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



 
                      PAYMENTS TO CERTAIN MEDICARE

                       FEE-FOR-SERVICE PROVIDERS

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 15, 2007

                               __________

                           Serial No. 110-41

                               __________

         Printed for the use of the Committee on Ways and Means



                   U.S. GOVERNMENT PRINTING OFFICE
47-174 PDF                  WASHINGTON : 2009
----------------------------------------------------------------------
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) 512-2104  Mail: Stop IDCC, 
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 May 15, 2007, announcing the hearing.................     2

                                WITNESS

Herb Kuhn, Acting Deputy Administrator, Centers for Medicare and 
  Medicaid Services..............................................     6
Mark Miller, Ph.D, Executive Director, Medicare Payment Advisory 
  Commission.....................................................    21

                                 ______

Charles N. Kahn III, President, Federation of American Hospitals.    59
Rich Umbdenstock, President and CEO, American Hospital 
  Association....................................................    77
Bruce Yarwood, President, American Health Care Association.......    90
Stanley Brezenoff, on behalf of the American Association of 
  Medical Colleges, and the Greater New York Hospital Association    96
Christine Chesny, on behalf of National Association for Home Care 
  and Hospice and the Michigan Home Health Association...........   117
Mary Beth Walsh, M.D., on behalf of American Medical 
  Rehabilitation Providers Association...........................   125

                       SUBMISSIONS FOR THE RECORD

American Association of Homes and Services for the Aging, 
  statement......................................................   144
Keith G. Myers, statement........................................   148
Visiting Nurse Associations of America, Boston, MA, statement....   157


                      PAYMENTS TO CERTAIN MEDICARE


                       FEE-FOR-SERVICE PROVIDERS

                              ----------                              


                         TUESDAY, MAY 15, 2007

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

    The Subcommittee met, pursuant to notice, at 2:05 p.m., in 
Room 1102, Longworth House Office Building, the Honorable 
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) 225-1721
FOR IMMEDIATE RELEASE
May 15, 2007
HL-11

                 Chairman Stark Announces a Hearing on

                      Payments to Certain Medicare

                       Fee-for-Service Providers

    House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) 
announced today that the Subcommittee on Health will hold a hearing on 
payments to hospitals, home health agencies, and skilled nursing 
facilities. The hearing will take place at 2:00 p.m. on Tuesday, May 
15, 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:

      
    The vast majority of Medicare beneficiaries--nearly 82 percent in 
2007--receive care within the traditional fee-for-service (FFS) 
program, rather than in a private plan under Medicare Advantage. 
Payments under FFS are projected to constitute 71 percent of overall 
Medicare benefits spending in 2007. Payments to FFS providers are 
typically based on a prospective payment system or a fee schedule. The 
goal of various Medicare FFS payment systems is to cover the costs that 
reasonably efficient providers would incur in furnishing high quality 
care.
      
    In announcing this hearing, Chairman Stark said: ``It has been far 
too long since our Committee has taken a thoughtful look at the payment 
systems for fee-for-service providers. Let's not forget that the vast 
majority of Medicare beneficiaries and payments are under the fee-for-
service system. As stewards of the Medicare program, we must take 
seriously our oversight responsibilities to ensure that Medicare pays 
efficiently and appropriately for quality care.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on issues related to payment accuracy and 
legislative and regulatory payment refinements for the Medicare 
inpatient hospital prospective payment system, outpatient hospital 
prospective payment system, home health, long-term care hospital, 
inpatient rehabilitation facility, and skilled nursing facility payment 
systems.
      

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 Tuesday, May 
29, 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, and 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. If you could, just take a seat. I'm pleased 
to announce Herb Kuhn and Mark Miller are here.
    Herb Kuhn is the acting deputy administrator of the Centers 
for Medicare and Medicaid Services. During his tenure he has 
been a key leader in the movement to transform CMS from a 
passive player of health services to an active purchaser of 
quality health care. He is a nationally recognized expert on 
value-based purchasing and payment policy.
    Mark Miller is the executive director of the Medicare 
Payment Advisory Commission, a nonpartisan Federal agency that 
advises the U.S. Congress on Medicare payment, quality and 
access issues. With more than 19 years of health policy 
experience, Dr. Miller has held several important policy, 
research and management positions in health care. Dr. Miller 
served as assistant director of health and human resources of 
the Congressional Budget Office. Prior to CBO, Dr. Miller was 
the deputy director of health plans at the Centers for Medicare 
and Medicaid Service, formerly the Health Care Financing 
Administration. Before CMS, Dr. Miller was the Health Financing 
Branch Chief at the Office of Management and Budget, prior to 
joining OMB. Dr. Miller was a senior research associate at the 
Urban Institute.
    This program is to ensure that Medicare is an efficient 
purchaser of care in both the traditional fee-for-service 
program and in the Medicare Advantage program.
    As I've said repeatedly, this year no program or payment 
system, no matter how big or small, should not be reviewed. 
Everything is on the table in terms of refinement, oversight 
and adjustment. Medicare inpatient hospital services are the 
largest portion of our spending, $106 billion in '06, and CMS 
has recently proposed a regulation that would move forward on 
MedPAC's recommendation to modify payments based on severity.
    I look forward to hearing the details of CMS's proposal and 
the hospital industry's reaction. While adjustments to DRGs 
along these lines are overdue, I understand that other parts of 
that regulation may be problematic for some providers. We'll 
return to that issue in a minute.
    In '06 Medicare spent $43 billion on care provided by post-
acute providers. That included skilled nursing facilities, home 
health agencies, inpatient rehab facilities, long-term care 
hospitals. These providers are important in ensuring the health 
of our seniors and people with disabilities, however the 
question we have to constantly ask is whether we're providing 
the right care to the right beneficiary in the right setting at 
the right price.
    There is a dramatic variation in the costs of care, often 
with little or no evidence that outcomes are better in more 
costly settings. The guiding tenet for Medicare should be that 
the site of care not be dictated by financial incentives but 
rather by what's best for the patient. The further challenge 
for Medicare is that the four post-acute settings, skilled 
nursing, home health agencies, inpatient rehab facilities and 
long-term care hospitals, act as individual compartments or 
silos and don't function as part of an integrated system.
    MedPAC and others have highlighted the need for a post-
acute assessment tool that guides placement decisions based on 
the resource needs of the patient regardless of the setting. I 
hope CMS is making progress in developing a congressionally 
mandated demonstration project on this issue and that we hear 
more about that today.
    CMS has put forth proposals or is implementing various 
regulations that attempt to better align payment incentives and 
ensure payment accuracy. I look forward to hearing CMS 
testimony on these regulations, however we are hearing from the 
industry that many of these regulations, particularly the 
inpatient hospital regulations, are nothing but backdoor 
attempts to circumvent Congress and cut spending.
    I'm loath to intervene in the nuts and bolts of 
regulations. I usually think that level of detail is best left 
to the experts like Mr. Kuhn. I recognize that the program 
needs to make changes to respond to provider behavior. However 
a lot of fair questions could be asked about how this behavior 
was estimated in reaction to the inpatient hospital regulation 
and the magnitude of payment reductions caused by the 
adjustment.
    Lastly, it boggles my mind that the hospital and post-acute 
care providers would stand by silently while we continue to 
overpay Medicare Advantage plans. We learned from the CMS chief 
actuary a few weeks ago that overpayments to Medicare advantage 
plans shorten the life of the Part A trust fund by 2 years. 
That's 2 years off of the life of this trust fund where we get 
the money to pay the inpatient hospital services and most post-
acute care.
    Now the program is not in crisis. We have always done what 
we needed in the past to protect Medicare, and I hope we'll 
continue to do that. That's one of the reasons we're having 
today's hearings.
    It's important to note that these overpayments directly and 
negatively affect Medicare's financial outlook. Last I looked 
it's not as if the plans are treating the hospitals, skilled 
nursing facilities, or home health agencies very well. In fact, 
I gather payments from the plans often fall short of Medicare's 
payment rate under fee-for-service.
    I hope that the providers who are here today recognize this 
tension and will work with us to protect Medicare and ensure 
its continued strength.
    Do you think you can add to that or top it, Mr. Camp?
    Mr. CAMP. I think I can, actually. Thank you, Mr. Chairman. 
Thank you all for coming.
    As the Committee seeks to improve the Medicare system we 
need to examine how the program pays for both hospital and 
post-acute treatments. Medicare currently allows its 
beneficiaries, as the Chairman mentioned, to receive care in 
four different post-acute settings, long-term acute hospitals, 
inpatient rehabilitation facilities, skilled nursing facilities 
and in the patient's home.
    Medicare payments are seemingly based more on the sign on 
the front of the facility than on the care provided. These 
differences in payments have a real impact on Medicare's costs. 
According to MedPAC a hip or knee replacement patient currently 
costs Medicare $3,400 more in an inpatient rehab facility than 
at a skilled nursing facility.
    The lack of quality and outcome data make it impossible to 
compare the two settings. Frankly we don't know whether 
patients are being treated in the most appropriate setting. The 
separate payment systems and different assessment tools have 
resulted in a fragmented post-acute care system and, as the 
Chairman said, silos of care, potentially resulting in patients 
receiving treatment at higher intensity than necessary, driving 
up the cost of the program to taxpayers.
    In the Deficit Reduction Act, Congress instructed CMS to 
develop a demonstration program that would use a common patient 
assessment tool to better compare the different post-acute care 
sites. I look forward to hearing what progress has been made in 
implementing this important project.
    I'd also like to say that I'm deeply concerned about CMS's 
continued expansion of the 25 percent rule to freestanding and 
grandfathered LTCHs. In 2004, I wrote CMS saying this policy 
was misguided. I believe then, as I do now, that MedPAC's call 
for patient admission criteria is the way to go. Admission 
should be based on clinical criteria not arbitrary quotas. 
Simple statistics are denying beneficiaries care at the 
appropriate facilities, adding unnecessary hurtles to getting 
care they deserve.
    We will hear about a proposal to modify Medicare payments 
to hospitals. Recently CMS proposed to make significant 
refinements to the payment system for inpatient services, which 
would adjust payments to account for sicker, more expensive 
patients. I've already heard concerns about how CMS has 
attempted to anticipate changes in hospitals' coding practices 
under the rule, and I look forward to examining how to best 
ensure payment accuracy without limiting beneficiary access to 
important patient services.
    I thank the Chairman for this hearing, and I yield back the 
balance of my time.
    Chairman STARK. Thank you, and now let's hear from our 
first panel.
    Mr. Kuhn, would you like to lead off and enlighten us in 
any manner you're comfortable?

                    STATEMENT OF HERB KUHN,

                  ACTING DEPUTY ADMINISTRATOR,
           CENTERS FOR MEDICARE AND MEDICAID SERVICES

    Mr. KUHN. Chairman Stark, Mr. Camp, distinguished Members 
of the Subcommittee, thank you for inviting me here today to 
discuss Medicare's reimbursement systems and payment updates 
for acute and post-acute care providers.
    The Centers for Medicare and Medicaid Services looks 
forward to working with Congress in the coming year to further 
reform Medicare's fee-for-service payment systems and to make 
strides toward our shared goal of delivering the highest 
quality of care to people with Medicare.
    As the Administration's fiscal year 2008 budget proposals 
and recent rule-making demonstrate, CMS is committed to 
ensuring that Medicare providers are paid appropriately and 
accurately for services furnished to beneficiaries.
    In turn, beneficiaries are entitled to and deserving of 
access to high quality care in the most appropriate setting. We 
firmly believe that the continued improvement and refinement of 
Medicare's payment systems with the aim of making the delivery 
of quality care more efficient will bring us closer to 
achieving these interrelated goals.
    The proposed rule to update hospital inpatient 
reimbursement in the coming fiscal year is estimated to 
increase payments to more than 3,500 acute care hospitals by 
$3.3 billion. CMS is embarking on a third year of refinements 
to inpatient prospective payment system based on 
recommendations from the Medicare Payment Advisory Commission. 
We propose to adopt a severity diagnosis related group system 
to better recognize severity of illness and the cost of 
treating Medicare patients.
    But increasing the number of DRGs from 538 to 745 we will 
improve the accuracy of Medicare payments. This follows 2 years 
of incremental severity adjustments and last year's movement 
from charge-based to cost-based weights. Consistent with the 
law, the severity adjustments would be implemented in a budget 
neutral manner, neither increasing nor decreasing overall 
Medicare spending. This step was taken to account for 
improvements in hospital coding.
    That hospitals would code more accurately under such 
circumstances is a sound and legitimate response supported by 
research dating back more than $20. Appropriately however, 
payments would increase for hospitals serving more severely ill 
patients and decrease for those serving patients who are less 
severely ill.
    This year's inpatient hospital rule aims to improve the 
reliability and quality of care by continuing to expand the 
number of publicly reported quality measures. Also for the 
first time, CMS is recognizing hospital-acquired conditions and 
will ensure that Medicare no longer pays hospitals for the 
additional costs of cases with these conditions.
    CMS has also issued proposed rules for skilled nursing 
facilities, home health agencies, and inpatient rehabilitation 
facilities. The SNF proposal provides a 3.3 percent update and 
seeks comment on the forecast error adjustment. IRFs are also 
given a 3.3 percent update, and the proposal seeks comment on 
whether some or all of the existing co-morbidities should be 
included and calculated in compliance with the 75 percent rule, 
which aims to promote access to care for beneficiaries who 
require specialized and intensive rehabilitation care furnished 
in rehabilitation facilities.
    The proposed rule for home health features the first major 
set of refinements since the advent of its prospective payment 
system in 2000. Research conducted by Medicare contractor APT 
Associates identifies two significant areas for payment 
requirement, therapy thresholds and case mix changes. This 
research was vetted thoroughly with the stakeholder community 
in 2005 and 2006.
    Finally, CMS has issued the final long-term care hospital 
rule, which continues the agency's efforts to ensure Medicare 
is paying appropriately for medically complex patients. The 
rule advanced recommendations to short stay outlier policy and 
modified the 25 percent rule to include freestanding 
facilities.
    In addition, it identified next steps CMS will pursue in 
working with the industry to develop patient and facility 
criteria for LTCHs. This effort stems from a MedPAC 
recommendation and subsequent research CMS conducted with it's 
contractor RTI.
    Mr. Chairman, CMS is firmly committed to implementing 
rational and responsible policies to ensure that Medicare 
remains fiscally sustainable. The actions we take now would 
directly impact our ability to preserve the promise of 
healthcare coverage for America's seniors, people with 
disabilities and low-income, vulnerable populations.
    We look forward to working with Congress in the coming year 
to reform Medicare's fee-for-service payment systems, in 
particular those that impact the providers we are discussing 
today.
    I would be happy to answer any questions the Committee 
might have.
    [The prepared statement of Mr. Kuhn follows:]

    [GRAPHIC] [TIFF OMITTED] 47174A.000
    

    [GRAPHIC] [TIFF OMITTED] 47174A.001
    

    [GRAPHIC] [TIFF OMITTED] 47174A.002
    

    [GRAPHIC] [TIFF OMITTED] 47174A.003
    

    [GRAPHIC] [TIFF OMITTED] 47174A.004
    

    [GRAPHIC] [TIFF OMITTED] 47174A.005
    

    [GRAPHIC] [TIFF OMITTED] 47174A.006
    

    [GRAPHIC] [TIFF OMITTED] 47174A.007
    

    [GRAPHIC] [TIFF OMITTED] 47174A.008
    

    [GRAPHIC] [TIFF OMITTED] 47174A.009
    

    [GRAPHIC] [TIFF OMITTED] 47174A.010
    

    [GRAPHIC] [TIFF OMITTED] 47174A.011
    

    [GRAPHIC] [TIFF OMITTED] 47174A.012
    

    [GRAPHIC] [TIFF OMITTED] 47174A.013
    


                                 

    Chairman STARK. Thank you.
    Mark?

STATEMENT OF MARK MILLER, EXECUTIVE DIRECTOR, MEDICARE PAYMENT 
                    AND ADVISORY COMMISSION

    Mr. MILLER. Chairman Stark, Ranking Member Camp, 
distinguished Subcommittee Members, as you know, MedPAC is a 
congressional support agency created to advise Congress on 
Medicare policy. As you know, we have 17 commissioners from 
diverse backgrounds that review the work produced by the staff 
and shape the advice that we forward to the Congress.
    As we consider our policy advice to Congress we keep a 
couple of principles in mind, assuring that beneficiaries have 
access to quality care, assuring that taxpayer dollars are 
spent wisely and then designing payment systems for providers 
that assure this access but also assure that care is provided 
efficiently. In this instance efficiently means not just lower 
spending if that's appropriate but also higher quality at the 
same level of spending.
    There are other considerations that I know are on the mind 
of commissioners. First there is a long run sustainability 
problem for Medicare. Medicare is growing faster than the 
budget, the economy and beneficiary incomes. But these spending 
increases have not been consistently accompanied by 
improvements either in coordination or the quality of care.
    We believe attention is needed to improve payment and 
delivery system incentives as part of the solution to 
correcting Medicare's long run sustainability issues.
    Second, Medicare policies must evolve to be more sensitive 
to the performance of providers. That is, we should pay more to 
providers who use resources wisely and provide high quality 
care, we should pay less to those who do not.
    Third, that as a payer Medicare must maintain physical 
pressure on providers in order to assure that providers are 
constantly engaged in spending carefully and improving the 
quality of care that they provide.
    The testimony I submitted discusses policies related to 
fee-for-service hospitals and to post-acute care. I will just 
note a few ideas and then take other questions for more 
details. MedPAC has previously made recommendations to 
establish a budget neutral pay-for-performance system for 
hospitals and home health agencies. We have also called for 
refinements to the hospital underlying payment system for 
hospitals, skilled nursing facilities and home health agencies.
    Regarding payment policy, as mandated by law each year we 
are asked to make recommendations on payment updates to 
Congress. We consider several factors, supply of providers, 
access to service, how much Medicare pays relative to 
providers' costs.
    With respect to hospitals the commission finds that most 
measures of financial performance are positive. For example, 
access is good, service volume is increasing and spending on 
capital is at an all time high. However there is some bad news. 
Medicare margins, the amount Medicare pays above cost, are 
negative and falling.
    Part of the reason that these margins are low is because 
hospitals have had high rates of cost growth. We think that 
part of the reason they have had high rates of cost growth is 
that private payers have not put significant fiscal pressure on 
hospitals to contain their costs. We find, for example, that 
hospitals that have consistently poor Medicare performance are 
also hospitals that are paid well above their costs by private 
payers and hence have higher costs per case and higher growth 
in cost per case.
    So, taking this evidence into account the commission tried 
to strike a balance between these various indicators and the 
need to maintain fiscal pressure. We have recommended a full 
market basket increase for hospitals but implemented 
concurrently with a budget neutral pay-for-performance system 
for hospitals. The pay-for-performance policy would 
redistribute dollars among hospitals so that the net payment to 
high quality hospitals would be greater than a market basket 
alone and the net payment to low quality hospitals would be 
less than the increase for a market basket alone. In other 
words, we do not believe that all hospitals are entitled to a 
net increase in payments equal to the full market basket.
    In a previous report on specialty hospitals, the commission 
made a series of recommendations to improve the underlying 
hospital payment system by refining the payments to remove 
distortions that make some services systematically more 
profitable than others and to better account for differences in 
patient severity.
    Regarding post-acute care services, home health SNF, long-
term care hospitals and inpatient rehab, generally the picture 
is positive. There's an adequate supply of providers. 
Beneficiary access is good. Volume of services is generally 
increasing and through 2005 Medicare payment exceeded cost by a 
wide margin.
    However, looking forward to 2007, some circumstances have 
changed. For inpatient rehab facilities and long-term care 
hospitals, changes in the regulatory environment will bring 
payments for these facilities down. But in evaluating these 
impacts the commission chose to recommend a small, one percent 
update for inpatient rehab facilities and a zero percent update 
for long-term care hospitals.
    Regarding long-term care hospitals, a few years ago MedPAC 
made recommendations to implement patient and facility criteria 
that would better target services to Medicare beneficiaries. 
Finally, projecting forward for home health and skilled nursing 
facilities, we continue to see that Medicare payments far 
exceed costs and have recommended zero updates in these areas.
    I look forward to your questions.
    [The prepared statement of Mr. Miller follows:]
    [GRAPHIC] [TIFF OMITTED] 47174A.014
    

    [GRAPHIC] [TIFF OMITTED] 47174A.015
    

    [GRAPHIC] [TIFF OMITTED] 47174A.016
    

    [GRAPHIC] [TIFF OMITTED] 47174A.017
    

    [GRAPHIC] [TIFF OMITTED] 47174A.018
    

    [GRAPHIC] [TIFF OMITTED] 47174A.019
    

    [GRAPHIC] [TIFF OMITTED] 47174A.020
    

    [GRAPHIC] [TIFF OMITTED] 47174A.021
    

    [GRAPHIC] [TIFF OMITTED] 47174A.022
    

    [GRAPHIC] [TIFF OMITTED] 47174A.023
    

    [GRAPHIC] [TIFF OMITTED] 47174A.024
    

    [GRAPHIC] [TIFF OMITTED] 47174A.025
    

    [GRAPHIC] [TIFF OMITTED] 47174A.026
    

    [GRAPHIC] [TIFF OMITTED] 47174A.027
    

    [GRAPHIC] [TIFF OMITTED] 47174A.028
    

    [GRAPHIC] [TIFF OMITTED] 47174A.029
    


                                 

