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



 
                 MEDICARE'S GEOGRAPHIC COST ADJUSTORS
=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 23, 2002

                               __________

                           Serial No. 107-85

                               __________

         Printed for the use of the Committee on Ways and Means







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                      COMMITTEE ON WAYS AND MEANS

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

                         SUBCOMMITTEE ON HEALTH

                NANCY L. JOHNSON, Connecticut, 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
JENNIFER DUNN, Washington

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

                              ----------                              
                                                                   Page
Advisories announcing the hearing................................     2

                               WITNESSES

Medicare Payment Advisory Commission, Glenn M. Hackbarth, 
  Chairman.......................................................    85
U.S. General Accounting Office, William J. Scanlon, Ph.D., 
  Director, Health Care Issues...................................    90

                                 ______

Aderholt, Hon. Robert B., a Representative in Congress from the 
  State of Alabama...............................................    59
Hinchey, Hon. Maurice D., a Representative in Congress from the 
  State of New York..............................................    45
Kanjorski, Hon. Paul E., a Representative in Congress from the 
  State of Pennsylvania..........................................    20
Kelly, Hon. Sue W., a Representative in Congress from the State 
  of New York....................................................    39
Moran, Hon. Jerry, a Representative in Congress from the State of 
  Kansas.........................................................    68
Nussle, Hon. Jim, a Representative in Congress from the State of 
  Iowa...........................................................    13
Peterson, Hon. Collin C., a Representative in Congress from the 
  State of Minnesota.............................................    41
Peterson, Hon. John E., a Representative in Congress from the 
  State of Pennsylvania..........................................    65
Roukema, Hon. Marge, a Representative in Congress from the State 
  of New Jersey..................................................    16
Sandlin, Hon. Max, a Representative in Congress from the State of 
  Texas..........................................................    62
Shays, Hon. Christopher, a Representative in Congress from the 
  State of Connecticut...........................................    34
Sherwood, Hon. Don, a Representative in Congress from the State 
  of Pennsylvania................................................    55
Smith, Hon. Nick, a Representative in Congress from the State of 
  Michigan.......................................................    48
Visclosky, Hon. Peter J., a Representative in Congress from the 
  State of Indiana...............................................    24
Watt, Hon. Melvin L., a Representative in Congress from the State 
  of North Carolina..............................................    52
Zuckerman, Stephen, Urban Institute..............................    99

                       SUBMISSIONS FOR THE RECORD

Alabama Hospital Association, Montgomery, AL, J. Michael Horsley, 
  statement......................................................   112
American Academy of Family Physicians, Leawood, KS, statement and 
  attachments....................................................   116
American Hospital Association, statement.........................   120
Baker Healthcare Consulting, Inc., Indianapolis, IN, Dale E. 
  Baker, statement and attachment................................   121
Bereuter, Hon. Doug, a Representative in Congress from the State 
  of Nebraska, statement and attachment..........................    72
Boston Organization of Teaching Hospital Financial Officers, 
  Boston, MA, statement..........................................   125
Bridgeport Hospital, Bridgeport, CT; Danbury Hospital, Danbury, 
  CT; Greenwich Hospital, Greenwich, CT; Griffin Hospital, Derby, 
  CT; Hospital of Saint Raphael, New Haven, CT; Midstate Medical 
  Center, Meriden, CT; Milford Hospital, Milford, CT; Norwalk 
  Hospital, Norwalk, CT; St. Mary's Hospital, Waterbury, CT; St. 
  Vincent's Medical Center, Bridgeport, CT; Stamford Hospital, 
  Stamford, CT; Waterbury Hospital, Waterbury, CT; Yale-New Haven 
  Hospital, New Haven, CT; joint statement.......................   126
Cardin, Hon. Benjamin, a Representative in Congress from the 
  State of Maryland, statement...................................     9
Children's National Medical Center, Greta Todd, letter...........   128
Christus St. Joseph's Health System, Paris, TX, Monty E. 
  McLaurin, statement............................................   129
Community Memorial Hospital, Ventura, CA, David B. Glyer, letter.   131
Crapo, Hon. Mike, a United States Senator from the State of 
  Idaho, and Hon. Bart Stupak, a Representative in Congress from 
  the State of Michigan, joint statement.........................    10
Crickenberger, Chuck, Sibley Memorial Hospital, letter...........   164
Danbury Hospital, Danbury, CT, joint statement...................   126
DC Partnership to Improve End-of-Life Care, Joan T. Panke, letter   132
DeLauro, Hon. Rosa L., a Representative in Congress from the 
  State of Connecticut, statement................................   133
District of Columbia Hospital Association:
    Joan H. Lewis, letter........................................   134
    Tracy A. Thompson, letter....................................   135
    Machelle Yingling, letter....................................   136
Duncan, Hon. John J., Jr., a Representative in Congress from the 
  State of Tennessee, statement..................................   136
Gallagher, Sean B., Washington Hospital Center, letter...........   171
Glyer, David B., Community Memorial Hospital, Ventura, CA, letter   131
Greenwich Hospital, Greenwich, CT, joint statement...............   126
Griffin Hospital, Derby, CT, joint statement.....................   126
Horsley, J. Michael, Alabama Hospital Association, Montgomery, 
  AL, statement..................................................   111
Hospital of Saint Raphael, New Haven, CT, joint statement........   126
Iowa Hospital Association, Des Moines, IA, Tracy Warner, 
  statement......................................................   137
Iowa Medical Society, West Des Moines, IA, statement.............   139
Lewis, Joan H., District of Columbia Hospital Association, letter   134
LoBiondo, Hon. Frank A., a Representative in Congress from the 
  State of New Jersey, statement.................................   141
Marshfield Clinic, Marshfield, WI, statement.....................   142
McDowell, Diana, Providence Hospital, letter.....................   155
McIntyre, Hon. Mike, a Representative in Congress from the State 
  of North Carolina, statement...................................   149
McLaurin, Monty E., Christus St. Joseph's Health System, Paris, 
  TX, statement..................................................   129
McNeill, Douglas W., Middletown Regional Health System, statement 
  and attachment.................................................   152
McNulty, Hon. Michael R., a Representative in Congress from the 
  State of New York, statement and attachment....................   150
Midstate Medical Center, Meriden, CT, joint statement............   126
Middletown Regional Health System, Douglas W. McNeill, statement 
  and attachment.................................................   152
Milford Hospital, Milford, CT, statement.........................   126
Newman, Dinetia M., South Central Regional Medical Center, 
  Laurel, MS, letter.............................................   167
North Mississippi Medical Center, Tupelo, MS, Gerald D. Wages, 
  letter.........................................................   153
Norwalk Hospital, Norwalk, CT, joint statement...................   126
Panke, Joan T., DC Partnership to Improve End-of-Life Care, 
  letter.........................................................   132
Providence Hospital:
    Diana McDowell, letter.......................................   155
    David Sparks, letter.........................................   156
Rural Referral Center/Sole Community Hospital Coalition, 
  statement and attachment.......................................   157
Saxton, Hon. Jim, a Representative in Congress from the State of 
  New Jersey, statement..........................................   163
Sibley Memorial Hospital, Chuck Crickenberger, letter............   164
Smith, Hon. Christopher H., a Representative in Congress from the 
  State of New Jersey, statement.................................   165
South Central Regional Medical Center, Laurel, MS, Dinetia M. 
  Newman, letter.................................................   167
Sparks, David, Providence Hospital, letter.......................   156
St. Mary's Hospital, Waterbury, CT, joint statement..............   126
St. Vincent's Medical Center, Bridgeport, CT, joint statement....   126
Stamford Hospital, Stamford, CT, joint statement.................   126
Stupak, Hon. Bart, a Representative in Congress from the State of 
  Michigan, and Hon. Mike Crapo, a United States Senator from the 
  State of Idaho, joint statement................................    10
Sutter Health, Sacramento, CA, statement.........................   170
Thompson, Tracy A., District of Columbia Hospital Association, 
  letter.........................................................   135
Todd, Greta, Children's National Medical Center, letter..........   128
Wages, Gerald D., North Mississippi Medical Center, Tupelo, MS, 
  letter.........................................................   153
Warner, Tracy, Iowa Hospital Association, Des Moines, IA, 
  statement......................................................   137
Washington Hospital Center, Sean B. Gallagher, letter............   171
Waterbury Hospital, Waterbury, CT, joint statement...............   126
Weller, Hon. Jerry, a Representative in Congress from the State 
  of Illinois, statement.........................................   172
Wilson, Hon. Heather, a Representative in Congress from the State 
  of New Mexico, statement.......................................    11
Yale-New Haven Hospital, New Haven, CT, joint statement..........   126
Yingling, Machelle, District of Columbia Hospital Association, 
  letter.........................................................   136


                  MEDICARE'S GEOGRAPHIC COST ADJUSTORS

                              ----------                              


                         TUESDAY, JULY 23, 2002

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:12 p.m., in 
room B-318 Rayburn House Office Building, Hon. Nancy L. Johnson 
[Chairman of the Subcommittee] presiding.
    [The advisory and the revised advisory announcing the 
hearing follow:]

ADVISORY
FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
July 16, 2002
No. HL-16

                      Johnson Announces Hearing on

                  Medicare's Geographic Cost Adjustors

    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 assessing Medicare's geographic 
cost adjustors used for Medicare payment. In addition, the Subcommittee 
will assess the adequacy of the definition of labor market areas. The 
hearing will take place on Tuesday, July 23, 2002, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 2:00 p.m.

    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives from the U.S. General Accounting 
Office, the Medicare Payment Advisory Commission (MedPAC), academia and 
interested Members of Congress. However, any individual or organization 
not scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.

BACKGROUND:

    Hospitals, skilled nursing facilities, and home health agencies are 
paid by Medicare under prospective payment systems. These payments are 
adjusted to reflect the cost of buying labor and other services across 
areas, as measured by the wage index. The wage index is one of the most 
important determinants of Medicare facilities' payment. Thus, its 
adequacy in accurately capturing geographic differentials in labor 
costs is critically important. Data on salaries and fringe benefits 
(including bonuses) from each hospital in the country are the only 
information used in calculating the wage index.

    The wage index is estimated by calculating an average hospital wage 
for each labor market area, and the average for that area is compared 
to the national average hospital wage. The labor market areas are 
Metropolitan Statistical Areas (MSAs), which are defined by the Office 
of Management and Budget. Counties not in MSAs are grouped into a 
single rural area in each State.

    Research by the Prospective Payment Assessment Commission (the 
predecessor to MedPAC) showed that the current labor market areas are 
frequently too large. The MSAs may contain an inner-city core labor 
market with higher wage costs than those in the surrounding suburban 
areas. More recent research (Dalton, et al 2000) suggests that the 
statewide rural areas typically contain three distinct markets based on 
the population size in the county. Consequently, the wage index 
redistributes payments within labor market areas from the inner city to 
suburban hospitals and to outlying hospitals in rural pockets within 
MSAs. Similarly, isolated rural hospitals benefit financially as the 
wage index is dominated by the higher wages of rural hospitals in large 
towns.

    However, the historical political county boundaries that define 
current labor market areas often arbitrarily separate facilities that 
participate in the same labor market. To address this problem, the 
Omnibus Budget Reconciliation Act 1989 (P.L. 101-239) established a 
process enabling hospitals to reclassify into another labor market if 
the hospital is close to the area, disadvantaged due to much higher 
costs than their actual labor market location (8 percent higher for 
urban hospitals and 6 percent higher for rural hospitals), and if it 
had wage costs no more than 18 percent lower for urban hospitals and 16 
percent lower for rural hospitals to those in the nearby area. Under 
the reclassification provision, 568 hospitals will receive a different 
and higher wage index in fiscal year 2003. Geographic reclassification 
is budget neutral (neither increases or decreases overall expenditures) 
so that the Centers for Medicare and Medicaid Services estimates that 
payments for urban hospitals will be reduced 0.5 percent and payments 
to rural hospitals increased 2.5 percent in fiscal year 2003.

    Although hospitals utilize the reclassification process, a number 
of hospitals that do not meet the criteria in the law have pursued 
congressional action to legislatively reclassify hospitals or 
arbitrarily raise the wage index. These bills often lack empirical 
evidence or support from the MedPAC for such changes.

    The geographic practice cost indices used to compute physician 
payments are conceptually quite different than hospitals. Separate 
geographic adjusters apply to three components: work, practice expense, 
and professional liability insurance. The geographic adjuster for work 
is based on a sample of median hourly earnings of workers in six 
professional specialty occupation categories and conceptually is 
intended to measure differences in the cost of living. The geographic 
adjuster for practice expense is based on employee wages, office rents, 
medical equipment and supplies, and other miscellaneous expenses. The 
geographic adjuster for professional liability insurance reflects the 
cost of this insurance.

    In addition, the geographic adjustment areas used to calculate 
physician payments are larger than those used to compute the wage 
index, and in a number of instances statewide. The physician geographic 
adjusters are reviewed, and revised as necessary, every 3 years, 
compared to the annual update of the hospital wage data.

    In announcing the hearing, Chairman Johnson stated, ``The operation 
of the wage index is extremely complex. Not only does it consume an 
inordinate amount of time to adjudicate changes on a case-by-case 
basis, we have heard a number of complaints about the huge disparities 
across regions and apparent inequities between providers who are 
situated just miles apart. This hearing will shed some much-needed 
light on this complex area.''

FOCUS OF THE HEARING:

    Tuesday's hearing will focus on assessing the current Medicare 
payment geographic adjustor and highlighting suggestions for 
improvement of the formula and appeals process.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    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, Tuesday, August 6, 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 sealed-
packaged deliveries to all House Office Buildings.

FORMATTING REQUIREMENTS:

    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 
Committee.

    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[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. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.

    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 LOCATION* * *

ADVISORY
FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         Subcommittee on Health

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
July 22, 2002
No. HL-16-Revised

             Change in Location for Subcommittee Hearing on

                  Medicare's Geographic Cost Adjustors

                         Tuesday, July 23, 2002

    Congresswoman Nancy L. Johnson, Chairman of the Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on Medicare's Geographic Cost Adjustors, scheduled 
for Tuesday, July 23, 2002, at 2:00 p.m., in the main Committee hearing 
room, 1100 Longworth House Office Building, will now be held in room B-
318 Rayburn House Office Building.

    All other details for the hearing remain the same. (See 
Subcommittee advisory No. HL-16 dated July 16, 2002.)

                                 

    Chairman JOHNSON. The hearing will come to order. My 
apologies to my colleagues for having to start a little bit 
behind.
    Good morning. Today's hearing will focus on the important 
subject of how Medicare payments account for differences in the 
costs of providing services across regions of the country.
    Our goal is to ensure that providers are compensated fairly 
for costs over which they have no control. Medicare funding is 
critical to the Nation's hospitals, nursing homes, home health 
agencies, and physicians. It is our obligation to make sure 
that payments are fair and the system works.
    In my own district, the limitations of the hospital 
geographic classification process are vividly exposed. The 
western edge of my district borders New York State and the 
southern edge borders the New York City Metropolitan 
Statistical Area (MSA). The hospital wage index in that portion 
of my district is 1.2294. The wage index for the area just 
across the State line is 1.4427, a 17-percent differential. 
Wage indexes are assigned by location, generally along county 
lines.
    As a result, a hospital in Danbury would be classified in 
New Haven MSA of 1.22 while one in Putnam County New York, only 
a few miles away, would be classified in the New York MSA wage 
index of 1.44. The result is that Putnam County receives 
Medicare payments 17 percent higher than even the Danbury 
hospital, even though they share a labor pool and draw patients 
from the same geographic area.
    Further adding to the inequity, the average hospital wage 
in Danbury is higher than the average hospital wage in Putnam 
County. One of the results is that the hospitals in the New 
York MSA have an inpatient margin of 28 percent compared to 
hospitals in the New Haven MSA with a negative margin of 10.3 
percent.
    In my own hometown of New Britain, the New Britain General 
Hospital would have an increase of $5 million a year if they 
could reclassify to New York City MSA and $.25 million a year 
if they could reclassify to the New Haven MSA and so on and so 
forth.
    Only five hospitals in all of Connecticut qualified for a 
reclassification in 2003, so I appreciate the importance of 
this hearing.
    I welcome my colleagues to testify because only through 
evaluating your experiences and the information you bring us 
about geographic adjustments in your communities and for your 
hospitals and doctors will we be able to determine if we can 
improve our payment system and its sensitivity to regional 
variations in costs.
    While this is a very complicated area of the law, it is an 
important one. If we focus on the facts, I believe we will be 
able to assure sound policy.
    That much said, the witness today from the U.S. General 
Accounting Office (GAO), the Medicare Payment Advisory 
Commission (MedPAC) and the Urban Institute will provide 
information that we simply must recognize, though for many of 
us the Medicare Payment Advisory Commission and the Urban 
Institute will provide information that we simply must 
recognize, though for many of us, some of their information 
contradicts what many have come to consider conventional 
wisdom.
    For example, the hard fact is that rural hospitals are 
helped by the wage index and large teaching hospitals in the 
inner cities are hurt by the wage index. This is because the 
wage adjustment process starts with actual hospital wage data 
and computes both a national average and a MSA regional average 
wage from reported hospital wages.
    This process of averaging inherently disadvantages the 
high-wage institutions in the MSA and inherently advantages the 
low-wage institutions and the MSA. While this is the underlying 
foundation of our system, other aspects of our system, the 
definition of the wage areas, the reclassification and all its 
parts must be scrutinized to determine if the system can be 
made to function more fairly.
    Congress has improved and modified the geographic 
adjustment process several times since 1983. Over 1989 an 
appeals process was established so that a hospital could 
increase its wage index by proving that it should be assigned 
to a different labor market.
    The bar for reclassification to a higher wage area is set 
low. The hospital's wage can be up to 16 percent lower than the 
wages in the area it seeks to join. In addition, the hospital 
must prove it is disadvantaged by its actual location. While 
experts conclude that the appeals process has made the system 
work a little better, it may need adjustments as the 
environment in which health care delivery has changed.
    Our experts will also tell us that the geographic adjustors 
for physician payments favor rural areas. The physician fee 
schedule includes three components: physician work, practice 
expense, and professional liability insurance. Each component 
has its own geographic adjustor.
    When Congress enacted the physician fee schedule in 1989, 
it limited geographic adjustment of the work component of 
physician payments. Instead of accounting for all cost of 
living differences, Congress decided to adjust only one quarter 
of the payment for physician work.
    This last of full accounting for cost of living differences 
means that physicians in lower cost of living rural areas are 
paid relatively more. Physicians in higher cost of living urban 
areas are paid relatively less than they would be paid if the 
full geographic adjustment had been made to the work component.
    In fact, more than half, 55 percent of the average Medicare 
physician fee is a national fee with no geographic adjustment. 
Three-quarters of physician work and all medical equipment and 
supplies are paid on a nationwide basis.
    In addition, Medicare is a program to deal with physician 
shortages which provides a 10-percent incentive bonus to 
physicians who previous care in any rural or rural health 
professional shortage area.
    In the Medicare Modernization and Prescription Drug Act of 
2002, I call for a GAO study of geographic differences and 
payments for physician services. This study would assess the 
validity of the adjustors and evaluate how they are constructed 
and used.
    Once we have this GAO report, we will return to this issue. 
I am committed to maintaining access to quantity care for all 
our seniors in all communities across America. As payments 
policies in both the public and private sectors have changed 
and each payer is focused more narrowly on the costs of its own 
patients, resources to cover uncompensated and under-
compensated care have diminished and payments based on averages 
may be having new impacts on access and quality.
    As we study the issues raised in the hearing, we will be 
looking for solutions that will treat providers more equitably 
in this era of bargained down reimbursements and rising costs. 
The answers will not be easy, but the signs of serious strains 
cannot be ignored.
    [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
    Good morning. Today's hearing will focus on the important subject 
of how Medicare payments account for differences in the cost of 
providing services across regions of the country. Our goal is to ensure 
that providers are compensated fairly for costs over which they have no 
control. Medicare funding is critical to the Nation's hospitals, 
nursing homes, home health agencies and physicians, and it is our 
obligation to make sure the payments are fair and the system works.
    I am pleased to see so many Members here today to talk about how 
geographic adjustments affect their communities. It is through 
evaluating the experiences of your hospitals and doctors that we will 
be able to determine if we can improve our payment system and its 
sensitivity to regional variations in cost. While this is a very 
complicated area of the law, it is an important one and if we all focus 
on the facts, we will be able to assure sound policy.
    That much said, the witnesses today from the General Accounting 
Office, the Medicare Payment Advisory Commission, and the Urban 
Institute will provide information that we must recognize, though for 
many of you some of their conclusions contradict what you have come to 
consider conventional wisdom.
    For example, the hard fact is that small rural hospitals are helped 
by the wage index and large teaching hospitals in the inner cities are 
disadvantaged. This is because the wage adjustment process starts with 
actual hospital wage data and computes both a national average wage and 
an MSA regional average wage from reported hospital wages. This process 
of averaging inherently disadvantages the high-wage institutions of an 
MSA--giving the low-wage providers more than their costs and high-wage 
providers less than their costs for labor.
    While this is the underlying foundation of our system, other 
aspects of the formula, the definition of wage areas, and the 
reclassification system must all be scrutinized to determine if the 
system can be made to function more fairly.
    Congress has improved and modified the geographic adjustment 
process several times since 1983. In OBRA 1989, an appeals process was 
established so that a hospital could increase its wage index by proving 
that it should be assigned to a different labor market. The bar for 
reclassification to a higher wage area is set low: the hospital's wage 
can be up to 16% lower than the wages in the area it seeks to join. In 
addition, the hospital must prove it is disadvantaged by its actual 
location. While experts conclude that the appeals process has made the 
system work a little better, it may need adjustment as the environment 
in which health care is delivered changes.
    Our experts will also tell us that geographic adjusters for 
physician payments favor rural areas. The physician fee schedule 
includes three components: physician work, practice expense, and 
professional liability insurance. Each component has its own geographic 
adjuster.
    When Congress enacted the physician fee schedule in 1989, it 
limited geographic adjustment of the work component of physician 
payments: Instead of accounting for all cost-of-living differences, 
Congress decided to adjust only one-quarter of the payment for 
physician work. This lack of full accounting for cost-of-living 
differences means that physicians in lower cost-of-living rural areas 
are paid relatively more, and physicians in higher cost-of-living urban 
areas are paid relatively less than they would be paid if full 
geographic adjustment were made to the work component.
    In fact, more than half--55 percent--of the average Medicare 
physician fee is a national fee for which no geographic adjustment is 
made. Three-quarters of physician work, and all of medical equipment 
and supplies are paid on a nationwide basis.
    In addition, Medicare has a program to deal with physician 
shortages. Medicare provides a 10 percent incentive bonus to physicians 
who provide care in any rural or urban health professional shortage 
area.
    In the Medicare Modernization and Prescription Drug Act of 2002, I 
call for a GAO study of geographic differences in payments for 
physicians' services. This study would assess the validity of the 
adjusters, and evaluate how they are constructed and used. Once we have 
this GAO report, we will be better able to evaluate the need for 
reform.
    I am committed to maintaining access to quality care for all 
seniors in Medicare in all communities. As payment policies in both the 
public and private sectors have changed and each payor has focused more 
narrowly on the costs of only its own patients, resources to cover 
uncompensated and under-compensated care have diminished and payments 
based on averages are having new impacts on care access and quality.
    As we study the issues raised in the hearing, we will be looking 
for solutions that will treat providers more equitably in this era of 
bargained-down reimbursements and rising costs. The answers will not be 
easy but the signs of serious strain cannot be ignored.

                                 

    Mr. Stark, would you like to comment?
    Mr. STARK. Madam Chair, thank you. I am often troubled by 
our process in that we dance around with a variety of formulas 
in an effort to be fair We have built into the system or the 
system has built into it an appeals process for those hospitals 
that I suspect we are mostly talking about today, who feel they 
have been unfairly treated, or for some reason or another, 
their MSA is just across the river and that is closer than the 
adjoining MSA that is across the mountains.
    Unless hospitals who have been turned down for an 
adjustment, which means that they not only don't qualify for a 
MSA labor payment, but they have appealed through the process 
and then been turned down again. I'm uncomfortable creating 
what I would refer to as rifle shots to start adjusting this on 
individual hospital bases unless we are willing to do it for 
all hospitals individually, which I would support.
    I certainly am uncomfortable doing it in the absence of 
hospital-specific financial data, which the hospitals don't 
like to provide. Now, we have that available to us, and I would 
ask each witness, both at the table and my colleagues to come, 
if we can't provide it and we would try in some cases to look, 
because what we often find is that the Medicare margins of the 
hospitals that you are concerned about are quite positive and 
the overall margins of the hospitals are negative. What does 
that tell you?
    Basically, it tells you that they have taken deep discounts 
from managed care plans or other and on this they are making 
money on Medicare, but they are losing money on other services. 
This happens probably in two-thirds of the hospitals across the 
country that have negative margins, they are making money on 
Medicare.
    So, the question then comes, should we increase the 
Medicare payments to bail out hospitals that either have poor 
management or have to take deep discounts to buy into managed 
care plans to generate volume or not. In some cases that may be 
a valid objective, but it is very hard.
    You know, we are going to end up with one MSA running from 
New York to Los Angeles, pretty soon, and then there will be 
basically no adjustment. I don't know what that gets anybody. I 
am happy to work with the Chair and our staff to remember 
instances where a strong case can be made that there is 
inadequate service available, there are no competing hospitals, 
for example, that the margins are low and that the hospital has 
a plan to correct its financial shortfall rather than trouble 
you all with having to come back here every couple of years and 
say, ``Good old Saint Somebody didn't make it this year again 
because they are just counting on our adding a subsidy,'' 
which, by the way, is unfair to the hospitals in your district, 
to our neighboring districts that are doing a good job, or 
doing a better job financially, I should say.
    So, to the extent that each of you can provide us more 
specific data, it will be helpful, I think, to come to judgment 
because there is a whole lot of requests in here for that. I 
for one would like to see the process become a little bit more 
empirical so that the hospitals that had to submit data, 
perhaps it could be in a uniform format to make the case that 
it would be a lot easier for us then, because it is a zero-sum 
gain; whatever money that you all are able to get for your 
hospitals comes out of the hide of other hospitals. So, we have 
to take that into account.
    I look forward to your testimony. I hope that you will 
recognize the problem that the Chair and the staff will have in 
coming to a fair decision in this case as to whether or not we 
have money to solve each of these problems.
    Thank you, Madam Chair.
    Mr. KLECZKA. Madam Chair.
    Chairman JOHNSON. Yes.
    Mr. KLECZKA. Madam Chair, our colleague from the Committee 
on Ways and Means, Mr. Cardin, was scheduled to be on the fist 
panel and had to leave. I would ask unanimous consent that his 
testimony be made part of the official record.
    Chairman JOHNSON. Yes, I was going to do that after 
introducing the panel. I do regret that Mr. Cardin had to 
leave. We will submit his testimony for the record.
    [The statement of Mr. Cardin follows:]
Statement of the Hon. Benjamin L. Cardin, a Representative in Congress 
                       from the State of Maryland
    Thank you, Madam Chairman, for the opportunity to submit testimony 
to the Subcommittee on Medicare's Geographic Cost Adjustments. My 
testimony addresses an often overlooked aspect in the wage index 
debate-the negative effects of the existing system on providers other 
than hospitals, specifically nursing homes.
    First, unlike hospitals, nursing facilities are unable to petition 
for geographic reclassification to benefit from the higher wage index 
of the area from which they draw labor because no SNF-specific wage 
index exists. This means that a free-standing SNF across the street 
from a hospital that has received a geographic reclassification cannot 
receive the same reclassification. Furthermore a hospital-based SNF 
based at that very same hospital cannot receive it either.
    Yet, the hospital, the freestanding SNF, and the hospital-based SNF 
are all facing the same labor market. The result is an economic 
disadvantage facing both SNFs in trying to recruit and retain the best 
available care-givers.
    Second, the use of hospital wage and fringe benefit data to set 
payment for nursing homes has created an imprecise measure that may 
result in lower than appropriate reimbursements to these facilities. 
Currently, the wage index portion of the nursing home reimbursement 
formula is determined by the same cost reports that hospitals submit 
for their payment. Often the two sets of data vary. Even when they are 
very similar, for this approach to work, hospitals must provide 
accurate wage and benefit data. If hospitals fail to report their own 
data accurately, and as a consequence, the wage index for a particular 
MSA is lowered, nursing home PPS rates will be reduced accordingly.
    Seemingly minor errors can produce wide variations in payment. 
Often payments are lower than merited because incomplete reports are 
submitted. In some cases, the Centers for Medicare and Medicaid 
Services (CMS) will assume the lowest amount in lieu of unreported 
data. The vast majority of the nation's hospitals have an incentive to 
ensure accuracy because their payments will be adversely affected by 
incorrect reporting.
    But nursing home operators in my home state of Maryland face a 
unique situation. Hospital data errors can reduce the wage index and 
the PPS rates for nursing homes but not for hospitals, because our 
hospital rates are governed by the Health Services Cost Review 
Commission. Historically, these hospitals have had less incentive to 
verify the accuracy of the reports they file. For this reason, I 
strongly support the timely development of a SNF-specific wage index 
that will accurately measure labor cost fluctuations in nursing homes.
    Recent experience in the Baltimore MSA illustrates this very 
problem. In May 2001, when CMS released the 1999 wage index data that 
would be used to calculate rates for FY2002, nursing home 
administrators noticed a suspiciously low indicator of 0.9365, down 
from the previous year's wage index of 0.9891. A consultant 
subsequently determined that several large Baltimore hospitals had 
failed to include fringe benefit data in their reports. That 5% drop in 
the Baltimore MSA wage index resulted in a $15 per patient day 
reimbursement loss for 111 nursing homes, for a total reduction of $4 
million in FY 2002.
    The current regulatory process provides facilities an opportunity 
to repair errors resulting from defective cost reports in the following 
manner: CMS publishes wage index data in the Federal Register as part 
of the May PPS proposed rule; this gives hospitals 60 days to comment 
and make corrections before the final rule establishing payment is 
published in August. The May proposed rule shows the new wage index 
numbers, but it does not indicate whether the rate will result in an 
increase or decrease from the previous year's payment unless the change 
is greater than 10%. In addition there is a mid-year corrections 
process for wage index data, but mid-year corrections are made only 
when the fiscal intermediary or CMS has miscalculated the data 
provided, not when incorrect data was supplied.
    In this case, the local nursing home association contacted the 
hospitals involved, which then submitted revised data to CMS. Effective 
October 1, 2001, the wage index was corrected, and the FY2002 rates 
were increased to reflect the adjusted wage index of 0.9856. The 
consultants' analysis also determined that the Maryland wage index was 
erroneous for FY2001-it was based on 1998 data. That year's error cost 
Maryland nursing homes approximately $3 million in FY2001. CMS has 
concurred with this estimate, but because the period for hospitals to 
submit cost report corrections had elapsed, CMS lacked the authority to 
adjust the nursing homes' payments.
Recommendations

    The Maryland experience demonstrates clearly the need for changes 
to the geographic classification system. I have several recommendations 
that I would encourage the Subcommittee to consider. First, Congress 
should urge CMS to develop a SNF-specific wage index as soon as 
possible. My Senate colleague, Russ Feingold, has introduced 
legislation, S. 1955, which I support. It requires the area wage 
adjustment for SNFs to be based on the wages of their employees.
    Second, CMS should be provided the flexibility to make mid-year 
corrections when errors are made by providers, as well as when they are 
made by CMS or the fiscal intermediary. Third, as a short-term remedy, 
CMS should be granted the authority to increase Baltimore nursing home 
rates in fiscal year 2003 by the amount that these facilities lost in 
FY2001 because of the hospitals' error.
    Madam Chairman and Members of the Subcommittee, I very much 
appreciate the chance to present this matter to you for your 
consideration, and I would welcome the opportunity to work with you on 
this issue.

                                 

    Mrs. THURMAN. Also, there is a request from Representative 
Stupak and Senator Crapo that would also like to have their 
testimony inserted into the record.
    Chairman JOHNSON. We will certainly accept that for the 
record.
    [The joint statement of Mr. Stupak and Mr. Crapo follow:]
 Joint Statement of the Hon. Bart Stupak, a Representative in Congress 
 from the State of Michigan, and the Hon. Mike Crapo, a United States 
                    Senator from the State of Idaho
    We applaud the Ways and Means Subcommittee on Health for addressing 
Medicare geographic cost adjusters, particularly Medicare geographic 
reclassification. The Medicare geographic reclassification process is a 
good and important opportunity for hospitals, particularly those in 
rural areas, to compete effectively for highly skilled clinical 
personnel. This highly skilled work force allows these hospitals to 
offer sophisticated health services in rural communities. It is our 
understanding that hundreds of rural hospitals across our Nation depend 
on the geographic reclassification process in order to recruit health 
professionals to their communities. However, it is not a perfect 
system. We join together to correct one particular flaw. Specifically, 
we recommend Congress immediately enact the Medicare Geographic 
Adjustment Fairness Act.
    (S. 659/H.R. 1375), legislation that would deem hospitals that have 
been geographically reclassified for purposes of their inpatient wage 
index to be reclassified for all provider based services. Congress has 
required the Centers for Medicare and Medicaid Services CMS to 
reimburse hospitals for most services provided to program beneficiaries 
using prospective payment systems (PPS). Hospital services that are 
reimbursed using PPS schemes include hospital inpatient, outpatient, 
skilled nursing, inpatient rehabilitation, long-term care, and home 
health services. In addition, we are informed CMS is also developing a 
PPS for inpatient psychiatric services. As you may know, under PPS, 
payment rates are geographically adjusted by a factor known as the 
``wage index,'' which is intended to reflect the cost of labor in the 
area in which the hospital is located.
    In order to improve the system to more accurately reflect the 
actual labor rates of certain rural hospitals, Congress approved within 
the Omnibus Budget Reconciliation Act of 1989 provisions creating the 
geographic reclassification process and the Medicare Geographic 
Reclassification Review Board (MGCRB). The MGCRB is charged with 
considering requests from hospitals that wish to reclassify from the 
area in which they are physically located to receive a wage index 
adjustment equal to that of a nearby area that experiences the same 
labor costs.
    However, when Congress established the reclassification opportunity 
in 1989, hospital inpatient services were the only services reimbursed 
under a PPS and the only services where payments were geographically 
adjusted using a wage index. Therefore, the wage index geographic 
reclassification opportunity applies only to hospital inpatient 
services even though, today, most hospital-based services are 
reimbursed under some form of a PPS and geographically adjusted using a 
wage index. CMS exercised discretion to extend a hospital's 
reclassified wage index to hospital outpatient services, but has not 
done so to reclassify wage indices for other hospital-based services. 
As such, a hospital that qualifies for wage index geographic 
reclassification from a rural area to an urban area will have the urban 
wage index used to adjust payments for hospital inpatient and 
outpatient services, but the rural wage index for other provider-based 
services, such as skilled nursing and inpatient rehabilitation 
services, even if these services are all provided in the same physical 
location.
    This has created a complicated and confusing system for rural 
hospitals in which, for example, Medicare pays one wage rate on one 
floor of a hospital and another wage rate on another floor. Since 
hospitals most often provide inpatient, outpatient, skilled nursing, 
inpatient rehabilitation, and other services in the same building, or 
on the same campus, it is logical to apply the same wage index to each 
of these services.
    To correct this disparity, we have introduced the Medicare 
Geographic Adjustment Fairness Act, which would require CMS to deem 
hospitals that have been geographically reclassified for purposes of 
their inpatient wage index to be considered reclassified for purposes 
of all other services that are provider-based and for which payments 
are geographically adjusted using a wage index. We are pleased to be 
joined in seeking this change by 15 of our colleagues in the Senate and 
19 of our colleagues in the House of Representatives. We thank the 
Subcommittee for the opportunity to submit this testimony and urge it 
to support and advance these changes. Thank you, Mr. Chairman

                                 

    Chairman JOHNSON. I do think that the goal of this hearing 
is to determine whether this is about individual hospitals and 
individual problems or whether this is about a system that is 
no longer operating effectively and fairly as it should.
    From your testimony and the testimony of our experts, and 
it will take considerable work thereafter, we hope to determine 
whether there are systems changes that are appropriate at this 
time. Mr. English.
    Mr. ENGLISH. One more? I apologize for interrupting. I ask 
unanimous consent to insert into the record Congresswoman 
Wilson's testimony. She will not be able to make it on the 
panel.
    Chairman JOHNSON. We are happy to do that. We are sorry 
that she cannot stay.
    [The statement of Ms. Wilson follows:]
Statement of the Hon. Heather Wilson, a Representative in Congress from 
                        the State of New Mexico
    I want to thank the Chairwoman for holding this hearing on equity 
in the Medicare system. Addressing the disparity of physician payments 
is one of my top priorities to improve health care in my state. I 
appreciate the Committee's willingness to examine this important issue.
    The current physician fee schedule for Medicare has several 
components, one of which is a geographic index supposedly to adjust for 
cost differences in different areas. While this makes sense for a 
physician's expenses for office rent and other costs to vary by region, 
the time spent evaluating and treating a patient should not depend on 
where a senior lives.
    I believe we should make the physician work component of the 
Medicare physician fee schedule fair. The physician work component 
measures the physician time, skill and intensity in providing a 
service. Two additional components account for practice expense and 
malpractice expense. While practice and malpractice reimbursement 
should reflect differences in geographic costs, significant differences 
in physician fees in a national market for health care providers 
directly creates shortages in some communities like New Mexico, and 
excesses in other communities because they pay more.
    The physician work geographic practice cost index (GPCI) for New 
Mexico is 0.973. Bringing New Mexico and other communities closer to a 
1.00 geographic adjuster whether through a floor or making all 
physician fees equal would translate into about a $2,592,203 annual 
increase in Medicare payments to New Mexico physicians. I worked to 
include a provision in the recently passed Medicare prescription drug 
bill to bring up lower paying states without hurting higher paid areas. 
Closing the gap between pay rates for this component will help New 
Mexico keep our physicians.
    More and more seniors are learning that their physician has moved 
to a neighboring state because salaries are dramatically higher. New 
Mexicans don't pay into Medicare based on where we live, and we should 
not be denied access to health care because of where we live. Seniors 
in rural areas or ``low cost areas'' have seen increasing numbers of 
doctors leave for higher paying areas. Keeping doctors in rural states 
is extremely difficult because of the pay gap driven by discriminatory 
Medicare reimbursement. The disparities are very large. In 2000, 
average Medicare payments per beneficiary in New Mexico were $3,726, 
while in Texas average payments were $6,539--70% more.
    The New Mexico medical community continues to be very concerned 
about geographic adjustments to the Medicare fee schedule which result 
in higher Medicare payments to the physicians in other states than in 
New Mexico. Our lower Medicare fees (32nd in the nation) contribute to 
other physician reimbursement problems and pose unique challenges for 
New Mexico in the national marketplace of medicine.
    New Mexico is especially affected by these payment disparities--
58.3% of our population is either uninsured, covered by Medicaid (18%) 
or Medicare (13%). Compare this to the rest of the country at 42.2%. 
Medicaid in New Mexico is paid at 95% of Medicare, and because most 
health plans establish their payments from Medicare levels, New Mexico 
falls lower for payments in the commercial area. These numbers all add 
up to low physician reimbursements in New Mexico. Data this year 
indicate the situation worsening with family practice doctors' income 
decreased from $125,000 to $110,000. Because reimbursements are lower, 
physician medical specialists like general surgeons, neurosurgeons, 
psychiatrists, endocrinologists and anesthesiologists are almost 
impossible to recruit. Physicians coming out of medical school and 
residency programs with high student loans cannot even consider New 
Mexico. We simply can't compete with other areas with much lower 
numbers of uninsured and where Medicare pays more.
    It isn't surprising that we often face physician shortages, 
especially in rural areas. But even in cities, patients often have a 
difficult time finding primary care physicians who can take new 
patients. Recently, Mike Stanford, president of First State Bank, 
called the New Mexico Medical Society in desperation after being unable 
to find a primary physician for himself and his family. Patients 
needing specialty services are delayed often by several months. I know 
of a emergency room physician who could not find neurosurgeon for his 
own mother. A top pediatric surgeon left New Mexico because he could 
not find an anesthesiologist on a regular basis.
    New Mexico Department of Health Secretary Alex Valdez is working 
with the New Mexico Medical Society to address what can be done on the 
state level to keep the doctors we have and get more here. But the 
medical profession is a national marketplace and New Mexico is not on a 
level playingfield. National intervention is needed.
    I urge my colleagues, especially those in rural states to carefully 
consider the implication of this discrimination on low paid areas and 
help me bring equity and access to the outdated Medicare system.

                                 

    Mr. STARK. Madam Chair, I assume that all Subcommittee 
Members will be able to submit statements for the record.
    Chairman JOHNSON. Of course, and also Subcommittee Members 
will be able to be part of the discussions about this. We 
certainly do want Subcommittee Members. That is why I inserted 
some of my own concerns to demonstrate that this is a concern 
for me as well as being Chairman.
    I am interested in how many Subcommittee Members have 
popped right up. So, we are going to hear from those off the 
Committee, but those on the Committee are going to have plenty 
of chance.
    Thank you all for being here. Thank you for your patience. 
Mr. Nussle?

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

    Mr. NUSSLE. Thank you, Madam Chairwoman and my colleagues 
from the Committee on Ways and Means. You are correct that 
those of us on the Committee on Ways and Means will have an 
opportunity to be heard on this subject for quite some time, 
and you will hear from us, particularly if the attitude is 
going to be that small adjustments to a flawed system is all we 
are going to be able to do, because I think that the phrase 
that comes to mind to me in listening to the opening statements 
is that ``If you always do what you always did you will always 
get what you always got.''
    That is the problem we have with Medicare right now, that 
we are continuing to make small minor adjustments to a system 
that was created in 1965. We wonder why GAO, within that 
context, comes back with data that suggests that within that 
context the system, which is flawed, may show that rural areas 
in particular are doing just fine.
    If that's the case, I mean I have very respectful testimony 
here that I would like to put into the record, but I can't 
believe that the opening statement is that rural areas are just 
doing fine, according to GAO. I don't know who GAO is talking 
to.
    We can't retain physicians. We have hospitals that are 
below the margin. I don't know what you are talking about, and 
I don't know what GAO is talking about. I came in here ready to 
give some very respectful testimony on what we need to do to 
adjust it, but if the testimony here today is that GAO is 
operating with 2-year-old data, which is what this is, is 
coming in here and say, oh, don't worry about it; rural areas 
are doing just fine.
    Tell that to the doctors that are leaving and that we can't 
retain. Tell that to the new graduates that aren't willing to 
look in rural areas to work. They are going to the urban areas. 
They are not going to the rural areas.
    So, if the word out of GAO is that your reimbursement must 
just be fine, the market is operating with their feet. People 
are voting with their feet and telling us very clearly that 
something is wrong.
    So, okay, if GAO says rural areas are doing just fine, I 
guess that is GAO's opinion based on 2-year-old flawed data. I 
think the marketplace is demonstrating this. Let me be clear, 
especially to Mr. Stark, we will take your deal, one MSA.
    We pay the same taxes out in Iowa as you do in California, 
but you have a better reimbursement. We will take your deal. 
Your hospitals seem to be doing just fine. Saint Somebody's, by 
the way, isn't just serving some no-name town out there. We are 
talking about people's lives.
    If the hospital closes, the town closes, because there is 
only one service provider in many instances for as far as 30 or 
40 miles. So, if the hospital in my town of Manchester decides 
because of its geographic hospital wage index it can't make it 
and pay its bills, that means not only is Medicare 
disadvantaged because it can't provide services to those folks, 
but it means the next obstetrician case, the next baby that 
needs to be delivered in that town, has the same disadvantage.
    I will go back to my testimony, but I have to say that when 
you say, ``We will take it out of the hide of other hospitals, 
that is the reason we are here.'' When you say, ``We will take 
it out of the hide of other hospitals and that is the only way 
you can fix it,'' that is really the crux of the whole debate 
here. Since 1965 this has been a zero-sum game and that the 
only way for me to have fairness in my systems is for me to 
take it from your system, that therein, I think, lies the 
problem. We have to figure out a way to get away from it.
    I understand because you have shown me then, 2-year-old 
data saying some hospital in my district is making ends meet. 
Okay, that is really nice. I have to tell you, that is not the 
way it is in the reality of the world that we operate in.
    So, you can quote statistics to me, but when we have, well, 
you can laugh, but this is a problem we are going to deal with, 
Mr. Stark, we are going to deal with it, because damn it, we 
pay the same taxes as your folks pay in California. We are not 
getting the same services and our doctors are not staying and 
our hospitals are not making margins.
    As long as you think that is okay, we have a problem.
    Mr. STARK. There is a 20 margin on Medicare in Manchester.
    Mr. NUSSLE. Where?
    Mr. STARK. In Manchester. Delaware Country Memorial 
Hospital, Manchester.
    Mr. NUSSLE. What year?
    Mr. STARK. In 1999.
    Mr. NUSSLE. Oh, well how many years ago has that been? That 
is 3-year-old data. So, I will take back my time, and I would 
be glad to submit my testimony for the record on both hospitals 
and doctors. We have a problem so long as you think we are 
living back in 1965. It is old data. It is an old formula.
    If you always do what you always did, you will always get 
what you always got, and we will have a tax rebellion about 
this at some point if we don't figure out a way to fix it.
    Now, I am willing to be part of the solution, but as long 
as you think this is about Saint Somebody's in some town that 
doesn't matter--which is the crux of this debate--there are 
people who think there are too many hospitals open in this 
country. I never hear that about California. I hear it about 
Iowa, and I hear it about other rural areas.
    As long as that is the attitude of some Members of this 
Committee, we are going to have a continuing debate and 
disagreement about how we are going to get our arms around 
this.
    Mr. STARK. I look forward to that. You will lose.
    Mr. NUSSLE. Hey, trust me, we have been losing now for 35 
years, so in an urban House of Representatives written by an 
urban body at that time, I have no doubt we are going to 
continue to lose. We will be heard.
    I appreciate the gentlelady holding this first ever hearing 
on this topic.
    Mr. STARK. Under the Republicans.
    Mr. NUSSLE. It was never held under your watch, I will tell 
you that much.
    Mr. STARK. Oh, it was indeed.
    [The prepared statement of Mr. Nussle follows:]
Statement of the Hon. Jim Nussle, a Representative in Congress from the 
                             State of Iowa
    Chairwoman Johnson, Ranking member Stark, I'm pleased to have been 
invited to testify before the Health Subcommittee about the impact of 
Medicare's Geographic Cost Adjustors on my home state of Iowa. 
Maintaining a high quality of health care in rural communities such as 
my hometown of Manchester has been one of my top priorities since being 
elected to Congress. In fact, just last year, I had the pleasure of 
hosting the Chairwoman of the Health Subcommittee, Mrs. Johnson, at 
several meetings with hospital administrators, physicians, and other 
health care providers in Dubuque.
    The erroneous assumption that providing quality health care in 
rural states costs less than those in urban areas has persisted since 
the Medicare program was initiated in 1965. As you probably know, Iowa 
ranks 8th in overall quality of health care delivery while it remains 
50th in overall Medicare reimbursement. The stability of our healthcare 
system across the state is threatened.
    While I applaud the steps the House has taken to improve these 
inequities in the Medicare Modernization and Prescription Drug Act by 
including both a separate title with a number of rural health care 
improvements as well as an amendment I offered providing relief to 
those states with hospitals most in need, clearly more action is needed 
to keep health care providers from leaving small, rural communities. 
Among the biggest contributors to these inequities faced by rural 
health care providers are the geographic adjusters on both hospital and 
physician wages.
    While the geographic adjusters for both physicians and hospitals 
are in essence supposed to provide an accurate reflection of area wages 
for particular markets and communities, in reality they have hampered 
the urgent efforts of small communities to retain and recruit health 
care personnel to serve in rural communities. The most pronounced 
examples of the inequities in geographic adjusters are the hospital 
wage index and the geographic practice cost index (GPCI).
                          Hospital Wage Index
    The area wage index is a scale used to adjust Medicare inpatient 
and outpatient payments to account for varying wage rates paid by 
hospitals for workers in difference market areas across the country. 
Hospitals in areas with a higher wage index receive higher Medicare 
payments than those with a lower wage index for the same services.
    The hospital wage index is the single greatest factor promoting 
geographic Medicare payment differences between urban areas and rural 
areas such as Iowa because it makes inaccurate assumptions about cost 
of living differences. I believe the current index itself is flawed 
because the inpatient wage index often contains wage and salary data 
relating to ``overhead'' for non-patient related healthcare personnel. 
The effect of this flaw dilutes the facility's average hourly wage 
because of the portion of total salaries attributed to lower paid 
employees. This phenomenon is particularly true in Iowa and other rural 
states where it is fairly common for a rural hospital to operate 
additional facilities such as nursing homes.
    Also, there is an assumption that Iowa hospitals can and do pay 
workers less. But in reality, Iowa hospitals are handicapped by the 
Medicare wage index adjustment because they must compete in a regional, 
interstate market for labor in what is a growing work force crisis. In 
my district, for example, hospitals in Osage, Cresco, and Decorah with 
a Medicare wage index of.8147 compete in the same labor market as 
Rochester, Minnesota, which has a wage index well above the national 
average of 1.1462. Hospitals in these rural areas simply do not have 
the resources to compete with larger urban areas in surrounding areas 
and states.
    It is critical that the hospital wage index be addressed to bring 
equity to Iowa and other poorly reimbursed states. Currently, the Iowa 
Hospital Association reports that the percentage of Iowa's hospitals 
with negative Medicare margins is growing every year. One promising 
idea proposed in H.R. 1609, of which I am a cosponsor, is the 
establishment of a wage index ``floor'' of.925. By establishing such a 
floor, significant relief could be provided to Iowa's under-compensated 
hospitals.
         Physician Work Component of the Physician Fee Schedule
    In a recent news article, Ed O'Neill, a surgeon in Dubuque, Iowa, 
stated correctly that, ``Recruitment and Retention of quality 
physicians is made that much harder by sub-par reimbursement.'' I 
wholeheartedly agree.
    The implementation of the Resource Based Relative Value Scale 
(RBRVS) was the first major change to Medicare Part B since the 
program's inception. This new payment system was based on three 
geographic practice cost indexes (GPCI's) meant to narrow the 
geographic differences among localities: physician work, practice 
expense, and professional liability insurance costs. In reality, the 
GPCI's have had the opposite effect. A particular troubling component 
is the Centers for Medicare and Medicaid Services definition of 
physician work as the amount of time, intensity, and skill, a physician 
provides in a patient visit. Clearly, physicians in Iowa provide the 
same time, intensity, and skill of those in all areas of the country, 
but yet Iowa ranks 81st out of 89 payment localities based on physician 
work component of the geographic practice cost index (Iowa-.959). Why 
should there be any difference among localities for physician's work at 
all? Iowa physicians provide high quality health care delivery and this 
inequity must be fixed.
    Similar to the wage index floor for hospitals, an idea that has 
emerged in the House is establishing a floor for the physician work 
component of this system. I have cosponsored H.R. 3569, the REPAIR Act, 
which would phase in a floor of 1.000 over five years so that rural 
states like Iowa can continue to recruit and retain physicians and so 
that they can continue to serve Medicare patients.
                                Summary
    I appreciate the opportunity to testify before the Subcommittee 
today and again applaud the efforts of the Committee and the House in 
passage of the Medicare Modernization and Prescription Drug Act (H.R. 
4954). This bill provides significant measures to eliminate the 
inequities that currently exist, but clearly more must be done. I look 
forward to working with the Chairwoman and the committee to eliminate 
the current discrimination that rural states face under the geographic 
adjustment systems for hospitals and physicians.

                                 

    Chairman JOHNSON. Mrs. Roukema. Hon. Marge Roukema of New 
Jersey.

   STATEMENT OF THE HON. MARGE ROUKEMA, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF NEW JERSEY

    Mrs. ROUKEMA. Thank you. Thank you very much, Madam Chair. 
I would like to say I recognize a lot of what you said. You 
know, Connecticut and New Jersey have a similar, if not 
identical, problem with respect to the Medicare wage index 
adjustment.
    I want to associate myself with many of your remarks. This 
is a well-timed hearing. I certainly hope we are going to move 
to make a correction as soon as possible. I might note that the 
Supplemental Appropriations Conference Report that we are going 
to be voting on today includes, as a result of what happened 
with a couple of Members of the New York delegation, language 
expressing in the strongest terms a request that the 
authorizing Committee of jurisdiction, the House Committee on 
Ways and Means, develop legislation as soon as possible to 
address the geographic inequities in Medicare payments.
    This issue affects not only my district, in Northern New 
Jersey and the districts in Southern New Jersey that relate to 
Philadelphia, but also Connecticut and some of Pennsylvania.
    Chairman JOHNSON. As we are going to see in these hearings, 
it is across the country.
    Mrs. ROUKEMA. Yes, but on a regional basis--I am really 
speaking for, that whole New York-Philadelphia region, as you, 
Madam Chair have already discussed. I want to point out to you 
that my district, which is in Northern New Jersey, is a stone's 
throw from the New York City financial markets. Whether it is 
the securities industry or the banking industry, we are only a 
stone's throw, and we have an enormous number of people who are 
commuters to that area.
    It is really a work force region where our hospitals are 
competing with the New York City area for employees. New York 
City hospitals are literally across the river, a stone's throw, 
from our own hospitals and the personnel are going to the New 
York City hospitals. This continued dislocation of workers will 
exacerbate New Jersey's nursing shortage problems and our 
vacancy rate of registered nurses, which is now 10 percent, 
will easily be estimated to increase to 18 percent within the 
next 5 years.
    We really have a crisis with respect to getting healthcare 
employees to New Jersey and getting patients the right kind of 
high quality care. The New Jersey hospital workforce shortage 
is directly attributable to the Medicare wage index. I would 
like to point out that the New Jersey delegation is, on a 
bipartisan basis, strongly supportive of my testimony here 
today and the need to fix Medicare adjustments and payments to 
hospitals. I would like to note that the New Jersey wage index 
is lower than the neighboring areas, even though it must 
compete with the hospitals in nearby localities for labor. This 
results in a Catch-22 for our hospitals.
    Going back to the Chair's reference to the GAO study and 
the report that they are going to be hopefully accelerating, I 
don't know how far into the future that will go. I believe the 
evidence is very much there now to deal with the MSA problem on 
a regional basis. I would think evidence is also there for the 
rural hospitals. So, I don't know that I want to be put in the 
position of having to wait into the indefinite future for the 
GAO report when I think that the evidence is there now and that 
we can act upon it now.
    What the Chairwoman has said pretty much makes the case. We 
have to address this issue immediately. It is not just about 
people's wages, but it is about the quality of care in our 
hospitals. We must get workers to stay in New Jersey hospitals 
by addressing the nursing shortage and other personnel 
shortages. The problem is accelerating and it is getting far, 
far worse and really destroying the quality of care.
    [The prepared statement of Mrs. Roukema follows:]
Statement of the Hon. Marge Roukema, a Representative in Congress from 
                        the State of New Jersey
    Thank you for the opportunity to speak today about an issue that 
has a tremendous impact on healthcare in New Jersey--the Medicare wage 
index adjustment. I commend you for convening a hearing on this 
important subject consistent with the request made by conferees in the 
Supplemental Appropriations Conference Report that we will be voting on 
today. The report reads: ``the conferees express in the strongest terms 
their request that the authorizing committees of jurisdiction, the 
Senate Finance Committee and House Ways and Means Committee, develop 
legislation as soon as possible to address the geographic inequities 
that exist nationwide in Medicare reimbursements because of the wage 
indices used.''
    We must find ways to provide fiscal relief to our hospitals. New 
Jersey hospitals are in a terrible financial condition and it threatens 
access to care for the state's 8 million residents.
    I represent the fifth district of New Jersey, which consists of 
Bergen, Passaic, Sussex, and Warren counties in northern New Jersey. My 
district has become known as a bedroom community for thousands of men 
and women who work every day in the most important financial district 
on the planet--in New York City. Indeed, my district is literally a 
stone's throw away from New York City, the largest city in the United 
States.
    Northern New Jersey and New York City constitute one large, 
integrated labor market. In 1998, 300,000 New Jersey residents paid 
almost $1.3 billion in New York income taxes. Commuting patterns 
between the two areas illustrate the high level of integration. 
Everyday, the George Washington Bridge carries 155,000 cars eastbound 
into New York City. The PATH train averages 180,000 daily riders on 
weekdays.
    In total, over 300,000 commuters enter New York City every day from 
New Jersey. The bottom line is that the only thing separating New 
Jersey from Manhattan is a river. There is perhaps no clearer 
illustration of the integration of New York City and northern New 
Jersey than the response to the Sept. 11 attacks. Nearly 5,000 patients 
crossed the Hudson River that day for treatment at New Jersey 
hospitals.
    Although the entire nation is facing a health care workforce 
shortage, New Jersey's proximity to New York City has caused its 
problems to be particularly severe. Industry analysts say that a 10 
percent vacancy rate of registered nurses constitutes a severe 
shortage. It is projected that New Jersey will have a vacancy rate of 
18 percent by 2006. This is a crisis and can be directly attributed to 
the inequitable Medicare wage index. New Jersey hospitals receive lower 
levels of reimbursement from Medicare than New York City hospitals. New 
Jersey hospitals simply cannot continue to compete with the nation's 
largest city while facing the strains of an unprecedented workforce 
shortage. More than 40 percent of New Jersey hospitals ended 2000 in 
the red, and with $21 billion looming budget cuts already set into law, 
the financial condition of hospitals will only become bleaker.
    As you are well aware, Medicare adjusts its payments to hospitals 
using an adjustment factor, called a wage index, to account for labor 
costs. New Jersey's wage index is lower than neighboring areas, even 
though it must compete with hospitals in these nearby localities for 
labor.
    Caught in a catch-22, New Jersey hospitals cannot afford to pay its 
employees more money to get a higher wage adjustment. Hospitals are 
losing their ability to attract physicians and nurses and other 
caregivers since they can work in higher paying hospitals in New York 
City.
    The New Jersey delegation has fought long and hard for increased, 
fair Medicare reimbursement levels. We have been working with the 
Office of Management and Budget since the 1980s to recognize the 
similar labor costs between the New York City MSA and the MSAs in the 
northern part of New Jersey.
    I would like to call the Committee's attention to the findings of 
the Metropolitan Area Standards Review Committee (MASRC), which was 
chartered in the fall of 1998 by the Office of Management and Budget 
(OMB) to examine the current metropolitan area standards and 
alternative approaches to defining those areas. The group recognized, 
in findings that were published in the October 1999 Federal Register, 
that the settlement patterns of the mid-Atlantic region constitute 
larger entities, suggesting that a larger ``megapolitan'' area for New 
York and New Jersey exists.
    We were pleased that H.R. 4954, the Medicare Modernization and 
Prescription Drug Act of 2002 (passed the House on June 28, 2002), 
included the establishment of a GAO study on improvements that can be 
made in the measurement of regional differences in hospital wages.
    The study would specifically examine the use of metropolitan 
statistical areas for purposes of computing and applying the wage index 
and whether the boundaries of such areas accurately reflect local labor 
markets. The study would also examine whether regional inequities are 
created as a result of infrequent updates of such boundaries. This is a 
step in the right direction and I commend the leadership for working 
with us to pursue this issue that is so critical for New Jersey 
hospitals. However, I believe that current evidence leaves no question 
that the current metropolitan area standards distort local labor 
markets and result in gross inequities in Medicare reimbursements.
    New Jersey hospitals deserve a wage index equitable to New York 
City. According to statistics provided by the New Jersey Hospital 
Association, the most recent Medicare data shows that the hospitals in 
my district have, on average, the lowest Medicare inpatient margins in 
the state. Let me offer you one example from a hospital located in my 
district. The Valley Hospital is a 474-bed acute care facility in 
Ridgewood, New Jersey. Over 50 percent of Valley's volume is Medicare. 
Like the other hospitals in my district, Valley only receives a 16 to 
18 cent add-on to each labor related Medicare dollar as a wage index 
adjustment. Neighboring hospitals located in the New York City 
Metropolitan Statistical Area (MSA), some of which are located just a 
few miles away, receive a 44-cent add-on. This disparity makes no 
sense!
    Hospitals in New Jersey are in their worst financial condition in 
over a decade. Because of the Medicare wage index add-on that is over 
two times higher than that of northern New Jersey hospitals, nearby 
hospitals located in New York City can afford to pay their health care 
professionals more. New Jersey cannot.
    Let me remind you that behind this entire debate about ``wage 
indexes'' and ``geographic classifications'' is one simple fact. This 
is about patients. It is about the millions of New Jerseyans who are 
threatened by a struggling hospital system. Patient care will be 
compromised if we don't address this crisis immediately.
    Additionally, our country is facing a situation today that we are 
totally unfamiliar with. We are battling terrorists who can strike 
against our country at any time and in any manner. Now more than ever, 
it is essential that our hospitals are capable of fully staffing their 
facilities. Future terrorist attacks would be even more devastating if 
our hospitals are not equipped with qualified staff to care for 
patients. This is a situation that must be addressed immediately. The 
safety of the residents of New Jersey is at stake.
    I urge you to keep New Jersey patients in mind when examining the 
inequity in Medicare payment add-ons between New York City and northern 
New Jersey.
[GRAPHIC] [TIFF OMITTED] 83922A.001

                                 

    Chairman JOHNSON. I thank the gentle lady. Congressman 
Kanjorski.

 STATEMENT OF THE HON. PAUL E. KANJORSKI, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. KANJORSKI. I believe that I may have an exceptional 
case, I doubt it, but those areas of the country which have an 
inordinate amount of senior citizens such as northeastern 
Pennsylvania, when they get stuck between MSAs, whether it is 
New York, Philadelphia, Harrisburg, Baltimore, and that area, 
which is the area that I represent, it can be catastrophic.
    Now, I believe it goes back to the fundamental idea of how 
you set this whole system up originally. It may have worked, 
but it certainly didn't have attention and repairs over the 
years because what we really did when we set the system up is 
we penalized frugality and efficiency. We rewarded inefficiency 
and extravagance.
    You can see that up and down the Medicare system. As Mr. 
Stark pointed out, some hospitals make a profit on Medicare 
payments, and that is very true. I have watched across the 
country areas like Philadelphia, New York, Miami, they actually 
show a profit on the Medicare payment. Twelve hospitals of the 
fifteen that were in the fix of the supplemental appropriation 
are in my district. Two of the twelve face immediate 
bankruptcy. They have exhausted their endowment programs over 
the last 3 or 4 years.
    When you go to the appropriate executive departments they 
say, oh, well, we have a formula, and we analyze this, and we 
have an appeal. That is great. Three years from now they will 
change the rate. Three years from now at least 2 of these 12 
hospitals will be gone and closed down. We are talking about 
billion dollar institutions.
    I am still working on what we do with a $1-billion hospital 
to close it down. We probably could turn it into a chicken coop 
or something, but I'm not sure what else we could use it for. 
Certainly when it closes down for 2 or 3 years it can't be 
reactivated. It is a dead piece of capital sitting out there.
    So, we are in dire need in northeastern Pennsylvania of a 
fix, I don't care whether it is an appropriation bill. I don't 
know if it is overall too complex for this Committee to adjust 
the whole country. All I am saying is if we don't rush funds to 
these hospitals in an immediate period, they can't meet their 
bottom line.
    The major hospital that I represent loses $2,000 for every 
senior citizen that comes in the door. As the administrator 
tells me, they should issue a check and a taxi ride to 
Philadelphia to each senior citizen who seeks care because that 
is the only way they could survive. Unfortunately, it is very 
difficult for families to visit people 100 miles away who are 
getting this type of treatment. Where there would be a profit 
in Philadelphia treating them; there is a $2,000 loss in Wilkes 
Barre or Scranton.
    Now, any system or any government that supports this type 
of inadequacy and inequity deserves to be censured and the 
Congress deserves to be censured in turning it around. We 
exacerbate the problem because every year when we feel a little 
guilty, we up the reimbursement payment by a percentage. I 
think it was 3 percent last year and everybody was gloriously 
happy.
    All you did was spread the differential between the lower 
paid hospitals and the higher paid hospitals, 3 percent greater 
because the 3 percent is on the base. When we were losing money 
on the base and we get 3 percent, other hospitals in other 
areas are making money on the base and they get 3 percent. They 
are making much more profit at an extended rate.
    Now, we have to go back and literally look at this problem 
of what kind of delivery system we want for health care for 
this country, how close by we want it, how far do people have 
to travel?
    Now, quite frankly, if I could convince all my constituents 
to be willing to travel 60 miles we can close the 12 hospitals 
and really work out very well. Unfortunately, those people with 
strokes, heart attacks, and other severe illnesses won't live 
that long. That has a salvation to it, because just think, we 
may help cure some of the Social Security payment problems. We 
won't really have to fix Social Security if we kill them off 
fast enough by not treating them. That may be the humorous 
response to the thing.
    I think the response to the problem is being honest. In my 
hospitals the nurses and the doctors can travel 16 more miles 
and double their incomes, and they are doing that. I tend to 
agree with my friend Mr. Nussle, and I don't often agree with 
my friend from Iowa, but he is absolutely right. Mr. Stark is 
right. Mr. Stark, maybe you and the Chairman should come to our 
districts and see the problem first hand rather than listening 
to the GAO and the department down here and thinking everything 
is rosy, because I'm telling you that I have 12 hospitals that 
are facing bankruptcy. The other exacerbated problem that I 
want to bring to the attention of the Committee, you know this 
works well if you are in the average county and your patient 
rate is only 30 percent on Medicare, but how about when your 
patient rate is 76 percent Medicare and you are losing $2,000 
per person? You are going broke very quickly. Where do we make 
it up? Oh, don't worry, we make it up on the private side, the 
24 percent. So, our rates of medical coverage for private 
industry are excessive in the State of Pennsylvania and as a 
result if industry is smart they are not going to move to 
northeastern Pennsylvania. They are going to move to 
Philadelphia where the insurance rate is much lower on the 
private side because so much money is coming into Philadelphia 
that they make a profit on Medicare.
    That is exacerbating a problem of stupidity in my view. 
Now, I know that this Committee pays attention to this and I 
know that we always say well, it is a zero-sum game, so we are 
stealing from Paul to pay Peter. That may be true, but I do 
have at least a better part than half of the Committee. You 
know, there was a way we could fix this. We could put more 
money into Medicare. We could put back the money we stole in 
the 1997 Act.
    I say to Mr. Nussle in fairness and in defense of my side 
of the Committee there, maybe we should re-examine the income 
tax cut, if we don't have the money that we made. We are not 
going to squeeze any money out of stones. We are jerking our 
constituents and the American people around.
    You know what, I want to tell you something, people from 
California, people from Connecticut, people from New York and 
people from all over this country travel through my district. I 
have four interstate highway systems. You had better hope you 
don't have a heart attack or a stroke when you are coming 
across northeastern Pennsylvania, because you may not be able 
to last long enough to get to that higher reimbursement MSA 
that can give you the type of services you need.
    So, it is a question of fairness and there is no reason in 
the world why my constituents have to have a lesser delivery 
system of Medicare, hospitalization, and treatment than any 
other area of this country. They, too, like Mr. Nussle's 
constituents pay the same amount of taxes for this.
    So, let's not start getting this war between the urban 
areas and the rural areas. Incidentally, what I may say, my 
area is neither urban or rural; it is ex-urban. It is just 
small enough to be a densely populated area, but it is not 
rural. Our hospitals are not 100 bed hospitals. They are 500 
and 1,000 bed hospitals, but they are not in New York, and they 
are not in Philadelphia. They are in a limited area of limited 
concentration of population on the east coast.
    Mr. Stark, it is your idea, if you want to make an MSA, let 
all of Pennsylvania be in one MSA, New York in one MSA. Do you 
want to do it from New York to Los Angeles? I am for that. It 
is the only way under the present system that people who live 
in northeastern Pennsylvania are going to get adequate and fair 
care and treatment from the Federal Government.
    We can go back and play formulas. They will never be 
equitable. That is what formulas are, a way of telling people 
they are equitable when in fact we all know they are not 
equitable.
    One thing, we are short of money. We don't have a 
sufficient amount. We can't argue over the same pie. There 
isn't anybody in this world, and if they doubt me, talk to Mr. 
English. He knows what Pennsylvania and northeastern 
Pennsylvania and northwestern Pennsylvania are like.
    We tried to work that fix in the supplemental appropriation 
with Mr. English and Mr. Sherwood's help. We failed. It is 
humorous to a lot of people that they thought it was a big fix, 
and I think it even came down that it was a political fix.
    It wasn't any political fix. As many of my constituents 
were in that fix as any other Member of Congress's 
constituents. The fact of the matter is that more of the 
hospitals were in my district because I represented the 
populated portion of that district and they are not going to 
survive in the future.
    So, Madam Chairman, thank you for having me here. Mr. 
Stark, I know you are an expert scholar in this area, but I 
think you need additional input. Don't rely on everything you 
read in the GAO. You have an open invitation of mine to take 
you to northeastern Pennsylvania to see first hand what it is 
like to have an underserved Medicare area in the country. Thank 
you.
    [The prepared statement of Mr. Kanjorski follows:]
 Statement of the Hon. Paul E. Kanjorski, a Representative in Congress 
                     from the State of Pennsylvania
    Madame Chair, Ranking Member Stark and Members of the Committee, I 
appreciate the opportunity to come before you today to testify about 
geographic cost adjustors used for Medicare payments and the need for 
payment revision in the current system. These issues are of great 
concern and importance to the people of my Congressional district in 
Northeastern and Central Pennsylvania.
    While almost no hospital in the nation has been left unaffected by 
the cost pressures brought about by the passage of the Balanced Budget 
Act of 1997, hospitals in my district face a unique set of problems 
because of the demographic composition of the area and its geographic 
location. First, the Metropolitan Statistical Area, or MSA, that makes 
up most of my district has an extremely high number of senior citizens. 
Of nearly 600,000 residents in the Scranton/Wilkes-Barre/Hazleton MSA, 
more than 18% are over the age of 65. The population of my district is 
old, relatively low-income and located close enough to areas in which 
Medicare reimbursement rates are much higher that skilled personnel are 
recruited away for higher salaries. Because we have such a high 
concentration of senior citizens, our hospitals are therefore much more 
dependent on Medicare reimbursements than most hospitals in other parts 
of the country. The Medicare patient utilization rate is well over 50% 
for most hospitals and as high as 76% in one hospital. Unfortunately, 
hospital officials have told me that the current reimbursement rate 
falls far short of covering the cost of treating senior citizens, so 
that hospitals in our region lose money caring for seniors.
    Medicare reimbursements to hospitals are based largely on the wage 
index for each MSA. The Scranton/Wilkes-Barre/Hazleton MSA has a wage 
index so low that hospitals are reimbursed at the rural wage index. 
This classification sets in motion a vicious cycle, however: Medicare 
reimbursements are lower for rural areas than for urban areas, meaning 
that hospitals in my district get less money back from Medicare and 
must consequently pay their employees less than those in urban areas. 
Because employee wages are lower, these hospitals continue to be 
classified under a lower paying rural wage index. Even as hospitals are 
forced to raise wages to keep qualified nurses and other personnel, the 
three-year lag in adjusting the reimbursement rate costs them hundreds 
of thousands of dollars. The hospitals are caught in this vicious cycle 
and cannot catch up. Meanwhile, hospitals in parts of the state that 
are just adjacent to my district continue to be classified under the 
higher paying wage index, and are consequently able to offer higher 
wages to their employees. A nurse working at a hospital in Hazleton, 
for example, has to drive just sixteen miles to work instead at a 
hospital in the Allentown MSA, which has a reimbursement rate 13% 
higher than that in my district.
    This introduces the second problem caused by inadequate 
reimbursement rates. The health care industry is currently experiencing 
a nursing shortage. There are shortages in other areas of skilled 
health care labor as well. These deficiencies combine to create a 
highly competitive market among health care employers. In this 
environment, it has become increasingly difficult for hospitals in 
Northeastern and Central Pennsylvania to recruit and retain skilled 
health care professionals. Because these hospitals are receiving 
significantly lower revenues in the form of Medicare reimbursement 
payments than hospitals in surrounding counties, they have experienced 
serious labor disputes and poor morale.
    Finally, this problem of proximity to areas under the higher wage 
index illustrates another concern. Although hospitals in my district 
receive Medicare payments under the lower rural wage index and thus 
take in less revenue than neighboring hospitals, their costs remain 
virtually the same as those of hospitals that are classified under the 
higher urban wage index. Therefore, these hospitals in my district 
experience an even greater financial burden than hospitals in general 
are experiencing.
    Working with Ways and Means Committee staff two years ago, I 
developed legislation that would have specifically addressed the 
problems of economically distressed hospitals, which serve a 
disproportionately high number of senior citizens and receive a 
relatively low reimbursement rate from Medicare. Under my Essential 
Hospital Preservation Act (HR 4622 in the 106th Congress), hospitals 
which met a number of criteria, including a greater than 40% Medicare 
patient load, would be eligible for special funds as determined by the 
Department of Health and Human Services in order to develop an economic 
recovery plan. While I realize that this approach may not be everyone's 
ideal, I submit my bill as a starting point for a discussion on finding 
a way to address the unique problems of a small number of areas of the 
country which have a high proportion of senior citizens, a low 
reimbursement rate and a proximity to MSAs with more generously 
reimbursed hospitals.
    I recognize that this is a highly complex and politically 
treacherous issue and I commend the subcommittee for addressing it. I 
look forward to working with you to find equity in a system that has 
for too long been greatly inequitable. Thank you again, Madame Chair, 
Ranking Member Stark and Members of the committee, for giving me the 
opportunity to present these facts to you today.

