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




 
                    HEARING ON MEDPAC'S MARCH REPORT
                      ON MEDICARE PAYMENT POLICIES

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

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

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 1, 2006

                               __________

                           Serial No. 109-63

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         SUBCOMMITTEE ON HEALTH

                NANCY L. JOHNSON, Connecticut, Chairman

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

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


                            C O N T E N T S

                               __________
                                                                   Page

Advisory of February 22, 2006, announcing the hearing............     2

                               WITNESSES

Medicare Payment Advisory Commission, Glenn M. Hackbarth, 
  Chairman.......................................................     5

                                 ______

Clarian Health Partners, Daniel F. Evans.........................    29
HCR-ManorCare, Stephen L. Guillard...............................    33
American College of Physicians, C. Anderson Hedberg, MD..........    39
DaVita Patient Services, Kent Thiry..............................    49

                       SUBMISSIONS FOR THE RECORD

American Association of Homes and Services for the Aging, 
  statement......................................................    64
American College of Cardiology, Bethesda, MD, statement..........    67
American Dietetic Association, Chicago, IL, Pam Michael and Mary 
  Hager, joint letter............................................    70
American Medical Association, statement..........................    72
HealthSouth, Birmingham, AL, statement...........................    76
National Renal Administrators Association, Prescott, AZ, Anthony 
  Messana statement..............................................    80
National Association For Home Care and Hospice, Val J. 
  Halamandaris, President, statement.............................    82


                    HEARING ON MEDPAC'S MARCH REPORT
                      ON MEDICARE PAYMENT POLICIES

                              ----------                              


                        WEDNESDAY, MARCH 1, 2006

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

    The Subcommittee met, pursuant to notice, at 3:28 p.m., in 
room 1100, Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
February 22, 2006
No. HL-12

                 Johnson Announces Hearing on MedPAC's

               March Report on Medicare Payment Policies

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the Medicare Payment Advisory 
Commission's (MedPAC) March report on recommendations on Medicare 
payment policies. The hearing will take place on Wednesday, March 1, 
2006, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 3:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Glenn Hackbarth, Chairman of MedPAC, as well as 
provider groups affected by the MedPAC recommendations. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The MedPAC advises Congress on Medicare payment policies. The 
Commission is required by law to submit its annual advice and 
recommendations on Medicare payment policies by March 1 and an 
additional report on issues facing Medicare by June 15. In its reports 
to the Congress, the Commission is required to review and make 
recommendations on payment policies for specific provider groups, 
including Medicare Advantage, hospitals, skilled nursing facilities, 
physicians, and other sectors, and to examine other issues regarding 
access, quality, and delivery of health care.
      
    In announcing the hearing, Chairman Johnson stated, ``The MedPAC 
provides valuable advice to Congress on Medicare payments for 
providers, and this information is important as we continue to explore 
how to strengthen the Medicare program for our Nation's seniors. This 
hearing will offer the Subcommittee an opportunity to pursue the 
Commission's recommendations and various providers' responses to these 
recommendations.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on MedPAC's March recommendations on 
Medicare payment policies.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
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noted above.

                                 

    Chairman JOHNSON OF CONNECTICUT. This hearing will come to 
order.
    Welcome, Mr. Hackbarth. It is a pleasure to have you before 
us again.
    This hearing is to discuss the report that the Medicare 
Payment Advisory Commission (MedPAC) has issued, proposing 
updates in every area for the next year. The Medicare Program 
is, as we all know, extremely complex, and the discussions made 
by policymakers must be well reasoned and based on accurate, 
timely information. We appreciate the hard work that you and 
your excellent staff do to provide us with that information, 
and we look forward to working with you to meet the challenges 
that we must meet in the next 6 months. The Commission reviews 
a variety of factors in making its payment recommendations, 
including providers' financial profitability, their access to 
capital, their cost, increase or decreases in the number of 
available providers, and beneficiary access to care.
    In reviewing the Commission's analysis of the various 
payment systems, we need to ensure that we explore any 
potential inconsistencies or problem areas in the analysis and 
the views of the provider groups most directly affected by the 
recommendations, and we will hear from some of those provider 
groups today. Some that we aren't hearing from today, we aren't 
hearing from because we are going to have a series of hearings 
taking each provider community that is involved in post-acute 
care singularly, and so we will have a chance to go in depth on 
some of the issues affecting home health and other sectors that 
aren't represented here today. I want that to be clearly 
understood.
    I do also want to mention in my opening comments that I do 
have concerns regarding the traditional factors that we have 
always considered, may not be giving us a clear enough picture 
of the state of the delivery system, that is, a picture that 
will enable us to make the policy decisions that we need to 
make at this time. We have so much happening between the 
nonprofit and for-profit sectors, the development of new 
technologies in both the diagnostic and treatment sectors, 
which our payment system doesn't very easily accommodate or 
reflect, and cost pressures on all of the groups we need to 
deliver care, like nursing salaries, fringe benefit costs, 
energy costs and malpractice costs, that it is hard for the 
system to capture this state of health of all of the actors in 
the delivery system, and particularly to distinguish or to 
understand the meaning of, in a sense, bad figures, or bad 
trends.
    I feel myself like we need to talk more about--and we have 
talked a little bit about this, you and I--that we need to go 
beyond the study of industry's margins, to what are the 
interactions that are happening, and how do we move toward a 
system that does what the Medicare Modernization Act (MMA) 
envisioned, P.L. 108-173, which is swinging Medicare from 
entirely an illness-treatment model to a health management and 
preventive model. I think the responsible way to control 
Medicare's cost growth is through focusing on the 20 percent of 
the seniors who use the 80 percent of the dollars. They are all 
people with five or more chronic illnesses.
    No fee-for-service has been skilled at dealing with the 
health problems of that type of population, and in the Medicare 
Modernization Act, we tried to set the predicate to move in 
that direction, both through mandates to the plans and through 
demonstrations in the fee-for-service arena.
    We are going to have some testimony here today that will go 
directly to that issue of how do we move to a system that is 
capable of reimbursing for a more holistic approach to health 
care as opposed to illness treatment. Mr. Stark, welcome.
    Mr. STARK. Thank you, Madam Chairman.
    Chairman JOHNSON OF CONNECTICUT. If you would like to say a 
few words, then we will go directly forward to Mr. Hackbarth.
    Mr. STARK. I would love to say a few works. Thank you for 
the hearing, which we haven't done for 3 years, and it used to 
be a routine. I hope it will start again.
    Mr. Hackbarth, I hope you won't take the sparse attendance 
as an indication of our interest, but you just happened to pick 
a time when we quit early, and I think people scattered after 
the last vote. It would have been helpful to have the Centers 
for Medicare and Medicaid Services (CMS) here today instead of 
having them hide behind your excellent report, and trying to 
get you to justify the cuts.
    The President's budget took your name and many 
recommendations, I think, in vain, and extended policies for 3 
years, and included a number of items that I am not sure you 
contemplated, or much less endorsed. I gather about a quarter 
of the President's proposed cuts are attributable to your 
recommendations, but the--it looks like they took the cuts in 
traditional Medicare and left off the recommendations which 
would have reduced payments to Heath Maintenance Organizations 
(HMOs) and Medicare, whatever that is called, aid, Medicare 
Advantage.
    You have recommended, I think, since 2001, for 5 years, 
that we eliminate the HMO and Medicare Advantage, what I call 
overpayments, and I think you may classify them as that too. We 
discussed this last year, and I think we would have saved 
another 50 billion over 10 if we had followed your advice.
    Without CMS here, we can't get a handle on this and discuss 
it, but I want to, as I say, welcome you here, and I hope it 
won't be your last appearance. I want to thank your staff. They 
have been extraordinary. I think Mark Miller will cringe, but I 
want to recognize him and thank him for his efforts at keeping 
us informed of what is going on, and I look forward to your 
testimony, and I know you will enlighten us on a whole host of 
issues that are rightly important to the Medicare Program. 
Thank you.
    Thank you, Madam Chair, for having these hearings.
    Chairman JOHNSON OF CONNECTICUT. Thank you, Mr. Stark. Mr. 
Hackbarth.

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

    Mr. HACKBARTH. Thank you, Chairman Johnson, Mr. Stark, and 
the Members of the Subcommittee.
    As MedPAC pursues its work, we come back over and over 
again to three basic themes. One is that we strive to assure 
that the Medicare payment systems pay fairly and accurately for 
the services provided. By fairly and accurately, we mean that 
the rates paid, for example, reflect the complexity of a 
patient or the risk assumed by a private health plan. You are 
familiar with recommendations we have made in that spirit to 
refine the payment system for hospitals, the Diagnostic Related 
Group (DRG) refinement proposals that were in our specialty 
hospital report.
    In this March report, published today, we have a series of 
recommendations about improving the physician payment system, 
the relative value system, to assure that those payments are 
more accurate. A second theme that we come back to frequently 
is that we want to reward improvements and quality, and you are 
well aware of the series of recommendations that we have made, 
encouraging pay-for-performance within Medicare. Third, we come 
back to a theme of encouraging improvement in efficiency in the 
delivery of care, and that is a very important aspect of our 
update analysis that is in this March report. To the extent 
that we can achieve these goals, we will increase the value of 
the Medicare Program both for Medicare beneficiaries and for 
taxpayers.
    Now, the Commissioners bring to this task a wide range of 
experience and perspectives and political viewpoints. As you 
know, MedPAC has 17 members. Seven of our members are trained 
as clinicians, either physicians or nurses. Eight of us have 
experience as executives, high-level executives or board 
members of health care provider organizations. Six of us have 
high-level experience working with the Congress as senior 
staff, or in support agencies like CBO, or working in CMS. 
There are a number of us who have experience of all three 
types. I daresay that every one of us has at least one loved 
one who is a Medicare beneficiary. I emphasize this point just 
to highlight that we are all people with a stake in the welfare 
of the Medicare Program. We want it to work well. We all have a 
lot of experience with how it does operate, and we try to bring 
that to bear on your behalf.
    In formulating our recommendations, I, as Chairman, have 
always sought to do that by consensus. I think it enhances the 
power of our work if we have substantial majorities in favor of 
our recommendations, not necessarily always unanimous 
recommendations, but very large majorities. In this case, in 
this March report, the one before you today, you will note that 
all of our recommendations are unanimous, so all 17 members of 
this diverse commission have supported these recommendations.
    The March report, as Chairman Johnson indicated, is largely 
devoted to update recommendations for 2007, and thus, the 
related goal of improving efficiency in the program. In 
formulating our recommendations for updates, what we are trying 
to do is, through this administered price system, or a series 
of different administered price systems, mimic after a fashion 
what might happen in a competitive marketplace.
    One of the important benefits of a truly competitive 
marketplace is that there is consistent, some would say, 
relentless, pressure to improve efficiency, and indeed, the 
taxpayers, who pay for the Medicare Program, experience that 
pressure all of the time, whether they are individual workers 
who experience it in terms of foreign competition for their 
jobs effecting their wages and benefits, or whether they have a 
job at all, or whether they are corporations who face those 
pressures on their profits in balance sheets. We believe it is 
entirely fitting that Medicare providers, through these 
administered price mechanisms, face that sort of relentless 
pressure to improve their efficiency. That is what fairness to 
the taxpayers requires.
    I won't spend a lot of time going through the individual 
recommendations on updates. I will, obviously, be happy to talk 
about them in response to questions. I do want to highlight, 
however, that often our recommendations are cast as market 
basket minus some figure, so it is less than the market basket. 
Sometimes they are characterized as lower than the budget 
baseline, and we often hear that, oh, that is a cut that is 
being recommended by MedPAC. MedPAC is endorsing a cut in the 
hospital payments. Let me focus on hospitals. For example, our 
recommendation there is the market basket minus one half of our 
usual productivity expectation, and that works out to--based on 
the most recent projection of the market basket--to a 2.95-
percent increase in rates. Where I come from in Oregon, that is 
an increase, that is not a cut. I hope that is clear.
    I also want to emphasize that although they are not 
included in our March report, we did make a series of 
recommendations about the Medicare Advantage Program in our 
June 2005 report. The theme of those recommendations was to 
achieve our longstanding goal, recommendation, that there be a 
neutral choice offered to Medicare beneficiaries between the 
traditional fee-for-service program on the one hand, versus 
enrollment in a private plan on the other.
    Finally, I just want to highlight that in our March report, 
although it is largely devoted to update recommendations, we do 
have a couple recommendations related to refining the payment 
systems to assure fairness and accuracy. One State has to do 
with the physician payment systems, RVUs. There is also a very 
important recommendation for refining the payment system for 
skilled nursing facilities. I look forward to your questions.
    [The prepared statement of Mr. Hackbarth follows:]

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

    Chairman Johnson, Ranking Member Stark, distinguished Subcommittee 
members. I am Glenn Hackbarth, chairman of the Medicare Payment 
Advisory Commission (MedPAC). I appreciate the opportunity to be here 
with you this afternoon to discuss MedPAC's March Report to the 
Congress and our recommendations on Medicare payment policy.
    The Commission has become increasingly concerned with the trend of 
higher Medicare spending without a commensurate increase in value to 
the program. That trend, combined with the retirement of the baby 
boomers and Medicare's new prescription drug benefit, will, if 
unchecked, result in the Medicare program absorbing unprecedented 
shares of the GDP and of federal spending. Policymakers need to take 
steps now to slow growth in Medicare spending and encourage greater 
efficiency from health care providers. Medicare can and should take the 
lead in initiating changes to the health care system. But to encourage 
more thorough improvements in quality and efficiency, Medicare should 
work in collaboration with other payers.
    Our March report to the Congress focuses on improving Medicare 
payment accuracy and calibrating payment adequacy to the efficient 
provider. The Commission reiterates its proposals to measure resource 
use and improve quality, to attain better value for the Medicare 
program. In this report, we review Medicare fee-for-service payment 
systems for eight sectors: hospital inpatient, hospital outpatient, 
physician, outpatient dialysis, skilled nursing, home health, long-term 
care hospitals, and inpatient rehabilitation facilities. Our analysis 
of payment adequacy for long-term care hospitals and inpatient 
rehabilitation facilities is the first for these sectors under their 
new prospective payment systems. The Commission's goal in all payment 
systems is for Medicare payments to cover the costs efficient providers 
incur in furnishing care to beneficiaries.
    While this report focuses on Medicare's fee-for-service payment 
systems, our June 2005 report made recommendations on the Medicare 
Advantage program. Generally, these recommendations are intended to 
improve neutrality between the Medicare Advantage and fee-for-service 
program and among Medicare Advantage plans. The Commission strongly 
supports giving Medicare beneficiaries a choice to join private plans, 
because these plans have greater flexibility to improve the efficiency 
and quality of beneficiaries' health care services. The Commission has 
long recommended that the program should be financially neutral as to 
whether beneficiaries join private plans or remain in fee-for-service 
Medicare.
    We also recommend improvements to the process for determining 
relative values in the physician payment system and continue to 
evaluate the relative payments for different services within other 
prospective payment systems (PPSs). Last year we made recommendations 
on improving payment accuracy within the inpatient hospital and skilled 
nursing facility PPSs. We reiterate our recommendations on the SNF PPS 
in this report. For the inpatient payment system we recommended in our 
March 2005 report on specialty hospitals four steps to improve payment 
accuracy: refine the system to more fully capture differences in 
severity of illness, base relative weights on estimated cost instead of 
charges, base weights on the national average of hospitals' relative 
values, and adjust relative weights for prevalence of high-cost outlier 
cases.
    Over the course of the last two years, the Commission has 
recommended that Medicare create incentives to improve quality through 
its payment systems. This approach builds upon the experience of 
private purchasers in designing and running pay-for-performance 
programs that reward health care providers for improving the quality of 
care. The Institute of Medicine and others have pointed to the quality 
gaps in the American health care system. While Medicare already has 
some programs in place to improve quality, these are not enough to 
orient the whole system towards improving quality; nor is it equitable 
for Medicare to pay a high quality provider the same as one that 
furnishes poor care.
    Medicare should start differentiating among providers by paying 
more for higher quality performance and less for poor quality. This 
change to Medicare's payment systems is urgently needed. Currently, 
Medicare pays providers the same regardless of their quality. We have 
recommended pay-for-performance programs and that the Congress direct 
the Secretary to set quality standards for all providers who bill 
Medicare for performing and interpreting diagnostic imaging studies--
which represents a major change in Medicare's payment policy. While 
some providers have raised concerns about aspects of a pay-for-
performance program, these concerns must be weighed against the costs 
of not moving forward: allowing the program to reward poor care and not 
recognize quality care. Because Medicare is such an important part of 
the American health care system, it can be very influential in 
transforming the incentives in the broader health care system.
    The Commission has concluded that pay for performance is ready to 
move forward in five settings--hospital, physician, home health, 
Medicare Advantage, and end-stage renal disease. The Commission has 
also recommended that Medicare measure resource use of physicians and 
feed this information back confidentially to them. The Commission is 
exploring measurement of resource use and evaluating its use in pay-
for-performance programs. These are important steps to improving 
quality for beneficiaries and laying the groundwork for obtaining 
better value in the Medicare program.
    While these recommendations will improve the current payment 
systems, as the new prescription drug benefit begins, new types of 
private plans enter the program, and new payment systems go into 
effect, new patterns of care will result. In particular, the Commission 
is conducting research on how beneficiaries learned about the drug 
benefit and what factors were important to them as they made decisions 
to enroll or not enroll in plans. We are also compiling baseline 
information on plan offerings for 2006 including: what organizations 
are offering plans; what type of plan they are offering (basic versus 
enhanced); and variations in premiums and benefit structures, including 
cost sharing and formularies.
    In future work the Commission will analyze these changes and make 
recommendations to the Congress on how the new programs can be improved 
to increase their value.
Context for Medicare payment policy
    Health care spending has been rising more rapidly than growth in 
national income for many decades, and all indications suggest that it 
will continue to do so into the future. The continuation of this trend, 
combined with the retirement of the baby boomers and Medicare's new 
prescription drug benefit, will lead the Medicare program to require 
unprecedented shares of GDP and federal spending.
    Policymakers need to take steps now to slow growth in Medicare 
spending and encourage greater efficiency from health care providers. 
Delaying taking action will require more drastic changes to the program 
in the future. Strategies to address Medicare's long-term 
sustainability include constraining payment rates for health care 
providers, changing eligibility and benefits, increasing the program's 
financing, and encouraging greater efficiency from health care 
providers. The last strategy--increasing efficiency--is the most 
desirable because it would enable the Medicare program to do more with 
its resources. Even if policymakers succeed at moving providers towards 
greater efficiency, they may still need to make other policy changes to 
help ensure that the program is sustainable into the future.
    Medicare and its beneficiaries are not alone in facing the 
challenges of rapid growth in health spending--all stakeholders in the 
U.S. health care system are confronting similar pressures. Medicare 
relies on providers and health plans that care for the entire 
population, not just Medicare beneficiaries, and thus broad trends in 
the health care system affect the environment in which the program 
operates.Medicare can and should take the lead in initiating changes to 
the health care system. But to encourage more thorough improvements in 
quality and efficiency, Medicare should collaborate with other payers. 
For example, Medicare could use comparative-effectiveness analysis more 
readily if other payers do so as well, and a common set of measures for 
quality and resource use across payers would reduce the reporting 
burden on providers and magnify the impact of any public and private 
incentive programs.
Accessing payment adequacy and updating payments in fee-for-service 
        Medicare
    We make update recommendations for one year at a time so that we 
can assess payment adequacy with the latest data each year. We answer 
the question of whether current Medicare payments are adequate by 
examining information about beneficiaries' access to care; changes in 
the capacity, volume, and quality of care; providers' access to 
capital; and, where available, the relationship of Medicare payments to 
providers' costs. Our assessment of the relationship between Medicare 
payments and providers' costs is influenced by whether current costs 
approximate those of efficient providers. Efficient providers use fewer 
inputs to produce quality outputs.
    We then account for expected cost changes in the next payment year, 
such as those resulting from changes in input prices. As part of those 
considerations, we incorporate our expectation for improvement in 
productivity (0.9 percent for 2007). Medicare payment rates to health 
care providers should be set so that the federal government benefits 
from providers' productivity gains, just as private purchasers of goods 
in competitive markets benefit from the productivity gains of their 
suppliers. In developing its payment recommendations, MedPAC expects 
improvements in productivity consistent with the productivity gains 
achieved by the firms and workers who pay the taxes and premiums that 
support Medicare. The productivity factor is a policy objective, not an 
empirical estimate. To the extent that providers are unable to achieve 
this productivity target, that outcome would be revealed subsequently 
in MedPAC's analysis of payment adequacy, which is considered anew each 
year.
Hospital inpatient and outpatient services
    Indicators of payment adequacy for hospitals present a mixed 
picture. Our assessments of beneficiaries' access to care, service 
volume growth, and access to capital are positive, while the results on 
quality are mixed. Regarding access to capital, hospital construction 
spending has been growing 15 percent annually since 1999 to an 
estimated $23 billion in 2005. However, the Commission is concerned 
that hospitals' overall Medicare margins are negative and that 
hospitals have had unusually large cost increases in recent years.
    The rate of cost growth has been affected by unusual cost 
pressures, but it also has been influenced by the recent lack of 
financial pressure from private payers. Hospital costs appear to be 
influenced by cycles in private sector profitability. From 1986 through 
1992, most insurers still paid hospitals on the basis of their charges, 
with little price negotiation or selective contracting. With limited 
pressure from private payers, the ratio of private-payer payments to 
hospitals' costs increased rapidly (Figure 1). In the mid-1990s, HMOs 
and other private insurers began to negotiate more vigorously for 
better prices and the payment-to-cost-ratio for private payers declined 
from 1993 through 1999. By 2000 hospitals had regained the upper hand 
in price negotiations due to hospital consolidations and consumer 
backlash against managed care and restricted networks. Private payer 
payment rates rose rapidly and the payment-to-cost ratio for private 
payers rose from 2000 to 2004.




    Cost growth during these same three periods followed the trends in 
private-payer profitability. In the last four years (2001 to 2004), 
increases in private-payer profitability were accompanied by hospital 
costs rising at a rate faster than the market basket of input prices.
    In addition, our analysis suggests that more efficient hospitals 
may not be performing as poorly as the industry's aggregate margin 
would suggest. High-cost hospitals have a significant effect on the 
industry's financial performance under Medicare. To illustrate, 
removing the roughly one fifth of hospitals with consistently high 
costs in both 2002 and 2004 raises the margin forecast by more than 2 
percentage points. In addition, hospitals with consistently negative 
Medicare margins had above-average costs and cost growth, and these 
hospitals are not competitive in their own markets as evidenced by 
having higher costs and lower occupancy than neighboring facilities.
    Balancing the payment adequacy indicators and concern about trends 
in margins and efficiency, the Commission recommends an update of 
market basket minus half of our expectation for productivity growth for 
both inpatient and outpatient hospital services. These updates should 
be combined with a quality incentive payment policy for hospitals and 
the improvements to the inpatient PPS relative values we recommended 
last year: refine the system to more fully capture differences in 
severity of illness, base relative weights on estimated cost instead of 
charges, base weights on the national average of hospitals' relative 
values, and adjust relative weights for prevalence of high-cost outlier 
cases. Although CMS has taken some steps to make payments more accurate 
for certain DRGs, ensuring payment accuracy across the board is 
necessary to make payments equitable and to lessen inequities resulting 
from selection.
Physican services
    Our analysis of beneficiary access to physician care, physician 
supply, Medicare-to-private fee level comparisons, and the growth in 
physician service volume finds that many of these indicators are stable 
and shows that the large majority of beneficiaries are able to obtain 
physician care. Beneficiaries' access to physicians is similar to, or 
even better than, access for those with private insurance and has been 
stable. Averaged across all services and areas, the ratio of Medicare 
payment rates versus private payment rates rose slightly from 2003 to 
2004. Additionally, the volume of services used per beneficiary 
continues to grow significantly, which has led to considerable spending 
increases. In consideration of expected input costs for physician 
services and our payment adequacy analysis, the Commission recommends 
that the Congress increase payments for physician services by the 
projected change in input prices less our expectation for productivity 
growth for 2007.
    In contrast to this recommendation, current law calls for 
substantial negative updates from 2007 to 2011, under the sustainable 
growth rate (SGR) formula. The Commission does not support these 
sustained fee cuts because they could threaten beneficiary access to 
physician services. The Commission is especially concerned about the 
effect of rate cuts on access to services provided by primary care 
physicians and in the longer term about the attractiveness of primary 
care to new physicians. Furthermore, the Commission considers the SGR 
formula a flawed, inequitable mechanism for volume control. Over the 
next year, the Commission will examine alternatives to the SGR formula 
as mandated by the Deficit Reduction Act of 2005.
Valuing services in the physician fee schedule
    Relative value units (RVUs) are a key element of Medicare's 
physician fee schedule. They determine how payment rates vary among the 
more than 7,000 services that physicians furnish to the program's 
beneficiaries. Periodic review of RVUs is important because the 
resources needed to perform a service can change over time. When that 
happens, the value of a service must be changed accordingly; otherwise, 
Medicare's payments will be either too high or too low.
    Because the current system does a poor job of identifying 
overvalued services, we recommend improvements to the process for 
determining relative rates paid for services in the physician payment 
system. Inaccurate rates distort the market for physician services, and 
the Commission is concerned that in the long run they may affect the 
supply of physicians--in particular those providing primary care 
services. The Commission recommends improvements to the process that 
will help reduce the number of physician fee schedule services that are 
misvalued, thereby making payment more accurate.
    The Commission recommends that the Secretary establish a standing 
panel of experts to help CMS identify overvalued services and to review 
recommendations from the American Medical Association's Relative Value 
Scale Update Committee (RUC), and that the Congress and the Secretary 
ensure that this panel has the resources it needs to independently 
collect data and develop evidence. In consultation with this expert 
panel, the Secretary should initiate reviews for services that have 
experienced substantial changes in factors that may indicate changes in 
physician work and identify new services likely to experience 
reductions in value. Those latter services should be referred to the 
RUC and reviewed in a time period as specified by the Secretary. 
Finally, to ensure the validity of the physician fee schedule, the 
Secretary should review all services periodically.
Outpatient dialysis services
    Most indicators of payment adequacy for outpatient dialysis 
services are positive. Beneficiaries are not facing systematic problems 
in accessing care. Providers are increasing capacity to meet patients' 
demand (as demonstrated by the increasing number of facilities and 
hemodialysis treatment stations), spending is increasing, and providers 
have sufficient access to capital. The quality of care is improving for 
some measures--dialysis adequacy and anemia status--and unchanged for 
others. Although most of the indicators for payment adequacy are 
positive, the Commission is concerned about the trend and level of 
Medicare margins for outpatient dialysis services. Balancing these 
considerations, the Commission recommends increasing the composite rate 
in 2007 by the projected rate of increase in the end-stage renal 
disease market basket less half of the Commission's expectation for 
productivity growth.
    In addition to updating the composite rate, to improve equity in 
payments between provider types the Commission reiterates its 
recommendation that the Congress eliminate payment differences between 
freestanding and hospital-based facilities for composite rate services 
and combine the composite rate and the add-on payment.
Post-acute care providers
    The recuperation and rehabilitation services that post-acute care 
providers furnish are important to Medicare beneficiaries. Medicare 
spending on post-acute care services totaled about $36 billion in 2004, 
accounting for more than 12 percent of total Medicare spending. After 
slowing in the late 1990s when CMS implemented the Balanced Budget Act 
of 1997, spending and the number of providers have risen (Figure 2). 
The number of home health agencies increased by 10 percent in the last 
year alone, and there were over 50 percent more long-term care 
hospitals in 2005 than in 2000. The rise in spending is the result of 
both higher payments and greater use.




    We have analyzed payment adequacy for each of the four types of 
post-acute care providers: skilled nursing facilities (SNFs), home 
health agencies, long-term care hospitals (LTCHs), and inpatient 
rehabilitation facilities (IRFs). The payment systems for all four of 
these providers face similar issues:

      payments are not well calibrated to costs,
      services overlap among settings,
      the post-acute care product is not well defined, and 
assessment instruments differ among settings.

    These issues make it difficult to get better value for Medicare 
spending across the spectrum of post-acute care.
    New prospective payment systems for post-acute care providers have 
led to changes in the patterns of post-acute care use, which may not 
serve the program or beneficiaries well. We have called for action to 
slow payments refine the case-mix systems, and measure quality of care. 
However, even refining all of the case-mix systems would still not 
resolve issues of whether patients go to the right post-acute care 
setting or whether they need post-acute care at all. There is still a 
need for comprehensive payment system reform across all PAC settings.
Skilled nursing facility services
    Most indicators of payment adequacy for SNFs--access to care, 
supply, spending, quality, access to capital--are stable, and the 
volume of services continues to increase. In addition, the Medicare 
margin for SNFs continues to be high and SNF payments appear more than 
adequate to accommodate cost growth. Therefore, the Commission 
recommends that the Congress eliminate the update to payment rates for 
skilled nursing facility services for fiscal year 2007.
    CMS's refinements to the SNF case-mix system in 2006 did not 
address long-standing problems with the allocation of SNF payments. 
Therefore, the Commission once again recommends that the Secretary 
modify the SNF PPS to more accurately capture the cost of providing 
care to different types of patients. This new system should: reflect 
clinically relevant categories of patients, more accurately distribute 
payments for nontherapy ancillary services, improve incentives to 
provide rehabilitation services based on the need for therapy, and be 
based on more contemporary data than the current system. We will 
continue work to further define such a new system.
    Currently, CMS has only three quality indicators for SNF patient 
care, all of which are limited. Medicare urgently needs quality 
indicators that allow the program to assess whether patients benefit 
from SNF care and to distinguish between facilities. The Commission 
recommends that CMS:

      collect information on activities of daily living at 
admission and at discharge;
      develop and use more quality indicators, including 
process measures, specific to short-stay patients in skilled nursing 
facilities; and
      put a high priority on developing appropriate quality 
measures for pay for performance.
Home health services
    Evidence suggests that access to home health services is good: 
communities across the country have providers and more providers are 
entering the program. In addition, the quality of care continues to 
improve slightly, and the number of users and the amount of services 
that they use are rising. These factors, along with more than adequate 
margins, suggest that agencies should be able to accommodate cost 
increases over the coming year without an increase in base payments. 
Therefore, the Commission recommends that the Congress eliminate the 
update to payment rates for home health care services for calendar year 
2007.
    The Commission continues to be concerned about aspects of this 
payment system. There is some evidence that payments are not being 
distributed accurately within the system. The number of visits per 
episode and the mix of the type of visits (therapy, skilled nursing, 
and aide) have changed substantially since the payment system was 
developed and hence, the payment system may not now accurately predict 
the relative costliness of episodes. Ideally, the system's adjustments 
should bring payments closer to costs. The Commission will continue to 
investigate improvements to the payment system.
Long-term care hospital services
    This year, for the first time under the new prospective payment 
system, the Commission assesses the adequacy of payment for long-term 
care hospitals. LTCHs provide care to patients with clinically complex 
problems who need hospital-level care for extended periods of time. 
Medicare is the predominant payer for long-term care hospital services.
    Medicare payments for LTCH services are more than adequate. The 
supply of LTCHs, the volume of services, and the number of 
beneficiaries admitted to LTCHs have all increased rapidly since 2001. 
Changes in quality are mixed and access to capital is good. Moreover, 
Medicare spending for these facilities increased twice as fast as 
volume, and in 2004 alone, spending increased almost 38 percent. This 
increase is due in part to patients being assigned to higher payment 
categories--some because of increases in patient complexity and some 
because of coding improvements. Margins in this sector have been high.
    The Commission concludes that long-term care hospitals should be 
able to accommodate cost changes in 2007 and therefore recommends that 
the Congress eliminate the update to payment rates for LTCH services 
for 2007.
Inpatient rehabilitation facility services
    This year, also for the first time under the new prospective 
payment system, the Commission is assessing the adequacy of payment for 
inpatient rehabilitation facilities. IRFs provide intensive 
rehabilitation services. To be eligible for treatment in an IRF, 
beneficiaries must be able to tolerate and benefit from three hours of 
therapy per day.
    Indicators of payment adequacy were generally positive through 
2004. Supply and volume increased, quality was stable, and access to 
capital was good. Medicare payments grew rapidly from 2002 to 2004, 
resulting in high margins for IRFs. Regulatory changes and industry 
trends complicate analysis of this sector affecting both volume of 
services and financial performance. However, we estimate margins will 
still be more than adequate and that IRFs can accommodate price changes 
without an increase in payments. Therefore, the Commission recommends 
that the Congress eliminate the update to payment rates for inpatient 
rehabilitation facility services for fiscal year 2007.

