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



 
    MEDICARE PAYMENT POLICY: ENSURING STABILITY AND ACCESS THROUGH 
                           PHYSICIAN PAYMENTS
=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                           FEBRUARY 14, 2002
                               __________

                           Serial No. 107-91
                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

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

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas                    SHERROD BROWN, Ohio
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     TED STRICKLAND, Ohio
NATHAN DEAL, Georgia                 THOMAS M. BARRETT, Wisconsin
RICHARD BURR, North Carolina         LOIS CAPPS, California
ED WHITFIELD, Kentucky               RALPH M. HALL, Texas
GREG GANSKE, Iowa                    EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      PETER DEUTSCH, Florida
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES ``CHIP'' PICKERING,          ALBERT R. WYNN, Maryland
Mississippi                          GENE GREEN, Texas
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland       (Ex Officio)
STEVE BUYER, Indiana
JOSEPH R. PITTS, Pennsylvania
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)













                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Lewers, Theodore, Trustee, American Medical Association......    46
    McSteen, Martha, President, National Committee to Preserve 
      Social Security and Medicare...............................    65
    Russell, Thomas R., American College of Surgeons.............    58
    Scanlon, William J., U.S. General Accounting Office..........    44
    Scully, Hon. Thomas A., Centers for Medicare and Medicaid 
      Services, Department of Health and Human Services..........    10
    Shuren, Allison Weber, American College of Nurse 
      Practitioners..............................................    53
    Turney, Susan, Medical Group Management Association, 
      Marshfield Clinic..........................................    67
Material submitted for the record by:
    American Academy of Family Physicians, prepared statement of.    73
    American Academy of Ontolaryngology--Head and Neck Surgery, 
      prepared statement of......................................    74
    American College of Osteopathic Physicians, letter dated 
      February 15, 2002, to Hon. Michael Bilirakis...............    75
    American College of Physicians--American Society of Internal 
      Medicine:
        Letter dated February 14, 2002...........................    76
        Prepared statement of....................................    77
    American College of Radiology, prepared statement of.........    80
    American Osteopathic Association, letter dated February 15, 
      2002, to Hon. Michael Bilirakis............................    81
    American Physical Therapy Association, letter dated February 
      12, 2002, to Hon. Michael Bilirakis........................    82
    American Society for Gastrointestinal Endoscopy, letter dated 
      February 13, 2002, to Hon. Michael Bilirakis...............    83
    Association of American Medical Colleges, prepared statement 
      of.........................................................    84
    Coalition for Fair Medicare Payment, letter dated February 
      14, 2002, to Hon. Michael Bilirakis........................    86
    Lewers, Theodore, Trustee, American Medical Association, 
      responses for the record...................................    92
    McSteen, Martha, President, National Committee to Preserve 
      Social Security and Medicare, responses for the record.....    96
    Medical Group Management Association, letter dated March 6, 
      2002, enclosing response for the record....................   104
    National Association of Rehabilitation Providers and 
      Agencies, letter dated February 22, 2002, to Hon. Michael 
      Bilirakis..................................................    87
    Russell, Thomas R., American College of Surgeons, responses 
      for the record.............................................   100
    Scanlon, William J., U.S. General Accounting Office, 
      responses for the record...................................    87
    Scully, Hon. Thomas A., Centers for Medicare and Medicaid 
      Services, Department of Health and Human Services, 
      responses for the record...................................   107
    Shuren, Allison Weber, American College of Nurse 
      Practitioners, responses for the record....................    97

                                 (iii)

  







    MEDICARE PAYMENT POLICY: ENSURING STABILITY AND ACCESS THROUGH 
                           PHYSICIAN PAYMENTS

                              ----------                              


                      THURSDAY, FEBRUARY 14, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 8:30 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Greenwood, 
Burr, Ganske, Norwood, Wilson, Shadegg, Bryant, Buyer, Brown, 
Waxman, Barrett, Capps, Stupak, and Green.
    Also present: Representative Bereuter.
    Staff present: Anne Esposito, health policy coordinator; 
Erin Kuhls, majority counsel; Eugenia Edwards, legislative 
clerk; Amy Hall, minority counsel; Karen Folk, minority 
counsel; Bridgett Taylor, minority professional staff; and 
Nicole Kenner, minority research assistant.
    Mr. Bilirakis. Good morning. I call to order the first 
hearing of the Health Subcommittee in the second session of the 
107th Congress. Today, we will examine the Medicare payment 
policy for physicians and at the outset I would say I know 
we've already extended our apologies to Mr. Scully, but I 
wanted to also apologize to our witnesses and the audience for 
such an early start. I think members will be coming in and out, 
but we were in session until 2:45 this morning, so we're going 
to do the best that we can.
    I did want to announce that on this Valentine's Day in 
addition to saying Happy Valentine's Day, I would like to take 
a moment on behalf of all of us to say goodbye to Anne Esposito 
who is sitting here to my right. Anne has been with me for some 
time. She has been, of course, a terrific staffer, 
conscientious, hardworking and she has an awful lot of energy. 
But because she has been so conscientious, so hardworking, 
she's been snapped up by downtown. That is the downside for 
having an effective staff. But anyhow, she has contributed so 
very much toward improving the health care system for all 
Americans and on behalf of Mr. Brown and the other members, I'd 
like to wish her the best of luck as she moves into the private 
sector and let her know, and I'm sure I speak for all of us on 
the committee, that she will be greatly missed. Thank you very 
much, Anne, for everything.
    Well, it's vital that we ensure the stability of the 
Medicare program and guarantee access to provider services for 
beneficiaries. This hearing will focus on the formula used to 
update payment rates for individual physician services under 
Medicare's Physician Fee Schedule.
    In 2002, health care professionals paid under this fee 
schedule will experience the largest, the largest across the 
board payment cut since the fee schedule was first put in place 
a decade ago. This subcommittee is concerned that the current 
update formula is flawed and may at times put at risk, as it is 
now doing beneficiaries' access to critical health care 
services.
    I would like to thank all of our witnesses for coming 
before the subcommittee so early this morning and as I've 
already said, I'd like to wish you all a Happy Valentine's Day.
    Our first panel consists of Tom Scully, the Administrator 
of the Centers for Medicare and Medicaid Services. He will 
discuss the history of physician payments under Medicare and 
explain the circumstances around the -5.4 percent reduction, in 
physician payments this year.
    On our second panel we will hear from Bill Scanlon our good 
friend who we hear from so very often with the General 
Accounting Office. He will lay out the various policy choices 
the subcommittee will face as we consider making changes to the 
current update system. We will also hear from a number of 
stakeholders, including the American Medical Association, the 
American College of Nurse Practitioners, the American College 
of Surgeons, the National Committee to Preserve Social Security 
and Medicare, and the Medical Group Management Association. 
These witnesses will testify about the real world effects of 
the payment cuts while highlighting ways to improve the current 
update system.
    As many of you know, late last year we realized the 
magnitude of this payment reduction and the trouble it would 
cause. In response, I introduced, along with Ranking Member 
Brown, Chairman Tauzin and Ranking Member Dingell, H.R. 3351, 
the Medicare Physician Payment Fairness Act of 2001. This 
legislation was intended to correct the conversion factor for 
payments in 2002 so the reduction would be a negative .9 
percent rather than the current 5.4 percent negative figure. 
Unfortunately, due to budget constraints, we were unable to get 
this legislation signed into law last year, but we do remain 
committed to improving the formula used to calculate the annual 
update for Medicare payments to physicians and other health 
care professionals paid under the physician fee schedule. I 
think that 316 at latest count, 316 bipartisan co-sponsors in 
the House of Representatives, along with 69 co-sponsors of the 
companion legislation in the Senate agree with that statement.
    I do want to keep my opening remarks brief. I will ask 
members to keep their remarks brief with the exception of Mr. 
Brown, to limit their remarks to no more than 3 minutes. And I 
also would like, on behalf of the committee to welcome Mr. Doug 
Bereuter from Nebraska here, from very cold Nebraska. Doug is 
not a member of this committee, but he has a concern regarding 
the physicians in his District and we wanted to give him the 
opportunity to sit here and to also query Mr. Scully.
    With that, I now recognize Ranking Member Brown.
    Mr. Brown. Thank you, Mr. Chairman, I will also be brief. I 
want to echo what you said about Ann Esposito who's been 
terrific to work with and always straight forward, always 
honest and honorable in her dealings and thank you for that, 
Ann.
    I want to thank Chairman Bilirakis for holding the hearing 
today. Administrator Scully, thank you for joining us. Mr. 
Scanlon, thank you for again joining us and all the witnesses 
that are here this morning.
    There have been dramatic changes, as we know, in health 
care since Medicare was established in 1965. As the old saying 
goes, the more things change, the more they stay the same. 
Health care may be more sophisticated today than it was 27 
years ago. Health care finance and delivery may have evolved 
from unfettered fee for service to coordinated care, to 
vertically and horizontally integrated care, HMOs, PPOs, PSOs, 
point of service plans and hybrid arrangements, I wouldn't even 
begin to explain. But it doesn't matter. Health care delivery 
still hinges on the doctor-patient relationship and when it 
comes to financing health insurance relies on the broad pooling 
of risk and health insurance still derives its value from the 
reliability of its coverage and the depth, the quality and the 
accessibility of its provider network.
    Medicare fee-for-service program which, if you want to get 
technical, is actually not fee-for-service, but a hybrid, still 
delivers on all these fronts. That's why logic rests on the 
side of sustaining Medicare as a single insurance program, 
rather than parsing the risk pool into multiple private plans. 
That's why Medicare is enduringly popular with its 
beneficiaries and that's why it's critical to pay physicians 
and other professionals who contract with Medicare on a fair 
and consistent basis.
    The current payment formula for Medicare physicians and 
allied health professionals is flawed. We need to fix it. These 
providers should not have received the 5.4 percent cut in their 
payments this year. I was pleased to join Chairman Bilirakis, 
Chairman Tauzin and Ranking Member Dingell in legislation to 
stop the cut from being implemented. That bill, H.R. 3351 
enjoys strong bipartisan support. I thought it was 312 
sponsors. The chairman says 316 which goes to show how 
productive he was on the House floor last night at 1 in the 
morning gathering more co-sponsors.
    An identical measure in the other body has 69 co-sponsors. 
The problem last year, the problem this year is finding the 
money to pay for it. That's the perennial issue, but for 
reasons I'll leave aside, Mr. Chairman, in the spirit of 
bipartisanship, it's too early in the morning to do anything 
else, the funding problem is even more daunting this year. 
We're simply going to have to find a way to overcome that 
challenge. The current payment formula is tied to a general 
economic indicator, the GDP, an overall expenditure target that 
is simply out of sync with legitimate changes in the volume and 
cost of care, compounded by data errors, the GDP link produced 
the unjustifiable 5.4 percent cut this past year. And if we do 
not take action, physicians and other professionals will be 
subjected to another significant and unjustifiable cut next 
year. We have responsibility to the beneficiaries who depend on 
Medicare to the health care professionals who make the program 
work to stop the 2002 cut in its tracks and establish a 
workable payment formula for the future. It's expensive, but it 
should be done.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. The Chair now 
recognizes for 3 minutes, the first member to appear here this 
morning and the vice chairman of the subcommittee, Mr. Norwood, 
Dr. Norwood.
    Mr. Norwood. Thank you very much, Mr. Chairman, and I mean 
this sincerely, thank you for holding this hearing. If any of 
us really do care about the health care of senior citizens, 
there probably won't be a more important hearing. And as you 
and I have discussed many, many times and for a long time that 
the Medicare payment rates were ultimately going to affect 
access to care and quality of care and it appears to me that it 
is finally coming true.
    I'd like to thank HCFA Administrator Tom Scully for joining 
us today. Tom, we don't have an opportunity to visit lots. 
You're busy, I'm busy. There are a number of little things I 
want to sort of talk about while we have you out there and 
frankly, I'm concerned about some of the things I've been 
reading in the press. Happily, the only reason I'm not mad, 
Tom, is that even I know by now you can't believe everything 
you read in the press and I'm sure before this hearing is over 
you're going to make me feel a lot better.
    Mr. Scully. No question.
    Mr. Norwood. I hear from the press that you don't like the 
provision in our Medicare Reform Bill that requires HCFA to 
tell someone whether a treatment is covered and I hear in the 
press you call that provision crazy and a Democratic provision 
and I'm upset because you're in a Republican Administration and 
I see no reason to give the Democrats all the credit solving 
that problem.
    I happen to like that provision very well. I happen to know 
it's a bipartisan provision. Dr. Ganske took the lead on that 
and it hurt my feelings a great deal to be honest with you, if 
you think I'm crazy, along with my mother-in-law to know if 
HCFA is going to cover something that she needs in health care.
    I also hear that you've been threatening to change the AWP 
for oncologists without changing the--you know how the press 
is, you can straighten me out in a minute. The AWP for 
oncologists without changing the reimbursement structure to pay 
oncologists for the services they perform. I read where you 
think that you have the authority to change AWP while leaving 
the oncologists high and dry. Now I don't think that would be a 
wise thing to threaten. In fact, somebody might call and idea 
that would blatantly drive up hospital treatment like that real 
crazy.
    We have some very important issues before us today, Mr. 
Chairman, on Medicare and I'd like to be comfortable with Mr. 
Scully on these issues and I know we will be by the end of the 
day. Take today's issue and what we're actually here about 
which is a very important issue. I know it's going to be 
costly, but let's be honest, please. Providing almost free 
health care coverage for American seniors is simply not an 
inexpensive proposition. And I don't lay all that at your door. 
That's Congress' responsibility. I know we're giving you 
signals saying that you've got to cut costs, cut costs, cut 
costs and we keep sending you less money.
    If your response, however, to the growing expense of 
Medicare is to constantly decrease payment to providers my view 
is that's just really not smart.
    Mr. Bilirakis. Please summarize. We're very happy that you 
aren't angry this morning.
    Mr. Norwood. Well, ultimately, as we all know, providers 
are simply going to walk away from Medicare. They can't 
continue to treat patients when it costs them money and I hope 
you realize that. I've got another 5 or 10 pages, Mr. Chairman. 
I will quit with this. I hope you will stay and hear the other 
witnesses. That's important that you hear what people who are 
in the trenches are going to tell this committee this morning. 
So I'll be observant whether you can stay or not.
    Thank you very much.
    Mr. Bilirakis. I thank the gentleman. For 3 minutes, Mr. 
Greenwood, a warm up for your later session today.
    Mr. Greenwood. Oh, I'll pass. It's too early in the 
morning.
    Mr. Bilirakis. Mr. Burr.
    Mr. Burr. After that, I wouldn't try it.
    Mr. Bilirakis. Let's see, I'm not sure who came in first. 
Dr. Ganske. Three minutes, Greg.
    Mr. Ganske. Thank you, Mr. Chairman. My State of Iowa ranks 
dead last in terms of provider reimbursement, 50th out of 50 
States. We are about 25th in terms of overhead expenses. And we 
are eighth in terms of quality of care delivery. So, we're dead 
last in terms of our reimbursement. We're in the middle, 
average, for overhead, yet we're still delivering really good 
health care. But I have some concerns if that can continue. I 
am hearing from physicians that they won't be able to take any 
more Medicare patients into their practices because they're 
having to make up the difference. And in small towns and rural 
areas, Medicare patients make up a disproportionate percentage 
of their practice.
    Hospitals are in the same situation. Today, we're dealing 
with the physician provider formula. We need to fix it. It is 
fundamentally flawed and if we don't, I predict that we are 
going to see a real decrease in terms of health care access of 
senior citizens to physicians. There's a lot of historical 
reasons for this, including some recent ones. For instance, 
when Medicare started, we weren't so heavily dependent on 
technology. In my State, there were lower utilization rates, 
meaning in a rural State people don't go to the doctor quite as 
often unless they really need to. So we started out with a 
lower average cost per patient than say New York. So, over the 
years then if you get an across-the-board increase, then the 
gap increases. For instance, lets say, before Medicare started, 
the average cost in New York was calculated at $300 a month and 
in Iowa it was $100 a month. And then the next year you get a 3 
percent increase across the board. Now you're dealing with $309 
as the base for New York and $103 for Iowa. Then the next year 
you get a 3 percent increase and the gap gets bigger and bigger 
and bigger. We need to deal with that.
    We had, as has been pointed out, a very large bipartisan 
group of Congressmen and Senators that wanted to move on this 
issue before we left for Christmas and I really applaud the 
chairman for taking a lead on this. We need to get this thing 
moving. So I'll look forward to the testimony from you, Mr. 
Scully, and the other members of the Panels, thank you.
    Mr. Bilirakis. I thank the gentleman. Mr. Buyer, for an 
opening statement.
    Mr. Buyer. I'd just say, I don't know if it's in response 
or in addition to Mr. Ganske's comment, I don't think it would 
be accurate to infer from his comment that if Iowa is last in 
reimbursement, but eighth in delivery of care that the other 49 
States are inflationary in their reimbursement. Because I think 
it would be easy to infer that from that statement. I do 
remember very well in April 1995 serving on a health care task 
force and when we got the letter delivered to us about Medicare 
and its potential insolvency and how difficult it was to work 
through that and sometimes we got it right and sometimes we 
didn't. And I think what was most distressing about 
reimbursements, whether it was to hospitals and others, was how 
the formula was handled. It was fascinating to see when you 
took a map of the United States and trying to follow the money 
and where it was, we actually took an overlay on to the map of 
the United States and learned that after, there was a 40-year 
domination of one political party when you laid the political 
map and Districts on to the reimbursements you saw where there 
was seniority in political power, that's where the money was 
going and that was wrong. And so we sought to bring equity to 
the reimbursements across the country. And I want to thank Mr. 
Brown and the chairman both for this hearing so we can--I'm 
hopeful that we continue in our equity in this funding formula, 
not just giving it to--let it follow the power, but make sure 
that it is done correctly.
    I yield back my time. Thank you.
    Mr. Bilirakis. I thank the gentleman. Ms. Wilson for an 
opening statement.
    Ms. Wilson. Thank you, Mr. Chairman. I'd like to echo the 
comments of my colleague from Iowa as well as my colleague from 
Indiana. Medicare, Dr. Norwood said in his opening statement 
that Medicare reimbursement rates affect access to care and 
quality of care. That shows up so astoundingly when we look at 
the discrimination within this program against States like New 
Mexico and like Iowa where we are at the low end of the 
reimbursement scale.
    Dr. Ganske is right. Iowa is No. 50. New Mexico is No. 37. 
And what makes it particularly difficult is that a doctor who 
is practicing in Albuquerque can go over the line to Amarillo, 
Texas and get a $20,000 or $30,000 raise just because of 
Medicare discriminating against New Mexico. New Mexico paid--
New Mexico citizens pay into Medicare at the same rate as 
everybody else and we shouldn't be denied access to care 
because Medicare has set up a system that discriminates against 
doctors in the State of New Mexico. The geographic disparity in 
this system is appalling. And I think it's about time that we 
put a little sunlight on that and what it does to access to 
care and quality of care in rural areas, in poor areas and in 
areas where people are under served by health care.
    We're going to talk today about the physician reimbursement 
payment and adjusting that and I am a co-sponsor of that bill, 
but I wish it was only 5 percent that we were arguing about 
here because in New Mexico, the average reimbursement for a 
Medicare--we can't get the reimbursement payments for 
physicians and compare completely apples to apples. I think 
somehow that's intentional. People don't really want everybody 
to know just how bad it is. But if you just look at the average 
per enrollee reimbursement for Medicare in the State of New 
Mexico, $3,726. In Texas, $6,539. We're talking about 
disparities of 40, 45 percent. You can't keep doctors in New 
Mexico for that. We have to address the geographic disparity 
and until we do that, we will continue to struggle with lack of 
access to care and lack of quality of care because the Federal 
Government discriminates against about 14 States in this 
country.
    I yield the balance of my time.
    Mr. Bilirakis. Thank you. Mr. Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman, and good morning. 
Nice to see you bright eyed and bushy tailed like the rest of 
us this early morning after a nice evening last night.
    I am thrilled that you're holding this hearing, Mr. 
Chairman, because I believe it is critically important. 
Medicine across America, I believe, is in a crisis of its own, 
indeed, my staff would say medicine in America, we're in such a 
deeply troubling situation that it's as though the building is 
on fire, but nobody can smell the smoke.
    I grew up with a number of young people in Arizona who are 
now physicians. I will tell you they come to me every day and 
they make a compelling case for what is wrong with medicine, or 
the hassle of their lives, or being ordered around by 
bureaucrats, or being ordered around by HMO bureaucrats and now 
on top of that, Mr. Chairman, we plan as a result of I believe 
a deeply-flawed formula, to reduce their reimbursement.
    Make no mistake about it, Mr. Chairman, if we do not pay 
physicians well, if we do not provide them control of their own 
lives, if we do not enable them to exercise their professional 
judgment in a way which they feel is appropriate, and reward 
them for doing so, then we will not attract qualified people to 
the practice of medicine. This 5 percent reduction is an 
outrage.
    Now there are serious problems with Medicare and the 
Medicare and the Medicare system, but I want to pay compliments 
to Tom Scully and the new administration for what they've done. 
This is a headline from the East Valley Tribune, the second 
biggest paper in the State of Arizona, I think, very 
significantly, it says ``Valley's ERS Overwhelmed''. This is a 
problem that has been emerging in my community and it is 
extremely severe. But I raised this problem with Tom Scully, 
the CMS Director who is here today and I want to tell you that 
he was incredibly responsive. He agreed after a brief series of 
meetings where I outlined what was going on in Arizona to come 
to Arizona to see the problem first hand and to work to address 
it. And he has done that.
    Your bill, Mr. Chairman, has I believe, 312 co-sponsors----
    Mr. Bilirakis. 316.
    Mr. Shadegg. 316. And I cannot remember a time when I knew 
of a bill with that many co-sponsors that did not see floor 
action.
    There's a great deal to be done here with regard to 
Medicare. There's a great deal for us to do with regard to 
medicine, because if we do not act now, we will have--we will 
not have quality people going into medicine. I'll bet you 
there's not a person in this room that's involved in this issue 
who hasn't had a doctor come up and tell them that they were 
encouraging their son or daughter not to go into medicine 
because of the condition of medicine today. We can't fix it 
overnight, but we must fix it. This bill is a good start. This 
hearing is a good start. I compliment you, Mr. Chairman.
    Mr. Bilirakis. Well, thank you, sir. And I endorse your 
comments and I would say that there's one other bill. It's a 
Veterans' bill that has considerably more co-sponsors and still 
has not seen the light of day.
    Mr. Barrett, for an opening statement, 3 minutes.
    Mr. Barrett. Thank you, Mr. Chairman. I won't need 3 
minutes. I just want to thank you for holding this hearing so 
quickly after we finished our debate on campaign finance 
reform.
    I'm pleased to be here because I think that this is an 
issue that needs our immediate attention. Obviously, as the 
previous speaker said, as we listen to health care providers in 
our Districts, we know that there's a problem here and I 
appreciate your convening this and hopefully, we can address 
this problem as quickly as possible.
    Mr. Bilirakis. Thank you, thank you, Tom. The Chair is 
pleased to recognize the gentleman from Nebraska, Mr. Bereuter, 
for an opening statement.
    Mr. Bereuter. Mr. Chairman, thank you very much for your 
courtesy. I admire the work ethic of this subcommittee, 
especially in light of what's happened. I do want to associate 
myself with remarks of the gentlemen from Iowa, the gentle lady 
from New Mexico, the gentleman from Indiana. This is an 
extremely important issue. I think the gentle lady has pointed 
out how our beneficiaries, of course, the people paying into 
the Medicare system are, in fact, cross subsidizing areas of 
the country with less than conservative practice styles and 
beneficiary preferences.
    Really, the result is that I introduced a bill which will 
attempt to deal, in part, with this problem by physician work 
adjustment changes, the formula thereof. And the current 
reimbursement rates are really having a negative effect on our 
ability to recruit adequately quality health care professionals 
in my State, particularly in the most sparsely settled parts of 
the State. The inequities really do need to be addressed and 
I'm very interested that you're holding this hearing, that 
you're trying to take some action and I appreciate the ability 
to sit in and listen to the witnesses and perhaps ask a 
question or two.
    Mr. Bilirakis. I thank the gentleman. Thank you for your 
interest.
    I believe that completes the opening statements. The Chair 
first would ask unanimous consent that all members of the 
subcommittee, their written statements might be made a part of 
the record. There's a written statement by Congressman Joe 
Knollenberg who he has asked might be made part of the record, 
so by unanimous consent I request it includes that, as well as 
a number of statements that have been furnished to the 
subcommittee by various stakeholders, unanimous consent of 
those, all be made a part of the record.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Chairman Bilirakis, thank you for holding this important hearing. 
I'd like to acknowledge your leadership in recognizing the urgency of 
the issue before us today. The Subcommittee has been actively engaged 
on the critical issue of physician payments, sponsoring Member and 
staff briefings, holding a press conference, and introducing 
legislation to provide immediate relief to those physicians and health 
care professionals experiencing a significant payment cut this year.
    At this hearing, we will focus our attention on how we got to where 
we are today and why we are using such an unpredictable formula, which 
has resulted in widely oscillating payment updates over the years. In 
my home state of Louisiana, according to the AMA, total Medicare losses 
for physicians will exceed $28 million--or $3,549 per physician. I'm 
concerned that the 2002 payment cut and the expectation of similar 
significant reductions in the future will cause many Louisiana 
physicians who are near retirement to leave medicine, which could have 
a serious effect on patient access to care.
    I'm sure many of us have heard from physicians and other health 
care professionals in our districts about the effect the 2002 negative 
payment update will have on their practices and the beneficiaries they 
serve. Just recently, I received a distressing letter from a surgeon in 
Louisiana. One comment Dr. Opelka made was particularly striking and 
I'd like to share it with you today.
    He states in his letter that ``reductions in Medicare physician 
payments are beginning to seriously impact Medicare patient access to 
the full spectrum of care in our community. Patients continue to 
receive treatment, but the availability of all aspects of care has 
decreased . . . If reimbursements continue to decrease, I have concerns 
that further changes will continue to erode the fabric of the finest 
care delivery system in the community.'' We must ensure that 
beneficiary access to critical health care services is not put at risk.
    At the same time, I recognize that money doesn't grow on trees. We 
are once again in deficit spending. Moreover, the Administration 
instructs us that we need to find offsets for any increases in provider 
payments. We take that budget proposal very seriously, and yet, at the 
same time, this payment policy needs to be fixed. But to accomplish 
this, we are going to need the Administration's help as well as the 
affected groups' input to make sure this type of cut never happens 
again.
    During today's hearing, we are honored to have before us Tom 
Scully, the Administrator of CMS. I look forward to hearing your 
testimony today and hope that it yields additional insight into ways we 
can improve our federal health care programs and remedy the instability 
plaguing the physician payment update system.
    Bill Scanlon from the General Accounting Office is also with us 
today. He will lay out the different policy options we will face as we 
work to draft a legislative fix--a fix that will make sense, be good 
policy, and last the test of time. We are also fortunate to have 
representatives from beneficiary, physician, and practitioner groups 
who are particularly affected by the negative payment update this year. 
They bring a valuable perspective that is critical to developing the 
right legislative fix.
    Chairman Bilirakis, thank you again for holding this important 
hearing. I yield back the balance of my time.
                                 ______
                                 
    Prepared Statement of Hon. Joe Knollenberg, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, I applaud the committee for holding this hearing as 
Congress continues to work with the Bush Administration to modernize 
and improve the Medicare system. As Congress addresses the issue of 
broad Medicare reform, it is essential to consider the impact of 
reducing Medicare payments to physicians. After all, physicians and 
other health care professionals are critical components of the Medicare 
system, serving on the front lines to provide quality health care to 
all Americans.
    I commend the efforts made already by many Congressional Members 
and the Bush Administration to implement administrative reforms to make 
the Medicare program work better for physicians. Programs such as the 
Physicians' Open Door Initiative and the Physicians Issues Project have 
helped improve the flow of information, reduce regulatory burdens and 
ease paperwork requirements. As a result, doctors will be able to spend 
more of their time providing health care and less of their time wading 
through pages of rules and regulations. It is my hope that we will 
build on these improvements.
    I appreciate the opportunity today to raise concerns expressed by 
many doctors in my home district in southeastern Michigan. I believe 
these issues have been echoed by health providers throughout the 
country as well. My constituents have brought to my attention the 
devastating consequences of the final payment policies and payment 
rates for 2002 under the Medicare Physician Fee Schedule announced by 
CMS on November 1, 2001. Reducing Medicare's physician payments by 5.4% 
would significantly restrict their ability to provide the necessary 
services to our seniors.
    In addition to physicians being discouraged by the enormous amount 
of federally required paperwork, our area has seen a significant 
decrease in the number of physicians financially able to care for 
Medicare beneficiaries, subsequently closing their practice to them. 
Moreover, some doctors are simply leaving medicine altogether because 
of the financial impossibility of providing services under Medicare.
    Emergency physicians will be particularly adversely affected given 
payment cuts in other areas. The role of emergency departments is 
becoming even more important as our country prepares to respond to 
bioterrorism and it is essential that their physicians be able to 
effectively carry out their responsibilities.
    A Medicare payment cut could also effect the entire health sector 
as numerous private sector plans and state Medicaid programs tie their 
physician fee schedules to Medicare rates. At a time when we are 
concerned with healthcare workforce shortages, we must identify 
strategies to increase recruitment, retention and development of 
qualified health care providers. I look forward to working with the 
Committee and the rest of my colleagues and the Bush Administration to 
enact comprehensive Medicare reform that will include strengthening the 
Medicare payment system.

    Mr. Bilirakis. Having done that, the Chair now would 
recognize, Mr. Scully. Tom, I'll set this for 10 minutes. Just 
present your story and don't worry too very much about the 
clock, even though I would say that we have to give us this 
room by 11 o'clock.
    Mr. Greenwood will definitely boot us out of here, if we're 
not finished. Enron, these days, takes priority apparently over 
everything else. In any case, Tom, please proceed.