                                 

    Chairman JOHNSON. Thank you, Mr. Kanjorski. Mr. Visclosky?

 STATEMENT OF THE HON. PETER J. VISCLOSKY, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF INDIANA

    Mr. VISCLOSKY. Madam Chairman, thank you very much for 
holding this hearing. I would like to use my time to talk about 
three concepts.
    The first is the concept of urgency. I really appreciate 
the fact that you and Mr. Stark and the Members of the 
Subcommittee are holding this hearing today. I would urge you 
to come to a judicious resolution of this issue and act this 
year.
    The problem came to my attention in 1999 because of the 
vagaries of the formulas that has been put in place. Subsequent 
to that, twice using Mr. Stark's term of a ``rifle shot,'' in 
conjunction with Senators Lugar and Bayh of the State of 
Indiana, we were able to help eight hospitals in Lake County, 
Indiana, as far as maintaining a classification.
    We have never been successful since 1999 in having Porter 
Memorial Hospital, which is in an adjoining country, classified 
at all. This is a process that has been going for 3\1/2\ years.
    Those nine institutions in those two counties are in one 
MSA, but they are treated differently within that one unit, 
which then is contiguous to the City of Chicago.
    So, my second point would be formula, that is today being 
used despite people's best of intentions and best work product 
has become incredibly arbitrary. When you look at all of the 
standards that need to be met, I am struck that in the case of 
Porter Memorial they meet the cost factor as far as the rate 
because you cannot tell where from downtown Loop Chicago and 
you leave, to where the suburbs end by the time you get to 
Valparaiso, Indiana, and you will have also gone past those 
eight other hospitals in Lake County. The same holds true for 
the eight hospitals in Lake County, as far as their wage rate 
and comparability.
    Yet there are now today under that formula, problems. I 
think when you have a formula where that is so arbitrary, it 
does need to be fixed.
    Mrs. Roukema talked about the language that is in the 
supplemental that is being debated as we talk, at this moment. 
I was a conferee last Thursday on the Committee on 
Appropriations. The fact is, as I think most people know, in 
the rule for the Supplemental in the House you had six counties 
in the State of Pennsylvania, a county in New York, and a 
county in the State of Ohio that were going to be dealt with in 
a rifle-shot formula, and I am not necessarily opposed to that 
because I have used it myself twice.
    During the debate, Mr. Harkin from Iowa said, ``If you are 
going to fix the problem for Pennsylvania, we need to fix it 
for Iowa.''
    A Member from the State of Washington said, ``Well, we have 
institutions in Washington.''
    I piped up about my nine hospitals. I believe the Committee 
did the right thing and said, ``This isn't a question of money 
or the appropriators; this is a systematic failure that needs 
to be corrected by those who have control over the 
authorization process.''
    So, I finally would suggest that the third concept I want 
to talk about is we do have to approach this in a fair fashion. 
I don't think the time is to blame anyone, to point and turn 
anyone against each other, or talk about zero-sum gains. We 
have people whose life and death is on the line and a system 
that is arbitrary.
    We are all sent here, collectively and in a bipartisan 
fashion, to make the world a little bit better. If by the end 
of this year all of you join together and make this formula 
more fair and help these institutions financially so they could 
treat people and save their lives, you would in fact be doing 
God's work, and that is what I ask you to do.
    [The prepared statement of Mr. Visclosky follows:]
Statement of the Hon. Peter J. Visclosky, a Representative in Congress 
                       from the State of Indiana
    Ms. Chairwoman, Mr. Stark, members of the Subcommittee, I thank you 
for providing me the opportunity to testify before you today, and I 
thank the Subcommittee for its previous help in reclassifying Lake 
County, Indiana under the Chicago Metropolitan Statistical Area for 
Medicare reimbursement purposes.
     As you may know, I have been working with two of the counties in 
my district to deal with the burdens they face because of the 
inequities set up under the Omnibus Budget Reconciliation Act of 1989. 
Both Lake and Porter Counties need to be reclassified under the current 
Medicare reimbursement system or the system needs to be changed.
    These counties are significant because of their size and their 
current economic turmoil. Lake County is a metropolis with over 485,000 
residents. It is comprised of a racially and ethnically diverse 
community, with over a quarter of the population being African-
American. It also includes three steel mills. Porter County, in turn, 
has close to 150,000 residents and two steel mills, one of which, 
Bethlehem Steel, recently filed for bankruptcy.
    It is not surprising that Lake and Porter Counties produce more 
steel than any other congressional district in the United States; 
making steel is the economic backbone of Northwest Indiana. However, 
the steel industry has been threatened by the surge of illegally dumped 
foreign steel, and has been fighting to stay viable for the past four 
years. As jobs in traditional manufacturing industries in the State of 
Indiana continue to be threatened, the local tax burden has increased 
along with the need for Medicare services for the maturing populations 
of these two industrial counties. Now more than ever these counties 
need to be reclassified.
    In 1999, Senator Bayh, Senator Lugar and I successfully 
reclassified Lake County into the Chicago Metropolitan Statistical Area 
for Medicare reimbursement purposes via the Balanced Budget Adjustment 
Act of 1999. The bill was officially included in the Consolidated 
Appropriations Act of 1999, which reclassified Lake County for Fiscal 
Year (FY) 2000 and FY 2001. At the end of 2000, the county was also 
reclassified for another three years. Thus, hospitals in Lake County 
continue to receive these funds through FY 2004.
    The case for Lake County is quite sound. Eight hospitals in Lake 
County, Indiana are contiguous to the Chicago Metropolitan Statistical 
Area (``MSA'') and are a part of the Chicago-Gary-Kenosha Consolidated 
Metropolitan Statistical Area (``CMSA''). They are St. Catherine's 
Hospital, St. Margaret Mercy Hospital of Hammond, Community Hospital of 
Munster, St. Margaret Mercy Hospital of Dyer, St. Mary's Medical 
Center, Methodist Hospital of Merrilville, Methodist Hospital of Gary, 
and St. Anthony's Medical Center of Crown Point. These hospitals have 
been reclassified in FY 1995, 1996, 1997, 1998 and 1999. Since that 
year, they have been unable to obtain regulatory reclassification.
    All eight hospitals, as well as all other businesses and services 
in the area, are fully a part of the Chicago metropolitan area. They 
are in the same labor pool, purchase supplies from many of the same 
vendors, and pay parallel costs for utilities and other necessities.
    Since 1999 we have been assisting these eight hospitals in their 
efforts to continue to receive fair and reasonable Medicare payments 
comparable to those paid to hospitals located in the Chicago MSA. 
However, unless Congress acts, the Lake County hospitals will lose $29 
million per year in Medicare payments, effective October 1, 2003.
    The Lake County hospitals are completely integrated within the 
greater Chicago metropolitan area. In fact, one Lake County hospital, 
St. Margaret Hospital located in Hammond, Indiana, is only about 15 
feet from the dividing line between Chicago and Lake County. In 
addition, the costs incurred by Lake County hospitals for the same 
services is virtually the same. The only difference between the Chicago 
and Lake County hospitals is a county line dividing Cook County, 
Illinois and Lake County, Indiana.
    In 1999, Lake County hospitals had Medicare costs of $4,266.00 per 
standardized case. Chicago hospitals per case cost was $4,481.00, a 
difference of only 4.8 percent. Lake County costs are clearly 
comparable to Chicago. In addition, the Lake County hospitals case mix 
index, which measures the type and severity of care needed, was 1.4343, 
while that of Chicago hospitals is 1.4277. This shows that for similar 
services, Lake County patients are actually in need of more acute care 
than their counterparts in Chicago.
    Our second county facing hardship is Porter County, located less 
than 30 miles from the Chicago city limits. Though Porter County has 
never been reclassified, continuing hardships and new developments make 
them an excellent candidate for higher reimbursement.
    Porter County has a single hospital, Porter Memorial Hospital. Due 
to the inequities between it and Chicago MSA, Porter Memorial Hospital 
has been forced to discontinue two services, lay off 32 employees and 
freeze over 100 other positions.
    The main contention of Porter Memorial Hospital is that it is 
currently unable to compete for skilled labor because of the demands 
placed on it due to the vicinity to Chicago. Currently, Porter County 
hospitals are facing employee shortages, especially in the fields of 
skilled nurses. Due to the concentration of hospitals in the region, 
all health care providers share the same employment pool with Chicago. 
Porter Memorial finds it difficult to compete with the compensation 
offered by the Chicago hospitals for qualified employees. It 
continually attempts to match the trends of salary increases and large 
sign-on bonuses offered by the Chicago hospitals, but this is becoming 
increasingly difficult to do with a different reimbursement rate. 
Porter's wage index value is approximately 86 percent of Chicago MSA. 
The requirement for inclusion in Chicago MSA is 84 percent.
    In terms of costs, Porter County hospitals had Medicare costs per 
standardized case of $4,424.00 for 1999. As mentioned previously, 
Chicago hospitals per case cost was $4,481.00. This is a difference of 
less than 1.2%. Porter County's costs are, once again, clearly 
comparable to Chicago.
    Many other costs are comparable as well. In a recent operating 
performance report comparing Porter Memorial with Chicago hospitals, 
the supply, capital and total costs per discharge were higher at Porter 
Memorial than two-thirds of the Chicago hospitals studied.
    In conclusion, we are seeking a further legislative extension for 
the existing reclassification for the Lake County hospitals and the 
inclusion of Porter Memorial hospital into the Chicago MSA. These 
hospitals are deserving of such support. They need fair and reasonable 
Medicare payments. They need permanent attachment to the Chicago MSA or 
successor entity, or they need a formula devised by CMS that fairly 
measures comparable costs.
    I appreciate your time and hope this body can find a solution to 
this dilemma. I would be pleased to provide any additional information 
you might need. Thank you for your attention.
                               __________

                             LAKE COUNTY, IN
           Calculation of adjustment data for margin to remove
  Chicago wage index and large urban standardized amount for 1999 year
------------------------------------------------------------------------
                                             FFY 1999        FFY 2000
------------------------------------------------------------------------
Per July 31, 1998 and July 30, 1999
 Federal Registers
  Chicago reclassified wage index.......          1.0469          1.0872
  Gary MSA average hourly wage..........        $19.6025         19.8884
  National average hourly wage..........        20.7325        21.1800
                                         -------------------------------
  Computed Gary Wage Index..............           .9455           .9390
                                         -------------------------------
 
Increase in wage index..................           .1014           .1482
                                         ----------------
 
Decrease in wage index if Gary rates              .09686           .1363
 were used (.1014/1.0469)...............
% Labor related standardized amount of             x.711           x.711
 total..................................
                                         -------------------------------
 
% Decrease in standardized amount.......           06886            0969
Add effect of large urban standardized            .01600           .0160
 amount.................................
                                         -------------------------------
 
  Percent decrease in standardized                .08486           .1129
   amount...............................
                                         -------------------------------
 
                                             Decrease in
                                                 Revenue
 
For December 31 hospitals
  (75% 1999) + (25% 2000)...............           .0918
For period 3/1/99 to 12/31/99
  (70% 1999) + (30% 2000)...............           .0933
For June 30, 2000 hospitals
  (25% 1999) + (75% 2000)...............           .1059
------------------------------------------------------------------------

    The adjusted Medicare margin for Lake County is a negative 10.72 
percent in total. Six of the eight hospitals had negative margins. 
Porter Memorial had a 20.24 percent negative margin.
                               __________

                                                                                         Medicare Margin
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Decrease
                                                                                            Medicare                    in         Revised
                                                                Provider                    Inpatient                Medicare     Medicare      Medicare     Subtract     Medicare     Adjusted
                           Hospital                              Number    Fiscal Period    Operating   Decrease %   Payments   Revenue Gary   Margin Per    Decrease    Margin Gary   Margin %
                                                                                           Revenue CMS                 (Gary        Rates       CMS Data    in Payment      Rates
                                                                                              Data                    Rates)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Methodist--Gary...............................................   15-0002   FYE 12/31/99     27,873,101      0.0918   2,558,751    25,314,350       266,644   2,558,751   (2,292,107)     -0.0905
St. Margaret Mercy--North.....................................   15-0004   FYE 12/31/99     41,641,303      0.0918   3,822,672    37,818,631     6,396,283   3,822,672     2,573,611      0.0681
St. Catherine.................................................   15-0008   FYE 12/31/99     18,706,176      0.0918   1,717,227    16,988,949       874,851   1,717,227     (842,376)     -0.0496
St. Mary......................................................   15-0034   FYE 12/31/99     22,472,891      0.0918   2,063,011    20,409,880   (1,333,555)   2,063,011   (3,396,566)     -0.1664
St. Margaret Mercy--South.....................................   15-0090   FYE 12/31/99     11,044,174      0.0918   1,013,855    10,030,319     (508,472)   1,013,855   (1,522,327)     -0.1518
Community Hospital............................................   15-0125  FYE 6/30/2000     46,168,771      0.0989   4,566,091    41,602,680   (2,237,686)   4,566,091   (6,803,777)     -0.1635
St. Anthony--Crown Point......................................   15-0126  3/1/99-12/31/     16,500,315      0.0933   1,539,479    14,960,836   (4,192,774)   1,539,479   (5,732,253)     -0.3832
                                                                                     99
Methodist--Broadway...........................................   15-0132   FYE 12/31/99     27,959,117      0.1059   2,960,870    24,998,247       383,051   2,960,870   (2,577,819)     -0.1031
Total.........................................................  ........  ..............   212,365,848  ..........  20,241,957   192,123,891     (351,658)  20,241,957  (20,593,615)     -0.1072
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  The above computations exclude the change in inpatient capital payments resulting from the adjustment of the Geographic Adjustment Factor (GAF) which is a derivative of the wage index. This
  adjustment is not considered to be material.


 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Operating Margin                                           Total Margin
                                       -----------------------------------------------------------------------------------------------------------------
               Hospital                    Net Patient         Operating           Adjusted
                                           Revenue Gary     Marginwith Gary    Operating Margin  Total RevenueGary   Net Income with      Total Margin
                                              Rates              Rates                %                Rates            Gary Rates         Percentage
--------------------------------------------------------------------------------------------------------------------------------------------------------
Lake County
Methodist--Gary.......................        106,757,602       (15,140,510)            -0.1418        126,899,705          6,121,460             0.0482
St. Margaret Mercy--North.............        136,664,308          (346,365)            -0.0025        151,942,147         14,931,474             0.0983
St. Catherine.........................         70,583,623        (6,298,559)            -0.0892         75,424,834        (2,057,348)            -0.0273
St. Mary..............................         71,742,752        (2,304,366)            -0.0321         76,194,447          2,147,329             0.0282
St. Margaret Mercy--South.............         69,346,327        (2,911,241)            -0.0420         71,179,202        (1,078,366)            -0.0152
Community Hospital....................        168,139,821          1,442,533             0.0086        173,669,532          1,791,437             0.0103
St. Anthony--Crown Point..............         68,372,527        (8,796,563)            -0.1287         75,892,576        (1,276,514)            -0.0168
Methodist--Broadway...................        106,903,908        (3,254,283)            -0.0304        120,763,466         11,087,560             0.0918
 
Total Lake County.....................        798,510,867       (37,609,355)            -0.0471        871,965,908         31,667,031             0.0363
 
Porter Memorial Hospital..............        140,077,043         -2,492,229            -0.0178        145,332,785          1,980,636             0.0136
(Per CMS Data at Gary Rates)
--------------------------------------------------------------------------------------------------------------------------------------------------------
  The above computations exclude the change in inpatient capital payments resulting from the adjustment of the Geographic Adjustment Factor (GAF) which
  is a derivitive of the wage index. This adjustment is not considered to be material.
 
  The operating margin (which include all patient income and expense) is a negative 4.71 percent for Lake County, IN hospitals and a negative 1.78
  percent for Porter Memorial Hospital. This indicates that these hospitals (in total) cost shifted a portion of the Medicare loss to non-Medicare
  patients, but still ended up in a loss position. Seven of the eight Lake County hospitals had losses from operations.


                                                                                               STATEMENT OF REVENUE AND EXPENSES--FACILITY
                                                                                                SOURCE: HCFA FORM 2552-96, WORKSHEET G-3
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
             Provider#                                MSA/County #                             150002            150004           150008          150034            150090             150125             150126             150132
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           THE METHODIST      ST. MARGARET   ST. CATHERINE'S     ST. MARY        ST. MARGARET                          ST. ANTHONY       THE METHODIST
           Provider Name                             MSA/County Name      Lake County     HOSPITALS, INC-   MERCY HLTHCARE-     HOSPT.-EA.        MEDICAL      MERCY HLTHCARE-       COMMUNITY      MEDICAL CENTER OF   HOSPITALS, INC-
                                                                                                GARY             NORTH           CHICAGO       CENTER, INC.         SOUTH             HOSPITAL            CROWN             BROADWAY
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Beginning..............                                                                 1/1/99           1/1/99           1/1/99          1/1/99             1/1/99             7/1/99             3/1/99             1/1/99
Fiscal Year Ending.................                                                               12/31/99         12/31/99         12/31/99        12/31/99           12/31/99            6/30/00           12/31/99           12/31/99
    LINE(S)                              COL(S)                            Group Totals
                                                  Revenue
3..................................           1   Net Patient Revenues     $819,352,824       $109,316,353     $140,486,980      $72,900,850     $73,805,763        $70,360,182       $172,705,912        $69,912,006       $109,864,778
25.................................           1   Total Other Income        $72,855,041        $20,142,103      $15,277,839       $4,241,211      $4,451,695         $1,832,875         $5,529,711         $7,520,049        $13,859,558
                                                  Total Revenue            $892,207,865       $129,458,456     $155,764,819      $77,142,061     $78,257,458        $72,193,057       $178,235,623        $77,432,055       $123,724,336
 
                                                  Expenses
4..................................           1   Total Operating          $836,720,222       $121,898,112     $137,010,673      $77,482,182     $74,047,118        $72,257,568       $166,697,288        $77,169,090       $110,158,191
                                                   Expenses
30.................................           1   Total Other Expenses       $3,578,655       ($1,119,867)               $0               $0              $0                 $0         $5,180,807                 $0         ($482,285)
                                                  Total Expenses           $840,298,877       $120,778,245     $137,010,673      $77,482,182     $74,047,118        $72,257,568       $171,878,095        $77,169,090       $109,675,906
 
                                                  Net Income                $51,908,988         $8,680,211      $18,754,146       ($340,121)      $4,210,340          ($64,511)         $6,357,528           $262,965        $14,048,430
                                                  Net Income/Total                5.82%              6.71%           12.04%           -0.44%           5.38%             -0.09%              3.57%              0.34%             11.35%
                                                   Revenue
 
                                                  Total Operating
                                                   Margin
3..................................           1   Net Patient Revenues     $819,352,824       $109,316,353     $140,486,980      $72,900,850     $73,805,763        $70,360,182       $172,705,912        $69,912,006       $109,864,778
4..................................           1   Total Operating          $836,720,222       $121,898,112     $137,010,673      $77,482,182     $74,047,118        $72,257,568       $166,697,288        $77,169,090       $110,158,191
                                                   Expenses
 
                                                  Operating Margin        ($17,367,398)      ($12,581,759)       $3,476,307     ($4,581,332)      ($241,355)       ($1,897,386)         $6,008,624       ($7,257,084)         ($293,413)
                                                                                 -2.12%            -11.51%            2.47%           -6.28%          -0.33%             -2.70%              3.48%            -10.38%             -0.27%
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                                                                                          MEDPAC's Formula for Calculation of Inpatient Margin
                                                                                 PPS Inpatient Payments = PPS Operating Payments + PPS Capital Payments
                                                                                      PPS Inpatient Costs = PPS Operating costs + PPS Capital Costs
                                                                          PPS Inpatient Margin = (PPS Inpatient Payments--PPS Inpatient Costs)/PPS IP Payments
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Total            Provider #
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PPS 16-FY99                                 MSA/County#                            0                150002             150004            150008           150034           150090           150125           150126           150132
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                THE METHODIST                       ST. CATHERINE'S      ST. MARY       ST. MARGARET                                      THE METHODIST
  Line (s)     Col (s)                    MSA/County Name                     Lake County      HOSPITALS, INC-      ST. MARGARET       HOSPT.-EA.    MEDICAL CENTER,  MERCY HLTHCARE-     COMMUNITY       ST. ANTHONY     HOSPITALS, INC
                                                                                                     GARY           MERCY NORTH         CHICAGO            INC.            SOUTH           HOSPITAL     CENTER OF CROWN      BROADWAY
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             SOURCE: HCFA FORM 2552-96, WORKSHEET E, PART A
                                                                                                         PPS Operating Payments
 
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8                    1    Total Payment for Inpatient Operating                 $212,365,848        $27,873,101        $41,641,303      $18,706,176      $22,472,891      $11,044,174      $46,168,771      $16,500,315      $27,959,117
                            Costs +......................................
14                   1    Part A Inpatient Routine Service Other                     $39,393                 $0                 $0               $0               $0               $0               $0          $39,393               $0
                            Pass Through Costs +.........................
15                   1    Part A Inpatient Ancillary Service Other                  $196,033                 $0           $166,942               $0               $0               $0               $0          $29,091               $0
                            Pass Through Costs +.........................
12                   1    Net Organ Acquisition Costs +..................                 $0                 $0                 $0               $0               $0               $0               $0               $0               $0
13                   1    Cost of Teaching Physicians +..................                 $0                 $0                 $0               $0               $0               $0               $0               $0               $0
21                   1    Inpatient Bad Debt Payments-...................         $1,379,669            $64,903           $642,262         $200,874         $220,351          $98,521          $59,231          $54,485          $39,042
21.01                1    Inpatient Bad Debt Adjustment..................           $827,802            $38,942           $385,357         $120,524         $132,211          $59,113          $35,539          $32,691          $23,425
                                                                                $214,808,745        $27,976,946        $42,835,864      $19,027,574      $22,825,453      $11,201,808      $46,263,541      $16,655,975      $28,021,584
 
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          PPS Capital Payments
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
9                    1    Payment for Inpatient Program Capital +........        $20,358,051         $2,094,245         $3,798,208       $1,777,287       $2,269,492       $1,359,745       $4,408,249       $1,934,157       $2,716,668
10                   1    Exception Payment for Inpatient                                 $0                 $0                 $0               $0               $0               $0               $0               $0               $0
                            Program Capital..............................
                                                                                 $20,358,051         $2,094,245         $3,798,208       $1,777,287       $2,269,492       $1,359,745       $4,408,249       $1,934,157       $2,716,668
                          Total Payments.................................       $235,166,796        $30,071,191        $46,634,072      $20,804,861      $25,094,945      $12,561,553      $50,671,790      $18,590,132      $30,738,252
 
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                SOURCE: HCFA FORM 2552-96, WORKSHEET D-1
                                                                                                      PPS Operating & Capital Costs
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
49                   1    Total Program Inpatient Operating Costs               $235,518,454        $29,804,547        $40,237,789      $19,930,010      $26,428,500      $13,070,025      $52,909,476      $22,782,906      $30,355,201
                            Including Pass Through Costs +...............
12                   1    Net Organ Acquisition Costs +..................                 $0                 $0                 $0               $0               $0               $0               $0               $0               $0
                            .............................................       $235,518,454        $29,804,547        $40,237,789      $19,930,010      $26,428,500      $13,070,025      $52,909,476      $22,782,906      $30,355,201
                          Inpatient Margin...............................        (-$351,658)           $266,644         $6,396,283         $874,851    (-$1,333,555)      (-$508,472)    (-$2,237,686)    (-$4,192,774)         $383,051
                          Margin %.......................................           -0.1495%            0.8867%           13.7159%          4.2050%         -5.3140%         -4.0478%         -4.4160%        -22.5538%          1.2462%
 
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Adjusted Inpatient Margin Calculation
                                                                                                      PPS Operating Payment Add-ons
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 
                          Indirect Medical Education Adjustment..........         $1,412,127           $486,348           $474,947               $0         $182,181         $268,651               $0               $0               $0
                          Disproportionate Share Adjustment..............        $10,146,105         $5,940,589         $1,916,308       $2,289,208               $0               $0               $0               $0               $0
                          Additional Payment--                                            $0                 $0                 $0               $0               $0               $0               $0               $0               $0
                            High Percentage ESRD.........................
                          Total Add-ons..................................        $11,558,232         $6,426,937         $2,391,255       $2,289,208         $182,181         $268,651               $0               $0               $0
                          PPS Operating Payments.........................       $214,808,745        $27,976,946        $42,835,864      $19,027,574      $22,825,453      $11,201,808      $46,263,541      $16,655,975      $28,021,584
                          PPS Capital Payments...........................        $20,358,051         $2,094,245         $3,798,208       $1,777,287       $2,269,492       $1,359,745       $4,408,249       $1,934,157       $2,716,668
                          PPS Operating Payment Add-ons..................     (-$11,558,232)      (-$6,426,937)      (-$2,391,255)    (-$2,289,208)      (-$182,181)      (-$268,651)               $0               $0               $0
                          Total Adjusted PPS Payments....................       $223,608,564        $23,644,254        $44,242,817      $18,515,653      $24,912,764      $12,292,902      $50,671,790      $18,590,132      $30,738,252
                          PPS Operating & Capital Costs..................       $235,518,454        $29,804,547        $40,237,789      $19,930,010      $26,428,500      $13,070,025      $52,909,476      $22,782,906      $30,355,201
                          Adjusted Inpatient Margin......................     (-$11,909,890)      (-$6,160,293)         $4,005,028    (-$1,414,357)    (-$1,515,736)      (-$777,123)    (-$2,237,686)    (-$4,192,774)         $383,051
                          Margin%........................................           -5.3262%          -26.0541%            9.0524%         -7.6387%         -6.0842%         -6.3217%         -4.4160%        -22.5538%          1.2462%
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


               STATEMENT OF REVENUE AND EXPENSES--FACILITY
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Provider#                                                         150035
                                                      ------------------
Provider Name              PORTER MEMORIAL HOSPITAL
 
Fiscal Year Beginning
       1/1/99
 
Fiscal Year Ending
     12/31/99
------------------------------------------------------------------------
LINE(S)          COL(S)     Total Margin Calculation         PPS 16-FY99
------------------------------------------------------------------------
SOURCE: HCFA FORM 2552-96, WORKSHEET G-3
------------------------------------------------------------------------
                          Revenue
3                     1   Net Patient Revenues              $140,077,043
25                    1   Total Other Income                  $5,255,742
                          Total Revenue                     $145,332,785
                          Expenses
4                     1   Total Operating Expenses          $142,569,272
30                    1   Total Other Expenses                  $782,877
                          Total Expenses                    $143,352,149
                          Net Income                          $1,980,636
                          Net Income/Total Revenue                 1.36%
                          Total Operating Margin
3                     1   Net Patient Revenues              $140,077,043
4                     1   Total Operating Expenses          $142,569,272
                          Operating Margin                 (-$2,492,229)
                                                                  -1.78%
------------------------------------------------------------------------
MEDPAC's Formula for Calculation of Medicare Inpatient Margin
PPS Inpatient Payments = PPS Operating Payments + PPS Capital Payments
PPS Inpatient Costs = PPS Operating costs + PPS Capital Costs
PPS Inpatient Margin = (PPS Inpatient Payments--PPS Inpatient Costs) /
 PPS Inpatient Payments
------------------------------------------------------------------------
SOURCE: HCFA FORM 2552-96, WORKSHEET E, PART A
------------------------------------------------------------------------
          PPS Operating Payments
------------------------------------------------------------------------
         8            1   Total Payment for Inpatient        $29,679,899
                           Operating Costs +
        14            1   Part A Inpatient Routine                    $0
                           Service Other Pass Through
                           Costs +
        15            1   Part A Inpatient Ancillary             $51,566
                           Service Other Pass Through
                           Costs +
        12            1   Net Organ Acquisition Costs                 $0
                           +
        13            1   Cost of Teaching Physicians                 $0
                           +
        21            1   Inpatient Bad Debt Payments-          $129,578
 
     21.01            1   Inpatient Bad Debt                  (-$77,747)
                           Adjustment
                                                             $29,783,296
------------------------------------------------------------------------
          PPS Capital Payments
------------------------------------------------------------------------
         9            1   Payment for Inpatient               $2,877,461
                           Program Capital +
        10            1   Exception Payment for                       $0
                           Inpatient Program Capital
                                                              $2,877,461
                          Total Payments                     $32,660,757
------------------------------------------------------------------------
SOURCE: HCFA FORM 2552-96, WORKSHEET D-1
------------------------------------------------------------------------
          PPS Operating & Capital Costs
------------------------------------------------------------------------
        49            1   Total Program Inpatient            $39,272,474
                           Operating Costs Including
                           Pass Through Costs +
        12            1   Net Organ Acquisition Costs                 $0
                           +
                                                             $39,272,474
                          Inpatient Margin                 (-$6,611,717)
                          Margin %                             -20.2436%
 
                  Adjusted Inpatient Margin Calculation
------------------------------------------------------------------------
          Operating Payment Add-ons
------------------------------------------------------------------------
3.03 + 3.24      1+1.01   Indirect Medical Education                  $0
                           Adjustment
      4.04       1+1.01   Disproportionate Share                      $0
                           Adjustment
      5.06       1+1.01   Additional Payment--High                    $0
                           Percentage ESRD
                          Total Add-ons                               $0
                          PPS Operating Payments             $29,783,296
                          PPS Capital Payments                $2,877,461
                          PPS Operating Payment Add-                  $0
                           ons
                          Total Adjusted PPS Payments        $32,660,757
                          PPS Operating & Capital            $39,272,474
                           Costs
                          Adjusted Inpatient Margin        (-$6,611,717)
                          Margin%                              -20.2436%
------------------------------------------------------------------------


                                 

    Chairman JOHNSON. Thank you very much. Mr. Shays, it is a 
pleasure to welcome you.

 STATEMENT OF THE HON. CHRISTOPHER SHAYS, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CONNECTICUT

    Mr. SHAYS. Thank you, Madam Chairman. I would like to 
submit my statement for the record and just make a few points.
    I am here to request that you reclassify Connecticut's six 
Fairfield County hospitals into the New York City Metropolitan 
statistical area. This county is basically contiguous to New 
York, touches it, and is 30 miles from the center of Manhattan.
    One of those five hospitals is outside the 4th 
Congressional District in Danbury. The rest are in the 4th 
Congressional District.
    Back in 1997, I am aware of what the Balanced Budget Act 
did in the reclassification systems and had worked on that. I 
was grateful to the Committee in 2000 in working with them, 
that they lengthened the reclassification for 3 years.
    Despite paying wage of about 10 percent less than hospitals 
pay in New York, the Fairfield County index is 17 percent less 
than the New York MSA. That has become a problem for our 
hospitals.
    The U.S. Census Bureau counts Fairfield County in the same 
consolidated metropolitan statistical area. This is determined 
based on population figures, commuting patterns, employment 
data, and overall economic and social integration of the 
surrounding areas.
    The Federal Reserve Bank, the U.S. Department of Labor, the 
Bureau of Transportation Statistics all include Fairfield 
Certify within New York City for statistical purposes.
    I have a letter from the Federal Reserve Bank of New York 
which I have included in my testimony which states a 
significant portion of the county's income is earned. Fifty 
National Association of Realtors NAR groups have Fairfield 
County housing prices with New York Metropolitan areas as well. 
We are focused that way. We commute that way. Everyone else, 
except Medicare, treats us as part of the New York MSA.
    We are just asking that you consider that true for Medicare 
as well.
    What can I do to get Mr. McCrery to smile? This is a very 
interesting subject, Mr. McCrery.
    [The prepared statement of Mr. Shays follows:]
 Statement of the Hon. Christopher Shays, a Representative in Congress 
                     from the State of Connecticut
    Chairwoman Johnson, Ranking Member Stark and Members of the 
Subcommittee, thank you for the opportunity to testify in favor of 
reclassification of the hospitals in Connecticut's Fairfield County 
into the New York City Metropolitan Statistical Area (MSA).
    Fairfield County borders the New York state line and is only 30 
miles from Manhattan. There are six hospitals in the county, four of 
which have been periodically reclassified on a temporary basis into the 
New York MSA. The hospitals included would be Greenwich Hospital, 
Stamford Hospital, Norwalk Hospital, Bridgeport Hospital and St. 
Vincent's Hospital from my congressional district. Danbury Hospital, 
which resides in Connecticut's new fifth congressional district, would 
also be reclassified.
    I am very aware of what hospitals Congress was trying to help when 
it created the system were the hospitals found in my district. Back in 
1997, I helped write the Balanced Budget Act. In that bill, we created 
the current geographic reclassification system. In 2000, I worked with 
the Ways and Means Committee to make the length of one reclassification 
three years, which gave hospitals greater long-term financial security.
    Despite paying wages which are only 10 percent less than the wages 
paid by hospitals in the New York MSA, Fairfield County's wage index is 
17 percent less than the New York MSA. The Fairfield County hospitals 
need to be on a level playing field with the New York hospitals to be 
able to attract and retain highly-skilled clinical staff.
    Fairfield County is widely recognized as being part of the New York 
Metropolitan Area geographically, economically and socially. In fact, 
the Census Bureau counts Fairfield County in the same Consolidated 
Metropolitan Statistical Area (CMSA) as New York City. This 
determination is based on population figures, commuting patterns, 
employment data, and the overall economic and social integration of the 
surrounding areas with the City. In fact, fully 11 percent of Stamford 
Hospital's labor pool resides in New York.
    In addition, the Federal Reserve Bank, the Department of Labor, and 
the Bureau of Transportation Statistics all include Fairfield County 
with New York City for statistical purposes. A letter, from Rae Rosen 
of the Federal Reserve Bank of New York, which I have included in my 
testimony, states, ``A significant portion of Fairfield County commutes 
to New York City where a significant portion of the county's income is 
earned.''
    The National Association of Realtors groups Fairfield County 
housing prices with other New York metropolitan area housing prices 
because the markets are similar in many ways and provide the housing 
for the greater New York metropolitan area labor market.
    By not reclassifying these hospitals, they are being penalized for 
efficiency. They have gone to great lengths to control costs, 
especially personnel costs by revamping their labor skill mix. However, 
rather than be rewarded for these cost-containment measures, Stamford, 
Norwalk and Bridgeport are penalized by the Medicare reclassification 
thresholds.
    H.R. 4954, the Medicare Modernization and Prescription Drug Act, 
helps in the reclassification battle. Currently, to be reclassified, 
hospitals have to qualify under the standardized amount and the wage 
index. The standardized amount is a fixed dollar amount which is 
divided into two classifications: the urban area standardized amount 
and the ``other area'' standardized amount.
    Section 303 eliminates the ``other area'' standardized amount, 
leaving only the urban area standardized amount. If H.R. 4954 is 
enacted into law, hospitals should no longer have to qualify under 
standardized amount provisions, which should bring some relief to many 
hospitals, particularly those in my district.
    In this matter, I would only request that the subcommittee work 
with the Department of Health and Human Services to ensure that 
hospitals no longer have to qualify for reclassification under the 
standardized amount. I would be more than willing to help in any way I 
can.
    In closing, I'd like to thank you for allowing me to testify in 
support of the reclassification needed for these six hospitals in 
Fairfield County are the type of hospital that Congress intended to 
help when it created the geographic reclassification process.

                                 

    Chairman JOHNSON. Well, we thank you all for your comments. 
I do, feel the urgency of this. Frankly, as far as I am 
concerned, budget neutrality is not my problem. My problem is 
how to define the problem, what will go with this.
    Don't underestimate the difficulty of defining the problem. 
The reason in my statement, and my staff did not include it, 
the reason I included that this whole process starts with an 
averaging of data from hospitals about their wages is that in 
the very process of averaging, in a sense you do violence to 
the ability of hospitals to survive.
    The violence of averaging helps low-wage areas and hurts 
high-wage areas and does affect, in an environment in which now 
people are paying differently for their patients than they were 
20 years ago.
    It was in the old days the private sector had some cushion 
in it and you could cost shift. You can't do that any more. So, 
we have a much different environment in which we are paying for 
health care. Therefore, every aspect of our payment system 
needs to be reviewed to see whether or not that technology, no 
matter how commonly accepted it has been, can still support our 
hospitals in a reasonable fashion.
    Now, what is driving my friend, Pete, here nuts is that in 
many, many hospitals across the country, and this may be true 
in your own hospitals and you should quietly ask, what is the 
profit margin on their in-patient Medicare patients?
    Now, of course, you might also ask what is the profit 
margin in their outpatient Medicare patients where we are 
having a much harder time getting an accurate payment.
    Then the major teaching hospitals, 22-percent profit on 
inpatient, but their total margins are low, like 2.4 percent. 
So, there are serious problems in this payment system. Some of 
the assumptions that we have always relied on, like averaging, 
are assumptions we need to understand the implications of.
    Beyond that are four or five other factors in each of these 
formula. One is that this data for the wage index is 4 years 
old; not 2 years old.
    So, we will look at each component, but even the 4-year-old 
is only a matter of relative paymency. So, it can't take 
account of spikes, but it may not be inaccurate according to 
the relativeness to the norm of 1 percent across the country. 
So, that is the national average of wages.
    So, I just tell you to be patient. We will try to figure 
out what vital information you need to get from your hospitals, 
to help us so you understand better, and we understand better. 
I personally am convinced that this not about badly managed 
hospitals looking for us to save them. We are way beyond that. 
Those guys are already out of business.
    I personally believe this is a very important problem that 
if we don't fix, we will affect access and quality both, first 
quality and then access. So, I just urge you to follow the 
discussion.
    I tried to have the Member panels after the experts. I was 
told that was unacceptable. I ask you to read the testimony of 
MedPAC and of GAO, those people who have been in the system a 
long time, know the technologies and complexities of the 
formula because in the end we do have to deal with that. We are 
going to have to deal with that in a way that is as rational as 
possible, because whatever system you have, it will have little 
problems.
    If those little problems aren't backed by at least some 
logic and some consistent policy that is on the whole fair, we 
will be in terrible trouble. We will continue to see the effort 
to make legislative fixes, and those are really the most 
destructive to both the concept of fairness and the concept of 
a nationally capable health care system.
    So, thank you very much for your testimony. We will go on 
to the next panel.
    Mr. STARK. Are we going to get to say anything?
    Chairman JOHNSON. Mr. Stark would like to comment.
    Mr. STARK. First of all, I think we will hear from MedPAC.
    Chairman JOHNSON. Yes, we will.
    Mr. STARK. To the effect that there is not a whole lot of 
correlation between profit margins and the wage index. Make out 
of that what you will.
    Then, for those of you who are somewhat less emotionally 
involved in your hospitals, how did you take Bloomsburg 
Hospital with 97 beds and a 25-percent occupancy, who has a 16-
percent Medicare profit margin, but loses 5 percent, I just 
don't know the answer to that either.
    Then you go to Wilkes Barre and they have a Medicare margin 
of 13 percent. They have 100 beds and they are 52-percent 
occupied. I don't know what that means. I am just trying to 
tell you.
    Mr. KANJORSKI. One hundred beds?
    Mr. STARK. There are 109 beds. They have a 52-percent 
occupancy, St. Joseph's. I don't know how big Wilkes Barre is. 
They lose 9.5 percent on Medicare, and they lose 3.5 percent 
over all.
    Then we go to Mr. Visclosky's district with a 300-bed 
hospital, and they lose 20 percent on Medicare, not as these 
others. Yet, they are making an overall profit of 1.4. That 
doesn't sound like a lot.
    Mr. VISCLOSKY. Indiana ingenuity.
    Mr. STARK. That may be. Now, all I am trying to suggest to 
you is that in the same town, for instance, we were talking 
about Wilkes Barre, Mercy Hospital in Wilkes Barre and St. 
Joseph's in Hazeltine. They are in the same county, right?
    Mr. KANJORSKI. Same county.
    Mr. STARK. They have a major difference. One is losing 
money and one is making money. I don't know how big the Wilkes 
Barre Hospital is. I could dig it out, but I am just trying to 
match.
    Mr. KANJORSKI. There are three hospitals in Wilkes Barre.
    Mr. STARK. It doesn't make a lot of sense to us, unless--
and quite frankly the hospitals are not willing to do this, and 
that is okay--to get hospital-specific information and then you 
could say, hey, this makes some sense. They have a problem for 
which we ought to adjust.
    If you have a rural hospital of 20 beds that is 30 miles 
away from a major city, not a lot of people are going to go 
there for specialized care. Perhaps that hospital should change 
its mission. Politically that is tough to say, but those are 
all options that have to be considered.
    Again, in the zero-sum gain, you have to remember even in 
your own districts, if we raise one hospital substantially, 
others will take less. This is not a question of California 
versus Indiana.
    Mr. KANJORSKI. May I respond?
    Chairman JOHNSON. Briefly, Pete, please.
    Mr. KANJORSKI. Yes. They are not sophisticated areas. It 
took everything I could do to get them to analyze. They didn't 
even know why they were losing money, quite frankly, until 2 
years ago. They were just losing money. We had a person come 
in. They are not sophisticated.
    Two, I made the point in my testimony to say you are 
punishing us for efficiency and frugality. The wage level in 
these hospitals has always been extremely low. Transportation 
systems weren't always built in this country that you could 
jump from one MSA to another and the growth between those MSAs 
haven't been accomplished until recently.
    Now, you can transport yourself 16, 20, 30 miles and easily 
go. We have in the Wilkes Barre area, in that entire MSA, the 
wage level is below the rural wage level, so we actually get a 
kick-up in formula because our wage is below it.
    So, in order for them to start using the wage level to be 
competitive with other hospitals, they would have to jump the 
pay of the professional people to such an extent they would go 
bankrupt and would be incapable of doing that.
    So, they will always be caught in that Catch-22. They can 
never move the formula up because they don't have the money to 
pay the wages and if they don't pay the wages, they have a 
drain of professional personnel and all what the penalty was 
because over the years they were very frugal in their delivery 
system and they weren't extravagant in their expenses and that 
punishes them in the formulas.
    Chairman JOHNSON. We are going to have to continue these 
discussions.
    Mr. STARK. This doesn't limit the wages they can pay. This 
just sets the reimbursement level for the hospital.
    Mr. KANJORSKI. No, if you don't get the money, Mr. Stark, 
if 70 percent of your income is coming out of Medicare, where 
are you going to get your money to pay wages?
    Chairman JOHNSON. This is a bigger discussion that I am 
sure we will be continuing.
    Mr. MCDERMOTT. Madam Chair?
    Chairman JOHNSON. Yes. We have two more panels of Members 
before the day is over, but I started it.
    Mr. MCDERMOTT. I just want to say that I think that this 
discussion is one that raises the whole question of why we need 
a national health plan because we are going to put Band-Aids on 
various ones of these people here. I had a conversation a 
number of years ago with the woman who ran the Canadian 
Hospital Association.
    She said, ``We are tired of you people beating up on us 
because we have a system that we can change. You don't.''
    She said, ``When I want to close a hospital or when I want 
to make an adjustment, I can do it. You have, whatever it is 
numbers, thousands of hospitals each doing it a different way. 
You can't even compare them.''
    This issue of data that Pete and you struggle with comes 
down to data; why does it happen that way, why is it different 
across the country, and how are you going to adjust it? You 
have no way. Medicare doesn't have any way. Medicare changes 
what they do, but not the rest of what goes on in health.
    We spent $1.2 trillion, $4,300 per person in this country. 
The next highest average in the world is Switzerland with 
$2,300 per person.
    Chairman JOHNSON. Okay, let me call the next panel.
    Mr. MCCRERY. Would the gentlewoman yield for just a brief 
comment?
    Chairman JOHNSON. I would be happy to, but briefly.
    Mr. MCCRERY. I just want to know if the gentleman doesn't 
agree that the Medicare system is a national health care system 
for the elderly.
    Mr. MCDERMOTT. No, it isn't a national health care system.
    Mr. MCCRERY. What you are proposing is that they give 
Medicare to everybody?
    Mr. MCDERMOTT. The problem is that it is a piece. Every 
county in Iowa has lost population except one. People are 
leaving.
    Chairman JOHNSON. If you had a national health care system, 
you would still have to figure out how to pay the hospitals 
across the country and whether you adjusted for local costs 
would still be an issue. So, it would just be for everybody.
    If you read Congressman Ryan's ``Dear Colleague'' about 
what is happening in Canada, you might not be so quick to offer 
it as an example. Thank you very much for your testimony.
    I will call the next panel of Members to testify. While 
this is, in my estimation, very good for our experts who are 
going to follow to hear, so while it takes a long time, it is 
very important for Members to have a chance to contribute to 
this is discussion. The next panel is Mr. Collin Peterson, Mr. 
Hinchey, Mr. Smith, Mr. Watt, and Mrs. Kelly.
    Congresswoman Kelly is long overdue for a speech. I am 
going to let her proceed. Your remarks will be submitted for 
the record in full and we are observing the 5-minute rule.

    STATEMENT OF THE HON. SUE W. KELLY, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Mrs. KELLY. Thank you very much. I thank you, Chairman 
Johnson, Congressman Stark, and the Members of the Health 
Subcommittee for giving me this opportunity to testify today.
    Geographic cost adjustment in Medicare is an important 
issue for hospitals across the country. I am very pleased this 
Subcommittee is focusing on this situation.
    I have been acquainted with this situation for many years 
due to the unique situation of the hospitals in my district, 
all of which are located in a commutable distance to New York 
City. Since hospitals in the New York City MSA receive a higher 
Medicare payment, hospitals in my district are forced to 
complete for labor with larger facilities in the city that can 
offer more attractive salaries and benefit packages.
    Nurses and other health care workers can easily take 
positions in New York City hospitals in order to earn more 
money, leaving hospitals in my district with a diminished 
hiring poor of health professionals.
    Lately, we have all heard about the deteriorating financial 
situation of our hospitals. It is certainly disturbing to hear 
about hospitals operating in the red and having to cut services 
and regional variance in the Medicare reimbursements only 
compounds this problem. Not only does it affect hospitals 
budgets, but more importantly it has an impact on patient care.
    I believe it is very important to level the playingfield so 
that hospitals in similar labor markets are reimbursed at the 
same level. I think this will help ensure that all hospitals 
are equally staffed and can accommodate patients.
    Not all hospitals belong in an MSA, but many should be 
included and they are not. Although Medicare has an 
administrative reclassification process supposedly designed to 
provide geographic payment parity, often one hospital will 
qualify while others narrowly miss.
    This can create yet another payment discrepancy between 
hospitals that are just a few miles apart and further 
disadvantage nearby facilities that do not meet standards for 
reclassification.
    A large-scale solution may be necessary to remedy existing 
disparity, however, in the meantime we cannot ignore the 
problems that loom for hospitals today. Congress must address 
the problem in places where it is particularly acute, where it 
has the potential to close community hospitals.
    That is why I am fighting to get the hospitals in Orange 
County, New York, Dutchess County, New York, and if possible 
those in the neighboring counties of Sullivan and Ulster 
Counties reclassified into the New York City MSA. There is an 
urgent need to ensure the hospitals in these areas can continue 
to provide quality care to the residents of Hudson Valley.
    Already I have seen one hospital close, leave an entire 
county that I represent with a New York City suburban 
population with only one place to go and a 40- to 60-minute 
drive to get there. Consider what emergency care is in that 
county.
    Hudson Valley residents depend on local hospitals for 
quality health care. The financial health of area hospitals is 
critical to their long-term ability to serve residents. For too 
long my hospitals have been left at a disadvantage competing 
with other nearby hospitals that were already receiving higher 
New York City rates.
    I thank you very much for holding this hearing. I think it 
is a very important issue. I apologize for needing to leave, 
but I am late to make a speech.
    Chairman JOHNSON. Thank you very much.
    Mrs. KELLY. I will be glad to answer any questions that you 
have right now though, if you want to do that.
    [The prepared statement of Mrs. Kelly follows:]
 Statement of the Hon. Sue W. Kelly, a Representative in Congress from 
                         the State of New York
    Good morning. Thank you Chairman Johnson, Congressman Stark and 
members of the Health Subcommittee for providing me this opportunity to 
testify today. Geographic cost adjustment in Medicare is an important 
issue for hospitals across the country and I am pleased the 
Subcommittee is focusing on this situation.
    I have been acquainted with the issue for many years due the unique 
situation of hospitals in my district which are located in commutable 
distance to New York City. Since hospitals in the New York City 
Metropolitan Statistical Area (MSA) receive higher Medicare payments, 
hospitals in my district are forced to compete for labor with larger 
facilities that can offer more attractive salaries and benefit 
packages. Nurses and other health care workers can easily take 
positions at New York City hospitals in order to earn more money, 
leaving hospitals in my district with a diminished hiring pool of 
health professionals.
    Lately, we have all heard about the deteriorating financial 
situation of our nation's hospitals. It is certainly disturbing to hear 
about hospitals operating in the red and having to cut services, and 
regional variance in Medicare reimbursement only compounds this 
problem. Not only does it effect hospitals' budgets, more importantly, 
it impacts patient care. I believe it is very important to level the 
playing field so that hospitals in similar labor market areas are 
reimbursed at the same level. This will help ensure that all hospitals 
are adequately staffed and can accommodate patients.
    Although Medicare has an administrative reclassification process 
designed to provide geographic payment parity, often one hospital will 
qualify while others nearby narrowly miss. This can create yet another 
payment discrepancy between hospitals that are just a few miles apart 
and further disadvantage nearby facilities that do not meet the 
standards for reclassification.
    Issues surrounding Medicare geographic cost adjustment certainly 
warrant further discussion. A large-scale solution may be necessary to 
remedy existing disparity. However, in the meantime, we can not ignore 
the problems that loom large for hospitals today. Congress must address 
this problem in places where it is particularly acute, where it has the 
potential to close community hospitals. That is why I am fighting to 
get hospitals in Orange County and Dutchess County, NY and those in the 
neighboring counties of Sullivan and Ulster, reclassified into the New 
York City MSA. There is an urgent need to ensure that hospitals in 
these areas can continue to provide quality care to residents of the 
Hudson Valley.
    I thank the Subcommittee for providing a discussion forum for this 
important issue. I look forward to working with this panel to maintain 
the viability of hospitals in my district and nationwide.

                                 

    Chairman JOHNSON. I think we don't have questions now. We 
will be taking the body of testimony from all the Members to 
see how we will proceed, and we will be back in touch with you. 
Mr. Peterson.

 STATEMENT OF THE HON. COLLIN C. PETERSON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MINNESOTA

    Mr. COLLIN PETERSON. Thank you, Madam Chair. I appreciate 
your doing this. As you are aware, I have been talking to you 
and Chairman Thomas and others about a couple of my situations 
for some time. I think it is good that we are having this 
hearing.
    I know you have been trying to deal with this. It seems 
like it is getting worse all the time. Out in my district I was 
having problems with these hospitals that were close to the 
metropolitan area.
    Now, you know, I am getting complaints from everybody out 
there. As somebody said on the previous panel, the 
transportation system has just moved this thing further and 
further. Even some of the remote rural hospitals are saying 
they are having to pay the same amount of money to get doctors 
and maybe more than they are paying in the Twin Cities, even 
though they are out in the middle of nowhere.
    So, it is a big problem, and I would like to talk to you 
today specifically about two situations, one you have heard 
about before, probably, the St. Cloud Hospital, which is in the 
St. Cloud MSA. St. Cloud is about 60 miles northwest of 
Minneapolis. The area has been filling in. It has basically 
become a suburban area. They provide all the same kind of 
services that all the hospitals in the Twin Cities provide. 
They have an MSA there in St. Cloud.
    This requirement that was put in, I guess in 1992 or 
whenever it was, where you had to use this 108 percent of the 
average-wage situation, St. Cloud actually has 90 percent of 
the wages in the MSA. So, they are in a Catch-22, and they 
can't qualify to get out of this.
    They have been surviving, but now the last 2 or 3 years 
they are running operating losses. You know, it is just a 
situation that is becoming very critical so I don't know 
exactly how we can solve this, but we have been trying to get 
them reclassified so we can get them on the same basis as the 
Twin Cities.
    One of the problems that we have is that St. Cloud is in 
three counties. Apparently that causes some problems. I don't 
know exactly why. This thing is so complicated that I can't 
figure it out. Anyway, it is a serious problem, and we would 
like some kind of way that we could get this situation in St. 
Cloud resolved.
    In my new district that is now represented by 
Representative Kennedy, the hospital in Hutchinson, Minnesota, 
which is actually closer to the Twin Cities than St. Cloud and 
the western suburbs have grown out there. This has become a 
bedroom community for Minneapolis. People commute back and 
forth. A lot of people actually commute out of the Twin Cities 
to Hutchinson. We have a 309M plant there and Hutchinson 
Technology. So, they have a lot of employment out there.
    This hospital has actually been reclassified twice; in 1995 
for 1 year and then again in 1998. Now, because of some kind of 
criteria, they don't qualify under the rules, and they have the 
same kind of problems that St. Cloud has.
    I know that this all costs money to fix and money is not in 
long supply around here. So, I know you have a real dilemma. I 
wanted to come by and share with you the problems we have in 
those two hospitals.
    As long as I am here, I will mention that last week I got a 
visit from Fargo, North Dakota, Merit Care, which is in North 
Dakota, but half the patients come from my district. They were 
complaining about the same thing, that they were competing with 
Minneapolis, even those that are 250 miles away. They are in 
some other kind of area, I am not exactly sure what it is. They 
are not losing money as well.
    They are talking about maybe closing some of the rural 
clinics in my district because they are going to have to look 
at cost savings to try to make their whole system operate. They 
have a big hospital in Fargo, but they have clinics scattered 
all over in the remote rural areas of Minnesota and North 
Dakota.
    If we don't get this fixed, they are going to be in the 
same kind of problems, and we may be curtailing services out 
there for rural people, which we don't need to do.
    I appreciate your holding the hearing. I've got a statement 
I would like to submit for the record. Thank you very much.
    [The prepared statement of Mr. Collin Peterson follows:]
Statement of the Hon. Collin C. Peterson, a Representative in Congress 
                      from the State of Minnesota
    Good afternoon. I am Collin Peterson and I represent the 7th 
District of Minnesota. I'd like to thank Chairman Johnson and the 
Subcommittee for inviting me to testify today.
Health Care Worker Shortage
    The Committee is well aware of the severe labor shortages within 
health care professions. The health care industry relies on the 
majority of its personnel to be licensed and hospitals are experiencing 
difficulties recruiting and retaining qualified personnel. Facilities 
are now having to offer signing bonuses and other recruiting incentives 
which encourage employees to ``job hop'' between employers, thus 
increasing turnover costs.
    In Minnesota, these shortages are felt across-the-board, including 
direct caregivers and non-patient care professionals such as nurses, X-
ray technologists, pharmacists, medical lab technologists, and others. 
According to recent findings from the Minnesota Department of Economic 
Security, the health care industry had 12,543 vacancies this spring. 
This study also reports 4,532 vacancies in the area of nursing, 69 in 
hospital pharmacy, and 230 lab technologists.
    These vacancies mean patients wait longer before seeing a health 
practitioner, may be diverted to another facility that could be more 
than 60 miles away, or experience limited availability to care because 
there are no personnel to safely expand patient capacities. Facilities 
are now competing for workers not only across the state but also across 
the country and around the world. Rural areas are especially hurt by 
these shortages not only because rural areas lack the cultural 
advantages that bring in new personnel but also because these 
facilities lack competitive wages. Rural hospitals are the main 
employer in the community and if the hospital goes under so does the 
community.
    The wage index needs to reflect only legitimate differences in area 
wage rates; and the reclassification system needs to be adjusted so 
that facilities can compete for workers on a level playing field with 
their urban counterparts. While rural hospitals have a cost structure 
similar to their urban counterparts, they are paid 100915% less for 
comparable services provided to Medicare beneficiaries. Not only are 
these facilities forced to pay higher wages in order to be competitive 
with other hospitals, but they also receive significantly lower 
reimbursement from Medicare for services provided to Medicare patients.
Reclassification Problems
    The Centers for Medicare and Medicaid Services (CMS) implemented 
the Inpatient Prospective Payment System (PPS) in the early 1990's. The 
agency used the Metropolitan Statistical Areas (MSA's) developed by the 
Census Bureau to organize the varying levels of reimbursement in the 
Medicare program. CMS created the MGCRB (Medicare Geographic 
Classification Review Board) to address specific issues of cost and 
reimbursement arising from the proximity of providers to adjacent urban 
places with higher costs and reimbursements. CMS developed criteria and 
a process to determine which providers qualify for reclassification (on 
an annual basis) into the larger, adjacent MSA's for purposes of 
Medicare reimbursements.
    St. Cloud Hospital, for example, qualified for wage index 
reclassification in 1992 (for FFY 1993). In 1993 (for FFY 1994), CMS 
made changes to the reclassification criteria formula that disqualified 
St. Cloud Hospital from reclassification in subsequent years. CMS added 
a requirement that a hospital's average wage be 108% of the average 
wage of all hospitals, in its home MSA, inclusive of its own wages. 
Only a small number of hospitals in the nation that are candidates for 
geographic reclassification pay more than 80% of all hospital wages in 
their home MSA. This change made it statistically impossible for 
hospitals like St. Cloud to meet the reclassification criteria from 
1994 to the present because this hospital pays 90% of all hospital 
wages in the St. Cloud MSA.
    St. Cloud Hospital is a ``dominant hospital'' in the St. Cloud MSA. 
The hospital's average hourly wage is about 15% higher than the average 
paid by the other hospitals in the St. Cloud MSA. Even so, it is not 
possible to pay 108% of a wage base where 90% of that base is St. Cloud 
Hospital's own wages.
    In BBA'97, Congress addressed the dilemma of dominant hospitals 
(hospitals which pay a disproportionately high percentage of hospital 
wages in their MSA's) by creating the dominant hospitals exception to 
the reclassification process. Dominant hospitals (paying more than 40% 
of the hospital wages in their home MSAs) are required to pay average 
hourly wages above 106% of the average hourly wage in their home MSA's 
exclusive of their own wages. To qualify for reclassification under the 
dominant hospitals' exception, dominant hospitals must pay at least 40% 
of the adjusted un-inflated wages in their home MSA and meet all other 
criteria for reclassification.
    In addition, BBA'97 required that a reclassifying hospital have 
been approved for designation each year from 1992091997. Hospitals like 
St. Cloud and Hutchinson meet all requirements for geographic 
reclassification other than the arbitrary requirement that hospitals 
have been reclassified from 1992091997. These hospitals provide a level 
of service to their communities that are more commensurate with 
services provided by hospitals in the neighboring urban MSA and at 
similar costs.
    In St. Cloud's case, more then 30 hospitals in the neighboring 
Minneapolis-St. Paul MSA have a higher wage index than St. Cloud 
Hospital. Some of theses are very small hospitals, yet they have 9.16 
percent higher Medicare base rate than St. Cloud Hospital. The case mix 
index measures the complexity of Medicare patients served. Of the 30-
plus hospitals in the Minneapolis-St. Paul MSA, only four hospitals 
have a higher case mix index than St. Cloud Hospital's. This means St. 
Cloud hospital is treating patients who have more complex cases than 
all but four of these Twin City hospitals--at a significantly lower 
rate of reimbursement. This is not how the system should work.
Solutions
    Some possible solutions to leveling the playing field between 
competing hospitals could be to change the wage index to reflect only 
legitimate differences in area wage rates, not the average per employee 
expenditures that are biased towards urban areas.
    Some less costly adjustments could be eliminating the BBA'97 
criteria requiring that a hospital be approved for reclassification 
each year from 1992091997, and, eliminating the requirement that 
hospitals have been approved for reclassification from 1992091997 when 
hospitals pay more than 80% of adjusted, un-inflated wages in their 
home MSA.
    Congress could also modify the requirement that hospitals pay 108% 
of the average, adjusted, un-inflated wage in their home MSA inclusive 
of their own wages when the hospital pays more than 80% of the 
adjusted, un-inflated wages in its home MSA. A hospital paying more 
than 80% of the adjusted, un-inflated wages in its home MSA could be 
held to criteria requiring that it pay 108% of the average, adjusted, 
un-inflated wage in its home MSA exclusive of its own wages.
    In conclusion, I would like to thank the Chairman and the Members 
of the Subcommittee for inviting me to testify today on these important 
issues.
                               __________
                      Minnesota Hospital Snapshot
St. Cloud Hospital
    St. Cloud Hospital is located in the City of St. Cloud and in the 
St. Cloud MSA, consisting of Stearns and Benton Counties in Central 
Minnesota.
    The St. Cloud MSA is immediately adjacent to the Minneapolis-St. 
Paul CMSA. St. Cloud Hospital is physically located about 1.8 miles 
north of the boundary between the St. Cloud MSA and the Minneapolis-St. 
Paul CMSA.
    St. Cloud Hospital is a regional referral center, providing a full 
range of specialty and emergency services to a 12-county area in which 
it is the only regional referral hospital. The services provided by St. 
Cloud Hospital are more complex than those of the other hospitals in 
the St. Cloud MSA and are more complex than most hospitals in the 
adjacent Minneapolis-St. Paul CMSA.
    Medicare insures forty-five percent of all patients served by St. 
Cloud Hospital. In Fiscal 2001 (ending 6/30/01), St. Cloud Hospital was 
reimbursed $11 million below its costs for services provided to 
Medicare patients.
Hutchinson Community Hospital
    Hutchinson Community Hospital is located in the City of Hutchinson, 
which is in McLeod County adjacent to the Minneapolis-St. Paul CMSA.
    Hutchinson Community Hospital is physically located 20 miles 
southwest of Minneapolis-St. Paul CMSA.
    Hutchinson Community Hospital is a regional referral center, 
providing a full range of specialty and emergency services in the area. 
The services provided by Hutchinson Community Hospital are more complex 
than other hospitals in the surrounding area and are more complex than 
some hospitals in the Minneapolis-St. Paul CMSA.
    Medicare insures forty-one percent of all patients served by 
Hutchinson Community Hospital.

                                 

    Chairman JOHNSON. Thank you very much, Mr. Peterson. Mr. 
Hinchey?

 STATEMENT OF THE HON. MAURICE D. HINCHEY, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Mr. HINCHEY. Well, Madam Chairman, Mr. Stark, and Members 
of the Subommittee, I want to thank you very much for holding 
this hearing, as others have.
    I was here for the previous panel and listened to the 
testimony of each of those Members. Frankly, it sounded very, 
very familiar, as did the testimony of Mr. Peterson just now. 
Of course, Mrs. Kelly is right next door to me, so I am very 
familiar with the situation that she outlined.
    This is a problem, obviously, that is of national 
proportions. It has to do with kind of an antiquated way in 
which we approach the reimbursement rates that are afforded to 
the various hospitals across the country.
    Medicare sets their rates, to a large extent, based upon 
geographical location. That may have been a good way of doing 
it back in 1965, I am not sure. I know very well that it isn't 
a very good way of doing it today.
    We have heard many people talk about the fluidity with 
which people cross, move around into different areas. That is 
certainly true of people who are in the wage pool. A number of 
approaches have been taken to deal with this problem.
    There was a local example of that in my situation in the 
mid-Hudson Valley in New York State, and I am talking now 
essentially about four counties, Sullivan, Dutchess, Orange, 
and Ulster, represented by three Members of Congress, two 
Republican and one Democrat, that being myself.
    They are suffering, because of the fact that they are 
sandwiched in between two metropolitan statistical areas, one 
in New York City and the other in Albany. They compete with a 
wage base in those two metropolitan areas.
    People who live in these counties can travel very easily 
either south or north. Back in 1999 the Balanced Budget 
Refinement Act had a creative provision in it which 
reclassified hospitals only in Orange County, put it into the 
New York Metropolitan Statistical area for Medicare 
reimbursement purposes. That, of course, compounded the problem 
for the remaining three counties in that region.
    So, taking that kind of approach isn't really the solution 
to the problem and many of us have tried it one way or another. 
What we need here is a comprehensive solution.
    I think first of all a data set that is considered by 
Medicare in determining geographical cost adjustments is not 
broad enough to provide a true representation of wage costs. My 
understanding is that the only data considered by Medicare in 
making these determinations are the salaries and benefits 
offered at other hospitals.
    This does not consider the many other contributing factors 
to the wage costs. Medicare does not take into consideration 
the fluidity of the wage costs. Medicare does not take into 
consideration the fluidity of today's labor market, as we have 
heard many people say.
    There is another way of approaching it which might make 
some sense, a broader consideration of wage costs as used 
elsewhere by the Federal Government and perhaps could be 
considered for Medicare wage rates.
    When the Office of Personnel Management OPM determines 
locality pay for Federal workers, it not only includes the 
salary levels for comparable jobs in the private sector, it 
also assesses the local cost of living, commuting rates and 
other factors.
    So, this is something that the Subcommittee may want to 
consider.
    So, this is a problem that cries out for solution. I know 
the solution is going to be a costly one, but that is what we 
are in business to do here. We are in business to make 
determinations that are going to help the people of this 
country. The situation that we have now is one that is highly 
discriminating. If you happen to be in a rural area, the 
quality of your health care is going to be less than that if 
you live in a metropolitan area.
    The fact of the matter is that doctors and nurses, the most 
qualified, the best trained, the most competent people are 
leaving rural areas, whether it is in Iowa or Pennsylvania or 
New York, or wherever it may be, Connecticut, and going into 
the cities because that is where the reimbursement rates are 
highest.
    We know that the hospitals in my area, and I have heard 
other people say the same thing, rely upon Medicare for 
approximately 70 percent and in some cases even higher, of 
their income. So, this is a matter that is very critical. The 
evidence of that is the fact that you are holding this hearing 
and listening to all of us here with the personal aspects and 
our personal experiences with these problems.
    I thank you very much for doing this, for listening and for 
the attention that you are going to pay to solving this 
problem.
    I wish you the best of luck and pledge my support and help 
in any way that I can to help you, to work with you to get a 
solution to this very different, but very critical issue that 
needs to be solved.
    [The prepared statement of Mr. Hinchey follows:]
Statement of the Hon. Maurice D. Hinchey, a Representative in Congress 
                       from the State of New York
    Good afternoon Chairman Johnson, Ranking Member Stark, and members 
of the Subcommittee. Thank you for the opportunity to address the 
Subcommittee today on an issue of great importance to the future of 
health care in my district: Medicare's Geographic Cost Adjustors.
    Medicare's approach to calculating the relative wage costs among 
regions is, in my view, rather troubled. The administrative process by 
which it determines the wage index fails to consider the full range of 
factors that contribute to wage costs for hospitals. In the absence of 
an equitable, effective administrative process, many hospitals have 
turned to their representatives in Congress for a legislative fix. That 
approach is also problematic and can lead to greater disparities within 
localities, but it is the only avenue open to many hospitals.
    For the last several years, I have been involved in an effort, both 
administrative and legislative, to correct an inequity in the wage 
reimbursement for hospitals in four counties in New York's Hudson 
Valley region. In many ways, I believe it is illustrative of the 
inherent flaws in the Medicare system, and appreciate the opportunity 
to share this experience with you.
    The Balanced Budget Refinement Act of 1999 (BBRA) reclassified 
hospitals in Orange County, New York into the New York Metro 
Metropolitan Statistical Area (MSA) for Medicare reimbursement 
purposes. This provision has had what I believe to be an unintended, 
but negative, economic impact on six hospitals in three adjacent 
counties in New York's Hudson Valley region.
    It is important to note that Dutchess, Orange, Sullivan and Ulster 
counties had, prior to the enactment of BBRA, been part of the same MSA 
as Orange County. Dutchess, Sullivan and Ulster counties had met the 
necessary criteria to be reclassified into the Newburgh, NY09PA MSA 
(Newburgh is located in Orange County). Based on the Health Care 
Financing Administration's (HCFA) decision to reclassify them, it in 
effect acknowledged that the hospitals operate within a similar wage 
index to hospitals in Orange County and should be treated similarly.
    When the Orange County reclassification was under consideration as 
part of BBRA, my colleagues and I from the Hudson Valley did not oppose 
the change. At the time, our staff members had been led by 
representatives of HCFA to believe that the Dutchess, Sullivan and 
Ulster county hospitals would automatically be reclassified into the 
New York Metro MSA along with the Orange County hospitals because of 
their status as part of the Newburgh MSA. We received assurances from 
HCFA that the legislative fix, which moved the Orange County hospitals 
into the New York Metro MSA, would correspondingly move the other 
hospitals into the New York Metro MSA. However, when the other Hudson 
Valley hospitals pursued the reclassification after BBRA was enacted, 
HCFA ruled that only those hospitals geographically located in Orange 
County could receive the New York Metro wage index.
    Having failed to correct this imbalance through the administrative 
appeals process, I have sponsored several efforts on behalf of the 
hospitals to secure a legislative fix. I understand that this is not 
the Committee's preferred mechanism for addressing wage 
reclassifications, but the six hospitals in Dutchess, Sullivan and 
Ulster counties had no other recourse available to them.
    Needless to say, the Orange County legislative fix has placed the 
six hospitals in the adjoining counties of Dutchess, Sullivan and 
Ulster at a severe competitive disadvantage. While the hospitals in all 
four Hudson Valley counties are competing for staff with the rest of 
the New York Metro MSA, they also compete most directly against each 
other.
    The reclassification of the Orange County hospitals into the New 
York Metro MSA has resulted in a significant increase in Medicare 
reimbursement for wage-related costs for those hospitals. As a result 
of this provision, Orange County hospitals have gained $8--$10 million 
annually in enhanced reimbursement. This enables the Orange County 
hospitals to offer much more generous compensation to their employees 
and to lure staff away from other hospitals.
    This ability to pay higher wages has been critical. Our local 
hospitals, like most across the country, are facing profound shortages 
in the health care workforce. Competition for registered nurses, 
technicians and certified aides has been fierce but ultimately the 
hospitals that can pay the highest wages, provide the most generous 
fringe benefits and even pay hiring bonuses are winning the battle.
    Having worked with the Hudson Valley hospitals on this issue since 
1999, I have experienced firsthand the problems that are inherent in 
the manner in which wage reclassifications are currently handled. I 
hope that as the Committee prepares to make changes to the system, you 
will take several concerns into consideration.
    First, the data set considered by Medicare in determining 
geographic cost adjustors is not broad enough to provide a true 
representation of wage costs. My understanding is that the only data 
considered by Medicare in making these determinations are the salaries 
and benefits offered at other hospitals. This does not consider the 
many other contributing factors to wage costs.
    In particular, Medicare does not take into consideration the 
fluidity of today's labor markets. In the case of the hospitals from my 
district, it is critically important to take into account that workers 
are prepared to travel well beyond the towns or counties in which they 
live to find lucrative work. New York's Hudson Valley region is 
sandwiched between the New York City metropolitan area and the Albany 
metropolitan area. Workers that live in the Hudson Valley are 
accustomed to commuting to either of these metropolitan areas for work. 
Therefore, when a substantially higher rate of pay is available in 
Albany or New York, workers will leave the Hudson Valley for those 
jobs. Because of the BBRA language that reclassified the Orange County 
hospitals, workers in Dutchess, Sullivan and Ulster counties need only 
to travel to Orange County to receive wages that can be as much as 40 
or 50 percent higher. This severely compromises the ability of 
hospitals in the lower-paying counties to retain staff and, ultimately, 
stay in business.
    A broader consideration of wage costs is used elsewhere by the 
Federal Government and perhaps could be considered for Medicare wage 
rates. When the Office of Personnel Management determines locality pay 
for federal workers, it not only includes the salary levels for 
comparable jobs in the private sector, it also assesses the local cost 
of living, commuting rates and other factors. I take the liberty of 
suggesting to the Subcommittee that a similar wage survey could be 
taken into consideration for Medicare.
    Because the administrative process does not currently include 
adequate mechanisms for assessing wage costs, hospitals may have no 
other remedy at their disposal except for a legislative correction. As 
the representative for many of the hospitals that have been endangered 
by the Orange County reclassification, I have been more than happy to 
work on their behalf for such a correction.
    However, I realize that there are inherent dangers in pursuing 
legislative corrections. Taking a ``rifle shot'' approach to wage 
reclassifications does not necessary make for a fair and equitable 
system. In the case of the hospitals I represent, the Orange County 
reclassification plucked one group of hospitals out of an MSA and moved 
it into a higher paying MSA, despite the fact that HCFA's 
administrative process had already determined that Orange County shared 
a similar wage index with hospitals in Dutchess, Sullivan and Ulster 
counties. Although Medicare should not be in the position of giving 
unfair advantages to some hospitals over others, making political 
changes to the wage index certain increases the likelihood that that 
will happen. Legislative reclassifications of hospitals can directly 
impact other hospitals in their immediate vicinity, but that is not 
necessarily part of the decision-making process.
    The present system has flaws that need to be addressed. Although I 
understand that it is a very complex and difficult task, I hope that 
the Subcommittee will consider serious reforms to Medicare's wage 
indexing structure. I look forward to working with you to supply any 
details that the committee may need regarding the situation I have 
presented today.
    Thank you.

