[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]





                         EXPLORING OPTIONS FOR
                         IMPROVING THE MEDICARE
                        PHYSICIAN PAYMENT SYSTEM

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

                                HEARING

                               BEFORE THE

                         SUBCOMMITTEE ON HEALTH

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 6, 2007

                               __________

                           Serial No. 110-13


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov


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                    COMMITTEE ON ENERGY AND COMMERCE

    JOHN D. DINGELL, Michigan, 
             Chairman
HENRY A. WAXMAN, California              JOE BARTON, Texas
EDWARD J. MARKEY, Massachusetts              Ranking Member
RICK BOUCHER, Virginia                   RALPH M. HALL, Texas
EDOLPHUS TOWNS, New York                 J. DENNIS HASTERT, Illinois
FRANK PALLONE, Jr., New Jersey           FRED UPTON, Michigan
BART GORDON, Tennessee                   CLIFF STEARNS, Florida
BOBBY L. RUSH, Illinois                  NATHAN DEAL, Georgia
ANNA G. ESHOO, California                ED WHITFIELD, Kentucky
BART STUPAK, Michigan                    BARBARA CUBIN, Wyoming          
ELIOT L. ENGEL, New York                 JOHN SHIMKUS, Illinois
ALBERT R. WYNN, Maryland                 HEATHER WILSON, New Mexico
GENE GREEN, Texas                        JOHN B. SHADEGG, Arizona
DIANA DeGETTE, Colorado                  CHARLES W. ``CHIP'' PICKERING,
    Vice Chairman                            Mississippi
LOIS CAPPS, California                   VITO FOSSELLA, New York
MIKE DOYLE, Pennsylvania                 STEVE BUYER, Indiana
JANE HARMAN, California                  GEORGE RADANOVICH, California
TOM ALLEN, Maine                         JOSEPH R. PITTS, Pennsylvania
JAN SCHAKOWSKY, Illinois                 MARY BONO, California
HILDA L. SOLIS, California               GREG WALDEN, Oregon
CHARLES A. GONZALEZ, Texas               LEE TERRY, Nebraska
JAY INSLEE, Washington                   MIKE FERGUSON, New Jersey  
TAMMY BALDWIN, Wisconsin                 MIKE ROGERS, Michigan
MIKE ROSS, Arkansas                      SUE WILKINS MYRICK, North Carolina
DARLENE HOOLEY, Oregon                   JOHN SULLIVAN, Oklahoma
ANTHONY D. WEINER, New York              TIM MURPHY, Pennsylvania
JIM MATHESON, Utah                       MICHAEL C. BURGESS, Texas
G.K. BUTTERFIELD, North Carolina         MARSHA BLACKBURN, Tennessee
CHARLIE MELANCON, Louisiana              
JOHN BARROW, Georgia                     
BARON P. HILL, Indiana              
                                   
                                  _______

                           Professional Staff

                     Dennis B. Fitzgibbons, Staff Director
                     Gregg A. Rothschild, Chief Counsel
                        Sharon E. Davis, Chief Clerk
                     Bud Albright, Minority Staff Director

                                  (ii)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                         Subcommittee on Health

                FRANK PALLONE, Jr., New Jersey, Chairman
HENRY A. WAXMAN, California          NATHAN DEAL, Georgia,
EDOLPHUS TOWNS, New York                 Ranking Member
BART GORDON, Tennessee               RALPH M. HALL, Texas
ANNA G. ESHOO, California            BARBARA CUBIN, Wyoming
GENE GREEN, Texas                    HEATHER WILSON, New Mexico
    Vice Chairman                    JOHN B. SHADEGG, Arizona
DIANA DeGETTE, Colorado              STEVE BUYER, Indiana
LOIS CAPPS, California               JOSEPH R. PITTS, Pennsylvania
TOM ALLEN, Maine                     MIKE FERGUSON, New Jersey
TAMMY BALDWIN, Wisconsin             MIKE ROGERS, Michigan
ELIOT L. ENGEL, New York             SUE WILKINS MYRICK, North Carolina
JAN SCHAKOWSKY, Illinois             JOHN SULLIVAN, Oklahoma
HILDA L. SOLIS, California           TIM MURPHY, Pennsylvania
MIKE ROSS, Arkansas                  MICHAEL C. BURGESS, Texas
DARLENE HOOLEY, Oregon               MARSHA BLACKBURN, Tennessee
ANTHONY D. WEINER, New York          JOE BARTON, Texas (ex officio)
JIM MATHESON, Utah
JOHN D. DINGELL, Michigan (ex officio)
















  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Frank Pallone Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................     1
 Hon. Nathan Deal, a Representative in Congress from the State of 
  Georgia, opening statement.....................................     3
Hon. Anna G. Eshoo, a Representative in Congress from the State 
  of California, opening statement...............................     4
    Prepared statement...........................................     4
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................     5
Hon. Diana DeGette, a Representative in Congress from the State 
  of Colorado, opening statement.................................     6
Hon. Lois Capps, a Representative in Congress from the State of 
  California, opening statement..................................     7
Hon. Darlene Hooley, a Representative in Congress from the State 
  of Oregon, opening statement...................................     8
Hon. Tim Murphy, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     9
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, opening statement.......................................    10
    Prepared statement...........................................    11
Hon. Tammy Baldwin, a Representative in Congress from the State 
  of Wisconsin, opening statement................................    12
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................    13
Hon. Tom Allen, a Representative in Congress from the State of 
  Maine, opening statement.......................................    14
Hon. Jim Matheson, a Representative in Congress from the State of 
  Utah, opening statement........................................    15
Hon. Hilda L. Solis, a Representative in Congress from the State 
  of California, opening statement...............................    15
Hon. Barbara Cubin, a Representative in Congress from the State 
  of Wyoming, prepared statement.................................    16

                               Witnesses

Glenn M. Hackbarth, chairman, Medicare Payment Advisory 
  Commission.....................................................    17
    Prepared statement...........................................    20
A. Bruce Steinwald, Director, Health Care, Government 
  Accountability Office, Washington, DC..........................    62
    Prepared statement...........................................    65
Elliott S. Fisher, M.D., professor, medicine and community and 
  family medicine, Dartmouth Medical School......................    74
    Prepared statement...........................................    76
T. Byron Thames, M.D., member, Board of directors, American 
  Association of Retired Persons.................................    92
    Prepared statement...........................................    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

 
  EXPLORING OPTIONS FOR IMPROVING THE MEDICARE PHYSICIAN PAYMENT SYSTEM

                              ----------                              


                         TUESDAY, MARCH 6, 2007

                  House of Representatives,
                            Subcommittee on Health,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:35 a.m., in 
room 2123 of the Rayburn House Office Building, Hon. Frank 
Pallone, Jr. (chairman) presiding.
    Members present: Representatives Eshoo, Green, DeGette, 
Capps, Allen, Baldwin, Solis, Ross, Hooley, Matheson, Dingell, 
Deal, Hall, Wilson, Shadegg, Murphy, Burgess, and Barton.
    Staff present: Robert Clark, Yvette Fontenot, Amy Hall, 
Christie Houlihan, Jodi Seth, Bridgett Taylor, Brin Frazier, 
Chad Grant, Ryan Long, Katherine Martin, Melissa Bartlett.

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. I would like to call the meeting to order. 
Today we are having a hearing on exploring options for 
improving the Medicare physician payment system, and I am glad 
to see that Mr. Hackbarth--we have two panels. The first is 
just Mr. Hackbarth. And I will recognize myself now for an 
opening statement. Since we are talking about physician 
services today, I figured I would try to couch my statement in 
medical terms so I am going to begin with a diagnosis. For the 
past several years physicians participating in Medicare have 
been threatened with payment cuts and these payments cuts are 
the result of the complex formula used to reimburse physicians, 
specifically physician payments are tied to an expenditure 
target known as a sustainable growth rate or SGR.
    As spending for physician services exceeds this spending 
target then payments are reduced. Congress, however, has 
stepped in each time to prevent these cuts from taking place 
and instead we have provided physicians with a freeze in 
payments or slight increase depending on the year. At the same 
time we are grossly overpaying managed care plans that 
participate in Medicare. According to the MedPAC report 
released last week payments to Medicare Advantage plans are 12 
percent higher than payments for physicians in traditional fee 
for service. These overpayments haven't bought us much either. 
There is no discernible difference in the quality of care or 
health outcomes for beneficiaries enrolled in private plans 
versus those who are enrolled in traditional fee for service.
    If the current system is left unchanged the prognosis is 
grim in my opinion. Physicians are already slated to receive 
annual payment cuts over the next 10 years. Each year that 
Congress steps in to avert these payment cuts from going into 
effect that increases the size of the cuts that doctors face in 
later years. As a result of previous interventions doctors will 
face a cut of 10 percent in 2008 and additional cuts over the 
next 10 years. The predicted payment cuts could have serious 
implications for beneficiaries, including jeopardizing their 
access to medical services, and while doctors don't seem to be 
refusing Medicare patients yet, I have little doubt that if 
Congress were to allow these payment cuts to go into place many 
doctors would drop out of the program altogether.
    Furthermore, if we do not correct the payment inequities 
between Medicare Advantage plans and traditional fee for 
service seniors are going to be forced into private managed 
care where their choice of doctors and their access to services 
will be severely constrained. We must preserve in my opinion 
the right of beneficiaries to select a doctor of their choosing 
which has been the hallmark of the Medicare program since it 
was created over 40 years ago. Beneficiaries will face access 
problems also if they can no longer afford the growing cost of 
their part B premium. Our seniors have already faced 3 years of 
record premium increases under Medicare. Currently, the part B 
premium is $93.50 per month. I remember when people would 
complain about it being $40 or $50. In 2008 the part B premium 
is expected to increase by approximately $15 to $109.40 per 
month. These increases are eating up a larger share of senior 
Social Security checks and forcing them to make tough choices 
between medical care they need and other necessities.
    So what is the course of treatment now that we have the 
diagnosis and the prognosis, what is the course of treatment, 
and first and foremost we need to level the playing field 
between Medicare Advantage plans and traditional fee for 
service Medicare by establishing neutral payment systems. We 
should also eliminate the slush fund used to provide extra 
payments for preferred provider organizations. These two steps 
alone will go a long way at reducing unnecessary costs in the 
program and preserving access for seniors. The harder part is 
deciding how to fix the payment structure. The MedPAC report 
that we will hear about today will hopefully provide us with a 
good starting point as we examine our options.
    From what I have seen so far, I think there are some good 
ideas included in this report, and I am eager to learn more 
about them from Mr. Hackbarth. I think it is important to note, 
however, that the task before us is a difficult one. We all 
know that. The commissioners themselves admit that they could 
not agree on a single approach or how to fix the problems 
associated with the SGR and that should be some indication of 
the challenges that Congress faces as we attempt to come up 
with a solution.
    Needless to say, we have our work cut out for us but that 
shouldn't deter us. I have said before, and I will say again, 
that we need a permanent solution to this problem. We should no 
longer settle for short-term fixes that simply kick the can 
down the road. In sum, we need to roll up our sleeves and get 
to work. I am looking forward to hearing from our witnesses 
today and working with all interested parties including my 
colleagues on both sides of the aisle to find a solution. I 
think that is important. It is really important for us, I 
believe, to work in a bipartisan fashion on this issue.
    I think we all want to provide physicians with a stable and 
predictable payment system as well as preserve beneficiaries 
access to care. I think I would just end by saying that I think 
the worse thing is when we have a reimbursement rate or system 
that is not based on what is actually happening out there when 
the government doesn't look at things practically in terms of 
what the real costs are and comes up with systems that are not 
really related to actual costs then we get into trouble, and 
that is what we need to fix. So thank you again. I will now 
recognize the ranking member for an opening statement.

  OPENING STATEMENT OF HON. NATHAN DEAL, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF GEORGIA

    Mr. Deal. Thank you, Mr. Chairman. Medicare physician 
payment has been an issue that has come before this committee 
several times over the last several years. In fact, I think we 
had two hearings that related to the subject during the last 
Congress. I am glad to see what we are looking at possible 
reforms again today because I do think that is something that 
we have to wrestle with. I think the report of MedPAC and the 
lack of consensus among the commissioners themselves indicates 
how complex this issue really is and how difficult it is to 
arrive at a solution that will satisfy everybody, and I am 
hopeful that we can use this as a springboard for coming to 
more long-term solution.
    I personally would have hoped that maybe MedPAC could have 
given us a little more definitive guide path but there again I 
think that fact recognizes the complexity of the issue and the 
difficulty of the commissioners themselves to come to 
consensus. The incentives in the existing payment system reward 
those physicians whose practices see a high volume of cases 
while paying much less attention to the quality of the services 
performed. This has led to the dramatic growth that we have 
seen in certain services. And here I think lies the significant 
weakness of the SGR because while it takes automatic action to 
check the cost of the service provided it does little to 
address the number of time that service is provided.
    Both of the components, the volume of services and the 
price paid for the service, must be considered during reform of 
physician payment. As the MedPAC report notes beneficiaries 
that receive more services do not necessarily experience better 
quality of care or better outcomes. I think this dynamic 
between the growth and the number of services and how much is 
paid for the service is why it is so important that the 
committee focuses on reforms which emphasize that patients 
receive high quality care. I believe we took a step in the 
right direction last year by providing a bonus payment for 
those physicians that voluntary report quality measures this 
year, and I hope that we can expand upon it again during this 
Congress. I thank you, Mr. Chairman.
    Mr. Pallone. Thank you. And then we will continue with the 
opening statements. I recognize the gentlewoman from 
California, Ms. Eshoo.

 OPENING STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Eshoo. First, Mr. Chairman, thank you for holding this 
hearing. We have had hearings before. We know we have a very 
large issue facing us that I hope we will finally address. 
Physicians and patients are deeply affected by this across the 
country. I could go member by member here. My staff has given 
me the numbers affecting each one of our congressional 
districts, the members that are here, and that really is a 
microcosm for the rest of the Congress. It is costly, and I 
think that is why the now minority really didn't get to address 
it.
    Every year there is a rush and a push on Congress to do 
something about physician reimbursements and we have come up 
with very temporary fixes, and this really calls for all of us 
putting our heads together. And I look forward to asking 
questions today, and I will place my statement in the record. 
But thank you for having this hearing. I think it is going to 
be instructive, and hopefully it will be a guide for how we can 
reform. Thank you.
    [The prepared statement of Ms. Eshoo follows:]

Prepared Statement of Hon. Anna G. Eshoo, a Representative in  
              Congress from the State of California

    Mr. Chairman, this committee has held many hearings 
examining the Medicare physician payment system over the last 
several years. We've waited far too long to act on this issue 
and physicians and their patients have suffered as a result.
    I hope today's hearing will be different from those of the 
past and that Congress will use this hearing as a guide for 
drafting, introducing and passing legislation that is long 
overdue. So thank you again, Chairman Dingell, for making this 
issue a priority for the committee in the 110th Congress.
    Last week, MedPAC released a report to Congress analyzing 
the current state of Medicare physician payments. Although the 
report did not contain a specific recommendation for how we 
ought to fix this problem, it did recommend two things: payment 
accuracy for physicians must be improved. To do so, the 
sustainable growth rate (SGR) payment formula should be 
abandoned in its current form.
     If we continue to use expenditure targets, they must 
involve two new themes: they must apply to all Medicare 
expenditures (hospitals in addition to physicians); and they 
must be applied at a smaller geographical scale, rather than 
the current SGR formula which is applied at the national level.
    With respect to the SGR, serious reforms are necessary and 
they're needed now. Last year many of my colleagues and I 
recommended that we eliminate the SGR and replace it with the 
Medicare Economic Index (MEI). The MEI is an index based on 
actual medical practice costs. It is used to reimburse all 
other providers in the Medicare program (including hospitals, 
health plans and nursing homes). MedPAC and many State medical 
associations have been supportive of past proposals to 
eliminate the SGR payment formula and adopt the MEI for 
physician payments.
    The SGR, however, is inappropriately tied to a non-medical 
index, the Gross Domestic Product (GDP), which has resulted in 
proposed physician payment cuts of more than 4 percent each 
year since 2003. If Congress doesn't act now, Medicare 
physician payment rates will be cut by roughly 10 percent on 
January 1, 2008. Congress scrambles every year to enact a last-
minute fix. What we really need is a permanent fix, and 
replacing the SGR with the MEI will do this.
    MedPAC's recommendation to scale expenditure targets to 
geographic areas leads me to raise a related issue of 
considerable concern to me, that of the Geographic Payment 
Locality. Despite major demographic changes across the country 
since 1966, the Geographic Payment Locality hasn't been updated 
in any meaningful way. The result is that physicians in 32 
states and 174 counties are currently inaccurately underpaid by 
up to 14 percent per year. Although the geographic payment 
locality is not a national problem, it's a huge problem for the 
affected localities.
    For example, in Ranking Member Deal's district, Pickens 
County physicians were underpaid by 12 percent in 2006. In 
Ranking Member Barton's district, Ellis County physicians were 
underpaid by 7.5 percent. In Chairman Dingell's district, 
physicians in Monroe and Livingston Counties were underpaid by 
5.4 percent last year.
    And in my district, Santa Cruz County physicians are 
underpaid by 10.2 percent. As of June 1 of last year, 
physicians in Santa Cruz County are no longer accepting new 
Medicare patients. This means that patients in Santa Cruz must 
travel at least 25 miles to neighboring Santa Clara County to 
receive care, if they are lucky enough to find a doctor who 
will accept new Medicare patients.
    We have to be careful moving forward: it makes absolutely 
no sense to even consider applying new expenditure targets to 
41-year-old geographies. We must first reform the payment 
localities, and the locality-based payment levels so they 
reflect actual real costs in the geographic units that we're 
developing. Otherwise, we'll only compound an already 
overwhelming problem.
    I urge you, Mr. Chairman, and members of our committee to 
listen carefully to the expert opinions of our witnesses today 
and make a commitment to reform the Medicare Physician Payment 
system before the summer recess.
    We've spent far too long investigating this issue. It's 
time to act.
                              ----------                              

    Mr. Pallone. Thank you. I recognize the gentleman from 
Texas, Dr. Burgess.