 STATEMENT OF HON. THOMAS A. SCULLY, CENTERS FOR MEDICARE AND 
   MEDICAID SERVICES, DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Scully. Thank you, Chairman Bilirakis, Congressman 
Brown and other distinguished members of the committee. I'll go 
as fast as I can. First, I'd like to quickly add my thanks to 
Ann. I didn't know she was leaving until this morning, so I'm 
sorry to hear that. She's been a terrific help to me and a lot 
of people in the administration.
    I also brought with me Rick Foster, who is the Chief 
Actuary at CMS, in case there are any technical questions and 
I'm not smart enough to answer or in case Mr. Norwood gets too 
mad at me. He'll get all the questions.
    But anyway, I'll go through this as quickly as I can. Let 
me just start off by saying I've worked on Medicare physician 
payment issues since 1989 when I was one of two people in the 
first Bush Administration who was, I guess, primarily 
responsible for working with Congress to develop the RBRVS 
system. Over the years, I think you can argue, that this has 
been the most stable system in Medicare and historically, the 
payments to physicians have been more predictable, more stable 
than most of the other Medicare payment systems. I think it's 
worked reasonably well, and in fact, of all the Medicare 
payment systems, this is probably the one that is mimicked most 
regularly by the private insurance sector.
    However, I do think it's important that we fix Medicare's 
payment mechanism because I think it does have significant 
problems for a variety of reasons, including the fact that I 
think we have to be careful that doctors don't lose confidence 
in the system and that the beneficiaries don't start to lose 
access to the vital services they provide.
    This year, Medicare will make about $43 billion in 
physicians payments. Between 1997 and 2001, Medicare physician 
spending went from about 17.6 percent of the program to 20.5 
percent of the Medicare fee-for-service program, so physician 
spending is not shrinking as a percentage of the program. It's 
actually growing and I'll get into that in much greater detail.
    Each year, Medicare processes about 600 million physician 
claims and the fee schedule that we use--the relative value fee 
schedule--pays for about 7,000 different physician services. 
The annual update for these services is now calculated based on 
inflation in physicians' costs to provide care and it's 
adjusted up or down for what is called the sustainable growth 
rate. I'll try to go through this as sanely as I can and 
explain how this extremely complicated system works.
    The system was designed to constrain the rate of Medicare 
physician spending and link the growth of physician spending to 
the overall economy as well as to take into account physician 
growth of volume and intensity of services. In large part, 
believe it or not--and there are obviously significant flaws 
and I'll try to explain them--the system has been working 
almost exactly as designed. There's just been a lot of factors 
that have come together in probably the worst possible way to 
throw the formula out of whack, but it is, in fact, working as 
designed.
    The law, as it was designed in 1989 and then updated in 
1993, 1997, and 1999, is extremely prescriptive, especially the 
last two updates. It gives CMS virtually no administrative 
flexibility to change anything. I think, as many of you know, I 
spent about a month working every day with many of the 
physician groups, including the AMA, to see if I had the 
administrative flexibility to change it this fall and it was 
abundantly clear that legally we do not. So the negative update 
was a surprise to us when the formula produced this mumber in 
September. We came up as quickly as we could to the Congress 
and explained it. Normally, we don't talk to anyone about this 
regulation until it comes out in November, but this year we 
started explaining it probably in mid-September.
    Several factors led to this negative update. First and most 
prominent is the downturn of the economy, since the formula, 
the sustainable growth rate formula, is tied to the gross 
domestic product. Second, the annual cumulative physician 
spending for services in prior years is much higher than 
expected. And third, as we go back and calculate actual 
expenditures in the past, there were some significant 
miscalculations--a couple of billion dollars a year, which I'll 
explain, in past years--that were basically missed in the 
expenditure formula. So we actually identified those and 
calculated them correctly and it significantly increased 
expenditures, basically putting the target back down--I'll go 
into great detail explaining this.
    The combination of the lower target for GDP and the much 
higher expenditures produced the negative update for physicians 
for 2002. We're required by law to make an estimate for 2003 on 
March 1--and Rick actually does it--and it is in these charts, 
as you'll see. We have given you our projections for the next 
couple of years and as you will see, the update is again 
significantly negative for next year.
    I think it's important to understand, from a historical 
perspective, how the system was set up and why it was designed, 
so let me just very quickly go through that, if I can.
    During the 1970's and 1980's--this is a quick discussion of 
physician payment before 1997--the annual growth rate for 
physicians was an unsustainable average growth rate of about 14 
percent. And because the system was based on historical 
charges, it produced even wider geographic variabilities and 
variabilities between medical specialties and services than the 
system we have now, which as you can see from the opening 
statements, is certainly not perfect.
    To address these criticisms, Congress directed the 
Physician Payment Review Commission, which is the predecessor 
of MedPAC, to come up with a new formula and on a bipartisan 
basis in 1989, the first Bush Administration, which I was a 
part of, and bipartisan Members in Congress--in this committee 
and the Ways and Means Committee and the Finance Committee in 
the Senate--pushed through those recommendations to create what 
is now the RBRVS, resource-based relative value system. Under 
these recommendations, we created a lot of relative values for 
each physician's service and the system is based on work from 
the AMA. So essentially, every year, the Relative-Value Update 
Committee, which is basically put together by the AMA and all 
of the physician groups in the country, sits down and says, 
``Here's $43 billion. What's the relative value of rates 
between anesthesiologists, gastroenterologists, surgeons,'' and 
recommends relative values of what the physician community 
thinks the relative payment should be.
    We take over 90 percent of the RUC's recommendations--that 
really is what drives the payment system.
    Let me just quickly, I'm going to quickly, since it's a 
very complicated structure, what I'm going to try to do, rather 
than just spend a lot of time testifying is I brought some 
charts which I was going to use the easel, but due to the 
cameras and the microphones, I'll just go through them over 
here at the table and I hope each of you have these charts in 
front of you.
    This is an unbelievably complicated process. I spent 15 
years on it and a lot of time in the last couple of days trying 
to figure out exactly how it works, so I don't expect everyone 
here to understand this in the next 5 minutes.
    Ms. Wilson. Mr. Chairman?
    Mr. Bilirakis. Yes?
    Ms. Wilson. Do we have these charts?
    Mr. Scully. You should have the charts, I hope.
    Mr. Bilirakis. No, they're not part of your statement.
    Mr. Scully. They were handed out separately from my 
statement because they weren't done in time to come up with the 
statement. They should be there. And I apologize that they're 
not, but we have charts and brought many copies.
    Mr. Bilirakis. Why don't you proceed, Tom.
    Mr. Scully. Anyway, just to walk through this quickly, what 
you'll find on the top line in the orange, in the dark orange 
is the sustainable growth rate, which is largely based on the 
GDP and what you see there is for 1998--I did it from 1998 
through 2003. The sustainable growth rate is 1.5 percent in 
1998 and goes up to 7.3 percent in 2000. That is the first 
major piece of the puzzle of how this works.
    The second piece is the actual annual spending target. This 
is what the current statute does. You look at 1998, the 
spending target for what we were supposed to spend in the year 
under the statute was $49.6 billion. This includes physician 
payments and additional things like lab services, other things 
that go into the pot.
    In 1999, it was $49.4 billion and then the next year 2000, 
$39.6 due to the changeover from fiscal years to a 9-month 
calendar year in 2000. For calendar year 2000, it was 55.9, 
then 59.3 for this year. The point of that is those are the 
statutory targets and they were set in 1997. So pre-1997, this 
target floated and changed every year.
    After 1997, it was locked in, locked in to GDP growth, 
locked in to expenditures. So what's happened to produce this? 
As I said, the formula worked virtually exactly as expected; 
this was the target and the target expenditures in orange and 
blue and then you have the target, the actual expenditures in 
the lighter shaded orange and, in the light blue, real 
spending. So what happens when you match up the years is, in 
1998 for instance, we're supposed to spend $49.6 billion. We 
spent $49.2. So we came in under the target. In 1999, we were 
supposed to spend $49.4 billion. We spent $50.6 billion, so 
we're obviously $1.2 billion over the target. It's important to 
remember, because as you go over the target, the numbers 
buildup and you have to recapture in later years.
    In 2000, the fiscal year was 9 months, there were two 
2000s, strangely, we were supposed to spend $39.6 billion in 
fiscal year 2000. If you look at the blue line, the two blue 
lines as a comparison, $39.6 billion versus $39.5. So we're 
under the target. Then the problems begin.
    In calendar year 2000, the target was $55.9 billion. We 
actually spent $58.2 billion. In calendar year 2001, we were 
supposed to spend $59.3 billion and we actually spent $65 
billion. So what you find is in 2000, we were $2.3 billion over 
the target and in 2001, we were $5.7 billion over the target. 
And this target is cumulative and it adds up every year and 
over a number of years you have to recapture the excess 
spending. This is the way it was designed. It's obviously not a 
perfect formula, but it's working exactly as designed, a whole 
bunch of factors, unfortunately, kicked in this year's very 
negative update.
    What you end up with is the cumulative growth target. If 
you look at the far right side in green, under the year 2001, 
over this year period, up through 2001, we were supposed to 
spend $302.7 billion. We, in fact, spent $311.6 billion and 
that's how the formula works. So roughly we have $9 billion in 
overspending over those years that, under the formula, has to 
be recaptured over the next couple of years.
    So two things happened. One is that, under the formula, the 
spending has to be recaptured and two things happened that 
really threw the formula off, resulting in the big change. One 
is GDP went down, so the target, which had been determined a 
year ago, had been estimated to be significantly higher but is 
now 5.6 percent. The target had been a lot higher when GDP was 
higher. In addition, spending was significantly higher than 
expected for two reasons. One, and I don't want to confuse you 
too much, but originally looking back at last March, we 
expected that spending was going to be significantly higher and 
it came down as GDP went up. Second, spending was much higher 
because we discovered a couple billion dollars a year in 
spending. What happens in these codes, and it's very confusing, 
I know, is that we have 7,000 codes. We used to have about 
6,000. We keep adding codes. Over the years as we added codes, 
some of the spending of those codes never showed up in the 
system. So going back a couple of years, our actuaries and our 
people found out the spending was actually larger, and they 
have to put that into the formula. Spending was actually 
larger, the GDP came down, the two lines crossed and instead of 
having a positive update, you ended up with a significantly 
negative update.
    So what you've got if you looked at last March when the 
Congressional Budget Office and CMS came out and said what is 
update going to be for this year, it was basically negative .1 
percent. The GDP came down this summer. The actual spending 
that we found going on was significantly higher, so instead of 
having a negative .1, you had a negative 5.4.
    The second chart, which is important, is that this is a per 
code calculation. This is not total spending. The negative 5.4 
is the base amount, called the conversion factor, and the 
original idea when it was passed in 1989 was to represent a 
base office visit for a physician. So the next code--when I go 
through and you see it ranges from anywhere from $31 to $38 and 
back down--that's the base dollar conversion factor for every 
one of these 7,000 codes. The update for that, next year is 
negative 5.4. Spending does not go down. The update of the 
dollar conversion factor is what's going down by 5.4 percent 
and that's important to remember. There are a lot of factors 
beyond that, including the fact, as I'll go through, that as we 
add codes and we do this with the agreement of the AMA and the 
physician groups, when you go from the 6,200 codes we started 
out with to 7,000, as you add codes and we do this in support 
of the medical system and it's happened gradually over the 
years, it waters down the base conversion factor value. So it's 
not always a cut. If the physicians come in and say we need 
extra codes, it comes out of the stagnant, finite pot of $43 
billion for physician spending this year, or roughly $60 
billion for the whole pot.
    So the point is it's not always a cut. Sometimes when you 
add codes, you actually water down the pot and payments go 
down.
    Anyway, the point of this next chart, to go through as 
quickly as I can and I'm sure I'm going to create a lot of 
confusion, but if you're trying to redesign these, I think it's 
important to understand why the numbers are driving the change. 
It's not an easy decision to figure out what the right fix is 
because what you'll find under the current law baseline 
spending which is the top one, I'm going to jump down to the 
second one. We obviously made some mistakes. Had we 
hypothetically calculated everything totally right the last 
couple of years and understood all the spending that was going 
on, what you'll find is that under the existing formula, if you 
look at line 2, you'll find that as a total amount of growth in 
the program, even though the updates are pretty flat and you 
see that they would be for 2002, the second line is if 
everything had worked fine and we understood all the spending, 
the physician payment update for 2001 would have been plus 3.6 
percent and 2002 it would have been negative 2.1; 2003 would be 
negative 4.9 which sounds, obviously, unsustainable and 
outrageous. But if you look at what actual spending is, and you 
look at the next line below, you'll see in 2000, spending, if 
everything is going right, would have gone up by 5.9 percent; 
spending in 2001 would have gone up by 9.7 percent; spending in 
2002 goes up by 5.2 percent and it's 1.2. But some of these 
numbers, obviously, 1.2 percent growth in physician spending is 
not a reasonable number, but I would argue 9.7 is and later on 
there's a 7.6 percent increase.
    So even though the actual per code, per conversion factor, 
which is the base physician visit, may be going down, spending 
is going up because volume is increasing significantly.
    The current law baseline, which is what we're really doing 
this year, given our errors, is a little harsher and produces a 
little tougher result, but as you can see, what's driven this, 
if you look under 2000 and 2001, the payment update for 2000 
was 5.5 percent. It shouldn't have been 5.5 percent had we been 
doing it correctly. If you look down below it, it should have 
been 1.0 percent under the formula. The agency made some 
mistakes and did not understand the expenditures. It's a multi-
year very static calculation.
    If you look at 2001, physicians got a 5.0 percent update. 
They should have gotten a 3.6 percent update. The result of 
that is that real physician spending in this pot in 2000 went 
up by 10.7 percent and in 2001 it went up by 11.2 percent. 
Those numbers are obviously fairly high. Part of the problem 
here is we--it's not the physicians' fault--inadvertently did 
not understand how the numbers were growing. The formula was 
thrown off and we paid out significantly more in 2000 and 2001 
than we should have. This is a recapturing formula by statute 
to take some of that back.
    So you go from--this is the current law baseline, it's 
actual real law and how it works right now. In 2000, we had 
10.7 percent increase; in 2001, we have 11.2; and the formula 
recaptures that spending. So under the current formula, you 
have a negative 4.8 percent update and there are other things 
that result in the 5.4 percent, but the 4.8 percent update 
results in a 2.4 percent spending increase. 2003, you get a 
negative 5.7 percent update, worse than this year. That results 
in a 1.1 percent spending increase. In 2004, and this is again 
current law, negative 5.7, results in a positive 1.5 percent 
spending increase.
    Now I think there's probably a good argument to be had that 
2.4 percent, 1.1, 1.5 is not a real significant spending 
increase. On the other hand, if you look at the other policy 
options, and I don't want to get into too much detail, but one 
of the major glitches in this formula, if you go down to the 
third option here, the way the statute was changed in 1998 and 
1999, the numbers we used for 1998 and 1999 were projected 
numbers, not actual numbers. Some people would argue that was a 
mistake as well and I think that's been some of the debate in 
the fall on the Hill.
    If you plugged in actual numbers for spending in 1998 and 
1999 rather than projections and, just to be clear about what 
that really means is the GDP under the formula we use early 
1998 and 1999 estimates coming out of our actuaries and that's 
what the law says, use those estimates. The GDP in 1998 and 
1999 was much, much, much higher than everybody projected. So 
if you actually plugged in real numbers instead of the 
projections, which the law does not allow us to do, you get 
totally different results. With that formula in place, if you 
look down there, you'd still have pretty significant negative 
updates the next 2 years. It would have been the same this 
year, but next year you have a positive update of 0.8, a 
positive update of 1.4, and in 2005, you go up to a positive 
update of 1.7. That would get you back on track, if you look at 
the growth in physician spending on the next line down under 
where it says fiscal year 1998 and 1999 adjusted for actual 
data, you'd have spending increases this year of 2.4 percent 
which is low, but next few years, 8.1, 9.1, 8.3, which some 
would argue is high. So that ought to give you the last 
torturous example because I think these are the sum of the 
policy suggestions.
    MedPAC's suggestion I would argue, is probably overly 
generous as a fix and the reason is it sounds good. If you look 
down at the bottom under the MedPAC proposed formula--they're 
going to suggest formally in a couple of weeks, but they put it 
out a few weeks ago--would result in payment updates just to 
start in 2001 of 2.6 percent, 2.9 percent, 2.2 percent, 2.0 and 
2.0, which sounds extremely reasonable and maybe modest. But 
the spending increases you get out of that are starting in 
2001, 9.7 percent, 11.7 percent, 10.7 percent, 10.8 percent and 
9.7 percent. And what that tells you is the problem is volume. 
There are a lot more services. A lot more high tech services. A 
lot more coming on line and the decision for Congress and it's 
obviously a very complicated one and we're happy to help 
redesign the formula any way you like, is what growth rate do 
you want? So the real issue is not necessarily the negative 
update, it's do you want physician spending in Part B to grow 
at 2 percent? Probably not. Do you want it to grow at 11 
percent? Probably not. Do you want it at 5 percent, 6 percent, 
7 percent? There are a million variables in between. I think 
there's a very strong argument this formula needs to be fixed 
and changed, but I don't believe anybody that I've seen has 
gotten it right yet and I think you can pick any of the numbers 
in between in their multi-billion calculations, and, obviously, 
even though this is incredibly complicated and very obscure 
stuff, it affects every physician in the country in a big way 
and as you know, I've spent a lot of time traveling around the 
districts and I've heard from 5 physicians in my family as 
well--I can't even identify my job any more. I get attacked too 
regularly.
    There are a lot of very unhappy physicians for a lot of 
reasons, but I think when you look at the numbers, and I've 
been involved in this, as I said, since 1989, the goal here was 
to control physician spending at a reasonable rate. I don't 
think anybody expected it to be negative or even plus 1 or 2 
percent, but I also don't think it needs to be plus 11 or plus 
12 percent. A reasonable level is somewhere in between and it's 
not just the conversion factor. The uproar is about the 
negative 5.4 percent reduction in the conversion factor. But 
you can have a negative 5.4 percent update and if the volume is 
high, you can still get 6, 7, 8 percent of your increases in 
spending. So I believe that somewhere in between these four 
options is probably the right fix and the right course. I don't 
believe MedPac got it right. I'm not sure anybody has it right 
yet, but it's obviously complicated. It's a major, major task 
for this committee and for the Ways and Means Committee and the 
Finance Committee this year. We'd like to work with the 
Congress to get it right, fix it and hopefully not have to come 
back and do it in a couple of years, but it's also obviously a 
very major spending initiative because fixing this formula, 
which is very specific and very locked in in statute, is 
obviously going to cost a significant amount of money under the 
current law baseline.
    So anyway, Mr. Chairman, I apologize if I went over and I 
again apologize if I confused everybody with my crazy charts, 
but I do think that if you look at them they'd really explain 
the problem pretty clearly, eventually.
    [The prepared statement of Hon. Thomas A. Scully follows:]
  Prepared Statement of Thomas A. Scully, Administrator, Centers for 
                     Medicare and Medicaid Services
    Chairman Bilirakis, Congressman Brown, distinguished Subcommittee 
members, thank you for inviting me to discuss how Medicare pays for 
physicians' services. I have worked on Medicare physician payment 
issues since 1989 when I was one of the primary people in the previous 
Bush Administration negotiating the creation of the resource based 
relative value physician payment system, sometimes referred to as 
RBRVS. I personally think that, over the years, this has been the most 
stable payment system in Medicare, and historically there has been far 
less controversy in physician payments than we have witnessed with 
other providers. In fact, the resource-based relative value system has 
worked reasonably well and often is used by private payors. Last year 
we encountered a situation where a number of factors combined to cause 
the formula, as set in law, to produce a negative update. It is 
important that we fix the mechanism and explain it to doctors so they 
do not lose confidence in the system, and they continue to provide 
beneficiaries with the vital care they need.
    This year, Medicare will pay about $43 billion for physician fee 
schedule services. Between 1997 and 2001, Medicare physician spending 
increased from 17.6 percent to 20.5 percent of total Medicare fee-for-
service spending. Each year, Medicare processes about 600,000,000 
physician claims. The fee schedule reflects the relative value of the 
resources involved in furnishing each of 7,000 different physicians' 
services. By law, we actually establish three components of relative 
values--physician work, practice expenses, and malpractice insurance--
for each of these 7,000 services. The actual fee for a particular 
service is determined by multiplying the relative values by a dollar-
based conversion factor. And the payment for each of the services is 
adjusted further for geographic cost differences among 89 different 
payment areas across the nation.
    Payment rates for physicians' services are updated annually by a 
formula specified in law. The annual update is calculated based on 
inflation in physicians' costs to provide care, then adjusted up or 
down by how actual national Medicare spending totals for physicians' 
services compare to a target rate of growth called the Sustainable 
Growth Rate (SGR). If spending is less than the SGR, the physician 
payment update is increased, and if spending exceeds the SGR, the 
update is reduced. The system was designed to constrain the rate of 
growth in Medicare physician spending and link it to growth in the 
overall economy, as well as to take into account physician control over 
volume and intensity of services. In large part, the formula has been 
working as designed.
    The law that sets this formula is extremely prescriptive. It does 
not give the Centers for Medicare and Medicaid Services (CMS) the 
administrative flexibility to adjust physicians' payments when the 
formula produces unexpected payment updates, as we witnessed last year. 
The size of the negative update for this year was a surprise when it 
became apparent last September. As we looked at the actual numbers 
going into the formula, we explored every issue and every alternative 
that could have produced a different update, but we concluded that we 
did not have any flexibility. We made sure that every part of the 
update was accurate and fully in accord with the law. I know that you, 
Mr. Chairman, and this Subcommittee, are closely examining the issue 
and potential alternatives. The Administration is willing to work with 
you to find a budget-neutral way to ensure that physicians receive 
appropriate payment for Medicare services, this year and in the future.
    Several factors led to the negative update. First, there has been a 
downturn in the economy, which affected the SGR because it is tied to 
the growth in the country's Gross Domestic Product. Second, actual 
cumulative Medicare spending for physicians' services in prior years 
was higher than expected. Third, our measure of actual expenditures had 
to be adjusted to capture spending information on services that were 
not previously captured in the measurement of actual expenditures. 
Counting these previously uncounted actual expenses, as required by 
law, also increased cumulative actual expenditures--driving down the 
update. I explain this in more detail later. The combination of a lower 
target and higher expenditures produced the negative update to 
physicians' payment for 2002. We are required by law to make a formal 
estimate of the update for 2003 by March 1 of this year. While we are 
still finalizing this estimate, our preliminary assessment is that the 
formula will produce a significant negative payment update again in 
2003.
    Physicians argue that these negative payment updates will hinder 
their ability to care for beneficiaries, and may result in some 
physicians not accepting new Medicare patients. We take these 
statements seriously, and are taking steps to monitor beneficiary 
access to care to ensure that our nation's most vulnerable citizens 
continue to receive the care they need. As we consider how to improve 
the Medicare physician payment formula, I think it's important to 
understand, from a historical perspective, how and why the formula 
operates the way it does today. It is, in fact, operating precisely as 
it was designed in 1997--but we recognize that this has produced some 
large short-term adjustments.
                    physicians' payment before 1997
    As the Medicare program has grown and the practice of medicine has 
changed, Congress and the Administration have worked together in an 
effort to ensure that Medicare's payments for physicians' services 
reflect these changes. As a result, the physician payment system has 
changed significantly in the past two decades. For many years, Medicare 
paid for physicians' services according to each doctor's actual or 
customary charge for a service, or the prevailing charge in the 
physician's area, whichever was less. From 1970 through the 1980's, 
spending for physicians' services grew at an unaffordable and 
unsustainable average annual rate of more than 14 percent. And, because 
the system was based on historical charges, it produced wide 
discrepancies in payments among different localities, medical 
specialties, and services. These payment differences did not 
necessarily reflect actual differences in the cost of providing 
services. As a result, the system was roundly criticized in the 1980's 
as overvaluing specialty services and undervaluing primary care 
services.
    To address these criticisms, Congress directed the Physician 
Payment Review Commission, an advisory body established by Congress and 
one of the predecessor organizations of the Medicare Payment Advisory 
Commission (MedPAC), to examine different ways of paying physicians 
while protecting beneficiary access to care, as well as slowing the 
rate of growth in Medicare physician spending. On a bipartisan basis, 
and with the support of the first Bush administration, Congress 
accepted these recommendations and passed these and other reforms in 
the Omnibus Budget Reconciliation Act (OBRA) of 1989, and the new fee 
schedule was implemented beginning January 1, 1992. The resource-based 
work component of the fee schedule was phased in between 1992 and 1996.
    Specifically, in its 1989 Annual Report, the Commission recommended 
a number of ways to change how Medicare pays physicians. The Commission 
first recommended instituting a fee schedule for physicians' payments 
based on the resources involved with furnishing each physician's 
service, rather than on historical charges. The Commission also 
recommended that the relative value of three separate components of 
each service--physician work, practice expense and malpractice 
insurance--be calculated, as discussed above.
    Under the Commission's recommendations, once the relative values 
were established, they were adjusted for cost differences, such as in 
staff wages and supply costs, based on the area of the country where 
the service was performed. Then the actual fee for a particular service 
for a year was determined by multiplying the relative value units by a 
dollar-based conversion factor. The American Medical Association (AMA) 
provides support for the Relative-Value Update Committee (RUC), a 
multi-specialty panel of physicians that plays an important role in 
making recommendations so that the relative values we assign reflect 
the resources involved with both new and existing services. We 
generally accept more than 90 percent of the RUC's recommendations, and 
our relationship is cooperative and extremely productive.
    The Commission's second recommendation was to provide financial 
protection to beneficiaries by limiting the amount that a physician 
could charge beneficiaries for each service.
    The Commission's third major recommendation was to establish a 
target rate of growth for Medicare physician expenditures, called the 
Medicare Volume Performance Standard (MVPS). The MVPS target growth 
rate was based on physicians' fees, beneficiary enrollment in Medicare, 
legal and regulatory changes, and historical measures of the volume and 
intensity of the services the physician performed. The MVPS was set by 
combining these factors and reducing that figure by 2 percentage 
points, in order to control to growth rate for physicians' services. 
OBRA '93 later changed this to minus 4 percentage points. Actual 
Medicare spending was compared to the MVPS target, which led to an 
adjustment, up or down, to the calculation to finally determine the 
update a future year. The law provided for a maximum reduction of 3 
percentage points, which OBRA '93 lowered to 5 percentage points.
                     physicians' payment since 1997
    The Balanced Budget Act of 1997 (BBA) changed the physician payment 
system in a number of ways based on Commission recommendations. In BBA, 
the SGR replaced the MVPS. Like the MVPS, the SGR is calculated based 
on factors including changes in physicians' fees, beneficiary 
enrollment, and legal and regulatory changes. However, the BBA did away 
with the historical target for volume and intensity of physicians' 
services. Instead, the real per capita Gross Domestic Product, which 
measures economic growth in the overall economy, was instituted as a 
replacement.
    One other important difference between the old and the new growth 
targets is that the old method compared target and actual expenditures 
in a single year. If expenditures exceeded the target in the previous 
year, the update was adjusted for the amount of the excess in the 
current year, but there was no recoupment of excess expenditures from 
the previous year. Under the new SGR, the base period for the growth 
target was locked in at the 12 months ending March 31, 1997. This is 
the base period and remains static for all future years. Annual target 
expenditures for each following year equal the base period expenditures 
increased by a percentage amount that reflects the formula specified in 
the law, and they are added to base period expenditures to determine 
the cumulative target. This process continues year after year, adding a 
new year of expenditures to the cumulative target. If expenditures in a 
prior year exceed the target, the current year update is adjusted to 
make annual and target expenditures equal in the current year and to 
recoup excess expenditures from a prior year. While the BBRA made some 
further technical changes to allow these adjustments to occur over 
multiple years, that is the general way the formula was established in 
law. The SGR is working the way it was designed.
    BBA also increased the amount that the update could be reduced in 
any year if expenditures exceeded the target. The maximum reduction was 
increased by 2 percentage points to 7 percentage points. Thus, for 
example, inflation updates in the range of 2 percent, reduced by the 7 
percent maximum reduction, would yield a negative update in the range 
of 5 percent. BBA also established a limit of 3 percentage points on 
how much the annual inflation update could be increased if spending was 
less than the target.
    Additionally, BBA created a single conversion factor (previously 
there were three separate ones for different types of services). BBA 
also required that the practice expense component of the relative value 
calculation, which reflects a physician's overhead costs, be based on 
the relative resources involved with performing the service, rather 
than the physicians' historical charges. This change made the practice 
expense component of the calculation similar to the physician work 
component, and reflected actual resources. The change was phased in 
over four years, and was fully implemented in 2002. BBA further 
required that the malpractice insurance expense component of the 
relative value calculation also be resource-based. The law required 
that the resource-based practice expense and malpractice relative value 
systems be implemented in a budget-neutral manner. The BBA provisions 
affecting physicians accounted for about 3 percent of total BBA 10-year 
Medicare savings. Because physician payment accounts for about 17.6 
percent of program payments in 1997, the physician savings in the BBA 
represented by these changes were perceived to be relatively modest.
    The Balanced Budget Refinement Act of 1999 (BBRA) made further 
revisions to the SGR in an attempt to help smooth out annual changes to 
physician payments such as blending cumulative and annual comparisons 
of target and actual spending. Beginning with the 2000 SGR, the law 
required us to revise previous SGR estimates based on actual data that 
became available after the previous estimates. BBRA also required us to 
make available to MedPAC and the public an annual estimate of the 
physician payment update for the succeeding year. This estimate is due 
on March 1 of each year, and is very difficult to make, because none of 
the claims used to determine actual spending are available by the time 
we are required to make the estimate. Last year, we estimated that this 
year's update would be around negative 0.1 percent. However, when we 
determined the actual update, which was published 7 months later on 
November 1, revised figures lowered the Gross Domestic Product figures 
for 2000 and predicted a slower growing economy for 2001 than was 
previously estimated. Further, 2001 physician spending was higher than 
our March estimate.
    Additionally, in making updates to the list of codes for specific 
procedures that are included in the SGR, we discovered that a number of 
codes for new procedures were inadvertently not included in the 
measurement of actual expenditures beginning in 1998. Therefore, the 
previous measurements of actual expenditures for 1998, 1999, and 2000 
were lower than they should have been. As a result, the physician fee 
schedule update was higher in 2000 and 2001 than it should have been, 
had those codes had been included. These updates, which were 
inadvertently higher in 2000 and 2001, created a partial downward 
adjustment on the physician fee schedule for 2002, and will require a 
further downward adjustment for the 2003 physician update. The 
combination of these factors led to the large negative update for 2002.
    In its March 2001 report to Congress, MedPAC recommended a complete 
repeal of the SGR system. MedPAC recommended replacing the SGR with a 
different type of annual update system like the one used for hospitals. 
That recommendation was not enacted in 2001. At its January 2002 
meeting, MedPAC voted to make a similar recommendation to Congress in 
its upcoming March 2002 Annual Report.
    As you can see, the process for calculating payments for 
physicians' services is highly complex. It is the result of years of 
efforts by Congress, previous Administrations, the Physician Payment 
Review Commission, and MedPAC to ensure that Medicare pays physicians 
as appropriately as possible. Today, while the underlying fee schedule 
and relative value system have been successful, we recognize that the 
update calculation has produced large short-term adjustments and 
instability in year-to-year updates. I know that you, Mr. Chairman, and 
others on this Subcommittee and elsewhere in Congress are involved with 
legislative efforts to improve the formula. I want to work with you and 
the physician community to smooth out the yearly adjustments to the fee 
schedule in a way that is budget-neutral across all providers. Although 
we cannot adjust the payment formula administratively, we have been 
working hard to do what we can, independent of the update levels, to 
help physicians and other providers in a variety of other areas.
                 helping physicians outside of payments
    I worked in the hospital industry for years, and I know how 
frustrating it can be for physicians and providers to work with 
Medicare. We know that in order to ensure beneficiaries continue to 
receive the highest quality care, we must streamline Medicare's 
requirements, bring openness and responsiveness into the regulatory 
process, and make certain that regulatory and paperwork changes are 
sensible and predictable. This effort is a priority for me personally, 
as well as for Secretary Thompson and President Bush. And we have a lot 
of activities underway to make Medicare a more physician- and provider-
friendly program.
    In June, Secretary Thompson announced that, as a first step in 
reforming the Medicare program, we were changing the Agency's name to 
the Centers for Medicare & Medicaid Services. The name-change was only 
the beginning of our broader effort to raise the service level of the 
Medicare program and bring a culture of responsiveness to the Agency. 
These are not hollow words: creating a ``culture of responsiveness'' 
means ensuring high-quality medical care for beneficiaries, improving 
communication with physicians and providers, and increasing our 
education efforts. To promote improved responsiveness, we have created 
eleven ``Open Door Policy Forums'' to interact directly with 
physicians, as well as beneficiary groups, plans, providers, and 
suppliers, to strengthen communication and information sharing between 
stakeholders and the Agency. I chair three groups: long-term care, 
rural health, and diversity. My Deputy Administrator and Chief 
Operating Officer, Ruben King-Shaw, chairs the Open Door Policy Forum 
for physicians, and I participate in the meetings. Ruben listens to 
physicians' concerns, and tries to fix them where possible. All of 
these Open Door Policy Forums facilitate information sharing and 
enhance communication between the Agency and its partners and 
beneficiaries. My goal is to make CMS an open agency--one that explains 
its policies to the beneficiaries and providers who rely on us.
    We also are working to alleviate the regulatory and related 
paperwork burdens that for too long have been associated with the 
Medicare program. The Secretary has formed a new Regulatory Reform 
Advisory Committee, comprised of providers, patients and other experts 
from around the country to identify regulations that prevent 
physicians, hospitals, and other health care providers from serving 
Medicare beneficiaries in the most effective way possible. This group 
will determine what rules need to be better explained, what rules need 
to be streamlined, and what rules need to be dropped altogether, 
without increasing costs or compromising quality. To support this 
group, we have developed a program, focusing on listening and learning, 
to get us on the right track.
    Under this program, we will conduct public listening sessions 
across the country. We want to hear directly from physicians and health 
care providers away from Washington, DC, and Baltimore--out in the 
areas where real people live and work under the rules we produce and 
with people who do not have easy access to policymakers to voice their 
legitimate concerns. Our first regional hearing is on February 25 and 
26 in Miami, Florida. Most of you in Congress have these kinds of 
regular listening sessions with your constituents, and I have already 
participated in 12 of these with a bipartisan group of Senators and 
Congressmen. We want to hear from local physicians, as well as seniors, 
large and small providers, allied health professionals, group practice 
managers, State workers, and the other people who deal with Medicare 
and Medicaid in the real world. We are determined to get their input so 
we can run these programs in ways that make sense for real Americans 
with real life health care problems. We hear from some of these people 
now, but we want to get input from many, many more.
    Like the physicians, providers, and beneficiaries who live and work 
with Medicare every day, CMS staff have worked with managing the system 
for years, and they too have suggestions about how Medicare can operate 
more simply and effectively. So, another aspect of our plan is to form 
a group of in-house experts from the wide array of Medicare's program 
areas. I have asked one of my close friends and advisors, Dr, Bill 
Rogers, a local practicing emergency room physician, to chair this 
group and challenge our in-house experts to suggest meaningful changes. 
This group of in-house experts will look to develop ways that we can 
reduce burden, eliminate complexity, and make Medicare more ``user-
friendly'' for everyone.
    Furthermore, our Physicians' Regulatory Issues Team (PRIT) 
integrates practicing physicians into our decision making process, 
allowing us to develop policies that will better serve beneficiaries 
and physicians. Specifically, PRIT members work within the Agency to 
serve as catalysts and advisors to policy staff as changes and 
decisions are discussed. Team members have assisted us with:

 Streamlining Medicare forms, including the physician 
        enrollment form;
 Improving operational policies;
 The PRIT also is working to improve current channels of input 
        from practicing physicians;
 Clarifying oversight policies; and
 Identifying and changing excessively burdensome requirements.
    The PRIT also has initiated a Physician Issues Project, where they 
sought and obtained from the physician community their input on those 
Medicare issues that seem particularly burdensome to them on a day-to-
day basis. The PRIT identified 25 issues to address, and where change 
or elimination of a requirement is not possible, we are looking for 
creative solutions that, at the very least, provide more information 
and clarification. I was very pleased that when I was in Tupelo, MS, a 
few weeks ago with Representative Wicker, the incoming Chair of the 
AMA, Dr. J. Edward Hill, who is from Tupelo, gave me unsolicited 
congratulations for the fine job that Dr. Barbara Paul and the PRIT are 
doing. So it is working a bit already!
    Furthermore, we are participating in and co-sponsoring 
``preceptorships'' with local county medical societies, where our 
policy staff can get out in the field and ``shadow'' physicians, 
watching them provide care, listening to lectures, and even observing 
operating room procedures. This is a great way for us to observe first-
hand their daily work life and the challenges they face in providing 
care to our beneficiaries.
    These outreach efforts will allow us to hear from physicians and 
all other Americans who deal with our programs. We are going to listen 
and we are going to learn. But we also are going to change. I am 
committed to making lots of common-sense changes and ensuring that the 
regulations governing our program not only make sense, but also are in 
plain and understandable language. This will go a long way in 
alleviating physicians' fears and reducing the amount of paperwork 
that, in the past, has all too often been an unnecessary burden on 
physicians.
                     improving physician education
    As part of our efforts to reinvigorate the Agency and bring a new 
sense of responsiveness to CMS, we are enhancing our education 
activities and improving our contractors' communications with 
physicians and providers. The Medicare program primarily relies on 
private sector contractors, who process and pay Medicare claims, to 
educate physicians and providers and to communicate policy changes and 
other helpful information to them. We have taken a number of steps to 
ensure the information our contractors share with physicians and 
providers is consistent, unambiguous, timely, and accurate.
    We recognize that the decentralized nature of our educational 
efforts has, in the past, led to inconsistency in the contractors' 
communications with physicians and providers, and we have recently 
taken a number of steps to improve the process. We have centralized our 
educational efforts in our Division of Provider Education and Training, 
the primary purpose of which is to educate and train both the 
contractors and the physician and provider community regarding Medicare 
policies. We also are providing contractors with in-person instruction 
and a standardized training manual for them to use in educating 
physicians and other providers. These programs help ensure consistency 
so that our contractors speak with one voice on national issues. We are 
continuing to refine our training on an on-going basis by monitoring 
the training sessions conducted by our contractors, and we will 
continue to work collaboratively to find new ways of communicating with 
and getting feedback from physicians and providers.
    We also are working to improve the quality of our contractors' 
customer service to physicians and providers. Last year, our Medicare 
contractors answered 24 million telephone calls from physicians and 
providers. We now have toll-free answer centers at all Medicare 
contractors. To insure that contractors provide correct and consistent 
answers, we have performance standards, quality call-monitoring 
procedures, and contractor guidelines in place to make our expectations 
clear and to ensure that contractors are reaching our expectations.
    Additionally, we want to know about the issues and 
misunderstandings that most affect physician and provider satisfaction 
with our call centers so that we can provide our customer service 
representatives with the information and guidance to make a difference. 
To improve our responsiveness to the millions of phone calls our call 
centers handle each year, we are collecting detailed information on 
call center operations, including frequently asked physician questions, 
the call centers' use of technology, and the centers' training needs. 
We will analyze this information so we can make improvements to the 
call centers and share best practices among all our contractors. We 
also developed a new Customer Service Training Plan to bring uniformity 
to contractor training and improve the accuracy and consistency of the 
information that contractor service representatives deliver over the 
phone. In addition, we are holding regular meetings and monthly 
conference calls with contractor call center managers to ensure 
Medicare's customer service practices are uniform in their look, feel, 
and quality.
    Just as we are working with our contractors to improve their 
physician and provider education efforts, we also are working directly 
with physicians and other health care providers to improve our own 
communications and ensure that we are responsive to their needs. We are 
providing free information, educational courses, and other services 
through a variety of advanced technologies. We are:

 Making our Agency website more useful to physicians through a 
        new website architecture tailored to be intuitive for the 
        physician user. We want the information to be helpful to 
        physicians and their office and billing needs. Once this new 
        website is successfully implemented, we will move to organize 
        similar web navigation tools for other Medicare providers. 
        Additionally, we have improved our Frequently Asked Questions 
        section, making it more intuitive and easier to search.
 Expanding our Medicare provider education website, 
        www.hcfa.gov/medlearn. The Medicare Learning Network homepage, 
        MedLearn, provides timely, accurate, and relevant information 
        about Medicare coverage and payment policies, and serves as an 
        efficient, convenient physician education tool. In recent 
        months, the MedLearn website has averaged over 250,000 hits per 
        month, with the Reference Guides, Frequently Asked Questions, 
        and Computer-Based Training pages having the greatest activity. 
        I encourage you to take a look at the website and share this 
        resource with your physician and provider constituents. We want 
        to hear feedback from you and from your constituents, 
        especially physicians, on its usefulness so we can enhance its 
        value. In fact, physicians and providers can email their 
        feedback directly to the MedLearn mailbox on the site.
 Providing free computer and web-based training courses to 
        physicians, providers, practice staff, and others. Interested 
        individuals can access a growing number of web-based training 
        courses designed to improve their understanding of Medicare. 
        Some courses focus on important administrative and coding 
        issues, such as how to check-in new Medicare patients or 
        correctly complete Medicare claims forms, while others explain 
        Medicare's coverage for home health care, women's health 
        services, and other benefits.
 Installing a Satellite Learning Channel to provide Medicare 
        contractors with the latest information on contemporary topics 
        of interest. We recently completed the installation of a 
        network of satellite dishes at all contractor call centers to 
        improve our training efforts with contractor customer service 
        representatives.
    These reforms are just examples of the work we are doing. We also 
have a comparable number of efforts underway to reach out to 
beneficiaries and to make Medicare a friendlier, easier-to-use program 
for them. These changes have been my top priority in my nine months at 
CMS, and I will continue to pursue these types of improvements as long 
as I am Administrator.
                               conclusion
    I took this job because I know how important Medicare, Medicaid, 
and SCHIP are to Americans, and because I want to make a difference in 
improving our health care system. I am just as frustrated as you and 
all of the physicians that you hear from when it comes to how confusing 
and complex these programs are, and I am working hard to improve them. 
I also am working hard to monitor beneficiary access to care, while 
ensuring that America's elderly and disabled can receive the high 
quality care they need and deserve.
    The Administration is willing to work with Congress to smooth out 
the physician payment system, but I know that it will not be easy. Any 
spending increases will have to be offset by corresponding adjustments 
in other provider payment systems so that it is budget neutral in both 
the short- and long-term. Therefore, improvements in physician 
payments, or any other Medicare payments, likely will lead to declines 
in Medicare payments for some other group of providers. There will be 
tough choices to make. The Administration will be helpful to you as you 
consider them. Thank you for the opportunity to discuss this important 
topic with you today. I hope that I have helped to explain the issues, 
and I look forward to answering your questions.

