[Senate Hearing 108-268]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-268
 
                 MEDICARE OUTLIER PAYMENTS TO HOSPITALS

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                     MARCH 11, 2003--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate


                               __________




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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
                    James W. Morhard, Staff Director
                 Lisa Sutherland, Deputy Staff Director
              Terrence E. Sauvain, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
JUDD GREGG, New Hampshire            ERNEST F. HOLLINGS, South Carolina
LARRY CRAIG, Idaho                   DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          HARRY REID, Nevada
TED STEVENS, Alaska                  HERB KOHL, Wisconsin
MIKE DeWINE, Ohio                    PATTY MURRAY, Washington
RICHARD C. SHELBY, Alabama           MARY L. LANDRIEU, Louisiana
                                     ROBERT C. BYRD, West Virginia (Ex 
                                         officio)
                           Professional Staff
                            Bettilou Taylor
                              Jim Sourwine
                              Mark Laisch
                         Sudip Shrikant Parikh
                             Candice Rogers
                        Ellen Murray (Minority)
                         Erik Fatemi (Minority)
                      Adrienne Hallett (Minority)

                         Administrative Support
                             Carole Geagley
                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Arlen Specter.......................     1
Opening statement of Senator Tom Harkin..........................     2
Statement of Thomas A. Scully, Administrator, Centers for 
  Medicare and Medicaid Services, Department of Health and Human 
  Services.......................................................     3
    Prepared statement...........................................     6
Statement of Joseph W. Marshall, III, chairman and CEO, Temple 
  University Health System.......................................    17
    Prepared statement...........................................    19
Statement of Gail Wolf, senior vice president and chief nursing 
  officer, University of Pittsburgh Medical Center...............    21
    Prepared statement...........................................    23
Statement of Andrew Wigglesworth, president, Delaware Valley 
  Hospital Association...........................................    24
    Prepared statement...........................................    26
Opening statement of Senator Mary L. Landrieu....................    46
    Prepared statement...........................................    46
Prepared statement of the American Hospital Association..........    48
Prepared statement of the New Jersey Hospital Association........    50
Questions submitted by Senator Arlen Specter.....................    51


                 MEDICARE OUTLIER PAYMENTS TO HOSPITALS

                              ----------                              


                        TUESDAY, MARCH 11, 2003

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:38 a.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Arlen Specter (chairman) 
presiding.
    Present: Senators Specter, Harkin, and Landrieu.


               opening statement of senator arlen specter


    Senator Specter. Good morning, ladies and gentlemen. The 
Appropriations Subcommittee on Labor, Health and Human 
Services, and Education will now proceed to a hearing on a 
technical subject known as outlier costs. Medicare pays 
hospitals a set amount for each of more than 500 patient 
illnesses or procedures, separated into different diagnosis-
related groups called DRGs.
    Under that system, hospitals have a financial incentive to 
avoid extremely costly patients and to counter that incentive, 
Medicare makes additional payments called outlier payments 
which compensate hospitals for costs of cases that are far more 
expensive than the average for each diagnostic-related group. 
In order for a hospital to receive outlier payments, their 
costs must exceed a fixed loss amount, yearly set by Medicare. 
The outlier payment is 80 percent of the excess over the fixed 
loss amount.
    Congress has mandated a range of 5 to 6 percent, of total 
Medicare DRG payments for outliers, and I just asked Mr. Scully 
informally if that was a realistic figure, and he assured me it 
was.
    There had been a schedule established by CMS to put a rule 
into effect immediately, and this subcommittee intervened 
because of concerns we heard from many hospitals across the 
country that there would be a great hardship on hospitals to 
have a new rule put into effect abruptly, especially without 
giving the hospitals an opportunity to be heard, and so CMS has 
established a procedure where OMB released the regulation on 
February 28, and it was made public on March 5, and the comment 
period will extend until April 4, and then a date for it to be 
put into operation will be set thereafter, so there will be an 
opportunity for hospitals to respond and some period to make an 
accommodation.
    Hospitals are obviously struggling yet under the impact of 
the Balanced Budget Act of 1997, and steps have been taken by 
Congress to ameliorate the impact. Most recently, on the fiscal 
year 2003 omnibus appropriation bill, having found out that a 
Medicare payment cut was due to take effect on March 1, we 
prevented any reduction until September to give us an 
opportunity to review the matter further.
    So this is another of the ongoing hearings by this 
subcommittee and others to try to come to grips with these very 
complex issues, to see to it that hospitals have a fair 
opportunity to be adequately paid, an opportunity to adjust to 
changing rules and to enable the Department of Health & Human 
Services and CMS to stay within the mandates and guidelines 
which Congress has expressed.
    I now yield to my distinguished colleague, Senator Harkin.


                opening statement of senator tom harkin


    Senator Harkin. Thank you very much, Mr. Chairman, for 
having this hearing. The outlier problem has a broad impact on 
the Medicare program, and some hospitals legitimately rely on 
these to help offset high-cost payments. However, because the 
outlier payments are taken from the base payments to all 
hospitals, any misuse of the program ultimately hurts all 
hospitals, especially those in low-reimbursement, high-
efficiency States that have little need for outliers--I am 
talking about Iowa--so we also have an interest in this issue, 
too, Mr. Chairman, and I thank you for having this hearing.
    So I look forward to hearing from the administration and 
the witnesses about their plans to address this outlier program 
problem.
    If I might just take a couple of minutes, Mr. Chairman, I 
also want to raise another issue that I am sure Mr. Scully 
knows I will be raising, and in my first questions I will ask 
him about it. Six weeks ago we had a hearing on a number of 
Medicare issues. I again raised my concerns at that time about 
the geographic disparity in Medicare reimbursements between 
rural and urban States. As I mentioned then, my State of Iowa 
has had a severe competitive disadvantage, because our 
providers and hospitals, as I pointed out then, are number 50 
in the Nation, bottom in terms of per-beneficiary reimbursement 
for Medicare.
    Mr. Scully, you testified at that time that the 
administration is aware of our concerns. You even suggested 
that you agreed that some rural States like Iowa are 
underreimbursed for some services. You indicated that I would 
be happy with some of the President's Medicare reform proposals 
because his plan would, in addition to creating a drug benefit 
for all beneficiaries, provide some assistance to rural States. 
Well, I am sure it comes as no surprise to you that I am 
anything but happy with the President's Medicare proposal, and 
I am sure that that is true across the spectrum of those of us 
who represent the State of Iowa, regardless of political party.
    First, the plan does nothing to address the geographic 
inequity issue. This, despite the fact that the President 
personally came to Iowa last year and committed to supporting 
efforts to increase Iowa's Medicare reimbursement. But worse 
than the fact that the President's plan does nothing to help 
address the geographic disparity is that the President's 
prescription drug proposal will hurt Iowans--hurt Iowans. 
According to the administration's plan, Iowans who elect to 
stay in fee-for-service will receive a meager drug benefit. 
Seniors with the lowest income and higher drug costs will 
receive added protection, but the bottom line is, only seniors 
who go into an HMO will receive the drug coverage they need and 
deserve.
    Now, why is that bad for Iowa? Because we do not have one 
Medicare HMO in the entire State of Iowa. That means that all 
the money that is going to be used for this program would go to 
private HMOs in other States.
    Now, the President emphasized that seniors should have 
choices, but I hope the President realizes that fewer than 20 
percent of rural residents in America have access to Medicare 
HMOs, fewer than 20 percent, one out of five, and as I said, in 
Iowa, we do not even have one, so not only does the 
administration's proposal fail to modernize Medicare for all 
seniors in terms of geographic disparity, it actually takes a 
step backward for seniors in rural States like Iowa.
    So Mr. Scully, I know we are here to talk about outlier, 
and I want to make it clear that it is also an important issue 
to us in Iowa because of the effect it will have on 
reimbursements and on payments--you take away from the base--
but I also wanted to ask you when my time comes to ask 
questions about the, again, the geographic disparity and the 
prescription drug proposal.
    Thank you very much.
    Senator Specter. Thank you very much, Senator Harkin.
STATEMENT OF THOMAS A. SCULLY, ADMINISTRATOR, CENTERS 
            FOR MEDICARE AND MEDICAID SERVICES, 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES
    Senator Specter. We now turn to the distinguished 
Administrator of the Centers for Medicare and Medicaid 
Services, Mr. Thomas Scully. He has held this position since 
May 2001. Prior to the appointment, he served as president and 
chief executive officer of the Federation of American 
Hospitals. He was a partner at Patton Boggs, and also served as 
deputy assistant to the President and counselor to the Director 
of the Office of Management and Budget. A law degree from 
Catholic University and a bachelor's degree from the University 
of Virginia.
    Mr. Scully, thank you for joining us here, and we look 
forward to your testimony.
    Mr. Scully. Thank you Mr. Chairman and Senator Harkin, and 
my testimony is all about outliers, but I would be very anxious 
to explain the positive impact of the President's plan, which I 
was very involved in developing, on the rural areas in Iowa.
    Anyway, thank you for inviting me here to discuss the 
incredibly complex subject of hospital outlier payments. 
Outlier payments, Mr. Chairman, as you mentioned, are available 
to hospitals to help ensure that the sickest and most complex 
Medicare beneficiaries receive high-quality health care in 
hospitals. I know that this issue, and how it works out in 
Pennsylvania's hospitals and Iowa's, is important to both of 
you, and it is very important to CMS.
    Medicare basically, as you mentioned, pays DRG payments for 
every hospital payment, a little bit under $100 billion a year, 
and we pay additional add-ons for outliers, because, as I 
mentioned, they are complex cases. The law requires CMS to set 
outlier payment thresholds at between 5 and 6 percent a year. 
We take that out of the $100 billion total hospital pot we set 
aside. Traditionally in the last 10 years, 5.1 percent has been 
the amount that is set aside. The 5.1 percent is required to 
meet a budget projection that is supposed to be budget-neutral, 
so we set a threshold for outliers that will result in spending 
only 5.1 percent of that whole hospital pot on these high-cost 
cases.
    As I mentioned, this past year the 5.1 percent threshold 
was supposed to work out to $3.7 billion for 2002, but instead 
we spent $5.3 billion, so we missed the target by $1.6 billion. 
We started overshooting the mark without understanding really 
why in 1997. In 1997, the outlier payment target was $3.6 
billion, but we spent $300 million more than that. In 1998, the 
outlier payments were $4.4 billion when the target was supposed 
to be $3.4 billion, so we spent $1 billion more than we were 
expected to.
    In 1999, we spent $5.2 billion, which was $1.8 billion more 
than we were supposed to spend under the law. In 2000, we spent 
$5.3 billion, again $1.8 billion more than we were supposed to 
under the law. In 2001, we spent $5.5 billion, which was $1.9 
billion more than expected and, as I mentioned, again last year 
we spent $1.6 billion more than the target. So overall from 
1997 to 2002 this thing steamrolled and developed without the 
Agency understanding why we had spent $8.4 billion more than 
Congress had authorized us to spend. We consistently missed the 
targets. We did not understand why. We kept raising the bar to 
get into this outlier pot on the theory that if we raised the 
bar we would actually get closer to the target, and we kept 
missing and missing, and really never understood the dynamics.
    In 2000, for example, the outlier threshold to get these 
extra payments was $14,050 per case, in 2002 we raised it to 
$21,025 per case, and last year we raised it to $33,560 per 
case, consistently raising the bar, thinking that would result 
in us getting closer to our target of 5.1 percent of overall 
hospital payments, and obviously we did not understand what the 
dynamics here were, and we kept missing.
    It was not until the rule finally came out on October 1 for 
this year that raised the threshold to $33,560 that this 
outlier problem was discovered in two ways. One is, hospitals 
that were losing because they were getting less outlier 
payments. As Senator Harkin said, I do not believe there is an 
outlier hospital in Iowa, but they were getting paid less by 
virtue of other people getting paid more. Some hospitals called 
me and flagged this and started to essentially tell us how the 
dynamics were working for some of their competitors that were 
taking advantage of this, and they also called some Wall Street 
analysts. On October 27, a Wall Street analyst wrote a fairly 
high-profile explanation of this dynamic and it resulted in a 
lot of attention, a lot of press attention, on the fact that a 
relatively small number of hospitals were getting a hugely 
disproportionate share of outlier payments, and that was what 
was, in fact, driving up the totals.
    As I mentioned, in the last full fiscal year, 2002, we were 
supposed to spend 5.1 percent of DRG payments, and we spent 6.9 
percent. On average, the average hospital should be getting 
about 5.1 percent of their total Medicare payments in outlier 
payments. What we found was that 3 percent of hospitals, 123 
hospitals out of 5,000, roughly, acute care hospitals in the 
country had outlier payments of more than 20 percent.
    There were some particularly egregious offenders, and I 
listed a few in the testimony in the addendum, but just to 
illustrate how badly this problem can get out of hand, how much 
some hospitals took advantage of it, Doctors Hospital in 
Modesto, California--and Modesto's Doctors Hospital is not a 
high-cost teaching hospital, it is a pretty standard community 
hospital--received $29 million in 2002 in regular standard 
Medicare payments. They received $62.5 million of outlier 
payments, so 215 percent. Instead of 5 percent they got 215 
percent of outlier payments. If they had gotten the national 
average they would have gotten $1.5 million in outlier 
payments. Instead, they got $61 million more, more than double 
their basic payments, and it is a pretty standard hospital.
    Redding Medical Center, which is also a pretty standard 
hospital in Redding, California, that has had some other 
problems that have been in the press lately, received $47 
million in regular Medicare payments and $56 million in outlier 
payments, so obviously, again, more than 100 percent. If they 
had gotten the standard amount of 5.1 percent, which to be 
honest with you, a hospital of that type of structure probably 
should get the average because it is not a teaching hospital, 
they should have gotten about $2.5 million, so they got $53.5 
million more than they should have.
    I would note that both of those hospitals are run by Tenet 
Healthcare, which probably drew the most press attention on 
this. Hospitals, under the regulation and under the law, can 
still bill us for this. It is arguable whether it is legal or 
not, but arguably, under existing regulations it is. I would 
note that Tenet, as a result of repeated contact from CMS, has 
voluntarily quit billing for this, and it has cost them $57 
million a month, or $750 million a year that they were getting 
from this program. As of January 1, they are voluntarily 
complying with this regulation and not billing us any more.
    But just to show that it is not just Tenet, they were about 
a third of the problem nationally. They own about 115 
hospitals. Community Medical Center in Toms River, New Jersey, 
receives $113 million in regular DRG payments, again, this is a 
community hospital, and got $87.6 million in outlier payments. 
Again if you looked at the national average, they should have 
gotten $4.7 million in outlier payments, so they picked up $83 
million this year in outlier payments that to us seem to be way 
out of line.
    Again, when you look down the line, 3 percent of hospitals, 
about 123, have outlier payments that are way, way beyond 
anything that is rational or understandable to us.
    The impact of this is not just that it helps the hospitals 
that figured out the way to game the system. The impact is that 
it hurts other people, and on the charts, I attach just one, 
Thomas Jefferson Hospital, for instance, in Philadelphia, lost 
about $2 million last year compared to what their normal 
outliers would have been. In past years, before we started to 
raise the bar, it received about 18 percent, which is what you 
would expect a big teaching hospital like Thomas Jefferson 
would get. But their outlier payments have been dropping, 
because as we raised the bar to get into the pool, they got 
less for each true high-cost patient. If they had lowered the 
outlier threshold through this current year to what last year's 
was, they would have gotten, just to be precise, $1.6 million 
more this year, if last year's rule was still in effect. But 
because of these abuses, we kept raising the bar, and it hurts 
all the community hospitals that have not gotten this.
    Hershey Medical Center in Pennsylvania, for instance, would 
have lost about half a million dollars this year, due to this. 
The University of Iowa, if it were under last year's threshold 
instead of this year's threshold, would get $1.5 million more.
    So the 3 percent of hospitals that have been taking 
advantage of the program are basically taking money away from 
the other 97 percent that are not, and we do not think that is 
fair, and that is why we thought that we should close this, 
what we consider to be loophole, immediately.
    We sought to do this, after the chairman understandably 
inquired about the impact on some Pennsylvania hospitals--and 
generally, the disproportionate number of the hospitals are in 
New Jersey, California, and Pennsylvania, for reasons we still 
do not really understand. Those were where the highest number 
were, and we sought to close it immediately, but we obviously, 
as you mentioned, turned it into a draft rule to get 30 days' 
comment from the hospitals that are going to be affected. We 
expect that shortly, after we consider the comments from 
hospitals we will put out a final rule. We are certainly 
respectful of the concerns of the chairman and ranking member, 
but as I mentioned to you earlier, the Ways and Means 
Committee, both Mr. Stark and Mr. Thomas in the House have 
expressed a strong interest in us fixing this as quickly as we 
possibly can.

