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




 
                          REFORMING MEDICARE'S
                        PHYSICIAN PAYMENT SYSTEM

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

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

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 11, 2008

                               __________

                           Serial No. 110-96

                               __________

         Printed for the use of the Committee on Ways and Means





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                      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
MIKE THOMPSON, California            THOMAS M. REYNOLDS, New York
JOHN B. LARSON, Connecticut          PAUL RYAN, Wisconsin
RAHM EMANUEL, Illinois               ERIC CANTOR, Virginia
EARL BLUMENAUER, Oregon              JOHN LINDER, Georgia
RON KIND, Wisconsin                  DEVIN NUNES, California
BILL PASCRELL, JR., New Jersey       PAT TIBERI, Ohio
SHELLEY BERKLEY, Nevada              JON PORTER, 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

                   Jon Traub, 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
RON KIND, Wisconsin

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
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                            C O N T E N T S

                               Page______

                               WITNESSES

Bruce C. Vladeck, Ph.D., Senior Health Policy Advisor and 
  Executive Director of Health Sciences Advisory Services, Ernst 
  & Young, LLP, New York, New York...............................     7
Gail Wilensky, Ph.D., Senior Fellow, Project Hope, Bethesda, 
  Maryland.......................................................    20
Nancy H. Nielsen, M.D., Ph.D., President, American Medical 
  Association, Chicago, Illinois.................................    26
Donald M. Crane, President and Chief Executive Officer, 
  California Association of Physician Groups, Los Angeles, 
  California.....................................................    39

                       SUBMISSIONS FOR THE RECORD

American Academy of Family Physicians, Statement.................    60
Charles Mayer, Letter............................................    63
Richard W. Whitten, Letter.......................................    64
The Honorable Ron Kind, Statement................................    65
The National Business Group on Health, Statement.................    66
W. Randolph Chitwood, Jr., Letter................................    69


                          REFORMING MEDICARE'S
                        PHYSICIAN PAYMENT SYSTEM

                              ----------                              


                      THURSDAY, SEPTEMBER 11, 2008

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

    The Subcommittee met, pursuant to call, at 10:10 a.m., in 
room 1100, 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) 225-3943
FOR IMMEDIATE RELEASE
September 04, 2008
HL-29

                         Hearing on Reforming 
                  Medicare's Physician Payment System

    House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) 
announced today that the Subcommittee on Health will hold a hearing on 
reforming Medicare's physician payment system. The hearing will take 
place at 10:00 a.m. on Thursday, September 11, 2008, in the main 
committee hearing room, 1100 Longworth House Office Building.

    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses 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:


    Medicare pays physicians and other practitioners on a fee for 
service basis using an administered price system. The fee schedule, 
which was established by the Omnibus Budget Reconciliation Act of 1989, 
sets prices for almost 7,000 discrete services using a methodology that 
places a value on each service relative to every other service. In 
determining the relative value for each service, three overall factors 
are considered: physician work, practice expense, and malpractice 
expense.

    Since 1997, annual updates to payment rates for services furnished 
under Medicare's physician fee schedule have been determined by a 
formula known as the Sustainable Growth Rate (SGR). The formula sets 
target amounts for overall spending under the fee schedule, and the 
growth in target amounts is tied to growth in gross domestic product. 
If Medicare expenditures for these services exceed the target, Medicare 
payment rates are reduced. If Medicare expenditures for these services 
are less than the target, payment rates are increased.

    Because the volume of services paid for under the fee schedule has 
consistently grown at a rate higher than GDP, as well as other factors, 
the SGR formula has called for reductions to payment rates for much of 
this decade. Since 2003, legislation has effectively overridden payment 
cuts called for by the SGR. Most recently, the Medicare Improvements 
for Patients and Providers Act (MIPPA) contained a provision to delay 
rate cuts that were being called for by the SGR formula for 2008 and 
2009. However, unless further legislative action is taken, Medicare's 
payment rates will fall by more than 20 percent in January 2010.

    In announcing the hearing Chairman Stark said, ``The SGR formula is 
clearly broken and needs to be fixed. But the problem is bigger than 
the SGR alone. The current payment system rewards physicians who 
increase the number or intensity of the services that they provide, 
irrespective of what is needed. This drives up spending. Unfortunately, 
spending growth has not been matched by an equivalent improvement in 
outcomes. Our recently enacted legislation provides a window of 
opportunity to look at how physician payment rates are updated. We need 
to use this time to examine payment system reforms that encourage 
better care coordination, higher quality care, and more efficient use 
of resources. This hearing will be an important step in that process.''


FOCUS OF THE HEARING:


    This hearing will focus on Medicare's reimbursement policy for 
physician services. It will address ways of reforming the current fee 
schedule so that physicians are encouraged to furnish the appropriate 
amount of care while also improving the quality of care. Particular 
attention will be paid to reforms that Congress can and should consider 
prior to January 2010.


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noted above.

                                 