                                 

    Chairman JOHNSON OF CONNECTICUT. Thank you very much, Mr. 
Hackbarth. I wanted to first just ask in a general sense, when 
your information indicates that the average hospital has a 
negative 2.2 Medicare margin, which indicates to me that more 
than 50 percent of the hospitals have a negative Medicare 
margin. How then, under those circumstances do you rationalize 
a reduction in market basket for productivity? If I were losing 
2 percent, I would be looking everywhere I could to increase 
productivity, and I wouldn't need another reimbursement cut 
from often a major payer, usually a major payer, to remind me 
that I needed to be more productive.
    Mr. HACKBARTH. Well, the Commission, of course, is 
concerned by the trend in hospital margins. We have a number of 
hospital members on the Commission, and, of course, they share 
with us their experience and how things are going in their 
institutions. We don't take that lightly, but we do try to look 
behind that number, and assess why there has been this fairly 
significant decline in Medicare margins over the last several 
years. As we look at the data, what we see is there has been a 
very rapid--compared to historical experience--very rapid 
increase in cost per case.
    Now, part of that has been attributable to factors that you 
well know, like increases in wages for nurses or malpractice 
insurance expense and the like. We believe another very 
important factor in the rate of increasing cost per case has 
been on the private side of the ledger, not what is going on 
with Medicare, but how hospitals have been interacting with 
private payers. What we have seen in the last five or 6 years, 
the years since the infamous, notorious backlash against 
managed care, is that there has been a dramatic change in our 
private payment to hospitals. In part that is because of 
changes in how private insurance is configured. They have gone 
to products that reduce the private payers' leverage in 
negotiating with hospitals. In part it is attributable to the 
fact that there has been a lot of consolidation within the 
hospital industry, and they are more powerful at the 
negotiating table.
    For a combination of reasons, though, there has been a very 
significant acceleration in the rate of private payments to 
hospitals. Now, hospitals have responded to that increase in 
revenue by spending a lot of it, and it spills over into their 
Medicare cost structure. We think part of the increase is due 
to factors beyond a hospital's control. Part of it is due to 
factors within hospital control that are in turn influenced by 
private payment policies. We don't think Medicare should 
accommodate increases in cost that are driven by a relaxation 
of private payment policies.
    A second piece----
    Chairman JOHNSON OF CONNECTICUT. Go ahead.
    Mr. HACKBARTH. Could I just go on for one moment?
    Chairman JOHNSON OF CONNECTICUT. Yes.
    Mr. HACKBARTH. The second piece of analysis that we conduct 
is in pursuit of a change in our statutory mandate that was 
included in the MMA. Our statutory mandate was amended to ask 
us to base our update recommendations on analysis that includes 
consideration of efficient hospitals, efficient providers of 
all categories. in a variety of ways we try to look not just at 
the average hospital, but assess the resources required by 
efficient hospitals. One piece of analysis that we have done 
looks at the hospitals that consistently lose money under 
Medicare, and what we find when we look at those hospitals is 
that the consistent losers tend to have higher cost per case, 
more rapid increases in their cost, smaller reductions in 
average length of stay, compared to their peer hospitals in 
their same markets. In addition, they also have lower occupancy 
rates.
    The consistent losers under Medicare seem to be performing 
less well compared to their own peers, and to the extent that 
that is the case, we shouldn't be gearing Medicare policy to 
assure that they make a profit, consistent with the efficient 
provider mandate.
    Chairman JOHNSON OF CONNECTICUT. I thank you for that 
explanation. I think we need to look behind it though, because 
the need for our institutions to invest significant amounts of 
money in technology, significant amounts, hundreds of thousands 
in training people to use the technology, both medical 
technology and information technology--but the next round on 
the horizon is information technology--is extremely important 
to the future of the whole health care system. To have so many 
hospitals, the majority of your hospitals--in some of the 
testimony someone says 70 percent with negative margins--does 
indicate that we might slow that development which will both 
help control costs and certainly, by reducing medical errors 
and reducing administrative cost, but also in managing chronic 
disease, and keeping people out of the high-cost setting.
    Although I hear what you are saying, I think, at least I 
don't know, maybe, but to what extent did you look at the state 
of the hospitals before the private sector reimbursement 
started going up? In other words, did they start going up 
because--I have seen examples of this. The hospital just 
couldn't take it any more and just said, ``We are not going to 
serve you because we can't.'' In other words, between our 
reimbursement squeeze and the private sector's reimbursement 
squeeze, I saw a lot of deferred maintenance, I saw a lot of 
tensions growing, a lot of nurse personnel problems across the 
board. My view of the turnaround wasn't that all of a sudden 
they got up the courage to ask for luxurious reimbursements, 
but because they couldn't stay open if they didn't turn the 
thing around.
    The higher payments from the private sector, I mean, I 
don't know. I hear you saying that you don't think so, but I 
don't see the data on which you base your thought that you 
don't think that the increase in private payments, which flowed 
over into public payments, was the result of actual need to run 
an institution that was state of the art, that had the latest 
technology, and so on and so forth. The picture that I got 
was--but I come from a State where the margins are--we have a 
CON and so on. We have high occupancy, but in my State, for 
over 10 years--and I don't know whether it is 12 or 14--the 
hospitals have run on plus or minus 1 percent.
    Well, it is hard to run a big institution like that, and 
when you go through a period where everybody is pressing you, 
you don't buy the latest technology, and then you have to. You 
know, you defer maintenance and then you can't. Combined with 
the continue pressure from traveling nurses, malpractice and 
premium increases, and so on, I don't interpret, though I think 
you do, the increase in private sector payments is somehow 
inappropriate, and is largely just profit. I see that as kind 
of saving the system.
    This is a longer discussion, but I think in order to 
evaluate this you really have to go in and examine some of 
those hospitals that saw that severe turnaround, see what were 
the problems, how did it happen, and was it just that managed 
care became unpopular? I don't think it was just that managed 
care became unpopular, at least that is not what I saw in the 
instances that I am most familiar with.
    This is a longer discussion, but I do worry, a lot, that 
the market basket minus this particular year with the majority 
of the hospitals minus, which are on the verge of health 
information technology and understanding how imperative it is 
to eliminating errors, to eliminating--to increasing quality, 
which you have been very good on pushing. I just fear that we 
are going to discourage the very one thing we know that could 
both improve quality and reduce cost.
    I have been talking too long, and I am going to turn to Mr. 
Stark.
    Mr. STARK. Thank you, Madam Chair.
    Mr. Hackbarth, the March report does not address the 
Medicare Advantage payments, but your June report did, and you 
recommended that the payments to HMOs and other private plans 
be reduced so that they are----
    Chairman JOHNSON OF CONNECTICUT. Mr. Stark, may I just 
intervene for a moment.
    Mr. STARK. Yes.
    Chairman JOHNSON OF CONNECTICUT. We do want to keep this, 
as much as possible, on this report because we are going to go 
back on those plans in a later hearing.
    Mr. STARK. Okay. I just wanted to know when you first 
adopted the position of paying the private plans comparable 
rates to traditional Medicare. I believe it was 2001.
    Mr. HACKBARTH. Thereabouts, yes.
    Mr. STARK. Did the MMA go toward or away from your 
recommendations? Did we end up paying the plans more or less?
    Mr. HACKBARTH. Under MMA, payments increased relative to 
fee-for-service levels.
    Mr. STARK. Had we followed your recommendations--is $50 
billion over 10 years a ballpark figure for the additional 
savings we might realize?
    Mr. HACKBARTH. As you know, we don't do specific estimates 
of----
    Mr. STARK. You have heard that number?
    Mr. HACKBARTH. I have heard that number, yes, but I can't 
vouch for it.
    Mr. STARK. All right. In 2004 or 2003, or whenever you 
recall, how many hospitals in the United States closed? Do you 
have any idea? Not mergers, but how many----
    Mr. HACKBARTH. 2003, 2004, I don't know the exact number 
off the top of my head, but it is a relatively small number. 
There actually have been more hospitals opening than closing.
    Mr. STARK. Closing, 10, 20 maybe?
    Mr. HACKBARTH. Maybe a little bit higher than that. A few 
dozen, I think.
    Mr. STARK. Okay. Let's say 25 or 30.
    Mr. HACKBARTH. Yes.
    Mr. STARK. Out of 6,000.
    Mr. HACKBARTH. Yes.
    Mr. STARK. Okay. On this figure of everybody with negative 
margins, they are talking about an average; the negative margin 
was minus 2, whatever it was.
    Mr. HACKBARTH. Yes, that is our projection.
    Mr. STARK. Do you know what the median was on that?
    Mr. HACKBARTH. Again, I don't have that off the top of my 
head, but I can get you that.
    Mr. STARK. What troubles me is if these guys are running 
along, it is my understanding that since 1985, when I first 
started to become aware of this problem of hospitals going 
broke, there has never been triple-digit numbers of hospitals 
closed--50, 20, 30, usually because the doctor dies or 
something happened. I mean, an insignificant number of 
hospitals closing relative to the approximately 6,000 in the 
country. Is that a fair statement?
    Mr. HACKBARTH. The numbers have always been small. There 
have been periods when it has been higher.
    Mr. STARK. What puzzles me, although you have suggested 
some of these areas, is that they are not going broke. They are 
continuing to build, as you said, many new fancy hospitals, and 
all of this on an average of a negative margin.
    Now, can you explain that to me?
    Mr. HACKBARTH. Well, in recent years, a big factor in that 
has been that their private payments have increased 
dramatically, and----
    Mr. STARK. As you said earlier.
    Mr. HACKBARTH. As I said earlier. In keeping with that, as 
you indicate, there has been a big increase in capital 
investment.
    Mr. STARK. I think what I further heard you say is that you 
are not sure that we should be bailing out inefficiently run 
hospitals with tax dollars when you find that well-managed 
hospitals are able to survive.
    Just one other quick question. On this 45-percent trigger, 
which now has been changed to be an automatic across-the-board 
cut if we exceed the 45-percent--is that not correct? The 
trigger is based entirely on part B spending, or non-A 
spending, to phrase it another way. Is that not correct?
    Mr. HACKBARTH. Well, as I understand the provision, it is 
based on the share of the program finance, but general 
revenues.
    Mr. STARK. General revenues, which is largely part B.
    Mr. HACKBARTH. Right.
    Mr. STARK. Therefore, if the hospitals screw up, if the 
doctors screw up, I mean, then we automatically have to cut the 
hospitals under the new law. I don't know whether people--do 
you think that across-the-board cuts are an efficient way to 
save money in the Medicare system, or that we ought to do it 
under the way you tend to recommend various areas that we 
overpay or underpay? Which do you think is a better system?
    Mr. HACKBARTH. Well, we have not looked at the 45-percent 
trigger specifically. We have not had any specific 
recommendations on that. Certainly we share the goal of 
increasing the efficiency of the program and reducing the rate 
of increasing costs. We think that is very important for the 
program, for the taxpayers, and so forth.
    As you point out, our general approach is very data-driven, 
and so as opposed to trying to predict what the right rate 
should be in 2009 or 2010, we want to look at the data within a 
reasonable period ahead, like a year, and make a recommendation 
based on those data at that time. We know very little about the 
circumstances that will exist in 2010, and so that is a very 
hard recommendation to make; what the rate should be that far 
out into the future.
    Mr. STARK. Thank you very much.
    Chairman JOHNSON OF CONNECTICUT. Mr. Hulshof?
    Mr. HULSHOF. Thank you, Madam Chairman.
    Chairman JOHNSON OF CONNECTICUT. Just a moment, before I 
recognize Mr. Hulshof, I did want to clarify for the record 
that the automatic trigger is not law. It is a proposal in the 
President's budget, because there has been some confusion as to 
whether that was involved in the last reconciliation act. Thank 
you.
    Mr. Hulshof.
    Mr. HULSHOF. Thank you, Madam Chairman. Mr. Hackbarth, 
thanks for the light reading.
    Mr. HACKBARTH. Yes. You are welcome.
    Mr. HULSHOF. I say this sincerely, because being on the 
Subcommittee and actually visiting with constituents, we were 
home this past week and there are a lot--I do not have the time 
to ask you the questions that have actually been put to me by 
constituents. For instance, I obviously, heard about the flawed 
Sustainable Growth Rate (SGR) formula and reimbursements and 
what is Congress going to do. We have heard about credentialing 
for imaging, which I know you address a bit. Oncologists were 
quick to talk about the average sales price. You do address the 
need for end-stage renal disease annual updates, which is in 
here.
    Let me take just a couple of minutes, though, because it 
something that I have actually had a constituent's visit with 
Chairman Johnson about, and that is a brief discussion about 
post-acute care. You talk about--the way that I understand it, 
and especially Dr. Worsowicz--and for the reporter, I will get 
the spelling of Dr. Worsowicz. He is very passionate about 
this, focusing on what is in the best interests of the patient. 
You know, we had these silos of care, if you will, these silos 
for payment, and we drive care by putting money in these 
particular silos, when, in fact, would it not be--this is 
perhaps a rhetorical question. Would it not be in the best 
interest of that particular patient if you had somewhat of a 
continuum of care? It may be that, you know an Long Term Acute 
Care (LACT) might be the appropriate setting. It could be, in 
fact, I have a personal experience with my mother-in-law, who 
sort of reaches a plateau, but then, you know maybe home health 
works in that particular respect, but then there may be 
somewhat of a relapse and so you have to have more of a skilled 
nursing facility. We focus on four separate ways to deal with 
health, and you address that in some regard because there is 
duplication of services in some regard.
    Let me ask you: since Medicare reimburses are based on the 
setting rather than the needs, do you think that Medicare 
should move or maybe could move toward a site-neutral payment 
system for post-acute care?
    Mr. HACKBARTH. I think that would be a very good goal. 
Having said that, we are quite a ways from it today. Our 
assessment of the situation is very much in line with what you 
describe. We think the fact that we have these four different 
payment systems based on a type of provider as opposed to 
patient need is a real problem in a variety of ways. It creates 
seams in the delivery of care. It creates incentives to try to 
get certain types of patients that are very profitable in 
certain types of settings when, in fact, they might be able to 
have their needs met as well or even better in a lower-cost 
setting. There is a lot that needs to be fixed.
    In addition to that, within the individual payment systems, 
like for skilled nursing facilities or home health agencies, we 
see problems there as well, even if you are not looking across 
the different types. We are worried that, for example, the 
skilled nursing facility system does not properly allocate the 
available dollars across different types of patients. The case 
mix adjustment system, in other words, needs considerable 
refinement.
    There are very big problems, as we see it, in post-acute 
payment policy. Getting to that site-neutral system that you 
describe, however, is not going to be an easy thing. Right now 
it is very difficult for us to even assess and compare across 
settings outcomes and costs. We have tried to do that in some 
particular cases and found it very difficult because the data 
don't support good analysis. We don't even have common 
assessment instruments.
    Mr. HULSHOF. I, obviously, failed to mention the Employee 
Retirement Funds (ERFs) as the other silo of post-acute care. 
This is, in fact, the data collection--if there was a way to 
quantify and use some standard protocols, would this be at 
least, maybe, a baby step forward or a beginning step forward?
    Mr. HACKBARTH. Yes. We have advocated for the development 
of a common assessment instrument, so we can compare outcomes 
and costs better than we do now. We think that an important 
step in getting better information may well be the 
demonstration project mandated by the Deficit Reduction Act of 
2005 (P.L.109-171) of last year, where some head-to-head 
comparisons of these things will be done.
    Mr. HULSHOF. The Chairman has been gracious in actually 
visiting with my constituent, Dr. Worsowicz, about perhaps, 
qualifying what we would need to do. I would like to continue 
this discussion further with you. My time has expired, but 
thank you very much.
    Mr. HACKBARTH. Thank you.
    Chairman JOHNSON OF CONNECTICUT. Thank you, Mr. Hulshof.
    Mr. Thompson.
    Mr. THOMPSON. Thank you, Madam Chairman. Thank you, Mr. 
Chairman, for being here. I would like to talk about the 
government Practice Cost Index (GPCI) issue and payment 
localities. I represent a number of counties, but one of which, 
Sonoma County, is in a geographic locality that does not 
provide for the appropriate reimbursement to doctors. As a 
result, Sonoma County docs get about 8.2 percent less than what 
has been termed ``optimal,'' and those are your numbers or 
Centers for Medicare and Medicaid Services (CMS) numbers, not 
mine. How long has it been since we have reconfigured the 
boundaries or we have updated the payment allocations.
    Mr. HACKBARTH. It has been quite a while, something like 10 
years.
    Mr. THOMPSON. Ten years?
    Mr. HACKBARTH. Yes.
    Mr. THOMPSON. It is my understanding that California, 
although we have a couple of very egregious examples, isn't the 
only State where this is happening. I understand that you have 
got Maryland, Virginia, Georgia, Texas, some of them up to 13 
percent. Is that fairly----
    Mr. HACKBARTH. Yes, this is certainly not limited to 
California at all, but we are well aware of the issues that do 
exist in California. We think that the proper way to approach 
this problem is not to try to fix it just in California or 
Maryland, but the overall system needs to be reviewed, 
revamped, updated. In fact, that is a very important item on 
MedPAC's agenda for the relatively near future.
    Mr. THOMPSON. What can I expect the relatively near future 
to be?
    Mr. HACKBARTH. March or June report of next year is what we 
are looking at for an----
    Mr. THOMPSON. For a fix?
    Mr. HACKBARTH. For a national type look at this problem and 
what appropriate fixes might be.
    Mr. THOMPSON. This has been going on in my situation for a 
number of years, and I guess, most recently, this last March, 
you stated that it would be fixed in the future. You were very 
specific. You said it was time to revisit the boundaries of 
payment localities; localities likely do not correspond to 
market boundaries; and Medicare is probably underpaying in some 
geographic areas because of this. We have heard a lot about it. 
As a matter of fact, Mr. Scully, when he was with CMS, was even 
out in my district and met with the docs. I have met with the 
Administration on this a number of times. Everybody admits 
there is a problem, but there has been a reluctance to move 
forward on it. Is it fair to--are you saying that the data that 
you are working on will be completed in March?
    Mr. HACKBARTH. Well, our goal would be to have 
recommendations on how to revamp this system.
    Mr. THOMPSON. In March?
    Mr. HACKBARTH. March or June of next year.
    Mr. THOMPSON. Next year.
    Mr. HACKBARTH. Yes, this is our March report of 2007 that 
we are talking about.
    I know this is an important issue, and I understand it has 
been going on a long time, and so I----
    Mr. THOMPSON. Well, it is really impacting health care.
    Mr. HACKBARTH. Yes, it is.
    Mr. THOMPSON. It is something that everyone has--it has not 
just been going on a long time, but everyone has admitted there 
is a problem and there has been some very valiant attempts to 
fix it. We haven't had a lot of help from you guys.
    Mr. HACKBARTH. Well, in the first instance, CMS, they are 
the people who make the decisions. We simply make 
recommendations, principally to you for legislation, although 
often, to CMS for things that they can do.
    Mr. THOMPSON. Mr. Chairman, can you release the numbers 
before you release the recommendations?
    Mr. HACKBARTH. Which numbers, sir?
    Mr. THOMPSON. The data runs that you are supposedly working 
on to quantify----
    Mr. HACKBARTH. Yes, well, as a matter--of course, we are 
happy to work with your staff, Committee staff, and give them 
updates on the work that we are doing, analysis as it is 
developed. We would be happy to keep you well informed about 
that.
    Mr. THOMPSON. I would appreciate that.
    Madam Chair, could I ask you to commit to me to work 
together on this? This has been going on for way too long.
    Chairman JOHNSON OF CONNECTICUT. Yes, my understanding is 
that also we will be working on the hospital wage areas this 
year.
    Mr. HACKBARTH. Yes.
    Chairman JOHNSON OF CONNECTICUT. What we learn from that--
and you might want to be involved in that because these are 
similar problems. I don't know whether there is any way of 
merging the considerations. We can do a seminar and begin to 
buildup the Committee's history and understanding of this. It 
is a very important problem. I am well aware of the situation 
in California and the fact that you are really losing 
physicians from some areas because of this specific weakness in 
the law. I will be happy to work with you and see if we can 
find a temporary fix before we go on.
    Mr. THOMPSON. Thank you.
    Mr. HACKBARTH. Mr. Thompson, I also mentioned that, unlike 
CMS, for example, all of our work is done in public, or the 
vast majority of it, so we have public meetings where there 
will be presentations on our work in progress, where data will 
be shared, and those materials are available to the public as 
well, and your staff is welcome to track that very closely.
    Chairman JOHNSON OF CONNECTICUT. Will you be starting that 
work this year, I mean before, say, summer?
    Mr. HACKBARTH. It probably will not happen until the fall. 
The staff will start doing the background work in the summer. 
It will first appear in our public meetings in the fall, 
September, October, thereabouts.
    Chairman JOHNSON OF CONNECTICUT. Thank you.
    Mr. McCrery.
    Mr. MCCRERY. Thank you. Mr. Hackbarth, on the question of 
dialysis services, you have recommended or MedPAC has 
recommended that those services receive an update in the 
reimbursement for 2007, and it seems like every year we face 
this question and we conclude that, yes, an update is needed 
sometimes--and sometimes we do and sometimes we don't. As a 
consequence, there is a lot of uncertainty from year to year as 
to what can be expected for reimbursement. Did you in your 
report talk about the question of having an automatic update as 
other sectors do? If so, what were your findings?
    Mr. HACKBARTH. As you know, Mr. McCrery, we have 
recommended updates for dialysis facilities, certainly every 
year that I have been on the Commission, the last 6 years. We 
think it is important for dialysis facilities, as for other 
providers, to have an annual review of their rates and a 
recommendation for an appropriate update, taking into account 
all of the factors that Chairman Johnson mentioned at the 
outset.
    As I said in my response to Mr. Stark, though, in general, 
we like to look a year ahead as opposed to multiple years ahead 
and say here is the right rate for some point way out into the 
future. We can understand why Congress has sometimes elected to 
do that legislatively and have updates for, a 2- or 3- or 4-
year period into the future. For our sort of analytically 
driven work, we think the most consistent thing to do is look 
year by year, not just for dialysis but for hospitals, for 
physicians, for home health agencies, for all types of 
providers.
    Given that, we have not taken a stance in favor of a 
formulaic update for dialysis or for any other provider. We 
have not advocated that. We are ``step by step, year by year, 
let's crunch the numbers and make a recommendation'' sort of 
group. Mr. MCCRERY. I understand that, and I have some sympathy 
for you in that regard. We have to work within our budget rules 
here in the Congress, and if there is not an automatic update 
in the baseline, then anything we add on; it costs us.
    Mr. HACKBARTH. Right.
    Mr. MCCRERY. It is harder in that sense to continually add 
an update that is not accounted for in the baseline than it is 
for us to take back an update that is in a baseline that we get 
credit for.
    Mr. HACKBARTH. Yes.
    Mr. MCCRERY. It might be helpful if you would ask your 
panel of experts to consider this question in that context: 
Should we put all providers or all sectors of the health care 
community on the same basis? Should they all have updates, or 
should they all not have updates and be subject to an annual 
re-examination?
    Mr. HACKBARTH. Yes.
    Mr. MCCRERY. Maybe there should be a change in the budget 
rules to allow us more flexibility to address this on an annual 
basis.You see my point that when one sector does not have an 
automatic update; I think they are disadvantaged in the context 
of our budget rules here in the Congress.
    Another area that we are now treating on a year-to-year 
basis is the rural add-on for home health services. Did you all 
look at that in this report and make any recommendation--going 
forward on the 5-percent add-on?
    Mr. HACKBARTH. Well, in years past, we have looked at that, 
and I can recall at least 1 year--I think maybe 2 years ago 
now--where we did recommend an extension of the add-on. 
However, as we look at the data now, we see that rural home 
health agencies as well as urban home health agencies are 
faring quite well under the Medicare Program and have quite 
healthy margins on average, especially compared to hospitals 
and dialysis facilities. So we didn't think that recommending a 
continued add-on was appropriate or necessary to assure access 
to quality care for rural beneficiaries.
    Mr. MCCRERY. Did you make a statement on that in your 
report, that you do not recommend that it be continued, or did 
you just----
    Mr. HACKBARTH. No----
    Mr. MCCRERY. Were you just silent on it?
    Mr. HACKBARTH. Yes, we were silent on the issue in this 
report. When we have advocated in the past, we have added 
specific language saying we think that is appropriate to extend 
This year, under these circumstances, we did not say that.
    Mr. MCCRERY. Okay. Thank you very much.
    Chairman JOHNSON OF CONNECTICUT. Mr. Doggett?
    Mr. DOGGETT. Thank you, and thank you so much for your work 
in leading this important effort. I am impressed, though I 
might not agree with every recommendation, with the fact that 
you do attempt to pursue this on a non-ideological basis, and 
also just from looking at the votes on these various 
recommendations, that you take a very broad-based, diverse 
group, and you get near unanimity. One of the areas that I 
would like to focus attention on that you have had near 
consistent unanimity on, I believe going back all the way to 
2001, is this whole issue about whether or not we ought to have 
a slush fund to pay a lot more to the Medicare Advantage plans 
than to traditional Medicare.
    If you look at that issue, is the effect of paying much 
more for traditional--for the Medicare Advantage plans than 
traditional Medicare, is one of the effects that it reduces the 
solvency of the Medicare trust fund?
    Chairman JOHNSON OF CONNECTICUT. Mr. Doggett, if you would 
yield just a minute?
    Mr. DOGGETT. Sure.
    Chairman JOHNSON OF CONNECTICUT. We did point out before 
you came in that the hearing is focused on the current report--
--
    Mr. DOGGETT. Sure, but this is intricately involved--I did 
hear your comment. I was here when you made that comment.
    Chairman JOHNSON OF CONNECTICUT. Okay, and that was an 
earlier report. If you will recall, part of all that is they 
raised the rural floor, which the Congress adopted. This issue 
of whether there are overpayments is a complicated one and 
deserves a lot of attention on its own----
    Mr. DOGGETT. When is that hearing set?
    Chairman JOHNSON OF CONNECTICUT. Well, we have been talking 
about this series of hearings we are going to try to have this 
year.
    Mr. DOGGETT. Well, I think this is so important that while 
he was here----
    Chairman JOHNSON OF CONNECTICUT. There was an enormous of 
misinformation about it in the last public discussion of this 
matter, so I think it is important to straighten out.
    Mr. DOGGETT. Right, and you got right to the heart of the 
misinformation in your earlier report where you had near 
unanimous agreement to the comment that for Congress to 
continue to pay higher rates for Medicare Advantage than 
traditional Medicare--and I quote your report--``would be a 
disservice both to Medicare beneficiaries and, in these times 
of increasing budget deficits, the taxpayer.'' It affects not 
only seniors having to pay higher premiums when Congress 
insists on advantaging Medicare Advantage, but it also has a 
big effect on the taxpayer, does it not?
    Mr. HACKBARTH. It does, yes.
    Mr. DOGGETT. I believe Mr. Stark asked you about this, but 
it was not just anyone talking about this, but the 
Congressional Budget Office that said if we adopted all of your 
recommendations that you had near unanimous agreement on 
concerning Medicare Advantage, we would save $50 billion over 
10 years.
    Mr. HACKBARTH. Yes.
    Mr. DOGGETT. Compared to some of the savings that you 
achieve in your recommendations, that is one of the biggest 
areas to make savings, isn't it?
    Mr. HACKBARTH. Yes. We have been consistent, as you point 
out, over a period of years in advocating that there be a 
neutral choice between traditional fee-for-service and private 
plans. We have also been unanimous in believing that it is very 
important to the Medicare Program to have private plans 
offered. In fact, in my previous life, I came from that world--
--
    Mr. DOGGETT. I am aware of that.
    Mr. HACKBARTH. --and I think that private plans can often--
not always, but often--offer things to Medicare beneficiaries 
that the traditional program cannot. we are trying to strike a 
balance.
    Mr. DOGGETT. As you strike a balance, you are aware of the 
comments of the Actuary that the Medicare Advantage as 
currently modeled will not save money this year or next year or 
even over the 5, 10, or longer period of time. It costs the 
taxpayer money and it costs the Medicare--it costs the senior 
additional premiums.
    Mr. HACKBARTH. Yes, although, as a result of MMA, there is 
a new dynamic that exists in the program where there is a 
competitive bidding process for the Medicare Advantage plans. I 
think at this point nobody knows precisely how that will play 
out and in turn, affect Medicare expenditures into the future.
    Mr. DOGGETT. Thank you very much. Thank you, Madam 
Chairman.
    Chairman JOHNSON OF CONNECTICUT. Thank you. I think it is 
important that the record note that it was the bipartisan Rural 
Caucus that fought hard over a long period of time to 
artificially inflate the rural floor, which has a lot to do 
with the subject that we were just talking about.
    Mr. Camp.
    Mr. CAMP. Well, thank you, Madam Chairman. I am a member of 
the Rural Caucus, but we won't go there. Really, I want to 
follow up on things Mr. McCrery said. You know, over the past 
several years, MedPAC has consistently called for an update for 
dialysis facilities, and I was glad to see that the Deficit 
Reduction Act (P.L. 109-171) did have the 1-year update, and I 
think it is important that in the context of legislating, it is 
a very heavy lift to each year try to address this issue from 
the context of our budget rules. I think he made a very 
important point. I just want to second that and associate 
myself with those remarks.
    I would also like to discuss how MedPAC developed its data 
on home health agencies. I know that the information indicates 
that their profit margins are about 14.7 percent. I have to 
tell you, that is not the experience in my district because 
largely many of the home health agencies are hospital-based. I 
would tell you, 45 percent of the agencies in my district have 
a margin at or below zero, so it is almost half. I think what 
happens is those hospital-based agencies are included in the 
hospital-based rate, and so, therefore, this 14.7 percent 
number ignores about 30 percent of the agencies nationwide 
because they are put in another category, leaving the most 
profitable ones in the other basket, and so you can correctly 
point and say, gee, they are making such a high rate of return.
    I just have to tell you, that is not the experience in 
large rural districts, as I have, particularly hospital-based 
home health agencies, because their rates are not as high. I 
just wanted to get your comment on that and how you think we 
might be able to address that inequity.
    Mr. HACKBARTH. You are correct, Mr. Camp, that the analysis 
that we provide here in our report is based on the free-
standing home health agencies and does not include the 
hospital-based agencies. The reason for that is that there are 
very important accounting issues, how costs are allocated when 
you have a home health agency being part of a larger enterprise 
like a hospital. In those accounting issues, how overhead is 
allocated can have a very large effect on the reported bottom 
line.
    When we look at that line of business within a hospital or 
any other line of business within a hospital, like a hospital-
based Skilled Nursing Facility (SNF), we are quite skeptical 
about the reported profitability because of the uncertainty 
about how overhead is allocated.
    Second, as I said at the outset, what we are looking for is 
to pay at the level of efficient providers. If, in fact, a 
hospital is incurring higher costs in running its home health 
business than a free-standing competitor in the same market, we 
would not want to pay high enough to cover the costs of a less 
efficient provider. We would want to be paying at the lower 
cost in the interest of the Medicare Program and the taxpayers 
that fund it. Yes, the analysis doesn't include hospital-based, 
but we think there are sound reasons for the approach that we 
take.
    Mr. CAMP. Well, you should know that in rural areas, in 
hospital-based home health agencies, there is not another 
alternative. If they exit the market, there will not be anyone 
delivering that service, unlike maybe a suburban or urban area, 
where there is a lot of competition and a lot of health care 
providers. I mean, just access is an issue.
    Mr. HACKBARTH. Yes. Sometimes that is the case, although 
one of the unique characteristics of the home health business 
is that entry is exceedingly easy, doesn't require a lot of 
capital, and so it is relatively easy to start a home health 
agency. In fact, we have seen rapid growth in the number of 
home health agencies, we think in part because it is a very 
profitable business under Medicare.
    Mr. CAMP. Thank you. Thank you, Madam Chairman.
    Chairman JOHNSON OF CONNECTICUT. Mr. Emanuel?
    Mr. EMANUEL. Thank you. Thank you, Mr. Hackbarth, for being 
here. Not in this hearing, but in another hearing, when the 
head of the Office of Management and Budget (OMB) was here, we 
talked about some of the recommendations from MedPAC. Now, this 
was from your other report; I know not today's report, but you 
had----
    Chairman JOHNSON OF CONNECTICUT. Mr. Emanuel, if I may just 
intervene for a moment, we have talked about this twice during 
this hearing, that the hearing is focused on this report, and 
it covers every single sector of Medicare. If you could focus 
your questions on the significant issues this report raises, it 
would be very helpful. If you want to go back to another 
report, it is not germane to this hearing. Your colleagues have 
used their time that way. It is really unfortunate when there 
are so many reimbursement issues before us that you have so 
little----
    Mr. EMANUEL. Is this coming out of my 5 minutes?
    Chairman JOHNSON OF CONNECTICUT. No.
    Mr. EMANUEL. Okay.
    Chairman JOHNSON OF CONNECTICUT. That you have so little 
concern--didn't you notice that--I am the only one that has a 
clock, but you have so little concern about the seriousness of 
the issues raised by this report. I understand the politics of 
what you are talking about, but there is a lot of 
misrepresentation of information in the course of these 
discussions, and before the Subcommittee, I do not consider 
that valuable. You may proceed.
    Mr. EMANUEL. I hope this had nothing to do with the way I 
spent my recess time. I do appreciate the guidance and counsel 
of your comments, and I was going to get to this report, Madam 
Chair. Obviously, look, if you wanted to say that--and I will 
just--and if you wanted to do that----
    Chairman JOHNSON OF CONNECTICUT. That is fine if you want 
to proceed.
    Mr. EMANUEL. I appreciate that.
    Chairman JOHNSON OF CONNECTICUT. You have the right to 
proceed either way, but I am disappointed that some of your 
colleagues have used the time primarily to talk about something 
that is not in this report when, frankly, the issues raised in 
this report----
    Mr. EMANUEL. Well, look, Madam Chair, you know what? I 
wasn't going to go there, but, if you want to do that, then I 
will say this: I am thoroughly disappointed you took a pass on 
$60 billion in savings. If you don't like it, I will take my 5 
minutes, if that is okay with you.
    Now, I was not going to do this. We have got a roomful of 
people. I had no interest in doing that, but I--and I have a 
lot of respect for you. If that is what you would like to do, I 
am sorry that you took literally the powder on $60 billion. You 
could have done something about it, and the MedPAC had 
recommendations for a PPO slush fund for $9 billion, 
eliminating double payments of $5.5 billion, equalizing 
payments for $30 billion----
    Chairman JOHNSON OF CONNECTICUT. Mr. Ram, you----
    Mr. EMANUEL. It is Mr. Emanuel and----
    Chairman JOHNSON OF CONNECTICUT. Mr. Emanuel, sorry, Mr. 
Emanuel----
    Mr. EMANUEL. It ain't ``Ram,'' it is ``Rahm.''
    Chairman JOHNSON OF CONNECTICUT. I am sorry. You----
    Mr. EMANUEL. You know what? You--Madam Chair?
    Chairman JOHNSON OF CONNECTICUT. There is so much to talk 
about----
    Mr. EMANUEL. Madam Chair----
    Chairman JOHNSON OF CONNECTICUT. In this report, I would 
like to urge you to focus your questions on the report, and the 
time is now yours and the clock is running.
    Mr. EMANUEL. I know you meant no disrespect for Mr. ``Ram'' 
but he is not here. Mr. Emanuel is here, and it is ``Rahm,'' 
for the record. I take a great deal of umbrage in the fact that 
you have no idea what my name is, having served here now 3 
years with you. Now, may I reclaim my time?
    Chairman JOHNSON OF CONNECTICUT. As I mentioned, the clock 
is running. It is your time.
    Mr. EMANUEL. All right. Well, maybe at some point we will 
learn why $60 billion was passed on by this Congress, and you 
can maybe give some of us who are interested why you thought 
that happened and ways that we can deal with that $60 billion. 
Since $60 billion to some Members on this panel is nothing but 
a rounding error, I will now move on to the fact currently 
Medicare pays certain plans 115 percent over what traditional 
Medicare charges. What happens to the trust fund, part B 
premiums and general spending? Is that good enough, Madam 
Chair?
    Mr. HACKBARTH. Well, in our world, we do not try to parcel 
out, Mr. Emanuel, what the effect is on the Part----
    Mr. EMANUEL. It is ``Rahm'' for you. For others it is 
``Ram.'' Go ahead.
    Mr. HACKBARTH. We do not try to parcel it out into the part 
A trust fund versus part B and so on. We just look at the 
aggregate expenditures, and you have seen from the report what 
we think the budget implications of our proposals would be.
    Mr. EMANUEL. Your recommendations specifically, what would 
be the total loss in revenue? Obviously, this is a guess, so it 
is both high and low.
    Mr. HACKBARTH. Yes. Well----
    Mr. EMANUEL. A guess being not just a guess, but taking 
ranges.
    Mr. HACKBARTH. The Congressional Budget Office (CBO) does 
the official projections, as you well know, for Congress, and 
what we publish in our reports are broad ranges of the 
potential savings from individual recommendations. We do that 
so that the Commissioners are aware of the budget implications 
of the recommendations we make, but we really try to avoid 
making very specific estimates because we do not have the 
expertise or the resources to do that. CBO does. For each of 
our recommendations on Medicare Advantage in the June 2005 
report, you will see a range. I caution you against adding 
those numbers because there are interactions among the 
proposals, and so you cannot----
    Mr. EMANUEL. You do not mind if we add them to the original 
$60 billion from the first report, do you?
    Mr. HACKBARTH. Well, I think the $60 billion figure you are 
referring to may be a CBO estimate of our proposals. That, 
again, is not our number. That is somebody else's number.
    Mr. EMANUEL. To some of us, $60 billion is real money. When 
you are looking for savings across the board, it is worth 
spending the time, whether that upsets people or not. I 
appreciate the time, Madam Chair.
    Chairman JOHNSON OF CONNECTICUT. Thank you, Mr. Hackbarth. 
Your report is very provocative. There are a number of things 
that we did not get a chance to go into. I do want to call your 
attention to--I know that you are to advise on Medicare, but I 
do not see how we can continue without learning, thinking more 
about Medicaid, because so many of our reimbursement policies 
will not work when Medicaid is such a poor payer, and I think 
that is affecting us all across the country. we were not able 
to get into that. Would you comment on that? Members are 
interested.
    Mr. HACKBARTH. On Medicaid?
    Chairman JOHNSON OF CONNECTICUT. Well, this terrible 
situation----
    Mr. MCCRERY. Well, on the question of not considering 
Medicaid--when you are looking at the appropriate level of 
reimbursement under Medicare, you do not take into 
consideration the sometimes low reimbursement rates of 
Medicaid. I think the Chairwoman is appropriately suggesting 
that maybe you ought to comment on that.
    Mr. HACKBARTH. Yes, I would be----
    Chairman JOHNSON OF CONNECTICUT. For example, in the area 
of SNF reimbursements, the crisis there is very real, caused by 
Medicaid. We no longer have a policy in that regard. This 
Committee does not have jurisdiction; you do not have scope; 
but, on the other hand, how can you continue to make 
recommendations even for hospital payments, the negative 
margins and what is the relationship between them and falling 
Medicaid reimbursements--that is certainly one thing we did not 
get to, and if Mr. McCrery would like to hear you comment, we 
would be happy to hear that.
    Mr. HACKBARTH. I would be happy to. Of our statutory 
responsibility, you are correct, we do not look at Medicaid 
rates for SNFs. We have no official opinion about whether 
States are paying too high or too low. Of course, we often hear 
from people in the industry that they feel that the Medicaid 
rates are much too low, and that is an important financial 
burden. Let's stipulate that just for the sake of argument.
    We think that increasing Medicare rates to offset any 
Medicaid shortfall would be a mistake for a couple reasons. 
First of all, if you increase the Medicare rates, what you are 
doing is making the Medicare patients even more attractive, 
relatively speaking, than the Medicaid, and so people would 
want to focus even more on Medicare and less on Medicaid.
    Second, if you increase the Medicare rates, the SNFs that 
get the most out of that increase will be the ones that have 
the highest proportion of Medicare patients and the lowest 
proportion of Medicaid. The assistance will not go to the 
skilled nursing facilities with the highest Medicaid burdens 
and, therefore, the worst financial problems.
    Third, we fear that if Medicare makes it known that it is 
our policy to offset Medicaid shortfalls--that is an invitation 
to State legislatures and Governors to cut their rates still 
further: Oh, Medicare will make up the difference, and we will 
do it out of the trust fund. For all three of those reasons, 
even if we assume as a given that Medicare rates are too low, 
we do not think increasing Medicare is the proper effective 
fix.
    Chairman JOHNSON OF CONNECTICUT. I appreciate that, and I 
appreciate that answer. I think your comments in your report 
are weak by not having that rationale in there, not at least 
noticing the seriousness of the problem and the fact that 
adjusting Medicare rates or overpaying in Medicare does not 
solve the problem, but it is like the elephant in the room. In 
many sections of payments it is an elephant in the room.
    The other thing, I just want to conclude with your 
recommendation for a standing panel, and I think that is a very 
good idea, to begin to better evaluate physician payments. I 
think we need to look at not just overvalued but undervalued, 
because earlier in your testimony you do recognize the problem 
of primary care, and we are going to have very good testimony 
on that, and I hope you will look at the testimony on the 
advanced medical home model.
    Mr. HACKBARTH. Yes.
    Chairman JOHNSON OF CONNECTICUT. Thank you for being with 
us.
    Mr. HACKBARTH. Thank you.
    Chairman JOHNSON OF CONNECTICUT. We will call the next 
panel now, please.
    Welcome, and we will start with Mr. Evans, the President 
and chief executive officer of Clarian Health Partners of 
Indianapolis, Indiana.