    Chairman STARK. Thank you. Thank you both.
    Mr. Kuhn, CMS has proposed to extend the 25 percent rule 
for long-term care hospitals to ``free standing'' long-term 
care facilities. Have you seen evidence that acute care 
hospitals and free standing long-term care hospitals are 
developing transfer relationships that are financially 
beneficial to both entities?
    Mr. KUHN. The issue of patient swapping has been a very big 
concern at the agency for the last couple of years as we've 
looked at this issue, and we do see a strong relationship 
between the primary referring hospital and ultimately the long-
term care hospital and we see this in a couple of areas. One is 
in terms of the number of actual patients coming from the acute 
care hospital, the referring hospital, to the LTCH. But where 
we also see it is in outlier payments.
    We see almost a 50 percent drop off in outlier payments for 
those facilities that have an LTCH or a relationship with an 
LTCH versus others. So I think it really raises the question 
with us as the agency--are we transferring patients while 
they're still in active treatment in an acute care hospital, 
and are we seeing shifting between hospitals in order to 
generate a second payment.
    So we thought, based on the information we had, that moving 
the 25 percent threshold to freestanding facilities was 
appropriate. Now it is different than what we proposed. It's a 
3 year phase in instead of all in the first year but we thought 
that was appropriate policy decision.
    Chairman STARK. Long-term care patient and facility 
criteria may not diminish the need for the 25 percent rule, but 
will the--why don't you think it will not diminish the need for 
the 25 percent rule?
    Mr. KUHN. Well, I don't want to prejudge the outcome in 
terms of what kinds of characteristics we can come up with, 
both facility as well as patient. One of the reasons we did, 
based on the comments we received, to do a 3 year phase in was 
to try to give us more time to look at the work that our 
contractor RTIs developed so we can try to synch those up at 
the end of the day.
    So, we want to move forward with the patient 
characteristics, the facility characteristics research, 
hopefully move to an assessment instrument, see if we can move 
forward in that direction. I think, at the end of the day is--
then we can look, is the 25 percent threshold still appropriate 
or does the patient characteristics take over and would help us 
better manage utilization?
    Chairman STARK. You have--you're proceeding to implement a 
75 percent inpatient rehab facility rule. Do you have any 
evidence on how that will affect patient access to care?
    Mr. KUHN. The information we've looked at so far doesn't 
seem to be impactful in terms of patient access. Yes, the 
number of admissions in rehab facilities are down, and of 
course they would be. But really this is about value. This is 
not about volume as we move forward. The intent is really to 
remove the risk of Medicare overpaying for treatment for 
patients in these facilities. So yes, the numbers are down. But 
what we're seeing correspondingly is that skilled nursing 
facilities, home health agencies are picking up these patients 
in the right settings.
    So, the biggest area where we had questions, that is, lower 
extremities or joint replacements are moving out of IRFs into 
other areas where they can be treated just as appropriately by 
the lower costs. But other patients--for maybe stroke, brain 
injury, nervous system problems are moving more aggressively 
into the rehab systems. So, this is a policy seemingly to have 
its impact in an appropriate way.
    Chairman STARK. Thank you.
    Mark, I know that you please all of the hospitals when you 
suggested a full update and got everybody all excited, but I 
gather in your testimony you're suggesting that--I'm not sure 
you gave us the list of who should get an update and who 
shouldn't. I'm waiting for you to hand me that list of the 
6,000 hospitals. You had a rate of A, B, C, D, so none of the 
ones that get a cut are in California, I presume.
    Mr. MILLER. Obviously.
    Chairman STARK. Or New York or Michigan or Texas. But at 
any rate, is it fair to say that you recommend an update for 
hospitals but that there should be some differentiation to the 
extent we can determine that among more efficient hospitals and 
less efficient hospitals?
    Mr. MILLER. I think that's a fair characterization of the 
commission's position. There's a lot of discussion around this, 
and you saw a lot of positive indicators, but the Medicare 
margins and the trends in those were disturbing commissioners. 
But at the same time there was a real concern that just sort of 
a blanket, across the board update for all hospitals was not a 
good use of either policy design or the resources that Medicare 
has. So, I think your characterization is correct.
    Chairman STARK. You also recommended a 1 percent update for 
inpatient rehab facilities for '08. You base that on a 
conservative assumption about how they'd respond to the 75 
percent rule. If they are nimble and able to restructure costs, 
how high might their margins go?
    Mr. MILLER. I just want to be clear that we're in the world 
of estimation here. But what we estimated on different sets of 
assumptions was as high as five-and-a-half percent.
    Chairman STARK. Under that scenario would an update that is 
lower than your recommendation be justified?
    Mr. MILLER. I can only speculate about what the commission 
would have concluded, and my sense is, given where things were 
in the inpatient rehab facility, they would have gone with a 
zero update in that circumstance. But that's my guess.
    Chairman STARK. I think we'll hear from witnesses later 
that the inpatient rehab facilities may have to turn away 
patients because of the 75 percent rule and that we're seeing a 
decline in admissions. Should the IRFs be turning away 
patients? Does the drop in admissions mean there's an access 
problem?
    Mr. MILLER. We looked at this just like Herb did as well. 
We decidedly see a reduction in admissions, just as Herb said. 
We decidedly see increases in areas like skilled nursing 
facilities and home health. I would characterize the 
commission's view of the 75 percent rule as a fairly blunt 
instrument, and our concerns about the 75 percent rule were to 
be that it needs to be dynamic, revisited, in order to be sure 
that it evolves with the change in care and that the process 
that they use to define diagnoses that are allowed should be 
transparent to the industry, to the patients, to clinicians.
    So, we don't see--we did not conclude that there was an 
access problem or an issue that would warrant change at this 
point. We made the recommendation that we made for the 1 
percent sort of evaluating the entire array of evidence.
    Chairman STARK. Thank you.
    Mr. Camp, would you like to go next?
    Mr. CAMP. Thank you, Mr. Chairman. I think I just would 
like to go back to the long-term acute care hospital issue for 
just a second. You know, as in many areas across the country 
there may be only one or two acute care hospitals. There's been 
a lot of mergers in the medical sector. How do you propose, how 
does CMS propose to address an area with fewer local hospitals 
and will hospitals, LTCHs, located in those areas be exempt 
from the 25 percent rule?
    Mr. KUHN. We did a couple things in the rule to try to help 
deal with that issue. Obviously the 25 percent rule is there 
for hospitals, but in two instances, if they're located in the 
rural area the threshold is 50 percent or if they happen to be 
a dominant facility in the area it can go up to 50 percent as 
well. The second part is that if a patient from an acute care 
facility has already triggered an outlier payment that doesn't 
count against the 50 percent threshold, or if they're receiving 
patients from someone's home or a skilled nursing facility or 
something like that. So, we think those changes provide the 
flexibility--enough flexibility in those areas.
    Mr. CAMP. You often don't have hospitals. You have hospital 
systems. Are hospitals within the hospital system treated as 
distinct hospitals or because they have the same parent are 
they all part of the same hospital?
    Mr. KUHN. My recollection, it's treated as a system for 
that process, but I could double check. I believe if I'm 
incorrect we could get back to you in writing on that one.
    Mr. CAMP. I also want to just also touch on the CMS 2.4 
percent reduction for hospitals. I guess what MedPAC giveth CMS 
taketh away. I realize there are significant changes being made 
to the DRG system, taking into account patient severity. How 
did CMS come up with this 2.4 percent reduction in payment for 
coding and can you explain how CMS proposes to implement that?
    Mr. KUHN. Sure. First of all, it really is not a reduction. 
It's a budget-neutral adjustment. The issue, if you really look 
at this year's rule, hospital payments are going up by an 
excess of $3 billion. It's a 3.3 percent market basket update.
    What we've done in this proposed rule is the third year in 
terms of adjustments on severity, and we're increasing the 
number of DRGs from approximately 538 to 745. When you do that, 
hospitals--and as I said in my opening statement, will code 
more accurately. As a result of that, you want to keep it 
budget neutral throughout the system. You don't want to spend 
more money by virtue of these additional DRGs, you want to 
spend the same amount of money, so you need to make a budget 
neutral adjustment.
    This is supported by over 20 years of research and 
experience in this area. When the PPS system for hospitals was 
first implemented in 1983 there was a behavioral adjustment put 
in place. In a retrospective manner it looked like the agency 
undershot and hospitals coded more aggressively than we 
originally thought.
    If you look at long-term care hospitals, psychiatric 
facilities, rehab facilities, all those were also put in 
prospective adjustments for behavioral changes. At least for 
long-term care hospitals and rehab facilities, the evidence 
shows that we undershot and we've had to go back and make 
retrospective changes.
    So, this is standard behavior in prospective payment 
systems and what we do. Where we got the numbers that we put in 
place were based on experience that we saw with the state of 
Maryland. Maryland operates under a waiver and they put in 
place the APRs, the all-payer refined DRGs, a few years ago, 
and we saw very aggressive coding changes as a result and in 
direct reaction to these new DRGs that were put in place.
    So based on the best information we had for Maryland our 
actuaries made these recommendations. But again, it's a 
proposed rule and we hope to get comments from the stakeholder 
community on it.
    Mr. CAMP. I'm sure you'll be receiving many of those. Just 
one last question, Mr. Kuhn. Regarding home health, obviously 
the Deficit Reduction Act tied home health payments to the 
reporting of quality measures and if you reported quality you 
received a higher payment, but CMS also required that home 
health agencies submit OASIS data in order to receive that 
higher update.
    Obviously this is something they were required to do 
anyway. I am encouraged that CMS is proposing to capture two 
additional measures relating to wound care next year, but does 
CMS really feel that it's getting enough useful information out 
of the OASIS data? Since payment is tied to the reporting of 
quality data, does it make sense to require agencies to submit 
something that they aren't required to submit as a condition of 
participation in the Medicare program?
    Mr. KUHN. It's a very good question, and you're right. We 
have 10 data elements we're using this year and we plan to go 
to 12 for next year. We do need more major development in the 
home health area. The time being from when the legislation was 
passed to the implementation of this was very short and so we 
had to kind of go with what we had, but there is a duplication 
between what's reported on OASIS and what's reported for the 
quality indicators. But major development is underway and we 
hope in future years we can get a more expanded list and 
achieve the objective you all wanted in the legislation that's 
better quality information that both patients and providers can 
use and that ultimately may be tied to payment someday in the 
future.
    Mr. CAMP. All right. Thank you. Thank you both for your 
testimony. I see my time has expired. Thank you, Mr. Chairman.
    Chairman STARK. Mr. Doggett, would you like to inquire?
    Mr. DOGGETT. Thank you, Mr. Chairman, and thank you 
gentlemen for your testimony. Mr. Kuhn if I could first address 
your attention to the monetary cap on therapy services under 
Part B in skilled nursing homes. As you know, we have the 
exceptions process. It's set to expire at the end of the year. 
What will happen to people who have life threatening conditions 
if they bump up against that cap and we don't extend the 
exceptions process?
    Mr. KUHN. If the exceptions process is not extended for 
this year it could create some real issues in terms of people 
as you indicated, bumped up against the cap. So I think this is 
something that's real ripe for us as the agency to engage with 
all of you to think about what should be the future policy. 
Should it be an extension of the cap or is there another way 
that we can structure this payment system to help in that 
effort?
    Last year we took possession of three reports we got from 
contractors in terms of therapy adjustments we could make, 
adjustments in the payment system. We posted all those to our 
website and we put it out for everybody to see. Then beginning 
this year we started calling in the stakeholder community to 
talk to them about those reports and what we could do together 
with them to come up with some ideas in order to engage you and 
others about the right way to go.
    So, I guess the question is, is there enough time yet this 
year to still develop some proposals that we could do something 
different than the current exception process or do we need to 
extent the exception process, or the third option is to let the 
caps go into place as they were first put in place as part of 
the BBA. All those are options and we'd like to talk with you 
and others in Congress more about that.
    Mr. DOGGETT. Well, if we let the caps go into place there 
will be some pretty severe impacts on individuals with 
disabling conditions, especially in rural areas, won't there?
    Mr. KUHN. I have no doubt that we would see some 
information. One of the things that maybe we--could be helpful 
to you and others is to understand kind of the time frame at 
which people start to hit the caps because people with real 
chronic issues might start hitting those caps by, say, the end 
of February of next year. Some it might be, you know, in the 
summer. We don't yet know.
    So, I think some better data mining on our part could help 
you all in terms of that decision-making process.
    Chairman STARK. Since we're almost to the midpoint of this 
year, do you have a proposal to advance at this point as an 
alternative to the exceptions approach?
    Mr. KUHN. Nothing specific yet other than what we have in 
those contract reports and our discussions with the stakeholder 
community. But again, I think this is something that we all 
could work together on and talk further about.
    Mr. DOGGETT. Of course it unfortunately is true, is it not, 
that the Administration did not put in any money in its budget 
for correcting the therapy caps under any proposal?
    Mr. KUHN. There was no recommendation in this year's 
President's Budget, that's correct.
    Mr. DOGGETT. As far as this year's President's Budget is 
concerned as well, do you agree with the chief actuary of 
Medicare who has estimated that overpayments, as the Chairman 
said in his opening statement to Medicare Advantage shortened 
the solvency of the Part A trust fund by 2 years?
    Mr. KUHN. I guess the way I would characterize it, not as 
an overpayment but the opportunity to pay for additional 
benefits for those in Medicare Advantage. I would not dispute 
the information provided by Rick Foster that if you change the 
payment rates or rate reductions in Medicare Advantage it could 
extend the trust fund for an additional 2 years. However, the 
provisions put in the President's Budget for changes in 
Medicare policy would extend the trust fund for an additional 4 
years.
    Mr. DOGGETT. Well, some of those are fairly--have fairly 
onerous consequences of doing that. You indicate that the 
President put in no money to help my constituent who has a head 
injury or lung disease and bumps up against the exceptions 
under Part B in a skilled nursing home, and yet, as I 
understand his budget he rules off limits taking even a dime 
from Medicare Advantage.
    Mr. KUHN. That's correct. There are no recommendations for 
changes in Medicare Advantage payments in the President's 
Budget.
    Mr. DOGGETT. Is that still the Administration's position 
that we are to look at Medicare and the many conflicting 
concerns and interests that we have but we're to do all of it 
without taking a dime from the Medicare Advantage program?
    Mr. KUHN. Again, there's no recommendations in the 
President's on Medicare Advantage. But having said that we are 
continuing to look at the Medicare Advantage program and 
changes are in the offing.
    This year because we are making changes in fee-for-service, 
that also impacts Medicare Advantage. So this year's proposal 
dealt with issues such as the frailty adjustment, to make sure 
that those adjustments were made accordingly, fee for service 
normalization and ESRD changes. So, there are changes that are 
ongoing with the payment system on Medicare Advantage as part 
of the regular regulatory process.
    Mr. DOGGETT. Finally with regard to long-term care 
facilities, you've had a couple of questions on this. As Dr. 
Miller pointed out, MedPAC made recommendations back in 2004, 
almost 3 years ago, to have you set up a facility and patient 
criteria system. When will we get it?
    Mr. KUHN. That's a very good point. Basically MedPAC did 
make that recommendation and acting upon that we engaged the 
contractor RTI to give us a report on this. That report was 
made available late last year. Already we have convened one 
technical expert panel with the industry to help us kind of 
look at the report, come up with a set of recommendations.
    Very soon we ought to be convening a second technical 
expert panel to help us move forward on that, and then the 
really hard work begins in terms of the development of 
assessment instruments. I would hope within the next couple 
years we could be at a better place here but probably not 
before then.
    Mr. DOGGETT. You think a couple of years before a new 
regulation is in place?
    Mr. KUHN. A couple of years before we would have some good, 
solid recommendations on a new kind of classification system 
for LTCH.
    Mr. DOGGETT. A couple of years before you make the 
recommendation, not before it becomes effective?
    Mr. KUHN. That's right, a couple years before we'd have a 
final recommendation.
    Mr. DOGGETT. As far as where you are now, you said you 
brought in some experts. Has MedPAC, Dr. Miller had a chance to 
see and comment on the alternatives that you're looking at?
    Mr. KUHN. They will be engaged in that process as we go 
forward, yes, sir.
    Mr. DOGGETT. But they have not thus far? Are you members of 
the----
    Mr. KUHN [continuing]. I can't remember if they were on the 
technical expert panel or not.
    Mr. MILLER. I believe that we were briefed on the 
directions that they were going in, yes.
    Mr. DOGGETT. We would certainly need your further input on 
that. It's been a very long process.
    Mr. MILLER. The only thing I would point out is that 
there's actually two different pieces of legislation floating 
around from the two different associations in long-term care 
hospitals, which take pieces of our criteria and build them 
into legislation. I would also suggest that we start looking at 
that and think of one piece of legislation that encompasses all 
of the criteria and use that as a place to start our 
discussions.
    Mr. DOGGETT. I'll just follow up on that. Is there one of 
those approaches that you find preferable to the other?
    Mr. MILLER. No, what the industry did is they sort of 
selected pieces of our criteria and kind of pulled them apart 
and put them in two different bills. We think there needs to be 
both patient and facility criteria, and we have our list, and 
we think that the legislation needs to include all of it.
    Mr. DOGGETT. Do we need to move forward in passing that 
legislation rather than waiting for another couple of years for 
them to come out with a recommendation?
    Mr. MILLER. I mean I think ultimately--and actually I'm not 
sure of this. I think ultimately there may need to be some 
legislation in order for the industry to--or for the agency to 
go forward, although I'm not sure of that.
    Mr. DOGGETT. What's your view on that, Mr. Kuhn?
    Mr. KUHN. We haven't taken an official position on any of 
the legislation that's out there. It does, for example, exclude 
psychiatric and rehabilitation cases from going into LTCHs, but 
on the rest of the area, really getting the good, scientific 
basis in terms of how you make an assessment of when someone is 
ready to be transferred from an acute care hospital to an LTCH. 
I just don't know if we're there yet on the body of evidence.
    So, legislation could get us part way there. I just don't 
know if it would get us all the way there yet.
    Chairman STARK. Mr. Johnson, would you like to inquire?
    Mr. JOHNSON. Thank you, Mr. Chairman. You know, I liked the 
question Mr. Doggett asked about how you're developing a 
patient assessment tool. I don't think you really answered the 
question, when's it going to happen. You're telling us maybe 
one, maybe 2 years.
    Mr. KUHN. It's probably still a lot of research and a lot 
of development needs to go on, Mr. Johnson, and we're probably 
2 years out from the final effort in this area.
    Mr. JOHNSON. Well, that brings me to another question. It 
seems silly to me that we're using outdated data. I've been 
after you guys about that before. But in home health care I 
think you went from '97 to '04, but '04 is still 3 years old. 
You know, we send patients to doctors, and I think doctors are 
more reliable on making decisions about where a patient ought 
to go or how long he ought to stay. Their information is 
current. I mean it's of the minute. So, why can't we get that 
kind of information and use it in our assessments?
    Mr. KUHN. I agree having the best information available for 
payment systems is absolutely key. Part of it is that the 
hospitals and other providers that provide us their information 
provide a report at the end of the year. It needs to be 
audited. Then if there's any disputes in it they need to go 
through that process. So, the whole back end process of 
auditing, making sure it's accurate takes time to play that 
out. If there's ways that we could accelerate that and use 
better, more current information we would certainly like to 
find a way, but at least at the time being it looks like it's 
about as fast as we can move on the data for payment systems.
    Having said that, in terms of clinical information, now 
that we're moving for paper reporting and some of those issues 
the data is turning around a lot quicker. So we're doing better 
on that and we seem to be able to move that one because you 
don't have to go through the extensive financial audits. So, on 
that side of the ledger I think we're going to have a better 
picture in the future.
    Mr. JOHNSON. Would it help if hospitals got everything on 
computer and talked to each other?
    Mr. KUHN. Most of it is electronic now, and our cost 
reports are standardized. They seem to be able to get the 
information in accurately and appropriately, but additional 
standardization in a number of areas probably would help as 
well.
    Mr. JOHNSON. You indicate, I believe, you announce that 
free standing, long-term health care would be subject to the 25 
percent rule. Yet, in areas across our country communities have 
only one or two acute care hospitals. How is the CMS proposing 
to address areas with three or fewer hospitals, and will long-
term care in these areas be exempted?
    Mr. KUHN. What we're trying to do in that area is a couple 
of different thresholds. One is to make sure for the rural 
long-term care hospitals, they're set at a 50 percent 
threshold, so they're not held to the 25 percent threshold. 
Then also those areas like you described where there's kind of 
a dominant player in the area, and say there's two 
institutions, one could be at the 50 percent threshold, the 
other could be, say, at a 40 percent. So, we think between the 
combination of both the dominant and the rural kind of set 
asides, I think it works in those areas and I think it makes a 
better policy.
    Obviously this is something we want to monitor as we do 
implementation. We're going to do a 3-year phase in. The idea 
of a 3-year phase in was to deal with the first question you 
asked to make sure that you kind of synch this up at the end of 
the day with a better classification system so that it will be 
one for active monitoring for all of us.
    Mr. JOHNSON. Mr. Chairman, I don't have any further 
questions. Thank you.
    Chairman STARK. Thank you. Mr. Thompson.
    Mr. THOMPSON. Thank you, Mr. Chairman. Mr. Kuhn, in regard 
to the proposed rule, the IPPS rule, as I understand it, the 
adoption of the cost-based weights might result in an increase 
to rural facilities but that the shift to the severity-based 
DRG will certainly result in a decrease. I believe your staff 
has conceded that this proposal will bring about a net decrease 
in reimbursements to rural hospitals. I'm interested to know if 
you have any way to quantify the severity of the cut that the 
rural hospitals will experience. Has there been given any 
thought to providing some sort of carve out for the rurals or 
hold harmless for the rurals?
    Mr. KUHN. What you're describing, you described it 
accurately. What happened was is when we did the cost-based 
weights last year that really did send payments away from 
surgical procedures more to medical procedures. Real hospitals, 
by kind of a generalization tent to treat more medical cases 
than surgical cases, so they were the beneficiary of the 
changes made last year as part of the process.
    But last year when we laid out the proposal and as we 
talked about the proposal this year, when you go to severity 
adjustments it tends to have the reverse effect. Urban 
hospitals tend to see sicker patients and probably ought to be 
awarded accordingly as a result of the----
    Mr. THOMPSON. I'm pretty familiar with the reasoning. I'm 
just wondering, have you been able to quantify what the hit is 
going to be to rural?
    Mr. KUHN [continuing]. I think the ultimate impact for 
rural hospitals over is a minus 1.5, maybe a minus 2 percent 
overall, a general characterization of rural hospitals.
    Mr. THOMPSON. So, have you thought about doing a hold 
harmless or provide some sort of--I don't think anybody in this 
room thinks that rural hospitals are fat and sassy. They're 
experiencing the same problems and maybe greater problems in 
other areas. It seems to me that this proposal would make 
things even more difficult for people who live in rural areas 
to get the type of medical care they need.
    Mr. KUHN. Now I think that's a fair point. That's not a 
specific proposal we made and we put forward. Having said that, 
what we could do is receive comments on it for people to give 
us comments in terms of ways that we could look at that. So, 
we're certainly open to hear any comments people might make.
    Mr. THOMPSON. Is it appropriate for me to ask you to give 
us some information on that or give us some thoughts?
    Mr. KUHN. We would be happy to come and talk to you and 
your staff at a later time about that if that would be helpful, 
happy to.
    Mr. THOMPSON. Thank you. My next question is regarding the 
recovery audit contractors that are used. I understand that 
these contractors are able to retain a pretty hefty percentage 
of recovered payments. Some of my hospitals tell me that 
there's one particular state contractor, PRG Schultz working in 
California, that they're denying reimbursements for almost all 
joint replacements, and these are ones that are done in IRFs. 
My question is if they go through the appeal process and 
they're found to--and that reduction is overridden, will that 
money be reclaimed from the contractors?
    Mr. KUHN. Yes. We have these RACs, the recovery audit 
contractors, that are operating right now in three states, 
California, New York and Florida. You're right, the one in 
California has been active in looking at payment options in 
terms of rehab facilities. Right now they are looking at single 
joint replacement issues, things like that.
    We've talked extensively to California Hospital 
Association. I think you and others have directed them to us to 
talk about this issue. Right now, from understanding it's that 
if the hospitals have appealed the determinations by the RACs 
none of them have been upheld in appeal--or they've all been 
upheld, none have been overturned. However if they are 
overturned of course, the dollars do flow back to the hospital.
    Mr. THOMPSON. It would come back from the contractor?
    Mr. KUHN. That's my understanding, yes. If I'm incorrect, 
we can correct that for you for the record, but that's my 
understanding.
    Mr. THOMPSON. Thank you. One final question. That's the 
cuts to capital payments, and some hospitals--and I hate to 
continue to be parochial about this, but California hospitals 
have put a lot of money in regard to safety issues, 
specifically seismic safety. My understanding is that this 
particular proposal would come down pretty hard on the efforts 
in California to protect patients from troubles that would come 
about if there were seismic incidents that would affect these 
hospitals.
    Mr. KUHN. I am aware of the seismic issues California 
hospitals have, and I think that would be a good thing for us 
to get a comment from the hospitals of California and others as 
we think about it.
    The other thing to point out about the capital 
recommendations we make in the proposed rule, and going back to 
your concerns about rural issues is that for the 
recommendations the only changes we made or the only 
recommendations we're making impact urban hospitals. For rural 
hospitals we say leave them alone on capital, give them the 
full update in that regard. So, it really--the differentiation 
is between urban and rural.
    Mr. THOMPSON. Well, urban and rural differences 
notwithstanding, California hospitals, the money that they need 
to retrofit their hospitals is more than the equity in all the 
hospitals in California combined. So, it's a huge issue, and I 
know it's a state mandate to require the seismic retrofit, but 
I don't think anybody at the Federal level is interested in 
putting patients in an unsafe situation.
    Thank you.
    Chairman STARK. Mr. Ramstad, I'm--we're crowding toward the 
end of the vote here. I would hope that we could ask you both 
to stay as we've got five votes. It will take us the better 
part of a half--45 minutes, but if it's possible we'd sure 
appreciate either or both of you staying.
    Mr. Ramstad.
    Mr. RAMSTAD. Thank you, Mr. Chairman. I'll be as succinct 
as possible. I thank you, Dr. Miller and Mr. Kuhn, for being 
here, and I appreciate certainly the fiscal challenges that 
Medicare is facing. I agree that changes obviously need to be 
made. One of the concerns I hear time and time again is that we 
can't cut Medicare because Medicare payments compensate for low 
Medicaid reimbursements. Isn't it true that cross subsidization 
is a big deal, a major issue, especially for providers like 
long-term care facilities that typically see a large number of 
Medicaid patients, caseloads are dominated by Medicaid 
patients? I want to know, number one, how major is the cross 
subsidization issue and number two whether CMS is working with 
the states and providers to develop a system where Medicare 
pays for Medicare services and Medicaid pays for Medicaid 
services. That seems to make only good sense.
    Mr. KUHN. That's a fair question. I think the most recent 
data I've seen on this and probably Mark Miller has probably 
better information than me right now, is that at least for a 
typical long-term care hospital, about 10 percent of their 
patient load is Medicare Part A stays, but it represents about 
20 percent of their revenues. So I think it makes the point you 
were talking about right there, there is a lot of cross 
subsidization going on there.
    Medicare itself works a lot with states in terms of their 
state plans to make sure that they're appropriate and adequate 
in terms of their payment systems. But again, states have a 
great deal of leeway in terms of their ability and their 
determinations in terms of setting rates under the Medicaid 
program. But that happens not only with long-term care 
providers but other providers in the Medicaid program as well.
    Mr. MILLER. We've addressed this issue a couple of times. 
This comes up all the time, as you might imagine, and our 
concerns here are that first of all, using a small block of 
dollars to subsidize the larger block, the targeting is wrong. 
Facilities that have more Medicare would get more payments. 
Then finally you'd basically be inviting the states to step 
back in their responsibilities and so we think that this is 
really a problem.
    Mr. RAMSTAD. Thank you.
    Chairman STARK. Thank you [continuing]. We'll recess 
subject to the call of the Chair.
    [Recess.]
    Chairman STARK. I thank the witnesses and our guests for 
their patience. Mr. Hulshof will inquire.
    Mr. HULSHOF. Thank you, Mr. Chairman. I ask permission. 
I've got an extended written statement. May I include it as 
part of the record?
    Chairman STARK. Without objection.
    Mr. HULSHOF. Thank you, sir.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] 47174A.030
    

    [GRAPHIC] [TIFF OMITTED] 47174A.031
    

    [GRAPHIC] [TIFF OMITTED] 47174A.032
    

    [GRAPHIC] [TIFF OMITTED] 47174A.033
    

    Mr. HULSHOF. I, too, want to thank both you gentleman for 
sticking around. Mr. Chairman, this past Saturday, I was the 
commencement speaker at the University of Missouri School of 
Health Professions. This was the new group going into physical 
and occupational therapy, speech pathologists, and the theme of 
my remarks was what were you thinking? It actually was quite 
inspiring, Mr. Kuhn. I see you smiling at me. But it was--I got 
their attention when we went into it.
    What I want to do is, is I want to talk a little bit about 
and follow up on what each of you has said regarding the 85 
percent rule. You know, one of my biggest concerns, and Dr. 
Miller, you said, and I absolutely agree, we need a dynamic way 
of looking at reimbursements. I think the goal that we share 
that you have as well is an integrated post-acute care system.
    But I've got to tell you that one of my concerns about the 
75 percent rule is the seemingly arbitrary effect it has on 
patients, specifically those not within the 13 diagnostic 
categories that count toward the 75 percent rule, including 
cardiac, pulmonary, cancer pain, joint replacement. So then 
patients that fall outside those 13 qualifying conditions are 
often denied access at an inpatient facility. Access is most 
restrictive for patients whose needs benefit from these newer 
rehab specialties, especially pulmonary and cardiac and cancer.
    I don't know if either of you have seen the Moran report 
that came out earlier this month. It basically says if you look 
at the drop in--as far as discharges from March 31st of 2004 
compared to March 31st of 2007, so a three-year period of time, 
we have seen a nearly 80,000 reduction in discharges. That's a 
23.5-percent decline. Now, Mr. Kuhn, you said, and I'm not--
this is not an indictment of what you said, but you said this 
is the intended impact. I mean, the whole idea of providing 
this integrated care.
    Yet I've got to tell you that, you know, 2 years ago, you 
may recall, Mr. Kuhn, you and I, we had a similar discussion, 
and you mentioned that, well, there was a high water mark 
because there was a spike in admissions because we had 
suspended the old 75 percent rule. But I've got to tell you, 
looking back over the last couple of years, you know, this is a 
fairly harsh picture. Dr. Miller called it a blunt instrument, 
and I couldn't agree more.
    So if we have achieved the intention--I mean, if the intent 
has now been realized, why don't we stop where we are? Mr. 
Tanner and I, and I know he wasn't able to return, but we have 
a bill. H.R. 1459, that basically recognizes that we've 
achieved those admission goals we had hoped for in drafting the 
75 percent rule, and we maintain the 60 percent threshold from 
here on out. You know, we're not repealing it. We're just--
we're standing pat with that. I would hope--I'm not going to 
ask you to comment on the bill specifically.
    But let me ask you, Mr. Kuhn, 2 years ago when we discussed 
the 75 percent rule, a lot of your prepared testimony back then 
focused on the need for research. You said research was an 
important next step. Since then, what research has CMS done or 
what has CMS looked at to more appropriately identify the types 
of clinical or functional or medical characteristics that could 
be used to refine the 75 percent rule if we keep it in place?
    Mr. KUHN. I would agree with you, Mr. Hulshof, that indeed, 
research is the way we need to go in this area. A couple of 
things that we've done in this area, first, right after we came 
out with the final rule back in 2004, we worked with the 
National Institutes of Health to convene a panel to help us 
talk about a research agenda and what would be the right way to 
go.
    As a result of that, we had an information notice to 
investigators that was posted last year by NIH in collaboration 
with us that talked really about the need for a research agenda 
for rehabilitative care, and the fact that how we can increase 
the base of knowledge of information that's out there, and how 
CMS could work with researchers to help them design their 
studies, how we could find ways through our clinical research 
policy to make sure that Medicare would pay for the patients in 
these studies, all the things that we could do to the maximum 
extent possible.
    To be quite candid, we haven't seen anything come forward 
yet as a result of that. We've had some general inquiries but 
no specific proposals yet on that agenda. But we want to 
continue in that area.
    Having said that, NIH convened another panel just a month 
ago to talk further about a research agenda which we 
participated in and encouraged as part of that process. Also, 
we've had some good outreach with the industry themselves, with 
specific rehabilitative hospitals and others who are trying to 
conduct some research. So, we're probably not as far along as 
we would probably like to be, but we are making progress in 
that area.
    Mr. HULSHOF. I appreciate it. As my final comment, Mr. 
Chairman, thank you. I won't ask you a question, Mr. Kuhn, but 
I'm concerned about CMS' proposal not to allow co-morbidity 
cases to be calculated. It's been counted for the past 3 years. 
Starting next year, it won't. If you don't mind, I'll submit a 
question to you and we can chat about this further.
    Mr. KUHN. We'd be happy to chat with you further about 
that, and we hope to get comments during the comment period on 
that specific issue. So, that would be helpful to hear more 
from you about that.
    Mr. HULSHOF. Thank you. Thank you, Mr. Chairman.
    Mr. MILLER. Could I add one thing to this?
    Mr. HULSHOF. Please.
    Mr. MILLER. You know, when the rule initially came out a 
few years back, and this I think just illustrates how difficult 
the problem is, we got a group of clinicians together and sort 
of talked about the implications in it. There was a lot of 
comments that you might imagine along the lines that you were 
saying. But there was also a clinician who said, actually--and 
we were talking about hip and knee replacement, that type of 
thing. There was also a clinician who said I don't use the 
facilities at all. I have a protocol where I send my patients 
through exercise, get them ready for the operation and then use 
strictly outpatient therapy and home health--or home setting in 
order to get them rehabbed.
    I think that points to the need that Herb is pointing out, 
and I think you're pointing out, that we just lack a lot of 
clinical information about what is needed for one situation 
versus another, and rehab is really a complicated area. 
Something that the commission is going to call for in its June 
report--we've talked about it public, but it will be out next 
month--is to develop comparative effectiveness information to 
try and address this as well as other types of issues where you 
get these complications.
    Chairman STARK. Thank you. Mr. Pomeroy, would you like to 
inquire?
    Mr. POMEROY. Mr. Chairman, the line of inquiry I have has 
largely been covered earlier, but I've got a couple of things 
to say about it. This involves the LTCH limitation. Mr. Kuhn, I 
would just say how disappointed I am representing two LTCHs in 
North Dakota. Each would have had substantial trouble with the 
initial 25 percent proposal, and even 50 percent in rural areas 
from one referring source.
    Just the dynamics of health care in rural areas render this 
very crude cost containment instrument somewhat inequitable in 
its application. I mean, we have dominant medical facilities 
that have relationships with these LTCH's for ventilator 
weaning, for wound closure. In light of the nature of 
utilization patterns, you're going to have these major 
hospitals being a major referral source.
    So, to have all this time go by and not really get to the 
crux of the issue, which is an evaluation of the particular 
patient, the severity of health conditions that they're dealing 
with, the kind of care required for that patient, seems to me 
that you spend an awful lot of time going nowhere on getting an 
appropriate handle on this, even though the MedPAC 
recommendation is now I think 3 years in the state.
    I'd like you to clarify for me--you talked about it a bit 
with the earlier questions, but do you intend to come down on a 
patient-based criteria for the appropriateness of LTCH funding, 
and if so, when?
    Mr. KUHN. You're right. It is our intent to move forward on 
a way to better classify not only the patients but the 
facilities as well, at least some recommendations for doing 
that. If you look at it right now, an LTCH, the only 
classification we have is that it's an acute care hospital with 
an average length of stay of 25 days or more. So what MedPAC 
opined on back in 2004, what we've moved forward with a 
contractor to get a report, which is out there, and we've 
already convened one technical expert panel, is now to take 
that information and what can we use for classification for 
both patients as well as facilities.
    Our best guess right now in terms of a research agenda to 
continue that forward is probably a 2-year window still is the 
best we can think of now. Would we like to do it sooner and 
faster? You bet. But at least that's kind of our current 
expectation of where we think the next steps are.
    Mr. POMEROY. Do you believe Congress then should hold in 
abeyance its own thoughts on this matter until this period has 
run its course, or move some of the legislation that's been 
pending?
    Mr. KUHN. You know, that's a tough question to answer, 
because I don't want to prejudge the research in any way, shape 
or form, but, obviously, if Congress wants to move forward with 
its own agenda, you know, that's certainly their prerogative.
    I think we have some good information out there. I think 
the work of our first technical expert panel, we hope to 
convene a second one here very soon, hopefully will give us the 
information that we need to move forward on.
    So, you know, this is hard for me to say here, you know, 
trust us. But I'd like us to be able to see how much further we 
can get before Congress wants to legislate in this area and 
hold us accountable for taking the next proper steps to move 
forward on a----
    Mr. POMEROY. What time does your rule--when does your rule 
take effect?
    Mr. KUHN [continuing]. It is effective July 1. The final 
was published about May 1, and it's effective on July 1. What 
we have in that rule is kind of a 3-year transition on the 25 
percent rule, and a chance for us to sync up the final 
classification somewhere, you know, in 2009, something like 
that.
    Mr. POMEROY. I'm sorry. I'm not quite sure I understood 
that part.
    Mr. KUHN. Yeah. What we did in the final rule, when we put 
the proposal out, we said we would do--our recommendation was 
to move to a 25 percent threshold immediately for free-standing 
LTCHs. But after the comment period and listening to the 
comments we received, we said let's do it over a 3-year 
transition. So, it would be 75 percent beginning on July 1, 
then move to 50 percent, and then ultimately 25 percent in the 
third year.
    That bought us, you know, 3 years to kind of work on this 
classification system because the issue is, is the 
classification a more appropriate system, or is the 25 percent 
rule more appropriate? So that kind of brings them both 
together so we can evaluate which one works best----
    Mr. POMEROY. I could almost tell you right now. What could 
be better than patient assessment? This involves reimbursing 
medical care delivered per patient.
    Mr. KUHN [continuing]. Right.
    Mr. POMEROY. How can you do better than per patient 
certification?
    Mr. KUHN. I agree patient assessment--perhaps Mark has some 
things to add about it, but, you know, the real crux of this 
issue, because these facilities are both acute care hospitals, 
one just has to have a longer length of stay, at what time do 
you stop active treatment in an acute care hospital and start 
treatment in an LTCH? How do you assess that? That's a tough 
clinical question that people need to work on, that we all need 
to work on as we go forward. But Mark might have some ideas on 
that, too.
    Mr. MILLER. I mean, just--when we went through and did this 
analysis, and our analysis was based on data as well as going 
out and talking to clinicians that worked in the long-term care 
hospitals, we acknowledged at the end of our report that even 
with a revised classification system for long-term care 
hospitals, patient and facility, there are still seams between 
the inpatient PPS system and the long-term care hospital where, 
I mean, for example, you can literally take a patient out of 
one part of the hospital, move him to another, and move him 
into a different payment system. I know you know this.
    So we said that there would still be issues that have to be 
worked through to kind of make sure that these two payment 
systems are calibrated to work with each other. We still would 
like to see the patient and facility criteria move along. But 
I'm not sure that it will come--and we think it will make the 
situation better. I'm not sure it will eliminate the issue 
entirely.
    Mr. POMEROY. I do, Mr. Chairman, and I know my time has 
expired----
    Chairman STARK. Go ahead.
    Mr. POMEROY [continuing]. I think that they were--I like 
the changes to the rule better than I like the initial rule. I 
thought the initial rule was horrible. Now I think what they're 
moving forward with is merely bad.
    [Laughter.]
    Mr. POMEROY. It could be better. I do think that at least 
Congress will have the chance to act before the--some of the 
outyears kick in. Thank you, Mr. Chairman. I yield back.
    Chairman STARK. Thank you both. Thank you for your patience 
as we went off and voted on some very seriously important 
legislation. We'll, I'm sure, be talking with both of you again 
more as we proceed and try and find answers to these questions.
    We now have an exciting panel who have all come here today 
to volunteer to give back money to Medicare, because they all 
feel they're being overpaid.
    [Laughter.]
    Chairman STARK. They're here to support the Medicare 
Advantage program. I'm just so thrilled that the Federation of 
American Hospitals has sent Mr. Chip Kahn to counsel with us. 
The American Hospital Association has sent its President and 
CEO, Mr. Umbdenstock. The American Health Care Association sent 
its President, Bruce Yarwood. The American Association of 
Medical Colleges and the Greater New York Hospital Association 
has sent Mr. Stanley Brezenoff. The National Association for 
Home Care and Hospice and the Michigan Home Health Association 
has sent someone Mr. Camp would like to introduce.
    Mr. CAMP. Well, thank you, Mr. Chairman. I appreciate the 
opportunity to introduce Christine Chesny, President of the 
MidMichigan Visiting Nurses Association from my hometown of 
Midland, Michigan. I've known Chris for many years. We've 
visited over the years on home health issues, and particular on 
home health agencies in Michigan. She's been an effective 
leader and advocate, and I welcome her to the Committee and 
look forward to her testimony today. I know it will be 
informative.
    Thank you very much, Mr. Chairman. I yield back.
    Chairman STARK. Thank you. Dr. Mary Beth on behalf of the 
American Medical Rehabilitation Providers Association is our 
cleanup batter today.
    Chip, lead off.