                           prepared statement

    I would just add, to close, that I ran a hospital 
association for 6 or 7 years. I did not understand this 
dynamic. I am a little embarrassed that I did not figure this 
out for the first 2 years I was on the job and, in fact, that 
my agency went for 5 years without understanding this, but we 
really believe that the outlier pool is a legitimate way to pay 
for high-cost Medicare patients. A lot of the hospitals that 
are taking care of these patients have not been paid 
appropriately, and we think, with respect to trying to be 
sensitive to the community needs that are involved with the 
hospitals that have been collecting these extra payments, that 
we need to fix this as fast as we reasonably can.
    Thank you, Mr. Chairman.
    [The statement follows:]
                 Prepared Statement of Thomas A. Scully
    Chairman Specter, Senator Harkin, distinguished Subcommittee 
members, thank you for inviting me to discuss how Medicare pays for 
inpatient hospital outlier costs. Outlier payments are those Medicare 
payments that are available to hospitals to help ensure that Medicare's 
sickest beneficiaries continue to have access to high quality health 
care. We have an obligation to safeguard this access for Medicare's 
sickest patients, and to ensure that we are spending taxpayer funds 
appropriately. Medicare generally pays most hospitals a predetermined 
amount for a typical patient's stay, based on the average cost of 
providing care to a patient in a similar condition. The payment is set 
under a diagnostic related group (DRG) that will allow an efficiently 
operated hospital to earn a reasonable rate of return overall. However, 
Medicare law recognizes that there are some beneficiary cases that are 
more complicated--and therefore more costly to treat--and requires that 
we pay an additional amount to hospitals for these cases known as 
outlier payments.
    Outlier payments can be viewed as insurance for hospitals against 
the large losses that could result from extremely expensive cases. In 
addition to the fixed rate per case, hospitals receive outlier payments 
when the estimated costs of the case exceed a fixed-loss threshold. 
This fixed-loss threshold operates like the deductible in a typical 
insurance policy. When the cost of a case exceeds the fixed-loss 
threshold, we pay the hospital an additional amount equal to 80 percent 
of the estimated costs beyond that loss threshold--similar to 
coinsurance required in most insurance policies. Under the law, CMS 
must set outlier payments between 5-6 percent of total inpatient 
payments. In recent years, CMS has set the outlier threshold at a level 
projected to pay 5.1 percent of total payments for inpatient care for 
these outliers--which was projected to result in spending of $3.7 
billion in fiscal year 2002. However, in reality, we spent $5.3 
billion--a difference of $1.6 billion.
    We are particularly concerned about excessive claims for outlier 
payments. Each year, when we update the hospital payment rates, we set 
a threshold for individual outlier payments designed to keep them at 
the overall target of 5.1 percent of total payments. As outlier claims 
increased (and the agency had no idea why) the outlier threshold has 
skyrocketed--from $14,050 in 2000 to $33,560 in 2003--as the agency 
raised the bar to try (very unsuccessfully) to stay within the 5.1 
percent target. As a direct result, more hospitals have been forced to 
absorb the costs of the complex cases they treat, while a relatively 
small number of hospitals that have been aggressively gaming the 
current rules benefit by getting a hugely disproportionate share of 
outlier payments. As you can see, the behavior of a few hundred 
hospitals--those that took advantage of the outlier program--are the 
main cause of the sharp increases in the loss threshold.
    CMS sets the outlier threshold to reach a target of total outlier 
payments equal to 5.1 percent of DRG payments. Moreover, we found that 
these hospitals, in order to maintain that level of outlier 
reimbursement, significantly exceeded the national average in raising 
charges between fiscal year 1999-2001, with Hospital A's charges 
increasing by 111 percent, and Hospital B's charges increasing by 126 
percent, compared to the national average of 18 percent. For fiscal 
year 2002, total outliers exceeded that target and reached 6.9 percent 
of total inpatient hospital payments. Hospital A in California received 
outlier payments equaling more than 215 percent of its DRG payments in 
fiscal year 2002--that's twice the amount of outlier payments to 
regular payments. Putting it another way, Hospital A received only 
approximately $29 million in regular DRG payments, but $62.5 million in 
outlier payments. However, under the target outlier amount of 5.1 
percent, Hospital A would have only received $1.5 million in outlier 
payments--a difference of $61 million. Hospital B, located in New 
Jersey, received outlier payments of 129 percent of its DRG payments. 
In dollars, Hospital B received about $113 million in regular DRG 
payment and $87.6 million in outlier payments, but under the national 
target of 5.1 percent, would have only received about $4.7 million in 
outlier payments. Again, the difference is substantial--about $83 
million.
    To make sure that outlier payments are used as they were intended, 
we issued a proposed rule that suggests revising the current outlier 
policy to prevent further gaming of the system by the few hospitals 
that get the lion's share of these payments. I wanted to close the 
loophole immediately, and help the hospitals that need it the most. 
Instead, we put out changes for comment, partially due to the 
Committee's interest in evaluating the impact of the changes. I would 
like to discuss our new proposed rule in greater detail with you today. 
However, I think it's important that I first discuss the logistics of 
the outlier system so that I may better explain how the new regulations 
improve the system, safeguarding access to care for a broader number of 
Medicare beneficiaries.
                               background
    The prospective payment system (PPS) was designed to pay hospitals 
appropriately while providing an incentive for hospitals to provide 
care as efficiently as possible. Under the inpatient PPS, Medicare pays 
hospitals a pre-determined, per-discharge rate for 509 patient 
categories called diagnosis related groups (DRGs). Each patient 
discharge is assigned to a DRG based on diagnosis, surgery, patient 
age, discharge destination and sex. Each DRG has a weight established 
for it based on charges submitted by hospitals for Medicare patients. 
Each weight reflects the relative average charge, across all hospitals, 
of treating cases classified in that DRG. In total, Medicare paid 
approximately $100 billion in fiscal year 2002 for inpatient hospital 
services.
    Because the PPS payment is based on an adjusted average payment 
rate, Medicare's payment for some beneficiary cases will be higher than 
the actual cost of the case while for other cases, payment will be less 
than the actual cost of the case. The system is designed to give 
hospitals the incentive to manage their operations more efficiently by 
evaluating those areas in which increased efficiencies can be 
instituted without adversely affecting the quality of care. Under 
inpatient hospital PPS, additional payments are made for those cases 
that generate extremely high costs when compared to average cases in 
the same DRG. These outlier payments are intended to protect hospitals 
from large financial losses due to unusually expensive cases.
    The Medicare billing form for inpatient stays provides hospitals 
with the opportunity to code whether they are requesting an outlier 
payment. When such a code is not selected, Medicare's fiscal 
intermediaries (FI), the private-sector contractors that process and 
pay Medicare hospital claims, identify outlier cases by comparing the 
estimated costs for a case to a DRG-specific fixed-loss threshold 
amount. The fixed-loss threshold amount is the sum of the DRG payment 
for the case, any add-on payments (new technology, indirect medical 
education, disproportionate share adjustment), and the fixed-loss 
threshold. We set the fixed-loss threshold each year at an amount that 
is projected to generate outlier payments equal to 5.1 percent of total 
payments under the PPS. Medicare then pays 80 percent of hospitals' 
costs above their fixed-loss threshold amounts. However, in the past 
few years actual outlier spending has exceeded the projected 5.1 
percent. For example, outlier payments totaled 7.6 percent in 1999 
($5.2 billion, or $1.8 billion more than projected); 7.6 percent in 
2000 ($5.3 billion, or $1.8 billion more than projected); 7.7 percent 
in 2001 ($5.5 billion, or $1.9 billion more than projected); and 6.9 
percent in 2002 ($5.3 billion, or $1.6 billion more than projected). 
The national fixed-loss threshold for 2003 is $33,560, up from $21,025 
in 2002. As you can see, as hospitals claim more and more outlier 
cases, we have been forced to raise the fixed-loss threshold to remain 
close to the 5.1 percent target (and we have not been close). Moreover, 
taxpayers spent $7.1 billion more than Congress authorized for these 
payments between 1999 and 2002 because of abusive practices and our 
inability to track or understand the abuses--until now.
                 problems with excess outlier payments
    The inpatient PPS outlier policy, prior to our publication of the 
new proposed rule, had a couple of major problems that allowed 
hospitals to claim excessive outlier payments. In order to estimate the 
actual costs incurred by a hospital for a given case, Medicare's FIs 
use the historical relationship between each hospital's costs and its 
charges to estimate the ``true'' cost of individual case. The cost-to-
charge ratio is determined by using the most recently settled cost 
report. So long as hospital costs and hospital charges change at 
roughly the same rate, this estimate produces a relatively reliable 
result. However, if a hospital increases its charges dramatically 
relative to costs in its most recently settled cost report, the use of 
the historical relationship will yield higher outlier payments than 
would be appropriate.
    In addition, the longer the lag between the historical data and 
current charges, the more likely it is that the cost-to-charge ratio 
estimate will be inaccurate. Hospitals must submit their cost reports 
within 5 months after the end of their fiscal year. CMS makes a 
decision to accept a cost report within 30 days. Once the cost report 
is accepted, CMS makes a tentative settlement of the cost report within 
60 days. The tentative settlement is a cursory review of the filed cost 
report to determine the amount of payment to be paid to the hospital if 
an amount is due on the as-filed cost report. After the cost report is 
tentatively settled, it can take 12 to 24 months, depending on the type 
of review or audit, before the cost report is final-settled. So if a 
hospital quickly starts raising its charges, the cost-to-charge ratio 
we use to calculate the payment does not immediately reflect that 
change. The increase in charges will eventually result in a lower cost-
to-charge ratio; however, during this lag time, hospitals can receive 
higher outlier payments than if a more current cost-to-charge ratio was 
used. While generally there is a lag period of a little under two 
years, over the past several years, the lag has been slightly longer, 
providing hospitals with a longer timeframe within which to continue 
gaming the system.
    For example, let's say that a hospital's cost-to-charge ratio from 
the settled 2000 cost report is 0.2 (meaning that the average charges 
were five times higher than average costs), and the patient charges for 
a particular case were $300,000. The estimated cost for that case would 
be $60,000 ($300,000  0.2), and the outlier payment would be based on 
that $60,000 cost (the outlier payment is based on 80 percent of the 
difference between $60,000 and $33,560). Then, assume that hospital 
starts raising its charges for that same type of patient to $320,000. 
The cost-to-charge ratio used would not immediately reflect this 
increased cost, but would rather remain at 0.2, based on data from the 
2000 cost report. So, the estimated cost for this same case would rise 
to $64,000 ($320,000  0.2). The hospital would then receive outlier 
payments based on $64,000, instead of $60,000.
    Another problem with the current outlier policy is hospitals' 
ability in certain cases to have the statewide average number 
substituted for their own cost-to-charge ratio. If the cost-to-charge 
ratio for a particular hospital is more than 3 standard deviations away 
from the national mean, the FIs will substitute the statewide average 
ratio to calculate costs and determine whether a hospital qualifies for 
outlier payments. This policy was initially adopted in 1989 in 
regulation to address a concern that cost-to-charge ratios falling 
outside such a range were probably because of faulty data reporting. 
However, using the statewide average instead of a hospital's cost-to-
charge ratio clearly increased outlier payments for particular 
hospitals where there were no errors.
    As an example, assume that the cost-to-charge ratio of 0.2, used in 
the previous example, is more than three standard deviations below the 
national average. The FI would then substitute the statewide average 
cost-to-charge ratio (0.4, for example) when calculating outlier 
payments. So, for the initial $300,000 procedure, the estimated costs 
would rise to $120,000 ($300,000  0.4), and the outlier payment would 
be based on the $120,000, not $60,000 ($300,000  0.2).
    Let me return to my previous examples for a moment and look at how 
these factors affected the cost-to-charge ratios of Hospitals A and B. 
The current cost-to-charge ratio we used to calculate payments for 
Hospital A is .339. However, we found by using more current data, 
Hospital A's actual relationship between cost and charges to be only 
.093. So basically, we are paying Hospital A at 3 times the actual rate 
of costs to charges. For our New Jersey hospital, Hospital B, we use a 
cost-to-charge of .325 to determine payments. However, our analysis 
found that Hospital B's actual relationship between costs and charges 
is .291. So clearly under the current outlier policy, we are grossly 
overpaying these hospital, and likely many more.
                         cms' initial response
    Upon discovering the abuse of the outlier policy, we quickly took 
corrective action. Last December, we instructed FIs to take action to 
help mitigate any potential vulnerability with outlier payments. First, 
FIs were instructed to identify hospitals that received outlier 
payments totaling more than 10 percent of their operating and capital 
DRG payments for discharges during fiscal year 2002. FIs were also 
directed to identify other hospitals where outlier payments might be 
problematic. Later that month, we issued a second program memorandum 
that initiated a progressive compliance strategy to ensure that 
Medicare payments for outliers are appropriate. This was designed to 
ensure that the greatest level of scrutiny is placed on hospitals that 
appear, through data analysis, to present the greatest risk to the 
program. We also instructed FIs to identify those hospitals that: (1) 
have outlier payments of 80 percent or more of their operating and 
capital DRG payments for discharges during October and November 2002 
(excluding outlier, indirect medical education, and disproportionate 
share payments); or (2) have estimated outlier payments greater than 20 
percent of their operating and capital DRG payments for discharges 
during October and November 2002 (excluding outlier, indirect medical 
education, and disproportionate share payments) and an increase in 
average charges per case (calculated including all Medicare discharges) 
of 20 percent or more from 2000 to 2001 and 2001 to 2002. This 
comparison may be performed using either hospitals' cost reporting 
periods or Federal fiscal years.
    For hospitals falling into the first category, FIs were instructed 
to perform comprehensive field audits for indirect medical education, 
graduate medical education, disproportionate share hospital payments, 
bad debts, organ acquisition costs, and any other pass through costs. 
FIs are also required to conduct medical reviews of a random sample of 
20 hospital outpatient outlier records, and have the state Quality 
Improvement Organization (QIO) perform outlier reviews for inpatient 
stays. For hospitals falling into the second category, FIs were to 
perform uniform charge reviews, medical review and additional reviews 
by the state QIO. FIs were instructed to begin the audits by February 
1, 2003, and to start all of the audits no later than July 31, 2003. 
The entire sample should be completed by July 31, 2004.
                             proposed rule
    In addition to auditing hospitals with potentially problematic 
outlier payments, CMS recently issued a rule in the March 5, 2003, 
Federal Register proposing revisions to the outlier payments 
regulations. In this proposed rule, we suggest changes to the 
methodology for determining payments for extraordinarily high-cost 
cases (cost outliers) made to Medicare-participating hospitals under 
the inpatient hospital prospective payment system. These proposed 
changes would be effective for discharges occurring on or after the 
date that we issue a final rule following this proposed rule and 
comment period.
    Currently, we use the most recent settled cost report when 
determining cost-to-charge ratios for hospitals. The covered charges on 
bills submitted for payment during fiscal year 2003 are converted to 
costs by applying a cost-to-charge ratio from cost reports that began 
in fiscal year 2000 or, in some cases, fiscal year 1999. These covered 
charges reflect all of a hospital's charge increases to date, in 
particular those that have occurred since fiscal year 2000 and are not 
reflected in the fiscal year 2000 cost-to-charge ratios. If the rate-
of-charge increases since fiscal year 2000 exceeds the rate of the 
hospital's cost increases during that time, the hospital's cost-to-
charge ratio based on its fiscal year 2000 cost report will be too 
high, and applying it to current charges will overestimate the 
hospital's costs per case during fiscal year 2003. Overestimating costs 
may result in some cases qualifying for outlier payments that, in 
actuality, are not high cost cases. Overestimating costs will also 
result in higher outlier payments if a case does qualify for outliers.
    Using our Medicare Provider Analysis and Review (MedPAR) file data 
from fiscal year 1999 to fiscal year 2001, we found 123 hospitals whose 
percentage of outlier payments relative to total DRG payments increased 
by at least 5 percentage points over that period, and whose case-mix 
adjusted charges increased at or above the 95th percentile rate of 
charge increase for all hospitals (46.63 percent) over the same period. 
We adjusted for case-mix because a hospital's average charges per case 
would be expected to change from one year to the next if the hospital 
were treating new or different types of cases. Because we use settled 
cost reports to compute hospitals' cost-to-charge ratios, the recent 
dramatic increases in charges for these hospitals are not reflected in 
their cost-to-charge ratios. For example, among these 123 hospitals, 
the mean rate of increase in charges was 70 percent. Meanwhile, cost-
to-charge ratios for these hospitals, which were based on cost reports 
from prior periods, declined by only 2 percent.
    Because a hospital has the ability to increase its outlier payments 
during this time lag through dramatic charge increases, in this 
proposed rule we are proposing to allow fiscal intermediaries to use 
more up-to-date data when determining the cost-to-charge ratio for each 
hospital. We are proposing to specify that fiscal intermediaries will 
use either the most recent settled or the most recent tentatively 
settled cost report, whichever is from the latest cost reporting 
period. Using cost-to-charge ratios from tentative settled cost reports 
would reduce the time lag for updating cost-to-charge ratios by a year 
or more.
    However, even the more recent data calculated from the tentative 
settled cost reports would overestimate costs for hospitals that have 
continued to increase charges much faster than costs during the time 
between the tentative settled cost report period and the time when the 
claim is processed. In fact, there would still be a lag of one to two 
years during which a hospital's charges may still increase faster than 
costs. Therefore, we are proposing to add a new provision to the 
regulations that would allow CMS the authority to direct the fiscal 
intermediary to change the hospital's operating and capital cost-to-
charge ratios to reflect the high charge increases evidenced by the 
later data. In addition, we are proposing to allow a hospital to 
contact its fiscal intermediary to request that its cost-to-charge 
ratios be changed if it presents substantial evidence that the ratios 
are inaccurate. Any such requests would have to be approved by the CMS 
Regional Office with jurisdiction over that fiscal intermediary.
    Because of hospitals' ability to increase their charges to lower 
their cost-to-charge ratios in order to be assigned the statewide 
average, we are proposing to remove the current requirement in our 
regulations that specify that a fiscal intermediary will assign a 
hospital the statewide average cost-to-charge ratio when the hospital 
has a cost-to-charge ratio that falls below the floor. After issuing 
our December 2002 Program Memorandum instructing fiscal intermediaries 
to identify all hospitals receiving the statewide average operating or 
capital cost-to-charge ratio because their cost-to-charge ratios fell 
below the floor of reasonable parameters, we identified 43 hospitals 
that were assigned the statewide average operating cost-to-charge ratio 
and 14 hospitals that were receiving the statewide average capital 
cost-to-charge ratio. Three hospitals were common to both lists. Prior 
to application of the statewide average cost-to-charge ratios, the 
average actual operating cost-to-charge ratio for the 43 hospitals was 
0.164, and the average actual capital cost-to-charge ratio for the 14 
listed hospitals was 0.008. In contrast, the statewide average 
operating cost-to-charge ratio for the 43 hospitals was 0.3425 and the 
statewide average capital cost-to-charge ratio for the 14 hospitals was 
0.035. In the proposed rule, we suggest a revision that would give 
hospitals their actual cost-to-charge ratios, no matter how low their 
ratios fall.
    However, we are proposing that statewide average cost-to-charge 
ratios would still apply in those instances in which a hospital's 
operating or capital cost-to-charge ratio exceeds the upper threshold. 
Cost-to-charge ratios above this range are more likely to be the result 
of faulty data reporting or entry, and should not be used to identify 
and pay for outliers. In addition, hospitals that have not yet filed 
their first Medicare cost reports with their fiscal intermediaries 
would still receive the statewide average cost-to-charge ratios.
    The proposed rule would greatly reduce the opportunity for 
hospitals to manipulate the system to maximize outlier payments by 
updating cost-to-charge ratios using the most recent tentative settled 
cost reports and using actual rather than statewide average ratios for 
hospitals that have cost-to-charge ratios that are more than 3.0 
standard deviations below the geometric mean cost-to-charge ratio. 
However, these two steps would not completely eliminate all such 
opportunity for aggressive gaming. A hospital would still be able to 
dramatically increase its charges by far above the rate of increase in 
costs during any given year. This possibility is of great concern, 
given the recent findings that some hospitals that have been able to 
receive large outlier payments by doing just that. Therefore, we are 
proposing to add a provision to our regulations to provide that outlier 
payments will become subject to adjustment when hospitals' cost reports 
are settled. Payments would be processed throughout the year using 
operating and capital cost-to-charge ratios based on the best 
information available at that time. When the cost report is settled, 
any reconciliation of outlier payments by fiscal intermediaries would 
be based on operating and capital cost-to-charge ratios calculated 
based on a ratio of costs to charges computed from the cost report and 
charge data determined at the time the cost report coinciding with the 
discharge is settled. The language we propose to add would allow 
outlier payments to be adjusted to account for the time value of the 
money during the time period it was inappropriately held by the 
hospital. This adjustment would also apply in cases where outlier 
payments were underpaid to the hospital. In those cases, the adjustment 
would result in additional payments to hospitals. Any adjustment would 
be based upon a widely available index to be established in advance by 
the Secretary, and would be applied from the midpoint of the cost 
reporting period to the date of reconciliation (or when additional 
payments are issued, in the case of underpayments). This adjustment to 
reflect the time value of a hospital's outlier payments would ensure 
that the outlier payment received by the hospital at the time its cost 
report is settled appropriately reflects the hospital's true costs of 
providing the care.
                               conclusion
    Outlier payments are a vital part of the Medicare payment system 
because they provide hospitals with insurance against extraordinarily 
high patient costs and ensure access to care for Medicare's 
beneficiaries. However, Congress intended that outlier payments would 
be made only in situations where the cost of care is extraordinarily 
high in relation to the average cost of treating comparable conditions 
or illnesses. Under the existing outlier methodology some hospitals' 
recent rates of charge increases greatly exceed their rates of cost 
increases. This disparity results in an overestimation of their current 
costs per case. In an effort to ensure that the outlier payments are 
used as they were intended, we issued a proposed rule that would 
prevent further gaming of the system by a few hospitals that obtain the 
majority of these payments. We are anxious to move forward with this 
effort as quickly as possible and are eager to receive comments on the 
proposed rule so that we can return the outlier policy to its original 
legislative purpose, which is to safeguard access to care for a broader 
number of Medicare beneficiaries and ensure appropriate use of taxpayer 
funds. I'm embarrassed that as a longtime hospital analyst I was not 
able to understand this problem and I am embarrassed for the Agency 
that we did not catch this sooner. Nevertheless, we firmly believe that 
this situation demands and immediate remedy. Thank you for allowing me 
to discuss this very important issue with you today. I look forward to 
answering your questions.

