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


 
   MEDICARE PHYSICIAN PAYMENT: HOW TO BUILD A MORE EFFICIENT PAYMENT 
                                 SYSTEM

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 17, 2005

                               __________

                           Serial No. 109-75

                               __________

      Printed for the use of the Committee on Energy and Commerce


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

                               __________

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                    ------------------------------  
                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director

        David Cavicke, Deputy Staff Director and General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                         Subcommittee on Health

                     NATHAN DEAL, Georgia, Chairman

RALPH M. HALL, Texas                 SHERROD BROWN, Ohio
MICHAEL BILIRAKIS, Florida             Ranking Member
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
BARBARA CUBIN, Wyoming               BART GORDON, Tennessee
JOHN SHIMKUS, Illinois               BOBBY L. RUSH, Illinois
JOHN B. SHADEGG, Arizona             ANNA G. ESHOO, California
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          TED STRICKLAND, Ohio
STEVE BUYER, Indiana                 DIANA DeGETTE, Colorado
JOSEPH R. PITTS, Pennsylvania        LOIS CAPPS, California
MARY BONO, California                TOM ALLEN, Maine
MIKE FERGUSON, New Jersey            JIM DAVIS, Florida
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
SUE MYRICK, North Carolina           JOHN D. DINGELL, Michigan,
MICHAEL C. BURGESS, Texas              (Ex Officio)
JOE BARTON, Texas,
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Arora, Vineet, Chair, Council of Associates, American College 
      of Physicians..............................................   112
    Cady, Duane M., Chair, Board of Trustees, American Medical 
      Association................................................   115
    Davis, Elizabeth, on behalf of Alliance of Specialty Medicine   107
    Hackbarth, Glenn M., Chairman, Medicare Payment Advisory 
      Commission.................................................    63
    Kennelly, Hon. Barbara B., President and CEO, National 
      Committee to Preserve Social Security and Medicare.........   119
    McClellan, Mark B., Administrator, Centers for Medicare and 
      Medicaid Services..........................................    20
    Opelka, Frank, on behalf of American College of Surgeons.....   103
    Super, Nora, Center for Health Services Research and Policy, 
      George Washington University Medical Center................   123

              Additional Material Submitted for the Record

Hackbarth, Glenn M.:
    Written responses to questions from Hon. Edolphus Towns......   139
McClellan, Mark B.:
    Written responses to questions from Hon. Edolphus Towns......   141
American Medical Association, prepared statement.................   143

                                 (iii)

  


   MEDICARE PHYSICIAN PAYMENT: HOW TO BUILD A MORE EFFICIENT PAYMENT 
                                 SYSTEM

                              ----------                              


                      THURSDAY, NOVEMBER 17, 2005

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:41 a.m., in 
room 2123, Rayburn House Office Building, Hon. Nathan Deal 
(chairman) presiding.
    Members present: Representatives Deal, Hall, Bilirakis, 
Upton, Gillmor, Norwood, Cubin, Shimkus, Shadegg, Pickering, 
Buyer, Pitts, Ferguson, Burgess, Barton (ex officio), Brown, 
Waxman, Towns, Pallone, Gordon, Eshoo, Green, Degette, Capps, 
Allen, Baldwin, and Dingell (ex officio).
    Staff present: Chuck Clapton, Chief Counsel; Melissa 
Bartlett, majority counsel; Brandon Clark, policy coordinator; 
Chad Grant, legislative clerk; Jessica McNiece, minority 
research assistant; Jonathan Brater, minority staff assistant; 
Bridgett Taylor, minority professional staff; and Amy Hall, 
minority professional staff.
    Mr. Ferguson [presiding]. The hearing will come to order. 
Good morning. Chairman Deal will be here shortly.
    I welcome you all to this necessary and timely hearing on 
Medicare's payment to those that act as a gateway into our 
health care system, our physicians. This morning we have two 
panels of distinguished doctors and observers of the medical 
profession to help us consider all our options in addressing 
this looming issue. Welcome all of you and look forward to your 
insights concerning some solutions to the physician payment 
problem at hand today.
    The beginning of 2006, doctors will see a 4.4 percent cut 
in payment for their services to Medicare patients and will see 
cuts in several subsequent years thereafter. Medicare's current 
system of payment which applies a formula called the 
sustainable growth rate or SGT is part of a history of 
adjustment and reform that leads us to where we are today. When 
the SGR was applied last time in 2002, physician payments were 
cut 5.4 percent. After the Medicare Modernization Act passed 2 
years ago in 2003, further decreases were averted and payment 
saw an increase of 1.5 percent in 2004 and 2005.
    Today we are facing a similar problem, and it is my belief 
that Congress has to act to ensure that doctors do not see the 
cuts that are destined to happen if the SGR is allowed to be 
applied once again. There are many options for us to consider, 
and I look forward to our panelists' help in deciphering what 
each means for our health care and for our system.
    Many of the fixes are expensive, but they are more 
expensive than seeing our doctors struggle to justify carrying 
Medicare patients at their practices. Will Medicare patients 
stomach another large increase in premiums to offset the huge 
cost that a fix will bring?
    Our doctors work long and hard to provide the care that 
they do. And our Medicare patients deserve the utmost quality 
of care and a wide and willing network of doctors to provide 
that care. I am currently on record as supporting a short-term 
fix to avert the looming cuts. I believe that is necessary so 
we can adequately compensate our doctors for their services and 
participation in Medicare. But I believe that if such a short-
term fix is passed, it is necessary to work in the meantime 
toward finding a more efficient system for physician payment in 
the future.
    Whatever the costs and however hard it is to find, we must 
work hard in order to find it. Again, I want to thank our 
distinguished panelists today for their insights and guidance 
as we hopefully move forward toward finding a fix. I now would 
like to recognize the ranking member, Mr. Brown from Ohio.
    Mr. Brown. Thank you, Mr. Chairman, thank you for filling 
in today.
    Today's hearing is not about paying health care 
professionals more or paying them less. This hearing today is 
about paying them fairly. Medicare's physician payment system 
holds doctors and other healthcare professionals responsible 
for system-wide changes in health care needs, health care 
preferences. The payment adjustment mechanism, the sustainable 
growth rate, SGR, simply put, is not fair. The premise that 
individual providers should somehow pay for increases in 
Medicare utilization is not logical. It is simply expedient. 
Even if individual providers could significantly influence 
overall utilization trends, it is difficult to conceive of them 
looking for opportunities to pedal unnecessary health care any 
more than it is for Medicaid beneficiaries to want to seek 
unnecessary health care. Most of them, most of these doctors 
are too busy providing the necessary kind of care. Nor do I 
think it is in the Nation's best interest to reward physicians 
for reductions in Medicare utilization. Physician decisions 
should hinge on patient need, not on Medicare budget targets.
    I join my colleague Nancy Johnson as a sponsor of the 
value-based purchasing of physicians' services act because it 
replaces the current physician payment system with an annual 
payment update. Taking that step would conform physician 
payment to that of most other Medicare providers. The Johnson-
Brown bill also embraces the notion of value-based purchasing 
which is a promising strategy aimed at improving the quality, 
effectiveness and cost efficiency of health care services. 
Patients can only benefit from efforts to link services to 
outcomes and use those linkages to improve care.
    Fixing the physician payment system is expensive; not 
fixing it is wrong. The Medicare program itself is expensive. 
Neglecting reimbursement flaws that jeopardize its future is 
wrong. To say we can't afford to pay physicians fairly but we 
can afford to cut physicians' taxes is a little disingenuous. 
There are legitimate concerns about the impact of physician 
payment changes on the Medicare part B premium, but we 
shouldn't suffer one problem in order to keep another in check. 
The Medicare premium is derived from an arbitrary formula. If 
we don't like the annual premium increases that the formula 
generates, we should change the formula. In other words, rather 
than doing one thing wrong so we can get another thing right, 
we should do both things right. We should hold Medicare 
beneficiaries harmless unless it is all worked out.
    But let's get back for a moment to the fairness issue. One 
of the most important insights I hope to gain from this hearing 
is why the Bush administration refuses to modify the physician 
payment formula to remove the effects of Medicare-covered 
prescription drugs. As far as I know, CMS has offered no policy 
rationale for their refusal to take this step. Removing drugs 
from the payment formula would prevent unjustifiable payment 
cuts next year. CMS could authorize the removal today even. I 
hope Dr. McClellan provides a compelling reason for 
intentionally perpetuating a bad policy. It is too expensive to 
fix. Remember, it was the President who initiated trillions of 
dollars worth of tax cuts, and I am confident the President has 
enough sway with his party even today to prevent the current 
round, which is worth $70 billion.
    Congress and the Bush administration share responsibility 
for Medicare. It is within our power to treat health care 
professionals fairly. Let us do it right, let us do our part. 
Thank you.
    Mr. Ferguson. Now recognize the distinguished chairman of 
the full committee, Mr. Barton, for an opening statement.
    Chairman Barton. Thank you, Mr. Ferguson. It is good to see 
you there in the chair. You don't sound like Mr. Deal, but what 
you say is similar to what he says; you just say it 
differently. We are glad to have you chairing this subcommittee 
today.
    Let me get my statement here. I appreciate the 
distinguished subcommittee holding today's hearing. It is 
important because, hopefully, it is going to provide members of 
this committee with a valuable perspective on the issue of 
Medicare physician payment and how to best ensure Medicare 
beneficiaries can continue to have access to quality health 
care. I want to particularly thank CMS Administer Dr. Mark 
McClellan and MedPAC Chairman Glenn Hackbarth for their 
appearances today. I applaud their leadership on building a 
more efficient and effective quality health care system.
    I intend to ask some very difficult questions to try to 
find out what we need to do to fix the broken Medicare payment 
system for physicians. I am going to ask, how we are going to 
pay for it? For too long, Congress has tried to repair the 
problem by not structurally reforming the system. Instead, we 
just dump money into short-term fixes which have only 
exacerbated the problem. This has only increased the total cost 
of reform and delayed the inevitable day of reckoning. I will 
not support simply pouring more taxpayer dollars year after 
year into a system that is broken. I want to repeat that. I 
will not support simply pouring more taxpayer dollars year 
after year into a system that is broken.
    I believe that we have an obligation to provide seniors 
with access to health care. We have an obligation to do it in a 
way that will not make taxpayers sick. We need to design a 
stable payment system which provides doctors with the right 
incentives and adequate compensation to provide the right 
health care for their patients every time. The incentives in 
the current system are misaligned. Doctors have to make more 
money by increasing the number of office visits, performing 
more imaging scans, running more tests. I doubt that they 
really want to do these things; it is simply something they 
have to do in order to cover their costs.
    Not only does this make our shrinking Medicare dollars more 
vulnerable, it hurts the beneficiaries stuck with copays for 
every visit and every test. We need to build a system instead 
that drives physicians to provide care for each patient because 
it is the best treatment, not because it is the best way to pay 
the bills.
    In this regard, I want to specifically applaud Dr. 
McClellan for his dedication to this issue. Under his watch, 
the government has taken steps to become a better payer and 
providers are working toward a more efficient and effective 
health care system. Dr. McClellan started this mission with the 
hospitals, I am pleased to say, with some success. As a result, 
the groundbreaking hospital pay-for-performance demonstration, 
the Medicare program, is giving close to $9 million to 
hospitals that showed improvements in the quality of the care 
they provide. The success of this demonstration program is 
evidence that the model works to improve the quality of health 
care.
    I look forward to working with CMS and others that share 
this vision on efforts to translate the physician reimbursement 
system or transform the physician reimbursement system. Again, 
I want to thank our subcommittee chairman for holding this 
hearing. I want to thank these two witnesses and the witnesses 
on the next panel. This is a very, very important hearing. We 
all know we need to do something before the beginning of the 
next calendar year, and it is possible that this hearing will 
lead to legislative action to fix the problem.
    Thank you, Mr. Chairman.
    Mr. Ferguson. On the advice of Mr. Brown, I am going do 
recognize Mr. Gordon for on opening statement.
    Mr. Gordon. Thank you, Mr. Chairman. While I am pleased the 
committee is holding a hearing on the Medicare physician 
payment system, in all due respect, this hearing is a day late 
and a dollar short. The committee so far has abrogated its 
responsibility to act on this issue on all fronts. Just a few 
weeks ago, this committee voted down a Democratic-supported 
amount to provide a temporary fix as part of the budget 
reconciliation package. It is long past due that this committee 
act decisively to reclaim its jurisdiction and to find a 
permanent solution to the SGR problem before physician payment 
cuts result in significant access problems to Medicare 
beneficiaries.
    Mr. Chairman, I think I can speak with personal hand or 
firsthand, talking to physicians all across Tennessee, they 
really are limiting access now. This is a real problem. Many 
physicians are just simply not able to take additional Medicare 
patients. We are seeing it in community after community. So, in 
all due respect, I think it is time this committee stopped talk 
about wanting to do something and actually taking action. Yield 
back the balance of my time.
    Mr. Deal. The gentleman yields back.
    Recognize Mr. Bilirakis for an opening statement.
    Mr. Bilirakis. Thank you, Mr. Chairman, thank you for this 
hearing.
    As we all know, Congress has specified a formula to provide 
an annual update to the physician fee schedule. This update is 
largely based on whether spending in the prior year has 
exceeded or fallen below the established spending target. That 
target, known as the sustainable growth rate or SGR, as we 
fondly refer to it, provides a spending benchmark for Medicare. 
If spending exceeds that target, the update for future years is 
reduced. If spending falls below that target, future updates 
are increased.
    The problem is the SGR formula upon which the updates are 
based is flawed principally because it fails to link payments 
to what it actually costs doctors to provide services for 
Medicare beneficiaries. These and other shortcomings have 
precipitated cuts in reimbursement which threaten the access of 
Medicare beneficiaries to the critical care that physicians 
provide.
    The Senate as we know has included a 1 percent payment 
update for next year in its recently approved budget 
reconciliation bill. While the version of the bill which this 
committee reported does not include a payment update, I am 
hopeful that conference deliberations or other alternatives 
will produce an appropriate remedy before payment cuts affect 
patient access to care.
    We don't have, as we have already said, the luxury of not 
acting. Under the current schedule, physician payments are 
projected to be reduced by 26 percent over the next 6 years 
while the costs of running a practice are expected to increase 
during that same period. This is simply unacceptable.
    Our colleague from Georgia, Mr. Norwood, has introduced 
legislation which would stop future reimbursement cuts and 
guarantee that physicians would receive at least level payments 
until we can address this issue in a comprehensive manner. 
Other members also have introduced payment reform bills which 
have served to further understanding this complicated issue. 
Many of us were involved in leading efforts in Congress in 
prior years to circumvent the application of the formula the 
past several years in order to avoid negative updates which 
would have resulted in substantial payment reductions. We 
helped to ensure that the Medicare prescription drug law 
provided a 1.5 percent update in each of these years instead of 
the scheduled cuts that would have taken effect had Congress 
not acted. The problem of course with providing at least 
temporary fixes, though they are much needed, is that doing so 
adjusts future updates downward to make up for added program 
spending.
    It is clear, I think, to all of us, Mr. Chairman, that we 
have got to change that formula to something so that we won't 
have to have these temporary fixes year after year and year. 
Thank you.
    Mr. Deal. Thank you.
    Mr. Pallone is recognized.
    Mr. Pallone. Thank you, Mr. Chairman.
    In my home State of New Jersey, Medicare payments are 
scheduled to be cut by at least $107 million beginning January 
1st and will total $5.26 billion from 2006 to 2014. Such 
actions would have a considerable negative impact on physicians 
and beneficiaries alike.
    Cuts in physician payments may result in diminished access 
to care for Medicare beneficiaries. Without financial relief, 
physicians and other health care providers may be forced to 
limit services, drop Medicare patients or leave the Medicare 
program altogether.
    Mr. Chairman, we need to provide our doctors with the 
appropriate economic support in order to preserve access to 
quality care for Medicare beneficiaries. Doctors are already 
underpaid, in my opinion, under the Medicare program. Congress 
has averted scheduled payment cuts in previous years by 
enacting stop-gap legislation, but I believe Congress needs to 
enact permanent legislation that would fix the funding formula 
once and for all. Physicians should not have to fight each year 
to ward off future cuts.
    There are several issues in particular that must be 
addressed when updating the fee schedule or the sustainable 
growth rate, SGR. First, the initial conclusion of drug 
spending as part of SGR must be adjusted. Drug spending has 
increased far more rapidly than any spending on physician 
services, and the cost of physician administered drugs as part 
of the SGR severely distorts the calculation of actual spending 
that should count toward the amount in Medicare reimbursement.
    In addition, it is unfair for the SGR formula to be linked 
to the GDP. Physician fee updates should not be linked to the 
overall economy because physician services and fees do not 
parallel its ups and downs. Exercising fiscal discipline 
through the current SGR is not fair to doctors in my opinion, 
and again, I urge this committee to work on enacting a 
permanent fix to the formula that would accurately assess the 
appropriate reimbursement for their services. Thank you.
    Mr. Deal. Thank the gentleman. Mr. Upton is recognized.
    Mr. Upton. I thank you, Mr. Chairman and Chairman Barton, 
to make sure this was on today's calendar. As a co-sponsor of 
the legislation that was introduced by Mr. Norwood--Dr. 
Norwood--and Mr. Whitfield, I am absolutely committed to 
working with all of us, all of you to prevent the anticipated 
4.4 percent cut from going into effect on January 1st that will 
replace the current badly flawed mechanism for calculating 
Medicare physician reimbursement. We need to put in place a 
system that accurately measures the true cost that physicians 
incur in providing high-quality medically necessary care to 
Medicare beneficiaries.
    Permitting the 4.4 cut next year and similar cuts that will 
occur in each succeeding year under the current flawed Medicare 
physician payment system and putting into place a system that 
accurately reimburses for the cost of care is particularly 
urgent to preserving for access to care for Michigan's Medicare 
beneficiary. With only 13.2 physicians per thousand Medicare 
beneficiaries, Michigan is below the national average, and that 
ratio is only going to get worse. Further, about a third of 
today's Michigan physicians are over 55 and approaching 
retirement. According to a recently released study of Michigan 
workforce modeled after a national study from the Council on 
Graduate Medical Education, Michigan is going to see a shortage 
of specialists beginning in 2006 and a shortage of 900 
physicians overall in 2010, rising to 2,400 in 2015 and 4,500 
in 2020. Obviously, this Medicare reimbursement will only 
exacerbate the shortages and seriously undermine access to 
care. I look forward to working with you to make sure that we 
seek legislation that can correct the problem, and I yield back 
my time.
    Mr. Deal. Thank the gentleman.
    Mr. Dingell is recognized for an opening statement.
    Mr. Dingell. Mr. Chairman, thank you, and I commend you for 
this hearing. To begin by mixing a few metaphors, however, 
unfortunately, we have the cart firmly in front of the horse, 
and we are seeking to lock the barn door after the horse has 
been gone. It is a very important matter, and it must be 
observed that the current system for paying doctors in Medicare 
and Medicaid in a fair way is not good. Doctors have already 
confronted several years of cuts in what Medicare will 
reimburse them for patient care. Further cuts are scheduled. 
None of these cuts and the inadequacy of payments to physicians 
and others as providers is grossly inadequate and threatens not 
only the morale of the providers but, very frankly, the 
sustainability of the program and the possibility of its 
success. While it is theoretically possible that something can 
be done about these problems within the framework of 
legislation, it appears to me to be quite difficult to 
accomplish anything during this year or perhaps even next year 
to correct what is a gross unfairness to providers in something 
which indeed was clearly to be anticipated as being a 
consequence of cuts already made.
    When this committee considered reconciliation measures, as 
you will remember, Mr. Chairman, I offered an amendment to help 
the doctors and the elderly patients who rely on them. The 
amendment failed because the majority's budget priorities were 
elsewhere. The problem remains. A continued cut in payments to 
doctors in the Medicare fee-for-service program will only 
gladden those who wish to turn seniors over to private 
insurance companies. It is a most curious fact that doctors 
will see a 4.4 percent cut in payments to them while HMOs in 
Medicare will see a 4.8 percent payment increase. I wonder, is 
this a coincidence? Of course, changes to the physician payment 
system will increase Medicare spending, and we must recognize 
that we need to protect beneficiaries against further out-of-
pocket cost increases.
    Medicare beneficiaries have seen 2 years of premium 
increases because their premiums are based on Medicare 
spending. Even though covered under Medicare, the elderly are 
still paying a significant portion of their health care out-of-
pocket.
    Fixing the Medicare physician payment system is expensive, 
but there are steps that the administration could take and 
perhaps can focus on them that would lower the total price tag 
for a congressional fix of Medicare payment systems, and they 
could be done this year. I understand why the HMOs do not want 
the problem solved, but why is it that the administration does 
not wish to help?
    We will also hear about pay-for-performance and other new 
health care buzzwords. Improving quality is the right goal, but 
we need to proceed in a measured fashion, and we should be 
starting first with the HMOs that promised they would improve 
performance but have only succeeded in increasing the payment 
to them and benefits to their stockholders and office holders.
    As you will recall, during the last budget reconciliation, 
we made changes to Medicare to provide financial incentives to 
induce HMOs to participate. We were promised that they would 
improve care and lower costs. It is most doubtful that either 
has occurred. They may have lowered costs for themselves, but 
the Federal Government is seeing none of it, and in fact, the 
HMOs, according to MedPAC, who is testifying today, are being 
overpaid.
    For those who championed the bill of rights and fought for 
the rights of doctors to make medical decisions in the best 
interests of their patients without corporate interference, 
there is peculiar, special and particular irony in what is 
happening to Medicare. If we do not act to address physician 
payments, we are going to see more seniors forced into managed 
care programs, not by choice but by grim necessity, over their 
reluctance.
    These plans cost more, are not as efficient and are more 
responsive to shareholders than they are to patients. The 
committee should act. The administration should act to protect 
the ability of our seniors to see their doctors and see to it 
that the doctors are properly paid. But I fear that the tax 
cuts, which were programmed by the majority leadership, will 
leave the cupboard bare for doctors, forcing them out of fee-
for-service and forcing seniors into HMOs. That could clearly 
be the end of Medicare as we know it.
    I thank the witnesses here today for addressing these 
important issues. I am grateful, Mr. Chairman, that you are 
holding this hearing, and I look forward to the consequences. I 
yield back the balance of my time.
    Mr. Deal. I thank the gentleman.
    Dr. Norwood is recognized for an opening statement.
    Mr. Norwood. Thank you, Mr. Chairman, and thank you for 
having this hearing. It is very important, and I agree with Mr. 
Dingell and others that it is time for this committee to act. 
And I am pleased; this is a good first step. I want to do my 
part like all of you to make sure that Medicare beneficiaries 
maintain their access to their doctors. But you know what? That 
is just simply not going to happen if we continue down this 
path of using this misguided SGR formula. Just doesn't work. 
And repeal of it is extremely expensive, but we have to find a 
fair and better way.
    We have big spending problems in Medicare. We are not 
paying, for example, for prevention, which is a cost saver. We 
are not utilizing the technology that is available, and 
frankly, fee-for-service has its problems simply because 
Medicare will not pay even the cost of doing business.
    However, linking physician payments to the GDP just simply 
doesn't make sense. I know the government, when it did it, 
thought it did, but none of us today think it makes any sense, 
and including biologics in that formula even makes a great deal 
less sense.
    Not having a payment system that reflects physicians' true 
costs is reducing Americans access to care. That is not 
difficult to understand. We have alternatives. The Medicare 
economic index is a good first place to start. Doctors in 
Medicare face a 4.4 percent cut. Next year, in my home State of 
Georgia, doctors are expected to lose $64 million in 2006 and 
$164 billion over the next 5 years if we just sit here and do 
nothing.
    In light of this, along with my good friend, Mr. Whitfield, 
we have introduced a very simple bill, H.R. 4078, and this 
legislation, thankfully, is already supported by 12 members of 
our full committee. It has been endorsed by the Alliance of 
Medicine, a group of 13 specialties representing over 200,000 
physicians, and I would very much love for my friends on the 
opposite side of the aisle to get on board with us with this so 
we make sure this 4.4 percent cut doesn't take place.
    I know that it is inevitable that pay-for-performance is 
going to come up today since 600,000 thousand Medicare 
recipients are in some type of test program. I think it is 
extremely sad that we don't separate these two issues in terms 
of what we actually and how we actually pay our physicians 
versus what we can do to improve quality, but it doesn't seem 
it is easy to get them separated. I have not been able to get 
one person anywhere to define what this so-called pay-for-
performance would look like or how it would work across 
Medicare or prove to me in any way that it is going to save 
money or improve quality or tell me how much this sucker is 
going to cost. I also know folks over in the Senate Finance 
believe that the only way the doctors should see any increase 
in their payments is by selling their soul to the so-called 
quality reporting.
    Now the devil, I agree, is in the details, and I am ready 
to wait and learn. But I fear there is a lot of devil in the 
details we are going to learn. Mr. Chairman, any time that we 
start discussing changes that could possibly give our 
government bureaucrats more say-so over determining what is 
good treatment or a quality outcome instead of patients and 
doctors, it should get all of our attention. It does mine. Here 
is an idea, why don't we start by finding out how much it costs 
a doctor for a service and build in a reasonable profit for 
them participating in Medicare as we are discussing improving 
patient care all at the same time maybe by covering some 
prevention, things that would save money? Here is basically, 
what we are telling our physicians, you need to work harder to 
provide the almost weekly expansion of services and regulations 
by CMS, while taking more patients as the Baby Boomers retire. 
The bunch of non-physician, government clerks, or in the case 
of insurance companies as you know, tell you how to do your job 
and even will do so more in the future. We are going to cut 
your paycheck up to 30 percent over the next 10 years even 
though we pay no more than that costs today; all the while, 
your practice costs are going to be rising by 20 percent, so in 
the next 10 years, you will have twice the work at half the 
pay. Why in the world aren't you happy?
    We say, you must be faster or do less tests or spend less 
on physical exams. What does that do for quality? Mr. Chairman, 
we won't have a Medicare program if we continue on this path 
because every physician in this program will quit, and they 
should, and they will have to. Doctors need to know for many 
reasons before the new year, not next year sometime, their 
payments are going to be updated. We called for a freeze. It 
ought to be an increase. I look forward to working with members 
on both sides of this aisle on this very important issue, and I 
yield back. Thank you, Mr. Chairman.
    Mr. Deal. Thank the gentleman.
    Ms. Capps.
    Mrs. Capps. Thank you, Mr. Chairman. This is an important 
hearing today. For Medicare to work, for our seniors to get 
their health care, we have to have enough doctors. We cannot 
afford for beneficiaries, real people living in communities 
across American, to lose access to their doctors because of 
some arcane formula that does not match health care costs or 
needs.
    Since 2001, we have known about this problem. At that time, 
I introduced legislation to stop the immediate cuts. This 
committee moved swiftly to pass this bill, to actually provide 
a small increase for the next year. Then the committee bought 
more time to make a long-term fix in the Medicare prescription 
drug bill. The time is about to run out. Nothing has been done.
    Now doctors are facing a 4.4 cut next year and 26 percent 
in cuts over the next 6 years. In my district, Medicare 
physician payments are already artificially low. Santa Barbara, 
San Luis Obispo Counties are lumped in with more rural parts of 
California where costs are lower. Doctors receive a payment 
that absolutely does not meet their needs, and they are 
leaving. And so their patients, my constituents, are already 
facing access programs. I along with other members of the 
California delegation have asked CMS to fix this problem; they 
have refused. Now the doctors will have to deal with these 
absurd cuts on top of the too low payments. It is intolerable. 
It is time for us to get to work on this problem, and we have 
to work quickly.
    I do applaud the efforts of Mr. Norwood and Mr. Whitfield 
to prevent these cuts but we also need to be providing a small 
increase so physicians can deal with medical inflation and make 
sure that beneficiaries who are already on a fixed income don't 
have to swallow the costs.
    Now Congress, in a drive to control Medicare spending, 
created this problem when it passed this arbitrary system. Now 
we have to fix it. The amendment that Mr. Dingell offered of 
the Medicaid markup would have been just the thing, 2.7 
increase for physicians next year, and would have prevented 
Medicare from passing this increase on to beneficiaries. It is 
a shame it was defeated on a party line vote.
    I also want to raise my concerns along with Mr. Norwood 
about the efforts to pass pay-for-performance. We should be 
looking for ways to improve quality and eliminate unnecessary 
costs, and financial incentives can be a very good way to 
accomplish this. But we must be absolutely sure we are not 
creating incentives for doctors to deny needed care, and we 
must not prevent physicians from doing what they think is 
necessary to care for their patients because we have an 
arbitrary national policy. Health care, after all, is about a 
relationship between a patient and his or her doctor. It is an 
individual relationship. Unnecessary care for one patient may 
be life-saving for another. I look forward to hearing from the 
witnesses. I yield back.
    Mr. Deal. Thank the gentlelady.
    Dr. Burgess.
    Mr. Burgess. Thank you, Mr. Chairman, and I want to thank 
both you and Chairman Barton for holding this hearing, and I do 
believe it is important this committee be very involved in this 
serious situation. I was at a breakfast yesterday with Chairman 
Greenspan, and he talked about funded pension plans, whether 
they are private or government sponsored, and this would 
include Medicare. And he specifically mentioned Medicare, and 
he said they are eventually not worthwhile if there is no one 
there to provide the services for those who are to receive 
them. I think he is exactly right, and that is what the current 
pay reduction that we are looking at in the Medicare system is 
going to do for us. It is going to drive more doctors out of 
providing Medicare. I hear that every day in my district, and I 
hear from patients' comments at town hall meetings the question 
is about the cost of drugs, But how come I turn 65 and I have 
to change doctors?
    Well, I don't think we are doing ourselves or our 
constituents any favors by driving doctors out of the practice 
of medicine. I don't think we are doing any favors by 
encouraging our best and brightest to avoid the field entirely, 
and I agree with Dr. Norwood's call for a freeze on the 4.4 
percent reduction for this next 2-year time period. We need 
that amount of time to think of innovative solutions to think 
outside the box for a more serious effort and at a long-term 
fix. We need to ask for--we are going to ask our doctors for 
considerable investments in information technology in their 
offices. Well, I think we need to ensure that we keep the best 
lines and best clinicians involved in the practice of medicine 
as we make that move for greater investment to information 
technology. It makes no sense to spend a lot of dollars on 
computers if we don't have good doctors. Garbage in, garbage 
out.
    Pay-for-performance, I have always had emotional trouble 
with pay-for-performance. As a physician, I never woke up in 
the morning and said, I hope I can be at least adequate for the 
better part of the day while I am seeing my patients. I always 
woke up and thought, I am going to do the best job possible, 
deliver top quality care. We need to keep excellent physicians 
involved in providing care for their patients, and we need to 
encourage bright, young physicians to participate. I hope 
MedPAC can shed some light on long-term solutions. I for one 
would like to see us consider some type of balanced billing. In 
the Medicare Modernization Act, we set the income guidelines 
when we implemented the part B premium. Maybe we should explore 
that exercise for bringing more money into the system, and I 
don't have a problem emotionally with loaning or borrowing from 
a part A premium that I pay every month whether I want to or 
not, no upper limit on that one, and as the economy improves 
there is more and more money in the Medicare trust fund, and I 
don't see why we don't look for that to a short-term solution 
to solve this problem. I yield back.
    Mr. Deal. Thank the gentleman.
    Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman, for convening this 
hearing. I want to welcome Dr. Jacob Garretson who is the 
president of the Maine Medical Association who is in the 
audience today.
    We cannot stand by and do nothing about the scheduled 4.4 
percent Medicare set to begin in January. Unless Congress acts, 
physicians can expect a 26 percent decline in payments over the 
next 6 years. By 2013 Medicare payment rates would be less than 
half of what they were in 1991 after adjusting for practice 
cost inflation. If the goal were to undermine Medicare while 
professing to support it, failing to act would be a giant step 
toward that goal. Physicians in Maine need relief because their 
Medicare payment rates are already lagging behind increases in 
practice costs. Rural States like Maine have two major 
problems: a disproportionate share of elderly citizens and 
problems in many places simply getting access to physicians, 
particularly specialists. Congress passed three updates to the 
physician payment schedule over the past several years but we 
need to do more. We need to change the underlying funding 
formula to accurately reflect practice costs. There are two 
ways to do that, two particular legislative fixes: H.R. 2356, 
Representative Shaw and Cardin, which would halt payment cuts 
in 2007 and beyond by replacing the SGR formula with a new 
formula that reflects changes in the Medicare economic index. 
That bill has 162 bipartisan cosponsors.
    The second effort is H.R. 3617 introduced by Representative 
Nancy Johnson which would repeal the SGR formula and replace it 
with a stable and predictable annual update based on the costs 
of changes in providing in care. The bill would link payment 
updates to health care quality and deficiency. That also has 
support on both sides of the aisle with 46 cosponsors.
    We should accept the Senate budget reconciliation package 
that has a 1 percent payment update for physicians. That also 
eliminates the slush fund for regional preferred provider 
organizations. CBO estimates that the elimination of this fund 
would reduce Medicare spending by $5.4 billion over 5 years and 
$10.2 billion over 10 years. MedPAC has explicitly called for 
the stabilization fund to be eliminated, sighting Medicare is 
already heavily overpaying HMO's.
    I hope that Dr. McClellan and Mr. Hackbarth as well as our 
other panelists can help us understand the flaws of the current 
payment system and how to ensure Medicare patients across the 
country continue to have the access they need. Mr. Chairman, I 
yield back.
    Mr. Deal. I thank the gentleman. Mr. Hall is recognized.
    Mr. Hall. Thank you, Mr. Chairman, and as others, I 
appreciate your organizing this meeting. Like so many members I 
am concerned as you are about the impending physician pay cuts 
and I am looking forward to a good solution like all of us are. 
The sustainable growth rate formula is clearly not workable. 
That has been said over and over again as evidenced by the fact 
Congress keeps providing temporary fixes to it year after year. 
The Centers for Medicare and Medicaid Services projects that 
physician practice costs are expected to rise 15 percent from 
2006 to 2011, while payment rates continue to follow. So it is 
easy to see that this trend may cost physicians to decrease 
their Medicare patient mix and defer to the purchase of 
beneficial information technology resources, something we don't 
want to see happen. However, it is equally clear that repealing 
the SGR and replacing it with a new reimbursement mechanism is 
also not viable since it costs approximately $50 billion over 5 
years. Medicare beneficiaries are already facing a 13 percent 
increase in part B premiums. A move to replace the SGR would 
result in further premium increases that have to be borne by 
our Nation's seniors.
    At a time when gas prices and home heating bills are 
increasing, people living off of fixed incomes cannot shoulder 
the burden of steep increases in health care premiums. It seems 
the me that any solution also needs to address the usage of 
services and the flawed system of incentive. The current system 
encourages doctors to increase their volume of services, an 
incentive to reward those physicians who provide more 
procedures even if they are not necessary. I am interested in 
hearing what the panelists have to say about building better 
incentives into the system. And I appreciate the panelists 
taking their time. I look forward to hearing their testimony 
and proposed solutions to a challenging issue, and I yield back 
the balance of my time.
    Mr. Deal. Thank the gentleman.
    Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman. Do I have 1 minute 
because the clock is clicking with less time than I thought.
    Mr. Deal. Living on borrowed time.
    Mr. Waxman. Thank you for lending it to me. Woe is me. 
Every member of this committee is just shocked, absolutely 
shocked the physicians are going to get a cut. This is already 
the last week of the session until we break for Thanksgiving, 
and then we will come back and see what happens for a couple of 
weeks. How did this happen? Who is in charge? This is like the 
perils of Pauline, the doctors are Pauline strapped to a log 
about to go over the waterfall. We have got to save her.
    Look, some of us who have been around a long time have some 
memory of how this happened. This was put in the 1997 Balance 
Budget Act where the Republicans in Congress negotiated with 
President Clinton to make deep cuts in Medicare. They made deep 
cuts in Medicare not to balance the budget, because the budget 
was going to be balanced anyway, they made deep cuts in 
Medicare to do what, cut some taxes. Does that sound familiar? 
That was 1997, and many of us voted against that balanced 
budget act; not too many but some voted against it because we 
didn't think those cuts in Medicare made any sense. Now it 
didn't hurt the doctors all that much when the GDP was going 
up. You may remember, when Democrats were in control, the 
economy was doing quite well. The GDP was increasing. Now the 
economy is not doing as well with doctors facing these cuts. 
Well, doctors, if you get your wish not to let this happen, you 
will get a short-term fix. That is about the best you are going 
to get. While members in the House on both sides of the aisle 
pontificate about how this would be terrible to let a cut go 
into effect, you have got to do something permanently and we 
have got to figure out what to do and wish we would do 
something but we can't let this happen, it is not fair to 
doctors, not fair to Medicare beneficiaries. They are right. 
But we had a chance to vote on this when we were doing the 
reconciliation bill. The reconciliation legislation is where we 
fix Medicare and Medicaid issues and Medicare is part of the 
jurisdiction of this committee and Mr. Dingell had a proposal, 
the republicans voted against to make sure that the 4 percent 
reduction didn't--4 percent fee payment decrease didn't take 
effect. Well, stay tuned.
    I hope and I think the political reality is that there will 
be a short-term fix before the end of the year, no thanks to 
this committee. We didn't do anything about the problem, but I 
shouldn't say that, that would be unfair, what you have had 
today is a real expression on a bipartisan basis that none of 
us want this to happen, and we sure hope somebody takes charge 
and someone makes sure it doesn't happen. Well, they are the 
ones in charge and let's see what they do and let's hope, at 
the end of the year, we will have another short-term fix, and 
we can visit the issue again next year and tell the doctors how 
much we care about them.
    Mr. Deal. Mr. Shadegg.
    Mr. Shaddeg. Thank you for holding this hearing. Everyone 
in the room does know we have a serious problem we have to deal 
with. The current system is not sustainable and it is not 
reasonable to expect physicians to take a 4.4 percent reduction 
in payments. I join my colleagues in urging that we look at 
this issue and not just enact a temporary fix but look at a 
permanent reform. I think today is in some ways historic. I am 
told that CMS and MedPAC now agree, and that perhaps that is 
the first time they have ever agreed that 20 years of various 
standards, volume performance standards, behavioral offsets and 
sustainable growth rates simply have not worked. We need, I 
believe everyone in this room, should agree that we need 
fundamental reform. The question is not how much we pay 
physicians this year, the question is how do we fairly 
compensate physicians for the work the government asks them to 
do. I think there is even a more fundamental question and that 
is can the Congress and the government go on promising a level 
of benefits and then when they discover, when the government 
discovers that the cost of that level of benefits is higher 
than anticipated, push that burden, shove that gap between cost 
and what they are willing to pay off on the providers.
    I would suggest that, since the creation of this program, 
we have had that problem. Politicians have said well, we love 
to promise benefits to the public, tell them we will provide 
these services, outline vast expansive services and then when 
the bill comes home, they like to say, my gosh, I didn't 
realize it was going to cost that much, what can I do. I don't 
want to raise taxes so I will short change the providers. The 
effects of that in the short term and in the long term are 
extremely serious. I believe they demonstrate that government-
run health care fundamentally doesn't work. I think they 
demonstrate that the market doesn't work. I think they 
demonstrate that government planners don't know the answer, and 
I think they demonstrate that politicians that promise benefits 
and refuse to pay for them don't belong in office. I believe we 
need to pay physicians for the services they provide. We looked 
at the quality of the service they provide and the value they 
added. But seems to me we are forever looking at one more 
government solution, one more government plan.
    The latest word now is pay-for-performance. And I share my 
colleague's skepticism about pay-for-performance because, in 
this context, while you think pay-for-performance sounds 
wonderful, let's do that, let's pay doctors who perform; you 
have to ask one more question, who is going to decide what 
level of performance we are going to pay for? And guess what? 
In none of these plans is it the consumer that is going to 
decide what performance they pay for. No, no, no, it's a 
government bureaucrat who is going to layout a set of practices 
and tell the doctor, perform to this standard, and then we will 
pay you. If I wanted to get my health care from a government 
bureaucrat, I would go to a government bureaucrat for my health 
care, but I don't. I go to physicians whom I trust and whom I 
believe in, and I would rather pay them based on the quality of 
the care I believe they deliver.
    Mr. Chairman, I commend you for holding this hearing. I 
think we have to look at fundamental reform of the Medicare 
system and I simply want to conclude by at least recognizing 
them for their travel here from far away Arizona, both Chick 
Older the executive vice president of the Arizona Medical 
Association and Dr. Richard Perry, a member and my personal 
surgeon. I thank you. With that, Mr. Chairman, I yield back my 
time.
    Mr. Deal. Gentleman yields back.
    Ms. DeGette.
    Ms. DeGette. Thank you very much, Mr. Chairman, and I would 
like to join my colleagues in welcoming my folks from Colorado, 
Dr. Lynn Perry, who is our new president-elect of the Colorado 
Medical Society and my old friend, Suzanne Hamilton, who I have 
worked with over the years. And I would like to recognize 
everybody from all of the State medical societies and you folks 
here in the room for coming today. It is just too bad you all 
weren't here 3 weeks ago when we passed the budget 
reconciliation bill out of the Energy and Commerce Committee 
which did nothing to fix the physician reimbursement problem 
and in fact when, with one exception, every single person on 
the other side of the room here voted against Mr. Dingell's 
amendment that would have increased physician reimbursement by 
2.6 percent in 2006 and then would have updated the rate using 
MedPAC's suggested formula, that would have been a 2.7 increase 
in 2007.
    Dr. Perry, I know you have come today to see how sausage is 
made. Sometimes it is not a really happy experience for some of 
us. I think every single person in this room who cares about 
physician reimbursement and who cares about serving patients 
needs to look both at what your Members of Congress say and 
what they do because sometimes they are two different things. 
And I am sorry to say this because I love my friends on the 
other side of the aisle, but, you know, each of the last few 
years, physicians who serve Medicare beneficiaries have had 
cuts in reimbursement. Every year, we come in. We do a short-
term fix, but the short-term fixes coupled with the broader 
problems inherent with the sustainable growth model right now 
have exacerbated the problem.
    Now given how close we are to the end of the year, we 
probably will work in the first couple of weeks in December to 
do some kind of a short-term fix, but in the longer run, we 
don't want a scenario that will force physicians to see more--
to see fewer Medicare beneficiaries because of the 
reimbursement and what is worse in the longer run, as the Baby 
Boomers start to retire, physicians who will close their 
practices altogether toward these patients.
    The fundamental problem is there is no longer a stable 
basis for reimbursement for Medicare physicians, and the system 
is so susceptible to changes in the Medicaid and the Medicare 
population. And there are so few mechanisms to incentivize and 
support physician attention to improve quality that Congress 
really needs to take a broader long-term view, and that is what 
many of us think.
    This problem is going to be exacerbated by the fact that 
Medicare beneficiaries are going to start using the new 
prescription drug plan on January 1st, 2006, if, of course, 
they can figure it out, which I am wondering, but these 
beneficiaries, if they have to pay higher copays for their 
drugs and they have to pay higher copays for their physicians, 
should give us all pause to see what is going to happen with 
patient care. I think there is a lot of other issues that we 
need to look at, but most importantly, I think we need to look 
at the long-term model of how we are going to do physician 
reimbursement so that all you good folks don't have to fly in 
every year right before the holidays to try to get Congress to 
give you a short-term fix. Thank you, Mr. Chairman.
    Mr. Deal. I will recognize myself since I was not here at 
the beginning of the meeting, and I thank Mr. Ferguson for 
opening the hearing today. First of all, we are pleased to have 
so many representatives of the medical associations across the 
country with us today. We welcome your presence, and we have 
two very distinguished panels that we will hopefully hear from 
in the very near future.
    I would respond, though, to the last opening statement with 
regard to what was not done several weeks ago. The context of 
that hearing and that markup at least was Medicaid. It was not 
Medicare. And we restricted our actions as we appropriately did 
to the reforms that we proposed in Medicaid, and those were 
difficult votes that we had to take. Unfortunately, most of 
those votes were taken on a partisan line, but I think those of 
you in the audience recognize that in dealing with the issue of 
Medicaid reform, those were necessary reforms, things that had 
to be done to change that program to keep it viable.
    We are here today to talk about the issue of physician 
reimbursements, a topic that is obviously very appropriate, and 
I will not take any further time but look forward to the 
testimony of the witnesses that I will introduce in just a few 
minutes.
    Ms. Baldwin is next.
    Ms. Baldwin. Thank you, Mr. Chairman, and welcome to our 
witnesses and guests today. I want to associate myself with all 
of my colleagues who have voiced their support for enacting a 
long-term fix to the Medicare physician payment issue rather 
than continuing to engage in these yearly or biyearly fixes. 
The short-term solutions that are really Bandaids are unfair. 
They are unfair to the physicians who, at the end of each 
short-term fix, are once again faced with projected cuts. They 
are unfair to beneficiaries who may face access issues if cuts 
are enacted. They are unfair to taxpayers because of the cost 
of providing a fix gets more and more expensive with each 
passing year. And they are unfair to Medicare because Medicare 
is truly a successful and efficient program that provides 
comprehensive, affordable health care for over 40 million 
seniors.
    I was happy to support the amendment offered by Ranking 
Member Dingell during our markup several weeks ago of the 
reconciliation bill that would have addressed the negative 
payment update. And while it is unfortunate that this amendment 
was voted down on a largely party line vote, I am encouraged 
that we are here today discussing physician reimbursement.
    That said, I do have concerns about some of the proposals 
that have been put forward. I believe that improved clinical 
quality should be rewarded, but I am concerned that some 
proposals set up a system of winners and losers in their effort 
to improve quality. I fear that lower-performing systems or 
practices would be deemed losers, would receive lower payments 
and then would be set up--set further back from reaching the 
quality level that we are trying to entice them to achieve, all 
the while affecting real people, real patients.
    Also, it is important that we keep in mind that efficiency 
in improvement is not the same as better patient care, and when 
considering the options before us, high-quality patient care 
should always be in the forefront of our thoughts. I thank the 
witnesses for coming. I look forward to today's discussion.
    Mr. Chairman, I yield back.
    Mr. Deal. Thank the gentlelady.
    Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    I think it is important that we come up with a long-term 
fix. There are no ifs, ands or buts about it.
    But I am troubled by two things this morning: No. 1 is how 
I am hearing statements, and then I look at the way people 
vote, and it is so different from what they say. That bothers 
me. And the second thing that bothers me is how we are using 
the term reform. Reform is not something that is always 
positive. And we use it like it is always positive. Reform is 
neither positive or negative, depends on what you do with it. 
Of course, around here, most of the time, what we do with it is 
cut the budget. That is what it really means. It is like what 
my father used to tell my brother and I about prayer, he said, 
son, if somebody says they are going to pray for you, you need 
to find out what they are going to say. They might pray that 
you break your neck. So as I look at this term reform here, 
that is what we are saying to the doctors, break your neck. 
That is exactly what we are doing.
    We need a long-term fix. I think that what we are doing is 
not fair to the doctors, and it is not fair to the patients. 
And I am hoping that we really get serious here and not just 
make statements but begin to do the kind of things that we know 
need to be done to fix this problem. We are aware of what 
happened and what needs to happen. I am certain you are hearing 
from doctors the way I am hearing from them that they are 
leaving the profession. They are just walking away from it, no 
longer want to practice, and I think that becomes very serious 
because if we don't fix that, then a lot of good people are not 
going to be out there providing the kind of services that we 
need.
    So I am saying to my colleagues on this committee this 
morning, let us listen very carefully, let us take this 
information in, and let us do something that we know that we 
need to do, and that is to fix it, and let us not loosely use 
that term reform because that is not a solution because you 
know as well as I do that everybody on this committee knows the 
word reform here in the U.S. House of Representatives means cut 
the budget. That is all it means. It doesn't mean fix anything 
or make it better; it means cut the budget and lets use less 
money. That is the only thing it means here.
    Mr. Chairman, I yield back the balance of my time. I have a 
statement that is prepared I would like to place in the record.
    Mr. Deal. Ms. Eshoo, You are recognized.
    Ms. Eshoo. Thank you, Mr. Chairman.
    This committee has held a series of hearings examining the 
Medicare payment system. I am just about the last one to speak, 
so I am not going to repeat the things that have been stated at 
this time. And I want to associate myself with what my 
colleagues on this side of the aisle have said. Really, today 
is the opportunity for members to get on record, everybody, and 
say, doctors, we are with you. But the fact of the matter is 
that when the vote came in order to implement what really needs 
to be done, it is not what happened. But I still welcome the 
opportunity because I think it is essential that if we are 
going to honor Medicare, that we are going to honor the people 
that are a part of it, the patients and the physicians. We are 
nowhere without the physicians, and we all know that. Try 
running a healthcare system without doctors.
    So now we are going to lurch to what we have done over the 
last couple of years. You should get that, but it shouldn't 
look like this; it should be long term. We all know that there 
needs to be a fix.
    Dr. McClellan, I am glad to see you here today. I am going 
to raise an issue with you that has been--that you know we have 
worked on. I am deeply, deeply disappointed in the CMS final 
rule, the failure to fix the payment localities in my home 
State of California.
    You know, I have been an honest broker in this, and I think 
that, as I look over my shoulder, where I would fault myself is 
that I trusted what you all would do, and we are now back to 
square one; we are now back to square one. It is not good 
enough for the physicians that are in the system or the people 
that are so dependent upon that. And I am going to have some 
questions to ask you about this and where you are going to take 
it. I am deeply frustrated because I was given the assurances 
that this was going to be done. I have done everything on my 
part, everything that you asked me to do to get done with the 
medical society, with all the people on the ground, and now we 
are completely back to square one. I don't think this speaks 
well of CMS. I really don't, and the rest of it, as far as I am 
concerned, are excuses. But I hope you will be prepared to tell 
me what you really plan to do, if you are going to shove this 
over to the legislative arena. You didn't want that before. We 
went to Mr. Thomas; he said that you were going to take care of 
it. Now it is going to go back to the legislative arena. We 
have wasted over a year. And meanwhile, people are left holding 
the bag. That is not what we are supposed to do. We are 
supposed to solve things.
    So you can tell that I am not only deeply disappointed, I 
am really, frankly, disgusted. I am disgusted. And that is 
pretty harsh, but for all of the work that is put into this, 
nothing, nothing has come--no fruit has been born as a result 
of it. And CMS weighs very heavily into this, very heavily.
    So I am going to look forward to the answers to the 
questions that I am going to pose, that is just a taste of 
where I am.
    Thank you, Mr. Chairman.
    Mr. Deal. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    I ask unanimous consent to place my full statement in the 
record, and again thank Dr. McClellan for coming today. This is 
such a major issue, and I think all of us on the committee 
understand that, whether you are Democrat or Republican.
    The Congress has deferred from 2005 these physician cuts; 
the problem is our committee, we need to correct the problem. 
And whether--I know the issue is getting overutilization, but I 
have a district where if physicians see more, because of the 
Medicare case load, they have more patients. So 1 year they go 
up, and then they get cut the next year because they are 
actually seeing more patients. And we need to deal with whether 
it is over utilization or whether this actually is providing 
better healthcare for our Medicare recipients, and that is our 
fault. I think we need some structural changes so we can see if 
someone is gaming the system as compared to actually working 
with patients to get better healthcare.
    And Mr. Chairman, again, I thank you, and I will yield back 
my time so we can get to questions.
    Mr. Deal. I thank the gentleman.
    Ms. Cubin.
    Mrs. Cubin. Mr. Chairman, I would like time to yield to Dr. 
Norwood; can I do that?
    Mr. Deal. I suppose we can.
    Mr. Norwood. I will be very brief, Mr. Chairman, I just 
want to try to see if we can get the record straight here just 
a little bit.
    A few weeks ago, we marked up a Medicaid bill, at which 
time an amendment was brought which does away with the cuts for 
the physicians and has an increase. Well, everybody then at 
that time in that room knew that was the wrong time, the wrong 
place, the wrong amendment. It had absolutely no offsets for 
the $20-plus billion. Everybody in this room knows the same 
thing.
    You ask what you can do to say to the doctors, we are with 
you? Well, I have a bill that is going to have a hearing, that 
is going to have a markup--it is going to the floor, it is 
going to pass--that stops that 4.4 percent increase. So I 
invite at least one of my Democrat colleagues to be a co-
sponsor of that. If you do that, then you can actually say to 
your doctors, we are with you. And with that, Mr. Chairman----
    Mr. Waxman. With the gentleman yield? Will there be offsets 
to pay for this? Is that what the gentleman is saying?
    Mr. Norwood. Yes.
    Mr. Waxman. We look forward to seeing the physician fees.
    Mr. Norwood. Reclaiming my time, Henry. Why don't you just 
look at first considering being a co-sponsor on something that 
is good for our physicians, that would be a nice first step, 
and then hopefully maybe you will even vote for it on the 
floor.
    Mr. Waxman. Well, I was for patients' rights----
    Mr. Deal. Regular order----
    Mr. Norwood. Mr. Chairman, I yield back.
    Mr. Deal. The Chair would recognize Mr. Pitts for an 
opening statement.
    Recognize Mr. Whitfield for a unanimous consent request.
    Mr. Whitfield. Mr. Chairman, thank you for recognizing me.
    This is the first time in my 11 years in Congress that I 
have not been a member of the health subcommittee, and I would 
ask unanimous consent that I be allowed to speak for maybe 90 
seconds on this issue.
    Mr. Deal. Without objection.
    Mr. Whitfield. Thank you. And first of all, I am delighted 
that you are having this hearing. This is the committee that 
has exclusive jurisdiction over Medicare Part B, and we should 
be addressing this problem.
    My friend Charlie Norwood and I did introduce 4048, the 
Medicare Access Act which in effect would be a 1-year stop gap 
measure that would at the very least avert this reduction in 
Medicare for physicians for 1 year. We look forward to the 
testimony of the eight witnesses today who have great 
experience. And I know that Dr. McClellan is going to be 
addressing this issue in his testimony. And it is our hope that 
if the reconciliation bill passes the House--and I guess that 
is still a question mark--but if it does, then we will be able 
to go into conference with the Senate, that they will have a 
bill that addresses this issue of Medicare reimbursement for 
physicians, and that we can fix this for the next year, and 
then ultimately come forward with major reform so that this 
program can work in a more effective way. And with that, I 
appreciate the opportunity and yield back the balance of my 
time.
    Mr. Deal. I thank the gentleman.
    Well, we are pleased to have our first panel, who have 
waited patiently. They are two of the most respected 
individuals in the area of healthcare policy.
    First of all, Dr. Mark McClellan, who is the administrator 
of CMS; and Mr. Glen Hackbarth, who is the chairman of MedPAC.
    And Dr. McClellan, you are recognized for 5 minutes.