    Mr. Bilirakis. Thank you, Mr. Administrator. When you met 
with Chairman Tauzin, Dr. Ganske and I you basically agreed, I 
think, that the cut was just too onerous, you agreed that the 
formula was flawed. You've said it time and time again. I guess 
I would have one bottom line question. We have people here, 
physicians and what not, who could probably go into some of the 
details better than I, but does CMS--Mr. Norwood kept referring 
to your agency HCFA. We should fine you a dollar every time you 
said that.
    Mr. Norwood. Mr. Chairman, I only meant that it hadn't 
changed any, other than the name.
    Mr. Bilirakis. That Georgia boy is quick, isn't he?
    Mr. Norwood. With 4 hours of sleep, not bad.
    Mr. Bilirakis. Do you have the flexibility, does CMS not 
have the flexibility? I guess nothing is going to be right, 
whatever we come up with. I would suggest and I'm not sure we 
have the expertise up here to determine what that formula 
should be. MedPAC has a lot more than we have. They apparently 
are coming forward with some recommendations. They have not 
issued them publicly and that's why they're not here, 
basically, to defend them, but we will have a subsequent 
hearing to go into that.
    But CMS, do you not have the flexibility to basically work 
on this and to determine what you think might be as close to 
right as possible?
    Mr. Scully. We certainly, Mr. Chairman, have given you a 
lot of technical advice and guidance and we'd be happy to do 
that. I've got a lot of people in the agency who have done this 
since it was written in 1989. Some of them I knew back then are 
still there. So we'd be happy to do that.
    We don't have the flexibility to do anything 
administratively in the law. I have gone up to the highest 
level of the Justice Department last fall but the law is 
incredibly prescriptive and gives us no flexibility to change 
it. It has to be done legislatively.
    Mr. Bilirakis. Should you have more flexibility?
    Mr. Scully. I think we probably did have more flexibility, 
the statute was more flexible, pre-1997. To be honest with you, 
the 1997 bill, the physician cuts in that bill were very, very 
modest. They were about 5 percent of the 1997 bill's cuts and 
physician spending is probably over 20 percent of the program. 
But this is part of 1997 bill and one of the ways they saved a 
little money on physicians in 1997 was to ratchet down in the 
formula a little bit, but they made it much more prescriptive. 
They basically made it a multi-year recapture. If you find 
overspending, it all comes back and is recaptured. And it's 
just a much tougher formula. It's much tighter, with much less 
wiggle room.
    But we'd be happy to work with you any way we can to come 
up with the right policy.
    Mr. Bilirakis. I wonder, you indicated that the proposed 
MedPAC formula would be terribly expensive. You didn't use a 
dollar figure unless I missed it. As I understand it, your 
actuaries have reported it would cost $127.7 billion over 10 
years to adopt the recommendation. Is that correct?
    Mr. Scully. That number is pretty close.
    Mr. Bilirakis. I don't know whether Mr. Foster wants to 
very briefly go into the basis for your coming to this cost 
estimate?
    Mr. Scully. He'd be happy to do that because a lot of 
people have questions about it. I mean the one thing I'm proud 
of--and I think the agency is too--is that our actuaries have 
always been perceived to be totally independent, above board, 
trusted on a bipartisan basis and of all the scoring and I 
spent many years at OMB, as you know, I think the No. 1 place 
in the Federal Government where the people who do the scoring 
has never been doubted is CMS. And Rick, I think, has an 
unbelievably squeaky clean 30-year history at this. So with 
that, Rick is our chief actuary.
    Mr. Bilirakis. Very, very briefly if you can, Mr. Foster. I 
know it's very difficult to describe it briefly.
    Mr. Foster. Sure. Can you hear me? Let me emphasize first 
that MedPAC, of course, has not actually released its 
recommendations yet.
    Mr. Bilirakis. Right.
    Mr. Foster. So we were working off of what our 
understanding was of the likely recommendation. That would 
involve essentially a limit in the SGR process and then paying 
an update each year based on an inflation index, the Medicare 
economic index with an adjustment or productivity. What happens 
is, if you use that basis, first, instead of getting these 
large negative updates that Mr. Scully referred to in his 
remarks, you would have something like a positive 2 to 2.5 
percentage here. So, on an on-going basis, you've have 2 or 2.5 
percent. Instead of for the next several years, minute 5.7, 
etcetera. That's where the bulk of the cost would come from and 
the $127.7 billion over 10 years, as we said was remarkably 
close to our estimate.
    Mr. Scully. Mr. Chairman, I might add that if you look at 
the chart we handed out and if you basically add up current law 
baseline physician spending, which is the top line versus the 
MedPAC proposal and you add up the numbers year by year, it 
only goes out to 2005, but those are Rick's numbers and if you 
calculate them, you get the first few years of the calculation 
pretty much dollar for dollar.
    Mr. Foster. The one other issue I would add is that the SGR 
process exists because Congress was worried about rapid growth 
in physician expenditures under Medicare. Without the SGR and 
with no other constraint on growth and volume or intensity of 
services, you would probably have more than you would have 
under the SGR and we estimated a modest additional growth in 
that regard which contributes further to the $127.7.
    Mr. Bilirakis. Well, my time has expired. I guess I just 
wonder wouldn't it have been simple to just start out with a 
certain basic figure that everybody kind of feels is relatively 
realistic and then just jack it up on the basis of cost of 
living increases or inflation increases and just let it go at 
that, rather than GDP? Why GDP is a part of this formula? What 
the heck does GDP have to do with doctors' costs?
    Mr. Scully. Mr. Chairman, I will say having been involved 
in this and I was not in the government, times have changed, 
obviously, but the argument at the time was that the formula 
used to grow with physician volume and intensity of services 
and that wasn't particularly well liked either. In 1997, this 
was expected to be in 1997 a more stable situation. I would 
argue it probably backfired to some degree, but it was with the 
best of intents when it was originally done.
    Mr. Bilirakis. I honestly feel that you care about the 
problem, Tom, and hopefully you'll continue to care. I know the 
dollars are big here and I don't know if the MedPAC formula is 
the best way to go, but I think we all are very intent on 
changing that formula. I don't know how many lost dollars, if 
you will, we can recover, but certainly in the future we should 
come up with something a little smarter, it seems to me.
    The Chair yields to Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. Tom, thank you again 
for joining us. I think our primary mission here today is not 
to satisfy doctors who do enjoy by and large pretty good 
incomes. Our mission it to make sure, obviously, that patients 
have good, quality care. We sometimes lose sight of that in our 
deliberations here. We're talking about 2002 and beneficiary 
and reimbursement levels. The last, my understanding is the 
last survey of beneficiaries was from 1999 which is a poor 
measure, I think, of whether seniors will have access in 2002. 
Is there a way, would you comment on that? Because 
reimbursement rates were obviously different, as your charts 
show in 1999. How do we get better measures of beneficiary 
access and participation? Ultimately, we want physicians to 
continue to provide that care. We want to make sure that the 
physicians are participating, beneficiary levels in 1999 were 
different from 2002. How can we measure that better and what 
are your plans to do that?
    Mr. Scully. I believe we have a new measurement coming out 
shortly, but I personally think, and I watch it reasonably 
closely, and there are probably other private measures as well, 
more than 85 percent of physicians always take Medicare 
assignment, which is where they take full Medicare payment as 
full payment, and about another 10 percent take Medicare 
patients, but charge what they're allowed to charge, 15 percent 
above the fee schedule. So I personally don't believe that 
right now there's a significant access problem for seniors. I 
do think that it's very possible that if this formula is not 
changed and you have multi-year reductions, then you will find 
more and more physicians not taking new Medicare patients in 
the least and you will eventually see an access problem. I 
don't believe we have one now, but I do think it's a boiling 
pot.
    Mr. Brown. So even with this new, these new 2002 numbers, 
surveys coming out, that's not going to measure something that 
you think is not a problem yet, but could possibly be or two or 
three from now?
    Mr. Scully. We haven't seen a significant erosion of access 
of physicians, taking Medicare patients yet. I would say 
anecdotally from just spending a lot of time talking to 
physicians I think more and more are trying to avoid taking new 
Medicare patients, but they generally do still take Medicare 
patients.
    Mr. Brown. The administration's 2003 released last week 
indicates that any so-called ``give backs'' to providers should 
be made in a budget neutral fashion, obviously payment 
increases to one provider should be paid by reductions in 
payments to others. We have sort of been in a sort of whipsaw 
situation the last four or 5 years with the cuts in 1997. And 
then we're restored some of the excessive cuts, the 15 percent 
cut in home health payment is imminent. DSH payment cuts. When 
we're talking estimates of fixing this problem seem to be as 
much as $80 billion over the next 10 years, how is the 
administration recommending we make this budget neutral, be 
able to do these ``give backs'' to providers that I think 
everybody up here wants to do? Where does it come from? What 
does it mean with DSH? What does it mean with the cut in home 
health payments, all of that?
    Mr. Scully. Well, that's multiple questions. As I said, I 
think the MedPAC formula--with all respect to MedPAC--probably 
goes a little too far. I think there are a variety of ways to 
do it. I think $80 billion is probably on the high end of what 
needs to be done and we're happy to work on that. In our 
budget, we also did not extend any existing Medicare policies, 
called baseline extenders, so virtually every policy from 1997 
that expires this year was not extended in our budget. And we 
did that intentionally because we did not have a specific way--
because there are many ways to do this--to fix this policy, but 
there are a whole bunch of things. There are virtually no 
``cuts'' in the traditional sense in our budget either. So for 
instance, the hospital payments--and we certainly have a debate 
about that--go back to the full market basket for the first 
time. I think it's happened once since 1982. So there are a lot 
of different policy options out there to ``save money'' to pay 
for this in a budget-neutral way. I'm not suggesting that. 
That's certainly one that the Ways and Means Committee has 
brought up in a previous hearing last week with Secretary 
Thompson and pretty directly asked his opinion on it. We 
basically said we're happy to sit down and evaluate the merits 
of all these different pieces.
    On home health for instance, and I know this probably won't 
be a popular comment, but it's our position, we very 
specifically did not propose fixing the 15 percent cut. Home 
health spending went up 42 percent last year and even if the 
``cut'' goes in place, spending goes up 12 percent next year, 
8.3 percent the year after that, 7.8 percent the year after 
that. And the fact is it's really not a cut, it's a 15 percent 
reduction in a 6-year-old calculation. The actual per home 
health spending rate from last year will go down by 7 percent 
from the old interim payment system. I'm not saying that we 
shouldn't look at home health as well, but just purely getting 
rid of the 15 percent cut will result in many, many double 
digit spending increases for years to come. So I think there's 
some mid-range approach to home health too.
    There are many pieces that are put together. I think there 
are certainly the grounds for putting together a budget-neutral 
reasonable package that can deal with some of the more acute 
provider problems that we have. I'm not suggesting specifically 
one way or the other. Obviously, the President's budget came 
up. I'm not the only one that has input in that. The 
President's budget very specifically did not fix this. It also 
very specifically did not extend a lot of the baseline 
extenders that traditionally had been in past budgets, so we 
could come out and work out some of these extremely complicated 
policies.
    Mr. Brown. Thank you.
    Mr. Norwood [presiding]. I recognize myself now for 5 
minutes. Tom, I think you do a great job. It's much like it was 
when you started. I thought you were crazy to take the job 
because there's no way you can win. I don't actually, in my 
heart, that it's you or your agency nearly as much as the 
problems that are in Congress, but you're much funner to shoot 
at than Congress.
    And what we want from you is to try to help Congress get it 
right because Congress has not gotten it right. Since 1992, 
Medicare payments to physicians averaged only 1.1 percent 
annual increases or 13 percent less than the annual increase in 
practice costs as measured by the Medicare Economic Index.
    Do you agree with that?
    Mr. Scully. I would certainly agree, I'm not sure the 
numbers are right, now that the per visit, what a physician 
gets paid per office visit, I'm sure that's right. But the 
fact, that because volume has been increasing and because we've 
added----
    Mr. Norwood. Well, this is accounting an annual increase, 
this is how much more money, in general, they receive.
    Mr. Scully. Per visit, that's probably true.
    Mr. Norwood. And the reason I'm saying that, we're going to 
have a witness testify to that. My question to you, you keep 
talking about increased spending, but clearly the problem isn't 
necessarily increased spending at the provider level at 1.1 
percent increase isn't exactly what I'd call increased 
spending.
    Are we directing our attentions to the fact that there are 
other factors that are causing this program to grow, rather 
than continually dealing with the problem of always costing 
more money, let's cut the providers back. Are you even talking 
about the other areas that are causing this increased spending?
    Mr. Scully. There are a lot of factors across the board. To 
be honest with you, one of the reasons I think RBRVS was put in 
place in 1989 and because, for instance, when you look at 
hospital spending, volume of services has not always been as 
big a variable. So there's never been a design situation for 
volume of services. Hospital spending has been flatter and more 
predictable.
    There's no question that per visits for physicians, the 
spending has been relatively flat and probably at or slightly 
below inflation. But the problem and the reason the system was 
designed in 1999 was that volume, new technologies, new 
services, the volume of service has grown and frequently have 2 
percent or less annual increases in the actual per visit fee, 
while spending was going up 15, 17 percent a year. So the idea 
has always been to find the right balance to disincentivize 
greater volume, but also to be fair to the individual 
physician.
    Mr. Norwood. If you want to do that, does that imply you 
mean they're treating people who don't need to be treated, 
that's how they increase their volume?
    Mr. Scully. No, part of it is also the physician community 
comes in every year and argues for new codes and new services 
and we've added hundreds in recent----
    Mr. Norwood. Well, why do you suppose they do that?
    Mr. Scully. To be more accurate, but the fact is, there's 
basically an agreement between the government and the physician 
community that as you add a new code, you take that percentage 
out of the pot, so every other one goes down a little bit.
    Mr. Norwood. I understand you take that percentage out of 
the pot, but I presume the new codes are for treatments that 
patients need and they're trying to make it clear with you guys 
so they can be paid.
    Mr. Scully. Sure. Mr. Norwood, obviously, the formula we 
use, the physicians come in and argue and we try to be 
conscious that we're not going to add a new gastroenterology 
code unless it's needed because by law, we're required to--
let's say we add 2 percent new codes, every other code goes 
down by 2 percent to pay for it. So if you add new codes----
    Mr. Norwood. That's part of the problem with the system is 
why the system is sort of broken.
    Let me get on to the next part because I'm running out 
time.
    Mr. Scully. Yes sir.
    Mr. Norwood. You implied earlier that CMS estimates were 
very wrong in 1998 and 1999. In fact, you were wrong with the 
GDP growth and enrollment changes and the fact is that ended up 
costing about $20 billion and I would suspect you would think 
it saved $20 billion, but it took away $20 billion from people 
who should have been paid and we have been told that you don't 
have the legal authority to fix that even though you know it 
was wrong 3 years ago. We still can't fix it because you don't 
have the legal authority. It is of interest to me that you're 
now spending in 2002 in the final rule that you do have the 
legal authority to change the 1998, 1999 SGR projections 
related to expenditures for certain CPT codes that had been 
overlooked by the agency.
    One gets the impression that you have the legal authority 
to do what you need to do, if it cuts payments or decreases 
your costs. You just never have the legal authority to do what 
you need to do if it increases the cost and I don't guess I 
have especially a question about that, other than that is an 
observation that I'd like to see somebody look at.
    Mr. Scully. I'd be happy to address that. I think this has 
been totally completely by the book and the fact is the AMA 
sued the Clinton Administration over the issue about whether 
they could use real numbers in 1998 and 1999. It was litigated 
extensively and the Clinton Administration prevailed and won in 
court. So it was litigated at length for 2 years because the 
previous administration said we are required by law, by statute 
to use projections and I can tell you that's very clear, I used 
to be a lawyer, thank God, I'm not anymore, and it says, by 
law, we have to use the projections. It was litigated in 
length. The Justice Department prevailed in that, so we're 
stuck.
    On the other side of spending, the law also clearly says 
you put in expenditures and what happened was inadvertent, the 
Department did not know about some of these expenditures 
related to new codes that we added. When they found them out, 
by law they're required to say those billions of dollars came 
out of the trust funds and were spent and they have to be 
calculated and I honestly, I'd be happy to spend as many hours 
as it would take, but I really believe we've done this totally 
by the book.
    Mr. Norwood. I'll finish with this. I know Congress 
requires you to use projections. Does Congress require you to 
continue to use projections that are known to be wrong?
    Mr. Scully. Unfortunately, it's only for those 2 years. The 
law, when it was changed in 1999, said continue to use 
projections for 1998 and 1999. For the years after that we can 
actually update it with real numbers. So since 1999 the numbers 
are correct. I mean they're real numbers, but what happened, as 
you know, it wasn't just CMS's numbers. It was the OMB numbers 
for GDP and if you look back in 1999 and 1998, no one projected 
4 or 5 percent annual growth rates, they projected 1 and 2 
percent. And at the end of the year it turned out to be 5 and 
6. So if those numbers were plugged in, the targets would have 
been higher. But it's very clear in the statute that we do not 
have the flexibility.
    Mr. Norwood. That sort of reminds me of the projections 
Lyndon Johnson's staff made in 1965. Not to worry, Medicare 
will only cost $9 billion 25 years from now. We don't do very 
well in this government with projections and when we do them 
wrong, we hurt a lot of people.
    My time is expired.
    Mr. Scully. Can I say just two quick things? You asked in 
your opening statement, you asked about our appeals policy and 
if I thought it was crazy and I said it was a Democratic 
provision. I don't believe I ever said it was a Democratic 
provision, by the way----
    Mr. Norwood. Great.
    Mr. Scully. But--and I'm happy to say it's crazy on a 
bipartisan basis. It's crazy, not because the policy is not 
good. My frustration, Mr. Norwood, is that basically what we 
allow, as I said, we get 600 million physician claims a year. 
What it would allow is for every patient that walks into an 
office to call up Medicare first and say is this claim going to 
be paid, and to be honest with you, my biggest concern about 
that----
    Mr. Norwood. It actually doesn't allow that. What it allows 
is what used to be done with predeterminations where when a 
patient comes in, the physician says you need such and such a 
treatment. The patient needs to know is this covered or not and 
the physician applies for that information. I think the crazy 
part is--what it basically does it a way of rationing care, 
it's a way of keeping people from getting treated because if 
you come in and need an MRI and the doc says hey, I don't know 
who's going to pay for this and if HCFA doesn't, you're going 
to and the patient's headache isn't real bad. They put it off. 
It's a way of rationing care.
    Mr. Scully. My concern, just to be clear, is not with the 
policy. My concern is that--and I'm a cheap OMB guy, so I'm not 
asking for more money. I run a $525 billion agency with a $2.3 
billion administrative budget. If we had seniors--you can 
debate the policy whether they should be able to call up and 
get preauthorization--if they did, I'd probably need at least 
$1 billion to hire more staff to answer those phone calls. We 
just don't--and the authorizing committees, as much as I love 
them, if the appropriators will give me the money to hire all 
those people, wonderful--but I just don't have the staff to do 
it. And so my concern about it being crazy is that it may be a 
wonderful idea, but frequently, with all due respect, Congress 
passes things and then CMS gets stuck with hundreds of 
thousands to millions of phone calls and nobody to answer them 
and it causes a lot of problems.
    Mr. Norwood. I stated that up front. It's Congress' fault, 
but if we're going to run an insurance agency, in my mind, 
that's what you really are, you're a third party, do it right 
for pity's sake. I'm way overboard.
    Mr. Scully. Well, can I have one more thing because I 
normally do stay around for these hearings and I would like to, 
but because the chairing was changed, I was supposed to speak 
at the AARP's Board at breakfast and I'm going to speak to them 
afterwards, so I'll stay as long as I can, but I have to go 
talk to the AARP right after this, so it's not out of lack of 
respect or interest of the other witnesses, but at some point I 
have to go over there and speak to their Board.
    Mr. Norwood. Thank you. Mr. Barrett, I apologize. You're 
recognized for 5 minutes.
    Mr. Barrett. Thank you very much, Mr. Chairman. It's a 
pleasure to have you here this morning, Mr. Scully. As I listen 
to your testimony and showing the charts and going through the 
charts, the thing that became most clear to me is that none of 
this is very clear to me.
    Mr. Scully. Sorry about that.
    Mr. Barrett. And I realize that we've discovered the enemy 
and the enemy is us in large part because of the actions taken 
by this Congress. But if you can just sort of help me. And 
hindsight is 20-20, but I'm still baffled as to why GDP is the 
factor here as opposed to a combination of factors, medical, 
technology, aging population. What would you give as the best 
rationale for using the GDP?
    Mr. Scully. From 1989 to 1997, volume and intensity of 
physician services, new technology was, in fact, the factor. 
And to be honest, I think, for a variety of reasons, some 
physicians didn't like it, to some degree, in those years 
because in many cases volume and intensity went up higher and 
they said what does this have to do with--maybe health care 
should be 1 or 2 percent higher spending. If the physician 
volume intensity was higher than GDP, they got cut more. So 
some people perceived the GDP to be a better number because it 
wasn't going to cut physicians as much and that might have been 
the case, but two factors happened. One is that GDP was added 
and it's argued that because it's bounced around much more than 
expected the last couple of years, it had a much more erratic 
effect. The second thing is that until 1997, the formula wasn't 
a multi-year calculation. So if you had found out that you paid 
too much out in 1999 and 2000, and they discovered in 2001, you 
only recaptured a little bit for past errors. This new formula 
is very strict, so if you make multi-year errors or over 
payments, as we have, to the tune of $209 billion, it's all 
recaptured over a certain period of time. It's just a much 
harsher formula.
    In addition, before 1997, the most the update could be, the 
true inflation update this year is about 2.9 percent, but then 
we go back and recapture previous spending. The current formula 
allows you to go as negative as negative 7 percent--we actually 
did it this year, negative 7 percent. We took 7 percent out to 
make up for what we were spending in past years because that's 
what the formula says. Prior to 1997, I believe the cap was 
originally 3 percent and then 5 percent. So this formula, I 
wouldn't say necessarily GDP is the problem. It's just that GDP 
has been much more erratic than it had been in the past and 
wasn't as predictable, plus the formula is much harsher at 
recapturing past errors or overpayments and I think all three 
of those combined come up with a particularly harsh result.
    Mr. Barrett. We're going to hear in the next panel from 
some people who are going to talk about the impact on rural 
areas and they will make the case, I think, that rural areas 
are hit disproportionately higher. Can you address that? What's 
your analysis as to which areas are hit the hardest and where 
beneficiaries potentially will be hit the hardest?
    Mr. Scully. I'm not sure that I can really give a fair 
analysis of who gets hit the hardest. I'm sure physicians any 
place that are getting lower payments per visit probably all 
feel like they're hit the hardest. I think the argument on the 
rural areas applies more to the Hospital Wage Index Update, 
that Congresswoman Wilson and others mentioned. When you get 
into rural areas, there's obviously a significant differential 
in payment, both in hospitals and physicians and across the 
board based on geographic area costs. Some have argued that 
maybe this is not fair. You could certainly spend a couple days 
debating that, but for a hip replacement, for instance, you may 
have the base rate, maybe $10,000, and in New York City make it 
$17,000 and in a rural area make it $6,000. Very similar things 
happen in physician payments. A gastroenterologist may get 
paid, if the base rate, I'm just picking out of thin air--I 
don't know what the rate is, $600 for a colonoscopy as the 
national rate. In some areas you may get $850 and some areas 
might get $450. It's all based on the area wage costs that are 
measured again through a statutory formula, for what it costs 
in Phoenix as opposed to rural Arizona or Los Angeles versus 
Santa Barbara or some place with the various wages in those 
areas. There's a very strict formula, both on the physician 
side and the hospital side, but the payments vary pretty 
significantly. In some places, like Mr. Ganske mentioned in 
Iowa for instance, that have traditional low costs of health 
care, health providers would argue that for being efficient and 
low cost they pay for that and there's probably some truth to 
that.
    Mr. Barrett. Has CMS run any data or do you have any data 
on specifically how different segments of the community----
    Mr. Scully. How different the payments are?
    Mr. Barrett. The impact.
    Mr. Scully. We have unbelievable amounts of data. I'd be 
happy to share whatever you'd like. The impact is probably a 
little tougher to measure, what the real impact is as far as 
the impact on provision of care. I think probably the impact 
probably--talking about rural versus urban and provision of 
care and access--is probably clear when you talk about what the 
base fee for service rates provide and as a result of 
Medicare+Choice payments is probably the clearest place it 
shows up, rather than as far as physicians versus hospitals.
    We have unbelievable amounts of data, if you'd like to get 
some for your District, I'd be happy to provide it for you.
    Mr. Barrett. I would like that. In terms of a remedy, and 
you've talked about cost neutrality----
    Mr. Bilirakis. Please finish up, Tom. I tell you, we've got 
to give us this room at 11 o'clock. So it's critical that we 
stay within----
    Mr. Barrett. Do you realistically think we can do this in a 
cost neutral basis?
    Mr. Scully. Yes, I do. I would think this formula is 
significantly flawed and it's up to Congress as to how you'd 
like to fix it. I personally believe that the MedPAC formula, 
it's just my personal opinion, it's not a good idea to return 
to double digit, Part B spending or any place in Medicare. So I 
don't think you have to spend $127 billion. I think there are 
some fixes that are significantly less expensive. I also think 
there are some other places in the Medicare spending and budget 
where you can extend some existing policies that expire and 
save enough money to come up with a budget neutral fix.
    Mr. Barrett. For example?
    Mr. Scully. The President, to be honest with you, sent up 
his budget last week and I don't think it's appropriate for me 
to make suggestions outside of that, but I think if you look at 
existing policies, there are many----
    Mr. Bilirakis. I'm sorry, we're going to have to move on 
here.
    Mr. Greenwood.
    Mr. Greenwood. Thank you, Mr. Chairman. Tom, I don't know 
if you've testified on this this morning or not, I'm a little 
groggy, but what has been the experience, the relative 
experience in the fee alterations in the Medicare managed care 
system versus the fee-for-service schedule?
    Mr. Scully. I'm sorry, as far as the year by year, the 
changes or? Well, I personally didn't testify to this. I 
personally think that it could be a toss-up as to which is more 
screwed up, the physician schedule or the managed care, 
Medicare+Choice schedule. Again, this is my opinion, I'm not 
sure it's administration policy, but I'm not sure we have one.
    In 1997, with the best of intentions at the time, 
Medicare+Choice was booming and it was about 18 percent of 
Medicare and CBO and everyone else projected we'd be at 30 
percent Medicare private plans by 2002. I believe a lot of 
rural areas, I'm sure Mr. Ganske could agree with this, said 
managed care is booming in New York and Philadelphia and 
Chicago, why can't it come to Iowa and Minnesota? And so 
effectively what Congress did in 1997 is they capped most of 
the urban areas for 5 years at 2 percent increases by statute 
while the rural area payments have gone up pretty 
significantly. What's effectively happened is there have 
probably been $2 billion a year that was expected to be spent 
and actually allocated under the budget that's not being spent 
because, basically, managed care rates really went up 
significantly and no one showed up. They built it, nobody came. 
And so the money has been allocated out there, but actual 
managed care spending in Medicare dropped from $42 billion last 
year to about $34 billion this year. That was never in the 
projections, but the idea was that managed care was on cruise 
control in the urban areas and was going to continue to do well 
and we need to push the money in the rural areas. Well, there 
is no managed care in many rural areas----
    Mr. Greenwood. My question is--sorry to interrupt you, my 
question is you're looking at the negative update for 
physicians and the fee-for-service fee schedule. What are the 
physicians looking at in average, if we know, in the managed 
care system?
    Mr. Scully. Well, obviously they don't get paid directly by 
us, but it's calculated in the formula, so overall, within the 
managed care formula, is an averaging of the fee-for-service 
payments. So fee-for-service payments are going down for 
physicians, that's built into the base Medicare+Choice managed 
care payment rate. That also, pro rata, goes down because it's 
basically----
    Mr. Greenwood. Are they, in fact, experiencing or projected 
to experience actual decreases in their fees?
    Mr. Scully. That's hard to say. We have, I guess, we're 
down to, how many, less than 250 Medicare+Choice contractors 
and I'm not exactly sure where the balances come down, but 
essentially what's happened is you know, especially in your 
District, premiums have gone up, deductibles have gone, drug 
coverage has dropped and physician payments have been squeezed, 
so it's hard to measure in M+C, but I would be very surprised 
if physician fees haven't been flat or reduced.
    Mr. Greenwood. On your charts, when we look at growth in 
physician benefit, do you have statistics to break that down so 
that we can take a look at how that affects the average 
physician? Is the average physician increasing volume to get 
that growth or is that--how do you separate that out from 
growth in the number of participating physicians, for instance?
    Mr. Scully. We have lots of data on that and I'd be happy 
to share it with you. It depends on physician practice areas. 
Some physician practices and the AMA puts out a lot of this 
data, but we have quite a bit too, some physician area incomes 
have been going up, volumes have been going up, payment for the 
services has been going up. The services that have been covered 
have been going up. For example, the last few years, Congress 
has covered a lot more services of gastroenterologists. And I 
think you can see that gastroenterologist Medicare services, 
that's probably a good thing. It's mainly colonoscopies that 
have been going up and some of the incomes have been going up. 
In other areas, like primary care and others, it's been going 
down, but we have a lot of data on that and I'd be happy to 
give you information by specific practice groups, if you'd 
like.
    Mr. Greenwood. You've talked about the increase in codes. 
Are codes regularly deleted? Is there any fall off? Is it only 
an additive process?
    Mr. Scully. I'm sure we do delete codes. It's my 
experience, I think we've gone from about over a little over 
6,000, close to 7,000 codes in the last 15 years, so they've 
generally been more additive, but occasionally we do delete 
them. But it's almost always done with the cooperation of the 
RUC, which is an AMA-guided physician group.
    Mr. Greenwood. Mr. Chairman, in the interest of time, I'll 
yield back the balance.
    Mr. Bilirakis. The Chair appreciates that. Ms. Capps?
    Ms. Capps. Thank you, Mr. Scully, for being here with us 
today. If you want more data about rural areas of our country, 
I can tell you that there are increasing number of physicians 
in my rural District who are applying for work at the prison 
hospital facility, citing that they will get better payment, 
payment on time and better hours. Because the number of 
Medicare+Choice programs is almost gone, our reimbursement rate 
in our District in California is so disproportionate to the 
costs of living in our area and they are also facing a very 
skewed geographic practice cost index, the GPCI, which means 
for them this current physician payment update is just kind of 
like the last blow. So it's reached dire proportions in many 
parts of the country, I'm sure, but I can tell you from first 
hand experience with the providers in my District that it is 
really a problem and it needs to be addressed. That's not in 
the form of a question. I would like for you to speak about two 
parts of technology. One piece of the physician payment formula 
need to account for scientific and technological advancements 
and changes in the complexity of services provided, the ability 
to account for that in a better way more quickly. And also, 
almost like the flip side of that, what kind of technology is 
going to really make a difference within your Department as 
you've come on to the scene now and taken over the helm, so 
that you can be better and that we can better monitor? In other 
words, accounting for the technology that is in medical 
practice, but also the use of technology to do a better job of 
monitoring the practice of medicine in the country as you do 
with the reimbursement rates and all of the reporting that 
needs to be done, the paperwork aspect of this for the 
providers?
    Mr. Scully. Well, there are a lot of things. One, to be 
honest with you, just with my own agency because we pay 
probably, certainly 50 percent of hospital bills and the bulk--
we're by far the biggest payor in the country--we're dealing 
with 35-year-old computers and our own systems are a disaster. 
The Clinton Administration tried to fix that and put several 
hundred million dollars and flipped the switch and it blew up. 
So we clearly, to their credit, they tried.
    We clearly have a technology problem at CMS. We have a very 
old, antiquated insurance system. As far as technology goes, 
the biggest help as far as monitoring the doctors and others is 
the paperwork burden, which is as controversial as HIPAA, which 
was put off for a year by Congress. I think that was probably 
wise, but we've been talking about streamlining paperwork for 
15 years. At some point we need to quit delaying it and just 
flip the switch and close our eyes and do it. Hopefully, we're 
going to do it in about a year and a half with HIPAA, but 
eventually, every physician will have common codes, common 
paperwork, common forms, every Blue Cross plan, every Cygna, 
Medicare will all be on one common coding system and it will be 
very difficult to pull off, but in four or 5 years when we 
actually do it, I think most physicians will find much less 
burdensome paperwork as will hospitals and providers all across 
the board, because they'll have basically one set of common 
insurance codes. That will be a big change.
    As far as technology, obviously medical technology is 
wonderful and there are a lot of terrific things about it. But 
part of our exploding health care problem is technology. I 
spent an enormous amount of time, for instance, spent a lot of 
time, 12 years ago when MRIs were coming in, trying to figure 
out how quickly we should pay for them, when we should pay for 
them, under what circumstances. There's a new generation of 
that. I spent a lot of time PET scans right now and I'm sure, 
as you know, it's wonderful technology for some things. I also 
know a lot of radiologists would like three in every hospital, 
so finding the balance where patients get access to the right 
things like PET scans, but that you don't have too many, 
generate too much volume and have an explosion of inappropriate 
volume for services is a very tough balance. It's something 
that I struggle with with the help of my large staff of 
physicians every day. There are a lot of complicated issues 
around technology and volume. And a lot of it is wonderful and 
terrific for the patient, but it also generates costs, that's 
one of the reasons why you have flat per visit fees and 
exploding health care costs. It's a tough balance to keep.
    Ms. Capps. I've had some manufacturers of devices and other 
people tell me that they know that even though this is 
developed in this country that there are other countries where 
patients are getting access to that kind of care at a much 
faster rate and that's a hard thing to swallow.
    Mr. Scully. It's tough. On the other hand, there are a lot 
of times when I get calls from the device manufacturers asking 
me to call people in Japan who are about six times as slow as 
we are, so it's a balance. There are some countries that are 
quicker. There are some that are a lot slower. And we're 
spending a lot of time working on this to try to improve new 
technology as quickly as we can. On the other hand, it is a 
constant debate, I spent most of last night on it. FDA approves 
things, drugs and devices, for being safe and efficacious. 
We're an insurance company. We have to pay for it with the 
taxpayer dollars and we try to find the balance to pay for the 
right things. We don't always pay for everything if it's not 
efficient for the patients and not a significant enhancement in 
health care.
    Mr. Bilirakis. The gentle lady's time has expired. Dr. 
Ganske.
    Mr. Ganske. Thank you, Mr. Chairman, I remember back in 
1995 when we had committee hearings and we were looking down 
the road at increased costs for Medicare. We were trying to 
preserve and protect and strengthen Medicare. I gathered a 
group of 30 Republicans the night before our vote on the House 
floor and we marched over to the Speaker's Office and I 
basically led that discussion and told Newt he didn't have the 
votes unless we began to address this issue of inequitable 
geographic payments.
    We got some improvement then, but I also warned everyone at 
the time that a tourniquet can stop a hemorrhage, but applied 
too tightly can cause gangrene. We are looking at a situation 
here where we can have gangrene happening.
    In the interest of disclosure, I think most people here 
know that I am a physician. I am a member of the American 
Medical Association and the American College of Surgeons and 
I'm proud of the professional ethics enforcement and standards 
of both of those organizations. Representatives will be 
testifying here.
    Now, my daughter is a senior is college. She's major in 
architecture, but she's interested in going into medicine. She 
asked me recently what I thought of her interest. With all of 
this data from Mr. Scully in mind, I said well, Ingrid, I don't 
know what your reimbursement will be. I then showed her a bill 
I received from the auto shop where I took my car. I pointed to 
the labor expense line and I pointed out to her what the 
mechanic was getting paid on an hourly basis compared to family 
physicians in my District. But I said to her, Ingrid, taking 
care of patients is the greatest privilege in the world and 
that's how you should make your decision because it's a 
wonderful profession. And helping people is really important.
    Nevertheless, we are dealing with a situation here today 
that, Mr. Scully, when I look at your own chart, for instance, 
on the third main line where it has data measured correctly all 
along physician update, if you look from 1995 through 2005, 
you're talking about on average of 1.1 percent annual increase 
and that is probably about half of what the medical inflation 
rate is.
    We have to do something about this. And so Medicare, MedPAC 
in January, voted to recommend adjustments to the Medicare 
update system to better account for actual physician practice 
costs, including a 2.5 percent payment increase in 2003. Now 
CMS actuaries, I am told, have reported that it would cost $127 
billion over 10 years to adopt those recommendations.
    I think we have to recognize that when we have an aging 
population, when they're getting treatments that help them be 
healthier, freer of pain and when we're dealing with the high 
cost of prescription drugs, we are going to have to spend more 
on health care.
    My question to you is this, the President identified the 
need to fix the update formula in his fiscal year 2003 budget. 
You also have expressed a willingness to work with Congress to 
develop a fix, albeit a budget neutral fix. Can you outline for 
this committee any solutions the administration has developed 
to deal with this problem?
    Mr. Scully. We don't have a specific policy proposal and 
what I tried to do with these charts is to outline the 
variations. I would say that probably we're somewhere between 
current law which is probably not sustainable and the MedPAC 
proposal and I think to be honest with you, I can't calculate 
it real quickly. I'm not that smart with the--1.1 percent is 
roughly the average conversion factor increase, but the average 
actual, part of the spending increase during those years is 
probably more along the lines of 7 or 8 percent. And I think 
that's the balance we have to find which is----
    Mr. Ganske. Mr. Scully, but we're recognizing that we have 
a lot more Medicare patients. They're getting total hip 
replacements. They're getting coronary artery bypasses. They're 
getting a lot of procedures that are helping them to be 
healthier, but also live longer and therefore have more 
expenses.
    Mr. Scully. I understand that. We're happy to find a fix, 
but we're also very committed, and incredibly serious about 
doing prescription drugs and Medicare reform this year and I'd 
also personally like to very much push through some combination 
of access expansions to knock down 42 million uninsured. There 
are a lot of claims on health care dollars and we're trying to 
do a lot of things with--I think there's no question we're 
going to spend more money on health care, but some of that has 
to go to the 42 million uninsured and some it has to go to 
prime prescription drugs, particularly for low-income seniors 
and hopefully for all seniors. And we obviously have to fix the 
physician update as well, but there's a lot of claim on what is 
going to be a growing health care budget, there's no doubt, but 
how much it's going to grow I think is the challenge.
    Mr. Bilirakis. The gentleman's time----
    Mr. Ganske. One question----
    Mr. Bilirakis. We've got to give up this room at 11 o'clock 
and we have another panel coming up. I can't. Mr. Green?
    Mr. Green. Thank you, Mr. Chairman. I know we have a vote 
and I'll be as quick as I can. I know our next Panel, Mr. 
Scully is going to--he said many of the witnesses suggest that 
we adopt a MedPAC, suggest we adopt the Medical Economic Index 
and you said earlier that you thought that an $80 billion fix 
might be excessive for the physician formula. Can you give us a 
number that you think would be available and also, since you 
also mentioned that the MedPac recommendation might be too 
much, can you tell us how we're going to deal with some of the 
problems my colleagues have asked questions about earlier, and 
I know you recognized and it is particularly sad that my 
colleague from Iowa who has a daughter who may go into medicine 
suggesting she not do that and maybe become an auto mechanic. I 
have lots of auto mechanics in my District, but not many 
doctors.
    Mr. Ganske. No, I actually suggested that she strongly 
think about going into it, but that the reason should be 
because she'd love to take care of patients.
    Mr. Green. Yes, and I understand that. It's just that we 
can't continue to see physicians who serve our Medicare 
population continually not matching what inflation is because 
they can't continue that. Maybe on a short term basis because 
of our budget needs, but not over the long term.
    Mr. Scully. Mr. Green, there are a million ways to do this. 
As a technical matter, a couple days ago I gave some of the 
staff a variety of different options done by our actuaries who 
were available to both sides of the aisle, any time they want, 
to run these numbers. And it went anywhere from $16 billion to 
$127 billion. So there are a variety of ways to do it. One 
observation I make is, and I hate to create policy that looks 
closely like what we arguably did in home health, but these 
numbers could get much smaller tomorrow if the economy comes 
back. A lot of this is related to the SGR which is related to 
GDP. So my own opinion, this hole is about as deep as it's 
going to get and you could argue they should make a two or 3 
year fix and if the economy comes back, Congress' ability to 
fix it much less expensively might be easier in a year or two. 
So you could certainly argue that a shorter-term fix to spend 
less money and see if this formula also has the capability of 
self-correcting the other way, so if the economy came back up 
and spending went back down, you could come back in 2 years and 
make a fix that was a lot easier. So fixing it for 10 years may 
not always be the right way to do it. Sometimes, for purely 
technical scoring purposes, and that sounds confusing, but from 
the point of view of spending money under the Federal budget 
guidelines on a pay-as-you-go basis, there certainly might be 
an argument for not fixing this. This is probably as backfired 
as this formula is going to get.
    Mr. Green. I can understand on a short term basis you can 
force Congress to revisit it on a timely basis instead of 
waiting like we have a tendency to do until maybe if we had 
dealt with it last year it might not have been as big a crisis 
as it is now for our medical community. That's why we want to 
do it in the long term because it takes Congress so long to 
come back and revisit some of these issues.
    Mr. Scully. This formula has gotten a lot of people angry. 
I personally, I shouldn't bring up old news, but I was very 
involved in writing it. I think it's still a good structure. It 
works and can be saved and I'm certainly committed to doing 
that.
    Mr. Green. At least a short-term fix on an immediate basis 
we have to do something. Should have done it last year with our 
Chairman's bill. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman. Mr. Burr to inquire.
    Mr. Burr. Thank you, Mr. Chairman. Tom, you know I wouldn't 
have your job. Of course, I'm pretty safe in saying that. I 
don't think it would ever be offered to me.
    Mr. Scully. You never know, standards have gotten pretty 
low, obviously.
    Mr. Burr. I've got a lot of confidence in your ability to 
understand both sides, the policy side and the fiscal side. 
That doesn't necessarily help you to increase the number of 
pools that you've got to solve the problem. And I'm confident 
that we will or have come to an agreement between Congress and 
the administration and the Agency on how to tweak the formula 
to where it may make more sense long term and the process that 
we've got to go through.
    I remember some time ago when there were targeted cuts, 
specifically for thoracic surgeons that were huge and I think 
Bruce Vladeck was the Administrator. I went home that next week 
and called one of my physicians and I said I want to come to 
the OR. I want to go in with you. And my purpose was to go in 
and see who was in that room, to see what could be eliminated 
in that bypass surgery or in that lung removal and that day I 
went through three surgeries. I was there all day. And I came 
back and I called Bruce and I said I don't know how we can 
propose a 55 percent cut because if I was on that table, there 
was nothing I didn't want in there.
    My point to him was at some point you have to look at what 
it takes to accomplish what you're trying to do. And I know you 
made the statement earlier, I don't want to see double digit 
increases in any part of Medicare. My response would be are we 
going to ration care or are we just going to ration 
reimbursement?
    Mr. Scully. Do you want me to answer that?
    Mr. Burr. Loved for you to.
    Mr. Scully. If I could just leave.
    I've been through--in the first Bush Administration, as you 
know, I was there from the first day to the last and we went 
through 18, 19 percent medical inflation in Medicaid, probably 
16 percent in Medicare. Everybody said this is the way it has 
to be. And we got back to where we had negative Medicare 
inflation in 1989 and certainly much for sustainable growth 
rates in the 1990's of 4, 5, 6 percent and I think the health 
care system did fine. Now I think we've got a significant 
problem with the Medicare update, but I don't think it's 
healthy for the economy or healthy for health care to have 
medical inflation running double or triple the rate of 
inflation of the rest of the economy. It may be a few percent 
higher, but I think there's no reason we should have 15 
percent.
    I also think the reality is there are many demands. As I 
mentioned, we have 40 million, pick your number, uninsured, and 
I think we need to do something about that. I know President 
Bush and Secretary Thompson and I are incredibly committed to 
that and we also have seniors who want prescription drugs. So 
if we're going to fit all these demands in a pot, I think we 
have to be somewhat restrained when we do the base programs. We 
certainly want to provide great health care and I think we do. 
I was in Grady Memorial Hospital, probably the biggest public 
hospital in the country, with Congressman Lewis Tuesday. I was 
thrilled to see the good quality care there. I think we need to 
make sure the quality care stays up. But there's also the great 
potential, because I've seen it, for overspending in health 
care and I think that's a tough balance we have to keep.
    Mr. Burr. I notice that as you presented the charts, it hit 
the percentage of increase, but it also talked about the total 
outlay, the total amount of money spent. And one of the things 
that you pointed to is that there are new procedures that are 
coming on line every day. They're requesting codes and 
physicians want to do this and companies are out trying to 
create a better way to accomplish a certain procedure.
    There's no mechanism for this process where we talk about 
physician reimbursements that if these procedures that we 
reimburse physicians under that are new and technologically 
advanced, enable us to keep somebody out of an in-patient 10-
day stay in the hospital, there's nothing that correlates the 
savings with the increase that's happening over there, is 
there?
    Mr. Scully. I think there are. I think in a lot of cases 
you've seen outpatient spending has clearly grown over the last 
few years, the trend----
    Mr. Burr. Not just when you're looking at the raw numbers 
of physician reimbursement.
    Mr. Scully. You can see where preventive services, and 
clearly I mean the drug companies make the argument that 
there's no question, some prescription drugs have reduced 
hospitalizations. They've reduced coronary bypasses. There's a 
lot of positive spending that saves money in other areas. But 
there's also places where there are services that aren't 
appropriate and I don't think we should always assume 
everything is appropriate. One example, we talked about home 
health earlier and I think home health is wonderful, but when I 
was booted out of the government in 1992, home health spending 
was $3 billion a year. By 1997, it went to $18 billion a year 
and then it went back to $9. It was a harsh cut, but the fact 
is it's probably should have gone from 3 to 9 without the 18 in 
between. There was a lot of churning home health services in 
the mid-1990's that shouldn't happen. Home health services are 
wonderful, but there is clearly the potential, if you don't 
watch it, for health spending to get out of control. And I 
think that's a very tough balance for us to keep an eye on. 
There's no doubt that new technologies, new spending and new 
services in many cases have positive benefits for patients, but 
not all of them.
    Mr. Burr. Thank you very much. We have home health to take 
care of before the calendar year is over too. Thank you, Mr. 
Chairman.
    Mr. Norwood [presiding]. Heather, it's a general vote and 
we've asked them to hold it until you get there. You're 
recognized for 5 minutes.
    Ms. Wilson. Thank you, Mr. Chairman, I appreciate that very 
much.
    Tom, I also appreciate you for being in this job, although 
like my colleagues, I'm not sure why the heck you took it, but 
it's certainly one of the tougher jobs in the country at this 
point.
    You were talking about various things the administration is 
considering for changing these formulas and as I mentioned in 
my opening statement my primary concern is the geographic 
disparity in these formulas which make this physician 
reimbursement issue just a side bar as far as my State of New 
Mexico is concerned.
    Would the administration support or consider changing this 
geographic adjustment for the physician work component or 
eliminating it entirely?
    Mr. Scully. Sure, I mean obviously, we'd be happy to 
discuss anything with Congress. I think that the statutory fix, 
it's very similar, as I said on the hospital side, there was a 
minor adjustment in the hospital geographic adjustment made a 
few years ago and we're happy to talk to anybody in Congress 
about doing that. Obviously, it's the tension between rural New 
Mexico and New York City and Philadelphia and Pittsburgh and 
that's the tension. We're happy to sit down and try to come up 
with the right substantive result.
    Ms. Wilson. The more I read about this and look at the 
Medicare system, the more I see the kind of Rube Goldberg 
patterns on the wall as to the way the whole system is set up. 
We've talked about--last year we dealt with Medicare+Choice and 
New Mexico, I think, is an anomaly in that 40 percent of New 
Mexicans have HMO health care coverage. It's a very high rate 
which is one of the reasons I think why we have very efficient 
health care and we're discriminated against in some of these 
reimbursements. But how many different fee schedules are there? 
I mean you talk about the fee-for-service Medicare physician 
payments. We know we've got Medicare+Choice. How many different 
fee schedules are there that have geographic components in them 
in the system that you operate?
    Mr. Scully. Virtually, all of them. There's only one that 
I'm aware of that does not have a geographic difference which 
isn't even out yet. It's coming out in 2 weeks is the long-
term, acute care hospital and that the hospital inpatient/
outpatient hospitals are geographically adjusted, physicians 
are. I think virtually everything is. Clinical labs may not be. 
But all the major payment systems. It's a $256 billion year 
program and I would say that the vast bulk of that is 
geographically adjusted.
    Ms. Wilson. How many payment systems, how many different 
schedules are there in this?
    Mr. Scully. The biggest are hospital in patient which is 
$100 billion. Hospital out patient is about $20 billion a year. 
Physicians are about $43 billion. That's the bulk. There's 
probably another, I guess, 25 different payment systems or so 
at much smaller levels. It's a great country, isn't it?
    Ms. Wilson. It's amazing this works at all.
    Have you ever considered or is it taking into account 
quality or efficiency factors into the formula, either as to 
control inflation and also to eliminate some of the disparity 
and the punishment of places that are efficient?
    Mr. Scully. That's very hard to do because, obviously, 
quality measurements are very subjective. The first major 
quality initiative we have, which actually starts April 1, is 
with the National Quality Forum. We've taken on six States--and 
New Mexico is not one of them, unfortunately--where we're 
basically going to measure every nursing home on an objective 
set of criteria on 11 outcomes. And as of April 1 in those six 
States, every nursing home, every local newspaper will publish 
the outcomes and relative quality. And we're trying to put 
together broad-based widely supported quality measures that we 
can start using to identify relative quality health care. But 
right now every hospital in Arizona or New Mexico or Georgia or 
anywhere gets paid the exact same amount in the same region for 
hip replacement or heart bypass regardless of quality and some 
day I think that's a very legitimate point, but I think we're a 
long way away from getting there.
    Ms. Wilson. Thank you, Mr. Chairman. It is hard to 
underestimate the impact this has on a community like 
Albuquerque, New Mexico and these disparities. We are 
hemorrhaging doctors to surrounding States where the payment 
rates are just much higher. In Albuquerque, New Mexico, we are 
so short of anesthesiologists and neurosurgeon, we are almost 
at the point where you cannot get neurosurgery in the State of 
New Mexico, the entire State of New Mexico. We have limited 
enclosed newborn ICU beds as we don't have the staff.
    I was talking to an OB/GYN recently and he just sent to 
hospitals in Phoenix and Denver critically ill newborn babies, 
15 of them within the prior 3 months because we don't have the 
staff in New Mexico to take care of them, so we had to close 
the beds and the reason we don't have the staff is because we 
can't compete with Denver and Phoenix and Amarillo and Dade 
County, Florida, because they pay so much more. And the reason 
they pay so much more is because the Federal Government pays so 
much less. If you just look at Medicare+Choice, even with the 
fixes we got last year with putting in a floor for 
Medicare+Choice. Per person per month in Albuquerque, New 
Mexico is $553 per person per month. In Dade County, Florida 
that same person, the Federal Government pays $834 per person 
per month for their health care. Until we got that floor last 
year, in Torrance County which is just outside of the 
Albuquerque, New Mexico, that amount was $370 per person per 
month. How can you attract doctor practice in Estancia, New 
Mexico with that kind of disparity? We have to fix that system 
or we will never have access and quality of care in my State.
    Thank you, Mr. Chairman.
    Mr. Norwood. Thank you. Mr. Scully, I don't know how you 
feel about it, no offense to my friend, Mr. Burr, who is my 
friend, but it makes me real nervous when a Member of Congress 
goes into an OR looking for efficiency.
    Mr. Waxman? No questions. We thank you very much for coming 
and in conclusion, let me just point out to you that in 1973 
when Congress, in its wisdom, decided to take taxpayer dollars 
and fund managed care, the idea, of course, was to save money. 
Now we're at the process where we're saying oh, we have to 
reimburse managed care, Medicare+Choice at 100 percent level 
for fee-for-service where at the same time continuing to cut 
fee-for-service. My President's budget has $4 billion for 
managed care, Medicare+Choice and we don't have any money out 
there for fee-for-service.
    Do you believe that there's an effort anywhere in this 
government that is trying to totally wipe out fee-for-service 
and move all Medicare patients into managed care?
    Mr. Scully. Absolutely not. We feel strongly about 
Medicare+Choice for one reason--I feel extremely strongly is 
that it's a great option for low-income people and the people 
in that program are disproportionately low income. And if you 
look around the country and you find people who are getting 
Medicare+Choice, it's usually because they can't afford Medigap 
and they, generally in the past, have gotten drug coverage, 
relatively low deductibles and co-payments and they're losing 
those options. And that money in the President's budget which 
is 6.5 percent increase, mainly for urban areas to be honest, 
is what our actuaries have told us was treading water, so we 
don't lose more people, but low-income people are seeing higher 
premiums, higher co-payments, less drug coverage. The money in 
the President's budget is a maintenance-of-effort level that 
would just keep us treading water where we are. It's not going 
to improve anything. We think that--I personally feel very 
strongly that it's a terrific option for low-income people, and 
it's one that's evaporating quickly and I think it's very 
dangerous to let it go. I have personally zero bias one way or 
the other toward--we like the private sector health plans, but 
we are committed to the Medicare fee-for-service program every 
bit as much.
    Mr. Norwood. What you're doing whether you like it or not 
is you're driving everybody in to managed care by simply 
running people out of fee-for-service because they can't afford 
it and I would just simply say let's use a little bit of that 
$4 billion to put back into the fee-for-service program 
particularly the 1.25 because of this cut.
    Mr. Shadegg, do you wish to question?
    Mr. Shadegg. I do.
    Mr. Norwood. You're recognized for 5.
    Mr. Shadegg. Thank you. I may be briefer than that. I 
recognize there's a Panel to follow you, Mr. Scully and I 
appreciate your being here. And we're going to have a limited 
time for them because as the chairman has pointed out, we're 
getting kicked out of the room.
    I simply want to kind of step back one notch. We're looking 
at the individual trees and we need to look at the forest. I've 
got to say if you look at the forest, it's a very bizarre 
picture. Indeed, I'm not certain that the Soviet Union could 
have created a more bizarre structure. I will compliment you on 
the charts. I actually never understood this one, but I tried 
diligently.
    I did understand this one. And it made sense to me and it 
compared what we planned to spend and the mistakes we made, 
what we actually spent and then you carefully explained it, 
this entire structure was created and I wrote your words down 
because I know you were accurately representing the system 
which you articulately make the case for that it was well 
intentioned, that it was signed with good intention. But what 
you said is we are--it is designed to control physician 
spending at a reasonable rate. In all candor, and without 
directing this at you in any personal way at all, I want to 
point out that that sounds precisely like the planned economy 
of the Soviet Union.
    We, the government, created the Medicare program. Good or 
bad, we made this decision and we said to America's seniors, 
these services will be there for you. And then we discover oh 
my gosh, they cost more than we thought. Why do they cost more 
than we thought? Well, we didn't take into consideration the 
aging of the population. We didn't take into consideration 
their increased demand for services. We didn't take into 
consideration it appears to me technology and the fact that 
much of the medicine today would be vastly more expensive then 
the medicine of 20 years ago, but by God, look how much better 
it is than the medicine of 20 years ago. I think you and I have 
had this discussion. We're saving the lives of people that 15, 
20 years ago we would have said goodbye on. We're performing 
operations on people we wouldn't have thought of operating on 
15, 20 years ago. We're extending their lives and their life 
spans and doing it in a great way. And I think that's 
appropriate, but we didn't account for those factors. But here 
along comes the government and says well, we better control 
physician spending. And what that sounds to me like is we 
promised these benefits. Then we've discovered what they cost 
and so what we're going to do is we're not going to pay for the 
benefits. We're going to squeeze the people in between the 
government and the patient. And the people in between the 
government and the patient are the physicians. And it may have 
been a laudable goal in 1997 to say well this is the way we'll 
do it, we'll squeeze down costs by projecting only these 
certain growth rates, and we leave out some facts in what now I 
think everybody agrees is a flawed formula and at the end of 
the day what we'll get to is a restraint from the growth of 
spending which harms physicians or which kind of takes the cost 
of the system, the differential between what it really costs to 
provide the services and what we're willing to pay for it out 
of the hides of physicians. It doesn't work. I think a complete 
abandonment of this formula is called for and I think we need 
to create a formula which takes into account what is necessary 
to pay for the services we've promised and to do so in a 
fashion which keeps professionals in the field. I think that 
you've been very candid about telling us that you're open to 
whatever we do. I hope we'll do something more responsible in 
the 1997 formula. I hope we do something that gives America's 
seniors the benefits we've promised them. And I really don't 
have a question, Mr. Chairman.
    Mr. Norwood. Thank you very much for that speech, Mr. 
Shadegg. We appreciate, Mr. Scully, thank you, sir.
    Mr. Scully. Thanks. Can I add one thing because I really 
would like to work on a physician formula? We really are 
extremely serious about Medicare reform, prescription drugs, 
and access for the uninsured and so I hope we can have an 
extremely active year in health care. We've got a lot of things 
like Enron, other things going on, but thank you very much.
    Mr. Norwood. Thank you, sir. If we can ask the other 
panelists to quickly come to the table. I apologize for the 
rush here.
    The committee will come to order. Ladies and gentlemen, 
thank you so much for being here. It is something we badly need 
to do is hear from you and we're all under time constraints 
that I'm very sorry about, but if we could, Mr. Scanlon, who is 
Director of Health Care Issues, U.S. General Accounting Office, 
if you begin your testimony, sir.

   STATEMENTS OF WILLIAM J. SCANLON, U.S. GENERAL ACCOUNTING 
OFFICE; THEODORE LEWERS, TRUSTEE, AMERICAN MEDICAL ASSOCIATION; 
ALLISON WEBER SHUREN, AMERICAN COLLEGE OF NURSE PRACTITIONERS; 
    THOMAS R. RUSSELL, AMERICAN COLLEGE OF SURGEONS; MARTHA 
   McSTEEN, PRESIDENT, NATIONAL COMMITTEE TO PRESERVE SOCIAL 
    SECURITY AND MEDICARE; AND SUSAN TURNEY, MEDICAL GROUP 
           MANAGEMENT ASSOCIATION, MARSHFIELD CLINIC

    Mr. Scanlon. Thank you very much, Mr. Chairman. I'm pleased 
to be here and I'll try to be brief, given the time 
constraints. As you review how Medicare pays physicians and 
deal with the incongruous result that we have had this year 
with the 5.4 percent reduction in fees while CMS has estimated 
that the cost of inputs required to produce physician services 
have increased 2.6 percent. It is not surprising, given that 
result, we have heard calls for the elimination of the spending 
targets that are in the sustainable growth system and----
    Mr. Norwood. Mr. Scanlon, if you will suspend just a 
minute. If we can have quiet in the back of the room, and close 
that door as quickly as possible. Please, proceed.
    Mr. Scanlon. As I've said, we have had calls to eliminate 
the sustainable growth system or at least to provide for 
changes in it. What I'd like to do today is provide you with 
some information about the potential for changes in this 
system. I think it's important first to take a historical 
perspective that looks at why we have the SGR and its 
predecessor the Volume Performance Standards and why they were 
created and what has transpired since their introduction.
    In the 1980's, the Congress began a series of steps to 
address the continuing rapid increases in Medicare spending by 
revising provider payment methods. The first step involved the 
hospital prospective payment system, the second, the physician 
fee schedule. When the fee schedule was adopted, it was widely 
recognized that controlling fees alone would not moderate 
physician growth.
    It was something that was recognized by analysts at CBO, at 
HCFA at the time, and in the private sector. We had some 
controls on physician fees during the 1970's, but the spending 
growth continued due to increases in volume and intensity 
beyond the increases that would be attributable to increases in 
the numbers of Medicare beneficiaries.
    If you look at Figure 2 in my written statement which is on 
page 6, you see that, prior to 1992 when the volume performance 
standards were introduced, annual increases in volume and 
intensity per beneficiary were quite significant--averaging 
nearly 8 percent per year between 1985 and 1991. After the 
introduction of the spending targets under the volume 
performance standard first, and then under the sustainable 
growth rate, increased spending due to volume and intensity 
declined dramatically, averaging roughly 2 percent per year 
between 1992 and 2000.
    While we've benefited from these moderations in spending, 
today we have this incongruous result that the fees are being 
reduced 5.4 percent. Administrator Scully, I think, gave you 
very clearly the reasons why this occurred, the confluence of 
events in terms of correcting for errors in past targets and 
mis-estimates of the spending in prior years.
    As we think about how to deal with this, one option is, of 
course, to deal with how errors are incorporated into payment 
adjustments. They can be phased in over time. Some steps in 
this direction were taken within the BBRA. It's clear though 
that those steps to moderate the annual changes do not result 
in enough moderation. Therefore, payment adjustments could be 
made over longer periods of time.
    A second thing to think about, and it's come up today, is 
the issue of the target itself. As we've talked, it's partially 
based on GDP and I'd underscore that ``partially.'' Other 
factors that are taken into account are increases in the number 
of beneficiaries in Medicare fee-for-service as well as 
increases in the costs of delivery of physician services, and 
changes in law that result in additional services--such as the 
addition of preventive services to Medicare over the last few 
years.
    GDP though is potentially a measure of the affordability of 
Medicare to our economy. The Comptroller General has testified 
many times before the Congress about the problem that we face 
over the longer term as the baby boom generation joins the 
ranks of Medicare beneficiaries. The cost of this program is 
going to be greater, if current trends continue, than what we 
currently spend on all Federal activities. We need to find a 
way to generate control over that spending.
    Using GDP though, is potentially problematic because of the 
fact that GDP is a cyclical variable. It moves up and down with 
the economy, whereas the health care needs of Medicare 
beneficiaries do not. We need to think about how we can take 
into account affordability without having this cyclical 
variation. One very simple way would be instead of using GDP 
for a single year as the basis for a target, is to take the 
average of GDP over much longer period of time. It reflects our 
economic wealth, but does not fluctuate with the business cycle 
on an annual basis.
    Let me end by saying that while we need to be very 
concerned about maintaining fiscal discipline, we also need to 
keep in mind the primary purpose of this program which is to 
generate appropriate access to services for Medicare 
beneficiaries. The one thing I think that is incredibly 
lamentable at this time is the fact that we have such 
inadequate data on access that we are not able on a timely 
basis to measure whether access is appropriate, whether a 
problem exists and whether an intervention is called for.
    Part of what needs to be done as we move forward is to be 
able to position ourselves to generate that kind of information 
so that appropriate interventions can be taken.
    Thank you very much, Mr. Chairman. I'd be happy to answer 
any questions the committee may have.
    [The prepared statement of William J. Scanlon appears at 
the end of the hearing.]
    Mr. Bilirakis. Thank you very much, Dr. Scanlon. Again, we 
appreciate your taking time to be here with us.
    Dr. Lewers is a trustee with the American Medical 
Association. Please proceed.