    Senator Specter. Would you call that a transition period, 
Mr. Scully, when you do not understand it?
    Mr. Scully. I am sorry, Mr. Chairman.
    Senator Specter. Would you call that a transition period, 
when you do not understand it? It took you 2 years, it took 
your agency 5 years to understand the impact.
    Mr. Scully. I have to say, Mr. Chairman, I did not 
understand what was going on in this. I knew that the outlier 
threshold was going up, and I was a little surprised that our 
staff did not understand it, but it is a very complicated 
program.
    Senator Specter. On the question of a phase-in period, I 
note that there have been very substantial past phase-ins. For 
example, on graduate medical education reimbursement, there was 
a 5-year phase-in period for the 1997 change. There was a 5-
year phase-in after 1997 for the change affecting acute 
hospital update care, a 4-year phase-in of the 1998 change in 
disproportionate share hospital reimbursements, a 10-year 
phase-in of capital prospective payments.
    With those kind of precedents, would it not seem reasonable 
to have some phase-in on a change in outlier payments?
    Mr. Scully. Well, Mr. Chairman, I think in those cases, and 
I think I was involved in all of them, those were policy 
changes that were big changes, but they were phased in as 
conscious policy decisions. In this case, I think the 
administration's belief is this really was a program abuse and 
should never have happened, and the people that are collecting 
this extra money are doing it at the expense of their 
neighboring hospitals, and it is a totally different situation.
    Senator Specter. Is that a no?
    Mr. Scully. I think our view is, with respect to you, Mr. 
Chairman, that we are trying to balance the fact that our 
authorizing committees think we should shut this down 
immediately, and the fact that there are hospitals and States 
affected, but I think our preference would be to fix it 
immediately.
    Senator Specter. Well, I do not think it is a matter of 
accommodating a House authorizing committee or the Senate 
Appropriations subcommittee. It is a matter of what is 
reasonable to allow hospitals to adjust to it, and in a context 
where there have been substantial phase-in periods, I would 
urge you to consider that.
    Mr. Scully. Mr. Chairman, I would think if Congress, wanted 
to buffer the impact on these hospitals in a Medicare bill, I 
think we would probably be happy to work with you on that. But 
within the context we have to do it in a budget-neutral 
fashion, hospitals that really have legitimate high-cost 
patients, I mean, we have to fix this, we have a set pot of 
money, and it is hurting hospitals that have legitimate high-
cost patients to have the hospitals that took advantage of what 
I consider a major loophole in the program. It is at their 
neighbors' expense.
    Senator Specter. Mr. Scully, when you have modified the 
figure from 2002 of $21,025 on the fixed loss amount threshold, 
raising it to $33,565 for 2003, isn't that an excessively sharp 
change which again has very, very substantial impact in a 
sudden way on the affected hospitals?
    Mr. Scully. It has. It has the biggest impact on the 
hospitals that have not been excessively billing for outliers, 
and that is one of the reasons I feel strongly that, and I have 
argued strongly within the administration that we should lower 
the threshold back to $22,000 or $23,000, but you can 
understand from OMB's point of view--and I used to work there, 
as you know, so I agreed with them in the draft rule to leave 
it where it was.
    Their view is, how could you possibly know what the right 
amount is. You have missed every year by $1.5 billion to $2 
billion, and as of right now, for this year, we are running way 
over even at this current target, if we do not change this 
regulation, we are expected to go way beyond the existing $3.8 
billion we have set aside, so from OMB's point of view, their 
view is, we have been wrong 5 years in a row, how could we be 
right?
    So we put the rule out for comment. We have encouraged 
strong comment from the hospitals. I happen to believe, and our 
actuaries believe that the correct number probably is in the 
midtwenties, if we fix the program abuses, I really think that 
fixing this will provide the other 97 percent of the hospitals 
that have not abused more money from it. And so I do think the 
outlier threshold--my personal opinion is that it probably, if 
we fix the abuses, would be too high, but I can understand the 
skepticism from our budget analysts to say we have been wrong 5 
years in a row by a couple of billion dollars, how could we 
possibly think we are right now?
    Senator Specter. The proposed rule change specifies that 
some 123 hospitals have outlier payments averaging 24 percent 
of their total Medicare income. That seems to me to be a 
relatively small number out of the 5,000 hospitals in this 
country. What would you consider to be a reasonable transition 
period to phase in the new regulations to avoid serious 
financial impact on certain hospitals?
    Mr. Scully. Well, Mr. Chairman, we made a pretty strong 
statement. There has been a lot of communication with the AHA 
and all the affected hospitals since October, and I think most 
hospitals that have been, we believe, billing excessively and 
taking advantage of this program have known since October that 
we were going to try to close it down, and they have basically 
had 6 months to adjust.
    I would also add that the way the outlier payments work, 
and I can really bore you with how this has been gamed, if you 
would like, but the hospitals, for example--and I explained 
this to Crozier Chester, which is my hometown hospital, which 
is one of the ones that has higher outliers. I think they are 
testifying later today. They are collecting about $30 million a 
year from outlier payments, and they are only getting about $40 
million of base Medicare payments, so obviously it is a major 
problem for them to lose that overnight.
    They can, in fact, continue to bill us for outliers. The 
way the rule works is that we would come back probably in 3 to 
4 to 5 years, maybe as long as 5 years in many cases, to 
actually reconcile and get the money back, so theoretically, if 
they wanted to finance their way out of this, they could keep 
collecting the $30 million a year for 5 years and would not 
have to pay it back until we actually closed their cost reports 
for 2003. Effectively they would get a Treasury bond rate loan 
to finance themselves out of this gradually, so they would not 
necessarily have to lose $30 million immediately.
    The bottom line is, at some point out in the future, we 
will come in and look at their real, true costs for 2003 and 
say, we are going to pay you outliers based on your true costs, 
not on the inflated costs that have been reported, and they 
would have to pay it back, but there is a way for them to 
finance their way out of this hole which effectively gives them 
a self-financing transition mechanism if that is what they 
choose to do.
    Senator Specter. My red light is on, so I will now defer to 
Senator Harkin.
    Senator Harkin. Well, Mr. Scully, this is one of those 
cases where on the one hand I agree with you, and on the other 
hand, we have a difference here. I mean, I agree with you on 
what you are doing on the outliers. That is a distinct problem. 
It is something that we have to address.
    I believe the administration has correctly set out the 
parameters of this and is addressing it correctly. I think you 
are right, that some of these people, in the future, as you 
look back, and as you see what the real costs were, could have 
those costs reimbursed later on, so I do not see any real 
problem with that, because it is hurting us and a lot of other 
States where we do not have this outlier problem, because it 
does take away from the base, as I said earlier, so I hope we 
can reach a reasonable agreement on this to move ahead on the 
outlier problem.
    Now, the part that I am now going to disagree with you on 
has to do with the thing that we talked about when you were 
here before, and that is the fact that still we have nothing 
done about closing this gap in the beneficiary reimbursement by 
Medicare.
    Now, I am going to take you to task, Mr. Scully, on what 
you said. You said that the plan would be helpful to Iowa. How 
do you tell Iowans, when we do not have one Medicare HMO in the 
State of Iowa, that this prescription drug plan is good for 
them? I just do not know how you can say that, especially when 
we have not done anything to address the fact that we are still 
number 50 in terms of per beneficiary reimbursement.
    Mr. Scully. Well, Senator Harkin, first, on the issue of 
geographic disparities in the existing Medicare program, I 
spent a good bit of the day yesterday working on next year's 
hospital regulation, and I think you will find, and I encourage 
you to keep talking to Secretary Thompson and me, that we are 
going to have a number of proposals out for comment on ways, in 
the hospital field and probably in the physician field, to make 
up some of the, what we perceive to be historical inequities in 
those. It probably will not make you happy, but I think 
incrementally we share some of your views, and we are at least 
going to put out for your consideration a number of ways that 
we can modify some of these geographic inequities.
    On the President's plan, I would love to have the 
opportunity to come down and explain the details, since I was 
very involved in drafting it. There are no HMOs in Iowa, and we 
do not expect there to be some. We do think that the Medicare + 
Choice program, which we have changed a little bit to call 
Medicare Advantage, is great in big cities like Philadelphia, 
where it has increasingly disappeared, or Pittsburgh. It does 
not work in Iowa. We do not expect there to be any HMOs.
    However, the new part of the program, which is Enhanced 
Medicare, works very much like the Federal Employee Health 
Benefits Plan. It is basically private fee-for-service plans 
and PPOs, which 70 percent of the people in the country under 
the age of 65 are in those types of plans, so it will be Blue 
Cross of Iowa, or Mutual of Omaha, or one of those private 
health plans that is not an HMO.
    That is exactly what the administration is proposing--it is 
a system of new private fee-for-service plans. And, in fact, 
there is a huge geographic adjustment, because we split up the 
payments by 10 regions, so Iowa would get paid across the board 
the same as everybody else in that region, which I believe is 
Missouri, Kansas, Nebraska. The Federal subsidy across those 
regions would be the same, so----
    Senator Harkin. We are talking about prescription drugs 
now, are we not?
    Mr. Scully. We are talking about, if you went into a 
Medicare, enhanced fee-for-service Medicare plan, what we would 
envision doing is having people buy all across Iowa, just like 
Federal employees do now--and there are Federal Employee 
Benefits Plans available all across Iowa, in the most rural 
areas.
    If you wanted to get into the region that included Iowa, 
which is Nebraska, Kansas, Iowa, Missouri, if you were Blue 
Cross of Iowa, or Cigna, or United Health Care, you would have 
to sell the same plan across that entire region to all-comers, 
not county-by-county, like HMOs work. It would be the entire 
region. You would have to offer the same Blue Cross plan for 
the same premium with the same subsidies, so Iowa is, in fact, 
I guess 46th in the country, by some counts 50th by others in 
subsidies, but you would basically get exactly the same subsidy 
level in Iowa as everybody in St. Louis and Kansas City would.
    So, in fact, when you look at the cross-subsidies, the 
cross-subsidy disparities to Iowa would be less. You would not 
be getting the same as New York, but you would be getting the 
same as everyone else in that Midwestern region and, in fact, 
if you look at the dollar subsidies to Iowa, it would 
significantly buffer the impact on Iowa as far as increasing 
the relative level of subsidies in the Medicare program to 
Iowans.
    I would be happy to come explain whatever detail you would 
like. In fact, I would look forward to it, if I could.
    Senator Harkin. I would like to know more about it, but I 
mean, it just seems to me, I do not mind if we are in with 
Kansas, Missouri, or whatever, but I am more concerned about 
the individual Medicare recipient in that region, if we are 
going to be in that region, compared with what the 
reimbursements for prescription drugs would be if they were in 
a State that had a Medicare HMO, say, Florida, California or 
New York.
    The beauty of the Medicare system--this is my own 
philosophy--has always been that everyone is treated the same. 
No matter where you are in this country, you ought to be 
treated the same. You pay the same, you have to treated the 
same.
    Now, if we are going to set up a system on prescription 
drugs where if you are in one State that has a lot of private 
HMOs, you get a higher benefit than if you are in States that 
do not, even though we might have Blue Cross or something, and 
I do not know how this is going to work in terms of the 
reimbursement. If you are saying that when this plan is over 
with, that a Medicare recipient in the State of Iowa for drug A 
will pay the same as a Medicare recipient in Florida, or 
Louisiana, or New York, or California, well then, I do not have 
a gripe.
    Mr. Scully. Eighty-nine percent of the population is on 
traditional Medicare, which is the program that CMS runs 
directly--we set all the rates. It is where this outlier 
problem came up--and 11 percent are in HMOs. The fundamental 
principle in our plan is that we believe that if you look at 
people under 65, 70 percent of those people are not in HMOs, 
they are in PPOs or private fee-for-service plans all through 
Iowa, like Mutual of Omaha or Blue Cross, and we tried to mimic 
that for seniors to give them another option.
    So seniors can stay on the old Medicare, they can go in 
HMOs, which we do not believe are going to help--outside urban 
areas they are never going to be that popular. But in addition, 
they would have the chance to join a private fee-for-service 
plan. In many cases they will have provider networks. They have 
to take any doctor, they have to take any hospital. They can 
have differential networks, but they have to take all 
providers, and those are the kinds of plans that have taken 
over in the commercial sector and they do not exist in 
Medicare, and in that case the beneficiary in Iowa would pay 
exactly the same premium as the beneficiary in Philadelphia or 
in Miami. It is a national premium, in that it is designed to 
be the same way as it is in the existing fee-for-service 
program.
    Senator Harkin. I understand paying the same premium. I am 
not understanding about the benefits.
    Mr. Scully. The benefits for drugs, obviously you may have 
a slightly different drug benefit between Blue Cross of 
Florida, or Blue Cross of Pennsylvania, or Blue Cross of Iowa, 
but the drug benefit subsidy is virtually the same. Between the 
enhanced fee-for-service, the drug benefit subsidy is 
identical.
    I mean we did not--to be honest with you, Mr. Harkin, make 
the final decision. Obviously, we need lots of input from 
Congress. They did not want us to set up every little detail 
because Congress wants to legislate, so the President very 
consciously set up a framework which did not have an awful lot 
of detail, but we left out all but the conceptual design. I can 
tell you that the subsidy for drugs is identical in the 
enhanced fee-for-service to what it is in the HMO.
    Senator Harkin. Thank you. Thank you, Mr. Chairman.
    Senator Specter. Thank you very much, Senator Harkin.
    One vital question, Mr. Scully, before we go on to the next 
panel, in our January 31 hearing, you testified that you did 
not intend to use more recent data to calculate Medicare 
reimbursement for malpractice expenses. That was despite the 
fact that the agency only updates geographic differences in 
costs every 3 years.
    I am especially concerned about that for Pennsylvania, 
where the malpractice costs exceed the national average and 
have risen dramatically in the last 2 years. In our 2003 
Omnibus Appropriations bill, which we passed after your January 
31 testimony, there was a direction for your agency to, quote, 
utilize data reflecting the current cost of liability insurance 
to determine current Medicare payment rates, including annual 
updates to the malpractice, geographic practice cost index, 
close quote. Will you comply with that direction?
    Mr. Scully. Yes, Mr. Chairman. I have talked to our 
actuaries already. We are working on next year's physician 
rule, and we are going to use the most recent possible update 
information we can.
    Senator Specter. Thank you very much. Thank you, Mr. 
Scully.
    Mr. Scully. Thank you.
STATEMENT OF JOSEPH W. MARSHALL, III, CHAIRMAN AND CEO, 
            TEMPLE UNIVERSITY HEALTH SYSTEM
    Senator Specter. We will call our next panel, Mr. Joseph 
Marshall, Dr. Gail Wolf, and Mr. Andrew Wigglesworth.
    Joseph W. (Chip) Marshall, III has served as chairman and 
chief executive officer of Temple University Health System 
since 2001. Previously, he was the chairman of the board. 
Before joining Temple's Health System he was a founding 
principal at Goldman & Marshall. He holds a law degree from 
Temple, and a bachelor's degree also from Temple.
    Welcome, Mr. Marshall, and we look forward to your 
testimony.
    Mr. Marshall. Thank you, Senator. Mr. Chairman, Senator 
Harkin, Mr. Scully, thank you for the opportunity to testify 
today, and thank you for holding this hearing. Temple 
University Health System is a cornerstone of the health care 
delivery system in North Philadelphia and the surrounding 
region. In 2001, TUHS treated 1.2 million patients through its 
hospitals and physicians. To put this in perspective, the 
population of Philadelphia and the surrounding five-county area 
is approximately 3.85 million people. On any given day, 
approximately 500 people utilize the services of TUHS emergency 
rooms, and an additional 1,700 people are present for 
nonemergency ambulatory services.
    Additionally, as one of the largest private employers in 
the city of Philadelphia, the health system plays a vital role 
in the local economy. In fiscal year 2002, TUHS employed over 
7,500 full-time employees and paid over $264 million in 
salaries, and an additional $64 million in benefits.
    Like many health systems today, Temple faces numerous 
pressures threatening the financial viability of our member 
institutions. These include steadily rising labor costs and 
dramatic increases in costs for liability insurance and medical 
supplies, most notably, blood and drugs.
    The cost of malpractice liability insurance alone has 
nearly doubled since 2001, when we paid $33 million for our 
systemwide liability costs to projected funding this year of 
$62 million. Temple has also been subjected to pressures from 
both private and public payers, including the long-term effects 
in the Balanced Budget Act on Medicare payment to hospitals.
    In addition, as a system that serves some of Philadelphia's 
poorest neighborhoods, Temple is the provider of last resort 
for many patients. Consequently, Temple is one of the largest 
providers of free and underreimbursed care in the Commonwealth 
of Pennsylvania. In fiscal year 2002, Temple provided more than 
$80 million in uncompensated care systemwide, which represents 
a $12 million increase over the previous year.
    In this time of constrained Federal and State budgets, it 
is reasonable to expect that there will be little or no 
abatement in the need for these services. Make no mistake, 
Senator, this is a responsibility that Temple proudly 
shoulders, but one that adds significantly to the list of 
financial pressures that we face. The bottom line is that the 
Temple University Health System showed an operating loss of $50 
million in the fiscal year ending June 30, 2002.
    In the face of this severe challenge, the health system has 
a responsibility to explore every means possible to ensure that 
we continue to provide quality health care to our communities. 
In recent years, Medicare outlier payments, which help offset 
the cost of treating high-cost patients, have become an 
increasingly important component in Temple's ability to meet 
that obligation. It is important to note that the increased 
payments to Temple for outliers were the result of accepted 
practices that were completely within the rules of the Medicare 
program.
    The funding Temple receives from Medicare outlier payments 
has become critical to our ability to carry out our mission in 
Philadelphia and the region. Last fall, CMS announced its 
intention to drastically alter the current outlier 
reimbursement formula. Recently, a proposed rule appeared in 
the Federal Register announcing the proposed changes and 
providing for a 30-day period during which affected parties may 
comment on the rule. Temple is grateful that CMS and the 
administration have decided to consider input from the hospital 
community in developing this policy, and will be submitting its 
concerns in writing regarding the rules shortly.
    Temple respects the decision of CMS to take these actions, 
and will work with CMS and our local fiscal intermediary to 
successfully implement the new system. However, we believe that 
there are two areas where the rules must be improved. First, we 
urge CMS to reconsider its decision not to lower the fixed loss 
threshold amount from its current level of $33,560. Lowering 
the outlier threshold would allow more hospitals to receive 
payments to help offset the cost of treating high-cost 
patients, and would help mitigate the effects on many 
hospitals, like Temple University Hospital, that will otherwise 
see outlier payments drop dramatically.
    Further, by maintaining the fixed loss threshold at this 
historically high level, the effect of the loss is that CMS is 
not merely redistributing the existing funding set aside for 
outlier payments, but actually removing money from the system.
    Second, and most important, Temple strongly disagrees with 
provisions in the proposed rule calling for an immediate 
implementation of the new system with no transition period.
    To repeat, we do not argue the administrator's right to 
change the rules, nor the general tenor of the proposed 
changes. However, we strongly urge the inclusion of a 
transition period to the new system to preserve the continuity 
of services at those hospitals that would be most affected by 
the new rules. Temple, like other providers, has budgeted for 
and is operating under the current rules of the Medicare 
program. A steep drop in an expected payment for outlier cases 
could be financially devastating, resulting in an immediate, 
unplanned loss of millions of dollars for TUHS in fiscal year 
2003, and losses of a similar magnitude in subsequent years. 
Additional cutbacks could create access problems in clinics 
supported by us and our physicians, and lead to the elimination 
of various community outreach efforts. Finally, budget 
shortfalls could curb the delivery of care within TUH hospitals 
by delaying necessary technology enhancements.

                           prepared statement

    In conclusion, Temple University Health System is committed 
to working with CMS to ensure the successful implementation of 
a new outlier policy. However, we believe that an immediate 
transition to these rules would excessively harm many 
hospitals, hospitals that have not violated the law, and 
provide indispensable services to key communities around the 
country. We ask only for the time to adjust to a new system.
    Mr. Chairman, thank you for the opportunity to testify on 
this important matter, and for your leadership on this issue.
    Thank you.
    [The statement follows:]
                Prepared Statement of Joseph W. Marshall
    Mr. Chairman, Members of the Subcommittee, thank you for the 
opportunity to testify today, and thank you for holding this hearing.
    Temple University Health System \1\ (TUHS) is a cornerstone of the 
health care delivery system in North Philadelphia and the surrounding 
region. In 2001, TUHS treated 1.2 million patients through its 
hospitals and physicians. To put this in perspective, the population of 
Philadelphia and the surrounding five county area is approximately 3.85 
million. On any given day, approximately 500 people utilize the 
services of TUHS emergency rooms and an additional 1,700 people present 
for non-emergent ambulatory services. Additionally, as one of the 
largest private employers in the city of Philadelphia, the Health 
System plays a vital role in the local economy. In fiscal year 2002, 
TUHS employed over 7,500 full-time employees and paid over $264 million 
in salaries, and an additional $64 million in benefits.
---------------------------------------------------------------------------
    \1\ Temple University Health System consists of: Temple University 
Hospital, Temple University Children's Medical Center, Temple 
University Hospital--Episcopal Campus, Jeanes Hospital, Northeastern 
Hospital, TUHS Physicians primary care network.
---------------------------------------------------------------------------
    Like many health systems today, Temple faces numerous pressures 
threatening the financial viability of our member institutions. These 
include steadily rising labor costs, and dramatic increases in costs 
for liability insurance and medical supplies, most notably blood and 
drugs. The cost of malpractice liability insurance alone has nearly 
doubled since 2001 (from approximately $33 million system-wide to a 
projected cost of nearly $62 million in 2003.) Temple has also been 
subjected to pressures from both private and public payers, including 
the long-term effects of the Balanced Budget Act on Medicare payments 
to hospitals.
    In addition, as a system that serves some of Philadelphia's poorest 
neighborhoods, Temple is the provider of last resort for many patients. 
Consequently, Temple is one of the largest providers of free and under-
reimbursed care in the Commonwealth. In fiscal year 2002, Temple 
provided more than $80 million in uncompensated care system-wide, which 
represents a $12 million increase over the previous year. In this time 
of constrained federal and state budgets, it is reasonable to expect 
that there will be little or no abatement in the need for these 
services. Make no mistake, this is a responsibility that Temple proudly 
shoulders, but one that adds significantly to the list of financial 
pressures that we face.
    The bottom line is that Temple University Health System showed an 
operating loss of $50 million for the fiscal year ending June 30, 2002.
                   tuhs and medicare outlier payments
    In the face of this severe financial challenge, the health system 
has a responsibility to explore every means possible to ensure that we 
continue to provide quality healthcare to our communities. In recent 
years, Medicare outlier payments, which help offset the costs of 
treating high-cost patients, have become an increasingly important 
component in Temple's ability to meet that obligation.
    It is important to note that the increased payments to Temple for 
outliers were the result of accepted practices that were completely 
within the rules of the Medicare program at the time. The funding 
Temple receives from Medicare outlier payments has become critical to 
our ability to carry out our mission in Philadelphia.
    Last fall, the Centers for Medicare and Medicaid Services (CMS) 
announced its intention to drastically alter the current outlier 
reimbursement formula. Recently, a proposed rule appeared in the 
Federal Register announcing the proposed changes and providing for a 
30-day period during which affected parties may comment on the rule. 
Temple is grateful that CMS and the Administration have decided to 
consider input from the hospital community in developing this policy 
and will be submitting its concerns in writing regarding the rule 
shortly.
    Temple respects the decision of CMS to take these actions and will 
work with CMS and our local Fiscal Intermediary to successfully 
implement the new system. However, Temple believes that there are two 
areas where the rules must be improved.
  --First, we urge CMS to reconsider its decision not to lower the 
        fixed-loss threshold amount from its current level of $33,560. 
        Lowering the outlier threshold would allow more hospitals to 
        receive payments to help offset the costs of treating high-cost 
        patients and would help mitigate the effects on many hospitals, 
        like Temple University Hospital, that will otherwise see 
        outlier payments drop dramatically. Further, by maintaining the 
        fixed-loss threshold at this historically high level, the 
        effect of the rule is that CMS is not merely redistributing the 
        existing funding set aside for outlier payments, but actually 
        removing funding from the system.
  --Second, and most important, Temple strongly disagrees with 
        provisions in the proposed rule calling for an immediate 
        implementation of the new system with no transition period.
    To repeat, we do not argue the Administrator's right to change the 
rules, nor the general tenor of the proposed changes. However, we 
strongly urge the inclusion of a transition period to the new system to 
preserve the continuity of services at those hospitals that would be 
most affected by the new rules.
    Temple, like other providers, has budgeted for, and is operating, 
under the current rules of the Medicare program. A steep drop in 
expected payment for outlier cases could be financially devastating, 
resulting in an immediate, unplanned loss of millions of dollars for 
TUHS in fiscal year 2003, and losses of a similar magnitude in 
subsequent years.
    We believe that this funding is essential to the ability of our 
hospital, which is already pushed financially, to deliver high-quality 
care. The immediate loss of Medicare dollars on top of substantial cuts 
in IME, physician reimbursement, and Medicaid and General Assistance, 
coupled with spiraling costs such as malpractice insurance, nursing 
salaries, and drugs would require a dramatic rethinking of our mission.
    TUHS cannot sustain the immediate loss of Medicare reimbursement of 
this magnitude. TUHS strives to provide the highest quality of care, 
physician training, and research, in the most difficult financial 
environment we have ever faced. The impact of these additional 
pressures could be severe. Potentially, TUHS could be forced to cut 
staff, and curtail services, particularly in the regional trauma center 
and the emergency room setting where TUHS provides the greatest amount 
of free care.
    Additional cutbacks could create access problems in clinics 
supported by TUHS physicians and lead to the elimination of various 
community outreach efforts. Finally, budget shortfalls could curb the 
delivery of care within TUHS hospitals by delaying necessary technology 
enhancements.
    Phasing in these changes, preferably over the course of several 
fiscal years, would ameliorate the effect on those hospitals that would 
be most severely affected by the new rules and prevent possible 
disruptions in service.
    CMS has a long history of utilizing phase-in periods to implement 
changes in payment policy for this very reason; perhaps the most 
notable example being the transition from cost-based payment for 
inpatient hospital services to the current DRG-based prospective 
payment system.
    We believe that a similar approach is warranted in this instance. 
If a revised outlier policy is implemented without a transition period, 
it will have a punitive effect on our system, and ultimately our 
patients. Further, because outlier payments are made from a fixed pot 
of funds, we would urge that any transition scheme be implemented in a 
non-budget neutral manner with an infusion of new Medicare funds to 
ensure that the burden for insuring continuity of services does not 
fall disproportionately on individual facilities. If CMS is not 
prepared to provide for a transition period, we would urge that the 
Congress take steps to pass legislation requiring that CMS do so.
                               conclusion
    Temple University Health System is committed to working with CMS to 
ensure the successful implementation of a new outlier policy. However, 
we believe that an immediate transition to these rules would 
excessively harm many hospitals, hospitals that have not violated the 
law and provide indispensable services to key communities around the 
country. We ask only for the time to adjust to a new system. Mr. 
Chairman, thank you for the opportunity to testify on this important 
matter and for your leadership on this issue.