    STATEMENT OF DANIEL F. EVANS, JR., PRESIDENT AND CHIEF 
   EXECUTIVE OFFICER, CLARIAN HEALTH PARTNERS, INDIANAPOLIS, 
                            INDIANA

    Mr. EVANS. Thank you, Madam Chairman. I appreciate your 
personal invitation to me to be here, and I appreciated your 
presence the other day in the President's conference at HHS. I 
am flattered to be invited.
    Chairman JOHNSON OF CONNECTICUT. Now, the rules are, of 
course, that you have 5 minutes.
    Mr. EVANS. Yes, ma'am.
    Chairman JOHNSON OF CONNECTICUT. All of your testimony will 
be included in the record, but the floor is now yours.
    Mr. EVANS. Thank you. I sit every day at the vortex of what 
has been discussed today, as some of my co-panelists do. I 
started today like I do many days. I talked to the director of 
our Emergency. Yesterday we had 400 patients in the Emergency 
Department. The average daily census in our Emergency 
Department is 250. I know what happens in our community when 
access to health care is limited elsewhere in the community.
    Madam Chairwoman, you referred to certain measures that 
have not been taken into consideration adequately in 
determining the costs. Rather than refer to my written 
comments, I would like to respond to those, if you do not mind. 
Last week, the signing bonuses for nurses in Indianapolis, 
Indiana, increased 50 percent, from $5,000 to $7,500, after 
taxes. Our costs by virtue of that will go up $20 million in 
one fell swoop, just like that. Unless and until Congress and 
State policymakers deal with the workforce shortage in health 
care, our workforce issues will continue to eat up any 
efficiencies we are able to create elsewhere.
    Secondly, despite the conclusions by MedPAC about 
productivity and profitability of hospitals that have a high 
loss in Medicare reimbursement--ours is 7 percent, by the way, 
so it vastly exceeds the national average; we are full 
virtually all the time. We are not a hospital that is half-
empty, so we look for everything we can to be productive. We 
look for technology, clinical information, messaging, 
electronic intensive care, evidence-based medicine, positive 
patient ID, everything we can think of to improve productivity.
    We just opened a new hospital on the north side of 
Indianapolis. The hallmark of that hospital is to be the 
highest tech that we can be. We have there positive patient ID, 
which is simply a bar code on the wrist of the patient, a bar 
code on the nurse, and a bar code on the drug. Interestingly, 
patients get that right away when they walk in because they are 
familiar with it.
    Thirdly, we promote value, that is, transparency in cost 
and quality. We do that through technology, and last week, we 
actually published for the first time our own quality data on a 
website that the world can access. I asked before I came here 
today how many hits we got the first day, and it was 3,200. 
Most were in our community. The average person, believe it or 
not, spent 21 minutes on our website. It was clear, like most 
medical websites, they were looking for something important to 
them. They were looking pretty hard for it. Those individuals 
deserve the kind of transparency on cost and quality that 
heretofore has not been extant within the system.
    Lastly, what we say to our people, no matter what they do, 
wherever they do it, at the end of the day it is about quality 
and the patient. That is what it is about. the testimony today 
about the very silos that patients have to go through to 
achieve care seems to me to beg the question of what the 
reimbursement system should be for those very same patients. 
This room is full of people my age who have octogenarian 
parents, who deal with the presence of silos every single day, 
and the absence of clinical messaging, the absence of 
communication between critical care hospitals.
    Lastly, we are 31 percent Medicare and 20 percent Medicaid. 
We have a large children's hospital. The reason for our high 
percentage is acuity is going up. length of stay has actually 
bottomed out. The length of stay is not going down anymore. How 
we are trying to deal with the increase in acuity is acuity-
based nursing and more skilled management of our Intensive Care 
Units (ICUs) so we can put people through the hospital and into 
rehab and long-term acute care facilities, skilled nursing 
facilities, so forth and so on. Those are my responses, Madam 
Chairwoman, to your specific comments earlier on rather than 
simply my testimony, which I have submitted in writing.
    [The prepared statement of Mr. Evans follows:]

 Statement of Daniel F. Evans, President and Chief Executive Officer, 
               Clarian Health Partners, Indianapolis, IN

    Madam Chairman and distinguished members of the Committee, good 
afternoon, and thank you for the opportunity to comment on MedPAC's 
proposed Medicare payment update formula. I am Dan Evans, CEO of 
Indianapolis-based Clarian Health Partners, a private, non-profit 
health center serving patients from across the state of Indiana through 
more than 73,000 annual admissions and over 1.3 million outpatient 
visits. Clarian is the state's only academic medical center, and is 
currently conducting 4,000 peer-reviewed research projects.
    Clarian is Indiana's largest and most comprehensive health center 
and is one of the busiest hospital systems in the nation. Clarian 
employs nearly 13,000 people, and owns or is affiliated with 15 
hospitals and health centers throughout Indiana. The Clarian-affiliated 
Indiana University School of Medicine educates the second largest 
medical student body in the United States. We have been ranked as one 
of the top American hospitals by U.S. News & World Report for the past 
eight years, and last year led the nation in solid organ transplant 
volume. Additionally, we operate one of the nation's top children's 
hospitals, and are one of only nine hospital systems nationwide to 
receive the coveted Magnet designation.
    I'd like to begin by acknowledging the difficulties faced by 
federal legislators tasked with meeting the budget reform mandate, the 
challenges faced by MedPAC, and the balancing of multiple and sometimes 
competing interests on an annual basis. But I am here today to address 
the issue of Medicare payment updates from a provider perspective. Like 
many providers, Clarian receives a large amount of its funding--roughly 
one-third--from Medicare reimbursements via its almost 200,000 Medicare 
patients. The demand for Medicare-reimbursed services continues to rise 
annually, and as the members of this committee may know, almost 70 
percent of all hospitals--including Clarian--lose money when treating 
Medicare patients. We therefore have a vested interest in the proposed 
payment reductions for FY07.
    If approved, the proposed FY07 rate reductions will impact Clarian 
in real dollars. From 2007 to 2009, we project that the reductions 
would cumulatively amount to $8.3 million in lost inpatient revenue and 
$1.1 million in lost outpatient revenue. In addition, revenue will be 
lost to our home health providers in the amount of $400,000 and our 
hospice providers in the amount of $100,000. This, coupled with other 
changes to the Medicare system as proposed in the budget, will also 
cause us to forfeit an estimated $7.5 million in lost revenue from 
reduced transplant cost reimbursements, $7.1 million in lost revenue 
from reduced DRG payments, $7.1 million in lost revenue from phased-out 
bad debt payments, and $100,000 in lost revenue from reduced ambulance 
fees. These are significant losses to a system that, like others across 
the country, continues to face annual decreases in all forms of 
reimbursement and that struggles to continue serving as a safety net 
for the growing numbers of underinsured and uninsured.
    I will not underemphasize the impact of these proposed reductions, 
and at least initially, they will constrain our current system of care 
delivery. But while these reductions will no doubt cause some growing 
pains, they will not impede Clarian's stated mission of providing high-
quality services, excellence in research and education, and holding 
true to our values of providing charity, equality, and justice in 
health care. Clarian can, should, and will respond to any payment 
reductions by striving to offer our services in a more efficient 
manner, but not by compromising quality or service.
    The difficulties facing academic, full-service medical centers like 
Clarian extend beyond the issue of Medicare reimbursement. They 
encompass the rising costs associated with pharmaceuticals, hospital 
supplies, nursing care, uncompensated care, and the national shortage 
of trained health professionals. The shortages also include the 
increasing number of employers that are dropping worker and retiree 
health coverage, our country's rapidly aging population, and the fact 
that our national health spending now exceeds $1.9 trillion annually. 
The challenge to control costs while continuing to provide quality care 
is upon us, and we must take immediate steps in order to stem the tide.
    We must specifically begin to address the shortage of physicians 
that we are already experiencing nationally in more than 13 
specialties, as well as the projected shortage forecasted by numerous 
studies of severe physician shortages by 2020 in nearly all 
specialties. It has been requested that Clarian and the Indiana 
University School of Medicine increase our education programs by 30 
percent, but in order to do so the government must preserve and 
increase funding for graduate medical education.
    While there is no panacea for this set of challenges, most would 
agree that an increase in the efficiency of the health care delivery 
system would go a long way toward an overall decrease in cost. 
Legislators, insurers, and hospital providers must work together to 
find new and innovative ways to address efficiency and the larger 
health care issues of access and affordability. I support efforts by 
the government to reward providers that are agile and innovative; that 
address accessibility in health care; that empower consumers; that 
stress preventive treatment; that focus their efforts on quality and 
transparency; and that invest in technologies that maximize medical and 
information efficiencies, eliminate redundant processes and procedures, 
and minimize errors in medical diagnostics and information management.
    I believe very strongly that an emphasis on quality, transparency, 
and consumer empowerment in health care can reduce costs, thereby 
aiding the federal government as it struggles to ration scarce dollars 
and remain accountable to taxpayers. Several weeks ago, I had the honor 
of participating in a panel discussion with President Bush and other 
leaders in the health care community regarding these very issues. We 
discussed how traditional health care delivery models obscure cost and 
quality data by limiting access to information that would allow a 
consumer to weigh a treatment's effectiveness. The rising health care 
consumerism movement, however, is leveling this playing field.
    By empowering people to make decisions about their own health care, 
and by creating a transparent delivery system, we provide consumers 
with an incentive to become accountable and responsible health care 
purchasers. Consumers will reduce costs by seeking out and choosing 
qualified doctors and hospitals. Proactive consumers have hastened 
efficiencies and cost reductions in many other industries. For example, 
when I call Domino's to order a pizza, they answer the phone and say--
before I identify myself--``Hello, Mr. Evans. Your medium sausage and 
mushroom pizza will be at your home in twenty minutes.'' This consumer-
oriented company uses existing technologies to identify me, anticipate 
my needs based on past orders, and supply me with service in a timely 
fashion, all of which prompt me to choose this pizzeria instead of 
another.
    Today's customers are driving a new paradigm of consumerism in 
virtually all industries, and informed consumers are increasingly 
basing their decisions--such as which car to buy, which university to 
choose for their children, or where to eat dinner--on quality and cost 
information published by consumer-focused, data-reporting groups like 
JD Power and Associates, the U.S. News & World Report, and Angie's 
List. Yet when we examine the purchase of health-related products and 
services, it is clear that those transactions are centered on the 
information needs of insurers and providers. Shouldn't health care 
customers be demanding the same transparency regarding quality and cost 
that is available to them when they purchase a washing machine or a 
pair of running shoes?
    Consumers should demand and expect the same level of transparency 
and efficiency from the health care market that they receive from other 
private sector businesses, and the market seems to be heading in that 
direction. Step one has been the public's gradual but growing 
acceptance of health savings accounts (HSAs). These accounts pair a 
catastrophic insurance plan with a tax-free savings account, the funds 
from which are used to pay health care expenses. HSAs encourage 
consumers to play a more active role by giving them an incentive to 
closely examine the cost of care.
    The explosion of technology-driven health solutions now being 
adopted by cutting-edge providers and insurers has powered the second 
part of the equation. Electronic medical records (already utilized by 
the U.S. Veterans Administration) allow physicians in separate 
facilities in different states to view a patient's history at the touch 
of a button; handheld PDAs update records in real time, and can be used 
to transmit prescription information directly to pharmacies, thereby 
reducing transcription errors; battlefield medics can scan microchipped 
dog tags, immediately accessing an injured soldier's medical history 
and providing appropriate treatment; and patients can examine online 
databases that list provider quality rankings and advise which 
facilities offer which procedures and at what price points.
    These scenarios are not a projection of the future; the technology 
is available today. At Clarian, we're working to provide cost and 
quality data to all our patients, and we're partnering with insurers 
and other providers to ensure widespread data availability. Almost 
three thousand physicians in the Indianapolis area--more than 90 
percent of the total--use the Indiana Health Information Exchange 
(IHIE), a messaging system that electronically provides physicians with 
clinical patient results via a secure platform; and Indiana's 
Regenstrief Institute is working with the IHIE to produce a model for a 
national health information network. We are on the cusp of a new 
culture of collaboration and information sharing, which is driven by 
one of health care consumerism's central tenets: that a patient's 
medical information belongs to the patient.
    Let's now apply these principles to the issue of Medicare 
reimbursement. Medicare continues to comprise the largest percentage of 
health care costs, and many hospitals--including Clarian--depend on 
Medicare payments to maintain their current levels of service. A 
reduction in Medicare reimbursement rates will not only force Clarian 
to provide its services more efficiently, but should also be 
incorporated into a larger consumerism movement that provides 
incentives for consumers to do their part to rein in soaring health 
care costs by comparison shopping for the best value in health care.
    This movement is gaining strength. Patients are using Internet-
based services to comparison shop for lower-priced drugs, and are 
visiting walk-in clinics instead of emergency rooms for earaches and 
other minor maladies. Hospital systems are adopting payment schemes in 
which doctors are compensated based on the quality of their performance 
and receive bonuses when patients do not experience complications. 
Medical records are being stored and transmitted electronically in a 
secure fashion, allowing patient information to follow the patient and 
reducing the risk of medical error and therefore the risk of lawsuits.
    Madam Chairman, it is true that Clarian and other hospitals will be 
greatly affected by a reduction in Medicare reimbursement rates, but we 
believe that these proposed reductions bring with them a tremendous 
opportunity for change. We ask that Congress join us in our efforts to 
address quality and access issues by focusing additional federal 
resources on investments in technology and consumer-driven care, 
thereby enabling providers such as Clarian to become more transparent, 
to empower their customers, and to work with other willing partners to 
reduce the costs associated with care.
    Thank you very much for your time.

                                 

    Chairman JOHNSON OF CONNECTICUT. Thank you very much. That 
was very provocative and helpful. Mr. Guillard of ManorCare 
from Toledo, Ohio. Nice to have you.

 STATEMENT OF STEPHEN GUILLARD, EXECUTIVE VICE PRESIDENT, HCR/
   MANORCARE, TOLEDO, OHIO, ON BEHALF OF THE SKILLED NURSING 
                      FACILITY PROFESSION

    Mr. GUILLARD. Thank you very much, Madam Chairman.
    Thank you very much for the opportunity to testify today on 
the most recent MedPAC recommendations for post-acute 
providers. As mentioned, I am with ManorCare. We are the 
largest skilled nursing facility provider in the United States, 
with 275 nursing homes in 29 States. ManorCare also offers 
services across the post-acute continuum with services in home 
health and hospice in 24 States, assisted living in 13 States, 
and inpatient and outpatient rehabilitation throughout the 
country. In addition to my position at ManorCare, I am 
representing the Alliance for Quality Nursing Home Care as 
their immediate past Chairman and the American Health Care 
Association. Together, these organizations represent small as 
well as large, multi-State operators, nonprofit as well as for-
profit, and the vast majority of skilled nursing providers 
throughout the country.
    In discussing today's MedPAC recommendations, I would like 
to focus on three key elements: negative effect that 
implementation of MedPAC's recommendations would have on the 
quality of care delivered in America's skilled nursing 
facilities; the flaws that we perceived in MedPAC's analysis of 
SNFs; and the policy changes we support that will help ensure 
that MedPAC's recommendations protect taxpayers as well as the 
quality of patient care.
    First, let me say that if MedPAC's recommendations as they 
affect skilled nursing providers would be implemented, they 
would have a devastating impact on quality of care. It is 
important to note that SNFs have in particular led the health 
care quality movement in this country. We worked with CMS to 
create quality measures and to create systems of public 
disclosure. We launched the first industry-wide voluntary 
health care quality initiative, called Quality First, which 
continues today, and we continue to support linking Medicare 
payments to quality performance. We supported legislation 
introduced in this Congress by Representatives English and 
Tanner last year. As a result of this focus, SNF quality has 
improved dramatically since 1999. The number of severe 
deficiencies in quality has dropped 60 percent since 1999 when 
using inspection data. In that same period, we have seen 
similar improvements in clinical care, one of the most notable 
being the identification and treatment of patients in pain.
    Since 1999, thanks to legislation enacted in 1999 and 2000, 
Medicare payments to SNFs have stabilized. We believe that this 
economic stability has contributed significantly to the quality 
gains we have seen. We believe that implementation of MedPAC's 
recommendations would lead to economic instability in this 
segment of health care, and would undermine our ability to 
sustain and expand on those quality improvements that we have 
demonstrated. Recognize that SNFs today have the lowest 
operating margins of any major provider group, and if MedPAC's 
recommendations of no market basket increase were adopted, our 
pre-tax operating margins as a sector would be a dangerously 
low 1.3 percent, and our post-tax margins would be less than 1 
percent. Given rising costs, rapidly aging physical plants, and 
limited access to capital, any decrease in the current low 
margins that we see today would potentially precipitate another 
financial and operating crisis, as we saw in 1999.
    Overall operating margins this low will make it impossible 
to sustain quality improvements, much less access the capital 
necessary to revitalize the post-acute infrastructure that 
today averages 30 years for every nursing home, with virtually 
no new construction in nursing homes across the country.
    Second, MedPAC's analysis of SNFs is flawed because it 
fails to assess the overall market for nursing facility 
services. By focusing exclusively on Medicare margins, MedPAC 
ignores the reality of the economic model that we currently 
work under. Four out of five patients in nursing facilities are 
paid for by the government. Two of three are paid for by the 
Medicaid program. I thought your comments on Medicaid were very 
appropriate.
    Although Medicare margins are positive, Medicaid margins 
are negative. Our Medicaid margins are at minus 7 percent, even 
when factoring in--not counting the full cost of capital costs 
that we incur. SNFs lose an average of $13 for every patient, 
every Medicaid patient, for every day we provide care. Medicare 
provides important and absolutely necessary support for the 
inadequate Medicaid funding that our sector provides. This 
cross-subsidization helps ensure that quality is provided for 
both Medicare and Medicaid patients.
    I would like to just comment quickly in terms of my 
summary. First and foremost, Congress should reject MedPAC's 
recommendations as they related to 2007 skilled nursing 
facility payment policy, and they should maintain a full market 
basket adjustment in 2007. Congress should direct MedPAC, 
secondly, to consider operating margins from all government 
payers in all segments and sectors of post-acute to assure 
economic stability and thereby, protect quality.
    Thirdly, Congress should direct MedPAC to consider the 
impact of economic stability on sustaining quality improvements 
in the skilled nursing sector. We believe that by requiring 
MedPAC to assess total government margins, Congress will 
receive more realistic and more useful analyses and 
recommendations.
    Thank you very much for the opportunity to appear here 
today, and I am happy to answer any questions you may have.
    [The prepared statement of Mr. Guillard follows:]

    Statement of Stephen L. Guillard, Executive Vice President, HCR-
                         ManorCare, Toledo, OH

    Good afternoon Chairman Johnson, Ranking Member Stark and members 
of this subcommittee. Thank you for the opportunity to comment on the 
most recent Medicare Payment Advisory Commission (MedPAC) report on 
Medicare payment policies, as they pertain to long term care in general 
and skilled nursing facilities in particular.
    As you know, my name is Stephen Guillard and I serve as Executive 
Vice President for ManorCare, which is based in Toledo, Ohio. ManorCare 
is the largest nursing home provider in America, with 275 nursing 
centers in 29 states. We also own and operate 65 assisted living 
residences in 13 states and offer home health care and hospice services 
in 24 states. In addition, we are one of the largest providers of 
rehabilitation services in both outpatient and inpatient settings. I am 
testifying on behalf of the Alliance for Quality Nursing Home Care, of 
which I am immediate Past Chairman, and the American Health Care 
Association.
    We are grateful that you and your colleagues appreciate the unique 
characteristics of the long term care sector. While much of today's 
discussion will focus on financial and statistical analyses, ultimately 
we are concerned with the quality of care and services for some of our 
society's most vulnerable citizens.
    The quality of care our beneficiaries receive today--and the 
quality of care many of us will require in the decades ahead--relates 
directly to the federal government's payment policies. We are deeply 
concerned that, all too frequently, the federal government's approach 
to funding for Medicare and Medicaid conflicts directly with its goals 
of sustaining and improving the quality of patient. When Medicare 
funding for skilled nursing services is stable, quality of care and 
services improves. When Medicare funding is inconsistent and unstable, 
our nation's long term care infrastructure deteriorates, to the 
detriment of every senior today and every retiree tomorrow.
    At a time when Congress and the Administration are increasingly 
looking at the post-acute sector as a continuum of care, we remain 
concerned that the MedPAC commissioners' restrictive view of long term 
care effects not only skilled nursing facilities, but also to such 
post-acute segments as home health care and hospice care.
    Chairman Johnson, we appreciate your previously comments that it is 
short-sighted to consider Medicare and Medicaid funding policies in 
isolation. From that standpoint, we believe the recommendations made by 
MedPAC are ill-advised, fail to accurately evaluate long term care 
funding necessities, and will contribute to the deterioration of our 
nation's long term care system at a time when every stakeholder can 
least afford it.
    The President's proposed budget incorporates MedPAC's most recent 
recommendations regarding the market basket adjustments for skilled 
nursing facilities. As a result, the proposed budget would cut Medicare 
funding for skilled nursing care by $810 million in 2007. $660 million 
of this amount is due to MedPAC's recommended freeze in the market 
basket increase. Over five years, the budget proposal slashes $8.5 
billion in Medicare funding for nursing home care, $5.1 billion of 
which is caused by market basket cuts. Cutbacks of this magnitude will 
threaten the progress we have achieved working with the federal 
government to improve care quality.
Nursing Home Quality Has Improved Significantly
    It is noteworthy that America's nursing home providers have led the 
quality movement. Our sector's leadership--which is reflected in the 
Quality First initiative, our partnership with the federal government 
on the successful Nursing Home Quality Initiative, our commitment to 
``pay for performance'' concepts, and other programs--has helped to 
improve the overall quality of care in our nation's nursing homes.
    Quality First, in fact, was the first nationwide, publicly 
articulated pledge by a community of health care providers to 
voluntarily establish and meet quality improvement targets. The 
watchword of our effort has been accountability; and taxpayers, 
consumers and lawmakers have every reason to expect government 
resources to be utilized in a manner that supports the provision of 
high quality long term care for every American. We are proud of our 
progress thus far--and remain committed to sustained improvement for 
the future.
    Our efforts are showing positive outcomes. For example, from 1999 
to 2004, the number of severe quality of care citations in America's 
nursing homes dropped by almost 60%.




    Similarly, over the same period, clinical processes like pain 
management and vaccination rates showed marked and sustained 
improvement as well. In fact, in most instances where skilled nursing 
facility providers partnered with Quality Improvement Organizations, 
patient outcomes improved.




    We remain committed to sustaining these quality improvements for 
the future.
MedPAC's Recommendations Would Jeopardize Quality of Care
    If MedPAC's recommendations were implemented, however, they would 
jeopardize continued quality improvement because operating margins 
would be driven to dangerously low levels. Skilled nursing facilities 
already have the lowest operating margins of all major health care 
provider providers. Adoption of the commissioners' recommendation to 
provide no annual update for skilled nursing facilities would, 
according to a recent analysis conducted by the Lewin Group, drive pre-
tax operating margins down to just 1.32% and cause post-tax operating 
margins to plummet to 0.88%. We concur with the analysis' conclusion 
that this is ``a level that is too low to support the future of the 
industry.''




    This is wholly inadequate to maintain our quality gains, 
particularly given the dramatic cost increases costs we face in key 
areas including labor, energy, liability and capital. Most of these 
costs are influenced by factors outside our control. For example, the 
shortage of nurses and other direct care workers, and the fact that we 
compete with myriad other employers both within and outside the health 
care sector for these employees, contributes significantly to increases 
in labor costs. When operating margins drop precipitously, we are far 
less able to recruit and retain qualified care givers, modernize and 
refurbish aging physical plants and equipment, acquire and implement 
new technologies to accommodate advances in medical practices, and meet 
the increasing complex care needs of an aging population.
MedPAC Must Consider Both Medicare and Medicaid
    MedPAC's exclusive focus on Medicare margins in the nursing home 
sector does a disservice to those frail, elderly and vulnerable 
individuals who receive care and services in America's nursing homes. 
By ignoring Medicaid operating margins, MedPAC's analysis and 
recommendations do not present an accurate picture of the long term 
care marketplace. Medicaid is responsible for funding the care for 66% 
of patients in America's nursing homes, and those nursing homes lose an 
average of $13 per Medicaid patient per day. This loss translates into 
a negative Medicaid operating margin of-7.06% in 2006, a negative 
margin that is expected to continue in 2007. Absent sufficient Medicare 
margins, the long term care sector would not be able to sustain 
economic viability, much less strive for continuing quality 
improvement. MedPAC's continuing and exclusive focus on Medicare 
ignores the real and growing interdependence between Medicare and 
Medicaid.