  STATEMENT OF CHARLES N. KAHN III, PRESIDENT, FEDERATION OF 
                       AMERICAN HOSPITALS

    Mr. KAHN. Thank you, Mr. Chairman and other Members of the 
Subcommittee. I appreciate the opportunity to appear here today 
to discuss Medicare policy on behalf of the Federation of 
American Hospitals, the nation's investor-owned hospitals.
    While Medicare has successfully protected America's seniors 
and disabled for many decades, the program frequently 
challenges the hospitals that its beneficiaries depend on for 
care. I will cover today five of those challenges.
    First, CMS proposes a payment rule for FY08 that cuts 
Medicare payments by some $25 billion. This proposal comes as 
MedPAC estimates overall Medicare--hospital Medicare margins at 
negative 4.5 percent for 2007, and so recommends a full market 
basket for hospitals for FY08. The CMS reg ignores the 
deteriorating Medicare hospital fiscal condition, and what is 
particularly frustrating is that the proposal is based on 
questionable analysis.
    Most of the cuts occur because CMS has decided to make the 
DRG system more sensitive to patient severity. CMS has paired 
the refinement with cuts in payments based on the assumption 
that hospitals will reap some kind of financial windfall from 
the effects of this policy change. Our analytical work has yet 
to reveal a credible basis for what amounts to an overall 
payment reduction of 4.8 percent over the next 2 years.
    Additionally, CMS proposes to cut hospital capital 
payments. The justification for these cuts are based on an 
analysis by CMS that covers 1996 to 2004. What hospitals 
experienced in 1996 is hardly relevant today, and in 2004, the 
Medicare hospital capital margins dropped to their lowest 
point, 5.1 percent, which is 34 percent below 2003, and 
extending that trendline further, capital margins today could 
easily be negative and are part of the negative bottom line on 
Medicare which is shown by MedPAC. Hospitals need relief from 
these CMS cuts.
    Second, these very cuts result from payment reforms that 
CMS would institute in response to problems identified with 
physician-owned specialty hospitals, while the Administration 
has failed to properly exercise its authority to apply the 
Stark rule in this regard. Yes, the CMS proposal will cut 
payments. But it will utterly fail to address the perverse 
economic fundamentals of self-referral and ownership on which 
the physician-owned pseudo hospitals operate. Payment changes 
will never resolve the conflict of interest inherent in this 
type of ownership and referral that is so disruptive in our 
health care system.
    CMS's action fails to eliminate the incentive for 
facilities to increase utilization, to avoid Medicaid and 
uninsured patients, to divert to their own facilities well-
insured and healthier private pay patients, to avoid emergency 
room and on-call obligations, or even to continue to engage in 
careful selection of Medicare patients. We strongly urge the 
Congress this year to permanently ban self-referral to these 
facilities.
    Third, public reporting of quality and performance metrics 
can lead both to improved care and better informed patient 
consumers. There is strong evidence that the reporting of the 
Hospital Quality Alliance, HQA, measures is making a 
difference. We recommend both reinforcing HQA's contributions 
and putting in place a national quality improvement agenda 
through expanding the role of the National Quality Forum to 
serve as the priority setter for the advancement of clinical 
performance metrics and as metric overseer.
    Congressional support is essential here whether you proceed 
with pay-for-performance or continue the current course of 
measurement and transparency.
    Fourth, while there is always a need for examination of the 
role of providers in the post-acute continuum, CMS has adopted 
arbitrary regulations in this area that we believe fail the 
patients. In one case, the 75 percent rule rehab hospitals, not 
yet fully implement, it has already exceeded estimate caseload 
declines and provided fiscal savings beyond that targeted by 
CMS. So, the Congress should act to sustain enforcement at 60 
percent.
    As regards to long-term care acute hospitals, CMS has 
advanced punishing policies that will likely result in payments 
below cost and that establish unprecedented quotas on referral 
sources. Instead, CMS should develop facility and patient 
certification criteria, as MedPAC recommends, to ensure that 
only the most medically complex patients are treated in these 
hospitals.
    Finally, Mr. Chairman, we support the Subcommittee's 
interest in reauthorizing the Child Health Insurance program 
and fixing Medicare physician payment. However, with your PAY-
GO responsibilities, funding must be found for these reforms. 
As Rick Foster, the CMS actuary, has pointed out, Medicare 
Advantage policies currently weaken the hospital trust fund by 
an initial 2 years. We believe these policies warrant your 
reexamination.
    In this regard, we hope that you find funding that is fair 
to the Medicare beneficiaries and to those providing the 
medical care that beneficiaries depend on and are entitled to 
receive.
    Thank you, Mr. Chairman, and the Subcommittee. I'll be 
happy to answer questions.
    [The prepared statement of Mr. Kahn follows:]
    [GRAPHIC] [TIFF OMITTED] 47174A.034
    

    [GRAPHIC] [TIFF OMITTED] 47174A.035
    

    [GRAPHIC] [TIFF OMITTED] 47174A.036
    

    [GRAPHIC] [TIFF OMITTED] 47174A.037
    

    [GRAPHIC] [TIFF OMITTED] 47174A.038
    

    [GRAPHIC] [TIFF OMITTED] 47174A.039
    

    [GRAPHIC] [TIFF OMITTED] 47174A.040
    

    [GRAPHIC] [TIFF OMITTED] 47174A.041
    

    [GRAPHIC] [TIFF OMITTED] 47174A.042
    

    [GRAPHIC] [TIFF OMITTED] 47174A.043
    

    [GRAPHIC] [TIFF OMITTED] 47174A.044
    

    [GRAPHIC] [TIFF OMITTED] 47174A.045
    

    [GRAPHIC] [TIFF OMITTED] 47174A.046
    

    [GRAPHIC] [TIFF OMITTED] 47174A.047
    

    [GRAPHIC] [TIFF OMITTED] 47174A.048
    

    [GRAPHIC] [TIFF OMITTED] 47174A.049
    


                                 

    Chairman STARK. Thank you, Chip.
    Mr. Umbdenstock, would you like to inform and enlighten us 
in any way you'd care?

              STATEMENT OF RICHARD J. UMBDENSTOCK,

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,
                 AMERICAN HOSPITAL ASSOCIATION

    Mr. UMBDENSTOCK. Thank you, Mr. Chairman. It's my pleasure 
to be here today on behalf of our 5,000, nearly 5,000 member 
hospitals.
    Mr. Chairman and Members of the Committee, the men and 
women of hospitals do great things in the face of very tough 
challenges. Demand is soaring, and the resources needed must 
keep up. My task today is to briefly explain how Congress can 
help hospitals face those challenges.
    First, we appreciate that Congress has rejected the more 
than $100 billion in cuts to Medicare and Medicaid that the 
Administration had proposed. Neither chamber's budget 
resolution contains cuts to these programs, and 223 House 
Members and 43 senators signed letters specifically opposing 
such cuts. We urge Congress to continue to hold the line on 
cuts.
    Mr. Chairman, we support your efforts to do away with the 
45 percent trigger, an arbitrary and misguided approach to 
dealing with the challenges facing Medicare.
    We urge you to follow the recommendations of MedPAC to 
grant a full update for inpatient and outpatient services. This 
is critical to ensuring that Medicare reimbursement keeps pace 
with inflation and to reversing the dramatic decline in 
hospitals' Medicare margins. MedPAC projects Medicare margins 
to fall from negative 3.3 percent in 2005 to negative 5.4 
percent in 2007, a ten-year low. With 65 percent of hospitals 
being paid less than the cost of services provided to Medicare 
patients, a full update is not just warranted, but necessary.
    However, what is unwarranted and unnecessary is the CMS 
proposal to cut $25 billion in payments for the services that 
beneficiaries need. First, they cut $24 billion by asserting 
that hospitals might change coding practices as a result of the 
new severity-adjusted DRG system. The new DRGs are simply a 
refinement of a classification system that hospitals have been 
using for 23 years. As a result, there is unlikely to be any 
change in coding practices.
    Second, CMS proposes cutting capital payments by nearly $1 
billion. Urban hospitals in particular would be deeply 
affected. CMS went well beyond its charge by recommending these 
two significant changes, and their action clearly exceeds 
Congressional intent. Two Members of the Committee, 
Representatives John Lewis and Jerry Weller, are circulating a 
letter among their colleagues calling on CMS to eliminate these 
provisions. We appreciate their efforts, and we urge Congress 
to do whatever is needed to block these provisions.
    Regarding inpatient rehabilitation facilities, the 75 
percent rule is making it difficult for patients to get the 
care they need. A study recently found that nearly 88,000 
patients were unable to receive care in rehabilitation 
hospitals during the first 2 years of the 75 percent rule 
phase-in, an assessment that far exceeds CMS' original estimate 
of 7,000 patients. We therefore oppose moving to the 65 percent 
threshold in July.
    We are equally concerned that many Medicare fiscal 
intermediaries have further restricted the number of patients 
who can be treated by these hospitals by issuing local coverage 
determinations based on unreasonable definitions of medical 
necessity. The AHA supports ensuring that all fiscal 
intermediaries use the national guidelines currently in place 
for medical necessity. Passage of H.R. 1459 would accomplish 
this goal.
    Regarding limited service hospitals, we strongly urge 
Congress to enact a permanent ban on physician self-referrals 
to limited service hospitals, with limited exceptions for 
existing facilities that meet strict investment and disclosure 
rules. When decisions are made with the doctor-owner's bottom 
line in mind, it's not in the patient's best interest. So, 
self-referral should be banned.
    Rural hospitals provide essential health care services that 
9 million Medicare beneficiaries need. Yet Medicare margins are 
the lowest for rural hospitals. The AHA supports H.R. 1177, 
which would extend permanently the outpatient PPS hold harmless 
provision for sole community hospitals, along with a number of 
other rural initiatives outlined in our written statement.
    The AHA is strongly opposed to a provision in the 
Administration's FY08 budget that recommends a nearly $5 
billion reduction over the next 5 years in payments to 
hospitals for graduate medical education. The Medicare 
Advantage plans, however, would continue to receive fundings 
for GME costs. We ask that the Subcommittee protect the 
payments to teaching hospitals, and we suggest that a source of 
legitimate savings in the Medicare program would be GME 
payments to Medicare Advantage plans that are not reaching the 
teach organizations.
    In addition, some Medicare Advantage plans are not 
reimbursing critical access hospitals at 101 percent of their 
cost as traditional Medicare does. H.R. 2159 would correct this 
inequity.
    Mr. Chairman, hospitals face significant challenges as they 
strive to provide the best care possible to Medicare patients. 
You have our pledge to help the Medicare Program accomplish its 
important goal.
    Thank you.
    [The prepared statement of Mr. Umbdenstock follows:]
    [GRAPHIC] [TIFF OMITTED] 47174A.050
    

    [GRAPHIC] [TIFF OMITTED] 47174A.051
    

    [GRAPHIC] [TIFF OMITTED] 47174A.052
    

    [GRAPHIC] [TIFF OMITTED] 47174A.053
    

    [GRAPHIC] [TIFF OMITTED] 47174A.054
    

    [GRAPHIC] [TIFF OMITTED] 47174A.055
    

    [GRAPHIC] [TIFF OMITTED] 47174A.056
    

    [GRAPHIC] [TIFF OMITTED] 47174A.057
    

    [GRAPHIC] [TIFF OMITTED] 47174A.058
    

    [GRAPHIC] [TIFF OMITTED] 47174A.059
    

    [GRAPHIC] [TIFF OMITTED] 47174A.060
    


                                 

    Chairman STARK. Thank you. Mr. Yarwood, would you like to 
proceed?
    Mr. YARWOOD. Sure. Do you want me to just go off message, 
or do you want me to read this to you?
    [Laughter.]
    Chairman STARK. Whatever you want to do. I was just 
wondering if we changed the Stark laws to the Camp laws whether 
the Administration might be more apt to enforce them.
    Mr. CAMP. I wouldn't count on it.
    Mr. YARWOOD. Well, the staff behind me is--they have over--
under 30 seconds of how long it will take me to go off message. 
So, I'll try my best.

   STATEMENT OF BRUCE YARWOOD, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, AMERICAN HEALTH CARE ASSOCIATION/NATIONAL CENTER FOR 
                        ASSISTED LIVING

    Mr. YARWOOD. Most of what I've had to say has been gone 
over and somewhat repetitive, but let me start. As you know, I 
am honored to be here and don't do this very often, so, thank 
you. But I'm on here on behalf of--we have 11,000 member 
facilities and nearly 2 million employees that work for us, 
significant impact on what we do.
    The nursing home of 30 years ago primarily cared for 
chronically ill residents with long lengths of stay. Today, 
nursing homes are developing to meet specific needs of today's 
aging American. We're seeing developments in services for more 
clinically complex patients with increased level of short-term 
rehabilitative care and services, an average length of stay of 
25 days.
    During this time, I've also seen a positive shift in which 
quality improvement programs are focused on delivering the 
highest quality patient care. You can recall 7 years ago, we 
had more than 2,000 long-term care facilities in bankruptcy, 
primarily as the result of an altered payment system that we 
had a hard time adapting to. These bankruptcies really 
threatened our ability to take care of folks. But progress has 
been achieved due to the fact that providers, regulators, 
lawmakers and consumers have established a more productive 
cooperation culture, which is undoubtedly contributing to the 
rising care quality and the standards of America's nursing 
homes.
    To continue the positive trends and make necessary 
investments to prepare for this aging population, the long-term 
care profession requires continued financial stability. The yo-
yo effect hurts us a lot. The link between stable funding and 
quality has been noted time and time again.
    I might just add that recently we had--we rolled out 
something called My Innerview, and what it showed is that in a 
survey of nearly 100,000 nursing home patients and their 
families, the vast majority, more than four out of five, are 
highly satisfied with the care provided in our nursing homes. 
Only 3 percent rated the satisfaction level as poor.
    As has been said more than once today, at present, there's 
an excessively fragmented, irrational health services payment 
structure. When it comes to post-acute, now we have it 
backward. Our post-acute payment structure is tied to the 
setting in which patients are placed, not to the patients and 
the services required.
    For certain diagnostic conditions, the inpatient rehab 
facility and long-term care hospital payments can be much 
higher than the SNF payments. Some of this is clearly due to 
the variations in the severity of illness. Yet because there 
are no common patient assessment tools or outcome measures 
across all settings, it is not possible to determine whether 
patients are being treated in the most appropriate setting, and 
whether resources are being allocated sufficiently and 
appropriately.
    Until a uniform system is finalized and applied, health 
care professionals must do a better job placing acute, post-
acute patients in the most appropriate care settings. We 
support the use of hospital discharge planning as the starting 
point to standardize the post-acute assessment tools.
    Mr. Chairman, at a time when the Administration and 
Congress are considering budget cuts in many essential health 
care programs, our first priority must be to ensure that we 
spend the existing resources wisely, as you well know. We are 
severely concerned about the potentiality of the cuts since we 
have been working real hard to balance out and stop the yo-yo 
effect. We have the lowest overall operating margins of all 
major health care providers, and we are operating in an 
environment of drastic cost increases in terms of the key 
building blocks of labor, energy, liability and technology.
    You heard the question someone asked before, is it 
appropriate that Medicare subsidize Medicaid? Until we start 
sorting out that whole thing, we have no choice. Mark Miller 
was correct. We do make a sizable profit, but that goes to 
subsidize the Medicaid program, which we're underfunded about 
13 percent across the country.
    There are also ways to achieve the budgetary savings. A lot 
has been said about the 85 percent rule, and I won't dwell on 
it. All I can say is that our cost per day averages about $500 
compared to $800, $1,000, or whatever. So, we're seeing--we see 
no diminution of care. Quite the contrary. We see the same at a 
much lower cost.
    Secondly, what we--someone also talked about the therapy 
cap problem. We would suggest that--we're going through and 
doing our studies now. We would suggest that we'll have a 
system to offer to you in September or October, so we would 
also with CMS to move this therapy cap problem down the line. 
It is irresponsible to have a $1,780 cap for someone that needs 
incredible rehab therapy. So, we think that we can move in that 
way.
    Third, we think that there are savings that should be 
incurred under what we call the 3-day hospital stay. It was a 
neck in the funnel effect a long, long time ago. We think that 
it's way past--outlived its usefulness. In fact, what we see is 
a discriminatory practice with the Medicare Advantage plans, 
because they have no 3-day stay. We do. They do not.
    So as we move forward in taking a look at the Advantage 
plans as has been the focus, we find there are a lot of 
activities that we need to pass on to you and follow up with, 
both in terms of how we contract, how they're operated under, 
and the different circumstances in which those Advantage plans 
are working with us.
    So, as I said, a lot of this has been said already today, 
and I'll try to stay on message and finish up by saying thank 
you very much.
    [The prepared statement of Mr. Yarwood follows:]

            Prepared Statement of Bruce Yarwood, President, 
                    American Health Care Association
    Thank you, Mr. Chairman, and this Committee, for providing the long 
term care community such a timely and valuable opportunity to discuss 
the long term care profession's ongoing commitment to providing quality 
long term care and services, and your efforts, specifically, to foster 
a constructive, cooperative environment in which we can continue to 
work successfully together on behalf of our nation's most vulnerable 
population of seniors and disabled citizens.
    I am Bruce Yarwood, President and CEO of the American Health Care 
Association, the nation's largest long term care advocacy organization. 
I am honored to be here today to speak on behalf of our nearly 11,000 
member facilities nationwide, and the nearly 2 million caring employees 
who provide critical care and services to 1.5 million frail, elderly 
and disabled every day.
    My 30 years in long term care provide me a unique perspective on 
the state of the profession, and how to best meet the needs of our 
patients and residents in the years to come. Over the course of those 
30 years, I have been the operator of facilities in northern 
California; served as a public servant running California's Medicaid 
program, MediCal; served as President of the California Association of 
Health Facilities; and have had the pleasure of working with several of 
you on this committee here in Washington during my more than 18-year 
tenure with AHCA.
    I have witnessed first-hand and been a part of many significant 
changes in the long term care profession since I began my career. The 
nursing home of the early 1970s and through the '80s and '90s primarily 
cared for chronically ill residents for long lengths of stay ranging 
from many months to several years.
    Our 21st century nursing homes are developing to meet the specific 
needs of today's aging American, where choice and the need for 
specialized services are more defined. We're seeing developments in 
both brick and mortar and care services to provide an increased level 
of short-term rehabilitative care and services to a more clinically-
complex patient--for an average of 25 days for the Medicare patient. 
During this time, I have also witnessed a positive shift in which care 
quality improvement programs--collaborative, successful and ongoing 
efforts between providers and Government--are focused upon delivering 
the highest quality patient-centered care available.
    In the context of today's discussion, I would like to preface my 
comments and observations by stating that the long term care profession 
has made tremendous strides to improve the quality of care and the 
quality of life of the nearly three million Americans who require 
critical skilled nursing care and services every year. At no time in 
the long term care profession's recent history has the commitment to 
quality been greater, and I am proud to sit before you today on our 
profession's behalf.
    Progress has been achieved due to the fact the entire long term 
care stakeholder community--providers, regulators, lawmakers and 
consumers--has established a more productive `culture of cooperation'--
which is undoubtedly contributing to the rising care quality standards 
in America's nursing homes. It is this spirit of a private/public 
partnership with a collective mission for quality care where we have 
been able to move the needle on quality.
    We must be aggressive in addressing the many quality challenges 
remaining--and objective in our assessment as to how best to move 
forward. There's far more to do, that's for certain, but we are 
extremely confident we are heading in the right direction. As we 
proceed, we must all ensure the entire stakeholder community is 
prepared to meet the growing complex care needs of the baby-boom 
retirees--who will inundate our long term care system in the years 
ahead.
Economic Stability--The Foundation of Quality Care
    In order to continue these positive trends and make the necessary 
investments to prepare for this aging population our shared success, 
the long term care profession requires a platform of continued 
financial stability--and will be the primary determinant to meeting our 
collective quality improvement goals and objectives.
    That link between stable funding and quality has been noted time 
and again--by former Secretary of Health & Human Services Tommy 
Thompson, former Administrator of the Centers for Medicare and Medicaid 
Services (CMS), Dr. Mark McClellan, and most recently CMS Acting 
Administrator Leslie Norwalk, whose article for this month's edition of 
Provider magazine states,

        ``Nursing home providers have been on the leading edge of this 
        quality movement. Long before hospitals, doctors, home health 
        providers, pharmacies, dialysis facilities and others came to 
        the table, the nursing home industry was out front with Quality 
        First--a volunteer effort to elevate quality and 
        accountability. . . . Advancing Excellence in America's Nursing 
        Homes launched last September . . . builds on the 2001 Quality 
        First campaign and stresses the essential connection between 
        quality, adequate payment for services and financial 
        stability.''

    As Ms. Norwalk pointed out, Quality First was the first nationwide, 
publicly articulated pledge by a community of health care providers to 
voluntarily establish and meet quality improvement targets. The 
hallmark of our effort has been raising the standards of 
accountability--and consumers, taxpayers, and lawmakers have every 
reason to expect Government resources to be utilized in a manner that 
supports the provision of high quality long term care for every 
American. We are proud of our progress thus far--and remain committed 
to sustained improvement for the future.
    This increased focus on resident-centered care, actual care 
outcomes, increased transparency and public disclosure, enhanced 
stakeholder collaboration and the dissemination of best practices 
models of care delivery is paying off.
    Key quality indicators tracked by the joint federal-provider 
Nursing Home Quality Initiative (NHQI) have improved since we stood 
with HHS and CMS officials to launch this pioneering program five years 
ago. Since that time, we have experienced improved pain management, 
reduced use of restraints, decreased number of patients with 
depression, and improvements in physical conditions such as incidents 
of pressure ulcers.
    In addition, Mr. Chairman, satisfaction of patients and family 
members is a critical measure of quality. Just last week, My Innerview, 
Inc. released the second annual report based on an independent survey 
of nursing home patients and their families. The report, 2006 National 
Survey of Resident and Family Satisfaction in Nursing Facilities, 
indicates that a vast majority (82%) of consumers nationwide are very 
satisfied with the care provided at our nation's nursing homes--and 
would rate the care as either excellent or good.
    We have been able to achieve these positive advances due to our 
collective commitment to quality--and the Government's recognition of 
how critical economic stability is for our sector has enabled us to 
continue these trends.
    Annual cost of living increases are integral to maintaining 
economic stability, and essential to the continued provision of quality 
care. Skilled nursing facilities have the lowest overall operating 
margins of all major health care providers, and we are operating in an 
environment of dramatic cost increases in terms of the key building 
blocks of labor, energy, liability and technology.
    The Administration's recent budget proposal to freeze the SNF 
market basket update in the coming fiscal year, create a prescriptive 
annual decrease of the market basket, and totally eliminate 
reimbursement for Medicare bad debt, not only infringes on Congress's 
authority to determine funding levels for the Medicare program, but 
would also siphon off more than $10 billion in funds over the next five 
years--the very funds utilized to sustain our quality improvement 
efforts.
    Further, Mr. Chairman, to continue focusing solely upon Medicare 
margins in the nursing home sector does a disservice to those frail, 
elderly and vulnerable individuals who receive care and services in 
those facilities. Nearly 70 percent of our nation's nursing home 
patients rely on Medicaid to fund the `around-the-clock' long term care 
and services required, a program that pays, on average, less than $6 an 
hour for critical around-the-clock care and services.
    But Congress cannot accurately assess the long term care 
marketplace and patients' growing needs without considering the rampant 
Medicaid underfunding crisis. America's nursing homes lose an average 
of approximately $13 per Medicaid patient per day. This annual $4.5 
billion loss translated into a negative Medicaid operating margin of 
7.06% in 2006--an unfortunate situation that is expected to continue 
throughout 2007.
Cost-Efficient, Clinically-Appropriate Post Acute Care
    In regard to the so-called Medicare ``75% Rule,'' Mr. Chairman, we 
state our unequivocal support for your recent efforts to continue 
moving towards full implementation. It is the right policy at the right 
time, being implemented for all of the right reasons.
    Skilled nursing facilities (SNFs) are clinically appropriate, cost-
effective settings providing the highest quality care and 
rehabilitative services. It is essential to note that since 
implementation of the 75% Rule was re-initiated in 2004, no Medicare 
beneficiary has been denied access to care--and the Federal Government 
has saved hundreds of millions in taxpayer dollars.
    Recently-introduced legislation to suspend implementation of the 
75% Rule is contrary to the interests not only for patients, but also 
to U.S. taxpayers--who deserve to see Medicare resources spent in the 
most efficient, cost-effective manner possible. Suspending 
implementation also runs contrary to the recent changes in the SNF 
patient classification system (RUGs 53), which provides incentives for 
SNFs to more accurately assess, and provide quality care to the 
patients requiring higher intensity rehabilitation services--at 
significantly lower cost (more than $500 per day) than those same 
patients who receive care in inpatient rehabilitation facilities.
    The Rule differentiates the truly high acuity patients who need the 
most intensive rehabilitation services provided in a hospital setting 
from those who could be cared for in other settings, like SNFs, at the 
same high level and quality--and at a significantly lower cost to the 
Medicare program. With these policies in place, it is illogical in the 
context of both care quality and fiscal prudence for either Congress or 
the Administration to take action which delays full implementation of 
the 75% Rule.
Therapy Caps--Cost Containment Not in the Interest of Patient 
        Rehabilitation
    After a Medicare beneficiary has exhausted their 100-day Part A 
coverage for rehabilitation and post acute care services, they may 
require additional clinically necessary therapy services--including 
physical or occupational therapies or speech, language pathology--which 
is covered by a Part B benefit.
    Unfortunately, current policy places arbitrary limits--or a cap--on 
the amount of the vital therapy services that are covered under Part 
B--an annual cap of $1,780. Practically since the inception of the cap, 
Congress has seen the error in this policy and for the past two years 
has directed CMS to develop an exceptions process for patients 
requiring rehabilitation in excess of the cap. Though this exceptions 
process is in place, it is not intended to be a long term solution to 
this illogical payment ceiling.
    In order to move away from an arbitrary ``therapy cap'' scenario, 
we have proposed and are working with Congress and the Administration 
to develop a permanent, condition-based payment system for Part B 
covered therapy services. Such a system should be crafted to ensure 
appropriate rehabilitation services are available to the frail and 
elderly receiving care in our nation's nursing facilities when they are 
required.
    We encourage Congress to require CMS to engage in a condition-based 
therapy reimbursement pilot program for one full year, and then fully 
implement a similar system nationwide while maintaining the current 
exceptions process to protect Medicare beneficiaries.
Moving to a Diagnostic-Based Post Acute Payment System
    At present, there is an excessively fragmented and irrational 
health care services payment structure. When it comes to post acute 
care, for example, we now have it backwards: our post-acute payment 
structure is tied to the institutional setting in which patients are 
placed--not to the patient and the services required.
    CMS requires different patient assessment instruments for three of 
the four post-acute care provider categories, and requires each 
provider to be certified under separate criteria. CMS ensures patient 
safety and quality in each of these settings through vastly different 
regulatory structures. In addition, the physical settings in which 
patients receive care greatly differ--ranging from a patient's home to 
a nursing home to a hospital.
    Most post-acute care providers, physicians and others involved in 
patient care believe in a hierarchy of acuity among the different 
settings, and assume patients with the highest acuity clinical needs 
will receive care in the highest acuity setting. Research as well as 
provider experience shows that different post-acute care settings 
sometimes serve similar patients. This overlap in patient populations 
can occur for legitimate non-clinical reasons or clinical reasons that 
are not measurable by research. Regardless, the overlap is sometimes 
inappropriate, and results in Medicare overpayment.
    For certain diagnostic conditions, inpatient rehabilitation 
facility (IRF) and long term care hospital (LTCH) reimbursements are 
much higher than SNF payments. Some of this is clearly due to 
variations in severity of illness. Yet, because there are no common 
patient assessment tools or outcome measures across all settings, it is 
not possible to ascertain whether patients are being treated in the 
most appropriate setting--and whether resources are being allocated 
efficiently and appropriately.
    AHCA strongly supported language in the Deficit Reduction Act of 
2005 (DRA) that served as a first step in reforming the post-acute care 
payment system. As is currently being developed, we believe it is 
essential for CMS to develop a patient centered uniform screening and 
assessment tool for post acute care patients, and a uniform integrated 
payment system based on this comprehensive assessment tool focused not 
on the site where services are provided but, rather, on the needs of 
the patient.
    But until CMS can finalize and apply a uniform system, it can do a 
better job of placing post acute patients in the most appropriate care 
settings. For example, AHCA supports the use of hospital discharge 
planning as a starting point to standardize post acute assessment 
tools.
    For patients with prior hospital stays, CMS should continue to 
apply hospital discharge planning that is already required by law and 
regulations. AHCA also supports continued Quality Improvement 
Organization (QIO) review of the appropriateness of patient placement.
Conclusion
    Mr. Chairman, at a time when the Administration and Congress are 
considering budget cuts in many essential health care programs, the 
first priority must be to ensure we spend existing resources wisely and 
efficiently--and in a manner that best serves our seniors, our 
taxpayers and our citizens at large.
    With the imminent wave of long term care patients before us, I 
reiterate that we must work together cooperatively to establish a 
health care system--particularly for post acute and long term care--
which is patient centered, not site-centered.
    For the reasons I have outlined, Mr. Chairman, it is imperative for 
Congress to take action to address the many existing payment and 
regulatory inconsistencies for skilled nursing facilities to ensure 
that we are able to effectively meet the needs of our aging population 
and continue the positive quality trends we are seeing. The Long Term 
Care Quality and Modernization Act of 2006 (HR 6199), which was 
introduced in the 109th Congress, represents an important step toward 
establishing and nurturing a culture of cooperation--a legislative step 
we enthusiastically embrace and endorse. This legislation would 
encourage investment in capital improvements and health information 
technology, support the sustainability of a stable and well-trained 
workforce, require joint training and education of surveyors and 
providers, and implement facility-based training for new surveyors.
    The bill would also enhance the role of nurse practitioners in the 
nation's nursing homes and amend current law to allow nursing 
facilities to resume their nurse aide training program when 
deficiencies that resulted in the prohibition of the training have been 
corrected, and compliance has been demonstrated.
    On the front lines of care, Mr. Chairman, these proposals are 
significant, and they merit strong support.
    And from the standpoint of common sense, what is best for our 
patients and, indeed, what is ultimately best for the future of our 
nation's health care policy, these proposals should be implemented as 
quickly as possible.
    Each of us here today seeks precisely the same objective--which is 
to improve the quality of care received by every long term care patient 
in America, and to do so in a manner that helps us best measure both 
progress as well as shortcomings.
    As I have noted, Mr. Chairman, improving care quality is a 
continuous, dynamic, ongoing enterprise. While we are enormously proud 
and pleased by our care quality successes, we acknowledge there is far 
more to accomplish. And from our profession's standpoint, there has 
never been a broader recognition of the importance of quality, or a 
broader commitment to ensure it continues to improve by working 
together.
    Thank You.