    Senator Specter. Thank you very much, Mr. Marshall.
STATEMENT OF GAIL WOLF, SENIOR VICE PRESIDENT AND CHIEF 
            NURSING OFFICER, UNIVERSITY OF PITTSBURGH 
            MEDICAL CENTER
    Senator Specter.We now turn to Dr. Gail Wolf, senior vice 
president and chief nursing officer for the University of 
Pittsburgh Medical Center. She also serves as executive 
director of the Beckwith Institute for Innovation of Patient 
Care, which she founded in 1989. Dr. Wolf has her baccalaureate 
in nursing from West Virginia University, her master's from 
University of Kentucky, and her doctorate in nursing 
administration and organizational psychology from Indiana 
University.
    Thank you for coming today, Dr. Wolf, and we look forward 
to your testimony.
    Dr. Wolf. Thank you, Senator. Thank you for the invitation 
to testify. As you said, I am the senior vice president and 
chief nursing officer for the University of Pittsburgh Health 
System. The UPMC Health System, located in Pittsburgh, is an 
integrated health delivery system comprised of 19 acute care 
hospitals. We care for approximately 165,000 hospitalized 
patients annually, and are the largest employer in Western 
Pennsylvania. My job is to oversee patient care and nursing 
practice throughout the entire system. I have been a nurse for 
more than 30 years, and it is from that perspective that I 
would like to speak with you today on the issue of patient 
outliers.
    We all know that patients in our hospitals today are 
sicker, largely due to advances in medical technology that is 
available today. At UPMC Presbyterian, which is our flagship 
academic health center, we see patients that are the sickest of 
the sick. People come to us from all over the world because 
they have medical conditions that cannot be treated elsewhere. 
We have currently patients in our intensive care units that 
would not have been alive 5 or 10 years ago, many of whom 
recover to lead productive lives. Because they are so ill, 
however, it often takes them longer to recover than the DRG 
time allowed for average cases and, thus, they become outliers, 
as we have heard today.
    To illustrate the gravity of the problem, however, I would 
like to share two examples of patients who are sitting in our 
ICUs as we speak. The first is Mr. B, who is a 57-year-old 
retired farmer from West Virginia. He came to us for treatment 
of advanced heart failure. This is a condition that can be 
caused by a heart attack, high blood pressure, or just 
weakening of the heart muscle. Heart failure affects over 6 
million Americans, and it is the most frequent discharge 
diagnosis for Americans aged 65 and older.
    In this case, Mr. B's heart failure was so advanced that he 
was totally unable to function due to his illness. While he was 
hospitalized with us, Mr. B developed ventricular tachycardia, 
which is a lethal heart rhythm that is pretty common in heart 
failure. He went into cardiac arrest. We successfully 
resuscitated him and implanted a permanent internal cardiac 
defibrillator and pacemaker so that if his heart failed again 
he would not suffer the dire consequences.
    The average length of hospitalization for heart failure is 
4.2 days, and in many cases that is adequate. However, in this 
extreme case, Mr. B had been hospitalized 9 days to undergo 
treatment for his condition.
    Now, this gentleman was a great patient, in that he learned 
and did everything he could possibly do himself to help manage 
his disease. He followed all of his instructions, he took all 
of his medications, but despite all of his and our efforts, he 
continued to deteriorate, and ultimately he needed an 
artificial heart device and subsequent heart transplant to stay 
alive. He was a fortunate one, in that he received a new heart 
after just a few months. Today, he is a new man, full of 
energy, up and about, cannot wait to get back to West Virginia 
for the snow to melt and get back to his garden.
    The second example I want to share with you is Mrs. B, who 
is a 32-year-old mother of two young daughters. She is a 
college graduate who works with the deaf. At age 13, she had 
been diagnosed with cancer of the kidney. Over the years, 
complications of her disease left her with liver damage and 
only about 30 inches of intestine. She went on disability, and 
eventually came to UPMC for a multivisceral transplant, which 
includes the stomach, duodenum, pancreas, and small bowel.
    While waiting for organ donation, Mrs. B developed acute 
liver failure and actually was the sickest patient I have ever 
seen. Fortunately, suitable organs were found in time, and she 
underwent a successful transplant of multiple organs. The 
allowed length of stay for this type of patient is 41\1/2\ 
days. However, in this extreme situation she was hospitalized 
for 60 days, due to the critical nature of her illness. Today, 
she is doing well, and ready to return to her children and her 
active life.
    I use these examples to illustrate how difficult it is for 
us to manage diseases by numbers. The proposed outlier policy 
penalizes hospitals like UPMC Presbyterian and others, that 
take on the toughest cases. Academic medical centers like ours 
have high outlier numbers because we are the only true academic 
center in western Pennsylvania and see the sickest patients. 
These are not average patients, and an arbitrary threshold is 
difficult to quantify the cost of their care in advance.
    In addition to patient intensity, geographic location will 
also determine the percentage of outliers an organization sees. 
In some areas such as Boston, or even here in Washington, there 
are multiple trauma and transplant centers to share the burden 
of outliers, but where there is a sole provider of those 
services, one would expect higher outlier percentages.
    Both of the patients I have described became outliers. 
Their care was not inexpensive, but it was necessary, and it 
saved their lives.
    Mr. Chairman, in conclusion, I hope that the committee will 
work with CMS to take into account these special patients when 
commenting on the new CMS outlier rule. Thank you.
    [The statement follows:]
                    Prepared Statement of Gail Wolf
    Good morning. My name is Gail Wolf, and I am the Senior Vice 
President and Chief Nursing Officer for the University of Pittsburgh 
Health System. The UPMC Health System is an integrated health care 
delivery system comprised of 19 acute care hospitals. We care for 
approximately 165,000 patients annually, and are the largest employer 
in Western Pennsylvania.
    My job is to oversee patient care and nursing practice throughout 
the system. I have been a nurse for more than 30 years, and it is from 
that perspective that I would like to speak to you today on the issue 
of patient outliers.
    At UPMC Presbyterian, which is our flagship academic health center, 
we see patients that are the sickest of the sick. People come to us 
from all over the world because they have medical conditions that could 
not be treated elsewhere. We currently have patients in our intensive 
care units that would not have been alive 5 or 10 years ago--many of 
whom recover to lead productive lives. Because they are so ill, 
however, it often takes them longer to recover than the DRG time 
allowed for average cases, and thus they become outliers.
    To illustrate, I would like to share two examples of patients 
sitting in our ICU today. The first is Mr. B, a 57-year-old retired 
farmer from West Virginia. He first came to us for treatment of his 
advanced heart failure, a condition caused by heart attacks, high blood 
pressure, or just weakening of the heart muscle. Heart Failure affects 
over six million Americans and is currently the most frequent discharge 
diagnosis for Americans age 65 or older. Mr. B's heart failure was so 
advanced that he was unable to function.
    While hospitalized, Mr. B developed ventricular tachycardia, which 
is a lethal heart rhythm common in heart failure. He went into cardiac 
arrest. We successfully resuscitated him and inserted a permanent 
internal cardiac defibrillator/pacemaker to prevent it from happening 
again. The average length of hospitalization for heart failure is 4.2 
days. However, in this extreme case Mr. B had been hospitalized 9 days 
to undergo treatment for his condition.
    Mr. B was a great patient in that he learned and did everything he 
could possibly do to manage his disease. But despite all his and our 
efforts, he continued to deteriorate and ultimately needed an 
artificial heart device and subsequent heart transplant to stay alive. 
Mr. B was fortunate in that he received a new heart after just a few 
months. Today he is a new man--full of energy, up and about, and 
anxiously waiting for the snow to melt so he can get back to his 
garden.
    The second example is Mrs. B, a 32-year-old mother of two young 
daughters. She is a college graduate who works with the deaf. At age 13 
she had been diagnosed with cancer of the kidney. Over the years, 
complications of her disease left her with liver damage and only about 
30 inches of intestine. She came to UPMC for a multivisceral 
transplant, which includes the stomach, duodenum, pancreas and small 
bowel.
    While waiting for organ donation, Mrs. B developed acute liver 
failure and was sicker than any patient I have ever seen. Fortunately 
suitable organs were found in time and she underwent a successful 
transplant of multiple organs. The allowed length of stay for this type 
of patient is 41.5 days; however in this extreme situation Mrs. B. was 
hospitalized for 60 days due to the critical nature of her illness. 
Today, however, she is doing well and is ready to return to her 
children and resume her active life.
    I used these examples to illustrate how difficult it is to manage 
diseases by numbers. The proposed outlier policy penalizes hospitals, 
like UPMC Presbyterian, that take on the toughest cases. Academic 
medical centers like UPMC Presbyterian have high outlier numbers 
because they see the sickest patients. These are not average patients, 
and an arbitrary threshold cannot quantify the cost of their care in 
advance.
    Both these patients I described became outliers. Their care was not 
inexpensive, but it was necessary--and it saved their lives. Mr. 
Chairman, I hope that the committee will work with CMS to take into 
account these special patients when commenting on the new CMS outlier 
rule.

    Senator Specter. Thank you very much, Dr. Wolf.
STATEMENT OF ANDREW WIGGLESWORTH, PRESIDENT, DELAWARE 
            VALLEY HOSPITAL ASSOCIATION
    Senator Specter. Our next and final witness is Andrew 
Wigglesworth, president of the Delaware Valley Healthcare 
Council, which represents and advocates for more than 150 
hospitals, health systems, and health-related organizations in 
southeastern Pennsylvania, southern New Jersey, and Delaware. 
He is also president and CEO of the Philadelphia International 
Medicine, received his B.A. in international relations from 
American University. Thank you for joining us, Mr. 
Wigglesworth. The floor is yours.
    Mr. Wigglesworth. Mr. Chairman, members of the 
subcommittee, I want to commend you for holding this hearing 
and appreciate the opportunity to present our views on the 
proposed changes to the outlier payment policies. I have 
submitted fairly lengthy testimony which I will try to 
summarize in the interest of time.
    Senator Specter. That will be made a part of the record, 
Mr. Wigglesworth. I have been advised since this hearing began 
that there is going to be a vote at 10:30. We are moving ahead 
on the nomination of Mr. Miguel Estrada, and the majority 
leader is summoning all Senators to the floor for that 
proceeding, but we have ample time, so proceed.
    Mr. Wigglesworth. Okay. I will be especially fast, Mr. 
Chairman.
    I think while we all agree on the need to reexamine and 
address any unintended consequences of the current outlier 
policy, the council and its member organizations are deeply 
concerned with respect to the method, timing, and overall 
impact of the proposed rule published on March 5, last week, by 
the Centers for Medicare and Medicaid Services. In its rush to 
judgment, CMS has made serious allegations about the conduct of 
community institutions, as well as appeared to initiate it and 
then did not wait for the results of its own audit process for 
determining whether inappropriate activity has even taken 
place, or what specific policies should be developed.
    More important, CMS is seeking to implement a remedy that 
(1) represents a fundamental shift in payment policies that 
Congress ought to be involved in and could, in fact, exceed its 
statutory authority, and (2) creates an administratively 
burdensome and potentially unworkable process for 
retrospectively reconciling payments and (3) will create 
immediate and, in some cases, unsustainable financial harm to 
certain hospitals that could jeopardize the access to needed 
services for Medicare beneficiaries as well as all other 
payments. We believe that the policy changes embodied in the 
proposed rule should be fully evaluated and any changes that 
have adverse financial implications should be phased in over a 
reasonable transition period.
    In short, Mr. Chairman, the rule as proposed will not only 
hurt institutions, it really does not help all others, as Mr. 
Harkin was suggesting in his concerns, because of the way it is 
constructed in not reducing the outlier threshold level.
    As was discussed by Mr. Scully, outlier payments are a 
critical component of any payment system based on averages. 
This system was established over 20 years ago, as the Medicare 
program moved from cost-based reimbursement to prospective 
reimbursement. The Congress intended that these additional 
payments limit financial risk to hospitals and diminish any 
financial incentive for hospitals to avoid treating elderly 
patients with serious illness. The outlier payments partially 
reimburse hospitals for the losses that they incur in treating 
high-cost patients and, as was suggested, are funded by 
reducing total PPS payments by 5 to 6 percent.
    As Mr. Scully pointed out, over the years, CMS has not been 
able to hit the outlier target consistently and, in fact, 
mentioned from 1997 onward the payments were over. Well, prior 
to 1997, all the payments were generally under, so there is a 
consistent track record of not being able to hit the outlier 
target, and it is due in part, obviously, to the complexity of 
this whole process, which is contributing to some of the 
problems that have been discussed here today.
    CMS has taken actions over the past several months. One, as 
you mentioned earlier, Mr. Chairman, they increased the 
threshold to $33,560. That was a 59 percent increase over the 
previous year. They also issued several program memoranda and 
initiated, as I referenced to earlier, a series of audits that 
all the fieldwork will be completed no later than July 1, 2003. 
They hope to have the whole process completed by July 31, 2004, 
and I guess as such, the principal point we would want to make 
here is, in terms of their whole audit process, none of the 
results are available that would either support or refute the 
allegations of abuse in terms of this program.
    I think in terms of moving to the regional impact, as you 
know, Mr. Chairman, Philadelphia is home to one of the largest 
concentrations of medical and health care expertise in the 
world. Life sciences is really the future of the economy of 
southeastern Pennsylvania. Hospitals and health systems in that 
region, there are over 100, 5 medical schools that train nearly 
a quarter of the Nation's physicians. The outlier proposal as 
before you, or as before, in the proposed rule, would reduce 
payments to hospitals in the Greater Philadelphia area by an 
amount in excess of $100 million, and this is coming in the 
context of an environment that you mentioned before, where 
medical professional liability costs are skyrocketing, the 
State budget has just been reduced in a significant way for 
Medicaid payments, which will reduce payments to hospitals in 
that region by another $120 million.
    In short, the institutions in southeastern Pennsylvania are 
in no position at this time to absorb a sudden and immediate 
reduction in outlier payments. In effect, the agency is, 
through the proposal--while there is a 30-day comment period 
would, in effect, be like switching a light switch in terms of 
cutting off a significant flow of dollars to this region.
    In terms of the recommendations, Mr. Chairman, I think, 
again, we understand that CMS has legitimate policy concerns 
about the unintended consequences. However, the concerns that 
CMS was trying to address were identified actually over a 
decade ago, and there were comments, and CMS actually--and 
included in my testimony is the response to those comments, and 
CMS has been following, by increasing the outlier threshold, 
the response that they identified as far back as 1989.
    Now, the proposed solution that they are proposing I think 
may have some equally significant unintended consequences. As I 
mentioned, just the manner and timing of the proposed policy 
will impact on the ability of hospitals to serve Medicare 
beneficiaries and their communities. No one wants this outcome. 
We urge the subcommittee to encourage CMS to consider the 
following recommendations:
    Provide for a transition period. As has been mentioned 
before, and as you mentioned, Mr. Chairman, in every other 
major policy change, CMS and/or the Congress has provided a 
transition period, and as Mr. Scully mentioned before, AHA has 
weighed in on this matter. AHA strongly supports, on behalf of 
all hospitals across the country, a reasonable transition 
period with respect to this proposed change.
    Second, we would like to see the proposed rule include a 
reduced threshold level. By remaining at $33,560, in effect, it 
is unclear as to whether or not the agency will actually spend 
the minimum amount, or 5.1 percent, that it is supposed to 
spend on outlier payments.
    Third, we would also like to see the elimination of the 
retrospective, really, reconciliation of cost-to-charge ratios 
that is included in the rule, and this is where there is a 
major policy change. In effect, they are turning the outlier 
payment as part of a prospective payment system in effect into 
a retrospective payment system, because hospitals and the 
fiscal intermediaries would have to engage in a process where 
they would have to reconcile and reprocess claims several times 
as the cost reports are finally settled. We believe that this 
is an unworkable process that will lead to a very burdensome 
administrative process and, again, may, in fact, exceed their 
fundamental authority.