                  STATEMENT OF THEODORE LEWERS

    Mr. Lewers. Thank you, Mr. Chairman, and thank you, members 
of the committee, we do appreciate your holding this hearing in 
such a timely fashion. I am Dr. Ted Lewers and I am a Trustee 
of the American Medical Association and a nephrologist from 
Easton, Maryland. I have to also reveal that I am a former 
member of the Medicare Payment Advisory Commission and its 
predecessor, the Physical Payment Review Commission, so this is 
something I have lived with for a number of years.
    Mr. Chairman, I want to thank you personally and Ranking 
Member Brown for the leadership in advancing H.R. 3351 and we'd 
also like to thank Committee Chairman Tauzin and Ranking Member 
Dingell for their support as well.
    The bipartisan majorities that you have spoken about are 
super majorities and they're both in the House and in the 
Senate and they recognize the need for Congress to correct a 
Medicare policy that threatens access to care for Medicare 
patients.
    We strongly urge this committee to promptly report out 
legislation that immediately halts the 5.4 percent cut that 
took effect on January 1, 2002. The SGR system must be 
repealed.
    CMS uses estimates that everyone agrees with, and you've 
heard today, are seriously off the mark. On Chart 2 on the 
panel down on the end, you will see these SGR projection, 
errors have shortchanged physicians and other health 
professionals by over $20 billion since fiscal year 1998. That 
was brought out earlier in the testimony. The errors that were 
made in predicting the enrollment mean that every year, 
physicians care for nearly 1 million Medicare patients whose 
costs are not counted in the update. Under this flawed formula, 
these errors are compounded annually and if you just look at 
the numbers on each year, the compounding comes to $20 billion.
    The current Medicare policy links physician updates to 
changes in the GDP, as Dr. Scanlon has just mentioned. There is 
no relationship between GDP and disease. The medical needs of 
the Medicare patient do not wane when the American economy 
falls into a recession. Chart 1 indicates information that has 
been discussed and clearly indicates the growing gap between 
the Medicare economic index or the practice cost inflation and 
the annual physician updates. Since 1991, physicians have 
received an average annual increase of 1.1 percent as shown by 
the red line versus the 2.4 percent increase in practice costs 
as shown in the blue line. That's called negative reimbursement 
and you cannot survive in a small business with negative 
reimbursement. This trend has serious implications for Medicare 
patients.
    Medicare payments are continually falling behind the actual 
cost of running a practice. In addition, physicians are 
experiencing a sharp increase in professional liability 
premiums, something we have not had the opportunity to discuss 
today. It is particularly acute in Pennsylvania, West Virginia, 
Florida and several other States.
    In addition to that, we have a host of regulatory burdens. 
The 5.4 percent Medicare cut will force physicians to make 
difficult choices such as whether to stop accepting new 
Medicare patients. This is occurring. Last night late, I got 
the word from Baylor that the orthopedic spine surgeons of 
Baylor University are no longer going to accept Medicare 
patients. This is a disaster and it is occurring and anyone who 
says it's not occurring needs to tour this country with me on a 
few visits.
    Other things that physicians are having to do, include 
discontinuing the provision of some medical services, stopping 
or reducing charitable care, limiting or discontinuing 
investments in new technology, laying off staff or retiring 
from practice entirely. These are not choices that physicians 
want to make because in each case their patients lose.
    Medicaid history teaches us that a payment structure that 
does not support the economics of maintaining a medical 
practice ultimately decreases physician participation in the 
program. Congress must promptly intervene. According to our 
estimates, physicians may see an additional 5 percent cut next 
year on top of the 5.4 percent that we've been discussing 
today.
    Last June, MedPAC warned that if the update of 2002 was 
``significantly lower'' then the negative .1 percent update 
that CMS was predicting at that time, this could raise concerns 
about the adequacy of payments and beneficiary access to care.
    Ladies and gentlemen, clearly, the 5.4 percent cut is 
significantly lower than .1 percent. The Commission recently 
recommended a new framework for Medicare physician updates and 
a repeal of SGR. We wholeheartedly agree. We support the MedPAC 
general framework and look forward to working with the 
committee on the specific details of a new update system.
    We ask the full committee to ensure that its views and 
estimates submitted to the Budget Committee include necessary 
funds to implement the MedPAC recommendation.
    In conclusion, we strongly urge Congress to enact an 
immediate halt to the 5.4 percent cut and repeal the flawed SGR 
system that threatens access to care for Medicare patients.
    Thank you, Mr. Chairman.
    [The prepared statement of Theodore Lewers follows:]
         Prepared Statement of the American Medical Association
    The American Medical Association (AMA) is grateful to the 
Subcommittee for the opportunity to provide our testimony concerning 
the fatally flawed Medicare physician payment update formula as well as 
the 2002 Medicare payment cut of 5.4 percent. This sudden and 
unexpected steep payment cut is alarming, and it is critical that 
Congress take steps to immediately halt this cut before it further 
jeopardizes the success of the Medicare program and patient access to 
care.
    We first would like to express our sincere appreciation to 
Subcommittee Chairman Bilirakis and Ranking Member Brown for your lead 
co-sponsorship of H.R. 3351, the ``Medicare Physician Payment Fairness 
Act of 2001,'' as well as for your strong efforts to move this critical 
legislation. We further extend our appreciation to full Committee 
Chairman Tauzin and Ranking Member Dingell for your additional support 
of H.R. 3351. Finally, we thank the more than 300 House co-sponsors of 
this bill, many of whom are on the Committee, and believe that the 
strong and broad bipartisan support of this legislation underscores the 
need to remedy the flawed Medicare physician payment update formula.
         congressional action needed to remedy access problems
    Because no action was taken last year on H.R. 3351, as of January 1 
of this year, the 5.4 percent Medicare cut impacts all Medicare 
services provided by physicians and other health professionals, 
including, but not limited to, physical therapists, audiologists, 
optometrists, advanced practice nurses and podiatrists, as well as 
medical doctors and osteopaths.
    This is the largest payment cut since the Medicare fee schedule was 
developed a decade ago, and is the fourth cut over the last eleven 
years. Since 1992, Medicare payments to physicians averaged only a 1.1 
percent annual increase, or 13 percent less than the annual increase in 
practice costs, as measured by the Medicare Economic Index (MEI). (See 
attached Chart 1, Medicare Payments vs. MEI, which compares Medicare 
physician payment updates to increases in inflation.)
    Further, this 5.4 percent cut is forcing doctors to make difficult 
choices concerning their ability to continue accepting new Medicare 
patients. It also raises questions about whether they can continue 
accepting assignment for their Medicare patients, and, ultimately, 
whether to retire from medicine and change careers. If the pay cut is 
not quickly reversed, it could become extremely difficult to prevent 
serious access problems for elderly and disabled patients.
    We appreciate the Subcommittee's continued support of legislation 
to remedy the ongoing problems resulting from the flawed Medicare 
physician payment update, and we urge the full Committee to report, and 
the Congress to enact, legislation that would--

 Immediately halt the 5.4 percent Medicare payment cut;
 Repeal the sustainable growth rate (SGR) system; and
 Replace the fatally flawed Medicare payment update formula 
        with a new system that appropriately reflects increases in 
        practice costs, including changes in medical practice, changes 
        in technology, patient need for medical services and other 
        relevant information and factors.
    It is critical that Congress not defer legislative action to halt 
the current payment cut or repeal the SGR until consideration of a 
broader package that might face significant delay. Continuation of the 
SGR system beyond 2002 would likely produce another steep payment cut 
in 2003, and there are no guarantees that a positive update would occur 
in 2004.
    Further, we ask the full Committee to ensure that its ``views and 
estimates'' on budgetary and legislative matters, to be submitted to 
the House Budget Committee, include an appropriate and specific amount 
of funds that should be set aside in the budget resolution to replace 
the Medicare physician payment update formula beginning in 2003.
   medpac's recommendations to replace the flawed medicare physician 
                             update formula
    The Medicare Payment Advisory Commission (MedPAC) warned in June 
2001 that if the 2002 update was lower than the Centers for Medicare 
and Medicaid Services' (CMS) estimate, which at that time was -0.1 
percent, it ``could raise concerns about the adequacy of payments and 
beneficiary access to care. MedPAC adopted a recommendation that 
Congress replace the current Medicare payment formula with one that 
more fully accounts for increases in practice costs. Specifically, 
MedPAC advised Congress to repeal the SGR system because an expenditure 
target system, like the SGR, does not appropriately reflect increases 
in practice costs. MedPAC further recommended that future updates be 
based on inflation in physicians' practice costs, less an adjustment 
for multi-factor productivity.
    We strongly agree with MedPAC's assessment and urge the 
Subcommittee to act on MedPAC's recommendations.
medicare patient access is seriously threatened by the flawed medicare 
      payment update formula and 5.4 percent medicare payment cut
    The current 5.4 percent Medicare cut for physicians' services has a 
broad impact well beyond the physician community and Medicare program. 
Since Medicare payments for numerous health professionals are directly 
tied to the physician payment schedule, these practitioners also are 
experiencing large payment cuts. In fact, nearly one million physicians 
and other health care professionals are immediately impacted by the 
cut. In addition, many private health insurance plans base their rates 
on Medicare payment rates.
    Most significantly, the payment cut jeopardizes access for elderly 
and disabled patients. Two-thirds of physician offices meet the 
definition of a small business. If a business, especially a small 
business, continues to lose revenue and operate on a negative income 
statement, the business cannot be sustained. Thus, when physicians and 
non-physician practitioners experience a Medicare cut of the magnitude 
being incurred in 2002, as small businesses, they will lose significant 
amounts of revenue and operate in the red. This means that physicians 
and impacted non-physician practitioners are left with very few 
alternatives for maintaining a financially sound medical practice. 
These alternatives include:

 Discontinue seeing new Medicare patients;
 Opt out of the Medicare program;
 Move from being a participating to a non-participating 
        Medicare provider;
 Balance bill patients;
 Lay off administrative staff;
 Relocate to an area with a smaller Medicare patient 
        population;
 Discontinue certain low-payment/high-cost Medicare services;
 Limit or discontinue charity care;
 Retire early;
 Partial or complete career change; and
 Postpone or discontinue necessary investments in new 
        technology.
    It is clear from the foregoing that the current Medicare payment 
cut likely will result in patients having difficulty finding a 
physician. Indeed, surveys and reports have found that Medicare 
patients increasingly are experiencing access problems. For example, an 
American Academy of Family Physicians (AAFP) survey found that nearly 
30 percent of family physicians are not accepting new Medicare 
patients. Further, recent press reports in many states have documented 
the access problems resulting from the Medicare payment cut. Excerpts 
from these reports are as follows:

 ``As a result (of the 5.4% cut), doctors around the country 
        are finding themselves pinched. `If you continue to lose and 
        lose, there may be a time when we will have to limit services 
        or close one of our sites,' says Susan Turney, medical director 
        of reimbursement at Marshfield Clinic, of Marshfield, Wis., 
        which operates about 40 sites with 600 physicians. `In some 
        areas of Wisconsin, we're the only provider,' she adds.'' The 
        Wall Street Journal, Jan. 20, 2002 (Some Doctors Say They May 
        Stop Seeing Medicare Patients After Cuts);
 ``Washington's health-care system is in serious decline, and 
        the prognosis is guarded. `Tests show the severity of the 
        problem,' said Tom Curry, executive director of the Washington 
        State Medical Association, which released a gloomy report in 
        Olympia. Responding to an informal poll of members in November, 
        57 percent of physicians said they are limiting the number or 
        dropping all Medicare patients from their practices . . . The 
        report says that for many years the state's health-care 
        delivery system has been in decline, characterized by a slow 
        erosion of funding for public health, growing administrative 
        expenses for practitioners and mounting frustrations of 
        physicians trying to cope with myriad regulations. A growing 
        number of patients, even those with private insurance, are 
        having trouble finding a physician because increasing numbers 
        of doctors have been leaving the state or retiring early since 
        the late 1990s, the report says.'' Seattle Times, Jan. 30, 
        2002;
 ``Medicare reimbursement to doctors was cut 5.4 percent the 
        first of the month, worsening an already tight financial 
        situation for rural hospitals . . . One result likely will be a 
        harder time recruiting doctors to rural areas . . . Medical 
        equipment purchases can suffer, staff cuts are more likely and 
        doctors sometimes will leave for better conditions elsewhere, 
        Bruning said (Dr. Gary Bruning of the Flandreau, South Dakota 
        Medical Clinic),'' Associated Press, Jan. 22, 2002 (Medicare 
        Cuts Strain Rural Health);
 ``Other West Virginia doctors fear their peers will stop 
        treating patients who have Medicare . . . And some wonder how 
        they will recruit doctors to a medical environment marred by 
        the recent struggles over malpractice insurance . . . At 
        Madison Medical PLLC in Boone County, three doctors treat at 
        least 80 patients a day. About 65 percent of them have 
        Medicare, said office management Phyllis Huffman. The cut in 
        Medicare reimbursement does not come at a good time, she said. 
        In the last two years, for example, the physician group's 
        malpractice insurance doubled. Huffman said she fears that in 
        the long run, the practice will not be able to afford to 
        replace a departing employee. Or they may have to stop offering 
        services for which they get little or no reimbursement from 
        Medicare.'' The Charleston Gazette, Jan. 23, 2002 (Doctors 
        criticize federal pay cut; AMA says state physicians will lose 
        $4,889 each).
    We urge the Congress to enact legislation to ensure that the 85 
percent of Medicare patients enrolled in the fee-for-service program 
will maintain access to physicians and the health care services to 
which they are entitled.
               factors compounding medicare payment cuts
    Several factors compound the current 5.4 percent Medicare payment 
cut. First, this cut occurs at a time when premiums for physicians' 
professional liability insurance (PLI) are increasing at an alarming 
rate. For example, the Las Vegas Sun recently reported that a Minnesota 
company's decision to get out of the PLI business could force nearly 40 
percent of Nevada's physicians to pay painfully high premiums for new 
coverage or close their office doors. This trend is occurring across 
the country. The Miami Herald reported that South Florida physicians' 
will see PLI premium increases between 25 and 350 percent this year, if 
any insurance is available at all. In Pennsylvania, rising PLI premiums 
threaten to close trauma centers and emergency rooms.
    Further, the effects of the payment cut also are compounded by 
requirements under the Medicare and Medicaid programs that physicians 
take on expensive new responsibilities without any additional 
compensation. For example, program integrity activities have led to 
demands for reams of documentation, expensive new compliance programs 
and the proliferation of time-consuming certificates of medical 
necessity that force physicians to police other providers, such as home 
health agencies and medical suppliers. Patient safety, quality 
improvement, privacy protection, interpreters for non-English-speaking 
patients and a host of other well-intentioned requirements also are 
pushing medical practice costs ever upward.
    The costs associated with PLI insurance premiums and the 
continually increasing amount of government-imposed regulatory 
requirements are not properly reflected in the Medicare payment update 
for physicians' services.
            flawed medicare physician payment update formula
    Medicare payments to physicians are annually adjusted through use 
of a ``payment update formula'' that is based on the SGR and the MEI. 
As discussed above, this formula has a number of critical flaws that 
create inaccurate and inappropriate payment updates that do not reflect 
the actual costs of providing medical services to Medicare patients.
Flaws In The Sustainable Growth Rate System
    Under the SGR system, CMS annually establishes allowed expenditures 
for physicians' services based on a number of factors set forth in the 
law. CMS then compares such allowed expenditures to actual 
expenditures. If actual expenditures exceed allowed expenditures, then 
Medicare payment updates may be reduced by as much as 7 percent below 
the MEI. Conversely, if allowed expenditures are less than actual 
expenditures, payment updates may increase up to 3 percent above the 
MEI.
    Allowed expenditures under the SGR system are intended to be based 
on changes in expenditures for physicians' services due to changes in 
(i) inflation, (ii) fee-for-service enrollment, (iii) gross domestic 
product (GDP), and (iv) laws and regulations. It is a highly 
unpredictable and unstable system that has a number of critical flaws:
    GDP Does Not Measure Health Care Needs: The SGR system permits 
beneficiary Medicare spending for physicians' services to increase by 
only as much as real per capita GDP growth--a measure of the business 
cycle that bears no relationship to the health needs of Medicare 
beneficiaries. Indeed, incidence of disease does not track the business 
cycle.
    Specifically, GDP does not take into account health status, the 
aging of the Medicare population, the costs of technological 
innovations or the escalating costs of medical practice. Thus, the link 
between medical care utilization and GDP growth under the SGR system 
creates a terribly flawed system as well as seriously deficient public 
policy. For example, unlike any other segment of the health care 
industry, physicians are being penalized with a steep Medicare cut this 
year largely because the economy has slowed, and, as discussed above, 
if the economy remains slow, an additional cut is likely in 2003. Yet, 
despite the economy, the health needs of patients continue and the use 
of new medical services increases.
    SGR Requires Unreliable Economic Forecasts: The SGR is based on 
factors, such as GDP or enrollment changes, that require CMS to make 
economic forecasts that almost always turn out to be erroneous. Thus, 
it is impossible to make accurate projections about future payment 
updates. When the resource cost-based physician payment system was 
first enacted in 1989, its major advantage was intended to be its 
stability and predictability over time. It is apparent, however, that 
the update formula has exactly the opposite effect; it creates payment 
updates that are unpredictable and subject to sharp swings as economic 
circumstances, beyond physicians' control, change. Perhaps most 
disturbing is that because of the lack of predictability, severe 
payment cuts may be imposed without any warning or opportunity for 
action by Congress.
    In March 2001, for example, CMS predicted that the Medicare payment 
update for 2002 would be a 1.8 percent increase. Tens days later, CMS 
reversed this prediction and stated that the 2002 update would likely 
be a 0.1 percent decrease. Finally, not until November, only eight 
weeks before the effective date of the 2002 update and with only a few 
weeks left in the Congressional session, CMS announced that the 2002 
physician payment update would be a 5.4 percent cut.
    As MedPAC has recognized, it has become clear that the current 
physician payment update system simply is bad public policy and should 
be replaced.
    Erroneous SGR Projections: In annually calculating the SGR, as 
discussed above, CMS has repeatedly underestimated or even ignored 
certain critical data. Erroneous CMS estimates of GDP growth and 
enrollment changes in 1998 and 1999 have shortchanged physicians by $20 
billion to date. (See attached Chart 2, CMS Errors in SGR: Impact on 
Funding for Physician Services.) CMS projected, for example, that 
Medicare+Choice enrollment would rise 29 percent in 1999, despite the 
many HMOs abandoning Medicare in 1999. This error led, in turn, to a 
projected drop in fee-for-service enrollment and a negative 1999 SGR. 
Accurate data later showed that managed care enrollment increased only 
11 percent in 1999, a fraction of CMS' projection and a difference of 
about 1 million beneficiaries.
    Nevertheless, based on this erroneous estimate, each year since 
1999, when CMS has calculated the total amount of expenditures that it 
is allowed to spend on physicians' services, the agency has not taken 
into account the cost of treating these 1 million patients. Since the 
SGR is a cumulative system, every year physicians are continuing to 
treat 1 million patients for whom the costs of their care are 
disallowed under the SGR system.
    CMS acknowledged its erroneous 1998 and 1999 SGR estimates at that 
time, but concluded it did not have the authority under the law to 
correct its erroneous projections. We disagreed, and were further 
perplexed by CMS' announcement in the 2002 final rule that it does have 
the legal authority to change 1998 and 1999 SGR projections relating to 
expenditures for certain CPT codes overlooked by the agency. CMS' 
interpretation of the law is highly unusual; it seems to allow the 
agency to make SGR changes only when they result in Medicare payment 
cuts, but not when the same changes would increase payments.
Flawed Productivity Adjustment under the Medicare Economic Index
    In the early 1970s, pursuant to congressional directive, CMS 
developed the MEI to measure increases in physician practice costs. A 
key component of the MEI has been a ``productivity adjustment,''' which 
offsets practice cost increases. Over the last eleven years, CMS 
estimates of productivity gains with respect to physicians have reduced 
annual increases in the MEI by 27 percent. Such estimates contrast with 
MedPAC estimates of the degree to which productivity gains offset 
hospitals' cost increases. In fact, in 2001, MedPAC's estimate for 
hospitals was -0.5 percent, while CMS' estimate for physicians was 
three times higher than MedPAC's. It is highly improbable that 
physician practices, which generally operate as small businesses, could 
achieve such substantial productivity gains in comparison to hospitals, 
which arguably have a much greater opportunity to utilize economies of 
scale.
    We continue to believe that the productivity adjustment in the MEI 
overstates productivity gains in the physician services industry for 
two reasons. First, it is widely recognized that productivity growth in 
service industries is typically lower than that in other types of 
industries. Indeed, productivity data from the Bureau of Labor 
Statistics show productivity growth in the general non-farm economy of 
2 percent per year from 1991 to 2000, compared to 4 percent annual 
productivity growth for manufacturing.
    Second, we believe that productivity growth in physician practices 
is likely to be low in comparison to other service industries due to 
the massive regulatory burden imposed on physicians. As discussed 
above, physician compliance with such matters as evaluation and 
management guidelines and other documentation requirements, workplace 
and patient safety requirements, quality improvement initiatives, 
language interpreter requirements, and certification (medical 
necessity) requirements, places demands on physician and staff time and 
reduces physician productivity. The cost of these regulatory 
requirements is absorbed by physicians with no offset paid by the 
Medicare program. In establishing the annual update for hospitals, 
however, MedPAC includes a category for these costs, and in its 
recommended update for 2000, for example, the Commission included a 0.2 
percent increase to help cover hospitals' Y2K conversion costs. None of 
these government-mandated costs are presently captured in the MEI.
    In recommending a framework for future payment updates, MedPAC is 
advising that the MEI should simply measure inflation in practice costs 
and that productivity should be separately reported. MedPAC further 
recommends that the productivity adjustment be based on multi-factor 
productivity instead of labor productivity, and estimates that this 
would significantly reduce the productivity adjustment that CMS 
currently uses in updating the Medicare fee schedule.
Cost of New Technology Not Taken Into Account
    Unlike most other Medicare payment methodologies, the Medicare 
physician update system does not make any adjustments to accommodate 
new technology, and thus physicians essentially are required to absorb 
much of the cost of technological innovations.
    Congress has demonstrated its interest in fostering advances in 
medical technology and making these advances available to Medicare 
beneficiaries through FDA modernization, increases in the National 
Institutes of Health budget, and efforts to improve Medicare's coverage 
policy decision process. The benefits of these efforts could be 
seriously undermined if physicians face disincentives to invest in 
important medical technologies as a result of reliance on a defective 
expenditure target system. New technologies, including ever-improving 
diagnostic tools such as magnetic resonance imaging, new surgical 
techniques including laparoscopy and other minimally-invasive 
approaches, have significantly contributed to quality of life for 
Medicare beneficiaries. For example, a paper published by the National 
Academy of Sciences indicated that from 1982-1994 the rates of chronic 
disability among the elderly declined 1.5 percent annually.
    Technological change in medicine shows no sign of abating, and the 
physician payment update system should take technology into account to 
assure Medicare beneficiaries continued access to mainstream, state-of-
the art quality medical care.
    All of the foregoing factors contribute to a payment update system 
that does not adequately reflect increases in the costs of practicing 
medicine and is already undermining Medicare patients' access to 
necessary medical services provided by physicians and other health 
professionals.
    Again, we thank the Subcommittee for its continued support of 
legislation to remedy the ongoing problems resulting from the flawed 
Medicare physician payment update.
    We urge the full Committee and Congress to (i) immediately halt the 
5.4 percent Medicare payment cut, and not defer action on this matter 
for consideration as part of a broader package that might face 
significant delay; and (ii) replace the flawed Medicare payment update 
formula with a new system that appropriately reflects increases in 
practice costs, in contrast to the current system, the flaws of which 
are significantly illustrated in attached Chart 1.
    We further ask the full Committee to include in its ``views and 
estimates'' of budgetary and legislative matters submitted to the House 
Budget Committee an appropriate and specific amount of funds that 
should be set aside to replace the Medicare physician payment update 
formula beginning in 2003.
    We appreciate the opportunity to provide our views about Medicare's 
physician payment update formula, and we look forward to working with 
the Subcommittee to quickly reach a satisfactory resolution to this 
critical problem.

    Mr. Bilirakis. Thank you, Doctor.
    Dr. Shuren, Allison Shuren represents the American College 
of Nurse Practitioners.

                STATEMENT OF ALLISON WEBER SHUREN

     Ms. Shuren. Good morning, Mr. Chairman, members of the 
committee. My name is Allison Shuren and as a Nurse 
Practitioner, I'm honored to be here today to testify on behalf 
of the American College of Nurse Practitioners. ACNP thanks the 
committee for giving us this opportunity to share how the 
reimbursement cut and the difficulties with the MEI and SGR 
impact providers other than physicians.
    We also wish to thank the chairman, the members of the 
committee, as well as Chairman Tauzin, Ranking Member Dingell 
for your support of H.R. 3351.
    The Balanced Budget Act of 1997 authorized Nurse 
Practitioners to bill the Medicare program directly and set the 
reimbursement rate at 85 percent of that received by other 
providers. As a result, an additional 5.4 percent reimbursement 
cut impacts NPs particularly hard. From the Nurse Practitioner 
perspective, we start at 15 percent below what is already a low 
payment rate, given that our costs of providing care are 
similar to those of other health care providers who receive 100 
percent of the fee schedule. Now, we're being asked to function 
with 5.4 less reimbursement.
    Furthermore, physicians and Nurse Practitioners who provide 
technical component services for Medicare beneficiaries such as 
diagnostic ultrasounds or EKGs experience an additional 4 to 6 
percent cut in their practice expense reimbursement this year. 
This cut was implemented by CMS without any notice in last 
year's proposed rule.
    If the update factor suffers another 3 percent decrease 
next year, that would leave NPs just 10 months from now 
receiving as much as 23 percent below the level of 
reimbursement other providers received just 2 months ago.
    If we consider the change in the payment for the technical 
component services, that number would rise to 29 percent. What 
profession would not be crippled by such a devastating series 
of losses in such a short period of time.
    Our members do not talk about profits or profitability. 
They talk only of surviving, to fulfill their commitments to 
patient care.
    We have already heard from NPs in at least 23 States, 
stating that the cut is affecting access. NPs are reporting 
that practices are limiting or refusing to accept new Medicare 
beneficiaries. They're laying off staff. They're reducing the 
length of patient visits and they're eliminating ancillary 
services such as vaccinations, EKGs and blood draws.
    Perhaps the best window into what our members are 
experiencing is the following comment from an NP in New York. 
She says, ``Currently, our practice is approximately 65 percent 
Medicare. A 5.4 percent cut will require us to stop accepting 
new Medicare clients. The physician in our practice will be 
cutting his hours and my hours will also be cut as a result. 
Urgent visits usually seen on the same day by the practice will 
become emergency room visits. We're planning on cutting certain 
conveniences already.'' She says she has one couple that she 
brings to mind. The husband is 91. The wife is 82. And just 1 
month ago the wife's hypertension became unstable. This couple 
until now was relatively self-sufficient, now she can't even 
get to her office for follow-up care. How is she possibly going 
to get to a laboratory for blood drawing and to a cardiologist 
to have an EKG. She says these people who lived through the 
Depression, a World War and know how to ration to help on the 
home front, what will we tell them now? Do we just tell them to 
go away?
    This situation has led our members and many others to ask 
us and you why--when 316 co-sponsors support H.R. 3351--this 
bill has not passed. We recognize and sincerely appreciate this 
committee's leadership, but our members are searching for 
definitive action.
    We urge you to please change the MEI to be a forecast that 
reflects cost changes for the coming year and that takes into 
account, among other things, the tremendous increase in 
malpractice premiums being experienced in State after State and 
increased practice operational costs that include new 
technology and expenses associated with compliance of the 
plethora of well-intentioned, although costly, mandates such as 
compliance plans and the HIPAA privacy standards. Furthermore, 
the MEI must take into consideration nonlabor productivity and 
use professional and technical employment cost indicies rather 
than the nonfarmworker index.
    Finally, the SGR mechanism needs to be replaced with a 
mechanism that in some rational manner determines to increase 
or decrease costs associated with providing services. As 
currently structured, the spending target really operates as an 
automatic tax on the physician fee schedule providers that can 
jeopardize the availability of health care to our elderly 
without any benefit of congressional debate nor an opportunity 
for providers, patients and patients' advocates to discuss 
whether this cut or another alternative is more appropriate 
from a policy perspective.
    On behalf of ACNP I thank you again for inviting us to be 
here and we look forward to working with you in the coming 
weeks to fix this issue.
    [The prepared statement of Allison Weber Shuren follows:]
 Prepared Statement of Allison Weber Shuren on Behalf of the American 
                     College of Nurse Practitioners
    Good morning. Chairman Bilirakis, Ranking Member Brown, and Members 
of the Committee, I am Allison Weber Shuren and I am honored to appear 
before you today to present testimony on behalf of the American College 
of Nurse Practitioners or ACNP regarding Medicare payment policy for 
nurse practitioners (``NPs''), physicians and other health care 
professionals. As both a nurse practitioner and a health care 
regulatory attorney, I understand that, as a country, we must find a 
balance between covering the costs of efficient providers of care to 
our elderly and addressing budget limitations. I also appreciate the 
enormity of this task.
    ACNP is a national nonprofit professional society dedicated to 
ensuring consumer access to health care and high quality nurse 
practitioner services through professional education, promotion of 
research, and leadership in health care policy development. One of 
ACNP's highest priorities is to increase access to outcome-driven, 
cost-effective health care by educating policymakers of the benefits of 
an interdisciplinary team approach to the delivery of health care 
services. ACNP considers direct Medicare reimbursement for nurse 
practitioners a key component of this mission, and, as a result, is 
extremely concerned by the 5.4% cut for provider reimbursement under 
the Medicare Part B fee schedule and by the formula used to calculate 
the annual conversion factor update, as we fear that both constitute a 
fundamental threat to access.
    ACNP thanks the Committee for including nurse practitioners in this 
important hearing and for giving us an opportunity to share how the 
reimbursement cut and the difficulties with the Medicare Economic Index 
(``MEI'') and the Sustainable Growth Rate (``SGR'') impact providers 
other than physicians. In addition, ACNP wishes to extend its 
appreciation to the Chairman and the many other members of this 
Committee for the introduction and sponsorship of The Medicare 
Physician Payment Fairness Act, H.R. 3351. This bill, along with the 
passage of the Medicare Regulatory and Contracting Reform Act last 
year, illustrate your commitment to addressing the pressing issues 
regarding health care for Medicare beneficiaries and the health care 
professionals who provide their care.
    Nurse practitioners are registered nurses who are prepared through 
advanced education and clinical training to provide a wide range of 
preventive and acute health care services to individuals of all ages. 
The first nurse practitioners were trained on-the-job in the early 
1960s. Today most nurse practitioners complete graduate level education 
and earn a master's degree. In addition, nurse practitioners who wish 
to obtain a Medicare provider number must be certified by a nationally 
recognized certifying body.
    Nurse practitioners take health histories and provide complete 
physical examinations; diagnose and treat many common acute and chronic 
problems; interpret laboratory results and X-rays, prescribe and manage 
medications and other therapies; provide health teaching and supportive 
counseling with an emphasis on prevention of illness and health 
maintenance; and refer patients to other health care professionals as 
needed. Like our physician colleagues, nurse practitioners may choose 
to specialize in a particular clinical area. For example, there are 
nurse practitioners who specialize in geriatrics, family health, 
pediatrics, cardiology, women's health and critical care.
    Nurse practitioners work in every site of service in which health 
care is delivered, solo practices, small and large group practices, 
medical centers, ambulatory surgery centers, skilled nursing 
facilities, homeless shelters, school-based clinics, and in the 
military, and in every possible geographic location, from the most 
inner city-urban areas, to upper class neighborhoods, to the most rural 
parts of this nation. Our patients range from the poorest, least 
educated individuals in this country to those who might be considered 
the most well-off, most educated members of our communities. According 
to 2001 data from the Health Resources and Services Administration, 
there are more than 88,000 nurse practitioners across the country. 
Nurse Practitioners have often been considered one of the backbones of 
care in underserved areas, willing to provide cost-effective, high 
quality services in rural and urban settings where providers are 
scarce.
    The National Bipartisan Commission on the Future of Medicare 
reports that ``Medicare must be strengthened and improved to handle the 
increased demand of 77 million `Baby Boomers' who will begin entering 
Medicare in the year 2011.'' As the geriatric population grows, we must 
work carefully to protect patient care, the availability of services 
and the quality of those services. This is the prism through which both 
this Committee and provider organizations must view the difficult issue 
of payment policy--to do otherwise is to compromise our respective 
duties to the Medicare beneficiaries. Unfortunately, we fear that we 
are on the brink of failing at this very task.
    The Balanced Budget Act of 1997 authorized nurse practitioners to 
bill the Medicare program directly and set the reimbursement value at 
85% of the physician rate for identical services. As a result, an 
additional 5.4% cut in reimbursement impacts nurse practitioners 
particularly hard. From the nurse practitioner perspective, we started 
15% below what is already a low payment rate given that our costs for 
providing care are similar to those of other health care providers who 
receive 100% of the fee schedule rate, now we are being asked to 
function with an additional 5.4% less in reimbursement. Furthermore, 
physicians and nurse practitioners who provide, or who are part of 
groups that provide, technical component services such as ultrasound 
and other basic diagnostic testing for their Medicare beneficiaries, 
experienced an additional 4 to 6 percent cut in practice expense 
reimbursement associated with these services this year. This cut was 
implemented by CMS without any notice in last year's proposed rule, and 
became apparent only after health care providers around the country 
began to calculate payment rates based on the Final Fee Schedule 
published November 1, 2001. Given the instability of the update factor 
and the practice expense formula, nurse practitioners cannot help but 
fear additional cuts next year unless these problems are addressed. If 
the update factor suffers another 3% decrease next year that would 
leave us, just 10 months from now, receiving as much as 23% below the 
level of reimbursement that other providers received just two months 
ago. If we consider the change in payment for technical component 
services that number could rise to 29%. What profession, trade, or 
industry would not be crippled by such a devastating series of losses 
in such a short period of time?
    The unstable nature of reimbursement has left our members scared--
scared for their patients, scared for their families, scared for the 
future of health care. Our members don't talk about net profits and 
profitability, instead they talk of surviving to fulfill their personal 
and professional commitments to patient care. Though the 5.4% cut is 
obviously a very recent change, our members report that it is already 
affecting access, and the willingness or ability to invest in 
additional personnel, equipment, and other inputs. We have heard 
repeatedly of practices that will stop offering vaccines, other 
injections, and blood drawing services as they simply can no longer 
afford to do so.
    We have received ACNP member input on the 5.4% cut and the comments 
show a disturbing and consistent trend of threats to access. Here are 
some examples: ``[w]e turn away Medicare patients every day,'' ``[w]e 
will consider restricting our Medicare influx to handle costs,'' and 
``[w]e reached our quota [of Medicare beneficiaries].'' A nurse 
practitioner from Texas stated that ``NPs and physicians in our area 
already do not see Medicare patients due to poor reimbursement and tons 
of reg[ulations] and paperwork. This will not encourage taking those 
patients who need care.'' Similarly, an NP from Minnesota told us that 
``[t]here will be practices closing or limiting services due to these 
cuts.'' An NP from California advised us that the clinic where she 
works is experiencing an influx of Medicare beneficiaries who are being 
turned away by other practitioners. We have also been informed that 
many practices are being forced to reduce the time they spend with 
patients in order to increase the volume of patients treated each day. 
Finally, there appears to be considerable concern that the commercial 
insurance/HMO community will follow Medicare's lead regarding 
reimbursement, possibly creating comparable challenges for all 
patients.
    Perhaps the best window into what our members are thinking and 
feeling is the comment on this issue shared by an NP in New York who 
told us the following--I note that some of what this practitioner who 
is struggling on the front lines articulates is a reflection of the 
frustration that so many feel. It is hard to hear, but it is important 
that we all listen:
          ``A 5.4% cut in reimbursement will devastate the care 
        received by the neediest segments of our society. Currently, 
        our practice is approximately 65% Medicare. A [sic] 5.4% cut 
        will require us to stop accepting new Medicare clients . . . 
        the physician in our practice will be cutting office hours, 
        [and] . . . [m]y hours will also be cut as a result . . . 
        Urgent visits, usually seen on the same day will become 
        Emergency Room visits as patients will be advised to seek care 
        in an ER. We are planning on cutting certain conveniences 
        already. For example, we attempt to provide one stop shopping 
        by doing our own labs and EKGs. We will now require patients to 
        go to a laboratory, and for EKGs we will send the patients to a 
        Cardiologist . . . I have one couple in particular. The husband 
        is 91, the wife is 82 . . . Just one month ago, her 
        hypertension was complicated with new onset atrial 
        fibrillation. This wonderful couple who up until now was 
        relatively self sufficient cannot even get here--how will she 
        get to the lab for her blood draws? How will she get to a 
        Cardiologist? . . . I am beginning to feel as though the 
        government would really prefer that these people just curl up 
        and die. It is certainly less costly than actually taking care 
        of them. If I sound frustrated, I am. These are the people who 
        lived through a depression, a World War (sometimes more than 
        one), know the meaning of rationing to help on the home front, 
        and what do we do when they are no longer ``productive members 
        of society''? We tell them to go away.''
    The situation has led our members to ask us, and you, their 
representatives in Congress some tough questions. If we as a society 
and as a government really value access to and the quality of the 
services that our elderly and disabled receive, is that commitment 
borne out by our actions? Why, when there are 312 cosponsors in support 
of H.R. 3351, has Congress not passed this bill? We know that this 
Committee has supplied tremendous leadership on this issue. We thank 
the Committee for that leadership, but our members are searching for 
definitive action. None of us want our commitment to the health of 
Medicare beneficiaries not adequately realized in policy and in fact.
    Our members have also asked why, when this Committee and its 
exceptional staff were able to articulate steps that CMS could have 
taken to offset some of the devastating effect of the current formulae, 
such as using a professional/technical employment cost index rather 
than the all non-farm worker index, did CMS fail to adopt that simple 
solution to this problem. We appreciate the reference in the Senate 
Finance Report to the use of a ``general earnings index,'' but the 
report did not say to use ``the most'' general index. This kind of 
rigidity strikes our members as failing to appreciate the need for a 
solution to a very real problem. It also seems to invite Congressional 
intervention.
    There appears to be some broad support for a number of steps 
Congress can take to address the existing situation prospectively.

 The MEI must be refined to include non-labor productivity as a 
        factor.
 The MEI must also be adjusted to be a forecast that reflects 
        cost changes for the coming year and take into account, among 
        other things, the tremendous increases in malpractice premiums 
        being experienced in state after state, increased practice 
        operational costs, and the expenses associated with developing, 
        implementing and maintaining compliance programs and the new 
        HIPAA Privacy Standards. When the government imposes additional 
        burdens on providers, the MEI must reflect the real cost of 
        complying with those burdens.
 Incorrect estimates from previous years need to be corrected--
        the current situation permits such arbitrary and capricious 
        results as to taint the system and undermine basic confidence 
        in the Medicare program.
 Finally, the automatic spending target mechanism needs to be 
        removed and replaced with a mechanism whose focus is to, in 
        some rationale manner, determine the increased or decreased 
        costs associated with providing services. As currently 
        structured, the spending target operates as an automatic tax on 
        physician fee schedule providers that can jeopardize the 
        availability of health care to our elderly without any benefit 
        of Congressional debate, nor an opportunity for providers, 
        patients, and patient advocates to discuss whether such a cut 
        or other alternatives are appropriate from a policy 
        perspective. Why are health care professionals automatically 
        singled out to bear a disproportionate burden of a diminished 
        Gross Domestic Product? We have no problem with health care 
        providers sharing in the burden to balance federal expenditures 
        in tough budget times, but we should have the opportunity at 
        those moments to engage with Congress and the public regarding 
        alternatives to such cuts, and the pertinent policy issues 
        driving the perceived need to decrease Medicare payment rates--
        particularly, where the cut is so devastating as to risk the 
        ability of the program to protect the very individuals it was 
        designed to assist.
    Given the support that has emerged for enacting at least these 
three modifications to the conversion factor update methodology, ACNP 
members are looking to this Committee to use its commendable leadership 
around this issue to implement such changes as soon as possible. Our 
members are counting on you as their representatives to fix a system 
that clearly seems broken at this point.
    On behalf of ACNP, I thank you again for the opportunity to be here 
this morning. ACNP looks forward to working with you in the coming 
weeks to help resolve the update issue as well as the many other 
significant health care issues we all face this session.

    Mr. Bilirakis. Thank you very much.
    Dr. Thomas R. Russell is Executive Director of the American 
College of Surgeons. Welcome, Dr. Russell, please proceed, sir.

                 STATEMENT OF THOMAS R. RUSSELL

    Mr. Russell. Thank you, Mr. Chairman, and members of the 
committee. My name is Tom Russell and I'm the Executive 
Director of the American College of Surgeons. To put it very 
briefly, I would simply like to say that the College urges 
prompt action on H.R. 3351, the Medicare Physician Payment 
Fairness Act, and an adoption of the framework MedPAC is 
recommending to address serious problems in the fee schedule 
update mechanism.
    We agree with the Commission's conclusion that the current 
update system is seriously flawed and must be reformed. The 5.4 
percent Medicare payment reduction in 2002 is the fourth 
across-the-board decrease in the last 10 years. Since 1991, 
Medicare payments to physicians have increased an average of 
1.1 percent per year while physician practice costs over the 
same period rose more than twice that amount.
    In addition, premiums for medical liability insurance are 
skyrocketing, up to 200 percent in certain States such as 
Pennsylvania and West Virginia. In my written statement, Mr. 
Chairman, I have some charts showing the history of Medicare 
payments over time for certain key surgical procedures, 
coronary artery bypass, cataract surgery, etcetera. These 
charts show the magnitude of the cuts that have occurred since 
1989 and what payments would have been if they had been allowed 
to keep pace with inflation. Payment for surgical services 
would, in fact, be considerably higher today if Congress had 
decided back then to simply freeze them for the next 12 years.
    One of the greatest achievements of the Medicare program is 
the access to high quality care it has brought to our nation's 
seniors and that's what this is all about, not so much payment 
reimbursement for physicians, but for our beneficiaries. We 
cannot expect this to continue uninterrupted, however, in the 
face of repeated steep pay reductions.
    The gap between physician payment and physician costs is 
leading to reported access problems throughout this country. 
Two years ago I stopped doing surgery and I have in my new 
position traveled extensively around the United States visiting 
surgeons in academic medical centers, in large urban centers 
and in rural areas. I can tell you that the morale of the 
providers of health care is abysmally low at this point. Many 
of them are limiting their range of services to the elderly, 
limiting the number of Medicare patients they will see and 
opting out of the program on occasion completely.
    Particularly, there are stressed areas of the country, such 
as Pennsylvania, which is driving physicians out of the area 
because of the cost of liability insurance. One of the most 
disturbing things that we've seen and Dr. Ganske alluded to 
this earlier, is the lack of people interested in a career in 
surgery, what I always call the joy of a surgical career, 
because nothing is any better. But young physicians today 
realize when they hear from the practicing physicians how 
really difficult it is, the hassle of practice, the cost of 
liability, the increased cost of running an office and of 
course, the reimbursement issues.
    I cannot overemphasize the seriousness of the situation 
from a provider aspect. This cut in the 2000 fee, the pattern 
of reductions of the last several years, escalating practice 
costs and the projected future decreases combine to create a 
truly urgent problem.
    Despite assurances from other sources, we believe that 
there is a real cause to be concerned about access to care. The 
data may not be there, but I can tell you I'm in the trenches 
going around this country and I may not have the data, but 
there's a problem. I cannot stress enough the importance of 
this issue. For any problems that are created cannot be solved 
simply by passing a new omnibus spending bill. It takes a long 
time to train a surgeon. They're often in debt over $100,000 
and they're about 35 years of age when they finish a training 
program in surgery and the new practice patterns that the 
system is forcing them to adopt are really going to be 
difficult.
    Thank you again, Mr. Chairman, and members of this 
committee for the opportunity to give our comments on this very 
pressing issue.
    [The prepared statement of Thomas R. Russell follows:]
   Prepared Statement of Thomas R. Russell on Behalf of the American 
                          College of Surgeons
    Mr. Chairman and Members of the Committee, I am Tom Russell, 
Executive Director of the American College of Surgeons. I am pleased to 
appear here today on behalf of the College's 62,000 Fellows to present 
our comments and recommendations about problems in the annual update 
mechanism of the Medicare physician fee schedule. I also will be 
commenting on the recommendations of the Medicare Payment Advisory 
Commission (MedPAC).
    First of all, I want to mention that the issue before you today 
affects all medical and surgical specialties and all Medicare patients. 
In an effort to develop a effective solution, the College is working 
closely with members of Congress and with other physician 
organizations, including the American Medical Association and the 
Coalition for Fair Medicare Payment--a group of medical and surgical 
societies that includes those who have been hit hardest by Medicare 
payment reductions over the course of many years.
    I come before you today urging prompt action on HR 3351, the 
Medicare Physician Payment Fairness Act, and adoption of the framework 
MedPAC is expected to recommend in its upcoming report to address 
serious problems in the Medicare physician fee schedule update 
mechanism. I strongly concur with the Commission's conclusion that 
statutory provisions specifying the physician fee schedule update are 
seriously flawed and must be reformed immediately.
    For 2002, the law produced a large negative adjustment in physician 
reimbursement--minus 5.4 percent--and government projections for the 
next few years indicate further significant cuts in Medicare physician 
payments. The reduction in 2002 is the fourth across-the-board decrease 
in Medicare payment rates for physician services over the last 10 
years. Since 1991, Medicare payments to physicians have increased an 
average of 1.1 percent per year, while over the same period physicians' 
practice costs rose more than twice that amount. In addition, premiums 
for medical liability insurance are skyrocketing. Physicians in some 
specialties report liability premium rate increases of more than 200 
percent.
    One of the greatest achievements of the Medicare program is the 
access to high quality care it has brought to our nation's seniors. 
This level of access, however, cannot be expected to continue 
uninterrupted in the face of continued reductions in payments to 
physicians and other health professionals whose reimbursement is based 
on the Medicare fee schedule. The gap between physician payment and 
physician costs has already led to press reports of access problems for 
Medicare beneficiaries throughout the country.
    The impact of the flawed update methodology and the negative update 
for 2002 must be viewed in the context of the significant Medicare 
payment reductions for surgical services that have occurred since 
implementation of the Medicare fee schedule. The Omnibus Budget 
Reconciliation Act of 1989 changed the payment methodology for 
physicians' services from a charge-based system to a resource-based 
system with three service components: work, practice expenses, and 
malpractice. The fee schedule was implemented in 1992 with a three-year 
transition, and in 1999 the four-year transition to resource-based 
practice expenses began. Resource-based malpractice relative values 
were incorporated into the fee schedule in 2000. This year marks the 
end of the transition to a fully resource-based system.
    Payments for surgical services have fallen substantially since 
inception of the fee schedule and they have suffered especially large 
decreases since passage of the Balanced Budget Act of 1997. The 
Medicare conversion factor applicable to surgical services decreased 
from $40.96 in 1997 to $36.20 in 2002, a reduction of almost 12 
percent.1 In addition to the conversion factor reduction, 
which dropped more for surgical services than for other physician 
services, the adoption of new relative values for the practice expense 
portion of the fee schedule cut payment rates for surgical services 
significantly. I would like to share some examples of how severe these 
decreases have been.
---------------------------------------------------------------------------
    \1\ In 1997, a separate conversion factor applied to surgical 
services. The Balanced Budget Act moved all services to a single 
conversion factor beginning in 1998.
---------------------------------------------------------------------------
    I am submitting for the record a table that illustrates the 
dramatic reductions in payments for surgical services by comparing 1989 
average payments for commonly performed procedures to the 2002 fee 
schedule amounts. For all these procedures, the fee schedule rate 
decreased by 7 percent or more; for 10 of these procedures, payments 
decreased by 10 percent or more; and for 9 of the 12--three-quarters of 
them--payments were reduced by more than 20 percent. There are four 
procedures on this chart with 2002 payments that are half what they 
were in 1989.

      Medicare Payment History for Representative Surgical Services
                            National Averages
------------------------------------------------------------------------
                                                             % Change 89-
           DESCRIPTION                 1989         2002          02
------------------------------------------------------------------------
Removal of breast................       $1,051         $961          -8%
Total hip replacement............       $2,427       $1,452         -40%
Total knee replacement...........       $2,301       $1,514         -34%
CABG, vein, three................       $3,957       $1,888         -52%
Rechannel carotid artery.........       $1,677       $1,061         -37%
Partial removal of colon.........       $1,256       $1,171          -7%
Diagnostic colonoscopy...........         $425         $205         -52%
Repair inguinal hernia...........         $560         $448         -20%
Prostatectomy (TURP).............       $1,139         $770         -32%
Total hysterectomy...............         $991         $893         -10%
Removal of spinal lamina.........       $2,078       $1,036         -50%
Remove cataract, insert lens.....       $1,573         $669         -57%
------------------------------------------------------------------------

    Obviously, physician payment rates for surgical services would be 
higher today if they had been frozen in 1989 for the next 12 years--a 
policy Congress certainly would not have enacted.
    As dramatic as the reductions are, they are much worse after 
considering the effect of price inflation. There are two principal 
measures of inflation that could be used to gauge whether physician 
payments are keeping pace with price changes: the consumer price index 
for U.S. cities (CPI-U) and the Medicare economic index (MEI). 
Comparing actual reimbursements to those that would be in place if 
updates were based on the MEI show that payments would have been 36 
percent higher in 2002 than they were in 1989; using CPI-U they would 
have been 46 percent higher.
    I am submitting for the record another table that compares actual 
2002 payments to projected payments based on updates of the 1989 
amounts using either the MEI or the CPI-U as the measure of inflation. 
The size of the payment reductions are so large that it can not be 
surprising that many skilled surgeons are considering early retirement 
while others are discouraging talented young men and women from 
pursuing surgical careers.

