals to the rate of the large 
urban areas would not only bring more equity to the table, but it would 
also help these hospitals attract and retain critical hospital labor. 
The standards of care are the same regardless of location. Whether a 
patient is being treated in a rural or urban setting, the standards of 
care the physician employ are the same and should, therefore, be 
reimbursed the same rate as the large urban areas.
    The Federation believes that any comprehensive solution to rural 
health care should also address the uninsured in rural America. The 
Federation remains concerned about the health and well-being of those 
who forego essential health coverage. Clearly, the absence of coverage 
is a significant contributor to poor health, and delaying or not 
receiving treatment can lead to more serious illness and avoidable 
health problems. America's hospitals have and will continue to do their 
part to treat the uninsured and indigent in their communities; because 
every American deserves access to basic and affordable health care 
services--services that provide the right care, in the right setting, 
at the right time.
    We certainly hope that this testimony sheds some light on what we 
believe to be constructive solutions to health care delivery in rural 
America. Thank you and we look forward to working with all Members to 
address these concerns.

                                


STATEMENT OF THE HON. JIM NUSSLE, A REPRESENTATIVE IN CONGRESS FROM THE 
                             STATE OF IOWA

    I appreciate this opportunity to express my continued views to the 
Subcommittee about the need to address the disparities in federal 
health policy for rural beneficiaries and health care providers.
    My home state of Iowa ranks 8th best in the nation for health 
quality. However, Iowa ranks 48th worst in the nation for overall 
Medicare reimbursements. The reimbursement levels are not fair to Iowa 
seniors who rely on Medicare for health coverage, to Iowa taxpayers who 
pay as much into the system as taxpayers in other states, and to Iowa 
health care providers who are forced to provide quality care with less 
than adequate resources.
    The disparities in Medicare reimbursement across the country are a 
result of outdated, complex and burdensome Medicare policies that when 
written, did not take into consideration the uniqueness of delivering 
health care in rural states such as Iowa. There lies a distinct rural-
urban disparity in the Medicare reimbursement system that has been in 
existence since the program was created in 1965. The Medicare program 
has not kept pace with modern medicine and it needs to be modernized.
    As Co-chairman of the House Rural Health Care Coalition during the 
105th and 106th Congresses, I worked with the Committee to address the 
unintended consequences of the Balanced Budget Act of 1997 (BBA) on 
rural health care providers. The Balanced Budget Refinement Act of 1999 
(BBRA) and the Medicare, Medicaid, SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA) included several provisions for rural 
beneficiaries and providers such as improved the Critical Access 
Hospital (CAH) program, provided increased payments to Sole Community 
hospitals, equalized eligibility under the Medicare Disproportionate 
Share Hospital (DSH) program, and expanded access to telemedicine 
services.
    The BBRA and BIPA provided much needed, immediate relief to 
beneficiaries and providers across the country. Congress now needs to 
address overall access to benefits for rural seniors and policy 
disparities for rural providers within comprehensive Medicare 
modernization.
    I recently had an opportunity to host a forum with health care 
providers in my congressional district and representatives from the 
Health Care Financing Administration (HCFA). The forum proved to be 
constructive and beneficial to all participants. The health providers 
pointed to specific areas in Medicare policy that need to be 
modernized.
    First of all, the Medicare hospital inpatient wage index needs to 
be reformed. It is unfair to all hospitals that the current wage index 
for fiscal year (FY) 2001 be calculated according to FY 1997 data. I do 
not know any other labor market that has to compete for qualified 
professionals with wages based on the market four years prior. Coupled 
with the questionable calculation that states that 71% of all 
hospitals' budgets are comprised of wage expenses and outdated 
methodology for arbitrarily defining hospital labor market areas, 
hospitals in rural states like Iowa are struggling to obtain and retain 
qualified professionals.
    BIPA required HCFA to collect occupational mix data every three 
years by FY 2004 and implement a new methodology for using this data by 
FY 2005. While this is a step in the right direction, there needs to be 
action taken now to ensure hospitals have the resources available to 
employ qualified health professionals while keeping their doors open 
for our seniors until a new methodology can implemented.
    Secondly, the national standardized payment rate for hospital 
inpatient services needs to be reformed. I do not believe there should 
be two separate inpatient payment base rates----one for rural hospitals 
and one for urban hospitals that is 1.3% higher. The playing field 
should be level for the Medicare national standardized payment rate.
    Additionally, the CAH program needs to be refined and expanded to 
include those rural hospitals over 25 beds that are ineligible for the 
program but need the safety net in order to keep their doors open. I am 
very pleased with the progress and results of the CAH thus far. I 
believe rural beneficiaries can continue to have access to their 
hometown hospital by expanding CAH eligibility.
    Lastly, health providers continue to be bogged down with paperwork 
and regulatory burdens. During the forum, I was presented with the 
paperwork requirement for one Medicare beneficiary's home health care 
incident that, when taped end to end, was 52 feet long. It was a very 
striking example of the federal government over medicating our health 
providers with paperwork.
    I look forward to continuing to work with Chairwoman Johnson and 
the Committee to ensure our rural seniors have access to local, quality 
health care as Congress considers Medicare modernization.