                           prepared statement

    Mr. Chairman, in conclusion, again we want to thank you for 
the opportunity to testify on this important public policy. The 
proposed rule will have a severe impact on the Greater 
Philadelphia area, as well as other parts of the Commonwealth 
and the Nation. We appreciate your help in trying to ensure the 
hospitals in our region are able to continue to provide 
services the public expects and deserves.
    I would be happy to answer any questions you may have.
    [The statement follows:]
              Prepared Statement of Andrew B. Wigglesworth
    Mr. Chairman and members of the Subcommittee, my name is Andrew 
Wigglesworth and I am president of the Delaware Valley Healthcare 
Council (DVHC). The DVHC is located in Philadelphia and has 150 member 
hospitals, health systems, and other health related organizations in 
Southeastern Pennsylvania, Southern New Jersey, and Delaware. The 
mission of the Council is to help member organizations improve the 
health status of their community and to exercise leadership in 
reforming our health care system. Mr. Chairman we commend you for 
holding this hearing and appreciate the opportunity to present our 
views on the proposed changes to the Medicare outlier payment policies.
    While we all agree with the need to re-examine and address any 
unintended consequences of the current outlier policy, the Council and 
its member organizations are deeply concerned with respect to the 
method, timing and overall impact of the Proposed Rule published on 
March 5, 2003 by the Center for Medicare and Medicaid Services (CMS). 
In its rush to judgment, the CMS has made serious and unsupported 
allegations about the conduct of many community institutions as well as 
appears to have initiated and then did not want for the results of its 
own audit process for determining whether any inappropriate or illegal 
activity even has taken place and what specific policies should be 
developed.
    More important, CMS is seeking to implement a remedy that: (1) 
represents a fundamental shift in payment policies that may exceed its 
statutory authority; (2) creates an administratively burdensome and 
potentially unworkable process for retrospectively reconciling 
payments; and (3) will create immediate and in some cases unsustainable 
financial harm to certain hospitals that could jeopardize access to 
needed services for Medicare beneficiaries as well as all other 
patients. We believe the policy changes embodied in the proposed rule 
should be fully evaluated and that any changes that have adverse 
financial implications should be phased in over a reasonable transition 
period.
    Outlined below is a detailed discussion of the Medicare Outlier 
program, the Proposed Rule and our concerns.
                               background
    The Medicare program provides for payments in addition to the basic 
prospective payments for cases involving extraordinarily high costs, 
referred to as ``outlier'' cases. Outlier payments are a critical 
component of any payment system based on averages. Twenty years ago, 
when the Medicare program moved from cost based reimbursement to a 
prospective payment system (PPS), Congress created these additional 
payments to limit hospitals' financial risk and to diminish any 
financial incentive for a hospital to avoid treating elderly patients 
with especially serious illness. The outlier payments partially 
reimburse hospitals for losses they incur in treating high cost 
patients and are funded by reducing total inpatient PPS payments by 5 
to 6 percent.
    Although the statute requires an outlier pool of between 5.0 
percent and 6.0 percent of total estimated DRG payments, it does not 
establish any criteria for deciding the pool size within those limits, 
and CMS presumably has the authority to adopt any non-arbitrary 
policy.\1\ The size of the pool within the permitted range affects the 
distribution of payments among hospitals, since some hospitals tend to 
have larger numbers of outlier cases than others, larger outlier pools 
and their related payments distribute more money to those hospitals 
with more complex and costly caseloads, while a smaller outlier pool, 
and the resulting larger regular PPS payments, favors those hospitals 
with caseloads of average complexity and cost.
---------------------------------------------------------------------------
    \1\ American National Health Lawyers Association, Medicare Law, 
First Edition (March 2001), at pg. 62.
---------------------------------------------------------------------------
    Initially, the outlier pool was established at 6.0 percent, the 
statutory maximum, in order to provide hospitals the greatest possible 
insurance against costly cases. For the second year of PPS, however, 
the policy was reversed, and the pool was established at the statutory 
minimum of 5.0 percent in order to provide greater payments for typical 
cases. That pool size was continued until 1988, when the pool was 
increased to 5.1 percent to accommodate the statutory amendment that 
increased payments for burn case outliers without changing the 
thresholds for the other types of cases.\2\ The pool has remained at 
5.1 percent since then.
---------------------------------------------------------------------------
    \2\ SSA Sec. 1886(d)(3)(B), 42 U.S.C. Sec. 1395ww(d)(3)(B), 42 
C.F.R Sec. ----------.
---------------------------------------------------------------------------
    Any case for which costs exceed the PPS payment amount plus an 
additional fixed dollar amount, called a ``threshold,'' qualifies as a 
cost outlier entitled to extra payment. CMS computes the threshold 
based on past experience, seeking to make the outlier payments exactly 
equal to the size of the outlier pool that has been set aside. Each 
year the PPS Rule states the dollar amount of costs that must be 
exceeded to qualify for cost outlier payments. Once the threshold is 
set for the year, all cases meeting the criteria receive outlier 
payments, with the result that the total amount of the outlier payments 
actually made may be greater or less than the size of the pool 
depending on the accuracy of the original estimates.
    To identify outlier cases, the Medicare Fiscal Intermediary 
compares the estimated cost for a case to the DRG specific fixed loss 
threshold. Because hospitals cannot calculate costs on a case-by-case 
basis, the fiscal intermediary uses Medicare charges the hospital 
reported on its claim to estimate the cost of a case. The intermediary 
arrives at the cost estimate by multiplying the covered charges by the 
hospitals cost-to-charge ratio (CCR) from the most recently settled 
cost report, which is often several years old. Under current CMS 
policy, if the hospital CCR is more than 3 standard deviations above or 
below the statewide average CCR then the statewide average is used. The 
policy of substituting the statewide average CCR was adopted in 1989 to 
address CMS's concern that ``. . . . ratios falling outside this range 
are unreasonable . . . probably due to faulty data reporting or entry. 
Therefore, they should not be used to identify or pay cost outliers.''
    From an overall perspective, CMS has not estimated the outlier 
thresholds correctly since the initial implementation of PPS, and 
repeatedly has paid more or less than that which was contemplated. This 
outcome has led to requests that the funds not spent from the outlier 
pool be distributed in the form of higher payments in following years. 
CMS rejected this approach, stating that the statute requires estimates 
that are binding whether subsequent events lead to greater or lesser 
outlier payments than originally predicted. CMS's position was upheld 
in a court challenge.\3\
---------------------------------------------------------------------------
    \3\ See County of Los Angeles v. Shalala, 192 F.3d. 1005 (D.C. Cir. 
1999).
---------------------------------------------------------------------------
                 recent cms outlier related activities.
    CMS, through the authority granted it in accordance with Section 
1886(d)(3)(B) of the Social Security Act, made revisions to the 
methodologies used in establishing outlier thresholds for Federal 
fiscal year 2003.\4\ This change increased the fixed cost outlier 
eligibility threshold from $21,025 to $33,560, an increase of 59.6 
percent. These revisions were expected to address the issue created by 
the increases hospital charges and the effect on Medicare outlier 
reimbursement.
---------------------------------------------------------------------------
    \4\ 67 Fed. Reg. 49981 (Aug. 1, 2002).
---------------------------------------------------------------------------
    In November 2002, CMS officials made a number public statements 
about ``fraud and abuse'' in connection with the existing cost outlier 
reimbursement mechanism, and that CMS would be launching a review of 
hospitals nationwide.
    On December 3, 2002, CMS issued Program Memorandum A-02-122 to 
Medicare fiscal intermediaries, which stated CMS' belief that some 
hospitals may be attempting to ``game'' the current outlier payment 
systems for the purposes of maximizing payment. This Program Memorandum 
launched a nationwide review of hospitals to determine whether and to 
what extent hospitals have sought to increase Medicare reimbursement 
for cost outliers by increasing aggregate charges.
    On December 20, 2002, CMS issued Program Memorandum A-02-126 to 
Medicare fiscal intermediaries, which provided instructions to perform 
data analyses to identify those hospitals that ``appear to present the 
greatest risk to the program''. This Program Memorandum sets forth the 
scope of claims audit(s) to be performed for those hospitals that meet 
or exceed the thresholds established in the data analysis. Engagement 
letters for all providers subject to audit were to be issued by January 
13, 2003. The audits were required to be scheduled so that fieldwork 
for some audits could start by February 1, 2003. Fieldwork for all 
audits must be scheduled to start no later than July 31, 2003. The 
Program Memorandum further states that CMS anticipates that this work 
will be completed on a flow basis with the entire sample being 
completed by July 31, 2004.
    As such, no results are available at this time that would either 
support or refute CMS' allegations of fraud and abuse of the outlier 
program.
                             proposed rule
    On March 5, 2003, CMS issued the Proposed Rule that would change 
the methodology for determining Medicare cost outlier reimbursement. 
Under the Proposed Rule, the outlier policy would change in the 
following key ways:
  --The cost-to-charge ratios (CCR) from the latest tentative settled 
        cost reports at the time the claim is processed would be used 
        instead of the CCR from the most recently settled cost report. 
        The proposal would also provide for an adjustment to the CCR 
        for hospitals with high charge increases.
  --The statewide average CCR would no longer be used in place of the 
        hospital's actual CCR when the hospital's actual CCR is more 
        than three standard deviations below the geometric mean. 
        However, the statewide average CCRs would still apply in those 
        cases where a hospital's operating or capital CCR exceeds the 
        upper threshold or where a hospital has not yet filed its first 
        Medicare cost report.
  --Outlier payments would be subject to retrospective reconciliation 
        when the cost report corresponding with the outlier cases is 
        settled, by using the actual CCR calculated from the final 
        settled cost report rather than the one from the latest 
        tentative settled cost report at the time the claim is 
        processed. Importantly, the details of the process required to 
        implement this retrospective settlement are not specified. At 
        the time of settlement, any overpayment or underpayment would 
        be adjusted for the time value of money during the intervening 
        period.
    The proposed rule does not provide a transition for outlier 
payments and does not lower the outlier threshold, which remains at 
$33,560. In spite of decreased outlier payments to providers, CMS and 
the Office of Management and Budget decided not to decrease the outlier 
thresholds until data is available to assess actual payments. CMS 
indicates that a change might be possible after first quarter 2003 data 
is available.
                             dvhc comments
    As you know Mr. Chairman, CMS has asserted that the use of the 
statewide average cost-to-charge ratio to calculate outlier payments 
for hospitals with cost-to-charge ratios below the statewide average is 
the primary concern. Despite the fact that the potential problem with 
this methodology was brought to the agency's attention over a decade 
ago, CMS has now decided that an abrupt, mid year change in policy is 
warranted regardless of the consequences for hospitals.
    Mr. Chairman, we believe this is the wrong way to change public 
policy and represents a significant departure from the process both 
Congress and CMS have used in the past to make major Medicare payment 
policy changes that have adverse financial implications for 
participating providers or health plans. As the members of the 
Subcommittee know, the federal government has very significant 
enforcement powers and legal remedies to take immediate action in cases 
involving allegations of fraud or other illegal activities. In fact, 
according to press accounts the federal government already has filed 
suit and entered into a voluntary agreement to suspend certain outlier 
payments with a California based organization.
    However there is no current evidence to suggest that all hospitals 
that benefited from the current outlier methodology engaged in fraud or 
other illegal activities. Quite the contrary as the audits conducted by 
the agency at a number of hospitals in New England did not result in 
any allegations of inappropriate, much less illegal, actions related to 
outlier payments. It raises a question as to why the agency has now 
decided to proceed with immediate changes over a year before its 
nationwide outlier audit process is scheduled to be completed.
    It is clear that CMS officials don't like the current outlier 
policy and believe it has had unintended consequences. But it is 
possible that even greater unintended consequences will occur by making 
radical changes to a decade old public policy with little external 
input or analysis on an immediate basis--like flipping a light switch--
in the middle of a fiscal year.
    As we all know too well, the Medicare program and its payment 
methodologies have become incredibly complex. In the past, both 
Congress and/or CMS have provided for transition periods to implement 
major policy changes. For example, the Medicare program originally 
included provisions for ``length-of-stay'' or ``day'' outliers. In 
1995, length-of-stay or day outliers were phased out over a three year 
period. Similar transitions have been provided for policy changes in 
many other areas including medical education payments, outpatient 
payments, and changes in the wage index formula.
    In another area that perhaps more closely parallels the core issue 
today, many in the hospital community have long felt that Medicare Plus 
Choice plans are ``overpaid'' when institution specific payments such 
as capital, outliers, medical education, and disproportionate share, 
are included in the calculation of per beneficiary payments to those 
plans. Why should these plans receive Medicare funds intended to help 
cover institution specific expenditures for services to the uninsured, 
medical education or physical plant improvement? The plans don't serve 
the uninsured or train doctors. After a number of years of debate, 
Congress changed the policy to exclude medical education payments from 
the calculation of the payments to plans. But the change did not occur 
overnight in the middle of the fiscal year in a manner that undermined 
the fiscal integrity of the plans. While the policy that gives any of 
these institution specific payments to the plans results in ``over 
payments,'' but it is not fraud . . . it is not illegal . . . rather it 
is bad public policy.
    To the extent that a hospital has uniformly applied its published 
charges to all payors and a decade old Medicare outlier policy results 
in what CMS argues are ``overpayments'' to that hospital, it is a 
flawed public policy, not fraud or illegal activity. Under Medicare 
law, an acute care hospital is not prohibited or otherwise restricted 
from increasing its published charges for patient services (as set 
forth in the hospital's ``chargemaster''). The Medicare program cannot 
dictate to a provider what its charges or charge structure may be, 
though the program may determine whether or not the charges are 
allowable for use in apportioning costs under the program.\5\ Medicare 
law requires hospital charges to be reasonably related to the costs of 
the services rendered, and uniformly applied to all patients.\6\ 
Subject to these conditions being met, there is nothing inherently 
unlawful in a hospital's choice to raise its rates/charges.
---------------------------------------------------------------------------
    \5\ Medicare Provider Reimbursement Manual Sec. 2203 (CMS-Pub.15-
1).
    \6\ Medicare Provider Reimbursement Manual Sec. 2202.4 (CMS-Pub.15-
1). 10
---------------------------------------------------------------------------
    Moreover, CMS has known that there are potential unintended effects 
of the outlier formula for years. In comments to the 1989 Medicare PPS 
Final Rule, HCFA acknowledged that outlier payments could be affected 
by charge increases:

    ``Although concern . . . is appropriate, we believe that there are 
several factors that will mitigate its effects. First, increases in 
hospitals' charges relative to costs will be reflected in the cost-to-
charge ratio assigned to the hospital in the future . . . Second, many 
hospitals are restricted in their ability to arbitrarily increase their 
charges by the fact that they must deal with other third party payers, 
some of which based their payments on charges . . . Third, a general 
acceleration in hospital charge increases can be incorporated into the 
setting of thresholds in future years, which would limit the potential 
benefits to hospitals . . .''----(53 Fed.Reg. at 38509 Sept. 30, 1988).

    Consistent with those comments from 1989, CMS, through the 
authority granted it in accordance with Section 1886(d)(3)(B) of the 
Social Security Act, made revisions to the outlier threshold for 
Federal fiscal year 2003. (67 Fed. Reg. 49981 (Aug. 1, 2002). This 
change increased the fixed cost outlier eligibility threshold from 
$21,025 to $33,560, an increase of 59.6 percent. This level is up from 
$14,050 just three years ago. These revisions were expected to address 
the problem created by the hospital charges increasing at a rate 
greater than hospital costs, and the effect on Medicare outlier 
reimbursement. To date there has been little analysis of the impact of 
increasing the threshold and whether the threshold increase coupled 
with the Proposed Rule will result in aggregate outlier payments of the 
statutorily required 5.1 percent of program expenditures.
    Mr. Chairman, given the history of the Medicare outlier program and 
the prior actions of HCFA/CMS, the federal government itself shares 
much of the responsibility for the problem that is the subject of 
today's hearing and that the Proposed Rule attempts to address. 
However, the proposed rule if adopted will have dramatic consequences 
for many of DVHC's members and the delivery of health care in the 
greater Philadelphia area.
                            regional impact
    The greater Philadelphia area is home to one of the largest 
concentrations of medical and health care resources in the world. In 
addition to being home to the nation's first hospital and first medical 
school, today the region is a global life sciences center.
  --The life sciences sector is the largest single component of our 
        regional economy and health services alone account for over 
        250,000 employees--one in seven jobs.
  --Nearly 100 hospitals and 5 medical schools.
  --Over 100 biotechnology companies
  --Home to 80 percent of the nation's largest pharmaceutical 
        companies.
  --Nearly one in five physicians in the country receives some portion 
        of their training in Philadelphia.
  --One of the top areas in the country in terms of NIH research.
    In short the Philadelphia metropolitan area is more dependent on 
health care as a percentage of its economy than any other major 
metropolitan area in the country.
    Equally important, those impressive statistics do not tell the full 
story, particularly as it relates to the financial stress on our 
hospitals and health systems. Consider a few other statistics:
  --Philadelphia is the largest city in America without a public 
        hospital system and our hospitals provide nearly a half a 
        billion dollars in uncompensated care.
  --The average hospital operating margin is only 0.2 percent.
  --The Philadelphia market is the most highly concentrated payor 
        market in the country where Moody's Investor Service has said 
        payors are dictating prices and driving down hospital revenues.
  --The cost of medical liability coverage is skyrocketing out of 
        control with hospitals spending nearly as much on liability 
        coverage as uncompensated care. The increased cost of liability 
        coverage has resulted in hospital layoffs, loss of physicians, 
        and closure of key services ranging from a trauma center and 
        paramedic units to maternity units.
  --In fact, recruitment of physicians in Southeastern Pennsylvania 
        virtually has been halted due to the liability insurance 
        crisis. In fact, last year out of all residency programs in the 
        area in orthopedics, not one of the graduating students resided 
        in Pennsylvania. Moreover, a recent survey of residents 
        indicated that 82 percent of residents after they completed 
        training would not stay in Pennsylvania due to the current 
        liability environment.
  --The state Medicaid program currently only pays 77 cents on the 
        dollar of care, and in response to the state budget deficit the 
        Governor just announced the elimination of Medicaid payments 
        for outpatient disproportionate share, medical education, and 
        community access funds resulting in the loss of $120 million to 
        hospitals in Southeastern Pennsylvania.
    These are just a few of the stresses on our region's hospitals. And 
like hospitals all across the country we are struggling with workforce 
shortages, the increased costs of disaster preparedness and the 
prospect of further Medicare cuts. It is because of these challenges 
that we are here today. The region's hospitals are extremely fragile 
and in no position to absorb sudden and dramatic mid year cuts in 
Medicare outlier payments.
    According to preliminary estimates, the combination of the increase 
in the outlier threshold adopted last year and the provisions of the 
proposed rule will reduce Medicare payments to our region by over $100 
million dollars. Further, we believe this number is conservative as it 
is very difficult to model the implications of the retrospective 
reconciliation of outlier payments based on cost-to-charge ratios in 
subsequently settled cost reports. At some institutions, the loss of 
these funds will result in layoffs, reduction in services, and impact 
on care for the entire community.
                            recommendations
    Mr. Chairman, we recognize that CMS has legitimate policy concerns 
about the unintended consequences of the current outlier policy. 
However, the concerns CMS is trying to address were identified over a 
decade ago. Now the proposed ``solution'' may have other equally 
significant unintended consequences. In fact, just the manner and 
timing of the proposed policy will impact on the ability of hospitals 
to serve Medicare beneficiaries and their communities. No one wants 
that outcome. We urge this Subcommittee to encourage CMS to consider 
the following recommendations:
    1. Provide for Transition Period.--The CMS should not implement 
Medicare policy changes that have significant adverse financial 
implications for participating providers in the middle of a fiscal year 
with no provision for a reasonable transition period. At the very least 
the proposed changes, including the elimination of the statewide 
average CCR should be considered in the context of the annual PPS rule 
effective October 1, 2003 with provision for a phase out similar to 
other major Medicare policy changes.
    2. Reduce the Threshold Level.--The proposed rule does not lower 
the current outlier threshold. As mentioned previously, the threshold 
has risen from $14,050 to $33,560 in just three years. The current 
threshold should be reduced in tandem with any orderly change that may 
be made to eliminate the use of the statewide average. As proposed, it 
is unclear whether combination of provisions will result in the 
statutory requirements for spending between 5.1 percent and 6 percent 
on outliers will be met.
    3. Eliminate the Retrospective Reconciliation of Cost-to-Charge 
Ratios.--The proposed rule would require individual claims to be 
processed twice over several years as the Medicare cost reports are 
settled. This will be very burdensome, if not impossible from an 
administrative standpoint for Fiscal Intermediaries as well as 
hospitals. Equally important, this policy change will result in further 
unpredictability in payments for hospitals and hinder prudent financial 
management in an era of extremely constrained resources. In addition to 
potentially exceeding the CMS statutory authority, this proposal will 
change a significant part of the prospective payment system into a 
retrospective system. This is a fundamental policy change. Any change 
of this magnitude should be under Congress' purview.
    Finally, in public comments and in the Proposed Rule, CMS officials 
have repeatedly implied that hospitals that benefited under the current 
policy have committed fraud or illegal activity. No one condones fraud. 
If there is evidence of illegal activity by individual organizations, 
the government should use the options available to it to address the 
issue. However, in this instance the vast majority of hospitals did not 
have any deliberate policy to take advantage of Medicare. The 
unintended consequences of bad public policy should not be equated with 
fraud or illegal activities. Moreover this whole issue is indicative of 
how badly the Medicare payment system for hospitals is broken and how 
complex it has become.
    Mr. Chairman, I want to thank you for the opportunity to comment on 
this important public policy issue. The Proposed Rule that will have a 
severe impact on the greater Philadelphia area as well as other parts 
of the Commonwealth and the nation. We appreciate your help in trying 
to ensure that hospitals in our region are able to continue to provide 
services the public expects and deserves. I would be happy to try to 
answer any questions you or the other members of the Subcommittee may 
have.

    Senator Specter. Mr. Scully, thank you for staying to hear 
the testimony. You have heard an impassioned plea, summarized 
by Mr. Wigglesworth, on the impact on southeastern 
Pennsylvania. I think that the issues relate generally and 
nationally, but he makes a pretty strong case about the--
focusing on southeastern Pennsylvania.
    You may have a special interest in that area since, as you 
have already identified, Chester Crozier is your home area 
hospital, notwithstanding the fact that you are a national 
officer. I have a special interest in Pennsylvania and the 
Southeast, notwithstanding the fact that I am a United States 
Senator, and we are concerned about the national policy, but 
Mr. Wigglesworth talks about life sciences being key to the 
area. Life sciences are key to the whole country, and the $100 
billion in loss in revenue is only one facet. The most 
important facet is the quality of care, so how about the 
recommendations which have come from these three witnesses, 
perhaps starting first with the transition period.
    I would urge you, this subcommittee would, and I think 
there would be a lot of support in the Congress, to establish a 
transition period which gives some time to acclimate.
    Before you respond to that, we have not had any specificity 
from our other witnesses. Mr. Marshall, what would you think to 
be an adequate transition period? Let us get the debate 
started.
    Mr. Marshall. About 30 months. That would take us into 3 
fiscal years, that would allow us to readjust.
    Senator Specter. What would you settle for?
    Mr. Marshall. 29.
    Senator Specter. Dr. Wolf.
    Dr. Wolf. I do not have a specific period of time in mind, 
but I think a transition period of at least several years would 
be a good one.
    Senator Specter. Mr. Wigglesworth.
    Mr. Wigglesworth. In terms of the time frame, I could go 
with either one, but at the very least, this whole process 
ought to be put into the regular rule that at least would 
extend it beyond, not have this policy go into effect in the 
middle of a fiscal year, and it should at least go to the next 
fiscal year, and there ought to be a period for an orderly 
phaseout over a number of months, as both the other witnesses 
say.
    I would also add this one other point. I am here 
representing a large number of institutions, some of which 
benefit, some of which are hurt. One thing that everyone is in 
agreement with is that there ought to be, where there is severe 
financial implications, there ought to be a transition period. 
Today, it is outliers. Tomorrow it could be some other major 
policy change, and the agency should not do it mid-fiscal year, 
in effect like switching a light bulb.
    Senator Specter. Well, would each of you submit in writing 
what you would like to see by way of a transition period?
    Mr. Wigglesworth. Absolutely.
    Mr. Marshall. Yes, Senator.
    [The information follows:]
                                UPMC Health System,
                        200 Lothrop Street, Pittsburgh, PA,
                                                     April 1, 2003.

RE CMS-1243-P / Medicare Program; Proposed Changes in Methodology for 
        Determining Payment for Extraordinary High-Cost Cases (Cost 
        Outliers) under the Acute Care Hospital Inpatient Prospective 
        Payment System

Centers for Medicare and Medicaid Services,
Department of Health and Human Services,
ATTN: CMS-1243-P, Baltimore, MD 21244-1850

