    [House Hearing, 109 Congress]
    [From the U.S. Government Publishing Office]

                        MEDICARE PAYMENTS TO PHYSICIANS

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

                                    HEARING

                                   before the

                             SUBCOMMITTEE ON HEALTH

                                     of the

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

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 10, 2005

                                   __________

                               Serial No. 109-11

                                   __________

             Printed for the use of the Committee on Ways and Means

                                     _____

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                          COMMITTEE ON WAYS AND MEANS

                       BILL THOMAS, California, Chairman

    E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
    NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
    WALLY HERGER, California             SANDER M. LEVIN, Michigan
    JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
    DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
    JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
    JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
    SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
    ROB PORTMAN, Ohio                    WILLIAM J. JEFFERSON, Louisiana
    PHIL ENGLISH, Pennsylvania           JOHN S. TANNER, Tennessee
    J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
    JERRY WELLER, Illinois               LLOYD DOGGETT, Texas
    KENNY C. HULSHOF, Missouri           EARL POMEROY, North Dakota
    SCOTT MCINNIS, Colorado              STEPHANIE TUBBS JONES, Ohio
    RON LEWIS, Kentucky                  MIKE THOMPSON, California
    MARK FOLEY, Florida                  JOHN B. LARSON, Connecticut
    KEVIN BRADY, Texas                   RAHM EMANUEL, Illinois
    THOMAS M. REYNOLDS, New York
    PAUL RYAN, Wisconsin
    ERIC CANTOR, Virginia
    JOHN LINDER, Georgia
    BOB BEAUPREZ, Colorado
    MELISSA A. HART, Pennsylvania
    CHRIS CHOCOLA, Indiana

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

                                     ______

                             SUBCOMMITTEE ON HEALTH

                    NANCY L. JOHNSON, Connecticut, Chairman

    JIM MCCRERY, Louisiana               FORTNEY PETE STARK, California
    SAM JOHNSON, Texas                   JOHN LEWIS, Georgia
    DAVE CAMP, Michigan                  LLOYD DOGGETT, Texas
    JIM RAMSTAD, Minnesota               MIKE THOMPSON, California
    PHIL ENGLISH, Pennsylvania           RAHM EMANUEL, Illinois
    J.D. HAYWORTH, Arizona
    KENNY C. HULSHOF, Missouri

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

                                C O N T E N T S

                                   __________

                                                                       Page

    Advisory of February 3, 2005, announcing the hearing.............     2

                                   WITNESSES

    U.S. Government Accountability Office, Bruce Steinwald, Director,
      Health Care, Economic and Payment Issues.......................     5
    Medicare Payment Advisory Commission, Glenn M. Hackbarth,
      Chairman.......................................................    16

                                     ______

    American Medical Association, Nancy Nielsen......................    39
    American Urological Association, William F. Gee..................    58
    Medicare Rights Center, Robert M. Hayes..........................    62
    Partners Community HealthCare, Inc., Thomas H. Lee...............    48

                           SUBMISSIONS FOR THE RECORD

    American Academy of Family Physicians, Wendy Gaitwood, statement.    71
    American Association for Geriatric Psychiatry, Bethesda, MD,
      Stephanie Reed, statement......................................    75
    American College of Radiology, Josh Cooper, statement............    76
    American Physical Therapy Association, Alexandria, VA, Justin
      Moore, statement...............................................    80
    Coalition for Patient-Centered Imaging, statement................    84
    Critical Care Cardiology, Inc., Chula Vista, CA, Vimal Indravadan
      Nanavati, letter...............................................    86
    Ethical Health Partnerships, Winter Park, FL, Dawn Lipthrott,
      statement......................................................    88
    Healthcare Information and Management Systems Society, Chicago,
      IL, H. Stephen Lieber, statement...............................    93
    Managed Care Advocacy Program, Toledo, OH, Elizabeth A. Flournoy,
      letter.........................................................    95
    Medical Group Management Association, William F. Jessee,
      statement......................................................    96
    Medtronic, Inc., Minneapolis, Minnesota, Arthur D. Collins, Jr.,
      letter.........................................................    97
    National Coalition for Quality Diagnostic Imaging Services,
      Houston, TX, statement.........................................    98
    Renal Physicians Association, James Weiss, statement.............   101

                        MEDICARE PAYMENTS TO PHYSICIANS

                                  ----------

                          THURSDAY, FEBRUARY 10, 2005

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

        The Subcommittee met, pursuant to notice, at 10:00 a.m., in
    room 1100, Longworth House Office Building, Hon. Nancy L.
    Johnson (Chairman of the Subcommittee) presiding.
        [The advisory announcing the hearing follows:]

    ADVISORY

    FROM THE
    COMMITTEE
     ON WAYS
    AND
    MEANS

                             SUBCOMMITTEE ON HEALTH

                                                    CONTACT: (202) 225-3943
    FOR IMMEDIATE RELEASE
    February 03, 2005
    HL-1

                          Johnson Announces Hearing on

                        Medicare Payments to Physicians

        Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
    Health of the Committee on Ways and Means, today announced that the
    Subcommittee will hold a hearing on Medicare payments to physicians.
    The hearing will take place on Thursday, February 10, 2005, in the main
    Committee hearing room, 1100 Longworth House Office Building, beginning
    at 10:00 a.m.

        In view of the limited time available to hear witnesses, oral
    testimony at this hearing will be from the invited witnesses only.
    Witnesses will include Glenn Hackbarth, Chairman of the Medicare
    Payment Advisory Commission (MedPAC), A. Bruce Steinwald from the U.S.
    Government Accountability Office (GAO), and representatives from groups
    affected by Medicare's payment policies. However, any individual or
    organization not scheduled for an oral appearance may submit a written
    statement for consideration by the Committee and for inclusion in the
    printed record of the hearing.

    BACKGROUND:

        Annual updates to Medicare's reimbursement for physicians and other
    providers paid under the physician fee schedule are determined by a
    formula set in law known as the sustainable growth rate (SGR). This
    formula sets a target for growth in Medicare expenditures for physician
    services based on growth in the gross domestic product. This target is
    also adjusted for volume growth and other factors. If Medicare
    expenditures exceed the target, Medicare payment rates to physicians
    are reduced. If Medicare expenditures are less than the target, payment
    rates are increased.

        Projections prepared by the Office of the Actuary for the Centers
    for Medicare & Medicaid Services, reported in the 2004 Annual Report of
    the Medicare Trustees, indicate that Medicare will reduce payment rates
    to physicians by approximately 5 percent annually for 7 years,
    beginning in January 2006. Physician payment rates would decline more
    than 31 percent from 2005 to 2012, while costs of providing services
    would increase by 19 percent over the same period.

        In announcing the hearing, Chairman Johnson stated, ``The current
    Medicare payment system for physicians is unsustainable. We cannot
    allow Medicare's payments to doctors to fall through the floor while
    the cost of providing care continues to rise. Physicians are essential
    to the Medicare program and without their participation our seniors
    will lose access to high-quality care. This hearing will offer the
    Subcommittee an opportunity to explore alternative payment systems such
    as paying for quality and efficiency.''

    FOCUS OF THE HEARING:

        The hearing will focus on identifying problems with the physician
    payment formula and exploring potential solutions. The GAO will present
    findings from its recent report on physician payments. The MedPAC will
    review its recommendations for physician payment reform, including
    tying payment to quality of care and resource use, and implementing
    measures to reduce the volume and increase the quality of certain
    services. The second panel will provide input from affected parties,
    including testimony from witnesses with practical experience in systems
    that promote quality and efficiency.

    DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

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    noted above.

        Chairman JOHNSON. Good morning, everyone. It is a pleasure
    to welcome you to the first hearing of the Subcommittee on
    Health and especially to welcome the new Members on both sides
    of the aisle that have joined us for this session's work. We
    also have today Congressman Cardin and Congressman Gingrey
    sitting in with us, as long as they are able, and I welcome
    them as well. Although our surroundings in this room have
    changed considerably with paint and carpeting, we do find
    ourselves today facing a very old problem, Medicare
    reimbursements to physicians. Unfortunately, I do not believe
    that the old formula used to update physician reimbursement
    rates can be fixed with a coat of paint or a tweak here or a
    tweak there. We need to fundamentally rethink how we pay our
    doctors. The Office of the Actuary for the Centers of Medicare
    & Medicaid Services (CMS) projects that Medicare under current
    law will reduce physician payment rates and other Medicare
    providers paid under the physician fees schedule by
    approximately 5 percent each year for the next 7 years,
    beginning in January of 2006, unless we change the law.
        If these reductions occur, payment rates would drop by
    almost one-third while costs of practicing medicine will rise
    by almost one-fifth. That is a swing of 50 percent. If we do
    not reform the sustainable growth rate (SGR) payment formula,
    physicians will have a disincentive to participate in Medicare,
    and the result will be that seniors will have reduced access to
    physician services. Let's face it, the so-called formula is
    unsustainable. We tried to fix this irrational payment formula
    the last two Congresses. We worked with the Administration to
    make sure that the formula accounted for 1 million
    beneficiaries in fee-for-service Medicare who were going to
    their doctors and receiving care who had not been counted
    previously. We urged the Administration to change the way they
    measured productivity. This change was made.
        Finally, in the Medicare Modernization Act (MMA, P.L. 108-
    173), we replaced a single year's measure of economic growth
    with a 10-year rolling average to smooth out projected
    expenditure calculations and to reduce fluctuation and payment
    updates. Despite these changes, the payment system is still
    broken. It is time to fundamentally reform how Medicare pays
    physicians. The current system generates no incentives for high
    performance, because the best and the worst providers receive
    the same reimbursement. The current system rewards providers
    for delivering more services, not for managing care and
    delivering better outcomes. It is time to make health care
    safer and more accountable and to reward providers who deliver
    quality care by using resources efficiently and effectively. In
    the MMA, we challenged hospitals to report on 10 quality
    indicators to be eligible to receive a full Medicare payment
    update. It is now time for physicians to come forward with
    quality indicators that can drive reimbursements up in
    recognition of physicians' commitment to quality care.
        On our first panel today, we will hear from Bruce Steinwald
    of the U.S. Government Accountability Office (GAO), which last
    fall released a report on the problems with the spending target
    system used to set physician reimbursements in Medicare. We
    will also hear from Glenn Hackbarth, the Chairman of the
    Medicare Payment Advisory Commission (MedPAC), which has
    recommended replacing the current payment system and offered
    some insights on how we might incorporate paying for quality
    and efficiency in Medicare. Witnesses on our second panel will
    share perspectives from the provider and beneficiary viewpoints
    on how the current payment system works and how it might be
    modified to better serve Medicare beneficiaries, providers and
    taxpayers. I now invite my colleague, Mr. Stark, to make his
    opening statement.
        Mr. STARK. Thank you, Madam Chairman, and I appreciate your
    calling this hearing today. Yes, our system was made worse over
    the past couple of years by Congress, mostly by saying--by
    putting it off and saying we will deal with it tomorrow, which
    is arriving. We should have tackled this issue 3 years ago when
    we had a sensible solution in sight. Instead, we did MMA. It
    made the system worse. If we begin linking payments and quality
    to extract value from the system, we are going down a road
    which I am not sure we are prepared to do. The present payment
    system was put into place with the cooperation and agreement of
    most physicians in the country. What is not mentioned is that
    from the year 2001 until 2005, the actual services payments
    exceeded what the physician should have gotten. They have
    gotten more than they were entitled to under the law for almost
    5 years.
        Now, if you are going to follow the formula, it dips down a
    little and goes below SGR for a period of time starting at
    around 2006 until 2012. In about an equal amount, and nobody
    likes that, and nobody likes to remember that they got overpaid
    last year, and so to make it even they get underpaid this year.
    That is not a popular position. I am not sure it is politically
    sustainable. I do want to suggest that the formula was put into
    place with the cooperation of the physician community in an
    effort to find a way that could be adjusted from time to time
    and changed and negotiated. Unfortunately, we did not do that.
    We diddled with the system, and I think that we should be very
    careful about what we do and just say we have to raise rates. I
    would also like to focus our discussion somewhat today. We talk
    about rates. To put it in more plebeian terms, we are talking
    about a piece-rate business.
        So, we are talking about the rate per procedure. We are not
    talking about physicians' incomes, which physicians do not like
    to talk about very much, because they have been going up rather
    substantially, and their gross Medicare payments have been
    going up rather substantially, which either means they are
    cheating on their time for playing golf and working harder, or
    they may be more productive and be able to do more procedures
    in the same amount of time, in which case we should be able to
    lower the rate per procedure if they become more efficient. I
    think we have to look at both sides of that formula, and I look
    forward to hearing the witnesses' testimony. Thank you for
    having the hearing.
        Chairman JOHNSON. Thank you very much. Now, I would like to
    begin with Mr. Steinwald of GAO.

     STATEMENT OF BRUCE STEINWALD, DIRECTOR, HEALTH CARE, ECONOMIC
       AND PAYMENT ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. STEINWALD. Thank you, Madam Chairman, Mr. Stark,
    Members of the Subcommittee. I am pleased to be here today to
    discuss with you the system that is used to annually update
    fees paid to physicians under the Medicare program. As you
    noted, the SGR system is calling for several years of
    reductions in physician fees beginning in 2006. How and why
    this happened, and what options are available for change, will
    be the focus of my remarks today. I believe the key to
    understanding the growth in Medicare expenditures for physician
    services lies in understanding the trends and service volume
    and intensity. Volume refers to the average number of services
    performed per beneficiary, and intensity refers to the
    costliness and complexity of those services. For example, if we
    have more magnetic resonance imaging (MRIs) and fewer X-rays
    from one year to the next, that is an intensity increase,
    because MRIs are more expensive than X-rays. However, if we had
    more MRIs and X-rays from one year to the next, we have both an
    intensity and a volume increase. That is, in fact, what we have
    experienced.
        Please direct your attention to the screen, which shows the
    trends in volume and intensity in physician services per
    Medicare beneficiary that is holding the number of
    beneficiaries constant from 1980 through 2003. This appears on
    page 4 as Figure 1 in the written statement. The chart presents
    national averages, and therefore masks considerable variation
    across physician specialties, geographic areas and Medicare
    beneficiaries. As the chart shows, volume and intensity growth
    during the 1980s and early 1990s was substantial. During these
    years, efforts to control spending growth by the Congress
    focused on limiting fee increases, and they were largely
    unsuccessful in controlling expenditures. In 1992, the chart-
    based system of setting fees was replaced by a Medicare fee
    schedule and, with it, a target system for controlling spending
    for physician services was also installed. As you can see, for
    several years afterward, volume and intensity were moderated,
    but then began to trend upward again in the year 2000. Largely
    because of this upward trend, in 2002, the SGR system called
    for a fee decrease for the first time ever, and only through
    congressional action were fee cuts averted in 2003, 2004 and
    2005. Without additional action, fee cuts will return in 2006.
        The reason for projected fee cuts are twofold. First is
    that volume intensity spending growth is projected to exceed
    the SGR allowance for such growth. This allowance is the
    average annual growth rate of the national economy or Gross
    Domestic Product, which is projected to be slightly higher than
    2 percent a year for the foreseeable future. The second reason
    is that the SGR system will need to recoup the overpayments
    made in 2004 and 2005, when the system's negative updates were
    averted by the MMA in 2003. As Mr. Stark noted, essentially,
    the MMA mandated fee update simply put off the requirements of
    SGR to balance spending with the targets rather than changing
    the targets. We at GAO recognize that multiple years of
    negative updates presents a difficult situation for physicians,
    for the Congress and potentially for Medicare beneficiaries. As
    you know, the MMA asked us to examine options for modifying and
    improving, and/or improving, the SGR system.
        I would like to call your attention to the screen, which
    displays table 1 on page 11 of my written statement. The table
    shows a sample of options that seek to address the SGR
    problems. I would note that our October 2004 report examines
    these options and several additional options in some detail. In
    general, however, we found that the choices for change cluster
    around two broad approaches. One approach, which has been
    recommended by MedPAC, would end the use of spending targets
    and replace them with more focused efforts to control spending.
    The other approach would retain spending targets, but modify
    the current SGR system to address its shortcomings. Eliminating
    the targets would make it easier to stabilize fee updates;
    whereas retaining targets with modifications would retain the
    mechanism that automatically applies fiscal breaks whenever
    spending for physician services grows too fast. In the interest
    of time, I will not explain the different options in detail. I
    will be happy to answer questions about any of them, except to
    note that they vary substantially in their effect on physician
    fees and spending. I might also add that the options vary in
    their effects on beneficiary out-of-pocket co-payment as well.
        Either of the two broad approaches could be implemented in
    a way that would likely generate positive fee updates, and each
    could be accompanied by separate more focused efforts to
    moderate volume and intensity growth. However, because multiple
    years of projected 5-percent fee cuts are incorporated in
    Medicare's budget baseline, almost any change to the SGR system
    is likely to increase program spending considerably. Overall,
    we are mindful of the serious financial challenges facing the
    Medicare program, the need to design policies that help ensure
    the long term sustainability and affordability of the program.
    We at GAO look forward to working with the Subcommittee and
    others in Congress on this complex issue. Madam Chairman, this
    concludes my prepared statement. I would be happy to answer any
    questions you or any other Subcommittee Members may have.
        [The prepared statement of Mr. Steinwald follows:]
       Statement of Bruce Steinwald, Director, Health Care, Economic and
             Payment Issues, U.S. Government Accountability Office
        Madam Chairman and Members of the Subcommittee:
        I am pleased to be here today as you discuss the sustainable growth
    rate (SGR) system that Medicare uses to update physician fees and
    moderate the growth in spending for physician services. A brief look at
    the updates resulting from the SGR system since it was enacted by
    Congress puts current concerns in context. From 1999--the first year
    that the SGR system was used to update Medicare's physician fees--
    through 2001, annual fee increases ranged from 2.3 percent to 5.5
    percent. However, in 2002 the SGR system reduced physician fees by
    nearly 5 percent. Fee declines in subsequent years were averted only by
    new legislation that modified or temporarily overrode the SGR system.
    For example, the Medicare Prescription Drug, Improvement, and
    Modernization Act of 2003 (MMA) specified a minimum update of 1.5
    percent for both 2004 and 2005.\1\ Absent additional administrative or
    legislative action, however, the SGR system is projected to reduce fees
    by about 5 percent per year for several years beginning in 2006. These
    projected declines have raised policymakers' concerns about the
    appropriateness of the SGR system for updating physician fees and about
    physicians' continued participation in the Medicare program. At the
    same time, there are concerns about Medicare spending growth and the
    long-term fiscal sustainability of the program.
    ---------------------------------------------------------------------------
        \1\ Pub. L. No. 108-173, Sec. 601(a)(1), 117 Stat. 2067, 2300.
    ---------------------------------------------------------------------------
        My comments today are intended to describe the issues that Medicare
    faces in annually updating physician fees and potential approaches for
    addressing those issues. Specifically, I will discuss (1) how the SGR
    system is designed to moderate the growth in spending for physician
    services, (2) why physician fees are projected to decline under the SGR
    system, and (3) options for revising or replacing the SGR system and
    their implications for physician fee updates and Medicare spending. My
    testimony today is based on the findings contained in our October 2004
    report on this subject.\2\ This work was performed between January 2004
    through September 2004 according to generally accepted government
    auditing standards.
    ---------------------------------------------------------------------------
        \2\ GAO, Medicare Physician Payments: Concerns about Spending
    Target System Prompt Interest in Considering Reforms, GAO-05-85
    (Washington, D.C.: Oct. 8, 2004).
    ---------------------------------------------------------------------------
        In summary, the SGR system is designed to apply financial brakes
    whenever spending for physician services exceeds predefined spending
    targets. It does this by reducing physician fees or limiting their
    annual increase. Historically, efforts that limited fees but did not
    set spending targets failed to moderate spending growth. Increases in
    the number of services delivered to each beneficiary--known as volume--
    and the complexity or costliness of those services--known as
    intensity--caused continued increases in spending. The SGR system
    allows for some volume and intensity spending growth, but if such
    growth exceeds the average growth in the national economy, as measured
    by the gross domestic product (GDP) per capita, fee updates are
    reduced. There are two principal reasons why physician fees are
    projected to decline under the SGR system beginning in 2006. One reason
    is that projected spending growth attributable to volume and intensity
    increases exceeds the SGR allowance for such growth. The MMA is also
    partly responsible because it increased the update for 2004 and 2005--
    thus increasing spending--but did not raise the spending targets for
    those years. The SGR system, which is designed to keep spending in line
    with its targets, must reduce fees beginning in 2006 to offset the
    excess spending attributable to both volume and intensity increases and
    this MMA provision. In general, proposals to reform Medicare's method
    for updating physician fees would either (1) eliminate spending targets
    and establish new considerations for the annual fee updates or (2)
    retain spending targets, but modify certain aspects of the current
    system. Either approach could be complemented by focused efforts to
    moderate volume and intensity growth directly.
    Background
        Although the current focus of concern is largely on the potential
    for several years of declining physician fees, the historic challenge
    for Medicare has been to find ways to moderate the rapid growth in
    spending for physician services. Before 1992, the fees that Medicare
    paid for those services were largely based on physicians' historical
    charges.\3\ Spending for physician services grew rapidly in the 1980s,
    at a rate that the Secretary of Health and Human Services (HHS)
    characterized as out of control. Although Congress froze fees or
    limited fee increases, spending continued to rise because of increases
    in the volume and intensity of physician services. From 1980 through
    1991, for example, Medicare spending per beneficiary for physician
    services grew at an average annual rate of 11.6 percent.
    ---------------------------------------------------------------------------
        \3\ Medicare paid physicians on the basis of ``reasonable charge,''
    defined as the lowest of the physician's actual charge, the customary
    charge (the amount the physician usually charged for the service), or
    the prevailing charge (based on comparable physicians' customary
    charges).
    ---------------------------------------------------------------------------
        The ineffectiveness of fee controls alone led Congress to reform
    the way that Medicare set physician fees. The Omnibus Budget
    Reconciliation Act of 1989 (OBRA 1989) \4\ established both a national
    fee schedule and a system of spending targets,\5\ which first affected
    physician fees in 1992.\6\ From 1992 through 1997, annual spending
    growth for physician services was far lower than the previous decade.
    The decline in spending growth was the result in large part of slower
    volume and intensity growth. (See fig. 1.) Over time, Medicare's
    spending target system has been revised and renamed. The SGR system,
    Medicare's current system for updating physician fees, was established
    in the Balanced Budget Act of 1997 (BBA) and was first used to adjust
    fees in 1999.\7\
    ---------------------------------------------------------------------------
        \4\ See Pub. L. No. 101-239, Sec. 6102, 103 Stat. 2106, 2169-89.
        \5\ Medicare sets fees for more than 7,000 physician services based
    on the resources required to provide each service, adjusted for
    differences in the costs of providing services across geographic areas.
        \6\ The first system of spending growth targets, known as the
    Medicare Volume Performance Standard (MVPS), was in effect from 1992
    through 1997. In 1998, the SGR system of spending targets replaced
    MVPS.
        \7\ See Pub. L. No. 105-33, Sec. 4503, 111 Stat. 251, 433-34. BBA
    set a specific fee update for 1998. See BBA, Sec. 4505, 111 Stat. 435-
    39.
    ---------------------------------------------------------------------------
        Figure 1:  Growth in Volume and Intensity of Medicare Physician
                      Services per Beneficiary, 1980-2003

            [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Notes: Data are for beneficiaries in the traditional fee-for-
    service (FFS) program only. Data for end stage renal disease patients
    are not included. From 1980 through 1992, volume and intensity of
    service changes are based on Medicare outlays for all physician
    services. From 1993 through 2003, volume and intensity of service
    changes are based on Medicare outlays for physician services covered by
    the fee schedule.

        Following the implementation of the fee schedule and spending
    targets in 1992, through 1999, average annual growth in volume and
    intensity of service use per beneficiary fell to 1.1 percent. More
    recently volume and intensity growth has trended upward, rising at an
    average annual rate of about 5 percent from 2000 through 2003. Although
    this average annual rate of growth remains substantially below that
    experienced before spending targets were introduced, the recent
    increases in volume and intensity growth are a reminder that
    inflationary pressures continue to challenge efforts to moderate growth
    in physician expenditures.
    SGR System Designed to Limit or Reduce Physician Fee Updates in
            Response to Excess Growth in Volume and Intensity
        The SGR system establishes spending targets to moderate physician
    services spending increases caused by excess growth in volume and
    intensity. SGR's spending targets do not cap expenditures for physician
    services. Instead, spending in excess of the target triggers a reduced
    fee update or a fee cut. In this way, the SGR system applies financial
    brakes to physician services spending and thus serves as an automatic
    budgetary control device. In addition, reduced fee updates signal
    physicians collectively and Congress that spending due to volume and
    intensity has increased more than allowed.
        To apply the SGR system, every year the Centers for Medicare &
    Medicaid Services (CMS) follows a statutory formula to estimate the
    allowed rate of increase in spending for physician services and uses
    that rate to construct the spending target for the following calendar
    year.\8\ The sustainable growth rate is the product of the estimated
    percentage change in (1) input prices for physician services;
     9,10 (2) the average number of Medicare beneficiaries in
    the traditional fee-for-service (FFS) program; (3) national economic
    output, as measured by real (inflation-adjusted) GDP per capita; and
    (4) expected expenditures for physician services resulting from changes
    in laws or regulations. SGR spending targets are cumulative. That is,
    the sum of all physician services spending since 1996 is compared to
    the sum of all annual targets since the same year to determine whether
    spending has fallen short of, equaled, or exceeded the SGR targets. The
    use of cumulative targets means, for example, that if actual spending
    has exceeded the SGR system targets, fee updates in future years must
    be lowered sufficiently both to offset the accumulated excess spending
    and to slow expected spending for the coming year.
    ---------------------------------------------------------------------------
        \8\ This allowed rate is the sustainable growth rate from which the
    SGR system derives its name. We use the abbreviation SGR when referring
    to the system and the full term of ``sustainable growth rate'' when
    referring to the allowed rate of increase.
        \9\ CMS calculates changes in physician input prices based on the
    growth in the costs of providing physician services as measured by the
    Medicare Economic Index, growth in the costs of providing laboratory
    tests as measured by the consumer price index for urban consumers, and
    growth in the cost of Medicare Part B prescription drugs included in
    SGR spending.
        \10\ Under the SGR and MVPS systems, the Secretary of Health and
    Human Services defined physician services to include ``services and
    supplies incident to physicians' services,'' such as laboratory tests
    and most Part B prescription drugs.
    ---------------------------------------------------------------------------
        Under SGR, spending per beneficiary adjusted for the estimated
    underlying cost of providing physician services is allowed to grow at
    the same rate that the national economy grows over time on a per-capita
    basis--currently projected to be slightly more than 2 percent annually.
    If volume and intensity grow faster, the annual increase in physician
    fees will be less than the estimated increase in the cost of providing
    services. Conversely, if volume and intensity grow more slowly than 2
    percent annually, the SGR system permits physicians to benefit from fee
    increases that exceed the increased cost of providing services. To
    reduce the effect of business cycles on physician fees, MMA modified
    the SGR system to require that economic growth be measured as the 10-
    year moving average change in real per capita GDP. This measure is
    projected to range from 2.1 percent to 2.5 percent during the 2005
    through 2014 period.
        When the SGR system was established, GDP growth was seen as a
    benchmark that would allow for affordable increases in volume and
    intensity. In its 1995 annual report to Congress, the Physician Payment
    Review Commission stated that limiting real expenditure growth to 1 or
    2 percentage points above GDP would be a ``realistic and affordable
    goal.'' \11\ Ultimately, BBA specified the growth rate of GDP alone.
    This limit was an indicator of what the 105th Congress thought the
    nation could afford to spend on volume and intensity increases.
    ---------------------------------------------------------------------------
        \11\ Physician Payment Review Commission, 1995 Annual Report to
    Congress (Washington, D.C.: 1995).
    ---------------------------------------------------------------------------
        If cumulative spending on physician services is in line with SGR's
    target, the physician fee schedule update for the next calendar year is
    set equal to the estimated increase in the average cost of providing
    physician services as measured by the Medicare Economic Index (MEI). If
    cumulative spending exceeds the target, the fee update will be less
    than the change in MEI or may even be negative. If cumulative spending
    falls short of the target, the update will exceed the change in MEI.
    The SGR system places bounds on the extent to which fee updates can
    deviate from MEI. In general, with an MEI of about 2 percent, the
    largest allowable fee decrease would be about 5 percent and the largest
    fee increase would be about 5 percent.
    Continued Volume and Intensity Growth
    and Legislated Fee Updates Contribute to Projected Decline in Physician
            Fees
        The 2004 Medicare Trustees Report announced that the projected
    physician fee update would be about negative 5 percent for 7
    consecutive years beginning in 2006; the result is a cumulative
    reduction in physician fees of more than 31 percent from 2005 to 2012,
    while physicians' costs of providing services, as measured by MEI, are
    projected to rise by 19 percent.\12\ According to projections made by
    CMS Office of the Actuary (OACT) in July 2004, maximum fee reductions
    will be in effect from 2006 through 2012, while fee updates will be
    positive in 2014. (See fig. 2.) There are two principal reasons for the
    projected fee declines: increases in volume and intensity that exceed
    the SGR's allowance--partly as a result of spending for Part B
    prescription drugs--and the minimum fee updates for 2004 and 2005
    specified by MMA.
    ---------------------------------------------------------------------------
        \12\ Boards of Trustees, Federal Hospital Insurance and Federal
    Supplementary Medical Insurance Trust Funds, 2004 Annual Report of the
    Boards of Trustees of the Federal Hospital Insurance and Federal
    Supplementary Medical Insurance Trust Funds (Washington, D.C.: Mar. 23,
    2004).
    ---------------------------------------------------------------------------
           Figure 2:  Projected MEI and Fee Update under Current Law

            [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Note: Projections are as of July 2004.
    Volume and Intensity Growing Rapidly, Partly as a Result of Included
            Spending For Outpatient Drugs
        Recent growth in spending due to volume and intensity increases has
    been larger than SGR targets allow, resulting in excess spending that
    must be recouped through reduced fee updates. In general, the SGR
    system allows physician fee updates to equal or exceed the MEI as long
    as spending growth due to volume and intensity increases is no higher
    than the average growth in real GDP per capita--about 2.3 percent
    annually. However, in July 2004, CMS OACT projected that the volume and
    intensity of physician services paid for under the physician fee
    schedule would grow by 3 percent per year. To offset the resulting
    excess spending, the SGR system will have to reduce future physician
    fee updates.
        Additional downward pressure on physician fees arises from the
    growth in spending for other Medicare services that are included in the
    SGR system, but that are not paid for under the physician fee schedule.
    Such services include laboratory tests and many Part B outpatient
    prescription drugs that physicians provide to patients.\13\ Because
    physicians influence the volume of services they provide directly--that
    is, fee schedule services--as well as these other services, defined by
    the Secretary of HHS as ``incident to'' physician services,
    expenditures for both types of services were included when spending
    targets were introduced. In July 2004, CMS OACT projected that SGR-
    covered Part B drug expenditures would grow more rapidly than other
    physician service expenditures, thus increasing the likelihood that
    future spending would exceed SGR system targets. To the extent that
    spending for SGR Part B drugs and other ``incident to'' services grows
    larger as a share of overall SGR spending, additional pressure is put
    on fee adjustments to offset excess spending and bring overall SGR
    spending in line with the system's targets. This occurs because the SGR
    system attempts to moderate spending only through the fee schedule,
    even when the excess spending is caused by expenditures for ``incident
    to'' services, such as Part B drugs, which are not paid for under the
    fee schedule.
    ---------------------------------------------------------------------------
        \13\ Most of the Part B drugs that Medicare covers fall into three
    categories: those typically provided in a physician office setting
    (such as chemotherapy drugs), those administered through a durable
    medical equipment item (such as a respiratory drug given in conjunction
    with a nebulizer), and those that are patient-administered and covered
    explicitly by statute (such as certain immunosuppressives).
    ---------------------------------------------------------------------------
    MMA's Minimum Updates For 2004 and 2005 Contribute to Future Physician
            Fee Cuts
        The MMA averted fee reductions projected for 2004 and 2005 by
    specifying an update to physician fees of no less than 1.5 percent for
    those 2 years. The MMA increases replaced SGR system fee reductions of
    4.5 percent in 2004 and 3.3 percent in 2005 and thus will result in
    additional aggregate spending. Because MMA did not make corresponding
    revisions to the SGR system's spending targets, the SGR system must
    offset the additional spending by reducing fees beginning in 2006.
        An examination of the SGR fee update that would have gone into
    effect in 2005, absent the MMA minimum updates, illustrates the impact
    of the system's cumulative spending targets. To begin with, actual
    expenditures under the SGR system in 2004 are estimated to be $84.9
    billion, whereas target expenditures for 2004 were $77.1 billion. As a
    result, SGR's 2005 fee updates would have needed to offset the $7.8
    billion deficit from excess spending in 2004 plus the accumulated
    excess spending of $5.9 billion from previous years to realign expected
    spending with target spending. Because the SGR system is designed to
    offset accumulated excess spending over a period of years, the deficit
    for 2004 and preceding years reduces fee updates for multiple years.
    Alternatives for Updating Physician Fees Would Eliminate Spending
            Targets or Revise Current SGR System
        The projected sustained period of declining physician fees and the
    potential for beneficiaries' access to physician services to be
    disrupted have heightened interest in alternatives for the current SGR
    system. In general, potential alternatives cluster around two
    approaches. One approach would end the use of spending targets as a
    method for updating physician fees and encouraging fiscal discipline.
    The other approach would retain spending targets but modify the current
    SGR system to address perceived shortcomings. These modifications
    include such options as removing the prescription drug expenditures
    that are currently counted in the SGR system; resetting the targets and
    not requiring the system to recoup previous excess spending; and
    raising the allowance for increased spending due to volume and
    intensity growth.
        Alternatives to the SGR system would increase fees and thus
    aggregate spending--both government outlays and beneficiary cost
    sharing, including Part B premiums, for physician services relative to
    projected spending under current law.14,15 (See table 1.)
    While seeking to pay physicians appropriately, it is important to
    consider how modifications or alterations to the SGR system would
    affect the long-term sustainability and affordability of the Medicare
    program.
    ---------------------------------------------------------------------------
        \14\ The Part B premium amount is adjusted each year so that
    expected premium revenues equal 25 percent of expected Part B spending.
    Beneficiaries must pay coinsurance--usually 20 percent--for most Part B
    services.
        \15\ See GAO-05-85 for more information about these alternatives.

        Table 1:  Projected Effect on Fee Updates and Physician Services Spending under Current Law and Selected
                                   Potential Options for the SGR System, 2006 to 2014
    ----------------------------------------------------------------------------------------------------------------
                                                                                                       Cumulative
                                                                         Years with                   expenditures
                           Options                         Minimum fee  negative fee   Maximum fee      increase
                                                             update        update        update        relative to
                                                                                                       current law
    ----------------------------------------------------------------------------------------------------------------
    Current law                                                 -5.0%             8         +3.9%                --
    ----------------------------------------------------------------------------------------------------------------
    Eliminate spending targets                                  +2.1%             0         +2.4%               22%
    ----------------------------------------------------------------------------------------------------------------
    Modify spending targets
    ----------------------------------------------------------------------------------------------------------------
    Set allowable growth to GDP+1 percent                       -5.0%             6         +5.3%                4%
    ----------------------------------------------------------------------------------------------------------------
    Reset spending base for SGR targets                         -2.3%             6         +2.2%               13%
    ----------------------------------------------------------------------------------------------------------------
    Remove Part B drugs                                         -5.0%             5         +5.3%                5%
    ----------------------------------------------------------------------------------------------------------------
    Combine all three modifications                             +2.2%             0         +2.8%               23%
    ----------------------------------------------------------------------------------------------------------------
    Source: CMS OACT.

    Eliminate Spending Targets, Base Fee Updates on Physician Cost
            Increases
        In several reports to Congress, the Medicare Payment Advisory
    Commission (MedPAC) has recommended eliminating the SGR system of
    spending targets and replacing it with an approach that would base
    annual fee updates on changes in the cost of efficiently providing care
    as measured by MEI.16,17 Under this approach, efforts to
    control aggregate spending would be separate from the mechanism used to
    update fees. The advantage of eliminating spending targets would be
    greater fee update stability. According to CMS OACT simulations, such
    an approach would likely produce fee updates that ranged from 2.1
    percent to 2.4 percent over the period from 2006 through 2014. (See
    table 1.) However, Medicare spending for physician services would rise,
    resulting in cumulative expenditures that are 22 percent greater over a
    10-year period than under current law, based on CMS OACT estimates.
    Although MedPAC's recommended update approach would limit annual
    increases in the price Medicare pays for each service, the approach
    does not contain an explicit mechanism for constraining aggregate
    spending resulting from increases in the volume and intensity of
    services physicians provide. In 2004 testimony, MedPAC stated that fee
    updates for physician services should not be automatic, but should be
    informed by changes in beneficiaries' access to services, the quality
    of services provided, the appropriateness of cost increases, and other
    factors, similar to those that MedPAC takes into consideration when
    considering updates for other providers.\18\
    ---------------------------------------------------------------------------
        \16\ See Medicare Payment Advisory Commission, Report to the
    Congress: Medicare Payment Policy (Washington, D.C.: March 2001, 2002,
    2003, and 2004).
        \17\ MedPAC suggested that other adjustments to the update might be
    necessary, for example, to ensure overall payment adequacy, correct for
    previous MEI forecast errors, and to address other factors.
        \18\ Medicare Payment Advisory Commission, Payment for Physician
    Services in the Medicare Program, testimony before the Subcommittee on
    Health, House Committee on Energy and Commerce (May 5, 2004).
    ---------------------------------------------------------------------------
    Retain Spending Targets, Modify Current SGR System
        Another approach for addressing the perceived shortcoming of the
    current SGR system would retain spending targets but modify one or more
    elements of the system. The key distinction of this approach, in
    contrast to basing updates on MEI, is that fiscal controls designed to
    moderate spending would continue to be integral to the system used to
    update fees. Although spending for physician services would likely also
    rise under this approach, the advantage of retaining spending targets
    is that the fee update system would automatically work to moderate
    spending if volume and intensity growth began to increase above
    allowable rates. The SGR system could be modified in a number of ways:
    for example, by raising the allowance for increased spending due to
    volume and intensity growth; resetting the base for the spending
    targets and not requiring the system to recoup previous excess
    spending; or removing the prescription drug expenditures that are
    currently counted in the SGR system.
    Increase Allowance for Volume and Intensity Growth
        The current SGR system's allowance for volume and intensity growth
    could be increased, through congressional action, by some factor above
    the percentage change in real GDP per capita. As stated earlier, the
    current SGR system's allowance for volume and intensity growth is
    approximately 2.3 percent per year--the 10-year moving average in real
    GDP per capita--while CMS OACT projected that volume and intensity
    growth would be more than 3 percent per year. To offset the increased
    spending associated with the higher volume and intensity growth, the
    SGR system will reduce updates below the increase in MEI. According to
    CMS OACT simulations, increasing the allowance for volume and intensity
    growth to GDP plus 1 percentage point would likely produce positive fee
    updates beginning in 2012--2 years earlier than is projected under
    current law.\19\ Because fee updates would be on average greater than
    under current law during the 10-year period from 2005 through 2014,
    Medicare spending for physician services would rise. CMS OACT estimated
    that cumulative expenditures over the 10-year period would increase by
    4 percent more than under current law.\20\ (See table 1.)
    ---------------------------------------------------------------------------
        \19\ We use GDP plus 1 percentage point as the allowance for volume
    and intensity growth for illustrative purposes only.
        \20\ In May 2004 testimony, CBO estimated that this option would
    raise net federal mandatory outlays by about $35 billion over the 2008-
    2014 period. Congressional Budget Office, Medicare's Physician Fee
    Schedule, testimony before the Subcommittee on Health, House Committee
    on Energy and Commerce (May 5, 2004).
    ---------------------------------------------------------------------------
    Reset Spending Base for Future SGR System Targets
        In 2002, we testified that physician spending targets and fees may
    need to be adjusted periodically as health needs change, technology
    improves, or healthcare markets evolve.\21\ Such adjustments could
    involve specifying a new base year from which to set future targets.
    Currently, the SGR system uses spending from 1996, trended forward by
    the sustainable growth rate computed for each year, to determine
    allowable spending.
    ---------------------------------------------------------------------------
        \21\ GAO, Medicare Physician Payments: Spending Targets Encourage
    Fiscal Discipline, Modifications Could Stabilize Fees, GAO-02-441T
    (Washington, D.C.: Feb. 14, 2002).
    ---------------------------------------------------------------------------
        MMA avoided fee declines in 2004 and in 2005 by stipulating a
    minimum update of 1.5 percent in each of those 2 years, but the law did
    not similarly adjust the spending targets to account for the additional
    spending that would result from the minimum update. Consequently, under
    the SGR system the additional MMA spending and other accumulated excess
    spending will have to be recouped through fee reductions beginning in
    2006. If the resulting negative fee updates are considered
    inappropriately low, one solution would be, through congressional
    action, to use actual spending from a recent year as a basis for
    setting future SGR system targets and forgiving the accumulated excess
    spending attributable to MMA and other factors. The effect of this
    action would be to increase future updates and, as with other
    alternatives presented here, overall spending.
        According to CMS OACT simulations, forgiving the accumulated excess
    spending as of 2005--that is, resetting the cumulative spending target
    so that it equals cumulative actual spending--would raise fees in 2006.
    However, because volume and intensity growth is projected to exceed the
    SGR system's allowance for such growth, negative updates would return
    beginning in 2008 and continue through 2013. Resulting cumulative
    spending over the 10-year period from 2005 through 2014 would be 13
    percent higher than is projected under current law. (See table 1.)
    Remove Prescription Drugs from the SGR System
        The Secretary of HHS could, under current authority, consider
    excluding Part B drugs from the definition of services furnished
    incident to physician services for purposes of the SGR system.
    Expenditures for these drugs have been growing rapidly, which, in turn,
    has put downward pressure on the fees paid to Medicare physicians.
    However, according to CMS OACT simulations, removing Part B drugs from
    the SGR system beginning in 2005 would not prevent several years of fee
    declines and would not decrease the volatility in the updates. Fees
    would decline by about 5 percent per year from 2006 through 2010. There
    would be positive updates beginning in 2011--3 years earlier than is
    projected under current law. (See table 1.) CMS OACT estimated that
    removing Part B drugs from the SGR system would result in cumulative
    spending over the 10-year period from 2005 through 2014 that is 5
    percent higher than is projected under current law.\22\
    ---------------------------------------------------------------------------
        \22\ In May 2004 testimony, CBO estimated that this option would
    raise net federal mandatory outlays by about $15 billion through 2014.
    Congressional Budget Office, Medicare's Physician Fee Schedule,
    testimony before the Subcommittee on Health, House Committee on Energy
    and Commerce (May 5, 2004).
    ---------------------------------------------------------------------------
    Combine Multiple Spending Target Modifications
        Together Congress and CMS could implement several modifications to
    the SGR system, for example, by increasing the allowance for volume and
    intensity growth to GDP plus 1 percentage point, resetting the spending
    base for future SGR targets, and removing prescription drugs. According
    to CMS OACT simulations, this combination of options would result in
    positive updates ranging from 2.2 percent to 2.8 percent for the 2006-
    2014 period. CMS OACT projected that the combined options would
    increase aggregate spending by 23 percent over the 10-year period. (See
    table 1.)
    Concluding Observations
        Medicare faces the challenge of moderating the growth in spending
    for physician services while ensuring that physicians are paid fairly
    so that beneficiaries have appropriate access to their services.
    Concerns have been raised that access to physician services could
    eventually be compromised if the SGR system is left unchanged and the
    projected fee cuts become a reality. These concerns have prompted
    policymakers to consider two broad approaches for updating physician
    fees. The first approach--eliminating targets--emphasizes fee stability
    while the second approach--retaining and modifying targets--includes an
    automatic fiscal brake. Either of the two approaches could be
    implemented in a way that would likely generate positive fee updates
    and each could be accompanied by separate, focused efforts to moderate
    volume and intensity growth. Because multiple years of projected 5
    percent fee cuts are incorporated in Medicare's budgeting baseline,
    almost any change to the SGR system is likely to increase program
    spending above the baseline. As policymakers consider options for
    updating physician fees, it is important to be mindful of the serious
    financial challenges facing Medicare and the need to design policies
    that help ensure the long-term sustainability and affordability of the
    program. We look forward to working with the Subcommittee and others in
    Congress as policymakers seek to moderate program spending growth while
    ensuring appropriate physician payments.
        Madam Chairman, this concludes my prepared statement. I will be
    happy to answer questions you or the other Subcommittee Members may
    have.
                                   ----------
                          Medicare Physician Payments
        Considerations for Reforming the Sustainable Growth Rate System
        Concerns were raised about the system Medicare uses to determine
    annual changes to physician fees--the sustainable growth rate (SGR)
    system--when it reduced physician fees by almost 5 percent in 2002.
    Subsequent administrative and legislative actions modified or overrode
    the SGR system to avert fee declines in 2003, 2004, and 2005. However,
    projected fee reductions for 2006 to 2012 have raised new concerns
    about the SGR system. Policymakers question the appropriateness of the
    SGR system for updating physician fees and its effect on physicians'
    continued participation in the Medicare program if fees are permitted
    to decline. At the same time, there are concerns about the impact of
    increased spending on the long-term fiscal sustainability of Medicare.
        GAO was asked to discuss the SGR system. Specifically, this
    statement addresses the following: (1) how the SGR system is designed
    to moderate the growth in spending for physician services, (2) why
    physician fees are projected to decline under the SGR system, and (3)
    options for revising or replacing the SGR system and their implications
    for physician fee updates and Medicare spending. This statement is
    based on GAO's most recent report on the SGR system, Medicare Physician
    Payments: Concerns about Spending Target System Prompt Interest in
    Considering Reforms (GAO-05-85).
                                   ----------

        To moderate Medicare spending for physician services, the SGR
    system sets spending targets and adjusts physician fees based on the
    extent to which actual spending aligns with specified targets. If
    growth in the number of services provided to each beneficiary--referred
    to as volume--and in the average complexity and costliness of
    services--referred to as intensity--is high enough, spending will
    exceed the SGR target. While the SGR system allows for some volume and
    intensity spending growth, this allowance is limited. If such growth
    exceeds the average growth in the national economy, as measured by the
    gross domestic product per capita, fee updates are set lower than
    inflation in the cost of operating a medical practice. A large gap
    between spending and the target may result in fee reductions. There are
    two principal reasons why physician fees are projected to decline under
    the SGR system beginning in 2006. One problem is that projected volume
    and intensity spending growth exceeds the SGR allowance for such
    growth. Second, the Medicare Prescription Drug, Improvement, and
    Modernization Act of 2003 (MMA) increased the update for 2004 and
    2005--thus increasing spending--but did not raise the spending targets
    for those years. The SGR system, which is designed to keep spending in
    line with its targets, must reduce fees beginning in 2006 to offset
    excess spending attributable to both volume and intensity growth and
    the MMA provision. In general, proposals to reform Medicare's method
    for updating physician fees would either (1) eliminate spending targets
    and establish new considerations for the annual fee updates or (2)
    retain spending targets, but modify certain aspects of the current
    system. The first approach emphasizes stable and positive fee updates,
    while the second approach automatically applies financial brakes
    whenever spending for physician services exceeds predefined spending
    targets. Either approach could be complemented by focused efforts to
    moderate volume and intensity growth directly. As policymakers consider
    options for updating physician fees, it is important to be mindful of
    the serious financial challenges facing Medicare and the need to design
    policies that help ensure the long-term sustainability and
    affordability of the program.

