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




                 MEDICARE PAYMENT ADVISORY COMMISSION'S
                          ANNUAL MARCH REPORT

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 1, 2007

                               __________

                           Serial No. 110-16

                               __________

         Printed for the use of the Committee on Ways and Means
















                     U.S. GOVERNMENT PRINTING OFFICE

40-305 PDF                 WASHINGTON DC:  2008
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office  Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800  Fax: (202) 512-2250 Mail Stop SSOP, 
Washington, DC 20402-0001













                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director
                  Brett Loper, Minority Staff Director

                                 ______

                         SUBCOMMITTEE ON HEALTH

                FORTNEY PETE STARK, California, Chairman

LLOYD DOGGETT, Texas                 DAVE CAMP, Michigan
MIKE THOMPSON, California            SAM JOHNSON, Texas
RAHM EMANUEL, Illinois               JIM RAMSTAD, Minnesota
XAVIER BECERRA, California           PHIL ENGLISH, Pennsylvania
EARL POMEROY, North Dakota           KENNY HULSHOF, Missouri
STEPHANIE TUBBS JONES, Ohio
RON KIND, Wisconsin

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




























                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 22, 2007, announcing the hearing............     2

                                WITNESS

Glenn M. Hackbarth, J.D., Chairman, Medicare Payment Advisory 
  Commission.....................................................     4

                       SUBMISSIONS FOR THE RECORD

Alliance for Quality Nursing Home Care, statement................    27
American Hospital Association, statement.........................    30
Mid-Florida Cardiology Specialists, Orlando, FL, statement.......    31
National Association for Home Care and Hospice, statement........    31
Yarwood, Bruce, statement........................................    34






















 
       MEDICARE PAYMENT ADVISORY COMMISSION'S ANNUAL MARCH REPORT

                              ----------                              


                        THURSDAY, MARCH 1, 2007

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

    The Subcommittee met, pursuant to notice, at 2:06 p.m., in 
room 1102, Longworth House Office Building, Hon. Fortney Pete 
Stark (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
February 22, 2007
HL-2

                 Chairman Stark Announces a Hearing on

                   MedPAC's Annual March Report with

                   MedPAC Chairman Glenn M. Hackbarth

    House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) 
announced today that the Subcommittee on Health will hold a hearing on 
the Medicare Payment Advisory Commission's (MedPAC) annual March report 
on Medicare payment policies with MedPAC Chairman Glenn M. Hackbarth. 
The hearing will take place at 2:00 p.m. on Thursday, March 1, 2007, in 
Room 1100, Longworth House Office Building.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the invited witness only. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    MedPAC advises Congress on Medicare payment policies. MedPAC is 
required by law to submit its annual advice and recommendations on 
Medicare payment policies by March 1, and an additional report on 
issues facing Medicare by June 15. In its reports to the Congress, 
MedPAC is required to review and make recommendations on payment 
policies for specific provider groups, including Medicare Advantage, 
hospitals, skilled nursing facilities, physicians, and other sectors, 
and to examine other issues regarding access, quality, and delivery of 
health care.
      
    In announcing the hearing, Chairman Stark said, ``Through its 
annual reports, MedPAC provides the careful analysis that Congress 
needs to make appropriate adjustments to Medicare payments. MedPAC's 
recommendations help Medicare remain a reliable partner to providers, 
while also assuring that beneficiaries and taxpayers are getting the 
best value for their money.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on MedPAC's March 2007 Report to Congress.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``110th Congress'' from the menu entitled, ``Committee Hearings'' 
(http://waysandmeans.house.gov/Hearings.asp?congress=18). Select the 
hearing for which you would like to submit, and click on the link 
entitled, ``Click here to provide a submission for the record.'' Once 
you have followed the online instructions, completing all informational 
forms and clicking ``submit'' on the final page, an email will be sent 
to the address which you supply confirming your interest in providing a 
submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Thursday, 
March 15, 2007. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman STARK. We will begin. We will welcome Glenn 
Hackbarth, the Chairman of the Medicare Payment Advisory 
Commission, known as MedPAC. Glenn, it is good to have you back 
with us, and we look forward to your analysis. I am sure we 
each look forward to some of your recommendations, and we 
appreciate the work that your staff and the commissioners do in 
advising us and how you remain as objective as you can in this 
area. We really do appreciate it.
    I am not going to say a lot. I am going to ask you to go 
through your recommendations and I am going to ask my 
colleagues to indulge me. We will have a vote, I think, around 
2:30, a couple of them. Five votes, okay, but I am going to 
suggest that Members, as Mr. Hackbarth goes through the 
recommendations--I will be happy to indulge them in making an 
inquiry as he goes along, but I really want to hold it to an 
inquiry, like 30 seconds for a technical question; no speeches 
about does red wine improve your health.
    Mr. THOMPSON. This is Congress.
    Chairman STARK. I know, all right. We will save the 
speeches, as we go through, almost like a walk-through. Glenn 
has suggested that he would accommodate us in that. Maybe that 
will help us as we move along.
    So, without further ado, I recognize Dave Camp for any 
comments he would like to make, and then we will look forward 
to Mr. Hackbarth's statement.
    Mr. CAMP. Well, thank you, Mr. Chairman. I know we have got 
a vote coming up, and in the interest of getting started, I 
will submit my statement for the record, but I do want to 
welcome Chairman Hackbarth. Thank you for joining us to discuss 
MedPAC's annual report. I also want to thank Mark Miller and 
the staff for their hard work on this report as well.
    We do rely on your payment recommendations for Medicare 
providers. Also we have seen recent and rapid growth in 
Medicare in past years. So, I look forward to hearing your 
analysis and want to thank you again for appearing before the 
Committee.
    Thank you, Mr. Chairman.
    Chairman STARK. Glenn, why don't you proceed any way you 
would like?

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

    Mr. HACKBARTH. Thank you, Chairman Stark and Mr. Camp, 
other Members of the Committee. It is a pleasure to be here to 
talk about our annual March report to Congress on Medicare.
    Before I start into the substance, let me just second what 
you said about the MedPAC staff. It is a terrific staff, and a 
real resource not just for me but for the Congress and more 
broadly. We are all very lucky.
    Before briefly reviewing the recommendations and findings, 
I would like to just quickly remind you about the commission 
and who sits on it. As you know, we have 17 members on the 
commission. Seven of the members are trained as clinicians, 
either physicians or nurses. We have eight members who have 
executive level or board experience in healthcare delivery 
organizations, five with executive level experience in 
healthcare purchasing organizations, and seven of us have high-
level Government experience, either in Congress or at support 
agencies or the executive branch. Some of us have more than one 
of these credentials.
    In short, we have a longstanding interest, each of us, in 
the Medicare Program, a stake in its success as well as 
considerable experience with it. The diversity of the 
commission is one of its strengths. It also presents a 
challenge, and that is to weave the various points of view and 
expertise into consensus recommendations.
    As Chairman, I strive very hard to do that, and believe 
that a consensus recommendation is much more useful to you, the 
Congress, than one that reflects a narrow majority. Of the 
recommendations in this year's March report, and there are nine 
of them, we had a total of 126 recorded votes by individual 
commissioners, only two of those were dissenting votes and one 
abstention. So, we have succeeded again this year to a very 
substantial degree in providing you with consensus 
recommendations from this diverse commission.
    Seven of the nine recommendations in our March report 
relate to payment updates. As you well know, that is one of our 
basic responsibilities under our governing statute. One of the 
recommendations pertains to payment, the Indirect Medical 
Education Payment to hospitals, and one pertains to collecting 
uncompensated care data which could guide reform of the 
Disproportionate Share Hospital (DSH) payment adjustment for 
hospitals.
    In addition, in our March report we review past 
recommendations from MedPAC on Medicare Advantage and Part D as 
well 
as present some new data on those aspects of the Medicare pro-
gram.
    Let me just talk for a minute about how we approach the 
task of recommending payment updates each year. In formulating 
those recommendations, we assess Medicare's payment adequacy 
for each of the respective provider groups, hospitals, 
physicians, dialysis facilities, post-acute providers and so 
on. We assess adequacy by reviewing all of the available data 
we can find on issues like access to care for Medicare 
beneficiaries, the quality of that care, changes in the volume 
of services provided, access to capital for the providers of 
the services and Medicare margins where those data are 
available.
    As required by our governing statute, we seek to recommend 
rates that are adequate for ``efficient providers of service.'' 
Consistent with that efficient provider requirement, we begin 
our analysis with an expectation that healthcare providers 
should improve productivity each year. Thus very often, 
although not always, our recommendations are cast in terms of 
increasing rates by the relevant measure of input price 
increases minus a productivity adjustment.
    Our seven update recommendations in this year's report are 
as follows. For physicians and dialysis facilities, our 
recommendation is the increase in market basket minus 
productivity adjustment. For post-acute care providers, 
specifically skilled nursing facilities, home health agencies 
and long-term care hospitals, we recommend no update in the 
rates. Then for inpatient rehab facilities, a one percent 
increase. Finally, for hospitals we recommend a full market 
basket increase in the rates, but also recommend that 
concurrently that we should move to implement a pay-for-
performance program for hospitals.
    Finally, with regard to the Indirect Medical Education 
adjustment, we recommend that that adjustment be reduced by 1 
percentage point, concurrent with implementation of a credible 
severity adjustment system in the Medicare hospital payment 
system.
    Then finally, the last recommendation is that the Centers 
for Medicare and Medicaid Services (CMS) collect uncompensated 
care data which might subsequently be used to guide reform of 
the disproportionate share of hospital payment adjustment.
    So, that is a very quick summary, Mr. Chairman. I would be 
happy to take your questions.
    [The prepared statement of Mr. Hackbarth follows:]

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

    Chairman Stark, Ranking Member Camp, distinguished Subcommittee 
members. I am Glenn Hackbarth, Chairman of the Medicare Payment 
Advisory Commission (MedPAC). I appreciate the opportunity to be here 
with you this afternoon to discuss MedPAC's March Report to the 
Congress and our recommendations on Medicare payment policy.
    The Commission has become increasingly concerned with the trend of 
higher Medicare spending without a commensurate increase in value to 
the program. (An increase in value would be, for example, beneficiaries 
receiving higher quality services with no increase in spending.) That 
trend, combined with the retirement of the baby boomers and Medicare's 
new prescription drug benefit, will, if unchecked, result in the 
Medicare program absorbing unprecedented shares of the GDP and of 
federal spending. Policymakers need to take steps now to slow growth in 
Medicare spending and encourage greater efficiency from health care 
providers, while assuring access and maintaining or improving quality.
    In our March report to the Congress, we review Medicare fee-for-
service payment systems for eight sectors: hospital inpatient, hospital 
outpatient, physician, outpatient dialysis, skilled nursing, home 
health, inpatient rehabilitation facilities (IRFs), and long-term care 
hospitals (LTCHs). The Commission recommends changes to payment and 
other policies designed to make payments more accurate and to improve 
the value received by beneficiaries and taxpayers for their 
expenditures on health care.
    Our March report also reviews recent findings and past 
recommendations on the Medicare Advantage (MA) plans beneficiaries can 
join in lieu of traditional fee-for-service Medicare, and the private 
plans offering the new prescription drug benefit. We express our 
support for the MA program, but also our concern that payments for 
private plans are higher than the amount traditional Medicare would 
have spent on the same beneficiaries. We also provide information on 
the enrollment, benefits and premiums of the plans offering the new 
prescription drug benefit, both the stand-alone prescription drug plans 
and the prescription drug plans affiliated with MA plans.
    Medicare should exert continued financial pressure on providers to 
control their costs, much as would happen in a competitive marketplace. 
We have found, for example, that hospitals under financial pressure 
tend to control cost growth better than those that have non-Medicare 
revenues that greatly exceed their costs. In all sectors, Medicare 
should also adjust payments for quality, paying more for high quality 
and less for poor quality. The Commission is striving to pursue 
innovative means to increase value in Medicare while maintaining 
financial pressure in all of its payment systems to restrain costs.
Context for Medicare Payment Policy
    Medicare was designed to help ensure access to medically necessary 
care for the aged and disabled. Many analysts give Medicare credit for 
improving the economic position of its beneficiaries. Today, however, 
Medicare and other purchasers of health care in our nation face 
enormous challenges for the future. One challenge relates to the wide 
variation in the quality and use of services within our health care 
system, with quality often bearing no relationship or even a negative 
relationship to spending. Analysts point to geographic variation in 
spending as evidence of inefficiency and waste. Although spending is 
rising it is not clear that beneficiaries are seeing commensurate 
increases in the quality of their care or their health. A second 
challenge is that, as is true for other purchasers of health care, 
Medicare's spending has been growing much faster than the economy. In 
Medicare, forces such as the broad use of newer medical technologies 
and enrollment growth will likely push future spending higher. Because 
of these forces, the Commission warns of a serious mismatch between the 
benefits and payments the program currently provides and the financial 
resources available for the future.
    Figure 1 shows the Medicare trustees view of the future of Medicare 
financing. Total expenditures for Medicare will take up an increasing 
share of the nation's GDP and quickly exceed dedicated financing. In 
their most recent report, the Medicare trustees project that, under 
intermediate assumptions, the hospital insurance (HI) trust fund (which 
finances Part A of Medicare) will be exhausted in 2018. Because 
Medicare cannot pay for Part A services once the HI trust fund is 
exhausted, either those expenditures will have to cease or some new 
source of financing will have to be found. For other parts of Medicare 
(Part B and Part D), general tax revenues and premiums automatically 
increase with expenditures. Those automatic increases will impose a 
significant financial liability on Medicare beneficiaries, who must pay 
premiums and cost sharing, and on taxpayers in general. For example, if 
income taxes remain at their historical average share of the economy, 
the Medicare trustees estimate that the program's share of personal and 
corporate income tax revenue would rise from 10 percent today to 24 
percent by 2030 and to 40 percent by 2080.
 Figure 1.  Medicare faces serious challenges with long-term financing
[GRAPHIC] [TIFF OMITTED] T0305A.001

  Note: GDP (gross domestic product), HI (Hospital Insurance). Tax on 
 benefits refers to income taxes that higher income individuals pay on 
   Social Security benefits that are designated for Medicare. State 
transfers (often called the Part D ``clawback'') refer to payments from 
    the states to Medicare for assuming primary responsibility for 
                      prescription drug spending.

 Source: 2006 annual report of the Boards of Trustees of the Medicare 
                              trust funds.