                                


                                      Volcano Press
                             Volcano, California 95689-0270
                                                      June 15, 2001
Alison Giles, Chief of Staff
Ways & Means Committee
U.S. House of Representatives
1162 Longworth House Office Bldg.
Washington, DC 20515
    Dear Alison Giles:
    Attached please find a copy of a letter sent to Kaiser Permanente, 
a major HMO provider in rural California. Let me start by stating that 
we have never received an answer.
    In the letter the Agency on Aging Advisory Council of Area 12 (five 
rural counties adjacent to Sacramento, CA) asks Kaiser to discuss the 
issue of many of its members being ``red lined'' by zip code.
    We understand that this is happening as a result of the inequality 
in capitation rates between urban and rural areas.
    We also understand that this problem was created in the Balanced 
Budget Act of 1997 which instructed HMO's to drop members outside their 
``service centers''.
    Please include this correspondence as part of ``written 
statements'' for the hearing on Rural Health Care Provider and 
Beneficiary Issues which took place on June 12, 2001.
            Sincerely,
                                             Ruth Gottstein

                            Area 12 Agency On Aging
                                   Sonora, California 95370
                                                     March 16, 2001
Lisa Koltun
KAISER PERMANENTE
1800 Harrison Street,
9th floor
Oakland, CA 94612
    Dear Ms. Koltun:
    The undersigned is a newly formed Health Care Committee for the 
Area 12 Advisory Council to the Agency on Aging. Area 12 includes five 
counties: Amador, Alpine, Calaveras, Mariposa and Tuolumne.
    This letter also carries the endorsement of the Amador Commission 
on Aging (see attached).
    We would like to meet with representatives of Kaiser Permanente to 
discuss the problems and impact of being outside the service areas. For 
seniors, many of whom have been members of Kaiser for over 50 years, 
this is a tragedy.
    Many of us have received notices stating that a decision, based on 
zip codes, will result in our memberships being terminated. For 
example, Amador county will be divided by this decision.
    At the same time, we constantly see full-page, full-color ads 
recruiting new members in the Sacramento Bee. We are also aware that 
Kaiser will be expanding to Elk Grove, Roseville and Folsom, which are 
nearby communities, and will be lowering members' monthly premiums in 
Fresno, Kings, Madera, Mariposa and Tulare counties.
    Our purpose in meeting will be to discover whether there are ways 
in which our HMO and we can work together to find solutions to our 
problems, as we value our many years of excellent services from Kaiser.
    We propose that the meeting take place in Amador county, and that 
once the time and place has been set, we can invite legislators, the 
California Department of Managed Care, and the media to attend.
    We thank you in advance for your consideration in responding to our 
invitation.
            Sincerely,
                                             Ruth Gottstein
                                       Chair, Health Care Committee
                                           Area 12 Advisory Council