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

                           PHYSICIAN PAYMENTS


                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                           FEBRUARY 28, 2002

                           Serial No. 107-70

         Printed for the use of the Committee on Ways and Means

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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                     Allison Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel


                         Subcommittee on Health

                NANCY L. JOHNSON, Connecticut, Chairman

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

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

                            C O N T E N T S

Advisories announcing the hearing................................  2, 4


Congressional Budget Office, Dan L. Crippen, Director............     6
Medicare Payment Advisory Commission, Glenn M. Hackbarth, 
  Chairman.......................................................    16


American Association for Thoracic Surgery, Society of Thoracic 
  Surgeons, Children's Hospital Boston, and Harvard Medical 
  School, John E. Mayer, Jr., M.D................................    43
American Medical Association, Donald J. Palmisano, M.D...........    49
American Physical Therapy Association, and Spine and Sports 
  Rehabilitation Center, Stephen M. Levine.......................    57
Center for Studying Health System Change, Paul B. Ginsburg.......    35

                       SUBMISSIONS FOR THE RECORD

American Academy of Family Physicians, statement.................    71
American College of Obstetricians and Gynecologists, statement...    72
American College of Physicians--American Society of Internal 
  Medicine, statement............................................    73
Association of American Medical Colleges, statement..............    77
Association of Maternal and Child Health Programs, Deborah F. 
  Dietrich, letter...............................................    79
College of American Pathologists, statement......................    80
Colorado Otolaryngology Associates, Colorado Springs, CO, Judy 
  Boesen; J. Lewis Romett, M.D.; Neiland Olson, M.D.; Joel 
  Ernster, M.D.; Barton Knox, M.D.; J. Christopher Pruitt, M.D.; 
  John Hohengarten, M.D.; and Edgar B Galloway, M.D.; letter.....    82
Hayworth, Hon. J.D., a Representative in Congress from the State 
  of Arizona, statement..........................................    82
Knollenburg, Hon. Joe, a Representative in Congress from the 
  State of Michigan, statement...................................    83
Professional Radiology, Inc., Cincinnati, OH, Frank E. 
  McWilliams, letter and attachment..............................    84
Sun Health, Sun City, AZ, Leland W. Peterson, letter.............    86

                           PHYSICIAN PAYMENTS


                      THURSDAY, FEBRUARY 28, 2002

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:41 a.m., in 
room 1100 Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisory and revised advisory announcing the hearing 



                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
February 20, 2002
No. HL-12

            Johnson Announces Hearing on Physician Payments

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the Medicare administrative pricing 
formula for physicians, which has resulted in a negative 5.4 percent 
update in 2002. The hearing will take place on Thursday, February 28, 
2002, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10:00 a.m. The hearing will conclude by 1:30 
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Dr. Glenn Hackbarth, Chairman, Medicare Payment 
Advisory Commission (MedPAC); Dan Crippen, Director, Congressional 
Budget Office; Dr. Paul Ginsburg, President, Center for Studying Health 
System Change; and representatives of physician organizations. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.


    Driven by high growth in payments for physician services in the 
1980s, the Medicare Volume Performance Standard (MVPS) was enacted in 
the Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) to give 
physicians an incentive to control volume and to limit the growth in 
Medicare expenditures for physician services. Based on the 
recommendations of MedPAC and with the support of physician groups, the 
Sustainable Growth Rate (SGR) replaced the MVPS in 1997. The SGR 
formula is linked, in part, to projected Gross Domestic Product, so 
when the economy slows the update is reduced accordingly. It is also 
tied to the difference between actual expenditures and target 
expenditures. The SGR is used in combination with the Medicare Economic 
Index (MEI), a measure of the increase in physician office and salary 
costs. Therefore, the SGR is not a direct limit on expenditures--
payments are not withheld if the target is exceeded--but the update is 
increased or decreased.
    Under the SGR formula, a ``saw-tooth'' pattern of funding has 
emerged. For example, the update increased 5.2 percent in 2000 and 4.8 
percent in 2001--more than twice the rate of physician cost inflation. 
Then in 2002, the update decreased to a negative 5.4 percent, resulting 
in more than a 10 percent swing in just one year. The SGR formula is 
inflexible in its administration. For example, the SGR is dependent on 
economists accurately predicting economic trends; otherwise, the target 
is missed. Moreover, past errors in setting the target carryover and 
must be absorbed in future years, making it difficult to correct for 
the missed target in one year. Consequently, the Office of the Actuary 
is predicting negative payment updates through 2006.
    MedPAC has recommended replacing the SGR with a simple model based 
on the MEI. Because successive and negative changes are projected, 
however, a change to the formula that produces moderate payment 
increases results in significant budgetary costs and increased 
beneficiary cost-sharing.
    In announcing the hearing, Chairman Johnson stated, ``Medicare's 
formula for paying physicians is completely irrational and must be 
reformed this year. These cuts are unjustifiable. They result from 
factors in a formula that has nothing to do with the cost of providing 
health care. Inadequate payment of health professionals will discourage 
the top quality candidates that medicine has traditionally attracted 
and harm patient access to care.''


    This hearing will focus on the Medicare physician fee schedule 
formula. It will discuss the effect of the formula on physician 
payments and beneficiary access to care. The hearing will also analyze 
reforms to the current sustainable growth rate and the impact of any 
change on access and Medicare outlays.


    Please note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by the close of business, Thursday, March 14, 2002. 
Those filing written statements who wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver their 200 copies to the Subcommittee on Health in room 1136 
Longworth House Office Building, in an open and searchable package 48 
hours before the hearing. The U.S. Capitol Police will refuse unopened 
and unsearchable deliveries to all House Office Buildings.


    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
mailto:[email protected], along with a fax copy to (202) 
225-2610, in Word Perfect or MS Word format and MUST NOT exceed a total 
of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov/.
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call (202) 225-1721 or (202) 226-3411 TTD/TTY in advance of the event 
(four business days notice is requested). Questions with regard to 
special accommodation needs in general (including availability of 
Committee materials in alternative formats) may be directed to the 
Committee as noted above.



                      ***NOTICE--CHANGE IN TIME***



                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
February 20, 2002
No. HL-12 Revised

     Change in Time for Subcommittee Hearing on Physician Payments

    Congresswoman Nancy L. Johnson (R-CT), Chairman of the Subcommittee 
on Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on physician payments, scheduled for Thursday, 
February 28, 2002, at 10:00 a.m., in the main Committee hearing room, 
1100 Longworth House Office Building, will now be held at 9:30 a.m. The 
hearing will conclude by 12:30 p.m.
    All other details for the hearing remain the same. (See 
Subcommittee Advisory No. HL-12, dated February 20, 2002.)


    Chairman JOHNSON. Good morning, everyone, and welcome to 
our witnesses and the panels that will follow. We appreciate 
your input on what we consider to be a very important hearing.
    Last year we held over a dozen hearings on why Medicare 
must be reformed and modernized. We unanimously reported and 
passed a bill to reduce the regulatory burden on our providers 
and to modernize Medicare's contracting system. Yet, the Senate 
has failed to even hold a hearing on that issue.
    Medicare's erratic and unpredictable payments to physicians 
clearly epitomize just one more reason why we cannot wait any 
longer to fundamentally modernize Medicare. When payments 
oscillate from 4.8 percent in 2001 to a negative 5.4 percent in 
2002 and actuaries project additional payment cuts in the 
future, something is wrong.
    The cost of practicing medicine will not get cheaper, it 
will get more expensive. If we do not reform the so-called 
sustainable growth rate payment formula, I fear our seniors may 
suffer access problems and our physicians will only become more 
demoralized in dealing with Medicare. I am committed to fixing 
this irrational payment formula as part of a larger Medicare 
modernization and prescription drug bill this year.
    Driven by high growth in payments for physician services in 
the eighties, the Medicare Volume Performance Standard (MVPS) 
was developed to give physicians an incentive to control volume 
and to limit the growth in Medicare expenditures for physician 
services. In 1997, the Sustainable Growth Rate (SGR) replaced 
the MVPS, based on the recommendations of Medicare Payment 
Advisory Commission (MedPAC) and with the support of physician 
groups. The SGR formula is linked to projected Gross Domestic 
Product (GDP), so when the economy slows, the update is reduced 
accordingly. It is also tied to the difference between actual 
expenditures and target expenditures. The SGR is used in 
combination with the Medical Economic Index (MEI), a measure of 
the increase in physician office and salary costs. Therefore, 
the SGR is not a direct limit on expenditures. Payments are not 
withheld if the target is exceeded, but if the update is 
increased or decreased accordingly.
    Today we will hear from MedPAC, who has recommended 
scrapping the SGR and linking payments to the Medicare Economic 
Index. Second, the Congressional Budget Office (CBO) will 
testify why payments to physicians and related providers are 
projected to be cut in the future and the fiscal implications 
of reforming the SGR. Finally, we will hear from an academic 
and several physician and provider groups about their ideas on 
reforming Medicare's payments to physicians and providers.
    We look forward to your input during this hearing. I 
personally am extremely concerned about the volatility of our 
payment formula and its interaction with Medicaid 
reimbursements, particularly out there in the urban 
communities. So, it is important that we understand not only 
the problems in our payment formula, but also what is happening 
to reimbursements to physicians out there in different types of 
communities. Because only then can we assure that there will be 
doctors there to provide the quality care that seniors need and 
deserve throughout the cities and hamlets of our Nation.
    So I welcome our witnesses and would yield to my Ranking 
Member and colleague, Mr. Stark.
    [The opening statement of Chairman Johnson follows:]
  Opening Statement of the Hon. Nancy L. Johnson, a Representative in
         Congress from the State of Connecticut, and Chairman,
                         Subcommittee on Health
    Last year, we held over one dozen hearings on why Medicare must be 
reformed and modernized. We unanimously reported and passed a bill to 
reduce the regulatory burden on our providers and to modernize 
Medicare's contracting system. Yet the Senate has failed to even hold a 
hearing on that issue.
    Medicare's erratic and unpredictable payments to physicians, 
clearly epitomizes just one more reason why we cannot wait any longer 
to fundamentally modernize Medicare. When payments oscillate from 4.8 
percent in 2001 to negative 5.4 percent in 2002, and actuaries project 
additional payment cuts in the future, something is wrong.
    The cost of practicing medicine will not get cheaper; it will get 
more expensive. If we do not reform the so-called ``sustainable growth 
rate'' payment formula, I fear our seniors may suffer access problems 
and our physicians will only become more demoralized in dealing with 
Medicare. I am committed to fixing this irrational payment formula as 
part of a larger Medicare modernization and prescription drug bill this 
    Driven by high growth in payments for physician services in the 
1980s, the Medicare Volume Performance Standard (MVPS) was developed to 
give physicians an incentive to control volume and to limit the growth 
in Medicare expenditures for physician services. In 1997, the 
Sustainable Growth Rate (SGR) replaced the MVPS, based on the 
recommendations of MedPAC and with the support of physician groups. The 
SGR formula is linked to projected Gross Domestic Product so when the 
economy slows the update is reduced accordingly. It is also tied to the 
difference between actual expenditures and target expenditures. The SGR 
is used in combination with the Medicare Economic Index, a measure of 
the increase in physician office and salary costs. Therefore, the SGR 
is not a direct limit on expenditures--payments are not withheld if the 
target is exceeded--but the update is increased or decreased.
    Today we will hear from MedPAC, who has recommended scrapping the 
SGR and liking payments to the Medicare Economic Index. Secondly, the 
Congressional Budget Office will testify why payments to physicians and 
related providers are projected to be cut in the future, and the fiscal 
implications of reforming the SGR. Finally, we will hear from an 
academic and several physician and provider groups about their ideas on 
reforming Medicare's payments to physicians and providers.


    Mr. STARK. Thank you, Madam Chair, and thank you for 
holding this important hearing. I agree in part with MedPAC 
that we should revisit the formula of the system under which we 
reimburse physicians. I think it is important to note, however, 
that while it is proper to be concerned about cost containment 
or fair reimbursement for services that we take this in context 
of what this Committee has to do.
    We have had 2 years of record increases in payments to 
physicians. In 2000, surgeons' median income in this country 
was well over $200,000. Even the poor GPs, general 
practitioners, and pediatricians were making about between 
$100,000 and $120,000 median, which means that half of them 
were making a lot more. The tax cuts that we have so generously 
bestowed on the richest Americans, which would include these 
physicians, further increases their take-home pay and we have 
done nothing to help the lowest income seniors in the program, 
so that I would like to see us perhaps, as we think about fair 
reimbursement for people making $2, $3, $4, $600,000--we have 
given them huge tax cuts. I hope we will be as quick and as 
concerned about the 70 percent of the 40 million Medicare 
beneficiaries whose incomes are below $40,000 and who have no 
access to pharmaceutical benefits and to the 12 million 
children in this country who have no health insurance at all 
and therefore no health care. And so let us take care of the 
top and hope that we set a standard for helping the less 
fortunate in this country.
    Chairman JOHNSON. Thank you. It is my privilege and 
pleasure to welcome our first panel. Mr. Crippen.


    Mr. CRIPPEN. Thank you, Madam Chairwoman and----
    Mr. STARK. Use the microphone.
    Mr. CRIPPEN. Does that work?
    Mr. STARK. Yes. Pull it up, swallow it. There you go.
    Mr. CRIPPEN. The issue before us today, as I understand it, 
is the adequacy of recent and future updates for physician 
payments under Medicare and ultimately the acceptability of the 
formula that produces those updates. More pointedly, we are 
here to discuss the price taxpayers and Medicare patients pay 
each year to physicians. But this discussion, this question, 
cannot, I would argue, be addressed in isolation. Physician 
fees, or prices, are only one part of the equation. We need to 
examine payments and payment policy in the context of both the 
history and the future of this program.
    With the indulgence of the Committee, I would therefore 
like to take a little temporal jig and try to address how we 
got here, address where we go from here, and then, ultimately, 
get to here and see if that enlightens us any.
    As the Committee is painfully aware, price controls or 
administered prices are difficult to establish and seemingly 
impossible to enforce. History is replete with the failure of 
price controls, in this case, on physician services to manage 
or control spending. That failure has a unique aspect in this 
case because physicians are able to adjust the volume of 
services they provide.
    This chart shows the perpetual, if you will, increase since 
the beginning of the program in total spending for physicians. 
There is a discontinuity because the physician services 
definition has changed, but nevertheless it is almost a 
straight line up. Throughout the eighties, despite fee 
schedules and regulation, Medicare spending for physicians per 
beneficiary, per beneficiary, rose at an average annual rate of 
12 percent.
    Virtually no matter what price controls have been employed, 
spending for physician services has almost always gone up. Even 
in those years after enactment of the Balanced Budget Act (BBA) 
1997 when hospital and total spending declined, physician 
payments went up. Total spending was targeted, beginning in 
1992, as you all know, and that approach was revised in 1997 
along with fee schedules to rein in what appeared to be an 
ever-increasing amount that taxpayers were contributing to this 
aspect of Medicare.
    I will return to that point in time--the near past--in a 
moment, but against this backdrop of apparently inexorable 
increases in spending for physician fees, I want to turn to the 
period that is our near future. The Committee has seen me 
present this chart in many and varied circumstances, but I 
think it is always important to establish a backdrop when we 
are considering these programs.
    As we see, current spending on Medicare, Medicaid, Social 
Security, much of which spending for retirees, is running at 
about 7 percent of GDP. When my generation retires, we will 
literally double the number of recipients from something like 
39 million today to about 80 million, come 2030. So it is not 
surprising that this chart suggests we will at least double and 
probably more than double the amount of the economy consumed by 
these programs.
    Of course, the single biggest increases that the chart 
shows--just graphically, let alone numerically--are for 
Medicare--which, again, is not surprising. The Congressional 
Budget Office assumes that Medicare costs are going to rise 
even faster than the economy in this projection, and that is 
probably a conservative estimate given the program's spending 
    The point here is that we have a future before us--that is 
a good redundant statement--we have a future that suggests that 
the total Federal budget itself, which is now only about 18 
percent of GDP, is going to be consumed largely by these three 
programs or else we are going to have to increase taxes 
dramatically or increase government debt dramatically. Anything 
we tend to add to these payments, whether it is higher fees for 
physicians or whether it is pharmaceutical benefits, will only 
exacerbate that outcome.
    This is not to say--and I certainly don't want to say--that 
there is any crisis here that needs to be addressed today; or 
maybe the Congress this year and in the future will not 
consider this to be a problem, in which case one would go about 
fixing up the program's finances to accommodate a physician 
payment increase. But I want to remind the Committee, as I have 
in the past, that the fiscal pressures of this demographic 
bulge are almost upon us, and anything we do to add to Medicare 
spending will certainly make them worse.
    Returning to the present, the Committee is faced with the 
prospect of a reduction in the prices for physician services 
for last year, this year, and possibly several more years. The 
reasons for that are several. As we see from this rather 
complicated, or apparently complicated, chart, the single 
largest reason is an error that was made a few years ago and 
that resulted in price increases--large price increases--that 
it turned out were not warranted under the formula.
    So a large piece of your current dilemma--the volatility of 
the increases and the fact that we have negative updates--is 
that physicians were overpaid according to the formula in 2000 
and 2001. In fact, if the correct data had been used, the 
updates would have been much less volatile, with a 2.1 percent 
reduction in 2002, a 4.9-percent reduction next year, and 
positive updates thereafter. Of course, the updates of more 
than 5 percent that were paid in 2001 and 2002 would have been 
smaller, but positive nonetheless.
    Some of the rest of the adjustment is due to volume 
increases, which put total spending somewhat above the target, 
and the slowing economy. There are at least two other pieces of 
information of which I think the Committee should be aware. Not 
all physicians have been hit equally over the past several 
years, primarily because of other changes taking place in the 
Medicare fee schedule. For example, in the past 4 years, family 
practice physicians experienced a 3 percent reduction in fees 
this year but an overall increase 19 percent in the prior 3 
    Volatility, Madam Chairwoman, while undesirable, certainly 
has characterized the structure of this program virtually from 
the beginning, and a big piece of the current volatility is due 
to the data error, or correction, that needed to be made. The 
current sustainable growth mechanism rate I suggest, can 
probably be modified to further reduce volatility.
    What are we to make of all this? First, physicians' 
revenues from Medicare are not declining. Spending for 
physicians' services will go up even with the past and 
projected reductions we have in physician fees. Indeed, CBO 
projects--as we say in our written statement, Madam 
Chairwoman--that total spending for physicians will go up by 
5.9 percent in fiscal year 2002, despite the fact that the fee 
schedule will be reduced. By the way, some of you may have a 
copy of the testimony that has the increase occurring in 2003. 
The first paragraph should read ``2002.'' I just note that 
    Second, even if the Congress does not change current law 
and does not increase physician compensation or anything else, 
even holding total physician spending to per capita growth in 
GDP will still ultimately lead to what are probably 
unsustainable costs for taxpayers, mostly our children.
    Third, the lion's share of the negative updates is 
attributable to unjustifiably large increases in total spending 
for physicians' services in 2000 and 2001.
    Fourth, not all physicians' fees have been reduced by even 
as much as the updates.
    In closing, I want to reiterate that it is the 
responsibility of the Medicare Payment Advisory Commission and 
my colleague on this panel to give you their best advice about 
appropriate payment of providers. However, it is the 
responsibility of this Committee and the rest of government to 
balance the various competing interests of present and future 
providers, beneficiaries, and taxpayers. Eliminating spending 
targets will only increase the burden on other providers, other 
government programs, and, ultimately, on our kids.
    Thank you.
    [The prepared statement of Mr. Crippen follows:]
   Statement of Dan L. Crippen, Director, Congressional Budget Office
    Chairwoman Johnson, Congressman Stark, and Members of the 
Committee, I am pleased to be here today to discuss Medicare payments 
to physicians. As you know, the fees that Medicare pays per physician 
service have fallen by 5.4 percent this year. What you might not know 
is that the Congressional Budget Office (CBO) projects that total 
Medicare payments to physicians will rise by 5.9 percent in fiscal year 
2002. Although the average fee per service will continue to fall for 
the next several years, total Medicare payments to physicians will 
continue to increase.
    The pattern of seemingly inexorable increases in Medicare spending 
for physicians' services spurred the creation of the sustainable growth 
rate (SGR) method to automatically link increases in Medicare physician 
spending per beneficiary to growth in the national economy. CBO 
estimates that the recent recommendation by the Medicare Payment 
Advisory Commission (MedPAC) would increase Medicare spending by $126 
billion over 10 years as a result of repealing the SGR system. Before 
discussing the reasons for that estimate, my testimony will review the 
relationship between Medicare payments to physicians, program spending, 
and the budget, as well as summarize the history of efforts to control 
Medicare spending for physicians' services.
    Allow me to begin by reviewing the relationship between the fees 
Medicare pays to physicians, overall Medicare spending for physicians' 
services, total Medicare spending, and the economy. Fees are paid for 
each medical service. But the amount paid per service is only one of 
the components driving Medicare physician spending. One other factor is 
obvious: Medicare spending for physicians' services increases with the 
number of beneficiaries. In testimony before this Committee, I have 
highlighted the massive changes associated with the impending 
retirement of my generation. According to last year's report by the 
Medicare trustees, the number of Medicare beneficiaries will virtually 
double between 2000 and 2030. During the same period, the number of 
workers paying for Social Security and Medicare will increase by about 
15 percent (see Figure 1).


    The aging of the baby boomers has dramatic fiscal implications for 
Medicare (see Figure 2). If we spent the same fraction of gross 
domestic product (GDP) on each Medicare beneficiary in 2030 that we 
spend today--a proposition reflecting only the increased number of 
beneficiaries--Medicare spending would grow from today's 2.3 percent of 
GDP to 4.5 percent in 2030. The fiscal implications of the boomers' 
aging are compounded by the fact that health care costs measured per 
beneficiary routinely grow significantly faster than does the economy 
measured on a per capita basis. As a result, if current law remains 
unchanged, Medicare spending will climb to 5.4 percent of GDP by 2030.
    Also projected to climb is spending for the ``big three'' programs 
for the elderly--Social Security, Medicare, and Medicaid--taken as a 
whole: between now and 2030, such spending as a share of GDP will 
virtually double. Transfers to the elderly will grow from 7.8 percent 
of GDP to 14.7 percent in 2030 (see Figure 3).
    Let me underscore that that increase in spending of almost 7 
percentage points of GDP will occur under current law. Proposals to 
increase payments to Medicare providers (such as MedPAC's 
recommendation to increase payments to physicians) or to expand 
Medicare benefits (such as proposals to create a Medicare prescription 
drug benefit) will exacerbate the long-term budgetary pressures 
projected for the next several decades. As this Committee knows, paying 
for those increased costs will require either dramatic reductions in 
spending, sizable tax increases, or large-scale borrowing.
    In addition to fees and growth in the number of beneficiaries, the 
number and type (or ``intensity'') of the services provided by 
physicians determine total Medicare physician spending. Taken together, 
the number and type of physicians' services constitute their 
``volume.'' Medicare physician spending measured per beneficiary equals 
fees times volume of services. Each year, Medicare sets fees for 
physicians' services using formulas in the Medicare Fee Schedule (MFS) 
and the SGR mechanism. However, because Medicare does not control the 
volume of services that physicians provide, its physician spending per 
beneficiary can grow even if fees are reduced.
    Medicare spending for physicians' services grew faster than 
Medicare spending for all other services throughout the 1980s; in the 
1990s, that trend reversed. From 1981 through 1990, spending for 
physicians' services grew at an annual rate of 13.7 percent; spending 
for all other services grew at a rate of 11.1 percent per year. By 
1990, Medicare's total payments to physicians were more than three-and-
a-half times greater than they had been 10 years earlier, and the 
average physician was receiving more than two-and-a-half times as much 
in Medicare payments. Indeed, Medicare payments per physician increased 
almost twice as fast as did the nation's economy during the 1980s. That 
rapid growth led policymakers to add expenditure targets to the 
formulas used to set the overall level of physician fees in order to 
control total spending for physicians' services. In the 1990s, growth 
in the volume of physicians' services moderated. To the extent that 
there have been surges in that growth, the system has lowered the 
update--the annual adjustment to physicians' fees--to offset the higher 


