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





     REDUCING REGULATORY AND PAPERWORK BURDENS ON SMALL HEALTHCARE 
             PROVIDERS: PROPOSALS FROM THE EXECUTIVE BRANCH

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

                                HEARING

                               Before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, JULY 25, 2001

                               __________

                           Serial No. 107-23

                               __________

         Printed for the use of the Committee on Small Business




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                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               BILL PASCRELL, Jr., New Jersey
STEVE CHABOT, Ohio                   DONNA M. CHRISTENSEN, Virgin 
PATRICK J. TOOMEY, Pennsylvania          Islands
JIM DeMINT, South Carolina           ROBERT A. BRADY, Pennsylvania
JOHN R. THUNE, South Dakota          TOM UDALL, New Mexico
MIKE PENCE, Indiana                  STEPHANIE TUBBS JONES, Ohio
MICHAEL FERGUSON, New Jersey         CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California          DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri                 GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia          BRIAN BAIRD, Washington
FELIX J. GRUCCI, Jr., New York       MARK UDALL, Colorado
TODD W. AKIN, Missouri               JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania           BRAD CARSON, Oklahoma
                                     ANIBAL ACEVEDO-VILA, Puerto Rico
                      Doug Thomas, Staff Director
                  Phil Eskeland, Deputy Staff Director
                  Michael Day, Minority Staff Director




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 25, 2001....................................     1

                               WITNESSES

Scully, Hon. Thomas, Administrator, Department of Health & Human 
  Services.......................................................     3
Graham, Hon. John, Administrator, Office of Management and Budget     7
Grob, George, Deputy Inspector General, Department of Health and 
  Human Services.................................................     9

                                APPENDIX

Opening statements:
    Manzullo, Hon. Donald........................................    44
    Velazquez, Hon. Nydia........................................    48
    Tubbs Jones, Hon. Stephanie..................................    51
    Ross, Hon. Mike..............................................    54
    Millender-McDonald, Hon. Juanita.............................    56
Prepared statements:
    Scully, Hon. Thomas..........................................    58
    Graham, Hon. John............................................    73
    Grob, George.................................................    78

 
     REDUCING REGULATORY AND PAPERWORK BURDENS ON SMALL HEALTHCARE 
             PROVIDERS: PROPOSALS FROM THE EXECUTIVE BRANCH

                              ----------                              


                        WEDNESDAY, JULY 25, 2001

                          House of Representatives,
                               Committee on Small Business,
                                                   Washington, DC. 
    The Committee met, pursuant to call, at 10:05 a.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo 
(chairman of the Committee) presiding.
    Chairman Manzullo. The Committee will come to order.
    This is the Committee's third hearing to examine the 
regulatory problems at HCFA, which is now known as the Centers 
for Medicare and Medicaid Services (CMS). However, a new name 
does not make a new organization.
    While I appreciate that Secretary Thompson and 
Administrator Scully are trying to bring a new attitude to the 
agency, personally I am not going to recognize the new name 
until such time as I am convinced that it has truly been 
transformed into a new organization that puts the interests of 
patients and healthcare providers before those of bureaucratic 
bean counters.
    At the previous hearings, all the participants agreed that 
the regulatory burdens are distracting from their primary 
business--delivering healthcare services. Today's hearing asks 
the decision makers from HCFA and the Office of Management and 
Budget what administrative actions they can take to eliminate 
burdensome and unnecessary regulatory requirements. My 
objective is to work cooperatively with HCFA, and I will put a 
slash in there, slash CMS, and OMB to reduce and even eliminate 
these regulatory burdens.
    It appears that the recordkeeping and reporting 
requirements provide little in the way of information and in 
fact may inhibit the practice of good medicine. Similarly, the 
burden of regulation would make sense if those covered by 
Medicare or the providers benefited from the regulations. That 
does not appear to be the case.
    Rather, the regulatory scheme appears to burden those who 
have the fewest resources to wend their way through the 
Department's administrative maze, the small businesses. 
Regulations and record keeping requirements appear to frustrate 
Medicare beneficiaries and participating providers.
    A regulatory morass exists at HCFA. Congress and the 
Executive Branch need to work together to reduce the regulatory 
burdens on small healthcare providers so they will stay in the 
Medicare program. If the Executive Branch cannot solve the 
problem by administrative action alone, then we are certainly 
willing to do whatever is necessary for remedial legislation.
    I would like to thank my colleagues, Mr. Toomey and Mrs. 
Berkley, for their leadership on this issue. I expect this 
hearing will be the foundation of a fruitful partnership that 
will bring accountability to a system that for too long appears 
to have been accountable to no one.
    I will now recognize the Ranking Member of the full 
Committee, the distinguished gentlelady from New York, for her 
opening statement.
    [Chairman Manzullo's statement may be found in appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman.
    Today's hearing is the third in a series on the Center for 
Medicare and Medicaid Services, the successor agency to the 
Health Care Financing Administration. If these hearings have 
shown us anything, it is that it will take more than a name 
change to reform how HCFA operates.
    To that end, the purpose of these hearings is to work with 
the Administration to find solutions to the problems of a 
complicated and growing system. Today's hearing will focus on 
the role of OMB, specifically the Office of Information and 
Regulatory Affairs, in enforcing the Paperwork Reduction Act.
    In addition, we will look at how effectively OMB has 
monitored and enforced federal agencies' compliance with the 
Regulatory Flexibility Act. As we know, reporting and 
regulatory burdens fall disproportionately on small business. 
One of this Committee's goals is to level the regulatory 
playing field for our country's entrepreneurs.
    In our last two hearings, we heard about problems facing 
the public healthcare financing system and small health service 
providers. In 1999, Congress tightened enforcement in order to 
cut down on waste, fraud and abuse. That goal is close to being 
met, but it has had unanticipated complications.
    We learned about the burdensome and often contradictory CMS 
paperwork endured by doctors simply to receive payment for 
their services. Often complying with CMS paperwork takes more 
time than the time they spend with their patients. The 
reporting requirements are complicated, often contradictory and 
prone to unintended errors. Then doctors must worry about 
unannounced audits for the errors they did not mean to make.
    Such a confusing and adversarial system is very 
discouraging and has real consequences. When doctors are 
treated as suspects instead of caring professionals, often the 
result is an avoidance of Medicare and Medicaid patients, many 
of whom have the greatest need for medical assistance.
    Mr. Chairman, this burden of paperwork and scrutiny falls 
hardest on the small healthcare provider. Doctors in private 
solo practice or partnership want to serve the poor and 
elderly, but they worry about complex reporting requirements 
that could just as easily result in an expensive audit as it 
could be a missed payment.
    Today we continue to focus on solutions to problems that 
face small healthcare providers, and we will hear then from the 
agencies responsible for running that system, CMS and OMB. I 
hope they provide this Committee with useful and constructive 
proposals that result in a solvent Medicare system providing 
quality services to the poor and elderly, reduce waste and 
fraud and protects the needs and interests of small healthcare 
providers.
    In closing, Mr. Chairman, let me say that I look forward to 
hearing the agencies' proposals for a fair and effective 
alternative to the current way of doing business with the 
government.
    Thank you.
    [Ms. Velazquez's statement may be found in appendix.]
    Chairman Manzullo. Thank you very much.
    We have a time clock here that is five minutes more or 
less, just an idea to help us run along. Our first witness, Tom 
Scully, is the administrator. His title is Administrator of the 
Centers for Medicare and Medicaid Services. That is his 
official title. We will recognize you by your official title.
    Mr. Scully, we look forward to your testimony. I appreciate 
your stopping by the office yesterday and informally going over 
some of the many onerous burdens that you are facing. 
Iappreciate the fact that you had the courage to accept the 
appointment.
    Please?

STATEMENT OF THOMAS SCULLY, ADMINISTRATOR, CENTERS FOR MEDICARE 
 AND MEDICAID SERVICES, DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Scully. Thank you, Mr. Chairman and Mrs. Velazquez and 
other Members. I would be happy to go through all the wonders 
of the former HCFA, and hopefully in the next few months I can 
convince you that we have changed enough to start calling it 
CMS.
    There are a lot of challenges obviously with the Medicare 
and Medicaid programs. As a first step, you talked of a change 
in the name. We changed the name for a variety of reasons. 
Secretary Thompson, before I even got confirmed, spent a week 
on what was then called HCFA with me. One day on the way up to 
Baltimore he said look, everybody hates HCFA. No senior knows 
what HCFA is. HCFA has a lot of baggage. As the governor of 
Wisconsin, he probably may have been tied with the Chairman for 
being the biggest HCFA hater.
    What he found when he got up there, though, and I had 
already known from a variety of roles, is that HCFA/CMS 
actually is filled with a lot of people that actually do care 
about the programs, do a pretty good job. They tend to be very 
insular and do not really talk to the outside world enough, 
which I am committed to changing, but they really do a good 
job. But, people really, really did not like HCFA.
    It was his idea to change it to CMS. We spent a lot of time 
talking to employees and had an employee contest and focus 
groups. We changed the name to CMS, even though some people 
have given us a little bit of a hard time about it.
    Our view is if you try to change attitudes and change the 
way people look at you and change the way the employees think 
about themselves and their own agency, changing the name at 
least gives you a little bit of a new breath of fresh air to 
change attitudes, and it is all about changing attitudes.
    I can tell you, having overseen HCFA in a prior life--I was 
at OMB and in various jobs in the White House for the first day 
and the last day of the first Bush Administration. I was the 
person responsible for HCFA's budget back then and for the 
Medicare and Medicaid programs for four years, both as the 
Associate Director of OMB and Deputy Domestic Policy Advisor in 
the first Bush Administration.
    It is an unbelievably huge job. HCFA's combined or CMS' 
combined budget this year, if you look at Medicare and Medicaid 
together, is $467 billion. The Medicare program alone is $240 
billion. They are the biggest program in the federal 
government.
    C.M.S. is a very complicated place, as we will probably get 
into today. The Medicare program is run by CMS and managed by 
CMS, but it is really run by 51 contractors around the county 
largely by the Blue Cross plans, Mutual of Omaha and some other 
contractors. We have about 5,000 employees.
    I am not complaining about my budget. I would never 
question what OMB gives us because I used to be there, but we 
do have 4,800 employees and a $2.5 billion roughly 
administrative budget for $467 billion of spending, so it is a 
very, very large, very complex program and very difficult to 
run.
    There is no question there is need for changes in the rules 
and need for changes in updating the way CMS does its job. 
Secretary Thompson and I are planning to methodically and 
aggressively change it. Changing the name was the first step. 
We have done a lot of other things, which I will get into 
today.
    You mentioned in your testimony--not in your oral 
testimony, but in your written testimony, which I just saw this 
morning--the 855 enrollment form that was 30 pages long for new 
providers. Totally unrelated to your testimony, I think you are 
going to find Secretary Thompson will have an announcement 
about that tomorrow that will hopefully be looked at as a first 
step towards convincing you we were serious about change. I 
just saw that in your testimony. He has a number of changes 
tomorrow, one of which will be that.
    I have done a lot of things personally since I have been 
there in seven weeks. Three things we announced on Thursday. 
One is, and I will get into these more in a little bit. One is 
that we announced that we are forming under the Secretary's 
regulatory reform initiative three different things that we are 
going to do to initially try to make CMS a more open and 
responsive place.
    One is that we will have seven different groups. One, which 
they first met for the first time on Thursday, is a group to 
deal with the physician community, a group for hospitals and 
rural health, a group for nursing homes, a group for health 
plans, a group for nurses and allied health professionals, a 
group for home health and hospice and a group for ESRD and 
dialysis centers.
    Each of these groups, and I am chairing personally the 
long-term care group with the executive director of the 
National Governors Association, Ray Chapok, because the 
governors obviously spend more money and the states spend more 
money on Medicaid and long-term care than we do.
    Each of these groups will be focused on getting everyone in 
the community--unions, hospitals, in my case unions, nursing 
homes, the governors, the AARP, who all came to the first 
meeting, but every group in these areas--together once a month 
to talk about our problems.
    You can imagine the nursing home world. The nursing homes 
and the unions are not always going to agree on the fixes, but 
I found that there are a lot of common problems in nursing 
homes we can fix, and we want to methodically get together with 
these people once a month, identify the problems and fix them.
    Until I took this job after I was tossed out of the 
government eight years ago, my most recent job was running a 
hospital association. I know the hospitals sat around, and we 
talked regularly about what needed to be fixed. Then someone 
would courageously go approach HCFA about it.
    What I am trying to do is get the CMS staff involved in 
every one of these groups around the industry with consumers, 
with unions, with hospitals, with nursing homes, with 
physicians, and find out what their problems are, have them 
have a forum to come tell us what their problems are and have 
the people who focus on this every day inside the beltway 
focused on fixing problems day to day. Not necessarily 
everything has to be a big healthcare forum. There are a lot of 
day-to-day problems we can fix.
    A second step is that I am going to go around the country, 
and the Secretary will come on some of these as well, and have 
public listening forums. I assume that some of those will 
happen to be in congressional districts as well, so hopefully 
with some of you. I already have eight of them scheduled in the 
next two months. I think the first one is with Montana with 
Chairman Baucus.
    To the extent I can still keep my family, I spend a lot of 
time traveling around the country trying to get outside the 
beltway and find out what people's problems are dealing with 
the Medicare program, Medicaid program and CMS.
    The third step is that internally we have a lot of very 
smart people who have spent a lot of time working on Medicare 
and Medicaid. The Secretary directed me to put together an 
internal work group of all the smartest, most creative people 
in CMS to fix our program. Since that probablycomes across as, 
you know, we are from the government and we are here to help you, 
people will not believe we will actually do that.
    I recruited a fellow who the Chairman met yesterday, Bill 
Rodgers, who actually ran an emergency room, a doctor, a 
practicing physician, ran the emergency room at Alexandria 
Hospital for years, patched up my kids for years. He is now 
over at the emergency room in Winchester, Virginia. He is going 
to spend four days a month coming in to chair this internal 
work group to actually push our employees to come up with ideas 
that are actually going to fix real problems for real people.
    The reason I did that is he actually has to go back to the 
hospital every day and deal with the other doctors and the 
other physicians and the other nurses, and he has to deal with 
the real problems. Sometimes I think it is helpful to have 
somebody who is operating in the real healthcare world to help 
you fix those problems, so he is going to chair that third 
group.
    We are very focused on streamlining burden and paperwork. 
One of the other things we announced with probably a little 
fanfare, and hopefully it will make the lawyers' jobs more easy 
too, is that we announced--I used to be a healthcare lawyer in 
another life, and I got paid outrageous fees to read the 
Federal Register and identify regs that were coming out when I 
was at Patton Boggs and Aiken Gump, two big law firms in town.
    We announced a few weeks ago that we are going to have a 
compendium of all regulations coming out of the Medicare/
Medicaid programs once a quarter. We are going to publish it 
once a quarter, and if it is not on that list of the menu of 
what we are going to put out that quarter it will not come out.
    In addition to that, when we put out regs once a quarter we 
are going to put them in the Federal Register--assuming we can 
get them to agree to this; I am working on that--only one day a 
month. The reason for that is to give people in the healthcare 
world the notice of what is coming. If we do not tell them that 
it is coming in the fourth quarter of the year it is not going 
to be issued in the fourth quarter of the year.
    The regs will only come out one day a month so that not 
everybody has to hire a lawyer at a couple hundred bucks an 
hour to go down and read the Federal Register so that they know 
what is coming if you are a physician or a nursing home or home 
health aid in hospice.
    We are trying to make the regulations less burdensome, more 
predictable and give people a lot more heads up of when they 
are coming because I think the perception in the healthcare 
world, fair or unfair, is that the HCFA regulatory process, CMS 
regulatory process, tends to be just random strafing runs, and 
you have to watch for these regulations to come out. I think 
you will find that will make life a little simpler as well.
    Another step that we are taking, which is important that I 
talked to the Chairman about yesterday, is contract reform. As 
I mentioned, when I was at OMB ten years ago we had 72 
contractors, and we announced that we were going to get it down 
to ten contractors. I came back ten years later, and we still 
have 51 contractors.
    Our goal, and the Secretary has said this, is to get the 
number of Medicare contractors down from 51 to about 18 to 20, 
and we believe by finding the best contractors who can work 
with us cooperatively and run the program most efficiently, 
come up with common systems, that we can run the program more 
like an efficient business.
    The program was designed as a contractor structure in 1965, 
and very little has changed. We are determined to fix that and 
make it work better. We are already working voluntarily. We 
need legislative changes. We are working voluntarily with Blue 
Cross, who represent most of the contractors, to fix that now.
    Finally, since I know I have gone over, I will just tell 
you that one of the other efforts that you will see this fall, 
and this is probably my personal biggest agenda item as I 
already went to the Appropriations Committees, and we have had 
$35 million reprogrammed for this fall. We are going to have a 
Medicare education campaign because my view when I came in is 
that seniors do not understand their own program. They do not 
understand where to get nursing homes. They do not understand 
where to go to dialysis clinics.
    I picked $35 million because that is what a Presidential 
campaign spends in two months, and that was the level of 
information and education effort that we wanted. We are going 
to spend $35 million between October 15 and December 15 
educating seniors about where to get information, where to get 
choices, where to get more information about a nursing home 
where they want to put their parents or their spouse, how to 
pick a health plan, how to pick a dialysis center, just to get 
them to ask more questions and answer more questions.
    We know that is going to generate more questions, so our 
Medicare 1-800 number, which currently operates eight hours a 
day, five days a week, as of October 1 will be running 24 hours 
a day, seven days a week. We are going to triple the budget for 
it. We are going to have people available to answer very 
specific questions.
    If you are in New York City right now and you call up with 
a specific question about New York City, you cannot get an 
answer about New York City. You are referred to the state. We 
are going to fix that, and hopefully as of this fall when 
seniors have questions, whether it is about the Medicare 
prescription drug card which we announced last week or whether 
it is about picking a nursing home, they will be able to get 
very specific answers about their area and their town and where 
they should go for help.
    We are going to make a very big effort not just to fix HCFA 
on a regulatory basis and make it CMS so you can call it that 
in the future, Mr. Chairman, but to also make seniors--they 
love Medicare. They are happy with the program. Most of the 
states generally like Medicaid, but to make people more aware 
of what their options are and get better services through the 
program.
    Thank you for having me. Sorry I went over my few minutes.
    [Mr. Scully's statement may be found in appendix.]
    Chairman Manzullo. That is okay. I appreciate it very much.
    Our next witness is John Graham. He is the Administrator of 
the Office of Information and Regulatory Affairs, OIRA, at OMB.
    I look forward to your testimony, Mr. Graham.