----------------------------------------------------------------------------------------------------------------
                                                                               Medicare                Medicaid
                                                                   Medicare     as % of    Medicaid     as % of
                                                                    Margins     Revenue     Margins     Revenue
----------------------------------------------------------------------------------------------------------------
2006                                                                  12.99%      27.30%      -7.06%      50.10%
2007: Proposed                                                       10.54%      26.70%      -7.06%      50.50%
----------------------------------------------------------------------------------------------------------------

    Source: The Lewin Group analysis of Lewin survey of nursing 
facilities owned by Multifacility organizations.
    While 66% of skilled nursing facility patients receive Medicaid 
benefits, those benefits account for only half of skilled nursing 
facility revenues. Given that the prevalence of Medicaid patients in 
skilled nursing facilities in four times that of the acute care sector, 
special consideration of the relationship between Medicare and Medicaid 
seems particularly relevant to skilled nursing facilities. While MedPAC 
does not include Medicaid as a determinant in recommending government 
funding policy, the millions of Medicaid patients who rely upon the 
care we provide simply do not have the luxury of ignoring the 
relationship between funding for both programs. .
MedPAC's Recommendations for Skilled Nursing Facilities Should be 
        Rejected
    Chairman Johnson, your description of this situation in 2003 as 
``morally wrong'' remains valid today. It is a tragic public policy 
error for MedPAC to dismiss the so-called ``cross subsidization'' issue 
as irrelevant to the debate at hand--despite the fact it has 
specifically acknowledged this phenomenon. Yet, to our typical Medicaid 
patient--an 85 year-old widowed female--the cross subsidization issue 
is real, it is tangible, and it is pertinent to her care needs. 
Similarly, for our typical Medicare patient--whose stay in a nursing 
home lasts less than 30 days--adequate funding to maintain and improve 
quality care is fundamental to provide them with the opportunity to 
return to the community and to maintain robust and active lives.
    In addition, MedPAC's recommendations fail to consider the impact 
of very recent changes in Medicare and Medicaid policy. Effective 
January 1, the Centers for Medicare and Medicaid Services implemented 
the new Medicare payment system,(RUG-53) restructuring the 
reimbursement system for skilled nursing care. The Deficit Reduction 
Act also adopted sweeping changes to the nation's Medicaid asset 
transfer laws. Neither of these very significant policy changes is 
included in MedPAC's recent recommendations, adding further 
justification to rejection of those recommendations as they apply to 
skilled nursing facilities.
Recommendations
    Therefore, Chairman Johnson and Ranking Member Stark, we make the 
following recommendations:

     Congress should reject MedPAC's recommendations for 
skilled nursing providers, and should maintain the full market basket 
for FY 2007.
     Congress should amend MedPAC's charter to require the 
Commission to consider operating margins of all government payers and 
the adequacy of all government funding in making its recommendations. 
This approach will enhance economic stability and quality improvements.
     Congress should require that MedPAC factor into its 
recommendations our sector's progress in improving quality. Funding 
volatility undermines providers' ability to remain focused on 
continuous quality improvement.

    At the outset of my testimony, I noted we must retain our focus on 
those we serve--the most vulnerable in our society--and we must sustain 
our ongoing commitment to quality care improvements. Chairman Johnson, 
Ranking Member Stark, and Members of this subcommittee, we continue to 
ask that you and your congressional colleagues, as well as President 
Bush, invest the resources needed to provide that quality care. 
America's seniors cannot afford another setback driven by continuing 
failures to recognize the relationships between payment policies and 
quality objectives or the division of oversight responsibilities for 
Medicare and Medicaid. Our recommendations concerning MedPAC offer an 
approach that avoids such a setback.
    Thank you for the opportunity to speak with you today. I will be 
happy to answer any questions you may have.

                                 

    Chairman JOHNSON OF CONNECTICUT. Thank you very much. Dr. 
Hedberg, welcome, from the American College of Physicians.

  STATEMENT OF C. ANDERSON HEDBERG, M.D., PRESIDENT, AMERICAN 
           COLLEGE OF PHYSICIANS, WINNETKA, ILLINOIS

    Dr. HEDBERG. Thank you very much, Madam Chairman. My name 
is Dr. Anderson Hedberg. I am President of the American College 
of Physicians, and I am pleased to share with you the College's 
views on the 2006 report of the MedPAC. The College is pleased 
that the report calls attention to disparities in payments to 
primary care physicians. Unless immediate steps are taken to 
address these inequities, primary care medicine in the United 
States will collapse. Few young physicians are going into 
primary care and many established physicians are leaving. In 
2005, among third year internal medicine residents, only 20 
percent plan to practice primary care or general internal 
medicine compared to 54 percent in 1998. The rest plan to go 
into subspecialties.
    A 2005 survey of internal medicine physicians found that 21 
percent of those who were board certified in general internal 
medicine had left the field within 10 years of entering 
practice, compared with only 5 percent of those who went into 
subspecialties. The collapse of primary care will occur at a 
time when we need more primary care physicians to care for an 
aging population. General internists take care of the majority 
of Medicare patients. Within 5 years, 75 million baby-boomers 
will begin entering Medicare, many of whom will have or develop 
multiple chronic diseases.
    The College supports the Commission's recommendations for 
improving the way that Medicare values services. Such 
improvements could begin correcting the disparities that 
disadvantage primary care. Overpriced services tend to be 
ordered more frequently, and may contribute to an increase in 
the total volume of services. the Sustainable Growth Rate 
(SGR), limits aggregate physician spending increases, the 
combination of mispriced relative values and volume mean 
certain types of services are capturing a larger share of 
Medicare spending, to the detriment of services provided by 
primary care physicians.
    Specialties that derive a substantial amount of income from 
misvalued services have higher lifetime earnings than primary 
care physicians. The College specifically supports the 
Commission's recommendation that the Secretary establish a 
panel of experts to help identify misvalued services based on 
data that the physician work may have changed. Our support is 
predicated on maintaining the current rule that reductions in 
work values are put back into the total budget neutral relative 
value pool.
    The College supports the Relative Value Scale (RVS) Update 
Committee, or the Relative Update Committee (RUC). The new 
expert panel should contribute to the work of the RUC and not 
replace it. We support the Commission's request that the RUC 
examine its composition. We applaud the Commission for 
recommending a 2.8 percent update for 2007 instead of a 5 
percent SGR cut. The SGR is especially detrimental to primary 
care. It does not control volume, and creates barriers to 
physicians adoption of health information technology. We 
appreciate the fact that Congress reversed the 4.4 SGR cuts for 
2006, but further action is needed to avert more cuts in 2007.
    In July 2005, the College endorsed Chairman Johnson's 
Medicare Value-Based Purchasing Act, H.R. 3617. We urge the 
Subcommittee to report legislation this year that would phase 
in pay-for-performance as the bill proposes. Performance-based 
payments should vary based on the individual physician's work 
and commitment to quality improvement. The College is proud to 
participate in efforts to develop performance measurements. We 
have worked with the Ambulatory Care Quality Alliance, and the 
American Medical Association's (AMA) Consortium for Performance 
Improvement to develop performance measures, and we commend the 
AMA for committing to the development of a starter set of 
quality measures for all specialties. We have also recommended 
that our Members consider participating in the CMS's present 
Voluntary Physician Reporting Program.
    The College is pleased that the Commission is exploring 
ways to improve the care of patients with chronic diseases. We 
urge pilot testing of a new model we have developed for 
organizing and reimbursing care of patients with chronic 
diseases, called the Advanced Medical Home. Advance Medical 
Home practices would ensure that patients have a personal 
physician to partner with them to manage their chronic 
conditions, provide a full spectrum of patient-centered 
services, use health information technology to improve care, 
and be accessible through e-mail consultations. The physicians 
would be accountable for providing regular reports on quality, 
cost of care, and patient experience measures. The College is 
developing a reimbursement model that would recognize the value 
of care provided in the Advanced Medical Home.
    In conclusion, the College applauds the Commission for its 
concern about the collapse of primary care and its proposals to 
improve the process of valuing services. These steps must lead 
to fundamental reforms. Such reforms should support the value 
of the patient's relationship with the primary care physician, 
provide incentives for physicians to organize their practices 
to improve care coordination and provide positive incentives 
for all physicians to report quality cost of care and patient 
experience measures. I would be pleased to answer questions.
    [The prepared statement of Dr. Hedberg follows:]

 Statement of C. Anderson Hedberg, MD, President, American College of 
                        Physicians, Winnetka, IL

    I am C. Anderson Hedberg, MD, FACP, President of the American 
College of Physicians. The College is the nation's largest medical 
specialty, with 119,000 internal medicine physician and medical student 
members. Internists provide primary and subspecialty care to more 
Medicare patients than any other physician specialty. I appreciate the 
opportunity to share with the Subcommittee the College's views on the 
Medicare Payment Advisory Commission (MedPAC) 2006 report to Congress. 
My comments today will focus on the following:

    1.   The impending collapse of primary care medicine in the United 
States and the potential impact of the MedPAC recommendations on 
slowing or reversing such a collapse.
    2.   MedPAC's recommendations on the process used by the Centers 
for Medicare and Medicaid Services to determine and make changes in 
physician work relative value units that may be overvalued or 
undervalued.
    3.   The need to integrate the goal of linking Medicare payments to 
quality with broader reforms of a dysfunctional Medicare payment system 
and the College's work to create such reforms.
    4.   The urgent need to repeal the sustainable growth rate (SGR) 
and our suggested guidelines for evaluating any alternatives to the SGR 
that may be recommended by MedPAC or others.
MedPac's Recommendations and the Impending Collapse of Primary Care
    The College is extremely pleased that the Commission's 2006 report 
to Congress, in the chapter ``Valuing services in the physician fee 
schedule: The five year review'' expresses concern about ``the 
disparities in remuneration between primary care and specialty care, 
and the implications of these disparities for the future of the 
physician workforce that will be necessary to meet the chronic care and 
other needs of Medicare patients'' [emphasis added].
    The Commission's subsequent recommendations to address the 
misvaluing of physician services under the Medicare physician fee 
schedule (MFS) could begin to improve the economic environment for 
primary care. As the Commission notes, misvaluing of services can have 
an impact on physician workforce, because ``over time, if certain types 
of services become undervalued relative to others, the specialties that 
perform those services may become less financially attractive, which 
can affect the supply of physicians.''  We are also pleased that the 
Commission recognizes that its recommendations on mispricing services 
are only a first step to the broader reforms that will be needed to 
assure an adequate supply of primary care physicians, to improve 
quality, and to reduce the rate of growth in expenditures on physician 
services.
    The Commission's concern about the future of primary care is well 
supported by evidence on trends in physicians' choice of specialty and 
demographic changes in the patient population. If anything, the 2006 
report understates the impact of Medicare payment policies on physician 
workforce, and particularly, the impact that disparities in 
remuneration can have on driving physicians away from specialties, like 
internal medicine and family medicine, that are required to meet the 
primary care needs of an aging patient population with increased 
incidences of chronic disease.
    Primary care, the backbone of the nation's health care system, is 
at grave risk of collapse due to a dysfunctional financing and delivery 
system. Immediate and comprehensivereforms are required to replace 
systems that undermine and undervalue the relationship between patients 
and their personal physicians. If these reforms do not take place, 
withina few years there will not be enough primary care physicians to 
take care of an agingpopulation with increasing incidences of chronic 
diseases. The consequences of failing to act will be higher costs, 
greater inefficiency, lower quality, more uninsured persons,and growing 
patient and physician dissatisfaction.
    Demographic changes will require more primary care physicians:

      General internists and other primary care physicians are 
at the forefront of managing chronic diseases, providing comprehensive 
care and coordinated long term care. Yet, 45 percent of the U.S. 
population has a chronic medical condition and about half of these, 60 
million people, have multiple chronic conditions. For the Medicare 
program, 83 percent of beneficiaries have one or more chronic 
conditions and 23 percent have five or more chronic conditions. Within 
10 years (2015), an estimated 150 million Americans will have at least 
one chronic condition.
      Within the next decade, the baby boomers will begin to be 
eligible for Medicare. By the year 2030, one fifth of Americans will be 
above the age of 65, with an increasing proportion above age 85. The 
population age 85 and over, who are most likely to require chronic care 
services for multiple conditions, will increase 50 percent from 2000 to 
2010.
      Among adults ages 80 and older, 92 percent have one 
chronic condition, and 73 percent have two or more. In 2000, physicians 
spent an estimated 32 percent of patient care hours providing services 
to adults age 65 and older. If current utilization patterns continue, 
it is expected that by 2020, almost 40 percent of a physician's time 
will be spent treating the aging population.
      It is anticipated that the demand for general internists 
will increase from 106,000 in 2000 to nearly 147,000 in 2020, an 
increase of 38 percent.

    Unfortunately, there will not be enough primary care physicians to 
meet this increased demand:

      Over the past several years, numerous studies have found 
that shortages are occurring in internal medicine and family medicine. 
Factors affecting the supply of primary care physicians, and general 
internists in particular include excessive administrative hassles, high 
patient loads, and declining revenue coupled with the increased cost 
for providing care. As a result, many primary care physicians are 
choosing to retire early. These factors, along with increased medical 
school tuition rates, high levels of indebtedness, and excessive 
workloads, have dissuaded many medical students from pursuing careers 
in general internal medicine and family practice.
      A recent study of the career plans of internal medicine 
residents documents the steep decline in the willingness of physicians 
to enter training for primary care. In 2005, only 20 percent of third-
year internal medicine residents planned to pursue careers in general 
internal medicine compared to 54 percent in 1998. Among first-year 
internal medicine residents, only 13 percent planned to practice 
general internal medicine.
      A 2005 survey of internal medicine physicians who 
received their board certification in the early 1990s found that 21 
percent of those who were practicing general (primary care) internal 
medicine have left internal medicine practice entirely, compared with 
only 5 percent of subspecialty internists who reported that they have 
left their subspecialty.
      More than 80 percent of graduating medical students carry 
educational debt. 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 
debt of $200,000 or more. Studies show that students with the highest 
debt are the least likely to choose primary care.

    Congress should be concerned about a collapse of primary care 
because it will result in higher health care expenses and lower health 
care quality:

      When compared with other developed countries, the United 
States ranked lowest in its primary care functions and lowest in health 
care outcomes, yet highest in health care spending.
      Studies have shown that primary care has the potential to 
reduce costs while still maintaining quality. Not only does early 
detection and treatment of chronic conditions play a vital role in the 
health and quality of life of patients, but it can also prevent many 
costly and often fatal complications when illnesses such as diabetes 
and cancer are diagnosed at a later stage. As expert diagnosticians, 
providing patient-focused, long-range, coordinated care, general 
internists play a significant role in the diagnosis, treatment and 
management of chronic conditions. It has been reported that states with 
higher ratios of primary care physicians to population had better 
health outcomes, including mortality from cancer, heart disease or 
stroke.

      States with more specialists have higher per capita 
Medicare spending. An increase in primary care physicians is associated 
with a significant increase in quality of health services, as well as a 
reduction in costs.
      Primary care physicians, including general internists, 
have been shown to deliver care similar in quality to that of 
specialists for conditions such as diabetes and hypertension while 
using fewer resources.
      The preventive care that general internists provide can 
help to reduce hospitalization rates. Studies of certain ambulatory 
care--sensitive conditions have shown that hospitalization rates and 
expenditures are higher in areas with fewer primary care physicians and 
limited access to primary care.
      Strengthening primary care may also result in more 
appropriate use of specialists. For example, patients receiving care 
from specialists for conditions outside their area of expertise have 
been shown to have higher mortality rates for community-acquired 
pneumonia, congestive heart failure, and upper gastrointestinal 
hemorrhage.

    The College is aware that MedPAC has not found evidence that 
patients are currently experiencing widespread access problems. We 
believe that there are areas of the country where Medicare patients' 
access to primary care services has already declined, even if national 
surveys do not have enough locality-specific responses to show an 
overall access problem. Most importantly, a snapshot of current access 
trends is not a reliable predictor of how access will be affected in 
the future if Medicare continues to undervalue payments to primary care 
physicians at the same time that it continues to cut payments to all 
physicians because of the flawed sustainable growth rate (SGR) formula. 
The data on changing demographics and workforce trends that point to an 
impending collapse of primary care are far better indicators of 
potential future access problems than surveys of current beneficiaries' 
experiences.
Improving the Process for Valuing Physician Services
    The College supports the Commission's recommendations for improving 
the process for valuing physician services under the MFS. We believe 
that the Commission's recommendations could help reduce the economic 
disincentive for physicians to practice in primary care specialties. 
Misvalued services contribute to the differentials that are undermining 
primary care in several ways.
    First, there is evidence that services that are overpriced are 
ordered more frequently and may contribute to an increase in the total 
volume of services, which in turn, can trigger reductions in payments 
to all physicians--including primary care physicians--under the SGR 
formula.
    Second, because the SGR limits the extent to which aggregate 
physician spending can increase, the combination of mispriced relative 
values and volume means that certain types of services are capturing a 
larger share of Medicare spending, to the detriment of evaluation and 
management services provided principally by primary care physicians.
    Third, specialties that provide services that are overvalued are 
more likely to have higher overall earnings, while specialties that 
provide services, such as evaluation and management services, that are 
undervalued are likely to have lower overall earnings. This continued 
earnings disparity is a major reason why young physicians are not going 
into primary care while many older physicians are leaving primary care 
medicine.
 The College would strongly oppose a process that results in reductions 
        in the work RVUs for some procedures in order to achieve 
        Medicare budget savings, since this would also make it 
        impossible to redistribute the changes resulting from such 
        revisions back into the services that are undervalued under the 
        current MFS. 
    Specifically, ACP supports the recommendation that the Secretary 
should establish a standing panel of experts to help CMS identify 
overvalued services and to review recommendations from the American 
Medical Association (AMA)-Specialty Society Relative-value scale Update 
Committee (RUC). The group should include members with expertise in 
health economics and physician payment, as well as members with 
clinical expertise. The Congress and the Secretary should ensure that 
this panel has the resources it needs to collect data and develop 
evidence.
    As the Commission envisions it, the expert panel would play a 
regular role in the process, particularly at the beginning when CMS is 
seeking to identify misvalued services. The panel would review the 
codes that CMS's data analyses identified as potentially misvalued and 
consider which services warranted further consideration by the RUC. The 
panel would then develop additional evidence providing support for 
correction, for example, by conducting its own provider surveys. This 
supporting evidence would then be forwarded to the RUC for RUC 
evaluation. To ensure that the panel has sufficient expertise in 
considering whether services are misvalued it should include 
representatives from CMS's network of carrier medical directors, 
experts in medical economics and technology diffusion, private payer 
plan representatives, and a mix of physicians, particularly ones that 
are not directly affected by changes to the Medicare physician fee 
schedule, such as those employed by managed care organizations or 
academic medical centers.
    The College strongly supports the RUC process and believes that the 
RUC should maintain its primary role in advising CMS on the relative 
value units (RVUs) assigned to physician services in the MFS. Medical 
specialty societies have the best understanding of the work involved in 
the services provided by physicians in their specialties. The RUC has 
adopted rules and processes that assure that any recommendations that 
go forward to CMS are supported by at least two-thirds of the RUC 
members and are based on survey and other standards to assure that the 
recommendations are supported by evidence. CMS has consistently shown 
confidence in the strength and accuracy of the RUC's recommendations by 
accepting the vast majority of them.
    We concur with the Commission's view, however, that the RUC, by 
itself, is not well-positioned to identify work values that may be too 
high. Because the recommendations that go to the RUC principally come 
from membership-based specialty societies, it is not surprising that 
specialty societies rarely suggest that some of the services that their 
own members provide may be overvalued. It is also difficult for 
specialty societies to identify services done by other specialties that 
may be overvalued. CMS itself lacks the internal expertise to identify 
work RVUs that may be too high. The expert panel recommended by MedPAC 
could play a valuable role in starting the process of identifying 
potentially overvalued services, while maintaining the RUC's essential 
role as the expert body that then evaluates the work RVUs recommended 
for review.
    The College has several suggestions for improving the MedPAC 
recommendation for an expert panel. In addition to physicians who are 
employed by managed care organizations or academic medical centers, it 
is essential that the panel include representatives of physicians in 
small practices, most of who continue to practice in a fee-for-service 
environment. The reason is that carrier medical directors and 
physicians in academic centers or MCOs will have little or no direct 
experience with the impact of Medicare's valuation of services on 
running a small primary care practice or the work involved in taking 
care of patients with multiple chronic diseases.
    Consideration should be given to including a member of the RUC on 
the expert panel in a liaison or observer capacity. It will also be 
important for the expert panel to operate in the open (public 
meetings), to solicit comments from specialties and the RUC, and to 
share the supporting evidence for any recommendations it makes relating 
to misevaluation of services. Should the expert panel disagree with a 
recommendation from the RUC, it should provide a clear explanation, 
with supporting data, on why.
    The Commission's report also acknowledges a concern expressed by 
ACP and others that physicians who furnish primary care services are 
not represented adequately on the RUC. It calls on the medical 
community to propose changes in the composition of the RUC, states that 
it is aware that the AMA and physician specialty societies are having 
ongoing conversations about the composition of the RUC, and states that 
it intends to continue to monitor this issue.
    The College agrees with the Commission that the RUC should re-
examine its current composition to assure balanced and appropriate 
representation and expertise from all specialties, and we specifically 
have suggested to the RUC that it should revise its composition to 
better reflect measures of each specialty's contributions to care of 
Medicare patients. For instance, data on the percentage of Medicare 
Part B evaluation and management (E/M) services allowed and/or 
percentage of overall Medicare Part B allowed expenditures, could be 
accepted as proxies for determining how many seats that a particular 
specialty would have on the RUC. The College anticipates that such a 
review would lead to an absolute and proportionate increase in primary 
care representation in the RUC. The RUC should also review its existing 
criteria (as well as the revised membership criteria that would result 
from adoption of the above) to assure that it is consistently applied 
to specialties already on the RUC, as well as to additional specialties 
asking for membership. This would address concerns from some 
specialties that the RUC has applied a different standard for 
specialties that already have permanent seats on the RUC to those 
applying for seats.
    The College believes that the RUC itself should consider the above 
recommendations, rather than having them imposed by CMS or by Congress. 
One of the important attributes of the RUC is that it is a private-
sector body that has an informal advisory relationship with CMS; as 
such, the RUC makes its own rules. Therefore, the responsibility for 
changing its rules lies with the RUC itself. However, MedPAC and CMS 
should provide appropriate oversight and guidance to the RUC as it 
examines its composition. We are pleased that the chair of the RUC has 
expressed a commitment to call on the RUC to re-examine its composition 
and a willingness to keep MedPAC informed about the results.
    The RUC finalized its recommendations on the E/M services in early 
February 2006. The College and other medical specialty societies 
originally asked CMS to include evaluation and management services in 
the Five-Year Review because we believe that there is compelling 
evidence that many of the services were undervalued as the physician 
work had increased over the 10-year period since they were last 
reviewed. CMS agreed to include the E/M codes in the Five-Year Review. 
The College then worked with the RUC to develop recommendations for the 
E/M service codes. We are unable to discuss the specific RUC 
recommendations because of the RUC's confidentiality policy, but we are 
able to inform the Subcommittee on Health that we support the RUC's 
recommendations on E/M services. The RUC has now sent all of its Five-
Year Review E/M recommendations to CMS. The Subcommittee on Health, if 
interested, could likely obtain the specific RUC recommendations 
directly from CMS. The College will be urging CMS to assure that the 
MFS final rule for 2007 includes increases in the work RVUs for 
evaluation and management services commensurate with the evidence on 
increased patient complexity and physician work associated with such 
services.
    The College also supports the following improvements in the process 
of reviewing relative work values as recommended by MedPAC:

      The Secretary, in consultation with the expert panel 
should initiate the five-year review of services that have experienced 
substantial changes in length of stay, site of service, volume, 
practice expense, and other factors that may indicate changes in 
physician work.
      CMS should institute automatic reviews of work relative 
values for selected new services after a specified period of time. The 
Commission's recommendation reflects the expectation that the work 
involved in furnishing many new services will change over time. The 
Secretary would initiate, after a specified period, reviews of the work 
relative values for selected recently introduced services. Where 
appropriate, services should be assessed by the RUC as soon as is 
practicable; reviews should not be postponed until an upcoming five-
year review.
      CMS should also assess established services for which the 
newly introduced services are substitutes. As the use of newly 
introduced services grows, the type of patients using the established 
services could change.
      CMS should work with the RUC to review relative values 
established more than 15 years ago that have not since been examined by 
the RUC and that, as a result, may no longer reflect current medical 
practice.

    One of the original premises behind the resource based relative 
value scale (RBRVS) is that the physician work associated with a 
procedure or technology is often greater when it is first introduced, 
and few physicians have acquired the technical skills required to 
provide the procedure, than later on when its use has become widely 
accepted and the ``learning curve'' associated with providing it has 
decreased. The current processes have not been effective in identifying 
services whose work RVUs may decrease over time. The College believes 
that the Commission's recommendations are a reasonable way to trigger 
RUC review of services whose work may change over time.
    As noted above, it is essential that any reduction in ``misvalued'' 
procedures be redistributed into the total budget neutral relative 
value pool instead of being used to achieve budget savings. Otherwise, 
there would no way for undervalued evaluation and management services 
to benefit from the redistribution that would result from reducing the 
work RVUs for overvalued procedures. Using the RUC and the new expert 
panel to identify procedures whose payments should be cut by CMS or 
Congress to achieve overall budget savings would undermine the support, 
credibility, and validity of the entire process for determining the 
value of physician work and lead physicians to question the fundamental 
fairness and accuracy of the RBRVS and the MFS.
Alternatives to the SGR
    The College urges Congress to replace the SGR with an alternative 
that will assure sufficient and predictable updates for all physicians 
and be aligned with the goals of achieving quality and efficiency 
improvements and assuring a sufficient supply of primary care 
physicians. At a minimum, Congress should enact legislation to replace 
the 2007 SGR cut, estimated to be 4.6 percent, with a positive update. 
The College supports the Commission's recommendations for a 2007 
Medicare fee schedule update based on the Medicare Economic Index, but 
recommends that further analyses be given to the assumption that the 
update should be lowered to reflect gains in physician productivity.
    We appreciate that leadership shown by Chairman Johnson in seeking 
repeal of the SGR, and the role that this subcommittee played in 
getting legislation enacted to reverse the 4.4 percent SGR cut in 2006.
    The SGR cuts payments to all physicians, but is especially 
detrimental to primary care physicians in small practices who already 
are under-reimbursed and have very low practice margins. The SGR does 
not control volume and, in fact, cuts payments without regard to the 
quality or efficiency of care provided by an individual physician. The 
SGR cuts also deprive physicians in primary care practices of the 
resources needed to invest in health information technology and quality 
improvements. It cuts payments for major surgical procedures and 
primary care services that have experienced lower volume growth by the 
same amount as procedures that have experienced higher volume growth.
    First, Congress must enact additional legislation this year that 
would avert SGR cuts in 2007 and stabilize payments as a pre-cursor to 
legislation that would lead to a permanent replacement of the SGR 
formula no later than calendar year 2007.
    Second, CMS, MedPAC and Congress should work with ACP and other 
medical organizations to develop a long-term alternative to the SGR. 
Key principles for this longer-term solution include:

      Separate physician fee updates from measures of per 
capita GDP
      Assure that the update formula is aligned with creating 
incentives for quality measurement and reporting and allow physicians 
to share in system-wide savings from quality improvement and 
coordination of patients with multiple chronic diseases
      Reflect increases in physician practice costs, including 
resources associated with acquiring health information technology to 
support quality improvement.
      CMS and Congress should also work with the College and 
other medical organizations to establish a process to address volume 
concern issues through a combination of encouraging adherence to 
evidence-based clinical measures through reporting and pay-for-
performance, use of efficiency or cost of care measures, correcting 
mispricing of physician services under the Medicare fee schedules, 
addressing geographic variations in quality and cost through increased 
use of evidence-based guidelines and measures linked to financial 
incentives, and asking MedPAC to make recommendations regarding 
suspected inappropriate service/procedure-specific volume increases.

    The College supports MedPAC's recommendation for a 2.8% MFS update 
in 2007 based on the Medicare economic index. We believe though that 
there should be further analysis of the productivity adjustment being 
recommended by the Commission. The Commission's view is that physician 
productivity has increased and that this should be factored into the 
update. The College questions the strength of the analysis to support 
this assumption. Studies and anecdotal reports from physicians indicate 
that as physicians incorporate electronic health records and quality 
measurement and reporting in their practices, the impact, at least in 
the early stages of adoption, is to reduce productivity, not increase 
it. We also question why the productivity adjustment for physicians is 
much higher than the productivity gains assumed for hospitals, when 
there is no evidence or reason to believe that physicians are achieving 
greater productivity gains than hospitals.
Linking Payments to Quality
    The College continues to strongly support reforms to link Medicare 
payments to quality. We commend Chairman Johnson for her leadership on 
developing legislation to begin linking payments to quality. In July, 
the College was pleased to endorse Chairman Johnson's Medicare 
Physician Value Based Purchasing Act of 2005. We continue to support 
the bill, but we also recommend that the Subcommittee on Health 
consider a legislative framework that would go beyond grafting pay-for-
performance on the current dysfunctional payment system to one that 
would create sufficient and sustained incentives for quality 
improvement, efficiency, and physician-directed coordination and 
management of care for patients with multiple chronic diseases.
    Specifically, we recommend that legislation to link payments to 
quality be aligned with the larger goals of reforming the payment 
system based on the following framework:

      The longer-term goal should be to replace current payment 
system should be replaced with new methods of reimbursement that reward 
physicians who follow evidence-based standards and take on the 
responsibility of coordinating care for patients with chronic diseases. 
Pay-for-performance (P4P) incentive payments should reflect the level 
of work and commitment to quality, which will differ among physicians 
and across specialties.
      P4P systems should rely on valid and reliable clinical 
measures, data collection and analysis, and reporting mechanisms.
      The value of health information technology should be 
recognized in the performance-based payments.
      Potential P4P rewards should be significant enough to 
support continuous quality improvement, directed at positive--not 
negative--rewards, and be balanced between rewarding high performance 
and substantial improvement over time.
      Medicare P4P should enable physicians to share in system-
wide savings (such as from reduced Part A hospital expenses) resulting 
from quality improvement.
      Adding an additional portion of reimbursement on top of 
the current dysfunctional payment system will not achieve the desired 
results.

    ACP believes that Medicare pay-for-performance, if done correctly, 
can lead to improvements in reimbursement for primary care physicians 
while improving quality and lowering costs. The College has released a 
new position paper on ``Linking Payments to Quality'' (http://
www.acponline.org/hpp/link_pay.pdf) that provides a framework for 
developing and implementing a Medicare pay-for-performance program that 
would recognize and support the value of care coordination and quality 
improvement by a patients' primary care physician. A key conclusion in 
this paper is that pay-for performance must be done in conjunction with 
other reforms to fix Medicare's dysfunctional payment system, including 
those described above, rather than grafting it onto a system that 
rewards volume and episodic care over quality and physician-directed 
care coordination.
    ACP believes that a Medicare P4P program will have to be supported 
by redistribution of funds among and across different geographic 
locations, health care professionals, and even among the College's own 
members on the basis of quality. It is, therefore, critical that, in 
providing rewards for physicians who commit to redesigning their 
practices to support quality improvement, the level of work and 
commitment involved should be recognized through differential payments. 
Basing incentives on effort assures that physicians who expend a 
disproportionately large amount of time and resources trying to improve 
quality and meet more complex measures, such as those who effectively 
manage patients with multiple chronic diseases, are recognized and 
rewarded accordingly. This is especially critical for the internist, 
whose ability to provide better care at lower costs through effective 
management of patients has been historically under-valued.
    Redistribution of payments is only a small aspect of a larger issue 
that must be confronted before a system that rewards physicians for 
quality improvement can be effective: the dysfunctional physician 
payment system. The current reimbursement system is fragmented and 
episodic in nature, leading to enormous inefficiencies. Physicians are 
paid a standard fee regardless of the quality of their care, which 
discourages innovations, coordination, and practice improvement. The 
current system must be replaced with new methods of reimbursement that 
reward those who follow evidence-based standards of care.
    The College realizes that designing a fair, credible, and effective 
P4P program is a challenging and complicated task. P4P is comprised of 
many aspects, including the development and selection of appropriate 
performance measures, the integration of acceptable methods of data 
collection and reporting, and an equitable determination of incentives. 
Within each of these categories are a set of unintended consequences 
that must be carefully monitored and reconciled. ACP also realizes that 
in the short-term, P4P programs may actually increase utilization of 
more effective but currently under-utilized treatments, thereby raising 
costs rather than reaping savings. As new systems of payment linked to 
performance are being explored, it is crucial that the right measures 
are used, that data collection is accurate and reasonable, that 
appropriate and adequate financial incentives are provided, and that 
quality--not just cost reduction--is always the overriding measure of 
success. The access-to-care problems that disadvantaged and severely 
ill patients may encounter, if P4P programs lead physicians to avoid 
sicker or non-compliant patients, must also be carefully monitored.
    The College continues to be a leader in developing quality measures 
that could be incorporated into a program to link Medicare payments to 
quality. Although we initially had concerns about number and validity 
of some of the measures that CMS proposed for the Physicians Voluntary 
Reporting Program, we have since reached an understanding with CMS that 
physicians should begin by reporting on a smaller set of measures that 
are aligned with those approved by the Ambulatory Care Quality Alliance 
(AQA). The College has since urged our members to strongly consider 
participating in the PVRP. We continue to be an active participant in 
the AQA through our leadership in the AQA's steering committee and 
through the extensive commitment of time that our volunteer physicians 
and staff have given to the AQA's work groups on performance 
measurement and data aggregation and reporting. The College also 
strongly supports and participates in the AMA's Consortium for 
Performance Improvement. We commend the AMA for its decision to invest 
more resources in the Consortium and for the AMA's commitment and 
leadership to work through the consortium to develop a starter-set of 
evidence-based performance measures for all specialties that could be 
incorporated into a voluntary reporting program as early as 2007. We 
believe that the timeline for developing measures for all specialties 
as recommended by the AMA and the Consortium is reasonable and 
achievable.
Creating Incentives for Physicians--Guided Care Coordination
    The College is pleased the Commission's work plan includes 
consideration of models for improving the care of patients with chronic 
diseases. We specifically urge the Commission and Congress to work with 
us to pilot test a new model for organizing and delivering primary and 
principal care that addresses the fact that the U.S. health care system 
is poorly prepared to meet the current, let alone the future health 
care needs of an aging population.
    This model, called the advanced medical home model, is based on the 
premise that the best quality of care is provided not in episodic, 
illness-oriented, complaint-based care, but through patient centered, 
physician-guided, cost-efficient, longitudinal care that encompasses 
and values both the art and science of medicine.
    Attributes of the advanced medical home include promotion of 
continuous healing relationships through delivery of care in a variety 
of care settings according to the needs of the patient and skills of 
the medical providers. Physicians in an advanced medical home practice 
are responsible for working in partnership with patients to help them 
navigate the complex and often confusing health care system. They 
provide the patient with expert guidance, insight and advice, in 
language that is informative and specific to patients' needs. In the 
advanced medical home model, patients will have a personal physician 
working with a team of health care professionals in a practice that is 
organized according to the needs of the patient.
    Physician practices would apply for voluntary certification that 
they have met the standards to be listed as a qualified advanced 
medical home. Although the standards and certification process still 
need to be fully developed, ACP envisions that qualified practices will 
have the following kinds of services in place:

      Primary care physicians who practice in an advanced 
medical home would be responsible for partnering with the patient to 
assure that their care is managed and coordinated effectively.
      The practice would use innovative scheduling systems to 
minimize delays in getting appointments.
      Physicians in the advanced medical home would use 
evidence based clinical decision support tools at the point of care to 
assure that assure that patients get appropriate and recommended care.
      They would partner with patients to help patients with 
chronic diseases, like diabetes, manage their own conditions to prevent 
avoidable complications. Patients would have access to non-urgent 
medical advice through email and telephone consultations.
      The practice would have arrangements with a team of 
health care professionals to provide a full spectrum of patient-
centered services.
      Advanced medical home practices will also be accountable 
for the care they provide, by using health information technology to 
provide regular reports on quality, efficiency, and patients' 
experience measures.