    The chronology of payments to physicians under Medicare can be 
divided into three periods. The first, shortly after the program began 
in 1965, was characterized by a rapid rise in spending as physicians 
increased both their charges and the volume of services that they 
provided. Even when the Congress limited the growth of fees for 
physicians' services by pegging the annual fee update to the Medicare 
economic index, or MEI, spending continued to climb rapidly.\1\ That 
experience led to the second period of physician payments, when the 
Congress froze fees and limited increases in them to less than the rise 
in the MEI.
    \1\ The Medicare economic index measures changes in the costs of 
physicians' time and operating expenses; it is a weighted sum of the 
prices of inputs in those two categories. The components of the index 
come from the Bureau of Labor Statistics. Changes in physicians' time 
are measured through changes in nonfarm labor costs. Labor productivity 
is also factored into the index.
    Despite those actions, spending for physicians' services continued 
to grow throughout the 1980s, and the Congress realized that 
limitations on the growth of fees alone--without regard to the volume 
of services that physicians provided--was not enough to control 
spending. That realization led to what is now the third period in 
Medicare's payments to physicians (beginning in 1992), a span 
distinguished by restraints on the uncontrolled growth in expenditures 
for physicians' services that Medicare experienced in the past.
Abandoning the Charge-Based System
    When Medicare was created in 1965, the program paid physicians fees 
that were based on their charges, the method of payment then used by 
private insurers. In addition, Medicare permitted physicians to bill 
beneficiaries for the amount of their charges that exceeded the fee 
that Medicare paid, a practice known as ``balance billing.'' The 
charge-based reimbursement system gave physicians the incentive to 
increase their charges from year to year to boost their revenues, and 
those increases led to the spiraling expenditures of the first period 
of Medicare physician payments.
    As concerns grew about the program's rising costs, policymakers 
focused on restraining those fees. In 1972, the Congress mandated that 
the annual update to physicians' fees be limited to the increase in the 
MEI, a provision that was implemented in 1975. Tying increases in fees 
to growth in the MEI was not sufficient to keep total payments from 
rising, however, and the Congress took further steps to limit spending 
through legislation enacted from 1984 through 1991, during the second 
period of physician payments. The Congress froze fees from 1984 through 
1986; from 1987 through 1991, it updated them by amounts specified in 
Limiting Beneficiary Liability
    Balance billing was another issue that prompted Congressional 
action during the 1980s. On average, liability for balance billing per 
beneficiary grew from $56 in 1980 to a high of $94 in 1986.\2\ 
Subsequently, the Congress responded by imposing limits on such 
billing, which prevented physicians from raising their charges; 
beneficiaries thus in effect made up for the constraints on Medicare 
physician fees. Balance billing is currently restricted to 109.25 
percent of Medicare's fees for participating physicians.\3\
    \2\ Physician Payment Review Commission, Annual Report to Congress 
    \3\ Under Medicare's rules, the program pays 80 percent of the fee 
schedule, and beneficiaries or their supplemental insurer pays 20 
percent. Balance billing occurs when beneficiaries pay more than 20 
percent of the fee. A physician elects either to ``participate'' (that 
is, take Medicare fees as payment in full for all services) or to 
receive Medicare payments as a ``nonparticipating'' physician allowed 
to balance-bill patients up to the statutory limit. Fees for 
nonparticipating physicians are set at 95 percent of the fees for 
participating physicians. Nonparticipating physicians are permitted to 
bill up to 115 percent of their fees.
    The program's limits on balance billing protect beneficiaries' 
liability for physicians' charges. However, those limits reduce the 
potential usefulness of balance billing either as a safety valve or 
signal that Medicare's fees are below the level necessary to attract a 
sufficient number of doctors to serve Medicare enrollees.
Redistributing Income Among Physicians' Services
    Policymakers also took steps to redistribute payments among 
physicians. In the 1980s, many analysts believed that Medicare's 
reimbursement for physicians' services was distorted by factors that 
tended to overcompensate so-called procedural services at the expense 
of what were termed cognitive services. Before the MFS was adopted, 
fees varied widely, with physicians in different specialties and in 
different geographic regions receiving different payments for 
comparable services.
    The response to those concerns was the implementation in 1992 of 
the Medicare Fee Schedule, which based payments for individual services 
on measures of the relative resources used to provide them. There are 
two parts of the formula for fees. One part is a set of weights that 
indicates the resource costs of each service relative to all others. 
(For example, a CAT scan has a higher relative value than an 
intermediate office visit with an established patient.) The other part 
is a fixed dollar amount, called the conversion factor, which is 
multiplied by each relative weight to calculate the fee to be paid for 
each service. The fee schedule was intended to promote equity and to be 
budget neutral--in 1992, the conversion factor was set so that 
estimated expenditures under the MFS equaled estimates of what 
expenditures would have been under the earlier payment system. One 
thing the MFS was not designed to do, however, was control costs.
Controlling Volume
    In an attempt to control total spending for physicians' services 
driven by volume, the Congress also enacted a mechanism that tied the 
annual update to fees under the MFS to the trend in total spending for 
physicians' services relative to a target. Under that approach, the 
conversion factor was to be updated annually to reflect increases in 
physicians' costs for providing care, as measured by the MEI, and 
adjusted by a factor to counteract changes in the volume of services 
provided per beneficiary. The introduction of expenditure targets to 
the update formula initiated the third period in physician payments. 
Known as the volume performance standard (VPS), the approach provided a 
mechanism for adjusting fees to try to keep total physician spending on 
    The method for applying the VPS was fairly straightforward, but it 
led to updates that were unstable. Under the VPS approach, the 
expenditure target was based on the historical trend in volume. Any 
excess spending relative to the target triggered a reduction in the 
update two years later. But the VPS system depended heavily on the 
historical volume trend, and the decline in that trend in the mid-1990s 
led to large increases in Medicare's fees for physicians' services. The 
Congress attempted to offset the budgetary effects of those increases 
by making successively larger cuts in fees, which further destabilized 
the update mechanism. Indeed, between 1992 and 1998 (the years that the 
VPS was in effect), the MEI varied from 2.0 percent to 3.2 percent, but 
the annual update to physician fees varied much more widely, from a low 
of 0.6 percent to a high of 7.5 percent (see Figure 4).
    That volatility led the Congress to modify the VPS in the Balanced 
Budget Act of 1997 (BBA), replacing it with the sustainable growth rate 
mechanism, the method in place today.
The SGR Approach
    Like the VPS, the SGR method uses a target to adjust future payment 
rates and to control growth in Medicare's total expenditures for 
physicians' services. In contrast to the VPS, however, the target under 
the SGR mechanism is tied to growth in real (inflation-adjusted) GDP 
per capita--a measure of growth in the resources that society has 
available per person. The update under this approach is equal to the 
MEI adjusted by a factor that reflects cumulative spending relative to 
the target (the VPS did not use cumulative spending).
    Policymakers saw the SGR approach as having the advantages of 
objectivity and stability in comparison with the VPS. From a budgetary 
standpoint, the SGR method, like the VPS, is effective in limiting 
total payments to physicians over time. GDP growth provides an 
objective benchmark; moreover, changes in GDP from year to year have 
been considerably more stable (and generally smaller) than changes in 
the volume of physicians' services.
    A key argument for switching from the VPS approach to the SGR 
mechanism was that over time, the VPS would produce inherently volatile 
updates. But updates under the SGR method have proven to be volatile as 
well. Until 2002, that volatility has tended to be to the benefit of 
physicians. Overall, the update in the first three years during which 
the SGR method was in place was almost twice as high as the MEI over 
the same period. It is the reduction for 2002 that has raised concerns 
among physicians.
    In 2002, for the first time since the MFS method was implemented in 
1992, physicians' fees have been reduced, drawing objections from 
physicians and raising concerns about assertions that beneficiaries' 
access to physicians' services will be impaired. Several factors 
contributed to the fee reductions:

          *As of November 2001, the cumulative spending target (that 
        is, the allowed spending from April 1996 through December 2001) 
        that was used to set the physician fee update for 2002 was 
        $302.7 billion. That target was $1.5 billion lower than the 
        amount expected a year earlier. The reduction was driven 
        largely by slower growth of GDP than had been estimated 
        previously; also contributing, however, were revisions in some 
        of the other factors that determine the spending targets.\4, 5\
    \4\ Centers for Medicare and Medicaid Services, ``Medicare Program; 
Revisions to Payment Policies and Five-Year Review of and Adjustments 
to the Relative Value Units Under the Physician Fee Schedule for 
Calendar Year 2002; Final Rule,'' Federal Register, vol. 66, no. 212 
(November 1, 2001), pp. 55312-55321.
    \5\ Centers for Medicare and Medicaid Services, Office of the 
Actuary, ``Estimated Sustainable Growth Rate and Final Conversion 
Factor for Medicare Payments to Physicians in 2002'' (February 4, 
2002), available at www.hcfa.gov/pubforms/actuary/sgr/sgr2002f.pdf, 
compared with previous versions dated March 19, 2001, and November 21, 
          *In addition, cumulative spending for physicians' services 
        far exceeded the spending target. The estimate of actual 
        spending through 2001 that was made in November of that year 
        and used to set the update for 2002 was $311.6 billion--or $8.9 
        billion (2.9 percent) above the corresponding target.
          *A large part of that discrepancy, however, resulted from the 
        omission previously of a portion of actual expenditures related 
        to certain service codes, which by mistake were not counted 
        (including, for example, chiropractic services). In March 2001, 
        the Centers for Medicare and Medicaid Services (CMS) estimated 
        that actual cumulative expenditures through 2001 would be 
        $303.9 billion--or $7.7 billion less than the November 2001 
        estimate. Although part of that difference is attributable to 
        the availability of more recent data on physician spending than 
        those used for the initial estimate, the size of the 
        discrepancy indicates that the effect of the previously omitted 
        services was substantial.

    Therefore, much of the reason for the large decline in Medicare 
physician fees this year may be related to a counting error. That error 
was a major factor in the large positive updates in fees for 2000 and 
2001, which otherwise would not have occurred. The effects of that 
oversight should not be confused with basic problems associated with 
the update mechanism.
    The BBA limited the maximum annual offset to the MEI to -7 
percentage points, so the update for 2002 was -5.4 percent. Because 
actual spending exceeded the expenditure target by more than 7 
percentage points for 2002, a portion of the past excess will lower the 
update for 2003. Currently, CMS projects negative updates through 2005 
(see Figure 4).
    Because of changes to the relative payment amounts, or weights, for 
individual services for 2002, the -5.4 percent reduction in the 
conversion factor does not change all fees by the same amount. Indeed, 
payments for some services will increase in 2002, and payments for 
others will drop by more than 5.4 percent below last year's. Those 
varying effects occur because 2002 is the final transition year in the 
reform of the ``practice expense'' portion of the fee schedule, which 
redistributed income among physician specialties. Starting in 2003, 
little redistribution of physician payments is anticipated.
    There are four general courses of action the Congress can take to 
address these issues. One possibility is to eliminate spending targets 
and determine the updates to fees without linking them to overall 
spending for physicians' services--that plan represents MedPAC's 
proposed approach. A second is to modify the SGR to reduce volatility. 
A third option is to legislate temporary relief from the reductions in 
fees generated by the current system. A fourth option is to make no 
changes to the current mechanism.
    In March 2001 and again this year, MedPAC recommended that the 
Congress discontinue using the SGR method for computing the update and 
replace it with a framework similar to that used for updating the fees 
of other types of providers. CBO estimates that implementing the MedPAC 
proposal would cost $126 billion over 10 years. That estimate is 
virtually the same as the estimate of the CMS actuary.
    Not only would the MedPAC recommendation lock in place the 
overstated payments and fees set in earlier years, but it would also 
increase annually the fees paid to physicians. For 2003 through 2005, 
the MedPAC recommendation would substitute positive updates for the 
reductions expected under current law. Total spending for physicians' 
services in the subsequent year would also be above the spending that 
would occur under current law.
    The new framework that MedPAC is proposing would end the use of 
expenditure targets, opening the door to large spending increases 
driven by volume. MedPAC's proposal would base the update on the 
forecast for the MEI and on changes in productivity--without any limits 
on volume or total spending.


    Physicians are unique among Medicare providers in being subject to 
an overall spending adjustment. By contrast, Medicare pays for most 
other services now through prospective payment systems that set a price 
for a bundle of services. Under those systems, the provider is free to 
make decisions about the volume of services provided to the patient, 
but the payment for the bundle is fixed.
    Physicians are unique as well in their ability to determine the 
volume of services they can provide. They are the gatekeepers and 
managers of the health care system; they direct and influence the type 
and amount of care their patients receive. (Physicians, for example, 
can order laboratory tests, radiological procedures, and surgery.)
    Moreover, the units of service for which physicians are paid under 
the MFS are frequently very small. The physician may therefore receive 
one payment for an office visit and a separate payment for individual 
services such as administering and interpreting x-rays--all of which 
can be provided in a single visit. That contrasts with the policy for 
hospitals, which receive payment for each discharge and no extra 
payment for additional services or days (except in extremely costly 
    Further, once a physician's practice is established, the marginal 
costs of providing more services are primarily those associated with 
the physician's time. The current method of physician payment takes 
that unique role into account by explicitly linking the update in fees 
to the level of spending, which--as I said before--is determined by 
both fees and volume.
    In considering whether to change the current system for setting 
Medicare physician payments, the Congress confronts the prospect of 
reductions in the fees paid per service for the next several years. 
MedPAC's recommendation would increase the federal government's 
spending for physicians' services under Medicare by $126 billion over 
the next 10 years. In contrast, other approaches might have the 
potential to lessen the volatility in the update without dismantling 
the mechanism for linking physician fees to total spending for 
physicians' services or growth in the economy.
    Maintaining access to care for Medicare beneficiaries is a key 
consideration in assessing Medicare's fee structure. MedPAC reports 
that the most recent systematic data currently available about access 
to care are from 1999. In evaluating that information, MedPAC reports 
that it found no evidence of problems in beneficiaries' and physicians' 
views about access. However, the lack of timely data makes it hard to 
know whether and to what extent problems exist in access to care. More 
timely data on that issue would be an important improvement over the 
current situation and could assist the Congress in its deliberations.
    Changes that increase Medicare payments to physicians will increase 
federal spending. Incorporating higher fees for physicians' services 
into Medicare spending as currently projected would add to the already 
substantial long-range costs of the program and to the fiscal challenge 
to the nation posed by the aging of the baby boomers. Raising fees 
would also increase the premium that beneficiaries must pay for Part B 
of Medicare (the Supplementary Medical Insurance program). Inevitably, 
over the long run, higher spending by Medicare for physicians' services 
will require reduced spending elsewhere in the budget, higher taxes, or 
larger deficits.


    SOURCE: 2001 Annual Report of the Board of Trustees of the Federal 
Hospital Insurance Trust Fund.


    SOURCE: Congressional Budget Office.


    SOURCE: Congressional Budget Office based on its midrange 
assumptions about growth in gross domestic product and program 
spending. For further details, see Congressional Budget Office, The 
Budget and Economic Outlook: Fiscal Years 2003-2012 (January 2002), Ch. 

                 MEDICAREPHYSICIAN SPENDING, 1992-2005

    SOURCES: Centers for Medicare and Medicaid Services for updates and 
historical spending and Congressional Budget Office for projection of 
spending from 2001 through 2005.
    NOTE: The actual increase in the conversion factor, which is a 
fixed dollar amount that is multiplied by relative weights to calculate 
Medicare physician fees, is also affected by a budget-neutrality 


    Chairman JOHNSON. Thank you very much, Mr. Crippen.
    Mr. Hackbarth of the MedPAC, very glad to have you.


    Mr. HACKBARTH. Thank you.
    As you know, MedPAC recommends that we repeal SGR and 
replace it with a system under which the Secretary would update 
fees annually based on estimated change in the prices that 
physicians need to pay for their inputs minus an adjustment for 
improved productivity.
    This is not a recommendation that we arrive at lightly. 
Controlling spending is obviously an important issue for the 
Medicare Program for all of the reasons that Mr. Crippen has 
outlined. Controlling spending, however, is not the only goal 
that we need to keep in mind. Here are some of the other goals 
that we at MedPAC think are important for the Medicare Program.
    One of course is to assure access to quality care for 
seniors. This is the overriding purpose of the Medicare 
Program. At MedPAC we believe that the best way to do that is 
to try to match payments for individual provider groups, 
including physicians, to the cost of efficient providers of 
those services, and that is what our recommendation would do. 
So that is another goal.
    A third goal is fairness to providers, and one type of 
fairness is rewarding good behavior and reserving punishment, 
if you will, for poor performers, and this is a critical area 
where we believe the current system, the SGR system, fails. If 
spending increases above the target, the punishment is 
distributed across all providers without regard to who 
contributed to the excess spending.
    A fourth goal, from our perspective, is to assure that 
clinical considerations, not payment policy, guides decisions 
about where particular services should be provided. Here again 
the current system falls short because SGR only applies to 
certain services. It could influence where to provide a 
particular service. If it is provided in the physician's 
office, it is subject to the constraint. If it is moved to an 
ambulatory surgical center or hospital outpatient department, 
it is not.
    Finally, we think that it is important for the Medicare 
Program, for the government to be a reliable and trustworthy 
partner to people who serve the Medicare population, and here 
again we think the current system falls short. The 
unpredictable and highly variable increases undermine 
confidence in the program. Yes, SGR controls spending, but only 
by compromising each of these other five important goals that 
we think should be included in the Medicare Program, and in our 
judgment that is a very high price to pay.
    The CBO and Centers for Medicare and Medicaid Services 
(CMS) estimate that the cost of repealing SGR will be quite 
large. We have not had the opportunity to review those 
estimates in detail, the underlying assumptions, so I have no 
specific comment on the estimate. But we think it is important 
to keep in mind why the projected cost is large. The projected 
cost is large because the underlying baseline is so low.
    The underlying baseline is based on the assumption that we 
will cut physician fees over the next several years by 17 
percent. The underlying baseline assumes that the conversion 
factor for physicians, basically the price per unit of service, 
will be lower in the year 2005 than in 1993. It is because of 
this unrealistically low baseline that there is a large price 
tag for the policy that MedPAC recommends.
    That cannot be a reason to avoid doing the right thing. The 
issue of volume in the Medicare Program is a critical issue. We 
think it is very important for the Committee to understand that 
the SGR system does not constrain volume per se.
    The Sustained Growth Rate system controls total spending, 
but it fails to provide appropriate incentives at the level of 
the individual physician. Fees again are cut across the board 
as spending targets are exceeded. The individual physician is 
not rewarded in any way for exercising restraint in decisions 
about what to prescribe. The individual physician is not 
rewarded for being a conservative practitioner. That 
conservative practitioner of medicine is punished under the 
system just the same as the person that increases volume 
inappropriately. That is a fundamental flaw in the system.
    What will happen if SGR is not fixed? We think the initial 
signs may of trouble may be subtle. Initially we may see 
shorter, more rushed office visits for our seniors. Perhaps 
there will be an incentive to increase return visits or 
prescribe more procedures or tests. Eventually we might see a 
move to relocate certain services out of the physician office 
to other locations. If fees continue to remain very low or fall 
even further, we could begin to see access problems for 
Medicare beneficiaries. In the long run if Medicare fees stay 
out of whack, we could begin to see a fewer number of 
applicants to medical school, certainly fewer from our best or 
brightest young people or a shift away from specialties that 
are heavily dependent on Medicare.
    All of these problems are serious problems and if they 
occur they will be difficult and costly to reverse in the 
    [The prepared statement of Mr. Hackbarth follows:]
            Statement of Glenn M. Hackbarth, J.D., Chairman,
                  Medicare Payment Advisory Commission
    Chairman Johnson, Mr. Stark, Members of the Subcommittee. I am 
Glenn Hackbarth, chairman of the Medicare Payment Advisory Commission 
(MedPAC). I am pleased to be here this morning to discuss MedPAC's 
recommendations concerning payment for physician services in the 
Medicare program.
    The current formula for updating physician payments, known as the 
sustainable growth rate system (SGR), should be repealed. We made this 
recommendation last year in our March report to Congress because the 
conceptual basis of the system is flawed and in June we warned of 
potentially large negative updates for 2002 and in the future. That 
future has arrived, and CMS now projects four years of negative 
updates. The basic problem is that in seeking to control spending, the 
SGR causes large swings in updates from year to year that are unrelated 
to changes in the cost of providing physician services. Although input 
price increases for physician services have been in the 2-3 percent 
range for the last few years, the SGR has produced payment updates of 
+5.4, +4.5, and -5.4 percent over the 2000-2002 period.
    We recommend treating payment updates for physician services as we 
do payment updates for other services. Accordingly, we recommend that 
the Congress repeal the SGR and instead require that the Secretary 
update payments for physician services based on the estimated change in 
input prices for the coming year, less an adjustment for growth in 
multifactor productivity. We also recommend that the Secretary revise 
the productivity adjustment currently used for physician services to 
make it a multifactor instead of a labor-only adjustment. Taking into 
account current estimates for input prices and productivity, we thus 
recommend that the Congress update payments for physician services by 
2.5 percent for 2003.
    Current estimates of updates using the SGR formula show three more 
years of negative updates for a total decrease of about 17 percent over 
the 2002-2005 period, a situation that is unsustainable (Figure 1). In 
addition, updates under the SGR will remain below estimated increases 
in the cost of providing physician services thereafter. Because the SGR 
is the current law, our recommendation--or any other action that 
corrects this problem--will show major budgetary costs. Nonetheless, 
maintaining access for Medicare beneficiaries and keeping physicians 
participating in the program and accepting new patients, will require 
that action be taken.

The problem with the current update system
    Setting prices correctly in Medicare's payment systems is essential 
to maintain access to services for Medicare beneficiaries. The 
underlying problem with the current SGR system is that it attempts both 
to set individual prices accurately and to control total spending on 
physician services delivered to Medicare beneficiaries. These two goals 
can seldom be achieved simultaneously. The SGR attempted to achieve 
both goals and failed, as did the Volume Performance Standard system 
before it.
    The SGR system causes payments to diverge from costs because, 
although the system accounts for inflation in input prices, 
productivity growth, and other factors affecting costs, it overrides 
these factors to achieve an expenditure target based on growth in real 
gross domestic product (GDP) per capita. If actual spending for 
physician services differs from the expenditure target, updates under 
the SGR system will diverge from costs. When this occurs, payments will 
be either too low, potentially jeopardizing beneficiaries' access to 
care, or too high, making spending higher than necessary. This is a 
particular concern given that the SGR system only applies to services 
paid for under the physician fee schedule. Services provided in 
physicians' offices are paid for entirely under the fee schedule, 
whereas when services are provided in other settings such as hospitals 
or ambulatory surgical centers, part of the payment is outside the fee 
schedule. Updates based on an expenditure target that fully applies to 
only one setting could create financial incentives that inappropriately 
influence clinical decisions about where services are provided.
    An expenditure target approach, such as the SGR, assumes that 
increasing updates if overall volume is controlled, and decreasing 
updates if overall volume is not controlled, provides physicians a 
collective incentive to control the volume of services. However, this 
assumption is incorrect because people do not respond to collective 
incentives but individual incentives. An individual physician reducing 
volume does not realize a proportional increase in payments. Instead, 
the increase in payments is distributed among all physicians providing 
services to Medicare beneficiaries. If anything, in the short run an 
individual physician has an incentive to increase volume under such a 
system and the sum of those individual incentives will result in an 
increase in volume overall. In fact, CMS makes exactly that assumption 
when it estimates the so-called behavioral response of physicians to 
lower payments--which is an increase in volume of services provided.
    Over a longer period, if payments were clearly less than 
physicians' marginal cost of providing a service, we might see 
physicians cut back their Medicare practice and concentrate on other 
patients, devote more time to other professional or leisure activities, 
or leave practice altogether. Ultimately, we could see fewer applicants 
to medical school or a shift in residency preferences away from those 
specialties most heavily dependent on Medicare. The result eventually 
would be decreased access for Medicare beneficiaries which would be 
very difficult to reverse.
    Compounding the problem with the conceptual basis of the system, 
the SGR system produces volatile updates. Updates went from large 
increases in 2000 and 2001 of 5.4 percent and 4.5 percent, 
respectively, to an unexpected large reduction in 2002 of 5.4 percent. 
The recent volatility illustrates the problem of trying to control 
spending with an update formula. To control spending the update formula 
compares actual spending to an expenditure target. That target changed 
abruptly last year because of two corrections. First, the Department of 
Commerce re-estimated historical GDP, which made prior physician 
spending growth too high by lowering the historical spending targets. 
Second, both actual and projected GDP went down since last spring, 
bringing down estimates of allowed future spending growth. In addition 
to corrections in the expenditure target, CMS found it had not counted 
some physician spending, correcting for that error increased actual 
expenditures and thus further increased the difference between actual 
and target expenditures. As a result of these corrections, CMS's 
estimates for the update in 2002 changed from -0.1 last March to -5.4 
percent in November.
    To address such problems, in our March 2002 report we recommend 
that the Congress replace the SGR system with an annual update based on 
factors influencing the unit costs of efficiently providing physician 
services (MedPAC 2002). The Commission's recommendation is based on a 
belief that getting the price right is important when making update 
decisions. If total spending for physician services needs to be 
controlled, it may be better to look outside the payment update 
mechanism, achieving appropriate use of services through outcomes and 
effectiveness research for example, as we suggested in our March 2001 
report to the Congress (MedPAC 2001). If controlling total Medicare 
spending is the goal, then an approach that targets all of Medicare 
spending, not just physician spending, would be more appropriate. Below 
we describe how the Congress should replace the SGR system.
What should be done?
    Replacing the SGR system would solve the fundamental problems of 
the current system and would allow updates to account more fully for 
factors affecting costs. The change also would uncouple payment updates 
from spending control and make updates for physician services similar 
to the updates for other services. This change would promote the goal 
of achieving consistent payment policies across ambulatory care 
settings, including physician offices, hospital outpatient departments, 
and ambulatory surgical centers. Accordingly, the Commission recommends 

        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 an adjustment for growth in 
        multifactor productivity.

    To replace the SGR system, the Congress could repeal provisions in 
current law and replace them with language similar to that for other 
services. For example, the Social Security Act requires updates for 
inpatient hospital care to equal the increase in the hospital market 
basket index, except when the Congress chooses to make the update 
smaller or larger. The Congress generally makes these choices after 
considering advice from MedPAC and the Secretary. With a similar update 
method for physician services, the Commission intends to base its 
advice to the Congress on assessments of payment adequacy such as the 
one discussed later in this testimony.
    Payment updates should take into account productivity improvements 
that enable physicians to provide care more efficiently. Revising the 
productivity adjustment to account for labor and nonlabor factors is 
consistent with the way physician services are produced. Labor accounts 
for most of the cost of providing physician services, but capital 
inputs are also important, including office space, medical materials 
and supplies, and equipment. The production of physician services, like 
the production of most other goods and services, is a joint effort that 
requires both labor and non-labor inputs.\1\ Therefore the Commission 
recommends that:
    \1\ The labor-only adjustment may simply be an artifact. It has 
been part of the MEI since the index was first used in paying for 
physician services in 1975, which was before the Bureau of Labor 
Statistics (BLS) began publishing measures of multifactor productivity 
in 1983.

        The Secretary should revise the productivity adjustment for 
        physician services and make it a multifactor instead of labor-
        only adjustment.

    Productivity gains are certainly possible in physician services and 
should be taken into account. For example, research suggests that 
doubling the size of a physician practice (from the current average of 
about 2.5 physicians to 5 physicians) increases productivity by 9 
percent with no increase in practice expense per physician (Pope and 
Burge 1996). Physicians apparently perceive the advantages of group 
practice: in 1990, 52 percent of self employed physicians were in solo 
practice, but by 1998, that percentage had dropped to 42 percent. Other 
gains might come from new technology, economies of scale, managerial 
skill, and changes in how production is organized.
    In other health care delivery settings such as hospitals, MedPAC 
assumes that cost savings from improved productivity are usually offset 
by cost increasing factors such as scientific and technological 
advances or complexity changes within service categories. However, 
Medicare's payment system for physician services accounts for those 
cost increasing factors by either, creating new billing codes or 
revising existing codes in the physician fee schedule, or by 
recalibrating the fee schedule's relative weights every five years. 
Thus, those cost increases do not offset cost decreases from 
productivity and productivity must be accounted for separately.
    Productivity growth is the ratio of growth in outputs to growth in 
inputs. Measuring productivity growth requires detailed information on 
the personnel, facilities, and other inputs used and on the quantity, 
quality, and mix of services (outputs) produced. Because such data are 
generally not available, MedPAC has adopted a policy standard, 0.5 
percent, for achievable productivity growth that is based on growth in 
multifactor productivity in the national economy. Such a measure should 
be used in the physician update as well.
    In making its update for physician services in 2003 MedPAC 
considered three things: the adequacy of Medicare physician payment in 
2002, the inflation in input prices projected for 2003, and an 
adjustment for multifactor productivity. Although payments for 
physician services have not kept pace with the change in input prices 
since 1999, MedPAC recommends no adjustment for payment adequacy at 
this time, pending collection of further data. The other components of 
the update are the estimate of the change in input prices for 2003, 
which is 3.0 percent, and MedPAC's adjustment for growth in multifactor 
productivity, which is 0.5 percent. Therefore:

        The Congress should update payments for physician services by 
        2.5 percent for 2003.