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Mr. Burgess. Thank you, Mr. Chairman. In anticipating I 
won't get through all of this in 3 minutes, I am going to claim 
the time of everyone who is not here on my side. Alan Greenspan 
right before he retired as Chairman of the Federal Reserve 
Board came and did a victory lap around the Hill last January, 
and he met with a group of us on my side of the aisle, and sure 
enough the questions came up are we going to be able to sustain 
Medicare spending, the same sort of things we hear David 
Walker, the comptroller, talk about.
    Alan Greenspan was saying, he said I think ultimately you 
will be able to solve those problems. It will be difficult but 
you will be able to do it. My bigger concern, said Mr. 
Greenspan, is there will be no one there to deliver the 
services by the time you get there. And I share Mr. Greenspan's 
concern. I am very anxious to hear from our witnesses today. 
Before we go home for the Easter break, I will be reintroducing 
legislation much as I did last year in Congress to deal with 
this program. Since MedPAC has not addressed a solution to the 
SGR problem, I will fill the void.
    But let me just go through with the committee today some of 
the principles that I think we must have in that legislation 
when it comes forward at the end of the month. Congress must 
develop a physician work force incentive that will insure 
future beneficiaries accessibility and keep doctors in the 
game. This has got to be complimentary to Medicare physician 
payment reform. The current Medicare physician payment system 
exacerbates negative physician work force trends. Therefore, 
the SGR ultimately cannot be reformed. It is just simply going 
to have to be eliminated or replaced with something else. I 
vote for MEI.
    Reimbursement must fairly compensate physicians who provide 
services covered by Medicare. Any new system must be able to 
adjust for growth and services but also be agile enough to 
determine what constitutes appropriate growth and service 
volume and when growth results in better patient outcomes that 
is recognized. That was the issue that Charlie Norwood brought 
up last year and hammered home when we had a similar panel to 
this last fall. Since Medicare is an integrated program the 
measure of appropriateness should take into account the growth 
in certain service resulting in the decrease or avoidance of 
other services covered elsewhere in the Medicare program.
    We keep loading stuff onto part B. We expand the premium 
for senior citizens. We cut the reimbursement rate to 
physicians but this is money that we are no longer having to 
spend in part A, part C, and part D. Medicare truly should be, 
if it is an integrated program, it should be reflective of that 
fact and not punitive to part B and ultimately punitive to 
seniors and to physicians who are involved in the part B 
program, so Congress must de-link any future cost containment 
to trends in the economy that are completely external to 
medicine.
    The doctors who practice medicine in this country have no 
control over what we do up here in Washington that ultimately 
affects the economy. Quality reporting, I am a big believer in 
it, but I will tell you what, and I believe this to be true, if 
you drive out the quality physicians, and I am talking about 
the doctors who are 45 to 65 years of age, if you drive those 
individuals out of the practice of medicine for our senior 
citizens it is going to cost you a heck of a lot of money to 
bring that quality back to speed and you will never recover. 
The result is we will have the scope of practice issues where 
we have people other than physicians delivering care to 
arguably what are our most complex patients in this country, 
our Medicare patients. I will yield back, Mr. Chairman.
    Mr. Pallone. Thank you, Doctor. Next I recognize the 
gentlewoman from Colorado, Ms. DeGette.

 OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF COLORADO

    Ms. DeGette. Thank you very much, Mr. Chairman. I would 
like to add my thanks to the other committee members for you 
having this hearing today. For the last few years we have an 
annual ritual in my office, which is we answer all the phone 
calls from the doctors in my district begging me to fix the 
reimbursement problem, and understandably they can't understand 
or comprehend why we come to the brink of significant 
reimbursement cuts every year only to make minor increases on 
December 31. Most physicians at the end of the day are small 
businessmen and women who need to make their payroll and cover 
their rent, pay for equipment upgrades, and plan for the coming 
year.
    They need the continuity of predictable reimbursement so 
that they can adequately plan for the future and spend their 
time doing what they are good at which is caring for patients. 
So in 2005 we heard all these same pleas for help, and we 
decided to start down the road to make changes. In the Deficit 
Reduction Act we called upon MedPAC to examine alternative 
methods for reimbursing physicians while also controlling 
levels of expenditures. I, like most of my colleagues here on 
the committee, was hopeful that MedPAC would be able to 
coalesce around a plan that could begin the process of 
developing a reimbursement system that made sense.
    So that is why I was disappointed to learn that the result 
of the study was not consensus but simply more discussion. It 
seems like as we pull the physician reimbursement system away 
from the precipitous of cuts every year so too do we pull a 
long-term fix away from successful development. And I think, 
Mr. Chairman, you and the other members on this side of the 
aisle, and I think our colleagues on the other side too, will 
agree this has just simply got to stop. In the absence of a 
concrete plan for fixing our physician reimbursement system, I 
hope that our hearing today will start a process that will 
eventually result in a usable model.
    We have all spent a lot more time than we should have on 
this issue, including the physicians, and it is time that we 
put patients first, roll up our sleeves, and develop a system 
that rewards high quality care at a reasonable price. Despite 
my disappointment over not having a final solution to our 
problem, I am happy to see that we are breaking the issue down 
to some important fundamentals. I am looking forward to hearing 
discussion of a pay for performance model, and I also want to 
hear how a system can be constructed that supports coordination 
of care among providers and rewards achieving the best outcome, 
not necessarily the specific services that were provided.
    Finally, I am interested in hearing how regional 
differences in utilization can be better understood so we don't 
just reward good behavior but we try to replicate it 
nationwide. Mr. Chairman, despite my concerns, I do appreciate 
the work that has been done to date, and I hope the discussion 
today generates ideas that will eventually lead to plans to 
move forward. And I yield back any time I might have. Thanks.
    Mr. Pallone. Thank you. I recognize the gentlewoman from 
California, Mrs. Capps.

   OPENING STATEMENT OF HON. LOIS CAPPS, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mrs. Capps. Thank you, Chairman Pallone. I believe we all 
agree that there is a dire need to reform the current Medicare 
physician reimbursement system. I am very pleased that early on 
in this session of Congress that you have called this hearing, 
thankful that our witnesses are here. We have discussed this 
topic in this committee quite often over the past few years, 
and I think we all would agree now that the first step is 
replacing the SGR formula. It is fundamentally flawed, needs to 
be scrapped, so that we can develop a better system. We need to 
set the stage for long-term solution that does not rely on 
enacting last minute 1-year updates and threatening long-term 
solvency concerns.
    So that is one of the reasons I am very happy that we are 
starting this discussion early on in the 110th Congress. It 
should give us time now at this time to really take some action 
as soon as possible. I hope that as we proceed with devising a 
solution to the overall Medicare physician fee problem we will 
also consider another related subject that deserves its own 
hearings and its own fix and that is a geographic adjustment 
issue. I brought this up before many times in this committee, 
and I am going to continue to do so. It is really something I 
would say almost every member who is here today at this hearing 
and many others as well are very concerned about it because it 
affects our districts.
    In fact, there are 175 counties in 32 States where 
physicians are paid 5 to 14 percent less than the Medicare 
assigned geographic cost factors because they are assigned to 
inappropriate localities. In my own district physicians in 
Santa Barbara and San Luis Obispo counties currently receive 
reimbursements much lower than the actual geographic cost 
factors in those counties. There are proposals out there but 
none have been acted on, and I want to take this opportunity to 
stress how important a fix would be to our constituents. It is 
heartbreaking to hear physicians closing up shop, beneficiaries 
who can't find a doctor who will take a new patient on 
Medicare. It is such a common theme across this country.
    Just a few days ago, I heard that the last psychiatry 
practice in San Luis Obispo County had to close its doors. With 
each physician who leaves a number of patients are left to find 
new doctors further away, wait longer for appointments, and 
this is a situation we cannot allow to go on any longer. 
Congress needs to act quickly to address the overall Medicare 
physician payment system as well as the geographic practice 
cost index. I am sure we are going to hear from our witnesses 
today and I agree with them that we cannot improve our health 
care delivery in this country when physicians cannot afford to 
sustain their practice and when patients are left with 
inadequate access to care. With that, I will yield back the 
balance of my time.
    Mr. Pallone. Thank you. The gentlewoman from Oregon, Ms. 
Hooley, is recognized.

 OPENING STATEMENT OF HON. DARLENE HOOLEY, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Ms. Hooley. Thank you, Mr. Chair. Good morning, Mr. 
Hackbarth. It is particularly nice to welcome an Oregonian to 
this committee. Medicare physician payment reform is a critical 
issue for Congress to address this year. Physicians will face a 
10 percent cut in payment next year if Congress fails to act. 
The health of Medicare cannot afford for Congress to keep 
relying on year-end stop gap measures to address the physician 
payment shortfalls like we did last year. Our dedicated 
physicians deserve better than to be forced to wait until the 
last days of the year to find out if they can afford to provide 
services to Medicare beneficiaries in the future.
    I firmly believe that a long-term fix for the physician 
reimbursement system is absolutely critical. Cutting physician 
reimbursement rates put an increased burden on an already 
strained system. Some seniors cannot get access to a physician 
because they have stopped accepting Medicare patients, and 
again I think you will hear this over and over again. There is 
a patient access issue, and we cannot let the Medicare system 
and our seniors be put at risk by failing to act on physician 
payment reform. Oregon's physicians provide care more 
efficiently than physicians in many parts of the country. The 
alternatives to the SGR discussed in your report are a good 
start toward addressing geographic disparities in how care is 
provided.
    It is important to assure that physicians who provide 
inappropriate level of care for their patients like the vast 
majority of physicians in Oregon benefit from the savings that 
they create in the system. I also want to insure that physician 
payment reform will not create a system under which providers 
with disproportionately sicker patient population will be 
punished. Medicare beneficiaries from underserved and rural 
areas are more likely to see patients in worse health than 
beneficiaries elsewhere. Any move toward pay for performance 
must insure that the providers are not punished for taking on 
the tough cases. We need to encourage providers to see the 
sickest patients as well as the healthy ones.
    Although I appreciate MedPAC's work in assessing 
alternatives to the sustainable growth rate, I think that 
MedPAC has not done enough to consider the impact of proposals 
on physicians practicing in rural areas. I think this may be in 
part because the commissioners with real health backgrounds are 
under represented on MedPAC. In the future I hope to see a more 
balanced representation of rural versus urban and suburban 
commissioners appointed. Thank you, Mr. Chair, and I look 
forward to discussing these issues more with you. Thank you for 
being here.
    Mr. Pallone. Thank you. I now recognize the gentleman from 
Pennsylvania, Mr. Murphy.

   OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    Mr. Murphy. Thank you, Mr. Chairman, and thank you for your 
high level of interest in helping to fix a number of things 
about health care particularly because our health care system 
is broken and must be reformed and fixing the system is not 
about who is paying, it is about what we are paying for. A 
broken system is not fixed only by shifting additional payments 
to seniors, families, employers or taxpayers. Affordability 
must begin with fundamental reforms to quality and 
accessibility. Every year Congress steps in to avoid a 
reduction in Medicare payments for our doctors. The two 
alternatives identified by the Medicare payment advisory 
commission to fix this problems involve repealing formulas and 
implementing pay for performance under Medicare to all 
providers including inpatient and outpatient hospital services, 
post acute care services, and even part D services.
     I am pleased MedPAC's recommendations to reward high 
quality care and reduce fraud and abuse is taking place. 
Whether the payment system remains unchanged or is replaced 
either change will require significant increase in funding. 
While it is important to reduce waste, fraud, and abuse in our 
Federal health care programs rather than simply reducing care 
and payment to our doctors, I have identified and plan on 
introducing further legislation to achieve over $300 billion in 
annual savings and a lot of lives. A few of these examples of 
savings include $50 billion and 90,000 lives saved annually by 
providing incentive payments to hospitals from publicly 
reporting and reducing deadly health care associated 
infections, expanding the number of volunteer doctors at 
community health centers to insure that every family has a 
neighborhood doctor since community health centers save about 
30 percent of Medicaid cases yielding an annual savings of 
about $17 billion, eliminating higher discriminatory co-
payments under Medicare for our nation's seniors for outpatient 
health care services and untreated mental health services, 
which also save money.
    Establishing collaborations and demonstration projects to 
improve the effectiveness of health information technology 
which can save $162 billion annually by reducing redundant 
tests, medical errors and mis-diagnoses. We have so much work 
to do here and I hope that this committee will work towards 
actually improving and renovating our health care system and 
not just continue a pattern that Congress has had for several 
decades of trying to find ways to save money on health care by 
cutting payments. We want to make sure that physicians and 
hospitals work effectively, but a fundamental part of that 
should be the leadership that this Congress and this committee 
takes in showing how we can do it better, more effectively, 
more efficiently save money and save lives in the process by 
transforming our nation's health care system. The Federal 
Government will be saving billions of dollars and thousands of 
lives. Thank you, Mr. Chairman.
    Mr. Pallone. Thank you. Mr. Green is recognized.

   OPENING STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Green. Thank you, Mr. Chairman, for holding the 
hearing. I would ask unanimous consent to place my full 
statement in the record. It has been over a decade since a 
physician fee schedule was put into place to help control 
increases in Medicare payments of physicians. Unfortunately, 
payments for physician services match the SGR and expenditure 
targets for only the first 5 years since the actual 
expenditures exceeded the target by so much that even Medicare 
trustees no longer consider the system realistic. We also know 
that the system isn't realistic on the physician level since 
red flags about spending growth have done little to affect 
physician behavior, and both physicians and the Medicare 
trustees know that Congress will eventually enact stop gap 
measures to prevent scheduled cuts making the system virtually 
irrelevant.
    The budgetary reality is staring us in the face. They 
mandate that we fix this system before we start to see serious 
access problems created in Medicare. The GAO has reassured us 
that beneficiaries generally enjoy good access to care but I 
worry about the future where fewer doctors may be willing to 
treat Medicare beneficiaries simply because of the 
reimbursement problems. In areas like mine that rely heavily on 
Medicare and Medicaid it probably won't be a situation where 
doctors will stop taking Medicare. Rather, we will see access 
problems created by attrition where the gap created by 
physicians retirements are not filled by new crops of doctors 
willing to take Medicare patients.
    If we reach that point, Medicare will have failed in its 
mission to provide quality and access to health care for all 
our seniors. There is no question the system contains some 
inherent flaws that must be addressed to insure the long-term 
viability of Medicare and access to beneficiaries. While the 
current system essentially penalizes physicians for increased 
service volume it does not distinguish between simple over 
utilization and increased utilization actually leads to better 
health outcomes. Unfortunately, the system does not recognize 
its spending on certain physician services often alleviates the 
needs for much more expensive inpatient services.
    I am glad to hear that MedPAC discussed the idea of 
different providers working together to devise a system that 
works for Medicare beneficiaries and Medicare providers. We 
have to facilitate some movement between part A and part B and 
find some ways to realize in the budget that costs that occur 
in part B can lead to savings in part A, not to mention a 
better quality of life for our beneficiaries who would prefer a 
doctor's visit to a stay in the hospital any day. I am also 
glad MedPAC sees the need to improve benefits for fee for 
service Medicare which had slowly begun to offer some 
preventative benefits.
    Mr. Chairman, I have a full statement I would like to put 
in the record. And the frustration, I guess, is we would hope 
at least in the odd-numbered years early in the year we would 
have a fix that we could do permanently. But I understand our 
budget realizations, but I would like us to at least do the 
permanent fix as early as possible so doctors and providers 
will be able to understand that they don't have to wait until 
maybe next February or March to hear about it, that we can 
actually do it even before December of this year. And I yield 
back my time.
    [The prepared statement of Mr. Green follows:]

  Prepared Statement of Hon. Gene Green, a Representative in 
                Congress  from the State of Texas

    Thank you, Mr. Chairman, for holding this hearing on 
physician reimbursement from Medicare.
    It has been over a decade since the physician fee schedule 
was put in place to help control increases in Medicare payments 
to physicians.
    Unfortunately, payments for physician services matched the 
SGR and expenditure targets for only the first 5 years.
    Since then, the actual expenditures have exceeded the 
target by so much that even the Medicare trustees no longer 
consider the system realistic.
    We also know the system isn't realistic at the physician 
level, since red flags about spending growth have done little 
to affect physician behavior.
    And both physicians and the Medicare trustees know that 
Congress will eventually enact stop-gap measures to prevent 
scheduled cuts--making the system virtually irrelevant.
    The budgetary realities are staring us in the face, and 
they mandate that we fix this system before we start to see 
serious access to care problems in Medicare.
    The GAO has reassured us that beneficiaries generally enjoy 
good access to care, but I worry about a future where fewer 
doctors may be willing to treat Medicare beneficiaries simply 
because of reimbursement problems.
    In areas like mine that rely heavily on Medicare and 
Medicaid, it probably won't be a situation where doctors stop 
taking Medicare.
    Rather, we'll see access problems created by attrition--
where the gap created physician retirements is not filled by 
new crops of doctors willing to take Medicare patients.
    If we reach that point, Medicare will have failed in its 
mission to provide equality in access to health care for our 
senior citizens.
    There is no question that this system contains some 
inherent flaws that must be addressed to ensure the long term 
viability of Medicare and access to beneficiaries.
    While the current system essentially penalized physicians 
for increased service volume, it does not distinguish between 
simple overutilization and increased utilization that actually 
leads to better health outcomes.
    Unfortunately, the system does not recognize that spending 
on certain physician services often alleviates the need for 
much more expensive inpatient services.
    I am glad to hear MedPAC discuss the idea of different 
providers working together.
    If we want to devise a system that works for Medicare 
beneficiaries and Medicare providers, we have to facilitate 
some movement between part A and part B and find some way to 
realize in the budget that costs incurred in part B can lead to 
savings in part A--not to mention a better quality of life for 
our beneficiaries, who would prefer a doctor's visit to a 
hospital stay any day of the week.
    I am also glad that MedPAC sees the need to improve 
benefits in fee-for-service Medicare, which has slowly begun to 
offer some preventive benefits.
    Congress has included some preventive benefits in Medicare 
and we want utilization of these benefits to be high.
    Yet the irony is that the current payment system would 
penalize physicians at the end of the year for actually 
utilizing these benefits.
    I doubt the SGR is behind the 2 percent take-up rates 
associated with the Welcome to Medicare physical and the 
diabetes screening benefit, but the system has to encourage the 
use of these benefits that are clearly cost-savers in the long 
run.
    I agree with MedPAC that any new system we devise should 
encourage coordination of the care delivered under the Medicare 
program.
    Two-thirds of Medicare spending goes to treat beneficiaries 
who suffer from five or more chronic conditions.
    If we are going to give these beneficiaries the quality 
care they deserve, we have to find ways to move beyond the 
acute-care, condition-specific manner in which health care is 
delivered and financed under this system.
    For several Congresses now, Senator Blanche Lincoln and I 
have been working on legislation to improve and coordinate 
Geriatric and Chronic Care under Medicare.
    And we're working to revamp that legislation to create the 
right incentives for physicians so that Medicare beneficiaries 
can find a true medical home, where their care will be 
comprehensive and coordinated.
    I am glad to see that MedPAC has laid out some interesting 
options for us on that front and others, as we try to solve 
this unavoidable problem.
    And I appreciate our witnesses being here today to lend us 
their expertise.
    With that, Mr. Chairman, I yield back my time.
                              ----------                              

    Mr. Pallone. Thank you. And that is our goal obviously so I 
appreciate what you said. And I now recognize the gentlewoman 
from Wisconsin, Ms. Baldwin.