  STATEMENTS OF MARK B. MCCLELLAN, ADMINISTRATOR, CENTERS FOR 
    MEDICARE AND MEDICAID SERVICES; AND GLENN M. HACKBARTH, 
         CHAIRMAN, MEDICARE PAYMENT ADVISORY COMMISSION

    Mr. McClellan. Mr. Chairman, Representative Brown, 
distinguished committee members, thank you for the opportunity 
to testify on Medicare physician payments. Our current payment 
system for physicians is not sustainable, both from a 
standpoint of the very rapid growth we have seen in spending on 
physician-related services and from the standpoint of failing 
to support high-quality care. We are committed to continuing to 
work with physician groups and the Congress to move toward a 
payment system for physicians that provides stable 
reimbursement and also promotes higher quality and more 
efficient care without increasing the financial strain on the 
Medicare program.
    As the budget reconciliation process moves forward, the 
administration will work with the Congress on a fully offset 
provision to address the negative physician updates for 2006 
and 2007 with differential updates for physicians who report 
valid, consensus-based quality measures. These short-term 
reforms should provide a transition to a better payment system 
that spends Medicare dollars more effectively.
    At a historic time when we are bringing Medicare's benefits 
up to date, when medical science gives us more opportunities 
than ever to help seniors and people with disabilities to live 
longer and better lives, it is time to change our payment 
systems to provide better support for physician efforts to 
improve quality and avoid unnecessary healthcare costs.
    Healthcare providers are in the best position to know what 
can work most effectively to improve care of their patients. 
And their expertise, coupled with their strong professional 
commitment to quality, means that any solution to the problem 
of healthcare quality and affordability must involve their 
leadership.
    But today, our current payment system does not support the 
best efforts of physicians to improve quality and lower costs. 
Instead, it reimburses providers on a per-service basis; the 
more services provided, the greater the reimbursement, and we 
are getting what we pay for. We have seen rapid increases in 
the Medicare spending on physician services in the past few 
years. This is not a sustainable course.
    It is time to provide better support for the best efforts 
of physicians. Linking a portion of Medicare payments to 
clinically valid measures of quality and effective use of 
healthcare resources would provide more financial support for 
care that results in better quality and better value.
    With support from the Medicare Modernization Act, we have 
already taken steps in this direction in other parts of the 
Medicare program. Thanks to payment updates tied to reporting 
on valid measures of quality, almost all hospitals are 
reporting on consistent measures of the quality of care they 
provide. And earlier this week, as Chairman Barton mentioned, I 
announced the first year results of the Premiere Hospital 
Quality Incentive Demonstration, which showed that pay for 
performance works in Medicare. Hospitals improved the quality 
of care they offer, avoiding costly complications when payments 
are structured to support a focus on quality.
    CMS has been engaged with the physician community and other 
stakeholders in our healthcare system to work collaboratively 
on establishing quality measures that can be used for reporting 
and for a better payment system. Using these quality measures, 
including measures related to avoiding unnecessary healthcare 
costs, CMS is working with physician organizations and 
physician practices to conduct a number of demonstrations and 
pilots of payment reforms to pay more for better quality, 
better patient satisfaction and lower overall healthcare costs 
in the Medicare fee-for-service program.
    Another step in this major collaborative effort to support 
better care is the Physician Voluntary Reporting Program that 
we announced on October 28th. Under this program, physicians 
can choose to work with CMS to voluntarily report on a number 
of widely accepted evidence-based quality measures that will 
help us implement the least burdensome approaches to quality 
reporting and will provide new information relevant to 
improving quality for the participating physicians.
    On these efforts, we have worked with many physician 
organizations, including the Alliance of Specialty Medicine, 
the American College of Physicians, the American College of 
Surgeons, the Society of Thoracic Surgeons, and many others. I 
would like to thank them for their continued collaboration and 
constructive imput as we keep working together to improve 
quality of care for patients.
    Mr. Chairman, it has taken a lot of collaborative work to 
get to the point where we now have a path to a better payment 
system, to a better alternative, to rapid and costly increases 
in the volume of services on the one hand and to a failure to 
support quality care on the other.
    We look forward to working with you and others in Congress 
and the medical community to use the opportunity we have right 
now to change Medicare's physician payment system to help 
provide appropriate payments while also promoting better care 
for patients without increasing overall Medicare costs. And I 
would be glad to answer your questions.
    [The prepared statement of Mark B. McClellan follows:]

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    Mr. Deal. Thank you.
    Mr. Hackbarth.

                 STATEMENT OF GLEN M. HACKBARTH

    Mr. Hackbarth. Chairman Deal, Congressman Brown, other 
members of the subcommittee, I appreciate the opportunity to 
talk to you today about this issue.
    Based on your statements, you all understand the reasons 
why so many people are unhappy with the financial side of Part 
B of Medicare. Because of the sustainable growth rate system, 
physician fees confront significant cuts, not just in 2006, but 
similar cuts for many years into the future. Because 
expenditures are growing rapidly, Medicare beneficiaries 
confront significant increases in their premiums. And taxpayers 
confront a much heavier burden, not just for Part B, but for 
all of Medicare, and not just for today's retirees, but for a 
growing retiree population in the future. So there is lots to 
be unhappy about for all parties on the financial side.
    The news on the quality side is better, but still 
troublesome in some important ways. As a nation, we are 
regularly amazed by medical progress, steps that mean better 
care, longer lives, healthier lives for Medicare beneficiaries 
and for others. At the same time, we can't ignore the fact that 
many Medicare beneficiaries and Americans in general don't 
receive recommended care, roughly half of the recommended care 
is delivered for Americans of and Medicare beneficiaries, and 
for the most vulnerable patients, failure to deliver that care 
can have disastrous consequences. On the other hand, research 
on variation in the medical practices well documents that many 
patients likely receive many more services than they need.
    MedPAC has recommended a series of steps to improve the 
value received for the Nation's large investment in Medicare 
Part B. Even more important, we suggest the change in mindset 
about how to approach Part B of Medicare. The longstanding 
focus on cost should give way to a focus on value, which 
combines quality and efficiency in the delivery of services. 
Medicare's traditional respect for clinician autonomy is 
appropriate and well deserved, but it must be complimented by a 
demand for accountability for performance.
    Across the board mechanisms, like SGR, should be replaced 
by much more targeted approaches. Our focus on perfecting 
service-by-service payment must be combined with analysis of 
performance based on larger episodes of care.
    Specifically, MedPAC has recommended eliminating SGR and 
replacing it with a year-to-year evaluation of payment 
adequacy. Payments should be linked to quality. Tools should be 
developed to measure and assess physician use of resources and 
provide feedback to physicians on how their performance 
compares to other physicians.
    Medicare should examine rapidly growing areas, such as 
imaging expenses, to reduce unnecessary spending and ensure 
quality of care. Medicare's fee schedule must be continually 
refined to make sure prices are set accurately. For some 
services, we believe we are paying too much and, for others, 
too little.
    And we also support giving Medicare beneficiaries the 
option of enrolling in private health plans that may be able to 
offer a better value for some beneficiaries. By themselves, 
these recommendations are not going to solve the problem of 
rapidly growing expenditures in Part B. Controlling volume 
growth in a free choice fee-for-service program like Medicare 
part is very, very difficult, and that is not just for 
Medicare, that is for private insurance programs, that is the 
experience in other countries as well.
    The problem of volume growth and increasing expenditures is 
not an acute illness, to use a medical metaphor, it is a 
chronic problem that requires ongoing efforts, careful 
treatment and monitoring.
    If MedPAC's approach does not guarantee a solution, why do 
we prefer our approach to SGR? Because it is targeted, while 
SGR is indiscriminate; not all increases in volume are bad, 
some are much needed; not all services are growing rapidly; not 
all physicians are high users, yet SGR treats every service, 
every physician, every area of the country as though they were 
the same. That is unfair. And not only is it unfair, such a 
system has no power, no opportunity to motivate and reward 
improvement, and that should be the ultimate goal of any 
payment system.
    SGR is not a volume-controlled mechanism, but rather simply 
a means of setting a budget baseline, and it is a baseline that 
is wholly unrealistic that I don't think anybody in this room 
thinks is ever going to happen. It has become an impediment, 
the mechanism has become an impediment to some policy as 
opposed to an aid, it is time to move on.
    I welcome your questions.
    [The prepared statement of Glenn M. Hackbarth follows:]

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

    Chairman Deal, Congressman Brown, 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 growing rapidly. 
CMS estimated in March of this year that spending related to the 
physician fee schedule for 2004 increased by approximately 15 percent, 
while the number of Medicare beneficiaries in FFS increased by only 1.1 
percent. 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 volume. To get good value for the Medicare program, the payment 
system should set the relative prices for services accurately and 
provide incentives to control unnecessary growth in volume.
    In this testimony we briefly outline the history of the Medicare 
physician payment system and discuss several ideas for getting better 
value in the Medicare program including: an alternative method to 
updating payments; differentiating among providers through pay for 
performance, measuring physician resource use, and setting standards 
for imaging services; improving the internal accuracy of the physician 
fee schedule; and creating new incentives in the physician payment 
system.

Historical concerns about physician payment
    Physicians are the gatekeepers of the health care system; they 
order tests, imaging studies, surgery, and drugs as well as provide 
patient care. Yet the payment system for physicians is fee for 
individual service; it does not reward coordination of care or high 
quality--by definition it rewards high volume. Several attempts have 
been made to address this tendency to increase volume and payments.
    The Congress established the fee schedule that sets Medicare's 
payments for physician services as part of the Omnibus Budget 
Reconciliation Act of 1989 (OBRA 89). 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 payment rates by geographic area that could 
not be explained by differences in practice costs. (As we discuss 
later, there is evidence that relative prices in the fee schedule may 
have once again become distorted.)
    The third element of OBRA 89 focused on volume control, which is 
still a significant issue for the Medicare program. Rapid and continued 
volume growth raises three concerns: is some of the growth related to 
provision of unnecessary services, is it a result of mispricing, and 
will it make the program unaffordable for beneficiaries and the nation?
    Some volume 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.
    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 at Dartmouth have reached 
several conclusions about such findings:

 Differences in volume among geographic areas is primarily due to 
        greater use of discretionary services that are sensitive to the 
        supply of physicians and hospital resources.
 On measures of quality, care is often no better 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.
    All this suggests that service volume may be too high in some 
geographic areas.
    In addition, volume varies among broad categories of services: 
Cumulative growth in volume per beneficiary ranged from less than 15 
percent for major procedures to almost 45 percent for imaging, based on 
our analysis of data comparing 2003 with 1999 (Figure 1). Although one 
would expect some variation as technology changes, one source of 
concern is that growth rates were higher for services which researchers 
have characterized as discretionary (e.g., imaging and diagnostic 
tests).
    Impact on beneficiaries--For beneficiaries, increases in volume 
lead to higher out-of-pocket costs--copayments, the Medicare Part B 
premium, and any premiums they pay for supplemental coverage. For 
example, 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, 17.3 percent in 2005, and 13.2 percent in 2006.
    Impact on taxpayers--Volume growth also has implications for 
taxpayers and the federal budget. Increases in volume lead to higher 
Part B expenditures supported with the general revenues of the 
Treasury. (The Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) established a trigger for legislative 
action if general revenues exceed 45 percent of total outlays for the 
Medicare program.) Medicare is growing faster than the nation's output 
of goods and services, as discussed in the Medicare trustees' report, 
and will thus continue to put pressure on the federal budget. Increases 
in Medicare spending per beneficiary is an important reason for that 
growth, cited by the Congressional Budget Office and the Government 
Accountability Office (GAO), among others.
    OBRA 89 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.
    The VPS was designed to give physicians a collective incentive to 
control the volume of services. But, 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 with the sustainable growth rate system in the Balanced Budget Act 
of 1997.