    Our assessment of the first two components of our update, payment 
adequacy and inflation in input prices, is discussed briefly in the 
following sections.
Assessing payment adequacy
    Is the current level of Medicare's payments for physician services 
adequate? The information available to answer this question is limited 
and better measures of payment adequacy are needed. We lack information 
on the cost of physician services, so we cannot compare Medicare's 
payments and costs the way we can for other services, such as hospital 
care. However, we do have information about several other factors that 
allow us to judge the adequacy of payments. This information includes 
data on the number of physicians furnishing services to Medicare 
beneficiaries, physicians' perceptions of the Medicare program and 
their willingness to furnish services to beneficiaries, and information 
from surveys of beneficiaries on their ability to obtain care and their 
satisfaction with the care received. However, because it takes some 
time for providers to respond to changes in payment, these indicators 
may lag behind payment changes and must be interpreted carefully. 
Additional measures of payment adequacy are needed that are sensitive 
to possible short-term effects of inadequate payments, such as the 
duration of office visits and changes in the volume of services.
    Available information suggests that, as of 1999, payments were not 
too low. From 1999 onward, we have very limited data; we do know, 
however, that payments did not keep up with increases in input prices. 
This suggests that payments for 2002 could be too low, raising concerns 
about beneficiaries' access to care. We will not know if payments are 
too low until we have further information on payment adequacy. One 
source of that information will be MedPAC's newest survey of physicians 
which will be fielded this spring.
Entry and exit of providers
    Data on provider entry and exit yield information regarding the 
adequacy of current payments. Rapid growth in the number of providers 
furnishing services to beneficiaries may indicate that Medicare's 
payment rates are too high. Conversely, widespread provider withdrawals 
from Medicare could suggest that the rates are too low.
    Counts of physicians billing Medicare show that the number of 
physicians furnishing services to beneficiaries has kept pace with 
growth in the number of beneficiaries. From 1995 to 1999, the number of 
physicians per 1,000 beneficiaries grew slightly, from 12.9 to 13.1.
Physician willingness and ability to serve Medicare beneficiaries
    MedPAC's 1999 survey of physicians suggests that physicians were 
willing and able to serve beneficiaries.

           LOnly about 10 percent of physicians reported any 
        change between 1997 and 1999 in the priority given to Medicare 
        patients seeking an appointment. Of those changing their 
        appointment priorities, the percentage that reported giving 
        Medicare patients a higher priority was almost the same as the 
        percentage that assigned Medicare patients a lower priority.
           LOnly 4 percent of physicians said that it was very 
        difficult to find suitable referrals for their fee-for-service 
        Medicare patients, a finding comparable to the percent who 
        reported problems referring their privately insured fee-for-
        service patients.

    One of the most important findings of the survey was that, among 
physicians accepting all or some new patients, more than 95 percent 
said they were accepting new Medicare fee-for-service patients--a 
finding consistent with the results of another recent survey.
    While these findings are positive, many doctors participating in 
MedPAC's survey expressed concerns about payment levels. About 45 
percent said that reimbursement levels for their Medicare fee-for-
service patients were a very serious problem although, even more, about 
66 percent, said that HMO reimbursements were a very serious problem.
Beneficiaries' access to care
    Another way to assess the adequacy of payment rates is to evaluate 
beneficiaries' access to and quality of care. Evidence of widespread 
access or quality problems for beneficiaries may indicate that 
Medicare's payment rates are too low. Access and quality measures are 
often difficult to interpret, however, because they are influenced by 
many factors. Access to care for specific services, for example, may be 
influenced by beneficiaries' incomes, secondary (medigap) insurance 
coverage, preferences, local population changes, or transportation 
barriers, all of which are unrelated to Medicare's payment policies.
    Access to care was not a problem in 1999, according to data from 
the Medicare Current Beneficiary Survey. The percentage of 
beneficiaries reporting trouble getting care (4 percent) was low and 
essentially unchanged from previous years. The data also show that 
beneficiaries were overwhelmingly satisfied with the care they 
received. We will continue to track these indicators as newer data 
become available.
Accounting for cost changes in the coming year
    Given the information about the adequacy of the current level of 
payments, the next step in determining payment updates is to ask how 
much costs will change in the coming year. Several factors will affect 
the cost of physician services, but the most important one is inflation 
in input prices. The available measure--the MEI--has two problems, but 
the Secretary can correct them. Other factors that may increase costs 
include scientific and technological advances and the regulatory burden 
of the Medicare program, including the burden of compliance with 
requirements of the Health Insurance Portability and Accountability Act 
of 1996. These other factors are likely to have small or unmeasurable 
effects on costs. The remaining factor--productivity growth--will 
reduce costs. Using appropriate measures of inflation and productivity 
growth, it appears that the cost of physician services will increase by 
2.5 percent during the coming year.
    Measuring inflation in input prices The MEI is the SGR system's 
measure of input price inflation. It is calculated by CMS as a weighted 
average of price changes for inputs used to provide physician services. 
Those inputs include physician time and effort, or work, and practice 
expense. Physician work, which accounts for the time, effort, skill and 
stress associated with providing the service, has a weight of 54.5 
percent; the remaining 45.5 percent is allocated among categories of 
practice expense. Practice expense includes support staff wages and 
benefits, office expense, medical materials and supplies, professional 
liability insurance, medical equipment, and other professional 
expenses, such as private transportation.
    Although the MEI is analogous to the market basket indexes used to 
update payments for inpatient hospital care, it currently differs from 
those indexes in that it includes an adjustment for productivity 
growth. Productivity growth is an important factor and MedPAC believes 
that it should be considered separately in update decisions. This would 
allow input price indexes to account only for changes in prices, not 
other changes in cost.
    As used in the SGR system, the MEI also differs from the market 
basket indexes in that it is not a forecast of the change in input 
prices for a given year, but a measure of input price inflation for the 
previous year. To allow payment updates to anticipate changes in costs 
during the coming year CMS should use a forecast of the MEI when making 
payment updates for physician services.
    By removing the productivity adjustment and making it a forecast, 
the MEI would become a better measure of input price inflation. So 
modified, the index shows that input prices for physician services are 
expected to increase by 3.0 percent in 2003.
Other cost-increasing factors
    The cost of physician services may increase because of factors 
other than changes in input prices. The overall effect of these factors 
is likely to be small, however. As noted the costs of scientific and 
technological advances are already accounted for in the physician fee 
schedule when new billing codes are created or existing codes are 
    Other factors increasing costs are difficult to measure. For 
example, the regulatory burden of the Medicare program is an important 
concern of physicians. Nevertheless, estimates of the cost of this 
burden are not available. One way to account for any measurable 
increases in cost due to these factors is to assess payment adequacy, 
as described earlier, and adjust payments accordingly in future 


    Chairman JOHNSON. Thank you very much, Mr. Hackbarth. That 
was a very thorough explanation, I think, of the multiple goals 
that we have in our effort to reimburse physicians and of the 
depth of concern that we ought to have about the SGR formula 
and the impact it is having.
    There are a couple of things I would like to bring up. The 
first one is a very brief question to Mr. Crippen. You say that 
spending on entitlement services Social Security, Medicare, and 
Medicaid will increase from 7 to 14 percent of the GDP. Do you 
have any idea what percentage of expected revenues that will 
    Mr. CRIPPEN. At the moment, we believe revenues will 
average about 19 percent of GDP during this decade and in the 
foreseeable future, given the way the Tax Code is constructed. 
Revenues can creep up over time, as they did in the recent 
past, to a little over 20 percent of GDP. The reduction in 
taxes that you all enacted last year will reduce that share to 
19 percent over the current decade. So revenues will fluctuate 
somewhere between 19 percent and 20 percent of GDP for the very 
long term.
    Chairman JOHNSON. So if this goes from 7 percent to 14 
percent of GDP, what percentage of the expected revenues do you 
imagine that would be?
    Mr. CRIPPEN. It would take 14 or 15 percentage points 19 
percent. So it would be taking the lion's share, or three-
    Chairman JOHNSON. So it would be taking 15 percent of the 
19 percent of expected revenues?
    Mr. CRIPPEN. Yes. About three-quarters.
    Chairman JOHNSON. Leaving less than 25 percent for all 
other functions by the year 2030?
    Mr. CRIPPEN. Right, if taxes were not raised or debt did 
not go up dramatically.
    Chairman JOHNSON. Thank you.
    Second, I wanted to ask whoever cares to comment on the 
following question. First of all, we do see that this formula 
has very different impacts on different physician groups, that 
some are receiving quite generous increases over time and some 
are receiving very steep reductions. The second thing that I 
see eclectically out there, and I wonder if you can look at 
this in your data, is that I see a very disparate impact on 
senior access to service, depending on how Medicare 
reimbursements interact with Medicaid policy and State 
decisions about whether or not to replace the 20 percent 
copayment, which is now a voluntary choice that States are 
    Let me be a little clearer. In some of the urban areas of 
Connecticut where the State is not replacing the 20 percent, 
urban physicians have large patient load being paid at the 
Medicaid rate, which is low, and then they have an unusually 
large number of Medicare patients now associated with a 5 
percent cut in reimbursement rate and next year an additional 
cut. Most of these same physicians also have a suburban office. 
In their suburban office they are not seeing nearly as many 
Medicare patients and not nearly as many Medicaid patients.
    So I am literally seeing before my very eyes public 
reimbursement policy driving care out of our inner cities, and 
I wonder whether any of your research into the impact of 
reimbursement rates is beginning to pick up this kind of data. 
I consider it probably the most serious impact of our 
reimbursement formulas on access to care for seniors and poor 
people, and yet I don't see it emerging from the materials that 
I am reading. Mr. Hackbarth.
    Mr. HACKBARTH. None of the data I have seen is that refined 
that it would detect the sort of problem you have identified. 
The access data that we have reviewed at the Commission is at a 
higher level and shows in general good access to care for 
Medicare beneficiaries as 1999.
    Those are the most recent data we have available. We will 
shortly be getting more up-to-date information, but in general 
access has been good.
    Chairman JOHNSON. My understanding of that data that you 
have from 1999 is that there is a factor in it that shows that 
45 percent of the physicians in 1999 are not happy with 
Medicare. Now, on average it is good but when you have 45 
percent 2 years ago, unhappy, and now we are cutting their 
reimbursements in an environment in which their malpractice 
premiums are soaring, their nursing costs are going up and 
other factors affecting practice costs, including the need to 
invest in new technology for just office management, never mind 
for diagnosis. Do we have any way of getting at more current 
data about the real impact of the 5 percent cost on physicians 
and particularly on the physician decision as to where to 
    Mr. HACKBARTH. Well, dissatisfaction among physicians about 
Medicare is certainly widespread, in particular in certain 
specialties. As you indicated, the impact of moving to the 
Resource Based Relative Value Scale (RBRVS) system has been 
differential across specialties. That was intentional, and 
certain specialties have experienced significant economic 
    By the same token, though, many physicians are also 
dissatisfied with other payers. So Medicare is not unique in 
this regard by any stretch. The decision not to participate, 
not to see Medicare patients or not to accept new patients is 
different, though, from a decision whether to be dissatisfied 
or not. So there is not necessarily a direct correlation 
between that 45 percent or even an increase in dissatisfaction 
levels with an immediate decision not to see Medicare patients. 
There are two separate issues.
    Chairman JOHNSON. Does your data allow us to look at the 
physician situation in those specialties that are most likely 
to serve elderly because it is not even across the specialties 
and of course there is going to be less dissatisfaction? If you 
are in a specialty that has a relatively modest Medicare load, 
it is going to be different in not only a specialty that has a 
high Medicare load but for an older physician whose patient 
base has probably aged with him? Do we have the ability to look 
at the variable impact from those points of view?
    Mr. HACKBARTH. We can look at it more specifically by 
specialty, and I would be happy to work with our staff on that. 
I think that is a legitimate and important question, but one of 
the dilemmas that you face if you are a physician practicing in 
a specialty dependent on Medicare is, well, where do I go if I 
don't see Medicare patients? If in fact it is a specialty that 
disproportionately cares for elements of the elderly, it is not 
like they can start seeing children as their alternative.
    And so they are in a bit of a box in that sense, and that 
is a reason why we don't necessarily think the first order 
effect of these constraints will be for physicians to say, 
well, I am not going to see a Medicare patient. The first 
response might be in fact to say, well, to make up for lost 
income, I am going to have them come back more frequently or I 
am going to do an extra procedure or test, and again that is 
one of the critical failings of the SGR system.
    All of the constraints are in the aggregate, not for the 
individual physician, and so perversely we could see that one 
of the indications that this series of cuts is doing real harm 
is an increase in volume for return visits, more procedures, 
more tests. The proponents of SGR will say, look, we told you 
so, we need this volume constraint, but in fact the increasing 
volume is a sign of distress.
    Chairman JOHNSON. Thank you. I think that is a very 
important point. I think also we do need to pursue this issue 
of more detailed data because increasingly physicians are 
choosing to go to some other specialty or leave medicine at a 
remarkably young age, and while the data is small yet, 
depending on the specialty, that could have an enormous impact 
on senior access to critical physician services.
    So we need to know a lot more about this because it is 
beginning to invade, in my estimation, senior access, and we 
are right on a point where we are going to see the interaction 
of the payment systems, the two publicly funded payment 
systems, really affect senior access. But I will not pursue 
this because my time has expired. Mr. Stark.
    Mr. STARK. Dan, CBO estimated that the MedPAC 
recommendation would cost us $126 billion over 10 years, and 
did that include spending increases driven by volume? In other 
words, can you elaborate on that? When you did the $126 
billion, did you just take the suggested increase and put it 
out or did you make any estimate as to change in aggregate 
    Mr. CRIPPEN. I think we included volume increases. Let me 
consult my colleague. Yes, we did.
    Mr. STARK. OK. Any idea of how much of that $126 billion 
would be due to volume and intensity as opposed to . . .?
    Mr. CRIPPEN. It looks like what we added was about 1 
percentage point-of-increase for each year, on average, as a 
result of volume and intensity.
    Mr. STARK. And how much through----
    Mr. CRIPPEN. The price increase?
    Mr. STARK. The price increase?
    Mr. CRIPPEN. Well, the total increase would have been the 
MEI. So we took the MEI plus 1 percent.
    Mr. STARK. What is MEI averaging?
    Mr. CRIPPEN. I am going to defer to my colleague here.
    Mr. STARK. That is all right.
    Mr. CRIPPEN. You have MEI data on
    Mr. HACKBARTH. For what period?
    Mr. CRIPPEN. The next 10 years. It has got to be 2.5 
percent or 3----
    Mr. HACKBARTH. Two to three percent.
    Mr. STARK. Two to three percent. So you are talking maybe 
two for MEI and maybe another point on top for volume, and 
really isn't that what we have averaged over the last 10 years 
or so? Albeit we had a chart here somewhere, but it seems to me 
over the last 10 years we have paid 33 percent in increases, so 
the average annual in physician updates from 1992 up has been 
2.6 percent. So I guess you guys are both talking, Mr. 
Hackbarth and Mr. Crippen, the same amount whether we pay it as 
we are currently doing it or whether we change it. Is that a 
fair assumption, that we are really not talking about great 
changes, although you suggest, Mr. Crippen, that it would be 
$126 billion more; so when you are dealing in these small 
percentages, a 10th of a percent here or there makes a major 
difference at least in your----
    Mr. CRIPPEN. And part of the dilemma is that the current 
system--the SGR mechanism--would reduce payments for the next 2 
or 3 years to catch up for the overpayments in 2000 and 2001. 
So if you just removed that effect of the current system and 
went back to roughly the increase in the MEI, then of course 
you would have something similar, but you would not recoup 
those payments that were made earlier.
    Mr. STARK. Now, the President has proposed making these 
payment changes, whatever payment changes we make, on a budget 
neutral basis, so what I would call a zero sum game, as it 
were, and each year you give us savings options. Have you 
analyzed the options that we could use to provide this extra 
$126 billion? Quickly what are the--where would you tell us to 
    Mr. CRIPPEN. The physicians' fees are a component of 
Medicare part B Supplementary Medical Insurance, and there 
aren't many places to go here unless you change the underlying 
differential fee structure. In part B, 25 percent of costs will 
be paid by beneficiaries and 75 percent by general revenues, 
which leaves you part A if you are going to glean savings 
inside Medicare. You could in theory, cut hospital payments, 
but that hasn't been very successful either, so then you have 
to go outside of Medicare, into other entitlement programs. 
Presumably, under the current pay-as-you-go rules, you would go 
to other entitlement programs or raise taxes.
    Mr. STARK. Just one question. I noticed in your testimony, 
Mr. Hackbarth, you got into the idea of incentives and not 
wanting a fee schedule to encourage one to use a procedure or 
not use a procedure. Now, I presume you practiced law at some 
point and shouldn't a lawyer, it may not always happen this way 
but at least according to the theory that you learned in law 
school, who takes a pro bono case, say, for the environment or 
criminal defense do just as good a job as somebody who is 
getting a hundred bucks an hour for that same type of work?
    Mr. HACKBARTH. Yes, sir.
    Mr. STARK. And I have always felt it cuts both ways, that 
for a long time we tried to hold down overutilization. Now we 
have got managed care plans and we are sort of trying to 
prevent underutilization, where the pendulum swings. Don't you 
think that whatever we do, and I am taking issue with this idea 
of incentivizing, and I will just finish my question and then 
shut up, Madam Chair, that we ought to be sure there is no 
incentive one way or the other for a physician to make clinical 
decisions based on reimbursement, that that ought to be our 
goal, that the reimbursement ought to try to be as separated as 
possible from the clinical decisions the physician makes 
relative to his or her patients?
    Mr. HACKBARTH. Yes, that should be the goal and it is one 
of the failures of SGR as we see it because it only applies to 
part of the system.
    Mr. STARK. It is also a failure of the fee-for-service 
system in general, isn't it?
    Chairman JOHNSON. Very important point.
    Mr. HACKBARTH. It is an elusive goal.
    Chairman JOHNSON. Mr. McCrery.
    Mr. McCRERY. Thank you. Mr. Crippen, in your data 
concerning the amount of GDP that we will consume with 
Medicare, Medicaid, and Social Security in 2030, you don't 
mention what percentage of GDP will be consumed by interest on 
the debt. Do you have some idea what that would be in 2030?
    Mr. CRIPPEN. In our 10-year baseline, it would be pretty 
small because we don't increase debt by much; we have the 
current level of debt and then come 2005 or 2006, we start 
paying it down. So by 2010--again, in our baseline--we would 
have virtually no debt outstanding, so there would be no 
interest at that point and no interest payments.
    Mr. McCRERY. You have no debt outstanding in 2030?
    Mr. CRIPPEN. Our baseline only goes for 10 years and as you 
well know, the precision of even that is questionable. But over 
that 10-year period, we return in the baseline to an era of 
surpluses, unified-budget surpluses, that will pay down debt 
held by the public. So sometime not long after 2010 in our 
baseline most of the debt held by the public will be redeemed.
    Mr. McCRERY. And you told Mrs. Johnson that we are spending 
about 19 percent of GDP. Actually that is down probably now to 
closer to 18 percent, isn't it, with the recession and----
    Mr. CRIPPEN. It could well be. My guess is that we are 
going to end up collecting revenues and outlays equaling about 
18.5 percent to 19 percent of GDP this year. It is going to be 
very close to balance, as you know. So the revenues are going 
to about equal what we are spending.
    Mr. McCRERY. And historically spending has been around 18 
percent of GDP, hasn't it?
    Mr. CRIPPEN. Revenues have been, since World War II, about 
18 percent of GDP. Spending has fluctuated around that level in 
the past few years--sometimes up above it but then, in our most 
recent history of surpluses, slightly below revenues. But 
revenue collections since World War II have averaged about 18 
percent of GDP.
    Mr. McCRERY. So in 2030 we will have precious little left 
to spend on national defense, on roads, highways, 
transportation, environmental protection, justice, courts?
    Mr. CRIPPEN. Exactly.
    Mr. McCRERY. Can you foresee a time when Congress would 
allow that to happen?
    Mr. CRIPPEN. I don't know, Mr. McCrery.
    Mr. McCRERY. Can you foresee the Congress only spending 
about 3 or 4 percent of GDP on all the other priorities of the 
Federal Government?
    Mr. CRIPPEN. No.
    Mr. McCRERY. No, of course not. So something is going to 
have to give.
    Mr. CRIPPEN. Exactly.
    Mr. McCRERY. As you pointed out, we will either have to 
raise taxes or go into debt or I think more likely we will 
ration health care to control spending. I think that is where 
we are headed, is explicit rationing of health care, and it 
won't be just Medicare by the way. We will have a payroll tax 
for everybody's health care. Everybody will be on Medicare, I 
think, and we will limit explicitly the health care that people 
can receive. I think that that is where we are headed clearly 
and your numbers underscore that. Therefore, I am somewhat 
troubled by your statement that you don't mean to say there is 
a crisis and nothing that needs to be addressed today. Isn't it 
a fact that the sooner we impose some kind of solution to the 
ever growing increases for Medicare, the better off or the 
better chance we will have to control those costs over the long 
    Mr. CRIPPEN. Absolutely. What I was trying to do was not 
characterize this picture as in any way my opinion, but rather 
as a view of the facts as we understand them at this point. I 
also want to make sure that it is understood, and I know you 
understand--the Committee does, that there is no peril here for 
Medicare recipients in your consideration of changes to current 
benefits. Benefits of current beneficiaries--my parents' 
benefits--are not what we are talking about. We are talking 
about my benefits, paid by my children, so I don't want to 
leave anyone with the impression that there is a pending crisis 
that we need to solve today. Certainly, any action we take now 
will help much more than action we delay.
    Mr. McCRERY. Exactly. I mean I would hope we would look 
beyond the ends of our noses and consider the burden that our 
children will bear for us and their children for them if we 
don't do something today. So I think there is a crisis. I 
believe that we are fiddling while Rome is burning not only for 
Medicare but for Medicaid and for Social Security. We know it 
and shame on us for not proceeding with a solution that will 
give us some hope for controlling these costs in the future and 
continuing to provide the array of services the Federal 
Government always has and always will provide.
    Chairman JOHNSON. Thank you, Mr. McCrery. Mr. Kleczka.
    Mr. KLECZKA. Thank you, Madam Chairman. Madam Chair, I have 
a series of questions for Chairman Hackbarth and some are 
specific, coming from physicians from Wisconsin, the district I 
represent. So if it is possible, what I would like to do is 
submit these in writing to you
    Mr. HACKBARTH. Sure.
    Mr. KLECZKA. And if you could review them and send back a 
response. Thank you very much. Thank you, Madam Chair.
    Chairman JOHNSON. Would you like that response shared with 
the Committee?
    Mr. KLECZKA. I will share it.
    [The information follows:]

                               Medicare Payment Advisory Commission
                                               Washington, DC 20006
                                                     March 18, 2002
Honorable Jerry Kleczka
U.S. House of Representatives
2301 Rayburn House Office Building
Washington, DC 20515-4572

    Dear Congressman Kleczka:
    Thank you for your letter concerning Medicare's payments for 
physician services. You asked us about payments for practice expense 
and professional liability insurance under the physician fee schedule. 
You also asked us about expenditure targets, the frequency of physician 
encounters, and the productivity adjustment in payment updates.

    Medicare reimbursement for practice expense and malpractice 
insurance may be below the real costs physicians incur. For example, at 
St. Luke's Hospital in Wisconsin, heart surgeons often employ staff who 
assist them in the hospital. These local surgeons have told me that 
most of these costs are not reimbursed. Are you concerned that the 
reductions in practice expense payment will hurt quality as surgeons 
cut back on staff they can no longer afford? Why aren't hospitals 
providing this staff? Is this included in the hospital reimbursement 
rate? Or, is it reimbursed separately to the surgeon?

    Your practice expense questions address the issue of whether 
payments for practice expense should account for the cost of support 
staff that surgeons bring to the hospital. These staff prepare patients 
for surgery, assist during procedures, and provide post-operative care.
    The position of the Centers for Medicare and Medicaid Services 
(CMS) is that Medicare should not pay for the cost of these staff under 
the physician fee schedule because:
           LPayments for the cost of these staff are included 
        in payments to hospitals under the inpatient prospective 
        payment system, and Medicare should not pay twice for these 
           LIt is not typical for most physicians to use their 
        own staff in facility settings.
           LPayment for these costs is inconsistent with the 
        Medicare statute and regulations.
    As you know, cardiothoracic and other surgeons contend that 
practice expense payments should cover the cost of support staff, when 
used in a facility, because hospitals are perceived as no longer 
providing the staff that are necessary.
    It appears that this issue will be resolved soon. CMS has asked the 
Office of the Inspector General (OIG) to assess the staffing 
arrangements between cardiothoracic surgeons and hospitals, and the OIG 
is finishing its report now. We anticipate that CMS will use the 
report's findings to change current policy, if necessary.

    Is MedPAC tracking the changes in costs of liability insurance that 
appear to be escalating this year (for at least some specialties)? How 
do you think the fee schedule should be adjusted in light of these 
changes in total costs and relative costs among specialties?

    MedPAC agrees that the physician fee schedule should account for 
changes in input prices, including increases in professional liability 
insurance (PLI) premiums. That does not occur under the current method 
for updating payment rates, however. Instead, the sustainable growth 
rate (SGR) system overrides changes in input prices to achieve an 
expenditure target. To solve this problem, the Commission recommends 
that the Congress repeal the SGR system. In its place, we recommend an 
update method based on the estimated change in input prices for the 
coming year, less an adjustment for growth in multifactor productivity

    In the past, there has been a presumption that expenditure targets 
would somehow influence individual physician behavior, and therefore, 
outlays. Does MedPAC believe that individual physician decisions can be 
affected by total expenditure targets?

    Your question about expenditure targets and physician behavior 
addresses one reason why MedPAC recommends that the Congress replace 
the SGR system. The Commission believes that expenditure targets can 
influence the behavior of individual physicians but not in the way that 
those designing the targets intended. It was hoped that the targets 
would give physicians an incentive to control the volume of services. 
Instead, we believe that the reverse occurs. With expenditure targets, 
physicians have an incentive to increase volume, in the short run, to 
make up for lost income when payment rates are reduced. In fact, CMS 
makes exactly that assumption when it estimates the so-called 
behavioral response of physicians to lower payments--which is an 
increase in the volume of services provided. Over a longer period, 
expenditure targets can have other undesirable consequences. If 
payments fall below costs, we might see physicians cut back on their 
Medicare practice and focus on other patients. Alternatively, they 
could devote more time to other professional or leisure activities, or 
leave practice altogether.

    Does MedPAC intend to analyze changes in frequency of physician 
encounters between specialties? Would these trends be important?

    On your question about whether MedPAC intends to analyze changes in 
the frequency of physician encounters among physician specialties, we 
will continue to assess the adequacy of Medicare's payment rates for 
physician services with whatever data are available. Analyzing changes 
in the volume of services, including changes in volume by physician 
specialty, is one way to assess payment adequacy. In our March 2002 
report to the Congress, we considered other factors--beneficiaries' 
access to care, physician willingness to furnish services to 
beneficiaries, and entry or exit of physicians from participation in 
the Medicare Program.