        Chairman JOHNSON. Thank you, Mr. Steinwald. Mr. Hackbarth
    from MedPAC. Thank you for being with us this morning.

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

        Mr. HACKBARTH. Thank you, Chairman Johnson and Congressman
    Stark.
        Mr. STARK. Microphone.
        Mr. HACKBARTH. Is that better? Thank you, and I appreciate
    the opportunity to report on MedPAC's recommendations. Our
    March report, soon to be published, will include
    recommendations, not just on the SGR, but on pay-for-
    performance for physicians, resource measurement--that is
    developing tools that allow us to assess physician
    performance--and imaging services. Let me begin by being
    explicit about the premise that is beneath my--supports my
    testimony, and that is that the U.S. healthcare system is a
    very technologically advanced healthcare system which, at its
    best, works wonders for Medicare beneficiaries, indeed the
    whole population. It does not, however, provide consistently
    high-quality service. By high quality, I mean service that is
    consistent with evidence-based guidelines for care and avoids
    errors in the provision of care. While physicians as a group
    are extraordinarily dedicated professionals--and I have had the
    privilege as Chief Executive Officer (CEO) of a large group to
    experience that firsthand--not all physicians are equal in
    terms of their performance. Some physicians perform better than
    others on quality of care, patient satisfaction and deficiency.
    Of these--these are not just MedPAC's conclusions or my
    personal conclusions. They are the conclusions of years of
    research and of esteemed bodies like the Institute of Medicine.
        The conclusion that MedPAC draws from these findings is
    that policies, like the SGR system, that treat all physicians
    as though they performed equally are inequitable. Even more
    important than that, they fail to create appropriate incentives
    to improve performance and invest in systems that would aid in
    better provision of health care. As a result, we think a better
    approach is a more targeted approach, one that establishes
    explicit performance standards and rewards physicians
    accordingly while also establishing incentives to invest in
    quality-enhancing systems. We believe that a latter approach
    develops analytic tools to help individual physicians as well
    as the Medicare program, better understand how their practice
    compares to their peers on both quality and efficiency. We
    believe a better approach focuses on areas of rapid growth and
    expenditures, like imaging, to ensure that we are buying care
    that is appropriate, of high quality and safe for Medicare
    beneficiaries.
        We recognize this targeted approach is not an easy approach
    by any stretch. Unlike the SGR, it is not automatic. It
    requires specific judgments about what we want and what we do
    not want in the provision of medical care, about what is good
    and what is bad. It requires investment in developing systems,
    analytic tools, administrative processes. It also, frankly,
    requires taking some calculated risks. Any complicated endeavor
    of this sort, mistakes will be made, some misjudgments will be
    made that we will have to recognize and address and improve
    over time. Despite these challenges, which are very real, we
    strongly believe, unanimously believe, on the Commission that
    it is the best course for Medicare to begin targeting our
    efforts to improve quality and reduce cost. That is the course
    that is in the best interest of the program, the best interest
    of Medicare beneficiaries, and ultimately for the U.S.
    healthcare system. Thank you very much.
        [The prepared statement of Mr. Hackbarth follows:]
     Statement of Glenn M. Hackbarth, Chairman, Medicare Payment Advisory
                                   Commission
        Chairman Johnson, Congressman Stark, distinguished Subcommittee
    Members. I am Glenn Hackbarth, chairman of the Medicare Payment
    Advisory Commission (MedPAC). I appreciate the opportunity to be here
    with you this morning to discuss payments for physician services in the
    Medicare program.
        Medicare expenditures for physician services are the product of the
    number of services provided, the type of service, and the price per
    unit of service. The number and type of services provided we refer to
    as service volume. The sustainable growth rate (SGR) system was meant
    to control the volume of physician services and hence total
    expenditures for physician services by setting the update (change in
    unit payment for the year) for physician services. The SGR is based on
    changes in: the number of beneficiaries in the Medicare fee-for-service
    program; input prices; law and regulation; and gross domestic product
    (GDP). The GDP, the measure of goods and services produced in the
    United States, is used as a benchmark of how much growth in volume
    society can afford. The basic SGR mechanism is to compare actual
    spending to target spending and adjust the update when there is a
    mismatch.
        The SGR approach has three basic problems.

          It disconnects payment from the cost of producing
    services. The formula produces updates that can be unrelated to changes
    in the cost of producing physician services and other factors that
    should inform the update. If left alone, negative updates would provide
    a budget control but in so doing would produce fees that in the long
    run could threaten beneficiaries' access.
          It is a flawed volume control mechanism. Because it is a
    national target, there is no incentive for individual physicians to
    control volume. There has been no consistent relationship between
    updates and volume growth, and the volume of services and level of
    spending are still increasing rapidly.
          It is inequitable because it treats all physicians and
    regions of the country alike regardless of their individual volume
    influencing behavior.
          It treats all volume increases the same, whether they are
    desirable or not.

        The SGR formula has produced updates that in some years have been
    too high and in others too low. MedPAC has consistently raised concerns
    about the SGR--when it has set updates both above and below the change
    in input prices. The current projection, according to the trustees of
    the Medicare trust funds, is that annual updates of negative five
    percent will occur for seven consecutive years. The trustees
    characterize this series of updates as ``unrealistically low'' and in
    terms of budget scoring, these projections make legislative
    alternatives to the SGR very expensive.
        Instead of relying on a formula, MedPAC recommends a different
    course--one that involves explicit consideration of Medicare program
    objectives and differentiating among physicians. Updates should be
    considered each year to ensure that payments for physician services are
    adequate to maintain Medicare beneficiaries' access to necessary high
    quality care. At the same time, the growth in the volume of physician
    services should be addressed directly. Volume and volume growth differs
    across geographic areas and by service and ultimately is the result of
    individual physician's practice decisions. Is all the care being
    provided necessary? Dartmouth researchers and others have shown that
    often high quality care is not correlated with more services. We know
    the private sector is taking steps to control volume in services such
    as imaging with very high growth rates. Volume growth must be addressed
    by determining its root causes and specifying policy solutions. A
    formula such as the SGR that attempts to control volume through global
    payment changes treating all services and physicians alike will produce
    inequitable results.
        In this testimony we will first review how the SGR came about and
    explain the problems with it. Then we will discuss our recommendations.
    First, a year-to-year evaluation of payment adequacy to determine the
    update. Second, approaches that would allow Medicare to differentiate
    among providers when making payments as a way to reduce inappropriate
    volume of services and improve the quality of care. Currently, Medicare
    pays providers the same regardless of their quality or use of
    resources. We recommend Medicare should pay more to physicians with
    higher quality performance and less to those with lower quality
    performance. With regard to imaging, a rapidly growing sector of
    physician services, the Commission recommends that providers who
    perform imaging studies and physicians who interpret them meet quality
    standards as a condition of Medicare payment. Further, the Commission
    recommends measuring physicians' use of Medicare resources when serving
    beneficiaries and providing information about practice patterns
    confidentially to physicians. This recognizes the unique role of
    physicians--who order tests, imaging studies, surgery, drugs--as
    gatekeepers of the healthcare system. These are all important steps to
    improve quality for beneficiaries and to lay the groundwork for
    obtaining better value in the Medicare program.
    Historical concerns about physician payment
        The Congress established the fee schedule that sets Medicare's
    payments for physician services as part of the Omnibus Budget
    Reconciliation Act of 1989 (OBRA89). As a replacement for the so-called
    customary, prevailing, and reasonable (CPR) payment method that existed
    previously, it was designed to achieve several goals. First, the fee
    schedule decoupled Medicare's payment rates and physicians' charges for
    services. This was intended to end an inflationary bias that was
    believed to exist under the CPR method because it gave physicians an
    incentive to raise their charges.
        Second, the fee schedule corrected distortions in payments that had
    developed under the CPR method. Evidence of those distortions came from
    William Hsiao and his colleagues at Harvard University who found that
    payments were lower, relative to resource costs, for evaluation and
    management services but higher for imaging and laboratory services.
    Further evidence came from analyses, conducted by one of MedPAC's
    predecessor commissions, the Physician Payment Review Commission, that
    revealed wide variation in CPR-method payment rates by geographic area,
    that could not be explained by differences in practice costs.
        A third element of the OBRA89 reforms is central to our testimony
    today. The legislation established a formula based on achievement of an
    expenditure target--the volume performance standard (VPS). This
    approach to payment updates was a response to rapid growth in Medicare
    spending for physician services driven by growth in the volume of those
    services. From 1980 through 1989, annual growth in spending per
    beneficiary, adjusted for inflation, ranged widely, from a low of 1.3
    percent to a high of 15.2 percent. The average annual growth rate was
    8.0 percent.
        Because of physicians' unique role in the healthcare system, the
    hope was that the VPS would give them a collective incentive to control
    the volume of services. Physicians order tests, imaging studies,
    surgery, drugs, and otherwise serve as gatekeepers of the healthcare
    system. In addition, the unit of payment in the fee schedule is quite
    small--over 7,000 discrete services.
        Experience with the VPS formula showed that it had several
    methodological flaws that prevented it from operating as intended.
    Those problems prompted the Congress to replace it as part of the
    Balanced Budget Act of 1997. Under the SGR, the expenditure target is
    not a function of historical growth in the volume of services. Instead,
    the SGR target is based on growth in real GDP per capita and other
    factors--inflation in physicians' practice costs, changes in enrollment
    in fee-for-service Medicare, and changes in spending due to law and
    regulation. As noted, the real GDP factor was included in the SGR to
    link the expenditure target to growth in the national economy. This
    linkage was thought appropriate because volume growth for physician
    services is theoretically as unlimited as the demand for health care.
    Congress decided to link growth to GDP as a benchmark of what the U.S.
    economy could afford.
    The problem with the current update system
        The underlying assumption of an expenditure target approach, such
    as the SGR, is that increasing updates if overall volume is controlled,
    and decreasing updates if overall volume is not controlled, provides
    physicians nationally a collective incentive to control the volume of
    services. However, this assumption is incorrect because physicians do
    not respond to collective incentives but individual incentives. An
    efficient physician who reduces volume does not realize a proportional
    increase in payments. In fact, an individual physician has an incentive
    to increase volume under a fee for service system: moreover, there is
    evidence that physicians have increased volume in response to
    reductions in fees. The sum of those individual incentives will result
    in an increase in volume overall, if fees are reduced, and trigger an
    eventual further reduction in fees under an expenditure target.
        Compounding the problem with the conceptual basis of the system,
    the SGR system has produced volatile updates. Updates went from
    increases in 2000 and 2001 of 5.4 percent and 4.5 percent,
    respectively, much larger than the increases in practice costs, to an
    unexpected large reduction in 2002 of 5.4 percent. This volatility
    illustrates the problem of trying to control spending with an update
    formula.
        In the MMA, the Congress attempted to reduce the volatility
    problem. The GDP factor in the SGR is now a 10-year rolling average,
    which dampens the effects of yearly changes in GDP growth. However,
    there is another source of volatility which has not been controlled--
    estimating changes in enrollment in traditional fee-for-service
    Medicare. CMS may need to reestimate enrollment growth as it gains
    experience with shifts in enrollment from traditional Medicare to
    Medicare Advantage. Under the SGR, this could lead to continued
    volatility in spending targets and updates.
    A different approach to updating payments
        To address these problems, in our March 2002 report we recommended
    that the Congress replace the SGR system for calculating an annual
    update with one based on factors influencing the unit costs of
    efficiently providing physician services. Replacing the SGR system
    could allow updates more consistent with efficiency and quality care
    and would also uncouple payment updates from spending control. If total
    spending for physician services needs to be controlled, it is necessary
    to look not only at adjusting payment updates, but at controlling
    volume growth directly--as discussed in the next section.
        A new system should update payments for physician services based on
    an analysis of payment adequacy which would include the estimated
    change in input prices for the coming year, less an adjustment for
    growth in multifactor productivity. Updates would not be automatic
    (required in statute) but be informed by changes in beneficiaries'
    access to physician services, the quality of services being provided,
    the appropriateness of cost increases, and other factors, similar to
    those MedPAC takes into account when considering updates for other
    Medicare payment systems. Furthermore, the reality is that in any given
    year Medicare might need to exercise budget restraints and MedPAC's
    analysis would serve as one input to Congress's decisionmaking process.
        For example, we use this approach in our recommendation on the
    physician payment update in our March report to the Congress. Our
    assessment is that Medicare beneficiaries' access to physician care,
    the supply of physicians, and the ratio of private payment rates to
    Medicare payment rates for physician services, are all stable. Surveys
    on beneficiary access to physicians continue to show that the large
    majority of beneficiaries are able to obtain physician care and nearly
    all physicians are willing to serve Medicare beneficiaries. In the fall
    of 2004, MedPAC found that among beneficiaries looking for a new
    doctor, 88 percent reported little or no problems obtaining a new
    primary care physician. Access to specialists was even better--94
    percent reported little or no problems. Further, Medicare beneficiaries
    and privately insured individuals age 55-64 report very similar
    experiences accessing physicians. Indeed, Medicare beneficiaries'
    reported as good as or better access than their privately insured
    counterparts. (These findings are consistent with earlier work done by
    the Center for Studying Health Systems Change.) A large national survey
    found that among office-based physicians who commonly saw Medicare
    patients, 94 percent were accepting new Medicare patients in 2003. This
    figure is up 1 percentage point from 2002.
        We have also found that the supply of physicians furnishing
    services to Medicare beneficiaries has kept pace with the growth in the
    beneficiary population, and the volume of physician services used by
    Medicare beneficiaries is still increasing. In consideration of
    expected growth in physicians' costs and our payment adequacy analysis,
    the Commission recommends that payments for physician services be
    updated by the projected change in input prices, less an adjustment of
    0.8 percent for productivity growth.
        This update should be thought of in the context of the entire
    package of our physician payment recommendations. The update, coupled
    with pay for performance and our imaging recommendations discussed
    below, will provide an adequate increase in physician payment overall
    while starting to reward better quality and dampen growth in a rapidly
    growing service. Over the next few years, as quality performance is
    rewarded, as physicians are made aware of their practice patterns and
    increase efficiency, and as specific volume problems are targeted,
    Medicare can improve the value of the physician services it buys.
    A different approach to controlling volume
        If payment rates are adequate and updated to account for changes in
    efficient physicians' cost, the remaining issue is controlling volume,
    which is important for both beneficiaries and taxpayers. For
    beneficiaries, increases in volume lead to higher out-of-pocket costs--
    co-payments, the Medicare Part B premium, and any premiums they pay for
    supplemental coverage. For taxpayers, increases in volume lead to
    higher Part B expenditures supported with the general revenues of the
    Treasury. The MMA has established a trigger for legislative action if
    general revenues exceed 45 percent of total outlays for the Medicare
    program.
        For beneficiaries, volume growth increases the monthly Part B
    premium. Because it is determined by average Part B spending for aged
    beneficiaries, an increase in the volume of services affects the
    premium directly. From 1999 to 2002 the premium went up by an average
    of 5.8 percent per year. By contrast, cost-of-living increases for
    Social Security benefits averaged only 2.5 percent per year during that
    period. Since 2002 the Part B premium has gone up faster still--by 8.7
    percent in 2003, 13.5 percent in 2004, and 17.3 percent in 2005.
        Volume growth also has implications for the federal budget. The
    Committee is aware of the growth of Medicare relative to the nation's
    output of goods and services as discussed in the Medicare trustees
    report. Increases in Medicare spending per beneficiary is an important
    reason for that growth, cited by the Congressional Budget Office and
    the General Accounting Office among others.
        However, some of the root causes of volume growth may be amenable
    to policy action and some growth may be desirable. For example, growth
    arising from technology that produces meaningful gains to patients, or
    growth where there is currently underutilization of services may be
    beneficial. But one indicator that not all growth is good may be its
    variation. Among broad categories of services, growth in volume per
    beneficiary ranged from about 15 percent to almost 45 percent, based on
    our analysis of data comparing 2003 with 1999 (Figure 1). Within these
    broad categories, growth rates were higher for services which
    researchers have characterized as discretionary (e.g., imaging and
    diagnostic tests). In imaging, for example, growth rates were over 15
    percent a year for such services as magnetic resonance imaging,
    computed tomography, and nuclear medicine.
        In addition, volume varies across geographic areas. As detailed in
    our June 2003 report to the Congress, the variation is widest for
    certain services, including imaging and tests. Researchers (e.g.
    Wennberg and Fisher) have reached several conclusions about such
    findings:

          Differences in volume among geographic areas is primarily
    due to greater use of discretionary services sensitive to the supply of
    physicians and hospital resources.
          On measures of quality, care is often worse in areas with
    high volume than in areas with lower volume. The high-volume areas tend
    to have a physician workforce composed of relatively high proportions
    of specialists and lower proportions of generalists.
          Areas with high levels of volume have slightly worse
    access to care on some measures, suggesting patients may be delaying
    entry into the healthcare system because of patient discomfort with the
    level of specialization.

        All this suggests that service volume may be too high in some
    geographic areas.
        In our March report to the Congress we make several recommendations
    that taken together will help control volume and increase quality of
    Medicare physician services. Our basic approach is to differentiate
    among physicians and pay those who provide high quality services in a
    resource efficient way more, and pay those who do not, less--or in some
    cases not at all. As a first step, we make recommendations concerning:
    pay for performance and information technology (IT), measuring
    physician resource use, and managing the use of imaging services.
    Pay for performance and information technology
        Medicare uses a variety of strategies to improve quality for
    beneficiaries including the quality improvement organization (QIO)
    program, and a variety of demonstration projects, such as the group
    practice demonstration, aimed at tying payment to quality. MedPAC
    supports these efforts and believes that CMS, along with its accreditor
    and provider partners, has acted as an important catalyst in creating
    the ability to measure and improve quality nationally. CMS's prior
    quality investments provide a foundation for initiatives tying payment
    to quality and encouraging the diffusion of information technology.
        However, for the most part, Medicare, the largest single payer in
    the system, still pays its healthcare providers without differentiating
    on quality. Providers who improve quality are not rewarded for their
    efforts. In fact, Medicare often pays more when poor care results in
    unnecessary complications. The incentives of this system are neutral or
    negative toward improving the quality of care.
        To begin to address these issues, the Congress should adopt budget
    neutral pay-for-performance programs, starting with a small share of
    payment and increasing over time. For physicians, this would initially
    include use of a set of measures related to the use and functions of
    IT, and over time a broader set of measures.
        IT measures should describe evidence-based quality- or safety-
    enhancing functions performed with the help of IT. Functions might
    include, for example, tracking patients with diabetes and sending them
    reminders about preventive services, or providing educational support
    for patients with chronic illnesses. This approach focuses the
    incentive on quality-improving activities, rather than on the tool
    used. It also allows providers to achieve performance in the early
    stages without necessarily investing in IT, although it would be easier
    if they did so. The potential additional payment may also increase the
    return on IT investments.
        Because physicians play a central role in directing patient care,
    their adoption and use of IT should be a part of physician pay-for-
    performance initiatives from the start. Physician use of electronic
    health records promises to lead to better care management, reduced
    errors, improved efficiency, and can facilitate reporting of meaningful
    quality indicators that may not otherwise be available. However, few
    providers use IT for clinical (as opposed to administrative) functions
    perhaps because it is difficult to demonstrate an adequate return on
    investment.
        Some suggest that Medicare could reward IT adoption alone. However,
    not all IT applications have the same capabilities and owning a product
    does not necessarily translate into using it or guarantee the desired
    outcome of improving quality.
        Process measures for physicians, such as monitoring and maintaining
    glucose levels for diabetics, should be added to the pay-for-
    performance program as they become more widely available from
    administrative data. Using administrative data minimizes the burden on
    physicians. We recommend improving the administrative data available
    for assessing physician quality, including submission of laboratory
    values using common vocabulary standards, and of prescription claims
    data from the Part D program. The laboratory values and prescription
    data could be combined with physician claims to provide a more complete
    picture of patient care. As clinical use of IT becomes more widespread,
    even more measures could become available.
    Measuring physician resource use
        Medicare beneficiaries living in regions of the country where
    physicians and hospitals deliver many more healthcare services do not
    experience better quality of care or outcomes. Moreover, they do not
    report greater satisfaction with care than beneficiaries living in
    other regions. This finding, and others by researchers such as Wennberg
    and Fisher are provocative. They suggest that the nation could spend
    less on health care, without sacrificing quality, if physicians whose
    practice styles are more resource intensive moderated the intensity of
    their practice; that is if they provided fewer diagnostic services,
    used fewer subspecialists, referred patients less frequently to
    hospitals and intensive care units (ICUs), and did fewer minor
    procedures.
        MedPAC recommends that Medicare measure physicians' resource use
    over time, and feed back the results to physicians. Physicians would
    then be able to assess their practice styles, evaluate whether they
    tend to use more resources than either their peers or what evidence-
    based research (when available) recommends, and revise their practice
    style as appropriate. Moreover, when physicians are able to use this
    information in tandem with information on their quality of care, it
    will provide a foundation for them to improve the efficiency of the
    care they and others provide to beneficiaries. Once greater experience
    and confidence in this information is gained, Medicare might use the
    results in payment, for example as a component of a pay-for-performance
    program.
        Although comprehensively measuring resource use and quality may be
    difficult, we must ask ourselves what the cost is of doing nothing.
    Right now, we know there are wide disparities in practice patterns, all
    of which are paid for by Medicare and many of which do not appear to be
    improving care. Yet many physicians have few opportunities to learn
    about how their practice patterns compare to others or how they can
    improve. This recommendation would inform physicians and is crucial to
    starting the process of improvement.
    Managing the use of imaging services
        The last several years have seen rapid growth in the volume of
    diagnostic imaging services when compared to other services paid under
    Medicare's physician fee schedule (Figure 1). This increase has been
    driven by technological innovations that have improved physicians'
    ability to diagnose disease and made it more feasible to provide
    imaging procedures in physician offices. Other factors include:

          possible misalignment of fee schedule payment rates and
    costs,
          physicians' interest in supplementing their professional
    fees with revenues from ancillary services, and
          patients' desire to receive diagnostic tests in more
    convenient settings.

        These factors have contributed to an ongoing migration of imaging
    services from hospitals, where institutional standards govern the
    performance and interpretation of studies, to physician offices, where
    there is less quality oversight. These variations in oversight, coupled
    with rapid volume growth, create an urgent need for Medicare to develop
    standards for all providers that receive payment for performing and
    interpreting imaging studies. These standards should improve the
    accuracy of diagnostic tests and reduce the need to repeat studies,
    thus enhancing quality of care and helping to control spending.
        Requiring physicians to meet quality standards as a condition of
    payment for imaging services provided in their offices represents a
    major change in Medicare's payment policy. Traditionally, Medicare has
    paid for services provided by physicians operating within the scope of
    practice defined by the state in which they are licensed. The
    Commission concludes that requiring standards is warranted because of
    the growth of imaging studies provided in physician offices and the
    lack of comprehensive standards for this setting. According to GAO, the
    Mammography Quality Standards Act has increased mammography facilities'
    compliance with quality standards and led to improvements in image
    quality. After the Act took effect, the share of facilities that were
    unable to pass image quality tests dropped from 11 percent to 2
    percent.
        In addition to setting quality standards for facilities and
    physicians, CMS should through administrative action:

          measure physicians' use of imaging services so that
    physicians can compare their practice patterns with those of their
    peers,
          expand and improve Medicare's coding edits for imaging
    studies, and
          strengthen the rules that restrict physician investment
    in imaging centers to which they refer patients.

        CMS should improve their coding edits that detect improper imaging
    claims, such as claims for unbundled and mutually exclusive services.
    Medicare also should discount payments for multiple imaging studies of
    the same modality that are performed on contiguous body parts. Medicare
    payments should reflect the efficiencies that are often gained when
    studies are performed in tandem.
    Creating new incentives in the physician payment system
        MedPAC has consistently raised concerns about the SGR as a volume
    control mechanism and recommended its elimination. We believe that the
    other changes discussed previously--pay for performance, IT, measuring
    resource use, and reform of payments for imaging service--can help
    Medicare beneficiaries receive high-quality, appropriate services while
    also controlling volume growth. Although the Commission's preference is
    to address issues of inappropriate volume increases directly as
    discussed in the previous section on imaging, we recognize that the
    Congress may wish to have some form of limit on aggregate volume as
    well; but it needs to be one that will more closely match physician's
    incentives to their individual performance. In our March report to the
    Congress, we will discuss potential ideas for creating incentives for
    more effective volume control methods that encourage more collaborative
    and cost effective delivery of physician services in accordance with
    clinical standards of care.