  Comparison of Actual 2002 payments to Projected Medicare Payments Based on Annual MEI or CPI-U Updates of the
                                              1989 Average Payments
----------------------------------------------------------------------------------------------------------------
                                                                              CPI-U
                  DESCRIPTION                    2002 Actual   MEI Update     Update     % Decrease   % Decrease
                                                   Payment      Payment      Payment      from MEI    from CPI-U
----------------------------------------------------------------------------------------------------------------
Removal of breast..............................         $961       $1,430       $1,528         -49%         -59%
Total hip replacement..........................       $1,452       $3,303       $3,497        -121%        -141%
Total knee replacement.........................       $1,514       $3,132       $3,316        -107%        -119%
CABG, vein, three..............................       $1,888       $5,386       $5,702        -185%        -202%
Rechannel carotid artery.......................       $1,061       $2,283       $2,417        -115%        -128%
Partial removal of colon.......................       $1,171       $1,710       $1,810         -46%         -55%
Diagnostic colonoscopy.........................         $205         $579         $613        -182%        -198%
Repair inguinal hernia.........................         $448         $762         $807         -70%         -80%
Prostatectomy (TURP)...........................         $770       $1,550       $1,641        -101%        -113%
Total hysterectomy.............................         $893       $1,349       $1,428         -51%         -60%
Removal of spinal lamina.......................       $1,037       $2,828       $2,994        -173%        -189%
Remove cataract, insert lens...................         $669       $2,141       $2,267        -220%        -239%
----------------------------------------------------------------------------------------------------------------

    I cannot over-emphasize the seriousness of this situation. The 5.4 
percent fee cut in 2002, the pattern of reductions over the last 
several years, escalating practice costs, and the projection of future 
decreases combine to create an urgent problem.
    Many factors contribute to the flawed update mechanism, but none is 
as important as the Sustainable Growth Rate (SGR). Legislated in 1997 
as part of the Balanced Budget Act, the SGR is used to set a target for 
aggregate Medicare expenditures under the fee schedule.\2\ If actual 
spending for physician services exceeds the applicable target, 
physicians are penalized by having the MEI update reduced; if spending 
remains below the target, they are rewarded with a full inflation 
update plus a ``bonus'' percentage. The SGR provision was amended by 
the Balanced Budget Refinement Act of 1999 (BBRA) to correct some 
technical deficiencies, but the SGR remains a seriously flawed and 
misguided policy, with negative consequences for the adequacy of 
physician payment rates. The dominant factor driving the 5.4 percent 
reduction in physician reimbursement this year is the SGR update 
adjustment factor, which caused a 7.0 percentage point reduction. If 
physician payments had been updated by the MEI alone, rates would have 
increased 2.6 percent.\3\
---------------------------------------------------------------------------
    \2\ The SGR formula is based on the government's estimate of the 
change in each of four factors: the estimated change in payments for 
physicians' services; the estimated change in the average number of 
Medicare fee-for-service beneficiaries; the estimated projected growth 
in real GDP per capita; and the estimated change in expenditures due to 
changes in law or regulations.
    \3\ The fee schedule conversion factor fell 5.4% for CY 2002. Of 
the total reduction, 4.8% is due to the update adjustment percentage 
and the remaining 0.6% derives from the budget neutrality adjustments 
for the 5-year review and the final transition to resource-based 
practice expense. The -4.8% update is the combined effect of the MEI 
(2.6%, or 1.026), the SGR performance adjustment (-7.0%, or 0.93), and 
an additional 0.2% reduction (or, 0.998) required by the technical 
amendments to the SGR made by the BBRA.
---------------------------------------------------------------------------
    The College is concerned that the current SGR growth limits are so 
stringent that they could affect Medicare beneficiaries' access to care 
both today and in the future as young men and women choose careers 
other than surgery. They also could have a chilling effect on the 
adoption of technological and clinical innovations in medical practice. 
Many organizations, including the Association of American Medical 
Colleges, the American Medical Association, and the national medical 
specialty societies comprising the Coalition for Fair Medicare Payment 
share this view. In addition, the Medicare Payment Advisory Commission 
(MedPAC) has identified serious problems in the SGR system and 
recommends replacing it with a totally different system. Improving the 
SGR is important to ensure that the 85 percent of Medicare 
beneficiaries enrolled in fee-for-service Medicare continue to receive 
the benefits to which they are entitled.
                         problems with the sgr
    Before I discuss our recommendations, I would like to note a few of 
the most salient problems with the SGR.
The SGR sets an arbitrary target ceiling on physician spending 
        unrelated to beneficiaries' need for physician services. 
        Consequently, it does not ensure beneficiary access to high 
        quality physician services.
    To preserve access, Medicare payments should reflect the costs that 
efficient providers incur in providing services. Medicare's other 
payment systems are adjusted annually using an update framework that 
accounts for changes in the cost of providing services, including 
changes in practice patterns, the intensity of services, and service 
mix. No other component of Medicare is subject to an overall limit on 
spending. Even worse, the annual increase in the physician spending 
target is strictly limited by the rate of GDP growth. If the economy 
falters, as it has, the physician spending target drops. This approach 
completely fails to assure that payments keep pace with the needs of 
Medicare beneficiaries and the cost of providing care. Beneficiaries do 
not need fewer services when the economy slumps
The SGR is highly volatile and unpredictable.
    In a letter to MedPAC and in data made public on its website in 
March 2001, the Centers for Medicare & Medicaid Services (CMS) 
estimated that the SGR adjustment factor for the CY 2002 update would 
be -1.5 percent. That is, the update percentage would be the MEI minus 
1.5. The actual adjustment factor for 2002, published just eight months 
later in the November 2001 final rule, was -7.0 percent. The most 
volatile component of the SGR is projected GDP growth. The cumulative 
SGR fell 4.0 percentage points from November 2000 to November 2001 due 
to the slumping economy and lower forecasts of GDP.
The SGR ignores many factors that affect physician services.
    Many factors influence the level of physician services provided to 
Medicare beneficiaries. The price of practice inputs like staff, 
building costs, equipment, and supplies; malpractice insurance 
premiums; productivity; new technology; aging of the Medicare 
population; site-of-service shifts; intensity of services provided in 
physician offices; preferences and needs of beneficiaries; and 
physician practice patterns all affect the cost of delivering physician 
services. Because the SGR only attempts to account for the first two 
factors--prices and productivity--it is an inadequate predictor of the 
appropriate level of physician spending.
The SGR is a crude attempt to control spending arbitrarily. Better 
        strategies are available that would not threaten beneficiary 
        access to services.
    Adjusting the physician update for a current period based on total 
physician spending in a past period compared to an arbitrary and 
inappropriate spending target is a crude and ineffective policy 
instrument. It can lead to fee schedule updates that may appear 
inappropriately high, as occurred in a couple of years, or updates that 
bear very substantial reductions, as for 2002. If growth in the volume 
and intensity of physician services were to re-emerge as a Medicare 
policy issue, MedPAC's March 2001 Report to Congress identifies several 
strategies that could be used. For example:

 working to achieve appropriate use of services through 
        outcomes and effectiveness research;
 disseminating tools for applying this research, such as 
        practice guidelines; and
 developing evidence-based measures to assess the extent to 
        which knowledge is being applied.
                            recommendations
    To address the many problems caused by the SGR and the fee schedule 
update mechanism, the College urges the Committee to approve 
legislative changes in several areas. We believe HR 3351 is an 
important first step and its enactment is our first recommendation.
Recommendation 1--Enact HR 3351 to limit the CY 2002 reduction in the 
        fee schedule conversion factor to 0.9 percent.
    HR 3351, introduced by Congressman Bilirakis, would limit the 2002 
fee schedule cut to 0.9 percent. We are extremely pleased that the 
legislation now has 321 cosponsors and we hope this Committee can act 
quickly to move it now rather than waiting for a larger Medicare bill 
later in the legislative session. The need for action is urgent. 
Although the CY 2002 conversion factor took effect January 1, 2002, the 
legislation could be enacted with a prospective effective date as early 
as April 1, 2002.
    HR 3351 also would require MedPAC to ``conduct a study on replacing 
or modifying the sustainable growth rate . . . as a factor in 
determining the update for payments under the Medicare physician fee 
schedule . . . such that the factor used more fully accounts for 
changes in the unit costs of providing physicians' services.'' MedPAC 
would be required to submit a report to Congress on the study together 
with any recommendations for legislation and administrative action. The 
College is pleased that MedPAC's March 2002 report to Congress will 
include recommendations to fix the SGR problem. We believe that the 
Commission's imminent report satisfies the study requirement in HR 3351 
and that Congress can proceed immediately to make the necessary 
legislative changes.
    Finally, we strongly support the technical clarification in HR 3351 
that the additional expenditures made in CY 2002 due to the higher 
update would not be considered in any year in calculating subsequent 
physician fees; that is, they would not be built into the base for any 
purpose. This is a significant protection to include while the Congress 
considers and legislates a lasting solution.
Recommendation 2--Eliminate the SGR update methodology and replace it 
        with an annual update based on factors influencing physicians' 
        costs of efficiently providing patient services. The update 
        formula would not include any performance adjustment factor 
        based on an expenditure target.
    This recommendation closely follows those made by MedPAC in its 
March 2001 Report to Congress, as well as those that are anticipated in 
its March 2002 report. Like MedPAC, the College believes the physician 
update should be based exclusively on Medicare beneficiaries' need for 
services and the cost of providing those services. Access to physician 
services under Medicare and payment for those services should not be 
limited, or even threatened to be limited, in any manner that could 
impede beneficiary access to the high quality care that the program has 
made possible for 36 years. Physician services provide the core of all 
patient care. They are essential for achieving quality care and, in 
addition, we believe they are the most cost-effective of all services 
included in the Medicare program.
    Under this College recommendation, MedPAC and the Secretary would 
establish an update framework similar to those used for other Medicare 
services. In addition to changes in input prices (as measured by the 
MEI), the framework would include components to reflect changes in all 
other factors affecting the cost of delivering physician services. 
These other factors include changes in the volume and intensity of 
physician services due to new technology, site of service shifts, and 
practice patterns, among others. Physician updates would be based 
solely on beneficiary needs and the cost of providing physician 
services.
    Under this recommendation, the SGR is repealed and it is not 
replaced with any expenditure target or similar adjustment mechanism. 
The expenditure target concept is a badly flawed policy. It is time to 
scrap it entirely.
    The College is very concerned about reports about the cost of 
repealing the SGR. We acknowledge that the cost may be substantial, but 
we do not believe it is nearly as much as some have suggested, unless 
the budget baseline assumptions are out of touch with reality. While we 
do not have an estimate of the proposal's cost, we note that if 
physician fees were increased by 2.0 percentage points each year over 
the next five years, Medicare physician spending would be about $12.7 
billion higher over the five years. If this continued for another 5 
years, total spending over the 10-year period would increase about $55 
billion. We also observe that if physician fees were frozen at their 
current level and given no MEI increase over the next 10 years, the 
savings would be about $53 billion. (The MEI is projected to average 
about 1.8 percent over the 10-year period.) In comparison to a savings 
estimate for a rate freeze, the projected price tags we have heard for 
eliminating the SGR suggests that the current payment system is 
expected to reduce physician spending by considerably more than a 
freeze--an outcome that is extremely troubling given the pressures 
facing the program today. Of course, estimates of the proposal's cost 
are driven by the baseline assumptions and projections made by the 
Congressional Budget Office (CBO) and CMS's Office of the Actuary. We 
think members of Congress should question a physician spending baseline 
that assumes physicians' payments will be reduced by an amount that is 
so much larger than the reductions that would occur under a rate 
freeze.
    The College is committed to working with this Committee and others 
to eliminate the SGR and replace it with an update framework like those 
used for other Medicare updates. We do not believe that unrealistic 
cost estimates should block action on this urgent problem.
          changes needed in the medicare economic index (mei)
    The College also urges Congress to direct the Secretary of Health 
and Human Services to make needed changes in the MEI. This index is 
important because it is the basis for the annual inflation updates to 
the physician fee schedule. Over the last several years, we have shared 
our MEI concerns with the agency in commenting on proposed regulations 
and in other communications, but the problems persist. We do not 
believe that the MEI as currently structured provides an appropriate 
measure on which to base annual adjustments to the physician fee 
schedule.
    The MEI continues to have essentially the same structure that it 
has had since its inception in 1972. Today, however, the Medicare 
program pays for physician services in a completely different way than 
it did in 1972. At that time, physicians were paid their reasonable 
charges, and the MEI was employed to limit the portion of the annual 
increases in charges that Medicare would recognize in its 
reimbursement. The portion of charges not recognized by Medicare was 
owed by the beneficiary. In contrast, physicians are now paid based on 
a government-set fee schedule, and--importantly--physicians face strict 
limits on the amount that can be balance-billed to the beneficiary. The 
College strongly believes that CMS should re-examine the structure of 
the MEI and not continue to make only minor changes in an index that 
was developed 30 years ago under a very different set of payment rules. 
At a minimum, we urge two changes.
Recommendation 3--The price proxy for the physician earnings component 
        of the MEI should be the employment cost index (ECI) for 
        professional workers, not the average hourly earnings (AHE) for 
        total non-farm workers.
    The component of the MEI designed to track changes in the cost of 
the physician work component of the fee schedule uses the average 
hourly earnings of all non-farm workers rather than the more 
appropriate category of all professional workers. To support its 
position in its proposed regulations, CMS cites Committee report 
language from 1972. The report language states that ``it is necessary 
to move in the direction of an approach to reasonable charge 
reimbursement that ties recognition of fee increases to appropriate 
economic indexes so that the program will not merely recognize whatever 
increases in charges are established in a locality.'' And, ``. . . 
Initially, the Secretary would be expected to base the proposed 
economic indexes on presently available information on changes in 
expenses of practice and general earnings levels.'' CMS also states its 
own conclusion that ``there is an obvious concern about circularity if 
increases in prevailing charges are linked to increases in physician 
charges, which are then tied to increases in physician income.''
    The College strongly disagrees with the CMS position and emphasizes 
two points: (1) the Committee's concern about charge-based 
reimbursement is not relevant since implementation of the resource-
based fee schedule; and (2) an index based on the earnings of all 
professional workers would have been sufficient to address the 
Committee's concern because physicians comprise a small portion of all 
professional workers. Physicians represent less than 3 percent of all 
professional workers in the economy, so the circularity point appears 
extremely weak. The College also notes that, in contrast, a significant 
portion of the hospital market basket, which is used as the basis for 
the annual update in the inpatient prospective payment system (PPS) 
rates, derives from the actual wages and salaries of civilian hospital 
workers. If there is any case to be made regarding circularity, this 
would seem to be the prime candidate.
    The College believes it would be much more appropriate for Medicare 
to use the rate of growth in incomes of all professional workers as the 
basis for adjusting payments to physicians, rather than using an index 
based on all non-farm workers in the economy. According to CMS, basing 
the physician earnings portion of the MEI on increases in the incomes 
of all professional and technical workers would have produced an 
average annual MEI of 2.4 percent for the period 1992-1997, compared to 
an average 2.2 percent under the all-worker proxy used by HCFA. The 
College strongly urges the Committee to direct CMS to make this long 
overdue change effective January 1, 2003.
Recommendation 4--The non-physician employee compensation component of 
        the MEI should be adjusted using a price proxy that reflects 
        the increase in skill mix in physicians' offices.
    Although CMS acknowledges that there has been a substantial shift 
in the skill mix in physicians' offices over the last few years, it 
continues to measure price changes using an economic statistic that 
holds the skill mix constant. The agency's rationale for this decision 
is that the use of higher skilled labor reflects the fact that work 
formerly performed in the hospital is now done in ambulatory settings. 
CMS continues its reasoning as follows: ``Skill mix shifts that reflect 
rising intensity of outputs in physician offices are automatically paid 
for by higher charge structures for the more complex mix of service 
inputs. Physicians performing more complex services may hire more 
skilled employees, and, thus, may tend to charge more for their 
services.''
    We do not understand what points CMS is trying to make in its 
argument, or the relevance of those points to physician reimbursement 
under the fee schedule. Medicare pays for physician services based on 
rates set by the government, not based on charges. In addition, much of 
the increased care provided by physicians in their offices is for post-
surgical care. These office visits cannot be separately billed under 
Medicare policy because they are included in the global service period. 
It is clear, however, that responsibility for much of this portion of 
patient care has shifted to the physician office as patients are 
discharged from the hospital significantly earlier in their recovery 
than in the past. These patients' greater care requirements necessitate 
both a higher skill mix in physicians' offices and the use of more 
costly supplies and equipment.
    The College would stress that payments under the Medicare fee 
schedule already fail to cover physicians' actual practice costs, a gap 
that has widened for surgeons under the recently implemented resource-
based formula for practice expenses. And, the problem is compounded by 
the agency's continuing failure to recognize shifts in skill mix in its 
design of the MEI. We urge the Committee to direct CMS to remedy this 
problem by adopting an index--such as one based on the average hourly 
earnings of health care workers--that recognizes skill mix shifts. This 
change should be effective January 1, 2003.
    In summary, the College strongly believes that the MEI as proposed 
by CMS does not provide an adequate basis for updating the physician 
fee schedule. The agency is continuing to rely on decisions made in the 
early 1970s about the appropriate structure of the index. We emphasize 
the points made earlier concerning the very different context for use 
of the MEI today compared to its use prior to implementation of the 
Medicare fee schedule and charge limits.
                               conclusion
    Finally, I would like to close with some additional comments about 
access to care. The College had an opportunity to review a draft of the 
section of MedPAC's 2002 report pertaining to physician payment 
updates, and we were concerned by conclusions reached about access to 
care. Survey findings from 1999 can not measure practice changes that 
are likely to have occurred with the phase-in to lower practice expense 
payments. Other limited studies we have seen tend to focus on allowed 
frequencies for the top three or four most often performed surgical 
services, or on the number of physicians signing Medicare participation 
agreements. These proxy measures are woefully inadequate to the task--
and are likely to be misleading. Much more timely and sophisticated 
analysis is needed before the cumulative impact of payment reductions 
occurring over the course of more than a decade can be assessed in any 
meaningful way. I can not stress enough the importance of the issue, 
for any problems that are created can not be solved simply by swift 
passage of a new omnibus spending bill. It takes a long time to train a 
surgeon, or to change the new practice patterns that the system is 
forcing them to adopt.
    Thank you once again, Mr. Chairman, for the opportunity to offer 
the College's comments and views. I would be pleased to answer any 
questions.

    Mr. Bilirakis. Thank you very much, Dr. Russell.
    Martha McSteen is the President of the National Committee 
to Preserve Social Security and Medicare.
    Ms. McSteen, nice to see you again, welcome. Please 
proceed.

                   STATEMENT OF MARTHA McSTEEN

    Ms. McSteen. Thank you. Good morning, Mr. Chairman and 
Ranking Member Brown and members of the committee. Thank you 
for holding this important hearing on the issue of Medicare 
payment policy and I'm pleased to speak as President of the 
National Committee to Preserve Social Security and Medicare and 
also as one of the first regional administrators of Medicare 
back in the mid-1960's.
    Certainly we find that many of our members across the 
country have been telling us that they are having a difficult 
time finding a physician who accepts Medicare. Now, with the 
5.4 percent cut in physician reimbursement, we are particularly 
concerned about any issue that will serve as a barrier to care 
for Medicare beneficiaries.
    Decreased payments to physicians can potentially be such a 
barrier, limiting beneficiaries access to primary and specialty 
care physicians. With decreased reimbursement, physicians may 
not be able to provide the same level of quality care. They may 
have to limit the time they spend with a patient or cut back on 
support staff.
    Some physicians may have to refuse to accept additional 
Medicare beneficiaries. Our members across the country tell us 
of physicians who are unable to accept Medicare reimbursement 
because they cannot afford to keep their offices open. The 
physician in many situations has to withstand some of the 
expenses of treating each Medicare patient. Frequently, that 
forces the physician to make an unwilling decision to eliminate 
Medicare patients from his or her practice.
    We also wonder if the Medicare reimbursements force the 
physicians to make up the difference by cost shifting to non-
Medicare patients.
    Physicians should not be overpaid in certain years and 
underpaid in other years. Uniformity and predictability are 
needed so that Medicare beneficiaries will know that their 
physician will not suddenly drop out of the program.
    One of our members who lives in Florissant, Colorado has 
advanced Parkinson's disease. He's had a terrible time finding 
a doctor who will accept Medicare. He says some doctors tell 
him he can pay them directly and he can try to get money from 
Medicare, if he would like. A person on Medicare shouldn't have 
to do this. Medicare shouldn't become two programs, one for the 
rich and one for the poor.
    It should treat everyone equally.
    Actually, our member says he probably can afford to do this 
more than some. He worries about his neighbors who may be 
living on a small Social Security check and have Medicare 
coverage, but no supplemental insurance. He says they can't 
afford to pay. Unfortunately, the parts of the country that are 
designated health profession shortage areas or medically under 
served areas are also the areas as we have heard this morning 
with the lowest physician reimbursement.
    In these areas, beneficiaries already have a hard time 
locating a physician, particularly a specialist. We fear that 
the 5.4 percent cut in physician payments may cause more 
providers to stop accepting Medicare. This will further limit 
seniors' access to care.
    The National Committee to Preserve Social Security and 
Medicare recommends that MedPAC study the issue again and again 
and suggest a payment formula to Congress.
    Mr. Chairman and members of the committee, thank you for 
this opportunity on behalf of seniors who depend on highly 
skilled physicians in this great country of ours for their 
well-being.
    [The prepared statement of Martha McSteen follows:]
Prepared Statement of Martha McSteen, President, National Committee to 
                 Preserve Social Security and Medicare
    Good Morning Chairman Bilirakis, Ranking member Brown and members 
of the committee. Thank you for holding this important hearing on the 
issue of Medicare payment policy and for inviting me to speak as 
president of the National Committee to Preserve Social Security and 
Medicare, a senior's grass root's education and advocacy organization 
with millions of members and supports.
    Unfortunately, many of our members across the country, have been 
telling us that they are having difficulty finding a physician who 
accepts Medicare. Now, with the 5.4% cut in physician reimbursement, we 
are particularly concerned about any issue that will serve as a barrier 
to care for Medicare beneficiaries. Decreased payments to physicians 
can potentially be such a barrier; limiting beneficiaries' access to 
primary and specialty care physicians.
    With decreased reimbursement physicians may not be able to provide 
the same level of quality care, they may have to limit the time they 
spend with a patient or cut back on support staff. Some physicians may 
have to refuse to accept additional Medicare beneficiaries.
    Our members tell us of physicians who are unable to accept Medicare 
reimbursement because they cannot afford to keep their offices open. 
The physician in many situations has to withstand some of the expenses 
of treating each Medicare patient. Frequently, that forces the 
physician to make an unwilling decision to eliminate Medicare patients 
from his or her practice.
    We also wonder if the Medicare reimbursements force the physicians 
to make up the difference by cost shifting to non-Medicare patients.
    Physicians should not be overpaid in certain years and underpaid in 
other years. Uniformity and predictability are needed so that Medicare 
beneficiaries will know that their physician will not suddenly drop out 
of the program.
    One of our members, who lives in Florissant, Colorado has advanced 
Parkinson disease. He has had a terrible time finding a doctor who will 
accept Medicare. He says some doctors tell him he can pay them directly 
and try to get money from Medicare if he would like. A person on 
Medicare shouldn't have to do this; Medicare shouldn't become two 
programs; one for the rich and one for the poor. It should treat 
everyone equally. Actually our member says he probably can afford to do 
this more than some. He worries about his neighbors who may be living 
on a small Social Security check and Medicare with no supplemental 
insurance. He says they cannot afford to pay.
    Unfortunately, the parts of the country that are designated Health 
Professions Shortage Areas (HPSA) or Medically Underserved Areas (MUA) 
are also the areas with the lowest physician reimbursement. In these 
areas beneficiaries already have a hard time locating a physician, 
especially a specialist. We fear the 5.4% cut in physician payments may 
cause more providers to stop accepting Medicare. This will further 
limit senior's access to care.
    We recommend that MedPac study the issue and suggest a payment 
formula to Congress.
    Mr. Chairman and members of the committee, thank you for the 
opportunity to testify on behalf of seniors who depend on the highly 
skilled physicians in this great country of ours for their well-being.

    Mr. Bilirakis. Thank you very much, Ms. McSteen.
    Dr. Susan Turney is a Member of the Board of Directors of 
the Medical Group Management Association. She has traveled all 
the way from Wisconsin to be here with us today. Thank you--and 
to get a little warmer.
    Ms. Turney. Yes.
    Mr. Bilirakis. Please proceed.

                    STATEMENT OF SUSAN TURNEY

    Ms. Turney. Good morning. I am a Member of the Board of 
Directors of the Medical Group Management Association and on 
behalf of MGMA I would like to thank you for convening today's 
hearing.
    I would also like to express our gratitude to the full 
committee for its leadership in pursuing the important issue of 
physician payments under Medicare. MGMA is the nation's oldest 
and largest organization representing medical group practices. 
There are 19,000 members who lead and manage more than 10,000 
organizations and represent more than 200,000 practicing 
physicians.
    Our individual members include practice managers, clinic 
administrators, and physician executives who work on a daily 
basis to ensure that the financial and administrative 
mechanisms within group practices run efficiently so that 
physician time and resources can be focused on patient care.
    As such, MGMA members are uniquely qualified to assess the 
direct impact of Medicare payment inadequacies on the delivery 
of quality care to Medicare beneficiaries.
    I am also a practicing internist and the Medical Director 
of Reimbursement at Marshfield Clinic. Marshfield is the 
largest private medical group practice in Wisconsin and one of 
the largest group practices in the United States. We have 678 
physicians, over 5,000 staff and we had over 1.6 million annual 
patient encounters. We are a tax-exempt corporation and we 
include a major diagnostic treatment center, research facility, 
reference lab and we provide care to 39 sites in rural 
Wisconsin.
    Mr. Chairman, the current Medicare physician payment system 
is stuck in reverse and threatens to severely impact 
beneficiary access and the stability of physicians practicing 
across the country. MGMA urges Congress to take three immediate 
steps to get Medicare moving forward in the right direction.
    First, halt the 5.4 percent reduction to the Medicare fee 
schedule.
    Second, eliminate the current unsustainable growth rate 
system.
    Third, implement a methodology that bases Medicare 
reimbursement on a formula that measures actual practice costs.
    Currently, Medicare patient access is unsustainable if we 
keep moving along this track. Again, at Marshfield, our 
experience serving a large rural region in northern Wisconsin 
is that the Medicare payment system falls far short of meeting 
the cost of delivering medical services to the Medicare 
beneficiaries.
    Recently, we conducted an internal analysis to determine to 
what extent the Medicare program covers the cost of providing 
services to the beneficiaries. Our analysis demonstrated that 
the clinic presently recovers only about 70 percent of the cost 
that we have in providing Medicare Part B services. And we 
project that for 2002 that amount will actually decrease as a 
percent of cost to approximately 68.5 percent.
    Like other practices, at Marshfield, we are directly 
impacted by the volatility of the current SGR system as well as 
the shortfall. The magnitude of the discrepancy between the 0.2 
percent reduction which had been predicted in March of 2001 and 
the actual reduction which took place in November, placed our 
clinic in an untenable position.
    In 2000, our clinic had net earnings as a percent of 
revenue of 2.87 percent and in 2001, this dropped to 1.58 
percent. These tight margins highlight how even minor 
fluctuations in the revenue stream have a material impact on 
our operations.
    Under the current Medicare payment system, SGR volatility 
plays havoc with our planning and our budgeting initiatives. We 
calculate that the revenue impact of the Medicare payment cut 
will be a negative $2.8 million for calendar year 2002. Such 
losses compromise acquisition of new technology as well as our 
ability to expand into additional rural areas.
    Marshfield Clinic is currently in the final stage of an 
internal analysis to determine the feasibility of entering the 
Medicare+Choice market. Our objectives as a system are to 
improve choices and to expand services to under served areas 
throughout north, central and western Wisconsin. The startup 
costs of implementing a Medicare+Choice Plan are significant. 
But from a Medicare beneficiary perspective, the plan 
potentially holds great value because beneficiaries with 
medigap insurance could receive a nearly identical plan and 
save between $35 and $95 per month to join.
    Unfortunately, the greatest challenge to this effort comes 
as a result of the Medicare fee-for-service payment cuts that 
have reduced the revenue the clinic needs to take the risk of 
bringing on any new product.
    At this time we are uncertain whether it is feasible in the 
present environment of pay cuts and with the SGR volatility to 
become an M+C plan.
    The true test of a system is how well it takes care of 
those in need. Presently, the Medicare payment system places 
those most in need in jeopardy. The leadership of the chairman 
and ranking member and other members of the subcommittee has 
been demonstrated by sponsorship of H.R. 3351. This truly 
indicates your support for physicians' ability to take care of 
those who are most in need.
    We do thank you for your efforts and we look forward to 
working with the committee to correct this problem.
    [The prepared statement of Susan Turney follows:]
Prepared Statement of Susan Turney, Member, Board of Directors, Medical 
                      Group Management Association
    Good morning. My name is Dr. Susan Turney. I am a member of the 
Board of Directors of the Medical Group Management Association (MGMA). 
On behalf of MGMA, I would like to thank the Chairman, the ranking 
member, and the entire Subcommittee for convening today's hearing. I 
also would like to express our gratitude to the full Committee for its 
leadership in pursuing the important issue of physician payments under 
Medicare so stability and access to this vitally important program are 
assured.
    MGMA, founded in 1926, is the nation's oldest and largest 
organization representing medical group practices. MGMA's 19,000 
members manage and lead more than 10,000 organizations in which more 
than 200,000 physicians practice medicine. Our individual members, who 
include practice managers, clinic administrators, and physician 
executives, work on a daily basis to ensure that the financial and 
administrative mechanisms within group practices run efficiently so 
that physician time and resources can be focused on patient care. As 
such, MGMA members are uniquely qualified to assess the direct impact 
of Medicare payment inadequacies on the delivery of quality care to 
Medicare beneficiaries.
    In addition to my leadership role with MGMA, I am a practicing 
internist and the Medical Director of Reimbursement at the Marshfield 
Clinic. Marshfield is the largest private medical group practice in 
Wisconsin and one of the largest in the United States, with 678 
physicians, 5158 staff, and over 1.6 million annual patient encounters. 
A tax-exempt corporation, the Marshfield Clinic system includes a major 
diagnostic treatment center, a research facility, a reference 
laboratory, and 39 regional centers. The Clinic also provides services 
in partnership with a federally funded Community Health Center at 13 
locations in Wisconsin, providing comprehensive integrated care to un- 
and under-insured residents of the community with incomes at or below 
200% of the federal poverty level.
    Mr. Chairman, the current Medicare physician payment system is 
stuck in reverse and threatens to severely impact beneficiary access 
and the stability of physician practices around the country. MGMA urges 
Congress to take three immediate steps to get Medicare moving forward 
in the right direction: (1) halt the recent 5.4% reduction to the 
Medicare fee schedule, (2) eliminate the current Sustainable Growth 
Rate system, and (3) implement a new methodology that bases Medicare 
reimbursement on a formula that measures actual practice costs. No 
other payment system under Medicare fluctuates with the Gross Domestic 
Product (GDP). Only physician fees are tied to this type of formula. 
Unless immediately addressed through congressional action, the cut in 
Medicare reimbursement rates will dramatically affect physician group 
practices that serve Medicare beneficiaries throughout the nation, 
especially in rural and underserved areas. MGMA is deeply concerned 
this will lead to new barriers to access to care for many Medicare and 
privately insured patients.
                      impact of the 2002 reduction
    According to MGMA data, the recent 5.4% cut steepens the slide 
created by inadequate Medicare payment updates over the last decade. 
From 1992-2000 MGMA's national practice cost survey indicates that 
total operating costs per physician in an average multi-specialty group 
practice rose 31.7%. During that same period, physician Medicare 
payments only increased 13%. Simply stated, Medicare payment increases 
covered roughly 40% of the actual cost increases that average group 
practices faced during this period. The recent cut exacerbates this 
critical situation.
    Over the past few months, MGMA received hundreds of reports 
regarding the impact of the 2002 cut. I would like to share two 
specific examples from around the country, as well as some personal 
details from my work at the Marshfield Clinic.
    In Colorado, a cardiology group practice reports that it expects an 
annual loss of over $1 million. To deal with the shortfall, it will 
dramatically reduce operating expenses and lay off employees. It has 
reached the point where the group is considering no longer accepting 
assignment for Medicare beneficiaries. These patients currently 
comprise 40% of its practice. In other words, it may no longer 
participate in the Medicare program.
    An academic medical practice in New York estimates a $1.7 million 
loss from the 2002 cut directly attributed to its 15% Medicare patient 
population. It faces an even more critical cut from its private sector 
patients, impacting approximately 60% of its business. This is due to 
the reduction in managed care fee schedules, which are negotiated based 
on the Medicare fee schedule. Including both public and private payers 
it estimates the total loss this year could be close to $7 million. In 
addition, this academic group practice is comprised of full time 
faculty employed by a university. The patient care revenue supports the 
education and research mission of the university's medical college. To 
the extent that patient care revenue drops, it will not only reduce the 
amount of faculty physician time available to Medicare patients, but 
also the amount of faculty time available for clinical education and 
clinical research.
                medicare patient access is unsustainable
    Patient access to care is a critical issue where I work at the 
Marshfield Clinic. Currently we have 102 physician openings that remain 
unfilled. These are most often in satellite clinics in rural areas we 
serve, where services are needed most but funding is limited. Physician 
recruiters advise the Clinic it will need to pay a premium to attract 
the physicians it needs. Under current funding conditions, let alone 
those reduced by recent cuts, this is extremely difficult. In 1999, 
Marshfield Clinic budgeted its physician salaries for the 50th 
percentile of relevant market surveys for the year, at the 45th 
percentile for the year 2000; and at the 55th percentile for the year 
2001. Both specialists and primary care physicians are needed by the 
Clinic to fill vacancies throughout the rural area the Clinic serves.
    In addition to physician openings, the Clinic presently has 237 
staff vacancies. These include open positions for nurses, medical 
assistants, MRI/ laboratory/ECG/ Nuclear medicine technicians, 
phlebotomists, housekeepers, clerks, programmers, medical illustrators, 
social workers, and many others that are essential components of a 
large integrated system of care.
    In our experience serving a large rural region in northern 
Wisconsin, the Medicare payment system falls far short of meeting the 
cost of delivering medical services to Medicare beneficiaries. To 
continue to exist as an organization, such revenue shortfalls are 
subsidized by private sector insurers, such as employer sponsored 
health coverage.
    At Marshfield Clinic, we conducted an internal analysis to 
determine to what extent the Medicare program covers the cost of 
providing services to Medicare beneficiaries. Our analysis demonstrated 
that the Clinic presently recovers only about 70% of its costs in 
providing Medicare Part B services. Specifically, for FY 2000 Medicare 
revenue was 71.52% of costs for fee-for-service Medicare. For FY 2001 
Medicare revenue (un-audited) as a percent of costs goes down to 
70.59%. For FY 2002 we project that Medicare revenue will decrease as a 
percent of costs to approximately 68.5%.
    To calculate the percent of its Medicare allowed costs for which 
Medicare reimbursement is received, Marshfield accountants eliminated 
all expenses and revenues received that might potentially be questioned 
by the Medicare program. Our methodology for FY 2000 follows principles 
applied in our annual federally qualified health center (FQHC) cost 
report that was audited by external auditors and submitted to the 
state. (Marshfield Clinic in conjunction with Family Health Center Inc. 
functions as a FQHC under the Medicaid Program.) For the purposes of 
this analysis, all expenses and revenues from activities such as the 
outreach lab, veterinary lab, research and education, rental property 
and optical and cosmetic surgery departments were removed. Our 
accountants also removed all non-Medicare ``allowed'' costs related to 
our bad debt, interest expenses, marketing programs, government affairs 
activities, National Advisory Council, goodwill amortization and other 
miscellaneous costs.
                        effect of sgr volatility
    Like other practices, at Marshfield, we are directly impacted by 
the volatility of the current SGR system as well as the 5.4% shortfall. 
The magnitude of the discrepancy between the 0.2% reduction, which CMS 
predicted in March 2001, and the November 1 5.4% announced cut placed 
the Clinic in an untenable position. Using the best available data from 
CMS, Marshfield Clinic budgeted a 0.1% reduction in Medicare Part B 
reimbursement for 2002.
    In 2001, the Clinic had net earnings as a percent of revenue of 
1.58%, 2.87% in FY 2000, and 0.86% in FY 1999. These tight operating 
margins highlight how even minor fluctuations in the revenue stream 
have a material impact on operations. Under the current Medicare 
Payment system, SGR volatility plays havoc with our planning and 
budgeting initiatives.
    We presently calculate that the revenue impact of the Medicare 
payment cut will be negative $2.8 million for CY2002. Such losses 
compromise planned capital equipment purchases, acquisition of new 
technology, and the Clinic's determination to expand the infrastructure 
of services in the rural areas throughout the 20 plus counties we 
serve. There are also many forms of Community Support in which the 
Clinic is involved including charity care, patient assistance, and 
charitable donations. While it is not the desire of the Clinic to 
withdraw this support to offset the losses, the Clinic's ability to 
maintain the same level of support will be constrained.
                        barriers to new markets
    Marshfield Clinic is in the final stages of an internal analysis to 
determine the feasibility of entering the Medicare+Choice market. Our 
objectives as a system are to improve beneficiary choices and expand 
services in areas that are presently underserved throughout north, 
central and western Wisconsin. By entering the M+C program, we hope to 
help support the infrastructure needed to fund information system 
improvements and implement targeted care management for the population 
we serve. The start up costs of implementing a Medicare+Choice plan are 
significant, and the prospect of breaking even is challenging because 
the health conditions of Medicare beneficiaries in the Marshfield area 
are slightly more complex than the national average and risk adjustment 
is uncertain. It is also very difficult to market to Medicare 
beneficiaries when they are spread so far geographically. From a 
beneficiary perspective, the Marshfield's M+C plan holds great value 
because beneficiaries with MediGap insurance could receive a nearly 
identical benefit plan and save between $35 and $95 per person per 
month to join the plan. Unfortunately, the greatest challenge to this 
effort comes as a result of the Medicare fee-for-service payment cuts 
that have reduced the revenue the Clinic needs to take risks in 
bringing on line a new product. At this time, Marshfield is uncertain 
whether it is feasible in the present environment of pay cuts and SGR 
volatility to become a Medicare+Choice plan.
              stability of the medicare program threatened
    I thought it important to quote from physician group practices 
around the country that have contacted MGMA to express their concerns. 
Each of these practices faces the daunting task of managing the 2002 
cut and dealing with the uncertainty of how to plan for the future. 
These are but a few of the reports we received expressing concern over 
the existing situation:

 A 225 physician group practice in Pennsylvania stated ``we 
        will have to close some of our offices, forcing our elderly 
        patients to travel a much greater distance to more centralized 
        locations if these rate decreases continue.''
 A group of 500 family physicians and internists responded that 
        ``we have restricted new Medicare patient access . . . this 
        will become terrible for this needy and deserving population.''
 A group of 180 physicians in New York said ``we will need to 
        discontinue senior outreach programs, thus not allowing us to 
        sustain services at current levels.''
 Several group practices in the Northwest reported ``to 
        survive, we will be limiting Medicare access.''
 A group in southeastern Wisconsin summed up their planning in 
        the following fashion. ``We are already having discussions 
        regarding the closure of the practice to new Medicare patients. 
        Unfortunately, we see no other alternatives, particularly if 
        the 2002 Medicare reduction stands. Without adequate 
        reimbursement, we simply will not be able to continue to offer 
        the level of care that our physicians expect of themselves 
        without limiting access.''
 One group of orthopedists in North Carolina reported ``we will 
        be forced to limit our exposure to Medicare recipients.''
 A practice of over 400 physicians in Utah reported that ``the 
        reduction in payment places a significant, if not impossible, 
        strain on our desire to provide services to the Medicare 
        population within our community.''
                            recommendations
    Last month, the Medicare Payment Advisory Commission voted to 
recommend that Congress repeal the current SGR system. MGMA strongly 
supports this recommendation.
    MedPAC also recommended that annual Medicare physician payment 
updates be based on changes in input prices that reflect actual medical 
practice costs as opposed to linking physician payments to GDP. Using 
this formula, MedPAC recommended a 2.5 percent Medicare payment 
increase in 2003. MGMA strongly supports this framework but believes 
work remains on the development of accurate price measures to reflect 
true costs.
    MGMA also agrees with MedPAC that if the Medicare Economic Index 
(MEI) is to be used to measure practice cost inflation, it must be 
improved. The MEI should be updated to include a number of significant 
costs borne by physician practices.
    Mr. Chairman, over the past year this Committee has shown 
tremendous leadership in addressing onerous regulatory obligations 
faced by Medicare providers. MGMA testified before the Committee last 
year regarding the impact of some of these regulatory burdens which 
include: communication failures with Medicare contractors, increased 
requirements for documentation, conflicting Medicare rules, costly 
compliance programs, needle stick prevention rules, onerous privacy 
provisions, and the un-funded requirement that practices provide free 
interpreters for patients with limited English proficiency. In 
addition, practices in many states currently face a crisis regarding 
premium increases for professional liability insurance. The current MEI 
does not accurately measure these costs. MGMA pledges to work with 
Congress to improve the precision of these practice cost measurements.
    As members of Congress, it is important for you to understand the 
global impact of changes to the Medicare fee schedule. In addition to 
the direct Medicare implications, physician group practices have 
contracts with private payers who benchmark their payment rates to the 
Medicare fee schedule. A drop in Medicare payments will mean a 
commensurate drop in reimbursement from numerous other payers linked to 
Medicare, damaging group practices ability to provide care to both 
Medicare beneficiaries and privately insured patients. The true test of 
a system is how well it takes care of those most in need. Presently the 
Medicare payment system places those most in need in jeopardy. Mr. 
Chairman, this Subcommittee has shown its leadership and understanding 
of this important point by its virtually unanimous co-sponsorship of 
H.R. 3351 ``Medicare Physician Payment Fairness Act.''
    We appreciate all of your hard work and, as you move forward, urge 
you to take the following steps to correct the existing system:

 Immediately halt the 5.4% physician payment cuts went into 
        effect on January 1, 2002.
 Adopt MedPAC's recommendation to eliminate the SGR system.
 Develop a system so that Medicare payments match the real 
        world costs of delivering efficient quality services to 
        Medicare beneficiaries.

    Mr. Bilirakis. Thank you. Thank you very much, Dr. Turney.
    Thanks to all of you. You have really reinforced in such a 
great down to earth, real world way concerns that I think every 
member of this committee has regarding what has taken place 
with respect to physicians' update.
    I know that we're all very anxious to at least improve or 
come up with a new formula, whether it be the MedPAC one or one 
that's going to be fair, that's going to be more real world and 
take into consideration the concerns not only of the 
physicians, but obviously of the patients.
    We're going to have to empty this room. So we're not going 
to have time to do what we want to do and that is to orally ask 
you questions. So what I'm asking the members to do is you have 
48 hours to submit to us any questions you want to be forwarded 
to this Panel and then of course, staffs will be working on 
others. So I'm going to ask you to respond in a timely fashion 
to these questions we will be asking and at the same time 
implore upon you to make suggestions. You know, you've all 
apparently expressed support, as I understand it from your 
written testimony, for the MedPAC recommendation. We don't 
really know how that's going to go. I mean right now I would 
say that's probably leading the pack, but if you have any other 
thoughts, whether you have improvements upon that formula, or 
something in lieu thereof, whatever it might be, feel free to 
bring it to the committee's attention. I assure you we will 
spend an awful lot of time on this issue.
    Mr. Norwood. Mr. Chairman, the answers to our questions 
will be placed in the record?
    Mr. Bilirakis. The answers to our questions and the answers 
thereto, will be made a part of the record. So with your help 
we're going to try to get this problem solved once and for all. 
Obviously, you know, democracy works only if the public gets 
involved and as great as it is for you to be here, and your 
testimony as helpful as it is, getting your folks back home to 
lobby, lobby, lobby is really most of the answer to resolving 
any problem we may have up here.
    Having said that, I will thank you on behalf of the entire 
committee. And I'm going to have to ask everybody other than 
maybe members of the press to vacate this room. Thank you very 
much. The hearing is adjourned.
    [Whereupon, at 11:07 a.m., the hearing was adjourned.]
    [Additional material submitted for the record follows:]
    Prepared Statement of the American Academy of Family Physicians
    Physicians and other health practitioners have experienced a sharp 
(5.4 percent) across-the-board reduction in their Medicare payments 
beginning January 1st. These cuts apply to all services and to more 
than one million health professionals. The Medicare Payment Advisory 
Commission (MedPAC) has called for the elimination of the current 
update formula and warned that cuts of the magnitude expected under 
this formula could raise concerns about the adequacy of payments and 
beneficiary access to care. AAFP agrees with that assessment and joins 
in urging Congress to take immediate steps to ``freeze and revise''; 
that is, freeze the conversion factor (payment rate) at the 2001 level 
and work to revise the update formula as recommended by MedPAC.
    Currently, Medicare officials are required to use a seriously 
flawed [because it's tied to business cycle not patient need], 
statutory formula to calculate physician conversion factor updates 
which take effect each January 1 and which apply to chiropractors, 
optometrists, nurse practitioners, therapists and many other 
practitioners in addition to doctors of medicine and osteopathy. This 
formula known as the sustainable growth rate (SGR) restrains aggregate 
Part B spending and ties this spending target to the business cycle 
rather than patient need. Despite 1999 legislation that attempted to 
stem volatility, large and unpredictable payment swings with potential 
cuts of more than 5 percent a year are still occurring.
    The cut experienced this year makes the fourth time in 11 years 
that Medicare physician payment rates have been reduced. During that 
time, physicians and other practitioners have been inundated with 
expensive new government regulations requiring physicians to provide 
interpreters, dedicate staff to documenting and overseeing compliance 
plans and supply unnecessary and duplicative documentation. Yet, 
Medicare payments during the same 11 years have risen by an average of 
just 1.1 percent a year or 13 percent less than the government's own 
estimate of practice cost inflation.
    The gap between cost inflation and Medicare's payment updates is 
already starting to take its toll and a negative update could greatly 
exacerbate the situation. In the last year or so, access problems have 
been reported in Atlanta, Phoenix, Albuquerque, Annapolis, Denver, 
Austin, Spokane, northern California and Idaho. AAFP data reveals that 
17 percent of family physicians are not taking new Medicare fee-for-
service patients.
    Perhaps the most striking example of the payment rate cut can be 
illustrated by the experience of Dr. Baretta Casey:
          Dr. Casey has done what the government wants many physicians 
        to do: set up practice in an underserved area, taking care of 
        many patients on Medicare and Medicaid. She came to medicine 
        later in life than many do, as a wife with two children--three 
        by the time she graduated. She wanted to become a family doctor 
        and practice in her Appalachian hometown of Pikeville, Ky.
          Her business background stood her in good stead. She bought 
        an office building at an auction, rented out the top floor to 
        offset the cost of her first-floor office, computerized her 
        practice from the start and opened her doors as a solo 
        practitioner eight years ago.
          Thanks to the booming practice and conservative living, Casey 
        significantly paid down her $145,000 in student loans her first 
        full year. But that was as good as it got. Ensuing years didn't 
        get better. In fact, they got worse.
          On her computer Dr. Casey watched while medical expenses 
        continued to grow but payment rates failed to keep pace. Dr. 
        Casey says: ``As a solo practitioner, I pay for everything. And 
        the increase in expenses hasn't been the measly little 
        percentage you hear forecasted by the government. I've tracked 
        it on my computer. It has gone up 10 to 15 percent every 
        year.''
          ``It took about six years, but at the six-year mark, expenses 
        and income literally met in the middle,'' she says. ``This past 
        year, they crossed over. And now, I have to dip into my savings 
        to cover the extra expense. I'm basically subsidizing my own 
        practice out of a savings account.''
          And now, in 2002, the worst blow of all--the 5.4 percent cut 
        in the Medicare conversion factor. ``I've had to make some 
        decisions,'' Dr. Casey says. ``I won't take any new Medicare 
        patients or any new patients with any insurance company that 
        follows suit and drops payment.'' And ultimately, she says, 
        ``If things don't change, I probably couldn't stay in practice 
        any more than two more years.''
          Dr. Casey has a message for Washington:
          ``If our reimbursement rates continue to go down and our 
        expenses continue to go up,'' she says, ``you will see an 
        exodus of physicians out of rural areas like Moses out of 
        Egypt. It's not because doctors don't care about their 
        patients. They do, tremendously.''
          ``It's because nobody is going to continue in a field or in a 
        business when they're losing 10 to 15 percent per year. The 
        practice of medicine is like any other business: If you can't 
        pay your bills, you can't survive.''
    Experience has already shown the danger of unrealistic payment 
rates in Medicaid, where twenty years of studies have consistently 
concluded that fee levels affect both access and outcomes. Medicare is 
not immune from similar problems as has been made abundantly clear by 
the continued exodus of Medicare+Choice plans from the program despite 
a guaranteed pay increase of at least 2 percent a year. Some 85 percent 
of elderly and disabled Americans rely on fee-for-service Medicare and 
for an ever-increasing number, there is no other option available.
    The American Academy of Family Physicians and its 93,500 members 
urge Congress to act now to freeze the conversion factor at last year's 
rate as we all work to revise the flawed formula that causes volatile 
swings and insufficient reimbursement for physicians. Your action will 
ensure that Medicare patients can continue to receive the care they 
depend on and deserve.
                                 ______
                                 
Prepared Statement of American Academy of Otolaryngology--Head and Neck 
                                Surgery
    The American Academy of Otolaryngology--Head and Neck Surgery (AAO-
HNS) is pleased to submit this statement for the record of the Energy 
and Commerce Subcommittee on Health's hearing on the future of 
Medicare's payment policy. AAO-HNS, representing more than 10,000 
otolaryngologist--head and neck surgeons across the country, is the 
national medical association of physician specialists dedicated to the 
care of patients with disorders of the ears, nose and throat and 
related structures of the head and neck. We are often referred to as 
ENT physician specialists.
    On November 1, 2001, the Centers for Medicare and Medicaid Services 
(CMS) announced a 5.4% reduction in the Medicare physician fee schedule 
conversion factor that resulted in an across-the-board cut in Medicare 
physician fees. This significant decrease, which went into effect 
January 1, 2002, reduced the conversion factor from $38.2581 to 
$36.1992 and sparked a unified and exhaustive effort in the physician 
community to urge Congress and the Administration to provide relief 
from the payment cut. However, despite overwhelming support by a 
majority of the House and Senate, Congress adjourned on December 21, 
2001 without addressing the physician payment update and left 
physicians struggling to cope with the largest payment cut since the 
inception of the fee schedule.
    It has been only six weeks and yet the reduction in physician 
payments has had immediate ramifications for physicians and the 
patients they treat. Physicians in every state are losing thousands of 
dollars in Medicare reimbursements, with specialists taking the hardest 
hit. The loss of revenue compounded with rising practice costs and 
increasing medical liability premiums are forcing physicians to lay off 
staff, reduce services and treat fewer Medicare patients in an attempt 
to keep their practices afloat. The overwhelming number of state and 
federal regulations and the inherent cost of remaining current and 
compliant further exacerbate the problems facing physicians.
    Unfortunately, these problems are not unique and will continue to 
adversely affect patients unless a permanent and equitable adjustment 
to the formula that determines physician payment is found. Linking 
physician reimbursements to the U.S. Gross Domestic Product (GDP) and 
the fluctuations of the nation's economy is an inaccurate measurement 
of the true cost of practicing medicine.
    Otolaryngologists are committed to providing their patients with 
the highest quality of care, including the latest technologies and 
procedures available. The significant reductions in reimbursement 
coupled with rising practice expenses, may force physicians to increase 
patient volume thus spending less time with individual Medicare 
patients. Reluctantly, doctors may forsake the treatment of Medicare 
patients altogether to preserve the viability of their practices and 
their dedication to quality care. The unfortunate consequences of the 
cut will ultimately jeopardize Medicare beneficiaries' access to 
physician services.
    We urge Congress to take immediate action to prevent any further 
erosion to an already fragile system. The best way to ensure access to 
high quality care to each and every Medicare beneficiary is to devise a 
permanent solution to the physician payment formula that reflects the 
real-world cost of treating patients.
    The AAO-HNS is pleased that the Subcommittee is addressing the 
important issue of adequate Medicare reimbursements for physicians. We 
welcome the opportunity to work with the Subcommittee to address the 
flawed formula currently used to calculate the physician payment 
update.
    Thank you for the opportunity to submit this statement.
                                 ______
                                 
          American College of Osteopathic Family Physicians
                                                  February 15, 2002
The Honorable Michael Bilirakis
Chairman
Energy and Commerce Health Subcommittee
2125 Rayburn House Office Building
Washington, DC 20515
    Dear Chairman Bilirakis: On behalf of the 21,000 osteopathic family 
physicians represented by the American College of Osteopathic Family 
Physicians (ACOFP), thank you for holding the hearing ``Medicare 
Payment Policy: Ensuring Stability and Access Through Physician 
Payments.''
    The ACOFP appreciates the leadership role that you and the 
Committee took in 2001 to try to prevent the 5.4% cut in the Medicare 
fee schedule from taking place on January 1st. We continue to support 
strongly the ``Medicare Physician Payment Fairness Act of 2001'' (H.R. 
3351) and look forward to working with you and the Committee to ensure 
its enactment. As you know, H.R. 3351 has over 315 cosponsors. We feel 
that any bill with this type of bipartisan support deserves immediate 
action.
    As you begin to formulate a strategy, and potentially draft new 
legislation, the ACOFP offers the following recommendations:

 Immediately halt the 5.4% Medicare payment cut;
 Repeal the sustainable growth rate (SGR) system;
 Replace the Medicare payment update formula with a new system 
        that reflects increases in practice costs, increased 
        utilization and other relevant factors; and
 Work with the House Budget Committee to ensure that 
        appropriate funds are set-aside in the budget resolution to 
        replace the Medicare physician payment update formula, 
        beginning in 2003.
    The ACOFP also requests that the Committee seriously consider the 
recommendations made by the Medicare Payment Advisory Commission 
(MedPAC) regarding the development of a new payment formula. The ACOFP 
supports the MedPAC proposal and urges its consideration by the 
Committee.
    Mr. Chairman, the ACOFP appreciates the invitation you extended to 
Congressman Doug Bereuter to share his thoughts on Medicare payment 
inequities. We have long supported legislation that would remove the 
geographic disparities in Medicare reimbursements. We support Rep. 
Bereuter's ``Rural Equity Payment Index Reform Act'' (H.R. 3569). It 
was evident by comments made during the hearing that a number of 
Committee members are concerned about payment policies that adversely 
effect rural areas. H.R. 3569 would raise all localities with a 
physician work adjuster below 1.000 to a floor of 1.000 over a five-
year period. We believe that H.R. 3569 provides an opportunity to 
improve health care in rural areas and we encourage the Committee to 
consider it during its deliberations.
    Mr. Chairman, thank you for the leadership you have displayed on 
these and many other health care issues. The ACOFP and our members 
stand ready to assist you and the Committee. Please contact Shawn 
Martin, Director of Government Affairs at (202) 414-0147 for additional 
information.
            Sincerely,
                            Louis J. Radnothy, D.O., FACOFP
                                                          President
cc: The Honorable W.J. Tauzin, The Honorable John Dingell, The 
        Honorable Sherrod Brown, ACOFP President-Elect, ACOFP Board of 
        Governors, ACOFP Executive Director, Chairman AOA Council on 
        Federal Health Programs, AOA Department of Government Relations
                                 ______
                                 
                     American College of Physicians
                      American Society of Internal Medicine
                                                  February 14, 2002
The Honorable Michael Bilirakis
Chairman
Committee Energy and Commerce Subcommittee on Health
2125 Rayburn House Office Building
Washington, DC 20515

The Honorable Sherrod Brown
Ranking Member
Committee Energy and Commerce Subcommittee on Health
2125 Rayburn House Office Building
Washington, DC 20515

RE: Addendum to ACP-Aim's Statement for the Record for the February 14, 
2002 Hearing, ``Medicare Payment Policy: Ensuring Stability and Access 
Through Physician Payments.''