    In regards to productivity, does the MedPAC recommendation assume 
that productivity changes are the same, or close to it, among all types 
of physicians, including surgeons, medical specialists, and primary 
care physicians?

    You are correct that the productivity adjustment in payment updates 
applies to all services uniformly and, therefore, to all physician 
specialties. This is true of the current productivity adjustment for 
physician services and the adjustment that MedPAC recommends. The 
question is whether payment rates can account for any changes in 
productivity that are unique to specific specialties. We believe the 
answer to this question is yes because payment updates are not the only 
way that payment rates change. Payment rates also change when the fee 
schedule's relative weights are recalibrated. This occurs every year, 
if billing codes are revised, and every 5 years, when CMS reviews the 
accuracy of the relative weights. As long as recalibration is sensitive 
to changes in cost due to productivity growth, it accounts for changes 
in productivity that are unique to specific specialties. It is likely 
that recalibration is this sensitive because, by law, the process 
considers changes in medical practice, coding changes, new data, and 
the addition of new procedures.
    If we can be of further assistance, please do not hesitate to 
contact us.
                                           Glenn M. Hackbarth, J.D.


    Chairman JOHNSON. Thank you. Mr. Crane.
    Mr. CRANE. Thank you, Madam Chairman.
    Mr. Crippen, the CBO projects nearly 20 percent in payment 
cuts over 4 years, a number that is greater if you count 
inflation, and I am sure I am not alone when I say that I have 
been hearing from numerous providers in my district who are 
upset about the recent payment cuts in the physician fee 
schedule. I am hearing that many of them can no longer afford 
to participate in the program and are considering leaving if 
something isn't done. In fact, I just saw a recent survey 
released by the North American Spine Society that says 48 
percent of physicians will be accepting fewer new Medicare 
patients, 35 percent will see fewer Medicare patients, and 6 
percent will leave the Medicare Program altogether.
    Does the CBO model cited in your prepared statement make 
any adjustments for the possibility that, as with Medicaid, 
many physicians will not continue to accept Medicare patients?
    Mr. CRIPPEN. I think the answer, Mr. Crane, is no, or not 
to any great extent. Let me refer to Appendix D in your 
Committee's Green Book which has a lot of information on 
Medicare; as I recall it is Table D-121. The only reason I have 
a sense of which table it is because I looked at it over the 
last day or two. It shows assignment rates--both the number of 
physicians or percentage of physicians accepting assignment but 
also equally important, the number of dollars spent by Medicare 
part B under assignment. And those numbers, of course, as my 
colleague said earlier, were quite high in 1999, and one would 
expect they might go down.
    But the point that this table makes is that we had much 
lower levels of assignment and participation even as recently 
as 5 years ago, or a few years ago, when payment rates were 
being cut. I don't know what to make of all of this other than 
to say that we had 99 percent assignment and in 1999 or 
thereabouts--or rather, 98 percent--and we have had 80 percent 
participation in the recent past.
    I don't know what the right standard is. Do we want to 
shoot for 99 percent participation? That may be a little high, 
frankly, if you have to resort to the highest common 
denominator to pay for these services.
    But I am not here to suggest what the right standard is. 
Rather, I am suggesting that these data and recent history say 
that at least for the next few years, we wouldn't anticipate 
that a fall-off in physician participation would change 
Medicare spending by much. That is, we don't think that 
patients, or beneficiaries, are going to be denied care because 
of the lack of physician participation. That is a long answer 
to your question.
    The short answer is that CBO assumes that a sufficient 
number of physicians for all Medicare recipients will 
participate over the 10-year budget period and our projections 
will be based on that.
    Mr. CRANE. Thank you. I yield back the balance of my time.
    Chairman JOHNSON. Thank you, Mr. Crane. Congresswoman 
    Mrs. THURMAN. Thank you, Madam Chairwoman. Let me follow up 
on his question, because that would generally be across the 
country and not necessarily State specific.
    Mr. CRIPPEN. Right. As I recall, your tables also have 
State-by-State numbers on assignment rates and on assigned 
    Mrs. THURMAN. But access.
    Mr. CRIPPEN. Sure; it varies.
    Mrs. THURMAN. That is one of the areas that, being from 
Florida, that I am getting very, very concerned about. And I 
had an opportunity similar to other Members who have talked to 
physicians as to what is going to happen in States like 
Florida. We are already understanding that we have got problems 
with even bringing people into Florida.
    Their first question to a practice might be what is your 
percentage of Medicare? Because if they say it is high, then 
they are concerned that with these failing numbers for them, 
that what good is it to go there? We would rather go someplace, 
compete in Georgia or someplace else on the Sun Coast. What is 
the question to them? What do you say to them? What am I going 
to say to these constituents?
    Many of us are on the bill that Mr. Dingell and Mr. Tauzin 
and others have put out there, but we are seeing long waits. We 
can't get people to come into Florida.
    And then the second question that I would ask really has to 
do with the Medicare+Choice issue, too, because Dr. Ginsburg is 
going to testify, and he actually mentions now that doctors 
have an opportunity to negotiate with some of these 
Medicare+Choice programs, and in fact are getting higher or 
being able to get more dollars out of there. Are we then 
putting an imbalance into our Medicare program where some may 
just gravitate to those programs and may leave more other areas 
uncovered in some of our rural areas or areas where there are 
no Medicare+Choice programs? Either one of you.
    Mr. CRIPPEN. I can start with the second one. At least by 
our lights and looking at future payments for Medicare+Choice, 
CBO anticipates, frankly, that there is going to be a fall-off 
in enrollment in those plans. Payment rates are going to be 
quite limited in most areas for the foreseeable future. So our 
projections certainly don't anticipate that we will have a 
migration from the fee-for-service program to Medicare+Choice. 
In fact, we assume quite the opposite.
    Mr. HACKBARTH. On that particular issue, it is our belief 
that Medicare+Choice is not going to be a large and important 
part of the program in rural areas. The efforts to make it so 
through floor payments and the like have not succeeded and in 
our view will not succeed. In fact, managed care is not 
prevalent in rural areas in the non-Medicare population, and so 
there is little we can do in Medicare to alter that basic 
    As for the overall Medicare+Choice program, whether it 
grows or not, certainly the recent trend, as Dan said, is down. 
Whether that reverses, in my view, will depend a lot on whether 
managed care organizations change how they do business. One of 
the reasons, in my view, that they are struggling is that they 
have stripped away a lot of their cost controls, expanded 
choice, and reduced the utilization controls to become more 
like fee-for-service. It is not surprising that they can't 
compete with Medicare.
    Mrs. THURMAN. So let me just say this, then. If the $126 
billion is what you said would bring us up to the right rates 
or at least bring us into line so we can actually take the 
dollars that we have put into the Medicare+Choice programs over 
the last couple of years to prop them up and move them over 
into the system, that would actually make us somewhat neutral 
in this budget, at least for this first year.
    Mr. CRIPPEN. I think that we are still paying--and I say 
``think'' because we have to look at the current formulations--
but I think we are still paying Medicare+Choice less than we 
would pay under the equivalent fee-for-service program in a lot 
of areas in the country. So it may be a net cost from actually 
moving people from managed care
    Mrs. THURMAN. Not necessarily moving them, but obviously 
that number has decreased. It went from 15 to 12 percent. We 
gave an additional amount of dollars over the last couple of 
years. I think there is some idea that we might do some more 
again this year. It just seems to me that we might be better 
off to keep physicians who are in Medicare fee-for-service at a 
level that they can continue to do their practices, not cutting 
off services, not have waiting lines for 3 months being able to 
bring people in, as versus putting it into Medicare+Choice.
    Mr. CRIPPEN. One of the ways in which you and the country 
have tried to grapple with this incentive question for 
physicians on payment versus volume--how you get the incentives 
right--has been capitation, or something like the approach that 
you see inside some managed care systems, in which the decision 
to treat or not to treat is not based on physician income, or 
at least not on the price of that particular service; rather, 
the payment is for a year of ``unlimited'' service. So by 
raising more fee-for-service payments, you may exacerbate the 
dilemma that you are facing in the overall question here.
    Chairman JOHNSON. Thank you, Congressman Camp? 
Congresswoman Dunn.
    Ms. DUNN. Thank you very much, Madam Chairman. Gentlemen, I 
bring to the table the same complaints that I bring in all of 
these hearings that we have, and it is about the incentives in 
this program that result in a State like my State, Washington 
State, which is very efficient in the delivery of health care 
being penalized because of its strong history. So I have 
physicians at home not only worried about the 5.4-percent 
reduction in their reimbursements but in the reimbursement 
system as a whole.
    So my question to both of you is, as we develop a new 
system, a new SGR, whatever we are going to call it, how are we 
going to begin to balance States like Washington, with States 
like New York?
    Mr. HACKBARTH. Well, the reasons for different levels of 
spending in different parts of the country are quite 
complicated and, frankly, not all that well understood. Some 
are obvious. Some have to do with a different standard of 
living, different wage levels. And in the Medicare Program, as 
you know, we adjust using a wage index for all the different 
services to varying degrees. So if you happen to be in a State 
where wage levels tend to be lower than, say, New York, the 
Medicare payment formulas result in lower spending. But that is 
only part of the issue.
    Perhaps an even bigger part of the problem might be 
differences in utilization patterns, which could be because of 
greater efficiency or could be because of differences in the 
underlying health status of the population, differences in 
tastes about medical care, different attitudes toward risk, and 
the like. It is a really complicated problem that has not been 
disentangled to this point.
    If our goal were to equalize spending across States, across 
cities, whatever geographic unit you describe, we would need a 
very different health care system to produce that uniformity. 
One of the virtues of our system, at least in the eyes of many 
people, is the degree of freedom that gives both patients and 
providers, the autonomy it gives them. Such a system is very 
unlikely to produce uniform results. So if you want uniform 
results, you need a much more controlled, centrally controlled 
system than we have, and that brings with it its own potential 
    Mr. CRIPPEN. I think, Congresswoman, you are absolutely 
right that there are some States that historically have had 
lower per capita costs--for example, in the Northwest, in 
Minnesota, and in others that in some sense early on had 
managed care. And so because we have no better basis, we have 
established payments based on historical expenditures. And 
those historical expenditures were lower in some States than in 
    Until we switch from a system that pays for inputs, based 
obviously on historical costs, to something that might pay for 
outcomes, or results, it is going to be hard and--and this is 
not a political matter--hard to figure out a system that would 
pay more to those States that have already established a more 
efficient delivery system without cracking down considerably on 
other States.
    So all I can suggest is that because you were efficient in 
the past, you are being penalized now, as my colleague just 
said, because your cost structure is lower. So there is some 
basis for the sense of unfairness. It may not be ``fair,'' but 
until we start paying for services differently--don't update 
payments inputs but rather on the basis of outputs or some 
other method--I don't see any magic in these formulas that will 
    Ms. DUNN. I will be waiting for such a system, hoping to 
take part in the development of such a system, and I appreciate 
your expressing the reality. Thanks.
    Chairman JOHNSON. Just to conclude, I think your answer on 
those issues is inadequate. No offense. It is just that the 
historic base on which some of the States' payment systems were 
based and we have this problem in Iowa and a number of other 
States was very low. But those physicians are still having to 
buy the new technology and pay the higher malpractice cost. So, 
the disparity is declining, and the old differential is no 
longer as relevant.
    And I am very concerned about their ability to attract 
physicians out of residency, because now our physicians coming 
out of residency have much higher debt loads. So it is a very 
hard decision to go to a State with lower reimbursement rates, 
because the cost of living isn't necessarily that much lower 
anymore. The original cost basis that was the foundation of 
this system is now not as relevant, because we have much more 
of a national system.
    You talked to the hospitals. They are buying through 
national combines. So this whole issue, and I know Mr. 
Hackbarth and I talked about trying to review this. This 
Committee will be holding hearings on the whole wage area 
issue. But we have to evaluate these past fundamentals because 
they are no longer as relevant as they once were and they are 
going to create very disparate access to care in a decade or so 
if we don't do something about it.
    It is like the baseline issue. The fact that you estimate 
your baseline to us on the basis of law will not prevail. Means 
that we have to raise lots more money just to stay where we 
are. So there are some things about the way that Congress has 
functioned in the past that make it hard to function in the 
future. This issue of the low paid States, I think, is going to 
be a much more significant problem for us as we go forward.
    And in closing, I wanted to just remind you, and I know 
some of the next panel might help us on this issue of the 
differential impact of the 5 percent cut according to specialty 
and also place of care, which I think actually nobody has very 
good data on. And on your five goals, Mr. Hackbarth, one of the 
ones you didn't mention is how do we meet a future in which we 
need to encourage physicians to participate in disease 
management programs? Our whole reimbursement system doesn't 
look at care coordination. It looks at isolated care decisions. 
And that is not going to serve us as a nation as we move into 
an era where there are going to be people living much longer 
with multiple illnesses to manage. So our payment system is not 
only inadequate to next year and the year after, it is 
inadequate to the future of medicine. Mr. Stark.
    Mr. STARK. Could I ask one brief question of Mr. Hackbarth, 
who may or may not have looked at this, but there has developed 
recently a phenomenon that I would refer to as boutique clinics 
or practices, wherein a primary care physician will charge 
somebody $1,500. There are some of us who are concerned that 
that may be extra billing or classified as that. Have you 
looked into that issue?
    Mr. HACKBARTH. We have not, sir.
    Mr. STARK. But you can understand how that might. When you 
charge a Medicare beneficiary an annual fee, do you spread that 
over some of the Medicare charges that that physician would 
collect from that patient? And if so, does that constitute 
extra billing? And you might--I would urge you to look into it 
because it is a question that will come up.
    Mr. HACKBARTH. Thank you.
    Mr. STARK. Thank you, Madam Chair.
    Chairman JOHNSON. I thank the panel for their input and 
call forward the second panel. I welcome the panel. And I also 
want to acknowledge the presence of my colleague, Ben Cardin, a 
Member of the Committee on Ways and Means, one very, very 
interested in health. He often does join us, although not a 
Member of the Health Subcommittee, and works with us closely on 
much of the health care legislation that comes out of the 
    Dr. Ginsburg.


    Dr. GINSBURG. It is really a privilege to be invited to 
talk on this topic. The Center for Studying Health System 
Change is an independent nonpartisan research organization 
funded by the Robert Wood Johnson Foundation. It conducts 
research on how the health system is changing and the impact of 
those changes on people. Our research includes surveys and site 
visits that provide unique perspectives on health care in 
communities. We seek to inform policy with timely and objective 
analysis, but the Center does not advocate particular policy 
    When the issue of the Medicare physician payment update 
developed late last year, I recognized that trend data from our 
surveys and data from our site visits could contribute to the 
    We have information from household survey respondents about 
their experience in obtaining care in a timely fashion. We have 
information from physician respondents about their acceptance 
of new patients and the time spent in patient care. And we have 
information from site interviews with health plan executives 
about how much they pay physicians in relation to Medicare 
payment rates.
    My testimony contains a lot of charts with data, but I 
would like to take you right to the bottom line. Many of the 
trends in the testimony point to a tightening of physician 
capacity in relation to demand that is leading to declines in 
peoples' ability to access care without delay. We see that more 
people are reporting delays in getting care. The time to get an 
appointment with a physician is increasing. Doctors are 
spending more hours per week in patient care and fewer doctors 
are accepting all new patients. A likely factor behind these 
trends is the recent growth in demand associated with the 
loosening of restrictions of managed care throughout the 
medical care system.
    These trends are affecting Medicare beneficiaries, but they 
are also affecting those with private insurance. The relative 
financial attractiveness between Medicare and private insurance 
has probably not changed much in the last few years. Physician 
willingness to accept all Medicare patients is declining, but 
so is physician willingness to accept all new privately insured 
    But this parallelism in trends could change over the next 
few years. The current law formula is expected to reduce 
Medicare payment rates a lot more. Also, physicians, 
particularly specialists, have been exerting greater leverage 
with managed care plans and are likely to get higher payment 
rates. The bottom line is that there are greater risks of 
deterioration and access to care from sharp cuts in Medicare 
physician payment rates today than in the past because of the 
stresses on physician capacity.
    Thank you.
    [The prepared statement of Dr. Ginsburg follows:]
            Statement of Paul B. Ginsburg, Ph.D., President,
                Center for Studying Health System Change
    Thank you Madam Chairman, Congressman Stark, and members of the 
committee for inviting me to testify about Medicare physician payment. 
I am Paul Ginsburg, President of the Center for Studying Health System 
Change (HSC). HSC is an independent nonpartisan policy research 
organization funded solely by the Robert Wood Johnson Foundation. Our 
longitudinal surveys of households and physicians and site visits to 12 
communities provide a unique perspective on the private health care 
market.\1\ Although we seek to inform policy with timely and objective 
analyses, we do not lobby or advocate for any particular policy 
    \1\ ``An Update on the Community Tracking Study: A Focus on the 
Changing Health System,'' HSC Issue Brief No. 18, February 1999.
Access for Medicare Beneficiaries
    The goal of Medicare physician payment policy is to assure 
beneficiaries' access to high quality care while meeting federal budget 
objectives. Problems with the Medicare physician payment update formula 
and the recent 5.4 percent fee cut have raised questions about the 
likely impact on access to care for Medicare beneficiaries. Our 
research suggests that Medicare beneficiaries' access to care over time 
may depend on physician capacity and local market conditions, factors 
that are difficult to capture within a budget-driven payment formula. 
By physician capacity, I mean the ability of physicians to provide 
services relative to the demand for those services. Capacity depends on 
a range of factors, including physician supply, the amount of time 
physicians are willing to devote to patient care, the mix of types of 
physicians and patients' demand for physician services.
    The good news is that, overall, Medicare beneficiaries currently 
experience fewer problems of access than the near elderly covered by 
private insurance. In 2001, 11 percent of Medicare beneficiaries said 
they delayed or did not receive needed care compared with 18 percent of 
the privately insured who are 50-64 years of age. We have, however, 
recently seen slight declines in access to care for both groups.
    Declines in access to care over time may reflect tightening of 
physician capacity in relation to demand. When asked the reasons for 
delaying or not obtaining care, respondents are increasingly reporting 
problems obtaining appointments. These problems are experienced by the 
privately insured near elderly as well as by Medicare beneficiaries. 
For example, in 1998-9, 16.3 percent of the Medicare beneficiaries who 
reported delaying or not obtaining care said they could not get an 
appointment soon enough compared with 20.9 percent of the privately-
insured near elderly. By 2001, this had grown to 23.7 percent for 
Medicare beneficiaries and 25.0 percent of the privately insured near 
elderly (Exhibit 2).

Exhibit 1: Percent Reporting Delaying or Not Receiving Needed Care in

Past Year, Comparison of Medicare Beneficiaries and Privately-Insured

Near Elderly

    Note: Data from the Community Tracking Study (CTS) Household 
Surveys, 1996-7, 1998-9 and 2000-1.

 Exhibit 2: Percent of People Who Had Problems Obtaining Care, by Reason
Reasons for Delaying/Not               1996-7       1998-9       2000-1
 Obtaining Care
Couldn't get appointment soon
  Age 50-64, privately insured           21.9         20.9         25.0
  Age 65+                                13.6         16.3         23.7
Couldn't get through on phone
  Age 50-64, privately insured            7.1          7.5          9.0
  Age 65+                                 7.3          5.4         11.2
Couldn't be at office when open
  Age 50-64, privately insured           15.0         13.5         16.6
  Age 65+                                13.0         15.1         15.6
Note: Data from the Community Tracking Study (CTS) Household Surveys,
  1996-7, 1998-9 and 2000-1.

    A second indication of tightening capacity is that both the elderly 
and near elderly are facing longer waits for appointments with their 
physicians. Over a third of people aged 50 and older must wait more 
than three weeks for a checkup, while roughly 40 percent must wait for 
more than a week for an appointment for a specific illness. These 
increases in waiting times are occurring across all age groups.

Exhibit 3: Percent Reporting Long Waits for Medical Check-ups,

Comparison of Medicare Beneficiaries and Privately-Insured Near Elderly

    Note: Data from the Community Tracking Study (CTS) Household 
Surveys, 1996-7, 1998-9 and 2000-1.

Exhibit 4: Percent Reporting Long Waits for Doctor Appointments

When Ill, Comparison of Medicare Beneficiaries and Privately-Insured

Near Elderly

    Note: Data from the Community Tracking Study (CTS) Household 
Surveys, 1996-7, 1998-9 and 2000-1.

    A third indication of tightening physician capacity is the increase 
in time that physicians are spending in patient care. Average hours per 
week increased sharply over the last two years. This may reflect a 
sharper increase in demand for services due in part the loosening 
restrictions in managed care. The increase in hours spent in patient 
care is also consistent with anecdotal reports that physicians are 
working harder to make up for lower fees--either meeting higher demand 
or creating it.

Exhibit 5: Average Hours Per Week Physicians Spend in Patient Care

    Note: Data from the Community Tracking Study (CTS) Physician 
Surveys, 1996-7, 1998-9 and 2000-1, unweighted.
    While there is considerable debate about the extent of a physician 
supply shortage, we do know that physicians have begun to exert 
increasing leverage with health plans to obtain higher payment 
rates.\2\ As managed care plans have broadened their provider networks 
in response to demands for more choice and physicians are less eager to 
be included in all networks, physician leverage with managed care plans 
has increased. Physicians in some specialties have won substantial 
increases in payment rates.\3\ If Medicare payment rates are falling, 
differentials between what physicians receive from Medicare and what 
they receive from private insurers would grow, putting beneficiaries' 
access to care at risk.
    \2\ Cooper, Richard A. and Thomas E. Getzen, Heather J. McKee and 
Prakash Laud, ``Economic and Demographic Trends Signal an Impending 
Physician Shortage,'' Health Affairs, 21(1): 140-154, January/February 
2002; Grumbach, Kevin, ``The Ramifications of Specialty-Dominated 
Medicine,'' Health Affairs 21(1):155-157; and Mullan, Fitzhugh, ``Some 
Thoughts on the White-Follows-Green Law,'' Health Affairs 21(1): 158-
    \3\ Strunk, Bradley C., Kelly Devers and Robert E. Hurley, ``Health 
Plan-Provider Showdowns on the Rise, HSC Issue Brief No. 40, June 2001 
and Short, Ashley C., Glen P. Mays and Timothy K. Lake, ``Provider 
Network Instability: Implications for Choice, Costs and Continuity of 
Care, HSC Issue Brief No. 39, June 2001.
Physicians' Acceptance of New Medicare Patients
    A key indicator of Medicare beneficiaries' access to care is the 
proportion of physicians who are accepting new Medicare patients into 
their practices. As part of our longitudinal physician survey, we ask 
physicians whether they are accepting new Medicare patients. Over the 
past 4 years, there has been a 4 percentage point drop in physicians' 
willingness to accept all new Medicare patients from 72 percent to 68 
percent (Exhibit 6). The sharpest decline occurred for surgical 
specialists, while there was a modest increase for medical specialists. 
(For this analysis, pediatricians and physicians not accepting new 
privately insured patients are excluded.)

Exhibit 6: Percent of Physicians Accepting ALL New Medicare

Patients, by Specialty

    Note: Data from the Community Tracking Study (CTS) Physician 
Surveys, 1996-7, 1998-9 and 2000-1, unweighted.

    The decline in accepting all new Medicare patients was the sharpest 
for physicians with the weakest connections to Medicare. That is, for 
physicians where Medicare revenues represent less than 10 percent of 
their practice revenue, acceptance of all new Medicare patients fell 
from 59 percent to 46 percent (Exhibit 7). In contrast, for physicians 
where Medicare revenues are over a half of their practice revenue, 
acceptance of new Medicare patients fell from 77 percent to 72 percent.

 Exhibit 7: Percent of Physicians Accepting ALL New Medicare Patients by
                            Medicare Revenue
Medicare revenue as percent of         1996-7       1998-9       2000-1
 practice revenue
Medicare revenue under 10 percent        59.1         55.8         45.9
Medicare revenue of 11 to 29             71.4         69.1         64.8
Medicare revenue of 30 to 49             75.3         74.1         71.5
Medicare revenue of 50 or more           76.6         73.2         71.9
Note: Data from the Community Tracking Study (CTS) Physician Surveys,
  1996-7, 1998-9 and 2000-1, unweighted.

    Similarly, physicians with the lowest revenue from Medicare were 
the most likely to report accepting no new Medicare patients. Among 
physicians who get less than 10 percent of their practice revenue from 
Medicare the number who now refuse to accept Medicare patients climbed 
from 12 percent to 21 percent in four years (Exhibit 8). In comparison, 
negligible changes occurred for physicians with higher Medicare 
revenues as a percent of their total practice revenue.

 Exhibit 8: Percent of Physicians Accepting NO New Medicare Patients by
                            Medicare Revenue
Medicare revenue as percent of         1996-7       1998-9       2000-1
 practice revenue
Medicare revenue under 10 percent        11.9         14.1         21.1
Medicare revenue of 11 to 29              2.8          2.7          3.4
Medicare revenue of 30 to 49              1.7          1.6          1.2
Medicare revenue of 50 or more            0.0          0.0          0.0
Note: Data from the Community Tracking Study (CTS) Physician Surveys,
  1996-7, 1998-9 and 2000-1, unweighted.