        Chairman JOHNSON. I thank the witnesses for joining us this
    morning and for the work you have done over the last number of
    months in preparation for our tackling this issue. There are
    two things, two brief questions that I want to ask about, the
    functioning of current law. I do thank MedPAC for the
    recommendations in regard to imaging, which I will not pursue
    in this hearing. The law explicitly requires that we adjust the
    target for any impact on physician visits that law or
    regulation has imposed. Those words of law and regulation have
    been very imperfect instruments, and we are going to hear later
    in this hearing testimony about things that have affected the
    number of physician visits, and are the direct consequence of
    policy changes adopted by either the Congress or the
    Administration, and yet were not included and were not
    considered in setting the target.
        Then there are nongovernmental things. For instance,
    advertising drugs. If it is a prescription drug, your doctor
    has to prescribe it. So, advertising drugs has resulted in a
    lot of physician visits that drive that volume up, that force
    that snapback in reimbursements, when actually that physician
    visit was not necessary, except that person wanted to evaluate
    the drug they heard advertised on television that morning in
    regard to their health. So, the adjustment that is implied in
    the law that will take place is inadequate, because a lot of
    new visits and volume issues are driven by forces outside law
    and regulations and our own policy initiatives. So, I would
    like you to comment on that factor. Also, not in the SGR
    formula, but in the target setting, we take into account the
    cost of drugs, at least those drugs, Part B drugs, administered
    by the physicians, and that cost--as that cost has gone up,
    that has dictated cuts in physician payments in a way that is,
    in my estimation, totally irrational. So, I would like you to
    comment on those two aspects of the formula that are part of
    what is driving the appearance that we are spending a lot more
    money on physician services. Either one of you, in whatever
    order you want to go.
        Mr. STEINWALD. Okay. I will start, Mrs. Johnson. With
    regard to the elements that enter into the setting of the SGR
    targets, I mentioned one of them, the allowance for growth
    above inflation is gross domestic product. Then there is the--
    what is called the Medicare economic index that measures
    inflation in running a medical practice. There is also the size
    of the fee-for-service beneficiary population, which tends to
    fluctuate from year to year. In addition, the Secretary has the
    authority to adjust the targets for changes in law and
    regulation that could affect spending for physician services.
    We have said at GAO that we think that CMS could be more
    transparent in how it makes those adjustments, makes it more of
    a public process. Other than that, we have not commented on
    whether we believe they have been deficient in their adjustment
    for law and regulation changes. With regard to Part B drugs,
    one of the options that we did outline in our report to you and
    in our testimony today, was the removal of Part B drugs from
    calculating the formula. In the past, Part B drug spending has
    inflated faster than the cost of physician services. The effect
    of having Part B drugs into the target-setting process has been
    to impose additional downward pressure on physician fee updates
    over time.
        Mr. HACKBARTH. For one of our reports, our mandated
    reports--and forgive me for not being able to remember which
    one--we were asked to look at the process that the CMS
    actuaries used to adjust for changes in law and regulation. We
    did not look at specific estimates, but we looked at the
    process. Based on that, and based on my own experience at CMS
    as deputy administrator, I have a lot of sympathy for the
    difficulty of the task the actuaries are asked to do. Often
    making an estimate of how these things will affect cost trends
    is exceedingly difficult. There simply is not sound evidence on
    which to base an estimate. So, in cases where they do not have
    sound evidence, they will not make an estimate in the first
    instance, but will assume as an initial assumption, no effect.
    Then they will go back and look at the actual performance, and
    as I understand the framework, they are permitted to go back
    and retrospectively make some adjustments. All in all, we think
    that that process that they use is a reasonable one, although
    we would agree with what GAO says about the need for greater
    transparency in the process.
        With regard to the point you made, Chairman Johnson, about
    a variety of societal factors, affecting the growth rate in
    services, whether it is direct advertising to consumers or
    technological changes, and the initial structure of the SGR,
    the purpose of the GDP element and formula was to provide an
    allowance for increased volume and intensity of service due to
    those sorts of factors. So, that is the piece of the formula
    that is to address changes that go on in the healthcare system
    or even in beneficiary preferences. The issue becomes, under
    the formula, whether it is a sufficient allowance to take into
    account those factors. At the end of the day, as you well know,
    it is MedPAC's judgment that trying to tinker with a formula of
    this sort, that applies across the board, affects all
    physicians without regard to their individual performance and
    provides no incentive to alter patterns of practice. It is just
    not a good thing to be doing. It is going to create inequity.
    It is not going to move the system in the proper direction. We
    need a much more targeted approach to do that.
        Chairman JOHNSON. Thank you. There are other factors like
    national coverage decisions, local coverage decisions that
    affect this, and they are beyond the control of the physician,
    so I think tinkering, you would have to tinker with an awful
    lot of parts of it. So, thank you both for your comments. I
    think it is also germane that, with regard to Part B services,
    we have now distinguished between drug price and physician cost
    and reformed that entire service. I think that gives us some
    indication of how we might go forward in translating that into
    this formula. Mr. Stark.
        Mr. STARK. Thank you, Madam Chair. Mr. Steinwald, Mr.
    Hackbarth, thank you both for your work. Do you know, Mr.
    Steinwald, off the top of your head, or would it be easy to
    find out, in your chart, which is on page 11, you list the
    cumulative expenditure increase relative to current laws as
    percentages. Would you be able to quantify that, put a number
    to those percentages, do you know?
        Mr. STEINWALD. I personally would not.
        Mr. STARK. Okay.
        Mr. STEINWALD. The actuaries in CBO and in----
        Mr. STARK. I think that is important in the measure. I just
    wanted to make a couple of comments and ask you each question.
    It is the case that the spending for physician services by
    Medicare has grown at the average rate of about 6 percent a
    year since 1997. By the end of 2002, we had exceeded our target
    by $17 billion, and I think CBO is not sure today. It says
    that, in the next few years, the target would have grown by
    another $10 billion. So, that while we cut the rates, the
    aggregate amount paid--and I may add that we did not add a
    whole lot of Medicare beneficiaries over that period of time,
    so that basically, I think, it could be said that the aggregate
    payment of these physicians went up comfortably.
        Now, I wanted to ask Glenn if you know--there have been two
    suggestions coming out of the--what is called the physician
    community. One has been to eliminate the SGR. The CBO, I
    understand, says that would cost us about $135 billion over 10.
    So, there is one juicy bit of money. Or, retroactively, take
    the prescription drug formula out of the growth formula, and
    that would cost us about, let us see, $119 billion over 10. I
    am hearing, and I wondered if those are correct. I wondered if
    you could comment on either the affordability or wisdom of
    either option, or, Mr. Steinwald--I mean, there are several
    suggestions out here, and I want to see if either of you or
    both of you could pinpoint the one you like best and how much
    you think it would cost.
        Mr. HACKBARTH. Yes. Well, the price tag associated with any
    of these changes in physician payment is obviously driven by
    the SGR baseline. From our perspective, the baseline itself is
    unrealistic. It is detached from reality. The Medicare trustees
    in their most recent report said that the updates that this
    baseline envisions are unrealistically low. I daresay nobody
    expects that we are going to repeatedly cut physician fees 5
    percent and more year after year after year. So, we are in a
    very difficult position where the baseline is not realistic,
    and it results in any constructive positive change having a
    very, very large price tag. From our perspective, that is one
    of the worst aspects of SGR. It has become a barrier to sound,
    prudent policy. We have not taken a position on proposals to
    remove drugs, for example, retrospectively, going back to the
    beginning of the SGR system. We see those as proposals that do
    not deal directly with policy, that is how much we should pay
    physicians. The real issue is about scoring, how can we alter
    this baseline with the minimum score, and we do not think that
    it is appropriate for MedPAC to be dealing in what are
    essentially scoring issues.
        Mr. STARK. Well, you touch on that. Do you have statistics
    that it might be interesting if--I know your staff does not
    have anything else to do--but the payment rates per procedure
    that Medicare pays and what Blue Cross or other indemnity
    payers, it has not always been lower, as I understand it.
        Mr. HACKBARTH. Well, in fact, it is one of the measures
    that we look at in assessing payment adequacy. As you look
    across the country, in fact, Medicare pays on average less than
    private payers. Actually, the Medicare payment has gone up
    recently, compared to private payment, but is still below on
    average. There is a lot of variation in that across the
    country. In some cities, Medicare is a comparatively good
    payer. In other cities, it pays quite a bit less.
        Mr. STARK. Yes, that is what I was going to say. There are
    some areas where it pays more, I understand.
        Mr. HACKBARTH. There are, in fact.
        Mr. STARK. Do you adjust that--if I could just finish,
    Madam Chair, then I will shut up. Because there are not many
    payers for folks over 65 other than Medicare?
        Mr. HACKBARTH. Right.
        Mr. STARK. You adjust, in other words, when you say private
    insurance pays often more, but does private insurance for the
    same procedure?
        Mr. HACKBARTH. Well, private insurance is not determined on
    the age of the patient; it is based on the procedure of the
    type of office visit, and so there is not an age difference.
        Mr. STARK. Thank you.
        Mr. STEINWALD. Mr. Stark.
        Mr. STARK. Yes, go ahead.
        Mr. STEINWALD. You asked about outpatient prescription
    drugs, and Glenn touched on it briefly. As I said, one of our
    options for you is to remove outpatient prescription drugs from
    the calculation of the target, but that was forward-looking. We
    have done a little bit of looking about whether the CMS has the
    authority to remove them retroactively, or retrospectively. If
    you will recall in 2003, they did adjust the targets in order
    to achieve a positive update for 2003. It seems to us that the
    same facts and circumstances would permit them if they wished
    to do a retroactive adjustment of targets, but that would be up
    to CMS.
        Mr. STARK. Madam Chair, if I could just yield at this
    point, because I would like to make a comment here that I think
    is important. There is a little bit here of territorial
    dispute. If the Administration, as I understand it, goes--makes
    these adjustments, it comes basically out of their budget, if
    you will.
        Chairman JOHNSON. Yes.
        Mr. STARK. If we do it legislatively, it comes out of ours.
    Therefore, there has always been a little tension between--they
    would say to us, you guys legislate.
        Chairman JOHNSON. That certainly is correct.
        Mr. STARK. Well, you do it on our side of the budget
    requirement, and if we say, CMS, you have the authority to do
    it, it comes out of theirs. I just point that out as there is--
    that is a little bit of back and forth.
        Chairman JOHNSON. We are keenly aware of it. We have
    written--exchanged correspondence on this subject quite
    extensively.
        Mr. STARK. I understand that.
        Chairman JOHNSON. However, I think the legislative action
    that the Congress took in the last session in the MMA
    strengthens our case considerably. Mr. Ramstad--excuse me, Mr.
    Johnson of Texas, excuse me, my mistake.
        Mr. JOHNSON. Thank you, Madam Chair.
        Chairman JOHNSON. I saw Johnson and skipped over him.
        Mr. JOHNSON. Mr. Hackbarth, I know you all were possibly
    considering pay for performance. I think it is a priority of
    CMS based on quality outcomes. As you said, medical imaging
    costs in Part B have experienced pretty good growth, and it
    makes sense as doctors are more frequently putting imaging
    machines in their own offices as opposed to handing their
    patients off across town to the hospital. In my mind, that
    provides great continuity of care as long as the imaging is up
    to par. So, your recommendation to implement standards of
    quality for imaging services in Part B makes sense to me.
    Kodak's Health Imaging Division is in my district, and they are
    innovative, as you know, working on translating technology into
    better care for patients. They would probably welcome a chance
    to set themselves apart. A few publications have noted the
    worth of less invasive therapies that are available because of
    medical imaging. In fact, the New England Journal of Medicine
    has called imaging one of the most important developments in
    the past 1,000 years, right up there with anesthesia, which
    anyone who has ever had surgery thinks is pretty good. It seems
    to me that Medicare could save money by avoiding longer
    hospital stays for patients and the patients benefit from an
    easier recovery. I am wondering if you know of any credible
    studies that have been done to analyze the cost of performing
    medical imaging versus the actual and potential savings that
    imaging might offer to private and public health programs. If
    not, do you think that Congress ought to direct GAO or the U.S.
    Department of Health and Human Services (HHS) to action in this
    area before we take up legislation?
        Mr. HACKBARTH. MedPAC agrees that medical imaging, advances
    in medical imaging are tremendous advances in medical care,
    often can both improve quality and reduce cost, to the extent,
    for example, that they--the imaging avoids unnecessary surgery,
    et cetera. So, not only are we in favor of the advancement in
    imaging--personally, I stand and wonder, looking at some of the
    equipment and what can be done. Now, having said that----
        Mr. JOHNSON. There is a machine right behind you, I can see
    right through you.
        Mr. HACKBARTH. That is what I was afraid of. Now, having
    said that, we do have some concerns, because there are a number
    of forces coming together here that changed the environment
    substantially. One is the advanced technology--and it is not
    only better, but it is also getting smaller and lower cost,
    which is making it feasible, for example, for physicians to
    purchase it and move it out of hospitals and large imaging
    centers.
        Mr. JOHNSON. We need to cover their costs.
        Mr. HACKBARTH. That is clearly an issue. As it moves out,
    that creates some issues. As things move out of institutional
    structures, like hospitals, where there are systems of
    oversight, into settings where there is less oversight, we need
    to be very vigilant about the quality of care provided and the
    safety of care provided, and that is the reason that we have
    made the recommendations that you referred to that Medicare
    needs to step up its efforts to assure both quality and safety
    as things migrate out of institutional settings. Right now, we
    have got a patchwork system aimed at quality and safety, and we
    think it needs to be much more systemic and organized, and that
    there are precedents for it. For example, a mammography
    screening, some years ago, a system was instituted to assure
    quality and safety for patients. We think some of those models
    could be applied more broadly in imaging. Now, with regard to
    your specific question about how much is saved, I am sure that
    there is research on that, that is not research that we have
    reviewed specifically. Frankly, we are willing to assume that,
    in many cases, it does save money, but it does not follow from
    that, that in every case, it saves money. So, what we would
    need is a system that, as I said at the outset, can more
    accurately discriminate between what is good, improving
    quality, reducing costs, from unnecessary, low quality and
    perhaps unsafe. You cannot generalize; you have got to go in
    and be very discriminating in your tools.
        Mr. JOHNSON. Thank you so much. You all keep up the good
    work. Thank you, Madam Chairwoman.
        Chairman JOHNSON. Thank you. Congressman Lewis.
        Mr. LEWIS. Thank you very much, Madam Chair, for holding
    this hearing. I want to thank the two of you for being here
    this morning. Mr. Steinwald, I would like to know from you, are
    there possible fixes you talk about in your statement, what can
    CMS do under its current regulatory authority and which require
    statutory action on the part of those of us on this Committee
    or on the part of Congress?
        Mr. STEINWALD. Yes, sir. To the best of my knowledge, of
    the options that we outlined, the only one that CMS has
    authority to implement on its own, relates to outpatient
    prescription drugs. We are fairly certain they have the
    authority to do it prospectively, remove the drugs from
    spending from setting the SGR targets. We are uncertain about
    whether they have the authority to do it retrospectively. We
    think that they might, but that would be a determination. I am
    sure they would be very careful to come up with. All of the
    other ones that we have outlined in our report in October and
    our testimony today would require legislative action.
        Mr. LEWIS. Thank you very much. The Chair--and I believe
    you, Mr. Hackbarth, made reference to all of the media,
    especially television adds, some mornings and the evening, we
    see the television saturated with ads from pharmaceuticals. Do
    you have any evidence that customers or patients are saying to
    their doctor, ``Doctor, I saw such and such a thing on
    television, why don't you try that? Why don't you prescribe it
    for me?''
        Mr. HACKBARTH. I am sure that there is research out there.
    I have not reviewed it. MedPAC has not reviewed it.
    Anecdotally, working with physicians, I have heard physicians
    talk about the impact that the advertising has on the
    relationships with patients and their expectations, but that is
    just anecdotal.
        Mr. LEWIS. You do not have any evidence that patients or
    the relatives of patients sort of converge on the doctors and
    say, ``I am convinced because of this ad.'' With all this
    pressure from these ads, spending hundreds, thousands, millions
    of dollars, somebody has got to use some of this medicine.
        Mr. HACKBARTH. Well, I would assume that the advertisers
    believe that it has an impact. Maybe they are the best words,
    they would not be spending all of this money unless they
    thought that it caused patients to go to their physicians and
    urge the physician to prescribe the medicine. They are doing it
    because they expect an impact. There may be academic research
    on the issue. I am not aware of it. MedPAC has not looked at
    it. Anecdotally, I have heard from physicians that it affects
    the dynamics of their interactions with patients, but that is
    all I have right now, Mr. Lewis.
        Mr. LEWIS. Mr. Steinwald, would you have any reading on
    this?
        Mr. STEINWALD. No, sir, I have nothing.
        Mr. LEWIS. Wouldn't that be an interesting study for
    someone to conduct?
        Mr. STEINWALD. Well, it might be, although advertising has
    been around now for some years. As Glenn pointed out earlier,
    there is an allowance in the update system for increased
    spending, that is increased volume and intensity of services,
    beyond the cost of the increase in the medical practice. That
    increase is set at the growth of GDP. It might be your judgment
    or anyone else's that that is too low of an allowance, and one
    of the options we presented to you was to increase that
    allowance to above GDP growth. That would accommodate just the
    kind of trend that you are talking about that leads to more
    services being prescribed.
        Mr. LEWIS. Well, with something that is driving this
    increase in growth, delivery of health care; it is not just the
    fees for doctors, hospitals. What about drugs?
        Mr. HACKBARTH. There are a number of different drivers of
    the increase. The one most often discussed is just
    technological change. The things that we can do for patients is
    ever-expanding, because of scientific advances. Often, although
    not always, the advancements, at least initially, cost more. A
    typical pattern that we see is a new technology and a new
    approach will become available, and it is applied to a small
    group of patients initially, and then over time as it is
    refined, improved, the pool of patients expands and the
    service, for example, is provided to patients that have higher
    levels of risk. So, there is the initial cost of the new
    technology and expanding diffusion of the technology across the
    patient population. That is one of the single most important
    drivers of the rate of increase in healthcare costs, not just
    for Medicare, but for society at the large. There are other
    factors. For example, direct consumer advertising alters
    patients perspectives. There are a lot of factors. Technology,
    broadly described, is probably the single most important.
        Mr. STEINWALD. I would like to add to that a little bit. In
    support of something that Glenn said early in his statement,
    just because we see these increases, and they may be driven by
    technology and other drivers, it does not indicate that all of
    it is necessary and of high value to Medicare beneficiaries. We
    have some evidence, especially in the variability with which
    elective surgery procedures, for example, are performed around
    the country, that leads us to believe that at least some of the
    utilization and some of the utilization increase we observe is
    not really necessary or of benefit to Medicare's beneficiaries.
    This leads us to further believe that there are opportunities
    to achieve savings in the program and, at the same time,
    provide beneficiaries with the services that they really need.
        Mr. LEWIS. Thank you, very much. Thank you, Madam Chair.
        Mr. HACKBARTH. Chairman Johnson, could I just add one point
    on this, because I really think this goes to the heart of the
    challenge facing Medicare and the healthcare system. One piece
    of evidence of the sort that Bruce was talking about is
    research done by Jack Wennberg and Elliott Fisher at Dartmouth,
    looking specifically at the care provided by academic medical
    centers, the jewels of our healthcare systems, the leaders in
    innovation. They looked at the patterns of care in academic
    medical centers for Medicare beneficiaries with some common
    medical problems. What they found was enormous variation, as
    Bruce describes, in the volume and intensity of service
    provided to Medicare beneficiaries. These are renowned
    institutions that each of you would instantly recognize. So,
    they vary greatly in what they do to patients with common
    problems. The quality of the result is not related to the cost.
    In fact, often, the highest-cost institutions that provide the
    most intense service have lower quality results. So, what we
    need is a system that--no, technology is not bad; technology is
    great. It does wonderful things, but it is not always great. It
    is not always appropriate, and we need to start to have systems
    that can make judgments about what is good and necessary and
    beneficial and what is not. Across the board approaches will
    not work.
        Chairman JOHNSON. Thank you for that clarification. Mr.
    Ramstad.
        Mr. RAMSTAD. Thank you, Madam Chairwoman, for convening
    this important hearing. Thank you, gentlemen, for your
    participation and important testimony here today. Mr.
    Hackbarth, I am sure you know that CMS recently announced that
    10 large physician groups will participate in the first pay-
    for-performance initiative. The demonstration project will
    allow physician groups to show that improving care in a
    proactive, coordinated way saves money. I was certainly
    grateful to see that Park Nicollet in my home district of
    Minnesota was selected to be part of this important
    demonstration. As both of you gentlemen know, I am sure,
    Minnesota has a history of delivering high quality care
    efficiently, but we have been penalized for this in various
    Medicare systems. The biggest culprit--our biggest nemesis is
    the AAPCC formula for managed care that rewards, really, high
    cost and inefficiency. A State like Minnesota, that has a
    history of lower costs and high quality, we are penalized for
    that cost deficiency. The formula is unfair. It is inequitable
    and unjust, to put it kindly, and I certainly believe that pay-
    for-performance paradigm in Medicare has great potential to
    improve outcomes for Medicare patients and reduce overall
    costs. My question for you, Mr. Hackbarth, is whether or not
    the CMS demonstration project matches the outlines of your
    recommendations for updates based on a pay-for-performance?
        Mr. HACKBARTH. Yes, in general terms, it certainly does. We
    are very excited about that demonstration and think that it has
    a lot of promise. In fact, one of our commissioners is the CEO
    of one of the groups involved, so we have learned a lot about
    it from him. What is unique about the demonstration and
    particularly exciting is that it will base the performance
    payments on both quality and efficiency in the provision of
    services and brings the two things, which, from our perspective
    are the ultimate goal to finding value, a combination of high
    quality and efficiency. Then the other thing that it does that
    we are especially excited about, is that it combines Parts A
    and B. We have this--from the perspective of the healthcare
    world, this artificial distinction between A and B, and it
    comes to be a barrier in improving performance, because it is
    an artificial line. Sometimes the things that will save money
    and improve quality span that artificial A-B line, and this
    demonstration is going to leap over it. So, there is a lot
    about the demonstration that we think is really promising.
    Having said that, we do not think that Medicare needs to stop,
    not do pay-for-performance at all until this demonstration
    project is complete. We believe that there are steps that can
    be taken for physicians and other providers that will begin
    moving the process forward, link payments to quality, and then
    down the roadway, we can take the lessons from this
    demonstration and take this to a larger step in the future.
        Mr. RAMSTAD. Well, your testimony and your response is very
    refreshing. For the first time since I have been here, 15
    years, I am sensing a paradigm shift. Sometimes changing
    Medicare is a little bit like moving a glacier. On both counts,
    your responses showed some promise. It is really hard for me to
    continue explaining to the seniors in Minnesota when they go to
    Florida or they go to California, without dividing the panel
    among States here, but the inequities in the AAPCC formula.
    There is no way that those inequities can be rationalized or
    justified. So, when you talk about a pay for performance
    paradigm in Medicare and you talk about, as you did, combining
    A and B, those are very positive signs. I applaud you for that
    progress. Let's continue to work together in a pragmatic way
    and make these necessary changes to improve Medicare for
    everyone. Thank you, Madam Chairman.
        Chairman JOHNSON. Thank you very much. I would like to
    recognize Mr. Doggett.
        Mr. DOGGETT. Thank you, Madam Chairman. Thank you,
    gentlemen, for your testimony. Let me direct my questions to
    Mr. Hackbarth, but I welcome anything you would want to add,
    Mr. Steinwald. I represent the poorest county in America,
    trails even the Mississippi delta, Starr County down on the
    border, and the poorest metropolitan statistical area, the area
    around McAllen and Mission, Texas. I have a number of
    physicians there who rely on Medicare, Medicaid, children's
    health insurance program for their high-paying folks; and the
    poor folks are the ones that don't qualify relatively for those
    programs. When you talk in your testimony about the inequities
    in the current payment system because they treat all physicians
    and regions of the country alike, how are the changes that you
    are contemplating likely to affect an area like that and
    physicians who practice there in that kind of practice setting?
        Mr. HACKBARTH. There are a couple of different approaches
    to this. One is that, over the course of a number of years, we
    have looked at the payment rules, the payment system, how the
    formulas work to try to assure that they pay providers in rural
    areas, in smaller communities, equitably. Going back a number
    of years now, we have made recommendations, for example, in the
    hospital payment system, many of which were included in MMA,
    that address what we saw to be inequities in the payment
    formulas. They have increased payment to rural healthcare
    providers of various types, both hospitals and physicians. The
    results of those changes are not yet in. Some of them are
    relatively new, but we think some very important steps have
    been taken toward payment equity. With regard to pay for
    performance, our goal there is to have evidence-based standards
    of care that wouldn't be different for a rural beneficiary or
    an urban beneficiary. This is what good medicine requires. So,
    to the extent that rural providers do very well, and we have
    reason to believe that many can do very well on those quality
    scores, they will get additional payment reflective of the
    quality of their practice. On the other hand, if they perform
    poorly, then they will lose money. That really ought not be an
    urban/rural thing. That ought to be a standard about what
    constitutes appropriate quality.
        Mr. DOGGETT. How do we measure the quality of their
    practice?
        Mr. HACKBARTH. For a physician specifically, we recommend
    basically a two-step process. The first step is to begin
    adjusting payment based on a physician's or a physician group's
    ability to produce and use specific types of information that
    are important in providing quality of care. For example, the
    ability to identify patients with chronic illness and provide
    appropriate care, track what they need, follow up on abnormal
    results and the like. It is the information capability. Good
    medical practice has to be based on good information. So, what
    we envision under some projects out there that have already
    specified information standards, we would say, to the extent
    that a physician collects and uses this sort of information,
    they ought to get additional payment and they ought to be
    rewarded for that.
        Mr. DOGGETT. They won't be penalized because they have a
    higher percentage of people who are poor and sick?
        Mr. HACKBARTH. No, no. The second step we envision is that
    we would begin instituting specific measures based on clinical
    standards, how you care for a diabetic patient or a patient
    with congestive heart failure. That would be based on evidence-
    based guidelines of practice. What we urge the Congress to do
    and the Secretary of HHS to do is to say to the physician
    community, that is where we are headed and we want to engage
    with you, the profession, and the specialty societies in
    developing those measures so that at a point in the not too
    distant future we have got a broad set of clinical performance
    measures to apply to physician practice. We believe that is
    eminently doable, given the research that exists, so long as
    there is a collaborative process between the department and the
    physician community.
        Mr. DOGGETT. Just one other thing about the pay for
    performance system. I think generally they aren't designed to
    control volume. How do you recommend that we control volume if
    we move away from the SGR and toward a more market-based-like
    update?
        Mr. HACKBARTH. We think that pay for performance can make
    sure that we get the right volume. One of the problems I have
    with the SGR is all volume is the same. It is undifferentiated.
    So, we want the right volume. There are some areas of underuse
    of service where we want to increase the utilization. That is a
    critical point. Some other tools that we think ought to be
    developed include what we refer to as resource measurement. The
    first step for a physician to improve his or her practice is to
    understand how their practice compares to evidence-based
    standards of care and their peers. We can through the Medicare
    program, begin helping physicians understand how their practice
    compares. When I am talking about their practice, I don't mean
    just how many office visits but how they care for episodes of
    care, for patients with particular clinical problems. What we
    propose is that CMS invest in developing that capability and
    then feed the information back to physicians on a confidential
    basis at first and say, this is how you compare with your peers
    in caring for a patient with, say, congestive heart failure.
    That is the first step to changing patterns of care in a
    constructive way, letting people know how they do, how it
    compares to their peers and to evidence-based standards.
        Mr. DOGGETT. Thank you. Thank you, Madam Chair.
        Chairman JOHNSON. I thank the gentleman. It was an
    excellent question. I hope you will be able to stay to the end
    of the panel, because we do have people who have direct
    experience with that, and we will be looking very deeply into
    exactly those issues. Mr. English.
        Mr. ENGLISH. Mr. Hackbarth, I am going to follow on my last
    colleague's question. Given that MedPAC has consistently urged
    us to sever the link between the fee update and volume controls
    and has recommended replacing the SGR system with an update
    based on changes in the cost of providing services, would you
    please describe for us in maybe a little more detail the volume
    control approaches favored by MedPAC and what kind of concrete
    impact can you suggest this would have on the system?
        Mr. HACKBARTH. The general approaches that we are
    recommending in this report are pay for performance, what I
    just described as resource measurement, and then looking at
    high growth areas like imaging and apply the resource
    measurement tools there, changing some of the coding edits that
    Medicare uses and applies to claims. So, they are very targeted
    approaches that we are talking about. Will these things, these
    specific recommendations--pay for performance, resource
    measurement, imaging--immediately alter the trend, the growth
    in volume and intensity? We think yes. They are not going to
    solve the problem, and more needs to be done in the future.
    Those are very constructive, targeted steps that we believe
    will have a much better effect on the system than the across-
    the-board SGR approach.
        Mr. ENGLISH. Okay. As I look at the proposed changes for
    the payment system specifically to reward providers for
    delivering quality care, I wonder if you could clarify. The
    intent of these changes is not simply to raise quality or
    efficiency in isolation but, as I understand it, rather to
    incentivize increases in quality tied to gains in efficiency.
    These two must be, I would think, achieved together. Are you
    confident your proposals will be able to do that?
        Mr. HACKBARTH. Ultimately, as you say, what we want to do
    is put together in a single set of measures both quality and
    efficiency measures. As I said to Mr. Ramstad, that is one of
    the exciting things about the new demonstration project, is
    that it is an effort to do that. We have to walk there. We
    can't begin at that point. We think we have to buildup, build
    the capabilities. So, right now, what we are talking about is
    having the efficiency and quality measures separate. Right now,
    what we are missing most is the quality measurement. We want to
    begin rewarding high quality over time and start to build an
    integrated set of efficiency and quality measures. One of the
    things that we want to change, and we haven't touched on this,
    is when we start rewarding quality of care, we start changing,
    I think, how physicians think about their practice, in
    particular with regard to things like clinical information
    systems. Right now, the system rewards volume, the system
    rewards technological sophistication, and so people invest in
    things that will allow them to increase their volume and do
    fancy new procedures that they get paid a lot for. If we start
    paying for quality, then they say, well, what I am investing I
    want to invest in things that will help me perform well on
    quality, like computerized medical records or order entry
    systems and the like. Once we start to expand those tools and
    have them in widespread use, I think we will see not only
    significant gains in quality but also in the efficiency of the
    system.
        Mr. ENGLISH. That is a marvelous blueprint to operate off
    of, Mr. Hackbarth. I, frankly, used to be a city finance
    officer. I have a passing familiarity with performance
    measurement systems and their potential but also their
    limitations. I guess my own feeling is, on something like this
    dealing with services that are so sophisticated, I am wondering
    in the long run how easy it is going to be to apply a
    performance measurement system in the way that you are
    suggesting here. I will look forward to examining your proposal
    in greater detail, and here I think the devil really is in the
    details. I thank you, Madam Chairman.
        Chairman JOHNSON. I thank the gentleman. Mr. Thompson,
    welcome to the Committee. I also welcome the other new Members.
        Mr. THOMPSON. Thank you very much, Madam Chair. Thank you
    for holding today's hearing. Thank you both for being here
    today. Mr. Hackbarth, if I could ask you, the reimbursement
    rates, are they having any effect in regard to physician
    shortages within the Medicare populations?
        Mr. HACKBARTH. With regard to access to care for Medicare
    beneficiaries?
        Mr. THOMPSON. Right.
        Mr. HACKBARTH. We see no evidence of widespread access
    problems. We look at a variety of different measures--what
    beneficiaries say about their own access to care, what
    physicians say about their willingness to accept new Medicare
    patients. As we discussed earlier, we look at the relationship
    between Medicare fees and private fees. In looking at all those
    different types of measures, we find that Medicare
    beneficiaries continue on a national basis to have very good
    access to care from the beneficiary's perspective--that is what
    they say--and in fact a higher level of satisfaction with
    access than the privately insured population. Having said that,
    there are specific communities within the United States where
    it may be a problem finding a physician. For example, if you
    are a Medicare beneficiary that is newly moved into a
    community, finding a primary care physician can in some
    isolated places be a problem, but, on a national basis, we do
    not see access problems.
        Mr. THOMPSON. Do you suspect that if this issue is not
    dealt with and dealt with quickly that that will become a
    problem?
        Mr. HACKBARTH. If by that you mean if the----
        Mr. THOMPSON. Will there be more people moving into areas
    where they won't be able to find a doctor?
        Mr. HACKBARTH. If we were to have a succession of 5
    percentage point cuts in the Medicare rates, I think it would
    be quite likely that we would begin to see widespread access
    problems.
        Mr. STEINWALD. I would certainly agree with that. I would
    point out, though, that we have researched this issue, too, and
    we also don't find an access problem. We did some research
    looking at trends in utilization and the percentage of Medicare
    beneficiaries receiving services over the 2000 to 2002 period
    and we found in every State those measures of utilization
    increased, and that includes the one year in which there was
    about a 5 percent fee cut in Medicare. There was still an
    increase in services and an increase in the proportion of
    beneficiaries served.
        Mr. HACKBARTH. The other thing on access is that, in the
    communities where there are some problems, it is not
    necessarily solely because of Medicare payment rates. They
    often tend to be very rapidly growing communities where the
    population is already perhaps outstripping the supply of
    physicians and then the Medicare payment issue comes in on top
    of that. Access is affected by non-Medicare issues as well.
        Mr. THOMPSON. Mr. Steinwald, if I could return to an issue
    that Mr. Lewis brought up earlier and that is prospectively
    dealing with the out-of-hospital drugs or retroactively dealing
    with those. It is my understanding that if we do it
    prospectively that we are going to see 5 percent cuts through
    2010. As we know, Congress hasn't been real receptive to
    allowing this to happen. I think it was your number, $120
    billion over 10 years, if we do it retroactively?
        Mr. STEINWALD. No, sir, that is not mine. I think that is--
    --
        Mr. THOMPSON. CBO?
        Mr. STEINWALD. Yes, it is a CBO estimate; and that is,
    actually, I think the estimate of the 10-year cost of repealing
    SGR and replacing it with an inflation-based update.
        Mr. THOMPSON. Do you have any knowledge of knowing what it
    will cost for Congress to continue to move up from the minus 5
    to baseline the physician reimbursement cost?
        Mr. STEINWALD. At GAO we don't do budget estimates. As you
    work with various options, I am sure you will be asking CBO to
    cost them out for you. What I have provided you in the table
    that I referred to earlier is an indication of the relative
    costliness of the different options in percentage terms. So,
    you can at least gauge of the different options, what relative
    impact they will have on spending and how they would be scored.
    The actual scoring will have to be done by the CBO.
        Mr. THOMPSON. I am just trying to get an idea. Does it pay
    to fix it now or kick the can down the road?
        Mr. STEINWALD. I think it is certainly timely and wise to
    start to address this problem. We don't have any experience
    with the consequences of multiple-year negative fee updates,
    but I think everyone--and I alluded to a single year when there
    appeared to be no access problems, but multiyear, as many years
    as we are talking about now, I think we would all agree there
    would have to be serious consequences for both doctors and
    beneficiaries, and so I would urge you to start to think about
    that in the short term.
        Mr. HACKBARTH. Mr. Thompson, could I just address that
    quickly? We are at the threshold of an important change here.
    In years past, the Congress has been able to do a 1- or 2-year
    override of the SGR rates and have the 10-year cost be
    basically zero because the system assumes that the SGR
    mechanism will take that money back in future years. So, there
    is an initial cost, but in the long run it comes to a zero.
    However, that is about to change. There are restrictions in the
    SGR on how much it can take back in any given year. We are now
    approaching the point where, even over the 10-year horizon, you
    can't take back all of the money from a year-to-year increase.
    So, even 1-year changes will start to have a positive 10-year
    budget score attached to them.
        Mr. THOMPSON. Thank you. Thank you, Madam Chair.
        Chairman JOHNSON. Mr. Hulshof.
        Mr. HULSHOF. Thank you, Madam Chairman. Let me say I am
    excited to be on the Subcommittee, and I appreciate this
    opportunity. This has been a prominent issue back home in
    Missouri, and so I am excited to be on the Subcommittee to help
    create a solution to that and look forward to that. Mr.
    Hackbarth, I am intrigued by the idea of pay for performance,
    because, again, during my tenure on the full Committee, in
    visiting with healthcare providers across the board, whether it
    is home health, hospice, hospitals, doctors, acute care
    providers, it seems that medical care in this country for our
    senior citizens population is driven by where the money is,
    where reimbursements are, and so this idea of actually focusing
    on patient care is an intriguing one. Missouri has also been
    recently designated by CMS to have one of these demonstration
    projects. It is not in my congressional district, it is in my
    colleague Roy Blunt's district in Springfield, Missouri. You
    have addressed this a bit insofar as that particular area which
    is more heavily populated than my own congressional district.
    My colleague from Texas talked about a concern that, in a more
    rural setting, if you have a higher senior citizen population
    or if you have higher rates of obesity or other factors, making
    sure that we don't create another AAPCC type of disparity
    between large urban settings and those rural areas. You
    addressed that a little bit.
        Since we have a vote on and I want to make sure that I
    adhere to my time limits, coming up behind you, maybe in front
    of the microphone where you sit in the next panel, Dr. Nancy
    Nielsen, who represents the American Medical Association, and
    so let me give you what I believe she is going to tell us
    through her testimony and then give you a chance to respond to
    it. Dr. Nielsen says that initiatives that provide financial
    incentives for quality care improvements should not be
    undertaken by Medicare until the physician payment update
    formula has been replaced with a system that ensures a stable
    economic environment for treating patients. I think, as she
    indicates in the paragraphs that follow that statement, the
    concern is that doctors out there, because of the uncertainty,
    because of the constant threat of cuts in reimbursements, that
    a lot of doctors or a lot of small practices have not made the
    investment in technology. A lot of these are a very expensive
    type of--converting to different types of systems, and so if we
    move in this direction of pay for performance, do we need to
    actually have a new payment structure in place and then talk
    about pay for performance, or can we do this in tandem? What is
    your opinion about that?
        Mr. HACKBARTH. We are in favor of changing the payment
    formula. We have been for a long time, both, incidentally, when
    it was in providing for updates which were much higher than the
    increase in input cost as well as more recently when it has
    been saying the update should be much lower. That is a change
    that we think is urgent and ought to happen as soon as
    possible. We don't think that Congress, even if it can't change
    the entire formula, ought to allow 5 percent cuts to go into
    effect. I think our position on that is very clear. With equal
    urgency, however, we think the system needs to begin moving in
    a measured, thoughtful way toward pay for performance and begin
    rewarding the many, many physicians who are providing very
    high-quality care, support investments in future provision of
    high-quality care. Those two things are equally important and
    urgent from our perspective.
        Mr. HULSHOF. In the interest of time, Madam Chair, I yield
    back so my colleague from Illinois can inquire before our vote.
        Chairman JOHNSON. Thank you very much. For the Members, we
    will reconvene at 20 minutes of 12 so that we can hear
    hopefully the next panel before noon. Those of you that can
    stay for questioning, that will be wonderful, but it is very
    important to hear both together, particularly from the point of
    view of technology, which we haven't had a chance to discuss
    here much. Mr. Emanuel, welcome to the Committee.
        Mr. EMANUEL. Thank you very much. I look forward to serving
    on the Committee. I thank the other Members, and I thank my
    colleague from Missouri. When you are the ninth questioner, you
    feel somewhat like Mo Udall's comment, ``Anything that needs to
    be asked has been asked, it just hasn't been asked by everybody
    that needs to ask it.'' Let me associate myself, though, with
    Congressman English's questions earlier about the volume cap.
    That was something I wanted to talk about. Maybe--in the
    interest of time, I am more than willing to take this answer to
    the question in writing because, obviously, some of us have to
    get to a vote; and rather than be anxious about the vote and
    hearing what you have to say, I am more than willing to take
    this in written form. The one area that I would like to talk
    about--maybe we can do it later; if not, just in writing. If
    you do make a major change to the physician payment, what is
    the strategy and the approach to ensuring that the
    beneficiaries both on copays and premiums don't also receive a
    major change? Can we hold them harmless or limit the damage to
    the beneficiary from a payment, either in the copay and the
    premium together? That would be an area, if we had more time, I
    would like to explore. I want to thank you again. I am more
    than willing to take that question in writing and further
    associate myself with what Congressman English talked about in
    the sense of the volume cap and the ability to control costs.
    Thank you very much.
        Chairman JOHNSON. Thank you. Would either of you like to
    comment on that? We have about 7 minutes left. If you want to
    comment a couple of minutes, you can.
        Mr. HACKBARTH. Let me begin by noting that it is very
    important to keep in mind the impact on beneficiaries of any of
    these changes. Because the way the system works, to the extent
    that physician fees increase, there is an increase in
    beneficiary co-payments and there is an increase in the Part B
    premium. Since 7 May, it also means that we move closer to the
    45 percent limit on the piece of the program financed through
    general revenues. So, we have to be mindful of all of those
    effects. We have not looked at specific proposals for giving
    beneficiaries the increase, and so I just don't have any MedPAC
    recommendation on that. The other side of the coin, though, is
    that we need to assure access to care for Medicare
    beneficiaries; and if we don't have fees that appropriately
    reflect the cost, as we have discussed earlier, there is a real
    threat to their access. So, it is a balancing act, as it has
    been since the beginning of the program. Nobody has more to
    gain, from our perspective, through pay for performance than
    the Medicare beneficiaries. So, we need to be mindful, but we
    need to move ahead on the fronts that we have described.
        Mr. STEINWALD. I agree with what Glenn said. You had asked
    would it be possible to hold the beneficiary harmless if these
    were increased. I think the simple answer to that is, not
    within current law on how co-payments and premiums are
    calculated. On the other hand, if we are talking about averting
    fee declines, the impact on beneficiary co-payments of fee
    declines should be a declining co-payment. If fees were allowed
    to increase or remain constant, the impact on beneficiaries
    should be slight. The impact on premiums, however, might be
    greater because volume and intensity increases spending and
    premiums are based on spending, not on fees.
        Chairman JOHNSON. We should note, though, that the impact
    on the beneficiaries is variable, that the low-income
    beneficiaries have their premiums and co-payments paid by the
    government.
        Mr. EMANUEL. If I may, if we had more time, and again
    because I am conscious of the vote, one of the questions as a
    follow-up on that is for low-income--obviously, it is true for
    everyone but for low-incomes especially--both the premium and
    the copay will hit a level that is different for other people,
    where you somewhat--if I hear your answer correctly--access--we
    are kind of putting it in the front of the queue as opposed to
    both on the payment side--either the copay or the premium. I
    think actually beneficiaries are somewhat affected on those two
    areas differently. You are weighing that and saying for
    everybody, blanketly, access is the primary area. I think
    actually people get affected based on income and geography
    differently. That is just for another time.
        Chairman JOHNSON. Thank you. I thank the panel very much
    for your good work and your good answers. We will reconvene in
    10 minutes.
        [Recess.]
        Sometimes votes take a little longer than you think they
    are going to take, but we are looking forward to the testimony
    of our second panel. If I may, let me just start with Dr.
    Nielsen from the American Medical Association.

     STATEMENT OF NANCY NIELSEN, M.D., AMERICAN MEDICAL ASSOCIATION

        Dr. NIELSEN. Thank you, Chairman Johnson. I am a member of
    the board of trustees of the American Medical Association and
    speaker of the house of the AMA. I am also a practicing
    internist in Buffalo, New York. The AMA would like to express
    appreciation to you, Chairman Johnson, to Ranking Member Stark
    and to each Member of the Subcommittee for your hard work and
    leadership in addressing the Medicare payment update problem.
    You are going to hear the same themes repeated that you heard
    in the first panel. The Medicare payment formula relating to
    physicians is flawed and permanently broken. It would have led
    to steep cuts in recent years unless there had been repeated
    congressional and Administration intervention. Additional cuts
    of 31 percent are expected beginning in January of 2006 through
    2013. These cuts present a serious threat, as you heard
    described in the earlier panel. Congress and the Administration
    must act now to replace the current physician payment formula,
    as MedPAC has recommended. MedPAC also recommended a 2.7
    percent physician payment update for 2006. There are a number
    of problems with the current payment formula.
        First, under a spending target system called the SGR, which
    applies only to physicians, annual payment updates are tied to
    GDP. The GDP is only a measure of growth in the overall
    economy. The medical needs of Medicare patients do not wane
    when the American economy slows. Second, GDP does not take into
    account health status, the aging of the Medicare population,
    technological innovations or changes in the practice of
    medicine; and, third, physicians are penalized across the board
    when arbitrary spending targets are exceeded. Here is the
    inequity. Failure to meet these targets results in large part
    from government policies and medical innovations that expand
    Medicare services. The Administration has the authority to take
    action to help ease the payment update problem and lead the way
    for congressional intervention. We certainly appreciate the
    efforts of this Subcommittee to encourage the Administration to
    take a critical first step toward solving the payment update
    problem, and we urge the Subcommittee to continue to press CMS
    to do so by removing physician-administered drugs from the SGR.
    CMS has the authority to remove drugs going back to the
    beginning of SGR, as described in a legal memo attached to our
    written testimony drafted by Terry Coleman, a former chief
    counsel and deputy administrator of HCFA. When CMS calculates
    the SGR spending target each year, it compares actual Medicare
    spending on physician services to target spending. In
    calculating the SGR, CMS includes the costs of physician-
    administered drugs, clearly not a physician service. The
    inclusion of drugs in the SGR makes it extremely likely that
    overall spending on physician services will exceed the spending
    target, thus triggering the physician pay cuts that jeopardize
    access.
        CMS defines and can revise the definition of physician
    services to exclude drugs. CMS can then recalculate actual or
    target spending, excluding the cost of the drugs, back to 1996-
    1997, the base period of the SGR. This would not involve
    adjusting physician payments for any previous year, however.
    The law also requires CMS, when calculating the SGR, to reflect
    increases in physician spending due to changes in law and
    regulation, but CMS does not include spending changes due to
    national coverage decisions. This further compounds the
    problem. Finally, we are interested in working with the
    Subcommittee and the Administration on quality improvement
    policies. I hope in the question and answer period we will have
    the opportunity to talk about some of the things that we have
    done as well in that regard. We will be hard-pressed to make
    investment in information technology if these planned cuts go
    into effect; and, therefore, it is critical to replace the
    flawed formula to allow quality improvement initiatives to
    flourish. Thank you for the opportunity to appear before you
    today.
        [The prepared statement of Dr. Nielsen follows:]
         Statement of Nancy Nielsen, M.D., American Medical Association
        Chairman Johnson, Ranking Member Stark and Members of the
    Subcommittee, the American Medical Association (AMA) appreciates the
    opportunity to provide our views today regarding Medicare payments to
    physicians.
        The AMA would like to commend you, Madam Chairman, and each Member
    of the Subcommittee, for all of your hard work and leadership in
    recognizing the fundamental problems inherent in the Medicare physician
    payment update formula. We deeply appreciate enactment of provisions in
    the Medicare Prescription Drug, Improvement, and Modernization Act of
    2003 (MMA), as well as your unrelenting support for the regulatory
    relief provisions that were included in the MMA.
        Today, the AMA especially applauds your commitment to developing a
    long-term solution to the current flawed physician payment formula. As
    you know, the flaws in the Medicare physician payment formula led to a
    5.4% payment cut in 2002, and additional cuts in 2003 through 2005 were
    averted only after Congress intervened. These short-term congressional
    interventions will expire next year, however, and the Medicare Trustees
    have projected that physicians and other health professionals face pay
    cuts totaling 31% over the next eight years. Payments for cataract
    surgery, for example, will fall from an average of $684 in 2005 to an
    average of $469 in 2013.
        These reductions are not cuts in the rate of increase, but are
    actual cuts in the amount paid for each service, resulting in a
    reduction in physician payment rates of nearly a third. They come at a
    time when even by Medicare's own conservative estimate, physician
    practice costs are expected to rise by 19% and when many physicians
    face far larger increases due to the skyrocketing cost of medical
    liability insurance. They also follow more than a decade of Medicare
    cost constraints that held payment increases to 18% between 1991
    through 2005 despite the government's conclusion that practice costs
    had increased by 40% over the same time period. Physicians simply
    cannot absorb these draconian payment cuts and, unless Congress acts,
    it is difficult to see how they can avoid discontinuing or limiting the
    provision of services to Medicare patients.
        A physician access crisis is looming for Medicare patients. While
    the MMA has made significant strides in improving the overall system
    for Medicare beneficiaries, including broad-scale improvements for care
    furnished to patients in rural areas as well as important new benefits,
    these critical improvements must be supported by an adequate payment
    structure for physicians' services. There are already some signs that
    access is deteriorating, including a 2.5% reduction in the number of
    new patient visits per enrollee in 2003, as reflected in claims data
    for that year. Physicians are the foundation of our nation's healthcare
    system, and continual cuts (or even the threat of repeated cuts) put
    Medicare patient access to physicians' services (as well as drugs and
    other services they prescribe) at risk and threaten to destabilize the
    Medicare program and create a ripple effect across other programs, as
    well. Indeed, Medicare cuts jeopardize access to medical care for
    millions of our active duty military family members and military
    retirees because their TRICARE insurance ties its payment rates to
    Medicare.
        Congress and the Administration must take immediate action to
    replace the SGR with a system that keeps pace with increases in the
    cost of practicing medicine. While we greatly appreciate the short-term
    reprieves achieved by Congress and the Administration in recent years,
    a long-term solution is needed now. Indeed, the temporary fixes have
    led to even deeper and longer sustained cuts because Congress recouped
    the cost of temporarily blocking the severe cuts in physician payments
    in the out-years. Without action to implement a long-term solution now,
    repeated congressional intervention will be required to block payment
    cuts that jeopardize continued access to high quality care for the
    elderly and disabled.
        The AMA is happy to have the opportunity today to address problems
    with the physician payment formula, and looks forward to working with
    the Subcommittee and Congress to ensure implementation of a new payment
    update that keeps pace with increases in the cost of practicing
    medicine.
                       THE SUSTAINABLE GROWTH RATE SYSTEM
        Medicare pays for services provided by physicians and numerous
    other healthcare professionals on the basis of a payment formula that
    is updated annually in accordance with a target rate of growth, called
    the sustainable growth rate (SGR). Under the SGR, enacted by the
    Balanced Budget Act of 1997 (BBA), the Centers for Medicare and
    Medicaid Services (CMS) establishes allowed expenditures for
    physicians' services based on certain factors set forth in the law: (i)
    inflation, (ii) fee-for-service enrollment, (iii) real per capita gross
    domestic product (GDP), and (iv) laws and regulations. CMS then
    compares allowed expenditures to actual expenditures. If actual
    expenditures exceed allowed expenditures in a particular year, then
    physician payments are reduced in the subsequent year. Conversely, if
    allowed expenditures are less than actual expenditures, physician
    payments increase.
               PROBLEMS UNDER THE SUSTAINABLE GROWTH RATE SYSTEM
        The flawed SGR system has led to payment volatility and substantial
    patient access concerns requiring congressional intervention to avoid
    erosion of beneficiary access to care.
        The vast majority of physician practices are small businesses, and,
    as such, do not have the economic and other necessary resources to
    absorb sustained losses or the steep payment fluctuations that have
    occurred under the SGR system. Further, the unpredictability of the SGR
    system makes it difficult for physician office practices, as small
    businesses, to project revenue into the future and make the necessary
    business and financial decisions needed to operate a sound business
    over time. It is nearly impossible for physician practices to plan
    ahead since SGR estimates for future years (which are based on numerous
    factors that are impossible to predict) are completely unreliable, in
    addition to being quite grim. When these small medical practices
    experienced the 5.4 percent Medicare cut in 2002, physicians and non-
    physician practitioners were left with very few alternatives for
    maintaining a financially sound practice without limiting their
    Medicare patients' access in some way.
        It took strong efforts by Congress, in particular by this
    Subcommittee, in addition to similar efforts by the Senate, the
    Administration and CMS to avoid another SGR-triggered pay cut in 2004
    and 2005. While we greatly appreciate this effort, we do not believe
    Congress and the Administration (nor patients, physicians and other
    healthcare professionals) should have to struggle with the ill effects
    of such a system, year after year.
        The Medicare Payment Advisory Commission (MedPAC) has recommended
    in the past that the SGR be replaced with a system where updates are
    based on an assessment of increases in practice costs, adequacy of
    payment rates, and beneficiaries' access to care, and we agree. In
    addition, we expect MedPAC, in its March Report to Congress, to
    recommend that Congress should increase 2006 payments for physician
    services by the projected change in input prices, less a productivity
    adjustment of 0.8 percent, resulting in a projected update of 2.7%. The
    AMA agrees with these MedPAC recommendations.
        There are several fundamental problems with the SGR formula:

        1.  Payment updates under the SGR formula are tied to the gross
    domestic product, which bears little relationship to patients'
    healthcare needs or physicians' practice costs;
        2.  The SGR formula is highly dependent on projections that in
    effect require CMS to predict the unpredictable; and
        3.  Physicians are penalized with lower payments when utilization
    of services exceeds the SGR spending target, yet, the factors driving
    these increases are often beyond physicians' control (as further
    discussed below under ``Administrative Action Needed.'')
    Problems with the Payment Formula Due to GDP
    GDP Does Not Accurately Measure Health Care Needs
        The SGR permits utilization of physicians' services per beneficiary
    to increase by only as much as GDP. The problem with this
    ``relationship'' is that GDP growth does not track the healthcare needs
    of Medicare beneficiaries. For example, when a slowed economy results
    in a decreased GDP, the medical needs of Medicare patients remain
    constant, or even increase, despite the economic downturn. Yet,
    physicians and numerous other health professionals, whose Medicare
    payments are tied to the physician fee schedule and who are doing their
    best to provide need services, are penalized with lower payments
    because of a slowly growing economy, resulting in the decreased GDP.
    Further, GDP does not take into account the aging of the Medicare
    population, technological innovations or changes in the practice of
    medicine.
        Historically, healthcare costs have greatly exceeded GDP. Yet, the
    SGR is the only payment formula in Medicare tied to that index. In
    contrast, payments for hospitals, skilled nursing facilities and home
    health, for example, are all tied to their inflationary pressures.
    Technological Innovations Are Not Reflected in the Formula
        The United States' population is aging and new technologies are
    making it possible to perform more complicated procedures on patients
    who are older and more frail than in the past. The Congressional Budget
    Office has said that recent Medicare volume increases are due to
    ``increased enrollment, development and diffusion of new medical
    technology'' and ``legislative and administrative'' program expansions.
    The SGR system's artificial cap on spending growth ignores such medical
    advances when it limits target utilization growth to GDP growth.
        Both Congress and the Administration have demonstrated their
    interest in fostering advances in medical technology and making these
    advances available to Medicare beneficiaries through FDA modernization,
    increases in the National Institutes of Health budget, and efforts to
    improve Medicare's coverage policy decision process.
        The only way for technological innovations in medical care to
    really take root and improve standards of care is for physicians to
    invest in those technologies and incorporate them into their regular
    clinical practice. The invention of a new medical device cannot, in and
    of itself, improve health care--physicians must take the time to learn
    about the equipment, practice using it, train their staff, integrate it
    into their diagnosis and treatment plans and invest significant capital
    in it. Although the Medicare hospital payment system allows an
    adjustment for technological innovations, the physician payment system
    does not do so. The physician payment system is the only fee structure
    of Medicare that is held to GDP, and no other Medicare payment system
    faces as stringent a growth standard.
        Government efforts to foster technological innovations could be
    seriously undermined as physicians now face disincentives to invest in
    new medical technologies or to provide them to Medicare beneficiaries.
    Site-of-Service Shifts Are Not Considered in the Formula
        Another concern that is not taken into account in the SGR formula
    is the effect of the shift in care from hospital inpatient settings to
    outpatient sites for certain medical procedures, such as imaging
    services. As MedPAC has pointed out in the past, hospitals have reduced
    the cost of inpatient care by reducing lengths-of-stay and decreasing
    staff. Indeed, it has been a goal by Congress and the Bush
    Administration to utilize more physician services through disease
    management and prevention initiatives in order to avoid expensive
    hospitalizations and nursing home admissions. Technological innovations
    have also made it possible to treat many services that once required
    hospitalization in physicians offices instead. Much of this shift--such
    as the replacement of surgical procedures with drug treatments that
    must be monitored by office-based physicians--cannot be accurately
    measured. MedPAC, however, has documented a shift for certain imaging
    procedures and some private payers have acknowledged that they have
    encouraged this trend because it saves money for both the government
    and patients. While this trend has led to treatment of increasingly
    complex cases in physicians' offices, the increased use and intensity
    that results is not recognized in the SGR formula.
    Beneficiary Characteristics Are Not Reflected in the Formula
        A related factor that also is unrecognized in the SGR formula is
    changes over time in the characteristics of patients enrolling in the
    fee-for-service program. For example, increases in patients diagnosed
    with, or having complications due to such diseases as obesity, diabetes
    and end stage renal disease, require greater utilization of physicians'
    services. Yet, these types of changes in beneficiary characteristics
    are not reflected in the SGR.
    Inability to Predict Payment Updates under the SGR
        Instead of making payments more predictable for physicians and
    budgets more predictable for policymakers, use of the SGR has had the
    opposite effect. Future updates are dependent on forecasts of (i) GDP,
    (ii) how many beneficiaries will choose Medicare Advantage versus fee-
    for-service Medicare, (iii) the rate of medical practice cost inflation
    each year, (iv) the rate of utilization growth each year, and (v)
    spending changes that will occur as a result of legislative and
    regulatory changes, such as expanded coverage for preventive services.
        Provisions in the MMA have reduced the volatility of GDP
    predictions, and fluctuations in the MEI generally are somewhat
    limited. It is still very difficult, however, to predict other factors
    in the SGR. As a result, policymakers cannot predict the impact of
    Medicare physician services on overall Medicare spending and medical
    practices cannot predict their revenue streams for the short- or long-
    term. Estimates of payment updates initially are based on incomplete
    data and such estimates can fluctuate significantly as more data
    becomes available. For example, in March of 2001, CMS projected that
    physician payments would fall slightly by about -0.1 percent in 2002.
    CMS noted that this projection was based on very early information and
    could change before a final update was announced in January 2002. In
    fact, those estimates did change, and Medicare payments to physicians
    and other healthcare professionals were cut by 5.4 percent in 2002.
      ADMINISTRATIVE ACTION NEEDED TO CORRECT SGR IMPLEMENTATION PROBLEMS
        Apart from the inherent problems in the physician payment formula,
    there are other problems with implementation of the SGR that seriously
    threaten patient access and inequitably affect payment updates due to
    factors that are beyond physicians' control. The Administration has the
    authority to take additional action to help ease these implementation
    problems and lead the way for congressional intervention. We strongly
    urge the Subcommittee to continue to press CMS to use its
    administrative authority to address and resolve the following issues in
    the proposed Medicare physician payment rule for 2006:

    1.  Remove Medicare-covered, physician-administered drugs and biologics
    from the physician payment formula, retroactive to 1996
                   CMS Authority to Remove Drugs from the SGR
        As discussed above, Medicare payments to physicians are reduced
    when actual Medicare spending for physicians' services exceeds a pre-
    determined spending target (the SGR). When CMS calculates actual
    spending on physicians' services, it includes the costs of Medicare-
    covered prescription drugs administered in physicians' offices.
    Although the physician's administration of the drug is clearly a
    physician service that by statute must be included in the pool, the
    drugs themselves are not ``physicians' services'' and drugs are not
    paid under the Medicare physician fee schedule. Thus, it is
    inconsistent to include drugs in the calculation of expenditures in the
    SGR methodology. In fact, in an interim final rule issued in December
    2002 (on the application of inherent reasonableness to Medicare Part B
    services), CMS chose to exclude drugs from the definition of
    ``physicians' services.'' To include drugs as a ``physicians' service''
    for certain purposes, but not for others, is inconsistent and
    inequitable. Indeed, this policy has been questioned by many
    legislators, including Subcommittee Chairman Johnson and Committee
    Chairman Thomas, who have repeatedly requested that CMS remove drugs
    from the SGR baseline. In addition, more than 240 House Members and
    more than 70 Senators have signed various letters asking CMS to take
    this action.
        Nothing in the statute requires Part B drugs to be included in the
    SGR formula. It has simply been a CMS decision to include drugs and CMS
    could easily make a different decision to exclude drugs, while still
    effectively implementing the statute written by Congress. CMS has
    stated it has the legal authority to revise the definition of services,
    although CMS has not yet stated whether it has the authority to
    implement a revised definition of physicians' services that would allow
    drugs to be fully removed from computation of actual and allowed
    expenditures back to the SGR base period. Any change in the definition
    of physicians services to remove drugs would not affect the SGR
    itself--only the actual and allowed expenditure amounts.
        We believe that CMS has the authority to fully remove drugs from
    the definition of physician services back to the SGR base period.
    First, if CMS adopts a revised definition of physician services that
    excludes drugs, it can recalculate actual expenditures back to the base
    period using that revised definition. Nothing in the statute limits how
    CMS is to calculate actual expenditures or limits CMS' ability to
    revise its previous calculations of actual expenditures. CMS has
    previously revised its calculations of actual expenditures based on the
    omission of codes and on additional claims data. Thus, CMS has
    implicitly taken the position that previously announced actual
    expenditure amounts can be recalculated. Accordingly, CMS can
    recalculate actual expenditure amounts for each year back to the base
    period using the revised definition. Recalculating the base period
    actual expenditures will also, by definition, recalculate the base
    period allowed expenditures since the statute sets the base period
    allowed expenditures equal to the base period actual expenditures. This
    approach would fully remove drugs from the SGR methodology for purposes
    of determining payments in future years.
        A second, supporting approach is based on the statutory language
    defining allowed expenditures. If CMS wants to remove drugs from the
    calculation of actual expenditures, it would presumably want to remove
    drugs from the calculation of allowed expenditures as well so that the
    same definition applies on both sides of the equation. To remove drugs
    from allowed expenditures for next year, however, requires
    recalculating last year's allowed expenditures using the revised
    definition, since the statute defines next year's allowed expenditures
    as last year's allowed expenditures increased by the SGR. Thus,
    revising a previous year's allowed expenditure amount is inherent in
    any implementation of a revised definition of physicians' services.
    Under the statute, the allowed expenditures should be revised back to
    the base period, since each year's amount is calculated by reference to
    the previous year's.
        In short, there is a firm legal basis for recalculating both the
    actual and allowed expenditures using a revised definition of
    physicians' services back to the SGR base period. The result is that
    drugs would be fully removed from the SGR methodology.
        This recalculation would not involve recalculating the allowed or
    actual expenditures for purposes of determining payment amounts in a
    prior year. The recalculation would affect only payment amounts in
    future years. Revising calculations for a past year for the purpose of
    setting future years' payment amounts is not impermissible retroactive
    rulemaking. It is similar, for example, to the recalculation of
    graduate medical education costs in a base year for purposes of setting
    future payment amounts. That recalculation was approved by the Supreme
    Court.
                      CMS Should Remove Drugs from the SGR
        In the past, some CMS officials have argued that including drugs in
    the SGR was necessary to counter-balance incentives for over-
    utilization in the drug reimbursement system. The AMA does not accept
    this premise. Certainly physicians are not administering chemotherapy
    drugs to patients who do not have cancer. Even if such incentives
    existed, however, they were surely eliminated by the reductions in
    payment for these drugs under the MMA. Thus, we urge the Subcommittee
    to reiterate the request that CMS reconsider its current policy in
    light of the changes made in the MMA. Pharmaceutical companies, not
    physicians, control the cost of drugs. Further, pharmaceutical
    companies and United States policy, not physicians, control the
    introduction of new drugs into the marketplace.
        A new physician payment formula that reflects the cost of
    practicing medicine is desperately needed, but current budget deficit
    projections will make it extremely difficult for Congress to take the
    steps that are needed to implement such a formula. The Administration
    must reduce the price tag and help pave the way for an appropriate
    long-term solution by removing drugs from the SGR pool, retroactive to
    1996. In fact, CMS actuaries recently announced that, in accordance
    with current estimates, removing drugs form the SGR would trigger a 3.7
    percent update in 2006. Even more fundamentally, removing Part B drugs
    from the SGR formula would nearly eliminate all of the impending cuts
    to physicians--every 5% cut for 7 consecutive years would be wiped out
    by taking this one simple action.
        Drug expenditures are continuing to grow at a very rapid pace. Over
    the past 5 to 10 years, drug companies have revolutionized the
    treatment of cancer and many autoimmune diseases through the
    development of a new family of biopharmaceuticals that mimic compounds
    found within the body. The lives of millions of disabled and elderly
    Americans have been extended and improved as a result. But such
    achievements do not come without a price. Drug costs of $1,000 to
    $2,000 per patient per month are common and annual per patient costs
    were found to average $71,600 a year in one study.
        Further, between the SGR's 1996 base year and 2003, the number of
    drugs included in the SGR pool rose from 363 to 430. Spending on
    physician-administered drugs over the same time period rose from $1.8
    billion to $7.7 billion, an increase of 318% per beneficiary compared
    to an increase of only 46% per beneficiary for actual physicians'
    services. As a result, drugs have consumed an ever-increasing share of
    SGR dollars and have gone from 3.7% of the total in 1996 to 9.8% in
    2003.
        This lopsided growth lowers the SGR target for real physicians'
    services, and, according to the Congressional Budget Office, annual
    growth in the real target for physicians' services will be almost a
    half percentage point lower than it would be if drugs and lab tests
    were not counted in the SGR. As 10-year average GDP growth is only
    about 2%, even a half percent increase makes a big difference. Thus,
    including the costs of drugs in the SGR pool significantly increases
    the odds that Medicare spending on ``physicians' services'' will exceed
    the SGR target. Ironically, however, Medicare physician pay cuts
    (resulting from application of the SGR spending target) apply only to
    actual physicians' services, and not to physician-administered drugs,
    which are significant drivers of the payment cuts.
        Although growth in drug expenditures appears to have slowed
    somewhat in 2004, Medicare actuaries predict that drug spending growth
    will continue to significantly outpace spending on physicians' services
    for years to come. This is a realistic assumption. In 2003, MedPAC
    reported that there are 650 new drugs in the pipeline and that a large
    number of these drugs are likely to require administration by
    physicians. In addition, an October 2003 report in the American Journal
    of Managed Care identified 102 unique biopharmaceuticals in late
    development and predicted that nearly 60% of these will be administered
    in ambulatory settings. While about a third of the total are cancer
    drugs, the majority are for other illnesses and some 22 medical
    specialties are likely to be involved in their prescribing and
    administration.
        The development of these life-altering drugs has been encouraged by
    various federal policies including expanded funding for the National
    Institutes of Health and streamlining of the drug approval process. To
    its credit, the Administration has made acceleration of the pace of
    drug development one of its goals and has adopted a number of policies
    that spur such development. Last June, for example, CMS and the
    National Cancer Institute announced a collaborative effort to improve
    the process for bringing new anti-cancer drugs to patients. In July,
    the Food and Drug Administration announced that it will create a new
    oncology office to further facilitate the approval process for these
    drugs. In August, CMS launched a new Council on Technology and
    Innovation that Administrator McClellan announced is intended to ensure
    that Medicare ``beneficiaries have access to valuable new medical
    innovations as quickly and efficiently as possible.'' The AMA shares
    and applauds these goals. However, it is not equitable or realistic to
    finance the cost of these drugs through cuts in payments to physicians.
        It is simply bad public policy to penalize physician payments when
    certain physicians prescribe needed life-saving drugs. Yet, the current
    formula creates disincentives to prescribe these drugs by cutting all
    physicians' pay when certain physicians prescribe Part B drugs.
        Accordingly, we recommend that the Subcommittee continue to urge
    CMS to remove drugs from the SGR pool, retroactive to 1996. With
    payment cuts slated to begin in 2006, it is critical for the
    Administration to act as soon as possible.

    2.  Ensure that government-induced increases in spending on physicians'
    services are accurately reflected in the SGR target

        As discussed above, the government encourages greater use of
    physician services through legislative actions, as well as a host of
    other regulatory decisions. These initiatives clearly are good for
    patients and, in theory, their impact on physician spending is
    recognized in the SGR target. In practice, however, many have either
    been ignored or undercounted in the target.
        Effective January 1, 2005, CMS is implementing the following new or
    expanded Medicare benefits, some of which have been mandated by the
    MMA: (i) initial preventive physician examinations; (ii) diabetes
    screening tests; (iii) cardiovascular screening blood tests, including
    coverage of tests for cholesterol and other lipid or triglycerides
    levels, and other screening tests for other indications associated with
    cardiovascular disease or an elevated risk for that disease; (iv)
    coverage of routine costs of Category A clinical trials; and (v)
    additional ESRD codes on the list of telehealth services. In addition,
    the new outpatient prescription drug benefit enacted under the MMA will
    significantly expand expenditures for physician services because
    beneficiaries who previously could not afford to purchase drugs will
    visit physicians to get prescriptions and will be monitored for the
    effect of the drugs.
        As a result of implementing a new Medicare benefit or expanding
    access to existing Medicare services, the above-mentioned provisions
    will increase Medicare spending on physicians' services. Such increased
    spending will occur due to the fact that new or increased benefits will
    trigger physician office visits, which, in turn, may trigger an array
    of other medically necessary services, including laboratory tests, to
    monitor or treat chronic conditions that might have otherwise gone
    undetected and untreated, including surgery for acute conditions.
        Although CMS has stated that the costs of these new services are
    included in the calculation of the SGR target for 2005, CMS has not
    provided details of how these estimates were calculated, and certain
    questions remain. CMS reportedly does consider multiple year impacts
    and cost of related services, but the agency has not provided any
    itemized descriptions of how the agency determined estimated costs.
    Without these details it is impossible to judge the accuracy of CMS'
    law and regulation allowances.
        In summary, CMS should adequately reflect, in the SGR target,
    physician spending increases due to such initiatives as the following:
    (i) legislative mandates, e.g., new preventive screening benefits and
    the new prescription drug benefit; (ii) CMS coverage expansions for new
    procedures and technology; (iii) government ``good health'' policies,
    such as efforts to reduce healthcare disparities, streamlining drug
    approvals, fighting diabetes, improving women's health; and (iv)
    federal ``quality initiatives,'' which tend to increase the use of
    physician services to save money elsewhere in the system.

    3.  Ensure that the SGR fully reflects the impact on physician spending
    due to national coverage decisions

        When establishing the SGR spending target for physicians' services,
    the law requires that impact on spending, due to changes in laws and
    regulations, be taken into account. The AMA believes that any changes
    in national Medicare coverage policy that are adopted by CMS pursuant
    to a formal or informal rulemaking, such as a Program Memorandum or a
    national Medicare coverage policy decision, constitute a regulatory
    change as contemplated by the SGR law, and must also be taken into
    account for purposes of the spending target.
        CMS' authority to make any regulatory change is derived from law--
    whether it is a law specifically authorizing Medicare coverage of a new
    service or a law that provides the Secretary of HHS with general
    rulemaking authority. Thus, any new coverage initiative is a direct
    implementation, by regulation, of a law. This is exactly what the SGR
    requires be taken into account--increases in spending due to ``changes
    in law and regulations.''
        When the impact of regulatory changes for purposes of the SGR is
    not properly taken into account, physicians are forced to finance the
    cost of new benefits and other program changes through cuts in their
    payments. Not only is this precluded by the law, it is extremely
    inequitable and ultimately adversely impacts beneficiary access to
    important services.
        HHS and CMS actively promote utilization of newly-covered Medicare
    services through press releases and other public announcements. For
    example, the Secretary of HHS released a 2002 report highlighting the
    importance of medical innovations and new technology, especially new
    drugs, in helping seniors live longer and healthier lives. Further,
    another HHS release regarding Medicare coverage of sacral nerve
    treatment for urinary incontinence stated, ``[u]rinary incontinence
    affects approximately 13 million adults in the United States, with
    nearly half of nursing home residents having some degree of
    incontinence. It is twice as prevalent in women as it is in men, and
    costs more than $15 billion per year, including both direct treatment
    of the disease and nursing home costs.'' The Secretary made a similar
    announcement when Medicare expanded its coverage of lymphadema pumps,
    stating, ``[i]t's important to make effective technologies available to
    Medicare beneficiaries when it helps them the most. This coverage
    decision simplifies Medicare policy to allow older Americans who need
    these pumps to get them more quickly and easily.''
        CMS also recently announced expanded Medicare coverage of
    implantable cardioverter defibrillators, as well as expanded coverage
    for diagnostic tests and chemotherapy treatment for cancer patients, as
    well as for carotid artery stenting, cochlear implants, pet scans for
    Alzheimers disease and use of photodynamic therapy to treat macular
    degeneration. While not every coverage decision significantly increases
    Medicare spending, taken together, even those with marginal impact do
    contribute to increased use of physician services. In addition, a
    number of coverage expansions since the advent of the SGR are expected
    to have a major impact on spending. The recent expansion of coverage
    for implantable defibrillators is expected to make this device
    available to some 500,000 people, with CMS anticipating that 25,000
    will receive the device in the first year alone. A decision last spring
    to expand the use of photodynamic therapy for treatment of macular
    degeneration is conservatively estimated by the National Opinion
    Research Center (NORC) to increase expenditures by more than $300
    million a year and could boost spending by more than twice that amount
    if used by all the Medicare beneficiaries who might be eligible.
        While the AMA strongly supports Medicare beneficiary access to
    these important services, physicians and other practitioners should not
    have to finance the costs resulting from the attendant increased
    utilization. Accordingly, CMS should ensure that the impact on
    utilization and spending resulting from all national coverage decisions
    is taken into account for purposes of the SGR spending target.

    4.  Rebasing of the Medicare Economic Index

        The Medicare Economic Index (MEI) is a measure of medical
    inflation, and is a factor used by CMS to update Medicare payments to
    physicians each year. The AMA appreciates and agrees with CMS' recent
    initiative to revise weights in the Medicare Economic Index (MEI) to
    reflect more current data and changes in the cost of practicing
    medicine. This initiative, however, does not address the broader
    problem that the MEI only measures changes in the prices for specific
    physician practice inputs, but there has been no effort to look at the
    inputs themselves and ensure that the market basket for which price
    changes are being measured is still the appropriate market basket.
        Inputs to the MEI are vastly different now than when the MEI was
    first developed in the early 1970s, and thus additional inputs are
    needed to ensure that the current MEI adequately measures the costs of
    practicing medicine. For example, physicians must comply with an array
    of government-imposed regulatory requirements, including those relating
    to fraud and abuse, billing errors, quality monitoring and improvement,
    patient safety, and interpreter services for patients with limited
    English proficiency. To ensure compliance with these initiatives,
    physicians have had to hire additional office staff to handle these
    additional responsibilities. Indeed, a Project Hope survey conducted
    for MedPAC in early 2002 found that ``half of all physicians reported
    that their practice had hired additional billing and administrative
    staff in the past year, and more than 80% indicated that the practice
    had increased the training given to staff regarding billing and
    insurance matters.''
        CMS should include in the MEI any additional inputs that are needed
    to ensure that the MEI adequately measures the costs of practicing
    medicine.
               FINANCIAL INCENTIVES FOR IMPROVED QUALITY OF CARE
        Last week, CMS announced new initiatives to pay healthcare
    providers for the quality of care they provide to Medicare patients,
    and stated that the Administration is committed to rewarding innovative
    approaches to get better patient outcomes at lower costs. The AMA is
    also committed to quality improvement and we strongly support
    innovative efforts across the nation to provide safe and effective care
    to our patients. We do not believe, however, that initiatives that
    provide financial incentives for quality care improvements should be
    undertaken by Medicare until the physician payment update formula has
    been replaced with a system that ensures a stable economic environment
    for treating Medicare patients.
        With projected Medicare payment cuts of more than 30 percent
    between 2006 and 2012, many physician practices are heavily focused on
    simply keeping their doors open to patients. In addition, due to recent
    cuts and the expectation of more to come in 2006 and subsequent years,
    many physicians have already been forced to delay investment in
    maintaining and improving office facilities, staff and equipment.
    Others have had to cover overhead by seeing more patients and
    shortening the time of each patient visit.
        Participation in successful quality improvement initiatives
    requires significant financial investment in expensive new information
    technology or increased human resources. It is difficult to fathom how
    physician office practices will be able to make such a financial
    investment in light of current struggles to absorb past and projected
    steep Medicare pay cuts. Additional funding to implement quality
    improvement initiatives in physicians offices would be critical for a
    successful outcome.
        The AMA also has strong concerns about any quality improvement
    initiatives that would seek to maintain budget neutrality by improving
    payments to some physicians while reducing payments to others that are
    already in financial jeopardy and unable to commit needed financial
    and/or human resources to participate in the initiative. To further
    complicate matters, effective and appropriate quality measures vary
    among specialties and some--such as patient tracking--that are most
    easily implemented may not be relevant for all specialties. Thus, the
    feasibility of participating in a quality improvement program may vary
    significantly among medical specialties, and it is not clear that all
    specialties would have a realistic opportunity to compete for quality-
    related payments.
        Finally, the AMA urges the Subcommittee to consider that while
    quality improvement initiatives could eventually improve quality and
    accrue overall savings to the healthcare system, these programs in the
    early years likely would increase utilization of physician services.
    For example, during his May 11, 2004 appearance before the House Ways
    and Means Health Subcommittee, CMS Administrator, Dr. Mark McClellan,
    suggested that one of the agency's quality improvement projects, the
    Chronic Care Improvement Project, ``may actually increase the amount of
    (patient-physician) contact through appropriate office visits with
    physicians.'' Additional care and patient visits to achieve improved
    quality, while applauded, would cause Medicare spending on physician
    services to exceed the SGR spending target, thereby triggering still
    more Medicare physician pay cuts and compounding the problems physician
    practices are experiencing due to already strained office budgets.
        The AMA thus urges the Subcommittee to ensure that a reliable,
    positive Medicare physician payment formula is in place before
    implementing comprehensive quality improvement programs. Expecting
    physicians to make investments in new information technology and
    participate in quality improvement initiatives before there is a
    solution to the payment update problem defies logic. Quality
    improvement initiatives can flourish only if payment cuts are
    permanently eliminated and replaced with at least modest updates.
        We appreciate the opportunity to provide our views, and look
    forward to working with the Subcommittee, Congress and the
    Administration to ensure an adequate and reliable Medicare physician
    payment system that keeps pace with the cost of practicing medicine.

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

      STATEMENT OF THOMAS H. LEE, M.D., CHIEF EXECUTIVE OFFICER,
      PARTNERS COMMUNITY HEALTHCARE, INC., AND NETWORK PRESIDENT,
        PARTNERS HEALTHCARE SYSTEM, INC., BOSTON, MASSACHUSETTS

        Dr. LEE. Thank you very much, Chairman Johnson. I want to
    thank you and the Subcommittee for the opportunity to testify
    today on pay for performance. I also am a practicing physician,
    and I am the network president for a large provider system in
    Massachusetts with a strong commitment to quality but also with
    practical experience with pay for performance over the last 4
    years. I want to make three main points today. The first is
    that pay for performance works. It really does drive
    improvements in quality and efficiency, or at least it can. The
    second point I want to make is that these improvements don't
    occur because someone has dangled a few dollars in front of
    physicians to try to work harder or be smarter, but it comes
    from promoting the adoption of systems that can actually
    improve care. Thirdly, I will make some comments on how Bridges
    to Excellence might be a model that can be extended for
    applying pay for performance to the large majority of U.S.
    physicians that are not tightly tied to any integrated delivery
    system.
        Partners is an integrated delivery system in eastern
    Massachusetts that was founded by Mass General Hospital and
    Brigham and Women's Hospital. We have about 2,000 some
    physicians in the community as well as another 2,000 are at
    academic medical centers, and we have pay for performance
    contracts now covering about 500,000 primary care lives and
    about 500,000 specialty referral patients beyond them. So, we
    have 10 percent or more of our payments under these contracts
    tied up in reaching incentives in efficiency and quality on
    both the hospital side and the doctor side. It is about $90
    million in 2005 that is contingent upon reaching these goals.
    As I summarized in my written testimony, most of our contracts
    have about half of this withhold tied to achieving efficiency
    targets, in-patient utilization, pharmacy utilization,
    radiology utilization. The other half is pretty much split
    between clinical quality reliability measures like diabetes
    care and the adoption of infrastructure, systems like
    electronic medical records and computerized order entry in the
    hospitals.
        The written testimony has some details on our performance
    but, to summarize quickly, it has driven us to adopt systems
    and do much better on both efficiency and quality. For example,
    in pharmacy, our rate of rise last year was 5 percent, and
    nationally it was 9 percent or more. On the quality side, on
    virtually all the measures that are in our contracts, we are
    better than the 90th percentile nationally. The key message is
    not to boast about our performance here but is to emphasize
    that we believe it has worked and we believe it has worked
    because we have adopted systems that make our care more
    reliable. The example that I would like to give is about
    imaging, because that is obviously a topic that is the fastest
    rising in health care and one of the most difficult. None of us
    want to go in and have doctors ratchet back and not do an MRI
    because they are just trying to save money. What we have done,
    because we have incentives in our contracts to moderate the
    rate of rise in radiology, is put in place a web-based system
    so that our doctors have to order all their x-rays through it
    and use clinical data to assess the appropriateness of tests.
        When tests are inappropriate or possibly inappropriate--and
    that is about 15 percent of the tests that go through our
    system--the doctor gets feedback right away, and most of the
    time our physicians change what they do. When they don't, they
    have to interact with a colleague about it, not outside our
    system but inside our system. These kinds of systems work best
    when they are integrated with electronic medical records. That,
    of course, is a theme many of us have on our minds today. I
    think you all know that the business case for adopting these
    records is challenging, particularly for these small practices.
    $25,000 cost per year per doctor, that is a typical and even
    conservative first-year cost. The incentives in our contracts
    fall far short of this figure, but if Medicare were to use
    incentives in this way, it would really strengthen the business
    case. Bridges to Excellence might be a model that can be used
    for the many physicians who will not be in contracts that
    reward pay for performance--that have a pay for performance
    model.
        I know that many of you are familiar with this, and there
    is a CMS demonstration project that may be beginning soon with
    that model. General Electric, working with providers, including
    us, uses a Six Sigma product design process to identify systems
    that they would expect would improve efficiency and quality,
    electronic but also humanware systems; and I can go into them
    more if we want during the question and answer period. Just to
    wrap up, let me just say that the Bridges program is voluntary.
    Physicians who want the rewards apply, undergo a survey
    administered by NCQA and then get the rewards of up to $50 per
    member per year based upon the number of members they have. In
    summary, my colleagues and I believe that pay for performance
    can drive improvement and it does so by the adoption of
    systems. We think that while organized systems are probably
    better positioned to deliver on the pay for performance, for
    the great majority of physicians who are not in organized
    systems, models like Bridges may be a good way to go. Thanks
    very much.
        [The prepared statement of Dr. Lee follows:]
      Statement of Thomas H. Lee, M.D., Chief Executive Officer, Partners
    Community HealthCare, Inc., and Network President, Partners HealthCare
                      System, Inc., Boston, Massachusetts
        I would like to thank Chairman Johnson and the Members of the
    Subcommittee on Health of the Ways and Means Committee for the
    opportunity to testify on the potential impact of pay-for-performance
    incentives on efficiency and quality for the Medicare program. I am
    invited to testify as a physician leader of a large provider system
    with a strong commitment to quality and with practical experience with
    pay for performance over the last four years. Based on this experience,
    I will discuss three points:

          Pay-for-performance works. I will provide data
    demonstrating that relatively modest incentives focused on well-
    defined, achievable targets can be successful in driving improvement in
    efficiency and quality.
          Adoption of systems (electronic and otherwise) that
    improve efficiency and quality should be an explicit focus of pay-for-
    performance programs. I will describe early progress toward the re-
    engineering of care through systems such as computerized prescribing
    and test ordering, which we believe to be critical to our current and
    future success under pay for performance.
          Finally, I will turn to thoughts on measures that may be
    applicable to both primary care and specialist physicians should
    Medicare seek to implement pay-for-performance incentives in the near
    future.
    Background
        These comments are drawn from three types of experience. First, I
    am Network President for Partners Healthcare System, an integrated
    delivery system in Eastern Massachusetts that includes two major
    teaching hospitals (Brigham and Women's Hospital and Massachusetts
    General Hospital), four community hospitals, and a large physician
    network with about 1,100 primary care physicians and 4,000 specialists.
    About half of the physicians in our Network are self-employed
    community-based physicians, usually in small 1-2 physician practices
    that are affiliated with Partners through our network, Partners
    Community Healthcare, Inc. (PCHI). We currently have three major pay-
    for-performance contracts that cover the care of more than 500,000
    primary care patients and a comparable number of referral patients to
    our specialists.
        The second role that informs these comments has come from the
    participation in the design and implementation of Bridges to
    Excellence, a program led by General Electric and other major employers
    such as UPS, Raytheon, Ford Motor Company. Bridges to Excellence is a
    program through which employers provide incentives to physician
    practices that adopt systems likely to reduce errors of all three types
    (over-use, mis-use, and under-use). This program has been implemented
    in several marketplaces in the U.S., and has influenced the design of a
    forthcoming CMS demonstration project. It is relevant to this
    discussion because it can be applied to both primary care and
    specialist physicians, and because it can be applied to physicians who
    are not members of an organized delivery system.
        Finally, I am a practicing internist and cardiologist, and have
    cared for patients under fee for service, capitation, and pay for
    performance contracts.
    Impact of Pay for Performance
        Our integrated delivery system has worked with the three major
    commercial managed care health plans in the Eastern Massachusetts
    marketplace since 2000 to develop pay for performance contracting as a
    successor to budget-based risk (capitation). As noted above, we
    currently have more than 500,000 primary care patients and a comparable
    number of referral patients to specialists whose care is covered by
    such contracts. Approximately $90 million in withhold is at stake based
    upon our ability to achieve efficiency and quality targets. This amount
    constitutes 10% or more of the fees for our physicians and payments to
    our hospitals for these patients.
        Table 1 summarizes the targets for improvement in efficiency,
    clinical quality, and error-reducing information infrastructure in our
    contracts. While the exact criteria for return of withhold vary from
    contract to contract, these targets require improving current
    performance, or beating actual or expected regional trends--that is,
    withhold return cannot be achieved by maintaining the status quo. We
    and the health plans have had little difficulty coming to agreement on
    which areas lend themselves to improvement and are meaningful. The
    health plans in our marketplace understand that consistency in these
    criteria across contracts increases the chances that providers will be
    able to invest in systems needed to achieve improvement.
        The proportion of the withhold that is tied to achieving the
    specific goals varies, but, in general, about half of the incentive is
    focused on the efficiency-related targets, with the remainder divided
    between clinical quality goals and investment in information
    infrastructure expected to reduce all three types of errors. Targets
    for return of hospital withhold and physician withhold overlap, but
    vary somewhat. For example, both hospital and physician withholds have
    the same targets for reducing hospital admissions, but hospital quality
    incentives focus on Joint Commission on Accreditation of Healthcare
    Organizations (JCAHO) inpatient care measures, while physician withhold
    is tied to National Committee on Quality Assurance (NCQA) HEDIS (Health
    Plan Employer Data and Information Set) measures (e.g., mammography and
    PAP smear rates).
        Note that in our most recent contracts (described as ``Version
    2.0''), the measures have evolved, so that the pharmacy target excludes
    drugs for which utilization should not be decreased (e.g., cholesterol-
    reducing agents), and radiology has been added as a major target for
    improved efficiency.

                   Table 1.  Withhold Targets in Prior and Current PCHI Pay For Performance Contracts
    ----------------------------------------------------------------------------------------------------------------
                                                         2001-2003 (Version 1.0)        2004-2008 (Version 2.0)
    ----------------------------------------------------------------------------------------------------------------
    Efficiency                                          Facility use: Inpatient
                                                         medical-surgical days/
                                                                   1000 members
                                                                                  Facility use: Weighted \1\ medical

    ----------------------------------------------------------------------------------------------------------------
    Clinical Quality                                            HEDIS measures:
                                                              Diabetes, asthma,
                                                            Chlamydia screening
                                                                                     Physicians: HEDIS measures for

    ----------------------------------------------------------------------------------------------------------------
    ``Error reducing''                                                                      Physicians: Adoption of
      infrastructure                                                                     electronic medical records

    ----------------------------------------------------------------------------------------------------------------
    \1\ Admissions to academic medical centers are counted more heavily than admissions to community hospitals.
    \2\ Examples of classes of excluded agents: statins, diabetes therapies, chemotherapy, HIV therapies.
    \3\ Monitoring frequency of at least one measurement of International Normalized Ratio (INR) per month for
      patients on chronic warfarin

        Thus far, our delivery system has achieved virtually every target
    under these. We do not expect to be able to maintain this record
    indefinitely, because the targets are becoming increasingly ambitious.
    In general, we budget based upon the assumption that we will attain 75%
    of our withhold. Our higher level of success to date reflects
    improvements in efficiency and quality that have led our Network to be
    among the region's leaders.
        Highlights of this performance include:

        1.  Inpatient utilization--In the two contracts in which the health
    plans are providing us with comparative data, our inpatient utilization
    (as measured in medical-surgical admissions or days/1000 members) has
    decreased and is better than the rest of the market.
        2.  Pharmacy--Our rate of rise in pharmacy spending in our
    contracts averaged about 5% in 2004, compared with the national average
    of about 9%.
        3.  Imaging--Under new targets for moderating the rate of rise of
    utilization of high cost imaging tests, we have developed decision
    support to help guide physicians to more appropriate ordering, and
    deployed this through order entry systems at our AMCs and for our
    community physicians. We have only limited data on the impact of this
    intervention at this date, but early information indicates that our
    rate of rise is less than the national trend of 15-18%.
        4.  Diabetes and other HEDIS measures--For virtually all NCQA HEDIS
    measures and for about 75% of inpatient cardiology measures, we are
    performing above the national 90th percentile. Perhaps more important
    is the finding that we have steadily improved in targeted areas (e.g.,
    diabetes--see Figure 1) under our pay for performance contracts. Pooled
    data that were publicly released on February 3, 2005, indicate that
    PCHI is among the region's leaders--The Boston Globe ranked PCHI second
    out of nine delivery systems, with performance exceeded only by a staff
    model HMO in which all physicians are salaried and using the same
    electronic medical record.

            [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    System adoption as key success ingredient
        This improvement has not been achieved solely by dangling
    incentives before physicians, and providing them data on their current
    performance. PCHI physicians use a combination of electronic and
    ``humanware'' systems aimed at improving quality and efficiency (Table
    2, next page).
        For example, in radiology, we have implemented a web-based ordering
    system for high cost tests that uses clinical information to assess the
    necessity and appropriateness of the tests. This program was stimulated
    by the introduction of a radiology management program by one payer that
    requires physician offices to call a 1-800 number to obtain
    authorization before scheduling any high cost tests (MRI, CT, nuclear
    cardiology, PET scans). We were able to negotiate an agreement with the
    payer so that our physicians instead use our software program, which
    uses established guidelines to rate tests as to their appropriateness.
    When tests are rated as being of marginal appropriateness (about 15% of
    all tests ordered to date), the ordering physician is given that
    feedback. Over half the time, physicians change their behavior when
    they receive this message from our decision support. Physicians can
    proceed with tests of such uncertain appropriateness, but with the
    additional hurdle of prospective or retrospective peer-review (i.e.,
    they must talk to a colleague about why they believe the test will be
    useful).

                                       Table 2.  PCHI Medical Management Programs
    ----------------------------------------------------------------------------------------------------------------
                              Program                                                Description
    ----------------------------------------------------------------------------------------------------------------
    Focus on reducing costs
    ----------------------------------------------------------------------------------------------------------------
    Inpatient utilization man-                                       Practice-based nurse care coordinators working
      agement                                                    predominantly with primary care physicians through
                                                                     weekly pod meetings and other forms of contact
    ----------------------------------------------------------------------------------------------------------------
    High risk patient inter-                                                     Telephonic case management program
      ventions
    ----------------------------------------------------------------------------------------------------------------
    Congestive heart failure                                     Nurse practitioner-based programs at PHS hospitals
    ----------------------------------------------------------------------------------------------------------------
    Pharmacy                                                       Programs to increase generic and preferred brand
                                                                  drug use; educate physicians and patients; assist
                                                                         physicians in switching individual patient
                                                                                                      prescriptions
    ----------------------------------------------------------------------------------------------------------------
    Radiology                                                                 Computerized decision support program
    ----------------------------------------------------------------------------------------------------------------
    Focus on improving reliability of care
    ----------------------------------------------------------------------------------------------------------------
    Registries for patients                                       Computer software for populations with asthma and
      with targeted chronic                                               diabetes, and patients being treated with
      conditions                                                                        anticoagulatant medications
    ----------------------------------------------------------------------------------------------------------------
    Registries for improve-                                     Databases to support improved reliability in use of
      ment of preventive care                                    mammography, cervical cancer screening, well-child
                                                                                      care, and Chlamydia screening
    ----------------------------------------------------------------------------------------------------------------
    Patient education pro-                                            Monthly mailings of educational materials for
      grams                                                                                  patients with diabetes
    ----------------------------------------------------------------------------------------------------------------

        We and most health plans/employers believe that the improvements
    needed to meet the market's needs in efficiency and quality cannot be
    attained without comprehensive adoption and use of systems that will
    improve care. Accordingly, Partners has launched a major program called
    The Signature Initiatives, which include five teams with the following
    goals:

        1.  Information systems--to promote quality and efficiency through
    use of electronic medical records.
        2.  Patient safety--to implement integrated medication ordering/
    administration systems to minimize adverse drug events.
        3.  Uniform high quality--to ensure that Partners patients reliably
    receive interventions known to improve outcomes.
        4.  Disease management--to identify high risk patients and to
    connect them to programs likely to improve the coordination of their
    care.
        5.  Trend management--to improve efficiency by having Partners
    physicians order drugs and radiology tests using decision support.

        A major focus of the contractual incentives and the Signature
    Initiatives is dissemination of electronic records. Currently, about
    80% of our academic medical center physicians and about 10% of
    community physicians are using electronic medical records. Achieving
    our withhold targets will require major increases in use of electronic
    records among community physicians in the next three years.
        However, the ``business case'' for adoption of such systems is
    challenging for small physician practices. First year adoption costs
    are on the order of $25,000 per physician. Even for five-physician
    practices, the costs-per-MD spread over a five year period are about
    $10,000 to $15,000 per year for systems sophisticated enough to provide
    high quality decision support. These costs include hardware, software
    licenses, interfaces with other systems, and training expenses. Smaller
    steps, such as adoption of hand-held prescribing devices, provide only
    a small part of the value of a full clinical system.
        Current fraud and abuse rules make it difficult for Partners and
    other delivery systems to assist physicians who are affiliated but not
    employed by the organization in overcoming these financial hurdles. We
    and other delivery systems are meeting with CMS on this issue, and
    would welcome congressional support for an anti-kickback safe harbor or
    an expanded Stark exception to permit systems like ours to help
    physicians adopt electronic records.
    Pay-for-Performance for physicians not integrated into delivery systems
        The majority of physicians in the U.S. are not currently
    participants in organized delivery systems that can negotiate pay for
    performance contracts or increase the likelihood of success under them
    by providing the systems described above. What kind of measures might
    be useful for encouraging such physicians--both primary care and
    specialist--to adopt systems that will improve quality and efficiency
    under Medicare?
        Ideally, such measures should have the following characteristics:

          Measurable at minimal expense
          Valid and reliable at an individual physician level
          Can be adjusted for differences in patient population
    (socioeconomic; health status)
          Identify areas in which improvement is feasible and
    practical
          Improvement will lead to meaningful improvements in
    efficiency and/or patient outcome

        At this time, measures of efficiency and quality based upon claims
    data fall short of these goals--particularly for the second and third
    characteristics. Therefore, interest has focused upon incentive
    structures under which physicians are rewarded:

          If they have adopted certain systems that are believed to
    improve quality and/or efficiency, or
          If they report clinical data on intermediate outcomes
    (e.g., diabetes or cholesterol control), and meet specified standards
    of excellence

        One model program that can be used to provide incentives for both
    primary care physicians and specialists is the physician office link
    program of Bridges to Excellence (http://www.bridgestoexcellence.org/
    bte/). This program requires that physicians who want to be eligible
    for rewards fill out a detailed survey administered by NCQA (and pay a
    fee that varies with the number of physicians in the practice). The
    survey assesses the presence or absence of office-based systems with
    the following goals:

          Monitor their patients' medical histories
          Work with patients over time not just during office
    visits
          Follow up with patients and with other providers
          Manage populations, not just individuals, using evidence-
    based care
          Encourage better health habits and self-management of
    medical conditions
          Avoid medical errors.

        There are three distinct areas under which physicians can earn
    bonuses (maximum $50 per patient per year):

          Evidence-based Clinical Information System. Key processes
    in this group include a reliable system for providers to track and
    understand the health status of their patients, and to compare the care
    they are receiving to widely accepted standards; and the use of
    electronic prescribing of drugs and laboratory exams, combined with
    smart edits to ensure higher patient safety and reduce overuse.
          Patient Education and Support. Key processes in this
    group include whether or not a patient's educational and language
    assessment was made; and whether or not the patient was provided with
    self-management tools and support specific to their condition.
          Care Management. Key processes in this group include the
    identification of patients with chronic illnesses and the deployment of
    appropriate resources to manage their care; and the identification of
    high-risk patients and use of systems to prevent emergency hospital
    admissions or readmissions.

        These areas and the specific components identified within them were
    determined using a Six Sigma product design exercise in a process that
    included employers, health plans, and healthcare providers from
    Partners and elsewhere.
        NCQA audits a small percentage of applications to ensure that the
    surveys are being completed accurately. NCQA then determines the amount
    of reward/member that physicians are eligible to receive. This reward
    is based upon the number of points assigned for each of three modules
    within each of these categories (See Table 3, next page). The number of
    modules in which physicians must have a minimum number of points
    increases each year, thereby encouraging physicians to improve office
    systems in order to keep receiving the same level of financial
    incentives.
        Medstat then determines the number of members per physician, and
    the size of the reward. The bonuses are based upon the size of the
    savings expected from these programs as determined by actuaries working
    for GE and other purchasers sponsoring Bridges to Excellence.
    Specialists and primary care physicians can both participate; rewards
    are given to all qualifying physicians engaged in the care of patients
    who are from Bridges organizations, reflecting the logic that greater
    savings are likely to occur for higher risk patients who need both
    primary and specialty care. Rewards are capped at $20,000 per
    physician.

            [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Bridges to Excellence also includes examples of programs in which
    physicians voluntarily submit clinical data (as opposed to the presence
    or absence of office systems, as in the Physician Office Link) based
    upon review of their own charts in order to qualify for ``Provider
    Recognition'' and bonuses. In the Diabetes Care Link and Cardiac Care
    Link programs, physicians can achieve awards of up to $100 per patient
    with the condition if their data indicate that they are achieving high
    levels of reliability and excellence in their care. For example, see
    Table 4 on next page, which lists the measures, goals, and rewards
    criteria for physicians applying for the adult diabetes provider
    recognition.
        As with the Physician Office Link, physicians interested in
    receiving the incentives apply to NCQA and complete the survey tool.
    Rewards reflect an expected savings of $300-400 per patient with
    diabetes who sees a physician with these clinical performance levels.
    Early analyses by Bridges to Excellence indicate that physicians who
    achieve this status have lower costs in the care of their diabetic
    patients.