    Dear Representatives Bilirakis and Brown: The American College of 
Physicians-American Society of Internal Medicine (ACP-ASIM)--
representing 115,000 physicians and medical students--is the largest 
medical specialty society and the second largest physician organization 
in the United States. Internists provide care for more Medicare 
patients than any other medical specialty. ACP-ASIM wishes to extend 
its sincere gratitude to the Committee for its efforts in assuring 
stability and access in the health care system through adequate 
physician payment.
    ACP-ASIM recently provided a statement for the record for the 
February 14, 2002 hearing entitled, ``Medicare Payment Policy: Ensuring 
Stability and Access Through Physician Payments.'' We are writing today 
to elaborate and clarify our position on the MedPAC's recommendations 
that will be contained in their March 2002 Report to Congress. We would 
request that the Committee include this addendum along with our 
official statement in the interest of a complete and accurate hearing 
record.
    ACP-ASIM strongly supports the MedPAC's goal of ``achieving 
consistent payment polices'' for physicians and their practices. 
Therefore, ACP-ASIM supports the Commission's recommendation to replace 
the SGR system and to require Medicare to update payments for physician 
services based on the estimated change in input prices for the coming 
year as measured by the Medicare Economic Index (MEI). We agree that 
any productivity adjustment for physician services should be based on 
several factors instead of being based on labor costs alone, and that 
this should be applied as a separate adjustment to the update, rather 
than being included in the MEI itself. Further, ACP-ASIM supports the 
Commission's recommendation to update the physician fee schedule by 2.5 
percent for 2003.
    We are recommending one addition to the MedPAC's recommendations, 
however. Legislation to eliminate the SGR formula and replace it with 
the MedPAC update framework should specify that if Congress declines in 
any given year to enact legislation to establish the physician fee 
schedule update based upon recommendations of the MedPAC, a default 
update equal to the modified MEI, i.e., the MEI excluding the 
productivity factor, MINUS a separate .5% productivity adjustment, 
shall apply. This adjustment would, at the very least, assure some 
predictability and stability in the update in the coming years, 
notwithstanding our reservations about applying an automatic 
productivity adjustment to the update (See the original ACP-ASIM 
statement for the hearing record).
    Finally, ACP-ASIM continues to seek a halt to the 5.4% cut that 
went into effect in January 2002 and calls on Congress to enact 
immediate relief. Correcting the problem in 2003, by replacing the SGR 
formula with the MedPAC framework, will not be sufficient to undo the 
harm created by the 5.4% cut. We are concerned that Congress may delay 
action on halting the 5.4% cut by bundling this relief into other 
Medicare reforms that may not be acted upon until late in the 
congressional session.
    We urge the Committee to report legislation to (1) put an immediate 
halt to the 5.4% reduction (2) replace the SGR formula with the MedPAC 
framework, with the addition of the above default mechanism recommended 
by ACP-ASIM and (3) establish the 2003 update at 2.5%. Such measures 
should be reported and acted upon by Congress prior to, and independent 
of, other needed Medicare reforms.
    Again, ACP-ASIM wishes to thank the Committee and its members for 
their interest in ensuring adequate Medicare physician payment. We 
would appreciate the Committee including this addendum along with our 
official statement for the record. If we can be of assistance to the 
Committee throughout this process in any way, please do not hesitate to 
let us know.
            Sincerely,
                                          Robert B. Doherty
      Senior Vice President, Governmental Affairs and Public Policy
                                 ______
                                 
  Prepared Statement of the American College of Physicians--American 
                      Society of Internal Medicine
    The American College of Physicians-American Society of Internal 
Medicine (ACP-ASIM)--representing 115,000 physicians and medical 
students--is the largest medical specialty society and the second 
largest medical organization in the United States. Internists provide 
care for more Medicare patients than any other medical specialty. We 
congratulate the Subcommittee on Health for holding this important 
hearing. Of the College's top priorities for 2002, addressing the 
inadequacies of physician payment is the most critical to our members. 
ACP-ASIM thanks Congressmen Michael Bilirakis, Chairman of the 
Subcommittee, Sherrod Brown, Ranking Member of the Subcommittee, and 
other members, for holding this important hearing to discuss ways to 
ensure stability and access in the health care system through adequate 
physician payment. We also want to extend special appreciation to 
Chairman W.J. ``Billy'' Tauzin and Ranking Member John Dingell for 
their efforts to seek stability in the physician payment system.
                               background
    Beginning January 1, 2002, Medicare reimbursement payments to 
physicians and other health care professionals fell an average 5.4 
percent. Despite serious concerns raised by ACP-ASIM and other medical 
associations, and warnings from the Medicare Payment Advisory 
Commission (MedPAC), medicine is having to endure the fourth physician 
payment cut in ten years.
    This is not a problem that was created overnight. Congress adopted 
the current physician payment methodology (known as the Sustainable 
Growth Rate or SGR) in the Balanced Budget Act of 1997. Even then, ACP-
ASIM recognized the serious flaws inherent in the SGR payment system 
and voiced our concern. Congress attempted to make corrections to the 
payment formula in 1999 with the Balanced Budget Refinement Act, 
however, it was not sufficient enough to correct the intrinsic 
problems. The recent economic downturn the country is now facing has 
only exacerbated the problem.
    Recognizing the unfairness of the SGR methodology and the 
tremendous hardship it has placed on physicians across the country, a 
super-majority of members of Congress cosponsored legislation that 
would stymie the magnitude of the 5.4 percent cut. Introduced in the 
waning days of the first session of the 107th Congress, ``the Medicare 
Physician Payment Fairness Act of 2001,'' (H.R. 3351 and S. 1707) would 
have cut the SGR update to physicians to 0.9 percent, rather than the 
current 5.4 percent cut. ACP-ASIM continues to strongly support this 
legislation. Unfortunately, Congress failed to act prior to adjournment 
and physicians are consequently now beginning to feel the affects of an 
across-the-board reduction in their medical practices.
                      flawed data used in formula
    The 5.4 percent across-the-board reduction in Medicare payment is 
primarily due to the flawed SGR system that governs the annual payment 
for physician services. The SGR system errantly ties physician payment 
to the Gross Domestic Product (GDP). There is no other segment of the 
health care industry that uses such a methodology to update payment. 
What is most unfortunate is that this method of tying physician payment 
to the health of the overall economy bears absolutely no relation to 
the cost of providing actual physician services. In the years where the 
economy is facing a downturn, such as today, a reduction in physician 
payment is significant.
    In its March 2002 report to the Congress, MedPAC expresses grave 
concern about the underlying problem of tying the SGR to the economy. 
MedPAC reports that the current SGR system may even cause payments to 
deviate from physician costs because it does not fully account factors 
affecting the actual cost of providing services. Specifically, while 
the current SGR payment system accounts for input price inflation and 
productivity growth, it provides no opportunity to account for other 
factors, such as an increase in the regulatory burden of the Medicare 
program.
    In addition to the flawed SGR payment system, physicians have 
repeatedly been penalized for inaccurate estimates in the past. Since 
the SGR payment formula was first utilized in 1998 and 1999, Medicare 
officials have consistently relied upon flawed data for the annual 
update. Because the SGR formula is cumulative (i.e., it relies on 
previous years' estimates), these errors that were never corrected are 
compounded, further exacerbating the problem year after year. Due to 
these successive errors, the spending target is about $15 billion lower 
than it actually should be.
                effect on physicians and their patients
    A physician payment cut of this proportion is a tremendous blow to 
physicians, particularly internists. According to a 2001 Medical Group 
Management Association study, Medicare payments account for nearly 50 
percent more of the average internists revenue than the average primary 
care physician. The 5.4 percent physician payment cut comes at a time 
when malpractice premiums are at their highest levels, the amount of 
regulatory burden it at its peak (such as costs associated with 
complying with HIPAA), and the costs of other overhead expenses are 
dramatically increasing. This culmination of events may force 
physicians to make difficult choices in order to continue to operate.
    Facing the rising cost of practicing medicine, physicians may be 
forced to limit the number of Medicare patients in their practice; lay 
off staff that help Medicare patients with appointments or medications; 
relocate to areas with a younger, non-Medicare eligible patients; spend 
less time with Medicare patients; discontinue participation in the 
Medicare program; limit or discontinue investment in new technology; 
limit or discontinue charitable care; or retire. A recent American 
Academy of Family Physicians study confirmed that physicians are having 
to make tough decisions, citing that nearly 30 percent of family 
physicians are not taking new Medicare patients.
    This will make it even more difficult for patients to gain access 
to an increasingly under-funded health care system. The effects of the 
most recent cut in reimbursement will most likely be hardest felt in 
rural areas. The problems that we see today will certainly only get 
worse unless the methodology in which physician payment is computed is 
immediately addressed.
    In a survey sponsored by MedPAC and conducted by Project HOPE and 
The Gallup Organization in 1999 (Schoenman and Cheng 1999), many 
physicians expressed concerns about payment levels. About 45 percent of 
them said that reimbursement levels for their Medicare fee-for-service 
patients were a very serious problem, compared with 25 percent who 
reported reimbursement levels for private fee-for-service was a very 
serious problem.
    Finally, many physicians who responded to MedPAC's 1999 survey 
reported that they had taken steps to reduce their practice costs. More 
than one-half said their practice had reduced staff costs, and two-
thirds said their practice had delayed or reduced capital expenditures. 
It should be noted that because this survey was taken three years ago, 
it does not reflect the current level of physician concern--which is 
likely to be even greater given the 5.4% reduction that went into 
effect on January 1, 2002.
    More recent studies confirm doctor frustration with inadequate 
reimbursement from all areas of physician payment. In Washington State, 
for example, a Washington State Medical Association poll of members in 
November 2001 revealed that 57 percent of physicians said that they are 
limiting the number or dropping all Medicare patients from their 
practice. The report blames the many years of decline of the state's 
health care delivery system, characterized by a slow erosion of funding 
for public health, growing administrative expenses for practitioners 
and mounting frustrations of physicians trying to cope with myriad of 
regulations.
    In December 2001, the American Medical Association conducted a 
state-by-state analysis of the impact of the 5.4% Medicare cut, which 
revealed a tremendous blow to the states. In Louisiana, for example, 
physicians' total Medicare losses will exceed $28 million. In Michigan, 
physicians are expected to lose $105 million. Surveys in both Louisiana 
and Michigan show that 80 percent of physicians in the over-50 age 
group are considering retirement or job changes. Florida physicians 
stand to lose more than $206 million, making it the second highest loss 
only to New York ($207 million) in physician payment reduction. And in 
Ohio, physicians' total Medicare losses will exceed $95 million, making 
Ohio the eighth ranked state in total Medicare losses.
                   medpac recommendations to congress
    In its March 2001 report to the Congress, MedPAC recommended that 
the Congress replace the SGR system with an annual update methodology 
based on factors influencing the unit costs of efficiently providing 
physician services. According to MedPAC, getting the price right is 
more important than controlling spending through the payment mechanism. 
The Commission noted that the main problems with the SGR were that it 
failed to account for all relevant factors that affect the cost of 
providing services, and the system exacerbates Medicare's problem of 
paying different amounts for the same service depending on where it is 
provided (physician's office, hospital outpatient department, 
ambulatory surgical center). The Commission added that other inherent 
problems with the SGR system stem from its volatility and 
unpredictability. These problems are as true today as ever.
    In MedPAC's March 2002 Report to Congress, the Commission will once 
again recommend that Congress repeal the SGR system due to these same 
concerns. This time, however, MedPAC offers more concrete 
recommendations for Congress to ask the Secretary of HHS to have 
implemented for the year 2003 and beyond.
    MedPAC's proposed payment method would make updates to physician 
services similar to the updates for other services and promote the goal 
of ``achieving consistent payment polices'' across ambulatory care 
settings, including physician offices, hospital outpatient departments, 
and ambulatory surgical centers. MedPAC's recommendations are as 
follows:

(1) The Congress Should Repeal the Sustainable Growth Rate System and 
        Instead Require that the Secretary Update Payments for 
        Physician Services Based on the Estimated Change in Input 
        Prices for the Coming Year, Less and Adjustment for Growth in 
        Multifactor Productivity;
(2) The Secretary Should Revise the Productivity Adjustment for 
        Physician Services and Make it a Multifactor Instead of a 
        Labor-Only Adjustment; and
(3) The Congress Should Update Payments for Physician Services by 2.5 
        Percent for 2003.
The Congress Should Require the Secretary to Update Payments for 
        Physician Services Based on the Estimated Change in Input 
        Prices, Less and Adjustment for Growth in Multifactor 
        Productivity
    In MedPAC's first recommendation to repeal the SGR system, the 
Commission states, ``Replacing the SGR system in this way would solve 
the fundamental problems of the SGR system.'' The adjustment the 
Commission recommends would change the current measure of input price 
inflation for physician services--the Medicare Economic Index (MEI)--to 
make it a forecast of input price growth for the coming year. Further, 
the productivity adjustment from the MEI would also be removed so the 
MEI is only a price measure and productivity can be considered 
separately in update decisions.
The Secretary Should Revise the Productivity Adjustment for Physician 
        Services and Make it a Multifactor Instead of a Labor Only 
        Adjustment
    MedPAC's second recommendation to revise the productivity 
adjustment to account for labor and nonlabor factors is consistent with 
the way physician services are produced. While labor accounts for the 
majority of the costs for providing physician services, other inputs, 
such as office space, medical materials and supplies, and equipment, 
are also important to consider. This adjustment would more accurately 
measure growth in productivity by considering all inputs. However, ACP-
ASIM cautions that tying physician productivity in order to lower the 
physician payment update may be problematic. Due to increased 
compliance with federal regulations, such as Medicare paperwork and 
HIPAA mandates, this may be what is contributing to the lower 
productivity, and may therefore skew the update. MedPAC acknowledges 
this problem, but admits that it has little or no data to support 
compensating for this issue.
    The first two recommendations in physician payment methodology 
would allow the updates to more fully and accurately account for 
factors affecting costs, and it would decouple payment updates from 
spending control. Further, the revision to the productivity adjustment 
will make payment of physician services consistent with modern methods 
of measuring productivity, and make payments stable and predictable 
from year to year.
Congress Should Update Payments for Physician Services by 2.5 Percent 
        for 2003
    MedPAC's third recommendation to update physician services by 2.5 
percent for January 2003 is the application of the first two 
recommendations. Since input prices are expected to rise 3 percent in 
2002, when factored in with a 0.5 percent productivity adjustment, the 
result yields a 2.5 percent payment increase.
                                solution
    ACP-ASIM strongly supports MedPAC's goal of ``achieving consistent 
payment polices'' for physicians and their practices. Therefore, ACP-
ASIM supports the Commission's recommendation to replace the SGR system 
and to require Medicare to update payments for physician services based 
on the estimated change in input prices for the coming year. We 
believe, however, that there needs to be further examination of the 
MedPAC recommendation to apply a negative adjustment to the update for 
productivity growth. We agree that any productivity adjustment for 
physician services should be based on a several factors instead of 
being based on labor costs alone. ACP-ASIM also supports the 
Commission's recommendation to increase physician payment by 2.5 
percent for 2003. Further, ACP-ASIM believes that consideration should 
be given to establishing an automatic default update, based on the 
revised MEI, should Congress decline to act on MedPAC's recommendation.
    These necessary changes will not only put the physician payment 
system in line with other segments of the health care industry, but 
more importantly, these changes will allow for an accurate accounting 
for all factors that impact the cost of providing physician services. 
Further, these changes will also contribute to a more stable and 
predictable physician payment schedule for years to come.
    Finally, ACP-ASIM continues to support legislation, H.R. 3351 and 
S. 1707, ``the Medicare Physician Payment Fairness Act of 2001''--that 
would cut the SGR update to physicians to 0.9 percent, rather than the 
current 5.4 percent cut--or any other legislative vehicle that would 
bring immediate relief and halt the 5.4 percent payment cut.
                               conclusion
    ACP-ASIM is pleased that the Subcommittee is addressing the serious 
problems associated with the current SGR physician payment system. We 
strongly urge the Subcommittee to adopt the MedPAC recommendations in 
the March 2002 Report to the Congress, and ask the Subcommittee to halt 
the 5.4 percent cut that became effective on January 2002 as quickly as 
possible.
                                 ______
                                 
        Prepared Statement of The American College of Radiology
    The American College of Radiology (ACR) welcomes the opportunity to 
submit written testimony for the record to the House Energy and 
Commerce Subcommittee on Health regarding its February 14, 2002 hearing 
entitled ``Medicare Payment Policy: Ensuring Stability and Access 
Through Physician Payments.''
    The ACR is very concerned about the drastic reduction in the 
conversion factor and that this significant across-the-board cut could 
exacerbate existing access problems for Medicare beneficiaries, 
particularly in rural communities. The conversion factor reduction 
stems from a fatally flawed formula that penalizes physicians for 
economic downturns and from CMS data errors that have short-changed 
physicians by $15 billion since 1998 and 1999. This would be the fourth 
broad-scale reduction in physicians' and other practitioners' fees 
since 1992 and has brought the average increase in Medicare fees 
between 1991 and 2002 down to just 1.1 percent a year--or 13 percent 
less than the government's own estimate of practice cost inflation.
    Over the last 10 years, physicians have been inundated with 
expensive new federal requirements and the gap between payments and 
costs has already led to access problems for Medicare beneficiaries in 
Atlanta, Phoenix, Albuquerque, Annapolis, Denver, Austin Spokane, 
northern California and Idaho. Experience with Medicaid has already 
shown the danger of unrealistic payment rates and Medicare is not 
immune from similar problems as has been made abundantly clear by 
Medicare+Choice plans' continued exodus from the program despite a 
guaranteed pay increase of at least 2% a year. Some 85% of elderly and 
disabled Americans rely on fee-for-service Medicare and for an 
increasing number, there is no other option available.
    As devastating as the 2002 reductions in the Medicare Conversion 
Factor are, the College is deeply concerned about the very real 
possibility that there may be similar reductions in 2003. ACR, the 
Medicare Payment Advisory Commission (MedPAC) and other medical 
specialty societies agree that if changes are not made to the present 
conversion factor update formula, and future cuts in the conversion 
factor continue, the ability of physicians to continue to treat 
Medicare patients will be in serious jeopardy.
    To address the problems described above, the ``Medicare Physician 
Payment Fairness Act of 2001,'' H.R. 3351, was introduced in the House 
on November 27, 2001 by Rep. Michael Bilirakis (R-Fla.). This bill 
would create an opportunity for Congress to make systemic changes in 
the physician update system. Specifically, it would reduce the current 
$38.26 conversion factor by 0.9 percent. In addition, it would ask the 
Medicare Payment Advisory Commission (MedPAC) to make further 
refinements in the commission's earlier proposal to eliminate the 
expenditure target or Sustainable Growth Rate (SGR) that now helps 
determine annual updates in the conversion factor. HR 3351 currently 
has 316 cosponsors. The College fully supports this legislation.
    The American College of Radiology is ready to work with the 
Subcommittee and all of Congress to ensure that this country's Medicare 
population continues to receive the care it deserves.
                                 ______
                                 
                           American Osteopathic Association
                                                  February 15, 2002
The Honorable Michael Bilirakis
Chairman
Energy and Commerce Health Subcommittee
2125 Rayburn House Office Building
Washington, DC 20515
    Dear Chairman Bilirakis: On behalf of the 48,000 osteopathic 
physicians represented by the American Osteopathic Association (AOA), 
thank you for holding the hearing ``Medicare Payment Policy: Ensuring 
Stability and Access Through Physician Payments.''
    The AOA appreciates the leadership role that you and the Committee 
took in 2001 to try to prevent the 5.4% cut in the Medicare fee 
schedule from taking place on January 1st. We continue to support 
strongly the ``Medicare Physician Payment Fairness Act of 2001'' (H.R. 
3351) and look forward to working with you and the Committee to ensure 
its enactment. As you know, H.R. 3351 has over 315 cosponsors. We feel 
that any bill with this type of bipartisan support deserves immediate 
action.
    As you begin to formulate a strategy, and potentially draft new 
legislation, the AOA offers the following recommendations:

 Immediately halt the 5.4% Medicare payment cut;
 Repeal the sustainable growth rate (SGR) system;
 Replace the Medicare payment update formula with a new system 
        that reflects increases in practice costs, increased 
        utilization and other relevant factors; and
 Work with the House Budget Committee to ensure that 
        appropriate funds are set-aside in the budget resolution to 
        replace the Medicare physician payment update formula, 
        beginning in 2003.
    The AOA also requests that the Committee seriously consider the 
recommendations made by the Medicare Payment Advisory Commission 
(MedPAC) regarding the development of a new payment formula. The AOA 
supports the MedPAC proposal and urges its consideration by the 
Committee.
    Mr. Chairman, the AOA appreciates the invitation you extended to 
Congressman Doug Bereuter to share his thoughts on Medicare payment 
inequities. We have long supported legislation that would remove the 
geographic disparities in Medicare reimbursements. The AOA supports 
Rep. Bereuter's ``Rural Equity Payment Index Reform Act'' (H.R. 3569). 
It was evident by comments made during the hearing that a number of 
Committee members are concerned about payment policies that adversely 
effect rural areas. H.R. 3569 would raise all localities with a 
physician work adjuster below 1.000 to a floor of 1.000 over a five-
year period. We believe that H.R. 3569 provides an opportunity to 
improve health care in rural areas and we encourage the Committee to 
consider it during its deliberations.
    Mr. Chairman, thank you for the leadership you have displayed on 
these and many other health care issues. The AOA stands ready to assist 
you and the Committee. Please contact Shawn Martin, Director of 
Congressional Affairs at (202) 414-0147 for additional information.
            Sincerely,
                                        James E. Zini, D.O.
                                                          President
cc: The Honorable W.J. Tauzin
   The Honorable John Dingell
   The Honorable Sherrod Brown
   Members, Energy and Commerce Health Subcommittee
   AOA President-Elect
   AOA Board of Trustees
   Chairman, AOA Council on Federal Health Programs
   Members, AOA Council on Federal Health Programs
   AOA Executive Director
   AOA Senior Staff
   AOA Department of Government Relations
                                 ______
                                 
              American Physical Therapy Association
                                     Washington, D.C. 30036
                                                  February 12, 2002
The Honorable Michael Bilirakis
Chairman
House Energy and Commerce Committee
Health Subcommittee
2125 Rayburn House Office Building
Washington DC 20515
    The Private Practice Section of the American Physical Therapy 
Association (``APTA-PPS'') thanks you for your leadership in holding 
the February 14, 2002 hearing entitled, ``Medicare Payment Policy: 
Ensuring Stability and Access through Physician Payment.'' APTA-PPS 
represents over 3,300 privately practicing physical therapists 
nationwide who have been negatively impacted by the reductions in the 
physician fee schedule announced by the Centers for Medicare and 
Medicaid Services (``CMS'') last fall. As you know, while the term 
``Medicare Physician Fee Schedule'' implies that the payment 
methodology principally affects physicians, physical therapists are 
also reimbursed pursuant to the fee schedule and accordingly suffer 
financially as a result of decreases in fee schedule payments. This is 
particularly problematic for many of our members who practice in rural 
areas where they are often the only source of critical rehabilitative 
care.
    On November 1, 2001, CMS unveiled final payment policies and 
payment rates under the fee schedule for physicians and non-physician 
practitioners who treat Medicare beneficiaries. Among other things, the 
regulation included a 5.4 percent across the board reduction in 
payments for services including physical therapy. According to CMS, new 
economic data from a slowing economy and high levels of expenditures 
for practitioners' services produced a negative update for the base 
practitioner fee calculation for calendar year 2002. As a result, the 
factor used to update payment rates for individual services has gone 
down by 4.8 percent, and the conversion factor is still lower--5.4% 
below 2001 levels. The 5.4% decrease in the conversion factor became 
effective on January 1, 2002 and privately Practicing physical 
therapists are now feeling the financial pinch. CMS Administrator 
Scully has said that CMS cannot address this problem without 
legislative authority. For this reason, Congress must act.
    The Section strongly supports the tenants of the ``Medicare 
Physician Payment Fairness Act of 2001'' (HR 3351 and S 1707.) Despite 
strong support, this legislation, which would have reduced the cut in 
2002 to 0.9% and required the Medicare Payment Advisory Commission 
(``MedPAC'') to report to Congress on a replacement for the sustainable 
growth rate (``SGR'') formula, did not pass last year. Nevertheless, we 
support legislation this year to lessen the impact of the 5.4 percent 
reduction in payments and to ease the burdens these reductions have 
placed on private practice physical therapists and their patients. The 
Section is aware of the recently issued Medicare Payment Advisory 
Commission recommendations on the physician fee schedule and the SGR 
formula and is currently reviewing them.
    We commend the House Energy and Commerce Committee for holding this 
hearing and look forward to working with the Committee to ensure that 
our nation's Medicare beneficiaries receive the quality of care they 
deserve and to ensure that physical therapists are reimbursed at a 
level that will enable them to continue providing such care.
            Sincerely,
                                           John Hendrickson
                                                 APTA-PPS President
                                 ______
                                 
    American Society for Gastrointestinal Endoscopy
                                  Manchester, Massachusetts
                                                  February 13, 2002
The Honorable Michael Bilirakis
Chairman
Subcommittee on Health
Committee on Energy and Commerce
United States House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515
    Dear Chairman Bilirakis: On behalf of the more than 7,000 members 
of the American Society for Gastrointestinal Endoscopy (ASGE), I am 
pleased to have the opportunity to submit these comments for the record 
of the hearing on Medicare physician payment issues scheduled for 
February 14. We greatly appreciate the Subcommittee's interest and 
concern about the problems that exist within Medicare's physician fee 
schedule. We strongly urge the Subcommittee to address these problems 
this year.
    ASGE recommends that Congress act quickly to address several key 
issues in the physician payment system.
    Congress should make every effort to immediately restore the 
conversion factor as suggested in H.R. 3351, the ``Medicare Physician 
Payment Fairness Act of 2001''. The technical changes and adjustments 
needed to create a new update mechanism will not be in place until 
2003; however, physician practices are today living with the reduced 
resources that came from the current method of calculating the 
conversion factor. The crisis in professional liability insurance costs 
that is affecting physicians in a number of states is only one of many 
reasons to act this year.
    The way Medicare updates the physician fee schedule each year is 
wrong. No other segment of the health care industry has experienced the 
same kind of swings in payment as physicians, who have watched their 
conversion factor rise by 4.5% in 2001 only to fall by 5.4% this year. 
Any notion that Medicare payments would be reasonably predictable went 
out the window with the current reduction. The fact that many observers 
anticipate a similar drop in the 2003 conversion factor calls for quick 
action by Congress. MedPAC and the physician community will soon make 
detailed recommendations for changes to the current sustainable growth 
rate system that governs the annual adjustments. We urge Congress to 
move rapidly to implement them.
    It is very important to get to a payment system that has 
predictable outcomes and determines those outcomes in a manner that is 
easily understood. The system must accurately measure the factors that 
drive the cost of physician services. This does not exist in the 
current arrangement, and it is time to correct that failure.
    Congress needs to take on the problem of the site of service 
differential in the physician fee schedule. This failed policy 
understates the value of procedures provided in hospitals and 
ambulatory surgery centers (ASC). This creates incentives to move 
services out of the hospital and ASC where quality of care is 
regulated, into the unregulated office, without carefully examining 
whether the office should be the venue of choice.
    ASGE recommends that the Centers for Medicare & Medicaid Services 
(CMS) either eliminate the site of service differential or make certain 
that the safety requirements for all settings are equal. Hospitals and 
ambulatory surgery centers must meet certain safety standards. None of 
these apply in the office setting; yet the risks of performing the 
procedure are equal in all settings.
    The problems in Medicare's physician fee schedule are exacerbated 
by the current difficulties with the implementation of the hospital 
outpatient department prospective payment system. Despite Congressional 
efforts to address the needs of new technology and to correct problems 
with the way the Medicare rates are calculated, it was still necessary 
to delay the effective date of the 2002 rates. Nearly 60% of all 
gastrointestinal endoscopic services for Medicare beneficiaries are 
provided in the outpatient department, and many of them use newer 
technologies that should be subject to pass through payments. ASGE 
members are very concerned that this new Medicare system threatens the 
economic stability of hospital outpatient departments and that new 
medical advances will not be widely available to patients if hospitals 
cannot recover their costs.
    ASGE is also concerned with the health of the ambulatory surgery 
center (ASC), where many endoscopic procedures are performed safely and 
effectively. CMS has not updated the list of procedures that will be 
covered when performed in that setting since 1995. This means that 
these centers are hard pressed to remain technologically current, and 
can no longer provide the level of care that Medicare beneficiaries 
have a right to expect. Congress needs to press CMS on this issue so 
that Medicare certified ASCs could once again provide modern medical 
care.
    ASGE believes that a crisis has been building in the Medicare 
physician fee schedule since its establishment in 1992. The current 
reduction of 5.4% in the conversion factor is just the most recent 
example. The misguided effort to develop new practice expense relative 
value units continues to distort payments, as reimbursement for complex 
physician services provided in the hospital declines, while payments 
for simpler work done in the office increases dramatically. This shift 
cannot be sustained if we are to continue providing high quality, 
technologically superior care in the hospital. It is time for Congress 
to address this imbalance. A further irony is the fact that even with 
the shift in dollars, compensation for many office based services is 
still too low because Medicare can't, or won't, accurately account for 
the true costs of providing medical care.
    Striking evidence of the failures of the fee schedule can be found 
in the low rates of colorectal cancer screening among Medicare 
beneficiaries, in the current debate over payments for outpatient 
cancer care, and in the numerous requests by Congress for the General 
Accounting Office to evaluate various problems arising in the payment 
system.
    The physician fee schedule is not channeling Medicare's investment 
into the services and procedures that can save lives and improve the 
quality of life for our nation's senior citizens. Congress needs to 
make sure that Medicare resources are directed to assure that 
beneficiaries maintain ready access to life enhancing and live saving 
procedures. Our senior citizens expect nothing less.
    Immediate action on these problems will go a long way to restore 
physician and patient confidence in Medicare. Failure to respond will 
only create more concern among those individuals dependent upon the 
program for their medical care. ASGE urges prompt action this year on 
these issues.
    Thank you for your careful consideration of these views. I request 
that this letter be made part of the formal record of the hearing.
            Sincerely,
                                   David A. Lieberman, M.D.
                                                          President
                                 ______
                                 
   Prepared Statement of The Association of American Medical Colleges
    The Association of American Medical Colleges (AAMC) is pleased to 
submit for the record testimony to the House Energy and Commerce 
Subcommittee on Health on the need to replace the Sustainable Growth 
Rate (SGR) methodology used to calculate the update for Medicare 
payments under the Physician Fee Schedule (``physician payment 
update''). We believe the SGR should be replaced with a methodology 
that assures adequate payments and stable updates for physicians who 
participate in Medicare. Appropriate and stable physician payments 
would ensure that Medicare beneficiaries have access to the complex and 
specialized care provided by academic physicians.
    The AAMC comprises the country's 125 accredited medical schools and 
nearly 400 major teaching hospitals and health systems, 90 academic/
professional societies representing approximately 100,000 faculty 
members (``academic physicians''), and the nation's medical students 
and residents.
                    the role of academic physicians
    Academic physicians play a unique, multifaceted role within the 
physician community, as well as within the larger healthcare system. As 
experts in their particular fields of medicine, academic physicians 
provide patients and referring physicians with cutting-edge clinical 
expertise. Academic physicians also educate and train the medical 
students, residents, and other health professionals who will become the 
next generation of caregivers. In addition, many academic physicians 
conduct clinical research that generates more effective, efficient, and 
compassionate healthcare for all Americans--including aging Americans.
    Because of their clinical expertise, access to innovative 
technologies within teaching hospitals, and participation in clinical 
research, academic physicians frequently provide inpatient and 
outpatient care for patients--including Medicare beneficiaries--with 
complex, multiple, or acute health problems that can not be managed 
elsewhere in the community.
    Working together with their teaching hospital partners, academic 
physicians are vital to the delivery of essential medical services. 
Over three-quarters of AAMC's teaching hospital members (which account 
for just 6% of the nation's hospitals) operate certified trauma centers 
in conjunction with academic physician partners. Over one-quarter of 
our teaching hospital members offer burn care, about 89% provide AIDS 
treatment, and 77% deliver geriatric care (eg, treatment for 
Parkinson's or Alzheimer's disease) in partnership with faculty 
practices.
    In addition, faculty practices partner with AAMC's teaching 
hospital members to provide nearly 45% of the nation's hospital-based 
charity care. By comprising a significant segment of America's 
healthcare safety net, academic physicians and their teaching hospital 
partners assure healthcare access for the poor and underserved--
including Medicare beneficiaries who are dually eligible for Medicaid 
or who are unable to pay for their care.
                 flaws in the update methodology (sgr)
    The Balanced Budget Act of 1997 (BBA) established a formula to 
calculate the SGR--the ``target growth rate'' for Medicare spending on 
physician services--that would control overall Medicare spending while 
simultaneously accounting for changes in the cost of providing care. 
The AAMC is concerned that the SGR has not achieved an equitable 
balance between fiscal management of the Medicare program and the 
actual cost of caring for Medicare patients, including the cost of 
medical inflation. Various analyses have shown that, since 
implementation of the SGR, updates in physician payments have failed to 
rise in proportion with increases in input prices.
    Additionally, as was the case this year, the SGR's link to the 
country's gross domestic product (GDP) is problematic and volatile. 
While payment updates in 2000 and 2001 were relatively large (5.4% and 
4.5% respectively), the 2002 payment update of negative 5.4% is not 
only a dramatic decline, but also contrasts sharply with the previous 
two years.
    In its March 2001 report, the Medicare Payment Advisory Commission 
(MedPAC) identified similar concerns with the SGR and unanimously 
called to replace the methodology, stating that it ``neither adequately 
accounts for changes in cost nor controls total spending.'' MedPAC 
reiterated their concerns at their January 2002 meeting and announced 
in their January 16-17 Meeting Brief that their March 2002 report will 
recommend ``replacing the SGR system, updating payments for 2003, 
accounting for productivity growth outside the MEI, and revising the 
productivity adjustment . . .'' The AAMC strongly supports MedPAC's 
conclusion regarding the need to develop a new update methodology that 
produces stable and adequate payments for physicians.
   the impact of stable and adequate physician payments on medicare 
                     beneficiaries' access to care
    Stable and adequate Medicare physician payments are critical to 
ensure that seniors have continued access to the specialty care 
provided by academic physicians. Nearly one-sixth of all physicians 
providing Medicare services are academic physicians. Medicare 
reimbursements to academic physicians total about $2.5 billion each 
year and represent up to one-third of faculty practice revenues. In 
light of the fact that faculty practice revenues, on average, represent 
about 35% of a medical school's total revenue, unstable Medicare 
payments could jeopardize beneficiary access to specialty care, as well 
as academic medicine's core missions of medical education, research, 
clinical services, and providing charity care.
    As disparity grows between the costs of caring for patients and the 
rates at which payers reimburse for those costs, medical schools and 
teaching hospitals find it increasingly difficult to maintain their 
missions. Since private payers often tie their own rates to those set 
by Medicare, reductions in Medicare payments could drive additional 
declines in reimbursement.
               a legislative solution to the sgr problem
    Last fall, bipartisan, bicameral legislation, ``The Medicare 
Physician Payment Fairness Act of 2001'' (H.R. 3351/S. 1707), was 
introduced to provide short- and long-term relief from unstable 
Medicare physician payment updates. The bills provide short-term relief 
by reducing the cut to the Medicare physician payment update from minus 
5.4% to minus 0.9% and long-term relief by directing MedPAC to develop 
a replacement for the SGR.
    The AAMC strongly endorses these bills and we applaud the 
Subcommittee's leadership--Chairman Bilirakis (R-FL) and Ranking Member 
Brown (D-OH)--for sponsoring H.R. 3351. We are pleased that a majority 
of Congress, including nearly all Energy and Commerce Committee 
members, are cosponsors of the bill. The AAMC and the deans of 86 
medical schools--who have signed a letter on behalf of their faculty 
practices in support of S. 1707/H.R. 3351--thank you for your support 
and urge your continued leadership to ensure that the losses currently 
experienced by physicians are mitigated as quickly as possible.
    In conclusion, Medicare beneficiaries--including those dually 
eligible for Medicaid--rely on academic physicians and academic medical 
centers to provide high quality, innovative, and accessible healthcare. 
They also rely on faculty physicians to develop the clinical advances 
and train the new generation of Medicare providers that will assure a 
high quality of life for all American seniors. Passage of H.R. 3351/S. 
1707 is a vital first step toward mitigating the losses currently 
experienced by all physicians. The AAMC looks forward to working with 
you in accomplishing the second step--devising a long-term solution to 
replace the current SGR methodology and assure adequate and stable 
Medicare physician payment updates.
    Thank you for your consideration.
                                 ______
                                 
                Coalition for Fair Medicare Payment
                                     Washington, D.C. 20005
                                                  February 14, 2002
The Honorable Mike Bilirakis,
Chairman, Subcommittee on Health,
Committee on Energy and Commerce
    Dear Chairman Bilirakis: The Coalition congratulates you and 
ranking minority member Brown for your leadership in scheduling today's 
hearing on Medicare physician payment policy. We know that the 
testimony the Subcommittee will hear from physician and non-physician 
provider groups will demonstrate the seriousness of the looming access 
crisis brought about by the recent negative update in reimbursement 
under the Medicare Fee Schedule.
    For almost all Coalition member organizations, the negative update 
represents only part of this critical problem. As you are aware, most 
physicians have recently experienced radical increases on the cost of 
professional liability insurance, and over the past four years, most 
surgical specialties represented in the Coalition have undergone very 
significant cuts in their reimbursement for practice expenses under the 
Fee Schedule.
    Congress has the opportunity to help, now, by immediately halting 
the 5.4% Medicare reimbursement cut that took effect last month. Well 
over 300 members of the House have cosponsored S. 3351, introduced by 
you and Mr. Brown with the direct support of Committee Chairman Tauzin 
and Ranking Committee Minority Member Dingell. We urge early action on 
this feature of the bill.
    The Coalition equally supports replacement of the current Medicare 
update formula with one which fully reflects increased annual costs to 
physician and non-physician providers in delivering care. We look 
forward to working with you on this issue in the weeks and months 
ahead.
            Sincerely,
                                       Michael Scott, Chair
                                Coalition for Fair Medicare Payment
                                 ______
                                 
  National Association of Rehabilitation Providers 
                                       and Agencies
                                Reston, Virginia 20190-5202
                                                  February 22, 2002
The Honorable Michael Bilirakis
Chairman
House Energy and Commerce Committee
Health Subcommittee
2125 Rayburn House Office Building
Washington DC 20515
    The National Association of Rehabilitation Providers and Agencies 
(``NARA'') would like to thank you for your leadership in holding the 
Subcommittee's recent hearing entitled, ``Medicare Payment Policy: 
Ensuring Stability and Access Through Physician Payment.'' NARA 
represents the interests of Medicare-certified rehabilitation agencies 
that furnish physical therapy, occupational therapy, and speech-
language pathology services to Medicare beneficiaries. Many NARA 
members are small businesses that have experienced a significant 
negative impact from the fee schedule reductions announced by the 
Centers for Medicare and Medicaid Services (``CMS'') last fall.
    The term ``Medicare Physician Fee Schedule'' suggests that the 
payment methodology principally affects physicians. However, 
rehabilitation agencies that provide services to Medicare beneficiaries 
are also paid under the fee schedule pursuant to the Balanced Budget 
Act of 1997. The cuts have been particularly problematic for many of 
NARA's members who are small businesses operating in rural areas.
    On November 1, 2001, CMS announced final payment policies and 
payment rates under the fee schedule for physicians and non-physician 
practitioners who treat Medicare beneficiaries. The regulation included 
a 5.4 percent across the board reduction in payments for services 
including physical, occupational, and speech-language pathology. The 
use of new economic data from an economy in recession and high levels 
of expenditures for practitioners' services have produced a negative 
update for the base practitioner fee calculation for calendar year 
2002. Thus, the conversion factor is 5.4% below 2001 levels--a decrease 
that is severely impacting NARA's members.
    NARA strongly supports the tenets of the ``Medicare Physician 
Payment Fairness Act of 2001'' (H.R. 3351 and S. 1707,) which despite 
strong support, did not pass last year. Nevertheless, we support 
legislation this year to lessen the impact of the 5.4 percent reduction 
in payments and to ease the burdens these reductions have placed on 
therapists and their patients. NARA is aware of the recently issued 
Medicare Payment Advisory Commission recommendations on the physician 
fee schedule and the sustainable growth rate (``SGR'') formula, and is 
currently reviewing them.
    The Administration has made it clear that it views payment 
adjustments through reforms in payment policy as something that must be 
budget neutral in both the short and long term. Given these budget 
constraints, we commend you for giving this matter priority and for 
holding this hearing. We look forward to working with the Subcommittee 
to ensure that our nation's Medicare beneficiaries receive the quality 
of care they deserve and that therapists are reimbursed at a level that 
will enable them to continue providing such care.
            Sincerely,
                           Gerald Goldstein, MSA, President
      National Association of Rehabilitation Providers and Agencies
                                 ______
                                 