Medicare Physician Payments Relative to Private Payers
    The extent to which Medicare patients' access to care is 
compromised by Medicare physician payment cuts will depend on the 
community where beneficiaries live. This is because the relationship 
between Medicare payment rates and the rates paid by private insurers 
vary widely across communities. As part of our site visits to 12 
communities, we conduct interviews with health plans and physician 
groups. From those interviews, we have found an extensive use of the 
Medicare relative value scale by private health plans and have also 
found that Medicare payment methods have had a large influence on the 
private sector. In fact, many health plans explicitly set their 
payments as a percentage of what Medicare pays.
    There is considerable geographic variation in relative payments 
across the 12 communities we track. In Miami, Northern New Jersey and 
Orange County, California, private insurers' physician payment rates 
relative to Medicare are relatively low compared with other 
communities. For example, in Miami, private payments range from 80 to 
108 percent of Medicare physician payments. In Northern New Jersey, 
private rates ranged from 95 to 105 percent of Medicare payments. In 
contrast, Boston, Cleveland, Greenville, Little Rock and Seattle have 
private rates that are much higher than Medicare. For example, private 
payments in Little Rock range from 120 to 180 percent of Medicare 
physician payments and from 100 to 150 percent in Boston.
    This pattern of relative differences across markets has remained 
stable over time. Those markets that are typically more generous than 
Medicare have maintained these higher rates over the last 6 years of 
our study. Similarly, the communities with the lowest rates have 
consistently paid lower rates than other communities.
    As a result of this variation in communities, a substantial decline 
in Medicare payments would pose the greatest risk to beneficiaries' 
access in those communities, such as Boston and Little Rock, where 
Medicare payment rates are the lowest relative to private rates. With 
the potential of ``hot spots'' of poor access developing in certain 
communities, new approaches for monitoring access in Medicare may be 
    Since the Medicare program's inception in 1966, access to care for 
the elderly has not been a significant issue. This included the 
transition to the Medicare Fee Schedule that began in 1992.\4\ But our 
research raises concerns about access in the near future. Physician 
capacity to meet the demands of patients appears to be tightening and 
could tighten even further in the future. At the same time, payment 
rates in private insurance have been increasing, particularly for 
    \4\ Trude, Sally and David Colby, ``Monitoring the Impact of the 
Medicare Fee Schedule on Access for Vulnerable Populations,'' Journal 
of Health Politics, Policy and Law, 22(1):49-71, 1997.
    Current policy established Medicare physician payment rates within 
the constraints of the federal budget. It also linked updates to the 
rate of growth of program spending and the growth of the economy. But 
attention also needs to be paid to Medicare beneficiaries' ability to 
command services in an environment of tightening capacity. MedPAC's 
recommendation of pegging updates in payment rates to trends in input 
prices would avoid cuts in the short term. However, given trends in the 
private markets, even under the MedPAC recommendation we would expect 
to see a widening gap between Medicare and private payment rates over 
the next few years. For this reason, just fixing the formula may not be 
enough to protect access to care for Medicare beneficiaries. At a 
minimum, more explicit attention to trends in Medicare beneficiaries' 
access nationally and within communities is advisable.


    Chairman JOHNSON. Thank you very much, Dr. Ginsburg. Dr. 


    Dr. MAYER. Thank you, Madam Chairwoman. I am Dr. John 
Mayer. I am a Pediatric Heart Surgeon at the Children's 
Hospital in Boston and a Professor of Surgery at Harvard 
Medical School. I am also Chairman of the Council on Health 
Policy for the Society of Thoracic Surgeons (STS), and I 
represent both the STS and the American Association for 
Thoracic Surgery. We are among the Charter Members of the 
Coalition for Fair Medicare Payment and we support, as does 
this coalition, H.R. 3351 which would moderate the 2002 
reductions in the physician fee schedule, as you have heard 
about previously.
    We want to leave you with three basic points. First, we 
think this bill, H.R. 3551, has to come to the floor and that 
the SGR formula has to be revised along the lines recommended 
by MedPAC. Second we would also want you to recognize that the 
RBRVS system, the relative value system, is in our opinion on 
the verge of breaking down, and that will have an inevitable 
impact on the quality of the care that Medicare beneficiaries 
    In announcing these hearings, Chairman Johnson said that 
Medicare's formula for paying physicians is completely 
irrational and must be reformed this year, and we 100 percent 
agree. This Congress should recognize that the 5.4 reduction 
this year in physician fee schedule across the board has been 
compounded for many specialties by inequities in reimbursement 
for practice expenses. More specifically in our case and other 
surgical subspecialties, CMS has refused to recognize the cost 
that cardio-thoracic surgeons incur for staff who are on their 
payroll and who are essential to patient care in the hospital.
    I really want to focus on some of the ways that this arcane 
system that has been devised for practice expense in particular 
has worked or not worked, and let me give you a few examples.
    I also represent the Society of Thoracic Surgeons on the 
Relative Value Update Committee of the American Medical 
Association (AMA) which recommends physician work values but 
also reviews all the practice expense relative values. I 
believe we have gotten ourselves into an absurd reductionist 
approach trying to estimate the resources needed for each phase 
of each physician service. As a committee, we actually had to 
make a recommendation on whether 21 minutes or 23 minutes of 
clinical staff time were typical for a standard mid-level 
office visit. We were told that our decision would shift $100 
million in the Medicare fee schedule. That is almost half as 
much as Medicare spends for the most common coronary artery 
bypass procedure that is done.
    I have personally and perhaps this is as a scientist 
relatively little confidence in the ability of a Committee of 
physicians sitting in a room to reliably distinguish between 21 
minutes and 23 minutes. As I said, the reductions in allowed 
charges for cardiac surgery are not 5.4 percent but, on 
average, are 10 percent; and for some of the procedures they 
are as high as 15 percent.
    Since 1994, for cardiac surgery, reductions in practice 
expense component of the fee schedule have been 47 percent. 
There are in the written materials submitted to you graphs that 
demonstrate the overall impact of this system over the last 10 
to 15 years and I think they are self-explanatory.
    Congress in 1997 instructed Health Care Financing 
Administration (HCFA) in revising the practice expense system 
to recognize all staff, equipment, supplies and expenses. And 
subsequently under section 212 of the BBRA, Congress instructed 
the U.S. Department of Health and Human Services (HHS) to 
utilize valid data from outside organizations in addition to 
HHS itself. We have submitted that data, but HCFA has 
nonetheless deleted from practice expense all costs our Members 
incur for clinical staff who actually help provide services in 
the hospital.
    In some States, some of these costs can be partially 
offset, but only for certain kinds of staff and only for 
certain kinds of activities. There is no reimbursement for any 
of the clinical staff for their services in intensive care 
units or on the wards postoperatively.
    You may ask, why it is that cardiothoracic surgeons employ 
these staff? Very simply, cardiothoracic surgeons have, at 
their local community levels found that these staff are 
essential to improving quality. The Institute of Medicine, IOM, 
report very clearly noted that in complicated situations like 
cardiac surgery, that a well-functioning consistent team is 
essential to quality. Our overall mortality rates for coronary 
surgery in the United States are down 40 percent in the last 10 
years and we think that these teams are essential to that 
    I actually gave a talk last week in Florida to a group of 
75 cardiothoracic surgeons, and I asked them how many of them 
employed clinical staff that they took with them to the 
hospital. Essentially everyone raised their hand. We don't want 
to go backward. And I think that the current course that we are 
on is one that will progressively deteriorate the quality of 
care that cardiac patients will receive in this country.
    I can tell you that for the last several years we have 
failed to fill cardiothoracic surgery training positions in 
this country with American medical school graduates, and this 
year we did not fill the positions at all. That is, there were 
positions that were left unfilled. I think this bodes poorly 
for the future, and if the baby boomers don't have some other 
health catastrophe befall them, we are going to need more and 
more cardiac surgical procedures in the future. And if the 
shortages continue in applicants, it will take years to turn 
this around.
    The decisions that are made this year will have an impact, 
and the impact is going to be felt not only tomorrow but in the 
future. We hope that we are looking ahead.
    Thank you.
    Chairman JOHNSON. Thank you very much for your excellent 
testimony. Anyone speaking out there with thoracic surgeons 
knows that this has been a specialty that has not been able to 
survive the automatic formula that governs reimbursement.
    Dr. Palmisano.
    [The prepared statement of Dr. Mayer follows:]
 Statement of John E. Mayer, Jr., M.D., Professor of Surgery, Harvard 
    Medical School, Boston, Massachusetts; Pediatric Heart Surgeon, 
Children's Hospital Boston, Boston, Massachusetts; Chairman, Council on 
  Health Policy, Society of Thoracic Surgeons, Chicago, Illinois; on 
 behalf of the American Association for Thoracic Surgery, Manchester, 
    Madam Chairwoman, I am John Mayer, M.D., chairman of the Council on 
Health Policy of the Society of Thoracic Surgeons. In practice I am a 
pediatric heart surgeon at Children's Hospital in Boston and Professor 
of Surgery at Harvard Medical School. I am here to represent both the 
Society of Thoracic Surgeons and the American Association for Thoracic 
Surgery; together these organizations represent essentially all of the 
surgeons providing heart, lung, esophageal, and other thoracic surgery 
in the United States. These two organizations are among the charter 
members of the Coalition for Fair Medicare Payment, formed last year in 
response to the crisis created by the across the board reduction of 5.4 
percent in the Medicare conversion factor. The effects of this across 
the board reduction are compounded for our specialty and many others by 
continued reductions in the practice expense component of the Medicare 
fee schedule.
    We support, as does the coalition, H.R. 3351, which would moderate 
these 2002 reductions. It is essential that this bill, which has over 
300 co-sponsors, be brought to the House floor in time to limit the 
damage that is being done.
    In announcing these hearings, Chairwoman Johnson said that 
``Medicare's formula for paying physicians is completely irrational and 
must be reformed this year.'' We fully agree. The ``Resource-Based 
Relative Value System (RBRVS)'' and the related ``Sustainable Growth 
Rate'' formula amount to a very complicated administered price control 
system. Administered price control systems sometimes work in the short 
run, but the lesson of history is that they end by breaking down. The 
RBRVS is now breaking down, and this will have an inevitable impact on 
the quality of care that Medicare beneficiaries receive.
    The first sentence of the Institute of Medicine's 2001 report, 
``Crossing the Quality Chasm: A New Health System for the 
21st Century,'' reads: ``The American health care delivery 
system is in need of fundamental change.'' One of the IOM's principle 
recommendations is:

    ``Private and public purchasers should examine their current 
payment methods to remove barriers that currently impede quality 
improvement, and to build in stronger incentives for quality 

    Our discussions of a rational reimbursement system should bear this 
closely in mind.
    Let me explain why a surgeon from a children's hospital is here to 
talk about Medicare. For the last six years, I have represented the 
Society of Thoracic Surgeons on the Relative Value Update Committee of 
the American Medical Association. This committee has been charged by 
CMS to advise it on changes in the fee schedule--originally, the work 
values, more recently on some aspects of the practice expense values. I 
do need to emphasize that all of the basic payment policy decisions on 
practice expense reimbursement were made by the CMS (formerly HCFA) 
staff. The Practice Expense Advisory Committee has only been asked to 
advise on some details, but the entire process for determining the 
components of practice expense is fundamentally flawed.
    Let me give you an example The PEAC was asked to give its opinion 
on the amount of clinical staff time (nurses, nurse assistants) 
involved in a typical mid-level office visit (99213). The committee 
considered 21 vs. 23 minutes of clinical staff time, and we were told 
that this two-minute difference would shift over $100 million in the 
Medicare fee schedule. This is over half as much as Medicare paid for 
the most common open heart procedure. I have no confidence that the 
committee could make any reliable distinction between 21 and 23 
minutes, yet this is the process that is being used to determine the 
practice expense component of the Medicare Fee Schedule.
    This is not the way to set fee schedules that are either 1) 
equitable to physicians or 2) in the best interests of patients. One 
fact this story illustrates is this: the ``relative value'' system is 
not about value--certainly not about value to the nation or to the 
patient. There is no attempt to base reimbursement on benefit--value--
to the patient. The name RBRVS is a misnomer. It is a relative cost 
system, not a relative value system. It does not reward experience, it 
does not reward quality, and it does not even (despite the original 
recommendation of Professor Hsiao) recognize the ``opportunity cost'' 
of extended training (seven to eight years after medical school for 
cardiothoracic surgeons).
    You have heard in detail about how the SGR system has evolved and 
the relationship between the fee schedule and the conversion factor. A 
system tied to gross domestic product is inherently unstable; even more 
important, the need for physician services is not dependent on the rate 
of growth of the economy. An economic downturn may even increase the 
need for some services. The issue of growth in volume and intensity of 
physician services is more complex, but I am uncomfortable with the 
proposition that there must be an absolute cap on growth. Any arbitrary 
formula will fail to recognize the growth of medical technology and our 
ability to offer life saving interventions to a greater proportion of 
the population. As a consequence, there is the potential for denying 
Medicare patients treatments that will prolong life and reduce 
    The steadily lengthening American life spans and the clear evidence 
that rates of disability in old age are diminishing should show that we 
should encourage, not penalize growth in medical services--so long as 
these services are indeed contributing to the health of our citizens. I 
suggest that the Administration and Congress look closely at where the 
growth in medical services has occurred in recent years. It is not in 
heart surgery. The recent report of John Wennberg and his associates 
from Dartmouth on ``supply/sensitive services'' is relevant. His 
suggestions for creation of centers of health care that will encourage 
necessary but discourage unnecessary services deserve consideration.
    In the short run, pending major system reforms, we basically 
support the draft recommendations of the Medicare Payment Advisory 
Committee. This would eliminate the SGR and base updates primarily on a 
revised Medical Economic Index. The productivity factor used in setting 
the MEI should be examined carefully; it probably does not 
realistically measure changes in physician productivity (for example, 
the learning curve in adopting new technologies) and certainly does not 
accommodate the current escalation in malpractice insurance costs. 
MedPAC also suggests that it be asked to make annual recommendations on 
the update formula, so that the system would not be on automatic pilot; 
Congress therefore would have the option of adopting higher or lower 
updates. There should be a default formula, to set the update if 
Congress does not act; for example, the default update could be the 
revised MEI with a productivity adjustment of -0.5 percent.
    Let's turn back to the RBRVS. The reductions in allowed charges for 
cardiac surgery this year are not 5.4 percent but, on average, ten 
percent. For some procedures it's as high as 15 percent. Since 1994, 
for cardiac surgery, the reductions in the practice expense component 
of the fee schedule alone have been 47 percent (see attached chart). 
How this has happened, and the consequences, will illustrate the 
problems with this administrative pricing system.
    Congress in 1997, under the leadership of this committee, 
instructed HCFA, in revising practice expense RVUs, ``to recognize all 
staff, equipment, supplies, and expenses.'' Congress said all expenses, 
not ``some expenses.'' Two years later, under Section 212 of the 
Balanced Budget Revisions Act, Congress instructed HHS, in computing 
practice expense, to utilize statistically valid data from outside 
organizations in addition to data from HHS itself.
    In recognition of the need for better data, the Society of Thoracic 
Surgeons contracted with the American Medical Association to conduct an 
enlarged sample of thoracic surgeons in its annual socioeconomic 
survey. The work was done by the AMA, through its own subcontractor, 
not by the STS. HCFA agreed that the survey met its very rigid 
standards for statistical validity and used some of this data in its 
1999 revisions of the practice expense RVUs. But that same year, 
despite the clear evidence in this survey that cardiac surgeons are 
incurring major costs for staff who assist in both operative and post-
operative care in the hospital, HCFA deleted from its practice expense 
equation all costs our members incur for clinical staff who help them 
in the hospital. This payment policy decision deleted more than 80 
percent of our clinical staff costs from the practice expense equation.
    We have subsequently done yet another survey, which showed that 74 
percent of cardiothoracic surgeons incur these costs for staff who 
assist in the hospital. In some states, these costs may be partially--
but only partially--compensated for by limited billing for some--but 
not all--of these staff when they assist at surgery. There is no 
reimbursement for any of the clinical staff on our members' payrolls 
for their services in the ICU or the wards post-surgery, and 
reimbursement even for assistance at surgery is inconsistent.
    Why do cardiothoracic surgeons employ this staff? Very simply, the 
cardiothoracic surgeons working at the grassroots level have made 
decisions that these staff are essential to quality outcomes. Only in 
the largest, mostly academic hospitals, is the hospital staff 
adequately specialized and trained to assist at heart surgery and care 
properly for these patients in the hospital post-surgery. Heart surgery 
is very complex. As the IOM has noted in regard to complicated 
procedures, quality outcomes require a team that works together 
consistently, both in the operating room and in post-operative care. 
Cardiothoracic surgeons have stepped up and incurred these costs as the 
practice of heart surgery has evolved over the last ten years. Risk-
adjusted mortality has dropped 40 percent in the last ten years. The 
team approach is one of the reasons for this quality improvement. That 
is what cardiac surgeons have done by incurring these costs themselves. 
I gave a talk to a statewide meeting of cardiothoracic surgeons in 
Florida last weekend, and I asked for a show of hands for how many of 
them employed clinical staff that helped them to care for patients in 
the hospital. Every one of them raised their hand.
    We do not want to go backwards. But if the RBRVS ignores these 
costs, cardiothoracic surgeons are no longer going to be able to 
maintain staff of the same quality.
    Also at the direction of Congress, the General Accounting Office is 
studying HCFA/CMS implementation of practice expense and its effects on 
all specialties. A preliminary report was submitted last year, entitled 
``Practice Expense Payments to Oncologists Indicate Need for Overall 
Refinements.'' The GAO in this study concluded that on average, 
practice expense reimbursement under the RBRVS meets only 70 percent of 
average physician costs. For cardiothoracic surgery, reimbursement was 
only 53 percent. That was under the 2001 fee schedule; adjusting the 
GAO study to 2002, the PE reimbursement for cardiac surgery would be 
less than 50 percent of costs.
    I noted at the beginning that the reimbursement system is broken. 
Physician morale is poor. In our own specialty, applications from 
graduates of U.S. medical schools for the 144 residency training 
positions offered annually in cardiothoracic surgery have dropped well 
below the positions available: this year, there were only 112 
applications from graduates of U.S. medical schools for these 144 
positions (chart attached). The total training period for a 
cardiothoracic surgeon, post medical school, is seven years. Most are 
in their mid-thirties before they begin practice. This drop off in 
applications does not bode well for the medical care the baby boomer 
generation will need as this large group enters the age in which 
cardiac disease is prevalent. If major shortages of cardiothoracic 
surgeons, or a decline in quality appears five or ten years from now, 
there will be no way to turn the situation around on a dime. The 
decisions Congress and CMS make this year will have their impact, and 
the impact will be felt much more in the future than the day after 
tomorrow. I hope we are looking ahead.

Cumulative Reductions in Medicare ``Allowed Charges'' for Coronary

Artery Bypass Surgery, 1986-2001 (with & without CPI adjustment)

       LCurrent Dollars
      {time}  LAdjusted to 1986 Dollars to reflect changes in the 
Consumer Price   Index (buying power)

Positions Filled and Applications To Thoracic Surgery Resident Programs




    Dr. PALMISANO. My name is Dr. Donald Palmisano. I serve as 
Secretary-Treasurer of the American Medical Association and am 
a Member of the AMA Board of trustees. I am a practicing 
General and Vascular Surgeon from New Orleans.
    We thank Madam Chairman Johnson and the Subcommittee for 
your leadership efforts in the commitment to providing a remedy 
for the 5.4 percent Medicare payments to physicians and other 
health care professionals. This deep cut is threatening access 
for all Medicare beneficiaries. We urge this Subcommittee and 
Congress to immediately halt this cut and replace the Medicare 
payment update system.
    Last June, MedPAC warned that a significant cut in the 
payment update could raise concerns about beneficiary access to 
care. Clearly, 5.4 percent is significant and it comes on top 
of sharp increases in professional liability premiums as well 
as a host of costly regulatory burdens. Many physicians as a 
result are being forced to make difficult choices, such as stop 
accepting new Medicare patients, discontinue the provision of 
some medical services, limit or discontinue investments in new 
technology, lay off staff or leave the practice of medicine. 
These are not choices that physicians want to make. In each 
case, our patients lose.
    In response to these access concerns, MedPAC recommended a 
new framework for Medicare physician updates. We support the 
MedPAC general framework and look forward to working with the 
Committee on the specific details of a new update system.
    The current system does not work for several reasons. 
First, the sustainable growth rate, SGR, requires the use of 
estimates that are nearly impossible to predict accurately. 
Chart 2 shows that inaccurate SGR predictions have shortchanged 
physicians and other health professionals by over $20 billion 
since fiscal 1998. Inaccurate enrollment projections mean that 
every year physicians care for nearly 1 million Medicare 
patients whose costs are not counted in the update. Under the 
formula, these errors are compounded annually.
    Further, physician updates, unlike any other category of 
providers, are linked to changes in the GDP, even though the 
medical needs of Medicare patients do not wane when the 
American economy falls into a recession.
    Chart No. 1 clearly illustrates the growing gap between the 
Medicare Economic Index and annual physician updates. Since 
1991, physicians have received an average annual increase of 
1.1 percent, as shown in the red line, versus the 2.4 percent 
increase in practice costs, as shown in the blue line. This 
trend cannot be sustained. Finally, the SGR is highly 
unpredictable and allows severe payment cuts to be imposed 
without any warning or opportunity for action by Congress.
    In March 2001, CMS predicted a 1.8-percent increase in the 
2002 payment update, and 10 days later predicted that the 
update would be a negative 0.1 percent. Not until November, 
with only a few weeks left in the congressional session, did 
CMS announce the 5.4 percent cut in the update. Like any small 
business, medical practices need to plan their expenses in 
order to remain financially sound. If practices continue to 
lose money due to low Medicare payments, patient access is 
    In conclusion, we strongly urge Congress to enact an 
immediate halt to the 5.4 percent cut and repeal the SGR 
system. We also ask the full Committee to ensure that its views 
and estimates submitted to the House Budget Committee include 
necessary funds to implement the MedPAC recommendations. Again, 
we thank the Subcommittee for your strong efforts on this 
important matter, and I am happy to answer any questions.
    Chairman JOHNSON. Thank you. I am going to have to suspend 
a hearing while we complete the vote. I will run over and be 
back quick as we can. I will suspend for 5 minutes.
    [The prepared statement of Dr. Palmisano follows:]
             Statement of Donald J. Palmisano, M.D., J.D.,
           Secretary-Treasurer, American Medical Association
    Madam Chairman, Ranking Member Stark and Member of the 
Subcommittee, my name is Donald J. Palmisano, MD, JD, and I serve as 
the Secretary-Treasurer of the American Medical Association (AMA). I am 
a practicing surgeon in New Orleans. The AMA is grateful to you and the 
Subcommittee for the opportunity to provide our views concerning the 
Medicare physician payment update formula, as well as the 2002 Medicare 
payment cut of 5.4 percent. This steep payment cut is alarming. 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 thank Chairman Johnson for your leadership efforts and 
commitment to providing a remedy for the 5.4 percent cut that became 
effective on January 1, 2002. We especially appreciate your leadership 
on H.R. 3511. The AMA is eager to work on legislation with you and 
Representative Stark to address this important matter and appreciates 
the various efforts of several Subcommittee Members on both sides of 
the aisle to assist America's physicians in this regard.
    As of January 1, 2002, Medicare implemented a 5.4 percent payment 
cut that applies to Medicare services provided by physicians and other 
health professionals, including, but not limited to, physical 
therapists, speech pathologists, optometrists, advanced practice nurses 
and podiatrists.
    This 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). (See attached Chart 1, Medicare Payments vs. MEI, 
which compares Medicare physician payment updates to increases in 
    The Administration argues that total spending for physicians' 
services by the Medicare program is increasing. This assertion misses 
the more important point--spending per physician service is being cut 
significantly. Increases in total Medicare spending are due in large 
part to such factors as the increasing Medicare population, greater 
longevity in lifespan, expensive technological innovations and greater 
demand for medical services. All of these factors contribute to 
spending, and all are beyond physicians' control. Increased spending 
resulting from these factors cannot be curbed simply by cutting 
payments to physicians. A global cap on physician payments cannot 
successfully control the health care utilization of individual 
    The current 5.4 percent cut is forcing many doctors to make 
difficult choices about their ability to continue accepting new 
Medicare patients, or even whether to retire or change to a career that 
does not involve patient care. If the pay cut is not immediately 
halted, it could soon become difficult to prevent serious access 
problems for elderly and disabled Medicare patients.
    For example, the National Committee to Preserve Social Security and 
Medicare has stated that their members are having difficulty finding a 
physician who accepts Medicare because physicians cannot afford to keep 
their offices open. A family practitioner in an underserved part of 
Kentucky says she now cannot take any new Medicare patients and, if the 
situation does not improve, she will have to close her practice in a 
couple years. 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.
    The American College of Nurse Practitioners warns that the pay cut 
is also forcing physicians and nurse practitioners to restrict their 
Medicare patient loads and cut back on the services they provide. One 
nurse practitioner in New York described a couple for whom she provides 
care (the husband is 91 and the wife is 82), and she stated that the 
cut ``will devastate the care received by the neediest segments of our 

    Because of these growing access problems, immediate action is 
needed. We appreciate the Subcommittee's bipartisan commitment to 
addressing in a timely manner the significant problems resulting from 
the 5.4 percent cut and the payment update formula. We urge the full 
Committee to report, and the Congress to enact, legislation that 

           LImmediately halt the 5.4 percent Medicare payment 
           LRepeal the sustainable growth rate (SGR) system; 
           LReplace the flawed Medicare payment update formula 
        with a new system that appropriately reflects increases in 
        practice costs, including changes in patient need for medical 
        services, changes in technology, 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. The Centers for Medicare and 
Medicaid Services (CMS) is projecting that the SGR system will continue 
to produce additional steep payment cuts in 2003, 2004, and 2005.
    We ask the Committee to ensure that its ``views and estimates'' 
letter on budgetary and legislative matters, to be submitted to the 
House Budget Committee, includes a request that appropriate funds be 
set aside in the budget resolution to replace the Medicare physician 
payment update formula beginning in calendar year 2003.


    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.'' 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 support the general 
framework of MedPAC's recommendations. We look forward to working with 
the Subcommittee and the Full Committee on the specific details of a 
new update system consistent with the MedPAC's framework.


    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 affected by the 
cut. In addition, many private health insurance plans base their rates 
and updates on Medicare payment rates, which mean an additional loss of 
revenue from non-Medicare sources.
    Most significantly, the payment cut jeopardizes access for elderly 
and disabled patients. Two-thirds of all physician offices are small 
businesses. If a business, especially a small business, continues to 
lose revenue and operate at a loss, the business cannot be sustained. 
Thus, when medical practices experience a Medicare cut of the magnitude 
being incurred in 2002, as small businesses, they may not survive. This 
means that physicians and non-physician practitioners and their staff 
are left with very few alternatives for maintaining a financially sound 
medical practice. These alternatives include:

           LDiscontinue seeing new Medicare patients;
           LOpt out of the Medicare program;
           LMove from being a participating to a non-
        participating Medicare provider;
           LBalance bill patients (subject to Medicare charge 
           LLay off administrative staff;
           LRelocate to an area with a smaller Medicare patient 
           LDiscontinue certain low-payment/high-cost Medicare 
           LShift services into the hospital outpatient 
        setting, which increases costs to Medicare and to patients;
           LLimit or discontinue charity care;
           LRetire early;
           LReduce hours of practice Change career;
           LShift into a position which involves reduced or no 
        patient care responsibilities; and
           LPostpone 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, concerns about patient access, due to payment cuts 
and excessive rate fluctuations, were raised by the General Accounting 
Office in testimony recently presented to Congress.
    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:

           L``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);
           L``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;
           L``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);
           L``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.
           LPatients are reporting having great difficulty 
        finding a physician that takes new Medicare patients in North 
        Carolina, where many physician practices have had to stop 
        accepting new Medicare patients due to low Medicare payments. 
        Dr. Conrad Flick, a vice president of the North Carolina 
        Academy of Family Physicians, stated that ``until [Medicare] 
        payments improve, medical practices will continue to cap the 
        number of Medicare patients they see, causing many practices to 
        refuse new patients.'' News & Observer, by Jean P. Fisher, on 
        website of American Association of Retired Persons (AARP).