 OPENING STATEMENT OF HON. TAMMY BALDWIN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF WISCONSIN

    Ms. Baldwin. Thank you, Mr. Chairman. I join my colleagues 
who have spoken before in underscoring the importance of 
addressing this issue, and I really look forward to today's 
witness testimony and discussion. Like many other members, I 
support enacting a long-term fix to the Medicare physician 
payment issue rather than continuing to do the yearly or 
biannual fixes. These short-term solutions, band-aids really, 
are unfair. They are unfair to the physicians who at the end of 
the short-term fix are once again faced with projected cuts. 
They are unfair to the Medicare beneficiaries who may face 
access issues if cuts are enacted and are unfair to taxpayers 
because the cost of providing a fix gets more and more 
expensive with each passing year.
    Put simply, the issue needs to be addressed. I welcome 
today's opportunity to focus on MedPAC's recently released 
report, and I am looking forward to exploring some of the newer 
options that the report proposes. Being from Wisconsin, I am 
especially interested in exploring MedPAC's views on geographic 
disparities in Medicare expenditures. Growth and volume of 
physician services has contributed to the increase in Medicare 
expenditures, which then leads to the physician payment cuts. 
Wisconsin tends to have lower than average volume of services 
and lower Medicare expenditures, yet when the cuts are proposed 
they apply nationally so doctors in Wisconsin are being 
punished for the increased volume in services being provided in 
high payment localities.
    I think this is unfair and I am glad to see that MedPAC 
acknowledged this in their recent report. Lastly, I would like 
to emphasize that this issue and what we choose to do regarding 
this issue has huge ramifications for Medicare beneficiaries. 
If we do nothing beneficiaries might face access issues. If we 
provide a fix without protecting part B premiums from increases 
beneficiaries face unacceptably high premiums. And if we enact 
a fix that increases Medicare spending then we will potentially 
move up the date that we reach the 45 percent trigger that was 
included in the MMA and will have to cut Medicare spending. So 
while we tend to talk about physicians when we consider this 
issue it has a huge impact on Medicare beneficiaries.
    I thank the witnesses for coming today. I look forward to 
your testimony and our discussion that will follow. I yield 
back, Mr. Chairman.
    Mr. Pallone. Thank the gentlewoman, and I would recognize 
our chairman of the full committee, Mr. Dingell.

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Dingell. I thank you, and I commend you for these 
hearings today. They are very much needed. I want to applaud 
the vigorous and wise way in which you are conducting the 
business of the committee. I welcome Dr. Hackbarth, the 
chairman of the Medicare Payment Advisory Commission, here. And 
also Mr. Steinwald from the Government Accountability Office 
and Dr. Fisher from Dartmouth University who have all thought 
greatly about the question at hand. Also to Dr. Thames from 
AARP, I thank him for bringing wise counsel and a good 
beneficiary perspective to this discussion.
    As we know, physicians are facing a 10 percent cut in their 
Medicare payments in 2008, as well as continued reductions in 
later years. No one can operate a business in that kind of 
environment. If your employer presented you with the prospect 
of a large pay cut for 10 years in a row, I am certain you 
would not continue in that line of work. More importantly, 
these payment reductions make running a quality health care 
practice difficult at best. At worse they provide the wrong 
incentives for the kind of care that Medicare beneficiaries 
should receive. Our goal should be to align the payment 
incentives so the patients are getting the right care at the 
right time. While I am not an advocate of pay for performance 
systems, we do need to create the right incentives for 
providers to incorporate technology into the practice of 
medicine to improve care outcomes and efficiency, and although 
we know we must insure the ultimate incentive it remains to us 
to decide what is the best way of delivering the care that is 
best for the patient.
    The perplexing problem in reforming Medicare physician 
payments is what to do about identifying services that are 
growing inappropriately. Clearly, the current system or global 
cap is not working. A variety of factors can cause appropriate 
service growth. For example, payment may not be aligned with 
the actual cost of providing service. Providers may not be 
clear of which treatments are most appropriate for the service 
to be provided. This indicates that there is a problem that 
will have to be addressed delicately but not with a hatchet or 
a sledge hammer. One possibility that we hear about today is 
comparing doctor practice patterns with their peers and 
identifying and working collaboratively with those who when 
adjusting for the relative health status of their patients have 
practice patterns that fall outside the norm.
    Again, there are ways to do things like this correctly and 
ways to do them in ways that would cause harm to the patient. 
Clearly, the latter must be avoided. This is what we must flush 
out in today's hearings and in future hearings in discussions 
on the matter. Changes to the Medicare physician payment system 
are long overdue. We will work hand-in-hand with the provider 
community and beneficiary representatives to protect Medicare 
fee for service for generations to come.
    I look forward, Mr. Chairman, to working closely with you 
as well as Mr. Barton and Mr. Deal to craft a successful 
conclusion to this problem. I want to again commend you for 
what you are doing in holding these hearings today. I want to 
point out that this is an enormously important question that 
simply must be addressed not just in the interest of the 
doctors or the Medicare system but also in the needs and the 
concerns of the patients who after all the reason that this 
system has been set up. Thank you, Mr. Chairman. I yield back 
the balance of my time.
    Mr. Pallone. Thank you, Chairman Dingell, and I know that 
you have introduced legislation and have been trying to address 
this for several years so thank you again. I would recognize 
the gentleman from Pennsylvania, Mr. Pitts.
    Mr. Pitts. No statement.
    Mr. Pallone. OK. Mr. Allen is recognized.

   OPENING STATEMENT OF HON. TOM ALLEN, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF MAINE

    Mr. Allen. Thank you, Mr. Chairman, for convening this 
hearing to take a serious look at the Medicare physician 
payment system and the effect future reductions will have on 
patients access to care. Although Congress was able to block 
the scheduled 5.1 percent Medicare payment cut this year 
physicians are facing a 10 percent reimbursement cut next year 
if we don't act. I am disappointed that the President's fiscal 
2008 budget does not provide any funds to deal with this 
problem. Maine and other rural States face unique challenges in 
attracting and retaining qualified physicians and insuring 
access to specialists. Insufficient payment by both Medicare 
and Medicaid is a major disincentive to providers in our State 
who are caring for a disproportionate share of elderly 
citizens.
    Seventeen percent of Maine's population is on Medicare, and 
we have 17 practicing physicians per 1,000 beneficiaries. This 
is a below average ratio of physicians to Medicare 
beneficiaries. In addition, our physician population is older 
than the national average. Forty-six percent of our doctors are 
over 50, and many have chosen to reduce their patient case 
loads. Congress must evaluate the current reimbursement system 
and create a more sound financial foundation for physician 
payment rates. Only by doing so will we avoid what has become 
an annual race to avert a financial crisis. Our goal must be to 
replace the current funding formula with one that accurately 
reflects physicians practice costs, new technology, and the age 
and health of the patient population being served. I look 
forward to hearing from our distinguished panel and yield back 
the balance of my time.
    Mr. Pallone. Thank you. I recognize Mr. Matheson of Utah.

  OPENING STATEMENT OF HON. JIM MATHESON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF UTAH

    Mr. Matheson. Thank you, Mr. Chairman. While I am a new 
member of the Health Subcommittee, I have long argued that the 
current formula used for determining physician payment rates is 
flawed and should be reformed. During my first 6 years in 
Congress, I have heard from hundreds of Utah physicians 
regarding this issue. They provided me with many examples of 
the disconnect that exists between the formula and the actual 
cost of providing services. They have raised compelling 
concerns about reduced access to health care if the formula is 
allowed to be implemented, and many of them have also provided 
suggestions regarding ways to fix the problems associated with 
the current payment calculation.
    As a result, I co-sponsored legislation at the last 
Congress that would reform the formula to more accurately 
reflect the cost of practicing medicine. Unfortunately, these 
reforms were not enacted prior to the end of last year's 
Congress. In fact, during my tenure in office Congress has 
always waited until the very last minute to pass a temporary 
fix to the problem. This creates uncertainty in the marketplace 
and is simply a case of avoiding the fundamental issue. I would 
also like to highlight the fact that last year's fix did 
include language allowing physicians who voluntarily report 
certain qualify measures to receive bonus payments of 1\1/2\ 
percent beginning July 1, 2007. I think that this was a good 
step forward and I am pleased to see that MedPAC is also 
interested in working with the Congress and with CMS on this 
aspect of reform.
    Mr. Chairman, I hope the committee will be able to tackle 
the issue this year because I believe the physicians need to be 
able to provide seniors the access to care that is so 
desperately needed. Thank you. I yield back the balance of my 
time.
    Mr. Pallone. Thank you. I recognize Ms. Solis of 
California.

 OPENING STATEMENT OF HON. HILDA L. SOLIS, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Solis. Thank you, Mr. Chairman, and good morning. Thank 
you for holding this very important hearing. Medicare was 
enacted to provide affordable health insurance to older 
Americans and is important to address the sky rocketing cost of 
health care and access especially to quality affordable health 
care and especially in critical communities, minority 
communities, communities of color since these populations often 
encounter greater burdens of disease. Seniors in California, as 
you know, are struggling, and I have heard from my constituents 
that some California physicians have stopped taking new 
Medicare patients because of inadequate reimbursements. We find 
this in areas in east Los Angeles where I have heard from many 
of our medical providers and doctors and physicians who are 
already losing a lot of money by being there but continue to do 
so but have continuously told me, ``Congresswoman, we need to 
do more to help provide for a greater rate of reimbursement''.
    So they stay in our communities because there are a low 
number of these physicians that are actually continuing to 
provide services in our much needed area. And earlier MedPAC 
reports stated that the percentage of physicians taking new 
Medicare patients has decreased. More than 62,000 seniors live 
in my district, and I wonder where those seniors are going to 
go if these doctors aren't receiving adequate payment. Sixteen 
percent of Medicare beneficiaries in California, by the way, 
happen to be Latino. Latinos already face many barriers in 
accessing medically necessary health services, and a MedPAC 
report published in 2006 stated that 7.1 of Latino Medicare 
beneficiaries delayed getting care due to cost.
    Less access to care in my opinion will result in further 
health care disparities in our communities. I believe that 
Medicare beneficiaries should receive equal access to 
physicians who provide quality care. The rapidly increasing 
costs of health care are problems for residents in my district. 
The current payment system has not solved the problem of higher 
Medicare spending and out-of-pocket costs for our seniors as 
well. Instead, some seniors are receiving unnecessary and 
expensive services that do not provide additional health 
benefits, and I am concerned about safety net providers, our 
clinics, who are already struggling to care for their patients.
    We need to insure that our physicians continue to care for 
our seniors and a physician payment system should emphasize 
prevention, primary care, and especially since today's seniors 
are living longer suffering from serious and costly chronic 
diseases such as diabetes and heart disease. I hope that any 
proposed physician payment system reimburses our doctors fairly 
for the vital services they provide and keeps health care 
affordable for the millions of seniors whom we represent, and 
we know they rely very heavily on Medicare. I look forward to 
hearing your recommendations and working with you to protect 
our seniors health care system. Thank you.
    Mr. Pallone. Thank you. And that, I believe, concludes our 
opening statements by the members of the subcommittee.
    Any other statements for the record will be accepted at 
this time.
    [The prepared statement of Mrs. Cubin follows:]

Prepared Statement of Hon. Barbara Cubin, a Representative 
           in Congress from the State of Wyoming

    Thank you Mr. Chairman. On January 1, 2007, America's 
physicians were scheduled to receive a 5 percent cut in 
Medicare reimbursement if Congress did not step in to provide a 
one-time bonus payment in the Tax Relief and Healthcare Act of 
2006.
    I was pleased to support this important intervention on 
behalf of Wyoming's 70,000 Medicare beneficiaries. The negative 
physician fee schedule, based on the flawed sustainable growth 
rate, most certainly presents an unacceptable situation not 
just for Wyoming's beneficiaries, but for the physicians they 
rely on.
    These doctors are also small businesses. They are saddled 
with high malpractice premiums. They practice in rural areas, 
and in some cases are the only providers in their communities. 
If just one Medicare provider shuts his or her doors in 
Wyoming, a whole community could be affected. But every time we 
act to stave off the cuts mandated by the sustainable growth 
rate, we are not only delaying the inevitable, we are making it 
worse.
    In 2006, we faced an eventual 5 percent cut in 2008. We may 
have stopped the 2007 cuts, but now we face a nearly 10 percent 
cut in 2008, with more to follow several years thereafter. 
Facing cuts of this magnitude, we cannot simply rely on 
physicians' generosity to treat Medicare patients regardless of 
the reimbursement rate.
    The sustainable growth rate formula was enacted to reduce 
the overutilization of Medicare services and control the growth 
of the Medicare program. While it has by many indications 
failed in respect to these goals, we cannot lose sight of them. 
The Centers for Medicare and Medicaid Services Office of the 
Actuary estimates that national health expenditures will double 
to $4 trillion over 6 years. Like the ever-present threat of 
physician payment cuts, this is a harsh realization we need to 
face head on.
    The Republican-led Congress faced this realization when it 
directed the Medicare Payment Advisory Commission, or MedPac, 
to look at alternatives to the sustainable growth rate in the 
Deficit Reduction Act of 2005.
    Today we have the opportunity to explore MedPac's long-term 
recommendations, with the goal of minimizing the cost of a 
long-term physician payment fix. I hope today's panelists will 
shed light on how this can be accomplished while at the same 
time taking steps to ensure quality and appropriate care to our 
Nation's Medicare beneficiaries.
    I thank our panelists for joining us and look forward to 
their testimony.
                              ----------                              

    Mr. Pallone. We will now turn to Mr. Hackbarth. Let me say 
that Mr. Hackbarth is the chairman of the Medicare Payment 
Advisory Commission. Your statement becomes part of the hearing 
record, and of course at the discretion of the committee you 
can submit additional brief and pertinent statements in writing 
for inclusion in the record. And I would now recognize you for 
a 5-minute opening statement. Thank you for being here.

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

    Mr. Hackbarth. Thank you, Chairman Pallone, and Ranking 
Member Deal. I appreciate this opportunity to talk about 
MedPAC's recommendations on alternatives to Medicare 
sustainable growth rate system. As requested in the 
congressional mandate, MedPAC has analyzed the pros and cons of 
expenditure targets in general as well as the five options 
specifically included in the mandate. We present two 
alternatives paths for your consideration, one that includes 
continuation of an expenditure target and one that does not.
    As you know, MedPAC is a 17-member commission with diverse 
participation including clinicians and health care executives 
and academics and former government officials. Despite the 
diversity of the commission, we generally are able to reach 
consensus on even complicated issues as has been discussed. 
That has not been possible on all dimensions of the SGR 
problem. To help you understand where the commissioners do 
agree and where we disagree, I have divided the SGR problem 
into four dimensions which are here on the screen. The first of 
those encourage efficiency in the delivery of health care. Let 
me begin with a quick definition of efficiency.
    Improving efficiency is not just about reducing cost. 
Efficiency is about maximizing the benefit for the patient for 
any given level of expenditure. There is unanimous agreement 
within MedPAC that expenditure targets like the SGR do not 
themselves establish appropriate incentives for efficiency. 
Indeed, by only constraining the amount paid for each 
individual physician service and expenditure target may 
actually increase, induce an appropriate or cost increasing 
behavior. Moreover, payments that become too low relative to 
the cost of delivering care may ultimately impede access to 
care.
    To establish proper incentives for efficiency, Congress 
must pursue the agenda briefly described on the second slide. 
There are a lot of very complicated stuff included under these 
broad headings so I won't take time in my opening statement but 
I would be happy to go back and talk about the specific ideas 
within each of these categories. So there is unanimous 
agreement that these sorts of policy changes are what are 
needed to in fact improve the efficiency of the Medicare 
program. The commission is also unanimous in believing that 
this agenda for increasing value and efficiency in Medicare is 
urgent and requires a much larger investment in CMS in order to 
speed its ability to develop, implement, and refine payment 
systems.
    Some progress to be sure is being made but that progress is 
far too slow. The second bullet here, as you can see, is 
encouraging fiscal discipline in policy making. Its expenditure 
targets like SGR don't by themselves establish proper 
incentives for efficiency. What might they be good for? And it 
is here that the commissioners disagree. Some commissioners 
believe that expenditure targets are useful for encouraging 
fiscal discipline in the policy-making process. To be clear, 
they don't establish appropriate incentives for providers but 
they may alter the dynamics of the policy-making process and 
result in more constraints, lower updates for providers.
    Some commissioners think that is a good thing. In addition, 
expenditure targets may create the political leverage to force 
providers to accept reforms they might otherwise resist. Other 
commissioners, while acknowledging these potential benefits, 
agree that they come at far too high a price, and hence the 
disagreement within the commission. The third bullet, 
increasing equity among regions and providers. Here is another 
point on which there is substantial although not complete 
consensus within MedPAC. The existing SGR system is highly 
inequitable in important respects. If the target is exceeded 
all physicians are punished equally regardless of their 
individual behavior.
    In addition, all regions of the country are treated equally 
even though there is abundant evidence that health care 
delivery is more efficient in some places than in others. And 
finally the SGR system as it exists currently targets only 
physicians when in fact Medicare has a total cost problem, not 
just a physician cost problem. Thus, if Congress elects to 
retain an expenditure target in some form it would be fairer 
and more effective to apply that target to total Medicare cost, 
not just physicians, to apply greater pressure in high cost 
regions than low cost regions and allow an opportunity for 
groups of providers to band together in what we refer to as 
accountable care organizations to receive their own performance 
assessment against the targets established by Congress.
    Making expenditure targets more equitable will not be an 
easy task. Time, patience, determination, and investment would 
be required and without these the risk of failure and 
unintended consequences will increase dramatically. Now let me 
turn finally to the last bullet here, minimizing or offsetting 
the budget score of fixing the SGR system. As you know all too 
well, proposals to repeal or modify SGR often carry a very 
large budget score as a result of the difference between the 
assumed payment rates and the base line and what are realistic 
rates to assure access to care. MedPAC nor anyone else for that 
matter has a simple magic solution to fill that gap. We do 
believe, however, that MedPAC's proposals can make a very, very 
substantial contribution to filling that budget gap. CBO has 
estimated that the 10-year cost of repealing SGR and replacing 
it with an alternative system is somewhere over $200 billion.
    According to CBO going to financial neutrality for Medicare 
Advantage plans as MedPAC has proposed would save about $160 
billion. Couple that with restraints on updates for other 
providers which MedPAC recommends. Couple that with the value 
and efficiency agenda that I alluded to earlier and you have a 
very substantial contribution towards filling that $200 billion 
plus budget gap. With that, Mr. Chairman, I will conclude my 
opening comment, and I look forward to questions.
    [The prepared statement of Mr. Hackbarth follows:]
   