The sustainable growth rate (SGR) system
    Under the SGR, the expenditure target allows growth to occur for 
factors that should affect growth in spending on physician services 
namely:

 inflation in physicians' practice costs,
 changes in enrollment in fee-for-service Medicare, and
 changes in spending due to law and regulation.
    It then allows for growth above those factors based on growth in 
real gross domestic product (GDP) per capita. GDP, the measure of goods 
and services produced in the United States, is used as a benchmark of 
how much additional growth in volume society can afford. The spending 
target in the SGR combines all these factors. The basic SGR mechanism 
only lowers the update when cumulative actual spending exceeds target 
spending.
    However, the SGR approach has run into difficulties as well. The 
SGR formula has produced volatile updates that in some years have been 
too high and in others too low. 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 unexpectedly large reduction in 2002 
of 5.4 percent. This volatility illustrates the problem of trying to 
control spending with an update formula. The current projection, 
according to the Medicare trustees, is that annual updates of about 
negative five percent will occur for six 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.
    There are two reasons why actual spending has exceeded target 
spending and the cumulative difference has become so great that 
multiple negative updates are projected.

 The first is that volume has continued to grow strongly even when 
        updates have been small or even negative. Figure 2 shows that 
        Medicare spending for physician services increased in 2002, the 
        one year when the update was negative, continued to increase at 
        a rate greater than the increase in the update through 2004, 
        and is projected to continue to increase in 2005. The trustees 
        projection assumes that negative updates will take place as 
        determined by the formula and eventually reduce spending.
 The second reason is that the spending target turned out to have been 
        too high several years in a row because growth in the economy 
        slowed. At the same time, inadvertent omissions of some billing 
        codes made actual spending appear lower than it really was. The 
        result was the updates calculated in those years were too 
        large. When the spending target and actual spending figures 
        were corrected, a large gap between actual and target spending 
        resulted. That gap has to be closed under the SGR formula, and 
        can only be diminished by multiple negative updates or very 
        large changes in the other factors.
    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.
    Even if all estimates of GDP and the other factors were always 
exactly right, the SGR approach is flawed.

 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, fee cuts might 
        eventually provide a budget control but in so doing would 
        produce fees that in the long run could threaten beneficiaries' 
        access to care.
 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 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 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.
    MedPAC has consistently raised concerns about the SGR--both when it 
set updates above and when it set updates below the change in input 
prices. The Commission recognizes the desire for some control over 
rapid increases in volume. However, 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.
    Volume growth must be addressed by determining its root causes and 
designing focused 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 not only 
for physicians, but also for the beneficiaries and taxpayers who have 
to pay for unwarranted volume. Volume growth that adds value should be 
treated differently from volume growth that does not.

Improving value
    We recommend a series of steps to improve payment for physician 
services. They are important steps that will improve quality for 
beneficiaries and lay the groundwork for obtaining better value in the 
Medicare program. They will not, by themselves, solve the problem of 
rapidly growing expenditures for physician services, but neither does 
the SGR. The SGR does not control volume; it only establishes budget 
targets, targets that have become unrealistically low. As a result, 
even sound policies often carry large budget "scores," a problem that 
will only get worse with time. Meanwhile, the SGR may be encouraging 
increases in volume, even while it creates serious inequities and the 
potential for future access problems.
    To begin improving payment for physician services, MedPAC 
recommends the following steps, which we discuss in more detail below:

 A year-to-year evaluation of payment adequacy to determine the 
        update.
 Approaches that would allow Medicare to differentiate among providers 
        when making payments as a way to improve the quality of care. 
        Currently, Medicare pays providers the same regardless of their 
        quality or use of resources--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, ensuring that providers who perform imaging studies 
        and physicians who interpret them meet quality standards as a 
        condition of Medicare payment.
 Measuring physicians' use of Medicare resources when serving 
        beneficiaries and providing information about practice patterns 
        confidentially to physicians.
 Ensuring that the physician fee schedule sets the relative price of 
        services accurately.

A different approach to updating payments
    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.
    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 the Congress might need to exercise budget restraints and MedPAC's 
analysis would serve as one input to Congress's decision making 
process.
    For example, we used this approach in our recommendation on the 
physician payment update in our March 2005 Report to the Congress. Our 
assessment was 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, were 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. This August 
and September for example, we found that among beneficiaries seeking an 
appointment for illness or injury with their doctor, 83 percent 
reported they never experienced a delay. This rate was higher than the 
75 percent reported for privately insured people age 50 to 64.
    A large national survey found that among office-based physicians 
who commonly saw Medicare patients, 94 percent were accepting new 
Medicare patients in 2004. We have also found that the number 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. 
CMS has found that two subpopulations of beneficiaries more likely to 
report problems finding new physicians are those who recently moved to 
a new area and those who state that they are in poor health. Center for 
Studying Health Systems Change has found that rates of reported access 
problems by market area are generally similar for Medicare 
beneficiaries and privately insured individuals. This finding suggests 
that when some beneficiaries report difficulty accessing physicians, 
their problems may not be attributable solely to Medicare payment 
levels, but rather to other factors such as population growth.

Differentiating among providers
    In our March Report to the Congress we made several recommendations 
that taken together will help improve the value of Medicare physician 
services. Our basic approach is to differentiate among physicians and 
pay those who provide high quality services more, and pay those who do 
not less. 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. Although some 
of these actions may be controversial, we must ask ourselves what the 
cost is of doing nothing--how long can we afford to pay physicians 
without regard to quality or resource use?

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 demonstration projects, such as the physician group 
practice demonstration, aimed at tying payment to quality. In addition, 
CMS recently announced a voluntary quality reporting initiative for 
physicians. 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. These CMS programs provide a foundation for initiatives 
tying payment to quality and encouraging the diffusion of information 
technology.
    However, other than in demonstrations, Medicare, the largest single 
payer in the system, still pays its health care 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.
    To begin to create incentives for higher quality providers, we 
recommend that the Congress 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 next a broader set 
of process measures.
    The first set of measures should describe evidence-based quality- 
or safety-enhancing functions performed with the help of IT. 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. Functions might include, for example, 
tracking patients with diabetes and sending them reminders about 
preventive services. This approach focuses the incentive on quality-
improving activities, rather than on the tool used. The performance 
payment may also increase the return on practices' IT investments.
    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 health care 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.
    MedPAC recommends that Medicare measure physicians' resource use 
over time, and feed back the results to physicians. Physicians could 
then start to assess their practice styles, and evaluate whether they 
tend to use more resources than their peers. 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 begin to use the results in payment, for example as a 
component of a pay-for-performance program.
    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. MedPAC and CMS are working on measuring resource use 
through episodes of care. This recommendation would help 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. In addition some imaging services 
have grown even more rapidly than the average (Figure 3). To the extent 
that this increase has been driven by technological innovations that 
have improved physicians' ability to diagnose and treat disease, it may 
be beneficial. However, other factors driving volume increases and 
increasing use of imaging procedures in physician offices could 
include:

 possible misalignment of fee schedule payment rates and costs,
 physicians' interest in supplementing their professional fees with 
        revenues from ancillary services,
 patients' desire to receive diagnostic tests in more convenient 
        settings, and
 defensive medicine.
    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, may mean that beneficiaries are receiving 
unnecessary or low quality care. Therefore, we recommended that 
Medicare develop quality 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 all medically necessary services provided by physicians 
operating within the scope of practice for the state in which they are 
licensed. The Commission concludes that requiring standards is 
warranted because of evidence of low-quality providers, the lack of 
comprehensive standards for physician offices, and the growth of 
imaging studies provided in this setting. There is precedent for this 
approach. 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, we recommended that CMS:

 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 
        pay less for multiple imaging studies perforemed during the 
        same visit, and
 strengthen the rules that restrict physician investment in imaging 
        centers to which they refer patients.
    CMS adopted some of these recommendations in the 2006 final rule 
for physician payment by restricting physician investment in nuclear 
medicine facilities to which they refer patients and reducing payments 
for multiple imaging studies.

Improving the physician fee schedule
    As progress is made on the steps discussed above, it is also 
important to assure that the relative rates for paying physicians are 
correct. Medicare pays for physicians' services through the physician 
fee schedule. The fee schedule sets prices for over 7,000 different 
services and physicians are paid each time they deliver a service. It 
is important to get the prices right because:

 Otherwise, Medicare would pay too much for some services and 
        therefore not spend taxpayers' and beneficiaries' money wisely.
 Misvaluation can distort the market for physician services. Services 
        that are overvalued may be overprovided. Services that are 
        undervalued may prompt providers to increase volume in order to 
        maintain their overall level of payment or opt not to furnish 
        services at all, which can threaten access to care.
 Over time, whole groups of services may be undervalued, making 
        certain specialties more financially attractive than others.
    The Commission is examining several issues internal to the 
physician fee schedule that could be causing the fee schedule to 
misvalue relative prices:

 The system for reviewing the relative value units (RVUs) which 
        determine the fee schedule prices may be biased. The system 
        identifies undervalued codes for review more often than 
        overvalued codes; it creates a presumption that current 
        relative values are accurate (even though the work associated 
        with some services, especially new services, should change over 
        time); and it may favor procedures over evaluation and 
        management services.
 The method for adjusting payments geographically for input prices may 
        be distorting relative prices and hence misvaluing services. 
        There are two aspects to this issue. First, the boundaries of 
        the payment localities have not been revised since 1997 and may 
        not correspond to market boundaries for the inputs physicians 
        use in furnishing services. Second, the share of the practice 
        expense payment that is not adjusted geographically is the same 
        for all services, although the cost of equipment and supplies 
        (which this share is supposed to represent) is not. This means 
        that payments may be too low for equipment-and-supply-intensive 
        services (such as imaging) in some areas and too high in 
        others.

 New data are needed for determining practice expenses and the current 
        method is complex and not transparent.
    The Commission is working on options to improve relative pricing 
accuracy in the physician fee schedule.

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, encouraging 
use of IT, measuring resource use, and reform of payments for imaging 
services--can help Medicare beneficiaries receive high-quality, 
appropriate services and improve the value of the program. Although the 
Commission's preference is to directly target policy solutions to the 
source of inappropriate volume increases, as discussed in the previous 
section on imaging, we recognize that the Congress may wish to retain 
some budget mechanism linked to volume. However, the mechanism should 
more closely match physicians' incentives to their individual 
performance. In our March 2005 Report to the Congress, we presented 
potential ideas for volume control methods that encourage more 
collaborative and cost effective delivery of physician services in 
accordance with clinical standards of care; these are described briefly 
below.
    Potentially, the SGR could be modified by creating smaller groups 
subject to a spending target. Research shows that reducing the size of 
groups subject to collective incentives may increase the likelihood 
that the actions of individuals within the group will be influenced by 
the incentives. Faced with such incentives, smaller, more cohesive 
groups of physicians may establish new guidelines for care that will 
reduce volume growth and improve quality. Although these smaller groups 
will differentiate updates more than a single update, many of the 
problems that accompany controlling volume growth through an update may 
persist. These methods will also require a means of risk adjustment. 
Four ways in which Medicare could move from one national spending 
target to multiple spending targets are:

 Create one or more alternate pools based on membership in organized 
        groups of physicians. Alternate pools could be formed, for 
        example, for group practices, independent practice associations 
        (IPAs), or hospital medical staffs. Organized groups of 
        physicians would apply for inclusion, and services provided by 
        group members would be aggregated in this separate pool. In 
        order to participate in the pool, groups would have to meet 
        certain criteria, such as functioning clinical IT systems, 
        quality recognition programs, and a commitment to the use of 
        evidence-based medicine. Continued membership would be subject 
        to performance standards.
 Divide the United States into regions and adjust the annual 
        conversion factor based on changes in the volume of services 
        provided in each region. An SGR-type formula could be used to 
        determine how much spending growth society could afford, but 
        the overall target would be adjusted regionally. Because 
        reducing volume growth would be more difficult to achieve in 
        areas where the volume of services provided was already low, 
        the formula would have to take into account the initial volume 
        level.
 Set targets based on the performance of hospital medical staffs. 
        Research shows that hospital medical centers can function as de 
        facto systems of care. Medical staff would be defined as all 
        the physicians practicing in a given hospital. Updates would be 
        higher for medical staffs that controlled spending growth and 
        lower for staffs for whom spending grew at rates above average.
 Adjust fees differentially by service or types of service. Fees for 
        services with very high volume growth would be reduced, or not 
        increased at the same rate as fees for other services. Either 
        volume targets or growth thresholds would have to be 
        established with exceptions where warranted.
    All of these ideas raise many questions about design, 
implementation, and policy. MedPAC has not endorsed any of these 
approaches, but we will explore them further if the Congress is 
interested in investigating them.

