- MEDPAC REPORT ON MEDICARE PAYMENT POLICIES

[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

MEDPAC REPORT ON MEDICARE PAYMENT POLICIES

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

HEARING

before the

SUBCOMMITTEE ON HEALTH

of the

COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

__________

MARCH 6, 2003

__________

Serial No. 108-14

__________

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 SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana JIM MCDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona EARL POMEROY, North Dakota
JERRY WELLER, Illinois MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

Allison H. 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 LLOYD DOGGETT, Texas
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....................................................... 7

______

AARP, Betty J. Severyn........................................... 62
American Health Care Association, Mary K. Ousley................. 51
American Hospital Association, and Moses Cone Health System,
Dennis Barry................................................... 56
American Medical Association, William G. Plested, III, M.D....... 44
Renal Leadership Council, and Gambro Healthcare U.S., Larry C.
Buckelew....................................................... 39
Visiting Nurse Associations of America, and Visiting Nurses
Association of Erie County, James Jaruzewicz................... 30

SUBMISSIONS FOR THE RECORD

American Association of Ambulatory Surgery Centers, Johnson City,
TN, David Shapiro, M.D., statement............................. 72
American Association of Health Plans, statement.................. 75
American College of Surgeons, statement.......................... 77
American Gastroenterological Association, Bethesda, MD, statement 80
American Society for Gastrointestinal Endoscopy, Oak Brook, IL,
David L. Carr-Locke, M.D., letter.............................. 82
Federated Ambulatory Surgery Association, Alexandria, VA, Kathy
Bryant, letter and attachments................................. 85
National Association for Home Care and Hospice, statement........ 99
Outpatient Ophthalmic Surgery Society, statement................. 101

MEDPAC REPORT ON MEDICARE PAYMENT POLICIES

----------

THURSDAY, MARCH 6, 2003

U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.

The Subcommittee met, pursuant to notice, at 2:00 p.m., in
room 1100, Longworth House Office Building, Hon. Nancy L.
Johnson (Chairman of the Subcommittee) presiding.
[The advisory, the revised advisory, and the revised
advisory #2 announcing the hearing follow:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
February 25, 2003
HL-3

Houghton Announces Hearing on

IRS Efforts to Modernize its Computer Systems

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Health of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the Medicare Payment Advisory
Commission's (MedPAC) recommendations on Medicare payment policies. The
hearing will take place on Tuesday, March 4, 2003, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 3:00 p.m.

In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from the invited witnesses only.
Witnesses will include Glenn Hackbarth, Chairman of MedPAC, as well as
provider groups affected by the MedPAC recommendations. 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:

The MedPAC advises Congress on Medicare payment policy. The
Commission is required by law to submit its advice and recommendations
on Medicare payment policy annually by March 1. In its report to the
Congress, the Commission is required to review and make recommendations
on payment policies for specific provider groups, including hospitals,
skilled nursing facilities, physicians, and other sectors.

In announcing the hearing, Chairman Johnson stated, ``The MedPAC
provides valuable technical advice to Congress on Medicare payments and
providers, and this information is important as we continue to explore
ways to strengthen the Medicare program for our Nation's seniors. This
hearing will offer the Subcommittee an important opportunity to explore
in-depth, with Medicare's providers, MedPAC's recent recommendations,
as well as the providers' responses to these recommendations.''

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, March 18, 2003.
Those filing written statements that 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 WordPerfect 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--HEARING POSTPONEMENT * * *

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
February 25, 2003
HL-3-Revised

Postponement of Hearing on the

MedPAC Report on Medicare Payment Policies

Tuesday, March 4, 2003

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Health of the Committee on Ways and Means, today announced the
Subcommittee's hearing on the Medicare Payment Advisory Commission's
(MedPAC) recommendations on Medicare payment policies, previously
scheduled for Tuesday, March 4, 2003, at 3:00 p.m., in the main
Committee hearing room, 1100 Longworth House Office Building, has been
postponed and will be rescheduled at a later date.

* * * NOTICE--HEARING RESCHEDULED * * *

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
February 26, 2003
HL-3-Revised #2

Johnson Announces Rescheduled Hearing on the

MedPAC Report on Medicare Payment Policies

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Health of the Committee on Ways and Means, today announced that the
Subcommittee hearing on the MedPAC Report on Medicare Payment Policies
previously scheduled for March 4, 2003, will now take place on
Thursday, March 6, 2003, at 2:00 p.m., in the main Committee hearing
room, 1100 Longworth House Office Building.

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, Thursday, March 20, 2003.
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.

All other details for the hearing remain the same. (See
Subcommittee Advisory Nos. HL-3 and HL-3-Revised, dated February 25,
2003.)

FORMATTING REQUIREMENTS:

Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.gov.

Chairman JOHNSON. The hearing will come to order. Mr. Stark
will be here momentarily, so I will proceed. The Floor has been
canceled, so Members have earlier planes than usual, and we
want to get started.
This Committee has the weighty responsibility of making
decisions regarding Medicare payments that affect over a
million providers and almost 40 million seniors and disabled
persons. The Medicare Program is extremely complex and making
these decisions accurately becomes increasingly difficult.
While we must avoid overpaying providers, underpaying those who
care for seniors could create real quality-of-care problems and
compromise access to care for our elderly. Recently we saw that
all too vividly with our inability to adjust physician
payments.
To help us through these tough issues, we rely on the
Medicare Payment Advisory Commission (MedPAC). Every year,
MedPAC, a Committee of health care experts, including
representatives of physicians, hospitals and beneficiaries,
makes recommendations to Congress. We look to them as a source
of independent, unbiased information. I don't agree with all
the recommendations, but appreciate the ideas they put on the
table.
This year, MedPAC made a number of recommendations that
would both increase and decrease spending. At the same time, in
his budget the President set aside $400 billion for Medicare
modernization and prescription drug benefits. We have to ensure
that any changes in reimbursement rates to providers are fair
and necessary, because we have a finite amount of money
available for the Medicare drug benefit and providers.
Additionally we have Medicare modernization challenges to meet,
such as providing better support for seniors and managing
chronic illness.
The MedPAC examines a number of factors before it makes its
recommendations for payment updates. It analyzes the financial
profitability of Medicare providers, their access to capital,
their costs, changes in the number of available providers,
beneficiary access to care and other factors. While this
analysis is enormously helpful, I am frustrated by the lack of
agreement between their analyses and those of individual
providers and provider groups.
Assuring a community of stable providers, who are able to
improve care as our knowledge and technology advance, is a
challenging but crucial responsibility.
Today, we have with us Glenn Hackbarth, the Chairman of the
Commission, who will talk about MedPAC's recommendations. We
also have representatives from the affected groups--seniors,
hospitals, physicians, dialysis facilities, nursing homes, home
health agencies. I hope that we can have a straightforward
dialog that will help us develop this year's legislation. I can
tell you, from reading the testimony, that this dialog will
have to go on beyond today for us to get where I think we will
all feel comfortable.
Mr. Stark.
[The opening statement of Chairman Johnson follows:]

Opening Statement of the Honorable Nancy L. Johnson, Chairman, and a
Representative in Congress from the State of Connecticut

This committee has the weighty responsibility of making decisions
regarding Medicare payments that affect over 1 million providers and
almost 40 million seniors and disabled persons. The Medicare program is
extremely complex and making these decisions accurately becomes
increasingly difficult. While we must avoid overpaying providers,
underpaying those who care for seniors could create real quality of
care problems and could compromise access to care for the elderly.
To help us with these tough issues, we rely upon the Medicare
Payment Advisory Commission. Every year, the MedPAC, a committee of
health care experts including representatives of physicians, hospitals
and beneficiaries, makes recommendations to Congress. We look to them
as a source of independent, unbiased information. I don't agree with
all the recommendations, but appreciate the ideas they put on the
table.
This year, MedPAC made a number of recommendations that would both
increase and decrease spending. At the same time, in his budget, the
President set aside $400 billion for Medicare modernization and a
prescription drug benefit. We have to ensure that any changes in
reimbursement rates for providers are fair and necessary, because we
have a finite amount of money available for the Medicare drug benefit,
providers, as well as Medicare modernization to meet challenges like
providing better support for seniors and managing illness.
MedPAC examines a number of factors before making its
recommendations for payment updates. It analyzes the financial
profitability of Medicare providers, their access to capital, their
costs, changes in the number of available providers, beneficiary access
to care and other factors. While this analysis is enormously helpful, I
am frustrated by the lack of agreement between their analyses and those
of individual providers and some provider groups. Assuring a community
of stable providers who are able to improve care as our knowledge and
technology advances is a challenging but crucial responsibility.
Today, we have with us Glenn Hackbarth, the Chairman of the
Commission, to talk about MedPAC's recommendations. We also have
representatives from the affected groups--seniors, hospitals,
physicians, dialysis facilities, nursing homes and home health
agencies. I hope that we can have a straightforward dialogue that will
help us as develop this years' legislation.

Mr. STARK. Thank you, Chairman, for calling this hearing,
probably one of our primary responsibilities on this Committee
and this topic. I suspect, and I am afraid, that this may be
one of the last times we will have Mr. Hackbarth before our
Committee; and I want to take this chance to thank him on
behalf of 40 million Medicare beneficiaries and their attendant
providers for your service as a Member and, recently, as Co-
Chairman of MedPAC.
I think you have done a great job, I think, dealing with an
explosive environment and delicate negotiations. I really want
to thank you for great service to our country. Thanks very
much.
One thing I think is clear from MedPAC's data is that we
have nothing to be ashamed of. Medicare pays well. In some
cases, I think too well. In others, not as well as it should
be, and we seem to be meeting the challenge set before us when
we set policy.
There are probably some providers who are in trouble
financially; there is no doubt about that. In most of those
cases, it is not Medicare's fault. Most of the problems might
very well, if they are related to the government, be Medicaid
related or else they are related to dumb hospital executives
taking low-price contracts from managed care companies on the
theory that volume would make up for reasonable pricing.
I can't--we can't solve that problem on this Committee. The
groups on the second panel, I think, should be lobbying
Congress for more money for Medicaid and opposing Bush's block
grant, which will end Medicaid's entitlement nature for the
most costly population. When that is gone, those hospitals with
negative margins or those physicians with low payments are
going to see their payments drop precipitously.
These are difficult issues, but it is important that we let
the financial facts drive the policy. I strongly oppose efforts
by the majority to use savings from fee-for-service providers,
as MedPAC recommends, to pursue a privacy agenda and increase
payments to their friends in the insurance industry. I would
hope that the providers would be smart enough to figure out
that it is easier to lobby Congress, for better or for worse.
You can always get an appointment to see your Congressman;
try to get in to see Leonard Schaeffer. Try to get in to see
the President of Aetna, and all I am going to tell you is good
luck. At least here you get a hearing, you get excellent, well-
advised legislators, people like Mr. Hackbarth, and you get a
fair shot.
So, when you are going to pick your poison, I would advise
you to think carefully before you decide to give up on the
government payment systems which may very well serve you much
better than the alternative.
To the extent that savings are gleaned by reducing updates
for fees-for-service, I think they should be spent improving
preventive benefits and coverage for beneficiaries in
traditional Medicare.
Having said that again, thank you, Glenn, for your service;
I look forward to your comments. Thank you, Chairman.
Chairman JOHNSON. Thank you and welcome, Mr. Hackbarth. It
is a pleasure to have you before us again.

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

Mr. HACKBARTH. Thank you Chairman Johnson, Congressman
Stark and other Members of the Subcommittee. I have a lot of
material to cover, so I will try to proceed very quickly. I
know time is short for the Subcommittee.
Let me begin by reminding you about what MedPAC is,
specifically who the commissioners are. I know you well know
the statutory charge, but I want to just characterize who they
are as people.
We have six commissioners with clinical training as either
physicians or nurses. Nine of us have executive level or board
experience with leading health care providers. Six have
executive level or board experience with large private
purchasers of health care. Five have high-level experience in
the Congress or in Centers for Medicare and Medicaid Services
(CMS). Most of us have more than one of those credentials.
I dare say that all 17 commissioners have either a friend
or a loved one who is a Medicare beneficiary. So, all of us
have not just expertise and experience, but also a stake in the
welfare of the health care system in general and a stake in the
welfare of the Medicare Program.
You have both alluded to the fact that the issues we deal
with are very complex and they are indeed and sometimes
controversial. Given that, I think it is remarkable that we
have had such a high level of agreement on the recommendations
before you today. We had 17 commissioners voting on 19
recommendations included in the report. So, that is more than
300 individual votes. Out of those 300 votes, there were 2
``no'' votes.
Let me now turn to the content of the report. Medicare's
principal objective, of course, is to assure access to quality
health care for older and disabled Americans. Chapter 3 of our
report is devoted to the access issue. Let me just very quickly
summarize a couple of key findings.
One is that Medicare beneficiaries actually report fewer
problems with access than other adults. Now there are some
issues for particular sub-populations, low-income groups and
the like, but in general, access for Medicare beneficiaries as
reported by the beneficiaries themselves is good.
We find, moreover, scant evidence at this point that
Medicare's payment systems are hurting access to quality care.
We are pushing the health care system to become more efficient,
and we believe that requires vigilance in terms of its impact
on quality and access. With that in mind, MedPAC is, in fact,
expanding its efforts to monitor access to care.
Now, before very quickly reviewing the recommendations, I
want to make a few broader observations about our findings and
our approach. First of all, the financial performance of
providers under Medicare is, on average, good. There are some
types of providers that do less well, and we have made specific
recommendations to address some of those needs. Examples would
include rural hospitals and hospital-based skilled nursing
facilities (SNFs). In other cases, we have found that Medicare
payments appear to be more than adequate, and examples of that
would include home health agencies and freestanding SNFs. It is
noteworthy that the payments for home health agencies and SNFs
appear to be more than adequate even after the payment
reductions that went into effect October 1.
A second point is that when MedPAC identifies examples of
possible underpayment, we prefer targeted solutions, as opposed
to across-the-board increases for all providers in a given
sector. Moreover, when we identify problems, fixing those
payment problems may involve a redistribution of payments
within that sector. This occurred, for example, in our
recommendations in both the hospital and SNF sectors.
We take this approach because we believe that it makes
Medicare payments more accurate and because we are mindful that
there are many demands for Federal resources including, as was
pointed out, competing demands within the Medicare Program.
Third, we focus on financial performance under Medicare, as
opposed to provider total margins. Using Medicare funds, for
example, to try to cross-subsidize Medicaid will often be a
very inefficient way of getting money to providers in need.
Later on we can go into that in a bit more detail.
Fourth, the most recently implemented prospective payment
systems (PPSs) for SNFs and home health agencies and hospital
outpatient departments are, as intended, changing patterns of
care and we believe improving efficiency. That change, of
course, is rarely painless. As with the inpatient hospital PPS,
these newer systems will no doubt require refinement over time.
Now let me quickly review our recommendations for each of
the major sectors beginning with hospital inpatient. Our update
recommendation is for a 3.2-percent increase in rates. Because
of our proposals for redistributing some dollars within the
inpatient sector, many hospitals with lower than average
margins would get more than that. Rural hospitals, for example,
on average would get a 4.2-percent increase. Urban hospitals in
small urban areas would get a 3.6-percent increase. Large urban
hospitals, that is, hospitals in large urban areas, would get a
2.7-percent increase. As for physicians, our recommendation is
for a 2.5-percent increase.
We do have in this year's report some data directly related
to the access issue based on a new survey that we did of
physicians and their willingness to accept Medicare patients.
We also have some new data comparing Medicare rates to private-
sector rates. As far as SNFs are concerned, we recommend a zero
update for freestanding SNFs.
As you know, a critical issue there is whether Medicare
payments should be cross-subsidizing Medicaid shortfalls. For
hospital-based SNFs, we recommend an increase in payments
through reallocating some money already in the system. For home
health care, again, we recommend no update, but that we retain
a 5-percent add on for rural agencies. Our data, post-
implementation of the PPS, indicates that payments for home
health agencies are more than adequate.
For dialysis providers, we recommend an update of 1.6
percent; and for freestanding ambulatory surgery centers, a
zero percent update.
We also urge that CMS proceed as quickly as possible with
collecting up-to-date cost data in developing a new payment
system. Pending that new data, we believe that Medicare should
not pay more to a freestanding ambulatory surgery center than
it does for a hospital outpatient department providing the same
service.
So, that is a very quick review. I welcome any questions
you have.
[The prepared statement of Mr. Hackbarth follows:]

Statement of Glenn M. Hackbarth, J.D., Chairman, Medicare Payment
Advisory Commission

Chairman Johnson, Congressman Stark, distinguished Subcommittee
members. I am Glenn Hackbarth, chairman of the Medicare Payment
Advisory Commission (MedPAC). I am pleased to be here this morning to
discuss MedPAC's March report including our recommendations on Medicare
payment policy.
The Congress has charged MedPAC with reviewing and making
recommendations concerning Medicare payment policies. The Commission's
recommendations aim to ensure that Medicare's payment systems set rates
that cover the costs efficient providers would incur in furnishing care
to beneficiaries. If payments are set too low, providers may not want
to participate in the program and Medicare beneficiaries may not have
access to quality care. If payments are set too high, taxpayers and
beneficiaries bear too large a burden.
In our March report to the Congress, we recommend updates and
policy improvements for seven Medicare prospective payment systems
(PPSs). After examining indicators such as providers' financial
performance under Medicare, changes in the volume of services, the
quality of and access to care, providers' access to capital, and market
entry or exit, we find that in general, Medicare payments are adequate
to cover the costs of efficient providers. Therefore we recommend the
following updates for 2004:

hospital inpatient prospective payment system: a
marketbasket index (representing input price changes), less 0.4
representing the net of an increase for technological change and a
decrease for expected productivity gains;
hospital outpatient, physician, and outpatient dialysis
payment systems: marketbasket less an allowance of 0.9 percent for
expected productivity gains; and
skilled nursing, home health, and ambulatory surgical
center payment systems: zero. For many skilled nursing and home health
providers, current payments exceed costs by a large enough margin to
offset expected cost growth in 2004. For ambulatory surgical centers
the growth in service volume and number of providers suggests payment
is more than adequate.

These update recommendations are coupled with others that improve
the distribution of payments in a sector to better follow the costs of
patient care, or that improve consistency in Medicare purchasing. The
update and other recommendations for each sector should be considered
as a package, because they are interrelated, and in some cases protect
potentially vulnerable providers and thus access to care for
beneficiaries.
We also discuss several broader issues related to Medicare
payments:

considering the context for Medicare payment
recommendations (e.g. how the growth of Medicare expenditures compares
to that of the economy, the federal budget, and the amount paid by
other payers; how to characterize the spending impact of our
recommendations);
assessing Medicare beneficiaries' access to care;
deciding how Medicare should pay for new technologies;
and
examining the health insurance choices available to
Medicare beneficiaries and the characteristics of insurance markets
that help determine those choices.

Context

We include in our report spending trends not just for Medicare but
also for private sector payers and other federal health care programs.
Over the long term, the rate of increase in per capita spending for
Medicare beneficiaries has been similar to that for members of private
sector health insurance plans and several government-sponsored plans
(e.g., the federal employees health benefits program). Year to year,
there are different patterns and fluctuations, but the factors driving
health care costs appear to operate similarly for all payers. We also
report trends in Medicare's share of health care spending in the United
States and of the federal budget, and the share overall health care
spending represents of gross domestic product. Over the next few
decades Medicare will constitute a greater proportion of economic
output. Similarly, it will create greater pressure within the federal
budget and on beneficiary resources through increased cost sharing.
Therefore, we include in our report estimates of spending changes
resulting from each of our recommendations--presented as ranges over
one--and five-year periods--and the implications for beneficiaries and
providers. Please note that these spending estimates cannot simply be
added together to compute an overall estimate. Unlike official budget
estimates, they do not take into account the complete package of policy
recommendations, the interactions among them, or assumptions about
changes in provider behavior.

Assessing payment adequacy and updating payments

We recommend payment adjustments for seven different Medicare
prospective payment systems. For each system, we assess whether
payments are adequate to cover the cost of efficient providers by using
indicators such as providers' financial performance under Medicare,
changes in the volume of services, quality of and access to care,
providers' access to capital, and market entry or exit. We then address
the likely change in efficient providers' costs in 2004. We estimate
input price inflation (as measured by a marketbasket index for each
sector); allow, when needed, for technological changes that both
improve quality and significantly increase costs; and determine a
reasonable expectation for productivity gains. For expected
productivity gains, we use the 10-year average change in multifactor
productivity in the general economy. Our update recommendations reflect
our assessment of all of these factors for each payment system. When
appropriate, we also make recommendations to improve the distribution
of payments among providers within each payment system.
Hospital inpatient and outpatient services--In the hospital sector
we make both update and distributional recommendations. These should be
considered as a package both because they are so closely interrelated,
and because some distributional recommendations would help certain
hospitals that are particularly vulnerable, such as some rural
hospitals.
Overall we find that Medicare payments for hospital services are
adequate as of fiscal year 2003. Using a margin calculation
encompassing nearly all Medicare payments to hospitals, and thus not
influenced by cost allocation problems, we estimate a margin for
hospital services in 2003 of 3.9 percent. (This includes changes
legislated for fiscal year 2004 that will reduce payments.) Other broad
indicators, such as trends in volume and access to capital, are also
generally consistent with a conclusion of adequate payments. This
conclusion, together with consideration of factors likely to affect
costs in the coming year--including input price inflation,
technological advances, and productivity--support an update for 2004 of
marketbasket minus 0.4 percent for inpatient services. Because
significant technological advances affecting outpatient services are
accounted for through new technology provisions in that payment system,
we recommend an outpatient update of market basket minus 0.9 percent
for productivity improvement.
The distribution as well as the level of inpatient payments is an
issue. For example, the overall Medicare margin varies by hospital
group, with hospitals in large urban areas having a margin of 6.9
percent and rural hospitals having a negative margin of 1.9 percent. We
recommend five policy changes to improve the distribution of inpatient
payments:

expand the current transfer policy for patients in
certain diagnosis related groups (DRGs) who are discharged to post-
acute settings after very short hospital stays;
implement an adjustment for hospitals with very few
patients;
reevaluate the labor share used for geographic adjustment
of rates;
increase the cap on disproportionate share payments that
applies to most rural hospitals and urban hospitals with less than 100
beds; and,
eliminate the differential in base rates for hospitals in
rural and small urban areas.

This last recommendation was recently put in law for the period
from April 1, 2003 to the end of fiscal year 2003.
We recommend expanding the post-acute care transfer policy to
additional DRGs to better allow payments to follow patient care and to
prevent hospitals that cannot discharge patients to post-acute care
from being disadvantaged. We have recommended the other four policy
changes in previous reports and reiterate them now as part of the
comprehensive package that, taken together with the inpatient update
recommendation, will help maintain the financial viability of the
hospital sector. The result of the total package of our hospital
recommendations is a 3.2 percent inpatient payment increase for all
hospitals taken together. All hospital groups we evaluated show an
increase, although the magnitude differs. For example, rural hospitals
and hospitals in smaller urban areas would receive increases greater
than the market basket (4.2% and 3.6%, respectively). Hospitals in
large urban areas, on the other hand, would receive an increase less
than the market basket (2.7%). In short, the groups with lower margins
before our recommendations would receive higher increases.
A final important issue is the current indirect medical education
adjustment to inpatient payments. That adjustment of an additional 5.5
percent for each 10 percent increase in the resident-to-bed ratio,
provides payments about twice the level justified by the empirical
evidence of the relation between teaching activity and hospitals'
Medicare costs. The Commission is not satisfied with the current policy
because there is no accountability for the use of the payments above
the empirical level. We will explore ways to better target those
payments to advance specific Medicare policy objectives through
increased accountability.
Physician services--Medicare payment rates for physician services
are based on a fee schedule and are updated annually based on the
sustainable growth rate system that ties updates to growth in the
national economy and other factors. Under this system, the update for
2003 would have been negative 4.4 percent. CMS implementation of recent
Congressional action, however, is now expected to produce a positive
update of 1.6 percent for 2003.
When assessing payment adequacy we find a mixed picture. The number
of physicians billing Medicare has increased and national indicators of
access are still good. There are, however, anecdotal reports of access
problems in some geographic markets and specialities. A national survey
of physicians suggests they are becoming more selective about accepting
new Medicare patients--but that is true for private HMO and Medicaid
patients as well. Finally, Medicare payment rates have fallen somewhat
relative to payment rates in the private sector, although they are
still above levels seen in the mid-1990s.
Although there was a negative update in 2002, the volume of
physician services increased; as a result, so did program spending.
Program spending for physician services is projected to continue to
increase even in the face of future negative updates. For example, the
March 2002 Congressional Budget Office baseline projected average
annual growth in program spending for physician services of 4 percent
from 2001 to 2006 even with negative updates for five years.
From this assessment, and given recent Congressional action on the
2003 update, the Commission concludes that payments are adequate.
Therefore, we recommend an update for 2004 that equals the estimated
change in input prices for physician services, less an adjustment for
productivity growth.
Skilled nursing facility services--Aggregate Medicare payments for
skilled nursing facilities (SNFs) are at least adequate for fiscal year
2003. For freestanding SNFs--about 90 percent of providers in this
sector--we estimate aggregate Medicare margins to be 11 percent in
2003. Including the 10 percent of SNFs that are hospital-based, the
aggregate SNF margin is about 5 percent. The high margin for
freestanding SNFs reflects a decline in costs in recent years. This
decline is a response to incentives in the SNF prospective payment
system (PPS) following high cost growth prior to its introduction.
Preliminary evidence indicates that the decline in costs has not
resulted in a lower quality of care. Because the PPS for SNFs is still
relatively new, we expect this cost trend to continue into 2004,
offsetting increases in input prices and other factors. Therefore, we
recommend that the Congress not update payment rates for SNFs for
fiscal year 2004.
Weaknesses in the current classification system for care in SNFs
result in payments that are not distributed appropriately to account
for the expected resource needs of different types of Medicare
beneficiaries. Resources should be reallocated until the classification
system is improved or replaced. As a start, we recommend that the
Congress give the Secretary authority to reallocate money currently
used as a payment add-on for rehabilitation classification groups to
other classification groups so that payment more closely follows
patient costs. This reallocation will benefit hospital-based SNFs to
the extent that they serve patients with conditions more complex than
those of patients in freestanding SNFs; therefore, no separate update
for hospital-based SNFs is recommended. If this reallocation does not
occur in a timely manner, however, the Congress should provide a
marketbasket update less productivity adjustment of 0.9 percent for
hospital-based SNFs only.
Home health services--Current aggregate Medicare payments for home
health services are more than adequate relative to costs. For the first
time, we now have cost data showing how home health agencies are
performing under the PPS. We estimate that the Medicare margin for home
health services in fiscal year 2003 will be over 23 percent, even after
accounting for the so-called 15 percent payment reduction and the
expiration of the current 10 percent rural add-on. Another measure of
financial performance, the ratio of payments to charges, also indicates
more than adequate payments. Payments are well above charges--12
percent overall--and assuming agencies charge more than costs, payments
exceed costs by at least 12 percent. Providers have responded to the
new PPS by changing the services they provide during home health
episodes: providing fewer visits but more therapy. The cost of
providing an episode of home health services is lower as a result.
Other broad indicators also suggest that payments are adequate: access
to care is generally good, the rate of decline in the number of users
has decreased, and the entry and exit of agencies has remained stable
for the third year in a row.
In the past, we have recommended updates that emphasized stability
for this sector because we lacked data on agencies' financial
performance, and also wanted to give providers time to adapt to the new
payment system. Home health agencies have adapted, and we expect them
to continue to adapt during the coming year, further reducing the costs
of providing an episode of care. Therefore, we recommend that the
Congress not update payment rates for home health services for fiscal
year 2004. Because of potential challenges that providers may face in
rural areas, we also recommend that the Congress extend for one year,
at a rate of 5 percent, add-on payments for home health services
provided to Medicare beneficiaries who live in rural areas.
Outpatient dialysis services--Current aggregate Medicare payments
for outpatient dialysis services for beneficiaries with end-stage renal
disease are adequate. Together, payments for composite rate services
and injectable drugs--the two main components of payment to providers
of outpatient dialysis services--exceeded providers' costs by about 4
percent in 2001. We conservatively estimate that the aggregate payment-
to-cost ratio will be no lower than 1.01 in 2003. If payment for
injectable drugs and their profitability relative to composite rate
services continue to increase from 2001 to 2003, as is likely, the
ratio will be higher. Other indicators--such as continued entry of for-
profit freestanding providers, increases in the volume of services
provided, lack of evidence of beneficiaries facing systematic problems
in accessing care, continued improvements in the quality of dialysis
care, and providers enjoying adequate access to capital--together
support the conclusion that Medicare's outpatient dialysis payments are
adequate relative to efficient providers' costs. To account for changes
in providers' costs in the coming year, the Congress should update the
composite rate for outpatient dialysis services for 2004 by the change
in input prices, less a 0.9 percent adjustment for productivity gains.
Ambulatory surgical center services--An ambulatory surgical center
(ASC) is a distinct entity that exclusively furnishes outpatient
surgical services. The current payment rates for ASC services are based
on a cost survey conducted in 1986. Because of the age of the data, our
first recommendation in this sector is that the Secretary expedite the
collection of recent ASC charge and cost data for the purpose of
analyzing and revising the ASC payment system. Because there are no
recent data on the cost of providing ASC services to Medicare
beneficiaries, we looked at market factors and concluded that current
payments for ASC services are more than adequate. The growth in the
number of ASCs has been rapid: between 1997 and 2001, the number of
Medicare-certified ASCs more than doubled. The volume of procedures
provided by ASCs to beneficiaries increased by over 60 percent between
1997 and 2001. Over the last 10 years, the increase in payments is even
more pronounced--in nominal dollars, payments have increased fourfold.
In addition, as indicated by their rapid growth, ASCs have sufficient
access to capital. Current Medicare payments for ASC services are at
least adequate to cover next year's expected increase in ASCs' costs.
Therefore, we recommend that the Congress not update the payment rates
for ASC services for fiscal year 2004.
In addition, although costs in ASCs should be lower than in
hospital outpatient departments because ASCs have less regulatory
burden and serve less medically complex patients, the ASC rate is
currently higher than the outpatient hospital rate for several high-
volume procedures. Therefore, we recommend the Congress ensure payment
rates for ASC procedures do not exceed hospital outpatient PPS rates
for those same procedures after accounting for differences in the
bundle of services covered.

Access to care

A basic goal of Medicare is to ensure that elderly and disabled
Americans have access to appropriate, quality health care. Therefore,
we plan to monitor three dimensions of beneficiaries' access to
Medicare-covered services each year: (1) the health system's capacity,
(2) beneficiaries' ability to obtain care, and (3) access to
appropriate care. We do not find widespread problems in beneficiaries'
access to care. Although more selective about accepting patients from a
number of payers than in the past, the vast majority of physicians are
accepting at least some new Medicare beneficiaries. Post-acute services
are generally available, although it has become more difficult to place
the most complex patients in SNFs. Nonetheless, some issues will
require careful monitoring. As in other populations, certain
beneficiaries--those in poor health, with low incomes, and without
supplemental insurance--report more difficulty than others in accessing
appropriate services. In addition, while the trend is improving, many
beneficiaries are not receiving the most appropriate clinically
recommended services. Finally, shortages of nurses could affect the
availability or timeliness of certain services, and demographic trends
raise concerns about the capacity of the health system over time.

Payment for new technologies

Medicare has the dual responsibility to pay enough for beneficial
new technologies to ensure beneficiaries' access to care, while also
being a prudent purchaser of new technologies. Prospective payment
systems tend to promote the use of new technologies that reduce costs,
but may slow adoption of technologies that increase costs. The
inpatient and outpatient PPSs therefore, incorporate the costs of new
technologies through special payment mechanisms as well as through an
annual review of payment rates. To ensure fair treatment across
technologies and payment systems, MedPAC recommends that the clinical
criteria currently applied to all new technology applicants under the
inpatient PPS, and to new medical device applicants under the
outpatient PPS, be extended to new drugs and biologicals applicants
under the outpatient PPS.

Health insurance choices for Medicare beneficiaries

Depending on where they live, Medicare beneficiaries may have a
wide array of insurance options beyond traditional fee-for-service
Medicare available to them. Those options may include Medicare+Choice
comprehensive care plans and private fee-for-service plans, cost
contract plans, preferred provider plans, and varying forms of
supplemental coverage. Availability of options, and how and when
beneficiaries choose among them, depends on specific market conditions
and the circumstances of individual beneficiaries. The determinants of
market conditions are both local and national. Although Medicare is a
national program, it is only at the local level that medical care is
delivered, beneficiaries choose insurance options and delivery systems,
and insurers make decisions to enter the insurance market. In our
report we review the entire spectrum of insurance choices, as a first
step in MedPAC's effort to better understand beneficiaries' choices and
market conditions.