   
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    Mr. Pallone. Thank you, Mr. Hackbarth. I am just going to 
recognize myself for 5 minutes initially. You mentioned a much 
larger investment in CMS to achieve the goals and you obviously 
talked about the role of CMS so that is my first question. It 
seems likely that the key to any change in physician payments 
is CMS' ability to implement the change. And so my question 
really two fold, can CMS implement any of your recommendations 
without legislation, and, second, what kind of resources and 
time are they going to need?
    Mr. Hackbarth. If you could put up the second of the two 
slides. Let me just quickly go through this agenda and talk 
about where the various pieces stand. Beginning with pricing 
accuracy, what this refers to is trying to establish prices 
that reflect the cost of providing high quality efficient care. 
It is an issue not just with the physician payment system but 
with all of Medicare's payment systems for hospitals and post 
acute providers as well as physicians. MedPAC in recent years 
has made numerous recommendations about how those systems can 
be refined and made more accurate. There is a lot of work 
underway in CMS currently. No new legislative authority is 
generally required. The issue is really the speed at which that 
refinement work occurs and that is often affected by available 
resources.
    Mr. Pallone. What do you think we need in terms of 
resources and then what would the time line be depending if 
they were available?
    Mr. Hackbarth. Making a specific recommendation about how 
much of the resources should be increased is beyond where 
MedPAC has gone at this point, and frankly a little beyond our 
expertise. Those are operational questions and require very 
detailed knowledge of CMS operations. What we are reflecting is 
that we talk to them about these issues and often they agree in 
principle with what we are recommending but the pace at which 
they can churn out the refinements is slower than it needs to 
be.
    Mr. Pallone. If you can't be more specific then I think I 
am going to move on. OK. I also wanted to ask about the HMOs 
because you mentioned how you can save a significant amount of 
money by looking at this differential in payment with the HMOs. 
In your update on the Medicare private plans you report that 
Medicare HMOs are paid 112 percent of traditional Medicare on 
average. In other words, for every beneficiary who chooses to 
enroll in a Medicare HMO the Medicare program pays 12 percent 
more than if they were to remain in traditional Medicare. So if 
you could just comment briefly on the commission's 
recommendations related to Medicare private plan payments. I 
know you did.
    Mr. Hackbarth. Yes.
    Mr. Pallone. But do you believe that they pose a threat to 
the traditional Medicare program, and if you want to go into a 
little more detail about how we are going to save money in 
terms of that overall. I know you mentioned 160 versus 200.
    Mr. Hackbarth. MedPAC has often stated that we believe 
having private plans as an option for beneficiaries is a good 
thing. We believe that many private plans may be able to offer 
something of value to Medicare beneficiaries through their 
efficiency, through their ability to deal with providers in 
ways that Medicare itself finds difficult to do. So having that 
option is very important. However, we think that that option 
ought to be on a financially neutral basis so if private plans 
can achieve efficiency and as a result of that efficiency have 
savings to share with Medicare beneficiaries in the form of 
added benefits and the like that is a terrific thing and we are 
all in favor of it.
    Mr. Pallone. Are you concerned that if we don't achieve 
that neutrality that they are going to be a threat to the 
traditional Medicare program?
    Mr. Hackbarth. Our concern is that if you pay more than 
Medicare's cost what you start to do is attract plans into 
Medicare that aren't adding value, that aren't more efficient 
than traditional Medicare and are only driving up the cost of 
the program. And we have particular concern about the private 
fee for service plans, which are in fact the most expensive of 
the plan types offered under Medicare Advantage. They offer 
relatively little value but they become very attractive to 
Medicare beneficiaries for obvious reasons, more benefits, no 
restrictions of any type on free choice, and so there is very 
rapid growth under the private fee for service plans, and they 
are much more expensive so that has put us on a path that could 
be dangerous for the program.
    Mr. Pallone. Thank you. Thank you very much. Mr. Deal.
    Mr. Deal. Thank you. Mr. Hackbarth, in your testimony and 
in your report, you outline two basic paths. I want to talk to 
you about the second path. In your testimony just a few minutes 
ago you said that if we retain the overall spending targets 
that one of the ways we could make it more effective is to 
apply it across all providers. Let me ask you just a very 
simple question to begin with and then I am going to ask you to 
explain it. Now by that, I would assume you are talking about 
including hospitals within the overall provider group.
    Mr. Hackbarth. Yes.
    Mr. Deal. Now obviously we have part A and part B of 
Medicare funded differently. Would you explain to me how if we 
were to adopt that approach how do we reconcile the different 
part A and part B components, and is that a problem or is it 
not a problem? Would you explain how you would envision that 
incorporation?
    Mr. Hackbarth. Well, the basic idea is to say this is our 
target for total expenditures for Medicare beneficiaries, and 
then to the extent that we miss that target it would affect the 
updates provided not just to physicians but to hospitals and 
all the providers. As to how that would interact with the 
different financing of the various trust funds, we have not 
looked at that in detail but rather focused on the basic idea 
of constraining updates across the board and not just for 
physicians. And one of the reasons we think, some 
commissioners, think that that would be a better thing to do is 
that we don't have just a physician cost problem. We have a 
total cost problem.
    And as some of the members of the committee have pointed 
out, if you focus just on physician cost and constrain only 
that when in fact there is potential substitution of services, 
growth in physician services to avoid hospital costs, a system 
that focuses only on physicians is really unfair.
    Mr. Deal. That is part of the complaint the physician 
community has had for a long time is that actions that they 
have taken to restrain overall costs have inured to the benefit 
of hospitals and their reimbursement formula but has penalized 
the physician community.
    Mr. Hackbarth. We want growth some places. Some types of 
services we want more in order to reduce other places, 
hopefully more expensive services. And so a total expenditure 
target in that sense would be fairer and more effective.
    Mr. Deal. You mentioned the regional discrepancies of costs 
and quality of care. Could you rather quickly sort of outline 
some examples of that?
    Mr. Hackbarth. I would be happy to do so. We have got the 
expert on that on the next panel, Dr. Fisher, and he could do 
it far better than I. But briefly what we see is at the State 
level more than two fold variation in Medicare expenditures per 
beneficiary after adjusting for differences in the populations, 
differences in the risk characteristics and the like. If you go 
to smaller geographic areas and States then the variation is 
even higher than two fold variation. We also have found that 
higher expenditures per beneficiary does not necessarily mean a 
better quality. In fact, many of the lower cost States fare 
very well in terms of their quality measures.
    So the idea behind regionalizing the expenditure target is 
to say if Congress decides we have got a Medicare cost problem 
it doesn't make any sense to apply the pressure equally to all 
States. Some States are demonstrably contributing more to that 
problem than others so if we got a cost problem we ought to 
apply the pressure differentially, apply the greatest pressure 
to the areas of the country that contribute most to the problem 
and less correspondingly to the lower cost areas, and in that 
sense it would be more equitable than the current SGR.
    Mr. Deal. In my closing seconds, I want to thank you for in 
your report addressing the specific issues that the DRA asked 
you to do. I think you have done a pretty good job of 
addressing those, and there are some areas such as the outliers 
that I think we have to explore in much greater detail, but 
thank you for being here.
    Mr. Pallone. Thank you. The gentlewoman from California, 
Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman. Thank you, Dr. 
Hackbarth. I have a lot of questions. Let me see how I can 
summarize them. The Deficit Reduction Act required MedPAC to 
look at alternatives and targets and other ways of 
reconfiguring the existing SGR and improving on the 
performance. And I appreciate the work that has gone into your 
report but I don't find that you have provided Congress with 
any recommendation to remedy the situation. Now maybe I missed 
it somewhere but I don't see any clear recommendation. Do you 
agree with that description?
    Mr. Hackbarth. No.
    Ms. Eshoo. All right. Well, in 2001 MedPAC concluded that 
the SGR should be eliminated, physicians should be subject to 
the inflation-based update system that the commission uses for 
other provider groups. Now has your position changed since then 
or is it the same?
    Mr. Hackbarth. Our position has changed somewhat for two 
reasons.
    Ms. Eshoo. And tell us why you abandoned it. Would you tell 
us the new recommendations?
    Mr. Hackbarth. Our positions changed somewhat for two 
reasons. One is, as you know, the composition of the commission 
changes over time, and so we have a different set of 
commissioners than we had in 2001 with a somewhat different 
perspective. The second thing that has changed is, and I think 
this applies to all commissioners, a growing sense of urgency 
about Medicare's cost problem and the health care system in 
general, its problem with costs. We are 5, 6 years further 
along on a path that the commissioners believe is ultimately 
unsustainable----
    Ms. Eshoo. So just succinctly what is your new 
recommendation? I have to tell you that looking at this is--
well, I think it is one of the skimpiest things I have ever 
seen. This is increasing value and efficiency in Medicare, 
pricing accuracy, coordination of care, accountability. The one 
that I love the most at the bottom is information. This is a 
commission that was put together by the Congress, instructed 
that it should be put together, and I know I am being a little 
hard but that is hardly any meat on the bones, I have to tell 
you. If this is what MedPAC is coming up with, I think you got 
to go back to the drawing boards. I mean this is really 
sophomoric what is up on the board.
    Mr. Hackbarth. We literally have hundreds of pages 
explaining those proposals in detail, and I would be happy to 
spend as much time as you would like----
    Ms. Eshoo. But when you are here, you need to summarize it 
but I think that you need to summarize and have some meat on 
the bones. I really have had trouble understanding what you 
have recommended to us in these key areas.
    Mr. Hackbarth. Well, the point that I hope the committee 
will understand is that we don't think that there is a single 
solution to this problem, that in fact there is unanimous 
agreement within the commission that a long series of changes 
need to be made to encourage efficiency in the Medicare program 
and follow----
    Ms. Eshoo. Now did MedPAC take a look at the geographic 
payment locality issue?
    Mr. Hackbarth. Not in this particular report, no, but we 
have previously.
    Ms. Eshoo. And when did you last take a look at that?
    Mr. Hackbarth. I think it was 2 years ago.
    Ms. Eshoo. Well, that was developed more than 40 years ago, 
and many areas in the country have changed and changed 
dramatically, and it seems to me that a commission that looks 
at or is responsible for reviewing how Medicare is delivered 
and to whom and by whom, I think this really cries out for 
review but maybe you have so much work to do that you can't 
take a look at it. Do you have a work plan that says that you 
are going to review this and make a recommendation to the 
Congress?
    Mr. Hackbarth. As I said, we looked at the issue 2 years 
ago and, no, we don't have any immediate plan to take----
    Ms. Eshoo. Does MedPAC think that Congress has done 
something it and that is why you are not reviewing it?
    Mr. Hackbarth. No. What we have said is that we think that 
there needs to be a system of geographic adjustment, that there 
are some problems, isolated problems, with the existing system, 
that the lines can be redrawn, should be redrawn in some 
States, including California, that those changes ought to be 
done on a budget neutral basis within the State, and that CMS 
ought to respect the fact that at least some States have 
elected to have a single area for the whole State. We don't run 
the Medicare program.
    Ms. Eshoo. I didn't suggest that you did, but you have the 
clear responsibility in terms of making I think clear and 
concise recommendations to Congress. I am having a hard time 
drawing them. I think my time is up. Thank you, Mr. Chairman.
    Mr. Pallone. Thank you. Dr. Burgess.
    Mr. Burgess. Thanks, Mr. Chairman. One of the issues that I 
think we have to most seriously address is the issue of quality 
reporting and I have always felt very strongly that there 
actually ought to be a platform of several quality reporting 
mechanisms available to doctors and that they not be punitive, 
that they be additive. And yet when we heard some of the other 
opening statements people talked about how grateful they were 
we were able to add an update in the bill that we passed right 
before the end of last year. But I have some data from Scott 
and White Hospital, from Dr. Rohack, who is the cardiologist 
there on the clinical faculty, on the medical school faculty, 
also I think a board member from the AMA, and they did a 
calculation for the last 6 months of 2006, their clinic part B 
allowables. Running that calculation it actually cost them $298 
per physician to do the paperwork in order to capture the 
monies that are going to be made available to them, I believe 
at the end of this year if CMS does indeed come up with those 
recommendations in June, and they jump through all of the hoops 
that they are required to jump through.
    So that hardly seems like an additive benefit. In fact, 
most physicians will look at that and simply shrug their 
shoulders and throw that into the file. They are not going to 
participate in a quality measure that in fact doesn't bring 
them additional revenue but ends up costing them revenue just 
to calculate what they are owed under the new formula. How do 
you see us getting around that type of problem because to me 
the critical aspect of quality reporting is that it has to be 
an additional payment in addition to what is available, whether 
it be under MEI or SGR, what is your feeling on that?
    Mr. Hackbarth. As you know, we favor the concept of not 
just quality reporting but also pay for performance, but we 
have also said that doing it for physicians presents some 
unique challenges for a couple of reasons. One is that there is 
a much higher degree of specialization among physicians than 
hospitals, for example. The infrastructure, the informational 
infrastructure, is less in small physician practices than it is 
in hospitals. And so there is some concern within the 
commission about just indiscriminately saying more quality 
reporting is better for physicians and the more measures the 
better.
    Mr. Burgess. Yes, I would just point out that Scott and 
White Hospital does enjoy already a good reputation for 
quality. I think they are number ranked No. 14 in the Nation, 
and they are not a small organization. They have 320 physicians 
in their central unit and another 180 physicians in their 
outlying areas. So a significant problem that we have created 
for them in our efforts to help them, and it just underscores 
how difficult and sometimes how awkward this process can be. 
With that in mind, what you described in your report with the 
ACO is a virtual care organization of some type. How do we 
insure that that does what it is intended to do and is not just 
simply a virtual organization to absorb dollars and not deliver 
any benefit?
    Mr. Hackbarth. The basis for supporting the idea of 
accountable care organization is that patients can benefit from 
more organization, systematic organization.
    Mr. Burgess. We have already seen the application at least 
in Dr. Rohack's case ended up being a detriment to their rather 
sizable quality practice in central Texas.
    Mr. Hackbarth. But I am not familiar with what is happening 
at that clinic right now. Are they in the group practice 
demonstration?
    Mr. Burgess. I am not sure whether they are in----
    Mr. Hackbarth. I don't know if they are or not. I don't 
think that they are.
    Mr. Burgess. But the figures that were given by CMS is what 
they anticipate the bonus to be so it was back of the envelope 
calculation to be sure but I wanted to get an idea, did we help 
Dr. Rohack when we passed this bill at the end of the year, and 
it looks at least at first blush we didn't help a bit. In fact, 
we cost them money if they put their actuaries to work on 
trying to collect the bonus to which they would be entitled by 
doing their quality reporting. Let me just point out to you 
additionally probably one of the worse days of my life as a 
practicing physician was when RVRBS came on the scene. Is there 
a better way to calculate the cost of differing services and 
differing practices and differing areas.
    Mr. Hackbarth. If I could, Mr. Burgess, I would just like 
to go back to the previous question for a second. When we are 
talking about accountable care organizations what we are 
talking about is a model whereby you would look at the total 
cost for beneficiaries within, for example, this clinic, and 
then share with the clinic the savings to the extent that they 
are able to hold costs below the target levels, so it is very 
different than the quality pay for performance model that was 
in the Tax Act. This is the model that is being tested now in 
the group practice demo. That is what we are referring to as 
accountable care organizations, and there the benefit might be 
much larger.
    Mr. Burgess. When will you be able to make this data 
available to us?
    Mr. Hackbarth. Well, the group practice demo is underway as 
we speak at 13 different locations across the country.
    Mr. Burgess. So when will we have the data available?
    Mr. Hackbarth. It is a 3-year demo, and we are like at the 
second year now.
    Mr. Burgess. Obviously that is a long time in this 
trajectory where we are catching up every year and trying to do 
something to prevent the total collapse.
    Mr. Pallone. We got to move on. You were over a minute. 
Thanks. I recognize Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. Mr. Hackbarth, we are 
all kind of concerned over here about the MedPAC 
recommendations because Congress has been looking for a long 
time at how we can find a long-term fix for the physician 
reimbursement problem, and in reading your written testimony 
and listening today it is virtually impossible for us sitting 
up here to figure out what your recommendations are, and in 
fact in your written testimony you say that Congress must 
decide between two paths. One path repeals the SGR and doesn't 
replace it with the new expenditure target. Congress 
accelerates development and adoption of approaches for 
improving incentives. Alternatively, the Congress could replace 
the SGR with a new expenditure target system. And it seems to 
me, No. one, these two alternatives are both a little bit 
nebulous. The second, it is two alternatives that we thought we 
created you to make a recommendation, so my question to you 
following up on what Ms. Eshoo said is if you were us and you 
had to pick one of the two alternatives, what would you do?
    Mr. Hackbarth. The commission is split on it. You can ask 
people who have expertise on these issues what they think. What 
they think is there is a disagreement. The commission is split 
down the middle on whether expenditure targets are useful in 
Medicare.
    Ms. DeGette. So if the commission, who are the experts, are 
split on what to do how do you think Congress should go about 
trying to figure out a solution, a long-term solution?
    Mr. Hackbarth. Again, you can ask people what they think 
and you can't generate agreement where it doesn't exist. There 
is agreement on a very broad agenda and a very detailed agenda 
that falls under these broad headings.
    Ms. DeGette. Right. As Ms. Eshoo points out to me just now, 
we can get information. I don't mean to belittle your efforts 
but what we are struggling to try to do is come up with 
solutions which we have been doing for some years and why we 
created you guys.
    Mr. Hackbarth. I would be happy to come and meet with you 
individually to talk about the specifics under these items and 
what it means by information in that bullet.
    Ms. DeGette. I respect you, and I know that there are many 
pages of information that support those four points, but the 
bottom line is there are still two recommendations, neither of 
which are flushed out in detail, somehow leaving it up to us to 
try to pick and choose, and for us as Mr. Green said, it just 
kicks the can down the road a little bit more.
    Mr. Hackbarth. Well, let us talk about the two paths and 
the difference in thinking between them. As I said in my 
initial comments the people who believe that expenditure 
targets should be preserved in some form believe they feel a 
great sense of urgency about the cost growth in the Medicare 
program and they believe that it is appropriate to take some 
risk, frankly, to maintain expenditure targets in order to 
establish fiscal discipline in the program. Ultimately, the 
Congress is the judge of how urgent that problem is and how 
concerned you are about the drain on resources for other 
important programs.
    Ms. DeGette. So would you say then that that is the 
approach that Congress should take only if we think that the 
fiscal pressures are great but that the other approach would be 
preferable?
    Mr. Hackbarth. The other approach focuses on trying to 
change payment systems at a very detailed level to improve the 
fairness of those systems and to encourage greater efficiency 
in the delivery of care. It is a complicated agenda. It is not 
an easy agenda. But in the long run if you want to improve 
fairness and efficiency these are the things that you need to 
do and there are literally dozens of steps under this agenda 
and all the commissioners agree on that.
    Ms. DeGette. This agenda could also be cost effective if 
implemented correctly.
    Mr. Hackbarth. Absolutely. And the commission is unanimous 
on that. There is no disagreement about that.
    Ms. DeGette. Mr. Chairman, with all due respect, I think 
that we should either disband this commission and get a new one 
that will give us clear recommendations or we should send the 
existing commission back to come up with a clear choice for us 
so that we can actually use this information. And I do 
appreciate Mr. Hackbarth coming today to talk to us but I think 
that the work product is unfinished and that we need much more 
information. Thank you for your indulgence, Mr. Chairman.
    Mr. Pallone. Thank you, Ms. DeGette. I would just point out 
again though that a lot has to do with what you were tasked to 
accomplish. I mean obviously we can ask you to do certain 
things and we can be more specific too in what we task you to 
do. And I think part of the concern is what exactly you were 
tasked to do. I am not going to get into that now but that is 
always the question is how specific we get in what we ask you 
to do. I would like to now move to recognize Mr. Murphy from 
Pennsylvania.
    Mr. Murphy. Thank you, Mr. Chairman. I thought I was 
further down the list. I just want to focus on some of the 
questions about waste and get some sense from you and some more 
details of how much do you think is currently within the 
Medicare system, the payment system, in terms of the waste that 
is taking place. Do you have some concrete assessments of that?
    Mr. Hackbarth. No. That is a very difficult question to 
answer including what you mean by waste.
    Mr. Murphy. Some of that would be just the efficiency of 
the system, health care system.
    Mr. Hackbarth. The problem in U.S. health care is not 
necessarily lots and lots of zero benefit care being provided 
but rather care being provided that adds only a little bit to 
better outcomes for patients at a very high cost. So there is 
some pure waste, no benefit care. In fact, there is some care 
provided that is actually harmful to patients but the big 
problem in U.S. health care is a lack of efficiency, care 
provided of only marginal benefit at great expense.
    Mr. Murphy. Well, one of the points that you may have heard 
me making in my opening statement had to do with the infection 
rate in hospitals in America. I know to their credit many 
hospitals are working diligently on this and many have provided 
significant or seen significant decreases in, for example, 
post-operative infection rates through many things including 
giving antibiotics at the right time before and after surgery 
but in some of them the low tech high turnout of outcome so 
even washing their hands, sterilizing or cleaning up before and 
after procedures, et cetera, and yet Medicare still pays for 
infections people get in hospitals. As I mentioned, I 
introduced a bill that would require hospitals to publicly 
state their infection rates.
    And what I would also like to see us do is actually take 
some of the cost savings from that and use it as grants to 
hospitals that are able to lower the infection rates to zero. 
Are these things that you think are doable, that we can really 
use the clout of Medicare's payment system to say this is 
something we ought to really be looking at and not continue to 
pay for that?
    Mr. Hackbarth. Yes. We do think that substantial progress 
can be made both through public reporting and pay for 
performance, and there is just no reason why we should have the 
level of infection rates that we have. We agree with that and 
there are steps that can be taken.
    Mr. Murphy. Let me ask another area, and that is with 
preventative care. Do you believe that Medicare should be 
reimbursing doctors for some preventative care services? And 
another area is patient care management. Let me explain a 
little bit about that. You probably are aware of this but I 
know that a couple studies done in Pittsburgh hospitals, one 
was following diabetics, and we recognize about 80 percent or 
so of health care costs of those were chronically ill. And a 
substantial portion of those are folks who we used to call it 
hospital non-compliant patients, we realize better now that a 
lot of that was from chronically ill patients who have very 
complicated cases. It is nearly impossible for them to monitor 
and do all the right things from their diet, their medication, 
their insulin, their exercise, their mental health, all those 
things that are so very, very important.
    One hospital found that just by monitoring the care of 
these patients and calling them on a weekly basis to ask them a 
few simple questions actually with diabetic patients reduced 
re-hospitalization rates by 75 percent. Another hospital 
reduced hospitalizations of those with heart disease by 50 
percent. These are massive savings. And yet my understanding is 
the Medicare system for diabetics will reimburse or pay the 
hospitals for providing hospital care or amputations, et 
cetera, but do not pay for a nurse to make a 5-minute call or 
for a doctor to set up an e-mail system. What kind of changes 
do you think realistically we can make there?
    Mr. Hackbarth. So what you are doing, Mr. Murphy, is 
actually going through the items on this list, and what you are 
talking about falls under the heading of coordination of care. 
And Medicare does not properly pay for coordination of care by 
primary care physicians, and MedPAC has recommended a number of 
ways that that might be altered. In addition to that, CMS is 
now testing different models for encouraging coordination of 
care. There is the health support pilot project that is looking 
at patients with chronic illness including diabetes, and we 
think potentially that is a very helpful model.
    In addition to that, there is a medical home demonstration 
that is now in the process of being established which basically 
increases payments for physicians for that ongoing 
relationship, counseling, education of patients, following up 
on their care, following up on specialist visits and the like. 
We think there is huge opportunity there.
    Mr. Murphy. I appreciate it. Mr. Chairman, I hope this is 
an area we can look further at because the cost savings on this 
are pretty massive so I thank you for dealing with this issue. 
Thank you, sir.
    Mr. Pallone. I understand. Thanks. Mrs. Capps.
    Mrs. Capps. Thank you, Dr. Hackbarth. And I have two 
different topics I would like to get into so keep in mind that 
this question I am about to address having to do with the 
geographic price cost index is but the first half. I am deeply 
concerned as you might know about the current GPCI, if we can 
call it that, formula currently in place. And I think it is 
interesting that you in your recommendations have highlighted 
the need to revisit. You have a proposal to establish 
expenditure targets based on geographic regions but I am 
wondering how you can do this. You said the last time the 
commission discussed GPCI was 2 years ago, but doesn't this 
proposal to deal with geographic regions highlight the need to 
revisit how we reimburse physicians based on their location 
because of the inequities in the current system and those 
inequities have become a huge barrier to access, and so many of 
counties across the country in my district.
    So I am asking you about how we update the current 
classification of geographic localities even as we devise a new 
system for Medicare physician reimbursements. I am worried that 
if we adopted the model of establishing expenditure targets 
without first revisiting GPCI classifications we would only be 
further compounding the existing problem. After all as I 
mentioned in my opening statement the bottom line is insuring 
access for all beneficiaries. The failure to account for these 
fatal flaws in the current price cost index is going to further 
exacerbate any kind of proposal you are going to make, and I am 
just asking you now have you taken into account these current 
inequities as you have formulated suggestions for updating the 
overall payment system?
    Mr. Hackbarth. As I said in my response earlier on the 
specific issues of GPCIs in California, we have said that we 
think there are some problems, and we do think that there are 
ways to correct them but that it ought to be done on a budget 
neutral basis within California.
    Mrs. Capps. Well, it is actually among 135 or so counties 
across the country, this inequity exists, so it is not just our 
region although I am certainly going to acknowledge that.
    Mr. Hackbarth. I wouldn't say that it exists only in 
California. I am not sure I would agree with 135 either. I 
don't know how that is calculated.
    Mrs. Capps. We can give you that information and maybe you 
can correct it if it is wrong.
    Mr. Hackbarth. Yes, but it is on a national basis a 
relatively isolated problem that we think can be corrected.
    Mrs. Capps. OK. I am just suggesting before I move on that 
in order to carry out the recommendations you are making now 
that we can't do it on the back of a very flawed system. We 
have to do more than one thing at the same time if we are going 
to make any progress. Maybe we need to revisit the actual 
mandate that you were given to deal with on this whole fix. But 
let me talk about another topic because it also is very 
relevant to the Deficit Reduction Act, and that has to do with 
imaging procedures. We have discussed this many times last year 
but I am still concerned about how these cuts have been 
proposed.
    MedPAC continues to cite the volume of imaging services as 
growing at a faster rate than all fee schedule services. But I 
don't believe you are taking into account the fact that over 
the last few years many imaging services have moved from 
hospitals to physician offices as a cost saving to health care 
both to the patients and to the providers of health care. It is 
less expensive if you do this in an outpatient or an office-
based setting. That should be a good thing also for the sake of 
preventive health services. Preventive health care is by far 
the least expensive way to provide health care with the best 
outcomes. I would hope you would agree with that.
    So I am wondering if you have done any further analysis of 
the growth and imaging services since our hearing in July, 2006 
to take into account the shifts in the site of service. I think 
it is safe to argue that early diagnosis of disease can be 
identified by imaging procedures. Early diagnosis produces much 
more savings in the long run but if we continue on the current 
path of this disparate discrepancy in reimbursement for office-
based services we are going to see physicians stopping to do 
this and it is going to end up increasing the cost again.
    Mr. Hackbarth. As we discussed last time, imaging is----
    Mrs. Capps. Well, let me ask you, have you discussed this 
further since that time?
    Mr. Hackbarth. MedPAC has not taken up imaging since our 
last conversation on this. Let me just review some points 
because I think we agree on some of this. Imaging is tricky 
because there are important technological advances. We can do 
great things for patients.
    Mrs. Capps. Yes.
    Mr. Hackbarth. And we are all in favor of that. In some 
cases potentially growth in imaging can avoid the need for 
other more costly services.
    Mrs. Capps. We all agree with that.
    Mr. Hackbarth. In some cases moving things from a hospital 
base to a physician base can be a good thing, and so I think we 
agree on that. We don't think that from hospital base to a 
physician base explains all of the growth in imaging. We have 
looked at that, and we think it is just a substitution effect.
    Mrs. Capps. I have to finish by saying that you are 
throwing the baby out with the bath water by hesitating to 
allow physicians to or giving them some guidelines showing the 
ways that they can do this that will be cost savings. And I 
would strongly urge that this needs to be dealt with in the 
earliest possible time frame----
    Mr. Pallone. We need to move on.
    Mrs. Capps. Thank you.
    Mr. Pallone. OK. Next we have Mr. Pitts of Pennsylvania is 
recognized for 8 minutes.
    Mr. Pitts. Thank you, Mr. Chairman. A couple of questions 
for you, Mr. Hackbarth, to continue this line of questioning on 
the imaging. I think that we can all support the need within 
Medicare to reward providers for an efficient use of resources. 
In this report, MedPAC continues to cite the growth in imaging 
as being a problem, yet ultrasound-guided breast biopsies save 
Medicare $1,000 per patient, and decrease the risk of 
infection, speed the time to diagnosis, and have better 
cosmetic results. However, ultrasound guided breast biopsies 
mean that two ultrasound are performed that would not be 
performed if the surgeon performed an open surgical biopsy.
    My first question, would MedPAC not consider this an 
efficient use of services, ultrasound services, where 
comparative effectiveness information has played a role in 
increasing ultrasound services related to breast biopsies while 
providing a better outcome for all parties? Second, is it clear 
from MedPAC's examination of the SGR by type of service 
included, that is, imaging lab services, et cetera, that the 
growth within the physician's fee schedule is not appropriate? 
I would assume that with Medicare beneficiaries living longer, 
increased incidents of disease change and clinical practice 
guidelines, shift in site of service and the screening benefits 
that Congress has enacted over the last several years that the 
growth found by MedPAC could be a result of the health care 
system being more efficient with the care going to the site of 
service with the lowest overhead and greatest beneficiary 
access.
    Mr. Hackbarth. We think that some of the growth is imaging 
is appropriate and to the benefit of patients and may even 
reduce other Medicare costs. We don't believe that applies to 
all of the growth in imaging. We think that part of the growth 
in imaging may in fact be driven by distortions in the Medicare 
payment system where we overpay for some types of services. 
Providers know that we over pay. They know they are profitable 
and so they increase the volume of those services. So it is a 
mixture, and I know that is frustrating to the committee but 
rarely these things have black and white answers. MedPAC has 
never recommended that we try to cut imaging across the board.
    The thrust of our recommendations has been for much more 
targeted, sophisticated approach than that because we recognize 
that there are benefits from some imaging.
    Mr. Pitts. And perhaps demographics of the Medicare 
population, the migration from invasive to non-invasive 
diagnostic tool.
    Mr. Hackbarth. Those are part of the reason for the rapid 
growth but we don't think that they explain all of it.
    Mr. Pitts. Well, MedPAC continues in this report to cite 
the volume of imaging services as growing at a faster rate than 
all fee schedule services over the last few years. Many imaging 
services have moved from hospitals to physician's offices. Has 
MedPAC done any further analysis of the growth and imaging 