   STATEMENT OF JOHN GRAHAM, PH.D., ADMINISTRATOR, OFFICE OF 
 INFORMATION AND REGULATORY AFFAIRS, OFFICE OF MANAGEMENT AND 
                             BUDGET

    Mr. Graham. Good morning, Mr. Chairman, Ranking Member and 
Members of the Committee. Thank you for the invitation to 
testify. You invited me to speak about OMB's role in reviewing 
information collection requirements pursuant to the Paperwork 
Reduction Act, as well as our review of regulations governing 
Medicare and Medicaid programs.
    I was confirmed by the Senate last Thursday night. Prior to 
that I was a professor at the Harvard School of Public Health, 
and I am pleased that I have the opportunity to testify as the 
OIRA Administrator this morning.
    I hope to leave this hearing today with a better 
understanding of the issues that this hearing is addressing, of 
your concerns and ideas for further action that may be taken by 
my office inconcert with Mr. Scully and the Centers for 
Medicare and Medicaid Services, which I also know as HCFA.
    I have appreciated the opportunity to read the testimony 
from the May 9 and July 11 hearings which constitutes a 
substantial part of my knowledge base on this issue.
    In your letter of invitation, you requested my views on the 
following issues: (1) administrative changes that OMB can make 
in ensuring that it properly understands the impact of 
reporting and record keeping requirements on small businesses; 
(2) the adequacy of OMB's review of reporting and record 
keeping requirements imposed by CMS contractors on small 
healthcare providers; (3) recommendations on necessary 
legislative changes in the Paperwork Reduction Act; and (4) our 
opinion on OMB's review of CMS regulations.
    These are important questions, and I look forward to 
working with the Committee and CMS to address the concerns that 
have been raised about the paperwork burdens that are placed on 
small healthcare providers. However, because I assumed the 
position at OIRA less than a week ago, I am not in a position 
at the present time to discuss what has happened in the past 
with respect to the relationship between CMS contractors and 
small healthcare providers, nor can I offer at the present time 
any views or recommendations regarding what deficiencies may or 
may not exist or how they can be remedied.
    However, I can assure you that one of my priorities as OIRA 
Administrator is to reinvigorate the Executive Branch's 
implementation of the Paperwork Reduction Act, and I am 
committed to working with OIRA staff and CMS and this Committee 
to look into this matter in detail and to identify actions that 
need to be taken.
    I would, however, like to briefly summarize the public and 
OIRA review that must occur before an agency can receive OIRA 
approval to collect information from the public. The 1995 
Paperwork Reduction Act amendments mandate an extensive agency 
review process and provide significant opportunity for public 
participation in both the agency and OMB processes.
    In accordance with the goals of the Paperwork Reduction 
Act, the Act requires agencies to plan well in advance when 
they develop new collections of information and they consider 
extending ongoing collections of information. This advanced 
planning is necessary because agencies need to estimate 
potential burdens on respondents and prepare to disclose 
certain additional information to the public.
    Only after doing this and considering changes based on 
comments received do agencies submit their paperwork clearance 
packages to OMB for review and approval. OIRA then reviews each 
agency information collection requirement before the agency can 
collect it and reevaluates the collections for their continued 
use at least once every three years. In cases where outstanding 
concerns remain, OIRA may call meetings with CMS staff, other 
affected agencies and other commentators.
    Our objectives throughout this process are to: (1) 
determine whether the agency's collection is necessary for the 
proper performance of the functions of the agency; (2) assure 
that the collection has practical utility; and (3) assess 
whether these benefits justify the burden imposed on the 
public. If the agency cannot demonstrate to OIRA's satisfaction 
that the collection's need and practical utility justifies this 
burden, OIRA disapproves the collection, and the agency may not 
go forward with the collection until it is revised.
    Through the PRA, OIRA must help agencies meet their 
obligations to the public by striking the proper balance. The 
Paperwork Reduction Act should not be used as grounds for 
denying the government the ability to collect from the public 
what is necessary to fulfill the mission that Congress has 
established. On the other hand, collection of unnecessary and 
duplicative information imposes unjustified costs on the 
businesses or individuals, in this case physicians, on the 
taxpayer and on the economy as a whole.
    O.I.R.A. is continuing to make efforts in this area 
reviewing individual paperwork collection proposals and 
producing an annual information collection budget that 
identifies agency by agency the initiatives underway to reduce 
paperwork burden and improve the quality of federal data 
collection. I plan to place renewed emphasis on a coordinated 
effort to produce better results in this regard, and I am happy 
to hear from Mr. Scully that efforts are being made promptly to 
work in this area at the present time.
    Thank you for this opportunity to testify. I look forward 
to working with you in the future.
    [Mr. Graham's statement may be found in appendix]
    Chairman Manzullo. Thank you very much.
    Our third witness is George is it Grob?
    Mr. Grob. Grob.
    Chairman Manzullo. Grob. Thank you. Where is the E?
    Mr. Grob. It is missing.
    Chairman Manzullo. I think it should be on there.
    Mr. Grob. Maybe the government could add an E, and it would 
sound right.
    Chairman Manzullo. Mr. Grob is the Deputy Inspector General 
for Evaluations and Inspections for the Department of Health 
and Human Services. We look forward to your testimony.
    I believe there is something a little bit unusual, Mr. 
Grob. When I read your testimony last night, I was nothing less 
than--my breath was taken away when I read on page 4 of your 
testimony, the middle paragraph, where it says we recommend 
that Medicare contractors and Administrative Law Judges apply 
the same standards.
    Mr. Grob. Yes.
    Chairman Manzullo. You might want to mention that in your 
regular testimony. I think that could be the rub of most of the 
problems going on with the doctors that are having difficulty.
    I appreciate your being here.

    STATEMENT OF GEORGE GROB, DEPUTY INSPECTOR GENERAL FOR 
  EVALUATIONS AND INSPECTIONS, DEPARTMENT OF HEALTH AND HUMAN 
                            SERVICES