    Mr. Deal. Thank you, both.
    I will begin the questioning.
    Dr. McClellan, there have been several suggestions about 
what we should do to change the SGR formula, one of them was a 
suggestion that drugs be removed from the calculations. Would 
you comment onthat, please?
    Mr. McClellan. Mr. Brown asked about that, too. We have 
more of a sense of discussion on this in my written testimony. 
In the final regulation that we issued on physician payment in 
the beginning of November that made very clear why we don't 
have the statutory authority, we don't see a path of statutory 
authority to remove drugs from the sustainable growth rate. The 
reason for is, to do so retrospectively at least, is there is 
specific legislation the Congress has passed that said the SGR 
formula cannot be adjusted more than a limited number of times. 
We got a lot of useful comments in about how we might see a 
path to this authority, but nothing that address that 
fundamental problem, fundamental obstacle to doing so with the 
way the current statute is written.
    Even if we had been able to find a way to do this, though, 
this would not have solved the problem that we are facing right 
now. It would have had some very real effects, it would have 
added $110 billion to Medicare costs over the next 10 years and 
added close to $40 billion in additional payments and premiums 
and co-pays by Medicare beneficiaries. Even with all of that 
additional spending, there would still be a significant 
negative update for physicians in 2006 and 2007 and subsequent 
years.
    So we don't have a way to have the statutory authority to 
doing this retrospective removal of drugs, but we will 
obviously keep looking for comments and input. But it doesn't 
solve the problem, you still have a negative update, you have 
even higher costs for the Medicare program and for 
beneficiaries, and that is why we are supporting working with 
you on legislation that would address the negative payment 
updates, and it would help us move toward a system that 
provides better support for quality care and avoiding 
unnecessary costs.
    Mr. Deal. Mr. Hackbarth alluded to the issue of the volume, 
and the escalating volume that we are seeing in terms of the 
number of times patients appear in the doctor's offices. Would 
you comment about that component? And Mr. Hackbarth, I would 
ask you, after he concludes, if you would comment on that 
further.
    Mr. McClellan. We both see the same data. In the last few 
years, spending in physician-related services has increased by 
12 or 13 percent or more. In the first 6 months of 2005, we 
have seen that same 12 percent rate of increase, about a $10 
billion, $12 billion increase over where physician spending was 
a year ago. This is due not only to more use of drugs in 
physician offices, going back to your earlier question, it is 
also due to more use of laboratory tests, more use of more 
intensive imaging procedures in conjunction with that patient 
care and more use of minor procedures in the office, more 
frequent visits. All of these types of services are growing at 
double digit rates. And we have had a lot of discussion with 
many of the physician groups, and many of these types of 
increases are unquestionably adding to value of care, they are 
helping patients stay healthier, better understand and diagnose 
diseases. But we have seen also a lot of evidence of growth in 
areas and big variations in care where there is no clear 
relationship, no clear evidence of what consequences it is 
actually having for important outcomes for patients. And we 
need to keep working to get better evidence on how we can 
support better care, while avoiding some of these potentially 
unnecessary cost growths.
    Mr. Deal. Mr. Hackbarth.
    Mr. Hackbarth. I think Mark has laid it out well. The only 
point that I would emphasize is that the rate of growth is 
highly variable, some areas like imaging are growing very, very 
rapidly. Others, like major procedures and evaluation and 
management, are growing much more slowly. So volume is not a 
generic problem in Part B, it is a very focused one, which is 
why we think that the approaches also need to be focused, the 
approaches we are dealing with.
    Mr. Deal. Dr. McClellan, as you know, as we have gone 
through Medicaid reform, one of the issues is use of drugs and 
generics, et cetera. Ifwe go to something in a pay performance 
type model, would there be some way to incentivize from the 
doctor's end of it the prescribing of generics rather than 
brand names?
    Mr. McClellan. Well, I think doctors are already taking a 
lot of steps to help patients find lower cost ways to get their 
medicines. That is going to be more important next year with 
the prescription drug benefit starting where just about all the 
drug plans provide excellent coverage for generic medicines, 
zero co-pays or a few dollars in co-pays.
    The payment reforms that we have been discussing, which 
would give, for example, internists more opportunities to get 
paid more when their patients get better results, would 
definitely be conducive to supporting--to helping doctors 
support use of generic medicines. If we paid more to help 
doctors get their patients into fewer complications, the 
doctors themselves would have more money to invest in 
electronic record systems and other approaches to help them 
identify ways to help their patients stay healthy and avoid 
unnecessary costs. Right now, our volume-based payment system 
doesn't do all that much to support that directly.
    Mr. Deal. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    Dr. McClellan, as I said, beginning in January physicians 
will see the reductions in payment. Is the President urging 
Congress to pass legislation preventing that cut before we 
adjourn this year?
    Mr. McClellan. The administration supports action in the 
budget reconciliation process to address the negative update 
for physicians. We would like to see that process, that reform 
also take steps, not just to put in--not just help for 
physicians with the negative updates, but also steps toward a 
better payment system. And we need more information on quality, 
quality that physicians themselves think is important, and I 
think it is what our healthcare system and our 
healthcarefinancing mechanisms ought to support to be part of 
that effort as well. So we want to see that happen as part of 
the budget reconciliation process.
    Mr. Brown. What should the deadline be for enacting a 
payment system that pays health professionals fairly?
    Mr. McClellan. Well, this is something that we have to work 
on with Congress. We will be looking to you all to see when and 
how we can act, but we would like to get to work on this 
reconciliation process.
    Mr. Brown. Has the President set a deadline for when he 
wants to see this done?
    Mr. McClellan. He has not set a specific deadline. He would 
like to see that budget reconciliation process completed as 
soon as possible, and we would like to try to address this 
issue as part of that process.
    Mr. Brown. Does the President have an opinion on the 
question of whether it is better to cut taxes by another $70 
billion or devote those dollars to paying physicians fairly?
    Mr. McClellan. Well, I think what the administration 
supports is getting more for our spending in the Medicare 
program. And what we have seen in our work over the last few 
years is that physician groups are taking a lot of steps to 
help us do that by identifying what is working in their 
practice, identifying ways that we can pay differently to 
better support quality care and avoid unnecessary costs. That 
is what is going on in the demonstration programs right now 
that we are working with physician groups to implement, and 
that is what we would like to see in legislation.
    Mr. Brown. But when is--what are his ideas about paying for 
this? Because you didn't really--your answer was fine, and not 
unexpected, but not as precise as I would have liked. How is 
this going to work? Explain this to me. You said there is no 
deadline except sooner rather than later. The reductions start 
in January. The President, I think, still wants to do the $70 
billion in tax cuts. My friends on the other side of the aisle 
want to pass--or at least some of them, not quite enough yet--
want to pass a reconciliation. I am confused about all this----
    Mr. McClellan. The administration has proposed a budget 
with a number of areas of proposed savings in it. The 
administration has also been working with the Congress on the--
in the reconciliation process to find ways to reduce government 
costs while not having adverse impacts on the quality of care 
or--also while taking steps to improve the way that government 
programs work, like improving the way that the Medicare program 
works.
    As part of the reconciliation process in the Senate, for 
example, there have been a number of offsets in spending 
identified, as well as support for an increase in physician 
payments next year. That is a good foundation to build on. And 
we will work closely with the Congress on getting legislation 
that is offset, but that does address this physician payment 
problem.
    Mr. Brown. But the savings aren't going to be in time to 
pay for the--to prevent the reductions next January.
    Mr. McClellan. Yes, they are. If they are part of the 
reconciliation process, that reconciliation process will result 
in some overall savings for the government. That bill that 
passed the Senate includes some new areas of savings as well as 
new areas of spending, including steps to address the physician 
payment problem that we are talking about today . That is a 
foundation that we can start to build on to get this--to get 
these payment changes implemented ahead of next year.
    Mr. Brown. You said some things passed in the Senate. The 
Senate cut HMO payments; does the President support cutting 
these HMO payments?
    Mr. McClellan. The Senate had a number of changes in 
Medicare payments----
    Mr. Brown. Specifically, I am asking about the HMO 
payments. Don't go off in----
    Mr. McClellan. No. The administration does not support 
reducing payments to Medicare advantage plans that now are more 
widely available than ever before, that are saving 
beneficiaries an average of a hundred dollars a month, and that 
should be available to every person on Medicare.
    Mr. Brown. Of course they are saving beneficiaries a 
hundred dollars a month because we are just dolling out huge 
numbers of tax dollars directly to insurance companies.
    Mr. McClellan. Well, if you look at the overall numbers, 
they are saving our healthcare system as well. The total 
payment----
    Mr. Brown. Not according to the----
    Mr. McClellan. Total payments to the Medicare advantage 
plans by beneficiaries, plus the government, is lower than, on 
average----
    Mr. Brown. Well, Mr. Waxman talked about the PBA 1997, part 
of the whole point was that bringing in Medicare plus choice--
is I believe what we called it--that was a way of saving money 
for taxpayers. I think they paid--it was a 5 percent discount, 
that was the money saved. And now it is 100 percent plus. So I 
don't know that I would say those numbers quite add up that 
way. I guess my time is expired, thank you.
    Mr. Deal. Thank you. Chairman Barton.
    Mr. Barton. Thank you.
    Thank you, Chairman Deal, and again, thank each of you 
gentlemen for being here. I have a few editorial comments.
    I listened to the opening statements--even though I was in 
and out, I have a television in my office here--and a number of 
members alluded to the fact that my good friend, Mr. Dingell, 
offered an amendment on this issue in the reconciliation mark-
up several weeks ago, and that is absolutely true. What wasn't 
mentioned was that he probably knew that it wasn't germane. He 
put it into play, and in trying to expedite the process, I 
recognized him before I realized that there was a point of 
order against it. And he kind of caught me with my procedural 
pants down--and that is okay, that shows how wiley he is--and 
so we had the debate because he had played by the rules, and he 
deserved it. We had to defeat that because it wasn't germane, 
but I promised at the time that we would have a hearing, and if 
we could get consensus, we would try to move something very 
quickly, and that is the purpose of today's hearing. It is a 
serious issue, and if we can find a way to constructively and 
structurally repair it long term, then I am all for it. As I 
said, though, I am not for a short-term fix for another year.
    So I just kind of want to set the record straight that the 
previous mark-up was on Medicaid, and it really wasn't on 
Medicare. Having said that, this issue needs to be addressed.
    Dr. McClellan, my first question is pretty straight 
forward--and nobody is really talking about it, but I would 
think that one answer to this problem might be to just allow 
physicians to do balance billing. What is the administration's 
position on that?
    Mr. McClellan. Well, physician balance billing would be 
certainly a way of getting additional payments to physicians 
for quality services they provide, to give physicians an 
opportunity, where they are offering valuable services that 
people are willing to pay for, to get the payments that they 
think are appropriate. As you know, that is not allowed under 
current law. It is something that Congress is----
    Mr. Barton. This committee can change the law.
    Mr. McClellan. And this committee can change the law. We 
would be glad to work with you on any number of ideas to get to 
a better payment system. I think any step in payment changes 
that get us more toward paying the value of services that 
patients actually want are steps in the right direction. In 
doing so, we need to make sure that we are preserving access to 
care for all beneficiaries. So that is, I think, the right 
overall goal for the payment discussions we are having, and we 
would be happy to talk with you about this kind of proposal as 
well.
    Mr. Barton. Mr. Hackbarth, do you have an opinion on 
balance billing?
    Mr. Hackbarth. Mr. Chairman, we have not taken a position, 
we have not looked at that issue specifically.
    Our primary focus has been trying to get Medicare's 
payments directly to physicians that are both in terms of the 
level----
    Mr. Barton. Is that something you think you could take a 
look at?
    Mr. Hackbarth. Sure. We would be happy to take a look at 
it, but we have not looked at it in the past.
    Mr. Barton. Another question--again, I will start with Dr. 
McClellan--what percentage of Medicare beneficiaries have 
Medigap insurance? And in most Medigap policies, do they have a 
provision that they kick in after Medicare has paid whatever it 
is going to pay to the physician?
    Mr. McClellan. The vast majority of beneficiaries in fee-
for-service Medicare have supplemental coverage of one kind or 
another. Some people get it from Medicaid, some people get it 
from former employers. Many people purchase Medigap insurance 
on their own. It is a lot more expensive generally than the 
Medicare premium itself. And the costs of Medigap have gone up 
a lot. It does fill in the gaps of Medicare payments, so the 
copayments, uncovered services or covered limits, rather, 
things like that are taken care of by Medigap for the people 
who have it.
    Mr. Barton. So what would happen if this 4.4 cut were to go 
into effect? Would the physician who takes a Medicare patient 
actually see that in real dollars received, or would those 
patients that had Medigap, would Medigap pick that up?
    Mr. McClellan. Well, the physicians would likely see it, 
and it gets to the point that you were talking about earlier, 
about the limits of balanced billing. When Medicare reduces its 
payment rates, as a general matter, physicians can't make up 
the difference by charging more in copayments. The copayment is 
statutorily set at 20 percent of the payment rate for the 
service. So when the payment rate for the physician goes down, 
the payment rate for the copay goes down as well.
    Mr. Barton. My last question, because my time is expired, 
have physician costs to Medicare been rising at about a 15-
percent-a-year rate the last several years?
    Mr. McClellan. That is true. In the last several years 
physician-related spending has gone up by close to 15 percent 
per year. We are seeing a growth rate around 12 or 13 percent 
for the first half of this year as well.
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Deal. Mr. Dingell is recognized.
    Mr. Dingell. Mr. Chairman, I thank you. And I thank 
Chairman Barton for his very kind words about me; it is much 
appreciated, as is the hearing.
    Dr. McClellan, I want to read you a couple of interesting 
statements: ``CMS believes statutory change is needed to 
improve physician payments.'' then we hear this in testimony to 
be given: ``as you are well aware, unless Congress intervenes, 
the certainty SGR method for determining Medicare physician 
payments will require 4.4 percent payment cut in 2006 with an 
estimated 26 percent accumulative cut anticipated over the next 
6 years''.
    And then this words: ``Medicare payments today are about 
half what they were in the 1980's, even before inflation is 
taken into account.'' Then I see these words: In fewer than 50 
days, Medicare physician payments will be cut by 4.4 percent, 
followed by significant reductions in year 2012. And rates will 
not return to their 2002 level before 2013. In other words, 
physicians will receive less reimbursement in 2013 than they 
did in 2002 for the same--for the exact same procedure. 
Although reimbursement will likely be cut by more than 30 
percent of the current formula during the time period, it is 
estimated that the cost of providing services will rise by 
close to 20 percent.
    Do you agree with all of those statements?
    Mr. McClellan. I think all of those statements are 
generally correct. We have got a payment system that is not 
sustainable.
    Mr. Dingell. I think you can understand the frustration of 
this committee. We have here before us a situation, which 
according to all accounts, borders on calamitous, and we do 
not, anywhere, have legislative recommendations from the 
administration to address the problem they say is very unfair.
    Two questions: Why do we not have those recommendations? 
And when are they coming?
    Mr. McClellan. In my testimony, I specifically stated----
    Mr. Dingell. I read your testimonly, and I didn't find 
either answer.
    Mr. McClellan. Well, what it said was, as you know, that we 
would like to address the negative update for physicians and do 
it in a context of providing a differential--report on 
quality----
    Mr. Dingell. We are having a hearing now. Where are your 
recommendations?
    Mr. McClellan. There are a number of proposals that have 
been developed by bipartisan Members of Congress----
    Mr. Dingell. Dear friend, I just want to know where they 
are and when they are coming and what they are. And if you will 
submit them in writing, we will try to see that they are 
enacted. If you do not have any at this time, I would 
appreciate if you would say so.
    Mr. McClellan. We don't have a specific legislative 
proposal because there is strong bipartisan interest in taking 
steps like the ones that we would support to address this 
problem.
    Mr. Dingell. And I note that your interest is piqued by 
these hearings, which comforts me, we may have to have more 
hearings in order to get greater interest on the part of the 
administration.
    Now two questions, can you please--well, no. We understand 
that this administration is concerned about the taxpayer's 
money. Can you please explain to me why CMS has ignored MedPAC 
and GAO reports that Medicare payments are excessive?
    Mr. McClellan. The Medicare advantage payments are bringing 
better benefits and lower costs to people in Medicare. The GAO 
and others have been concerned in the past that Medicare 
beneficiaries who choose Medicare advantage plans are healthier 
than people in fee-for-service Medicare. What we have seen----
    Mr. Dingell. That is a very fine answer, but it doesn't 
respond to the question.
    Mr. McClellan. Well, what we have seen----
    Mr. Dingell. Why not?
    Mr. McClellan. As we have improved the Medicare advantage 
payment systems and the plan availability is that a lot of 
people are enrolling in these plans.
    Mr. Dingell. I have 30 seconds remaining. I am going to 
assume that you are telling me that you are not interested in 
those matters.
    Now, Dr. McClellan, can you please explain why Medicare 
HMOs, who only provide service to 15 percent of the Medicare 
population yet are responsible for 2.9 percent of the 2006 
premium increase, while doctors provide care to a much larger 
percentage of seniors, are only responsible for 2.5 percent of 
the 2006 premium? Now that is one of your actuary's findings.
    Mr. McClellan. Well, I think what the actuary's finding 
showed is that a much larger part of the increase was due to 
making up for reductions in the reserves that were available in 
the Part B trust fund, and that is because spending grew faster 
than expected in the past year, and that in turn was due to the 
rapid growth in physician-related services. So I don't think 
that is a complete picture of the causes of the spending growth 
that you just described.
    Mr. Dingell. Well, I do not read that in the statement of 
the Medicare actuary, and I must confess I find that they are 
being permitted to cut a fat hog, while at the same time the 
doctors are seeing themselves with their benefits and their 
payments cut in rather startling fashion----
    Mr. McClellan. That is why we need to work together to 
address this.
    Mr. Dingell. It is a shameful situation, and I look forward 
to you bringing some solution to us in an early time. Remember, 
we only have 50 days in which to address the matter.
    Thank you, Mr. Chairman.
    Mr. Deal. Mr. Bilirakis,.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    Dr. McClellan, in your written testimony you noted that 
much of the increase--I guess I think I am using your words 
here--much of the increase in Medicare spending cannot be 
easily explained by changes in treatments based on new medical 
technologies. So my question is, to what extent--and you didn't 
mention this in that statement, that is why I bring it up--to 
what extent does defensive medicine and skyrocketing medical 
liability premiums contribute to this increased spending?
    Mr. McClellan. Well, it is a good question. And there is 
considerable evidence that in areas where doctors are facing 
some real----
    Mr. Bilirakis. I want to make sure that the people on the 
other side of the aisle hear your answer.
    Mr. McClellan. Where doctors are facing increased pressure 
from liability that cost increases are higher, with no impact 
or no measurable impact on patient health. And you know from 
the State of Florida, where there have been some real problems 
with liability in the past, that not only do you tend to get 
more services, more defensive medical practices, you also start 
to see real problems in access to care as physicians in high-
risk specialties are no longer even able to practice. We could 
go a long way toward paying for addressing this physician 
payment problem by implementing the kind of commonsense 
liability reforms that many States have already successfully 
put into place and that the administration has advocated should 
be put in place nationally to help save money, while protecting 
patients in the Medicare program.
    Mr. Bilirakis. Can that information be documented? By that 
what I mean is, how much of these increased costs really--are 
the result of----
    Mr. McClellan. There are a number of studies that have 
documented the relationship between Medicare liability and 
healthcare costs, and also the lack of impact on stricter 
liability laws on patient health. We would be happy to provide 
that information to you. The administration's done a number of 
reports and many independent academic studies on this topic, 
and I believe CBO in the past has scored substantial savings 
for the Medicare program from liability reform, savings that 
could go right into helping provide appropriate compensation 
for physicians.
    Mr. Bilirakis. Well, Doctor, does the SGR account for this 
spending?
    Mr. McClellan. The SGR is--the features of the SGR program 
are that you get paid less when overall physician spending goes 
up. And that is the vicious circle that we have gotten into, 
more use of all these specific procedures leads to a decline in 
payment rate for physicians, and you get into a vicious circle. 
So the SGR problem is--the payment system itself isn't doing as 
much as it should to help doctors focus on high-quality care, 
giving the financial support that they need.
    Mr. Bilirakis. But I guess what I am wondering is, does it 
specifically take into account the defensive medicine that is 
practiced and the premiums that are----
    Mr. McClellan. There are some limited adjustments in the 
Medicare physician payment system for malpractice costs, it 
doesn't take full account of the cost of defensive medicine 
except that it all goes into this overall reduction that is the 
direct consequence of the increase in utilization----
    Mr. Bilirakis. But should it not take all that into 
account?
    Mr. McClellan. Right. I mean, if increases of utilzation 
are greater in areas where doctors are facing defensive 
medicine pressures, then that does contribute to the overall 
SGR scheduled payment reductions.
    Mr. Bilirakis. Well, now, in the process of--we all hope we 
can work up a sort of a permanent--if I can call it that--
change to the overall system so that we won't have to have 
these fixes every year, et cetera, could that formula, whatever 
it it might turn out to be, be developed to account for this 
spending?
    Mr. McClellan. I think it is worth looking into, but I 
think the best solution here is to take a step that has been 
proven to lead to lower costs without any adverse consequences 
on quality, and also better access to care, and that is 
implement effective liability reforms. That would be best way--
--
    Mr. Bilirakis. We are having trouble doing that, as you 
well know about, so but the point is it can be done----
    Mr. McClellan. We could try to look at that more closely.
    Mr. Bilirakis. I would ask you, maybe sort of as an aside, 
very quickly, all the members of this committee have indicated 
a concern for the doctors and things of that nature, but I 
would ask you to what extent does the defensive medicine and 
the skyrocketing medical liability premiums contribute to M.D.s 
leaving certain specialties, leaving certain geographical 
areas--as we know, moving from one State to another for various 
reasons--leaving the practice of medicine?
    Mr. McClellan. It is unquestionably a significant 
contributor. Our liability system is a big problem in inside.
    Mr. Bilirakis. And there is information available----
    Mr. McClellan. Absolutely, strong information. We have 
developed indpeendent studies, the American Medical 
Association, a lot of evidence on this.
    Mr. Bilirakis. Thank you very much, Doctor. Thank you, Mr. 
Chairman.
    Mr. Deal. I thank the gentelman.
    As you know from the bells going off, we have a series on 
the floor. We are going to stand in recess and vote and return 
immediately. I would ask the members to do that so that we may 
resume with the questioning. If you would just wait for us few 
minutes, thank you. Stand in recess.
    [Brief recess.]
    Mr. Deal. I will call the hearing back to order.
    Mr. Pallone is next to ask questions.
    Mr. Pallone. Thank you, Mr. Chairman.
    I wanted to ask some questions about the pay-for-
performance standard or suggestion. I guess I will start with 
Dr. McClellan. I am concerned there will be a lot of pitfalls 
associated with a pay-for-performance model and implementing 
that initiative. There is some risk to physicians. And just to 
give you some examples, what if a doctor uses evidence-based 
care but fails to meet quality standards, are they penalized 
for that? Or if a patient refuses a certain kind of treatment? 
I mean just for an example, what about a doctor who was 
possible skimming or cherry picking the healthiest 
beneficiaries in order to achieve quality measures? What would 
be your response to some of those, particularly the idea of the 
cherry picking?
    Mr. McClellan. Those are all important concerns, and it is 
appropriate to raise them and work on them through the process 
of getting to a better payment system. We have been working 
closely with physician groups and other stakeholders to 
identify measures that could be a basis for supporting quality 
of care better, measures that are typically led in their 
development by physician groups themselves.
    We have been working with an alliance called the ambulatory 
care quality alliance. It has a lot of involvement from 
physician groups and other health care stakeholders, other 
health care organizations to make sure that those kinds of 
concerns are addressed, I think starting with physician 
leadership on what we ought to be focusing on in supporting 
better quality.
    Mr. Pallone. Let's use the cherry picking. How would you 
prevent that? What would you do?
    Mr. McClellan. You develop measures and develop a system 
that prevents that kind of gaming, that you really do focus 
on----
    Mr. Pallone. How would you go about it?
    Mr. McClellan. We are doing this now. We have pilot 
programs, demonstration programs going on right now, paying 
physicians more for supporting better care. For example, in our 
physician group practice demonstration program, physicians get 
additional payments when their group has better use of 
preventive care, better management of the quality of care of 
their chronically ill beneficiaries, when they help save 
overall costs in Medicare.
    Mr. Pallone. I understand all that. I am not trying to take 
away from it.
    Mr. McClellan. It is a good question.
    Mr. Pallone. I just don't know how you prevent it. Maybe 
Mr. Hackbarth can answer.
    Mr. Hackbarth. You can deal with the issue in part by 
carefully choosing the type of measures of performance. If for 
example you used an outcome measure performance, what was the 
ultimate outcome of care, that kind of measure heightens the 
risk that physicians could be punished for caring for more 
seriously ill patients.
    If on the other hand, instead of using ultimate outcomes 
you use measures of clinical process, evidence-based measures 
of process so every patient with this kind of condition ought 
to get this care based on evidence, then you have narrowed down 
the range of patients that you are talking about, making it a 
more homogenous group and less risk.
    Mr. Pallone. That's a good point.
    Mr. McClellan. If I can be clear about what I talked about 
in my testimony, that we would like to do this in a step-wise 
fashion. First, we need to make sure we have--we know what we 
want to support better quality and work with physician groups 
on that, and that is why we are getting better information on 
quality, which is the best place to begin and then move from 
there to paying more to help doctors deliver better care.
    Mr. Pallone. Let me ask Mr. Hackbarth another thing. Pay-
for-performance I think should apply to both physicians and 
HMOs, but is there any reason that we are not moving to a pay-
for-performance system for HMOs? I mean, I see that it seems 
like it is being oriented toward fee-for-service as opposed to 
HMOs, and how soon could you implement something for HMOs?
    Mr. Hackbarth. In fact, MedPAC's first recommendation in 
this field of pay-for-performance was that the concept be 
applied to HMOs and private plans, and that was a couple of 
years ago now. So that was actually our starting point, and we 
started there because the way the industry is developed, there 
is a consensus set of measures of basic performance for private 
plans that we thought Medicare could quickly adopt and 
piggyback on through established mechanisms for collecting that 
information and verifying it. I think the HMOs should be at the 
front of the list.
    Mr. Pallone. So are you moving toward the HMOs at the same 
time with the individual physicians?
    Mr. Hackbarth. Our role in this process is simply to make 
recommendations to the Congress and to CMS. We think it is very 
important that there be measures of performance for private 
plans. As I said in my opening comment, MedPAC believes that 
there is an important role for private plans in Medicare. We 
think that some private plans can offer Medicare beneficiaries 
a high value for both the government's investment and 
beneficiaries' payments, and by high value, I mean a good mix 
of efficiency and high quality. So we think it is a great 
program, but not all private plans are created equal. Some are 
better than others. And so we think it is important for the 
program, important for the beneficiaries that we have a pay-
for-performance mechanism that rewards the superior plans.
    Mr. Pallone. Okay. Thank you.
    Mr. Deal. The gentleman's time has expired.
    Dr. Norwood.
    Mr. Norwood. Thank you very much, Mr. Chairman.
    I know we have little time, but let me just do a little bit 
of history on this. In the beginning, we decided that if I took 
an x-ray of a patient, that the Government would pay me for 
that x-ray. Lo and behold, we find out this is costing a lot of 
money, people are going to use this free service, so now, why 
don't we set the price under usual and customary? So we go to 
that feature. Not only are we going to pay for the x-ray but 
tell you what we are going to pay for it.
    That didn't work because people kept using the service, and 
we go to a system called SGR. Now, in 1997, in the BBA, a lot 
of people were patting themselves on the back about this great 
new payment system. Well, my point of view, it has been a 
disaster. In 2002, when we applied SGR, we cut the payments 5.4 
percent. Then, in 2003, Congress turns around and adds an 
increase of 1.6 percent. Then Congress, through our Medicare 
Modernization Act of 2003, we increased the payments again 1.5 
percent for 2004 and 1.5 percent for 2006.
    Now we are looking at this thing that we all patted 
ourselves on the back about, SGR, and we find that we are going 
to have next year a 4.4 cut. In addition to that, probably if 
you project out for several years, we are looking at probably a 
26 percent cut. Well, everybody at CMS and Congress says that 
is a terrible idea; we really shouldn't do that. We have got to 
find another way to pay our physicians. So now we are coming up 
with another idea of how we should pay, certainly not in my 
mind concerning ourselves with what actual costs are, what 
actual payments ought to be, but we are going to do this thing 
called pay-for-performance.
    Now it is beyond me what that means because you already pay 
me to perform when I take that x-ray. Granted, you pay me what 
you set the price for, but you do pay me to perform. So what 
does pay-for-performance mean. Surely, you can assure me it 
doesn't mean pay for nonperformance. I hope we are not going 
there with that. Yes, that is not right; we are not going to do 
that; are you? You are not going to pay me so I won't take x-
rays; are you?
    Mr. McClellan. No.
    Mr. Norwood. Good. So we aren't really talking about 
performance, so what are we really talking about here? Are we 
talking about, when I take my x-ray, did I take a good x-ray? 
Is that what we are talking about? Or are we talking about, you 
are going to pay me because I read that x-ray well? Are we 
talking about the quality here? Is that what you are going to 
pay me now, according to the quality of what I do? Is that what 
I am hearing?
    Mr. Hackbarth. Yes, in a word.
    Mr. Norwood. A word is all I need. You are going to pay me 
for the quality. Now who is going to determine the quality of 
my x-ray?
    Mr. Hackbarth. The idea is to pay for quality as determined 
by evidence-based standards of care, not standards of care 
developed by MedPAC.
    Mr. Norwood. So we are going to the radiologist and saying, 
guys, we would like to you to work with us; why don't you set 
up evidence-based standards that all radiologists should 
perform? In other words, if you do A, B and C, then that is a 
quality procedure. Is that where we are?
    Mr. Hackbarth. One of the parts of this whole process that 
we think is very important is to engage with the various 
specialty societies and experts in the different specialties in 
determining what those standards of performance ought to be.
    Mr. Norwood. Is that what quality means? If I do A, B and 
C, if I follow these three protocols, then am I considered 
doing a quality job?
    Mr. Hackbarth. Typically, the way a standard would work, it 
would be for a particular set of patients. This is evidence-
based recommended care; was that provided?
    Mr. Norwood. What if I do A, B and C and I misread the x-
ray and don't pick up that malignant tumor that later kills the 
patient. Now, have I done a quality job?
    Mr. Hackbarth. One of the key issues--and this gets back to 
the earlier question that Mr. Pallone was asking about--is, 
what are the units that we are trying to measure to apply the 
quality standards to? And for the reasons that he was alluding 
to, initially, I think we are going to be talking about 
relatively closely defined experiences, and so it is going to 
be, did certain tests happen? Were certain results achieved for 
a particular type of patient as opposed----
    Mr. Norwood. So it is not just quality but outcome, too.
    Mr. Hackbarth. In fact, that was my point, as opposed to 
trying to say, well, the patient died; we are going do reduce 
the physician's fee. Measuring ultimate outcomes in assessing, 
adjusting for differences in risk is very technically difficult 
to do so that is not where we would start. We would start in a 
much more confined, focused way. Are evidence-based standards 
of care applied in the care of a diabetic or a patient with 
congestive heart failure?
    Mr. Norwood. Mr. Chairman, are we going to have another 
round with these?
    Mr. Deal. It depends. We have got a second panel waiting.
    Mr. Norwood. Can I ask for a last question then if you are 
not going to do another round?
    Mr. Waxman. Do the same for our side.
    Mr. Norwood. Then I yield back my time.
    Mr. Deal. Ms. Capps.
    Mrs. Capps. Thank you, Mr. Chairman.
    Dr. McClellan, I hope by now you are aware the doctors in 
my congressional district, in fact in ten counties in 
California, face a very serious problem. Because of the way the 
geographic practice cost index lines are drawn in California, 
Santa Barbara, San Luis Obispo and eight other counties are 
lumped in with many other counties with significantly lower 
costs. This grouping into what is called locality 99, or the 
rest of California, means that the payment rates are 
artificially lower because they are averaged with the lower-
cost counties.
    I have been trying to get CMS to address this and fix it 
for years. I brought your predecessor to meet with our medical 
societies. We have had numerous meetings in San Francisco and 
were told that a statewide fix needed to be proposed.
    Last year, we submitted a proposal from the California 
Medical Association. This proposal would have fixed this 
problem for all ten counties, protected the other counties in 
locality 99 and budget-neutral, yet CMS refused to fix it.
    This year, CMS, using the same authority we suggested you 
use last year, proposed to fix just two of the counties, Sonoma 
and Santa Cruz, leaving the other eight counties high and dry, 
in fact cutting their payments out of that same fix. Not 
surprisingly, there was negative feedback about leaving out 
these other counties.
    In a recent meeting, it was suggested that MedPAC would 
look at this issue, but it would not resolve the matter until 
2008. This is completely unacceptable. So I want to know now, 
why hasn't CMS taken this matter seriously? The president of 
the California Medical Society was in my office yesterday. 
Doctors in California are waiting for your answer. Why didn't 
you accept the CMS proposal when it was offered? And why did 
you try to make a fix for just two of the counties?
    Mr. McClellan. First of all, Congresswoman, as you know, I 
care deeply about this issue as well and am very frustrated, 
too, with how things have worked out. I have been a practicing 
physician in California. I know a lot of the people who are 
directly affected by a payment system that isn't working as 
well as it should and have been working hard over the past year 
that I have been in this job to address it.
    As you said, the approach to solving this problem requires 
a change in the way Medicare allocates funds from county to 
county. The way that we make those regulatory changes is we 
look to the State medical society to give us input as to how 
the allocation should be changed.
    Mrs. Capps. Which did happen.
    Mr. McClellan. When we made our proposal in the regulation 
this year, we put in a specific proposal about two counties 
including Santa Cruz and Sonoma.
    Mrs. Capps. But the proposal submitted was for ten 
counties.
    Mr. McClellan. We left open any other proposal. We 
specifically said any supportable proposal that the medical 
society can get behind and that we can implement 
administratively, we would support.
    Mrs. Capps. It was done.
    Mr. McClellan. Let me tell you the comment we received from 
the California Medical Association--I am going to read from a 
letter signed by Dr. Sexton and Dr. Lewen. What they said was: 
We support a legislative solution at a cost of $114 million a 
year to this problem.
    They specifically rejected our two-county proposal. They 
rejected any suggestion for an eight county or any other 
administratively implementable proposal and said that instead 
what they want is a legislative solution because of its great 
potential for enactment, and I'll quote from them: This is the 
only, the only gypsy solution that we are supporting at this 
time. That was the comment that we received on our opening the 
door to any proposal that could be implemented.
    Mrs. Capps. Excuse me, with all due respect, you have not 
answered. Why you did not accept that original proposal?
    Mr. McClellan. Because the California Medical Association 
said that they did not want an----
    Mrs. Capps. The one they submitted regarding ten counties.
    Mr. McClellan. I am reading from their letter.
    Mrs. Capps. That is in response to the two counties that 
were chosen. I am asking for an answer regarding the initial 
proposal by CMS.
    Mr. McClellan. We mentioned a two-county proposal in the 
rule. We also said we would take any other proposal.
    Mrs. Capps. Excuse me, but you didn't answer the question 
of why you didn't----
    Mr. McClellan. If we had gotten a letter from the CMA on 
the proposed regulation saying we want this ten county proposal 
implemented, we would have implemented it.
    Mrs. Capps. That was the original proposal. In response to 
your fixing two counties----
    Mr. McClellan. They may have told you something in your 
office, what they told us in formal comments on the regulation 
was the only solution they want to the gypsy problem is 
legislative; something that we cannot do.
    Mrs. Capps. Well, I see my time is up.
    Mr. McClellan. I am very frustrated.
    Mrs. Capps. This is very frustrating to know that there has 
been this impasse over several years now. This is your job to 
do. CMS is responsible for this. Now I am bringing this up 
today because now they are going to get over 4 percent cuts on 
top of this.
    Mr. McClellan. It is not an acceptable situation. All we 
needed was any proposal this year on our regulation that we 
could do administratively. We could do a ten county, two 
county, but all we got in comment from CMA was saying that they 
wanted a legislative solution and a legislative solution only. 
I don't know what they told you in their office, but that is 
not what they supported in terms of our regulation.
    Mrs. Capps. I yield back. I will be in touch.
    Mr. Deal. The time is expired.
    Mr. McClellan. We should be in touch about this. It needs 
to be fixed.
    Mr. Deal. Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Health care financing issues, whether it is the government-
run programs or it is for private profit, if we don't get the 
consumer engaged in addressing issues of cost and quality, we 
are going to continue to follow these battles, and that is just 
an opening statement based upon kind of what the Chairman said 
about reform. Reform is not a bad word. Reform is needed 
because with the Baby Boom generation and people living longer, 
we can't sustain this. We are going to continue to have these 
fights about funding until we get people engaged.
    So I know it is a challenge. We are working through it. I 
have talked with professions from all aspects of the health 
care arena, so I applaud you being in the gap and trying to 
take the slings and arrows and trying to move public policy. 
Now, after saying those nice things I will yield the balance of 
my time to Dr. Norwood who will continue to ask you some 
diligent questions.
    Mr. Norwood. We were talking about the failure of SGR. 
Eight years ago, we were celebrating it. Today we are trying to 
solve the problem, it seems to me, of two things. One is, how 
do we fairly reimburse our physicians so that they will keep 
treating Medicare patients, a thing that comes to mind to me 
might be Medicare economic index is probably a good start. But 
we are confusing that with another thing we want to solve which 
is quality of care, and you are basically, I think, saying that 
we want to pay you more if your outcomes and your quality is 
better.
    Now why mix those two together? Why not set aside how we 
want to fairly pay our physician community? Then if you want to 
experiment with this thing called pay-for-performance--I 
presume it is an experiment--you are doing a demonstration 
project. I know that the private insurance companies are doing 
it where they can, and that is not a good sign at all when they 
do that because there is only one reason they do that, and that 
is to protect their bottom line. We know that they are doing it 
in Great Britain. So we ought to maybe at least know enough to 
know some of the unintended consequences which we are going to 
have with pay-for-performance.
    So, gentlemen, why not solve this problem and then play 
around with your academic games of trying to determine how you 
get people to practice so the quality of it suits you or suits 
somebody over at CMS or suits somebody who is going to 
determine what is a good outcome or what is a quality surgery. 
I fail to understand mentally how it can work.
    And, Dr. McClellan, if you know, I have got 1 minute and 54 
seconds for you to tell me how this can possibly work without 
terrible consequences.
    Mr. McClellan. I am looking forward to taking some more 
time with you beyond this time to work on this issue, but you 
are absolutely right that we shouldn't be playing academic 
games. This is patients' care, patients getting access to 
needed care and doing it at a cost that they and taxpayers can 
afford. We would like to take some steps to address the payment 
reductions that are coming now. You have got legislation to do 
it. We want to work with you on proposals to address this 
payment reduction. That costs a lot of money.
    Mr. Norwood. I understand it costs a lot of money. The 
Senate is over there saying, gosh, we are going to pay you 
costs, but for gosh sakes, we are not going to do that unless 
we do pay-for-performance. We have got a bill out of Ways and 
Means that says, we don't really want you to have that 4.4 cut 
but we are going to hold the axe over your head to do this pay-
for-performance. You keep talking about working with these 
different physician groups. You know why you are working with 
them? Because they don't have any choice. When you come and 
say, we are going to put in pay-for-performance, do you want to 
play, of course, what choice do they have but to say we don't 
like this but----
    Mr. McClellan. I have heard from a lot of physician groups 
that agree that the cost growth in Medicare spending, 14 
percent, 15 percent a year, we can do better than that. They 
can do better than that. It is not a question of them needing 
incentives. It is a question of physicians needing financial 
support for doing what they think is the right thing for 
patient care. They are not getting that support now.
    Internists aren't getting support for taking simple steps 
to prevent complications for their patients. Surgeons are not 
getting support for taking steps that prevent complications 
operatively in the services that they deliver.
    Mr. Norwood. Excuse me, but we thought we were getting 
there with SGR, and we didn't, period. And now we think we can 
get there maybe with this. All I am asking you to do is don't 
go out there experimenting.
    Mr. McClellan. I agree with that.
    Mr. Norwood. And explain to everybody--if somebody asked me 
what pay-for-performance is, I still don't know what to say.
    Mr. Waxman. I ask unanimous consent he be given an 
additional minute. I think he is getting on to a very good 
point.
    Mr. Deal. Without objection.
    Mr. Norwood. Henry, I can't believe it. All I am trying to 
get you to agree to is stop forcing these groups--they want to 
work with you because, yes, we can do better, and I think you 
are right, I think we can do better, too. But if we don't watch 
out, we are going to turn around and codify into law a new 
payment system called pay-for-something that could well be 
disastrous.
    Mr. McClellan. Just to be clear, what I said at the outset, 
that what we supported was addressing the negative physician 
update, No. 1; No. 2, getting some better data, some better 
information from the physicians on how we could provide better 
support for their delivering quality care. Those are the short-
term steps. I think we do need to get to a better long-term 
payment system but not via experiments; via confidence that we 
are going to support physicians in delivering better care at a 
lower cost.
    Mr. Norwood. Would you agree not only do we not need to do 
a 4.4 cut, that we need to determine how we in the future are 
going to pay physicians?
    Mr. McClellan. The best way to start that process is to get 
some better information from the physicians on the kind of care 
that they want to provide and how we can best support it. That 
is what I essentially proposed to do earlier.
    Mr. Norwood. That is what we will spend our time talking 
about if that is indeed in the best way, because maybe it 
isn't.
    Mr. McClellan. We need to learn more and keep working to 
get to that better payment system because you are right, the 
ones up until now haven't done the job.
    Mr. Norwood. Maybe they will work with you a little better 
if you will take their feet out of the fire and say, look, we 
know you need to be paid at least cost for what you do, and 
make that arrangement and put it in the law and then let's sit 
down altogether and talk about how we can decrease expenses and 
increase quality, doing these other things that you are 
suggesting. Don't combine them.
    Mr. McClellan. I appreciate that. We are under a lot of--
the growth rates that we have seen in physician-related 
spending, the growth rates in Medicare have made it a real 
challenge to not take any steps at the same time as we are 
addressing physician payment to also help physicians improve 
quality and avoid unnecessary costs. That is just a constraint 
that we are operating under. The kind of bills that would just 
do the economic index update as you said would be $180 billion 
over 10 years or more. That is just a constraint we are going 
do have to work with.
    Mr. Deal. The gentleman's time has expired.
    Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman.
    Dr. McClellan, Mr. Hackbarth said earlier that the MedPAC's 
first recommendation about pay-for-performance was to apply it 
to HMOs. He said the industry has developed seven measures for 
performance, something like that, so my question to you, I have 
been here long enough so I can't not ask this question, has the 
administration decided that it is better to experiment with a 
physician community than with the HMO community? If the answer 
to that is, no, then why not? If pay-for-performance is such a 
good idea, why not try it out first on HMOs and Medicare?
    Mr. McClellan. Absolutely, we are not going to experiment 
first with doctors. In fact, we are already providing 
information on quality of health plans to people in Medicare to 
help them make their choices about the plans. The Medicare 
Advantage Plans exist today. The HMOs report on the quality of 
care they provide. We are expanding these reports to give 
people even better information.
    Mr. Allen. But you don't have a pay-for-performance.
    Mr. McClellan. There is a performance system in there in 
that if a plan is not delivering good care at a good price, 
people are not going to sign up. They will stay in traditional 
Medicare or Medicare Advantage Plan that has a lower premium. 
We have already got a system in place for Medicare Advantage 
Plans where they get paid more if--the only way they can get 
paid more is if people want to pay for that service. It is not 
bad. I think some of the members here today have talked about 
giving physicians that same kind of opportunity.
    Mr. Allen. Those of you who from rural States don't think 
it is such a grade model. We don't have those plans. We don't 
miss them, frankly, because we think the fee-for-service plan 
is cheaper and more effective. But I will say this, I have 
trouble with the fact, you said earlier that Medicare Advantage 
Plans provide better benefits at a lower cost. Well, yeah, I 
mean, they are being overpaid. That is the analysis. So the 
equitable problem, people in Maine are in Medicare, too, just 
like everyone else, they pay the same premiums. Why should 
money go to people in more urban areas to give them better 
benefits at a lower cost and leave out those areas which don't 
have the Medicare Advantage Plans? I am not asking for Medicare 
Advantage Plans. I am simply saying, it seems to make more 
sense to me to do what MedPAC constantly urges you to do which 
is take some account of the equity between those who have those 
plans and those who don't and not overpay the HMOs.
    Let me just deal with one question that I think is 
important. It is also related to the smallness, the small size 
of--not just physicians' offices in Maine but around the 
country. You said that this new physician voluntary reporting 
program is going to ask physicians to voluntarily report to CMS 
on a number of evidence-based quality measures. These physician 
payments will not increase or decrease based on that individual 
reporting, but, frankly, there is a cost involved to the 
doctors themselves and their offices. There may be increased 
costs of overhead, information technology upgrades, the cost of 
new diagnostic equipment, all of that.
    So if we are going to do pay-for-performance, we have got 
to remember that the average physician's office is fairly 
small. Three-quarters of them are eight physicians or fewer, 
and so, who is going to pay? I mean, is CMS's view that the 
pay-for-performance should be an add-on to the current 
reimbursement rate or should be taken out of the physician 
reimbursement as it exists today?
    Mr. McClellan. What I talked about earlier in my testimony 
was, we would like to start with paying for reporting, paying 
more for reporting on quality-related issues where the 
physician community, other experts have all come together and 
said, this is good evidence-based care that we should be seeing 
more of in the Medicare program, and we would pay more for that 
and----
    Mr. Allen. That would be an add-on?
    Mr. McClellan. Right, a larger update for physicians who 
report on quality care. Then, as we see what those measures of 
quality show, as they help us and help physicians identify 
better ways to deliver care at a lower cost, we can make 
further reforms in our payment systems to support that. So it 
is a step-wise process, and there are some costs involved. We 
are right now working with some physician groups on a voluntary 
system for reporting to help us find the least burdensome way, 
the easiest way for small office practices, including rural 
practitioners, to provide this information. Right now, we can't 
rely on electronic records because doctors don't have them.
    Mr. Allen. Mr. Hackbarth, I have very little time, but do 
you have any comments on that?
    Mr. Hackbarth. On the issue of small practices? Just two 
quick comments. One is that I don't think we should assume that 
smaller practices including practices in rural areas will fair 
poorly under pay-for-performance. When you look at the Nation 
as a whole and you look at how States, various States' 
information on quality measures, in fact, many of the highest 
performers are in the States with large rural areas. They have 
lower costs and higher quality.
    Mr. Allen. Often lower reimbursement, too. This would 
address that.
    Mr. Hackbarth. For their performance, their high quality, 
they would get additional funds. On the issue of investing in 
clinical information systems, which we think is a very 
important step forward for a health care system to get the 
value that Medicare beneficiaries deserve, as we see the 
problem right now, physicians and other providers have little 
incentive, too little incentive to invest in valuable clinical 
information technology. Capital is scarce so what do they spend 
it on, things that are going to generate economic returns, 
bring in new patients, new services, new equipment. So medical 
information technology, automated medical reports don't produce 
those things.
    Under a pay-for-performance system though, you start 
getting paid for quality, and so your investment decisions are 
different, and so, as opposed to buying a new piece of 
diagnostic equipment, you might say I can get a return from 
improving patient care, and that is the sort of change in 
mindset that we need to try to encourage across the whole 
health care system.
    Mr. Deal. The gentleman's time has expired.
    Dr. Burgess.
    Mr. Burgess. Thank you, Mr. Chairman. Just to continue 
along that line of thought, a wonderful opportunity was missed 
with Y2K, and as a practicing physician who was told you better 
upgrade your stuff or else you are not going to be open for 
business January 2, we had to make those hard decisions. It was 
a decision to buy a new sonogram machine and deliver more care 
or buy a computer system. And unfortunately, there was very 
little leadership from the administration at that time, no 
leadership from HHS to help doctors offices decide to buy 
equipment that would interface with what HHS was going to be 
using down the road, what hospitals might be using down the 
road, so our office, a five-physician office went out and spent 
$60,000 on a computer system only to find out the next year 
that ours was compatible with what the hospital next door was 
using. So it was an opportunity lost, and certainly, we ought 
to be on the lookout for new opportunities as they come 
forward.
    That is why I am so glad that Dr. McClellan is in the 
office he is in. I think, for the first time, we see the 
marriage of science and technology and what medicine is 
supposed to be about and Medicare trying to deliver what 
medicine is supposed to be about in the Medicare system.
    Gosh, we heard from Chairman Barton earlier, and he 
mentioned the same words I used, pay-for-performance--I am 
sorry, balanced billing. It was wonderful to hear those words 
from the Chairman's lips, and heard the ranking member Mr. 
Dingell, he told you, if you go back to the White House and get 
a proposal and bring it back here, he will pass it.
    So I would ask you to go to the White House, get a proposal 
that has balanced billing in it, bring it back here; we will 
get Mr. Dingell to vote for it, and we will be happy to carry 
it on to the full House.
    Mr. McClellan. I am not quite sure of the last part of 
that, but we certainly want to work with him.
    Mr. Burgess. On the issue of pay-for-performance, and I am 
concerned like Dr. Norwood is, I know we have to have better 
support for quality care. Do you think from the pilot studies 
you have done so far that you can in fact deliver on that 
promise to make--bring that to fruition without additional 
burdensome paperwork and regulation that would be shuffled on 
to the backs of the practicing physicians?
    Mr. McClellan. We are seeing some promising results. I 
mentioned earlier that in our hospital payment system we are 
doing a demonstration program with the Premier Hospital System 
where it is working, saving lives; it is a lot better way to 
spend the money. Our physician demonstrations are a little bit 
earlier along, but we have some in place already where when you 
start paying for better results for patients. You start getting 
more investments in things like e-mail reminder systems or 
interoperable electronic health care records, systems that can 
help patients stay well, stay out of the hospital, maybe even 
stay out of the doctors office, but until now, Medicare would 
pay less in those circumstances so the physician practice 
couldn't get the resources they needed to provide these kinds 
of services. We are starting to see that, but the evidence is 
pretty early on, and there are a number of programs being 
implemented in the private sector supported by employer groups, 
by physician groups, not just by the insurers that Dr. Norwood 
mentioned, that are already showing some promising results in 
terms of better quality of care at a lower cost.
    We need to learn more, but I think there is enough to show 
that we can start moving down this road toward a better payment 
system that supports doctors and what they really want to do, 
which is provide better quality care and do it at the lowest 
possible cost.
    Mr. Burgess. I think to channel all of the IT stuff that 
has to deal with Medicare, Medicaid, VA and try to have one 
platform that works in all venues, there you have captured 50 
percent of the health care market in this country.
    One of the things that really concerns me, because my 
district is so diverse, one of the things that concerns me 
about pay-for-performance is, we always hear about health care 
disparities, different ethnic groups having different outcomes, 
and it is something we in medicine should focus on and try to 
correct, but I see pay-for-performance and young people getting 
out of their residencies, do I want to practice in the 
intercity or suburbia? And my patients will be better educated 
and have greater health literacy in suburban markets. And if I 
go in the intercity, I am going to be penalized. Are we 
addressing that in the pay-for-performance platforms?
    Mr. McClellan. Absolutely. We would not want to support any 
payment reform that harms the people who have the most to gain 
in terms of better quality care, facing some of the biggest 
quality problems and access problems right now. Our payment 
system should support efforts to get better quality care to 
where it can make the most difference and that is why I think 
we do need to be careful as many of the members here have 
emphasized and adopt steps that really are going to lead to 
better care and not just cherry picking. I think there are 
promising steps.
    Mr. Burgess. One last thought, and Mr. Bilirakis was on the 
money, we do practice defensive medicine. You can't walk into 
the emergency room on a Friday night with a headache and not 
buy an MRI. We need to work on that. And if you can provide us 
some additional data, the last data is 1996, a study in 
Stanford, California, that you might be familiar with, but I 
bet in 2005 or 2006 dollars, that savings would be much 
greater.
    Mr. McClellan. There is plenty more evidence.
    Mr. Burgess. I would like to thank you for all the work you 
have done on the prescription drug issue, part B rollout. I 
have done several town halls in my district. This is not hard; 
people can understand it. Health care is complex, and it is not 
a sound bite, but you can impart that information if a Member 
of Congress is willing to do it and willing to take the effort 
to do it. Their constituents, their seniors will benefit.
    I yield back, Mr. Chairman.
    Mr. Deal. The gentleman's time has expired.
    Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman.
    Dr. McClellan, you are the head of CMS. I assume that in 
that capacity you have to deal with Department of HHS and 
people at the White House; is that right?
    Mr. McClellan. Yes.
    Mr. Waxman. So you have communications with them which 
would, I assume, mean conversations, memos, e-mails; is that 
right?
    Mr. McClellan. When there is an important topic that we are 
working together to address, yes.
    Mr. Waxman. Now when you are communicating to people in 
your bureaucracy--obviously you need to communicate with them. 
Do you communicate through e-mails, conversations and memos to 
them?
    Mr. McClellan. Depends on the issue. I do talk with my 
senior staff informally about whatever issues are coming up. 
When there is a decision that comes to me, I will send back a 
response if something like that arises.
    Mr. Waxman. I want to ask you about the time you were 
commissioner of the Food and Drug Administration because the 
General Accounting Office just came out with a report saying 
that the decision on plan B--the science was pushed aside and 
the application was rejected because even though the expert 
panel and the professional reviewers at FDA wanted it, they 
were told that others in FDA didn't want that decision. 
Obviously, the decision was made, or a decision was in fact 
made after you left FDA, but they were reviewing it during the 
time you were at the FDA. Did you have any communications with 
any official at the White House about this plan B issue?
    Mr. McClellan. First of all, I am not sure that the GAO 
report quite said what you characterize it as, and I want to be 
very clear that I did not make a decision nor did I recommend a 
decision on plan B. And as you said, that decision was made; 
the release of the non-provable letter came 2 months after I 
left.
    Mr. Waxman. That is absolutely right. But my question to 
you is, while you were the commissioner of the Food and Drug 
Administration, did you have any communication with any 
official at the White House about plan B?
    Mr. McClellan. Not any specific communications about 
information that wasn't publicly available and only occasional 
communications at that. Certainly nothing related to the plan B 
decision or any recommendations on plan B.
    Mr. Waxman. Were there any communications between you and 
people at the Department of Health and Human Services on this 
question?
    Mr. McClellan. Same thing.
    Mr. Waxman. That?
    Mr. McClellan. It didn't involve information that was 
already public or publicly available and nothing that involved 
a decision or a recommendation on a decision.
    Mr. Waxman. When you had communications with somebody at 
the White House, who would that have been?
    Mr. McClellan. I don't even have any specific recollections 
about specific conversations related to plan B because it did 
not come up very often. That was not a decision that was made 
while I was there, and the only information that I received on 
it was information that happens generally in the course of 
being the commissioner of Food and Drugs where you need to be 
familiar with all of the major issues and the science behind 
all the major issues at your agency.
    Mr. Waxman. Were there any communications between other 
officials at FDA and anybody at the White House about plan B?
    Mr. McClellan. I don't know anything about any other 
conversations, and let me just be very clear about this, there 
was no decision made while I was there. I did not make any 
decisions or any recommendations, and I did not have any 
communications making any decisions or recommendations.
    Mr. Waxman. Why did you refuse to talk to the GAO. They 
wanted to contact you and they said: We attempted to interview 
the individual who had been the commissioner of FDA until March 
2004. We were unable to arrange an interview. He did not 
respond to written questions we submitted.
    Mr. McClellan. I did respond to the GAO with a written 
response that said basically what I have told you just now.
    Mr. Waxman. Why wouldn't you make yourself available for an 
interview?
    Mr. McClellan. Because my written response plus all the 
materials that the GAO had requested from the agency covered 
what was in their questions.
    Mr. Waxman. So it is your testimony that you don't know of 
anybody in the White House, the Department of Health and Human 
Services that communicated to anybody at FDA on the plan B 
issue.
    Mr. McClellan. I didn't have any communications about a 
plan B decision or a recommendation.
    Mr. Waxman. That wasn't my question. Do you know--listen to 
my question first. Do you know of anybody that received a 
communication from the White House or the Department of Health 
and Human Services about the plan B issue?
    Mr. McClellan. I wouldn't know about any specific 
conversations that other people had about recommendations or 
decisions.
    Mr. Waxman. Well, you wouldn't ordinarily, but did you 
know, do you know of any such conversations or communications?
    Mr. McClellan. I, again, did not have any communications 
about----
    Mr. Deal. The gentleman's time has expired.
    Mr. Waxman. Mr. Chairman, everybody has been given----
    Mr. Deal. Everybody has asked questions with regard to the 
subject matter of this hearing.
    Mr. Waxman. I would ask 1 minute.
    Mr. Deal. Your time has expired. I object.
    Mr. Waxman. On the subject matter of the issue.
    Mr. Deal. You used your time on a subject matter not the 
subject of the hearing. Maybe one of your colleagues will yield 
to you as they yielded to Mr. Norwood.
    Mr. Waxman. You have been very lenient with your members on 
that side of the aisle. You have not given me any leniency. I 
would request it.
    Mr. Deal. I would have if you had asked questions relating 
to the subject matter of this hearing. These gentlemen have 
given their time. There is a second panel waiting to testify. 
We are about to have another series of votes and interrupt this 
hearing again, and if one of your colleagues wishes to yield 
their time----
    Mr. Waxman. They have been waiting a long time. I want to 
ask 1 minute of questions on the subject matter of this 
hearing.
    Mr. Deal. Are there objections?
    Mrs. Cubin. I object.
    Mr. Deal. Objection is heard.
    Mrs. Cubin, you are recognized for questions.
    Mr. Waxman. Better stay within 5 minutes.
    Mrs. Cubin. Thank you, Mr. Chairman, and I would like to 
apologize to the panel for the fact that political questions 
are being asked here today rather than issues related to the 
subject for which we are here, which is how to build a more 
efficient payment system for the benefit of doctors and 
especially patients. Unfortunately, the other side of the aisle 
seems to be using this tactic on every issue that comes before 
the Congress to the detriment, I might say, of the public and 
of the country as a whole.
    Dr. McClellan, I will start with you. You are an advocate 
of payment for purchase--or pay-for-performance; excuse me. Do 
you believe that Congress should appropriate additional funding 
in order to implement pay-for-performance? Or do you think we 
should redistribute the funding in order to reward high-
performing doctors?
    Mr. McClellan. It is a good question, and there are a lot 
of proposals out there that would go both ways. The best 
approach I think is we are going to need to keep working with 
the Congress and with the medical community. I do think, in the 
short run, the most important thing to do is to take some steps 
to stabilize the payment system and do it in a way that moves 
toward an effective performance-based payment system, however 
exactly that works out. And that is why, earlier in my 
testimony, I talked about addressing the negative physician 
update and paying more to physicians who report on quality of 
care and help us develop better evidence on the best way to pay 
for physicians and other services in the Medicare program.
    Mrs. Cubin. Thank you.
    Mr. Chairman, the committee is not in order. Mr. Chairman, 
the committee is not in order.
    Mr. Deal. The committee is not in order. Committee will be 
in order.
    Mrs. Cubin. Thank you.
    Mr. Deal. You may continue.
    Mrs. Cubin. Mr. Hackbarth, going back to you, MedPAC 
identified in-office imaging services such as MRI, CAT scan as 
growing exponentially between 1999 and 2002. Are in-office 
imaging procedures subject to the same quality and safety 
standards as hospital imaging services in relation to 
maintenance and personnel training and so on?
    Mr. Hackbarth. No, they are not.
    Mrs. Cubin. Do you think lack of such standards could lead 
to improper utilization of imaging procedures and possible 
over-exposure of patients to radiation?
    Mr. Hackbarth. We are concerned about that. Let me 
emphasize, I think that a lot of wonderful things are happening 
with imaging. The capabilities to improve care for patients are 
just mind-boggling, and so this is an area where we think much 
of the increase in volume may well be appropriate and helpful 
to patients.
    We are concerned, however, about the migration of imaging 
from arenas where there are clear standards and oversight into 
places like physician offices where that is not the case, and 
we believe it is in the interest of both the patients and the 
program that we assure that the imaging that is done is of high 
quality and not dangerous to patients, and that requires some 
new rules.
    Mrs. Cubin. Would you be opposed to Congress requiring the 
Secretary of HHS to implement quality and safety standards for 
imaging services if it would help off-set implementation costs 
of physician SGR increase?
    Mr. Hackbarth. We have in fact recommended that such 
standards be set.
    Mrs. Cubin. Would the implementation of quality and safety 
standards reduce improper utilization or over utilization?
    Mr. Hackbarth. The main reason for doing them is to protect 
the quality of care and patient safety. It is possible that 
there might be some reduction in utilization, but that is not 
the principle reason for doing it.
    Mrs. Cubin. Do you think that the standards would produce 
any significant Medicare savings?
    Mr. Hackbarth. Again, there could be some. There might be 
some test that would have been done that won't be done in the 
future because of quality standards. That is not the principle 
objective, however. The principle objective is a quality 
objective.
    Mrs. Cubin. Thank you, Mr. Chairman. So as not to go over 
my time, I yield back my 33 seconds.
    Mr. Deal. I thank the gentlelady.
    Ms. Eshoo, you are recognized.
    Ms. Eshoo. Thank you, Mr. Chairman.
    Dr. McClellan, back to the subject that you don't want to 
hear me talk about, but I am going to raise it anyway. You know 
how disappointed I am in the CMS final rule. It is a failure 
because there isn't--you don't present any solution to the 
problem, to the fix of the payment localities.
    You said earlier something about--I know that I am 
paraphrasing--you know that we want efficient systems that 
reimburse people properly in the proper areas. I know I am 
paraphrasing, but it made me think of this.
    Just to refresh your memory, the draft rule that CMS 
recommended included a fix for two counties. I was more than 
pleasantly surprised--and I wrote to you and thanked you--when, 
to my amazement, that CMS even acknowledged in that draft rule 
that ultimately--that you were ultimately responsible for 
establishing fee schedule areas.
    Now CMS has issued its final rule. You not only remove the 
fix for the two counties that were deeply affected, but you 
have failed to address a State-wide solution; and I think, to 
add insult to injury, you suggest no alternatives.
    Now I have to tell you that, you know, I wish I had known 
this ahead of time. I mean, I worked with all of you absolutely 
on the level on this; and I think it is like a year, 2 years 
where you just strike a match to it.
    I raise this because I think you have responsibility for 
this. I mean, this isn't just going to go away. This isn't 
something that is a nitpicking issue in one corner of 
California. There are physicians that are leaving, that are 
leaving an area that is no more rural than Washington, DC, is. 
So it affects the system. We have a responsibility together to 
do something about this.
    So my first question is, other than waiting for MedPAC 
recommendations and a fix in 2008, what are you going to do?
    My second question is--and it is a follow-up to a comment 
that you made this morning--did we understand you to say that 
the administration would consider charging or changing the 
balanced billing protections in the law? I mean, something that 
is clearly designed to protect beneficiaries in order to pay 
doctors more? Is this the way you want to solve the problems 
with the physician fee payment system, by shifting costs onto 
the beneficiaries? I don't know if this is--if I misunderstood 
what you said.
    Mr. McClellan. What I said was that we wanted to work with 
the committee and the Congress on a way of addressing the 
physician payment problem that they are facing now. We would 
want to do so in a way that it not jeopardize access to quality 
of care for any beneficiary. So we will work together with the 
committee on that.
    Ms. Eshoo. Well, with all due respect, I am going to 
harkenback to what the ranking member said. It really is, I 
think, the responsibility of the administration to bring 
legislation forward, Dr. McClellan. Administrations do that; 
and when they do, they carry a great deal of clout because they 
say, this is our position, bring it to the Hill, and it is 
carefully considered. We are flailing. This thing is all over 
the place. So there is, you know----
    Mr. McClellan. Well, there is bipartisan legislation that 
would work in the direction that we have talked about. We often 
find----
    Ms. Eshoo. Has there been a letter from the White House 
that says, this is our position----
    Mr. McClellan. I just stated the administration's position 
this morning again in my testimony, and we found in many cases 
that building on bipartisan legislation that already has 
support in Congress may be the best way to get this done.
    Ms. Eshoo. Let's get back to the two questions.
    Mr. McClellan. Let's get back to the first question about 
the situation in California. And I can imagine how frustrated 
you are. I am frustrated. You have been involved with this from 
a payment perspective longer than I have. I have been involved 
with this since I came into this job over a year ago. Since I 
have practiced in your district, I know exactly how serious 
this problem is----
    Ms. Eshoo. It is hard to explain to everyone. We knew each 
other some time ago, which is great. You know I respect you, 
but I am furious.
    Mr. McClellan. As you know, we had an approach that 
involved you working with California----
    Ms. Eshoo. But what are you going to do about it now?
    Mr. McClellan. Well, what the California Medical 
Association has left us with is no alternative but legislation. 
We proposed a two-county solution that would address this 
problem, would solve this problem with a minimal impact on 
other counties----
    Ms. Eshoo. You announced in your draft--you said, CMS is 
ultimately responsible for establishing fee scheduling areas. 
This is getting to be a ping pong game. It is not good enough.
    Mr. McClellan. And we also added that CMS has never taken 
action to change the payment rates affecting physicians in a 
State without the support from a State medical society or at 
least without the--support isn't even needed at this point. I 
would just settle for something short as strong opposition. Yet 
when we put that regulation out for comment, Congresswoman, 
what the California Medical Association said was that they 
opposed the solution that you and I had thought might work; 
they opposed any other administrative solution that we could 
implement.
    Again, I will quote from their comments to me on the 
regulation, the only gipsy solution that we are supporting at 
this time is a legislative solution. So they are basically 
telling you that you need to find new legislative money to 
solve this problem.That is the only approach----
    Ms. Eshoo. This is just great. I am telling you, I am going 
to write a short story on this one.
    Can you answer the other question?
    Mr. McClellan. What is the other question?
    Ms. Eshoo. Did you clear up the misunderstanding about the 
balance----
    Mr. McClellan. I thought I had answered that one before, 
that we are open to ideas from Congress. It could get 
bipartisan support to address this problem. I think there is 
already bipartisan legislation. The Senate passed some 
legislation that would move in the direction of fixing the 
physician payment system. Any solution should not jeopardize 
quality of care for beneficiaries, and we would be happy to 
work with the committee on something within those bounds. There 
is definitely bipartisan interest and bipartisan legislation 
that we can build on.
    Ms. Eshoo. Thank you.
    Mr. Deal. The time is expired.
    Mr. Green.
    Mr. Green. Thank you, Mr. Chairman; and I thank Dr. 
McClellan for being here.
    I think we are going to probably see lots of political 
questions, as they say. I want to follow up with one that Mr. 
Bilirakis talked about in liability issues.
    In Texas, we have dealt with medical liability now for 30 
years. Most medical liability lawsuits are filed in State 
courts. In fact, I am trying to think of one in history that 
has been filed in a Federal court. But, typically, those are in 
State courts. I think States have the opportunity--and they are 
doing it--to deal with it. I just wish we could quantify the 
savings to our physicians on the increased liability 
protections that they are getting through State law, and maybe 
once we can do that we would like at a national law.
    The other thing from my colleague, Dr. Burgess from north 
Texas, I can tell you, sure, there may be overutilization in 
the emergency room, but I can give you an experience in a Texas 
case that even with blunt trauma of the head there wasn't an 
MRI done, and it happened to be to my son about a year, 2 years 
ago. When I found out, I demanded to know why. I went all the 
way up to the administration; and they said, oh, that is our 
standard practice. I said, you are opening yourself up for a 
lawsuit; and we went and paid for one elsewhere. Thank 
goodness, nothing happened. There wasn't a problem. So it is 
not automatic in emergency rooms.
    The problem with emergency rooms is they are being used as 
clinics, and people are showing up not because they had an auto 
accident but because they have some medical problem that really 
should be at a clinic down the street if they had late hours. 
And I thank the administration for the effort on community-
based clinics. I wish our Labor/H appropriation bill today had 
provided more funding for the community-based clinics, and that 
is one of the issues I know we can agree on.
    I said in my opening statement the frustration is how we 
can quantify the overutilizations compared to over--the better 
effort to treat under Medicare. And my concern and one of the 
questions, services offered under Medicare are certainly 
increasing. We are seeing an increase in preventive services 
such as screenings under Medicare, and I think that is a 
positive development, hopefully, to--you are not going to cure 
diabetes, but if we do things earlier we can cut the costs not 
only to the family but also to the taxpayers.
    Our frustration on the committee is that we can't quantify 
some of that, at least CBO won't do it. That is how--I think 
that is one of the questions I want to ask, has CMS or MedPAC 
analyzed the future budget benefits on current spending on the 
preventive care that we can see? Because it just seems 
reasonable for someone who--instead of losing a leg, we may 
postpone that for years maybe if we do preventive care with 
them; and, of course, the patient accepts that suggestion on 
different lifestyle changes.
    Mr. McClellan. Well, it is certainly a lot better way to 
spend the money. While the evidence isn't as extensive as many 
people would like, and that is one reason I think we would like 
to see better measures, better information developed on how we 
can have the most impact on patient health at the lowest cost, 
there is some evidence out there. Our actuaries and others have 
been looking at the experience of programs that focus on 
preventing the complications of heart failure, for example. 
That is the No. 1 coster in the Medicare program today, and 
much of the cost involves emergency room admissions or hospital 
admissions for people who have had breathing problems--what is 
clinically called decompensation--from their heart failure 
condition. And there are proven steps that can help prevent 
those from happening.
    So I think there is some potential for scorable savings 
from these programs already. I think we can work harder to 
develop more as we get to a better payment system in the next 
few years. And you may have something to----
    Mr. Hackbarth. No, I think Mark covered it well.
    In specific response to your question, Mr. Green, I don't 
know of any study that says here is the savings that would be 
achieved from that. Certainly there are savings, but I am just 
not aware of any specific number that we can give you or to CBO 
or to anybody else.
    Mr. Green. Giving it to us would be great, but CMS is the 
one who tells us what we can do and how we can pay for these.
    One of the concerns I have--and getting back on the 
diabetic issue--doctors in my area that pay for performance. My 
concern is if we do look at the problem of pay for performance, 
we will end up seeing doctors who may not take a person who is 
diabetic because they know that they will end up being cut in 
the long run. Can CMS or MedPAC address that issue?
    Mr. Hackbarth. This goes back, again, to Mr. Pallone's 
question earlier. I think it is critically important that the 
pay for performance system be designed so that it does not 
discourage physicians from taking complicated patients, sick 
patients; and we think one way to do that is by using evidence-
based process standards of care, as opposed to trying to 
measure ultimate outcomes and pay based on ultimate outcomes. 
If you tried to do it on ultimate outcomes, you would need very 
sophisticated risk adjustment, probably more sophisticated risk 
adjustment than currently exists. But if you narrow it down and 
say, when you have the diabetic patient, are you doing these 
things that, based on evidence, is shown to help improve 
results, then I think there is no reason to avoid the diabetic 
patient, that you will get paid for good performance.
    Mr. Green. Thank you.
    Mr. Deal. The gentleman's time is expired; and, Ms. 
Baldwin, you are next.
    Ms. Baldwin. Thank you, Mr. Chairman.
    Mr. Hackbarth, I have a couple of questions for you.
    Some physician groups have long asserted that CMS can take 
action on its own to prevent the cuts from being implemented, 
and I am wondering if MedPAC has taken a position on whether 
CMS can administratively act to prevent or relieve the negative 
updates? Has MedPAC addressed this issue?
    Mr. Hackbarth. We have not taken a position on that issue.
    Ms. Baldwin. On another matter, at the end of your written 
testimony you discuss creating new incentives in the physician 
payment system. I am particularly interested in this idea, as 
we have seen, that national spending targets like the SGR have 
had little effect on physician behavior, and that is one of the 
reasons why the SGR doesn't work.
    In Dr. McClellan's testimony he talks about the growth in 
the volume of services physicians have provided, which in 2004 
increased by a factor of 14 percent. While the increase in 
volume of physician services is concerning, I think it is 
important to recognize that this is not a trend we see 
everywhere and uniformly in the United States.
    For example, in my home State of Wisconsin there is the 
example of Marshfield Clinic that only realized a 1.5 increase 
in volume for Medicare services in 2004, and this relatively 
low level of increase in volume is something that we see 
throughout the State of Wisconsin. In effect, doctors in 
Wisconsin and other areas of the country with low levels of 
increase in volume of services that physicians provide are 
being punished, I think, by the way the system currently works. 
So I am particularly interested in the four ways that you 
suggest that Medicare can move from one national spending 
target to multiple spending targets or multiple alternate 
pools, and I am wondering if you can expand a little bit on 
these options.
    Mr. Hackbarth. Sure, I would be happy to.
    As you point out, one of our most fundamental objections to 
SGR is that unfairness that you refer to. Everybody is punished 
equally, even if they didn't contribute equally to the problem 
facing the program. That is unfair, and it means there is no 
incentive for good performance, and that is the road to ruin.
    We are a bit leery in general of formulating systems like 
SGR that says that you can reduce down to a calculation what 
the right amount of spending should be. We are a little 
concerned that they may be simplistic.
    Should Congress decide, however, that in view of the long-
term financial projections for the program or immediate budget 
circumstances that it wants to retain such a formula-driven 
system, we think the most important step that could be taken 
that would move it in the proper direction would be to have it 
applied to smaller, more accountable units. So that in the case 
of Wisconsin and in other States in the upper Midwest who have 
a very different pattern of care and rate of increase in costs 
they would not be punished for what happens in another group of 
States that have a much higher level of cost and more rapid 
increase in cost. So a geographic subdivision of the country 
might be one direction you might go.
    Another direction that you might take is not to do it 
geographically but to identify smaller groups of physicians who 
could be accountable not for what happens on the other side of 
the country but what happens within their group practice or 
what happens within their hospital medical staff. If that is 
the sort of group that is held accountable, physicians can deal 
with one another face to face and say, we have got a challenge. 
We have got a risk of having our payments cut. What can we do 
to better manage care and control costs? That is a more 
meaningful accountability than you get under the SGR system, 
and it can lead to a constructive incentive to improve care.
    Now having said that, let me emphasize again that MedPAC 
has not endorsed any of these alternatives. What we have said 
is, if Congress decides it wants an overall formula-driven 
system, you would want to go to smaller units. We would be 
happy to look at the strengths and weaknesses of various 
options, and they would all have those strengths and 
weaknesses.
    Ms. Baldwin. I notice that your last sentence in your 
written testimony presents that invitation for those of us 
interested in seeing you explore those further to do so, and I 
suspect--I can't speak for other members, but I suspect there 
is interest.
    Mr. Deal. I will second that.
    The gentlelady's time is expired.
    I believe all members of the subcommittee have asked 
questions, and we thank the two gentlemen part of this panel. 
We kept you here for 4 hours----
    Mr. Engel. Mr. Chairman, I wonder if I would be given the 
opportunity----
    Mr. Deal. You would have to ask unanimous consent. I don't 
believe you are a member of this subcommittee, are you?
    Mr. Engel. Not this committee, no.
    Mr. Deal. Do you ask unanimous consent?
    Mr. Engel. Yes, I do.
    Mr. Deal. Do I hear an objection?
    If not, you will be allowed to ask questions. I would urge 
you to do so rather quickly because I think we are getting 
close to a vote on the floor.
    Mr. Engel. Okay.Thank you, Mr. Chairman; and although I am 
not, this Congress, a member of the Health Subcommittee, I 
appreciate the opportunity to ask questions.
    Obviously, the SGR system is seriously flawed and needs to 
be fixed; and physicians deserve to be fairly and appropriately 
compensated for the important work that they do. And, 
obviously, we are facing a serious access problem, and access 
to health care for beneficiaries would be hurt if physicians 
continue to drop out of the Medicare system. But increasing 
payments under the current SGR system means that beneficiaries 
will also be subject to higher cost sharing and premiums. They 
face 2 years or record premium increases because their premiums 
are based on Medicare spending. Any further large increases are 
another barrier to care. It is time to really reform this 
unsustainable system, and long-term solutions are needed so 
that our doctors don't face the same uncertainties next year.
    I have two questions essentially. Dr. McClellan, obviously, 
this hearing is about creating a more efficient payment system. 
The Senate amendment during the reconciliation debate seeks to 
include marriage and family therapists and mental health 
counselors under Medicare in an effort to expand access to 
mental health services in rural areas. In 2002, MedPAC reported 
to Congress that including marriage and family therapists and 
mental health counselors under Medicare would likely increase 
costs to the Medicare program without expanding access to 
mental health services in rural areas; and they voted 12 to 2 
against, including MFTs and MHCs under Medicare. Instead, 
MedPAC suggested addressing other barriers, like the 50 percent 
co-insurance payment. The mental health care and other all 
medical care requires a 20 percent co-insurance payment.
    According to the report, and I quote, addressing the 
barriers to mental health services embedded in Medicare payment 
and coverage policies may have greater potential to improve 
mental health services to the largest number of beneficiaries 
than would expanding the list of recognized providers. So I 
have to tell you, I think one of the cruelest injustices in our 
Medicare program is the continued disparity in payment between 
these equally important services. They should be no different.
    So my question is, in determining a more efficient Medicare 
program, MedPAC has found it is more efficient to pay 
appropriately for mental health services than to add non-
physician providers to the already burdened payment system. Do 
you agree with MedPAC's assessment of this situation?
    Mr. McClellan. Well, I certainly agree with the expansion 
to other types of providers not being as high priority as 
addressing the physician payment problems and moving to a 
better physician payment system and taking other steps that can 
improve care for patients with mental illnesses. Now we haven't 
taken any position on the reduction in co-pays that MedPAC 
recommended for mental health services. We have been focused on 
other steps to improve access to treatments for mental illness 
among seniors and people with disability. The most important 
one is the new prescription drug benefit, which not only 
doesn't have any disparity in how mental illnesses are 
treated--in fact, all of the prescription drug plans are 
required to cover essentially all of the treatments for mental 
illness that are available. That is a big step toward greater 
access to care that will improve outcomes related to mental 
illness for seniors.
    Mr. Engel. Would you recommend to Congress that Congress 
eliminate this disparity?
    Mr. McClellan. Well, I think we can look at ways to reduce 
problems in access to mental health care and find cost-
effective ways to do that. Many of the Medicare advantage plans 
that we have already been talking about provide additional 
mental health services, for example, that are not covered by 
Medicare. We have not taken a specific position on that 
proposal, though.
    Mr. Engel. Let me just finally, before I have--the second 
question is, MedPAC has certainly convinced me that we should 
pay for, appropriately, for mental health services. I think it 
is very, very important. My last question is, has CMS looked at 
how further cuts in the Medicaid conversion factor because of 
the SGR formula would harm resident physician teaching 
programs?
    For example, CMS recently failed to take any positive 
action on the anesthesiology teaching rule, despite lots of 
support from Members of Congress, including me. My doctors back 
home tell me that academic anesthesiology teaching programs are 
really struggling under the inflexible Medicare payment policy. 
The policy, which reduces payments to teaching anesthesiology 
by 50 percent, has had a significant adverse impact on the 
ability of academic programs to train future generations of 
anesthesiologists; and many programs therefore are having 
difficulty filling faculty positions and are operating at 
negative revenue margins. So I feel that these programs, like 
in my area in the Albert Einstein College of Medicine in the 
Bronx, New York, would be further battered by cuts in physician 
payments; and I am wondering if you could comment on that.
    Mr. McClellan. Well, I think you are talking about the 
limit on the number of residents that an anesthesiologist in a 
teaching program can supervise at one time, and we did ask for 
comments related to changes in this policy. We did get some 
comments back on both sides. While there were some in support, 
a number of anesthesiology programs, as you mention, in support 
of a change in the payment, there were other groups that were 
saying, basically, if you make that change here, hey, you need 
to make similar changes in a bunch of other programs. That 
would have had considerably larger cost implications; and so 
that is something that we are still looking at now, whether 
this is a financially viable approach.
    But I agree with you about the need to pay some close 
attention to the viability of the anesthesiology and other 
teaching programs. We have seen some big changes in medical 
practice, and our teaching support systems have not kept up 
with that. So we are paying a lot of attention to possible 
reforms in teaching payments.
    Mr. Engel. Well, I am hoping we can continue the dialog on 
this; and I thank you, Mr. Chairman, for your indulgence.
    Mr. McClellan. Absolutely, thank you.
    Mr. Deal. I thank the gentleman, and thanks to both panel 
members. We kept you now in excess of 4 hours. We thank you for 
yourindulgence, and we look forward to hearing from you again 
in the very near future. Thank you.
    I am going to ask the second panel, if you will come to the 
table, I probably will only be able to introduce you before the 
bell goes off for votes on the floor, but we will do that and 
then probably have to recess for votes.
    All right. Very good. Well, thanks again. You have been 
patient as well since you had to sit out there and listen all 
this time, and we thank you for your presence.
    Let me introduce the panel: Dr. Frank Opelka, a surgeon 
from New Orleans, Louisiana, who is here on behalf of the 
American College of Surgeons; Dr. Vineet Arora, an internal 
medicine physician from Chicago, who is representing the 
American College of Physicians; Dr. Elizabeth Davis, an 
ophthalmologist from Minnesota, who is representing the 
Alliance of Specialty Medicine; Dr. Duane M. Cady, a surgeon 
from Upstate New York and the Chairman for the Board of 
Trustees for the American Medical Association; our former 
colleague, the Honorable Barbara Kennelly, who is currently the 
President and CEO of the National Committee to Preserve Social 
Security and Medicare; and Ms. Nora Super, from the Center for 
Health Services Research and Policy at the George Washington 
University Medical Center.
    Ladies and gentlemen, we are pleased to have you here. 
Since you have been waiting so long, I am going to go ahead and 
start.
    Dr. Opelka, we will start with you. We probably will be 
interrupted by bells in just a few minutes, but you are free to 
proceed.