Chairman JOHNSON. Thank you very much for that initial
overview. I was curious as to why you used the same
productivity figure across the board for everyone.
Mr. HACKBARTH. The productivity figure that we use, 0.9
percent, is based on the long-term, 10-year average in
productivity improvement for the economy as a whole. So, as
opposed to data on actual sector-by-sector change in
productivity, it is probably best characterized as an
expectation for improvement in productivity.
Chairman JOHNSON. I am concerned about that approach. To
take the productivity figure, which I understand you are saying
is from across the whole economy, and apply it to all the
different disciplines, given the pressure that providers have
been under since 1997 from the government and from managed care
and from underpayments in Medicaid, seems to me a leap of
faith.
Furthermore, now, productivity increases are going to
require more sophisticated technology, not just better billing
systems. I don't know how providers, many of whom are quite
strapped from having been through transitions, can invest in
the technology that might help them increase productivity.
Mr. HACKBARTH. Well, technology is certainly one way to
improve productivity, but there are other ways that don't
involve that sort of investment. That would be point number
one.
Point number two is that we see many of these providers
finding adequate capital to make lots of investments in
expansion and acquisitions and the like. If they have capital
for those purposes, they ought to also have capital for
improvements and clinical technology and the like.
Chairman JOHNSON. I do respect that comment, but there are
lots of health care providers whose capital access you can't
see; they are too small. This is another way in which the
system works, on average, where according to national
assumptions capital doesn't get down to the little home health
agency or the smaller provider that doesn't show up on the
indicators. Many of these organizations tend to be investor-
owned facilities.
Mr. HACKBARTH. On the subject on improving productivity,
let us use the example of home health where there are many
relatively small participants in that field.
Now, even if we look at the smallest home health agencies,
we find that after the implementation of PPS, that they had
7.5-percent positive margins. This is post-implementation of
PPS; this is after the payment reductions of October 1. This is
taking those factors into account. So, these are the smallest
of players in the field. The average margin in the industry is
much, much higher than that.
Now, how did they accomplish that? In a sense, at least
broadly defined, they have improved their productivity. They
have changed the pattern of care to reduce costs. So, there are
lots of ways for this to be accomplished. It is not all about
investing in high-cost clinical information systems. In every
sector that we look at, we see that when given appropriate
incentives, providers can change patterns, lower costs, without
hurting access and quality.
Chairman JOHNSON. The point you make is a perfectly valid
one.
I think there is a difference between the pressure that has
been put on physicians and the number of patients that are now
confined to 15 minutes. The decisions I see out there are where
physicians are forgoing the responsibility to provide 6-hour
operations because they need to be back in their office and do
something that the system recognizes as ``real work.''
This is a longer subject, and I hope you will come back and
talk to the Subcommittee at length. If you look at the
testimony of the home health people, they do point to some very
real concerns about the fact that big repayments that are going
to be recouped because of the system problems in Medicare were
seen as profit under your analysis. However, they are going to
repay all that.
Many of the small organizations were particularly hit by
bad debt from the old payment system in the transition. I am
not as comfortable as you are that what you are looking at is
real money and real profit margin. It is too complicated.
I do want to sit down with you and your staff, and I will
invite any Committee Member who wants to come, because I think
we are having trouble understanding this issue. I would like to
recognize Mr. Stark.
Mr. STARK. Thank you, Chairman. I guess just for the
record, does the Commission have a benchmark for an adequate
Medicare margin?
Mr. HACKBARTH. We have avoided trying to pinpoint a
particular number. The circumstances for different sectors vary
so, we haven't tagged a particular number.
Mr. STARK. In general, do you think it is appropriate--I
presume you would like to see providers have a positive margin?
Mr. HACKBARTH. Yes.
Mr. STARK. Do you think it is appropriate to look at their
entire--make of their entire margins all their business, as
opposed to just segregating Medicare and trying to account for
that separately and say they have a Medicare margin that is
different?
Mr. HACKBARTH. Our general approach is to look specifically
at their Medicare financial performance. It may be--a good way
to illustrate why we do that is to talk about freestanding
SNFs, where this has been a big issue.
According to the data that the industry has presented to
the Commission, they more or less agree with our estimate of
Medicare margins. Our finding was that the average Medicare
margin was about 11 percent, which we think is quite a healthy
margin. They argue, however, that that is substantially, if not
totally, offset by losses that they incur on Medicaid.
We are unpersuaded by that argument for several reasons.
First of all, Medicare patients represent about 10 percent of
the business. We think loading the responsibility for the
financial welfare of the whole industry on 10 percent of the
patients is balancing a whole lot on a narrow base.
Second is that were we to decide to increase Medicare
payments for each SNF patient, it wouldn't get the money to the
right place. The SNFs that have the most Medicare patients
would, by definition, have fewer Medicaid patients, and so we
would be adding money to each of the Medicare cases to offset a
relatively small number of Medicaid patients.
Mr. STARK. Would the same argument hold with an acute care
hospital?
Mr. HACKBARTH. Obviously, the numbers are different in
terms of Medicare share of total revenues.
Mr. STARK. In general, you look at the Medicare----
Mr. HACKBARTH. We look at the Medicare margins.
Mr. STARK. You have some historical comparisons of per
capita growth for Medicare, private health insurance, the
Federal Employee Health Benefit Plan (FEHBP) and California
Public Employees Retirement System, and you discuss the
relative comparability of the growth rates and you adjust it
for the difference in the prescription drug coverage. You show
that Medicare's rate comes out at 3.1 percent, while private
insurance is at 4 percent.
Now that may not sound like anything but chump change, but
isn't that really a 25 percent difference in the growth rate
and a rather significant difference?
Mr. HACKBARTH. The Medicare rate of growth is, indeed,
somewhat lower for the period that we looked at. We think that
that comparison, though, needs to be made with caution.
There are differences in terms of, for example, the benefit
package. We didn't attempt to adjust for the fact that there
are not prescription drugs in Medicare and that has, in fact,
been one of the fastest growing areas in the private sector.
So, the numbers are not quite apples and oranges--or not quite
apples and apples, excuse me; they are apples and oranges.
Mr. STARK. You also focus on fee-for-service payments, and
you have calculated that we are currently paying
Medicare+Choice plans 104 percent of the fee-for-service rates
without even accounting for risk selection and the fact that
they should have no fraud and abuse because they wouldn't steal
from themselves, you hope. They don't pay for graduate medical
education because they don't refer as much as they should. So,
the actual payments relative to fee-for-service are actually
much higher.
Is it therefore correct to say that MedPAC has determined
that we are overpaying Medicare+Choice plans?
Mr. HACKBARTH. Two comments: The reason that we are
currently paying more is as a result of some of the features of
the 1997 law, including the floor payments and minimum rates of
increase and the like. So, it doesn't reflect any ill doing on
the part of the plans. It is an artifact of the statute.
Mr. STARK. That is good lobbying.
Mr. HACKBARTH. I will let you judge that.
The second point I would like to make is, it is our belief
that Medicare ought to offer a neutral choice between private
options in the traditional program. So, what we would like to
see is that Medicare pay 100 percent of what it would pay to
have the patient remain in traditional Medicare after adjusting
for risk differences.
Mr. STARK. Thank you, Chairman.
Chairman JOHNSON. Mr. Johnson.
Mr. JOHNSON OF TEXAS. Thank you, Chairman. I believe that
Ms. Johnson hit on it when she was talking about your
productivity idea. I don't think you told us how you came up
with that 0.9 percent.
Mr. HACKBARTH. The 0.9 percent reflects the long-term rate
of growth over 10 years in the economy as a whole. So, it is an
expectation----
Mr. JOHNSON OF TEXAS. You can predict that growth? We
can't.
Mr. HACKBARTH. This is looking back the past 10 years.
What we are trying to do in managing this system of
administered prices is mimic, as best we can, what happens in
competitive markets to create incentives for efficiency and the
like. In fact, as businesses of all types and all sectors
across America have experienced over the last decade and more,
pressures for improvement in productivity and efficiency in the
competitive market are relentless.
By including a productivity factor in Medicare, what we are
trying to do is simulate the same thing in this administered
price system, for people who pay the taxes to finance the
program experience these pressures all the time. We think it is
only fair that the providers who get paid by the Federal
Government experience the same sort of pressure.
Mr. JOHNSON OF TEXAS. It is different all over the country;
I think you would agree with that. There is not one number you
can use for every State, every county even.
Let me ask you a question. You recommended raising the base
payment for hospitals in rural areas and small cities. In
contrast, the Commission never recommended a floor on the wage
index. Can you explain why one proposal was accepted and the
other not?
Mr. HACKBARTH. Well, we do need to make some changes in the
wage index. We don't think the floor is the right way to go.
The changes that we advocate are reexamining the so-called
``labor share'' within the rate. We believe that the labor
share may well be too high for rural areas. The effect of that
is to basically redistribute money in the system and increase
payments for rural hospitals and reduce payments in high-wage
areas. So, that is one recommendation we have made.
A second, which is----
Mr. JOHNSON OF TEXAS. How do you assess the difference
between rural and urban? I represent two counties, one Dallas
and one Collin. Dallas is urban, Collin is rural. So, how do
you assess that?
Answer me another question, if you would. Are your facts
current, because in the past we have been told that you are
operating with statistics that are 2 or 3 years old.
Mr. HACKBARTH. The definition of urban and rural that we
use is the one that you put in statute. For purposes of the
wage index, I think most analysts agree that we need better
definitions that reflect employment markets, which leads to a
second of our recommendations.
Mr. JOHNSON OF TEXAS. You made that recommendation?
Mr. HACKBARTH. Yes. We have recommended that the data be
collected that would allow us to explore better labor market
areas and make some other adjustments in the wage index that
worked to the disadvantage of rural areas.
Mr. JOHNSON OF TEXAS. Okay. Are you using current
statistics? You didn't answer that question.
Mr. HACKBARTH. The wage index, in particular, the data are
several years old, but our analysis is that the relative
relationships as you go across the country don't really change
much over time. Everybody may go up, but the relationship
between location A and location B tends to be more consistent
over time.
So, the age of the data throughout the program is a
problem; I would freely concede that. In this particular area
of the wage index, we don't think it is the most important
problem.
Mr. JOHNSON OF TEXAS. Under current law, targets are set
for physician expenditures and physician updates are based in
part on comparison between actual and targeted expenditures.
Are there other factors that should be taken into account,
such as changes in technology or aging or relative health
status of the Medicare population?
Mr. HACKBARTH. Well, our recommendation on the physician
payment system has, in fact, been to drop the so-called
``sustained growth rate'' system that you are referring to. So,
we have not taken a stance on particular refinements in the
mechanism.
So, the questions that you are asking are simply not
questions that the Commission has addressed.
Mr. JOHNSON OF TEXAS. Thank you very much. Thank you,
Chairman.
Chairman JOHNSON. Thank you. Mr. Kleczka.
Mr. KLECZKA. Mr. Hackbarth, a couple of questions.
You discussed the skilled nursing problem with Mr. Stark.
However, I met with some of these folks from the State of
Wisconsin yesterday, and they indicated that because of the
loss of the add-on payments, the industry nationwide will lose
$1.8 billion; and in the State of Wisconsin, the nursing homes
will lose some $40.6 million.
Are you still indicating that their margin is such that
they don't need an annual increase?
Mr. HACKBARTH. I believe the numbers that you are referring
to, certainly with regard to the Nation as a whole, are total
margins and again reflect the fact that they are losing money
on Medicaid. That really is the crux of the issue here. For
reasons that I have already given, we don't believe----
Mr. KLECZKA. Let me just back up. What they cited to me was
that this is a loss in Medicare funding. They didn't discuss
the margin and the fact that it is cross-subsidies.
Mr. HACKBARTH. After the withdrawal of the add-ons, the
ones that expired in October, we believe the average margin for
freestanding SNFs is 11 percent.
Mr. KLECZKA. Even with the loss. So, you are saying----
Mr. HACKBARTH. Even with the withdrawal of all of those
add-on payments.
Mr. KLECZKA. Let us say there was no loss of the payments.
Was that margin going to increase 15, 16 percent or what?
Mr. HACKBARTH. I don't know what the additional increment
would be, but it would be higher than 11 percent certainly, if
those payments were restored, yes.
Mr. KLECZKA. Are you saying they are calling ``wolf''
without the necessity to do so?
Mr. HACKBARTH. What I am saying is that there is a very
important analytic and philosophical disagreement. When they
say they are losing money, on a national basis at least--I have
not looked at the numbers in particular for Wisconsin, but the
national basis at least, when they say they are losing money,
it is counting the Medicaid patients. In the documents they
have given to us, they acknowledge they are making money on
Medicare, but they think they need to do that to offset
Medicaid losses.
We don't think that is good policy for the Medicare
Program.
Mr. KLECZKA. Later this afternoon we are going to hear from
the Renal Council and there was a recommendation for an annual
adjustment for the renal folks. However, they are also looking
for an annual update mechanism.
That is not your bailiwick or your responsibility, but do
you have a view on providing for a mechanism?
Mr. HACKBARTH. Current law does not provide for an annual
update for dialysis providers. In fact, each year we do look at
the rates and analyze whether a change is appropriate. So, in
that sense within the MedPAC framework, we do an annual update
analysis.
As is true of all providers, I would be a little bit
cautious about writing in the statute an automatic increase for
dialysis providers. The circumstances in all of these
businesses can change a lot year to year, and I think they need
to be reanalyzed each year. These should not be formulaic
automatic increases, guaranteed.
Mr. KLECZKA. The last concern is the whole question of
Medicare Choice. I believe you indicated because of the risk
selection for the Choice plans that they should actually
receive a lower reimbursement than the fee-for-service
Medicare?
Mr. HACKBARTH. That isn't quite what I said.
Mr. KLECZKA. That is what I was hoping you said.
Mr. HACKBARTH. It wasn't quite what I did say, though.
I actually have a lot of personal experience in this field
having worked for Harvard Community Health Plan, that had a
substantial Medicare risk program. I know from my personal
experience that some health maintenance organizations (HMOs)
probably get a better-than-average selection of risks while
other HMOs may, in fact, enroll more sick people than average.
I think the temptation to say HMOs are all the same ought to be
avoided.
What we need in Medicare is a payment system for private
plans that pays fairly after adjusting for risk. The CMS with
help from the industry has been working toward a new risk
adjustment mechanism which we are optimistic about. We think it
will be an improvement over current law, so we favor that move.
For some HMOs, it would be more payment; for some it would be
less payment depending on their risk profile.
Mr. KLECZKA. Thank you.
Chairman JOHNSON. Mr. Ramstad.
Mr. RAMSTAD. Thank you, Chairman.
Thank you, Mr. Hackbarth, for the job you are doing in
Chairing the MedPAC. This is a tough policy area, very
difficult policy area, probably as difficult as any that we
deal with at the Federal level, and we appreciate your
leadership helping us sort out these Medicare payment policy
issues.
I know, Mr. Hackbarth, that MedPAC's recommendations for
skilled nursing home care are limited to Medicare for skilled
nursing care. I also know that too many SNFs in Minnesota have
closed. They have gone broke and they are closing literally
every week.
My question is a more broad question than was previously
asked. Since Medicare serves as a subsidy, really, for
Medicaid, it seems to me these two programs are obviously
interrelated, and it would follow that Medicare reimbursement
policies have an impact on Medicaid patients' access, certainly
to nursing home care. Would you agree with those premises?
Mr. HACKBARTH. That Medicare payments affect Medicaid----
Mr. RAMSTAD. Yes.
Mr. HACKBARTH. Access? I am honestly not sure whether I
would agree or not. A lot would depend on the specific
circumstances.
Mr. RAMSTAD. Doesn't Medicare essentially subsidize
Medicaid?
Mr. HACKBARTH. In general, the Medicare rates are
significantly higher than the Medicaid rates.
Mr. RAMSTAD. Therefore, it seems the two are directly
related?
Mr. HACKBARTH. Yes.
Mr. RAMSTAD. Then it seems to me that it would follow that
Medicare reimbursement policies have an impact on Medicaid
patients' access to nursing home care.
Mr. HACKBARTH. Well----
Mr. RAMSTAD. Let me ask you the question I am getting at. I
am trying to lay the foundation for this question.
Why doesn't MedPAC expand its scope so that the elderly can
be considered in totality, so that we are looking at the total
picture instead of just a piece?
Mr. HACKBARTH. We are the MedPAC, of course. Medicaid
payment levels are not only beyond the scope of MedPAC's
charge, but under the Medicaid framework, are determined at the
State level as opposed to the Federal level.
Mr. RAMSTAD. I understand that. I also understand the
interrelationship, which you recognize and cited in your
colloquy with my friend from Wisconsin, the previous Member who
asked questions. It just seems to me that we are kidding
ourselves.
I understand your jurisdiction, but it just seems, not to
look at the whole access question, in its totality, not to
consider the elderly in terms of the total picture is not doing
them a service and not doing us a service. We need to reexamine
the jurisdictional limitations.
Mr. HACKBARTH. This is really way beyond, though, a point
about statutory jurisdiction.
The critical point here is the best way to fix Medicaid's
underfunding problem is through Medicaid because, that way, the
dollars will flow according to the volume of Medicaid patients
served by the nursing facility.
If we try to fix the problem on the Medicare side, the
institutions with the smallest Medicaid populations will get
the most Medicare dollars. By the same token, the institutions
with a lot of Medicaid patients would get fewer Medicare
dollars.
Medicare add-ons simply cannot get the resources to the
institutions in need. So, it is not a quibble about
jurisdiction; it is about getting bang for the taxpayers' buck
when we have a lot of other pressing priorities within the
Medicare Program.
Mr. RAMSTAD. I see my time is about up, and I appreciate
the situation and the predicament, but I also, as the son of a
parent who is in the last stage of Alzheimer's disease and
somebody who has been looking for an appropriate SNF and
talking to--and hearing from these people at that level, there
is a real problem out there in the real world--in the State of
Minnesota, in the State of Wisconsin, in the State of
Connecticut--and we have got to fix it.
So, I hope you will continue to work with us, and I hope--
this is one problem we truly need to address in a bipartisan,
pragmatic, common-sense, cost-effective, humane way. Thank you
Mr. Hackbarth.
Chairman JOHNSON. If I may, I can't help but comment.
I think the problem is when MedPAC looks only at Medicare
reimbursements--and I appreciate what you are saying that if
you increase reimbursements you aren't necessarily going to get
to the Medicaid-heavy facilities.
Nonetheless, it seems to me there is clearly a public
interest in the survival of nursing homes and in the problem of
underpayment in Medicaid. For us to simply, in our narrow view,
deal with our payment problem, knowing that it could put homes
out of business because we have no plan to require the States,
who are our partners, to reimburse fairly is morally wrong.
It is also wrong from the point of view of public policy
because you just can't deal with one public policy in isolation
from another failing public policy. So, I think this is why
this such a difficult issue.
Mr. STARK. Would the gentlelady yield on that topic?
Chairman JOHNSON. Very briefly.
Mr. STARK. Should we--Medicaid, I suspect, is the highest
payer. Private insurance plans are the second highest payer. If
we are going to coordinate what Medicare and Medicaid pay, we
should also then control what private insurers pay. In a sense,
they pay more than Medicare, I think.
Chairman JOHNSON. The great majority of nursing home
patients are paid for by Medicaid. The second--it is a
relatively small amount, and we have direct responsibility
under current law for Medicaid and Medicare.
Mr. CARDIN. We could reinstitute the Boren amendment, and
then we wouldn't have to worry about this.
Chairman JOHNSON. Mr. English.
Mr. ENGLISH. Thank you, Chairman.
Mr. Hackbarth, I wonder, following up on Mr. Johnson's
question, if I could get you to elaborate further. In regard to
the labor share of the wage index, what would you suggest the
percentage be adjusted to?
Mr. HACKBARTH. We don't have, Mr. English, a specific
percentage in our recommendation. We think that CMS is in the
best position to do the recalculation. We have done some
analytic work that would suggest that the current labor share
of 71 percent is probably a few percentage points too high,
something like that, something in that neighborhood.
Mr. ENGLISH. Another question, CMS issued an analysis on
June 28, 2002 on the financial status of the home health care
industry under the Medicare Prospective Payer System, which
concluded that the median profit margin for home health
providers was 2 percent prior to the 15 percent cut and
elimination of the 10 percent rural add-on and, further, prior
to payment of interest, taxes, depreciation and amortization.
Further, an agency of the Pennsylvania General Assembly in
November 2002 released a survey of rural home health providers
in Pennsylvania, which discovered that 40 percent of the
Medicare-certified home health agencies are considered to be
financially vulnerable, and 24 percent expressed concern that
they might not be able to survive under PPS. Again, these
conclusions were reached without taking into account the 15
percent cut, the elimination of the 10 percent rural add-on.
With this in mind, would you please elaborate on how MedPAC
concluded in its March 2003 report that, and I quote,
``Aggregate Medicare margins and the ratio of payments to
charges suggest that current payments are more than adequate in
relation to cost''?
Mr. HACKBARTH. I would be happy to.
Here was our approach: First of all, we looked at actual
cost report data for the first year under the new PPS for home
health agencies. We had cost report data available for about 10
percent of all agencies. This was not a random sample, I want
to be clear about that, but it was a reasonably representative
sample in terms of urban and rural composition, for-profit and
voluntary ownership and the like.
Using that data, we found that the average margin after the
implementation of PPS and adjusting for the so-called 15
percent cut was in excess of 20 percent. There was a slight
urban/rural difference, but even the rural margins were up in
the neighborhood of 20 percent.
The biggest disparity--the variable that made the biggest
difference was size, as I alluded to earlier. The smallest
agencies had a positive margin in this sample of about 7.5
percent. So, that is actual cost report data.
Since it was only 10 percent of the agencies and not a
random sample, we tried to look at the issue from another
vantage point where we could get even more recent data. What we
did was look at actual claims data and compare the Medicare
payments to the charges, the actual charges, made by the home
health agencies. There were two important findings. One was
that payments exceeded charges, the amount that was charged, by
about 11 or 12 percent and that positive margin of payment
overcharges was actually growing over time during the first
year-and-a-half of the PPS for home health agencies.
So, with the completely different database--and this one
was a random sample--we had results confirming what we got from
the cost reports.
Still a third piece of information comes from the U.S.
General Accounting Office study estimating payments and costs
for home health agencies, which also found very high, positive
margins. So, we have looked at it three different ways and we
have come to the same basic conclusion.
Mr. ENGLISH. Well, let me simply say, the experience I
have, which is limited to a lot of anecdotal feedback in places
like northwestern Pennsylvania, suggests a very different
story.
I appreciate your testimony, and my time has expired.
Mr. HACKBARTH. Chairman Johnson, if I could make one quick
point there.
In every sector that we are talking about, there will be
some organizations that do better than others. You know there
may be particular organizations that are losing money. That
happens all across the economy all the time. Not everybody wins
all the time.
Mr. ENGLISH. Chairman, Mr. Hackbarth makes that point, but
the feedback that I get in my region is not limited to isolated
or scattered organizations. This is a uniform picture that is
coming from the providers throughout the region in different
communities, and it is pretty much the same story.
So, I would like to revisit your methodology at some point,
but I thank you for your testimony.
Chairman JOHNSON. Congresswoman Tubbs Jones.
Ms. TUBBS JONES. Thank you, Chairman.
Good afternoon, sir. How are you? This is my first service
on the Committee on Ways and Means and an opportunity the
second time to sit on the Subcommittee on Health. So, I am
rushing through this report having not had a real opportunity
to review it, but I do have a few questions for you.
I am interested in the section that speaks about access to
health care and specifically access to health care as it is
related to race and ethnicity and socio-economic levels. I just
wondered--and I will read just one quickly. It says that ``Race
and ethnicity were highly significant in influencing whether a
beneficiary reported having a usual doctor, and not having a
usual doctor seemed to deal with the lack of access.''
Ms. TUBBS JONES. Do you make recommendations for how we can
address that particular problem?
Mr. HACKBARTH. No, ma'am, not in this particular report.
Ms. TUBBS JONES. Would that be part of your responsibility?
Mr. HACKBARTH. We could take that up in the future, yes,
but we have not made any specific recommendations to this.
Ms. TUBBS JONES. I would encourage you to take that up in
the future, because it becomes such a significant issue,
particularly when you start talking about race, ethnicity and
socio-economic income as it impacts, because I am sure that you
would agree that over time that problem will create greater
problems on the other end, particularly when you look at the
report that says that the sickest use more money out of the
system than anyone else, and if we could give them health care
on the front end maybe we wouldn't spend so much money on the
back end.
I also was interested in a chart on page 4 where--
specifically going back to the Medicare, spending is
concentrated in a small percentage of beneficiaries. Are you
making any recommendations on how we adjust that in any way
that we don't spend so much money, or is it too late that they
are in such bad health care, bad shape that it is too late to
try and work on that issue?
Mr. HACKBARTH. It is roughly true. These are ballpark
figures, that about 20 percent of the Medicare beneficiaries
account for something like 80 percent of the spending. So, the
patients who have the most serious health problems, maybe
multiple chronic diseases, consume a lot more resources
obviously than patients who don't have any medical problems.
That is not unique to Medicare. If you look at any insurance
program, you see a very similar phenomenon.
Ms. TUBBS JONES. Let me skip to one other thing real
quickly since my time is very short. Will you be asked to
assess how the delivery of a prescription drug benefit will
impact Medicare in the future?
Mr. HACKBARTH. We have not specifically looked at that, nor
have we been asked to look at that by the Congress.
Ms. TUBBS JONES. Let me ask, but part of the delivery of
health care as we know it in years 2000 and going forward is
probably greater--there is a greater use of pharmaceuticals to
deal with health care problems than there has ever been before.
Is that a fair statement?
Mr. HACKBARTH. That is true. We did do a report June of
last year looking at the Medicare benefit package, and one of
the points that we made there was not a new one by any stretch,
but the role pharmaceuticals play in modern medical practice is
much greater than was true 10 or 20 years ago, and so looking
at it from the standpoint of a clinician it is really hard to
practice quality medicine if your patient can't afford drugs.
Ms. TUBBS JONES. Can you tell me the name of that report?
Chairman, that will be my last question.
Mr. HACKBARTH. We would be happy to get you a copy of the
report. It is our June 2002 report.
Ms. TUBBS JONES. I am in 1009 Longworth. I would appreciate
it. Thank you. Thank you, Chairman.
[This report will be retained in the Committee files.]
Chairman JOHNSON. Mr. Ryan, who is not a Member of this
Subcommittee but is interested and has joined us, would you
like to question?
Mr. RYAN. I would appreciate that. Thank you, Chairman.
Thanks for allowing us.
I have been very interested in the discussion that is going
on about the cross-subsidization of Medicare and Medicaid in
our nursing homes. I met with the skilled nursing providers in
Wisconsin, as Mr. Kleczka did, just about an hour ago, so I
don't want to go over that again. I understand, and I think you
can appreciate that from a nursing home standpoint they have a
large pool of Medicaid recipients that must be cross-
subsidized. So, they aren't getting those kinds of margins,
only if you look at it in the narrow view of just the Medicare
patients. So, I think you can appreciate that.
It sounds like at MedPAC you had a vigorous debate about
the appropriateness of cross-subsidization between Medicare and
Medicaid patients. I am too new to know how in the world we
decided 1 day years ago why a low income senior was a poor
person first and then a senior citizen second and coming
through Medicaid, but I would like to see if you have actually
gone into that in this vigorous debate you had as to the
appropriateness of this cross-subsidization or not. Do you look
at it from that perspective at all?
Mr. HACKBARTH. I am not sure, Mr. Ryan, that I am--I
understand the question. We look at what the proper financial
analysis is for Medicare. We don't--we have not looked, at
least in my tenure on the Commission, at the specific issues
raised by the so-called dual eligibles.
Mr. RYAN. Right. That is what I am talking about.
Mr. HACKBARTH. That is something we have talk about putting
on our agenda in the future.
Mr. RYAN. I would be interested in seeing if you would look
at that.
The second thing is, with your experience with risk
adjustment, I would like to ask you one question about that.
That is a very murky science right now, and it has improved
lately, but we haven't learned how to build the right kind of
risk adjustment mousetrap for the marketplace. What is your
opinion about changing the way Medicare+Choice providers are
reimbursed from the current kind of program, even if we build a
better risk adjustment mousetrap to, say, a mid-based pricing
system such as what is employed now at the FEHBP plan.
Mr. HACKBARTH. The current system, as you know, is
basically based on demographic factors. We adjust for age, sex
and very basic characteristics like that. Those are clearly
inadequate to the task. Within each of those categories some
patients are sick and some aren't, and so there is way too much
variation.
The CMS, as we speak, is in the process of collecting data
for a new system that we think would be a significant
improvement by incorporating data about the services the
patients have been using. Is that going to be a perfect risk
adjustment system? No. In fact, the perfect risk adjustment
system doesn't exist.
Mr. RYAN. Right. So, isn't a better risk adjustment system
a system that continually evolves over time and where the
person who bears the risk or who bears the loss if the risk is
adjusting properly is the provider, not necessarily the
government, and therefore we have plans pulling in and pulling
out? Wouldn't it be better for a big-based pricing system that
incorporates all of those factors, incorporates all of the risk
adjustments, and has an incentive for new risk adjusting
technologies to be built into the price? Wouldn't that be a
better way of actually reflecting the costs of providing health
care in the reimbursement rates and going to that kind of a
payment system for Medicare+Choice plans?
Mr. HACKBARTH. I think that there are two distinct and
separable issues. One is there may well be substantial merit in
going to a competitively set system of pricing for plans for
the Medicare Program in general. Competitive markets have many
advantages, one of which is the flexibility and fluidity that
you referred to.
Even if you go down that path and accept all of that, in
order to make the markets work fairly you are going to need a
risk adjustment system, because the costs, the future costs
incurred vary enormously for different patients. So, I don't
think going to a competitive system necessarily obviates the
need for a better risk adjustment.
Mr. RYAN. I agree with that. My question is will it make us
risk adjust more quickly and more accurately rather than going
through the CMS regime that we are doing right now?
Mr. HACKBARTH. Well, I am not sure that I am smart enough
to know the answer to that. Risk adjustment is a very difficult
field for private plans, as well as for the Medicare Program.
One of our commissioners, Alice Rosenblatt, is the Chief
Actuary for WellPoint, and she can bend your ear for hours
about how difficult this issue is.
Mr. RYAN. I see my time has expired. Thank you, Chairman.
Chairman JOHNSON. Thank you. Mr. Cardin, also not a Member
of the Subcommittee but an active participant in our
discussions.
Mr. CARDIN. Thank you, Chairman. Mr. Hackbarth, I thought
that your response to Mr. Ramstad's point about Medicare and
Medicaid was well taken, but I think it does point out the fact
that when we repealed the Boren amendment, which required the
States to provide reasonable reimbursements under Medicaid, it
had an impact on Medicare. Because the pressure is now on the
Medicare reimbursement structure to compensate for inadequate
State reimbursement rates under Medicaid, that has an effect on
the affordability of Medicare and what we can do in Medicare.
So, I think there is a relationship here, and I would just
encourage us to at least be mindful that the State
reimbursement rates are having an effect on access, including
seniors' access, to care.
I want to ask you about the rehabilitation therapy caps of
$1,500, the caps we implemented in 1997 as part of our cost
savings effort in Medicare, that I must tell you were not well
thought out back in 1997. There were no hearings on that. They
took effect for 1 year in 1999, and proved to be very difficult
for the one out of every six seniors who reached that cap.
Congress twice enacted moratoria, which ended on January 1,
2003. Unless we act, access to outpatient therapy services for
our seniors will be affected, and I didn't see anything in your
written statement on that. I am just wondering whether you have
done any work on this issue.
Mr. HACKBARTH. We have not. That is not an issue that we
have examined, at least in my tenure, on MedPAC the last 3
years.
Mr. CARDIN. Did you not examine it because you figured we
were going to take care of it?
Mr. HACKBARTH. No. Simply because there is just a whole lot
of opportunities for doing analysis and making recommendations,
and that simply isn't one that we have taken up.
Mr. CARDIN. Well, I would urge you to. Mr. English and I
have introduced legislation to try to correct that. The
Chairman has been very helpful to us in trying to deal with the
$1,500 cap, as has the Chair of the full Committee, and I hope
you will take action. I understand from CMS that they can't
implement them until July, but then they will affect access to
needed therapy services, particularly for those who are in the
most dire need. It doesn't make much sense the way the caps are
organized. I hope we take care of it here, but I do think you
should have it on your radar screen, because I suspect it will
have an impact on the work that you are doing, if in fact the
therapy caps are permitted to actually affect services for our
seniors. I would just encourage you to keep that on your radar
screen. Thank you, Chairman.
Chairman JOHNSON. Thank you. Mr. Hackbarth, did you exclude
from your home health analysis home health agencies connected
with hospitals?
Mr. HACKBARTH. We didn't exclude them for processing
reasons. They were not in fact included in that initial 10
percent sample of cost reports. I would ask you to keep in
mind, though, we take a little different approach to analyzing
the, if anything, performance of the different lines of
business of a hospital within the Medicare Program. As you
know, there are major questions about how you allocate costs
that a hospital incurs across different lines of business,
inpatient care versus the hospital-based SNF, versus the
hospital-based home health agency, and we think the best
approach to dealing with that is to look at the hospital's
overall Medicare margin encompassing all of its lines of
Medicare business.
So, when we report hospital margins--for example, we
estimated the margin for 2003 being on average 3.9 percent.
That includes not just their inpatient care but also their SNFs
and their home health agencies line of business. Generally
speaking, if you break it out line by line, the inpatient
margins are overstated and the particular margins on SNF care
and home health are understated strictly for cost allocation
reasons. It is an accounting issue, not an economic issue.
Chairman JOHNSON. It does suggest that we should look less
at hospital inpatient margins and more at hospital total
margins?
Mr. HACKBARTH. That has been approached in recent years.
Chairman JOHNSON. Well, that has certainly been my
interest.
Last, let me just say you have heard from many Members that
their experience out there in the real world is not confirming
them what you are telling them. This does raise one other issue
that we haven't talked about. We talked about cross-subsidizing
and a number of other philosophical issues. The last I would
like to raise is this business of dealing on average. You like
to stray from that only in targeted ways. So, you target rural
providers and give them a bump-up, but you don't target those
who serve our inner cities, which often have much higher costs.
So, I would like to ask you to do in every provider sector what
you are in the process of trying to do for us, look at the ones
below the average. Are there common characteristics? Are there
certain kinds of home health agencies that tend to have
negative margins? Are they just rural? Are they rural and inner
city with certain concentrations? Are they only the inner city
ones that have security people? This is same with hospitals. We
have looked at this some. Unfortunately, we are not looking at
some aspects of it, but volume is clearly an issue. Clearly
exceptions need to be made for rural, but there are other
factors, too. I think we need to put a lot more research into
who is below the average. Does being below the average mean
that you are ``inefficient,'' and ``could do better,'' and
``morally should do better,'' or does it mean that we are going
to put you out of business because we don't understand the
clients you serve or the environment in which you serve or the
geographics in your area?
Mr. HACKBARTH. We do as a matter of course in each sector
look at variations and see if there are certain patterns. So,
that is a typical part of our analysis. As you well know, this
is an issue that you and I have talked about in the past, and
we have embarked upon a piece of analysis for hospitals, which
we refer to as the winners and losers analysis, to try to
better identify the characteristics that are associated with
good performance under the Medicare system and poor
performance, and if I am not mistaken, our June report will
include some of that analysis.
Chairman JOHNSON. Yes, and I just would point out for the
Members to remember that the total margins are higher in the
rural areas where we get bump-ups. The very lowest margins
often, around 2 percent I think, are the medical centers, if I
am not mistaken. We do have to ask ourselves whether these very
big medical institutions on which we rely for treating our most
difficult patients, life star and burn centers, and all these
things should honestly be operating at a 1 or 2 percent margin,
whether that is healthy. I look forward to that analysis coming
in your June report and I think it should be part of our
discussion. I think we are moving into an era where the average
is beginning to fail us, and that is why we are looking at the
fringe issues and the wage distribution. This is failing us,
but there are many other ways in which the on-average analysis
is interesting. However, it can't help us assure the public
interest in a network of providers that, like the U.S. Post
Office, reaches everyone everywhere with adequate access to
adequate health services.
So, I thank you for your testimony and for the good work of
the Commission. Mr. Stark.
Mr. STARK. Could I get a second crack at the apple here, as
it were? Pardon me, Mr. Hackbarth.
Chairman JOHNSON. Yes.
Mr. STARK. This issue of subsidization, I want to touch on
that for a moment. Just historically some years ago we examined
the idea, at the risk of the more--at the suggestion of the
more conservative Members here, we subsume Medicaid into
Medicare, with the exception of long-term care; in other words,
that we have one Federal payment system for rich and poor or
seniors and poor, making it another part of Medicare, so that
we had similar patients and similar benefits and then let the
States take on the responsibility of home health care. So, that
has been examined, or on long-term care, in the past, I suppose
could be something we could examine again.
The question has also come up time and time again, we used
to call it cost shifting, I guess, and I suspect that 15 or 20
years ago Medicare benefited from the generous fee-for-service
payments that private insurance companies were paying. I think
that has now turned, and I would ask you--I might suggest
that--and I am going to ask you for your opinion of this
number, that in the case of hospital payments, that 90 percent
of the copayments to hospitals, that Medicare is probably the
highest payer for that copayment, or is it 80 percent or 50
percent or 60 percent? What is the guess?
Mr. HACKBARTH. The highest payer for a hospital?
Mr. STARK. For hip transplant, for hospitalization or for a
prostrate removal or whatever you want, that if you compare
private insurance, Medicare and Medicaid, that Medicare is
generally the highest payer.
Mr. HACKBARTH. I am not sure, Mr. Stark, the answer to
that, and maybe I can get some help here in just a second. My
recollection of the data is that a couple points are important.
It varies a lot by market depending on the local circumstances,
the amount of managed care and how much aggressive negotiation
there is in the private rates. That would be point number one.
Point number two is, as I recall the data, if you look at
the country as a whole, that the payment to cost ratio is
higher for private payers on average across the country than
for Medicare. If I am--they are telling me I was lucky and got
it right. So, in some cases that may be true, but on average I
don't think it is true.
Mr. STARK. The question has been raised several times by my
colleagues on both sides of the aisle dealing with wage rates
and classification by location and rural and urban and inner
city and teaching and on and on and on.
What in your opinion--and I have often thought about this
as an alternative, but as I understand it, there is about 6,000
hospitals in the country, about a dozen per Congressional
district.
Mr. HACKBARTH. Uh-huh.
Mr. STARK. Would it be a major undertaking beyond your
comprehension, understanding, information technology as it
exists, that to say let us quit fussing with this adjusting
rates that are universal and then begin to adjust them by
region and by a whole host of proxies, and say let us go
hospital specific, require the hospitals to--and keep a second
set of books for all I care--to have a cost accounting basis
that is standard. Then come to us and say we ought to get
more--this was done in the State of Maryland, for example, but
we ought to get more because we are rural and we can't find
people or our costs are very high because of weather and we are
inner city and we have a huge security problem, and come to
this Committee and suggest that they are going to go broke if
they are not adjusted and present to us a business plan that
says, all right, we will take these actions. If we are given a
subsidy or a higher rate, whatever you want to call it, for a
certain number of years, we will eventually work our way out?
We would say, okay, let us do this. Would that be a horrendous
accounting problem for MedPAC to handle a situation like that?
Mr. HACKBARTH. I think the answer to that is yes. The
system that we currently----
Mr. STARK. It would put a lot of lobbyists out of business.
Mr. HACKBARTH. The system that we currently have with all
of these proxies, as you put it, is clearly imperfect. It is
one of the well-known drawbacks of these so-called administered
price systems. You are always struggling with trying to refine
and improve. I think on average we have done a pretty good job
with the Medicare payment system. Frankly, I was in the U.S.
Department of Health and Human Services (HHS) when the system
was enacted in the early eighties, and I would have bet a lot
of money at that point that it wouldn't have worked as well as
it has, and I am happy to concede that. It is difficult,
laborious to work with these proxies.
The alternative approach that you suggest of hospital-
specific budget review, as it were, has a whole different set
of problems, and trying to ascertain what is legitimate cost
and what isn't, how different the patients are, you will be
confronted with problems at every turn there as well. I think
what happened in a lot of the State rate-setting problems was
you tend to end up saying de facto, well, if you started high,
you get to stay high in perpetuity, and that creates a whole
different set of injustices. So, these are tough questions.
There is no getting around that.
Chairman JOHNSON. Thank you very much. Coming from a State
who had that kind of budget review and dumped it, one of the
most liberal Democratic States in the Nation. This wasn't a
conservative group that dumped it. It has its own set of
problems.
As you take your leave, Mr. Hackbarth, would you just
reaffirm in my mind whether or not the Commission stands by its
earlier recommendations to reform the physician payment system?
Mr. HACKBARTH. Yes.
Chairman JOHNSON. Thank you very much, and thank you for
being with us today. You have been very gracious with your
time. We appreciate it.
As Mr. Hackbarth leaves, let me call the final panel, and I
am going to yield to Mr. English while you are assembling. Mr.
English.
Mr. ENGLISH. Thank you, Chairman. This is a rare privilege
for me to welcome a witness on this panel from my hometown of
Erie, Pennsylvania. James Jaruzewicz is a true expert on the
practical implications of Medicare payment policy. Jim is
devoted to providing quality care for some of our community's
frailest and most at-risk individuals. For almost 10 years, he
has worked at St. Mary's Hospital in Erie--I am sorry, he has
worked at the hospital level in my hometown, overseeing the
operations, personnel and purchasing. Continuing his commitment
to quality health care, he has served as Executive Director of
the Visiting Nurses Association since 1985.
He is also affiliated with the Pennsylvania Association of
Home Health Agencies, St. Vincent Health System and the Erie
Homes for Children and Adults. I want to thank him for
participating in the hearing today and look forward to his
testimony.
Chairman JOHNSON. Thank you very much, Mr. English, for
that nice introduction, and indeed it is very, very nice for
all of us to have a representative from the real world that one
of our Members knows well, and so we do thank you for being
here. Thanks as well to all the others who have come to
testify. We look forward to hearing from you. I won't go
through the introductions because of the time. Mr. Jaruzewicz.

STATEMENT OF JAMES JARUZEWICZ, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, VISITING NURSES ASSOCIATION OF ERIE COUNTY, ERIE,
PENNSYLVANIA, ON BEHALF OF THE VISITING NURSE ASSOCIATIONS OF
AMERICA

Mr. JARUZEWICZ. Chairman and Members of the Subcommittee,
good afternoon. My name, as you know, is Jim Jaruzewicz.
Chairman JOHNSON. Excuse me. You have to pull the
microphone close to you, and turn it on.
Mr. JARUZEWICZ. Chairman and Members of the Subcommittee,
good afternoon. My name is Jim Jaruzewicz, and I am President
and Chief Executive Officer (CEO) of the Visiting Nurses
Association in Erie, Pennsylvania. I want to thank you for
giving the Visiting Nurses Association of America (VNAA) and me
the opportunity to present our testimony. The nearly 500
nonprofit visiting nurse agencies (VNAs), across the country
collectively provide home health care to over 4 million
Americans each year.
We were disappointed that the Commission--excuse me. Let me
begin by saying that VNAA sharply disagrees with the
assumptions that were made by MedPAC staff about excessive
profit margins and cost of care in the Medicare home health
benefit. We are disappointed that the commissioners accept the
staff's analysis of the data as sufficiently accurate on which
they base their recommendations. Their discussion on the 15th
of January was solely based on an assumption that reimbursement
exceeds costs. Therefore, reimbursement needs to be cut,
period. No further analysis needed.
Their recommendations to freeze the inflation update for
home health care for fiscal year 2004 and to reduce the rural
add-on from 10 percent to 5 percent were based on what was
perceived to be a fact that agencies are making 23 percent
average margins and the non-profits 15 percent margins, and
therefore money needs to be taken away from them.
The VNAA believes that this finding is absolutely false.
The reason that we believe this is because our data shows that
VNA's average net income is 1.3 percent, which accounts for
only a 3 percent profit under Medicare. This average Medicare
profit is used to increase nurse salaries, repay interim
payment system (IPS) debt, acquire technology to comply with
the Federal regulations and to subsidize losses under managed
care in Medicaid. In addition, VNAA believes that the MedPAC
data is inaccurate and misleading at best. Here are only two of
the nine statistical omissions that we found in the staff's
data analysis.
The cost report data was used from a 10 percent nonrandom
sample. The MedPAC staff admits that the sample was not
geographically representative, and due to CMS programming
problems, there is no cost report data available at all from
six of the States in which VNAs are most numerous.
In addition, hospital-based agencies were excluded from the
margin analysis, because these agencies represent 30 percent of
the total home health agencies in the United States. Leaving
them out of the data poll is statistically irresponsible. We
now understand after listening to their prior testimony that
they will never be included in the home health data analysis.
The VNAA believes that MedPAC has put in motion a
potentially tragic situation where findings of excessive
margins based on statistically unreliable data are now accepted
as the truth, which have led to damaging recommendations that
would hurt real people if adopted by Congress.
In addition, we believe that MedPAC has done a great
disservice to Congress by adding to the circulating rumors that
home health care expenditures are increasing. This is
absolutely not true, and CMS in its own data confirms that
expenditures are not increasing. The latest numbers from CMS
now project a decline in home health spending over the next 10
years from what was originally projected.
The U.S. Congressional Budget Office has also said that it
will revise its estimates for home health care spending
downward in its March report.
We believe that if the 5 percent cut is not repealed and if
the pending 10 percent rural add-on is not extended, VNAs will
have no choice but to cut clinical staff, which will further
reduce their ability to accept patient referrals. Some of us
are already turning patients away for the first time in our
100-year history, because we don't have the clinical staff to
provide adequate levels of care.
Two days ago the House passed by a 411 to 0 vote, a
resolution establishing National VNA Week in recognition of the
caring hearts and the willing hands the VNA nurses bring to the
Nation's frailest and most at-risk individuals, regardless of
severity of the patient's condition or ability to pay. The VNAA
asks you to please not to consider legislation that will once
again undermine VNAs' very existence, as was done under the
former IPS.
Across the board cuts are inherently unfair to home health
providers who are desperately trying to meet the health care
needs of their patients. It forces agencies with break-even
budgets to cut patient care or go out of business.
Finally, we urge Congress to establish a disproportionate
share payment for providers who serve the highest percentage of
Medicaid patients and provide disproportionate amounts of
charitable care. Our specific technical recommendations are
included in my written testimony.
[The prepared statement of Mr. Jaruzewicz follows:]
Statement of James Jaruzewicz, President and Chief Executive Officer,
Visiting Nurses Association of Erie County, Erie, Pennsylvania, on
behalf of the Visiting Nurse Associations of America

Introduction

Madam Chairwoman and members of the subcommittee, good morning. My
name is Jim Jaruzewicz. I am President and CEO of the VNA of Erie
County in Erie, Pennsylvania. I want to thank you for giving the
Visiting Nurse Associations of America (VNAA) and I the opportunity to
present our testimony, which addresses the Medicare Payment and
Advisory Commission's (MedPAC's) recent data analysis and
recommendations to Congress related to Medicare home health payment
policy.
VNAA is the national association for Visiting Nurse Agencies
(VNAs), which are non-profit, community-based home health agencies
governed by voluntary boards of community leaders. The nearly 500 VNAs
across the country collectively provide home--and community-based
services to over four million Americans each year. Founded in the
1890s, VNAs have continuously served as charitable providers in their
local communities, creating a safety net for the poorest and most
chronically-ill and functionally-disabled individuals. VNAs serve the
majority of Medicaid home health beneficiaries and represent nearly
one-half of all non-profit home health agencies in the United States.
On average, Medicare and Medicaid represent approximately 82% of VNAs'
revenue.