                                 

    Chairman JOHNSON. Thank you very much, Congressman Hinchey. 
Congressman Smith?

STATEMENT OF THE HON. NICK SMITH, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF MICHIGAN

    Mr. SMITH. Madam Chair, Pete, everybody, thank you for 
doing all the listening when you probably also could do a lot 
of talking about some of the problems.
    With your permission, I would like to show a chart. My main 
concern is Jackson Hospital which is a 359-bed hospital. Madam 
Chair, this Jackson Hospital, it is a nonprofit. It hires 2,500 
people, the highest employer in the MSA.
    It is bordered by seven other counties, MSA districts, 11 
hospitals all receiving significantly higher reimbursement, 12 
percent in Lansing, 20 percent in Livingston, 20 percent in Ann 
Arbor, these other hospitals receive 20 percent higher 
reimbursement, 15 over in Battle Creek, and 12 percent in 
Eaton. Jackson is in the middle.
    [The chart follows:] 
    [GRAPHIC] [TIFF OMITTED] 83922B.001
    
                                 

    People are willing to drive, nurses, doctors, 40, 50, and 
60 miles.
    I just called the financial people about their estimate of 
what they are going to do this year. They are estimating that 
they are going to lose between $4 and $9 million at the 
hospital. So, what we are faced with is a system that puts some 
hospitals at a competitive disadvantage and therefore is going 
to deprive the kind of equal service.
    We have a lot of different rates, but I think we should 
make no mistake. Individuals that can get a 10 percent higher 
salary in one area compared to another are going to travel that 
30 or 40 miles.
    This is what has happened in the Jackson area. The reason 
why these wage reimbursement indices are higher and stay higher 
are complicated, as you know, but are due in large part to the 
fact that wage indices tend to be self perpetuating. The 
hospitals in these surrounding areas receive higher than 
average reimbursement from Medicare and so can offer higher 
wage, salaries to more hospital staff.
    The more labor costs these hospitals incur, the higher the 
resulting wage index and the higher resulting Medicare 
reimbursement and the more Medicare reimbursement they receive, 
the more they can pay their staff.
    Now, the inverse is true at Foote Hospital. Foote receives 
lower than average Medicare reimbursement and like any 
business, they try to make ends meet. The way Foote does this 
is by having a different staff mix. Instead of, in Ann Arbor in 
a certain situation they would have three registered nurses, 
Foote, in trying to survive, has one registered nurse and then 
two assistants who are going to work for a lower wage. So, only 
one registered nurse out of the three is getting the higher 
wage that has to be competitive of else they would lose that 
nurse.
    Due to the proximity of these other hospitals with higher 
reimbursement rates, Foote competes and Foote must and does 
offer the wages. However, with a change in mix, that means that 
there is a little less quality and service where some people 
are going to decide to take their business elsewhere.
    We have talked about maybe a universal reimbursement. The 
fact is that we are having doctors more to other States where 
they think they can make more money.
    The University of Michigan has a medical hospital. Michigan 
State has two, both the regular and the osteopathic. These 
doctors aren't staying in Michigan. They are looking across the 
country where they can get the reimbursement they need. Rural 
areas especially are jeopardized.
    One of these hospitals, Hillsdale Hospital is not getting 
20 percent because the law we passed several years ago that 
allows a special consideration to have a change for 3 years, 
that is going to expire. So, Hillsdale Hospital that is the 
only rural hospital as far as reimbursement in southern 
Michigan, is also at a competitive disadvantage.
    Let me concluded by saying in addition to Foote Hospital, 
we have calculated there are 100 additional hospitals in the 
United States with a similar problem that pays more than 40 
percent. Jackson represents 80 percent in the Jackson MSA. They 
represent about 80 percent of the total medical wages.
    So, one of the considerations for being allowed to change 
your MSA, even though you pay higher wages, is meeting the 108-
percent requirement that you are aware of. You can't be 108 
percent of your own market.
    Doctors Hospital, partially because of the lower 
reimbursement in the Jackson area, is going out of business. 
So, Jackson very well could be 100 percent. We need to change 
this special dominating hospital exception that would allow 
these or any hospital, and I suggest any hospital, that is more 
than maybe 60 or 70 percent of their MSA to be allowed to not 
meet that 108-percent requirement that is now in the law in 
terms of changing.
    I appreciate the Committee's time. My time is up, but it is 
a tremendous problem of inequity in a requirement system that 
puts some hospitals out of business and that is what we are 
threatened with in Jackson. Thank you.
    [The prepared statement of Mr. Smith follows:]
Statement of the Hon. Nick Smith, a Representative in Congress from the 
                           State of Michigan
    Madam Chairperson and members of the Subcommittee, thank you for 
the opportunity to testify before you today.
    I wish to speak with you today about a shortcoming of the 
geographic reclassification system, which has directly and adversely 
affected hospitals within my district.
    W.A. Foote Memorial Hospital, a 359-bed non-profit general hospital 
located in Jackson, Michigan employs 2,500 persons, making it the 
second largest employer in the Jackson Metropolitan Statistical Area 
(MSA). The only other hospital in Jackson County serving Jackson 
residents is Doctors Hospital. Doctors is a 65 bed hospital that 
employs 300 people. They are a significant provider of health care 
county-wide.
    The Jackson MSA is surrounded by seven counties, with eleven 
hospitals, all receiving higher reimbursement. The wage indices in 
those other MSAs are consistently and significantly higher than the 
wage index applicable to Jackson. As you see by this chart the Jackson 
wage index is between 6 and 20 percent below the eleven surrounding 
hospitals.
    The reasons why these wage reimbursement indices are higher and 
stay higher are complicated, but are due in large part to the fact that 
wage indices tend to be self-perpetuating. The hospitals in surrounding 
areas receive higher than average reimbursements from Medicare, and so 
can offer higher than average salaries to more hospital staff. The more 
labor costs these hospitals incur, the higher the resulting wage index, 
and the higher the resulting Medicare reimbursements. The more Medicare 
reimbursement they receive, the more they can pay their staff.
    The inverse is true for Foote and Doctors. These hospitals receive 
lower than average Medicare reimbursements. Like any business, 
hospitals must operate within a budget, which means costs must try to 
be held to projected revenues. Because Foote receives a low wage index 
and low Medicare reimbursements as a result, Foote must constrain its 
labor costs. Constrained labor costs lead to lower wage indices, and 
lower Medicare reimbursements, which again lead to constrained labor 
costs. Foote ends up at a competitive disadvantage for reimbursement 
and ultimately for survival.
    Because of its proximity to these other hospitals with higher 
reimbursement rates, Foote and Doctors compete with hospitals in those 
areas for clinical personnel, such as nurses and technicians. They must 
and do offer wages at least commensurate with, perhaps even greater 
than, those paid by hospitals in those neighboring cities to induce 
highly skilled clinical personnel to remain in Jackson, rather than 
seek jobs elsewhere. However, Foote, for example suppresses its labor 
costs by adjusting its skill mix, for example. Whereas the University 
of Michigan Hospital might staff a nursing unit with three registered 
nurses, Foote would staff a similar unit with one registered nurse and 
two licensed practical nurses, or other clinicians with lesser skills, 
therefore requiring lower average wages.
    Congress established the geographic reclassification process to 
address exactly the kind of situation confronted by Foote. Foote is 
located in close proximity to three MSAs. Its labor costs are higher 
for a particular skill level than the other hospitals in its area, and 
comparable to hospitals in the Ann Arbor, Lansing, and Kalamazoo MSAs. 
Yet, Foote is unable to qualify for geographic reclassification because 
of a flaw in the criteria that hospitals must satisfy. A hospital 
seeking wage index geographic reclassification must satisfy three 
tests, one of which requires that the applying hospital's wages are 108 
percent higher than hospitals in the area in which the hospital is 
physically located. Foote cannot satisfy this 108 percent test.
    There are only two hospitals in the Jackson MSA. Foote is the 
larger of the two, and pays the majority of hospital-related wages. 
Given the dominance of Foote's own wage data, over 75 percent of the 
MSA wages, Foote cannot satisfy the 108 percent threshold.
    There is a special reclassification opportunity put in by some 
members of Congress called the'' Special Dominating Hospital 
Exception,'' that permits an eligible hospital to remove its wage data 
from the calculation of the 108 percent test. However, to limit the 
future application of that amendment, the hospital must also have 
qualified for reclassification in each of the fiscal years 1992 through 
1997, making this exception closed to many hospitals who are today 
confronted with this situation.
    In addition to Foote and Doctors, there are approximately 100 
similarly situated hospitals, (that is hospitals that are in MSAs with 
only one or two other hospitals), which pay more than 40 percent of the 
wages in their MSA, but which cannot qualify for reclassification, 
because of the 108 percent test. I suggest the committee consider 
modifying the ``Special Dominating Hospital Exception'' to allow any 
hospital paying over 75 percent of wages and do away with the 920997 
restrictions.
    Hillsdale Community Health Center, also located in my district, is 
dealing with similar problems. Hillsdale, while providing vital 
services to the people of Hillsdale County, is struggling to survive, 
because of the level of Medicare payments made to it, particularly in 
comparison with other hospitals in southern Michigan. There are twenty-
eight counties in the lower third of Michigan. In twenty-seven of those 
counties, hospitals are paid Medicare rates as urban hospitals. 
Hillsdale is the only hospital in the lower third of Michigan paid on 
the basis of rural hospital Medicare rates. Hillsdale has received 
limited administrative reclassification for the next two years, however 
this classification is again temporary. It's important for long term 
planning that Hillsdale, and other hospitals disadvantaged by a rural 
designation, receive a permanent legislative reclassification.
    The geographic reclassification process works for many hospitals. 
However, it should be fixed. Because of the low reimbursement rate, 
Doctors Hospital in Jackson County, the only other hospital in the 
county besides Foote, reportedly might close. To have a reimbursement 
system that, because of technicalities, forces some hospitals into 
insolvency and out of business is not good public policy, is unfair and 
reduces available health care for particular communities. Congress 
should remedy the situation that I described by enacting legislation 
that would amend the ``Special Dominating Hospital Exception'' to 
enable Foote and other similarly situated hospitals to qualify for 
reclassification. And, Congress should consider broader legislation 
that would allow hospitals, which are struggling with geographic 
reclassification issues, to permanently reclassify once and for all. 
Distance between hospitals is no longer the factor it once was. Most 
hospitals should have similar reimbursement rates.
    Thank you for your time and consideration of this request.

                                 

    Chairman JOHNSON. Thank you very much for your testimony 
and for your interesting map. Mr. Watt, welcome.

   STATEMENT OF THE HON. MELVIN L. WATT, A REPRESENTATIVE IN 
           CONGRESS FROM THE STATE OF NORTH CAROLINA

    Mr. WATT. Thank you, Madam Chair and Members of the 
Subcommittee. I appreciate the opportunity to come and testify. 
I prepared a written statement, which you have, and I will try 
not to repeat that.
    I am going to try to use a chart that is not quite as 
sophisticated as Nick's and ask him if he will hold it up. That 
kind of illustrates the problem here, and it is not different 
from what you have heard already.
    [The chart follows:] 
    [GRAPHIC] [TIFF OMITTED] 83922C.001
    
                              ----------                              

    You have Charlotte, North Carolina, right here at the base 
of a ``V'' and through Charlotte, North Carolina, runs 
Interstate 85 and Interstate 77. This is a bipartisan problem 
because up Interstate 77 is Sue Myrick and Cass Ballenger. Up 
Interstate 85 is Representative Robin Hayes and Representative 
Howard Coble.
    I am down here at the base and running that direction and 
that direction. You all know I have this strange congressional 
district. I run all over the place. I adjoin all of these 
people.
    The problem is that people in Charlotte, Cabarrus County, 
Rowan County, and Iredell County have always been in the same 
metropolitan statistical area. They move back and forth. The 
highway system is there. Patients move back and forth. Doctors 
move back and forth. Employees of all kinds move back and 
forth. So, if one is paying more and the other is paying less, 
they will just move.
    They continue to reside where they used to but they go 
somewhere else to work. They drive down the highway some 15, 
20, 25, or 30 miles. I mean it is a 30-minute commute. So, 
nobody is going to take less money in a system like this and to 
make matters worse, if you cut across Highway 70, which is not 
an interstate highway, you can go from Rowan County to Iredell 
County. People move in that direction. They always have.
    Now, what happens? All of a sudden there is a proposal that 
comes forward that says, ``We are going to take Rowan County 
and put it in a 'micropolitan' statistical area and leave 
everybody else in a metropolitan statistical area.'' What is 
that going to do?
    It is going to cost Rowan County Hospital $2.5 million a 
year when they have to pay the exact same salaries that 
everybody else in this triangle has to pay. It just can't work 
that way. Six or 7 years ago we had to solve Iredell County's 
problem with a legislative fix. I mean that is where they tried 
to do the same thing with Iredell County, they got back into 
the Charlotte metropolitan statistical area.
    So, everybody in this area is drawing from the same 
employee base, same physician base, and hopefully providing the 
same quality of medical care or trying to provide, but if you 
take Rowan County out and put it into a lower reimbursement 
rate, they will get some employees. The question is, will they 
be as qualified as the employees that they have now, because 
all their best paid employees pick up and go to Charlotte.
    They will get some physicians, yeah, but the question is, 
will they be the same quality physicians. The problem exists up 
on the northern end of my district, up in the Greensboro part. 
They took Greensboro and Winston-Salem and separated them into 
two. I mean that is a natural Interstate 40 corridor. People 
move along that corridor everyday. People go from Greensboro to 
Winston-Salem to work or Winston-Salem to Greensboro to work.
    The same thing applies in this area. This simply needs to 
be fixed. You know, I used to aspire, when I first got here to 
be on the Committee on Ways and Means. I am glad I am not. I am 
glad it's you all's problem because I came and listened to the 
first panel.
    This is a serious problem. I know that that solution of 
putting Rowan County in separate micropolitan area is just 
going to make the quality of medical care in Rowan Country 
lower than it currently is because they are not going to be 
able to pay the same salaries to their employees and that is 
going to put them at a disadvantage.
    [The prepared statement of Mr. Watt follows:]
Statement of the Hon. Melvin L. Watt, a Representative in Congress from 
                      the State of North Carolina
    Madame Chair and Members of the Subcommittee, thank you for holding 
this hearing and inviting me to speak on the very important topic of 
geographic factors in the current Medicare payment system and the need 
for a comprehensive legislative fix.
    I represent a district in North Carolina which includes parts of 
Charlotte, Greensboro and Winston-Salem, as well as parts of suburban 
and not so rural areas that connect these metropolitan centers. While 
my district (like the districts many Members represent) is diverse with 
a multiplicity of racial, ethnic, demographic, economic and political 
constituencies, one common bond all these constituencies share is the 
health care system and, in particular, the network of hospitals that 
provide critical services to residents in these cities and communities. 
The financial condition of these hospitals is, therefore, a topic of 
vital importance.
    The specific issue I have come to address today is the new 
standards issued by the Office of Management and Budget in December 
2000 for defining Metropolitan and Micropolitan Statistical Areas. 
Those standards will change the classification of 713 counties around 
the country and in some cases will be devastating for hospitals in 
urban, suburban and rural communities and, in turn, devastating for the 
patients who depend on these hospitals. Rowan Regional Medical Center 
is one of those hospitals.
    Rowan Regional Medical Center in Salisbury, North Carolina is 
located in one of the counties that would change from the Metropolitan 
Statistical Area (MSA) category under the current system to a 
Micropolitan Statistical Area under the new system. For good reasons, 
Rowan County (which I share with Representative Howard Coble) has been 
included in the Charlotte MSA for decades (as has Iredell County, 
represented by Representative Cass Ballenger and Cabarrus County, 
represented by Representative Robin Hayes). Under the new plan, the 
Micropolitan Statistical Area in which Rowan County is being placed 
would continue to be immediately adjacent to the Charlotte Metropolitan 
Statistical Area. However, according to PricewaterhouseCoopers, which 
conducted an independent analysis on behalf of Rowan Regional, the 
change would reduce Medicare payments for inpatient services to Rowan 
Regional by $2.9 million per year. In this case, the differential is 
simply not justified.
    Because of the close proximity and ease of access between 
Charlotte/Mecklenburg County, Cabarrus County and Rowan County along 
Interstate 85 and the close proximity and ease of access between 
Charlotte/Mecklenburg County and Iredell County along Interstate 77, 
these areas have grown almost seamlessly. Patients, as well as nurses, 
doctors, custodians and workers of all kinds regularly live in one area 
and commute to and from work in another. Wages and benefits tend, by 
necessity, to be competitive throughout the area. Rowan Regional is one 
of the acute care facilities in the area, employing over 1,200 full and 
part-time staff and serving over 130,000 people from Rowan County and 
surrounding areas. Rowan Regional can't afford to pay its workers less. 
If it does, they'll simply choose to work in Cabarrus, Mecklenburg or 
Iredell.
    As is the case with many hospitals around the county that are 
operating with razor-thin margins, the proposed change could 
dramatically reduce the quantity of services Rowan Regional provides, 
compromise its exceptional quality of medical care or, quite possibly, 
even jeopardize its viability and survival. On the patient level, the 
people affected most will be those who can afford it least-- the 
elderly, working poor and home-bound patients. The services and 
programs currently provided that could be adversely impacted include:

         LFree mammography for low-income citizens;
         LHome health and hospice services;
         LA free telephone triage service;
         LHealth education programs for the general public;
         LReduced-cost Hepatitis B shots for school teachers; 
        and
         LA Community Care Clinic for the working poor.

    While I recognize that the Federal Government sets different 
Medicare reimbursement rates because hospitals operate in different 
market environments, Rowan Regional should be reimbursed at the same 
level as Charlotte-region hospitals because the two areas are closely 
connected and part of the same market. The new standards assume that 
hospitals in smaller communities pay lower wages and, therefore, do not 
require reimbursements comparable to those hospitals in more urban 
areas. As I indicated above, however, this is simply not the case for 
Rowan Regional Medical Center.
    Clearly, there are many of us who have hospitals in our districts 
which will be negatively impacted by MSA reclassifications and lower 
Medicare payments for inpatient services. But this is not a problem 
that should be fixed one hospital at a time in the current budget 
environment. Our hospitals and, more importantly, our patients should 
not be subject to such a zero-sum game. Congress needs to address the 
underlying geographic factors in the current Medicare payment system 
with a comprehensive legislative fix.
    Thank you for giving me the opportunity to testify before the 
Subcommittee today and I welcome any questions you may have.

                                 

    Chairman JOHNSON. Thank you very much, Mr. Watt. Mr. 
Sherwood?

    STATEMENT OF THE HON. DON SHERWOOD, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. SHERWOOD. Thank you very much, Madam Chairman for 
convening this very important hearing. I appreciate the Members 
of the Subcommittee and the Ranking Member, Mr. Stark, being 
here to listen to our concerns.
    We have heard today about disparities be regions. That is 
part of the issue. We know that the system was designed to try 
and give equal health care across the country, and it took into 
account the fact that wage rates were different.
    Now what we have had, and I have spent years looking at 
reports like Mr. Stark had on different business ventures, 
trying to figure out why one in one town was more profitable 
than one in another town. If they have different rules it is 
very difficult to compete.
    My area, which Paul Kanjorski represents also, we are 
disadvantaged by 34 percent between the Newburgh, New York, 
area which butts right up against us. In other words, it is not 
one, its Montana and the other is New York. This is part of 
Pennsylvania in the Newburgh, New York, area. My part of 
Pennsylvania is held by the rural floor and there is a 34-
percent difference in the wage reimbursement.
    Now, no business, health care or otherwise, can compete 
when the people next to them can charge 34 percent more than 
they can charge for 50 or 60 percent of their patients. So, 
this is an issue that we must address.
    I don't want to trash the system. I understand that it was 
designed to try to be fair. As legislators and representing 
people from all parts of the country, we have to make sure that 
the money we spend for health care is fair.
    If the people 5 miles down the road are paid more, 34 
percent more than the people 5 miles up the road, it just 
doesn't work.
    You know, Wyoming County, Lackawanna County, Lucerne 
County, Lacoming County, Pennsylvania, are very disadvantaged 
by this formula and it is driving some of their hospitals, as 
other people have said, out of business.
    Now, we know that health care was overbuilt a little bit 
and some of this has to happen. We have to be careful about how 
much of it we make happen and 34 percent is not something that 
anybody, a disparity that anybody can live with.
    Madam Chairman, I worked with you on the milk issue, and I 
know how hard you fight for your constituents. That is what I 
am here to do. I appreciate the consideration of the 
Subcommittee to look into this very important issue.
    I would just like you to take that one thought home with 
you that two hospitals right next to each other can have a 34-
percent disparity in what they are paid. It doesn't work. Thank 
you.
    [The prepared statement of Mr. Sherwood follows:]
 Statement of the Hon. Don Sherwood, a Representative in Congress from 
                       the State of Pennsylvania
    Thank you, very much, Madame Chairman, for convening this important 
hearing on the critical issue of Medicare access disparities caused by 
inequities built into the historic wage rates. The current Medicare 
payment system has several adverse affects on the hospitals I 
represent.
    They have been shortchanged rather than rewarded by Medicare for 
keeping their wages down. Hospitals in the cities of Scranton, Wilkes-
Barre have kept wages down and now receive only the Pennsylvania rural 
floor wage index, which for 2002 is 0.8683 and for 2003 will be 0.8525.
    My district borders the higher wage rate areas of Allentown, 
Pennsylvania to the southeast with a 0.9833 wage index and Harrisburg, 
Pennsylvania at 0.9315. But by far the greatest threat to our health 
staff is from hospitals in the Newburgh, New York MSA to the East with 
a wage index of 1.1434.
    A Hospital which is part of the Newburgh MSA classification put up 
a billboard in my hometown of Tunkhannock, under an hour away by car, 
to advertise for health workers. How can the hospitals I represent be 
expected to compete when the Federal Government is giving a nearly 30% 
wage rate advantage to a neighboring employer?
    As the healthcare manpower shortage continues to worsen, the 
hospitals I represent are in the difficult position of having to retain 
or attract healthcare workers without adequate resources. Because every 
time we provide a percentage increase, the gap widens.
    According to the 2001 Financial Analysis by the Pennsylvania Health 
Care Cost Containment Report on General Acute Hospitals, the hospitals 
in the region I represent posted a negative 1.51% operating margin. 
That was the worst in the Commonwealth of Pennsylvania and contrary to 
a statewide improvement in operating margins to 2.10% from 2000.
    As you know, I have been working hard to have some of the hospitals 
I represent reclassified in order to provide a more reasonable wage. In 
trying to find an administrative solution, Centers for Medicare & 
Medicaid Services Administrator Tom Scully told me that the solution 
must come in the form of legislation.
    Adequate Medicare reimbursement is vital for my hospitals because 
they serve a relatively higher population of older Americans. We need 
to be able to attract and retain skilled nurses and health 
professionals to provide quality care for Medicare patients.
    Madam Chairman, I know that there is no greater champion in the 
Congress for health care equity than you. It was my great pleasure to 
work with you on behalf of your dairy farmers, and I saw how seriously 
you take your position as an advocate for the people of the Sixth 
District of Connecticut. As the advocate for the Tenth Congressional 
District of Pennsylvania, I implore you and your colleagues here to 
address this issue legislatively.
    I thank the Subcommittee for their efforts to find a remedy to this 
very critical problem and I look forward to supporting your good work.

                                 

    Chairman JOHNSON. Thank you, Mr. Sherwood. We have our last 
panel of Members coming. As you depart, it is incredible that 
there could be such disparities when much of the payment 
structure is uniform at a national rate. The wage index only 
applies to about--is it 45 or 55 percent? It is 71 percent of 
the costs. Even part of the 71 percent of the costs are 
actually nationally paid.
    It is clear this is a very, very big problem in the lives 
of our hospitals and therefore the lives of our communities. 
So, we certainly will be working on it.
    Mr. STARK. May I?
    Chairman JOHNSON. Yes.
    Mr. STARK. Thank you, Madam Chair. I have just a couple of 
things. Bear with me, Mel, for a minute. The change in the wage 
base has nothing to do directly with what your hospitals pay in 
salaries
    Mr. WATT. That's correct.
    Mr. STARK. It is a measure that is used to raise the per-
case reimbursement to hospitals in high- or low-wage rate areas 
from the national setting. So, there is no reason, for instance 
in a highly unionized area like I am in, all the hospitals pay 
pretty much, the nurses rates are the same if they are all in 
the Service Employees Industry Union SEIU.
    All it does is adjust the amount of money that your 
hospital receives from Medicare. There is no difference what 
your patients pay for all practical purposes, Mr. Sherwood. So, 
the competition changes. It changes in your area so that in a 
sense one would wonder why we adjust for a disproportionate 
share, which is the number of poor people.
    A lot of people are in areas which we have come to use as a 
proxy for the idea that hospitals get stuck with a lot of 
nonpaying patients. So, we adjust Medicare a little bit to 
cover that. It doesn't mean the hospitals have to take in more 
charity cases, but it is an adjustment we use.
    Our teaching hospitals, that doesn't necessarily mean that 
teaching hospitals pay anybody any more, but because of the 
burden that they have to carry for running the educational 
thing, we pay them a little extra.
    Basically the Medicare reimbursement for every 
appendectomy, let us say, is the same for every hospital in the 
country. We adjust it a little bit if you are a low-wage area 
or a high-wage area. That does affect the ability of hospitals 
to pay more money, but for hospitals who have a positive 
margin, they could do it anyway. They just end up which a 
little less profit.
    So, what I am trying to suggest to you is that it is a 
proxy for trying to adjust the system that is supposed to pay 
every hospital the same. Arguably, because we let it come in, I 
for one would probably do away with the wage-base adjustment 
because it can and will mean millions of dollars to a hospital, 
but it doesn't mean they have to pay anybody any more. It just 
means they have to bring it down to the bottom line.
    Then I would say, what the hell, if they are already making 
a profit, why disadvantage other hospitals in a community who 
are not, just because this one hospital may have found a way to 
get closer to a different line?
    All I am suggesting is that if we had a more definitive way 
to look at each hospital, if you assume that we should only pay 
them what it costs to treat Medicare, and maybe, you would say 
not, we should pay more for Medicare so they can run charity 
care. I won't disagree with that, but I'm not sure that is 
built into the system.
    So, what we have is a system that is very difficult to make 
any sense from. We can respond to your individual hospital 
pleas, and I heard several people mention hospitals that went 
broke. Do you know that we have never, I don't think in any 
year and I have been at this business 15 years or so, and we 
have never closed 40 or 50 hospitals in the year. There are 
6,000 in the country. That isn't so bad. Most of them close 
because the doctor died or something else happens or they 
merge.
    Basically, it's a constant battle to adjust whatever we can 
adjust. This happens to be one of the things we can adjust 
specifically. It would help us. Now, I will shut up.
    The hospitals won't give you or us specific financial data 
because they don't like to let that out. That is what we are up 
again, how do we do it?
    Mr. HINCHEY. Just a practical example, the first part of 
your statement, Mr. Stark. You have 12 hospitals. Two of them 
are now suddenly, arbitrarily moved into a metropolitan 
statistical area. The amount of money that those two hospitals 
receive is now increased between $8 to $10 million a year.
    Mr. STARK. It could very well happen.
    Mr. HINCHEY. They are now able to pay 40 to 50 percent more 
to the employees that they require to deliver health care in 
those hospitals.
    Mr. STARK. Did they?
    Mr. HINCHEY. They did, thereby disadvantaging the other 
hospitals in the group from which they were plucked 
arbitrarily.
    Mr. WATT. My situation is the reverse of that. They were in 
the same MSA----
    Mr. STARK. They changed their wages?
    Mr. WATT. Now, they are going into a ``micropolitan'' 
statistical area. I mean I didn't do the math. The study they 
had done, the accountant says, well, I hope they are not Enron 
accountants, but their accountants say this is going to cost 
this hospital $2.5 million a year.
    If they get $2.5 million less per year, there is no way 
they are going to be able to pay the same salaries that they 
are paying employees in Charlotte.
    Chairman JOHNSON. Mr. Watt, this only a proposal by the 
Centers for Medicare and Medicaid Services CMS. It is an effort 
to look at, if you make the area smaller, will it be more 
accurate. What your testimony is it won't be more accurate 
because the hospital is already a part of a large area and you 
can't change that. That is not even proposed to go into effect 
until 2005. There is a long time between now and then. It is 
one response to his problem. What you are saying is it won't 
work. Mr. Sherwood and then let's go on to the next panel.
    Mr. SHERWOOD. If mine are being reimbursed at a 34-percent 
less figure than their competition, it is hard for them to pay 
their people enough to get out of the trap.
    Chairman JOHNSON. Yes, I agree with that. I thank you all 
very much for your testimony. We will invite the last panel up.
    Mr. CARDIN. Madam Chairman, while you are doing that, may I 
just make one brief comment?
    Chairman JOHNSON. Yes.
    Mr. CARDIN. First, I appreciate the courtesy. I was on the 
first panel, I couldn't be here, and my statement has been made 
a part of the record. I just really want to at least put on the 
table another perspective here. That is these wage indexes not 
only affect the hospitals, but they affect the skilled nursing 
facilities.
    Chairman JOHNSON. Oh, yeah.
    Mr. CARDIN. Even though in 2000 we gave authority to the 
U.S. Department of Health and Human Services (HHS) to develop 
wage indexes for skilled nursing facilities, they have not done 
that. So, we are finding, at least in my State, that the 
information given by the hospitals was not accurate, and it 
cost our skilled nursing facilities a couple of million 
dollars.
    So, I would just urge, as we look at this, we also look at 
making other providers who are impacted by this, that we have a 
fair way--to me, I think that HHS should develop a wage index 
for the skilled nursing facilities. There should be a way to 
correct information that is made available that was inaccurate 
that affects other providers than the provider who submitted 
it. I appreciate your attention.
    Chairman JOHNSON. Mr. Aderholt, Mr. Moran, Mr. Peterson, 
Mr. Sandlin, and Ms. Wilson is not going to be able to join us. 
So, Mr. Sandlin, Mr. Peterson, Mr. Moran, and Mr. Aderholt. Mr. 
Aderholt, would you just start right in, please?

 STATEMENT OF THE HON. ROBERT B. ADERHOLT, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF ALABAMA

    Mr. ADERHOLT. Yes. Robert Aderholt, 4th District of 
Alabama. Madam Chairman and Members of the Subcommittee, thank 
you for the opportunity to appear today on an issue which is of 
critical importance in terms of our ability to provide health 
care. No formula for distributing funds is perfect, and I am 
grateful for the openness of making some much-needed 
adjustments, particularly with regard to rural health care.
    Since Alabama is a low-income State, hiring and keeping 
workers in any field can be difficult. However, this problem is 
particularly severe in the field of health care.
    The reason is simple. The market for health care workers is 
tight; so tight, in fact, that cities and rural areas often 
compete for the same people. Unfortunately for rural areas, the 
cities usually win. More and more districts like mine in north 
Alabama are seeing workers move away to large urban areas or 
drive the long distances to those areas in order to make higher 
wages.
    Rural hospitals provide essential inpatient, outpatient, 
and post-acute, including skilled nursing, home health care and 
rehabilitation services to nearly 9 million Medicare 
beneficiaries. Rural hospitals rely more on Medicare payments, 
which can be 70 percent or more of their revenue, yet are less 
able to manage within the prospective payment system because of 
low financial reserves, thinner margins, and significant 
fluctuations in patient volume.
    These challenges, coupled with their sparse population, 
high levels of poverty, and shortages of critical health 
professionals, have significantly impacted the ability of many 
rural hospitals to remain financially viable under Medicare 
prospective payment policies. In fact, one out of every three 
rural hospitals is losing money, and 66 percent have negative 
total Medicare margins.
    As you know, the Federal payment calculations, as they were 
first designed, there were certain factors used to adjust the 
payment based on the various geographic locations within the 
country. One of the factors was an adjustment for the wages 
paid. Later, the government developed a way to differentiate 
between payments to large urban facilities and all other 
hospitals. Once these adjustments were put in place, they were 
never reevaluated and have penalized States like Alabama for a 
number of years.
    This provides hospitals in large urban areas, like Atlanta, 
with a larger base rate. The base rate is the starting point 
upon which all of the other factors are based, and can make a 
significant difference in the rates paid to facilities in those 
areas. Alabama has no facilities that qualify for this 
additional payment to a large urban. We would argue that there 
are not enough differences in the cost of running a large urban 
hospital, when compared to all other hospitals, to justify this 
difference in the base rate. We believe that all hospitals 
should begin with the same base rate for payment, especially 
since there are other factors that reflect differences.
    In addition to the base rate, the government uses a formula 
to factor in the wages of an area. It established a national 
average to represent hospitals' labor costs as a percentage of 
total costs. As you are aware, that average is 71 percent. 
Then, each year, the government assigns each MSA, a multiplier 
that is applied to this national average of 71 percent. Rural 
areas, or those outside the MSAs, are given another multiplier. 
These multipliers are supposedly based on the wages paid to 
persons in a given geographic area, and fluctuate each year.
    For Alabama hospitals, there are two main problems 
associated with the wage calculation. The first is that the 
Alabama average wages as a percent of total costs are actually 
about 51 percent. Therefore, when the multipliers for hospitals 
in Alabama are applied to the national average, they are 
actually applied to about 20 percent of non-labor costs. In 
practical terms, what this means is that Alabama hospitals get 
less, even though their labor costs may be as high as urban 
areas.
    A second reason is that in order to get qualified health 
care professionals, Alabama hospitals must compete with all 
areas, including out-of-State locations of Nashville and 
Atlanta. Therefore, the pay scales cannot be that different. 
Currently, the national average of wage index factors goes from 
about 70 percent to a high of 144 percent. I would submit to 
you that there is no rationale for having that much of a 
difference in health care salaries for different parts of the 
country. In fact, many hospitals in Alabama have to offer 
competitive salaries in order to attract personnel.
    For these reasons, I have given my support to H.R. 1609, 
which was introduced by a Member of this Subcommittee, Phil 
English, which establishes a floor on the area wage index to 
adjust Medicare hospital inpatient and outpatient prospective 
payments. By setting a floor of.925 on the area wage index, 
this proposal would bring Medicare payments in areas with the 
lowest wage index up to just below the national average, which 
is set at 1.0.
    H.R. 1609 has universal support among State hospital 
associations. It is also supported by the rural hospital 
administrators, the ones that live with this on a day-to-day 
basis. I know that many good ideas have and will be presented 
today, but what I am asking for this Subcommittee to do is look 
at something practical that will provide immediate assistance 
to America's rural hospitals. Thank you.
    [The prepared statement of Mr. Aderholt follows:]
Statement of the Hon. Robert B. Aderholt, a Representative in Congress 
                       from the State of Alabama
    Because Alabama is a low income state, hiring and keeping workers 
in any field can be difficult. However, this problem is particularly 
severe in the field of healthcare.
    The reason is simple. The market for healthcare workers is tight. 
So tight, in fact, that cities and rural areas often compete for the 
same people. Unfortunately for rural areas, the cities usually win. 
More and more, districts like mine in north-central Alabama are seeing 
workers move away to Atlanta or Birmingham, or make the extra hour and 
more drive to the city for the promise of higher wages.
    Rural hospitals provide essential inpatient, outpatient and post-
acute care, including skilled nursing, home health and rehabilitation 
services, to nearly 9 million Medicare beneficiaries. Rural hospitals 
rely more on Medicare payments, which can be 70 percent or more of 
their revenue, yet are less able to manage within a prospective payment 
system, or PPS, because of low financial reserves, thinner margins and 
significant fluctuations in patient volume. These challenges, coupled 
with their sparse populations, high levels of poverty, and shortages of 
critical health professionals, have significantly impacted the ability 
of many rural hospitals to remain financially viable under Medicare 
prospective payment policies. In fact, one out of every three rural 
hospitals is losing money, and 66 percent have negative total Medicare 
margins.
    When federal payment calculations were first designed, there were 
certain factors used to adjust the payment based on the various 
geographic locations within the country. One of the factors was an 
adjustment for the wages paid. Later, the government developed a way to 
differentiate between payments to large urban facilities and all other 
hospitals. Once these adjustments were put in place, they were never 
re-evaluated and have penalized states like Alabama for a number of 
years.
    This differential provides hospitals in large urban areas, like 
Atlanta, with a larger base rate. The base rate is the starting point 
upon which all of the other factors are based and can make a 
significant difference in the rates paid to facilities in these areas. 
Alabama has no facilities that qualify for this additional payment of 
``large urban.'' We would argue that there are not enough differences 
in the cost of running a large urban hospital when compared to all 
other hospitals to justify this difference in base rate. We believe 
that all hospitals should begin with the same base rate for payment, 
especially since there are other factors that reflect differences.
    In addition to the base rate, the government uses a formula to 
factor in the wages of an area. It established a national average to 
represent hospitals' labor costs as a percentage of total costs. Today, 
that average is 71 percent. Then, each year, the government assigns 
each metropolitan statistical area (MSA) a multiplier that is applied 
to this national average of 71 percent. Rural areas--those outside of 
MSAs--are given another multiplier. These multipliers are supposedly 
based on the wages paid to persons in a given geographic area and 
fluctuate each year.
    For Alabama's hospitals, there are two main problems associated 
with the wage calculation. The first is that Alabama's average wages as 
a percent of total costs are actually about 51 percent. Therefore, when 
the multipliers for hospitals in Alabama are applied to the national 
average (71 percent), they are actually applied to about 20 percent of 
non-labor costs. In practical terms, what this means is that Alabama's 
hospitals get less even though their labor costs may be as high as 
urban areas.
    The other is that in order to get qualified health care 
professionals, Alabama's hospitals must compete with all areas 
including out-of-state locations like Nashville and Atlanta. Therefore, 
the pay scales cannot be that different. Currently, the national range 
of wage index factors goes from about 70 percent to a high of 144 
percent. There's simply no rationale for having that much of a 
difference in health care salaries for different parts of the country. 
In fact, many hospitals in Alabama have to offer competitive salaries 
in order to attract personnel.
    For these reasons, I have given my support to H.R. 1609. This bill 
establishes a ``floor'' on the area wage index used to adjust Medicare 
hospital inpatient and outpatient prospective payments. By setting a 
floor of 0.925 on the area wage index, this proposal would bring 
Medicare payments in areas with the lowest wage index up to just below 
the national average, which is set at 1.00.
    H.R. 1609 has universal support among state hospital associations. 
It is also supported by rural hospital administrators--the ones who 
live with the day-to-day consequences of what we do here. I know that 
many good ideas have and will be presented today, but what I am asking 
for you to look at is something practical and that will provide 
immediate assistance to America's rural hospitals.

                                 

    Chairman JOHNSON. Mr. Aderholt, before we go on to Mr. 
Moran, I do just want to point out that in the payer package of 
the prescription drug bill, we do address this large urban 
issue. That bill does bring all hospitals up to the same 
standardized amount as the large urbans depend on. So, it will 
eliminate a longstanding inequity. With your permission, I 
would like to recognize Mr. Sandlin next because he has to 
leave. Is that comfortable with you?
    Mr. MORAN. That is fine.
    Chairman JOHNSON. Mr. Sandlin?

STATEMENT OF THE HON. MAX SANDLIN, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF TEXAS

    Mr. SANDLIN. Thank you, and I appreciate the other Member 
of the panel for letting me go. Thank you, Congresswoman and 
Madam Chairwoman Johnson for holding this hearing. It is good 
to see all the Members here, and it is always good to see my 
good friend and next-door neighbor, Congressman McCrery.
    I appreciate the opportunity to testify before you. I have 
submitted my written testimony for the record and won't be 
reading that to you, I know you will be disappointed to hear. I 
just wanted to go through a few of the points.
    As you know, as has been testified, the geographic 
adjustors have resulted in significantly lower Medicare rates 
in rural America. Approximately 15 hospitals in the 1st 
Congressional District of Texas are facing low Medicare 
reimbursement rates. Several of these hospitals compete for 
health care talent and thus face similar costs with hospitals 
in Dallas, Texas; Tyler, Texas; and other urban areas. However, 
they are compensated at a much lower rate by Medicare due to 
the wage index policy.
    Among the hardest hit in my district is the Christus St. 
Joseph's health system in Paris. Christus St. Joseph's is the 
sole rural referral center hospital in its 8-county service 
area in northeast Texas and southeast Oklahoma. Over 60 percent 
of Christus's patients are on Medicare, and it is the only 
hospital with tertiary level services between Oklahoma City and 
Dallas and between Texarkana and Sherman.
    Christus St. Joseph's is located in Lamar County, Texas, 
and it is only about 20 minutes from the Dallas MSA, and it is 
similarly close to the Sherman-Denison MSA. Since Christus is a 
high-skilled facility and because of its proximity to those 
markets, it competes with hospitals in those urban areas for 
skilled clinical personnel. As a result, Christus's average 
hourly wage is considerably higher. It is 105 percent higher 
than other rural Texas hospitals. Unfortunately, because of the 
wage index, Christus St. Joseph's is receiving about $7 million 
less in Medicare reimbursements than similar hospitals in the 
nearby urban MSA.
    As a result, Christus St. Joseph's recently announced that 
it is losing between $1 million and $1.5 million a month, it is 
closing one of its two locations, and it is laying off over 200 
employees. Unless it is reclassified, it is going to close its 
state-of-the art heart center, close its rural health clinics, 
further reduce staff, and reevaluate its involvement in 
hospice, home health, and other community based programs. In 
fact, it appears that it is very possible that without that 
relief St. Joseph's will risk closing altogether.
    Other hospitals in my district face similar shortfalls--
Longview, Texas; Henderson, Texas; and others spring to mind. 
The most serious is this particular hospital.
    Reclassification must be done on a case-by-case basis, I 
know it can be time-consuming and costly for these rural 
hospitals. Urban and suburban hospitals don't have to petition 
to make sure they get adequate Medicare funding, and neither 
should the rural hospitals.
    While I will continue to help Christus St. Joseph's and 
other hospitals in my district, I hope this Committee will 
begin to work on a long-term solution to the wage index 
inequity. I appreciate Congressman Phil English, who was here a 
moment ago, for H.R. 1609 that would eliminate the wage index 
disparity across the country. Those of us in rural areas feel 
that whether you practice in Paris, Texas, or New York City, 
that we should have some equity and we should be protected 
against an inaccurate and unfair formula. Thank you, Madam 
Chairwoman, for letting me testify today, and I appreciate your 
letting me go out of order.
    [The prepared statement of Mr. Sandlin follows:]
 Statement of the Hon. Max Sandlin, a Representative in Congress from 
                           the State of Texas
    Good afternoon, thank you for the privilege of being here today. 
Congresswoman Johnson, I also want to commend you for your decision to 
hold this hearing and to focus attention on this important issue.
    When Congress passed the Balanced Budget Act of 1997, the goal was 
to set up a payment system under which health care providers would be 
adequately compensated for their marginal costs, while eliminating 
waste in the Medicare system. The new prospective payment systems were 
designed to take into account, among other factors, differences in 
costs based on local market factors. Under Medicare Part A, the factor 
that is supposed to reflect differences in local wages is known as the 
wage index.
    While I support the intent of these geographic adjusters, in 
practice, many rural areas are receiving significantly lower Medicare 
reimbursements that do not necessarily reflect true cost differences. 
The result can be financial difficulties for rural doctors, hospitals 
and other health care providers. Congress must begin to address these 
inequities so that all health care providers--whether they live in 
Texarkana, Texas, or New York City--are adequately compensated for the 
services they provide under Medicare.
    In its June 2001, Report to Congress, the Medicare Payment Advisory 
Commission, more commonly known as MedPAC, also raised concerns about 
the current use of geographic adjusters--and especially of the wage 
index. It acknowledged that Congress has taken some steps toward 
eliminating the unwarranted disparities, but also pointed out some 
areas where policy changes may be needed.
    One of the most pressing problems is that the political boundaries 
of current MSAs--which determine a hospital's wage index, according to 
the July 2001 report, ``often arbitrarily separate facilities that 
participate in the same labor market.'' To some extent Congress has 
helped to alleviate this problem by establishing a process to enable 
hospitals to appeal their labor market assignments and request 
reclassification. However, as you will hear, reclassification has not 
ended the disparities nor addressed the needs of many rural hospitals.
    Approximately 15 hospitals in the 1st Congressional District of 
Texas face low Medicare reimbursement rates due to the current wage 
index formula. Several of these hospitals compete for health care 
talent--and thus face similar labor costs--with hospitals in Dallas, 
Tyler, and other urban areas, but are compensated at a lower rate due 
to the current wage index policy. Among the hardest hit is Christus St. 
Joseph's Health System in Paris, Texas. Christus St. Joseph's is the 
sole Rural Referral Center hospital in its eight-county service area in 
Northeast Texas and Southeast Oklahoma. Over 60 percent of Christus' 
patients are on Medicare--and Christus is the only hospital with 
tertiary level services between Oklahoma City and Dallas and between 
Texarkana and Sherman.
    Christus St. Joseph's should be the type of hospital that Congress 
intended to help when we established the opportunity for hospitals to 
apply for wage index geographic reclassification. Christus is located 
in Lamar County, Texas, only 30 miles from the Dallas MSA and similarly 
close to the Sherman-Denison MSA. Because Christus is a high-skilled 
facility, and because of the geographic proximity to these markets, 
Christus competes with hospitals in those urban areas for skilled 
clinical personnel. As a result, Christus' average hourly wage (AHW) is 
considerably higher--105 percent higher--than other rural Texas 
hospitals.
    Unfortunately, however, while Christus qualified for 
reclassification in FY 1999 and FY 2001, Christus has not met the 
strict requirements of the reclassification criteria for FY 2002 and FY 
2003. The Medicare Geographic Reclassification Review Board requires 
that a hospital's wage index be at least 82 percent of the closest MSA. 
While other MSAs surround Lamar County, Dallas is the closest and 
Christus' average hourly wage is only 81 percent of hospitals in the 
Dallas MSA. However, Christus' average hourly rate is 91 percent of 
hospitals in the Sherman-Denison MSA.
    The wage index disparity means that Christus St. Joseph's is 
receiving over $7 million less in Medicare reimbursements than similar 
hospitals would in a nearby urban MSA. Recently, Christus St. Joseph's 
announced that it is losing between $1 million and $1.5 million a 
month, closing one of its two locations, and laying off over 200 
employees. Unless it is reclassified this year, it will have to 
terminate the state-of-the-art heart center and will likely close 
altogether.
    Christus St. Joseph's CEO recently told me that even with the 
cutbacks and layoffs, that it will continue to lose money--and all the 
while it is operating at full capacity and having to turn away patients 
for a lack of beds. That is just not right.
    Even more striking is that the Medicare Geographic Reclassification 
Review Board has already decided to reclassify Christus St. Joseph's as 
of October 1, 2003. However, given the amount of money the hospital is 
losing every month--there is a good possibility that Christus--at least 
in its current form--may not last that long.
    One potential problem with the wage index may be the use of MSAs in 
determining which wage index level is used to compensate individual 
hospitals. In fact, in a December 27, 2000, Federal Register 
announcement the Office of Management and Budget (OMB) cautioned that, 
``MSA definitions should not be used to develop and implement Federal, 
state, and local non-statistical programs and policies without full 
consideration of the effects of using these definitions for such 
purposes.'' Further, OMB stated that MSAs `` may or may not be suitable 
for use in program funding formulas. Programs that base funding levels 
or eligibility on whether a county is included in a MSA may not 
accurately address issues or problems faced by local populations, 
organizations, institutions, or government units.''
    In addition, since the reclassification process must be done on a 
case-by-case basis, it can be a time-consuming and costly effort for 
the small, rural hospitals that are affected by the wage index 
inequity.
    The problems with the wage index are not unique to my rural, 
Northeast Texas district. In fact, there are 195 cosponsors of H.R 
1609, legislation introduced by Congressman Phil English which would 
eliminate the wage index disparity across the country.
    In addition, individual Members of Congress have sought to help out 
hospitals in their districts. The most recent example was the addition 
of the wage index reclassification provisions to the FY 2002 
Supplemental Appropriations bill to help specific counties in New York 
and Pennsylvania.
    While I will continue to help Christus St. Joseph's--and other 
hospitals in my district that seek geographic reclassification--I hope 
that Congress will seek to find a long-term solution to this inequity. 
Health care providers who treat Medicare patients must be adequately 
compensated for their costs. And rural areas must not be discriminated 
against by the use of an unfair, inaccurate formula.
    Again, thank you for the opportunity to testify here today. I 
appreciate your interest in this important issue.

                                 

    Chairman JOHNSON. Thank you very much for your input. We 
appreciate it. Mr. Peterson?

  STATEMENT OF THE HON. JOHN E. PETERSON, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. JOHN PETERSON. Thank you very much. I want to thank 
Madam Chairman and the Subcommittee for sitting here and 
listening to this testimony. I am sure you find it real 
exciting--a little repetitive, but very important to all of us.
    Chairman JOHNSON. It is very important.
    Mr. JOHN PETERSON. I have 18 hospitals in the largest rural 
district east of the Mississippi. I have a 5-bed hospital; the 
majority of my hospitals are from 30- to 100-bed; I have four 
200-bed hospitals. So, I have the gamut of rural hospitals.
    For 10 years I chaired the Health Committee in the 
Pennsylvania Senate and worked closely with all hospitals in 
Pennsylvania. I am quite familiar with the tertiary down to the 
small rural hospitals and how they function.
    The point I want to make today is that both Medicaid and 
Medicare treat rural hospitals poorly. In most rural hospitals, 
between 70 to 88 percent of their volume is government pay. I 
want to tell you, they do not get paid fairly. It is a very 
complicated, convoluted payment system, that every bill we pass 
leaves hospitals in my district with no improvement, no matter 
how we try to engineer it.
    The part, I guess, that has always been puzzling to me is 
that CMS's most cost-effective provider is rural. Rural 
providers provide the best buy for health care for CMS. Yet 
they discriminate against them. If I were running CMS, I would 
be looking to see how I could provide care in the most cost-
effective settings. I wouldn't be trying to put them out of 
business. When rural hospitals diminish their care or eliminate 
care, they go to tertiary centers where the system pays a whole 
lot more. Makes sense? I don't think so.
    Doctors, equipment, and high-tech people cost about the 
same, no matter where you go. I cannot be convinced of anything 
else. The utilization is less. For a hospital to be a good 
hospital, you have to have all the diagnostic equipment. You 
don't use it as many times a day or as many times a week. It is 
the only business in America or in the free-market world where 
the highest volume provider gets the highest payment and the 
low-volume provider, user gets the lowest payment.
    When you go to a local five and dime or local Quick-Fill or 
whatever convenience store, you pay the highest price. If you 
go to a supermarket, you pay a more competitive price. If you 
go to Wal-Mart and buy food, you probably buy the lowest price. 
Volume discounts. Yet in health care, we pay for the everyday 
services--I am not talking about the tertiary care--we pay the 
highest rate to those that provide the most volume and have the 
big centers. We all know that volume saves cost.
    Rural health care has been so historically discriminated 
against, and it is not the most--it is not over-bedded. In my 
rural district, we are not over-bedded. In fact, at the edge of 
my district, into the central part of Pennsylvania, all our 
major hospitals are on divert almost every weekend. There are 
not a lot of beds. Now, that is different in the suburban-urban 
markets.
    The other problem we have, that I don't think we have 
adequately addressed at Congress or at the State level, is we 
have the skilled workers providing health care in a bidding 
war. I mean, there is a shortage of every kind of skilled 
worker that we use providing health care today, so we have a 
bidding war out there. I don't want to tell you who is losing 
in that bidding war--is rural.
    A wage index would be helpful, but I believe we ought to 
take MedPAC's view that rural, whether it is long-term care, 
whether it is home health care, or whether it is small rural 
hospitals, deserve a 10-percent add-on. That is the fairest 
way. Now, I don't known what percentage of the volume we are, 
but in my view, if you want to preserve quality health care in 
rural America, they need an add-on. They need a fair payment.
    I have heard those say that they are making a lot of money. 
Well, I don't have any hospitals in my district that are making 
money on operations. There are a few that have had benevolent 
people who leave them money, that is in trust, and they use 
that money to make their bottom line positive. The majority of 
my hospitals do not have a positive bottom line. I just had a 
hospital, after 5 years of losses, just sold out to a chain. I 
think it was a mistake, but they sold out. That community now 
is being provided health care by a national chain.
    I have a lot of hospitals that are struggling financially 
and economically. In rural areas, your hospital is often your 
economic engine. It is your number one employer. It is the base 
of your community. We do not get Medicare+Choice. We are not a 
part of that system. That system pays twice as much for urban 
as it does for rural. How does that make any sense? So, we 
don't have Medicare+Choice options. We only have fee-for-
service care.
    So, I urge you to look at giving rural the 10-percent bump 
they need to keep them in business. They still will be the most 
cost-effective part of the delivery system.
    [The prepared statement of Mr. John Peterson follows:]
 Statement of the Hon. John E. Peterson, a Representative in Congress 
                     from the State of Pennsylvania
    Madam Chairman, thank you for your gracious invitation allowing me 
to testify before you and the other distinguished Members of the 
Subcommittee this afternoon on an issue which I care so deeply about: 
bringing fairness to the way in which Medicare treats rural America. It 
is truly a pleasure to be here today. Thank you.
    As you know, I have made a personal commitment over many years 
toward improving the viability of rural health care in America. As 
Chairman of the Health Committee in the Pennsylvania Senate for ten 
years, I began tackling the inefficiencies facing our health care 
delivery system, as well as identifying and growing the positive 
attributes. Upon coming to Washington, I made rural health care my top 
priority. In my view, rural America too often receives inadequate 
health care when viewed next to their urban/suburban counterparts by 
way of less reimbursement, less choice, less access, and thus, less 
quality of care. I thank the Subcommittee for recognizing this inequity 
by way of holding this hearing today on geographic adjusters.
    Other Members of this panel have and will discuss the adjusters 
impacting our rural physicians, and I would like to particularly praise 
Mr. Bereuter for his efforts to bridge the payment gap between doctors 
practicing in rural versus urban areas. In fact, I am a proud original 
co-sponsor of Mr. Bereuter's legislation to do just that, and will let 
him and others make our case on that issue. I would like to address the 
wage index issue and its impact on our rural hospitals.
    Madam Chairman, from our many personal conversations on the issue, 
you know how deeply I care about preserving rural health care 
providers; as it is so critically linked to preserving the rural way of 
life. Many times, the local hospital is the largest employer in a rural 
community--acting as the economic engine and primary tax base. 
Additionally, a strong, vibrant rural hospital is necessary to attract 
potential employers to the region so they may be assured that their 
employees will have access to adequate care. If the local hospital is 
no longer viable, the entire community will no longer be viable. It is 
that simple. The disparity in the wage index is a major contributing 
factor of Medicare's unfair treatment toward rural hospitals, 
threatening their viability and the economic health of the entire 
region.
    Medicare issues are compounded for rural hospitals because a 
majority of their patients are elderly. Coupled with above-average 
Medicaid volumes, most of my hospitals rely on government payers for 60 
to 85 percent of their patients. One of these hospitals is Bradford 
Regional Medical Center in northwest Pennsylvania just a few miles 
south of the New York border. Approximately 55% of the volume of 
services they offer are utilized by Medicare-eligible patients with 
approximately another 20% utilized by Medicaid-eligible patients. 
Bradford is significantly impacted by Medicare's geographic adjustors. 
Underlying the notion of geographic adjustors are the assumptions that 
a differential in wages exists from one geographic area to another, and 
that those differences can be captured by the MSA's defined by the 
Office of Management & Budget. These assumptions are problematic for 
two reasons. First, while those differences may exist for some jobs, 
they either don't exist or are much less significant for key 
professional positions such as nursing and pharmacy. And second, the 
boundaries are arbitrary and frequently don't reflect the relevant job 
market. The difference in wages between MSA's in any region of the 
country for key health care personnel such as nurses and pharmacists 
and highly trained technical staff is rapidly diminishing. 
Additionally, as an example of the arbitrary nature of the boundaries, 
Bradford is located only 3 miles from the New York State border and 
competes actively for key staff with the hospital in Olean, New York. 
Olean is in the Buffalo MSA and therefore, better compensated in 
comparison to Bradford. The arbitrary nature of the wage boundaries 
places many rural hospitals at a competitive disadvantage by no fault 
of their own.
    Madam Chairman, this impact is heightened by the current 
environment of shortages in health care personnel which are reaching 
crises proportions,
    creating a long-term drain on many organizations. These shortages 
are having the most severe negative impact on rural hospitals' 
abilities to recruit and retain staff. The problems with the wage index 
magnify the dilemma.
    However, the wage index is only a part of the problem. Medicare 
reimbursements also obviously contribute to the financial plight of 
rural hospitals. In fact, given the complexity of the wage index and 
the cost associated with fixing it completely, perhaps a more realistic 
way to help rural hospitals immediately is to provide every single 
rural hospital in America with a simple, across-the-board rural add-on 
similar to what has been done for rural home health agencies and 
inpatient rehab facilities. This ensures that the many rural hospitals 
who do not fit one of the many special rural classifications do not 
fall through the cracks, as is happening now. I realize that this is a 
discussion for another hearing; however, this may be a simple solution 
until Secretary Thompson and the Centers for Medicare and Medicaid 
Services are able to fully complete their ongoing review of rural 
health care and provide recommendations to Congress.
    Madam Chairman and Members of the Subcommittee, I thank you again 
for allowing me the opportunity to share with you my thoughts on an 
issue so important to rural America, and I look forward to working with 
you in strengthening rural health care. I applaud your concern and 
commitment.

                                 

    Chairman JOHNSON. Thank you, Mr. Peterson. Mr. Moran?

STATEMENT OF THE HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF KANSAS

    Mr. MORAN. Madam Chair, thank you very much for inviting, 
allowing me to testify before your Subcommittee today.
    There are significant issues that affect rural America. One 
of the most significant is the access, availability, and 
affordability of health care. This issue of geographic 
disparity greatly affects rural areas in my home State of 
Kansas, but rural areas across the country. Our doctors, our 
nurses, hospitals, and other health care providers are 
struggling to meet the needs of our communities.
    Our ability to keep a community together is very much 
directly related to the availability to access health care. 
Such a large portion of our population in rural America are 
seniors, and they will reluctantly move from a town that cannot 
meet their health care needs. Our ability to attract and retain 
young families to rural America is dependent upon access to 
health care by those moms and dads, as well as their children.
    So, this issue of access to health care is one that affects 
the future of every rural community across the country. The 
Medicare Program represents such a significant portion of 
providing health care needs in States like mine. I think the 
number is 17 percent nationally--17 percent of the health care 
costs are paid by Medicare. In my hospitals in the 1st District 
of Kansas, 67, 70, 80, even 90 percent of the patients seen by 
physicians or admitted to our hospitals are on Medicare because 
of the age of the population. Unfortunately, these Medicare 
payments have not kept pace with rising costs, and the majority 
of the hospitals now lose money when caring for Medicare 
patients.
    Since Medicare reimbursements do not meet actual costs, 
county hospitals are putting pressure on local property 
taxpayers and Kansas citizens and businesses are subsidizing 
Medicare's shortfall. Federal payments vary dramatically from 
State to State and from city to city, from hospital to 
hospital. Rural residents pay their fair share of Federal 
Insurance Contributions Act FICA taxes and should have the same 
access to hospitals and health care as anyone else. Whether we 
are young or old, sickly or healthy, we all want to know that 
health care will be available when and where we need it.
    As you know, Madam Chairman, I am a co-Chair of the Rural 
Health Care Coalition. Members of the panel are Members of that 
group. It is 182 of us House Members, Republicans and 
Democrats, working together on behalf of access and 
affordability of health care in rural America. It is our goal 
to bring these kinds of issues to the attention of our 
colleagues. Legislation that we see in Congress from time to 
time overlooks the unique challenges of smaller rural 
communities.
    I would like to specifically thank you for your efforts. 
Our Rural Health Care Coalition works closely with you and with 
Chairman Thomas for rural health care providers in the 
legislation that we passed in Congress, the Medicare 
Modernization and Prescription Drug Act. The items that you 
mentioned to Mr. Aderholt, the item that you mentioned is 
awfully important to us, and we appreciate its inclusion.
    The Medicare Prospective Payment System (PPS) does not work 
for us in rural America. The congressional mandate to create a 
predictable one-size-fits-all payment system for acute 
inpatient Medicare patients in the early eighties was based 
upon lots of assumptions that have proven to be inaccurate.
    A basic assumption was that if Medicare paid every hospital 
the same amount for the same procedure, based upon Diagnosis 
Related Groups (DRG), and then adjust those payments based upon 
geographic and labor variances, part A of the trust fund would 
remain solvent well into the future. As promising as the 
prospective payment seemed to be to policy makers early on, it 
soon became apparent that the one-size-fits-all solution 
approach was not working. As a result, a plethora of payment 
fixes have been proposed and passed, particularly to address 
the inadequacies of the PPS for rural hospitals.
    We have sole community provider hospitals, we have 
Medicare-dependent hospitals, Medicare geographically 
reclassified hospitals, critical access hospitals, and each of 
these fixes has the goal to remove certain hospitals from PPS 
because of the problems of the wage index and geographic 
classification.
    I have to admit that I have joined in that effort and 
introduced legislation, H.R. 4514, the Rural Community Hospital 
Assistance Act, which would expand the critical access 
hospitals to have additional service covered under cost-based 
reimbursement, and to allow for a new category of hospitals for 
those hospitals that have 50 beds or less to qualify, similar 
to what critical access hospitals do. So, each of us try to put 
a Band-Aid upon what is a very large wound with PPS.
    Although the payment fixes that we have talked about, that 
I mentioned, have helped, those rural hospitals are still 
struggling. There are 70 hospitals--I think I have a 
congressional district that has more hospitals than any 
congressional district in the country. We have more than 70. 
While these classifications are constantly changing, we have 14 
critical access hospitals, 17 Medicare-dependent hospitals, 25 
sole community hospitals, 2 geographically reclassified 
hospitals, and 14 rural hospitals.
    There are no urban hospitals in the district. Eight percent 
of the hospitals in the district qualify for some form of a 
payment fix. However, of the 70 hospitals in the district, only 
24 were able to break even or make a small profit treating 
Medicare patients. Even under reasonable cost-based 
reimbursement, half the critical access hospitals are operating 
in the negative Medicare margins, and only two of my rural 
hospitals are operating with positive Medicare margins.
    Changes to the standardized base payment and wage index are 
needed to help rural communities to recruit and retain health 
care professionals. The base payment standardized amount set by 
the government was designed to recognize distinctions in 
operating costs between rural and urban areas. The assumptions 
that led government to develop these different payments to 
rural and urban hospital areas are no longer valid. Given the 
shortage of nurses, physicians, and other skilled hospital 
labor, rural areas struggle to compete with their urban 
counterparts in the current labor market. In addition, the 
assumption that it costs less to perform medical procedures, 
less to purchase durable medical equipment, and less to 
administer small rural hospitals is erroneous.
    Again, we would like to thank you for that standardized 
base payment that was a significant step in our efforts to make 
things better in rural America, and look forward to working 
with you to see that that bill ultimately becomes law.
    In regard to labor areas, the original concept of a labor 
market was probably fairly adequate in the early eighties, but 
they don't reflect the reality of 2002. Due to decreased supply 
of skilled health care workers, hospitals are expanding their 
labor market by up to 150 miles routinely. You can't pick up a 
newspaper in any rural community without seeing an ad for which 
they are seeking health care professionals. What is surprising 
is they are advertising in papers 150, 200 miles away, trying 
to find that nurse, trying to find that skilled health care 
professional. This has caused a significant shift in what local 
areas now have to pay for workers. Rural hospitals now have to 
compete in both wages and benefits with their urban 
counterparts or they risk losing their employees.
    I look forward to working with you on this difficult but 
very important issue. I think the access and affordability of 
health care is the number one domestic issue we face as policy 
makers. Thank you.
    [The prepared statement of Mr. Moran follows:]
 Statement of the Hon. Jerry Moran, a Representative in Congress from 
                          the State of Kansas
    Madam Chairman, thank you for inviting me to testify before the 
House Ways and Means Subcommittee on Health, regarding geographic 
inequities in the Medicare program.
    The issue of geographic disparity greatly affects rural areas in my 
home state of Kansas. Our doctors, nurses, hospitals and other health 
care providers are struggling to meet the needs of our communities. 
Hospitals and health care providers are not only important for our 
quality of life, but are also essential for the survival of our 
communities. Our seniors, as well as our younger families, will not be 
able to remain in communities that lack adequate health care services.
    The Medicare program represents a significant portion of funding 
for health care in our state. 80% of patients visiting hospitals in my 
district depend on Medicare. Unfortunately, Medicare payments have not 
kept pace with rising costs and the majority of hospitals now lose 
money when caring for Medicare patients. Since Medicare reimbursements 
do not meet actual costs, county hospitals are putting pressure on 
local property taxes, and Kansas' citizens and businesses are 
subsidizing Medicare's shortfall.
    Federal payments vary dramatically from state to state, and city to 
city. Rural areas, like Kansas, continue to receive lower 
reimbursements than other parts of the country. Rural residents pay 
their fair share of taxes and should have the same access to hospitals 
and health care as anyone else. Whether we are young or old, sick or 
healthy, we all want to know that health care will be available when we 
need it.
    As Chairman of the Rural Health Care Coalition, a group of 182 
House members working together on behalf of health care in rural 
America, my goal is to bring this issue to the attention of my urban 
colleagues. Legislation too often is directed toward large hospitals 
and metropolitan areas, while overlooking the unique challenges of 
smaller, rural communities. I would like to thank Chairwoman Johnson 
for her recent efforts to provide help for our rural hospitals and 
other health care providers in the Medicare reform legislation that 
passed the House last month.
Medicare's Prospective Payment System
    The Medicare Prospective Payment system does not work in rural 
areas. The Congressional mandate to create a predictable, one-size-
fits-all, payment system for acute, inpatient Medicare patients in the 
early 1980's was based upon a lot of assumptions that have proven over 
time to be inaccurate. Those assumptions were that if Medicare paid 
every hospital the same amount for the same procedures, based upon 
Diagnostic Related Groups (DRG's), and adjust those payments based upon 
geographic and labor variances the Part A Trust Fund would remain 
solvent well into the future. And while this concept was simplistic in 
design, it soon became apparent that the ``Devil was in the details.''
Payment Adjustments
    Geographic Adjustment: The first payment adjustment was to 
differentiate hospitals based upon where they were located 
geographically. According to Section 1886(d)(3)(E) of the Act, the 
Secretary of HHS must adjust the standardized amounts ``for area 
differences in hospital wage levels by a factor (established by the 
Secretary) reflecting the relative hospital wage level in the 
geographic area of the hospital compared to the national average 
hospital wage level.'' In accordance with this broad directive, the 
Secretary divided the country into payment areas based upon 
Metropolitan Statistical Areas (MSA's), Primary MSA's (PMSA's), New 
England County Metropolitan Areas (NECMA's), Consolidated MSA's 
(CMSA's) and statewide rural areas. MSA's were further subdivided into 
large urban MSA's and small urban MSA's. PMSA's, NECMA's and CMSA's 
were included after the inception of the PPS system when data showed 
that MSA's alone did not adequately differentiate variances in labor 
markets--in other words--it didn't work as designed originally.
    Wage Index Adjustment: In 1993, Section 1886(d)(3)(E) of the Act 
was further amended requiring the Secretary to ``update the wage index 
annually based upon a survey of wages and wage-related costs of short-
term, acute care hospitals.'' This gave birth to Worksheet S093 of the 
Medicare Cost Report. The instructions for the completion of this 
worksheet from HCFA (CMS) to their intermediaries and providers could 
best be described as vague, contradictory and confusing from the 
beginning. Again it was believed that labor markets would routinely 
behave homogeneously within each labor area as previously designed.
    Payment Fixes--Hospital Re-Classifications: As promising as the 
Prospective Payment System seemed to policy makers early on, it soon 
became apparent that the one-size-fits-all approach was not working. As 
a result a plethora of payment ``fixes'' have been proposed and passed, 
particularly to address the inadequacies of PPS for rural hospitals. 
Among those are Sole Community Hospitals, Medicare Dependent Hospitals, 
Medicare Geographically Reclassified Hospitals and Critical Access 
Hospitals. Each of these ``fixes'' has as its goal to remove certain 
hospitals from the Prospective Payment System because of problems with 
the wage index and geographic classification.
First Congressional District Hospitals
    Although these payment fixes to the Prospective Payment System have 
helped, our rural hospitals are still struggling. There are 70 
hospitals located with the First Congressional District of Kansas. 
While the specific classifications are constantly changing, as of the 
close of FY 2000, there were 14 Critical Access Hospitals; 17 Medicare 
Dependent Hospitals; 25 Sole Community Hospitals; 2 Geographically 
Reclassified Hospitals, and 14 rural hospitals. There are no urban 
hospitals in the district. Eighty percent of the hospitals in the 
district qualify for some form of payment fix. However, of the 70 
hospitals in the District only 24 were able either break even or make a 
small profit treating Medicare patients. Even under reasonable cost-
based reimbursement, half the Critical Access Hospitals in my district 
are operating in negative Medicare margins and only two of my rural 
hospitals are operating in positive Medicare margins. 
[GRAPHIC] [TIFF OMITTED] 83922D.001


    For these reasons, I introduced HR 4515, the Rural Community 
Hospital Assistance Act. This bill would provide enhanced cost-based 
reimbursement for critical access hospitals and extend such 
reimbursement to post-acute care services. It would also provide an 
option for rural hospitals with less than 50 inpatient beds to receive 
enhanced cost-based reimbursement for inpatient, outpatient and select 
post-acute care services. An alternative payment structure based on a 
reasonable cost-based reimbursement system is necessary to ensure that 
the survival of these essential providers of care and to ensure that 
Medicare beneficiaries located in small rural areas continue to receive 
access to quality health care services.
Standardized Payment and Wage Index Problems
    Changes with the standardized base payment and wage index are also 
needed to help rural communities to recruit and retain health care 
professionals.
    Standardized Payment: The base payment or ``standardized amount'' 
set by the government was designed to recognize distinctions in 
operating costs between urban and rural areas. However, the assumptions 
that led the government to develop different payments to urban and 
rural areas are no longer valid. Given the shortage of nurses, 
physicians, and other skilled hospital labor, rural areas struggle to 
compete with their urban counterparts in the current labor market. In 
addition, the assumption that it costs less to perform medical 
procedures, less to purchase durable medical equipment, and less to 
administer small rural hospitals is erroneous.
    I would like to thank Chairwoman Johnson for working with the Rural 
Health Care Coalition to include a provision to standardize the base 
payments between rural and urban hospitals in the Medicare reform bill 
that passed the House last month.
    HR 4954, the Medicare Modernization and Prescription Drug Act, 
would standardize hospital base payments in two years.
    Wage Index Survey: There remains considerable variance in the data 
supplied to CMS for the compilation of the wage index between Medicare 
Fiscal Intermediaries (FI's). For instance, hospitals in Kansas that 
use Mutual of Omaha as their FI versus Kansas Blue Cross are subject to 
different audits and allowances of the basically the same data. 
Further, the data CMS uses for the calculation of the wage index is 
four (4) years old. For this upcoming fiscal year (FY 2003), data from 
the FY 1999 Medicare Cost Report is used. This time frame cannot 
possible reflect changes in costs or availability of labor.
    Relevance of Labor Areas: The original concept of labor market 
areas was probably fairly adequate in the early 1980's but they do not 
reflect reality in 2002. Due to the decreased supply of skilled health 
care workers, hospitals are expanding their labor markets by up to 150 
miles routinely, often offering to house workers for a workweek. This 
has caused a significant shift in what local areas now have to pay for 
workers. Rural hospitals now have to compete in both wages and benefits 
with their urban counterparts or risk losing their employees to them.
    I look forward to continuing to work with you to improve the access 
to affordable health care in rural communities. Again, thank you for 
the opportunity to testimony on this important issue.