  STATEMENTS OF FRANK OPELKA, ON BEHALF OF AMERICAN COLLEGE OF 
SURGEONS; VINEET ARORA, CHAIR, COUNCIL OF ASSOCIATES, AMERICAN 
 COLLEGE OF PHYSICIANS; ELIZABETH DAVIS, ON BEHALF OF ALLIANCE 
OF SPECIALTY MEDICINE; DUANE M. CADY, CHAIR, BOARD OF TRUSTEES, 
    AMERICAN MEDICAL ASSOCIATION; HON. BARBARA B. KENNELLY, 
   PRESIDENT AND CEO, NATIONAL COMMITTEE TO PRESERVE SOCIAL 
   SECURITY AND MEDICARE; AND NORA SUPER, CENTER FOR HEALTH 
  SERVICES RESEARCH AND POLICY, GEORGE WASHINGTON UNIVERSITY 
                         MEDICAL CENTER

    Mr. Opelka. Thank you, Chairman Deal. And I appreciate the 
opportunity, the distinguished members of the panel, to present 
to you on behalf of the 70,000 fellows of the American College 
of Surgeons. As you said, my name is Frank Opelka. I am from 
New Orleans. I am a practicing surgeon there. I am also a 
professor of surgery and the Associate Dean for Louisiana State 
University.
    Before I get into my remarks, may I just thank you and all 
the Members of the Congress and the constituents from all of 
the States across the country who have poured out their hearts 
in helping us in Louisiana. We appreciate that.
    For my remarks themselves, I would like to direct attention 
toward the SGR that we have talked about today, as well as I 
would like to direct some remarks about pay for performance.
    Regarding the SGR, as everyone has said, this is a flawed 
problem. It is a unique problem for surgeons. It is a little 
bit different for surgeons as compared to other practices where 
there may be volume and intensity opportunities.
    In the surgical arena, there has been a relatively flat 
growth of surgery, as you can see in our graphic illustration. 
Surgery is the deep purple, and it is pretty much a flatter or 
relatively minimum growth over years. The other services have 
increased because of opportunities for improving patient care. 
Those volume increases and those intensity increases have an 
impact on helping other practices try and deal with these 
intense reductions.
    Surgeons don't have that opportunity. Much like the example 
that was given in the Marshfield Clinic in Wisconsin, those 
surgeons can't make up those opportunities. Therefore, they end 
up getting into niche practices, focusing down and limiting 
services. So it becomes a quality and access issue. We need 
your help in stopping this reduction and moving forward with 
you in looking at different types of solutions in the SGR, and 
that is where the College stands with that program.
    We may actually see this as a link with pay for performance 
or value-based purchasing. We are in strong support of value-
based purchasing, but we think that, like SGR, it may not be a 
one-size-fits-all situation. The ambulatory care quality 
initiatives are much different from the surgical inpatient 
quality initiatives. The American College of Surgeons has 
worked for a long time in establishing a very active data base 
that deals with risk-adjusted outcomes, employs processes and 
systematic solutions that really work with hospitals to enhance 
quality care. In fact, there is even a business model for this, 
too. There is cost savings that we can appreciate by limiting 
complications, limiting length of stay and improving overall 
proper evidence-based utilization.
    So the College strongly asks you from the SGR standpoint to 
limit this reduction. We are willing to work with you, 
realizing there is probably not a one-size-fits-all solution 
there. And, also, we strongly support pay for performance, 
realizing there is probably one set of solutions in an 
ambulatory environment and another set of solutions in the 
hospital environment where the surgeon and the hospital are 
working together can improve overall outcomes and save money on 
behalf of the beneficiaries. Thank you very much.
    [The prepared statement of Frank Opelka follows:]

Prepared Statement of Frank G. Opelka on Behalf of the American College 
                              of Surgeons