    Chairman STARK. Good morning. This morning the Health 
Subcommittee will commence a hearing in the hopes that we can 
be enlightened on a system for reimbursing physicians in the 
Medicare Program.
    Back in 1997 we created a formula called the sustainable 
growth rate, and whoever came up with that name--I know who 
came up with the idea--but that had an ironic sense of humor, 
because there is not much that is very sustainable about it. 
The formula called for cuts in Medicare fees every year since 
2002. And each year we have intervened to prevent the cuts. And 
if we fail to act, next year the rates are scheduled to go 
down, the payment rates are scheduled to go down 20 percent. 
And I don't know of anyone who seriously advocates letting this 
cut take effect, but if we don't the budgetary cost is about 10 
billion and if we repeal the whole thing the budgetary costs 
can get up into 100 billion and more.
    This Committee and subsequently the House made the first 
real attempt this year to reform the SGR, and the CHAMP Act 
contained provisions that addressed some of the underlying 
problems and attempted to put the system on a path toward 
sustainability, but it was never considered in the other body. 
So we had just another short-term fix, we got an 18-month 
patch. And kicking the problem down the road I can tell you 
began when the Republicans were in control, but I have to 
acknowledge that we didn't do anything but continue the 
practice in the recently enacted Medicare bill, and I strongly 
suggest that we don't follow this practice anymore. And I am 
committed to using the time prior to 2010 to address the 
problems posed by the SGR. And I have no plan in mind, and 
quite frankly none has been offered. Many of our advisers, 
people we have worked with in the past, have come up with long 
lists of options, but nobody has been willing to say, start, go 
this way. And I'm waiting for Mr. Camp to do that, but we don't 
seem to be able to get there.
    And so it is in that spirit that I am hoping, I know all of 
you, all the witnesses this morning have ideas about what we 
should do and shouldn't do.
    I want to interject a prejudice here just so the witnesses 
and my colleagues understand at least where I am coming from 
now, and I would be willing to have people explain to me 
otherwise. I think it has been somewhat disingenuous on the 
part of the physicians to cry poverty based on what I call 
piecework rates. There is a major difference between the price 
per procedure and the gross income that is earned in any 
period, month or year. And I rather suspect that there are a 
large number of physicians making way north of a half million 
dollars a year whose income increased, even would have 
increased even with a 10 percent in a per fee; they would just 
quit taking Wednesday afternoons off and do a few more 
procedures. I suspect that is mostly in the higher priced 
procedural areas. Certainly I don't think it is as much in the 
primary care area. But the physician community is very close 
with that information. I have yet to see any sanitized tax 
returns comparing previous years for a few years to see how 
broke, how many Porsche dealers come in and tell me that they 
are having to repossess a lot of cars because the docs can't 
keep up their payments. I have heard all kinds of threats that 
oh, we are not going to deal with Medicare patients anymore. I 
don't believe that for a minute. As I have often said, I have 
got three kids, all of whom have threatened when they don't get 
their second dessert to hold their breath, turn blue and die. 
And the last time I looked, they were still kicking.
    So there is that concern, and that is not to say that I 
don't think we need some major changes. But I do think that as 
we think about reimbursing physicians we also have to think 
about the taxpayers and the survival of the Medicare system for 
those of us who want the Medicare system to survive. So that is 
kind of underlying some of my concerns. And I'd love to have 
anybody straighten me out on that, as I am sure Mr. Camp will 
in the opening remarks he has.
    Mr. CAMP. Well, thank you, Mr. Chairman. And I want to 
thank you for having this hearing and I also want to thank our 
distinguished panel for being here today.
    You know, I would like to just note that the importance of 
the doctor-patient relationship is critical, and there is 
nobody on this dais who thinks that physician payments should 
be cut by 20 percent in 2010. And the cuts called for by the 
SGR would undermine the foundation of the Medicare Program and 
the important doctor-patient relationship I referred to. There 
are a number of policy options open to us that I look forward 
to hearing about today.
    I hope this hearing is an honest attempt to develop a long-
term solution to the problem with Medicare physician payments. 
As I noted before, doctors serving Medicare patients are headed 
for a cliff of 20 payment reductions, and while that cliff has 
been pushed off for a few months, we did so by permanently 
cutting coverage care for some seniors. And I think kicking 
more than 2 million seniors out of their Medicare health plan 
permanently should not be viewed as an acceptable way to avert 
a cut in 18 months. The fact that these reductions and cuts 
were made to seniors should embarrass this committee and this 
Congress. There is another way.
    I was disappointed that there wasn't any consideration of 
the Senate's compromise Medicare bill that was being discussed 
earlier in the summer. But to be fair, both parties are guilty 
of taking the short-term route on SGR. Since 2003 Congress 
passed six laws providing short-term Band-Aids that prevent 
physician payment cut rates called for by the SGR and many 
times making the following year's problems even worse, as was 
done in this last and sixth time.
    We spent billions of dollars, billions in taxpayer dollars 
that have only magnified longer term problems. It is a bad 
habit that we have to kick once and for all. I am confident we 
don't need another 5 years to find a real solution to this 
problem. But as to the shortcomings of the SGR system, there 
are many, and I will simply say that the current system can 
tell us the total number of procedures performed, the tests 
administered and images taken have all increased. But it cannot 
tell us some of the information Mr. Stark referred to or 
whether beneficiaries have actually received better care. And 
we need a better system that rewards physicians who provide 
comprehensive, efficient and high quality care. And we will 
hear testimony today about how some physician practices have 
improved quality, provided more comprehensive care and reduced 
costs when placed under an alternative payment system.
    When health care dollars are deployed in a rational way, it 
optimizes the whole delivery system, and we can then 
incentivize prevention, early assessment and disease management 
rather than only paying physicians to treat beneficiaries once 
they become sick.
    So I look forward to working with the chairman of this 
Subcommittee to reform physician payments so that physicians 
are paid fairly and appropriately and that seniors also receive 
the high quality care that they deserve. And I thank the 
chairman again for holding this hearing and yield back my time.
    Chairman STARK. If I could respond for all of the Members 
of the Committee, the Ranking Member, myself, I think in the 
periods that he mentioned over the last 5 or 6 years, these 
fixes that were put into the bills which we may have voted for 
or against were done without the input of any Member of this 
Subcommittee, in a room that we never understood where, by 
people with whom we had little contact. And that will be a 
different procedure at least with this Committee and thus far 
for what little legislation we have has been somewhat 
different, that there has been more conversation among Members 
of the Subcommittee than we did previously. I am not saying we 
came up with anything better, but I just think that it is 
something to understand that we have a lot of learning to do 
with how this process went along.
    With that, I would like to introduce our panel. Dr. Bruce 
Vladeck, who is the Senior Health Policy Advisor and Executive 
Director of Health Sciences Advisory Services of Ernst & Young 
of New York, formerly Director of--what was it--HCFA or CMS 
when you were there?
    Mr. VLADECK. It was HCFA.
    Chairman STARK. HCFA, all right.
    Dr. Gail Wilensky, who is aSenior Fellow at Project Hope in 
Bethesda, who was also Director of HCFA, with whom this 
Committee has written a great deal of legislation in the past, 
including--did we do catastrophic with you?
    Ms. WILENSKY. That was right before I came.
    Chairman STARK. Okay.
    Dr. Nielsen, who is the President of the American Medical 
Association. And if her attendance record gets better they tell 
me they will let her become chairman of the board and make 
somebody else be president next year from Chicago.
    Mr. Donald Crane, who is the President and CEO of the 
California Association of Physician Groups in Los Angeles.
    If you all would like to enlighten us in the order that I 
called your names, please proceed.
    Mr. VLADECK. Thank you very much.
    Chairman STARK. I should say one other thing. We are going 
to try to cram your testimony into 5 minutes to review what you 
have. We all have written copies of it, and then we will have a 
chance for the other Members to inquire during questions here. 
Also we are faced with about an 11:30 possibility of a recess, 
and it will be up to the Members then if we want to continue 
through or we might have to ask you to stay for a while. And I 
want you to go ahead, but if we do recess, we will try and 
encourage you to stick around so that we can reconvene and 
finish the hearing.
    Bruce, go ahead.