                                 

    Chairman STARK. Thank you.
    Mr. BREZENOFF?

 STATEMENT OF STANLEY BREZENOFF, PRESIDENT AND CHIEF EXECUTIVE 
               OFFICER, CONTINUUM HEALTH PARTNERS

    Mr. BREZENOFF. Thank you, Mr. Chairman, other distinguished 
Members of the Committee. I thank you for the opportunity to 
testify before you today. I am the president of Continuum 
Health Partners, a major health care network in New York City 
that includes four distinguished teaching hospitals; Beth 
Israel Medical Center, St. Luke's and Roosevelt, Long Island 
College Hospital and the New York Eye and Ear Infirmary.
    These hospitals are safety net hospitals, and they are 
distinguished in part by the extraordinary degree to which they 
provide care to New York's poor, uninsured and the elderly. Of 
Continuum's 123,000 inpatient discharges in 2006, nearly 65 
percent were Medicare or Medicaid. Our emergency room visits, 
over a quarter of a million were more than 45 percent Medicare 
and Medicaid. Of our more than 600,000 clinic visits, over 80 
percent were insured by Medicare and Medicaid.
    We also have a total of 80 residency programs, and in 2006, 
trained and educated over 1,000 interns and residents. So, 
today I'm pleased to testify on behalf of both the Association 
of American Medical Colleges, which represents all 125 
accredited medical schools and nearly 400 major teaching 
hospitals and health systems throughout the United States and 
the Greater New York Hospital Association, which represents 
nearly 300 hospitals and continuing care facilities in New 
York, New Jersey, Connecticut, and Rhode Island, including many 
academic medical centers.
    Continuum is also a member of the American Hospital 
Association, and I want to strongly endorse the testimony 
delivered on their behalf earlier.
    I don't have to tell you, teaching hospitals have a unique 
role in our nation's health care system. In addition to 
providing basic, primary health care services to their 
communities and Medicare beneficiaries, teaching hospitals have 
the additional societal responsibilities of providing education 
for all types of health care professionals, an environment in 
which clinical research can flourish, and highly specialized 
tertiary patient care and cardiac care as well as transplant 
services.
    Because of this, teaching hospitals care for the nation's 
sickest patients with the most complicated conditions. Teaching 
hospitals also provide almost half of all inpatient care, and 
provide a huge amount of care for the poor and the uninsured. 
Indeed, in many communities, teaching hospitals through their 
ambulatory care clinics are the family doctor, particularly in 
low income communities where individual practitioners who 
accept Medicaid or provide care for the uninsured are few.
    One of our essential missions, to teach the next generation 
of physicians, has never been more important. The Census Bureau 
has pointed out that the elderly, the number of elderly will 
double by 2030, and with this will come a sizable increase in 
demand for health care services. According to data from the 
National Ambulatory Medical Care Survey, patients aged 65 and 
older typically average six to seven physician visits a year.
    If the annual number of physician visits continue at this 
rate, the U.S. population will make 53 percent more trips to 
the doctor in 2020 than in 2000, which means that we will need 
to produce many more physicians per year than we are producing 
now. This has enormous implications for health care policy, 
given the length of time it takes to train physicians, 2020 is 
virtually now, and we need to take action immediately.
    Unfortunately, at a time when the missions of our teaching 
hospitals have never been more important, many of them are 
struggling financially. The 2004 aggregate operating margin for 
all major teaching hospitals was negative 8.3 percent, with the 
typical major teaching hospital having a negative 5 percent 
operating margin. This is why Federal payment policies 
affecting our nation's teaching hospitals are so important.
    As you know, Medicare has two special payments for teaching 
hospitals, IME and Direct Graduate Medical Education payments. 
The IME medical payment accounts fully for the fact that 
teaching hospitals must treat more severely ill patients than 
other hospitals, and DGME are designed to make sure that 
Medicare pays its share of costs.
    Unfortunately, the President's proposals, both statutory 
and regulatory, put our nation's teaching hospitals at risk. As 
the AHA has testified, the President's budget would cut $101 
billion from the Medicare and Medicaid programs over 5 years. I 
want to talk about two proposals that solely impact teaching 
hospitals--the elimination of the Medicare indirect medical 
education programs, payments associated with treating Medicare 
managed care or Medicare Advantage beneficiaries, and the 
complete elimination of Medicaid funding for GME.
    First, in regard to Medicare Advantage, the argument seems 
to be that in teaching hospitals, we are getting paid twice. 
It's an absolute falsehood. We barely get paid once. The truth 
of the matter is that it is the Medicare Advantage programs 
that have been insulated from declines in funding with the 
addition of the 2 percent adjustment that they were able to 
get. That funding is what ought to be looked at if in fact 
there is an issue of too much funding going in the direction of 
IME.
    As I noted, our hospitals are operating on negative 
margins. To remove that and to protect the Medicare Advantage 
programs would be to turn logic on its head.
    Thank you.
    [The prepared statement of Mr. Brezenoff follows:]
    [GRAPHIC] [TIFF OMITTED] 47174A.061
    

    [GRAPHIC] [TIFF OMITTED] 47174A.062
    

    [GRAPHIC] [TIFF OMITTED] 47174A.063
    

    [GRAPHIC] [TIFF OMITTED] 47174A.064
    

    [GRAPHIC] [TIFF OMITTED] 47174A.065
    

    [GRAPHIC] [TIFF OMITTED] 47174A.066
    

    [GRAPHIC] [TIFF OMITTED] 47174A.067
    

    [GRAPHIC] [TIFF OMITTED] 47174A.068
    

    [GRAPHIC] [TIFF OMITTED] 47174A.069
    

    [GRAPHIC] [TIFF OMITTED] 47174A.070
    

    [GRAPHIC] [TIFF OMITTED] 47174A.071
    

    [GRAPHIC] [TIFF OMITTED] 47174A.072
    

    [GRAPHIC] [TIFF OMITTED] 47174A.073
    

    [GRAPHIC] [TIFF OMITTED] 47174A.074
    

    [GRAPHIC] [TIFF OMITTED] 47174A.075
    

    [GRAPHIC] [TIFF OMITTED] 47174A.076
    

    [GRAPHIC] [TIFF OMITTED] 47174A.077
    

    [GRAPHIC] [TIFF OMITTED] 47174A.078
    

    [GRAPHIC] [TIFF OMITTED] 47174A.079
    

    [GRAPHIC] [TIFF OMITTED] 47174A.080
    

    [GRAPHIC] [TIFF OMITTED] 47174A.081
    


                                 

    Chairman STARK. Ms. Chesny?

 STATEMENT OF CHRISTINE CHESNY, NATIONAL ASSOCIATION FOR HOME 
     CARE AND HOSPICE AND MICHIGAN HOME HEALTH ASSOCIATION

    Ms. CHESNY. Thank you, Mr. Chairman, Ranking Member Camp 
and Subcommittee Members for inviting me to present testimony 
on issues related to payment accuracy and legislative and 
regulatory payment refinements for the Medicare Home Health 
Prospective Payment System.
    My name is Christine Chesny. I am president of the Michigan 
Visiting Nurse Association, a not-for-profit provider of home 
health, hospice, home medical equipment, palliative care and 
private duty nursing services to 11 rural counties in the heart 
of Michigan. I am the past president of the Michigan Home 
Health Association and a finance Committee Member of the 
National Association for Home Care and Hospice.
    The Prospective Payment System for Medicare Home Health is 
based on the right principles as it facilitates outcomes-
oriented patient care planning that is focused on 
rehabilitation and self care. However the current Medicare Home 
Health Prospective Payment System has been found to be 
seriously flawed.
    MedPAC states the system fails to fairly set rates in 
relation to the level of care in over 75% of the case 
categories, yet Medicare's recently proposed changes to PPS 
incorporate a presumption of--that we believe to be completely 
unfounded.
    NAHC has strongly supported CMS efforts to restructure the 
system and to replace a poorly functioning case mix adjustment 
model. However the CMS proposal assumes all increases in 
average case mix weight are entirely due to provider gains. To 
assume that any change is attributed to gaining assumes that 
nurses throughout the country are deliberately falsifying 
patient assessments to garner higher payments for their 
agencies.
    Given our agency's experience, I believe the increase 
reflects the changing demographic of our patient population. 
First and foremost, they are older and more frail. In our 
agency in 2001, 24.9 percent of our patients were over age 80. 
In the most recently completed fiscal year that percentage has 
risen to 34.
    In general the type of patient referred to us is more--
requires more intense service and has increased significantly 
due in large part to hospital DRG policy changes leading to 
decreased length of stay and from changes in inpatient rehab 
facility reimbursement that have appropriately scared more but 
sicker patients into home health services.
    This brings me to my second point. Home health is local and 
in our service area that means rural. The loss of the rural add 
on and the changes in wage index has significantly impacted 
rural agencies throughout the country. In our agency the 
ramification of rural add on loss and wage index changes total 
over $1.2 million on a $9 million budget. We have had to pull 
out of several counties.
    To my knowledge, no home health provider in these counties 
is able to provide the full compliment of Medicare home health 
services. Staff shortages are common in many agencies across 
the nation. We have been recruiting for a full time physical 
therapist for over 900 days.
    MedPAC's financial analysis of Medicare home health 
agencies alleging a 16 percent margin is unreliable. It 
excludes the 21 percent of agencies that are part of a hospital 
or skilled nursing facility. When all agencies' margins are 
included and given equal weight the true average margin is 3.12 
percent.
    About one-third of home health agencies have Medicare 
margins at or below zero. Our overall margin is 4.9 percent but 
drops to 2.8 when United Way, grant and other charitable funds 
are removed. We have benefited from the generosity of local 
foundations and the receipt of two USDA grants. These grants 
allowed us to acquire over 150 tele-health units and other 
patient care technology.
    The USDA grants, which require an agency match, total over 
$600,000. Even using technology to improve our productivity, 
our mileage expense is just under a half a million dollars this 
fiscal year but down $200,000 before technology. Yet technology 
such as tele-health is not included in the allowable costs on 
the Medicare cost report, nor does the tele-health monitoring 
event count as a home health visit.
    As part of the proposed rule to refine the home health 
prospective payment system CMS added cuts in the base payment 
rate. This would come on top of the President's Budget proposal 
to eliminate the inflation adjustment. Over the past 10 years, 
the Medicare home health benefit has been cut nearly every 
year. Once comprising 8.7 percent of Medicare spending, today 
it is 3.2 percent and it's projected to drop to 2.6 by 2015.
    Given our growing population of elderly and disabled, cuts 
to the home health benefit will only prove to be penny wise and 
pound foolish.
    In conclusion, Mr. Chairman and Ranking Member Camp, we 
respectfully request that the Subcommittee request CMS to 
suspend its plan to cut home health payment rates based on 
unfounded allegations of case mix creep, not reduce the annual 
inflation update, expand access to technology and tele-health, 
reinstate the rural add on.
    NAHC and MHHA look forward to working with the Subcommittee 
to address the home health payment adequacy issues as outlined 
in this testimony. This concludes my formal remarks and I'll be 
happy to accept any questions.
    [The prepared statement of Ms. Chesny follows:]

     Prepared Statement of Christine Chesny, on behalf of National 
  Association for Home Care and Hospice and the Michigan Home Health 
                              Association
    Thank you, Mr. Chairman, Ranking Member Camp, and Subcommittee 
Members, for inviting me to present testimony on issues related to 
payment accuracy and legislative and regulatory payment refinements for 
the Medicare home health prospective payment system. My name is 
Christine Chesny. I am President of MidMichigan Visiting Nurse 
Association (VNA), a not-for-profit affiliate of MidMichigan Health, 
the largest health care system in north-central Michigan. MidMichigan 
Visiting Nurse Association provides home health, hospice, home medical 
equipment, palliative care and private duty nursing services to eleven 
rural counties in the heart of Michigan. As a part of the MidMichigan 
Health family of services, we support a continuum of care that 
includes: 4 acute care hospitals with 481 beds, a critical access 
hospital, a 200 bed skilled nursing facility and 40 assisted living 
beds, an urgent care center with mobile diagnostics, such as PET 
scanning, and over 300 physicians and mid-level providers on staff. I 
am also the immediate Past President of the Board of Directors of the 
Michigan Home Health Association (MHHA), and a finance committee member 
of the National Association for Home Care and Hospice (NAHC).
    NAHC is the largest home health trade association in the nation. 
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.
    Earlier this year, the Medicare Payment Advisory Commission 
(MedPAC) recommended that Congress eliminate the home health market 
basket update for calendar year 2008. Relying in part on MedPAC's 
recommendation the President's fiscal year 2008 budget proposes a 
reduction of nearly $10 billion in home health spending by imposing a 
five-year freeze in home health payments (2008 through 2012), and 
permanent market basket reductions annually thereafter of .65 percent. 
Additionally, the Administration also plans to reduce home health 
payments through regulatory changes by nearly $7 billion over the same 
five years. Home care, with its annual Medicare expenditures of only 
$13 billion, cannot sustain such draconian cuts without the loss of 
access to care throughout the country.
Preservation of the Medicare Home Health Market Basket Inflation Update 
        is Needed to Protect and Preserve Care for Medicare 
        Beneficiaries
    MedPAC's rationale for freezing home health payments 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 enacted the MedPAC 
recommendation will severely compromise continued access to care.
    In specific response to the recommendation, we note the following:

          The current 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' 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 led Medicare to 
        undertake a wholesale revision of HHPPS that is scheduled to 
        take effect on January 1, 2008.
          The considerable shortcomings in the HHPPS are 
        further illustrated by a dramatic range in profits and losses 
        among home health agencies (HHAs). About 31% of all HHAs 
        experienced financial losses under Medicare in 2002; that 
        figure increased to 33% 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 1,723 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. When 
        all agencies' margins are included and given equal weight, the 
        true average margin is 3.12%. 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 
        profit margin as representative of over 8,000 very diverse 
        HHAs.

    Our overall profit in home health at MidMichigan Visiting Nurse 
Association is just under 5%. This number drops to below 3 percent when 
United Way, grant and other charitable funds are removed. We consider 
ourselves fortunate. Let me explain. As a non-profit free standing 
agency we receive charitable donations to support under and uninsured 
patient care including Medicaid. We also benefited from the generosity 
of local foundations as our agency first implemented laptop computers 
for clinicians in 1998. Since that time we have been even more 
fortunate to receive two USDA grants. These grants allowed us to 
acquire over 150 telehealth units, pulse based oxygen concentration 
meters, blood clotting time meters, and more computers for both branch 
offices and clinical staff. The USDA grants, which require an agency 
match total over $600,000. No small investment for any home health 
agency.
    The use of technology has enabled our agency to more efficiently 
and effectively care for our patients while maintaining high quality 
outcomes. For other agencies unable to make this capital intensive 
investment, the economies are lost and their costs continue to rise. 
Even using technology to improve our productivity, our average miles 
per visit is 22 which translates into an expense of just under a half 
million dollars this fiscal year. Yet, CMS does not recognize 
telehomecare technology equipment and patient service costs as 
reimbursable by the Medicare program.
    This brings me to my second point. Home health care services are 
local. And in our service area that means rural. The loss of the rural 
add-on and the changes in wage index have had significant impact on our 
agency and other rural agencies in Michigan and throughout the country. 
The wage index calculation is fundamentally flawed as rural hospitals 
are continuously reclassified to CBSAs eliminating their costs from the 
rural calculation. In our agency, the ramifications of the loss of the 
home health rural add-on and wage index change total over $1.2 million 
on a $9 million budget. We have had to make difficult decisions 
regarding our service area. We eliminated our two most northern 
counties 3 years ago. We also eliminated the majority of another county 
whose population is only 17,000 residents and are contemplating 
reducing the service area in the northern most reaches of two other 
counties. The void will not be easily filled. To my knowledge, no one 
in these areas is able to consistently offer the entire Medicare 
covered services in the home health benefit. Our agency is unable to 
afford the price that physical therapists demand for work in these 
areas. We have been persistently recruiting for a full time physical 
therapist for over 900 days.

          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.
          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 HHPPS.
          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 altogether, which could have potential adverse 
        consequences on care access and patients' clinical outcomes. 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 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 10 years, the Medicare home health 
        benefit has been cut nearly every year, placing serious 
        financial strains on HHAs:


----------------------------------------------------------------------------------------------------------------
                      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%.
----------------------------------------------------------------------------------------------------------------
FY 2002                                          Home health care's inflation update was cut by 1.1%.
----------------------------------------------------------------------------------------------------------------
FY 2003                                          Total home health care expenditures were cut by 5% off previous
                                                  year's rates.
----------------------------------------------------------------------------------------------------------------
CY 2004                                          Home health care's inflation update was cut by 0.8%.
(3/4 of year)
----------------------------------------------------------------------------------------------------------------
CY 2005                                          Home health care's inflation update was cut by 0.8%.
----------------------------------------------------------------------------------------------------------------
CY 2006                                          Home health care's inflation update of 3.3% was eliminated.
----------------------------------------------------------------------------------------------------------------


CMS' Proposed Revisions for the Home Health Prospective Payment System
    As discussed earlier, all indications are that Medicare's current 
payment system for home health is flawed, and that, rather than across-
the-board cuts that will harm those agencies that can least afford it, 
a redistribution of payments through refinements in the home health 
prospective payment system is the appropriate course of action. 
Medicare recently proposed major changes in the payment system to 
institute a more balanced reimbursement method to take effect in 2008. 
NAHC has strongly supported CMS efforts to restructure the system and 
to replace a poorly functioning case mix adjustment model that 
determines the payment rates for 80 different patient categories. 
However, as part of the proposed rule, Medicare added the 
administrative cuts proposed by the President in his 2008 budget, 
thereby jeopardizing the intended benefits of the reforms.
    The intended purpose of the payment system changes was to refine 
the case mix adjustment so that the payments would be more fairly 
distributed. Instead, CMS put forward a blatant effort to extract over 
$7 billion from the system. Specifically the proposal would cut payment 
rates by 2.75% for each of the next three years (beginning in 2008). 
This cut will spell disaster for access to services.
    The proposal indicates that the cuts are intended to eliminate the 
effect of increases in patient coding that does not reflect changes in 
the patients' characteristics. CMS assumes that, because the average 
case mix weight of home health patients has risen since the first year 
of the PPS (from approximately 1.135 to 1.233), every single point of 
that increase has been due to provider ``gaming'' of the system, or 
deliberately establishing a higher case mix weight to secure higher 
reimbursement under Medicare. CMS refuses to acknowledge that the 
patients under the care of home health agencies have dramatically 
changed since the inception of PPS in October 2000. Instead, CMS 
concludes that there has been absolutely no change at all.
    I think that it is important for those of you unfamiliar with the 
payment system to understand what this assumption of gaming means. Home 
health patients are not simply taken onto service and ``assigned'' a 
case-mix weight by the home health agency. Instead, a physician orders 
specific care based on the patient's condition and needs. Once an 
agency accepts a patient for service, a registered nurse or therapist 
must visit the patient and do a full assessment of the patient's 
condition--an assessment that often takes as long as 1\1/2\ or 2 hours 
to complete. Elements from the assessment are then used to establish a 
``score'' for the patient relative to the severity of the patient's 
condition, the patient's functional ability, and. the services the 
patient requires. It is these scores in these areas--clinical 
condition, functional ability, and service needs--that combine to 
establish the case-mix score of the patient. The ``score'' then assigns 
the patient to a specific case mix weight.
    To assume that any change in average case mix weight is 
attributable to ``gaming'' assumes that nurses throughout the nation 
are deliberately falsifying or changing patient assessments so as to 
ensure that the patient will receive a higher score that will translate 
into higher payment for the agency. There is no foundation for this 
adjustment other than a hazarded guess. Given our agency's experience 
with increasing age and acuity in the patient population, I believe the 
increase reflects the changing demographic of our patient population. 
First and foremost, the patients we treat are older. In our own agency 
in 2001, 24.9% of the patients we cared for were over age 80. In the 
most recent fiscal year that percentage had grown to 34%. Older 
patients are more frail. They are more likely to have numerous health 
conditions that contribute to the length of time and the amount of 
service required to recover from an illness, or learn to manage a 
chronic condition. This translates into a higher level of acuity for 
this patient population. In general, the intensity of service required 
by patients referred to us by our health system has increased 
significantly since the late 1990s.
    In addition, we are often the first health care providers in our 
local area to see the results of technological innovations in health 
care. Residents of our service area who travel to tertiary care centers 
return home with devices and treatment modalities requiring home care 
follow up. These tertiary hospitals rely on highly skilled home health 
clinicians to follow the care plans established and maintain the 
equipment, administer the medications and treatments as well as 
reporting results to the patient's physician and modifying the care 
plan as prescribed. Because these tertiary hospitals are either front 
line in clinical trials or early adopters, home care is often the first 
place the local health care provider experiences these advances in 
medical care.
    CMS ``case mix creep'' assumption also fails to acknowledge a 
number of changes that have occurred within the health care system that 
are having an impact on the types of patients home health agencies are 
taking onto service, including:

        1.  Home health PPS has redrawn both the nature of patients 
        served and the way those patients are cared for in the home. 
        Home health has been transformed into post-acute, 
        rehabilitation-oriented care. Instead of patients receiving the 
        supportive personal care of home health aides for an extended 
        period of time, physical and occupational therapy have taken on 
        a greater role, leading to improvements in function and self-
        sufficiency. The average length of stay in home health services 
        has dropped to less than 90 days from a pre-PPS average of over 
        150 days. Correspondingly, therapy visits have increased by 
        over 25% to an average of five in a 60-day episode. This change 
        was part of the congressional purpose behind the mandate to 
        create the PPS. That change has benefited the patients and 
        Medicare in that home health expenditures remain far below 1997 
        levels of $17 billion.
        2.  Patients are discharged into home health services from 
        inpatient hospitals earlier than ever before. This is evidenced 
        by the institution of the hospital transfer DRG policy. Under 
        that policy hospital payments have been reduced in multiple 
        DRGs because the transfer of patients from hospitals into home 
        health has reduced the inpatient length of stay. Those 
        discharges have led to the admission of patients into home 
        health with higher acuity levels than ever before.
        3.  The alteration of coverage and payment standards at 
        Inpatient Rehabilitation Facilities (IRF) and Long Term Care 
        Hospitals (LTCH) has increased the number of rehabilitation 
        patients in home health as well as their level of service 
        needs. For example, the phasing in of the 75% rule for IRFs has 
        steered more patients with higher needs for therapy 
        appropriately into home health services.

    CMS has failed to utilize a sound methodology to determine the 
extent to which the increase in case mix weight is due to changes in 
patients or changes in coding. In its published analysis, for example, 
CMS admits that more patients are admitted into home health care from 
Skilled Nursing Facilities (SNF). This is a factor that the CMS scoring 
system considers as a strong indication of patients with greater care 
needs, yet CMS ignores this fact in reaching its conclusion that all 
the increase in case mix weight is ``coding creep.''
    More alarming is the fact that CMS considers the increase in 
therapy services to be unrelated to any change in the nature of 
patients served. Effectively, this conclusion means that CMS considers 
the therapy visits to be unnecessary all across the country without 
ever reviewing actual patient care records. This conclusion flies in 
the face of the significant rehabilitative gains of the home health 
patients and the numerous structural changes in other care settings 
that impact on the patient population served by home health agencies.
    Instead, the primary justification that CMS offers for its 
conclusion is that home health agencies have received policy 
clarifications and training on how to complete the patient assessment 
forms. That justification is a strong indication that CMS is 
desperately grabbing onto anything available to explain its action.
    In 1997 with the Balanced Budget Act, Congress set in motion a 
revolution in the Medicare home health benefit. With changes to both 
the payment system and the scope of the benefit coverage, Congress 
shifted home health services into a rehabilitative oriented benefit 
with strong controls on expenditures. Those goals have been 
accomplished yet CMS, through its unfounded and unprecedented 
conclusion that patients have not changed since 2000, now seeks to 
undermine this remarkable Congressional success by instituting an 8.7% 
cut in payment rates through 2.75% reductions in each of the next three 
years. That proposal can only serve to derail the gains over the last 
seven years. I urge Congress to intervene and stop CMS before damage is 
done to Medicare beneficiaries.
CMS Should Not Undermine Its Worthwhile Effort To Refine the Home 
        Health Prospective Payment System By Making Rate Cuts
    In its proposal to reform and refine the Medicare home health PPS, 
CMS offers many improvements that will likely redistribute payments in 
an improved manner. NAHC and MHHA have long supported efforts to 
correct weaknesses in the PPS model. However, the additional proposal 
by CMS to reduce the base payment rate to account for increases in the 
average case mix weight will jeopardize the effectiveness of the 
proposed corrections. The indications of that threat are:

        1.  The ``case mix creep'' adjustment is applied to all home 
        health agencies whether they engaged in abusive coding or not. 
        In fact, any offending agencies are better positioned to absorb 
        the impact of the cut than those agencies that did everything 
        above board. This approach makes the many pay for the sins of 
        the few (if any exist).
        2.  The increase in case mix weight is primarily due to an 
        increase in therapy services to patients. To the extent that 
        the current system encourages inappropriate increases in those 
        services, the CMS reform proposal institutes a corrective 
        course. Under the current system, higher payments occur 
        whenever patients receive 10 or more therapy visits in a 60 day 
        episode. The proposal replaces the 10 visit threshold with a 
        system that changes payment rates at 6, 14, and 20 visits, with 
        additional incremental changes between those points. This 
        modification is intended to align payment more closely to 
        patient needs. However, combining this change with the coding 
        adjustment reduction is in effect a ``double dipping'' in that 
        payment rates for patients with 10 or fewer therapy visits are 
        greatly reduced through both the cut and the payment system 
        reform.
        3.  The case mix weight adjustment is not the only step taken 
        by CMS to reduce agency payment rates. To achieve budget 
        neutrality with the system reforms CMS institutes an additional 
        adjustment to the case mix weights. This adjustment reduces 
        payments by approximately 4% based on an apparent assumption 
        that providers of services will modify their care behavior to 
        increase Medicare expenditures. The CMS proposal is devoid of 
        transparency in that there is no explanation as to how this 
        adjustment is calculated.
        4.  The true impact of the PPS reforms will not be known until 
        some time after their implementation. The 8.7% payment rate 
        reduction over three years through the case mix weight 
        adjustment seriously complicates any ability to determine 
        whether care and access change that may occur is due to 
        weakness in the new payment model or errors in calculating the 
        case mix weight adjustment. With the serious errors that we 
        believe exist in that adjustment, the goals of the reform will 
        not be realized.