services to take into account the shifts in site of service 
since our hearing in July 2006 and was MedPAC able to look at 
both the hospital outpatient fee schedule data and the 
physician fee schedule data combined over time to account for 
this site in service shift or are we again without real data 
regarding what is the true new growth in each of these types of 
services?
    Mr. Hackbarth. We have not looked as a commission at the 
issue since the last hearing but at that hearing the numbers 
that we talked about, we did look at the substitution issue and 
whether the growth in fee schedule expenditure and imaging was 
solely due to substitution, and we did not find that to be the 
case. We don't think that substitution of physician services 
for hospital services explains all the growth and imaging. 
There are a lot of different factors that go into it.
    Mr. Pitts. Your analysis only used Medicare physician fee 
schedule database, is that correct, therefore, the MedPAC has 
not adjusted the growth rate to count for that shift in the 
site of service?
    Mr. Hackbarth. We have tried to look at whether movement 
from hospital-based imaging to physician-based imaging explains 
the growth and we don't think it explains all the growth, no.
    Mr. Pitts. And what about my first question, the efficient 
use of services?
    Mr. Hackbarth. Well, as I said earlier there are new types 
of imaging that can be more efficient. They can improve patient 
outcomes and reduce the need for other services that are higher 
cost. And that is good. We want to preserve that. We don't 
believe that is all that is happening in the growth imaging. We 
think some of the growth is for care of marginal benefit to 
patients at a high cost. We think some of the growth is due to 
inaccurate pricing and unusual profit opportunities. You go to 
physician conferences and you can see the imaging manufacturers 
selling their wares, talking about what a great profit 
opportunity this is, so that is a factor in this complicated 
picture as well.
    Mr. Pitts. Thank you, Mr. Chairman.
    Mr. Pallone. Thank you. I recognize Ms. Hooley of Oregon.
    Ms. Hooley. Thank you, Mr. Chairman. I have three 
questions. I am going to ask you all three of them, and then we 
will have a chance to discuss them. MedPAC concluded in its 
report to Congress that Medicare beneficiaries do not suffer 
from a lack of access to physicians. However, that is not what 
Medicare beneficiaries tell me in Oregon. That is not what they 
say. It is not what the doctors say. And I used to jokingly say 
to my friends that are about ready to retire if your doctor is 
older you better find a younger doctor, otherwise, you are not 
going to be able to get a doctor if you are retired and are on 
Medicare.
    I used to say it jokingly. I now am dead serious when I say 
that. You are from Oregon. I want to know if you have heard the 
same problems in Oregon or what is happening in Oregon that may 
be unusual in terms of the rest of the country. The second 
question is Oregon provided health care at a very reasonable 
cost. We were very efficient. We had a high penetration of 
managed care. And because of that we had been penalized over 
and over again for low reimbursement rates. And in rural areas 
where you have a high percentage of Medicare beneficiaries than 
in other parts of the country you combine that with a high 
number of beneficiaries and a low reimbursement rate, and 
frankly you can't find doctors to serve in the rural areas 
because they simply can't make a living doing it, and the 
question is has that been taken into account.
    And then the third question is MedPAC noted in its report 
that adjusting payments based on physicians participating in a 
group practice would be difficult to implement in rural 
communities because few if any rural providers can join multi-
specialty practices. I was very pleased to see that you 
recognized that. However, that is the only thing in your report 
that you really pay attention to the impact of MedPAC on rural 
providers. And my question is why doesn't MedPAC's report give 
more attention to highlighting the differences and how various 
proposals would impact rural communities versus other 
communities?
    Mr. Hackbarth. OK.
    Ms. Hooley. Are we different in Oregon?
    Mr. Hackbarth. I don't know about different in Oregon in 
general but there are places within Oregon where there might be 
unusual access issues. Let me just start with the big picture. 
When we ask both beneficiaries and physicians about access to 
care in the case of physicians willingness to accept new 
patients, in the case of beneficiaries their satisfaction with 
access on a national basis things look pretty good on both 
beneficiaries and physician front. Access compares pretty well 
to what exists for privately insured, non-Medicare patients.
    Ms. Hooley. They may be fine nationwide but I am telling 
you it is a problem.
    Mr. Hackbarth. Now having said that, obviously the picture 
can differ in particular communities. Take mine of Bend.
    I think that there are somewhat greater access issues for 
Medicare beneficiaries in Bend than in most other parts of the 
country. Are those the result of Medicare payment rates and 
Medicare payment rates alone? I don't think so. One of the 
issues that fast-growing communities face is that there can be 
an imbalance between the number of patients and the supply of 
physicians. I think that is true in Bend. We have had very 
rapid growth in a retiree population and that has grown faster 
than the supply of physicians. That is not just a matter of 
Medicare payment rates. There are broader issues involved 
there.
    Ms. Hooley. But Salem, an area, capital city, there are 
literally no doctors taking Medicare patients.
    Mr. Hackbarth. I don't know what the data are in Salem in 
particular but we do know on a national basis the access 
continues to be pretty good. It wouldn't necessarily stay that 
way as Chairman Pallone mentioned in his statement if we had 
successive years of cuts in rates. We do believe that would 
affect access but we are not seeing that in the national 
picture right now. As for the second question about low cost 
states being penalized to some extent, let us put it this way, 
they are not rewarded under Medicare for their efficiency and 
systems like SGR that cut across the board, hurt the low cost 
states maybe more than others. That is why some commissioners 
think that we ought to go to a geographically-based system of 
targets that applies the greatest pressure in the high cost 
states, not the low cost states like Oregon.
    Ms. Hooley. I am talking about Oregon in general, not just 
my district, you have places in rural communities because of 
the high number of beneficiaries there, and the low 
reimbursement doctor's offices are closing. There is one 
doctor's office in the area. I mean they just simply can't 
afford to take another Medicare patient, and it is interesting 
because if you look at the rest of Oregon it is amazing, and 
that is why I tell my friends you better get a young doctor is 
if they have other insurance they seem to be able to get 
accepted into that doctor's practice but if they have Medicare 
they don't get accepted into the doctor's practice.
    Mr. Pallone. I am going to have to stop you guys. I know 
you only got into the second of the three questions but I will 
just ask you to respond to complete the second and get to the 
third in the record because we are just over, that is all.
    Mr. Hackbarth. On this issue of access in rural areas, I 
think it is a critical question.
    Mr. Pallone. OK. Just if you could summarize because we 
already went over almost 2 minutes.
    Mr. Hackbarth. What doctors tell us is that almost 60 
percent of rural physicians say they accept all new Medicare 
patients. That is what physicians tell us.
    Mr. Pallone. And, Mr. Hackbarth, if you could just finish 
the rest of it in a written response, I would appreciate it. 
Thank you.
    Ms. Hooley. Thank you.
    Mr. Pallone. Next we have our ranking member, Mr. Barton, 
of Texas.
    Mr. Barton. Thank you, Mr. Chairman. We are going to 
disagree a number of times this year on solutions but I think 
we have bipartisan agreement that this particular issue is a 
huge problem trying to find a way to adequately reimburse our 
physicians while at the same time not bankrupting the Medicare 
trust fund and the part B premium payers. The recipients, our 
Medicare beneficiaries, is an ongoing problem. I wrestled with 
it. Mr. Tauzin wrestled with it. Now you and Mr. Dingell are 
wrestling with it. So some time this year when we get to the 
solution stage, we are certainly going to be vigorous probably 
in debating solutions but we don't disagree that this is a 
problem.
     Did your group prepare the table that lists all the costs 
of the proposed solutions or is that something that CBO has 
done? It has 15 different alternatives from a freeze payment 
rate in 2008 and hold future updates at current law levels. 
That cost $4.2 billion. And then No. 15 is an automatic MEI 
update that replaces the SGR and holds the premium payers 
harmless, and that is $330 billion. Is that your table?
    Mr. Hackbarth. That is CBO's. It is not ours. My guess is 
it is a CBO table.
    Mr. Barton. OK. Have you seen that table?
    Mr. Hackbarth. The $330 billion figure is not the one that 
I have seen. The one I have seen is I think $260 billion, $270 
billion for repeal and replaced with MEI.
    Mr. Barton. Do you have a cost estimate for whatever MedPAC 
has said is the solution?
    Mr. Hackbarth. We don't do cost estimates, Mr. Barton. That 
is----
    Mr. Barton. That is convenient.
    Mr. Hackbarth. Well, that is CBO's institutional 
responsibility. We are both congressional support agencies and 
that is their responsibility, not ours.
    Mr. Barton. Well, what is your policy recommendation or 
recommendations then?
    Mr. Hackbarth. Well, what we have recommended is not just 
in this report but in previous reports a long series of 
recommendations to improve pricing accuracy and to encourage 
efficiency in Medicare, and I would be happy to go through it 
but I have a feeling that I am not going to have a chance to.
    Mr. Barton. So you don't have a recommendation on this 
chart that CBO has put out about a specific recommendation like 
the 1 percent update in 2008 and 2009 or an MEI update in 2008?
    Mr. Hackbarth. On this specific issue, Mr. Barton, of what 
the annual increase should be for physicians what we recommend 
is that that not be set in legislation but that the Congress 
look at it year by year to determine what the appropriate 
increase is so----
    Mr. Barton. Do you advocate abolishing the SGR?
    Mr. Hackbarth. That is the issue on which the commission is 
divided, Mr. Barton.
    Mr. Barton. So there are some that say it should be and 
some that say it shouldn't be?
    Mr. Hackbarth. Yes. Roughly half the commission would like 
to see a system of expenditure targets retained although not 
applied only to physicians but rather to all providers.
    Mr. Barton. Now what we did last year was put some quality 
measures and put some bonus payments and we just did a very--
not a permanent change but created a small incentive program 
for the next year or so. Does MedPAC support that?
    Mr. Hackbarth. We support the general idea of quality 
reporting and of rewarding that.
    Mr. Barton. But on the issue of the cost your group doesn't 
try to cost any of these alternatives out?
    Mr. Hackbarth. No. CBO does the cost estimate.
    Mr. Barton. Mr. Chairman, I am going to yield back and look 
forward to working with you and Mr. Deal and Mr. Dingell to try 
to find a way out of this mess.
    Mr. Pallone. I appreciate that. Thank you.
     Mr. Green of Texas.
    Mr. Green. Thank you, Mr. Chairman, and following our 
former chairman of the committee, I know last year he told me 
many times he wanted to have a permanent fix to it, and we are 
in the same situation, and even in the odd numbered years like 
I said earlier as well as in the even numbered years. Mr. 
Hackbarth, we often hear from physicians who describe their 
payment situation under Medicare when they are comparing it to 
hospitals, specifically we hear that hospitals get annual 
updates with no global target or automatic cuts if the volume 
grows too much. Can you speak to the differences in the payment 
systems for the physicians and the hospitals?
    Mr. Hackbarth. Well, again this is the issue that I 
referred to earlier. There are some commissioners who believe 
that treating hospitals and physicians differently in this 
regard is inequitable, and Medicare has a total cost problem, 
not just a physician cost problem. And so if there is an 
expenditure targeted it ought to be applied equally to 
hospitals and physicians.
    Mr. Green. OK. Physicians get paid for each service they 
provide while hospitals get paid on the episode or group of 
services, and could Medicare group those services together and 
pay physicians for a whole episode rather than a service by 
service fee, and in your opinion would this payment practice 
encourage care coordination?
    Mr. Hackbarth. We have recommended that Medicare begin 
looking at physician resource use on an episode basis so how 
much does it cost to care for a patient with say diabetes as 
opposed to just looking at office visits and imaging, 
everything separate. Our recommendation is that in the first 
instance we provide that information to physicians on how their 
patterns and practice compare to their peers and do it on a 
confidential basis. As we develop the tools and experience with 
them then the analysis might be used with payment rates and 
higher updates, for example, for physicians that are 
consistently efficient in their episodes, so that is a 
direction that we think we ought to go.
    Mr. Green. Thank you. Mr. Chairman, I would hope that we 
can look at, for example, whether diabetes patients or 
something else instead of one treating each visit, it is 
actually the episode of visits similar with the hospitals. 
Since my co-sponsor on the bill on imaging, Congressman Pitts, 
asked a question about--highlighted MedPAC's comments about the 
importance of imaging in primary care and care coordination, 
and Ms. Capps mentioned how nowadays there is lots of imaging 
being done in doctor's offices compared to hospitals, let me 
ask you a different question. Two-thirds of Medicare spending 
goes for individuals with more chronic conditions, and I agree 
with your recommendation that we should encourage care 
coordination and more emphasis on primary care.
    However, the Medicare system is designed both in delivery 
and financing health care to address acute condition specific 
problems. Can you discuss how this element of the Medicare 
system serves as a barrier to effective primary care and care 
coordination, and would it take a fundamental change in the 
system either through CMS or through statute to insure that 
proper delivery of primary care and the care coordination, 
again this fits in with the first question, but do we need the 
structural change to do that?
    Mr. Hackbarth. Yes. There is going to need to be a 
structural change in all likelihood. A big part of it is going 
to require legislation to do. There are some things that can be 
done without legislation but, for example, the medical home 
idea where we pay a primary care physician to work with a 
patient over time, particularly a patient with chronic illness, 
that requires a new payment method that will have to be 
legislated. We are looking at different models for how best to 
do that and have demonstration projects underway that will 
hopefully give us guidance.
    Mr. Green. Does MedPAC have a time frame for that study and 
those models?
    Mr. Hackbarth. Well, the demos of course are being run by 
CMS, and each has its own schedule. The one that is most 
advanced at this point is the Medicare health support pilot 
that was initiated I guess under MMA. Some of the other 
demonstrations are still in the developmental stage.
    Mr. Green. Thank you, Mr. Chairman. I yield back my time 
but again I would urge--hopefully our committee would look at 
that because again I think it might end up hopefully saving 
money but it also makes sure that physicians know that patient 
is with him and the whole episode of their illnesses 
particularly the chronic, the numbers that we saw. Thank you, 
Mr. Chairman.
    Mr. Pallone. Thank you. And you raise some very important 
questions that we have to look into, so thanks again. Mr. 
Shadegg of Arizona.
    Mr. Shadegg. Thank you, Mr. Chairman, and I appreciate your 
holding this hearing. It is yet one more in a series that I 
have participated in what continues to puzzle me. I must begin 
by saying, Mr. Hackbarth, that I sympathize with you. As I hear 
my colleagues complain about not liking your product, it seems 
to me that the next thing we need to do, and I want to make 
sure this is understood to be tongue in cheek, is create a 
commission to study your commission. I think you have been 
given an impossible task. In my tenure in Congress, I have 
watched Medicare funding. I have watched the SGR system fail 
year in and year out. I have watched the Congress do what I 
think I just heard you recommend which is look at each year and 
try to figure out the appropriate level of funding.
    What I think you are charged with doing is price fixing or 
setting prices appropriately for the entire health care 
industry and I quite frankly think that is an impossible task. 
I also think, and I have said it here before but I want to say 
it again, that it is a scandal that the United States Congress 
creates a program, promises health care to a category of 
people, then discovers that it doesn't have enough money to pay 
the providers to deliver that health care and so it says, well, 
we won't scale back the promised benefits, what we will do is, 
quite frankly, cheat or under pay the providers. I guess that 
gives me some sense of understanding why the providers then 
naturally gain where some portions of the SGR have 
overcompensated some categories of work and others under 
compensate, and so providers are drawn to the areas where they 
overcompensate.
    Let me ask you first, as I understand your testimony what 
you have been able to come up with is two different 
alternatives, I gather in part because the commission is 
partially divided. One is to repeal the SGR, not replace it, 
but go to some form of alternative which I gather would be pay 
for performance, is that the so-called path one?
    Mr. Hackbarth. Pay for performance would be part of it but 
not the whole thing. Care coordination would be part of it as 
we just discussed with Mr. Green. Resource measurement episode 
based analysis would be part of it. There are many different 
pieces to it.
    Mr. Shadegg. The second piece of it as I understand it 
would be to actually replace the SGR with a new price setting 
mechanism that would apply to all care providers in the hope 
that that would reduce the untoward incentives in the current 
system which has the SGR just setting position rates, is that 
correct?
    Mr. Hackbarth. Generally speaking, right.
    Mr. Shadegg. To the extent that pay for performance were to 
be a part of the first path, who would decide which physicians 
had performed or not performed? How do you envision that 
decision being made?
    Mr. Hackbarth. One of the things that we have looked and 
will come back to is how to institutionalize the process of 
developing performance measurements. I think physicians and all 
providers for that matter have a right to expect that there be 
some consistency in that process and that it be done in 
accordance with the best available evidence as opposed to be 
done in a bureaucratic process.
    Mr. Shadegg. That is the available evidence. Are you 
envisioning that it would then be--or maybe you haven't gotten 
to this point. My bottom line question is, is physician 
performance going to predominantly be measured by patient 
satisfaction, patients saying we were satisfied, or by external 
measures other than the expression of patient satisfaction?
    Mr. Hackbarth. I think it needs to be both. It needs to be 
incorporated in the framework with patient satisfaction and 
technical measurements of quality based on best available 
evidence.
    Mr. Shadegg. I have deep concerns about any system which is 
not predominantly driven by patient satisfaction, and I would 
encourage you if you are going to look at this to look at 
making--while I understand there are professional evaluations 
my cardiologist in whose hands I have put my life knows the 
other good cardiologists in town and knows the good practices. 
At the same time I believe that patient evaluation as it should 
be, must be a huge component of this. Let me ask you another 
question. With regard to an alternative to SGR you have been 
asked to look at its failure and to recommend alternatives. 
Have you considered or could you consider in the future a big 
picture evaluation, that is to say perhaps doing away with 
government price setting in Medicare altogether, and instead 
providing people with essentially a stipend or a fixed amount 
of money, a tax credit, if you will, and allowing the consumers 
of Medicare services to spend that for Medicare services the 
way they deem appropriate so that you wouldn't need a top down 
government price setting mechanism but you could use a Medicare 
patient driven system because I personally believe that in all 
of health care where we have gone wrong is by taking patients 
out of the driver's seat, and I don't see patients being put 
back into the driver's seat. Is that an issue you could look 
at?
    Mr. Hackbarth. What we have said is that Medicare needs 
some of each, that we believe that there should continue to be 
the traditional Medicare program but that private options ought 
to be available to Medicare beneficiaries and that there ought 
to be a financially neutral choice between the two so private 
plans can do it more efficiently and if beneficiaries want to 
choose them they ought to have that opportunity to do so. What 
we object to is paying private plans more than traditional 
Medicare.
    Mr. Shadegg. My time has expired. But let me just conclude 
by saying I am not suggesting necessarily private plans. I am 
suggesting that--and I would accept this as one portion, one 
alternative, putting the money in the hands of the patients and 
letting them spend it where they thought it was appropriate so 
that you use them to set prices even as a demonstration 
project. I thank you, Mr. Chairman.
    Mr. Pallone. Thank you. Ms. Baldwin.
    Ms. Baldwin. Thank you, Mr. Chairman. I have two sort of 
directions for my questions. Both have been touched on already, 
but I hope that you can perhaps explore these a little bit more 
deeply with me. The first relates to reimbursement practices in 
primary care, and the second goes back to this area of the 
concept of the geographical disparities. So first on primary 
care, I have had the opportunity, as I am sure many of my 
colleagues have, to meet with physicians engaged in primary 
care practices and also to talk a little bit about the number 
of medical students who are choosing to specialize rather than 
go into primary care practices, and the trend is of concern 
certainly away from primary care, family practice or internal 
medicine studies.
    I visited a clinic in my district during our last recess 
where the Medicare payment trends were of great concern. It is 
a physician group that is only primary care, and the percentage 
of Medicaid and Medicare patients that they have and the low 
reimbursement rates are such that they have unsustainable 
losses that they are experiencing that are increasing in each 
year. They don't have any specialty doctors in their practice 
with which they could do some sort of cross subsidy or cost 
shifting, and in fact they even broke down in charts that they 
provided to me the per physician per year cost to subsidize 
basically the Medicaid and Medicare services that they are 
providing.
    And it was very distressing to me to wonder how long they 
can sustain such a practice. And so I would ask you how can our 
payment policies as we look at this, look at a long-term fix, 
what sort of hope can I give these primary care physicians, and 
also with regard to students entering medical school, how can 
our payment policies impact this very problematic trend that we 
are seeing with regard to the number of students going into 
primary care.
    Mr. Hackbarth. Improving payment for primary care involves 
work on three paths. One is we think there are problems in how 
the relative values are set for different physician services 
that lead to underpayment of some primary care services, and we 
have made some recommendations on that. We think that Medicare 
might also look at adding some new codes to the system 
specifically directed at rewarding time spent in educating 
counseling patients, basic primary care activities. Finally, as 
we discussed already, there are demonstrations underway that 
look at rewarding care coordination specifically through an 
added payment, a per patient payment, to cover the cost of care 
coordination, especially for those with serious chronic 
illness, so there are multiple different approaches to 
improving primary care payment.
    As for the supply issue certainly the low income potential 
for primary care relative to other specialties is a deterrent 
for some medical students. People who are deeply involved in 
that process and medical education, working with medical 
students, tell me though that income isn't the only factor, 
that other factors that discourage people from going into 
primary care are the lifestyle compared to some of the 
specialties. It is a harder lifestyle. And finally it seems as 
having less intellectual challenge than some of the 
sophisticated sub-specialties. So in short we favor increasing 
payment for primary care in various ways. We shouldn't have any 
illusions though about how easily it will change the supply of 
primary care physicians.
    Ms. Baldwin. I would love to explore that more deeply. I am 
going to not do so because I want to quickly get in a question 
about the geographic disparities. We talked a bit about this 
and I guess two questions. One is the extent to which MedPAC 
and CMS has measured the differences in volume of services 
provided in different localities so how much of that data 
exists. And, second, in your report you discuss the option of 
reimbursing physicians based on sub-national geographic areas. 
I wonder what you mean by that is what is the most feasible 
unit of measurement, states, portions of states or groups of 
states.
    Mr. Hackbarth. Yes. On the first piece the available 
evidence on variation, Dr. Fisher, who is on the next panel, is 
the expert on that question so maybe I will let him address it 
in detail for you. As opposed to the appropriate geographic 
unit, roughly half the commission likes the idea, first of all. 
We didn't talk about what the right geographic unit would be. 
There is a trade off. As you go to smaller units you get more 
precision in the targeting but with smaller units you get some 
problems like variability with small numbers, instability in 
the numbers from year to year, a risk that people will start to 
cross borders to receive their care or physicians will change 
location of practices.
    And so there is not a clear right answer that I can offer 
you as to the right geographic unit, but we can go into that 
more at another time if you wish.
    Mr. Pallone. We are running out of time. Thank you. OK. I 
recognize Ms. Wilson of New Mexico.
    Ms. Wilson. Thank you, Mr. Chairman. I think I join my 
colleagues on both sides of the aisle here in agreeing that 
this sustainable growth formula is unsustainable, and it should 
be permanently fixed. But I also don't think it is reasonable 
to try to mandate consensus among experts if a consensus isn't 
really there. I recognize it is a very difficult problem that 
thoughtful people and thoughtful people can disagree. So I 
appreciate your input. Really two areas of questions that I 
wanted to focus on. And the first has to do with incentives. 
You highlight a number of areas of possible incentives or ways 
to change the system so there are incentives for providing high 
quality care and so forth.
    Do you think there are any savings inherent in those 
approaches or is the recommendation of the commission to put 
those incentives in place and allow or indeed encourage those 
funds to be kept in patient care?
    Mr. Hackbarth. We do believe that there are savings. We do 
believe that the better incentives will change patterns of care 
and make care more efficient. They are not the sort of savings 
that are readily scored by CBO though because they involve 
behavioral change over a long period of time.
    Ms. Wilson. I also, like some of my colleagues from other 
rural states, I am always concerned when people talk about 
changing the formulas and making different formulas for sub-
national geographical areas, and we saw in the managed care 
formulas, for examples, significantly disadvantaged rural 
areas, and a lot of the formulas the way they are set up pay 
much less in rural areas, and I can understand where the cost 
of space or the cost of energy may be different in different 
regions of the country but the cost of a physician's time 
should not depend on where they live. And the value and the 
increasing value of their time should not depend on where they 
live.
    When you talk about sub-national geographic areas, if we 
were to do this, have you all done any modeling on which areas 
or type of areas of the country would be winners and which 
would be losers?
    Mr. Hackbarth. We have not. Again, the commission has not 
agreed on that issue of doing sub-national geographic targets, 
and we have not made a recommendation to do that, and as a 
result we haven't tried to figure out all of the variations 
within that category.
    Ms. Wilson. So you haven't gone back and looked at data and 
done modeling and said if we had done this what would have 
happened?
    Mr. Hackbarth. In response to previous requests from 
Congress looked at variation by state and how Medicare 
expenditures vary by state. Dr. Fisher has looked at it based 
on hospital service areas and I couldn't characterize simply 
who the winners are and who the losers are. We can provide a 
list of the states and who has low cost and who has high cost. 
I would be happy to do that.
    Ms. Wilson. I appreciate that. I worry that when we start 
doing that you immediately start to put pressure on rural 
areas, and I have seen it happen in other formulas here, and I 
also know the reality is that concentrated population centers 
in America have more votes in the House of Representatives, and 
that is a reality but it is something I am very concerned 
about.
    Mr. Hackbarth. The proponents of geographically based 
expenditure targets believe that that system would be fairer to 
the low cost states, many of which have large rural components. 
Many of the states that are highest cost have very large urban 
areas and so the intent certainly is not to disadvantage rural 
areas, and in fact it may benefit many rural areas, many rural 
states.
    Ms. Wilson. If you have any further data on that that you 
are able to share or information on it that would help us to 
expand our understanding on what that might mean, I would very 
much appreciate it. Thank you, Mr. Chairman.
    Mr. Pallone. Thank you. Ms. Solis.
    Ms. Solis. Thank you, Mr. Chairman. I know we don't have a 
lot of time. I did want to touch base regarding the geographic 
payment locality issue as well. I am not sure what statistics 
or information you have about Los Angeles County in southern 
California, but I am very concerned because as I said earlier 
in my opening statement we are losing the ability to attract 
doctors to come in to low income underserved areas. And the 
county of Los Angeles if we use say a median income or a median 
formula to pay for reimbursements could actually end up 
penalizing communities that are unincorporated, which are part 
of Los Angeles County, as an example, but have the highest 
number of seniors that really require and would be eligible for 
this type of assistance. So I am anxious to hear at some point, 
if not now, to get that information from you.
    And then also you mentioned earlier that there might be 
some type of attempt to try to compensate physicians that have 
to do a little bit more counseling. One of the things that has 
come up in the course of my being here on the hill is trying to 
figure out how we can help provide for incentives for doctors 
who do have to spend more time translating information to 
immigrant populations to seniors from diverse backgrounds and 
the notion that they should be given some additional pay 
because they are spending more time to technically go through 
and actually explain and interpret every little detail as to 
the care for that patient.
    And then lastly how do we bridge the gap for disparities 
because we have so many underserved African-American, Asian and 
Latino communities where they typically are not being, for 
example, given the same kinds of testing or examinations or 
vaccinations like influenza. And I have a real concern with 
that because our communities are being overlooked so if you 
could please touch on those three items.
    Mr. Hackbarth. On the issue of the geographic adjusters in 
California maybe the most efficient way to deal with that would 
be to have a follow-up conversation and provide a letter for 
you about Los Angeles County. I don't know the facts off the 
top of my head so we would have to do some research on that. On 
the issue of the cost of translation that is not an issue that 
we have looked at specifically one way or the other.
    Ms. Solis. It has never come up?
    Mr. Hackbarth. Translation specifically, no, it has not.
    Ms. Solis. Even the demographic challenges and the case 
load that is increasing in the Hispanic population? I find that 
rather surprising. I would urge the commission to strongly 
consider that.
    Mr. Hackbarth. Yes, that is fair enough.
    Ms. Solis. Disparities, and how do we have kind of a across 
the board health examination for communities that typically 
don't get, for example, influenza vaccinations as readily as 
say the traditional population.
    Mr. Hackbarth. Yes. Certainly there are disparities in 
access. Our focus has been on trying to assure fair payment for 
all types of providers. How to change that issue is not 
something that we specifically talked about the disparities.
    Ms. Solis. That is a big issue in our district.
    Mr. Hackbarth. We may come back to that.
    Ms. Solis. And maybe I could just mention quickly that we 
have a tri-caucus that exists in the House; Black Caucus, Asian 
Caucus, and Hispanic Caucus, and we are going to be introducing 
legislation on health care disparities of which many of our 
seniors are impacted heavily with respect to how to tackle 
chronic illnesses particularly in the area of diabetes 
treatment, stroke, cancers, things of that nature, and would 
love to share with you that information.
    And then something that one of my colleagues brought up 
that I have to also touch on is the fact that it is hard to 
attract physicians and incoming interns, medical interns, into 
low income service areas. And I understand the need to have 
more available in rural areas, particularly on Indian 
reservations and other low income areas. But in the areas that 
I represent it is very hard to attract young students and 
beginning that process early on, not at their senior year and 
not at the college level, and what incentives might we be able 
to look at since we see this increasing changing demographic 
population in the senior community that is going to live 
longer, that is going to look a lot different than what we 
normally have provided treatment to in the last 40 years, and 
if maybe there is an incentive or there is initiatives that we 
could put forward through the Congress to help you in that 
manner to help promote that.
    Mr. Pallone. Did you want to comment? Do you agree?
    Mr. Hackbarth. In principle but we just have not studied it 
so I don't have anything to offer on behalf of the commission.
    Ms. Solis. Thank you.
    Mr. Pallone. Thank you. And last but not least is the 
gentleman from Texas, Mr. Hall.
    Mr. Hall. Mr. Chairman, thank you. As you know, I have two 
Energy and Commerce subcommittees working, the Energy 
Subcommittee on the third floor, and I have been there and not 
knowing the questions that have been asked, I won't take his 
time. I am sure that the chairman is going to allow us to 
submit questions and they will give us answers, and we will do 
that. But I thank Chairman Hackbarth for his time and the time 
of preparation and the time in appearing here, and the good 
services you render this country. I appreciate it, and I am 
sure this committee and this chairman appreciates it. I yield 
back my time.
    Mr. Pallone. Thank you, Mr. Hall. Let me reiterate that we 
do appreciate what the commission has done, and I thought it 
was a very thorough analysis today. You have taken a lot of 
questions here for the last couple hours or so, so thank you so 
much for all that you do. And, you know, again I always say we 
can only expect you to do what we task you to do. That is 
always the issue here. So thanks again.
     I would ask the next panel to come forward.
     I will start by introducing Mr. Bruce Steinwald, who is 
Director of Health Care for the Government Accountability 
Office, and then we have Dr. Elliott Fisher, who is a professor 
of Medicine and of Community and Family Medicine at Dartmouth 
Medical School, and I know that your mom has been ill so I did 
want to thank you for coming down here to testify today even 
despite that situation with her. I hope that she is getting 
better and that everything works out. Thank you.
     Dr. Thames, we have seen you many times. Thank you for 
coming back again. He is Dr. Byron Thames, member of the Board 
of Directors of the American Association of Retired Persons. I 
guess we will begin with Mr. Steinwald.