    In order to ensure that the 85 percent of Medicare patients 
enrolled in the fee-for-service program will maintain access to 
physicians and health care services, this payment crisis must be 
addressed immediately.
    Several variables 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.
    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 magnitude of regulatory burdens on physician is not lost on 
this Committee. Last year you passed legislation to assist us in this 
regard. We thank you and look forward to working with you to ensure 
that it passes the Senate.
    Finally, 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.
    Medicare payments to physicians are annually adjusted through the 
use of a legislated ``payment update formula'' that is based on the SGR 
and the MEI, which measures increases in practice costs. These costs 
include, among others, such factors as payroll, physician time, office 
equipment, supplies and expenses.
    This update formula originally was intended to cap increases in 
practice costs. It has several flaws that create inequitable and 
inappropriate payment updates that do not reflect the actual costs of 
providing medical services to Medicare patients.
The Sustainable Growth Rate System
    Under the SGR system, CMS annually establishes an expenditure 
target for physicians' services based on a number of factors set forth 
in the law. CMS then compares actual expenditures to the target. If 
actual expenditures exceed the target, the Medicare payment update may 
be as much as 7 percent below the MEI. Conversely, if allowed 
expenditures are less than actual expenditures, the update may be up to 
3 percent above the MEI.
    The target is 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 economy 
that bears little relationship to the health needs of Medicare 
beneficiaries. Incidence of disease did not lessen with recent 
downturns in the economy.
    Specifically, GDP does not take into account health status, the 
aging of the Medicare population or the costs of technological 
innovations. Thus, the artificial link between medical care spending 
and GDP growth under the SGR system creates a system that is seriously 
deficient. 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. Yet, the health needs of 
patients continue, the number of beneficiaries continues to grow and 
the use of new medical services approved by Medicare increases.
    SGR Requires Unreliable Economic Forecasts: To calculate the SGR, 
CMS must make projections of GDP, enrollment and other factors. It is 
nearly impossible to make accurate predictions about these factors and 
thus it is equally impossible to predict future payment updates. When 
the resource-based physician payment system was first enacted in 1989, 
it was intended to provide predictability over time. Yet, the current 
update formula has created payment updates that are unpredictable and 
subject to sharp swings as economic circumstances, beyond physicians' 
control, change.
    Further, because the update system is unpredictable, 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. Ten days 
later, CMS recanted 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. Like any small 
business, medical practices need to plan their expenses in order to 
remain financially sound. Small businesses are the engine of the U.S. 
    For these reasons, as MedPAC has recognized, the current physician 
payment update system should be replaced.
    Problems with SGR Projections: In annually calculating the SGR, CMS 
estimates of GDP growth and enrollment changes in 1998 and 1999 have 
shortchanged funding for physicians' services by $20 billion to date. 
(See attached Chart 2, CMS Errors in SGR: Impact on Funding for 
Physician Services.) CMS projected that Medicare+Choice enrollment 
would rise by 29 percent in 1999, 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 in the costs of 
treating about 1 million beneficiaries. Nevertheless, these patients 
were and will continue to be treated, and 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.
    CMS acknowledged its mistakes in calculating the 1998 and 1999 SGR 
estimates at that time, but concluded it did not have the authority 
under the law to correct its mistakes. We disagreed then, and were 
further shocked by CMS' announcement in the 2002 final physician fee 
schedule rule that not only do they have the legal authority, but the 
legal imperative, to change 1998 and 1999 SGR projections relating to 
spending for certain CPT codes overlooked by the agency. CMS' 
interpretation of the law is perplexing and 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.
    The full magnitude of this problem has only recently become 
apparent. Information supplied by CMS suggests that the total amount of 
this latest ``missing code'' error was nearly $5 billion. Recent 
predictions by CMS of continued payment cuts for several more years 
show that its decision to continue using bad data in the target while 
correcting the errors in actual spending will ultimately have a 
devastating impact on payments for physician services.
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 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.
    We continue to believe that the productivity adjustment in the MEI 
is overstated. 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 previously-mentioned massive regulatory burden imposed on 
physicians. The cost of these 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 appropriate 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 continue to 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, quality 
medical care.
    All of the foregoing factors contribute to a payment update system 
that does not adequately reflect increases in the costs of caring for 
Medicare patients and is already undermining Medicare patients' access 
to necessary medical services provided by physicians and other health 
    Again, we thank the Subcommittee for its continued support and 
commitment towards mitigating the ongoing problems resulting from the 
Medicare physician payment update formula.

    We urge the full Committee and Congress to (i) immediately halt the 
5.4 percent Medicare payment cut; and (ii) replace the Medicare payment 
update formula with a new system that appropriately reflects increases 
in practice costs.
    We further ask the full Committee to include in its ``views and 
estimates'' letter of budgetary and legislative matters submitted to 
the House Budget Committee that appropriate funds be set aside to 
replace the Medicare physician payment update formula beginning in 
calendar year 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.
                                 [GRAPHIC] [TIFF OMITTED] T0217I.001



    Chairman JOHNSON. We will resume with the presentations. 
Mr. Levine.


    Mr. LEVINE. Thank you, Madam Chairwoman and the Members of 
the Subcommittee on Health. The American Physical Therapy 
Association (ATPA) is grateful for the opportunity to provide 
testimony today concerning the need to reform the update 
formula of the resource based relative value fee schedule. This 
issue is of great significance to physical therapists who bill 
their services to the Medicare program under part B.
    My name is Steve Levine and I am a practicing Physical 
Therapist and owner of Spine and Sports Rehabilitation Center 
in Timonium and Falston, Maryland. My practice specializes in 
the evaluation and management of the musculoskeletal 
dysfunction involving the spine. Physical therapists provide 
services to patients who have impairments, functional 
limitations, disabilities, or changes in health status 
resulting from injury, disease, or other causes. As clinicians, 
physical therapists are involved in the evaluation, diagnosis, 
prognosis, intervention, and prevention of musculoskeletal and 
neuromuscular disorders in the acute chronic and rehabilitative 
    Please allow me to express my appreciation for the 
commitment of the Members of the Committee and Madam Chairwoman 
to address the problems that exist in the update formula for 
the part B fee schedule. The APTA is hopeful that Congress can 
work to ensure the fee schedule is modified appropriately 
before the end of this year.
    Many health professionals, including physical therapists, 
utilize the RBRVS fee schedule to bill for their services. By 
inviting APTA to testify today, you are helping to dispel the 
myth that this is solely a physician concern. The APTA urges 
the Committee to consider the following immediate actions to 
address the problem.
    First, immediately stop implementation of the 5.4 percent 
cut to the Medicare fee schedule; and second, adopt MedPAC's 
recommendations which would eliminate the SGR and replace it 
with a system that would more appropriately account for the 
changes in the cost of providing services. It is important that 
Congress acts this year, as CMS has projected that the formula 
will produce further significant negative fee schedule updates 
in the aggregate 19.6 percent by 2005. Should Congress fail to 
act, physical therapists and other health care professionals 
will experience Draconian cuts in reimbursement over the next 4 
years. We are concerned that this downward projection will 
hinder the ability of physical therapists to care for Medicare 
beneficiaries needing rehabilitative services.
    Because the SGR system is flawed, updates under the system 
do not reflect the cost of providing services. Our 
recommendation is to eliminate the SGR methodology. 
Furthermore, the MEI, which accounts only for growth in labor 
productivity, overstates productivity gains in services and 
should be revised.
    The APTA takes issue with the administration's assertion 
that reform of the update formula must happen in a budget-
neutral environment. Clearly, additional financial resources 
are necessary to address this fundamental problem. APTA feels 
strongly that to correctly remedy this situation, the Committee 
should seek appropriate resources through the Budget Committee 
to meet this and other challenges. A short-term fix is nothing 
more than simply moving the furniture around on the deck of a 
ship that continues to speed toward an iceberg. The ship must 
change its course to avoid certain disaster. The impact of the 
Medicare cuts needs to be viewed in the context of significant 
legislative and regulatory changes affecting physical 
    As you know, the BBA also imposed a $1,500 cap on 
outpatient therapy services in all settings except for 
hospitals. In 1999, and again in 2000, due to concerns raced by 
beneficiaries, Congress placed a moratorium on enforcement of 
the $1,500 cap. The present moratorium will expire at the end 
of this year unless Congress acts. If the cap goes back into 
effect, it will compound the Medicare payment cuts.
    In addition to the cap, physical therapists continue to 
deal with increased documentation requirements, conflicting 
Medicare rules, nonuniform application of Medicare requirements 
among its contractors and impending privacy requirements under 
the Health Insurance Portability and Accountability Act of 1996 
or HIPAA. These issues further compound an already alarming 
    During the past few months, The APTA has heard numerous 
reports from its Members concerned about the impact of the 2002 
cut and future CMS projections. As an illustration, this year, 
for a typical 45- to 60-minute skilled visit with a physical 
therapist, Medicare will allow approximately $85.78. Currently 
my cost to provide this visit is $79.57. Next year for the same 
visit and using the current formula, Medicare's allowable rate 
will drop to $80.89. Considering a cost-of-living adjustment to 
both salaries and expenses, my cost to provide this visit is 
projected to increase to $81.95 in 2003. Therefore, next year 
if Congress does not act to change this formula, my practice 
will lose over a dollar on each physical therapy visit under 
Medicare. The only choice for survival is to reduce my cost, 
which will ultimately reduce the quality of services that can 
be provided to Medicare beneficiaries.
    In conclusion, as the older adult population continues to 
rapidly grow, prompt and coordinated quality health care 
services will be necessary to avoid hospitalization, decrease 
the length of institutional stay, reduce the amount of care 
required after discharge, prevent complications, and improve 
the individual's level of function. The health of older 
Americans will be at risk if access to and appropriate payment 
for health care services does not keep pace with the growing 
number of Medicare beneficiaries.
    Madam Chairwoman, I would like to thank you for submitting 
this testimony before the Subcommittee.
    [The prepared statement of Mr. Levine follows:]
      Statement of Stephen M. Levine, Co-Owner and Administrator,
      Spine and Sports Rehabilitation Center, Timonium, Maryland,
         on behalf of the American Physical Therapy Association
Medicare Part B Fee Schedule Payment Update Formula
    Madam Chairwoman and members of the Subcommittee on Health, the 
American Physical Therapy Association (APTA) is grateful for the 
opportunity to provide testimony today concerning the need to reform 
the update formula of the Resource-Based Relative Value Fee Schedule 
(RBRVS). This issue is of great significance to health professionals 
who bill their services to the Medicare program under Part B, including 
physical therapists.
    It is an honor to testify today on behalf of the APTA's 64,000 
member physical therapists, physical therapist assistants, and students 
of physical therapy. My name is Stephen Levine, PT, MSHA. I am 
presently co-owner and administrator of the Spine and Sports 
Rehabilitation Center, with offices in Timonium and Fallston, Maryland. 
My practice specializes in the evaluation and management of 
musculoskeletal dysfunction involving the spine.
    I have also served nationally within the APTA as a former member of 
the Board of Directors and Vice Speaker of APTA's House of Delegates. 
From 1992 to 1999, I was APTA's appointee to the American Medical 
Association's (AMA) Health Care Professional's Advisory Committee of 
the Relative Value Update Committee, a multi-specialty committee which 
advises the AMA and the Centers for Medicare and Medicaid Services 
(CMS) on appropriate relative values of medical services provided by a 
broad range of licensed providers.
    First, I would like to thank you for holding this hearing today and 
for the commitment of Committee members to address the outstanding 
problems that exist in the update formula for the Part B fee schedule. 
Many health professionals, including physical therapists, utilize the 
RBRVS fee schedule to bill for services. By inviting APTA to testify 
today, you are helping to dispel the myth that this is solely a 
physician concern.
    Physical therapists provide services to patients who have 
impairments, functional limitations, disabilities, or changes in health 
status resulting from injury, disease or other causes. As clinicians, 
physical therapists are involved in the evaluation, diagnosis, 
prognosis, intervention, and prevention of musculoskeletal and 
neuromuscular disorders. On a daily basis, physical therapists provide 
care for Medicare patients with acute, chronic, and rehabilitative 
conditions. Physical therapy is a dynamic profession whose goal is to 
preserve, develop, and restore optimal physical function.
    APTA was pleased with the strong support members of the House gave 
to legislation last year that would have forestalled a 5.4 percent cut 
in payments that took effect January 1st. Some 316 members of the House 
cosponsored H.R. 3351, a bill to promote payment fairness under the 
RBRVS fee schedule. Unfortunately, Congress failed to act last year. 
APTA is hopeful the Congress can work to ensure the fee schedule is 
modified appropriately before the end of this year.
Congressional Action Necessary
    APTA urges the Committee to consider the following immediate 
actions to address the problem:

           LImmediately stop implementation of the 5.4% cut to 
        the Medicare fee schedule;
           LAdopt MedPAC's framework for updating the Part B 
        provider fee schedule, which includes eliminating the 
        sustainable growth rate (SGR) and replacing it with a factor 
        which will more appropriately account for changes in the cost 
        of providing services. MedPAC's framework was highlighted in 
        its March 2001 report to Congress and will be part of its March 
        2002 report.

    It is important that Congress act this year as CMS has projected 
that the formula will produce significant negative payment updates of 
5.7% in 2003, 5.7% in 2004, and 2.8% in 2005. Should Congress fail to 
act, physical therapists and other health care professionals will 
experience draconian cuts in reimbursement over the next four years.
    APTA takes issue with the Administration's assertion that reform of 
the RBRVS update formula must happen in a budget neutral environment. 
Clearly, additional resources are necessary to address this fundamental 
problem. Moving the furniture around on the deck of the ship will not 
slow it from sinking. APTA feels strongly that remedying this issue 
must not be a budget neutral exercise. We recommend the Committee seek 
appropriate resources through the Budget Committee to meet this 
challenge and other necessary Medicare reforms.
Patient Access Problems Will Result from Flawed Update Formula
    APTA is concerned that the negative payment updates to the RBRVS 
fee schedule will hinder the ability of physical therapists to care for 
Medicare beneficiaries needing rehabilitation services. It is important 
that these individuals continue to receive the rehabilitation and other 
services that they need in order to achieve their maximum level of 
functional independence. Because rehabilitation enables beneficiaries 
to function more independently, rehabilitation will save the Medicare 
program dollars in the long run.
    The impact of the Medicare cuts needs to be viewed in the context 
of significant legislative and regulatory changes affecting physical 
therapists that have occurred over the past few years. Since 1992, 
physical therapists in private practice have been reimbursed under the 
RBRVS fee schedule. Prior to 1999, all other outpatient therapy 
settings were reimbursed under a cost-based system. The 1997 Balanced 
Budget Act (BBA) required that outpatient therapy services in all 
settings be reimbursed under the RBRVS fee schedule, beginning in 
January 1999. Thus, in addition to impacting physical therapists who 
own and operate private physical therapy practices, the 5.4% cut in 
payment and the flawed update methodology also impacts the provision of 
outpatient therapy services in outpatient hospitals departments, 
skilled nursing facilities (Part B), home health agencies (Part B), 
rehabilitation agencies, and comprehensive outpatient rehabilitation 
facilities (CORF).
    The BBA also imposed a $1500 cap on outpatient therapy services in 
all settings except for hospitals. In 1999 and again in 2000, due to 
concerns raised by beneficiaries, Congress placed a moratorium on 
enforcement of the $1500 cap. The present moratorium will expire at the 
end of this year unless Congress acts. If the cap goes back into 
effect, it will compound the Medicare payment cuts.
    In addition to the cap, physical therapists continue to deal with 
increased documentation requirements, conflicting Medicare rules, non-
uniform application of Medicare requirements among Medicare 
contractors, and impending privacy requirements under HIPAA. When 
combined with the current and impending cuts you can begin to 
understand how difficult it is and will be for health professionals to 
continue providing services within the Medicare program.
    The majority of physical therapists in private practice are small 
businesses. As small business, their ability to operate is in jeopardy 
when they lose necessary revenue or cannot forecast revenue accurately 
from year to year. As a result, maintaining access to providers like 
these, that play such an important role in health care delivery, cannot 
be sustained without immediate reform of the payment update formula.
    During the past few months, APTA has heard numerous reports from 
its members regarding the impact of the 2002 cut. Speaking from my own 
experience, the Medicare allowable amount per visit, as projected over 
the next two years, will cause Medicare reimbursement to fall below my 
actual cost to provide physical therapy services (in 2002 dollars), 
particularly as costs increase due to inflation. As a result, we may be 
forced to become non-participating providers in the Medicare program, 
which will result in a decreased ability for patients to access skilled 
physical therapy services from our office.
Flawed Medicare Payment Update Formula
    Medicare payments are updated annually based on the SGR system. 
Because the SGR system is flawed, updates under the system do not 
reflect the cost of providing services. The flaw in the system is 
apparent in 2002 as the SGR resulted in a 5.4 percent reduction in 
payment rates, despite an estimated 2.6 percent increase in the costs 
of inputs used to provide services.
    The SGR system sets spending targets for services reimbursed under 
the RBRVS fee schedule and adjust payment rates to ensure that spending 
remains in line with those targets. If spending equals the targeted 
amount, payment rates are updated in accordance with the percentage 
change in input prices, which is determined by the MEI. If the spending 
for that year exceeds the target, the increase in payment rates is 
smaller than the increase in input prices (MEI). If spending for that 
year is less than the target rate, payment rates are allowed to be 
increased by a greater amount than the rise in input prices.
    The annual target is a function of projected changes in four 
factors: input costs, enrollment in traditional Medicare, real gross 
domestic product (GDP) per capita, and spending attributable to changes 
in law and regulations. Revisions to any of these four factors or to 
estimates of prior spending can change the spending estimate 
    One of the problems with this methodology is the use of changes in 
GDP as a factor. Linking annual changes in the targets to annual 
changes in GDP ties the target to the business cycle. During times of 
prosperity, GDP growth rates would be higher; yet, during periods of 
downturn, such as the past year, the GDP rates are lower. Health care 
needs of Medicare beneficiaries do not follow the same cycle. 
Beneficiaries do not need fewer services and the cost of providing care 
to these beneficiaries does not lessen when the economy is in a 
    Another problem with the methodology is that the SGR is highly 
volatile. In March 1, 2001 rule, CMS estimated that that the 2002 
update would be around negative 0.1 percent. However, in November 1, 
2001, just 7 months later, the SGR was at negative 0.7 percent, which 
caused the fee schedule update to be reduced by 5.4 percent. This was 
due, in part, to a predicted slower economy, and changes in spending 
estimates. These excessive and unpredictable rate fluctuations make it 
very difficult for providers to continue to participate in the Medicare 
    Still another problem relates to errors in estimating beneficiary 
enrollment. According to CMS, Medicare+Choice enrollment would rise 29 
percent in 1999. In actuality, the projection was off by 10 percent and 
nearly 1 million enrollees. The corresponding projected drop in fee for 
service enrollment was erroneous and has negatively influenced the SGR 
ever since.
Changes Needed in the Medicare Economic Index (MEI)
    In addition to eliminating the SGR, the MEI, which is calculated by 
CMS and used to measure practice cost inflation, also needs to be 
improved. The MEI is a weighted average of price changes for inputs, 
which include physician time and effort (work, non-physician employees, 
and office expenses) used to provide care. The MEI, which was developed 
in 1972, also includes an adjustment for productivity growth, which 
affects the cost of providing services. Currently, the MEI, which only 
accounts for growth in labor productivity, overstates productivity 
gains in services.
    In its framework, MedPAC recommends that the MEI measure inflation 
in practice costs and that productivity be separate from the MEI. In 
addition, MedPAC recommends that the productivity adjustment be based 
on multi-factor productivity (which would include both labor and 
capital inputs), instead of labor productivity. Making this change 
would ensure that it would account for changes in productivity for all 
relevant inputs used to provide services. According to MedPAC, this 
would significantly reduce the productivity adjustment that CMS uses 
currently in updating the Medicare fee schedule. APTA urges Congress to 
adopt MedPAC's recommendation regarding MEI.
    As the older adult segment of our population continues to rapidly 
grow, it will be paramount that they have access to qualified health 
care professionals who are able to serve their health care needs. 
Prompt and coordinated services provided by health professionals can 
help to avoid hospitalization, decrease the length of institutional 
stay, reduce the amount of care required after discharge, prevent 
complications, and improve the individual's level of function. The 
health of older Americans will be at risk if access to and payment of 
health care providers does not keep pace with the growing number of 
Medicare beneficiaries.
    Thank you for the opportunity to submit this testimony before the 