    Strategies to help ensure a more sustainable Medicare program 
include using payment policy to obtain greater value (that is, higher 
quality using fewer resources or restraining unnecessary spending), 
increasing the program's financing, and restructuring Medicare's 
benefits and supplemental coverage. Policymakers will need to use a 
combination of approaches to address Medicare's long-term 
sustainability. Since Medicare heavily influences many aspects of 
health care, policymakers should keep in mind that the program could 
play a leading role in initiating some types of change. At the same 
time, broad trends in the health care system affect the environment in 
which it operates, and Medicare needs to work in collaboration with 
private sector payers who face similar pressures from growth in health 
spending.
Assessing Payment Adequacy and Updating Payments in Fee-For-Service 
        Medicare
    The Commission recommends payment updates for 2008 and other policy 
changes for fee-for-service Medicare. An update is the amount (usually 
expressed as a percentage change) by which the base payment for all 
providers in a prospective payment system is changed. To help determine 
the appropriate level of aggregate funding for a given payment system, 
the Commission considers whether current Medicare payments are adequate 
by examining information about beneficiaries' access to care; changes 
in provider supply and capacity; volume and quality of care; providers' 
access to capital; and, where available, the relationship of Medicare 
payments to providers' costs. Ideally, Medicare's payments should not 
exceed the costs of the efficient providers. Efficient providers use 
fewer inputs to produce quality services. We then account for expected 
cost changes in the next payment year, such as those resulting from 
changes in input prices.
    Improvements in productivity reduce providers' costs in the coming 
year. Medicare's payment systems should encourage providers to reduce 
the quantity of inputs required to produce a unit of service by at 
least a modest amount each year while maintaining service quality. 
Thus, in most cases where payments are adequate, some amount 
representing productivity improvement should be subtracted from the 
initial update value, which is usually an estimate of the change in 
input prices. Consequently, we apply a policy goal for improvement in 
productivity (the ten year average of productivity gains in the general 
economy, 1.3 percent for 2008). This factor links Medicare's 
expectations for efficiency to the gains achieved by the firms and 
workers who pay taxes that fund Medicare. Competitive markets demand 
continual improvements in productivity from these workers and firms; as 
a prudent purchaser, Medicare should expect the same of health care 
providers.
Hospital Inpatient and Outpatient Services
    Most indicators of payment adequacy for hospitals are positive. 
More Medicare-participating hospitals have opened than closed in recent 
years. Inpatient and outpatient service volume continues to increase 
but at reduced rates of growth in 2005 and into 2006. The quality of 
care hospitals provide to Medicare beneficiaries is generally 
improving. Spending on hospital construction increased substantially in 
recent years while the median values of several financial indicators 
(such as measures of debt service coverage) reached their best value 
ever recorded in 2005.
    Hospitals with consistently lower Medicare margins (the excess of 
payments over costs divided by payments) over the last three years tend 
to have higher private payer payments. Those higher payments allow 
those hospitals to continue to have higher costs, and thus they are 
under less pressure to control costs. Table 1 shows that hospitals with 
consistently low Medicare margins over the last three years had 
revenues from non-Medicare payers that were 1.16 times the hospitals' 
costs for providing the services. Conversely, hospitals with 
consistently high Medicare margins had non-Medicare revenues just under 
their costs. Those hospitals were under pressure to control their costs 
and did so more successfully, with costs increasing at a lower rate and 
length of stay decreasing at a faster rate than hospitals with 
consistently low margins. The result was that in 2005 hospitals with 
low Medicare margins were less competitive with nearby hospitals and 
those with high Medicare margins more competitive. Excluding hospitals 
with consistently high standardized costs (about 17 percent of 
hospitals) would raise the industry-wide Medicare margin by 3 
percentage points.

   Table 1:  Hospitals with consistently low or high adjusted overall
             Medicare margins face different cost pressures
------------------------------------------------------------------------
                                          Hospitals' adjusted Medicare
                                                    margins:
              Indicators:              ---------------------------------
                                          Consistently     Consistently
                                              low              high
------------------------------------------------------------------------
Non-Medicare ratio of revenues to                 1.16             0.99
 costs (2005)
Average annual increase in inpatient              6.3%             5.2%
 cost per
  case (2002-2005)
Annual change in Medicare length of              -2.3%            -3.1%
 stay
  (1997-2005)
Standardized cost per case (2005):
    Subject hospital                            $6,203           $4,527
    Hospital within 15 miles                     5,742            5,103
------------------------------------------------------------------------
Note: Hospitals with consistently low or high margins had adjusted
  overall Medicare margins (margins calculated excluding indirect
  medical education and disproportionate share payments over empirically
  justified amounts) from 2002 to 2005 that were in the top or bottom
  third each year. Per cases costs are standardized for wages, case-mix,
  severity, outlier cases, and teaching intensity. Median values shown.
Source: MedPAC analysis of data from the Centers for Medicare and
  Medicaid Services.


    Lack of pressure to control costs because of high non-Medicare 
revenues may have also contributed to an increase in the growth in 
costs per unit of service in 2006, leading to the negative Medicare 
margin (-5.4 percent) we project in 2007.
    Balancing positive indicators and negative margins, the Commission 
recommends that the Congress update both inpatient and outpatient 
services by the hospital market basket, with this increase implemented 
concurrently with a quality incentive payment program. A pay for 
quality performance program would pay those hospitals with higher 
quality more than the basic payment rate. Although such a program would 
operate separately from the update, a hospital's quality performance 
would likely determine whether its net increase in payments in 2008 
would be above or below the market basket increase.
    Part of the funding for a quality incentive payment policy for all 
hospitals should come from reducing indirect medical education (IME) 
payments. Our analysis finds that more than half of the IME add-on 
payment is unrelated to the additional cost of care that results from 
the intensity of a hospital's teaching program (measured by the ratio 
of residents per bed). The Commission recommends that the Congress 
reduce the IME adjustment by 1 percentage point to 4.5 percent per 10 
percent increment in the resident-to-bed ratio, concurrent with 
implementation of a system for adjusting payments for severity of 
illness. Teaching hospitals as a group already have better financial 
performance than non-teaching hospitals under Medicare. They will also 
benefit from the severity adjustments to hospital payments that CMS is 
considering for proposed regulation and which are necessary to help 
improve the accuracy of the payment system.
    Our recommendations on the update and IME payments, along with the 
contemplated severity adjustments and a focused pay-for-performance 
initiative, should be viewed as a package that would improve the 
accuracy of Medicare's acute inpatient payments while creating an 
incentive for improving the quality of care.
    For several years, policymakers have been considering options for 
the federal government to help hospitals with their uncompensated care. 
We found little evidence of a relationship between the disproportionate 
share payments hospitals receive and the cost of caring for Medicare 
patients or the amount of uncompensated care they provide. If 
policymakers desire to provide a federal payment for uncompensated 
care, it should be distributed on the basis of each hospital's 
uncompensated care not as an add-on to a Medicare per case payment 
rate. To provide the necessary data, the Commission recommends that CMS 
improve its instrument for collecting information on uncompensated 
care. The Commission has previously suggested specific changes to help 
CMS revise its data collection instrument.
Physician Services
    Our analysis finds that most indicators of payment adequacy for 
physicians are stable. Beneficiary access to physicians is generally 
good with few statistically significant changes in recent years. We 
find that the number of physicians providing services to Medicare 
beneficiaries has more than kept pace with growth in the beneficiary 
population in recent years, and per beneficiary service volume grew at 
a rate of 5.5 percent in 2005. Our claims analysis shows small 
improvements in the quality of ambulatory care. The ratio of Medicare 
payment rates to private payment rates was essentially unchanged.
    In consideration of expected input costs for physician services and 
our payment adequacy analysis, the Commission recommends that the 
Congress update payments in 2008 for physician services by the 
projected change in input prices less the Commission's expectation for 
productivity growth. Physicians, like other providers and the taxpayer 
and firms that fund Mecicare, should be expected to increase their 
productivity each year.
    Although the recently passed Tax Relief and Health Care Act directs 
additional funds to physicians in 2008, the sustainable growth rate 
(SGR) formula continues to call for substantial negative updates 
through 2015. Though currently we do not see overall access problems, 
the Commission is concerned that consecutive annual cuts would threaten 
beneficiary access to physician services over time, particularly those 
provided by primary care physicians. As a mechanism for volume control, 
the current national SGR has several problems, which the Commission 
examines in its mandated report to the Congress: Assessing Alternatives 
to the Sustainable Growth Rate System.
    Fee-schedule mispricing may be one factor contributing to 
disparities in volume growth among services. The Secretary could play a 
lead role in identifying mispriced services by measuring volume growth 
for specific services, while taking into account changes in the number 
of physicians performing the service and other factors. CMS or the 
Relative Value Update Committee (RUC) could use the results from these 
analyses to flag services for closer examination of relative work 
values. Alternatively, the Secretary could automatically correct such 
mispriced services and the RUC would review such changes during its 
regular five-year review process.
Outpatient Dialysis Services
    Most of our indicators of payment adequacy for outpatient dialysis 
services are positive. Beneficiaries' access to dialysis care is 
generally good; the number of facilities increased, capacity increased, 
and there do not appear to be access problems. The growth in the number 
of dialysis treatments kept pace with patient growth. Quality of care 
is improving for some measures; more patients are receiving adequate 
dialysis and more have their anemia under control. Yet, one quality 
measure--patients' nutritional status--has not improved during the past 
five years. Recent evidence about trends in opening new dialysis 
facilities suggests that providers have sufficient access to capital. 
Between 2003 and 2005, the cost per treatment for composite rate 
services and dialysis drugs fell, largely driven by decreases in drug 
prices. We project that Medicare payments will cover the costs of 
providing outpatient dialysis services to beneficiaries in 2007 with a 
margin of 4.1 percent.
    Considering expected input costs and our payment adequacy analysis, 
the Commission recommends that the Congress update the composite rate 
for outpatient dialysis services in 2008 by the projected change in 
input prices less the Commission's expectation for productivity growth.
    The Commission remains concerned that Medicare continues to pay 
separately for drugs and laboratory tests that providers commonly 
furnish to dialysis patients. Medicare could better achieve its 
objectives of providing incentives for controlling costs and promoting 
access to quality services if all dialysis-related services, including 
drugs, were bundled under a single payment. In addition to broadening 
the payment bundle, the Secretary should continue efforts to improve 
dialysis quality. The Commission has recommended that Medicare base a 
portion of payments on the quality furnished by facilities and 
physicians who treat dialysis patients. The Secretary also needs to 
continue to develop quality measures and to monitor and improve 
dialysis care. Together, these steps should improve the efficiency of 
the payment system, better align incentives for providing cost-
effective care, and reward providers for furnishing high-quality care.
Post-Acute Care Providers
    The recuperation and rehabilitation services that post-acute care 
providers furnish are important to Medicare beneficiaries. In our March 
report the Commission analyzes payment adequacy for the four types of 
post-acute care (PAC) providers: skilled nursing facilities (SNFs), 
home health agencies (HHAs), inpatient rehabilitation facilities 
(IRFs), and long-term care hospitals (LTCHs).
    Prospective payment systems (PPSs) for each setting were developed 
and implemented separately. While the PPSs have changed the pattern of 
service use within each setting, we do not have adequate data to 
evaluate whether beneficiaries are being treated in the setting that 
provides the most value to them and the program. Three barriers 
undermine the program's ability to know if it is purchasing high-
quality care in the least costly PAC setting consistent with the care 
needs of the beneficiary:

      Case-mix measures often do not accurately track 
differences in the costs of care.
      There is no common instrument for patient assessment 
across PAC settings, which makes it difficult to compare costs, quality 
of care, and patient outcomes.
      There is a lack of evidence-based standards of care.