    STATEMENT OF A. BRUCE STEINWALD, DIRECTOR, HEALTH CARE, 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Steinwald. Thank you, Mr. Chairman, Mr. Deal, and 
members of the subcommittee. Thank you for having me here 
today. I am going to briefly summarize the findings of a 
recently completed GAO study, but before I do I wanted to speak 
directly into the microphone and give you a little pictorial 
summary of how we got into the situation we face today. Very 
briefly, these are the years covered by the SGR on that 
exhibit. The bars that are up there now show the annual 
increases in the Medicare economic index, which is about 2\1/2\ 
percent per year, not a great deal.
    The next chart shows the annual updates in physician fees 
under the SGR system. You can see the updates in the early 
years of the SGR were in excess of inflation and the cost of 
running a medical practice until 2002 when there was the 1-year 
decline, and subsequent to that modest updates by result of an 
act of Congress overriding the scheduled negative updates that 
the SGR called for. All of that was related to increases in 
Medicare spending for part B services per beneficiary. You can 
see in the years 2000 and 2001, those spending amount increases 
per beneficiary far exceeded the updates in the MEI. It is 
those spending increases that led to the decrease in 2002, and 
you can see subsequent to then the spending increases have far 
exceeded either the MEI or the update.
    And let me point out and emphasize those spending increases 
that have occurred in the first half of this decade have both 
yielded additional revenue to doctors above the update factor 
and yielded additional co-payments on the part of 
beneficiaries. So with that as a back drop, let me go on to the 
current study. We have done two studies in response to mandates 
in the Medicare Modernization Act. The first was a study on the 
sustainable growth rate itself. The second was a study that 
directed us to look at physician compensation generally, and 
when we consulted with Hill staff and others about how we might 
make best use of this direction, we decided to address what are 
the principle criticisms of the SGR, ones that we share.
    It is a very blunt instrument. It treats all doctors the 
same. It doesn't discriminate between efficient and inefficient 
medical practices, and it doesn't provide incentives that 
operate at the individual physician level. And so we embark on 
a study that would try to get out those deficiencies of the 
SGR. These are generally what we did up there on the screen. 
The first thing we did was we looked at what some health care 
purchasers, not Medicare, but outside of Medicare are doing to 
encourage efficiency in medical practice. We looked at a wide 
range of purchasers. Some of them are private insurance 
companies, some of them were provider organizations, and some 
were government directed including one Canadian province.
    They all do several things, one of which is they look at 
the spending of the physicians' patients, not just for 
physicians' own services but for a full range of services. They 
create bench marks for efficiency to try to gauge and identify 
the doctors who appear to be practicing medicine inefficiently. 
They all measure quality as well as efficiency and have 
performance measures that combine quality with efficiency, and 
they all try very hard to bring their physicians on board and 
explain to them what they are trying to accomplish. And what is 
listed on the chart are some of the things that these 
purchasers do with that profiling information once they collect 
it.
    They range from simply educating physicians, providing 
information on how they stack up compared to their peers all 
the way to more stringent arrangements including directing 
patients to receive care from the doctors who score high on 
performance measures up to and sometimes excluding inefficient 
physicians from provider networks. By having seen what some 
provider organizations do, we then embarked on an examination 
of Medicare claims data to see if we could devise a methodology 
that could identify efficiency in Medicare and could we do what 
some of these providers do, and we selected 12 metropolitan 
areas in which to conduct this study. First, we identified 
patients who appear to be overly expensive given their health 
status. It is very important to correct for health status 
because obviously expect patients who have multiple illnesses 
to consume more services.
    Second, we measured not just what these patients were 
spending for doctor services but a full range of services and 
then we drew a threshold, we tried to see whether these overly 
expensive patients tended to cluster among certain doctors or 
were they randomly distributed. In all of the 12 areas that we 
studied, we found that there was some clustering of these 
overly expensive patients among a relatively few doctors. There 
was more clustering in some areas than others. In the Miami 
metropolitan area, for example, there was a great deal of 
clustering over the overly expensive patients.
    And then finally having gone through this exercise, we 
asked ourselves, well, what is the applicability of the kinds 
of things that the other purchasers are doing to Medicare, and 
we find that there are some important strengths and 
differences. Medicare has tools available to do this kind of 
identification of efficient practices. They have a 
comprehensive claims database on patient consumption of health 
care services. They are several hundred thousand physicians 
that participate in Medicare so that in almost every community 
you can form meaningful comparisons among doctors, and they 
have experience in using methods to account for differences in 
patient health status.
    Mr. Pallone. I just want you to wrap up because we are 
going over.
    Mr. Steinwald. I am wrapping up right now. We are sending a 
report to CMS later this week for their review. We don't think 
that this approach is a panacea and it is not going to be the 
solution to the SGR problem, but the primary virtue of this 
kind of approach is that it does get at the problem of SGR 
being such a blunt instrument and so inequitable. We hope that 
CMS will work with you and others to see if this is one 
approach that could be included in a package of reforms to help 
reform Medicare payment for physicians. Thank you very much.
    [The prepared statement of Mr. Steinwald follows:]
   