                         Table 4:  Measures for Adult Patients in the Diabetes Care Link Program
    ----------------------------------------------------------------------------------------------------------------
                                                                     Measures            Goal    Points   Frequency
    ----------------------------------------------------------------------------------------------------------------
    Measures For Both                                            HbAlc * (most recent     93%       NA     Once per
    3-Year Recognition                                                        result)                          year
    and Rewards and
    Annual Rewards
    ----------------------------------------------------------------------------------------------------------------
                                                               Proportion w/HbAlc <8%     55%      5.0
    ----------------------------------------------------------------------------------------------------------------
                                                           Proportion w/HbAlc >9.5% *     21%     10.0
    ----------------------------------------------------------------------------------------------------------------
                                                             Blood pressure frequency     97%     10.0     Once per
                                                                 (most recent result)                          year
    ----------------------------------------------------------------------------------------------------------------
                                                             Proportion <140/90 mm Hg     65%      5.0
    ----------------------------------------------------------------------------------------------------------------
                                                                                     Lipid85%ofile 5.0    Annual **
    ----------------------------------------------------------------------------------------------------------------
                                                                     Proportion with LDL  63%      5.0
                                                                         <130 mg/dl *
    ----------------------------------------------------------------------------------------------------------------
    Additional Meas-                                                       Eye exam *     61%     10.0    Annual **
    sures for 3-Year
    Recognition
    ----------------------------------------------------------------------------------------------------------------
                                                                            Foot exam     80%     10.0       Annual
    ----------------------------------------------------------------------------------------------------------------
                                                             Nephropathy assessment *     73%     10.0    Annual **
    ----------------------------------------------------------------------------------------------------------------
                                                                         Total Points             70.0
    ----------------------------------------------------------------------------------------------------------------
                                                                    Points to Achieve             52.0
                                                                        Recognition &
                                                                      Receive Rewards
    ----------------------------------------------------------------------------------------------------------------
                                                                    Points to Receive             30.0
                                                                       Annual Rewards
    ----------------------------------------------------------------------------------------------------------------

    Conclusion
        In summary, my colleagues and I at Partners Healthcare System
    believe that pay for performance contracts can drive meaningful
    improvement in both quality and efficiency, and are currently speeding
    the adoption of systems such as electronic medical records that we
    believe critical to the re-engineering of care. Organized provider
    systems such as staff model organizations (e.g., Kaiser, the VA) and
    more heterogeneous provider groups (e.g., Partners Healthcare System)
    are particularly well positioned to respond to such incentives.
    However, we believe that it is possible to provide incentives to small
    1-2 physician practices to adopt systems likely to improve care.
    Bridges to Excellence provides an example of a program that provides
    rewards based upon the presence or absence of such systems, and upon
    self-reported clinical performance.

    Disclosures: Dr. Lee is a member of the Board of Directors of Bridges
    to Excellence, and co-chairman of the Committee on Performance Measures
    of NCQA. He receives no compensation for either role.

        Chairman JOHNSON. Thank you, Dr. Lee. Dr. Gee.

        STATEMENT OF WILLIAM F. GEE, M.D., AMERICAN UROLOGICAL
                    ASSOCIATION, LINTHICUM, MARYLAND

        Dr. GEE. Thank you, Madam Chair, Members of the
    Subcommittee. I am Dr. William Gee from Lexington, Kentucky. I
    am going to not attempt to read everything in the statement but
    rather highlight several things. I am the Chair of the American
    Urological Association Health Policy Council. I have been a
    member of the AMA Relative-Value Update Committee, the group
    which establishes relative value units for physician work and
    practice expense, for 10 years. I am here today actually
    representing the Alliance of Specialty Medicine, a coalition of
    13 physician specialty societies, including the AUA, which
    represents over 200,000 specialty physicians in the United
    States. I want to talk first about the SGR, and I will truncate
    those comments because much of what I will say will agree with
    previous speakers. Then I want to talk briefly about P for P,
    or pay for performance.
        First, on the SGR formula, it has significant flaws which
    have all been recognized, causing steep reductions in physician
    payment. The four biggest flaws we feel are, first, including
    the cost of Medicare-covered outpatient drugs and biologicals
    even though these items are not physician services and lead to
    decreases in annual payment updates; two, the linking of
    physician fees to the GDP, which does not accurately reflect
    changes in the cost of caring for Medicare patients; three,
    inadequately accounting for changes in volume of services due
    to new preventive screening benefits that CMS puts forward,
    national coverage decisions that increase demand for services
    and a greater reliance on drugs and a greater awareness of
    benefits by the Medicare population; and, finally, improperly
    accounting for costs and savings associated with new
    technology. We know that recent congressional action has fixed
    some of these temporarily.
        Earlier, when the Committee was making comments, it was
    mentioned by Mr. Stark that physicians' incomes were as high as
    they had ever been. I would just like to note that, in 1992,
    when the Medicare fee schedule was instituted, the conversion
    factor was $40. It is now about $37. That is an 8 percent
    decrease. However, if you adjust $40 into 2004 dollars from
    1992, it would be $53.86. So, actually, the conversion factor
    has gone down 33 percent in the last 13 years. So, I think we
    have to look at inflation when we talk about those numbers.
    There is, as we have heard, drastic reductions coming if the
    situation isn't fixed. The situation was temporarily adjusted,
    but in 2006 through 2012 we have heard the 5 percent reductions
    coming unless something happens. What is the solution? There
    are two things the Alliance feels needs to be done.
        First, Medicare-covered outpatient drugs and other
    incident-to services included in the expenditure target need to
    be removed retroactively back to the base period, as Dr.
    Nielsen said, 1996, 1997. The second thing that needs to be
    done is to replace the SGR formula with a system that
    adequately accounts for the true costs of delivering healthcare
    services, the Medicare Economic Index. The Alliance believes
    the current SGR formula needs to be repealed and replaced with
    a system that is more predictable and recognizes the true cost
    of providing physician services to Medicare beneficiaries. The
    current MEI is a conservative measure of these costs. Other
    providers, such as hospitals and skilled nursing facilities,
    are reimbursed on inflation and their costs. The physician
    reimbursement formula should be based on the true cost of
    providing services to the Medicare beneficiaries.
        Now, I would like to very briefly touch on pay for
    performance, P for P. The Alliance's member specialty
    organizations are continually striving to offer high
    specialized care. P for P measures for specialists are
    different than those for generalists, and this is one of the
    problems that we are grappling with in trying to see how to
    come up with P for P and what it would mean for specialties. We
    feel there are a number of things that are bulleted in our
    comments that need to be addressed on P for P. First, any
    system that rewards providers by improving patient care and
    outcome should not be subject to budget neutrality or be used
    as physician volume control. Two, reporting needs to be able to
    be administered without being prohibitive and expensive and yet
    an unfunded mandate to providers, particularly for smaller
    offices. Three, pay for performance programs must not be
    punitive. Four, measures need to be specialty specific. Some
    measures may be appropriate for some specialties but not for
    others, particularly in areas of surgery. Five, performance
    measures must be developed by the physician community in
    conjunction with CMS, but they should not be developed by CMS
    alone. Six, in order to be effective, collecting data has to be
    reliable and easy for physicians to record and report. Seven,
    given the limitations of the current status of specialty
    performance measures, the Alliance believes incentives should
    be placed on optimizing quality of care and physician
    participation, not on reporting uncontested quality data simply
    for the purpose of reporting data. Finally and most
    importantly, if a pay for performance requirement is
    implemented, it must be phased in and pilot tested on a
    voluntary basis first to see what works and what doesn't. Thank
    you very much, Madam Chair, for the opportunity to comment.
        [The prepared statement of Dr. Gee follows:]
      Statement of William F. Gee, M.D., American Urological Association,
                              Linthicum, Maryland
        Madame Chair, Members of the Subcommittee, I am Dr. William Gee
    from Lexington, KY. In addition to serving as the managing partner of a
    17 member private urological practice, I am the Chair of the American
    Urological Association's (AUA) Health Policy Council and a member of
    the AMA Relative-Value Update Committee since 1995.
        I am here today representing the Alliance of Specialty Medicine--a
    coalition of 13 physician specialty societies, including the AVA,
    representing over 200,000 specialty physicians. I am pleased to have
    this opportunity to testify before the Subcommittee on the issue of
    Medicare payment to physicians, and in particular on the issue of the
    flawed Sustainable Growth Rate (SGR) formula and possible solutions.
        As advocates for patients and physicians, the Alliance of Specialty
    Medicine supports modifications to the current Medicare physician
    payment formula to ensure continued beneficiary access to timely,
    quality health care. The current SGR formula has significant flaws;
    however, causing steep reductions in physician reimbursement and
    prompting an increasing number of specialty physicians to reconsider
    their participation in the Medicare program, limit services to Medicare
    beneficiaries, or restrict the number of Medicare patients they will
    treat.
        The sad reality of the current situation is that the only way that
    physicians can avert negative updates is to somehow limit care to the
    population that needs quality health care the most, our nation's
    elderly and disabled. No doctor wants to turn away patients or leave a
    practice and the patients she or he have been serving for years. No
    doctor wants to end a career earlier than he or she intended. To take
    such actions goes against the very reasons we became doctors.
    Why the SGR Formula is Flawed
        Flaws in the complex Medicare physician reimbursement update
    formula include, but are not limited to: Including the costs of
    Medicare-covered outpatient drugs and biologicals in setting the
    expenditure target for physicians' services, even though these items
    are not physicians' services and therefore, under the formula, lead to
    decreases in the annual payment update; linking Medicare physician fees
    to the Gross Domestic Product (GDP)--which does not accurately reflect
    changes in the cost of caring for Medicare patients; inadequately
    accounting for changes in the volume of services provided to Medicare
    patients due to new preventative screening benefits, national coverage
    decisions that increase the demand for services, a greater reliance
    upon drugs to treat illnesses, and a greater awareness of covered
    health benefits and practices due to educational outreach efforts; and
    improperly accounting for costs and savings associated with new
    technologies.
    Recent Congressional Action
        While the problems with the SGR were in some respects anticipated
    when the law was passed in 1997, the first detrimental effects were not
    experienced until 2002, when physicians received a 5.4 percent
    reduction to the conversion factor. Since then, the flaws with the SGR
    formula have been so pronounced that Congress has been forced to pass
    two temporary measures to keep the system from falling apart
    completely.
        In 2003, after the Centers for Medicare and Medicaid Services
    delayed a second payment reduction for three months, Congress passed
    the first law, which required CMS to fix accounting mistakes that were
    made during 1998 and 1999. Fixing these errors restored $54 billion to
    the Medicare physician payment system and prevented another year of
    reductions in reimbursement, but the legislation did nothing to fix the
    overall problems that plague the formula.
        With physicians anticipating a 4.4 percent reduction in 2004,
    Congress again acted and included a provision in the Medicare
    Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
    that mandated an increase of at least 1.5% in both 2004 and 2005. While
    we appreciate the leadership of this Committee in preventing the
    reductions and the eventual intervention of Congress, the statutory
    increase did nothing to change the underlying formula. In fact, while
    the statutory update in the MMA prevented the additional reductions for
    2004 and 2005, no additional funds were provided to pay for this
    temporary fix, therefore exacerbating the problem. As a result, the
    money used to fund the increase in these updates must be paid back to
    the Medicare program, with interest, over the next ten years.
    Reimbursement Rates in 2006 and Beyond Again, if the SGR formula is not
    fixed this year, physicians will receive negative updates of
    approximately 5 percent each year from 2006 until 2012 and rates will
    not return to their 2002 level until well after 2013.
        In other words, physicians will receive less reimbursement in 2013
    than they did in 2002 for the exact same procedure, regardless of
    inflation and increased practice costs. While reimbursement will likely
    be cut by over 30 percent under the current formula during that time
    period, it is estimated that costs for providing services will rise by
    close to 20 percent. Such cuts will further inhibit each physician's
    ability to provide services to Medicare beneficiaries, as many
    physicians will simply be unable to afford to treat Medicare patients.
    The Solution
        As I have previously stated--congressional action has delayed the
    imminent meltdown of the Medicare program and has allowed some
    breathing space to evaluate approaches to fixing the payment update
    formula. It is now time, however, to put an end to these stop-gap
    measures and fix the formula and the Alliance of Specialty Medicine
    looks forward to working with this Committee and Congress to develop a
    solution. Physician payments must be stabilized and further cuts must
    be prevented, and to this end, the Alliance of Specialty Medicine
    believes the following issues need to be addressed: Medicare-covered
    outpatient drugs and other incident-to-services that are included in
    the expenditure target need to be removed retroactively back to the
    base period. CMS must exercise its statutory authority and remove
    Medicare covered drugs from the physician payment pool retroactively.
    We thank you, Madame Chair, as well as Mr. Thomas and the other Members
    of this Committee who have supported the removal of these drugs. As you
    know, physicians do not control the costs of these products and
    services and each year these costs represent a greater proportion of
    actual costs incurred by the Medicare program. And, as the agency has
    acknowledged in the past, physician-administered drugs are not a ``true
    physician service.'' Yet the costs of these drugs continue to have a
    negative impact on reimbursement for real physician services.
        The Congressional Budget Office (CBO) has predicted that spending
    for outpatient drugs and other incident-to-services will grow faster,
    on a per-beneficiary basis, than allowed by the expenditure target.
    Each year these services will consume a greater portion of the
    expenditure target, rising from $12 billion (20 percent of the $62
    billion expenditure target) in 2004 to $28 billion (23 percent of the
    $121 billion expenditure target) in 2012. These services must be
    removed from the expenditure target retroactively, back to the base
    period, so that it accurately reflects what it is supposed to
    represent--payment for physician services. Recent estimates show that
    this will have an immediate substantial impact on the predicted cuts by
    bringing up the baseline and, therefore, filling in much of the
    ``hole'' that has been created. Only Congress can replace the flawed
    SGR formula. However, without assurance from CMS that it will remove
    drugs from the physician payment pool, we understand that Congress will
    be left with few options for replacing the flawed formula.
    Replace the SGR Formula With a System that Adequately Accounts For the
            True Costs of Delivering Healthcare Services.--The Medicare
            Economic Index (MEI)
        The Alliance believes that the current SGR formula needs to be
    repealed and replaced with a system that is more predictable and
    recognizes the true costs of providing physician services to Medicare
    beneficiaries. The current MEI is a fairly accurate measure of these
    costs. Other providers, such as hospitals and skilled nursing
    facilities, are reimbursed based upon changes in the costs of providing
    services and the physician reimbursement formula should be based on
    this, as well.
    Pay for Performance
        The Alliance's member specialty physician organizations are
    continually striving to offer the highest specialized quality care to
    all Medicare beneficiaries. However, with our physicians facing over
    30% reductions in Medicare reimbursement from 2006 through 2013
    compounded by exorbitant liability premium increases, many of these
    specialty physicians are reconsidering their Medicare participation
    status. Therefore, the Alliance believes that if Congress is to begin
    to explore alternative payment requirements--such as pay for
    performance--then the current unsustainable Medicare physician payment
    system needs to be fixed. The Alliance represents 12 physician
    specialties, which are all at varying stages of sophistication
    regarding pay for performance initiatives; therefore, we believe that
    the following points need to be considered: Any type of system that
    rewards providers by improving patient care and outcomes should not be
    subject to budget neutrality or be used as a physician volume control.
        The reporting of quality or efficiency indicators and health
    outcomes data could be administratively prohibitive to many physicians,
    especially those in small practices that do not have electronic medical
    records. It could be difficult to link payment to performance without
    an interoperable health information technology infrastructure. Pay for
    performance programs must not be punitive. Measures will need to be
    specialty specific. Some measures may be appropriate for some
    specialties, and not others. In some areas, particularly surgery--it
    can be difficult to keep quality measures up-to-date enough to be
    perceived as relevant. Any measures would have to be developed by the
    physician community.
        In order to be effective, collecting data must be reliable and easy
    for physicians to record and report based on a clinical data set and in
    a manner that is acceptable to the physician community. The collection
    of such data must be timely and easily submitted and should not create
    a burden on practices. Furthermore, the data collected must allow for
    physicians to comply with Medicare HIP AA requirements. Given the
    limitations on the current status of specialty performance measures,
    the Alliance believes that incentives should be placed on optimizing
    quality of care and physician participation, not on performance of
    specific quality measurements. If a pay for performance requirement is
    implemented, it should be phased-in and pilot tested on a voluntary
    basis first.
    Conclusion
        Congress must find a solution to implement a rational Medicare
    physician payment system, and the Alliance of Specialty Medicine looks
    forward to working with you to develop a system that is more
    predictable, insures fair reimbursement for physicians, and continued
    beneficiary access to quality specialty health care.

        Chairman JOHNSON. Thank you, Dr. Gee. Mr. Hayes.

       STATEMENT OF ROBERT M. HAYES, PRESIDENT, MEDICARE RIGHTS
                       CENTER, NEW YORK, NEW YORK

        Mr. HAYES. Madam Chairman, Mr. Stark, Committee Members,
    thanks so much for having us. I run the Medicare Rights Center,
    which is a nonprofit consumer service organization. Every day
    we help people with Medicare access, needed care. Tens of
    thousands of callers use our help-lines annually, and we work
    with these folks to help them navigate the healthcare system in
    rural programs and to help them pay for the health care that
    they need. We are consumer driven and independent. We rely on a
    small staff and hundreds of deeply committed volunteers. Madam
    Chairman, the issue under consideration in today's hearing is
    very critical to the continued vitality of Medicare from a
    consumer perspective. We don't envy you, how to determine how
    Medicare can best balance the demands of fair payments to
    doctors and maintain access to people--to care for people with
    Medicare. As we report from the trenches in which we work each
    day, I remind myself that these tough issues are really
    important for a single reason. The issues are all about how we
    best meet our moral obligations to assist our mothers, our
    fathers, our grandparents and our neighbors secure the health
    care they need. We are all doing a lot of talking and analyzing
    today about numbers, dollars, policy but we struggle with these
    issues, each of us, because ultimately we care about human
    health, human dignity, human survival.
        Alice Kavanagh is one of the millions of Americans whose
    well-being depends on Medicare. Ms. Kavanagh, from Durham, New
    Hampshire, is 82 years old, lives in a family home with her
    son, active in her church, spends a lot of time on the phone
    connecting with her friends and neighbors. She is a cancer
    survivor. Two years ago she was treated for colon cancer, and
    she can see her oncologist and other doctors regularly. So far
    she is free from cancer, and she is grateful for the Medicare
    coverage that enabled her to have surgery and followup care. I
    mentioned Ms. Kavanagh because she is why we celebrate
    Medicare, warts and all, as a national treasure. It does
    provide the financial security, access to health care, choice
    of doctors and peace of mind that are a lifeline to many older
    and disabled Americans. One of Medicare's traditional
    strengths, of course, is that most doctors across the United
    States participate in the program. Yesterday's report from the
    GAO, along with work by MedPAC and our own hotline experience,
    consistently demonstrates that nearly all people with
    traditional Medicare are able to see the doctors they need when
    they need to. On our hotlines, to be sure, we occasionally do
    hear from people with Medicare who have trouble finding a
    doctor. It usually turns out that those doctors are not taking
    any new patients into their practices regardless of payer.
        From the customer point of view, this broad access gives
    people with Medicare the ability to choose a doctor based on
    provider relationships, transportation needs, and other
    critical factors. That is why on behalf of consumers we are
    grateful for this Committee's stated interest in preserving
    access to doctors by ensuring that payment rates do not drive
    high-quality physicians away from Medicare patients. It is not
    just rates that allows such wide access to doctors for people
    with Medicare. MedPAC has reported--and this is our on-the-
    ground experience as well--that the speed and reliability of
    Medicare payments, in sharp contrast with many of the
    Subcommittee's largest private insurers, makes Medicare the
    extraordinarily attractive insurer that it is for patient and
    doctor alike. Now, this is not to say that people with Medicare
    do not see trouble on the horizon; it is coming from many
    directions. It does appear obvious that repeated 5-year 5-
    percent annual cuts in physician payments, as modeled by the
    CBO, could well undermine physician access for people with
    Medicare, if not immediately, then over time. We do credit
    MedPAC and GAO for carefully monitoring access to services and
    providing this Congress with their unvarnished analyses. In
    these thorny and technical analyses, both of these agencies in
    our view shoot straight, and we rely heavily on their
    intelligence.
        We can also say that at times there has appeared to be a
    contradiction between what physician lobbyists say about access
    to physicians and what is really happening. We believe that
    payments should be about reality, not political pressure or
    influence, and we say that because the soundness of the
    Medicare system is of single importance to people with
    Medicare. On that particular issue, Madam Chairwoman, let me
    wrap up by commenting on an issue raised by Mr. Emanuel this
    morning and which, Mrs. Johnson, you followed up on; that there
    is indeed a great deal of struggle among people with Medicare
    to pay the out-of-pocket expenses involved with that, with
    their coverage. The numbers are well-known, that 40 percent of
    the people with Medicare live on under $18,000 a year income.
    It is true that Medicare savings programs can help very low-
    income people meet their premium needs and their coinsurance
    requirements in some cases. We look forward in the year ahead
    to work with this Committee and with anyone else to try to find
    a way that, moving ahead, those programs can be made more
    available to the 50 percent of folks who are eligible for that
    help who don't get it; and as we go into low-income support
    program under Part D, that we have enrollment programs that
    work to actually get people the support that they do need.
    Thank you so much.
        [The prepared statement of Mr. Hayes follows:]
     Statement of Robert M. Hayes, President, Medicare Rights Center, New
                                 York, New York
        Good morning, Madam Chairman, Mr. Stark and Members of the
    Committee.
        I am Robert M. Hayes, President of the Medicare Rights Center. We
    very much appreciate the opportunity to address you today on consumer
    issues related to changes in Medicare payment policies and bring before
    the Committee our day-to-day experiences assisting people with Medicare
    obtain good health care.
        The Medicare Rights Center (MRC) is the largest independent source
    of Medicare information and assistance in the United States. Founded in
    1989, MRC helps older adults and people with disabilities obtain good
    affordable health care. Every day we help people with Medicare access
    necessary services. Tens of thousands of callers use our help-lines
    annually. We help people with Medicare navigate the healthcare system,
    enroll in programs that may help them pay for health care, and overcome
    barriers to care.
        The Medicare Rights Center is a not-for-profit consumer service
    organization, with offices in New York, Washington and Baltimore. It is
    supported by foundation grants, individual donations and contracts with
    both the public and private sectors. We are consumer driven and
    independent, relying on a small staff and hundreds of deeply committed
    volunteers to carry out our mission. We are not supported by the
    pharmaceutical industry, insurance companies or any other special
    interest group. Our mission is to serve the 41 million men and women
    with Medicare.
        Through national and state telephone hotlines, casework and
    professional and public education programs, MRC provides direct
    assistance to people with Medicare from coast to coast. We are also
    bringing to counselors and consumers across the country Medicare
    Interactive, a web-based counseling tool--developed with major support
    from the United States Department of Commerce--that assists people with
    Medicare access the health care they need.
        MRC gathers data on the healthcare needs of the men and women that
    we serve, and devises policy recommendations from those data. We share
    the data with researchers, policymakers and the media. Just one of
    MRC's services, its New York State Health Insurance Assistance Program
    (SHIP), offers counseling support to one out of every 14 Medicare
    recipients in the nation. Each year, the Medicare Rights Center
    receives over 75,000 calls for assistance from people with Medicare.
    Our counselors are trained to assist consumers with complex problems
    and we complement the basic services offered by the 1-800-MEDICARE
    hotline operated by the Centers for Medicare and Medicaid Services
    (CMS). 1-800-MEDICARE is the largest source of referrals to our
    hotline, and CMS, through the SHIP program, provides about 25 percent
    of the financial support for the MRC hotline; the rest we raise
    privately.
        The issues under consideration at today's hearing are critical to
    the continued vitality of Medicare--how can Medicare balance the
    demands of fair payment to doctors, appropriate growth in a major
    federal budget item, and access to care for people with Medicare
    coverage.
        As we report from the trenches in which we work, I remind myself
    that these tough issues are important for a single reason: these issues
    are all about how do we best meet our moral obligations to assist our
    mothers, our fathers, our grandparents and our neighbors secure the
    health care they need. We all are doing a lot of talking about numbers,
    dollars and public policy. We do struggle with these issues because,
    ultimately, we care about human health, human dignity, human survival.
        Alice Kavanagh and John Rowe are two New Hampshire citizens whose
    very well-being depends on Medicare. They reflect the realities of many
    of the 41 million men and women with Medicare.
        Mrs. Kavanagh, from Durham, New Hampshire, is 82 years old, and
    lives in her family home with her son. She is active in her local
    church and spends a lot of time on the telephone staying connected with
    her friends. She is a cancer survivor--in 2003, she was treated for
    colon cancer. She sees her oncologist and other doctors regularly, and
    so far is free from cancer--and she is thankful for the Medicare
    coverage that enabled her to have surgery and followup care. She has
    other needs that aren't covered by Medicare--she recently paid $300 for
    a tooth extraction and needs further expensive dental work. She also
    needs eye care, but has put off seeking care because of the cost.
        Mr. Rowe, aged 67, hails from Raymond, New Hampshire. He is
    extremely grateful for his Medicare coverage--he was uninsured twice in
    the last decade, first when he was working as an independent
    contractor, and then for the two years he was unemployed before turning
    65. He still looks for work, but now he knows that with Medicare he has
    health coverage he can depend on, particularly since he must monitor
    his cholesterol, triglycerides and blood pressure following triple-
    bypass surgery. He says that Medicare's wide choice of doctors was very
    important when he needed to change doctors.
        I mention these folks because they are why we celebrate Medicare,
    warts and all, as a national treasure. It provides the financial
    security, access to health care, choice of doctors and peace of mind
    that are a lifeline to many older Americans.
        One of Medicare's traditional strengths is that most doctors across
    the United States participate in the program. Yesterday's report from
    the Government Accountability Office, along with work by MedPAC and our
    own hotline experience, consistently demonstrates that nearly all
    people with traditional Medicare are able to see doctors when they need
    to. For example, the CMS-sponsored Consumer Assessment of Health
    Plans--Fee For Service (CAPHS-FFS) survey found that 90 percent of
    beneficiaries report ``always'' or ``usually'' obtaining a timely
    appointment for routine care.
        On our hotlines, we occasionally hear from people with Medicare who
    have trouble finding a doctor, but it usually turns out that those
    doctors are not taking any new patients into their practices,
    regardless of payor. From the consumer point of view, this broad access
    gives people with Medicare the ability to choose their doctor--based on
    personal preference, long-standing patient-provider relationships,
    convenience, transportation needs and other factors--and get the care
    they need.
        So we are grateful for the Committee's stated interest in
    preserving access to doctors by ensuring that payment rates do not
    drive high quality physicians away from Medicare patients. Rates are
    obviously one of the main mechanisms to make sure that the Medicare
    program delivers on its promises to older Americans and people with
    disabilities. It is not just rates, however, that allows such wide
    access to doctors for people with Medicare. MedPAC reports, and our on-
    the-ground experience, demonstrate that the speed and reliability of
    Medicare payments--in sharp contract with many of the nation's largest
    private insurers--make Medicare the extraordinarily attractive insurer
    that it is for patient and doctor alike.
        That is not to say that people with Medicare do not see trouble on
    the horizon. It is coming from many directions. For example, it is
    obvious that repeated five percent per year cuts in physician payment,
    as modeled by the Congressional Budget Office, would undermine
    physician access for people with Medicare--if not immediately, then
    over time. I'm not competent to tell the Committee what the magic
    number is that will create appropriate payment levels and maintain
    vibrant access to doctors within Medicare.
        We do credit MedPAC and GAO for carefully monitoring access to
    services and providing the Administration and the Congress with their
    unvarnished analysis. In these thorny and technical analyses, both of
    these agencies shoot straight, and we rely heavily on their
    intelligence.
        We also can say that there has appeared to be a contradiction
    between what physician lobbyists say about access to physicians, and
    what apolitical clinicians actually do. Too often lobbying hyperbole is
    the rule, and this causes needless anxiety among many people with
    Medicare--especially the older and frailer men and women for whom
    Medicare, and their access to good medical care, is indeed a lifeline.
        So, consumers look to this Committee to strike the proper balance
    in paying providers enough, but just enough. Payment should be about
    reality, not political pressure. We say that because the soundness of
    the Medicare system is of single importance of people with Medicare.
        Further, many of our clients struggle to pay the out-of-pocket
    healthcare costs that accompany Medicare: their co-insurance and
    deductibles, their Part B premiums and uncovered needs. Month after
    month, calls about the affordability of the Part B premium--you all
    know of this year's record increase--top the list of our clients'
    concerns. Changes in patient out-of-pocket costs create real hardship,
    and provider payments contribute to these costs. According to the
    Department of Health and Human Services (HHS), increases in physician
    payments and other payment increases in fee-for-service Medicare were
    the ``principal contributing factor'' to the $11.60--17.3 percent--
    increase in Part B premiums from 2004 to 2005.
        On average, Medicare-covered individuals living in the community
    spent 22 percent of their income in 2003 on out-of-pocket costs,
    including Medicare premiums, cost-sharing, and services not covered by
    Medicare, while individuals with long-term care needs spent
    considerably more. And these data are based on average incomes and
    average healthcare expenses. The poorer, the frailer and the sicker men
    and women with Medicare inevitably face greater hardship. Forty percent
    of people with Medicare live on incomes below 200 percent of poverty
    ($18,620 for an individual and $24,980 for a couple in 2004) and
    struggle to manage their out of pocket healthcare costs--going without
    necessary care, or forgoing other necessities of life.
        People with Medicare would also be dramatically affected by any
    cuts in the Medicare program in response to a ``Medicare Funding
    Warning'' provoked by the cap on the percent of general revenues
    dedicated to Medicare spending. Any increases in general revenue
    spending on Medicare--including any unnecessary increases in provider
    payments--will accelerate the timetable for considering program cuts
    that may have a devastating impact on the Medicare program as a whole.
    A prudent and balanced approach to increasing payment levels is clearly
    imperative.
        We believe that one of the best ways to approach these
    countervailing pressures is through innovative strategies for improving
    access and quality of care for people with Medicare. Nearly 80 percent
    of people with Medicare have a chronic condition such as stroke,
    diabetes, congestive heart failure, emphysema, heart disease,
    hypertension, or Parkinson's disease. It is imperative that fee-for-
    service Medicare adopt improvements in chronic care management and
    other quality improvement strategies. Madam Chairman, you personally,
    and this Committee as a whole, have provided important leadership in
    this area, most recently exemplified by the Chronic Care Improvement
    Program. While it is true that current systems for measuring quality
    are imperfect, the impact of financial incentives on quality of care
    will be forever limited unless large purchasers such as Medicare use
    their market clout to experiment, evaluate and reform. Some long-
    standing models, like the team management approach at the heart of the
    PACE program, have already proven their worth over time.
        In particular, MRC is interested in new approaches that focus on
    improving health outcomes, individual function and quality of life, in
    addition to creating more effective and efficient modes of care. Recent
    private-sector efforts to improve chronic care management have
    experimented with financial incentives, performance profiling and other
    strategies to improve care for diabetes, coronary artery disease,
    depression and other chronic conditions. For example, Rochester Rewards
    Results uses quality bonuses, provider reports on clinical, service and
    efficiency measures, and patient engagement to focus on chronic care
    management and improve appropriateness of acute care services.
    Similarly, the Integrated Health Association in California uses bonus
    payments tied to a scorecard that measures clinical quality, patient
    satisfaction and investment in information technology; chronic
    conditions included in this scorecard include asthma, diabetes and
    coronary artery diseases. Other approaches to chronic care management
    can be found on the Leapfrog Compendium at http://
    www.leapfroggroup.org/. These experiments are interesting, but since
    they are relatively new efforts, we do not yet know how significant an
    impact they will have on quality, effectiveness or efficiency.
        Up to now, Medicare demonstrations have focused more heavily on
    efficiency and cost-effectiveness, rather than improved function,
    quality of life, or other measures that reflect consumer needs and
    experiences. These needs should be balanced--Medicare can use its power
    as a purchaser to ensure that consumers get improved value, not just
    lower cost. MRC is eager to work with CMS, this Committee and other
    experts to identify the next wave of quality improvement and care
    coordination strategies.
        It's a tough balance to be sure: but remember Alice Kavanagh who
    needs dental and vision care that Medicare does not cover. And remember
    John Rowe, who was uninsured for the two years before he became
    eligible for Medicare when he turned 65. Those are gaps that a generous
    and efficient healthcare system should fill. That may not be where
    today's political winds are blowing, but we submit that without system
    efficiencies, the necessary debate over how Medicare can best serve the
    American people, how it can best allow us to meet our moral obligations
    and meet the health needs of our neighbors, will be compromised.
        So we offer our on-the-ground assistance as you work, Madam
    Chairman, with doctors, consumer groups, economists--whoever it takes--
    to balance delicately the question of how much is enough, but not too
    much, to pay physicians.