    Mr. Grob. Thank you very much. I appreciate being here, 
too. I was actually excited when I saw the invitation letter 
with the words that asked us to please come up with ideas on 
how to streamline the administration of the program without 
compromising program integrity.
    The first thought that crossed my mind was that this is 
going to be complicated. Now, I knew it would be complicated 
long before we got the invitation from you because we work on 
this all the time, and we are constantly thinking and doing 
studies about things like the appeals system and the contractor 
system and all those details of the programs that we work our 
way through day after day and year after year.
    If there were any doubt about it at all, when I reviewed in 
detail the testimony in the two previous hearings that you held 
on this subject it would remove all doubts that we are dealing 
with a very complicated matter. It may be because the program 
is big. Medicare is the biggest insurance program in the world. 
That may have something to do with it, but the fee for service 
parts and the Medicare Plus charts are essentially very 
complicated because of all the people that are involved in 
this.
    Now, I think you knew that when you asked us to answer the 
question, and I am going to try to deal with this complexity by 
dealing at several different levels; from a very general level 
and then trying to get down to more and more specifics as we 
go. Five minutes will not be enough to do it, but I will look 
for other opportunities to discuss things with you and your 
staff.
    In one way, the question that you asked is actually the 
beginning of the answer. I think it might be worthwhile for us 
to pause to lay out a principle that we can use in dealing with 
these, and the principle that I would like to articulate is the 
principle of balance.
    Because the subject is so complicated, we need to get our 
bearing from time to time. I think the correct bearing is this. 
I think anything we do has to balance the needs first of the 
beneficiaries, the healthcare providers, and then the financial 
and program integrity of the program.
    A statement I think that on the surface sounds trite, but 
those of us who have worked in the field know how hard it is, 
and every once in a while when we get lost it is good to have 
something we can grab back onto that sort of tells us where we 
should go. So I think if we start with that we can always get 
our bearing when we need to do it.
    Now let me descend one level of generality here, and let me 
look at the infrastructure. I think that nothing will help the 
healthcare providers if the fundamental infrastructure of the 
program is not there. There are lots of aspects to it, but I 
would like to single out two. One is the Medicare contractors, 
and the other is the appeals system that you mentioned earlier.
    Now, Medicare has these 51 contractors that Mr. Scully 
referred to, and we have actually found problems with the way 
these contractors work even with their own integrity. We have 
had 15 settlements with contractors for false representation of 
the work that they do, for turning off the codes that they use 
to detect integrity problems and a number of things like this 
amounting to $350 million ever since 1993. We have also had 
some problems with the effectiveness of their fraud units.
    But there remain very fundamental problems with the 
contractors simply with accounting. The contractors to date do 
not have integrated dual entry accounting systems, which is a 
fundamental aspect of any large business in this country, as I 
am sure that you know.
    Above and beyond these procedural weaknesses, there are 
very fundamental weaknesses in the way the contractors are 
chosen. Only insurance companies can serve as carriers. As far 
as intermediaries are concerned, these are basically nominated 
by the National Blue Cross/Blue Shield Association, which 
chooses which ones to nominate, and they do that by consulting 
with the various provider groups. Only cost based reimbursement 
is possible, and no specialization is allowed except for the 
anti-fraud contractors.
    There is no business in this country that could possibly 
function if its hands were tied with the same rules that 
Medicare has tied the hands of its contractors. Now, when this 
started it made perfect sense because we had to quickly muster 
the resources of large insurance companies to manage these 
programs. But right now the CMS has very little flexibility in 
how to choose its contractors.
    Secretary Thompson has announced that he is going to reform 
this, as well as the reductions in the number of contractors 
that Mr. Scully mentioned earlier. We completely support these 
reforms. We think they are common sense, and they should be 
made as soon as possible.
    The second one is the appeals system. It is fundamentally 
broke. Right now, for example, in Part B there are four levels 
of appeals. At the first level, a carrier reconsideration takes 
45 days on average. At the second level of a hearing it takes 
120 days. At the ALJ level it takes about a year, and then at 
the Departmental Appeals Board it takes up to two years on 
average to handle these appeals. It takes too long.
    There is a very high reversal rate, which we believe is due 
to discordant standards at the different review levels, which 
is what you had referred to earlier. There is, we believe, 
somewhat of a breakdown in the communication and understanding 
at all these levels, and there is a very dysfunctional 
administrative system. If someone is worried about paperwork 
reduction, they ought to try to follow the files of an appeal 
as they work their way through the system and even across the 
country from office to office as they try to resolve these 
matters.
    We believe that the solution to this is first to provide 
enough resources for the system to work. If it is taking too 
much time, it may be due to procedures, but it may be due to 
overload. If people would like their appeals addressed, there 
should be enough people involved in hearing the cases so that 
it can be resolved quickly.
    We think the ALJs should be moved to the Department of 
Health and Human Services. Right now they function out of the 
Social Security Administration. In a sense they focus a 
residual of their activities on Medicare after trying to 
satisfy the needs of social security. Now, there is a cadre of 
Judges which do specialize in Medicare, although they do not 
hear all the Medicare appeals. We believe that these should be 
moved to HHS.
    Communication should be approved at every level. The system 
should be subject to regulation. There should be a case 
precedent system. There should be reasonable time frames set 
out for the various levels of appeal, and there should be 
representation of the Department at some of the appeals levels, 
where they are not currently represented.
    Moving now to something more specific, which is the actual 
dealings with the providers and the beneficiaries of our 
program, I think that we strongly endorse what everyone has 
been saying, which is the need for outreach and education for 
the provider community.
    Now, the primary responsibility for this lies with CMS. The 
Inspector General's Office has gone out of its way, though, to 
try to provide as much guidance as we can to the industry to 
respond to needs that they have brought forward to us. I think 
many of you are familiar with our voluntary compliance 
guidelines program, which we have issued for nine segments of 
the healthcare industry, including hospitals, home health, 
medical equipment, prosthetics, hospices, Medicare Plus Choice, 
nursing facilities and more recently for the physician 
community.
    We also issue by statute, which required it in the most 
recent legislation, advisory opinions when questions are raised 
to our office to give an answer as to whether a particular 
service is allowed. We issue fraud alerts, safe harbor 
guidelines, and our website contains every audit we perform. 
Every evaluation which my office performs is on there. Our work 
plan is on there. Our hearing information is on there. Anyone 
who wants to know what we are doing and what we are saying, 
they can go to our website, and they can find it there.
    Of course, CMS has also been aggressive in conducting 
education and plans to do even more. This really works. In 
1996, we conducted our first payment error reduction study, and 
we found that the error in Medicare at that time was 14 
percent, costing the government $23.3 billion. Last year, for 
the year 2000, it dropped in half. It is 6.8 percent. It is 
about $12 billion right now, so it is half of what it used to 
be, but it is still too high.
    To show you that success is really possible here, I would 
tell you initially in the hospital community $1 billion worth 
of their error was due to documentation problems. In the last 
several years, not a penny of their error that we detected was 
due to documentation problems. I think this demonstrates that 
the education and the effort to deal with problems once 
identified can be very successful.
    My time is now over, and there will be plenty of 
opportunities I think in dealing with your staffto answer other 
questions that you may have. I would really look forward to the 
opportunity to do that. I have gone through all of the material, and 
any way that we can meet with you or your staff to go over those 
problems one by one until we figure out how to do that would be most 
welcome to me.
    I will just end by saying obviously Medicare should not 
just be the biggest healthcare program in the world. It should 
be the best.
    Thanks.
    [Mr. Grob's statement may be found in appendix.]
    Chairman Manzullo. Thank you for that testimony.
    I have a couple of questions here. Mr. Grob, I would refer 
to page 4 of your testimony.
    You know, I practiced law for 22 years. I did a lot of 
social security disability. We had guidelines. We had a hearing 
here a couple weeks ago with Dr. Michael Hulsebus, who was 
terrorized, along with his brothers, by Wisconsin's Physician 
Services, WPS. We found out that that group does not know the 
difference between an x-ray and the X files. The only way that 
you can qualitatively state whether or not somebody needs an 
adjustment by a chiropractor is to take a look at x-rays. They 
did not even look at x-rays.
    As far as I am concerned, performance contracts are nothing 
more than the same thing as telling a state trooper that he has 
a quota of tickets that he has to write. The terrorizing that 
has gone on by these contractors has got to come to an end.
    What I do not understand is why? There is a local medical 
review policy and a contractor manual, which is what the so-
called carrier hearing officers are. They are a joke. The ALJs 
are bound by statute, regulations and national coverage 
determination.
    In fact, Dr. Hulsebus, after he was fined $250,000 and we 
beat it down to zero, then they came back with $40,000. We beat 
it down to $1,500. Then they decided to appeal the $1,500 after 
the Administrative Law Judge threw it out on its face. Again, 
they got three more letters.
    The latest from Wisconsin's Physician Service, and I will 
mention names and names of people on the record and publicly to 
bring about accountability. They said well, here is your 
appeal. You can send a letter, and somebody may or may not 
respond to it.
    My question both to you and Mr. Scully would be, you know, 
why are the contractors not bound by statute, regulation and 
national coverage determination?
    Before you answer that, I am also concerned over the fact 
that the contractors are insurance companies. This is what 
answers the questions of why the insurance companies in non-
Medicare situations are trying to pay the same rate of Medicare 
reimbursement. I just think it is a very cozy arrangement and 
that there should be an end to that. This is an administrative 
function.
    I would like your comments on that, but if you could first 
comment on the first, both you and Mr. Scully. Well, whoever 
wants to comment on that.
    Mr. Grob. On the first one I would say I think your point 
about the performance contracting is very valid. I think there 
is a good solution to that, and I think it is implied by what 
Secretary Thompson has announced, which is you can change the 
basis upon which you measure the performance of a contractor.
    If the contractor is supposed to have timely appeals then 
their performance can be based on how timely those appeals are. 
If the contractor is supposed to handle appeals that are 
accurate and in which people are treated with dignity then that 
can be what the performance is based on.
    I think that is a very good way to do it, which would be to 
structure those contracts so that there is a strong performance 
element to it.
    Mr. Scully. Maybe I will switch to a couple of the other 
subjects you mentioned. The national versus regional coverage 
decisions. That is an ongoing policy dilemma. Obviously with a 
$240 billion insurance company, people can get coverage 
decisions that they do not like regionally and want national 
coverage decisions and vice versa. It is kind of like forum 
shopping as a lawyer.
    Probably 80 percent of the coverage decisions about what 
Medicare covers are made locally by the carriers. Most people 
like that. Most physicians like it. Most hospitals like it 
because it leaves a lot of flexibility for local practice 
patterns and local decisions. There has been a lot of pressure 
to push more of that to the local areas.
    On the other hand, big decisions like PT scanners, things 
like that, MRIs, which I was involved in ten years ago, how 
much you are going to cover on that, the bigger decisions tend 
to be in the multi-billion dollar range and tend to get pushed 
up to the national level and be national coverage decisions, 
but that is always going to be a problem because when a local 
carrier and a local contractor turn somebody down for coverage 
obviously those people are very unhappy.
    On the other hand, in many cases they prefer the local 
coverage because they are more likely to get a more flexible 
decision locally than they would if they pushed it up to 
Baltimore and had the decision made nationally on a national 
coverage decisions. That is probably a pressure that is not 
going to go away, the balance between national and local 
coverage decisions. I have already spent quite a bit of time on 
it.
    I am not sure which other ones you wanted me to cover, but 
as far as the fraud and abuse we discussed yesterday my views 
on fraud and abuse have probably been shaped as much by my 
experience the last ten years out of government as they have 
been in government. I was the co-chair of the Fraud Task Force 
in the first Bush Administration with the Deputy Attorney 
General when I was at OMB and spent a lot of time on it. There 
were a lot of great strides made in the last ten years on I 
think more aggressive Medicare fraud enforcement.
    On the other hand, having been the chairman of the 
compliance committee of two large public corporations, Oxford 
Health Plans in New York City and Davida, as I mentioned to you 
yesterday, in having to put together compliance programs and 
trying to push large corporations to be compliant I think you 
could argue that there was maybe not enough done ten years ago, 
and maybe the last couple years the government has been 
arguably overzealous in some areas, which you have focused on.
    I think finding a happy balance where we find people that 
are bad that are not partners that are big contractors and bad 
providers and go after them more aggressively while being more 
responsive to the people that are actually being good public 
partners with us as contractors for Medicare is a tough balance 
to hit. I hope working with the IG and the Justice Department 
in the next four years we can pull that off.
    Chairman Manzullo. My time has expired. My point was simply 
that the carriers should follow the laws, statutes and 
regulations. The problem with HCFA is the fact that it is not 
predictable, and that is why it is all screwed up.
    Mrs. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Scully, on July 16 the Administration published a 
notice of publication in the Federal Register outlining their 
requirements for participation in the President's new Medicare 
prescription drug card program. Is the Administration following 
the requirements under the Administrative Procedures Act during 
this rule making?
    Mr. Scully. We have, but it is not a rule making. Actually 
we are not really making a rule. What we are effectively doing 
is putting together a consortium or cooperative and giving 
theMedicare seal of approval to drug discount cards. They are going to 
use it to hopefully draw more seniors, but that proposal is something 
that was largely mine. If you want to spend a lot of time having me 
explaining it I can, but it was around in the last Administration. I 
think there are a number of bills in the House and Senate.
    Our view on that package was that no matter which Medicare 
prescription drug reform proposal you look at, getting people 
into organized purchasing cooperatives is from anywhere from 
one-third to two-third of every reform bill savings, whether 
Democrat or Republican.
    Ms. Velazquez. But are you not setting up a new program?
    Mr. Scully. No. We are setting up a cooperative where the 
government is going to be a partner with private companies, and 