    The combination of these factors serves to destabilize the home 
health benefit at a time when it is intended to achieve greater 
accuracy in payment rates. In the midst of this chaos are the Medicare 
beneficiaries and the uncertain future for access to care in their 
homes.
Conclusion
    Home health services are part of the solution to growing health 
care expenditures in Medicare. Increasingly, home health services are a 
less costly alternative to inpatient services and institutional care. 
Home care also has a long history of exceptional care quality. 
Invariably, our patients express high marks for home care services. Now 
is the time to support and expand access to home health services under 
Medicare and all federal health programs to address a growing 
population of elderly and disabled. Cuts to the home health benefit 
will only serve to prove that it is ``penny wise and pound foolish.'' 
We need to look no further than to the increased expenditures for 
Inpatient Rehabilitation Facilities, Long Term Care Hospitals, and 
Skilled Nursing Facilities following on the heels of the massive home 
health services cuts in the Balanced Budget Act.
    We respectfully recommend that the Committee:

        1.  Request that CMS suspend its plan to cut home health 
        payment rates based on unfounded allegations of unwarranted 
        increases in patient case mix weights as set out in its April 
        26, 2007 proposed rule.
        2.  Withhold any reductions in the annual inflation update for 
        home health until the impact of the implementation of the 
        prospective payment system in 2008. This step is particularly 
        essential with the pending $7 billion in cuts in the CMS 
        regulatory proposal.
        3.  Expand access to technology and telehealth services in home 
        health services through grants, loans, and elimination of 
        restrictions on the use of telehealth within the Medicare 
        benefit.
        4.  Reinstate the rural add-on to preserve services in our 
        nation's rural communities.

    NAHC and MHHA look forward to working with the Subcommittee to 
address the home health payment adequacy issues as outlined in this 
testimony. This concludes my formal remarks. I would be happy to answer 
any questions from the Subcommittee members.

                                 

    Chairman STARK. Thank you very much.
    Dr. Walsh, would you like to enlighten us, please?

     STATEMENT OF MARY BETH WALSH, M.D., AMERICAN MEDICAL 
              REHABILITATION PROVIDERS ASSOCIATION

    Dr. WALSH. Thank you, Chairman Stark, Ranking Member Camp 
and Members of the Subcommittee. I appreciate the opportunity 
to testify today on behalf of the American Medical 
Rehabilitation Providers Association, representing more than 
half of the some 38,000 inpatient rehabilitation beds in the 
United States.
    Could I ask that my written testimony be made part of the 
record in light of members' time?
    We are sensitive to the difficult budget pressures and 
choices facing this Committee and this Congress under the Pay-
Go budget rule, but we have to urge you to use this constraint 
to balance provider payment needs more fairly, much of which 
you've heard through this whole panel today.
    Medical rehabilitation is that piece of medicine that is 
dedicated to providing patients everything they need to recover 
from debilitating illness and injury to achieve maximal 
functional independence and hopefully return to home and 
community living.
    The existence of this critical sector of health care is 
threatened by some current in-process Medicare policies just at 
the time, as you have heard, we are all Baby Boomers aging up, 
and our wounded soldiers are returning home and moving out of 
acute care into our fragmented post-acute care world.
    I should introduce myself. I am a rheumatologist, which is 
an internist specializing in the care of arthritis and other 
rheumatic diseases. I also direct Burke Rehabilitation 
Hospital, which is a 150 bed, freestanding rehabilitation 
hospital in New York, a Cornell University academic affiliate 
since the 1930s, and I've been trying to do this since 1979.
    We are testifying today seeking legislative relief to 
address the two critically important issues impacting this 
field. The first is the 75 percent rule and the second is the 
unprecedented increase in claims denials experienced by 
providers across the country of rehabilitation services.
    First let me hit the 75 percent rule. When CMS revised it 
in 2004 it failed to use that opportunity to update these 
criteria in accordance with the 25 to 30 years of medical 
practice. Patients with certain cardiac disease, with crippling 
pulmonary disease, with cancers, with organ transplants living 
in ways that were not imagined 30 years ago have come in need 
of this level of service in order to walk out of the hospital. 
So, the rule does not represent these changes.
    You have heard from several of the earlier panel that there 
is no access problem. Well, from where I sit there is an access 
problem. Let me describe to you a 72-year-old gentleman with a 
lymphoma who 25 years ago in this rule there was no treatment 
for so he certainly would not have survived. After a long and 
arduous course in an acute care hospital, on and off a 
ventilator with various chemotherapy and lung surgery he did 
survive.
    He is not one of the diagnostic criteria that one could 
count, so if he presents to our hospital for an absolutely 
medically necessary level of care, first we have to decide are 
we close to the percent rule. If it's early in the year we can 
take him because hopefully we're not. If we've been careless 
and we're a little over it, we will have to deny him access in 
order to continue to provide care to any patients. This is an 
access problem.
    CMS has underestimated the impact. In the final rule it 
estimated a .1 percent drop in the number of patients treated. 
MedPAC noted that in the first year that was 9 percent. MedPAC 
anticipates that rehab hospital patients will drop an 
additional 20 percent as we move to the 65 percent rule, and 
you have heard that this is some 80,000 plus patients.
    The financial impact of the rule has also considerably 
exceeded the estimates. In the first year alone it was 
approximately $343 million not the much lower estimate.
    I think the critical question here, separate from numbers 
and dollars, is so what, which lets me talk for a second about 
the quality of care provided in inpatient rehab hospitals and 
units. There is a longstanding tradition in this field to 
measure our individual patient outcomes, how long are they in 
the hospital, do they go home walking or in need still of my 
distinguished colleague's home care services or are they 
independent enough to go to an outpatient program? How many 
days did that take? How many of them got sick enough to go back 
to an acute care hospital? These are reported. These are 
measured. These are quality measures that matter to a patient. 
It's their quality outcome, not the state of other things.
    There is a growing body of published research that 
indicates that in non-hospital based settings, although the per 
day cost may and is lower, the length of stay may be 
approximately twice, the number of patients needing 
rehospitalization because they're not in a hospital with 24-
hour nurses in physicians there may well be about twice. This 
all costs money as well as poor patient outcome and suffering.
    MedPAC, in its 2007 report to Congress, noted that there 
was a decline in one of these areas, the skilled nursing 
facility 30-day community discharge had declined consistent 
with what I indicated. I would ask that before an entire 
infrastructure and this field of medicine is dismantled 
completely the government should be required to demonstrate 
that its policy changes are indeed in the best interests of the 
patients that we serve.
    Because my time, I see, has run out I will just in two 
sentences tell you that the second area is the fiscal 
intermediary denial made under local coverage decisions, which 
I think some of you are aware of in your own districts. These 
denials do not reference or improperly apply the more than 20 
year rules of coverage, so we are asking you to codify in 
statute the coverage rules contained in ruling 85 to bring some 
uniformity across the country to this field.
    So, in summary, I testified because we are urging you to 
support the enactment of H.R. 1459. The field is prepared to 
work with Congress, with CMS, with all of our other sectors of 
the acute and post-acute care world to define an appropriate 
continuum of care that should be used to guide patient 
placement and Medicare coverage decisions, which will 
eventually reduce the true cost to the Medicare Program by 
providing the right care in the right place.
    Thank you for your patience as I went over, and I'd be 
happy to answer any questions.
    [The prepared statement of Dr. Walsh follows:]
  Prepared Statement of Mary Beth Walsh, M.D., on behalf of American 
              Medical Rehabilitation Providers Association
    Chairman Stark, Ranking Member Camp, and Members of the 
Subcommittee on Health, I appreciate the opportunity to testify on 
behalf of the American Medical Rehabilitation Providers Association 
(AMRPA) concerning payment systems for fee-for-service providers. The 
American Medical Rehabilitation Providers Association (AMRPA) is the 
leading national trade association representing over 550 freestanding 
rehabilitation hospitals, rehabilitation units of acute care general 
hospitals, and numerous outpatient rehabilitation services providers. 
Our members serve over 450,000 Medicare and non-Medicare patients per 
year, and most, if not all, of our members are Medicare providers. They 
also represent over half of the 38,388 inpatient rehabilitation 
hospital and unit beds in the country.
    Let me say at the outset, AMRPA is sensitive to the extremely 
difficult budget pressures and choices facing this Committee and this 
Congress under the ``pay-go'' budget rules, but we urge you to use this 
constraint to balance provider payment needs more fairly. For example, 
the financial benefits provided to Medicare Advantage plans have come 
at the expense of other providers and deplete the Part A Medicare Trust 
Fund; these inequities should be addressed as the Medicare Payment 
Advisory Commission (MedPAC) suggests, and as the Committee, assesses 
how to proceed. However, it is our hope that the challenges of this 
cost-containment environment will recognize the vital role that 
rehabilitation hospitals and units play in providing care and services 
aimed at placing patients back into their homes and communities where 
they can resume their independence.
    Mr. Chairman, AMRPA testifies before you today seeking legislative 
relief that would address two critically important issues that are 
adversely impacting inpatient rehabilitation providers and patients who 
need their services: (1) the 75% Rule; and (2) an increasingly 
aggressive pattern of medical necessity-based denials against claims 
filed by inpatient rehabilitation hospitals and units, the frequency of 
which is unprecedented in comparison to any other Medicare Part A 
provider segment. AMRPA is vitally concerned about both of these 
issues, as they are increasingly eroding access to high-quality 
rehabilitation care for those who need it.
    With respect to the 75% Rule, we recognize the propensity of this 
Committee to defer to the Centers for Medicaid and Medicare Services 
(CMS) in the regulatory rulemaking arena. It is critically important to 
note, though, that the 75% Rule is no longer a regulation falling 
solely within the jurisdiction of CMS. As part of the deficit reduction 
legislation enacted into law early last year, Congress asserted 
jurisdiction over the 75% Rule and temporarily maintained it as its 
current level, 60%, for an additional year. Unless Congress takes 
timely action this year, the Rule will remain on its current trajectory 
toward escalating to the 65% and then 75% threshold levels. Even if CMS 
wanted to alter the 75% Rule threshold percentages on their own, the 
agency could not do so given the statutory framework.
    The situation I present to you today is perhaps most analogous to 
the overreaching that occurred after implementation of the Balanced 
Budget Act of 1997. In that instance, the Department and Congressional 
Budget Office (CBO) grossly miscalculated and underestimated the 
savings that would be achieved by the adoption of certain agency cuts. 
In the case of the inpatient rehabilitation hospital and unit (IRH/U) 
75% Rule, here too the Department substantially underestimated the 
adverse Medicare beneficiary impact and the cost savings impact of its 
rulemaking. The 75% Rule threatens seniors by denying them access to 
the vital inpatient medical rehabilitation services provided by IRH/Us. 
Even in its most recent rulemaking promulgated just a few weeks ago, 
the Department continues to publish inaccurate data that significantly 
underestimates the beneficiary access implications and financial impact 
under the Rule.
    Rehabilitation providers are dedicated to helping Medicare and 
Medicaid beneficiaries recover from debilitating conditions through 
medical rehabilitation. We are all aware that post-acute care will 
become more and more important as the population ages. As we prolong 
life, previously fatal diseases have become chronic conditions, and 
people want the opportunity to regain function and live in their homes 
and communities as independently as possible. At the same time, it is 
hard to ignore that our aging population, as well as our disabled 
veterans returning from combat, keenly need--and will continue to need 
indefinitely--access to high-quality medical rehabilitation care. The 
very existence of the critical inpatient rehabilitation sector of the 
health care arena is threatened by these Medicare policies which are 
the focus of my testimony today.
Impact of the 75% Rule
    To participate in Medicare under the prospective payment system for 
inpatient rehabilitation facilities (IRFs), inpatient rehabilitation 
hospitals and units must satisfy the 75% Rule, in addition to other 
criteria. The Rule requires that a certain percentage of IRF patients 
fall within 13 diagnostic categories. Patients outside the 13 
qualifying conditions are often denied IRH/U access.
Background on the 75% Rule
    In 1983, when Congress passed the law mandating the use of 
diagnosis-related groups (DRGs) as the basis for payment of acute care 
hospitals, it excluded certain types of hospitals from that payment 
system, including rehabilitation hospitals and rehabilitation units of 
general acute care hospitals. However, the Secretary of the Department 
of Health and Human Services had to define these facilities in order to 
distinguish them from acute care hospitals and thereby exclude them 
from the DRG payment system. The Secretary published seven exclusion 
criteria that IRFs must meet in order to be paid separately. One of 
these criteria for provider participation in the Medicare program is 
known as the ``75 Percent Rule'' because it requires that 75% of 
Medicare and non-Medicare patients fall within a list of 10 conditions: 
stroke, spinal cord injury, brain injury, neurological disorders, 
burns, amputation, fracture of the femur, polyarthritis, major multiple 
trauma, and congenital deformity.
    When CMS revised the 75% Rule in 2004, it redefined the list of 10 
conditions in a way that excluded many cases long considered to fall 
within the 75% Rule. Herein lies the major compliance and enforcement 
problem, as CMS started counting and defining cases differently. In 
addition to a substantial narrowing of the universe of cases that could 
be deemed compliant with the Rule, other important diagnoses--such as 
cardiac, pulmonary, cancer, and transplant--were not added. There has 
been little discussion of the medical and/or scientific bases for the 
Rule's inclusion or exclusion of various clinical conditions or medical 
diagnoses. Furthermore, the revised 75% Rule allows certain patients 
who meet the definition of a ``comorbidity'' to be included in the 
compliance threshold. Yet when the Rule is fully implemented those same 
patients will no longer comply--a policy approach which is logically 
and medically inconsistent and is not supported by any medical or 
clinically-based evidence or data. The revised 75% Rule simply does not 
represent any changes in medical science or practice and their 
connections to the advancements made in the field of physical medicine 
and rehabilitation over the past quarter-century. It also does not 
recognize the decreased mortality rates for certain health care 
conditions and how those cases can be improved by intensive 
rehabilitative care.
Impact of the 75% Rule
    CMS' policy and savings objectives clearly have been achieved and 
continue to be achieved. The 75% Rule impact on patient access has been 
significant, even after implementation at only the 60% compliance 
threshold. Access is most restrictive for patients whose medical 
rehabilitation care benefits from newer rehabilitation specialties such 
as cardiac, pulmonary, pain, and cancer care. As a result, the number 
of Medicare cases treated in IRFs declined by 88,000 patients during 
the first two years of 75% Rule phase-in, some rehabilitation hospitals 
and units have closed, and many providers have significantly reduced 
beds, services, and staff. All of this confuses patients, physicians, 
and general acute-care hospitals. It also forces rehabilitation 
hospitals and units into an arbitrary, quota-based lottery system for 
their services, depending on whether they are ``meeting their 
number''--meaning the same patient could be admitted at the beginning 
of the month but not admitted toward the end of the month, regardless 
of physician judgment and medical necessity.
CMS Underestimated the Impact of the 75% Rule in Terms of the Patients 
        Who Are Prevented from Accessing Care in Inpatient 
        Rehabilitation Hospitals and Units
    Due to the revisions made to the 75% Rule, a large number of 
patients with medical conditions and diagnoses that previously 
satisfied the Rule are unable to access the care and services of 
inpatient rehabilitation hospitals and units. Multiple reports have 
shown that patient volume has fallen at a rate much greater than 
anticipated by CMS when adopting the 75% Rule. In the Final Rule of May 
7, 2004, CMS indicated that it anticipated a 0.1% drop in the number of 
patients treated in IRFs during the first full year of implementation 
of the Rule. This number has been shown through multiple analyses to be 
grossly understated in terms of the devastating impact implementation 
of the Rule has had on inpatient rehabilitation hospitals and units. 
There has been a dramatic drop in total volume, by specific types of 
cases, as well as a number of unintended consequences of the Rule.
    In 2006 and 2007, the Medicare Payment Advisory Commission (MedPAC) 
examined the payment adequacy of the IRF PPS. In both years, MedPAC 
examined closely the impact of the 75% Rule on the margins and 
operation of IRFs. It noted in 2006 that the volume of patients dropped 
by 9% from 2004 to 2005 due to implementation of the Rule. In its 2007 
report, MedPAC anticipates that patient volume in IRFs will drop an 
additional 20% as facilities come into compliance with the 65% 
compliance threshold slated to take effect on July 1, 2007. The 
Commission also noted in its March 2007 report that only 449,321 cases 
were treated in IRFs in 2005, compared to 496,695 cases treated in 
2004.
    The inpatient medical rehabilitation field has independently 
analyzed the total volume drops since the inception of the Rule and 
also found that the total impact well exceeds the original estimates. 
Using data supplied by the field, the Moran Company has analyzed the 
impact of the 75% Rule and tracked the decline in caseload on a 
quarterly basis. The data reviewed originated from two large industry 
data bases, representing 75% of all Medicare IRF discharges. The Moran 
Company report through the second quarter of 2006 notes that the total 
Medicare case load declined by 88,053 cases over the first two program 
years of the Rule. It also notes that for program year 2006, the 
Medicare case load was down 12.4% from Program Year 2005 and 18.4% from 
Program Year 2004.
    In a separate analysis, AMRPA/eRehabData noted a decrease in 
Medicare patients for the first year of 34,624 and of non Medicare 
patients of 5,970 compared to the year before the implementation of the 
Rule and a decrease of over 85,282 Medicare patients and 9,428 non-
Medicare patients in the second year of the Rule compared to the year 
before implementation of the Rule. In the third year of the Rule, which 
is almost completed, AMRPA anticipates that even though the threshold 
has been held at 60% for a second year, the number of people denied 
care will increase to 118,281 Medicare patients in anticipation of 
moving to the 65% level as compared to the level of cases in the year 
prior to the Rule's implementation.
    Unless legislative relief is provided, Congress should expect even 
more caseload decline as implementation of the 75% Rule continues. 
eRehabData estimates that once the compliance threshold moves to 65%, 
the number of Medicare patients not served will increase to 138,344 
compared to the year before the Rule was implemented. This represents a 
decrease in volume of 29.57%, which supports MedPAC's estimates.
The Rule's Intended and Unintended Consequences on Patient Access
    As noted above, the medical rehabilitation field has also found 
that certain types of cases are no longer receiving care in inpatient 
rehabilitation hospitals and units. The Moran Company has been tracking 
the change in the types of cases denied care. In its Q1 2007 report 
``Utilization Trends in Inpatient Rehabilitation: Update Through 
Q1:2007,'' it notes that the ``five categories with the largest 
declines account for nearly 90% of the total decline in caseload in the 
first quarter of 2007, relative to the first quarter of 2004.'' These 
five categories are as follows: (1) replacement of lower extremity 
joints, (2) miscellaneous cases which includes all cancer cases, (3) 
cardiac, (4) pulmonary, and (5) other orthopedic cases. Of great 
interest, however, is that since the second quarter of 2006, there has 
been a decrease in the number of stroke cases served.
    AMRPA has tracked the changes in the volume of cases by type. We 
note also that the changes from the first quarter of 2004 to the first 
quarter of 2007 show that the largest drops are in the categories of 
osteoarthritis (-79.32%), pulmonary (-57.68%), amputation, other 
(-58.49%), pain (-50.82%), replacement of lower extremity joint 
(-49.51%), and rheumatoid, other arthritis (-49.66%). As with the Moran 
data, there is also a drop, albeit smaller, in treatment of stroke 
patients. Additional AMRPA analysis of Impairment Group Codes (IGCs) 
found a number of additional changes in access which are quite 
disturbing. Stroke cases, brain injuries, cerebral palsy, burns, 
specific types of paraplegia and quadriplegia, and other complex cases 
are being treated less and less frequently in the inpatient 
rehabilitation setting.
    Where patients who are denied admission to inpatient rehabilitation 
hospitals and units go to receive services is not clear. Of greater 
concern are the outcomes of their care in terms of the key hallmarks of 
rehabilitation. These include length of stay, mortality, infection, 
complication rates (e.g. DVT, pneumonia, other), readmission to acute 
care, and primary motor and cognitive function.
    Of grave concern is the decline in both the number of traditional 
comprehensive medical rehabilitation cases and the number of patients 
with newer conditions that benefit from medical rehabilitative care. 
CMS's changes in 2004 essentially eliminated most arthritis and single 
joint replacements from being served in IRH/Us. There is also a drop in 
the areas where medical science is making great advancements in 
mortality and longevity, turning serious cardiac, respiratory and 
especially cancer diagnoses into conditions to be managed (frequently 
after surgery), not death sentences. Even before the IRF PPS was 
enacted, the medical rehabilitation field saw an increase in cardiac, 
pulmonary and cancer patients. Cardiac cases increased from 2.47% of 
cases in 1994 to 5.71% of cases in 2002; pulmonary from 1.98% is 1994 
to 2.71% in 2002 and the miscellaneous category, which includes cancers 
and other serious pulmonary cases, from 5.43% in 1994 to 11.21 % in 
2002. We believe this growth reflects underlying improvements in 
medical science, decreases in mortality, and therefore increased need 
and benefit from medical rehabilitation.
    By 2006, cardiac cases had dropped to 4.17%, pulmonary to 1.53% and 
miscellaneous to 9.44% of the total cases. These cases are complex, 
resource-intensive cases and reflect the underlying shift in successful 
acute medical treatment and the then subsequent need for intensive 
hospital rehabilitation services. We do not believe that this effect 
was necessarily intended and that it may be of concern to hospital 
providers, patients with these conditions, their families, advocates on 
their behalf, and policy makers.
CMS Significantly Underestimated the Rule's Financial Impact
    AMRPA has also tracked the financial impact of the Rule and again, 
it considerably exceeds CMS' original estimates. According to CMS' 2006 
data, total Medicare spending amounted to $408 billion dollars, of 
which $6 billion is attributable to inpatient rehabilitation hospital 
services; therefore, inpatient rehabilitation spending represents only 
1.5% total Medicare spending. CMS estimated that the total savings for 
IRF payments in the first year would be $5.4 million. When CMS 
accounted for care in other settings it estimated total net savings of 
$2.4 million. Using the eRehabData database, we estimate that the drop 
in payments to IRFs in the first year of the Rule for Medicare patients 
alone was approximately $343 million and for non-Medicare patients a 
decrease of $59.2 million as compared with payments in the year prior 
to implementation of the Rule. In the upcoming fourth year of the Rule 
when the compliance threshold moves to 65%, we project that the drop in 
Medicare payments alone to IRFs will be $1.372 billion as compared to 
the year prior to the Rule; at 75% it will be $1.8 billion compared to 
payments in the year prior to the Rule's implementation. Given the size 
of this sector, this staggering decrease results in disproportionate 
financial consequences.
    Congress and the agency must appreciate and recognize that the 
continued drops in patients, the increases in costs that cannot be 
otherwise covered by payments and the overall drop in payments cannot 
be sustained by the IRH/U field for an indefinite period. The 
Government has vastly underestimated the impact of this Rule at every 
turn--drop in total volume, impact on unintended populations, failure 
to recognize the growing types of patients that clearly need inpatient 
hospital and unit rehabilitation services and financial devastation by 
several orders of magnitude, unless the true intent of the Rule is to 
eliminate the inpatient rehabilitation hospitals and units as providers 
under Medicare.
CMS Should Retain Comorbidities for Purposes of the Exclusion Criteria 
        in order to Ensure Access for Patients who Need Specialized 
        Care
    AMRPA urges enactment of the statutory protection provided by the 
legislative provision in the Tanner-Lowey-Hulshof-LoBiondo bill which 
provides for permanent retention of the use of comorbidities. AMRPA 
believes that the use of the comorbidities that meet the definition 
outlined in 412 C.F.R. 412.23(b)(2) and as listed in Appendix A of 
Transmittal 938 should be retained indefinitely or permanently for 
determining compliance with the threshold percentage. Comorbidity 
considerations represent a significant component of patient access to 
medically necessary inpatient rehabilitation. Simply shifting 
percentages does not change the clinical characteristics of the 
patients being admitted to an IRH/U overnight. There are patients who 
have a comorbidity that falls into one of the 13 conditions and have a 
significant decline in their functional ability. These are usually 
severely compromised patients for whom appropriate treatment is not 
available in other settings. They have significant functional 
involvement by definition due to the comorbidity or other complication 
and generally constitute both medically and functionally complex 
patients. CMS estimates that 7% of cases come from comorbidities--so 
moving to a full threshold of 75% is actually moving to 82%.
CMS Should Modernize Inpatient Rehabilitation Criteria, Per Clear 
        Congressional Instruction
    The failure to modernize the 75% Rule in any meaningful way since 
1985, in combination with the agency's regulatory and compliance 
activities, have resulted in policies which are dismantling the 
infrastructure of inpatient rehabilitative medicine in the United 
States today. What is astonishing is that the agency's policies are 
completely without explicit Congressional authorization. In fact, 
Congress has repeatedly expressed contrary intent. Initially, Congress 
conveyed its opinion through letters to the Secretary signed by more 
than half of the House of Representatives and 82 Senators--to reverse 
the regulatory course and halt further implementation of the Rule until 
the issue could be studied and a different regulatory course pursued. 
The Department disregarded no less than three formal Congressional 
requests to halt implementation of the 75% Rule. In a year when there 
was no appropriate moving authorizing Committee legislation, the 
Appropriations Committees of both the House and Senate included 
Conference Committee report language directing the agency to develop an 
alternative to the 75% Rule and enlist the assistance of an independent 
expert panel convened under the auspices of the Institute of Medicine 
(see H.R. Rep. No. 108-401). Congress clearly recognized that statutory 
intervention was required and therefore in 2005, imposed a freeze on 
the compliance threshold at 60 percent. Quite candidly, we perceive 
most Members of Congress would have gone further than the one-year fix 
provided at that time. The statutory language provided then now compels 
additional Congressional action in 2007. It is time to put the 75% Rule 
controversy behind us.
Codification of Medical Necessity Standard is Essential to Protect 
        Patients and Provide Stability
    In addition to the 75% Rule, inpatient rehabilitation hospitals and 
units have endured an unprecedented level of medical necessity denials 
over the past two years. Numerous CMS contractors have denied coverage 
for services provided in inpatient rehabilitation hospitals and units 
to thousands of patients. These denials are frequently based on local 
coverage determinations (LCDs) or case-by-case rationales that fail to 
reference or properly apply the binding rules for coverage that have 
existed for the past 22 years.
    In order to address this problem, AMRPA supports codification of 
HCFA Ruling 85-2 in the Medicare statute, as called for in H.R. 1459. 
This ruling, which CMS issued in 1985, sets clear, clinically-based 
rules for inpatient rehabilitation coverage which have been used by 
HCFA and CMS over more than two decades to determine what constitutes 
medically necessary inpatient rehabilitative care. Because of the 
wording which gives primary deference to physician judgment, we believe 
this ruling is just as effective today as it was 22 years ago at 
establishing medical necessity for inpatient rehabilitation services. 
HCFA Ruling 85-2 established two basic requirements that must be met 
for inpatient hospital stays for rehabilitation care to be covered:

        1.  The services must be reasonable and necessary (in terms of 
        efficacy, duration, frequency, and amount) for the treatment of 
        the patient's condition; and
        2.  It must be reasonable and necessary to furnish the care on 
        an inpatient hospital basis, rather than in a less intensive 
        facility, such as a skilled nursing facility (SNF), or on an 
        outpatient basis.

    The Ruling then sets forth eight criteria, which, if satisfied, 
demonstrate that both of these two requirements for inpatient 
rehabilitation are satisfied. These eight criteria stipulate that the 
patient must require:

        1.  Close medical supervision by a physician with specialized 
        training or experience in rehabilitation;
        2.  Twenty-four hour rehabilitation nursing;
        3.  A relatively intense level of rehabilitation services;
        4.  A multi-disciplinary team approach to delivery of the 
        program;
        5.  A coordinated program of care;
        6.  A significant practical improvement must be likely;
        7.  The rehabilitation goals must be realistic; and
        8.  The length of the rehabilitation program must be 
        reasonable.