    Similar barriers limit our ability to compare differences in 
financial performance among the provider within each post-acute 
setting. We do not know if better financial performance results from 
higher efficiency or differences in the mix of patients chosen for 
treatment, but, as might be expected, we found that those facilities 
had consistently low unit costs, used fewer resources, and had higher 
occupancy.
Skilled Nursing Facility Services
    Our indicators of payment adequacy are generally positive for 
skilled nursing facilities (SNFs), but quality shows a decline. 
Beneficiaries have good access to SNF care, although those who need 
certain expensive services may experience delays in finding SNF care 
and end up staying longer in the hospital. The number of facilities 
providing SNF care to Medicare beneficiaries has remained almost 
constant. Spending and volume of days and stays increased in 2005, with 
cases continuing to shift to rehabilitation case mix groups, which 
receive higher payments. Two outcome measures for Medicare SNF patients 
show declining quality in recent years: average facility rates of 
avoidable rehospitalizations increased and discharges to the community 
declined. SNFs appear to have good access to capital. We project that 
Medicare payments will more than cover the costs of providing SNF care 
to Medicare beneficiaries in 2007 with margins for freestanding SNFs of 
around 11 percent.
    The data suggest that skilled nursing facilities should be able to 
accommodate cost increases in 2008. Therefore, the Commission 
recommends that the Congress should eliminate the update to payment 
rates for SNF services for fiscal year 2008.
    Some have argued that, although Medicare payments may be more than 
adequate, Medicaid payments to nursing facilities are inadequate and, 
therefore, Medicare should increase its payments to SNFs. The 
Commission rejects this argument for three reasons. First, Medicare 
payments should be set to cover the costs of an efficient provider, not 
to cover the additional costs of caring for non-Medicare patients. 
Second, increasing Medicare payments would target the wrong facilities; 
SNFs with more Medicare patients and fewer Medicaid patients would 
receive larger increases, and those with fewer Medicare patients and 
more Medicaid patients, would receive smaller increases. Third, if 
Medicare took this perspective, States might scale back their spending 
in response.
Home Health Services
    Our measures for home health are positive. Access to care continues 
to be satisfactory; more than 99 percent of beneficiaries live in an 
area served by a home health agency (HHA) in 2006. The number of 
beneficiaries using the benefit increased substantially, the number of 
HHAs participating in Medicare also continues to increase rapidly, but 
the growth in new HHAs varies among regions with two states accounting 
for two-thirds of the growth. For most measures quality has increased 
slightly, but the rate of hospital readmissions and of unplanned 
admissions to emergency rooms has not changed. Between 2004 and 2005 
average cost per episode grew at a rate of under one percent yielding a 
margin for freestanding agencies of over 16 percent. We project that 
Medicare payments will more than cover the costs of providing home 
health care to Medicare beneficiaries in 2007 and project margins 
remaining over 16 percent.
    The data on access, quality, volume, and financial performance 
suggest that agencies should be able to accommodate cost increases in 
2008, hence, the Commission recommends that the Congress should 
eliminate the update to payment rates for home health care services for 
calendar year 2008.
Inpatient Rehabilitation Facility Services
    Judging payment adequacy for inpatient rehabilitation facilities, 
which has been robust in recent years, is now more difficult because of 
a major change in Medicare policy. The change was CMS's modification of 
the 75 percent rule, which requires IRFs to have 75 percent of 
admissions with one or more of a specified list of conditions, and 2005 
was the first full year the new rule took effect. Medicare is the 
principal payer for IRF services, accounting for about 70 percent of 
discharges.
    The number of IRF cases increased rapidly after the introduction of 
the PPS but decreased as the 75 percent rule started to be phased in. 
Medicare spending followed the same trends, increasing rapidly from 
2002 to 2004 but decreasing from 2004 to 2005. Our other indicators 
show that the supply of IRFs was stable in 2005, the patients treated 
by IRFs in 2005 were more complex than those who shifted to alternative 
settings, and quality indicators for all IRF patients and for those who 
were discharged home improved slightly. Most IRFs are hospital-based 
units that access capital through their parent institutions, which have 
good access.
    As expected, in response to the modified 75 percent rule growth in 
costs per case accelerated between 2004 and 2005. This is because the 
volume of cases declined, and the patient mix became more complex as 
patients with lesser needs were treated in other settings. Aggregate 
Medicare margins for 2005 were high, around 13 percent. We estimate 
that margins in 2007 will be lower, largely because of the effect of 
the 75 percent rule. We estimate that the margin will range between 0.5 
and 5.5 percent, depending on the ability of the IRFs to control their 
costs to compensate for the drop in volume.
    In this time of transition from historically high margins and 
growth to lower margins and volume declines, the Commission recommends 
that the Congress update payment rates for IRFs for 2008 by 1 percent.
Long-Term Care Hospitals
    Our indicators of payment adequacy for long-term care hospitals 
(LTCHs) are largely positive. Medicare is the predominant payer for 
LTCH services and accounts for more than 70 percent of LTCH discharges. 
The number of LTCH providers increased between 2004 and 2005, with the 
number of LTCH hospitals within hospitals (HWHs) growing twice as fast 
as the number of freestanding facilities. The number of cases increased 
10 percent annually from 2003 to 2005 and Medicare spending grew at 
almost triple that pace during the same period. The rate of growth 
slowed in 2006. The evidence on quality is mixed. Risk-adjusted rates 
of death in the LTCH, death within 30 days of discharge, and one of 
four patient safety indicators (PSIs) showed improvement between 2004 
and 2005. But more patients were readmitted to acute care and three 
PSIs worsened. Rapid expansion of both for-profit and nonprofit LTCHs 
demonstrates good access to capital for this sector.
    LTCHs' Medicare margins for 2005 were high, almost 12 percent, but 
CMS has made a number of policy changes that will reduce payments. We 
estimate the margin in 2007 to be between 0.1 and 1.9 percent with the 
magnitude depending on how LTCH-HWHs respond to the 25 percent rule 
(this rule pays less for certain patients these facilities admit from 
their host hospitals).
    The Commission is concerned about growth in long-term care 
hospitals because we are not certain that this high-cost service is 
being used only on patients who need it. LTCHs have shown themselves to 
be very responsive to changes in payments and should be able to 
accommodate cost changes in 2008. These findings, as well as the other 
factors the Commission considers, which are almost all positive, lead 
us to recommend that the Secretary should eliminate the update to 
payment rates for LTCH services for 2008. The Commission recommends 
limiting growth in payments per case until the industry and CMS agree 
on patient and facility criteria to better define these facilities and 
the patients appropriate for them, as we previously have recommended.
Update on Medicare Private Plans
    In our March report the Commission presents recent findings on the 
Medicare Advantage (MA) plans beneficiaries can join in lieu of 
traditional fee-for-service Medicare, and the private plans offering 
the new prescription drug benefit.
    All beneficiaries will be able to join an MA plan in 2007, and 
enrollment in MA plans grew substantially in 2006 with the percentage 
of beneficiaries enrolled in MA plans reaching 17 percent, a level 
close to its all-time high. Almost half the growth in 2006 was in 
private fee-for-service MA plans. In addition, our analysis of MA 
payments shows that the benchmarks (which are the reference level for 
plan bids and the maximum program payment) now average 116 percent of 
traditional Medicare fee-for-service (FFS) levels, and payments average 
112 percent.
    The ratio of benchmarks and payments varies by plan type, although 
it exceeds the expected Medicare FFS expenditures for those 
beneficiaries for all types of plans. Table 2 shows that payments to 
HMOs are 110 percent of expected FFS costs. Payments for PFFS plans are 
119 percent of expected Medicare FFS costs as they are located in areas 
of the country where benchmarks are much greater than FFS. The amount 
returned to beneficiaries in the form of extra benefits and reduced 
premiums varies as well. For example, PFFS plans returned a much lower 
share of plan payments to beneficiaries in the form of extra benefits 
and reduced premiums than HMOs.

      Table 2:  Medicare Advantage benchmarks and payments in 2006 exceed expected Medicare fee-for-service
                                       expenditures for all types of plans
----------------------------------------------------------------------------------------------------------------
                                                          Enrollment as of      Benchmark
                      Type of plan                         July 2006 (in     relative to FFS   Payments relative
                                                             thousands)            cost           to FFS cost
----------------------------------------------------------------------------------------------------------------
HMO                                                                 5,195               115%               110%
Local PPO                                                             285              120                117
Regional PPO                                                           82              112                110
PFFS                                                                  774              122                119
----------------------------------------------------------------------------------------------------------------
Note: FFS (fee-for-service), PPO (preferred provider organization), PFFS (private fee-for-service). Payments
  relative to expected FFS costs for the beneficiaries enrolled in Medicare Advantage plans.
Source: MedPAC analysis of data from the Centers for Medicare & Medicaid Services on plan bids, enrollment, and
  benchmarks.


    The Commission has always supported a private plan option in 
Medicare, and has recommended a policy of financial neutrality between 
private plans and traditional Medicare fee-for-service. Financial 
neutrality includes setting payment benchmarks at 100 percent of fee-
for-service costs and removing duplicative payments for indirect 
medical education. In addition to financial neutrality between MA and 
FFS, the Commission has also recommended neutrality between types of MA 
plans, including eliminating the stabilization fund for PPO plans and 
making bidding rules consistent across plan types. Further, the 
Commission has recommended a pay for quality performance program for MA 
plans, and calculating clinical measures for the FFS program that would 
permit CMS to compare quality in the FFS program with that in MA plans.
    The report also provides information on the enrollment, benefits, 
and premiums of the plans offering the new prescription drug benefit, 
both the stand-alone prescription drug plans and the prescription drug 
plans affiliated with Medicare Advantage plans. Our analysis of Part D 
plan offerings for 2007 shows that about 30 percent more plans entered 
the market for 2007 than in 2006 and that the typical beneficiary has a 
choice of over 50 stand-alone drug plans. More plans are including 
coverage in the gap for generic drugs. (The gap is that part of drug 
spending where the basic benefit provides no coverage.) Looking at 
average premiums unweighted by plan enrollment, those for basic plans 
are lower in 2007 than in 2006, and those for plans with enhanced 
coverage are higher
    Plans bid to provide Part D coverage, and current law calls for 
weighting Part D plan bids for 2007 with plans' 2006 enrollment when 
calculating the national average bid (called enrollment weighting). 
Because enrollees tended to choose lower premium plans, enrollment 
weighting would have led to a lower government subsidy, which would 
mean lower Medicare payments to plans and higher enrollee premiums. 
Similarly, the law also calls for enrollment weighting in the formula 
for calculating each region's low-income premium subsidy amount for 
2007. CMS chose not to fully enrollment weight bids in either case. 
This action means that enrollees will pay lower premiums and more low-
income enrollees will be able to remain in their current plan. However, 
it also does not allow the full benefits of competition to be realized 
and thus, the cost to Medicare will increase.
    CMS is using its general demonstration authority to transition to 
enrollment weighting over time. The Commission is concerned that CMS is 
using its demonstration authority to provide higher payments rather 
than demonstrate policy options. The Commission has previously 
recommended that the Secretary should use his demonstration authority 
to test innovations in the delivery and quality of healthcare, not as a 
mechanism to increase payments. The Commission has also previously 
recommended that the Secretary have a process for timely delivery of 
Part D data to Congressional support agencies. CMS has proposed a 
regulation that supports the intent of that recommendation. MedPAC 
supports that proposed regulation and urges CMS to make it final.

                                 