we have the ability under current law to allow people--only 
CMS, the Secretary of Health and Human Services, is allowed to 
give people the ability to use the Medicare name, such as 
Medicare Select, Medicare Plus Choice.
    All we are basically doing is allowing our name to be used 
under certain circumstances to market these cards. We are also 
putting together a private cooperative to market them and then 
make sure that the enrollment is coordinated, but it is not a 
new federal program by design.
    Ms. Velazquez. Mr. Grob, many of the problems healthcare 
providers are facing is between themselves and the private 
sector Medicare contractors. Now the President wants to 
implement a prescription drug card program administered by the 
private sector.
    Are we creating more new problems ahead where these 
contractors are out of control?
    Mr. Grob. My office has not seen the specifications of the 
new proposal, simply the general announcements that were made 
of it, so at this time I am not prepared to talk about the 
ramifications of the specifications of it.
    Certainly there will be a new administrative arm here 
through the private sector, and I think concerns like that need 
to be looked at.
    Ms. Velazquez. Mr. Grob, will you look at this new program 
and get back to me with an answer?
    Mr. Grob. I certainly will.
    Ms. Velazquez. Mr. Scully, often times regulations that 
were considered burdensome by a regulated community were not 
only required by statute, but required within a certain time 
frame.
    Do you believe that the growing amount of CMS paperwork 
requirements are the result of recent Congressional mandates?
    Mr. Scully. Well, they probably are. I was pretty involved 
in I think the 1990 bill, the 1993 bill, the 1997 bill, the 
1999 bill. Every time you update and try to improve the 
program, obviously you get much more guidelines both in 
Medicare and Medicaid.
    I would say that one of the problems of CMS in the last few 
years, in fairness to Nancy Min-Pearle, my predecessor, who 
happened to also be my successor at OMB and is a good friend, 
is that through the 1997, 1998 and 1999 bills the agency was 
largely overwhelmed with work. I think I have had the good 
fortune of I would not say it is a quiet time, but as a post-
legislative period a relatively quiet time to come in and try 
to fix some things.
    I think it is fair to say that the paperwork burden was 
overwhelming as a result of the legislation.
    Ms. Velazquez. What is the difference between the BPA 
provisions that apply to the appeals and coverage process and 
the provisions contained in MERFA?
    Mr. Scully. I am sorry. What?
    Ms. Velazquez. Is there any difference between the BPA 
provisions that apply to the appeals and coverage process and 
the provisions contained in MERFA? This is the legislation that 
we just held some hearings about.
    Mr. Scully. I am not sure where they conflict. We have 
spent a lot of time. I actually have not talked to them in two 
months, but spent a fair amount of time talking to Mr. Toomey 
and other sponsors about MERFA. There are some things in there 
that we support and some we do not.
    Ms. Velazquez. Mr. Grob.
    Mr. Grob. A quick reaction is that they generally do not 
conflict with one another, but rather they deal with different 
aspects of the problem.
    The BPA provisions on the appeal system are primarily 
intended to constrain the amount of time that is taken at each 
level of the appeal system so that things can move rapidly 
through it, whereas the provisions in MERFA tend to deal with 
appeals that relate either to the status of the provider in the 
program, or they try to provide a more rapid hearing of matters 
that are related either to constitutional issues or to issues 
related to the authority of CMS.
    Ms. Velazquez. Should we be giving the agency time to 
promulgate the BPA regs before we start reforming the system 
again?
    Mr. Grob. It is my opinion, and I do not know that everyone 
shares it, that with respect to the appeal system we really 
need to look the whole thing over from top to bottom.
    As you know, we have recommended that the ALJs be moved 
into the Department, and I think if that should happen, and we 
believe that it ought to happen, that at the same time all the 
other things should be considered.
    I would agree with you that these things need to be looked 
at together. We are very much in favor of a much more rapid 
handling of the appeals, but we do have some misgivings about 
the automatic raising of them to the next level because we are 
afraid that if that is done either too soon or without adequate 
attention it could actually have the opposite effect of 
basically encumbering the higher levels of the appeal system 
with issues that have not been fully reviewed yet, and it may 
not only move the backlog to a different place, but it may be 
more difficult then to deal with that backlog at the place.
    Having said that, I do not want anyone to misconstrue my 
remarks as saying that we do not want it to move faster. I just 
think we need to look at it very carefully and make sure that 
it works right.
    Ms. Velazquez. Thank you.
    Chairman Manzullo. Thank you, Ms. Velazquez.
    I am going to go a little bit out of order here to 
accommodate Congressman Christian-Christensen, who is an M.D. I 
want to make sure her testimony gets in.
    Mrs. Christensen. Thank you, Mr. Chairman. I also might 
have to leave to vote in another Committee.
    I want to welcome you here. It is great to have you. You 
can imagine as a physician of 20 odd years and having worked 
with HCFA that this is a day that, you know, most physicians 
would relish having HCFA in front of me. I started to come 
here, you know, in an attack mode to try to get even for all of 
the problems that I have had, but maybe it is because I got 
stuck in an elevator this morning. I have kind of changed my 
mode.
    You know, we are having serious problems in my district. I 
used to think it was just my district, but I see it is all 
over. We are pretty much facing a crisis in that physicians are 
opting out of the system. There have always been those 
physicians who have never charged Medicare beneficiaries 
because it was just too horrendous to go through the process, 
but now, becausethere is an option to opt out, they are opting 
out. That is going to have a very terrible effect on beneficiaries 
being able to get service in a small community as ours.
    I am hoping that as we go through this morning through the 
question and answer period you will help me to develop some 
confidence in the changes that are going to be taking place so 
that I can go back and find some way to encourage my physicians 
not to opt out, but to stay in the system. I am still looking 
for some of that. In answering the questions I am going to 
pose, I hope you will help me to develop that confidence so 
that I can go back and encourage my physicians and other 
providers.
    I have gotten many complaints, and actually all of my 
providers want to change the carriers, whether it is Part A or 
Part B. They just want those carriers out of their lives. I met 
with providers before I came back this week, and nothing has 
changed in ten, 15, 20 years with our providers.
    Could you, Mr. Scully, explain? You talked in your written 
testimony about flexibility and specialization and how that 
would improve the contractor relations with providers. Could 
you explain how that is going to improve the relationship with 
the providers?
    Mr. Scully. Well, I think the biggest thing that will 
improve the relations with providers is incentivizing the 
contractors. I personally, and this is my own personal opinion, 
and I actually agree with the IG on most of what they said 
about contract reform. Virtually everything. I hate to start 
agreeing with the IG too early. That could be dangerous.
    We really do need to fix the program. There is no place in 
the Medicare system we have had cost based programs that have 
worked. I mean, basically with these contractors we pay them on 
cost, which, as I said to some of my staff, anybody that thinks 
the people are making money on a cost based program is silly. 
They are charging their plant and equipment and their systems 
and other things, but their incentives are not appropriate, so 
this is the backwater of most Blue Cross plans.
    Just even in my personal experience, when I was a lawyer I 
represented Blue Cross of California, which is chaired by 
Leonard Schaefer a former HCFA administrator and friend of 
mine. They had disastrous problems. One of the best run 
insurance companies on the private side in the country, and 
maybe at that point--they have gotten out of the Medicare 
contracting system. Maybe at that point one of the worst run.
    The reason was it was not profitable for the company 
because they were non-incentivized. It was a cost based 
contract. It was a way for them to cross subsidize their 
computer systems and their building and equipment, but they had 
the worst people in the company running the Medicare program, 
at least at that time. It got a little better. Blue Cross is 
not out of the Medicare program.
    I believe, as with any other contractor system of the 
federal government, we have to incentivize them right. Part of 
the Secretary's contract reform proposal, and the IG supports 
this, is to start paying these people as other government 
contracts and incentivize them appropriately and allow them to 
make a predictable government contractor profit so that they 
start looking at this as a good business opportunity because 
they are not incentivized appropriately.
    As a result, the Blue Cross plans and Mutual of Omaha and 
EDS and the other people that run this program do not have 
appropriate incentives to focus their best people in the 
company in the long term on running this program efficiently. 
We do have our hands tied.
    Mrs. Christensen. Okay. Mr. Scully, you talked also about 
looking at the different areas, whether it is home healthcare, 
hospitals and so forth. Are providers involved in that process 
on an ongoing basis in looking at the reforms that are going to 
be taking place----
    Mr. Scully. Yes.
    Mrs. Christensen [continuing]. Of groups that are looking 
at hospitals and other providers and home healthcare? Are the 
providers involved in that discussion?
    Mr. Scully. That was the whole point of the groups that I 
announced on Thursday, as I obviously used to run a provider 
association, so I tend to be focused on that. In the nursing 
home area, for instance, the group that I am chairing is the 
unions, the major nursing home groups, the AARP, the other 
patient advocacy groups.
    The whole point is to get out to those groups and find 
things they want to fix. Hopefully we will fix them fast enough 
that we can get the Chairman to start calling us CMS sooner or 
later.
    Mrs. Christensen. If I could just throw in one last 
question? I guess I would ask this of Mr. Grob, who talked 
about balance. We are really looking forward to balance because 
from a provider point of view we have shared most of the burden 
and the suffering in the system, so we are looking forward to 
some balance.
    Everybody acknowledges that the carriers are a big part of 
the problem. You also acknowledge that when physicians are 
investigated or audited you do not find really fraud and abuse. 
You find honest mistakes.
    While you are reforming the system, while you are changing 
the carrier, the way that the contractors are contracted with, 
would it not be a good idea to put a moratorium on some of 
those investigations of the providers? We are really not 
involving ourselves in criminal activity. They are honest 
mistakes. The system is so bad that I am sure that it is 
responsible for a lot of the reasons why they are audited, 
investigated, et cetera.
    Mr. Grob. Okay. Let me address this one. I think I am going 
to pick up the principle of complexity to answer this one 
because it is very complex.
    We have always said, and I will emphasize it now. I will 
say it again a dozen times if we have to. Most providers are 
honest. They are hard working. They are very concerned about 
their patients. They come through for them all the time. There 
is a handful that are not, and they besmirch the name of all 
the rest that do.
    Having said that, however, I do not think that I could 
agree that all the problems that we are having are simply due 
to mistakes. On the other hand, I do not know that it is all 
due to fraud either.
    What I really think is that there is a spectrum in there. 
It runs from someone who made an innocent mistake to someone 
makes a lot of innocent mistakes, to someone who does not care 
very much, to someone who might just want to press it and just 
see what they can get out of this program without crossing the 
fraud line, all the way up to people who systematically sit 
down and say ``let us see if we can take this thing for all it 
is worth.'' It really runs the gamut like that.
    Now, the error rate study that we produce every year is not 
capable of detecting what the underlying reason is. It can only 
detect whether or not a payment was not made correctly. We are 
not able to look underneath that to see whether it was due to 
fraud.
    There is something about the statements that go around, 
and, as I said, I would really like to take this opportunity to 
put it on the table. I think that part of the reason for the 
fear that physicians and others have about being investigated 
is that they do not understand that not all that many are. The 
number of physicians who have been criminally convicted or for 
whom fines and administrative remedies have been taken is very 
small. For example, it has averaged about 25 a year. Most 
people think it amounts to much more than that.
    I believe that there are several ways to handle the 
question of the fear that people have of being criminalized, if 
you will. One is to make sure that the systems do not do that 
wrong. We havealways said we try to be very professional about 
this. We do not want to cross that line. We are very open. As we have 
always said, if anyone knows a specific case, anything they want to 
bring to us where this has not worked right, let us know.
    I think that another way to deal with the problem, though, 
is to deal with the fear. I think part of the education and 
understanding that we have to bring about is for everyone to 
gain an understanding as to what the limits of those 
authorities are and how they are practiced, so that if there 
are any fears that are not justified we can take care of those.
    Chairman Manzullo. I appreciate your testimony.
    Mr. Pence.
    Mrs. Christensen. Thank you.
    Mr. Pence. Thank you, Mr. Chairman. I want to thank Mr. 
Scully for being with us, as well as our other distinguished 
guests today in the Small Business Committee.
    I would compliment you, Mr. Scully, already by saying that 
on the House Floor yesterday, following your meeting with our 
Chairman of this Committee, you were responsible for the first 
reference to HCFA that I have ever heard the Chairman make 
where I did not feel that he was restraining himself from using 
expletives. I congratulate you for that, for good first 
impressions, and I am confident that they will go forward with 
good actions.
    My question more has to do with a process that has come to 
my attention. I serve as Chairman of the Subcommittee of the 
Small Business Committee on Regulatory Reform and Oversight, 
and I am very encouraged to hear that the Centers for Medicare 
and Medicaid Services recently announced the formation of in-
house expert teams across its program areas to think 
innovatively about new ways of doing business that will reduce 
the administrative burdens and simplify rules and regulations, 
very much a goal I know of the Chairman of this full Committee 
and very much part of our vision for the Subcommittee that I 
chair.
    I would like to congratulate you in this effort and 
encourage you strongly as you pursue this process of innovation 
and reform. I would also suggest, though, as you go forward 
that you establish a team to investigate specifically the 
survey process for skilled nursing facilities. I serve an east 
central Indiana district that is home to many of these 
facilities that you have I think accurately spoken well of 
today.
    What I hear from the folks in east central Indiana is that 
in effect this system is broken, and the current survey process 
does not really measure quality; that in fact they tell me that 
it only really provides a snapshot of compliance on that 
particular day.
    I would like to encourage you and just simply invite your 
comments, Mr. Scully, in particular on this recommendation. I 
want to encourage you to review the process, including the 
frequency of surveys, and take a hard look at the shortcomings 
of the survey process itself.
    I would also invite you beyond today's hearing to share 
with me in our Subcommittee capacity any of your thoughts going 
forward. I would just invite you to comment in any way about 
this new process and specifically in the area of skilled 
nursing facilities.
    Mr. Scully. Well, as I mentioned earlier, there are seven 
outreach groups, and I not by accident picked the long-term 
care and nursing home group to chair myself. One, as a former 
hospital person I think I should do the hospital one.
    The executive director of the National Governors 
Association, Ray Chapok, one of the chief people at the AARP, a 