    Over the past several years, Fiscal Intermediaries have issued a 
number of very restrictive local coverage determinations, also known as 
``LCDs,'' that deviate from HCFA Ruling 85-2 in significant and 
troubling ways. For instance, these LCDs sometimes require as a 
precondition to inpatient rehabilitation coverage that beneficiaries 
prove that their care could not be furnished in a skilled nursing 
facility--which is an impossible burden, requiring a detailed knowledge 
of the level of care provided across the SNF industry, which often 
varies considerably. Moreover, this is a completely subjective 
determination. Other LCDs create ``rules of thumb'' precluding coverage 
for certain patients, such as those who undergo joint replacements, 
with little or no regard to the individual beneficiary's comorbid 
conditions or medical history. We believe that these LCDs impermissibly 
supersede the patient-centered, clinically-based criteria of Ruling 85-
2.
    Fiscal intermediaries have used these LCDs to deny retrospectively 
thousands of claims, both through prepayment reviews and through post-
payment audits. Even in the absence of LCDs, intermediaries are denying 
claims on questionable grounds similar to the LCDs just mentioned. 
Other Medicare contractors, such as Program Safeguard Contractors, are 
similarly denying claims across the board in a wholesale fashion.
    These denials place a significant burden upon the rehabilitation 
hospitals and units affected, both in terms of the funds withheld and 
in the administrative burden of appealing the denials. AMRPA members 
have appealed many, if not all, of their denied cases. Our members tell 
us that they are winning the vast majority of their appeals in hearings 
before administrative law judges (ALJs). These ALJs, unlike earlier 
levels of review, are not contractors of CMS. The ALJs, therefore, 
function to provide independent third-party review. The high level of 
reversals of these claim denials demonstrates that Medicare reviewers 
are not adhering to the binding rules of coverage in Ruling 85-2. 
Providers and patients need the statutory protection from Congress for 
the current medical necessity standard.
    This is why we urge Congress to codify in statute the coverage 
rules contained in Ruling 85-2 and make clear that LCDs are not to 
deviate from this federal standard. Ruling 85-2 sets straightforward, 
clinically-based criteria for evaluating medical necessity. It 
effectively safeguards the Medicare Trust Fund while also ensuring that 
Medicare beneficiaries receive the appropriate level of rehabilitation 
care to which they are entitled.
Recovery Audit Contractors are Compounding the Instability in the Field
    AMRPA is also deeply concerned about how the Recovery Audit 
Contractor (RAC) process is unfairly amplifying the same misguided 
critical review and denials based on medical necessity with devastating 
consequences for the viability of providers in the states where RAC 
activity is occurring. Authorized as a demonstration project by the 
Medicare Modernization Act of 2003, RACs have been established in 
California, New York, and Florida, but will soon be expanded 
nationwide. RACs are charged with recovering overpayments and are paid 
a percentage of every dollar that they recover. The RAC demonstration 
is the first time the Medicare program has ever paid a contractor on a 
contingency basis for overpayment work or claims review. We believe 
that this payment scheme creates perverse incentives to deny as many 
claims as possible and place the burden on providers to appeal these 
denials.
    AMRPA strongly supports efforts by CMS to identify and eliminate 
fraudulent and/or erroneous Medicare payments to maintain the integrity 
of the Medicare program. However, the RAC program appears to be more 
focused on collecting money regardless of the impact the audit activity 
has on hospitals and patients. The financial incentives in place for 
contractors have resulted in aggressive and inappropriate audit 
activity. Recovery audit contractors may retain a significant 
percentage of recovered payment, and contractors may be able to retain 
recovered payments even when CMS overturns the auditor's coverage 
decision. In addition, the appeals process is complicated and fraught 
with inherent barriers that deter providers from seeking appeals to RAC 
determinations. AMRPA thinks that the combination of financial 
incentives for contractors and perhaps insufficient oversight by CMS of 
RAC activities is wreaking havoc, adding instability to the field, and 
may be resulting in misapplication of Medicare policy.
    A prime example of this problem can be seen in the State of 
California. The RAC in California, PRG-Schultz, has focused much of its 
energy on inpatient rehabilitation hospitals and units. AMRPA has heard 
reports from some providers that PRG-Schultz has denied virtually every 
claim it has reviewed. Single hospitals have had over 300 claims denied 
worth several million dollars. The denial letters that they receive 
from PRG-Schultz are usually form letters that repeat stock phrases 
that purport to explain the denials. It is clear, however, from the 
volume of denials, the time spent reviewing each case, and the pro 
forma nature of the explanations that this RAC is not conducting a 
meaningful medical review and applying the coverage criteria of Ruling 
85-2. According to the California Hospital Association, these audits 
have resulted in significant financial hardship throughout the state's 
hospital system and may threaten access to rehabilitation services in 
California.
Quality of Care in Inpatient Rehabilitation Hospitals and Units
    Inpatient rehabilitation hospitals and units provide high quality 
care to patients suffering from newer rehabilitation conditions, such 
as cardiac, cancer, transplants, pulmonary, and pain, as well as joint 
replacement patients who would also benefit from medical advancements. 
However, AMRPA remains concerned that patients are being turned away 
from quality inpatient rehabilitation care to settings less-suited to 
treat intense rehab needs. While there is a long-standing tradition in 
the rehab field to measure quality and outcomes of individual patients, 
programs, and facilities, comparable efforts do not exist in SNFs, the 
setting in which most patients turned away from IRH/Us ultimately find 
treatment. In fact, as MedPAC and GAO have underscored to Congress, 
there are no systems in place in SNFs, Acute Care Hospitals, Home 
Health Agencies, or Long Term Acute Care Hospitals to determine 
rehabilitation necessity, program activity, patient benefits or need, 
or outcomes. Interestingly, while 78% of SNF admissions in the RUG 
system receive ``rehabilitation,'' current SNF data collection does not 
include appropriate rehab or other outcome data. The SNF field has no 
way to collect such information, so we do not know what percentage of 
these patients ever become independent at home, at what cost, and over 
what period of time.
    Notably, concern about the comparability of care in other health 
care settings has been articulated by not only rehabilitation 
providers, but also MedPAC and CMS. In its March 2007 Report to 
Congress, MedPAC noted that there was a decline in the quality of care 
for SNFs. At its April meeting, MedPAC further examined the issue of 
quality of care in SNFs. Dr. Andrew Kramer presented his study which 
examined the changes in factors associated with SNF rates of discharge 
to the community and rehospitalization between 2000 and 2004. He found 
that the rate of discharge to community is dropping and that 
rehospitalization rates are up, both of which he suggests reflect 
declining quality of care in SNFs. CMS is currently seeking to explore 
development of measures and systems for SNFs and all post-acute care, 
but it will take years to complete and make this new approach 
functional. However, despite the absence of measures, goals, standards 
for SNFs and LTCHs similar to IRF standards, and without a clinical 
evidence basis for action, CMS has doggedly moved forward with 
regulation and policy changes that have forced thousands of your 
constituents away from receiving their medically necessary care in a 
rehabilitation hospital or unit, and instead channeled them to SNFs and 
other settings.
    What is perhaps most startling is the agency's dogged pursuit of 
the 75 percent policy absent any clinical data or outcomes analysis on 
the quality of care received, the overall costs to the health care 
system (including costs of rehospitalization, longer lengths of stay in 
other settings), and the impact on patient lives. The Department has no 
way of knowing what harm to patients has occurred since there is no 
evidence being accumulated.
    An expanded national research effort is of paramount importance. 
AMRPA has been concerned since the inception of the 75% Rule that 
patients would not receive the same quality of care they receive in an 
inpatient rehabilitation hospital or unit. Therefore, in the past year, 
the field created the ARA Research Institute and has privately 
sponsored more than $2 million of research in an effort to understand 
and improve the quality of care, outcomes, and cost-effectiveness of 
the rehabilitation hospital compared to other settings, and to develop 
proper medical necessity standards. The newly formed ARA Research 
Institute has funded eight studies to date and, under sponsorship of 
other leading national associations, held a ``State of the Science 
Symposium'' in February 2007 to discuss the work in progress. We have 
shared abstracts with CMS, requested its comments and encouraged CMS to 
attend the Symposium.
    My own hospital has participated in research to compare care 
between IRFs and SNFs. A study conducted at Burke Rehabilitation 
Hospital analyzed whether outcomes differed between patients with 
single knee or hip joint replacement surgery undergoing rehabilitation 
in an inpatient rehabilitation facility compared to a skilled nursing 
facility. Patients, matched for age, gender, operative diagnosis and 
admission ambulation function (FIM), who received rehabilitation in the 
IRH/U had, on average, a shorter length of stay and superior functional 
outcomes. The study is being repeated to include hip fracture patients 
as well, and to match for comorbidity, and measure actual dollars 
expended. The preliminary outcomes data shows that the clinical 
outcomes in subsequent study are similar to the results previously 
published. Patients treated in the rehabilitation hospital were less 
likely to require re-hospitalization, have shorter lengths of stay, and 
were more likely to be discharged home.
    In the absence of governmental funding, the industry has taken 
steps to engage in the necessary research and modernize criteria for 
treatment. AMRPA and other leading organizations have produced an 
alternative model for defining medical rehabilitation hospitals and 
units, to demonstrate that the 75% Rule is not necessary to properly 
distinguish between rehabilitation and acute care hospitals. The 
American Academy of Physical Medicine & Rehabilitation (AAPM&R) has 
offered an approach that is perceived to be a better way of sorting 
patients into the proper setting. The field is convinced that it can 
work together with CMS and that patient-centered criteria for site of 
care can be developed.
    Every day, AMRPA member hospitals hear clinical stories of 
frustrated and upset Medicare beneficiaries who are unable to receive 
the care they need and want because of these rules, and from angry 
physicians who cannot send their patients to the program they believe 
to be the best and most appropriate. SNFs play an important role in our 
health care system, but they are not a substitute for rehabilitation 
hospitals and units. Stated most simply, there is no evidence to 
support the Government and SNF industry's contention that care in other 
settings is of the same quality and less costly. Studies are now 
showing that the opposite is true. In general, for otherwise similar 
patients, those who are cared for in a rehabilitation hospital or unit 
make twice the progress, in less time compared to SNFs. Furthermore, 
given the increased length of stay in SNFs over IRH/Us, arguably 
Medicare payments to SNFs and IRFs are likely to be comparable, thereby 
bringing into questions CMS' claims of cost savings.
    The Executive Branch to date has provided no evidence that its 
policy initiatives in this arena are clinically or evidence-based. 
Before an entire infrastructure and this field of medicine is 
dismantled completely, the Government should be required to demonstrate 
that its policy changes are in the best interests of (or at least will 
not harm) Medicare beneficiaries. In this instance, private sector 
patients are harmed as well in terms of access to medically necessary 
services. Moreover, the ultimate costs to the health care system are 
completely unclear. Aside from quality of life considerations, under 
the mantle of cost-savings, the agency policies may well result in 
higher long-term Government spending as patients receive care in other 
venues.
AMRPA Recommendations
    Mr. Chairman, I testify here today because the 60% compliance 
threshold legislative relief Congress provided (in Section 5005 of the 
DRA) expires for cost-reporting periods beginning on or after July 1, 
2007. Recognizing the statutory problem in front of this Committee, 
Representatives John Tanner (D-TN), Nita Lowey (D-NY), Kenny Hulshof 
(R-MO), and Frank LoBiondo (R-NJ) introduced legislation that would 
freeze implementation of the 75% Rule as an immediate and short term 
fix to the current crisis. The Preserving Patient Access to Inpatient 
Rehabilitation Hospitals Act (H.R. 1459) presents a reasonable and 
balanced approach--the legislation extends the 60% compliance 
threshold, continues the use of comorbidities, and codifies current 
medical necessity standards established by HCFA Ruling 85-2. The 
Tanner-Hulshof bill, although relatively recently introduced, already 
has more than 150 cosponsors. Members of Congress have become keenly 
aware of the adverse consequences to date emanating from the 75% Rule. 
We urge this Committee to address this problem and provide time 
sensitive legislative relief in the first moving Medicare legislative 
vehicle considered by this Committee. AMRPA strongly urges Congress to 
enact the provisions in H.R. 1459 as soon as possible this year to halt 
the continued hemorrhaging of this sector.
    Unlike the recommendations seen for SNFs and LTCHs, MedPAC 
recommended a positive 1% update in the market basket for inpatient 
rehabilitation hospitals and units for FY 2008. The IRH/U field cannot 
absorb additional resource cuts that would further heighten volatility 
and threaten access to care as IRH/U beds, units, and hospitals. We 
urge Congress to support a positive market basket update for inpatient 
rehabilitation hospitals and units in FY 2008.
    Finally, the field is prepared to work collaboratively with 
Congress, CMS, and the other sectors of the post-acute care world to 
define together an appropriate continuum of care, the distinctions 
among the various segments of the provider community, the criteria that 
should be used to guide patient placement and Medicare coverage 
decisions. The field also supports the need for research to be 
conducted and supported to create evidence that should be used to guide 
public policy.
    We know Congress and this Committee face difficult payment system 
decisions. We seek favorable consideration by your Committee, and we 
pledge to work with you and your staff, and CMS. AMRPA and its members 
are convinced that if we work together, we can shape a rational and 
better health care delivery system that improves outcomes, increases 
access, more accurately places patients in appropriate settings, and 
reduces the true costs to the Medicare program and beneficiaries alike. 
We appreciate the opportunity to appear today, and I would be pleased 
to respond to any questions.
[GRAPHIC] [TIFF OMITTED] 47174A.082


[GRAPHIC] [TIFF OMITTED] 47174A.083


[GRAPHIC] [TIFF OMITTED] 47174A.084


[GRAPHIC] [TIFF OMITTED] 47174A.085



                                 

    Chairman STARK. I want to thank the entire panel. I just 
very quickly--we as a Committee I suppose could do nothing, and 
then the doctors would take that 10 percent dip in their fees 
and the three of us wouldn't be able to get medical care any 
place in the United States that we would feel comfortable 
asking for it.
    On the other hand, we can begin to follow a variety of 
recommendations and cuts across the board. To the extent that 
that's all we can do, I think sometimes we fail to provide it. 
It's not easy to write legislation that applies equally in 
Louisiana, Michigan, California and North Dakota for example. 
There are different needs, different practice patterns, 
different requirements.
    To the extent that you all representing your various groups 
can help us determine how we sort the wheat from the chaff, 
Bruce, you indicated that there are some units that do better 
than others. Teaching hospitals have a particular need. Rural 
hospitals in many cases have a need.
    Not all long-term care facilities, Ms. Chesny, have 
negative margins. Some in the old days maybe had a 16 percent 
margin. That's different from somebody who has a zero to 
negative margin.
    But you have to help us determine how best we can write 
legislation that does sort this because if we try to be as fair 
as we can--people are talking about--I don't know who keeps 
leaking this, I suspect it's Dave, that I am bound and 
determined to cut $50 billion or save $50 billion so we can 
fund SCHIP. Well, probably if we fund SCHIP the majority of 
that goes back to providers, more children's hospitals, more 
pediatricians. This is kind of a zero sum gain, and it is not 
easy for us.
    Now to your credit and the credit of the American Medical 
Association, the California Medical Association, almost all of 
the providers have come to us, I don't know whether Mr. Camp 
has had the same experience, and said they recognize that this 
is not going to be a year of huge financial increase. As a 
matter of fact, some are predicting that they may not get every 
nickel that either the president's budget or MedPAC 
recommended.
    I don't quite know how we're going to adjust to that to get 
a vote that will get us through the House and the Senate and 
get the President to sign. But without your help we'll make a 
mess of it because we could be pushed as one particular group 
of providers is suggesting they don't want to be in the room.
    Well, without being able to determine who's better and 
who's worse, who's more deserving and less deserving, the only 
alterative left to us is across the board cuts. I don't like 
those. I don't think they--we're apt to harm people that ought 
not to be harmed and not help the people who need help.
    So, that's a long-winded way of saying you all could be 
helpful to us. You don't have to endorse cuts but you could 
help us learn how to determine what the priorities ought to be 
as between the competing interests in your own group, whether 
it's rural long-term care providers or home health or whether 
it's inner city home health. There's a difference I think in 
the costs and the problems faced.
    So, I'm asking you for more than just the excellent 
testimony you've given us today but to help us and help our 
staff as you used to help Chip figure out we can make these 
decisions and balance the interests of the providers, the 
beneficiaries and the taxpayers. My measure is usually when 
everybody on the Committee is scowling we've got the right mix 
and that's when we ought to drop it down a little. If anybody 
is smiling, they're taking home something that the rest of us 
don't know about.
    Let me just ask you to run down the line here and ask if 
each of you care to or have experience with Medicare Advantage 
and how the Medicare Advantage payments compare to payments 
under traditional fee-for-service programs, and do you have any 
problems with beneficiary access or any other problems with 
Medicare Advantage that we might look for. If you don't, don't 
bother.
    Chip.
    Mr. KAHN. Though the Medicare Advantage payments are lower 
than Medicare payments I think the issues with Medicare 
Advantage though go to the question of fairness and equality 
between beneficiaries. I think we have the situation today 
where we want to have--I think we want to have as a country a 
Medicare Program that gives people the options to have the kind 
of coverage they had when we were privately employed or before 
they retired, but I think we have to examine how much that 
option is worth in terms of equality between Medicare 
beneficiaries.
    Chairman STARK. Mr. Umbdenstock.
    Mr. UMBDENSTOCK. Mr. Chairman, we hear from our members in 
three areas around Medicare Advantage. Number one, in the 
private fee-for-service plans there's a lot of confusion as to 
what's covered, what's not covered, what benefits the members 
have, and they often show up at our front door or ER not aware 
of that and we only find out--and they find out later.
    Another area of significant concern that we hear a lot 
about is from our rural members where the Medicare Advantage 
Plans are not paying the critical access hospitals the way the 
traditional plan is and that causes significant challenges for 
our members.
    The third, your comment about where to maybe look for 
opportunities for savings has already been brought up in my 
comments and in Stan's around the issue of the payments to 
indirect, on indirect medical education. To those plans we 
think there's a legitimate place to look there as well.
    Chairman STARK. Bruce.
    Mr. YARWOOD. We're finding a very confusing pattern out 
there about long-term care because it's not the thing that 
people look at in terms of the advantage. The confusion first 
goes to a state like Arizona that has almost all HMO care.
    What we saw in Arizona was the diminution in terms of bids 
of about 30 to 40 percent in a period of four or 5 years. Then 
you get into the question--and I'll just continue using 
examples--then you get into the question of the number of plans 
there with the different benefit structures, with the different 
payment structures and the different billings process that 
makes it extremely confusing patient to patient to patient.
    We have one person that is an employee of the association 
that spends half her time trying to work with her member 
associations, with member facilities, going through and just 
working the billing process.
    The second thing we find is that when you go into an area 
that may have excess capacity--I'll use the Bay Area, Kaiser, 
and if they go into a facility in Hayward that has six or seven 
beds open all of a sudden they're going to contract to put 
people into those beds at probably $50 to $100 less than the 
basic fee-for-service rate.
    Why? Because you're making--if you compare it to nothing, 
you're getting something. Now the question then is can you get 
the staff to take care of that in the way necessary for those 
folks.
    The third thing that I indicated in the testimony that we 
think is pretty unfair is the fact they have no 3-day hospital 
stay rule. People could go back and forth between facility and 
the hospital on a 1-day pattern or if you have a dual diagnosis 
where someone had a hip fracture, it was there for a while, 
they've used up their hundred days, they have diabetes and they 
have to get--again for the next--second hundred days, they have 
to go back to the hospital for 3 days, which is stupid, just 
stupid.
    So, we find those kind of patterns, and as we start looking 
into it more and more and more we think that there will 
probably be some recommendations coming from us as to how to 
improve the system with us.
    Chairman STARK. Thank you. Mr. Brezenoff ?
    Mr. BREZENOFF. I strongly endorse and support the comments 
that have just been made. I would only add that it is clear 
that we get less money from the Medicare Advantage plans than 
we do for fee-for-service. The obvious question is what's 
happening for that richer premium that the Medicare Advantage 
organizations are getting. Do we see it in the improved care or 
improved access?
    The best case answer is we don't know and the worse case 
answer is that it's reflected more in the bottom lines of these 
organizations. In New York state it is very clear to us that 
the Advantage plans have much fatter bottom lines 
disproportionally because of what they get from the Medicare 
Advantage premiums, and it's not translated into reimbursement 
for hard pressed teaching hospitals, and it is not clear that 
it's turned into improved access or benefits for the covered 
lives.
    Chairman STARK. Ms. Chesny.
    Ms. CHESNY. Our experiences at the home health benefit end 
are Medicare Advantage is not the same benefits as a Medicare 
fee-for-service patient has. It's administered under the 
Medicare Advantage plan as a per visit benefit instead of a per 
episode benefit. Therefore the utilization responsibility often 
falls either to the managed care organization on each separate 
encounter under home health or what happens is the patient is 
subjected to copayments that can be as high as 50 percent for 
an out of network provider, and they ration their own care.
    So, it's a complement of the benefit being changed--we also 
see prior authorization being a significant impact on medical 
necessity. The doctor is taken out of the picture. The nurse 
and the physical therapist's judgment is taken out of the 
picture. It's really administered by the dollars in the managed 
care organization. So, we see a significantly different 
Medicare benefit under Medicare Advantage.
    Chairman STARK. Dr. Walsh.
    Dr. WALSH. I think it's all been said. First, I don't have 
any aggregate data here to speak for the entire organization, 
but speaking for my hospital it is a very different benefit.
    Patients when they sign up have the notion--and I don't 
know if it's misrepresentation or not but they have the same 
Medicare benefits, so that after an acute care stay for an 
accident that they didn't plan and therefore had not 
anticipated, if they are told that we don't cover inpatient 
rehab for, in this case it was pulmonary rehab, and I was 
surprised that their case manager knew that because I didn't 
think it was pulmonary rehab; they had no intrinsic lung 
disease; they had a lot of medical things and couldn't get out 
of bed. That was a surprise.
    So, I think in terms of the confusion for the beneficiary 
about what their benefit now is--is terribly important. 
Secondly I think that the plan's attempt to negotiate a rate 
that wouldn't meet the costs is going to create other access 
problems.
    Chairman STARK. Thank you all. Mr. Camp.
    Mr. CAMP. Well, thank you, Mr. Chairman. Mr. Umbdenstock, I 
know some of your members have Medicare Advantage plans. Is 
there a value in those plans with coordinating care and other 
benefits that come under Medicare Advantage.
    Mr. UMBDENSTOCK. Pardon me, Mr. Camp. I think the key 
question is what is the benefit of the extra payment that goes 
to the plans and how is it being used. If it's being used to 
highly coordinate care to the benefit of the patient for a true 
clinical integration of services and at the same time achieving 
financial results, that's a very good thing for everybody in 
terms of stretching those dollars.
    So, I think the question that we'd all want to explore is 
exactly what models work best, what are the best practices in 
care coordination and how can we see that all the plans employ 
those for everybody's benefit.
    Mr. CAMP. Thank you very much. Ms. Chesny, why are the 
margins for home health services different in freestanding home 
health agencies than hospital or skilled nursing facility-based 
agencies? I know you mentioned that MedPAC's financial analysis 
was at best incomplete because of the difference there. Can you 
talk about that a little bit?
    *Ms. Chesney. I believe that home health agencies that are 
affiliated with hospitals and skilled nursing facilities tend 
to take care of patients that are higher in costs, more 
resource intensive and carry just an overall cost burden. They 
tend to be located in more geographically disbursed areas, and 
therefore their cost structure is much higher.
    Our own agency, we've tried to be as efficient as we 
possibly can and we still look at a 2.8 percent margin in home 
health and that's an improvement for us. We were below zero 3 
years ago, prior to tele-health implementation.
    Mr. CAMP. I know you and I have obviously worked together 
on the tele-health issue. I know for example in rural home 
health agencies the transportation costs can be significant, 
particularly covering an area as large as 11 counties in the 
state of Michigan and other areas. Can you talk about that a 
little bit and how that may have changed in recent weeks?
    Ms. CHESNY. I can tell you that we reimburse the IRS 
allowable mileage to our staff. It's a quality of life issue 
for our staff. We ask them to drive numerous miles on a daily 
basis. We average 22 miles per patient visit, and that is after 
we've improved our productivity with the augmentation of tele-
health and technology for our staff. We used to be close to 30 
miles a visit for most of our patient care.
    So at 48-and-a-half cents IRS and then we now have gas 
that's sitting at $4 a gallon. I don't think that allowable is 
going to quite sit at the same place and so our costs will only 
rise again.
    Mr. CAMP. All right, thank you.
    Mr. Kahn, many providers in the LTCH community have called 
for an implementation of a criteria-based assessment. I don't 
know if you were here for the testimony previously, there was 
some discussion of that then. Can you talk about what kind of 
patient is best served by an LTCH and how that might differ 
from the care offered in an inpatient rehab hospital or a 
skilled nursing facility?
    Mr. KAHN. Most of the patients in long-term care hospitals 
are on ventilators. I've been to a number of these institutions 
and the LTCHs have the kind of staff, the kind of knowledge 
about these patients, particularly if they're going to be on 
ventilators for a lengthy period of time that well serves the 
very complex cases, particularly as I said, those cases that 
will be on ventilators for a long period of time.
    So, we feel there is a difference between the level of care 
there and other institutions. It warrants better criteria. It 
warrants the kind of system that the legislation that's been 
proposed envisions and the kind of arbitrariness of the CMS 
policy is not the kind of backstop you need in terms of moving 
this type of benefit to a point where we get the right patient 
to the right place.
    I think the 25 percent rule is really wrongheaded as a way 
to get us there.
    Mr. CAMP. Ms. Chesny, there was a discussion about case mix 
creep and you said that obviously some of the patients are on 
average older now than they used to be, but isn't it also 
correct that your pattern of care is physician ordered?
    Ms. CHESNY. Yes, all of our services are required to be 
ordered by a physician. What we've seen, not only is it that 
our patients are older and more frail. As the payment changes 
have gone in place, for instance the inpatient rehab 
facilities, our orthopedic patients volume has increased 
significantly. There is a higher case mix weight with that. We 
went from having orthopedic being like the best, highest volume 
patient we have to now they're in a close contest for the 
second place. Right now, this year it's third place.
    Cardiac patients, cancer patients and orthopedic patients 
are the patients we're seeing most in home health. Those are 
all very sick patients that we're caring for, so it's a 
different population.
    As we were preparing the testimony, I have to tell you, I 
said to the National Association for Home Care staff, this 
system was designed in the '90s and the patient we are seeing 
today is not your father's Oldsmobile. It's a different patient 
that we are seeing from 1997 when the Prospective Payment 
System was designed. It is, I believe, a much sicker patient 
who requires a much more intense service, and the system isn't 
being abused.
    We averaged 52 days to 45 days for the average patient on 
our Medicare home health episode. We're not seeing them for 
extended periods of time. We're teaching them to take care of 
themselves and we're rehabilitating them so that they can 
become as productive as they possibly can in their activities 
of daily living.
    Mr. CAMP. Thank you very much, Mr. Chairman. Thank you all 
for your testimony. It was very helpful and I sure appreciate 
it. Thank you.
    Chairman STARK. Again, I would invite all of you to 
elaborate some more to help us in the next month, 6 weeks, 2 
months as we have to see if we can cobble together some 
legislation that will deal with all of these issues. It's going 
to be a busy summer for us. We appreciate your help.
    I do appreciate you taking the time and the patience again 
of waiting for us. I'm sorry that we ran so late this 
afternoon, but thank you all very much.
    Hearing is adjourned.
    [Whereupon, at 4:54 p.m., the hearing was adjourned.]
    [The submissions for the record follows:]

                                 

 Statement of American Association of Homes and Services for the Aging
    The American Association of Homes and Services for the Aging 
(AAHSA) appreciates this opportunity to submit a statement for the 
record of the House Ways and Means Health Subcommittee's hearing on 
Medicare payments to health care providers, including nursing homes and 
home health agencies.
    AAHSA members serve over one million people every day through 
mission-driven, not-for-profit organizations. Seventy percent of our 
members are faith-based. Our members offer the continuum of aging 
services: home and community based programs, adult day programs, 
continuing care retirement communities, nursing homes, assisted living, 
and senior housing. AAHSA's vision is for all Americans to receive the 
care they need, when they need it, in a place they call home.
    President Bush's budget proposal for fiscal year 2008 called for a 
freeze on Medicare reimbursement to nursing homes and home health care 
providers. We urge the subcommittee to reject this proposal, which 
would penalize the very health care providers who are making the 
greatest effort to ensure high quality care for frail older people.
    CMS itself has projected that the cost of the items and services 
that skilled nursing facilities and home health agencies must buy will 
increase by 3.3% and 2.9% respectively over the next year. Since long-
term care is a labor-intensive service, failure to provide the payment 
update CMS has proposed will have severe implications for providers' 
ability to recruit and retain the staff essential to meeting Medicare 
beneficiaries' needs.
Skilled nursing facilities--the not-for-profit difference
    Approximately 70 percent of payments nursing homes receive come 
from the Medicare and Medicaid programs. Very few nursing home 
residents currently have private insurance to cover the cost of their 
care. This heavy reliance on these two programs makes their payment 
policies even more critical to nursing facility operations than they 
are for health care providers that have more varied sources of payment.
    The average non-profit home cares for about 10-20 Medicare patients 
each day. The proposed cuts translate into the loss of $100,000-
$200,000 annually for the average home and much more for those that 
specialize in Medicare's high need patients. There just are not 
sufficient ``excess'' dollars in the system to make up these losses. 
Forcing nursing homes to ``economize'' even further on nursing staff 
and wages--inevitable with cuts of this magnitude since nursing is 40% 
of total costs--would be bad for Medicare and bad for patients.
    Adequate Medicare reimbursement makes a major difference to nursing 
homes' ability to recruit and retain staff, the single greatest 
determinant of the quality of care facilities are able to provide. 
According to reports the Medicare Payment Advisory Commission has 
submitted to Congress for the last two years, not-for-profit nursing 
facilities spend substantially more on nursing staff than for-profits 
and therefore have low to zero profit margins on the Medicare payments 
they receive. For 2005, MedPAC found that for-profit nursing facilities 
achieved margins of fifteen percent on the Medicare payments they 
received, while not-for-profits' margins were below five percent.
    Denial of a payment update to facilities that already are 
struggling to break even on the services they provide to Medicare 
beneficiaries would run directly counter to the many initiatives we are 
pursuing to raise nursing home quality. Facilities that are achieving 
high margins through skimpier staffing would be hurt far less by the 
denial of a payment update than facilities that have committed maximum 
resources to providing quality care to frail older people.
    Furthermore, the proposal to deny nursing facilities a payment 
update is a false economy. A ten year study, conducted by HHS at the 
request of Congress, on nurse staffing in nursing homes found that 
homes with less than optimal nurse staffing had significantly more 
avoidable hospitalizations than those with appropriate nurse staffing 
(USDHHS. Report to Congress: The Appropriateness of Minimum Nurse 
Staffing in Nursing Homes, 2002). The fewer the nurses, the higher the 
rates of avoidable hospitalizations. Every avoidable hospitalization 
costs Medicare an average of $7,600. An increase of just 13 avoidable 
hospitalizations per skilled nursing facility would wipe out the $1.5 
billion in Medicare ``savings'' from cutting SNF rates.
    Because payment policies are so critically tied to adequate 
staffing, we recommend that the subcommittee adopt a proposal that was 
introduced in the last Congress by Rep. Marcy Kaptur to require nursing 
facilities to make itemized reports to the Centers for Medicare and 
Medicaid Services (CMS) of the amounts they spend annually on staffing. 
This requirement, contained in H.R. 1166, would be a promising first 
step toward better aligning the Medicare program's payment incentives 
with the quality of care provided in nursing facilities.
Medicare's Perverse Payment Incentives for Skilled Nursing Care
    The subcommittee also needs to revisit the deeply flawed final rule 
CMS issued in 2005 to ``refine'' the skilled nursing facility 
prospective payment system. The system is based on Resource Utilization 
Groups (RUGs) that still do not accurately determine acuity of need and 
responsibly calculate the cost. This is particularly true for medically 
complex patients who generally require not only extensive nursing care 
but also significant amounts of medications, supplies, tests, 
respiratory care, and other so-called ``non-therapy ancillaries.'' 
Medicare reimburses skilled nursing facilities for many very expensive 
patients at considerably lower rates than Medicare pays for patients 
whose care costs much less. The Inspector General, MedPAC, and the GAO 
have all reported on these inaccuracies.
    Specifically, the revised RUG system poses the following problems 
for nursing homes and their residents:

        Quality of care

            The system creates strong financial incentives for 
        nursing facilities to find patients who qualify for the nine 
        new RUG groups created by the 2005 rule.
            To qualify for the nine new (higher) payment 
        groups, patients must be assigned to intensive physical therapy 
        and to ``Extensive Services.'' The ``Extensive Services'' 
        designation requires that the patient have an activities of 
        daily living score greater than 7 and have had intravenous 
        medications, ventilator or respirator care, a tracheotomy or 
        suctioning within the last fourteen days, or intravenous 
        feeding within the last seven days, even if these treatments 
        were given during hospital stays.
            There is intense financial pressure on facilities 
        to ``find'' such patients, because otherwise facilities may 
        have substantial financial losses in their Medicare 
        reimbursement.
            The availability of patients qualifying for the new 
        RUG categories depends heavily on local hospital practices, 
        particularly as to how frequently intravenous medication 
        (rather than oral) is ordered. Hospitals seeking to find a 
        skilled nursing facility for patients who are being discharged 
        will soon learn that Medicare payment rules favor patients who 
        had an IV in the hospital. Practice patterns are likely to 
        shift in ways that have more to do with perverse payments than 
        with good clinical care.