    Chairman STARK. Okay. This one is on. Dave, do you want to 
start out here? I can come back to you.
    Mr. CAMP. I noticed that you--first of all, thank you for 
your testimony. I noticed--obviously I just want to talk about 
Medicare Advantage a little bit.
    You note that the plans are paid 12 percent more than the 
traditional fee-for-service. Did that analysis take into 
account the additional services that Medicare Advantage plans 
may provide to beneficiaries?
    Mr. HACKBARTH. The 12 percent is the amount paid on behalf 
of enrollees in the various types of private plans. So, it is a 
total of all of the payments going on behalf of those 
beneficiaries. So, it includes the additional benefits provided 
by some plans to beneficiaries.
    Mr. CAMP. Yes, but the value of those plans--obviously, the 
payment to the Advantage Plan covers all those plans. My 
question is, did that amount take into account the value of 
those plans, which I am not sure I heard you address.
    Mr. HACKBARTH. Yes. Well, let me approach it from a little 
bit different perspective and see if we can come together. As 
you know, there are various types of private plans 
participating in Medicare Advantage. There are Health 
Maintenance Organizations (HMOs), local preferred provider 
organization (PPOs), regional PPOs and private fee-for-service. 
Those plans are located in different parts of the country. So 
the amount that they are paid varies according to where they 
are located.
    Of those types of plans there is only one of them, the 
HMOs, where the amount going to the--the plans bid for Medicare 
part A and B services--is less than it costs traditional 
Medicare to provide the same service, but when you add the 
amount paid to those plans, it is passed on to beneficiaries, 
and added benefits reduce premiums. The combined total takes 
the HMO payments above the traditional fee-for-service expense.
    For all the other plan types, local PPOs, regional PPOs, 
private fee-for-service, the bids of those plans on Part A and 
B Medicare are higher than it costs traditional Medicare to 
provide the same services.
    Mr. CAMP. Yes, but what I think that I hear you saying is 
that that finding did not take into account the value of the 
additional services outside of traditional fee-for-service 
Medicare, nor does it take into account the value of a lower 
copayment and deductible to a beneficiary. Am I accurate in 
making that statement?
    Mr. HACKBARTH. Well, not exactly. The amount we are paying 
on behalf of each enrollee exceeds the amount that Medicare 
would spend on behalf of the same people. Now, in fact, the 
private plan enrollees often get additional benefits or lower 
premiums as a result of that additional payment. So, that is 
unquestionably real value and benefit to many of your 
constituents.
    The evidence from the bidding process suggests that those 
plans are not delivering even the Medicare A and B services 
more efficiently. So, we are using an inefficient mechanism to 
provide additional benefits to beneficiaries.
    Chairman STARK. Would the gentleman yield?
    Mr. CAMP. Yes, I would be happy to.
    Chairman STARK. Glenn, let me try it this way. Let us just 
take Plan A and let us say that fee-for-service Medicare in 
that community would be $6,000. What you are suggesting is that 
we are paying $6,720 on average to that plan, so we are paying 
$720 more than what we would normally pay for A and B services.
    Mr. HACKBARTH. Right.
    Chairman STARK. I think where David and I are curious to go 
is would the $720 extra, would that be eaten up, if you will, 
by eyeglasses, hearing aides, reduced monthly premiums, et 
cetera, on average? In other words, for the extra 12 percent, 
are the beneficiaries getting that much extra value?
    Mr. HACKBARTH. We don't know what the plan's cost structure 
is for providing the eyeglasses and the other things that you 
mentioned. So, for that $720 the beneficiary is getting 
additional benefits.
    Chairman STARK, but you don't know what they are worth?
    Mr. HACKBARTH. Right. I don't know what they are worth. The 
second point that is critical is that if we want to pay more 
through traditional Medicare, you could also buy additional 
benefits for beneficiaries, and in many cases at a 
significantly lower cost than it costs the private plans to do 
the same.
    Chairman STARK. So, if the policy goal is more benefits or 
more support to lower income patients, those are reasonable 
policy goals, but let us use the most efficient vehicle, which 
often will be traditional fee-for-service Medicare not the 
private plan.
    Mr. CAMP. Well, thank you. What we are trying to get at is 
comparing values, and what is interesting is HMO plans, for 
example, which have the highest enrollment, did 3 percent less 
than traditional Medicare, but we are trying to compare the 
value of the plan that recipients receive.
    Obviously in Medicare Advantage they receive a little bit 
more, but is it enough to make the extra payment valuable? We 
are just trying to determine that, and so the conclusion that 
Medicare Advantage plans are paid more I think we all accept 
and understand and agree to, but the question is, is it a wise 
use of taxpayer dollars to pay those plans more to go into 
these areas that--to have lower deductibles, to have these 
extra benefits? That is the bottom line we are trying to get 
to.
    Mr. HACKBARTH. Well, I think that the question about 
whether we are getting good value is an important question to 
ask. The way the current payment mechanism works, because the 
payment rates are generous and the private plans are able to 
provide additional benefits, lower premiums for that, we are 
basically sucking more and more Medicare enrollees into private 
plans that cost more than traditional Medicare to provide the 
part A and B benefit package.
    Mr. CAMP. Except that doesn't explain the HMO plans.
    Mr. HACKBARTH. The HMO plans, of the types, the HMO plans 
are the only type that, on average, the bid for Part A and B is 
less than what it costs traditional Medicare to provide the 
same package. For all the other plan types the average bid is 
higher than traditional Medicare.
    Mr. CAMP. Thank you. I see my time has expired. Thank you, 
Mr. Hackbarth.
    Chairman STARK. Yielding to Mr. Thompson.
    Mr. THOMPSON. Thank you, Mr. Chairman. Could you just tell 
me, I am wondering if you did any analysis on the issue of 
private pay margins in hospitals, urban versus rural? I know 
you talked about how the Medicare margins of rural and urban 
hospitals compare. I am talking about just the private 
component. Did you do anything with that? How do they compare?
    Mr. HACKBARTH. Well, as you know, Mr. Thompson, we do focus 
on the Medicare margins of hospitals principally, not the 
private margins. We do know that the total margins, which is a 
combination of Medicare and of private, for rural hospitals 
tend to be higher on average than for urban hospitals.
    Mr. THOMPSON, but you didn't break out the specific 
categories?
    Mr. HACKBARTH. Well, I can infer. Right now, the average 
Medicare margin of rural hospitals and urban hospitals is very 
close. Rurals are actually somewhat higher at this point. Let 
us say they are even, so if their total margins are higher, the 
private margins therefore must be higher.
    Mr. THOMPSON, but you didn't separate them out? You 
didn't----
    Mr. HACKBARTH. No.
    Mr. THOMPSON. Okay. I just wanted to know that. On the 
critical access hospitals, some of the problems that we are 
facing, especially out in California where, like every place 
else, hospitals are getting old and they are trying to build 
new hospitals, but in California we have the seismic hurdle 
that we are trying to clear, and it is pretty significant. I 
don't know if you know the numbers, but it costs more to 
seismically retrofit the hospitals in California than the 
equity in all the hospitals in California. Some of these guys 
are trying to consolidate, and some are trying to build new 
maybe five miles up the road from the old, and they can't get 
any guarantee from CMS that they can stay a critical access 
hospital. Have you taken any position on this?
    Mr. HACKBARTH. We have not. We have discussed the issue.
    Mr. THOMPSON. Would you, please?
    Mr. HACKBARTH. Well, I come here to represent the 
commission and there is no formal commission position on that 
issue. We did talk about recommending that CMS have the ability 
to allow mergers without losing designation as critical access.
    Mr. THOMPSON. I didn't hear the last part of your 
statement.
    Mr. HACKBARTH. I am sorry. We did talk about recommending 
to CMS that they allow mergers of critical access hospitals 
without the hospitals losing their designation, but we did not 
make a formal recommendation on it.
    Mr. THOMPSON. When you say you talked about, you talked 
about it in the positive?
    Mr. HACKBARTH. Generally speaking, yes. As with almost 
everything we talk about, there are pros and cons, but in 
general the feeling was that it could be positive. The other 
part of the discussion was that at that point in time at least 
we did not have an indication that there was a widespread 
interest in doing such mergers. So, we could take a look at it.
    Mr. THOMPSON. There is a pretty widespread interest--and I 
can't speak for everyone here who represents rural areas, but I 
know that in my area there is. I am sure that the seismic issue 
probably pushes it a little bit, but this is really important 
for a lot of folks, and it is going to mean whether or not some 
of these hospitals are able to rebuild or not.
    I would appreciate any work you can do on that.
    On the Geographic Practice Cost Indices (GPCI) issue, does 
your report or the Surgeon General's Report (SGR) do any work 
on some of the things that you have talked about before? I know 
in your 2005 report you made some findings that it was time to 
revisit the boundaries of payment localities. Localities likely 
do not correspond to market boundaries, and you said that 
Medicare is probably underpaying in some geographic areas 
because of this. Probably most of us here can point to examples 
in our own districts where this is the case. I am wondering if 
your report or the SGR report dealt with this and if not when 
are you going to complete your work and will you be making 
recommendations?
    Mr. HACKBARTH. Yes, we have talked at some length about 
this issue with specific regard to some areas in California 
where there seem to be particularly acute issues with the 
boundaries.
    I would make a couple points. First of all, this sort of 
geographic adjustment to reflect underlying difference in costs 
is pervasive in the Medicare Program. The purpose of doing it, 
of course, is to try to match payments with the cost of doing 
business in particular areas.
    It is not an easy thing to do. Drawing these lines almost 
inevitably leads to people feeling unhappy about where the line 
is; they are on the wrong side.
    Mr. THOMPSON. I don't think anybody is suggesting it is 
easy, but in a lot of areas it is just patently unfair and it 
is hurting in the delivery of healthcare and we need to try to 
figure this out.
    Mr. HACKBARTH. So, with specific regard to California, we 
think that there are some places in California where the 
problems are particularly severe and our advice to CMS has been 
to look at how those boundaries can be redrawn.
    Mr. THOMPSON. With all due respect, and my time has run 
out. I ask to be indulgent for a second. We have been talking 
about this forever. Ever since I have been here we have been 
talking about this and you guys have told us that you are going 
to make recommendations, and I would just like to know when the 
recommendation will be forthcoming. Thank you.
    Mr. HACKBARTH. May I answer the question? What I was 
describing is our view of the issue, Mr. Thompson, and that is 
that CMS ought to look at redrawing. We do agree with CMS that 
redrawing of the boundaries ought to be budget neutral within 
the State. In addition to that, as CMS reviews this sort of 
line drawing, they ought to be willing to respect the wishes of 
States where there has been an agreement to have a single area 
in the whole State. So, those are our thoughts on the issue.
    Chairman STARK. MR. Ramstad.
    Mr. RAMSTAD. Thank you, Mr. Chairman. Chairman Hackbarth, 
good to see you again. I appreciate your testimony. I certainly 
agree that we need a thorough analysis of Medicare Advantage 
payments, and I certainly also appreciate MedPAC's 
recommendations, but I have this distinct feeling of deja vu.
    I remember 1997 when we enacted the Balanced Budget Act 
(P.L. 105-33) and made significant changes to Medicare Managed 
Care, and certainly these changes did achieve some savings, but 
they also caused many private plans to desert the market 
entirely. Of course this diminished the number of overall 
choices for Medicare beneficiaries many places, including my 
home State of Minnesota.
    So, then we spent the next few years trying to undo some of 
those reforms. Today in my hometown of Minnetonka, Minnesota, 
we have 42 Medicare Advantage plans available. Six of the 42 
plans have $0 premiums and 11 have monthly premiums less that 
$30. Nearly half allow a beneficiary to see any willing 
physician. Thirty plans offer vision--eye benefits. Eleven 
offer dental benefits and 35 offer physical exams. In the 
aggregate, 35 percent of Medicare beneficiaries enrolled in 
Medicare Advantage plan in my district, which by the way is the 
second lowest percentage only to my distinguished Chairman, Mr. 
Stark, who has the highest percent on the Subcommittee.
    Anyway, in cataloguing these virtues, reading the litany of 
the result of these reforms really, my concern is--and I think 
the key question we have to ask, if we limit payments to 
Medicare Advantage plans, won't these seniors in Minnetonka, 
Minnesota be deprived of these benefits? That is what the 
seniors are asking me, and that is their big concern, 
understandably so.
    Mr. HACKBARTH. I certainly understand their concern. Let me 
sort of go back to square one for a second. MedPAC, over a 
period of many years, has repeatedly expressed its support for 
giving Medicare beneficiaries the option of enrolling in 
private health plans. That is something that we believe very 
strongly in.
    Chairman Stark will remember that when I was deputy 
administrator of the Health Care Financing Administration 
(HCFA) in the Reagan Administration too many years ago, that 
this was an issue that we felt very strongly about, worked with 
Congress to enact legislation at that point to allow HMOs to 
participate in Medicare. I was Mr. Private-Health-Plan-Option 
within the CMS, then HCFA, at that point in time. In addition, 
in my own career, I was CEO of Harvard Vanguard Medical 
Associates, a very large, multi-specialty, practice that is 
overwhelmingly prepaid group practice.
    I believe, and I have worked in the field, and I think this 
is critically important for Medicare beneficiaries. On the 
other hand, Medicare has severe long-term financing issues. We 
want private health plans in Medicare, the private health plans 
that will help deal with the long-term challenges facing the 
programs, not plans that will help drive up the cost still 
further and create impossible choices for this Committee in the 
future.
    Our concern about the current structure, the Medicare 
Advantage program, is that through these overly generous 
payment rates which are translated for beneficiaries into very 
attractive with added benefits, and lower premiums, and free 
choice of physician, we are going to be sucking millions of 
additional beneficiaries into private health plans that are 
demonstrably less efficient than traditional Medicare.
    Once we get millions, and millions and millions of people 
in those plans, changing course on this policy is going to 
become impossible. So, we see a very clear and imminent risk 
from this overpayment that is going to put the Committee, the 
Congress and the country on hold in an untenable position.
    Private plans that are more efficient? Absolutely, I am all 
in favor. Private plans that are going to drive up Medicare 
costs are a mistake for the program.
    Mr. RAMSTAD. Well, let me just--I see that time is waning 
both for our floor vote and here. Let me just ask a final 
question very directly. It should be a pretty simple answer and 
it concerns pay for performance. I think you are an advocate, 
as I have been for a long time, of pay for performance if it is 
done right. It seems to me that if we want to effectively 
implement MedPAC's pay-for-performance proposal that Congress 
needs to accompany that with a comprehensive information 
technology (IT) bill. Do you agree?
    Mr. HACKBARTH. I certainly agree that clinical IT is very, 
very important for the advancement of a broad health policy 
agenda, including pay for performance.
    I mention my experience with Harvard Vanguard. Harvard 
Vanguard has had a computerized medical record since 1974. It 
is one of the leaders in the field. I have seen the benefits of 
computerized medical records firsthand. So, yes, we need to 
build that infrastructure.
    Mr. RAMSTAD. Thank you, Mr. Chairman. Dr. Hackbarth, thank 
you.
    Chairman STARK. Thanks very much. Ms. Tubs-Jones.
    Ms. TUBBS JONES. Mr. Chairman, I was getting ready to say 
if we are getting ready to recess I want to say hi, and welcome 
and I will see you next time, but since we are not, let me real 
quick--maybe somebody else will get a chance to ask questions 
before votes as well, Mr. Kind over here. I will only take two-
and-a-half minutes, Mr. Kind.
    I represent the city of Cleveland, great hospital systems. 
Can you tell me what you think the impact of you imposing 
controlling costs will have on the ability of urban hospitals 
who tend to have larger healthcare costs or delivery costs or 
have on their ability to deliver service?
    Mr. HACKBARTH. Well, our goal in making recommendations 
about the hospital payment system is to ensure that medicare 
pays adequately for the cost of the efficient provider of those 
services. There are two aspects to that, one is the level of 
the payment and the other is how it is adjusted for different 
types of patients. So we spend a lot of efforts trying to make 
our payment rates fair to all providers, both urban and rural.
    Ms. TUBBS JONES. Can I stop you just for 1 minute and ask 
you what a ``different type of patient'' is? What is that?
    Mr. HACKBARTH. Different diagnoses, for example a heart 
patient as opposed to a patient with knee surgery.
    Ms. TUBBS JONES. Just so the record is clear, we are not 
talking about the type of patient, we are talking about the 
type of service----
    Mr. HACKBARTH. The diagnosis, the clinical needs of the 
patient.
    Ms. TUBBS JONES. Okay.
    Mr. HACKBARTH. So we do think our recommendations are 
adequate to finance the Medicare operations of efficiently run 
urban and rural hospitals.
    Ms. TUBBS JONES. Is there a differentiation between an 
urban hospital and a rural hospital in terms of cost?
    Mr. HACKBARTH. The system uses a wage index to adjust for 
differences in the cost of hiring people in urban areas versus 
rural areas or among different types of urban areas. So, the 
system is fairly complex in making adjustments for those costs.
    Ms. TUBBS JONES. So, the fact, for example, that diabetes 
or high blood pressure or other diseases such as that 
predominate in many urban areas and many minority areas, is 
that factored into your decisionmaking with regard to cost?
    Mr. HACKBARTH. Well, we pay on a per case basis. If 
diabetes, for example, is more common and there are more 
hospital admissions unfortunately for diabetes, then the 
hospital gets paid for each of those cases. So, if the 
prevalence of the disease is higher in a particular community 
there will be a higher volume of patients and a higher volume 
of payments to the hospital.
    Ms. TUBBS JONES. I could ask you a thousand more questions, 
but in the interest of making sure that my colleague, Mr. Kind 
has an opportunity to ask questions before we break, I am going 
to end with that.
    I may submit some questions in writing. My greatest concern 
is that we deliver quality healthcare, my greatest concern.
    Chairman STARK. Mr. Kind, would you like to take some time?
    Mr. KIND. Yes, thank you Mr. Chairman. I will try to get 
right to the point. Thank you, Chairman Hackbarth, for your 
testimony here today. We appreciate the work you put in.
    I come from a district not unlike Mr. Ramstad's, western 
Wisconsin, and we, for a very long time, have been dealing with 
some of the regional reimbursement disparities. I am sure you 
are familiar with the Weinberg study or the Dartmouth Atlas 
study highlighting this issue.
    Getting the MedPAC recommendations on pay for performance, 
do you think that is one way of being able to deal with these 
regional disparities that exist today?
    Mr. HACKBARTH. Perhaps indirectly. As you know, some of the 
areas that have low cost on a per-beneficiary basis actually 
have higher quality on average than the high-cost areas in the 
country.
    Mr. KIND. That is right.
    Mr. HACKBARTH. So, to the extent that we are adjusting 
payments for performance, there will be rewards for those 
States that are low cost and high quality which don't exist in 
the current system.
    Mr. KIND. I am new to the Committee, and obviously we will 
be getting into this in greater detail, but that always has 
been a puzzlement for many of my constituents back home, the 
fact that we are one of the lower reimbursed areas, yet still 
consistently one of the highest quality as far as performance 
outcome is concerned. I also agree with--I think it was Mr. 
Ramstad that raised the issue with health information 
technology (HIT) and the importance of trying to get to that 
promised land as soon as possible.
    I haven't had a chance to obviously review MedPAC's 
recommendations, but are you making any specific 
recommendations to incentivize getting HIT nationwide that we 
should be looking at?
    Mr. HACKBARTH. Briefly, our general view of it is that the 
best way to encourage clinical information technology is to 
reward performance, in particular reward high quality of care. 
There is lots of capital in the U.S. healthcare system. There 
is lots of investment going on every day, in fact in the 
hospital world record-breaking investment in new facilities and 
upgrades and the like.
    So, there is lots of money around. The problem is, right 
now, there is not a return on investment because we don't 
reward higher quality. So if you are a hospital executive and 
you look into invest money, you put it into things like 
scanners that have a rate of return. Higher quality doesn't 
have a rate of return in today's healthcare system.
    If you pay more for quality, you will get more----
    Mr. KIND. Let me ask you, there are really two approaches. 
We could either offer a bonus payment for those that get there, 
make the investment and do it, or threaten payment 
reimbursement if they don't do it.
    Mr. HACKBARTH. Yes. The approach that we caution against is 
to say, well, we will give you money to buy computer systems 
and not link that payment to results. It is easy to go out and 
buy a computer system and have boxes in offices. What we want 
is for them to use it to improve care. So, pay for the outcome, 
and that will provide an incentive to invest in the tools, 
don't just pay for the tools and leave the outcomes----
    Mr. KIND. Let me ask you real quick in regards to the 
recommendation on home health services, MedPAC is recommending 
eliminating the update to the payment rates. It seems to me 
that this should be the direction we should be advocating, more 
home health services. It is better for the patient and I think 
ultimately better for the taxpayer too. A lot of the home 
health agencies that are around my neck of the woods have been 
experiencing some pretty tough times. So, I am concerned in 
regards to the rate. I am wondering if you could offer a brief 
explanation of why you are recommending this.
    Mr. HACKBARTH. Yes. The brief explanation is that there is 
plenty of money in the home health system right now. On average 
the margin, Medicare margin for home health is about 16 
percent. For rural providers, as I recall, it is about 13 
percent. It is a few points lower than the average but still 
very healthy. So we don't think the problem in home health 
right now is a lack of money.
    We do think that there are some issues in the case mix 
adjustment system and whether we pay adequately for all types 
of patients. So we have made some recommendations on improving 
that case mix adjustment system. There is plenty of money in 
the bank.
    Mr. KIND. Well, I have a similar concern in regards to the 
recommendation on skilled nursing facilities, nursing homes 
back home. Again, I have heard a lot from them throughout the 
years in regard to how tight their budget is, and while 
Medicare reimbursement may be their one shining star in the 
revenue portfolio, they are telling me that with insufficient 
Medicaid payments, which is the bulk of their reimbursement, 
that they are just barely staying even. So, if they see a hit 
on Medicare reimbursement, that is going to put them in even a 
tougher spot.
    Let me ask, in the report do you take into consideration 
Medicaid reimbursement?
    Mr. HACKBARTH. We do not. The reason for that--first of 
all, the Medicare margin for skilled nursing facilities is also 
quite healthy. We do not take into account Medicaid because we 
think it would be a very inefficient way to deal with the 
Medicaid payment problem if there is one.
    Just think about this for a second. If the problem is 
Medicaid patients, the skilled nursing facilities with the most 
problems are the ones that have the most Medicaid patients and 
the fewest Medicare patients. So, if we increased Medicare 
payments for those institutions with a very high Medicaid 
proportion, they are not going to get a lot of assistance. The 
skilled nursing facilities that will be helped are the ones 
that already have a high Medicare share relative to Medicaid.
    So, if you pump up Medicare payments, it is not going to go 
to institutions with a heavy Medicaid burden. So, it is 
misdirected and it is just not an effective way to deal with 
the Medicaid payment problem.
    Mr. KIND. Thank you again. Thank you, Mr. Chairman.
    Chairman STARK. You are welcome. Glenn, I am going to ask--
I know this is going to send Mark into a tailspin, but if we 
could keep the record open, I think we will conclude the 
hearing. We have got 45 minutes or more of voting.
    I know it will only take Mark that long to answer all the 
letters that we will submit to you to add to the record. Thank 
you, and as I said, I know we have got a lot more questions, 
but I don't think it is quite fair to keep all of you guys 
hanging around now. We will revisit this again.
    Thanks very much for your help.
    Mr. HACKBARTH. Okay. Thank you.
    Chairman STARK. Bye-bye.
    [Whereupon, at 2:46 p.m., the hearing was adjourned.]
    [Questions submitted by the Members to the Witness follow:]
           Questions Submitted by Mr. Stark to Mr. Hackbarth
    Question: Private Fee for Service. Private Fee for Service appears, 
based on your data, to be the most overpaid of all the Medicare 
Advantage plans, with payments to private fee-for-service at 119 
percent of what we pay in fee-for-service Medicare. What is the range 
of overpayments to private fee-for-service plans? Can you tell us what 
a beneficiary gets from joining a private fee-for-service plan? What 
care coordination services do they typically provide? How are they 
different from fee-for-service Medicare? Are there other additional 
benefits that a beneficiary receives from a private fee-for-service 
plan?