    Chairman JOHNSON. I thank you very much for your testimony. 
It was very interesting.
    I wonder if any of the practicing physicians at the table 
have seen any effect on their practices of payment issues 
driving access? In other words, have you seen any referrals 
from people that normally would have provided care but for the 
payment structures, and are there any ways in which you are 
seeing any impact on access of the payment system. Dr. Mayer?
    Dr. MAYER. Well, you know, I don't spend any time taking 
care of Medicare patients, since I am a pediatric heart 
surgeon. But I can tell you that similar sorts of things that 
are affecting Medicare are also affecting both private insurers 
who are now using the Medicare fee schedule to a large extent, 
and also affects Medicaid. I can certainly tell you that there 
have been patients covered under Medicaid programs and referred 
to our center who have essentially been told that they can't 
come to a center like ours and that they have to stay locally. 
So these are children with complicated forms of congenital 
heart disease who are basically being told they have to stay 
closer to home and perhaps be cared for in centers that don't 
have as much experience as we do. So it is having an effect 
even in a non-Medicare population.
    Chairman JOHNSON. Thank you. Do any of you have any comment 
or information about Dr. Ginsburg, I think there was a chart in 
your testimony that really went to the heart of the matter of 
the impact of our reimbursement policies on different types of 
practices. Would you go through that a little bit more?
    Dr. GINSBURG. Yes, certainly. There was a chart in my 
testimony on trends of the proportion of physicians who accept 
all Medicare patients by specialty. Whereas for all physicians, 
the percent that are accepting all the new Medicare patients 
declined from 71.8 percent to 67.5 percent over this 4-year 
period, the decline was steepest among surgeons, from 81.3 
percent to 73.4 percent. In contrast, medical specialists 
actually slightly increased the proportion that are accepting 
all new Medicare patients over this period. The differences in 
these trends probably are related to Medicare payment policy; 
in going to a common conversion factor, it reduced payments to 
surgeons, and increased payments to medical specialists.
    Chairman JOHNSON. Thank you very much. Dr. Palmisano?
    Dr. PALMISANO. Thank you, Madam Chairperson. If I may, I 
would like to respond to your first question. We have gathered 
information from around the country in the area where I am of 
New Orleans. I will give you an example. A group of clinic-
based colon and rectal surgeons in New Orleans, Louisiana, 
first reduced from four to one the number of days each month 
that they would test and treat elderly women with fecal 
incontinence. Later they scaled back these services to once 
every 3 months. Now they have reached the point where they will 
no longer accept new patients who need these services.
    Colon and rectal surgery is a very small specialty. There 
are only about 1,250 who are board-certified and in active 
practice nationwide. It makes a difference to a community when 
one of them ceases to provide a service. There are few others 
to meet that need.
    And we have other examples around the country that we will 
be glad to submit to you, again, from New Orleans and Pine 
Bluff, Arkansas, Pensacola, Florida. Physicians report to us 
they are having a difficult time identifying primary care 
physicians to provide follow-up care for elderly surgical 
patients who do not have a regular doctor. They are hearing 
that these practices simply are not accepting new Medicare 
    We have other stories that we can put into evidence. Thank 
    Chairman JOHNSON. Thank you. I hope you will all of you who 
have any access to contemporary data that reflects the 
difficulty of access for seniors to care, share that 
information with us, because anecdotally I am seeing that in a 
way that I have never seen it, being out there in the real 
world, and I don't know to what degree it is driven by the 
Medicare reimbursement problems, both administrative and cuts, 
and to what degree it is an interactive consequence of the 
problems in Medicaid.
    And if you could begin also to help us identify where these 
problems are the most acute, we can begin to look at those 
    The other thing that we need to know is how are these cuts 
affecting physicians of different ages? And are we going--do we 
see an increase in early retirement amongst physicians because 
of the complexity of the reimbursement problems and this 
erratic cut. Dr. Mayer?
    Dr. MAYER. I would like to speak, I think, to two points. 
One is I think it is important to recognize that the access 
problem is not just a straight numeric one. It also has 
embedded in it quality. Certainly what we are hearing, and I 
don't mean to beat this practice expense issue to death, but 
what is happening is that surgeons are laying off the clinical 
staff that are part of their teams that are taking care of 
these cardio patients. I think that is inevitably going to have 
an impact on quality. So I would expand the access issue, and I 
would say it is an access to quality care issue, not just 
fundamental access to get in the door.
    Chairman JOHNSON. The other thing I would be interested in 
hearing is, more and more physicians are actually involved in 
care management. They are using their nurses. We don't give any 
reimbursement for that. How do we get physicians into disease 
management protocols and using them with the reimbursement 
structure we have, or what reimbursement structure--what 
adjustments need to be made to the reimbursement structure so 
we can help physicians through their practices actually follow 
patients? Because it is having a very significant impact on the 
reuse of appointments and reuse use of hospital facilities. And 
while we had hoped that the Medicare+Choice plans would lead us 
in this direction more rapidly, clearly if it is going to lead 
in this direction, it is going to be slowly, so we cannot have 
a physician reimbursement that is blind to the need for disease 
    Dr. GINSBURG. Yes, I agree very strongly with you, Madam 
Chair, about the importance of changing our payment system so 
that it can be supportive rather than discouraging toward 
physicians engaging in disease management. I believe you are 
right that we realize that the fee-for-service Medicare Program 
is going to be responsible for the overwhelming majority of 
beneficiaries for some time.
    It was very encouraging that in the past week the CMS 
announced a large demonstration of to encourage disease 
management. We need a lot more initiatives to experiment with 
this within our fee-for-service system.
    In Medicare, we have a fee-for-service system. It has some 
strengths, but it has limitations as far as ability to control 
volume. A key weakness is that when the services of 
professionals other than physicians are very important to 
disease management, we need to quickly find a way where the 
system can through payment, if not encourage disease 
management, at least avoid discouraging it.
    Dr. MAYER. We actually have a group in the State of 
Virginia, all of the cardiothoracic surgeons and all the 
hospitals that provide cardiac surgical care in the State of 
Virginia, and they have actually given to CMS a proposal in 
which all of them would get together, globally contract, and 
there would be global pricing. So one would include hospital 
services as well as physician, surgeon, anesthesiologist, 
cardiologist as well as cardiac surgeon fees all together. The 
CMS has said they can't do it somehow, which we found 
particularly disappointing, because one of the things that our 
sort of an approach allows is an alignment of incentives. It 
then becomes to everyone's advantage to make the care both more 
cost effective and efficient.
    Chairman JOHNSON. I would like to have copies of that 
information, if I may. I do think that at this time when we are 
clearly going to rewrite the way we pay physicians, we can 
simply ill afford to be blind to the most promising approach to 
reducing overuse of extensive services and at the same time 
improving quality of care. So I look forward to working with 
you on that.
    That was my amendment in the last bill on the disease 
management, and I am pleased to see it going forward. But as is 
often the case, the real world is far ahead of us, and a 
demonstration at this point is almost pathetic. We can't afford 
this opportunity to think about it either.
    Let me recognize my colleague, Mr. McCrery.
    Mr. McCRERY. Go ahead, Dr. Palmisano. You had a comment?
    Dr. PALMISANO. Thank you, Representative McCrery. I just 
wanted to make one point. Thank you very much for that 
courtesy. Two things I also wanted to add on the record. the 
physician's ethical obligation to do the very best for the 
patient. Last week my partner, Jim Brown, and I operated on a 
patient who had a very difficult problem with his thyroid. He 
had a mass. He previously had hyperthyroidism. The operation 
took 5 hours using magnification to make sure we didn't cut the 
nerves of the voice box, to make sure we kept the parathyroid 
gland so he wouldn't go into tetani at the operation. And we 
weren't thinking of whether or not we were going to stop the 
operation after 3 hours because we weren't paid beyond 3 hours 
or whatever. We are going to do the very best for the patient.
    But as my partner tells me repeatedly, and told me again 
this morning, when I called to check on the practice, he said, 
just remember you can't make it up on volume if everything else 
escalates and the fees for your services continue to decrease.
    And I think going back to the disease management question, 
there is the old Louisiana saying about it is hard to remember 
you came here to drain the swamp when you had so many different 
alligators, and the different alligators biting at you are the 
unfunded mandates or the decreasing payment for your services 
and just the increased burdens of the Emergency Medical 
Treatment and Active Labor Act, EMTALA, and all of these things 
I know you are working on and have done a wonderful job to get 
that out of the House to ease the burden.
    There are so many factors here that this really is the 
perfect storm, to use that analogy, and we are going to act 
like the weather person and say there will be an access problem 
if we don't fix these things. Regardless of how we do the long-
term fix, right now we have to stop the 5.4-percent cut.
    Mr. McCRERY. One of the other elements of your perfect 
storm that you mention in your testimony was medical 
malpractice premiums going up. You know what causes those 
premiums to go up?
    Dr. PALMISANO. Well, yes, sir. I am quite familiar with how 
premiums go up. In an ideal world, it is based on severity and 
frequency; frequency of claims and severity. And it is 
outrageous awards that have no relationship to the damages.
    And before you ask me the next question, is that in your 
State, my State, beloved State of Louisiana, we have one of the 
best tort reform laws in the Nation. And we think it is equal 
to California and Indiana and New Mexico. We think ours is 
really perhaps a little better. The AMA has the California 
model. So those are increases, and yet we are seeing physicians 
retiring early in New Orleans even though we have a very 
effective tort reform compared to West Virginia, Florida, 
Pennsylvania, and Nevada and all of these places that are in 
severe distress.
    Mr. McCRERY. We do have a good tort reform or medical 
malpractice reform in Louisiana and have had for a number of 
years. Do you think it would be helpful to the Nation's health 
care system if we had a nationwide medical malpractice reform 
that would model, or that would go after the model in 
    Dr. PALMISANO. The AMA's position for many years has been 
that we need effective tort reform. The particular model that 
we picked was the model in California, which is the micromodel, 
and it is a cap of $250,000, periodic payments, collateral 
source and those types of issues.
    So we do definitely believe that it would be good to have 
that nationwide, at the same time protecting States like 
Louisiana and Indiana, who might have substantially similar 
laws but slightly different so as not to upset their 
jurisprudence that has accumulated over the years. Our act has 
been upheld by the Louisiana Supreme Court, and the U.S. 
Supreme Court says there is no Federal question on it.
    Mr. McCRERY. So the AMA supports nationwide medical 
    Dr. PALMISANO. Yes, sir. The AMA supports, and in our 
December meeting, the AMA said this is a top priority for the 
Association to get nationwide tort reform and help States if we 
are not able to get it effectively because that is another 
access problem, physicians going out of practice.
    Mr. McCRERY. So you would now support having medical 
malpractice reform passed as a part of the Patients' Bill of 
    Dr. PALMISANO. Well, that question comes up all the time 
but we have said, we will always look. We certainly want to sit 
down and reason and would love to be at the table on the 
Patients' Bill of Rights issue and the tort reform issue. AMA's 
position in the past, we think these are both an effective 
Patients' Bill of Rights is an important issue. Tort reform is 
an important issue. And we think that they can stand alone. If 
you want to put them together in a bill, let us look at it 
together. But what we don't want to do is have everything get 
killed based on those two being put together. We would like to 
get one thing out that is effective and then continue to work 
on the other than get nothing.
    Mr. McCRERY. Perhaps if you would help us underscore the 
importance of medical malpractice reform, we could attach it to 
some vehicle like the Patient's Bill of Rights that is popular 
in the element that doesn't like medical malpractice reform, 
and we might get them both done. I would submit that the AMA 
ought to----
    Dr. PALMISANO. Mr. McCrery, I am sorry. Just repeat that a 
little bit. I lost one of my hearing aids coming up here and I 
am having a little trouble with it, I am sorry.
    Mr. McCRERY. My point is that we may never pass medical 
malpractice reform if the AMA doesn't stand squarely behind it 
on any vehicle that we might get through the Congress, and if 
we could get solid support from the AMA for what to many of us 
seems to be a commonsense reform for the benefit of our society 
and for the preservation our private health care system, we 
could maybe get it done. But if we get mixed signals like don't 
put it on this vehicle or that vehicle, it is not that 
important, go ahead and pass this, then it is going to be 
impossible to pass medical malpractice reform.
    Dr. PALMISANO. Sure. And if I might respond to that for the 
record, the AMA would like to see any language in any bill that 
would give us nationwide tort reform because it is a top 
priority of the American Medical Association.
    Mr. McCRERY. Thank you. The only other thing I would add to 
the list that Mrs. Johnson asked you to provide some evidence 
for is medical school applications. Is there any evidence that 
medical school applications are going down because of the best 
and the brightest changing their minds as to what career path 
to pursue because of all these problems?
    Chairman JOHNSON. Dr. Mayer, did you want to respond?
    Dr. MAYER. Yes. I think there are data now that the number 
of applicants is going down. The applications are still in 
excess of the number of positions available. I would only 
reemphasize when you weren't here to point out, though, that in 
cardiothoracic surgery we had fewer applicants than we had 
available positions. It has never happened in our specialty 
before. It was sort of the creme de la creme who made it 
through general surgery and then went on to cardiothoracic 
surgery. For the last 3 or 4 years, we have not filled with 
American medical school graduates. Those applicant positions 
are going to overseas folks, and many of them are high-quality 
people, but I think it is symptomatic of the problem. And this 
year, even with the non-U.S. medical school graduates, we 
didn't fill the programs.
    So, you know, I think these things are all having an 
impact, and, you know, as I said in my formal comments, I think 
once this train goes off the edge of the cliff, it is going to 
take 10 years to turn it around, because that is how long it 
takes, post medical school, to mint a new cardiothoracic 
    Chairman JOHNSON. Mr. Levine.
    Mr. LEVINE. Madam Chair, if I may just regress for one 
minute and go back to your comment on disease management and 
access, I think that is a very significant concern. Physical 
therapists focus on functional restoration with patients, and 
prevention is a key to disease management. One of the other 
things that I hope the Committee will look at is not only the 
impact of the fee schedule cuts but the other regulatory 
restrictions that limit Medicare beneficiaries' access to those 
health care providers that do impact disease management.
    In my practice in the State of Maryland, physical 
therapists have had direct access for physical therapy services 
since 1979. However, the Medicare beneficiary does not have 
that ability to seek physical therapists and oftentimes it is 
the physician who is not familiar with the fact that the 
physical therapist can be an integral component of the disease 
management process.
    So I would only urge the Committee to look at the other 
regulatory issues in combination as you look to navigate this.
    Chairman JOHNSON. I would just like to add to Mr. McCrery's 
comments that it is truly bizarre for Congress to consider 
capping the liability of plans without capping the liability, 
at least at those same levels, of physicians. So I consider it 
imperative to have some malpractice reform in the Patient's 
Bill of Rights in order to simply have a level playingfield, 
and was very disappointed with the lukewarm support we got on 
that issue. And I recently sat down with insurance companies in 
my district, physician-owned insurance companies, where the 
issues of utilization and quality have been rigorously 
addressed, and they had a 20-percent cost increase last year, 
they will have a 25-percent cost increase this year. It is not 
because there are more cases being brought. It is specifically 
because the awards have gone absolutely through the ceiling. So 
this is a very big issue, and you can't talk about cost control 
in Medicare or anywhere else unless you are willing to confront 
it. Congresswoman Thurman.
    Mrs. THURMAN. Thank you, Madam Chairman. Although, Madam 
Chairman, I would also say that in some of the instances with 
the insurance and I don't want us to get too caught up in all 
of this it is also the interest payments that they are 
receiving on their investments which is also not helping them. 
And for some of those doctors who are doing their own 
insurance, and through the reinsurance because of September 11, 
they are also having an increase in their reinsurance which is 
also creating a part of the problem.
    Chairman JOHNSON. If the gentlelady will yield, I asked 
those questions of this particular company. They do not use 
reinsurance and they are invested in ways that are not affected 
by Wall Street. So we need to get into this in a way that 
demonstrates, because here is kind of a creme de la creme plan 
and it is strictly award size.
    Mrs. THURMAN. And I have talked to others that say 
differently. So I would agree with you that we probably need to 
sit down and talk about that overall, so that we have a better 
idea of what is going on here.
    I just want to tell you all thank you very much for being 
here. I am sorry I missed your testimony, and so at this time I 
don't have any questions, but we certainly appreciate it and 
hopefully we will be able to help our constituents by making 
sure they have access to physicians without long waits and 
without the loss of physicians in areas that are underserved 
today. So we thank you for being here.
    Chairman JOHNSON. Mr. McDermott.
    Mr. McDERMOTT. Thank you, Madam Chair. I am sorry that the 
Congress is trying to do everything in 2 days a week, so that 
some of us are running between committees. I was just up 
listening to Secretary Thompson talk about all of this, and I 
had to kind of decide whether I would go there or stay here. 
What he is saying up there isn't going to make you folks very 
happy, I am sure.
    But let me ask you a question, first of all. I think, Dr. 
Ginsburg, you were here when we put in the RBRVS system?
    Dr. GINSBURG. Yes.
    Mr. McDERMOTT. And I had just come to the Congress. That 
was in 1989, so I wasn't on this Committee yet. And I thought 
there was a lot of discussion at the time that one of the goals 
of putting in the RBRVS system was to increase payments to 
primary care people and to make additional access, to actually 
increase the volume of things; is that correct?
    Dr. GINSBURG. Certainly we felt, and many people felt at 
that time, that Medicare had an imbalance, that we were paying 
too little for primary care and really were concerned that this 
would discourage the use of primary care in the Medicare 
program--and encourage too much specialty care. When this fee 
schedule, RBRVS, was put in, there also were concerns about the 
total volume and about the trends in total volume of Medicare 
physician services; although recognizing that this is a fee-
for-service payment system, the incentives to the individual 
physicians are to increase volume, and this is what led to the 
Volume Performance Standards. This mechanism was attempting to 
engage the medical profession as a whole in professional 
attempts to limit volume through better information about 
effectiveness of care.
    Mr. McDERMOTT. How did that fail? I mean, we have gotten 
better payments for primary care physicians. And why is it that 
we can't control volume? I mean, we knew it. There was all this 
discussion about it. It should be no big surprise to anybody 
around here that the volume has gone up.
    Dr. GINSBURG. I don't know that we should say we failed, 
because actually----
    Mr. McDERMOTT. I don't think we did. We hit the goal.
    Dr. GINSBURG. Volume trends in the nineties were far more 
benign than they were in the eighties, although I am not sure 
that it was Medicare policy that was driving this, you know. 
Throughout the nineties we had a dramatic change in our system 
toward managed care. Most people in private insurance went from 
traditional plans to managed care plans. The managed care plans 
I suspect did have some effects on volume, and I believe that 
the effects of managed care on physician behavior, such as from 
requiring authorizations for admission to a hospital or 
referral to a specialist, probably spilled over into the fee-
for-service Medicare Program. When physicians learn how to 
treat some of their patients differently, it is going to spill 
over to how they treat other patients.
    So it is really hard to say whether the mechanism to 
control volume succeeded or failed, but the nineties were a 
period of low cost trends both for privately insured patients 
and for Medicare patients; but you know, I wouldn't--attribute 
it to the policy that the Congress passed in 1989.
    Mr. McDERMOTT. Now, I know you can't make recommendations, 
but I would like to ask you an option. We are not going to pass 
a bill for $126 billion, like MedPAC suggests, but how about 
letting the Secretary make a volume adjustment each year in the 
fee update, maybe 1 or 2 percent, and just give them a little 
flexibility? How would you feel about that as a public policy?
    Dr. GINSBURG. Yes. Drawing on the research, my biggest 
concern is with a formula that locks us into a very large 
decrease in rates over time. So to the degree to which people 
would make better judgments making annual decisions as opposed 
to having a lockstep formula, I would say that would be a 
positive. Policymakers would be in a better position to respond 
to the various data on physicians' costs and access to care for 
Medicare beneficiaries.
    Mr. McDERMOTT. I have one final question for the panel and 
I am sorry I also didn't hear all the testimony. We decided we 
are going to save a lot of money by turning the U.S. Department 
of Justice (DOJ) loose on medical providers, and I would like 
to know how many places you know about, or if you can provide a 
list to me after the hearing or whatever of those places where 
the DOJ has gone in on criminal charges on doctors and 
hospitals for their forums.
    Where is that happening? I happen to know it is going on in 
Seattle, and I don't know where else it is going on, but what I 
know about it there; makes me really concerned about what you 
are doing to the health care and the practice of medicine. So I 
would like to know where else; so I have got to figure out 
which of my colleagues is having this same thing that is going 
on in Seattle.
    Does anybody know the answer to that or have a list?
    Dr. MAYER. Well, I think the University of Pennsylvania 
certainly was affected. The University of Pennsylvania 
hospitals took a significant financial hit based on a 
Department of Justice investigation. I know in Boston there was 
the threat of a Department of Justice inquiry at the Beth 
Israel Medical Center.
    Mr. McDERMOTT. How did they abort it?
    Dr. MAYER. I am not sure that I know the answer to that. 
But it may be that the Beth Israel is sort of teetering 
financially, and maybe they didn't want to to be honest with 
you, I just don't know, but I do know that this threat existed.
    Mr. McDERMOTT. Were those both criminal? Pennsylvania was 
criminal and Beth Israel was criminal?
    Dr. MAYER. I don't know the answer to whether it was 
criminal or civil. I know that the University of Pennsylvania 
had to pay $30 million and, you know, the method they used is 
actually quite interesting. You know, they will take 200 charts 
and find some percentage rate of failure to comply or 
something, and then they will extrapolate it to the entire 
volume at that institution and then come up with a number times 
3, because it is treble damages sort of thing, and it can add 
up to a lot of money in a big hurry. And I think that is 
exactly what is going on in Seattle, too, at least from what I 
read on my e-mail.
    Mr. McDERMOTT. Is there anybody else that has any 
information about this? My colleague say the University of 
Florida has been going through is there anybody else?
    Chairman JOHNSON. If the gentleman would yield, this is a 
very big issue. We have worked on this a little bit in the 
regulatory reform bill to deal with some of the extrapolation 
problems. But one of the big problems in the Pennsylvania 
situation was that originally the Inspector General was 
completely ignoring HCFA's own directives to that institution 
about how to pay, and they were ignoring the portion of the law 
that allowed indirect supervision of residents, and a number of 
us got into that and suspended that whole process for a number 
of months, but when the Secretary allowed it to go ahead, there 
was not clarity on those issues.
    Since that time we have had some better compliance by the 
Inspector General's Office, with the fundamental principle of 
recognizing the law and the directives that these organizations 
must comply with under other provisions of the law, because too 
often the Inspector General was not acknowledging the orders 
from HCFA themselves but was interpreting the law according to 
their own judgment and leaving the providers in a terrible 
bind. So we do have work to do on that issue, and I appreciate 
the gentleman from Washington bringing up, as he always does, 
very difficult but extremely important issues.
    Mr. McDERMOTT. Madam Chair, just for a second, I would hope 
that we could have a hearing on this issue so that we could 
understand what actually is going on because what I know about 
the Seattle situation is that they are crushing either the 
number one or number two neurosurgery program in the United 
States by this criminal investigation, and I think there is a 
real question about whether or not what is happening there is 
what we intended. And it has happened to me first, but I think 
other people are going to get the same treatment.
    Chairman JOHNSON. I will be very happy to explore this with 
you, because I thought after the Pennsylvania thing that we had 
brought some greater rationality to the process. But we have 
seen in many parts of the Medicare system a total lack of 
respect for the law and justice, in my estimation, and we will, 
Mr. McDermott, look into this and see if we can put it into our 
    We do have a very tight schedule on some portions of our 
work, but there will be lots of opportunity to fold in things 
learned, perhaps even after floor action, so we will look into 
    Thank you very much. I thank the panel for their input, and 
I thank the Members for their attendance. The hearing is 
    [Whereupon, at 11:46 a.m., the hearing was adjourned.]
    [Submissions for the record follow:]


         Statement of the American Academy of Family Physicians

         Congress Must Fix the Medicare Physician Fee Schedule
    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 
    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.


  Statement of the American College of Obstetricians and Gynecologists
    The American College of Obstetricians and Gynecologists (ACOG), an 
organization representing nearly 45,000 physicians dedicated to 
improving women's health, strongly urges Congress to repeal the 5.4% 
cut in Medicare payment and to replace the current, flawed Medicare 
payment formula.
    The Medicare Physician Payment Fairness Act of 2001 (S 1707 and HR 
3351) enjoys a supermajority in both Houses, with over 300 co-sponsors 
in the House and 69 in the Senate pledging their support. Yet, in 2001, 
no floor action occurred to prevent the 5.4% cut from going into effect 
January 1, 2002. This legislation is the critical first step in solving 
the inherent problems in the annual Medicare Physician Payment updates.
    The 5.4% cut implemented by the Centers for Medicare and Medicaid 
Services (CMS) 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. Services 
provided by physicians are subject to an aggregate Medicare spending 
limit that does not include any adjustment for new technology and that 
is tied to the gross domestic product.
    This cut is the fourth broad-scale reduction in physicians' fees 
since 1992, bringing the average increase in Medicare fees between 1991 
and 2002 to just 1.1% a year--13% less than the government's estimate 
of practice cost inflation. This cut is especially hard on ob-gyns, 
whose professional liability premiums have skyrocketed in the last six 
months. Ob-gyns face these increases, combined with decreases in 
federal payments and expanding regulatory burdens.
    Medicaid and private payers often base their payments on the 
Medicare payment update as well. Medicare beneficiaries make up 13% of 
ACOG Fellows' patients. Twenty percent of their patients are Medicaid 
beneficiaries. Already, compromises in access to care have been 
reported in Atlanta, Phoenix, Albuquerque, Annapolis, Denver, Austin, 
Spokane, northern California, and Idaho. We cannot allow this to 
    The Medicare Physician Payment Fairness Act would provide an 
immediate legislative halt to the 5.4% Medicare Payment cut, and give 
Congress the opportunity to make systemic changes in the physician 
update system next year. In addition, it would direct the Medicare 
Payment Advisory Commission (MedPAC) to recommend ways to eliminate or 
fix the expenditure target or Sustainable Growth Rate (SGR), which now 
helps determine annual Medicare Physician Payment updates.
    ACOG urges Congress to act today to restore fair payments to 
physicians and ensure patients' access to quality care.


            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 by the Medicare program is the most 
critical to our members. ACP-ASIM thanks Congresswoman Nancy Johnson, 
chair of the Subcommittee, Congressman Pete Stark, ranking member of 
the Subcommittee, and other members, for convening this important 
hearing. We also want to extend special appreciation to Chairwoman 
Johnson for her extensive efforts to seek stability in the physician 
payment system.
    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. Because of flaws in the formula used by 
Medicare to determine annual updates, the CMS is projecting that 
Medicare payments will continue to decline over the next four years--by 
a grand total of 18.3 percent from 2002-2005. This is an absolute 
reduction in payments; it does not take into account the impact of 
inflation in the costs of providing services. Using a very conservative 
inflation assumption of 3 percent per year, Medicare payments per 
service in constant dollars will be cut by 28.1% over the 2002-2005 
    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 reduction 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 effects of an across-the-board reduction in their medical 
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 has been the case in the recent 
past, 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 for 
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 cost of other overhead expenses is 
dramatically increasing. This culmination of events may force 
physicians to make difficult choices in order to continue to operate.
    Physicians have a strong sense of commitment to their Medicare 
patients. They will do everything within reason to continue to provide 
their Medicare patients with high quality, accessible health care, even 
in the face of rising costs and declining reimbursement. However, there 
is a point where the economics of running a practice will force 
physicians to institute changes to limit the damage from continued 
Medicare payment cuts. Like any small business, revenue must exceed the 
costs of providing services in order for a practice to remain 
financially viable. For practices that are heavily dependent on 
Medicare revenue, such as a typical internal medicine practice, an 
after-inflation payment reduction of 28.1 percent over the 2002-2005 
period will dictate that they take preventive steps to cut their losses 
from seeing large numbers of Medicare patients.
    Physicians will have essentially only four options available to 
them to offset the losses from declining Medicare payments and rising 
costs. They can reduce their reliance on Medicare revenue, by 
restructuring their practices to decrease the share of their practice 
revenue that comes from Medicare while increasing the share that comes 
from more reliable (non-Medicare) payers. This would be accomplished by 
putting limits on how many Medicare patients will be seen while 
marketing the practice to non-Medicare populations. They can cut 
costs--eliminating beneficial services and technology. They can do 
both: cut beneficial services and reduce their reliance on Medicare. Or 
they can go out of business, by closing their practices entirely.
    We believe that it is extremely probable physicians will 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 in some cases, retire or close 
their practices. Physicians will make such changes reluctantly, but the 
laws of economics will leave them no choice but to do so.
    The effects of the most recent and projected cuts in reimbursement 
will most likely be hardest felt in rural and other areas that are 
already underserved. The problems that we see today will certainly only 
get worse unless the severely flawed methodology utilized by Medicare 
to compute physician payments is immediately addressed.
    Physicians' efforts to reduce their reliance on an unstable and 
unreliable Medicare payment system will make it even more difficult for 
patients to gain access to an increasingly under-funded health care 
system, particularly as the number of Medicare patients increases from 
34 million today, to 40 million in 2010, to 60 million in 2030. More 
Medicare beneficiaries will be seeking care, yet fewer and fewer 
physicians may be able and willing to provide care to Medicare 
patients. As Medicare is increasingly viewed as an unreliable payer 
whose reimbursement does not cover the costs of providing services, 
young physicians will be disinclined to go into specialties that are 
viewed as being heavily dependent on Medicare--particularly internal 
medicine and geriatrics--at the time when those specialties should be 
most in demand to provide care to an aging population.
    A recent American Academy of Family Physicians study confirmed that 
physicians are already making tough decisions, citing that nearly 30 
percent of family physicians are not taking new Medicare patients. 
Other 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 of or dropping all Medicare patients from their 
practices. 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 
    The subcommittee will be hearing testimony today from Dr. Paul 
Ginsburg, Director, Center for Studying Health System Changes, which 
provides further evidence to support the view that the availability of 
care for Medicare patients has already deteriorated over the past four 
years. He reports that the percentage of Medicare patients who did not 
receive or delayed needed care increased from 9.27 percent in 1997 to 
11.1 percent in 2001. The percentage of primary care physicians 
accepting all new Medicare patients declined steadily over the 1997-
2001 period. These changes were occurring even before the impact of the 
5.4 cut went into effect, and before most physicians have become fully 
aware that they will have to cope with an after-inflation cut of 28.1% 
over the 2002-2005 calendar period.
    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 Connecticut, for example, 
physicians' Medicare losses will total $33.8 million. In California, 
physicians are expected to lose more than $205 million. New York 
physicians stand to lose more than $207 million, the highest physician 
payment reduction total of any state.
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 direct the Secretary of HHS to 
implement 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 

          1. LThe 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 an Adjustment for Growth in 
        Multifactor Productivity;
          2. LThe Secretary Should Revise the Productivity Adjustment 
        for Physician Services and Make it a Multifactor Instead of a 
        Labor-Only Adjustment; and
          3. LThe 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 
an 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 would only be a price measure. Productivity would 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 factoring in physician productivity in order to 
lower the physician payment update may be problematic. Increased 
compliance with federal regulations, such as Medicare paperwork and 
HIPAA mandates, 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 
2003, when combined with a 0.5 percent productivity adjustment, the 
result yields a 2.5 percent payment increase.
    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.
    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% and (4) urge the 
House Budget Committee to include money in the budget resolution to 
accomplish these changes. Such measures should be reported and acted 
upon by Congress prior to, and independent of, other needed Medicare 
    ACP-ASIM is pleased that the Subcommittee is addressing the serious 
problems associated with the current SGR based physician payment 
system. Our organization stands ready to assist the Subcommittee in 
resolving this pressing issue in any way we can.


       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 Ways and Means 
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''). The AAMC appreciates the Subcommittee's interest in this 
issue of great importance to both Medicare providers and Medicare 
beneficiaries. The AAMC supports replacement of the SGR with a 
methodology that assures adequate payments and stable updates for 
physicians who participate in Medicare. Appropriate and stable 
physician payments will ensure that Medicare beneficiaries have access 
to the complex and specialized care provided by academic physicians.
    The AAMC represents 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 percent of the nation's hospitals) deliver geriatric care 
(e.g., treatment for Parkinson's or Alzheimer's disease) and operate 
certified trauma centers in conjunction with academic physician 
    In addition, faculty practices partner with AAMC's teaching 
hospital members to provide nearly 45 percent 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. In 1999, faculty practices 
provided an average of $12 million in charity care. According to Agency 
for Health Research and Quality (AHRQ) and AAMC analyses (using survey 
data collected by the Center for Studying Health System Change's 
Community Tracking Study Physician Survey), academic physicians spend 
more time providing charity care than physicians in all other settings. 
This is true both when time is measured in hours per month and as a 
percentage of total patient care time and medically related time.
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 
percent and 4.5 percent respectively), the 2002 payment update of 
negative 5.4 percent 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 
members 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.