    Dear Sir or Madam: On behalf of the UPMC Health System (UPMC), we 
are submitting one original and three (3) copies of our comments 
regarding the Centers for Medicare and Medicaid Services (CMS) proposed 
rule, ``Medicare Program; Proposed Changes in Methodology for 
Determining Payment for Extraordinary High-Cost Cases (Cost Outliers) 
under the Acute Care Hospital Inpatient Prospective Payment System'' 
(FR Vol. 68, No. 43 Page 10420-10429, 3/5/03). We hope these comments/
suggestions will be considered before any final guidelines are 
published.
                          general observations
    Even the most modest changes to Medicare payment systems have 
profound effects on providers and Fiscal Intermediaries (FIs). Though 
the proposed changes in methodology for cost outliers appear simple, 
the procedural changes, data requirements, and financial implications 
to making such changes are not. Therefore, we believe that before these 
rules are finalized, CMS should better define the terms, offer guidance 
for different scenarios, add clear explanations for how they should be 
addressed, and ensure consistency between these proposed new rules and 
those already in place.
    Because these changes not only have a financial implication but 
also require process changes for compliance, there should be a phased-
in implementation schedule. Reasonable processes should be set-up and 
tested among the providers, Fiscal Intermediaries (FIs), and CMS to 
make the accounting correct and expeditious. Considering the magnitude 
of both the processing implications, and financial implications, CMS 
should work together with health care providers nationwide to ensure 
that all aspects of Medicare outlier reimbursement are covered. It is 
only in this manner that CMS can ensure the integrity of the Medicare 
Trust Fund, and providers can be assured that they are being 
appropriately compensated for the expense incurred for high cost cases.
    With the sweeping changes being proposed in this rule, the most 
crucial aspect to providers is the maintenance of the fixed-loss 
outlier threshold at the current $33,560 level. Special consideration 
should be given to re-evaluating CMS' position to hold the threshold at 
that level before it is implemented in the final rule.
 specific comments--phase-in of the proposed changes over a transition 
                                 period
Eliminate Statewide Averages (Pg. 10424) and Gradually Reduce Fixed-
        Loss Outlier Threshold (for Inpatient PPS) from $33,560 Level 
        (Pg. 10426)
    CMS has proposed sweeping changes to the calculation and process 
for the payment of Medicare outliers. The proposed changes include:
  --Using more current cost-to-ratios (CCRs) to ensure that outlier 
        payments are made for truly high cost cases.
  --Eliminating the use of the statewide average for hospitals that 
        fall below the range considered reasonable (effective October 
        1, 2002, the low end of the range was 0.194, per Federal 
        Register, August 1, 2002, Vol. 67, No. 148, page 50125) under 
        the current Medicare regulations, using instead the hospital's 
        own specific cost-to-charge ratio.
  --Shifting the Medicare outlier payment from a prospective Medicare 
        payment to a retrospective or ``settled'' item on the Medicare 
        cost report to ensure that the outliers paid are reflective of 
        the high cost cases for that period.
  --Maintaining the fixed-loss threshold at the current $33,560 level 
        to maintain the outlier payments at the estimated 5.1 percent 
        of total payments.
    Comments.--As a Health System, we are in agreement with many of the 
provisions outlined in the proposed rule, such as the use of more 
current cost-to-charge ratios and the elimination of the statewide 
average for hospitals below the range considered reasonable. We are 
also in agreement that hospitals that have worked to game the system 
should be prevented from continuing to receive outlier payments for 
cases that are not high cost cases. The dilemma for the Medicare 
Program is how to prevent excessive payments to those hospitals that 
aggressively set their charges to maximize their Medicare payments for 
outliers, without negatively impacting those hospitals that did not 
engage in such practices.
    Under Program Memorandum A-02-l22, CMS defined excessive charging 
practices as those hospitals that had an increase in average charges 
per Medicare case of 20 percent or more from fiscal year 2000 to fiscal 
year 2001 and fiscal year 2001 to fiscal year 2002. One of our major 
teaching facilities that treats a significant number of high intensity 
cases, which is also being paid under the statewide average provision, 
did not meet the criteria noted above. Their charge increases were not 
excessive as defined by CMS. This facility, as well as all other 
facilities in our Health System, will be significantly impacted by the 
immediate implementation of all of these provisions. In evaluating our 
Health System's financial position, it is projected that our outlier 
payments will now approximate 2.68 percent of total payments (defined 
as the combination of the base DRG plus outlier payments) under the 
proposed provisions. Although we are not in a position to assess the 
impact to healthcare providers nationwide, based upon our own 
Healthcare System, these provisions will most certainly impact the 
financial position of many providers in a similar manner.
    Recommendation.--We would propose to allow a transition period for 
those hospitals that did not engage in aggressive price setting. This 
transition period would entail the following:
  --gradual phase-out of the statewide average for those hospitals 
        below the range considered reasonable.
  --gradual reduction of the fixed-loss threshold from the current 
        $33,560.
  --gradual increase of the marginal cost factor from 80 percent to 100 
        percent as actual costs would be used for the calculations.
    In addition to phasing in the revenue reductions certain to come 
from these proposed provisions, a transition period would afford CMS 
the opportunity to monitor the impacts these provisions would have on 
healthcare providers nationwide, as well as allow providers to adjust 
their operations accordingly. With the implementation of a transition 
period, CMS could then assess the impact these provisions were having 
on the Medicare outlier payments representing 5 percent-6 percent of 
total payments as mandated in Section 1886 (d)(5)(A)(iv) of the Social 
Security Act, giving CMS the opportunity to amend these provisions if 
the Medicare outlier payments drop below the 5 percent level.
   specific comments--individual propose medicare outlier component 
                               revisions
    Regardless of a transition period which we believe is essential, we 
believe that CMS should reconsider the following individual provisions 
outlined in the proposed rule.
Fixed-loss Outlier Threshold (for Inpatient PPS)--Maintain at $33,560 
        Level (Pg. 10426)
    CMS has indicated that they believe the fixed-loss outlier 
threshold should be based on projected payments using the latest 
available historical data without retroactive adjustment, either mid-
year or at the end of the year, to ensure that actual outlier payments 
are equal to 5.1 percent of the total DRG payments.
    Comments.--We are not in agreement with this position and believe 
the $33,560 fixed-loss threshold is too high based on the fiscal year 
2003 data currently available to providers. CMS indicates that outlier 
payments are intended to recognjze the fact that hospitals occasionally 
treat cases that are extraordinarily costly and otherwise not 
adequately compensated under an average-based payment system. CMS needs 
to recognjze that with the limitations established by the proposed 
rule, especially maintaining the fixed loss threshold at $33,560, many 
high cost cases will not be recognized as outlier cases. In the 
treatment of patients, care can't be stopped at a point in time so as 
not to exceed the threshold, and as such, providers will incur the cost 
of the case and not receive the corresponding outlier payment 
compensating them for this cost.
    UPMC Health System is comprised of a number of academic teaching, 
and community hospitals. Utilizing recent claims data and the proposed 
changes in outlier regulations, we estimated our outlier payments as a 
percentage of total payments (combination of the base DRG plus outlier 
payments). Under the provisions of the proposed regulations, outlier 
payments represent 2.68 percent of total payments, significantly below 
the legislative number of 5 percent. Section 1886 (d)(5)(A)(iv) of the 
Social Security Act states the following: ``The total amount of the 
additional payments made under this subparagraph for discharges in a 
fiscal year may not be less than 5 percent nor more than 6 percent of 
the total payments projected or estimated to be made based on DRG 
prospective payment rates for discharges in that year.'' While we 
recognize that our analysis may not be indicative of national data, we 
believe that since a large discrepancy exists within our specific 
system data, CMS should use more current data in assessing the impact 
of the proposed regulation.
    Recommendation.--We believe that section 1886 (d)(5)(A)(iv) of the 
Social Security Act requires CMS to change its fixed loss outlier 
threshold when mid-year changes decrease the total projected outlier 
payments below the 5 percent minimum level. While we realize CMS cannot 
wait for all outlier settlements to be finalized to determine an actual 
5 percent payment level, nor can they accurately project a provider's 
possible charge increases, they should calculate estimated outlier 
recovery projections based upon available federal fiscal 2003 data. 
These estimated outlier recoveries should be factored into the 
development of a new outlier threshold level.
    CMS indicated the data for the first quarter offiscal year 2003 
inpatient claims will be available soon, and that this data may allow 
CMS to evaluate the current threshold and whether outlier payments to 
date appear to be approximately 5.1 percent of the total DRG payment. 
Our recommendation would be for CMS to evaluate that data prior to 
finalizing the proposed rule so as to adjust the fixedloss threshold 
based on current data.
Recalculation of Outlier (Inpatient) Payments at Time of Settlement 
        (Page 10425)
    CMS has proposed a new section Sec. 412.84 (i)(2) which would 
require that outlier payments be subject to adjustment when a 
hospital's cost report is settled. As part of the proposed settlement 
process, the Fiscal Intermediary (FI) would be required to detennine 
the actual operating and capital cost-to-charge ratios (CCRs) based on 
the ratio of costs and settlement charges used on that fiscal year's 
finalized cost report. These audited CCRs would then be applied against 
each Medicare discharge claim to re-compute the final outlier 
reimbursement amount.
    Comments.--While we recognize that this methodology would result in 
a cost outlier payment that is more reflective of the time period for 
which the cost outlier is being paid, we believe that this process 
presents a multitude of issues which need to be addressed. 
Specifically, there are five (5) aspects of this proposed provision 
that we would like to address.
    (1) Historically, since September 1, 1983, the outlier payment 
policy applied by CMS has been prospective, with payments made for 
outliers considered final payments. CMS has indicated that they believe 
that prospective outlier payments are more vulnerable to potential 
overpayments, thus necessitating the need for actual cost outlier 
settlements. This proposed outlier rule would make the outlier payment 
a ``settled'' item on the Medicare cost report. In this regard, we 
refer to the Social Security Act, Section 1886(d)(2)(B) and Section 
1886(d)(5)(A)(iv) which respectively state:

    ``Reducing for Value of Outlier Payments.--The Secretary shall 
reduce each of the average standardized amounts determined under 
subparagraph (A) for hospitals located in an urban area and for 
hospitals located in a rural area by a proportion equal to the 
proportion of payments under this subsection (as estimated by the 
Secretary) based on DRG prospective payment amounts which are 
additional payments described in paragraph (5)(A) (relating to outlier 
payments) for hospitals located in such respective area'' and ``The 
total amount of the additional payments made under this subparagraph 
for discharges in a fiscal year may not be less than 5 percent nor more 
than 6 percent of the total payments projected or estimated to be made 
based on DRG prospective payment rates for discharges in the year''.

    Section l886(d)(2)(B) of the Social Security Act points to the fact 
that there is a reduction of the base DRG, via the standardized 
amounts, for providers based upon the estimate of outlier payments to 
providers. By making the outlier a ``settled'' item, the proposed rule 
is silent on how the over or under payments of the outlier recouped/
paid at year-end be translated into the base DRG payment, since the 
base DRG would continue under the current policy to be handled 
prospectively, with the outlier under the proposed policy being handled 
retrospectively.
    Recommendation.--CMS needs to address how the over or under 
payments of the outlier recouped/paid at year-end be handled in 
relationship to the base DRG in the final rule. In addition, with the 
transition of the outlier from a prospective payment basis to a 
retrospective payment basis, we believe CMS should obtain Congressional 
approval to make that switch since it departs from what Congress 
intended in Section 1886(d)(2)(B) of the Social Security Act.
    (2) The proposed rules are silent as to what point in time the 
outlier settlement for a given fiscal year becomes final. The Medicare 
appeal process and/or re-opening process, available to providers and 
Fiscal Intermediaries (FIs), can include issues which affect the 
outlier calculation. These issues include fudirect Medicare Education 
(IME) and Disproportionate Share (DSH) payments. Both IME and DSH 
impact not only the outlier threshold, but also the actual outlier 
payment itself. If teaching or disproportionate share providers are 
underpaid for either IME or DSH, the outlier payments and the number of 
cases that qualify for an outlier are overstated. Conversely, if IME or 
DSH is overstated, the outlier payments and the number of cases that 
qualify for an outlier are understated. The proposed regulation does 
not provide guidance related to this complicated issue.
    Recommendation.--In the final rule, CMS needs to address at what 
point in time the outlier settlement for a given fiscal year becomes 
final.
    (3) CMS has indicated in this proposed rule that they are still 
evaluating the procedural changes necessary to implement this process 
but admitted that this process would have to be done on a claim-by-
claim basis to obtain new and accurate outlier settlement amounts.
    Recommendation.--Prior to implementation, CMS should assess the 
procedural changes that will be necessary to re-process and validate 
100 percent of all claims for all providers nationwide. That assessment 
should not only include the necessary procedural changes that need to 
be implemented by both the Healthcare providers and the Fiscal 
Intermediaries (FI), but it should include the estimated manpower and 
cost to the Medicare Program to re-process 100 percent of all Medicare 
claims.
    (4) CMS indicates that by targeting the outlier to be a ``settled'' 
item, outlier payments would now be based on the relationship between 
the hospital's costs and charges at the time a discharge occurred, 
ensuring that when the final outlier payments are made, they would 
reflect an accurate assessment of the actual costs the hospital 
incurred. However, under the current Medicare outlier payment formula, 
that is not the case. The actual Medicare outlier payment represents 
only 80 percent of the difference between the actual cost of the case 
and the established threshold for that case.
    Recommendation.--For Medicare outlier payments to represent actual 
cost, we would recommend that the marginal cost factor of 80 percent be 
eliminated and valued at 100 percent. The 80 percent marginal cost 
factor is reducing the cost outlier payment to 80 percent of the actual 
calculated cost.
    (5) The adoption of this proposed provision to make the inpatient 
acute Medicare outlier payment a retrospective or ``settled'' item as 
opposed to a prospective item creates an inconsistency between the 
Inpatient Prospective Payment System (IPPS), and both the Outpatient 
Prospective Payment System (OPPS) and the Long-Term Acute Care Payment 
System. Currently, the outpatient outlier provisions under both the 
Social Security Act 1833(t)(5) and OPPS regulation 419.43(d) do not 
recognize any further or final settlement of the outpatient outlier 
payments. In addition, the Final Rule in Federal Register 67, No. 69, 
August 30, 2002, establishing a prospective payment system for Medicare 
payment of inpatient hospital services furnished by long-term care 
hospitals, does not recognize any further or fmal settlement for the 
outlier payments.
    Recommendation.--The inconsistency in the treatment of Medicare 
outlier payments for prospective payment systems should be addressed by 
CMS prior to being implemented in the fmal rule under IPPS.
The Proposed Rule Requests Comments Regarding ``Substantial Evidence'' 
        Requirements by a Provider to Request a Change in the Cost-to-
        Charge Ratios. (Proposed Sec. 412.84(i)(1))
    The preamble of the proposed rule indicates that CMS would have the 
authority (page 10424) to direct the Fiscal Intermediary (FI) to change 
the hospital's cost-to-charge ratio (CCR) if a hospital's charges have 
been increasing at an excessive rate compared to that of other 
hospitals. Provider(s) would be permitted to contact their FI to 
request that its CCR be changed if it presents ``substantial evidence'' 
that the ratios are inaccurate. The CMS regional office, however, would 
have to approve these requests.
    Comments.--We believe the terms ``substantial evidence'' and 
``excessive charges'' are subjective and are open to varying 
interpretations. Before the regulations are issued, better definitions 
along with clear examples should be provided.
    Recommendation.--CMS should provide clear examples of what is 
defined as ``substantial evidence'' including guidance on how the 
implementation of high cost programs (such as a new heart program) and 
the related charging structure should be handled. Another example may 
be linking the overall charge increase to the related cost due to the 
implementation of better cost accounting methods.
    With respect to ``excessive charging practices'' of a provider, 
although we agree that no provider should engage in behavior that 
jeopardizes the integrity of the Medicare Trust Fund, the current 
Medicare regulations are silent with respect to the charge structure 
that a provider implements as long as the charge structure is 
consistent among payrols. To propose a process that could dissuade a 
provider from raising their charge structure could potentially impact 
the reimbursement from other payors. Therefore, CMS should define what 
type of charge increase is ``excessive''.
The Proposed Rule is Silent on How to Calculate the Iterim (Operating & 
        Capital) Cost-to-Charge Ratios in a Merger Situation
    Recommendation.--CMS should add a provision explaining how the 
cost-to-charge ratio (CCR) will be calculated for the situation where 
two (2) providers merge under one (1) provider number. The current 
regulations as well as the proposed rule are silent with respect to 
this issue.
Special Recordkeeping Requirements in Conjunction with the 
        Recalculation of Outlier Payments at Time of Settlement (Page 
        10425)
    The proposed outlier recalculation settlement process (as proposed 
in section Sec. 412.84(i)(2)) includes special record keeping 
requirements which would be necessary to implement this procedural 
change. Currently CMS has indicated that they are still evaluating 
procedural changes necessary to implement this process but admitted 
that this process would have to be done on a claim-by-claim basis to 
obtain new and accurate outlier settlement amounts.
    Comments.--Because the procedural changes have not yet been 
defined, and the implementation will undoubtedly place additional 
burden on both providers and Fiscal Intermediaries (FIs), consideration 
must be given to the information that must be made available to 
providers to validate the Medicare outlier payments received.
    Recommendation.--We believe that CMS should instruct each FI to 
supply each provider with an electronic file listing by claim, showing 
the original interim outlier payment and the re-calculated outlier 
amount, detailing the specific data elements used in the calculation. 
We believe CMS and the FI must incorporate this detailed outlier data 
file into their standard routine settlement process so no special 
request is required by the provider from the FI.
    Without these detailed files from the FI, the provider will be 
unable to confinn the accuracy of the FI's outlier re-calculation. As 
CMS indicated, this re-calculation cannot be done accurately except on 
a claim-by-claim basis, supporting documentation should be availabJe 
for the provider's review.
The Establishment of a Time Value Adjustment for Over and Under 
        Payments of Outliers
    CMS has proposed to incorporate a time value adjustment for 
possible overpayment or underpayments of outlier payments as detennined 
using updated cost-to-charge ratios (CCRs) from the applicable cost 
report settlement year. For discharges occurring on or after the 
effective date of the final rule, the time value adjustment would be 
made for the period the outlier payments were inappropriately held by 
the provider. A similar adjustment would be made for underpayments to 
the hospital.
    Comment.--We are not in agreement with this approach as the 
initiation of a time value adjustment on selected line items on the 
cost report is not consistent with other ``settled'' items such as 
Indirect Medical Education (IME) and Disproportionate Share (DSH). CMS 
supports its argument by noting that providers have the opportunity to 
manipulate their outlier payments by dramatically increasing charges 
during the year in which the discharge occurs. In this situation, the 
provider would receive excessive outlier payments, which although the 
provider would incur an overpayment and have to pay the money back when 
the cost report is settled, would allow the provider to obtain excess 
payments from the Medicare Trust Fund on a short-term basis. Other 
areas of the cost report that involve ``settled'' items are not 
subjected to the assessment of interest.
    Recommendation.--CMS should address the consistency of assessing 
interest on overpayments of ``settled'' items on the cost report prior 
to this provision being implemented in the final rule.
     If you have any questions regarding our comments please telephone 
me at (412) 647-4820.
            Sincerely,
                                           John W. Paul.
                                 ______
                                 
                        Delaware Valley Healthcare Council,
                                                    March 27, 2003.
Hon. Arlen Specter,
Chairman, Subcommittee on Labor, Health and Human Services and 
        Education, U.S. Senate, Washington, D.C.
    Dear Mr. Chairman: On behalf of the members of the Delaware Valley 
Healthcare Council, I am writing, to follow up on the March 11 hearing 
before your Subcommittee on Medicare outlier payment policies: In 
particular, we would like to respond to your request far a specific 
recommendation on the appropriate timeframe for a transition period as 
well as to clarify the record related to certain statements made at the 
hearing by CMS Administrator Thomas Scully. The Council, along with 
many other hospital associations including the AHA, is urging CMS to 
amend the proposed regulations to provide at least a 30 month 
transition period, reduce in the outlier threshold, and to eliminate 
the proposed retrospective reconciliation of outlier payments. Our 
position is described in greater detail below.
    At the outset, we also want to take this opportunity to thank you 
again for holding the March 11 hearing. Your continued commitment to 
developing an equitable resolution to this policy matter is of critical 
importance to all hospitals in the Delaware Valley and across the 
Commonwealth.
    While we all agree with the need to re-examine and address any 
unintended consequences of the current outlier policy, the Council and 
its member organizations are deeply concerned with respect to the 
method, timing, and overall impact of the Proposed Rule published on 
March 5, 2003 by the Center for Medicare and Medicaid Services (CMS). 
The CMS has made serious and unsupported allegations about the conduct 
of many community institutions. Further, CMS appears to have initiated 
an audit process and then failed to even wait for its outcome in 
determining either whether any inappropriate activity has taken place 
or what specific policies should be developed.
    As drafted, the Proposed, Rule will adversely affect virtually all 
hospitals across the United States. CMS is seeking to implement a 
``remedy'' that: (1) represents a fundamental shift in payment policies 
with no transition; (2) does not lower the current outlier threshold; 
(3) creates an administratively burdensome and potentially unworkable 
process far retrospectively reconciling payments; and (4) creates 
immediate and, in some cases, unsustainable financial harm to certain 
hospitals that could jeopardize access to needed services for Medicare 
beneficiaries and all other patients. In our region, no hospital would 
benefit from the Proposed Rule. In short, the combination of changes 
proposed by CMS represents the ``worst of all worlds'' for hospitals.
                       30 month transition period
    After discussions with our members, the American Hospital 
Association and other interested parties, we are urging the CMS to 
provide at thirty-month transition period (i.e. the remainder of this 
fiscal year plus at least two years beginning on October 1). There is 
no justification for a policy of this magnitude to be implemented in 
the middle of a fiscal year. As noted at the hearing there is amply 
precedent for such transition periods. For example, the Medicare 
outlier program originally included provisions for ``length-of-stay'' 
or ``day'' outlies. In 1995, length-of-stay or day outliers were phased 
out over a three-year period. We urge the Subcommittee to support a 
thirty-month transition period in this case as well.
    The CMS suggested that there is a need to act immediately, and 
without any transition, based on concern of fraudulent or other illegal 
activity. However, there is no current evidence to suggest that 
hospitals that benefited from the current outlier methodology actually 
engaged in fraud or other illegal activities. In fact, at institutions 
where the CMS actually has completed audits, there have been no 
allegations of inappropriate, much less illegal, actions related to 
outlier payments.
    As you know, the federal government has very significant 
enforcement powers and legal remedies to take immediate action in cases 
involving allegations of fraud or other illegal activities. According 
to press accounts, the federal government has already filed suit and 
entered in to a voluntary agreement to suspend certain outlier payments 
with a California based organization. As a practical matter, it would 
appear that a substantial portion of the fiscal impact of the proposed 
policy already has been achieved through this voluntary agreement. If 
the CMS believes that some institutions have engaged in illegal 
conduct, then it can and should take appropriate enforcement action.
    However, CMS should not penalize the entire hospital field by not 
providing a reasonable transition for implementation of this policy. In 
fact, CMS officials now have conceded in various forums that the 
primary issue appears to be the result of a flawed public policy, not 
illegal actions by hospitals. It is unfortunate that the debate over 
this important policy in a sense has been distorted and undermined by 
these allegations. The unintended consequences of bad public policy 
should not be equated with fraud or illegal activities. Moreover, this 
whole issue is indicative of how badly the Medicare payment system for 
hospitals is broken and, how complex it has become.
               fiscal impact on delaware valley hospitals
    At the hearing there may have been some confusion concerning the 
fiscal impact of the Proposed Rule on institutions in the Greater 
Philadelphia area. Unfortunately, doe to the time constraints it was 
not possible to respond to certain points made for the record. First, 
as part of his verbal testimony, Mr. Scully suggest that our estimate 
of the fiscal implications of the Proposed Rule included Tenet 
institutions in Philadelphia. As Tenet has voluntarily given up outlier 
payments, our fiscal estimated did not include those institutions.
    Second, also as part of his verbal testimony, Mr. Scully suggested 
that Thomas Jefferson University Hospital (TJUH) would benefit under 
the March 5 Proposed Rule and gain approximately $2 million in Medicare 
payments. Based on our review of the rule and discussions with the 
administration of TJUH, the hospital lost approximately $2 million when 
the outlier threshold was raised from $14,050 to $21,025 several years 
ago. TJUH now is losing millions more in Medicare payments as a result 
of increasing the outlier threshold to $33,560 in 2002. Perhaps Mr. 
Scully was referring to impact of his original hope to reduce the 
outlier threshold. As the outlier threshold under the March 5 Proposed 
Rule remains unchanged at $33,560, it is unclear how TJUH could benefit 
under the CMS proposal. Unfortunately, the material accompanying 
proposed rule does not include any financial impact analysis or data to 
help further clarify the effect of this rule on TJUH or all other 
hospitals.
    According to our estimates, the combination of the increase in the 
outlier threshold adopted last year and the provisions of the proposed 
rule will reduce Medicare payment to hospital in our region by over 
$100 million. Further, we believe this number is conservative as it is 
very difficult to model the implications of the retrospective 
reconciliation of outlier payments based on cost-to-charge ratios in 
subsequently settled cost reports. Given the enormous financial stress 
and other challenges facing our hospitals, the loss of these outlier 
funds will result in layoffs, reduction in services, and impact on care 
for the entire community.
    Despite the fact that the potential problems with current 
methodology were brought to the agency's attention over a decade ago, 
CMS is proposing an abrupt, mid year change in policy without regard to 
the significant financial consequences for hospitals. We believe this 
is the wrong way to change public policy and represents a significant 
departure from the process both Congress and CMS have used in the past 
to make major Medicare payment policy changes that have adverse 
financial implications for participating providers or health plans.
    As we testified on March 11, we recognize that CMS has legitimate 
policy concerns about the unintended consequences of the current 
outlier policy. However, the proposed ``solution'' may have other 
equally significant unintended consequences. We urge CMS to: (1) 
provide at least a 30 month transition period (i.e. remainder of this 
fiscal year and 24 months beginning on October 1); (2) reduce the 
outlier threshold; and (3) eliminate the retrospective reconciliation 
of outlier payments.
    Again, thank you for your continuing leadership to help shape an 
appropriate Medicare outlier payment policy. The Proposed Rule will 
have a sever impact on the greater Philadelphia area as well as other 
parts of the Commonwealth and the nation. We appreciate your help in 
try to ensure that hospital in our region are able to continue to 
provide health care services that the public expects and deserves.
            Sincerely,
                                   Andrew Wigglesworth,
                                           President.
                                 ______
                                 