    Answer: Our data do indicate that private fee-for-services (PFFS) 
plans receive program payments that are 119 percent of what Medicare 
Program expenditures would have been for the enrollees of these plans 
if they had been in traditional fee-for-service (FFS) Medicare. The 119 
percent figure is weighted by actual enrollment in PFFS plans as of 
July 2006. That is, the 119 percent figure is higher than for other 
plan types, such as HMOs, because PFFS plans draw their enrollment from 
counties where the benchmarks are relatively higher than other 
counties. Generally, PFFS plans are drawing their enrollment from 
counties that have benchmarks that reflect statutorily set floor levels 
that exceeded historical fee-for-service expenditures levels (the 
floors established in the Balanced Budget Act 1997 and in the Medicare, 
Medicaid and SCHIP Benefits Improvement and Protection Act of 2000).
    The table below shows the range of MA program payments to PFFS 
plans and the enrollment in each range.


----------------------------------------------------------------------------------------------------------------
 Range and distribution of Medicare Advantage program payments  to private fee-for-service plans in relation to
                    Medicare fee-for-service  expenditures, weighted by enrollment, July 2006
-----------------------------------------------------------------------------------------------------------------
                                                                                     Enrollment-weighted average
      MA program payments to PFFS compared to FFS            Percentage of PFFS      MA program payment for this
                                                          enrollment in this range              range
----------------------------------------------------------------------------------------------------------------
140%                                                                            2%                         142%
----------------------------------------------------------------------------------------------------------------
130, <140                                                                      9                          134
----------------------------------------------------------------------------------------------------------------
120, <130                                                                     34                          125
----------------------------------------------------------------------------------------------------------------
Subtotal of enrollment in
counties with payments at or    45
above 120 percent of FFS
----------------------------------------------------------------------------------------------------------------
110, <120                                                                     42                          115
----------------------------------------------------------------------------------------------------------------
105, <110                                                                     10                          108
----------------------------------------------------------------------------------------------------------------
<105                                                                           3                          103
----------------------------------------------------------------------------------------------------------------

    In our analysis of benchmarks and program payments in MA in 2006, 
we found that level of rebates in PFFS plans was about 10 percent of 
FFS expenditure levels, on an enrollment-weighted basis. Thus, PFFS 
plans are providing enrollees with extra benefits financed by rebate 
dollars (75 percent of the difference between plan bids and the 
benchmarks in their service areas). The majority of the rebates are 
used to finance reductions in cost sharing for Medicare part A and part 
B services that beneficiaries would otherwise be responsible for--about 
70 percent of rebate dollars are used for this purpose in PFFS plans. 
About 20 percent of rebate dollars finance enhancement of the Part D 
drug benefit, and/or a reduced premium for that benefit; and about 9 
percent of the rebate dollars are used to finance extra benefits, such 
as hearing, dental and vision care not covered by Medicare. (A very 
small percentage of rebate dollars were used in 2006 to finance 
reductions in the part B premium for PFFS enrollees--under 1 percent.)
    While the availability of extra benefits and reduced cost sharing 
is something that would attract beneficiaries to PFFS plans, being able 
to use any provider appears to be an important consideration.
    We do not have information on the degree to which PFFS plans might 
coordinate care for their plan members. A number of PFFS plans have 
reported that they use nurses to perform care coordination functions 
for their enrollees, but we do not have data on how prevalent that is. 
Currently all PFFS plans pay providers using Medicare's fee-for-service 
payment rates. They rely on Medicare's administered pricing system and 
do not negotiate rates with providers or set up networks (as they are 
permitted to do under the statute).
    We would also note that 90 plans require an enrollee to notify the 
plan if the beneficiary is going to be admitted to the hospital, and 
these plans impose an additional charge for the hospital stay if the 
plan is not notified. It is possible that, on being notified of a 
hospital admission, the PFFS plan will coordinate hospital care.
    Although PFFS plans are allowed to form networks of providers, as 
far as we are aware, none of the PFFS plans has a network. Thus, 
beneficiaries can use any Medicare provider that is willing to accept 
the terms and conditions of the PFFS plan.

    Question: IME Payments to Medicare Advantage Plans. Medicare 
currently pays teaching hospitals directly for the indirect medical 
education (IME) costs associated with Medicare Advantage beneficiaries 
and we also make IME payments to the Medicare Advantage plans. Are MA 
plans using the portion of their payments attributable to IME to 
enhance payments to teaching hospitals? Is there anything preventing 
Medicare Advantage Plans from diverting these dollars to other 
purposes, such as plan administrative or marketing costs?

    Answer: MedPAC staff has consulted with plans and hospitals in the 
past and we have been told by both sides that plan payments to 
hospitals are determined by negotiation between the parties. The 
teaching hospitals have told us that they must compete with community 
hospitals and that plans do not recognize teaching costs separately. 
Plans tell us that they need to include the teaching hospitals in their 
networks in order to attract enrollees seeking care in prestigious 
institutions. The plans claim that the teaching hospitals have all the 
leverage in negotiations and thus they pay the teaching hospitals more 
than non-teaching community hospitals. The plans further claim that the 
teaching hospitals do not give them credit for Medicare teaching 
payments for the plans' enrollees.

    Question: Future analysis of Part D. What type of data does MedPAC 
need to analyze the Part D program? Are there issues with the 
proprietary nature of private plan data that will preclude you from 
doing certain analyses?

    Answer: The Commission must report to the Congress about the 
effects of Medicare payment policies on cost, quality, and access. We 
need detailed data on enrollment, prices, payments, and the performance 
of individual plans in order to develop policy recommendations for the 
Part D program. For example, we would need detailed data to:

      Look at how plan benefit designs, cost-sharing 
requirements, and formularies affect the use of prescription drugs by 
enrollees. This would help us evaluate the effects of proposals to 
change Part D's standard benefit, other coverage rules, and monitor how 
well plans control drug spending for both the program and enrollees.
      Evaluate whether plan features are related to a 
beneficiary's compliance with drug therapy and with use of part A and 
Part B services.
      Analyze the characteristics of plans that have higher 
quality measures or lower costs than other plans.

The types of data we need include:

      Information describing plan benefit designs, formularies, 
and bids;
      Prescription drug events that can be linked to claims for 
Part A and part B services provided to the same beneficiary. These data 
identify the plan, the prescriber, and the pharmacy that dispensed the 
product, as well as the drug dispensed and amounts paid by the patient, 
plan, and other payers.
      Levels of enrollment and disenrollment in individual 
plans, including numbers of enrollees who receive low-income subsidies.
      Data on drug prices and negotiated price concessions 
aggregated in such a way as to conceal proprietary information.
      Information for plan payment adjustments based on health 
status, reinsurance payments, and risk corridor payments.
      Other plan-level data on rates of prior authorizations, 
nonformulary exceptions, appeals, coordination of benefits for out-of-
pocket determination, call-center operations, grievances, and consumer 
satisfaction.

    Of course, plan-level data are often proprietary. The Commission 
has a history of negotiating data use agreements and taking measures to 
protect the security and confidentiality of person-level and plan-level 
data. Nevertheless, stakeholders consider it more important to prevent 
disclosure of certain types of data, such as rebates from 
pharmaceutical manufacturers. Without access to data on aggregate price 
concessions, the Commission will not be able to examine program costs 
thoroughly. However, even in the absence of rebate information, the 
Commission could still address relationships between plan features and 
drug utilization so long as we obtain access to other types of data 
such as Part D claims.
    The Commission is concerned that congressional support agencies do 
not now receive Part D claims data. In MedPAC's June 2005 Report to the 
Congress, the Commission recommended that the Secretary should have a 
process in place for timely delivery of Part D data to congressional 
support agencies to enable them to report to the Congress on the drug 
benefit's impact on cost, quality, and access.
    Under the law, CMS has clear authority to collect Part D claims and 
other data for purposes of making payments. Until CMS issued a proposed 
regulation last October, it was less clear whether the agency had 
authority to use Part D data for other nonpayment purposes. It has also 
been unclear whether CMS has legal authority to provide claims and 
other Part D data to other Federal agencies, to congressional support 
agencies, and to private researchers. CMS's proposal would allow the 
agency to share Part D data with Federal agencies and researchers under 
the same safeguards that exist for the release of other Medicare data. 
If this regulation goes forward, it will address many of our concerns 
about gaining access to Part D claims. However, if the regulation or 
new legislation authorizing release of Part D claims does not move 
forward, that outcome would severely inhibit the Commission from 
carrying out its duty to provide policy recommendations to the 
Congress.

    Question: Growth in number of Part D plans. The number of stand 
alone prescription drug plans and MA prescription drug plans grew 
exponentially in 2007. Why has this growth occurred? Does MedPAC intend 
to track the Medicare margins of these plans like you do for other 
providers?

    Answer: The Commission's analysis of plan offerings for 2007 in 
MedPAC's March 2007 Report to the Congress shows that sponsors are 
offering about 30 percent more stand-alone prescription drug plans 
(PDPs) and 25 percent more Medicare Advantage Prescription Drug (MA-PD) 
plans this year. New PDPs for 2007 emerged in every region of the 
country, and the median number of plans offered in each region rose 
from 43 in 2006 to 55. A number of factors account for this new plan 
entry.
    Several organizations began offering nationwide plans in 2007. 
Nationwide plans refer to the same plan name that a sponsor offers in 
each of the country's 34 PDP regions. In 2007, 17 organizations are 
offering at least one nationwide PDP in each region, and those 
organizations together account for 80 percent of all stand-alone plans. 
In 2006, 10 organizations had at least one nationwide plan, and those 
organizations offered 62 percent of all PDPs. Some of the new 
nationwide plan offerings were from organizations that operated plans 
in nearly all PDP regions for 2006. In other words, these near-national 
organizations chose to expand their presence to all PDP regions for 
2007. Other organizations were entirely new entrants into the Part D 
market for 2007. Some of those organizations had sponsored Medicare 
drug discount cards during the period after the prescription drug law 
was passed in 2003 but before Part D began in 2006.
    As is also true for Medicare Advantage plans, the Commission cannot 
measure margins of Part D plans as we do for other providers in 
Medicare's fee-for-service (FFS) payment systems. The reason is that 
while most FFS providers submit cost reports to CMS, private plans do 
not.

    Question: The Need for a Common Assessment Tool for Post-Acute 
Care. Mr. Hackbarth's testimony discusses the need for a common 
instrument for patient assessment across post-acute care settings. How 
would care for Medicare beneficiaries be improved by the development 
and use of a single assessment tool for post-acute care? Do you have 
concrete recommendations that can move us forward in a meaningful way 
on this front?