    Chairman Deal, Ranking Member Brown, and distinguished subcommittee 
members, thank you for the opportunity to testify today on behalf of 
the 70,000 Fellows of the American College of Surgeons. My name is 
Frank Opelka. I practice colorectal surgery in New Orleans, and serve 
as Associate Dean for Healthcare Quality and Safety at Louisiana State 
University. I also serve as the College's Alternate delegate to the 
AMA/Specialty Society RVS Update Committee, or ``RUC.''
    We are grateful to you for holding this hearing on the challenges 
posed by the sustainable growth rate (SGR) method for determining 
Medicare payments to physicians. While it is important to consider the 
impact the current system is having in general on physicians and on 
patient access to care, a wise course for reforming Medicare payment 
must also consider what is happening across the range of specialties 
and subspecialties. Spending trends, practices, billing rules, and the 
way patient care is delivered all vary substantially among specialties, 
and the current payment system simply is not designed to accommodate 
that diversity.
    As you are well aware, unless Congress intervenes the current SGR 
method for determining Medicare physician payments will require a 4.4 
percent payment cut in 2006, with an estimated 26 percent cumulative 
cut anticipated over the next 6 years. As a first step toward bringing 
some rationality and predictability to the Medicare physician payment 
system, Congress must act to stop the cut from going into effect on 
January 1. In the long run, we need a system that enables 
reimbursements to keep pace with physicians' costs. The SGR system has 
to be reformed, with future payments linked to a reasonable measure of 
practice cost inflation such as the Medicare Economic Index.
    While these pending cuts threaten the financial viability of 
physician practices across the range of the specialties, surgeons are 
uniquely threatened by the current payment system. Policymakers seem to 
lose sight of the fact that, for many key surgical services, Medicare 
payments today are about half what they were in the 1980s, even before 
inflation is taken into account. In addition, as surgeons continue to 
confront rising practice costs associated with day-to-day operations, 
they also are faced with some of the highest liability insurance 
premiums in medicine--a major cost that has escalated in recent years, 
and one that has not been addressed by the current payment system.
    At the same time, by the nature of the services they provide and 
differences in the way their services are billed, surgeons are less 
able to compensate for payment losses by increasing the volume of 
services they provide. For example, patients rarely self-refer to 
surgeons; rather, most are referred by other physicians who have 
determined that a surgical assessment is needed. In addition, major 
operations are reimbursed on a global basis that reflects not only the 
procedure itself but also the pre- and post-operative care that occurs 
within a 90-day period. This payment is based on the typical rather 
than average patient, and remains the same regardless of complications 
or how many post-operative services an individual requires. Further, 
unlike most physician services, major procedures can generally be 
performed only once on a given patient.
    As a result, surgery is disproportionately affected by the 
correlation between the price that Medicare pays for specific physician 
services and the overall volume target set for all physician services 
under Medicare. This is because the growth in major operations 
performed by surgeons is consistently lower than the growth rate for 
other services provided to Medicare patients. For example, major 
procedures accounted for 6 percent of total Medicare physician spending 
in 2004, and for only 3 percent of the growth in Medicare physician 
spending that year. Practically, this means that the current formula 
requires surgeons to bear the cost of increased utilization of services 
that they do not provide--whether or not that increased utilization is 
justified.
    We did some back-of-the envelope calculations, projecting forward 
the 2004 growth rates for the major categories of physician services 
and estimating what surgical services would be paid in the future under 
a surgery-specific SGR. Under such a system, major operations would be 
awarded payment increases totaling 14.5 percent by 2011, as opposed to 
the 26 percent cumulative cut that has been estimated under the current 
system. Under this scenario most other service categories, of course, 
would see their cuts deepen over the same period. Clearly, the SGR 
system is siphoning payments away from surgery toward other services 
that are experiencing significantly higher rates of growth.
    The attached chart compares surgery with the largest category of 
physician spending--evaluation and management (E/M), or visit services. 
As you can see, in 1998 Medicare spent about $575 per Medicare 
beneficiary for visit services; that amount grew by over 36 percent to 
about $784 in 2003. For major procedures, on the other hand, the 
comparable figures are $212 in 1998 and $226 in 2003--an increase of 
less than 7 percent. (I should point out that we expanded the specific 
services typically classified in the ``major procedures'' category by 
Medicare to include several high-volume ambulatory services, including 
the number one Medicare procedure--cataract surgery.)
    We have no reason to suspect that the relatively high rate of 
spending growth for E/M services is inappropriate. Indeed, it is clear 
that public health experts and policymakers are very concerned about 
access to the primary care services that comprise the largest portion 
of this E/M service category. And, many efforts are underway--including 
value-based purchasing proposals--that we expect will accelerate the E/
M growth rate through improved immunization rates, greater access to 
screening services, better management of chronic conditions, and so 
forth. But, what impact will that have on surgery? As the government 
encourages primary care physicians to provide more of these office-
based services, the SGR requires the money to come from other 
services--regardless of any spending or access issues that may be 
involved. Surgeons simply cannot continue to foot the bill for 
increases in the volume of unrelated services provided by others--no 
matter how valuable those services may be.
    In other words, the current Medicare payment and update system is 
simply inadequate to the task of appropriately pricing services as 
diverse as E/M and surgery.
    With respect to pay for performance or value-based purchasing, the 
College is optimistic that such a program, if properly designed, holds 
great promise for truly imposing some rationality on the physician 
payment system. We agree that it is time to shift the focus away from 
the ``price'' Medicare pays for a service and toward the 
``effectiveness'' of the care that patients receive.
    Since the College's founding over 90 years ago, it has demonstrated 
its commitment to ensuring high-quality surgical care for patients. 
This commitment to excellence in surgery is evident in the professional 
standards to which our Fellows are held and in the wide range of 
educational services that the College offers to ensure that they 
maintain their skills and learn about advances in technology and 
practice. We set standards for trauma care, we approve hospital cancer 
programs, and we have developed standards for bariatric surgery 
programs. With respect to promoting processes and data collection to 
improve surgical outcomes, the College has partnered with CMS and the 
Centers for Disease Control and Prevention in the Surgical Care 
Improvement Project (SCIP), and first with the Department of Veterans 
Affairs and now with hospitals and health plans in the National 
Surgical Quality Improvement Project (NSQIP). The College believes 
strongly that, if value-based purchasing in Medicare is to be 
successful, physician measures must be based on physician-led efforts 
such as these public-private partnerships, which have been shown to 
improve outcomes for patients and lower healthcare costs.
    Again, it is important to note that the diversity of physician 
services and the settings in which they occur must be taken into 
account in the design of a value-based purchasing program. Surgeon-led 
quality improvement initiatives, for example, tend to focus on the 
entire episode of care and the system in which patient care is 
provided. Surgery is a team effort, and our quality and safety efforts 
incorporate all elements of that team. This is a very different 
approach from the more narrowly drawn process measures that have been 
developed for other service types. Surgical care also lends itself more 
readily to risk-adjusted outcomes measurement than many primary care 
services for which success relies more heavily on patient compliance 
factors beyond the physician's control. Finally, the potential for cost 
savings through improvements in the quality of surgical care can be 
tremendous. For example, it has been estimated that taking the 
necessary steps to prevent post-operative pneumonia can save $22,000 to 
$28,000 per patient admission. However, for Medicare these savings are 
achieved outside the Part B physician payment system, a complex issue 
that needs to be addressed if payment incentives are to truly be 
aligned to favor cost effectiveness and quality improvement.
    Nevertheless, the College and its Fellows stand ready to work with 
Congress and with CMS to ensure that any value-based purchasing reforms 
are structured in such a way to properly reward high-quality care and 
to promote advances that will improve the quality of surgical care in 
the future.
    Finally, with respect to the reconciliation process, we note that 
the Senate's package (S. 1932) proposes to replace the 4.4 percent cut 
in 2006 with a 1 percent payment increase. While we certainly 
appreciate this effort at a time when the committee was seeking budget 
savings, we are deeply concerned that the value-based purchasing 
program included in the bill is unworkable and holds the potential of 
causing even greater financial instability. Value-based purchasing 
simply cannot succeed in a system that is producing steep, annual 
payment cuts. By-and-large, physician offices are small businesses--the 
majority of surgeons are in solo practice or in groups of two or three 
partners. They need a reasonably stable and predictable revenue stream 
to make effective practice decisions.
    When a conference committee convenes, members of this Subcommittee 
will be asked to help draft revisions and ultimately vote on value-
based purchasing provisions. In that effort, we ask that you be mindful 
of the commitment that will be required by both physicians and the 
government to truly align incentives and make value-based purchasing 
work toward achieving the goal of higher-quality patient care.
    Mr. Chairman, the College appreciates this opportunity to share its 
perspective on the challenges facing surgeons under the Medicare 
program today. We are ready to work with you to reform the Medicare 
physician payment system to ensure that our patients have access to the 
high-quality surgical care they need.

    Mr. Deal. Thank you, Dr. Opelka.
    1As you heard the bell, we do have two votes on the floor, 
so if you will indulge us for just a few more minutes we will 
go vote. And maybe I can find some more members to come back 
with me. Hopefully, that will be the case. But we will be back, 
and we stand in recess subject to return.
    [Brief recess.]
    Mr. Deal. We will call this hearing back to order.
    I understand that Dr. Davis has a flight to catch; and, Dr. 
Davis, I would simply ask, would you be inclined to respond to 
written questions that panel members may submit to you?
    Ms. Davis. Yes, I will.
    Mr. Deal. You are recognized.

                  STATEMENT OF ELIZABETH DAVIS

    Ms. Davis. Thank you very much.
    Mr. Chairman, members of the Subcommittee, in addition to 
serving as a partner in a private ophthalmology practice in 
Minneapolis, Minnesota, and as a clinical assistant professor 
at the University of Minnesota, I am also the Chair of the 
American Society of Cataract and Refractive Surgery's Young 
Physicians and Residents Committee and a member of the ASCRS 
Government Relations Committee.
    I am here today representing the Alliance of Specialty 
Medicine, a coalition of 13 societies, including ASCRS, 
representing more than 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 formula and to offer 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 physicians can avert negative updates to is somehow limit 
care to the population that needs quality health care the most, 
our Nation's elderly and disabled. No physician wants to turn 
away patients or leave a practice and the patients he or she 
has been serving for years. No physician wants to end a career 
earlier than he or she intended. To take such actions goes 
against the very reason they became physicians.
    Flaws in the complex Medicare reimbursement update formula 
include, but are not limited to:
    No. 1, including the cost of Medicare-covered outpatient 
drugs and biologicals in setting the expenditure target for 
physician services, even though these items are not physicians' 
services and therefore, under the formula, lead to decreases in 
the annual payment update.
    No. 2, linking Medicare physician fees to the GDP, which 
does not accurately reflect changes in the cost of caring for 
Medicare patients.
    No. 3, 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 on drugs to treat 
illnesses, and a greater awareness of covered health benefits 
and practices due to educational outreach efforts.
    And, No. 4, improperly accounting for costs and savings 
associated with new technologies.
    Although the problem 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 reduction to the conversion factor. 
Since then, the flaws of 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, and 
we are again faced with a 4.4 reduction January 1, 2006, and 
significant reductions beyond.
    In 2003, after the Centers for Medicare and Medicaid 
Services delayed a second payment reduction for 3 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 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 reduction in 2004, 
Congress again acted and included a provision in the Medicare 
Prescription Drug Improvement and Modernization Act of 2003 
that mandated an increase of at least 1.5 percent in both 2004 
and 2005. Although we appreciate the leadership of this 
committee in preventing the reductions in the eventual 
intervention of Congress, the statutory increase did nothing to 
change the underlying formula. In fact, while the statutory 
update in 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 increased in these updates must be 
paid back to the Medicare program with interest over the next 
10 years.
    In fewer than 50 days, Medicare physician payments will be 
cut by 4.4, followed by significant reductions until 2012, and 
rates will not return to the 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.
    Although reimbursement will likely be cut by more than 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 be unable to afford to 
treat Medicare patients.
    As I have previously stated, Congressional action has 
delayed the imminent meltdown of the Medicare problem and has 
allowed some breathing space to evaluate approaches to fixing 
the payment update formula. Although we prefer that Congress 
repeal the SGR and replace it with a system that takes into 
account the actual cost of providing care to Medicare patients, 
such as the Medicare Economic Index, we recognize that this is 
unlikely this year, given the current fiscal constraints facing 
the Congress. Providing short-term relief, therefore, is 
absolutely necessary to maintain access to care for 
beneficiaries and to stabilize the Medicare program until the 
SGR problem is resolved.
    We also believe that it would be unwise to legislate a 
punitive pay-for-performance system for Medicare at this time. 
We clearly understand that the administration and Congress are 
intent on moving the Medicare into a quality reporting and 
value-based purchasing system. However, the SGR and a value-
based purchasing or pay-for-performance system are 
incompatible. For physicians to embrace a value-based 
purchasing system, the SGR must be replaced with a more 
equitable and stable payment system so that physicians can 
invest in health information technology and pilot test data 
collection methods and quality measures as steps toward 
establishing a pay-for-performance system that actually 
improves care for Medicare patients.
    Moving too rapidly by legislating pay-for-performance now 
without first resolving the SGR, especially a pay-for-
performance system which is not supported by the physician 
community, amounts to replacing one broken system with another. 
Again, pay-for-performance is unworkable applied on top of the 
current unstable payment system. Simply put, value-based 
purchasing system and the SGR are not compatible and cannot 
work together.
    The Alliance's member specialty physician organizations are 
continually striving to offer the highest specialized quality 
care to all Medicare beneficiaries. Over the past 8 months, the 
members of the Alliance of Specialty Medicine have worked 
diligently to prepare physicians for a value-based purchasing 
system. We have cooperated with CMS on the initial development 
of quality measurements that could be voluntarily reported 
through a claims-based system. In fact, physician specialty 
organizations played a role in developing the newly announced 
CMS Voluntary Physician Reporting Program and look forward to 
working with CMS to address some concerns that we have with the 
selected measures and process. All specialty groups in the 
Alliance have made tremendous progress in developing quality 
measures and preparing their physician members for this new 
payment system, and we stand ready to continue our involvement 
as the process moves forward.
    We also continue to believe that quality reporting measures 
should be evidence-based developed by the specialty societies 
with expertise in the area of care in question and based on 
factors physicians can directly control. Quality measures must 
be pilot-tested and phased in across a variety of specialties 
and practice settings to help determine what does and does not 
improve quality. This is critical as we move to a system that 
produces a more efficient, reliable and stable patient system.
    Therefore, the Alliance understands that there is an 
opportunity to work with Congress and the administration to 
enhance quality measurement for the specialty care provided to 
our Nation's seniors and individuals with disabilities. Patient 
safety and quality care are the cornerstones on which all 
patient care is delivered by the more than 200,000 specialty 
physicians the Alliance represents and the millions of patients 
they care for each year.
    We stand ready to continue to work with Congress and the 
administration and ask that the following issues be addressed:
    Physician payment reduction scheduled for January 1, 2006, 
and future years be prevented.
    Before a mandatory value-based purchasing system is put 
into place, the current SGR must be replaced with a system that 
is more predictable and recognizes the true cost of providing 
physician services to Medicare beneficiaries.
    Any new value-based purchasing program must be nonpunitive 
and use consensus-driven, evidence-based quality and efficiency 
measures developed by the medical specialties, and it must be 
phased in over several years.
    All quality and efficiency measures should be consensus-
driven and pilot-tested across a variety of specialties and 
practice settings.
    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 and ensures fair 
reimbursement for physicians as well as continued beneficiary 
access to quality specialty health care.
    Thank you very much.
    [The prepared statement of Elizabeth Davis follows:]

 Prepared Statement of Elizabeth A. Davis on Behalf of the Alliance of 
                           Specialty Medicine

    Mr. Chairman, Members of the Subcommittee, in addition to serving 
as a partner in a private ophthalmology practice in Minneapolis, 
Minnesota, and as a Clinical Assistant Professor at the University of 
Minnesota, I am the Chair of the American Society of Cataract and 
Refractive Surgery's (ASCRS) Young Physicians and Residents Committee 
and a member of the ASCRS Government Relations Committee. I am here 
today representing the Alliance of Specialty Medicine--a coalition of 
13 societies, including ASCRS, representing more than 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 to offer 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 
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 physician wants to turn away patients or leave 
a practice and the patients she or he has been serving for years. No 
physician wants to end a career earlier than he or she intended. To 
take such actions goes against the very reasons we became physicians.

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 on 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
    Although 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% reduction to the conversion factor. Since then, the flaws of 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, and we are again faced with a 4.4% reduction January 1, 
2006--and significant reductions beyond.
    In 2003, after the Centers for Medicare and Medicaid Services 
delayed a second payment reduction for 3 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% 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. Although 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 10 years.

Reimbursement Rates in 2006 and Beyond
    In fewer than 50 days, Medicare physician payments will be cut by 
4.4%, followed by significant reductions 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. Although reimbursement will likely be cut by 
more than 30% under the current formula during that time period, it is 
estimated that costs for providing services will rise by close to 20%. 
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. Although we prefer that Congress repeal the SGR and replace it 
with system that takes into account the actual cost of providing care 
to Medicare patients, such as the Medicare Economic Index (MEI), we 
recognize that this is unlikely this year given the current fiscal 
constraints facing the Congress. Providing short-term relief, 
therefore, is absolutely necessary to maintain access to care for 
beneficiaries and to stabilize the Medicare program until the SGR 
problem is solved.
    We also believe that it would be unwise to legislate a punitive 
pay-for-performance system for Medicare at this time. We clearly 
understand that the Administration and Congress are intent on moving 
the Medicare program into a quality-reporting and value-based 
purchasing system. However, the SGR and a value-based purchasing or 
pay-for-performance system are incompatible. For physicians to embrace 
a value-based purchasing system, the SGR must be replaced with a more 
equitable and stable payment system so that physicians can invest in 
health information technology and pilot test data collection methods 
and quality measures as steps toward establishing a pay-for-performance 
system that actually improves care for Medicare patients. Moving too 
rapidly by legislating pay for performance now without first resolving 
the SGR, especially a pay for performance program that is not supported 
by the physician community, amounts to replacing one broken system with 
another. Again, pay-for-performance is unworkable applied on top of the 
current unstable payment system. Simply put, value-based purchasing and 
the SGR are not compatible and cannot work together.

Pay for Performance
    The Alliance's member specialty physician organizations are 
continually striving to offer the highest specialized quality care to 
all Medicare beneficiaries.
    Over the past 8 months, the members of the Alliance of Specialty 
Medicine have worked diligently to prepare physicians for a value-based 
purchasing system. We have cooperated with the CMS on the initial 
development of quality measures that could be voluntarily reported 
through a claims-based system. In fact, physician specialty 
organizations played a role in developing the newly announced CMS 
Voluntary Physician Reporting Program (PVRP) and look forward to 
working with CMS to address some concerns that we have with the 
selected measures and process. All specialty groups in the Alliance 
have made tremendous progress in developing quality measures and 
preparing their physician members for this new payment system, and we 
stand ready to continue our involvement as the process moves forward.
    We also continue to believe that quality reporting measures should 
be evidence based developed by the specialty societies with expertise 
in the area of care in question, and based on factors physicians can 
directly control. Quality measures must be pilot-tested and phased in 
across a variety of specialties and practice settings to help determine 
what does and does not improve quality. This is critical as we move to 
a system that produces a more efficient, reliable, and stable patient 
system.
    Therefore, the Alliance understands that there is an opportunity to 
work with Congress and the Administration to enhance quality 
measurement for the specialty care provided to our Nation's seniors and 
individuals with disabilities. Patient safety and quality care are the 
cornerstones on which all patient care is delivered by the more than 
200,000 specialty physicians the Alliance represents and the millions 
of patients they care for each year. We stand ready to continue to work 
with Congress and the Administration and ask that the following issues 
be addressed:

 The physician payment reductions scheduled for January 1, 2006, and 
        future years be prevented.
 Before a mandatory value-based purchasing program is put into place, 
        the current SGR system must be replaced with a system that is 
        more predictable and recognizes the true costs of providing 
        physician services to Medicare beneficiaries.
 Any new value-based purchasing program must be non punitive and use 
        consensus-driven, evidence-based quality and efficiency 
        measures developed by the medical specialties, and it must be 
        phased-in over several years.
 All quality and efficiency measures should be consensus drive and 
        pilot tested across a variety of specialties and practice 
        settings.

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 and ensures fair reimbursement for physicians as well as 
continued beneficiary access to quality specialty health care.

    Mr. Deal. Thank you, Dr. Davis.
    Dr. Arora.

                    STATEMENT OF VINEET ARORA

    Ms. Arora. I would like to thank Chairman Deal, Ranking 
Member Brown and distinguished members of the subcommittee for 
holding today's hearing on Medicare physician payment.
    My name is Vineet Arora. I am a physician and Chair of the 
Council of Associates of the American College of Physicians and 
a member of the College's Board of Regions.
    I am an instructor of medicine in the section of general 
internal medicine at the University of Chicago, where I 
recently completed my internal medicine residency. We deliver 
primary care to the residents of the South Side of Chicago. 
Eighty-five percent of our patients are African-American, and 
the majority is over age 65 and covered by Medicare.
    I also a currently serve as the Associate Program Director 
for the Internal Medicine Residency Program and am an Assistant 
Dean for the Pritzker School of Medicine at the University of 
Chicago.
    ACP's Council of Associates, which I chair, represents 
physicians who are being trained in an internal medicine 
residency program or who have gone for additional training in a 
subspecialty medicine fellowship program. Together, we are the 
new generation of physicians that your elderly and disabled 
constituents will be counting on for their primary care; and, 
unfortunately, there won't be enough of us. A combination of 
high student debt and an unfavorable economic environment is 
causing many of us to choose careers other than general 
internal medicine or family practice, which are the two 
specialities that aged and disabled patients must most depend 
on for their primary care. Furthermore, Medicare payment cuts 
that will result from the flawed sustainable growth rate 
formula will accelerate this looming crisis in access to 
primary care.
    Today, I am pleased to report that the American Academy of 
Family Physicians and the American Osteopathic Association have 
participated in the preparation of today's testimony.
    There is growing evidence that shortages are developing for 
U.S. Physicians but particularly in general internal medicine 
and family practice. Current projections indicate the future 
supply of primary care physicians will be inadequate to meet 
the health care needs of the aging U.S. Population, especially 
as baby boomers are beginning to reach retirement age in 2011.
    In 1998, over half of graduating internal medicine 
residents plan to practice general internal medicine. Compare 
that with less than one-third in 2003. Strikingly, in 2003, 
only 19 percent of all internal medicine residents planned to 
pursue careers in general internal medicine. In my own 
residency program, I was one of only two of our nearly 30 
graduating residents that did not enter a subspecialty 
fellowship training program. Moreover, primary care careers are 
too often becoming the default pathway of those students that 
could not enter competitive specialties.
    The reasons why medical students and young physicians are 
turning away from primary care are complex and multifaceted. 
But based on my own experience and my conversations with peers 
I can honestly say with confidence that the dismal economic 
practice environment associated with primary care today is the 
major barrier.
    The pending Medicare payment cut will only make a bad 
situation even worse. Right now, physician payments under 
Medicare will be cut by 4.4 percent on January 1, 2006. 
Additional cuts will decrease physician reimbursement by more 
than 26 percent from 2006 to 2011. In this same period, CMS 
projects physician costs will rise by 15 percent.
    Now we learn early in our medical training about the 
importance and joy of having a continuous and on-going personal 
relationship with a patient, and these are the hallmarks of 
general internal medicine and family medicine. Unfortunately, 
we also learn that primary care is under-reimbursed compared to 
other specialties and that many primary care physicians are 
struggling to keep their practices open at a time of escalating 
practice costs, excessive paperwork requirements that take time 
away from caring for patients, and reimbursement from other 
Medicare and other payers that does not keep pace with the 
rising costs. It is so bad that many of the excellent role 
models in primary care that we meet every day in our training 
programs go so far as to counsel us not to go into primary 
care, and you may wonder why, and that is because they tell us 
there is no economic future in primary care.
    Today, a physician entering practice like myself has, on 
average, accumulated more than $100,000 in student debt, but 
the average doesn't tell the whole story. The median 
indebtedness of medical school students graduating this year is 
expected to be $120,000 for students in public medical schools 
and $160,000 for students attending private medical schools. 
About 5 percent of all medical students will graduate with a 
debt of $200,000 or more. Unfortunately, many of those young 
graduates facing the highest debt burden are of modest means 
and diverse backgrounds that are underrepresented in medicine, 
exactly the type of physicians we want to recruit to provide 
primary care for our increasingly diverse population.
    In addition, many of us are entering practice at the same 
time we are getting married and buying homes and starting 
families. Just this week I was visiting my friend, a new mom 
who is also completing her family medicine residency in New 
Hampshire. She is married to another medical trainee, and 
together they have nearly $400,000 in medical student debt and 
another baby on the way. When interviewing for jobs, she 
realized that she could not accept a job in office-based 
primary care and expect to pay for her child care while 
continuing to pay off their debt. And there are countless 
others like her. Is it any surprise that more and more of us 
have concluded we simply cannot afford to support our families 
and also practice primary care?
    Now reversing this decline will require immediate action by 
policymakers. The long pipeline of medical education, which is 
sometimes in some cases greater than 10 years, and retirement 
or career changes of older physicians necessitates that the 
Nation have a constant influx of new students embarking on 
medical careers. As the population ages, larger numbers of 
patients encounter chronic and more complex illnesses. The need 
for general internists and family physicians will increase. The 
need for primary care physicians who can provide first contact 
and comprehensive continuing care for adults will continue to 
increase as the population ages and its health care needs 
increase and as the demand for acute, chronic and long-term 
care increases.
    Unfortunately, unless Congress acts now, the Medicare cuts 
will result in fewer physicians going into primary care; and 
many of those who are already in practice will be forced to 
retire or limit how many Medicare patients they will see.
    In conclusion, I strongly urge the subcommittee to 
recommend that Congress take immediate action now to help avert 
the looming crisis and access to primary care by the following:
    First, Congress must stabilize Medicare payments by halting 
the 4.4 percent cut and replacing the SGR cuts with positive 
updates for at least the next 2 years.
    Second, Congress must enact a long-term alternative to the 
SGR.
    Third, Congress must recognize that successful 
implementation of the Medicare value-based purchasing program 
or a pay-for-performance type of program will require that the 
SGR be replaced with an alternative that provides stable, 
adequate and predictable payments to physicians.
    And, fourth, Congress must work on developing a coordinated 
and comprehensive strategy for reversing the decline of young 
physicians going into primary care.
    I am pleased to answer any questions from the committee.
    [The prepared statement of Vineet Arora follows:]
    Mr. Deal. Thank you.
    Dr. Cady.

                   STATEMENT OF DUANE M. CADY

    Mr. Cady. Thank you, Mr. Chairman.
    I thank you, Mr. Chairman. My name is Duane Cady. I am the 
chairman of the Board of Trustees of the American Medical 
Association and a general surgeon in upstate New York.
    Today I, too, want to talk about the Medicare physician 
payment formula, or the SGR. As we have all heard today over 
and over, it is severely broken, and the patient access crisis 
is looming. Congress must take action this year.
    As of today, there are 44 calendar days until the 4.4 
percent cut goes into effect. This will be the first in a 
series of steep cuts over 6 years that will total 26 percent. A 
recent AMA survey shows that these Draconian cuts will impair 
access. It will also have a ripple effect across other payers, 
including TRICARE, which pays for medical care for military 
families and dependents.
    The fatally flawed SGR led to a 5.4 percent cut in 2002, 
and physicians are grateful for congressional intervention to 
stave off additional reductions from 2003 through 2005. 
However, despite Congress's good-faith efforts over the last 4 
years, physicians have received less than half of CMS's own 
conservative measures of increases in medical practice costs.
    If the 2006 is imposed, average physician payments will be 
less in 2006 than they were in 2001, and that is in real terms, 
not adjusted for inflation.
    The graph on the easel shows a grim view of the future. 
Physicians practice costs are expected to rise by an additional 
15 percent from 2006 to 2011, yet during that same time, 
Medicare physician payments will decrease by 26 percent, as you 
see on the right-hand side on the lower line on the graph.
    Now no business could survive these unsustainable cuts, 
especially physician practices, which typically operate as 
small businesses. The bar chart shows that only physicians face 
updates of 7 percent below the annual increase in their 
practice costs. Updates for hospitals, long-term care providers 
will keep pace with their market increase. Medicare advantage 
plans will see an average update of 4.8 percent in 2006. And as 
you see on the right-hand side of the bar graph in the tan 
color, that are the physician cuts.
    Physicians form the foundation of our Nation's health care 
system. Without an adequate Medicare payment structure, this 
foundation will crumble. Congress is considering linking 
quality and Medicare physician payment through value-based 
purchasing legislation. The AMA and the leadership of the 
national medical specialty societies have invested extensive 
resources in quality improvement initiatives well before the 
concept of value-based purchasing evolved over the last several 
years we have been involved in this. We work diligently to 
develop countermeasures that are the basis for value-based 
purchasing, and we will continue to do so.
    Value-based purchasing and the SGR, however, are not 
compatible. Value-based purchasing may save dollars for the 
program as a whole. However, in the beginning there may be an 
increase in cost. But many performance measures ask physicians 
to deliver more care, such as vaccines or mammogram or tests 
for diabetes. If the SGR is linked to value-based purchasing, 
more physician services will result in more cuts.
    Further, the success of value-based purchasing depends on 
greater physician adoption of information technology. We are 
well aware of that. Without positive updates, IT investment 
will not be possible. A recent AMA survey indicates that steep 
pay cuts would cause more than half of the physicians to defer 
IT purchases, as well as other medical equipment. Thus, 
implementation of value-based purchasing proposals should be 
deferred until the SGR is repealed and a stable Medicare system 
is in place that reflects increases in physician's practice 
costs, as we saw on the graph.
    Now this doesn't mean that we cannot continue to move 
forward with some kind of quality reporting system, but details 
should be refined among the physician community, Congress and 
the CMS. In fact, the AMA recently requested another meeting 
between Administrator McClellan and physician leaders for 
meaningful dialog on future quality activities.
    Congress has a long-held commitment to seniors and disabled 
persons under the Medicare program. They deserve to have 
continued access to their physicians of choice, along with 
high-quality medical services. Working together, Congress, the 
administration and the physician community can strengthen this 
program and correct problems that undermine its goals.
    In the meantime, what is needed now, this year, is at least 
2 years of positive updates to reflect increases in medical 
practice costs. This would prevent Congress from having to 
struggle with this problem, as I witnessed today again, early 
next year. It will would also give Congress time to enact a 
long-term solution. The AMA looks forward to working with 
Congress in carrying out our long-held mission: service to 
patients, with assurances of access and quality of care.
    Thank you very much.
    [The prepared statement of Duane Cady follows:]

 Prepared Statement of Duane M. Cady on Behalf of the American Medical 
                              Association

    The American Medical Association (AMA) appreciates the opportunity 
to provide our views today regarding the urgent need for Congressional 
action to replace steep Medicare physician pay cuts with positive 
updates for at least the next two years, giving Congress and the 
Administration time to enact a permanent solution to the fatally flawed 
Medicare physician payment formula. Pending physician pay cuts will 
affect nearly one million physicians and other health care 
professionals whose Medicare payment rates are determined by the 
Medicare physician fee schedule.
    Physicians have been working with Congress over the last several 
years to achieve a solution to the Medicare physician payment formula. 
A permanent solution to this problem is critical for maintaining access 
to and quality of care for Medicare patients. In fact, in 2004, the 
Centers for Medicare and Medicaid Services (CMS) Administrator Mark 
McClellan, MD, underscored to Congress the agency's ``concern about 
making sure that Medicare payments to physicians are adequate and 
encourage better care, because physician decisions can have such a 
critical impact on all Medicare costs and on patient health.'' That 
statement still rings true today. Indeed, there is widespread 
agreement--from many in Congress (both sides of the aisle) and the 
Medicare Payment Advisory Commission (MedPAC)--that the physician 
payment formula should be scrapped altogether. Further, Congress and 
CMS agree that an adequate payment structure for physicians is vital 
for maintaining a strong foundation under which Medicare can properly 
provide quality health care for our nation's seniors and disabled 
citizens. Yet, here we are today, with 44 calendar days until a 4.4% 
Medicare physician pay cut goes in effect. Congress must act now, or 
the foundation upon which the Medicare program is built will crumble.

 CONGRESSIONAL ACTION NEEDED THIS YEAR TO STOP MEDICARE PHYSICIAN PAY 
                                  CUTS

    CMS recently confirmed that Medicare physician payments will be cut 
by 4.4%, effective January 1, 2006. This will be the first in a series 
of cuts projected over the next six years by the Medicare Trustees, 
with cumulative cuts of 26% from 2006 through 2011. Congress must act 
this year to stop the pending cuts and provide positive payment updates 
for at least 2006 and 2007. This will help preserve access to health 
care services for seniors and persons with disabilities while Congress 
and the Administration jointly work to enact a permanent fix to the 
current Medicare physician payment formula.

FUNDAMENTAL PROBLEMS WITH THE FATALLY FLAWED MEDICARE PHYSICIAN PAYMENT 
                            FORMULA: THE SGR

    A fatally flawed Medicare physician payment update formula--called 
the sustainable growth rate (the SGR)--is responsible for the projected 
cuts. Under the SGR, payment updates are tied to GDP growth, which 
factors in neither patients' health care needs nor physicians' practice 
costs. Physicians are penalized with pay cuts when Medicare spending on 
physicians' services exceeds SGR spending targets that are based on GDP 
growth, but make no allowance for government policies and other factors 
that increase utilization of services.
    Because of these fundamental defects, the SGR led to a negative 
5.4% update in 2002, and additional reductions in 2003 through 2005 
were averted only after Congress intervened and replaced projected 
steep negative updates with positive updates of 1.6% in 2003 and 1.5% 
in each of 2004 and 2005. We greatly appreciate these short-term 
reprieves. Even with these increases, however, Medicare physician 
payment updates during these years were only about half of the rate of 
inflation of medical practice costs. To make matters worse, if the 2006 
cut is imposed, average physician payment rates will actually be less 
in 2006 than they were in 2001 (in real terms, not adjusted for 
inflation). Further, a 4.4% cut in January 2006, would mean that from 
2002-06, payment rates will have fallen 16% behind the government's 
index of inflation in physicians' practice cost.
    As shown by the graph below, these reductions come at a time when, 
even by Medicare's own conservative estimate, physician practice costs 
are expected to rise by an additional 15% from 2006-11 (with Medicare 
physician payments decreasing by 26%). The vast majority of physician 
practices are small businesses, and the steep losses that are yielded 
by what is ironically called the ``sustainable growth rate,'' would be 
unsustainable for any business, especially small businesses such as 
physician office practices.
    Only physicians and health professionals face updates of 7% below 
the annual increase in their practice costs. Hospitals and long-term 
care providers are slated for updates that fully keep pace with their 
market basket increases, and Medicare Advantage plans will see average 
updates of 4.8% in 2006, as illustrated in the bar graph below. 
Medicare physician payments must be re-structured to ensure access for 
fee-for-service patients as well.