STATEMENT OF BRUCE VLADECK, PH.D., SENIOR HEALTH POLICY ADVISOR 
 AND EXECUTIVE DIRECTOR OF HEALTH SCIENCES ADVISORY SERVICES, 
                       ERNST & YOUNG, LLP

    Mr. VLADECK. Thank you very much, Mr. Chairman, Mr. Camp, 
Members of the Subcommittee. It is always a pleasure to be back 
here and to continue this conversation, the last stage in which 
we personally--it was about 18 months ago on very much the same 
subject. In the interest of time, and you do have my statement, 
let me just say one sort of general thing and then talk about 
some specific ideas and issues.
    I don't think it is necessary to spend any amount of time 
on all the things wrong with the current system. In thinking 
about what to do about it, I would only emphasize the 
importance of being very careful not to overestimate the 
ability to change the way in which health care is delivered by 
tinkering with reimbursement systems. I think there are some 
things you can accomplish. You can move a lot of money around, 
but the difficulty of changing phenomena as complex and as 
multi-dimensional as the way in which physicians practice 
medicine--there is no better example for that difficulty than 
the existing Medicare physician payment system, which was 
launched 15 years ago with great hopes and expectations of 
accomplishing exactly the opposite of what it appears to have 
accomplished in a variety of ways.
    So I think it is very important there be substantial 
changes in the way physician practices are organized and 
conducted in the United States, but it is not clear to me that 
you can do all the things you want to do by changing payment 
mechanisms. The best you may be able to hope for in changing 
payment mechanisms is to get the payment fairer and more 
equitable, get the signals going in the right direction, 
address some of the very serious income distribution problems 
we have in physician practice at the moment, and sort of do no 
harm in terms of other kinds of reforms in physician payment.
    In that regard I have four very specific recommendations I 
would be so bold as to make to the Subcommittee for its 
consideration, and then a couple of additional observations.
    First, for whatever reasons, the way in which the updating 
and evolution of the Medicare fee schedule has occurred, and 
the way in which it interacts with the SGR, has led to a 
gradual relative devaluation of primary care services relative 
to specialty services. Over time it would be desirable if we 
know how to fix that process. In the short run, everyone agrees 
on the effects and the impacts: that is it is harder and harder 
for physicians to make a living providing primary care services 
to Medicare beneficiaries at the same time that the fee 
schedule is probably encouraging the excessive proliferation of 
certain high technology diagnostic and procedural services. I 
don't think we have to be shy or sort of disingenuous about 
intervening in what appears to be an arbitrary way, because 
there are so many other forms of arbitrariness built into the 
system. And if everyone agrees, as I think--except for some of 
some of the specialty societies--everybody does, that we are 
now overpaying specialists and underpaying primary care 
physicians, I think it is perfectly appropriate for the 
Congress to say: let's shift some of that by changing some of 
the weights through legislative action or authorizing the 
Secretary to make certain kinds of changes.
    I think, ironically, you might even save some money in the 
process because in fact if we are able to keep more primary 
care physicians participating actively in the Medicare Program, 
all the theory suggests that their patients will use fewer 
expensive services and there should be some savings to the 
program.
    In addition, I would very much support a form of a 
recommendation recently made by MedPAC, which is that Medicare 
recognize through data and technology it already has which 
physicians are really serving as primary care physicians to 
Medicare beneficiaries, that is not a questions of specialty 
labeling. It is a question of actually looking at the claims 
and seeing who is doing it, and there should be some additional 
adjustment for them. I think we are all concerned about the 
ability of primary care physicians and primary care practices 
to afford the infrastructure in terms of IT and in terms of 
support staff and so forth necessary to take advantage of the 
potential benefits of primary care. I think an adjustment to--
again necessarily arbitrary because there is no data on either 
side of the issue--to the practice expense component of the fee 
schedule for those doctors who meet some objective criterion of 
being primary care physicians would begin to address that.
    Third, I think this Subcommittee and the House did 
something very sensible last year in the CHAMP Act relative to 
its changes and modifications to the SGR formula, both by going 
back to the pre-1993 practice of having different update 
factors for different kinds of services or different allowable 
growth rates for different kinds of services, and by excluding 
some of the culprits driving the formula in the wrong direction 
in terms of incident to services, drugs, and laboratory, and so 
forth.
    Again it is not a perfect system, it is not an ideal 
system, but starting from where you start, with what we know, I 
think it would be a major improvement.
    And finally, there are a number of people who know more 
about this than I do, whose views I respect, who think you will 
never fix this system as long as you are stuck with the 
existing evaluation and management coding and the CPT system. 
And it may well be there are a lot of people who believe that 
there are underlying flaws in the entire coding process and 
coding system that we will never escape unless we look at 
seriously modifying or replacing it. With all the other studies 
going on of aspects of fee schedule, I would urge that 
attention be paid to that as well.
    I will make two more points. All of these recommendations 
of mine assume at least for some period of time the maintenance 
of a fee-for-service payment system for most physicians 
services under Medicare. And I know that is sort of a minority 
view in health policy circles in Washington and elsewhere, but 
I would suggest that fee-for-service is a hearty beast in part 
because, as the chairman suggested in his opening remarks, 
nobody has really come up with a totally convincing 
satisfactory alternative to replace it with. I think most of 
the countries that do much better than we do of balancing 
primary care with specialty services still use a fee-for-
service for paying the majority of physician services. There 
may be special add-ons or other adjustments for primary care 
physicians, but the British model of paying a purely capitated 
rate for primary care is still the minority in national health 
systems.
    Similarly, one of the things that has occurred in the last 
15 years in the private health care market, even for plans that 
receive capitated payments for Medicare or other payors, have 
largely moved away from capitation in their payments to 
physicians, back to fee-for-service for a variety of reasons. 
So I wouldn't be so quick to assume if we did away with fee-
for-service based payments, we would solve all our problems, 
until somebody had something absolutely better.
    Finally, I couldn't agree more with some of the other 
testimony you are going to hear today and some of the other 
comments that if we lived in a world in which most physician 
services were provided through large multi-specialty group 
practices, we would be better off in a lot of ways. We have 
known for 20 years that those practices provide higher quality 
care at lower costs, often with higher patient satisfaction 
than atomized solo practice fee for service.
    [The statement of Mr. Vladeck follows:]