    Answer: Until a common instrument gathers patient assessment 
information across settings, it is impossible to compare the value of 
services furnished to beneficiaries. Without diagnosis and comorbidity 
information, we can not compare the care needs, service use, costs, and 
outcomes. We do not know, for example, if providers with high costs 
treat more complicated patients or whether their higher costs are 
associated with inefficiencies. Without comparable outcomes measures, 
we can not determine whether high service use produced better patient 
outcomes or whether the additional services added little of clinical 
value to the patient. Outcomes information that is adequately risk-
adjusted would allow the program to compare practice patterns across 
settings and their relative effectiveness at treating specific types of 
cases, especially in settings where there is overlap in the types of 
patients treated, such as post acute care. In settings with poor case 
mix adjustment methods for the prospective payment systems, such as 
SNFs and HHAs, more detailed clinical information could also be used to 
improve the patient classification systems used for risk adjustment and 
payment.
    Providers and clinicians could also use comparable diagnosis and 
outcomes information to develop evidence-based guidelines for treating 
patients with specific clinical conditions. Providers could use data-
based guidelines to predict a patient's expected care needs and 
establish anticipated outcomes. Evidence-based benchmarks could 
delineate typical resource use by condition and indicate over and under 
provision of services.
    Section 5008 of the Deficit Reduction Act of 2005 required that the 
Secretary establish a 3-year demonstration program by January 1, 2008 
to develop and gather uniform patient assessment information for use at 
hospital discharge and across post acute care settings. In March 2007, 
CMS and its contractor convened a technical advisory panel to gather 
feedback on a draft of the tool. Participants will be recruited this 
spring and testing of the tool is planned for the summer. The 
demonstration will begin in one market in January 2008 with broader 
implementation planned for April 2008. The Commission is watching this 
demonstration with great interest.

                                 
          Questions Submitted by Mr. Doggett to Mr. Hackbarth
    Question: In June 2006, MedPAC reported in the chapter on 
outpatient therapy services that CMS needs more outcomes data before it 
can develop an alternative to the therapy caps. Contractors working for 
CMS have already recommended four outcome measurement tools--including 
the NOMS database which has patient outcome data on speech-language 
pathology, but has not taken further action. Would you support CMS 
moving quickly in implementing a pilot program that would gather data 
through these four recommended measurement tools?

    Answer: In its report to CMS, researchers at Computer Sciences 
Corporation (CSC) suggested that four patient assessment tools--the 
Patient Inquiry Tool, the National Outcomes Measurement System (NOMS), 
the Outpatient Physical Therapy Improvement in Motion Assessment Log 
(OPTIMAL), and the Activity Measure--Post Acute Care (AM-PAC)--be 
evaluated for use in an alternative payment system. While each tool is 
appropriate for evaluating the patients it was designed to evaluate, 
none could be used to evaluate all types of outpatient therapy 
(physical and occupational therapy and speech-language pathology 
services), for all patient conditions in every outpatient setting. For 
example, the NOMS evaluates only speech-language-pathology (SLP) 
services, the OPTIMAL evaluates only physician therapy (PT) services, 
the AM-PAC does not fully evaluate patients' swallowing difficulties, 
and the Inquiry tool does not evaluate SLP services. Looking at the 
performance of these tools is a good thing for CMS to do. One of the 
goals of the pilot would be to assess how each of these tools performs 
in a variety of settings, across a wide range of patient conditions, 
and for which types of therapy; however, the concern is that such a 
pilot would not produce an assessment tool that works in all settings.

    Question: In MedPAC's 2006 report, it specifically discussed the 
fact that we cannot gather data on speech-language pathologists because 
they do not have a Medicare supplier number that can be tracked. Since 
that report, another event has taken place that has made this issue 
even more relevant. In December, Congress passed legislation allowing 
Speech-Language pathologists (and others) to voluntarily participate in 
the pay-for-reporting program. However, without a supplier number, 
speech-language pathologists have little incentive to participate 
because the bonus payment will go to the entity holding the supplier 
number--not to the speech-language pathologist. Given MedPAC's interest 
in this latest report in pay-for-performance, shouldn't we make sure 
that providers who are eligible for the bonus program have an incentive 
to participate in it?

    Answer: We haven't taken up this particular question in the 
Commission; however, it touches on a larger question regarding the 
Administration of pay-for-performance programs: Must pay-for-
performance bonuses be awarded at the individual provider level to 
improve quality, or could the bonuses also be effective when directed 
at the provider's affiliated organization?
    On the one hand, pay-for-performance initiatives may be most 
successful when they direct bonuses to the provider most responsible 
for administering the care in question. Under this theory, removing the 
provider from the direct receipt of the bonus could dilute the desired 
behavioral response (i.e., improved performance).
    On the other hand, the parent entity, such as the hospital or 
skilled nursing facility, that receives payment for the service has an 
incentive to establish a system to reward its employees or contractors 
who report data and provide high quality care. It is possible that such 
systems may have a wider effect on the general delivery of care, than 
if rewards were exclusively between Medicare and individual providers.

    Question: In CMS's latest 5-year review of part B billing codes, 
payment for evaluation and management (E&M) services were increased, 
and as a result, payment for work relative value units (RVUs) were all 
depressed by 10% to offset the increase to E&M services. For 
psychologists and social workers who provide mental health services, 
this cut is especially harmful as they cannot bill for E&M services 
that are within their scope of practice. Would MedPAC support removing 
psychologists and social workers from the 5-year review cuts? 
Alternatively, would MedPAC support allowing psychologists and social 
workers to bill for E&M services?

    Answer: The Commission has not taken up this question.

                                 
          Questions Submitted by Mr. Pomeroy to Mr. Hackbarth
    Question: When calculating Medicare margin's for Home Health 
providers, I understand that the Medicare Payment Advisory Committee's 
analysis excludes over 1600 agencies that are classified as ``hospital-
based'' from the margin calculation. I also understand that in some 
locations, like North Dakota, these agencies are either the sole source 
of home health services or the primary provider. Isn't it necessary 
that these agencies be incorporated into any evaluation on the impact 
of a payment rate freeze on access to care? What would be the simple 
average margin, across all agencies large and small, if these agencies 
were included?

    Answer: In 2005, the aggregate margin for all agencies was 13.8 
percent, a number which includes hospital-based agencies. (The margin 
for freestanding providers was 16.7 percent.) Previous research 
suggests that the discrepancy between hospital-based and freestanding 
margins is not attributable to factors that would cause the margins of 
efficient providers to differ. Given this analysis, we do not think the 
margins should be combined into a single average.
    Hospital-based data shows higher costs in part because hospitals 
shift overhead costs to the hospital-based home health provider; if 
this cost shifting did not happen, the hospital-based margin would be 
higher. Furthermore, there is nothing we see in the patient or other 
economic characteristics of hospital-based home health agencies that 
would explain these higher costs. A review of 2001 data found that 
hospital-based providers were similar to freestanding ones in many 
respects, such as case mix, average reimbursement per agency, volume of 
patients, and average number of visits (MedPAC 2004). Of course, 
hospital-based and freestanding providers deliver care in the same 
setting--the beneficiary's home--so the differences we see in costs are 
not due to different settings.

                                 
          Questions Submitted by Mr. Ramstad to Mr. Hackbarth
    Question: CMS's assumes that all imaging equipment is in use about 
50% of the time. In its June 2006 report, MedPAC presented survey 
results that showed that MRI equipment was in use more than 90% of the 
time and CT equipment was in use 70% of the time. MedPAC suggested that 
imaging procedures may be paid more than twice the appropriate amount, 
based on these survey results. Independent analysis of the MedPAC 
survey shows that less than 1% of the independent diagnostic testing 
facilities nationwide responded to the survey. The survey did not cover 
x-ray or ultrasound equipment, or many other imaging modalities. How 
would you characterize the MedPAC findings which are based on survey 
responses from 80 physician offices and testing facilities in 6 
selected geographic areas, and only surveyed use of MR and CT 
equipment?

    Answer: CMS assumes that imaging machines (and all other medical 
equipment) are used 50 percent of the time a practice is open for 
business, which may overstate the cost of equipment. In order to test 
this assumption, we surveyed imaging providers in six markets (Boston; 
Miami; Greenville, South Carolina; Minneapolis; Phoenix; and Orange 
County, California) to find out how frequently they were using MRI and 
CT machines. We focused on MRI and CT machines because of their high 
cost and the rapid spending growth for MRI and CT services.
    In our June 2006 Report to the Congress, we acknowledged that the 
survey is not nationally representative because it is based on six 
markets. We did not intend f or it to be representative--the data was 
meant to help the Commission and CMS focus on the issue. However, all 
providers in one of those markets that submitted a Medicare claim for 
an MRI or CT service in 2003 had the same chance of being selected for 
the survey.
    The survey found that providers were using these machines 
significantly more than 50 percent of the time, which should lead to 
lower costs per use. The survey results raise questions about whether 
CMS currently underestimates how frequently these machines are used. 
Therefore, we suggested that CMS revisit its assumption that all 
equipment is used 50 percent of the time. In its final rule on the 2007 
physician fee schedule, CMS agreed that the 50 equipment utilization 
assumption should be examined for accuracy.
    The Commission did not suggest that imaging procedures may be paid 
twice the appropriate amount. Rather, we estimated that increasing the 
equipment use assumption to 90 percent and using a more updated 
interest rate assumption would lower equipment price per service by 50 
percent. In addition to equipment, there are other parts of practice 
expense payments: nonphysician clinical staff, supplies, and indirect 
costs. We did not model the impact of changing the equipment use 
assumption on total practice expense payment rates.
    It is important to note that the American Medical Association 
(AMA)/specialty society Relative Value Update Committee recommended 
that CMS use a rate higher than 50 percent for all equipment, while 
permitting specialty societies to present evidence that specific items 
are used less frequently. The AMA and specialty societies are about to 
field a new multi-specialty survey of physician practice costs that 
will include questions on how frequently practices use high-cost 
equipment.
    Please feel free to follow up with me or Mark Miller, MedPAC's 
Executive Director (202-220-3700) on any of these issues. Again, we 
appreciate the opportunity to testify on our March 2007 report and 
appreciate the Committee's interest in this area.

                                 