VNAA's Assessment of MedPAC's Data Analysis and Recommendations

VNAA has a lot of respect for the MedPAC commissioners and staff;
however we simply disagree with the assumptions that were made about
excessive profit margins and cost of care. The discussion during the
January 15 MedPAC meeting focused on what was claimed to be ``excessive
margins,'' and on what recommendations the commissioners should make to
Congress in terms of an appropriate policy response. Because the
commission accepted the staff's analysis of the data as sufficiently
accurate on which to base policy recommendations, the debate and
discussion were based on an assumption that reimbursement exceeds
costs; therefore, reimbursement needs to be cut--period--no further
analysis needed.
While other issues were discussed and pondered, such as the
unexplainable wide variation in visits per patient among different
states, and the overall drop in the number of individuals receiving
Medicare-covered home health services between 1991 and 2001, the
recommendations were based on what was perceived to be a fact--agencies
are making 23% average margins (the voluntaries at 15%), and therefore
money needs to be taken away from them. MedPAC Chairman Glenn Hackbarth
said repeatedly that he did not understand how more money would bring
more beneficiaries into the program. We strongly argue that if Congress
does not authorize additional expenditures for Medicare-covered home
health services, the number of beneficiaries receiving home health care
will continue to decline.
The reason that we believe that beneficiary access will continue to
decline is because non-profit home health agencies' average bottom line
margins are zero or less, making it impossible to expand services to
more beneficiaries. In addition, VNAA believes that the MedPAC data is
inaccurate and misleading at best, which is explained in detail prior
to the conclusion section of this testimony. MedPAC's findings
certainly do not reflect my experience. Therefore we believe that
MedPAC has put in motion a potentially tragic situation where findings
of excessive margins based on statistically unreliable data are now
accepted as ``the truth,'' which have led to damaging recommendations
that would hurt real people if adopted by the Congress.
In addition, MedPAC has added to the false hysteria of circulating
rumors that home health expenditures are increasing. At the time when
MedPAC made its recommendations, CMS was projecting Medicare home
health spending for FY 2005 to be over $17 billion. The latest numbers
from CMS now project a decline in Medicare home health spending over
the next 10 years. CMS's estimate for FY 2005 has now been reduced to
$11.4 billion. CBO has also said that it will revise its estimates for
home health spending downward in its March report. There is absolutely
no reason to base cuts in payment rates on the fear of runaway home
health spending. In fact, there is every reason to believe that
Medicare expenditures will continue to decline, along with patient
access, as payment levels are reduced.
Because the focus of MedPAC's discussion was on positive margins
under PPS, I would like to begin by discussing the margin issue. VNAA
analyzed a random sample of 32 VNA financial statements from 2001,
which indicated that the average net income as a percentage of net
revenue that year was 1.3%, which accounts for an average 8% profit
under the Medicare prospective payment. The profit margin under
Medicare was used to increase nurse salaries to become competitive in
local marketplaces, repay debt incurred under the former Interim
Payment System (IPS) at a high Medicare interest rate, acquire
technology to comply with OASIS and PPS, and to subsidize losses under
Medicaid and managed care.
That average net income of 1.3% included all charitable
contributions received that year and does not reflect the 5% Medicare
cut that was implemented on October 1, 2002. As a result of the 5% cut,
the average 8% Medicare profit was reduced to an average 3% Medicare
profit, not taking into account new HIPAA-compliant technology costs
(estimated at an average $750,000) or nurse salary increases, which we
believe (from our discussion with several VNA CEOs) have reduced the
Medicare profit to zero and pushed average overall bottom line budgets
into the red. The Medicare margins are no longer able to offset the
other losses mentioned above.
In its report, MedPAC has said that cost per Medicare home health
visit has gone down. We honestly do not understand how they could
arrive at such a conclusion. It is almost as if MedPAC staff
unknowingly did not review an entire database of agency costs. VNAA's
data shows that VNAs' average cost per Medicare visit went from $72 in
FY 1997 to $103 in FY 2001 (the first year of PPS). If technology
costs, interest costs on IPS debt, and nursing recruitment and training
costs were adequately accounted for, we are certain that MedPAC would
not have arrived at the margins that they did. For example, VNAA's data
shows that VNAs have had to raise nurses' salaries by an average 12%
during the past two years; however, reimbursement to compensate for
increases in labor costs has only increased by about 12.5% during the
past five years. In addition, VNAs have had disproportionately high IPS
debts because of their low per-beneficiary limits under IPS (another
penalty on their cost-efficiency). This is another significant drain on
their budgets. MedPAC staff agreed when reporting to commissioners that
``IPS repayments continue to be an important factor in their financial
stability.'' However, because MedPAC accepted CMS's cost accounting
conventions, it failed to consider agency expenditures to pay back IPS
debt and amortization of certain agency expenditures over many years,
although the agencies had to incur many costs immediately (e.g.
computer hardware and software for HIPAA, OASIS and PPS).
We believe that if the 5% cut is not repealed, and if the pending
10% rural add-on is not extended on April 1, VNAs will have no choice
but to cut clinical staff, which will further reduce their ability to
accept all patient referrals. VNAA's data indicates that VNAs' average
RN vacancy rate is 15%, and our average home health aide vacancy rate
is 25%. It also shows that labor costs represent an average 78% of
VNAs' overall budgets, so when agencies are desperate to trim costs,
they have no choice but to layoff some of their clinical staff. This is
exactly what happened under the former Medicare home health interim
payment system (IPS), and we strongly believe that IPS was a
contributing factor to the current national nursing shortage. Many of
our nurses went into other professions where job security and market
stability were more predictable.
Therefore, cutting clinical staff simply means that fewer numbers
of patients can be admitted for home health services. Because VNAs are
often the providers of last resort in their communities and receive a
high number of referrals from other local home health agencies, we
believe that many of the individuals whom we cannot admit for services
must access care through hospital emergency rooms. People with
intensive care needs, such as daily wound care, chemotherapy and other
infusions, indigent patients with excessive supply needs, and dually-
eligible patients are particularly hard to serve. All of these
individuals are eligible for the Medicare home health benefit; however,
because they require more frequent visits, admission to home health
care is difficult because agencies simply do not have enough clinical
staff to make the necessary visits.
In order to remain viable under the current 5% cut and nursing
shortage, individual VNAs have reported that they are:

Exerting more caution when reviewing patient referrals
from hospitals, physicians and nursing homes;
Not able to admit some Medicare patients primarily due to
staffing shortages (a direct result of non-competitive nurse salaries);
Less able to serve Medicaid patients with intensive care
needs in states with extremely low Medicaid reimbursement (e.g.
Florida's reimbursement is $34.45 per visit);
Restricting service areas to cut down on travel costs;
Laying off nursing staff, which perpetuates their
inability to accept all referrals;
Reducing the number of visits provided to patients to the
extent feasible; and/or
Reassessing their ability to purchase and/or update
electronic equipment to comply with PPS, OASIS and HIPAA requirements,
and potentially resorting to paper documentation.

At the very least, the 5% cut has diminished most VNAs' ability to
return any additional dollars back into their communities through
support services to the poorest individuals.
If the 10% rural add-on is terminated in April, rural agencies are
seriously concerned that they will not be able to survive. Services
have already been curtailed or eliminated in many rural areas because
agencies cannot afford to send their limited clinical staff to outlying
areas. Most VNAs report increased waiting times at hospitals and delays
in getting to patients on a regular schedule. Again, this is primarily
due to the number of unfilled nursing and home health aide positions.
And, if MedPAC's recommendation to eliminate the inflation update
for FY 2004 is adopted by Congress, VNAs report they will lose hundreds
of thousands of dollars on average. As a result, individual VNAs are
contemplating the following actions:

Cutting clinical and administrative staff (who support
the clinical staff);
Continuing to be cautious about accepting patients with
intensive care needs;
Scrapping plans for new or updated electronic systems and
restore to a paper operation;
Cutting back evening care;
Cutting back family caregiver support;
Cutting back maternal and child health programs;
Utilizing emergency reserves;
Freezing staff levels and salaries/benefits;
Cutting specialty services (e.g. psychiatric);
Re-examining case-mix of patients;
Reducing home care coordinator services; and
Cutting back on charitable care.

Another troubling issue concerning the discussion on margins is
that it appears that MedPAC automatically assumes that making margins
on Medicare is somehow an abuse of the system and should be dealt with
accordingly (i.e. across-the-board cuts among all home health
providers). It assumes that all providers are the same, make the same
margins, and behave in the same ways, and that all patients are the
same and have the same needs. This is a broad-brush assessment that
does not account for any variations in what agencies do with their
margins, what types of patients they serve, and what the geographic
variables are.
For instance, we know that 13% of all home health agencies are
public agencies operated under state and local governments. Their
obvious incentive is to provide the most cost-efficient and quality
care with government dollars. Yet, these and other agencies that
operate under the same value and financial objectives are treated in
the same way as all others for no other reason than because they have a
Medicare home health certification number.
We do not believe that positive margins are bad when they allow
agencies to maintain and build their capacity to provide services that
restore or improve people's health and reduce overall medical and
social costs. That is why we believe that across-the-board cuts, as was
done under IPS, are inherently unfair to home health providers who are
desperately trying to meet the health care needs of their patients. It
forces these agencies with break-even budgets to cut patient care or go
out of business.

Recommendations

VNAA recommends that Congress determine if positive Medicare
margins are used appropriately in line with congressional intent or if
they are used inappropriately or outside congressional intent for the
Medicare home health benefit. Do positive Medicare margins help the
indigent population who would otherwise rely on hospital emergency
rooms? Do they expand services, such as Meals on Wheels and adult day
care, which support persons receiving home health care and help people
stay out of nursing homes? Do they help attract more clinical staff so
that the current staff does not burn out and quit?
During MedPAC's January 15 meeting, MedPAC Commissioner Dr.
Newhouse suggested that MedPAC look at behavioral differences among
agencies in terms of margin use. ``It could be that we have some
agencies that are really trying to make out like bandits and we have
some agencies. . . . that are doing as much as you can with what you're
given. . . . And that may show up in a distribution at the agency level
that I haven't really seen,'' said Dr. Newhouse.
We believe that the Medicare cost reports should be modified in
order to better identify all expenditures related to patient care. For
example, how have nurse salaries changed over the past few years? This
should be determined by tracking the cost reports. IPS overpayment
recoupment should be captured on the cost report. The cost report
should be modified to show the costs of technology that has been
purchased to comply with federal mandates. Care management should be
better documented on the cost report, including the costs of
telemedicine and coordination among the patient's interdisciplinary
team. These are costs that are not reflected as part of the patient
visit. PPS was intended to increase flexibility and creativity in home
health, yet the cost report fails to capture the cost of innovation and
change.
VNAA believes that it is essential to document uncompensated care
to indigent patients on the cost report and the losses incurred through
serving Medicaid patients. During MedPAC's meeting on January 15,
Senator Durenberger urged the commissioners to look at Medicare and
Medicaid together. We could not agree more. The federally-funded health
care system needs to be looked at in the aggregate. State Medicaid
programs are being cut back across the nation, and state governors are
turning to the White House and Congress for relief. Significant cuts to
optional Medicaid programs, such as nursing home and home health care,
have resulted in significant reimbursement cuts to providers. Because
VNAs serve the majority of Medicaid and minority home health
beneficiaries, we have certainly felt the pinch. Surveys from a random
sample of our members showed that 81% of VNAs are losing money under
Medicaid. Needless to say, any margins under Medicare quickly vanish by
the fact that we serve a large percentage of Medicaid patients.
It is also critical to understand that a significant percentage of
home health patients are ``dually-eligible'' for Medicare and Medicaid
coverage. To the degree that federal policy continues to treat such
patients as beneficiaries of totally independent funding sources, the
well-documented inefficiencies related to funding their care will
continue to be exacerbated.
If Medicare home health care is cut, Medicaid patients will be the
first to be dropped--and are being dropped now. We understand that the
immediate reaction is to say ``that is not Medicare's responsibility.''
But is the right answer cutting Medicare? In some ideal world in which
states' budgets are flush with surplus money, perhaps it is. But that
has not been the situation in the history of the Medicaid program and
it is certainly not the situation now.
If the conclusion is to continue considering the Medicare and
Medicaid programs in isolation , then we urge you to establish a
disproportionate share payment for home health agencies that serve the
highest percentage of dually-eligible patients and provide
uncompensated care to individuals who cannot pay for home health
services. By tracking such services and related costs on the cost
report, not only will Congress have a better understanding of what
happens to Medicare margins, but will also have better assurance that
beneficiaries have not lost access to home health services. VNAA
strongly urges you to explore the average margin issue and the tracking
of margins before any further cuts are made to the Medicare home health
benefit.
In addition, the incentives under PPS could be changed to address
MedPAC's concern about the drop in utilization. MedPAC has documented
that it is the decrease in average visits that have changed the nature
of the home health ``product.'' High average margins are attributed to
this reduction, and the tacit assumption is that visits will continue
to be cut to maintain margins in the face of further cuts. Meanwhile,
those agencies that are providing a higher level of services than the
average, and are not enjoying such margins, are nevertheless having
their payments cut. As a result, they feel compelled against their will
to reduce services and be more selective in admissions.
At the same time, much concern is being expressed about
``stinting'' on care. The only logical outcome of cutting payments
across-the-board is the reduction in services, which prompts yet
further payment cuts. The resulting outcome is a continuous spiraling
down of service in home health care until only patients with the most
minimal needs can be provided services. Dr. Newhouse agreed that a
reduction in payments would create incentives ``to keep cutting the
volume and selecting.'' Dr. Reischauer wondered if ``at some point
we'll get down to average number of visits of one over the lower limit
and the people who are being sent out are the least skilled people we
can find and Carol [Raphael] will come back and say that the numbers of
people being served has shrunk by 85% and we don't know who they are,
who have left the system.''
Many of the commissioners were clearly concerned that the benefit
seems to be shifting dramatically from one that accommodated both
individuals with chronic and acute conditions to one that only
accommodates acute conditions. Dr. Nelson said that the Medicare home
health benefit is ``different now that it was 10 years ago and payment
policy should not force it to become different in a way that's
perverse, that's qualitatively perverse.''
We believe that there are ways to change the payment system to
preserve service levels in the Medicare home health benefit, discourage
stinting on care, and create greater stability in the home health
payment system. We suggest that you explore creating an incentive to
maintain service levels by rewarding those agencies that, going
forward, maintain utilization at or above the average number of visits
by exempting such full episodes of care from the recent 5% cut and any
future market basket reductions. At the same time, the 5% cut would
apply to episodes where service levels have dropped significantly below
the average number of prior year visits for that PPS payment category
(i.e. HHRG). Thus agencies would be encouraged to stabilize service
levels in each payment category rather than reduce services in an
effort to stay ahead of further budget cuts. Because of the variation
in service levels based on locality, we recommend that the average
visit threshold be set on an SMSA/non-SMSA basis. This would have the
effect of stabilizing margins over time.

Other Recommendations
Technical Changes to PPS

There are also several technical changes that should be made to the
outlier and ``significant change in condition'' (or ``SCIC'') policies
under PPS, which have had a well-documented effect of discouraging care
for the most chronically-ill and disabled individuals. CMS has not
taken action on either of these components. The outlier component
requires agencies to take too high of a loss before payment resumes,
thus discouraging its use.
Similarly, the SCIC adjustment was intended to provide additional
resources when patients become sicker in the middle of an episode of
care. However, it is subjected to a prorating scheme that often results
in lower payments. CMS's only solution has been to allow agencies the
same payment as when the patient was less sick, but has not increased
payments as was intended. Congress should rectify this situation by
mandating that the outlier fixed dollar loss ratio be reduced to $500
and the SCIC proration methodology be based on full episodes of care
vs. the current day of service methodology.
VNAA also recommends that Congress create a low-volume provider
payment adjustment to recognize the special problems faced by home
health agencies whose low volume of Medicare patients distorts the PPS
payment system. Because the PPS system bases payment levels on averages
across all home health agencies, it does not function to create
consistently accurate payments when agencies serve a relatively small
number of Medicare patients. The higher costs from such agencies were
excluded from computing base PPS rates. Moreover, the smaller number of
patients seen in such agencies does not allow a large enough base to
allow underpaid cases and overpaid cases to create an equilibrium,
which is intended by the average-payment methodology under PPS. Thus,
low volume agencies, usually small and rural, have a much higher
probability to take losses on patients requiring intensive care. We
recommend that low volume providers be allowed the alternative to be
paid at a fixed base rate of $450, plus a prospective, per visit rate
set at the per visit, LUPA rate that is established by CMS for short-
stay patients. This will encourage such agencies to remain Medicare
providers, and help ensure access for intensive-care patients
We recommend the creation of a rural critical access home health
concept to maintain access to Medicare home health in underserved,
rural areas. With the sunsetting of the rural ``add-on'' to the home
health PPS system, many small, rural home health agencies are being
forced to constrict their service areas and be more selective in their
admission policies to remain solvent. Others, sadly, are being forced
to consider closing their agencies. This is inevitably creating access
problems in the most rural areas of the country. These access problems
are masked by the inability of CMS to measure access in small
subdivisions of the country and by the willingness of rural
beneficiaries to endure ``going without'' rather than get needed
services that could improve their health and extend their lives.
Clearly, the current model of Medicare home health regulation and PPS
payment do not accommodate the kind of small, non-profit agencies that
have historically reached out to our most rural citizens. The
regulatory burdens placed on home health agencies can only be borne
with the help of expensive technology and specialized staffing, whether
it is for OASIS assessments, quality measurement activities, HIPAA
compliance, or complex PPS billing systems.
VNAA proposes that a separate classification of rural area critical
access home health providers be created. This provider type would only
be offered to agencies that demonstrate a commitment to serve rural
areas in which there is no other agency willing to accept all home
health patients. Such agencies would be paid by Medicare on a
reasonable cost basis and be exempted from regulatory burdens that the
Secretary shall determine may reasonably be waived in such limited
situations.
We also recommend that CMS study the beneficiary access issue
specific to geographic areas by identifying by zipcodes those areas
where services are disproportionately less or non-existent than other
areas. This could be done by analyzing the CMS claims and OASIS
databases.

Labor Wage Index

The current manner in which home health payments are affected by
the hospital wage index results in a bias against home health
recruitment of nurses and other key clinical staff in specific
geographic regions, placing stress on the provision of quality home
care to eligible beneficiaries. The inconsistent manner in which CMS
applies the hospital wage index to hospitals as opposed to home health
agencies creates hardship, uncertainty and distortions in the PPS
system. Wage indices create disparities in Medicare home health
payments that result in competitive disadvantages for the lower paid
agencies and prevents them from recruiting and retaining the staff they
need.
To resolve these problems, VNAA recommends that Congress amend
Section 1895(b)(4)(A)(ii) of the Social Security Act to:

1. Require that home health agency payments be adjusted by the
current hospital wage index, rather than the pre-floor, pre-
reclassified wage index from the prior year. This should be effective
with the calendar quarter following enactment.
2. Provide that for any hospital that is reclassified to a higher
wage index area, any home health agency that competes for labor in that
same MSA shall automatically be reclassified to an equal wage index.
3. Require a ``circuit-breaker'' in the wage index applied to home
health such that the amount a wage index is reduced in any one year is
limited to no more than 2%. If there is a legitimate reduction in wage
levels, this will provide for an orderly adjustment by agencies. If the
reduction is actually an error or an aberration, this will help
maintain services until the index returns to its normal level the
following year.

State Surveys

At the same time as one component of CMS is expressing concern
about access issues for heavy care patients, another component,
Medicare surveyors, are acting to discourage home health agencies from
accepting such patients. While motivated by good intentions to allow
zero risk to patients in home health, overzealous Medicare surveyors
are threatening VNAs with termination of their certification if they
accept patients who the surveyors deem as carrying some risk. They have
advised VNAs to discharge such patients or not to admit them in the
first place, regardless of the patient's and family's wishes in favor
of home health care. Let me assure you that no VNA would try to
persuade a patient to accept home care where there was a significant
risk. At the same time we believe that we should make every effort to
accept the choice of patients to avoid institutional care. Unless
Congress takes action to affirm the rights of patients to accept risk
to maintain their independence in home care, strict interpretation of
zero risk policies by CMS and its surveyors will force VNAs to
eliminate patients from care regardless of their wishes.
Closely related to this problem is the total lack of effective due
process protections in the Medicare home health survey process. When
VNAs are accused by a Medicare surveyor of a violation of the Medicare
rules, the agency has no recourse but to essentially plead guilty.
There is no opportunity for third-party review of facts and policy
until after the agency must either comply or be terminated, even if
they believe the surveyor was totally incorrect. Thus, the surveyor
becomes investigator, prosecutor, judge, and jury of alleged home
health violations. We strongly recommend that Congress allow for an
independent, third party review of facts and policy, when requested by
a home health agency and that this be concluded before the agency is
put on track to Medicare termination. This alternative dispute
resolution must be binding rather than advisory to be effective. To
allow excessive discretionary power in the hands of only a handful of
Medicare survey staff is to encourage further governmental excess that
is damaging to home health agencies and their patients, and alien to
the American concept of due process.
Finally, we concur with MedPAC's recommendation to expand
beneficiary access studies beyond interviewing hospital discharge
planners. As MedPAC Commissioner Carol Raphael pointed out, 50% of home
health referrals do not come from hospital discharge planners.
Therefore, 50% of referral sources are not interviewed for the
feasibility of referring Medicare beneficiaries for home health care.

VNAA's Analysis of the Inaccuracies of MedPAC Staff's Data Assumptions

We believe that MedPAC's data analysis is inaccurate and misleading
for the following reasons:

The cost report data that was used was from a 10% non-
random ``sample,'' which could not be truly representative. MedPAC
staff admits that it is ``a non-random sample'' and that ``it is not
geographically representative.'' Due to CMS programming problems, there
is no cost report data available at all from the six states in which
VNAs are most numerous. Moreover, PPS revenues are subject to many
forms of post-payment reductions that are not captured accurately on
cost reports.
Hospital-based home health agencies were excluded from
the margin analysis. In fact, MedPAC staff said that including
hospital-based agencies' data ``would decrease the all agencies' 2003
margin [23%] to about 17% and would decrease the rural margin
specifically to about 9%.'' Because hospital-based home health agencies
represent 30% of total Medicare-certified home health agencies in the
U.S., leaving them out of the data pool for calculating margins is
statistically irresponsible.
In April 2003, CMS is planning to recoup massive amounts
of overpaid money from home health agencies. The overpayments were made
due to CMS processing errors. These overpayments were included in
MedPAC's profit data. The money that will be recouped will
significantly lower any profit margins but this will not likely be
considered or reported by MedPAC. OIG is also planning to recommend
separate recovery actions for billing errors not caught by the CMS
claims process.
The only cost report data on which the MedPAC
recommendations are made is from the first year of PPS, an atypical
period that fell on the heels of the Interim Payment System (IPS). IPS
forced agencies to conserve revenue because of the expected recoupment
of ``overpayments'' in an austere reimbursement environment. Data from
the first year of PPS would reflect a ``save for survival'' mentality
that was absolutely essential under IPS.
MedPAC attributes reduced visits under home health to
PPS. Actually 75% of the reduction occurred under IPS and was beginning
to move back upward under PPS until the 5% cut. MedPAC fails to report
this fact.
The data is based on averages, which do not account for
geographic or clinical differences in patient populations or the
inherent distributional problems in the new prospective payment system.
Due to its inadequate data, MedPAC does not bore down into its data to
highlight those states and agencies that are NOT experiencing high
margins. By focusing attention on averages, inequities are masked.
MedPAC repeatedly makes reference to ``estimated'' budget
increases related to Medicare home health care. Because of the
instability created in the home health industry, these CBO budget
estimates have continuously decreased as experience proves them wrong.
As alluded to above, budget estimates have already dropped
dramatically.
MedPAC denies any access issues in home health yet cannot
account for why more than one million fewer beneficiaries are receiving
services today than in 1997. This does not make sense in light of the
fact that every economic indicator (e.g. increased hospital and nursing
home discharges, increased number of individuals over the age of 85)
points to what should be an increase in home health admissions, but
that is not the case. Why are there less people today receiving
Medicare-covered home health services than there were 10 years ago? The
oblique suggestion by MedPAC staff that this might be related to their
ineligibility for covered care is completely unsupported by any facts.
It incredibly suggests that over a million frail elders who had
participated in a fraudulent receipt of Medicare services have been
driven back by unseen forces.
MedPAC, knowing the inadequacy of its cost report data,
uses charge data in its place. However, the ``assumptions'' made from
using charge data are not based on fact. For example, MedPAC makes no
adjustment for the incurred costs of recruiting and retaining nurses
due to the well-documented nursing shortage. We believe that the
current national nursing shortage and the costs associated with
retaining and recruiting nurses must be considered in the overall
context of discussing the appropriateness of any margin under the
Medicare prospective payment system.

Conclusion

VNAs were beginning to recover from the damaging effects of IPS,
but are now once again concerned about their financial stability. We
believe that MedPAC's recommendations to freeze the FY 2004 Medicare
home health inflation update, reduce the current 10% rural add-on to
5%, and to essentially endorse the recent 5% cut have the potential to
seriously damage the Medicare home health benefit. We do not believe
that Congress would want to once again look back, as was done under the
Interim Payment System, and say ``we went too far and we need to
correct the unintended damage.'' I can tell you that this will happen
if you let the 5% cut that went into effect on October 1, 2002, remain,
and if you do not extend the 10% rural add-on or maintain the FY 2004
home health market basket index.
VNAA believes that the best way to ensure continued access to
quality home health care is to break the cycle of uncertain Medicare
payments, which feeds the ``cut-back mentality'' begun by IPS and has
been perpetuated by the recent 5% cut.
VNAs are committed to serving their communities and the most at-
risk individuals as they have done for over 100 years. We urge Congress
to seriously consider the damaging effect that a continued 5% cut,
frozen rates, and the elimination of the 10% rural add-on, would
continue to have on VNAs' ability to continue to be the safety net
providers in their communities. Thank you for allowing me this
opportunity to prevent my views and those of VNAA.

Chairman JOHNSON. Thank you very much. Mr. Buckelew.

STATEMENT OF LARRY C. BUCKELEW, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, GAMBRO HEALTHCARE U.S., LAKEWOOD, COLORADO, AND
CHAIRMAN, RENAL LEADERSHIP COUNCIL

Mr. BUCKELEW. Chairman Johnson, Congressman Stark and
distinguished Subcommittee Members, thank you for inviting me
to discuss MedPAC's recommendations regarding Medicare end-
stage renal disease (ESRD) reimbursement. My name is Larry
Buckelew, and I am President and CEO of Gambro Healthcare in
the United States, and I also serve as the current Chairman of
the Renal Leadership Council (RLC), and I will be testifying
today on the Council's behalf.
The RLC is particularly pleased to participate in this
hearing because of MedPAC's consistent recognition of the need
for an annual inflation adjustment to Medicare's dialysis
reimbursement. In fact, nearly every year the Commission has
recommended positive percentage increases.
Let me begin today by telling you a little bit about the
people we serve in the renal care sector. An ESRD is invariably
a fatal disease without regular dialysis treatments or organ
transplantation. With so few organs available for transplant,
most patients have no option but to receive dialysis three
times a week in a clinic.
Congress made an important commitment to these ESRD
patients in 1972 when it established the Medicare ESRD Program.
Today, about 70 percent of the 300,000 dialysis patients in
this country are Medicare beneficiaries, and they are older and
sicker than those initially enrolled in the ESRD Program.
To add some perspective, let me point out that Congress
adopted the composite rate, as it is called, in 1983 as the
prospective payment mechanism for outpatient dialysis services.
The rate was designed to include all nursing services,
supplies, equipment and certain drugs associated with a single
dialysis session.
Now, two decades later, the ESRD reimbursement, unlike all
other PPSs in the United States, does not include an updating
mechanism. The reimbursement methodology of today remains
grounded in the medical standards of technology 1983. Over the
years the cost to reimbursement ratios have gotten increasingly
out of balance. The MedPAC has recognized that dialysis costs
are rising faster than Medicare reimbursement rates and have
consistently acknowledged the need for an increase in the
composite rate.
During 2003, Medicare will cover on average just 94 percent
of the costs of delivering dialysis services to Medicare
beneficiaries. This represents a loss to ESRD providers of
approximately $10 per treatment, for each treatment, and,
again, the key to remember, this is 70 percent of our patient
population.
The impact of continued underpayment is substantial. It is
impeding our ability to recruit and retain the best staff for
our facilities. We are at a point where other providers in the
other segments of health care who do receive updates in their
prospective payment rates are able literally to use that money
to hire away our nurses.
The RLC strongly urges Congress to establish a framework
that provides for an annual updating formula to the composite
rate, as it has already done in each of the Medicare PPSs.
This is a fairness issue. It is also an access to care
issue. Congress has taken important steps toward establishing
an annual update for the composite rate. The Benefit Protection
and Improvements Act of 2000 (P.L. 106-554) requires the
Secretary of HHS to develop an ESRD ``market basket'' and
report back to Congress.
This ``market basket'' report was due to Congress in July
of 2002. It is our understanding this report has cleared CMS
and is in the Secretary's office for final approval. The RLC
respectively requests that you contact Secretary Thompson's
office and ask that he send you this report as soon as
possible, because it is, I think, essential that the Committee
have sufficient time to study this report before it considers
legislation to create an annual updating mechanism for the
dialysis composite rate.
In closing, I would like to emphasize that health care
quality and access to care are directly related to Medicare
payments, and for that reason it is essential that Congress
maintain its commitment to ESRD, Medicare beneficiaries, and
providers of care by establishing an annual update mechanism
for the Medicare dialysis composite rate.
I thank you for the opportunity to share the RLC's views
with you today and look forward to answering questions that you
will have later.
[The prepared statement of Mr. Buckelew follows:]

Statement of Larry C. Buckelew, President and Chief Executive Officer,
Gambro Healthcare U.S., Lakewood, Colorado, and Chairman, Renal
Leadership Council

Introduction

Chairwoman Johnson, Congressman Stark, and distinguished
Subcommittee Members, thank you for inviting me to discuss the Medicare
Payment Advisory Commission's recommendations regarding Medicare End
Stage Renal Disease (ESRD) reimbursement.
My name is Larry C. Buckelew, and I am President and CEO of Gambro
Healthcare U.S. I also serve as the current Chairman of the Renal
Leadership Council (RLC), and I am pleased to testify today on the
council's behalf.
The RLC is extremely pleased to participate in this particular
hearing, because MedPAC has consistently recognized the need for annual
inflation adjustments to Medicare's dialysis reimbursement. In fact,
nearly every year, the commission has recommended positive percentage
increases. It has also discussed in several reports to Congress the
need to add an annual update formula to the Medicare composite rate
reimbursement.
I am here today to tell you about the renal care industry and the
people we serve. I am also here to underscore the importance of
enacting structural reforms to create an annual update mechanism for
dialysis reimbursement to bring the composite rate in line with other
Medicare prospective payment systems. This will level the playing field
with other providers, allow us to continue improving quality of care
for our patients and help mitigate the closing of dialysis facilities
with disproportionately high percentages of Medicare patients.

Overview

Renal care providers are committed to meeting patients' needs--
regardless of the circumstances. During Hurricane Andrew, for example,
providers mobilized their dialysis facilities to treat individuals
whose regular treatment facilities were unavailable. This was also true
after 9/11 in New York.
The RLC represents four of the largest renal dialysis providers in
America--DaVita, Gambro Healthcare, Renal Care Group, Inc., and
National Nephrology Associates. Together, RLC members provide renal
replacement therapy services to 40 percent of all dialysis patients in
America (approximately 110,000 individuals). We provide services to
ESRD patients in more than 1,350 dialysis facilities in 42 states and
the District of Columbia.
All of the RLC's members are dedicated to providing the highest
quality care to our patients, and we are committed to working with the
government to achieve that goal. As part of this commitment, the RLC
strives to inform Congress, the Centers for Medicare and Medicaid
Services, the Medicare Payment Advisory Commission (MedPAC) and other
policy-making organizations about issues related to the provision of
renal replacement therapy.
RLC members operate freestanding dialysis clinics and hospital-
based centers throughout the country in both urban and rural areas. For
example, Gambro has dialysis facilities in the districts of Chairwoman
Johnson and Representatives McCrery, English, Lewis and Kleczka. Our
clinic in Chairwoman Johnson's district--located in Greater Waterbury,
Connecticut--has a staff of 39 providing dialysis care to 222 patients.
In the districts of the other Members I mentioned, there are a total of
343 staff members providing care to 1,355 patients. Nationwide, Gambro
has 530 dialysis facilities in 33 states and the District of Columbia
serving over 41,000 patients.

Background on ESRD--Commitment to Quality of Care

Without regular dialysis treatments or organ transplantation, ESRD
is invariably fatal. Because of the severely limited number of organs
available for transplant, most patients receive hemodialysis three
times per week. Each of the blood cleansing treatments lasts from three
to four and a half hours per session.
Congress made an important commitment to these ESRD patients by
establishing the Medicare End Stage Renal Disease (ESRD) program in
1972. Today, about 70 percent of the 300,000 dialysis patients in this
country are Medicare beneficiaries and they are older and sicker than
those initially enrolled in the ESRD program--also their numbers are
increasing.
At the same time, I am proud to say the quality of treatment
provided to ESRD patients continues to improve. Our four RLC companies
are absolutely dedicated to improving patient care. Over the past 8
years our companies have been instrumental in essentially doubling the
adequacy of a dialysis treatment (the key measure of quality),
according to CMS' Clinical Performance Measurement Reports. In fact,
even the Office of the Inspector General (OIG) within the Department of
Health and Human Services (HHS) noted that the major dialysis
corporations ``encourage their facilities to use performance measures
to foster improvements in dialysis care . . . [and] look to facilities
to conduct quality improvement projects'' (January 2002 report entitled
``Dialysis: Building on the Experiences of the Dialysis
Corporations'').

The Medicare Payment Crisis

In 1983, Congress adopted the ``composite rate'' as the prospective
payment mechanism for outpatient dialysis services. The rate was
designed to include all nursing services, supplies, equipment, and
certain drugs associated with a single dialysis session. Unlike all of
the subsequent prospective payment systems, however, the ESRD
reimbursement did not include an updating mechanism. Because Congress
has not reformed the methodology, it remains grounded in 1983 medical
standards and technology. Congress, on occasion, has taken note of new
drug treatments to improve patient outcomes (such as intravenous
Epogen, iron and vitamin D supplements) through special payment rules.
These additions to the composite rate are commonly referred to as
separately billable items. Dialysis providers have over the years used
the additional reimbursement from separately billable drugs to offset
the losses on the composite rate reimbursement but this is no longer a
viable option.
MedPAC has recognized dialysis costs are rising faster than the
Medicare reimbursement rate and has consistently a rate. In 1999, 2000,
and 2002, MedPAC recommended that Congress increase the composite rate
2.4 percent for each subsequent year. For its 2003 report, it appears
that MedPAC will recommend an increase of 1.6 percent.
In the face of increasing costs, the composite rate, averaging
around $131 per treatment, continues to under-pay dialysis facilities
relative to facilities' costs. In January 2003, MedPAC staff indicated
that when considering only the composite rate services, the payment-to-
cost ratio across freestanding dialysis facilities is 0.97, and in last
year's report found the ratio for small facilities to be only 0.86 and
0.94 for rural facilities. The commission projected that input prices
would increase 2.5 percent in 2003.
In other words, during 2003 Medicare will only be covering on
average 94.5% (i.e. 97% minus 2.5%) of the cost of delivering dialysis
services to Medicare beneficiaries. This will impede our ability to
introduce new technology and recruit the best staff for our facilities.
It will also make it virtually impossible to open new facilities in
areas where the majority of the patients rely on Medicare coverage for
their dialysis care.
Further, contrary to MedPAC's findings, an Abt Associates, Inc.
study, conducted in 2002, found that, ``the profits made on separately
billable items were not large enough to cover the increasing losses on
composite rate services.'' The RLC agrees with the findings of the Abt
study: The profits MedPAC attributes to separately billable drugs are
essentially creating a break-even situation by cross-subsidizing the
losses on the prospective composite rate system.
In short, even with Medicare reimbursement for separately billable
intravenous drugs, the composite rate remains woefully inadequate as
dialyssi costs continue to increase. The increases are due not only to
inflation, but also to several other factors. For example, many
patients now require longer treatment times of 4 to 4\1/2\ hours, which
increase staff, supply and overhead costs. Dialysis facilities also
face the same shortage of health care workers that is plaguing
providers nationwide. The industry's nursing costs have nearly tripled
over the past ten years. The competition to secure qualified, quality
health care workers is intense and severe, and dialysis facilities
simply cannot compete with the benefits and pay given by providers who
receive updates in their prospective payment rates.
When viewed in comparison to the CPI, the ESRD composite rate lags
far behind. Since 1996, the CPI has increased 16.9 percent, and the CPI
Medical Care Component has risen 26.9 percent. During that same period,
the Medicare Hospital Operating Update has increased 11.25 percent. By
contrast, the ESRD composite rate has risen only 3.6 percent--well
below the rate of inflation (see attachment A).

The Importance of Enacting an Annual Update

The composite rate adopted by Congress does not provide for an
update mechanism, nor does it give the HHS Secretary the authority
necessary to develop one. It is essential that Congress act to address
the underlying problem caused by the lack of an annual update formula
in the composite rate. The ESRD program is essentially the only
prospective payment in the Medicare program that does not have a
methodology in place to adjust payments from year to year to reflect
inflation, changes in technology, labor, or other relevant factors.
The RLC strongly urges Congress to establish a framework that
provides for an annual updating formula to the composite rate, as it
has already done in each of the other Medicare prospective payment
systems. Adding an updating formula would finally create a level
playing field with hospitals and other provider prospective payment
systems and would constitute real Medicare reform. This is a fairness
issue.
This is a fairness issue. Until dialysis providers receive regular
inflation updates, the industry will never be able to compete
successfully with other providers for the limited supply of nurses and
other health care workers. It is also a fairness issue to our patients.
Dialysis providers want to deliver the best possible quality of care,
and we are proud that patient outcomes have improved significantly over
the past several years. However, dialysis providers cannot continue
this progress indefinitely without an update formula that takes into
account new technologies.
Most importantly, this is an access to care issue. Without regular
inflation updates, our companies will be unable to open and operate
clinics in areas where there is a disproportionately high percentage of
Medicare beneficiaries who require regular dialysis treatments to
survive. In the past few years, our companies have actually closed some
fifty dialysis facilities in both rural and urban areas where our
Medicare economics were unacceptably inadequate. Having only a thirty
month ESRD Medicare Secondary Payer requirement further burdens our
facilities with a disproportionately high percentage of Medicare
beneficiaries. In addition, proposed Medicaid cuts to dialysis payments
in a number of states will only exacerbate the looming threat to
patient access to care.
The RLC supports an annual update forumla modeled after the one
currently used within the hospital prospective payment system. Under
this model, the Secretary of HHS would have authority to increase the
ESRD ``market basket''--i.e., the percentage by which the cost of the
mix of goods and services included in the provision of dialysis
services, appropriately weighted, exceeds the cost of such mix of goods
and services for the preceding calendar year. The costs would include
labor (including direct patient care costs and administrative labor
costs, vacation and holiday pay, payroll taxes, and employee benefits);
other direct costs (including drugs, supplies, and laboratory fees);
overhead (including medical director fees, temporary services, general
and administrative costs, interest expenses, and bad debt); capital
(including rent, real estate taxes, depreciation, utilities, repairs,
and maintenance); and other allowable costs specified by the Secretary.
The Secretary would also take into account the increase in the cost of
providing the services due to new technology, new service delivery
methods, and other relevant factors. Another important component of
this update formula would be to permit the Secretary to periodically
review and update the items and services within the market basket. The
need for reviews and updates is exemplified by the problem created by
the nursing shortage
The need for reviews and updates is exemplified by the problem
created by the nursing shortage. The industry's nursing costs have
nearly tripled over the past ten years and gone up in the range of 18%
to 36% in the last three years. Nephrology nurses are very specialized
nurses who require more training and education that even ICU nurses. To
cope with the nursing shortage and rising costs, dialysis providers
have been shifting to the use of more nursing assistants (technicians).
The industry cannot continue this trend without harming our patients'
health and safety. The Secretary needs the authority to adjust the
composite rate to take account of inflationary and market changes, such
as this one.
Acting upon the recommendation of the Ways and Means Committee,
Congress in 2000 took an important step toward the establishment of an
annual update in the composite rate. The Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 (BIPA) required the
Secretary of Health and Human Services to develop an ``ESRD market
basket'' and report to Congress on it. This ``market basket''
calculation is to account for the percentage by which the costs for the
year of the mix of labor and non-labor goods and services included in
the ESRD composite rate exceed the costs for the preceding year and to
account for changes in technology, and other relevant factors.
This ``market basket'' report, along with a report on including
additional services in the composite rate, was due to Congress in July
2002. It is our understanding that these two reports have cleared CMS
and are now in the Secretary's office for final approval. The RLC
respectfully requests that you contact Secretary Thompson's office and
ask that he send you both reports as soon as possible. It is essential
that the Committee have sufficient time to study the reports before it
considers legislation to create an annual updating mechanism for the
dialysis composite rate.
We would also like to point out that in its March 2001 report,
MedPAC conducted a review of the entire prospective payment system for
freestanding dialysis facilities and called for an annual update to the
composite rate.
The RLC in 2001 and 2002 worked with the CMS Office of Actuary and
achieved consensus on all of the elements of a ``market basket''
formula. We believe the report will provide a good road map for CMS to
follow in establishing an annual updating mechanism. We understand that
under this approach CMS would adopt the same annual regulatory process
for dialysis reimbursement that the agency currently utilizes for
hospitals, and we endorse this process.
In closing, I would like to emphasize that health care quality and
access are directly related to Medicare payments. For that reason, it
is essential that Congress maintain its commitment to ESRD patients by
establishing an annual update formula for the Medicare dialysis
composite rate.
I thank you for the opportunity to share the RLC's views with you
today. I look forward to answering any questions you may have.