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    Chairman STARK. Let's let Gail have a chance for now. We 
will come back to you.
    Ms. WILENSKY. Thank you, Mr. Chairman.
    Chairman STARK. Is your mike on? Pull it closer to you.
    Ms. WILENSKY. Now it is, thank you.

 STATEMENT OF GAIL WILENSKY, PH.D., SENIOR FELLOW, PROJECT HOPE

    Ms. WILENSKY. Thank you, Mr. Chairman and Members of the 
subcommittee. Thank you for inviting me here to testify on 
strategies to reform the way the Medicare pays physicians.
    As you mentioned, I was a HCFA Administrator. I wasn't sure 
I should remind you I was actually the HCFA Administrator on 
duty when the RBRVS was implemented in January of 1992. I had 
spent the previous 2 years struggling with how that was going 
to happen. And subsequent to being at HCFA I have tried to help 
you with these issues in my roles as Chair of the Physician 
Payment Review Commission in the mid-nineties and then 4 years 
of chairing the Medicare Payment Advisory Commission. So while 
these are not new issues, they are very difficult ones.
    I would like to remind you of the general movement in 
Medicare because I believe that Bruce has raised what I see as 
fundamental choice that you the Congress has to make with 
regard to where you want to go in terms of physician 
reimbursement reform. In general Medicare has moved 
increasingly toward the use of bundled payments such as DRGs, 
or APCs as a reimbursement strategy except for the way in which 
it reimburses physicians where Medicare uses a very 
disaggregated fee schedule paying for about 7,000 separate 
discrete services under the RBRVS.
    The RBRVS was implemented to have a fee schedule that was 
more resource based and focused on relative values. But it 
basically is structured similarly to what existed before, many 
disaggregated discrete services. Because of correct concern 
about the potential for increased spending with such a 
disaggregated fee schedule, the spending limits, first the 
volume performance standard and then replaced by the 
sustainable growth rate, were introduced. This was a legitimate 
concern, based on the experiences of the 1980s where Part B 
spending increased faster than other parts of Medicare.
    The problem, as I see it, with the SGR is that while it can 
in principle, if used, control total spending, behavior occurs 
at the level of individual physician or the physician's 
practice. And here the incentives are at best unhelpful, I 
would say as an economist actually perverse. The problem is 
that nothing the individual physician does can affect the 
overall SGR behavior, while at the same time physician fees are 
affected by what physicians do collectively, but this isn't 
where behavior occurs.
    Conservatively practicing physicians continue with very low 
fees, aggressively practicing physicians make up for low fees 
by the volume mix of services that are provided, and therefore 
their incomes may indeed not decline. That is a very unfair 
system. Several short-term patches are possible. Physicians, I 
agree with Bruce and the comments of the committee, appears to 
be undervalued by any measure you might look at. The 
recommendation made by MedPAC that you use a budget neutral 
modifier for primary care physicians targeting those 
individuals who are primarily providing primary care services 
is a reasonable first step. I also support the notion of a demo 
for a medical home. Medical home could be an important part of 
a longer term fix. We need to understand how it would work.
    I very much support more aggressive reviews of physician 
claims for outliers that was allowed under the MIPPA 
legislation that was just passed, as I understand the 
legislation. I think it has to be done with care, and use clear 
processes, so that there is not a generalized chilling effect 
inappropriately for physicians, but I think it in principle is 
a very important step and I support it.
    I regard the use of multiple SGRs, as was included in the 
CHAMP legislation, as a move in a better direction compared to 
where we are now, and I also think that separate SGRs for 
multi-specialty group practices is a good idea. I am indeed one 
of the many health policy people who believe moving in that 
direction, toward more use of multi-specialty group practices, 
would solve many of our current problems.
    But ultimately the Congress has to decide what direction it 
wants to go in the future. If you want to stay with the current 
disaggregated fee schedule, then I believe you need to think 
about an SGR that operates at the level of the individual 
physician or the physician's practice. That is where the 
behavior occurs. That is the only way to have a system that is 
not unfair. We are not talking millions, we are talking maybe a 
couple hundred thousand SGR rates. I don't think that is 
undoable in this present day and age.
    Or there is another option, which I actually prefer because 
I think it would be better in terms of encouraging quality as 
well as restraining spending, and that is to begin moving 
toward more aggregated bundles of payments.
    I would propose that CMS be ready to start July of 2010 
making single payments for the most important chronic diseases 
that our Medicare beneficiary population presents to 
physicians, either singly or in terms of multiple chronic 
diseases and, similarly, to make a single payment for the 
highest cost highest volume DRGs, that covers all the physician 
services provided during a particular DRG like heart valve 
replacement or heart bypass procedures, and that this become 
the strategy move going forward.
    CMS and Congress will need to engage some serious work done 
regarding the redesign of a payment system, and in my 
testimony--I hope you do not regard it as presumptuous--I have 
laid out a calendar of events that if you choose to move in 
this direction, CMS could use developing an RFP, with two 
parts, initially to go out in 2009, getting some ideas laid out 
about the direction that a new physician payment system would 
take, with a second and more specific contract being let within 
a year, a final report due no later than June 30th of 2011 and 
an implementation start date of January 1st, 2013. I think this 
is as fast as you can realistically move to a different 
reimbursement system.
    As someone who was there when the Congress passed a half 
developed RBRVS in November of 1989 and then directed HCFA to 
implement it January 1st, 1992, this schedule I am suggesting 
is not inconsistent with what has been done in the past. It 
will require additional support for the agency. But first, the 
Congress needs to decide do you want to stay with a 
disaggregated fee schedule, in which case I urge you to think 
about individualized SGRs, or do you want to move toward more 
bundled payments, as you directed the agency to do in all other 
majors areas of Medicare, and you need to start directing the 
agency to do that, ready to start at the beginning of the 
following presidential term.
    Thank you.
    [The statement of Ms. Wilensky follows:]