    [Submissions for the Record follow:]
          Statement of Alliance for Quality Nursing Home Care
    The Alliance for Quality Nursing Home Care (the ``Alliance'') 
represents seventeen of the nation's largest providers of long term and 
post-acute care and services. The roughly 2,000 skilled nursing 
facilities (``SNFs'') owned and operated by Alliance companies care for 
more than 300,000 older Americans and employ more than 300,000 people 
in forty-nine states. As compared to Medicare-certified SNFs as a 
whole, Alliance members disproportionately provide skilled nursing care 
to Medicare beneficiaries.
    The quality of care Medicare beneficiaries receive today--and the 
quality of care many of us will require in the decades ahead--relates 
directly to the federal government's payment policies, particularly 
Medicare and Medicaid. The Alliance is deeply concerned that, all too 
frequently, the federal government's approach to funding for Medicare 
and Medicaid conflicts directly with its goals of sustaining and 
improving the quality of patient care. When Medicare funding for 
skilled nursing services is stable, quality of care and services 
improves. When Medicare funding is inconsistent and unstable, our 
nation's long term care infrastructure deteriorates, to the detriment 
of every senior today and every retiree tomorrow.
    At a time when Congress and the Centers for Medicare and Medicaid 
Services (``CMS'') increasingly look to develop a more rationale post-
acute Medicare benefit, an objective that the Medicare Payment Advisory 
Commission (``MedPAC'') has long championed, we remain concerned that 
MedPAC's restrictive view of Medicare payments to SNFs undermines not 
only care and services for Medicare beneficiaries, but for all nursing 
home patients as well. In addition, we are concerned that MedPAC's 
short-term recommendations undermine its long-term goal of a more 
rational and unified post-acute benefit.
    MedPAC's sole recommendation is that SNFs receive no market basket 
adjustment in FY 2008. Its March 1, 2007 report notes that, if Congress 
were to adopt this recommendation, payments to SNFs would be $250 
million to $750 million less next year than the Medicare baseline 
otherwise would allow. Given that the President's proposed FY 2008 
budget also eliminates the market basket increase for SNFs and scores 
the impact at $1 billion, it seems likely that the impact will be at 
least $750 million. We respectfully submit that this recommendation is 
short-sighted and urge that Congress reject it in favor of a more 
expansive view to assure that all SNF patients continue receiving high 
quality care and services.
The Relationship Between the SNF Marketplace and Medicare Payments
    A fair evaluation of MedPAC's recommendations requires an 
appreciation for the economic realities for SNF operations. In SNFs 
today, Medicare pays for 12% of patients but represents 26% of 
revenues, Medicaid pays for 66% of patients but represents only 50% of 
revenues and private sources (commercial insurance, long term care 
insurance and out-of-pocket expenditures) pay for 22% of patients but 
represent 24% of revenues. While MedPAC estimates that SNFs Medicare 
operating margins in 2007 will be 11%, MedPAC does not acknowledge that 
Medicaid operating margins are negative 7% and private payment 
operating margins are less than 2%.\1\
---------------------------------------------------------------------------
    \1\ Source: The Lewin Group analysis of Lewin survey data from 
multifacility organizations.
---------------------------------------------------------------------------
    As a result, according to independent analysis, overall after-tax 
operating margins for SNFs were only 2.9% in July 2006, the lowest 
overall operating margins of any Medicare Part A provider group.
    Given these economic realities, robust and positive Medicare 
operating margins effectively subsidize negative Medicaid operating 
margins. The Medicare and Medicaid programs, moreover, pay for three of 
every four SNF patients. While Medicare cross-subsidization of Medicaid 
may not be optimal policy in the long run, is it is necessary at least 
until the inadequacy of Medicaid payments is addressed effectively.
    Over the past decade, moreover, Medicare funding for SNFs has been 
volatile. The Balanced Budget Act of 1997 (``BBA'') slashed Medicare 
payments to SNFs and forced 20% of SNFs into bankruptcy. In 1999 and 
2000, Congress enacted temporary additional payments to help SNFs 
overcome the most severe consequences of BBA. Thereafter, CMS made 
certain administrative changes designed to maintain some stability in 
Medicare payments. Ultimately, in 2006, all Congressional add-ons 
expired and CMS refined the payment system to better recognize the 
growing intensity of rehabilitation services Medicare beneficiaries now 
receive in SNFs.
    The net effect of these changes is that, only in 2006 did average 
Medicare payments to SNFs return pre-BBA levels. In 1998, average per 
diem payments were $367. In 2006, average per diem payments were 
$366.\2\
---------------------------------------------------------------------------
    \2\ United BioSource analysis of Alliance database.
---------------------------------------------------------------------------
Nursing Home Quality Has Improved Significantly
    It is noteworthy that America's SNFs have led the quality movement 
despite comparatively low overall operating margins and volatile 
Medicare payments. The sector's leadership--which includes the Nursing 
Home Quality Initiative (a partnership between CMS and providers), the 
Quality First initiative (a voluntary provider effort) and most 
recently the Advancing Excellence in America's Nursing Homes campaign 
(a partnership among providers, consumers, unions, private foundations 
and CMS)--has helped to improve the overall quality of care in our 
nation's nursing homes.
    As part of CMS' Nursing Home Quality Initiative, the agency now 
reports comparative clinical data for use by consumers in choosing SNFs 
and by SNFs to benchmark and improve performance. Quality First was the 
first nationwide, publicly articulated pledge by providers in any 
health care sector to voluntarily establish and meet quality 
improvement targets. The Advancing Excellence campaign, which was 
launched in September 2006 and is modeled on the recently completed 
``100,000 Lives'' campaign in the acute care sector, seeks to improve 
quality in eight clinical and operational domains over a two-year 
period. Taken together, these efforts underscore that SNFs are 
committed to accountability for the quality of care and services they 
provide, as well as prudent use of government resources.
    Perhaps more importantly, these efforts are showing positive 
outcomes. For example, from 1999 to 2004, the number of severe quality 
of care citations in America's nursing homes dropped by almost 60%.
    Similarly, over the same period, clinical processes like pain 
management and vaccination rates showed marked and sustained 
improvement as well.
    Consumer satisfaction with nursing home care also reflects 
noteworthy quality improvement. In 2005, 80% of nursing home patients 
and their families found the care SNFs provided to be excellent or 
good. By contrast, 80% of Americans rate their overall health care as 
excellent or good.
    The Alliance remains committed to sustaining these quality 
improvements for the future. However, sustained quality improvement 
depends on maintaining the stable Medicare funding which the sector has 
begun to enjoy in the past few years.
Congress Should Reject MedPAC's Recommendation for FY 2008
    MedPAC specifically acknowledges that its recommendation that SNFs 
receive no market basket increase in FY 2008 is based solely on its 
evaluation of Medicare payments to SNFs. Consequently, MedPAC directly 
rejects any consideration of overall operating margins in formulating 
its recommendation.
    While this may be consistent with MedPAC's legislative charter, 
Congress certainly is not so limited. Congress should base its decision 
not only on budgetary concerns with respect to the Medicare program, it 
also should assess the impact on the provision of care and services 
overall. Given the recent history of volatility in Medicare payments to 
SNFs, the importance of robust Medicare margins to overall SNF 
operating margins and therefore to assuring that SNFs have the 
resources necessary to continue quality improvement efforts, Congress 
should reject MedPAC's recommendation that Congress forego the market 
basket increase that current Medicare law otherwise would afford to 
SNFs.
    MedPAC's March 1 report does attempt to address the effect of 
Medicaid payments on overall margins. Its arguments, however, are 
unpersuasive. First, MedPAC asserts that Medicaid payment rates are 
adequate because, since the elimination of the Boren Amendment in 1998, 
Medicaid payments to SNFs have risen and state revenues in 2006 and 
2007 have grown. In fact, Medicaid payment rates prior to repeal of the 
Boren Amendment were inadequate, such that growth since 1998 does not 
reflect adequacy of Medicaid payments. Indeed, the gap between the 
reasonable cost of care and Medicaid payments to nursing facilities has 
grown consistently since 1999.
    The fact that state revenues increased in 2006 and 2007, moreover, 
ignores the fact that, earlier in the decade, state revenues were 
severely threatened and, as a result, Medicaid payments were 
undermined, particularly given that, in more challenging economic 
periods, Medicaid enrollment swells. While overall Medicaid 
expenditures may increase in such circumstances, this does not reflect 
more robust payments for services. Rather, it reflects more enrollees, 
which places even greater strain on state Medicaid budgets and prompts 
even more aggressive cost containment initiatives.
    It is noteworthy that historic reports from the Kaiser Commission 
on Medicaid and the Uninsured, the very group whose work the MedPAC 
report cites in support of its argument, has a long history of reports 
to the contrary.\3\ Congress itself recognized the financial straits 
states faced earlier in the decade, and the adverse impact on Medicaid 
programs, by temporarily increasing the federal Medicaid matching rate 
in the Federal Fiscal Relief Act.\4\
---------------------------------------------------------------------------
    \3\ See, e.g., the following Kaiser Commission reports, State 
Fiscal Conditions and Health Coverage: An Update on FY2004 and Beyond 
(September 2003), Medicaid Spending: What Factors Contributed to the 
Growth Between 2000 and 2002? (September 2003); The Current State 
Fiscal Crisis and Its Aftermath (September 2003); States Respond to 
Fiscal Pressure: State Medicaid Spending Growth and Cost Containment 
(September 2003); State Responses to Budget Crisis in 2004: An Overview 
of Ten States (January 2004); Is the State Fiscal Crisis Over? A 2004 
State Budget Update (January 2004), States Respond to Fiscal Pressure: 
A 50-State Update of State Medicaid Spending Growth and Cost 
Containment Actions (January 2004); The Role of Medicaid in State 
Economies: A Look at the Research (April 2004), State Fiscal Conditions 
& Medicaid, April 2004 (April 2004), Medicaid and the 2003-05 Budget 
Crisis--State Case Studies (August 2005), available at www.kkf.org/
statepolicy/budgets.cfm.
    \4\ Kaiser Commission on Medicaid and the Uninsured, Financing the 
Medicaid Program: The Impact of Federal Fiscal Relief, April 2004 Fact 
Sheet (April 2004), available at www.kff.org/statepolicy/budgets.cfm.
---------------------------------------------------------------------------
    MedPAC also argues that paying nursing facilities higher Medicare 
rates misdirects resources because facilities with higher Medicare 
census benefit from additional payments but such payments should be 
directed to facilities with higher Medicaid census. This claim 
misapprehends the ownership structure of a majority of America's 
nursing homes. Most nursing homes are not owned independently as 
freestanding facilities. Rather, they are part of multi-facility 
organizations. Within multifacility structures, providers cross-
collateralize across all facilities. Operating losses in facilities 
with higher Medicaid census are offset by operating gains in facilities 
with higher Medicare census. The facility-by-facility approach MedPAC 
suggests is not in keeping with the operating realities of the nursing 
home financial environment.
    In addition, MedPAC's recommendation for FY 2008 threatens its 
longer-term objective to develop a unified and more rational post-acute 
benefit. As part of this objective, MedPAC has encouraged policy 
changes that create incentives for Medicare post-acute patients to 
receive care and services in the least costly setting consistent with 
appropriate quality outcomes. CMS has acted on these recommendations in 
various ways, including refinements to the Resource Utilization Groups 
(``RUGs'') payment system for SNFs effective in FY 2006. These 
refinements have encouraged SNFs to care for higher acuity patients, 
particularly those patients requiring short-term rehabilitation care.
    Eliminating the Medicare market basket increase in FY 2008 would 
deprive SNFs of resources necessary to continue expansion of care for 
these beneficiaries, undermining the effort to rationalize the post-
acute benefit. Since SNFs frequently are the lowest cost settings in 
which such services may be provided, the intermediate-and-long-term 
impact could well be to increase overall Medicare post-acute spending 
by continuing to provide post-acute care in higher cost settings. For 
example, based on CMS data for FY 2004, the average cost to Medicare 
for an episode of care in a SNF was $7,000, while the average cost to 
Medicare for a comparable episode of care in an Independent 
Rehabilitation Facility was $12,525, or 78% higher than the cost per 
episode of care in a SNF. Slowing the trend toward SNFs treating a 
growing percentage of Medicare post-acute patients similarly slows 
efforts to rationalize the post-acute system and better control 
Medicare spending growth in the future.
    In conclusion, the Alliance respectfully urges Congress to reject 
MedPAC's recommendation that SNFs receive no market basket increase in 
FY 2008.

                                 
               Statement of American Hospital Association
    The American Hospital Association (AHA), representing nearly 5,000 
member hospitals, health systems, networks and other providers of care, 
is pleased to submit this statement for the record regarding the 
hearing on the Medicare Payment Advisory Commission's (MedPAC) Annual 
March Report to Congress.
    Inpatient and Outpatient Update. The AHA commends MedPAC for 
recommending at its January 2007 meeting that Congress implement a full 
market basket update, currently estimated at 3.1 percent, for both the 
inpatient and outpatient prospective payment systems (PPS) in fiscal 
year (FY) 2008. A full market basket update is essential if America's 
hospitals are to keep up with inflation and fulfill our roles of caring 
for patients, preserving the safety net, being ready for unexpected 
emergencies and disasters, and modernizing the health care system.
    According to MedPAC estimates, hospitals' overall Medicare 
margins--including the costs of inpatient, outpatient and post-acute 
care services--will reach a 10-year low in 2007 at negative 5.4 
percent.
    According to AHA annual survey data, a staggering 65 percent, or 
more than 3,000 hospitals, lost money in 2005 serving Medicare 
patients. These statistics clearly indicate that Medicare payments are 
inadequate and full market basket increases for both inpatient and 
outpatient hospital services are critical.
    Despite MedPAC's recommendation, the president's FY 2008 budget 
request would reduce hospital inpatient PPS reimbursements by $13.8 
billion and outpatient PPS payments by $3.4 billion over five years. 
These cuts would jeopardize the ability of hospitals to serve their 
patients and their communities and should be rejected by Congress.
    In addition to recommending a full market basket update for 
inpatient and outpatient hospital services, MedPAC made a series of 
other payment recommendations.
    Inpatient Rehabilitation Facilities Update. The commission 
recommended an update of only 1 percent for inpatient rehabilitation 
facilities--only about a third of the actual expected 3.1 percent 
increase in costs due to inflation. These facilities are run by 
specially trained doctors and staff who treat both patients' 
rehabilitation and medical needs. While the number of inpatient 
rehabilitation facilities is stable, the strict enforcement of the 
``75% Rule,'' which sets key conditions a facility must meet to qualify 
for reimbursement under Medicare, reduced patient volume by 10 percent 
and increased the severity of patients seen by 6 percent in 2005. The 
75% Rule, even at a transitional level, has already changed the course 
of inpatient rehabilitation facility payment. To avoid further erosion 
of beneficiary access to quality inpatient rehabilitation care, a full 
market basket update to account for inflation is warranted.
    Indirect Medical Education. In January, the commission recommended 
that Congress reduce the indirect medical education adjustment in FY 
2008 by 1 percentage point--from 5.5 percent to 4.5 percent--concurrent 
with the Centers for Medicare & Medicaid Services' efforts to implement 
a payment system based on severity-adjusted diagnosis related groups. 
However, it is not clear at this time what, if any, adjustments will be 
made for patient severity, the size of these changes or how these 
changes will affect the indirect medical education adjustment.
    The AHA opposes this recommendation, as a one percentage point 
reduction equates to a 20 percent cut in indirect medical education 
payments.
    The indirect medical education adjustment is intended to help 
compensate teaching hospitals for the higher costs of training 
physicians, research-related patient care costs, treating sicker 
patients and providing more complex and costly services. Many teaching 
hospitals have trauma centers, transplantation services, and most use 
cutting-edge new technologies. In addition, teaching hospitals are also 
preparing to be first-line responders in the event of a flu pandemic, 
or biological or chemical attack.
    Arbitrarily targeting indirect medical education payments for 
reductions may lead to reduced access to high-caliber medical education 
for our future physicians. We urge Congress to consider the benefits 
provided by teaching hospitals and reject any cuts to indirect medical 
education.
    We appreciate the opportunity to submit this statement for the 
record and look forward to working with members of the Subcommittee and 
the MedPAC commissioners to ensure that Medicare reimbursement keeps 
pace with inflation and the changing needs of our health care system. 
Americans depend on hospitals to be there, ready to serve, 24 hours a 
day, 365 days a year. Reversing the dramatic decline in hospitals' 
Medicare margins is essential to ensuring hospitals' ability to fulfill 
this expectation.

                                 
   Statement of Mid-Florida Cardiology Specialists, Orlando, Florida
    It is imperative that we receive a voice every time you are meeting 
on the healthcare issues that are so greatly affecting our practice. 
First let me express our great appreciation for averting the 5% cut by 
your congressional action of December 8, 2006. But the effects of the 
other budget adjustments have taken a heavy toll on cardiology 
practices in the Central Florida area. We are experiencing lay offs of 
personnel and searching for other areas to save a few pennies to be 
able to continue to provide services to the Medicare population of 
Florida.
    Two areas have had great impact on this cardiology group. First the 
imaging cap for the technical component of the global service provided 
by our office. These codes affected by this imaging cap will have a 
very detrimental effect on services provided to the Medicare patients 
in our office. The nuclear stress test reduced $55.94 which is 6%. It 
would be incomprehensible to imagine what the 5% averted cut would have 
added to this already devastating reimbursement system. This test is 
only one of the imaging services that we provide.
    We have a total of three fee schedules to consult to try to figure 
out what our reimbursement is going to be in 2007. There is a 2007 Fee 
for Service Participating Physician Fee Schedule. Then there is a fee 
schedule for the imaging caps. Then there is another fee schedule for 
the ``carrier priced'' codes. It is challenging at best.
    The second area where we are greatly affected is the work relative 
value decrease which was lowered to maintain budget neutrality. Each 
code for 2007 decreased by 0.8994% for the relative work value portion 
of the code. The majority of our codes decreased with very few 
increasing. Out of the 217 codes we have priced in our system, only 22 
codes increased.
    With every committee meeting that you have, you hold the very 
future of many practices in your hands. I have been with this practice 
for nineteen years and these physicians provide excellent and 
compassionate care to our Medicare population. We can not continue to 
do so at the current reduction rate of reimbursement. We have been 
unable to find a ``bandage'' large enough to cover the wound this 
constant downward spiral is opening. I know this is a challenge, but to 
continue to cut the physician's fee schedule is NOT the answer.