LThe 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 professional services 
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 percent of a medical school's total revenue, unstable Medicare 
payments could jeopardize beneficiary access to faculty professional 
services, as well as academic medicine's core missions of medical 
education, research, clinical services, and providing charity care.
    A sample analysis of the impact of the 2002 Medicare fee schedule 
on faculty practice plans identified that a vast majority of faculty 
practices will lose more than minus 5.4 percent of Medicare revenue. In 
fact, Medicare revenue for some plans will decline by as much as 7.5 
percent. Because faculty practices provide multispecialty and complex 
care for Medicare patients, the negative payment update, when combined 
with recent changes in Relative Value Units (RVUs)\1\, will drive 
payment reductions that exceed minus 5.4 percent in many Medicare-
related clinical specialties (as illustrated in the table below). It is 
important to note that while some specialties included in the analysis 
will experience less than 5.4 percent decline, no specialties will 
experience an increase in Medicare revenue under the 2002 payment 
    \1\ Currently, payment for services determined under the Medicare 
Physician Fee Schedule is the result of several factors. One of these 
is a nationally uniform ``relative value'' for each service that 
includes weights for physician work, practice expenses, and 
professional liability insurance components.

 Medicare Payment Forecast Analysis Impact of Change in 2002 Conversion
           Factor and RVU Values Across Faculty Practice Plans
Specialty                                                 Percent Change
Cardiology: Invasive                                             -13.21%
Cardiology: Noninvasive                                            -9.7%
Critical Care                                                      -5.6%
Emergency Medicine                                                 -7.7%
Gastroenterology                                                   -7.3%
Neurosurgery                                                       -8.4%
Ophthalmology                                                      -6.9%
Physical Medicine                                                  -5.9%
Psychiatry                                                         -6.2%
Pulmonary                                                          -6.3%
Radiology: Interventional                                          -7.1%
Radiology: Nuclear Medicine                                        -8.5%
Surgery: Cardiovascular                                           -10.1%
Urology                                                            -7.3%
Source: University HealthSystem Consortium (UHC)/AAMC Faculty Practice
  Solutions Center

    Since private payers often tie their reimbursement rates to those 
set by Medicare, reductions in Medicare payments will further increase 
the disparity between the costs of care and the rates at which payers 
reimburse for those costs. For example, one large faculty practice 
(nearly 900 physicians) anticipates a loss of $4.8 million in managed 
care reimbursement because the contracts are linked to the Medicare fee 
schedule. Note that this does not include Medicaid and Tricare, which 
would also be affected by cuts in the Medicare fee schedule.
    The growing disparity between costs and reimbursement will make it 
increasingly difficult for medical schools and teaching hospitals to 
maintain their patient care, education, research, and community service 
missions. Because of their revenue losses, the practice described above 
is implementing a policy to limit its appointments for indigent 
patients to no more than 10 percent of patient visits.
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 percent to minus 0.9 percent and long-term relief by directing 
MedPAC to develop a replacement for the SGR.
    The AAMC strongly endorses these bills, and is pleased that a 
majority of Representatives and Senators have cosponsored the bill. The 
AAMC urges the Subcommittee to support this legislation and ensure that 
the losses currently experienced by physicians are mitigated as quickly 
as possible.
    In conclusion, Medicare beneficiaries rely on academic physicians 
and academic medical centers to provide high quality, innovative, and 
accessible healthcare. They also rely on academic physicians to develop 
the clinical advances and train the new generation of physicians 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 Subcommittee members 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.


                  Association of Maternal and Child Health Programs
                                               Washington, DC 20036
                                                  February 27, 2002
The Honorable Nancy Johnson
Subcommittee on Health of the Committee on Ways and Means
United States House of Representative
Washington, DC 20515

    Re: Committee Hearing on Medicare Physician Payments

    Dear Representative Johnson:
    The Association of Maternal and Child Health Programs (AMCHP) 
represents state public health leaders and others working to improve 
the health and well being of women, children and youth, including those 
with special health care needs, and families. We are very concerned 
about the Centers for Medicare & Medicaid Services' (CMS) decision to 
publish only the practice and physician liability expense values for 
the two vaccine administration codes (90471 and 90472), without 
publishing any values for the physician work involved in the 
administration of vaccines. As a result of this under-valuation, we 
fear that many Medicaid programs and other insurers that base payments 
on the Medicare fee schedule will reduce reimbursement for this service 
to levels well below the actual costs incurred by providers. Under-
compensating private physicians for vaccine administration, thereby 
discouraging them from providing this valuable service in their 
offices, could have a significant detrimental impact on the viability 
of our nation's immunization efforts.
    State health programs across the nation alongside federal partners 
CDC, HRSA, and CMS, and the private medical community have worked hard 
to reach the current high rate of immunization and low rate of vaccine-
preventable diseases in the United States. The Vaccines for Children 
(VFC) program has been remarkably effective in moving vaccine delivery 
for low-income families into the setting of a medical home, where 
children receive the benefit of comprehensive health services as well 
as immunizations. This effort to increase vaccine availability and 
utilization by increasing family awareness and encouraging families to 
seek primary, preventive care supports national health status goals 
reflected in the Healthy People 2010 initiative. Now is a particularly 
inopportune time to weaken that system, as it is already being severely 
stressed. Shortages of varicella, measles, mumps, rubella, DtaP and 
pneumococcal vaccines mean providers must recall the child, thus, 
increasing their financial burden and workload. In some cases, 
physicians' offices vaccine shortages mean that patients seek 
immunizations in already overburdened public health clinics.
    The rationale guiding CMS' values for vaccine administration does 
not reflect what actually happens at an administration site, since 
there is, in fact, physician work involved in the administration of 
childhood vaccines. The American Medical Association's Related Value 
Update Committee (RUC) recently reaffirmed their recommendation to 
include specific vaccine administration physician work values. At the 
time each dose is administered, the physician must explain the 
vaccine's benefits and possible adverse reactions to the patient's 
parents or guardians. Provision of this information is requirement of 
the National Childhood Vaccine Injury Act. With the increases in 
disseminating misinformation, the time that physicians spend on 
education and cognitive discussion has increased. Some children receive 
vaccines from a variety of sources (e.g., public health departments, 
community health centers) further complicating the physician's task of 
forming a comprehensive vaccine history using scattered records. 
Finally, physicians make every effort to avoid any ``missed 
opportunities'' to immunize a patient, so they administer vaccines in 
contexts other than preventive health care visits.
    For these reasons, AMCHP strongly recommends that the committee 
correct this problem, either through working with the administration on 
rewriting the rule or through legislative action if necessary, so that 
physicians are adequately compensated for administering vaccines to our 
nation's children.
    The goal of public health and its partner organizations is to 
foster a healthy society. This goal will be significantly and 
negatively affected if private physicians are not adequately 
compensated for administration of vaccines. The result would be 
increasing the burden on public health clinics and reducing the 
likelihood that a child will receive comprehensive care in a medical 
home. If CMS does not change the Medicare fee schedule for vaccine 
administration, the result could be a decrease in the number of 
immunized children and a concomitant increase in preventable--and 
sometimes fatal--infectious diseases. We urge the committee, on behalf 
of our nation's women, children, and their families, to address this 
issue as you look at the broader issues involved with the physician 
payment rule put forth by CMS.
                                                Deborah F. Dietrich
                                          Acting Executive Director


           Statement of the College of American Pathologists
    The College of American Pathologists (CAP) is pleased to submit 
this statement for the record of the Subcommittee on Health's hearing 
on the Medicare physician fee schedule formula and physician payments. 
The College is a medical specialty society representing more than 
16,000 board-certified physicians who practice clinical or anatomic 
pathology, or both, in community hospitals, independent clinical 
laboratories, academic medical centers and federal and state health 
    The CAP first would like to applaud Subcommittee Chair Nancy 
Johnson for her support of improved Medicare payments for physicians 
and her strong statement last week regarding the flawed formula now 
used to calculate annual updates to the Medicare physician fee 
schedule. The CAP also would like to express its appreciation to Ways 
and Means Chair William Thomas and other members of the full committee 
who have voiced the need to address the important issue of Medicare 
physician payments. We look forward to working with all of you so that 
Congress can act quickly to lessen the damage caused by this year's 
precipitous decline in Medicare physician payments and replace the 
current update formula with one that more accurately reflects true 
practice costs.
    The 5.4 percent reduction in physician payments that began January 
1, 2002, affects pathologists profoundly and exacerbates existing 
financial pressures brought on by increasingly complex and costly 
regulatory requirements and rising liability insurance rates.
    The January 1 reduction in payments is the fourth payment cut--and 
the largest--since Medicare instituted its physician fee schedule a 
decade ago. Since 1991, Medicare physician payment rates have risen an 
average of only 1.1 percent annually, or 13 percent less than the 
annual increase in practice costs, as measured by the Medicare Economic 
Index. Further, the Jan. 1 reduction comes on top of cuts to pathology 
services made in the transition to resource-based practice expenses, 
such as an 11.5 percent drop in payment over four years for the 
diagnosis of breast cancer, prostate cancer and malignant melanoma.
    Pathologists and other physicians cannot continue to sustain the 
financial pressures the Medicare program has placed upon them. 
Compounding the current problem of falling payment rates are numerous 
new administrative requirements imposed on Medicare providers in recent 
years. For example, documentation requirements necessitated by Medicare 
program integrity initiatives and various provisions of the Health 
Insurance Portability and Accountability Act of 1996 have created 
substantial new paperwork burdens in laboratories and physician 
offices, and more are expected in coming years. These requirements 
raise the cost and complexity of providing care, but come with no 
additional compensation. Further adding to the burden on providers are 
rising professional liability insurance rates and the cost of 
technological advances critical to maintaining state-of-the-art medical 

    The 2002 payment cut stems from a flawed Medicare update formula--
the ``sustainable growth rate,'' or SGR. This system inappropriately 
reflects downturns in the general economy and that, along with data 
errors by the Centers for Medicare and Medicaid Services, have short-
changed physicians by $15 million since 1998. The Medicare Payment 
Advisory Commission (MedPAC) warned last year that significant cuts in 
2002 ``could raise concerns about the adequacy of payments and 
beneficiary access to care.'' MedPAC adopted a recommendation that 
Medicare replace the SGR with a system based on estimated changes in 
physician practice costs less an adjustment for growth in multi-factor 
productivity (labor, supplies and equipment--not just labor, as is now 
the case).
    MedPAC's concerns regarding access must not be taken lightly. 
Experiences with Medicare+Choice disenrollment and Medicaid patient 
access give ample evidence of the need to maintain adequate payment to 
ensure adequate access. This year's reduction and future cuts that are 
likely absent immediate changes to the update system will force some 
physicians to discontinue accepting new Medicare patients, switch from 
participating to non-participating provider status, reduce 
administrative staff, retire early or take other actions to limit their 
Medicare liability. It is unfortunate that those same actions likely 
will jeopardize Medicare patients' access to care.
    The CAP urges Congress to act this year to mitigate the 5.4 percent 
reduction to the Medicare physician fee schedule, repeal the 
sustainable growth rate system and replace it with an update formula 
that accurately reflects increases in practice costs.

    The College thanks the Subcommittee for the opportunity to present 
its views on this important issue and offers its support and continued 
assistance as Congress moves toward remedying the flawed SGR formula 
and restoring equity to Medicare physician payments.


                                 Colorado Otolaryngology Associates
                                   Colorado Springs, Colorado 80909
                                                  February 26, 2002
The Honorable Nancy L Johnson
Chairwoman, House Ways and Means Committee, Health Subcommittee
2113 Rayburn H.O.B.
Washington, DC 20515

    Dear Representative Johnson;
    I recently learned of the February 28, 2002, hearing on 2002 
physician payments. I would like to offer this written comment for 
consideration during this hearing.
    Physicians are very concerned about the 5.4% decrease in Medicare 
payments. This year this decrease in payment is linked to most if not 
all-commercial third-party payers. Since 1997 the commercial third 
parties have been trying to control their costs and increase their 
profits by changing the way they develop their fee schedules. Fees used 
to be based on standard unit values by McGraw Hill (now called St. 
Anthony) but are now based on RBRVU's (Resource Based Relative Value 
Units). The sole purpose of this change was to reduce their physician 
payments. This move has been very successful for the health plans but 
has left the physicians with less money to run their practices.
    As of January 2, 2002, most health plans had completed their 
conversion to RBRVU's. Physicians have had no input into this change. 
Health plans have also changed computer systems to comply with other 
government regulations and now the systems support only one fee 
schedule, as I understand it.
    My physicians have not received an increase in salary in 7 years. 
This is far longer than most people in this country have gone without a 
salary increase. Therefore, you can see that a 5.4% decrease in payment 
is a deep cut into the physician budget; and you expect this decrease 
to continue through 2006. I can foresee many physicians having to give 
up their practices because they cannot afford to run an office at that 
level of payment.
    To add to our problems, over the past two years commercial third-
party payers have increased their premiums to employers by 50-60% per 
year. Health plans have not only increased their premiums but also now 
get a windfall profit of 5.4%.
    In concrete terms the cost to run our practice has increased 6% in 
the past year. Coupled with this new 5.4% decrease in payments, we are 
now faced with an increased cost of 11% this year. We cannot sustain 
increased costs and decreased payments. If this only affected Medicare 
patients, a solution would be to stop seeing Medicare patients. As it 
is, our patient mix includes only 10% Medicare patients.
    I hope this helps you understand the plight of all physicians in 
the United States. I need you to understand this issue and develop a 
formula for the Medicare conversion factor that will be fair and allow 
physicians to provide quality care to patients and at the same time let 
the medical business grow.
    If you have questions or need clarification, I can be reached at 
(719) 867-7850. Thank you in advance for your consideration.
                                          Judy Boesen, RN, BGS, MAM

                                                J. Lewis Romett, MD
                                                  Neiland Olson, MD
                                             Joel Ernster, MD, FACS
                                              Barton Knox, MD, FACS
                                          J. Christopher Pruitt, MD
                                               John Hohengarten, MD
                                               Edgar B Galloway, MD


                  Statement of the Hon. J.D. Hayworth,
         a Representative in Congress from the State of Arizona
    Thank you Madam Chairwoman for holding today's hearing on the 
Medicare payment formula for physicians. I commend your leadership in 
addressing this pressing issue that will impact not only physician 
payment levels, but also beneficiary access to quality health care.
    I have heard from many physicians in Arizona who have serious 
concerns about the physician payment update, which has resulted in a 
negative 5.4 percent update in 2002. I share their concerns because 
this significant cut could exacerbate existing access problems for 
Medicare beneficiaries, particularly in rural communities. 
Unfortunately, the current flawed formula has nothing to do with the 
cost of providing health care. I am concerned that the physician 
payment cut in 2002 and the expectation of similar significant 
reductions in the next several years may have the potential to sway 
physicians to retire early or simply choose not to participate in the 
Medicare program, which would have a serious effect on patient access 
to care.
    As you know, the current physician payment formula links physician 
updates to the Sustainable Growth Rate (SGR) and changes in the Gross 
Domestic Product (GDP). The Medicare Payment Advisory Commission 
(MedPAC) and others have recommended replacing the SGR because it fails 
to account adequately for changes in physicians' costs by tying updates 
to the growth in the economy and exacerbating different payments to 
different groups for the same services.
    I strongly believe that this critical issue must be addressed this 
year and I again commend your leadership in holding this hearing today. 
With the input of the physician community, MedPAC, the General 
Accounting Office, and the Administration, our committee can improve 
the existing physician reimbursement system. I look forward to 
continuing to work with you on a new payment methodology that will 
yield more fair, stable, and predictable updates for physicians.


                 Statement of the Hon. Joe Knollenberg,
        a Representative of 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.


                                        Professional Radiology Inc.
                                             Cincinnati, Ohio 45223
                                                  February 27, 2002
Ms. Allison Giles
Chief of Staff
US House of Representatives
Committee on Ways and Means
1102 Longworth House Office Building
Washington, DC 20515
    Dear Ms. Giles:
    Attached is a submission for the record to be included in the 
February 28, 2002 Subcommittee on Health Hearing on Physician Payments. 
This letter represents the views of the President Elect of the Alliance 
Physicians and Surgeons, speaking for 1250 Cincinnati physicians, the 
Ohio State Radiological Society representing 150 Diagnostic 
Radiologists and Radiation Oncologists, as well as the members of 
Professional Radiology, Inc., a 21-physician radiology group from the 
Christ and Jewish Hospitals in Cincinnati, Ohio, who are also members 
of the Health Alliance.
                                          Frank E. McWilliams, M.D.
                                        Professional Radiology Inc.
                                             Cincinnati, Ohio 45223
                                                  February 27, 2002
The Honorable Rob Portman
Member of Congress
238 Gannon Building
Washington, D.C. 20515
FAX: c/o Mr. Tim Miller
(202) 225-1992
    Dear Rob:
    Thank you very much for inviting me to attend the Medicare 
information meeting with Mr. Tom Scully on February 22, 2002. I found 
the exchange positive and Mr. Scully an eminently reasonable, 
intelligent man with a good grasp of CMS services, as one would expect. 
I was interested in the comments of all that spoke, and wanted to 
supplement what was stated at the meeting with some of my own comments, 
particularly in regards to physician reimbursement and mammography 
screening, as these issues were not perhaps as definitively explained 
by the participants as I think they should be. It is my understanding 
that the Health Services Subcommittee in the House is meeting this 
week, according to Mr. Miller, and hopefully these comments, if 
helpful, could be forwarded.


    CMS indicated that between 1998 and 2001, the cumulative update for 
physicians was 15.9%, compared to a 9.3% increase in medical inflation. 
This calculation ignores certain technical adjustments that reduce the 
conversion factor by a total of about one percentage point between 1998 
and 2001. Furthermore, and more importantly, it focuses on the most 
positive four-year period in the target's history, and completely 
ignores six of the ten years that physicians have been under an 
expenditure target. The physician payments were cut in three of the 
missing years, 1992, 1996 and 1997, and were well below medical 
inflation in a fourth, 1993. Therefore, over the full ten years under 
an expenditure target, the cumulative change in physician payment was 
18.5% compared to a 26% increase in medical inflation. Average annual 
increase in payments was 1.7% per year for physicians, while medical 
inflation averaged 2.3% per year. If one includes inflation, adjusted 
physician's reimbursement over that period of time is minus 13%, with 
all hospital and institutional reimbursement staying at 0% with no 
increase or decrease relative to inflation.
    MS also claimed that over the long haul, physician payments and the 
CPI have risen by nearly identical rates, with one going up on the 
average of 3.2% and the other by 3.3%. To understand this assertion, it 
is important to understand that Medicare officials essentially issue 
two different conversion factor updates every year. The first (-4.8% in 
2002) is based just on the Medical Economic Index. The second 
conversion factor as required by the expenditure target (-5.4% in 2002) 
makes additional negative budget neutrality adjustments, including one 
to offset volume increases that CMS assumes will occur as physicians 
attempt to make up for the reductions in the relative values for some 
services. This significantly impacts physicians in the service area, 
such as Radiology, where examinations are requested by other 
physicians, and there is no control by the radiologist over the volume. 
This results in a skewing of the relative value units, which we have 
all previously negotiated and agreed to in past years, and places an 
undue burden on those physicians who do not control the service demand. 
It also does not take into account the growing Medicare population or 
patient demands.
    The 5.4% across the board reduction in Medicare physician payments 
is indefensible and will create a political fire storm. The practice 
policies that are beyond the control of physicians have increased 
dramatically. Medicare has imposed excessive administrative burdens and 
unfunded mandates on physicians in the past, and is now going to 
compound the situation with and an across the board cut. In fact, in 
some services such as Radiology, the cut is not 5.4%, but is estimated 
between 12 and 14%.
    In Cincinnati, this Medicare fee schedule impacts dramatically the 
reimbursement climate. As Mr. Scully pointed out, the average Medicare 
recipient receives $6,800 in benefits across the country, whereas in 
Cincinnati it is $4,800, and in other areas it is $8,400, representing 
a significant discrepancy. This discrepancy is compounded by the fact 
that the high HMO penetration in the Greater Cincinnati area utilizes 
Medicare as a benchmark. Therefore, Cincinnati physicians, again at a 
reimbursement rate that is 25% below the national average for Medicare, 
are penalized further by the insistence of the HMO's on utilizing those 
figures as the baseline.
    In Cincinnati, there are numerous physicians that are leaving the 
community. In particular, we note that cardiovascular surgery is 
significantly understaffed in the community, as well as neurosurgery. 
In Radiology, we are unable to recruit physicians who do not have 
significant ties to the Greater Cincinnati community and who wish to 
return in spite of a significant penalty in initial and ultimate 
reimbursement. A group of oncologic surgeons with which I am familiar, 
has been trying for three years to recruit an additional surgeon. One 
individual who came and interviewed demanded a salary that was greater 
than any of the senior associates in the medical corporation. Of 
course, they were unable to adequately answer his salary demands.
    Across the board, as Mr. Scully indicated, this creates a downward 
spiral in employment opportunities and institutional viability, as well 
as in the general level of medical care. I am hopeful, Rob, that you 
can address these inequities in this session of Congress, as in some 
instances, physicians are really on the economic bubble and may have to 
bail out on the Cincinnati community and move elsewhere. I am hopeful 
that our parents and ourselves as we age, will have an excellent 
medical environment in which to receive care. I am sincerely concerned 
that this reimbursement discrepancy will lead to a lower tier of care 
in the long run, as it seems to have in the short run in certain areas, 
for our future.
    Finally, it appears to me that we are reaching a crisis in the 
Medicare program. I believe that the President's proposal for phased-in 
prescription coverage for the poorest seniors is an appropriate first 
step. I also believe Mr. Scully's comments that Medicare needs to be 
overhauled to be more of an insurance plan with co-payments, and follow 
the insurance model is an appropriate one. We find often that families 
insist on heroic measures for their elderly family members that appear 
to be related to their complete desensitivation from financial 
responsibility. This often leads to patients receiving extraordinary 
heroic care in the last waning moments of their lives, which often does 
not provide any benefit to the patient, but only prolongs suffering. A 
reasonable economic model, I believe, would help reign in these 
    Rob, as always, I appreciate your listening to my concerns as a 
friend and constituent, and as a practicing Radiologist in the 
Cincinnati community. In my new role as a member of the Board of 
Trustees of the Health Alliance, and as President-Elect of the Alliance 
Physicians and Surgeons, as 1200 member group of specialists and 
primary care physicians, I am in a position to speak for numerous 
physicians. In addition, in my position as President-Elect to the Ohio 
State Radiological Society, I represent the views of 950 radiation 
oncologists and diagnostic radiologists who practice in Ohio. I look 
forward to any way to serve you to provide time, expertise, or counsel 
regarding these complex issues in the healthcare arena.
    As always, those of us in the Cincinnati community feel proud and 
privileged to have you representing us in the United States Congress.
    With fondest regards,
                                          Frank E. McWilliams, M.D.


                                                         Sun Health
                                            Sun City, Arizona 85351
                                                      March 7, 2002
The Honorable Nancy Johnson
Chairwoman, Subcommittee on Health
Committee on Ways and Means
1102 Longworth House Office Building
Washington, D.C. 20515
    Re: March 1, 2002 Ways and Means Health Subcommittee hearing

    Dear Chairwoman Johnson:
    I respectfully request that this letter be included in the official 
record for the Ways and Means Health Subcommittee hearing on March 1, 
2002, regarding physician payment for Medicare services.
    Sun Health is a nonprofit healthcare system with over 90% of its 
hospital admissions representing Medicare beneficiaries; for this 
reason, Sun Health is often the harbinger of various healthcare trends 
and Medicare reimbursement implications. In the case of current 
Medicare reimbursement for anesthesia services, the quality of care 
offered to Medicare beneficiaries is suffering and will become 
substandard in Medicare-dependent locations nationwide. The following 
appeal is in support of an increase in Medicare's anesthesia conversion 
factor, and strives to depict the early albeit devastating implications 
of the current anesthesia conversion factor insufficiencies.
    Sun Health prides itself on a tradition of offering superior 
patient care to over 135,000 seniors in our service area. During 2001, 
Sun Health treated 28,228 inpatient cases and 124,033 outpatient cases, 
and is well on its way to surpassing those numbers in 2002. However, 
the quality of care offered to our Medicare beneficiaries is threatened 
by Medicare's minimal reimbursement for anesthesia services.
    Currently, Arizona anesthesiologists serving Medicare patients 
receive $16.61 per unit. In contrast, commercial payers in Arizona 
reimburse up to $42 per unit. This translates into an Arizona Medicare 
rate that is 50-60% lower than current market value. Accordingly, Sun 
Health and other Arizona facilities that serve high proportions of 
Medicare patients are facing a crisis in recruiting and retaining 
qualified anesthesiologists because serving Medicare beneficiaries 
results in a financial detriment to the anesthesia professional.
    There is an exodus of anesthesiologists from Medicare-dependent 
facilities. For instance, Walter O. Boswell Memorial Hospital, our Sun 
City facility, lost an unheard of 65% of its anesthesia professionals 
in the past year, while Del E. Webb Memorial Hospital, our Sun City 
West facility, lost its entire anesthesia group because of the Medicare 
reimbursement insufficiencies.
    An inadequate supply of anesthesiologists translates into longer 
days for the few anesthesiologists who do stay, often upwards of 12 
hours for five consecutive days of direct patient care, and often in 
critical care situations. When anesthesiologists who leave Sun Health 
or other Medicare-dependent facilities to seek at least the median 
income in their profession at other hospitals, a multitude of surgical 
procedures must be cancelled or postponed. This compromise to Medicare 
beneficiaries is inexcusable.
    While Sun Health continues to search for methods to recruit and 
retain anesthesiologists, we are utilizing locum tenens, or temporary, 
anesthesiologists. Between this unforeseen expense and the added 
expense of guaranteeing after-hours coverage of staff 
anesthesiologists, the substandard Medicare reimbursement cost Sun 
Health over $2,920,000 during 2001 for anesthesia services, and is 
projected to cost Sun Health $1,680,000 in 2002. This expensive 
subsidization solution should not be borne by community hospitals, but 
will continue to be an extreme financial burden as this issue 
intensifies for Medicare-dependent facilities nationwide.
    In order to solve the anesthesia payment crisis, anesthesiologists 
serving Medicare beneficiaries nationwide deserve at least a 25% 
adjustment to the conversion factor. Additional increases may still be 
required in the future. Sun Health urges the House Ways and Means 
Subcommittee on Health to reform the process for physician payment 
under Medicare in an effort to avoid the Medicare patient anesthesia 
catastrophe that otherwise awaits us.
    This issue is so critical to the health of our patients and to the 
future of our hospital system that our system appeals to Congress to 
take steps necessary to ensure a fair rate adjustment. If I or any of 
my colleagues at Sun Health may be of assistance to you in this 
endeavor, including providing additional correspondence, contact with 
our anesthesiologists, or personally testifying in Washington, D.C., we 
would be pleased to do so.
            Respectfully submitted,
                                                 Leland W. Peterson
                              President and Chief Executive Officer