[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 
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unintentional errors or omissions. Such occurrences are inherent in the 
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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.
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    \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.
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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.

                                 
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