Attachment A: Percent Changes in Price/Reimbursement
------------------------------------------------------------------------
Medicare
CPI Medical Hospital ESRD
Year CPI \1\ Care Operating Composite
Component \2\ Update Rate
------------------------------------------------------------------------
1996 3.0 3.0 1.5 0.0
1997 2.3 2.8 2.0 0.0
1998 1.6 3.4 0.0 0.0
1999 2.2 3.7 0.5 0.0
2000 3.4 4.3 1.1 1.2 \3\
2001 2.8 4.7 3.4 2.4 \4\
2002 1.6 5.0 2.75 0.0
Average: 2.4 % 3.8 % 1.6 % 0.5 %
Cumulative Total: 16.9% 26.9% 11.25% 3.6%

------------------------------------------------------------------------
----------

\1\ Source: Bureau of Labor Statistics, U.S. Department of Labor.
\2\ Id.
\3\ Source: The Medicare, Medicaid, and SCHIP Balanced Budget Refinement
Act of 1999 (P.L. 106-113).
\4\ Source: The Medicare, Medicaid and SCHIP Benefits Improvement Act of
2000 (P.L. 106-554).

Chairman JOHNSON. Thank you very much. Dr. Plested.

STATEMENT OF WILLIAM G. PLESTED III, M.D., CHAIR ELECT, BOARD
OF TRUSTEES, AMERICAN MEDICAL ASSOCIATION

Dr. PLESTED. Thank you, Chairman Johnson. My name is Bill
Plested. I am Chair Elect of the Board of trustees of the
American Medical Association (AMA) and a practicing
cardiovascular surgeon in Santa Monica, California. The AMA
would like to express our appreciation to you, Chairman
Johnson, to Committee Chairman Thomas, Ranking Member Stark and
to every Member of the Subcommittee for your hard work and
leadership in fixing the Medicare physician payment mistake.
In the last several years MedPAC has made a number of
recommendations concerning Medicare's physician update formula.
For instance, last year, MedPAC recommended replacement of an
expenditure target system such as the current sustainable
growth rate (SGR) with a system that is based on an assessment
of increased practice costs, adequacy of payment and
beneficiaries' access to care. The AMA agrees.
There are several problems with using an expenditure
target. First, it is based on a collective action and does not
provide an incentive at an individual level to control
utilization. Second, payment updates can fluctuate wildly from
year to year, and overall do not keep pace with medical costs.
Since 1991, Medicare payments to physicians have averaged only
a 1.1 percent annual increase, or 14 percent less than
inflation, in medical practice costs as measured by the
Medicare Economic Index.
Third, an expenditure target system caps spending on
medical services but not the amount of services needed to treat
sick patients. When patients' need for and use of medical
services exceeds the target, payment rates are inappropriately
reduced. This can raise serious access concerns, as occurred
after the 5.4 percent pay cut in 2002.
Instead, expenditure target volume growth or other issues
could be addressed through specific actions that deal with the
actual source of the increase. Accordingly, the AMA recommends
that the Subcommittee reconsider the use of an expenditure
target system. Short of this, the AMA urges modifications to
the SGR.
The SGR links physician updates to changes in GDP. However,
GDP is only a measure of growth in the overall economy. The
medical needs of the Medicare patients do not wane when the
American economy slows. Further, GDP does not take into account
health status, the aging of the Medicare population,
technological innovations or changes in the practice of
medicine. The MedPAC has recommended that Congress revise the
SGR to include an allowance for spending increases due to these
factors, and the AMA agrees.
Reliance on GDP has also led to a system based on economic
forecasts that are unpredictable and thus often inaccurate.
This makes it difficult for physicians as small businessowners
to make the necessary decisions for the growth and fiscal
survival of their practices.
For example, in March 2001 physician payments were
projected to fall slightly in 2002. Yet, in actuality, payments
were cut by 5.4 percent. A 4.4 percent cut was averted in 2003.
However, the formula may still generate payment cuts in future
years. The MedPAC has recommended a full inflation update for
2004, as measured by the Medicare Economic Index. The AMA
strongly supports a 2004 update that, at a minimum, keeps pace
with inflation.
Finally, I would like to address the implementation
problems with the SGR. In determining the SGR, calculations of
actual physician spending include the costs of prescription
drugs. Drugs do not belong on the SGR, because they are paid
under a separate fee structure. Furthermore, many HHS policies
and goals encourage the development of new drug and cancer
therapies. Partially due to these policies, drug spending is
rising five times as fast as physician spending.
Inclusion of drugs in the SGR makes it extremely likely
that drug spending will give the false impression that spending
on physicians' services exceeds the SGR target, thus triggering
physician pay cuts and jeopardizing access. We urge the
Subcommittee to encourage removal of drugs from the SGR.
Finally, although required by law, the SGR target does not
take into account changes in utilization and spending resulting
from national coverage decisions. We urge an allowance in the
SGR target for these decisions.
Thank you again for the opportunity to provide our views as
well as for your strong leadership for the medical community
and the seniors that we serve.
[The prepared statement of Dr. Plested follows:]

Statement of William G. Plested III, M.D., Chair Elect, Board of
Trustees, American Medical Association

Chairman Johnson and Members of the Subcommittee, the American
Medical Association (AMA) appreciates the opportunity to provide our
views today regarding the recommendations by the Medicare Payment
Advisory Commission (MedPAC) concerning the Medicare payment update
formula for physicians and other health care practitioners.
The AMA would like to take this opportunity to commend you,
Chairman Johnson, as well as Chairman Thomas and each Member of the
Committee, for all of your hard work and commitment to fixing the
Medicare physician payment update problem. We greatly appreciate your
leadership in working closely with the Administration and the Centers
for Medicare and Medicaid Services (CMS) to enact H.R. Res. 2 (Pub. Law
108-7), which contains a provision to avert a Medicare payment cut that
jeopardized continued access to physicians' services for our nation's
elderly and disabled patients.
Without this legislation, a 5.4 percent cut in 2002 would have been
compounded by an another 4.4 percent cut on March 1, 2003, and by
additional cuts of about 8 percent over the next two years. At the same
time, physicians' practice expenses, particularly medical liability
insurance costs, have skyrocketed, adding to the already significant
pressures on physicians to discontinue or limit the provision of
services to Medicare patients. In fact, a recent AMA survey found that
had the scheduled 4.4 percent cut gone into effect in 2003, nearly half
of all physicians (61 percent of primary care physicians and 44 percent
of specialists) planned to reduce the number of Medicare patients in
their practice.
As a result of the recent Congressional and Administrative action,
physicians and other health care practitioners received a 1.6 percent
payment increase instead of the 4.4 percent cut on March 1, and we are
hopeful that this will prevent wide scale access problems. The picture
for future years is also much improved over the long term. Additional
payment cuts, however, are still possible and could be significant.
Thus, while we are extremely grateful for the efforts that Congress has
made to restore stability to the physician payment system, problems in
the design of the formula remain.
Indeed, there have been implementation problems with the physician
payment update formula since expenditure targets were first imposed in
1990. As some members of the Subcommittee may recall, problems with the
original Medicare Volume Performance Standards (MVPS) targets led to
its replacement with the Sustainable Growth Rate (SGR) in 1997, which
itself has now required two Congressional interventions. Even with all
of these changes, however, the formula may still generate payment cuts
that endanger Medicare beneficiaries' access to care. The Medicare
Payment Advisory Commission (MedPAC) has recommended a full inflation
update for 2004, as measured by the Medicare Economic Index (MEI), and
the AMA strongly supports an update in 2004 that, at a minimum, keeps
pace with inflation.
Further, last year MedPAC recommended that the SGR be replaced with
a system where updates are based on an assessment of increased practice
costs, adequacy of payment, and beneficiaries' access to care. The
medical profession continues to support that recommendation. MedPAC
previously called for a number of changes in the SGR, however, and if
it ultimately is not possible to replace the SGR target system, the
prior MedPAC recommendations would be a good starting point for
improving the formula.
The AMA very much appreciates the Subcommittee's continued focus on
problems that are inherent in the update formula, and we are pleased to
offer the recommendations discussed below concerning the physician
payment update system.

USE OF A SPENDING TARGET

The AMA believes that use of an expenditure target in determining
annual updates to Medicare payments for physicians' services, does not
achieve its goal of reduced volume growth and, further, can lead to
serious access concerns for Medicare patients. Indeed, MedPAC in the
past has expressed its view that an expenditure target system does not
appropriately reflect increases in practice costs and that this could
impact access.
MedPAC proposed a different payment system for physicians' services
using the same framework that is currently in place for evaluating
payment updates for all other Medicare provider groups. Specifically,
under that framework, there would be neither automatic bonuses nor
automatic cuts in physician payments. However, payments to physicians
could still be reduced if MedPAC and Congress believed that cuts were
warranted and would not put Medicare's 40 million beneficiaries at
risk. Issues, such as volume growth, could be tackled through targeted
actions that deal with the source of the increase. This would give
Congress more control over the process than exists under the current
system.
An expenditure target system does not create the incentives needed
to achieve its cost containment goal. As you observed, Chairman
Johnson, along with Committee Chairman Thomas in a letter, dated March
21, 2002, to CMS Administrator Scully: ``An individual physician who
reduces volume in response to . . . the SGR system would not gain a
proportionate increase in payments, because payment increases would be
shared among all physicians who serve Medicare beneficiaries. Contrary
to the system-wide goal of restraining volume growth, an individual
physician has incentives to increase volume under the SGR system.''
There is also a risk in any expenditure target system that payment
updates will not keep pace with medical practice costs. Further, this
type of system may create instability in rates with payments that keep
up with inflation in some years and fall well behind inflation in
others. Since 1991, when an expenditure target system was first
implemented, Medicare payments to physicians have averaged only a 1.1
percent annual increase, or 14 percent less than inflation in medical
practice costs, as measured by the conservative Medicare Economic
Index. It is difficult for physicians to make appropriate decisions
regarding such matters as staff size and office space, if they cannot
rely on a predictable income stream.
Finally, it is important to note that elderly and disabled
Americans' need for medical care is not subject to constraints. The
United States' population is aging and new technologies are making it
possible to perform more complicated procedures on older and frailer
patients than in the past. While Medicare's expenditure target system
artificially caps spending on medical services, this type of system
inherently cannot cap the amount of medical services that are needed to
adequately treat sick patients. When patient need for and utilization
of medical services is greater than the target, payment rates for
individual physicians are reduced. These inappropriate payment
reductions lead to serious access problems, such as those chronicled in
surveys and news articles as a result of the 5.4 percent Medicare
payment cut in 2002.
Accordingly, the AMA recommends, in view of the access implications
resulting from an expenditure target system, that the Subcommittee
reconsider use of this type of system for determining payment updates
for physicians and other health care professionals.

PROBLEMS UNDER THE SUSTAINABLE GROWTH RATE SYSTEM

The current expenditure target system used for determining Medicare
payments for services furnished by physicians and other health care
professionals is the SGR system. This system manifests all of the
shortcomings inherent in any expenditure target, and has led to payment
volatility, created substantial patient access concerns and generated
significant problems for the Federal Government.
The SGR system also has had a particularly serious impact on
physician practices since they generally are organized as small
businesses. Indeed, AMA data shows that two-thirds of physician
practices have 25 employees or less. Small businesses do not have the
economic and other necessary resources to absorb sustained losses or
the steep payment fluctuations that have occurred under the SGR system.
Further, the unpredictability of the SGR system makes it difficult for
physician office practices, as small businesses, to project into the
future and make the necessary business and financial decisions needed
to operate a sound business over time. For example, when medical
practices experienced the 5.4 percent Medicare cut in 2002, as small
businesses, physicians and non-physician practitioners and their staff
were left with very few alternatives for maintaining a financially
sound practice.
As this Subcommittee well knows, it took valiant efforts by full
Committee Chairman Thomas, Subcommittee Chairman Johnson, as well as
every member of this Subcommittee, in addition to similar efforts by
the Senate, the Administration and CMS to avoid another SGR-triggered
pay cut in 2003. While we greatly appreciate this effort, we do not
believe Congress and the Administration (nor patients, physicians and
other health care professionals) should have to struggle with the ill
effects of such a system, year after year.
Under the SGR system, CMS establishes allowed expenditures for
physicians' services based on certain factors set forth in the law. CMS
then compares allowed expenditures to actual expenditures. If actual
expenditures exceed allowed expenditures in a particular year, then
physician payments are reduced in the subsequent year. Conversely, if
allowed expenditures are less than actual expenditures, physician
payments increase.
Growth in allowed expenditures under the SGR is determined by
changes in (i) inflation, (ii) fee-for-service enrollment, (iii) real
per capita gross domestic product (GDP), and (iv) laws and regulations.
There are two fundamental problems with this formula. First, it is
highly dependent on projections that in effect require CMS to predict
the unpredictable and, second, it uses GDP as a proxy for appropriate
growth in the use of physician services. Payment swings under the SGR
are unavoidable for several reasons:

GDP Does Not Accurately Measure Health Care Needs

The SGR permits utilization of physicians' services per beneficiary
to increase by only as much as GDP. Linking Medicare physician payment
updates with GDP is problematic because the GDP is a measure of growth
in the overall economy and bears little relation to the health needs of
Medicare patients. Specifically, GDP does not take into account health
status, the aging of the Medicare population, technological innovations
or changes in the practice of medicine. Indeed, MedPAC, prior to
recommending an alternative to the SGR system, recommended that
Congress revise the physician payment update system to include an
allowance for spending increases due to technological advancement as
well as demographic changes.
Reliance on GDP has also led to a system that relies on economic
forecasts that nearly always turn out to be inaccurate, and thus it is
impossible to make accurate projections about payment update levels.
For example, in March of 2001, CMS projected that physician payments
would fall slightly by about -0.1 percent in 2002. CMS noted that this
projection was based on very early information and could change before
a final update was announced in January 2002. In fact, this is exactly
what occurred, and Medicare payments to physicians and other health
care professionals were cut by 5.4 percent in 2002.

Technological Innovation

Both Congress and the Administration have demonstrated their
interest in fostering advances in medical technology and making these
advances available to Medicare beneficiaries through FDA modernization,
increases in the National Institutes of Health budget, and efforts to
improve Medicare's coverage policy decision process. The benefits of
these efforts could be seriously undermined if physicians face
disincentives to invest in new medical technologies or to provide them
to Medicare beneficiaries as a result of inadequate spending targets.
Technological changes in medicine show no sign of abating, and, if
the SGR is retained, the AMA agrees with MedPAC that it should include
an adjustment for the impact of new technology on physicians' cost and
patients' use of services so that Medicare beneficiaries continue to
have access to mainstream, state-of-the art quality medical care.

Site-of-Service Shifts

Another concern that is not taken into account in the SGR formula
is the effect of the shift in care from hospital inpatient settings to
outpatient sites. As MedPAC has pointed out in the past, hospitals have
reduced the cost of inpatient care by reducing lengths-of-stay and
decreasing staff, as well as by moving more services to outpatient
sites, including physician offices. This trend increased the number and
intensity of services as patients with increasingly complex conditions
are treated in physicians' offices. This increased use and intensity,
however, is not directly recognized in the SGR formula. Thus, the AMA
believes the SGR target should also reflect changes in site of service.

Beneficiary Characteristics

A related factor that also is unrecognized in the SGR formula is
changes over time in the characteristics of patients enrolling the fee-
for-service program. A 1999 MedPAC analysis concluded that the fee-for-
service population is growing older, with proportions in the oldest age
groups (aged 75 and over) increasing by 2 percent from 1993 to 1997,
while proportions in the younger age group (aged 65-74) decreased by
3.4 percent. Older beneficiaries likely require increased health care
services, and, in fact, MedPAC reported that payments per beneficiary
rose by about 0.1 percent a year during that same time frame. As MedPAC
has previously recommended, the SGR utilization standard should be
adjusted to reflect this sort of demographic change.

Reliance on Predictions

Use of GDP has led to a payment system that relies on economic
forecasts that nearly always turn out to be inaccurate. Medicare
actuaries must also predict what actual spending will be, how many
beneficiaries will move between Medicare+Choice and fee-for-service, as
well as what type of utilization changes will occur as a result of
legislative and regulatory changes, such as the addition of coverage
for various preventive services. None of these factors can be
accurately predicted before they occur. As a result, payment updates
are always based on incomplete and inaccurate data, and can fluctuate
wildly from year to year.
In exploring alternatives to the current update formula for
physicians' services, the AMA urges the Subcommittee to take into
account the uncertainty and volatility resulting from use of the GDP in
determining payment updates.

SGR IMPLEMENTATION PROBLEMS

Apart from the inherent structural problems in an expenditure
target system, as well as the SGR itself, there are other problems with
implementation of the SGR that seriously impact access and inequitably
affect payment updates due to factors that are beyond physicians'
control.

Inclusion of Drugs in the SGR

As discussed above, in determining the SGR each year, CMS compares
actual spending on physicians' services to an amount established under
a spending target. Calculations of actual spending include the costs of
prescription drugs that are administered in physicians' offices.
The AMA does not believe that drugs should be included in the SGR.
Although the physician's administration of the drug is clearly a
physician service that by statute must be included in the pool, the
drugs themselves are not ``physicians' services'' and are not paid
under the Medicare physician fee schedule. Thus, it is inconsistent to
include drugs in the SGR. In fact, in a recent interim final rule (on
the application of inherent reasonableness to Medicare Part B
services), CMS chose to exclude drugs from the Medicare definition of
``physicians' services.'' To include drugs as a ``physicians' service''
for certain purposes, but not for others, exacerbates the
inconsistency. In the March 2001 letter to Administrator Scully,
referenced above, Subcommittee Chairman Johnson and full Committee
Chairman Thomas suggested that the Medicare policy of including drugs
in the SGR needs modification.
In addition, the SGR does not provide an incentive to individual
physicians to control drug utilization. Since the SGR is based on the
collective actions of all physicians and other health care
professionals who bill the Medicare program, it is difficult for an
individual physician to assess, at any given point in time, the impact
of needed prescription drugs on the SGR. We also note that Medicare
payment for drugs is not based on the SGR. Since neither prices nor
utilization of drugs are affected by the SGR, it is inconsistent and
inequitable to argue that the SGR controls drug spending.
Further, inclusion of drugs in the SGR is at odds with a number of
government policies that encourage the rapid development and use of new
drugs and cancer therapies, and, in effect, punishes physicians with
lower payments if they provide the very new drugs and therapies that
these policies encourage.
Specifically, appropriations for the National Cancer Institute
(NCI) increased by more than 35 percent between 1997 and 2000, the Food
and Drug Administration (FDA) drug approval process was streamlined,
and Congress expanded Medicare to include new screening benefits for
breast, cervical, colorectal and prostate cancer. The Department of
Health and Human Services has actively promoted these new benefits and
the Administration apparently intends to continue these policies, as
evidenced by a draft HHS strategic plan that proposes to ``accelerate
private sector development of new drugs, biologic therapies and medical
technology.''
While these are laudable policies, and the AMA by no means objects
to these policies, nevertheless, they play a large role in causing drug
spending to rise at a much greater pace than physician spending.
According to AMA analyses, from 1996 through 2001, drug spending growth
was 178 percent compared to 35 percent for physicians' services.
The enormous increases in drug spending are also due to innovations
in the treatment of cancer and arthritis along with improvements in
pain management and modifications in clinical practice. For example,
between 1996 and 2001, some 61 new drugs were introduced. Eight of the
fifteen most frequently used drugs in 2000 were either brought to
market or received FDA approval for expanded uses between 1996 and
2000. In addition, use of some drugs rose dramatically, as is the case
with epoetin (previously used primarily to counteract anemia in end
stage kidney disease patients). Use of this drug was extended to
patients with chronic kidney disease, cancer and other conditions where
anemia is common or is a by-product of treatment.
Increased incidence of lung cancer and enhanced efforts to promote
screening for breast and prostate cancer also contributed to the
expansion of Medicare expenditures for a number of drugs. Between 1996
and 2000, expenditures for chemotherapy drugs increased by 81 percent.
Moreover, growing evidence that pain associated with cancer and other
conditions is frequently under-treated, along with enhanced abilities
to control pain, led to the evolution of pain management as a specialty
during this time period.
Additionally, a number of new products, including several
additional promising arthritis and cancer drugs, are in the pipe line.
This is compounded by the fact most of the more prevalent cancers are
found primarily among the aged, and cancer incidence in the U.S. is
predicted to double over the next 50 years. (The Annual Report to the
Nation on the Status of Cancer, 1973-1999, Featuring Implications of
Age and Aging on the U.S. Cancer Burden, 94 Cancer 10, at 2766-2792
(May 15, 2002)).
Drug spending as a share of total SGR spending doubled from 3.7
percent in 1996 to 7.4 percent in 2001. CMS actuaries, as well as AMA
economists, expect that drug expenditures will continue to outpace
growth in spending for physician services. Thus, inclusion of drugs in
the SGR makes it extremely likely that spending on physicians' services
will exceed the SGR target. Essentially, physicians are being asked to
finance drug costs through cuts in their Medicare payments even though
they do not have the ability to control the factors that are causing
increases in drug utilization, and, therefore, should not be penalized
through reduced payments.
We emphasize that Medicare policies have an enormous impact on the
SGR. In times slow economic growth, as is currently the case, these
policy decisions are critical to determining whether there will be a
negative or positive payment update. CMS' decision to include drugs in
the SGR could make the difference between a positive update versus a
Medicare pay cut in future years. Further, this policy decision will
have an even more devastating impact in the event that a Medicare
prescription drug bill is enacted and these drugs are also included in
the SGR.
We, therefore, respectfully request that the Subcommittee encourage
the removal of drugs from the SGR.

Changes In Medicare Spending On Physicians' Services

Due To Laws And Regulations

The AMA believes that there must be a full accounting of the impact
of regulatory changes on physician spending.
When establishing the SGR spending target for physicians' services,
the law requires that impact on spending, due to changes in laws and
regulations, be taken into account. The AMA believes that any changes
in national Medicare coverage policy that are adopted by CMS pursuant
to a formal or informal rulemaking, such as a Program Memorandum or a
national Medicare coverage policy decision, constitute a regulatory
change as contemplated by the SGR law, and must also be taken into
account for purposes of the spending target.
CMS' authority to make any regulatory change is derived from law--
whether it is a law specifically authorizing Medicare coverage of a new
service or a law that provides the Secretary of HHS with general
rulemaking authority. Thus, any new coverage initiative is a direct
implementation, by regulation, of a law. This is exactly what the SGR
requires be taken into account--increases in spending due to ``changes
in law and regulations.''
When the impact of regulatory changes for purposes of the SGR is
not properly taken into account, physicians are forced to finance the
cost of new benefits and other program changes. Not only is this
precluded by the law, it is extremely inequitable and ultimately
adversely impacts beneficiary access to important services. Further, in
the March 2001 letter to Administrator Scully, referenced above,
Subcommittee Chairman Johnson and full Committee Chairman Thomas
suggested that national coverage decisions ought to be included in the
SGR target.
HHS and CMS actively promote utilization of newly-covered Medicare
services through press releases and other public announcements. For
example, the Secretary of HHS last year released a report highlighting
the importance of medical innovations and new technology, especially
new drugs, in helping seniors live longer and healthier lives. Further,
another HHS release regarding Medicare coverage of sacral nerve
treatment for urinary incontinence stated, ``[u]rinary incontinence
affects approximately 13 million adults in the United States, with
nearly half of nursing home residents having some degree of
incontinence. It is twice as prevalent in women as it is in men, and
costs more than $15 billion per year, including both direct treatment
of the disease and nursing home costs.'' The Secretary made a similar
announcement when Medicare expanded its coverage of lymphadema pumps,
stating, ``[i]t's important to make effective technologies available to
Medicare beneficiaries when it helps them the most. This coverage
decision simplifies Medicare policy to allow older Americans who need
these pumps to get them more quickly and easily.''
While the AMA supports Medicare beneficiary access to these
important services, physicians and other practitioners should not have
to finance the costs resulting from the attendant increased
utilization.
Accordingly, we urge the Subcommittee to ensure that the impact on
utilization and spending resulting from all national coverage decisions
is taken into account for purposes of the SGR spending target.
We appreciate the strong efforts of the Subcommittee Chair and
Members to avert the Medicare payment cut in 2003 and to further
explore the problems presented by the SGR system. We urge the
Subcommittee and Congress to consider the recommendations we have
discussed today, and we are happy to work with the Subcommittee and
Congress as it concerns these important matters.

Chairman JOHNSON. Thank you very much, Dr. Plested. Ms.
Ousley.

STATEMENT OF MARY K. OUSLEY, CHAIRMAN, AMERICAN HEALTH CARE
ASSOCIATION

Ms. OUSLEY. Good afternoon, Chairman and Members of the
Subcommittee. Thank you very much for the opportunity to
testify this afternoon on the recent MedPAC report. My name is
Mary Ousley, and I am representing today the American Health
Care Association.
It is essential that as we discuss all of the multitude of
the facts associated with the MedPAC findings, that we never,
ever lose sight of the fact that we are talking about real
human beings and real lives being impacted by these
recommendations.
I want to say first and foremost that we strongly, strongly
believe that the MedPAC recommendations are, number one, ill-
advised and, number two, that they will contribute to the
further deterioration of the services being provided to seniors
in America in long-term care.
One of the problems that we are attempting to overcome and
to deal with and one that is apparent that this Committee also
understands well is that MedPAC continues to focus solely on
the data regarding the Medicare margins without looking at the
associated Medicaid losses and issues with Medicaid.
When it comes to making very important public policy
recommendations, it is inconceivable to me that key data used
to reach these conclusions about the sufficiency of Medicare
payments fails to look collectively at the issues of both
Medicare and Medicaid. Again, as this Committee has discussed,
some have chosen to dismiss this issue of cross-subsidizing as
not relevant to the debate at hand.
What I really want to say to this Committee today,
Chairman, is that when you look at the average patient in our
SNFs today there is an 85-year-old widowed resident that is in
need of care, multiple activities of daily living dependencies,
that she does not see herself as Medicare or Medicaid. She sees
herself as elderly and sick and in need of care, and these
recommendations do not serve this average patient well at all.
When you consider the average Medicaid rate in this Nation
of $115 a day, about $5 per hour with multiple States
throughout the Nation paying far less than that, Texas,
Oklahoma, Louisiana, the overall picture presented by MedPAC is
misleading because of the gross shortfalls in Medicaid, and
MedPAC's own research supports that its recommendations would
have dire consequences on patient care.
The new payment adequacy framework obviously adopted last
year by MedPAC requires that the Commission take into
consideration Medicare beneficiaries' access to care and
providers' access to capital. These recommendations ignore
both, and this is a critical problem.
Today our nursing facilities' capital ratios evaluated by
Lewin Group have almost for the entire sector been moved to the
status of poor.
The CMS recognized these issues in its own study last year,
saying that the 2002 potential cuts then went into effect, that
this would have dire consequences on the creditability of
nursing facilities throughout this Nation.
Chairman, that issue is absolutely real for us today.
MedPAC today, in the conversations at the meeting in December,
saying that the overall access to capital is generally good is
simply incorrect.
Newspaper headlines across this Nation tell the story:
``Centennial into Chapter 11.'' There are multiple nursing
facilities closing all across this Nation. In my company this
year I have closed facilities in Massachusetts, California,
Washington State. The closings are increasing, and this is a
critical problem for seniors.
Significantly, Chairman, I want to say to you, this is not
just a problem for one sector. It is not proprietary, non-
proprietary, multi-facility, independent owner, small chain. It
is a problem for all of us as we continue to try to provide
this care.
I agree with the MedPAC recommendations that access to care
needs to be carefully monitored as we move forward. It is
extremely important, and we certainly see this access to
skilled nursing changing.
At the outset of the testimony I said that we should never
forget that we are dealing with the most vulnerable individuals
in America today. Chairman, I ask that this Committee, our
Federal Government, our President, this Administration invest
the resources that are needed to provide that care.
Just a few short months ago, one of the proudest days of my
career, I stood with Secretary Tommy Thompson, Administrator
Scully, American Association of Retired Persons (AARP), Service
Employees International Union, and others as we announced the
Nursing Home Quality Initiative. Chairman, unless the resources
are there to continue this quality initiative, it will fail,
and it will fail on the behalf of seniors of America. I ask
that you discount the illogical and superficial MedPAC analysis
and that you do not accept this data or this view. I believe
that we cannot accept, Congress and America cannot tolerate
this type of approach to providing care for the most frail,
vulnerable individuals in America today, our senior citizens
and our disabled.
Thank you very much for the opportunity to express our
opinions. Thank you.
[The prepared statement of Ms. Ousley follows:]

Statement of Mary K. Ousley, Chairman, American Health Care Association

Good morning, Madame Chairman and members of this subcommittee.
Thank you for inviting me to provide you with an accurate, balanced
perspective on the recent Medicare Payment Advisory Commission (MedPAC)
report on Medicare payment policies.
My name is Mary Ousley, and I am Chairman of the American Health
Care Association. I speak today on behalf of all members of the
American Health Care Association (AHCA). We are a national organization
representing some 12,000 providers of long term care, who serve more
than 1.5 million elderly and disabled people annually, employing more
than 1.5 million caregivers.
Let me briefly tell you about myself. I have been in the care
giving profession for nearly three decades. I am a registered nurse and
a licensed administrator. I am intimately familiar with the challenges
of being on the front lines of care giving.
I have worked formally and informally with the Centers for Medicare
and Medicaid Services (CMS) and its predecessor, the Health Care
Financing Administration (HCFA), in various capacities on many issues
representing the long term care profession.
I would like to commend you, Madame Chairman, on your vision for
long-term care, and for taking the time to understand our profession,
its nuances, and the care needs of the beneficiaries we serve.
It's essential, however, that when we discuss the myriad of facts,
statistics and analyses associated with the MedPAC findings, we never
lose sight of the fact that, really, we're dealing with the lives and
well-being of the most vulnerable citizens in our society.
The quality of care our beneficiaries receive today, and the
quality of care many of us will receive in the future, is directly
related to this important hearing.
Among our primary concerns is the fact that our Federal
Government's goals and objectives in regard to quality are directly
contradicted by its own actions and policies.
There is a growing disconnect between what government expects and
what it is willing to invest--especially in light of the fact that
demand for care will increase dramatically in the future. Demographic
realities cannot be ignored.
I have been asked to comment on the MedPAC's conclusions. It is my
opinion they follow a pattern of government turning a blind eye to an
obvious problem that we and others have been pointing out for quite
some time: The government is the purchaser of almost all nursing home
services; it demands that quality be first rate, as it should; and the
reality is that quality care cannot be provided for less than cost.
At a time when we as a nation ought to be strengthening our long
term care infrastructure to prepare for the wave of baby-boom retirees
who will enter the system, we are, instead, allowing the infrastructure
to deteriorate.
We strongly believe the recommendations made by MedPAC are ill-
advised, and will contribute to the further deterioration of long term
care at a time when every stakeholder can least afford it.

Accurate Analysis Requires Collective Evaluation of Medicare AND
Medicaid

One substantial problem we are attempting to overcome--and one we
hope this Committee appreciates--is that MedPAC continues to focus
solely on data detailing the sector's Medicare-only profits--without
also looking at Medicaid losses.
When it comes to making important public policy recommendations
that truly impact people's lives, it is inconceivable that key data
used to reach conclusions about the sufficiency of Medicare funding
fails to look collectively at the real, and growing, interdependence
between Medicare and Medicaid.
While MedPAC has opted to ignore Medicaid as a determinant in
recommending governmental policy, the one million Medicaid patients who
rely upon the care we provide do not have that luxury.
Unfortunately, some have chosen to dismiss the issue of ``cross
subsidization'' as not relevant to the debate at hand. Yet, to our
average patient--an 85 year-old widowed female in need of care, the
cross subsidization issue is real.
As Commissioner and former Senator David Durenberger believes, a
far more holistic evaluation is called for at this critical point in
time, so that beneficiaries will not fall through the cracks due to an
incomplete data picture and a short-sighted policy.
The cross-subsidization of Medicaid by Medicare is a policy that is
in place today--empirical evidence and hard data prove it is occurring.
We respectfully suggest that you as policymakers consider the
ramifications of ignoring this reality, as MedPAC has done. While no
one would advocate that one entitlement subsidizing another is good
long term policy, it is a current necessity to ensure the adequacy and
quality of patient care.
We must also consider other factors in determining the data that
provides an accurate assessment of the bigger picture: Our states are
coping with the worst state fiscal crisis since World War II, and the
nation's Governors are struggling to ensure their states' most
vulnerable citizens do not end up as unfortunate statistics on a
balance sheet.
Forty-nine out of fifty states--according to a January 2003 Kaiser
Commission on Medicaid and the Uninsured study--will act to reduce
their Medicaid spending this year, with 37 planning on reducing or
freezing the amount of funding for nursing care. And consider that
Medicaid payments average about $115 per day nationally. That's less
than $5 per hour--less than many people pay babysitters. Many states
pay below the national average. For example, in 2001 Louisiana paid $78
per day; Texas' rate was $97; and Illinois' statewide average rate was
$94 per day. And for this funding, nursing facilities provide room,
board, 24 hour nursing care, therapies and social activities.
The overall picture provided by MedPAC of the Skilled Nursing
Facility (SNF) sector, therefore, is misleading because of the gross
shortfalls in Medicaid.
MedPAC's own research corroborates that its own recommendations
will have dire consequences for patient care. MedPAC's analysis last
year, bolstered by a more recent investigation by the Lewin Group,
found that the pre-tax total margins of freestanding skilled nursing
facilities are projected to be minus 2 percent.
The deficit resulted from the expiration of $1.8 billion in
Medicare payments last October and a $3.5 billion shortfall in Medicaid
payments versus allowable costs last year--factors which must be
addressed and that will be exacerbated if MedPAC's recommendations are
accepted.
The negative 2 percent total margin came from MedPAC's analysis of
data existing before the present day worsening of Medicaid--and the
current state fiscal crisis.
Imagine, Madame Chairman and Members of the Committee, what present
day data would show if these data were available now.

The Capital Crisis and Impact on Patient Care

The new payment adequacy framework adopted last year by MedPAC
requires that the Commission take Medicare beneficiaries' access to
care and providers' access to capital into account when determining the
appropriateness of payments.
The recommendations put forward to you for consideration, Madame
Chairman, ignore both factors.
Indeed, access to capital is a critical problem for SNFs, and the
problem is not abating. In fact, it is worsening. Bank loans, bonds and
other forms of capital fund the day-to-day operations of most nursing
facilities, and are an absolute necessity to providing and maintaining
quality of care.
According to the most-recent Lewin Group analysis of capital
formation, nursing homes' capital ratios and other statistics evaluated
by lenders have deteriorated to the point that the credit profile of
nearly the entire sector is viewed as poor.
Furthermore, a Legg-Mason equity research analysis stated the
problem very succinctly by specifying the need for predictability in
funding over the long term if SNFs are to regain investor confidence,
``and attract the capital needed to meet the future long term care
needs of America's seniors.''
CMS identified this problem last February in its Health Care
Industry Market Update: Skilled Nursing Facilities, which reported that
the October 2002 expiration of the Medicare SNF payment adjustments
would have, and I quote, ``a very negative impact on nursing facility
company credit profiles and their ability to access capital.''
Madame Chairman, CMS' analysis, unfortunately, has proven correct.
According to that report, the ``fixed charge coverage''--a
statistic used by bond analysts and investors to gauge a company's
ability to pay its debt service and other obligations--for six of the
seven largest nursing facility providers in the country has dipped
below the minimum level considered necessary by analysts to raise
capital.
Another statistic closely followed by bankers is the ``rent
adjusted leverage,'' which measures a provider's ability to pay rent
and interest based on cash flow.
Again, according to the CMS report, the elimination of the Medicare
payment adjustments in October 2002 has moved the rent adjusted
leverage ratios of several major provider companies into a highly
problematic range.
These findings from the Lewin Group and CMS clearly do not
correspond with the opinion expressed by MedPAC staff at their December
meeting that SNFs' access to capital is ``generally good,'' and ``over
investment prior to PPS may mean less need for construction capital in
the near term.''
A sector that is one-third insolvent does not have ``generally
good'' access to capital.
Although both for-profit and non-profit SNFs can operate with
negative margins for a short period of time--as is now the case--the
cumulative instability of the sector over the past five years has
eroded equity and shortened that grace period.
Even more troublesome is the Lewin Group's finding that one-third
of all SNFs, regardless of ownership, will report negative equity in
2006--meaning that their total liabilities will exceed all their
assets.
Negative equity is unsustainable for any extended period of time,
and makes obtaining access to capital all but impossible.
In the short term, the recently experienced BBA-related Chapter 11
bankruptcies could be followed by a round of Chapter 7 bankruptcies--
liquidation versus restructuring.
If Medicare add-ons are not soon reinstated, while the government
begins to fix the long ailing Medicaid system, the result may be forced
asset sales and facility closures.
The question that emerges from the capital crisis, therefore, is
what is the impact on the quality of care ultimately received by
Medicaid beneficiaries?
The near term budget reductions are already affecting the capital
availability needed to modernize and replenish physical plants and
equipment, acquire new technologies, and meet changing community health
care needs.
This comes at a time when an aging population will, increasingly,
require complex medical services within the nursing facility setting.
The effects of the October 2002 expiration of the Medicare SNF
payment adjustments are already being felt. Newspaper headlines across
the nation tell the story: Centennial Health Care, which operates 86
nursing homes in 19 states, filed for Chapter 11 bankruptcy protection
in December, citing ``severe cuts in federal reimbursement.''
As a consequence of inadequate reimbursements, nursing facilities
in Philadelphia, PA, Oakland, CA, Lynn, MA, and South Austin, TX, have
already closed--and additional facilities will soon close their doors
in cities such as Minneapolis, MN, Seattle, WA and Burlingame, CA.
These are just a few on the many examples of the consequences of
already insufficient reimbursements.
If MedPAC is truly concerned about safeguarding beneficiaries'
access to care, outcomes and quality, the Commission should not have
recommended eliminating SNFs inflation adjustment for this year based
on Medicare-only margins and a selective, superficial assessment of the
sector's financial health.
Significantly, Madame Chairman, this is not just a matter of
urgency to the for-profit sector; far from it. The largest non-profit
nursing facility chain, the 215 facility Good Samaritan Society--whose
President and CEO, Judith Ryan, testified before this Committee three
weeks ago--had managed to maintain investment-grade bond ratings.
Moody's, however, changed the outlook last year from ``stable'' to
``negative.''