                                 

    Chairman JOHNSON. Thank you very much, Mr. Moran. I really 
do appreciate the thoughtful input of so many Members. I also 
want to put on the record that Congressman Doug Bereuter, who 
has been very active in writing the Committee on this subject, 
and particularly on the subject of physician reimbursement, had 
hoped to testify today, but has responsibilities on the 
Intelligence Committee that could not be delayed. So, we will 
welcome his testimony in the record as well. Thank you very 
much for your comments.
    [The statement of Mr. Bereuter follows:]

Statement of the Hon. Doug Bereuter, a Representative in Congress from 
                         the State of Nebraska
    Madam Chairman, thank you for inviting me to testify before the 
House Ways and Means Subcommittee on Health, regarding geographic 
inequities which currently exist in the Medicare program. I deeply 
regret that I am not able to accept the invitation, as I am one of the 
two bipartisan designated questioners for the Joint Intelligence 
Committee's Joint Inquiry and the Member briefed and relevantly 
experienced to perform that role. My commitment and the Inquiry's 
agenda cannot be changed.
    I am very disappointed that I am unable to express my views in-
person by testifying at this hearing, as I have been actively pursuing 
a geographic disparity issue which has a great impact on my home state 
of Nebraska. I would like to bring two issues to your attention: (1) 
the geographic adjustment factor as applied to the physician work 
component of the Medicare physician fee schedule; and (2) the hospital 
wage index.
1. LPhysician Work Component of the Medicare Physician Fee Schedule
    It has come to my attention that the formula used by the Medicare 
Program to reimburse health care providers for beneficiaries' medical 
care is not accurately measuring the cost of providing services, and is 
reimbursing physicians and other health care providers in a manner that 
favors urban providers over rural providers.
    While the Medicare, Medicaid, and S09CHIP Benefits Improvement Act 
of 2000 (BIPA) specifically addressed inadequate payment for 
Medicare+Choice organizations and took steps to stabilize and improve 
rural hospital payments, nothing substantive in the legislation 
addressed the underlying issues of inadequate reimbursement of the 
costs of providing physician services under Medicare part B.
    As you are aware, payments for physicians' services under Medicare 
are made on the basis of a fee schedule. The fee schedule has three 
components:

         the relative value for the service;
         a geographic adjustment; and
         a national dollar conversion factor.

    The relative value for a service compares the relative physician 
work involved in performing one service with the work involved in 
providing other physician's services. It also reflects average practice 
expenses and malpractice expenses associated with the particular 
service.
    Each of the 7,500 physician service codes is assigned its own 
relative value. The relative value for each service is the sum of three 
components:

         Lphysician work, which measures physician time, skill, 
        and intensity in providing a service;
         Lpractice expense, which measures average practice 
        expenses such as office rents and employee wages; and
         Lmalpractice expense, which reflects average insurance 
        costs.

    Geographic adjustments (Geographic Practice Cost Indicies or GPCIs) 
for each Medicare locality are then applied to each of the three 
components of the relative value unit.
    I am concerned that the current physician work GPCIs discriminate 
against rural areas. I recognize that when Congress created the 
physician fee schedule, it required that the amount of the adjuster for 
the value of physicians' work be reduced by 25 percent of its nominal 
value. This was a specific attempt by Congress to encourage rural 
physician practice. Ironically, the opposite has happened. There is, 
for example, a demonstrated shortage of physicians in non-metropolitan 
areas, as evidenced by the designation of Health Professional Shortage 
Areas (HPSAs) and it is still quite difficult to recruit and retain 
physicians in these rural areas. According to the March, 2002, CMS 
Communique; Nebraska currently has a total of 34 full HPSAs and 14 
partial HPSAs.
    Additionally, some physicians in my congressional district are 
working through their lunch hours as a result of physician shortages. 
In order to see as many patients as possible, Dr. Gerald Luckey, a 
family physician in David City, Nebraska, is working long hours (130914 
hours per day) and skipping meals to accommodate the health needs of 
the community. In fact, he spends his vacation time conducting nursing 
home rounds and doing necessary paperwork. Clearly, it is evident that 
the incentives currently used by the Medicare Program to encourage 
physicians to practice in rural areas are not adequately addressing the 
health care professional shortages we currently experience.
    The current Medicare physician fee schedule discounts the relative 
value of physician work in localities where physicians are becoming 
scarce. It seems apparent that relatively low payments in areas where 
physicians, and the nurses and non-physician practitioners they employ, 
are in scant supply is bad public policy. Rural communities must 
compete in a national market to recruit and retain physicians. Thus, 
sound public policy should provide rural communities with equal access 
to successfully recruit and retain these vital professionals.
    According to the Centers for Medicare and Medicaid Services, 
``physician work'' is the amount of time, intensity, and skill, a 
physician provides in a patient visit. Physicians and other health care 
providers in rural areas provide equal time, intensity, skill, and 
clinical reasoning during a patient visit as do physicians in urban 
areas. Thus, geographic adjustment of quantifiable work challenges 
common sense. Physician work should be valued equally, irrespective of 
where a physician delivers work.
    In addition to this fundamental injustice devaluing the clinical 
decisions of physicians in rural areas, I also find the justification 
for the methodology of calculating the geographic adjustment applied to 
the physician work component to be obscure. For example, current 
geographic adjustment is based on hourly earnings of non-physician, 
college-educated professionals, such as engineers, natural scientists, 
and teachers. I am not aware of any data suggesting that this earning 
distribution mirrors that of physicians.
    Medicare payments to rural physicians and other health care 
providers are less than what their equivalent counterparts are paid in 
more densely populated areas even though it has been indicated that it 
costs as much and sometimes even more to provide medical services in 
rural areas. As a result of this regional inequity and existing 
physician shortages, I introduced the Rural Equity Payment Index Reform 
Act (REPaIR, H.R. 3569), which would phase-in a floor of 1.000 for the 
Medicare ``physician work adjuster,'' thereby raising all localities 
with a work adjuster below 1.000 to that level. This is a bipartisan 
bill, which currently has 60 bipartisan cosponsors.
    Since it is probably not politically feasible to lower the work 
adjuster levels of health care providers in urban areas to correct this 
inequity, this proposed change would be put in place without regard to 
the budget neutrality agreement in the present law. Thus, Congress 
would need to change the law in order to authorize an increase to 
establish a floor of 1.000 to all parts of the nation. The phase-in 
approach attempts to soften the budgetary ramifications by spreading it 
over several years. The legislation that I proposed will at least begin 
to reduce the current inequity in payments.
    I am enclosing two spreadsheets for your review. The first 
spreadsheet illustrates the impact of H.R. 3569 on each of the Medicare 
localities. The second spreadsheet demonstrates the impact of a 
compromise agreement, which was included in the Medicare Modernization 
and Prescription Drug Act of 2002 (H.R. 4954), which passed in the 
House on June 28, 2002, with my support. The compromise agreement would 
establish a floor of 0.985 for the physician work adjuster in 2004 
only, thereby raising all localities with a work adjuster below 0.985 
to that level. This change would be dependent upon the outcome of a 
General Accounting Office study and secretarial discretion. The 
Secretary of the Department of Health and Human Services would 
determine, after taking into account the GAO report, if there is ``a 
sound economic rationale for the implementation'' of such a change. If 
so, the new floor would go into effect. The change would thereby allow 
36 Medicare localities across the country, including this my home state 
of Nebraska, to receive a higher reimbursement rate without harming 
other localities. This language is a modified version of H.R. 3569.
2. Hospital Wage Index
    On a related note, I have visited a number of hospitals, and at 
every one, hospital administrators and hospital staff have urged me to 
do something about the wage index. At each hospital, staff has 
illustrated for me the amount of money the hospital loses each year as 
a result of this unfair formula. Time after time it has been cited as 
one of the key issues for Nebraska's hospitals, as well as the Nebraska 
Hospital Association.
    A complicated and mostly arbitrary formula, the wage index is part 
of the hospital Perspective Payment System (PPS) which was created in 
the early nineties in an effort to cut Medicare spending. It 
established a base rate for Medicare reimbursement based on two 
components: labor and non-labor related costs. While non-labor related 
costs are similar nationwide, labor-related costs must be adjusted to 
account for the regional differences in wage costs. This adjustment is 
made according to a wage index.
    Rural hospitals, although providing quality, efficient patient 
care, consistently have the lowest Medicare margins. Nebraska's non 
critical-access rural hospitals' total margins have declined five 
straight years.
    Small rural hospitals simply do not have the financial resources to 
compete with neighboring rural referral centers or urban hospitals for 
nurses and other hospital staff. The wage index is applied to 
approximately 72 percent of Medicare payment, which is based on 
national cost data. The percentage of labor cost to total cost can be 
lower than 72 percent in rural hospitals; therefore, the wage index is 
applied to too high of a percentage of Medicare cost, which again 
penalizes rural hospitals.
    To cope with the growing gap between Medicare reimbursements and 
actual costs, hospitals must transfer this deficit to the private 
sector. Therefore, due to flaws in the wage index calculation, Nebraska 
citizens and businesses have historically subsidized Medicare's failure 
to pay equitably. County hospitals are causing taxes to be raised, and 
all hospitals are forced to raise charges.
    This situation threatens the very future of Nebraska hospitals, 
which employ more than 30,000 workers and spend more than $2 billion on 
salaries and operations each year. Initiatives such as offering 
alternative health plans to Medicare beneficiaries and adding a 
prescription drug benefit do little to enhance the overall Medicare 
situation in Nebraska. Because of Nebraska's low payment rates, 
Medicare+Choice managed care plans are virtually nonexistent in the 
state; increasing payments to insurance companies will not make such 
plans available in Nebraska. Only a change in the payment formula, 
ultimately bringing equity to Nebraska and other poorly reimbursed 
states, can create the financial incentive necessary for these plans to 
exist in Nebraska.
    Nebraska hospitals depend on Medicare, and so do Nebraskans. Nearly 
half of all rural hospital revenue comes from Medicare payments, and 
more than 230,000 Nebraskans are eligible for Medicare. The number of 
those eligible will only continue to grow as the baby boomer generation 
ages.
    Again, thank you for the opportunity to submit testimony on these 
very important health care issues.
                               __________

 
 
                                                      2004 Floor = 0.985
                                                                                              %      Net Payment
      Medicare Payment Locality        Work     Work Payment     Work                     Increase    Increase
                                        GPC     2001 CMS Data    GPCI     Work Payment                From Base
 
Alabama.............................   0.978      $490,817,777   0.985      $494,330,788    0.716%    $3,513,011
Alaska..............................   1.064       $20,987,417   1.064       $20,987,417    0.000%            $0
Arizona.............................   0.994      $358,157,589   0.994      $358,157,589    0.000%            $0
Arkansas............................   0.953      $280,059,972   0.985      $289,463,875    3.358%    $9,403,903
California..........................
26 Anaheim/Santa Ana, CA............   1.037      $184,923,615   1.037      $184,923,615    0.000%            $0
18 Los Angeles, CA..................   1.056      $785,520,296   1.056      $785,520,296    0.000%            $0
03 Marin/Napa/Solano, CA............   1.015       $37,183,815   1.015       $37,183,815    0.000%            $0
07 Oakland/Berkeley, CA.............   1.041      $107,656,658   1.041      $107,656,658    0.000%            $0
05 San Francisco, CA................   1.068       $69,297,111   1.068       $69,297,111    0.000%            $0
06 San Mateo, CA....................   1.048       $34,742,869   1.048       $34,742,869    0.000%            $0
09 Santa Clara, CA..................   1.063       $80,663,146   1.063       $80,663,146    0.000%            $0
17 Ventura, CA......................   1.028       $47,653,454   1.028       $47,653,454    0.000%            $0
99 Rest of California*..............   1.007      $863,291,754   1.007      $863,291,754    0.000%            $0
Colorado............................   0.985      $213,737,613   0.985      $213,737,613    0.000%            $0
Connecticut.........................   1.050      $344,474,114   1.050      $344,474,114    0.000%            $0
Delaware............................   1.019       $92,557,169   1.019       $92,557,169    0.000%            $0
DC + MD/VA Suburbs..................   1.050      $310,834,805   1.050      $310,834,805    0.000%            $0
Florida.............................
03 Fort Lauderdale, FL..............   0.996      $640,346,767   0.996      $640,346,767    0.000%            $0
04 Miami, FL........................   1.015      $294,157,698   1.015      $294,157,698    0.000%            $0
99 Rest of Florida..................   0.975    $1,306,673,956   0.985    $1,320,075,740    1.026%   $13,401,784
Georgia.............................
01 Atlanta..........................   1.006      $248,889,978   1.006      $248,889,978    0.000%            $0
99 Rest of Georgia..................   0.970      $418,862,789   0.985      $425,340,049    1.546%    $6,477,260
Hawaii/Guam.........................   0.997       $76,743,547   0.997       $76,743,547    0.000%            $0
Idaho...............................   0.960       $81,615,001   0.985       $83,740,392    2.604%    $2,125,391
Illinois............................
16 Chicago, IL......................   1.028      $509,665,467   1.028      $509,665,467    0.000%            $0
12 East St. Louis, IL...............   0.988       $50,593,569   0.988       $50,593,569    0.000%            $0
15 Suburban Chicago, IL.............   1.006      $164,367,363   1.006      $164,367,363    0.000%            $0
99 Rest of Illinois.................   0.964      $349,128,505   0.985      $356,734,001    2.178%    $7,605,496
Indiana.............................   0.981      $592,510,463   0.985      $594,926,408    0.408%    $2,415,945
Iowa................................   0.959      $344,790,897   0.985      $354,138,721    2.711%    $9,347,824
Kansas*.............................   0.963      $242,175,916   0.985      $247,708,491    2.285%    $5,532,575
Kentucky............................   0.970      $428,227,400   0.985      $434,849,473    1.546%    $6,622,073
Louisiana...........................
01 New Orleans, LA..................   0.998      $108,863,072   0.998      $108,863,072    0.000%            $0
99 Rest of Louisiana................   0.968      $316,136,675   0.985      $321,688,662    1.756%    $5,551,987
Maine...............................
03 Southern Maine...................   0.979       $55,969,778   0.985       $56,312,800    0.613%      $343,022
99 Rest of Maine....................   0.961       $80,532,703   0.985       $82,543,926    2.497%    $2,011,223
Maryland............................
01 Baltimore/Surr. Cntys, MD........   1.021      $270,041,065   1.021      $270,041,065    0.000%            $0
99 Rest of Maryland.................   0.984      $109,968,412   0.985      $110,080,169    0.102%      $111,757
Massachusetts.......................
01 Metropolitan Boston..............   1.041      $321,095,572   1.041      $321,095,572    0.000%            $0
99 Rest of Massachusetts............   1.010      $313,421,317   1.010      $313,421,317    0.000%            $0
Michigan............................
01 Detroit, MI......................   1.043      $594,767,786   1.043      $594,767,786    0.000%            $0
99 Rest of Michigan.................   0.997      $524,342,991   0.997      $524,342,991    0.000%            $0
Minnesota...........................   0.990      $350,744,499   0.990      $350,744,499    0.000%            $0
Mississippi.........................   0.957      $278,777,323   0.985      $286,933,817    2.926%    $8,156,494
Missouri............................
02 Metropolitan Kansas City, MO.....   0.988      $100,323,973   0.988      $100,323,973    0.000%            $0
01 Metropolitan St. Louis, MO.......   0.994      $195,771,938   0.994      $195,771,938    0.000%            $0
99 Rest of Missouri*................   0.946      $255,934,246   0.985      $266,485,446    4.123%   $10,551,200
Montana.............................   0.950       $78,311,124   0.985       $81,196,271    3.684%    $2,885,147
Nebraska............................   0.948      $159,489,529   0.985      $165,714,331    3.903%    $6,224,802
Nevada..............................   1.005      $137,828,181   1.005      $137,828,181    0.000%            $0
New Hampshire.......................   0.986      $106,363,444   0.986      $106,363,444    0.000%            $0
New Jersey..........................
01 Northern NJ......................   1.058      $669,989,716   1.058      $669,989,716    0.000%            $0
99 Rest of New Jersey...............   1.029      $406,179,441   1.029      $406,179,441    0.000%            $0
New Mexico..........................   0.973      $103,305,844   0.985      $104,579,914    1.233%    $1,274,070
New York............................
01 Manhattan, NY....................   1.094      $360,963,758   1.094      $360,963,758    0.000%            $0
02 NYC Suburbs/Long I, NY...........   1.068      $920,258,886   1.068      $920,258,886    0.000%            $0
03 Poughkpsie/ N NYC Suburbs, NY....   1.011      $104,839,656   1.011      $104,839,656    0.000%            $0
04 Queens, NY.......................   1.058      $149,267,348   1.058      $149,267,348    0.000%            $0
99 Rest of New York.................   0.998      $581,393,070   0.998      $581,393,070    0.000%            $0
North Carolina......................   0.970      $807,383,158   0.985      $819,868,465    1.546%   $12,485,307
North Dakota........................   0.950       $67,915,157   0.985       $70,417,294    3.684%    $2,502,137
Ohio................................   0.988    $1,112,061,200   0.988    $1,112,061,200    0.000%            $0
Oklahoma............................   0.968      $310,754,921   0.985      $316,212,394    1.756%    $5,457,473
Oregon..............................
01 Portland, OR.....................   0.996       $55,833,828   0.996       $55,833,828    0.000%            $0
99 Rest of Oregon...................   0.961      $118,667,883   0.985      $121,631,493    2.497%    $2,963,610
Pennsylvania........................
01 Metropolitan Philadelphia........   1.023      $416,204,339   1.023      $416,204,339    0.000%            $0
99 Rest of Pennsylvania.............   0.989      $948,618,029   0.989      $948,618,029    0.000%            $0
Puerto Rico.........................   0.881      $306,581,596   0.985      $342,772,840   11.805%   $36,191,244
Rhode Island........................   1.017       $90,906,095   1.017       $90,906,095    0.000%            $0
South Carolina......................   0.974      $409,802,472   0.985      $414,430,631    1.129%    $4,628,159
South Dakota........................   0.935       $78,565,176   0.985       $82,766,522    5.348%    $4,201,346
Tennessee...........................   0.975      $656,184,654   0.985      $662,914,753    1.026%    $6,730,099
Texas...............................
31 Austin, TX.......................   0.986       $65,731,707   0.986       $65,731,707    0.000%            $0
20 Beaumont, TX.....................   0.992       $42,378,361   0.992       $42,378,361    0.000%            $0
09 Brazoria, TX.....................   0.992        $8,267,256   0.992        $8,267,256    0.000%            $0
11 Dallas, TX.......................   1.010      $183,407,037   1.010      $183,407,037    0.000%            $0
28 Fort Worth, TX...................   0.987       $78,152,298   0.987       $78,152,298    0.000%            $0
15 Galveston, TX....................   0.988       $14,234,587   0.988       $14,234,587    0.000%            $0
18 Houston, TX......................   1.020      $333,251,087   1.020      $333,251,087    0.000%            $0
99 Rest of Texas....................   0.966      $963,274,096   0.985      $982,220,481    1.967%   $18,946,385
Utah................................   0.976      $126,223,102   0.985      $127,387,045    0.922%    $1,163,943
Vermont.............................   0.973       $52,502,348   0.985       $53,149,859    1.233%      $647,511
Virgin Islands......................   0.965        $2,474,182   0.985        $2,525,460    2.073%       $51,278
Virginia............................   0.984      $532,672,197   0.985      $533,213,531    0.102%      $541,334
Washington..........................
02 Seattle (King Cnty), WA..........   1.005      $117,755,518   1.005      $117,755,518    0.000%            $0
99 Rest of Washington...............   0.981      $256,949,210   0.985      $257,996,913    0.408%    $1,047,703
West Virginia.......................   0.963      $214,946,053   0.985      $219,856,555    2.285%    $4,910,502
Wisconsin...........................   0.981      $461,845,879   0.985      $463,729,043    0.408%    $1,883,164
Wyoming.............................   0.967       $34,746,922   0.985       $35,393,711    1.861%      $646,789
TOTAL EXPENDITURE...................           $26,594,480,185           $26,803,033,132    0.784%
INCREASE FROM PREVIOUS YEAR.........                        $0              $208,552,947
 
 
*Payment locality is serviced by two carriers

                               __________

 
 
                                                                                   YEAR 1 Floor = 0.976                YEAR 2 Floor = 0.987                YEAR 3 Floor = 0.995                YEAR 4 Floor = 1.000          Net Payment
                                                   Work     Work Payment                                                                                                                                                      Increase
            Medicare Payment Locality               GPC     2001 CMS Data    Work                         %      Work                         %      Work                         %      Work                         %     From Base to
                                                                             GPCI     Work  Payment   Increase   GPCI     Work  Payment   Increase   GPCI     Work  Payment   Increase   GPCI     Work  Payment   Increase     Year 4
 
Alabama.........................................   0.978      $490,817,777   0.978      $490,817,777    0.000%   0.987      $495,334,505    0.920%   0.995      $499,349,374    0.811%   1.000      $501,858,668    0.503%   $11,040,891
Alaska..........................................   1.064       $20,987,417   1.064       $20,987,417    0.000%   1.064       $20,987,417    0.000%   1.064       $20,987,417    0.000%   1.064       $20,987,417    0.000%            $0
Arizona.........................................   0.994      $358,157,589   0.994      $358,157,589    0.000%   0.994      $358,157,589    0.000%   0.995      $358,517,909    0.101%   1.000      $360,319,506    0.503%    $2,161,917
Arkansas........................................   0.953      $280,059,972   0.976      $286,819,027    2.413%   0.987      $290,051,618    1.127%   0.995      $292,402,594    0.811%   1.000      $293,871,954    0.503%   $13,811,982
California
26 Anaheim/Santa Ana, CA........................   1.037      $184,923,615   1.037      $184,923,615    0.000%   1.037      $184,923,615    0.000%   1.037      $184,923,615    0.000%   1.037      $184,923,615    0.000%            $0
18 Los Angeles, CA..............................   1.056      $785,520,296   1.056      $785,520,296    0.000%   1.056      $785,520,296    0.000%   1.056      $785,520,296    0.000%   1.056      $785,520,296    0.000%            $0
03 Marin/Napa/Solano, CA........................   1.015       $37,183,815   1.015       $37,183,815    0.000%   1.015       $37,183,815    0.000%   1.015       $37,183,815    0.000%   1.015       $37,183,815    0.000%            $0
07 Oakland/Berkeley, CA.........................   1.041      $107,656,658   1.041      $107,656,658    0.000%   1.041      $107,656,658    0.000%   1.041      $107,656,658    0.000%   1.041      $107,656,658    0.000%            $0
05 San Francisco, CA............................   1.068       $69,297,111   1.068       $69,297,111    0.000%   1.068       $69,297,111    0.000%   1.068       $69,297,111    0.000%   1.068       $69,297,111    0.000%            $0
06 San Mateo, CA................................   1.048       $34,742,869   1.048       $34,742,869    0.000%   1.048       $34,742,869    0.000%   1.048       $34,742,869    0.000%   1.048       $34,742,869    0.000%            $0
09 Santa Clara, CA..............................   1.063       $80,663,146   1.063       $80,663,146    0.000%   1.063       $80,663,146    0.000%   1.063       $80,663,146    0.000%   1.063       $80,663,146    0.000%            $0
17 Ventura, CA..................................   1.028       $47,653,454   1.028       $47,653,454    0.000%   1.028       $47,653,454    0.000%   1.028       $47,653,454    0.000%   1.028       $47,653,454    0.000%            $0
99 Rest of California*..........................   1.007      $863,291,754   1.007      $863,291,754    0.000%   1.007      $863,291,754    0.000%   1.007      $863,291,754    0.000%   1.007      $863,291,754    0.000%            $0
Colorado........................................   0.985      $213,737,613   0.985      $213,737,613    0.000%   0.987      $214,171,598    0.203%   0.995      $215,907,538    0.811%   1.000      $216,992,501    0.503%    $3,254,888
Connecticut.....................................   1.050      $344,474,114   1.050      $344,474,114    0.000%   1.050      $344,474,114    0.000%   1.050      $344,474,114    0.000%   1.050      $344,474,114    0.000%            $0
Delaware........................................   1.019       $92,557,169   1.019       $92,557,169    0.000%   1.019       $92,557,169    0.000%   1.019       $92,557,169    0.000%   1.019       $92,557,169    0.000%            $0
DC + MD/VA Suburbs..............................   1.050      $310,834,805   1.050      $310,834,805    0.000%   1.050      $310,834,805    0.000%   1.050      $310,834,805    0.000%   1.050      $310,834,805    0.000%            $0
Florida
03 Fort Lauderdale, FL..........................   0.996      $640,346,767   0.996      $640,346,767    0.000%   0.996      $640,346,767    0.000%   0.996      $640,346,767    0.000%   1.000      $642,918,441    0.402%    $2,571,674
04 Miami, FL....................................   1.015      $294,157,698   1.015      $294,157,698    0.000%   1.015      $294,157,698    0.000%   1.015      $294,157,698    0.000%   1.015      $294,157,698    0.000%            $0
99 Rest of Florida..............................   0.975    $1,306,673,956   0.976    $1,308,014,134    0.103%   0.987    $1,322,756,097    1.127%   0.995    $1,333,477,524    0.811%   1.000    $1,340,178,416    0.503%   $33,504,460
Georgia
01 Atlanta......................................   1.006      $248,889,978   1.006      $248,889,978    0.000%   1.006      $248,889,978    0.000%   1.006      $248,889,978    0.000%   1.006      $248,889,978    0.000%            $0
99 Rest of Georgia..............................   0.970      $418,862,789   0.976      $421,453,693    0.619%   0.987      $426,203,683    1.127%   0.995      $429,658,222    0.811%   1.000      $431,817,308    0.503%   $12,954,519
Hawaii/Guam.....................................   0.997       $76,743,547   0.997       $76,743,547    0.000%   0.997       $76,743,547    0.000%   0.997       $76,743,547    0.000%   1.000       $76,974,470    0.301%      $230,923
Idaho...........................................   0.960       $81,615,001   0.976       $82,975,251    1.667%   0.987       $83,910,423    1.127%   0.995       $84,590,548    0.811%   1.000       $85,015,626    0.503%    $3,400,625
Illinois
16 Chicago, IL..................................   1.028      $509,665,467   1.028      $509,665,467    0.000%   1.028      $509,665,467    0.000%   1.028      $509,665,467    0.000%   1.028      $509,665,467    0.000%            $0
12 East St. Louis, IL...........................   0.988       $50,593,569   0.988       $50,593,569    0.000%   0.988       $50,593,569    0.000%   0.995       $50,952,025    0.709%   1.000       $51,208,066    0.503%      $614,497
15 Suburban Chicago, IL.........................   1.006      $164,367,363   1.006      $164,367,363    0.000%   1.006      $164,367,363    0.000%   1.006      $164,367,363    0.000%   1.006      $164,367,363    0.000%            $0
99 Rest of Illinois.............................   0.964      $349,128,505   0.976      $353,474,503    1.245%   0.987      $357,458,334    1.127%   0.995      $360,355,666    0.811%   1.000      $362,166,499    0.503%   $13,037,994
Indiana.........................................   0.981      $592,510,463   0.981      $592,510,463    0.000%   0.987      $596,134,380    0.612%   0.995      $600,966,270    0.811%   1.000      $603,986,201    0.503%   $11,475,738
Iowa............................................   0.959      $344,790,897   0.976      $350,902,936    1.773%   0.987      $354,857,785    1.127%   0.995      $357,734,038    0.811%   1.000      $359,531,697    0.503%   $14,740,800
Kansas*.........................................   0.963      $242,175,916   0.976      $245,445,165    1.350%   0.987      $248,211,453    1.127%   0.995      $250,223,298    0.811%   1.000      $251,480,702    0.503%    $9,304,786
Kentucky........................................   0.970      $428,227,400   0.976      $430,876,229    0.619%   0.987      $435,732,416    1.127%   0.995      $439,264,189    0.811%   1.000      $441,471,546    0.503%   $13,244,146
Louisiana
01 New Orleans, LA..............................   0.998      $108,863,072   0.998      $108,863,072    0.000%   0.998      $108,863,072    0.000%   0.998      $108,863,072    0.000%   1.000      $109,081,234    0.200%      $218,162
99 Rest of Louisiana............................   0.968      $316,136,675   0.976      $318,749,375    0.826%   0.987      $322,341,837    1.127%   0.995      $324,954,537    0.811%   1.000      $326,587,474    0.503%   $10,450,799
Maine
03 Southern Maine...............................   0.979       $55,969,778   0.979       $55,969,778    0.000%   0.987       $56,427,141    0.817%   0.995       $56,884,504    0.811%   1.000       $57,170,355    0.503%    $1,200,577
99 Rest of Maine................................   0.961       $80,532,703   0.976       $81,789,717    1.561%   0.987       $82,711,527    1.127%   0.995       $83,381,935    0.811%   1.000       $83,800,940    0.503%    $3,268,237
Maryland
01 Baltimore/Surr. Cntys, MD....................   1.021      $270,041,065   1.021      $270,041,065    0.000%   1.021      $270,041,065    0.000%   1.021      $270,041,065    0.000%   1.021      $270,041,065    0.000%            $0
99 Rest of Maryland.............................   0.984      $109,968,412   0.984      $109,968,412    0.000%   0.987      $110,303,682    0.305%   0.995      $111,197,734    0.811%   1.000      $111,756,516    0.503%    $1,788,104
Massachusetts
01 Metropolitan Boston..........................   1.041      $321,095,572   1.041      $321,095,572    0.000%   1.041      $321,095,572    0.000%   1.041      $321,095,572    0.000%   1.041      $321,095,572    0.000%            $0
99 Rest of Massachusetts........................   1.010      $313,421,317   1.010      $313,421,317    0.000%   1.010      $313,421,317    0.000%   1.010      $313,421,317    0.000%   1.010      $313,421,317    0.000%            $0
Michigan
01 Detroit, MI..................................   1.043      $594,767,786   1.043      $594,767,786    0.000%   1.043      $594,767,786    0.000%   1.043      $594,767,786    0.000%   1.043      $594,767,786    0.000%            $0
99 Rest of Michigan.............................   0.997      $524,342,991   0.997      $524,342,991    0.000%   0.997      $524,342,991    0.000%   0.997      $524,342,991    0.000%   1.000      $525,920,753    0.301%    $1,577,762
Minnesota.......................................   0.990      $350,744,499   0.990      $350,744,499    0.000%   0.990      $350,744,499    0.000%   0.995      $352,515,936    0.505%   1.000      $354,287,373    0.503%    $3,542,874
Mississippi.....................................   0.957      $278,777,323   0.976      $284,312,087    1.985%   0.987      $287,516,424    1.127%   0.995      $289,846,851    0.811%   1.000      $291,303,368    0.503%   $12,526,045
Missouri
02 Metropolitan Kansas City, MO.................   0.988      $100,323,973   0.988      $100,323,973    0.000%   0.988      $100,323,973    0.000%   0.995      $101,034,770    0.709%   1.000      $101,542,483    0.503%    $1,218,510
01 Metropolitan St. Louis, MO...................   0.994      $195,771,938   0.994      $195,771,938    0.000%   0.994      $195,771,938    0.000%   0.995      $195,968,892    0.101%   1.000      $196,953,660    0.503%    $1,181,722
99 Rest of Missouri*............................   0.946      $255,934,246   0.976      $264,050,554    3.171%   0.987      $267,026,534    1.127%   0.995      $269,190,882    0.811%   1.000      $270,543,600    0.503%   $14,609,354
Montana.........................................   0.950       $78,311,124   0.976       $80,454,376    2.737%   0.987       $81,361,136    1.127%   0.995       $82,020,598    0.811%   1.000       $82,432,762    0.503%    $4,121,638
Nebraska........................................   0.948      $159,489,529   0.976      $164,200,190    2.954%   0.987      $166,050,807    1.127%   0.995      $167,396,710    0.811%   1.000      $168,237,900    0.503%    $8,748,371
Nevada..........................................   1.005      $137,828,181   1.005      $137,828,181    0.000%   1.005      $137,828,181    0.000%   1.005      $137,828,181    0.000%   1.005      $137,828,181    0.000%            $0
New Hampshire...................................   0.986      $106,363,444   0.987      $106,471,318    0.101%   0.987      $106,471,318    0.000%   0.995      $107,334,307    0.811%   1.000      $107,873,675    0.503%    $1,510,231
New Jersey
01 Northern NJ..................................   1.058      $669,989,716   1.058      $669,989,716    0.000%   1.058      $669,989,716    0.000%   1.058      $669,989,716    0.000%   1.058      $669,989,716    0.000%            $0
99 Rest of New Jersey...........................   1.029      $406,179,441   1.029      $406,179,441    0.000%   1.029      $406,179,441    0.000%   1.029      $406,179,441    0.000%   1.029      $406,179,441    0.000%            $0
New Mexico......................................   0.973      $103,305,844   0.976      $103,624,362    0.308%   0.987      $104,792,259    1.127%   0.995      $105,641,639    0.811%   1.000      $106,172,502    0.503%    $2,866,658
New York
01 Manhattan, NY................................   1.094      $360,963,758   1.094      $360,963,758    0.000%   1.094      $360,963,758    0.000%   1.094      $360,963,758    0.000%   1.094      $360,963,758    0.000%            $0
02 NYC Suburbs/Long I, NY.......................   1.068      $920,258,886   1.068      $920,258,886    0.000%   1.068      $920,258,886    0.000%   1.068      $920,258,886    0.000%   1.068      $920,258,886    0.000%            $0
03 Poughkpsie/ N NYC Suburbs, NY................   1.011      $104,839,656   1.011      $104,839,656    0.000%   1.011      $104,839,656    0.000%   1.011      $104,839,656    0.000%   1.011      $104,839,656    0.000%            $0
04 Queens, NY...................................   1.058      $149,267,348   1.058      $149,267,348    0.000%   1.058      $149,267,348    0.000%   1.058      $149,267,348    0.000%   1.058      $149,267,348    0.000%            $0
99 Rest of New York.............................   0.998      $581,393,070   0.998      $581,393,070    0.000%   0.998      $581,393,070    0.000%   0.998      $581,393,070    0.000%   1.000      $582,558,186    0.200%    $1,165,116
North Carolina..................................   0.970      $807,383,158   0.976      $812,377,281    0.619%   0.987      $821,533,172    1.127%   0.995      $828,192,002    0.811%   1.000      $832,353,771    0.503%   $24,970,613
North Dakota....................................   0.950       $67,915,157   0.976       $69,773,888    2.737%   0.987       $70,560,274    1.127%   0.995       $71,132,191    0.811%   1.000       $71,489,639    0.503%    $3,574,482
Ohio............................................   0.988    $1,112,061,200   0.988    $1,112,061,200    0.000%   0.988    $1,112,061,200    0.000%   0.995    $1,119,940,176    0.709%   1.000    $1,125,568,016    0.503%   $13,506,816
Oklahoma........................................   0.968      $310,754,921   0.976      $313,323,143    0.826%   0.987      $316,854,449    1.127%   0.995      $319,422,672    0.811%   1.000      $321,027,811    0.503%   $10,272,890
Oregon
01 Portland, OR.................................   0.996       $55,833,828   0.996       $55,833,828    0.000%   0.996       $55,833,828    0.000%   0.996       $55,833,828    0.000%   1.000       $56,058,060    0.402%      $224,232
99 Rest of Oregon...............................   0.961      $118,667,883   0.976      $120,520,139    1.561%   0.987      $121,878,460    1.127%   0.995      $122,866,330    0.811%   1.000      $123,483,749    0.503%    $4,815,866
Pennsylvania
01 Metropolitan Philadelphia....................   1.023      $416,204,339   1.023      $416,204,339    0.000%   1.023      $416,204,339    0.000%   1.023      $416,204,339    0.000%   1.023      $416,204,339    0.000%            $0
99 Rest of Pennsylvania.........................   0.989      $948,618,029   0.989      $948,618,029    0.000%   0.989      $948,618,029    0.000%   0.995      $954,373,042    0.607%   1.000      $959,168,887    0.503%   $10,550,858
Puerto Rico.....................................   0.881      $306,581,596   0.976      $339,640,905   10.783%   0.987      $343,468,825    1.127%   0.995      $346,252,767    0.811%   1.000      $347,992,731    0.503%   $41,411,135
Rhode Island....................................   1.017       $90,906,095   1.017       $90,906,095    0.000%   1.017       $90,906,095    0.000%   1.017       $90,906,095    0.000%   1.017       $90,906,095    0.000%            $0
South Carolina..................................   0.974      $409,802,472   0.976      $410,643,956    0.205%   0.987      $415,272,115    1.127%   0.995      $418,638,049    0.811%   1.000      $420,741,758    0.503%   $10,939,286
South Dakota....................................   0.935       $78,565,176   0.976       $82,010,280    4.385%   0.987       $82,934,576    1.127%   0.995       $83,606,792    0.811%   1.000       $84,026,926    0.503%    $5,461,750
Tennessee.......................................   0.975      $656,184,654   0.976      $656,857,664    0.103%   0.987      $664,260,773    1.127%   0.995      $669,644,852    0.811%   1.000      $673,009,902    0.503%   $16,825,248
Texas
31 Austin, TX...................................   0.986       $65,731,707   0.986       $65,731,707    0.000%   0.987       $65,798,372    0.101%   0.995       $66,331,692    0.811%   1.000       $66,665,017    0.503%      $933,310
20 Beaumont, TX.................................   0.992       $42,378,361   0.992       $42,378,361    0.000%   0.992       $42,378,361    0.000%   0.995       $42,506,521    0.302%   1.000       $42,720,122    0.503%      $341,761
09 Brazoria, TX.................................   0.992        $8,267,256   0.992        $8,267,256    0.000%   0.992        $8,267,256    0.000%   0.995        $8,292,258    0.302%   1.000        $8,333,927    0.503%       $66,671
11 Dallas, TX...................................   1.010      $183,407,037   1.010      $183,407,037    0.000%   1.010      $183,407,037    0.000%   1.010      $183,407,037    0.000%   1.010      $183,407,037    0.000%            $0
28 Fort Worth, TX...............................   0.987       $78,152,298   0.987       $78,152,298    0.000%   0.987       $78,152,298    0.000%   0.995       $78,785,751    0.811%   1.000       $79,181,660    0.503%    $1,029,362
15 Galveston, TX................................   0.988       $14,234,587   0.988       $14,234,587    0.000%   0.988       $14,234,587    0.000%   0.995       $14,335,439    0.709%   1.000       $14,407,477    0.503%      $172,890
18 Houston, TX..................................   1.020      $333,251,087   1.020      $333,251,087    0.000%   1.020      $333,251,087    0.000%   1.020      $333,251,087    0.000%   1.020      $333,251,087    0.000%            $0
99 Rest of Texas................................   0.966      $963,274,096   0.976      $973,245,878    1.035%   0.987      $984,214,837    1.127%   0.995      $992,192,262    0.811%   1.000      $997,178,153    0.503%   $33,904,057
Utah............................................   0.976      $126,223,102   0.976      $126,223,102    0.000%   0.987      $127,645,698    1.127%   0.995      $128,680,314    0.811%   1.000      $129,326,949    0.503%    $3,103,847
Vermont.........................................   0.973       $52,502,348   0.976       $52,664,226    0.308%   0.987       $53,257,777    1.127%   0.995       $53,689,451    0.811%   1.000       $53,959,248    0.503%    $1,456,900
Virgin Islands..................................   0.965        $2,474,182   0.976        $2,502,385    1.140%   0.987        $2,530,588    1.127%   0.995        $2,551,100    0.811%   1.000        $2,563,919    0.503%       $89,737
Virginia........................................   0.984      $532,672,197   0.984      $532,672,197    0.000%   0.987      $534,296,198    0.305%   0.995      $538,626,866    0.811%   1.000      $541,333,534    0.503%    $8,661,337
Washington
02 Seattle (King Cnty), WA......................   1.005      $117,755,518   1.005      $117,755,518    0.000%   1.005      $117,755,518    0.000%   1.005      $117,755,518    0.000%   1.005      $117,755,518    0.000%            $0
99 Rest of Washington...........................   0.981      $256,949,210   0.981      $256,949,210    0.000%   0.987      $258,520,765    0.612%   0.995      $260,616,171    0.811%   1.000      $261,925,800    0.503%    $4,976,590
West Virginia...................................   0.963      $214,946,053   0.976      $217,847,713    1.350%   0.987      $220,302,964    1.127%   0.995      $222,088,601    0.811%   1.000      $223,204,624    0.503%    $8,258,571
Wisconsin.......................................   0.981      $461,845,879   0.981      $461,845,879    0.000%   0.987      $464,670,624    0.612%   0.995      $468,436,952    0.811%   1.000      $470,790,906    0.503%    $8,945,027
Wyoming.........................................   0.967       $34,746,922   0.976       $35,070,316    0.931%   0.987       $35,465,576    1.127%   0.995       $35,753,038    0.811%   1.000       $35,932,701    0.503%    $1,185,779
TOTAL EXPENDITURE...............................           $26,594,480,185           $26,710,386,933    0.436%           $26,827,161,108    0.437%           $26,942,290,587    0.429%           $27,025,503,201    0.308%
INCREASE FROM PREVIOUS YEAR.....................                        $0              $115,906,748                        $116,774,174                        $115,129,480                         $83,212,613
CUMULATIVE INCREASE.............................                        $0              $115,906,748                        $232,680,923                        $347,810,402                        $431,023,016            $431,023,016
 
 
*Payment locality is serviced by two carriers

                                 

    Mr. JOHN PETERSON. I have two letters here I received from 
hospitals that have some detail. Could I enter them into the 
record?
    Chairman JOHNSON. You certainly can.
    [The letters follow:]

                                     Charles Cole Memorial Hospital
                               Coudersport, Pennsylvania 16915-9762
                                                      July 19, 2002
Jeffrey Vorberger
Legislative Assistant
Office of Congressman John Peterson
307 Cannon House Office Building
Washington, DC 20515

Dear Jeff:

    In response to your request for information concerning the impact 
of the wage index upon the hospitals in Northern Pennsylvania, I have 
examined a number of issues which may be helpful.
    Among the most critical challenges which rural hospitals currently 
face is the inability to recruit and retain professional staff. During 
the last 2 years we have consistently had nursing vacancy rates in 
excess of 10%. We currently have 11 vacant nursing positions. As a 
result, mandatory overtime is frequently imposed and recently nursing 
supervisors have been asked to fill nursing staff holes in the daily 
working schedule. Last week one of our best nursing supervisors 
resigned in large measure as a result of having to work night shifts to 
staff the floor for a position that we have been unable to fill.
    We have been recruiting heavily in Canada in an attempt to fill the 
vacancies and have had some limited success. Last year in an attempt to 
recruit and retain nurses, we gave unbudgeted wage increases to the 
nursing staff in excess of 11%. In November of this year we must 
negotiate the nursing union contract and are anticipating once again 
substantial increases. In non-nursing areas, such as respiratory 
therapy, speech therapy, occupational therapy, and pharmacy, we have 
been compelled to use agency staff at exorbitant rates in order to fill 
these vacancies. Over the last 3 years our wages have increased in the 
aggregate of 13% which in total represents $2 million of additional 
wage costs. It is our projection that this hospital will show an 
operating loss of in excess of $2.5 million for the fiscal year ended 
June 30, 2002.
    Among the problems that are created by inadequate reimbursement 
from Medicare and Medicaid is that we simply do not have adequate funds 
to compete for these workers on the same level as more urban hospitals 
within our region. As shortages for these skilled professionals have 
worsened, the region from which we attempt to recruit has expanded so 
that we are now recruiting nurses from all over the states of 
Pennsylvania and New York. Further difficulty which we are seeing with 
the inadequate reimbursements is that the wage index calculations are 
predicated upon data which I understand is at least 2 years old. As can 
be seen in the case of Charles Cole Hospital, the increase in wages 
over that period of time is skyrocketing and is not recognized in the 
wage index calculations.
    The flaws in the current wage index system which have long been 
recognized to disadvantage rural hospitals can be broken down into a 
few succinct categories:
    1) Rural hospitals are competing with urban hospitals for the same 
workers in a system which compensates those urban hospitals at a higher 
rate than rurals, making the rurals unable to compete on a level 
playingfield.
    2) Because urban hospitals invariably offer services which allow 
them to treat more acutely ill patients, their reimbursement is higher 
as a result of a higher case mix. In other words, on a per case basis 
urban hospitals receive higher reimbursement by virtue of that fact 
alone which in a large measure dilutes the need, if any exists, to pay 
them at a higher wage index rate.
    3) Given the fact that the data used to calculate the wage index 
is, at a minimum, 2 years old, in an environment where there are 
rapidly rising wages due to acute shortages of skilled health care 
workers, the current indexes do not come close to reflecting the 
current labor costs.
    4) Last, a singular wage index for all of the rural hospitals in a 
state such as Pennsylvania does not recognize the huge differences in 
the availability of labor and the costs of that labor that exists in 
the very different rural communities in the state. As a general 
proposition, the more remotely located the hospital the higher the 
price you will have to pay to recruit skilled health care workers, 
whereas rural hospitals more proximate to urban areas typically find a 
greater pool of available workers at a lesser cost.
    Given the fact that there are so many inequities in the wage index 
system and that the urban hospitals are so distinctly advantaged by the 
current Medicare reimbursement scheme, the implementation of a wage 
index floor would be one small step toward normalizing and making more 
fair our current system of reimbursement.
            Yours truly,
                                                     David B. Acker
                                            Chief Executive Officer

                                 

                                           Titusville Area Hospital
                                     Titusville, Pennsylvania 16354
                                                      July 19, 2002
Hon. John Peterson
307 Cannon House Office Building
Washington, DC 20515

Dear John:

    Thank you for the opportunity to comment on the wage index 
deliberations being held by the Subcommittee on Health of the Committee 
on Ways and Means. Congresswoman Johnson is correct. The Medicare wage 
index formula is extremely complex. The following are some observations 
as to how this impacts on Titusville Area Hospital.
    The wage index is formulated on wage, salary and benefit 
information provided by Pennsylvania rural hospitals. These figures 
reflect the levels of wages being paid by these hospitals; however, 
once the wage index is calculated, it is then applied to payment rates 
set by Medicare meant to reflect prices paid for other services such as 
consultants, attorneys and other purchased medical services utilized by 
the hospital. The prices of these services are often very different 
than the wages paid employees. For instance, in Titusville's case our 
attorneys are in Pittsburgh, our accountants are in Pittsburgh and our 
medical services are purchased from a wide variety of vendors as far 
away as San Antonio, Texas. How a wage index calculated on rural 
Pennsylvania wages and salaries can adequately reflect these costs is a 
mystery to me.
    I would be very much opposed to segregating rural areas and thus 
their wage index based upon large town, small town. My reason for this 
is that Titusville would no doubt be considered small town and assigned 
a lower wage index. On the other hand, our neighbors (Meadville and 
Franklin) would no doubt be designated as large towns and assigned the 
higher wage index. My point being, we must compete for labor with both 
these towns. A lower wage index, thus a lower reimbursement, would put 
us at a competitive disadvantage when trying to attract employees. We 
are already at a disadvantage and find employees leaving to accept 
higher wages at neighboring hospitals.
    Finally, once again we find ourselves in a situation that holds the 
potential to short-change us based upon past performance and what I 
consider to be responsible management. Wages, and thus the wage index, 
are impacted not only by dollars per hour but also hours worked. 
Hospitals with higher productivity will have lower wage costs and thus 
lower benefit costs than less efficient, less well-managed hospitals. 
Titusville Area Hospital has had a long track record of high 
productivity and low cost per case. This has been documented by every 
government agency that benchmarks hospital operating statistics as well 
as several private agencies. In 2000 this high efficiency, coupled with 
superior clinical outcomes, earned Titusville Area Hospital recognition 
as a Top 100 Hospital by Solucent, a national benchmarking firm. Should 
Congress allow CMS to again set the future reimbursement on past cost 
history, Titusville Area Hospital will once again be short-changed and 
penalized for being efficient and managing well. I encourage you to 
make Congress be prospective not retrospective. My belief is that a 
fair and equitable index should be developed which recognizes not 
penalizes efficient performance.
            Sincerely,
                                         Anthony J. Nasralla, FACHE
                                                      President/CEO

                                 

    Chairman JOHNSON. Thank you very much. We appreciate 
hearing from you all, and I would like to now call the panel. 
Those of you who can either stay or have staff who can stay, I 
think it would be worth it for them to stay and hear the 
testimony of Mr. Scanlon of the GAO, Mr. Hackbarth of the 
Medicare Payment Advisory Commission, and Mr. Zuckerman of the 
Urban Institute. Mr. Hackbarth, would you please open for 
MedPAC?

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

    Mr. HACKBARTH. Thank you, Chairman Johnson.
    As you know, the purpose of the wage index is to adjust 
Medicare's payment rates for costs beyond the control of a 
hospital. As you pointed out earlier, we use averages. This 
whole payment formula is built on averages, and the reason for 
that, of course, is to try to set prices that, so far as 
possible, mimic what a competitive market would set. What we 
don't want to do is set up payment amounts that reflect the 
individual hospital's costs and not an average; otherwise, we 
would be creeping back toward a cost reimbursement system.
    That said, the wage index used by Medicare is imperfect. 
There are four major problems that have been touched on today. 
One is that the areas used, the geographic areas do not 
correspond with labor markets. Basically they are too big.
    A second is that the data we use for wage adjustment 
reflect both hourly wage rates and occupational differences, 
differences in occupational mix among hospitals. So, we are not 
really comparing wages for the same type of employees, but also 
differences in the mix of hospital employees across labor 
markets.
    A third problem with the wage index is that, arguably, too 
large a share of the payment is adjusted by the wage index. As 
you pointed out, Chairman Johnson, 71 percent of the rate is 
subject to adjustment. Some think that is marginally too high 
and the number ought to be at least a few percentage points 
lower.
    Finally, the wage index uses old data.
    The effect of these imperfections can be pretty large for a 
given hospital. As your colleagues testified, for an individual 
hospital near the boundary of one of the geographic areas, the 
difference in payment can be very large, from being on one side 
of the border versus the other. Even the occupational mix 
problem, as we refer to it, could result in payment differences 
of 2 or 3 percent for a hospital, and for a hospital on a small 
margin, 2 or 3 percent at the bottom line is quite significant.
    The good news is that these imperfections can be fixed with 
the proper data. The bad news is that we don't have the proper 
data on hand, and to collect the proper data and develop better 
adjustments, is a 2- or 3-year proposition.
    I should note that the MSAs that currently are at the heart 
of the wage index system are about to be modified as a result 
of the 2000 Census. Whether that will make things better or 
worse for individual hospitals, of course, remains to be seen.
    In the interim, the geographic reclassification system has 
been a useful tool for resolving at least some problems for 
some hospitals along the borders of the wage index areas. In 
our view, it is useful precisely because it is targeted to 
hospitals that meet particular criteria. We think that the 
Congress needs to be careful to avoid fixes for this problem 
that are not so targeted and result in large-scale, widespread 
increases in payment. A wage index floor, for example, would be 
too indiscriminate in how it spreads money around.
    The problem with that sort of poorly targeted fix is not 
just that it costs a lot of money or, if it is done on a 
budget-neutral basis, takes money away from other hospitals. 
Another problem is that it creates a constituency opposed to 
future reform among hospitals that now have a big payment that 
they want to hold on to. They don't want a system with new data 
and more accurate market areas. They now like the old system. 
We have to be very wary about creating such a constituency.
    One last observation. As Mr. Stark pointed out, having a 
low-wage index does not necessarily mean that the hospital 
performs poorly on its Medicare business. In fact, we find that 
there is little correlation between the wage index and poor 
financial performance. What does that mean? Well, I think one 
thing that it means is that, for all of its imperfections, the 
system is adjusting in the aggregate fairly well. Again, there 
are individual problems, but it is not true that if you have a 
low-wage index you are doomed to failure under the Medicare 
Program. That is simply not supported by the data. Thank you.
    [The prepared statement of Mr. Hackbarth follows:]
 Statement of Glenn M. Hackbarth, 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 
views on how Medicare's payment systems account for differences in 
local market prices for the goods and services providers must buy to 
furnish care.
Medicare's payments for services in the traditional program
    In the traditional fee-for-service program, Medicare generally uses 
prospective payment systems (PPSs) to set market-like prices that are 
intended to encourage efficient delivery of health care services to its 
beneficiaries. Two of these systems--the PPS for acute inpatient 
hospital care and the physician fee schedule--are mature systems that 
have been in place for over a decade. New systems are being phased in 
for care furnished by hospital outpatient departments, home health 
agencies, skilled nursing facilities, rehabilitation hospitals, and 
starting soon, long-term care hospitals.
    To ensure access to care for Medicare beneficiaries without 
imposing undue costs on taxpayers, these payment systems should set 
payment rates that approximate the costs that efficient providers would 
incur in furnishing high quality care. Efficient providers' costs will 
vary because of local market factors--such as prices for labor--that 
are beyond their control. Consequently, Medicare's payment rates must 
vary to account for such factors or risk creating undesirable financial 
incentives and payment inequities.
Adjusting for local market conditions
    Market input prices for labor and supplies vary widely across the 
nation. These input-price differences have substantial effects on 
providers' costs but are largely beyond their control. Consequently, 
Medicare's payment rates in each market should be adjusted to reflect 
the local price level.
    How to make these adjustments accurately is one of the most 
important problems for payment system design and operation. Because 
input-price differences can account for one-third or more of the 
variation in unit production costs among providers, errors in input-
price adjustments can result in payment inequities and undesirable 
financial incentives.
    Medicare's prospective payment systems generally address this 
problem by establishing a national base payment rate and then adjusting 
the rate for the expected relative costliness of the specific case or 
service and for the local input-price level where the service is 
furnished. To carry out this design, policymakers must have one or more 
measures of geographic variation in input prices--such as the area wage 
index in the acute inpatient hospital care PPS or the geographic 
practice cost indexes in the physician fee schedule. Policymakers also 
must know what portions of providers' unit costs are affected by 
variations in input prices. This information is used to determine how 
much of the national base payment rate should be adjusted by the 
geographic input price factor for each market area. Most Medicare 
payment systems use a version of the hospital wage-index.
The hospital wage index
    Medicare's prospective payment systems for inpatient (and other 
facility) services include input-price adjustments that raise or lower 
payment rates to reflect the hourly wages of health care workers in 
each local market, as measured by the hospital wage index. The Centers 
for Medicare&Medicaid Services (CMS) constructs the hospital wage index 
for each market area using compensation data from annual hospital cost 
reports filed by the hospitals located in the area. By law, CMS must 
define market areas using the 325 Metropolitan Statistical Areas (MSAs) 
designated by the Office of Management and Budget and 49 statewide 
rural areas for counties not included in MSAs. The wage index for 2002 
varies from a high of 1.53 in Oakland, California to a low of 0.74 for 
providers in rural Alabama (Figure 1). To address inequities in labor 
market definitions, particularly for rural hospitals located near the 
edges of MSAs, Medicare policy allows acute care hospitals to apply for 
reclassification from one market area to another for the wage index 
under certain conditions. In FY 2001, 490 hospitals (about 10 percent 
of all acute care hospitals) were reclassified (Figure 2).
 Wage index issues
    MedPAC and others have identified four problems with the hospital 
wage index.\1\ One, the so-called occupational mix problem, in which 
differences among areas in the mix of workers employed affect the 
average wage rate, distorting the measurement of market prices for 
labor. Second, market areas as defined by MSAs and statewide rural 
areas can be too large, encompassing more than one distinct health care 
labor market. Third, the wage data that underlie the adjustment are 
four years old. Finally, the share of the payment to which the input 
price adjustment is made may include cost components--for example, 
billing services--that may be purchased in regional or national markets 
(and whose prices, therefore, should not vary with local market wages).
---------------------------------------------------------------------------
    \1\ For a more detailed discussion of wage index issues please see 
Medicare Payment Advisory Commission, Report to the Congress: Medicare 
Payment Policy, March 2001.
---------------------------------------------------------------------------
    The effect of differences in the mix of occupations across labor 
market areas. The objective of the geographic adjustor is to account 
for differences beyond the control of the provider--local market 
prices--and not for differences created by management decisions--the 
mix of labor. Thus, using aggregate wages and hours may distort the 
wage index by elevating the average wage per hour in markets (such as 
urban areas with large teaching hospitals) where providers employ a 
costly mix of labor and depressing the average wage in markets (such as 
many rural areas) where hospitals employ a relatively inexpensive labor 
mix. These inaccuracies in the wage index may have substantial effects 
on payment accuracy. Addressing the occupational mix problem directly 
will require occupation-specific data that CMS has not yet begun to 
collect. In the meantime, MedPAC recommended that the Secretary 
accelerate the planned phase-out from the hospital wage index of 
salaries and hours for teaching physicians, residents, and certified 
registered nurse anesthetists. Although the impact would not be large, 
this policy would improve the distribution of payments. CMS 
incorporated this suggestion in its proposed rule for hospital payments 
during fiscal year 2003. We also believe that CMS should collect 
occupation-specific data on wages and hours using hospitals' annual 
Medicare Cost Reports, as is done for the aggregate wage and hour data 
needed to construct the current wage index.
    Labor market size. MSAs and statewide rural areas are frequently 
too large to capture homogeneous labor markets for health care workers. 
Research has shown a strong pattern of systematic differences in 
hospital wage levels within many urban and rural labor market areas.\2\ 
Hospitals in outlying suburban counties generally appear to face lower 
market wage rates than those located in the central core of the same 
MSA. Similarly, hospitals located in outlying rural areas appear to 
face lower wage rates than those located in counties adjacent to MSAs. 
In addition, MSA and state boundaries often separate nearby hospitals 
(and give them substantially different wage index adjustments) although 
they are obviously competing in the same labor market. As I mentioned 
earlier, the Congress established the geographic reclassification 
policy to ameliorate this boundary problem. But inequities within large 
market areas remain.
---------------------------------------------------------------------------
    \2\ See Dalton, K., Slifkin, R.T., Howard, H.A. Rural hospital area 
wages and the PPS wage index: 1990-1997, available at http://
www.shepscenter.unc.edu/research_programs/Rural_Program/wp.html.
---------------------------------------------------------------------------
    These problems are difficult to resolve, in part because developing 
consistent criteria that can be used to define labor market areas is 
technically very difficult. A further barrier, however, is that any 
change in market definitions creates financial benefits for some 
providers and financial disadvantages for others, thereby generating 
great political resistance to reform.
    Timeliness of CMS wage data. By the time the wage index is applied 
to adjust payments, the underlying wage data are four years old. 
Although the age of the data has often been cited as an important 
problem, recent research (Dalton et al. 2000) suggests that relative 
wage levels across geographic areas do not change much over time. 
Occupation-specific wage data (when available) will allow a more 
thorough investigation of this issue.
    Proportion of costs affected by locally purchased inputs. We also 
recommend that the Secretary reevaluate current assumptions about the 
proportions of providers' costs that reflect resources purchased in 
local and national markets. This so-called labor share estimate is 
developed and periodically revised by the Office of the Actuary in CMS. 
The labor share is based on the weights for certain components 
(categories of inputs) of the hospital market basket index--a measure 
of annual inflation in the prices of goods and services hospitals buy 
to produce health care services, which is used in determining annual 
updates for Medicare's PPS payment rates. Some have argued that the 
current labor share overstates the proportion of costs that rural 
hospitals devote to labor and other locally purchased inputs. The 
components included in the labor share were originally designated in 
1983, and many of these are still largely purchased in local markets. 
However, other inputs may be purchased wholly or partly in national 
markets, and including them overstates the labor share to some extent. 
Applying the wage index adjustment using an overstated labor share 
would lead to underpayment in low-wage areas and over-payment in high-
wage areas. For fiscal year 2003, CMS proposes increasing the labor-
related share of hospital costs used to apply the wage index from 71.1 
percent to 72.5 percent. But analysis sponsored by the Commission 
indicates that the labor share is at least modestly lower than that 
currently used, not higher.
    The limitations of the hospital wage index have led some advocates 
to propose that a floor be put under the index. This would raise 
payments in market areas with low hospital wage rates (and, if done 
budget neutrally, lower them in areas with high wage rates), but it 
would do so in an arbitrary fashion. Moreover, if the objective is to 
help hospitals with poor financial performance, a wage index floor is a 
poor way to do so because it would raise payments to both low--and 
high-margin hospitals. Our analysis shows that there is no correlation 
between hospitals' Medicare inpatient margins and the wage index; 
hospitals with low margins are just as likely to be located in areas 
that have high wage indexes as they are to be in areas that have low 
wage indexes. 
[GRAPHIC] [TIFF OMITTED] 83922E.001

 [GRAPHIC] [TIFF OMITTED] 83922F.001


                                 

    Chairman JOHNSON. Thank you, Mr. Hackbarth. Dr. Scanlon?

 STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR HEALTH CARE 
             ISSUES, U.S. GENERAL ACCOUNTING OFFICE

    Dr. SCANLON. Thank you very much, Madam Chairwoman, Mr. 
Stark, and Members of the Subcommittee. I am very happy to be 
here today as you look into how the Medicare Program adjusts 
payments to hospitals and physicians to account for geographic 
differences in costs.
    Over the past 20 years at the Congress' direction, Medicare 
has implemented a series of payment reforms designed to promote 
efficient delivery of services and control program spending. A 
key requirement for these payment methods is that besides the 
incentives for efficiencies, payments must be calibrated to 
assure beneficiary access and fairness to providers. Adjustment 
of payment levels for geographic cost differences is a critical 
element of that calibration.
    As you have heard, there have been considerable concerns 
about the geographic cost adjustors, and I would like to expand 
upon some of the points that Mr. Hackbarth made as the Congress 
has asked us to look into the geographic adjustments as well a 
Medicare's reclassification policies. Let me now provide you 
the highlights of our findings.
    As you have heard, Medicare adjusts payments to hospitals 
for differences in wages based upon the averages in each 
hospital's designated geographic area compared to wage rates 
nationally. As the designated or labor market areas, Medicare 
has used the 324 metropolitan statistical areas identified by 
the Office of Management and Budget (OMB) and then treats all 
the non-metropolitan areas in each State as another labor 
market area. While this is a reasonable approach to adjust for 
cost differences across areas, the fundamental problem, as Mr. 
Hackbarth indicated, is that Medicare's defined areas are 
simply too large and likely subsume multiple labor markets.
    The MSAs often include multiple counties which can exhibit 
different patterns of urban-ness, commuting patterns, and so 
forth. The Washington, DC, MSA is a prime example. If you will 
look at the chart over there, you will see that the Washington, 
DC, MSA includes 18 counties which stretch into Maryland, 
Virginia, and West Virginia. Across these counties, wage rates 
that hospitals pay differ significantly. Hospitals in the 
District of Columbia and the nearby suburban counties, the red 
areas, pay an average of $23 per hour, while hospitals in 
several of the outlying counties pay below $20 an hour. All 
these hospitals receive the same labor cost adjustment based on 
an average wage of $23 per hour.
    We found the same pattern in many other MSAs, central 
county hospitals paying wages in excess of outlying county 
wages. The range was from 7 percent in Houston to a 38-percent 
difference in New York City.
    The non-metropolitan areas in each State are also ill-
defined. These areas can be huge. If you will look at the other 
chart of Washington State, all of the white-colored area in 
Washington State is the State's non-metropolitan area. From 
east to west, this area stretches more than 350 miles. There is 
no illusion that this comprises a single labor market. It would 
be appropriate, however, to use this large area as the basis 
for adjusting payments if wage rate levels were similar 
throughout. However, what we found is that in most States there 
is systematic variation in wage levels within these non-
metropolitan areas. Wages in large towns were often higher than 
in small towns and rural areas. Such systematic variations 
suggest that labor markets in the non-metropolitan areas differ 
enough that a single labor cost adjustment for the entire area 
is not appropriate.
    The geographic reclassification process was created to 
address some of these problems resulting from Medicare's labor 
area designations. Hospitals whose wages exceed the average for 
their designated area by specified amounts and are physically 
close to another area with higher wages can be reclassified and 
receive higher payments. Reclassification has helped 
significant numbers of hospitals paying higher wages. Three 
hundred and ten hospitals with wages exceeding the required 
threshold were reclassified in 2001. Large-town hospitals in 
particular benefited as almost three-quarters of those paying 
higher wages reclassified. About half of other non-metropolitan 
and only 12 percent of metropolitan higher-wage hospitals also 
reclassified.
    The disproportionate share of large-town hospitals 
reclassifying is attributable in part to another provision 
which allows rural referral centers to be exempt from having to 
meet the higher-wage requirement or the requirement of being 
near another high-wage area in order to reclassify. While this 
exemption benefits large-town hospitals which may be adversely 
affected by Medicare's definition of labor cost areas, it also 
allows hospitals paying lower wages to reclassify. The rural 
referral center, other exemptions, and special provisions 
allowed 116 hospitals with wages not meeting the threshold to 
reclassify in 2001, including 55 hospitals that were initially 
paying wages below the average for their original area.
    Let me conclude with some of the implications of all of 
this for Medicare payment.
    First, Medicare's geographic area definitions should be 
reviewed with the idea that the number of smaller areas be 
created and it will likely result in more homogeneous areas and 
more appropriate labor cost adjustments.
    Second, refining the geographic area definitions will 
reduce reliance on reclassification as a means of redressing 
inappropriate payment levels. Limiting the need for 
reclassifications would be a positive step. Making appropriate 
reclassification decisions is difficult. The fact that a 
hospital pays higher wages than neighboring hospitals, as Mr. 
Hackbarth indicated, is not sufficient to justify a 
reclassification. Consequently, reclassification policy has 
involved not only that hospitals pay higher wages, but that 
they also be proximate to a higher-wage area as an evidence of 
their operating in a different labor market and have a need to 
reclassify.
    This, however, leaves vulnerable hospitals that must pay 
higher wages but are not located near another area. For 
example, a large-town hospital, one of the circled areas in the 
map of Washington State, may not be able to re-qualify because 
it is distant from any MSA in Washington State.
    Exemptions for rural referral centers and sole community 
hospitals have helped some of these hospitals, but have also 
allowed lower-wage hospitals to receive higher payments. Some 
or all of these additional payments may be needed because of 
higher wage rates, but also due to other factors affecting 
cost, and may be necessary to assure continued access for 
beneficiaries.
    The difficulties I have outlined in making payments 
appropriate for each hospital may stem from our reliance on 
essentially one lever, the labor cost adjustment, to vary 
payments to hospitals. To achieve the calibration of payments 
that encourages efficiency and assures access and provides 
fairness that I mentioned at the outset, we need to assess 
whether other types of adjustments are necessary and indeed 
could be more effective in assuring appropriate payment.
    Thank you very much, Madam Chairman. I would be happy to 
answer any questions you or Members of the Subcommittee may 
have.
    [The prepared statement of Dr. Scanlon follows:]
  Statement of William J. Scanlon, Director, Health Care Issues, U.S. 
                       General Accounting Office
    Madam Chairman and Members of the Subcommittee:
    I am pleased to be here today as you discuss how the Medicare 
program adjusts payments to hospitals and physicians to account for 
geographic differences in costs.
    Because Medicare's hospital and physician payment systems are based 
on national rates, these geographic cost adjustments are essential to 
account for costs beyond providers' control and to ensure that 
beneficiaries have adequate access to services. If these adjustments 
are not adequate, Medicare could financially reward or penalize 
providers due only to where they are located. Over time, this could 
affect some providers' financial stability and their ability or 
willingness to continue serving Medicare patients.
    Some providers contend that Medicare's geographic cost adjustments 
are inadequate.
    Medicare's payments to hospitals are intended to vary with the 
average wages paid in a hospital's labor market. Yet, some hospitals 
believe that the labor cost adjustment applied to their payments does 
not reflect the average wage they face in their labor market area. 
Hospitals that meet certain criteria can qualify to have their payments 
increased through Medicare's reclassification process. But concerns 
remain about the geographic variation in payments to hospitals and 
disparities in hospital financial performance under Medicare's hospital 
payment system. Similarly, physicians have raised concerns about the 
appropriateness of Medicare's geographic adjustment to their fees.
    My comments today are based on our forthcoming report on the 
Medicare program's labor cost adjustment for hospital services and our 
preliminary work on the program's physician payment adjustment. I will 
focus on (1) how Medicare determines the labor cost adjustment for 
hospitals in an area; (2) whether Medicare's labor cost adjustment 
accounts appropriately for geographic variation in wages paid by 
hospitals; (3) the extent to which geographic reclassification 
addresses potential problems with Medicare's labor cost adjustment for 
hospitals; and (4) how Medicare determines geographic adjustments to 
physician fees. My comments are based primarily on our analysis of 
hospital Medicare cost report data and other information, including 
that compiled by the Centers for Medicare and Medicaid Services, the 
agency within the Department of Health and Human Services that oversees 
the Medicare program.
    In summary, Medicare's labor cost adjustment does not adequately 
account for geographic differences in hospital wages in some areas 
because a single adjustment is applied to all hospitals in an area even 
though the area may encompass multiple labor markets or different types 
of communities within which hospitals pay significantly different 
average wages.
    Geographic reclassification addresses some inequities in Medicare's 
labor cost adjustments by allowing some hospitals that pay wages enough 
above the average in their area to receive a higher labor cost 
adjustment. At the same time, however, some hospitals can reclassify 
even though they pay wages that are comparable to the average in their 
area. To help ensure that beneficiaries in all parts of the country 
have access to services, Medicare adjustments its physician fee 
schedule based on indexes designed to reflect cost differences among 92 
geographic areas. The adjustment is designed to help ensure that the 
fees paid in a geographic area appropriately reflect the cost of living 
in that area and the costs of operating a practice. We are beginning an 
analysis of the methodology and data that Medicare uses to make the 
adjustment to determine whether it appropriately reflects underlying 
costs and, if not, whether beneficiary access to physician services has 
been impaired in certain areas.

A Hospital's Labor Cost Adjustment Is Based
On Average Wages Paid in a Geographic Area

    Medicare's prospective payment system (PPS) provides incentives for 
hospitals to operate efficiently by paying them a predetermined, fixed 
amount for each inpatient hospital stay, regardless of the actual costs 
incurred in providing the care.
    Although the fixed, or standardized, amount is based on national 
average costs, actual hospital payments vary widely across hospitals, 
primarily because of two payment adjustments in PPS. There is an 
adjustment that accounts for cost differences across patients due to 
their care needs, and a labor cost adjustment that accounts for the 
substantial variation in average hospital wages across the country. The 
fixed amount is adjusted for these two sources of cost differences 
because they are largely beyond any individual hospital's ability to 
control.
    The Medicare labor cost adjustment for a geographic area is based 
on a wage index that is computed using data that hospitals submit to 
Medicare. The wage index for an area is the ratio of the average hourly 
hospital wage in the area compared to the national average hourly 
hospital wage. The wage indexes ranged from roughly 0.74 to 1.5 in 
2001.\1\ Only the portion of the hospital payment that reflects labor-
related expenses (71 percent) is multiplied by the wage index. The rest 
of the payment, which covers drugs, medical supplies and certain other 
non-labor-related expenses, is uniform nationwide because prices for 
these items are not perceived as varying significantly from area to 
area.\2\
---------------------------------------------------------------------------
    \1\ The fiscal year 2001 Medicare wage indexes were based on 1997 
data from Medicare cost reports--which hospitals submit annually to 
Medicare.
    \2\ For hospitals in Alaska and Hawaii, the non-labor portion of 
the payment is subject to a cost-of-living adjustment.
---------------------------------------------------------------------------
    The geographic area for which a wage index is calculated is 
supposed to represent an area where hospitals pay relatively uniform 
wages. If it does not, the hospitals in the area may receive a labor 
cost adjustment that is higher or lower than the wages paid in their 
area would justify.\3\
---------------------------------------------------------------------------
    \3\ In addition to being affected by wage differences, the wage 
index is affected by differences in the occupational mix of hospital 
employees across geographic areas: The wage index can be higher in 
areas with a concentration of hospitals employing a more skilled (and 
more expensive) mix of staff, and lower in areas where hospitals employ 
a less skilled mix of staff. The Congress has required the Secretary of 
Health and Human Services to take into account the effects of 
occupational mix on the wage index beginning October 1, 2004.
---------------------------------------------------------------------------
    The Medicare program uses the Office of Management and Budget's 
(OMB) ``metropolitan/non-metropolitan'' classification system to define 
the geographic areas used for the labor cost adjustment. Medicare 
calculates labor cost adjustments for 324 metropolitan areas and 49 
``statewide'' non-metropolitan areas. Medicare specifies an OMB 
metropolitan statistical area (MSA) as a distinct region within which 
wages are assumed to be relatively uniform.\4\ Medicare specifies the 
rest of a state--all the non-MSA counties \5\--as a single, non-
metropolitan area in which hospitals are assumed to face similar 
average wages. These non-metropolitan areas can be quite large and not 
contiguous (see fig. 1).
---------------------------------------------------------------------------
    \4\ In general, MSAs are groups of counties containing a core 
population of at least 50,000, together with adjacent areas having a 
high degree of economic and social integration with that core. OMB 
defines the central county or counties of an MSA as those containing 
the largest city or urbanized area. An outlying county or counties 
qualify for inclusion in a metropolitan area based on commuting ties 
with the central counties and other specified measures of metropolitan 
character. The current geographic areas may change when OMB updates MSA 
boundaries in 2003 using population data from the most recent decennial 
census and revised OMB standards for including counties in an MSA.
    \5\ In New England, the MSAs are defined in terms of cities and 
towns, rather than counties.
---------------------------------------------------------------------------
Figure 1: Washington State Non-metropolitan Hospitals 
[GRAPHIC] [TIFF OMITTED] 83922G.001


    Source: GAO analysis of Medicare Provider of Services file, fiscal 
year 2001.

Labor Cost Adjustment Does Not Adequately
Account for Wage Differences Within Certain Areas

    The variation in hospital wages within some Medicare geographic 
areas--MSAs or the non-metropolitan areas in a state--is systematic 
across different parts of these areas. While wages paid by hospitals 
are expected to vary within a labor market, such systematic variation 
suggests that some Medicare geographic areas include multiple labor 
markets within which hospitals pay different average wages. For 
example, average hospital wages in outlying counties of MSAs tend to be 
lower than average hospital wages in central counties. Average wages in 
non-metropolitan large towns tend to be higher than in other non-
metropolitan areas within a state. Because the labor cost adjustment 
does not take this kind of systematic variation into account, the 
adjustment sometimes does not appropriately reflect the average wages 
that hospitals pay.

Medicare Metropolitan Geographic Areas

May Encompass Multiple Labor Markets

With Varying Average Wages

    Because an MSA may extend over several thousand square miles, the 
hospitals within an MSA may not be competing with each other for the 
same pool of employees. Therefore, these hospitals may need to pay 
varying wages to attract workers. The Washington, D.C. MSA illustrates 
how hospital wages in a large MSA can vary across different counties 
(see fig. 2). It includes hospitals located in the central city of the 
District of Columbia and in 18 counties in Maryland, Virginia, and West 
Virginia. Hospital wages averaged $23.70 per hour in fiscal year 1997 
in the District of Columbia and in most adjacent suburban Maryland and 
Virginia counties, but averaged $20.14 per hour in the outlying 
counties. Yet, the labor cost adjustment for hospitals within this MSA 
is based on an average wage of $23.41 per hour and is the same for 
hospitals within all its counties.

Figure 2: Hospital Wages, by County, Washington, D.C. MSA, Fiscal Year 
                                  1997
[GRAPHIC] [TIFF OMITTED] 83922H.001


    Source: GAO analysis of fiscal year 1997 hospital wages used in 
calculating the fiscal year 2001 wage index, as reported in Medicare 
cost reports.

    Hospitals in central counties of an MSA typically pay higher wages 
than hospitals in outlying counties. Central county hospital wages 
ranged from 7 percent higher than outlying county hospital wages in 
Houston to 38 percent higher in New York City. In most of the MSAs with 
the highest population, the difference was from 11 to 18 percent in 
fiscal year 1997.

Some Medicare Non-metropolitan Geographic Areas

Encompass Multiple Community Types with Varying Wages

    Medicare uses the same labor cost adjustment for all hospitals in 
the non-metropolitan areas of a state. The adjustment would be adequate 
for all hospitals in these sometimes vast areas if the hospitals paid 
similar average wages. However, we found wage variation across non-
metropolitan areas that appears to be systematically related to type of 
community. In three-quarters of all states, the average wages paid by 
hospitals in large towns are higher than those paid by hospitals in 
small towns or rural areas. About 38 percent of hospitals in large 
towns paid wages that were at least 5 percent higher than the average 
wage in their area, and 16 percent paid wages that were at least 10 
percent higher than the area average.
    As a result, the Medicare labor cost adjustment for non-
metropolitan areas may be based on average wages that are lower than 
wages paid by large town hospitals and based on average wages that are 
higher than wages paid by hospitals in small towns and rural areas. For 
example, the fiscal year 2001 labor cost adjustment for non-
metropolitan Nebraska was based on an average hourly wage of $17.65. 
Yet, Nebraska hospitals in large towns had an average wage that year 
that was 11 percent higher; small town Nebraska hospitals had an 
average wage that was 5 percent lower; and hospitals in rural areas of 
the state had an average wage that was 16 percent lower.

Through Reclassification, Some Hospitals
Receive a More Appropriate Labor Cost Adjustment

    The administrative process for geographic reclassification allows 
hospitals meeting certain criteria to be paid for Medicare inpatient 
hospital services as if they were located in another geographic area 
with a higher labor cost adjustment.\6\ The first criterion concerns 
the hospital's proximity to the higher-wage ``target'' area. The 
proximity requirement is satisfied if the hospital is within a 
specified number of miles of the target area (15 miles for a 
metropolitan hospital and 35 miles for a non-metropolitan hospital) or 
if at least half of the hospital's employees reside in the target area. 
The second criterion pertains to the hospital's wages relative to the 
average wages in its assigned area and in the target area. This 
criterion is satisfied if the hospital's wages are a specified amount 
higher than the average in its assigned area and if its wages are 
comparable to the average wages in the target area.\7\
---------------------------------------------------------------------------
    \6\ This discussion pertains only to the reclassification option to 
be paid based on a higher wage index. Other, less common 
reclassification options, such as county-wide reclassifications, are 
available.
    \7\ A metropolitan hospital's average wage must be at least 8 
percent higher than the average in its assigned area and at least 84 
percent of its target area's average wage. A non-metropolitan 
hospital's average wage must be at least 6 percent higher than the 
average in its assigned area and at least 82 percent of its target 
area's average wage.
---------------------------------------------------------------------------
    Rural referral centers (RRC) and sole community hospitals (SCH) can 
be reclassified by meeting less stringent criteria. These hospitals 
receive special treatment from Medicare because of their role in 
preserving access to care for beneficiaries in certain areas. RRCs are 
relatively large rural hospitals providing an array of services and 
treating patients from a wide geographic area. SCHs are small hospitals 
isolated from other hospitals by location, weather, or travel 
conditions.\8\ RRCs and SCHs do not have to meet the proximity 
requirement to reclassify. RRCs are also exempt from the requirement 
that their wages be higher than those of the average wages in their 
original market.
---------------------------------------------------------------------------
    \8\ In general, SCHs may elect to be paid based on their own 
hospital-specific costs or the applicable PPS payment amount. SCHs 
electing payments under PPS may qualify to be reclassified. Payments to 
SCHs that do not elect the PPS option are not subject to a labor cost 
adjustment. See U.S. General Accounting Office, Medicare's Rural 
Hospital Payment Policies GAO/HEHS090009174R, Washington, D.C.: Sept. 
15, 2000), for more detail on rural hospital designations.
---------------------------------------------------------------------------

Not All Higher-Wage Hospitals Can Be Reclassified

    Of the 756 hospitals that paid wages high enough to qualify for 
reclassification, only 310, or 41 percent, were reclassified in fiscal 
year 2001. More than one-quarter of these higher-wage hospitals were in 
large towns, and 73 percent of them were reclassified.
    Higher-wage hospitals in large towns are likelier to be 
reclassified than other higher-wage hospitals because many are RRCs, 
which are exempt from the reclassification proximity criterion.
    In contrast to the nearly three-quarters of large town higher-wage 
hospitals that reclassified in fiscal year 2001, about half of higher-
wage hospitals in small towns and rural areas were reclassified.
    Almost 39 percent of the reclassified higher-wage small town and 
rural hospitals were exempt from the proximity criterion because they 
were RRCs or SCHs. Some non-reclassified, higher-wage small town or 
rural hospitals that were SCHs may have opted out of PPS to receive 
cost-based payments from Medicare, making reclassification irrelevant.
    Moreover, even though metropolitan area higher-wage hospitals made 
up 42 percent of the higher-wage hospitals, only 12 percent of them 
were reclassified in fiscal year 2001--a percentage far lower than that 
for higher-wage hospitals in other areas.
    Reclassified metropolitan hospitals paid wages that were about 10 
percent above the average wage in their former area; those average 
wages are equal to the average wage in the new areas to which these 
hospitals were reclassified in fiscal year 2001.
    The likely reason that so few metropolitan higher-wage hospitals 
were reclassified is that few are close enough to a higher-wage MSA to 
meet the proximity criterion. More than two-thirds of the metropolitan 
hospital reclassifications in fiscal year 2001 were concentrated in two 
areas--California and a region that includes parts of New York, 
Connecticut, New Jersey and Pennsylvania--where metropolitan areas are 
close enough to each other that more higher-wage hospitals in these 
areas may be able to meet the reclassification proximity requirement.
LCertain Hospitals Can Be Reclassified Without Meeting Wage Criterion
    While reclassification is designed to increase payments to 
hospitals paying wages significantly above the average for their area, 
certain provisions allow some hospitals that pay lower wages to 
reclassify. For example, an additional 116 hospitals were reclassified 
for a higher wage index in fiscal year 2001, even though they paid 
wages that were too low to meet the wage criterion.
    Prior to reclassification, these non-metropolitan hospitals had 
average wages that were close to the area average. With 
reclassification, these hospitals were assigned to areas with a labor 
cost adjustment based on wages that averaged 8 percent higher than 
their own.
    Of the 116 hospitals that reclassified for a higher wage index in 
fiscal year 2001, but failed to meet the wage criterion, 89 were RRCs 
(see table 1).
    About 42 percent of these had wage costs below their statewide non-
metropolitan average. The other hospitals that reclassified, but did 
not pay wages that met the wage criterion, include those that were part 
of county-wide reclassifications and those reclassified through 
legislation.

Table 1: Reclassified Hospitals That Did Not Satisfy the Wage Criterion,
             by Reclassification Category, Fiscal Year 2001
------------------------------------------------------------------------
                                                        Hospitals with
                                    Hospitals with       average wages
    Reclassification Category      average wages too   below the average
                                  low to satisfy the   in their original
                                    wage criterion           area
------------------------------------------------------------------------
RRCs............................                 89                  37
 
------------------------------------------------------------------------
Legislative.....................                 20                  15
 
------------------------------------------------------------------------
County-wide.....................                  7                   3
------------------------------------------------------------------------
Source. GAO analysis of fiscal year 1997 hospitals wages used in
  construction of fiscal year 2001 wage index, as reported in Medicare
  cost reports.


Physician Fees Are Adjusted for Cost-of-Living,
Practice Expense and Malpractice Premium Differences

    Medicare's physician fee schedule, which specifies the amount that 
Medicare will pay for each physician service, includes an adjustment to 
help ensure that the fees paid in a geographic area appropriately 
reflect the cost of living in that area and the costs associated with 
the operation of a practice. This geographic adjustment is a critical 
component of the physician payment system. An adjustment that is too 
low can impair beneficiary access to physician services, while one that 
is too high adds unnecessary financial burdens to Medicare. Although 
much attention in recent months has focused on the method used to 
annually update the physician fee schedule, concerns have also been 
voiced about the appropriateness of the geographic adjustments.\9\ H.R. 
4954, the Medicare Modernization and Prescription Drug Act of 2002, 
would require that we evaluate the methodology and data that Medicare 
uses to geographically adjust physician payments.\10\ We are beginning 
an analysis of the methodology and the available data to determine 
whether Medicare's geographic adjustment appropriately reflects 
underlying costs and whether beneficiary access to physician services 
has changed in certain areas.
---------------------------------------------------------------------------
    \9\ U.S. General Accounting Office, Medicare Physician Payments: 
Spending Targets Encourage Fiscal Discipline, Modifications Could 
Stabilize Fees, GAO090209441T (Washington, D.C. Feb. 14, 2002).
    \10\ H.R. 4954 was passed by the House of Representatives on June 
28, 2002.
---------------------------------------------------------------------------
    In adjusting 2002 fees for physician services, Medicare has 
delineated 92 separate geographic areas. In some instances, these areas 
consist of an entire state. For example, physician fees are uniform 
across Connecticut. In other cases, a large city or group of cities 
within a state is classified into one geographic area and the rest of 
the state is classified into another. Maryland illustrates this case: 
Baltimore and surrounding counties are classified into one geographic 
area and the rest of Maryland is classified as another. Finally, some 
large metropolitan areas, such as New York City and its suburban 
counties, are split into multiple geographic areas.
    Medicare's geographic adjustments for physician fees are based on 
indexes that are designed to reflect cost differences among the 92 
areas. There are three separate indexes, known as geographic practice 
cost indexes (GPCI), that correspond to the three components that 
comprise Medicare's payment for a specific service: (1) the work 
component, reflecting the amount of physician time, skill, and 
intensity; (2) the practice expense component, reflecting expenses, 
such as office rents and employee wages; and (3) the malpractice 
insurance component, reflecting the cost of personal liability 
insurance premiums. The overall geographic adjustment for each service 
is a weighted average of the three GPCIs where the weights represent 
the relative importance of the components for that service. Across all 
physician services in 1999, the average weights were approximately 55 
percent for the work component, 42 percent for the practice expense 
component, and 3 percent for the malpractice insurance component.
    The GPCIs are calculated from a variety of data sources. The work 
GPCI is based on a sample of median hourly earnings of workers in six 
professional categories. Physician earnings are not used because some 
physicians derive much of their income from Medicare payments, and an 
index based on physician earnings would be affected by Medicare's 
existing geographic adjustments. The work GPCI is a weighted average of 
the median earnings of these professions in the area and their median 
earnings nationwide.\11\  If the work GPCI was based solely on the 
median earnings in each area, physician payments would likely increase 
in large metropolitan areas and decrease in rural areas. The practice 
expense GPCI is based on wage data for various classes of workers, 
office rent estimates, and other information. The malpractice insurance 
GPCI is based on average premiums for personal liability insurance.
---------------------------------------------------------------------------
    \11\ An area's median earnings are weighted by 0.25, and the 
national average by 0.75.
---------------------------------------------------------------------------
    Concerns have been raised that the current geographic adjustments 
for physician fees do not appropriately reflect the underlying 
geographic variation in physicians' costs and that, as a result, 
beneficiary access to services may be impaired in certain areas. 
Unfortunately, information on physicians' willingness to see Medicare 
patients is dated--although it does not indicate access problems. Data 
from the 1990s show that virtually all physicians were treating 
Medicare beneficiaries and, if they were accepting new patients, 
accepted those covered by Medicare. A 1999 survey conducted by the 
Medicare Payment Advisory Commission (MedPAC) from that year found that 
93 percent of physicians who had been accepting new patients were 
continuing to do so. It is unclear whether the situation has 
deteriorated since 1999. MedPAC is updating its survey, and the new 
results may shed light on this issue. However, MedPAC's survey results 
may not be able to identify access problems if they occur only in 
certain areas. As I said in my testimony before this Subcommittee in 
February, it is important to identify beneficiary access problems 
quickly and take appropriate action when warranted. As part of the work 
we are beginning on access to physician care, we will examine Medicare 
claims data to get the most up-to-date picture possible of access by 
area, by specialty, and for new versus established patients.

Concluding Observations

    Medicare's PPS for inpatient services provides incentives to 
hospitals to deliver care efficiently by allowing them to keep Medicare 
payment amounts that exceed their costs, while making hospitals 
responsible for costs that exceed their Medicare payments. To ensure 
that PPS rewards hospitals because they are efficient, rather than 
because they operate in favorable circumstances, payment adjustments 
are made to account for cost differences across hospitals that are 
beyond any individual hospital's control. If these payment adjustments 
do not adequately account for cost differences, hospitals are 
inappropriately rewarded or face undue fiscal pressure. The adjustment 
used to account for wage differences--the labor cost adjustment--does 
not do so adequately because many of the geographic areas that Medicare 
uses to define labor markets are too large.
    Geographic reclassification provides relief to some hospitals that 
pay wages that are higher than the average in their area. Yet, other 
hospitals paying higher wages cannot be reclassified. Still other 
hospitals get a higher labor cost adjustment than is warranted by the 
wages they pay, and many are in rural areas and may be facing financial 
problems. Their labor cost adjustment, however, is not necessarily the 
cause of these problems. Therefore, reclassification may not be the 
most effective mechanism to address the financial pressure faced by 
these rural hospitals.
    Madam Chairman, this concludes my prepared statement. I would be 
happy to answer any questions you or other Members of the Subcommittee 
may have.

                                 

    Chairman JOHNSON. Thank you very much, Dr. Scanlon. Dr. 
Zuckerman?

   STATEMENT OF STEPHEN ZUCKERMAN, PH.D., PRINCIPAL RESEARCH 
                   ASSOCIATE, URBAN INSTITUTE

    Dr. ZUCKERMAN. Thank you, Chairman Johnson and Members of 
the Committee. I appreciate the opportunity to appear before 
you today to discuss the geographic practice costs adjustment 
in the Medicare Physician Fee Schedule. Along with Greg Pope at 
the Center for Health Economics Research in Waltham, 
Massachusetts, and Pete Welch, a former colleague of mine at 
the Urban Institute, I co-directed the development of the 
practice cost adjustors that were adopted for use in the fee 
schedule in 1992. The conceptual basis for the geographic cost 
adjustors has not changed in the intervening years.
    There has been widespread agreement that fees should be 
adjusted for geographic differences in costs that are beyond 
physicians' control. This suggests that a geographic practice 
cost index should definitely reflect differences in wages for 
clinical and administrative staff, office rents, and 
malpractice insurance premiums. I am not going to talk about 
these today, but these factors are addressed in my written 
statement. However, the largest share of practice revenues 
represents the costs of compensating physicians for his or her 
own time, and there has been considerable debate over how 
geographic differences in these costs should be taken into 
account.
    In the interest of creating an equitable compensation 
system, payments for physicians' own time should vary in 
relation to costs of living and other factors. The fundamental 
reason to allow for geographic variation in the cost of 
physicians' own time is to create fees that compensate 
physicians at the same real rate in all areas of the country. 
To equalize real rates, fees should be higher in areas with 
higher costs and lower in areas with lower costs. Properly 
adjusted, Medicare physician payments should tend to promote an 
adequate supply of physicians in both urban and rural areas.
    Although a cost-of-living adjustor is an intuitively 
appealing measure of an area's costs, a cost-of-living adjustor 
would over-adjust fees by not taking into account the impact 
that an area's amenities might have on compensation. For 
example, physicians are willing to locate in Boston despite its 
high cost of living, in part because of the area's modern 
hospitals and large numbers of potential colleagues. 
Alternatively, for low-cost areas with poor amenities to 
recruit and retain physicians, compensation probably has to 
exceed cost of living. If physicians value urban amenities, 
they would need to be paid more relative to the cost of living 
to locate in rural areas. Due to these differences in 
amenities, compensation will vary less across areas than cost 
of living.
    Well, if not cost of living, what can be used as a 
geographic adjustor of physician time cost? We used hourly 
earnings of highly educated workers in professional occupations 
to derive a geographic adjustor for the physicians' work 
component of the fee. These highly educated workers should be 
similar to physicians with respect to the types of goods and 
services they purchase and their preference for area amenities. 
Essentially, we argued that the geographic variation in 
payments for physicians' own time should reflect the variation 
in earnings for other highly educate professionals.
    The geographic adjustor that was incorporated in the fee 
schedule reflected only one-quarter of the variation in 
professional earnings as we measured it with Census data. This 
means, for example, that an area like rural Missouri that had a 
work adjustment of about 20 percent below the national average 
based on professional earnings currently has a work adjustment 
only 5 percent below the national average.
    We were aware of concerns about the level of fees in rural 
areas, and we gave explicit consideration to this issue. Our 
analysis suggested that the indices we developed did a 
reasonably good job of tracking actual practice cost expenses 
across rural and urban physicians. However, we pointed out that 
one way of raising fees in low-cost rural areas would be to set 
an arbitrary floor on practice cost adjustors. An arbitrary 
change in the adjustor would mean that it was no longer 
capturing practice cost differences, and we did not see this as 
a desirable path to follow.
    Instead, if the policy goal is to raise Medicare fees in 
areas that have problems recruiting and retaining physicians, 
it is reasonable to build on a different mechanism that already 
exists. Currently, the Medicare fee schedule includes a 10-
percent bonus payment for fees in health professional shortage 
areas. This bonus could be increased and/or extended to more 
areas. This could explicitly achieve the desired policy 
objective as opposed to making a less transparent change, such 
as putting an arbitrary floor on the work cost adjustor.
    Let me conclude by saying that as the debate over the 
geographic adjustment in the Medicare physician fee schedule 
continues, the adjustor for the work component remains the most 
contentious issue. Some argue that the physician labor market 
is a national market and, as such, physicians should be paid 
the same in all areas. Even if physicians are recruited from 
all areas of the country, that does not mean that their dollar 
level of compensation needs to be the same everywhere.
    As implemented, 75 percent of the payment for the work 
component of the Medicare fee is already the same in all areas. 
Any change in this work adjustor is going to have very little 
impact on the payments that physicians receive. The remaining 
25 percent is appropriately adjusted to reflect differences in 
earnings that capture differences in costs of living and area 
amenities. Although this partial adjustment may not fully 
achieve the original objective of the method we proposed, 
namely, an equalization of real compensation rates across 
areas, it moves fees in the desired direction and should be 
retained. Thank you.
    [The prepared statement of Dr. Zuckerman follows:]
 Statement of Stephen Zuckerman*, Ph.D., Principal Research Associate, 
                            Urban Institute
---------------------------------------------------------------------------
    * The views expressed in this testimony are those of the author and 
do not necessarily represent the Urban Institute, its Board of 
Trustees, or its sponsors.
---------------------------------------------------------------------------
    Chairman Johnson and members of the committee, I appreciate the 
opportunity to appear before you today to discuss the geographic 
practice costs adjustment in the Medicare Physician Fee Schedule. My 
name is Stephen Zuckerman and I am a Principal Research Associate at 
the Urban Institute, a non-profit, non-partisan research institute 
located in Washington, D.C. Along with Gregory Pope at the Center for 
Health Economics Research in Waltham, MA and W. Pete Welch, a former 
colleague of mine at the Urban Institute, I co-directed the development 
of the practice cost adjusters that were adopted for use in the Fee 
Schedule in 1992. I also worked on the first revision of the adjusters 
in 1995. The conceptual basis for the geographic cost adjusters has not 
changed in the intervening years.
    There has been widespread agreement that, under the Medicare Fee 
Schedule, fees should be adjusted for geographic differences in costs 
incurred by physicians that are beyond their control. This suggests 
that a geographic practice cost index should reflect differences in 
wages for clinical and administrative staff, office rents and 
malpractice insurance premiums. However, the largest share of physician 
practice revenues represents the costs of compensating the physician 
for his or her own time, and there has been considerable debate over 
how geographic differences in these costs should be taken into account.
    In my testimony today I will review the conceptual foundation for 
the geographic practice cost adjusters used in the Medicare Fee 
Schedule, emphasizing why we felt it was, and still is, appropriate to 
adjust for geographic differences in the costs of physicians' own 
time.\1\ I recognize that at the time the Fee Schedule was being 
developed some felt that physicians' work was the same in all areas of 
the country and, therefore, should be paid for at the same rate in all 
areas. This view still persists. However, I hope to show why, in the 
interest of creating an equitable compensation system, payments for 
physicians' own time should be allowed to vary in relation to costs of 
living and other factors.
---------------------------------------------------------------------------
    \1\ A great deal of this testimony is based on research summarized 
in Zuckerman, S., W.P. Welch and G. Pope, ``A Geographic Index of 
Physician Practice Costs,'' Journal of Health Economics 90(1), June 
1990, pages 390969.
---------------------------------------------------------------------------
    Physicians' Own Time. The fundamental reason to allow for 
geographic variation in the costs of physicians' own time is to create 
fees that compensate physicians at the same real rate in all areas of 
the country. An area's real rate of compensation can be thought of as 
the ratio of the dollar payment to the area's costs. Although a cost-
of-living adjuster is an intuitively appealing measure of an area's 
costs, that is not what we viewed as a desirable adjuster for the costs 
of physicians' own time. A cost-of-living adjuster would over-adjust 
fees by not taking into account the impact that an area's amenities 
might have on compensation. Amenities differ across areas due to 
professional factors such as access to quality colleagues and the 
presence of modern hospitals and medical technologies, and due to 
personal factors such as availability of good schools, proximity to 
cultural events, and clean air. Because of these differences in 
amenities, compensation will vary less across areas than costs of 
living. 
    Economics predicts that compensation would not fully reflect an 
area's high costs of living if the area had desirable amenities. 
Desirable amenities would be a type of compensation of their own and 
offset some of the high costs of living. For example, workers are 
willing to locate in Honolulu despite its high cost of living because 
of its attractive environment. Similarly, for low-cost areas with poor 
amenities to attract and retain physicians, compensation would have to 
exceed costs of living. For example, if physicians value urban 
amenities, they would need to be paid more relative to the cost of 
living to locate in rural areas. Over time, compensation differences 
across areas would adjust so that a physician who is deciding where to 
locate would not care in which area he or she locates. Properly 
adjusted, Medicare physician payments should tend to promote an 
adequate supply of physicians in both urban and rural areas.
    If not costs of living, what can be used as a geographic adjuster 
of physician time costs to equalize real compensation? Data on 
geographic variation in physician earnings are available from the 
Census. However, it would have been inappropriate to use these data to 
adjust payments under the Medicare Fee Schedule because these earnings 
were, in part, determined by historical patterns of Medicare payment 
rates. Further, these data are hard to work with because they cannot be 
adjusted to control for specialty mix differences across areas and 
because they reflect the profitability of physicians' practices as well 
as earnings.
    As an alternative, we used hourly earnings of workers in 
professional occupations with five or more years of college education 
to derive a proxy for the physician work component of the geographic 
practice cost adjuster. This group of highly educated workers can be 
viewed as being similar to physicians with respect to the types of 
goods and services they purchase and their preferences for area 
amenities. Therefore, they should have earnings that reflect the 
appropriate amount of geographic variation that should be captured in 
the Medicare Fee Schedule. In addition, this adjuster did not 
perpetuate distortions that may have been present in the geographic 
distribution of physician earnings. Essentially, we argued that the 
geographic variation in payments for physicians' own time should 
reflect the variation of earnings for other highly educated 
professionals.
    The adjuster we developed based on professional earnings ranged 
from about 24 percent above the national average in Manhattan, New York 
to about 20 percent below the national average in rural areas of 
Missouri. After considerable sensitivity analysis, we concluded that 
this appeared to be the most defensible adjuster for physicians' own 
time costs. As the policy was implemented, a geographic adjuster was 
incorporated into the Medicare Fee Schedule that reflected only one-
quarter of the geographic variation in professional earnings. Primarily 
as a result of this decision, the physician work value in Manhattan, 
New York is about 9 percent above average and about 5 percent below 
average in rural Missouri.
    These examples show that there is considerably less variation in 
the actual physician work adjuster used in the Fee Schedule than in the 
one we had derived in our original research. The three legislatively 
required revisions to the index over the past decade have not resulted 
in movement away from the decision to reflect only one-quarter of the 
variation in professional earnings in the physicians' work adjuster. 
Although the one-quarter work approach is not consistent with our 
original conceptual and empirical work, it still may be a credible 
geographic adjuster. Research has shown that geographic variation in 
employee physician wages is very closely related to the variation in 
the one-quarter work adjuster.\2\ Therefore, retaining that adjuster 
throughout the three revisions may have been a good decision. However, 
this research also concluded that the one-quarter adjuster is superior 
to allowing for no geographic adjustment, suggesting that an adjuster 
with less geographic variation would not be advisable.
---------------------------------------------------------------------------
    \2\ Gillis, K., R, Willke and R. Reynolds, ``Assessing the Validity 
of the Geographic Practice Cost Indices,'' Inquiry 30(3), Fall 1993, 
pages 26509280.
---------------------------------------------------------------------------
    Because we were aware of concerns about the level of fees that 
could exist in rural areas under the Fee Schedule, we gave explicit 
consideration to this issue in our final report to the Health Care 
Financing Administration.\3\ Our analysis suggested that the indices 
did a reasonably good job of tracking actual practice expenses across 
rural and urban physicians. However, we pointed out that one way of 
raising fees in low-cost rural areas would be to set an arbitrary floor 
on the practice cost adjusters. Depending on how such a policy was 
implemented, this could lead to lower fees in high-cost areas. 
Moreover, an arbitrary change in the index would mean that it was no 
longer capturing practice costs differences.
---------------------------------------------------------------------------
    \3\ Welch, W., S. Zuckerman and G. Pope, ``The Geographic Medicare 
Economic Index: Alternative Approaches,'' Urban Institute Working Paper 
3839-01-01, June 1989.
---------------------------------------------------------------------------
    If the policy goal is to raise Medicare fees in areas that have 
problems recruiting and retaining physicians, it is reasonable to build 
on a different mechanism that is already a part of the payment system. 
Currently, the Medicare Fee Schedule includes a 10 percent bonus 
payment that is added to fees in Health Professional Shortage Areas. 
The bonus could be increased and/or extended to other areas. This could 
achieve the desired objective explicitly as opposed to a less 
transparent change, such as putting an arbitrary floor in the practice 
cost adjuster.
    Other Practice Expenses and Malpractice Insurance. Aside from 
physicians' own time, the largest component of physician practice 
expenses is employee wages. To calculate an employee price adjuster, we 
used median hourly earnings of administrative support occupations, 
Registered nurses, Licensed practical nurses, and Health technologists 
and technicians (excluding LPNs). To reflect the occupation mix in 
physicians' offices, each category of hourly earnings was weighted to 
reflect the occupation's share of physician expenditures for employees. 

    The next most important expense category is office rents, but there 
are no nationwide data on rental rates for physician office space. 
However, the U. S. Department of Housing and Urban Development annually 
derives a ``fair market rent'' for all areas with a Section 8 housing 
assistance program. These data represent the 45th percentile rent for 
various sized units in each geographic market and were used as a proxy 
for a geographic adjuster of physician office rents. A key advantage of 
this price information is that it is available for all metropolitan 
areas and rural counties. A weakness of this proxy is that physician 
offices are in commercial as well as in residential buildings. However, 
residential and commercial rents are likely to be highly correlated 
because the same factors--such as population density, construction 
costs, and area income--are likely to affect both. The limited evidence 
shows that residential and commercial rents do tend to track each other 
across areas.
    Geographic differences in malpractice costs are measured by 
comparing premiums charged for a mature claims-made insurance policy 
with $1 million/ $3 million limits of coverage. Premiums are averaged 
across the top twenty Medicare specialties, according to their shares 
of Medicare physician spending, so as to represent the full range of 
malpractice risk classifications. The data are derived from periodic 
surveys of malpractice insurers in all states and, where necessary, 
reflect intrastate variation in premiums charged.
    Our review of available data uncovered no information on geographic 
differences in the prices of medical supplies and equipment. Anecdotal 
evidence suggested that price variation in these inputs is minimal. In 
computing the geographic adjuster, we assumed that the costs of these 
inputs as well as prices for ``other'' expense items were the same in 
all areas. Since only about 14 percent of total practice revenues are 
accounted for by these inputs, our approach with respect to the other 
inputs still captured the bulk of the variation in practice input 
prices.
    Geographic Areas. Prior to the implementation of the Fee Schedule, 
carriers administered physician payments within state boundaries and 
had a great deal of discretion as to how fees would vary across 
geographic areas within their jurisdictions. Although there were many 
statewide ``payment localities,'' some states had highly disaggregated 
payment areas. For example, Texas was divided into 33 payment areas for 
some specialties. We developed the set of geographic adjusters based on 
a more consistent set of criteria to define areas in all states. We 
wanted to base the index on areas that (1) had reasonably consistent 
prices for practice inputs within their borders; (2) were large enough 
to be a fairly self-contained market for practice inputs; and (3) were 
compatible with Medicare's administrative practices. Our decision was 
to use metropolitan areas and state rural areas as were and are being 
used in the Medicare Prospective Payment System for hospitals. We 
viewed this as striking an acceptable balance across the three criteria 
we had established. 
    The original localities were retained during the initial stages of 
the Fee Schedule implementation and our index was adapted for use in 
this geographic configuration of payment areas. Subsequently, Medicare 
has changed to a greater reliance on statewide payment areas with 
exceptions that allow for intrastate variation in those states with 
substantial within state practice cost variation.
    Conclusion. As the debate over a geographic adjustment in the 
Medicare Physician Fee Schedule continues, the adjuster for physicians' 
own time costs remains the most contentious issue. Some argue that the 
physician labor market is a national market and, as such, physicians 
should be paid the same in all areas. Even if physicians are recruited 
from all areas of the country, that does not mean that their nominal 
level of compensation needs to be the same everywhere. However, as 
implemented, 75 percent of the payment for the physician work component 
of a Medicare fee is the same in all areas. The remaining 25 percent is 
appropriately adjusted to reflect differences in earnings that capture 
differences in costs of living and area amenities. Although this 
partial adjustment may not achieve the original objective of the 
geographic adjuster that we proposed--an equalization of real 
compensation across areas, it moves fees in the desired direction in 
all areas and should be retained.

                                 

    Chairman JOHNSON. Thank you very much to all of you. I am 
sorry you had to sit so many hours and listen, but, frankly, it 
is good for you.
    [Laughter.]
    Dr. ZUCKERMAN. It is interesting.
    Chairman JOHNSON. Just like it is good for us. I am going 
to yield my time to Congresswoman Dunn because she has to 
leave, like now.
    Ms. DUNN. Thank you very much, Madam Chairman. Mr. Scanlon, 
thank you for that chart. It helps us understand the problems 
in Washington State a little bit better. Dr. Zuckerman, right 
now I want to invite you to come to my office, and I think 
Congressman McDermott would join us, because we have got a lot 
to talk over on physician reimbursements.
    Dr. ZUCKERMAN. Okay.
    Ms. DUNN. I think I have time before I have to race to run 
a Member meeting just to ask you one question. Let me tell you 
what the problem is in Washington State. In Washington State, 
Medicare spends just about $3,921 per beneficiary, and that 
compares to $5,490 for the national average in the year 2000. 
We are at $3,921; national average is $5,490.
    One reason for the variation in Medicare's reimbursements 
for physician services in Washington State is that they are 
lower than other States. This has resulted in many physicians 
leaving the State to practice in areas where the reimbursement 
levels are higher. We all heard a lot of testimony, have over 
the last few months, about this.
    I want to better understand why physicians' work is not 
valued equally, whether it is provided in King County, 
Washington, or in New York City. It seems to me that 
reimbursements for physicians' work should be the same because 
they have the same education and clinical skills within a 
specialty. So, let me ask you one question, and I have got a 
lot more to do, and as I say, if we can do it in my office, we 
can just zip through this stuff, and I will know exactly why 
our State is being under-reimbursed.
    Can you change the physician formula to include an 
additional reimbursement to account for quality or efficiency 
of health care? For example, the existence of managed care in 
an area like Seattle could hold health care costs down overall. 
Is there a way we could change that formula to include the 
efficiency of the provision of care?
    Dr. ZUCKERMAN. When you think about aggregate payments 
within a State like Washington, you are dealing with a lot of 
different factors. You are not only dealing with Medicare 
physician fees and hospital payment rates. The volume of care 
that patients receive plays an important role in determining 
aggregate payments. When you think about what determines 
payments for physicians' work, it is important to recognize at 
the heart of the fee schedule is the relative value scale, and 
is uniform across the country.
    What the geographic cost adjustors do is simply vary the 
average payment for physicians' work, and there is not much 
that is actually varied. Three-quarters of the payment is 
constant across the country. The remainder of the average 
payment varies to reflect differences in costs of living, 
offset somewhat by the fact that some areas are more attractive 
to professionals to live in than other areas.
    So, physician work is treated uniformly through the 
relative value scale. It is just that the payment rate that 
varies slightly to reflect differences in cost of living and 
other factors.
    Ms. DUNN. Except that is a huge variation, I think, those 
numbers that I gave you.
    Dr. ZUCKERMAN. Well, those aggregate payments could be 
driven largely by the volume of services that patients receive, 
not simply by Medicare fees.
    Mr. STARK. California is overpaid. It is not that you are 
underpaid.
    Chairman JOHNSON. Excuse me. Would you pursue that? What 
you just said I think needs to really be understood. Seventy 
percent of the payment is the same across the whole Nation.
    Dr. ZUCKERMAN. Seventy-5 percent of the physician work 
payment is the same across the country, and in total, about 55 
percent of the overall Medicare fee is not adjusted by any 
geographic index.
    Ms. DUNN. So, you are saying that 75 percent is 
predetermined, is equal across the Nation, but because we have 
Mount Rainier or we have better traffic--they will be 
interested in hearing that--that my doctors are being 
reimbursed at a lesser amount.
    Mr. STARK. Would the gentlelady yield----
    Dr. ZUCKERMAN. Well, let me point out that in Seattle, the 
work payment is adjusted to be just at the national average, 
and in the rest of Washington, the work payment is about 1.9 
percent below the national average, the cost adjustment. So, 
there is not a lot of difference in the work payment between 
Washington and the national average.
    Mr. STARK. If the gentlelady would yield, a lot of it is 
they may do more procedures in other parts--you guys may be 
more efficient----
    Ms. DUNN. I understand that. We are more efficient, and 
that is the point that I am trying to make. When you look at 
these numbers, $3,900 per person in Washington State versus 
$5,400, almost $5,500, the national average--that is just an 
average--the people in my State say we deliver health care at a 
much higher quality, we are proud of our hospital systems, 
proud of our doctors who practice there. We have had health 
maintenance organizations (HMOs) for many, many years. The 
system works well. It cuts the cost of health care. We are 
sitting there being told, in effect, because salary or 
reimbursement is everything, that we are at a lower quality.
    So, I need to be able to tell my people back home why we 
are being paid at well below the national average, and it can't 
just be because of Mount Rainier.
    Dr. ZUCKERMAN. No, I don't think that, and I don't think 
that is what the cost adjustors in the fee schedule are 
designed to capture. I think one of the reasons that the 
aggregate payments in Washington are much lower than the 
national average is because the volume of services that 
residents of Washington receive is probably lower. This may 
very well be due to the historical influence of HMOs in the 
State of Washington. This is probably an issue for another 
hearing on Medicare+Choice payment rates and how those are 
determined.
    Chairman JOHNSON. Dr. Zuckerman, this was brought up 
earlier by some other Members as well. In my part of the 
country, I call it the ``old Yankee syndrome.'' Where you have 
very efficient care, you might also have more conservative 
practice and so lower volume. The formula does make it harder 
for efficient providers to survive.
    Ms. DUNN. It seems to me we should be rewarding efficiency 
in some way. For me, this formula is skewed and it doesn't 
work. So, what I am going to be looking for is how do we have a 
more realistic formula. We have talked about having more up-to-
date numbers or not projecting numbers, using actual numbers, 
but the reality is that with such a huge difference, our 
physicians are fleeing or they are not serving Medicare 
patients. They are choosing a lot of different routes, 
especially in eastern Washington where the payments are even 
lower.
    So, what I have to do on this Committee, and I would 
suspect that Congressman McDermott is going to be with me on 
this one, we have to figure out what to do to make our people 
feel like they are at least being considered as a part of a 
high quality health care provider system and are being 
reimbursed for the quality of their care, not penalized for the 
efficiency of the provision of care.
    Dr. ZUCKERMAN. I think that these issues you are talking 
about are not really related to the Medicare fee schedule. The 
fee schedule is pretty close to the national average in the 
State of Washington.
    Ms. DUNN. Well, reimbursements aren't, and we have to 
figure out what the answer to that is. Anyway, thank you.
    Chairman JOHNSON. I do just want to clarify that part of 
this conversation is like ships passing in the night. When you 
use those average amounts nationwide, they reflect also a 
different pattern of practice. How we separate out the pattern 
of practice issue from the actual reimbursement rate is a 
problem. What I was trying to raise and what I want you all to 
sort of help us with is that I think there is an issue here 
that we don't attend to in the formula, that as you have a more 
conservative pattern of practice, you have a lower volume. In 
my State, the hospitals that are okay are the ones that are 
doing cardiac. Why? Because we pay more for cardiac.
    So, sometimes when you are doing a lower volume because you 
have conservative practice, then you are not doing well. So, it 
means that in figuring this formula of practice expenses--and 
remember how many hearings we had about how bad the practice 
expenses studies were and how many times it took us to, quote, 
get it right. My confidence that we have got it right frankly 
isn't very high, nor is my confidence that the Resource Based 
Relative Value Scale RBRVS system is accurate over time either.
    So, you know, I think we have to look at the fact that in 
an area like Washington that has historically had managed care 
and other structures that we know promote efficiency and lower 
costs, that at a certain point they begin to do badly. In Iowa, 
that sort of has, for a variety of reasons is there a problem 
that when you start with a disparate base, which often are 
reflected in my part of the country, old Yankee 
parsimoniousness, and then you have to add on expensive 
equipment, and you still have conservative practice so the 
expensive equipment can't be allocated over and blah, blah, 
blah, I think we are missing something about these areas that 
have now cost pressures from all sides, have gotten much more 
efficient. We are still treating them like we are treating 
everybody else.
    So, that is why I wanted to enlarge on that. There is a lot 
of misunderstanding amongst Members. I can't say that I really 
understand this. You don't get this much of an outcry--and you 
are hearing Members testify here about 17 hospitals, not one 
that needs to be reclassified. The number of applications for 
reclassification and the number that actually get reclassified 
are very small. Yet you have got this group of rural health 
centers and sole providers, I would love to have some of those 
in my district because we wouldn't have to go through this 
reclassification system that we can't survive in.
    So, the problems are truly manifold, and I wanted to point 
out that as Members use these average statistics, you know, 
they do mask practice patterns. It isn't enough to say that, we 
aren't going to be able to fix that. We have to be sure that 
that doesn't mask a more serious problem in our own technology, 
which was developed in a different era. Mr. Kleczka.
    Mr. KLECZKA. Thank you, Madam Chair. I just have a quick 
question for Dr. Scanlon. I scanned through your testimony real 
quick, and I am sorry I didn't get to hear it personally. Can 
you discuss what the resolve might be to the problems that we 
are talking about? I think you mentioned something about a 
State-specific budget neutrality proposal.
    Dr. SCANLON. That actually was a policy option that the 
Congress asked us to look at, because right now the way the 
reclassification policy works is that a national budget 
neutrality application is used. In other words, for all the 
hospitals that are reclassified, all the hospitals across the 
country have a change in their payment due to those hospitals' 
being reclassified.
    What we were asked to look at was what would be the 
difference between a State-specific and a national budget 
neutrality. State-specific budget neutrality would mean that in 
a State where a significant number of hospitals reclassify, the 
other hospitals would have a bigger change in their payments. 
In States where no hospital is reclassified, there would be no 
change in payments.
    In terms of hospitals reclassifying in 2001, the national 
adjustment is in the range of about 1 percent. If there was a 
State-specific adjustment, it could be as high as 3 or 4 
percent in some States where more hospitals reclassify.
    Mr. KLECZKA. Now if you do the State within the State, 
wouldn't you still have to contend with the national disparity? 
Then we have all these colleagues coming from the various 
States comparing us to California or to Wisconsin or whatever 
the case may be.
    Dr. SCANLON. Well, I think that this doesn't deal with the 
fact that there are going to be huge variations in payment 
rates across the country that still remain. Some of that 
variation is appropriate because costs of services do differ, 
not just health care service but costs of all kinds.
    Our problem is we have got to get the rates we pay in the 
health care system, particularly in Medicare, calibrated 
correctly to the cost differences that exist across areas. I 
think what our work shows is that that calibration is not 
correct today. We have done it at too crude a level, and the 
net result is we are paying inappropriately in a large number 
of areas.
    Mr. KLECZKA. If we are going to correct the problem, either 
nationally or within each State, aren't we looking at a rather 
vast expenditure of additional dollars through the Medicare 
Program?
    Dr. SCANLON. I think we have to think about this 
potentially in terms of a reallocation of Medicare dollars. We 
are putting a lot of money into Medicare at this point, and----
    Mr. KLECZKA. Yes, but then we start--in Congress we start 
playing with hold harmlesses, and, you know, in my lifetime you 
are not going to see any disparity erased.
    Dr. SCANLON. Well, I think we see----
    Mr. KLECZKA. The haves and have-nots--the haves are not 
going to give to the have-nots, and let's not kid a kidder. 
Unless we are willing to throw in a whole bunch of new dollars 
for the have-nots, it is just not going to get done.
    Dr. SCANLON. As you heard today, there are changes, though, 
in payment rates over time for individual providers. The other 
factor is that each year, new money is infused into the 
Medicare Program through the updates. So, part of what we may 
be talking about is how we distribute the new moneys going into 
Medicare and over a period of time achieve the kinds of 
readjustments that are necessary to make rates----
    Mr. KLECZKA. What period of time do you judge it would have 
to be?
    Dr. SCANLON. I think it would depend on different 
providers.
    Mr. KLECZKA. You can talk in millenniums if you want, but--
--
    Dr. SCANLON. No, I think we need to be talking much more in 
terms of a 5-year timeframe or less, because I think we may not 
be talking about that significant a set of changes. Again, as I 
said, you know, the budget neutrality impact nationally for the 
reclassifications is 1 percent. It is not a huge change.
    As we think about the changes that we are trying to make, 
we are going to be targeting them on a subset of providers, and 
they may not, in the aggregate, add up to that much that the 
transition can't be more prompt.
    Mr. KLECZKA. Would any of the other panelists like to chime 
in?
    Mr. HACKBARTH. My perspective is pretty much the same as 
Bill's. I think that there needs to be some redistribution. 
That would be far and away the preferable way to go.
    You hear from the hospitals that, if you like, believe they 
are being underpaid and in some cases they are making a 
legitimate argument. The flip side of that coin is that there 
are hospitals that currently benefit, sometimes in a 
substantial way, from the same imperfections that we have 
talked about. If our solution to all of these problems is just 
to add new money to the system, it could get very expensive 
indeed.
    So, from our perspective, the preferred approach would be 
get better data, which will take time, correct the market 
areas, and address the underlying problems in the wage index. 
If that can't be done quickly, if something needs to be done in 
the short run--and I understand the political demands--make the 
solutions as targeted as possible. Proposals like wage index 
floors spend money indiscriminately. A lot of additional money 
will go to hospitals that are undeserving, that already have 
high Medicare margins, and given the short supply of dollars, 
that doesn't seem a very prudent course.
    Chairman JOHNSON. Excuse me. Do you want to comment?
    Dr. ZUCKERMAN. No.
    Chairman JOHNSON. Mr. Hackbarth--and, actually, you can all 
come in on this, but, first of all, I find it very disturbing 
that any Member can come before this panel and show adjacent 
counties with a 20-percent differential in payment. I think 
mobility has made the existence of those hospitals by 
definition impossible, the ones that are under the--that are 
the 0 versus the 20 percent. That isn't about management. So, 
if our formulas--if our payment systems have resulted in that 
level of disparity, I think we have big problems. I don't think 
we have little problems. We need a lot of help in this.
    Personally, I don't see any way that you can say this has 
to be--that we should reallocate money. I don't see any 
evidence with current-year data that there are hospitals out 
there that are making a profit when you look at inpatient and 
outpatient. You look at the number of drugs that are taking the 
entire DRG payment, and you look at what is coming down the 
road. So, I don't think there is a reallocation opportunity 
here, not of the dimensions of the problem that we are seeing.
    Let's go through some of the possibilities for change from 
the testimony that we have received. First of all, this issue 
of occupational mix, I appreciated your breaking out the wage 
index issue so cleanly for us, and it affects a number of the 
adjustors, I believe. How accurate is that, not including 
physicians in your occupational mix to find out what their 
average wages are?
    Mr. HACKBARTH. Well, in the case of the hospital wage 
index, it would not be appropriate to include hourly wage rates 
for physicians that are paid separately through part B. What we 
want to do is capture differences among hospitals in their 
underlying costs. Indeed, one of the historic problems with the 
wage index, albeit a pretty small one, has been that the data 
included information on teaching physicians and residents, and 
that needs to be stripped out of the wage index calculation to 
have an accurate comparison of how hospital salaries and wages 
differ.
    Chairman JOHNSON. You mean because the residents are being 
paid under a separate system?
    Mr. HACKBARTH. Those costs, hospitals' costs for residents' 
salaries, are paid separately under the graduate medical 
education payment policy. Physician costs and nurse 
anesthetists are paid separately under part B. So, CMS is in 
the process, as I understand it, of stripping out that 
information which will improve the accuracy of the wage index. 
It will have a small effect for rural hospitals. It will 
increase payments for rural hospitals and reduce them for 
facilities in market areas that have many teaching hospitals. 
That is a relatively modest impact, though.
    The bigger problem with the wage index is that you don't 
have data you need to accurately capture how much Hospital A 
pays for a nurse versus Hospital B. What you have now in the 
wage index is not just differences in apples to apples 
comparisons, but that some teaching hospitals have a wholly 
different mix of employees than most rural hospitals. The 
effect of that is to drive up the wage index for urban areas 
with teaching hospitals and push down the wage index for 
hospitals in rural areas. That is not consistent with the 
underlying purpose of the wage index and needs to be corrected. 
The problem, as I said earlier, is that collecting the data to 
construct a proper wage index is a 2- or 3-year proposition 
from the date of collection to date of implementation.
    Chairman JOHNSON. On the issue of the size of the MSAs, you 
know, we heard some testimony that actually making them smaller 
could make the problem worse. You are saying they are too 
large. I think you both said they are too large.
    Dr. SCANLON. We do think they are too large, because, when 
you look within the MSAs, you see some systematic variations in 
the wages that are being paid that are consistent with the kind 
of variation that you may see in the cost of other services. 
Think about the cost of housing, the cost of rent for office 
space. As you move from the central city, these things become 
less expensive.
    Chairman JOHNSON. Well, that certainly changes, but, you 
know, if your workforce is as mobile as our work force is, I am 
not sure that smaller is going to be more accurate.
    Dr. SCANLON. Let me talk about both those things. One is: I 
do think that in order to attract workers into the central 
city, companies, both in health care and outside of health 
care, will tell you that they have to pay premiums. People 
don't want to go into congested central cities. They don't want 
to go into unsafe central cities to work. They need to be 
compensated more to attract them there. So, central city 
hospitals may end up paying more.
    Parking for employees and transportation costs may be 
higher as you move into the central city, and so workers take 
that into account. So, I think that some of the reality we are 
seeing is that as you do move out from the central city, wages 
that need to be paid can decline. Think of the geographic area 
that is encompassed in the Washington, DC, metropolitan area. 
Yes, there are some people from West Virginia who do commute to 
Washington, DC, but it is not the norm. The norm is going to be 
that people in West Virginia are likely to work in West 
Virginia.
    Making smaller metropolitan statistical areas is going to 
eliminate some of the problem that you talked about in terms of 
the large gaps at the borders of the MSA's. Right now some of 
that gap, when you take a West Virginia county that is not in 
the metropolitan statistical area, is due to the fact that what 
we are doing is we are comparing that county's rural wages with 
wages from Washington, DC, which are much, much higher.
    Chairman JOHNSON. Your averaging process does not----
    Dr. SCANLON. It is an averaging process.
    Chairman JOHNSON. Those disparities.
    Dr. SCANLON. Right. I hate to introduce those because we 
always talk about how complicated our systems are. If you were 
to bring economists here and ask them how to define labor 
markets, they would tell you that you can't draw very bright 
lines between labor markets.
    Chairman JOHNSON. Right.
    Dr. SCANLON. The labor markets overlap. We have to do the 
best job we can to make the system both understandable and 
appropriate, and I think the way we get to being more 
appropriate is if we look into reducing the size of the 
metropolitan statistical areas that are used for Medicare 
geographic areas. Even as important is to think about the non-
metropolitan areas, these huge sections of States which are 
treated identically, yet that have large towns, small towns, 
very rural areas, where wages do--we see over and over again--
differ systematically. I think recognizing some of those 
differences is going to make this geographic reclassification 
much more reasonable and provide a much more solid basis to 
defend it.
    Chairman JOHNSON. I appreciate your comments in terms of 
New York City versus outlying areas, but I think in terms of 
most cities, even like Ann Arbor--I am not as familiar with 
that area as I am with many, but say Hartford, Connecticut, 
then you take the suburbs and then you take the rural areas. 
Any rural areas from Connecticut you can commute in. On the 
other hand, there is no question but that wages vary. That is 
not even as good an example because New England has such a 
uniform high cost of living.
    Dr. SCANLON. Right. I am a former Chicagoan so I relate to 
the example from Lake County. There is commuting within these 
areas, but to go from Lake County in Indiana or to go from Lake 
County in Illinois down into the city of Chicago is a major 
commute. It is not done regularly by the majority of workers. 
People take commuting into account, and it reduces the value of 
your having a job, and, therefore, you are going to want more 
if you are going to put up with that. So, I think what we do 
see is this pattern in wages, and we need to recognize that in 
terms of the payment levels.
    Mr. HACKBARTH. Could I just underline one point? We have 
two problems with the current areas. One is that they are so 
big and so diverse that you are averaging very different 
populations together, different wage groups together. The 
second problem is these steep cliffs as you move across 
boundaries. So, ideally I think what you want is more areas, 
more homogeneous areas, and then you will have smoother 
movement across the boundaries. You won't have big changes, as 
large a change in the wage index as you move from the central 
city to suburban areas to rural areas. It just needs to be a 
smoother gradient than we have right now.
    Chairman JOHNSON. I think that has potential, but to do 
that you would almost have to do that within an understanding 
of regions as opposed to sort of automatic, I don't know what 
Federal delineations you would use.
    Mr. HACKBARTH. Ideally, you need to develop new area 
definitions from the raw data.
    Chairman JOHNSON. Right.
    Dr. SCANLON. Right, I agree. I think one of the things that 
we are suffering from is that we have taken off the shelf OMB's 
designation of metropolitan statistical areas, which were not 
created for Medicare hospital payment or any other kind of 
payment. We have used it without really considering the 
modifications that might be necessary to make it appropriate 
for hospital payment.
    Dr. ZUCKERMAN. Can I make one comment?
    Chairman JOHNSON. Yes.
    Dr. ZUCKERMAN. The issues of the geographic areas and the 
occupation mix adjustment are probably not as separate as this 
discussion suggests. An occupation mix adjustment will go a 
long way toward getting a more appropriate geographic 
differential across areas. If you have very different types of 
workers in the hospital work force across geographic areas, 
this will be reflected in the payments. Some of the difference 
across areas is due to a ``cliff'' at the boundary states 
created, in part by the geographic gradient of wages. Some of 
the difference is also due to fairly dramatic changes in the 
composition of the hospital work force across areas.
    When we were doing the physician cost adjustors, both the 
work adjustor and the employee adjustor, we didn't have the 
luxury of provider-based data. We built up the indices from 
Census-based data. We used median wages within fairly detailed 
classifications of workers at the county level and aggregated 
this data up to the Medicare payment localities, controlling 
for occupational mix. We found that occupation mix made a big 
difference.
    If we looked at aggregate median wages across all workers, 
we got a very different pattern of geographic cost differences 
than if we looked at median wages within a class of occupation 
and then aggregated that information up to the area.
    I think the occupation mix adjustment and the area 
definition in the hospital wage rates interact with one another 
and you probably need to do both.
    Chairman JOHNSON. That combined with more--I assume you are 
looking at both different data and more current data.
    Mr. HACKBARTH. Ideally, more current. As you pointed out, 
the data used for the wage index are 4 years old, which seems 
quite old. We have, however, looked at how quickly the relative 
wage rates across areas change over time--that is what we are 
trying to measure here. If you look back into the nineties, 
actually there is not that much change in the relative position 
of different markets.
    Now, whether that continues to be true today, you know, 
with the shortage of various types of health care workers, I 
don't know, frankly. If you look back, the data lag has not 
been that big of a problem. In other areas, the data lag is a 
real big problem.
    Chairman JOHNSON. I appreciate the accuracy of the 
proportionality, but I worry about the fact that that formula 
cannot take into account spikes in costs, real costs, and the 
market basket may or may not take into account those costs. 
Over time you get a spike of malpractice, you get a spike of 
something else, and pretty soon you have a tension within the 
system that the formula doesn't represent but life represents.
    Mr. HACKBARTH. Yes. Well, the spikes, as you put it, do 
need to be accounted for in the update process. The wage index, 
again, is just trying to measure relative wage levels and not 
the effect of shortages or the malpractice situation, and so 
forth.
    Chairman JOHNSON. I appreciate your patience very much, and 
I also appreciate the hour and the soggy state of most 
everyone's mind by about now. I do appreciate your testimony, 
and I appreciate your sitting through all the Members, and I 
look forward to working with you. I don't think this is a 
problem we cannot do something about, so, we will look forward 
to more informal discussions as we search for answers. Thank 
you very much for your expertise and your time.
    Dr. ZUCKERMAN. Thank you.
    Dr. SCANLON. Thank you.
    Mr. HACKBARTH. Thank you.
    [Whereupon, at 4:56 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
     Statement of J. Michael Horsley, President, Alabama Hospital 
                    Association, Montgomery, Alabama
    The Alabama Hospital Association (the ``Association'') and its 
members submit this written statement to the Subcommittee on Health of 
the Committee on Ways and Means regarding the geographic cost adjustors 
used in calculating Medicare hospital payments. More than one hundred 
of Alabama's acute care hospitals are members of the Association. The 
Medicare and Medicaid programs are the two largest payors for hospital 
services furnished in the State. Therefore, any adjustment to the 
payment levels under the Medicare program, including an adjustment to 
the calculation and application of the wage index, will have a 
significant impact on the financial wherewithal of these hospitals.
Background
    The Subcommittee's examination of Medicare payments is well-timed. 
For fiscal year 2002, CMS attributed 71.066 percent of the PPS payment 
to the ``labor component.'' This amount is adjusted by a ``wage index'' 
assigned to each geographic area in the country. The wage index 
reflects the wage costs in the local area relative to the wage costs in 
the country as a whole.
    All areas in Alabama have a wage index that is under 1.0. In the 
fiscal year 2002, for example, the Huntsville MSA has the highest wage 
index in the State at only 0.8883. The rural wage index in Alabama is 
0.74, one of the lowest in the country. When the large labor component 
is adjusted by these low wage indices, Medicare payments to Alabama 
hospitals are artificially reduced.
    As the Subcommittee evaluates the formula for wages and the appeals 
process it should consider several specific actions.
I. LCONGRESS AND CMS SHOULD IMMEDIATELY IMPLEMENT AN OCCUPATIONAL MIX 
        ADJUSTMENT OR A COMPENSATING INTERIM ADJUSTMENT TO THE WAGE 
        INDEX.
    Wage indices are not accurately calculated under the current 
regulations. They do not reflect the ``occupational mix'' variations 
from hospital to hospital. The ``occupational mix'' is the distribution 
of workers among various occupational groups delineated by their 
skills, training, and wages. See 66 Fed. Reg. 22,674 (May 4, 2001). By 
failing to make these adjustments, CMS mistakenly presumes that the 
``occupational mix is constant across markets.'' MedPAC, Report to 
Congress, Medicare Payment Policy, at 52 (March 2001). Due to this 
mistake, hospitals that truly need more highly skilled and specialized, 
and higher wage workers receive duplicate payments: once through their 
higher wage index and once through the higher DRG weights attributable 
to their higher case mix index. 66 Fed. Reg. 22,674 (May 4, 2001). At 
the same time, due to this mistake, PPS rewards hospitals that have a 
lower case mix index but unnecessarily elect to have a more specialized 
staff with higher labor costs. These higher payments are at the expense 
of more efficient hospitals.
    Congress has directed CMS to implement an occupational mix 
adjustment no later than October 1, 2004. Pub. L. No. 106-554, 
Sec. 304(c), 114 Stat. 2763A-495 (2000). Meanwhile, this delay in 
adjusting wage indices for occupational mix variations is a 
disadvantage to virtually all hospitals in Alabama. Therefore, the 
Association believes that an occupational mix adjustment should be 
implemented immediately.
    If it is not possible to implement an occupational mix adjustment 
for 2003, Congress at least should direct CMS to implement one of two 
interim, compensatory adjustments to the wage index. First, Congress 
could establish a wage index ``floor,'' i.e., a fixed index that 
constitutes the lowest wage index that is assigned to any area. MedPAC, 
Report to the Congress: Medicare in Rural America, 72-73. (June 2001). 
Hospitals in any area with a wage indices less than this floor amount 
would use the floor index in computing their PPS payments.
    Further, a wage index floor will be necessary even after CMS 
finally develops an occupational mix adjustment. CMS itself recognizes 
the problems in developing an accurate occupational mix adjustment. 66 
Fed. Reg. 22,674-675 (May 4, 2001). Hospitals with a low occupational 
mix may still be disadvantaged after the adjustment is implemented. An 
index floor will limit the residual distortions in the wage index due 
to occupational mix variations.
    A permanent floor is also needed because the wage index inherently 
is based on short term analysis, i.e.,, that in the short run, 
employers compete for labor in a local labor market. In the long run, 
however, labor markets are national because workers readily migrate 
from one area in the country to another due to wage differentials. The 
current payment system freezes existing wage differentials--and, 
effectively, long term migration patterns--because hospitals in areas 
with exceptionally low wage indices cannot raise wages to be 
competitive in the long term labor markets. Therefore, Congress and CMS 
should set a floor for the wage index to eliminate the long term 
disadvantages of wage indices based exclusively on current wage data.
    As an alternative to a wage index floor, Congress could require CMS 
to implement a ``compression factor,'' i.e., an adjustment that reduces 
the wide variations in the wage index due to the differences in 
occupational mix. A compression factor would slightly reduce the wage 
index of those hospitals with an extraordinarily high occupational mix, 
while it would increase the wage index of those hospitals with an 
extraordinarily low occupational mix. MedPAC has endorsed a compression 
factor from 0.959 to 1.032. MedPAC, Report to Congress, Medicare 
Payment Policy, at 52 (March 2001).
    Pending the implementation of an occupational mix adjustment, 
either of these adjustments would minimize the effects of occupational 
mix variations on those hospitals hit hardest by such variations.
II. LCONGRESS SHOULD ENSURE THAT THE WAGE INDEX AND THE LABOR COMPONENT 
        ARE CALCULATED AND APPLIED ON A CONSISTENT AND UNIFORM BASIS 
        THROUGHOUT THE COUNTRY.
A. LCMS Should Establish a Consistent Method For Calculating the Labor 
        Component and the Wage Index.
    Congress must direct CMS to develop a consistent policy governing 
the labor component and the wage index. Currently, the wage index is 
based on one set of data but it is applied to the labor component which 
includes a completely different set of costs. There is no discernable 
relationship between the wage index and these other costs.
    CMS now bases the wage index on salaries and fringe benefits. 
However, CMS includes ``nonmedical professional fees'' and ``all other 
labor intensive services'' in the labor component. 67 Fed. Reg. 31,447 
(May 9, 2002). These two categories of costs amount to about 10 percent 
of the 71.066 percent of all costs assigned to the labor component. Id. 
This adjustment is made even though CMS does not include ``nonmedical 
professional fees'' and ``labor intensive services'' in the calculation 
of the wage index. CMS has no data demonstrating that costs in these 
categories vary from area to area like wages and fringe benefits.
    The adjustments to labor costs must be internally consistent. 
Otherwise, hospitals with a low wage index are penalized while 
hospitals with a high wage index are overcompensated.Thus, Congress 
should enact legislation requiring CMS to apply the wage index only to 
the costs that are included in the calculation of the wage index.
B. LCMS Should Establish a Method for Calculating the Wage Index That 
        is Uniform For All Hospitals.
    Congress and CMS also must develop uniform rules governing the 
calculation of the wage index for all areas in the country. CMS now 
uses different data from area to area in calculating the wage indices. 
For example, CMS recognizes that some hospitals contract out certain 
services that are typically lower wage--such as dietary and 
housekeeping services--that other hospitals furnish with their own 
employees. 67 Fed. Reg. 31,433. Still, CMS excludes the costs of the 
contracted services in the calculation of the wage index of the areas 
in which these contracting hospitals are located. Id.
    The exclusion of contract labor in the calculation of the wage 
index skews the wage indices assigned to different areas. The best 
evidence available suggests that contract labor is used predominately 
in urban areas, and that the exclusion of these predominately lower-
wage services in the calculation of the wage indices overstates the 
wage index assigned to these areas.
    Congress and CMS must identify all disparities in the calculation 
of the wage indices of the different areas of the country and must 
ensure that the wage index is calculated in a uniform manner.
III. LCONGRESS SHOULD REQUIRE CMS TO REVISE THE LABOR COMPONENT TO MORE 
        ACCURATELY ESTIMATE WAGE AND WAGE-RELATED COSTS.
    Congress also should modify the methodology that CMS uses to 
calculate the labor component. There are several actions the 
Subcommittee should consider.
A. LCongress Should Exclude From the Labor Component Costs That do Not 
        Vary by the Wage Index.
    First, Congress should enact legislation to limit CMS's over-
inclusive definition of the labor component. Right now, CMS includes 
costs that are neither ``wage or wage-related costs'' and are not 
likely to vary with the local labor markets. These costs should not be 
included in the labor component and should not be adjusted by the wage 
index.
    Insurance costs are a good example of costs that should not be 
adjusted by the wage index. Most insurance premiums are not ``wage or 
wage-related'' or, at most, have only a tenuous relationship to local 
wage levels. For example, premiums for workers compensation insurance 
are based in large part on estimates of payments to claimants for 
medical expenses, pain and suffering, legal fees in defending cases, 
administrative costs in processing claims, and other costs. These 
elements are not related to the hospital's wages. Further, to the 
extent lost wages are included the estimate of expected losses, lost 
wages are calculated on a statewide basis rather than a local level.
    This same analysis is applicable to other kinds of insurance. 
Premiums for fire and property insurance are based on the replacement 
value of the assets insured. Premiums for general liability insurance 
are based on the cost of professional malpractice insurance, and CMS 
already has determined that premiums of malpractice insurance are not 
wage-related.
    Other costs that are included in the labor component do not vary 
with local wage levels. For example, CMS includes accounting fees in 
the labor component. However, most hospitals retain national accounting 
firms whose fees are set on a national basis. Those fees do not vary by 
local wage levels.
    More generally, it appears that Congress intended that CMS would 
apply the wage index to that portion of the PPS payment attributable to 
wages paid by hospitals. CMS has drastically expanded application of 
the wage index to a wide variety of costs, including the fees or 
charges of independent contractors. However, CMS does not have any 
information showing that these fees or charges vary by the local wage 
levels in the area in which a hospital is located.
B. LAlternatively, CMS Should include in the Labor Component Only the 
        Portion of Fringe Benefits, Nonmedical Professional Fees, and 
        Other Labor Intensive Services That Are Wage-Related.
    The application of the wage index to ``nonmedical professional 
fees'' and ``labor intensive'' costs is arbitrary also because only a 
portion of these costs are ``wage or wage-related.'' For example, at 
present, the labor component includes landscaping services and auto 
repair services, 67 Fed. Reg. at 31,447, even though only a portion of 
those cost are attributable to labor. Even CMS recognizes that there is 
a non-labor component of contract services, 67 Fed. Reg. 31,432-33, but 
it has not eliminated this portion of the charges from the labor 
component.
    Alternatively, the definition of ``wage and wage-related costs'' 
should be limited to those costs for items or services that can be 
purchased only in the local labor market. MedPAC Report to Congress, 
Medicare in Rural America, at 79 (June 2001); see 67 Fed. Reg. 31,447. 
CMS's current definition of the labor component, however, includes any 
inputs with prices ``influenced'' by the local market, even if those 
inputs are purchased only in a national market, or if a portion of the 
inputs is purchased locally and the remainder is purchased regionally 
or nationally. Id.
IV. LCONGRESS SHOULD ENSURE THAT THE WAGE INDEX REFLECTS THE FACT THAT 
        MANY LABOR COSTS ARE INCURRED IN A NATIONAL MARKET.
    A faulty premise underlying the wage index as it is now 
administered is that labor markets are entirely ``local'' markets. 
Right now, Alabama hospitals confront the migration of workers outside 
the state. Thus, Alabama hospitals should have PPS rates adjusted to 
reflect the wages that are paid to migrating workers by hospitals in 
other states.
    The Association has monitored these migration patterns. Each year, 
for example, more than ten percent of the nurses in Alabama apply for 
license verifications to permit them to practice outside the State. 
Approximately 7,000 RNs, out of a total of 68,000, seek license 
verifications each year to be licensed to practice in another state. 
This exodus is not limited to RNs: other groups of medical 
professionals are regularly leaving Alabama, too.
    The hospitals in Alabama clearly are competing with out-of-state 
hospitals for these nurses. These out-of-state hospitals with higher 
contract labor costs will be assigned an ever-increasing wage index; 
they will be paid higher DRG payments; and they can then better afford 
even more contract labor. Conversely, hospitals in low wage index areas 
like Alabama will confront steadily lower wage indices and will not be 
able to retain RNs and other specialized labor as salaried employees. 
Therefore, these national labor markets must be taken into account in 
calculating the wage indices of states like Alabama.
V. LCONGRESS SHOULD ENSURE THAT CMS ADOPTS MORE REALISTIC STANDARDS FOR 
        GEOGRAPHIC RECLASSIFICATIONS.
    There is a mechanism for hospitals with unusually high labor costs 
to seek relief by applying to the Medicare Geographic Classification 
Review Board. However, the standards for reclassification are overly 
restrictive.
    In general, an urban hospital qualifies for reclassification only 
if it is within 15 miles of the area to which it seeks 
reclassification. A rural hospital must be within 35 miles of the area 
to which it seeks reclassification. 42 C.F.R. Sec. 412.230(a)(2). These 
mileage restrictions were arbitrarily established more than a decade 
ago, 55 Fed. Reg. 36,766 (Sept. 6, 1990), as amended, 56 Fed. Reg. 
25,488 (June 4, 1991). The commuting patterns in Alabama and throughout 
the country have expanded so dramatically that the 15- and 35-mile 
proximity requirements are now outdated. These proximity requirements 
should reflect new commuting patterns so that either an urban or rural 
hospital may be reclassified if it is within 50 miles of the area to 
which it seeks reclassification. Also, to eliminate confusion, this 
mileage should be measured in air miles.
    If a hospital does not meet the mileage requirements, it may be 
reclassified if, among other things, more than 50 percent of the 
hospital's employees live in the area to which it seeks 
reclassification. 42 C.F.R. Sec. 412.230(b)(2). This is an unduly 
restrictive definition of the real labor market in which hospitals 
operate and in which employees commute. Congress should make three 
changes to these requirements.
    First, reclassification should be permitted if as few as 10 percent 
of a hospital's employees live in the area to which the hospital seeks 
reclassification. Standard market definitions recognize that a single 
market exists if there is as little as 10 percent movement between the 
two areas. See, e.g. Horizontal Merger Guidelines (1997) (Department of 
Justice and FTC measurement for geographic market definition for 
antitrust cases).
    Second, hospitals should be reclassified if a significant number of 
people in the area in which the hospital is located commute to the 
region to which the hospital seeks reclassification. Reclassification 
is possible only if the hospital in the low wage area draws a 
significant number of workers from the area that has the higher wage. 
42 C.F.R. Sec. 412.230(b)(2). By definition, in a fluid labor market 
the workers from the low wage area in which the hospital is located 
will commute to the hospitals that are located in the higher wage 
areas.
    Third, reclassification should be permitted if a hospital competes 
for labor with facilities in two or more nearby geographic areas. Under 
42 C.F.R. Sec. 412.230(b)(2), reclassification currently is permitted 
only if the hospital draws at least 50 percent of its employees from 
the one area to which it seeks reclassification. This standard for 
reclassification is overly restrictive in that it focuses exclusively 
on the dynamics between two geographic areas. Some hospitals may draw 
employees from (or lose employees to) two or more different geographic 
areas. Therefore, Congress should modify this standard to allow 
reclassification whenever there is any significant in-migration or out-
migration from the area in which the hospital is located, even if the 
workers commute to several nearby areas.
    Finally, an urban hospital seeking reclassification must 
demonstrate that its wage levels are at least 108 percent of those of 
the hospitals in the area in which it is located, and at least 84 
percent of the wages in the area to which it seeks to be reclassified. 
Similarly, a rural hospital seeking reclassification must demonstrate 
that its wage levels are at least than 106 percent of those in the area 
in which it is located and at least 82 percent of the wages in the area 
in which it seeks to be reclassified. These requirements are too 
stringent, and Congress should adopt more flexible standards.
CONCLUSION
    Various factors affect the proper calculation of Medicare payments 
to hospitals. Apparently, the Subcommittee is concerned that the 
geographic areas used to calculate the wage indices may be arbitrary. 
The Association strongly suggests, however, that these more fundamental 
problems in the calculation of the wage index and the labor component 
must be corrected before the Subcommittee can evaluate the use of the 
geographic areas now specified by statute.
    I look forward to the opportunity to testify in person on these 
issues and other matters the Subcommittee may address regarding the 
calculation of payments to hospitals under Medicare's Prospective 
Payment System.

