[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:

      
    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.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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \iii\ AHA Annual Survey, 1997-2001.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \vi\ PricewaterhouseCoopers Survey of Hospitals and Health Systems, 
2001.
    \vii\ First Consulting Group Study, 2001
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \x\ AHA Annual Survey.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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 30th 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
                                 
    Copyright  2002 SMG Marketing Group Inc

                                 

     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.

                                 
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