        Chairman JOHNSON. Thank you. I thank the panel. I will just
    make a comment, and then I am going to let other people
    question, and if I can I will come in at the end, but some of
    them have been here quite a long time. In my work in disease
    management and getting out there and looking at hospitals that
    have good integrated electronic systems and in large practices,
    I firmly believe that there is a relationship between
    integrated care, quality, prevention, holistic medicine and
    technology. In other parts of the Medicare law, we explicitly
    reimburse for at least some of the costs of technology.
    Technology requires investment, it requires knowledge and
    learning, it requires training and staff development, and it is
    an ongoing cost, but it has ongoing power to increase quality.
    As you answer other people's questions--or at the end--I hope
    you will come back to this issue of the costs of technology. I
    am starting from the assumption of--Mr. Hayes, if you disagree
    with me--I don't disagree with anything you said in your
    testimony--but if you disagree that systems are essential to
    the next round of quality improvements, we do need that on the
    record today, because I think that is sort of indisputable. So,
    I will--let me just lay my comments aside, you can leave them,
    or you can think about them later, but some of the Members have
    been here a long time and I would like to move on to them
    rapidly. Mr. Stark, out of courtesy.
        Mr. STARK. I thank the Madam Chair, I thank the panel. I
    guess I too would make some comments. I have been here 20
    years--longer than that, actually--but 20 years that I have
    been fussing with Medicare. At least physician-lobbyists are
    consistent. In 20 years, I have never heard the American
    Medical Association come, either to my office or to this
    Committee, and ask for anything on behalf of patients or the
    uninsured, or anything but more money for their members or
    lower malpractice rates from their insurance companies. So, at
    least they are right on target. Many of the specialists, Dr.
    Gee, have done the same thing. In Dr. Nielsen's surgery,
    mentioned here that cataract surgery will drop from $684 in
    2005 to $469 in 2013. I can remember back in the early 1980s
    when cataract surgery was paid around 1,800 bucks, and then
    Fitzburg recommended--I think these are the right numbers,
    maybe it was 1,200. There was a learning curve and the
    ophthalmologists became more efficient and they recommended we
    should drop it to 1,500, because it took a lot less time to
    train to use the laser equipment. Of course, they screamed and
    did not want to share with us what technology provided, and
    that was greater productivity.
        I guess in the LASIK area today, it started out maybe at 5
    or 6 grand for a couple of eyes, and now you maybe have--
    although these guys may be the charlatans of the practice, you
    can get them for 495 an eye. We don't pay for that, but I am
    just suggesting that as physicians, like auto mechanics or
    anybody else, become more efficient, they become more
    productive, and should in fact share some of that savings with
    the taxpayers who fund this. Now, it may be that the index has
    dropped, but urologists, for example, between 2003 and 2004,
    their compensation ranges, according to modern health care
    here, ran from 250- to 440,000 bucks a year. That is an
    increase of around 18 percent. Now, if I were wondering how I
    would make more money as a urologist, I don't think I would
    be--and I were at the 250 level--I wouldn't be back here
    getting me to raise those fees a few bucks. I would go to see
    those guys who are making 450 and find out what he is doing.
    That is a good jump. I don't think that Medicare should have to
    take care of that. Also, in the pay-for-performance issue, a
    bit of mugwumpery on the part of the American Medical
    Association. I think what you were suggesting in your
    testimony, Dr. Nielsen, is you think it is all right, but you
    don't want any penalties, you want it all up. In other words,
    if it is a lousy performer, you don't want us to cut--is that
    right--you just want it to go up.
        I am saying, well, that may be good, but we do have a zero-
    sum game here, and it may surprise you to know I am rather
    reluctant for Congress to get into the quality issue. I don't
    think we are capable of doing that. With all the wonderful
    staff help we have, I think actually MedPAC is barely able. I
    think it is up to the docs to regulate themselves. We had
    suggested one time, sometimes doctor-specialists have to go in
    every 7 years and take a test to be recertified. Fought like
    hell to stop that. They wouldn't have anything to do with that.
    The AMA led the charge. So, if the physicians won't govern
    themselves--and they generally won't--I don't think you will
    find a physician in there in a fee-for-service area who would
    criticize another physician and rank his colleagues or her
    colleagues from a score of 1 to 10. They just won't do it. It
    is just not built into their psyche. So, my theory is we ought
    to demand a minimum high quality from everyone who is licensed
    to practice medicine, because I think that is basically where
    we are. In technology, sure, if we got outcomes research, and
    could get everybody to use the same kinds of electronic medical
    records, physicians would have a better information base on
    which to base their decisions.
        We should decide that if a urologist is board certified,
    that is good enough for me. Should I rank you with Dr. Walsh? I
    don't think so. I mean, he will rank himself with anybody.
    Doc--everybody is going. At any rate, what I am suggesting is
    how could we get into that fight? I mean he has got to write
    books and promote his stuff, and down there in Virginia you
    probably just go ahead and do what you are supposed to do and
    treat your patients well, and I don't--I shouldn't make that
    decision. You see what I am saying? You are saying you are
    certified and you are good. You are an internist, and I have
    got to depend on somebody else, hopefully, that you are good.
    Because if we start trying to sort out about are you this much
    better than somebody two floors down, I think we run into
    trouble. I hope we will get some help.
        Chairman JOHNSON. Mr. Hulshof.
        Mr. HULSHOF. Thanks, Madam Chair. I certainly don't have
    the institutional memory or the longevity of the gentleman from
    California, the number of years that he has been here and
    having these discussions. I will say to the gentleman, I know
    when I mention his name to certain providers back in my
    district, it evokes a response. I will leave it, leave it at
    that.
        Mr. STARK. Do that after you get off of the examining
    table.
        Mr. HULSHOF. I do. Dr. Nielsen, I teed this up for you with
    Mr. Hackbarth earlier, and to paraphrase what he mentioned in
    response to my question was, let us--okay, we do this, the SGR,
    and I hope everyone understands the fact that Mrs. Johnson has
    made this an issue, we are going to make strong strides to
    solving the issue. I think back to last year's discussion. The
    reason that there is a generous practice expense, for instance,
    for oncologists is because of Mrs. Johnson and others. So, the
    fact that we are here discussing this reimbursement and she has
    made this a priority means that we are going to accomplish
    something, and hopefully something significant. Dr. Nielsen,
    what Mr. Hackbarth, as I recall, the last hour said, that we
    could do this in tandem. In other words, we could address the
    flawed formula and at the same time begin to institute a pay
    for performance. I seem to read from your testimony--and you
    invited a question along this line--that we should first fix
    the formula and then look at a transition to pay for
    performance. Have I adequately set out--or let me just let you
    elaborate on your opinion on that.
        Dr. NIELSEN. That is partly right. First of all, let me
    talk about pay for performance. Theater troops perform, belly
    dancers perform. Doctors care for patients. We can do a better
    job. So, the idea is to increase the quality of the care that
    is rendered to Medicare beneficiaries. That is what everybody
    is here about. It is not about asking for an increase in fees
    at all, with all due respect to Congressman Stark. It is not.
    Let me now go to the issue of can you do it in tandem, the pay
    for performance. Pay for performance absolutely works. I would
    agree with my colleague from Massachusetts that it does work. I
    have seen it. I have been part of that. On the other hand, you
    really have to be careful that you pilot these projects to make
    sure you are measuring the right things. It needs to be
    identified by the profession, and so I would absolutely agree
    with Congressman Stark about that. Let me tell you that the
    American Medical Association over the past 5 years have spent
    $5 million in convening the Consortium for Performance
    Improvement, where we in fact do exactly what he asked for; we
    came up with measures of performance, the critical measures
    that are going to make a difference in outcomes. So, yes, I
    think they--I think we have clear--we clearly can't let this
    formula go on. It just can't go on. So, the simple answer is
    please, please, fix it. Absolutely, we want to be part of the
    solution in terms of improving the quality for our seniors and
    for all our patients.
        Mr. HULSHOF. Dr. Nielsen, Dr. Gee suggested in his
    testimony that if we were to scrap the present formula and move
    to something like the MEI, the Medicare Economic Index, does
    your group have an official position on that or not?
        Dr. NIELSEN. Well, sure. We are the only group that is not
    treated in that way. So, absolutely. The inequity should be
    fixed.
        Mr. HULSHOF. Last, Dr. Lee, Dr. Gee mentioned in his
    testimony that there may be certain specialties that would not
    fit well with a pay for performance. Any response to that
    point?
        Dr. LEE. Well, I think that there are--like the Bridges to
    Excellence model, specialists can participate in them, adopt
    electronic records, do computerized prescribing and so on.
    There are some specialists for whom it is not--it wouldn't make
    a big difference, and there isn't a lot of data on measures. I
    would say where there aren't good measures and where
    computerized prescribing isn't going to produce a lot of value,
    it probably isn't that important for the healthcare system to
    get them on pay for performance, because the stakes aren't that
    high and we don't know what to do. There are enough specialties
    where we do know what to do; my own specialty, cardiology,
    being an example.
        Mr. HULSHOF. Thank you. Thank you, Mr. Chairman. I yield
    back.
        Mr. ENGLISH. [Presiding.] Thank you, Mr. Hulshof. Dr. Lee,
    you have testified that Partners HealthCare and several pay-
    for-performance contracts work, and intuitively we know that
    well-defined, achievable targets can improve quality and
    efficiency in a range of settings. I listened to Dr.
    Hackbarth's--I am sorry, Mr. Hackbarth's testimony in the first
    panel, and came away with the fact that he apparently is
    offering us a very generalized model without a lot of details
    in approaching performance measurement in this area. Can you
    give us some more detailed examples? Here I particularly want
    you to describe your experience with Bridges to Excellence,
    what you have learned about the application of private-sector
    systems to reducing errors in healthcare delivery. Is this a
    model that can be broadly applied and, in your opinion, for
    what other provider services would a pay-for-performance model
    likely increase quality and improve efficiency?
        Dr. LEE. Thanks very much for the opportunity to address
    some of those issues which are on my mind, too. If I seem like
    I am singing a slightly different tune from my physician
    colleagues, it is because the role that I am representing here
    is a delivery system trying to work with the insurance
    companies in our area to make the healthcare system work for
    our region. So, we are--we are very focused on quality, but we
    actually have to sit at the table and think about the
    affordability of care, so that is why we really feel as
    Partners HealthCare System we have to work toward aggressively
    improving efficiency as well as quality. So, our measures, we
    want to improve diabetes care to be nice to diabetics, but we
    also need to work on the affordability of care if we are going
    to take good care of everyone. So, the things we are trying to
    focus on--reduce admissions; we focused on trying to shorten
    hospitalizations where the contracts were paid by the day, and
    we have been able to do that, reduce 5 to 10 percent of
    admissions by having practice-based case managers follow their
    high-risk patients, stay in touch with them, make sure that
    they know how to take their medications. By the time they come
    to the emergency department, it is too late to prevent the
    admission. You can't get into our hospitals these days unless
    you are close to dying.
        We have to be doing things in the week or two before they
    might have gone to the emergency department to prevent that, so
    you can lower admissions. As I say, you can improve your
    pharmacy prescribing. You can improve your radiology
    utilization. It is not just--just yelling at doctors to be more
    efficient doesn't do it. It is giving them the tools so it is
    easy for them to go to the most cost-effective choice. That is
    really what they need to perform. Now, we have done good things
    in the quality sector too. I wanted to play up the efficiency
    side, because as you think about SGR and you try to make
    Medicare work, doctors' fees is not where the action is. It is
    what the doctors do during the visit. So, trying to make
    Medicare work by cutting doctors' fees, that is not where the
    action is. It is when they prescribe radiology tests, when they
    prescribe drugs, that is where you should be trying to look,
    because that is going up 10, 15, 20 percent. Doctors' fees
    certainly are not. Now, in terms of Bridges, Bridges is a
    program that you think the jury is still out, because it is
    new. I was part of the design team, and I am one of the board
    of directors on it; unpaid, but I am a believer in it. It takes
    the approach that we can't measure the quality and efficiency
    of all the onesies and twosies doctors out there. It is going
    to be a long time before the systems are in place to allow us
    to do that. What we can do is determine whether or not they
    have systems which we think should improve efficiency and
    quality. That is a leap of faith that will actually lead to
    efficiency quality. At least we can go that step and say do
    they have the electronic records, are they prescribing them by
    computers, do they have systems to identify high-risk patients
    and to take good care of them?
        Mr. ENGLISH. Your focus is not on actual performance at the
    individual level, it is on tools and incentives.
        Dr. LEE. Right, because these systems are not there to
    measure, to measure the performance at this point. I think it
    will be several years before they are there.
        Mr. ENGLISH. I presume you listened to Mr. Hackbarth's
    testimony.
        Dr. LEE. Yes.
        Mr. ENGLISH. Do you think the sort of broad vision of
    performance measurement that he laid out without I think some
    of the important specifics spelled out, is that a viable model
    for us to be pursuing at this stage?
        Dr. LEE. I believe it is, and I believe it is not ready
    yet. I think it--but I think that--and he and I talked
    beforehand. The measures will never be perfect, so I think--I
    say to my physician colleagues, we have to recognize they are
    not going to be perfect, and I think that the provisions should
    work with policymakers, with the understanding we have to get
    something out there in like a 3- to 5-year timeframe, where we
    are measuring performance that we can live with. We are going
    to have to have systems that protect against gross unfairness
    in their application, but we have to recognize that they are
    not going to be perfect, but we can't let imperfection be the
    enemy of the good.
        Mr. ENGLISH. I would like to thank the panelists for
    providing us each individually with an exceptional presentation
    today. This has been very helpful to us. With that, I believe
    all Members having had an opportunity to inquire, I will
    adjourn this hearing. Thank you.
        [Whereupon, at 12:47 p.m., the hearing was adjourned.]
        [Submissions for the record follow:]
       Statement of Wendy Gaitwood, American Academy of Family Physicians
    Introduction
        This statement is submitted on behalf of the 94,000 members of the
    American Academy of Family Physicians to the House Ways and Means
    Health Subcommittee as part of its hearing on Medicare reimbursement to
    physicians. The AAFP appreciates the work of this Subcommittee to
    examine the issue of how Medicare reimburses physicians services and we
    share the Subcommittee's concerns that the current system is
    unproductive. This fee-for-service system as presently constructed
    rewards increased volume of services whether or not these services
    enhance quality outcomes for Medicare beneficiaries. Such a system of
    physician reimbursement by itself and without improvement is unworkable
    and unsustainable over the long-term. This is why the AAFP supports the
    restructuring of Medicare reimbursement to reward quality and care
    coordination. This restructuring must be built on a fundamental reform
    of the underlying fee-for-service reimbursement system.
        Family physicians have a unique perspective on the effectiveness of
    the Medicare system. After all, the majority of Medicare beneficiaries
    who identify a physician as their usual source of care report that they
    have chosen a family physician. Family physicians take very seriously
    the obligation to provide the best health care possible to our Medicare
    patients. But Medicare reimbursement policies are challenging the
    ability of family physicians to fulfill that obligation.
    Sustainable Growth Rate (SGR)
        The American Academy of Family Physicians supports congressional
    action to replace the formula known as the sustainable growth rate
    (SGR) used to determine the annual updates in the Medicare Physician
    Fee Schedule (MPFS) conversion factor. Above all, the reimbursement
    system should be designed to ensure that Medicare patients can continue
    to receive the care they depend on and deserve.
        Because of the leadership of the Ways and Means Committee, the
    Medicare Prescription Drug and Modernization Act (MMA), signed into law
    in December 2003, included a provision that waived the SGR formula and
    set the increase in the conversion factor for the Medicare Physician
    Fee Schedule for 2004 and 2005 at no less than 1.5 percent each year.
    However, unless Congress acts again, the SGR formula used to calculate
    annual updates will be reinstituted in 2006 and Medicare actuaries are
    predicting a 5.2 percent decrease that year. Moreover, because of the
    cumulative nature of the arcane formula, similar sized decreases are
    projected annually for many years into the future. Such unrelenting
    decreases will make it impossible for many more family physicians to
    accept new Medicare patients. To avoid this, the AAFP supports the
    recommendation of the Medicare Payment Advisory Commission (MedPAC)
    that calls for repealing the SGR formula and basing the conversion
    factor on the Medicare Economic Index (MEI) minus a productivity
    adjustment.
        AAFP agrees with concerns expressed by commissioners of the MedPAC
    that necessary changes made to the SGR going forward will not eliminate
    the SGR deficit that has accumulated due to the cumulative nature of
    the flawed formula. Nevertheless, Congress must act to protect the
    stability of the ambulatory care portion of the Medicare program which
    is essential to meeting the medical needs of our nation's seniors.
    Without action to fix the SGR, these insufficient updates will continue
    to disproportionately affect primary care offices relative to other
    subspecialties because of higher overhead costs.
        Until a complete revision of the reimbursement formula is
    accomplished, there is an administrative adjustment that CMS can make
    immediately. Congress should join AAFP and the community of organized
    medicine in urging CMS to immediately remove, retroactive to the
    inception of the SGR, the physician-administered drugs from the SGR.
    These in-office medications are not reimbursed under the MPFS and
    should never have been part of the formula used to calculate the
    conversion factor for physician services. Moreover, the MMA
    restructured how these medications are paid for. CMS's continued
    inaction, in the face of a growing Medicare ambulatory care
    reimbursement crisis, is irresponsible.
        The SGR has failed to result in a Medicare payment rate that has
    kept pace with the cost of delivering care. While the SGR update
    contributes to the crisis of Medicare reimbursement, the negative
    impact of Medicare's reimbursement system on ambulatory-based primary
    care is a much larger issue.
    Care Management Reimbursement
        Medicare's current visit-based reimbursement system has compromised
    both the ability of primary care physicians to serve in the role for
    which they are best trained and the beneficial services they are
    prepared to deliver. Rather than rewarding cost-effective care
    coordination and care integration, the system rewards physicians for
    ordering tests and performing procedures. There is no direct
    compensation to physicians for the considerable time and effort of
    assuring that the patient's care is organized correctly and is
    integrated in a way that makes sense to patients, while remaining cost-
    effective to the Medicare program.
        Congress and CMS must be willing to adequately reimburse primary
    care functions. Without the necessary resources to allow physicians to
    redesign their clinical workflow to deliver quality outcomes, Medicare
    beneficiaries will continue to experience fragmented and ineffective
    care.
        The urgency to transform the design, delivery, and financing of
    primary care converges well with interest in more broadly implementing
    a model of chronic care that demonstrates improved quality and cost-
    effectiveness. CMS is currently engaged in congressionally-created
    demonstration projects such as the chronic care improvement program and
    in projects of its own design such as the high-cost Medicare
    beneficiary demonstration program. There is strong evidence that the
    Chronic Care Model, as developed by Ed Wagner, M.D., does produce both
    quality and efficacy. The six components of this model (self
    management, decision support, delivery system design, clinical
    information systems, healthcare organizations, and community resources)
    have been tested in more than 39 studies and have repeatedly
    demonstrated their value.\1\ The implementation of the Chronic Care
    Model can reduce unneeded specialty referrals, as well as lead to
    increased patient satisfaction and improved clinical outcomes. These
    components are not specific to the care of the chronically ill, rather
    they are generally applicable to the needed redesign of primary care
    for all Medicare beneficiaries.
    ---------------------------------------------------------------------------
        \1\ Casalino L, Gillies RR, Shortell SM, Schmittdiel JA,
    Bodenheimer T, Robinson JC et al. External incentives, information
    technology, and organized processes to improve healthcare quality for
    patients with chronic disease. JAMA 2003; 289(4):434-441.
    ---------------------------------------------------------------------------
        A blended model of payment combining fee-for-service reimbursement
    system plus a per-beneficiary, per-month stipend for care management,
    paid directly to the patients' designated personal physician, is a
    promising option that would enable family physicians to redesign their
    offices to deliver high quality preventive and chronic care with
    improved outcomes for Medicare beneficiaries. Bodenheimer et al.
    suggest that through blended payments Medicare, specifically, could
    best make the business case to primary care for taking on chronic care
    management by paying for chronic care costs (including information
    technology) and paying for performance through reimbursement
    enhancements.\2\
    ---------------------------------------------------------------------------
        \2\ Bodenheimer T, Wagner EH, Grumbach K. Improving primary care
    for patients with chronic illness: The chronic care model, part 2. JAMA
    2002; 288(15):1909-1914.
    ---------------------------------------------------------------------------
        Others have made similar recommendations to Medicare for blended
    payments that support additional coordination responsibilities,
    electronic communication and documentation, and community-based care as
    well.\3\
    ---------------------------------------------------------------------------
        \3\ Berenson RA, Horvath J. Confronting the barriers to chronic
    care management in medicare. Health Aff 2003; W3:37-53.
    ---------------------------------------------------------------------------
    Medicare Pay-for-Performance
        Pay-for-performance programs are rapidly growing among private
    health plans. Payers see pay-for-performance as a means of tailoring
    reimbursement to physician performance. Its increasing use in the
    private sector has prompted federal health policymakers to examine
    whether pay-for-performance could be applied to Medicare physician
    reimbursement.
        For example, MedPAC recommended during the January meeting that
    Congress create Medicare pay-for-performance programs for physician
    services. According to the MedPAC commissioners, such a program should
    begin with structural measures such as whether a physician office is
    utilizing a patient registry to notify patients of followup
    appointments or whether a physician is utilizing an electronic health
    record (EHR). MedPAC commissioners recommend the subsequent gradual
    inclusion of performance measures such as whether patients with
    diabetes have had their cholesterol checked or whether they have
    received an annual foot exam.
        Such a recommendation for structural measures as an initial step
    makes sense particularly in regard to office based technologies such as
    EHRs which can provide more complete and integrated health data along
    with clinical reminders during the office visit. An EHR would allow a
    physician to track his or her performance along with CMS, as well as
    appropriately risk-adjust the reported data. However, even in the
    absence of an EHR, there is still a minimum data set that could be
    collected. The AAFP is working in a collaborative effort with the
    America's Health Insurance Plans, the American College of Physicians,
    the Agency for Healthcare Research and Quality and many other groups to
    develop a starter set of performance measures from a larger set of
    ambulatory measures undergoing expedited review by the National Quality
    Forum. The collaborative effort plans to have agreed on an initial set
    of performance measures by this summer. Data on these measures will
    come from both administrative claims as well as clinical data sources.
        As MedPAC has recommended, several legislators have expressed an
    interest in designing a pay-for-performance system that holds
    physicians accountable for the care they deliver. The Academy would
    support a Medicare pay-for-performance program for physicians that
    occurred within the context of a positive annual update in Medicare;
    rewarded physicians who were reporting performance measures as chosen
    by the collaborative efforts of the AAFP, ACP, AHRQ, and AHIP and
    medical specialty societies; and did not force physicians to compete
    for limited withholds.
        For example, any competitive system that creates bonuses for those
    physician practices that can report clinical performance measures
    through the use of health information technology by taking withholds
    from physicians who have not been able to purchase technology will only
    delay the rapid dissemination of technology. In addition, it could in
    some areas create real access problems as physicians opt not to take on
    additional Medicare patients. Likewise, inequities may be created among
    different types of physicians. Currently, the NQF, for example, is
    examining a subset of clinical performance measures for ambulatory
    physician offices. However, this set of measures does not cover every
    medical subspecialty. If some physicians, such as primary care
    physicians, have withholds on some portion of their reimbursement while
    other physicians do not, it would create a profoundly unfair system for
    Medicare physician reimbursement.
    Conclusion
        The Academy remains deeply concerned about the inadequate and
    flawed Medicare physician reimbursement system. The Academy suggests
    that an MEI-based formula should replace the SGR. As for alternative
    payment schemes, they should focus on adequately reimbursing the
    functions of primary care with a per-member per-month fee for care
    management separate from and in addition to fee-for-service. Pay-for-
    performance programs in Medicare should focus on improving quality
    through the use of the starter set of performance measures currently
    under development. Pay-for-performance programs should give bonuses to
    reporting physicians while maintaining annual positive updates in
    Medicare reimbursement to keep pace with increased expenses.
        The Academy looks forward to working with the Ways and Means Health
    Subcommittee in its work to improve Medicare physician reimbursement.
                                   ----------
                  AAFP Policy On Pay-for-Performance Programs
        The Academy recognizes the need to explore alternative methods of
    reimbursing physicians and supports voluntary pay for performance (PFP)
    programs that incorporate the following guidelines:

          Improving clinical outcomes and quality of care should be
    the central purpose.
          Practicing physicians should be involved in the design of
    these programs and the selection of performance measures through a
    practicing physician advisory committee.
          PFP programs should provide incentives to physician
    practices:
            for adoption and utilization of health information
    technology,
            for implementation of systems to improve care and
    patient safety,
            for measuring patient satisfaction with care delivered.
          Incentive payments should reward progress towards
    improving clinical performance up to, and including, achieving overall
    clinical performance targets.
          Financial awards to physician practices must sufficiently
    cover the administrative costs (e.g., data collection and measurement)
    of participating in the program in addition to bonuses that may be
    awarded.
          PFP programs must rely on new sources of revenue.
    Preferably these revenues can be accessed by redistributing a portion
    of projected savings. There should be no reduction in existing
    reimbursement to physicians as a result of a PFP program.
          PFP should state the source of the data for measuring
    performance, e.g., claims data, medical record audit, pharmacy claims,
    or patient surveys.
          Performance data feedback should be provided to
    physicians as soon as possible and should show comparisons to peers and
    performance targets.
          Physician practices decide when to share performance data
    with an independent third party who collects and analyzes such data.
    The third party maintains data confidentially and shares with physician
    offices any analysis done to improve efficiency, quality or safety.
    Processes should be in place to assure the accuracy of reported data
    and physicians must be allowed to validate their reported data.
          Reported performance measures must be based on medical
    evidence. They must address areas where treatment for common medical
    conditions can be substantially improved and where such improvement
    would be cost-effective for both patients and payers. In addition,
    performance measures must be measurable in a risk-adjusted, accurate
    manner; and they should represent achievable, feasible areas for
    improvement without creating any undue financial burdens on physician
    practices.
          Physician profiles should be provided only to the
    physician profiled and disclosed to individuals or organizations only
    with the approval of that physician. Physician profiles should include
    only clinical performance measures that are clearly linked to improved
    clinical outcomes; measures of timely and appropriate care; patient
    satisfaction; and financial or resource allocation measures related to
    clinical outcomes.
          For a complete statement of AAFP policy on pay-for-
    performance, see www.aafp.org/x30307.xml, and for policy on data
    stewardship see www.aafp.org/x30300.xml.

        Statement of Stephanie Reed, American Association for Geriatric
                         Psychiatry, Bethesda, Maryland
        The American Association for Geriatric Psychiatry (AAGP)
    appreciates the opportunity to share our concerns with the Members of
    the Subcommittee on Health on the problems associated with the Medicare
    physician fee schedule. AAGP is a professional membership organization
    dedicated to promoting the mental health and well-being of older people
    and improving the care of those with late-life mental disorders. Our
    membership consists of 2,000 geriatric psychiatrists as well as other
    healthcare professionals who focus on the mental health problems faced
    by senior citizens.
        Physicians who treat Medicare beneficiaries, as Medicare providers,
    accept a fee schedule that is, at baseline, often significantly lower
    than their ``usual and customary'' fee schedule for providing services
    to their self-paying patients. As you are aware, these physicians
    continue to face the prospect of additional across-the-board reductions
    in the fees paid by the program. Unlike many other payment ``cuts'' in
    Washington, these reductions are not simply reductions in a rate of
    increase, but are absolute reductions in fee levels. In 2002, fees were
    cut by 5.4 percent below 2001 levels. Although Congress has taken
    action since that time to hold off additional reductions on a temporary
    basis and in fact provided for a positive update of 1.5% for 2004 and
    2005, it is clear that a permanent resolution to the flawed formula
    governing physician payments must be enacted. This issue is most
    important because of the effect it will have on access to care for
    Medicare beneficiaries, especially for the vulnerable among them--those
    elderly and disabled persons who have multiple, complex medical
    conditions and limited financial resources.
        As a result of the recent and projected reductions, many physicians
    are having to reevaluate their willingness to treat Medicare patients,
    as well as their willingness to be ``participating physicians'' who
    accept Medicare payment as payment-in-full for their services.
    Consequently, many Medicare patients are already having trouble finding
    physicians to treat them. A survey by the American Medical Association
    following the 5.4 percent cut in 2002 found that 24 percent of
    physicians had either placed limits on the number of Medicare patients
    they treated or planned to institute limits. In the case of geriatric
    psychiatrists--most of whose patients are enrolled in Medicare--the
    impact of these reductions is particularly severe and is causing at
    least some in our profession to consider leaving clinical practice
    altogether to enter other fields where their experience and expertise
    are valued more appropriately.
        The impact on geriatric psychiatrists--and their patients--is
    compounded by the discriminatory reimbursement policies Medicare
    already imposes on consumers of mental health services. Under current
    law, Medicare requires beneficiaries to pay a 20 percent co-payment for
    Part B services with the single exception of a requirement of a 50
    percent co-payment for outpatient mental health services. The lack of
    parity for mental health treatment is unconscionable--and of great
    consequence to older adults who feel more stigmatized by psychiatric
    illness than any other group. Despite widespread need, many seniors
    decline, delay, or drop out of treatment because of the high co-
    payment. In addition, current law discriminates against the non-elderly
    disabled Medicare population, many of whom have severe mental
    disorders.
        The result of these factors--declining reimbursement rates,
    existing discriminatory reimbursement for mental health care, and
    stigma--will undoubtedly compound the existing serious access problems
    for Medicare beneficiaries in need of mental health treatment--either
    in finding a physician to treat them or in ``balance billing'' charges
    by physicians who previously accepted assignment.\1\ Shifting costs to
    beneficiaries--many of whom are low income--can make essential mental
    health care unaffordable.
    ---------------------------------------------------------------------------
        \1\ Although ``balance billing'' may provide a short-term safety
    valve that allows some physicians to continue treating Medicare
    patients, the additional amount that Medicare permits physicians to
    collect from beneficiaries under its balance billing limits will not
    fully offset the cumulative reductions in program payments in the
    future. Moreover, some States prohibit balance billing Medicare
    beneficiaries as a condition of licensure in the State, which leaves
    those physicians without this option.
    ---------------------------------------------------------------------------
        The fee reductions that are forcing these choices stem from the
    mechanism for automatic annual fee ``updates'' that is currently part
    of the Medicare statute. For most types of providers, Medicare law
    incorporates a mechanism by which payment rates are automatically
    updated annually for inflation, in much the same way that Social
    Security and other Federal cash benefits are automatically increased by
    the cost of living adjustment (COLA) each year.
        However, since the inception of Medicare physician payment reform
    in the early 1990s, updating physician fees has been handled somewhat
    differently from those of other providers. The payment reform law
    established a mechanism under which the annual inflation update for
    physicians' services is automatically adjusted--above or below the rate
    of inflation--based on how actual Medicare spending for physicians'
    services compares to an annual spending target computed by the Centers
    for Medicare and Medicaid Services (CMS) based on a formula set out in
    the law.
        Until recently, this mechanism resulted in some relatively modest
    reductions below full inflation--as well as some ``bonuses'' above
    inflation. However, changes made in the ``Balanced Budget Act of 1997''
    (BBA) tightened the annual spending targets, making it substantially
    more difficult for physicians to meet them.
        Before the BBA, the annual spending target was based on a formula
    that included a reasonable allowance for spending increases due to
    changes in technology and other related factors affecting the ``volume
    and intensity'' of services provided by physicians. The BBA replaced
    this allowance with a much less generous proxy--the estimated increase
    in the gross domestic product (GDP)--which bears no relationship to the
    factors affecting volume and intensity of services provided. The impact
    of this change can be demonstrated quite simply. Where the volume and
    intensity allowances for 1992 and 1993 were 6.8 percent and 6.0
    percent, respectively, the corresponding GDP allowances for 1999 and
    2000 were 1.3 percent and 2.7 percent.
        Furthermore, because the BBA made the new targets cumulative--so
    that a breach in one year's target would have to be fully offset by
    corresponding expenditure reductions in later years--inaccurate CMS
    estimates of several components of the formula used to compute the
    spending targets for 1998 and 1999 have been carried forward, producing
    inappropriately low targets in each subsequent year.
        For example, actual growth in the GDP for 1998 and 1999 was greater
    than the estimates on which CMS based its targets. Growth in the
    beneficiary population is another component of the target. CMS
    overestimated beneficiary migration from traditional Medicare into
    managed care plans during 1998, which had the effect of understating
    beneficiary enrollment growth in the traditional program. All of these
    forecasting errors resulted in lower targets than would have occurred
    if better data had been available.
        Unfortunately, CMS interprets the law as precluding it from
    correcting these errors. Although AAGP takes no position on this arcane
    legal issue, we do think that it is fundamentally unfair to make
    physicians--and Medicare beneficiaries--pay for estimates that everyone
    agrees in hindsight were wrong.
        Physicians want to serve all Americans. However, they simply cannot
    afford to accept an unlimited number of Medicare patients into their
    practices when they are facing continued payment reductions. These
    drastic cuts must be stopped before they devastate Medicare
    beneficiaries' access to health care.
        We commend the Congress for its action to avert the impending
    reductions in Medicare physician fees for 2004 and 2005. We note,
    however, that the legislation does not address the fundamental defects
    in the formula for setting annual Medicare spending targets for
    physicians' services and that projections for 2006 under current law
    will result in a cut of 5.2 percent.
        Especially in light of the recent recommendation by the Medicare
    Payment Advisory Commission (MedPAC) for an increase of 2.7 percent for
    2006, we urge Congress to revisit this issue this year and--at a
    minimum--to replace the GDP component of the formula with a more
    realistic proxy for changes technology and other factors affecting the
    volume and intensity of the services furnished to Medicare
    beneficiaries.
        Thank you again for the opportunity to share our views on this
    important issue. We look forward to working with you as you craft a
    correction to the Medicare physician payment formula.

            Statement of Josh Cooper, American College of Radiology
        The American College of Radiology (ACR), which represents over
    32,000 diagnostic radiologists, interventional radiologists, radiation
    oncologists, nuclear medicine physicians and medical physicists,
    appreciates the opportunity to submit written testimony on the subject
    of Medicare payments to physicians.
    Image Over Utilization
        The ACR encourages and supports the technological innovations and
    advances in diagnostic medical imaging, which have unequivocally
    improved the quality of health care while producing cost savings
    through less invasive diagnostic techniques. The College appreciates
    and supports the tremendous developments imaging has brought to patient
    care, however we have concerns regarding the quality, safety and costs
    associated with the dramatic rise in the volume of procedures utilizing
    high-cost diagnostic imaging modalities and would like to address these
    concerns in our testimony.
        The Medicare Payment Advisory Commission's (MedPAC) June 2004
    report to Congress shares the College's concerns, stating that
    diagnostic medical imaging is the fastest growing type of medical
    expenditure within the category of physician services in the United
    States, boasting an annual growth rate that is more than three times
    that of general medical procedures. The ACR, as well as lawmakers and
    federal regulators, recognize that this trend line, which is growing
    exponentially every year is unsustainable and that the growth of
    imaging utilization, some of which may be inappropriate, must be
    controlled. As troubling as the rising costs associated with the
    increased over utilization of imaging services is, MedPAC also has
    expressed a growing concern that both the quality and safety necessary
    for effective diagnosis may be decreasing.
        The ACR shares MedPAC's concerns regarding the quality, safety and
    costs associated with the dramatic rise in the volume of procedures
    utilizing high-cost diagnostic imaging modalities. To address this
    alarming imaging utilization trend, the College and several private
    insurance companies have worked closely with MedPAC to establish a
    Medicare physician payment policy focused on quality of care, patient
    safety and expertise of the physician interpreter as a means for
    obtaining needed cost savings in the area of diagnostic medical imaging
    services.
        MedPAC believes this policy is appropriate as evidenced by their
    unanimous approval of recommendations to establish quality standards
    for the provision and interpretation of imaging services. (See attached
    summary of MedPAC Recommendations). The MedPAC recommendations, many of
    which the College fully supports, will be published in its March 2005
    report to Congress. In short, these recommendations call for all
    diagnostic imaging providers to meet quality standards for imaging
    equipment, non-physician staff, images produced, patient safety
    protocols, and increased training for physicians who bill Medicare for
    interpreting diagnostic imaging procedures.
        According to data compiled for the ACR, congressional
    implementation of these MedPAC recommendations designed in part to stem
    the financial incentive associated with some of the growth in imaging
    utilization, could save the Medicare program a minimum of $6 billion
    over ten years (the analysis behind this cost savings has been provided
    to Committee staff). Moreover, the quality of care Medicare
    beneficiaries receive should significantly improve with the
    implementation of quality and safety requirements for medical imaging.
    Concerns
        Many medical specialty organizations do not share the ACR's and
    MedPAC's concerns regarding the growth in diagnostic imaging
    utilization. Some suggest that the shift in the site of service from
    inpatient hospital to physician offices has inflated the increase in
    imaging utilization. However, while the growth in in-office imaging was
    much more rapid than the overall growth, there is no evidence that this
    is simply a shift in site of service. Imaging procedures in Part B
    Medicare (measured in terms of number of procedures as well as
    professional component RVUs per 1,000 beneficiaries), increased in both
    inpatient and office settings. As per the Physician Supplier Procedures
    Summary (PSPS) Masterfile, the three-year growth in imaging per 1,000
    beneficiaries for the period 2000-2003, in all sites of service
    combined, was 17% (5.3% per year) in number of procedures and 26% (7.9%
    per year) in professional component RVUs.
        Other medical specialty organizations cite patient convenience and
    ``one stop shopping'' as a reason not to pursue quality and safety
    standards for imaging procedures. Frankly, the ACR questions whether
    patients receiving imaging services in the office of a non-radiologist
    physician truly receive a more convenient encounter. A preliminary
    analysis of the 2001 Medicare 5% physician Standard Analytical File
    (SAF) reveals that of all the imaging billed by non-radiologists, at
    most 3.1% of CTs and 2.58% of MRIs were billed with an Evaluation and
    Management (E&M) code on the same day. Therefore, based on available
    data, approximately 97% of the cases of imaging performed by non-
    radiologist physicians are not done on the same day and patients must
    return for a second visit in order to receive an imaging procedure. In
    other words, there is little or no evidence indicating a ``same day''
    convenience for the patient having a CT, MRI or PET performed in the
    office of a referring physician. Additionally, throughout the private
    payer health system, the use of prior-authorization and other screening
    procedures almost always, with the exception of emergency services,
    results in one to multi-day delays in obtaining these diagnostic tests.
    Perhaps a more precise analysis on this matter could be conducted by
    Medicare officials, who would have access to fully identified Medicare
    files that are now restricted to the public as a result of privacy
    regulations.
    Established Quality and Safety Programs in Diagnostic Imaging
        The use of Accreditation standards is one mechanism to help attain
    the goal of increasing quality and safety, while at the same time
    reducing utilization costs to Medicare. MedPAC's imaging standards
    recommendations are based on the concept of accreditation and are
    similar to the standards facilities and physicians who perform
    mammograms must meet under the federally established Mammography
    Quality Standards Act of 1992. Accreditation programs evaluate the
    equipment specifications and calibration, dose (where appropriate),
    clinical image quality, physician and non-physician personnel
    qualifications, and quality control protocols among other items.
        The ACR's history of developing and administering accreditation
    programs that assess the quality of imaging facilities dates back to
    1963 and is a testimony to the College's dedication to quality patient
    care in imaging and radiation therapy. While there may be some who
    believe that the important requirements associated with accreditation
    may be covered by state radiation protection programs, it must be
    understood that these programs vary by state and typically only
    evaluate the amount of radiation exposure and other equipment related
    measures. State radiation protection programs do not evaluate the
    entire imaging system the way accreditation does.
        Currently, the ACR has established and maintains nine different
    accreditation programs, all with pathways for radiology and non-
    radiology practices to receive accredited status. For example,
    approximately 15% of the facilities accredited by the ACR in nuclear
    medicine are cardiology practices. The College is also ready and
    willing to collaborate with other specialty organizations in the
    development of our quality and safety resources. For example, the ACR
    Stereotactic Breast Biopsy Accreditation Program was developed in
    collaboration with the American College of Surgeons.
        Radiologists are physicians who are the imaging experts. Unlike
    other specialties, radiologists have received years of unique,
    specific, post-medical school training in the performance of
    radiological procedures and interpretation of diagnostic images. The
    ACR is the premier organization with unmatched breadth, depth and
    expertise in radiological sciences, medical imaging, radiation safety,
    radiation protection, dose delivery and image interpretation programs.
    The College has demonstrated its commitment to evidence based
    decisionmaking in health care and dedication to high quality, safe and
    effective patient care through all of its available resources. The ACR,
    we assure you, shares your goal of quality imaging provided by
    individuals and facilities that can demonstrate they are qualified to
    perform and interpret these life-saving examinations.
    Conclusion
        The American College of Radiology recognizes that the unbridled
    growth of high cost diagnostic imaging services within the Medicare
    program is unsustainable and that the costs associated with
    inappropriate volume must be contained. The policy recommendations
    developed by MedPAC that the Congress will soon review can
    significantly help accomplish this goal.
        Please avail yourself of the ACR's expertise and experience. The
    American College of Radiology is available to work with MedPAC,
    Congress and CMS to establish quality standards in diagnostic imaging
    services that will benefit our patients and the healthcare system in
    general.
                                   ----------
              MedPAC Recommendations Regarding Imaging Utilization
        At the January 12, 2005 meeting of the Medicare Payment Advisory
    Commission (MedPAC), the Commission voted to recommend to Congress six
    manners in which to improve Medicare physician payment policy,
    especially in the area of diagnostic medical imaging services. The
    Commission weighed the likely administrative costs against expected
    benefits before reaching the following recommendations:

    1.  The Secretary should use Medicare claims data to measure fee-for-
    service physicians' resource use and share results with physicians
    confidentially to educate them about how they compare with aggregated
    peer performance. The Congress should direct the Secretary to perform
    this function.

           In terms of spending, the Commission anticipates that
    measuring resource use activity could reduce the volume of physician
    services over time, but from a budget scoring standpoint, it is
    unlikely this recommendation will affect program spending relative to
    current law.
           The Commission foresees no adverse impact on access or
    quality for beneficiaries by implementing this tactic. To the extent
    that physicians adopt more conservative practice patterns,
    beneficiaries may pay less in terms of coinsurance and Part B premiums.
           From the perspective of physicians and providers of
    services, this recommendation has the potential to affect the volume of
    services that providers furnish over time.

    2.  The Secretary should improve Medicare's coding edits that detect
    unbundled diagnostic imaging services and reduce the technical
    component payment for multiple diagnostic imaging services performed on
    contiguous body parts.

           The Commission expects better coding edits to reduce
    physician fee schedule spending, but has not estimated the magnitude of
    savings.
           Assuming it would reduce Medicare spending, the
    Commission believes this recommendation would also decrease beneficiary
    premiums and cost-sharing. Because past coding edit changes do not
    appear to have reduced beneficiary access to quality health care, the
    Commission does not anticipate any effect on access and quality in this
    instance.
           According to the Commission, providers who bill for
    unbundled or multiple imaging procedures would experience a decrease in
    Medicare payments. However, the Commission does not predict this
    recommendation will affect providers' willingness or ability to provide
    quality care to beneficiaries.

    3.  The Congress should direct the Secretary to set standards for all
    providers who bill Medicare for performing diagnostic imaging services.
    The Secretary should select private organizations to administer the
    standards.

           The Commission acknowledges such standards could include
    imaging equipment, non-physician staff, image quality, a supervising
    physician, and patient safety. For example, Medicare's rules for
    independent diagnostic testing facilities require that each facility
    have a supervising physician who is proficient in interpreting clinical
    images produced in diagnostic imaging studies. Several private
    accreditation programs also require that the imaging provider have on-
    site a supervising physician who is qualified to interpret these
    images.
           In making this recommendation, the Commission relied
    upon evidence suggesting that providers vary in their ability to
    perform quality diagnostic imaging studies. Moreover, poor quality
    studies can lead to repeat tests, misdiagnoses, and improper treatment.
    In order to remedy this problem, the Commission advocates establishing
    national standards that would apply in all settings. These standards
    should improve the quality of imaging services, thereby increasing
    diagnostic accuracy and reducing the need for repeat tests.
           In order to be reimbursed by Medicare for this technical
    component of diagnostic medical imaging services, providers must meet
    or exceed these quality standards.

    4.  The Congress should direct the Secretary to develop standards for
    physicians who bill Medicare for interpreting diagnostic imaging
    studies. The Secretary should select private organizations to
    administer the standards.

           The Commission acknowledges such standards could be
    based on training, education, and experience required to properly
    interpret clinical images produced in diagnostic imaging studies.
           The Commission further acknowledges such standards
    should apply to all physicians who interpret clinical images in the
    United States, regardless of location of interpretation. Therefore, a
    physician interpreting an image in a different location from where its
    corresponding diagnostic test was performed falls within the scope of
    this recommendation.
           Similar to the rationale used in recommendation three,
    the Commission cites evidence of variations in the quality of physician
    clinical image interpretation and formal reports. More specifically,
    the Commission recognizes that inaccurate interpretations and
    incomplete reports could lead to improper treatment. By ensuring that
    only qualified physicians are paid for interpreting imaging studies,
    diagnostic accuracy and treatment should improve for patients.
           In order to be reimbursed by Medicare for this
    professional component of diagnostic medical imaging services, the
    physician interpreting the clinical image that is produced in a
    certified facility must meet or exceed these standards.
           Impact of Recommendations Three and Four:
            Based on the experience of private plans that have
    implemented selective privileging and other similar programs for
    diagnostic medical imaging services, the Commission foresees a
    reduction in Medicare program spending if recommendations three and
    four are implemented. Some providers would be unable to meet these
    standards and consequently be driven from the marketplace, which would
    reduce the overall number of studies. In addition, the Commission
    expects these standards to result in a reduction in the number of
    initial poor quality imaging tests, thus significantly limiting the
    number of repeat exams.
            Both recommendations should improve care for
    beneficiaries because better quality studies should increase diagnostic
    accuracy and reduce unnecessary exposure to radiation, which could
    result from the need for repeat CT scans if the initial exams are of
    poor quality. To the extent that spending is decreased, beneficiary
    cost sharing should also decline.
            If a diagnostic medical imaging service provider
    chooses to satisfy these new Medicare standards and remain in the
    marketplace, that provider would likely incur additional costs to do
    so. For example, physicians offering diagnostic medical imaging
    services may need to invest in newer equipment and higher credentialed
    technicians, as well as obtain additional education.
            Many diagnostic imaging providers already receive
    accreditation by private organizations and are familiar with these
    types of standards.

    5.  The Secretary should include nuclear medicine and PET procedures as
    designated health services under the Ethics in Patients Referrals Act
    (``Stark II'').

           The Commission asserts that physician investment in
    facilities that provide nuclear medicine services are associated with
    higher use. Such investments create financial incentives to order
    additional services and to refer patients to facilities in which the
    physician is an investor, thus undermining fair competition.
           While this recommendation prohibits physicians from
    owning nuclear medicine facilities to which they refer patients, it
    does not close the loophole for in-office ancillary services found in
    the Stark law.

    6.  The Secretary should expand the definition of physician ownership
    in the Ethics in Patients Referrals Act (``Stark II'') to include
    interests in an entity that derives a substantial proportion of its
    revenue from a provider of designated health services.

           This recommendation prevents physicians from owning
    companies whose primary purpose is to provide services to facilities
    that are covered by the Stark prohibitions on self-referral.
           Impact of Recommendations Five and Six:
            The Commission anticipates that these recommendations
    should decrease physician fee schedule spending because they would
    reduce the financial incentive for physicians who order additional
    imaging studies.
            To the extent that fewer studies are ordered,
    beneficiary cost sharing would decline. The Commission does not expect
    that beneficiary access to quality diagnostic medical imaging services
    would be affected.
            If these recommendations are implemented, physicians
    would no longer be able to refer Medicare or Medicaid patients to
    nuclear medicine facilities in which they are investors. Moreover,
    physicians would no longer be able to refer patients to a provider that
    contracts with an entity that they own if that entity derives a large
    share of its revenue from that provider. However, these changes should
    provide a competitive balance for healthcare providers.

       Statement of Justin Moore, American Physical Therapy Association,
                              Alexandria, Virginia
    Executive Summary
        The American Physical Therapy Association (APTA) is vitally
    interested in the efforts to reform the physician payment formula. On
    behalf of APTA's 67,000 member physical therapists, physical therapist
    assistants and students of physical therapy, we would like to dispel
    the notion that the physician fee schedule is solely a physician
    concern. The physician fee schedule impacts numerous health
    professions, including physical therapists. Our members work closely
    with Medicare beneficiaries in private practice, inpatient and
    outpatient rehabilitation facilities, hospitals, skilled nursing
    facilities and other settings. For these patients, physical therapists
    utilize the physician fee schedule to bill independently for services.
        APTA is concerned that the negative payment updates to the
    physician fee schedule will hinder the ability of physical therapists
    to care for Medicare beneficiaries needing rehabilitation services. It
    is important that these individuals continue to receive the
    rehabilitation and other services that they need in order to achieve
    their maximum level of functional independence. Because rehabilitation
    enables beneficiaries to function more independently, rehabilitation
    will save the Medicare program dollars in the long term.
        APTA commends Congress for its action in 2003 to implement the 1.5%
    increase to the physician fee schedule in 2004-2005 as a provision of
    the Medicare Modernization Act (MMA). However, this was merely a
    temporary solution to the problem, as CMS project that the formula will
    produce a negative payment update of approximately 5% per year
    beginning in 2006. We urge Congress to:

          Move forward with a MedPac recommended 2.7% increase for
    CY 2006 to avoid the proposed 5% cut.
          Adopt MedPAC's framework for updating the Part B provider
    fee schedule, which includes eliminating the sustainable growth rate
    (SGR) and replacing it with a factor which will more appropriately
    account for changes in the cost of providing services.
          Remove Medicare-covered drugs from the SGR in order to
    prevent physician services from exceeding the SGR target.
          Update and improve the MEI so that it measures inflation
    in practice costs and separates productivity.

        Should Congress fail to act, physical therapists and other
    healthcare professionals will experience draconian cuts in
    reimbursement over the next several years. APTA feels strongly that
    remedying this issue must not be a budget neutral exercise as
    additional resources are necessary to address this fundamental problem.
    We recommend the Committee seek appropriate resources through the
    Budget Committee to meet this challenge.
        Chairwoman Johnson and Members of the Subcommittee on Health, the
    American Physical Therapy Association (APTA) is submitting testimony
    concerning the need to reform the update formula of the sustainable
    growth rate (SGR) in the physician fee schedule. The APTA represents
    67,000 physical therapists, physical therapist assistants and students
    of physical therapy. This issue is of great significance to our
    members, many of whom who bill their services to the Medicare program
    under Part B.

              The APTA applauds the Committee for holding this hearing
            today and for the commitment of Committee Members to address
            the outstanding problems that exist in the update formula for
            the Part B fee schedule. Many health professionals, including
            physical therapists, utilize the fee schedule to bill for
            services. We wish to dispel the conception that this is solely
            a physician concern, as physical therapists are affected by the
            potential cuts in reimbursement.