    The advanced medical home is the way that most primary care doctors 
want to deliver care to their patients, and what most patients want 
from their physicians. It can only work, though, if Medicare and other 
payers develop and implement new ways of paying physicians that 
recognize the value of care coordinated by a personal physician. A 
revised reimbursement system would acknowledge the value of both 
providing and receiving coordinated care in a system that incorporates 
the elements of the advanced medical home model. Further, such a system 
would align incentives so physicians and patients would choose medical 
practices that deliver care according to these concepts. Physicians 
would elect to redesign their practices because the model is supported 
by enhanced reimbursement for system-based care in the advanced medical 
home, rather than the volume-based, episodic, fee-for-service system 
currently in place. Patients would select an advanced medical home 
based on service attributes such as the patient centeredness of a 
practice, improved access, and coordinated care--as well as value 
attributes as demonstrated by publicly available reports on quality and 
cost.
    Pilot testing is crucial before the Advanced Medical Home model can 
be implemented nationwide. A pilot test would permit exploration of the 
model's applicability, reliability, strengths, weakness and 
identification of potential unintended consequences. The College 
recommends that the Subcommittee ask the Center for Medicaid and 
Medicare Services (CMS) to conduct a national pilot program in 2007 to 
determine the feasibility, cost effectiveness and impact on patient 
care of the advanced medical home in a variety of primary care 
settings. This effort should specifically address the advanced medical 
home model, but would complement ongoing and planned CMS pilot programs 
such as the Medicare Physician Group Practice Project, the Medicare 
Care Management Performance Demonstration (MMA Section 649), and 
Medicare Health Support Pilot (MMA Section 721) and Medicare Health 
Quality Demonstration Program (MMA Section 646). The College will also 
explore testing of this model with commercial payers.
Conclusion
    The College applauds the Medicare Payment Advisory Commission for 
its willingness to recommend improved ways for valuing physician 
services, for its commitment to address the reimbursement disparities 
that are contributing to the collapse of primary care, for its work on 
developing new models for physician-directed care coordination, and for 
the leadership it has shown on linking Medicare payments to quality. We 
applaud Chairman Johnson for her outstanding leadership on advocating 
for a halt to the SGR cuts and for proposing a way to link Medicare 
payments to quality that would gradually phase-in reporting of quality 
data and provide safeguards against unintended adverse consequences.
    Although we are supportive of the specific recommendations made by 
the Commission for improving the process for valuing physician 
services, we also believe that more fundamental reforms of Medicare 
payment policies will be needed, including replacing the SGR with 
alternatives that provide positive updates to all physicians and that 
are aligned with the goals of creating incentives for continuous 
quality improvements and physician-guided are coordination. We urge the 
Commission and the Subcommittee on Health to work with us and other 
physician groups to reach agreement on a framework that would 
fundamentally change the way that we reimburse physicians to recognize 
the value of the patient's relationship with a personal physician who 
is working in systems of care, such as the advanced medical home, that 
are centered on patients' needs. Such fundamental reforms are 
essential, we believe, to prevent the impending collapse of primary 
care medicine and to assure that current and future beneficiaries have 
access to high quality and affordable care.
    I would be pleased to answer any questions.

                                 

    Chairman JOHNSON OF CONNECTICUT. Thank you very much, Dr. 
Hedberg. Mr. Thiry, welcome, from DaVita Patient Services, 
California.

   STATEMENT OF KENT THIRY, CHIEF EXECUTIVE OFFICER, DAVITA 
   INCORPORATED, EL SEGUNDO, CALIFORNIA; AND IMMEDIATE PAST 
               CHAIRMAN, RENAL LEADERSHIP COUNCIL

    Dr. THIRY. First, on behalf of all dialysis providers, 
thank you to the Committee for this opportunity.
    Second, today I am specifically representing the Renal 
Leadership Council, the RLC, a group made up of providers who 
take care of over 70 percent of all of America's dialysis 
patients. That organization includes providers large and small, 
profit and not-for-profit.
    Third, we heartily endorse the MedPAC recommendations and 
are grateful for the analytical rigor they brought to the task.
    Fourth, we also recognize the Committee must consider those 
recommendations in a broader context, which perhaps could best 
be characterized by the question: are kidney care providers 
good citizens in the broader health care community? To that end 
we would answer four questions.
    No. 1: Over the last 5 to 10 years have we demonstrably 
improved quality? No. 2: Over the last 5 to 10 years have we 
demonstrably improved productivity? No. 3: Over the last 5 to 
10 years have we added a broader value to society and the 
community rather than just taking direct care? No. 4: Are we 
willing to be held accountable for our use of taxpayer dollars?
    With respect to question no. 1, CMS, the Office of the 
Inspector General (OIG), National Institute of Health (NIH) and 
others agree, over the last 5 to 10 years there are few 
segments of American health care that can so clearly 
demonstrate improved quality for our patients.
    With respect to question no. 2, have we demonstrably 
improved productivity, the two points that I typically make as 
a way of making the assertion that the answer is yes quite 
clear, is back in 1991 when I began, we had, roughly speaking, 
in most clinics two nurses for every tech. Now in most of our 
clinics we have two techs for every nurse, and in many 
instances we are at the statutory limit of one nurse per shift. 
The other fact we point out is that we provide 4 hours of 
hands-on technology intensive care three times a week to our 
patients. Those 4 hours of hands-on technology intensive care 
include dietician support, include most pharmaceuticals, 
include labs, and include social worker support, and the total 
cost is approximately $220 for Medicare for that 4 hours. We 
don't know of any comparably intensive therapy in America that 
can match that productivity.
    The fourth and final question, are we willing to be held 
accountable as a community of care givers? The short answer is, 
yes, we are prepared to implement a truly substantive pay-for-
performance in our community, and that is not just a provider 
speaking. The Renal Leadership Council is a Member of a broader 
group, the Kidney Care Partners Coalition, which includes most 
of the patient organizations, the nursing organization, the 
physician organization, device and pharma companies, and there 
is a tremendous consensus and significant substantive momentum 
toward proposing pay-for-performance mechanisms that would have 
real teeth and add real value for the patients and the 
taxpayer.
    Hopefully, the answers to those four questions support the 
assertion that we are a good care-giving citizen within the 
context of the broader health care community.
    The next question the Committee has to ask is, do we need 
this update? The short answer is yes, and the two things we 
would point out are, No. 1, we do need the level playingfield 
that has been referred to earlier by some of the Members of the 
Committee. Every single day we will lose a 6- or 7-year 
experienced wonderful nurse or technician to one of the other 
segments of American health care that receive an annual update, 
which we do not. We replace that person with a first- or 
second-year individual, and invest massively to train them, but 
at some point we cannot continue that trend.
    Second, as MedPAC points out, we have a negative Medicare 
margin. That has historically been subsidized by our ability to 
increase private pay rates every year. That is no longer the 
case, and now we are regularly experiencing in fact decreases 
in private rates from the ever consolidating insurance sector.
    We endorse the MedPAC recommendations, and we also endorse 
the fact that they believe there is room for improvement for 
patients and the taxpayer in the areas of vascular access, and 
the areas of nutritional therapy. We also endorse their 
recommendation that the whole issue of home dialysis be looked 
at very thoughtfully from a policy point of view in terms of 
cost, convenience, and impact on the overall system.
    Thank you for this time.
    [The prepared statement of Mr. Thiry follows:]

Statement of Kent Thiry, Executive Officer, DaVita Patient Services, El 
                        Segundo, CA Introduction

Introduction
    Chairwoman Johnson, Congressman Stark, and distinguished 
Subcommittee Members, thank you for inviting me to discuss the Medicare 
Payment Advisory Commission's (MedPAC) recommendations regarding 
payment adequacy for providers that care for patients with end stage 
renal disease.
    My name is Kent Thiry, and I am the Chief Executive Officer of 
DaVita Incorporated. I am also the Immediate Past Chairman of the Renal 
Leadership Council (RLC), and I am pleased to testify on the RLC's 
behalf.
    The RLC is especially pleased to participate in this hearing given 
MedPAC's consistent support for improvements and modernizations to the 
outdated dialysis payment system, which has lagged far behind those of 
many other Medicare payment systems that receive payment updates each 
year on an automatic basis. We also appreciate MedPAC's longstanding 
support of policies that would level the playing field between 
hospital-based dialysis providers and freestanding providers, and 
policies that would improve quality and outcomes for our patients 
overall.
    I am here today to discuss this year's MedPAC recommendations, and 
in so doing to answer four fundamental questions that shed light on our 
past, present and future commitments to our patients, and that offer a 
useful lens from which to view our comments on the recommendations. 
After providing a brief overview of our member companies and the 
patients we serve, I will take each of the following four questions in 
turn:

    1.   Are we delivering high quality care and do we provide good 
value for the taxpayer dollars spent on health care?
    2.   Do we support pay-for-performance?
    3.   How important is an annual update to our ongoing quality 
improvement efforts?
    4.   Do we support the MedPAC recommendations?
Brief Overview
    The Renal Leadership Council is a coalition representing eight 
renal care organizations that provide care to over 70% of the dialysis 
patients in the United States. The RLC includes 2 non-profit providers, 
3 small providers, 2 mid-sized providers, and 3 large providers. Our 
members operate more than 3,300 dialysis facilities in 48 states, 
Puerto Rico, and the District of Columbia, providing care to over 
220,000 patients. We are: American Renal Associates, Inc., Centers for 
Dialysis Care, DaVita Inc., Fresenius Medical Care North America, 
Northwest Kidney Centers, Renal Advantage, Inc., Renal Care Group, 
Inc., and Satellite Healthcare.
    Most of our patients are Medicare beneficiaries. Today, 
approximately 93% of the 309,000 dialysis patients in the United States 
are eligible for Medicare.\1\ The illness occurs at the last stage of 
progressive impairment in kidney function and is a consequence of a 
variety of conditions, including diabetes, hypertension, 
glomerulonephritis, and cystic kidney disease. Diabetes is both the 
primary risk factor for ESRD and its most frequent underlying cause--
the occurrence of diabetes in new ESRD patients was 55.7% in 2004.\2\ 
The disease affects minorities in greater proportions than Caucasians, 
with African Americans being four times more likely to suffer from 
ESRD.\3\ ESRD is fatal without regular dialysis treatments or a kidney 
transplant. Because of the limited number of organs available for 
transplantation, most patients receive dialysis treatments three times 
per week. Each of the blood cleansing treatments lasts from three to 
four and a half hours per session.
---------------------------------------------------------------------------
    \1\ Medicare Payment Advisory Commission, A Data Book: Health Care 
Spending and the Medicare Program, Washington, D.C., at 183 (June 
2005).
    \2\ United States Renal Data System, USRDS 2005 Annual Data Report: 
Atlas of End-Stage Renal Disease in the United States, at 82, National 
Institutes of Health, National Institute of Diabetes and Digestive 
Kidney Diseases, Bethesda, MD, available at www.usrds.org/atlas.htm 
(accessed 2006).
    \3\ United States Renal Data System, USRDS 2004 Annual Data Report: 
Atlas of End-Stage Renal Disease in the United States, at 32, National 
Institutes of Health, National Institute of Diabetes and Digestive 
Kidney Diseases, Bethesda, MD, available at www.usrds.org/atlas.htm 
(accessed 2006).
---------------------------------------------------------------------------
    RLC members operate freestanding dialysis clinics and hospital-
based centers in both urban and rural areas. Our members have 327 
centers in the districts of the members of the Committee, with more 
than 6,900 employees serving more than 21,000 of patients. The RLC 
members have dialysis facilities in all the districts of this 
Subcommittee's Members. All of the RLC member companies are committed 
to working with Congress and the Medicare program to ensure good 
patient access to high quality dialysis services across the country.
Discussion
    1.   Are we delivering high quality care, and do we provide good 
value for the taxpayer dollars spent on health care?

    Yes. Over the last ten years, dialysis providers have dramatically 
improved the quality of care for ESRD patients on dialysis, and 
continue to do so. In fact, dialysis providers are one of only three 
Medicare providers to report quality indicators to the Centers for 
Medicare and Medicaid Services (CMS) and to have that information 
publicly available through the World Wide Web via the Dialysis Facility 
Compare website.\4\
---------------------------------------------------------------------------
    \4\ See  www.medicare.gov/default.asp.
---------------------------------------------------------------------------
    Numerous metrics reflect a service sector that produces excellent 
clinical quality improvements year after year, and offers exceptional 
value for the taxpayer:

      The quality of delivered dialysis in the hemodialysis 
population has improved dramatically over the last decade. According to 
CMS' 2004 Report of the ESRD Clinical Performance Measures Project, the 
percentage of patients receiving adequate hemodialysis was 94%, 
compared to 85% in 1998. Likewise, the number of continuous ambulatory 
peritoneal dialysis patients receiving adequate dialysis increased by 
more than 15% over the same period of time.\5\ These represent 
significant increases in patients achieving this goal.
---------------------------------------------------------------------------
    \5\ Centers for Medicare and Medicaid Services, 2004 Clinical 
Performance Measures Project Report, (December 2004), available at 
http://www.cms.hhs.gov/ESRDQualityImproveInit/downloads/
2004%20Report%20Describing%20the%20Data%20Collection%20Results.pdf.
---------------------------------------------------------------------------
      The industry's commitment to anemia management has 
resulted in the percentage of patients with hemoglobin levels greater 
than 11 gm/dl increasing from 43% in 1997 to 80% in 2003,\6\ meeting 
the Kidney Disease Outcomes Quality Initiative (K/DOQI) target.
---------------------------------------------------------------------------
    \6\ Id.
---------------------------------------------------------------------------
      The number of hospital days dropped 15% from 1993 to 
2001, despite a substantial increase in the age and co-morbidities of 
patients on dialysis.\7\ Similarly, Medicare spending for dialysis 
patients receiving adequate dialysis is about 15% lower than for those 
receiving inadequate dialysis. High quality and efficient outpatient 
dialysis leads to less frequent and less expensive hospitalizations and 
surgical interventions, reduced drug use, and overall better outcomes 
for patients.
---------------------------------------------------------------------------
    \7\ United States Renal Data System, USRDS 2003 Annual Data Report: 
Atlas of End-Stage Renal Disease in the United States, at 104, National 
Institutes of Health, National Institute of Diabetes and Digestive 
Kidney Diseases, Bethesda, MD, available at www.usrds.org/atlas.htm 
(accessed 2006).
---------------------------------------------------------------------------
      The use of fistulas to routinely provide access to the 
bloodstream for the purpose of providing dialysis treatments has 
increased from 27.8% in 1998 to 35.2% in 2002.\8\ Fistula use is known 
to lessen complications from dialysis and improve patient outcomes, and 
is associated with lower per-patient Medicare costs.
---------------------------------------------------------------------------
    \8\ United States Renal Data System, USRDS 2005 Annual Data Report: 
Atlas of End-Stage Renal Disease in the United States, at 24, National 
Institutes of Health, National Institute of Diabetes and Digestive 
Kidney Diseases, Bethesda, MD, available at www.usrds.org/atlas.htm 
(accessed 2006). A fistula is a surgically created connection between 
an artery and vein in the arm or leg.

    Indeed, there have been continuous, demonstrable improvements in 
patient outcomes, patient safety, and quality of life for patients 
suffering from kidney failure.
    Finally, RLC member companies have improved clinical performance 
and outcomes by increasing efficiencies and productivity in each 
treatment. RLC members provide intensive direct patient care services, 
for approximately four hours during each treatment. Patients are 
clinically evaluated before dialysis is administered; nurses and 
technicians spend one-on-one time ensuring patient safety, comfort and 
clinical effectiveness at each treatment; nutritionists work with 
patients to educate and improve their dietary habits; and social 
workers provide a broad range of lifestyle maintenance and counseling 
services. Facilities provide all of these services, including needed 
diagnostic tests and pharmaceuticals, to patients for an average per-
treatment payment of $215-$220 from the Medicare program.\9\ We believe 
this figure presents an exceptional value for beneficiaries, the 
Medicare program and the taxpayers who fund it, and could be a model 
for other financing systems in American health care.
---------------------------------------------------------------------------
    \9\ See generally, Medicare Payment Advisory Commission, Report to 
the Congress: Medicare Payment Policy, Washington, D.C. (March 2005).

---------------------------------------------------------------------------
    2.   Do we support pay-for-performance?

    The kidney care community is supportive of and ready for pay-for-
performance, especially a system that rewards providers who produce 
positive improvements in patient clinical outcomes, which ideally would 
be tied to an annual payment updating mechanism (as is done in other 
Medicare provider segments). As we have discussed, we have already 
achieved the quality outcomes that are the foundation of any pay-for-
performance system. In addition, the Kidney Care Partners--an alliance 
of the broader kidney care community of which I am privileged to be the 
current Chairman and in which the RLC pays a key role--is preparing for 
additional quality advances in the near future by mapping an ambitious 
quality improvement agenda--the Kidney Care Quality Initiative (KCQI)--
which is charged with developing a consensus-based pay-for-performance 
program that includes clinical and quality of life measures and takes 
into account the unique needs of pediatric patients. The KCQI's goal is 
to develop a program that federal policymakers can implement 
immediately. We believe this program is ready for consideration now, 
and we are fully supportive of the efforts of this Committee and other 
federal policymakers to inject value-based purchasing models into the 
Medicare ESRD program and into Medicare's other payment systems.

    3.   How important is an annual update to our ongoing quality 
improvement efforts?

    As we have discussed, dialysis providers must seek payment updates 
directly from Congress each year--an obligation unique to the dialysis 
payment among most other Medicare payment systems that receive payment 
updates automatically each year. While this process has resulted in 
Medicare payments that do not cover patient treatment costs, dialysis 
providers have continued to provide high quality health care to 
Medicare beneficiaries. We have been able to accomplish this, despite 
the Medicare deficits, by cross-subsidizing Medicare reimbursement with 
the higher rates from private insurance. However, this system is simply 
not sustainable for the future, as the numbers of private pay patients 
decline and as dialysis providers compete with other health care 
providers for qualified staff. An annual update mechanism is essential 
to fixing this unstable cross-subsidization once and for all, ensuring 
that Medicare pays its fair share for its beneficiaries, as required by 
the Social Security Act,\10\ and allowing dialysis providers to 
continue providing high quality, cost effective care.
---------------------------------------------------------------------------
    \10\ See Social Security Act Sec. 1861(v)(1)(A)(i) (``--the 
necessary costs of efficiently delivering covered services to 
individuals covered by the insurance programs established by this 
subchapter will not be borne by individuals not so covered, and the 
costs with respect to individuals not so covered will not be borne by 
such insurance programs--.'').
---------------------------------------------------------------------------
    We believe an annual update to the dialysis payment system is a 
necessary foundation from which to build upon our quality improvements 
to date. A stable, predictable payment update is an essential step 
toward putting dialysis payment on equal ground with other Medicare 
payment systems. Dialysis providers believe in and are guided by the 
quality imperative, as are others, but in order to be fully 
competitive--to invest in new technology, commit to hiring high quality 
staff, and continue to improve productivity--we simply must be provided 
the same resources as other Medicare providers that work within a 
steady, seamless financing mechanism.

    4.   Do we support the MedPAC recommendations?

    Yes. The RLC appreciates MedPAC's thoughtful analysis of our 
clinical and economic concerns related to dialysis, including the lack 
of an annual update mechanism. MedPAC's two payment recommendations 
from its January 2006 public meetings are appreciated and are generally 
supported by the RLC.
    Recommendation 1: Congress should update the composite rate by the 
projected rate of increase in the ESRD market basket, less half the 
productivity adjustment, for services provided in calendar year 2007.
    The RLC supports MedPAC's proposed update to the composite rate. We 
believe the proposed update is justified and imperative for 2007 
because it takes steps to meet our real costs in operating clinics and 
providing clinical services with the newest, most appropriate 
technology and the most highly qualified staff. RLC members want to 
deliver the best possible care, and we are pleased by improvements in 
patient outcomes at many of our companies, but we cannot continue this 
progress indefinitely without an update formula that takes into account 
the high cost of new technologies, daily operating costs, and the cost 
of attracting and retaining high quality doctors, nurses and other 
clinical staff.
    We are pleased with the proposed one year increase in the composite 
rate for 2007, and with similar proposed increases that preceded it.  
Given the fact that MedPAC has consistently recommended updates for the 
last five years, we believe a more comprehensive and consistent policy 
for updating dialysis services each year is warrantedand essential to 
our ongoing ability to provide quality dialysis services for our 
patients. Although the single year updates have helped to narrow the 
gap in our reimbursement, they have not eliminated our ongoing Medicare 
deficits. Thus, this payment situation is not viable going forward.
    RLC supports an annual update formula modeled after the one 
currently used within the hospital prospective payment system. Under 
this model, the Secretary of the Department of Health and Human 
Services (HHS) would have authority to increase the ESRD ``market 
basket''--i.e., the percentage by which the cost of the mix of goods 
and services included in the provision of dialysis services, 
appropriately weighted, exceeds the cost of such mix of goods and 
services for the preceding calendar year.\11\ The Secretary would also 
take into account the increase in the cost of providing the services 
due to new technology, new service delivery methods, and other relevant 
factors. Another important component of this update formula would be to 
permit the Secretary to periodically review and update the items and 
services within the market basket.
---------------------------------------------------------------------------
    \11\ The costs would include labor (including direct patient care 
costs and administrative labor costs, vacation and holiday pay, payroll 
taxes, and employee benefits); other direct costs (including drugs, 
supplies and laboratory fees); overhead (including medical director 
fees, temporary services, general and administrative costs, interest 
expenses, and bad debt); capital (including rent, real estate taxes, 
depreciation, utilities repairs and maintenance); and other allowable 
costs specified by the Secretary.
---------------------------------------------------------------------------
    For our patients, only 7% of whom are not eligible for Medicare, 
access and quality are directly related to Medicare reimbursement. For 
this reason, it is essential that Congress maintain its commitment to 
beneficiaries with ESRD by establishing an annual update mechanism for 
the dialysis services they need to stay alive.
    Over the past five years, MedPAC has consistently called for annual 
improvements in dialysis payment policy, including upward adjustments 
to the composite rate, the establishment of quality incentive policies 
for physicians, and the elimination of unfair site-of-service payment 
differentials. We thank the Commission for its understanding of and 
commitment to these proposed policy changes. However, we urge the 
Commission to go further still and make recommendations to the Congress 
for the creation of an automatic annual updating mechanism for the 
dialysis payment, like those available to other Medicare payment 
systems.
    Recommendation 2: Congress should direct the Secretary to (1) 
eliminate differences in composite rate payments between hospital and 
freestanding facilities and (2) combine the composite rate and drug 
add-on adjustment.
    The RLC supports both aspects of MedPAC's second 
recommendation\12\--first, to eliminate the approximately $4 per 
treatment difference in the hospital-based facility and independent 
facility composite rates; and second, to combine the composite rate and 
drug add-on adjustment.
---------------------------------------------------------------------------
    \12\ Medicare Payment Advisory Commission, Transcript of January 
11, 2006 Public Meeting, Washington, D.C., at 33-34 (January 2006); 
Report to the Congress: Issues in a Modernized Medicare Program, 
Washington, D.C., at 89, 91 (June 2005).
---------------------------------------------------------------------------
    The RLC agrees with MedPAC that CMS should eliminate the 
differences between hospital-based and independent facilities in paying 
for composite rate services. There is no data or evidence to suggest 
that hospital-based facilities treat patients of greater acuity or 
incur additional, unique costs in treating their patients. Since there 
is no rationale for doing otherwise, CMS should pay the same rates for 
the same services, regardless of the treatment setting. In addition, 
payments should reflect the costs of efficient providers and be 
adjusted for costs that are beyond the providers' control, rather than 
allow inefficiencies to continue. If CMS were to maintain different 
composite rates, hospital-based providers would inappropriately 
continue to receive higher payments for providing the exact same 
services that independent facilities do. There is simply no economic or 
policy justification for this differential. Therefore, we support 
MedPAC's recommendation to eliminate these differences, and urge the 
Congress to mandate such action.
    We also support the MedPAC recommendation to combine the composite 
rate and drug add-on adjustment, but note that such action must be done 
in a way that is consistent with Congressional intent in establishing 
the drug add-on adjustment. We believe that the proposed combination of 
composite rate services and the drug add-on adjustment is useful, but 
only if this combined payment amount is indexed to account for expected 
annual increases in drug spending, as required by the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003.
    Finally, we would like to note that we continue to work with 
Commission Members and staff on patient nutrition, an issue that has 
been raised by the Commission. In our experience, one of the key issues 
that directly affects the quality of patient care and clinical outcomes 
in the ESRD program is nutrition. Approximately 30-40% of all dialysis 
patients are malnourished;\13\ 6-8% are severely malnourished;\14\ and 
3-4% fail to respond to conventional nutritional therapies.\15\ Severe 
malnutrition is the best predictor of impending death for dialysis 
patients. We believe that dialysis providers and federal policymakers 
must address patient nutrition issues in ESRD care protocols.
---------------------------------------------------------------------------
    \13\ Pupim LB, Caglar K, Hakim RM, Shyr Y, Ikizler TA., Uremic 
Malnutrition Is A Predictor of Death Independent of Inflammatory 
Status, Kidney Int., 2004 Nov; 66(5):2054-60.
    \14\ Hakim RM, Levin N., Malnutrition in Hemodialysis Patients. Am 
J Kidney Dis., 1993 Feb;21(2):125-37.
    \15\ Owen WF Jr, Lew NL, Liu Y, Lowrie EG, Lazarus JM, The Urea 
Reduction Ratio and Serum Albumin Concentration as Predictors of 
Mortality inPatients Undergoing Hemodialysi s. N Engl J Med., 1993 Sep 
30;329(14):1001-6.
---------------------------------------------------------------------------
    I thank you for this opportunity to share the RLC's views with you 
today, and look forward to answering any questions you may have.

                                 