senior person at the SCIU, the biggest union in the nursing 
home business, and I met last Thursday to start working on this 
working group. It is going to be expanded to virtually anybody 
in the nursing home business that wants to be involved. And 
Chip Rodman--I am sorry--the president of the American 
Association of Health Care Associates, which is the largest 
nursing home group. We are going to look at everything from top 
to bottom in the nursing homes.
    I have already started working on the survey and cert 
process. We are pretty much tied by statute. I personally think 
it is nutty that every nursing home in the country is surveyed 
and certified every 12 to 15 months, the best to the worst. My 
view is the really bad ones we should be in every three or four 
months, and the really good ones we should be in every three 
years. It is not tied to quality.
    When I came in, at one of my first staff briefings I said 
are you telling me we survey every nursing home. I picked one 
company's nursing homes with the exact same frequency as the 
bad ones? The answer was yes. That is a statutory requirement.
    I am hoping that we can convince Congress to change that 
based on a quality initiative. I do not want to preempt the 
Secretary, but we are working very, very, very aggressively and 
cooperatively with a lot of different parts of the nursing home 
business on a nursing home quality initiative that I think will 
be done this fall, and I think it will significantly change the 
way we work with nursing homes for the better.
    I think you will find that hopefully we will come back to 
you pretty quickly with an entire approach to refocus and 
restructure the review and surveys and certification and 
overall regulation of nursing homes. I mean, the good thing in 
a strange way about the nursing homes--they have masked their 
problems in the last three or four years. As you know, five of 
the top six chains are in bankruptcy. It has been a tough 
couple of years for nursing homes.
    They are willing to look at a lot of the things, which has 
been good for me, that they probably would not have talked 
about three or four years ago. They have been very cooperative 
partners so far in trying to get things changed. I hope to work 
with them and the unions and others to get some significant 
regulatory forum for nursing homes.
    Mr. Pence. Very good. Thank you. I will just reiterate my 
desire in my Subcommittee chairmanship role to ask your 
forbearance in keeping us informed as that goes forward----
    Mr. Scully. Sure. Absolutely.
    Mr. Pence [continuing]. In how we can be helpful on this 
side of the process. Thank you.
    Mr. Toomey [presiding]. I think we have time for one more 
questioner before we return for the vote, so the gentleman from 
New Jersey, Mr. Pascrell.
    Mr. Pascrell. Thank you, Mr. Chairman.
    Mr. Grob, what part does the bureaucracy play in 
precipitating fraud? We noticed a reduction in what we know of 
in fraud. What part does the bureaucracy play in this? You 
started to touch upon that.
    Mr. Grob. I am not quite sure I understand your question, 
sir.
    Mr. Pascrell. Well, the fraud in Medicare. We talked about 
$25 billion reduced to about $12.5 billion.
    Mr. Grob. Right.
    Mr. Pascrell. The $12.5 billion that still remains that we 
know about, you know.
    Mr. Grob. Yes.
    Mr. Pascrell. We are conjecturing here.
    Mr. Grob. Yes.
    Mr. Pascrell. What leads to that fraud? Is it because we 
have set up a system that is unmanageable, or is it because we 
just have crooks out there?
    Mr. Grob. Okay. I see what you are saying. Okay. Thank you. 
I think if I could mention, this is a further extension of the 
answer to the question previouslyraised about this. Again I 
would like to emphasize that our error rate study does not measure 
fraud. In other words, we do not have a six or seven percent fraud 
rate, but it is an improper payment rate. I think that goes a long way 
to answering your question.
    There is no doubt in my mind that a good part of that is 
that people may have trouble understanding the rules in some 
cases, or maybe their own management is just not tight enough, 
you know. In other words, I believe that the weaknesses run the 
gamut from something that is purely innocent, but also includes 
some things like some management that may not be as tight as it 
should be.
    That certainly would be exacerbated by complex program 
rules. The frequency of change of program rules I think is 
something that contributes to that as well.
    Mr. Pascrell. Much of it precipitated by us on this side of 
the table.
    Mr. Grob. Yes. It is interesting at several hearings that I 
have participated in how readily various Members of Congress 
initiate the discussion about the changes that have been due to 
the legislation that can make program management more 
difficult. I think there is an overall general awareness of the 
fact that the frequency of change does contribute to that.
    Mr. Pascrell. Do you think that all the agencies are in 
this room to redesign a new delivery system for Medicare and 
Medicaid?
    Mr. Grob. Well, I think going to remarks made earlier that 
certainly the provider community has to play a big role in 
that. I do not think it would work very well if CMS, for 
example, were to design all the rules. I think it would get 
bogged down.
    I actually think that a big step here is this listening 
process that Mr. Scully has put into effect. I think that in 
looking at the questions that were raised in the testimony in 
the previous sessions, I find that a lot of them go to the 
structure of the program they were trying to manage, as well as 
to the structure of accounting and hearings and things of this 
nature.
    There really are underlying questions about who is eligible 
for the benefit, how do you enroll in the program, what 
benefits are covered, how well people know that, and so I 
really think a process of continuous improvement or continuous 
engineering is what is called for, and I think the idea of 
forming the groups with the different provider groups is 
probably a very critical and essential element of that.
    Mr. Pascrell. Would you, Mr. Scully, believe that in one 
year if we put all those agencies and providers together, the 
representatives in a room, we could devise a system that was 
less bureaucratic and much more to our liking with a reflection 
to the questions that are being asked today and the last two 
times we have met?
    Could you envision a new system, a delivery system being 
put together that you could recommend to the Congress? I mean, 
otherwise we are spinning our wheels here.
    Mr. Scully. Well, not to be a cynic, Congressman, but I 
have been involved in every major health reform since 1986 I 
think. RBRBS, which was the biggest, in 1989 was something I 
was negotiating on behalf of the first Administration.
    I think it is a big program. Everything you do is 
politically controversial. Believe me, I am hopefully a big 
change agent, but I also think that big change in Medicare 
comes slowly. We are very hopeful we get significant reform in 
Medicare. We are totally committed, the President is, to 
prescription drugs and Medicare reform this year, but I also 
think that you have to look back a long ways to find 
significant change in the healthcare system. Politically it 
just does not happen.
    I like to think that rather than give up, I try to go for 
small changes. One of the reasons for taking this job was to 
get Medicare reform and prescription drugs this year, and I am 
going to spend a lot of time on it, but I also think smaller 
changes like RBRBS, small changes like some of the things we 
did in 1993 and 1997, do help. It is a big ship to turn. We are 
committed to doing whatever we can to make small changes.
    Mr. Pascrell. I want to commend the Chair for offering 
legislation to begin that process. I think that is a very 
serious kind of thing because part of the fallout is fraud. 
Part of the fallout is a system where nobody really understands 
who is participating.
    We do have to start someplace. It would seem to me that if 
we had a full year of concentration that we could put a 
delivery system together. I do not believe you are really a 
cynic at heart. I think you have had enough experience perhaps, 
maybe too much. The same thing for the folks on this side of 
the table. We can do something about this if we put our minds 
to it.
    Thank you, Mr. Chairman.
    Mr. Toomey. Thank you. We have probably six or seven 
minutes left in this vote, so we will adjourn for the vote. 
There are three votes. We will reconvene immediately following 
the last vote.
    [Recess.]
    Chairman Manzullo [presiding]. We are going to proceed. If 
we are suspended, it happens again.
    I would recognize Congresswoman Millender-McDonald.
    Ms. Millender-McDonald. Thank you, Mr. Chairman.
    I apologize for not being here through most of your opening 
statements, but I certainly got the feel of the rhythm of this 
hearing with the questions that were raised by my colleagues.
    The one thing that I guess I want to touch on is the 
education outreach. Mr. Scully, in your presentation you spoke 
of wanting to hear from local seniors and large and small 
providers, state workers and the people who really deal with 
Medicare and Medicaid in the real world.
    My question to you is what are you doing for an education 
outreach to those because those are the ones that we get a 
myriad of complaints and concerns with and from with reference 
to the horrendous paperwork and regulatory processes that go 
along with Medicare and Medicaid.
    What is your education outreach, for a beginning question 
to you, on trying to hear from these folks, you know, albeit 
through AARP, older seniors or whatever? What are some of your 
outreach efforts?
    Mr. Scully. Well, I mentioned in my statement there are 
three basic things we are going to do, and we are certainly 
happy to do more.
    One is that I am going to, to the extent I can still stay 
married and have a family, I am going to be traveling around 
the country this year to do personal hearings probably with 
Members of Congress.
    Ms. Millender-McDonald. Starting with me, of course.
    Mr. Scully. Well, I hate to say that I already have eight 
scheduled I think through the end of September as of this 
morning in my staff meeting, almost one a week, with 
alternating Members of each party in the House and Senate. I am 
getting somewhat booked up, but we are planning to do a lot of 
those around the country. The Secretary directed me to do 
those.
    We also created last Thursday seven industry outreach 
groups so that inside the--the hearings are basically intended 
to get input from people around the country outside the 
beltway. We also created seven working groups which represent 
basically every sector of healthcare.
    I am chairing the one on long-term care and nursing homes 
with the executive director of the National Governors 
Association, but in that case we will have the unions, all the 
nursing home groups and basically anybody that wants to come 
in. We are going to meet with them once a month to try to 
methodically go through all the issues that can be resolved and 
try to fix them all.One of them is hopefully survey and 
certification of nursing homes is the first one.
    In the hospital sector, the first thing the Secretary 
committed to doing the other day when we created these is to 
fix cost reports, which if you know about hospitals we are 
determined to I do not know if we can eliminate cost reports, 
but we are certainly determined to size them down to the 
absolute bare bones needed for us to get information about 
managing hospital reimbursement.
    We announced the other day that we are recalling and 
reconsidering the whole ENM payment guidelines for physicians, 
and we are trying to go through and focus in every area of the 
health professions where we have serious problems and fix them.
    The third effort that we are making is really an outreach 
effort. The Secretary announced that he is putting together 
sector work groups within my own agency to come up with new 
ideas to fix the place and to make it work better. To make sure 
that we do not end up being captives of our own agency, I 
appointed a fellow who actually runs an emergency room at a 
Winchester, Virginia, hospital. He is going to work with us 
four days a month to come in and chair this to actually make 
sure that the ideas my current staff come up with actually work 
in the real world because he has to actually go back and run an 
emergency room every day.
    Those are the first steps, the hearings around the country, 
an effort within the beltway and an effort within the agency to 
try to shake things up and change things.
    Ms. Millender-McDonald. Well, I do appreciate those 
outlines that you have articulated to us, but I would certainly 
like to encourage you to put any education outreach information 
inside of journals that are endemic to these respective groups 
because that is important and is key to providing the type of 
education and information. Communication is the key. 
Information to those groups.
    The home healthcare folks came to see me last week, and 
part of their problem were these over burdensome regulations 
with reference to Medicare and Medicaid. They are not really 
understanding a lot of its processes, so there lies one group 
that is critical for you to engage in.
    Your sector work groups that you have outlined. Who do they 
comprise? What is the composition of those groups and the 
persons who work within the groups?
    Mr. Scully. Well, they are chaired by senior people at 
CMS----
    Ms. Millender-McDonald. Right.
    Mr. Scully [continuing]. Which is me in the nursing home 
case, my deputy, Reuben Kinshaw, in the physician case and down 
the line.
    We are going to stagger those so that hopefully I can go to 
a lot of them, but basically anybody that wants to participate. 
For instance, in the nursing home area I had an organizational 
meeting last week, and it was the senior representative from 
the SCIU, which is the biggest union of nursing homes, the head 
of the American Health Care Association, the biggest nursing 
home trade association, the executive director of the National 
Governors Association, one of the senior people at AARP and me.
    Ms. Millender-McDonald. So it is a plethora of folks?
    Mr. Scully. We are trying to get everybody involved----
    Ms. Millender-McDonald. Absolutely.
    Mr. Scully [continuing]. On all sides of politics, you 
know, in every issue. I mean, we are not trying to--I have 
found, and I ran a hospital association until seven weeks ago. 
I found that, you know, 90 percent of the day-to-day 
operational problems are not political.
    There are a lot of common problems we can fix. I think 
getting people to identify those is a good first step. There 
are plenty of political things to fight over, but there are a 
lot of operational things we can fix right away.
    Ms. Millender-McDonald. I think so, and I think it is 
critical that we do that. Leave the politics to us, but try to 
fix the operational aspects of it.
    You said you want to hear from rural offices and inner 
cities. I do represent Watts and Willowbrook, Compton, some of 
the most impoverished areas, as well as some of the suburban 
areas. I am from the most impoverished to the affluent.
    Given that stretch, we still have problems irrespective. I 
think as you begin to schedule your time across this nation I 
certainly would like for you to think of Watts. I would be more 
than happy to receive you there to talk with persons from that 
region to come in.
    Mr. Scully. I am certain we will have a hearing at some 
point in Los Angeles.
    Ms. Millender-McDonald. Okay. Fine.
    Mr. Scully. I think I had 180 hospitals in California in my 
former trade association, so I spent a lot of time there over 
the years.
    Ms. Millender-McDonald. I understand. The cooperatives that 
you talked about. You said that it is not a new culture. It is 
not a new concept, but it is a complement to that that you have 
already been engaged in. Can you explain that more to me?
    Mr. Scully. I am not sure. Do you mean on the prescription 
drug card or on the----
    Ms. Millender-McDonald. I think the Ranking Member spoke 
about you are changing a whole new system, and you said no, you 
are just integrating the existing system with some 
cooperatives.
    Mr. Scully. I think I was talking about the Medicare 
prescription drug card.
    Ms. Millender-McDonald. Yes. That is right. It was that.
    Mr. Scully. This is something that is not a new concept. 
Actually the way that developed, and I have said this publicly 
before, is when I came in before I was confirmed by the Senate 
I asked the staff at CMS why do you not give me the 20 crazy 
ideas that have been sitting around here for years that nobody 
wanted to do. They did it. Probably 19 of them were not things 
that I thought were viable.
    The one that I thought was a great idea that somebody 
should have done years ago was the prescription drug discount 
card. Senator Hagel had a bill similar to this last year in the 
Senate. There have been other people that have done it. I 
brought it to Secretary Thompson, who also liked it. We brought 
it to the White House, and the President liked it and so the 
President announced it.
    For whatever reason, it seemed to get more press than our 
Medicare forums, which in some ways is unfortunate, but it 
seemed to me to be an intuitively smart thing to do even if you 