 ACCESS PROBLEMS FOR MEDICARE BENEFICIARIES UNDER THE CURRENT MEDICARE 
                     SGR PHYSICIAN PAYMENT FORMULA

    Physicians simply cannot absorb the pending draconian payment cuts. 
In fact, a recent AMA survey indicates that if the cuts begin January 
1, 2006:

 More than a third of physicians (38%) would decrease the number of 
        new Medicare patients they accept;
 More than half of physicians (54%) plan to defer information 
        technology purchases;
 A majority of physicians (53%) would be less likely to participate in 
        a Medicare Advantage plan; and
 One-third (34%) of physicians whose practice serves rural patients 
        would discontinue their rural outreach services.
    A physician access crisis is looming for Medicare patients. More 
than 20 states each face cuts in Medicare funding of more than one 
billion dollars from 2006-2011. The MMA promised important new benefits 
for patients. An adequate payment structure for physicians' services 
must be in place in order for the government to deliver on its promise 
of these important benefits.
    Yesterday, Medicare patients began enrolling for the new Medicare 
drug benefit that will become effective January 1, 2006. Physicians are 
the foundation of our nation's health care system, and Medicare 
patients' access to physicians' services is imperative for the success 
of the new prescription drug benefit. Continual cuts put such access at 
risk. Indeed, there are already signs that access to care is 
deteriorating. A MedPAC survey found that 22% of patients already have 
some problems finding a primary care physician and 27% report delays 
getting an appointment.
    The physician cuts that threaten to destabilize the Medicare 
program will also create a ripple effect across other programs. Indeed, 
these 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. The Military 
Officers Association of America (MOAA) recently sent a letter to 
Congress urging Congressional action to avert the 4.4% cut because it 
will ``significantly damage'' military beneficiaries' access to health 
care services. MOAA stated that ``[w]ith our nation at war, Congress 
should make a particular effort not to reduce health care access for 
those who bear and have borne such disproportionate sacrifices in 
protecting our country.''

   MEDICARE QUALITY OF CARE INITIATIVES DEPEND ON ADEQUATE PHYSICIAN 
                           PAYMENT STRUCUTRE

    An adequate Medicare physician payment structure is also imperative 
for Medicare quality of care initiatives. There is a growing consensus 
that greater physician adoption of information technology is vital to 
improvements in quality of care. Unless physicians receive positive 
payment updates, however, these investments will not be possible.
    Further, inclusion of value-based purchasing (or pay-for-
performance) provisions as part of any final budget reconciliation 
bill, without a long-term solution to the SGR, will only compound the 
looming access problem and make future SGR reforms more expensive. 
Value-based measures will lead to higher volume of physicians' 
services. Under the SGR formula, more services will result in more 
cuts. Value-based purchasing and the SGR formula are incompatible. The 
SGR formula needs to be repealed in order for value-based purchasing 
proposals to succeed.

 PERMANENT SOLUTION TO THE SGR IS NEEDED TO PROTECT PATIENT ACCESS AND 
                            QUALITY OF CARE

    The Medicare physician payment problem continues to exist because, 
as discussed above, it is inherently flawed and has led to deep cuts 
that were not projected when the formula was implemented in 1997. While 
we greatly appreciate the short-term reprieves achieved by Congress and 
the Administration in recent years, these 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 a long-term solution, repeated Congressional 
intervention will be required to block payment cuts that jeopardize 
continued access to high quality care for the elderly and disabled. A 
one-year fix would provide a temporary respite and lead to another 
struggle to deal with this problem early next year. Thus, at least a 
two-year fix is urgently needed this year to allow time for a permanent 
solution to the SGR.
    Some government officials have cited the SGR formula as a method 
for restraining the growth of Medicare physicians' services. Yet, there 
are many reasons for such growth, and there are no studies documenting 
systematic inappropriate care. Without valid studies, it is impossible 
to determine what volume growth is appropriate or inappropriate. 
Earlier this year, for example, Medicare officials announced that 
spending on Part A services is decreasing. This suggests that, as 
technological innovations advance, services are shifting from Part A to 
Part B, leading to appropriate volume growth on the Part B side. If 
there is a problem with volume growth regarding a particular type of 
medical service, the AMA looks forward to working with Congress and the 
Administration to address it, rather than retaining a formula that 
penalizes both patients and physicians for growth that may not be 
inappropriate at all.

  ADMINISTRATIVE ACTION NEEDED TO ASSIST CONGRESS IN REPLACING THE SGR

    CMS Administrator McClellan recently stated that ``the current 
system of paying physicians is simply not sustainable.'' We agree and 
urge the Subcommittee to continue pressing CMS to use its authority to 
take administrative action to help Congress avert physician pay cuts 
and ensure that a stable, reliable Medicare physician payment formula 
is in place for Medicare patients.
    Despite their protestations, the AMA firmly believes that CMS has 
the authority to remove the costs of drugs, back to the base period, 
from the calculation of the SGR. Because this would significantly 
reduce the cost of legislation and allow Congress to address the 
looming Medicare pay cuts more easily, CMS should take this step as 
soon as possible. Indeed, CMS told Congress earlier this year that 
removing drugs prospectively is worth about $36 billion in lowered 
costs, while removing them from the base-year forward reduces $111 
billion from the cost of an ultimate fix.
    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. Such achievements do not come without a price. 
For example, in 2004 alone, six oncology drugs received FDA approval or 
expanded approval, and two others received approval in 2003. As Dr. 
McClellan noted in testimony earlier this year, spending for one 
recently-developed drug, Pegrilgrastim (Neulastra) totaled $518 million 
last year, more than double the 2003 total. This drug strengthens the 
immune systems of cancer patients receiving chemotherapy, thereby 
improving and extending the lives of many and potentially reducing 
hospital costs in the process.
    Growth rates for drug spending dwarf those of the physician 
services the SGR was intended to include. Between the SGR's 1996 base 
year and 2004, the number of drugs included in the SGR pool rose from 
363 to 445. Spending on physician-administered drugs over the same time 
period rose from $1.8 billion to $8.6 billion, an increase of 358% per 
beneficiary compared to an increase of only 61% per beneficiary for 
actual physicians' services. As a result, drugs are consuming an ever-
increasing share of SGR dollars, nearly tripling from 3.7% of total SGR 
spending in 1996 to 9.8% in 2004.
    It is not equitable or realistic to finance the cost of innovative 
drug therapies through cuts in payments to physicians and other health 
care professionals. CMS must act now to remove these costs form 
calculations of the SGR. The longer CMS waits to make this policy 
change, the more costly it will be for the government to do so.
    The AMA appreciates the opportunity to provide our views to the 
Subcommittee on these important matters. We look forward to working 
with the Congress and the Administration to: (i) stop the pending 
Medicare cuts; (ii) provide at least two years of positive Medicare 
physician payment updates beginning in 2006; and (iii) defer 
implementation of value-based purchasing proposals until the SGR is 
repealed and replaced with a formula that does not unfairly penalize 
physicians for volume increases. These measures will assist the 
Medicare program in providing broad-based access and quality of care 
for seniors, persons with disabilities, and military beneficiaries.

    Mr. Deal. Thank you.
    Ms. Kennelly.

              STATEMENT OF HON. BARBARA B. KENNELLY

    Ms. Kennelly. Thank you, Chairman Deal and Ranking Member 
Brown, Mr. Bilirakis and Congressman Burgess. I am really 
delighted to be able to participate in this hearing and to 
present the beneficiary's point of view in this discussion 
about physician payment rates.
    The National Committee to Preserve Social Security and 
Medicare is a nonprofit member association. We have roughly 4.5 
million members, and the vast majority of them are seniors.
    Mr. Chairman, I am not here today to take a specific 
position on how to reimburse physicians who are participating 
in the Medicare program. That is going to be your very 
difficult task. Instead, as an advocate for seniors, I amhere 
to remind this committee and all Members of Congress that 
access to health care can be denied in many ways. Financial 
barriers can deny needed health care to millions of older 
Americans.
    One of the reasons most seniors choose fee-for-service 
Medicare over managed care is that most older Americans like 
their current doctors and want to be able to choose their own 
doctor when they need a new one. They have long histories with 
the doctors and feel most comfortable with someone who is 
familiar with their medical history. For this reason, seniors 
tend to be very sensitive to the slightest prospect that more 
doctors might limit their practices.
    But access is more than a personal issue. The vast majority 
of seniors receive the bulk of their health care in doctors' 
offices or clinics. Adequate access to physicians is therefore 
a key component to keeping seniors healthy.
    Although there are always cases of closed access, Medicare 
beneficiaries are generally able to see the doctor of their 
choice at least as often as seniors with private insurance. The 
fear of access problems is often greater than reality.
    Physician payment reductions are controversial every year. 
With physicians raising the spectrum of future restrictions on 
access if projected cuts are not reversed, we strongly believe 
doctors should be fairly compensated for their service. 
However, I would like to remind the members of the subcommittee 
of the flip side of that coin. Access can also be denied as 
seniors are priced out of the health care market.
    Two out of three retirees today receive more than half of 
their income from Social Security, and for one out of five 
retirees Social Security is their only source of income. 
Fortunately, these seniors have Social Security costs of living 
adjustments to help them keep up with inflation, but the Social 
Security COLA can only help so much because it is based on 
annual increases in the Consumer Price Index. Medicare 
premiums, which are set at a level to finance about one-fourth 
of the cost of Part B, rise significantly faster because they 
are based on health care inflation, which rises much faster 
than general inflation.
    Since 2000, Medicare Part B premiums have doubled, while 
Social Security COLAs have lagged far behind, with increases 
averaging under 3 percent. If this trend continues, Medicare 
out-of-pocket costs will consume one-half of the average Social 
Security benefit by 2021. If this prediction proves to be 
accurate, it won't make much difference whether physicians are 
willing to take new Medicare patients or not. Many seniors will 
find it more and more difficult to afford the Part B premium at 
all. This is why any expenditure which increases Part B costs 
must be looked at as a part of the whole, rather than in 
isolation.
    Reversing the planned payment reduction, when combined with 
normal increases tracking health inflation, will significantly 
erode seniors standard of living. It would also merely postpone 
the problem, as physician payments are scheduled to decrease in 
future years.
    Physician payments do not alone add cost to Medicare, of 
course. The treatment managed care plans also have a negative 
impact on traditional fee-for-service Medicare. A recent MedPAC 
report found that Medicare pays HMOs an average of 107 percent 
of what it pays to cover individuals enrolled in a traditional 
fee for service. Older, less healthy, seniors who are left 
behind in traditional Medicare help subsidize younger, 
healthier seniors in managed care. This makes Medicare less 
accessible to those seniors who need insurance the most: the 
frailest, the most economically vulnerable.
    There are also two costly items in the Medicare 
Modernization Act instituted for the first time which are known 
as the ``soft cap'' for the Medicare program. The soft cap is 
designed to shift more costs from the Federal Government to 
seniors and could become a problem as early as 2007.
    Finally, the new Medicare law for the first time tied the 
Medicare Part B deductible to health inflation. In only 2 years 
the deductible has already increased 24 percent, with further 
increases expected in the future. This increase could affect 
every senior who is covered under Medicare Part B. Whether or 
not they enroll in a Part B or not, this change should be 
revisited.
    To conclude, Mr. Chairman, the National Committee believes 
in protecting access to health care services for seniors, both 
financial as well as physical. We urge Congress to keep both in 
mind as you consider provisions that affect the Medicare 
program.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Barbara B. Kennelly 
follows:]

Prepared Statement of Barbara B. Kennelly, President & Chief Executive 
  Officer, National Committee to Preserve Social Security and Medicare

    Mr. Chairman and Members of the Committee: Thank you for inviting 
me to participate in this hearing, to present the beneficiary's point 
of view in this discussion about physician payment rates.
    The National Committee to Preserve Social Security and Medicare is 
the second largest organization representing seniors in this country. 
Our 4.6 million members and supporters come from all walks of life and 
all political backgrounds--what we share in common is our dedication to 
the preservation of Social Security and Medicare, two of the most 
successful social insurance programs in our nation's history.
    Mr. Chairman, I am not here today to take a specific position on 
the various methods of reimbursing physicians participating in the 
Medicare program. Instead, as an advocate for seniors, I am here to 
remind this Committee and all Members of Congress that any decision you 
make relating to the Medicare program has a direct and powerful impact 
on millions of older Americans.
    One of the reasons most seniors choose fee-for-service Medicare 
over managed care is because most older Americans like their current 
doctors, and have a strong desire to chose their own doctors. Many 
seniors have long histories with their family physician, not to mention 
a host of specialists, and they are loath to start anew with someone 
who is not extensively familiar with their medical history.
    Although there are always cases of closed access, Medicare 
beneficiaries are generally able to see the doctor of their choice. 
According to a MedPAC report to Congress on Physician Services in March 
of this year, 88 percent of Medicare beneficiaries reported that they 
experienced no problem, or only a small problem, finding a primary care 
physician. This percentage was the same for privately insured seniors. 
And while 11 percent of seniors reported significant problems seeing 
the primary care physician of their choice, the percentage of privately 
insured patients in the same age category who reported significant 
problems was higher, at 13 percent.
    Specialists were even more available, as 94 percent of Medicare 
beneficiaries and 91 percent of privately insured individuals reported 
either no problem, or a small problem, accessing specialists.
    The reason access matters is because physicians are often the most 
important link between Medicare beneficiaries and health care. 
According to a 2003 CMS study, about 80 percent of non-
institutionalized Medicare beneficiaries report that a doctor's office 
or clinic is their usual source of care. Adequate access to physicians 
is therefore a key component to keeping seniors healthy.
    It should not be a surprise that the threat of losing access to 
their physicians is one that seniors take very seriously. It is also no 
surprise that Congress takes this risk equally seriously, as you 
should. While the Senate has included a ``fix'' for the physician 
payment problem in its budget reconciliation bill, the House has not 
budgeted for this ``fix''. This seems to be an unrealistic assumption, 
as Congress has eliminated planned reductions to physicians in all but 
one earlier fiscal year.
    But while we strongly believe doctors should be fairly compensated 
for their services, I would like to remind you of the flip side of that 
coin--access can equally be denied if seniors are priced out of the 
health care market.
    Two out of three retirees today receive more than half of their 
income from Social Security, and for one out of five retirees, Social 
Security is their only source of income. Social Security is even more 
important to women. It makes up nearly three-fourths of the income of 
the average elderly widow, and ninety percent of the income of four out 
of five widows. This reliance on Social Security is unlikely to change 
significantly in the future, as only one-half of today's workforce has 
access to private pensions at work, and the mean 401(k) balance hovers 
around $50,000--hardly enough to finance a lengthy retirement.
    Unlike private pensions, most of which do not have cost of living 
adjustments, Social Security's annual COLA helps seniors keep up with 
inflation. However, the Social Security COLA can only help so much, 
because it is based on annual increases in the Consumer Price Index. 
Medicare premiums, which are set at a level to finance about one-fourth 
of the cost of Part B, rise significantly faster because they are based 
on health care inflation. Beneficiaries pay 25 percent of any increase 
in Part B costs, and that has resulted in dramatic premium increases in 
recent years.
    Since 2000, Medicare Part B premiums have doubled, with increases 
of 13 percent in 2004, 17 percent in 2005 and 13 percent announced for 
2006. In the meantime, Social Security COLAs have lagged far behind, 
with increases averaging 2.7 percent. If this trend continues, the CMS 
Office of the Actuary predicts Medicare out-of-pocket costs will 
consume one-half of the average Social Security benefit by 2021.
    If this prediction proves to be accurate, it won't make much of a 
difference whether physicians are willing to take new Medicare patients 
or not--many seniors simply won't be able to afford the Part B premiums 
at all.
    That is why any expenditure which will increase Part B costs must 
be looked at as part of a whole rather than in isolation. The Social 
Security Office of the Chief Actuary has projected that converting a 
4.3 percent reduction in physician payments into a 1 percent increase 
(as is currently in the Senate reconciliation bill) will result in a 
premium increase of $2.90 in 2007. While this may not seem like a 
dramatic increase standing alone, when combined with the additional 
increase already projected by CMS, this represents yet another 
significant erosion of seniors' standard of living. I would also note 
that such a provision would merely postpone the problem, as physician 
payments are scheduled to decrease further in future years.
    Although not related directly to physician payments, I would also 
like to bring to the Committee's attention the impact of managed care 
plans on traditional fee-for-service Medicare. Managed care plans 
receive flat benefits per enrollee, rather than receiving compensation 
based upon specific services rendered. For that reason, regardless of 
the roadblocks Congress places in their way, they have a natural 
inclination to recruit younger and healthier seniors. These seniors are 
the most likely to be familiar with the concept of managed care, and 
the least likely to have long-standing relationships with specific 
doctors--this makes them the most receptive to managed care recruitment 
efforts.
    As managed care plans siphon off healthier seniors, the older, less 
healthy population is left in fee-for-service Medicare, breaking up the 
risk pool that makes Medicare, as well as all insurance programs, work. 
A recent MedPAC report found that Medicare pays HMO's an average of 107 
percent of what it would pay to cover individuals enrolled in the 
traditional fee-for-service Medicare program. All Medicare 
beneficiaries, regardless of whether they enroll in a managed care 
plan, subsidize these overpayments in the form of higher premiums. In 
effect, the older, less healthy seniors who are left in traditional 
Medicare are helping subsidize younger, healthier seniors in managed 
care.
    This drives costs for the fee-for-service program higher, and makes 
Medicare less accessible to those seniors who need insurance the most--
the frailest and most economically vulnerable.
    Among MedPAC's recommendations is a proposal to compensate managed 
care plans at 100% of costs. We believe such an action would remove the 
most egregious incentive given to managed care plans, and minimize the 
subsidy participants in traditional fee-for-service provide to those in 
managed care.
    Two final concerns I would like to bring to your attention relate 
to the Medicare Modernization Act. I know this is not a hearing on the 
new Part D prescription drug benefit, so I won't digress by discussing 
that issue, but there is a little known provision in MMA relevant to 
this hearing that I would like to briefly mention. As you may recall, 
MMA instituted, for the first time, what is known as a ``soft cap'' for 
the Medicare program. Under this soft cap, if at any point the Social 
Security Trustees project that the federal contribution to the Medicare 
program will exceed 45 percent within a seven year window of time, they 
issue an ``excess general funding'' determination in their annual 
report. If the Trustees issue two such findings in a row, a series of 
expedited procedures is triggered that requires the President and 
Congress to consider legislation that would reduce the federal 
contribution to the program.
    I should point out that the expedited procedures do not apply to 
legislation that would increase payroll taxes, or change the 45 percent 
threshold, which was an arbitrary limit set without hearings or public 
input. The expedited procedures only apply to legislation that would 
cut benefits or increase premiums--either one would result in 
significant cost shifting from the federal government to seniors.
    This year's Trustees report projected the first time the government 
share would exceed 45 percent in 2012--just outside the seven year 
window. Because the cost sharing ratio between beneficiaries and the 
federal government is 25 to 75 percent, any significant increase in 
program expenses hastens the day when the 45 percent limit will be 
reached, and increases the costs that will need to be borne by seniors 
to bring the federal share back down to the 45 percent limit. Unless 
increases in health care costs are contained, at some point, Medicare 
will become unaffordable for all but a few.
    Finally, MMA for the first time tied the Medicare Part B deductible 
to health inflation. In only two years, the deductible has already 
increased 24 percent, from the flat $100 per year beneficiaries had 
paid for years, to $124 per year announced for 2006--with further 
increases expected into the future. This increase affects every senior 
who is covered by Medicare Part B, whether or not they enroll in the 
new Part D prescription drug benefit and deserves to be revisited.
    To conclude, Mr. Chairman, the National Committee believes in 
protecting access to health care services for seniors, both financial 
as well as physical. We urge Congress to keep both in mind as you 
consider provisions that affect the Medicare program.
    Thank you.

    Mr. Deal. Thank you.
    Ms. Super.

                    STATEMENT OF NORA SUPER

    Ms. Super. Mr. Chairman, ranking member Brown and 
distinguished members of the subcommittee, I am Nora Super, 
senior research associate at George Washington University's 
Center for Health Services Research and Policy. I appreciate 
the opportunity to be here today to discuss how to build a more 
efficient physician payment system for the Medicare program.
    As a health services researcher from George Washington 
University, I studied many broad aspects of the Medicare 
program. Physician payment reform continues to be one of the 
most challenging and important issues facing the program today. 
Many experts have concluded that improving the quality of care 
ultimately requires changes in individual physician behavior. 
However, aligning incentives at the national level to reduce 
inappropriate care while simultaneously improving quality has 
so far proved elusive.
    Under the fee-for-service system, it is faster and 
therefore more remunerative for physicians to order more tests 
or procedures than to spend time with patients, for example, 
discussing recommended preventive services to help them manage 
their chronic diseases.
    Sicker patients with multiple chronic conditions are likely 
to take up more of a physician's time. Our current system does 
not reward physicians for spending time with these patients. In 
fact, it provides incentives to avoid them. At present, 
Medicare makes no distinctions based on appropriateness or 
quality of care. A physician who orders and performs procedures 
that are not truly necessary or indicated is paid better than 
one who is judicious and only employs complex interventions 
when the cost effectiveness is clear and the benefit clearly 
outweighs the risk.
    Essentially, physicians who see more patients per hour, do 
more procedures, make and receive the most specialty referrals, 
make more money. In contrast, lengthy discussions with patients 
and family members to discuss treatment options or preventive 
care are reimbursed at much lower rates if at all.
    In a recent case study I conducted of a multi-specialty 
practice physician group in Cincinnati that switched from 
capitation to fee-for-service after 30 years, physicians 
quickly responded to changing financial incentives by ordering 
more tests and seeing patients frequently, demonstrating that 
payment incentives can markedly change the way physicians 
practice medicine.
    Let's look for a moment at an example of what we might gain 
if health care financing actually created incentives for 
physicians to spend time communicating with patients and their 
families. Palliative care is a growing service in hospital and 
nursing homes in the U.S. And is a response to abundant 
evidence of poorly treated pain and other symptoms for patients 
with advanced illnesses.
    Interestingly, in addition to improving quality of care, 
multiple studies have demonstrated that palliative care, which 
involves talking to patients and family, managing complex 
symptoms and coordination and communication across settings, 
also reduces spending. Data demonstrates that palliative care 
lowers costs by reducing hospital and intensive care unit 
length of stay and by reducing direct cost per day. It achieves 
these outcomes in a low-tech but highly intensive and time-
consuming discussion, clarifying goals of care with patients 
and their families and helping them select medical treatments 
and care settings that meet their goals. Yet, our payment 
system not only fails to incentivize high-qualify management of 
such payments with proven palliative care approaches, it 
powerfully rewards and encourages through it its payment 
methods just the opposite, more costly procedures, more 
specialist visits and more hospital stays for the patients 
least likely to benefit from them.
    As the single largest purchaser of care, many have 
concluded that the Medicare program must begin to tie payments 
to physician behaviors that are demonstrably linked to better 
outcomes. Congressional leaders, CMS and MedPAC have all called 
for financial incentives to be targeted to promote high value 
and efficient resource use under Medicare's fee-for-service 
system.
    While I applaud these pay-for-performance efforts as a 
critical step in the right direction, I encourage you, 
Congress, as others have suggested today, to not simply adopt 
programs that have been successful in younger commercial 
populations and assume they will transfer seamlessly to the 
Medicare population. Adjustments will need to be made to ensure 
that pay-for-performance does not create adverse incentives for 
physicians seeking to deliver high-quality care to patients 
with multiple chronic conditions and advanced complex illness 
who account for over two-thirds of Medicare spending. Thank you 
very much for your attention.
    [The prepared statement of Nora Super follows:]

Prepared Statement of Nora Super, Senior Research Associate, Department 
   of Health Policy, Center for Health Services Research and Policy, 
              George Washington University Medical Center

    Chairman Deal, Ranking Member Brown, and members of the 
Subcommittee on Health of the House Energy and Commerce Committee, I am 
Nora Super, a senior research associate at George Washington 
University's Center for Health Services Research and Policy. I 
appreciate the opportunity to be here today to discuss how to build a 
more efficient physician payment system for the Medicare program.
    As a health services researcher from George Washington University, 
I study many broad aspects of the Medicare program, ranging from 
implementation of the new drug benefit to coordination of care for 
those who are dually eligible for Medicare and Medicaid. Nonetheless, 
physician payment reform continues to be one of the most challenging 
and important issues facing the program today. Many experts have 
concluded that improving the quality of care ultimately requires 
changes in individual physician behavior.1 However, aligning 
incentives at the national level to reduce inappropriate care while 
simultaneously improving quality have thus far proved elusive.

Drivers in Fee-For-Service Utilization
    As you know, the vast majority of Medicare beneficiaries receive 
care under Medicare's fee-for-service system. In fee-for-service 
medicine, the incentives are clear: a physician or other practitioner 
charges separately for each patient encounter or service rendered. 
Under this payment system, expenditures and incomes increase if more 
units of service are provided or more expensive ones are substituted 
for less expensive ones. Thus, individual physicians have an incentive 
both to increase the volume of patients that they see, and to recommend 
the highest cost and best reimbursed procedures under these incentives.
    Physicians, like anyone, respond to incentives. Under the fee-for-
service system, physicians are paid based on the number of procedures 
or encounters provided and are paid much more generously for doing 
interventional procedures, such as coronary stenting or colonic 
polypectomy than they are for so-called evaluation or management 
services--time spent with a patient and family weighing the benefits 
and risks of alternatives and/or discussing treatment options.
    I recently completed a case study of a multi-specialty physician 
practice group that switched to fee-for-service reimbursement after 
nearly 30 years as a capitated-based medical group in Cincinnati, 
Ohio.2 The group did not do so willingly, but in response to 
an evolving marketplace that no longer rewarded small capitated 
products. Nevertheless, the physicians in the 100+ physician group 
quickly responded to the changed financial incentives by seeing 
patients more frequently and ordering more tests, demonstrating that 
payment incentives can markedly change the way physicians practice 
medicine.
    Under the fee-for-service system, it is faster and therefore more 
remunerative for a physician to order more tests or procedures than to 
spend time with patients, for example, discussing recommended 
preventive services to help them manage their chronic diseases. Sicker 
patients, with multiple chronic conditions, are likely to take up more 
of a physician's time. However, our current system does not reward 
physicians for doing so. According to a study by Duke University 
Medical Center, the amount of time spent with a patient in discussing 
preventive services can increase three-fold if one or more chronic 
conditions are uncontrolled at the time of the patient 
visit.3 Under the current payment incentive structure, 
physicians are encouraged to avoid these patients rather than to 
embrace them.
    At present, Medicare makes no distinctions based on appropriateness 
or quality of care--a physician who orders or performs procedures that 
are not truly necessary or indicated is paid better than one who is 
judicious and conservatively employs complex interventions only when 
the cost-effectiveness is clear and the benefit clearly outweighs the 
risks. Essentially, physicians who see more patients per hour, do more 
procedures, and make and receive the most specialty referrals, make 
more money. In contrast, lengthy discussions with patients and their 
family members to discuss treatment options are reimbursed at much 
lower rates, if at all, for roughly the same amount of physician time. 
For example, the national average Medicare reimbursement for placement 
of two coronary artery stents via cardiac catherization was $1,012 in 
2002; a two-hour family meeting was reimbursed on average between $75 
and $95.
    One of the explicit objectives of the Resource Based Relative Value 
Scale (RBVBS) physician fee schedule that was implemented in 1992 was 
to redistribute payment in such a way that rates for ``cognitive'' or 
``evaluation and management'' services (as they are called today) would 
rise relative to other services, such as surgery and other procedural 
services. However, preliminary work done by the Urban Institute on 
behalf of the Medicare Payment Advisory Commission has found that the 
desired redistribution has stopped for a number of reasons, primarily 
the interaction between changes in the relative value units (RVUs) and 
the growth in the volume of services, as well as the effects of 
introducing new services.4

Valuing Physician-Patient Communication: Palliative Care as a Model 
        within the Current System
    An example of the benefits of care focused on quality of life, 
maximizing clear doctor-patient communication, and expert coordination 
of care across settings may be found in the recent rapid growth of 
palliative care services and specialists in the U.S. Through research 
funded by the Center to Advance Palliative Care--a national program 
initiative of the Robert Wood Johnson Foundation based at the Mount 
Sinai School of Medicine in New York City--I have learned that meeting 
the needs of the most complex and vulnerable Medicare beneficiaries 
will require physicians to employ skills that are not recognized or 
rewarded in the current Medicare payment system.5 Studies of 
doctor-patient communications have found that clinicians typically fail 
to discuss patients' values, goals of care, and preferences regarding 
treatment.6 Not only are these skills rarely taught in 
medical school, any physician who tries to provide these services will 
soon be forced out of practice due to under-reimbursement. Physicians 
in practice quickly learn what they have to do to pay their overhead 
and themselves--see more patients faster and spend most time doing the 
highest-paid procedures. Talking to patients and families, managing 
complex symptoms, coordination and communication of care across 
settings--the kind of care patients and families say they want 
7 and what most of us would agree we would want for 
ourselves and our loved ones--is a sure path to bankruptcy under the 
current physician payment system.
    Let's look for a moment at what we might we gain if health care 
financing actually created incentives for this kind of high quality 
care. Palliative care is a growing service in hospitals and nursing 
homes in the U.S., and is a response to abundant evidence of poorly 
treated pain and other symptoms. It aims to relieve suffering and 
improve quality of life for patients with multiple chronic conditions 
and advanced illnesses. It is offered simultaneously with all other 
appropriate medical treatment and is not limited to the care of the 
terminally ill. In practice, palliative care involves expert pain and 
symptom assessment and management, communication among the patient, 
family and providers about the goals of care, and coordination of care 
across multiple settings.8 Studies demonstrate that 
palliative care is effective at reducing suffering of all causes, and 
those patients and families are more satisfied when they receive 
it.9
    Interestingly, in addition to improving quality of care, multiple 
studies have demonstrated that palliative care also reduces spending. 
Data demonstrate that palliative care lowers costs (for hospitals and 
payers) by reducing hospital and intensive care unit length of stay, 
and by reducing direct costs per day (such as pharmacy and imaging 
utilization).10 Palliative care achieves these outcomes in a 
low-tech but highly intensive and time consuming discussion--clarifying 
goals of care with patients and their families and helping them select 
medical treatments and care settings that meet their goals. This kind 
of in-depth conversation about the benefits and burdens of treatment 
alternatives often lead to more resource-conservative decisions on the 
part of patients'--such as going home rather than remaining in the 
hospital--but there is no way to help patients and families make these 
difficult decisions without a major commitment of physician time and 
effort--time and effort which is rewarded at less than 10 percent of 
the level we reimburse invasive cardiologists for placing coronary 
stents.
    These findings are especially significant for patients with chronic 
illnesses. We know that Medicare per capita spending increases as 
health status declines. For example, Medicare spends twice as much for 
beneficiaries living in long-term care facilities than what it spends 
for those living in the community. Medicare spending is also much 
higher for the sickest beneficiaries--those in their last year of life. 
In 1999, Medicare spending reached $24,856 for beneficiaries who died 
that year compared to $3,669 for those who were alive at the conclusion 
of the year.11
    More than 80 percent of Medicare beneficiaries have at least one 
chronic condition, and the prevalence of chronic conditions, which 
typically require ongoing care and treatment to maintain health and 
functional status and to slow the progression of the disease, has been 
strongly linked to high utilization of medical resources. More than 75 
percent of high cost Medicare beneficiaries were diagnosed with one or 
more of seven major chronic conditions (e.g., chronic obstructive 
pulmonary disease, congestive heart disease, diabetes).12 A 
striking 68 percent of all Medicare spending is spent on the 23 percent 
of Medicare beneficiaries with five or more chronic conditions and 
these patients receive services from an average of 14 different 
physicians each year.13 The clinical need for care 
coordination is immense.
    Yet our payment system not only fails to incent high quality 
management of such patients with proven palliative care approaches, it 
powerfully rewards and encourages through its payment methods just the 
opposite--more costly procedures, more specialist visits, and more 
hospital stays for the patients least likely to benefit from them. Jack 
Wennberg's data from the Center for Evaluative Clinical Sciences at 
Dartmouth suggests that the higher utilization that results from 
current Medicare payment incentives is not only not associated with 
improved quality of care for seriously ill Medicare beneficiaries, 
counter to the prevailing assumption, more services are actually 
associated with higher (not lower) mortality. In contrast, a healthcare 
system that provided comprehensive palliative care as the default 
approach, rather than the exception, would result in more satisfied 
patients and families, a lower burden of pain and suffering, equivalent 
or better survival rates, and markedly lower but more appropriate use 
of complex high cost procedures and care settings.