    Chairman JOHNSON OF CONNECTICUT. Thank you very much. I 
appreciate the panel's testimony.
    Dr. Hedberg, I particularly appreciate your going into 
detail about the Advanced Medical Home Practice model, and I 
will work with you to see if we can't begin getting that out 
there and test it, because it is truly the rational way to 
begin to bring fee-for-service Medicare into the capacity to 
deliver chronic disease management. We have some demonstrations 
out there to be sure that the fee-for-service component of 
Medicare keeps up with the times. We can mandate it on the 
plans, and they have the technology to do it, and they are more 
integrated, so it is harder for fee-for-service to do it.
    I think your approach not only will help us get to proper 
reimbursements of family physicians and internists that will 
practice family care, but also will give us a way for that 
family care to address what we know to be a significant problem 
with Medicare, and that is the number of seniors with multiple 
chronic illnesses. When 20 percent at five or more, and almost 
every senior has at least one, you really are then responsible 
for moving the system from a silo incident illness payment 
model to a more holistic health prevention and management 
model. I look forward to working with you. Our bill needs some 
refinement in that regard, and I open that opportunity to you 
and anyone else who is interested. Since your testimony went 
right to that, I was particularly interested in mentioning 
that.
    The other thing I want you to think about is that MedPAC's 
testimony recommends these panels, which I think is a promising 
idea, but only for overvalued services. Undervalued services 
are just as important, and it was only a couple years ago that 
MedPAC was concerned about under coding. One of the reasons 
people aren't choosing family practice is because we undervalue 
the services that a family practitioner provides. I think it is 
equally important that if we re going to get into this panel 
formation, that we get into it with both feet and look at both 
over reimbursement and under reimbursements. There is a lot to 
be learned there. I think the system is really quite 
considerably off base from where it was when it began. I just 
want to comment on a couple of other things in your testimony, 
and then I am going to yield to Mr. Stark, and let you add as 
you would like.
    I do want to comment, Mr. Guillard, that while I appreciate 
the seriousness of the Medicaid under reimbursement issue, you 
have to admit that the Medicare payment system is a very blunt 
instrument, because as Mr. Hackbarth pointed out, a home that 
gets lots of Medicaid and no Medicare, gets all the benefit of 
the high reimbursements and little of the problem of the low 
reimbursements. Those homes that take the--you know 95, 90 
percent, 85 percent Medicaid are really left then with a 
problem. I think MedPAC needs to begin mentioning that. I think 
this Committee needs to be talking about that. We need to be 
talking about to the other Committee about that. If we want to 
accurately pay for the services we provide, we are really going 
to have to insist that other payers, especially that we 
participate in, at least are accountable to that same measure.
    I do want to mention, Mr. Evans, that in your testimony you 
point out that if the President's recommendations are 
implemented, you will lose $30 million next year. That is a lot 
of money when you add up all the factors that you laid out. You 
brought up in your testimony something that I tried to discuss 
with MedPAC, but not very well. You are losing money. You say 
in your testimony that 70 percent of all hospitals lose money 
on Medicare patients, and yet, you are opening a new hospital. 
They are seeing that then as everything is all right. If that 
doesn't indicate that everything is all right, since you have 
the money to open another hospital, then you need to explain 
why you are opening another hospital even though you have 
negative Medicare margins, and maybe may not indicate that 
everything is all right. I conclude my comments with that 
question. I invite you to answer it, and then we will go to Mr. 
Stark, and then you will each have another shot at----
    Mr. EVANS. You won't be surprised, Madam Chairman, to learn 
that I get asked that question fairly often. We have three 
downtown hospitals, a large pediatric hospital, Riley Hospital 
for Children, highest level of acuity in America there; Indiana 
University Hospital, which is an academic medical center. That 
is where Lance Armstrong went to get his treatment, just to 
give you some idea of what goes on there. Then a large 
community hospital, Methodist Hospital, which has the large 
emergency department that I referred to earlier. We have about 
1,200 beds downtown. They are not economically sustainable, so 
we require a system to support the 1,200 that we have downtown, 
so we build or own other hospitals throughout the State so we 
can be a viable system in totality. That is, we have hospitals 
that lose money and we have hospitals that make money.
    At the end of the day, the overall margin for Clarian 
Health Partners is 4.8 percent. That includes our investment 
portfolio, which at times during the last decade has been 
profitable and at time has not been profitable, but we are 
trying to build an integrated system, so that we are able to 
support the critical care that occurs downtown by having the 
more profitable work that occurs in the suburbs--where we built 
the new hospitals has been in the suburbs.
    Chairman JOHNSON OF CONNECTICUT. I think that is telling. 
In the suburbs you are likely to get a more higher percentage 
of payers who pay you the cost.
    One last question to you, because it also goes to my 
concern about MedPAC's methodology. Given the things they look 
at to determine cost, do you think they adequately consider the 
cost of running an emergency room?
    Mr. EVANS. Absolutely not. I will tell you, the emergency 
rooms, as every manager in this room knows, go on diversion on 
a regular basis. Every community has to have one that doesn't. 
That is ours. It does not. It can be profitable to the extent 
that it feeds certain kinds of trauma to the main hospital, no 
doubt about that, but a great deal of what it does is the 24-
by-7 service that it provides. I am not sure the level of 
acuity that a Level 1 trauma center presents to its parent 
hospital is properly recognized anyplace. Madam Chairwoman, 
here is the tough decision, I think, does society want it or 
not? If society wants it then they should value----
    Chairman JOHNSON OF CONNECTICUT. Like so many things, it 
wants it but it doesn't want to pay for it, and it is another 
one of those undervalued service areas. You talk to any 
emergency room physician--and they don't stay there long 
because they can't afford to stay there long. It is just as 
important to look at undervalued services as overvalued 
services, and that might be part of straightening out the 
reimbursement kind of mess that we put hospitals in.
    My point was--and if you support it, you have to give more 
and more examples--my point was you just can't look at the 
bottom-line margins, either Medicare or total, without looking 
at a combination and what is behind it, where really are the 
losses being absorbed and where are the profits to offset them. 
If a specialized hospital bills in the area and draws paying 
patients off, or in ambulatory surgery center is established 
and draws paying patients off, what does the community hospital 
do? Do they cut out services for the poor that are losing 
money, or do they build cancer care services that might make 
money?
    We need to know more about how in a sense the beast is 
responding to the pricks in its skin because the responses now 
are going to have long-term implications for the availability 
of care in many, many areas, but you all who are professionals 
can help me know whether my general view is true or not. I am 
always open to being wrong. If it is true, we have to fill it 
with far more detail because it is not driving the analysis 
that drives reimbursements. I could easily be wrong, but 
anyway, thank you for your testimony.
    Mr. Stark.
    Mr. STARK. Thank you, Madam Chair.
    I just don't know where to begin. I guess I should tell Mr. 
Evans that I just got a call from the American Hospital 
Association, and they are going to raise your dues for not 
pushing for a higher reimbursement. I am not sure they are 
going to welcome you back to the convention, but I will vouch 
for you.
    I am concerned that in your testimony, there are two things 
that puzzle me. You suggest that if the rates are cut, you are 
just going to get more efficient. Now, you did pretty well. You 
made 72 million bucks in 2003, but isn't your board going to be 
upset if we were to tell them we heard that you had a lot of 
areas where you could increase your efficiency and you haven't 
done it yet?
    Mr. EVANS. My board reminds me almost on a monthly basis.
    Mr. STARK. I can't also resist, having watched ``Goodnight 
and Good Luck,'' trying to mimic my former Senator when I grew 
up, but are you now, or have you ever been----
    [Laughter.]
    Mr. STARK. --in any kind of a business relationship with or 
professional relationship with Pat Rooney?
    Mr. EVANS. Me?
    Mr. STARK. Yes.
    Mr. EVANS. I used to be a practicing lawyer, and my law 
firm represented Golden Rule.
    Mr. STARK. Which is where you get your interest in health 
savings accounts?
    Mr. EVANS. No.
    Mr. STARK. Okay. Mr. Guillard, and Dr. Hedberg, are either 
of you guys worried about what is going to happen if we 
continue to overpay HMOs, what is going to happen to your 
reimbursements? That trouble you, ever thought about it, Mr. 
Guillard?
    Mr. GUILLARD. In terms of our sector, at the present time 
we have a growing level of referrals from managed care 
organizations, and we continue to try to ensure that we get 
adequate rates from those managed care organizations.
    Mr. STARK. you are happy, if we pay it more, you come out 
well?
    Mr. GUILLARD. We still struggle to get rates that are 
appropriate, given the acuity level of the patients.
    Mr. STARK. Dr. Hedberg?
    Dr. HEDBERG. What was your question again, sir?
    Mr. STARK. We have talked about it, but we are overpaying 
managed care plans, with the result that we don't have as much 
money to pay the people you represent. Does that concern you?
    Dr. HEDBERG. Many of the people we represent work in HMOs, 
including Kaiser Permanente and others all over the country, 
that is part of our Membership, and I haven't thought of this 
as a major concern.
    Mr. STARK. I was thinking for those who operate in fee-for-
service. The Kaiser guys are on salary, so that doesn't trouble 
them.
    Dr. HEDBERG. I think most of us recognize that there is a 
broad spectrum of internal medicine being practiced, and that 
some are going to be salaried and some are not salaried, and I 
don't think we pay too much attention to the differences.
    Mr. STARK. Mr. Thiry, can you tell me a little bit about 
DaVita pulled in 228 million bucks and change in profit in 
2005. How much of that came, or how do you relate drug rebates 
that dialysis providers traditionally get from pharmaceutical 
manufacturers? How big a item is that in your profit?
    Dr. THIRY. I don't know the answer offhand. I would have to 
go back to my group.
    Mr. STARK. Would you guess? I don't know the answer. A 
little bit or a lot?
    Dr. THIRY. What I think, we do about 4\1/2\ billion dollars 
in annual revenue, and----
    Mr. STARK. How much of that is drugs?
    Dr. THIRY. That is at about 35 percent of our cost 
structure, so we are talking about well over a billion dollars 
in drug expense, and so----
    Mr. STARK. If you have a 5 or 10 percent rebate, it would 
be a big chunk of change.
    Dr. THIRY. Correct.
    Mr. STARK. Okay. I guess I would just ask you, are you all 
sanguine with the budget for this year? Mr. Evans is.
    Mr. EVANS. No. In my written statement I did not----
    Mr. STARK. I know what I want to ask you. Tell me this--let 
me give you my test, and I am not really being facetious. Let 
me ask you how much does a base mammography exam cost at your 
hospital?
    Mr. EVANS. I don't know.
    Mr. STARK. How much does a proctoscopic examination cost at 
your hospital?
    Mr. EVANS. I just had one. I will let you know when I get 
the bill.
    Mr. STARK. You don't know it, do you?
    Mr. EVANS. No.
    Mr. STARK. Who would know more, the chief executive officer 
of the hospital? I tried this on doctors. We talk about 
shopping for stuff. Nobody knows what it costs.
    Mr. EVANS. Yes. We are----
    Mr. STARK. Seriously now.
    Mr. EVANS. You are absolutely right.
    Mr. STARK. You could give this test, I will bet you Dr. 
Hedberg isn't sure what a proctoscopic examination costs in his 
neighborhood, unless you had one just recently.
    Dr. HEDBERG. Well, it is very rarely done. It is now a 
colonoscopy.
    Mr. STARK. I am sorry, okay.
    [Laughter.]
    Dr. HEDBERG. I think that Medicare pays about $250, 
something like that, $200 to 250 dollars, but some of the 
private patients are charged much more, maybe in the 600-700 
dollar range. These figures are just a guess.
    Mr. STARK. I just raise that----
    Dr. HEDBERG. I haven't had one for 2 years. It may have 
changed.
    Mr. STARK. What is it, 5 years now or 10? Five, 10 for you.
    Dr. HEDBERG. Generally, I think it is 10 now for people who 
are really clean.
    Mr. STARK. I raise that only to say that this idea of the 
free market is difficult. We met with a thoracic surgeon 
yesterday, and as he pointed out, 70 or 80 percent of the 
procedures that he performs are done in a hurry because the 
ambulance just brought him in, and you are not apt to shop with 
the ambulance driver giving a Chinese menu of where you could 
go to get it at what price, and that is what troubles me a 
little bit about this idea that just by transparency we are 
going to have people picking things which Dr. Hedberg to help 
me select, but I am never sure that I know until I talk to him. 
Then he says, ``Stark, you need to do this or that,'' and I 
say, ``Yes, sir.''
    Dr. HEDBERG. The instance you brought up though is probably 
a gunshot wound and nobody argues with anybody in those 
situations.
    Mr. STARK. No. I mean the heart guy goes into some kind of, 
what do you call it, cabbage or whatever? I mean it is bang, 
and they need to go quickly. This surgeon said that he thinks 
about 70 percent of the people he sees in that procedure aren't 
there--you know it isn't an elective procedure.
    Madam Chair, again, thank you. I think it has been a 
fascinating hearing, and I appreciate your indulgence.
    Chairman JOHNSON OF CONNECTICUT. Thank you.
    Mr. Evans, is your hospital in Indianapolis involved in one 
of the demonstrations on price transparency? We are going to 
have a hearing on this.
    Mr. STARK. Can I ask one more?
    Chairman JOHNSON OF CONNECTICUT. Yes.
    Mr. STARK. You mention in your testimony, the veterans. Do 
you use that system?
    Mr. EVANS. We work with Dr. Bagidn and the Veterans 
Administration, and we have a----
    Mr. STARK. Do you like it?
    Mr. EVANS. Yes. We have a robust relationship, and we have 
a robust----
    Mr. STARK. Do you have a chief nerd who knows all about 
computers and IT on your staff?
    Mr. EVANS. We have a nerd department.
    Mr. STARK. A whole nerd department.
    Mr. EVANS. Yes.
    [Laughter.]
    Mr. STARK. Mrs. Johnson and I are in the business of 
chatting with nerds about this stuff, and I am wondering about 
the veterans program, which people say, ``Oh, gee, it is old-
fashioned and stuff,'' but that is why----
    Mr. EVANS. The Veterans Hospital is on our campus, so is 
our Children's Hospital, University Hospital and community 
hospital are within walking distance of each other, and the 
public hospital is as well. We have a very robust----
    Mr. STARK. We should go look. Will you invite us out to 
observe?
    Mr. EVANS. Consider the invitation extended, and we would 
be happy to show you how it works, and how the patient can see 
through the silos if----
    Mr. STARK. Dr. Hedberg, if he had Vista could get--and if I 
was a patient at your hospital and I went to see him, he could 
get the information quickly----
    Mr. EVANS. We went fully online last week, as a matter of 
fact, and before I came here I asked our chief nerd how many 
data transmissions we had had so far, and it was well over 
100,000. The amount of data is huge. I personally went through 
it a couple weeks ago with my mom, who presented herself at one 
of our suburban hospitals, and we were able to get the data 
transmitted immediately. I consider it a moral imperative, by 
the way, and this is what I--I didn't say it, but collaboration 
rather than competition is the way to deal with disease, rather 
than making the patient jump around from place to place.
    Chairman JOHNSON OF CONNECTICUT. Mr. Evans, do you think 
that the gain-sharing model might be able to encourage 
collaboration?
    Mr. EVANS. Yes, ma'am, for sure.
    Chairman JOHNSON OF CONNECTICUT. On the collaboration 
issue, how many of your physicians out in the community can 
communicate with your system?
    Mr. EVANS. Well, we have all the large groups signed up, so 
I would guess it is 30 to 40 percent of the physicians. The 
primary care doctors are organized in large groups, so they 
will be signed up. We either are affiliated with or own the 
larger group, so they will be required. Now, signing them up 
and getting them to use it are two separate things.
    Chairman JOHNSON OF CONNECTICUT. Who pays for the 
technology?
    Mr. EVANS. We are paying for it. We have a demonstration 
grant with CMS. We are the home of Regenstreif Institute, which 
is the largest clinical----
    Chairman JOHNSON OF CONNECTICUT. I think it would be very 
useful to do that. People do not realize how much CMS is doing 
to enable the system to try out, to get to the point of 
interoperability. These grants are very important. I didn't 
realize you had one.
    Then, to answer my first question, aren't you involved in 
transparency demo too?
    Mr. EVANS. I am not sure.
    Chairman JOHNSON OF CONNECTICUT. Price transparency.
    Mr. EVANS. We have a price transparency demo going on, but 
I don't know if it is the one to which you are referring.
    Chairman JOHNSON OF CONNECTICUT. There aren't very many. I 
think it is with Aetna in your area.
    Mr. EVANS. No. That is the one in Cincinnati.
    Chairman JOHNSON OF CONNECTICUT. That is the one in 
Cincinnati, okay. Well, we will check on that, but we will try 
to get out and see all the things you have going. Thank you 
very much.
    Mr. STARK. Dr. Hedberg.
    Dr. HEDBERG. I just wanted to mention, Thank you very much, 
Madam Chairman, for your interest in the Advance Medical Home. 
We think that this proposes a way that we can get proper 
preventive chronic care for everybody, and we hope that 
eventually the uninsured would be benefited tremendously by 
this. This is a comprehensive plan.
    Chairman JOHNSON OF CONNECTICUT. In terms of the grants 
that the government is making available, they are making 
available some of these grants to urban areas, and they are 
connecting people up from the emergency room with Medicaid with 
a chip, and then making sure that the other people do get an 
electronic health record and are placed with a physician who 
provides them essentially this medical model, medical home 
model. However, we need to follow that with a different payment 
system if you are a medical home. For the uninsured in the 
small cities--this is not a population that changes a lot, the 
homeless population doesn't change a lot--we could actually do 
a far better job of providing not only good care, but 
preventive care, early intervention care for the poor, 
uninsured and homeless by following this model. There are 
things we need to see out there in the real world, and we will 
try to make it out.
    Dr. HEDBERG. We will be glad to work with you on that, and 
we believe very strongly that health information technology, 
the electronic health record and its interoperability is the 
basis of all of this.
    Mr. STARK. Can I follow up?
    Chairman JOHNSON OF CONNECTICUT. You certainly can.
    Mr. STARK. Doctor, do you see any hope that this medical 
home or disease management or call it what you will, and its 
proper reimbursement to the providers might be a special task 
that the primary care docs, the family docs, and the internists 
would be best suited to provide?
    Dr. HEDBERG. Absolutely.
    Mr. STARK. I don't see a surgeon, he would see you once or 
twice or she would see you once or twice after they spent a 
couple hours with you, but it is who calls you to say, ``Did 
you walk your half mile today?'' It is you guys, and you don't 
usually get paid much. If we paid them, maybe we would get 
more----
    Dr. HEDBERG. Correct.
    Mr. STARK. --or would they worry about signing up at med 
school, and saying, ``Gee, I am just being another clerk.''
    Dr. HEDBERG. We want to make primary care exciting, and 
what would make it exciting is to be able to provide what we 
think they need and what we think they want.
    Mr. STARK. A little money might help too.
    Dr. HEDBERG. Money helps.
    [Laughter.]
    Dr. HEDBERG. I like the statement that we want a proactive 
medical system in the home. That is the spirit, and we want an 
active patient who knows about their disease.
    Chairman JOHNSON OF CONNECTICUT. Dr. Hedberg, one reason I 
find it distressing to have the kind of conversation we have 
had earlier in this hearing is that ultimately the combination 
of the advanced medical home and distance technology will allow 
rural physicians to manage almost any care protocol because 
they will have the specialist at their fingertips through the 
imaging technology, through the consulting technology. It is 
implanting that technology that was the reason for the Rural 
Caucus wanting higher reimbursement rates so the plans would be 
able to afford to hook rural medicine into urban medicine and 
into medical centers.
    Although I know the money sounds bad and we need to look 
into this, we have to keep in mind that if we don't connect up 
rural care more effectively so a rural physician, who has had 
all these years of training and internship and residency, will 
want to stay there because some of his interesting patients he 
gets to follow, he gets to manage.
    Dr. HEDBERG. Sure. Let's say this: we are desperate to get 
all of medicine wired into modern health information 
technology.
    Chairman JOHNSON OF CONNECTICUT. We are desperate and that 
is why I don't like the recommendation, not taking that into 
account, and I am glad you addressed the pressure you are under 
from your board every day on productivity.
    I do also think that there was a--see, our instruments are 
too blunt. The Rural Caucus wanted something to happen that we 
wouldn't have objected to, so your concept gives us a way to 
begin to re-approach that in a way that is more carefully 
associated with care. The blunt instrument of raising the rural 
floor was not something I supported to begin with, but it is 
there, and that was the reason for it, to keep physicians in 
the rural area, and to give plans enough reimbursement to use 
the technology to be able to hook people together. I was there 
when those discussions were held. That is what the slush fund 
is for that the Administration doesn't want to give up, and so 
on and so forth.
    We need to look holistically at the system like we need to 
look holistically at individual people and their health needs, 
and I hope we will be able to get to that in a rational way, 
although this environment is far from a rational environment in 
which to try to do that. Thank you very much. I appreciate Mr. 
Stark for staying, and his real intense interest in the topic 
that we have come to here at the end, which is ultimately the 
challenge we face.
    Dr. HEDBERG. We feel that we can link this concept with the 
traditional physicians' feelings for their patients and wanting 
to help, and wanting to have the time to help. We can really 
rejuvenate the profession.
    Chairman JOHNSON OF CONNECTICUT. Thank you. The hearing is 
adjourned.
    [Whereupon, at 5:24 p.m., the hearing was adjourned.]
    [Question submitted from the Honorable Sam Johnson to Glenn 
M. Hackbarth and his response follows:]

    Question: MedPAC has articulated its support for giving the HHS 
Secretary authority to regulate gainsharing arrangements. However, one 
of my concerns with gainsharing is its impact on small, innovative 
medical device companies (some of which are in my district), who must 
already overcome restrictive/anticompetitive practices in the current 
marketplace.
    My understanding is that the practical implication of gainsharing--
whatever its hypothetical implications may be--is that hospitals are 
contracting with only the market leaders. Therefore, gainsharing could 
have the unintended negative consequence of limiting diffusion of new 
technology into the marketplace and ultimately harming patient care and 
stifling innovation. Can you please address this issue?
    Answer: Gainsharing should improve competition based on cost and 
quality for medical devices and supplies. Under gainsharing, hospitals 
and physicians agree to share savings from reengineering clinical care 
in the hospital setting. Such efforts could include the use of lower-
cost, but equally effective, supplies and devices and improving 
compliance with clinical protocols.
    There arrangements have the potential to improve care and reduce 
costs, provided there are safeguards in place. In MedP AC's report on 
the issue, we recommended that these arrangements include specific 
measures to ensure that lower quality does not result. Gainsharing 
arrangements would also need measures to ensure that physicians are not 
rewarded for changing their referrals. For example, arrangements 
approved by the Office of the Inspector General do not limit 
physicians' ability to choose the most clinically appropriate device or 
supply.
    Currently, physicians often do not benefit from choosing lower-
cost, equally effective products because the hospital in which the 
physician works keeps all of the savings (and is prohibited under law 
from sharing these savings with physicians). Under gainsharing, the 
hospital could share these savings with physicians. Device companies 
would be rewarded for developing lower-cost, clinically equivalent 
products. Because physicians would still be able to choose the most 
appropriate device for a patient, companies that develop higher-cost 
products that are clinically superior would not be penalized.

                                 

    [Submissions for the record follow:]
 Statement of American Association of Homes and Services for the Aging
    The American Association of Homes and Services for the Aging 
(AAHSA) appreciates this opportunity to submit a statement for the 
record of the Ways and Means Health Subcommittee's hearing on the March 
report by the Medicare Payment Advisory Commission (MedPAC).
    AAHSA members serve two million people every day through mission-
driven, not-for-profit organizations dedicated to providing the 
services people need, when they need them, in the place they call home. 
Seventy percent of our members are faith-based. Our members offer the 
continuum of aging services: home and community based programs, adult 
day programs, continuing care retirement communities, nursing homes, 
assisted living, and senior housing. AAHSA's commitment is to create 
the future of aging services through quality people can trust.
    We are extremely concerned about MedPAC's recommendation that 
nursing facilities should receive no payment updates for inflation in 
2007. We believe that MedPAC's own findings do not support this 
position for non-profits. MedPAC itself found that (1) Medicare margins 
for non-profit skilled nursing facilities are approaching zero, and (2) 
that the Medicare Resource Utilization Group (RUG) system adopted by 
CMS last year does not accurately account for the cost of caring for 
residents with complex conditions. The combination of these factors has 
a devastating impact on non-profit nursing homes.
1. Not-for-profits' Medicare payment margins are approaching zero
    On Dec. 8, 2005, the MedPAC staff publicly reported the difference 
between for-profit and non-profit skilled nursing facilities' Medicare 
reimbursement margins for the first time. While for-profit margins were 
well over 10 percent, margins at non-profits approached zero. MedPAC 
could not provide conclusive evidence to explain this difference, but 
they did find that non-profits had higher costs per day than for-
profits, possibly due to higher nursing and other care-related costs.
    The report stated that:
    ``Although the estimated overall SNF sector margins adequate to 
cover the costs of providing care to Medicare patients . . . as the 
margins are projected to decline in 2006 [to 9.7 percent for all SNFs] 
certain categories of providers--government facilities and voluntary 
facilities--margins are approaching zero.'' (page 176)
    On not-for-profits' access to capital:
    ``Analysts continue to have a negative outlook for the non-profit 
SNF sector. Annual public debt issurance for non-profits dropped again 
in 2004 . . . and it's expected that there won't be any investment 
grade [non-profit] nursing homes.'' (page 174)
    MedPAC reported that, for FY 2004, for-profits had margins of 16% 
and non-profits had margins of 4%. In December, MedPAC estimated the 
2006 Medicare margin for all (for-profit and not-for profit) 
freestanding skilled nursing facilities to be 9.7% based on policy in 
current law. Changes to bad debt reimbursement policy and the Deficit 
Reduction Act would reduce the overall margin to 9.4%, with non profit 
margins approaching zero. The significant reduction in margin 
percentage between 2004 and 2006 results from the revised RUG system 
and the accompanying elimination of temporary payment add-ons.
    MedPAC estimated that in 2006 the combined effect of all these 
payment changes will be a 0.1% increase for all facilities, and a 
negative 0.4% for freestanding skilled nursing facilities. Hospital-
based facilities are estimated to receive payment increases. Urban 
hospital-based facilities are expected to see increases of 4.6% and 
rural ones 4.1%. Despite these modest gains, hospital-based SNFs are 
still projected to have extremely negative margins--losing money on 
every Medicare patient they treat.
2. Revised RUG system will cut skilled nursing facilities' 
        reimbursement
    The Medicare skilled nursing facility reimbursement system, which 
is prospective based on Resource Utilization Groups (RUGs), is supposed 
to determine acuity of need and responsibly calculate the cost and pay 
for it. CMS issued a revised RUG system in 2005 that was supposed to 
accomplish this goal, but as MedPAC has acknowledged, the payment 
system still contains significant flaws.. Medicare payment add-ons that 
had been in effect before the latest revision in the RUG system ended 
at the beginning of this year. The new system inadequately reflects the 
true costs of care for medically complex patients, who generally 
require not only extensive nursing care but also significant amounts of 
medications, supplies, tests, respiratory care, and other so-called 
``non-therapy ancillaries''. Nursing facilities therefore face 
significant losses in Medicare reimbursement this year and every year 
hereafter.
    CMS began revising the RUG III system shortly after it went into 
effect in 1998 because research clearly showed that the system did not 
pay accurately, especially for medications and other ``non therapy 
ancillaries.'' Medicare reimburses skilled nursing facilities for many 
very expensive patients at considerably lower rates than Medicare pays 
for patients whose care costs much less. The Inspector General, MedPAC, 
and the GAO have all reported that these inaccuracies. As MedPAC noted 
in its comments to CMS on the proposed refinements, CMS did not 
adequately address these problems when it removed the add-ons, leaving 
care of complex patients still not properly accounted for.
The new RUG system poses the following problems for nursing homes and 
        their residents:
   (a) Quality of patient care implications

      The new system creates strong financial incentives for 
nursing facilities to find patients who qualify for the nine new RUG 
groups.
      To qualify for the nine new (higher) payment groups, 
patients must be assigned to intensive physical therapy and to 
``Extensive Services.'' The ``Extensive Services'' designation requires 
that the patient have an activities of daily living score greater than 
7 and have had intravenous medications, ventilator or respirator care, 
a tracheotomy or suctioning within the last fourteen days, or 
intravenous feeding within the last seven days, even if these 
treatments were given during hospital stays.
      There will be intense financial pressure on facilities to 
``find'' such patients, because otherwise facilities will have 
substantial financial losses under the new rule, about 7--8 percent 
below current reimbursement.
      The availability of patients qualifying for the new RUG 
categories will depend heavily on local hospital practices, 
particularly as to how frequently intravenous medication (rather than 
oral) is ordered. Hospitals seeking to find a SNF for patients who are 
being discharged will soon learn that Medicare payment rules favor SNF 
patients who had an IV in the hospital. Practice patterns are likely to 
shift in ways that have more to do with perverse payments than with 
good clinical care.
   (b) There is no evidence that payment accuracy will be improved by 
        the new payment system; in fact, accuracy could actually be 
        reduced.
      CMS cites only one piece of scientific evidence in the 
final rule in an attempt to justify the nine new RUGs groups and the 
contention that the new system is more accurate, as Congress required. 
But this bit of ``evidence'' is not relevant to the changes CMS 
actually made in the payment system and is the result of researchers 
studying a completely different issue.
      CMS has refused to release the scientific study on which 
the new system is supposed to have been based; nor has the agency sent 
Congress the legally mandated report on the topic, due January 1, 2005.
      Increased payments are not targeted to medically complex 
patients who do not receive rehabilitation, even though their care can 
be very costly, with heavy use of non-therapy ancillaries. The previous 
payment add-on for these patients has expired, reducing the 
reimbursement for their care relative to payments for care of non-
medically complex patients receiving rehabilitation.
      Also, non-therapy ancillary costs would continue to be 
paid as if they correlated with nursing costs, which research has 
repeatedly shown is not the case. CMS itself noted that the new payment 
system would not account accurately for non-therapy ancillary costs, 
and that the addition of nine new RUG categories didn't solve this 
discrepancy. CMS attempted to solve the problem by applying the same 
small increase in the nursing index across all RUG groups, about three 
percent of total revenues. But because the payment system doesn't 
accurately cover non-therapy ancillaries or correlate to the nursing 
index, the payment system still does not accurately correlate costs of 
care with payment rates.
      CMS used tiny samples of patients who classify into the 
new RUG groups in doing its data analysis. For three of the new RUG 
groups, payments for millions of Medicare days are being set based on 
what happened to fewer than ten patients in a small number of 
facilities nine to twelve years ago. Among other problems, this use of 
small samples risks destroying the accuracy of the current payment 
system's correlation of payment rates to nursing and therapy staff 
times.
      In doing its data analysis, CMS mixed apples and oranges, 
using some numbers from Abt Associates and other numbers from the Urban 
Institute. Each of these studies used different databases, different 
analytical techniques, and likely different trim points.
      The new RUG system incorporated an inaccurate therapy 
index for computing reimbursement, a mistake that CMS did not 
adequately correct before the new system became final.
   (c) Revisions to the wage index will cause severe financial losses 
        to many facilities and will result in geographic inequities in 
        payment rates.
      Although CMS has predicted a $20 million increase in 
payments to nursing facilities for fiscal year 2006 (October 1, 2005--
Sept 30, 2006), in calendar year 2006 and in every year thereafter, 
facilities will have real losses in revenue because the previous 
payment add-ons have ended and the inaccuracies in the system have not 
been fixed.
      The new RUG system continues to use inpatient hospital 
wage data to define local market differences for skilled nursing 
facilities. This hospital wage index does not as appropriately adjust 
for variations in nursing home labor costs as an index specific to 
nursing homes would.
      The new rule applies new labor market designations issued 
by the Office of Management and Budget to nursing facility payments. 
According to calculations by over 800 AAHSA nursing facility members, 
the redrawn geographic areas will cause substantial losses to many 
facilities.
      Because of the lack of a nursing facility-specific wage 
index, these facilities cannot apply for reclassification, as hospitals 
located in the same geographic areas might.
      The short, one-year phase-in period that CMS set in the 
final rule will make it especially difficult for skilled nursing 
facilities to adjust to the new geographic designations and wage index 
based on hospital data.
      CMS could have, but failed to mitigate the losses through 
a more equitable transition, involving a temporary redistribution of 
resources from facilities that experience extremely large increases in 
wage index to those that experience large decreases.
3. Medicaid under-reimburses for nursing home care
    In the long-term care field, Medicaid serves as a stable but 
inadequate source of reimbursement for the care of those who have 
exhausted their own financial resources. The costs of care do not 
disappear, however, if they are not fully covered by Medicaid.
    Federal law mandates that nursing homes in particular provide the 
level of services that residents need to achieve and maintain their 
highest practicable level of functioning. Nursing homes have to spend 
whatever it costs to provide this level of care. If states reimburse 
nursing homes at less than the cost of care provided, as they generally 
do, the shortfall must be made up from other sources.
    Approximately 66% of nursing home residents have their care covered 
by the program, as do 35% of those receiving home and community-based 
services. Medicaid's failure to adequately reimburse health care 
providers for the care it covers makes it all the more important that 
nursing facilities receive appropriate reimbursement levels from 
Medicare. Every year, the Medicare Payment Advisory Commission (MedPAC) 
reports to Congress that nursing homes are being well paid by Medicare 
for the costs of care covered by that program. These reports never 
discuss the fact that Medicare reimbursements must cross-subsidize 
inadequate Medicaid reimbursement.
    Similarly, nursing homes frequently are forced to raise rates for 
privately-paying residents above the level they otherwise would have to 
pay in order to counteract the inadequate reimbursement facilities 
receive for the care of residents covered by Medicaid. Thus, inadequate 
funding by public programs has become an unfair tax on privately paying 
frail seniors, those whose modest savings and incomes are already 
stretched.
4. Cost of providing nursing home and home health care is rising
    CMS itself projected that the cost of the things that skilled 
nursing facilities must buy will increase by 3.1% over the next year.
    A key component of long-term care, both in nursing homes and in the 
community, is staffing. Long-term care is a labor intensive service--
40% of the cost of nursing home care is for nursing staff--the key to 
quality. Adequate funding therefore is a necessary (if insufficient) 
condition of quality care. The literature confirms the obvious: homes 
that spend more on nursing have better quality of care.
    President Bush's budget for fiscal year 2007 proposed a 2.2% pay 
raise for both federal civilian employees and military personnel. This 
budget request reflects the Administration's recognition that higher 
wages will be necessary to attract and retain qualified workers in the 
coming year. In view of the continuing severe shortage of nurses 
nationwide, health care providers may well have to offer even greater 
pay increases in order to attract and retain the caliber of direct care 
workers needed to give high-quality care.
Conclusion
    The denial of a payment update to skilled nursing facilities in 
2007 would impose a severe hardship, especially in the not-for-profit 
sector, making it extremely difficult for facilities to meet the costs 
of staffing and other elements of high-quality care. Data from CMS and 
MedPAC themselves indicate the need for a payment update in the next 
fiscal year, and Congress must allow the update for which current law 
provides.
    Striving to provide the highest quality of care, not-for-profit 
nursing facilities are spending every dollar of reimbursement they 
receive from Medicare. The denial of a payment update would be a heavy 
financial blow to these facilities.