           Statement of Gail Wilensky, Ph.D., Senior Fellow, 
                    Project Hope, Bethesda, Maryland

    Mr. Chairman and members of the subcommittee: thank you for 
inviting me here today to testify on strategies to reform the way 
Medicare pays physicians. I am currently a senior fellow at Project 
HOPE, an international health education foundation. I have previously 
been the Administrator of the Health Care Financing Administration, now 
known as the Center for Medicare and Medicaid Services and also the 
chair of the Physician Payment Review Commission and the Medicare 
Payment Advisory Commission. I am here today to discuss reimbursement 
strategies that could encourage physicians to provide the appropriate 
quantity of services as well as improve the quality of the services 
provided. My views reflect my background as an economist and also the 
experiences gained in the various positions I have previously held. 
This testimony reflects my personal views and should not be regarded as 
reflecting the views of Project HOPE.
    My testimony reviews the ways in which Medicare has reimbursed 
physicians over its history, why it adopted the SGR as an expenditure 
limit on Part B spending, the fundamental challenges posed by the use 
of a RBRVS reimbursement schedule combined with SGR and alternative 
strategies to consider in its place.
Medicare's History Reimbursing Physicians
    Medicare originally based its reimbursement to physicians on 
historic charges as it did for all of its reimbursements. In 1984, 
around the time that Medicare moved away from a charge-based per diem 
rate for hospitals, Medicare introduced the use of the Medicare 
Economic Index (MEI) to update payments to physicians. This began what 
has been an increasingly divergent way of reimbursing physicians under 
Medicare compared to the ways Medicare reimburses other providers. This 
divergence has profoundly effected the pressures being generated by the 
SGR and the increasing frustrations that the current system of 
reimbursing physicians seems to cause almost everyone--members of 
Congress, congressional staff, policy analysts, and most of the 
physician community.
    The history of most of Medicare reimbursement has been to move to 
increasingly bundled services for purposes of payment. The adoption of 
a prospective payment system for in-patient hospital care in 1983 was 
the beginning of that process but it has now been extended to capital 
payments for inpatient care, outpatient hospital care, renal care, home 
care and nursing homes. The ultimate in bundled services is a single 
capitated payment that covers all Medicare services.
    These bundled payment systems continue to use administered pricing 
to set the reimbursement which means they also require a methodology to 
update the payment. The bundled systems generally use a ``bottoms-up'' 
approach for their updates. Estimates are made for the components in 
the bundle that are believed to be associated with increasing costs. 
The inflation measure that results is usually in the form of an 
industry-specific input-price index called a ``market-basket''. In many 
cases, a downward adjustment is also made for a presumed increase in 
productivity.
    Potential volume increases for services that are paid as part of a 
bundle have been regarded as less likely and thus less problematic than 
those associated with payments for unbundled services. There still are 
concerns and some prohibitions have been introduced to limit their 
likelihood, such as the 30 day prohibition on a hospital readmission 
for the same diagnosis.
    The history of physician payments under Medicare is different. 
There was a period in the 1980's when physician DRG's (Diagnostic 
Related Group) were under some consideration but there has not been a 
serious move towards bundled payments for physicians--at least not one 
that is known to me. There are, of course, some bundled payments that 
are traditional in reimbursing physicians: surgeons receive a fixed 
payment that covers the pre-operative care, surgery and post-operative 
care, at least the care provided for a specified period of time and 
obstetricians (obviously not a Medicare matter) receive a single 
payment for prenatal, post-natal and delivery. In general, however, 
physicians are paid for discrete services using a disaggregated fee 
schedule with approximately 7000 billing codes. Because the concerns 
about potential volume increases are much greater for a payment 
schedule that is as disaggregated and discrete as the Medicare 
physician fee schedule, the updates to the fee schedule has followed a 
``top-down'' strategy--initially tied to the MEI and now the 
Sustainable Growth Rate (SGR).
    The big change for physician payment, comparable to the 
introduction of DRG's for hospitals in 1983, occurred in 1989 when the 
fee schedule, which had been based on historical charges, was replaced 
with a resource-based relative value scale (RBRVS) combined with a 
spending limit--initially the Volume Performance Standard which was 
superseded in 1997 by the SGR. The period prior to 1989 had made it 
clear that using a disaggregated fee schedule without a spending limit 
leads to increased rates spending on physician services in excess of 
other parts of Medicare.
    Frustration with reliance on historical charges which was perceived 
as under-valuing primary care and over-paying for procedures led to the 
adoption of the RBRVS. Under the RBRVS, relative values for each 
service are set by considering physician work effort, physician 
practice expense and malpractice liability. But while the RBRVS sets 
the relative prices, it is the SGR, through its impact on the 
conversion factor that converts relative weights to absolute dollars 
that sets the absolute reimbursement rates.
Problems with the SGR
    A lot of the focus for reforming physician payment under Medicare 
has been on fixing the SGR. The reason is clear. It is the requirements 
of the SGR to keep the growth in spending on Part B services tied to 
the growth in the economy that has caused the downward pressure on 
physician fees for most of the decade. This happens whenever growth in 
the economy slows and/or increases in the volume and mix of services 
provided under part B increases. For much of this decade, both have 
been occurring. Any excess growth in Part B spending relative to the 
level suggested by the SGR is supposed to lead to compensating downward 
changes in physician fees. These scheduled reductions would have meant 
annual reductions in fees for about 5% for most years since 2002. In 
reality, however, except for 2002, all of the scheduled reductions have 
been mitigated by acts of Congress because of concerns that repeated 
reductions in fees would severely diminish access to physician 
services. Instead, fees either have been held constant or been 
increased by 1%-1.5%, much lower than the rate of inflation but much 
greater than the reduction that had been scheduled to occur. 
Legislating these annual patches has provided short term fixes but has 
also produced a very big hole for Congress to fill when it wants to 
move to another system of reimbursement.
    The use of an SGR tied to the economy forces one share of Medicare 
to maintain a rigid relationship to the economy that does not apply to 
other parts of Medicare. As a result, one of the options that MedPAC 