        Physical therapists provide services to patients who have
    impairments, functional limitations, disabilities, or changes in health
    status resulting from injury, disease or other causes. As clinicians,
    physical therapists are involved in the evaluation, diagnosis,
    prognosis, intervention, and prevention of musculoskeletal and
    neuromuscular disorders. On a daily basis, physical therapists provide
    care for Medicare patients with acute, chronic, and rehabilitative
    conditions such as stroke, Parkinson's disease, arthritis and
    musculoskeletal disorders. Physical therapy is a dynamic profession
    whose goal is to preserve, develop, and restore optimal physical
    function.
    Patient Access Problems Will Result from Flawed Update Formula
        APTA is concerned that the negative payment updates to the
    physician fee schedule will hinder the ability of physical therapists
    to care for Medicare beneficiaries needing rehabilitation services. It
    is important that these individuals continue to receive the
    rehabilitation and other services that they need in order to achieve
    their maximum level of functional independence. Because rehabilitation
    enables beneficiaries to function more independently, rehabilitation
    will save the Medicare program dollars in the long run.
        The impact of the Medicare cuts needs to be viewed in the context
    of significant legislative and regulatory changes affecting physical
    therapists that have occurred over the past few years. Since 1992,
    physical therapists in private practice have been reimbursed under the
    physician fee schedule. Prior to 1999, all other outpatient therapy
    settings were reimbursed under a cost-based system. The 1997 Balanced
    Budget Act (BBA) required that outpatient therapy services in all
    settings be reimbursed under the physician fee schedule, beginning in
    January 1999. Thus, in addition to impacting physical therapists who
    own and operate private physical therapy practices, the anticipated 5%
    cut in payment and the flawed update methodology also impacts the
    provision of outpatient therapy services in outpatient hospitals
    departments, skilled nursing facilities (Part B), home health agencies
    (Part B), rehabilitation agencies, and comprehensive outpatient
    rehabilitation facilities (CORF).
        The BBA also imposed a $1,500 cap on outpatient therapy services in
    all settings except for hospitals. The present moratorium will expire
    at the end of 2005 unless Congress acts. If the cap goes back into
    effect, it will compound the Medicare payment cuts.
        In addition to the cap, physical therapists continue to deal with
    increased documentation requirements, conflicting Medicare rules, non-
    uniform application of Medicare requirements among Medicare
    contractors, and impending privacy requirements under HIPAA. When
    combined with the current and impending cuts, it will be difficult for
    physical therapists and other health professionals to continue
    providing services within the Medicare program.
        The majority of physical therapists in private practice are small
    businesses. As small business, their ability to operate is in jeopardy
    when they lose necessary revenue or cannot forecast revenue accurately
    from year to year. As a result, maintaining access to providers like
    these cannot be sustained without immediate reform of the payment
    update formula.
    Flawed Medicare Payment Update Formula
        Medicare payments are updated annually based on the SGR system.
    Because the SGR system is flawed, updates under the system do not
    reflect the cost of providing services. In 2005, the payment update to
    the physician fee schedule is 1.5%, which is not keeping pace with
    increasing healthcare costs. However, CMS is predicting payment
    reductions for 2006 and later years as a result of the formula for
    determining the updates.
        The SGR system sets spending targets for services reimbursed under
    the physician fee schedule and adjusts payment rates to ensure that
    spending remains in line with those targets. If spending equals the
    targeted amount, payment rates are updated in accordance with the
    percentage change in input prices, which is determined by the MEI. If
    the spending for that year exceeds the target, the increase in payment
    rates is smaller than the increase in input prices (MEI). If spending
    for that year is less than the target rate, payment rates are allowed
    to be increased by a greater amount than the rise in input prices.
        The annual target is a function of projected changes in four
    factors: input costs, enrollment in traditional Medicare, real gross
    domestic product (GDP) per capita, and spending attributable to changes
    in law and regulations. Revisions to any of these four factors or to
    estimates of prior spending can change the spending estimate
    significantly.
        One of the problems with this methodology is that payments under
    the SGR are tied to the GDP which bears no relationship to patients'
    healthcare needs or physical therapists' practice costs. By linking
    annual changes in the targets to annual changes in GDP, Medicare ties
    the target to the business cycle. Health care needs of Medicare
    beneficiaries do not follow the same cycle. The cost of providing care
    to these beneficiaries does not lessen when the economy is in a
    downturn. The current methodology also increases the volatility of the
    SGR, as economic forecasts frequently change. The unpredictable rate
    fluctuations make it very difficult for providers to continue to
    participate in the Medicare program.
        Another problem relates to estimating beneficiary enrollment.
    Increased utilization rates are often beyond the control of the
    physical therapist. While physical therapists strive to meet the
    clinical needs of increased patient volume and maintain a high standard
    of care, they are penalized with lower payments when utilization
    exceeds the SGR spending target. As the number of Medicare
    beneficiaries dramatically increases in coming years, this problem will
    only worsen if Congress does not intervene.
        Additionally, prescription drug expenditures under Medicare are
    growing at a rate that far outpaces those of physician and physical
    therapy services. Inclusion of drugs in the SGR increases the odds that
    Medicare spending on physician services will exceed the SGR target,
    resulting in lower payments for physicians. Moreover, drugs are not
    paid under the physician fee schedule and should not be included in the
    definition of physicians' services. Inclusion of the drug expenditures
    in the SGR remains a substantial barrier to creation of a workable
    payment system for healthcare professionals.
        While prescription drug should be removed from the SGR, the
    potential costs from government legislation and regulations should be
    included in the calculation of the SGR target. The Medicare
    Modernization Act (MMA) includes several provisions that lower
    patients' out-of-pocket costs on health care, which also is shown to
    increase utilization on physician, physical therapy and other
    healthcare services. The MMA's new prescription drug benefit is
    designed to enable Medicare beneficiaries who could not afford to
    purchase drugs to do so. Increased patient utilization of healthcare
    services and increased access to prescription drugs will also increase
    expenditures for physician services, and should be given consideration
    in the SGR. In addition, local coverage determinations have a
    significant impact on physical therapist practices in some areas of the
    country and should be taken into account as spending due to changes in
    law and regulations.
    Changes Needed in the Medicare Economic Index (MEI)
        In addition to eliminating the SGR, the MEI, which is calculated by
    CMS and used to measure practice cost inflation, also needs to be
    improved. The MEI is a weighted average of price changes for inputs,
    which include provider time and effort (work, non-physician employees,
    and office expenses) used to provide care. The outdated MEI was
    developed in 1972 and only accounts for growth in labor productivity
    which overstates productivity gains in services.
        In its framework, the Medicare Payment Advisory Commission (MedPAC)
    recommends that the MEI measure inflation in practice costs and that
    productivity be separate from the MEI. In addition, MedPAC recommends
    that the productivity adjustment be based on multi-factor productivity
    (which would include both labor and capital inputs), instead of labor
    productivity. Making this change would ensure that it would account for
    changes in productivity for all relevant inputs used to provide
    services. According to MedPAC, this would significantly reduce the
    productivity adjustment that CMS uses currently in updating the
    Medicare fee schedule. APTA urges Congress to adopt MedPAC's
    recommendation regarding MEI.
    Action Needed by the Subcommittee on Health
        APTA commends Congress for the 1.5% increase in 2004-2005 and urges
    the Committee to consider the following immediate actions to address
    the problem:

          Move forward with a MedPac recommended 2.7% increase for
    CY 2006 to avoid the proposed 5% cut.
          Adopt MedPAC's framework for updating the Part B provider
    fee schedule, which includes eliminating the sustainable growth rate
    (SGR) and replacing it with a factor which will more appropriately
    account for changes in the cost of providing services.
          Remove Medicare-covered drugs from the SGR in order to
    prevent physician services from exceeding the SGR target.
          Update and improve the MEI so that it measures inflation
    in practice costs and separates productivity.

        It is important that Congress act this year as CMS has projected
    that the formula will produce significant negative payment updates
    beginning in 2006. Should Congress fail to act, physical therapists and
    other healthcare professionals will experience draconian cuts in
    reimbursement over the next several years.
        APTA feels strongly that remedying this issue must not be a budget
    neutral exercise. Clearly, additional resources are necessary to
    address this fundamental problem. We recommend the Committee seek
    appropriate resources through the Budget Committee to meet this
    challenge and other necessary Medicare reforms.
    Conclusion
        As the older adult segment of our population continues to rapidly
    grow, it will be paramount that they have access to qualified
    healthcare professionals who are able to serve their healthcare needs.
    Prompt and coordinated services provided by health professionals can
    help to avoid hospitalization, decrease the length of institutional
    stay, reduce the amount of care required after discharge, prevent
    complications, and improve the individual's level of function.
    Continued cuts to payments may force healthcare professionals to limit
    the number of Medicare patients they serve. Therefore the health of
    older Americans will be at risk if access to and payment of healthcare
    providers does not keep pace with the growing number of Medicare
    beneficiaries.
        Thank you for the opportunity to submit this testimony before the
    Subcommittee.

              Statement of Coalition for Patient-Centered Imaging
        The Coalition for Patient-Centered Imaging (CPCI) represents the
    undersigned healthcare organizations committed to ensuring that
    patients have full access to high quality, convenient, and up-to-date
    imaging technology. The Coalition organized in response to efforts to
    limit the availability of imaging services provided in physicians'
    offices.
        As the use of imaging services has increased, some medical
    organizations and health plans have sought to place the ``blame'' for
    this change on physicians, such as obstetricians/gynecologists,
    neurologists, orthopaedic surgeons, cardiologists and urologists, to
    name a few, who use these technologies in their office practices.
    Because these physician services are included under the volume
    considerations of the sustainable growth rate, they are clearly
    relevant to today's hearing on physician payments.
        Office-based imaging services offer three important advantages to
    patients. First, office-based imaging speeds correct diagnosis and
    treatment of the patient's medical condition. For example, a patient
    who visits an orthopaedic surgeon with knee pain will almost certainly
    need an image of the knee for proper diagnosis. If the orthopaedist
    provides these services in the office, examination, diagnosis and
    initiation of therapy can be done in one encounter with the patient. If
    the physician were not able to provide the service, diagnosis and
    treatment would be delayed until the patient was seen by the
    radiologist and that physician sent the report back to the
    orthopaedist. Another patient visit to the orthopaedist would be needed
    to review the findings and determine the appropriate therapy. This
    results in unnecessary delays in treatment and added costs as noted
    below.
        Second, as can be seen from the preceding scenario, in-office
    imaging is very convenient for the patient. This is especially
    important for elderly Medicare beneficiaries who may have limited
    transportation options or mobility problems. The fact that their
    physician is skilled in both the imaging aspect and physiology of their
    ailment increases patient confidence as well.
        Third, in-office imaging can limit Medicare spending by reducing
    the number of office visits and other physician encounters that are
    billed to the system. By providing ``one stop shopping'' the
    orthopaedic surgeon has reduced the number of office visits required to
    complete the diagnosis and treatment decisions for the patient. The
    alternative requires one visit to the physician to determine that an
    image is needed. This is followed by the encounter with the radiology
    practice. Finally, the patient must return at least once to the
    physician's office for review of the image and treatment decision. All
    of these encounters engender a separate billing to Medicare. In-office
    imaging reduces the number of billed encounters, thereby reducing
    spending for evaluation and management services.
        The Medicare Payment Advisory Commission (MedPAC) is in the process
    of finalizing its March report to Congress that will include
    recommendations relating to imaging services. They fall into two main
    categories: (1) safety and quality and (2) billing and payment. CPCI
    has cautioned MedPAC to frame any recommendations carefully to ensure
    that they are not interpreted in a manner likely to impede patient
    access to high quality physician imaging services.
        Furthermore, we have urged the Commission to assure that any
    statistics cited in the final report regarding utilization of imaging
    services do not overstate actual growth due to shifts in site of
    service. According to MedPAC, about 20 percent of the overall 8.6
    percent growth in imaging services are attributable to shifts in site
    of service, rather than new volume. If these shifts in site of service
    were appropriately accounted for, the actual overall growth rate for
    imaging would be about 6.9 percent by our estimates. Because some
    interests will urge Congress to respond to the increase in imaging
    services, we believe it is important not to overstate that number.
    Congress needs greater certainty in the data on increased use of
    imaging services than now exists. It is also important to understand
    that the greatest increases are in the higher technologies, such as CT
    and MRI, areas already dominated by radiology.
        The public needs to understand the extraordinary contributions of
    diagnostic imaging to physicians' ability to diagnose and treat illness
    quickly and accurately. We do not believe that the issue of whether or
    to what extent the increase in diagnostic imaging utilization is
    medically unnecessary has been fully explored, and, therefore, we
    believe any action, such as mandatory accreditation and privileging,
    that could result in arbitrarily limiting diagnostic imaging
    utilization would not be appropriate.
        Opponents of office-based imaging have challenged the competence of
    the physicians who provide such services, as if only they possess the
    knowledge required to safely perform and interpret diagnostic imaging.
    The ability of a physician to interpret a diagnostic image cannot be
    determined based exclusively on the physician's specialty. In fact all
    specialties include as a part of their training the education and
    experience needed to use the imaging technologies that have become an
    essential component of their practice. If Congress looks to the use of
    accreditation programs as a means of assuring safe and appropriate use
    of imaging, it is critical that those organizations that explicitly or
    implicitly authorize only radiologists to perform or interpret imaging
    studies not be the sole source of accreditation. To the extent that
    specific accreditation organizations are named, we urge that a number
    of such organizations be included, to avoid any implication that
    Congress endorses any particular set of standards.
        Congress should not assume that there is consensus in the physician
    community regarding the training, experience, and other requirements
    for interpreting physicians in each modality. In fact, standards of
    practice are always evolving and it is not uncommon for there to be
    disagreement regarding the appropriate training and experience
    standards among different specialties or even within a particular
    specialty. We seriously doubt whether sufficient credible data exists
    to determine which standards are appropriate. In addition, we do not
    believe it is practical or prudent to place CMS in the position of
    arbiter in this arena, nor do we believe that it is appropriately
    within the purview of the Federal Government to review each
    interpreting physician's particular credentials.
        CPCI also cautions Congress from accepting the notion that
    significant cost savings to the Medicare program can be achieved by
    mandating accreditation and physician qualifications without a thorough
    analysis into why growth in imaging services is occurring and who is
    responsible for that growth.
        Those who purport significant cost savings claim that the growth in
    imaging services is due to inappropriate utilization. However, the few
    studies that MedPAC has cited during its public discussions to justify
    its recommendations for accreditation and privileging are insignificant
    and overtly biased. For example, MedPAC has referenced a 1998 study by
    Verrilli for Blue Cross Blue Shield of Massachusetts that suggests 2
    percent savings in imaging services were realized when physician
    privileging and facility accreditation standards for diagnostic imaging
    services were combined. However, MedPAC has failed, in public
    discussions, to acknowledge that the study found a higher failure rate
    among chiropractors and podiatrists than among medical and surgical
    specialists during site inspections. We suggest that MedPAC's claim of
    cost savings should not be based on a study that found a higher failure
    rate among non-physician providers that have limited ability to bill
    Medicare for imaging services. In another study frequently cited by
    MedPAC (Moskowitz), the findings were based solely on an examination of
    radiography, or X-rays, and did not outline any clear cost savings.
    While quality improvement is a goal shared by all physicians, to assume
    savings from such studies is inherently risky.
        Congress should be cautious about statements that raise issues of
    imaging safety in the absence of credible and impartial studies
    documenting that medical imaging raises serious public safety concerns.
    Data cited on this issue in prior MedPAC reports is based on an
    unpublished survey conducted in Utah by a company that sells radiology
    benefits management services to insurers and authored by a radiologist
    who is one of the most vocal opponents of in-office diagnostic imaging.
    Various aspects of medical imaging equipment safety are already
    regulated by the Nuclear Regulatory Commission, the Food and Drug
    Administration, the Occupational Safety and Health Administration and
    by state authorities. In the absence of credible, published, peer-
    reviewed literature documenting safety concerns arising from the use or
    misuse of diagnostic imaging, we urge Congress to shy away from the
    conclusion that these agencies are not performing their designated
    functions adequately.
        MedPAC has proposed changes to coding edits and billing practices
    that could reduce the number of individual imaging services that can be
    billed by physicians. As imaging technology has evolved, it is
    appropriate that Congress review current billing rules to determine if
    they are still relevant for current use. It is not yet clear to what
    extent savings might be found. We believe that further analysis is
    needed before Congress directs CMS to incorporate new billing rules.
        CPCI appreciates the opportunity to provide these comments to the
    Subcommittee on the subject of the current use of imaging technology in
    medical practice. We urge caution in the examination of MedPAC's
    recommendations and encourage Congress to assure that any actions it
    takes in this area reflect the consensus of a broad and balanced group
    of affected organizations and are done in the best interests of
    Medicare beneficiaries.

        American Academy of Family Physicians
        American Academy of Neurology
        American Academy of Ophthalmology
        American Association of Clinical Endocrinologists
        American Association of Orthopedic Surgeons
        American Association of Neurological Surgeons
        American College of Cardiology
        American College of Obstetricians and Gynecologists
        American College of Surgeons
        American Gastroenterological Association
        American Medical Group Association
        American Society for Gastrointestinal Endoscopy
        American Society of Breast Surgeons
        American Society of Echocardiography
        American Society of Neuroimaging
        American Society of Nuclear Cardiology
        American Urological Association
        Congress of Neurological Surgeons
        Heart Rhythm Society
        Medical Group Management Association
        Society for Cardiovascular Angiography and Interventions
        Society for Cardiovascular Magnetic Resonance

                                         Critical Care Cardiology, Inc.
                                          Chula Vista, California 91910
                                                      February 11, 2005

    Honorable Members of House Ways and Means Committee
    United States House of Representatives
    Washington, DC

    Dear Respected Members:

        This letter is to inform you of an increasingly difficult situation
    being imposed upon myself and all physicians in the United States. As
    you may know, physicians since 1985 have had to endure annual cuts in
    Medicare re-imbursement rates. While the U.S. economy during this time
    has experienced unprecedented prosperity, we physicians have sustained
    continued reduction in our income. In fact, in 2005, if present rates
    are allowed to continue, physicians will get paid less than they did in
    1991 (CBS News Report, November 22, 2002). Indeed, I get paid less for
    a heart catheterization than a plumber gets for working on your pipes!
    Cardiologists get paid by MediCare $345.00 for performing a cardiac
    catheterization, a procedure requiring plastic tubes to enter the heart
    arteries to diagnose coronary artery blockages. Cardiologists have to
    train for at least 10 additional years out of college to perform these
    procedures. Yet, plumbers get at least $350.00 for fishing your wedding
    ring out of the pipe under the kitchen sink. They get paid 1\1/2\ times
    that amount if they have to work on evenings or weekends. Physicians
    get neither right. My own employess are permitted ``time and a half''
    if they work overtime, but I, as a physician, get no such right.
    Physicians have to go through seven to 10 years of extra schooling
    beyond college having to work >100 hrs/week and working 36 hours in a
    row every 3rd or 4th night to complete training as an MD or DO. Why
    this double standard?
        At the same time our overhead has climbed to 41% of the total
    operating budget as of 1999. To make matters worse, the Medicare system
    has increasingly complex rules and regulations making it necessary for
    professional billers and office managers to be able to conduct a
    physician's office. At this point many bright physicians will be forced
    to retire prematurely or change careers. Perhaps Dr. Frist, the Senate
    Majority Leader, saw this coming in 1990 when he chose to run for
    Senator to attempt to change this disturbing trend.
        I wish to invite you to spend 24 hours on call with me to
    demonstrate the value of cardiologists on call for potential heart
    attack victims. Even living the life of a doctor on call for one day
    will give you a glimpse of the investment in time, money and delayed
    gratification to achieve the skills and experience needed to properly
    take care of sick people. I am asking you as a champion of the rights
    of patients to make certain there will be bright enthusiastic doctors
    available when the baby boom generation reaches Medicare age. These
    people have paid into the system and deserve excellent care. We have
    the best medical care system in the world. Do not let this great system
    deteriorate into a labyrinth of bureaucrats and accountants. Let
    doctors be free to be doctors and allow the best physicians to care for
    patients without having to worry about how they can make ends meet.
        I am a cardiologist--I practice interventional cardiology. As you
    know 22 million people worldwide suffer from heart failure. Heart
    failure cost the Medicare system 44 billion dollars in 1999. This is
    the single largest expenditure for the Medicare system. As you well
    know, a timely cardiac catheterization and, if required, an
    intervention performed during an acute MI can reduce if not abolish
    altogether the prospect of heart failure. Yet the Medicare system has
    been systematically reducing reimbursements for cardiac catheterization
    and angioplasty for the last twenty years. Now a doctor gets $300 for a
    heart catheterization. He could not even get the fan belts in his car
    changed for $300. And for that $300, the doctor has to wait months to
    get paid. In fact, Medicare has long abandoned additional payments for
    middle of the night emergencies or weekend emergencies. Elective
    procedures get paid at the same rate as emergent procedures. Yet when
    my staff works even one extra hour in excess of their 40 hour week,
    time and a half kicks in. We are obligated by labor laws. Yet there are
    no such laws for doctors even though they routinely work in excess of
    100 hours per week. There is, therefore, no incentive (other than to
    save the patients life), to handle emergency heart ailments. As you can
    clearly see, the Medicare system presently provides disincentives for
    emergent procedures thereby increasing the incidence of heart failure.
    These very procedures that, if performed emergently by an experienced
    cardiologist, can save the life of a heart attack victim and more
    important save him/her from heart failure. These very procedures that
    can save the Medicare system 44 million dollars in expenditure for CHF
    therapy are being discouraged by Medicare!
        So far physicians have no alternatives to Medicare reimbursements.
    Moreover, whatever Medicare chooses to do, HMOs and insurance companies
    soon follow suit. We are at your mercy and yet I am certain if you
    understand the continuous cuts and slashes to physician's reimbursement
    that has taken place, you will understand our plight. If this trend is
    to continue, I and many of my collegues will have no choice but to give
    up clinical care of patients and find an alternative source of income.
    Already physicians are showing up on TV screens as `` Doctors to the
    Media.'' Many doctors are serving as consultants of medical devices and
    pharmaceutical companies as well as investment banking guides. These
    are talented physicians that have left clinical medicine because of the
    continued and relentless annual cuts in Medicare reimbursements. Why
    cut pay to doctors when doctors are your front line to patient care?
    Why not cut in places where there is excessive waste already? Let us
    examine objectively where there is waste and cut them out first.
    Doctors who help save patients money from unnecessarily expensive
    medications when cheaper drugs will do, should be rewarded. Physicans
    can be given incentives to help the government save money while
    preserving excellent health care. Government must also do more to curb
    cost with the larger portion of the Medicare budget: Medicare Part A.
    This and other ancillary services are where the bulk of the waste
    occurs. We physicians have too long taken the brunt of the cuts while
    hospitals and other ancillary agencies have only gotten pay hikes every
    year. Finally, insurance companies and HMOs must also be made to
    account for proper spending of Medicare funds. Medicare funds must not
    be available to pay for the multimillion dollars of HMO CEOs. In fact
    the HMO United Healthcare pays its CEO 75 million dollars. For that
    amount of money you can pay the annual salary of 7,500 physicians each
    at $100,000.00. That does not include the large administrative burden
    added from HMOs and insurance companies. According to a February 10
    article in the San Francisco Chronicle, 50% of Medicare funds are not
    used for direct patient care spending and are wasted.
        You as our Representatives and Congressional leaders now have the
    unique opportunity to initiate a true reversal of these disturbing
    trends in Medicine we have seen in the past twenty years. A few good
    people in the right position at the right time can accomplish a great
    deal. There has been no better time than now to objectively re-examine
    the flawed formula Medicare uses to pay physicians and replace it with
    the Physicians Payment Fairness Act S. 1707. It is my hope you now
    understand this true paradox in the Medicare system and are willing to
    fix it. We ask you to do your utmost to rectify the flawed formula for
    physician payments and put an end to annual reimbursement cuts for
    physicians. We doctors can do a lot to save the Medicare system of
    needless expenditures. Allow doctors to earn what from their expensive
    and long education. I am certain that you will make doctors and their
    patients your utmost priority in 2005!

                Respectfully Yours:

                                              Vimal Indravadan Nanavati

    Statement of Dawn Lipthrott, Ethical Health Partnerships, Winter Park,
                                    Florida
        I am grateful for this opportunity to speak to you about the
    proposed reductions in Medicare reimbursement for physicians and the
    SGR formula.
        I understand and appreciate your great concerns about the ability
    to finance Medicare for the future while trying to be fair to
    physicians. This becomes even more of an issue for you in light of the
    recent budget estimate for the prescription drug benefit, which assumed
    the 5% per year reductions in reimbursement for physicians and is
    nearly double the original estimate. You are faced with urgent fiscal
    challenges, as are many physicians. However, even in the face of these
    challenges, I urge you to avoid the temptation to take the easy way of
    adjusting expenditures by cutting physician reimbursement. Physician
    payment is no doubt the easiest to control, but it puts undue burden on
    the very people who provide the care--and it avoids the more difficult
    and high cost problems like reducing obesity, non-compliance with
    treatment, and defensive medicine--each of which costs more than the
    entire amount Medicare spends on physician services. Each one of these
    problems also increase both the volume and intensity of Medicare
    services. In contrast, physician care has historically been the slowest
    growing category of healthcare spending and has increased very little
    in recent years. (Source: Tracking Health Care Costs, Strunk, BC and
    Ginsburg, PB, Center for Studying Health System Change, December 2004.)
    Ethical Health Partnership as a Framework for Your Decision
        I am a patient, a relationship specialist, and I represent
    EthicalHealthPartnerships.org, a beginning community of people
    committed to building more ethical health partnerships not only between
    physicians and patients, but also between all groups that impact health
    care, whether that be your Committee, Congress, insurance companies,
    hospitals, pharmaceutical companies, the legal profession and others.
        While the purpose of health care is the well-being of the patient,
    the core of health care is the physicians who provide care for the
    patient. Ethical health partnership implies that the good of one is not
    gained at the undue expense or damage of the other. To place unfair
    burden on physicians, and even to damage some through reducing payment,
    is in our view, unethical and unacceptable. You would create a
    situation of further injustice by essentially penalizing physicians for
    expansion of Medicare benefits and increased utilization, when both are
    outside their control.
        The attempt to save Medicare or balance the budget by decreasing
    reimbursement and placing undue financial burden on physicians will
    erode the quality and accessibility of health care at it's core. This
    is not only a physician issue, it is a patient issue.
    Past `Increase in Medicare Spending on Physician Services' is
            Misleading
        In the hearing of your Committee on February 10, 2005, Rep. Pete
    Stark (D-Calif) stated that ``aggregate payments have increased
    comfortably'' with spending on physician services increasing 6%
    annually since 1997.
        While the increase may be true overall, it does not take into
    consideration the uneven distribution of that spending or the
    increasing cost of living, practice expense, and malpractice premium
    increases that have far exceeded any benefit from that 6%. The general
    figure of 6% does not acknowledge that many physicians in high risk
    specialties, in high malpractice rate states, and/or those in solo or
    small group practices are not experiencing `comfortably' increasing
    payments. The increase in physician services payment can have more to
    do with increased volume of services. That must be balanced by the fact
    that average practice expenses for physicians in general has increased
    approximately 22% from 1995 to 2004. (Source: American Medical
    Association.)
    Specialties Like General Surgery Have Had Decreasing Reimbursement for
            10 Years with Significantly Increasing Expense
        Some medical specialties like general surgery have had more
    difficulty than others, partially due to outdated RBVRS formulas in
    considering physician work, practice expense and liability risk. As a
    result, Medicare rates for common surgical procedures like gallbladder
    surgery, partial mastectomy, hernia repair and others have already been
    reduced 15-29% over the past 10 years.
        At the same time, in Florida, the average malpractice premiums for
    general surgeons in Florida, excluding the Miami area, was $174,000 in
    2003 and $227,000 in the Miami area in 2003, an increase of 30% from
    the previous year. In 2004, the rate in Miami went up to $277,000 and
    while I don't have the exact amount for the rest of the state, the
    percentage of increase is usually close to the same. Florida has seen
    double digit increases, sometimes 60-70%, in premiums for over 4 years
    for surgeons and other higher risk specialties. Surgeons in Miami paid
    220.2 percent more than those in Los Angeles in 2003. (Source: Medical
    Liability Monitor.) Similar percentage increases have occurred in other
    states as well.
        The trend of increasing practice expense and increasing malpractice
    premiums will continue with practice expenses expected to increase 19%
    from 2006-2012. (Source: American Medical Association.)
    Reduced Access and Quality to ALL Adult Patients, Not Just Medicare
        According to a report on your February 10th hearing, physicians
    told you that the proposed cuts could result in reduced access to care
    for Medicare patients and that fundamental change in the reimbursement
    system is needed.
        However, the actions you take to address these issues will have
    far-reaching negative consequences beyond physicians and patients
    directly involved in Medicare. The cuts will reduce accessibility and
    possibly quality of care for nearly every adult patient in the United
    States and every physician who provides care to adults.
    Medicare Cuts Will be Mirrored by Private Health Insurance Plans
        Most insurance companies, network management companies and health
    plans base their rates of reimbursement on the Medicare rates, even
    though Medicare was never intended to be the model for reimbursement.
    Some base their fees just above Medicare rates and others set their
    rates at 80% of the Medicare rate. Therefore if the cuts are allowed,
    the same percentage cuts will be mirrored to a great extent in the
    private insurance sector, putting an enormous burden on physicians.
    Solo and small group practitioners, especially those in certain
    specialties, like surgery and Ob-Gyns, will find it increasingly
    untenable to remain in practice.
    The Medicare Cuts Would Put My Healthcare, as a Non-Medicare Patient,
            at Risk
        I, a middle class patient with private insurance, living in
    Orlando, Florida, have had my gynecologist close her practice, my
    family's orthopedic surgeon stop doing surgery, and our family's
    cardiologist stop doing any invasive procedures--all because of their
    stated reasons of decreasing reimbursement and increasing malpractice
    risk and costs. These are physicians in their 50's, in the prime of
    their career in knowledge and experience, who love medicine and
    patients, who are respected in their community, but who find it
    increasingly difficult to sustain a practice.
        My own surgeon, who is known for giving exceptional care and who
    has over 25 years experience in our community, was paid less for
    gallbladder surgery in 2004 by private insurance than she would have
    been paid by Medicare in 1995. This is a direct result of the
    progressive reductions in Medicare payment and the fact that private
    insurance companies and plans base their rates on the Medicare
    schedule. That is unjust. Expecting her and other surgeons and
    specialties to absorb a further 30% reduction puts the physicians, and
    their patients, at risk.
    Physician Dissatisfaction, Stress and Quality of Care
        In addition to potential restrictions in access for all adults,
    there is indication that quality of care may suffer as well if the
    proposed cuts are left in place.
        A recent article in Health Affairs talked about the connection
    between physician dissatisfaction and the quality of patient care,
    including dissatisfied physicians' own perceptions of their reduced
    ability to provide the quality care they want to give their patients.
    (Source: Caring for Patients in a Malpractice Crisis: Physician
    Satisfaction and Quality of Care, Michelle M. Mello; David M. Studdert;
    Catherine M. DesRoches; Jordon Peugh; Kinga Zapert; Troyen A. Brennan;
    William M. Sage, Health Aff 23(4):42-53, 2004.)
    DIRECTIONS FOR THE FUTURE
    A Note on the Pay for Performance Suggestion
        Rep. Nancy Johnson (R-Conn.) has suggested a pay for performance
    approach. Some health plans have begun similar reimbursement strategies
    with mixed benefits and problems. Adding bonuses, rather than
    withholding fees for services already provided is essential in terms of
    fairness. One of the problems with the approach is that if performance
    is based on successful outcomes, factors like non-compliance of
    patients with treatment, or patients with multiple conditions that
    impact outcome could unfairly penalize physicians doing everything in
    their power to provide quality care. And the bigger problem is that
    those patients may find it increasingly difficult to find physicians to
    take them as patients.
        Another potential problem in pay-for-performance programs is that
    some specialties, like surgery, are difficult to separate from the
    system in which the services are performed. In the statement to the
    Federal Trade Commission and Department of Justice by LaMar McGinnis,
    MD, FACS of the American College of Surgeons Quality and Consumer
    Information testimony on May 30, 2003, while supporting quality
    performance, he states:

              ``In addition, surgeons and the systems of which they are
            part are hard to separate. This makes it difficult to develop
            meaningful, surgeon-specific quality data. Primary care lends
            itself more to adherence to public health driven protocols that
            prevent or ameliorate chronic disease. There are guidelines
            that work to manage ischemic heart disease, high blood
            pressure, diabetes, and other conditions. On the other hand,
            surgical quality does not lend itself as easily to process
            measures. We feel strongly that the only appropriate way to
            measure the quality of surgical care is truly risk-adjusted,
            outcomes assessments reported before, during, and after the
            procedure. Risk-adjustment allows both the patient and the
            healthcare system to know that the service received was
            appropriate, considering the state of the patient and his
            disease.
              Unlike surgical care, there are some aspects of primary care
            that lend themselves to process measures as indicators of
            quality. For example, repeated visits to monitor the state of
            chronic care make sense and can be an indicator of quality in
            primary care. Physicians can diagnose increased sugar in
            diabetics, detect glaucoma, and discern extremity circulation
            problems as a result of scheduling repeat patient visits, thus
            the use of administrative ``process'' measures can yield
            considerable information about quality of care. In contrast,
            repeat visits to a surgeon or to the operating room are not
            generally viewed as quality indicators. In addition, surgeons
            are more likely to be confronting an emergent problem that must
            be identified in the first encounter, and the nature of the
            interventions they take are very different.''

        The American College of Physicians issued a position paper in
    April, 2004 on pay for performance that listed recommendations for the
    approach to be fair and effective. Some of their recommendations are:

          To create voluntary demonstration programs of performance
    measurement before implementing system-wide change.
          To use widely accepted, evidence-based measures that
    ``provide valid and reliable comparative assessment across
    populations.''
          To avoid rating physicians on factors that they cannot
    control (like compliance).
          To use incentives that are positive, not punitive.
          To use pay for performance to foster quality improvement,
    not just competition.
          To ensure that any data collection needed to demonstrate
    performance will protect patient privacy and avoid adding to the
    paperwork burden or additional costs of data collection.

        One of our major concerns of pay-for-performance is that `quality'
    may be based on how much money the physician or facility saves, rather
    than the quality of care provided. When physicians cut back or delay
    referrals or specialists, tests, patient care can suffer. That again
    creates potential risks for patients and for physicians.
        Because of these concerns and needs, I urge you to look at the
    possibility of pay-for-performance not as an instant solution, but as
    one possible direction that requires time to plan, study and implement.
    Demonstration projects should be initiated not only in large group
    practices, as currently planned, but in practices of varying sizes and
    specialties (included solo practices) to study the fairness and
    feasibility before system-wide implementation.
        It should also be noted that in some instances when private health
    plans have implemented this approach, they did not accurately forecast
    the budget expenses associated with paying for performance and paid
    physicians less than they had originally agreed.
    Remove Part B Drugs and Supplies From Spending Targets
        One option that others have recommended is that you remove Part B
    drugs and supplies from any determination of Medicare spending with
    target limits. We view this as one more band-aid approach and we
    strongly recommend a new system of determining reimbursement levels and
    increases.
    Recommendations
        We strongly urge you to consider not only the financial
    limitations, but also the ethical issues in this Committee's and the
    government's relationship with both patients and physicians. We believe
    that ethical decisionmaking includes the elements of fairness, justice,
    responsibility, valuing the well-being of all involved, respect, not
    placing undue burden, and preventing the well-being of one to be gained
    at the expense or detriment of another.
        In light of those factors, the most ethical decision in your health
    partnership with physicians and patients is to prevent the proposed
    cuts in reimbursement for 2006-2012, even if viable, clear solutions
    for budget concerns are not yet evident. Reducing physician
    reimbursement while their expenses are increasing at double-digits,
    weakens the entire system of health care and puts physicians and
    patients at risk. The ongoing problem of fair reimbursement for
    physicians should be addressed for the long term and not based in one
    or two year reprieves as in the past. To me, it is unconscionable that
    this problem has been known for so long and has not been adequately
    addressed. I hope you will be the ones to finally accomplish that.
        Ethical health partnership also require that you consider that the
    impact of actions taken to address Medicare problems will create direct
    impact on the reimbursement schedules of private health plans. Nearly
    all doctors and patients will be affected, even if they do not
    participate in the Medicare program. Those taking Medicare patients
    will receive double impact.
        Moreover, we believe that ethical health partnership requires that
    a more just and equitable method of determining reimbursement be
    developed and implemented for the long term. There is substantial
    agreement in Congress and in health care that the formula is seriously
    flawed and that past attempts to modify it have failed. The SGR formula
    is also unfairly applied to physicians as a group, while other
    healthcare entities are not governed by the formula.
    Therefore we suggest:
          Base rates on current medical indices and update the
    RBVRS to better reflect current practice expense and liability.
    MedPac's annual reports to the Congress recommend a physician fee
    update based on MEI. While it will increase the expenditures of the
    Medicare program, it makes health care a priority, creates positive and
    relatively fee updates, more accurate predictions of future needs, and
    protects patients and physicians and the quality health care we all
    want.
          Implement more current geographic profiles for
    consideration of malpractice premium areas, like Florida and other at
    risk states, in determining payment.
          Provide either regular cost-of-living increases or
    regular increases to adjust for inflation and ongoing average increases
    in practice expenses.
          Remove volume and intensity of service factors from the
    determination of physician payment. Most often this is outside the
    physician's control. In addition, the idea of rewarding physicians for
    cutting back on service or limiting referrals or tests, sets up a
    danger for patients in terms of quality health care and for physicians
    in terms of liability.
             Sustaining the Medicare budget short term and over the long
    term, should not be bolstered by penalizing physicians each time
    Medicare usage increases, or when there is a budget deficit or downturn
    in the economy. Decreasing physician fees weakens the system by putting
    patients and physicians at risk. Using physician payment as a way of
    managing the budget is easy because it is a factor over which Medicare
    has direct control, but it does not begin to address the root causes
    fueling increasing costs.
             While the focus of your hearings is on the problems in
    physician reimbursement and we fully support an ethical and fair
    resolution of that, we recommend that you consider that in the context
    of other drivers of high cost. When you look at ways to finance fair
    reimbursement, it is essential to look at the bigger picture of what is
    increasing and will continue to increase Medicare costs.
          Therefore, we also recommend that your Committee make
    recommendations leading to appropriate departments to address those
    high cost factors that directly impact the Medicare budget. When you
    look at these factors and remember that the amount spent for Medicare
    reimbursement of physician services was $36.9 billion in 2000 and an
    estimated $54.2 billion for 2005, it is clear that addressing the
    biggest drivers of increasing costs makes more sense than penny-
    pinching with the providers of health care. (Source: MEDICARE PHYSICIAN
    PAYMENTS Information on Spending Trends and Targets--May 5, 2004
    Testimony Statement of A. Bruce Steinwald Director, Health Care--
    Economic and Payment Issues, Testimony Before the Subcommittee on
    Health, Committee on Energy and Commerce, House of Representatives
    www.gao.gov/cgi-bin/getrpt?GAO-04-751T.)
    Some of these high cost factors include:
          Increasing prevalence of obesity in adults and children:
    The rapidly rising prevalence of obesity puts people at greater risk
    for numerous serious illnesses such as certain forms of cancer
    (including breast and colorectal, kidney among others), diabetes, high
    blood pressure, arthritis, cardiovascular disease and more. The
    combined prevalence of both overweight and obesity averages 53.6%
    across all categories and is largest for those enrolled in Medicare
    (56.1%). Obesity-attributable expenditures by state totalled
    $75,051,000,000 from 1998-2000. We urge Medicare to work in partnership
    with private insurance to develop national and local campaigns to
    prevent and reduce obesity. (Sources: Estimated Adult Obesity-
    attributable Percentages and Expenditures by State (BRFSS 1998 to
    2000). http://www.naaso.org/statistics/obesity_exp_state.asp. Also:
    National Medical Spending Attributable to Overweight and Obesity.
    Finkelstein, EA et al, Health Affairs, May 14, 2003).
          Patient non-compliance with treatment for chronic
    conditions such as diabetes, high blood pressure and others. In 1992,
    the cost of medication noncompliance alone was $100 billion ($45
    billion in direct medical costs). $31.3 billion was spent on nursing
    home admission due to noncompliance, $15 billion was spent on hospital
    admissions due to noncompliance, $1,000 was spent per year per non-
    compliant patient versus $250 spent on per compliant patient. (Source:
    Compliance in Elderly Patients, University of Arkansas College of
    Pharmacy http://www.uams.edu/compliance/. Also, Schering Report IX: The
    Forgetful Patient: The High Cost of Improper Patient Compliance. Also
    Standberg, LR, Drugs as a Reason for Nursing Home Admissions, American
    Healthcare Association Journal 10, 20, 1984).
          Defensive medicine: Explore meaningful alternatives to
    the current tort system for handling complaints and patient injury to
    reduce cost, improve patient safety, and avoid unnecessary tests and
    procedures. If reasonable limits were placed on non-economic damages to
    reduce defensive medicine, it would reduce the amount of taxpayers'
    money the Federal Government spends by $23.6-42.5 billion per year.
    (Source: Confronting the New Health Care Crisis, U.S. Department of
    Health and Human Services, July, 2002).
          Rising drug costs, especially for Medicare beneficiaries:
    Marketing and research companies such as Delta Marketing Dynamics of
    New York and Price Alert show that 31 of the top 50 drug companies
    raised prices from November 2004-January 2005. The year before, 22 of
    those companies increased prices. Analysts believe that this is part of
    the preparation to take advantage of the prescription drug benefits
    through Medicare. We recommend that Congress change the law recently
    passed that prohibits Medicare from negotiating prices with
    pharmaceutical companies. Veteran Affairs already negotiates their
    prices. Even under the best of reimbursement systems, you negotiate
    physician services. Negotiating with pharmaceutical companies is the
    sensible choice of action.

        Utilization will increase by the nature of the aging population and
    the fact that people live longer. But every attempt needs to be made by
    Medicare, private insurance, patients, and all others to take joint
    responsibility for addressing those other contributing factors.
    Medicare could think beyond the short-term and focus on those areas
    which would both improve health and reduce costs.
        I realize that truly ethical and fair reimbursement of physicians
    without changes elsewhere in the federal budget could affect the long
    term sustainability of the Medicare program. However, failure to
    progressively and consistently address the real causes of rising costs
    and to take steps to create a more just reimbursement system will lead
    to a deeper erosion of physicians' ability to sustain their practices
    and provide the care that Medicare is designed to support. That will
    affect every person, not just Medicare beneficiaries.
        We urge you to make decisions for true ethical health partnership
    with patients and their physicians by preventing further cuts in
    reimbursement and creating a more just payment system.

     Statement of H. Stephen Lieber, Healthcare Information and Management
                       Systems Society, Chicago, Illinois
        Congresswoman Johnson and Members of the Subcommittee on Health of
    the House Committee on Ways and Means, thank you for this opportunity
    for the Healthcare Information and Management Systems Society (HIMSS)
    to submit testimony on potential solutions for problems with the
    current physician payment formula.
        My name is Steve Lieber and I am president and chief executive
    officer of HIMSS. HIMSS is the healthcare industry's membership
    organization exclusively focused on providing leadership for the
    optimal use of healthcare information technology and management systems
    for the betterment of health care. Founded in 1961 with offices in
    Chicago, Washington, D.C., and other locations across the country,
    HIMSS represents more than 15,000 individual members and 240 corporate
    member employing more than 1 million people. HIMSS frames and leads
    healthcare public policy and industry practices through its advocacy,
    educational and professional development initiatives to promote
    information and management systems' contributions to ensuring quality
    patient care.
        HIMSS agrees with your statement, Madame Chair, that ``physicians
    are essential to the Medicare program and without their participation
    our seniors will lose access to high-quality care.'' And, we applaud
    your recognition of the relationship between payment systems and
    quality and efficiency.
        Specifically, HIMSS would like to recommend the following three
    suggestions to your Subcommittee for consideration:

          Continuation and expansion of pay-for-performance
    initiatives through the physician reimbursement system that require:
            Adoption of certified electronic health record (EHR)
    products;
            Achievement of defined quality outcomes; and
            Reporting of performance measures.
          A cost/benefit analysis of including in the Medicare
    physician fee schedule virtual provider-patient visits in response to a
    patient's inquiry that support (a) disease management, and (b)
    physician oversight of a diagnosed condition or similar criteria.
          Encourage physician adoption of certified EHRs by
    exploring cost differential options for Medicare enrollees.