                                 

    Statement of American College of Cardiology, Bethesda, Maryland
    The American College of Cardiology (ACC) appreciates the 
opportunity to provide a statement for the record of the subcommittee's 
hearing on the March 2006 Medicare Payment Advisory Commission's 
(MedPAC) report to Congress.
    The ACC is a 33,000 member non-profit professional medical society 
and teaching institution whose purpose is to foster optimal 
cardiovascular care and disease prevention through professional 
education, promotion of research, and leadership in the development of 
standards and formulation of health care policy.
    The ACC commends the subcommittee for its work to address the 
problems with the current system of Medicare physician reimbursement. 
We are committed to working with Congress and the Administration to 
strengthen the Medicare program and to ensure that Medicare patients 
can benefit from the life-saving and life-enhancing care that 
cardiovascular specialists provide. As such, the ACC outlines its 
position below on many of the issues MedPAC addresses in its current or 
past reports, including the Medicare physician reimbursement formula, 
office-based medical imaging, valuing of physician services and pay-
for-performance.
Medicare Physician Reimbursement Formula
    The ACC thanks Congress for its action to stop the 4.4 percent cut 
in Medicare physician reimbursement scheduled for 2006 by enacting a 
one-year freeze in reimbursement levels through the Deficit Reduction 
Act of 2005 (DRA). However, we are concerned that physicians continue 
to face cuts in reimbursement totaling 25 percent over the next six 
years, including a 4.6 percent cut scheduled for January 1, 2007. The 
ACC is also concerned that Congress singled out office-based medical 
imaging for significant cuts in the DRA arbitrarily and without a 
public vetting process. The cumulative effect of these cuts, in 
addition to administrative changes being considered by the Centers for 
Medicare and Medicaid Services (CMS), will devastate some physician 
practices like never before, resulting in challenges for Medicare 
beneficiaries in accessing needed medical services.
    We appreciate that MedPAC recommends an update of 2.8 percent in 
2007 Medicare physician reimbursement in its report to Congress. The 
ACC urges Congress to act in 2006 to avert further scheduled physician 
reimbursement cuts and to correct underlying flaws in the Sustainable 
Growth Rate (SGR) reimbursement formula. This formula should be 
eliminated and replaced with a formula that more accurately reflects 
the cost of providing health care services to Medicare beneficiaries. 
Medicare physician payment rates that keep pace with the rising cost of 
practicing medicine are essential to physicians' efforts to improve the 
quality of care provided to Medicare beneficiaries, and in some cases, 
to provide care at all.
    The ACC also commends the efforts of Congress to address quality 
improvement through pay-for-performance type programs. The ACC's 
position on pay-for-performance is described in detail below; however, 
it is important to note that physicians will be unable to develop the 
infrastructure required to support effective pay-for-performance 
systems if steep cuts in reimbursement are allowed to continue. The ACC 
is grateful for Chairman Johnson's attention to this concern, and we 
support her legislation, the ``Medicare Value-Based Purchasing for 
Physicians' Services Act of 2005'' (H.R. 3617), which would replace the 
SGR formula and establish a value-based system for Medicare physician 
reimbursement. In addition, we are pleased that several of the health 
information technology (HIT) proposals before Congress would provide 
incentives, such as tax credits, to physician offices for implementing 
HIT systems. Such incentives will be critical in helping physician 
offices build the infrastructure necessary to participate in pay-for-
performance systems, particularly for small physician practices.
Office-Based Medical Imaging
    The ACC believes the increase in office-based medical imaging 
utilization needs to be studied to determine the extent to which the 
growth is appropriate and medically necessary. MedPAC, in its 2005 
examination of imaging growth, could not determine if the growth in 
imaging utilization is inappropriate. The ACC recognizes the intense 
pressure to control Medicare spending; however, Congress should be 
cautious in singling out specific physician services (such as medical 
imaging) on the basis of growth alone to achieve cost savings through 
arbitrary cuts.
    The ACC is disappointed that Congress enacted significant cuts to 
office-based medical imaging in the DRA, and we urge Congress to 
mitigate the cuts before they take effect on Jan. 1, 2007. Under the 
DRA, the technical component of office-based imaging services will be 
paid at the lesser of the Medicare Physician Fee Schedule (MPFS) or the 
Hospital Outpatient Prospective Payment System (HOPPS) rate. These cuts 
were included in the dead of night without open dialogue. In many 
cases, the HOPPS payment rate would not reflect the true costs of 
owning and operating imaging equipment in the physician office. Many 
physicians may no longer be able to afford to provide imaging in their 
office due to the cuts, which will drive Medicare beneficiaries to the 
hospital setting where they could have longer wait times, will loose 
the benefit of having imaging services performed by their treating 
physician, and in some cases, will be responsible for co-pays up to 40 
percent of the hospital payment. Co-pays in the physician office 
setting are limited to 20 percent.
    Quality initiatives for medical imaging developed by specialty 
societies, such as the development of appropriateness criteria, quality 
measures and certification standards, are growing and should continue. 
For instance, the ACC is working to foster collaboration among health 
plans, payers and cardiologists to improve the efficiency and equity of 
cardiovascular imaging. Last fall, the ACC and the American Society of 
Nuclear Cardiology (ASNC) released Appropriateness Criteria for Single-
Photon Emission Computed Tomography Myocardial Perfusion Imaging (SPECT 
MPI) as a means of defining ``when to do'' a specific procedure in the 
context of scientific evidence, the health care environment, the 
patient's profile and a physician's judgment. The ACC currently is 
developing appropriateness criteria for CT, MR and echocardiography, 
all of which will be completed in 2006. It is important to note that 
the ACC is employing a collaborative and multi-disciplinary approach to 
the development of appropriateness criteria.
    The ACC believes that such efforts help to ensure that Medicare and 
private payers spend its resources on the most effective, most 
appropriate care for beneficiaries. Neither arbitrary payment cuts, nor 
one-size-fits-all regulatory requirements can achieve this goal. Public 
policy initiatives should support efforts by individual medical 
societies to ensure appropriate utilization by qualified specialists, 
but should not encumber these efforts by overly burdensome regulations 
or duplicate them through the implementation of generic, non-specialty 
specific requirements.
Valuing Physician Services
    Ensuring the accuracy of the work relative value units in the 
physician fee schedule and the fairness of the process for reviewing 
those values is a high priority. During the past year, MedPAC has 
devoted substantial attention to discussions about the role of the 
American Medical Association Specialty Society Relative Value Scale 
Update Committee (RUC) in helping the Centers for Medicare and Medicaid 
Services (CMS) review, maintain, and update Medicare's Resource Based 
Relative Value Scale (RBRVS). The ACC was a founding member of the RUC 
and has been an active participant in the RUC process since its 
inception. The ACC believes that the cooperation between the RUC and 
CMS is an outstanding example of a successful public-private 
partnership and we take MedPAC's recommendations for improving this 
process very seriously. We are, therefore, concerned with several 
aspects of MedPAC's report on valuing physician services.
    The Commission's recommendations for improving the review process 
for the work relative values center on establishment of an expert panel 
to assist CMS and ``augment'' the RUC process. There is no question 
that lack of resources limits CMS's ability to identify services that 
warrant review and to provide the RUC with supporting data for that 
review. MedPAC has not, however, provided evidence that investing 
resources in an expert panel is the best way to improve the accuracy of 
physician reimbursement. The ACC urges that CMS be consulted regarding 
the need for and potential benefit of an expert panel before one is 
established. We also note that the RUC and the specialty societies are 
acutely aware of MedPAC's concerns about the RUC's ability and 
willingness to identify and review overvalued services. The RUC is now 
considering ways in which to strengthen its performance in this area.
    The Commission has been concerned about the ability of the RUC to 
overcome what the report describes as specialty societies' financial 
stake in the outcome of the RUC's deliberations. Although it is 
certainly true that members of one specialty society may have a 
financial stake in having the RUC recommend high values for their 
codes, physician reimbursement still operates within a zero sum game. 
Therefore, the RUC process assures that one specialty society's 
representatives must also persuade other physicians who have a 
financial stake in keeping other specialty's values low. Competing 
interests result in the RUC providing a very rigorous review of all 
specialties' recommendations.
    MedPAC has also been concerned that the RUC's composition does not 
provide adequate representation for primary care physicians. The RUC's 
primary function is to recommend relative values for new procedures, 
most of which are performed by non-primary care specialties. It is 
essential that the RUC encompass the broad spectrum of medical practice 
to ensure that adequate expertise is available to review new 
procedures. The combination of viewpoints and broad range of experience 
RUC members bring to the process has been a key to the committee's 
ability to closely examine and evaluate the work of new technology.
Pay-for-Performance
    Discussions regarding physician payment reform increasingly revolve 
around proposals that would transition the Medicare program to a 
performance-based reimbursement system. The ACC supports the concept of 
aligning financial incentives with the performance of evidence-based 
medicine to inspire greater focus on improving care delivery systems. 
In fact, the ACC has a long history in working with CMS on 
cardiovascular care performance measurement and quality improvement. 
Below are a few examples of our collaborations:

      The ACC and American Heart Association (AHA) issued their 
first clinical practice guideline on Implantation of Pacemakers in 
1984, in part to respond to a CMS (then HFCA) request for expert 
opinion on patient indications for the device.
      In 1993, the ACC lent support to development by CMS of 
objective performance measures based on the ACC/AHA Guideline for the 
Early Management of Patients with Acute Myocardial Infarction. These 
measures tracked inpatient care first at the state level and then at 
the national level.
      The ACC, AHA and Physician Consortium collaborated in 
2003 on coronary artery disease (CAD), Heart Failure and Hypertension 
measurement sets. CMS agreed to use many of the measures from these 
sets in the Doctors Office Quality demonstration project.
      The ACC, AHA, CMS and JCAHO collaborated on updating the 
ACE measure for acute myocardial infarction (AMI) and Heart Failure 
patients in 2004.
      Last spring, the ACC, AHA, CMS, JCAHO and AHRQ issued a 
practice advisory on the impact of the COMMIT trial on current beta 
blocker measures for AMI patients.
      In the fall, CMS announced mandatory use of NCDR ICD 
Registry for data collection for the devices.
      Finally, in 2006, the ACC, AHA, CMS, JCAHO and AHRQ 
issued an editorial on collaboration related to evolution of STEMI/
NSTEMI measures.

    The ACC's experience with performance measurement in cardiovascular 
care reinforces our belief that physician pay-for-performance systems 
should be designed to support and facilitate the quality improvement 
process and strengthen the patient-physician relationship, not just to 
report performance and outcomes or to control Medicare spending. The 
ACC, therefore, developed the following principles to guide the 
development of pay-for-performance programs. Physician pay-for-
performance programs should:

     1.  Be built on evidence-based, well established and proven 
performance measures.
     2.  Provide adequate incentives for investments in structure, best 
practices and tools that can lead to improvement and high quality care.
     3.  Reward process, outcome, improvement and sustainability.
     4.  Assign attribution of credit for performance to physicians in 
ways that are credible and encourage collaboration.
     5.  Favor the use of clinical data over claims based data.
     6.  Set targets for performance through national consensus 
processes that address factors such as local resource constraints and 
socio-demographic differences.
     7.  Address appropriateness (i.e. what behaviors should be 
encouraged as well as discouraged).
     8.  Emphasize success and reward achievement, rather than be 
punitive.
     9.  Use an objective third party to audit performance measure 
data.
    10.  Establish transparent provider rating methods.
    11.  Not create perverse incentives, such as excluding sicker 
patients from a physician's panel.
    12.  Invest in outcomes and health services research.
Conclusion
    As the subcommittee works this year to strengthen the Medicare 
program and improve the Medicare physician reimbursement system, the 
ACC is committed to working with you. Thank you for the opportunity to 
provide a statement for the record. Should you have any questions, 
please contact Camille Bonta or Jennifer Brunelle.

                                 

                                      American Dietetic Association
                                            Chicago, Illinois 60606
                                                     March 14, 2006
Nancy L. Johnson
Chairman
Subcommittee on Health of the Committee on Ways and Means

    The American Dietetic Association (ADA) represents the largest 
professional association of Registered Dietitians (RDs) with a 
membership of approximately 65,000. RDs apply evidence-based practice 
and intensive counseling to promote and achieve good health through 
behavior, nutrition and physical activity interventions. ADA presents 
the following comments regarding the Medicare Payment Advisory 
Commission's (MedPAC) March Report on Medicare Payment Policies.
    Registered dietitians became Medicare Part B providers in 2002, 
when the Centers for Medicare & Medicaid Services developed regulations 
for the Medicare medical nutrition therapy (MNT) benefit that was 
signed into law by President Clinton. RDs are paid from the physician 
fee schedule, therefore MedPAC's comments are of interest to ADA.
Update the Physician Fee Schedule in 2007
    ADA supports MedPAC's recommendation ``Congress should update 
payments for physician services in 2007 . . .'' ADA agrees the 
impending physician fee schedule cuts that CMS projects through 2011 
will adversely affect Medicare providers' participation in Medicare 
Part B. Although MedPAC's report reviewed access to beneficiary care 
provided by physicians, ADA is concerned that continued fee schedule 
reductions will negatively impact participation in the program by other 
Medicare non-physician providers. In certain geographical settings, 
beneficiaries may have limited access to nutrition services provided by 
RDs due to fee schedule rates that limit RD participation in Medicare. 
Continued decreases in the fee schedule may impact current Medicare RD 
providers' level of participation, and limit future Medicare RD 
provider enrollment.
Seek alternatives to the flawed SGR
    ADA feels the sustainable growth rate (SGR) is flawed and 
contributes to the ongoing problems associated with downward spiraling 
of the Medicare physician fee schedule rates. Similar to many other 
medical societies' recommendations for fixing' the SGR, ADA believes 
the SGR should reflect professional services. The inclusion of drugs in 
the SGR is unwarranted and should be removed.
Quality indicators for Medicare services
    ADA agrees with MedPAC's recommendations to improve the value of 
services provided to beneficiaries through quality improvement 
initiatives. RDs provide patient-focused, evidence-based practice using 
nationally recognized protocols to deliver quality services to Medicare 
Part B beneficiaries with diabetes and renal disease. We agree that 
adoption of quality measures extends beyond Medicare; support and 
adoption of common measures are needed among all third party payers.
    Considerable effort will be needed to coordinate the development of 
standard quality measures, develop an infra-structure for data 
collection, data analysis and reporting of quality measure results, 
including the training and inter-rater reliability measurement of those 
collecting the data.
    ADA and its members are involved in a variety quality improvement 
initiatives spearheaded by the ADA Quality Management Committee. A few 
of these activities are listed in Appendix 1.
Closing comments
    ADA recognizes MedPAC's effort to complete the recent Medicare 
Payment Policies report. We concur with the need to adjust the 
physician fee schedule and SGR. While MedPAC indicated that primary 
care physicians were the group most impacted by the current fee 
schedule methodology, ADA believes access to quality Medicare Part B 
services provided to beneficiaries by a variety of Medicare providers, 
physician and non-physician professionals, will be restricted if 
corrections to the fee schedule are not undertaken next year.
    ADA will continue to actively participant in dialog with CMS and 
Congressional leaders to impact physician fee schedule methodologies. 
Please do not hesitate to call either Pam Michael, MBA, RD, Director of 
Nutrition Services Coverage team at 312-899-4747 or Mary Hager, PhD, 
RD, Senior Manager, Regulatory Affairs at 202-775-8277 with any 
questions or requests for additional information.
    Best regards,
                                               Pam Michael, MBA, RD
                            Director of Nutrition Services Coverage
                                             Mary H. Hager, PhD, RD
                                 Senior Manager, Regulatory Affairs

Appendix 1
American Dietetic Association Quality Improvement Activities
    As MedPAC and CMS moves forward with efforts to measure healthcare 
quality in skilled nursing facilities, please take into consideration 
some of ADA's ongoing quality improvement initiations:

      The American Dietetic Association is preparing a Nursing 
Home Weight Loss Quality Measure toolkit for Registered Dietitians, 
April 2006
      The American Dietetic Association has established a 
process for evidence based-analysis that will be essential to the 
development of any nutrition and food service-related quality measures:

    http://www.adaevidencelibrary.org/default.cfm?auth=1
    http://nutritioncaremanual.org/

      The American Dietetic Association is preparing the 
following evidence-based guidelines from which national quality 
measures can be developed:

    1.  Disorders of Lipid Metabolism Toolkit, June 2006
    2.  Adult Weight Management Evidence-Based Guideline, May 2006
    3.  Adult Weight Management Evidence-Based Toolkit, October 2006
    4.  Critical Illness Evidence-Based Guideline, July/Aug 2006
    5.  Pediatric Weight Management Evidence-Based Guideline, May 2007
    6.  Hypertension Evidence-Based Guideline, Dec 2006/Jan 2007
    7.  Heart Failure Evidence-Based Guideline, Dec 2006/Jan 2007

      The American Dietetic Association requests the 
opportunity to contribute to if not lead the work related to the 
development, collection and analyses of nutrition and food service 
quality measures.
      The American Dietetic Association requests the 
opportunity to provide comments regarding improvement opportunities 
surrounding the current Nursing Home Weight Loss Quality Measure.
      The American Dietetic Association requests the 
opportunity to provide comment regarding all nutrition and food 
service-related Nursing Home Quality Measures, currently in place.
      ADA Publication: Niedert KC, Dorner B. Nutrition Care of 
the Older Adult: A Handbook for Dietetics Professionals Working 
Throughout the Continuum of Care 2nd Edition; Part V. Regulatory 
Compliance; Ch. 27. Quality Management; Ch. 28. Federal Regulations. 
American Dietetic Association, 2004.

                                 

             Statement of the American Medical Association

    The American Medical Association (AMA) appreciates the opportunity 
to provide our views today regarding MedPAC's March Report on Medicare 
payment policies, and we commend you, Madam Chairman, and Members of 
the Subcommittee, for all of your hard work and leadership in 
recognizing the fundamental need to address the fatally flawed Medicare 
physician payment update formula, called the sustainable growth rate, 
or SGR.
CONGRESSIONAL ACTION IS NEEDED THIS YEAR TO HALT PHYSICIAN PAYMENT CUTS 
        SCHEDULED FOR 2007
    We are grateful to the Subcommittee and Congress for enacting a 
freeze in Medicare physician payment rates for this year, reversing the 
4.4% cut that had taken effect for 2006. Despite this intervention, 
however, a crisis still looms. It is projected that on January 1, 2007, 
payment rates will be cut across-the-board by about 5%. The 2006 
Medicare Trustees report is expected to project cuts in physician 
payment rates totaling 34% through 2015. 
    The AMA shares in federal policymakers' vision of transforming the 
Medicare physician payment system into a system that delivers the 
highest quality of care to patiemts using kealth information 
technology(HIT) and quality improvement initiatives. To fulfill this 
vision, Medicare payments to physicians must be premised on a stable 
physician payment system that provides positive payment increases to 
physicians and accurately reflects increases in physicians' pratice 
costs. Positive payments are vital for encouraging and economically 
supporting physicians' ability to make the very significant finanical 
investment required got HIT and perticipation in quality improvement 
programs.
    There is widespread consensus that the SGR formula needs to be 
replaced: (i) many members of this Subcommittee, as well as many 
Members of Congress on a bipartisan basis, have advocated the need to 
avert the projected physician pay cuts and establish a formula that 
accurately reflects increases in physician practice costs; (ii) the 
Medicare Payment Advisory Commission (MedPAC) has recommended that the 
SGR be replaced with a system that reflects increases in practice 
costs, as well as a 2.8% payment update for 2007 (as further discussed 
below); (iii) CMS Administrator McClellan has stated that the current 
physician payment system is not sustainable; and (iv) the Military 
Officers Association of America (MOAA) has stated that payment cuts 
under the SGR would significantly damage military beneficiaries' access 
to care under TRICARE, which will have long-term retention and 
readiness consequences.

PROBLEMS WITH THE MEDICARE PHYSICIAN SGR PAYMENT FORMULA
    The projected physician pay cuts are due to the SGR formula, which 
has two fundamental problems:

    1.   Payment updates under the SGR formula are tied to the growth 
in the gross domestic product, which does not factor in patient health 
care needs, technological advances or physician practice costs; and
    2.   Physicians are penalized with pay cuts when Medicare spending 
on physicians' services exceeds the SGR spending target, yet, the SGR 
is not adjusted to take into account many factors beyond physicians' 
control, including government policies and other factors, that although 
beneficial for patients, increase Medicare spending on physicians' 
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.
    Furthermore, as shown by the graph below, these reductions come at 
a time when, even by Medicare's own conservative estimate, physician 
practice costs from 2001 through 2015 are expected to increase by 41%. 
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.
    The UN-Sustainable Growth Rate
    2001 through 2015:
    Physicians' costs up 41%; Medicare payments down 34%
    
    
    Sources: Conversion factor update and MEI data from Centers for 
Medicare and Medicaid Services, Office of the Actuary. Analysis of 
updates relative to inflation by American Medical Association, Division 
of Economic and Statistical Research, February 2006.
    Sustainable? No way!
    Only physicians and health professionals face updates of 7% below 
the annual increase in their practice costs. Other providers are 
receiving updates that fully keep pace with their market basket 
increases. In 2006, for example, updates for other providers were as 
follows: 3.7% for hospitals, 3.1% for nursing homes, and 4.8% for 
Medicare Advantage plans (which are already paid at 107% of fee-for-
service costs). In addition, CMS recently estimated a national per 
capita Medicare Advantage growth percentage of 6.9% for 2007.
    Similar to these other Medicare providers, it is critical that 
physicians receive positive payment updates. This is necessary to 
achieve the new, improved Medicare program envisioned by policymakers 
that seeks to assure access and the highest quality of care to fee-for-
service patients through the use of HIT and quality improvement 
programs.
Increases in Growth of Volume of Services
    Some government officials have argued that the SGR formula is 
needed to restrain the growth of Medicare physicians' services. This 
argument ignores the fact that volume growth has accelerated despite 
the SGR, and blindly assumes that some of this growth must be 
inappropriate. Spending on physician services, however, is growing for 
a number of very legitimate reasons. The number of elderly Americans is 
increasing and more of them suffer from obesity, diabetes, kidney 
failure, heart disease, and other serious chronic conditions.
    Further, last year, Medicare officials announced that spending on 
Part A services was 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. In fact, new 
technology and drugs have made it possible to treat more people for 
more diseases and to provide this treatment in physicians' offices 
rather than in more expensive hospital settings. Quality improvement 
initiatives also have increased the number of beneficiaries receiving 
physician care. This has led to fewer hospital admissions, shorter 
lengths of stay, longer life spans, and fewer restrictions in 
activities of daily living among the elderly and disabled. One of the 
more interesting findings in MedPAC's 2006 Report is a finding that, 
based on its 38 quality tracking measures, more Medicare beneficiaries 
received necessary services in 2004 than in 2002 and potentially 
avoidable hospitalizations declined as well.
    While the foregoing studies suggest appropriate volume growth, in 
contrast, there are no studies documenting systematic inappropriate 
care. Without valid studies, it is impossible to determine what volume 
growth is appropriate or inappropriate. 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. This would effectively address the problem.
Beneficiary Premium Increases
    CMS has also noted that an increase in Medicare payments for 
physician and other health professionals would, in turn, increase the 
Medicare Part B premium for beneficiaries. Part B premium increases are 
due as much or more to increased spending on other health benefits, 
including Medicare Advantage plans and hospital outpatient services. In 
addition, low-income Medicare beneficiaries are protected from such 
increases through programs that cover the cost of their premiums. In 
fact, according to CMS, many beneficiaries are protected from premium 
increases because one in four is eligible for Medicare premium 
subsidies. Many others have access to low or no cost Medicare Advantage 
plans.
    Physician pay cuts will ultimately cost beneficiaries more because 
these cuts will force physicians to discontinue providing certain 
services in the physician's office. Patients then will have two 
choices. Either they will have to go without care until their illness 
has become more severe and costly to treat, or they will have to seek 
care in higher-cost hospital settings where they will experience more 
inconvenience, and higher deductibles and co-payments than if they had 
been treated in their physician's office.

ACCESS PROBLEMS FOR MEDICARE BENEFICIARIES UNDER THE CURRENT MEDICARE 
        SGR PHYSICIAN PAYMENT FORMULA
    Physicians simply cannot absorb the pending draconian payment cuts. 
A 2005 AMA survey shows that if steep cuts are enacted:

      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.

    Physicians are the foundation of our nation's health care system. 
Continual cuts put patients' access to care at risk, and there are 
signs of a problem already. A MedPAC survey found that, in 2005, 25 
percent of Medicare patients looking for a new primary care physician 
had some problem finding one and that a growing number had a ``big 
problem.'' It concluded that some beneficiaries ``may be experiencing 
more difficulty accessing primary care physicians in recent years and 
to a greater degree than privately insured individuals.'' In the long-
run, all patients--especially baby boomers--may find it more difficult 
to find a physician. The Congressionally-created Council on Graduate 
Medical Education is already predicting a shortage of 85,000 physicians 
by 2020, and multi-year cuts in Medicare are nearly certain to 
exacerbate this shortage by making medicine a less attractive career 
and encouraging retirements among the 35 percent of physicians who are 
55 or older.
    Further, Medicare physician cuts have a ripple effect across the 
whole health care system and leverage down payment rates from other 
sources. For example, TRICARE, which provides health insurance for 
military families and retirees, ties its physician payment rates to 
Medicare, as do some state Medicaid programs. Thus, Medicare cuts 
trigger TRICARE and Medicaid cuts as well. In fact, MOAA has sent 
letters to Congress urging Congressional action to avert the physician 
payment rate cuts, which would ``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 PAYMENT ADVISORY COMMISSION MARCH REPORT RECOMMENDATIONS ON 
        PHYSICIAN PAYMENT POLICIES
MedPAC Recommends a Positive Medicare Physician Payment Update in 2007
    The Medicare Payment Advisory Commission (MedPAC) is expected to 
recommend that Congress increase Medicare physician payment rates by 
2.8% for 2007. The AMA agrees, and we urge the Subcommittee to approve 
legislation adopting this recommendation. This positive update would 
avert the pending cut expected to take effect on January 1, 2007, and 
would more accurately reflect increases in physician practice costs.
    We caution, however, that MedPAC's cost estimates associated with 
this recommendation appear to assume that this positive update would be 
self-funded through additional Medicare physician pay cuts in later 
years. In other words, the 2007 update would be another temporary 
increase that would penalize physicians with greater cuts in later 
years. This is simply untenable when physicians already face nine years 
pf Medicare pay cuts. In fact, every temporary fix merely digs the 
physician payment system deeper into a hole that, each year, becomes 
more costly for Congress to fix and increases the risk of a meltdown in 
Medicare patients' access to care.
Productivity Adjustment
    MedPAC's recommended 2.8% update in Medicare physician payment 
rates for 2007 is based on a projected 3.7% increase in physicians' 
costs minus a.9% productivity adjustment. At the same time, however, 
MedPAC is recommending a hospital productivity adjustment of only half 
the amount (.45%) it is recommending for physicians. We see no 
rationale to support this disparity. Physicians are already at full 
capacity seeing patients and complying with layer upon layer of 
administrative paperwork burden due to such laws as HIPAA and new 
quality improvement reporting programs recommended by MedPAC and 
proposed by CMS that will further reduce productivity. There is simply 
no reason to suggest greater productivity increases by physicians than 
hospitals. Thus, we urge that physicians be subject to the same 
productivity adjustment as is applied to hospitals.
Quality Standards
    MedPAC evaluated the impact on quality of care with regard to 38 
quality measures for ambulatory care. Initial results show that the 
number of patients receiving appropriate care increased for 20 of the 
38 measures and remained the same for most others. Significantly, the 
study also found that for several measures, increases in the use of 
physician services was associated with declines in potentially 
avoidable hospitalizations.
    This conclusion is consistent with the Leapfrog Group, which 
recently announced the results of a long-term national study, including 
seven experimental projects designed to test a variety of pay-for-
performance models. The study showed significantly increased physician 
visits for many services (as well as physician investment in 
information technology and electronic medical records.) More physician 
services, however, means increased Medicare spending on physician 
services, which is extremely problematic under the SGR spending target 
system.
    Pay-for-performance and the SGR are not compatible. Pay-for-
performance may save dollars for the program as a whole. Many 
performance measures, however, ask physicians to deliver more care, as 
indicated by the Leapfrog and MedPAC studies. If the SGR is linked to 
pay-for-performance, because the SGR imposes an arbitrary target on 
Medicare physician spending, more physician services will result in 
more physician payment cuts. Further, pay-for-performance programs 
depend on greater physician adoption of information technology, as 
indicated by the Leapfrog study. Unless physicians receive positive 
payment updates, however, these investments will not be possible. As 
discussed above, an AMA survey indicates that steep pay cuts beginning 
in 2006 would cause more than half of physicians to defer IT purchases. 

    As discussed above, positive payment updates for physicians are 
necessary to realize the vision of a Medicare physician payment system 
that emphasizes health information technology and quality improvement. 
We urge the Subcommittee, therefore, to ensure that pay-for-performance 
initiatives are premised on a stable Medicare payment system that 
reflects increases in physicians' practice costs.
Alternatives to the Medicare Physician SGR Formula
    MedPAC has been asked by Congress to review alternatives to the 
current Medicare physician SGR payment formula. Alternatives under 
consideration include using multiple targets that could be based on: 
(i) geographic regions; (ii) types of services; (iii) physician group 
practice affiliation; (iv) hospital medical staffs; and (v) outliers--
physicians with extremely high volume of services.
    The AMA believes a multiple target payment system would create just 
as many problems as physicians experience under the SGR system. 
Spending targets have not and never will achieve policymakers' goal of 
reducing volume growth by discouraging inappropriate utilization. This 
type of system does not create the incentives needed at an individual 
physician level to achieve its cost containment goal, and produces an 
inaccurate and arbitrary payment system. Furthermore, spending target 
systems are based on the fallacious premise that physicians alone can 
control the utilization of health care services, while ignoring patient 
demand, government policies, technological advances, epidemics, 
disaster and the many other contributors to volume growth.
    Additionally, if a multiple target system intended to influence the 
behavior of smaller groups of physicians were used, that would be an 
administrative nightmare and virtually impossible to administer. The 
current problems with estimating and administering the current SGR 
target would multiply exponentially. As discussed above, the AMA has 
continued to advocate that volume growth issues be tackled through 
targeted actions that deal with the source of the increase. This would 
give Congress more control over the process than exists under the 
current system.
    The AMA appreciates the opportunity to provide our views to the 
Subcommittee on MedPAC's March Report to Congress, and we look forward 
to working with the Subcommittee and CMS to develop a payment system 
for physicians that ensures the highest quality care and accurately 
reflects increases in the costs of practicing medicine.

                                 

             Statement of HealthSouth, Birmingham, Alabama

Introduction
    HealthSouth Corporation (HealthSouth) is pleased to submit this 
statement for the record in connection with the Subcommittee on Health 
of the House Committee on Ways and Means' ``Hearing on MedPAC's March 
Report on Medicare Payment Policies'' (March 1, 2006), and for the 
Subcommittee's consideration regarding the 2007 Medicare Payment 
Advisory Commission (``MedPAC'') recommendations on Medicare payment 
policies, specifically as those recommendations pertain to inpatient 
rehabilitation and long term care hospital services.
    HealthSouth is one of the Nation's largest healthcare services 
providers, providing comprehensive medical, diagnostic, therapy and 
other post-acute services in both inpatient and outpatient settings. We 
provide diverse services to a broad patient mix via our inpatient 
division (comprised of 95 inpatient rehabilitation hospitals and 10 
long-term acute care hospitals); our surgery division (comprised of 158 
ambulatory surgery centers and three surgical hospitals); our 
outpatient division (comprised of 620 outpatient rehabilitation sites); 
and our diagnostic division (comprised of 87 diagnostic imaging 
centers).

Executive Summary
    In this statement, we discuss our reactions to and concerns with 
recent MedPAC recommendations affecting inpatient rehabilitation 
facilities (``IRFs''), and in connection with recent Congressional 
policymaking in this area; and long--term acute care (``LTCH'') 
hospitals, and in connection with recent regulatory proposals published 
by the Centers for Medicare and Medicaid Services (``CMS'') applicable 
to LTCHs. In short, we believe the MedPAC recommendations calling for 
zero updates for IRFs and LTCHs in 2007, if implemented, could 
jeopardize access to high quality services for some of the Medicare 
program's sickest and most vulnerable beneficiaries. Our statement also 
shares with the Subcommittee the rationale behind our ongoing 
commitments to research and study in the area of post-acute care 
services, and reviews current and anticipated activities in this area. 
We also discuss our support for implementation of quality measurements 
that can be used for a pay-for-performance framework applicable to 
inpatient rehabilitation providers. Finally, we express our support for 
the post-acute care payment reform demonstration program in section 
5008 of the Deficit Reduction Act of 2005.

Inpatient Rehabilitation Facilities
    HealthSouth respectfully disagrees with MedPAC's contention that 
IRFs can accommodate the cost of caring for Medicare beneficiaries in 
2007 without an increase in the base rate (currently forecast by CMS to 
equal 3.4 percent).\1\ We believe IRFs require an update in order to 
continue to preserve patients' access to high quality, intensive 
rehabilitative care that includes the services of highly-skilled 
physicians, rehabilitation nurses, and therapists, and the most cutting 
edge, cost-efficient technology.
---------------------------------------------------------------------------
    \1\ Medicare Payment Advisory Commission, Report to the Congress: 
Medicare Payment Policy, March 2006 at 238.
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    As the Nation's single-largest provider of inpatient rehabilitative 
care and services, we are in a unique position to testify to the 
special role that IRFs play within our healthcare system. IRFs are an 
essential provider of post-acute hospital care, providing 
comprehensive, intensive rehabilitative care and therapy in combination 
with management of a patient's primary diagnosis and comorbidities. 
Care is coordinated through a multi-disciplinary team that includes 
specialty-trained rehabilitation physicians, nurses and therapists--a 
service model that is unique and unmatched by any other provider within 
the post-acute continuum.
    We are concerned that a zero update in 2007 will affect our ability 
to attract and retain skilled clinical in the face of competition form 
hospitals and providers that will be receiving increases in 2007. 
Keeping pace with increases with basic labor and supply costs also 
allows facilities to acquire and implement new technologies to meet the 
increasingly complex needs of our patients. Without an update in 2007, 
our ability to accomplish these goals will be compromised.
    Our disagreement with the zero update recommendation for IRFs is 
particularly heightened by the implementation of the so-called ``75% 
Rule.'' Under the Rule, which Congress stayed for one additional year 
effective in July, 2006,\2\ 75% of an IRF's patients must fall into one 
or more of 13 qualifying conditions.\3\
---------------------------------------------------------------------------
    \2\ Deficit Reduction Omnibus Reconciliation Act of 2005, Pub L. 
No. 109-171,  5005. The Conference Agreement established the 
compliance threshold for IRFs at 60 percent during the 12-month period 
beginning on July 1, 2006; at 65% during the 12-month period beginning 
July 1, 2007; and at 75% beginning on July 1, 2008 and subsequently.
    \3\ See Medicare Payment Advisory Commission, supra, n.1 at 230. 
The 13 CMS conditions are: (1) stroke; (2) brain injury; (3) 
amputation; (4) spinal cord; (5) fracture of the femur; (6) 
neurological disorders: (7) multiple trauma; (8) congenital deformity; 
(9) burns; (10) osteoarthritis, after less intensive setting; (11) 
rheumatoid arthritis, after less intensive setting; (12) joint 
replacement, bilateral, for patients 85 and older, with body mass index 
of 50 or greater; and (13) systemic vasculidities, after less intensive 
setting. Categories (10)-(12) replace polyarthritis on the old 
condition list created by the then-Health Care Financing 
Administration.
---------------------------------------------------------------------------
    Even before the Congressional stay at 60% was implemented, IRFs 
experienced a significant drop in patient caseload that was 
attributable to the 75% Rule's effects. In all, patient caseload in 
IRFs declined by approximately 52,000 cases in the roughly one year 
period between Q3 2004 and Q3 2005\4\--far in excess of CMS' own 
projections of 1,750 cases.\5\ In the first three quarters of 2005, the 
downtrend in patient caseload due to the 75% Rule is equivalent to a 
16% annual decline in discharges.
---------------------------------------------------------------------------
    \4\ The Moran Company, Utilization Trends in Inpatient 
Rehabilitation: Update through QIII 2005 (December 2005). The Moran 
data set comprises 77 percent of total Medicare volume estimated by 
CMS; the Moran Report accounts for the remaining 23 percent of IRF data 
to arrive at an overall caseload decline of approximately 52,000 cases.
    \5\ See 69 Fed. Reg. 25,772 (May 7, 2004). The CMS estimate is 
based on projected $10M in FY 2005, divided by $5,710, the ``net 
savings'' per case reduction due to movement to skilled nursing 
facility, home health, etc.
---------------------------------------------------------------------------
    We recognize that a key policy objective of this Rule is to ensure 
that IRFs are treating the right types of patients who require our 
services. We wish to emphasize with the Subcommittee that we agree with 
this objective--IRFs should treat patients whose medical conditions and 
needs require intensive inpatient rehabilitative care. However, because 
too little is known about the 75% Rule's effects on inpatient 
rehabilitation providers and patients who need post-acute 
rehabilitative care and services, a zero update for 2007 is not 
warranted.
    MedPAC underscored the concerns about the unknown effects of the 
Rule in its March 2006 Report by acknowledging its inability to fully 
evaluate whether the 75% Rule is creating access to care problems for 
patients requiring intensive rehabilitative care. ``If patients who 
need intensive rehabilitation are still getting it, the drop in volume 
[due to the 75% Rule] may not be an access issue. Moreover, patients no 
longer treated in an IRF can receive care in other settings, such as 
outpatient, home health, or skilled nursing facilities. However, we are 
unable to judge whether patients are treated in the appropriate 
setting.'' \6\ (Emphasis added). MedPAC also predicts that the 75% Rule 
will require IRFs to lower patient caseload volume by as much as 25% 
during 2007 in order to comply with the 75% Rule, and that such 
reductions will result in overall increased costs due to the fewer 
numbers of cases over which overhead costs can be spread.\7\
---------------------------------------------------------------------------
    \6\ See, Medicare Payment Advisory Commission, supra,n.1at 226.
    \7\ Id. at 239.
---------------------------------------------------------------------------
    We firmly believe that until the impact and effects of the 75% Rule 
on inpatient rehabilitation providers and our patients are more fully 
known and understood through dedicated study and research--a process 
HealthSouth is committed to and will discuss in more detail below--it 
would be shortsighted to withhold the annual update for IRFs in FY 
2007. We believe that IRFs should receive the full update available to 
them under current law in 2007.