has proposed is using expenditure targets like the SGR across all parts 
of Medicare, as preferable to only using a spending target for 
physician spending. While freezing the relative shares of Medicare 
spending that exist at a particular time would lessen some of the 
pressures produced by the SGR on physicians, there is no assurance that 
the relative shares of spending on Medicare that exist at a particular 
moment in time represent the best distribution of spending in Medicare 
as of that time--and certainly no assurance that they represent the 
most appropriate shares of spending on Medicare for the future. 
Expenditure targets across all of Medicare could keep Medicare spending 
within specified growth rates--something it has had difficulty doing 
throughout most of this decade--especially if the targets were actually 
enforced. But as the use of the SGR for physician fees has amply 
demonstrated, expenditure targets, per se, do nothing to improve 
quality, ensure clinical appropriateness or accomplish any of the other 
goals that have been set for Medicare--and they are usually not 
implemented anyway.
    The most fundamental problem with the SGR is that the fulfillment 
of its objectives are inconsistent with the incentives it produces--
which can and frequently does result in a very perverse dynamic. The 
objective of the SGR is to control total spending by physicians, which 
it will do if it is implemented. The problem is that it neither affects 
nor is driven by the volume and intensity of spending of any individual 
physician. In fact, there is concern that the SGR expenditure targets 
provide individual physicians with even greater incentives to increase 
the volume and intensity of services they provide because physicians 
know that nothing they do as individuals can affect overall physician 
spending and as a result, their fees and also that they will be 
affected by whatever other physicians do, irrespective of their own 
behavior.
Short Term ``Patches''
    There are a variety of changes that can be made in terms of how the 
SGR is defined and also strategies that would directly improve the 
valuation of primary care. These changes would better target fee 
increases or declines to areas that are considered over-valued or 
undervalued under the current system or could target areas of spending 
that have been or are at least thought to be particularly egregious.
    By a variety of measures--including waits and difficulties in 
getting appointments with new primary care physicians, numbers of 
unfilled residencies, etc. it is easy to conclude that despite the 
intent of the RBRVS to recalibrate payments between primary care 
oriented services and procedure based services, primary care remains 
under-valued in the RBRVS. MedPAC recommended in their June 2008 report 
a fee schedule adjustment for primary care that would raise payments 
for selected primary care services. They have suggested using a 
modifier for billing codes for primary care services provided by 
practitioners who focus on primary care. The modifier would provide a 
mechanism to target increases in payment for selected services to 
practitioners who primarily provide primary care services and doing so 
on a budget-neutral basis so as to not increase total physician 
spending. It should be noted that this would change the orientation of 
the RBRVS from a fee schedule which was meant to reflect the 
differences in resource costs to one that directly promotes primary 
care but since the latter seemed to be an underlying rationale behind 
the adoption of the RBRVS in the first place, it seems a reasonable way 
to accomplish a goal that has clearly not been met to date. This could 
be considered for a mid year 2009 start.
    The ``medical home'' demonstration, which MedPAC also recommended, 
seems like a good way to encourage more coordinated care in a world 
where most beneficiaries still receive care in a fragmented fee for 
service setting and could become an important element in improving the 
care of individuals with chronic disease. The medical home program pays 
a monthly payment to qualified medical practices that agree to 
coordinate the patient's care across various setting and providers. If 
combined with changes in the fee schedule, the medical home concept 
could become an important part of a longer term ``fix''.
    Other short term patches have focused on the use of multiple SGR's 
rather than the single SGR which is currently in use. This seems 
somewhat of a ``back to the future'' proposal since when the RBRVS was 
first implemented, it was with three separate spending targets: for 
primary care, for surgery and for other services. Among the reasons 
that this strategy was abandoned was the concern that these 
differential updates were distorting the relative values in the RBRVS.
    There have been several versions of separate SGR's that have been 
recommended. Kaiser Permanente's Jay Crossen, executive director of the 
Permanente foundation, and others have suggested that groups that are 
more accountable as systems, such as multispecialty group practices, 
could be allowed to have their own spending targets in order to reward 
and incent their membership and make participation in multispecialty 
practices more attractive to the physician population. Another somewhat 
differentiated system of SGR's was included in the Children's Health 
and Medicare Protection Act (CHAMP) passed in the summer of 2007 which 
not only distinguished between various types of service categories but 
also allowed the spending target for primary care and preventive 
services to be substantially greater than the spending target increases 
for the other categories of service. Like the use of three separate 
targets, this strategy would also push the RBRVS away from its relative 
value origins. It is an improvement over the current system but does 
not respond to the fundamental problems embedded in the current system 
of physician reimbursement.
    A different way to improve the equity associated with an SGR type 
of mechanism and also to potentially reduce some of the downward 
pressure on fees caused by inappropriate increases in spending would be 
to have CMS or its contractors more aggressively review billing and 
medical records of physicians who are clear ``outliers'' in terms of 
their prescribing or use of medical procedures and ancillary services. 
It appears that the MIPPA legislation passed in July permits this type 
of behavior. Past periods when the Department of Justice or HHS 
Inspector General's office have made Medicare fraud priority activities 
have indicated a substantial potential to reduce spending but it can 
have a real ``chilling'' effect on providers who are not engaging in 
inappropriate behavior but who are uncertain of the rules. This appears 
to have been at least part of the reason that Medicare spending slowed 
so dramatically in 1998/99. However, if done with appropriate guidance 
from medical reviewers and following clear protocols, these types of 
reviews could reduce inappropriate spending and thus reduce the 
pressure for future fee reductions and I would strongly support such a 
move.
Next Steps
    The Congress is under enormous pressure to decide how it wants to 
reform physician payment. The short-term patch passed during the summer 
has physician fees dropping off the proverbial cliff on January 2010. 