                                 
Statement of the American Academy of Family Physicians, Leawood, Kansas
    This statement is submitted to the House Ways and Means 
Subcommittee on Health on behalf of the 93,500 members of the American 
Academy of Family Physicians. Twenty-eight percent of the members of 
AAFP reside and practice in rural areas and are therefore disadvantaged 
by Medicare payment formulas that include geographic adjustment 
factors.
    AAFP strongly supports the elimination of all geographic adjustment 
factors from the Medicare Fee Schedule except for those designed to 
achieve a specific public policy goal (e.g., to encourage physicians to 
practice in underserved areas). This longstanding policy of the AAFP 
was first adopted in 1973, was reaffirmed in 1996 and remains current 
today.
    Medicare payment formulas should accurately compensate physicians 
and providers who deliver high-quality, cost-effective services to 
Medicare beneficiaries in all areas of the country. However, the 
formulas used by the Medicare program to reimburse physicians and 
health care providers for beneficiaries' medical care are not 
accurately measuring the cost of providing services, and are 
reimbursing physicians and other health care providers in a manner that 
favors urban providers over rural providers. AAFP commends the chair 
for convening this hearing today and appreciates the efforts of the 
committee to promote fairness and equity in the Medicare program.
    As stated above, Medicare payments to rural physicians and other 
health care providers are less than what their equivalent counterparts 
are paid in more densely populated areas, even though it costs as much 
and even more to provide medical services in rural areas.
    Medicare payment policy with respect to physician services 
delivered in rural and underserved areas can be described as 
contradictory--paying bonuses to physicians for practicing in rural and 
underserved areas on the one hand while devaluing physician clinical 
decision-making and patient services in rural areas less, on the other. 
AAFP urges Congress to correct this mixed message by aligning the 
policies and ensuring that they consistently provide incentives to 
physicians to practice in rural and underserved areas.
    The American Academy of Family Physicians has endorsed two pieces 
of legislation that would correct these inconsistencies: the ``Rural 
Equity Payment Index Reform Act'' (REPaIR, H.R. 3569), introduced by 
Representative Doug Bereuter (R-NE) and 60 bipartisan cosponsors, would 
phase-in a floor of 1.000 for the Medicare ``physician work adjuster,'' 
thereby raising all localities with a work adjuster below 1.000 to that 
level. This proposed change would positively and substantially affect 
patients and physicians in 56 (63 percent) of the 89 geographic payment 
localities. A phase-in over four years would soften the budgetary 
ramifications of such a policy correction.
    A second bill, the ``Revitalizing Underserved Rural Areas and 
Localities Act'' (RURAL, S. 2555), introduced by Senator Max Baucus (D-
MT) would revise and improve the Medicare Incentive Payment Program 
(MIP) which exists for the purpose of encouraging physicians to 
practice in rural and underserved areas. The existence of MIP could be 
interpreted as a commitment of the Federal Government (and the Medicare 
program in particular) to help rural America attract and retain 
physicians. However, when MIP is combined with a geographic disparity 
represented by the devaluing of physician work in rural areas, the 
incentive makes Medicare appear contradictory. This contradiction sends 
a mixed message to physicians who would consider locating their 
practices in rural America.
The Medicare Incentive Payment Program (MIP)
    Created in 1989, the MIP program provides bonus payments to 
physicians who practice in HPSAs in an effort to encourage more 
physicians to those areas. According to a Medicare Payment Advisory 
Commission (MedPAC) report dated June 2001, a recent decline in the 
bonus payments to physicians has caused concern that several aspects of 
the program design are compromising its effectiveness.
    For example, currently the MIP ten-percent bonus is paid to 
physicians practicing in HPSAs only upon submission of the claim form 
along with a special coding modifier that is attached to each service. 
Since the bonus payment is predicated upon the use of this special 
coding modifier, and, due to the inherent instability of the HPSA 
designation, physicians cannot always be certain if they are practicing 
in a shortage area, the use of the MIP has been less than expected.
    In 1996, 75 percent of participating rural physicians, or about 
18,700 doctors, received less than $1,520 each in bonus payments for 
the year. In addition to the complexities described above, the low 
level of payments may be attributable to carriers being required to 
review claims of physicians who receive the largest bonus payments. A 
1999 study by the Health Care Financing Administration (HCFA) suggested 
this policy may discourage physicians from applying for the MIP 
program. More importantly, a 1999 General Accounting Office (GAO) 
report suggested the ten-percent bonus payments may be insufficient to 
have a significant influence on recruitment or retention of primary 
care physicians.
    The RURAL bill (S.2555) would make any physician practicing in a 
Health Professional Shortage Area (HPSA) automatically eligible for a 
ten-percent bonus. The bill would also charge the Secretary of Health 
and Human Services to conduct an ongoing program to provide education 
to physicians on the Medicare Incentive Payment (MIP) program. The 
Secretary would also be directed to conduct an ongoing study of the MIP 
program, which would focus on whether such a program increases the 
access to physicians' services for those Medicare beneficiaries who 
reside in a HPSA.
Geographic Practice Cost Indices (GPCIs)
    Payments for physicians' services under Medicare are made on the 
basis of a fee schedule. The fee schedule has three components: the 
relative value for the service; a geographic adjustment; and a national 
dollar conversion factor. The relative value for a service compares the 
relative physician work involved in performing one service with the 
work involved in providing other physician's services. It also reflects 
average practice expenses and malpractice expenses associated with the 
particular service. Each of the 7,500 physician service codes is 
assigned its own relative value. The relative value for each service is 
the sum of three components:

         Lphysician work, which measures physician time, skill 
        and intensity in providing a service;
         Lpractice expense, which measures average practice 
        expenses such as office rents and employee wages; and
         Lmalpractice expense, which reflects average 
        professional liability insurance costs.

    A separate geographic adjustment is made for each of these three 
components. As stated earlier, Medicare payments to rural physicians 
and other health care providers are less than what their equivalent 
counterparts are paid in more densely populated areas even though it 
costs as much, and in some cases even more, to provide medical services 
in rural areas.
    AAFP policy recommends that physician work should be valued 
equally, irrespective of the geographic location in which it is 
performed. Since it is probably not politically feasible to lower the 
work adjuster levels of health care providers in urban areas to correct 
this inequity, this change proposed in the ``Rural Equity Payment Index 
Reform Act'' (REPaIR, H.R. 3569) would be put in place without regard 
to the budget neutrality agreement in the present law. Thus, Congress 
would need to change the law in order to authorize an increase to 
establish a floor of 1.000 to all parts of the nation. The phase-in 
approach attempts to soften the budgetary ramifications by spreading it 
over a few years. HR 3569 will at least reduce the current inequity in 
payments.
Ratios of Physicians Practicing in Health Professional Shortage Areas
    The number of Health Professional Shortage Areas (HPSAs) in the US 
indicates that these programs are not fully successful. (See Exhibit A, 
which indicates the current number of HPSAs in the US.)
    Of 3142 counties in the United States, 1189 (63%) are designated 
full or partial county HPSAs meaning that the desired ratio of one 
primary care physician to 3500 people is not met. If family physicians 
are removed or choose to remove themselves from the system due to 
insufficient payment or other reasons, the large majority of US 
counties would become full or partial county HPSAs. (See Exhibit B, 
which indicates how many counties would become full or partial HPSA if 
family physicians were to be removed).
    Indeed, family physicians are opting for less than full 
participation in the Medicare program at an unprecedented rate. Recent 
AAFP research reveals that 21.7 percent of AAFP members responding 
indicate they are not accepting new Medicare patients, compared with 
17.0 percent just a year ago. This represents a 28 percent increase in 
the past 12 months.
    More than 2,200 physicians are needed in non-metropolitan areas to 
remove all non-metropolitan health professional shortage area (HPSA) 
designations for primary care. More than twice that many are needed to 
achieve a 2,000-to-1 optimal ratio in those HPSAs. Congress needs to 
take steps to improve Medicare for rural and other non-metropolitan 
areas now. Increasing the supply of primary care providers in rural 
areas by lessening geographic differentials in physician income is an 
important step Congress can take right now.
Experience of a Rural Family Physician
    Dr. Baretta Casey has done what the government wants many 
physicians to do: set up practice in an underserved area, taking care 
of many patients on Medicare and Medicaid. She came to medicine later 
in life than many do, as a wife with two children--three by the time 
she graduated. She wanted to become a family doctor and practice in her 
Appalachian hometown of Pikeville, Ky.
    Her business background stood her in good stead. She bought an 
office building at an auction, rented out the top floor to offset the 
cost of her first-floor office, computerized her practice from the 
start and opened her doors as a solo practitioner eight years ago.
    Thanks to the booming practice and conservative living, Casey 
significantly paid down her $145,000 in student loans her first full 
year. But that was as good as it got. Ensuing years didn't get better. 
In fact, they got worse.
    On her computer Dr. Casey watched while medical expenses continued 
to grow but payment rates failed to keep pace. Dr. Casey says: ``As a 
solo practitioner, I pay for everything. And the increase in expenses 
hasn't been the measly little percentage you hear forecasted by the 
government. I've tracked it on my computer. It has gone up 10 to 15 
percent every year.''
    ``It took about six years, but at the six-year mark, expenses and 
income literally met in the middle,'' she says. ``This past year, they 
crossed over. And now, I have to dip into my savings to cover the extra 
expense. I'm basically subsidizing my own practice out of a savings 
account.''
    And now, in 2002, the worst blow of all--the 5.4 percent cut in the 
Medicare conversion factor. ``I've had to make some decisions,'' Dr. 
Casey says. ``I won't take any new Medicare patients or any new 
patients with any insurance company that follows suit and drops 
payment.'' And ultimately, she says, ``If things don't change, I 
probably couldn't stay in practice any more than two more years.''
Dr. Casey has a message for Washington:
    ``If our reimbursement rates continue to go down and our expenses 
continue to go up,'' she says, ``you will see an exodus of physicians 
out of rural areas like Moses out of Egypt. It's not because doctors 
don't care about their patients. They do, tremendously.''
    ``It's because nobody is going to continue in a field or in a 
business when they're losing 10 to 15 percent per year. The practice of 
medicine is like any other business: If you can't pay your bills, you 
can't survive.''
Conclusion
    Medicare payment rates, insufficient valuation of physician work 
performed in rural areas, and an ineffective Medicare Incentive Payment 
Program contribute to the problems experienced by Dr. Casey and many 
other family physicians across the country, particularly those who 
practice in rural and underserved areas.
    AAFP calls upon Congress to take the necessary steps to remedy this 
failing system by: (1) permanently fixing the formula by which Medicare 
payment rates are determined; (2) eliminating the geographic disparity 
that devalues physician work performed in rural and underserved areas; 
(3) and revising the Medicare Incentive Payment Program to increase its 
effectiveness. These adjustments will create a more consistent Medicare 
policy and improve the likelihood that it will accomplish the intended 
policy objective: i.e., to attract physicians to rural and underserved 
areas.
[GRAPHIC] [TIFF OMITTED] 83922I.001

                              ----------                              


[GRAPHIC] [TIFF OMITTED] 83922J.001


                                 

             Statement of the American Hospital Association
    On behalf of the American Hospital Association's (AHA) nearly 5,000 
member hospitals, health care systems, networks and other providers of 
care, we are pleased to submit the following statement for the record 
as the Subcommittee on Health discusses the critical issue of 
geographic cost adjustors for Medicare payment.
    As rural hospitals must now compete in a national labor market for 
the same health care workers as urban hospitals, today's Medicare 
reimbursement policies hamper the ability of rural hospitals to close 
the expanding wage gap. As a result, many rural hospitals are paid too 
little to compete for personnel in an increasingly tight labor market.
    These facilities and the men and women who work in them are an 
integral part of their communities, not only providing access to health 
care services but also serving as a hub for public health, wellness and 
social services. Because many are smaller facilities, these hospitals 
have difficulty absorbing changes in reimbursement and coverage 
policies, as well as government regulations. They are more severely 
affected by shifts in local demographics, health status, practice 
patterns and the loss of health care professionals. And, because there 
often are few or no reasonable alternatives to care, small or rural 
hospitals are usually the sole source of essential health care for 
their communities.
    As rural hospitals struggle with continued Medicare and Medicaid 
payment reductions, mounting regulatory requirements and rising 
technology and blood expenses--all of which impose significant 
financial burdens on small rural hospitals--they must also confront a 
growing shortage of health care professionals. Because rural health 
care workers may earn less than their urban counterparts as a result of 
Medicare payment policies, these health care professionals may commute 
long distances or relocate to earn higher wages in urbanized areas. As 
a result, small or rural hospitals feel the financial pressure to 
compete with their urban neighbors for a dwindling pool of health care 
professionals.
    America's 2,200 rural hospitals provide essential inpatient, 
outpatient and post-acute care, including skilled nursing, home health 
and rehabilitation services, to nearly 9 million Medicare 
beneficiaries. Rural hospitals rely heavily on Medicare payments, which 
can be 70 percent or more of their revenue, yet are less able to manage 
within a prospective payment system (PPS) because of low financial 
reserves, thinner margins and significant fluctuations in patient 
volume. These challenges, combined with their sparse populations and 
high levels of poverty, have significantly affected the ability of many 
rural hospitals to remain financially viable under Medicare prospective 
payment policies. In fact, one out of every three rural hospitals is 
losing money, as reported by the Medicare Payment Advisory Committee 
(MedPAC) in their 2002 Report to Congress.
    To help hospitals in rural and smaller metropolitan areas attract 
and retain quality health care personnel, the AHA urges a 
comprehensive, national solution to this problem through passage of 
H.R. 1609, the Area Wage Index and Base Payment Improvement Act, 
introduced by Representatives Phil English (R-PA) and John Tanner (D-
TN).
    This bill specifically establishes a ``floor'' on the area wage 
index used to adjust Medicare hospital inpatient and outpatient 
prospective payments. By setting a floor of 0.925 on the area wage 
index, this proposal would bring Medicare payments in areas with the 
lowest wage index up to just below the national average. Another 
provision of the bill raises inpatient PPS base payment amounts for 
rural and smaller urban hospitals to match the ``large urban'' rate, 
which was included in the recently passed H.R. 4954, The Medicare 
Modernization and Prescription Drug Act, phased-in over two years.
    Adequate government funding is essential to help hospitals attract 
and retain qualified personnel. Because overall hospital margins have 
been reduced, funds for increasing wages are not available from 
internal sources and must be added by all payers, including Medicare. 
With today's tight labor market, Congress should pass legislation 
creating a wage index floor and moving to one base payment amount. 
These two measures will help ensure that rural and smaller metropolitan 
hospitals have the necessary health care workers to continue providing 
the highest quality of care to our nation's elderly.

                                 

    Statement of Dale E. Baker, Baker Healthcare Consulting, Inc., 
                         Indianapolis, Indiana
    Baker Healthcare Consulting, Inc. is an Indianapolis based 
consulting firm that works with hospitals throughout the country on 
Medicare geographic classification matters and Medicare wage index 
matters. Our clients range from small rural hospitals to large urban 
metropolitan medical centers. We also work with leading hospital 
associations on wage index matters and prepare applications for 
geographic reclassification for groups as well as individual hospitals. 
Our comments are not prepared on behalf of any individual client of 
this firm but are submitted as an effort to focus the testimony of 
members of Congress and others on the prevalent technical issues that 
were being addressed (but not always enumerated) by members of 
Congress.
    Most people think of Medicare geographic reclassification as a 
rural program, increasing payments primarily to rural hospitals. 
Statistics support this point of view, for FFY 2004 of 628 reclassified 
hospitals 82% or 515 were rural hospitals reclassified to nearby other 
areas (source: August 1, 2002 Federal Register, page 50280).
    Surprising though, of the fifteen members of Congress on the 
tentative witness list, only five represented truly rural 
constituencies (Representatives Nussle, Aderholt, Moran, Peterson (PA) 
and Sandlin). Ten presenters represented mostly urban areas and in 
fact, five representers areas included in Consolidated Metropolitan 
Statistical Areas (CMSAs) which are areas with over one million 
population and generally sprawling areas surrounding major metropolitan 
areas with significant commuting patterns to and/or from major city. 
This includes Representatives Roukena, Visclosky, Shays, Hinchey and 
Kelly. These witnesses represent a very different constituency than a 
simple glance at the overall hospital reclassification statistics would 
suggest.
    Defining the technical issues that the hospitals in these urban 
jurisdictions represent might assist the Subcommittee (and perhaps the 
administration) in defining solutions to the problems presented by 
members of Congress.
Group Reclassifications
    The Medicare program allows for group reclassifications (countywide 
reclassifications or New England County Metropolitan Area (NECMAs) for 
areas that are included in CMSAs. The five presenters on this topic all 
represent Primary Metropolitan Statistical Areas (PMSAs, a designation 
within a CMSA) that were just outside the large urban areas, New York 
City and Chicago.
    Hospitals in these outlying PMSAs are in competitive labor markets 
with the larger ``core'' areas such as New York City or Chicago. The 
size of the wage index ``cliffs'' at artificially designated county 
lines create enormous hardships on these outlying hospitals in 
attracting and retaining health professionals, whose mobility allow 
them to commute considerable distances, in many instances to earn 
significantly higher wages. As savvy hospital human resource managers 
design worker friendly shifts (such as three twelve hour days rather 
than the standard five day work week) workers become ever more willing 
to commute greater distances for greater pay. Combine that with 
shortages of health professionals including RNs, pharmacists, and many 
others, and the need for geographic reclassification to hospitals in 
outlying PMSAs becomes obvious.
    Hospitals in eligible outlying PMSAs can seek group 
reclassification if the group meets two key statistical criteria. 
First, the group average hourly wage must be at least 85% of the target 
PMSAs hourly wage. This criteria corresponds to an 84% criteria for an 
individual hospital reclassification. In the mid nineties the 85% 
criteria was reduced to 84% for individual urban hospitals seeking 
reclassification. In explicit idly, the group criteria were never 
changed.
    For a group reclassification, hospitals must additionally meet a 
second criteria based on the groups average standardized cost per case. 
That criteria requires the standardized group cost per case to exceed a 
computed threshold amount to prove ``comparable costs'' to the target 
PMSA. The threshold amount is not based on the cost per case in the 
target PMSA but is based on the Medicare standardized payment rates 
computed as follows:(25% of the home PMSA Medicare standardized payment 
amount) plus (75% of the target PMSA Medicare standardized payment 
amount) equals the threshold amount.
    For FFY 1995, there were twenty-three group reclassifications 
approved for a total of 119 hospitals. For FFY 2003, in an ever more 
competitive environment for scarce healthcare workers, only five group 
reclassification requests were approved for a total of sixteen 
hospitals, 13% of the hospitals approved in 1995. The attached exhibit 
summarizes the number of group reclassifications approved and the 
number of hospitals reclassified by year.
    What happened? Hospital have greatly expanded outpatient units, 
opened and enlarged alternate sides of care including rehabilitation, 
psychiatric and long term care units to provide more expert cost 
effective patient care. The fixed overhead costs, which were formerly 
allocated largely into the inpatient acute care units, are now 
distributed to the other expanded units. Hospital groups can no longer 
meet the artificial cost per case criteria conceived before 
proliferation of alternative care sites. Note that these changes in 
health delivery are not unique to the outlying PMSAs but also apply to 
the New York City and Chicago hospitals as well. The criteria do not 
measure the relative urbanicity of these outlying areas as a true 
comparison of relative costs compared to the nearby city. The rate-
based criteria is a ``proxy'' designed in 1989 that lacks relevance in 
today's environment and simply does not work right.
    Modernizing the criteria, which were developed based on 1988 data, 
and eliminating the cost per case criteria (or modifying the criteria) 
would result in more appropriate reclassifications. Also, the wage 
index criteria should be set at 84%, the same as for individual urban 
hospitals.
    Eliminating the standardized amount group criteria would result, 
based on our modeling in approximately twenty group reclassifications 
and shift approximately $132 million of inpatient operating payment to 
the newly reclassified hospitals. Total Medicare payments of $83.2 
billion are budgeted for FFY 2003 (11,484,000 discharges times $7,247.2 
per case payment per August 1, 2002 Federal Register). This budget 
neutral shift would reduce payment to other hospitals by only.0016 or 
$11.50 per discharge for inpatient operating payment. We would be 
please to work with staff to further refine these estimates. These 
criteria can fixed by regulation.
Dominant Hospital in Small MSA Issue
    Two Congressmen, Representative Peterson (MN) and Smith represent 
urban districts with a dominant hospital that is unable to be 
reclassified. For an individual urban hospital to be reclassified for 
wage index purposes to a nearby urban area the applying hospital must 
generally meet three criteria as follows:

        1. LProximity requirement--the hospital must be within fifteen 
        miles of the target MSA to which it requests reclassification. 
        A few formerly rural hospitals are exempt from this 
        requirement.
        2. LThe applying hospital must have an average hourly wage 
        equal to or greater than 84% of its target MSA; and
        3. LThe applying hospital's average hourly wage must be at 
        least 108% of its home geographic area (including the applying 
        hospital's wages).

    The 108% criteria by definition prevents a hospital that is the 
only hospital in a small MSA from even qualifying for an individual 
hospital reclassification (unless the hospital is in a PMSA and can 
qualify under the aforementioned group criteria).
    The issue also affects dominant hospitals where there may be two or 
three other hospitals in the MSA making it all but impossible for the 
dominant hospital to exceed the 108% criteria.
    There are several technical solutions to fix this problem, 
including waiver of the 108% criteria where appropriate, or other 
criteria modification for small MSAs with dominant hospitals. Such a 
fix could be done by regulation or by statute. Approximately three 
years ago we estimated one possible fix to this issue might impact 
approximately twenty-six hospitals and shift $40 million in budget 
neutral payments. We will be pleased to work with staff to update this 
estimate based on various criteria that would alleviate this issue. 
These criteria can be fixed by regulation.
The Rural Issue
    Several presenters (including Representatives Anderholt, Moran, 
Peterson (PA) and Sandlin) indicated that the same competitive 
pressures outlined in our PMSA discussion negatively impact rural 
hospitals. Various presenters endorsed the proposal for a.9250 wage 
index floor.
    We agree that there are problems with the rural hospital payment 
level. We believe that there are an alternate technical approach to 
Congressional action on this issue that have several advantages 
compared to the floor proposal. We believe that the Subcommittee should 
consider ``compression'' as MedPAC has coined the term. CMS usually 
uses a Geographic Adjustment Factor (GAF) to modify inpatient capital 
payment. The GAF is the wage index taken to the power of.6848. The GAF 
is always closer to the mean of 1.0000 than the wage index. 
``Compression'' would change all hospital wage indexes under some 
legislative threshold and result in a revised wage index that would be 
closer mean, resulting in wage indexes that are in the same order as 
the present wage index (i.e. the lowest wage index would still be the 
lowest).
    If the Committee decides to grant rural and some urban hospitals 
wage index relief, a technique similar to the GAF would be an 
appropriate alternative to the floor. Such an approach would preserve 
existing incentives for rural hospitals to carefully collect and report 
wage index data. The floor might eliminate this incentive for many 
hospitals that have wage indexes well below the.925 proposed floor and 
result in distortion in the overall wage index. The formula could be 
applied, for example, to all hospitals with a wage index of less than 
1.0000 thus giving more hospitals at least a small increase in payment. 
The.9250 floor rewards the lowest paying hospitals disproportionably, 
while denying rural hospitals in a state such as Vermont (with a wage 
index of.9345) any additional add on payment. We believe that Vermont 
hospitals face the same pressures as for example rural Alabama 
hospitals and therefore it seems appropriate that the rural Vermont 
hospitals should get some increase. ``Compression'' would achieve this 
objective. A factor such as the.6848 power used for the capital payment 
can be accurately crafted to increase payment according to a 
Congressional mandate.This change would require legislation.
Budget Neutrality
    Traditionally, the members of Congress, the AHA and others have 
lamented the budget neutrality impacts of reclassification on other 
hospitals. The significant shift of funds in Budget Neutrality 
Adjustment occurred as of October 1, 1991, when the reclassification 
system first was implemented.
    Since 1991, the only difference in budget neutrality is the annual 
incremental change of reclassifications; a very small number compared 
to total Medicare payments. If Congress is concerned about the impact 
on non-reclassified hospitals it could consider a proposal to ``cap'' 
the total rewards to reclassified hospitals in a separate pool of money 
to totally eliminate budget neutrality consideration. Such a pool could 
be enlarged from today's level if additional reclassifications are 
anticipated as a result of Congressional action to modernize the 
criteria as advocated in this paper. Such a pool could then be 
increased annually based on the rate of increase in the standardized 
amount, or some other objective methodology.
    The above three issues address the vast majority of requests as 
presented by Congressional representatives at the July 23, 2002 
hearing. There are other smaller reclassification issues, but fixing 
the above three issues would greatly improve the reclassification 
system.
    We appreciate the opportunity to present our comments to the 
Subcommittee. Should you have further questions please do not hesitate 
to contact us.
                               __________

                                 MEDICARE GEOGRAPHIC CLASSIFICATION REVIEW BOARD
                         Group Reclassification Approvals Federal Fiscal Year 1995-2003
 
                                                            Number of Hospitals Reclassified \1\
         County Group           Target MSA
                                             1995    1996    1997    1998    1999    2000    2001    2002   2003
 
Atlantic County Hospital        Philadelph  3       3       3       3       3       3                      3
 Group, NJ.                      ia
Bergen County Hospital Group,   New York                    6
 NJ.
Boulder County Hospital Group,  Denver      3       3                                       3       3      3
 CO.
Butler County Hospital Group,   Cincinnati  4       4       4       4                               4      4
 OH.
Cape May County Hospital        Philadelph  1       1       1       1               1
 Group, NJ.                      ia
Cumberland County Hospital      Philadelph  2       2       2               2
 Group, NJ.                      ia
Dade County Hospital Group, FL  Ft.         8
                                 Lauderdal
                                 e
Hunterdon County Hospital       Newark      1       1       1       1               1
 Group, NJ.
Kankakee County Hospital        Chicago             2
 Group, IL.
Kenosha County Hospital Group,  Chicago                                                                    2
 WI.
Kitsap County Hospital Group,   Tacoma      1       1       1
 WA.
Lake County Hospital Group, IN  Chicago     8       8       8       8       8
Mercer County Hospital Group,   Monmouth    5       5       5
 NJ.
Middlesex County Hospital       Newark/     4       4               4               4
 Group, NJ.                      Monmouth
Monmouth County Hospital        Middlesex   5       5       5
 Group, NJ.
Morris County Hospital Group,   Bergen-     4       4               4               4
 NJ.                             Passaic
Ocean County Hospital Group,    Philadelph  4               4
 NJ.                             ia
Orange County Hospital Group,   Los         33      33
 CA.                             Angeles
Orange County Hospital Group,   Bergen-     6               6       6       6       6
 NY.                             Passaic
Passaic County Hospital Group,  Newark                      6
 NJ.
Pierce County Hospital Group,   Seattle     5
 WA.
Portage County Hospital Group,  Cleveland   1               1       1       1
 OH.
Racine County Hospital Group,   Milwaukee   3       3       3       3                               3      3
 WI.
Santa Cruz County Hospital      San         3       3       3       3
 Group, CA.                      Francisco
Somerset County Hospital        Newark      2               2       2
 Group, NJ.
Summit County Hospital Group,   Cleveland   5       5       5
 OH.
Union County Hospital Group,    Bergen-             5
 NJ.                             Passaic
Ventura County Hospital Group,  Los         8
 CA.                             Angeles
Total Group Reclassifications.              23      17      18      10      5       5       2       4      5
Total Hospitals Reclassified..              119     88      66      35      20      15      7       13     16
 
Source: Listings of MGCRB decisions analyzed by Baker Healthcare Consulting, Inc.
 
\1\ The number of reclassified hospitals is from the CMS PPS Year 16 data file. No adjustments for new
  hospitals, closures, or mergers have been made.


                                 

  Statement of the Boston Organization of Teaching Hospital Financial 
                    Officers, Boston, Massachussetts
    The Boston Organization of Teaching Hospital Financial Officers is 
pleased to submit the following statement for the record as the 
Subcommittee on Health discusses the critical issue of geographic 
adjustors for Medicare payment. We thank Chairwoman Johnson, Ranking 
Member Stark and all Members of the Subcommittee for addressing this 
highly complex issue. The Boston Teaching Hospitals urge the Congress 
to take action to improve the current methodology for adjusting 
Medicare hospital payments based on area wage differences in a manner 
that will ensure the ability of hospitals to recruit and retain top-
level personnel.
    As currently constructed, the Medicare Area Wage Index (AWI) system 
is incapable of recognizing that multiple distinct labor markets can 
exist within a single MSA. We are encouraged by the acknowledgement of 
Chairwoman Johnson, MedPAC and GAO of this particular problem the 
Boston Teaching Hospitals (and others) face in Medicare's current 
determination of the AWI. To quote the statement given by Glenn 
Hackbarth of MedPAC at the July 23, 2002, hearing: ``[M]arket areas as 
defined by MSAs and statewide rural areas can be too large, 
encompassing more than one distinct health care labor market.'' The 
most recent CMS hourly wage data illustrates the wide variation in 
hospital wages within the Boston MSA, which stretches from southern New 
Hampshire to southeastern Massachusetts. The average hourly wage for 
hospitals in the core central city of Boston (Suffolk County) exceeds 
the average hourly wage of the New Hampshire county within the MSA with 
the lowest wages by 25 percent and the hourly wage of the most distant 
Massachusetts county within the MSA by 12 percent.
    Further, as a result of its reliance on averaging wage data across 
an entire MSA to determine the AWI adjustment, the current system 
disadvantages those facilities in higher cost labor markets. To 
illustrate, Boston hospitals' average hourly wage exceeds that of the 
entire MSA, on which their payment is based, by nearly 8 percent. This 
8 percent variance results in an annual ``transfer payment'' of more 
than $20 million a year from the hospitals in Boston to the outlying 
counties. This in turn inhibits the ability of Boston hospitals to 
compete for the services of the most qualified patient care personnel 
in the local labor pool. While this problem is especially acute in 
Boston, it is by no means unique to that area, as indicated in the 
GAO's testimony before the Subcommittee. This annual loss of funding--
at a time when MA hospitals continue to experience significant 
financial pressures at all levels--points out the weaknesses of the 
current system and the need for Congress to act. The Boston hospitals 
attempted to address this situation several years ago through the 
established administrative mechanism, the Geographic Reclassification 
Board, but were denied under jurisdictional grounds.
    We recognize the responsibility of Congress to manage Medicare 
spending and thus, the pressure to implement program changes in a 
manner that adds no new costs. We are well aware of how difficult it 
will be to correct Medicare geographic adjustors in a budget neutral 
manner. Yet the system should be corrected to work as intended, even 
though some hospitals that have benefited from the current system will 
no doubt experience losses under a corrected system. (As CMS knows, 
there are mechanisms to soften these adjustments, including phase-ins.)
    In fact, the Boston Teaching Hospitals (and all teaching hospitals) 
are currently in the midst of a Medicare payment system correction that 
is also having a re-distributive effect, in this case, redistributing 
payments from teaching hospitals to non-teaching hospitals. Until 
recently, the average hourly wage for each hospital included the wages 
pertaining to teaching programs. Since these wages were generally 
higher than the average hourly wage of the hospital as a whole, their 
inclusion increased the average hourly wage of teaching hospitals, the 
AWI of their areas and, of course, their payments. Several years ago, 
CMS correctly concluded that the inclusion of these teaching wages in 
the AWI calculation was unfair, since these wages (and other teaching 
costs) were also reimbursed separately by payments for Graduate Medical 
Education. The phase-out of these teaching wages from the AWI 
calculation has decreased the AWI and, therefore, Medicare payments to 
the Boston Teaching Hospitals. Since the AWI calculation is budget 
neutral nationwide, our payment reductions (and those of other teaching 
hospitals) are redistributed to non-teaching hospitals. To be clear, 
this redistribution is of considerably less magnitude than that which 
may be required to correct Medicare's geographic adjustors. But in 
principle, correction of the AWI calculation is necessary and 
appropriate.
    We urge the Subcommittee to continue this principle and correct 
Medicare's geographic adjustors to so that they accurately define labor 
markets and adjust national payment amounts to reflect the wages 
hospitals in each labor market must pay to attract and retain high 
quality personnel.
    The Boston Organization of Teaching Hospital Financial Officers 
thanks the Subcommittee for the opportunity to provide this written 
statement. We would be pleased to offer any assistance we can to help 
the Subcommittee in its efforts.

                                 

     Statement of the Bridgeport Hospital, Bridgeport, Connecticut;
                Danbury Hospital, Danbury, Connecticut;
               Greenwich Hospital, Greenwich Connecticut;
                 Griffin Hospital, Derby, Connecticut;
           Hospital of Saint Raphael, New Haven, Connecticut;
             Midstate Medical Center, Meriden, Connecticut;
                Milford Hospital, Milford, Connecticut;
                Norwalk Hospital, Norwalk, Connecticut;
              St. Mary's Hospital, Waterbury, Connecticut;
         St. Vincent's Medical Center, Bridgeport, Connecticut;
             The Stamford Hospital, Stamford, Connecticut;
              Waterbury Hospital, Waterbury, Connecticut;
            Yale-New Haven Hospital, New Haven, Connecticut
    This statement is submitted on behalf of the thirteen hospitals 
listed above, which together comprise all of the Medicare-
participating, general acute care hospitals in Fairfield and New Haven 
counties, Connecticut.
New Haven and Fairfield Counties
    Fairfield and New Haven counties are located in southwestern 
Connecticut and in close proximity to New York and New York City. The 
two counties together form the New Haven-Bridgeport-Stamford-Waterbury-
Danbury, Connecticut Metropolitan Statistical Area (the ``New Haven 
MSA''). The New Haven MSA is a component of the New York-Northern New 
Jersey-Long Island Consolidated Metropolitan Statistical Area.
LThe Two Counties Are Integrated With the New York City Metropolitan 
        Area
    In many ways--economically, socially, and politically, for 
example--New Haven and Fairfield counties are highly integrated with 
the New York City metropolitan area. Fairfield County is adjacent to 
the New York MSA; several of the hospitals in Fairfield County are only 
a few miles from the New York border, and in close proximity with New 
York City. The Federal Reserve Bank of New York groups Fairfield County 
with New York for purposes of its statistical analyses, because ``A 
significant portion of Fairfield County commutes to New York City where 
a significant portion of the county's income is earned,'' according to 
Rae Rosen of the Federal Reserve Bank of New York.
    The same is true for hospital workers. The hospitals in Fairfield 
County compete with those in the New York MSA for staff, particularly 
clinical personnel. In the case of The Stamford Hospital, for example, 
fully 11 percent of the hospital's labor pool resides in New York. 
Despite having a wage index (1.2294 in 2002) that is 17 percent below 
the New York MSA wage index (1.4427 in 2002), the hospitals in 
Fairfield collectively pay wages that are only 10 percent below the 
wages paid by hospitals in the New York MSA (the combined average 
hourly wage of hospitals in Fairfield County is 89.83 percent of the 
combined average hourly wage of hospitals in the New York MSA). The New 
Haven hospitals share similar characteristics and issues. This 
significant reimbursement differential has made it difficult for these 
Connecticut hospitals to effectively retain and attract clinical 
personnel, a problem with particularly dire consequences in this time 
of nursing shortages.
LThe Medicare Methodology for Classifying and Grouping Hospitals is 
        Flawed
    The Medicare hospital prospective payment systems classify 
hospitals for purposes of the wage index based solely on location vis-
a-vis county lines. One of the problems associated with grouping 
hospitals in this manner is that two hospitals may be less than one 
mile apart and have very similar labor cost experiences, but, because 
of their location in different counties, each would have a different 
wage index. For example, a hospital in Danbury would be classified in 
the New Haven MSA, whereas one in Putnam County, New York, while 
located only a few miles away, would be classified in the New York MSA. 
The average hourly wage of hospitals in Putnam County is 81 percent of 
the average hourly wage of hospitals in the New York MSA, of which they 
are a part, while the average hourly wage of hospitals in Fairfield 
County is 89 percent of the average hourly wage of hospitals in the New 
York MSA. Yet, the hospitals in Putnam are paid 17 percent more per 
case than hospitals in Fairfield. As a result, the hospitals in the New 
York MSA have a positive Medicare inpatient service margin of 1.93 
percent; if none of the hospitals in the New Haven MSA qualify for 
reclassification, they would have a negative margin of 7.53 percent 
(based on the methodology used by the Medicare Payment Advisory 
Commission to calculate hospital Medicare inpatient service margins).
The Geographic Reclassification Process Can Resolve these Deficiencies
    In an effort to address these situations, Congress established a 
geographic reclassification process in 1989. The geographic 
reclassification opportunity is worthwhile, and works effectively for 
more than 500 hospitals. However, it is not perfect, and does not work 
for the hospitals in Fairfield and New Haven counties.
Geographic Reclassification Improvements are Necessary
    The Fairfield and New Haven hospitals are the type that Congress 
intended to help when it created the geographic reclassification 
process. However, most cannot qualify for geographic reclassification. 
Of the six hospitals within Fairfield County only four presently 
qualify for reclassification for purposes of the wage index: i.e., 
Stamford, Greenwich, Danbury, and Norwalk. However, one--i.e., 
Norwalk--likely will not qualify for reclassification in the next 
application cycle. Despite their close proximity to and integration 
with New York City, only three of these six hospitals expect to qualify 
for reclassification in the next application cycle. There are seven 
hospitals in New Haven County; none are able to qualify for geographic 
reclassification under current rules.
    Most of the hospitals in New Haven and Fairfield counties cannot 
individually qualify for geographic reclassification because of the 
unrealistically restrictive proximity limitations. An urban hospital 
seeking reclassification to a nearby MSA must be within 15 miles of 
that MSA. In promulgating the original rules establishing the 
reclassification criteria, the Health Care Financing Administration, 
now the Centers for Medicare & Medicaid Services instituted a mileage 
limitation as evidence of economic integration, and reasoned that 
economic integration is not likely present where an urban hospital is 
more than 15 miles from the target MSA. In most large urban areas, and 
particularly in the New York City metropolitan area, typical workplace 
commuting distances exceed 15 miles. In fact, some employees of Yale-
New Haven Hospital commute 55 miles one-way from New York.
    Likewise, the New Haven and Fairfield hospitals cannot qualify for 
reclassification as a group because they cannot satisfy the 
requirements for standardized amount reclassification. Whereas an 
individual hospital may seek to reclassify to a neighboring area for 
purposes of the wage index or standardized amount, or both, hospitals 
applying jointly may apply for geographic reclassification only for 
purposes of the wage index and standardized amount. Consequently, 
hospitals applying jointly must concurrently satisfy the criteria for 
standardized amount and wage index reclassification. For this reason, 
very few hospital groups qualify for geographic reclassification; few 
can meet the requirements for standardized amount reclassification. In 
the last five years, no more than five hospital-groups nationwide were 
able to satisfy the requirements for standardized amount 
reclassification and qualify for geographic reclassification; in 2001, 
only two groups qualified
    There is no policy justification that credibly explains why 
hospitals seeking reclassification individually may seek to reclassify 
to a neighboring area for purposes of the wage index or standardized 
amount, while hospitals applying jointly may apply only for purposes of 
the wage index and standardized amount. This requirement for group 
reclassification is particularly inexplicable when the hospitals 
seeking geographic reclassification as a group are already located 
within a ``large urban area'' and the resulting reclassification 
therefore would not entitle the qualifying hospitals to a higher 
standardized amount. The hospitals in Fairfield and New Haven counties 
are in a ``large urban area''; they would not receive a higher or even 
different standardized amount by reclassifying to the New York MSA, 
which also is a ``large urban area.''
Recomendations
    Congress should permit hospitals seeking group reclassification to 
seek reclassification for purposes of the wage index, standardized 
amount, or both, just as individual hospitals may. Congress may have 
already taken steps in this direction. Legislation recently approved by 
the U.S. House of Representatives (H.R.4954, Sec. 303) would eliminate 
the ``other area'' standardized amount, and provide that payments to 
all hospitals beginning in fiscal year 2004 be determined using the 
``large urban area'' standardized amount. In other words, if enacted, 
there would be only one standardized amount. If so, there no longer 
would be a need for geographic reclassification for purposes of the 
standardized amount.
    If this legislation is enacted, Congress should concurrently and 
expressly eliminate references in the geographic reclassification 
statute (Sec. 1886(d)(10) of the Social Security Act) to 
reclassifications for purposes of the standardized amount, thereby 
eliminating the availability of reclassification for this purpose. 
Congress likewise should establish that, in considering applications 
from hospital groups for reclassification for purposes of the wage 
index, the Secretary may not require such applicants to also satisfy 
existing criteria required of hospitals seeking reclassification for 
purposes of the standardized amount.
    The hospitals in New Haven and Fairfield counties likely could 
qualify as a group for geographic reclassification for purposes of the 
wage index, if they also do not need to satisfy the criteria for 
standardized amount reclassification.

                                 

                                 Children's National Medical Center
                                               Washington, DC 20010
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515-6353

Dear Madam Chairman:

    On behalf of Children's National Medical Center in Washington, DC, 
I am writing today to express our strong support of the testimony 
offered by both William J. Scanlon, Director, Health Financing and 
System Issues, U.S. General Accounting Office (GAO), and Glenn D. 
Hackbarth, Chairman, Medicare Payment Advisory Commission (MEDPAC), at 
the July 23rd Subcommittee on Health Hearing on Medicare's Geographic 
Cost Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of 2001, in section 304(b) of Public 
Law106-554, a process was established under which an appropriate 
statewide entity may apply to have all the geographic areas in the 
State treated as a single geographic area for purposes of computing and 
applying the area wage index. The District of Columbia would be an 
excellent example of where this ``statewide'' designation should be 
applied and even the Virginia Hospital and Health Care Association 
submitted a letter of support of the District's effort to designate 
itself as such. However, the Centers for Medicare and Medicaid Services 
(CMS) commented that they believed that ``Congress did not intend for 
section 304(b) to address the type of situation presented by 
Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospital, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured. Already two District hospitals have 
recently closed and half of the remaining hospitals operate in the red. 
The future of health care in the District of Columbia may be placed 
jeopardy if corrective action is not taken.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me at (202) 884-2340.
            Sincerely,
                                                         Greta Todd
                              Director, Government External Affairs

                                 

Statement of Monty E. McLaurin, Chief Executive Officer and President, 
           Christus St. Joseph's Health System, Paris, Texas
    CHRISTUS St. Joseph's Health System (``CSJHS'') thanks the 
Subcommittee for conducting a hearing on the important issue of 
geographic cost adjusters used to determine Medicare payment to program 
participating hospitals, and for the opportunity to submit this 
statement. CSJHS is systematically undercompensated by the prevailing 
wage index used to adjust payments for inpatient and outpatient 
services furnished to program beneficiaries, and by its inability to 
qualify for geographic reclassification in 2002, and so welcomes this 
opportunity to share its concerns and suggestions with the 
Subcommittee.
    CSJHS is a two-campus hospital licensed for 405 beds located in 
Paris, Texas. The Hospital is a Medicare designated Rural Referral 
Center (``RRC''), which offers state-of-the-art heart care, surgical, 
orthopedic, radiology, emergency and rehabilitation services, among 
others. CSJHS also operates four clinics that offer quality medical 
care in surrounding rural areas.
    For purposes of Medicare payment, the Hospital is considered to be 
located in Rural Texas, although it is physically located approximately 
30 miles from the Dallas Metropolitan Statistical Area (``MSA''). CSJHS 
has qualified for geographic reclassification for purposes of the wage 
index and standardized amount to the Dallas MSA in past years. Because 
of its proximity to Dallas, CSJHS competes with hospitals in these 
areas for personnel, particularly highly skilled personnel, such as 
nurses and technicians.
    CSJHS failed to qualify for wage index reclassification for federal 
fiscal year (``FFY'') 2002 in part because of shortcomings in the 
current reclassification process. In 1996, CSJHS had to make a 
significant downward adjustment to workers compensation reserves, which 
lowered its average hourly wage (``AHW'') for 2001 considerably. 
Failure to qualify for geographic reclassification in this year is 
particularly devastating to the Hospital, since nearly 64 percent of 
its inpatient days are attributable to Medicare patients. In fact, the 
percentage of population 65 years or older in CSJHS's eight county 
primary service area is nearly twice the percentage in the remainder of 
the state. Specifically, CSJHS estimates that it will lose 
approximately $3.1 6.8 million in Medicare revenues in 2002 because it 
failed to qualify for geographic reclassification in this year. This 
foregone reimbursement, compounded with other Medicare reimbursement 
reductions in recent years, has forced CSJHS to discontinue services 
and close facilities, including a home health agency, an inpatient 
behavioral medicine unit and a hospice. Moreover, the Hospital has 
current plans to eliminate approximately 5% of its workforce.
    In February 2000, CSJHS appealed the decision of the Medicare 
Geographic Classification Review Board (``MGCRB'') to the Centers for 
Medicare and Medicaid Services (``CMS'') Administrator. CSJHS argued 
that the Administrator should reverse the MGCRB's decision as a matter 
of fairness. Regrettably, the Administrator denied our appeal and 
upheld the MGCRB's decision.
    We commend the Subcommittee for examining the deficiencies of the 
Medicare geographic reclassification process. The geographic 
reclassification process is good. It works for many hospitals. It 
should be maintained. However, it also should be fixed. There are 
numerous flaws, which Congress can and should address. We believe that 
had the MGCRB and CMS conducted a subjective, case-by-case evaluation 
in this instance, as was initially envisioned by the reclassification 
statute, CSJHS would be reclassified for 2002.
    Congress created the geographic reclassification process because it 
recognized that the system of assigning wage indices based solely on a 
hospital's physical location within a particular county does not always 
reflect true labor-market experience. In addition to the physical 
location of hospitals, Congress deemed it appropriate to take into 
account the location of hospitals relative to proximate urban areas, 
worker commuting patterns and other considerations when assigning wage 
indices.
    Congress conferred upon the Secretary discretion to establish 
guidelines for determining whether and when hospitals would qualify for 
geographic reclassification, but intended for the Secretary to utilize 
the MGCRB as a tribunal, much like the Provider Reimbursement Review 
Board, that would hear and consider all relevant facts presented by an 
applicant hospital. The Medicare regulations reflect this original 
intent: ``The MGCRB will issue a decision based upon all documents, 
data, and other written evidence and comments submitted timely to MGCRB 
by the parties.'' 42 C.F.R. Sec. 412.254(a). The regulations further 
provide, ``MGCRB's decision is based upon the evidence of record, 
including the hospital's application and other evidence obtained or 
received by MGCRB.'' 42 C.F.R. Sec. 412.274(a).
    In practice, however, the MGCRB evaluates applications under a 
series of bright-line objective criteria, without taking into account 
any additional evidence presented by the applicant. Moreover, the 
process is almost entirely staff-driven, and leaves virtually no role 
for Board members. Despite numerous requests each year from hospitals 
wanting to present additional relevant information to the MGCRB through 
its oral hearing process, it is our understanding that the Board has 
neither granted nor held an oral hearing since 1990. It is in part 
because of what the MGCRB has become that hospitals have been 
increasingly seeking relief from Congress.
    Had the MGCRB and Administrator looked beyond the bright-line 
objective criteria at the additional evidence CSJHS presented, the 
reclassification may have been granted. CSJHS is the type of hospital 
that Congress intended to help when it created the opportunity for 
hospitals to apply for wage index geographic reclassification. CSJHS is 
located just a short distance from the Dallas MSA (approximately 30 
miles). Moreover, the Hospital is an RRC, offering skilled services 
more akin to those offered in the Dallas MSA. Congress has repeatedly 
recognized the important role played by RRCs, and enacted legislation 
intended to buttress these hospitals. In fact, Congress has repeatedly 
expressed a desire that CMS make it easier for RRCs to qualify for 
geographic reclassification. Because of its proximity to the Dallas 
MSA, and comparability to the hospitals in Dallas in terms of services 
offered, CSJHS competes with hospitals in these neighboring urban areas 
for skilled clinical personnel. As a result, CSJHS's AHW is 
considerably higher (i.e., 107 percent) than other hospitals located in 
rural Texas, and comparable to hospitals within the Dallas (i.e., 81 
percent) MSA. Moreover, CSJHS had qualified for wage index 
reclassification in past years. For these reasons, CSJHS should have 
been eligible for wage index geographic reclassification, even though 
it did not satisfy the wage comparison threshold required to qualify 
under the MGCRB's standard evaluation. CSJHS encourages Congress to 
improve the reclassification process by taking steps to restore the 
MGCRB to its original intended purpose.
    Additionally, CSJHS encourages Congress to ensure that hospitals 
with labor cost aberrations are not precluded from reclassification. 
Congress significantly improved the geographic reclassification process 
in 2000 when it required that wage index reclassifications should be 
valid for three years. This change to some extent limited the in-one-
year-out-the-next phenomenon that caused significant reimbursement 
fluctuations for hospitals and made it difficult for hospitals to 
budget from year-to-year. However, Congress should take additional 
steps to ensure that wage data aberrations, such as reporting errors or 
one-time labor cost spikes or dips, do not exclude a hospital from 
reclassification for a year.
    Finally, CSJHS implores Congress to take action to restore the 
reimbursement funding lost by CJSHS in 2002 by requiring that the 
Hospital be deemed to be reclassified to the Dallas MSA for that year.

                                 

                                        Community Memorial Hospital
                                          Ventura, California 93003
                                                      July 22, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Johnson,

    In 1995, Ventura County hospitals met the requirements of the 
Medicare Geographic Classification Review Board (MGCRB) for a 
countywide reclassification to the Los Angeles Primary Metropolitan 
Statistical Area (PMSA). Since then the Ventura County hospitals have 
not been able to meet the criteria for a countywide reclassification.
    Competition with Los Angeles hospitals for scarce medical personnel 
has increased markedly since 1995 because of shortages in skilled 
positions such as registered nurses, pharmacists and radiation 
technologists. Our freeways promote commuting across county lines and 
the Ventura County hospitals must offer competitive wages to keep 
existing personnel and attract new employees in our mobile society.
    The Ventura County hospitals have an average hourly wage that Is 
93% of the Los Angeles MSA average hourly wage which easily exceeds the 
minimum criteria of 85% to allow for a wage index reclassification to 
LA. But the Centers for Medicare and Medicaid Services (CMS) require 
the Ventura County hospitals to meet a second criteria for the MGCRB to 
approve a group reclassification. This second criteria is designed to 
demonstrate comparability of the per discharge costs between the 
hospitals in the two counties. The formula mandated by CMS is out of 
date and frustrates Ventura and similarly situated counties throughout 
the country from receiving needed reclassifications.
    In 1995, the peak year, twenty-three group reclassifications were 
approved by the MGCRB, reclassifying a total of 119 individual 
hospitals. For FFY 2003, only five groups were approved for 
reclassification affecting a total of sixteen hospitals. Only 13% of 
the hospitals in these large metropolitan areas that met the criteria 
in 1995 were able to meet these outdated criteria FFY 2003. This is not 
a result of less competition for scarce personnel now compared to 1995, 
it is clear evidence that the criteria no longer works as originally 
intended.
    The flawed criteria computes the standardized cost per case for the 
group seeking reclassification (the Ventura County hospitals) and 
compares that amount to a computed threshold amount that is not based 
on the cost per case of LA hospitals. The cost per case must exceed 
that threshold for a group reclassification to be approved. The 
threshold amount is a Medicare payment rate based criteria (25% of the 
Medicare standard payment rate applicable to Ventura County plus the 
addition of 75% of the Medicare payment rate of LA hospitals). The 
criteria worked reasonably well when promulgated thirteen years ago in 
1989. But since then hospitals have changed dramatically by increasing 
the types of procedures performed on an outpatient basis and changed 
the site of care to specialized units such as rehabilitation, 
psychiatric and skilled nursing. This has improved patient care and 
improved cost efficiency within the hospitals. These changes are not 
unique to Ventura County hospitals but are equally applicable to LA 
hospitals and hospitals throughout the country. Because overhead costs 
are now absorbed by these other expanded units, groups can no longer 
qualify.
    We believe it is important to consider that Ventura County is an 
integral part of The Los Angeles Metropolitan area. The county meets 
every census bureau criteria to be a part of the Los Angeles MSA. This 
includes the minimum population requirements, the percentage urban 
population requirement and the requisite minimum commuting percentages 
between the counties. The only reason that Ventura County has been 
designated a Primary Metropolitan Statistical Area (PMSA)-- which is a 
part of the large urban Los Angeles-Orange County-Riverside 
Consolidated Metropolitan Statistical Area (CMSA) is that ``local 
opinion'' was considered by the census bureau in establishing a PMSA 
designation. Without the PMSA designation, Ventura County would be a 
part of the Los Angeles MSA and share the same wage index with the Los 
Angeles county hospitals. Based on the ``artificial'' PMSA designation 
and the realities of the competitive marketplace, treating Ventura 
County hospitals as a separate wage index area and not approving a 
reclassification to Los Angeles penalizes these hospitals and puts them 
at a competitive disadvantage in recruiting and retaining needed health 
professionals.
    We ask for short term legislation to grant Ventura County hospitals 
a needed reclassification and that the cost-per-case criteria be 
modernized or eliminated, or the labor market areas for PMSAs be 
treated so as not to disadvantage hospitals located in a major 
metropolitan area solely as a result of a ``local opinion'' census 
standard.

                                                     David B. Glyer
                                       Director, Financial Services

                                 

                         DC Partnership to Improve End-of-Life Care
                                               Washington, DC 20005
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515

Dear Madam Chairman:

    On behalf of the DC Partnership to Improve End-of-Life Care, I am 
writing today to express our strong support of the testimony offered by 
both William J. Scanlon, Director, Health Financing and System Issues, 
U.S. General Accounting Office (GAO), and Glenn D. Hackbarth, Chairman, 
Medicare Payment Advisory Commission (MEDPAC), at the July 23rd 
Subcommittee on Health Hearing on Medicare's Geographic Cost 
Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of2001, in section 304(b) of Public Law 
106-554, a process was established under which an appropriate statewide 
entity may apply to have all the geographic areas in the State treated 
as a single geographic area for purposes of computing and applying the 
area wage index. The District of Columbia would be an excellent example 
of where this ``statewide'' designation should be applied and even the 
Virginia Hospital and Health Care Association submitted a letter of 
support of the District's effort to designate itself as such. However, 
the Centers for Medicare and Medicaid Services (CMS) commented that 
they believed that ``Congress did not intend for section 304(b) to 
address the type of situation presented by Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospital, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured.
    Already two District hospitals have recently closed and half of the 
remaining hospitals operate in the red. The future of health care in 
the District of Columbia may be placed jeopardy if corrective action is 
not taken.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me.
            Sincerely,
                                                      Joan T. Panke
                                                 Executive Director

                                 

                 Statement of the Hon. Rosa L. DeLauro,
       a Representative in Congress from the State of Connecticut
    Madam Chairwoman and members of the Committee, thank you for the 
opportunity to testify on this important issue that affects our 
hospitals, skilled nursing facilities, home health agencies, and 
ultimately our seniors.
    This issue is of particular concern in my home state of 
Connecticut. As a result of their proximity to New York City, fourteen 
hospitals in Fairfield and New Haven counties in Connecticut compete 
with hospitals there for staff, particularly clinical personnel. 
However, despite being close to the city, these hospitals are 
reimbursed significantly less for furnishing services to Medicare 
beneficiaries, because the wage index applicable in Fairfield and New 
Haven counties is seventeen percent lower than the wage index available 
to hospitals in the New York Metropolitan Statistical Area (MSA). This 
significant reimbursement differential has made it difficult for the 
Connecticut hospitals to effectively retain and attract clinical 
personnel, a problem with particularly dire consequences in this time 
of nursing shortages.
    As you know, the Medicare hospital prospective payment systems 
classify hospitals for purposes of the wage index based solely on 
location vis-à-vis county lines. One of the problems associated 
with grouping hospitals in this manner is that two hospitals may be 
less than one mile apart and have very similar labor cost experience, 
but, because of their location in different counties, each would have a 
different wage index. For example, a hospital in Danbury would be in 
the New Haven MSA and have a much lower wage index than a hospital 
located only a few miles away in Putnam County, New York, which would 
be classified in the New York MSA. Consequently, the hospital in Putnam 
would receive millions more in Medicare reimbursements than a hospital 
of comparable size and case mix in Danbury, even though the hospital in 
Danbury may be as close to New York City and have comparable labor 
costs to the hospital in Putnam.
    In an effort to address these situations, Congress established a 
geographic reclassification process in 1989. However, only two of these 
fourteen Connecticut hospitals are likely to qualify for geographic 
reclassification during the upcoming application review cycle.
    The Fairfield and New Haven hospitals are the type of facilities 
that Congress intended to help when it created the geographic 
reclassification process. Fairfield and New Haven counties are 
proximate to the New York MSA and compete with hospitals there for 
staff, particularly clinical personnel. In fact, several hospitals in 
Fairfield are only a few miles from the New York MSA. The Fairfield and 
New Haven hospitals need to be on a level playing field with the New 
York hospitals to be able to attract and retain highly skilled clinical 
staff.
    I understand there to be two reasonable solutions to this problem. 
One option is to expressly deem the hospitals in the New Haven-
Bridgeport-Stamford-Waterbury-Danbury MSA to be located in the New York 
MSA for Medicare payment purposes. The other is legislation that would 
permit hospitals seeking ``county-wide'' reclassification to seek 
reclassification for purposes of the wage index, standardized amount, 
or both (at present, when an individual hospital seeks reclassification 
it can seek reclassification for purposes of the wage index, 
standardized amount, or both; however, when all hospitals within in a 
county join together to seek ``county-wide'' reclassification, they 
must seek and qualify for reclassification for purposes of both the 
wage index and standardized amount.) However, this latter option, if 
enacted, would benefit only the hospitals in Fairfield County; the 
hospitals in New Haven County would not qualify for reclassification 
for the wage index as a group.
    Providing quality care to patients requires hiring the best 
qualified doctors and nurses. Without a change to the current system, 
hospitals in Connecticut will not have the resources to compete with 
other hospitals, in some cases only miles away. For the health of our 
seniors, I believe we must change the current system so that our 
hospitals can retain and attract doctors and nurses that will provide 
high quality health care.
    I am hopeful that we can remedy this situation and enable the 
Fairfield and New Haven hospitals to qualify for reclassification, and 
I welcome any assistance the Committee can provide.
    Thank you again for the opportunity to testify today. I look 
forward to working with you on this vital issue.