look at Senator Graham's bill, the leading Democratic bill for 
Medicare prescription drugs.
    Thirty-five to 70 percent of those savings to seniors over 
the next ten years come from organizing seniors into 
prescription purchasing cooperatives. The only people in the 
country right now that walk into a pharmacy and pay over-the-
counter costs for drugs are the uninsured and seniors. I 
thought that was crazy.
    We do not have the ability to subsidize seniors' drug 
purchases, though we will hopefully negotiate that with 
Congress this fall. We do have the ability to do what most 
people, including all Members of Congress and me do, which is 
belong to a pharmaceutical benefits manager who is going to 
negotiate prices for you and save you a little money.
    This is not the fix for all seniors, but we believe it is 
going to save them between 15 and 25 percent on average on 
their prescriptions, and that will help.
    Ms. Millender-McDonald. But not all seniors have bought 
into this concept, so we are still guarded to some extent.
    Mr. Scully. We have not even started yet. It will not even 
be in place until January 1.
    Ms. Millender-McDonald. I understand, but in even talking 
about it I think there is a lot of concerns about this.
    Mr. Scully. I really think it is not intended to be 
political. I happen to live in Jim Moran's district. He is my 
Congressman from Alexandria. I have lived there for 20 some 
years. I went over and explained to a group of his seniors at 
his town hall meeting last week how this worked. He is an old 
friend. He came in a little late and started beating up the 
cook.
    Ms. Millender-McDonald. Again, it is an education.
    Mr. Scully. I said that is my idea. Once I explained it to 
him and his seniors and how it was going to work, I think 
generally--it is not intended to be political. I think it is 
going to help people. I do not think it is going to be the be 
all and end all for all seniors. I think it is going to be of 
marginal help. It is going to save them money.
    It is not a substitute for prescription drug reform. We are 
committed to doing that. It is going to save seniors money, and 
it is going to work. I think that if you actually look at the 
details of how we structured it it is a good idea, and it is 
kind of unfortunate it has become political because I had hoped 
it would not.
    Ms. Millender-McDonald. The operative word is it is not a 
substitute.
    Mr. Scully. It is not a substitute.
    Ms. Millender-McDonald. That is the operative word. Again, 
you have educated portions of the masses who are still guarded 
on this whole concept. Then I think education is the key to all 
of this.
    Mr. Chairman, I have just one more. I just have one more 
question, if I may.
    Chairman Manzullo. You have gone ten minutes. If you would 
not mind?
    Ms. Millender-McDonald. Okay. Fine. I thank you.
    Chairman Manzullo. Thank you.
    Ms. Millender-McDonald. I have a statement for the record, 
Mr. Chairman.
    Chairman Manzullo. All the statements will be put into the 
record without objection.
    Ms. Millender-McDonald. Thank you.
    Chairman Manzullo. Mr. Shuster.
    Mr. Shuster. Thank you, Mr. Chairman. I would like to thank 
the panel for being here today. I appreciate your testimony.
    My question is to Mr. Scully. There is a crisis in rural 
healthcare, and that is due in large part to the reimbursement 
of Medicare. It has been decreased, and I know that is a 
legislative correction we need to make, as well as costs going 
up, those types of things. I applaud your efforts to streamline 
the paperwork and to make a change to make it more user 
friendly, your organization.
    The question I have is another problem that is being 
caused, my administrators are telling me, is, of course, the 
paperwork. The nurses are saying for every hour of care they 
have about a half an hour of paperwork. What I need to get from 
you is what is the goal of I want to say HCFA? I have not got 
myself changed over yet.
    What is the goal to reducing that amount of paperwork and 
streamlining it, and what are the measurements we are going to 
use? This measurement here, that hour and half hour that I have 
put out to you. I do not know if you think that is accurate, 
but it seems to me a measurement like that is something that we 
can put out there that we can all see. Nurses can see. People 
on the ground can use that as a measurement of how much you are 
going to decrease the paperwork from that half hour down to 25 
minutes, down to 15 minutes, something like that.
    Mr. Scully. It is a complex program. I think the 
measurement is balance. I think the issue is we have a gigantic 
program, $240 billion. The last time I was in the government 
eight or nine years ago we had 15 percent a year Medicare 
inflation. There were a lot of factors behind that, but I do 
not have any desire, as I consistently tell my staff, to be 
back in the system of providing double digit Medicare/Medicaid 
inflation.
    A piece, and I do not think it is the biggest piece, but I 
think a piece of getting that inflation, is Medicare inflation 
went from 15 percent in I think 1992 down to negative one 
percent in 1999. A piece of that was more aggressive anti-fraud 
efforts to make sure that people were not abusing the program. 
I do not think that is the biggest piece. The biggest piece was 
the 1997 BBA, which probably took a little bit more out of the 
system than people expected.
    My goal is to find the right balance between having not 
enough regulation and having enough regulation where the 
program treats taxpayer dollars responsibly, but not so much 
regulation that we torture people in the outside world. We have 
seen instances where there was clearly rampant fraud going on 
in the home health area. There were a lot of people sending in 
home health bills that were wrong. If you do not have 
appropriate billing rules and appropriate structures, you have 
a disaster on your hands.
    On the other hand, between 1997 and 2000 home health 
spending went from $18 billion to $9 billion, so we racheted 
down on them so fast that that was one of the reasons that home 
health has become a huge political issue. We wiped out a lot of 
home health providers, probably some good ones along with the 
bad ones.
    My goal is to have a more gentle policy, a more rational 
progression in home health spending from $3 billion to $9 
billion without the $18 billion in between. My goal is to find 
a rational policy balance where we spend taxpayer dollars 
wisely and have enough regulation and enough structure to make 
sure people do not cheat and do not over bill the program, but 
to the point where nurses do not want to get out of the 
profession and doctors do not want to get out of the profession 
because they feel tortured by Medicare and Medicaid 
regulations.
    That is a tough balance to have in a gigantic public 
program, but I think that is the goal.
    Mr. Shuster. No number figure on that? Ten percent? Fifteen 
percent?
    Mr. Scully. It is hard.
    Mr. Shuster. Can you quantify?
    Mr. Scully. We are trying in home health. Believe me, I was 
on the provider side for years, so I am highly sensitive to the 
regulations.
    You know, cost reports in hospitals are largely a creature 
of the past that needed reform. The OASIS guidelines for home 
health we are trying to streamline. The regulatory burdens for 
nursing home filings, which I think we are going to have an 
announcement on soon so that nursing homes will file less 
information.
    The goal is to collect enough information to make sure that 
we can make sure that people are being paid correctly and to 
make sure that we can track patient quality, which is a big 
focus of mine as measuring and putting out information about 
patient quality, without just correcting enough so that in a 
lot of cases you will find, you know, like in hospital cost 
reports why did we require 25 percent of the information? 
Because somebody would like the data.
    That is not to me a good reason to collect it because it is 
a convenient source of data for an academic. I mean, there are 
a lot of ways to do it. It is an incredibly torturous process 
to go through every area sector by sector and come up with this 
balance.
    Mr. Shuster. I am a small businessman myself. Going about 
trying to make the organization more user friendly, it is a 
cultural change. Do you have the ability, and this maysound 
cold-hearted, but you can educate some people, and some people just do 
not want to change.
    Do you have the ability to remove those people so that the 
people who are not going to be user friendly, and I see 
government agencies that do not have the will or do not have 
the ability to remove people who just are not doing the job. 
Again, somebody would be in there for 20 years. Some of them 
just do not want to change.
    Mr. Scully. There are limits, and that probably calls for 
another set of hearings, but there are limits of what you can 
do in the federal government. You know, in general I think, and 
Secretary Thompson found this, the people at CMS are actually 
very good. I have known that for years.
    I guess my major goal is I was a hospital lobbyist for a 
number of years when I was out of the government, and I spent a 
lot of time going to Baltimore. I knew all the hospital people, 
and I thought they were great. If you had asked me during that 
period was CMS/HCFA responsive, they were, but it was because I 
knew how to go up there and talk to the people. That was my 
job.
    The average administrator in Harrisburg or Pittsburgh or 
Philadelphia thinks the place is a big black box. I think part 
of that is because the agency got pummeled over the years by 
Congress and people in the outside. The people tend to be I 
think very hard working, very well intentioned, but very 
insular. They did not talk to the outside world.
    Part of what I have been trying to do is convince people in 
the agency, and I think they are starting to do it. They should 
talk to the outside world more. They should explain what they 
are doing. My view is, and part of this comes from being a 
mean-spirited OMB guy for all those years. Just joking. I 
firmly believe that if you have the substantively correct 
answer it may not be popular, but if you give it to people 
straight they are generally happier than if they get yanked 
around.
    My goal is, you know, you cannot run a $240 billion 
Medicare program and a Medicaid program and tell everybody what 
they want to hear all the time because we would have 50 percent 
inflation. You have to say no a lot. My preference is to push 
people to give people a straight answer and give them a 
straight no if that is the case because I think the perception 
is in the past that the answer at CMS and HCFA has generally 
been to yank people around as long as possible and not give 
them an answer because they might get mad at you.
    Chairman Manzullo. Thank you.
    Mr. Baird.
    Mr. Baird. Thank you, Mr. Chairman.
    Mr. Scully, I applaud your efforts. This is like cleaning 
the proverbial stables I am afraid. One of the biggest problems 
we have in Washington state where I represent is the inequity 
in compensation formulas, both in fee-for-service compensation, 
but particularly Medicare Plus Choice.
    What thoughts have you got about ways we might remedy that? 
It is a terrible problem for our hospitals actually in terms of 
how it affects cost shifting, et cetera, and impacts small 
business as well.
    Mr. Scully. Well, Congressman, you may not know that I 
worked for a Senator from Washington state for five years, so I 
am pretty familiar with Washington state. It has been a long 
time. I left in 1985. That shows how old I am.
    I think it is a problem, and I think you are going to find 
a shifting of that with a shifting in Congress. I do not mean 
to cause any political controversies, but in the hospital 
business if you sat down purely on a public policy basis and 
looked at the formulas for how hospital money is spent, it is 
not totally based on policy. A lot of it is based on historical 
positioning and who was chairman of what committee and what 
states were they from. I think you would find there are certain 
parts of the country--Washington state was not one of them--
that probably did not benefit from that.
    I do think it is an incredibly complicated program. There 
are new chairmen, for instance, in the Senate that are from 
Montana and Iowa, as opposed to where they used to be for years 
from other parts of the country. I think you will see some of 
that policy be more rationally redistributed.
    Hopefully it will not be so irrationally redistributed that 
all the urban areas will get hit and the rural areas will be 
overcompensated, but clearly there are a lot of different 
issues out there from the hospital wage index, which is 
probably what you are referring to, back to many, many, many 
other formulas in Medicare that I think need to be reassessed 
on the merits. I think the IG has made suggestions about that 
over the years. I think GAO has made suggestions about that 
over the years.
    One of the surprising things to me in Medicare over the 
years is that even though most Congressional districts probably 
get at least as much financing for their people out of 
Medicare/Medicaid as they do out of the Appropriations 
Committee is because the programs are so complicated rarely 
does Congress actually focus on how they are delivered, but I 
hope to help restore some equity over the years.
    Mr. Baird. I applaud that. We were part of the Fairness 
Caucus last Congress and worked hard to raise the floor, et 
cetera. Anything we can do to help on that we would surely 
pitch in on.
    Let me ask kind of a theoretical question. I was looking at 
page 6 of some of the commentary for today. One of my questions 
was, and I am not sure whose testimony it was. It may be just 
background. The tremendous amount of fraud that we have from 
these contractors.
    You know, the Administration and the Majority party spends 
an awful lot of time bashing big government bureaucrats and 
talking about contracting out, yet here we have private 
enterprise screwing the people. I do not think that is very 
good. I just wonder what your thoughts are on that and how we 
can correct that. Does it teach us anything about whether 
contracting out is necessarily the panacea it is often proposed 
to be?
    Finally, when contractors do not make enough money, be they 
these contractors here or HMOs, we say well, we have to throw 
more federal money at it and incentivize them. When public 
employees are deemed to be not doing their job, we attack them 
as faceless bureaucrats who do not want to serve the public. 
Could you comment on that?
    Mr. Scully. That is a tough one to comment on. I think 
realistically Medicare has a lot of problems. I mean, 
philosophically and fundamentally I think Medicare is a 
wonderful program and seniors love it. I do not think that any 
person, Republican and Democrat, would have sat down today and 
said let us spend $240 billion a year on 40 million seniors and 
design the program the way it works.
    I do not like price fixing any place. The federal 
government sets prices in Medicare/Medicaid for every physician 
and for every hospital across the board. That is the only place 
in the economy we do it. For 13 or 14 percent of the economy, I 
think if you sat down and redid it again that is probably not 
the best way to start.
    On the other hand, I think the contracting system, even 
though I think it needs to be drastically reformed, has served 
pretty well considering the fact that it is a giant program, 
$240 billion, and we spend $2.5 billion a year administering 
it, including the contractors and including my budget. It is 
kind of miraculous that it holds together. I think it barely 
holds together some days, but it holds together.
    Generally the biggest response I get from Congressmen who 
visit Baltimore, and even Secretary Thompson has said it, is 
where are the people paying the claims? There are not any 
people paying the claims. I do not think the government could 
possibly do it. I mean, it is basically the Blue Cross plans 
that do it. I think they are incentivized inappropriately, but 
I think generally the contracting out system has worked 
reasonably well. For 35 years it has paid a lot of Medicare 
claims.
    Even though there are a lot of problems and a lot of angry 
docs and a lot of angry hospitals and a lot of angry people out 
there, generally they are angry at the appeals process, which 
tends to be the ALJs and sometimes the fiscal intermediaries 
and the carriers rather than the payers. I mean, if you talk to 
insurance companies every day like I do--I have been trying to 
keep a lot of the Medicare Plus Choice plans from bailing out--
and you talk to hospitals, generally Medicare is one of their 
quickest and best payers.
    The program clearly has problems, and fundamentally I am 
not a big fan of the government price fixing anything. Given 
the system we have, I think it works okay. There is certainly a 
lot of things we can fix, but I think the contracting out 
system actually works all right.
    Mr. Baird. I appreciate that. I guess my fundamental 
question was why is it that when there is a private enterprise 
that is found to be not necessarily treating the public fairly 
and the solution to that seems to be throw more money at them, 
but when government workers are criticized the solution to that 
is lay off government workers? It just seems paradoxal.