   
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    Mr. Pallone. Thank you, Mr. Steinwald. Dr. Fisher.

   STATEMENT OF ELLIOTT S. FISHER, M.D., M.P.H., PROFESSOR, 
 MEDICINE AND COMMUNITY AND FAMILY MEDICINE, DARTMOUTH MEDICAL 
                             SCHOOL

    Dr. Fisher. First I would like to thank you for your 
expression of concern about my mother. I think she will be 
fine. It is a wonderful example of the challenges of care 
coordination that are faced by Medicare beneficiaries and their 
children. Mr. Chairman, Congressman Deal, and remaining members 
of the committee, the recently released report assessing 
alternatives to the sustainable growth rate system provides an 
outstanding analysis of the key issues and challenges 
confronting Congress as it considers both how to reform payment 
approaches in a period of serious budget constraints.
    The report outlines a broad array of policy approaches that 
Congress and CMS could and probably should pursue to improve 
the quality and cost of Medicare beneficiaries. I agree with 
almost all of their principles and many of the specific 
recommendations. I am going to focus on the relevance of my own 
research to the implications for reform and what I believe are 
some of the principles that you should pursue. Two full 
differences in Medicare spending exist across U.S. regions and 
across the populations cared for by hospitals and major 
academic medical centers. These aren't due to differences in 
patient needs or the prices of services. Rather they are due to 
the volume of care, differences in the amount of care provided 
to similar patients.
    The differences are largely due to what Jack Wennberg and I 
have now termed supply sensitive services, things like the 
frequency of physician visits, use of specialists in lieu of 
primary care physicians, use of the acute care hospital as a 
site of care for patients who might otherwise be cared for 
elsewhere, and the frequency of diagnostic tests and imaging. 
Our work has shown convincingly that higher spending regions, 
higher spending hospitals, those with higher volume do not 
provide better care. On the contrary the evidence suggests that 
higher spending is associated with lower quality, and more 
recently that U.S. regions that grew fastest fell further 
behind in their quality and outcomes.
    The research highlights the magnitude of the opportunity to 
improve the value of Medicare services. It said a little bit 
with tongue in cheek recognizing that it would be hard to do 
but if all U.S. regions could safely adopt the practice 
patterns of the most conservative regions Medicare spending 
would fall by 30 percent. The research also provides support 
for several key payment reform principles that are imbedded in 
the commission's pathway two. First, insuring that incentives 
to control spending growth apply to all providers whether 
through expenditure targets or other means.
    Second, striving to reduce regional disparities in spending 
by applying greater pressure on currently high spending 
regions. And finally our research provides strong support for 
the importance of fostering what the commission refers to as 
accountable care organizations. These are locally integrated 
delivery systems that would have the following key attributes. 
First, they are large enough to support comprehensive and 
effective performance measurement. Second, they can provide or 
manage with others the full continuum of care, patient care, 
provided to Medicare beneficiaries. And, third, they could 
participate in shared savings approaches to payment reform as 
an interim step toward fundamental reform of the Medicare 
payment system.
    Accountable care organizations should be a key element of 
payment reform for the following four reasons. First, most 
physicians actually already practice within the context of an 
existing virtual multi-specialty group practice. Most 
physicians make their referrals to other physicians within a 
local network. Most physicians admit their patients to a single 
hospital and work within the context of that hospital and the 
local physicians who are practicing with them. Therefore, 
modest incentives that could prompt physicians to come together 
around either the hospital or medical groups would neither 
disrupt the physician's current practice patterns nor disrupt 
their patients' experience of care.
    These virtual multi-specialty group practices are described 
in the commission's report and currently exist in almost all 
communities of the United States. ACOs could be given 
incentives to control total Medicare payments allowing 
budgetary savings with smaller relative impact on individual 
provider incomes. Third, performance measurement at the level 
of an accountable care organization would be much more 
trackable in the near term than any other efforts to measure 
performance. I have served on the Institute of Medicine 
performance measurement committee that reported to Congress a 
year ago. We have in the testimony that I submitted examples of 
the kinds of performance measurement that could be readily 
implemented at the level of an accountable care organization or 
local entity.
    Finally, most physicians continue to practice in one or two 
physician practices, in small group practices. Accountable care 
organizations, whether it is large physician groups or built 
around hospitals, would have the capacity to invest in 
electronic health records, improve care management protocols, 
coordination of care, the issues that are highlighted as the 
major problems that we face in U.S. health care today. We have 
found that growth in spending on physician services varies 
dramatically across these virtual medical specialty groups, and 
data that is included in the written testimony we have shown 
that within these groups within the United States growth rates 
over the last 4 years ranged between 2.4 percent per year in 
the slowest growing fifth of current physician practices, so 
almost 10 percent per year in the highest growing fifth of 
physician practices.
    We can therefore now identify the ACOs that are most 
responsible for growth in spending and they should be held 
accountable for their contribution to growth in spending but we 
can also offer to identify those groups, those who are growing 
at 2.4 percent per year or less that offer us a path toward 
improved value for Medicare. Thank you very much for the 
opportunity to testify.
    [The prepared statement of Dr. Fisher follows:]
   
   
   
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    Mr. Pallone. Thank you, Dr. Fisher. Dr. Thames.

STATEMENT OF T. BYRON THAMES, M.D., MEMBER, BOARD OF DIRECTORS, 
            AMERICAN ASSOCIATION OF RETIRED PERSONS

    Dr. Thames. Mr. Chairman, Mr. Deal, thank you very much for 
inviting AARP to testify today. AARP believes that the Medicare 
physician payment system should be changed from one that 
rewards quality to one that rewards quality. AARP recently 
conducted a survey of our members, current and future Medicare 
beneficiaries, about their experience with physicians. The vast 
majority report good access to and high levels of satisfaction 
with their physicians but for many the cost of care remains a 
concern. These AARP members represent the nearly 43 million 
Americans who rely on Medicare for their health care coverage.
    Physicians are central to delivery of that care. While we 
believe physicians who treat Medicare beneficiaries should be 
paid fairly. Our members tell us the program must be kept 
affordable as well. Determining how to balance these two needs 
is a complex yet critical policy problem that must be solved 
for the Medicare program to remain strong for future 
generations. The sustainable growth rate system which has been 
widely recognized as flawed does not distinguish between 
doctors who provide Medicare beneficiaries with high quality 
care and those who provide unnecessary or inappropriate 
services. Moreover, the SGR has not been effective at 
controlling the volume or intensity of services leading to 
higher Medicare spending and greater out of pocket cost for 
beneficiaries.
    The monthly Medicare part B premium set at 25 percent of 
part B spending has doubled since 2000. Beneficiaries also face 
increased cost sharing obligations and higher deductibles when 
part B expenditures rise. There doesn't seem to be an end in 
sight for these out-of-pocket increases. Using existing SGR 
methodology physician fees are expected to be reduced each year 
at least until 2012. Under this scenario, we can expect to 
continue the now annual cycle of physician groups lobbying 
Congress to avoid payment cuts, doctors threatening to stop 
taking Medicare patients, and Congress overriding the SGR at 
the last minute.
    We must find a better approach. AARP believes that 
ultimately the SGR should be replaced with a system that 
encourages physicians to provide beneficiaries of the Medicare 
program with greater value for the health care dollar. Medicare 
beneficiaries need and expect their doctors to provide 
respective treatment. Payment incentives should encourage high 
quality, not unnecessary quantity. A truly sustainable payment 
system will be built on a foundation that emphasizes four key 
elements; one, information technology; two, greater use of 
comparative effectiveness research; three, performance 
measurement including physician resource use; and, four, 
enhanced care coordination.
    My written statement details each of these but before any 
changes to the SGR are made there are a number of factors to 
consider. First, ultimately repealing the SGR will be quite 
costly. A transition to a value-based purchasing framework must 
not be financed at beneficiary expense. Second, we need to make 
sure beneficiaries are protected from extraordinary out-of-
pocket expenses as the system is reformed. One such protection 
would be a cap on part B premium increases. Another potential 
option is to limit the total part B out-of-pocket costs. Third, 
elimination of the SGR cannot be viewed as carte blanche for 
physicians to maximize revenues through uncontrolled volume.
    Rather, a new payment system should be designed to 
encourage appropriate care. Congress cannot continue to avoid 
the current problem in the part B payment system. Each year we 
wait the problem only gets worse. AARP stands ready to work 
with Congress and the physician community to develop a workable 
solution. Thank you, Mr. Chairman.
    [The prepared statement of Dr. Thames follows:]
      