Decline In Numbers of Skilled Nursing Facilities

On another front, Madame Chairman, we dispute MedPAC's conclusion
that there has been in increase in freestanding SNFs. Their analysis is
by calendar year, and includes only surveys in the OSCAR data that took
place in the twelve months of the year--1998, 2001, and 2002.
Since facilities are not necessarily surveyed every 12 months but
only required to be surveyed every 15-months, a strictly calendar-year
analysis does not include all active facilities--perhaps only 80% of
facilities.
Any analysis by calendar year reflects only when survey data were
entered into the CMS database--not which facilities existed at any
given time.
At AHCA, we take the most recent survey of all facilities at a
point in time to do this type of trend analysis. At any point in time,
some active facilities may have survey data older than 12 months.
For example, because of the strictly calendar year analysis used by
MedPAC, MedPAC shows only 12,862 freestanding facilities exist in 1998.
Taking the most recent survey for all facilities, we show 14,845 in
1998 and, as of December 2002 data, 14,722 freestanding facilities with
current survey data.

Measuring Access To Care

One of the MedPAC recommendations was that the U.S. Department of
Health and Human Services' (HHS) Office of Inspector General (OIG)
should continue to monitor access to skilled nursing care.
We agree that this is important because as the most recent General
Accounting Office (GAO) report indicates, access to skilled nursing
care is worsening. In 2000, 80% of hospital discharge planners said
they could place all Medicare patients in skilled nursing care. One
year later, that percentage deteriorated to 73%. Consequently, more
than 25% of Medicare patients leaving hospitals could not be placed in
skilled nursing facilities by hospital discharge planners.
At the outset of my testimony, I said we should never forget that
we are dealing with the most vulnerable in our society--and that we
must all make the commitment to quality care the paramount public
priority.
Madame Chairman, and Members of this Committee, we continue to ask
and hope that the Federal Government--President Bush and the U.S.
Congress--will invest the resources that are needed to provide that
quality care.
Let us not forget that just several months ago, there was a
substantial and certainly successful public relations effort
surrounding the announcement of the government's new Nursing Home
Quality Initiative (NHQI).
We believe in the goals of the nursing home quality initiative, and
we are active participants, and we have supported it since its
inception.
Working as partners--cooperatively and collegially--we want to
continue working with you to build the best system of long term care
our nation is capable of achieving.
There's no doubt: these are challenging times on both the domestic
and international fronts. National security is a paramount priority,
and this must be so. But, our seniors' retirement security must also be
a national priority--and these goals cannot be mutually exclusive.
We want to provide quality care, and the government has the correct
expectation that we do so. To achieve this shared objective in
partnership, we must consider these issues with a comprehensive
understanding by looking at the interaction of patient populations for
whom we provide care.
Madame Chairman, we ask for your help, and the help of your
colleagues to assure adequate funding to deliver quality care. We are
indeed at a crossroads when it comes to deciding whether we succeed, or
whether we fail.
We must meet our nation's retirement challenges together because
great nations protect those least able to protect themselves.
You must discount the illogical and superficial MedPAC analysis.
Acceptance of this myopic view and data while the system disintegrates
constitutes a detached perspective on a problem that affects real
people--and cannot be accepted or tolerated in an area as important as
the frail, elderly and disabled of America.
Thank you Madame Chairman, and Members of the Committee, for
providing us the opportunity to share our concerns with you here today.

Chairman JOHNSON. Thank you very much. Mr. Barry.

STATEMENT OF DENNIS BARRY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MOSES CONE HEALTH SYSTEM, GREENSBORO, NORTH CAROLINA,
AND CHAIRMAN, BOARD OF TRUSTEES, AMERICAN HOSPITAL ASSOCIATION

Mr. BARRY. Thank you, Chairman. I am Dennis Barry,
President of Moses Cone Health System in Greensboro, North
Carolina. I also have the pleasure of serving as the Chairman
of the American Hospital Association (AHA) Board of trustees.
The AHA is disappointed that MedPAC chose to ignore the
needs of both patients and hospitals by recommending reduced
hospital payments under Medicare. The Commission's
recommendations fail to reflect the enormous economic pressures
hospitals are facing today, most of which are beyond our
control.
These pressures are many and growing. Health care is
experiencing a severe work force shortage, which is driving
labor costs higher than many other parts of the service sector.
Liability premiums are skyrocketing. At Moses Cone, our
liability premiums have tripled over the past 4 years.
The pace of clinical innovation is increasing rapidly,
bringing high-tech improvements to patient care. In our
regional cancer center in Greensboro, at a cost of millions, we
bring patients the latest and the best drugs that we can.
Medicare payment levels for those same drugs, however, don't
cover the raw cost of the drugs. Yet, hospitals must absorb
these high costs, because Medicare payments for technology are
made in a budget-neutral manner.
As America's health care safety net, hospitals provide care
regardless of one's ability to pay. With 41 million and growing
uninsured Americans, the care demands of this population are
increasing. Last year at Moses Cone we took care of thousands
of patients who did not have coverage, providing $33 million of
free care at our cost.
Given all of these forces and more, the cost of caring is
rising. In 2001, it increased by 4.7 percent, more than double
than the prior year. Hospitals simply can not sustain
additional payment cuts.
MedPAC's update recommendations are appalling. For fiscal
year 2004, MedPAC recommends that hospitals receive less than a
market-basket update for inpatient and outpatient services.
Their recommendation comes even as 36 percent of hospitals had
negative Medicare PPS margins in 2000. Medicare reimburses for
outpatient services below cost, paying 86 cents on each dollar
of care.
In 2001, 57 percent of hospitals lost money treating
Medicare patients. Aggregate Medicare margins have dropped
every year since 1998. In 2002 at Moses Cone, we received 96.7
cents for every dollar of care we provided to a Medicare
patient. A full market-basket update for all hospitals is
critical to ensuring that we can continue to care for our
communities.
Over the past 4 years, the market basket for hospital care
has increased by over 13 percent, but Medicare update payments
to hospitals have increased only by 5.6 percent.
I can think of no other field in the private sector where
organizations are expected to keep their doors open and serve
all when they are paid less than their cost. The MedPAC also
recommends expanding the post-acute care transfer provision. We
applaud Chairman Johnson's rejection last year of this ill-
conceived idea, and we implore you to maintain that stance in
the future. Expanding this provision is bad policy.
First, physicians and clinical staff work hard to ensure
that patients receive the right care at the right time and in
the right setting. Determining when to release patients from
the hospital and whether they should receive post-acute care
are clinical decisions, not business ones.
Second, expanding the transfer provision undercuts the
basic principles of inpatient PPS, a system based on averages
and which contains positive incentives to be efficient. The
transfer provision unfairly penalizes hospitals for the
efficient treatment of patients.
We commend the Commission's rejection of the staff proposal
to further reduce the Indirect Medical Education (IME)
adjustment. With teaching hospitals still reeling from last
October's $800 million cut, we doubt that these vital
institutions could have sustained reducing the IME adjustment
to 2.7 percent. We urge Congress to address the 2002 cuts in
IME and restore the adjustment to 6.5 percent.
We appreciate the Commission's recommendation to improve
payments to rural hospitals by equalizing the standardized base
payment amount, and we urge Congress to permanently adopt the
increased standardized base amount for hospitals in rural and
small urban settings.
Finally, with regard to the area wage index for rural
hospitals, we believe the best way to address this issue is to
provide additional resources and lower the labor-related share
to 62 percent for hospitals in below-average wage areas while
holding harmless all other hospitals.
In conclusion, Chairman, hospitals' total margins are at
the lowest point they have been in the last 10 years, and a
growing majority of America's hospitals are reimbursed less
than what it costs them to treat Medicare patients. The
government has a responsibility to be a fair business partner
and provide hospitals a payment update that, at a minimum,
keeps up with inflation. We urge Congress to reject MedPAC's
misguided recommendations to reduce the market-basket payment
updates and to expand the transfer provision. We need to
repair, not impair, our Nation's hospitals and the communities
that they serve. Thank you.
[The prepared statement of Mr. Barry follows:]

Statement of Dennis Barry, President and Chief Executive Officer, Moses
Cone Health System, Greensboro, North Carolina, and Chairman, Board of
Trustees, American Hospital Association

Mr. Chairman, I am Dennis Barry, president and CEO of Moses Cone
Health System in Greensboro, North Carolina. I also serve as the
chairman of the American Hospital Association's (AHA) Board of
Trustees, and am here today on behalf of the AHA's nearly 5,000
hospital, health system, network and other health care provider
members. We are pleased to testify on the Medicare Payment Advisory
Commission's (MedPAC) report to Congress. The Commission's
recommendations are of great concern to the health care community
because they affect more than 37 million Medicare beneficiaries.
Moses Cone Health System is a not-for-profit health system serving
the four counties surrounding Greensboro. What was born in 1911 as the
result of one woman's vision and generosity--to provide medical care
for her fellow townspeople--has grown into a comprehensive health
system that includes five hospitals, numerous freestanding outpatient
services and two nursing homes. Moses Cone is a recognized leader in
cardiology, neuroscience, oncology, rehabilitation and obstetrics. We
employ more than 7,000 professionals dedicated to caring for the
725,000 people living in our community, of which approximately 27
percent are seniors. In 2002, our health system cared for half a
million patients.

MEDPAC

As the independent advisor to Congress, MedPAC's recommendations
have a significant impact on the Medicare program, its beneficiaries
and its providers. It's important to note that a single percentage
point increase or decrease in MedPAC's update recommendation for one
year for inpatient and outpatient care translates into about $1 billion
a year either provided to or withheld from America's hospitals in a
single year alone--and additional billions in years to come. That's why
the Commission's recommendations each year are critical to sustaining
the nation's health care system and the continued delivery of Medicare
services to America's seniors.
While we are pleased that MedPAC continued its longstanding support
of the special role of rural hospitals and also chose not to recommend
additional cuts to teaching hospitals at its January meeting, the AHA
is disappointed that the Commission chose to ignore the needs of
patients and the hospitals that serve them by recommending reduced
hospital payments under Medicare. Given the enormous cost pressures
hospitals face--from skyrocketing costs of technology, pharmaceuticals
and professional liability insurance to spending for disaster
readiness--MedPAC's January recommendations are not reflective of
today's needs.

TELLING THE HOSPITAL STORY

Hospitals are people taking care of people--doctors, nurses, other
health care professionals, support staff, as well as executive and
volunteer leaders--working in unique ways to provide essential health
care services. In times of need, Americans depend on the hospital
promise to be there 24/7 when any health care need arises, when
disaster strikes, when an uninsured child needs care, when others have
closed for the night, when there is no place else to turn.
But, even as hospitals strive to continue meeting their
communities' current needs and rising expectations, their ability to
keep the promise of care is being severely challenged. Hospitals are
bearing the cumulative impact of a series of forces that are beginning
to erode the foundation of the essential public service they provide.
Work force shortages. Health care is about people caring for
people, but we face a severe shortage of caregivers and other workers.
An estimated 168,000 positions are currently unfilled, and about three-
quarters of these are for registered nurses ⁱ Hospitals are
facing billions of dollars in escalating labor costs due to this severe
work force shortage. Labor costs comprise more than 60 percent of
hospitals' costs. Higher salaries, incentive payments and temporary
agency fees designed to help ease the effects of the shortage
contribute to even higher labor costs. Hospitals face labor cost
increases over 50 percent higher than service industries as a
whole.ⁱⁱ
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\i\ AHA Trendwatch, June 2001.
\ii\ Bureau of Labor Statistics, data released April 25, 2002.
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Increased demand for services. Since 1997, inpatient admissions
have increased 7 percent and outpatient visits have risen 20
percent.ⁱⁱⁱ Hospitals face rising demand and constrained
capacity--nowhere is this more evident than in our nation's emergency
departments (EDs). Our EDs are overcrowded and many frequently must
divert ambulances to other facilities because they lack the staff and
space to care for additional patients. For example, in 2002 survey of
AHA members, 62 percent of all hospitals--and 79 percent of urban
hospitals--are operating ``at'' or ``over'' ED capacity.
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\iii\ AHA Annual Survey, 1997-2001.
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Technology. The rapid infusion of new technologies is steadily
improving care, but the investment requirements to keep pace are
staggering. While a traditional X-ray machine costs $175,000, a more
advanced CAT Scanner--now standard in most hospitals--costs $1 million,
and the next round of technology, the PET scanner costs $2.3 million.
^iv As you can see, the pace of clinical innovation is
increasing rapidly, yet hospitals must absorb the high costs associated
with new technologies. Because the inpatient prospective payment system
pays for technology in a budget neutral manner, increased payments for
technologies, like drug-eluting stents, result in equally decreased
payments for all other services.
---------------------------------------------------------------------------
\iv\ O 2002 University Health System Consortium.
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Skyrocketing medical liability premiums. According to a recent
survey, about one-third of hospitals in 2002 experienced increases of
100 percent or more in their medical liability insurance premiums.
^v At Moses Cone, our liability premiums increased 29.4
percent in 2002, and we received an additional 13 percent price hike
for 2003. Skyrocketing premiums threaten access to care and add
tremendous cost to hospitals and physicians.
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\v\ AHA Trendwatch, June 2002.
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Disaster readiness. As frontline responders in the event of
disasters, hospitals are working to upgrade their readiness to respond
to nuclear, biological and chemical emergencies. This requires an
investment of billions to ensure that every hospital has a minimum
capacity to respond to such emergencies. The need to keep our homeland
safe has become even more critical as the U.S. is poised for possible
war with Iraq.
Regulatory burden. Government regulation of health care is complex
and confusing, creating a paperwork burden that takes caregivers away
from the bedside. In an era of serious health care worker shortages,
caregivers' time must be used as efficiently as possible. But,
paperwork requires at least 30 minutes--often as much as an hour--for
every hour of patient care provided.^vi The burden is too
heavy--at the expense of patient care. Excessive paperwork not only
shortchanges the patient, it also makes the job of the health care
professional less rewarding--a key issue in making the health care
field attractive to future workers. In addition, new federal regulatory
mandates will impose additional administrative and paperwork burdens.
Compliance with the Health Insurance Portability and Accountability
Act's privacy regulations alone are expected to cost hospitals between
$4 billion and $22 billion.^vii
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\vi\ PricewaterhouseCoopers Survey of Hospitals and Health Systems,
2001.
\vii\ First Consulting Group Study, 2001
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Capital costs. Hospitals continually need capital to maintain and
update their physical plant, retool facilities to meet changing patient
demand, and invest in new technology. For example, the average age of
hospital physical plant is at its highest level in over 10
years.^viii But, hospitals are having difficulty accessing
capital to make necessary improvements, experiencing almost six times
as many bond downgrades vs. upgrades in 2001.^ix
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\viii\ CHIPS: The 1994 Almanac of Hospital Financial & Operating
Indicators; The 1996-97 Almanac of Hospital Financial & Operating
Indicators; and The 2001 Almanac of Hospital Financial & Operating
Indicators.
\ix\ Standard and Poor's.
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Caring for the uninsured. Millions of Americans have no health
insurance coverage. Hospitals--by their own mission and under federal
law--serve as America's health care safety net, and provided $21.5
billion of uncompensated care in 2001 alone.^x
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\x\ AHA Annual Survey.
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Hospitals cannot sustain additional cuts. Hospitals need adequate
rates to create a work environment that can attract and retain skilled
workers. Hospitals need adequate rates to be able to invest in
readiness and patient safety. Hospitals need adequate rates to keep up
with the ever-growing demands of our aging population, especially as
the capacity to provide this care is strained in many communities.

INPATIENT AND OUTPATIENT HOSPITAL PAYMENT UPDATES

For fiscal year 2004, MedPAC is recommending that for inpatient
care, hospitals receive market basket minus 0.4 percentage points; for
outpatient services, market basket minus 0.9 percentage points. For the
majority of America's hospitals, Medicare already is not paying
adequately, and these rates would exacerbate the situation.

Thirty-four percent of hospitals had negative Medicare
inpatient prospective payment system (PPS) margins, according to a 1999
MedPAC report (most recent data available).
For outpatient services, Medicare continues to reimburse
hospitals well below the costs of caring--paying 86 cents on the
dollar, according to statistics recently released at the January MedPAC
meeting.
In 2001, 57 percent of hospitals had negative Medicare
margins--that is, the majority of hospitals were paid less than the
cost of caring for Medicare patients. Aggregate Medicare margins have
dropped every year since 1998, even with the additional congressional
funding provided in 1999 and 2000.^xi
---------------------------------------------------------------------------
\xi\ AHA Annual Survey.
---------------------------------------------------------------------------
In total, aggregate Medicare payments to hospitals were
less than the actual costs hospitals incurred in 2001, with a payment-
to-cost ratio of only 98.4 percent.^xii
---------------------------------------------------------------------------
\xii\ AHA Annual Survey.
---------------------------------------------------------------------------
In addition, nearly one-third of hospitals have negative
total margins, meaning they recover less than the cost of caring for
every patient they treat.^xiii
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\xiii\ AHA Annual Survey.

It is inconceivable to think that a full inflationary increase for
both inpatient and outpatient services is not warranted. Medicare has a
responsibility to pay its fair share especially as the economy creates
financial pressure on states and the ranks of the uninsured swell.
Medicare payments to hospital are inadequate. Given current cost
pressures, most beyond the control of hospitals, it is essential that
Medicare payment updates at least account for inflation. A full market
basket update for all hospitals is critical to ensuring that they have
the resources needed to continue to provide access to quality health
care in their communities. I can think of no other field in the private
sector where organizations are expect to operate when they are paid
---------------------------------------------------------------------------
less than their costs.

POST-ACUTE CARE TRANSFER PROVISION

MedPAC is recommending expansion of the post-acute care transfer
policy to an additional 13 diagnosis-related groups (DRGs). Some argue
that this recommendation will help address ``inequities'' in the
payment system by reducing payments to hospitals for Medicare patients
receiving both acute and post-acute care services. We, however, contend
that expanding the post-acute care transfer provision is bad policy.
First, expansion of the transfer policy undercuts the basic
principles and objectives of the Medicare inpatient prospective payment
system--a system based on average costs. In general, hospitals are paid
below costs for patients with longer-than-average lengths of stay, but
they are paid above costs for patients with shorter-than-average stays.
The transfer policy makes it nearly impossible for hospitals to break
even on patients that require post-acute care after discharge.
Hospitals already ``lose'' if a patient is discharged after the average
length of stay and, under the expanded transfer policy, would also
``lose'' if a patient were discharged prior to the mean length of stay.
The transfer provision prevents hospitals from balancing their
losses associated with the many above average length-of-stay cases with
these shorter-than-average length-of-stay cases. It unfairly penalizes
hospitals for the efficient treatment of patients and for providing
patients with the right care, at the right time, in the right place.
Second, concerns about rising Medicare spending for post-acute care
have already been addressed through other policy changes. When Congress
first called for creation of the transfer policy, both the use and cost
of post-acute care by Medicare beneficiaries was growing. Since that
time, however, Medicare spending on post-acute care has dramatically
slowed as Congress enacted prospective, rather than cost-based, post-
acute payment systems. There is no basis for concerns that the growth
in post-acute spending may have been due to the early transfer of
hospital patients to post-acute care settings. Studies show that
Medicare patients who use post-acute care have longer-than average--not
shorter-than-average--hospital stays. These are patients truly in need
of inpatient care and follow-up skilled nursing or home care. Further
expanding the transfer policy at this time is unwarranted and bad
public policy.
Third, we have yet to see any hard evidence to support how
expanding the transfer provision improves patient care. But we do know
that expanding the post-acute care transfer provision would be
devastating for hospitals. According to CMS' 2003 proposed inpatient
rule, the estimated impact of expanding this policy to 13 additional
DRGs would have reduced payments to hospitals of $900 million in 2003
alone, adding up to billions of dollars over multiple years.

INDIRECT MEDICAL EDUCATION

We commend the Commission's wise rejection of its staff's proposal
to further reduce indirect medication education (IME) payment
adjustments. With teaching hospitals still reeling from the $800
million cut that occurred in October 2002, and the largest teaching
hospitals facing a total margin of 1.5 percent (as of 2000), we doubt
that these vital institutions could have sustained an IME adjustment
reduction from the current level of 5.5 percent to 2.7 percent. Such a
drastic step would mean more than $2 billion in additional cuts in 2004
alone and $11.5 billion over a five-year period. As MedPAC moves
forward, we urge the Commission to remember that IME payments are
critical to the viability of teaching hospitals and the patients they
serve, and that these special payments must be protected. In addition,
we continue to urge Congress to address the October 2002 cuts in IME
payments teaching hospitals are currently experiencing.

POST-ACUTE CARE SERVICES

For skilled nursing facilities (SNFs) and home health agencies, the
Commission is recommending no update be given. We strongly urge
Congress to reject this ill-advised recommendation. SNFs and home
health agencies are facing may of the same cost pressures as
hospitals--especially work force shortages-related cost. Hospital-based
SNFs and home health agencies already dramatically under-funded by
Medicare, and they need a full inflationary update in order to keep up
with the cost of caring for America's seniors.
We appreciate the Commission's support for addressing the special
needs of hospital-based SNFs. MedPAC recognized that medically complex
cases require additional resources, and has recommended that CMS
develop a new classification system for SNFs to adequately account for
these cases. MedPAC also recommends that if this payment inadequacy for
medically-complex cases is not addressed quickly, Congress should
increase hospital-based SNF payments to market basket minus 0.9
percentage points.

RURAL HOSPITALS

We appreciate the Commission's recommendation to improve payments
to providers in rural communities by equalizing the standardized base
payment amount. Congress also acknowledged the need to equalize the
base payment rate by funding this provision in its fiscal year 2003
omnibus spending bill. We urge Congress to permanently adopt the
increased standardized base amount for hospitals in rural and small
urban areas. The AHA also supports MedPACs recommendation to increase
the Medicare disproportionate share hospital cap from 5.25 percent to
10 percent. These recommendations are a good start for addressing the
needs of Medicare patients living in rural areas.
The Commission also recommended that CMS further evaluate the
appropriate labor-related share of the inpatient PPS base amount. We're
concerned about the competitive problems that result from using the
area wage index as health care workers are increasing their willingness
to commute longer distances to their jobs. Rural areas are often
competing for the same workers as their urban counterparts. Rather than
further study, we feel the best way of addressing area wage index
problems is to provide additional resources and lower the labor-related
share to 62 percent for hospital's in below average wage areas, while
holding harmless all other hospitals.

CONCLUSION

Mr. Chairman, Medicare margins are at their lowest level in 10
years and the majority of America's hospitals continue to be reimbursed
less than what it costs them to treat Medicare patients. Every day,
hospitals walk a tightrope trying to provide more and more patients
with the services they need even as resources and federal commitment
continue to dwindle. MedPAC's recommendations further upset the
balance, and would jeopardize hospitals' ability to care for their
communities. Who will lose? Patients and families. That's why we urge
Congress to reject the Commission's misguided recommendations to reduce
the market basket payment updates and expand the transfer provision.
These actions will impair--not repair--our nation's health care system.
Thank you.

Chairman JOHNSON. Thank you very much, Mr. Barry. Ms.
Severyn, pleasure to have you.

STATEMENT OF BETTY J. SEVERYN, MEMBER, BOARD OF DIRECTORS,
AARP, CHATTANOOGA, TENNESSEE

Ms. SEVERYN. Chairman and Members of the Committee, I am
Betty Severyn a Member of AARP Board of Directors from
Chattanooga, Tennessee. On behalf of our more than 35 million
Members, I want to thank you for inviting us here today, and I
would like to bring a little different perspective to this
discussion today.
The AARP Members want Medicare providers to be paid
adequately. However, because increases for providers also
increase costs to beneficiaries, reimbursement changes should
be weighed very carefully.
Congress enacted broad payment increases in 1999 and again
in 2000. This year, you acted more narrowly to correct an error
in the physician payment formula. These changes have
significant impact on beneficiaries' out-of-pocket costs. A
good example is the physician payment mix. The AARP supported
this fix--it is ``fix,'' not ``mix.'' The AARP supported this
fix. It was necessary to correct an error that would have cut
physician payments deeply. That would have been unfair and it
could have threatened access to care.
The fix had been reported as costing $54 billion over 10
years, but that is only the cost to the Federal Treasury. It
will cost beneficiaries $18 billion in higher part B premiums.
It will cost yet another $18 billion in higher coinsurance
amounts. In total, beneficiaries would be paying $36 billion
more over the next 10 years.
This type of net impact needs to be calculated any time
provider increases are considered.
While the physician fix was needed to correct an error and
protect access, we are not aware of any such errors or access
problems with other providers. We therefore urge the
Subcommittee to look at MedPAC's careful and objective analysis
in considering other changes. Reimbursement changes that are
not supported by objective evidence are inherently unfair to
beneficiaries who bear a great share of the burden.
Beyond that, unwarranted increases limit the ability of
Congress to enact a long overdue Medicare drug benefit. Every
dollar spent on provider rate hikes is $1 less that is
available for a drug benefit. Our Members want Congress to
enact an affordable stable drug benefit this year and one that
guarantees all Medicare beneficiaries access to meaningful drug
coverage. We know a workable drug benefit requires a sizeable
commitment of Federal dollars. Therefore, it would be
inappropriate to use limited Federal dollars to increase
provider payments without first ensuring that older and
disabled Americans get the drug coverage they need.
Medicare beneficiaries, who are your constituents, would
not understand why Congress could find the money to make
reimbursement changes, but not to help beneficiaries meet
increasing drug prescription needs.
Thank you for inviting us to participate in this hearing.
[The prepared statement of Ms. Severyn follows:]

Statement of Betty Severyn, Member, Board of Directors, AARP,
Chattanooga, Tennessee

Mr. Chairman and members of the Subcommittee, I am Betty Severyn
from Chattanooga, Tennessee. I am a member of AARP's Board of
Directors. On behalf of our organization, and its more than 35 million
members, I want to thank you for convening this hearing and for
inviting us to participate.
More than 41 million older and disabled Americans depend on
Medicare for affordable health insurance protection. They also rely on
the practitioners who treat them and the facilities and agencies that
provide them with quality care. Our members want Medicare to pay health
care providers fairly. It is the right thing to do, and critical for
ensuring access to care. However, changes to Medicare's reimbursement
systems have consequences for beneficiaries and should therefore be
weighed very carefully.
Since the enactment of the Balanced Budget Act of 1997, Congress
has revisited the issue of provider payments three times--broadly in
1999, again in 2000, and more narrowly this year to correct an error in
the physician payment formula. As you deliberate yet another round of
reimbursement changes, we ask you to consider seriously the effect that
any changes will have on beneficiaries' out-of-pocket costs, as well as
the impact on enacting a long-overdue Medicare prescription drug
benefit. Each dollar allocated for provider reimbursement increases is
one dollar less that will be available for a Medicare drug benefit.

Reimbursement Changes and Increased Beneficiary Out-of-Pocket Costs

Even when errors in payment calculations need correction, it is
important to keep in mind that Medicare beneficiaries pay directly for
these fixes. For example, AARP supported Congressional action to fix
the payment formula error that would have cut physician reimbursement
4.4 percent this year. Nevertheless, this correction came at a
significant cost to beneficiaries.
The Congressional Budget Office (CBO) estimates the net cost of the
physician fee schedule fix to be $54 billion over the period 2003
through 2013, but that represents only the cost to the federal
treasury. Beneficiaries pay approximately 25 percent of Part B costs
with their premiums, and the physician fix will increase those premiums
by roughly $18 billion dollars over the same timeframe, for a total
increase in payments from Medicare to physicians of $72 billion. As a
result, beneficiaries will pay about $2.50 more per month in increased
Part B premiums next year and will see their premiums continue to
increase over the next ten years above the annual Part B premium
increases.
The physician payment fix will also add to beneficiary costs by
increasing the amount of coinsurance for physician services. That is
because the $72 billion from Medicare represents only 80 percent of
what physicians are paid for Medicare services. The law requires
beneficiaries to pay the remaining 20 percent. This means that--because
of the recent fee schedule fix--beneficiaries are estimated to pay an
additional $18 billion in coinsurance over the next ten years.
Beneficiaries pay this coinsurance either directly out-of-pocket or
indirectly through higher Medigap premiums. Some of the cost is also
borne by state Medicaid programs for dually eligible beneficiaries and
employers who provide retiree coverage. Additionally, since some
physicians ``balance bill'' patients 15 percent more than Medicare's
allowed payment, the total figure may be higher.
The net result is that the physician fix will cost approximately an
additional $36 billion in higher premiums and coinsurance over the next
ten years--much of it paid directly or indirectly by beneficiaries.
Physicians thus will receive around $90 billion in higher total
payments, not the $54 billion that has been so widely reported. This
type of net impact, especially the impact on beneficiaries, needs to be
considered as part of any provider pay increase.
While the physician fix intended to correct a payment formula
error, we are not aware of any such errors in other provider payment
calculations. We also are not aware of significant access problems in
the program. We therefore urge you to look to the careful, objective
analyses of the Medicare Payment Advisory Commission (MedPAC) in
considering whether any additional reimbursement changes are necessary
at this time. Provider pay hikes that are not supported by objective
evidence and analyses are inherently unfair to beneficiaries who must
bear a great share of the burden.

Priority for a Medicare Prescription Drug Benefit

The need for a Medicare prescription drug benefit for all
beneficiaries continues to escalate. Older and disabled Americans
continue to face double-digit increases in their prescription costs.
Employer-based retiree health coverage continues to erode.
Medicare+Choice plans continue to scale back their drug benefits. The
cost of private Medigap coverage is increasingly unaffordable. State
prescription drug assistance programs provide only a limited safety
net, and are themselves at risk because of current state budget crises.
Despite promises of relief, this serious gap in Medicare persists.
Beneficiaries continue to struggle to pay for necessary medications.
Some even take desperate--and sometimes dangerous--measures. For
instance, some beneficiaries do not follow a course of treatment, do
not take the prescribed full dosage, or take their prescriptions
intermittently. That is why ensuring that beneficiaries have a
meaningful, affordable prescription drug coverage is AARP's top
legislative priority.
Our members and their families have told us they want Congress to
pass legislation this year that:

ensures all Medicare beneficiaries have access to
affordable, meaningful prescription drug coverage;
provides stable coverage that beneficiaries can rely on
from year to year;
protects beneficiaries from extraordinary out-of-pocket
costs, and ensures reasonable cost-sharing;
protects those with high drug costs;
provides lower-income beneficiaries with additional
assistance; and
does not create incentives for employers to drop current
retiree coverage.

AARP members are looking to Congress to fulfill the promise to
begin to provide long-overdue relief from the devastating costs of
prescription drugs. We believe that a prescription drug benefit should
be integrated into Medicare in a way that strengthens the program.
We know a workable prescription drug benefit will require a sizable
commitment of federal dollars. AARP has urged a level of funding that
will enable the Congress to design a Medicare drug benefit that will
provide real value to beneficiaries. As we learned from last year's
debate, more than $400 billion will ultimately be needed to create a
Medicare prescription drug benefit that our members will find valuable.
Therefore, while we want providers to be paid fairly, we also
believe it would be inappropriate to use limited federal dollars to
increase provider payments without first ensuring that older and
disabled Americans get the drug coverage they need. Our members would
not understand why Congress could find the money to help providers, but
not to help meet beneficiaries' increasing prescription drug needs.

Conclusion

AARP members want a fair Medicare program--for beneficiaries and
for the providers who treat them. As you consider the appropriateness
of further payment changes, we urge you to keep in mind the direct
impact that these changes will have on beneficiary out-of-pocket costs
and on the dollars available for a Medicare prescription drug benefit.
We also urge you to consider carefully the recommendations of the
Medicare Payment Advisory Commission.
We believe that a Medicare prescription drug benefit must be the
top priority this year. We can see no justification for increasing
beneficiaries' cost burden through provider pay increases without first
meeting the need for assistance with increasing drug costs through an
affordable, meaningful benefit available to all beneficiaries. Thank
you again for inviting us to participate in this hearing.

Chairman JOHNSON. Thank you very much, Ms. Severyn.
We had a little discussion with Mr. Hackbarth about
outmoded data. I can't help but think, particularly in view of
your comments, Ms. Severyn, how difficult it is for us to
reimburse in a way that assures that hospitals can provide you
with state-of-the-art equipment on the basis of data that is
anywhere from 2--to 4-years-old. So, while proportionately,
across the Nation, it may tell us something about payments, it
does not help us in meeting a sort of crisis period like we are
in.
Just because of 9/11, small providers, small home health
agencies in my district are seeing their workmen's comp double
and triple when they have never had a claim. So, just the
underlying insurance costs--the plummeting of the market is
requiring small hospitals to put $2 million they hadn't
expected to have to spend into their pension plan to bring it
up to government standards. So, this is an extraordinary time
for health care providers.
Insurance costs, nursing costs, technology costs are all
rising, and we have been through a period of pressure. We have
already cut staff; we have done a lot of those things. I know
there are Members of the Commission staff still here. We will
have a good deal of dialog about this, but it is very hard for
Members who are out there all the time and see what is
happening in their institutions to put together these national,
on-average generic recommendations with the reality that,
frankly, you see. You go into an intensive care unit at
Columbia University where some of the most cutting-edge care is
available--and this is true of any hospital; I just happened to
be there--and you see people hooked up to 20 machines, not 2,
and all the computer interaction it is overwhelming.
If we are going to be able to provide outstanding quality
in the future and see that quality develop, but that frontier
of medical science is pressed back, we have to be careful right
now what we do about reimbursements. In my estimation--and I
could hear it in each of your voices. I have been in Congress
for 20 years and have been on this Committee for 17 years, and
I've never seen such a disparity between the report of people's
experiences and the recommendation of the experts.
I do not mean to disrespect the experts in this regard, nor
does it mean that everything the people out there in the real
world get what they want. It does tell you that we have
increasing--tension of increasing proportions between what our
systems are bringing to us about our health care system and the
experience of our health care system.
Now, when you think when the systems were structured and
where we are now, it is not surprising. We should have included
in our physician payment system the cost of drugs. When we
reimburse for those drugs, either separately or not at all, it
is a bizarre system that can hardly be dealt with. As drug
prices go up, payments go down.
This is the same with the limit, the cap. The cap says: We
are just not going to pay any more than that; it doesn't matter
how much seniors need.
We do need to make an effort. In this regard, the
physicians had the courage--MedPAC had the courage to recommend
a major change, which I have introduced. It hasn't gotten very
far because it is a major change, but we have to keep at it. If
we don't pay our providers fairly, we aren't going to have
providers.
We do have some very difficult problems and some totally
irresponsible neglect--and I am pointing to my friend,
Representative Ben Cardin, over there. Many people mentioned
it, and we are ignoring the fact that Medicaid is undermining
the payment of the system, whether it is hospitals, nursing
homes, or anyone else in the system, including doctors. So, we
do have our hands full.
I understand that it does burden our seniors, but it is
important for our seniors to remember that they all have access
to a health care plan which their grandchildren don't yet. We
are struggling to maintain a system that is capable of quality
improvements, but on the other hand, it doesn't overpay its
providers.
Let me just say that all of you have made very good
comments. Your testimony was very detailed, and I particularly
appreciate it in the home health areas and the other areas.
Dr. Plested, your specific recommendations, we will look at
those carefully. We will look at those with the MedPAC staff
and others, because I appreciate the constructive efforts that
you have made to help us make some of the systems change. It
will enable us to be more accurate in our work.
I also wanted to mention that--I thought it would be
interesting, Dr. Plested--CMS is charged by law to take into
account all changes in law and regulation. Are there examples
you could give us of how physicians' payments have not taken
into account even that bottom line of change?
Dr. PLESTED. Thank you, Chairman. We will be happy to
provide those to you in writing.
In brief, there are continuous changes in rules that come
out that certainly affect what physicians are asked to deliver.
There are changes in treatment recommendations for Alzheimer's
disease; there are changes in recommendations for treatment of
urinary incontinence, to name a couple. A number of these
things come through, they aren't prescribed by law as in the
directive to HHS, so they don't feel--CMS does not feel they
need to make allowance for that.
Chairman JOHNSON. They do have costs associated with them?
Dr. PLESTED. Absolutely.
[The information follows:]

This is to follow up with you concerning the March 6, 2003, Ways
and Means Health Subcommittee on the MedPAC Report on Medicare Payment
Policies. You requested that the American Medical Association (AMA)
provide the Subcommittee with examples of how the Centers for Medicare
and Medicaid Centers (CMS) has not taken into account the full impact
on physician spending of changes in law and regulations, as is required
under the sustainable growth rate (SGR) law.
As the AMA discussed at the March hearing, CMS has not fully
accounted for the impact on physician spending due to changes in
various regulations. In particular, CMS does not take into account, for
purposes of calculating updates in Medicare payments for services
furnished by physicians and numerous other health professionals, the
impact on physician spending due to national coverage decisions. There
have been 62 national coverage decisions since CMS formalized its
process for making such decisions in 1999, and this number is growing
rapidly, as indicated by the 23 decisions that have already been made
in the first 3 months of this year.
An HHS release earlier this year regarding expanded Medicare
coverage of sacral nerve treatment for urinary incontinence stated,
``[u]rinary incontinence affects approximately 13 million adults in the
United States, with nearly half of nursing home residents having some
degree of incontinence. It is twice as prevalent in women as it is in
men, and costs more than $15 billion per year, including both direct
treatment of the disease and nursing home costs.'' Further, when
Medicare expanded its coverage of lymphadema pumps, the Secretary of
HHS stated, ``[i]t's important to make effective technologies available
to Medicare beneficiaries when it helps them the most. This coverage
decision simplifies Medicare policy to allow older Americans who need
these pumps to get them more quickly and easily.''
Other national coverage decisions that expand Medicare coverage of
certain services have also impacted spending on physicians' services,
including those relating to ocular photodynamic therapy used in
conjunction with verteporfin, deep brain stimulation for patients with
Parkinson's disease, medical nutrition therapy for patients with
diabetes and renal disease, positron emission tomography for patients
with breast cancer, image-guided breast biopsies, positron emission
tomography for patients with heart disease, and therapy coverage for
alzheimer's disease patients. We have attached CMS coverage decisions
or press releases concerning these coverage expansions for your review.
While the AMA supports Medicare beneficiary access to these
important services, there must be a full accounting of the impact on
physician spending due to these national coverage decisions and all
other regulatory changes. When the impact of regulatory changes for
purposes of the SGR is not properly taken into account, physicians are
forced to finance the cost of new benefits and other program changes.
Not only is this precluded by the law, it is extremely inequitable and
ultimately adversely impacts beneficiary access to important services.
Accordingly, as discussed at the March hearing, we urge the
Subcommittee to ensure that the impact on utilization and spending
resulting from all national coverage decisions and all other regulatory
changes is taken into account for purposes of the SGR spending target.
[Attachments of CMS coverage decisions or press releases covering
these coverage expansions are being retained in the Committee files.]