    Mr. Scully. Well, I hope I have been supportive of my 
workers at CMS. Everybody hates them, but I think generally 
most of them are pretty dedicated.
    Chairman Manzullo. I have not been supportive of the people 
at Wisconsin Physician Services because of the very 
unprofessional way that they have handled working with my 
Medicare Part B providers in Illinois and Wisconsin.
    I would hope that by mentioning Wisconsin Provider Services 
or Wisconsin Physician Services that they would get their act 
in order because they may be the next witnesses at a hearing. 
That hearing is not going to be as gentle as this one.
    They need a warning that when they send a letter to a 
doctor with a carbon copy going to the patient accusing the 
doctor of fraud and that doctor sends back a letter saying I 
would like an explanation and those clowns say well, you my or 
may not get an explanation, that has to stop.
    Mr. Scully, I would like to have you personally contact 
those people at Wisconsin Physician Services and tell them to 
treat my constituents humanely.
    Mr. Scully. I talked to them yesterday, and I will talk to 
them a little more.
    Chairman Manzullo. Thank you.
    Mr. Scully. Believe it or not, Secretary Thompson years ago 
worked at that company, so I talked to him about it last night 
as well.
    Chairman Manzullo. Mr. Toomey.
    Mr. Toomey. Thank you, Mr. Chairman.
    Let me start by saying, Mr. Scully, I am delighted you are 
in the position that you are in. You have the exact kind of 
background and perspective that we need at that agency that was 
formerly known as HCFA.
    As a very quick point, I would just like to also thank you 
for working with us on the bill that I have co-authored with 
Shelley Berkley. We call it MERFA, H.R. 868, which, as you 
know, attempted to make some modest but I think very important 
reforms to the way HCFA does business.
    I think you have indicated that there are some things about 
our bill that you can probably support, some things that I know 
you would like to do differently. I would like to touch on a 
couple of those briefly, and if we could do it briefly because 
I have some questions I would like to ask Mr. Grob also.
    One, you mentioned improving education, and you emphasize a 
program of improving education for seniors. I support that 
effort, but I think it is also important, and I think you 
agree, that part of this effort has to be improving physician 
and provider education. Our bill does make an effort to do 
that, to require that there be a greater effort to educate 
providers in the arcane rules and regulations of HCFA.
    I think what is more important, frankly, is providing some 
due process rights to healthcare providers and balancing what 
is now an extremely unleveled playing field in which HCFA is 
enormously powerful, enormously intimidating, and providers are 
often deemed guilty before they are proven guilty and not given 
really the fair hearing that they ought to have.
    Specifically, I was hoping you would reflect on a couple of 
the provisions in this bill, in my bill, that try to address 
this perceived imbalance perceived on my part and certainly on 
the part of most healthcare providers. One is that my bill 
would allow repayment plans for overpayments, not require that 
physicians who make an honest mistake and acknowledge that, 
that they not be required to pay all the money at once, but 
rather could pay in a series of installments.
    A second provision would prevent HCFA from unilaterally 
recouping alleged overpayments while the appeals process is 
still underway. That is something I want to discuss further 
with Mr. Grob also, but the fact is that appeals very, very 
often go in favor of the provider. It seems to me fundamentally 
unfair for HCFA to keep the money when in fact most of the time 
HCFA is wrong when a claim is in the appeals process.
    Lastly, if you could comment on providing some kind of safe 
harbor for physicians who honestly discover that they have made 
a mistake, and they want to pay the full amount of their 
mistake? They would I think in that case deserve immunity from, 
you know, punishment.
    If you could comment on those three things? There are other 
features in the bill, but I think those are three of the most 
important features.
    Mr. Scully. Well, one thing I learned over the years is I 
cannot take administrative positions with OMB, so subject to me 
not taking administrative positions I think as we discussed I 
guess a month ago or so we are sympathetic to some of the ideas 
in MERFA and certainly the concept, what you are trying to do 
with MERFA.
    The more specific details of what we do with repayment 
plans. I have talked to Chairman Thomas, and Senator Grassley 
and Senator Baucus and others are working on taking your bill 
and looking at it and overall reform bills about some other 
approaches that I think, for instance, there are various issues 
about repayment plans. Repayment plans can be troublesome I 
think if we stretch them out too much. We have a history that 
we have allowed some providers with bad histories to escape 
repaying the government.
    On the other hand, I think we should treat people the same 
way the IRS does. The IRS does it the other way around. 
Basically if you lose you repay the government with interest. I 
think that is something that we are going to look at. Right now 
what happens is, as you say, you pay up front. If you end up 
being right later we pay you back. That is it. You lose the 
time value of the money.
    I think that we have looked at, and this is not the 
Administration's position, but I have discussed with the other 
Committees who are looking at kind of taking a lot of your 
provisions, as you know, and trying to fold them into their 
bills, some middle ground ideas that hopefully will be more 
workable. That is one of them.
    I think the IRS basically allows you to withhold payment to 
tax penalties, and if you lose you pay it with interest. I 
think that is something we should look at. We require providers 
to pay things up front immediately. Again, it is not the 
Administration's position, but it is discussions I know that 
are going on.
    As far as safe harbors, as I said, I was a provider until 
recently. I totally see the sense in creating some safe 
harbors, and there are safe harbors in the law now. We want to 
make sure that we create the appropriate safe harbors without 
creating safe harbors that are going to allow people who really 
are not the two percent of bad providers to find ways to avoid 
any kind of FI carrier, IG or CMS enforcement activities. That 
is a concern. We are totally sensitive.
    What you are trying to do in MERFA is absolutely right. I 
think some of the provisions are overreaching, and we would 
look forward to trying to work with you this summer and this 
fall to get the pieces of MERFA that we can work with the IG on 
and with you and make sure that we make the system 
significantly more friendly to the providers.
    Mr. Toomey. Thank you.
    Mr. Chairman, do I have time for one other question?
    Chairman Manzullo. Let me go first to Mr. Thune. I want to 
make sure everyone gets in. Then perhaps we may have some more 
time.
    Mr. Thune.
    Mr. Thune. Thank you, Mr. Chairman. Thank you for holding 
this hearing. I think it is important. This does have an impact 
on a lot of people across the country.
    I think if there is one thing I hear that is just uniform 
from providers across South Dakota it is we need to enact 
MERFA, so I congratulate Mr. Toomey and Ms. Berkley for 
introducing this. I think it is high time that we look at what 
we can do to improve the function, the way that this work is 
done, the process that is used, because it is clear at least 
right now that there are just serious problems out there.
    I am glad you changed your name the agency formerly known 
as HCFA. I think it will buy a little time. When people figure 
out the new acronym it might buy us a little bit of time, but 
then it will be that blankety-blank whatever the next iteration 
is in terms of an acronym because there is just a tremendous 
amount of, at least in my state, maybe disgust is the right 
word in the way things operate.
    The question I would have for you is how do you go about 
getting at the bad actors without penalizing the good guys? I 
mean, we have in South Dakota, partly because as a result of 
our ethic in our state, we just do not have people who are 
trying to circumvent, with rare exceptions. This is not 
something that is a common practice. We do not have people who 
are trying to beat the system. We have people who want to play 
by the rules.
    I am just curious to know in sort of a general 
philosophical way what your thoughts are about being able to 
get at those people that are chronic rule breakers and not at 
the same time penalize and inordinately put burdens upon people 
who are trying to do things by the book.
    Mr. Scully. Well, I guess you want me to answer that one. 
That is probably one of my I could not agree with you more on 
that----
    Mr. Thune. If you must.
    Mr. Scully [continuing]. Having been on the other side of 
it seven weeks ago and seeing some people I consider to be 
extremely honest, decent providers be repeatedly pounded and 
some of them run out of business for what I thought was not 
particularly legitimate reasons.
    I think one of my frustrations, and I do not have any 
announcement to make today, but I have talked to the Secretary 
a lot about it. The new Inspector General I hope will be 
confirmed soon. Janet Rehnquist was here--I do not know if she 
is still here--who I have known for quite a long time, since 
college actually, and the Justice Department. Those are really 
the three prongs of making this thing work better. We hope to 
work much more efficiently to find some ways to fix these 
things.
    My own frustration is that I think we need to come up with 
a mechanism, and we are talking about a variety of them, where 
we can basically find people who are doing the right things. I 
can give you two examples. I spent $25 million when I was on 
the board of Oxford Health Plans as the chairman of the board 
of the compliance committee, another $30 million at Davida 
Healthcare Dialysis Company when I was chairman of the board of 
the compliance committee putting together very expensive 
compliance plans. Those companies I think are about as 
compliant as you can possibly get right now. Their shareholders 
made a big investment in it, but they get nothing for it. I 
mean, they find out they have a problem.
    In my view, when you find people who are trying to do the 
right thing, whether it is a small hospital in South Dakota or 
a big HMO or a physician practice group, there ought to be a 
way for them to put together the appropriate compliance 
guidelines to make the IG and to make the Justice Department 
and to make CMS show that they are serious about it or they 
have some self-policing where they get somewhat different 
treatment. That is a big structural challenge to come up with 
something like that. I personally feel strongly about it. As I 
said, I cannot do that alone.
    The IG. I went in, and again I had a good relation with the 
IG. I went in with Mack Thornton, who is the chief counsel at 
the IG's office. I brought the CEO of Oxford in. I brought the 
CEO of Davida in. I said we are trying to do all the right 
things. They said congratulations. You are doing the right 
things. That is great.
    They do not have the staff to go through and certify 
compliance plans or to go through and regulate everybody across 
the country, so we need to come up with some hybrid way of 
telling people that are trying to do the right thing that you 
are going to get some credit for doing the right thing so that 
we can focus our enforcement actions on the bad actors that are 
out there.
    Mr. Thune. I appreciate your comments and also in looking 
through your testimony the sort of user friendly, responsive 
tact that you are taking in terms of the relationship with the 
provider community.
    I guess one follow up question would be, you know, as you 
look at the way that we do things today the enormous amount of 
paperwork, the enormous amount of red tape which is always 
alluded to irrespective of who you talk to, which provider 
group. It is the same message over and over again, and that is 
that we cannot provide quality care for our patients because we 
spend all of our time filling out forms and paperwork.
    Is there a way that we can construct a different model in 
the computer age--you talk about figuring out ways to comply 
where it just literally is not consuming in terms of the time 
requirement and commitment that is imposed upon providers who 
are just trying to do a good job, so it is sort of I guess 
again maybe of a more general, philosophical question.
    Mr. Scully. I think the biggest gain to me in fraud abuse 
activities, aside from the increased enforcement activities 
addressed in the IG, is capitation. I mean, the thing that 
moves us forward the most is moving towards capitated systems 
because in the past when you have a government run fee-for-
service system, let me just tell you in the hospital business 
that when you come in a lot of the ``fraud'', and you can 
either call it fraud or people adjusting to dumb rules. When 
you are in the hospital business and the government comes in 
and capitates your hospitals in 1993 with DRGs, what do you do? 
You start building a nursing home on a cost basis next door or 
a rehab hospital.
    It is kind of wack-them-all system, or it has been over the 
years, with finance. A lot of the stuff that was ``fraud'' was 
based on crazy, poorly structured reimbursement systems. Part 
of this was the government chasing people around for doing what 
was marginally, you know, probably unethical stuff, but was 
arguably legal.
    Personally, the biggest advance in Medicare is going to a 
capitated payment strategy where you do not have to oversee as 
much, and there is not as much opportunity for abuse. For 
instance, we are putting out a reg shortly on capitating rehab 
hospitals, which I think will help in that area. We have one in 
the works for long-term acute care hospitals.
    We went to skilled nursing facility prospective payment 
last year, which I think will do a lot to reduce fraud. It just 
provides people with the right incentives, and I think the more 
you can get towards capitated systems where you get the 
government out of the micro managing of business and you give 
people prospective payment systems, you are moving in a big way 
towards incentivizing rational behavior and getting the 
government out of micro managing and micro enforcing.
    Mr. Thune. I appreciate you comments.
    Mr. Scully. Thank you.
    Mr. Thune. I obviously want to work with you. My time is 
expired, but we all want to try and solve some of these 
problems.
    Thank you.
    Chairman Manzullo. Mrs. Kelly.
    Mrs. Kelly. Thank you very much, Mr. Chairman. Thanks for 
holding this hearing.
    Mr. Scully, I found your testimony very interesting 
reading. On page 5 you say you want input from folks like group 
practice managers, physician assistants and nurses and so on, 
and then you say also CMS is going to conduct public listening 
sessions across the country.
    I invite you into the 19th Congressional District. I 
represent a medical school plus an enormous amount of people 
who are practicing medicine north of New York City and have a 
lot to say on this subject because they have been saying it to 
me. I hope that you will come.
    I really am very hopeful that you are going to try to do 
something to reduce this enormous paperwork load that every 
doctor has to bear. My father was a doctor. One of the reasons 
he quit being a doctor was the government was finally demanding 
just too much. He was having to charge too much.
    I lived in a town where he dealt with farmers and people 
who were generally blue collar workers in factories. He could 
not charge a great deal. He had to constantly be cutting back 
on services he wanted to offer his patients because of the 
government demands. He had to put his time into filling out 
forms. I think that is wrong. I think doctors need to practice 
medicine and not worry about these forms.
    I agree with my colleague, Mr. Thune, that in the 
environment we have today with the ability to electronically do 
things there certainly ought to be a way that we can construct 
some models that are rather permanent and do not need to 
constantly be refilled out. I would hope that would be 
something you would look at.
    There are a couple of other things. I have had some serious 
concerns about the authority that the HCFA people have used 
with regard to declaring doctors to be fraudulent in their 
claims. It seems to me to be an attitude of aha, gotcha, 
instead of working with the doctors to find out what happened 
and to help them do whatever they have done to take a look at 
it and see whether in fact it is fraud or it is somehow a 
mistake on papers that have been filed because sometimes that 
is what happens. It is reclassifications. It is different kinds 
of things. I really hope that you will do something to try to 
restructure the attitude in that particular department of the 
new CMS.
    One other thing that I am concerned about. There was a 
decision that would allow the nurse anesthesia givers to be 
able to give anesthesia without medical support, without 
somebody standing there, an M.D., overseeing what they are 