   
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    Mr. Pallone. Thank you, Dr. Thames. I will start off 
recognizing myself for 5 minutes of questions, and I wanted to 
ask Mr. Steinwald a couple questions. You mentioned how in the 
GAO study you were judging doctors against their peers in the 
community, and obviously medicine traditionally follows that 
local standard of practice. In other words, doctors are judged 
against their peers in the community. But when you compare 
doctors in the community did you still find significant 
variations in the use of services for similar beneficiaries?
    Mr. Steinwald. Yes, we did, Mr. Chairman. We divided all 
beneficiaries into 31 different risk categories so we were 
really trying to hold their health status constant. And then 
within each one of those categories we took the top 20 percent 
of beneficiaries who were spending the most holding risk 
constant, and we do find variations within the community on how 
those patients are treated. As I said before, we found that 
there tends to be clustering of those expensive patients among 
a subset of doctors in the community. The amount of clustering 
varies from one metropolitan area to another.
    Mr. Pallone. Now what areas had the most of the outliers, 
the doctors that were providing extra care or whatever 
prescribing more services than is normal, what areas did you 
find had the most of those?
    Mr. Steinwald. Well, we selected 12 metropolitan areas so 
we don't have a survey of the entire country. Of the 12 Miami 
metropolitan area is what was by far the most extreme, and I 
think second was Baton Rouge. And then there are others. As I 
say, all had some of these doctors but others were less than 
those two.
    Mr. Pallone. Did you find that there were any 
characteristics that the outliers had in common across the 12 
regions that you studied or those 12 metropolitan areas?
    Mr. Steinwald. I should have said that we were only looking 
at generalists, not specialists in that study.
    Mr. Pallone. OK.
    Mr. Steinwald. And we don't have measures of how they 
differ from one another. We do have some measures of how their 
patients differ though. And, for example, we found that the 
patients of these doctors tend to me more frequently 
hospitalized and especially more frequently hospitalized 
multiple times in a year.
    Mr. Pallone. OK. In your testimony you note that CMS has 
the tools to identify the outliers, but I mean if they have 
those tools why are they doing it? Is it a legislative barrier? 
Is it something that Congress has to do to help them move 
forward?
    Mr. Steinwald. CMS currently has tools that it uses 
principally in its program integrity efforts to detect fraud 
and abuse. What we are suggesting that they think about doing 
goes far beyond just detecting fraud and abuse, and if they 
were in fact to consider doing some of the things that the 
other payers I mentioned do, they would almost certainly need 
new legislative authority for that purpose.
    Mr. Pallone. OK. Thank you. Thank you, Mr. Steinwald. I 
want to ask Dr. Fisher, in your opinion what role does 
information play in insuring proper utilization and accurate 
payment rates? In other words, should we be alerting physicians 
who are outliers with regard to the utilization use? Should 
that information be public or remain private? I know these are 
touchy issues but what is your opinion on it?
    Dr. Fisher. The role of information is absolutely critical. 
I highlight two areas that you haven't mentioned, the need for 
comparative effective research and performance measurement, but 
focusing specifically on the kinds of individual provider 
profiling that are being discussed and were highlighted in the 
GAO report. I think the key question is around the validity, 
accuracy, and meaningfulness of the measures that are used to 
profile the physicians. When those measures are meaningful and 
can be fed back to physicians that provide useful information 
to physicians and there is good data from a variety of studies 
over the last 30 years then physician feedback and performance 
information is a useful way to help physicians move toward the 
middle.
    It will not, however, address the problem of underlying 
increases in health care costs. It will help improve physician 
practice. It may bring physicians back toward the middle of the 
mean but the problems between Miami and Minneapolis is the mean 
is that they are different in the averages, and most of the 
clinical decisions that physicians are making are subject to 
substantial clinical judgment, cannot be specifically judged to 
be inappropriate, so the challenge is how to guide local 
delivery systems to improve the overall efficiency of care.
    If there were one hypothesis I would have about why 
physicians or high cost physicians are clustered together is we 
know well from our work comparing academic medical centers 
across the country that the patients who were cared for by some 
academic medical centers within Los Angeles or within Miami are 
treated very differently by the physicians who work within that 
particular system, and what we believe is the driver of the 
differences in cost between a high cost hospital and Miami and 
the lower cost health system is Miami in terms of per 
beneficiary cost is the relative capacity of that system, how 
many hospital beds they have or beneficiaries they serve 
because physicians and hospital physicians will rely on the 
beds if they can get their hands on them because it is easier 
for us to manage our patients when we have access to a hospital 
bed.
    Mr. Pallone. So you wouldn't want to draw any broad 
conclusions about how or what information we should provide to 
physicians or whether we should make information public or 
remain private. You have to look at a lot of different 
situations.
    Dr. Fisher. I think feedback to physicians with good 
measures is very important. I think public release of that 
information at the individual physician level is not likely to 
be helpful. Neither MedPAC nor the Institute of Medicine was 
willing to talk about release of information. It depends a lot 
on the information that you are releasing, information on how 
patient-centered care, how effective a physician is at 
providing patient-centered care. That may well be important to 
release at the individual physician level, who has got good 
manners, who listens to their patients.
    Resource use measures are much more complicated than the 
technical issues around those, and measurement and attribution 
at the individual physician level remain a controversial 
measurement issue that I think is not yet ready for public 
release.
    Mr. Pallone. OK. That is helpful. Thank you. Mr. Deal.
    Mr. Deal. Thank you. I am going to try to see if I can put 
together some pieces of what everybody has said here and see if 
we can come up with some general idea of where we can head if 
we have the courage to approach designing a new system. And I 
guess I would start with the four ingredients that Dr. Thames 
has outlined briefly, information technology, greater use of 
comparative effectiveness research, performance measurements 
including physician resource use, and enhanced care 
coordination. The other two gentlemen, do you both agree that 
those are essential ingredients of whatever we try to design?
    Dr. Fisher. Sure.
    Mr. Steinwald. Yes.
    Mr. Deal. And I think that is also consistent with what we 
heard from MedPAC as to the general categories of that. Now 
when we go beyond that we have some real problems with how we 
design something, and let me focus in on that. Dr. Fisher, you 
said volume of services is one of the primary ingredients of 
driving costs up, and this is pretty self-explanatory, I think. 
If we go to a system like an accountable care organization, I 
presume the idea would be that if we are going to set spending 
targets that instead of it being a national spending target we 
would begin to segment that down into the minutia of even these 
accountable care organizations having a set target for 
themselves, would that be sort of the concept?
    Dr. Fisher. MedPAC has talked about a concept that would 
have the target at a regional level with shared savings models 
for the accountable care organizations within those and others 
subject to the expenditure target.
    Mr. Deal. We would probably have to do it that way to start 
with anyway.
    Dr. Fisher. Yes, but I think the fundamental notion of 
trying to have the incentives aligned so that accountable care 
organizations could benefit from doing all of those four things 
and reducing the cost of care that they would receive some of 
the savings when they achieved that. That is the fundamental 
notion.
    Mr. Deal. But it is this cohesiveness and coordination of 
care that we are trying to emphasize. Now in that regard if we 
return to looking at getting into health IT that we did not 
finalize last year one of the big sticking points was the 
grants and how big the grant program is going to be, et cetera. 
It would seem to me that if we want to do something here that 
implements that then maybe in the grants for health IT they 
ought to be centered in organizations such as this that would 
give you an overall arching information base rather than just 
piecemealing it out into pieces that are disjointed. Does that 
have some sense to it?
    Dr. Fisher. I would certainly agree with that.
    Mr. Deal. Because that is one of the key ingredients that 
we sort of all agree to is information technology. OK. 
Obviously in whatever we set as goals, we have to balance the 
cost versus quality of care and the great irony as your study 
shows is that you don't reach the conclusions that you would 
normally expect that greater costs reach greater efficiencies. 
In fact, it may be exactly the opposite of that. Let us then 
try to take what GAO looked at in the private sector with 
regard to what they do, and I presume these are PPOs, these are 
managed care organizations, and so forth, is that right?
    Mr. Steinwald. Yes, a wide range of organizations ranging 
from traditional insurers to some government-sponsored 
programs.
    Mr. Deal. OK. But if we are going to begin with these 
accountable care organizations, them being the umbrella 
organization that sort of manages and has responsibility for 
containing cost and insuring quality of care, are some of the 
principles that Mr. Steinwald said that the private sector is 
doing applicable to them, and the ones that sort of jumped out 
at me was giving the enrollees some financial incentive to see 
physicians in particular tiers that meet certain criteria. Now 
I don't know how you do that, but is that something that could 
be translated into this sector, Dr. Fisher? I suppose I will 
ask you.
    Dr. Fisher. I believe it could. I would probably set it up 
if I were a health care czar so that you had several 
accountable care organizations within a community and patients 
would be given information about the quality and cost of care 
there which might influence both their part B premiums and 
might encourage them to choose the higher quality and lower 
cost systems.
    Mr. Deal. Incentivizing.
    Dr. Fisher. Incentivize.
    Mr. Deal. If it is going to affect their premiums, is it 
going to affect their premiums in the aggregate which is the 
way we compute premiums now or are we going to approach the 
concept of premium allocations based on the efficiencies within 
an area.
    Dr. Fisher. That is a question I probably can't answer. I 
can't think quickly enough to give you an intelligent answer.
    Mr. Deal. Mr. Steinwald.
    Mr. Steinwald. Well, the payers that we looked at were 
mostly tiering for co-payment purposes so the co-payment might 
be less when they go see a doctor that is gauged to be high on 
performance measures than if they saw other doctors.
    Mr. Deal. Could we make that work in a Medicare system?
    Mr. Steinwald. I think every idea ought to be on the table 
because the situation that you face is serious enough. It 
couldn't be done under current law but I think it could be 
considered. And let me add one thing. It is hard to find much 
good news in this discussion and from the previous panel as 
well, but one thing that Dr. Fisher pointed out that I think 
could be viewed that way is that quality and efficiency are not 
enemies. You can't have only one of them. His research and his 
organization has shown that very often good quality and 
efficient care go together. The question is how do we encourage 
more within our health care system.
    Mr. Deal. Let me take probably the most difficult of what 
the private sector does and ask if it could be applied to a 
reformed Medicare system and that was excluding inefficient 
physicians from the network. We have concentrated our concerns 
about doctors who are voluntarily leaving the system because 
the inadequacies and inequities of the current system put those 
pressures on the good doctors and many of them are the ones 
that are leaving. Can we make a system that basically puts the 
pressure in the opposite direction like the private sector does 
of saying that if you don't meet certain criteria you don't 
qualify to serve Medicare patients.
    Dr. Fisher. It seems to me there are two parts to that 
question. The technical part is that it is feasible to do it. 
With good measures it will be feasible to define those 
providers who could be limited and are restricted and not 
allowed to participate in the Medicare program. The second 
problem is a political problem and that would not be one that I 
could easily answer and that you would have to address.
    Mr. Deal. It also means that you got to make the Medicare 
program financially incentivized enough so that doctors want to 
stay in the system and it is something they want to participate 
in. Thank you, Mr. Chairman, for being lenient with me.
    Mr. Pallone. Thank you. Dr. Burgess.
    Mr. Burgess. Well, just very briefly, either Mr. Steinwald 
or Dr. Fisher, to carry Mr. Deal's logic a little bit further, 
is there a risk of driving out the good physicians if these 
types of principles are applied unevenly or in an non-even 
handed fashion where you only ended up with the poor 
performers?
    Mr. Steinwald. Well, you certainly want to have good, 
credible measures, and it is one thing to do a statistical 
analysis of the kind that we did, but if you were going to take 
that information and really apply it more stringently than the 
program currently does, I think you would want to supplement it 
with additional information at the individual physician level. 
So it is essential that the measures be good, credible, and 
fair.
    Mr. Burgess. Since I can't always count on the chairman 
giving me the extra minute that he gave Mr. Deal, let me go 
kind of quickly. Mr. Steinwald, you talked about insuring that 
the incentives applied to all providers. Were you speaking 
strictly of physician providers or were you talking about all 
parts of what should be an integrated Medicare system where 
hospitals, HMOs, part D pharmaceuticals would all be considered 
as part of that financial landscape?
    Mr. Steinwald. Our approach was different from the one that 
MedPAC adopted. What we were suggesting is that physicians be 
profiled but not just for services that they provide themselves 
but for a full range of services. Research generally has shown 
about 20 percent of spending is for physician services but they 
control something like 90 percent so it is their decisions to 
admit to the hospital and refer to other services accounts for 
that other spending.
    Mr. Burgess. Just briefly on the ACOs, Dr. Fisher, you said 
in some cases that may be a hospital in a medium size 
community. If you are going to use the ACO to help you with the 
technology platforms that are going to be available, how do you 
get around the star clause? We wrestled with that last time and 
never really got past go with that.
    Dr. Fisher. There are a number of serious barriers to 
moving forward with ACOs, among them the legal barriers to 
collaboration among hospitals and physicians. Those would have 
to be addressed and Gayle Lewinsky has written a nice piece in 
Health Affairs about some of the challenges around addressing 
gain sharing, and the importance of doing so in order to 
improve care collaboration and care coordination. There are 
other barriers as well but obviously some legal changes would 
have to take place if you were to have independent physicians 
collaborating with hospitals under the current legal model.
    Mr. Burgess. If that were the model in a medium sized 
community where I practiced for over 25 years was a community 
of 60,000 with an HCA hospital right in the middle of, so 
presumably that by default would be looked to as the ACO. How 
is the accountability then governed?
    Dr. Fisher. I think the challenges of defining the legal 
structures of the physician organization are substantial but 
there are models, physician hospital organization which emerged 
in the early 1990's and then quickly died as capitation was 
eliminated, independent practice association models where the 
physicians could----
    Mr. Burgess. And that was not without financial pain, let 
me just underscore.
    Dr. Fisher. I understand. But the notion of trying to 
create some form of physician group accountability and shared 
opportunity to gain----
    Mr. Burgess. And that is exactly the point. Does that 
accountability derive from the HCA hospital in the middle of 
the community?
    Dr. Fisher. There are models and some of them are discussed 
in our testimony and in the Health Affairs article, and I would 
be happy to provide those, where hospitals own physician 
groups, where physician groups----
    Mr. Burgess. I don't think you can do that in Texas, that 
we have a lot of corporate practice of medicine. But if the 
hospital is the notice of that accountability then the 
physicians surrounding the hospital while, yes, they make up 
the medical staff, and, yes, they are responsible for the bulk 
of the decisions about what medical services to utilize it is 
ultimately the hospital answerable to its owners and boards off 
site that is going to be the entity to which Medicare is 
responding for that accountability. That is, if a bonus is paid 
it is paid to the hospital, not necessarily to the physicians 
that surround the hospital if their network is so loose that 
there is not an identifiable physician's organization.
    Now if there is an identifiable physician's organization we 
also get into some difficulty with the anti-trust statutes as 
they exist today because as you know we are not allowed to talk 
to each other about what we would or wouldn't accept as fair 
and reasonable compensation for a medical service or hauled up 
before the FTC downtown, and while we will eventually get off 
it costs us $250,000 in legal fees and we are all scared to 
death of taking that on. Is that something that you are looking 
at with the development of the ACO model?
    Dr. Fisher. We are talking with a number of people about 
how to try to move it forward effectively, and there are lots 
of legal barriers, technical barriers and social and cultural 
barriers to moving it forward but our general sense is that 
among all of the strategies that are out there for improving 
both the quality and costs of care fostering better 
collaboration and coordination among physicians and between 
physicians and other providers within the community, not just 
hospitals but also nursing homes is an important one to 
consider.
    Mr. Pallone. Dr. Burgess, we are going to do a second 
round. We are going to come around again so one more time.
    Mr. Burgess. My minute over isn't up yet.
    Mr. Pallone. I know, but you will have another 5 minutes so 
let us move on. This will be the last round. We haven't asked 
you, Dr. Thames, too many questions so I want to ask you a 
question. You are aware CMS has embarked on a voluntary pay for 
performance system for physicians in Medicare, and this program 
asks all physicians to report on a number of measures intended 
to measure and improve quality. Of course, now we have the 
financial incentive to do so but this did exist, this system 
previously, and the results so far have been paltry due to lack 
of participation. That might change maybe with the financial 
incentive. But I wanted to ask from your perspective, are there 
certain modifications that AARP believe should be made to CMS' 
current pay for performance efforts with regard to how they are 
focused?
    Dr. Thames. Well, sir, we think that the measures that are 
going to be used ought to be vetted where particularly say 
vetted through the national quality forum because it not only 
has providers but it has purchasers and it has consumers so 
that the measures that you get are valid. Now we are going to 
have to see since it is a new program and I understand not 
starting very well now whether before the end of the year those 
incentives really get you the information that you need.
    Mr. Pallone. You want it changed and refocused, if you 
will, on these high cost, highly prevalent conditions for which 
you have the valid----
    Dr. Thames. Yes. We want it focused on those chronic 
diseases that cost the most money in order to get the 
information that is most valuable to us sooner.
    Mr. Pallone. OK. I was just going to ask him but I see you 
are kind of twitching there. Did you want to say something, Dr. 
Fisher?
    Dr. Fisher. I am nodding my head saying I agree.
    Mr. Pallone. All right. Thank you. That is all I have. Mr. 
Deal.
    Mr. Deal. Let me revisit one of the other things that, Dr. 
Fisher, I think your research indicates, and that is that just 
as nature abhors a vacuum in the medical field empty beds abhor 
a vacuum, new imaging equipment abhors a vacuum when it is not 
being used, and specialists abhor a vacuum when their services 
are not being called on, so your high cost is in part 
attributable to those areas that have more bed space in the 
hospitals, more specialists in the community, and I presume if 
we were to branch it on out into the imaging more high cost 
imaging equipment in the community. All of that leads to an 
escalation of cost, is that correct?
    Dr. Fisher. That is correct.
    Mr. Deal. OK. How do we get a handle on that part? I want 
to give you a specific example. My state has been a certificate 
of need state in Georgia. My legislature is in serious debate 
right now as to whether or not to repeal it in its entirety or 
at least partially, and I don't know how to predict what the 
outcome of that will be. In looking at the chart even though 
mine is a black and white chart, and the color coding I have a 
little bit of difficulty deciphering, I still think we are 
probably one of those high cost states even with out 
certificate of need law.
    Now we allowed the moratorium on specialty hospitals to 
expire last year. I was not one of those who favored allowing 
that to happen because I think we will see this vacuum that I 
just alluded to probably increase as more specialty hospitals 
come on line. Do you have any of you have any suggestions as to 
how should we approach that? Should we take a hands-off 
approach, which now appears to be pretty much what we are in 
the posture of doing, and as we see more states do like mine of 
taking a hands-off approach too, aren't we going to see an 
escalation of this phenomenon?
    Dr. Fisher. I believe you are. I think the challenge we 
face is that physician incomes and the incomes of providers 
within the current delivery system depend upon through put, 
depend upon staying busy, and as fees are cut whether it is in 
the private market or by Medicare the way to maintain your 
income is to increase the volume or adopt new practices such as 
a specialty on a hospital or an outpatient facility or an 
imaging device that the physician owns themselves. The key to 
the puzzle, I believe, is in fostering accountability for 
future costs. One of the advantages of a model that is either 
regional or ideally accountable so that the physicians have to 
stare at each other eyeball to eyeball when they are making 
their decisions the notion of an accountable care organization 
is that the best way with a shared savings model even under fee 
for service the most effective way to have your incomes be 
increased in the future is to reduce the recruitment of new 
physicians to avoid buying new technologies and perhaps to let 
physicians who are doing too much health services research to 
remain competent physicians to step down and stop practicing, 
as my colleagues have recommended to me.
    But the notion of professional birth control is a future 
strategy for physicians to be able to maintain their incomes or 
for hospitals to control their future growth of services is the 
way even for the high cost areas to gain from a shared savings 
model and slow the growth of total health care spending.
    Mr. Deal. My concern is how do we put the adequate 
mechanism in place to allow that to happen because just as Dr. 
Burgess is concerned about the physician who may be in effect 
trapped by the hospital, I can see a situation where you have 
competing factions within this ACO in which somebody who is 
being responsible is being penalized because one component 
within the ACO is not being responsible. What kind of 
discipline measure do you have other than the discipline that 
we have got the problem with now of the good actor suffering 
with the bad? How do you differentiate even with an ACO even 
though you break it down into smaller components? You still 
have that human nature at play. How would you address that?
    Dr. Fisher. Well, this is not a simple problem. We are in a 
complicated problem in the Medicare system right now and in 
health care in general in the United States. The strategy I 
think is clear of moving towards models of accountability for 
both quality and cost. A prospective payment system would be 
much more effective but it took us 5 years to design the DRG 
payment system and 6 years to do the RBRBS. The current 
examples from the physician group practice demonstration that 
was mentioned by Chairman Hackbarth this morning at least the 
preliminary data talking with many of those groups is that they 
look as though they are doing the things that you would hope 
they would do to improve the quality and the cost of care 
because the potential gains from shared savings at the large 
group are quite substantial when you have large enough groups, 
so it depends a little bit on how the incentives and how they 
play out, so I can't predict the future but those would be my 
thoughts.
    Mr. Deal. On a related subject, does gain sharing in which 
a hospital would allow a gain sharing arrangement with a doctor 
or a doctor's group, does it have any liability in terms of 
minimizing these creative of maybe extraneous service 
components?
    Dr. Fisher. I believe that well-designed gain sharing 
arrangements which could avoid the creation of a competing 
hospital, specialty hospital, and increase in local capacity 
could be very important.
    Mr. Deal. Mr. Chairman, I want to thank all of these 
gentlemen. They have been very helpful to us. Thank you.
    Mr. Pallone. And I also want to thank all of you. I thought 
this was very helpful today, and we appreciate your being here 
and sharing your thoughts with us. Thanks again. I would also 
remind members that you may submit additional questions for the 
record to be answered by the relevant witnesses so you may get 
additional questions, and those are submitted to the committee 
clerk within the next 10 days. And without objection, this 
meeting of the subcommittee is adjourned. Thank you.
    [Whereupon, at 12:45 p.m., the subcommittee was adjourned.]