                                 

                          District of Columbia Hospital Association
                                               Washington, DC 20005
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515

Dear Madam Chairman:

    On behalf of the District of Columbia Hospital Association, I am 
writing today to express our strong support of the testimony offered by 
both William J. Scanlon, Director, Health Financing and System Issues, 
U.S. General Accounting Office (GAO), and Glenn D. Hackbarth, Chairman, 
Medicare PaymentAdvisory Commission (MEDPAC), at the July 23rd 
Subcommittee on Health Hearing on Medicare's Geographic Cost 
Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of 2001, in section 304(b) of Public Law 
106-554, a process was established under which an appropriate statewide 
entity may apply to have all the geographic areas in the State treated 
as a single geographic area for purposes of computing and applying the 
area wage index. The District of Columbia would be an excellent example 
of where this ``statewide'' designation should be applied and even the 
Virginia Hospital and Health Care Association submitted a letter of 
support of the District's effort to designate itself as such. However, 
the Centers for Medicare and Medicaid Services (CMS) commented that 
they believed that ``Congress did not intend for section 304(b) to 
address the type of situation presented by Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospitals, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured.
    Already two District hospitals have recently closed and half of the 
remaining hospitals operate in the red. The future of health care in 
the District of Columbia may be placed jeopardy if corrective action is 
not taken.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me at 202-289-4923.
            Sincerely,
                                                      Joan H. Lewis
                                              Senior Vice President

                                 

                          District of Columbia Hospital Association
                                               Washington, DC 20005
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515

Dear Madam Chairman:

    On behalf of District of Columbia Hospital Association, I am 
writing today to express our strong support of the testimony offered by 
both William J. Scanlon, Director, Health Financing and System Issues, 
U.S. General Accounting Office (GAO), and Glenn D. Hackbarth, Chairman, 
Medicare Payment Advisory Commission (MEDPAC), at the July 23rd 
Subcommittee on Health Hearing on Medicare's Geographic Cost 
Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of 2001, in section 304(b) of Public Law 
106-554, a process was established under which an appropriate statewide 
entity may apply to have all the geographic areas in the State treated 
as a single geographic area for purposes of computing and applying the 
area wage index. The District of Columbia would be an excellent example 
of where this ``statewide'' designation should be applied and even the 
Virginia Hospital and Health Care Association submitted a letter of 
support of the District's effort to designate itself as such. However, 
the Centers for Medicare and Medicaid Services (CMS) commented that 
they believed that ``Congress did not intend for section 304(b) to 
address the type of situation presented by Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospital, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured. Already two District hospitals have 
recently closed and half of the remaining hospitals operate in the red. 
The future of health care in the District of Columbia may be placed 
jeopardy if corrective action is not taken.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me at (202) 289.4925.
            Sincerely,
                                                  Tracy A. Thompson
                                                  Financial Analyst

                                 

                          District of Columbia Hospital Association
                                               Washington, DC 20005
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515

Dear Madam Chairman:

    On behalf of the District of Columbia Hospital Association, I am 
writing today to express our strong support of the testimony offered by 
both William J. Scanlon, Director, Health Financing and System Issues, 
U.S. General Accounting Office (GAO), and Glenn D. Hackbarth, Chairman, 
Medicare Payment Advisory Commission (MEDPAC), at the July 23rd 
Subcommittee on Health Hearing on Medicare's Geographic Cost 
Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of 2001, in section 304(b) of Public Law 
106-554, a process was established under which an appropriate statewide 
entity may apply to have all the geographic areas in the State treated 
as a single geographic area for purposes of computing and applying the 
area wage index. The District of Columbia would be an excellent example 
of where this ``statewide'' designation should be applied and even the 
Virginia Hospital and Health Care Association submitted a letter of 
support of the District's effort to designate itself as such. However, 
the Centers for Medicare and Medicaid Services (CMS) commented that 
they believed that ``Congress did not intend for section 304(b) to 
address the type of situation presented by Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospital, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured. Already two District hospitals have 
recently closed and half of the remaining hospitals operate in the red. 
The future of health care in the District of Columbia may be placed 
jeopardy if corrective action is not taken.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me at 202-682-1585.
            Sincerely,
                                                  Machelle Yingling
                               Vice President, Information Services

                                 

               Statement of the Hon. John J. Duncan, Jr.,
        a Representative in Congress from the State of Tennessee
    Madame Chairwoman and Members of the Committee, thank you for 
inviting me to appear before this Committee. I regret that, due to a 
scheduling conflict, I could not sit before you and share in person my 
thoughts on a topic that has such a vital impact on the entire health 
care industry--Medicare's Geographic Cost Adjustment. Thank you for 
allowing my submitted testimony to the official hearing record.
    Like so many areas of Medicare, the formula used to determine a 
hospital's standing on the wage index is quite complex. The wage index, 
as you know, is estimated by calculating an average hospital wage for 
each labor market area, and the average for that area is compared to 
the national average hospital wage. It is a system that I believe 
leaves way too much room for error and is not always interpreted 
fairly.
    The hospitals in Knoxville, Tennessee, are suffering because of the 
downfalls of this current cost-adjusting system.
    The wage index in the Knoxville Metropolitan Statistical Area (MSA) 
(Knox, Anderson, Blount, Loudon, Sevier and Union Counties) is well 
below the national average. It is also based on data from the Medicare 
Cost Report filed about four years earlier, which does not reflect 
issues like significantly higher wages paid to nurses because of the 
current shortage.
    In 2001, nine hospitals in the Knoxville MSA lost between $14 
million and $17 million in Medicare reimbursements because the MSA's 
2000 area wage index was not appropriately adjusted.
    The hospitals impacted are Blount Memorial, Baptist Health System 
of East Tennessee, University of Tennessee Memorial Hospital, St. 
Mary's and Covenant Health, which consists of Fort Sanders Loudon 
Medical Center, Fort Sanders Parkwest Medical Center, Fort Sanders 
Regional Medical Center, Fort Sanders Sevier Medical Center and 
Methodist Medical Center of Oak Ridge).
    The problem is the result of errors made by the fiscal intermediary 
(Riverbend Government Services), the former Health Care Financing 
Administration (HCFA), now the Centers for Medicare and Medicaid 
Services (CMS) and several Knoxville hospitals. However, there is 
incontrovertible evidence that the hospital data supports a 
substantially higher FY 2001 wage index than the one imposed.
    Considering the financially stressed condition of Knoxville area 
hospitals--even with the relief received through congressional action 
last year--the loss of these funds is having a negative impact on 
hospital operations.
    There was a dramatic reduction in the wage index between 2000 and 
2001, as you can see from the following chart. When hospitals 
discovered this significant reduction last year, they worked diligently 
with expert help to determine the causes for the steep decline. 
However, by the time an analysis was completed, HCFA officials said it 
was too late to make any changes.

 
 
   FY                         Wage Index Based on Cost Report Year
 
   1998                .88311994
   1999                .89371995
   2000                .91991996
   2001                .83401997
   2002                .89041998
 

    These hospitals have all the detailed documentation necessary that 
supports a higher wage index in FY 2001. This information was provided 
to the fiscal intermediary as soon as the wage index reduction was 
discovered. The intermediary, Riverbend Government Services, 
recommended that the hospitals appeal directly to HCFA and the 
intermediary supported the hospitals' findings. An appeal was made and 
rejected.
    If not corrected, the losses could compound as the government moves 
toward a three-year wage index averaging methodology. I believe CMS 
should have the authority to make these types of adjustments--
regardless of who is at fault--when these errors are discovered. 
Otherwise, we are unfairly penalizing the patients who are served by 
these hospitals.
    Should legislation be introduced, I believe it should include an 
adjustment for these Knoxville area hospitals that reflects the reality 
of the data for the 2001 program year. They must be made whole.
    Thank you, Madame Chairwoman, for conducting this hearing on an 
issue of critical importance to our nation's health care system.

                                 

       Statement of Tracy Warner, Vice President, Finance Policy,
              Iowa Hospital Association, Des Moines, Iowa
    On behalf of Iowa's 116 community hospitals, the Iowa Hospital 
Association (IHA) appreciates the opportunity to provide comment to the 
House of Representatives Committee on Ways and Means Subcommitte on 
Health for its hearing on assessing Medicare's geographic cost 
adjustors used for Medicare payment.
    As indicated in the advisory announcing the hearing, the Medicare 
wage index is one of the most important determinants of Medicare 
payments to hospitals. In addition to determining over 71 percent of 
inpatient payment, the wage index is applied to 60 percent for 
outpatient payment, and just over 75 percent of the skilled nursing 
facility payment is adjusted by the hospital wage index. Medicare is 
profoundly important to Iowa hospitals given the fact that nearly half 
of Iowa hospitals' revenue comes from Medicare. This is due to the fact 
that as a percentage of its population, more citizens 85 years and 
older live in Iowa than any other state, and further, Iowa ranks fifth 
in the nation in the percent of residents over age 65. Yet Iowa 
hospital Medicare payments are among the lowest in the nation, and Iowa 
ranks last in the nation for Medicare payments per beneficiary at $3053 
per enrollee. The national average per enrollee payment is $5490, or 45 
percent more than what is paid in Iowa. Because of the heavy dependence 
on the Medicare and the low revenues received from the program, its not 
surprising to learn that the total Medicare margin for Iowa hospitals 
is -6.5%, among the worst in the nation. Further, Iowa hospitals lose 
$48 million a year on Medicare services.
    One of the primary factors why Medicare payments to Iowa hospitals 
are among the lowest in the nation is because the wage index data used 
by Medicare locks Iowa into a historic inequity devised in 1983 when 
the Medicare inpatient prospective payment system (PPS) was developed. 
Although the Social Security Act requires that as part of the 
methodology for determining prospective payments to hospitals the 
Secretary must adjust the standardized national payment amounts for 
area differences in hospital wage levels by a factor reflecting the 
relative hospital wage level in the geographic area of the hospital 
compared with the national average hospital wage level, the reality is 
that wages necessary to attract and retain quality health care 
professionals are not really that much different in Iowa than the rest 
of the nation. But the Medicare wage index leaves hospitals in areas 
with historically lower labor costs at a critical disadvantage when it 
comes to recruiting and retaining personnel. Iowa hospitals are 
competing in a regional, interstate market and must pay as well as 
hospitals in Omaha, Nebraska; Rochester, Minnesota; La Crosse, 
Wisconsin; and Kansas City, Missouri. Yet every hospital in Iowa has a 
wage index below 1.00. For example, hospitals in northwestern Iowa with 
a wage index of.8147 must compete with the Mayo Clinic across the 
Minnesota state line with a wage index of 1.1462. In fact, the 
Minnesota facility buses nurses from the Decorah, Iowa community up to 
its hospital every day and nurses are more than willing to commute 
across the border for an additional $10 per hour. Similarly, hospitals 
is Red Oak, Atlantic and Harlan, Iowa with a wage index of.8147 must 
attempt to match wages in Omaha, Nebraska (wage index.9712) that is 
within 50 miles, a drivable commute in exchange for an enhanced salary. 
And with the continued shortage of health care professionals, qualified 
workers can and do make the choice to seek out positions that will pay 
them more. The wage index should reflect market realities so hospitals 
can pay competive wages to attract and retain quality health care 
professionals and meet workforce challenges.
    This inequity is compounded even further because the Centers for 
Medicare & Medicaid Services (CMS) currently assumes that just over 71 
percent of hospital costs included in the inpatient prospective payment 
system are labor-related while wages, salaries and benefits generally 
comprise a much lower percentage of costs for most hosptials--no more 
than 55 percent in Iowa. Yet CMS has recently proposed increasing the 
percentage to 72.5% in FY 2003 which is contrary to a recent study by 
the Medicare Payment Advisory Commission (MedPAC) indicating that the 
labor-related portion of the wage index that should be applied to the 
Medicare inpatient payment base rate should be reduced, rather than 
increased.
    Furthermore, the wage index itself is flawed in that the current 
inpatient wage index often contains wage and salary data related to 
``overhead'' for non-inpatient related health care personnel. For 
example, the lower wages of personnel in the general administration 
category, such as housekeepers and maintenance staff, cannot be 
adequately split between the time providing service in a hospital 
inpatient unit and hospital-based nursing facility. The affect of this 
flaw dilutes the facility's average hourly wage because of the portion 
of the salaries attributed to lower paid employees. This phenomenon is 
particularly true in Iowa and other rural states where it is fairly 
common for a rural hospital to operate an attached nursing facility.
    In addition, the data used to construct the wage index is several 
years old, with the FY 2002 index based on cost data filed by hospitals 
in 1998. This timetable does not immediately recognize the increased 
costs of personnel in a dynamic health care environment driven today by 
workforce shortages. Furthermore, the data is audited by fiscal 
intermediaries with only general guidance from CMS. Therefore, various 
interpretations result in inconsistent application of costs depending 
on the fiscal intermediary which can and does lead to lower wage 
indices in some locations.
    Although there is an opportunity for hospitals to be geographically 
``reclassified'' into a nearby labor market, only 12 hospitals (less 
than one percent of Iowa's facilities) meet the requirements that would 
allow them to receive the wage index of another area and thus, higher 
Medicare reimbursement.
    Due to the dependence of Iowa hospitals on revenue from the 
Medicare program, IHA has placed high priority on equity issues that 
address the long-standing formula-driven Medicare payment problems. 
Among the ideas for fixing these problems include the creation of a 
wage index floor of.925 and adjusting the percentage of inpatient 
payment to which the wage index is applied. If enacted by Congress, 
either of these changes would have a positive impact on Iowa hospital 
payments and stabilize the precarious financial position in which many 
Iowa hospitals exist. Passage of the wage index floor would have a $179 
million impact over five years for Iowa hospitals thus allowing our 
facilities to continue to provide high quality healthcare services to 
Medicare beneficiaries in rural communities and throughout the state of 
Iowa. But the Medicare equity issue is more than a hospital problem. To 
cope with the growing gap between Medicare reimbursements and actual 
costs, hospitals must transfer this deficit to the private sector. 
County hospitals are raising property taxes, and all hospitals are 
forced to raise charges. This situation threatens the very future of 
Iowa hospitals. Imagine the consequences for a community that loses its 
local hospital, not only in terms of access to health care, but in the 
local and regional loss of jobs, business partnerships, and economic 
stability.
    In conclusion, IHA requests support from members of Congress to 
enact changes that would have a positive impact on hospitals in Iowa, 
as well as nationwide, and stabilize the precarious financial position 
in which many Iowa hospitals exist. Immediate action is needed to 
address payment inequities within the Medicare system that threaten 
access to quality healthcare services for Medicare beneficiaries.

                                 

      Statement of the Iowa Medical Society, West Des Moines, Iowa
    Congresswoman Johnson and members of Congress, thank you for the 
opportunity to submit testimony on the issue of Medicare's geographic 
cost adjustors used for Medicare payment. Medicare's application of 
geographic payment adjustors to the physician reimbursement formula has 
created a disparity in payments to Iowa and many other states and it is 
having a detrimental impact on our citizens, physicians, and our health 
care infrastructure. Fixing Medicare's payment disparity to Iowa is the 
number one priority of the Iowa Medical Society and our physician 
members.
8th Highest in Quality of Care
    In 2000, the Health Care Financing Administration (HCFA) released a 
study ranking states on Medicare quality for six clinical areas 
including heart attacks, breast cancer, diabetes, heart failure, 
pneumonia and stroke. Measured according to quality indicators for each 
condition, Iowa's care of Medicare patients ranked 8th highest in 
quality among 52 states and territories. Yet of Medicare's 89 
geographic payment localities, Iowa is the 80th lowest reimbursed 
locality. Iowa's poor reimbursement is due to the geographic 
adjustments made to the three Geographic Practice Cost Indices 
(GPCIs)--physician work; practice expense and medical liability expense 
under the Medicare Part B Resource Based Relative Value System (RBRVS). 
This unfair formula is at the root of Iowa's poor reimbursement.
    Can you imagine if the geographic adjustments used to reimburse 
physicians were applied to Social Security benefit payments in such a 
way that, if you lived in Iowa, your benefits were reduced? What if 
United States Congressmen and women from California and New York were 
paid higher than Congressmen and women from Iowa and Kansas?
    Both of those ideas are ludicrous, and if they were even proposed, 
they would be laughed out of the Capitol. But that is exactly how we 
reimburse for Medicare services in our country, and Iowa patients and 
the state's health care infrastructure are suffering as a result even 
though Iowans pay the same Medicare taxes.
The Impact of Medicare's Geographic Cost Adjustors on Iowa
    The Federal Government's own data indicates that Iowa physicians 
provide high quality care and that our patients use health care more 
efficiently than recipients in other states. Iowa's reward for 
providing high quality care efficiently and appropriately is to receive 
much less for the same services as provided in other states.
    The fact that Iowa physicians receive less reimbursement for the 
same procedure than their colleagues in other parts of the country is 
having a serious impact on our citizens. The payment to Iowa physicians 
on ten common procedure codes currently shows Iowa ranks 80th for each 
procedure out of the 89 geographic payment localities across the 
nation.
    Over the past two years, Katie Couric from the Today Show, has made 
a point of having a screening colonoscopy each year on national 
television. She lost her husband to colon cancer and wanted to stress 
the importance of screening colonoscopy, which might have saved her 
husband's life.
    Today, in Des Moines, Iowa, in a very well-run, sophisticated 
practice, if you were to call to schedule a screening colonoscopy, it 
takes six months to get an appointment. In that same practice, if your 
primary care physician refers you to a gastroenterologist specialist 
(GI), it takes two weeks to get in, even if you are symptomatic and 
require a gastroenterologist consult.
    Why is that the case? Is it because the GI specialists are lazy and 
want to get home by 5:30 every night? Not at all, they are currently 
working hours that few other professionals would endure because their 
commitment to this community is so great. But they have been trying to 
recruit a partner for several years, and they are competing with 
practices in states with much more generous Medicare reimbursement than 
Iowa. GI is a specialty that relies a great deal on Medicare and, 
therefore, the recruit has to choose between Iowa, where they will work 
considerably more hours for significantly less pay, and another 
location, for more pay, and a schedule that allows them to enjoy more 
time with their families. Consider that physicians coming out of 
residency today have between $85,000 and $115,000 in education debt, 
and you know what choice you would make if it were your decision.
    For the first time in our state's history, a system in Northern 
Iowa laid off ten physicians. That means that patients who used to go 
to Dr. Jones can no longer see him, because he is out of a job. He is 
out of a job because the health system that formerly employed him can 
no longer afford him, due in large part to the Medicare crisis of 
underpayment. His patients will have to find another physician. If 
those patients were in the room today, they could explain in stark 
terms how this crisis affects quality of care.
    Iowa physicians are also competing with surrounding markets for 
health care professionals including Chicago, Kansas City, and 
Minneapolis. But how can we compete when we are reimbursed less and 
when buses are being sent into Iowa to take nurses across the border 
where they can earn more?
    We stress that this issue is not just about the bottom line 
suffering for physicians and hospitals. Iowa patients are also truly 
being shortchanged under the current system.
Medicare HMO's
    Medicare's geographic payment disparities have also kept Iowa 
recipients from receiving benefits that recipients in other states with 
higher Medicare reimbursement receive. As reported in a July 7, 2002 
Washington Post Article, ``At a time when the government has been 
encouraging Medicare patients to find drug benefits by signing up for 
managed care, Iowa does not have a single Medicare HMO.'' In some areas 
of the country, reimbursement rates are high enough that Medicare HMOs 
can offer plans without a premium. Consequently, in those localities, a 
majority of Medicare patients are in managed care plans. Those Medicare 
recipients are, in some cases, receiving prescription drug coverage, 
vision and hearing services and a plethora of other benefits, sometimes 
for no annual premium and no co-payment. Iowa's low reimbursement has 
created an environment that penalizes Iowans by offering no Medicare 
HMO plan.
Iowa's Medicare Population
    The impact of Medicare's poor reimbursement to Iowa is additionally 
magnified by the state's increasing proportion of people who are aged 
65. Iowa's high percentage of Medicare eligibles translates into the 
reality that as Iowa physicians are being reimbursed less, they are 
also treating more Medicare patients. Iowa's practice environment is 
also more difficult because Iowa physicians are faced with treating 
Iowa's 80+ population which is its fastest growing age group. As you 
can imagine, the health care needs of the 80+ age group are more 
demanding and costly.
    As a whole, Iowa's proportion of older adults in our population 
exceeds that of the United States as a whole. In fact, Iowa ranks 
second in the nation of percentage of persons aged 85 and older--2.2%; 
fourth in the nation of percentage of persons aged 75 and older--7.7%; 
fifth in the nation of percentage of persons aged 65 years old and 
older--14.9%; and fourth in the nation of percentage of persons aged 60 
years and older--19.2%. As our population ages, these percentages will 
only increase. Iowa's current Medicare population is approximately 
475,000 eligibles.
Iowa's Poor Medicare Reimbursement: Driving the Market
    Our high percentage of Medicare enrollees is not the only reason 
Iowa physicians are beholden to our poor Medicare reimbursement rates. 
In Iowa, Medicare's reimbursement rate is driving all aspects of 
physician reimbursement. Iowa Medicaid reimbursement is tied to 
Medicare through Iowa law and private insurance payors are using 
Medicare to set their rates as well.
The Flawed Formula: Geographic Practice Costs Indexes
    The Medicare Part B formula is fundamentally flawed, due to its use 
of geographic cost adjustors. The formula used to reimburse physicians 
is based on assumptions that it is cheaper to provide care in certain 
parts of the country than it is in others. However, the costs measured 
by GPCIs do not accurately represent all of the costs associated with 
practicing medicine. While the formula may be able to fairly measure 
the cost of rent, it cannot appropriately or accurately measure the 
cost of providing services.
    Iowa physicians face additional costs of having to travel to 
satellite clinics sometimes as far away as 60 miles to treat patients. 
To perform the latest treatments, Iowa physicians must purchase the 
same equipment as their colleagues in New York and San Francisco, often 
at the same price. However, for the same surgical procedure the 
equipment is utilized for, they are reimbursed less. An ophthalmologist 
removing a cataract in Iowa is reimbursed 34% less than physicians in 
San Francisco for the same exact procedure.
    Additionally, the GPCIs are only updated every three years, causing 
them to lag behind the costs being incurred in today's market. The 
professional liability insurance cost GPCI is a prime example. While 
this GPCI is measured accurately, the fluctuating market can endure 
sudden increases, making the three-year lag time unacceptable in 
setting reimbursement rates today.
Geographic Payment Coalition
    Iowa providers are not alone in our outcry about the inequitable 
Medicare payment system. That is why this past June at the American 
Medical Association Annual Meeting, Iowa played a leading role in 
launching the Geographic Equity in Medicare (GEM) Coalition.
    GEM is a coalition of medical organizations that agree that current 
physician reimbursement should be equitable across the country. The 
substantial degree of this geographic disparity in patient services and 
physician reimbursement levels in the Medicare Part B program is 
unjustified and inherently unfair--and is having an increasingly 
negative impact on patient care and access in many parts of the United 
States.
    GEM's member organizations believe that federal policy makers must 
assign a high priority to eliminating Geographic Practice Costs Indices 
(GPCIs) and other components of the Medicare Part B program that result 
in inappropriate and inequitable reimbursement to tens of thousands of 
physicians across this country providing medical care to millions of 
Medicare beneficiaries.
The Solution
    The Iowa Medical Society and GEM propose that GPCIs should be 
eliminated from the Medicare reimbursement formula, and as a result, 
the nation be put on a single national fee schedule for Medicare 
reimbursement of physician services.
    While the goal of the Iowa Medical Society is to implement a 
national Medicare physician fee schedule, we are aware of the political 
impediments inherent to such a proposal. Given that incremental steps 
in public policy are most likely to be successful, we ask that you 
further legislative language that sets an absolute floor on all three 
GPCIs at 1.0.
    Placing all physicians in the nation on the same fee schedule will 
not completely solve the Medicare problem. The government also needs to 
fully fund their obligation by raising Medicare reimbursement up to a 
level that at least fully covers the cost of treating our country's 
elderly population.
    Iowa's physicians are deeply committed to doing the best job they 
can and remain committed to our Iowa Medicare patients. It is up to you 
and your colleagues to fix this program so that they can keep that 
commitment.

                                 

                Statement of the Hon. Frank A. LoBiondo,
       a Representative in Congress from the State of New Jersey
    Chairman Johnson and Ranking Member Stark, I appreciate this 
opportunity to provide written comment on Medicare's Geographic Cost 
Adjusters as they pertain to the State of New Jersey. The New Jersey 
delegation has had a longstanding commitment to rectifying the 
inequities in Medicare's geographic cost adjusters.
    The Balanced Budget Act of 1997 imposed drastic cuts in Medicare's 
payments to healthcare providers. In New Jersey alone, our hospitals 
will experience over $2.5 billion in Medicare payment reductions 
through 2005.
    Congress recognized that the BBA of 1997 went too far and thereby 
acted on two Medicare relief bills which were passed to lessen the 
reductions. The Balanced Budget Refinement Act of 1999 and the Benefits 
Improvement and Protection Act of 2000 provided relief to our hospitals 
valued at $110 million and $281 million, respectively. While helping to 
ease the burdens imposed by BBA, these relief measures combined to 
restore only 15 percent of the original reductions.
    Going forward, the Congress must continue their efforts at ensuring 
fair and adequate Medicare payments to hospitals. The Medicare reform 
bill that was passed late last month contains three provisions that 
will benefit New Jersey hospitals by restoring almost $300 million in 
Medicare payments over a 10-year period.
    Medicare recognizes that there are differences in market prices for 
labor and other inputs across the nation. To adjust for these 
differences, Medicare uses several geographic cost adjustment factors 
in its payment systems, including the area wage index in the hospital 
inpatient acute care PPS and the geographic practice cost indexes in 
the physician fee schedule.
    For the hospital inpatient PPS, Medicare uses two separate 
operating base payments known as the standardized amounts. One 
standardized amount is for hospitals in large urban areas (defined as a 
metropolitan statistical area with a population of one million or 
more). The other standardized amount is for hospitals located in all 
other urban areas and rural areas.
    Many of the hospitals in my district are designated as ``other 
urban. I support the MedPAC recommendation that the differences between 
the two standardized amounts be eliminated, and that hospitals located 
in any urban area should be reimbursed using the ``large urban'' 
standardized amount as the base payment for Medicare operating 
payments.
    The area wage index is another geographic adjuster used by Medicare 
to reflect differences in regional labor markets. With New Jersey 
sandwiched between New York City and Philadelphia, boasting the first 
and fifth highest rankings in city populations in the nation, we share 
the same labor markets. Although I represent a portion of the state 
that is currently satisfactory in its MSA designation, one of my 
counties, Cumberland County, would benefit from having the option of 
joining the Philadelphia MSA or joining with the Atlantic County MSA. 
Therefore, I would support the Federal Government's efforts of ensuring 
equity in the calculation of area wage indexes among hospitals in 
northern New Jersey and New York City as well as among southern New 
Jersey hospitals and the Philadelphia MSA.
    Included in the Medicare reform bill, recently passed by the House, 
is a GAO study on this important issue and I believe this study will 
provide useful information to the Committee in the future.
    I thank the Committee for their attention to the Medicare 
Geographic Cost Adjuster issue and for holding this important hearing.

                                 

       Statement of the Marshfield Clinic, Marshfield, Wisconsin
    The following testimony is submitted on behalf of the physicians 
and staff of Marshfield Clinic, who thank the Subcommittee for 
conducting this hearing and the opportunity to express concerns 
regarding the Medicare Physician Fee Schedule. We commend the 
Subcommittee for its leadership in the development of the Medicare 
Modernization Act of 2002 and for its continued efforts to improve the 
Medicare program.
    Marshfield Clinic is a large private group medical practice in 
Wisconsin with 690 physicians, 5400 additional staff, and 1.6 million 
annual patient encounters. The Marshfield Clinic system includes a 
major diagnostic treatment center, a research facility, a reference 
laboratory and 42 regional centers located in northern, central and 
western Wisconsin. Approximately one-half of the Clinic physicians are 
in the city of Marshfield (population 19,000). Marshfield Clinic serves 
a disproportionately large socio-economically disadvantaged population. 
As a 501(c)(3) non-profit organization, Marshfield Clinic's assets are 
held in a charitable trust. Marshfield Clinic serves patients 
regardless of their ability to pay. The Clinic serves several federally 
designated Health Provider Shortage Areas (HPSAs). The Clinic also 
provides services in partnership with a federally funded Community 
Health Center at 13 locations in Wisconsin providing comprehensive 
integrated care to un- and under-insured residents of the community 
with incomes at or below 200% of the federal poverty level. Security 
Health Plan of Wisconsin, a tax-exempt health maintenance organization, 
is a wholly owned subsidiary of Marshfield Clinic and provides 
financing for health care services for almost 120,000 members 
throughout northern, central and western Wisconsin. Security Health 
Plan initiated enrollment and marketing of Advocare, Marshfield's M+C 
product on July 22, 2002.
    The mission of Marshfield Clinic is to serve patients through 
accessible high quality health care, research, and education. 
Marshfield Clinic is committed to improve the health of the patients 
and communities it serves. Marshfield Clinic concurs with and strives 
for the six aims articulated in Crossing the Quality Chasm by the 
Institute of Medicine (IOM) for a future health care system that is 
safe, effective, patient centered, timely, efficient and equitable. 
Marshfield Clinic continues to build the infrastructure necessary to 
support these six aims. Unfortunately, the current Medicare 
reimbursement system represents a major barrier, not only to achieving 
the future vision but also to preserving the rural health care delivery 
infrastructure Marshfield Clinic has painstakingly built and maintained 
over the last three decades. Simply stated, in our part of the country 
Medicare does not even pay close to the true costs of beneficiary 
health care, much less lend support for the infrastructure of 
population health initiatives such as disease state management 
programs.
    While the Resource Based Relative Value Scale attempted to 
uniformly align payments with resource use across services, it did not 
address payment adequacy. Within the Marshfield Clinic system payments 
from all sources for covered services provided to Medicare 
beneficiaries is less than 70% of Medicare defined reasonable costs, 
which in turn are themselves not entirely ``reasonable'' in terms of 
actual costs of good quality care. Historically, the difference has 
been made up by charging other patients more. Marshfield Clinic no 
longer has the ability toshift the costs of Medicare underpayment to 
the private sector. It is critically important to our patients that 
steps are taken soon to assure that Medicare reimbursement more fairly 
approximates the cost of providing services.
    We believe the best solution to this dilemma is to foster 
improvements in the quality and effectiveness of care, reinvesting 
savings (historic or otherwise) in the care system. Unfortunately, even 
where evidence exists that changing inputs in the care process within 
our clinic setting can generate significant system-wide savings for 
Medicare (through lower hospitalization) the existing reimbursement 
system will not support such changes. This has not allowed us to 
systematize pilot projects that have demonstrated utility.
    In the absence of comprehensive payment reform that would support 
improvements in the care process and faced with an unsustainable 
erosion in the adequacy of Medicare payments, Marshfield Clinic is 
interested in any and all legislative initiatives that would either 
close the gap between payments or directly support activities that 
enhance quality and effectiveness of care.
    While it is true that creating a floor for the geographic 
adjustment factor for physician work within the Medicare physician 
payment system is not likely to enter into the locational decisions of 
individual physicians, it does not follow that placing such a floor 
would not be helpful to physicians and health systems serving low 
payment localities. Marshfield Clinic urges the Subcommittee to support 
efforts to phase in a floor of 1.000 for the Medicare physician work 
adjuster, as articulated in H.R. 3569 introduced by Representative Doug 
Bereuter and S. 2555 introduced by Senator Max Baucus precisely because 
it would help to close the gap between Medicare payments and cost of 
providing Medicare services. It would also send a signal that there is 
an understanding of the problem faced by organizations like Marshfield 
Clinic and the will to take steps (however small) to address our 
legitimate concerns.
    We believe, and hope that you would agree, that Medicare payments 
should closely match the necessary costs of high quality efficiently 
provided services. We would like to call your attention to several 
inter-related problems regarding Medicare Part B reimbursement that 
affect physicians throughout the country: 1) Medicare physician payment 
falls far short of meeting the Medicare allowable costs of delivering 
medical services to beneficiaries. 2) There are systemic flaws in the 
Medicare payment formula. The subject of this hearing, Medicare's 
geographic adjustment of the work element of physician fees, is an 
inherently flawed formula that exacerbates access problems in rural 
areas. 3) Medicare revenue shortfalls are offset by cost shifting to 
other sectors, resulting in a hidden tax principally on patients with 
employer-based insurance, and have had a determinative effect on 
commercial premium inflation throughout the country.
    This testimony will expand upon the above issue through examples 
and research into the effects of Medicare underpayments on physician 
practices and the effect of cost-shifting on commercial health 
insurance premiums. We acknowledge that rising healthcare costs are 
caused by many factors, only one of which is the Medicare underpayment.
    At the same time, however, Medicare is Marshfield Clinic's largest 
payor and its systematic underpayments have a significant impact on our 
operations and potentially on our entire delivery system.
LMedicare Reimbursement Falls Far Short Of The Cost Of Producing 
        Physician Services
    During 2001, Marshfield Clinic worked with the General Accounting 
Office to evaluate Medicare chemotherapy reimbursement and oncology 
practice expense payments. In conjunction with the evaluation, 
Marshfield Clinic also conducted an internal analysis utilizing 
generally accepted accounting principles to determine to what extent 
payment from all sources for covered services to Medicare beneficiaries 
covers the ``Medicare allowable'' costs of providing those services. 
The analysis indicates thatthe Clinic recovers approximately 70% of its 
costs in providing Part B Medicare services. The following chart also 
demonstrates an alarming trend. The gap between the cost to produce 
Medicare covered services and total payments for those services is 
growing.

 
 
     Year                            Medicare Revenue as a % of cost
 
      2000                                                      71.52
      2001                                                      70.59
      2002                                                      68.50
 

    This study demonstrates that the Medicare reimbursement is 
significantly below Marshfield Clinic's Medicare allowable cost of 
providing services to Medicare beneficiaries, and that the situation is 
getting worse. It is our understanding that this result is similar for 
other group practices in our State.
    The Medical Group Management Association (MGMA), a large 
association for physician clinics of all sizes, conducted a national 
practice cost study between 1992 and 2000. MGMA's study found that over 
this period, total operating costs per physician rose by 31.7%. During 
this same period of time, physician Medicare payment increased only 
13%. If the MGMA estimate of changes in physician operating costs 
roughly approximates changes in the Medicare physician practice and 
malpractice expenses, it follows that there has been little or no 
increase during this nine-year period in nominal payments for physician 
work.
    Physician reimbursement under the Medicare program is significantly 
different than other forms of Medicare reimbursement for hospitals, 
nursing homes and other health professionals. Inaccuracies in Medicare 
physician payment have created significant economic incentives to 
provide more care than is needed in some localities and have impeded 
access to services in other localities. These inaccuracies distort 
markets for delivery of health services and undermine the potential for 
federal reliance on competitive markets to reign in the cost of health 
care services. Markets adjust to the distortions of federal payment but 
they shift the costs to commercial purchasers of insurance and clinical 
services, most notably those employees who are already taxed to provide 
Medicare benefits. The inaccuracies of the traditional Medicare fee-
for-service system have also been imported into and assimilated in the 
Medicare+Choice system and threaten the viability of M+C.
    Though not the subject of this hearing, inaccuracies in the 
measurement of practice expense (overhead costs) lead to the 
misstatement of non-physician professional staff salaries, benefits 
(including health insurance), equipment expenses, and facility 
construction costs/rents. These errors affect the cost of services, the 
delivery of care, and the markets for services in widely diverse 
communities. In rural communities the additional expenses associated 
with establishing a regional system of care are spread across a 
disproportionately smaller and more aged population. This problem must 
be addressed immediately because it is fundamental to comprehensive 
Medicare reform. Congress must not wait for a system collapse to 
recognize that this problem affects all specialties, and is a 
significant source of payment disparity between Medicare and commercial 
purchasers of physician services.
    Physician reimbursement is the only payment system under Medicare 
that is tied to the gross domestic product (GDP). The program utilizes 
a formula called the sustainable growth rate (SGR), which reduces fees 
to physicians as the volume of services increases. In 2002, the result 
of this formula was a decrease in payments to physicians of 5.4%. 
Physician payments for 2003 will be further reduced by 4.4% unless 
Congress acts to change the formula.
    Under current law the Centers for Medicare and Medicaid Services 
(CMS) estimates the amount of total services to be paid for under 
Medicare Part B; as the volume and cost of Part B services increases, 
beyond target levels, Medicare law requires that the reimbursement per 
unit of service must be reduced to achieve budget neutrality. The net 
effect is that the increasing volumes of services provided throughout 
the country lead to reduced payments for Medicare physician services 
without regard for those responsible for the volume increase. This 
zero-sum approach penalizes conservative medical practices. It also 
penalizes low payment areas because across-the-board reductions in the 
Medicare conversion factor represent larger percentage reductions in 
low payment areas relative to high payment areas.
    While Medicare payments for physician services have increased in 
the aggregate as a result of increasing volume, population and 
benefits, Medicare payments for services have been substantially 
reduced since the fee schedule was implemented. The amount Medicare 
pays is now less than it costs to provide the service. In addition, the 
amount Medicare spends on its beneficiaries varies substantially across 
the country, far more than can be accounted for by differences in the 
cost of living or differences in health status.
    Since beneficiaries and others pay into the program on the basis of 
income and wages and beneficiaries pay the same premium for Part B 
services, this results in substantial cross subsidies from people 
living in low payment states with conservative practice styles or 
beneficiary preferences to people living in higher payment states with 
aggressive practice styles or beneficiary preferences.
    A recent report prepared May 13, 2002 for the Medicare Payment 
Advisory Commission by David Glass compared the premium amounts that 
would be paid monthly by Medicare beneficiaries for Part B services if 
beneficiaries were to pay a premium that covers 25 percent of the 
spending for services provided in their state. Currently Medicare 
beneficiaries residing anywhere in the United States pay a premium of 
$54 per month for Part B coverage, that is set at this level to cover 
25 percent of Part B spending for all aged beneficiaries. Some 
observers have suggested that it would be more fair for beneficiaries 
to pay a premium that covers 25 percent of the spending for the 
services provided in their state. If such a policy were implemented the 
highest premiums, $69 in Louisiana, $68 in Florida, $64 in New York, 
$64 in New Jersey, and $63 in California, reflect high use of services 
by the state's beneficiaries and relatively high payment rates paid to 
the state's providers. The lowest premiums, $38 in Minnesota, $39 in 
Hawaii, $39 in South Dakota, $40 in North Dakota, $40 in Wisconsin, $41 
in Iowa, and $42 in Montana, Nebraska and Idaho reflect low service use 
and relatively low payment rates. There are a total of 36 states for 
which the premium would be less than $54 if this policy were 
implemented. The District of Columbia and 14 other States would have 
premiums greater that $54. It is unquestionable that Medicare's payment 
policies treat beneficiaries in high and low payment states 
inequitably.
    It seems unfair that the cost of providing the service is 
increasing yet the government is decreasing the payment. This has 
caused a problem with access to care for the elderly, as many physician 
practices now limit the amount of Medicare services they provide in 
order to stay in business.
The Medicare Geographic Adjuster is an Inherently Flawed Formula
    We do not believe that geographic adjustment favors rural areas. We 
would remind the committee that the Physician Payment Review Commission 
recommended in 1989 that there should be no geographic adjustment of 
payment for physician work, based on the judgment that physician 
compensation for providing a service should be the same regardless of 
the locality where the service was provided. The Physician Payment 
Review Commission in its 1989 Report to Congress recommended ``the 
cost-of-practice index underlying the geographic multiplier (of the fee 
schedule) should reflect variation only in the prices of non-physician 
inputs.''
    In the Omnibus Budget Reconciliation Act of 1989 Congress overrode 
the recommendation of PPRC to recognize differences among geographic 
areas in the cost of living. While we recognize that there are 
differences in the cost of living, they do not affect the value of the 
work of physicians nor do they fundamentally relate to the supply and 
demand for physician services in any locality. In spite of higher 
measured cost of living, physicians are abundant in high payment 
localities, but in short supply in low payment localities. We question 
whether Congress intended this outcome! Many more services are also 
provided to Medicare beneficiaries in high payment localities than low 
payment localities. Compounding the difficulty is the phenomenon that 
many seniors are attracted to rural and other low cost areas 
concentrating the extra expenses incurred in serving Medicare 
populations in localities where physicians are scarce.
    In Urban Institute testimony to the Committee, Stephen Zuckerman, 
an invited witness who co-directed the development of the practice cost 
adjusters that were adopted for use in the Fee Schedule, stated that 
the fundamental reason to allow for geographic variation in the costs 
of physicians' own time is to create fees that compensate physicians at 
the same real rate in all areas of the country. He noted that a cost of 
living adjuster would over-adjust fees by not taking into account the 
impact of an area's amenities might have on compensation. To overcome 
this problem HCFA used hourly earnings of workers in professional 
occupations with five or more years of college education to derive a 
proxy for the physician work component of the geographic practice cost 
adjuster, in spite of the fact that there is no statistical data to 
demonstrate a work value relationship between physicians and the 
proxies selected. Zuckerman also made the theoretical observation that 
``Properly adjusted, Medicare physician payments should tend to promote 
an adequate supply of physicians in both urban and rural areas.'' We 
believe that if proper adjustment of physician work ever occurs, this 
may hold true.
    The HHS Rural Task Force to the Secretary published its report 
``One Department Serving Rural America'' on July 26, 2002 noting on 
page 6: ``As of 2001, only 9 percent of the nation's physicians 
practiced in rural areas while roughly 20 percent of the nation's 
population lived in rural areas.'' Presently the validity of the 
Medicare geographic adjustment formula is in question because there is 
a measurable abundance of physicians in high payment localities and an 
undersupply of physicians leading to access problems in rural areas. In 
high payment localities that are geographically desirable there are 
surpluses of physicians who negotiate and accept lower salaries. 
Conversely in low payment localities that are geographically less 
desirable there are many physician vacancies reported and physicians 
negotiate and demand higher salaries.
    The absence of a relationship between the Medicare payment and the 
reasonable cost of providing services is highlighted by the emergence 
of physician supply problems in many rural localities. Marshfield 
Clinic currently has 80 physician vacancies, and 317 staff vacancies 
``on hold'' because the Clinic's budget for 2003 is facing multi-
million dollar deficits. We presently have patients waiting three 
months for scheduled appointments and we are juggling the placement of 
new physicians and support staff to maintain the delicate balance of 
revenues and expenditures in an environment of large and increasing 
budget deficits. We recruit in local, regional, Midwestern, and 
national markets for all of these positions and track national wage and 
productivity data utilizing the best available resources to maintain 
the competitive position and professional environment of Marshfield 
Clinic.
    Physician shortages are particularly troublesome to Marshfield 
Clinic in the following physician specialties: Anesthesiology, 
Dermatology, Gastroenterology, Radiology, and Urology. Robert Redling 
reports in the July 2002 MGMA Connexion that physician recruiters are 
reporting shortages in most subspecialties, with gastroenterology, 
cardiology and radiology the hardest subspecialties to recruit for. 
(page 35) MGMA reports that median compensation for these specialties 
increased substantially between 1999 and 2000. According to the MGMA 
Physician Compensation and Production Survey Median income for 
urologists increased 22.7% between 1999 and 2000. Median income for 
Anesthesiologists increased 19%, Cardiologists increased 18%, and 
Radiologists increased 11.6%. We do not believe that it is a 
coincidence that Marshfield Clinic is experiencing great difficulty in 
filling these positions.
    The market for radiologists is unusual, but serves as a good 
example of the market basis for physician services, because salaries 
for radiologists recently hit a new peak this year after the term of 
radiology residencies was extended from four to five years last year 
creating a gap in the radiologist pipeline.
    Staff shortages among physician support personnel are also 
particularly troublesome for Marshfield Clinic for nurse practitioners, 
CNRAs, and physician assistants. Marshfield Clinic recruits for these 
positions on a nationwide basis. Many positions go unfilled because 
payments, even in Health Professional Shortage Areas where Medicare 
contributes an additional 10 percent, are not adequate to sustain the 
staffing levels required to meet the service needs.
    The breakdown in the relationship between Medicare payments and 
cost to provide Medicare services is exacerbated by the incongruous 
notion that the Medicare payment for physician work should be related 
to the reported earnings of proxy professionals (engineers, 
mathematicians, teachers, lawyers, nurses, and artists) identified as 
having similar tastes in amenities as physicians, because HCFA, now CMS 
believed that ``the earnings of physicians will vary among areas to the 
same degree that the earnings of other professionals vary.'' (July 17, 
2001 FR 44190) There is no mechanism in the CMS formula that takes into 
account the relative supply and demand of these proxy professionals nor 
is there a statistical basis to justify the use of the proxies to 
determine how physician work should be adjusted.
    At the request of Marshfield Clinic, RSM McGladrey, of Minneapolis, 
MN, has provided to the Committee a nationwide sample of physician 
salaries demonstrating the salary expectations of physicians in all 
specialties. This data is utilized by organizations throughout the 
country to determine the appropriate salary ranges and productivity 
norms for the purposes of hiring physicians and establishing 
appropriate compensation for their services. Similar data is published 
annually by the Medical Group Management Association and the American 
Medical Group Association demonstrating that there is a national market 
for physicians' services.
    In this day and age, when physicians and other professionals are 
exceedingly mobile, the choice of where one wants to live is a 
discretionary choice, like choice of automobile or securities broker. 
Medicare subsidies of individual physician choices about where they 
chose to live is not an appropriate use of taxpayer money. Physician 
salaries are determined by supply and demand. The supply and demand of 
positions and eligible candidates for the six proxies is unrelated to 
the supply and demand of physicians.
    Simply stated, in our view the geographic adjuster has never made 
good sense from any perspective. We compete in national markets for our 
physicians and highly trained staff. We pay salaries and wages 
determined by national markets. We buy our equipment, medical supplies, 
computer ware, etc., in national markets. We borrow money at rates 
determined by national markets. We deliver medical care on the basis of 
the national and international literature. Our vendors, lenders, 
suppliers, and professional work force charge us no less because of 
geography. The only practical effects of a geographic adjuster on rural 
Wisconsin are to cost-shift to the private sector, increase insurance 
rates, compromise beneficiary access, and make it increasingly 
difficult for organizations with public service values to stay in 
business.
LThe Effect of Cost-Shifting on Commercial Health Insurance Premiums in 
        Wisconsin
    The crisis in Medicare reimbursement is becoming increasingly 
precipitous, as more and more seniors age into the Medicare program, 
overwhelming other sources of revenue. In a 20-county Marshfield Clinic 
service area, which covers more than one-third of the geography of the 
State of Wisconsin, the regional micro-economy is depressed because 
there are 3.04 workers for every Medicare beneficiary, a ratio not 
expected on a national basis by the Bipartisan Commission on Medicare 
Reform until 2017. In some counties in the Marshfield Clinic service 
area, the ratio is already below 2 to 1. Medicare fee-for-service 
payments in Wisconsin are among the lowest in the nation. Wisconsin's 
premiums for commercial insurance, according to ModernHealthCare Dec. 
24, 2001 issue, are the 7th highest in the nation, and are ranked above 
Maryland and DC.
    Payments by Medicare for healthcare services are not uniform across 
the country, or across types of providers. This results in very 
different and disparate levels of reimbursement based on location in 
the United States. In fact, Wisconsin ranks in the lowest quartile of 
states in payments for services to Medicare beneficiaries.
    A secondary effect of low payments by Medicare, is that hospitals, 
physicians and other providers must charge private patients a much 
higher fee for the same service, resulting in higher costs and higher 
health insurance premiums. This is what is referred to as ``cost-
shifting.''
    The cost-shifting from underfunded government programs to private 
fee-for-service payers is causing businesses and individuals to pay 
higher premiums for their health insurance. The effect of the cost-
shift from government-sponsored health care to the private pay patients 
has driven Wisconsin commercial health insurance premiums to some of 
the highest in the country. This problem is further magnified by the 
demographic shift in Wisconsin of a decrease in people age 20-40 and an 
increase in the population over 65.
    Wisconsin has become unattractive for business to locate here or 
remain here for a couple reasons. First, we have high tax rates. 
Secondly, commercial health insurance premiums in Wisconsin are some of 
the highest in the United States. The following sources that have 
identified Wisconsin's commercial health premiums as some of the 
highest in the United States.
Kaiser Family Study
    The first source is the Kaiser Family Study, which was conducted in 
1999. This study, which compared the average annual cost of employment-
based health insurance for single coverage, found that the nationwide 
average in 1999 was $2,325. Wisconsin ranked seventh from the top with 
an average annual cost of $2,502. States that border Wisconsin were 
slightly less, with Illinois at $2,403, Iowa at $2,241 and Minnesota at 
$2,198. None of them were in the top seven, but this demonstrates that 
Wisconsin's costs for commercial insurance is higher than the national 
average by a substantial amount and higher than our bordering states by 
a significant amount.
Mercer/Foster Higgins National Survey of Employer Sponsored Health 
        Plans
    The Mercer/Foster Higgins National Survey of Employer Sponsored 
Health Plans is a credible source to compare commercial health 
insurance premiums across the country. At the request of Marshfield 
Clinic Mercer/Foster Higgins arrayed their data to compare overall 
commercial premiums on a state-by-state basis. In 2001, the nationwide 
average cost for an employee per year was $5,100. Wisconsin's cost was 
approximately $5,500 per year, making it the fourth highest cost per 
employee in the country.
Milliman USA 2001 HMO Intercompany Rate Survey
    The actuarial consulting firm of Milliman USA has conducted an HMO 
intercompany rate survey for the past 13 years. This survey allows 
health plans to submit their manual rates for a defined group with 
common age/sex and common set of benefits. Other surveys comparing 
Wisconsin do not standardize the benefits or the age/sex of the group 
and, thus, may tend to rate Wisconsin slightly higher based on our 
history of more liberal benefits. This Milliman study takes into 
account the standardized benefit and population.
    Milliman arrayed their data on a state-by-state basis, having 28 
states with credible data. Of the 28 states with credible data, the 
Intercompany Rate Survey found that Wisconsin had the second highest 
per member per month premium for this group. The only state that was 
higher than Wisconsin was North Carolina.
    Further comparing Wisconsin to states with more substantial 
Medicare payments, such as Florida, found Wisconsin commercial rates to 
be 20.6% higher than the Florida commercial premium. Comparing to 
Louisiana, Wisconsin's commercial premium was 31.5% higher. In 
comparing with California, which has some of the highest Medicare 
reimbursement, Wisconsin's commercial health insurance rates are 44.2% 
higher, based on the Milliman survey. We believe there is a strong 
correlation between the level of Medicare underpayment and higher 
commercial health insurance rates.
The Problem is Going to Get Worse
    The problem is going to get worse, unless change is imminent. Rural 
areas are especially hard hit by the demographic shift that is 
occurring in the Medicare population. 77 million baby boomers are about 
to enter Medicare. Between 2000 and the year 2020, the number of 
Medicare beneficiaries will increase from 40 million to 61 million, or 
a 50% increase. At the same time, the number of workers per retiree to 
fund Medicare is decreasing. There will be fewer workers to support 
each Medicare beneficiary. Medicare and Social Security are pay-as-you-
go programs and by almost all accounts and estimates, Medicare costs 
exceed revenues near the year 2025. In the year 1960, there were 4.5 
workers per retiree. By the year 2000, this had decreased to 3.9 
workers per retiree. In the year 2020, it is estimated that the number 
of workers per retiree in the United States will be 2.8.
    In 1999, Wisconsin was at 3.69 workers per retiree, which was below 
the 2000 estimate for the country. Rural Wisconsin is in much worse 
shape than the rest of the country or the rest of Wisconsin. Many 
counties in northern Wisconsin have ratios between 2.0 and 3.0 laborers 
per Medicare beneficiary. In other words, Wisconsin's rural areas are 
already at the point where it is estimated that the Medicare program is 
no longer sustainable.
CONCLUSIONS
    In summary, we believe that there are emergent access, cost, and 
quality-of-care concerns for the Medicare program that must be 
addressed immediately. Congress must take several steps to address the 
misalignment of incentives in Medicare reimbursement, and the mal-
distribution of payments across different localities.
    We commend you for developing provisions in the Medicare 
Modernization Act of 2002 that would forestall the projected 20% 
reductions in Medicare physician payment that the Centers for Medicare 
and Medicaid Services (CMS) would impose over the next three years. We 
also commend you for calling upon the General Accounting Office study 
to determine whether the CMS is using accurate information to adjust 
the physician work component of the RBRVS.
    These are short-term steps, however, which do not address the 
immediate crisis regarding payment for physicians under the Medicare 
program. Medicare payments to rural physicians must be addressed 
immediately if Congress is going to avert the crisis in rural health 
care delivery and the related crisis in commercial premium increases.
    We believe that the Medicare payment mechanisms that reduce 
physician payments in areas where physicians, and the professional 
staff they employ are in scant supply is bad public policy. We strongly 
support efforts to phase-in a floor of 1.000 for the Medicare physician 
work adjuster, as articulated in HR 3569 introduced by Rep. Doug 
Bereuter, and S. 2555 introduced by Senator Max Baucus that would raise 
all localities with a work adjuster below 1.000 to 1.000. A similar 
mechanism establishing a floor for the practice expense GPCI should 
also be implemented.
    We will support your efforts to develop better information by which 
to address this problem. We believe that the Medicare Payment Advisory 
Commission should be instructed to study the adequacy of payment to 
physicians in much more depth than has been done to date, with the aim 
of developing a process to be used by the government to use cost 
information related to physicians in determining the adequacy of 
physician payments and examine the issue of cost variability among 
physician practice structures.
    CMS should be engaged in this effort through research 
demonstrations structured to examine health delivery factors that 
encourage the delivery of improved quality in patient care as 
recommended in S. 2752 introduced by Senator Jeffords.
    We believe that immediate changes are needed to assure the adequacy 
of Medicare payment for physician services. Medicare physician payments 
must be improved to match the costs of producing efficiently provided 
services. Consequently we support your efforts to improve reimbursement 
for physicians as one small step in the larger scheme of necessary 
modernizations of the Medicare program. We urge you to continue your 
efforts to bring about comprehensive Medicare reform.
    Thank you for considering our views.

                                 

Statement of the Hon. Mike McIntyre, a Representative in Congress from 
                      the State of North Carolina
    As Co-Chairman of the Rural Health Care Coalition in the House of 
Representatives, I am concerned that Medicare reimbursements create few 
incentives for physicians, nurses, and other health care professionals 
to practice in rural areas. Instead, dramatic disincentives exist that 
reduce access to quality health care for rural Americans. As the number 
of Medicare eligible citizens increases over the next two to three 
decades, this crisis will become acute in rural America.
    The calculation of the physician fee schedule creates one such 
disincentive. Currently, the physician fee schedule uses three 
geographically adjusted variables to determine reimbursements. Two 
variables deal with the cost of a practice facility and malpractice 
insurance. The third, ``physician work,''is the amount of time, skill, 
and intensity a physician puts into a patient visit. Rural areas and 
states have a lower physician work component index number. Because this 
number is used to determine the physician fee schedule in conjunction 
with the other variables, rural physicians are reimbursed less per 
patient than their urban counterparts. I have seen no evidence to 
suggest that rural physicians spend less time on patients, possess less 
skill than urban physicians, or pay less attention to their procedures. 
Physicians and other health care providers in rural areas put in as 
much time, skill, and intensity into a patient visit as do physicians 
in other areas. Yet, under the Medicare program, rural physicians are 
paid less for their work than those who practice in urban areas.
    As you know, many rural communities have great difficulty retaining 
physicians and other skilled health care professionals.Recruitment 
difficulties for primary and tertiary care remain more severe in areas 
with lower cost of living indices. As it stands today, the fee schedule 
creates a barrier to physician recruitment--specifically specialists. 
Why would a new physician, saddled with student loans, practice in 
rural America if he or she will not be properly compensated for 
treating a higher number of Medicare patients?
    Rural hospitals also suffer from Medicare's use of Geographic 
Adjustors. The Wage Index and the Base Payment Amount for Inpatient and 
Outpatient Discharges are examples of metrics that are used to 
approximate costs that are based in part on geography. The logic is 
that it costs less to provide services in rural areas because labor 
costs are lower. Therefore, Medicare reimbursements should be lower.
    There are three primary problems with this logic:
    First, it is not true that wages for hospital personnel are the 
same as in the general labor market. Certainly, clerical services or 
computer programmers should be accounted for using the labor market as 
a whole. But hospital personnel--nurses, physicians, radiology 
technicians, physical therapists, and others--are not accurately 
reflected in the market basket. MedPac suggested changes in the market 
basket for this very reason. In fact, to create the proper financial 
incentives for health care personnel to locate in rural areas, perhaps 
we should compensate rural hospitals more for providing services. In 
any case, the market basket does not accurately reflect the actual 
costs of competing in the health care labor market.
    Second, a rural hospital operates with high fixed costs but a lower 
volume of total patients than its urban counterparts. Simply put, a 
heart monitor costs nearly the same in Lumberton, NC as it does in 
Washington, DC. However, it takes more time for a sufficient number of 
Medicare patients to cycle through rural Southeast Regional Hospital in 
Lumberton to pay for the same piece of equipment. In addition, it takes 
more Medicare patients to pay for the heart monitor because Medicare 
reimburses Southeast Regional Hospital less for each patient discharge.
    Third, and related to the second, rural hospitals treat a larger 
proportion of Medicare patients as a percentage of total discharges 
than urban and suburban hospitals. Therefore, rural hospitals are more 
adversely affected by lower Medicare payments than other hospitals 
because Medicare provides a higher percentage of revenues. Generally, 
excluding Critical Access Hospitals, the smaller, more rural the 
hospital, the more financial trouble it has. Studies have shown that 
the Prospective Payment System has a deleterious effect on the 
financial health of rural hospitals because it reimburses them 
significantly less for providing the same services as other hospitals. 
Over time, Medicare revenue has declined setting off a chain reaction 
of unintended consequences for rural hospitals: a reduction in hospital 
services; reduced investment in hospital infrastructure and equipment; 
aging facilities and technology; limited ability to compete in a tight 
health care labor market; less demand for inferior service; and 
increased hospital closures. If the Wage Index and the Base Payment 
were adjusted to reflect this economic reality, rural hospital solvency 
would improve.
    At a time when rural hospitals are having significant problems 
keeping their doors open--I have two hospitals in my district that 
operate in the red and 9 out of 10 that are not meeting their budget 
for this fiscal year--the Federal Government must be proactive and 
address these geographic disparities. If there are no rural hospitals, 
there will be no rural health care. We need to create the proper 
economic incentives for physicians to practice in rural areas. We need 
to create the proper economic incentives for physicians to take more 
Medicare patients. We need to end the perverse logic that says that 
just because janitorial services cost less in rural America, it must 
cost less to perform bi-pass surgery.
    Rural Americans deserve equal access to quality care. Geographic 
discrimination--as it exists today--denies them this equality.

                                 

               Statement of the Hon. Michael R. McNulty,
        a Representative in Congress from the State of New York
    Chairwoman Johnson, Ranking Member Stark, and members of the 
Subcommittee, thank you for holding this hearing, and thank you for 
allowing me the opportunity to share with you my concerns about 
Medicare's Geographic Cost Adjustors.
    The Medicare program's approach to determining the relative 
differences in area wage costs is both inequitable and flawed. The 
current approach harms areas with historically lower wages. To compound 
this problem, Medicare's definition of labor markets is antiquated and 
inaccurate.
    Over the last twenty years, health care providers in the Capital 
Region of New York State, my Congressional District, have successfully 
contained the rising cost of health care. The Federal Government, the 
community, and businesses have benefited from these efforts. 
Unfortunately, given the inherent flaws in Medicare's approach to 
paying for health care, ``doing the right thing'' now jeopardizes the 
future of health care services in the Capital Region. Many of the 
hospitals in my district teeter on the brink of financial collapse. 
During the last two years, the region's hospitals have combined losses 
of nearly $32 million.
    Medicare bases an area's geographic cost adjustor, commonly called 
the wage index, entirely on historical data. Relying entirely on 
historical data confines some counties to perpetual low wage index 
values and lower Medicare payments. It creates an unavoidable cycle of 
decline--without additional payments from programs like Medicare, 
hospitals are unable to pay wages comparable to those in areas with 
historically higher labor costs. As a result, their future wage index 
values decline even further.
    This problem is readily apparent when we compare wage levels for 
all workers (health care and non-health care workers) in the Capital 
Region to wages nationally and regionally. According to the Federal 
Government, wages in the Capital Region are between one and two percent 
greater than the U.S. average. Total wages in the Capital Region are 
five to six percent greater than wages in nearby and adjacent Berkshire 
County, Massachusetts.
    Yet the Medicare program sees a very different picture when it 
looks at health care wages. According to Medicare, health care wages in 
the Capital Region are 15% less than the national average and 30% less 
than the health care wages in nearby Berkshire County. As a result, the 
Medicare program pays hospitals in nearby Berkshire County almost 25 
percent more than it pays hospitals in Capital Region (see attached 
chart).
    The differences in wages have a real impact on the workforce. Non-
health care workers from surrounding counties travel to the Capital 
Region for employment. Health care workers leave the Capital Region for 
employment.
    The Medicare program's definition of discrete labor markets is 
simplistic and distorted. Medicare uses a ``bright line approach'' to 
define labor markets. It is not uncommon for a hospital on one side of 
a bright line to receive 50% more in Medicare payments for the same 
types of patients than a hospital five miles away on the other side of 
this bright line. Labor markets are no longer discrete. Given the 
shortage of health care workers, health care labor markets have become 
both regional and to some extent national. Health care workers 
frequently relocate for better wages and, like any other part of the 
labor force, they do not hesitate to travel for better wages and 
working conditions.
    What does this mean for my hospitals and my community? Emergency 
room nurses, critical care nurses, operating room nurses, respiratory 
therapists, radiology technicians, and even clerical staff can travel 
to hospitals in Massachusetts or to counties south of my area and earn 
30 to 40 percent more. As a result, in the Capital Region, these 
positions go unfilled for weeks and sometimes months. Patients must 
wait in emergency rooms for hours or even days before a bed becomes 
available because hospitals don't have adequate staff. Necessary 
medical care is put on hold and patients ``queue'' and wait their turn.
    Hospitals across the country are often told that these ``wage index 
problems'' can be fixed by applying for relief to the Medicare 
Geographic Reclassification Review Board. While the Board is able to 
address some problems, it is still bound by the two fundamental flaws 
in the current approach to computing wage index values--relying 
exclusively on historical costs and the bright line approach to 
defining labor markets.
    Given the mobility of our work force and the regionalization/
nationalization of the labor market, any new approach for defining the 
differences in wage costs between areas cannot rely on historical data 
or on the misguided notion that labor markets are discrete and have 
fixed boundaries.
    I offer three recommendations. First, no more than 50% of the wage 
index should be Metropolitan Statistical Area (MSA) or county specific. 
The remainder should be national and/or regional, i.e. reflective of 
the broader labor market.
    Second, the Congress should immediately develop a meaningful 
appeals process--a process reflecting the realities of the health care 
labor marketplace. Labor markets are very complex and it is unlikely 
that a single national model can adequately reflect the vagaries and 
complexities in every area. As a result, we need a qualitative--not a 
quantitative, appeals process.
    Third, the Congress should authorize demonstration projects 
designed to test new ``wage index values.'' Given the complexity of 
this problem, we cannot abandon the future of the nation's health care 
system to untested computer models that may or may not work.
    I recognize that defining labor markets and relative wage indices 
is a very difficult task. Yet the present system is distorted. It 
brings some hospitals to financial ruin, undermines the quality of 
patent care and, in some communities, threatens the future of health 
care. At the same time, it rewards other hospitals without merit simply 
because they fall into the right Medicare ``wage index area.''
    In conclusion, I hope we can rectify this serious problem and I 
look forward to working with this Subcommittee to reach an agreeable 
solution. Specifically, I ask this Subcommittee to keep under 
consideration the grave situation in my Congressional District. I very 
much appreciate Chairwoman Johnson and Ranking Member Stark offering me 
the opportunity to share my views.
                               __________

                               MEDICARE WAGE INDEX vs. HOUSEHOLD AND FAMILY INCOME
----------------------------------------------------------------------------------------------------------------
                                                                                  Median House
                                                                  Wage Index      hold Income      Est. Median
                Metropolitan Statistical Area                      (FY2002)         (1999) 1      Family Income
                                                                                                    (FY2001)2
----------------------------------------------------------------------------------------------------------------
Albany-Schenectady-Troy, NY..................................          0.8547          $43,250          $53,000
Pittsfield, MA...............................................          1.1454          $38,515          $49,600
Syracuse, NY.................................................          0.9621          $39,750          $47,900
Rochester, NY................................................          0.9347          $43,955          $52,900
Buffalo-Niagara Falls, NY....................................          0.9459          $38,488          $48,400
Dayton-Springfield, OH.......................................          0.9225          $41,550          $56,900
Columbus, OH.................................................          0.9565          $44,782          $59,900
Altoona, PA..................................................          0.9126          $32,861          $39,500
Harrisburg-Lebanon-Carlisle, PA..............................          0.9425          $43,022          $52,400
Allentown-Bethlehem-Easton, PA...............................          1.0077          $43,098          $52,000
Greensboro-Winston-Salem-High Point, NC......................          0.9539          $40,913          $53,100
Spokane, WA..................................................          1.0668          $37,308          $45,800
Columbia, SC.................................................          0.9492          $41,677          $53,200
Bangor, ME...................................................          0.9593          $35,837          $42,500
Charleston, WV...............................................          0.9264          $35,418          $44,100
Albany, GA...................................................          1.0640          $34,829          $43,300
Atlantic-Cape May, NJ........................................          1.1293          $43,109          $49,800
Flint, MI....................................................          1.0913          $41,951          $52,700
Muncie, IN...................................................          0.9939          $34,659          $47,900
Pocatello, ID................................................          0.9448          $36,683          $45,000
Salem, OR....................................................          1.0033          $40,665          $45,600
 
United States................................................  ...............         $41,994          $52,500
----------------------------------------------------------------------------------------------------------------
1 Source: U.S. Bureau of the Census, Census 2000
2 Source: U.S. Department of Housing and Urban Development


                                 

Statement of Douglas W. McNeill, President and Chief Executive Officer, 
          Middletown Regional Health System, Middletown Ohio,

                    Fort Hamilton Hospital 36-0132,
                   McCullough Hyde Hospital 36-0046,
             Mercy Hospital of Hamilton/Fairfield 36-0056,
                  Middletown Regional Hospital 36-0076
    The above-referenced hospitals are in my Congressional district and 
benefited greatly from the Section 152 of BBRA--1999 countywide 
reclassification to the Cincinnati Primary Metropolitan Statistical 
Area (PMSA). Butler County is a PMSA that is an integral part of the 
Cincinnati-Hamilton Consolidated Metropolitan Statistical Area (CMSA).
    The Butler County hospitals compete with Cincinnati hospitals for 
the same labor market of skilled hospital professional employees. The 
four Butler County hospitals easily exceed the 85% criteria for 
geographic reclassification to Cincinnati, but for the last two years 
the four hospitals have met the also required standardized amount cost 
per case criteria by less than 1%. In fact, for the FFY 2002 
reclassification the Medicare Geographic Classification Review Board 
(MGCRB) did not reclassify these hospitals because their computations 
indicated that the hospitals did not meet the cost per case criteria. 
CMS's Office of Attorney Advisor recomputed the MGCRB data, found that 
the hospitals met the criteria and overturned the MGCRB decision and 
reclassified the group. The threshold amount was set by regulation in 
1989 and never modified. It is outdated and works to prevent hospital 
groups in PMSAs from receiving a needed wage index reclassification to 
another PMSA which is a part of the same CMSA.
    For FFY 2003, the cost per case exceeded the threshold amount by a 
razor thin margin of.01562% (.0001562) for a standardized amount 
reclassification. These hospitals are clearly in a competitive labor 
market with Cincinnati, but the out of date cost per case criteria 
almost prevented a standardized amount reclassification for the last 
two years in a row.
    If the Congress approves statutory reclassifications, we believe 
that Butler County's request should be approved as it was in the BBRA.
    A review of hospital margins supports the need for such a 
reclassification. The attached schedules, prepared by Baker Healthcare 
Consulting, Inc., indicate that the county hospitals experienced a 
negative Medicare margin of 6.82%, a negative operating margin of 
8.75%, and total margin of a negative 4.81% for the FFY 1999 data (the 
most recent data currently available from CMS). The investment income 
incurred in 1999 assisted in reducing the loss from operations. Such 
investment income is unlikely to be realized in FFY 2002.
    Please carefully consider a statutory reclassification for the 
Butler County hospitals.

                  Mercy Hospital of Hamilton/Fairfield
                          Provider No. 36-0056
          Restated Margin Data for Year Ended December 31, 1999
           (Without Wage Index Reclassification for FFY 2000)
                   Per July 30, 1999 Federal Register
Hamilton average hourly wage (AHW)                              $18.9474
National AHW                                                21.1
                                                                     800
                                                     -------------------
Computed wage index                                                .8949
 
Cincinnati reclassified wage index                                 .9434
                                                     -------------------
Increase in wage index                                             .0485
 
Labor related standardized amount as a percent of           x       .711
 total
                                                     -------------------
Increase in payment (annualized)                                   .0345
 
Percent of year effective (October 1-December 31)            x       25%
                                                     -------------------
                                                                   .0086
 
Mercy inpatient Medicare payment                           x 105,785,491
 
Reduction in revenues and profits                               $909,755
 
Total revenue per cost report                                109,217,543
 
Revised total inpatient Medicare revenue                    $108,307,788
 
Net patient revenue per cost report                          105,785,491
 
Revised net patient revenue                                  104,875,736
 
Net loss per cost report                                     (8,066,009)
 
Revised net income                                           (8,975,764)
 
Net operating margin computed from cost report              (11,498,061)
 
Revised operating margin                                    (12,407,816)
 
Medicare margin computed from cost report                    (1,329,765)
 
Revised Medicare margin                                      (2,239,520)
 


                                 

                                   North Mississippi Medical Center
                                          Tupelo, Mississippi 38801
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515-6353

Re: LComment of Medicare's Geographic Cost Adjusters by North 
    Mississippi Medical Center--Medicare Provider Number 25-0004

Madam Chairwoman and Members of the Subcommittee:

    On Tuesday, July 23, 2002, the Subcommittee on Health of the 
Committee of Ways and Means held a hearing to assess the geographic 
cost adjustments to Medicare payment. Congresswoman Nancy L. Johnson, 
Chairwoman, invited individuals and organizations not scheduled for an 
oral appearance to submit a written statement for consideration by the 
Committee. Please accept the following as the comment of North 
Mississippi Medical Center (the ``Medical Center''), Medicare Provider 
Number 25-0004.
    The Medical Center supports continuation of the Medicare geographic 
reclassification program for the following reasons:

The Medical Center is a tertiary care regional referral center.

    A not-for-profit, acute care hospital licensed for 650 beds, the 
Medical Center is the largest hospital in Mississippi as well as the 
largest rural hospital in the United States. The Medical Center, a 
major regional hospital, provides a full range of services and programs 
consistent with its role as provider of primary, secondary and tertiary 
care for its service area residents in Tupelo and Lee County, 21 
additional Mississippi counties, several counties in northwest Alabama 
and several counties in southwest Tennessee. The Medical Center's 
medical staff includes approximately 250 multi-specialty physicians. As 
of January 2002, the Medical Center employs 2,678 full time employees 
and 464 part-time employees, making it the largest employer in 
northeast Mississippi.
    Significantly, the Medical Center is not supported by any public 
appropriations, unlike many Mississippi community hospitals owned by a 
governmental entity.
    The Medical Center is also a regional referral center, providing 
sophisticated health care services and technology comparable only to 
that available in metropolitan areas such as Memphis, Tennessee; 
Birmingham, Alabama and Jackson, Mississippi. As the next closest rural 
referral center is at least 50 miles distant, the Medical Center is the 
predominant provider of services to Medicare and Medicaid beneficiaries 
in northeast Mississippi.
    The Medical Center currently qualifies for reclassification to the 
Memphis, TN-AR-MS MSA (the ``Memphis MSA'') for purposes of calculating 
its wage index and has done so ever since the inception of the 
reclassification program. See MGCRB Case Nos. 90C0618, 91C0380, 
92C0037, 93C0033, 94C0031, 95C0023, 96C0019, 97C0022, 98C0029, 99C0008, 
00C0029.