          There is no evidence that revised system improves payment 
        accuracy; in fact, accuracy may actually be reduced.

            CMS cited only one piece of scientific evidence in 
        the final rule in an attempt to justify the nine new RUGs and 
        the contention that the new system is more accurate, as 
        Congress required. But this bit of ``evidence'' is not relevant 
        to the changes CMS actually made in the payment system and is 
        the result of researchers studying a completely different 
        issue.
            Increased payments are not targeted to medically 
        complex patients who do not receive rehabilitation, even though 
        their care can be very costly, with heavy use of non-therapy 
        ancillaries.
            Also, non-therapy ancillary costs continue to be 
        paid as if they correlated with nursing costs, which research 
        has repeatedly shown is not the case. CMS itself noted that the 
        new payment system would not account accurately for non-therapy 
        ancillary costs, and that the addition of nine new RUG 
        categories didn't solve this discrepancy. CMS attempted to 
        solve the problem by applying the same small increase in the 
        nursing index across all RUG groups, about three percent of 
        total revenues. But because the payment system doesn't 
        accurately cover non-therapy ancillaries or correlate to the 
        nursing index, the payment system still does not accurately 
        correlate costs of care with payment rates.
            CMS used tiny samples of patients who classify into 
        the new RUG groups in doing its data analysis. For three of the 
        new RUG groups, payments for millions of Medicare days are 
        being set based on what happened to fewer than ten patients in 
        a small number of facilities nine to twelve years ago. Among 
        other problems, this use of small samples risks destroying the 
        accuracy of the current payment system's correlation of payment 
        rates to nursing and therapy staff times.
            In doing its data analysis, CMS mixed apples and 
        oranges, using some numbers from Abt Associates and other 
        numbers from the Urban Institute. Each of these studies used 
        different databases, different analytical techniques, and 
        likely different trim points.

    Congress should require CMS to go back to the drawing board on the 
skilled nursing facility prospective payment system to ensure that it 
more accurately reflects the true costs of caring for frail elders.
Home Health Care
    An estimated 83% of older Americans who have long-term care needs 
live in non-institutional, community-based settings. Medicare covers 
the skilled nursing care, home health aide service, physical therapy, 
speech-language therapy and occupational therapy in the home after a 
hospital stay. These services are critical for the patient to remain 
independent at home. Home health agencies reduce the risk of a re-
admission into the hospital, as well as nursing home placement.
    In addition to ensuring that home health agencies receive the 
payment update that CMS has proposed for next year, we urge Congress to 
review the plans to overhaul the home health prospective payment 
system. Home health agencies provided quality services despite many 
years with no payment updates until 2006. In 2008 most agencies would 
experience a 2.75% reduction annually over three years in the Medicare 
base payment rate under the revised payment system. Twenty percent of 
all home health agencies already are operating in the red. This 
reduction in reimbursement rates could reduce the availability of vital 
home health services for seniors and the disabled.
    Home health care providers need sufficient funding to recruit and 
retain quality staff, invest in telehealth technology and meet 
escalating transportation costs. Eliminating the 5% rural add-on has 
already had a negative impact on rural home health agencies. These 
agencies are estimated to experience a decrease in their average case 
mix from 1.583 to 1.1417. Twenty-three percent of older Americans live 
in rural areas, and we need to have these services available for them. 
CMS also predicts that home health agencies in the South would 
experience a 1.84% decrease in 2008 under the new payment system. CMS 
is proposing a $2,300.60 national average base rate for 2008, down from 
this year's $2,355.96 for 2007 episodes. But even after a 2.9% 
inflation update worth more than $400 million in 2008, these changes 
would add up to $7 billion in lost Medicare revenues over five years.
    We appreciate that the proposal would allow severity-adjusted 
amounts of up to $367 per episode for non-routine medical supplies, add 
nearly 60% of the Lower Utilization Payment Adjustment (LUPA) episodes 
to cover admission costs and eliminate the episode payment adjustment 
for a significant change in condition (SCIC) and for prior hospital 
stays. We also appreciate the guidance offered by CMS in changing to 
the new and more complicated case mix process.
    State Medicaid programs are struggling to meet the increasing 
demand for home health services for older adults and the disabled. The 
budget proposes legislative changes in Medicaid that would reduce 
Federal Medicaid funding by $25.7 billion over the next five years, of 
which $20.9 billion would be achieved by shifting costs to the states. 
The cost shifts include a reduction of the Federal matching rates for 
all administrative activities and for targeted case management 
services. Medicaid and Medicare cuts in home health services are 
reducing our ability to meet the goals of the New Freedom Initiative, 
the Money Follows the Person programs from the Deficit Reduction Act, 
as well as the vision of the future of aging in America that was 
announced at the White House Conference on Aging in 2005. We look 
forward to working with your committee and CMS to assure that older 
Americans and people with disabilities can obtain quality home health 
services, so they can remain healthy and independent in their own 
homes.
Medicare Therapy Caps
    One Medicare payment policy that must be addressed this year is the 
annual cap on coverage of outpatient physical, occupational and speech 
therapy. These caps are enormously counterproductive to quality care 
and efforts to keep Medicare beneficiaries living as independently as 
possible.
    Therapy needs have increased as the population ages and people live 
longer. Limiting the therapy that one can receive in a particular year 
often hinders an individual's ability to regain physical strength and 
daily living skills that are required to live independently. In 
addition, an individual may exhaust his or her permitted therapy early 
in the year and have a new need for therapy later in the year--as a 
result of a new medical setback (surgery, injury from a fall, heart 
attack, etc.)
    In the ten years since the therapy caps were enacted under the 
Balanced Budget Act of 1997, Congress has allowed them to be fully 
effective for only a few months. Congress itself has recognized the 
danger of limiting essential therapies for beneficiaries with serious 
injuries and health conditions. While the Congressional Budget Office 
scores repeal of the therapy caps as being costly to the Medicare 
program, this analysis does not take into account the hidden costs that 
may result from limiting essential therapy services. If a Medicare 
beneficiary fails to regain full functioning and suffers a serious fall 
or otherwise comes to need higher levels of care, the potential cost to 
the Medicare program could well exceed whatever savings are achieved 
through the therapy caps.
    We recognize the need to ensure that therapy services, like other 
forms of health care, are only covered by Medicare to the extent that 
they are medically necessary. CMS for several years has pursued a 
Medicare integrity initiative under which waste, fraud and abuse in the 
Medicare program have been successfully prosecuted and inappropriate 
payments recovered. According to CMS, this initiative has resulted in 
the recovery of many billions of dollars over the years in which it has 
been in effect. Applied to therapy services, the integrity initiative 
should be more than sufficient to detect, prosecute and prevent any 
improper use of the benefit.
    We therefore urge Congress to enact the Medicare Access to 
Rehabilitation Services Act of 2007, H.R. 748, which would repeal the 
Medicare outpatient rehabilitation therapy caps. This legislation would 
ensure that beneficiaries are able to obtain therapy services for which 
they have a medical need in the setting that is most appropriate for 
them.
Need to examine entire long-term care funding system
    We recognize that today's hearing concerns the appropriateness of 
Medicare reimbursement to health care providers, and that a different 
House committee has jurisdiction over the Medicaid program. However, in 
the real world of long-term care, the payment policies of both programs 
are crucial to facilities and agencies that serve vulnerable elders. 
For the immediate future, we urge this subcommittee to act on the 
proposal contained in Rep. Kaptur's bill from the last Congress that 
would require CMS to analyze and report to Congress on all of the 
issues affecting nursing facility costs and funding, including the 
adequacy of Medicaid funding now and in the future to pay for the 
quality of care mandated by state and Federal law and regulation. In 
the longer term, Congress must reevaluate how to pay for long-term care 
services. AAHSA has developed a financing plan this is both socially 
and fiscally responsible, and we would be happy to work with the 
committee on this issue.
Conclusion
    The denial of a payment update to skilled nursing facilities and 
home health care providers would impose a severe hardship, especially 
in the not-for-profit sector, making it extremely difficult for 
facilities to meet the costs of staffing and other elements of high-
quality care. Data from CMS and MedPAC themselves indicate the need for 
a payment update in the next fiscal year, and Congress must allow the 
update for which current law provides.
    Striving to provide the highest quality of care, not-for-profit 
nursing facilities and home care agencies are spending every dollar of 
reimbursement they receive from Medicare on staffing and other 
essential components of quality. The denial of a payment update would 
be a heavy blow to these providers, their staff, and the vulnerable old 
people they serve.
    Instead of taking the easy route of across-the-board payment cuts, 
we urge your committee to thoughtfully evaluate the skilled nursing and 
home health payment systems and redirect their incentives toward 
encouraging continuous improvement in the quality of care Medicare 
beneficiaries receive. We look forward to working with the committee in 
this effort.

                                 

                      Statement of Keith G. Myers
    The LHC Group appreciates the opportunity to provide testimony on 
behalf of its patients and caregivers concerning payment systems for 
fee-for-service providers. The LHC Group is a provider of post-acute 
health care services primarily in rural markets in the southern United 
States. We provide home-based services through our home nursing 
agencies and hospices and facility-based services through our long-term 
acute care hospitals and rehabilitation facilities. These services are 
provided by a trained staff of over 3600 nurses, physicians, 
therapists, and aides throughout our locations in Texas, Louisiana, 
Mississippi, Arkansas, Alabama, West Virginia, Kentucky, Florida, 
Tennessee, and Georgia. We share Medicare's mission of providing care 
in the least restrictive, most cost-effective, and most appropriate 
environment possible.

        The ability to have home health in rural areas provides Mother 
        the luxury to stay at her home and get excellent care. Home 
        health has made her life easier. It has been beneficial to me 
        and her family. We know she is in good hands. They are all so 
        caring and they are always available. For a person Mother's 
        age, staying in her familiar surroundings helps her mentally, 
        physically and spiritually. If these services are cut, or the 
        reimbursement is not adequate for services to continue to 
        assist in providing the nurses to care for Mother, she would 
        have to go to a nursing home. I know she would not last two 
        weeks. It is cheaper for us to have her at home than in a 
        facility. I feel the secret to longevity is the ability to 
        receive home care.--M.W., Mississippi
I. OVERVIEW
    Each day, home health agencies that provide essential clinical and 
supportive care services to Medicare beneficiaries in America's rural 
areas stretch limited resources far and wide to meet the unique needs 
of the patients they serve. Historically, Congress and the Centers for 
Medicare and Medicaid Services (CMS) have asked rural home health 
agencies to do more with less, a demand the rural home health provider 
community has largely met. Today, providers who serve rural 
beneficiaries continue to face new challenges that that they cannot 
meet alone. They need help from Congress.
    In April, CMS issued a proposed rule detailing a far-reaching 
restructuring of the Medicare home health prospective payment system. 
If finalized in its current form, the rule will threaten the ability of 
rural home health agencies--already faced with higher costs and lower 
reimbursements than urban agencies--to continue to provide services to 
rural residents.
    Historically, Congress sought to mitigate both the financial 
pressures on rural home health agencies and the related access barriers 
encountered by rural residents through the creation of a special 
payment adjustment, or ``add-on,'' to the prospective payment system's 
base payment rates. Congress authorized the payment adjustment for home 
health services delivered in rural areas during most of the period from 
April 2001 through December 2006, and the add-on greatly assisted 
providers' ability to meet rural resource needs that are different, and 
more costly, than those in urban areas. However, the rural add-on 
expired on December 31, 2006 and has not yet been reauthorized.
    In this testimony, we illustrate the urgent need for 
reauthorization of the rural add-on. We detail the economic and 
clinical access challenges that the proposed rule imposes on health 
care in rural America, highlighting the adverse impact of the proposed 
rule on rural beneficiaries and the home health agencies that serve 
them. We also discuss the policy rationale behind the rural add-on as 
well as its bipartisan history, and we conclude with a call for 
Congress to reauthorize the rural add-on and make it permanent.
II. RESTATING THE CASE FOR THE RURAL ADD-ON
    A primary reason that rural home health agencies require the rural 
add-on payment is to help cover their operating costs, which are higher 
on average than urban agencies' costs. These higher costs result from a 
combination of factors, including the increased acuity of patients in 
rural agencies as well as other built-in additional costs of providing 
home health services in a rural setting--costs that urban providers do 
not carry.
A. More Complex Conditions
    The service mix for home health beneficiaries in rural areas is 
considerably different than that in urban areas. Hospital care in rural 
areas tends to be focused on short-term, acute primary care with 
limited access to tertiary care centers and the specialty services they 
provide. Post-acute care providers in rural areas tend to treat a 
higher proportion of chronically ill patients than their urban 
counterparts. This basic difference in patient mix results in part from 
the different relative balances of provider types in rural and urban 
areas, and in part from the fact that rural Americans tend to be 
disproportionately older and have more chronic health problems than 
urban Americans.
    Providing care to these elderly patients with multiple health 
conditions can be more time-intensive than serving other patients. This 
is illustrated by one home health nurse's discussion of treatment for 
an elderly patient with multiple co-morbidities who lives with his 
elderly wife, who also faces several health conditions:

        Home health nurses are required weekly to assess and literally 
        be the ``eyes'' for the physician and, hence, to [implement] a 
        rapidly changing treatment plan for his multiple diagnoses. To 
        transport the patient is an extremely taxing and un-safe 
        situation. The patient and his wife have no means for 
        transportation, no local caregivers, and no economic resources. 
        The physician agrees that the most vital part for safety of 
        this patient and his wife is totally dependent on the 
        assistance of the home health nurses.--Anonymous, Louisiana

    Beyond age and chronic illness, another reason for increased acuity 
among rural agencies' patients is the homebound status of many of these 
rural patients. Rural home health agencies frequently function as the 
primary caregivers for homebound beneficiaries, who have minimal access 
to transportation. This situation results in higher costs per patient 
and per visit, since homebound patients require more resources than 
patients who have access to other providers. One home health nurse 
encountered this situation when treating an elderly patient who lives 
alone and who was admitted to home care following a month-long 
hospitalization for a serious and extended illness. In this nurse's 
words:

        The patient requires daily dressing changes, which she was 
        unable to perform herself. She has no local family members but 
        relies on neighbors and friends for transportation to receive 
        medical care. However, many of her rural neighbors are also 
        senior citizens and are limited in their ability to assist her. 
        In the patient's eyes, her situation ``would [have been] 
        devastating had it not been for home care services.''-- A.S., 
        Alabama

    Another home health nurse discovered the increased resource needs 
of homebound, high acuity patients when caring for a man with multiple 
chronic illnesses who had recently had a new tracheostomy and feeding 
tube put in place. This nurse described the homebound man's situation 
as follows:

        The wife, who has dementia, is unable to provide or participate 
        in the care of her husband. This patient requires daily visits 
        from the home health nurse. In addition to daily visits made by 
        the skilled nurse, their case manager consistently receives 
        phone calls to coordinate care. The closest caregiver is the 
        patient's granddaughter who has to travel a 100-mile round trip 
        to their home. The couple has no means of transportation, and 
        it is very taxing and risky for the patient to leave his home. 
        The home health nurse is the primary caregiver to this couple. 
        If this patient did not receive home health services he would 
        have no access to health care and would have to be 
        institutionalized to receive care.--Anonymous, Louisiana

    As the examples above demonstrate, elderly rural beneficiaries 
often face multiple health conditions that require near-constant care 
that their families are unable to provide. In addition, these patients 
are frequently unable to leave their homes to receive care either 
because they lack transportation or because their health conditions 
make transportation unsafe.
    Many rural agencies also report an increase in more complex 
patients because of recent CMS restrictions on admissions to other 
post-acute care providers. In particular, the recent tightening of 
admission criteria for inpatient rehabilitation facilities and 
inpatient long-term acute care hospitals has resulted in more patients 
receiving treatment in the home setting.
    These facts in combination result in a higher acuity patient mix 
for rural than for urban home health agencies, and treating these 
patients, in turn, requires more costly resources in terms of staffing, 
medications, and other treatments. While these patients desperately 
need care, the many financial strains on rural agencies may ultimately 
force some agencies to turn away these resource-needy homebound 
beneficiaries because of resource limitations.
B. Special Structural Challenges
    As demonstrated above, rural home health agencies experience some 
additional costs because of their patient mix, which itself is a result 
of the structure of the broader health care marketplace and of regional 
behavior trends in rural areas. Other additional costs of rural home 
health agencies depend less on the particular service requirements of 
the agencies' patient populations and more on the structural issues 
raised by the provision of home health services in rural areas. These 
structural considerations, in combination with more complex patient 
conditions, further demonstrate the need for the rural add-on.
1. Greater Driving Distances
    Home health agencies in particular experience significantly higher 
costs in providing care to rural beneficiaries because the services are 
provided in the patients' homes and not in an institutional setting. 
Rural beneficiaries are scattered throughout rural areas and not 
congregated in cities like their urban counterparts. This results in 
increased personnel costs and decreased efficiency due to the longer 
drive times to reach rural residents. Compounding these extra costs are 
the increases in fuel prices and the additional visits necessary to 
ensure that rural patients without access to phone service comply with 
medication adjustments (which can be frequent for some high-acuity 
patients).
    Although caregivers try to conserve costs by planning efficient 
driving routes, patient care needs often force them to change their 
plans. These obstacles to efficiency are detailed in one home health 
nurse's description of an ordinary day in rural home health service:

        Due to multiple circumstances such as the high price of gas, 
        and the distance from patient to patient, I have to 
        strategically plan my geographical route for the day, to ensure 
        proper patient care and timing of my visits. Unfortunately, 
        there are multiple times where this plan does not unfold as 
        planned. Numerous times I receive calls from my office, which 
        changes my routine. There are patients that must be seen ASAP 
        to avoid possible emergency room/hospital admission. When this 
        does happen, I am forced to drive great distances, sometimes 
        just to see a single patient. Once I get there, I have to take 
        into consideration the multiple variables that I will be faced 
        with to complete this extra visit. These include performing the 
        initial assessment on the patient; after this assessment, my 
        work has just begun. I am responsible for notifying the doctor 
        of any changes in the patient's condition. At this point, I am 
        responsible for implementing and executing any new orders from 
        the doctor, which may include, but are not limited to, 
        contacting the pharmacy for any medication changes, setting up 
        lab work, x-rays, or any additional test. Any changes to the 
        plan of care at this point must be reiterated through teaching 
        to the patient/caregiver along with possible transportation 
        issues. At times, this can be a daunting task due to the lack 
        of appropriate resources in rural communities, along with the 
        knowledge deficits of various patients and caregivers.--
        Anonymous, Louisiana

    Other home health nurses have overcome unique obstacles to reach 
rural patients. One such nurse writes that she has ``waded creeks, 
climbed over broken porches, and battled many a dog. Many of our aides 
have had to go to a well or a branch [office] to draw water and then 
heat it on the stove (or a hot plate) before they are able to bathe 
their patients.''--M.A., Kentucky. Another nurse recalls ``[being] 
attacked while riding on a rural road because [the driver] knew I was a 
nurse and was going to try to rob me,'' ``having to run from dogs,'' 
and ``driv[ing] on gravel roads and get[ting] stuck in the mud due to 
bad roads.''--C.J., Mississippi. Yet another nurse often visited a 
patient who lived in a rural area across a river that, because it was 
unpredictably passable by vehicle, had to be reached ``by a swinging 
bridge that spanned the river. After reaching the end [of the bridge], 
the nurse would then have to walk on a narrow footpath that followed 
the riverbank, through the woods to the patient's home, toting supplies 
and equipment.''--R.B., Arkansas
2. Smaller Agency Size
    Rural agencies are often smaller than agencies in urban areas. 
Simple economics dictates that small agencies will have higher costs 
relative to larger organizations. Smaller agencies have fewer patients 
and fewer visits over which all the agencies' fixed costs of service 
provision--including costs of meeting regulatory requirements--can be 
spread. This results in higher overall costs per patient, per visit. 
Smaller agencies also are more likely than larger agencies to be faced 
with a homogeneous case mix, as they will have lower patient volumes 
than their larger urban counterparts. In such a situation, there will 
not always be enough even slightly profitable cases to counterbalance 
the high-cost, resource-demanding cases.
    This problem is exacerbated by the fact (noted above) that rural 
agencies already serve a higher acuity patient population. Although the 
Medicare reimbursement system attempts to account for these high-cost 
patients through additional outlier payments, these payments are too 
low to cover agencies' actual service costs.
3. Scarcity of Skilled Professionals
    Many home health agencies have difficulty getting certain health 
care professionals to service beneficiaries in rural areas. Some rural 
agencies have reported frequent use of nurses instead of therapists to 
provide rehabilitative services because of a lack of therapists willing 
and able to provide services in rural areas.\1\ Unfortunately, when an 
agency substitutes skilled nursing restorative services for 
rehabilitative therapy services, it does not qualify for the higher 
therapy rates allowed under the home health prospective payment system.
---------------------------------------------------------------------------
    \1\ National Association for Home Care & Hospice (NAHC), ``Maintain 
the Add-on for Home Health Services in Rural Areas'' (hereinafter 
``Maintain the Add-on'') (2004); NAHC, ``Preserve Access to Rural Home 
Health Services'' (hereinafter ``Preserve Access'') (April 2007), 
available at http://www.congressweb.com/nahc/docfiles/
RuralTalkPts07.pdf.
---------------------------------------------------------------------------
III. DOING MORE WITH LESS IN RURAL AMERICA
    To address these challenges, some home health agencies in rural 
areas have developed alternative operating models to reduce costs. They 
have been forced to do more with less.
    Many agencies serving remote rural areas have established branch 
offices, or ``drop sites,'' to minimize personnel drive times and to 
provide a local repository for supplies and records. While these types 
of remote locations do increase personnel efficiencies, any savings are 
often offset by increases in agency overhead costs for rent, utilities, 
and other expenses associated with operating a remote office. And, as 
noted above, these increased overhead costs are spread over a smaller 
number of patients, which intensifies the impact on the agency's 
finances.
    Other agencies have sought to maximize personnel productivity by 
compensating their clinical staff on a per visit basis instead of a 
monthly or hourly basis. This method of compensation causes clinical 
staff to travel more efficiently between patient visits. While 
compensating on a per visit basis may help minimize the costs of 
providing care to home health providers, the caregivers themselves must 
incur the added cost of travel. As one caregiver noted, ``when it takes 
an hour or more to just drive from one patient to another, my 
productivity is obviously limited. Add to that the wear and tear on my 
car and you see that I get less in my paycheck than my urban 
counterpart.''--A.C., Florida. Per visit compensation, then, places 
agencies at a competitive disadvantage, often resulting in retention 
problems.
    To address the scarcity of skilled professionals, most home health 
agencies are forced to compensate these professionals at higher rates 
than their urban or hospital-based counterparts. While this issue 
affects almost every professional discipline, the most commonly 
affected professionals are physical therapists, speech therapists, and 
medical social workers. The Medicare program fails to recognize this 
incremental increase in the program's area wage adjustments, yet the 
increase remains a significant extra cost of providing home health 
services to rural beneficiaries that urban providers do not bear. 
Additional discussion of regional wage discrimination follows below.
IV. INACCURACY OF WAGE-BASED REIMBURSEMENTS
    In addition to facing higher costs than urban agencies, rural home 
health agencies receive Medicare reimbursements that do not adequately 
account for their labor costs, a problem the proposed rule exacerbates.
A. Lower Reimbursement for Rural than for Urban Agencies
    Inaccuracies in wage index values are the core cause of 
reimbursement distress for rural home health agencies, yet there are 
few opportunities for correction.
    Medicare rural wage indices are uniformly lower than urban wage 
indices, a reality that results in substantially lower Medicare 
reimbursement to rural home health agencies for the same services, 
provided to the same type of beneficiaries, as compared to urban 
agencies. The national average Medicare wage index is set at 1.0. 
Addendum B of the final rule for the home health agency prospective 
payment system for calendar year 2007 shows rural wage indexes ranging 
from 0.7215 to 1.1709 for the 50 states with an average rural wage 
index of 0.8445 and a median of 0.8588.\2\ Only seven states have a 
wage index over 1.0 (Alaska, California, Connecticut, Hawaii, 
Massachusetts, New Hampshire and Washington).\3\
---------------------------------------------------------------------------
    \2\ 71 Fed. Reg. 65884, 65936 (November 9, 2006).
    \3\ In 2004, CMS rebased and revised the home health market basket, 
resulting in a labor-related share of 76.775 percent and a non-labor 
portion of 23.225 percent. 69 Fed. Reg. 62126 (October 22, 2004). To 
calculate the reimbursement due a provider for an episode of care, the 
national 60-day episode rate is multiplied by the beneficiary's 
applicable case mix weight. The result is then divided into a labor and 
non-labor portion. The labor portion is multiplied by the applicable 
wage index based on the residence of the beneficiary. The total 
reimbursement due the provider for the episode is the sum of the wage-
adjusted labor portion and the non-labor portion of the case-mixed 60-
day episode amount.
---------------------------------------------------------------------------
    Because Medicare reimbursement is based largely on CMS' estimation 
of differences in wages among geographic areas, the accuracy of 
reimbursement depends on the accuracy of CMS' calculations of wage 
rates. As mentioned above, rural agencies are often compelled to pay 
the same wages as urban agencies for therapists, whose services are 
required for the agencies not only to provide top-quality patient care, 
but also to qualify for certain higher Medicare reimbursements (i.e. 
for therapy visits). In addition, nursing shortages exist nationwide, 
which can force rural agencies to pay nurses wages on par with urban 
agencies to attract staff. CMS' failure to take into account this 
equivalence in wages between rural and urban home health agencies 
results in inappropriately low wage indices for rural agencies, for 
which there is no remedy other than the rural add-on.
B. No Access to Reclassification Relief or to Special Rural Payment 
        Policies
    In the hospital setting, a rural hospital with disproportionately 
high labor costs can apply for reclassification of its wage index. Such 
a hospital could, thus, be paid at the same wage index-based rate as an 
urban hospital that had the same wage rates. Home health agencies, 
however, are not eligible for reclassification. Moreover, the inequity 
is increased in rural areas in which a hospital can qualify as a 
critical access hospital or sole community provider--and receive higher 
reimbursements--while a rural home health agency in the same community 
has no access to these additional payments.
    Rural home health agencies also lack access to other payment 
sources created by Congress to address the numerous challenges facing 
health care providers and Medicare beneficiaries in rural areas. For 
example, the Rural Hospital Flexibility Program re-established cost-
based reimbursement for critical access hospitals. Small rural 
hospitals are still held harmless from the effects of the hospital 
outpatient prospective payment system. Physicians practicing in rural 
health professional shortage areas qualify for a 10 percent Medicare 
payment bonus. Rural health clinics and federally qualified health 
centers receive reasonable cost-based reimbursement for providing 
service to Medicare beneficiaries. None of these cost-management tools 
are available to home health agencies serving rural beneficiaries. 
Thus, home health agencies lack resources to correct the low wage 
indices assigned to them by CMS, which does not accurately recognize 
rural agencies' high labor costs.
C. Detrimental Effects of the Wage Differential
    The dramatic reimbursement effect of rural wage indices is 
evidenced by the financial situation in rural North Carolina, which 
represents the median rural wage index:





National 60-day Episode Amount:         $2,300
Labor-Related Share:                    $1,766   [0.76775 * $2300]
Wage Index:                             0.8588   [rural North Carolina]
Wage-Adjusted Labor Portion:            $1,517   [0.8588 * $1766]
Non-Labor Share:                          $534   [.023225 * $2300]
  Total Reimbursement:                  $2,051   [$1,517 + $534]



    This rural payment ($2,051) stands in contrast to the full payment 
of $2,300, which would be available if the wage adjustment were equal 
to 1.0--a difference of 10.83 percent, or $249, for the episode ($4.15 
per day).
    The range of the rural wage indices for the 48 states subject to a 
rural wage adjustment for this same example is as low as $1,808 in 
South Dakota and as high as $2,602 in Connecticut, as illustrated by 
the following calculations:



                                           South Dakota     Connecticut

National 60-day Episode Amount:            $2,300          $2,300
Labor-Related Share:                       $1,766          $1,766
Wage Index:                                0.7215          1.1709
Wage-Adjusted Labor Portion:               $1,274          $1,517
Non-Labor Share:                             $534            $534
  Total Reimbursement:                     $1,808          $2,602



    This represents a $794 difference for the same services, provided 
to patients with the same conditions who reside in rural areas, and 
provided by Medicare-certified home health agencies with the same case 
mix. The only difference in the two scenarios is the geographic 
location of the patient's residence.
D.  Additional Concerns with the Wage Index System
    Setting aside the concern about inaccuracies in wage index 
calculations, the home health provider community has long opposed CMS' 
use of the hospital wage index to establish home health wages. 
Differences in the personnel pool and costs between hospitals and home 
health agencies make use of the hospital index inappropriate in the 
home health setting, where the institutional efficiencies used by 
hospitals to spread costs are not available. Statewide rural wage 
indices do not accurately represent local labor markets because 
geographically disparate hospitals are treated together without regard 
to their true labor costs.
    For rural home health agencies, inaccuracies in wage index values 
are made worse by differences in payer mix between the urban and rural 
settings. Because of the substantially higher proportion of poor and 
elderly individuals in rural areas, rural health care providers are 
primarily dependent on Medicare and Medicaid reimbursement. The 
financial stability of Medicare- and Medicaid-dependent rural agencies 
is essential in ensuring access to care for low-income beneficiaries in 
particular, as national benchmarking data indicate that rural home 
health agencies provide twice the amount of indigent care as urban home 
health agencies.\4\
---------------------------------------------------------------------------
    \4\ Fazzi Associates, ``BestWorks Report'' (2005, 2006).
---------------------------------------------------------------------------
V.  RURAL BENEFICIARIES' RELIANCE ON HOME HEALTH AGENCIES
    In the midst of increased costs and reduced reimbursements, rural 
home health agencies often find themselves as the primary providers of 
post-acute care services for rural Medicare beneficiaries. Research has 
shown that rural Medicare beneficiaries are less likely than urban 
beneficiaries to use institutional post-acute services, including 
skilled nursing facilities and inpatient rehabilitation facilities 
\5\--a trend attributable to patient preferences and to a lack of 
specialized post-acute care providers in rural areas. Additionally, it 
is recognized that rural beneficiaries do not receive the same level of 
physical and occupational therapy services as urban residents.\6\
---------------------------------------------------------------------------
    \5\ J.P. Sutton, ``Patterns of Post-acute Utilization in Rural and 
Urban Communities: Home Health, Skilled Nursing, and Inpatient Medical 
Rehabilitation,'' NORC Walsh Center for Rural Health Analysis (March 
2005), available at http://www.norc.org/NR/rdonlyres/3329577F-87E4-
4C4A-BEBE-1D6E66B7C4DD/0/WalshCtr2005_PAcuteU.pdf.
    \6\ J.P. Sutton, ``Home Health Payment Reform: Trends in the Supply 
of Rural Agencies and Availability of Home-Based Skilled Services,'' 
NORC Walsh Center for Rural Health Analysis (March 2005), available at 
www.norc.org/NR/rdonlyres/51442860-0B0F-4F45-A76B-0C3B093FBCFD/0/
WalshCtr2005_NORCMarchCX2.pdf.
---------------------------------------------------------------------------
    Based on a recent study of the CMS Home Health Compare data, 
researchers determined that there are only minor differences in the 
quality of care provided by home health agencies in urban and rural 
areas. Functional improvement scores varied by less than 2 percent, and 
no statistically significant differences in adverse outcomes are 
apparent. This is a particularly good indication of the effectiveness 
of rural home health agencies in providing care to rural beneficiaries 
in light of the challenges explained above.
    The effectiveness of rural home health care, in spite of the 
numerous obstacles to service provision, is further attested to by Dr. 
Gary Wiltz, a board certified internist and CEO/Medical Director of the 
Teche Action Clinic in rural Louisiana. Dr. Wiltz writes:

        Caring for patients in a rural community presents many 
        challenges, chief among which are lack of transportation, high 
        poverty, low educational attainment and lack of resources 
        available in an urban setting. The patients served by our 
        community health center are truly the sickest of the sick. They 
        suffer from debilitating chronic diseases and co-morbidities 
        impairing functional status. Many of our elderly patients 
        cannot independently obtain health care without assistance. 
        Utilization of home health services results in improved health 
        care outcomes for our patients. Length of hospital stays are 
        decreased when we can provide in-home services, the emergency 
        room visits are decreased when a Plan of Care can be 
        implemented in the home which monitors the patients' health 
        status preventing exacerbations requiring medical intervention, 
        nursing home placement is prolonged or prevented, and overall 
        better disease management especially as it relates to diabetes, 
        hypertension, and heart disease (congestive heart failure).