Long Term Care Hospitals
    Like the IRF recommendation, we respectfully disagree with the 
Commission's recommendation to freeze the LTCH update in 2007. We 
dispute the notion that LTCHs should be able to accommodate cost 
changes in rate year 2007 without an increase in our base rate 
(currently forecast by CMS to equal 3.5 percent).\8\ As the 
Subcommittee is aware, CMS recently issued a proposed rule for the LTCH 
PPS that includes a zero update for 2007, a proposal with which we 
disagree.
---------------------------------------------------------------------------
    \8\ Id. at 218.
---------------------------------------------------------------------------
    LTCHs specialize in providing intense care to patients with complex 
conditions and multiple comorbidities, such as ventilator-dependent 
patients or patients with severe burns or skin ulcers. The costs of 
providing highly intensive, life-sustaining services like these 
increase every year, and even though MedPAC has noted an increase in 
case volume and in new LTCHs since 2001--facts it uses to support the 
zero update recommendation--the ability of LTCHs to remain competitive 
and provide high quality care to this complex patient population would 
be jeopardized by withholding the annual update.
    We believe a zero update recommendation, especially when read 
together with CMS' proposed regulation of January 27, 2006 that sharply 
reduces Medicare spending for LTCH services,\9\ overreacts to concerns 
with the rate of growth in LTCH services. Spending on LTCH care remains 
less than one percent of overall Medicare spending. The total effects 
of the various adjustments contained in CMS' proposed rule, such as the 
proposed revision to payments for short stay outlier cases, stand to 
result in LTCH payment reductions in excess of 15%. This would be one 
of the single-largest payment reductions imposed upon any Medicare 
payment system, whether through administrative or legislative 
processes.
---------------------------------------------------------------------------
    \9\ See 71 Fed. Reg. 4648 (January 27, 2006).
---------------------------------------------------------------------------
    HealthSouth agrees with MedPAC and CMS that a more uniform policy 
defining the types of patients treated by LTCHs is warranted, but we 
remain concerned that the payment and regulatory changes proposed by 
CMS, try to achieve this objective without a sufficient clinical or 
evidence-based foundation. In 2004, CMS awarded a contract to Research 
Triangle International, Inc. (``RTI'') to evaluate LTCH policies and to 
review prior MedPAC recommendations regarding LTCHs. The RTI's final 
report is expected to be delivered in a few months and we believe its 
findings should be evaluated before the changes in proposed rule are 
permitted to take effect. In the face of this nearly completed 
research, we believe any substantial change to current LTCH payment 
policy would be premature.
    HealthSouth believes the more reasonable course is to wait for the 
results of the RTI report to be made public and evaluated by 
policymakers and providers. We fully agree that appropriate uniform 
patient criteria should be developed and used to distinguish the types 
of patients who are appropriate for LTCHs. HealthSouth welcomes the 
opportunity to work with CMS, Congress, and MedPAC in the development 
of these criteria. We therefore respectfully request that the 
Subcommittee reject MedPAC's zero update recommendation for LTCHs in 
2007 and that it urge CMS to forgo implementation of its proposed LTCH 
rule, including the zero update, until appropriate uniform patient 
criteria for LTCHs are developed.

Research and Study: Our Commitment to Fair, Rational, and Sound 
        Policymaking
    HealthSouth recognizes that the current and future financial 
environment of the Medicare program requires that it be a prudent 
purchaser of healthcare services. We believe scientific research and 
evidence-based decision-making is essential for the development of 
effective, cost-efficient, and sound policies within the Medicare 
program's various levels of post-acute care. It is in this spirit that 
we recommend that proposed LTCH changes be postponed until further 
evidence-based assessments can be evaluated in order to develop 
appropriate uniform patient criteria to distinguish patients who are 
appropriate for LTCHs. It is also in this spirit that we have 
undertaken a landmark scientific study on treatment protocols and 
patient outcomes for lower extremity joint replacement patients treated 
in post-acute settings.
    In order to provide enhanced awareness and understanding of the 75% 
Rule's impact on patient care, HealthSouth and its professional 
partners in the rehabilitation and hospital communities have undertaken 
a national research initiative, designed to evaluate the efficacy of 
care and outcomes for post-surgical rehabilitative care provided to 
joint replacement patients in the skilled nursing facility (``SNF'') 
and IRF settings. This is a prospective study of 2,800 patients, 
equally divided between IRF and SNF admissions. The aim of the study is 
to more accurately identify and define the types of joint replacement 
patients who are most suitable to the environment of care available in 
IRF and SNF settings and what elements of care have the greatest effect 
on patient outcomes. The initiative responds to CMS' own request for 
research in this area.\10\
---------------------------------------------------------------------------
    \10\ See, e.g., 69 Fed. Reg. 25752 at 25762-63 (May 7, 2004).
---------------------------------------------------------------------------
    The research initiative is being directed by the widely-respected 
National Rehabilitation Hospital (``NRH'') in Washington, D.C., and the 
Institute for Clinical Outcomes Research (``ICOR'') of Salt Lake City, 
and includes a policy advisory panel comprised of participants from 
National Institutes of Health, the Association for Health Care Research 
and Quality, the American Medical Rehabilitation Providers Association, 
the American Hospital Association, the Federation of American 
Hospitals, the American Association of Homes and Services for the 
Aging, the American Physical Therapy Association and various other 
organizations. Although the study is underwritten by the American 
Hospital Association, the Federation of American Hospitals, and 
HealthSouth, the principal investigators are NRH and ICOR.
    The study includes the participation of 1,400 IRF patients and 
1,400 SNF patients drawn from 20 geographically diverse facilities--11 
IRFs and 9 SNFs. The study questions are as follows:

      What are the characteristics of joint replacement 
patients (DRGs 209 and 210) served in IRFs and SNFs? How are they 
similar or different?
      How are the interventions and processes of care for joint 
replacement patients different in IRFs than SNFs?
      What specific interventions or combinations of 
interventions in IRFs and SNFs make the biggest difference in outcomes 
for joint replacement patients taking into account patient differences?
      Which joint replacement patients do better in an IRF and 
which do better in a SNF?
      What is the relative cost-effectiveness of IRF and SNF 
care for joint replacement patients?
      Are comorbidities among joint replacement patients an 
adequate indicator of additional medical need during the rehabilitation 
process? Can a severity-of-illness measure serve as a better indicator 
of medical need? Are patients with greater medical needs served better 
in an IRF or a SNF?
      Can we design a more efficient course of rehabilitation 
interventions for joint replacement patients in IRFs and SNFs to reduce 
the length of stay and costs?

    We believe the study's findings will shed new light on the types of 
joint replacement cases requiring post-surgical rehabilitative care who 
are appropriately treated in IRFs and SNFs. The findings should also 
serve as a guide for policymakers in setting rehabilitation payment and 
regulatory policies in the years to come. We recognize the need for 
additional research within the post-acute space, and we are committed 
to doing our part to pursue it. Indeed we are actively pursuing other 
research opportunities as of this writing, and we will apprise the 
Subcommittee on their status and progress later this year. We also wish 
to commend CMS for its active interest in the joints study; their 
observatory participation throughout the various stages of the study's 
development and implementation will be critically important to its 
overall utility. Complete information about this study is available on 
the internet at www.jointsstudy.org.

Post-Acute Care Payment Reform Demonstration
    As one of the Nation's leaders in the provision of post-acute 
hospital services, we applaud Congress' and the Subcommittee's 
commitment to study and test new payment and regulatory pathways in 
post-acute care. HealthSouth stands ready and eager to participate in 
this important exercise of cutting-edge policy development.
    For too long, Medicare's post-acute payment systems have offered 
financial incentives to classify patients by service type, with more 
focus placed on where patients receive medical care and services and 
less focus placed on what their medical needs are and the 
appropriateness of the settings of care in which those needs are 
served. We agree with Congress, CMS and MedPAC that post-acute care 
treatment decisions should be made based upon patient needs. These 
decisions should be based upon the best evidence-based and clinical 
grounds possible, and appropriately tailored to meet individual patient 
needs.
    We believe the demonstration program in section 5008 of the Deficit 
Reduction Act is a tremendous opportunity to ``level the playing 
field'' with respect to financial incentives in post-acute care payment 
policy and to promote fair and clinically-appropriate treatment 
decisions. We stand ready to work with CMS and Congress in the 
development and implementation of this important post-acute care 
policy.

IRF Pay For Performance
    HealthSouth believes that IRFs are a provider type that is ripe for 
the development and implementation of a pay-for-performance framework. 
We embrace the principle that the Medicare program must be a prudent 
purchaser of efficient, cost-effective healthcare services. Basing a 
portion of IRFs' payments from the Medicare program upon the quality of 
care we provide to our patients is the right thing to do and makes 
sense for everyone--providers, patients, and taxpayers. Indeed we 
believe in the power of competition and the positive outcomes it can 
produce.
    The IRF industry is particularly well-suited for a pay-for-
performance model because the necessary data systems to implement such 
a model have been in existence for more than 15 years and are widely 
accepted and used by the inpatient rehabilitation industry. These 
include, for example, the inpatient rehabilitation facility patient 
assessment instrument (``IRF PAI'') and the functional independence 
measure (``FIMTM''). Furthermore, the existing IRF PPS 
contains features, such as its case mix groups, that could be easily 
adjusted and integrated into a quality measurement and pay-for-
performance model. We believe the existence of these kinds of 
instruments, through which data collection and reporting activities are 
already occurring, can readily permit quality measurement and payment 
incentive structures without the creation of new or additional 
measurement tools and without the creation of additional data 
collection or reporting burdens on providers.
    We encourage the Subcommittee to consider the existing assets that 
are inherent within the widely used data collection and reporting tools 
and the IRF payment system, for use in quality improvement and payment 
reforms for inpatient rehabilitation providers. We are willing to test 
these assets within our own hospital network in an attempt to evaluate 
their effectiveness and scalability on a program-wide basis.
    We hope the Subcommittee finds this information useful. HealthSouth 
appreciates this opportunity to share its views on the 2007 MedPAC 
recommendations and on related policy matters pertinent to the 
provision of post-acute care services associated with those 
recommendations. If you have any questions, please do not hesitate to 
contact Justin Hunter, HealthSouth's Vice President for Government and 
Regulatory Affairs.

                                 

      Statement of Anthony Messana, National Renal Administrators 
                     Association, Prescott, Arizona

    We greatly appreciate the opportunity to submit the following 
statement for inclusion in the record of the March 1, 2006 hearing of 
the Subcommittee on Health on the Medicare Payment Advisory 
Commission's (MedPAC) recommendations in its recent report to Congress. 
We will focus our comments on the portion of the report concerning the 
adequacy of payment for providers that care for patients with end stage 
renal disease.
    The National Renal Administrators Association (NRAA) is a voluntary 
organization representing professional managers of dialysis facilities 
and centers throughout the United States. Our membership includes free-
standing and hospital-based facilities, which are for-profit and non-
profit providers located in urban, rural and suburban areas and serving 
dialysis patients in all settings. Many of our members are small 
providers that provide dialysis services to patients in underserved 
areas in rural and inner city locations. NRAA members are located in 
virtually every Congressional district.
    Before addressing MedPAC's specific recommendations, I want to call 
to the Subcommittee's attention the fact that, unlike most providers 
participating in the Medicare program, those of us who care for 
dialysis patients do not have a statutory mechanism to update our 
reimbursement on an annual basis. We must seek Congressional action in 
order to gain any increase in the composite rate, which serves as the 
basis for our reimbursement under Medicare.
    While we greatly appreciate the 1.6 percent increase that Congress 
provided in the Deficit Reduction Act of 2005 over the last five years 
the composite rate has only been adjusted twice for a total of 3.2 
percent. Quite simply, Medicare payments do not cover the patient's 
dialysis treatment costs. For most of our members, since Medicare and 
Medicaid account for 70 percent to 95 percent of their revenue, it is 
impossible to compensate for these losses by seeking higher 
reimbursement from private insurers.
    This problem is particularly difficult for the smaller provider 
that has to absorb increases in pharmaceutical costs and medical 
products, employee compensation and benefits, utilities, and other 
requirements simply to continue to serve their patients. Unfortunately, 
some are being forced to close their doors, forcing patients to seek 
care in other facilities, which in rural areas, can require hours of 
driving time.
    Given the fact that most patients must receive treatment for the 
better part of a day-three times a week--the additional driving time is 
a tremendous hardship. Unfortunately, in some instances, patients have 
decided to stop treatment rather than place the burden of travel on 
their loved ones.
    NRAA members are committed to providing their patients with the 
best possible care. But the current reimbursement system under Medicare 
makes it difficult to fulfill this commitment. To ensure the quality of 
care that Medicare beneficiaries deserve and to guarantee reasonable 
access to dialysis services, it is essential that Congress provide an 
annual update mechanism.
    We urge the Subcommittee to give serious consideration this year to 
the Kidney Care Quality and Improvement Act (H.R. 1298) and begin the 
process of moving this legislation through the Congress to enactment 
into law. Among the many important provisions in this legislation is 
one which would establish an annual update process for providers of 
dialysis services.
    With regard to the MedPAC report, we fully support the 
recommendation proposing that Congress update the composite rate ``by 
the projected increase in the ESRD market basket, less half the 
productivity adjustment, for services provided in calendar year 2007.'' 
We greatly appreciate the detailed analysis in the report and MedPAC's 
consistent commitment to improving patient care while seeking 
improvements in the outdated dialysis payment system.
    The proposed update in the composite rate for 2007 is not only 
justified, it is essential to enabling our members to continue to 
provide quality care to dialysis patients and to assisting them in 
meeting the costs of providing such services. But this should be the 
first step, and not the last, in modernizing the current payment 
system. For the past five years, MedPAC has recommended updates in the 
composite rate. But Congress has acted only twice to increase the 
composite rate, and at a much lower level than was recommended by 
MedPAC.
    Needless to say, while these increases have been helpful, they have 
not eliminated the ongoing Medicare deficit. Simply stated, the current 
system is not sustainable. We are ready to work with MedPAC and 
Congress to fashion an update mechanism that would bring the necessary 
consistency and fairness in Medicare payments that are available to 
other providers. We believe that an annual update formula modeled after 
the hospital prospective payment system would be appropriate. We also 
believe that Congress should recognize and take into account the higher 
costs and difficulty of providing quality services faced by smaller 
providers in medically underserved areas.
    Given the financial strains inherent in the current system, it is a 
tribute to our membership and their concern for their patient well 
being that, over the last ten years, dialysis providers have 
dramatically improved the quality of care for patients with end stage 
renal disease. Dialysis providers are only one of three Medicare 
provider sectors that currently report quality of care indicators to 
the Centers for Medicare and Medicaid Services (CMS) and that 
information is publicly available on the Dialysis Facility Compare 
website and in Medicare's Clinical Performance Measurement annual 
publication.
    Some indicators of the improvements in quality of care are: the 
percentage of patients receiving adequate hemodialysis was 94 percent 
according to a 2004 CMS Clinical Performance Measurement report 
compared to 85 percent in 1998; anemia management has dramatically 
improved, with hemoglobin levels greater than 11gm/dl increasing from 
43 percent in 1997 to 80 percent in 2003; hospital days for dialysis 
patients have decreased 15 percent from 1993 to 2001, despite an 
increase in dialysis patient age and co-morbidities; and the use of 
fistulas has increased by more than 7 percent from 1998 to 2002.
    Each of these is a quantifiable and demonstrable improvement in 
patient care, enabling Medicare beneficiaries with end stage renal 
disease to have a better quality of life. We are also working with 
others in the kidney care community to design a system for rewarding 
providers who produce improvements in patient clinical outcomes that 
would be tied to an annual update mechanism. We would be pleased to 
work with the Subcommittee and the Administration as this process moves 
forward.
    In conclusion, we greatly appreciate the opportunity to state our 
views for the record. We look forward to continuing to work with the 
Congress and MedPAC on improving the dialysis program and to ensure 
that Medicare beneficiaries receive the best possible care. We are 
hopeful that Congress will act this year to implement the MedPAC 
recommendation for increasing the composite rate and that an annual 
update mechanism will become a reality.

                                 

 Statement of Val J. Halamandaris, President, National Association For 
                         Home Care and Hospice

    The National Association for Home Care & Hospice (NAHC) 
respectfully submits this statement to the Subcommittee on Health of 
the Committee on Ways and Means of the U.S. House of Representatives. 
The statement relates to the Subcommittee hearing regarding the report 
of the Medicare Payment Advisory Commission (MedPAC) scheduled for 
March 1, 2006.
    NAHC is the largest trade association representing the interests of 
home care and hospice providers in the United States. In that capacity, 
NAHC represents, among others, the vast majority of home health 
agencies (HHAs) participating in the Medicare program. The NAHC 
membership includes Medicare-participating home health agencies for all 
of the states and U.S. territories, small and large agencies, rural and 
urban providers, nonprofit and proprietary organizations, and 
freestanding and facility-based entities. As such, NAHC is uniquely 
capable of addressing the recommendation of MedPAC with respect to 
Medicare home health payments rates and the underlying rationale for 
that recommendation.
    On January 10, 2006, MedPAC commissioners voted to recommend that 
Congress freeze Medicare rates of payment to home health agencies in 
2007. This recommendation was made with the expectation that Congress 
would enact and the President would sign into law the Deficit Reduction 
Act of 2005, which contained a Medicare payment rate freeze for 2006.
    NAHC believes that the Subcommittee should reject the 
recommendation of MedPAC with respect to the 2007 Medicare home health 
services payment rates. Instead, NAHC recommends that the Subcommittee 
engage in active support of the current home health services payment 
rate reforms under way at the Centers for Medicare & Medicaid Services 
(CMS) that are designed to better align payment rates with the level of 
resources required by Medicare home health services patients. A second 
consecutive year of payment rate freezes in the face of rising 
transportation, technology, and personnel costs places continued access 
to care, the quality of home health services, and the delivery system 
of home care at significant risk. In addition, a payment rate freeze in 
2007 would interfere with the proper development, implementation, and 
evaluation of the systemic payment method changes that should be 
unveiled by CMS later this year.

The Medicare Home Health Services Payment System
    After nearly 20 years of effort by Medicare and the home health 
services community, the Medicare home health services benefit was 
transformed on October 1, 2000, into a modernized benefit that replaced 
an antiquated and inflationary cost reimbursement system with an 
episodic prospective payment methodology that allows flexibility in 
meeting the patient's home care needs while encouraging positive 
patient outcomes and discouraging unnecessary utilization of care. 
Instead of a system where rates were annually adjusted to reflect costs 
that were controlled by the providers, home health agencies are 
required to deliver care within a set episodic payment rate that 
reflects the expected care needs of Medicare patients with one of 80 
different case mix categories over a 60-day period of time. The changes 
have generally been positive, with the home health agencies 
incentivized to rehabilitate patients rather than drive them toward 
dependency. As the MedPAC report notes, patient outcomes have improved 
under the prospective payment system (HHPPS) in spite of a financial 
design that may encourage shorting or ``stinting'' on care and 
premature discharges.
    However, the system is not without its weaknesses. In October 2000, 
HHPPS was fully implemented without any testing of the payment 
methodology and its payment distribution mechanism, the 80-category 
case mix adjuster. An earlier demonstration program employed virtually 
nothing of the system that was ultimately implemented. Now, over five 
years after implementation, the strengths and weaknesses of HHPPS are 
apparent, with the most disturbing aspect being the unreliability of 
the case mix adjuster that determines the actual episodic payment rate 
for each of the 80 patient categories. As a MedPAC analysis revealed, 
the accuracy of the case mix adjuster is so limited that in 60 of the 
80 case mix categories the payment rates are significantly unrelated to 
the range of resource needs of the patients. In layman's terms used by 
MedPAC, the range of services provided for the same rate of payment in 
these 60 categories is ``2300 minutes, give or take 2300 minutes.'' 
Recent analyses by CMS indicate comparable findings with the estimated 
``explanatory power'' of the case mix adjuster being 21 percent, 
meaning that in 79 percent of the nearly 3 million episodes of care, 
the payment rate is either too low or too high.
    CMS is not sitting on its heels, leaving this inaccurate system to 
continue to operate. An intense effort has been under way for months to 
refine and reform the case mix adjuster. In a highly responsible 
manner, CMS has included in-house and outside technical experts to 
design system improvements. Further, CMS has openly included home care 
industry representatives in the process. MedPAC has actively 
participated in this reform process as well, both independently and in 
consultation with CMS. It is expected that the research and redesign 
will be completed later this year.
    Adopting the MedPAC recommendation to freeze payment rates in 2007 
is not a solution. It only enhances the problems of repairing a payment 
system by creating a ``moving target'' where efforts at reform are 
hampered by across-the-board payment cuts that are directed against all 
home health agencies arbitrarily, without any relationship to the merit 
of imposing those cuts on providers who are serving underpaid patient 
categories. The only result of such across-the-board cuts for home 
health services in the past has been an increase in the number of HHAs 
operating with financial margins in the red.

MedPAC's Analysis is Incomlete and Unreliable
    MedPAC's underlying rationale for its recommendation to freeze 
Medicare home health services payment rates for a second consecutive 
year is that HHAs had a 16 percent average profit margin in 2004, 
access to care is ``good,'' and the quality of services has improved. 
It is notable that the MedPAC standard of good access is that nearly 20 
percent of patients seeking home health services report that they have 
difficulty in accessing care.
    MedPAC's analysis of the financial condition of home health 
agencies is of equal concern. It explains that the average Medicare 
margin in 2004 among home health agencies is 16 percent, and estimated 
to fall to 14.8 percent in 2006 as a result of the payment freeze 
contained in the Deficit Reduction Act of 2005. However, in reaching 
these calculations, MedPAC fails to report or acknowledge that:

    1.  It excluded nearly 30 percent of all HHAs from its analysis 
because these HHAs are part of a hospital system. In some parts of the 
country, the only access to home health services is through a hospital-
based HHA.
    2.  It used a concept of ``average'' that fails to recognize the 
local nature of home care, favoring large metropolitan HHAs over small 
rural HHAs in the method employed.
    3.  It did not adequately reveal the extraordinarily wide range in 
financial margins among HHAs that indicates a failure of the payment 
system to fairly and properly distribute payments.
    4.  It did not reveal that over 33 percent of all HHAs had Medicare 
margins less than 0 percent in 2004 and that number will rise to over 
42 percent with payment freezes in 2006 and 2007.
    5.  It did not explain that the overall financial margins of HHAs 
when considering all revenue sources, including Medicare, Medicaid, and 
managed care, are significantly lower, with average margins for 
freestanding HHAs at 1.56 percent.
MedPAC Ignores All Hospital-Based HHAs
    In a manner inconsistent with its analysis of the financial status 
of hospitals, the MedPAC evaluation of Medicare profit margins of HHAs 
excludes consideration of all hospital-based providers of home health 
services. Instead, MedPAC evaluates only freestanding HHAs.
    Today there are approximately 8,000 Medicare-participating HHAs. In 
1997, there were over 10,400. Between 1997 and today, the provision of 
home health services through hospital-based HHAs has become essential, 
with the closure of HHAs in many parts of the country leaving the 
hospital-based program as the only surviving provider. Approximately 
2,000 Medicare HHAs are part of a hospital system. In parts of the 
country, it is the only provider of home health services.
    MedPAC excludes the hospital-based HHA from its analysis ostensibly 
because Medicare cost reporting standards require a cost allocation 
methodology that assigns a share of the system's administrative costs 
to the HHA. However, while MedPAC excludes hospital-based HHAs from its 
home health rate analysis, it includes all hospitals with home health 
agencies in its hospital rate analysis. MedPAC has never explained its 
discriminatory approach.
    HHAs across the country report that their hospital system continues 
to measure the financial viability of continuing to operate their HHA 
through the Medicare cost reporting analysis of the individual HHA 
financial margins. Whether MedPAC considers the data to be skewed is 
irrelevant: the marketplace views a hospital-based HHA with negative 
financial margins as a candidate for closure. When that occurs, many 
communities are left with no home health services or an inadequate 
supply to meet residents' needs.
    When including hospital-based HHAs in the calculation of the 
financial status of Medicare home health services, the profit margin in 
2004 is 2.91 percent (facility weighted).
    MedPAC Uses a Confusing ``Average''
    Only statisticians with doctoral degrees can appreciate the concept 
of ``average'' that MedPAC employs in evaluating the Medicare margins 
of home health agencies. Rather than recognize that every HHA 
contributes to access to care in its specific community, MedPAC lumps 
them all together nationally and favors large metropolitan HHAs in 
calculating an average national margin. The approach used is known as a 
``revenue weighted averaging'', whereby the financial condition of a 
few very large HHAs can significantly affect the calculation of the 
``average.'' This approach ignores the reality that a large 
metropolitan HHA in the Northeast cannot relocate its operation or 
duplicate its economies of scale in a small Midwestern town.
    MedPAC's failure to correlate Medicare margin calculations with 
localities results in a wholly misleading picture of the financial 
condition of home health agencies. When focusing the analysis on a 
smaller geographic area, such as congressional districts, the financial 
picture of HHAs sharpens and reveals that the Medicare margins in these 
areas range dramatically, thereby indicating an instability that a 
freeze in rates can only exacerbate.
    An alternative to the revenue-weighted average used by MedPAC is a 
``facility-weighted average.'' This method, while far from perfect, 
offers a cleaner picture as to the financial condition of home health 
agencies by recognizing that each entity has value in its community. 
The facility-weighted average Medicare margin in 2004 is 2.91 percent 
for all HHAs and 8.56 percent for freestanding HHAs only.
The Wide Range in Medicare Margins Indicates Severe Flaws in the 
        Payment System
    Even with the MedPAC analysis, it is apparent that the Medicare 
HHPPS is failing to distribute payments in a fair and appropriate 
manner. The only reliable explanation that has surfaced is that the 
case mix adjustment methodology is the culprit. CMS recognizes its 
severe weaknesses and is diligently moving ahead with corrective 
action.
    The range in financial results driven by a flawed case mix adjuster 
and other HHPPS weakness is startling. For example:


                                                    Lowest      Highest
                      State                         Margin      Margin

Alaska                                             (243.19)%      32.51%
Connecticut                                       (111.50)       53.17
Florida                                           (339.28)       76.43
Illinois                                          (198.37)       79.05
Louisiana                                         (258.23)       69.92
Montana                                           (217.70)       53.82
New Mexico                                        (280.81)       79.40
Texas                                             (326.60)       78.77
Washington                                        (157.60)       45.58


    (Parentheses denote negative margins)

    The lowest margin is not exclusively held by hospital-based HHAs. 
In fact, the lowest margins listed above for Louisiana, New Mexico, and 
Texas belong to freestanding HHAs. Accordingly, the extreme range in 
Medicare margins indicates a poorly-operating system in need of repair 
rather than an across-the-board payment rate cut.

The Number of HHAs Operating With Negative Medicare Margins Is Growing

    A bell weather of impending crisis is the proportion of home health 
agencies that are at risk of closure due to inadequate payment rates 
from Medicare. Over the last five years, HHAs received a full inflation 
rate increase only once. In 2002, rates were reduced by nearly 5 
percent after the application of the so-called 15 percent cut (the real 
effect was a reduction of approximately 7 percent) and the 2.1 percent 
inflation update (3.2 percent minus 1.1 percent as mandated). The year 
2003 saw another reduction of the inflation update of 1.1 percent. In 
2005, the update was delayed from October 2004 to January 2005 and was 
reduced by 0.8 percent. Originally, the inflation rate for 2006 was to 
be reduced by 0.8 percent. Instead the DRA 2005 froze 2006 rates at 
2005 levels, representing a combined cut of 3.6 percent for 2006.
    These cuts have had an effect on the financial stability of HHAs. 
In 2002, 31 percent of HHAs had Medicare margins less than 0 percent. 
That has risen in 2004 to 33.4 percent. Of those in 2004 with positive 
margins, 8.7 percent of HHAs had Medicare margins between 6.2 and 0 
percent. With the effect of a rate freeze in 2006 and the MedPAC 
proposed freeze in 2007 estimated as reducing payment rates by 6.2 
percent in comparison to pre-DRA 2005 projections, the estimated number 
of HHAs that will be operating with negative Medicare margins in 2007 
rises to 42.1 percent.

The Overall Financial Margins of Home Health Agencies Indicates Serious 
        Problems
    Unlike its analysis of hospitals, MedPAC did not evaluate the 
overall financial condition of home health agencies when opining that 
access to care would be unaffected by a second consecutive rate freeze 
in Medicare payments. This is a serious shortcoming of the MedPAC 
review. The absence of such information makes it impossible for the 
Subcommittee to determine the likely impact of accepting the MedPAC 
recommendation.
    NAHC has conducted an analysis of the overall financial margins of 
home health agencies participating in Medicare. It is limited to 
freestanding HHAs (the focus of MedPAC's reviews) because data from 
hospital-based HHAs does not make it possible to separate non-Medicare 
home care revenues from other hospital revenues. Freestanding HHAs 
submit a slightly different cost report to Medicare that includes a 
total revenue and total cost report.
     The NAHC analysis shows that the 2004 overall financial margins 
for freestanding HHAs was 1.56 percent. In 2002 and 2003, the margins 
were 2.53 percent and 1.34 percent, respectively.
    The Medicare cost report does not allow the differentiation of one 
type of non-Medicare revenue source from another. However, HHAs 
anecdotally report that the primary revenue sources outside of Medicare 
fee-for-service is Medicaid and Medicare Advantage. These HHAs further 
report that Medicaid payments rates fall far short of actual costs. 
Similar reports have been received regarding Medicare Advantage plan 
contracts. With respect to Medicare Advantage, HHAs also report that 
home health services provided to patients in those plans have higher 
administrative costs because of extensive authorization processes. 
Therefore, it appears that any ``profits'' that HHAs receive through 
Medicare are transferred to the support of Medicaid and Medicare 
Advantage patients.
    In the event that Congress enacts the 2007 recommendation from 
MedPAC, the reduction in available payments will affect the overall 
financial status of providers and jeopardize the delivery 
infrastructure. While Medicare should not be expected to subsidize 
Medicaid and Medicare Advantage plans, the reality of 2006 is that 
without the Medicare margins, home health agencies cannot continue to 
provide the access to care currently available in their communities.

Recommendations
    NAHC respectfully recommends that the Subcommittee reject the 
MedPAC recommendation on home health services payments. In addition, 
NAHC recommends that the Subcommittee direct MedPAC to provide the 
following information:

    1.   Comprehensive data on the overall financial status of 
Medicare-participating home health agencies, including data on revenues 
and costs from Medicare Advantage plans and non-Medicare payers for 
services provided to non-Medicare patients.
    2.   Medicare financial margin data from all Medicare-participating 
home health agencies, including hospital-based HHAs.
    3.   Medicare financial margin data as above, segmented by state 
and Congressional district.
    4.   An analysis of the strengths and weakness of the current 
Medicare HHPPS, including its case mix adjustment methodology and the 
area wage index.
    5.   A zip-code based analysis of patients served by HHA by year 
since 1997.

    NAHC further recommendations that the Subcommittee make available 
all resources necessary for CMS to expedite the development and 
implementation of a refined HHPPS that calculates payment rates in a 
manner reasonably consistent with a patient's need for health care 
resources. NAHC is available at any time to assist in the development 
of such reforms.

Conclusion
    The National Association for Home Care & Hospice, on behalf of the 
home care community, wishes to thank the Subcommittee for its 
longstanding dedication to improving the Medicare home health benefit.

                                 
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