Chairman JOHNSON. I wanted to ask you, Mr. Buckelew, about
the dialysis issue. One of the things that was a little
disconcerting about MedPAC's report was that there has been a
rise in freestanding, in-center dialysis--in the number of
facilities in that area. I wonder if that is driven by a
reimbursement structure, as I want our reimbursement structure
to be neutral.
If you look at what is happening in the facility area, 25
percent of the facilities are located in rural areas, but the
decline has been in the urban areas. So, is this growth of
freestanding, in-center dialysis associated with better service
to the suburbs in the rural areas at the expense of the urban
areas? Are we prejudicing in-center dialysis over home
dialysis?
Mr. BUCKELEW. Yes. Thank you for your question, Chairman.
I think the key issues that come to mind in response to
your question are as follows: While there was, in years past,
expansion in the number of centers, the current situation we
find ourselves in, where the economics are dramatically
changing--as you have mentioned and as MedPAC noted, the
incredibly increasing cost of care givers, the rates of
insurance and so on--what has happened over a very short period
of time is that the economics for the dialysis segment have
dramatically changed.
What we find today--and there was reference in the report
from MedPAC to efficient providers versus less efficient
providers--I will tell you that in an analysis that we have
done, we find that the larger providers that are there, the
chains that represent Members of the RLC, there is a tremendous
consistency in the quality of care. What is not consistent is
the patient mix.
Again, what is extraordinary is, 70 to 80 percent of all of
our patients are Medicare; and so you can see, since the
testimony provided today indicates that on each treatment we
lose about $10 for each Medicare patient, if a center happens
to have a mix that is higher than the average for Medicare
patients, then that business model becomes one that is not
sustainable. What we are finding is that the areas that are hit
the hardest first tend to be center city, where the
demographics and such have a higher mix of Medicare and
Medicaid patients; and the rural areas, while it is not always
the case, they tend to be smaller clinics, which makes them far
more sensitive to cost increases because they can't spread
their overhead as well.
So, it is a dramatically changing situation and one that we
think is not a sustainable business model for us.
Chairman JOHNSON. That is interesting because really what
you are saying is--because I think this is not untrue
throughout the sector--the reimbursement system is pushing us
toward national change. This is because the freestanding
``little guy'' has less ability to sustain the ups and downs of
either patient mix or the relationship between patient mix and
reimbursement units or fluctuations in costs. This does concern
me. I have seen this in a number of areas, and I don't think
that is in our interest.
Incidentally, we are sending a letter to the Secretary to
get that report, because it will be very helpful to us. Mr.
Stark.
Mr. STARK. Thank you, Chairman. I guess I would be
surprised if any of the testimony was any different. I have
been listening to this testimony from providers somewhat longer
than the Chair, and I have never ever heard a provider come
before us and suggest that we were paying them enough. So, it
makes sense.
Mr. Barry, based on your cost reports, your inpatient
Medicare margin is 18 percent. Your overall margin is almost
6.5 percent. Your occupancy rate is above the national average,
73 percent. Why should we pay you any more?
Mr. BARRY. You must be looking at old data.
Mr. STARK. It is the same data you used in your testimony,
1999 data. You used the same data.
Mr. BARRY. You mean the Moses Cone system?
Mr. STARK. Yes.
Mr. BARRY. I have the data with me, and I will be glad to
supply it to you. As I said in my testimony, this past year,
fiscal year 2002, we received 96.7 cents on every $1 of
Medicare costs.
Mr. STARK. Did you say you have a negative Medicare margin
this year?
Mr. BARRY. Yes, sir.
Mr. STARK. What is your average for the past couple of
years?
Mr. BARRY. That I can't tell you.
Mr. STARK. That is inpatient? Outpatient?
Mr. BARRY. That is both inpatient and outpatient.
Mr. STARK. What is your inpatient margin?
Chairman JOHNSON. Would the gentleman yield? We just had
Mr. Hackbarth say that we should be looking at total margins
and not just at inpatient. We would love to look----
Mr. STARK. You didn't like what Mr. Hackbarth had to say--
--
Chairman JOHNSON. I didn't like a lot of what he had to
say, but I thought it was interesting that he admitted that we
should look at total----
Mr. STARK. Don't just use them when it is convenient. I am
just looking at inpatient margins, and I suspect there aren't
many hospitals in North Carolina that have negative inpatient
margins, but what do you think a Medicare inpatient margin
should be?
Mr. BARRY. I think it ought to be at least at cost.
Mr. STARK. What should the margin be--1 percent, 2 percent,
10 percent?
Mr. BARRY. I think 1 percent or 2 percent would be fine. I
would be happy with that personally, if that is what you are
asking me.
Mr. STARK. Come on. Higher than that. The margins are far
higher than that. If you want to, I will stipulate that we
could take 1 or 2 percent and save Medicare a lot of money, but
I don't think you want to go back to your hospital
association----
Mr. BARRY. As I said earlier, 57 percent of the hospitals
in 2001 were paid less than their costs on Medicare patients.
Again, that takes all Medicare--inpatient, outpatient--into
account.
Mr. STARK. Dr. Plested, if I could digress for a moment, I
can't resist because you are a cardiologist practicing in
California?
Dr. PLESTED. I am a cardiac surgeon.
Mr. STARK. Do you think you should clean up your own house
in California? In other words, I will get right to it. Have you
taken any action to get rid of Dr. Moon in Redding?
Dr. PLESTED. The AMA has no power to do anything with Dr.
Moon. I can tell you, sir, that nobody, nobody in this country
thinks less of a poor physician than physicians. Through our
legal system, we are not allowed to do anything other than
appear before governmental institutions to testify, and we
cannot bring this type of an action ourselves.
Mr. STARK. You are familiar with his case?
Dr. PLESTED. Yes, sir, I am.
Mr. STARK. I trust you think that is not something that the
profession should be proud of.
Dr. PLESTED. Absolutely. We are not proud of it at all.
Mr. STARK. It is troublesome, and I hope you will help us
in any way we can, because it is only the occasional person
that gives it all a bad record, and I would like to get rid--
the other issue is that I want to make clear that the reduction
in the physician payment structure which--I happen to believe
the formula should be corrected, but I want to make clear that
that was a per procedure reduction; is that not right?
Dr. PLESTED. The decrease that came about with the mistake
in the SGR? I believe that is the case, sir.
Mr. STARK. That in many cases, it is conceivable that
physicians could have earned more money or had a higher gross
income if they done more procedures?
Dr. PLESTED. That is a fair assumption.
Mr. STARK. Okay. So, that--and we are having some trouble--
and as a matter of fact, there are some of us who think that is
fair. As you have higher technology, which Mrs. Johnson would
like to--years ago, cataract surgery was maybe $1,800. As they
got lasers and got more skilled at it and it took less time to
train, I think we cut the price to maybe $1,200, which was
still maybe a reasonable payment, but we got some of the
advantage of productivity, and I think that is a fair trade.
I just wanted to suggest that it is possible that some
physicians made as much money, or more, even though there was
this incorrect reduction in the per procedure fee.
Dr. PLESTED. I certainly agree with you. What we are
interested in, of course, is fair payment.
Mr. STARK. Now, in getting to that, your colleagues in
California were very helpful and very forthcoming, as we
Californians always are.
I asked--and I asked this before; this is in, I think--I
think this is probably 2001 data, but just a couple of
procedures. We were not the bad guys, and I am just going to
quickly go through this.
In Sonoma County, for dermatology, new patient routines,
the Medicare rate was $101.82. The average private HMO rate was
$98. Established patient routine, we were $56.54. The HMO rate
was only--was $58, $2 higher.
A hip replacement, for example, in Santa Clara County, our
rate was $1,697.67. The average HMO rate was $1,600. They tend
to follow us anyway.
If I knew what this was, an arthroscopic knee. I don't know
if that is a new knee or replacing it, but we were within $1.
For your primary care brethren in Alameda County, my home
county, new patient routine, the Medicare rate is $102; the
average HMO rate, $67. Established patient routine, $57 for us,
$41 for HMO. Established patient extended visit was $88.94 for
Medicare, $52 for HMOs.
So, I wanted to get this in the record only to suggest that
we are not always--and I am sure you would agree that Medi-Cal
pays less than either of those and causes in your profession,
in and for hospitals, real concern.
So, while I am perfectly willing to help SNFs or others,
this is all taxpayers' money. Ms. Ousley, I would suspect that
your group strenuously opposes the President's suggestion for
block granting Medicaid; is that correct?
Ms. OUSLEY. I would say--or I personally have just started
to look at that proposal, just reading part of it coming up on
the plane. I would say that at this point in time with that
very preliminary review, we certainly have some very, very
major concerns about whether or not that would deal with the
issues for our residents, and just don't think it would shore
up what we have detailed today as the significant problems in
Medicaid reimbursement.
Mr. STARK. If could address Ms. Severyn's concern in her
excellent testimony, and if the Chair will indulge me for
another minute or two.
Dr. Plested, do you think, if we are not there now, that we
are approaching the time in overall medical care where
prescription drug protocols will be equally as important to a
physician as a hospital facility?
Dr. PLESTED. I think we are definitely approaching that
time rapidly. There are other factors we have to consider.
Mr. STARK. That may not have been the case 20 years ago,
but it is becoming a major part of tools for you to use in your
practice of medicine?
Dr. PLESTED. Yes, sir.
Mr. STARK. Ms. Severyn was suggesting to us, if we are
going to have a Medicare payment system to provide for our
seniors, that we are kind of--we have got a three-legged stool
there at least, and we are kind of hobbling along on two legs;
and decent medical care requires that we provide as part of the
protocol for the quality care that we pride ourselves in in
this country that we get to a prescription drug benefit.
I appreciate your taking the time, Ms. Severyn, to come in
and present your position, which is also one that AARP
presents. I appreciate all of you taking the time. I wish we
had enough money--and we don't--to correct the problems that
may be covered by--whether it is Medicaid that is causing the
problem or whether it is aggressive private insurance companies
or managed care plans or anything else, we have to do that as
an entire government payment plan.
Then I don't suppose you care where the money comes from.
You would just be happy if we raised Medicaid, wouldn't you?
So, while we recognize that we may be the next best source for
visiting nurses or SNFs, we also have to take care of Dr.
Plested's Members and Mr. Barry's Members, and the dream that
Ms. Severyn represents for the seniors, who would like to be
included. If we are going to cut Medicaid, which is being done
and the States are all in financial trouble, I am not sure we
can do all of that just through the part A, part B, and what
hopefully will be the new drug system, but we will try.
Thank you for coming and thank you, Chairman, for the
hearing.
Chairman JOHNSON. I thank you all for coming.
I would like to end on a note that I think reflects my
state of mind. There was an article in the New England Journal
about a month ago called the Homeostasis of Medicine Today, and
it goes through all the changes in law, I mean major changes in
law, that have affected our medical delivery system in recent
years. It makes, I think, a very compelling case for the fact
that we have made it through an awful lot of change. However,
the balance within the system is far more delicate, the
stability of individual providers is far more fragile.
The message, to me, was very clear. If we make a mistake
now of serious proportions, either in a reimbursement rate
setting or in the way we change the law, we will have
consequences on the system that will be irreversible. I think
if we hadn't done something about physician payments, for
example, we would have lost many, many physicians who have 10
good years of practice left in them.
Just as serious, our failure to wait until the 11th hour,
one might even have said the 12th hour, is discouraging young
people from going into medicine. It is preventing our filling
certain kinds of residencies.
It is having an impact already on the future quality of our
health care system, and unless we straighten up and get some
formulas out there that are fair, and get a system that can run
without Congress' passing a bill every year, you are not going
to have the quality of people going into medicine, the quality
of administrators and small businesspeople opening home health
agencies, or small nursing homes that have been typical of the
care system.
In the end, that is what it is, it is primarily about care
of people with needs. We will erode the quality of the human
beings we are attracting into health care if we cannot create a
health care system that runs more fairly and without
congressional intervention every single year.
I think often about that issue of homeostasis. It is true,
your body has it. If you are in good shape, you can take
exposure to diseases. If you have one illness, you are more
likely to get another, and after awhile, you are just
vulnerable to anything that comes along small, medium, or
large.
I consider this a very serious moment right now, and I
think your testimony reflected your concern and frustration
with formulas and the reality that you face in which nursing
costs are rising rapidly and insurance costs are rising
rapidly. Fuel costs are now going to rise rapidly; technology
costs are rising rapidly.
We have made the system far more complicated with the
Health Insurance Portability and Accountability Act 1996 (P.L.
104-191) and every other law, and so on and so forth. That is
the reality. So, we need to work closely together and see if we
can't get through this period well. I think the next round will
give us an opportunity, on the basis of far more sophisticated
technological capability in medicine, to provide better quality
care and managed care in such a way that we can also control
costs.
So, I think the future out there is enormously positive,
and I think the present is extraordinarily dangerous.
Chairman JOHNSON. I thank you for your testimony and look
forward to working with you.
[Whereupon, at 4:30 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

Statement of David Shapiro, M.D., American Association of Ambulatory
Surgery Center, Johnson City, Tennessee

The American Association of Ambulatory Surgery Centers is delighted
to provide this statement concerning the Medicare Payment Advisory
Commission's (MedPAC) recommendations regarding Medicare payments for
services furnished in ambulatory surgery centers (ASCs). Our members
either own or perform surgery in Medicare-certified ASCs. As such, our
membership is very interested in potential changes to Medicare
reimbursement for services furnished in ASCs.
AAASC is a professional medical association of physicians, nurses,
and administrators who specialize in providing surgical procedures in
cost-effective outpatient environments, primarily in Medicare-certified
ASCs. For more than twenty years, ASCs have offered Medicare
beneficiaries patient-friendly, cost-efficient, and high-quality
alternatives for surgical services, and saved the Medicare program
literally billions of dollars in the process.
ASCs save the Medicare program hundreds of millions of dollars
each year. Medicare payments to ASCs for outpatient surgical procedures
are usually substantially lower than payments to hospitals (both on an
inpatient and outpatient basis). Moreover, ASCs have brought the
benefits of competition to the entire outpatient surgery market: the
opening of an ASC in a particular area has frequently been followed by
a significant reduction in the charges of local hospitals for
outpatient surgery, as well as increased attention on the part of the
hospitals to quality of care and patient satisfaction.
MedPAC's March 1st report to Congress, and subsequent testimony
before the House Ways & Means Subcommittee on Health made three
recommendations with respect to ASCs. This statement seeks to provide
the Subcommittee with supplemental information that it should consider
when evaluating MedPAC's recommendations.

Recommendation 1: The Secretary should expedite the collection of
recent ASC charge and cost data for the purpose of analyzing
and revising the ASC payment system.

AAASC agrees with MedPAC's recommendation. Congress, MedPAC, and
the Centers for Medicare and Medicaid Services (CMS) should have better
data for the purpose of analyzing ASC payment rates. In many ways,
MedPAC's report and recommendations are unreliable and incredible
because the Commission lacked contemporary data on which to evaluate
Medicare ASC payment rates. However, for two reasons, AAASC cautions
Congress from advancing legislation that requires CMS to collect ASC
cost data.
First, Congress need not advance legislation to require CMS to
collect ASC facility cost data. Medicare statute (Soc. Sec. Act
1833(i)(2)(A)) already requires that CMS survey ASCs for facility costs
every five years. As such, further congressional action on this matter
would be redundant.
Second, facility surveys are an impractical way of rebasing ASC
payment rates. Past history has shown that CMS is incapable of defining
a survey instrument able to accurately capture ASC procedure cost
experience. Moreover, most ASCs are insufficiently sophisticated and
equipped to accurately respond to such a survey. As such, Congress
should not expect, nor urge, CMS to undertake a survey process for the
sake of rebasing ASC rates. Congress twice intervened, once in the
Balanced Budget Refinement Act of 1999, and again in the Benefits
Improvement and Protection Act of 2000, to prevent CMS from
implementing rebased rates proposed in 1998 that were based on the
flawed survey and rebasing methodology CMS conducted between 1994 and
1998. Congress should not conclude from MedPAC's recommendation that a
survey of facility costs continues to be the best way to rebase
payments to ASCs.
Rather, Congress and CMS should explore new alternatives to
rebasing ASC rates. AAASC has been working collaboratively with CMS
since 2000 to identify mutually acceptable alternatives to rebasing ASC
rates, and we believe that we may be close to making a recommendation
to Congress to implement one such alternative. In the interim period
while AAASC and CMS work to develop these alternatives, Congress should
refrain from directing CMS to undertake obsolete approaches to rate
rebasing.

Recommendation 2: The Congress should eliminate the update to payment
rates for ASC services for fiscal year 2004.

AAASC strongly disagrees with this recommendation, and particularly
with the bases on which MedPAC reached this recommendation. First,
Congress has held ASC payment rates steady for more than 10 years.
Although the Medicare statute currently requires CMS to update payment
rates to ASCs each year by the consumer price index for urban areas
(CPI-U), Congress did not always provide for these inflation
adjustments. In fact, the Omnibus Budget Reconciliation Act of 1993
froze Medicare payments to ASCs for 1994 and 1995. Consequently, ASC
payments were not adjusted for inflation, or by any other factor, in
those years. The Balanced Budget Act of 1997 similarly limited Medicare
ASC payment updates to CPI-U minus 2% for the period 1998 through 2002.
During that five-year period, CMS updated payments by less than 1% in
most years, since inflation was so low, and did not update payments at
all in 2000, since CPI was only 2.1%. For these reasons, ASC service
payment updates averaged only 1.88 percent per year between 1991 and
2002. By comparison, the hospital market basket index, a measure of
health care cost inflation, averaged nearly 3 percent in the last 8
years.
Second, MedPAC's assertion that changes in technology and
productivity since 1986 have made procedures less expensive to furnish
is unsupported and wrong. While true that some procedures may be
furnished faster and more efficiently, input costs for many procedures
have continued to increase. Procedures that used to be performed by
open techniques, but that may now be done with closed techniques,
require expensive scopes and video monitoring equipment. Even common
instrumentation, like scalpels, is more expensive now in relative
terms. Moreover, rent, labor, and liability insurance costs have
continued to inflate, and are largely unaffected by technological
advancements.
Third, MedPAC relied considerably on ASC growth statistics, and
asserted that recent growth in the number of ASCs is attributable to
payment rates that exceed costs. No evidence supporting this
proposition was presented. Moreover, there are many explanations why
the number of ASCs has grown in recent years.

The Medicare ASC benefit is only 20-years-old, and so the
market is still in a growth phase.
Many states in recent years have loosened or eliminated
certificate of need laws, which previously contained ASC growth. As
proof, Congress should take note that ASC growth has been largely
focused on a few states where CON laws have been relaxed. In states
where CON remains a substantial hurdle, there has been virtually no ASC
growth, and remains limited alternatives to hospitals for surgical
care.
Technological advancements--e.g., closed surgical
techniques and fast-acting anesthetics--have made it possible for a
broader range of procedures to be performed in the ASC setting.
The number of ASCs has increased commensurate with CMS
expanding the list of procedures approved for the ASC setting. In the
early years of the ASC benefit, only 400 procedures were covered in the
ASC setting. As more procedures have been added, it becomes
increasingly feasible for ASCs to operate, and more ASCs are developed.
ASCs are attractive to the physicians who develop them,
because they return control over procedure scheduling to the surgeon.
Surgeons develop ASCs because they expect to improve their overall
productivity by being able to perform more surgical procedures per day
and, thus generating more professional fees.
Private payors, particularly managed care entities, also
are driving ASC growth in many areas, because they recognize the
efficiencies and savings inherent in ASC settings.
Most importantly, patients tend to find ASCs to be
friendlier environments, and prefer the convenience and efficiency
offered by most ASCs.

MedPAC failed to recognize the limited effect that Medicare rates
actually have on growth of ASCs. If, as MedPAC itself says, Medicare
accounts for only 20 to 30 percent of revenues received by the largest
for profit chain, then clearly Medicare payments cannot be a driver of
facility expansion.
Congress should recognize that Medicare payments to ASCs have been
held relatively flat in recent years, and therefore should allow CMS to
inflate Medicare rates by the CPI for 2004 .

Recommendation 3: Until the Secretary implements a revised ASC payment
system, the Congress should ensure that payment rates for ASC
procedures do not exceed hospital outpatient PPS rates for
those procedures after accounting for differences in the bundle
of services covered.

AAASC concurs that there should be more of a relationship between
the amounts Medicare pays for outpatient surgical services. AAASC
further applauds MedPAC for recognizing that creating greater
consistency cannot be achieved through arbitrary across-the-board
adjustments, but rather must be achieved only after a careful
accounting for differences in the bundle of services reimbursed through
each payment system. In considering its recommendation, MedPAC
recognized that Congress has ordered CMS to develop payment rates for
outpatient surgical services for ASCs, hospitals, and physician offices
using different methodologies and data sets, and that each system is
designed to reimburse providers for different bundles of services. For
example, in addition to the base payment rates for hospital outpatient
procedures (which is all that MedPAC examined), hospitals are entitled
to numerous payment add-ons and adjustments--e.g., outlier adjustments
and drug and device pass-throughs--that inflate the base payment
amount. ASCs are not entitled to these same treatments. The base
payment amount made to an ASC is all that the ASC will receive for
furnishing that service. Congress should not draw conclusions by
comparing base payment rates alone. These differences must be
identified, quantified, and evaluated before true relationships can be
established across systems.
Nonetheless, AAASC believes that MedPAC substantially
underestimated and disregarded numerous other important considerations
in making its recommendation. First, MedPAC failed to appreciate that
hospital outpatient service payments are not a credible measure of the
cost of furnishing hospital outpatient services on a procedure-by-
procedure basis. In fact hospital outpatient payment rates are not
derived from costs, and they are widely recognized to be less than
actual costs in many instances. Consequently, it is irresponsible to
compare ASC rates to hospital rates, and conclude that ASC rates are
inappropriate simply because they are higher in some instances. This
conclusion presupposes that hospital rates in each specific instance
are an accurate measure of procedure costs and appropriately
reimbursing hospitals, neither of which is a correct presupposition.
Additionally, MedPAC failed to report to Congress the implications
of its proposal on single-specialty ASCs. While many ASCs perform
procedures of various types--e.g., orthopedic, gastrointestinal, and
ophthalmologic--the majority are single specialty, furnishing
procedures of only one type. In multi-specialty ASCs, as in the
hospital setting, if some Medicare procedure reimbursement amounts are
less than costs, the efficient facility should still have a positive
net margin, because other procedure payment rates will be higher than
costs. The same may not be true for single-specialty ASCs, many of
which furnish only a narrow range of procedures, and which therefore
cannot cross-subsidize in the same manner.
MedPAC also failed to point out to Congress that hospital payment
rates are in flux, and have varied wildly in the first years since the
payment system was implemented. MedPAC's comparisons presented a
moment-in-time snapshot using only 2003 rates. Where an ASC
reimbursement amount may well have been more than the corresponding
hospital base payment rate in the year studied, it very well may have
been lower in the previous year, and may be lower again the next year.
MedPAC should have shown comparisons using 2001 and 2002 rates, too,
and, at the very least, pointed out to Congress that hospital
outpatient rates have fluctuated significantly in the early years,
making a comparison based on one year incomplete.
Congress should not take hasty, arbitrary action to ensure that ASC
rates do not exceed hospital rates, or vice versa. Rather, efforts to
create a credible relationship between hospital and ASC rates should be
done as part of a thoughtful effort to rebase ASC rates, and only after
fully accounting for differences in the bundle of services covered, and
other differences between the two payment systems.

Statement of the American Association of Health Plans

Madam Chair and members of the subcommittee, the American
Association of Health Plans (AAHP) appreciates the opportunity to
provide a written statement in response to the Medicare Payment
Advisory Commission's (MedPAC) March 2003 Report to Congress on
Medicare payment policies. AAHP represents more than 1,000 health
plans, including HMOs, PPOs, and similar network plans providing
coverage to more than 170 million Americans. AAHP member plans are
dedicated to a philosophy of care that puts patients first by providing
coordinated, comprehensive health care.
MedPAC's March 2003 report includes a chapter on the choices that
Medicare beneficiaries currently have to receive care within the
Medicare+Choice program. These include Coordinated Care Plans, managed
fee-for-service plans, and preferred provider organizations (PPO).
MedPAC finds that 80 percent of Medicare beneficiaries currently live
in areas where these choices are available. In addition, many Medicare
beneficiaries throughout the country purchase Medigap plans, have
access to employer-sponsored retiree benefits, and if low-income, may
be eligible for their state's Medicaid program. While MedPAC notes that
beneficiaries in many areas may have significant choices, those living
in other areas may have none. The Commission proposes to study the
factors that contribute to the variation of the number of choices
available to Medicare beneficiaries in different areas.
The report also notes the concerns with Medicare commonly expressed
by managed care plans that have caused a significant number of managed
care plans to leave the Medicare program. These include inadequate
payment rates, regulatory burdens, and limits on plan benefit design to
offer flexible benefits. MedPAC does not provide recommendations to
address these concerns. AAHP believes that certain changes to the
Medicare+Choice program must be made to provide more program stability
and improve the access beneficiaries have to the high quality, more
comprehensive care offered by Medicare+Choice plans.

Medicare+Choice enrollees receive high quality health coverage through
Medicare+Choice plans.

Medicare+Choice plans offer a different approach to health care
than beneficiaries experience under the Medicare fee-for-service
program. Instead of focusing almost exclusively on treating
beneficiaries when they are sick or injured, Medicare+Choice plans also
place a strong emphasis on preventive health care services that help to
keep beneficiaries healthy, detect diseases at an early stage, and
avoid preventable illnesses. At the same time, Medicare+Choice plans
have improved the overall delivery of health care services by
coordinating care through medical professionals who are responsible for
coordinating medically appropriate health care services on a timely
basis.
Medicare+Choice plans today are delivering more and better
coverage--including access to prescription drugs--than the Medicare
fee-for-service program:

A January 2003 report by the Kaiser Family Foundation
(KFF) shows that Medicare+Choice--despite being drastically
underfunded--generally costs beneficiaries less, charges lower
premiums, and provides coverage for services that are not available
under Medicare fee-for-service.
According to an AAHP analysis of data published in the
Journal of the American Medical Association (JAMA) and data compiled by
the National Committee for Quality Assurance (NCQA), Medicare+Choice
plans outperform Medicare fee-for-service in five of seven key HEDIS
quality measures: beta blockers after heart attacks; annual flu
vaccines; breast cancer screenings; diabetes testing; and diabetes
lipid screening.

Medicare+Choice plans also introduced the concept of disease
management programs to Medicare--improving quality of care for
beneficiaries with diabetes and other chronic conditions by focusing on
the comprehensive care of patients over time, rather than individual
episodes of care. A recent AAHP survey, based on responses from 131
health plans, found that 97 percent have implemented disease management
or chronic care programs for diabetes, 86 percent have programs for
asthma, and 83 percent have programs for congestive heart failure.
Health plans also are developing disease management programs for end-
stage renal disease, depression, and cancer.

The Medicare+Choice program serves as an important safety net for low-
income and minority Medicare beneficiaries.

Medicare+Choice plans play an important role in providing health
coverage to many low-income and minority beneficiaries who cannot
afford the high out-of-pocket costs they would incur under the Medicare
fee-for-service program. For many beneficiaries who do not receive
supplemental coverage through Medicaid or a prior employer, the
Medicare+Choice program provides comprehensive, affordable coverage
that is not available under the Medicare fee-for-service program.

Medicare+Choice payments are not keeping pace with the rapidly
increasing costs of providing health care services to Medicare
beneficiaries.

Since 1998, a large proportion of Medicare+Choice beneficiaries
have been enrolled in health plans to which payments increased by only
the minimum annual update--which has been set at two percent since 1998
(but was temporarily increased to three percent in 2001 only). To
underscore the inadequacy of government payments to Medicare+Choice
plans, it is useful to compare Medicare+Choice to other government
health programs and private sector health coverage. In 2003, funding
for the health benefits of all Medicare+Choice enrollees increased by
only two percent. The following facts highlight the inadequacy of this
increase:

the Office of Personnel Management (OPM) has estimated
that, on a per enrollee average, total premiums collected by health
plans in FEHBP increased by 10.5 percent in 2001 and by 13 percent in
2002;
PricewaterhouseCoopers has estimated that health
insurance premiums increased by an average of 13.7 percent for large
employers between 2001 and 2002; and
the William M. Mercer consulting firm has released survey
findings showing that spending for employer-sponsored health coverage
increased by an average of 11.2 percent in 2001 and 14.7 percent in
2002.

These examples raise important concerns about the adequacy of
Medicare+Choice payments. Any serious effort to stabilize the
Medicare+Choice program must directly address these concerns by
committing a significant level of additional funds to support the
health benefits of Medicare+Choice enrollees.

Conclusion

AAHP appreciates this opportunity to submit a written statement to
the Committee on the March 2003 MedPAC report. We believe the report
provides substantial insight--MedPAC fairly represents our members'
concerns with the Medicare+Choice program and the report's discussion
of the impact of local factors, including regulatory environments, is
extremely useful.
We look forward to working with MedPAC and Congress to address the
problems that MedPAC identifies and improve the choices available to
Medicare beneficiaries. Over the past two years, more than 120 Members
of Congress--including 79 Democrats and 43 Republicans--have
cosponsored bills or signed letters indicating their support for
legislation to address the Medicare+Choice funding crisis. The Bush
Administration has also proposed additional funding to stabilize the
Medicare+Choice program. Building upon this strong base of bipartisan
support, it is critically important for Congress to pass legislation to
provide additional funding to protect the health care choices and
benefits of Medicare+Choice enrollees.

Statement of the American College of Surgeons
The American College of Surgeons--an organization representing more
than 64,000 surgeons dedicated to accessible, high-quality care for
surgical patients--is grateful to Chairman Thomas, Chairwoman Johnson,
and the other distinguished Members of the Ways and Means Committee who
worked diligently to avert the 4.4 percent physician payment cut that
was scheduled to take effect this week. By providing the Centers for
Medicare and Medicaid Services (CMS) with the legal protection to
correct faulty data from projections made about gross domestic product
(GDP) and fee-for-service enrollment growth for 1998 and 1999, your
work guaranteed a 1.6 percent increase in physician payments. Surgeons
historically have had particularly high Medicare participation rates.
Your advocacy takes an important first step in guaranteeing the
profession's continued participation in the program.
We are pleased that the subcommittee is hosting this hearing on the
Medicare Payment Advisory Commission's (MedPAC) report on Medicare
payment policies. Unfortunately, MedPAC fails to adequately address our
concerns in two important ways. First, it inappropriately stresses the
importance of data regarding physician participation as an indicator of
patient access. Second, its treatment of rising liability premiums is
at best cursory. It is within this context that we offer the following
comments.

The emerging access issue

Over the last 15 years, Medicare reimbursements for surgical
services have declined steeply. Indeed, payments for many surgical
procedures are now less than half of what they were before the current
physician payment system was implemented in 1992 (in actual dollar
amounts, without any adjustments made for inflation). Because the price
of medical liability insurance and other practice costs continue to
escalate, surgeons and other physicians find themselves struggling to
keep up with the demands of an aging population.
Physician practices are essentially small businesses. As is true
for many small enterprises, there are limited options available to
physician practices for reducing overhead costs. Unlike other business,
however, when faced with decreasing income and soaring expenses,
doctors cannot simply charge higher rates for their services. To keep
the operating doors open, practices must make tough choices. Some delay
the purchase of new equipment. Others reduce the size of their staff.
Many increase the percentage of non-Medicare patients they see.
While we were pleased to avoid another payment cut, it is important
to recognize that a 1.6 percent increase does not keep pace with the
inflationary costs of operating a practice. And, for surgical
specialties in particular, the more recent crisis in the Medicare
payment system comes on the heels of a series of steep reductions that
were implemented over the past decade. For most surgical practices,
there simply aren't too many cost cutting options left.
Those who are skeptical about the need to increase funding for
physician payment often cite the high participation level in the
Medicare program as evidence that reimbursement rates are at least
adequate. MedPAC frequently looks to the number of participating
physicians as an indicator of payment adequacy. Analysis of payment
adequacy, however, is subtler.
MedPAC relies on the fact that physicians are participating or that
they continue to accept Medicare, managed care, and other private plan
payment rates. This analysis, still, overlooks the important point of
the unequal contractual relationship between physicians and payors. For
example, a vascular surgeon has no choice but to see Medicare patients
if he or she wants to remain in practice. They comprise the majority of
a vascular surgeon's practice.
MedPAC also notes that since 1994 Medicare payment rates have
remained competitive with private plan rates. This ignores the fact
that the fee schedule has been adopted increasingly by private payors
since its phased implementation by Medicare began in 1992 causing
payments to track more closely. There may be a causal relationship here
that their analysis fails to address.
Additionally, MedPAC relies on the fact that more physicians see
Medicare patients than Medicaid patients. They note as an examples that
finding referrals for Medicare patients is easier than for Medicaid
patients. Again, the analysis here could go deeper. It may be possible
that Medicaid access problems are becoming more apparent because rates
paid by Medicare and others are falling. Since few earn their living
caring for Medicaid patients to begin with, this population is easier
to drop as the cross-subsidization of their care by other payors such
as Medicare continues to erode. We are troubled by this and see it as a
precursor of emerging access problems for patients covered by other
plans like Medicare.
True, most surgeons will continue see some Medicare patients even
as rates continue to fall. It is difficult for physicians to sever
long-standing relationships with their patients. More telling, however,
is the number of physicians accepting new Medicare patients into their
practices. As more and more doctors curtail the time they devote to
Medicare patients, seniors and disabled patients will wait even longer
to visit a specialist. Moreover, like Medicaid providers, they will
struggle to find physicians available for referrals for follow-up
chronic care.
One problem associated with decreasing reimbursements is especially
acute within the surgical community. The number of physicians who elect
to practice surgery is declining. Many variables enter into a medical
student's choice of specialty. Among these factors is the viability of
maintaining a practice. As reimbursements fail to keep pace with
inflation, so too do the number of applicants interested in pursuing
surgery. For example, following the most recent residency match, 15
percent of the positions in thoracic surgery went unfilled. Similarly,
a significant number of openings in general surgery and neurosurgery
remained unsatisfied.
Underserved communities that traditionally struggle to recruit and
retain physicians are particularly hard hit. Expanding the number of
patients seen is one of the most common means to bolstering a
beleaguered practice--an option that often cannot be exercised in
sparsely populated communities. Rural areas find it particularly
challenging to attract young specialists, again because they cannot
supply a sufficient patient base. Never are the consequences more dire
than for trauma patients in underserved areas. The inability to
sufficiently staff hospitals in emergency situations is one of the
ripple effects of cost-cutting in physician reimbursement.
Not only are we seeing a decline in the number of young surgeons,
the ranks of older surgeons are beginning to diminish as well. Faced
with lagging reimbursement rates and dramatically increasing liability
premiums, many of our most experienced surgeons are pursuing early
retirement. As the number of Medicare patients continues to increase in
our aging population, conversely the number of seasoned surgeons is
decreasing, further exacerbating all of the problems associated with
access to care.
The College implores Congress to work with CMS to keep physician
participation in Medicare at optimal levels. We suggest two areas for
Congressional action. First, as part of on ongoing effort to reform the
Medicare physician payment update system, Congress should urge CMS to
revise the SGR formula to reflect changes in Medicare benefits that are
attributable to national coverage decisions. Second, Congress must
examine the adequacy of Medicare reimbursement for physician liability
insurance costs and urge CMS to make necessary revisions in the
malpractice relative value units (RVUs) in time for implementation with
the 2004 Medicare fee schedule.

1. Congress should urge CMS to revise the SGR to reflect changes in
Medicare benefits that are attributable to national decisions.

The ultimate solution to the update problem is for Congress to fix
the flawed formula that is used today to calculate the annual changes
made to the conversion factor. Physicians are the only provider group
that has payment update that reflects a sustainable growth rate or SGR,
and the formula has other parts that are faulty--such as its use of
gross domestic product (GDP) growth as an ``affordability'' factor. One
thing CMS can do, though, is to adjust the SGR formula to reflect
changes in Medicare benefits that are attributable to national coverage
decisions. (Of course, there are many other problems with the SGR
formula that Congress and CMS need to pursue, as well.)
Although one component of the SGR reflects changes in law and
regulation, CMS currently only includes changes in program benefits
that are attributable to legislation. By excluding important benefit
expansions that are made through national coverage decisions, CMS
compares actual expenditure data that include these services against a
spending target that does not include them, making it more likely that
the target will be exceeded. We urge Congress to work with CMS to
correct the SGR formula.

2. To ensure that reimbursement adequately encompasses liability
premium costs, Congress must urge CMS to make necessary revisions
in the malpractice expense RVUs in the final rule for the 2004 fee
schedule. Additionally, Congress should recommend the immediate
public release of the most current professional liability data.
Furthermore, Congress should also consider new mechanisms for
ensuring that Medicare payments for physician liability costs are
adequate.

The growing cost of liability insurance is a primary concern for
most surgeons, and for many other specialists, as well. In a growing
number of states, surgeons are having difficulty obtaining medical
liability insurance, and for those who are able to find coverage the
cost is often prohibitively high. The large premium increases and
declining number of liability insurance carriers are forcing many
surgeons to make difficult decisions about limiting the scope of their
practice, moving to other states, or retiring early. Medicare payment
cuts only add more financial pressure to make these decisions.
For most surgeons, the increases are quite tangible. In Broward
County, Florida, for example, the premium of a general surgeon was
$67,647 in 2001. In 2002 that surgeon's premium rose to $108.997--a 61
percent increase. In Ohio, the premium for an obstetrician-gynecologist
was $95,310 in 2001. In 2002 that physician paid a $152,496 premium--a
60 percent increase. According to the Medical Liability Monitor, an
independent trade publication, the median increase in premiums for
general surgeons was 29.1 percent last year.
The College appreciates CMS' recognition of the growing liability
crisis and is pleased that the agency has responded by implementing an
increase in the Medicare Economic Index (MEI) update for professional
liability insurance of 11.3 percent in the 2003 Physician Fee Schedule.
While we support this increase, there is a heightened concern that
specialties being hit the hardest by rising insurance costs are not
getting the help they need.
MedPAC fails to take into consideration that those specialties
experiencing the greatest liability premium hikes are coincidently the
same groups who have been experiencing net pay decreases for a number
of years. This results from the transition to a single conversion
factor, followed by the phase-in to the generally lower resource-based
practice expenses. Certain surgical specialties--such as neurosurgeons,
general surgeons, thoracic surgeons, and those in obstetrics-gynecology
and orthopaedics--pay the highest premiums as a matter of course and
are suffering disproportionately from the current escalation in premium
rates. Yet, any MEI adjustment applies broadly and cannot direct funds
to those who are actually experiencing these increases--even if the
faulty SGR system did not eliminate the benefits of such an adjustment
entirely.
This may be the best place to note that MedPAC imprecisely
restricts its comments of increasing liability premium costs to its
discussion of the MEI. As stated previously, we appreciate the 11.3
percent increase in 2003, but it in no way results in a payment
increase commensurate with the added cost that many are experiencing--
even if the update were set at the MEI with no SGR performance
adjustment. Since the MEI applies equally to all fee schedule services,
it does not channel new money to those who are actually providing the
higher ``resource inputs'' by paying higher premiums.
We cannot emphasize enough how important it is to address this
problem and ensure that the resource-based payment system reflects the
costs involved. Professional liability premiums are a major resource
``input,'' the cost of which falls outside physicians' control.
Further, as press reports have shown, the recent escalation in these
costs is starting to have a significant adverse impact on access to
many important services. Since the Medicare fee schedule is used as the
basis for determining payments for many insurers, it is critical for
the entire health care system--not just Medicare--to account for these
costs appropriately.
We are concerned that CMS has not devoted the staff and resources
necessary to assure that the relative value units for malpractice truly
reflect the relative costs associated with liability premiums. To some
extent this is understandable, given the resources that must be devoted
to the physician work and practice expense portions of the fee
schedule. The College strongly supports the HEALTH Act, HR 5,
legislation to stabilize volatile jury awards and rising premiums.
Until that meaningful liability reform is enacted the liability crisis
will persist, and it must be addressed immediately.
Section 1848(c)(2)(B)(i) of the Social Security Act requires that
``The Secretary, not less often than every 5 years, shall review the
relative values established under this paragraph for all physicians'
services.'' The current resource-based malpractice expense RVUs were
implemented on January 1, 2000. Therefore, the resource-based
malpractice expense RVUs resulting from a 5-year review must be
implemented on January 1, 2005. That may seem like a long way off--but
the reality is that the refinement of malpractice RVUs should already
be well under way. Therefore, it is essential that the proposed rule
for 2004 address the refinement of the malpractice RVUs. We believe the
agency should present options and invite public comment on various
approaches to refinement.
The College is involved in its own development and analysis of
various alternatives. As part of our process, we believe it is
essential that we have access to the data used by CMS in the
calculation of the 2003 MEI update. In the final rule for the 2003 fee
schedule, CMS stated that the professional liability data used to
develop the 2003 MEI update was based on premium rates effective as of
June 2002. These data included both the premium amount and effective
date, which CMS used to create a quarterly time series. Thus, the
professional liability insurance component of the 2003 MEI update
includes effective premium rates through the second quarter of 2002.
We have requested this data, but to date it has not been provided
to us. We ask Congress to request the immediate public release of this
current professional liability data to facilitate the development and
review of various options for refining the malpractice expense RVUs.
Finally, we are so concerned about the impact of rising premiums
that we believe CMS must be prepared to make necessary revisions in the
malpractice expense RVUs in the final rule for the 2004 fee schedule.
While the statute requires that refinement must take place by 2005, the
actual wording of the statute is ``not less often than every 5 years.''
CMS has the flexibility to revise the RVUs in 2004. In light of the
crisis created by the dramatic increase in liability premiums for many
critical specialties, we ask Congress to call on CMS to include in the
proposed rule for 2004, an explicit request for comments on the
appropriateness of refining the malpractice expense RVUs in 2004,
rather than 2005.

Conclusion

One of the greatest achievements of the Medicare program is the
access to high-quality care it has brought to our nation's senior and
disabled patients. This level of access cannot be expected to continue
uninterrupted in the face of continued cuts and ballooning liability
premiums. We cannot emphasize enough how important it is for this
Subcommittee to take steps to ensure that physician payment adequately
reflects the cost of doing business.
Thank you for your consideration of Medicare payment policies,
including the adequacy of reimbursement for physicians. The College
appreciates this opportunity to present its views and looks forward to
working with you to ensure continued access to Medicare.