There are only a limited number of changes that can occur between now 
and then--most of them in the nature of the short term fixes discussed 
above. There are, however, some more significant changes that could 
occur over the next four years, which I have outlined below.
    The most important next step is for there to be agreement on the 
basic direction of a future reimbursement system for physicians. As I 
have testified before, I believe that developing a more aggregative 
payment strategy for physicians is the key to resolving both the 
frustrations and the perverse incentives associated with the current 
fee schedule. While some have argued for simply removing the spending 
target, only doing this would open the program to unsustainable 
spending increases and would not promote the development of improved 
quality or accountability. The only way to continue with a 
disaggregated fee schedule without the perverse incentives in the 
current system is to develop an SGR or spending target at the 
individual practice level. Some type of risk adjustment would probably 
be necessary for small practices or for practices that had a small 
Medicare population.
    While a spending target at the practice level could effectively 
impact physician spending levels, the continued use of a disaggregated 
fee schedule is not as an effective way to encourage and reward 
physicians who provide high quality, efficiently produced care as 
moving to a more aggregative way of paying for physician services. The 
question is how to begin moving in that direction quickly while laying 
the groundwork for a new physician payment system to be developed no 
later than the end of the next Presidential term.
    In the near term, payments could be developed that would cover all 
services provided by a physician to a particular patient during a 
discrete period of time--presumably a one year period--for the care of 
a chronic disease. It may be desirable to establish bundled payments 
for multiple chronic diseases that have high co-morbidity rates such as 
congestive heart failure and diabetes or COPD although not necessarily 
on an immediate basis. These payments could include only the physician 
services but preferably would also include all ancillary services 
provided by the physician as part of the treatment of the chronic 
disease. In addition, bundled payments should be developed for high 
cost/high volume DRGS to include at the minimum the reimbursement for 
all physician services associated with the provision of care during the 
hospital stay. Consideration should also be given to including the cost 
of the hospital stay as well. CMS needs to be ready to implement these 
first set of changes no later than July 1, 2010. Group practices could 
be allowed to opt out and use their own negotiated SGR's.
    In part of moving to a more aggregated payment system, CMS needs to 
have developed a two-part RFP that would result in strategies for a 
more fulsome redesign of an aggregated physician payment system, ready 
for release in the first quarter of 2009 and awarded before the end of 
the fiscal year. A selection of one or two of these proposals should be 
selected for further development, with a final report due no later than 
June 30, 2011. Implementation of the new system could be set for Jan. 
1, 2013. I don't think a new system could be implemented faster than 
this and these dates assume agreement on the direction that the new 
payment system should take. This timing in generally consistent with 
the timetable that was used for the RBRVS where a partially completed 
RBRVS was passed into law in Nov. 1989 with an implementation date of 
Jan 1, 1992. The cost of developing the payment system and implementing 
it in a timely way will need to be recognized in future CMS budgets.
Conclusion
    Medicare has increasingly moved towards the use of bundled 
payments--such as DRG's or APC's as a reimbursement strategy, except in 
the way it pays for physician services. For physician services, 
Medicare introduced the use of the MEI as an updating mechanism in the 
1980's but has never moved away from a disaggregated fee schedule that 
pays for about 7000 discrete services. The RBRVS was implemented in 
1992 to provide a fee schedule that was more resourced-based and 
focused on relative values but was structurally similar to what had 
been in use previously. Because of concerns about spending growth with 
such a disaggregated fee schedule, an expenditure target was also 
introduced, now known as the SGR.
    The problem with the SGR is that while it can control (in 
principle) total spending, behavior occurs at the level of the 
individual physician or the physician's practice and here the 
incentives are at best unhelpful, if not actually perverse. The problem 
is that nothing the individual physician does affects the SGR; while at 
the same time physician fees are affected by what physicians do 
collectively--but this is not where decisions about behavior occur.
    Several short-term patches are possible. Primary care, which 
continues to appear under-valued, could be helped by a (budget neutral) 
fee schedule adjustment as suggested by MedPAC although this would 
change the function of the RBRVS away from a resource-based system. 
Information about how and how well a ``medical home'' functions could 
be important part of a longer term fix and should be pursued now in 
demo form. More aggressive reviews of physician claims by ``outliers'' 
could (and should) also be pursued as the MIPPA legislation has 
authorized. Multiple SGR's such as were included in the CHAMP 
legislation could also be used as a strategy to target updates in a 
somewhat more directed way but only represent at best a short-term move 
in a ``better direction''. Separate SGR's could also be negotiated for 
multi-specialty group practices. Ultimately, however, the Congress has 
to decide on the future direction of physician reimbursement and it 
better do so in a hurry.
    If the Congress wishes to remain with the current type of 
disaggregated fee schedule that allows for the billing of thousands of 
services, it should consider the concept of an SGR that operates at the 
individual physician/practice group level. This would not only be a 
fairer system but could affect behavior at the level where behavior 
occurs.
    The other option is to begin the process of paying physicians for 
more aggregated bundles of services. Payments could be developed by CMS 
to begin by July 1, 2010 to cover all of the services provided for the 
most important chronic diseases, singly or for multiple diseases, 
provided to a patient over the course of a year. Similarly, single 
payments for a subset of high cost/high volume DRG's covering all of 
the physician services to a patient during their hospital stay could 
also be developed. While these inter-rim steps are occurring, CMS needs 
to be developing a two-part RFP to have produced a redesigned 
aggregative physician payment system. The initial contract needs to be 
let early in 2009, with a final report due no later than June 30, 2011 
and an implementation start date of Jan. 1, 2013. This is a very 
aggressive schedule for the agency and it would need resources to 
support these efforts. The Congress has been digging an ever-increasing 
hole for most of this decade. It has got to start getting itself out 
and it had better do so fast.