    Rural beneficiaries' comments about their home health providers 
also reveal a high degree of satisfaction with--and a strong dependence 
on--this type of care. As rural beneficiaries' primary providers, home 
health nurses spend extra time completing assessments, answering 
patients' questions about their treatments and conditions, and forming 
relationships with patients. These patients and their families often 
thank their home care providers for being, among other things, ``very 
thorough,'' ``[available to] help no matter the time,'' ``very helpful, 
courteous, and dependable,'' ``prompt,'' ``willing to find out answers 
for difficult questions,'' and ``comforting.''--Louisiana. 
Beneficiaries and their families rely on their home health nurses to 
meet not only their physical needs, but also their emotional, social, 
and often spiritual needs, frequently coming to view their home health 
nurses as ``part of the family.''--A.J., Mississippi
    However, positive trends like this cannot continue if the current 
proposed rule, discussed in more detail below, is fully implemented.
VI.  THE PROBLEM: THE PROPOSED RULE AND ITS IMPACTS
A.  Basics
    The proposed rule includes sweeping structural and functional 
changes to the home health prospective payment system, including:

          A 2008 base payment rate of $2,300 per episode with a 
        negative adjustment for provider coding behavior of 2.75 
        percent each year for the next 3 years;
          The introduction of 153 home health resource group 
        models based on 4 equations;
          New limitations on rehabilitation therapy access, 
        including a three-threshold model using payment increase 
        trigger points of 6, 14, and 20 visits; and
          Continued application of the pre-floor, pre-
        reclassified hospital wage index for wage-indexing home health 
        payments, and an increase in the labor-related share of the 
        base payment from 76.775 percent to 77.082 percent.\7\
---------------------------------------------------------------------------
    \7\ 72 Fed. Reg. 25356 (May 4, 2007).
---------------------------------------------------------------------------
B.  A Disproportionate Impact on Rural Providers
    CMS' analysis of the impact of the changes to the home health 
prospective payment system indicates an overall negative change for 
rural home health agencies of 0.5 percent and a positive change for 
urban home health agencies of 1.26 percent. However, CMS data also 
indicate that the impact on rural proprietary freestanding agencies 
will be, approximately, a 4.87 percent reduction in reimbursement to 
these rural agencies as opposed to a negative 1.64 percent impact for 
their urban counterparts.\8\
---------------------------------------------------------------------------
    \8\ Id. at 25456-25457.
---------------------------------------------------------------------------
    Rural providers and industry consultants are still evaluating the 
effect of the proposed changes on rural providers, but several 
preliminary reviews of the impact of the proposed rule using 2006 data 
indicate that the actual impact of the proposed rule on home health 
reimbursement will be substantially more significant than what is 
stated by CMS in its regulatory flexibility analysis. Rural wage 
indices used by CMS are significantly lower than those applied to urban 
providers, so the actual losses experienced by rural providers will be 
still greater. Nonetheless, these initial results indicate that rural 
home health agencies will experience substantially greater losses than 
the 0.5 percent estimated by CMS in the proposed rule.
    Additional analyses of the data and the effects of the proposed 
rule are ongoing. But the clearly disproportionate impact on rural 
providers--an impact exceeding CMS' own estimates--makes it imperative 
that rural agencies obtain immediate help with covering their costs. 
Reauthorizing the rural add-on is the single most effective means of 
doing so.
VII.  THE SOLUTION--REAUTHORIZATION OF THE RURAL ADD-ON
A.  Background
    Congress has historically used the rural add-on policy as a means 
to level the reimbursement playing field for home health agencies that 
treat rural beneficiaries. Three times in recent history, through the 
authorization and reauthorizations of the rural add-on, Congress has 
taken affirmative steps to ensure that strong, high-quality home health 
care providers are available to serve rural beneficiaries:

          Congress enacted a 10 percent add-on for rural home 
        health between April 1, 2001 and March 31, 2003 as part of the 
        Benefits Improvement and Protection Act of 2000 (BIPA).
          The BIPA 10 percent add-on lapsed for twelve months, 
        but Congress enacted a 5 percent add-on for one year between 
        April 2004 and March 2005 in the Medicare Prescription Drug, 
        Improvement, and Modernization Act of 2003 (MMA).
          In February 2006, Congress extended the add-on for an 
        additional year in the Deficit Reduction Act of 2005 (DRA).

    The add-on lapsed in 2007, yet the policy rationale for it has not.
B.  Legislative History Reflective of Congress' Longtime Concerns
     Since 2001, Congress has been sensitive to the challenges rural 
home health care providers face. The hearing records of Congressional 
committees are replete with studies and detailed discussions of 
discrepancies between urban and rural home health costs, net 
reimbursement values, and differences in clinical care--none of which 
have changed materially since the add-on was first authorized in 2001. 
The Medicare Payment Advisory Commission (MedPAC) also supported the 
add-on, indicating that rural agencies' travel costs are higher than 
urban agencies' costs and that rural agencies face a cost disadvantage 
because they have a low volume of services and cannot spread fixed 
costs over a large number of episodes.\9\
---------------------------------------------------------------------------
    \9\ Glenn Hackbarth, ``Hearing on Rural Health Care in Medicare,'' 
Hearing before the Subcommittee on Health of the House Committee on 
Ways and Means (June 12, 2001), available at http://
waysandmeans.house.gov/legacy.asp?file=legacy/health/107cong/6-12-01/6-
12hack.htm.
---------------------------------------------------------------------------
C.  Bipartisan Support
    The rural add-on has garnered strong bipartisan support throughout 
its authorization and reauthorizations. In 2003, 57 Senators, led by 
Senators Susan Collins (R-ME) and Russ Feingold (D-WI), sent a letter 
to Congressional authorizers and party leaders promoting the add-on to 
ensure rural access.\10\ In 2005, Senators Collins and Feingold 
introduced legislation to extend the additional payment for home health 
services in rural areas. The Senators continued to identify as much as 
a 12 to 15 percent difference in costs to rural home health providers 
``because of the extra travel time required to cover long distances 
between patients, higher transportation expenses, and other factors,'' 
and they recognized that without the add-on, ``agencies may be forced 
to make decisions to simply not accept rural patients with greater care 
needs.'' \11\ Senators Collins and Olympia Snowe (R-ME) provided 
additional data in support of the add-on in a letter to the Senate 
Finance Committee later that year.\12\
---------------------------------------------------------------------------
    \10\ ``Collins & Feingold Lead Effort for Affordable and 
Comprehensive Home Health Care: 57 Senators Support Elimination of Co-
Payments and Changes for Rural Equity'' (September 30, 2003), available 
at http://collins.senate.gov/public/
continue.cfm?FuseAction=PressRoom.Press
Releases&ContentRecord_id=4F3AED3F-802A-23AD-4F7B-
A7E4DF562251&CFID=33919502&
CFTOKEN=13706486. See also Medicare Modernization and Prescription Drug 
Act of 2002, H. Rep. No. 107-539(I) (2002).
    \11\ ``Senators Collins and Feingold Introduce Rural Home Health 
Legislation'' (February 7, 2005), available at http://
collins.senate.gov/public/continue.cfm?FuseAction=PressRoom.Press
Releases&ContentRecord_id=4F3AC8DE-802A-23AD-4F14-
4E1C0663C092&CFID=33919502&
CFTOKEN=13706486.
    \12\ Letter from Sen. Olympia J. Snowe and Sen. Susan Collins to 
Sen. Charles Grassley and Sen. Max Baucus (December 15, 2005), 
available at http://collins.senate.gov/public/
continue.cfm?FuseAction=PressRoom.PressReleases&ContentRecord_id=B092F31
0-802A-23AD-
4581-699286022FDC&CFID=33919502&CFTOKEN=13706486.
---------------------------------------------------------------------------
VIII.  CALL TO ACTION: REAUTHORIZATION OF THE RURAL ADD-ON IN 2008
    Rural home health agencies stand in a precarious financial 
situation. With several sources of extra costs--including increased 
patient acuity and structural issues associated with rural home health 
care--and inadequate Medicare reimbursements, rural home health 
agencies will not be able to continue current service levels without 
assistance from Congress.
    Over the years, rural home health agencies' margins have regularly 
fallen below urban agencies' margins. A recent MedPAC analysis of 2005 
cost report data indicates that freestanding rural agencies face 
margins that are, on average, 2.8 percent lower than urban agencies' 
margins.\13\ Moreover, approximately 20 percent of all home health 
agencies had negative margins in 2005, and about 60 percent of 
hospital-based and 20 percent of freestanding home health agencies lose 
money providing care to Medicare beneficiaries.\14\ While it should be 
noted that national average margins can be misleading because of the 
wide variation in home health agency margins, rural home health 
agencies have the lowest margins in every study reviewed.
---------------------------------------------------------------------------
    \13\ MedPAC, ``Report to Congress'' (March 2007), 194, 195.
    \14\ Id.
---------------------------------------------------------------------------
    National benchmarking data from the Fazzi Associates indicate that 
home health agencies have a one percent profit margin overall, when all 
payers and service lines offered by agencies are considered. The 
benchmark data indicate that urban home health agencies have Medicare 
profit margins of 11.6 percent and that rural agencies average Medicare 
margins of 10.5 percent. However, rural agencies had been receiving the 
5 percent rural add-on payment during the review period, so the real 
Medicare margin for rural home health agencies was 5.5 percent, or 
about one-half of the margins of urban agencies.\15\
---------------------------------------------------------------------------
    \15\ Fazzi Associates, ``BestWorks Report'' (2005, 2006).
---------------------------------------------------------------------------
    Unsurprisingly, removal of the rural add-on would significantly 
affect rural home health agencies' margins and corresponding ability to 
serve rural beneficiaries. Between April 1, 2003 and March 31, 2004--
the period during which the rural add-on was not in effect--several 
service areas were reduced and some agencies were forced to turn away 
resource-intensive patients.\16\ Moreover, just before the most recent 
expiration of the rural add-on in December 2006, a higher percentage of 
rural than urban states reported service by only one home health agency 
or by no home health agencies at all.\17\ Rural access thus remains a 
serious problem that will only be worsened if Congress fails to 
reauthorize the rural add-on.
---------------------------------------------------------------------------
    \16\ NAHC, ``Maintain the Add-on,'' supra note 1; NAHC, ``Preserve 
Access,'' supra note 1.
    \17\ MedPAC, ``Report to Congress'' (March 2007), 190.
---------------------------------------------------------------------------
IX.  REINSTATE AND MAKE PERMANENT THE 10 PERCENT ADD-ON
    Because ensuring beneficiary access to medically necessary care is 
one of the Medicare program's central purposes, the threat to rural 
beneficiary access to home health services should be a primary concern 
as Congress evaluates the health care system this year in light of CMS' 
proposed changes. The advent of the substantial structural and 
functional changes in the Medicare prospective payment system for home 
health agencies as proposed by CMS makes it imperative that Congress 
act quickly to reinstate and make permanent a 10 percent rural add-on 
to avoid additional problems with access to care by rural 
beneficiaries.
    Importantly, policy support for the rural add-on at its inception 
in 2001 and during subsequent reauthorizations remains in force today. 
Concerns about the effects of inadequate reimbursements on rural access 
and on small businesses, as well as proper recognition of the high 
costs of rural home health agencies and the relative efficiencies of 
home health care compared to institutional settings, all demand 
reauthorization of the rural add-on.
    The rural home health care provider community has demonstrated 
remarkable resiliency in adapting to continuing changes in 
reimbursement over time, but this trend cannot last indefinitely. 
Essential support in the form of a reauthorized and permanent add-on 
for rural home health care providers is urgently needed.
        Without the help of home health, I would be in a nursing home. 
        I have received excellent service that has allowed me to stay 
        in my home, so that I may have the quality of life that is 
        satisfying to me. The thought of losing this service is 
        frightening and would be devastating to me. I plead with you 
        not to cut these services. Please reconsider any changes that 
        limit funding and availability of home care services.-- N.E., 
        Arkansas

                                 

         Statement of Visiting Nurse Associations of America, 
                         Boston, Massachusetts
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to present written testimony for the Subcommittee's hearing 
on ``Payments to Certain Medicare Fee-for-Service Providers.'' As 
President and Chief Executive Officer of the Visiting Nurse 
Associations of America (VNAA), the national membership association for 
non-profit and community-based Visiting Nurse Agencies (VNAs), I speak 
on behalf of our voluntary Board of Directors and the association's 
membership.
    At the outset, I would like to commend you and Subcommittee Members 
for your leadership in engaging the health care provider community in 
reforming Medicare fee-for-service policies with the goal of ensuring 
that Medicare pays efficiently and appropriately for quality care. We 
agree with you that Medicare payment policies should be revisited 
frequently to not only protect the solvency of the Medicare Trust Fund 
and ensure high quality care for beneficiaries, but also because health 
care and demographics in the United States are evolving daily. The 
rapid rate at which American citizens are currently accessing Medicare-
covered services will only increase as the baby boom generation 
approaches retirement. VNAA believes that it is essential for national 
health care policies to reflect this change in demographics by 
supporting the most efficient and cost-effective forms of health care 
delivery, including innovative technologies that support consumer 
choice of care and independent living.
    In this testimony, VNAA would like to address three different areas 
of Medicare home health payment policy that we believe will help the 
Subcommittee identify reforms to ensure that Medicare pays efficiently 
and appropriately for quality care to beneficiaries. These areas 
include: 1) CMS's newly proposed rule for PPS refinements; 2) MedPAC's 
analysis involving costs and reimbursement for Medicare-covered 
services; and 3) Preparing for the future by cost-effectively meetings 
the health care needs of a rapidly aging society.
    Briefly, I will make the case in my testimony that: 1) VNAs' 
mission to serve as the safety net for the most sick and vulnerable 
homebound seniors and those with disabilities is currently at risk and 
would be seriously jeopardized by the Administration's proposed cuts to 
Medicare home health reimbursement; 2) CMS's policies to account for 
the true cost of providing home health care in 2007 is outdated and 
therefore MedPAC's analysis of the adequacy of Medicare home health 
reimbursement is not based on complete and current cost data; and 3) 
Home health care has the ability to provide significant savings to the 
Medicare program if Federal congressional and regulatory policies 
recognize its cost-efficiency when compared to the costs associated 
with treating like medical conditions in institutional settings.
About Visiting Nurse Agencies
    For over 120 years, VNAs have shared several common goals, 
including: 1) to provide the highest quality health care to the sickest 
and the poorest who otherwise would not have access to the health care 
they need; 2) to help people with chronic illnesses and disabilities to 
stay within the comfort of their homes by maintaining their health, 
strength and independence; and 3) to form local partnerships within 
individual communities to improve the overall public health of those 
communities.
    Today, approximately 400 VNAs provide care to nearly four million 
individuals each year. While continuing to embrace and fulfill their 
original common goals, VNAs have evolved to provide the types of highly 
skilled nursing care that only 20 years ago were rarely provided 
outside a hospital, such as peritoneal dialysis and intravenous 
chemotherapy. The tens of thousands of clinicians employed by VNAs are 
passionate about improving the quality of life of all of their 
patients, including some of the nation's sickest and poorest 
individuals. Their expertise is in geriatric care, public health 
measures such as mass-immunization, infusion therapy, pain management, 
ventilator care, hospice care, and chronic care management for those 
with diabetes, congestive heart disease, AIDS, chronic obstructive 
pulmonary care and cancer. These basic medical services are 
supplemented by support services that enable individuals to remain in 
their homes and communities, including adult day care, Meals on Wheels, 
personal care services, caregiver education, telehealth monitoring, and 
nutrition management.
Medicare Home Health Prospective Payment System Refinement and Rate 
        Update for Calendar Year 2008
    The Subcommittee's hearing is particularly timely on the issue of 
provider payments given the recent publication of several proposed 
regulations on such payments by the Centers for Medicare and Medicaid 
Services (CMS). On May 4, the ``Medicare Home Health Prospective 
Payment System Refinement and Rate Update for Calendar Year 2008 
Proposed Rule'' was published in the Federal Register, 42 CFR Part 484. 
This proposed rule includes the most significant refinements to the 
Medicare home health prospective payment system since its 
implementation in October 2000.
    Very generally, it appears that the proposed redistribution of 
case-mix weights by case-mix categories has incorporated many of VNAA's 
suggestions to re-balance the system to more fairly reflect costs by 
case-mix category. However, we are only in the early stages of our 
analysis and cannot at this point offer definitive recommendations to 
the Subcommittee regarding this redistribution of payments. We believe 
that several of the other proposed changes are positive, including the 
replacement of the ``10-therapy visit'' threshold with three threshold 
benchmarks, the increase from 80 to 153 home health resource groups, 
the elimination of both the ``MO175'' OASIS variable and the 
``Significant Change in Condition (SCIC) Adjustment,'' and the 
recognition that secondary diagnoses provide a more accurate picture of 
patient condition.
    VNAA is disheartened, though, that CMS inserted a budget-driven, 
across-the-board 2.75% payment reduction in each of 2008, 2009, and 
2010 in order to address what it believes is a provider-driven effort 
to increase the average case-mix weight. CMS's estimate of the 
increased case-mix weight between 2000 and 2003 assumes that home 
health agencies in general had deliberatively ``upcoded'' the medical 
and functional status of their patients to achieve higher 
reimbursement. The estimate dismisses the very real possibility that 
the demographics of the home health population had changed in the first 
three years of PPS.
    In our experience, the home health profession was generally so 
confused by the complete overhaul of patient assessment and 
reimbursement in October 2000 and into the first few years of PPS that 
``upcoding'' would have been highly unlikely. In addition, VNAA has 
asked CMS for a better understanding of its rationale for why it now 
assumes that an increase in diagnostic coding following the publication 
of CMS coding instructions is inappropriate ``upcoding'' when before 
CMS had said that this particular increase in diagnostic ``upcoding'' 
was a result of nurses' better understanding of diagnostic coding due 
to the instructions put out by CMS.
    For these reasons, VNAA believes that CMS's proposed 2.75% cut in 
payments in 2008-2010 is based on unreliable assumptions at best about 
the increase in case-mix weight from 2000 to 2003. The harsh reality is 
that VNAs in 2004 (year of most recently available data) had an average 
total operating margin of negative 2.3% accounting for all payer 
sources. Charity contributions to VNAs brought that average up to 3%. 
Since that time, costs have only increased--not decreased--because of 
the stiff competition for clinicians, gas price increases, and purchase 
of telehealth systems to better manage patient caseloads by thinly 
stretched clinical staffs.
    Last year, the Moran Company produced data for VNAA that 
demonstrated that 66% of VNA providers have total operating margins of 
less than 5% and that 39% of VNA providers have negative total 
operating margins. If CMS includes the combined 8.25% cut in its final 
rule for PPS refinement, the vast majority of VNAs would be in serious 
financial jeopardy. The real tragedy though would be the impact that 
any VNA closures would have on Medicare beneficiaries' access to a 
safety net home health provider in their community. Following the 
implementation of the BBA'97 and the devastating Interim Payment System 
(IPS), 26 VNAs were forced to close their doors. We are concerned what 
any repetition of the past would have on communities nationwide.
MedPAC's Analysis of Medicare Home Health Reimbursement
    The Administration's proposed rule comes on the heels of an equally 
troubling set of conclusions and recommendations by the Medicare 
Payment Advisory Commission (MedPAC) regarding home health payments. In 
its most recent analysis, MedPAC once again concluded that home health 
agencies' average costs for home health services to Medicare 
beneficiaries are less than average payments, and therefore the annual 
inflation updates for calendar years 2003-2008 for such services have 
been viewed as unwarranted.
    We believe that MedPAC's annual analyses have been grossly 
misleading to the Congress for the following reasons:

        1)  The analyses have not included data from 1,723 home health 
        agencies, or 21% of total home health agencies, that are 
        ``provider-based.'' Therefore, all costs and payments to 
        hospital-based and skilled nursing facility-based home health 
        agencies have been excluded from MedPAC's annual home health 
        margin analysis. Exclusion of these agencies has clearly skewed 
        the average home health margin upward. According to the 
        National Association for Home Care, the average Medicare profit 
        margin of the provider-based agencies in 2004 was less than 
        negative 5.3%. In some states, particularly rural states, 
        provider-based agencies represent the vast majority of existing 
        home health providers and exclusion of those providers' data 
        does not provide a meaningful assessment of beneficiaries' 
        access to home health care.
        2)  The methodology that MedPAC uses to assess home health 
        agencies' margins is outdated, largely because CMS's policies 
        for what costs are considered ``allowable'' or ``not-
        allowable'' are significantly outdated. MedPAC can only include 
        in its margin analysis the costs that CMS considers 
        ``allowable'' costs. Yet, the scope of primary ``allowable 
        costs'' has not been revisited for 10 years. For example, many 
        if not most home health agencies have invested substantial 
        resources in telehealth monitoring to more closely monitor 
        patients at home. The national nursing shortage has made such 
        investments a necessity because telehealth monitors can assist 
        a slim clinical staff in monitoring patients' vital signs and 
        any changes in medical conditions that they may consider 
        alarming.

    Telehealth monitors assist nurses in determining which nursing 
visits are immediately necessary according to the incoming patient 
data, versus those visits that can be scheduled the following day(s). 
Telehealth does not replace nursing visits but assists nurses in their 
management of their patient caseloads, which has been vital in 
compensating for an average 10% nursing staff vacancy rate during the 
past few years according to VNAA member surveys.
    Data from our agencies demonstrate that early intervention by the 
clinicians in response to such incoming telehealth data has reduced 
costly and unnecessary hospitalizations. Yet despite telehealth's 
clinical value and cost-effectiveness, CMS does not consider telehealth 
monitoring costs ``allowable'' for cost reporting purposes because it 
has concluded that telehealth monitors cannot be considered a 
replacement for nursing visits. And, because laws that govern home 
health payments are structured to account only for direct visit costs, 
telehealth costs therefore cannot be captured, thereby artificially 
inflating actual home health agency Medicare margins.
    Even with the flaws in the CMS and MedPAC approaches to assessing 
margins, they concede that a significant proportion of agencies face 
reimbursement challenges that in our view contribute to access problems 
for Medicare beneficiaries. According to MedPAC, 20% of home health 
agencies had negative Medicare margins in 2004 (most recent data 
available) and at least 20% of Medicare beneficiaries had a problem 
accessing home health care that year.
    With such substantial evidence of financial strains on the home 
care system, VNAs do not think it is wise for the Administration to 
propose payment cuts or for Congress to freeze home health providers' 
2008 update when beneficiaries' access to care is at risk.
Preparing for the Future by Cost-Effectively Meeting the Health Care 
        Needs of a Rapidly Aging Society
    VNAA strongly believes that home- and community-based care must be 
at the center of our health care delivery system to address the 
inevitable rise in Medicare costs due to the rapid aging of the 
American population. HHS Secretary Michael Leavitt underscored the 
cost-effectiveness of such care during his speech to the February 2005 
World Health Congress. ``Providing the care that lets people live at 
home if they want is less expensive than providing nursing home care. 
It frees up resources that can help other people. And obviously, many 
people are happier living at home,'' stated Secretary Leavitt.
    As the following CMS data illustrate, home health care has the 
potential to be a huge cost saver to Medicare, Medicaid and private 
insurance.


------------------------------------------------------------------------
                                                Length
           Setting             Classification     of      Payment (2003
                                                 Stay        rates)
------------------------------------------------------------------------
Inpatient Rehabilitation      Case-mix group    14      $10,828.60
 Facility (IRF)                804 (lower        days
                               extremity joint
                               replacement
                               with some
                               functional
                               capabilities)

------------------------------------------------------------------------
Skilled Nursing Facility      Either the very   14      $4,446.82 for
 (SNF)                         high (RVB) or     days    RVB and
                               ultra high                $6,352.60 for
                               (RUB)                     RUB
                               rehabilitation
                               group
------------------------------------------------------------------------
Long Term Care Hospital       Patient group     14      $17,671.22
 (LTCH)                        238               days
------------------------------------------------------------------------
Home Health                   High/High/        60-day  $5,165.26
                               Moderate Group    episo
                                                 de of
                                                 care
------------------------------------------------------------------------
Source: Statement by CMS, 6/6/2005, Ways and Means Health Subcommittee


    To further bolster the notion that home care is a cost effective 
alternative to institutional care, a June 2005 RAND study, titled 
``Comparison of Medicare Spending and Outcomes for Beneficiaries with 
Lower Extremity Joint Replacements,'' detailed costs and outcomes for 
hip and knee replacement patients in different post-acute care 
settings. The report found that total post--acute care payments for 
inpatient rehabilitation facility (IRF) and skilled nursing facility 
[SNF] ``were $8,023 and $3,578 respectively higher than Medicare 
payments for patients who were discharged home.''
    According to RAND, ``In general, the results from that model show 
that in terms of Part A [Medicare] costs, episodes in an IRF or SNF are 
much more costly for Medicare than for episodes of care among patients 
going home.'' (06/2005 MedPAC Report to Congress)
    The broader medical research community has also documented the 
cost-effectiveness of home health care. A study published in the 
December 2005 issue of the Annals of Internal Medicine demonstrated 
significant savings when patients with similar conditions were treated 
in their homes instead of hospitals. The average cost of treating 
patients at home was $5,801 compared to an average cost of treating 
patients in the hospital of $7,480.
    In conclusion, the demand for home health care will continue to 
grow as both a consumer preference during retirement years and as a 
result of greater recognition of the cost-savings it produces for 
payers and consumers. The kinds of highly skilled services that VNAs 
and other home health agencies provide have enabled millions of 
Americans to avoid hospital and nursing home stays. By preventing such 
institutional care, VNAA believes that home health care is a solution 
to curbing the persistent and continuous rise in national health care 
costs.
    Mr. Chairman and Subcommittee Members, VNAA respectfully urges you 
to ensure that Medicare beneficiaries continue to have access to home 
health care by supporting full market basket inflation adjustments in 
2008 and in subsequent years as provided under current law and by 
urging CMS to exclude its proposal to reduce Medicare home health 
payments by 2.75% in each of 2008, 2009, and 2010.
    Thank you again for providing this opportunity to share our 
concerns and recommendations.

                                  