Responses for the Record of William J. Scanlon, U.S. General Accounting 
                                 Office
                 questions from hon. michael bilirakis
    Question 1. With the 5.4 percent negative update for physician 
payments this year, the rationale behind paying for physician services 
differently than other Medicare covered services has come into 
question. It seems as though there would be merit in having consistent 
payment methodologies across different service categories. What makes 
physician services different? Why was a different payment methodology 
put in place for physician services?
    The principle behind Medicare's payment systems is to pay providers 
fairly and efficiently to achieve the ultimate goals of ensuring that 
beneficiaries have appropriate access to quality care and that the 
program remains sustainable in the long run. The consistent application 
of this principle may require tailoring payment systems to fit the 
circumstances different providers face. Currently, Medicare's payment 
systems vary across types of providers. Some have comparable elements, 
but there are also divergent features to reflect differences in types 
of providers and services. In all cases, Medicare should establish and 
maintain appropriate payment levels that take these circumstances into 
account and reimburse providers fairly for the services they deliver.
    The current physician payment method, which includes the use of 
spending targets, was introduced after Medicare spending on physician 
services grew at an average annual rate of more than 12 percent per 
beneficiary through the 1980s. Previous attempts to limit spending 
growth had only limited success because of large increases in the 
volume and intensity of services provided by physicians. The Congress 
recognized that expenditure growth of this magnitude was not 
sustainable and created a payment update mechanism that makes use of 
spending targets to curb Medicare expenditures for physician services.
    Question 2. The current physician fee schedule update system 
includes a spending, or expenditure, target. Is it possible to 
reconcile the need for a spending target with assuring that payments 
keep pace with the needs of Medicare beneficiaries and the cost of 
providing care? Please explain. Are there other ways to address growth 
in the volume and intensity of services provided? If so, please provide 
a detailed description of these alternatives.
    Under the current system, spending targets increase as the number 
of beneficiaries grows and the cost of providing services Uses. In 
addition, targets increase to permit real spending per beneficiary 
(volume and intensity) to grow as fast as the overall economy.
    The current payment system was created after attempts to limit 
spending growth by moderating fee increases alone were unsuccessful. 
Spending targets have been in effect since 1992. Since that time, the 
volume and intensity of physician services has grown at an average 
annual rate of about 2 percent--much lower than prior periods--while 
virtually all physicians treated Medicare beneficiaries or, if 
accepting new patients, accepted those covered by Medicare.
    Any payment system needs to be revisited periodically to ensure 
that it is still meeting its objectives. It is important, for example, 
to monitor service use in order to ensure that beneficiary access 
continues to be secure as updates change. Spending targets should 
always be viewed within the context of beneficiary needs. Targets may 
need to be periodically adjusted based on a reassessment of the 
spending necessary to ensure that Medicare continues to meet the needs 
of beneficiaries.
    Question 3. The sustainable growth rate (SGR) system and its 
reliance on the gross domestic product (GDP) have been widely 
criticized. Specifically, cities have cited the failure of GDP to take 
into account the health status, the aging of the Medicare population, 
costs of technological innovations, or escalating costs of operating a 
medical practice. Why is GDP a part of the SGR system? Should the 
annual increase in the expenditure target for physician services be 
limited by the rate of GDP growth? Why or why not?
    GDP is only one of four factors that determine the SGR expenditure 
targets. The other factors are included to help account for some of the 
cost-related elements you mentioned. They include the changes in the 
cost of inputs used to produce physician services (as measured by the 
Medicare Economic Index (MEI)), the number of Medicare beneficiaries in 
the traditional fee-for-service program, and the estimated effect that 
changes in laws or regulations win have on spending. The Congress 
designed the expenditure target formula to allow for increases in the 
volume and intensity of services delivered to each beneficiary. By 
including GDP in the formula, the Congress permitted volume and 
intensity to grow at the same rate as the economy. This decision 
reflects a policy choice about how much of the increase in society's 
wealth should be spent on physician services. In linking this growth to 
GDP, the Congress created a balance between growth in volume and 
intensity on the one hand and the need to limit growth in Medicare 
spending on the other hand. Without such limits, there is nothing to 
keep spending on physician services from consuming an increasing 
proportion of Medicare dollars and the federal budget. As I indicated 
earlier, however, it is important to periodically revisit the SGR 
target to ensure it remains aligned with beneficiaries' needs.
    Question 4. With positive updates in 2000 and 2001 and flow a 
negative update in 2002, it is clear that the sustainable growth rate 
(SGR) system is some what uncertain. Should the SGR system be replaced? 
Is there any way to modify the current update system to make it less 
volatile and more predictable? For example, would a five-year average 
of GDP growth help? In your testimony, you mention narrowing the 
statutory update limits. Currently, they are 3 percentage points above 
MEI and 7 percentage points below MEI. How would you suggest the limits 
be narrowed?
    My testimony outlined two ways the current update system could be 
made less volatile. First, greater rate stability could be achieved by 
revising how adjustments to the MEI are determined. For example, the 
current bounds of plus three and minus seven percentage points around 
the MEI could be narrowed. Another approach would be to limit the 
adjustment as a share of the change in MEI--say to no more than a 75 
percent increase or decrease. Alternatively, a hold harmless provision 
could be implemented to prevent rate decreases. Finally, some 
combination of these types of changes could be adopted. Any of these 
kinds of changes could increase rate stability, but they might also 
increase the amount of time necessary to bring actual spending in line 
with targeted spending.
    Second, the update system could be made less volatile by linking 
spending targets to average increases in GDP over several years rather 
than a single year. By neither significantly lowering spending targets 
during a downturn nor unduly increasing them in a period of prosperity, 
spending targets would be less variable in the short term.
    Question 5. To improve the precision of the measurement of prices 
within the SGR system, should additional factors that affect the cost 
of delivering physician services be included, such as new technology, 
aging of the Medicare population, site of service shifts, the intensity 
of services provided in physician offices, the preferences and needs of 
beneficiaries, and changes in physician practice patterns? If so, which 
factors should be included and why?
    The Centers for Medicare and Medicaid Services (CMS) \1\ uses the 
MEI to measure changes in physicians' cost of providing services. The 
MEI is a weighted average of annual price changes for inputs used to 
provide care, including physician time and effort (work), non-physician 
employees, and office expenses, and is adjusted for changes in labor 
productivity.
---------------------------------------------------------------------------
    \1\ In June 2001, the agency formerly known as the Health Care 
Financing Administration (HCFA) was renamed the Centers for Medicare 
and Medicaid Services (CMS). These responses refer to the agency as 
HCFA when discussing actions taken before the name change and as CMS 
when discussing actions taken since the name change.
---------------------------------------------------------------------------
    It is important that the MEI remain current--reflecting the changes 
in the cost of delivering services, including differences in the use of 
equipment and sites of service delivery. The Medicare Payment Advisory 
Commission has recommended that productivity adjustments should reflect 
all the factors involved in producing physician services, not just 
labor, and we agree with that recommendation.
    The SGR system includes the changes in real per capita GDP to 
provide an allowance for growth in the volume and intensity of services 
that can reflect, in part, the health of the population and the 
development of new valued services. Accounting for changes in the age 
distribution of the Medicare fee-for-service population in the annual 
payment update formula would be feasible, but would require estimating 
which segment of the overall Medicare population will remain in the 
fee-for-service program and could introduce the kind of estimation 
errors that have been problematic this year. Estimating the cost effect 
of the aging of the entire Medicare population is straightforward, but 
these changes are likely to be gradual and so may be better addressed 
through periodically revisiting the appropriateness of the overall 
target. It may also be interesting to note that as the large number of 
baby boomers start to join Medicare, the average beneficiary age and 
hence, cost per beneficiary, will initially decline.
    Question 6. In your testimony, you highlighted the need for 
improved data to monitor the effect of the negative update on 
beneficiary access to care. How would you suggest such data be 
improved?
    Ensuring that the use of spending targets does not compromise 
appropriate access to services is a key concern. As I mentioned in my 
testimony, more timely data on beneficiary access and physician 
participation in the program are essential to monitoring the adequacy 
of program payments. Data are also needed that allow evaluation of 
beneficiary access at the state and local level to detect access 
problems that could be masked by national aggregation. By regularly 
reviewing Medicare claims data, CMS could quickly detect changes in 
providers' billing patterns and potential beneficiary access problems. 
CMS would need to make information from claims available more quickly, 
but increased data timeliness is also an imperative for overall program 
management improvements.
    The advantage of using claims data to monitor access is that it 
could help to identify potential access problems in specific locations 
or among certain specialties. In addition, claims data are already 
collected for payment purposes. Information from claims data could be 
augmented with information gathered from a beneficiary survey, such as 
the Medicare Current Beneficiary Survey, to determine the extent to 
which supplemental insurance coverage, income levels, or other factors 
also affect beneficiary access to physician services.
                  questions from hon. charlie norwood
    Question 1. Do you believe that physicians are, generally, 
reimbursed at a rate that is below the cost of the treatment provided?
    Unlike other providers, physicians do not file cost reports that 
can be used to compare the costs of providing physician services to 
Medicare payments. A physician's time is the largest single component 
of the cost of his or her services. On average, 55 percent of the fees 
in Medicare's fee schedule are for physician work. Given this inability 
to compare payments and costs for physician services, the question that 
needs to be asked in setting payments is whether they are sufficient to 
secure appropriate access. Payment rates that are too low can impair 
beneficiary access to physician services, while payment rates that are 
too high add unnecessary financial burdens to Medicare.
    Information on physicians willingness to see Medicare patients is 
dated but overall indicates that providers are willing to accept 
Medicare patients, and thus Medicare payment for services. However, as 
I discussed in my testimony, more timely data are critical to 
monitoring beneficiary access to the program and responding if data 
indicate that access is jeopardized. As health needs change, technology 
improves, or health care markets evolve, spending targets and resulting 
payment rates may need to be adjusted periodically to ensure 
appropriate payment rates and beneficiary access to services. Informed 
decisions about appropriate payment rates and rate changes cannot be 
made unless policymakers have detailed and timely data on beneficiaries 
access to needed services.
    Question 2. Do you believe that is the case for any specific 
physician or any specific treatment?
    Medicare's physician fee schedule establishes payments for more 
than 7,000 different services, such as office visits, surgical 
procedures, and treatments. Since 1992, HCFA, now CMS, has been phasing 
in a new fee schedule that bases the payment for each service on the 
amount of resources used to provide that service relative to all other 
services.\2\ The implementation of the resource and methodology for 
determining practice expense has been the subject of considerable 
controversy, partly because of HCFA's adjustments to the underlying 
data and basic method and partly because payment changes were required 
to be budget-neutral--which means that total Medicare spending for 
physician services was to be the same under the new payment method as 
it was under the old one.
---------------------------------------------------------------------------
    \2\ The Medicare physician fee schedule has three components: the 
physician work component, the practice expense component, and the 
malpractice component. In 1999, the three components accounted for 
approximately 55 percent, 42 percent, and 3 percent, respectively, of 
the average fee.
---------------------------------------------------------------------------
    As a result, if Medicare payments to some specialties increased, 
payments to other specialties had to decrease.
    As we discussed in our October 2001 report on physician practice 
expense payments, such redistributions have in fact occurred, prompting 
concern from various specialties that their revised practice expense 
payments, a component of the total physician payment, are too low.\3\ 
Oncologists (cancer specialists) claim that their practice expense 
payments are particularly inadequate for certain office-based services, 
such as chemotherapy administration. In that October 2001 report we 
made several recommendations regarding the determination of the 
practice expense component of the physician fee schedule. One of the 
effects would be to increase payments to oncologists for some services. 
We believe that implementing these recommendations would help ensure 
that practice expense payments better reflect differences in the costs 
of providing services. At the same time, we recognize the limitations 
of the data used to set fees. We are working on a reported mandated by 
the Congress to assess how these data can be improved.\4\ That report 
will be issued later this year.
---------------------------------------------------------------------------
    \3\ Medicare Physician Fee Schedule Practice Expense Payments to 
Oncologists Indicate Need for Overall Refinements (GAO-02-53, Oct. 31, 
2001). This study was mandated in section 213 of the Medicare, 
Medicaid, and SCIHP Balanced Budget Refinement Act of 1999 (P.L. 106-
113, Appendix F, 113 Stat. 1501, 1501A-350).
    \4\ The study was mandated in section 411 of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(P.L. 106-554, Appendix F, 114 Stat. 2763, 2763A-508).
---------------------------------------------------------------------------
                   questions from hon. sherrod brown
    Question 1. Under the current payment formula for physician 
services, the Sustainable Growth Rate (SGR) acts as an expenditure 
target. In other words, the SGR works to control the growth in Medicare 
payments for physician services. Could you explain exactly how this 
works and how an expenditure target is different from a cap on 
expenditures?
    The SGR sets overall spending targets for physician services and is 
used to determine fees for services paid for under the physician fee 
schedule so that, over time, total spending equals the spending 
targets. The target under the SGR system for a given year is not 
considered a cap because it can be exceeded in that year. The SGR 
target does not limit expenditures, but rather is taken into account 
when setting payment rates for the next year. The fee schedule update 
reflects the success or failure in meeting the spending target. If 
prior expenditures have exceeded the established target, the update for 
the upcoming year is reduced. If expenditures were less than the 
target, the update is increased.
    Question 2. The SGR, or expenditure target on payments for 
physician services, is intended to control the volume and intensity of 
services provided. Has the growth in volume and intensity of services 
actually been controlled, and, if so, was it due to the SGR or other 
factors?
    As my testimony indicated, between 1992 and 2000, volume and 
intensity grew at an average annual rate of about 2 percent. In 
contrast, between 1985 and 1991, immediately before the introduction of 
spending targets, volume and intensity of services per beneficiary 
increased at an average annual rate of about 9 percent. Because a 
number of changes may have affected spending for physician services, it 
is impossible to isolate the precise effect the SGR has had on growth 
in volume and intensity of services provided. However, the SGR and its 
predecessor the Volume Performance Standard were designed and 
implemented to impose discipline on the growth in volume and intensity 
of physician services. Because the use of the spending targets to set 
payment rates coincided with a period of slowed growth in volume and 
intensity, the role of targets cannot be dismissed as an important 
factor in controlling growth in Medicare spending for physician 
services.
    Question 3. At the hearing, several witnesses stated that Medicare 
payments for physician services need to reflect the actual costs of 
providing services to beneficiaries. However, Medicare has moved away 
from cost-based reimbursement. Congress does not necessarily want to 
return to basing payments on costs, which does not encourage 
efficiency. Could you explain how payments that reflect the costs of 
providing services are different than cost-based reimbursements
    The cost-based reimbursement that Medicare has wisely moved away 
from is one where individual providers could increase their revenues by 
increasing the costs of delivering services. It was inherently 
inflationary and has been recognized as such for decades. At the same 
time, it is necessary to have payments that reflect the costs of 
delivering services. Otherwise, providers may not be willing to deliver 
services and we may not be able to ensure appropriate beneficiary 
access to those services.
    The difference between the new method of setting payments to 
reflect costs and the old method of malting payments based on reported 
costs, is that under the new method individual providers cannot 
increase their revenue simply by reporting higher costs. The hospital 
prospective payment system (PPS) is a prime example. Before the PPS, 
each hospital was paid its actual costs of providing services, subject 
to certain limits. Payments under the PPS reflect the average costs of 
delivering particular services for all hospitals in an earlier period 
of time. The payments are updated to reflect changes due to inflation, 
service delivery, and other factors, to ensure that they continue to 
reflect the costs of an efficient provider.
    Question 4. I have heard concerns voiced about the current way we 
evaluate beneficiary access. The best indicator we have for beneficiary 
access today in 2002, is a survey of beneficiaries from 1999. Whether 
or not seniors had access to doctors in 1999 seems a poor measure of 
whether seniors will have access in 2002, when reimbursements have 
changed significantly. How do we get better measures of beneficiary 
access and participation? Or are we stuck with relying on old data and 
anecdotes and trying to guess what's going on?
    Ensuring that the use of spending targets does not compromise 
appropriate access to services is a key concern. As I mentioned in my 
testimony, more timely data on beneficiary access and physician 
participation in the program are essential to monitoring the adequacy 
of program payments. Data are also needed that allow evaluation of 
beneficiary access at the state and local level to detect access 
problems that could be masked by national aggregation. By regularly 
reviewing Medicare claims data CMS could quickly detect changes in 
providers' billing patterns and potential beneficiary access problems. 
CMS would need to make significant improvements in the timeliness of 
the availability of information from claims, but those improvements are 
also imperative for improved overall program management. Our prior work 
on the state of information technology systems at CMS indicated that 
malting necessary improvements to these crucial systems may require a 
larger administrative budget.\5\
---------------------------------------------------------------------------
    \5\ Medicare: Information Systems Modernization Needs Stronger 
Management and Support (GAO-01-824, Sept. 20, 2001).
---------------------------------------------------------------------------
    The advantage of using claims data to monitor access is that it 
could help to identify potential access problems in specific locations 
or among certain specialties. In addition, claims data are already 
connected for payment purposes. Information from claims data could be 
augmented with information gathered from a beneficiary survey, such as 
the Medicare Current Beneficiary Survey, to determine the extent to 
which supplemental insurance coverage, income levels, or other factors 
also affect beneficiary access to physician services.
    Question 5. A number of witnesses on the second panel mentioned 
that they are particularly concerned with how the 54% cut in physician 
payments could hurt access to care for beneficiaries living in rural 
areas. Could you discuss how this cut could disproportionately affect 
beneficiaries living in rural areas? Does CMS have any data on how this 
payment reduction could affect beneficiaries living in rural areas?
    GAO does not have data to evaluate whether the physician payment 
reduction in 2002 will disproportionately affect beneficiaries in rural 
areas. I expect that CMS would have difficulty generating these data as 
well. Your question highlights the need for CMS to monitor claims data 
to detect potential access problems at the community level.
    Queston 6. Many people, including the Medicare Payment Advisory 
Commission, are recommending that Congress eliminate the SGR and 
replace it with another formula to calculate updates to physician 
payments. However, there isn't a clear answer as to what the SGR should 
be replaced with. Could you outline some of the questions that Congress 
needs to answer in developing a replacement for the SGR system? What 
type of information does Congress need before making decisions, and 
what type of policy questions will Congress need to answer?
    As I outlined in my testimony, a physician payment update policy 
must balance concerns about program sustainability with the need to 
maintain adequate payment rates to ensure that beneficiaries have 
access to physician services. Because the paramount consideration in 
setting payment rates is ensuring appropriate beneficiary access to 
services, timely and detailed data on Medicare beneficiary service use 
are essential to achieving this balance. Congress could consider 
whether CMS currently has the resources to generate these data in a 
timely manner and communicate the importance of this task to the 
agency.
    Since targets were established, spending growth for physician 
services that was viewed as unsustainable has been greatly moderated. 
Before considering a completely new system, Congress may want to 
consider whether modifications to the SGR system could address its 
perceived shortcomings, such as year-to-year rate instability. When 
contemplating an entirely new system, Congress may want to consider 
whether the new system will be able to restrain spending growth and 
help ensure the long-term sustainability of the program. The approach 
Medicare tried before 1992 constrained fee increases, but not overall 
spending.
                                 ______
                                 
Responses for the Record of Theodore Lewers, Trustee, American Medical 
                              Association
                   questions from chairman bilirakis:
    Question 1. In your testimony, you mentioned that errors made by 
the Centers for Medicare and Medicaid Services (CMS) in 1998 and 1999 
have shortchanged physicians by $20 billion to date. Could you explain 
this further? It was my understanding that CMS is required by statute 
to correct past projection errors. Is that not the case? What happened 
with the 1998 and 1999 errors? How do these past errors factor into 
this year's payment reduction?
    In annually calculating the SGR, estimates by the Centers for 
Medicare and Medicaid Services (CMS) for GDP growth and enrollment 
changes in 1998 and 1999 have shortchanged funding for physicians' 
services by $20 billion to date. CMS projected that Medicare+Choice 
enrollment would rise by 29 percent in 1999 and that fee-for-service 
enrollment would fall by 4.3%, even though many HMOs were abandoning 
Medicare. In fact, as accurate data later showed, managed care 
enrollment increased only 11 percent in 1999, a difference of about 1 
million beneficiaries. This means that when CMS determined the fee-for-
service spending target for 1999, it did not include the costs of 
treating about 1 million beneficiaries. Nevertheless, since the SGR is 
a cumulative system, each year since 1999, the costs of treating these 
1 million patients have been and will continue to be included in actual 
Medicare program expenditures, but not in the SGR target. Clearly, this 
disparity should be remedied. Without these 1998 and 1999 projection 
errors, the 5.4% Medicare payment cut in 2002 would have been smaller, 
and, unless remedied, these errors will continue to negatively impact 
annual physician updates.
    CMS acknowledged its 1998 and 1999 projection errors at that time, 
but concluded it did not have the authority under the law to correct 
its mistakes. We disagreed, and supported a clarification under the 
Balanced Budget Refinement Act of 1999 (BBRA) requiring CMS to fix past 
projection errors as actual data becomes available. The BBRA, however, 
applied with respect to SGR projections after the 1999 update.
    Question 2. In your testimony, you indicated strong support for 
repealing the sustainable growth rate (SGR) and replacing it with an 
inflationary adjustment. However, in the past, the American Medical 
Association (AMA) has supported refining the SGR to reduce payment 
volatility, including the adoption of a five-year average for growth in 
the gross domestic product (GDP) and the tightening of current 
statutory update limits. How would these refinements reduce payment 
volatility? Are these options the AMA continues to support?
    While those refinements might reduce payment volatility, they would 
not eliminate the possibility of multi-year payment cuts that put 
elderly and disabled Americans' access to high quality health care at 
risk. In fact, CMS is currently projecting such a wide divergence 
between target and actual spending that narrowing the limits on payment 
updates would mean only that physicians would face perhaps a decade-
long payment freeze instead of the current projection of a nearly 20% 
cut over four years.
    Further, refining the sustainable growth rate (SGR) would leave in 
place the current expenditure target system, which is a flawed concept. 
The AMA has always been opposed to this type of system. Simply 
tinkering with the SGR formula will not remedy the fact that if the 
Medicare program is not adequately funded, physicians will be forced to 
ration care to their patients. Further, maintaining a payment update 
system that is linked to the U.S. Gross Domestic Product (GDP) is 
inherently flawed. The GDP is a measure of the economy that bears 
little relationship to the health needs of Medicare beneficiaries. 
Indeed, incidence of disease does not lessen with downturns in the 
economy.
    The improvements to the payment update formula that were part of 
the Balanced Budget Act of 1997 (BBA) and the BBRA were as much change 
as we were able to accomplish at those times. It is apparent, however, 
that even these refinements to an expenditure target system have not 
eliminated the problems with the target. We agree with MedPAC that the 
goals of controlling patients' use of services while maintaining 
payment updates that keep up with the cost of inflation are simply 
incompatible.
    Question 3. The current physician fee schedule update system 
includes an expenditure target. It is my understanding that the target 
was put in place to curb spending growth due to significant increases 
in the volume and intensity of physician services provided in the 
1980s. You testified in strong opposition to an expenditure target 
system. Are there other ways to address growth in the volume and 
intensity of physician services provided? If so, please provide a 
detailed description of these alternatives.
    Physicians' services are the only segment of the Medicare program 
that are subject to an expenditure target. No other provider is paid on 
this basis. An expenditure target assumes that physicians have a 
collective incentive to control the volume of services. This is 
incorrect, however, because aggregate spending targets do not create 
direct incentives for any individual physician.
    In large part, the volume and intensity of physician services is 
driven by technological advances and other improvements in clinical 
practice that have extended and improved the lives of Medicare 
beneficiaries. Any restrictions on the availability of such services to 
the elderly should be determined through national policy and not by 
individual physicians who are trained, and indeed have a Hippocratic 
Oath, to provide appropriate treatment for each of their patients. 
Imposing an expenditure target that attempts to ration care indirectly 
is failed public policy.
    If CMS believes that some new services are not of any benefit to 
the elderly, it need not approve coverage for these services. If, on 
the other hand, CMS believes physicians are providing services that are 
not necessary in individual cases, it has a wide array of tools--such 
as utilization review and physician profiling--available to detect and 
eliminate abusive billing practices.
    Question 4. The Medicare Economic Index (MEI) is a common component 
of both the SGR system and the proposed update system you have 
discussed in your testimony. You have identified a number of flaws in 
the current composition of the MEI. How can the MEI be improved so that 
it more accurately represents increases in the cost of operating a 
medical practice, including premium rate increases.
    In the early 1970s, CMS developed the MEI to measure increases in 
physician practice costs. A key component of the MEI has been a 
``productivity adjustment,'' which offsets practice cost increases. 
Over the last eleven years, CMS estimates of productivity gains have 
reduced annual increases in the MEI by 27 percent. Such estimates 
contrast with MedPAC estimates of the degree to which productivity 
gains offset hospitals' cost increases. In fact, in 2001, MedPAC's 
estimate for hospitals was -0.5 percent, while CMS' estimate for 
physicians was -1.4 percent. It is highly improbable that physician 
practices could achieve such substantial productivity gains in 
comparison to hospitals, which arguably have a much greater opportunity 
to utilize economies of scale. Indeed, physicians have very limited 
ability to increase productivity. Economic and societal factors have 
forced physicians to see and treat as many patients as possible within 
a single day. At a certain point, it is virtually impossible to 
increase productivity through increased patient visits or medical 
procedures.
    In recommending a framework for future payment updates, MedPAC is 
advising that the MEI should simply measure inflation in practice costs 
and that productivity should be separately reported. MedPAC further 
recommends that the productivity adjustment be based on multi-factor 
productivity instead of labor productivity, and estimates that this 
would significantly reduce the productivity adjustment that CMS 
currently uses in updating the Medicare fee schedule.
    We agree with the general framework of MedPAC's recommendations. We 
also believe that MedPAC should be directed to look at other aspects of 
the MEI--such as the treatment of liability insurance premiums, which 
we do not believe are adequately reflected under the current formula--
to determine if additional changes are needed. We look forward to 
working with the Subcommittee to implement the details of a new payment 
update system.
    Question 5. At its January meeting, the Medicare Payment Advisory 
Commission reported that there is no evidence indicating that 
beneficiary access has been impaired as a result of the 2002 negative 
update. For example, most physicians are still participating in 
Medicare. However, much of the testimony today mentions access. How do 
you reconcile this? Is there an access problem?
    The Medicare Payment Advisory Commission (MedPAC) warned in June 
2001 that if the 2002 update was lower than the CMS estimate, which at 
that time was -0.1 percent, it ``could raise concerns about the 
adequacy of payments and beneficiary access to care.'' Clearly, the 5.4 
percent cut is significantly lower than 0.1 percent.
    The 5.4% cut took effect on January 1, and MedPAC met on January 16 
and 17. It was at this time that MedPAC reported that there is no 
evidence indicating impaired beneficiary access. Yet, there was 
virtually no way that the Commission could have had any information on 
how the negative update was affecting access at that time. In fact, 
what the Commission concluded in January was that access seemed to be 
adequate in 1999 and that there was insufficient information to draw a 
conclusion about access at the current time. In its just-released 
annual report, MedPAC said that ``payments for 2002 may be too low 
raising concerns about beneficiary access to care.''
    Further, although it may be too early to clearly understand the 
full impact of this cut, there are early warning signs that must be 
recognized and that indicate significant problems. For example, a 
cardiology group in Colorado is being forced to lay off employees and, 
in Texas, spine surgeons at Baylor University plan to stop taking 
Medicare patients. In addition, there have been many press reports 
about reduced access resulting from the 5.4% cut that are very 
alarming. We have attached a sampling of those reports for your review.
    Further, CMS predicts that under the current system the updates 
over the next three years will be, respectively, -5.7, -5.7 and -2.8. 
This is roughly a 20% cut in Medicare payments over 4 years (2002 
through 2005), and this number increases to almost 30% when you account 
for medical inflation. Moreover, the 2005 conversion factor predicted 
by CMS would be lower than the conversion factor in 1993. Physicians 
will be paid less in 2005 than they were in 1993. A 20 to 30 percent 
pay cut over four years would add to the already significant pressures 
on physicians to discontinue or limit the provision of services to 
Medicare patients.
    Question 6. With positive updates in 2000 and 2001 and now a 
negative update in 2002, it is clear that the current update system is 
volatile and unpredictable. How would you fix the physician fee 
schedule update system to prevent instability in payment changes from 
year to year and ensure that Medicare beneficiaries continue to receive 
the quality care they deserve?
    As discussed above, we wholeheartedly agree with MedPAC's 
recommendations to replace the SGR system. We believe that the current 
update system should be replaced with one that:

 Eliminates the use of the SGR or any other expenditure target;
 Uses a more realistic productivity assumption in calculating 
        the MEI; and
 Bases annual updates primarily on the revised MEI but allow 
        MedPAC to recommend and Congress to adopt higher or lower 
        updates.
    We look forward to working with the Subcommittee and Congress on 
the details of a new payment update system that better reflects 
increases in practice costs.
                  question from ranking member brown:
    Question 7. Many providers are concerned about Medicare payment 
reductions that are scheduled to occur this year or next. In some 
cases, these are reductions that were enacted in the Balanced Budget 
Act of 1997 (BBA). In other cases, these reductions will occur because 
temporary payment increases implemented since the BBA are scheduled to 
expire. However, it seems that the problem with the physician payment 
system is different. In this case, there are major problems with the 
underlying formula used to update payments to physicians. Instead of 
figuring out how to offset a planned reduction, Congress is going to 
have to figure out how to rewrite a formula. Could you comment on how 
the problem with physician payments is unique.
    The two giveback bills, the BBRA and the Medicare, Medicaid and 
SCHIP Benefit Improvement and Protection Act of 2000 (BIPA), generally 
adjusted specific payment updates for hospitals, home health agencies 
and other providers that had been set by Congress in the BBA. Congress 
does not set physician updates; they are set by a formula that runs on 
automatic pilot. Legislation to address the physician update problem 
would replace a system with the flaws in the underlying payment 
structure. This is needed to ensure that Medicare payments 
appropriately reflect increases in practice costs. Otherwise, as CMS 
predicts, the current system will produce negative updates over the 
next three years, which would be, respectively, -5.7, -5.7 and -2.8. 
This comes to almost a 20% cut in Medicare payments over 4 years (2002 
through 2005), and this number increases to almost 30% when you account 
for medical inflation. The 2005 conversion factor predicted by CMS 
would be lower than the conversion factor in 1993. Congress did not 
intend for the SGR payment system to pay physicians less in 2005 than 
they were in 1993. Further, a 20 to 30 percent pay cut over four years 
would add to the already significant pressures on physicians to 
discontinue or limit the provision of services to Medicare patients, 
thereby creating a significant access problem.
                 questions from representative norwood:
    Question 1. Do you believe that physicians, generally, are 
reimbursed at a rate that is below the cost of the treatment provided?
    Question 2. Do you believe that is the case for any specific 
physician or any specific treatment?
    In many cases, Medicare payments are below the cost of providing a 
service. More significantly, however, is the fact that over the last 11 
years, Medicare payments to physicians have been significantly less 
than increases in practice costs. The 5.4% cut, effective on January 1, 
2002, is the largest payment cut since the Medicare physician fee 
schedule was developed more than a decade ago, and is the fourth cut 
over the last eleven years. Since 1991, Medicare payments to physicians 
averaged only a 1.1 percent annual increase, or 13 percent less than 
the annual increase in practice costs, as measured by the Medicare 
Economic Index (MEI).
    Further, CMS predicts that under the current system the updates 
over the next three years will be, respectively, -5.7, -5.7 and -2.8. 
This is roughly a 20% cut in Medicare payments over 4 years (2002 
through 2005), and this number increases to almost 30% when you account 
for medical inflation. Moreover, the 2005 conversion factor predicted 
by CMS would be lower than the conversion factor in 1993. Physicians 
will be paid less in 2005 than they were in 1993. A 20 to 30 percent 
pay cut over four years would add to the already significant pressures 
on physicians to discontinue or limit the provision of services to 
Medicare patients.
    These cuts impact all physicians and other health care 
practitioners whose rates are tied to the physician fee schedule, as 
well as the health system as a whole. For example, many physician 
practice plans affiliated with an academic institution provide 
substantial support to the teaching program. We understand that the 
current cuts, as well as any potential future cuts, are seriously 
impacting these practice plans. This, in turn, can impact the viability 
and quality of the teaching program, which has far-reaching 
implications.
    In addition, the Marshfield Clinic in Wisconsin recently reported, 
based on their internal analysis, that the Clinic recovers only about 
70% of its costs in providing Medicare Part B services, and, that for 
FY 2002, Medicare revenue will decrease as a percent of costs to 
approximately 68.5%. Further, the Medical Group Management Association 
(MGMA) conducted a survey of its members and found that average total 
operating costs from 1999 to 2000 increased by 6.2%.
    Finally, these Medicare cuts are exacerbated by the fact that 
physicians are experiencing sharp increases in professional liability 
premiums.
    These trends cannot be sustained.
                                 ______
                                 
    Responses for the Record of Martha McSteen, President, National 
           Committee to Preserve Social Security and Medcare
                  questions of hon. michael bilirakis
    Question 1. In your testimony you state that ``the parts of the 
country that are designated Health Professions Shortage Areas (HPSAs) 
or Medically Underserved Areas (MUAs) are also the areas with the 
lowest physician reimbursement.'' Cay you explain this further? Is 
there data that indicates beneficiaries in these areas already have 
greater barriers to access to care?
    Areas that are designated Health Professionals Shortage Areas, for 
a variety of reasons have not attracted sufficient numbers of 
physicians. Although some of them are urban areas with sufficient 
Medicare physician reimbursement levels, many of them are in fact rural 
areas. Rural areas in particular have low levels of Medicare physician 
reimbursements. Many members of the Subcommittee on Health of the 
Energy and Commerce Committee remarked during their opening statements 
that their rural districts have very low Medicare physician 
reimbursements levels. The situation is the same with Medically Under 
served Areas, those areas with insufficient numbers of all health care 
providers. Far too many of them are rural areas with low Medicare 
physician reimbursement. The problem feeds on itself: Medicare 
reimbursements stay low, or decrease (as happened this year), therefore 
physicians do not locate in these areas, and they remain HPSA and MUA.
    Question 2. Have your members seen a different in access between 
primary and specialty care physicians? If so, do you know why?
    They have not reported any difference to us.
    Question 3. With positive updates in 2000 and 2001 and now a 
negative update in 2002, it is clear that the current update system is 
volatile and unpredictable. How would you fix the physician fee 
schedule update system to prevent instability in payment changes from 
year to year and ensure that Medicare beneficiaries continue to receive 
the quality care they deserve?
    Medicare beneficiaries need a system that will ensure they continue 
to have access to quality care. This means access to a physician and 
sufficient time with the doctor as well. We believe Congress, with 
advice from MedPac, physicians groups and other knowledgeable parties, 
can arrive at a formula that is fair to beneficiaries, physicians and 
taxpayers. These are the parties most appropriate to determine how to 
fix the formula
                   questions of hon. charlie norwood
    Question 1. Do you believe that physicians are, generally 
reimbursed at a rate that is below the cost of the treatment provided?
    No, not generally. However, with inflation the cost of everything 
goes up, not down. Certainly, physicians cannot have cuts in payments 
when their cost of operations is going up.
    Question 2. Do you believe that is the case for any specific 
physician or any specific treatment?
    As a consumer and beneficiary organization, we only hear from 
Medicare beneficiaries. Our members have not reported this to us. We 
have not heard from physicians.
                    questions of hon. sherrod brown
    Question 1. Medicare fee-for-services is the plan of choice for 
about 85 percent of seniors. In any given year, almost all seniors 
receive Part B services, the most common of which are physician 
service. Given these facts, it is particularly important that Congress 
work on revising the physician payment formula to ensure that payments 
are appropriate. Otherwise, we could end up in a situation where tens 
of millions of beneficiaries are at risk due to instability in Medicare 
physician payments. What do you think could happen to seniors if large 
numbers of physicians either dropped out of Medicare of decided not to 
accept new Medicare patients?
    This would certainly create a crisis situation for seniors. The 
doctors who continue to accept Medicare would quickly find their 
practice full, reaching the saturation point they would not be able to 
accept any more patients. We know that seniors could not self-pay; most 
are on low fixed incomes. Nor should they have to self-pay this was the 
situation Medicare was designed to prevent. Seniors would have no place 
left to go for treatment. Without physician management, senior's 
chronic conditions would quickly escalate to acute episodes requiring 
long in hospital stays or surgery. Persons with high blood pressure 
would have strokes, persons with heart problems would have heart 
attacks and those with diabetes would have all of the complications 
that result from that disease. Treatment in hospital for acute epos 
ides and for surgery cost far more than years of routine physician 
visits. This would ultimately cost the Medicare system far more than 
increasing payments to physicians.
    Question 2. If Congress does not fix the problem with the physician 
payment formula in the Medicare fee-for-service system, I worry that 
physicians could decide to drop out of the Medicare program. I'm afraid 
that we could end up with a have-and-have-not situation, where seniors 
with less money would have less access to physician services than 
seniors who can pay physicians with private funds. One of the 
fundamental tenets of the Medicare program is that all seniors are 
treated equally, regardless of their ability to pay. How important is 
it for Medicare to ensure that seniors of all income levels have access 
to the same level or care?
    This is crucial. We don't want to develop 2 Medicare systems, one 
for the rich and one for the poor. In fact, Medicare was developed to 
ensure that all seniors have access to the same level of quality care. 
We don't want to means test Medicare.
    Question 3. Physicians and other practitioners--including nurse 
practitioners, physician assistants, and more--are really the 
foundation of the Medicare fee-for-service system. We need to maintain 
adequate payments for these providers so we can keep the fee-for-
service system strong. Could you elaborate on how important the fee-
for-service Medicare program is to seniors?
    The Medicare fee-for-Service system is literally a lifesaver for 
seniors. As you stated, 87% of seniors remain in the traditional 
Medicare program, enrollment in Medicare Plus Choice plans is down from 
an all time high of 15% down to 13%. This is despite years of CMS 
trying to attract Medicare Plus Choice plans and trying to enroll 
beneficiaries in the plans. Plans have proven to be very unbelievable; 
they withdraw from particular coverage areas, raise premiums and copays 
and decrease benefits. The Medicare Plus Choice Plans have throw the 
lives of many seniors into total disarray by abruptly dropping hundreds 
of thousands of seniors from their plans leaving these seniors 
scrambling to find alternative coverage. Fortunately, fee-for-service 
Medicare was there to provide essential coverage. What would almost one 
million seniors (933,000) have done in 2001 if traditional Medicare 
were not there when the Medicare Plus Choice Plans withdrew? We must 
make sure seniors never have to face this by keeping traditional 
Medicare strong and viable. The M+C experience proves we cannot rely on 
private companies to provide critical lifesaving coverage for seniors. 
Private companies are about profits. We cannot rely on private 
companies to ensure high quality health care; this is our collective 
responsibility as a people, otherwise know as the government's 
responsibility. Therefore, alternatives can be made available, but the 
bedrock of Medicare must be fee-for-service and we must continue to 
strengthen and improve this program.
                                 ______
                                 
Responses for the Record of Allison Weber Shuren, The American College 
                         of Nurse Practitioners
  responses to questions presented by the honorable michael bilirakis
    Questions #1: In your testimony, you talk about ``practices that 
will stop offering vaccines, other injections, and blood drawing 
services as they simply can no longer afford to do so.'' What options 
are left for beneficiaries to obtain these necessary services?
    Response #1: Though the 5.4% cut is a very recent change, members 
of the American College of Nurse Practitioners (ACNP) are reporting 
that it is already affecting access, and the willingness or ability of 
nurse practitioners and physicians to invest in additional personnel, 
equipment, and other inputs. We have heard repeatedly of practices that 
will stop offering vaccines, other injections, and blood drawing 
services as they simply cannot afford to do so. For example, an NP in 
New York informed us that her practice is planning on cutting certain 
conveniences already, such as offering laboratory and EKG services on 
site. As a result, Medicare beneficiaries will now be required to go to 
an outside laboratory and to a Cardiologist for an EKG. Beneficiaries 
now will be forced to travel in order to have such diagnostic tests, 
and our members fear that many Medicare beneficiaries will simply 
choose not to have necessary procedures performed.
    Question #2: You are representing nurse practitioners--allied 
health professionals who are padia set percentage of the physician fee 
schedule. Are there other allied health professionals whose payment 
rates are based on the physician fee schedule? If so, please identify 
them.
    Response #2: A number of allied health professionals receive 
payments under the Medicare program that are based upon the physician 
fee schedule. According to Section 1833 of the Social Security Act, the 
allied health professionals who are reimbursed under the Medicare 
program and the percentages they receive of the physician rate are 
listed below:

a. Nurse Practitioners, Physician Assistants, Clinical Nurse 
        Specialists, and Medical Nutrition Therapists are reimbursed at 
        85% of the physician rate.
b. Certified Nurse Midwives are reimbursed at 65% of the physician rate
c. Certified Registered Nurse Anesthetists are reimbursed at 80% of the 
        physician rate
d. Psychologists are reimbursed at 80% of the physician rate
e. Clinical Social Workers are reimbursed at 100% of the physician rate 
        for covered diagnostic tests (according to the Part B Answer 
        Book, 2002 Edition)
f. Assistants at Surgery are reimbursed at 85% of the physician rate
g. Occupational and Physical Therapists are reimbursed at 100% of the 
        physician rate
    Question #3: You have identified a number of flaws in the current 
composition of the Medicare Economic Index (MEI). How can the MEI be 
improved so that it more accurately represents increases in the cost of 
operating a medical practice, including premium rate increases?
    Response #3: There appears to be broad support for a number of 
steps Congress can take to address the existing concerns with the 
Medicare Economic Index (MEI). First, the MEI must be refined to 
include non-labor productivity as a factor. At present, the MEI only 
recognizes growth in labor productivity. In addition, the MEI must also 
be adjusted to be a forecast that reflects cost changes for the coming 
year and take into account, among other things, the tremendous 
increases in malpractice premiums being experienced in state after 
state; increased practice operational costs; and the expenses 
associated with developing, implementing and maintaining compliance 
programs; and the new HIPAA Privacy Standards. When the government 
imposes additional burdens on providers, the MEI must reflect the real 
cost of complying with those burdens.
    Question #4: The current physician fee schedule update system 
includes an expenditure target. It is my understanding that the target 
was put in place to curb spending growth due to significant increases 
in the volume and intensity of physician services provided in the 
1980s. You testified in strong opposition to an expenditure target 
system. Are there other ways to address growth in the volume and 
intensity of physician services provided? If so, please provide a 
detailed description of these alternatives.
    Response #4: The Medicare Payment Advisory Commission (MedPAC) 
released a report in March 2001 encouraging Congress to replace the 
SGR. In light of this recommendation, MedPAC also addressed the issue 
of controlling spending for physician services, with which we concur. 
The report states, ``If volume growth reemerged as a concern, a better 
strategy might depend on: 1) trying to achieve appropriate use of 
services through outcomes and effectiveness research; 2) disseminating 
tools for applying this research, such as practice guidelines; and 3) 
developing evidence-based measures to assess the extent to which 
knowledge is being applied (PPRC 1994).''
    Question #5: I appreciate your support of this Committee and our 
efforts to reform the methodology behind the update for physician 
services. In your testimony, you list several steps Congress can take 
to address the current situation. How would you prioritize those and 
how would you rank the costliness of those priorities?
    Response #5: Our recommendations as reported at the February 14 
hearing in order of priority are: 1) Remove and replace the SGR system. 
2) Refine the MEI to include non-labor productivity as a factor; 3) 
Adjust the MEI to be prospective in nature rather than retrospective; 
and 4) Correct erroneous estimates from previous years--the current 
situation permits such arbitrary and capricious results that taint the 
system and undermine basic confidence in the Medicare program.
    We understand that modifying the system to alleviate the 5.4% cut 
may entail a considerable price tag; however, Congress must take 
action. Even if providers and practices are able to withstand a one 
time 5.4% cut, the compounding nature of reimbursement cuts as 
projected by the Centers for Medicare and Medicaid Services (CMS) for 
the next five years is staggering. According to CMS projections, 
providers will be operating at a -18.3% cut by 2005. The estimated 
decline in reimbursement will make it impossible for providers to 
operate within the Medicare program, thereby damaging our seniors 
insurance system and threatening the access to care they deserve.
    Question #6: With positive updates in 2000 and 2001 and now a 
negative update in 2002, it is clear that the current update system is 
volatile and unpredictable. How would you fix the physician fee 
schedule update system to prevent instability in payment changes from 
year to year and ensure that Medicare beneficiaries continue to receive 
the quality care they deserve?
    Response #6: The Sustainable Growth Rate (SGR) system must be 
eliminated. The automatic spending target mechanism needs to be 
replaced with a mechanism whose focus is to, in some rationale manner, 
determine the increased or decreased costs associated with providing 
services. As currently structured, the spending target operates as an 
automatic tax on physician fee schedule providers that can jeopardize 
the availability of health care to our elderly without any benefit of 
Congressional debate, nor an opportunity for providers, patients, and 
patient advocates to discuss whether such a cut or other alternatives 
are appropriate from a policy perspective. Why are health care 
professionals automatically singled out to bear a disproportionate 
burden of a diminished Gross Domestic Product? We have no problem with 
health care providers sharing in the burden to balance federal 
expenditures in tough budget times, but we should have the opportunity 
at those moments to engage with Congress and the public regarding 
alternatives to such cuts, and the pertinent policy issues driving the 
perceived need to decrease Medicare payment rates--particularly, where 
the cut is so devastating as to risk the ability of the program to 
protect the very individuals it was designed to assist.
   responses to questions presented by the honorable charlie norwood
    Question #1: Do you believe that physicians are, generally, 
reimbursed at a rate that is below the cost of the treatment provided?
    Response #1: The Balanced Budget Act of 1997 granted Nurse 
Practitioners the statutory authority to bill directly under the 
Medicare program, but according to the Social Security Act, Nurse 
Practitioners are only reimbursed at 85% of the physician rate for 
delivering the exact same services. Therefore, Nurse Practitioners 
automatically receive a lower Medicare reimbursement for the services 
performed.
    Furthermore, Nurse Practitioners and physicians who provide, or who 
are part of groups that provide, technical component services such as 
ultrasound and other basic diagnostic testing for their Medicare 
beneficiaries, experienced an additional 4 to 6 percent cut in practice 
expense reimbursement associated with these services this year. This 
cut was implemented by CMS without any notice in last year's proposed 
rule, and became apparent only after health care providers around the 
country began to calculate payment rates based on the Final Fee 
Schedule published November 1, 2001. Given the instability of the 
update factor and the practice expense formula, Nurse Practitioners 
cannot help but fear additional cuts next year unless these problems 
are addressed. If the update factor suffers another 3% decrease next 
year that would leave Nurse Practitioners, just 10 months from now, 
receiving as much as 23% below the level of reimbursement that other 
providers received just two months ago. If we consider the change in 
payment for technical component services that number could rise to 29%.
    In addition, in sharing your question with our members, we received 
various feedback. Some members mentioned specific treatments which they 
felt are underpaid, while others stated that everything under the 
Medicare program is reimbursed well below the accepted range of 
payment.
    Question #2: Do you believe that is the case for any specific 
physician or any specific treatment?
    Response #2: ACNP members shared a number of specific examples of 
services whose Medicare reimbursement rates do not cover the cost of 
the treatment. Our members comments are listed below:
    `` . . flu influenza immunization. CMS reduced the payment this 
year at the same time the cost of the immunization went up 27%!!! The 
flu immunization program immunization rates have decreased over the 
past two years per CMS claims data . . . Therefore, many providers are 
not providing this service for their patients.''
    ``I can say that services provided for these [subacute] patients 
under the Medicare Skilled Nursing regulations are under-reimbursed. We 
struggle to keep this much needed, very effective, program going.''
    ``I think that e&m [evaluation and management] codes for nursing 
home rounds are underpaid for NPs (99311, 99312, 99313, 99301, 99302, 
99303).''
    ``Everything we do is reimbursed at well below the accepted range 
of payment--and that's when we get paid.''
    ``I think reimbursement for any medicare visit is too little, 
especially for primary care. We do a lot with physicals, scheduling 
bone density tests, mammograms, colonoscopies, etc. All of this 
teaching, planning and time spent doing a physical, health promotion is 
given little credit.''
                                 ______
                                 