doing. These people have been doing it for years. I do not 
understand why the HCFA anesthesia care final rule was not 
implemented.
    I wonder if you would be willing to get back to me on that 
because I think that the idea was to remove a lot of 
restrictions and reduce a lot of the regulatory burdens on the 
hospitals. The other thing is it allows nurses to perform that 
function in greatly under served areas where there is no 
anesthesiologist available. Nurse anesthesiologists are very 
good at what they do. I would like, if you do not mind, for you 
to get back to me on that.
    Mr. Scully. I am extremely familiar with that issue. It is 
hard to miss. It is kind of like watching Joe Frazier and 
Muhammad Ali go after----
    I was in the hospital business for the prior six years, and 
we have obviously a lot of anesthesiologists and nurse 
anesthetists. I think we wisely stayed out of that one, but 
that was obviously controversial. It was a change to the 
regulations to allow nurse anesthetists to do that. It was in 
the proposed rule.
    In the final rule, which that came out with I think an 
appropriate compromise, basically obviously, you know, we are 
federalists. We believe in states' rights. We basically pushed 
it back to the governors and said if a governor wants to 
certify that in his state nurse anesthesiologists can 
appropriately provide the care the governor can effectively 
apply for a waiver.
    I believe that is the final rule. I am not sure. I am 
pretty sure that is what it is.
    Mrs. Kelly. The governor can issue a waiver?
    Mr. Scully. Can apply to us for a waiver. Yes.
    Mrs. Kelly. And you would approve those waivers, I take it 
then, from what you have just said?
    Mr. Scully. I think they are under the reg all virtually 
presumptively approved. Yes.
    Mrs. Kelly. Okay.
    Mr. Scully. Obviously this was a hotly debated issue over 
many years in the Medicare program. It was more interesting to 
be in the hospital business watching it than it is to be at CMS 
having to work it out.
    Mrs. Kelly. Well, I would hope that this will all work out, 
and I am just greatly relieved that you are there at the head 
of the helm and going to make some changes. We need those 
changes desperately, the sooner the better.
    Mr. Scully. And I apologize because I have looked into your 
other hospital issue. I will call you about that later today.
    Mrs. Kelly. Thank you very much.
    Mr. Toomey [presiding]. Thank you.
    I appreciate the cooperation of the witnesses. We would 
like to have one more very brief round of questions, which will 
consist of a question from Ms. Velazquez, myself and Ms. 
Christian-Christensen, and then we will be finished for this 
hearing, which has gone on some time.
    Ms. Velazquez.
    Ms. Velazquez. Thank you.
    Mr. Scully, we may disagree on whether or not the 
prescription drug card initiative is a program, but are you 
willing to go back and perform an impact assessment on the 
effect this program is going to have on small businesses; for 
example, community pharmacists?
    Mr. Scully. You know, to be honest with you, Congresswoman, 
under the rules it is not a federal government program.
    Certainly we are very sensitive to the concerns the 
community pharmacists have. I have obviously been hearing from 
them virtually every day. The small pharmacists are very 
concerned. The chain drugstores--my former boss in my former 
campaign life, Craig Fuller, runs that. We are very sensitive 
to the concerns that the chain drugstores and the small 
pharmacies have because they are concerned the discounts are 
going to come out of them.
    We hope and believe that we structured this so that the 
discounts--the entire intent of this program was to structure 
it to give enough market clout to these purchasing negotiators 
that the discounts would come out of the manufacturers and not 
out of the chain drugstores.
    It is certainly within the ability of CMS to do it because 
it is not a government program. We are certainly happy to go 
back and look at it. We are highly sensitized to it. I am 
certainly happy to go back and do a study on the impact of it.
    Ms. Velazquez. I take very seriously the fact that you say 
we want to hear from a broad range of providers, including----
    Mr. Scully. We do.
    Ms. Velazquez [continuing]. Community pharmacists. If there 
are concerns that this is going to have an impact on them, I 
think it would be sensitive for you to go and to listen to 
their concerns.
    Mr. Scully. I am happy to meet with them. I have tried to 
talk to as many as I can. I am happy to talk to them any time.
    I will say that in a system where the only people in the 
world paying over-the-counter pharmaceutical prices are 
seniors, the Administration's number one concern is saving 
seniors money. Number two would be helping to make sure we do 
not hurt community pharmacists. Number three, probably way, 
way, way down the line, would be worrying about manufacturers 
appropriately making sure everybody pays a reasonable price.
    Clearly the goal here is to save seniors money. A number of 
people said this will not work. To be honest with you, it will 
not work. It is going to work. If it does not work, there will 
probably be people mad at us, but we are clearly, clearly 
intending to do everything we can to make sure that the impact 
is not on the pharmacist.
    Ms. Velazquez. Thank you.
    Mr. Toomey. Thank you.
    Mr. Grob, I would like to ask a couple of questions and 
actually take issue with a statement that you made in your 
written testimony and ask a question in another area if I 
could.
    In the area of immunity from investigation, you addressed 
that on page 8 of your testimony. This has to do, of course, 
with the safe harbor that we would provide a physician or 
another healthcare provider who discovers an honest mistake and 
wants to correct it.
    Mr. Grob. Yes.
    Mr. Toomey. Your statement here on page 8, and I will 
quote, says, ``There is no need for such immunization. 
Physicians and other healthcare providers are not subject to 
civil or criminal penalties for honest mistakes, errors or even 
negligence.''
    It seems to me the fact is that absent this immunity 
providers face other tactics--audits, the use of extrapolation, 
a terrible appeals process--all of which can drive providers 
right out of Medicare, sometimes even out of their practice. 
These kinds of very onerous outcomes strike me as every bit as 
severe as civilian penalties.
    I would cite a case--there are so many, but just one in 
particular--of AIDS patients in San Francisco whose clinic was 
closed because the HCFA carrier refused to allow the alleged 
overpayments to be repaid in installments, or the Pittsburgh 
physician whose carrier decided after the fact that the care he 
provided to critically ill patients was not medically necessary 
and demanded that he pay $339,000 within 30 days.
    Now, neither of these medical practitioners were accused of 
fraud. They were not convicted of any crimes, yet their 
practices and their lives were torn apart. These are not 
rumors. These are facts that happened to real people, and I 
believe it is because HCFA's practices lack sufficient due 
process and fairness.
    I think the immunization we are talking about, first of 
all, would only occur on the first audit. There is nothing to 
stop HCFA from doing a subsequent audit. We did not amend the 
False Claims Act. Any kind of fraud that is suspected or has 
been committed would still be prosecuted.
    Frankly, your suggestion that some doctors will use this 
provision to actually decide to commit fraud, risk losing their 
practice, risk going to jail by deciding to systematically over 
bill Medicare, knowing they are doing this, and then repay 
their over billing within a year, and also that they can 
collect interest from HCFA in the meantime, strikes me as 
extremely implausible.
    At the end of the day, I do not think this is a vehicle 
that is going to facilitate or allow or encourage physicians or 
other providers to commit fraud. I think it is a measure of 
fairness for honest providers that discover a mistake.
    My question for you actually is related to this, but it 
goes more directly to the appeals process. In light of the fact 
that such a huge percentage of appeals go in favor of the 
provider and in light of the fact that it takes such a long 
process, do you not think it is reasonable and do you not think 
it is only fair that healthcare providers be able to keep the 
alleged overpayment until the appeals process is finished?
    Mr. Grob. Okay. I would recommend against going all the way 
to the end of the appeals process as a general matter of 
practice, but I do think there are some good options that can 
be considered.
    For example, we find that the longer the time period that 
you take in trying to get the money back, if you will, where an 
overpayment is due, the more your ability to get the money back 
drops off. I think some tradeoff needs to be taken with regard 
to the time frame.
    I think one of the things that could be considered, for 
example, would be how far down that process do you want to go? 
Perhaps, for example, having the money not paid back, say, 
until after the first reconsideration--which results in 
agreement with about 70 percent, for example, of the appeals 
that occur at that time might be a move in the right direction.
    I also think that a remark that Mr. Scully made earlier is 
also germane. I think the interest might even things out 
because right now the interest is kind of a one-way street. So 
I think if the interest were paid back the other way that would 
tend to mitigate that somewhat as well.
    Mr. Toomey. Well, I think that would help, but I do not 
think it is enough. I would cite the fact that in the carrier 
fair hearing stage of the appeal process in fiscal year 2000 my 
figures show that 42 percent of cases appealed at that level 
were decided in the physicians' favor.
    At the final step in the process, the ALJ level, which 
occurs over a year on average after that process begins----
    Mr. Grob. That is correct.
    Mr. Toomey [continuing]. Which is way too long----
    Mr. Grob. Yes.
    Mr. Toomey [continuing]. Sixty percent of those cases are 
decided in favor of the healthcare provider.
    Mr. Grob. That is correct.
    Mr. Toomey. I just do not understand how HCFA can justify 
holding onto the money when 60 percent of the time they are 
wrong.
    Mr. Grob. Okay. Again, my remark would be that it has to do 
with the numbers that we are talking about. There are actually 
very few cases that go that far. Most of them are resolved at a 
much earlier stage.
    I think a concern that we would have, for example, is if 
holding onto the money were an option all the way to the very 
end of the process that that might in fact incentivize some 
additional appeals.
    Mr. Toomey. But maybe they are justified when the providers 
are winning 60 percent of them.
    Mr. Grob. On the other hand, if a person could hold onto 
the money longer, there may be more frivolous appeals.
    Mr. Toomey. I think the evidence suggests so far that given 
the outcomes they are obviously justifiable appeals.
    I will yield the balance of my time and recognize Ms. 
Christian-Christensen.
    Mrs. Christensen. Thank you. If I could just follow up 
somewhat on your question? I would like to go to page 9 where I 
think in H.R. 868 there is a provision whereby a payment plan 
could be instituted. I think you are also opposed to that in 
the bill. Is that correct?
    Mr. Grob. We have been working with the staff on this bill 
for quite a bit of time, and we have really appreciated the 
opportunity to go back and forth on that.
    In the bill, the part we had a problem with was the 
automatic entitlement to a payment plan for a particular period 
of time no matter what the circumstance, but I think that very 
much the idea that a repayment plan could be developed for 
providers is certainly very viable, and we think some attention 
ought to be paid to that.
    Mrs. Christensen. To me, the agency is trying to go in the 
direction of cooperation and working together. I think we 
should go a little more to the side of really doing that and 
allowing for a payment plan and really to compare trying to get 
your money back from an HMO, which has a lot of resources, or 
from a telephone company is not the correct comparison when you 
are talking about a physician's office or a provider that does 
not have that kind of money readily available.
    Mr. Scully. The problem, Congresswoman, just to defend and 
to help him out a little bit maybe because we have had even 
differences, and we are working together with Congress and the 
IG to try to work out some of our views on MERFA.
    I think repayment plans in a lot of cases may be 
appropriate, but there are also cases, and not to pick on any 
one group, but there are a lot of home health providers that 
had a lot of not particularly legitimate claims four or five 
years ago that disappeared from the face of the earth pretty 
quickly.
    Part of the problem we have is a lot of bankruptcies. In a 
lot of cases if you give people a repayment option where you 
know they are not going to be around to repay it, they will 
have 15 different shells, and they will go bankrupt.
    There are a lot of really functional problems with giving 
everybody a guaranteed repayment option. There are certainly 
appropriate places that will happen, but there are an awful lot 
of cases, and I am sure the IG has 1,000 more examples than I 
will have where providers have provided numbers, over billed 
this, we went after them, and then all of a sudden they have 
disappeared never to be found again. We have hundreds and 
hundreds of millions of dollars of outstanding claims like 
that.
    I am totally supportive of what you are saying, but I think 
we have to balance.
    Mrs. Christensen. And I appreciate the fact that you are 
working with the Congress on the bill and that we will be able 
to work out something, but it just seems unfair.
    I was trying to figure out where I saw the statistic about 
most of the claims being accurate. Actually, Mr. Grob it was in 
your testimony----
    Mr. Grob. Yes.
    Mrs. Christensen [continuing]. In one of the other----
    Mr. Grob. That is right.
    Mrs. Christensen. In the Senate, I believe. It talked 
mainly about the payment, the request for payment, being free 
of error.
    Mr. Grob. Yes.
    Mrs. Christensen. To go back to our previous conversation, 
I would really like to see what the record really is on 
investigations and audits and if we could get a more specific 
breakdown on those and how many actually end up going to 
criminal prosecution----
    Mr. Grob. Right.
    Mrs. Christensen [continuing]. Or some kind of a sanction.
    Mr. Grob. Yes.
    Mrs. Christensen. I wanted to talk a bit about I am glad 
that there is going to be an educational process for the 
beneficiaries because in my experience and in the experience of 
my providers a lot of the information that goes out to the 
beneficiaries is just unintelligible to most beneficiaries, and 
in the case where there may be a question of payment it almost 
makes the provider look like a criminal.
    It really sets up a bad situation in the case of a 
physician that has a more personal relationship with their 
patient that the physician has done something wrong. It is 
really an interference with the patient/physician relationship.
    Mr. Scully. Can I put in my two cents on that?
    Mrs. Christensen. Sure.
    Mr. Scully. Having lived through the last 15 years in 
Washington doing health policy, part of that is, and the IG is 
responding to the pressure that is largely from the Hill, as 
was the former HCFA, now CMS, as was the Justice Department, 
for most of the late 1980s and early 1990s the perception on 
the Hill was that all Medicare problems and reform problems 
could be solved if you wiped out Medicare fraud, which I think 
was an overly simplified view, so you had this clamoring to 
crack down on Medicare fraud, Medicare fraud, Medicare fraud, 
and everybody in the agency has responded to that.
    Now you are getting a little bit of a push back with 
Congress to find a balance. I think that is appropriate, but 
all the provider notifications that go out to my mom and dad to 
tell them every time there is a problem, those are all 
statutorily required. I think there are an awful lot of things 
that Congress has pushed us to do that may have been 
overcompensating.
    I think again, as I said earlier, there probably was not 
enough being done ten years ago. Arguably, there are a few 
things we might rein back in a teeny bit now, and I think that 
is part of what the MERFA process is all about.
    Mrs. Christensen. Thanks. I am very much interested in 
having a listening session. I see that my time is up. A 
listening session in my district.
    Mr. Scully. Well, Congresswoman, if I have the choice of 
going to a lot of other district or the Virgin Islands----
    Mrs. Christensen. I think you need to come back and see the 
safer hospitals where your daughter was treated.
    Mr. Scully. I have been there with my daughters. Yes, I 
have.
    Mrs. Christensen. Right.
    Mr. Scully. They did a great job. Thanks.
    Mrs. Christensen. Thank you.
    Mr. Toomey. I would like to thank the witnesses for their 
patience and their cooperation.
    The hearing is adjourned.
    [Whereupon, at 12:15 p.m. the Committee was adjourned.]
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