Changing the Incentives: Is Paying for Performance the Answer?
    The latest fascination in Washington and in the business community 
has been a move to influence physician behavior by paying for health 
care services based on quality of care. ``Pay-for-performance'' seeks 
to reward physicians and other health care providers for delivering 
health care services that meet specified standards or achieve defined 
levels of quality. These payment methods have been adopted across the 
country by public and private purchasers with some demonstrated 
success; however, they face important impediments and challenges too. 
Most notably, the incentives are not likely to change physician 
behavior unless they apply to ``enough patients to make a noticeable 
difference in office income.'' 14
    As the single largest purchaser of care, many have concluded that 
the Medicare program must begin to link payments to physician behaviors 
demonstrably linked to better outcomes. CMS has several pay-for-
performance pilot and demonstration projects underway. Congressional 
leaders and the Medicare Payment Advisory Commission (MedPAC) have also 
stepped up efforts to align the incentives of Medicare's payment 
systems to improve the quality of care. A key component of MedPAC's 
vision for paying for performance is that Congress ``should pay more to 
physicians with higher quality performance and less to those with lower 
quality performance.'' 15 Recognizing that the current FFS 
payment system encourages individual physicians to increase the volume 
of services they provide, MedPAC also recommends measuring physician 
resource use over time and providing information about practice 
patterns confidentially to physicians. Given that Medicare payment 
systems are currently negative or neutral toward quality, these efforts 
are important steps in the right direction.
    At the same time, clinicians and advocates have raised concerns 
that P4P could create adverse incentives for physicians seeking to 
deliver high quality care to patients with multiple chronic conditions 
and advanced complex illness.16 Quality of care for this 
very costly and very sick patient population involves more than 
remembering to order a mammogram--one of the measures associated with 
higher pay for performance. In fact a mammogram, or a bone density test 
or a gait assessment may be impossible or completely irrelevant to the 
care of some of these patients--such as a bed-bound person with 
advanced dementia and recurrent pneumonias. Despite the fact that this 
highly complex chronically ill population accounts for over two-thirds 
of Medicare spending, the physicians caring for them will be 
predictably paid less for failing to conduct these procedures, even 
though they are delivering high quality care tailored to the needs of 
this particular subset of beneficiaries. An undifferentiated P4P 
process could create strong monetary incentives to care only for 
younger healthier Medicare beneficiaries, those for whom the P4P 
quality measures were developed and in whom they make sense. If P4P is 
to be relevant to the costliest Medicare beneficiaries it will have to 
utilize measures truly correlated with quality care in this patient 
population--things like assessing and treating pain, conducting family 
meetings, and completing advance directives. Thus I conclude that we 
cannot simply adopt programs that have been successful in (younger) 
commercial populations and assume they will transfer seamlessly to the 
Medicare population. Adjustments will need to be made.

Conclusion
    Medicare's attempt to control volume through its sustainable growth 
rate (SGR) system has been widely recognized as flawed. National volume 
controls, such as the SGR, are based on a faulty assumption--that 
physicians have a collective incentive to reduce the volume of 
services. To the contrary, when fees are reduced, individual physicians 
have an incentive to increase the number of services they provide in an 
effort to keep income steady. Thus, across-the-board fee reductions 
ultimately penalize the most prudent physicians and reward those who do 
more procedures and provide more, not necessarily better, services.
    We cannot assume that the market alone will ensure that appropriate 
services are rendered. Indeed, cost escalation is almost guaranteed 
without some controls. A thought-provoking analysis of 12 markets over 
time by prominent researchers at the Center for Studying Health System 
Change concluded that market forces alone were limited in their ability 
to deliver efficient health care systems, mostly because of local 
provider market power vis-a-vis payers and patients.17 As 
both public and private purchasers look for ways to align the 
incentives to improve the quality of care as well as reduce 
inappropriate care, financial incentives should be targeted to promote 
high value and efficient resource use under Medicare's fee-for-service 
system. The demonstration and pilot projects being undertaken by CMS in 
the fee-for-system to study ways to improve care for beneficiaries with 
high medical costs and chronic conditions will give us important 
information about how to better care for patients.18 
However, the underlying physician payment system--and the incentives 
inherent within it--must be addressed if we are to achieve any 
significant improvements over the long term.
    The Medicare system of the future should assure access to a well 
trained primary care physician who is compensated as well for his time 
and effort as his colleague doing cardiac catheterization across the 
street. If society rewards high quality primary care physicians, 
allowing them to make a good living commensurate with their lengthy 
training and sufficient to repay their medical student loans, the best 
and the brightest will stop flocking solely to highly subspecialized 
and highly compensated procedural specialties. Data from the new field 
of palliative care suggests that comprehensive management of the 
sickest and most complex patients not only measurably improves quality 
of care and patient satisfaction, but does so at substantially lower 
cost to Medicare. This kind of rational system--where chronically ill 
elderly patients and their families can reliably expect expert 
continuity of care--is within our reach. If we want to effectively 
redesign the Medicare payment system, we need to make sure we pay for 
the performance Medicare beneficiaries really need.

                                 Notes

    1 Epstein, A. Lee, T. and Hamel, M. ``Paying Physicians 
for High-Quality Care,'' The New England Journal of Medicine, 2004 
350:406-410.
    2 Super, N. ``From Capitation to Fee-For-Service in 
Cincinnati: A Multi-Specialty Practice Group Responds to a Changing 
Marketplace,'' Health Affairs, forthcoming.
    3 Presentation by Kimberly Yarnall, MD, Clinical 
Associate Professor, Department of Community and Family Medicine, Duke 
University Medical Center, National Health Policy Forum Session, 
``Medicare Health Support: Working with Physicians?,'' October 21, 
2005.
    4 Medicare Payment Advisory Commission, Report to the 
Congress: Issues in a Modernized Medicare Program, June 2005.
    5 Morrison, R.S. and Meier, D.E. ``Palliative Care,'' 
The New England Journal of Medicine 2004: 350:2582-2590.
    6 Tulsky J.A. ``Doctor-patient communications,'' in: 
Morrison R.S., Meier, D.E., eds. Geriatric Palliative Care. New York: 
Oxford University Press, 2003:314-31.
    7 Singer, P.A., Martin, D.K., and Kelner, M. ``Quality 
End-of-Life Care: Patients' Perspectives,'' JAMA 1999; 281(2); 163-168; 
Tolle et al. Oregon report card, 1999. www.ohsu.edu/ethics.
    8 Morrison, R.S. and Meier, D.E. ``Palliative Care,'' 
New England Journal of Medicine 2004; 350;2582-2590.
    9 Teno, J. et al. ``Family Perspectives on End-of-Life 
Care at the Last Place of Care,'' JAMA, 2004; 291:88-93. Higginson et 
al. Journal of Pain and Symptom Management, 2003.
    10 National Consensus Project for Quality Palliative 
Care. ``Clinical Practice Guidelines for Quality Palliative Care,'' 
www.nationalconsensusproject.org.
    11 Cubanski, J., Voris, M., Kitchman, M., Neuman, T., 
and Potetz, L. Medicare Chartbook, Third Edition. Summer 2005. The 
Henry J. Kaiser Family Foundation.
    12 U.S. Congressional Budget Office, ``High-Cost 
Medicare Beneficiaries,'' May 2005.
    13 Anderson, G.F. ``Medicare and Chronic Conditions,'' 
The New England Journal of Medicine 2005: 353: 305-309.
    14 Cunningham, R. ``Professionalism Reconsidered: 
Physician Payment In A Small-Practice Environment,'' Health Affairs, 
23(6) 36-47.
    15 Statement of Glenn M. Hackbarth, Chairman, Medicare 
Payment Advisory Commission, before the Subcommittee on Health of the 
House Committee on Ways and Means, February 10, 2005.
    16 Boyd, C., Darer, J., Boult, C., Fried, L., Boult, L., 
and Wu, A. ``Clinical Practice Guidelines and Quality of Care for Older 
Patients with Multiple Comorbid Diseases: Implications for Pay-for-
Performance,'' JAMA, 2005: 294:716-724.
    17 Nichols, L. et al. ``Are Market Forces Strong Enough 
To Deliver Efficient Health Care Systems? Confidence is Waning,'' 
Health Affairs, 2004 23(2) 8-21.
    18 See information on CMS website regarding the Medicare 
Health Support Programs (MHSPs) and the Care Management for High Cost 
Beneficiaries (CMHCB) demonstration (www.hhs.cms.gov).

    Mr. Deal. Thank you.
    It was worth waiting to hear your testimonies.
    I think you have all pretty well laid out the problem. As I 
listened to your testimony, we get from within the medical 
profession itself some very different opinions. Dr. Opelka 
being a surgeon is in effect saying that our current system 
doesn't adequately compensate in the non-ambulatory 
environment. And then we hear, in the ambulatory environment, 
Dr. Arora saying there is no incentive to go in that area, and 
we hear well, that is the only area of the practice where you 
can sort of self-help with additional charges for services or 
testimony or whatever. And then we all want to be sympathetic 
to dealing with the problem that has been outlined from the AMA 
position and yet appropriately Ms. Kennelly points out to us if 
we raise those fees, that has an impact on the part B premiums 
and actually beyond that even into the private pay community as 
a whole. So you have thoroughly explored the problem that we 
have.
    Let me briefly see if I can try to see if we can come up 
with some solutions to it. Ms. Super, I am very intrigued by 
the study that you did. I think that it is great that you have 
taken on a project of trying to look at that and hopefully come 
up with some solutions. How would you go about incentivizing 
palliative care, to incentivize not making the extra imaging 
that may or may not be necessary, without calling it something 
that sounds like pay-for-performance?
    Ms. Super. Well, I thank you very much for your question, 
Mr. Chairman. I think if we want to look at the fee-for-service 
system, that there are ways we can look at the coding, programs 
that incentivize physicians to order procedures and tests 
rather than spend time with patients, and so time-sensitive 
codes. There have been some efforts that some physician groups 
have advocated and have talked about in terms of care 
coordination and working in terms of some partial capitation, 
talking about different ways that a physician could be 
designated as the one physician that is coordinating the care 
for beneficiaries, for example, that might have a certain 
number of chronic conditions.
    If you looked at beneficiaries that had two, three or four 
chronic conditions which have been identified by the 
Congressional Budget Office--someone had said earlier scoring 
is an issue--as being the highest-cost beneficiaries that we 
have, perhaps identifying those high-cost beneficiaries that we 
know cost our system so much money and targeting those 
beneficiaries and perhaps putting them into programs and 
identifying some of the physicians to coordinate their care for 
us and looking at those types of programs.
    Mr. Deal. Dr. Cady, would that be something that has merit?
    Mr. Cady. I do think we should look at programs like that. 
One of our concerns would be that if you compartmentalize 
patients, that you may be restricting care for those that need 
it also if you are not careful. So coordination plans need to 
be carefully worked out between the team and a team effort. I 
think Dr. Opelka talked about a team effort, and he supports 
that. Any growth that is inappropriate needs to be looked at 
and taken care of; we agree with that.
    Mr. Deal. Dr. Opelka, it almost sounds like we are talking 
about having to devise maybe two different ways of compensating 
for medical services depending on the type of medical service 
that is provided because they are so different. Is that 
something that we should be looking at?
    Mr. Opelka. Mr. Chairman, thank you. I do believe that 
maybe it is more than two. In our own practices where we have 
complex ambulatory and hospital-based activities, we have 
hospital-based physician services. We have a crossover between 
them. We don't see solutions as one size fits all in those 
environments. We all know there are different forces tugging at 
each one of these elements of patient care.
    I think we need to start with the patient and build a 
quality valued system and fund that quality valued system for 
the costs that are built into that system. We are trying to 
actually take the round peg and fit it in the square hole or 
the square into the round, and it is not happening. And we were 
with volume standard performance and utilization controls at 
one point, then gone into the SGR, and now we are at a point 
where we are saying this ought to be evidence-based, and I 
think you will find various types of evidence. It needs to be 
system and process developed and in a hospital-based system 
where you have got part A funding and part B funding all 
centered around one person, that patient; we need to put a 
system that wraps this together. That is going to be different 
from long-term care, chronic care, ambulatory care models, and 
I think working with CMS, we have opened a lot of doors with 
this pay-for-performance initiative. We are excited about that, 
and we think we ought to put our arms around this and look for 
a solution. If we need a 1- or 2-year window to do that and you 
want to set benchmarks where we have to hit benchmarks with 
performance to show where we are going, that is where we want 
to be.
    Mr. Deal. My time has expired. Maybe someone will explore 
that a little further.
    Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. There is sort of a 
bigger question that is begged by the appearance of all of you 
here, and I thank you all for good presentations, and you all 
make sense, and you are all right in your own way. The bigger 
question is that this Congress, this committee, this 
government, this President have found a way without, I don't 
see, rancor among the five of you or the six of you before, but 
has found a way to play off doctors against seniors when you 
look at what has happened to Medicare premiums, in part because 
of this formula, premiums 6 years ago, my recollection, $46, 
$47, now they are $88, and I hear doctors all the time at home 
talking to me about their problems, their very legitimate 
problems, but Congress has created this pitting seniors against 
doctors because we do tax cuts for the wealthiest people in our 
country, many of them for doctors; we are in a war that costs 
us a billion dollars a week that the President's Secretary of 
State says we may be in for 10 years.
    So I don't expect the AMA nor any of you to lobby Congress 
in opposition to the tax cuts, although I wish you would 
because I think we could fix a lot of this more easily, and I 
don't expect the AMA or other doctor groups to lobby against 
the Iraq war and speak out against it, although that could be 
your role as citizens, and I am not here to lecture you, but I 
look at this picture, and that is what is wrong with this 
picture. We haven't fixed these problems anymore than the 
Medicaid situation because this government doesn't have the 
money to do it because we do extraordinarily stupid things that 
have nothing to do with you but have everything to do with that 
bigger picture.
    So enough of that, except that I would urge all of you to 
help us address some of those bigger problems and correct the 
direction that we seem to be going in that sets this situation 
up.
    I guess I just, everybody on this panel, both parties, is 
very sympathetic in wanting to fix this. As Mr. Waxman says, I 
don't know why this Congress won't fix it permanently except 
for the budget issues.
    I want to talk to Ms. Kennelly and ask her to give me sort 
of your opinion of what has happened and how we make sure that 
this is fixed so that this fix doesn't have the impact on 
premiums that it could have.
    Ms. Kennelly. Congressman Brown, I have to disagree with 
you about seniors pitted against doctors because I have worked 
with seniors since I went out in public life as a city 
councilwoman in Hartford, and seniors really do like their 
doctors.
    Mr. Brown. I am not arguing that. But this is what happens.
    Ms. Kennelly. I can remember when we wanted doctors to take 
assignments. You couldn't get seniors to tell a doctor to take 
an assignment because they thought the doctor was right. So 
that relationship is good. I think one of the problems is not 
Medicare, not Medicaid; it is the whole health system that is 
fractured. And that is what we really should be looking at.
    And the other thing we have to look at very seriously that 
will affect seniors is the fact there is no cost containment in 
part D, and it really goes up with health inflation. And that 
is going to be very detrimental to seniors because so much 
health care now is through prescriptions. But I think the 
answer, we have squeezed Medicare and squeezed Medicare. We 
have got people going on Medicaid because private companies 
have dropped their health care benefits. So I have to tell you 
and I maybe did not feel this way in 1994, but I really think 
we have to look at the entire health care system if we are ever 
going to talk about the aging of America.
    Mr. Brown. Comment, Dr. Cady?
    Mr. Cady. Thank you, Congressman Brown. I want to make 
something clear, and I know Ms. Kennelly is aware of this; 
doctors want to take care of their patients, whether they are 
seniors, not seniors, doesn't matter. That is what we are 
trained to do. That is what this young doctor was train to do. 
But when the reimbursement formula doesn't even cover practice 
costs, it is hard to keep your office open.
    So what we are saying is adopt physician payment updates 
for 2 years, give us a chance to work with you and CMS on a 
permanent fix for this problem, and we can also discuss in the 
future value-based quality issues.
    We worked on this. We have the consortium at the AMA which 
CMS participates in. We developed something like 70 measures, 
36 of them approved and many of them waiting for NQF approval. 
So all of those things are in the hopper. But if we don't 
stabilize the reimbursement situation, doctors are not going to 
be able to practice, some of them; some of them will retire, 
some of them will find a new profession; some of them will not 
be able to see new Medicare patients.
    I am a Medicare patient. My doctor 3 months ago told me, 
you need an evaluation by a primary care internist. I am a 
procrastinator like everybody else, and they called the 
doctor's office first, couldn't get an appointment. I called 
the doctor's office myself, as a physician, could not get an 
appointment for 3 months. Why? Not because I was a physician, 
not because I was chairman of the board of the AMA, because I 
was a Medicare patient. So it is out there, and it has affected 
me, the access problem. And it can be fixed. Congress can fix 
this problem if you have to find the money.
    As far as the seniors are concerned, we would agree, if you 
can find the money for that, we certainly wouldn't oppose 
holding the beneficiaries harmless on the issue.
    Mr. Deal. Thank the gentleman.
    Mr. Bilirakis.
    Mr. Bilirakis. Thank you, Mr. Chairman, and thank you 
gentlemen and ladies for taking time to be here today. I just 
hope some good comes out of it. We often times talk about each 
other, that we should be more open-minded and open to new ideas 
and that sort of thing so when it comes to this pay-for-
performance business, at first blush, I think a lot of us say, 
hey, that is probably virtually impossible to work well and 
that sort of thing, but the truth of the matter is we should be 
open-minded.
    But having said that, in very brief responses, would you 
agree that, first, we ought to fix this particular problem of 
Medicare reimbursements before we even consider something like 
that. Dr. Opelka?
    Mr. Opelka. Absolutely agree with you.
    Ms. Arora. Absolutely agree.
    Mr. Cady. Absolutely.
    Ms. Kennelly. Agree.
    Ms. Super. Agree.
    Mr. Bilirakis. That is good to hear. Regarding this 
subject, very quickly again, because you are here to help us, I 
remember a few years ago that it was a congressional trip but 
that included Dr. Roland from Georgia, a medical doctor, 
primary care physician who was in Congress at the time, and we 
were delegates to NATO. And the meetings were in Athens, 
Greece, at the time because they keep rotating around, and so 
we had a break, 1 day's break. And I suggested, Roy, wouldn't 
you like to go see where Hippocrates first started his concept 
of medicine, and it is on the island of Kos right near the 
island that my parents come from.
    Anyway, the guide took us around to show us a hospital, and 
the remnants of that hospital are still there, and then the guy 
told us he never lost a patient, and then he proceeded to 
explain to us, of course, he wouldn't take any patients that 
were really sick and so he had a perfect record.
    So we go now to pay-for-performance. I guess I am using the 
term cherry picking when I say that. So is there a real danger 
of that? Hopefully, Dr. McClellan and others coming up with 
these ideas will take all that into consideration because I 
know we have hospitals in some low-income areas, hospitals that 
will take basically any patient and whatnot, and they are not 
going to have near the record a private hospital which is in a 
higher area would have. So, hopefully, we will take all that 
into consideration.
    Dr. Arora, first, I want to commend you for being a primary 
care physician, and principally, I say that because my oldest 
son is an internist, as you may know, and I was telling Mr. 
McClellan earlier that, in all these years, he has been in a 
perfect position to lobby, particularly when I chaired this 
committee for 10 years, and he never did. He just wouldn't take 
advantage of the situation.
    But more recently, he finally has become very verbal, and 
that has to do with this reimbursement business, and he says, 
dad, we see them all. We see all the patients. We refer 
everybody they take. The other day he was telling me x-rays are 
taken, CAT scans or whatever the case may be, and if there 
seems to be a little bit of a change in the treatment, has to 
go back to the primary care physician and what not. Then I know 
he hasn't told me, but I know about the house calls he makes by 
his patients. I know about the times he goes to the pharmacy 
personally and purchases pharmaceutical drugs for people and 
delivers them to their homes because they are elderly, and they 
can't get around.
    So you guys are really something pretty darn special, as 
are all physicians obviously, but we do know there that there 
are bad apples in every bushel. Maybe I shouldn't use that 
term, and Dr. Burgess here will probably correct me, but there 
are doctors who take advantage of the system, are there not?
    Ms. Arora. Yes. I would first like to take your first 
question regarding, just to tell you a little bit about my 
practice environment. Many patients that I personally see have 
chronic medical problems, five medical problems; they are 
Medicare patients, on over 10 drugs, and so they are very sick, 
and even in our own practice, we worry that implementing pay-
for-performance type of programs without adequate risk 
adjustment that is properly explained, we would be penalized 
and look like the bottom of the barrel because we are trying to 
work with our patients who can't understand how to take their 
medications and who actually may be non-compliant because they 
can't afford their medications.
    Mr. Bilirakis. Why? You are not compensated for that?
    Ms. Arora. I wanted to highlight if there is a question 
about the need.
    Mr. Bilirakis. I have spent a lot of time in his offices. I 
have seen that.
    Ms. Arora. The other thing I think all physicians are 
trained with the ideals of the great physicians of years ago, 
and we all try to do what is best for our patients. Nowhere do 
we ever learn that we--actually, part of medical 
professionalism is that we put the patient first, ahead of 
ourselves, and our entire medical training is really designed 
that way. We spend many sleepless nights in the hospital 
learning about the virtues of following a patient, following 
patients in our clinic. And so I guess what I would say is that 
I can't be accountable for everybody in the system, but I know 
that there are lots of really good doctors out there and a lot 
of really good physicians that try to practice really good 
primary care and an environment where they just can't make it 
because we can't do this and also continue to try to take care 
of our patients at the same time we are worried every year that 
our salaries are going to be cut.
    And I have been involved with the ACP for several years now 
and have had the opportunity to travel to Capitol Hill and meet 
with my Congressman, and the first time I learned about SGR was 
on one of these trips. And now I am here, I am still here a 
year later, 2 years later, talking about this same issue, and 
what I would like to see is some stability in this process so 
that we are not here again next year, so that we have some 
stability which would mean positive updates over at least 2 
years, and that is just a short-term outcome. A long-term fix 
would be that we get rid of this SGR completely, and I know it 
will cost money, and I am sympathetic to the case of the 
seniors. Obviously, it will cost money, but I want everyone to 
kind of think about this as a long-term investment in the 
future of America's health. I mean, this is going to be dismal 
if we can't go see primary care physicians to coordinate care 
and to work on that. And it is especially important because 
many primary care physicians, when it is done right, it can 
lower the cost. And we have data that shows that, and I think 
it is really important that we make sure people get to primary 
care physicians who can actually deliver that type of care.
    Mr. Bilirakis. Thank you, Doctor.
    I apologize, Mr. Chairman, but she was on a good role 
there, and I think that was all we need to hear.
    Mr. Deal. She has been neglected up to this point; I didn't 
want to cut her off.
    Ms. Capps.
    Mrs. Capps. Thank you, Mr. Chairman.
    I want to thank each of the panelists for taking your time 
to come and educate us and Members of Congress.
    Dr. Arora, thank you particularly for your last statement, 
which was right on the money.
    Dr. Cady, I want to take a moment to commend you, the AMA, 
as a trustee of the AMA, for the statement you submitted to the 
Medicaid Commission. That statement, and I have it here, that 
statement underlined the need to protect benefits for children, 
pregnant women, seniors and the disabled. It highlighted the 
need to avoid increases in the uninsured.
    And despite statements by many colleagues of mine that 
Medicare physician issues had no place in the reconciliation--
I'm sorry, say that again because it is a bone of contention 
today, despite statements by my colleagues that Medicare 
physician issues have no place in--had no place in 
reconciliation, your statement made clear that physician fee 
cuts are integrally related to Medicaid cuts. Unfortunately, 
the House reconciliation package ignored all of your comments. 
It still contains proposals that will make Medicaid too 
expensive for beneficiaries, still eliminates guaranteed health 
care for children that the AMA supports, and 50 percent of the 
savings and cost sharing will come from charging children.
    The changes the majority has made are cosmetic; their only 
purpose being, I believe, to add to the confusion of Members of 
Congress just like Medicare beneficiaries are now being 
confused by some recent changes.
    So I am going to ask that the statement by the AMA be made 
part of the record for our proceedings here today, and I thank 
you for that. I am going to turn to my former colleague.
    Mr. Burgess. Do we have a copy?
    Mrs. Capps. I am going to be asking that it be made part of 
the record, and I have copies to share with our members.
    [The information referred to follows:]--AMA STATEMENT HERE-
-
    Mr. Deal. If you would share so we can be looking at it.
    Mrs. Capps. Surely. I want to address a question to my 
former colleague Barbara Kennelly. While this hearing is 
focused on Medicare today, many of us in Congress and many of 
your constituents now, too, as you advocate for both Medicare 
and Social Security, are concerned with what is going on with 
this important program to millions of our seniors, Medicaid; 
some of the beneficiaries of Medicaid are Medicare recipients 
as well.
    As you know, there are a number of proposals in our bill 
which has been reported out of the committee and may be 
actually voted on this afternoon in the full House that would 
be very harmful to seniors. For example, increasing copayments 
on necessary services, allowing States to severely reduce 
benefits, as an example, and imposing harsh penalties on 
disabled and elderly who are penniless and need Medicaid's 
coverage of nursing care and other long-term services.
    I want to ask you now, we heard the other panel members 
talk about the profession that is so vital in Medicare. If you 
could comment on the beneficiaries and their experience in this 
House reconciliation bill.
    Ms. Kennelly. Thank you, Congresswoman Capps. I want to 
commend you for putting that statement in. Dr. Cady and I 
spent, last month, a couple of days together on Medicaid with a 
group that was brought together to address these things, and I 
know that statement, and it is excellent.
    Yes, our seniors are concerned, and we hear from them 
constantly. We have ten people answering the phone all day with 
our members and talking to them. Any increase, I know it 
doesn't sound like much, $3 to $5, but when you are living on 
an incredibly fixed income, it is something. And not only is it 
the amount of money that you have to worry about, they will 
just say, never mind, and they won't get their medicine. That 
is the problem.
    The other thing that we hear from our members on is the 
whole long-term care situation and putting up the time when 
your assets will be looked at. I know, and I can remember when 
Medicaid began, I can remember when--it was really quite 
profound how many assets they put to their children so they 
could go into a home and get put on Medicaid.
    That doesn't happen very much any more. Most States have 
made good laws so that they can keep the abuses really down to 
a limited amount and to have people go into a nursing home and 
then have their assets begin going back 5 years, and they can't 
remember what those assets even were, and they are in the home, 
and then they are not able to pay. So those changes are very 
worrisome to us, and we do hear from our seniors on it.
    But what you have to say about Medicaid, we do focus 
groups. And I want to tell you something, not too many people 
know about Medicaid or understand it unless you are on it or 
family member on it. The point is, nobody wants to be on 
Medicaid. They are our poorest people, most vulnerable, and we 
have to make every effort that we don't make their lives worse 
by taking away one of the few things they have, and that is 
health care.
    Mrs. Capps. I yield back the balance of my time.
    Thank you very much, all of you witnesses.
    Mr. Deal. Dr. Burgess.
    Mr. Burgess. I thank the Chairman.
    I thank the panel for their tenacity and their enthusiasm, 
for being here today.
    Ms. Super, you talked about the study you did going from 
capitated to a fee-for-service environment. Did you have a 
copay when you were under a capitated system? Was there an 
across the counter charge to get in to see the doctor, or was 
there no copay in the capitated system that was under study?
    Ms. Super. I didn't study the copay system. It was mainly 
looking at how the physicians were paid under a multi-
speciality practice group, and so it wasn't so much looking--I 
can't answer that question, I am sorry. It was mainly looking 
at how the physicians were paid.
    Mr. Burgess. As that change occurred from a capitated 
system, I presume that was like a staff model HMO that you were 
studying and then went to a fee-for-service environment, and 
you found that utilization went up. Do you think the 
utilization went up because needed services weren't being 
provided under the capitated system or that health care 
profiteers were abusing the system under a fee-for-service 
side?
    Ms. Super. Well, it was a little bit of both. I would say 
that the conclusions of the study were that neither fee-for-
service nor capitation are perfect models, and I think that 
what we found was that physicians respond to incentives very 
strongly, and that under the capitated model, there may have 
been some under-utilization of services; that they were not 
incented to see the patients as frequently, that they didn't 
necessarily stay as long each day, that they didn't have to 
meet with them as frequently. And as soon as they went to a 
full--they were at risk with the patients to whether or not--
when the patients would come in under capitation, the 
physicians were at risk, and that seemed to be the indicator of 
what made a difference. Once the physicians went under a model 
where they were compensated based on the number of patients 
that they saw and the number of tests that they ordered, that 
made a complete difference on their practice patterns and so--
--
    Mr. Burgess. Doctors, of course, are not stupid.
    Ms. Super. Right.
    Mr. Burgess. Now you talk about incentivizing, and I am 
glad to hear you use that word. In a lot of instances, that 
does mean paying for time.
    Ms. Super. Exactly.
    Mr. Burgess. There are areas in our system where we don't 
compensate for time, and if we are going to be serious about 
our move to medical information technology, I know my own 
experience with going to a computerized prescription writing 
program, that it added about 1 to 2 minutes per patient. And 
when you are seeing 30 to 45 patients a day, you can do the 
math, and someone has got to pay for that 1 to 2 hours that you 
have added onto that doctor's day.
    If I could, Dr. Arora, let me ask you, and I appreciate 
very much you bringing your four principles to the committee. 
Surely, we will study these. Several of them we are probably 
well on our way to doing without your advice, but at the same 
time I thank you for bringing them because your concerns are 
some of the most important because it is physicians your age. 
Dr. Cady and I are at the far end, but you are at the beginning 
of your career. And it is important that we pay particular 
attention to what physicians your age are thinking and what 
physicians your age are needing.
    To your point about comprehensive strategy for developing 
or reversing decline in physicians going into primary care, of 
course, you hold a lot of those cards in your hand, and it will 
be your involvement, your continued involvement in the 
policymaking process and your development as a physician leader 
for your peers that will be so critical in keeping young 
physicians as they come up through the ranks interested in 
going into primary care. So I do thank you for what you have 
brought to the committee, and I promise you we will give that 
serious consideration.
    In the last seconds that I have, Dr. Cady, as a general 
surgeon, have you yourself, do you think you have seen 
instances where access to care has been limited to the 
diminution in physician reimbursements?
    Mr. Cady. Absolutely.
    Mr. Burgess. Have procedures themselves been shunned 
because they don't pay as well as they used to? Some doctors 
still see Medicare patients but not do the more complex 
procedures.
    Mr. Cady. No, not in my own practice. That was not an issue 
with me as a general surgeon. If a patient needed a gall 
bladder out, if it was appropriate and indicated, we did it 
regardless. But I have seen my daughter, who is an 
otalaryngologist, and my son, who is an anesthesiologist, 
having difficulty with the Medicare reimbursement formula.
    At my stage of my career, as you mentioned, this is not so 
much an issue with me individually, but I am concerned about 
her, and I am concerned about my two kids as they try to 
practice medicine, meet their practice costs.
    The graph there, I think, is critical. To me as a surgeon, 
it is very simple to understand. Practice expense goes up, 
reimbursement goes down and the gap gets wider, and it costs 
more every year that we avoid fixing the SGR and replacing it 
with the medical economic index, like the hospitals and the 
other people do.
    So it is a critical issue for you, and I am sensitive to 
the difficulty, but at the same time, I am sensitive to the 
patients out there that are going to have access problems.
    Mr. Burgess. One of the things I would like to mention, I 
know you work with AOA. You might consider working with AMA and 
looking into developing tools for calculating practice costs. I 
know that was one of the most difficult tasks that I had in my 
office. If someone says, how much does it cost for you to 
deliver a baby, it was a tough figure for me to come up with 
because we just don't think along those lines.
    So if you can develop some of the tools for doctors to use 
to help young physicians know as they set up their offices, if 
you were going to do an electrocardiogram in your office, this 
is what it is going to go cost you, that way Dr. Arora will 
know what to charge, and not just you want to cover overhead, 
you want to pay her for her time.
    I will yield back, Mr. Chairman. You have been very 
indulgent.
    Mr. Deal. Thank you. I believe we have reached the end of 
this very long day for all of us. We thank you. We realize the 
sacrifice you make of your time and your effort to get here and 
to be present for us to hear from you and to ask you questions, 
and we truly appreciate that and express our appreciation to 
you. And to the representatives of the organizations, please 
extend our appreciation.
    Mr. Bilirakis. The one chart there, if you can call it 
that, the map of the United States, that is not in your written 
testimony.
    Mr. Cady. It is a very simple map of each State. The top 
number is how much.
    Mr. Bilirakis. But we don't have a copy of that.
    Mr. Cady. We will get a copy of it. The top number is the 
amount your State of Florida will lose in 2006, and the bottom 
number is how much they will lose over the 2006 to 2011 period, 
and it is significant.
    Mr. Bilirakis. Thank you. I already know that.
    Mr. Deal. I am sure he will make sure we get copies of 
those. Thanks to all of you again.
    With that, this hearing is adjourned.
    [Whereupon, at 3:48 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

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