Through Reclassification, the Medical Center Receives a More 
                    Appropriate

Labor Cost Adjustment.

    Geographic reclassification allows the Medical Center to receive a 
more appropriate labor cost adjustment. Average wages for the Medical 
Center tend to be higher than in other non-metropolitan areas within 
Mississippi. Surrounding the Medical Center are much smaller, rural 
hospitals lacking the tertiary services that the Medical Center 
provides including Aberdeen-Monroe County Hospital (49 licensed beds), 
Trace Regional Hospital (84 licensed beds), Okolona Community Hospital 
(10 licensed beds), Hillcrest Hospital (30 licensed beds), Pontotoc 
Hospital (58 licensed beds), Baptist Memorial Hospital-Booneville (114 
licensed beds), Baptist Memorial Hospital-Union County (153 licensed 
beds), Gilmore Memorial Hospital (95 licensed beds), Iuka Hospital (48 
licensed beds), Tippah County Hospital (70 licensed beds), and Clay 
County Medical Center (60 licensed beds). Because the labor cost 
adjustment does not take this kind of systematic variation into 
account, the adjustment sometimes does not appropriately reflect the 
average wages that hospitals such as the Medical Center pay.
    Unlike surrounding hospitals, the Medical Center competes in its 
health care professional recruitment efforts with and has labor costs 
similar to major tertiary care hospitals in Memphis, Birmingham, and 
Jackson. To recruit and retain qualified, highly-skilled health care 
professionals in competition with hospitals in these metropolitan 
localities, the Medical Center must pay comparable wages. Thus, the 
Medical Center's costs reflect the average wage hospitals in these 
metropolitan areas face in their labor market area. To compete with 
these hospitals, the Medical Center must be reimbursed on the same 
level.
    The geographic reclassification process recognizes the similar 
labor costs between the Medical Center and its counterparts in 
metropolitan areas. In allowing the Medical Center to receive a more 
appropriate labor cost adjustment, geographic reclassification ensures 
that the Medical Center is compensated fairly for these costs and can 
compete with similar hospitals in the labor market.

The Ability to Pay Higher Wages Is Critical to the Medical Center.

    The Medical Center's ability to pay higher wages helps ensure that 
Medicare beneficiaries residing in the Medical Center's service area 
have adequate access to critical inpatient hospital services and other 
health care. One of Congress' primary goals in enacting the geographic 
reclassification program was adequate compensation of rural hospitals, 
thereby assuring that patient populations, predominantly Medicare and 
Medicaid patients, would continue to receive appropriate medical 
services.
    As a regional referral center, the Medical Center more often than 
not is the only provider of tertiary care available to Medicare 
beneficiaries. Few hospitals in Mississippi provide the broad range of 
services available at the Medical Center, including services provided 
in a state-of-the-art cancer center, comprehensive cardiac care 
services, inpatient dialysis facilities, a specialty hospital for 
women, a sleep disorder center, a diabetes treatment center, a 30-bed 
rehabilitation institute and a behavioral health center. The cardiac 
care services include open heart surgery and a Heart Institute 
comprised of a complete cardiology center offering diagnostic, medical 
and surgical care which was recognized in 2001 as one of the top 100 
hospitals in the nation in successful treatment of heart disease. The 
NICU is one of five Level II NICUs in Mississippi and one of five which 
has three neonatologists on staff. The diabetes treatment center is one 
of only three American Diabetes Association-recognized centers within 
Mississippi. Faced with the closure of many rural hospitals, 
Mississippi must maintain the caliber of hospitals such as the Medical 
Center. Elderly and/or disabled, Medicare beneficiaries, for whom 
travel is often very difficult, receive at the Medical Center the 
highly specialized treatment ordinarily found only in large 
metropolitan areas.
    While the Medical Center provides highly specialized treatments, 
its patients are sicker than area hospitals. The severity of the 
illnesses of Medical Center patients is reflected in its case mix index 
of 1.6867. In fact, the Medical Center's case mix is comparable to the 
average case mix index of hospitals in metropolitan areas. In contrast, 
area hospitals provide fewer high tech health care services and treat 
less severely ill patients as evidenced by their average case mix 
indices.
    The Medical Center is also a provider of care for a significant 
percentage of elderly and/or disabled patients. During fiscal year 
2001, the Medical Center had 11,812 Medicare discharges, more than one-
third of its total admissions, and qualified as a Medicare 
disproportionate share hospital. In fiscal year 2001, the Medical 
Center derived approximately 66% of its revenue from the treatment of 
Medicare and Medicaid beneficiaries.
    Maintenance of the Medical Center's regional medical leadership, 
not to mention increased growth, requires consistent funding. Medicare 
funding is critical to the Medical Center and its geographic 
reclassification revenues constitute a significant part of the Medical 
Center's bottom line.
    The lack of a geographic adjustment factor over time could reduce 
the quantity of services the Medical Center provides, compromise its 
exceptional quality of medical care or, quite possibly, even jeopardize 
its financial stability and ability to continue serving Medicare 
patients. Loss of reclassification would significantly hamper the 
Medical Center's physician recruitment efforts. On the patient level, 
the people affected most will be those who can afford it least--the 
elderly, working poor and home-bound patients. Reduction in the Medical 
Center's services due to lack of funding would necessitate travel by 
Medicare beneficiaries to either Memphis, Birmingham or Jackson to 
obtain medical services formerly available at the Medical Center. To 
continue providing its current level of tertiary services to Medicare 
beneficiaries and to retain its status as a regional referral center, 
the Medical Center needs to be reimbursed at the same level as its 
regional competitors.
    On behalf of the Medical Center and other rural hospitals whose 
geographic cost adjustments are essential to ensure adequate access to 
appropriate medical services for Medicare beneficiaries in rural areas, 
I would like to thank the Subcommittee on Health for the opportunity to 
submit this comment. Geographic reclassification is an effective 
mechanism to address the financial pressure faced by the Medical Center 
and other rural hospitals that pay wages higher than the average in 
their area. Recognizing the need to support those hospitals such as the 
Medical Center which provide tertiary care in isolated rural areas, the 
process provides equitable and reasonable Medicare reimbursement levels 
for rural hospitals competing with their metropolitan counterparts.
            Sincerely,
                                                    Gerald D. Wages
                                                          Treasurer

                                 

                                                Providence Hospital
                                               Washington, DC 20017
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515-6353

Dear Madam Chair:

    On behalf of Providence Hospital, I am writing today to express our 
strong support of the testimony offered by both William J. Scanlon, 
Director, Health Financing and System Issues, U.S. General Accounting 
Office (GAO), and Glenn D. Hackbarth, Chairman, Medicare Payment 
Advisory Commission (MEDPAC), at the July 23rd Subcommittee on Health 
Hearing on Medicare's Geographic Cost Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of 2001, in section 304(b) of Public Law 
106-554, a process was established under which an appropriate statewide 
entity may apply to have all the geographic areas in the State treated 
as a single geographic area for purposes of computing and applying the 
area wage index. The District of Columbia would be an excellent example 
of where this ``statewide'' designation should be applied and even the 
Virginia Hospital and Health Care Association submitted a letter of 
support of the District's effort to designate itself as such. However, 
the Centers for Medicare and Medicaid Services (CMS) commented that 
they believed that ``Congress did not intend for section 304(b) to 
address the type of situation presented by Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospital, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured. Already two District hospitals have 
recently closed and half of the remaining hospitals operate in the red. 
The future of health care in the District of Columbia may be placed 
jeopardy if corrective action is not taken.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me at 202 269-7131.
            Sincerely,
                                                     Diana McDowell

                                 

                                                Providence Hospital
                                               Washington, DC 20017
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515-6353

Dear Madam Chair:

    On behalf of Providence Hospital, I am writing today to express our 
strong support of the testimony offered by both William J. Scanlon, 
Director, Health Financing and System Issues, U.S. General Accounting 
Office (GAO), and Glenn D. Hackbarth, Chairman, Medicare Payment 
Advisory Commission (MEDPAC), at the July 23rd Subcommittee on Health 
Hearing on Medicare's Geographic Cost Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of 2001, in section 304(b) of Public Law 
106-554, a process was established under which an appropriate statewide 
entity may apply to have all the geographic areas in the State treated 
as a single geographic area for purposes of computing and applying the 
area wage index. The District of Columbia would be an excellent example 
of where this ``statewide'' designation should be applied and even the 
Virginia Hospital and Health Care Association submitted a letter of 
support of the District's effort to designate itself as such. However, 
the Centers for Medicare and Medicaid Services (CMS) commented that 
they believed that ``Congress did not intend for section 304(b) to 
address the type of situation presented by Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospital, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured. Already two District hospitals have 
recently closed and half of the remaining hospitals operate in the red.
    Providence Hospital, located in northeast Washington, DC, is a 300+ 
bed community provider with a high portion of its care that it provides 
dedicated to Medicare and Medicaid beneficiaries. As costs, such as 
nursing salaries and pharmaceuticals, have escalated rapidly in the 
last 5 years, the reductions in Medicare are eroding hospital's mission 
to serve the elderly and the poor. The reductions in our wage index 
only serve to exacerbate the problem. Any assistance would be greatly 
appreciated.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me at 202-269-7131.
            Sincerely,
                                                       David Sparks
                                     Senior Vice President--Finance

                                 

    Statement of the Rural Referral Center/Sole Community Hospital 
                               Coalition
    The Rural Referral Center/Sole Community Hospital Coalition (the 
``Coalition'') appreciates the opportunity to submit testimony to the 
Ways and Means Subcommittee on Health regarding Medicare geographic 
cost adjusters, and particularly on Medicare geographic 
reclassification.
    Formed in 1986, the Coalition is comprised of approximately sixty 
large rural hospitals that have either or both the rural referral 
center (``RRC'') or sole community hospital (``SCH'') designations 
under Medicare (See Attachment A for a listing of Coalition Hospitals). 
These hospitals provide rural populations with local access to a wide 
range of health care services. In so doing, these facilities localize 
care and minimize the need for referrals and travel to urban areas. 
Coalition hospitals have as their common goal assuring that federal 
hospital payment laws and policies take into account their unique 
nature and role. A significant number of Coalition hospitals apply and 
qualify for Medicare wage index geographic reclassification, and so the 
issue of geographic reclassification is exceedingly important to 
Coalition hospitals. The Coalition urges the Subcommittee to correct a 
technical inconsistency in the reclassification system.
    Medicare reimburses hospitals for providing inpatient services to 
Medicare beneficiaries using a prospective payment system (``PPS''). 
Payments to hospitals under the PPS are geographically adjusted by a 
factor known as the ``wage index,'' which is intended to reflect the 
cost of labor in the area in which the hospital is located.
    Congress recognized that the system of assigning wage indices based 
solely on a hospital's physical location within a particular county is 
highly objective and crude and requires some degree of subjectivity. 
Therefore, in the Omnibus Budget Reconciliation Act of 1989, Congress 
created the geographic reclassification process and the Medicare 
Geographic Classification Review Board (``MGCRB'') for the purpose of, 
among other things, considering requests from hospitals that wish to 
reclassify from the area in which they are physically located to 
another nearby area, to receive the higher wage index available in that 
other area.
    However, statutorily speaking, the opportunity for hospitals to 
seek wage index geographic reclassification presently applies only to 
hospital inpatient services. When Congress established the 
reclassification opportunity in 1989, hospital inpatient services were 
the only services reimbursed under a PPS, and the only services where 
payment amounts were geographically adjusted using a wage index. As 
such, the opportunity for hospitals to seek wage index geographic 
reclassification applied only to hospital inpatient services. Now, most 
hospital-based services are reimbursed under some form of a PPS, and 
geographically adjusted using a wage index. In fact, the Centers for 
Medicare and Medicaid Services (``CMS'') uses the same inpatient 
service wage index for virtually all services paid on a prospective 
basis. Yet, CMS has extended reclassification only to hospital 
outpatient services.
    While CMS has exercised discretion to extend a hospital's 
reclassified wage index to hospital outpatient services, it has refused 
to use reclassified wage indices to adjust payments for other hospital-
based services. As such, a rural hospital that qualifies for 
reclassification to an urban area would have an urban wage index used 
to adjust payments for inpatient and outpatient services, but still 
would have a rural wage index used to adjust payments for most other 
services provided by that hospital, such as skilled nursing, and 
inpatient rehabilitation services. This inconsistency means that 
Medicare pays one wage rate on one floor of a hospital and another wage 
rate on another floor. This inconsistency cannot be justified and 
places rural hospitals at a disadvantage when trying to recruit health 
professionals.
    The same rationale that Congress applied in justifying 
reclassification for inpatient service wage indices now applies in the 
other contexts where a wage index is used to geographically adjust 
payments. A hospital provides inpatient and outpatient services within 
the same building. Similarly, skilled nursing services, inpatient 
rehabilitation services, and others are often located in the same 
building, or at least on the same campus as the acute care hospital. In 
these situations, the hospital's provider-based entities are therefore 
just as proximate to the MSA, and just as likely to incur the same 
labor cost experience, as the hospital's inpatient component.
    Senator Michael Crapo and Representative Bart Stupak and 15 other 
Senators and 19 other Representatives recognize this disparity and have 
stepped forward with a solution. Messrs. Crapo and Stupak are seeking 
to advance a legislative remedy, the Medicare Geographic Adjustment 
Fairness Act (S. 659/ H.R. 1375), that would require CMS to deem 
hospitals that have been geographically reclassified for purposes of 
their inpatient wage index to be considered reclassified for purposes 
of other services (1) which are provider-based and (2) for which 
payments for those services are geographically adjusted using a wage 
index.
    The Lewin Group, a prestigious Washington-based health care policy 
consulting firm, studied the Medicare Geographic Adjustment Fairness 
Act. The Lewin Group study revealed that nearly 400 hospitals would 
benefit from this proposal, and that approximately 90% of the hospitals 
that would benefit are rural hospitals (See Attachment B for a state-
by-state breakdown of rural hospitals that would benefit). 
Additionally, S. 659 and H.R. 1375 would have no budget impact. 
Moreover, the Lewin Group predicts that $70 million would be 
redistributed by this bill and that the gain that eligible hospitals 
would receive represents less than.06% percent of total Medicare 
payment to all hospitals. Therefore, the redistrubutive effect of this 
proposal is negligible.
                                 ______
                                 
    The Coalition urges the Subcommittee to embrace the legislative 
remedies outlined in S. 659/H.R. 1375 as it considers Medicare's 
geographic cost adjusters.

 
White River Medical Center, Inc.,          ALABAMA
 Batesville, Arkansas
 
St. Bernard's Regional Medical Center,     Boaz Albertville Medical
 Jonesboro, Arkansas                        Center
Baxter County Regional Hospital, Inc.,     Cherokee Baptist Medical
 Mountain Home, Arkansas                    Center
St. Mary's Hospital and Medical Center,    East Alabama Medical Center
 Inc., Grand Junction, Colorado
Hamilton Medical Center, Dalton, Georgia   Cullman Regional Medical
                                            Center
John D. Archbold Memorial Hospital,        Andalusia Regional Hospital
 Thomasville, Georgia
Kootenai Medical Center, Coeur D'Alene,    Chilton Medical Center
 Idaho
St. Joseph's Regional Medical Center,      Selma Baptist Hospital
 Lewiston, Idaho
Provena United Samaritans Medical Center,  Vaughn Regional Medical
 Danville, Illinois                         Center, Inc.
Freeport Health Network, Freeport,         Edge Regional Medical Center
 Illinois
Galesburg Cottage Hospital, Galesburg,     L.V. Stabler Memorial
 Illinois                                   Hospital
Sarah Bush Lincoln Health Center,
 Mattoon, Illinois
CGH Medical Center, Sterling, Illinois     ARIZONA
 
Columbus Regional Hospital, Columbus,      Verde Valley Medical Center
 Indiana
Marion General Hospital, Marion, Indiana   Payson Regional Medical
                                            Center
North Iowa Mercy Health Center, Mason      Sierra Vista Community
 City, Iowa                                 Hospital
Hays Medical Center, Hays, Kansas
Hutchinson Hospital Corporation,           ARKANSAS
 Hutchinson, Kansas
 
Salina Regional Health Center, Inc,        Central Arkansas Hospital
 Salina, Kansas
Trover Regional Medical Center,            St. Bernards Regional Medical
 Madisonville, Kentucky                     Center
Cape Cod Healthcare, Hyannis,              St. Joseph's Regional Health
 Massachusetts                              Center
Gratiot Community Hospital, Alma,          Baxter County Regional
 Michigan                                   Hospital
Alpena General Hospital, Alpena, Michigan  Baptist Health Med. Ctr.--
                                            Arkadelphia
Marquette General Hospital, Marquette,     Hot Spring County Medical
 Michigan                                   Center
Northern Michigan Hospital, Petoskey,      National Park Medical Center
 Michigan
Munson Healthcare, Traverse City,          Harris Hospital
 Michigan
Heartland Health, St. Joseph, Missouri     Medical Center of South
                                            Arkansas
Kalispell Regional Medical Center,         Medical Park Hospital
 Kalispell, Montana
St. Francis Medical Center, Grand Island,  DeQueen Regional Medical
 Nebraska                                   Center
Mary Lanning Memorial Hospital, Hastings,  White River Medical Center
 Nebraska
Good Samaritan Hospital, Kearney,          Advance Care Hospital
 Nebraska
Regional West Medical Center,
 Scottsbluff, Nebraska
Cheshire Medical Center, Keene, New        COLORADO
 Hampshire
 
Lakes Region General Hospital, Laconia,    Mercy Medical Center
 New Hampshire
Mary Hitchcock Memorial Hospital,          St. Mary's Hospital & Medical
 Lebanon, New Hampshire                     Center
Watauga Medical Center, Boone, North       Boulder Community Hospital
 Carolina
Southeastern Regional Medical Center,      Yampa Valley Medical Center
 Lumberton, North Carolina
Craven Regional Medical Center, New Bern,  Valley View Hospital
 North Carolina
Columbus County Hospital,Inc.,             Sterling Regional Medical
 Whiteville, North Carolina                 Center
Wilson Memorial Hospital, Wilson, North    Vail Valley Medical Center
 Carolina
Jackson County Memorial Hospital, Altus,   Avista Hospital
 Oklahoma
Grady Memorial Hospital, Chickasha,
 Oklahoma
Valley View Regional Hospital, Ada,        GEORGIA
 Oklahoma
 
St. Charles Medical Center, Bend, Oregon   Hamilton Medical Center
Bay Area Hospital, Coos Bay, Oregon        Upson Regional Medical Center
Evangelical Community Hospital,            Satilla Regional Medical
 Lewisburg, Pennsylvania                    Center
Avera St. Luke's, Aberdeen, South Dakota   Gordon Hospital
Avera Queen of Peace, Mitchell, South      Southeast Georgia Reg.
 Dakota                                     Medical Center
Avera Sacred Heart Hospital, Yankton,      Northeast Georgia Medical
 South Dakota                               Center
Maury Regional Hospital, Columbia,         John D. Archbold Memorial
 Tennessee                                  Hospital
CHRISTUS St. Joseph's Hospital & Health    Murray Medical Center
 Center, Paris, Texas
Memorial Health System of East Texas,      Bulloch Memorial Hospital
 Lufkin, Texas
Dixie Regional Medical Center, St.         Mitchell County Hospital
 George, Utah
Rutland Regional Medical Center, Rutland,  South Georgia Medical Center
 Vermont
Halifax Regional Hospital, South Boston,   Redmond Park Hospital
 Virginia
St. Agnes Hospital, Fond Du Lac,           Chestatee Regional Hospital
 Wisconsin
St. Joseph's Hospital, Marshfield,         Lanier Park Hospital
 Wisconsin
                                           Fannin Regional Hospital
IDAHO
                                           North Georgia Medical Center
Magic Valley Regional Medical Center
Gritman Medical Center                     ILLINOIS
 
Eastern Idaho Regional Medical Center      Katherine Shaw Bethea
                                            Hospital
Kootenai Medical Center                    Eureka Hospital
Wood River Medical Center                  Blessing Hospital
                                           St. Anthony's Memorial
                                            Hospital
IOWA
                                           Galesburg Cottage Hospital
Marshalltown Medical & Surgical Center     CGH Medical Center
Boone County Hospital                      Good Samaritan Regional
                                            Health Center
Mary Greeley Medical Center                Passavant Area Hospital
Floyd County Memorial Hospital             Provena United Samaritan
                                            Medical Ctr.
Great River Medical Center                 Community Hospital of Ottawa
Mercy Medical Center--North Iowa           Freeport Memorial Hospital
Mercy Medical Center--Clinton              Memorial Hospital of
                                            Carbondale
Story County Hospital                      Marion General Hospital
Waverly Municipal Hospital                 St. Anthony Hospital & Health
                                            Centers
Fort Madison Community Hospital            White County Memorial
                                            Hospital
                                           Decatur County Memorial
                                            Hospital
KANSAS
                                           Memorial Hospital
Newman Memorial County Hospital            Saint Joseph's RMC--Plymouth
                                            Campus
Mercy Health System of Kansas, Inc.        Vencor Hosp.--LaGrange
Hays Medical Center                        Wabash County Hospital
Hutchinson Hospital Corporation            Columbus Regional Hospital
Atchinson Hospital Association             Kosciusko Community Hospital
St. Catherine Hospital
St. Luke Hospital                          KENTUCKY
 
Mercy Health System of Kansas, Inc.        Highlands Regional Medical
                                            Center
Stevens County Hospital                    Marymount Medical Center,
                                            Inc.
Norton County Hospital                     The Medical Center
Western Plains Regional Hospital           Jewish Hospital Shelbyville
                                           St. Claire Medical Center
MAINE
                                           McDowell Appalachian Regional
Central Maine Medical Center               ARH Regional Medical Center
St. Mary's Hospital                        Pikeville Methodist Hospital
                                           Ephraim McDowell Regional
                                            Medical Ctr.
MINNESOTA
                                           Logan Memorial Hospital
Glencoe Area Health Center                 Williamson Appalachian
                                            Regional Hosp
Northfield Hospital
Community Hospital & Health Care Ctr.      MICHIGAN
 
Itasca Medical Center                      Community Health Care Ctr. of
                                            Branch
International Falls Memorial Hospital      Gratiot Community Hospital
St. Joseph's Medical Center                Marquette General Hospital
Rice Memorial Hospital                     Central Michigan Community
                                            Hospital
Cannon Falls Community Hospital            Sturgis Hospital
Cook County North Shore Hospital           Munson Medical Center
Mercy Hospital                             Northern Michigan Hospital
Mille Lacs Hospital
Long Prairie Memorial Hospital             MISSISSIPPI
 
Kanabec Hospital                           North Mississippi Medical
                                            Center
                                           Magnolia Hospital
MISSOURI
                                           Baptist Memorial Hospital--
Bothwell Regional Health Center            Northwest Mississippi
                                            Regional Med.
St. Mary's Health Center                   Riley Memorial Hospital
Phelps County Regional Medical Center      Field Memorial Community
                                            Hospital
Northeast Regional Health System           Wesley Medical Center
Hannibal Regional Hospital                 Southwest Mississippi
                                            Regional Med. Ctr.
Capital Region Medical Center              Baptist Memorial Hosp.--
                                            Golden Triangle
Audrain Medical Center                     Anderson Regional Medical
                                            Center
Moberly Regional Medical Center            Natchez Community Hospital
Skaggs Community Health Center             North Oak Regional Medical
                                            Center
Southeast Missouri Hospital Assoc.
Mineral Area Regional Medical Center       MISSOURI
 
Three Rivers Doctors RMC                   Callaway Community Hospital
Lucy Lee Hospital                          Saint Francis Medical Center
Pike County Memorial Hospital              Lake Regional Health System
 
MONTANA
                                           NEBRASKA
 
Holy Rosary Hospital                       Good Samaritan Hospital
St. Peters Community Hospital              Saint Francis Medical Center
Central Montana Medical Center             Mary Lanning Memorial
                                            Hospital
St. James Community Hospital               Beatrice Community Hosp. &
                                            Health Center
Kalispell Regional Medical Center          Memorial Hospital
Bozeman Deaconess Hospital                 Regional West Medical Center
                                           Great Plains Regional Medical
                                            Center
NEW HAMPSHIRE
                                           Fremont Area Medical Center
Mary Hitchcock Memorial Hospital           Columbus Community Hospital,
                                            Inc.
Lakes Region General Hospital
Cheshire Medical Center                    NEW MEXICO
 
                                           San Juan Regional Medical
                                            Center
NORTH CAROLINA
                                           Eastern New Mexico Medical
Northern Hospital of Surry County          Espanola Hospital
Scotland Memorial Hospital                 Holy Cross Hospital
Rutherford Hospital                        Carlsbad Medical Center
Park Ridge Hospital                        Lea Regional Medical Center
Lenoir Memorial Hospital
Iredell Memorial Hospital, Inc.            NORTH DAKOTA
 
Southeastern Regional Medical Center       St. Ansgar's Health Center
Watauga Medical Center                     Jamestown Hospital
Davie County Hospital
Wilkes Regional Medical Center             OHIO
 
Transylvania Community Hospital            Southern Ohio Medical Center
FirstHealth Moore Regional Hospital        Union Hospital
Lake Norman Regional Medical Center        Marion General Hospital
Craven Regional Medical Center             O'Bleness Memorial Hospital
Catawba Memorial Hospital                  Providence Hospital, Inc.
Davis Medical Center                       Firelands Community Hospital
Nash General Hospital                      Wooster Community Hospital
                                           St. Vincent Charity Hospital
OKLAHOMA
                                           Genesis HealthCare System
Baptist Regional Health Center             McCullough-Hyde Memorial
                                            Hospital, Inc.
St. Joseph RMC of Northern OK, Inc.        Mercy Hospital of Hamilton/
                                            Fairfield
Medical Center of Southeast Oklahoma       Fisher-Titus Memorial
                                            Hospital
Jane Phillips Memorial Medical Center,     Middletown Regional Hospital
 Inc.
Jackson County Memorial Hospital           Aultman Hospital
Duncan Regional Hospital                   Mercy Memorial Hospital
                                            Memorial Hospital
Muskogee Regional Medical Center           Blanchard Valley Hospital
McAlester Regional Health Center           Coshocton County Memorial
                                            Hospital
Mercy Memorial Health Center               Community Hospitals of
                                            Williams County
McCurtain Memorial Hospital                Fort Hamilton-Hughes Memorial
                                            Hosp.
Stillwater Medical Center                  South Pointe Hospital
Grady Memorial Hospital                    Adena Regional Medical Center
Haskell County Hospital                    Clinton Memorial Hospital
Sayre Memorial Hospital                    Mary Rutan Hospital
Elkview General Hospital
                                           OREGON
 
PENNSYLVANIA
                                           Mid-Columbia Medical Center
Geisinger Medical Center                   Three Rivers Community
                                            Hospital
Evangelical Community Hospital             Mercy Medical Center
Lewistown Hospital                         St. Charles Medical Center
Clearfield Hospital                        Merle West Medical Center
Robert Packer Hospital                     Lower Umpqua Hospital
Northwest Medical Center                   Tillamook County General
                                            Hospital
Clarion Hospital                           North Lincoln Hospital
Conemaugh Valley Memorial Hospital         Valley Community Hospital
Meadville Medical Center                   Bay Area Hospital
Waynesboro Hospital
Greene County Memorial Hospital            SOUTH CAROLINA
 
Chambersburg Hospital                      Georgetown Memorial Hospital
Shamokin Area Community Hospital           Springs Memorial Hospital
Pocono Medical Center                      The RMC of Orangeburg &
                                            Calhoun Co.
                                           Tuomey Regional Medical
                                            Center
SOUTH DAKOTA
                                           Self Memorial Hospital
Northern Hills General Hospital            .............................
Brookings Hospital                         TENNESEE
 
Sacred Heart Health Services               Hillside Hospital
Avera Queen of Peace Hospital              Bradley County Memorial
                                            Hospital
Avera St. Luke's                           Southern Tennessee Medical
                                            Center
St. Mary's Healthcare Center               Cookeville Regional Medical
                                            Center
Sturgis Community Health Center            Lakeway Regional Hospital
Gregory Healthcare Center                  Athens Regional Medical
                                            Center
Lookout Memorial Hospital                  Maury Regional Hospital
Siouxland Surgery Center                   Baptist DeKalb Hospital
                                           Crockett Hospital
TEXAS
                                           Jellico Community Hospital
Memorial Medical Center                    Smith County Memorial
                                            Hospital
Graham General Hospital                    Livingston Regional Hospital
East Texas Medical Center--Pittsburgh      White County Community
                                            Hospital
Pampa Regional Medical Center
Crane Memorial Hospital                    UTAH
 
Permian General Hospital                   Dixie Regional Medical Center
Hansford County Hospital District          Delta Community Medical
                                            Center
Spohn Klenberg Memorial Hospital           Central Valley Medical Center
Pecos County Memorial Hospital             Heber Valley Medical Center
Hill Regional Hospital                     Bear River Valley Hospital
East Texas Medical Center--Jacksonville
Memorial Medical Center of East Texas      VERMONT
 
Gulf Coast Medical Center                  Central Vermont Medical
                                            Center
Presbyterian Medical Center at Winnsboro   Brattleboro Memorial Hospital
Harris Methodist Erath County              Southwestern Vermont Medical
                                            Center
Alice Regional Hospital
East Texas Medical Center--Mt. Vernon      WASHINTON
 
Memorial Medical Center--Livingston        Saint Mary Medical Center
Parkview Regional Hospital                 Affiliated Health Services
Colorado--Fayette Medical Center           Island Health Northwest
Navarro Regional Hospital                  Central Washington Hospital
Glen Rose Medical Center                   St. John Medical Center
Nacogdoches Memorial Hospital              Olympic Memorial Hospital
Northeast Medical Center
Jackson County Hospital                    WEST VIRGINIA
 
Scenic Mountain Medical Center             West Virginia University
                                            Hospitals, Inc.
Nacogdoches Medical Center                 Greenbrier Valley Medical
                                            Center
El Campo Memorial Hospital                 United Hospital Center
Trinity Valley Medical Center              Princeton Community Hospital
Covenant Hospital--Levelland               Fairmont General Hospital,
                                            Inc.
Golden Plains Community Hospital           Beckley Appalachian Regional
                                            Hospital
                                           Raleigh General Hospital
WISCONSIN
 
St. Michael's Hospital                     WYOMING
 
Memorial Hospital of Taylor County         Ivinson Memorial Hospital
Amery Regional Medical Center              Evanston Regional Hospital
The Monroe Clinic
St. Joseph's Hospital
Memorial Hospital of Burlington
Mercy Health System
Beaver Dam Community Hospital
Columbus Community Hospital
St. Agnes Hosp.
Howard Young Medical Center, Inc.
St. Luke's Memorial Hospital
St. Mary's Medical Center
Holy Family Memorial, Inc.
Bay Area Medical Center, Inc.
Memorial Medical Center--Ashland
 


                                 

Statement of the Hon. Jim Saxton, a Representative in Congress from the 
                          State of New Jersey
    Chairman Johnson and Ranking Member Stark, I thank you for allowing 
me to provide written comment on Medicare's Geographic Cost Adjusters 
as they pertain to the State of New Jersey. The New Jersey delegation 
has worked to address the fiscal health of our hospitals over the last 
several years, and has specifically concentrated on rectifying the 
inequities in Medicare's geographic cost adjusters.
    To preserve Medicare for the next ten years, the Balanced Budget 
Act of 1997 (BBA) slowed the rate of growth in payments to hospitals, 
physicians, and other providers; and established new payment systems 
for skilled nursing facilities and home health agencies. At the time of 
enactment, it was estimated that this would result in a savings of 
$116.4 billion over five years, $1.8 billion of which New Jersey 
hospitals were expected to shoulder.
    Since that time, the actual Medicare payment reductions resulting 
from the BBA have been much larger than originally intended. As a 
result, beneficiary access to health care has suffered as the health 
care facilities have been faced with deep cuts in payments.
    To remedy this situation and help improve the fiscal health of many 
Medicare providers, Congress passed the Balanced Budget Refinement Act 
of 1999 (BBRA) and the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA) to help restore funding 
to hospitals and other critical providers. Unfortunately, New Jersey 
hospitals received only a small fraction of the givebacks. This was due 
in large part to the fact New Jersey hospitals did not qualify for many 
of the major provisions in each bill, including aid to rural hospitals. 
In fact, N.J. hospitals only received $110 million over five years in 
BBRA and $281 million over five years from BIPA.
    Most recently, I was pleased to see the House pass the Medicare 
reform bill in June 2002 because it will benefit New Jersey hospitals 
by restoring almost $300 million in Medicare payments over a 10-year 
period. Looking in the future, the Congress must continue their efforts 
at ensuring fair and adequate Medicare payments to hospitals.
    However, aside from the Medicare provider restoration efforts, the 
New Jersey delegation has been examining other fundamental payment 
problems within the Medicare program, including the area wage index--a 
geographic adjuster used by Medicare to reflect differences in regional 
labor markets. New Jersey is unique from the rest of the country in 
that it is bordered by the first and fifth largest cities in the United 
States. Many New Jersey residents commute into these metropolitan hubs 
for employment and recreational purposes. New Jersey hospitals and 
other healthcare facilities have been and continue to be forced to 
compete for labor resources and patients in each of these markets. As a 
result, the largest and fastest growing cost of providing health care 
in New Jersey is not building new facilities or developing new 
technology, but workers' salaries.
    Yet, while New Jersey hospitals compete for the same workers and 
patients in these areas, they have significantly lower Medicare wage 
indexes. This means that New Jersey hospitals receive hundreds of 
millions of dollars less in Medicare reimbursement than hospitals in 
the New York and Philadelphia metropolitan statistical areas (MSAs). 
For example, hospitals in Bergen County, New Jersey, some of which are 
only a few miles from New York City, receive $25 million less annually 
than hospitals in the New York MSA.
    New Jersey hospitals simply cannot continue to compete with two of 
the nation's largest cities while facing the strains of an 
unprecedented workforce shortage. They need increased wages to retain 
nurses and other healthcare professionals. More than 40 percent of New 
Jersey hospitals ended 2000 in the red, and with $21 billion in looming 
budget cuts already set in law, the financial condition of this 
critical industry will only become bleaker.
    While part of my district is currently satisfied with its MSA 
designation, Ocean County would benefit tremendously if given the 
opportunity to join the New York City MSA. In fact, as a whole, if 
hospitals in New Jersey were given the opportunity to reclassify into 
the New York City MSA as many as 60 hospitals in New Jersey would 
garner $241 million in additional wage-adjusted payments. Therefore, I 
would support the Federal Government's efforts of ensuring equity in 
the calculation of area wage indexes among hospitals in northern New 
Jersey and New York City as well as among southern New Jersey hospitals 
and the Philadelphia MSA.
    I was extremely pleased to see the inclusion of a GAO study on 
improvements that can be made in the measurement of regional 
differences in hospital wages in H.R. 4954, the Medicare Modernization 
and Prescription Drug Act of 2002. Specifically, the study would 
examine the use of MSAs for purposes of computing and applying the wage 
index and whether the boundaries of such areas accurately reflect local 
labor markets. The study would also examine whether regional inequities 
are created as a result of infrequent updates of such boundaries.
    This study is a critical step in the right direction, and I thank 
the leadership for working with the New Jersey delegation to address 
the critical fiscal problems faced by the New Jersey hospitals.
    Once again, I appreciate having the opportunity to provide written 
testimony on this issue and thank the Committee for their attention to 
the Medicare Geographic Cost Adjuster issue and for holding this 
important hearing.

                                 

                                           Sibley Memorial Hospital
                                               Washington, DC 20016
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515-6353

Dear Madam Chairman:

    On behalf of Sibley Memorial Hospital, I am writing today to 
express our strong support of the testimony offered by both William J. 
Scanlon, Director, Health Financing and System Issues, U.S. General 
Accounting Office (GAO), and Glenn D. Hackbarth, Chairman, Medicare 
Payment Advisory Commission (MEDPAC), at the July 23rd Subcommittee on 
Health Hearing on Medicare's Geographic Cost Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of 2001, in section 304(b) of Public Law 
106-554, a process was established under which an appropriate statewide 
entity may apply to have all the geographic areas in the State treated 
as a single geographic area for purposes of computing and applying the 
area wage index. The District of Columbia would be an excellent example 
of where this ``statewide'' designation should be applied and even the 
Virginia Hospital and Health Care Association submitted a letter of 
support of the District's effort to designate itself as such. However, 
the Centers for Medicare and Medicaid Services (CMS) commented that 
they believed that ``Congress did not intend for section 304(b) to 
address the type of situation presented by Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospitals, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured. Already two District hospitals have 
recently closed and half of the remaining hospitals operate in the red. 
The future of health care in the District of Columbia may be placed 
jeopardy if corrective action is not taken.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me at 202-364-7609.
            Sincerely,
                                                Chuck Crickenberger
                              Director, Contracts and Reimbursement

                                 

              Statement of the Hon. Christopher H. Smith,
       a Representative in Congress from the State of New Jersey
    I'd like to thank and commend the Chairman and the committee for 
holding this very important hearing on Medicare's Geographic Cost 
Adjustors, an issue of national importance. I'd also like to thank my 
New Jersey colleague, Congresswoman Marge Roukema, for her very 
excellent and comprehensive statement on the Medicare wage index and 
its impact on northern and central New Jersey hospitals. I'd like to 
add my full support for, and endorsement of, her testimony.
    I think one of the best case studies clearly demonstrating the need 
to reform Medicare's Geographic Cost Adjustor can be found by examining 
New Jersey's hospitals. Our state's hospitals have been in a terrible 
financial condition for several years in a row. If something is not 
done very soon, many of them will run their bond ratings into the 
ground, run out of cash, and go bankrupt. Approximately one third of 
our state's acute care hospitals are running in the red. According to 
data recently published by the American Hospital Association (AHA), New 
Jersey's average Medicare margin is negative 8.1 percent, and has been 
negative for several years. This means that on average, every time a 
hospital treats a Medicare patient, the hospital will get back less 
than its actual cost of providing care. Mr. Chairman, no hospital on 
the planet can lose money year in and year out and operate 
indefinitely. Statewide, our hospitals are losing $300 million a year 
in treating Medicare patients.
    Several explanations have been offered to explain New Jersey's 
hospital crisis. However, none of the traditional explanations really 
account for it. Some have argued that New Jersey has too many hospitals 
and overcapacity leads to unused beds, high overhead costs, and red 
balance sheets. That might be true in individual hospitals, but there's 
no statistical evidence showing New Jersey suffers from system-wide 
overcapacity or underutilization problems. New Jersey's hospital beds 
per 1000 persons is tied for 23rd among 50 states, according to the 
2000 American Hospital Association Annual Survey. The national average 
is 3.0 beds per 1000 persons. New Jersey has 3.1 beds per 1000 people. 
This is not abnormally high. As far as utilization is concerned, New 
Jersey's admissions per 1000 persons is tied for 17th out of 50 states, 
and total admissions are higher than the national average, not lower 
(130 in NJ vs. 120 nationwide). Obviously, overcapacity and 
underutilization cannot explain New Jersey's hospital financial crisis.
    The other ``usual suspect'' is the average length of stay (ALOS) 
for our state's inpatient hospitals. Here again, while New Jersey's 
average length of stay is 7.5 days, according to CMS data for FY 2000, 
and higher than the national average of 6.0 days, it cannot fully 
explain New Jersey's negative Medicare margins. New York has an average 
length of stay of 8.3 days, higher than both New Jersey and the 
national average, but yet their hospitals' Medicare margins are 
substantially better than New Jersey's (negative 8.1%) at positive 
2.1%, according to AHA's latest data. If higher-than-average length of 
stay were the main variable driving New Jersey's sharply negative 
Medicare margins, shouldn't New York also have negative Medicare 
margins? One would expect to see that, yet the evidence is not there. 
Again, it is clear ALOS is not the key to understanding why New 
Jersey's hospitals are in a financial crisis.
    Mr. Chairman, our delegation has studied this issue very closely 
for the better part of a decade, trying to figure out why our hospitals 
are consistently financially underperforming compared to their 
neighbors in Pennsylvania and New York. We have concluded that the one 
factor seeming to explain the vast majority of this difference relates 
to a huge gap in the wage adjustment factor.
    Under current law, hospitals in nearby New York City receive a 44% 
add-on for every labor-related dollar of payment received from 
Medicare. New Jersey's hospitals, on the other hand, receive a wage 
adjustor of just four to 18 percent. In many cases, New Jersey 
hospitals in Bergen, Middlesex, Monmouth, and Union Counties are far 
closer to New York City and Staten Island than hospitals actually 
included in Medicare's New York City Metropolitan Statistical Area 
(MSA), which include hospitals as far away as Westchester and Orange 
Counties. By almost any measure, New Jersey's hospitals are competing 
for the same labor pool as the hospitals in the greater New York City 
MSA.
    I cannot emphasize enough that many of New Jersey's hospitals 
suffer significant financial inequities due to Medicare's cost 
adjustment factors and those inequities have a severe negative impact 
on the hospitals' financial condition. In fact, if hospitals in 
northern and central New Jersey received the same labor adjustment as 
its close neighbors in New York, it would dramatically improve New 
Jersey's Medicare margins. According to estimates prepared by the New 
Jersey Hospital Association, our state's overall loss of $300 million 
due to negative Medicare margins would be reduced by nearly $244 
million. The correlation between the two variables is an incredibly 
high.81. This means 81% of New Jersey's problem of low Medicare margins 
can be explained by just this one variable--the Geographic Cost 
Adjustor.
    As the Chairman knows, to account for differences in market prices 
for labor and other inputs across the nation, Medicare uses several 
geographic cost adjustment factors in its payment systems, including 
the area wage index for the hospital inpatient acute care prospective 
payment system (PPS). For the hospital PPS, Medicare uses two separate 
operating base payments known as the ``standardized amounts.'' One 
standardized amount is for hospitals in large urban areas, defined as a 
metropolitan statistical area with a population of one million or more. 
The other standardized amount is for hospitals located in all ``other 
urban areas and rural areas.''
    Many of the hospitals in my district are designated as ``other 
urban.'' I support MedPAC's recommendation that differences between the 
two standardized amounts be eliminated, and that hospitals located in 
any urban area should be reimbursed using the ``large urban'' 
standardized amount as the base payment for Medicare operating 
payments.
    Another adjustment factor Medicare uses to reflect differences in 
labor markets is the area wage index. New Jersey's wage index is lower 
than neighboring areas, even though it must compete with hospitals in 
these nearby localities for labor. With New Jersey geographically 
positioned between New York City and Philadelphia, cities which boast 
the first and fifth highest rankings in city populations in the 
country, significant parts of the State share the same labor markets 
with these metropolitan areas. If you examine actual commuting 
patterns, you will see the labor markets in New Jersey and in the 
Philadelphia and New York markets are essentially two big markets that 
stretch across state lines.
    In late 1999, the Metropolitan Area Standards Review Committee 
recognized that the settlement and commuting patterns of the mid-
Atlantic region constituted larger entities, and formally suggested 
that a larger ``megapolitan'' area for New York and New Jersey exists. 
Sadly, when the MASRC proposed formally merging New Jersey's MSAs into 
one big megapolitan area, the New Jersey Chamber of Commerce opposed 
the move, arguing it would hurt its efforts to market New Jersey as a 
place to do business. Personally, I believe their opposition was 
baseless and foolish in the extreme. In the end, the Chamber's 
opposition caused the MASRC to reverse course, and leave the MSA 
borders as is. As a result, New Jersey lost out on hundreds of millions 
of dollars each year that our hospitals desperately need to operate. 
The fact that political opposition scuttled the proposal does not mean 
the MSARC was wrong. On the contrary, I believe the experts were 
correct all along.
    It is commendable that the Medicare Modernization and Prescription 
Drug Act, as passed by the House, includes a provision my fellow New 
Jersey colleagues and I requested. The requested provision directs the 
General Accounting Office to conduct a study of the Medicare wage 
index. The study would specifically examine the use of metropolitan 
statistical areas for purposes of computing and applying the wage index 
and whether the boundaries of such areas accurately reflect local labor 
markets. The study also would examine whether regional inequities are 
created as a result of infrequent updates to such boundaries. 
Additionally, the study would examine the portions of hospital cost 
reports relating to wages, and methods for improving the accuracy of 
the wage data and for reducing inequities resulting from differences 
among hospitals in the reporting of wage data. It is important that GAO 
examine both the use of MSAs and the consistency and equity of wage 
data.
    The current Medicare wage index for Trenton, New Jersey--within my 
district--is 1.0419, as compared to the New York City index of 1.4427. 
As a result, for every $1 in Medicare services used, $1.04 will be paid 
to one of my Trenton hospitals, but $1.44 will be paid to a hospital in 
New York City. When a Trenton hospital tries to hire a nurse who lives 
in Hamilton, New Jersey, the Trenton hospital will have substantially 
less resources at their disposal to offer. Given the national shortage 
of nurses, the massive wage index disparity puts Trenton hospitals at a 
major disadvantage vis-a-vis their competitor hospitals in New York.
    Even though Medicare's wage index is patently unfair, if you look 
hard enough, there is evidence that the labor market for health care 
workers is one and the same in New Jersey and New York. According to 
data collected and reported by the Bureaus of Labor Statistics (2000 
Occupational Employment Statistics), the mean annual salary for the 
standard classification for ``healthcare practitioners and technical 
occupations'' across all standard industrial classifications (SICs) is 
$58,770 for the Trenton Primary Metropolitan Statistical Area (PMSA), 
while it is $55,760 for the NY, NY PMSA. I do not draw conclusions from 
this snapshot of BLS data for all SICs, but it does reinforce the need 
to examine the Medicare hospital wage index as far as its current 
ability to reflect the relative cost of labor.
    The Medicare Modernization and Prescription Drug Act, passed by the 
House last month, provides significant assistance to our nation's 
hospitals, and will benefit New Jersey hospitals by restoring almost 
$300 million in Medicare payments over a 10-year period. I greatly 
appreciate the efforts of this committee to help our nation's 
hospitals, but Congress must continue and reinforce efforts at ensuring 
fair and adequate Medicare payments to hospitals.
    I thank the Chairman for her interest in this important issue.

                                 

                              South Central Regional Medical Center
                                          Laurel, Mississippi 39440
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515-6353

Re: LComment on Medicare's Geographic Cost Adjusters by South Central 
    Regional Medical Center--Medicare Provider Number 25-0058

Madam Chairwoman and Members of the Subcommittee:

    On Tuesday, July 23, 2002, the Subcommittee on Health of the 
Committee of Ways and Means held a hearing to assess geographic cost 
adjusters used for Medicare payment. Congresswoman Nancy L. Johnson, 
Chairwoman, invited individuals and organizations not scheduled for an 
oral appearance to submit a written statement for consideration by the 
Committee. Please accept the following as the comment of South Central 
Regional Medical Center, Medicare Provider Number 25-0058.

LSouth Central Regional Medical Center supports the continuation of the 
                    Medicare geographic reclassification program.

    South Central Regional Medical Center (``South Central'') is a 285-
bed Medicare-designated sole community hospital and rural referral 
center located in Laurel, Jones County, Mississippi. South Central's 
nearest competitors offering comparable services are located 
approximately 30 miles from South Central. South Central provides vital 
health care services that residents of Jones County and the surrounding 
areas otherwise would receive from hospitals in larger medical 
communities many miles distant. These services include emergency 
services, a women's center, rehabilitation services, a wellness center, 
surgical services, diagnostic and imaging services, cardiac services, 
outpatient services, a nursing home, home health services and hospice 
services.
    South Central supports continuation of the Medicare geographic 
reclassification program. Through this program, South Central and other 
rural hospitals receive Medicare payment in amounts comparable to 
payment received by competitor urban hospitals located across county 
lines.
    Until fiscal year 1995, South Central was periodically reclassified 
to the Jackson, Mississippi Metropolitan Statistical Area (MSA) and 
received a substantial benefit from reclassification. Reclassification 
allowed South Central to compete, not only with nearby urban hospitals, 
but also with nearby rural hospitals that reclassified to the Jackson 
MSA and the Biloxi-Gulfport-Pascagoula MSA.
    For example, in fiscal year 1993, South Central's wage index 
increased from the rural floor of .6963 to .7740 as a result of 
reclassification. This adjustment increased the amount of South 
Central's payment per discharge by $234.25 allowing South Central to 
provide an increased number of health care services to residents in 
central Mississippi.
    Additional payment from geographic reclassification also allowed 
South Central to participate in many community activities. For example, 
South Central initiated a project known as ALIVE Jones County to 
develop a community health improvement plan focusing on four critical 
issues facing Jones County: breakdown of the family, teenage pregnancy, 
health care access and poor nutrition and exercise. South Central also 
serves as a training site for many area schools, universities and 
organizations, and provides a variety of community education programs, 
including a diabetes education and support group. South Central's 
Women's Life Center offers a health library complete with video tapes, 
books and pamphlets, as well as classes such as the Prepared 
Childbirth, Sibling Preparation and Safe Sitter classes. In addition, 
the Women's Life Center offers a monthly luncheon program called 
``Speaking of Women'' and an annual Women's Life Conference which is 
Mississippi's premier women's health and wellness event. In addition to 
these activities, South Central sponsors Health Break, a weekly 
television program which features physicians and other health 
professionals discussing topics of interest to the community relating 
to health and well-being. Thus, Medicare geographic reclassification 
has benefitted not only South Central, but all residents of Jones 
County and the surrounding areas.

LProblems with the Medicare geographic reclassification program 
                    jeopardizing South Central's continued viability.

    Although South Central supports the continued existence of the 
Medicare geographic reclassification program, there are serious 
problems with the system that currently threaten South Central's 
continued viability as a provider of health care services in central 
Mississippi.

LFormation of new MSAs may unexpectedly cause rural hospitals located 
                    near the MSA to lose their ability to compete.

    In fiscal year 1995, the Hattiesburg, Mississippi MSA was formed, 
comprised of Forrest and Lamar counties. The Hattiesburg MSA borders 
Jones County, where South Central is located. In fiscal year 2002, all 
of the hospitals located within the Hattiesburg MSA reclassified for 
wage index purposes to the next closest MSA, the Biloxi-Gulfport-
Pascagoula MSA. This reclassification resulted in significant increased 
Medicare payments to these hospitals. However, it left the Hattiesburg 
MSA empty with a wage index equal to the Mississippi rural wage index. 
Suddenly, through no action of its own and no shift in the labor 
market, South Central's ability to compete with other hospitals in the 
area was drastically reduced. South Central now may apply for 
reclassification to the Hattiesburg MSA but, unlike each of its 
competitors, receives no benefit from such reclassification.
    Since fiscal year 1995, the MGCRB has reclassified most Mississippi 
rural referral centers, including South Central's competitors, to MSAs 
with a higher wage index. South Central's competitors include rural 
referral centers in Meridian, Mississippi (58 miles distant) and in 
Hattiesburg, Mississippi (23 miles distant). These hospitals each 
reclassified to the Jackson MSA and the Biloxi-Gulfport-Pascagoula MSA. 
As a result of its reclassification to the empty Hattiesburg, 
Mississippi MSA and its inability to reclassify to any other urban 
area, South Central receives a lower wage index than any other rural 
referral center in Mississippi meeting the reclassification criteria.
    This situation places South Central in the position of 
reclassifying to the Hattiesburg MSA, which receives the rural floor 
wage index (.7680), while its nearest competitors qualify for 
reclassification to the Biloxi-Gulfport-Pascagoula MSA or the Jackson 
MSA, each of which receive a much higher reclassified wage index (.8667 
and.8368, respectively). Based on fiscal year 2003 PPS rates, South 
Central will receive an estimated $362.21 less per Medicare discharge 
in fiscal year 2004 than it would have received had it reclassified to 
the Jackson MSA, and an estimated $268.83 less per Medicare discharge 
than it would have received had it reclassified to the Biloxi-Gulfport-
Pascagoula MSA. Furthermore, South Central receives an estimated 
$359.20 less per Medicare discharge than it would receive if it were 
located across the county line in the Hattiesburg MSA, due to the 
increase in the DSH adjustment for an urban area. South Central's 
payment from Medicare on a per discharge basis is lower than that of 
any of its competitor hospitals in Hattiesburg, Meridian, Jackson and 
the Mississippi Gulf Coast and than any other reclassification-
qualifying rural referral center in Mississippi.\1\
---------------------------------------------------------------------------
    \1\ Assuming that South Central has 4,350 discharges in FY 2003 (a 
number comparable to previous year), South Central's total Medicare 
payment for FY 2003 will be $1,575,618.28 less than it would be if 
South Central were reclassified to the Jackson MSA, $1,169,390.92 less 
than it would be if South Central were reclassified to the Biloxi-
Gulfport-Pascagoula MSA, and $1,562,514.34 less than it would be if 
South Central were located within the Hattiesburg MSA.
---------------------------------------------------------------------------
    In fiscal year 2002, South Central was the only rural referral 
center in Mississippi that qualified for reclassification, but did not 
receive a benefit from such reclassification. South Central competes 
with reclassified hospitals for labor from the same labor pool, buys 
supplies and equipment from the same suppliers and has costs comparable 
to the competing hospitals. As a rural referral center, South Central 
must comply (as must other referral centers) with federal statutes, 
such as the Emergency Medical Treatment and Active Labor Act, that 
restrict activities of rural referral centers and impose upon South 
Central expensive administrative and clinical burdens. Yet South 
Central receives lower Medicare payments per discharge than any of its 
competitors.

LThe reduction in Medicare payment to South Central may cause serious 
                    detrimental effects to Jones County and the 
                    surrounding areas.

    According to the U. S. Census Bureau, in 2000, 14.2% of the 64,536 
residents of Jones County (over 9,000 people) were over the age of 65. 
Obviously, South Central's ability to provide services to Medicare 
recipients is vital to the residents of Jones County. However, the 
drastic reduction in Medicare payment that South Central experiences as 
a result of the formation of the Hattiesburg MSA threatens South 
Central's ability to provide services to these individuals.
    Additionally, like many hospitals, South Central's ability to 
remain viable as a provider of health care services in central 
Mississippi is largely dependent upon Medicare revenues. Therefore, the 
reduction in Medicare payment to South Central that results from its 
inability to gain a benefit from reclassification to an urban area 
affects not only the health care services that it provides to Medicare 
beneficiaries, but its overall ability to provide quality health care 
services at prices comparable to its competitors. South Central's 
inability to compete with nearby hospitals for labor threatens its very 
existence.
    In addition to providing health care services and as noted above, 
South Central participates actively in many community activities, 
including ALIVE Jones County, the diabetes education and support group, 
Health Break and activities sponsored by the Women's Life Center. The 
reduction in funds that South Central receives threatens its ability to 
participate in such outside activities. Thus, Jones County is 
threatened in its ability to obtain not only health care services, but 
many community services as well.
    There are several possible ways to correct these inequities 
suffered by South Central and other rural hospitals that may reclassify 
only to an empty MSA. The wage index rules could be revised to provide 
that when all hospitals within an MSA (the ``home MSA'') qualify to 
receive payment rates of another MSA (the ``reclassified MSA''), the 
home MSA will be assigned the same wage index as the reclassified MSA. 
Alternatively, the geographic reclassification rules could be revised 
to state that if all urban hospitals within an MSA are reclassified to 
a reclassified MSA, rural hospitals otherwise seeking reclassification 
to the home MSA will be exempt from proximity criteria and will be 
reclassified to the reclassified MSA. Finally, a grandfather clause 
could be added to the rules for rural hospitals that are detrimentally 
affected by the formation of a new MSA, which would allow a rural 
hospital to continue to reclassify to the previous MSA to which it was 
reclassified before the formation of the new MSA.
    On behalf of South Central and other rural hospitals experiencing 
similar problems as a result of reclassification to an empty MSA, I 
would like to thank the Subcommittee on Health for the opportunity to 
submit this comment.
            Sincerely,
                                                  Dinetia M. Newman

                                 

           Statement of Sutter Health, Sacramento, California
    Chairman Johnson and members of the committee, we appreciate the 
opportunity to present this written statement on the geographic 
practice costs adjustment in the Medicare Physician Fee Schedule. 
Because Sutter Health serves more than twenty Northern California 
counties and has care centers in more than 100 communities, we feel we 
are in a unique situation to provide insights into the practical impact 
of the fee schedule.
    We would like to focus on a particularly troubling provision of the 
physician fee schedule that unfairly impacts physicians practicing in 
certain areas. The problem stems from the methodology used in 1997 to 
create new payment ``localities.'' Each locality includes one or more 
counties within a state. Under the physician fee schedule each locality 
has a unique geographic adjustment factor that reflects the relative 
resource cost differences among all localities. This factor is applied 
to the base rate to determine the adjusted rate to be paid to 
physicians in the respective locality.
    The 1997 methodology established unique localities with costs that 
were at least 5 percent higher than the combined average costs of all 
lower-cost localities in the state. The rest of the localities, i.e., 
those with cost equal to or less than the 5 percent threshold, within 
the state were combined into a single rest-of-state locality, because, 
it was assumed, their costs were relatively homogenous. These rest-of-
state localities are called ``Locality 99.''
    The major flaw in this methodology is that Medicare did not start 
in 1997 by looking at the relative cost difference of each county, 
instead it used the localities established in 1967 for Medicare's 
reasonable charge based physician payment system. The current 
localities in all states were established under the 5 percent threshold 
noted above by comparing the then existing locality costs, not by 
comparing individual county costs. That is, the ``charge based 
localities'' were not broken down into their county components.
    The result is, at least in California, that the state's Locality 99 
includes four counties with cost differences exceeding 5 percent. In 
other words, if Medicare had used individual counties instead of the 
``charge based localities,'' the counties of Santa Cruz, Sonoma, Santa 
Barbara and San Diego would be grouped in more appropriate localities 
or new unique localities. And, they would not be grouped in Locality 
99.
    For example, under the ``charge based localities,'' Santa Cruz 
County was in a locality with San Benito and Monterey counties. The 
costs for this locality reflected the weighted average costs among 
these counties. Two other counties, Santa Barbara and Sonoma were also 
so grouped with lower cost counties. Since the average county costs 
with these ``charge based localities'' did not exceed the average costs 
of localities with lower values by at least 5 percent, these localities 
were combined with California's rest-of-state locality, i.e., 
``Locality 99.''
    If instead of using the ``cost based localities'' to establish the 
new localities for the physician fee schedule, Medicare had started on 
a county-by-county assessment (and retained the same 5 percent 
threshold), Santa Cruz, Sonoma, Santa Barbara and San Diego counties 
would be classified as a unique California localities with adjustment 
factors ranging from about 4 percent to 6.5 percent above their current 
level.
    When confronted with this arbitrary inequity, Medicare officials, 
while acknowledging the validity of the argument, impose essentially 
non-scaleable barriers to making the fair correction.
    Medicare essentially requires that the physicians in the area from 
which the respective county would like to leave must agree to the 
change. And, if the county would be assigned to a more appropriate 
adjacent locality with a higher adjustment factor, the physicians in 
that locality would also have to support the change. Frankly, this is 
not going to happen. Under the budget neutrality provisions of the 
enabling physician fee schedule statute, the lost of the higher cost 
county would lower the adjustment rate for the remaining physicians in 
Locality 99 and the adjustment factor in the locality to which the 
county could be assigned would likely be reduced. The economic 
imperatives of this situation will always trump equity. The irony of 
this situation is that it is a problem caused by Medicare, not by the 
physicians in the higher cost counties. If Medicare had initially 
established the 1997 localities in a fair and equitable manner, we 
wouldn't, by definition, have the current inequity. But Medicare is 
implicitly saying it's the physicians' problem not Medicare's.
    We recommend that Congress establish a Medicare physician fee 
schedule payment locality reclassification option similar to the option 
available to hospitals under Medicare. In this case, however, the 
reclassification option would apply to counties. Under this option, 
Congress would adopt certain standards and, if met by a county, the 
respective county would be deemed to have met the criteria. The 
petitioning county would then be re-assigned to a more appropriate 
locality or assigned to a new unique locality.
    As an alternative, Congress could, for purposes of such 
reclassifications, suspend the budget neutrality requirements. We 
believe the former option is attractive due to its objectivity and 
fairness. It would mute the affects of the economic consequences in the 
decision making process. The criteria would be straightforward and 
known to all. The use of the ``deemed'' status would speed the decision 
making process. The latter option, while offering a simplified 
approach, would have budget consequences for Medicare. Having observed 
the geographic reclassification process for hospitals, we feel the 
former option is compelling. And certainly has a precedent. In closing, 
we invite and urge your close attention to this matter. And, we stand 
ready to assist in any way possible. The issue is simple equity.

                                 

                                         Washington Hospital Center
                                               Washington, DC 20005
                                                     August 6, 2002
House Committee on Ways and Means
The Honorable Nancy L. Johnson, Chairman
Subcommittee on Health
1102 Longworth House Office Building
Washington, DC 20515

Dear Madam Chairman:

    On behalf of The Washington Hospital Center, I am writing today to 
express our strong support of the testimony offered by both William J. 
Scanlon, Director, Health Financing and System Issues, U.S. General 
Accounting Office (GAO), and Glenn D. Hackbarth, Chairman, Medicare 
Payment Advisory Commission (MEDPAC), at the July 23rd Subcommittee on 
Health Hearing on Medicare's Geographic Cost Adjustments.
    As referenced in Mr. Scanlon's testimony, the urban hospitals in 
the Washington, DC Metropolitan Statistical Area (MSA) have 
historically been disadvantaged by the current system to adjust 
payments to hospitals for geographic differences in labor costs, 
otherwise known as the Medicare wage index. The geographic area or MSA 
for which the wage index is calculated is supposed to represent an area 
where hospitals pay relatively uniform wages. If it does not, the 
hospitals in the area may receive a labor cost adjustment that is 
higher or lower than the wages paid in their area would justify. The 
Washington, DC MSA currently encompasses the 10 urban hospitals in 
Washington, DC, 16 hospitals in Virginia, 12 hospitals in Maryland and 
2 rural hospitals in West Virginia. This geographic region is hardly a 
representative of a uniform labor market that competes for the same 
pool of employees. Consequently, when the Medicare Wage Index factor is 
applied to modify 71 percent of Medicare payments to hospitals, the 
outlying Virginia and West Virginia hospitals in our MSA benefit 
greatly from the higher average hourly wage that District of Columbia 
hospitals require to attract employees, and the District of Columbia 
Hospitals are deprived of the financial support from Medicare that is 
truly representative of the labor market costs in an urban area.
    Furthermore, in the Medicare Inpatient Prospective Payment System 
Final Rule released in August of 2001, in section 304(b) of Public 
Law106-554, a process was established under which an appropriate 
statewide entity may apply to have all the geographic areas in the 
State treated as a single geographic area for purposes of computing and 
applying the area wage index. The District of Columbia would be an 
excellent example of where this ``statewide'' designation should be 
applied and even the Virginia Hospital and Health Care Association 
submitted a letter of support of the District's effort to designate 
itself as such. However, the Centers for Medicare and Medicaid Services 
(CMS) commented that they believed that ``Congress did not intend for 
section 304(b) to address the type of situation presented by 
Washington, DC.''
    We urge your subcommittee's support to review and update the 
current geographic classification system for purposes of the Medicare 
wage index and to support the findings and recommendations of the GAO 
and MEDPAC. It is a system that unfairly penalizes urban hospitals that 
fall into MSAs that are not representative of a single labor market. 
District of Columbia hospitals, as all urban hospitals, continue to 
struggle financially due to rising health care costs and the provision 
of health care to the uninsured. Already, two District hospitals have 
recently closed and half of the remaining hospitals operate in the red. 
The future of health care in the District of Columbia may be placed 
jeopardy if corrective action is not taken.
    Thank you for your consideration. If you have any further 
questions, please do not hesitate to contact me at (202) 877-6225.
            Sincerely,
                                                  Sean B. Gallagher

                                 

 Statement of the Hon. Jerry Weller, a Representative in Congress from 
                         the State of Illinois
    Chairwoman Johnson, I appreciate the opportunity to submit 
testimony for the record regarding Medicare's Geographic Cost 
Adjustors.
    My home state of Illinois has 77 hospitals located in rural areas, 
nearly 34% of total hospitals in the state. These rural hospitals are 
more likely to serve large Medicare populations. In addition, rural 
residents in Illinois have higher rates of hospitalization than their 
urban counterparts. Illinois' rural hospitals depend on government 
payments as the government is the primary payor for care. Fifty-nine 
percent of Illinois rural hospitals' gross patient revenue was derived 
from government sources in the year 2000. It is important to note that 
Medicare contributed 48.4% of rural hospitals' gross revenue while 55% 
of discharges from rural hospitals were Medicare patients.
    Illinois has many hospitals that are negatively affected by the 
Medicare Wage Index and their Metropolitan Statistical Area (MSA) 
classification. In my district, there are multiple rural hospitals 
which must compete with the nearby Chicago MSA for labor including 
nurses and other medical personnel. Community Hospital of Ottawa (in 
LaSalle County), and Riverside Medical Center (in Kankakee County) as 
well as nearby St. Margaret's Hospital in Spring Valley, Illinois are 
among those most affected. These rural hospitals have problems 
attracting and maintaining staff because of the higher wage rates paid 
in the nearby urban area. For example, Community Hospital of Ottawa is 
just eight miles away from the Chicago MSA border and has problems 
attracting nurses and other medical personnel because of higher wage 
rates paid in the nearby urban area. When hospitals receive higher 
reimbursement, they can pay higher salaries, creating an unfair 
advantage for certain hospitals over others.
    Congress recognized this problem in its creation of the Medicare 
Geographic Classification Review Board to reclassify hospitals if they 
met eligibility requirements as determined by CMS. In determining the 
eligibility criteria for a wage index reclassification, several tests 
are applied. One of these tests to obtain a wage index reclassification 
is that a rural hospital must have an average hourly wage of at least 
82% of its target MSA. However, rural hospitals often compete with 
close by urban areas for labor but cannot afford to have the same mix 
of professionals as the urban hospitals due to their lower Medicare 
reimbursement. This ``labor substitution'' often causes the rural 
hospital to ``fail'' the 82% test. An alternative to the 82% test is 
the 90% occupational mix criteria for hospitals unable to meet the 
average hourly wage criteria. The 90% occupational mix criteria 
determined if a hospital's pay rates are at least 90% of the target MSA 
pay rates for similar positions.
    However, the data used to calculate this 90% occupational mix has 
not been maintained regularly since the 1990s. Several of my district 
hospitals including Ottawa Community Hospital in my district and St. 
Margaret's Hospital near my district have continued to seek a solution 
through CMS, but have as yet been able to obtain relief. Although it 
has been demonstrated that the occupational mix changes very slowly and 
that data from years past is still accurate, CMS has refused to allow 
this data to be used for the 90% occupational mix criteria. This leaves 
a few hospitals with no regulatory solution and no relief but still in 
a position where they cannot compete effectively with their nearby 
hospital counterparts for labor. Occupational mix data will be 
available within two years since OBRA 2000 requires CMS to capture this 
data.
    Along with Community Hospital of Ottawa, Riverside Medical Center 
has also struggled with the Medicare Geographic Wage Index 
Reclassification issue. Riverside does not currently qualify for an 
administrative reclassification due to the statistical complications of 
having only two hospitals in its MSA. Riverside has lost the 
opportunity to completely recruit over 100 nurse applicants because of 
the higher wage index in the nearby Chicago MSA. In total, Riverside 
currently has 143 positions unfilled. Likewise, Community Hospital of 
Ottawa competes with hospitals just a few miles away in the Chicago MSA 
and attracted only one candidate out of nursing school this year due to 
wage differentials.
    Kankakee and LaSalle counties' proximity to the Chicago MSA means 
that there are higher wage paying opportunities at other hospitals, 
leaving many vacancies in my district hospitals. This year, the rural 
hospitals in my district have a wage index of.816--30 percent less than 
the Chicago MSA. This problem with vacancies will only grow worse for 
rural hospitals in my district as these gaps in the wage index continue 
to grow.
    Kankakee County is a Primary Metropolitan Statistical Area (PMSA) 
and is part of the Chicago-Gary-Kenosha Consolidated Metropolitan 
Statistical Area (CMSA). As such, the county is eligible for a group 
reclassification. Like nearby Gary, Indiana, the Kankakee hospitals are 
unable to meet the cost per case criteria to qualify for a group 
reclassification. Kankakee County's wage index is scheduled to drop 
to.9591 while the Chicago wage index is proposed to rise to 1.1088 in 
2003.
    If the Congress grants reclassification to specific hospitals I ask 
that Community Hospital of Ottawa and St. Margaret's Hospital, Spring 
Valley receive temporary reclassifications. Both of these hospitals 
have submitted applications to the MGCRB demonstrating that the two 
hospitals meet the 90% occupational mix criteria and therefore are 
deserving of reclassification. I would ask additionally that relief be 
granted to Kankakee hospitals, which are comparable to Gary hospitals.
    In addition, I believe the Committee should take a serious look at 
H.R. 1609, legislation to establish a floor for rural hospital payments 
at.925. This would bring many of Illinois' rural hospitals closer to a 
reasonable reimbursement rate and would help some of the specific 
hospitals that are compete directly with the Chicago MSA which is 
proposed to receive a rate of 1.1088 in 2003. Other Illinois hospitals 
in or near the 11th Congressional district that would benefit from this 
legislation include Mendota Community Hospital, Perry Memorial, Provena 
St. Joseph, St. Mary's in Streator, Illinois, Bromenn Regional Medical 
Center, and Illinois Valley in Peru.
    The Medicare Geographic Wage Index has clearly created wage 
problems for areas such as I represent. These are areas that transition 
from urban to rural, but are close enough to urban centers to make 
competition for labor a serious issue for community hospitals. Several 
rural hospitals are faced with the additional burden of being able to 
recruit and maintain staff because higher paying jobs can be found 
often within an equal distance. I commend the Subcommittee for holding 
this hearing and look forward to working with you to reach a solution 
to this problem.

                                   - 