                        Delaware Valley Healthcare Council,
                                                      May 12, 2003.
Hon. Arlen Specter,
Chairman, Subcommittee on Labor, Health and Human Services and 
        Education, U.S. Senate, Washington, DC.
    Dear Mr. Chairman: On behalf of the members of the Delaware Valley 
Healthcare Council (DVHC), I am writing in further follow up to your 
Appropriations Subcommittee's March 11 hearing on Proposed Regulations 
changing Medicare outlier payment policies. As you know, in the 
proposed regulations the Centers for Medicare and Medicaid Services 
(CMS) provided for a 30-day comment period. As the comments received by 
CMS demonstrate overwhelming support for core elements of DVHC's 
position, we wanted to share a brief summary of those comments for the 
Subcommittee's hearing record.
    At the March 11 hearing and in a March 27 letter to you, we 
outlined DVHC's strong opposition to the Medicare outlier payment 
changes proposed by CMS. In our view CMS is seeking to implement a 
``remedy'' that (1) represents a fundamental shift in payment policies 
with no transition; (2) does not lower the current outlier threshold; 
(3) creates an administratively burdensome and potentially unworkable 
process for retrospectively reconciling payments; and (4) will create 
immediate, and in some cases unsustainable, financial harm to certain 
hospitals that could jeopardize access to needed services for Medicare 
beneficiaries as well as all other patients. We continue to believe the 
combination of changes contained in the CMS Proposed Rule represents 
the ``worst of all worlds'' for hospitals in Southeastern Pennsylvania 
and across the nation.
    My colleagues and I have since examined all of the public comments 
submitted to CMS and the results show virtually unanimous support for a 
transition period to enable hospitals to adjust in an orderly way to 
proposed policy changes. Of the hundreds of letters received by CMS, 
nearly 300 specifically ask CMS to include a transition period and only 
four expressed outright opposition to a transition period. Importantly, 
all the major national hospital associations--the American Hospital 
Association, the Association of American Medical Colleges, the National 
Association of Public Hospitals, and the Federation of American 
Hospitals--supported a reasonable transition period. Attached for your 
review is a list of all hospitals and associations that wrote to CMS in 
support of a transition period.
    As we indicated at the hearing, CMS has a long-standing practice of 
providing a transition period for major changes in Medicare payment 
policies including previous changes to outlier payment polices. For 
example, CMS has provided transition periods ranging from ten years for 
modifications to capital payments to three years for phasing out length 
of stay outliers. In fact, we are unaware of any major payment policy 
change with a negative impact on hospitals for which CMS has provided 
less than a full year transition. Hospitals in Southeastern 
Pennsylvania, as well as many other parts of the country, are simply in 
no financial position to absorb abrupt mid-year changes in payment 
policies of the nature proposed by CMS. If the changes proposed by CMS 
are adopted immediately; it will adversely affect the delivery of care 
not only for Medicare beneficiaries, but for the entire community in 
many parts of this country.
    Mr. Chairman, we continue to be grateful for your efforts on behalf 
of hospitals to secure a reasonable transition period for this major 
change in Medicare outlier payment policy. If you or your staff have 
any questions or need further clarification of the issues related to 
the outlier policy changes or our analysis of the public comments on 
the March 5 Proposed Rule, please do not hesitate to call. I can be 
reached at 215.735.3295.
            Sincerely,
                                   Andrew B. Wigglesworth,
                                           President.
                    In Support of Transition Period
National
    American Hospital Association; Federation of American Hospitals; 
National Association of Public Hospitals and Health Systems; and 
Associations of American Medical Colleges.
Alabama
    Northwest Medical Center (Winfield); Jefferson Health System, 
Cooper Green Hospital, Jefferson Outpatient Care (Birmingham); Jackson 
Hospital (Montgomery); Alabama Hospital Association; DCH Health System 
(West Central Alabama); Wedowee Hospital (Wedowee); Alabama Hospital 
Association (Montgomery); and Gasden Regional Medical Center.
Arizona
    Arizona Hospital and Healthcare Association (Phoenix); Sierra Vista 
Regional Health Center (Sierra Vista); Sun Health (Sun City).
                                Arkansas
    Arkansas Hospital Association; Baptist Memorial Hospital Forrest 
City (East Arkansas); Delta Memorial Hospital (Dumas); Ouachita County 
Medical Center (Camden); Ouachita Valley Health System (Camden); St. 
Vincent Health System (Little Rock); Baptist Health (Little Rock); 
Sparks Health System (Fort Smith); Baptist Memorial Hospital 
(Blytheville).
California
    Mark Twain St. Joseph's Hospital (San Andreas); Sequoia Hospital 
(Redwood City); Dominican Hospital (Santa Cruz); Chino Valley Medical 
Center (Chino); Oak Valley Hospital (Oakdale); Coalinga Regional 
Medical Center (Coalinga); Torrance Memorial Medical Center (Torrance); 
Hoag Hospital (Newport Beach); Healthcare Association of Sand Diego and 
Imperial Counties (San Diego); Sutter Auburn Faith Hospital (Auburn); 
Adventist Health, Feather River Hospital (Paradise); San Clemente 
Hospital and Medical Center (San Clemente); University of California 
(Oakland); and Catholic Healthcare West (San Francisco).
Colorado
    Porter Adventist Hospital (Denver); Parkview Medical Center 
(Pueblo); Colorado Health and Hospital Association; and Memorial 
Hospital (Colorado Springs).
Connecticut
    St. Vincent's Medical Center (Bridgeport); Johnson Memorial 
Hospital (Stafford Springs); Saint Mary's Hospital (Waterbury); and 
Bristol Hospital (Briston).
Delaware
    St. Francis Hospital (Wilmington) and Delaware Healthcare 
Association (Dover).
Florida
    Kendall Regional Medical Center (Miami); Shands HealthCare 
(Gainesville) (2 letters); Munroe Regional Medical Center (Ocala); West 
Florida Healthcare (Pensacola); Tampa General Hospital (Tampa); 
Memorial Healthcare System (Hollywood); and Bethesda Memorial Hospital 
(Boynton Beach).
Georgia
    Union General Hospital, Inc. (Blairsville); Central Georgia Health 
System (Macon); Southern Regional Health System (Riverdale); Piedmont 
Medical Center (Atlanta); Gwinnett Health System (Lawrenceville); 
Georgia Hospital Association (Marietta); Memorial Health (Savannah); 
and Saint Joseph's Hospital of Atlanta (Atlanta).
Idaho
    Portneuf Medical Center (Pocatello); Idaho Hospital Association; 
St. Luke's Regional Medical Center (Boise); and Saint Alphonsus 
Regional Medical Center (Boise).
Illinois
    Louis A. Weiss Memorial Hospital (Chicago); Resurrection Health 
Care (Chicago) (2 letters); Adventist Health System (Hinsdale); 
Freeport Health Network (Freeport); Katherine Shaw Bethea Hospital 
(Dixon); St. Mary's Hospital (East St. Louis); Morris Hospital 
(Morris); Proctor Hospital (Peoria); Loyola University Health System 
(Maywood); and Illinois Hospital Association (Naperville).
Indiana
    Kosciusko Community Hospital (Warsaw); Good Samaritan Hospital 
(Vincennes); St. Vincent Health (Indianapolis); St. Vincent Health St. 
Joseph Hospital (Kokomo); and Greater Lafayette Health Services 
(Lafayette).
Iowa
    Trinity Regional Medical Center (Fort Dodge); Mercy Medical Center 
(Des Moines); and Spencer Hospital (Spencer).
 Kansas
    Hospital District No. 5 (Harper); Cushing Memorial Hospital 
(Leavenworth); Saint Luke's South Hospital (Overland Park); Kansas 
Hospital Association; Salina Regional Health Center (Salina) (2 
letters); Anderson County Hospital, Saint Luke's Health System 
(Garnett) (6 letters); and Wesley Medical Center (Wichita).
Kentucky
    Kentucky Hospital Association; Jewish Hospital HealthCare Services 
(Louisville); and Caritas Health Services (Louisville).
Louisiana
    North Oaks Health System (Hammond); Tulane University Hospital and 
Clinic (New Orleans) (2 letters); Pendleton Memorial Methodist Hospital 
(New Orleans); and West Jefferson Medical Center (Marrero).
Massachusetts
    Lahey Clinic (Burlington) (2 letters).
Michigan
    Henry Ford Health System (Detroit); Botsford General Hospital 
(Farmington Hills); Detroit Medical Center (Detroit); and University of 
Michigan Health System (Ann Arbor).
Minnesota
    St. Francis Regional Medical Center (Shakopee); Minnesota Hospital 
Association (St. Paul); and United Hospital (St. Paul).
Mississippi
    Grenada Lake Medical Center (Grenada); Baptist Mernorial Hospital 
Golden Triangle (Columbus) (11 letters); Baptist Memorial Hospital 
Booneville (Booneville) (4 letters); Baptist Memorial Hospital North 
Mississippi (Oxford); Baptist Memorial Hospital Union County (New 
Albany); Natchez Regional Medical Center (Natchez); St. Dominic/Jackson 
Memorial Hospital (Jackson); Mississippi Baptist Health Systems 
(Jackson); Baptist Memorial Hospital DeSoto (Southaven); and Gilmore 
Memorial Hospital (Amory).
Missouri
    Wright Memorial Hospital (Trenton); St. Francis Hospital and Health 
Services (Maryville); Bates County Memorial Hospital (Butler); SSM 
Health Care (St. Louis) (2 letters); Cass Medical Center 
(Harrisonville); Saint Luke's Northland Hospital (Kansas City); St. 
Luke's Health System (Smithville); Freeman Health System (Joplin) (42 
letters); and St. John's Mercy Health Care (St. Louis).
Montana
    An Association of Montana Health Care Providers (Helena).
Nebraska
    BryanLGH Medical Center (Lincoln); Good Samaritan Health Systems 
(Kearney); and Nebraska Hospital Association.
Nevada
    Nevada Hospital Association.
New Hampshire
    The Cardiovascular Center at St. Joseph Hospital (Nashua) (2 
letters).
New Jersey
    Trinitas Hospital (Elizabeth); St. Joseph's Wayne Hospital (Wayne) 
(2 letters); and St. Mary's Hospital (Passaic); New Jersey Council of 
Teaching Hospitals (Trenton); New Jersey Hospital Association; Saint 
Clare's Health System; St. Joseph's Regional Medical Center (Paterson); 
Atlantic Health System (Florham Park); The University Hospital, 
University of Medicine and Dentistry of New Jersey (Newark); Atlantic 
City Medical Center (Atlantic City); and The Cooper Health System.
New Mexico
    Memorial Medical Center (Las Cruces) and Sandia Health System 
Albuquerque Regional Medical Center and Rehabilitation Hospital of New 
Mexico (Albuquerque).
New York
    NYU Hospitals Center (New York); Nyack Hospital (Nyack); Lenox Hill 
Hospital (Upper East Side); John T. Mather Memorial Hospital (Port 
Jefferson); Oswego Hospital (Oswego); Catholic Health System Mercy 
Hospital of Buffalo (Buffalo); Catholic Health System Kenmore Mercy 
Hospital (Buffalo); Catholic Health System Sisters of Charity Hospital 
(Buffalo); Catholic Health System St. Joseph Hospital (Cheektowaga); 
Soldiers and Sailors Memorial Hospital (Penn Yan); Saratoga Care 
(Saratoga Springs); Hospital for Joint Diseases Orthopaedic Institute 
(New York); Long Beach Medical Center (Long Beach); Montefiore Medical 
Center (Bronx); Greater New York Hospital Association (New York); New 
York-Presbyterian Hospital, New York-Presbyterian Healthcare System 
(New York); University of Rochester Medical Center, Strong Memorial 
Hospital and Highland Hospital (Rochester); Lenox Hill Hospital (New 
York); St. Elizabeth Medical Center (Utica); North Shore--Long Island 
Jewish Health System (Westbury); and Nicholas H. Noyes Memorial 
Hospital (Dansville).
North Carolina
    Wilkes Regional Medical Center (North Wilkesboro); Person Memorial 
Hospital (Roxboro); Alleghany Memorial Hospital (Sparta) (5 letters); 
Southeastern Regional Medical Center (Lumberton); Carolinas HealthCare 
System (Charlotte); Novant Health (Winston-Salem); and Moses Cone 
Health System (Greensboro).
North Dakota
    Medcenter One (Bismarck) and North Dakota Healthcare Association 
(Bismarck).
Ohio
    The Center fbr Health Affairs (Cleveland).
Oklahoma
    St. John Medical Center (Tulsa).
 Oregon
    Asante Health System (Medford) (9 letters); Columbia Memorial 
Hospital (Northwest Oregon); Oregon Association of Hospitals and Health 
Systems; Rogue Valley Medical Center (Medford) (3 letters); Three 
Rivers Community Hospital (Grants Pass); Genesis Recovery Center 
(Central Point); Silverton Hospital (Silverton); and Mid-Columbia 
Medical Center, (The Dalles).
Pennsylvania
    Temple University Health System (Philadelphia); Delaware Valley 
Healthcare Council; Phoenixville Hospital, University of Pennsylvania 
Health System (Phoenixville); Central Montgomery Medical Center 
(Lansdale); Memorial Hospital (York); Chestnut Hill Healthcare 
(Philadelphia); St. Joseph Medical Center (Reading); Holy Redeemer 
Health System; Catholic Health East (Newtown Square); The Hospital and 
Healthsystem Association of Pennsylvania (Harrisburg); Geisinger Health 
System (Danville); Abington Memorial Hospital (128 letters); Crozer-
Keystone Health System, Delaware County Memorial Hospital (Drexel Hill) 
(2 letters); Crozer-Keystone Health System, Crozer-Chester Medical 
Center (Upland); UPMC Health System (Pittsburgh); Crozer-Keystone 
Health System, Taylor Hospital (Ridley Park); Crozer-Keystone Health 
System (Springfield); Holy Redeemer Health System (Huntingdon Valley) 
(6 letters); Temple University Health System (Philadelphia); Mercy 
Health System (Havertown) (3 letters); and Thomas Jefferson University 
Hospital (Philadelphia).
South Carolina
    Trident Health System (Charleston); Summerville Medical Center 
(Summerville); and Bamberg County Hospital and Nursing Center 
(Bamberg).
South Dakota
    Avera McKennan Hospital and University Health Center (Sioux Falls).
Tennessee
    Baptist Memorial Hospital Collierville (Collierville); Tennessee 
Christian (Madison); West Tennessee Healthcare (Jackson); Williamson 
Medical Center (Franklin); Gateway Health System (Clarksville); Baptist 
Memorial Hospital Union City (Union City); Baptist Memorial Hospital 
for Women (Memphis); Baptist Memorial Hospital Tipton (Covington); 
Baptist Memorial Hospital Memphis (Memphis); Baptist Memorial Hospital 
Lauderdale (Ripley); Baptist Memorial Hospital Huntingdon (Carroll 
County); Baptist Rehabilitation Germantown (Germantown); Tennessee 
Hospital Association (Nashville); and Maury Regional Hospital 
(Columbia).
Texas
    East Texas Medical Center Regional Healthcare System (Carthage); 
Memorial Hermann Healthcare System (Houston); Christus St. Joseph's 
Health System (Northeast Texas) (2 letters); Christus Health Gulf Coast 
(Houston); St. Joseph Health System (Bryan); Seton Healthcare Network 
(Austin) (2 letters); Dallas Southwest Medical Center (Dallas); Vinson 
and Elkins (Houston); Baylor Health Care System (Dallas); St. Luke's 
Episcopal Hospital (Houston); Hillcrest Health System (Waco); and St. 
Joseph Regional Health Center (Bryan).
Utah
    Utah Hospitals and Health Systems Association.
Virginia
    Southside Regional Medical Center (Petersburg); Prince William 
Health System (Manassas); Tazewell Community Hospital (Tazewell); 
Carilion Giles Memorial Hospital (Pearisburg); and Mary Washington 
Hospital (Fredericksburg).
Washington
    Tri-State Memorial Hospital (Clarkston); Sacred Heart Medical 
Center (Spokane); and Empire Health Services (Spokane).
West Virginia
    Charleston Area Medical Center Health System (Charleston); 
Jefferson Memorial Hospital (Ranson) (2 letters); West Virginia 
University Hospitals (Morgantown); and Monongalia Health System 
(Morgantown).
Wisconsin
    Columbia St. Mary's (Milwaukee) (2 letters) and Aurora Health Care 
(Milwaukee).
Wyoming
    Wyoming Hospital Association (Cheyenne).

    Senator Specter. If you want to be successful in 
influencing CMS, you are going to have to be realistic. This 
subcommittee urges a realistic transition period, but let us 
come to grips with the realities. When you are talking about 
the end of the fiscal year, I think that is something that CMS 
may well accommodate to, and something beyond that, but put it 
in writing, and make it specific.
    On the threshold issue, there again I would like to see 
something specific. It seems to me that the increase from 
$20,000 to $33,000 is a big increase, calculated, according to 
the testimony, at some 59 percent, but let us come forward, 
aside from the comment and the objection, with something very 
specific that you would like to see them undertake.
    Mr. Wigglesworth, would you explain a little more of this 
concept of the retrospective payment system?
    Mr. Wigglesworth. Mr. Chairman, what is being proposed in 
the rule is to use the most current cost-to-charge ratio which 
is part of the process of calculating outlier payments, and 
using it from not, as is the current process, where you use the 
final, settled cost report, but using the tentatively settled 
cost report, but it would be the most recent one that is 
submitted.
    Then, 2 to 3 years later, as is in current practice, the 
final cost report would be settled, and what the agency is 
proposing is that they would pay initially on the basis of the 
tentative cost report, and then have a reconciliation process, 
where they would reconcile the claims several years later, 
based on the final settled cost report.
    So what it means is, the FIs would process them once, then 
2 years later, when there is a final cost report, they would 
have to process it again, rerun it, and there would be a 
reconciliation, either with the agency paying potentially more 
to the hospital, or the hospital reimbursing the agency. This 
creates a whole other level of uncertainty. From a financial 
standpoint, while we are still evaluating, I assume they would 
have to create reserves on their books in terms of the 
hospital. It is an unworkable addition to an already complex 
claims processing environment.
    Senator Specter. Mr. Scully, would you care to comment 
these issues?
    Mr. Scully. Yes, I would like to comment on a couple, one 
is of the $100 million rough impact on southeast Pennsylvania. 
About $60 million of that is on Tenet, and they have already 
voluntarily said they are not going to bill us for those any 
longer, largely as a result--I have all the detailed numbers 
hospital-by-hospital, for every hospital in the country, if you 
would like them for the committee, and I do think there is a 
problem, obviously with Tenet, with Temple, and we have talked 
about that, and Crozier Chester and UPMC probably are three of 
the biggest hospitals in Pennsylvania.
    But I think when you look at lowering the threshold, which 
Andy and I have talked about a lot, back down from $33,560, 
which I have personally advocated to the administration, OMB 
understandably is skeptical, since we have been $1.6 billion to 
$1.9 billion over each of the last 5 years, and their attitude 
is, your estimators are never right, and so I think unless we 
do something to limit, at least a very, a limited transition in 
order to take away the people that have been overbilling for 
this, I am going to have a very hard time making the argument 
to bring down the threshold, which will affect all of the other 
hospitals.
    As of right now, OMB's position, which I think is 
understandable is, since you have missed by $1.8 billion last 
year, maybe we should just leave it where it is until we figure 
out whether we are close, and Andy is correct that in several 
years in the 1980s and the mid-1990s, we spent less than the 
5.1 percent on the outliers, but in the last few years, we have 
been way, way off on the high side.
    The other argument I would make on the 5-year, on the 
retrospective fix, which I came up with because it was the only 
way I could think of fixing it, if I could just take 1 minute 
to explain how this works. If you have a $10,000 hip 
replacement in a hospital, hospitals, even though it is not 
relevant for anything but Medicare generally, have charges that 
are generally much higher than the costs, so if you have a 
$10,000 DRG for hip replacement--it is not what it costs. I am 
just making that number up for simplicity--a hospital might 
have a $50,000 charge.
    We monitor those charges on their cost reports, and if they 
had a history 3 or 4 years back where their last cost report 
was a $50,000 charge, we give them what is called a cost-to-
charge ratio. In that case it would be .20, or they are 
charging five times their true cost. We discount that, so when 
their charges came in we would say, you said your charge was 
$50,000, but history shows you that it is really not, it is 
$10,000, so you do not get an outlier payment.
    What the hospitals have done is, they have basically jacked 
up their charges from, say, $50,000 to $200,000, and in some 
cases much higher, so our cost report data is 3 years old, so 
we go back and look at the most recent cost reports we have, 
which is 1999, and if a hospital had a cost-to-charge ratio of 
.20, we take their $200,000 charge, discount it by one-fifth, 
and come up with a $40,000 charge and say, that is your real 
true costs, and they get an outlier payment for that. In many 
cases, they have jacked it up much more than that.
    But essentially we are working on 3-year-old data, so there 
is no way for us to really reconcile their true costs, so what 
Andrew is concerned about, and there is no other way I can find 
to fix this, is that we would say, look, you can charge us for 
outliers as much as you want, but at some point when we catch 
up on our true cost reports, we are going to come back and see 
if you actually charged us true costs.
    The two ways people have gamed this is by massively 
ratcheting up their cost-to-charge ratio, in some cases 15, 20 
times true costs, and the other way is, if you come in below 
.20, which means you are charging five times your true charges, 
your true costs, we kick automatically through--God knows why 
we came up with this--what is called the State-wide average, so 
if you came out that you actually charged seven times your 
costs, we say that must be a mistake and we are going to bring 
you up to the State-wide average, so if your cost-to-charge 
ratio is .15 in Philadelphia, which some of the Tenet hospitals 
were, we would say that must be a mistake, so we will bring you 
up to the State-wide average, which is .35. It is very 
confusing.
    Senator Specter. Mr. Scully, another Senator has arrived.
    Mr. Scully. Yes, sir.
    Senator Specter. Let us give her a chance.