Statement of the American Gastroenterological Association, Bethesda,
Maryland
The American Gastroenterological Association (``AGA'') is pleased
to submit testimony concerning the Medicare Payment Advisory
Commission's (``MedPAC'') recommendations on Medicare payments for
services performed by physicians in ambulatory surgery centers
(``ASCs''). The AGA is the nation's oldest not-for-profit medical
specialty society, representing more than 12,500 physicians and
scientists worldwide who are dedicated to the prevention, treatment and
cure of digestive diseases.

MedPAC RECOMMENDATIONS

I. Physician Payment Update Recommendation

Congress should update payments for physician services by the projected
change in the input prices, less an adjustment for productivity growth
of 0.9% for 2004.

In addition to a physician payment update for 2004 that keeps pace
with inflation, MedPAC also recommended that the sustainable growth
rate be replaced with a system where updates are based on an assessment
of increased practice costs, adequacy of payment, and beneficiaries'
access to care. AGA and the greater medical professional community
supports this recommendation and wishes to work with Members of the
Committee to reform the physician payment update formula to achieve
equitable physician payment rates.
AGA is thankful to Congress in general and the members of the Ways
and Means Health Subcommittee in particular for mitigating the
physician payment update crisis by enacting H.R. Res. 2, which
contained a provision to avert a Medicare payment cut that would have
jeopardized access to physicians' services for Medicare beneficiaries.
Without this remedy, physicians could have been forced to limit or
discontinue services to our nation's seniors.

II. Ambulatory Surgery Center Recommendations

A. The Secretary should expedite the collection of recent ASC charge
and cost data for the purposes of analyzing and revising the
ASC payment system.

There is no question that better data is needed to analyze the
appropriateness and equity of ASC payment rates. In fact, AGA is
concerned that MedPAC's recent report and subsequent recommendations
relied on obsolete data when evaluating Medicare ASC payment rates.
However, rather than taking legislative action to require CMS to
collect ASC cost data, Congress should direct CMS to attentively adhere
to current Medicare statute. Medicare statute already directs CMS to
survey ASCs for facility costs every five years. Further congressional
action would be duplicative and confusing.
Additionally, Congress should not take action to require CMS to
further use facility surveys to rebase ASC rates. Relying on facility
surveys as an instrument to accurately determine ASC procedure costs
has proved to be an impractical means of rebasing ASC payment rates.
Congress twice intervened in 1999 and 2000 to prevent CMS from
implementing rebased rates that were developed using flawed survey
methodology. One reason such surveys have repeatedly failed to capture
accurate cost data is because most ASCs are not properly equipped to
respond to such a survey.
Instead, Congress should consider new approaches to rebase ASC
rates, and urge CMS to work collaboratively with the ASC community to
develop methods to accurately capture ASC procedure cost experience and
rebase ASC rates. Until a more accurate data collection method is
determined, attempts to rebase rates based on obsolete approaches will
continue to be inadequate.

B. Congress should eliminate the update to payment rates for ASC
services for fiscal year 2004.

AGA does not agree with this recommendation and challenges the
rational MedPAC used to reach it. To reach this recommendation, MedPAC
made assumptions based on ASC growth statistics, yet did not support
the assumptions with evidence. MedPAC concluded that the growth in the
number of ASCs is attributable to payment rates that exceed procedure
costs.
There are several reasons why the number of ASCs has grown,
including the following:

Technological advancements, including closed surgical
techniques--e.g. colonoscopy and endoscopy--and fast-acting anesthetics
have made it possible for a broader range of procedures to be performed
safely in the ASC setting.
The number of ASCs has increased proportionally to CMS
expanding the list of procedures approved for the ASC setting. As CMS
expands this list, it is reasonable to expect that it becomes
increasingly feasible for an ASC to operate, modestly sustain itself,
and for more ASCs to develop as a result.
ASCs are attractive to physicians, because they return
control over procedure scheduling to the physician. Because of
scheduling efficiencies, surgeons are able to perform more surgical
procedures per day in the ASC setting and thus provide services in a
more efficient and cost-effective manner.
Managed care entities, including those that participate
in the M+C program, are also driving ASC growth, because they recognize
the efficiencies and savings inherent in the ASC setting.

Medicare payments to ASCs have been held relatively constant in
recent years. In fact, the Balanced Budget Act of 1997 limited Medicare
ASC payment updates to the consumer price index for urban areas minus
2% for the period 1998-2002. Therefore, Congress should inflate, rather
than eliminate, the update to ASC payment rates for fiscal year 2004,
considering the treatment of ASCs in 1998-2002.

C. Until the Secretary implements a revised ASC payment system, the
Congress shold ensure that payment rates for ASC procedures do
not exceed hospital outpatient PPS rates for those procedures
after accounting for differences in the bundle of services
covered.

AGA appreciates that MedPAC recognized that creating greater
consistency between what Medicare pays for procedures performed in the
HOPD and the ASC setting must not be achieved through arbitrary across-
the-board adjustments that fail to account for inherent differences in
the current payment schematic used to reimburse hospitals and ASCs.
Oftentimes, HOPD base payments paint an inaccurate picture of
procedure-by-procedure payments, because hospitals are eligible to bill
for services that ASCs cannot. Also, hospitals are entitled to
supplemental payments and add-ons that ASCs are not.
Additionally, AGA is disappointed that MedPAC compared only 2003
HOPD and ASC rates. Hospital payment rates have varied from year to
year. In 2003, an ASC payment rate may have been higher than the HOPD
rate. However, the HOPD rate may have been higher in previous years and
could be higher in the future. For example, in 2001 HOPDs were paid
$396 for three common gastroenterological procedures (diagnostic
colonoscopy, colonoscopy with lesion removal and colonoscopy with
bioposy), in 2002 the rate for the same procedures fell 6.5% to $372,
then in 2003 those rates increased 11% to $413. A comparison based on
only one year's rate differences is deficient.
This recommendation also fails to consider the impact on single-
specialty ASCs, such as those furnishing only gastroenterological
procedures. It is crucial to note that the majority of ASCs are single-
specialty. Therefore, if Medicare procedure reimbursement amounts are
less than actual costs, a single-specialty ASC would risk having a
negative net margin, because unlike multi-specialty ASCs, there is no
opportunity for cross-subsidizing less-than-cost procedure
reimbursements with other procedure payment rates.
AGA urges Congress not to take sudden action to standardize payment
rates between HOPDs and ASCs. Congress should first examine the two
settings and consider the similarities and differences. Once that is
achieved, ASC rates can be effectively rebased while maintaining the
patient-friendly, cost-efficient, and high-quality nature of ASCs.

American Society for Gastrointestinal Endoscopy
Oak Brook, Illinois, 60523
March 19, 2003
The Honorable Nancy Johnson
Chair, Subcommittee on Health
Committee on Ways and Means
1136 Longworth House Office Building
Washington, D.C. 20515

Dear Representative Johnson:

On behalf of the American Society for Gastrointestinal Endoscopy
(ASGE), I am pleased to submit this statement for the record of the
Subcommittee's March 6 hearing on the recommendations of the Medicare
Payment Advisory Commission (MedPAC). I request that this statement be
made part of the formal hearing record.
ASGE represents more than 7,500 physicians who specialize in the
use of endoscopy to diagnose and treat gastrointestinal diseases and
conditions. For example, they use colonoscopy to screen for colo-rectal
cancer. Early identification and removal of precancerous polyps can
prevent the development of this fatal cancer in almost all cases.
Many of the procedures performed by ASGE members require the use of
moderate, or conscious, sedation. In a few cases, even deeper sedation
may be required for certain patients. Gastroenterologists, and other
physicians who perform these procedures, have found that the ambulatory
surgery center (ASC) is an appropriate setting for these services. The
regulatory requirements imposed on ASCs by states and Medicare help
assure a safe environment for the patient undergoing one of these
procedures. Approximately 40% of Medicare endoscopies are performed in
ASCs. The balance of the procedures requiring sedation are conducted in
the hospital outpatient department. Most physician offices do not meet
the safety standards that exist in the ASC and the outpatient
department; therefore, few endoscopic procedures requiring conscious
sedation are performed in that setting.
Because of the safety, efficiency and cost effectiveness of the
ASC, it has become an important part of modern GI practice. Patients
often prefer this setting to the hospital, and the co-payments for
Medicare patients are generally much lower in the ASC than in the
hospital outpatient department. This cost savings to the Medicare
patient is an added reason that patients and physicians have found the
ASC to be an excellent site for the delivery of GI endoscopy.
Therefore, we are deeply concerned by the Medicare payment
reductions recommended by MedPAC. The Commission has made three
recommendations to Congress regarding ASC payments. First, MedPAC
recommended that the Department of Health and Human Services collect up
to date ASC cost information in order to be able to establish
appropriate payment rates for the services provided in this setting.
Second, the Commissioners suggested that ASCs receive no update in
their payments for fiscal year 2004. Third, they have urged that the
payment rate for any ASC procedure not exceed the payment for the same
procedure in the hospital outpatient department.
ASGE supports the first recommendation. The Centers for Medicare
and Medicaid Services (CMS) has failed to comply with the statutory
requirement that the agency survey ASCs every five years to determine
the costs of providing services. As MedPAC correctly noted, ASCs are
paid on the basis of data collected in 1988, updated occasionally for
inflation. The list of covered procedures has not been updated since
1995, even though the agency is required to do so every two years. The
1993-1994 survey which was used as a basis for the proposed rule in
1998 was a failure and could not be relied on. Congress recognized this
problem and has twice since then passed legislation intended to assure
the collection of accurate and current cost information. However, CMS
has yet to resurvey ASCs. ASGE urges the Subcommittee to push the
agency to meet its statutory obligations. If the agency cannot meet
these basic requirements, then Congress should work with the various
ASC stakeholders to develop an alternative system that will be reliable
and current.
As the transcripts of the November, December and January Commission
meetings reflect, MedPAC has no information on the costs of providing
services to Medicare beneficiaries in ASCs. We simply cannot understand
how the commissioners could favor a proposal that would reduce Medicare
reimbursements by an estimated seven percent in the absence of cost
data demonstrating convincingly that Medicare payments across all ASC
services were excessive. ASGE urges Congress to make certain that it
has the information that can help the Members better understand the
nature and cost of the services provided in the ASC before addressing
the appropriateness of reimbursement in that setting.
In the absence of any cost data supporting MedPAC's action, the
Commission made the argument that Medicare payments are excessive
because corporate ASC systems are favored by Wall Street and have
access to adequate capital. We would argue that quite the opposite is
true. Private payers have recognized the value of ASCs and reimburse
appropriately for their services. Medicare payment is, as is most often
the case, low, and the costs of elderly patients are subsidized by
private insurance. Any favorable consideration by the markets is driven
by the rate of private health plan payment, not Medicare's rates.
Across the ASC industry, Medicare represents less than 30% of total
revenue. We urge the Subcommittee to reject this analysis as a basis
for ASC rate setting in the Medicare program.
We also object to the proposal that ASCs receive no update in
fiscal year 2004. This update is equal to the CPI-U, except in years
when CMS rebases rates based on the cost survey. In the last ten years,
ASCs have received the full update only four times. In all other years,
the update has either been eliminated or restricted by Congressional
action. For example, the Balanced Budget Act of 1997 restrained the
annual update in ASC payments to CPI minus two percentage points.
Effectively, there was almost no update of rates for five years. In
fiscal year 2003 that provision expired, and ASCs received the full
update of three percent. This increase was also lower than the increase
granted to hospitals for the 2003 hospital outpatient department
prospective payment system (HOPD PPS).
ASCs have experienced significant cost increases in many
operational areas. Liability insurance premiums have grown
significantly in most states, and labor costs, particularly for
nursing, have increased substantially. New medical technology, while
often very beneficial to the patient, is not inexpensive and the pace
of technological change is very rapid. Medicare payments for ASCs are
not keeping pace with changing costs. The full inflation update,
currently estimated to be 2.7 percent for fiscal year 2004, is badly
needed by our centers to help offset some of these cost increases.
ASGE can accept the principle that ASC rates ought not to exceed
HOPD rates for the same procedures. However, the comparison of ASC
rates to HOPD rates, as if the HOPD PPS were the gold standard of
payment, also lacks credibility. The legal bases for determining the
rates in both settings are very different. In fact, the ASC payment
system is among the earliest prospective payment systems in Medicare.
In virtually every other area of Medicare reimbursement, Congress has
copied its success. The HOPD PPS is of much more recent vintage and the
data sources (hospital cost reports instead of cost surveys) are very
different. Even if the Centers for Medicare and Medicaid Services (CMS)
had carried out its legal responsibilities toward the ASC payment
system, which it clearly has not since there has been no cost survey
since 1994, we would not be surprised if the calculations produced
results different from those that arise from the use of hospital cost
reports to calculate the HOPD PPS. The mere fact that both systems rely
on different data sets and different methods of rate calculations will
lead to differences in payments for the same services. This does not
make either system, or the resulting rates, right or wrong. They are
simply different for the reasons stated.
We also note that the HOPD PPS is a work in progress. There has
been substantial movement in the payment values assigned to individual
services. This has been true of GI services as well as many others. In
fact, in those limited situations where the ASC payment for an
endoscopy exceeds the outpatient rate, we have noted that the gap has
closed as CMS has gained more experience with the PPS. We believe that
Congress should delay any action on equalizing ASC and PPS
reimbursement until the PPS rates are more settled. To regard this
system at this early stage of implementation as the benchmark for
payment would be a serious error. In time, as CMS and hospitals gain
more experience with the system and the underlying data, the outpatient
PPS might become a basis for judging the adequacy of Medicare
reimbursement in other settings. However, to give the PPS such a level
of credibility at this time is premature.
A further important point is the fact that Medicare bundles medical
and surgical services differently in the HOPD PPS and the ASC facility
fee. The published fees do not reflect the differences. For example,
hospitals are able to bill radiology services separately from the APC
for the surgical service. ASCs cannot bill radiology separately from
the facility fee. Unless adjustments are made to equalize the service
bundles, any simple comparison of rates will lead to incorrect
conclusions.
ASGE notes that more than 2300 procedures are covered by Medicare
in the ASC. Only 350 of them are paid more in the ASC than in the
hospital. All the other rates are below the hospital payments. ASGE is
disappointed that MedPAC did not recommend the corollary to their view
that the HOPD PPS rate should be the ceiling. Why has the Commission
not suggested that those lower ASC rates be brought closer to the
hospital level? After all, if one goal is to assure that payment rates
do not drive site of service selection, then the rates must be
comparable across all settings. This omission, we believe, further
undermines the credibility of the recommendation now pending before
Congress.
ASGE does not believe that the current ASC payment system is
perfect. Indeed there are many problems with it, not the least the fact
that CMS has consistently failed in its statutory obligations to keep
the cost data and list of covered procedures up to date. We are fully
prepared to engage in a serious discussion with Congress on how the ASC
payment system could be improved. In fact, we have participated in such
discussions with CMS staff since their ASC ``town meeting'' in 1996. We
believe the wiser course for Congress would be to disregard MedPAC's
recommendations and focus attention to the need to have a workable,
current payment system for ASCs.
In conclusion, we strongly urge the Subcommittee to reject MedPAC's
proposals to reduce Medicare payments to ASCs. If adopted, its
contribution to deficit reduction would be miniscule, but its impact on
the services available to Medicare beneficiaries in ASCs could be
significant. Congress would have been better served if MedPAC had made
the effort to work with experts in the ambulatory surgery center arena
and then brought recommendations to Congress on ways to keep the ASC
payment rates current.
On behalf of our members, and most importantly the Medicare
beneficiaries they serve, we urge your careful consideration of these
views. ASGE is fully prepared to work cooperatively with Subcommittee
to address these important issues. Please contact me directly or our
Washington Representative, Randy Fenninger, at 202-833-0007 if you need
additional information on the use of ambulatory surgery centers by
gastroenterologists and other endoscopic specialists.
Sincerely,
David L. Carr-Locke, M.D.
President

Federated Ambulatory Surgery Association
Alexandria, Virginia 22314
March 20, 2003
The Honorable Nancy Johnson
Chair, Subcommittee on Health
Committee on Ways and Means
United States House of Representatives
Washington, D.C. 20515

Dear Madam Chairman:

The Federated Ambulatory Surgery Association (FASA), the largest
national association of single--and multi-specialty ambulatory surgery
centers (ASCs) and the health care professionals who deliver services
in them, submits these comments on the recommendations of the Medicare
Payment Advisory Commission (MedPAC) relating to payments to ASCs. We
request that this letter be made part of the official record of the
Subcommittee's March 6 hearing on the MedPAC recommendations. Attached
is the letter sent to MedPAC commenting on the draft ASC chapter. It
further documents the lack of information and knowledge that the staff
and commissioners brought to this issue.
Access by Medicare beneficiaries and other patients to ASCs is a
prime concern for FASA, and thus we appreciate the opportunity to
comment on how MedPAC's recommendations to change the reimbursement of
ASCs detract from the industry's efforts to deliver high quality and
cost-effective surgical care to all patients. We estimate that the
total impact on ASC Medicare revenues would be 10 percent, a
significant reduction by any standard. In fact, Congress recently acted
to prevent a similar occurrence from taking place in physician
payments, substituting a payment increase for a payment cut that if
allowed to go forward would have reduced physician payments by 10
percent over two years. Congress properly responded to the concerns
about access to physicians that were raised. We urge Congress to give
similar consideration to the access problems that would result from a
10 percent reduction in ASC payments in one year.
FASA believes that MedPAC may not have been fully informed about
the ASC industry and its history. The overall tone of the
recommendations and MedPAC's failure to recognize the significant
contributions by ASCs to the well being of many Americans, including
many Medicare beneficiaries, cause us to question whether MedPAC
adequately considered the issues. ASCs offer Medicare beneficiaries and
other patients an alternative surgical site in those communities where
they exist. In communities where patients have a choice, competition
benefits the patient by improving services and increasing choice.
However, throughout the chapter, information negative to ASCs is
emphasized, but almost no information favorable to ASCs is included,
resulting in a biased discussion that does little to meet Congress'
need for impartial and reliable information upon which to build payment
policies.
In fact, ASCs are well received by patients, physicians and other
medical staff. By any measure they provide an excellent surgical result
at highly competitive rates. ASCs provide critical space that relieves
pressure on existing hospital facilities and makes it possible for
patients to have access to surgery more quickly. If all ASCs closed
tomorrow, it would be impossible for existing hospitals to fill the
void. Certainly, patients would have to wait much longer for surgery.
MedPAC makes three recommendations relative to ASCs; however, only
one, the recommendation to expedite the collection of recent cost and
charge data, is based on fact. The other two recommendations, to
eliminate the annual update and cap ASC rates at HOPD levels, are based
only on speculation. The salient fact is that there is no recent data
on ASC costs to allow MedPAC or any other agency to determine if
Medicare payments are appropriate to the services provided in these
settings. Absent this data, any recommendation on future payments is
pure guesswork. It is not at all clear why MedPAC would risk its
reputation for fair, data driven analysis to make these
recommendations. While ASC payments are less than one percent of all
Medicare spending, the damage that the proposals could do is large. The
great majority of the approximately 3,300 ASCs in the United States are
not part of large corporate chains, but are small community owned
enterprises with limited financial resources. More than 61 percent of
ASCs employ 20 or fewer employees.
MedPAC bases its conclusions on the adequacy of Medicare rates on
``market factors, such as entry and exit of providers, changes in the
volume of services, and providers' access to capital.'' FASA contests
the appropriateness of using market factors as a proxy measure for
assessing the adequacy of Medicare rates. For this to be a reliable
measure, Medicare rates would have to be a significant portion of ASC
payments and a major factor in Wall Street's investment assessments.
Investment decisions are more dependent on factors other than Medicare
payment rates because Medicare is not a dominant payer for most ASCs. A
recent FASA survey found that the median Medicare revenue for ASCs was
28 percent. Data from large corporations suggests that it is an even
lower percentage for many of them. The market simply is not going to
respond to a minority payer whose rates are well known to be on the low
side of commercial payment. A major factor in investment decisions is
other alternative investment opportunities. Thus, recent problems in
other sectors of the economy are a major factor in ASCs' current access
to capital. Moreover, the vast majority are small providers as noted
above and are not financed by Wall Street.
MedPAC also cites industry growth as another factor illustrating
the adequacy of Medicare payments. However, Medicare payments are not
generous in comparison to the commercial payers. ASC growth, therefore,
must be fueled by other factors unrelated to Medicare payment rates.
These include changes in surgical and anesthetic techniques that have
allowed more procedures to move to an outpatient setting. In fact,
outpatient surgery in all settings now constitutes 70 percent of all
surgery performed in the United States; and data show that surgical
volume in hospital outpatient departments and physician offices has
grown more quickly. Patient and physician desire for an alternative to
the traditional hospital model are other forces behind the growth of
ASCs. An aging population would account for both the increased use of
the ASC by Medicare beneficiaries and an increase in surgical demand.
To examine the adequacy of Medicare payments, MedPAC should have
looked at two other sources of information that are far more accurate
indicators of the appropriateness of payment than the ``market
factors'' analysis that was conducted. Both sources of information were
provided to the Commission during the time it was considering ASC
payment issues. They simply were not used.
One measure of the paucity of Medicare ASC payments is a 2002 study
conducted by Ingenix, Inc for the Texas Workers' Compensation System.
Ingenix was asked to help establish a new fee schedule for the workers'
compensation program based on Medicare rates. Ingenix found that
commercial rates for hospital inpatient were between 107 and 121
percent of Medicare; hospital outpatient department rates were 140 and
148 percent of Medicare; and ASC rates were between 225 and 233 percent
of Medicare, demonstrating the enormous disconnect between Medicare
rates and the rest of the market. Moreover, it shows that ASC payments
are low even compared to other Medicare rates.
Another point demonstrating the problems with the Medicare rate
structure is the distribution of services provided to beneficiaries
compared to non-Medicare patients. Of the 2,300 Medicare approved ASC
services, only a few ophthalmology and gastroenterology procedures
constitute the vast majority of procedures performed. To some extent,
the Medicare distribution is due to the Medicare beneficiaries' needs,
but the needs of patients of different ages are not as different as
these distributions suggest. This maldistribution of services is
further evidence that Medicare rates are not adequate across the board,
a strong argument against eliminating the annual inflation update that
would affect all services.
Even though these two pieces of information did not convince MedPAC
that Medicare payments are inadequate, we suggest that there was simply
not enough other information available to MedPAC to allow it to make a
recommendation to change the Medicare payment structure. Moreover,
there does not appear to be a significant reason to do so. ASC payments
in total are a miniscule part of the Medicare budget so even a major
reduction for our small industry will have a negligible effect on total
Medicare spending. In fact, these cuts could drive Medicare
beneficiaries into higher cost settings, not only offsetting any
savings accrued from the ASC industry, but also adding to overall costs
to Medicare and to beneficiaries. This point is particularly important.
Patients who receive surgery in an ASC pay a copayment of 20 percent,
regardless of the procedure. In the hospital outpatient, 20 percent is
the minimum amount and copayments can run much higher depending on the
procedure.
FASA is willing and eager to engage in a thorough discussion of how
to appropriately set Medicare payment rates. In fact, we have been
engaged in such discussions with the Centers for Medicare and Medicaid
Services (CMS) for almost two years. Should Congress adopt MedPAC's
recommendations, no benefit will be achieved for the Medicare
beneficiary or the Medicare program, nor will there be any measurable
reduction in the current federal budget deficit. However, such an
action would further the process of making the Medicare patient a
second class citizen and limit their options for care even further.
The recommendation that there be no update for fiscal year 2004 is
particularly troubling in light of the increased expenses facing ASCs.
Like other health care institutions, the nursing shortage has placed
significant pressure on wages. The last two years have seen significant
increases in the costs of nursing personnel. Congress has acted on
several fronts, as has the Administration, to address the nursing
shortage, recognizing that it is a problem that affects patient care
and medical costs across the health care system.
All insurance premiums have increased, and liability insurance has
been particularly volatile. The same increases that affect physicians
affect ASCs. The recent passage by the House of H.R. 5 is dramatic
recognition of the problems caused by skyrocketing premium costs and
limits on insurance availability. ASC's ability to respond to these
cost increases is limited. We are disappointed that MedPAC did not pay
greater attention to these two important cost drivers. We urge the
Subcommittee to rely on its own experience in both areas and reject the
call for no inflation update.
Even if ASCs did not face these twin cost pressures, they have
fallen further behind inflation over the last decade. The cumulative
change in the CPI-U (the basis for the ASC update) from 1994 to 2002
was 22.4 percent. The cumulative updates for ASCs in that same period
totaled 9.1 percent. This difference exists because of Congressional
action to reduce Medicare spending in omnibus budget legislation in
1993 and 1997. Had ASCs been given the statutory update each year
during that period, the rate structure and the distribution of services
performed in ASCs would have been very different. For example, Group 7
would be $1311.46 instead of the current national rate of $995. Loss of
another update would only increase the disparities between the real
costs of providing surgical services and Medicare payments. In our
experience, only Medicare has fallen so far behind the realities of
medical costs. Private payers recognize the value of ASCs and reimburse
them more appropriately.
MedPAC's final recommendation, that ASC rates not exceed APC rates
for the same procedure, is equally flawed and premature. First, the
rates are calculated in entirely different ways, using different data
and a different mix of services. Unless costs in both settings are
measured in an identical manner, it is impossible to determine which
numbers are correct. Second, use of the APC rate as a gold standard is
premature. These rates have changed significantly in the three years
that the HOPD PPS has been in place. Until the rates stabilize, it is
premature to use them as any kind of standard to justify legislative
action now. Third, the services that are included in an APC in the HOPD
and in the ASC facility fee groups are not identical. ASCs, for
example, cannot bill for radiology. HOPDs can bill separately for this
service. Until the service units are defined equally, any comparison of
payment rates is meaningless. To suggest otherwise is to mislead
Congress and the public.
On behalf of its members, FASA appreciates the opportunity to
provide the Subcommittee with these comments on the MedPAC
recommendations. Changes in reimbursement will have a dramatic impact
on the ASC industry and the delivery of outpatient care for Medicare
beneficiaries. We look forward to the opportunity to work with the
Subcommittee as it considers the MedPAC recommendations. Please do not
hesitate to contact FASA if we can be of any assistance as you consider
these recommendations and any other Medicare policy changes that might
impact on the delivery of surgical services in ambulatory surgery
centers.
Sincerely,
Kathy Bryant
Executive Director

Attachment
______

Federated Ambulatory Surgery Association
Alexandria, Virginia 22314
January 27, 2003
Mark E. Miller, PhD
Executive Director
MedPAC
601 New Jersey Ave, NW
Suite 900
Washington, DC 20001

RE: Chapter 2, Section 2F: Assessing payment adequacy and updating
payments for ambulatory surgical center services.

Dear Dr. Miller:

The Federated Ambulatory Surgery Association (FASA), the largest
national association of single--and multi-specialty ambulatory surgery
centers (ASCs) and the health care professionals who deliver services
in such ASCs, submits these comments regarding the proposed chapter 2,
Section 2F issued by MedPAC. Access by Medicare beneficiaries and other
patients to ASCs is a prime concern for FASA and thus we appreciate the
opportunity to comment on how MedPAC's proposed recommendations
changing the reimbursement of ASCs detracts from the ASC industry's
efforts to ensure quality and cost-effective health care to all
patients.
At the outset, FASA is concerned with regards to the overall tone
of the chapter and its failure to recognize the significant
contributions by ASCs to the well-being of many Americans, including
many Medicare beneficiaries. ASCs offer Medicare beneficiaries and
other patients an alternative in those communities where ASCs exist. In
communities where patients have a choice, competition benefits the
patient by improving services and increasing choice. Throughout the
chapter, information negative to ASCs is emphasized, but almost no
information favorable to ASCs is included, resulting in a biased
discussion that does little to improve the quality of the debate on
these issues. A couple of examples demonstrate this point. None of the
almost 2000 procedures for which the ASC gets paid less than the
hospital outpatient department (HOPD) are even mentioned. In one case,
the ASC is paid 2563 percent less than the HOPD. The excellent Wall
Street performance of a few ASC chains is discussed, but only one of
the several that have had poor Wall Street performance is mentioned and
its troubles are dismissed as being unrelated to ASC issues. Further,
information on the inadequacy of payment rates is not included.
MedPAC makes three recommendations relative to ambulatory surgery
centers (ASCs); however, only one, the recommendation to expedite the
collection of recent cost and charge data, is based on fact. The other
two recommendations, eliminating the annual update and capping ASC
rates at HOPD rates, are based only on speculation. The salient fact is
that there is no recent data on ASC costs to allow MedPAC or any other
agency to determine if Medicare payments are appropriate to the
services provided in these settings. Absent this data, any
recommendation on future payments is pure guesswork. It is not at all
clear why MedPAC would risk its reputation for fair, data driven
analysis to make these recommendations. While ASC payments are only
about one percent of all Medicare spending, the damage that the
proposals could do are large. The great majority of ASCs are not part
of large corporate chains, but are small community owned enterprises
with limited financial resources.
MedPAC bases its conclusions on the adequacy of Medicare rates on
``market factors, such as entry and exit of providers, changes in the
volume of services, and providers' access to capital.'' FASA contests
the appropriateness of using market factors as a proxy measure for
assessing the adequacy of payments rates. For this to be a reliable
measure, Medicare rates would have to be a significant factor in Wall
Street's investment assessments. Conceding that Medicare reimbursement
policy is a factor, we do not believe that it is a significant one.
First, Medicare is not a dominant payer for most ASCs. A recent FASA
survey found that the median Medicare revenue for ASCs was 28 percent.
Data from large corporations suggests that it is an even lower
percentage for many of these. The market simply is not going to respond
to a minority payer whose rates are well known to be on the low side of
commercial payment. A major factor in investment decisions is other
alternative investment opportunities. Thus, recent problems in other
sectors of the economy are a major factor in ASCs current access to
capital.
MedPAC also cites industry growth as another factor illustrating
the adequacy of Medicare payments. However, growth clearly cannot be
the result of generous Medicare payments, because they are not generous
in comparison to the commercial payers. ASC growth, therefore, must be
fueled by other factors unrelated to Medicare payment rates. These
include changes in surgical and anesthetic techniques that have allowed
more procedures to move to an outpatient setting. In fact, outpatient
surgery in all settings now constitutes 70 percent of all surgery
performed in the United States. Patient and physician desire for an
alternative to the traditional hospital model are other forces behind
the growth of ASCs. An aging population would account for both the
increased use of the ASC by Medicare beneficiaries and an increasing
surgical demand.
Having said that market factors are an inappropriate measure of the
adequacy of Medicare ASC payments, we would suggest MedPAC look to two
other sources of information as to the adequacy.
One measure of the paucity of Medicare ASC payments is a 2002 study
conducted by Ingenix, Inc for the Texas Workers' Compensation System.
Ingenix was asked to help establish a new fee schedule for the workers'
compensation program based on Medicare rates. Ingenix found that
commercial rates for hospital inpatient were between 107 and 121
percent of Medicare; hospital outpatient department rates were 140 and
148 percent of Medicare; and ASC rates were between 225 and 233 percent
of Medicare, demonstrating the enormous disconnect between Medicare
rates and the rest of the market. Moreover, it shows that ASC rates are
low, even compared to other Medicare rates.
Another point demonstrating the problems with the Medicare rate
structure is the distribution of services provided to beneficiaries of
that program compared to non-Medicare patients. ASC services to the
Medicare population are heavily weighted to only a few ophthalmology
and gastroenterology procedures (approximately 70 percent of all
services), with only 30 percent coming from the other 2000 procedures
on the ASC list. This skewed distribution does not exist among private
patients. To some extent, the Medicare distribution is due to the
Medicare beneficiaries' needs, but the needs of patients of different
ages are not as different as these distributions. This maldistribution
of services is further evidence that Medicare rates are not adequate
across the board, a strong argument against eliminating the annual
inflation update that would affect all services.
While we recognize that these two pieces of information may not
convince MedPAC that the payments are inadequate, we suggest that there
is simply not enough information available to MedPAC to make a
recommendation to change the Medicare payment structure. Moreover,
there does not appear to be a significant reason to do so. ASC payments
in total are a miniscule part of the Medicare budget so even a major
reduction for our small industry such as those proposed in this chapter
will have a negligible affect on total Medicare spending. The harm that
could be done to certain segments of the industry could in fact drive
Medicare beneficiaries into higher cost settings. FASA strongly
recommends that MedPAC hold off making any recommendations on ASC
payments until it has the opportunity to study the issue thoroughly.
Ironically, the recommendations that MedPAC is making may actually
delay the collection of the cost data that it desires as CMS staff are
diverted from executing their duties under the existing statutory
framework to address what MedPAC concedes are temporary measures until
cost data can be collected.
FASA is willing and eager to engage in a thorough discussion of how
to appropriately set Medicare payment rates. In fact, we have been
engaged in such discussions with CMS for almost two years. FASA and
MedPAC may disagree about what is wrong with ASC rates but without data
and a thorough understanding of the issues it is likely that more harm
than good will be done by premature recommendations that may well
divert attention from the real issues. Should Congress adopt MedPAC's
recommendations, no benefit will be achieved for the Medicare program
or the Medicare beneficiary, but it would only further the process of
making the Medicare patient a second class citizen and limiting their
options for care even further.
With this as a framework, the remainder of this document raises
specific issues with data, facts commentary and conclusions included in
the draft chapter. Although FASA is opposed to recommendations for ASC
payment changes at this time, we have made numerous suggestions that
will improve the accuracy and fairness of the report. FASA feels that
these issues must be addressed if the report is to provide accurate and
useful information to Congress and the public.

Background

PAGE 2 & THROUGHOUT: The Medicare requirements for ASCs are called
``conditions of coverage.'' To be technically correct, the term
``conditions of participation'' should be changed throughout the
chapter to ``conditions of coverage.'' Conditions of participation is
the term used for the hospital conditions.
PAGE 2: Since the beginning of its consideration of ASC payments,
MedPAC staff have been raising the issue that four states have 40
percent of the nation's ASCs. We are unsure how this relates to the
issues that MedPAC is addressing. Variances in state ASC licensure laws
and certificate of need laws are major factors in the development of
ASCs. As a result of these laws there citizens of some states have
greater access to ASCs than those of other states. Absent MedPAC making
a recommendation regarding the benefits of eliminating laws that impede
the development of ASCs the geographic distribution appears to be
irrelevant.
To the extent that MedPAC addresses the geographic disparity issue,
FASA recommends a more thorough analysis. MedPAC notes that 40 percent
of the Medicare-certified ASCs are in four states. These states have
only 33 percent of the total ASCs and thus have a higher percentage of
Medicare-certified ASCs. As mentioned elsewhere, Medicare-certification
may be a requirement for state licensure or a major insurer in the area
may require it and thus all ASCs in that state will become certified
whether or not they treat Medicare patients.\1\
---------------------------------------------------------------------------
\1\ Please see page 9 for more information on reasons for Medicare
certification.
---------------------------------------------------------------------------
Given the variances in state population looking only at the
absolute number of ASCs per state tells little. For example, the states
mentioned above with 33 percent of the ASCs have 27 percent of the US
population. If one looks at ASCs as compared to patient population one
finds that the states with the most ASCs per 100,000 patient population
are Arizona, Idaho, Maryland and Nevada. Maryland is the only one state
of the four states highlighted by MedPAC that is in the top 10 by
patient population. Texas, another state raised by MedPAC as having a
lot of ASCs, ranks 30^th in ASCs per patient population.
Looking at ASCs by patient population shows a more even
distribution. Half of the states have between one and two ASCs per
100,000 population. More than 75 percent of states have greater than
0.90 ASCs per 100,000 population.
Of course geographic variances exist and will as long as individual
states determine what constitutes an ASC, regulate differently the
operations of the ASCs and impose varying the barriers to building one.
For example, only two states have 0.50 or fewer ASCs per 100,000
population--New York and Massachusetts. Both have imposed incredible
barriers to opening ASCs. In fact, a 2002 GAO study found that the
barriers to opening an ASC in New York resulted in New York City having
almost 30 percent of gastroenterological procedures being in physician
offices, while in the rest of the country less than 10 percent were
being performed in physician offices.

------------------------------------------------------------------------
ASCs/100,000 Population # of States
------------------------------------------------------------------------
0.50 2
.51-.90 12
------------------------------------------------------------------------
.90-1.00 5
------------------------------------------------------------------------
1.01-2.00 25
------------------------------------------------------------------------
>2.00 6
------------------------------------------------------------------------

PAGE 2: The statement, ``ASCs also must be licensed by a state
agency or accredited by a private accreditation body'' is inaccurate.
42 CFR 416.40 provides that ASCs must comply with state licensure
requirements. Of course, if under state law a license is not required
than an ASC does not need one for Medicare. For example, the New Jersey
does not require a state license if an ASC has only one operating room
and is owned by licensed physicians. Medicare does grant the four
mentioned accrediting bodies deeming authority meaning that a survey by
one of these groups can suffice instead of a state or federal survey to
determine compliance with Medicare's conditions of coverage.

Procedures covered in ASCs

PAGE 3: MedPAC's discussion of Medicare coverage is misleading. The
chapter implies that Medicare will only cover procedures in an ASC if
the procedure is on the ASC list. This is not true; rather Medicare
only pays the ASC a facility fee if the procedure is on the ASC list.
In fact, Medicare pays the physician performing the service whether or
not it is on the list. In those situations, Medicare does not pay the
ASC a facility fee and dicta in physician fee schedule regulations says
that the patient may not be billed by the ASC. Thus, from the physician
and Medicare beneficiary standpoint it is covered.
PAGES 2 & 3: Use of the Berenson-Eggers Type of Services
Classification system comparison is confusing to those not familiar
with the system, which is likely to include many members of Congress.
For example, when MedPAC uses ``other eye procedure'' it raises the
question of ``other than what.'' Those familiar with the system may
know it means other than cataract removal and lens insertion, but the
uninformed may ask what does this mean. Some have thought, for example,
it means an eye procedure on the second eye. Similarly, ``other
ambulatory procedures'' could include almost anything and groups
totally unrelated procedures together. As a result significant issues
are hidden by grouping of unrelated items. If it is going to be used,
we'd suggest changing ``other eye procedures'' to ``eye procedures
other than cataract removal and lens insertion.'' Also, ``other
ambulatory'' needs to be clarified. Each time it is used it needs a
footnote of what is included.
PAGE 3: Add to the sentence, that CMS is required to update list
every two years, ``by law'' to clarify why CMS is required to update
the list.
PAGE 3: The statement ``By allowing procedures that are frequently
performed in physician offices to be considered for coverage, this
could have led to the shift of some procedures from the less-expensive
physician office setting to the more-expensive ASC setting.'' is
problematic for several reasons:

1. CMS never proposed allowing procedures frequently performed in
the physician's office to be added to the ASC list. CMS only proposed
eliminating the strict numerical criteria to allow CMS to make a
judgment about the most appropriate sites for the procedure.
2. The fact that CMS considered something for coverage could not
contribute to a shift in the site of service where it was performed.
Actual reimbursement of a facility fee in an ASC could have an impact
on where the procedure was performed.
3. The assumption that a physician's office is always less
expensive to Medicare is not a valid one. The costs to Medicare for
some procedures may in fact be more. MedPAC would need to look at costs
for specific procedures in each setting before this statement could be
made.

PAGE 3: The statement that CMS had been planning to issue a revised
version of the proposed criteria may not be accurate. The letter from
CMS Administrator Scully to Representative Stark solely indicated only
that CMS intended to add procedures to the list in early 2003. It did
not indicate that any other portions of the proposed rule from 1998
were being implemented.

ASC payment system (level 2)

PAGE 4: Describing current ASC payment rates as ranging from $333
to $1399, while technically accurate, is misleading since the highest
payment that any ASC can receive is $995. The footnote to the preceding
sentence is not sufficient to clarify the issue as it only says that
one group is not currently used but does not specify that the highest
paid group ($1399) is the group that is not active. FASA suggests the
sentence be modified to read ``For fiscal year 2003, the payment rates
for the eight payment rates currently used range from $333 to $995.'' A
footnote could be added to this sentence saying that should any
procedures be added to group nine the payment rate would be $1399. This
would be make it clear that ASCs do not receive this level of
reimbursement at this time.