                                 
      Statement of National Association for Home Care and Hospice
    The National Association for Home Care and Hospice (NAHC) is the 
largest national home health trade association. Among our members are 
all types and sizes of Medicare-participating care providers, including 
nonprofit agencies such as the VNAs, for-profit chains, public and 
hospital-based agencies and free-standing agencies.
    NAHC is pleased to submit this statement for the record to the 
Committee on Ways and Means Subcommittee on Health on the Medicare 
Payment Advisory Commission's (MedPAC) recommendations and report to 
Congress on home care payment adequacies. In January 2007, MedPAC voted 
to recommend that Congress eliminate the home health market basket 
update for calendar year 2008. The MedPAC recommendation is based upon 
a number of factors including access to care, supply of providers, 
volume of services, quality of care, access to capital, and payment and 
costs.
    NAHC believes that MedPAC's recommendation fails to address the 
true financial status of home health agencies. The recommendation is 
based on an incomplete analysis of Medicare cost report data that 
excludes a significant segment of home health agencies, ignores 
essential home care service costs, and relies on a methodology that 
treats home health services as if it were provided by one agency in 
just one geographic area. If accepted, the MedPAC recommendation will 
severely compromise continued access to care.
    In specific response to the recommendation, we note the following:

      The Medicare home health prospective payment system 
(HHPPS) has been found to be seriously flawed and extremely ineffective 
at predicting the costs of care delivery. As a result, care for some 
types of patients can be reimbursed at significantly higher rates than 
agencies' care costs while Medicare reimbursement for other patients is 
woefully inadequate. MedPAC has found that the payment distribution 
system of HHPPS fails in over 75% of the case categories to fairly set 
rates in relation to the level of care. Payment is either significantly 
lower or greater than justified for the level of care. These and other 
findings have lead Medicare to undertake a wholesale revision of HHPPS 
that is expected to take effect in January 2008.
      The considerable shortcomings in the home health PPS are 
further illustrated by a dramatic range in profits and losses among 
home health agencies (HHAs). About 31.0% of all HHAs experienced 
financial losses under Medicare in 2002; that figure increased to 33.0% 
in 2004. A five year freeze would increase the number of agencies with 
Medicare margins of zero or below to around 60%. These figures actually 
understate losses because Medicare cost report data excludes the costs 
of numerous items that are legitimate care expenses, such as telehealth 
services and respiratory therapy.
      MedPAC's financial analysis of Medicare home health 
agencies, alleging a 16% margin, is unreliable. First, it does not 
include any consideration of the 1723 agencies (21%) that are part of a 
hospital or skilled nursing facility. In some states, hospital-based 
HHAs make up the majority of the providers (MT 63.2%; ND 65.4%; SD 
60.5%; OR 58.3%). These HHAs have an average Medicare profit margin of 
negative 5.3%. Second, the MedPAC analysis uses a weighted average, 
combining all HHAs into a single unit, rather than recognizing the 
individual existence and local nature of each provider. This approach 
fails to portray the real status of HHAs that are experiencing a wide 
range of financial results. Third, MedPAC fails to evaluate the impact 
on care access that occurs with the current wide ranging financial 
outcomes of HHAs. Instead, it sees a single national average profit 
margin as indicative of over 8000 very diverse HHAs. When all HHAs are 
included in the analysis, the true average Medicare profit margin is 
3.12%.
      With the existing HHPPS, an agency's mix of patients 
(case-mix) can result in significant profits or losses unrelated to 
efficiency or effectiveness of care Losses exist for agencies of all 
sizes and in all geographic locations that are a result of the flawed 
HHPPS. These agencies are essential care providers in their 
communities. An across-the-board cut or freeze would do tremendous 
financial damage to those agencies that are at break-even or losing 
money on Medicare. Further, it would interfere with Medicare's effort 
to solve payment rate concerns with a reformed HHPPS in the near term.
      Home health agencies are already in financial jeopardy as 
a result of Medicaid cuts and inadequate Medicare Advantage and private 
payment rates. Ongoing study of home health cost reports by the 
National Association for Home Care & Hospice indicates that the overall 
financial strength of Medicare home health agencies is weak, and 
expected to diminish further. In 2002, the average all-payor profit 
margin for freestanding HHAs was 2.53%. A more recent cost report data 
analysis indicates that the average all-payor profit margin for 2004 
dropped to 1.55%.
      Current reimbursement levels have failed to adequately 
cover the rising costs of providing care, which include: increasing 
costs for labor, transportation, workers' compensation, health 
insurance premiums, compliance with the Health Insurance Portability 
and Accountability Act and other regulatory requirements, technology 
enhancements including telehealth, emergency and bioterrorism 
preparedness, and systems changes to adapt to the prospective payment 
system (PPS).
      A loss of the market basket inflation update could leave 
home health providers no alternative but to cut down on the number of 
visits per episode or avoid certain high-cost patients, which could 
have potential adverse consequences on a patient's clinical outcome. It 
would be difficult for HHAs to continue to lower visit frequency 
without compromising quality of care. Outcome Concept Systems, a 
national home health benchmarking firm, has found, in general, that 
reductions in average visits below 20 visits per episode (the current 
average is around 18) result in lower outcome scores.
      Medicare home health services reduce Medicare 
expenditures for hospital care, inpatient rehabilitation facility (IRF) 
services, and skilled nursing facility (SNF) care. For example, a study 
by MedPAC shows that the cost of care for hip replacement patients 
discharged to home is $3500 lower than care provided in a SNF and $8000 
less than care provided in an IRF, with better patient outcomes.
      Home health agencies have already experienced a 
disproportionate amount of cuts in reimbursement as a result of the 
Balanced Budget Act of 1997 (BBA). For example, under the BBA, Congress 
expected to reduce Medicare home health care outlays in FY 2006 from a 
projected $40.4 billion to $33.1 billion. The Congressional Budget 
Office (CBO) now estimates that home health outlays for FY 2006 were 
$13.1 billion. This reduction is far in excess of the reduction 
originally envisioned by Congress, and already has had a profound 
impact on beneficiary access to care and home health agency (HHA) 
financial viability. Home health care as a share of Medicare spending 
has dropped from 8.7 percent in 1997 to 3.2 percent today. By 2015 it 
is projected to drop to 2.6 percent of total Medicare spending.
      Over the past ten years, the Medicare home health benefit 
has been cut nearly every year placing serious financial strains on 
home health agencies:


----------------------------------------------------------------------------------------------------------------
                      Year                                                    Impact
----------------------------------------------------------------------------------------------------------------
FY 1998-1999                                          Home health interim payment system (IPS) was implemented.
                                                   During two years under IPS Medicare spending for home health
                                                 care dropped from $17.5 billion to $9.7 billion and the number
                                                       of Medicare beneficiaries receiving home health services
                                                   dropped by 1 million. Over 3,000 home health agencies closed
                                                                                                   their doors.
----------------------------------------------------------------------------------------------------------------
FY 2000                                             Home health care's inflation update was cut by 1.1 percent.
----------------------------------------------------------------------------------------------------------------
FY 2002                                             Home health care's inflation update was cut by 1.1 percent.
----------------------------------------------------------------------------------------------------------------
FY 2003                                           Home health care total expenditures were cut by 5 percent off
                                                                                         previous year's rates.
----------------------------------------------------------------------------------------------------------------
CY 2004                                             Home health care's inflation update was cut by 0.8 percent.
  (\3/4\ of year)
----------------------------------------------------------------------------------------------------------------
CY 2005                                             Home health care's inflation update was cut by 0.8 percent.
----------------------------------------------------------------------------------------------------------------
CY 2006                                                  Home health care's inflation update of 3.3 percent was
                                                                                                    eliminated.
----------------------------------------------------------------------------------------------------------------


    NAHC recommends that Congress reject any efforts to reduce the home 
health inflation adjustment and support a full market basket update for 
Medicare home health services. NAHC suggests that relying on the 
ongoing efforts to reform the Medicare Home Health Prospective Payment 
System is a better approach to address any concerns with payment rates. 
Those efforts are intended to target payment changes in a manner that 
more closely aligns the rate to the level of service required by the 
patient avoiding excess reimbursement unrelated to patient care. Those 
efforts are expected to be implemented in January 2008.
    Mr. Chairman, NAHC appreciates the opportunity to provide these 
comments to the Committee on Ways and Means Subcommittee on Health on 
Medicare home care payment adequacy. We look forward to working with 
the Subcommittee as it studies and considers NAHC's recommendations on 
MedPAC's report to Congress

                                 
                       Statement of Bruce Yarwood
    Chairman Stark, Ranking Member Camp, and Members of this Committee, 
thank you for allowing us the opportunity to outline our views--based 
on our direct experience--that the federal government's approach to 
funding Medicare and Medicaid all too often conflicts directly with our 
shared goal of sustaining and improving the quality of patient care for 
America's seniors and people with disabilities.
    The matter at hand is relatively simple. When Medicare funding for 
skilled nursing services is stable, quality of care and services 
improves. When Medicare funding is inconsistent and unstable, our 
nation's long term care infrastructure deteriorates, to the detriment 
of every senior today and every retiree tomorrow.
    We are appreciative of comments voiced in the past by Members of 
this Committee that considering Medicare and Medicaid funding policies 
in isolation is short-sighted. We agree, and believe the Medicare 
Payment Advisory Commission's (MedPAC's) recommendation that there 
should be no annual inflation update is ill-advised, fails to 
accurately assess long term care funding necessities, and will 
contribute to the deterioration of our nation's long term care system 
at a time when every stakeholder can least afford it. Federal Reserve 
Board Chairman Ben Bernanke testified on Capitol Hill just yesterday 
that Congress ``must budget for the rising costs of retirement and 
medical benefits or face a `fiscal crisis' in coming decades.''
    Unfortunately, the Administration's proposed FY 2008 Budget 
incorporates MedPAC's most recent recommendation regarding the market 
basket adjustments for skilled nursing facilities. As a result, the 
proposed overall budget would cut Medicare funding for skilled nursing 
care by $10 billion over five years. Cutbacks of this magnitude will 
not only threaten the progress we have achieved working with the 
federal government to improve care quality, but could impact seniors' 
access to much-needed quality long term care.
    In addition, the Congressional Budget Office's (CBO's) new ``Budget 
Options'' report to Congress also warns that reducing update factors 
``might lead to certain patients having difficultly obtaining post-
acute care.'' The report also states, ``To the extent that patients 
faced limited access to post-acute care, they might either remain 
longer in a short-stay hospital, return home without receiving post-
acute care, or be discharged to receive long-term care not covered by 
Medicare. By reducing the revenue of providers, this option might also 
limit their ability to provide high-quality care.''
    It is noteworthy, Mr. Chairman, that America's nursing home 
providers have led the quality movement. Our sector's leadership--which 
is reflected in the Quality First Initiative and our partnership with 
the federal government's successful Nursing Home Quality Initiative 
(NHQI) and recently launched Advancing Excellence in America's Nursing 
Homes campaign, has helped to improve the overall quality of care in 
our nation's nursing homes. We remain committed to sustaining these 
quality improvements for the future.
MedPAC's Recommendations Would Jeopardize Quality of Care
    We fear implementation of MedPAC's recommendations would seriously 
jeopardize ongoing quality improvement because, among other negative 
variables, operating margins would be driven to dangerously low levels. 
Skilled nursing facilities already have the lowest operating margins of 
all major health care provider providers.
    Given the dramatic cost increases we face in key areas including 
labor, energy, liability and capital, not providing an annual update is 
wholly inadequate to maintaining our gains in care quality, especially 
as these cost increases stem from factors beyond providers' control. 
For example, the shortage of nurses and other direct care workers 
coupled with the fact that long term care must compete with other 
employers both within and outside the health care sector for these 
employees, contributes significantly to increasing labor costs. In 
addition, we must adjust to the ripple effect that the minimum wage 
increase will surely have throughout our profession. So, when operating 
margins are further reduced, we are far less able to recruit and retain 
qualified care givers, modernize and refurbish aging physical plants 
and equipment, acquire and implement new technologies to accommodate 
advances in medical practices, and meet the increasingly complex care 
needs of an aging population.
MedPAC Must Also Consider Medicaid
    MedPAC's exclusive focus on Medicare margins in the long term care 
sector does a disservice to those poor frail, elderly and vulnerable 
individuals who receive care and services in America's nursing homes. 
By ignoring Medicaid operating margins, MedPAC's analysis and 
recommendations do not present an accurate picture of the long term 
care marketplace. Medicaid is responsible for funding the care for 66% 
of patients in America's nursing homes, and those nursing homes lose an 
average of $13 per Medicaid patient, per day.
    MedPAC's continuing and exclusive focus on Medicare ignores the 
real and growing interdependence between Medicare and Medicaid. While 
66% of skilled nursing facility patients receive Medicaid benefits, 
those benefits account for only half of nursing facility revenues. 
Given that the prevalence of Medicaid patients in our nation's nursing 
facilities is four times that of the acute care sector, special 
consideration of the relationship between Medicare and Medicaid seems 
particularly relevant to nursing facility care. While MedPAC does not 
include Medicaid as a determinant in recommending government funding 
policy, the millions of Medicaid patients who rely upon the care we 
provide do not have the luxury of ignoring the broken funding 
relationship between both programs.
MedPAC's Recommendations for Skilled Nursing Facilities Should Be 
        Rejected
    It is a public policy error for MedPAC to dismiss the Medicare-
Medicaid ``cross subsidization'' issue as irrelevant to the debate at 
hand--despite the fact it has specifically acknowledged this phenomenon 
in the past--which is certainly noteworthy. On that basis, MedPac's 
recommendations should be rejected, and we make the following 
recommendations:

      Congress should reject MedPAC's recommendations for 
skilled nursing providers, and should maintain the full market basket 
for FY 2008.
      Congress should amend MedPAC's charter to require the 
Commission to consider operating margins of all government payers and 
the adequacy of all government funding in making its recommendations. 
This approach will enhance economic stability and quality improvements.
      Congress should require that MedPAC factor into its 
recommendations long term care's progress in improving quality. Funding 
volatility undermines providers' ability to remain focused on 
continuous quality improvement.

    Mr. Chairman, America's seniors cannot afford another setback 
generated by the continuing failure in Washington to recognize the 
tangible, growing relationship between payment policies and quality 
objectives. Our recommendations concerning MedPAC offer an approach 
that avoids such a negative scenario, and properly prepares the 
nation's long term care infrastructure for the challenging task ahead.
    Thank you for the opportunity to offer these comments on behalf of 
millions of professional, compassionate long term care givers and the 
millions of frail, elderly, and disabled Americans they serve each day.

                                  