  Responses for the Record of Thomas R. Russell, American College of 
                                Surgeons
             questions from the honorable michael bilirakis
    Question 1. The Medicare Economic Index (MEI) is a common component 
of both the current sustainable growth rate (SGR) system and the 
proposed update system you have discussed in your testimony. You have 
identified a number of flaws in the current composition of the MEI. How 
can the MEI be improved so that it more accurately represents increases 
in the cost of operating a medical practice, including premium rate 
increases?
    The purpose of the MEI is to measure changes over time in the 
prices of the various components involved in providing physician 
services. The American College of Surgeons believes that the current 
MEI methodology contains technical deficiencies and urges Congress to 
direct the Secretary of Health and Human Services (HHS) to make needed 
changes. As you know, the MEI is important because it is the basis for 
the annual inflation updates to the physician fee schedule.
    Over the last several years, the College has shared its MEI 
concerns with the Health Care Financing Administration (HCFA) and the 
Centers for Medicare and Medicaid Services (CMS) in commenting on 
proposed agency regulations and in other communications, but the 
problems persist. We do not believe that the MEI as currently 
structured provides an appropriate measure on which to base annual 
adjustments in the physician fee schedule.
    The MEI continues to have essentially the same structure that it 
has had since its inception in 1972. Today, however, the Medicare 
program pays for physician services totally differently than it did in 
1972. At that time, physicians were paid their reasonable charges, and 
the MEI's principal role was to limit the portion of the annual 
increases in charges that Medicare would recognize in its 
reimbursement. The portion of charges not recognized by Medicare was 
owed by the beneficiary. In contrast, physicians today are paid based 
on a government-set fee schedule, and--importantly--physicians face 
strict limits on the amount that can be balance-billed to the 
beneficiary. The College strongly believes that HCFA should re-examine 
the structure of the MEI rather than continue to make only minor 
changes in an index that was developed 30 years ago in a different 
Medicare payment context. At a minimum, we urge four changes.
    Recommendation--The price proxy used to measure changes in the 
physician earnings component of the MEI should be the employment cost 
index (ECI) for professional workers, not the average hourly earnings 
(AHE) for total non-farm workers.
    The component of the MEI designed to track changes in the cost of 
the physician work component of the fee schedule uses the average 
hourly earnings of all non-farm workers rather than the more 
appropriate category of all professional workers. To support its use of 
the non-farm worker category as the proxy, CMS has cited Committee 
report language from 1972. The report language states that ``it is 
necessary to move in the direction of an approach to reasonable charge 
reimbursement that ties recognition of fee increases to appropriate 
economic indexes so that the program will not merely recognize whatever 
increases in charges are established in a locality.'' And, ``. . . 
Initially, the Secretary would be expected to base the proposed 
economic indexes on presently available information on changes in 
expenses of practice and general earnings levels.'' CMS also states its 
own conclusion that ``there is an obvious concern about circularity if 
increases in prevailing charges are linked to increases in physician 
charges, which are then tied to increases in physician income.''
    The College disagrees with the CMS position and emphasizes two 
points: (1) the Committee's concern about charge-based reimbursement is 
not relevant since implementation of the resource-based physician fee 
schedule; and (2) an index based on the earnings of all professional 
workers would have been sufficient to address the Committee's concern 
because physicians comprise a small proportion of all professional 
workers. Because physicians represent less than 3 percent of all 
professional workers in the economy, the circularity point is without 
basis. The College also notes that, in contrast, a significant portion 
of the hospital market basket, which is used as the basis for the 
annual update in the inpatient prospective payment system (PPS) rates, 
derives from the actual wages and salaries of civilian hospital 
workers. If there is any case to be made regarding circularity, this 
would seem to be the prime candidate.
    The College believes it would be much more appropriate for Medicare 
to use the rate of growth in the incomes of all professional workers as 
the basis for adjusting payments to physicians, rather than using an 
index based on all non-farm workers in the economy. According to CMS 
estimates used in its most recent rulemaking on the MEI, basing the 
physician earnings portion of the MEI on increases in the incomes of 
all professional and technical workers would have produced an average 
annual MEI of 2.4 percent for the period 1992-1997, compared to an 
average 2.2 percent under the all-worker proxy used by HCFA. The 
College strongly urges the Committee to direct CMS to make this long 
overdue change effective January 1, 2003.
    Recommendation--The non-physician employee compensation component 
of the MEI should be adjusted using a price proxy that reflects the 
increase in skill mix in physicians' offices.
    CMS acknowledges that there has been a substantial shift in the 
skill mix in physicians' offices over the last few years, yet it 
continues to measure price changes using an economic statistic that 
holds the skill mix constant. The agency's rationale for this decision 
is that the use of higher skilled labor reflects the fact that work 
formerly performed in the hospital is now done in ambulatory settings. 
CMS continues its reasoning as follows: ``Skill mix shifts that reflect 
rising intensity of outputs in physician offices are automatically paid 
for by higher charge structures for the more complex mix of service 
inputs. Physicians performing more complex services may hire more 
skilled employees, and, thus, may tend to charge more for their 
services.''
    The College does not understand the CMS argument, or its relevance 
to physician reimbursement under the fee schedule. Medicare pays for 
physician services based on rates set by the government, not based on 
charges. In addition, much of the increased care provided by surgeons 
in their offices is for the post-surgical care of patients. These 
office visits cannot be separately billed under Medicare policy because 
they are included in the global surgical period. It is clear, however, 
that responsibility for much of this portion of patient care has 
shifted to the physician office as patients are discharged from the 
hospital significantly earlier in their recovery than in the past. 
These patients' care requirements are significantly greater and they 
necessitate both a higher skill mix in physicians' office staff and the 
use of more costly supplies and equipment. Physicians' services to 
these patients are supported by their own office resources not by 
hospital staff and supplies as was the case when hospital stays were 
longer.
    The College emphasizes that payments under the Medicare fee 
schedule already fail to cover physicians' actual practice expenses, a 
gap that has widened for surgeons under the recently implemented 
resource-based formula for practice expenses. And the problem is 
compounded by the agency's continuing failure to recognize shifts in 
skill mix in its design of the MEI. We urge the Committee to direct CMS 
to remedy this problem by adopting an index, such as one based on the 
average hourly earnings of health care workers, that recognizes skill 
mix shifts. This change also should be effective January 1, 2003.
    Recommendation--The productivity adjustment should be removed from 
the MEI and treated as one of the other factors affecting the cost of 
providing physician services.
    The MEI, liked the hospital market basket, is an index designed to 
measure changes in prices affecting the cost of physician for services. 
Unlike the hospital market basket, however, the MEI is not a pure price 
index because it includes an offset for increased productivity. The 
offset was included originally for technical reasons to avoid paying 
physicians twice for productivity improvements: once in wage growth 
reflected in the MEI and a second time in the additional services they 
are able to provide due to their enhanced productivity.
    In its March 2002 report to Congress, the Medicare Payment Advisory 
Commission (MedPAC) also recommended removing the productivity 
adjustment from the MEI. The College agrees with MedPAC that 
productivity improvements should be considered as part of the other 
factors affecting the cost of providing physician services. These other 
factors, which include items such as changes in medical science and 
technology, site of service, practice patterns and patient severity, 
often will tend to more than offset productivity growth. Removing 
productivity would make the MEI a pure form of what it is intended to 
be: a price index. It also would make the measure consistent with the 
market basket indices used for other Medicare services such as 
hospitals and nursing homes.
    The College believes that CMS could implement this change January 
2003 and urges the Committee to direct the agency accordingly.
    Recommendation--Medicare should use a forecast of the MEI to make 
the annual update adjustments to the physician fee schedule.
    Currently the fee schedule update for a calendar year is based on 
changes in the MEI that occurred two years prior. This practice causes 
an unnecessary lag in the MEI update and means that it does not reflect 
current experience. When malpractice premiums are skyrocketing as they 
currently are, the MEI is woefully out-of-date and will take two years 
to catch up. The College believes that this is both unacceptable and 
unnecessary. Looking again to the hospital market basket as a model, 
this index is used on a forecast basis to make the annual updates in 
hospital rates under both the inpatient and outpatient prospective 
payment systems. Future updates are adjusted for the forecast error 
made in earlier estimates.
    The College urges the Committee to direct CMS to change the way the 
MEI is used to measure price changes so that it is a forecast of the 
change in the MEI for the coming year. Forecast errors would be 
accounted for in future years' adjustments. This change should be 
implemented January 2003.
    In summary, the College strongly believes that the MEI as currently 
used by CMS does not provide an adequate basis for updating the 
physician fee schedule. The agency continues to rely on decisions it 
made in the early 1970s about the appropriate structure of the index 
although implementation of the physician fee schedule and limiting 
charge has dramatically changed the way physicians are paid and created 
a different context for the MEI.
    Question 2. The SGR system compares cumulative total spending for 
physician services with a spending target. It is my understanding that 
the target was put in place to curb spending growth due to significant 
increases in the volume and intensity of physician services provided in 
the 1980s. Are there other ways to effectively address growth in the 
volume and intensity of physician services? If so, please provide a 
detailed description of these alternatives.
    The College understands that Medicare, like other healthcare 
payers, wants to reimburse only for services that are necessary to 
provide quality healthcare to its beneficiaries. The program seeks 
mechanisms that promote appropriate utilization and financial 
accountability. But your question about how to achieve this is a very 
difficult one. Before sharing our thoughts on your question, I would 
like to address two assumptions that underlie mechanisms like the SGR 
and its predecessor, the Medicare Volume Performance Standard (MVPS).
    The first assumption of these approaches is that physician spending 
is out-of-control, that unnecessary services are being provided. Data 
from the CMS actuaries show that from 1985 through 2000, allowed 
physician charges per aged Medicare enrollee grew at an average annual 
rate of 6.1 percent. Since implementation of the physician fee schedule 
in 1992, the average annual increase has been 4.1 percent (1992-2000). 
By comparison, hospital outpatient spending per enrollee increased an 
average annual 9.6 percent from 1985 through 2000 and an average annual 
7.7 percent from 1992 through 2000. For both of these periods, average 
annual increases in physician spending were about 3.5 percentage points 
lower than the comparable increases for hospital outpatient spending. 
In other words, growth in physician spending has been low to moderate. 
Regarding the corollary assertion that physicians are providing 
unnecessary services, there simply are no data or other evidence to 
corroborate this.
    The second assumption is that the SGR is an effective system to 
control physician spending. It is not. Although it is true that the SGR 
can reduce Medicare spending by imposing onerous price cuts as it is 
doing this year, there is no evidence that it promotes more appropriate 
utilization. In fact, going back to its predecessor, the MVPS, many 
have questioned whether such mechanisms can provide an incentive for 
appropriate utilization of physician services. Critics believe the 
approach is fundamentally flawed and note several problems that negate 
any incentive value. For example, because the target is national in 
scope, no single physician or physician practice can effectively 
control whether the target is met. [For this reason, the original 
Medicare fee schedule legislation included an option for group volume 
performance standards that would allow group practices to opt out of 
the national system and be subject to separate targets set for the 
group. This option has not been implemented.]
    Beyond these very fundamental structural problems are other serious 
issues: the scope of the SGR includes services other than physician 
services, further weakening incentives; the target is set not based on 
the need for physician services, but on arbitrary external factors like 
economic growth; adjustments based on the SGR are made as much as two 
years after the fact--too far removed to affect behavior; when the 
adjustments are actually made, they could make payments in that year 
inappropriately low or unnecessarily high.
    Policies like the SGR are crude attempts to control spending based 
on arbitrary expenditure targets. Better strategies are needed to 
support appropriate utilization and discourage unnecessary utilization 
of services. The College does not have a magic bullet for such a 
strategy. This is a difficult issue that has perplexed physicians and 
insurers for years. We do believe, however, that the solution lies in 
the collection and use of better information and appropriate models of 
care. For example, the government, in collaboration with physicians and 
others, should continue to develop evidence-based models of care and 
techniques to gauge the extent to which the models are being applied. 
The goal should be, as MedPAC has observed, to achieve appropriate use 
of services through outcomes and effectiveness research and through the 
dissemination of tools, such as practice guidelines, for applying this 
research.
    The College also believes that the medical community can make much 
greater use of data that compares treatments and results with 
appropriate care models and with experience of other practitioners. 
These data should be used as part of a non-threatening, continuous 
quality improvement program, not to hit physicians over the head or 
penalize them. Physicians are highly committed professionals who seek 
the best for their patients. Physicians will respond to comparisons and 
other information. We live in an information age of rapidly increasing 
capacity and creativity, yet the practice of medicine is only recently 
beginning to take advantage of the opportunity that information 
technology affords. The College strongly believes that this is the path 
to pursue. It is a course that will not threaten beneficiary access to 
needed services, unlike the path of expenditure targets.
    Question 3. With positive updates in 2000 and 2001 and now a 
negative update in 2002, it is clear that the SGR system is volatile 
and unpredictable. How could you fix the physician fee schedule update 
system to prevent instability in payment changes from year to year and 
ensure that Medicare beneficiaries continue to receive the quality care 
they deserve?
    To address the many problems caused by the SGR and the current fee 
schedule update mechanism, the College urges the Committee to adopt the 
approach contained in the MedPAC recommendations. This is an approach 
modeled on the update mechanisms used for other Medicare services. 
Moreover, it is policy that has been applied since 1982 for hospital 
inpatient services without instability in payment levels or other major 
problems.
    Recommendation--Eliminate the SGR update methodology and replace it 
with an annual update based on factors influencing physicians' costs of 
efficiently providing patient services. The update formula should not 
include any performance adjustment factor based on an expenditure 
target.
    Like MedPAC, the College believes that the physician update should 
be based exclusively on Medicare beneficiaries' need for services and 
the cost of providing those services. Access to physician services 
under Medicare and payment for those services should not be limited, or 
even threatened to be limited, in any manner that could impede 
beneficiary access to the high quality care that Medicare has made 
possible for 36 years. Physician services provide the core of all 
patient care. They are essential for achieving quality care and, in 
addition, we believe they are the most cost-effective of all services 
included in the Medicare program.
    Under this recommendation, MedPAC and the Secretary would establish 
an update framework similar to ones used for other Medicare services. 
In addition to changes in input prices (as measured by the MEI), the 
framework would include components to reflect changes in all other 
factors affecting the cost of delivering physician services. These 
other factors include changes in the volume and intensity of physician 
services due to new technology, site of service shifts, and practice 
patterns, among others. Physician updates would be based solely on 
beneficiary needs and the cost of providing physician services. I 
emphasize that under this recommendation, the SGR would be repealed and 
it would not be replaced with any expenditure target or similar 
adjustment mechanism.
                                 ______
                                 
                       Medical Group Management Association
                                                      March 6, 2002
The Honorable Michael Bilirakis, Chairman
House Committee on Energy and Commerce
Subcommittee on Health
Washington, DC 20515-6115
    Dear Chairman Bilirakis: Please find attached, MGMA's answers to 
member questions related to MGMA board member Dr. Susan Turney's 
testimony before the Health Subcommittee during its February 14, 2002 
hearing regarding Medicare Payment Policy.
    Again, thank you for holding the hearing on this important issue. 
If MGMA can be of further assistance concerning this or any other 
matter, please feel free to contact Anders Gilberg, MGMA government 
affairs representative at 202-293-3450
            Sincerely,
                                  William F. Jessee MD CMPE
                                                    President & CEO
                   questions from chairman bilirakis:
    Question: In your written testimony you mentioned that the impact 
of the 2002 payment cut will be felt beyond the Medicare program can 
you elaborate on this?
    Many private health insurance plans that contract with Medical 
Group Management Association members' group practices use the Medicare 
Resource Based Relative Value System (RBRVS) as a benchmark to set 
private rates. Practices often negotiate contracts with insurers as a 
percentage of Medicare. In addition, a number of state Medicaid 
programs use the Medicare reimbursement framework as a proxy to set and 
annually update payment rates. As a result, any change to the Medicare 
RVUs and/or conversion factor will be felt beyond Medicare as other 
private and public payers adjust their rates accordingly.
    The ripple effect of the cut can be further illustrated using the 
Marshfield Clinic as example. Marshfield Clinic derives revenue 
principally from physician services, and its sources of revenue are 
limited to Medicare, Medicaid, BadgerCare (Wisconsin program for 
uninsured families), commercial insurance, and payments made by 
individuals who are not covered by any commercial or public source. 
Payments from Medicare, Medicaid and BadgerCare are regulated and fall 
considerably short of the cost of providing the services. Medicare is 
the largest component of the public payer mix. Medicare shortfalls 
require the Clinic to increase commercial charges to offset the losses 
created by federal programs. This is particularly challenging in areas 
where Medicare beneficiaries are in greater relative abundance, because 
the losses are spread across a relatively diminishing population of 
workers and individuals.
    The crisis in Medicare reimbursement is becoming increasingly 
precipitous, as more and more seniors transition into the Medicare 
program, overwhelming other sources of revenue. Nationwide, according 
to the National Bipartisan Commission on the Future of Medicare there 
are presently 3.9 workers for every Medicare beneficiary. In the 20 
county Marshfield Clinic service area, which covers more than one-third 
of the land mass of the State of Wisconsin, the regional micro-economy 
is depressed because there are only 3.04 workers for every Medicare 
beneficiary, a ratio not expected on a national basis by the Bipartisan 
Commission until 2017. In some counties in the Clinic service area the 
ratio is already below 2 to 1. I have enclosed a map that shows the 
ratios of employed workers to Medicare beneficiaries in Wisconsin.
    It is also important to note that Medicare fee-for service payments 
in Wisconsin are among the lowest in the nation. Wisconsin's premiums 
for commercial insurance, on the other hand, according to the 
ModernHealthCare Dec. 24, 2001 issue, are the 7th highest in the 
nation, and are ranked above Maryland and DC. We do not believe that 
this is a coincidence.
    In Marshfield's service area, Federal underpayment is one of the 
principle causes of high premiums for commercial insurance, and as 
premiums increase the number of uninsured individuals also increase. In 
addition, costs that are shifted to other sectors of the economy have 
created tensions between rural and urban providers, primary care and 
specialty care clinicians, doctors and HMOs, providers and the employer 
purchasing community, and retirees and workers. In effect federal 
payment shortfalls are the source of many of the problems in the health 
care delivery system. These problems will trouble the country until the 
federal government takes steps to establish parity between federal and 
commercial pricing.
    Question: You testified that the Marshfield Clinic has been 
thinking about entering the Medicare+Choice market. How does the SGR 
system factor into the Marshfield Clinic's concerns about implementing 
a Medicare+Choice plan?
    In 2001, the Clinic had net earnings as a percent of revenue of 
1.58% on revenue of $527 million. We calculate that the revenue impact 
of the Medicare Payment rule will be negative $2.8 million for CY2002. 
In the pro forma analysis of the Medicare+Choice market and the rollout 
of the M+C plan the Clinic assumes that enrollment will not reach a 
critical mass to allow the plan to break even and expand services to 
needed areas until the second or third year of operation. In 2002 we 
expect to lose an additional $2.5 million if we enter the M+C market. 
With such slim margins, even very slight changes in other revenue 
streams take on a magnified consequence. We have assumed that we will 
enroll 5000 Medicare beneficiaries in the first year of operation and 
5000 more in the second year. If these enrollment projections are not 
met the M+C plan losses may be significantly higher forcing the Clinic 
to exit M+C prematurely. This is not a desirable outcome for the 
Medicare program, Medicare beneficiaries in M+C or traditional Fee-for-
Service, or for the Marshfield Clinic.
    Question: In your testimony you mentioned that payment volatility 
plays havoc with your planning and budgeting initiatives because of 
your slim margins. Can you help the Subcommittee understand how early 
in your budget planning process you need to know what the next year's 
Medicare update will be to enable you to properly plan and develop your 
budget?
    Like the federal government, the Marshfield Clinic initiates budget 
planning for the coming fiscal year in January. In the past we have 
relied on update predictions announced at the Medicare Payment Advisory 
Commission in March and subsequently confirmed in the Medicare 
physician fee schedule NPRM published in June or July. Usually the 
Clinic budget is finalized and approved by the Marshfield Clinic's 
Board in August. Like the federal government, the fiscal year for the 
Clinic begins October 1. Changes announced in November that are 
significantly different from those announced in July force the Clinic 
to spread the impact of the period from October--January on the 
remaining three quarters of the fiscal year--a task made more difficult 
because there are fewer months in which to accomplish the expense 
reductions.
    Question: I understand that the Marshfield Clinic serves a large 
rural area in northern Wisconsin. How will the current Medicare payment 
reduction affect your ability to serve rural communities in your 
service area?
    As a matter of policy the Clinic provides services to everyone 
regardless of their ability to pay. Many rural communities that lack 
physician services have asked the Marshfield Clinic to provide services 
in their area. The Clinic has established telemedicine services to 
extend care into many of these areas. The problem is the cost of 
staffing clinic satellite locations. The largest component of the 
Marshfield Clinic's budget is related to staffing. The Clinic presently 
has 102 physician positions open and unfilled in settings where 
services are needed but funding is limited. Physician recruiters have 
advised the Clinic that it will need to pay a premium to attract the 
physicians it needs. Shortages in the critical medical specialties of 
anesthesiology, radiology, orthopedics and dermatology are driving up 
the costs of recruiting and resulting in delays in related areas of 
medical service. The Clinic also has 237 other staff vacancies in all 
of the fields that are essential components of a large integrated 
system of care. Recruiting efforts take place in local, regional, 
state, and national markets.
    It is particularly distressing to the Clinic that the most cost 
effective response to the Medicare payment cut is to freeze hiring 
especially in the more remote areas that the Clinic serves. These areas 
may have significant access problems but do not have the necessary 
volumes of patients to make services viable. It is even more 
distressing that the Clinic's ability to provide charity care is 
further constrained by reductions in Medicare payment. Consequently 
Medicare payment reductions fall on those least capable of dealing with 
health problems. This is very shortsighted.
    Question: You have identified a number of flaws in the current 
composition of the Medicare Economic Index (MEI). How can the MEI be 
improved so that it more accurately represents increases in the cost of 
operating a medical practice, including premium rate increases?
    The MEI should be updated to include accurate measures for a number 
of significant costs borne by physician practices. These costs include 
regulatory burdens such as: increased requirements for documentation, 
conflicting Medicare rules, costly compliance programs, needle stick 
prevention rules, onerous privacy provisions, and the unfunded 
requirement that practices provide free interpreters for patients with 
limited English proficiency. In addition, practices in many states 
currently face a crisis regarding premium increases for professional 
liability insurance. The current MEI does not accurately reflect these 
costs.
    From 1992-2000, MGMA's national practice cost survey indicates that 
total operating costs per physician in an average multi-specialty group 
practice rose 31.7%. During that same period, the MEI increased 21.2% 
and, finally, Medicare payments increased only 13%. While the MEI is a 
more accurate reflection of real world inflation costs than recent 
Medicare payment updates, it should be updated to better reflect 
medical specific economic cost inflation.
    Question: With positive updates in 2000 and 2001 and now a negative 
update in 2002, it is clear that the current update system is volatile 
and unpredictable. How would you fix the physician fee schedule update 
system to prevent instability in payment changes from year to year and 
ensure that Medicare beneficiaries continue to receive the quality of 
care they deserve?
    No other payment system under Medicare fluctuates with the Gross 
Domestic Product (GDP). Only physician fees are fixed to move in line 
with the overall economy. As the economy fluctuates, so do physician 
payments under the SGR system. The fact remains that Medical costs are 
not necessarily tied to the growth of the overall economy
    MGMA urges Congress to take three immediate steps to address the 
current volatile and unpredictable SGR update system.

1. Halt the 2002 5.4% reduction to the Medicare fee schedule,
2. Eliminate the current Sustainable Growth Rate system, and
3. Implement a new methodology that bases Medicare reimbursement on a 
        formula that links annual Medicare updates to actual practice 
        costs.
                 questions from representative norwood:
    Question: Do you believe that physicians are, generally, reimbursed 
at a rate that is below the cost of the treatment provided?
    Medicare reimbursement is significantly below the cost of providing 
physician services. Marshfield Clinic recently worked with the General 
Accounting Office to evaluate Medicare chemotherapy reimbursement and 
oncology practice expense payments. In conjunction with the evaluation 
Marshfield Clinic also conducted an internal analysis to determine to 
what extent the Medicare program covers the cost of providing services 
to Medicare beneficiaries. Our analysis demonstrates that the Clinic 
presently recovers only about 70% of its costs in providing Medicare 
Part B services. We do not believe that we are unique, but suspect that 
the shortfalls in Medicare revenue are common for physicians providing 
Medicare Part B services.
    To calculate the percent of its Medicare allowed costs for which 
Medicare reimbursement is received, Marshfield accountants eliminated 
all expenses and revenues received that might potentially be questioned 
by the Medicare program. Our methodology for FY 2000 follows principles 
applied in our annual FQHC cost report that was audited by external 
auditors and submitted to the state. (Marshfield Clinic in conjunction 
with Family Health Center Inc. functions as a federally qualified 
health center (FQHC) under the Medicaid Program.) For the purposes of 
this analysis all expenses and revenues from activities such as the 
outreach lab, veterinary lab, research and education, rental property 
and optical and cosmetic surgery departments were removed. Our 
accountants also removed all non-Medicare ``Allowed'' costs related to 
our bad debt, interest expenses, marketing programs, government affairs 
activities, National Advisory Council, goodwill amortization and other 
miscellaneous costs.
    For FY 2000 Medicare Revenue was 71.52% of Costs for Fee for 
Service Medicare. For FY 2001 Medicare revenue (un-audited) as a 
percent of costs goes down to 70.59%. For FY 2002 we project that 
Medicare revenue will decrease as a percent of costs to approximately 
68.5%.
    The current shortfall between payments and cost is in part due to 
payment updates that were lowered in anticipation of volume offsets. 
These national decisions assume that increasing volume in response to 
tightening reimbursement takes place uniformly across the country. To 
the extent that rural areas, particularly those with a shortage of 
physicians could not or did not participate in enhancing volume in 
response to tightening payment constraints they suffer a ``fix'' for a 
problem that didn't exist. We urge you to take steps to remedy this 
inequity as soon as possible.
    Question: Do you believe that is the case for any specific 
physician or specific treatment?
    It is difficult to answer this question definitively without a 
mechanism for isolating costs to specific services. Marshfield Clinic 
provides more than 4000 services. In aggregate we know that Medicare 
services are provided below cost.
    The Clinic presently has 102 physician positions open and unfilled 
in settings where the services are needed but funding is limited. 
Physician recruiters have advised the Clinic that it will need to pay a 
premium to attract the physicians it needs. Shortages in the critical 
medical specialties of anesthesiology, radiology, orthopedics and 
dermatology are driving up the costs of recruiting for these 
specialties and may result in limited access to care or delays in 
receiving treatment by the specialist who can best address a patient's 
needs.
    For the present discussion it is important that Congress make the 
distinction between payment adequacy and update adequacy. Even if 
Congress makes wise decisions to fix the annual physician payment 
updating formula, it still must address the underlying problem that the 
baseline from which Medicare payment starts is still significantly 
below the cost of providing services.
    These circumstances are further aggravated in rural areas because 
the physician work adjuster reduces Medicare physician payments in 
rural localities. This disparity in payment is an aspect of Medicare 
law should be revised without delay.
                                 ______
                                 
    Questions for Administrator Scully from Hon. Michael Bilirakis, 
   Chairman, Subcommittee on Health, Committee on Energy and Commerce
    Question 1. With the 5.4 percent negative update for physician 
payments this year, the rationale behind paying for physician services 
differently than other Medicare covered services has come into 
question. It seems as though there would be merit in having consistent 
payment methodologies across different service categories. What makes 
physician services different? Why was a different payment methodology 
put in place for physician services?
    Response: Based on the recommendations of the Physician Payment 
Review Commission (PPRC), one of MedPAC's predecessor organizations, in 
1989, Congress first established a volume control mechanism in the 
Omnibus Budget Reconciliation Act of 1989 as part of the major reform 
of Medicare's payment for physicians' services. The three key parts of 
the legislation were: (1) a fee schedule that redistributed payments 
among types of services and geographic areas, (2) beneficiary financial 
protections (limits on balance billing); and (3) a volume control 
mechanism, called the Medicare Volume Performance Standard (MVPS). The 
MVPS was established because of the concern about large increases in 
expenditures for Medicare physicians' services through the 1980's. 
These large increases in expenditures were on top of growth in the 
number of Medicare enrollees and inflation.
    Physicians are different from other providers in several respects. 
It has long been recognized that physicians are the gatekeepers to 
health care, influencing the volume and intensity of services they 
furnish as well as directing the utilization of other services. 
Physicians can order and receive reimbursement for services (such as 
lab and diagnostic tests) that they do not necessarily personally 
perform. In addition, Medicare's payment for providers such as 
hospitals, skilled nursing facilities and home health agencies is 
bundled. In contrast, physicians bill for each individual service 
provided. For example, even though spending is twice as much for 
hospitals as for physicians, there are about 500 units of service for 
hospitals in comparison to about 7,000 units of service for physicians. 
Under a bundled payment system, the reimbursement amount is the same 
regardless of the volume and intensity of services furnished. With a 
fee-for-service system, the system under which physicians are paid by 
Medicare, the total payment is dependent upon the volume and intensity 
of services furnished.
    The MVPS was an annual system of targets. If expenditures exceeded 
the target, the physician fee schedule update was reduced two years 
later. If expenditures were less than the target, the physician fee 
schedule update was increased two years later. This system allowed 
expenditures to grow for inflation, enrollment, and any policy changes 
that would increase or decrease expenditures. In addition, it included 
an allowance based on historical volume trends for physicians' services 
less a ``performance adjustment factor.'' OBRA 1993 tightened the MVPS 
because large performance adjustments in two years led to a belief that 
the MVPS was too loose.
    The MVPS was replaced with the Sustainable Growth Rate (SGR) in the 
Balanced Budget Act of 1997. The SGR made two major changes to the 
nature of the system. First, the system was made cumulative. This 
eliminated the annual rebasing under the MVPS. That is, if expenditures 
exceeded the target for a year under the MVPS, the update for a year 
would be reduced, but for the next year, the actual base expenditures 
(including the excess expenditures) were the new starting point for 
applying the target and measuring expenditures. The SGR eliminated the 
annual rebasing feature. Second, like the MVPS which was based on four 
factors (price, population, a volume/intensity factor and policy 
changes that would increase or decrease expenditures, less a 
performance adjustment factor), the SGR also is based on the same four 
factors. The difference is that under the MVPS the volume/intensity 
factor was the 5-year historical average of Medicare physician volume 
and intensity of services. SGR changed that volume intensity factor to 
real gross domestic product (GDP) per capita. Having accounted for 
price and population, real GDP per capita is the allowance for growth 
in the volume and intensity of physicians' services.
    Question 2. The current physician fee schedule update system 
includes a spending, or expenditure, target. Is it possible to 
reconcile the need for a spending target with assuring that payments 
keep pace with the needs of Medicare beneficiaries and the cost of 
providing care? Please explain. Are there other ways to address growth 
in the volume and intensity of services provided? If so, please provide 
a detailed description of these alternatives.
    Response: My number one priority is to ensure that Medicare 
beneficiaries have access to the care they need. That includes making 
sure that we maintain the fiscal integrity of the Medicare program to 
so that it is solvent for the beneficiaries of today and the many new 
beneficiaries that will soon be added as baby boomers become eligible.
    The current physician spending target is intended to increase rates 
based on the cost of providing care with an adjustment either up or 
down depending upon on how expenditure growth compares to target rates 
of increase. In the past few years, the system led to updates that 
increased Medicare payment rates above inflation in physician costs. 
Unfortunately, for the next few years, the system will lead to 
adjustments below inflation in physician costs.
    It is possible to reconcile the need for a spending target with 
assuring that payments keep pace with the needs of Medicare 
beneficiaries and the cost of providing care. While the SGR has largely 
been working as designed, it has produced large short-term adjustments 
and instability in year-to-year updates. One way to improve stability 
in the SGR system would be to substitute a multi-year rolling average 
of real per capita GDP in place of single year GDP used in the current 
system. Real per capita GDP can fluctuates in the short term and lead 
to large differences in the year-to-year change to physician fee 
schedule rates. Using multi-year real per capita GDP would link the 
physician expenditure growth to long run trends in economic growth with 
less oscillation from one year to the next in the physician fee 
schedule update.
    Question 3. The sustainable growth rate (SGR) system and its 
reliance on the gross domestic product (GDP) have been widely 
criticized. Specifically, critics have cited the failure of GDP to take 
into account health status, the aging of the Medicare population, costs 
of technological innovations, or escalating costs of operating a 
medical practice. Why is GDP a part of the SGR system? Should the 
annual increase in the expenditure target for physician services be 
limited by the rate of GDP growth? Why or why not?
    Response: Like the MVPS, the SGR growth target is comprised of four 
factors: (1) changes in prices, (2) changes in the fee-for-service 
population, (3) changes in the volume and intensity of services, and 
(4) changes in law or regulation. Under the MVPS, the volume and 
intensity factor was the historical 5-year average of volume and 
intensity of Medicare physicians' services, less 4 percentage points. 
The SGR changed the volume and intensity factor to the real gross 
domestic product (GDP) per capita.
    The 1996 Annual Report to Congress from PPRC indicates the policy 
rationale for using real GDP per capita rather than historical 
physician volume and intensity as the basis for the volume and 
intensity factor.
          ``The use of historical trends, and a fixed deduction of 4 
        percentage points may lead to unrealistic and arbitrary 
        performance standards. High or low expenditure growth 
        eventually becomes part of the historical trend in volume and 
        intensity used to calculate the default performance standards. 
        As a result, reducing volume and intensity growth increases the 
        conversion factors in the short term, but lowers the 
        performance standards over the long term, making them more 
        difficult to meet.''
          ``Linking the performance standard formula to projected 
        growth of real GDP per capita, instead of a five-year 
        historical trend with a fixed deduction of 4 percentage points, 
        would provide a realistic and affordable goal that links the 
        budget targets to the economy as a whole. Projected GDP growth 
        is an appropriate choice because it represents the economy's 
        capacity to grow, while avoiding the effects of business 
        cycles. Real, rather than nominal, GDP growth should used since 
        the formula already accounts for input price inflation; per 
        capita growth should be used because the formula incorporates 
        enrollment growth.''
    Since real GDP per capita measures real growth in the economy, and 
other factors such as technology are difficult to measure, it is 
appropriate to base the volume and intensity component of the SGR on 
real GDP per capita. (In 1995 PPRC recommended adding 1 or 2 points to 
real GDP per capita to allow for advancements in medical capabilities.)
    Question 4. With positive updates in 2000 and 2001 and now a 
negative update in 2002, it is clear that the SGR system is unstable. 
Should the SGR system be completely replaced? Is there any way to 
modify the current update system to make it less volatile and more 
predictable? For example, would a five-year average of GDP growth help? 
What about changing the statutory update limits?
    Response: It is important to note that the SGR system is operating 
largely as designed, constraining the rate of growth in Medicare 
physician spending and linking it to growth in the overall economy, as 
well as to taking into account physician control over volume and 
intensity of services. As such, it is not necessary to do away with the 
SGR entirely. We need to refine it and make it more stable. Use of 
average of real GDP per capita over a number of years would help make 
the system more stable. Revision of the statutory limits on performance 
adjustments could also be considered.
    Question 5. To improve the precision of the measurement of prices 
within the SGR system, should additional factors that affect the cost 
of delivering physician services be included, such as new technology, 
the aging of the Medicare population, site of service shifts, the 
intensity of services provided in physician offices, the preferences 
and needs of beneficiaries, and changes in physician practice patterns? 
If so, which factors should be included and why?
    Response: We have examined the impact of the aging Medicare 
population on Medicare expenditures for physicians' services. To date, 
the aging of the population has had a very small effect on year-to-year 
changes in Medicare expenditures for physicians' services. However, it 
may become more important in the future as the baby boom generation 
becomes eligible for retirement and later as the generation ages. PPRC 
also studied this issue and made similar findings. At this time, the 
law governing physician payment is prescriptive and does not 
specifically allow the target to be adjusted for the aging of the 
Medicare population.
    It is difficult, if not impossible, to measure the effect on year-
to-year changes in Medicare expenditures for physicians' services that 
might result from changes in technology, changes in site of service, 
changes in physician practice patterns, or changes in the needs and 
preferences of beneficiaries. Basing the SGR volume and intensity 
factor on real GDP per capita, or growth of the overall economy, is 
intended to capture these factors. Real economic growth per capita was 
intended as a proxy for the many factors that lead to expenditure 
growth other than inflation, Medicare enrollment, and policy changes 
that could increase or decrease Medicare expenditures.
    Question 6. In your testimony, you mentioned that current law does 
not give the Centers for Medicare and Medicaid Services (CMS) 
administrative flexibility to adjust physician payments when the 
formula produced unexpected payment updates. How would you propose 
addressing this inflexibility?
    Response: While the SGR has largely been working as designed, it 
has produced large short-term adjustments and instability in year-to-
year updates and, currently, projected negative updates for the next 
few years. The SGR system could be revised and stabilized through the 
use of a multi-year rolling average of the real per capita GDP factor 
rather than using the factor for a single year. While the current 
formula does not give us administrative flexibility to make changes, we 
want to work with Congress on changing the overall payment system in a 
budget-neutral way.
    Question 7. In January, the Medicare Payment Advisory Commission 
(MedPAC) voted to recommend adjustments to the Medicare update system 
to better account for actual physician practice costs, including a 2.5 
percent payment increase in 2003. CMS actuaries have reported that it 
would cost $127.7 billion over ten years to adopt the MedPAC 
recommendations. Please provide a detailed explanation of the basis of 
this cost estimate.
    Response: The MedPAC proposal for updating Medicare payments to 
physicians would:
    (1) Eliminate the Sustainable Growth Rate (SGR) system. Thus, there 
would be no performance adjustments beginning in 2003. In addition, the 
legislated adjustments from BBRA would be removed; and
    (2) Use multifactor productivity in the calculation of the Medicare 
Economic Index (MEI), rather than the current labor productivity 
factor. This will increase the yearly update by 0.5 to 1.0 percent per 
year.
    Medicare physician payments are increased on January 1 of each year 
by the MEI, adjusted by a performance adjustment which compares actual 
physician spending to target physician spending under the SGR system. 
Elimination of the SGR system would result in significant increases in 
currently projected physician fee schedule updates. Currently, we are 
estimating the physician fee schedule update to be negative for each of 
the next four years, including updates of -5.7 percent for 2003 and 
2004. MedPAC's proposal would result in physician fee schedule payments 
of between 2.0 percent and 2.5 percent per year. A summary of these 
updates is shown in the table below.

                                           Estimated Physician Updates
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
          Calendar Year            2003    2004    2005    2006    2007    2008    2009    2010    2011    2012
----------------------------------------------------------------------------------------------------------------
Current Law.....................    -5.7    -5.7    -2.8    -0.1     1.6     1.8     1.7     1.3     1.0     0.4
MedPAC's Proposal...............     2.1     2.0     2.0     2.5     2.2     2.1     2.1     2.4     2.3     2.3
----------------------------------------------------------------------------------------------------------------

    In addition to the costs identified above, our actuaries assume 
that the underlying growth in the volume and intensity of physicians' 
services would be increased by 1 percent per year due to the 
elimination of the SGR. Since Medicare spending for physicians is 
currently more than $40 billion per year, there is a sizeable cost 
associated with large changes to the physician fee schedule update. Our 
actuaries estimate that this proposal will increase Medicare spending 
by $127.7 billion over the next ten years.
    Question 8. The President identified the need to fix the physician 
payment update in his fiscal year 2003 budget. You also have expressed 
a willingness to work with Congress to develop a budget neutral fix. 
Please provide the Subcommittee with a detailed explanation of the 
various options the agency is studying to fix the update formula, 
including the estimated cost of each option.
    Response: We believe that considerations of sustainability and of 
our urgent priorities in Medicare argue strongly that, if changes in 
the physician payment system are undertaken this year, they should be 
undertaken carefully and implemented in a way that does not 
significantly worsen Medicare's long-term budgetary outlook. The 
Administration supports reforms in physician payment that lessen 
volatility, and further believes that any short-term payment problems 
can be addressed at a much lower cost than the MedPAC recommendation 
implies. We are happy to provide technical assistance to help Congress 
smooth out the physician payment system in a budget neutral way.
  Questions for Administrator Scully from Hon. Sherrod Brown, Ranking 
    Member, Subcommittee on Health, Committee on Energy and Commerce
    Question 1. How much money does CMS believe is necessary to fix the 
problem with the physician formula?
    Response: There are a number of options that range in cost from $17 
billion to more than $127 billion, depending on the approach selected. 
While we appreciate MedPAC's efforts to develop proposals to improve 
the physician payment system, we do not believe their ideas are the 
appropriate starting point for a discussion of Medicare provider 
payment--$127 billion is simply too much. However, we are happy to work 
with Congress to develop a budget neutral way to address concerns about 
inconsistencies in physician payment updates.
    Question 2. What specific changes does CMS recommend that Congress 
make to the physician payment system to fix the problem with the 
current formula?
    Response: We believe that considerations of sustainability and of 
our urgent priorities in Medicare argue strongly that, if changes in 
the physician payment system are undertaken this year, they should be 
undertaken carefully and implemented in a way that does not 
significantly worsen Medicare's long-term budgetary outlook. The 
Administration supports reforms in physician payment that lessen 
volatility, and further believes that any short-term payment problems 
can be addressed at a much lower cost than the MedPAC recommendation 
implies.
    Question 3. Which particular providers does CMS recommend that 
Congress reduce payments in order to make the fix for physicians budget 
neutral? Please describe the particular policies that CMS recommends be 
implemented to reduce spending for each provider listed. What data or 
other evidence does CMS have to support such payment reductions to each 
of the particular provider groups?
    Response: While the President's Budget did not contemplate any 
particular provider payment changes, we are willing to consider limited 
adjustments to payment systems and to work with you to develop a 
comprehensive package that is budget neutral across providers. We will 
not support any package of provider payment changes unless it is budget 
neutral in the short- and long-term. To this end, we recognize that 
some provisions in law that, in the past, have restrained growth in 
payments are about to expire, and extension of these provisions is one 
potential way to ensure a budget neutral package of reforms.
    Questions for Administrator Scully from Hon. Bennie G. Thompson
    Mr. Secretary, it is my understanding that under the current 
Medicare Sustainable Growth Rate (SGR) update formula, the center for 
Medicare and Medicaid Services (CMS) is projecting that physician 
payments will be cut by 17% over the next four years due to the 5.4% 
cut that went into effect on January 1, 2002. If we assume 
conservatively, an inflation rate over 3%, this would result in a real 
dollar cut of 25% percent over the next five years. If physicians are 
forced to endure this cut, coupled with inflation, they will be forced 
to cut services in some manner in order to sustain their businesses. 
Mr. Secretary, I represent a rural, heavily impoverished district, 
where it is already hard enough for my constituents to locate and 
receive adequate health care. Under this cut, physicians in my state of 
Mississippi will lose more than $22.5 million. With 9.2 physicians per 
1,000 beneficiaries, Mississippi already has the fewest doctors per 
Medicare beneficiary than any other state with the exception of North 
Dakota. I would hate for this daunting task to be compounded even more 
due to physicians having to limit the number of Medicare patients they 
see, due to the relocation of service in order to serve a younger area 
with far fewer Medicare eligible patients, or due to the cease of 
investment in new technologies that may prove critical in the diagnosis 
or treatment of ill patients.
    Question 1. Is my understanding of the dollar impact of the current 
flawed formula correct?
    Response: The physician fee schedule update for 2002 was -4.8 
percent. The 2002 conversion factor is $36.20. We currently estimate 
that in 2003, the physician fee schedule conversion factor update would 
be -5.7 percent. In 2004, we estimate the physician fee schedule 
conversion factor would be -5.7 percent. And, in 2005, we estimate the 
physician fee schedule conversion factor update would be -2.8 percent.
    However, we also estimate that overall Medicare physician spending 
will total $66.3 billion in 2002, a growth rate of 2.4 percent. We 
estimate that in 2003, overall Medicare physician spending will total 
$67.1 billion, a growth rate of 1.1 percent. In 2004, overall Medicare 
physician spending will total $68.0 billion, a growth rate of 1.5 
percent. And, in 2005, overall Medicare physician spending will total 
$70.4 billion; a growth rate of 3.5 percent.
    You can see that, under current law, although the physician payment 
update will be reduced, Medicare spending for physicians' services will 
continue to increase.
    Question 2. If so, is it your view that physicians that provide 
services to Medicare patients can absorb a reduction of 25% in their 
fees without having any adverse impact on access for beneficiaries?
    Response: We have no compelling evidence that there is a problem 
with the overall adequacy of provider payments, nor that Medicare 
beneficiary access to overall care has been negatively impacted, 
although we recognize that recent short-term adjustments in the 
Medicare physician payment system have been substantial. Clearly, we 
will continue to monitor the situation to ensure that America's elderly 
and disabled have access to the health care they need.
    Question 3. And given the magnitude of this reduction, is the 
administration willing to reconsider its position that any "fix" to the 
problem must be budget neutral?
    Response: The Administration is willing to work with Congress to 
consider limited modifications to Medicare's provider payment systems 
in order to address payment issues in a budget neutral manner. As we 
all consider changes, we need to be cautious and recall that any 
increases in spending will be borne, in part, by beneficiaries in the 
form of higher premiums and coinsurance payments. We believe it is 
possible to develop a fiscally responsible package of provider payment 
adjustments that remain budget neutral. We are happy to begin to work 
with you to provide technical support for such a package.
    Question 4. Do you believe that the way the rate is determined 
needs to be changed? And if so, how do you propose that the rate be 
fixed to take into consideration the ability of physicians to provide 
quality health care under Medicare? What can we do legislatively to 
help you in this endeavor.
    Response: While the underlying fee schedule and relative value 
system have been successful, the update calculation has produced large 
short-term adjustments and instability in year-to-year updates. As you 
know, last fall I spent about a month working every day with many of 
the physician groups, including the American Medical Association, to 
see if I had the administrative flexibility to change the formula, and 
it was abundantly clear that legally we cannot change it. Such a change 
has
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