Trends in Medicare payments for ASC services (level 2)

PAGE 5: The statement comparing the growth in ASCs by comparing to
physician services and outpatient surgery departments misrepresents the
growth and the reasons for growth. If you want to look at growth in
ASCs and whether is disproportionate, the appropriate comparison would
be the growth of ambulatory surgery in outpatient departments and
physician offices. Industry data demonstrates that total surgical
volume is increasing at a rate higher than that in the ASC alone. In
fact, when reviewing trends for ambulatory surgery the growth in
procedures in physician offices and far outpaced that in the ASC. (See
attached chart.) Perhaps a partial explanation of the discrepancy is
that MedPAC is looking at total volume not ambulatory surgery volume.

Factors affecting growth of ASC services

PAGE 7: The section entitled ``Benefits to Physicians'' is
distorted in that it focuses almost entirely on benefits that are only
available to owner physicians. While owner physicians do receive added
benefits in terms of control and potential investment income, ASCs
offer benefits to physicians performing procedures whether or not they
are owners. If the primary benefits to physicians were those associated
with ownership one would expect most of the physicians performing
procedures at ASCs to be physician owners. This is not true. In some
small facilities designed primarily to serve the needs of the owners,
only owners may perform surgery there. However, the more usual model is
for ASCs to have many more physicians performing procedures there than
those who have an investment interest. MedPAC has many times mentioned
the growth and success of the large ASC chains. These chains rely on
large volume from non-owner physicians. In fact, in one chain of ASCs
almost half of their facilities have no physician ownership. At a
minimum this section should have at least as much about the other
benefits to physicians as the ownership benefits. The first sentence
could certainly be expanded on as many of the Members of Congress will
not know why ASCs offer greater control over scheduling, staffing or
surgical environment. Explaining this could increase their
understanding. In addition, the reference to ``performing more
procedures'' should be in this section since this is an issue related
to scheduling, staffing and surgical environment. ASCs allow physicians
to perform more procedures through the opportunity to control their
schedule and efficiency due to block scheduling and less down time
between procedures. Grouping this sentence in the paragraph on
investing opportunities could be misinterpreted to imply that it
relates to performing unnecessary procedures, which has not be
discussed as part of MedPAC's deliberations.
It is true that ASCs offer physicians the opportunity to increase
their invest income through investing in ASCs. Although this is an
appealing aspect to some physicians, physician investment in ASCs does
not usually produce a major source of income as compared to their
practice. Discussing this as part of the chapter is appropriate but the
discussion should be balanced mentioning the benefits of physician
ownership. It should be noted through physician investment in ASCs
individuals throughout the country have a choice in where to have
procedures performed and have to wait less time to have a procedure
performed. Also, in many communities services improve at both the ASC
and the HOPD due to the competition. When this happens patients are the
beneficiaries. The positive side of physician investment needs to be
discussed.
Moreover, it is particularly important that the facts in this
section be accurate and clear. The draft chapter is incomplete and
gives short-shrift to several facts and thus confuses rather than
illuminates the facts. For example, it says that the Stark law does not
apply to ASCs. This is incorrect; the Stark law applies to ASCs as it
does other health care facilities. However, it only applies to
referrals for designated health services. Ambulatory surgery is not a
designated health service under the Stark Law. Physicians referring to
ASCs for designated health services have the same restrictions under
the Stark law as they do in referring to other health care facilities.
This discussion is also misleading as it confuses the Stark law and the
anti-kickback law. Either one or both could be implicated in cases of
physician referral to health care facilities in which he or she have an
ownership interest. However, the laws impose varied requirements and
cannot be dealt with by broad general statements. Similarly, the
statement on the ASC safe harbor under the anti-kickback law is
misleading. The conditions for the safe harbor are extremely stringent
and difficult to meet to assure that physician ownership is not a
subterfuge to allow payments for referral. An adequate discussion of
this issue would include this information and a discussion of why a
safe harbor exists.
A main argument for not including ambulatory surgery as a
designated health service in the Stark law and for a safe harbor under
the anti-kickback law was that the physician referring and performing
the procedure would generally make so much more from the professional
fee that any investment income to be received was unlikely to influence
the physician to perform unnecessary procedures. This is easy to
understand when one puts in the context that the maximum fee that an
ASC receives from Medicare for a procedure is $995. The physician would
only receive a small proportion of this. Their share would be what is
left after paying facility expenses, such as drugs, supplies,
equipment, rent, and staff salaries, divided by investors. Thus, in
almost all cases the surgeon's professional fee would be much larger
than their share of investment income from a procedure. To the extent
there is an incentive to perform unnecessary surgery for financial
reasons it is the payment for the professional fee that would be the
greater incentive.
Another argument is that the ASC serves as an extension of the
physician's office. The physician him or herself actually performs the
procedure. This is very different than referrals for laboratory
services, etc.
It is inaccurate to say that ``Physicians who own an ASC receive
both the facility fee and the physician fee for procedures that they
perform there.'' As noted earlier in the draft chapter, to be eligible
for Medicare reimbursement the ASC must be a distinct entity from any
other, including the physician's office. Thus, Medicare pays fees for
facility use and professional services to two distinct entities. While
it is true that a physician who owns an ASC may receive a distribution
of profits (after all the expenses of the ASC and its staff are paid)
of which some amount may be related to procedures that he or she
performed in the ASC, his or her payment is and must be under Medicare
laws related to the amount of his or her investment not the volume of
procedures that he or she performs there. Thus, two physicians who each
invest $500,000 will each get the same distribution even though one may
have performed 100 procedures and the other only five. Thus, any
connection between procedures performed and return on investment is
diluted significantly. For these reasons, this statement should be
deleted.
PAGE 7: In MedPAC's discussion of the benefits to physicians, you
state that ``at least one medical specialty association has encouraged
its members to establish ASCs in order to take advantage of favorable
Medicare payment rates for ASC services.'' This is a misrepresentation
of the referenced article. Rather than recommending urologists build or
invest in an ASC, Rutherford lays out important factors that must be
considered by urologists when considering creating an ASC, including
potential joint ventures, legal and regulatory issues, and financing
issues. In his discussion with regards to payment rates, Ruthorford
simply states, ``Recent updates in ASC payment rates from Medicare
provide additional incentives for urologists to investigate this
potential site of service.''
The issue of the physician investment in health care facilities is
an extremely complex one that cannot adequately be dealt with in a few
paragraphs. Given that the focus of this discussion has been on ASC
rates, it seems most appropriate to delete this section of the report.
To present an accurate and fair discussion to assist Members of
Congress in their deliberations would take significant work and time
would appear not to allow this.

Collecting recent ASC cost data (level 1)

PAGE 8: The draft chapter claims that payment disparities between
settings may be contributing to the growth in the share of surgical
services provided in ASCs. This statement makes no sense from an
economic standpoint. ASCs or any other health care provider are
influenced to offer a service if the reimbursement for the service
exceeds their cost of providing it. Thus, in deciding whether to offer
a service the ASC considers whether it is financially viable for it to
do so. Similarly, the hospital decides whether or not to offer a
service based upon its costs and revenue; not the revenue of some other
provider. Thus, the decision to offer a service has nothing to do with
whether or not another type of facility gets paid more or less. The
fact that the most common procedure performed in an ASC on Medicare
beneficiaries is paid less than what it is at the HOPD and was still
performed several hundred thousand times in an ASC last year would
appear to prove this point.
The discussion also ignores that if the service is offered in a
community in both an ASC and HOPD it is the physician and the patient
that decide where it is performed not the physician. In most cases the
physician is not concerned with what the facility makes or loses on a
procedure but rather factors related to his or her performance of the
procedure.

Recommendation 2F-2

PAGE 9: We would suggest that this recommendation be modified to
reflect the law more closely. The ASC statute requires CMS to conduct a
cost survey every five years. FASA sees no reason for CMS to collect
charge data. In commenting on the draft 1999 cost survey we explained
our arguments saying, ``We do not understand how this (charge) data is
to be used. The law requires a cost survey and the rate to be based on
costs so information on charges would seem to be unnecessary and
irrelevant. Moreover, in areas of heavy managed care and contract
business, charge data has very little relationship to the actual
contractual reimbursement. Often a schedule bears little relationship
to what is actually paid. In addition, individual contracts with payors
change frequently. Given that this question is so time consuming to
answer and has little relevance, if any, to HCFA's task of a cost based
system, we suggest that it be deleted.''

Assessing Payment Adequacy (level 1)

PAGE 9: Including a statement that the proposed rule in 1998 would
have reduced payments for certain high-volume procedures, suggesting
that the current payments exceeded costs as measured in the 1994 cost
survey is yet another example of the bias shown throughout this
chapter. If the 1998 proposed rule is to be used as a measure of
assessing ASC costs and MedPAC intends to present a fair picture why
are not all of the rates that would have increased under the 1998 rule
mentioned. FASA's analysis of the proposed rule, for example, shows
that payments for orthopedic procedures would have increased 24 percent
when adjusted for Medicare volume.
However, FASA believes it is inappropriate to use the data from the
1994 cost survey at all. This cost survey was significantly flawed in
many ways and the proposed reimbursements for more procedures were
based upon extrapolations instead of actual cost data. Congress
prohibited CMS from implementing and CMS ultimately withdrew that
regulation because the industry was able to demonstrate that major
problems existed with the data collection and analysis and that it
could not be relied upon to set rates. Had that data been reliable new
payment rates would be in effect today.
In citing the growth of Medicare-certified ASCs, it should be noted
that simply because an ASC is Medicare-certified, the facility does not
necessarily provide Medicare services. An OIG study found 16 percent of
Medicare-certified ASCs provided no Medicare services in the previous
year. ASCs may choose to become Medicare certified for a variety of
reasons including state licensure, qualification for certain insurance
contracts and demonstrating quality to the public. For the number of
providers to be a true measure, one would need to assess the growth in
facilities providing a significant amount of Medicare services.
Moreover, one would have to compare the growth in ASCs generally with
the growth in those providing significant Medicare services.
It is true that most new and existing ASCs are for profit. However,
increasingly ASCs are joint ventures between doctors and not-for-profit
hospitals.
PAGE 9: As discussed in the opening, FASA believes that reliance on
these market factors for determining if Medicare payment rates are
adequate is nonsensical at best. Even assuming that market factors
could be relied upon for assessing payment adequacies, there are
several problems with its application in this case. A major problem
with this analysis is that Medicare payments are a small percentage of
the business for most ASCs. The survey FASA conducted at MedPAC's
request showed that the median Medicare percent of total revenue is 28
percent. Since Medicare is not a dominant payer for ASC services the
impact of its rates on Wall Street is impossible to assess. From the
limited information it appears that the firms that are often touted in
this report may have less than average Medicare volume. For example, in
a letter to MedPAC, HealthSouth indicated about 25 percent of their
patients were Medicare beneficiaries.
Even assuming that Wall Street likes ASCs, it should be noted that
the vast majority of ASCs are not funded by Wall Street. Most ASCs are
owned by local physician investors. Physicians generally do not go to
Wall Street to obtain financing but rather go to the local bank where
access to capital is determined by the physician's credit worthiness.
Moreover, recent market experience would suggest that it is risky to
base our health care system on Wall Street's views.
In discussing market factors, the report notes the firms that have
done well on Wall Street and primarily dismisses those that have not. A
balanced approach would require that both be discussed. The one ASC
stock mentioned that did not perform well is dismissed as having
nothing to do with its ASC operations. This may be true, but it does
not appear that this statement is based upon a careful analysis of the
situation but rather a glib response to some headlines. Other ASC firms
have had stock devalued; some to the point of almost going out of
business. It would appear to us that an intelligent and informed
discussion of the market as it affects ASC publicly traded companies is
beyond the expertise of MedPAC and should not be included in this
report.
MedPAC ignored information provided to it showing that rates might
not be adequate. For example, FASA provided information about the
aforementioned Ingenix study showing that Medicare rates for ASCs were
well below market both absolutely and relative to HOPDs and inpatient
Medicare rates. If it is intended to be a fair report this information
should be included.

Changes in the volume of service (level 2)

PAGES 9 & 10: FASA would suggest that MedPAC reassess whether
simple growth in the volume of services provided indicates that the
rates are adequate. Even if they are currently adequate, MedPAC should
reassess if they will remain adequate without inflation updates and if
some can be cut by seven percent without affecting access. Growth in
the volume of Medicare procedures performed could be due to increased
number of Medicare beneficiaries, aging population, changes in Medicare
coverage (such as screening colonoscopies), overcrowding and long waits
in hospitals and growth in ASCs. Whether this has anything to do with
Medicare rates cannot be determined just by looking at growth. Again, a
more reasonable approach would be to evaluate growth after isolating
for these factors and comparing growth in Medicare with growth in
private insurance. It should also be noted that Medicare services are
concentrated in a relatively few procedures. MedPAC should evaluate why
this is. FASA submits that ASC payments for other procedures may be so
poor that Medicare beneficiaries are being forced to have these
procedures in hospitals. Again, FASA would point to the orthopedic
rates as one example.
Accounting for cost changes in the coming year (level 1) PAGE 12:A
statement is included that ``it does not appear that the ASC payment
system has created barriers to the use of new technology.'' No evidence
or basis for this conclusion is offered. Based upon the anecdotal
information that comes to FASA, we expect that there are significant
barriers to the use of new technology for Medicare patients. One piece
of irrefutable evidence that Medicare beneficiaries are being denied
access to new technology is that they still do not have access to the
several hundred procedures that Medicare proposed adding in 1998. Thus,
at a minimum they are at least five years behind and in reality much
more than that.
Update Recommendation 2F-2 PAGE 13: MedPAC alleges that eliminating
the inflation update in 2004 (to take effect October 1, 2003) will not
reduce beneficiaries' access to care or pose a significant burden on
ASCs. Little information is provided to support this contention. Absent
data to the contrary, it is reasonable to assume that the costs of
providing services have gone up at least at the rate of inflation since
the last cost survey and rate update occurred in the late eighties. In
addition to the overall factors such as increasing real estate and
energy costs, specific ASC costs have increased. Costs of all types of
insurance have risen significantly over the last two decades. MedPAC is
well aware of the escalating costs of providing health insurance and
purchasing liability insurance. Recent nursing shortage increases the
costs of staffing, which Medicare estimates is about 35 percent of an
ASC's costs. Anesthetic drugs are a significant cost to ASCs, and a
rising cost as are prescription drugs generally but also particularly
due to shortages and improved drugs. Medical technology improves and
increases in costs. The chart below shows the limited inflation updates
that ASCs have received over the last decade. To again, deny ASCs an
inflation update would further limit their ability to treat Medicare
patients. To make the statement that this proposal would not decrease
beneficiaries access one has to conduct a more thorough analysis. For
example, other payers are probably subsidizing the care provided to
Medicare patients. This subsidy is only so great and at some point the
reductions in Medicare payments will make it impossible for ASCs to
continue to care for Medicare patients at the expense of others.
Moreover, this cut has to be evaluated together with the other
recommendation. Together the recommendations are almost a 10 percent
cut in ASC payments. To suggest payments can be cut 10 percent and
beneficiaries will see no impact is ridiculous. If the assumption is
that if they aren't seen in an ASC they can go to the HOPD, MedPAC
needs to acknowledge the higher co-pays beneficiaries would incur and
ascertain if the HOPD has adequate capacity to handle the increased
volume. Longer wait times may very well be experienced. This is worth
noting.
Even if one assumes that the average ASC can continue to serve
Medicare patients if rates are decreased by 10 percent, one cannot make
that assumption for many single-specialty facilities whose Medicare
patient volume is significantly higher than average. According to our
recent survey, one-third of single-specialty ASCs had a median of 80
percent Medicare revenue. These facilities will be particularly hard
hit. With higher Medicare volume the cuts will be a larger cut in total
revenue. In addition, since they are disproportionately eye and GI
centers the second recommendation will hit these facilities much
harder. Of the seven percent reduction proposed by limiting payment to
the HOPD, five percent of it comes from a few ophthalmology and
gastroenterology procedures. In addition, these facilities have less
ability to make up cuts by performing more, profitable procedures or
attracting more non-Medicare patients than do other ASCs.
PAGE 14: The report notes that there is no data to suggest that
ASCs do not incur higher costs than HOPDs. This is a purely speculative
and without any data to back it up. If MedPAC is going to include
purely speculative comments it should indicate that they are
speculative. FASA would argue that the only specific data that we have
on these procedures is the data from the last cost survey in 1986 and
this data shows that these rates are appropriate. It should also be
noted that there can be absolutely no confidence at this point that the
HOPD rates are not too low. It may well be that the HOPD costs are
higher than the ASC's and it is the HOPD rate that is too low. The new
HOPD system has been particularly volatile and no rates have been
subject to more criticism than the GI ones. The chart below shows the
variability between 2000-2003 in HOPD payments for top volume
procedures. To use the HOPD payments as a gold standard at this point
in time is unwise. Most experts appear to believe it will take a few
more years for this system to stabilize. At that point comparisons
might be worthwhile, but they are certainly premature at this point.
PAGE 14: The report notes that there is no data to suggest that
ASCs do not incur higher costs than HOPDs. This is a purely speculative
and without any data to back it up. If MedPAC is going to include
purely speculative comments it should indicate that they are
speculative. FASA would argue that the only specific data that we have
on these procedures is the data from the last cost survey in 1986 and
this data shows that these rates are appropriate. It should also be
noted that there can be absolutely no confidence at this point that the
HOPD rates are not too low. It may well be that the HOPD costs are
higher than the ASC's and it is the HOPD rate that is too low. The new
HOPD system has been particularly volatile and no rates have been
subject to more criticism than the GI ones. The chart below shows the
variability between 2000-2003 in HOPD payments for top volume
procedures. To use the HOPD payments as a gold standard at this point
in time is unwise. Most experts appear to believe it will take a few
more years for this system to stabilize. At that point comparisons
might be worthwhile, but they are certainly premature at this point.

VARIABILITY IN HOPD RATES 2000-2003
----------------------------------------------------------------------------------------------------------------
% Change % Change % Change
CPT Code DESCRIPTION HOPD From HOPD From HOPD From
02-03 01-02 00-01
----------------------------------------------------------------------------------------------------------------
66984 Cataract surg w/iol, i stage 9.90% -19.86% 2.29%
----------------------------------------------------------------------------------------------------------------
66821 After cataract laser surgery 10.91% -8.70% 2.29%
----------------------------------------------------------------------------------------------------------------
45378 Diagnostic colonoscopy 10.95% -5.98% 2.29%
----------------------------------------------------------------------------------------------------------------
43239 Upper GI endoscopy, biopsy 4.75% 4.07% 2.29%
----------------------------------------------------------------------------------------------------------------
62311 Inject spine l/s (cd) 29.39% 6.87% 2.29%
----------------------------------------------------------------------------------------------------------------
45385 Lesion removal colonoscopy 10.95% -5.98% 2.29%
----------------------------------------------------------------------------------------------------------------
45380 Colonoscopy and biopsy 10.95% -5.98% 2.29%
----------------------------------------------------------------------------------------------------------------
45384 Lesion remove colonoscopy 10.95% -5.98% 2.29%
----------------------------------------------------------------------------------------------------------------
43235 Uppr gi endoscopy, diagnosis 4.75% 4.07% 2.29%
----------------------------------------------------------------------------------------------------------------
52000 Cystoscopy 25.25% -2.47% 2.29%
----------------------------------------------------------------------------------------------------------------
64476 Inj paravertebral l/s add-on 9.38% 66.94% 2.29%
----------------------------------------------------------------------------------------------------------------
64483 Inj foramen epidural l/s 9.38% 66.94% 2.29%
----------------------------------------------------------------------------------------------------------------
64475 Inj paravertebral l/s 9.38% 66.94% 2.29%
----------------------------------------------------------------------------------------------------------------
64721 Carpal tunnel surgery 18.43% 0.58% 2.29%
----------------------------------------------------------------------------------------------------------------
43248 Uppr gi endoscopy/guide wire 4.75% 4.07% 2.29%
----------------------------------------------------------------------------------------------------------------
28285 Repair of hammertoe 16.67% 2.97% 2.29%
----------------------------------------------------------------------------------------------------------------
G0105 Colorectal scrn; hi risk ind 9.81% -15.24% 188.43%
----------------------------------------------------------------------------------------------------------------
62310 Inject spine c/t 29.39% 6.87% 2.29%
----------------------------------------------------------------------------------------------------------------
55700 Biopsy of prostate -22.18% 0.97% 2.29%
----------------------------------------------------------------------------------------------------------------
43450 Dilate esophagus 9.93% 22.99% 2.29%
----------------------------------------------------------------------------------------------------------------
29881 Knee arthroscopy/surgery 12.74% -0.83% 2.29%
----------------------------------------------------------------------------------------------------------------
67904 Repair eyelid defect 20.11% 5.99% 2.29%
----------------------------------------------------------------------------------------------------------------
45383 Lesion removal colonoscopy 10.95% -5.98% 2.29%
----------------------------------------------------------------------------------------------------------------
29877 Knee arthroscopy/surgery 12.74% -0.83% 2.29%
----------------------------------------------------------------------------------------------------------------
66170 Glaucoma surgery 8.99% -4.52% 2.29%
----------------------------------------------------------------------------------------------------------------

Two justifications are given for why hospitals costs may be higher
than ASCs. In both cases, the analysis is simplistic and incomplete and
will do more to confuse issues than to clarify Congressional
understanding.
It is true that hospitals and ASCs have different regulatory
burdens. However, one can't conclude that one is more onerous than the
other without analyzing the complete set. Two examples of regulatory
burdens are provided--EMTALA and privacy requirements. It is true that
in general ASCs are not covered by EMTALA. Having said that it does not
mean that they do not have any obligation to emergency patients that
may show up at the ASC. Moreover, if an emergency Medicare patient is
treated at an ASC the ASC receives no Medicare payment whatsoever for
those services. From time to time, ASCs have to provide services to
family members of patients having surgery and again usually no
reimbursement is received. When hospitals provide EMTALA benefits they
are allowed to bill the insurance company or Medicare if coverage
exists.
The other example--privacy is just incorrect. HIPAA applies to ASCs
as it does hospitals, and as small businesses the cost of compliance is
much higher for ASCs per patient. Moreover, many states and accrediting
bodies have privacy requirements.
Finally, ASCs are subject to regulatory requirements that hospitals
are not. Before concluding that regulations are more expensive for ASCs
or hospitals a more complete analysis needs to be done. What can be
said is that the regulatory burdens are different.
The second assertion is that hospitals treat more high-risk
patients and the implicit argument is that this justifies higher
payments. FASA challenges both assertions. First, two pieces of
information are provided to support the contention that for any given
procedure hospital outpatient departments treat higher risk patients.
For example, we have found no information to support the contention
that cataract patients treated in a HOPD are higher risk than those
treated in an ASC. Truly high risk patients are more likely to have
surgery performed as an inpatient and thus are treated in the hospital
but this is irrelevant to the outpatient reimbursement and comparisons.
We are not familiar with the first measure of patient level of
risk. When it was presented at the MedPAC meeting, we immediately
requested more information of staff and were told that we would get
that with the chapter. The chapter does not include sufficient
information for us to analyze it nor did we have time in the three
working days before comments were due to research this.
The second analysis is sheer nonsense. Due to the unconventional
nature of what was being suggested as a risk analysis when it was
presented at MedPAC, it was difficult for commissioners and audience to
understand. As we have come to understand it, staff are suggesting that
you can measure whether a patient is likely to require more services
during a particular surgical procedure by measuring the total payments
Medicare makes on their behalf during a year. It is hard for us to
understand an informed health policy group even making such a
suggestion. More Medicare expenses would appear to mean only that that
person is accessing the health system more or in more costly ways. Why
they access the health system more would determine whether or not it is
a measure of riskiness. A few examples might best demonstrate the flaws
in this logic.

A person with a high risk condition who is being treated
regularly may see a health care provider more and incur higher costs
while a person with the same condition but undiagnosed may incur few
expenses in that year. Most surgical providers would prefer to treat
the first person rather than the second.
A person in a car accident (before or after outpatient
surgery) would have very high expenses but would not impose any greater
risk for surgery.
A very high risk person that had surgery in the first
month of the year and was murdered three days after surgery would have
still been high risk at time of surgery but would be very low risk in
MedPAC analysis.
A person living in the city with easy access to providers
might make more visits than a similarly risky individual living 200
miles from the nearest hospital.
Ability to pay for care might affect access but not risk.
A provider that orders more tests and procedures may
affect how much care a patient receives but not riskiness.
Lonely elderly patients visit providers more driving up
costs but not changing risk factors.
High use of the emergency room rather than a primary care
provider may increase costs but not risk.

These examples demonstrate why a simple comparison of Medicare
payments shows little about riskiness. We believe it is fundamentally
flawed and should not be used to even make crude comparisons of risk.
PAGES 14 & 15: Even if one accepts that hospitals treat patients
with more health conditions, we are not convinced this justifies higher
payments. Usually riskier patients cost more to treat because you are
looking at the total care provided. For example, a riskier patient in
skilled nursing needs more care or the primary doctor must provide
treatment for a whole variety of conditions. This makes sense. However,
for outpatient surgery reimbursement you are talking only about the
facility costs that are incurred on one day. This is episodic care and
the presence of risks and complicated conditions may not affect
significantly the usual cost of providing care. Of course, the patient
may incur some additional pre-testing to determine the appropriateness
of surgery in the outpatient setting but this is not part of the
payment for surgery and thus is either paid to another provider such as
lab or x-ray facility or physician or an additional payment to HOPD.
FASA asked a few of its members to determine additional costs of
caring for high risk patients. The general conclusion was that the
impact on the bottom line of costs was minimal. Most additional tests
required would be conducted before surgery and the costs paid to
another provider or in the HOPD case as a separate payment. Some
additional costs were incurred but most found these to be limited. For
example, for the diabetic patient the additional costs were for a
fingerstick blood glucose test immediately before surgery and before
they were discharged. Some also thought the diabetic patient might be
in recovery slightly longer than a regular patient. Based upon this
quick review, we do not think justifying additional payments based upon
a slightly higher risk status of patients is legitimate. We would have
liked to have done a more comprehensive assessment but time did not
permit.
PAGE 17: The draft chapter asserts that revising the ASC payment
system based upon recent cost data should reduce disparities between
HOPD and ASCs. This may be true, but at this point it is pure
conjecture. No information has been considered that suggests the
variations are due to anything other than different methods of
collecting the data. If in fact, there are legitimate differences in
the cost of treating in different settings more recent data might
increase not decrease disparities.
PAGE 17: As discussed on page 8, paying different providers
different amounts does not in and of itself create an incentive to move
the case from one site to another. The issue is profitability for the
facility that affects the decision.

Recommendation 2F-3

MedPAC's final recommendation, that ASC rates not exceed APC rates
for the same procedure, is equally flawed and premature. First, the
rates are calculated in entirely different ways, using different data
and a different mix of services. Unless costs in both settings are
measured in an identical manner, it is impossible to determine which
numbers are correct. Second, use of the APC rate as a gold standard is
premature. These rates have changed significantly in the three years
that the HOPD PPS has been in place. Until the rates stabilize, it is
premature to use them as any kind of standard to justify legislative
action now. Third, the services that are included in an APC in the HOPD
and in the ASC facility fee groups are not identical. ASCs, for
example, cannot bill for radiology. HOPDs can bill separately for this
service. Until the service units are defined equally, any comparison of
payment rates is meaningless. To suggest otherwise is to mislead
Congress and the public.
It is also a fallacy to assume that a hospital or an ASC will make
a decision on whether or not to provide a service based on the payment
made to the other facility. ASCs do not care if the HOPD can provide
the service based on the financial impact of APC rates. They care only
if they can provide the service based on the financial realities of
their own rate structures.
On behalf of its members, FASA expresses appreciation to MedPAC for
considering our comments on your report to Congress. Changes in
reimbursement will have a dramatic impact on the ASC industry and the
delivery of outpatient care for Medicare beneficiaries. We also
appreciate the time that MedPAC Commissioners and staff have devoted to
this issue and in particular to conversations with FASA and other ASC
industry representatives to facilitate a thorough understanding of the
issues. We look forward to speaking with you about the issues we have
raised. Please do not hesitate to contact FASA if we can be of any
assistance as you finalize the chapter.
Sincerely,
Kathy Bryant
Executive Director

Attachment
______

[GRAPHIC] [TIFF OMITTED] T9629A.001

Statement of the National Association of Home Care and Hospice
The National Association for Home Care and Hospice (NAHC) is the
largest national home health trade association representing nearly
6,000 member organizations. Among our members are Medicare-
participating home care providers, including nonprofit agencies like
the VNA, for-profit chains, public and hospital-based agencies, free-
standing agencies. We also represent home care aide and hospice
organizations.
NAHC is pleased to be able to submit our statement for the record
to the Committee on Ways and Means Subcommittee on Health on the
Medicare Payment Advisory Commission's (MedPAC) recommendations and
report to Congress on home care payment adequacies. Those
recommendations include a freeze in payment rates with no market basket
inflation update for fiscal year 2004, a one year increase of 5 percent
in PPS rates for rural patients (to replace a 10 percent add-on that
expires in April 2003), and the Department of Health and Human
Services' continuing analysis of access to home health services. MedPAC
did not address the 15 percent cut that took effect October 1, 2002.
The MedPAC recommendations are based upon a number of factors including
profit margins, entry and exit into the marketplace, access to care and
other factors demonstrating payment rate adequacy.
NAHC believes that MedPAC's recommendations fail to address serious
and growing access problems under the Medicare home health benefit.
Further, NAHC believes that MedPAC recommendations are based upon
extremely limited and soft data and projections on provider costs and
revenues. Finally, MedPAC recommendations appear to be based upon the
acceptance of a dramatically altered scope of the home health benefit
without any authorization from Congress for that benefit change.
In specific response to the recommendations it must be noted:

In the first full year of PPS, 300,000 fewer Medicare
beneficiaries found access to home health services. This represents a
12 percent decline in the number of Medicare home health users in just
one year. This decline is on top of the 1 million-user decrease from
1998 to 2000.

------------------------------------------------------------------------
CY TOTAL MEDICARE HOME HEALTH PATIENTS
------------------------------------------------------------------------
1997 3.6 MILLION
------------------------------------------------------------------------
1998 3.1 MILLION
------------------------------------------------------------------------
1999 2.7 MILLION
------------------------------------------------------------------------
2000 2.5 MILLION
------------------------------------------------------------------------
2001 2.2 MILLION
------------------------------------------------------------------------

Medicare home health users now represent approximately 5
percent of all Medicare enrollees, a level lower than in 1991. The
reduction in the number of Medicare users precedes the payment rate cut
of October 1, 2002, the pending loss of the 10 percent rural add-on,
and the recommended freeze in rates beginning October 2003.
MedPAC relies upon extremely limited cost report data
involving a non-random sample of a small portion of all home health
agencies (10 percent) since cost report data is not otherwise
available. While MedPAC presents average profit margins from this
limited data, it does not discuss the actual ranges in margins which
would show home health agencies losing money, breaking even, as well as
achieving profits prior to the October 1, 2002 additional cuts.
Additionally, MedPAC misleadingly estimated average profit margins by
weighing more heavily-high volume Medicare providers. Given the direct
relationship between volume and estimated profits (MedPAC Report, page
107), it is clear that this weighing skews the profit averages toward
the higher volume/higher profit agencies.
This provides an inaccurate view of actual profits being
experienced by individual agencies and the breadth of the access
problems that could result from the October 2002 and April 2003 payment
cuts, and from a freeze on rates for fiscal year 2004. A full display
of ranges by geographic location is necessary to understand the impact
of MedPAC's recommendation. Areas where there are only low margin
providers are likely to experience access to care problems.
Further, the prospective payment system (PPS) data does
not include pending retroactive adjustments due to the Centers for
Medicare & Medicaid Services' (CMS) implementation problems that have
led to higher than appropriate payments in the first year of PPS. These
adjustments will significantly reduce profit margins.
MedPAC suggest that home health agencies can further
reduce services to patients as the means of addressing rising costs and
lower payment rates. Since 1997, the average visits provided over a 60
day episode has dropped from 36 to 20. With the MedPAC analysis, the
average visits would drop an additional 2 to 3 visits. MedPAC has
offered no support for its assumption that there would be no adverse
consequence to patient's clinical outcomes.
MedPAC fails to consider foreseeable increased home
health costs in estimating profit margins. Costs related to staff
shortages, workman's compensation and health insurance increases,
purchases of new technologies, HIPAA compliance, bioterrorism and
emergency preparedness, and the installation of new information systems
to accommodate PPS have not been considered. Further, MedPAC fails to
consider increases in per visit costs triggered by the allocation of
fixed operational costs to a lower visit volume.
MedPAC did not evaluate the overall financial status of
home health agencies. In its review of hospital services, MedPAC
properly analyzed the total financial bottom line because it is
necessary to understand the potential impact of Medicare payment
changes on the whole delivery system to ensure access to care. Home
health agencies are in financial jeopardy as a result of Medicaid cuts,
low private payment rates, and Medicare IPS overpayments.

Most telling in the MedPAC Commissioners' discussion of the
recommendations is an acknowledgement that the scope of the Medicare
home health benefit has been completely changed in the last few years.
Commissioners expressed concern that this change may not have been
intentional. The Commissioners, however, failed to connect the change
in the scope of benefit with the dramatic alterations in Medicare
reimbursement systems for home health services. It is very apparent
that acceleration in the reduction of users in Medicare home health
services was directly triggered by the implementation of PPS.
Madame Chairman and members of the Subcommittee, on behalf of home
care providers and the patients they serve, NAHC encourages you to
question MedPAC regarding payments to home health agencies and
ascertain the answers to the following questions.

Quality of Care Under the Medicare Home Care Benefit

While MedPAC believes that quality of care was not
affected by a reduction in numbers of visits per patient during 2002,
what evidence does MedPAC have that further reductions in numbers of
visits per patient, as suggested by MedPAC as an acceptable reaction to
the elimination of the rural add-on and/or elimination of the FY2004
inflation update, would have no harmful effect upon patient care?

Percentages of Medicare Beneficiaries by Provider

How does the current percent of total Medicare fee-for-
service beneficiaries receiving home health care compare with the same
figure from the early 1990s? What are the comparable percentages for
fee-for-service hospital and skilled nursing facility use for the same
time periods?
MedPAC's data indicate a further reduction of 300,000
beneficiaries receiving home health services during the first year of
PPS. What analysis has MedPAC done on who these beneficiaries are?

Failure to Examine the Ranges of Profit Margins of Home Health Agencies

What is the range of profit margins for agencies in the
sample of 700 agencies used, including the pure range, the unweighted
average, geographic ranges, and by type of home health agency?

Overall Financial Status of Home Health Agencies

What is the overall margin for home health agencies
considering the effect of all payors, including Medicaid, as well as
repayments to Medicare?

CMS is already working on reforms to the Medicare home health PPS.
The reforms can not be appropriately targeted and implemented if there
is no stability in these early stages of PPS. Both Congress and CMS
recognized that the implementation of an untested PPS posed some risks
for patients, providers and Medicare. It was anticipated that CMS would
make any necessary adjustments when the impact of PPS could be properly
analyzed. As such, it is premature for Congress to accept the MedPAC
recommendation and institute across the board cuts and rate freezes
before CMS has had the opportunity to finish its plan of action on PPS
fine tuning.
NAHC recommends that Congress reject MedPAC's advice in order to
stem further losses of access to home health services. While
maintaining the status quo through restoration of the 15 percent cut,
continuation of the 10 percent rural add-on, and application of a full
inflation update will not guarantee the restoration of access to
hundreds of thousands of individuals who have lost home health services
recently, it should prevent further erosion in access. Congress should
also undertake an immediate effort to institute corrective action to
provide an opportunity for the full scope of the Medicare home health
benefit to be honored and access restored.
Madame Chairman, NAHC appreciates the opportunity to provide these
comments to the Committee on Ways and Means Subcommittee on Health on
Medicare home care payment adequacy. We look forward to working with
the Subcommittee as it studies and considers NAHC's recommendations on
MedPAC's report to Congress.

Statement of the Outpatient Ophthalmic Surgery Society

The Outpatient Ophthalmic Surgery Society (OOSS) appreciates the
opportunity to present testimony to the Ways and Means Subcommittee on
Health regarding recommendations made by the Medicare Payment Advisory
Commission (MedPAC) in its March 2003 Report to Congress. OOSS members
are particularly interested in MedPAC's recommendations concerning
Medicare reimbursement for procedures performed in ambulatory surgery
centers (ASCs).
OOSS is an organization comprised of approximately 600
ophthalmologists dedicated to providing high-quality ophthalmic
surgical care in various outpatient settings. A substantial number of
our members either own or perform surgery in Medicare-certified ASCs.
As such, our membership takes a keen interest in proposals to modify
Medicare payment to ASCs.
Before providing our comments on MedPAC's recent ASC-related
recommendations, we must applaud Congress and this subcommittee in
particular for answering the plea of physicians nationwide for relief
from the pending physician payment update. Without your responsiveness,
physician payment would have been drastically cut for a third
consecutive year, which would have forced many physicians to reevaluate
their participation in the Medicare program and caused an access crisis
for beneficiaries.
With respect to ASCs, MedPAC issued three recommendations. These
recommendations are as follows:

The Secretary should expedite collection of recent ASC
charge and cost data for the purpose of analyzing and revising the ASC
payment system;
Congress should eliminate the update to payment rates for
ASC services for fiscal year 2004; and
Until the Secretary implements a revised ASC payment
system, Congress should ensure that payment rates for ASC procedures do
not exceed hospital outpatient PPS rates for those procedures, after
accounting for the differences in the bundle of services.

OOSS agrees with MedPAC's recommendation that urges CMS to collect
recent data on ASC costs. Current cost data is the foundation of
equitable payment rates. However, we remind Congress that Medicare
statute already requires the regular, every five years, collection of
ASC facility costs. We discourage Congress from taking action that is
unnecessary and redundant.
Additionally, we discourage Congress from further urging CMS to
rebase ASC rates from a facility cost survey. CMS's past facility
surveys have failed to yield accurate cost data for ASCs. Congress
acted in 1999 and again in 2000 to prevent CMS from implementing
rebased rates that were based on data collected using imperfect
methodologies. Instead, we recommend a completely different approach
and departure from the facility survey as the means to rebase ASC
rates.
OOSS disagrees with MedPAC's recommendation that payment updates
for ASC services should be eliminated for fiscal year 2004. The ASC
setting has proven to be an efficient environment in which to perform
outpatient surgeries. This efficient quality has helped the ASC
community survive consecutive years of minimal updates. However, input
costs, such as clinical staff, surgical instruments and equipment,
liability insurance, office space rent and utilities, that are largely
out of the control of ASCs, continue to increase. A payment update is
needed to offset these input cost increases.
OOSS encourages Congress to proceed cautiously with respect to
MedPAC's third recommendation. Certainly, CMS should take steps to
bring a greater degree of consistency between what Medicare pays for
outpatient surgery across various settings. However, as MedPAC suggests
this should not be done by arbitrary across-the-board cuts or with an
assumption that the current rates that Medicare pays HOPDs or ASCs are
an accurate calculation of actual procedure-by-procedure costs. Rather,
this standardization can be achieved only after a careful accounting
for differences in the bundle of services reimbursed through each
payment system. These differences must be identified, quantified, and
evaluated before true relationships can be established across systems.
Additionally, before taking any action, Congress should remember
the following:

Hospitals are eligible for add-on payments that ASCs are
not, such as outlier adjustments and drug and device cost pass-
throughs;
Hospitals are permitted to bill for services that ASCs
cannot, such as radiology procedures; and
The bundles of services that ASC and HOPD rates are based
upon differ.

Additionally, when Congress looks to standardize outpatient surgery
payment rates it should compare multiple years of rate data for the
HOPD and ASC setting to account for year-to-year payment rate
fluctuations. MedPAC chose to only compare the 2003 rates, which in our
opinion distorted the comparison of rates. For example, for cataract
removal with lens insertion, HOPD payment rates in 2001 were $1,317; in
2002, the HOPD rate was cut by 19.8% to $1,055; then, in 2003, the rate
was increased by 10% to $1,160. With variation of this degree, multiple
years of rate data must be considered for comparison purposes,
especially before reaching a conclusion that payment in one setting is
inappropriately greater than the other setting.
It is imperative that Congress not take hasty, impulsive action to
standardize ASC rates and HOPD rates. Rather, efforts to create a
credible relationship between hospital and ASC rates should be done as
part of a thoughtful effort to rebase ASC rates, and only after fully
accounting for differences between the two payment systems.