             OPENING STATEMENT OF SENATOR MARY L. LANDRIEU

    Senator Landrieu. Thank you, Mr. Chairman. I wish I could 
have been here when you all started, but I had two speeches 
this morning and a meeting earlier. I wanted to thank you for 
calling this hearing, and say that I am aware of the problem 
that exists within Medicare outliers and hope that we can find 
a solution that gives the proper kind of guidance to hospitals 
as they seek proper reimbursements.
    So I thank you for focusing on this. If there are ways that 
we can save the system dollars we want to, but we can begin by 
giving clear guidance to the hospitals that are using these 
very complicated. If anybody can come up with a solution, Mr. 
Scully, you with your experience probably can.
    So I have a statement to submit to the record. I am just 
going to sit and listen for a few minutes.
    Senator Specter. It will be made a part of the record, 
without objection.
    Senator Landrieu. Thank you, Mr. Chairman.
    [The statement follows:]
             Prepared Statement of Senator Mary L. Landrieu
    Thank you, Mr. Chairman. For 38 years, Medicare has provided health 
care security to millions of America's seniors and people with 
disabilities. This year alone, 38 million people will receive the 
medical treatment they need because of Medicare. As successful as it 
has been, the Medicare program functions as one would expect a 1965 
program to perform in the year 2003. Its rules and regulations are 
cumbersome, its reimbursements are too often inadequate, and it has not 
always kept pace with decades of dramatic improvements in health care.
    In addition, Medicare faces serious financial challenges. Its 
current form will not sustain the 77 million baby boomers that will 
begin to retire in 2010. Without substantial changes to the program, 
the federal government will not have the resources necessary to fulfill 
its promise of health care security for all seniors. Congress has 
attempted to reform Medicare in the past, but has succeeded only in 
making incremental changes to a program in need of overall reform. The 
time has come for us to meet this challenge head on.
    The main function of the Center for Medicare and Medicaid Services 
is to maximize the benefits for current and future participants by 
preserving the integrity of the provider payment system. One of the 
single most effective ways for them to fulfill this role is to be 
cognizant of payment structures that may be open to fraud and abuse and 
regulate them in such a way as to ensure fraud and abuse is limited. 
That is exactly what CMS has done in the case of Medicare outlier 
payments. I commend them for their efforts to increase the level of 
scrutiny of these payments and encourage them to continue in this 
endeavor.
    At the same time, I would recommend to you, Mr. Scully, that CMS 
further study the underlying payment formula to assess whether or not 
any of its components or assumptions are inherently flawed and as a 
result are giving rise to inflated payments. For instance, your own 
reports indicate that the lag in time that results from basing the 
cost-to-charge ration on the most recently settled cost instead of the 
current cost report may increase outlier payments. There may, in fact, 
be ways to improve this formula so that it better reflects the actual 
cost a hospital incurs in caring for a complicated patient.
    In addition, Medicare should also strive to provide detailed and 
ongoing guidance to providers on ways to avoid compliance risks. If one 
studies the suggested ways that hospitals could manipulate their costs 
to generate higher reimbursement, it is clear that many, if not all, of 
these situations may be occurring unintentionally or because of billing 
errors and outdated accounting procedures. Advising providers of ways 
that they may avoid these risks will eliminate the negligent wrongdoers 
and allow CMS and OIG to focus only on those engaged in intentional 
fraud.
    I am looking forward to the opportunity to engage in a discussion 
on this issue with our panel here today. I hope that this will be the 
first of many opportunities this committee has to engage in the debate 
of Medicare reform. The 38 million seniors who depend on this program 
need for us to do what is necessary to meet our obligation to fulfill 
Medicare's promise of health care security.
    I thank the Chair.

    Senator Specter. Thank you, Senator Landrieu. Thank you 
very much.
    Mr. Scully, we hope you can find some way to make an 
accommodation on an adjustment period, and that rise from the 
20s to $33,000 does seem, at least to me, to be very, very 
tough, but to give some accommodation period so that it can be 
assimilated.
    I think we have made some significant progress, because 
there had been an attempt, as you outline it, to put the rule 
into effect immediately. It was released on February 28, 
published on 5 March, a comment period until April 4, so there 
will be a period of time after that, and then there will be 
some additional time before a rule is promulgated taking into 
account what those comments were, so at least that is some 
assistance, but I hope you will work with the hospitals, which 
are having these very difficult transition times.

                     ADDITIONAL PREPARED STATEMENTS

    We have received addditional prepared statements that will 
be made part of the hearing record.
    [The statements follow:]
        Prepared Statement of the American Hospital Association
    On behalf of our nearly 5,000 member hospitals, health care 
systems, networks and other providers of care, the American Hospital 
Association (AHA) appreciates the opportunity to submit this statement 
on changes to the outlier payment policy proposed by the Centers for 
Medicare & Medicaid Services (CMS) and published March 5, 2003 in the 
Federal Register.
    We have very serious concerns about this proposal's dramatic 
revisions to Medicare outlier payment policy. While we agree that 
changes need to be made to ensure the accuracy of outlier payments, the 
mid-year amendments proposed by CMS are unreasonable. The revisions 
will not just affect a small number of hospitals with significant 
outlier experience, but rather almost every hospital in the country. 
Yet CMS did not publish any data on the financial impact of its 
proposed changes or offer a full 60- day comment period so that 
hospitals could better analyze, understand, and comment on the dramatic 
mid-year changes in the proposed rule. Moreover, cost settlement of 
outlier payments for all hospitals is unnecessary and unjustified, the 
outlier threshold must be lowered to reflect savings achieved by its 
proposed policy changes, and a transition period is necessary for those 
hospitals harmed.
                               background
    Twenty years ago, when the Medicare program moved from cost-based 
reimbursement to an inpatient prospective payment system (PPS), 
Congress mandated that additional payments be provided to limit 
hospitals' financial risk when treating elderly patients with 
especially serious illnesses. These so-called ``outlier'' payments are 
critical for hospitals because they are designed to alleviate the 
financial burden of unusually costly cases that otherwise would be 
significantly under-reimbursed in a PPS that pays on the basis of 
averages. The system is budget neutral--meaning that the PPS 
standardized amount is reduced to fund outlier payments.
    The outlier system and its payment formula are very complex. In 
general, a hospital's costs must exceed a specified dollar amount, or 
threshold, in order to qualify for the additional payments. But CMS 
cannot determine actual hospital costs for each and every patient seen 
in a hospital, so the agency uses hospital charges and converts them to 
estimated costs, using a hospital's cost-to-charge ratio. Even when 
compensated for outlier payments, however, hospitals are not reimbursed 
the full cost of care for these patients.
                            cost settlement
    Currently, CMS uses the cost-to-charge ratio from a hospital's most 
current final settled cost report to estimate hospital costs in the 
current year. Because there is a significant time lag in settling 
Medicare cost reports, this cost-to-charge ratio may be three to five 
years old. During this time, it is likely that a hospital's charges as 
well as its costs will have changed, making that cost-to-charge ratio 
outdated, and no longer reflective of hospitals' costs.
    Under the proposed rule, CMS would use more up-to-date data when 
determining the cost-to-charge ratio for each hospital. Rather than 
relying on the most recent final settled cost report, CMS proposes to 
use the most recent tentatively settled cost report. The AHA supports 
this initiative, which would decrease the lag time in cost-to-charge 
ratios from the three-to-five-year period to potentially eight months 
after the close of a hospital's cost reporting period. In addition, CMS 
has proposed to allow hospitals to request changes to their cost-to-
charge ratio if they present data that the current ratio used by fiscal 
intermediaries is inaccurate. And, CMS would be able to change a 
hospital's cost-to-charge ratio if, within the past two years, its data 
show dramatic hospital charge increases. These changes will ensure that 
outlier costs are calculated using accurate and timely data, and this 
will dramatically improve outlier payments in the inpatient prospective 
payment system. The AHA strongly believes that these measures are 
sufficient to ensure both accountability of the system, and appropriate 
outlier payments. Proceeding further with cost-settlement is not 
necessary.
    In addition to changing the calculation of a hospital's cost-to-
charge ratios, CMS would require that outlier payments be adjusted and 
reconciled upon final settlement of a hospital's Medicare cost report. 
This would be implemented by using hospitals' final settled cost-to-
charge ratio to re-calculate outlier payments. This incredibly 
burdensome proposal is duplicative and inefficient, as it would require 
the re-processing of hundreds of thousands of claims to determine both 
if a claim qualifies for an outlier payment given a hospital's final-
settled cost-to-charge ratio, and if so, how much the payment should 
be. This would create more volatility in Medicare payment and 
hospitals' planning, budgeting and operations. Under such a scenario, 
cost settlement would result in outlier payments that are no longer 
part of a prospective payment system, but rather they would be cost-
based--the direct opposite of the intent of Medicare legislation.
    This complex process is unwarranted and unnecessary. The use of 
tentatively settled cost reports should be more than adequate to 
determine appropriate outlier payments in a prospective payment system. 
We urge you to strongly encourage CMS not to move forward with cost 
settlement. The agency's other proposed changes will achieve the 
desired improvements in the system to protect access to care for the 
most costly and ill Medicare patients, protect the integrity of outlier 
payments, and protect Medicare Part A Trust Fund payments to hospitals.
                           statewide average
    In addition to using more recent cost-to-charge ratios, the rule 
proposes to eliminate use of the statewide average cost-to-charge 
ratio. Currently, hospitals with cost-to-charge ratios that fall 
outside of an acceptable range have their hospital-specific cost-to-
charge ratio changed to the average urban or rural cost-to-charge ratio 
for their state. This policy, adopted in 1989, resulted in significant 
changes in the cost-to-charge ratios for certain hospitals. The 
American Hospital Association agrees that use of the statewide average 
should be eliminated.
                               threshold
    Given the significant policy changes in the rule, the outlier 
threshold needs to be recalculated. Using more updated cost-to-charge 
ratios and eliminating the use of statewide average cost-to-charge 
ratio would substantially lower overall outlier payments to hospitals 
in 2003. And thus, the outlier threshold must be lowered to allow more 
hospitals and more high-cost cases to qualify for these payments. If 
these two changes were adopted it is our belief that the threshold 
should decline in order to ensure hospitals are reimbursed at the 
targeted amount of 5.1 percent of total inpatient PPS payments. These 
funds have already been carved out of base Medicare payments for 2003, 
necessitating that the threshold be recalculated to ensure that 
Medicare outlier payments in aggregate are received in full by the 
nation's hospitals. We're extremely disappointed that CMS has ignored 
the premise that elimination of the statewide average should, by 
definition, result in a lowering of the outlier threshold. We ask the 
subcommittee to insist that CMS adapt this policy change. In addition, 
AHA is conducting an analysis to determine how much the outlier 
threshold should be lowered and we will include the findings of this 
analysis in our comment letter to CMS.
                               transition
    In the proposed rule, CMS indicated that it was ``unable to 
quantify the likely impacts of these proposed changes.'' AHA's initial 
data analysis indicates that the adoption of these policies would have 
a significant impact on many providers. Three out of four hospitals 
receive outlier payments. These providers have budgeted for and are 
operating under the current rules of the Medicare program. A steep drop 
in expected payments for outlier cases could be financially 
devastating, especially given the increased financial pressures of 
workforce shortages and skyrocketing labor costs, rising pharmaceutical 
and technology costs, and soaring medical liability premiums.
    CMS frequently provides transition periods to help ameliorate the 
impact of major policy changes that reduce Medicare payments to 
hospitals and other providers. For example, CMS recently completed a 
10-year phase-in of capital PPS payments, and a four-year phase-in of 
the removal of salaries related to graduate medical education and 
certified registered nurse anesthetists in the calculation of the area 
wage index. Hospitals were also provided transitional corridor payments 
and hold harmless payments when the outpatient hospital prospective 
payment system was implemented. We urge the subcommittee to ensure that 
a transition period is made available for those hospitals significantly 
harmed by any change in the outlier regulation.
                               conclusion
    Mr. Chairman, America's hospitals are experiencing total margins 
that are at their lowest level in 10 years, and the majority of 
hospitals continue to be reimbursed less than what it costs them to 
provide the services that Medicare patients need. Still, even as they 
face dwindling federal resources, hospitals are committed to continue 
providing top-notch care . . . including the care needed by those most 
extremely ill of America's seniors.
    But the proposed outlier rule, as it currently is written, stands 
to jeopardize our ability to deliver on that commitment. While we 
support CMS' proposal to use the most current cost-to-charge ratio in 
calculating outlier payments, we ask you to urge CMS to abandon the 
additional requirement that outlier payments be reconciled upon cost 
settlement. In addition, CMS must reexamine and lower the outlier 
threshold, and ensure that protections are put in place that allow a 
transition period for those hospitals affected by this mid-year change 
in policy.
                                 ______
                                 
       Prepared Statement of the New Jersey Hospital Association
    The New Jersey Hospital Association has reviewed the proposed rule, 
published by the Centers for Medicare and Medicaid Services on March 5, 
2003 related to Medicare cost outliers. We are currently in the process 
of formulating our comments associated with this proposed rule for 
submission to CMS. Prior to the completion of those comments we would 
like to take the opportunity to outline our initial thoughts in the 
form of this statement.
    While CMS has provided a general outline for how Medicare cost 
outlier payments to hospitals will be calculated in the future, there 
are a number of ambiguities in the proposed rule. Further, we are 
currently reviewing several aspects of the proposal. The following is a 
list of those issues:
                         the outlier threshold
    The proposed rule calls for a change to use of a more recent ratio 
of cost to charges (RCC), and ultimate settlement to a hospital's 
actual RCC. Making these changes without a significant downward 
adjustment to the cost outlier threshold will cause CMS to make cost 
outlier payments at a level significantly below the required 5 percent 
and therefore over-correct for any excess payments in this payment 
pool. We are concerned that the proposed rule as presented will not 
adequately reimburse hospitals their cost, as prescribed, for outlier 
cases.
                           transition period
    With the strong likelihood that outlier payments to many hospitals 
will be significantly reduced, it would be appropriate for CMS to 
include a transition period that would allow hospitals to adjust to 
these changes over a multi-year period.
                             implementation
    A mid-year change to an issue of this magnitude will be problematic 
for hospitals. CMS should consider implementing this rule for hospital 
cost reporting periods beginning on or after the effective date of the 
rule.
                         the settlement process
    In the proposed rule, CMS indicates its intent to reconcile 
outliers retrospectively to hospital's actual RCC from their final 
settled cost report. CMS has not clearly described whether this 
reconciliation will occur in all cases. Further, CMS has not explained 
how it will account for IME and DSH components of outlier payments and 
the outcome of hospital appeals that occur post settlement. Since post-
payment reconciliation based on audited costs undermines the 
prospectivity of PPS, CMS should limit the cases to which this is 
applied.
               intermediary adjustments to tentative rccs
    The proposed rule allows intermediaries to adjust hospital specific 
RCCs from the tentative settled cost report subsequent to a review 
relative to other hospitals. CMS should provide the intermediaries with 
corridors or other guidelines to minimize the potential for uneven 
application of this component across intermediaries.
                          interest assessments
    Interest assessments under the Medicare program are statutory. CMS 
should not impose interest assessments on outliers without specific 
statutory to do so.
    Again, NJHA will be providing more comprehensive comments to CMS on 
the proposed rule prior to the April 4, 2003 deadline. We appreciate 
this opportunity to inform the Subcommittee of out initial concerns 
related to this rule.
    If the Subcommittee has any questions about these comments, please 
contact Sean Hopkins, Senior Vice President, Health Economics at 609 
275-4022 or [email protected].

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Specter. There will be some additional questions 
which will be submitted for your response in the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
              Questions Submitted by Senator Arlen Specter
    Question. The new outlier payment policies, if implemented, will 
cause significant payment reductions for many hospitals. Consistent 
with prior Medicare practice when payment policies are changed 
abruptly, wouldn't it be fair to transition these payment reductions 
over a multi-year period?
    Answer. Outlier payments are uniquely susceptible to manipulation 
because hospitals set their own level of charges and are able to change 
their charges without notification to, or review by, their fiscal 
intermediary. Such changes by a hospital directly affect its level of 
outlier payments, unlike IME or DSH where the fiscal intermediary must 
agree to a change to the underlying data. Therefore, an extended 
transition period would allow the effects of inappropriate 
redistribution of outlier payments to continue into the future. We 
believe it is essential to ensuring that outlier payments are made for 
truly high-cost cases to eliminate those effects as soon as possible.
    Question. Don't the current outlier thresholds take into account 
the projected 2003 charge increases that would be reversed by the 
reconciliation of outlier payments to the final, audited 2003 cost 
reports under the proposed rule? Shouldn't the outlier thresholds be 
reduced to reflect these new policies?
    Answer. We are examining the appropriate level of the threshold in 
conjunction with preparing the final outlier rule, and will address the 
issue of whether the threshold should be reduced in that final rule 
that is expected to be published later this year.
    Question. Isn't it true that CMS has never issued any clear 
guidance on hospital charging levels? Didn't CMS's historic outlier 
policies require hospitals to raise charges dramatically even to 
receive the appropriate level of outlier payments they were due 
(because of substantial annual increases in the outlier thresholds)?
    Answer. It is true the Federal government has never directly 
regulated hospitals' charging practices. It is not true that CMS 
policies regarding the outlier threshold have required hospitals to 
increase charges dramatically. Outlier thresholds are determined based 
on hospitals' historical charge data, and the dramatic increase in the 
threshold is a reflection, not a cause, of some hospitals' rapidly 
rising charges.
    Question. Isn't it true that the failure of the Medicare Program to 
timely settle cost reports often caused hospitals to receive excessive 
outlier payments?
    Answer. It is true that extended delays in settling cost reports 
increases the time lag between the data used to process claims and the 
contemporaneous data. However, the excessive outlier payments we are 
addressing are primarily attributable to small groups of hospitals 
increasing their charges by 30 percent or more annually the last couple 
of years.
    Question. Isn't it true that the failure of the Medicare Program to 
properly update cost-to-charge ratios also often caused hospitals to 
receive excessive outlier payments?
    Answer. It is true that extended delays in settling cost reports 
increases the time lag between the data used to process claims and the 
contemporaneous data. However, the excessive outlier payments we are 
addressing are primarily attributable to small groups of hospitals 
increasing their charges by 30 percent or more annually the last couple 
of years.
    Question. These new policies would impose interest charges on a 
hospital that receives outlier payments that are later reduced upon 
audit. Can the Medicare Program impose interest charges without 
explicit statutory authority?
    Answer. We are imposing an adjustment to account for the time value 
of the excess outlier payments the hospitals have received. This 
adjustment is consistent with the statutory requirement at section 
1886(d)(5)(A)(iii) that outlier payments approximate the marginal cost 
of care beyond the threshold. That is, because hospitals are uniquely 
able to manipulate outlier payments by increasing charges, it is 
necessary to establish a mechanism whereby an adjustment can be made to 
ensure payments appropriately reflect the marginal costs of care for 
outlier cases.
    Question. Isn't it true that the cost-to-charge ratio of outlier 
cases differs from that of regular cases because outliers are the 
highest cost cases? If yes, how can outlier payments be determined 
accurately using cost-to-charge ratios based principally on non-outlier 
cases?
    Answer. Hospitals' charge structures are consistent across 
patients. Therefore, the cost-to-charge ratio should not vary based 
upon whether a case incurs high costs. The charges will be higher, but 
the ratio will be the same, and, thus, the costs will be 
correspondingly higher.
    Question. When your proposal went to OMB the threshold was $22,000 
and you claimed it would affect a small number of hospitals and when it 
came out of OMB it was $33,000 and affects nearly every hospital. If 
this fix is so urgent, how could you send a proposal to OMB that was 
completely rewritten?
    Answer. It was revised as part of the necessary review and 
clearance process applicable for every Federal regulation, no matter 
how urgent.
    Question. What was the result of your October 2002 adjustment in 
the threshold? What was the result of the national program review 
initiated December 3, 2002? If you believed a national review was 
necessary how can you move forward with a precise and accurate proposed 
reform when you don't have the results of your national program review?
    Answer. In fiscal year 2002, we now project we will actually have 
paid 7.9 percent of total DRG payments in outliers. The adjustment we 
made October 2002 appears to have brought the fiscal year 2003 
percentage down significantly below that level. The national review 
helped us to identify the scope of the problem, and the changes we are 
making reflect our findings from that review.
    Question. Why are you opposed to a 60-day comment period, followed 
by a 180-day rulemaking period and working with all hospitals on a fair 
and seamless transition period to account for significant impacts and 
changes?
    Answer. Outlier payments are uniquely susceptible to manipulation 
because hospitals set their own level of charges and are able to change 
their charges without notification to, or review by, their fiscal 
intermediary. Such changes by a hospital directly affect its level of 
outlier payments, unlike IME or DSH where the fiscal intermediary must 
agree to a change to the underlying data. Therefore, an extended 
transition period would allow the effects of inappropriate 
redistribution of outlier payments to continue into the future. We 
believe it is essential to ensuring that outlier payments are made for 
truly high-cost cases to eliminate those effects as soon as possible.
    Question. Mr. Scully what would you do if you were a hospital 
administrator and CMS told you that in the middle of your fiscal year 
you were going to lose $2 million per month? How can you say hospital 
administrators should not be in the position when CMS only now has 
figured out there is a ``problem'' and it's your system and 
administration under which they all operate?
    Answer. In just fiscal year 2001 and fiscal year 2002 alone, 
Medicare has paid hospitals $4.4 billion more than budgeted for outlier 
payments. We now know that much of that excess amount was directly 
attributable to hospitals deliberately taking advantage of a loophole 
in the system. For example, one hospital in Brownsville, Texas, had 
outlier payments in 2003 approximately 110 percent of its DRG payments, 
and, under current rules, is projected to receive outlier payments in 
fiscal year 2004 equal to 134 percent of its 2004 DRG payments. 
Furthermore, this hospital increased its charges by 40 percent from 
fiscal year 2001 to fiscal year 2002. Those are the hospital 
administrators this change is targeting.

                         CONCLUSION OF HEARING

    Senator Specter. Thank you all very much for being here. 
That concludes our hearing.
    [Whereupon, at 10:46 a.m., Tuesday, March 11, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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