        In its 1997 report, the Institute of Medicine (IOM) estimated that
    between 44,000 and 98,000 preventable deaths occur each year as a
    result of medical errors in hospitals. These events are occurring at
    the same time that healthcare costs are escalating at double-digit
    rates. The Office of the National Coordinator of Health Information
    Technology of the Department of Health and Human services noted that
    2004 will be the fifth consecutive year of double-digit increases in
    healthcare costs; a trend exerting increased pressure on payers,
    including Medicare, to find new solutions. But, with the dual realities
    of ever-advancing medical science and an aging U.S. population, the
    demand for care will only increase and further drive costs upwards.
        The present situation grows increasingly dangerous and expensive.
    However, as the IOM has declared,\1\ widespread adoption of HIT--such
    as EHRs--can reduce the risk of medical errors. Studies also show that
    such systems not only improve quality and safety, but also advance
    efficiency of care through lower utilization, better management of
    chronic disease, increased longevity, and increased health status.\2\
    ---------------------------------------------------------------------------
        \1\ Institute of Medicine (IOM), Committee on Quality in Healthcare
    in America. ``To err is human: building a safer health system.''
    Washington, DC: National Academy Press, 1999.
        \2\ Balas, E.A., and S.A. Boren. ``Managing clinical knowledge for
    health care improvement.'' Yearbook of Medical Informatics (2000): 65-
    70.
    ---------------------------------------------------------------------------
        Unfortunately, the growing body of evidence showing advancements in
    quality and efficiency resulting from the use of HIT has not translated
    into rapid adoption by physicians. It is estimated that only 6% to 13%
    of physician practices have an EHR in place and adoption is lowest
    among small- and medium-sized practices where a majority of physicians
    practice.\3\ There are a number of barriers to widespread adoption; one
    such barrier is financial, including limited access to capital and a
    lack of incentives.
    ---------------------------------------------------------------------------
        \3\ Miller, R.H., J.M. Hillman, and R.S. Given, ``Physician Use of
    IT: Results from the Deloitte Research Survey.'' Journal of Healthcare
    Information Management, Vol. 18, No. 1 (2004):72-80.
    ---------------------------------------------------------------------------
        The cost of acquiring an EHR for a small physician group practice
    of 1-5 doctors is estimated at $16,000-$36,000 per physician.\4\ Plus,
    there are annual operating costs to be borne by the practice. Solo and
    small physician group practices are small businesses. And like other
    small businesses, limited cash and earnings restrict technology
    expansion. However, linking payments with quality and efficiency
    measures in the physician reimbursement system can address such
    financial barriers.
    ---------------------------------------------------------------------------
        \4\ Miller, R.H., Sim, I., Physicians' Use of Electronic Records:
    Barriers and Solutions, Health Affairs, March 2004.
    ---------------------------------------------------------------------------
        Significant discussions are underway to make a pay-for-performance
    system effective and affordable. Within the past several weeks,
    President Bush proposed to double the budget to $125 million for
    demonstration projects related to HIT. Last year, Senator Judd Gregg
    introduced S. 2710 that contained provisions with loan guarantees and
    grants for the purchase of interoperable HIT systems. The Department of
    Health and Human Services' Framework for Strategic Action describes a
    goal centered largely around efforts to bring EHRs directly into
    clinical practice; thereby reducing medical errors and duplicative
    work, and enabling clinicians to focus their efforts more directly on
    improved patient care.
        A key action called for in the Strategic Framework is the
    establishment of private sector certification for EHR products. HIMSS,
    together with the American Health Information Management Association
    and the National Alliance for Health Information Technology, launched
    such an organization last fall. We are well on our way to having the
    certification mechanism ready for the industry to utilize.\5\
    ---------------------------------------------------------------------------
        \5\ http://www.cchit.org.
    ---------------------------------------------------------------------------
        With such guidance in place to ensure that the technology available
    in the marketplace is robust, interoperable, and capable of supporting
    strategic goals, the Strategic Framework calls for payers to provide
    incentives for EHR adoption. A report by the Health Strategies
    Consultancy for the Foundation of the eHealth Initiative identified
    four types of financial incentive models used to promote the adoption
    of HIT: payment differentials, cost differentials, direct
    reimbursement, and shared withholds.\6\
    ---------------------------------------------------------------------------
        \6\ http://www.healthstrategies.net/research/docs/
    HIT_Incentives_Report_Foundation_for_eHI.pdf.
    ---------------------------------------------------------------------------
        Payment differentials, also known as pay for performance, provide
    bonuses for results (e.g., IT implementation or quality outcome
    measures). Cost differentials target consumer behavior by employing
    lower co-payments or deductibles at providers who have adopted IT or
    achieved certain quality standards. Direct reimbursement is pay for
    specific procedures involving technology, such as virtual provider-
    patient visits. The shared withhold model withholds or delays provider
    payments rate increases with release subject to IT adoption or quality
    improvements.
        Already, some payers have implemented one or more of these
    approaches. Blue Cross Blue Shield of Rochester, NY, Empire BCBS and a
    number of other BCBS plans have programs that pay incentive bonuses for
    adoption of IT and standards that improve the safety of care. Bridges
    to Excellence, a coalition of physicians, health plans and employers
    have several programs that pay physicians who implement specific HIT
    processes to reduce errors and increase quality. And states, such as
    Wisconsin, are exploring changes to tax structures to encourage
    physicians and hospitals to purchase and implement HIT.
        The Medicare program, as you know, is also exploring incentive
    options. A three-year demonstration project launches April 1 in 10
    large medical groups across the country with CMS paying participating
    clinicians more if they improve the efficiency and quality of care
    while lowering costs.
        The Connecting for Health project coordinated by the Markle
    Foundation estimates that incentives in the range of $12,000 to $24,000
    per full-time physician per year should achieve broad adoption of EHRs
    on an accelerated timetable. This amount translates into about $3 to $6
    per patient visit or $.50 to $1.00 per member per month for enrolled
    plans.\7\
    ---------------------------------------------------------------------------
        \7\ http://www.connectingforhealth.org.
    ---------------------------------------------------------------------------
        In aggregate, incentives at this level require an investment of
    approximately $21.6 to $43.2 billion across all payers, according to
    the Connecting for Health work. The Federal Government, as the largest
    payer of health care, will need to contribute its share in an incentive
    system if it is to work. Without the Federal Government's incentives,
    there will not be an adequate level of funding for physicians to
    acquire and implement HIT.
        However, the current physician reimbursement formula is not
    designed to assist physicians with IT adoption and--in fact--may
    achieve counterproductive results. The Office of the Actuary for the
    Centers for Medicare & Medicaid Services, as reported in the 2004
    Annual Report of the Medicare Trustees, projects that under the current
    formula Medicare will reduce payment rates to physicians by
    approximately 5% annually for seven years, beginning in January 2006.
    Physician payment rates would decline more than 31 percent from 2005 to
    2012, while costs of providing services would increase by 19 percent
    over the same period.
        If this methodology continues, declining Medicare payments to
    physicians will create further barriers to IT adoption and therefore
    perpetuate barriers to improvements in the efficiency and quality of
    care. Savings may occur in the short term, but declining rates of
    participation in the Medicare program and failure to improve patient
    safety and quality will only result in higher, long term costs to
    Medicare and the U.S. healthcare system.
        We are at an exciting juncture. Technology now has the components
    necessary to truly impact the quality, safety, and cost-effectiveness
    of patient care. Consumers, clinicians, payers, and other stakeholders
    are all exploring ways to get appropriate solutions into the hands of
    small- and mid-sized practices across the United States. The
    Subcommittee has a unique opportunity to positively influence these
    efforts. Again, on behalf of the HIMSS individual and corporate
    members, I thank the Subcommittee for this opportunity to share with
    you our views and we look forward to working with you on these
    recommendations to improve health care for all.

                                          Managed Care Advocacy Program
                                                     Toledo, Ohio 43620
                                                       February 9, 2005

    The Honorable Congresswoman Nancy Johnson, Chairman
    Subcommittee on Health
    2409 Rayburn Building
    Washington, D.C. 20515

    Dear Chairman Johnson:

        The Managed Care Advocacy Program (MCAP), is a benefits counseling
    program for seniors. We do one on one as well as group counseling in
    helping them through the maze of Medicare, Medicaid, Medicare Advantage
    Plans and the healthcare delivery system. We are a program of our local
    Area Office on Aging.
        On a daily basis, we connect with the senior population and hear
    their concerns and complaints.
        We encourage your Committee to consider modifying the current SGR
    system. We understand the financial challenges of the Medicare system
    and the need for fiscal discipline of this program. We believe this can
    be done without shortchanging the physicians who care for our elderly.
    We hear from our elderly seniors that physicians often express their
    discontentment with the Medicare payment system.
        Also addressed in this report was the fact that physician's
    compensation be based on quality and efficiency of care. If this is a
    concern, when physicians accept the Medicare Assignment, any concerns
    regarding these doctors should be addressed at that time. CMS would
    need a specific monitoring system to monitor quality and efficiency.
        MCAP does not support any reduction in payments to physicians who
    care for the elderly. However, we do support CMS in ridding the
    Medicare system of fraud and any person or healthcare provider
    participating in such. We believe this savings could aid in paying
    physicians fairly.
        We believe fiscal management must be found elsewhere--not in direct
    medical care to our elderly.

                Sincerely,

                                                  Elizabeth A. Flournoy
                                                               Director

      Statement of William F. Jessee, Medical Group Management Association
        Madam Chairman, Congressman Stark, and distinguished Members of the
    Subcommittee, thank you for your leadership on an issue that
    dramatically impacts the ability of physician practices to continue
    providing high quality care to patients, and especially for steps taken
    by this Subcommittee to guarantee a minimum 1.5 percent increase in
    physician reimbursement rates for 2004 and 2005. That stopgap measure
    has provided the time we now have to help ensure access for Medicare
    and non-Medicare patients.
        Medical Group Management Association (MGMA) data show that the cost
    of caring for patients has risen 48 percent over the last 10 years.
    However, according to the Medicare Trustees 2004 report, under current
    law Medicare physician reimbursements will be cut by more than 30
    percent between 2006 and 2012, as costs continue to escalate. These two
    diverging trajectories represent an unsustainable future for patients
    and the providers who care for them, and a looming crisis for the
    American healthcare system.
    Escalating costs, declining reimbursements
        MGMA, founded in 1926, is the nation's principal voice for medical
    group practice. MGMA's 19,500 members manage and lead some 11,500
    healthcare organizations in which more than 240,000 physicians
    practice. MGMA leads the industry with its research into practice
    costs. In fact, MGMA has conducted extensive surveys of medical
    practice costs for more than 50 years, and our data are widely
    respected as accurate benchmarks of the expenses associated with caring
    for patients. MGMA-collected data indicate that the cost of operating a
    group practice rose by an average 4.8 percent per year over the last 10
    years. In fact, between 2001 and 2003, MGMA data show that operating
    costs increased nearly 11 percent.
        Such escalating costs should come as no surprise. We are all
    familiar with skyrocketing professional liability premiums.
    Additionally, advancements in medical technologies have transformed the
    way we practice medicine, and hold great promise for future
    improvements. MGMA has long supported enhancing quality of care while
    reducing administrative burdens on physician practices. Information
    technology (IT), in particular, holds great promise in this area.
    However, the initial investment required to establish, for example, a
    fully interoperable electronic health record system, is prohibitive for
    many group practices. Moreover, while it seems intuitive that IT should
    help to restrain escalating costs by generating administrative savings,
    the vast majority of such savings will accrue to payers and others
    within the system, not to the physician group practices that provide
    the initial investment. Despite their desire to improve quality,
    physician group practices are largely unable to commit significant
    financial resources to IT because the investment seems unlikely to pay
    for itself in the foreseeable future. The projected Medicare
    reimbursement cuts also create an unstable economic environment, making
    it virtually impossible for many group practices to pursue the types of
    expensive technologies that hold great promise for improving patient
    care and generate administrative savings.
        Unfortunately, even before the projected cuts may begin taking
    effect, Medicare reimbursement rates for physician services have fallen
    far short of the increased cost of delivering quality services to
    Medicare patients. And as you know, Medicare generally serves as the
    standard on which private payers base their reimbursement rates. With
    escalating costs as shown by MGMA data, projected Medicare cuts of more
    than 30 percent and private payers sure to follow, there is no question
    that some group practices will be unable to afford continued care for
    patients under current law. It is absolutely crucial that policymakers
    address this concern now. The timing of this hearing, so early in the
    109th Congress, strongly emphasizes your recognition of the critical
    need to address this problem. Thank you again for your leadership.
    While MGMA recognizes that any solution will involve an investment by
    the taxpayers, it is necessary to protect some of the nation's most
    vulnerable citizens, the elderly and disabled, beginning as soon as
    next year.
    Removing drugs from the Sustainable Growth Rate
        There is a relatively easy way to begin improving the Medicare
    physician reimbursement system. The Centers for Medicare & Medicaid
    Services (CMS) should remove Part B covered drugs from the calculation
    used to determine Medicare physician updates beginning with the base
    year. This administrative action would help to mitigate the impact of
    the projected cuts and facilitate your efforts to establish long-term
    improvements to this broken reimbursement system. Such administrative
    change also represents the right thing to do from a policy perspective.
        The definition used by CMS for ``physician services'' in the
    sustainable growth rate (SGR) formula inappropriately includes the cost
    of physician administered outpatient prescription drugs. Medicare's
    coverage of costly prescription drugs administered in the physician's
    office has been a significant factor in the growth of Medicare
    expenditures. Since 1996 (the SGR base year), SGR spending for
    physician-administered drugs has more than doubled. These expenses
    reflect patient acquisition of products rather than services rendered
    by a medical professional and therefore are different than ``physician
    services.'' These drugs are not even reimbursed under the physician fee
    schedule, but under a completely different system. Their inclusion in
    the definition of physician services runs counter to CMS' stated goal
    of paying appropriately for drugs and physician services.
        A separate definition of physician services clearly distinguishes
    physician administered outpatient prescription drugs from services
    rendered by physicians. CMS adopted this definition in the December 12,
    2002, ``Inherent Reasonableness'' rule (67 FR 76684). The definition of
    physician services must be applied consistently for fair and equitable
    administration of the Medicare program. Furthermore, the recent rule
    reforming the payment system for physician-administered prescription
    drugs refines a separate venue to address the utilization and cost of
    drugs. MGMA has strongly urged CMS to remove prescription drug
    expenditures from the definition of ``physician services'' used to
    calculate the physician reimbursement update, beginning with the 1996
    base year. Although this would not retroactively impact reimbursements
    between the base year and 2005, it would appropriately correct the
    figures on which future updates are based and represent better Medicare
    policy.
    Conclusion
        MGMA is extremely concerned about the negative impact on Medicare
    beneficiaries, non-Medicare patients, and physician group practices
    that would result from the current physician reimbursement system. I
    strongly urge you to encourage CMS to remove Part B drugs from the SGR
    calculation beginning with the base year. Please let me know how we can
    help you to develop a long-term legislative solution to the flawed
    Medicare physician reimbursement system. Thank you again for your
    efforts to address the projected cuts of more than 30 percent in
    Medicare physician reimbursement rates, and for the opportunity to
    comment on this important issue.

                                                        Medtronic, Inc.
                                                  Minneapolis, MN 55432
                                                      February 22, 2005

    The Honorable William ``Bill'' Thomas
    Chairman, Committee on Ways and Means

    The Honorable Nancy L. Johnson
    Chairman, Ways and Means Subcommittee on Health
    U.S. House of Representatives
    1102 Longworth House Office Building
    Washington, DC 20515

    Dear Sir and Madam:

        Medtronic would like to express its appreciation to you and your
    colleagues on the Ways and Means Committee for your commitment to
    improving the physician payment system under the Medicare program.
        As you may know, Medtronic is the world's leading medical
    technology company, providing lifelong solutions for individuals with
    chronic disease. Our therapies span the fields of cardiology,
    neurology, spinal, vascular, endocrinology, urology, and
    gastroenterology, among others, and we value the essential services
    provided to Medicare beneficiaries by physicians who specialize in
    these critical areas of care.
        Medtronic understands that a revised physician payment system will
    need to balance a number of priorities, including fiscal
    responsibility, continued beneficiary access to physician services, and
    adequate reimbursement for office visits and preventive services. While
    there may not yet be consensus on the best way to achieve these goals,
    Medtronic is concerned that future negative payment updates could place
    significant undue constraints on physicians.
        Effective medical technologies play an important role in prolonging
    and improving the quality of beneficiary lives. But they can only be of
    benefit to patients if physicians receive adequate, predictable
    payments that enable them to sustain their practices and provide the
    highest level of care to their patients. We urge you to act to ensure
    that physicians do not face abrupt reductions in Medicare payment that
    could jeopardize patient care or limit access to the latest advances in
    medical technology.
        As demonstrated by the diverse views represented at the Ways and
    Means Subcommittee on Health hearing February 10, 2005, Medtronic is
    pleased that you are committed to working with all stakeholders in the
    design and implementation of changes to physician payments. We look
    forward to being a part of the discussion to improve and stabilize the
    Medicare physician payment system as you move forward.

                Best regards,

                                                 Arthur D. Collins, Jr.
                                   Chairman and Chief Executive Officer

        Statement of National Coalition for Quality Diagnostic Imaging
                            Services, Houston, Texas
        Chairman Johnson, we are pleased to have this opportunity to
    provide testimony for the record to the House Ways and Means
    Subcommittee on Health at a hearing on ``Medicare Payments to
    Physicians.'' NCQDIS is comprised of more than 2,400 outpatient imaging
    centers and departments in the United States. The coalition promotes
    ``best industry practices,'' strategies for healthcare cost savings and
    advocates for public and private sector standards for quality and
    safety in diagnostic imaging services.
        Advances in diagnostic imaging have led to great strides in patient
    care: from reducing the need for invasive surgical procedures to early
    detection of life-threatening diseases. NCQDIS and its members are at
    the forefront of medical technology, providing physicians and patients
    with the most state-of-the-art innovations, techniques and procedures
    available in diagnostic imaging.
        We are pleased to have this opportunity to comment to the House
    Ways and Means Subcommittee on Health on the opportunities that we
    believe exist to increase quality of care to Medicare patients, while
    addressing the Committee's cost concerns about the physician payment
    system. We share the concerns expressed by the Medicare Payment
    Advisory Commission (MedPAC) regarding utilization of diagnostic
    imaging services in Medicare. There are significant costs associated
    with this increased utilization, as well as quality concerns regarding
    the use of this constantly evolving technology.
        Fortunately, Congress can address these cost concerns while
    increasing the quality and safety of services provided to Medicare
    patients. Today, many of the policies and standards supported by NCQDIS
    have been implemented by private payers to successfully reduce costs
    and improve patient safety and quality. The coalition believes that the
    same policies and programs that are working in the private sector
    should be available to protect Medicare beneficiaries and safeguard the
    Medicare Trust Fund.
    Medicare Should Incorporate the Innovations of the Private Sector
        Empirical evidence demonstrates that private sector privileging
    strategies promote high quality care. For example, Tufts Health Plan
    uses an Imaging Privileging Program to address quality and utilization
    issues for non-emergency, outpatient diagnostic imaging provided by
    non-radiologists. Privileging to perform specialty-appropriate imaging
    procedures is granted based on a provider's specialty designation, and
    otherwise must be provided by a radiologist or imaging facility. Miriam
    Sullivan, representing Tufts Health Plan, has testified to MedPAC that
    by expanding the use of freestanding imaging facilities and increasing
    competition, physician groups have less desire to purchase equipment
    and more incentives to use Tufts' quality and evidence-based
    guidelines.\1\
    ---------------------------------------------------------------------------
        \1\ Medicare Payment Advisory Commission, Meeting Transcript, March
    18-19, 2004, page 53.
    ---------------------------------------------------------------------------
        We firmly believe that private sector quality standards should also
    be available to Medicare beneficiaries. Highmark uses privileging
    guidelines where imaging facilities must have a documented Quality
    Control Program, Radiation Safety Program, and As Low As Reasonably
    Achievable (ALARA) Program. Highmark providers must be appropriately
    licensed and meet the physician specialty criteria in the plan's
    privileging guidelines.\2\
    ---------------------------------------------------------------------------
        \2\ http://icael.org/icael/reimbursement/highmark_press.htm.
    ---------------------------------------------------------------------------
        States have also become concerned payers of diagnostic imaging
    services and are increasingly taking action at the state level to limit
    physician self-referral of services. The State of Maryland passed
    legislation in 2000 that is similar to the federal Stark ban on
    physician self-referral, except that Sec. 1-301(k)(2) of the law
    specifically excludes magnetic resonance imaging services, radiation
    therapy services, and computer tomography scan services from the in-
    office ancillary services exception. The Maryland Attorney General
    released a legal opinion on January 5, 2004, stating that this law bars
    a non-radiologist physician from referring patients for tests on an MRI
    machine or CT scanner owned by that practice. Medicare should have the
    same opportunities to increase quality and contain unnecessary
    utilization that are being implemented at the state level.
    Protecting Beneficiaries and the Trust Fund Requires Medicare Take a
            Closer Look at Use of Imaging
        As you know, data from MedPAC and the GAO have raised concerns
    about the growth of diagnostic imaging performed by non-radiologists.
    Nevertheless, research shows that services performed by radiologists
    account for a small portion of the growth of diagnostic imaging. MedPAC
    found that imaging services increased by 9% between 1999 and 2002.\3\
    Other research has defined the growth in imaging services between 1993-
    2002 as a 7% increase by radiologists, 49% by non-radiologists, and
    141% by cardiologists alone. In addition, the growth in Medicare
    payments for radiology services grew by 72% for radiologists and by
    119% for non-radiologists.\4\
    ---------------------------------------------------------------------------
        \3\ Report to the Congress: Medicare Payment Policy, MedPAC, March
    2003, page 77.
        \4\ Levin DC, Intenzo CM, Rao VM, Frangos AJ, Parker L, Sunshine
    JH. Comparison of recent utilization trends in radionuclide myocardial
    perfusion imaging among radiologists and cardiologists. J Am Coll
    Radiol, in press.
    ---------------------------------------------------------------------------
        Non-radiologist physicians owning their own equipment use
    diagnostic imaging tests more frequently than physicians who refer
    their patients to radiologists. One study found physicians owning
    equipment used imaging 2-8 times more often than physicians who refer
    their patients to radiologists.\5\ A similar 1994 GAO study revealed
    physicians owning their equipment use imaging 2-5 times more often than
    referring physicians.\6\
    ---------------------------------------------------------------------------
        \5\ Hillman BJ, Olson GT, Griffith PE, et al. Physicians'
    utilization and charges for outpatient diagnostic imaging in a Medicare
    population. JAMA 1992; 268:2050-2054.
        \6\ Medicare: Referrals to Physician-Owned Imaging Facilities
    Warrant HCFA's Scrutiny; GAO, HEHS-95-2, October 20, 1994.
    ---------------------------------------------------------------------------
        Based on this evidence, we believe that radiologists and
    independent diagnostic testing facilities (IDTFs) can provide the most
    cost-effective care. In addition, there is no differential in Medicare
    payment if services shift from non-radiologist physicians to
    radiologists and independent diagnostic testing facilities, where
    identical payments are made under the physician fee schedule. Updated
    statistics show that there are sufficient radiologists in the U.S. to
    meet patients' needs.
    Medicare Beneficiaries Should Be Assured of Access to the Highest
            Quality Imaging Services
        Like private payors, Medicare should only pay for imaging services
    that meet quality standards. Medical literature shows that imaging
    equipment and facilities operated by non-radiologists is often sub-
    optimal. One private sector imaging site inspection program revealed
    that over \1/3\ of imaging facilities operated by non-radiologist
    physicians had one or more significant quality deficiencies, while only
    1% of facilities operated by radiologists had such deficiencies.\7\
    Quality standards for equipment and facilities would reduce the need
    for duplicate scans or expensive therapy from incomplete images or
    misdiagnosis.
    ---------------------------------------------------------------------------
        \7\ Orrison & Levin, Radiology 2002; 225(P):550.
    ---------------------------------------------------------------------------
        We are especially concerned that non-radiologists' offices are less
    likely to become accredited. Though the ACR has full accreditation
    programs for many diagnostic procedures, non-radiologist physician
    offices are not required to become accredited to provide these
    services. ACR began an MRI accreditation program in 1997, including
    standards for equipment and for qualifications of technologist's
    performing the test. Though non-radiologists may voluntarily become
    accredited, most do not. Almost all accredited entities are
    freestanding MRI centers owned by radiologists or hospitals, or are
    contracted with radiologists. NCQDIS believes that all physician
    offices providing imaging services should be accredited.
        In addition, the recycling of obsolete diagnostic imaging equipment
    should be curtailed by implementing strong equipment standards. Dr.
    Thomas Ruane, BC/BS of Michigan, testified to MedPAC that, ``The
    diagnostic equipment that becomes somewhat obsolete in our tertiary
    medical centers often does not go to the Third World. It often goes
    down the street to another doctor's office where it lives another
    life.'' \8\ NCQDIS believes that Medicare patients deserve better.
    ---------------------------------------------------------------------------
        \8\ Medicare Payment Advisory Commission, Meeting Transcript, March
    18-19, 2004, page 34.
    ---------------------------------------------------------------------------
    NCQDIS Promotes the Appropriate Use of Diagnostic Imaging By Trained
            Specialists
        Radiologists spend 4-6 years in residency training to learn imaging
    techniques and interpretation. Most non-radiologist physicians have
    limited or no formal training in image interpretation. Although some
    physicians in other specialties get limited amounts of training in
    certain areas of imaging, the training is often informal and does not
    meet defined standards. To protect patient safety and reduce medical
    errors, physicians billing Medicare for imaging services should meet
    certain training and education standards.
        Radiologists working with other clinicians provide an important
    second opinion in clinical diagnosis, helping to minimize medical
    errors. As is being discussed in the hearing today, the best clinical
    outcomes are achieved when a team approach is used to manage patient
    care. The radiologists serve as an important second opinion in clinical
    diagnosis, treatment, and management of patients needing diagnostic
    imaging services.
        It is important to note that imaging centers owned by radiologists
    and IDTFs do not create a demand for imaging services. Business is
    independently referred to imaging centers from third party physicians
    who determine that a patient needs a diagnostic imaging test.
    Therefore, radiologists and IDTFs are limited in their ability to
    generate business outside of that which is referred.
        Evidence also demonstrates that quality of care is improved if
    radiologists read diagnostic images. In 2000, one research group used a
    standardized set of chest radiographs to compare the accuracy of
    interpretation of radiologists and non-radiologists. The composite
    group of board-certified radiologists demonstrated performance far
    superior to that of non-radiologist physicians. Even radiology
    residents in training out-performed non-radiologist physicians.\9\
    ---------------------------------------------------------------------------
        \9\ Potchen, RADIOLOGY 2000; 217:456.
    ---------------------------------------------------------------------------
    NCQDIS Recommends That Medicare Take Steps Now to Protect Medicare
            Beneficiaries
        NCQDIS is pleased to submit its recommendations to the House Ways
    and Means Subcommittee on Health on the best way to promote quality of
    care in diagnostic imaging. Congress has the opportunity to act now to
    address this important issue.
        1. Congress should enact a privileging policy for high cost high
    tech imaging. A privileging policy for MRI, CT, and PET would require
    that physicians meet certain professional standards in order to
    directly bill Medicare for the technical and professional components of
    these procedures. This policy would allow current billing practices to
    continue for cardiac ultrasound procedures and plain X-rays. Medicare
    should promote quality of care and patient safety by reimbursing only
    those doctors who are certified and have the appropriate training in
    diagnostic imaging services. This approach would avoid the provision of
    low-quality images, interpreted by inadequately trained non-
    radiologists using sub-standard technology. NCQDIS supports privileging
    policies that address the professional and technical components of
    diagnostic imaging services. CMS conditions of coverage could require
    that a physician become certified by CMS as a qualified ``designated
    physician imager'' in order to bill Medicare for diagnostic imaging
    tests.
        2. NCQDIS also suggests that CMS address the technical component of
    diagnostic imaging services by implementing standards for equipment
    quality. An image produced by a poor quality piece of equipment will
    inevitably lead to errors, misdiagnoses, and the need for repeat
    testing.
        3. NCQDIS supports coding edits to allow financial intermediaries
    to detect improper billing.
        NCQDIS understands that more expansive privileging policies
    targeting other procedures and specialties take time to develop and
    test. Therefore, NCQDIS recommends that Medicare be authorized to
    implement a broader privileging policy based on private sector
    privileging policies, to be implemented within one year from the date
    of enactment using a panel of experts. This policy should detail by
    medical specialty those imaging tests permitted by the specialty.

             Statement of James Weiss, Renal Physicians Association
                        Approved by RPA Board, 7/17/2004
          RPA Position Paper on Legislative Issues Related to Linking
      Reimbursement to Performance Measures in ESRD Care (Part One of Two)
    Introduction
        A rapidly evolving movement in modern healthcare delivery is the
    effort to create a linkage between reimbursement to providers and
    measurements of the quality of the care delivered to patients. This
    change in direction has been fueled in large part by the growing
    necessity to focus on more cost-efficient use of increasingly scarce
    fiscal resources in health care, and the recent publication of high-
    profile reports on patient safety and provider accountability by major
    advisory organizations in medicine, such as the Institute of Medicine
    (IOM) report ``Crossing the Quality Chasm: A New Health System for the
    21st Century.'' \1\
    ---------------------------------------------------------------------------
        \1\ Institute of Medicine. Crossing the Quality Chasm: A New Health
    System for the 21st Century. 2001. National Academic Press.
    ---------------------------------------------------------------------------
        There are a variety of structural and environmental factors that
    make the care delivered to end-stage renal disease (ESRD) patients a
    compelling subject for efforts to link reimbursement to quality. These
    include the federal data-gathering infrastructure long in place for
    this patient population, the capitated nature of the payment systems
    for these patients (the composite rate payment for dialysis facilities
    and the monthly capitated payment for physician services), and the
    reported sub-optimal clinical outcomes for many ESRD patients.
    Accelerating the impetus to utilize a reimbursement-quality link in the
    ESRD program is the overt commitment by the Centers for Medicare and
    Medicaid Services (CMS) to pursue implementation of such a methodology
    for this target group.
        In recognition of this changing environment, the RPA convened a
    panel of experts in quality, accountability, and safety from the renal
    community to address the link between quality measures and
    reimbursement for ESRD patients in a sensitive and responsible manner.
    The meeting included panelists involved in clinical and academic
    nephrology, representing physicians providing care to both the adult
    and pediatric patient populations, in addition to a representative from
    a large managed care organization with extensive experience in linking
    reimbursement to quality measures and a representative from a large
    kidney patient group.
        This document is the first of a two-part discussion paper resulting
    from the RPA-convened meeting. Part one will provide background and
    counsel to congressional leaders as they consider the legislative
    initiatives affecting the Medicare program that will be necessary to
    appropriately assess and implement measures linking reimbursement to
    quality measures. Part two is intended to provide focused
    recommendations to CMS staff as they develop the specific methodologies
    for designing a system linking reimbursement to quality measures and
    making it operational. The segregation of the policy positions reflects
    RPA's belief that to effectively and appropriately implement change of
    this nature, a fundamental restructuring of elements of the Medicare
    program will likely be necessary.
        This document will review the history of nephrology's role in
    quality measurement and improvement for ESRD patients, RPA's place in
    that history, and how quality efforts in renal care compare to similar
    efforts in other medical disciplines. In addition, included is a review
    of the current status of the scientific evidence in this area, and a
    discussion of how the underlying principles of the current Medicare
    physician fee schedule will contribute to the complexity of
    establishing a reimbursement-quality link. The document will conclude
    with recommendations for the next steps that the RPA believes are
    necessary to appropriately pursue such a course.
    Quality Efforts in Nephrology_Historical Perspective
        One of the unique aspects of nephrology's involvement in the issues
    of quality improvement relates to the prescient nature of the
    specialties' activities in this area over the past two decades.
    Nephrology's commitment to quality measurement and quality improvement
    has foreshadowed not only those efforts on the part of other
    disciplines within organized medicine, but has also guided CMS (and
    previously HCFA) toward the development of appropriate quality measures
    and information systems necessary to support quality improvement. A
    partial list of nephrology-specific activities in this area includes:

          The 1988 creation of the United States Renal Data System
    (USRDS) by the National Institute of Diabetes and Digestive and Kidney
    Diseases (NIDDK)
          The 1994-1996 NKF Dialysis Outcome Quality Initiative
    (DOQI) on adequacy of hemodialysis, adequacy of peritoneal dialysis,
    anemia, and vascular access \2\
    ---------------------------------------------------------------------------
        \2\ National Kidney Foundation. Dialysis Outcomes Quality
    Initiative Clinical Practice Guidelines on Hemodialysis Adequacy,
    Peritoneal Dialysis Adequacy, Vascular Access, and Anemia Management.
    1997. NKF.
    ---------------------------------------------------------------------------
          The renal community project to convert high priority
    evidence-based clinical practice guidelines into well-defined clinical
    performance measures
          The 1995 publication of the RPA Position on
    Implementation of Health Care Quality Improvement (HCQIP) in Medicare's
    End Stage Renal Disease Program \3\
    ---------------------------------------------------------------------------
        \3\ Renal Physicians Association. RPA Position Paper on
    Implementation of Health Care Quality Improvement in Medicare's End
    Stage Renal Disease Program. 1995. RPA.
    ---------------------------------------------------------------------------
          The release of the 2000 RPA/ASN clinical practice
    guideline on Shared Decision Making in the Appropriate Initiation of
    and Withdrawal from Dialysis \4\
    ---------------------------------------------------------------------------
        \4\ Renal Physicians Association/American Society of Nephrology.
    Clinical Practice Guideline on Shared Decision Making in the
    Appropriate Initiation of and Withdrawal from Dialysis. 2000. RPA/ASN.
    ---------------------------------------------------------------------------
          The release of the 2002 RPA clinical practice guideline
    on Appropriate Patient Preparation for Renal Replacement Therapy \5\
    ---------------------------------------------------------------------------
        \5\ Renal Physicians Association. Clinical Practice Guideline on
    Appropriate Patient Preparation for Renal Replacement Therapy. 2002.
    RPA.
    ---------------------------------------------------------------------------
          The 2003 publication of the RPA White Paper on the Use of
    Performance-Based Incentives in Renal Care \6\
    ---------------------------------------------------------------------------
        \6\ Renal Physicians Association. RPA White Paper on the Use of
    Performance-Based Incentives in Renal Care. 2003. RPA.

        These initiatives, lead by organized nephrology, have resulted in
    sustained improvement in all targeted clinical measures to a degree
    unprecedented in medicine. These improvements occurred without any
    financial incentive, but rather capitalized on the innate desire of the
    majority of nephrologists to provide the highest level of care possible
    to their patients. It is important to note that these changes were
    greatly supported by and ultimately only made possible by development
    of data collection and reporting systems, heretofore unseen in
    medicine.
        Thus, the work of clinical nephrology in general and the RPA
    specifically over the last two decades has to some extent influenced
    many healthcare quality improvement initiatives in the U.S. It also
    puts the clinical arm of nephrology in a position of unique sensitivity
    to the risks and benefits associated with implementation of incentive-
    based quality improvement initiatives for ESRD patients. Further, the
    degree to which nephrology has pursued quality measurement and
    improvement, and modifications in provider behavior in ESRD care,
    predates and transcends many of the circumstances leading to the
    concerns outlined in the IOM's Crossing the Quality Chasm report. As a
    result, the substantial experience that nephrology has gained in the
    area of quality improvement has fostered a judicious perspective toward
    the use of performance-based reimbursement systems.
        Accordingly, the RPA endorses the concept of linking reimbursement
    to performance--providers should be rewarded for good performance. But
    in designing truly effective reimbursement systems to reward
    performance, there are a number of hazards that must be avoided. In
    particular, since few such systems have been tested extensively, and
    since little empirical research exists to provide evidence of benefit,
    the design and implementation of such systems should be undertaken with
    extreme caution. Further, and likely most significant from the patient
    perspective, it is particularly important that the issue of adverse
    risk selection or ``cherrypicking'' be addressed and prevented to the
    extent possible in the development of such systems. The implementation
    of a performance-based reimbursement system can be subject to
    cherrypicking, so the principle of ``do no harm'' should clearly apply
    in the development of these systems as much as it does in routine
    reimbursement situations.
    Policy Implications of Current Scientific Evidence
        Beyond the public policy considerations of whether performance-
    based reimbursement systems represent an appropriate and effective
    means of improving the quality of care provided to ESRD patients,
    questions regarding the science behind such efforts remain unanswered.
    It has been postulated that the three primary predictors of patient
    outcomes of hemodialysis--dialysis adequacy, hemoglobin, and albumin--
    explain only 15% of the variance in ESRD patient outcomes.\7,8,9\ Other
    measures provide little additional explanatory power. This level of
    uncertainty in the science underlying efforts to promote performance-
    based incentive systems is clearly problematic.
    ---------------------------------------------------------------------------
        \7\ Lowrie E, Teng M, Lacson E, Nancy L, Owen W, Lazarus JM: ``The
    Association Between Prevalent Care Process Measures and Facility
    Specific Mortality Rates.'' Kidney International 60:1917-1929, 2001.
        \8\ Lacson E, Teng M, Lazarus JM, Lew N, Lowrie E, Owen W:
    ``Limitations of the Facility-Specific Standardized Mortality Ratio for
    Profiling Healthcare Quality in Dialysis.'' American Journal of Kidney
    Disease 37:267-275, 2001.
        \9\ Lowrie E, Teng M, Lew N, Lacson E, Owen W, Lazarus JM:
    ``Towards a Continuous Quality Improvement Paradigm for Hemodialysis
    Providers with Preliminary Suggestions for Clinical Practice Monitoring
    and Measurement.'' Hemodialysis International 7:28-51, 2001.
    ---------------------------------------------------------------------------
        Accordingly, the predictive limits of current measures of outcome
    suggest the need for a more robust scientific foundation on which to
    base these initiatives. Elements from both the basic science and health
    services research realms that would complement these efforts should
    include: (1) research on the full range of appropriate outcomes
    measures, including relevant patient behaviors and patient-reported
    quality-of-life, by the Agency for Healthcare Research and Quality
    (AHRQ), seeking to differentiate actionable factors under the control
    of physicians (process), facilities (structure), patients, as well as
    others; and (2) additional research by AHRQ on the impact of existing
    institutional structures, such as the ESRD Network quality program, and
    other economic and financial levers.
        Recent literature underscores the dearth of scientific evidence in
    this area. The March/April 2004 edition of Health Affairs includes an
    article entitled ``Paying for Quality: Providers' Incentives for
    Quality Improvement,'' \10\ that endeavors to systematically assess the
    relationship between provider' incentives and quality improvement.
    Among the authors' findings are: (1) confirmation that there in fact
    are no controlled studies on the efficacy of incentive programs in
    improving quality; (2) that existing incentive programs highlight the
    dichotomy between treatment of `good' performance and `improved'
    performance, tending to reward the former and not the latter, an
    orientation of particular importance for those individuals or entities
    at the lower end of the performance spectrum; (3) that the result of
    this orientation is that low performers are less likely to strive for
    incentive payments, and thus less likely to change their programs to
    improve performance; and (4) that most measures of quality currently
    used are a mix of process and structure measures, with a much smaller
    role for patient experience and outcomes measures.
    ---------------------------------------------------------------------------
        \10\ Rosenthal MB, Fernandopulle R, Song HR, Landon B: ``Paying for
    Quality: Providers' Incentives for Quality Improvement.'' Health
    Affairs 23:127-141, 2004.
    ---------------------------------------------------------------------------
        Such a structurally triggered payment methodology could have
    several negative unintended consequences. First, for those low
    performers who likely need the fiscal resources the most in order to
    improve their systems of care delivery, programs of this nature would
    make it more difficult to obtain them. Further, over time this deficit
    could have the downstream effect of putting low performers who
    consistently do not achieve bonus payments out of business, negatively
    impacting ESRD patient access to care. These groups, unfortunately,
    tend to care for ``at risk'' populations already in dire financial
    straits. This model may further disenfranchise them by creating
    financial disincentives for physicians and dialysis chains dissuading
    them from investment. While this is certainly only a theoretical
    outcome, RPA strongly recommends that Congress direct CMS and other
    federal policymakers to consider this issue and others like it
    specifically during the development stage of an incentive-based quality
    improvement program, rather than placing patients at potential undue
    risk. RPA also urges Congress to direct CMS to recognize that the
    unique characteristics of the pediatric dialysis patient population
    requires special consideration, and that the likelihood that a
    performance-based incentive system is inappropriate for these patients
    is significant. Policymakers should consult with the American Society
    of Pediatric Nephrology (ASPN) before proceeding with policy
    development affecting that patient sub-population.
    Linking Reimbursement to Quality in the Medicare Physician Fee Schedule
        Implementation of a reimbursement system based on performance or
    quality measures would represent a drastic change within the current
    Medicare physician fee schedule context. Under its present,
    congressionally-mandated resource-based relative value scale (RBRVS)
    methodology, Medicare, through the Medicare fee schedule (MFS)
    reimburses physicians for the services they provide based on the
    resources necessary to furnish those services to the typical patient.
    Therefore, by current law the relative value units (RVUs) that
    ultimately determine the rank order payment for a specific physician
    service within the MFS must be resource-based and by definition exclude
    the use of a quality measure (or a surrogate measure) as a factor in
    determining payment. Thus, legislation would be necessary to allow for
    the implementation of quality or performance-based payment methodology
    within the RBRVS structure.
        Another confounding factor that must be addressed is that the MFS
    by law is mandated to be budget neutral. One option that has been
    advanced to address the mandate for resource-basing in the MFS outlined
    above is to provide an additional payment to high performers beyond
    what is provided within the RBRVS system. However, budget neutrality
    limitations will force CMS to take funds necessary to provide the
    additional reimbursement from another sector of the Medicare payment
    arena, thereby creating a ``withhold'' situation, an approach that has
    been clearly shown to be ineffective in improving quality. Among the
    currently available policy lever options, desegregation of the Medicare
    Part A and Part B funding pools would offer one seemingly reasonable
    avenue for provision of the funds needed for a quality incentive
    program without resorting to a withhold. The separation of these
    funding pools may have been useful in the 20th century but currently
    appears to be more of an artifact of a previous policy structure that
    does not promote the more global responsibilities of healthcare
    providers participating in each pool. Because improved quality for
    dialysis patients will result in fewer hospitalizations, decreasing
    Part A expenditures, the desegregation of Part A and Part B for this
    purpose is quite appropriate. If this or a similar option were to be
    pursued, alignment of financial incentives across this chasm would be a
    necessary step in the linkage of quality measures to reimbursement,
    however contentious such a shift would be.
    Conclusions
        In spite of legislative, regulatory, and fiscal obstacles, the RPA
    is committed to designing effective systems linking payment to
    performance. The issue is not one of commitment but the complexity of
    the task. The necessity of implementing such a system without doing
    unintended harm to the most vulnerable Medicare beneficiary sub-
    population, the difficulties in developing a system within the current
    Medicare payment structures, and the paucity of research related to
    these issues all provide ample reason for proceeding cautiously. The
    combined impact of these considerations underscores the need for firm
    commitment, both philosophically and fiscally, from Congress, CMS and
    other federal policymakers to address the following recommendations
    prior to implementing a methodology linking reimbursement to quality.
    Recommendations
        1.  RPA believes that before CMS develops a payment methodology
    linking reimbursement to quality, Congress must direct the Agency to
    actively involve and draw on the intellectual resources and experience
    of the nephrology community throughout the process. This will help to
    ensure that the development and final products emphasize the expected
    benefits of a modified payment methodology and minimize negative
    unintended consequences.
        2.  RPA believes that Congress must support substantial research in
    both the pertinent basic science and health services arenas, especially
    related to nephrology outcomes research in order to strengthen the
    essential and necessary scientific evidence supporting a transition to
    a performance-based payment system.
        3.  RPA believes that Congress should direct CMS to develop a
    performance-based payment system that considers and separately rewards
    both high performance and measurable improvement.
        4.  RPA believes that for such a revised payment methodology to be
    effective longitudinally, the system must not disrupt the resource-
    based relative value scale (RBRVS) system, and must for the purposes of
    the incentive payments have budget neutrality waived. Incentive
    payments should not be derived by decreasing usual payments or
    establishing a withhold from the usual payments.
        5.  RPA believes that to effectively implement a payment
    methodology linking reimbursement to quality, Congress must consider
    fundamental change to the policy structure underlying the Medicare
    program, specifically assessing the desegregation of the Medicare Part
    A and Part B funding pools. Physician activities that improve quality
    and produce savings by decreased hospitalizations ought to be accounted
    for in the adjudication of the funds available for physician incentive
    reimbursement.
        6.  RPA urges Congress to direct CMS to recognize that the unique
    characteristics of the pediatric dialysis patient population require
    special consideration. It is likely that a performance based incentive
    system is inappropriate for these patients. Policymakers should consult
    with the American Society of Pediatric Nephrology (ASPN) before
    proceeding with policy development affecting pediatric dialysis
    patients.