                                 

    Chairman STARK. Thank you, very much. Dr. Nielsen.

STATEMENT OF NANCY H. NIELSEN, M.D., PH.D., PRESIDENT, AMERICAN 
                      MEDICAL ASSOCIATION

    Dr. NIELSEN. Good morning, Mr. Chairman. I am Nancy 
Nielsen, President of the American Medical Association and an 
internist from Buffalo. And I drive a previously owned Jeep.
    We thank you very much both you, Mr. Chairman and Ranking 
Member Camp, for your help and your leadership in trying to 
make sure that the next few months are spent constructively 
with something that will replace what is clearly a flawed 
physician payment system. You all know the flaws, and so I am 
not even going to point that out.
    We are facing a projected shortage of 85,000 physicians by 
2020 and, as has also been in the news recently and alluded to 
by virtually everyone who has spoken, the big problems are not 
only--are primarily in primary care and we are very, very 
concerned about that. But there are some other shortages with 
surgeons with oncologists and geriatricians. So we are facing 
this, and the cliff about which we are going to go over unless 
something productive is done of a 20 percent or more cut is not 
going to help at all.
    We are also on the brink of transformation of health care 
with information technology, and the problem there is the 
investment that is necessary, not only the interoperability. 
But you know all of that, so I won't go into that.
    It is really important that we try to figure out what we 
are going to do over the next 18 months, and we need a stable 
payment system that allows physicians to focus on what they 
want to do which is to take care of patients. We very much 
appreciate the help of Congress in buying us a little time so 
that instead of coming to Washington and fighting over stopping 
going off a precipice that nobody wants us to go over, we now 
have the opportunity to work together to try to achieve some 
real change.
    The first thing that we would ask is to ask the Congress to 
rebase the projections for Medicare. The forecast baselines 
change every time Congress passes a bill to prevent the 
immediately pending cuts. With every single necessary 
congressional intervention, by the way for which we are 
eternally grateful, the chasm gets deeper. And everybody knows 
that that is not something that can be allowed. So we urge this 
Subcommittee to consider establishing a new baseline that 
erases the SGR deficit, reset the baseline to reflect actual 
spending which acknowledges reality and would establish a 
rational basis for designing a new system in which we would 
have appropriate incentives for quality of care, utilization 
and efficiency.
    Even with rebasing the AMA understands that the need exists 
to ensure that physician services are both appropriate and 
properly valued. The RUC is reviewing potentially misvalued 
services and exploring opportunities to bundle services that 
are currently offered together most of the time. The RUC has 
also developed relative values for care coordination services 
outside of the face-to-face encounter, but CMS has not adopted 
those values.
    We support confidential feedback to physicians, both on 
quality measures and on resource utilization. We also support 
funding for comparative effectiveness research so that 
physicians can make better choices for their patients and 
patients can make better choices for their own health care. We 
are working with State and specialty organizations to analyze 
the specific reform proposals that are out in the marketplace 
such as the medical home, quality incentives, bundling episodes 
of care, and one I haven't heard here, accountable health 
organization.
    We look forward to sharing with the Committee more specific 
comments as our efforts proceed. It is important that we get 
widespread physician input and consensus because these reforms 
may have significant advantages and disadvantages. Some involve 
complex factors such as risk adjustment that might have 
unintended consequences for patients and physicians.
    As we move forward we look forward to working with the 
Subcommittee and with Congress and with many others who have a 
large stake in the success of a strong and sustainable 
Medicare. Challenges abound. It may be that because the issues 
involving certain communities are diverse that a multi-pronged, 
multi-faceted approach may be necessary and it may not be one 
size fits all. On the other hand, we look forward to working 
with you to fulfill the promise of Medicare for our seniors.
    Thank you very much.
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    Chairman STARK. Thank you, Dr. Nielsen.
    Mr. CRANE.

  STATEMENT OF DONALD M. CRANE, PRESIDENT AND CEO, CALIFORNIA 
                ASSOCIATION OF PHYSICIAN GROUPS

    Mr. CRANE. Thank you, Mr. Chair, Ranking Member Camp, and 
thank you, Members of the Committee. I am Don Crane. I am the 
President and CEO of CAPG, California Association of Physician 
Groups. We thank you for this opportunity to address this very 
important issue that is so near and dear to our hearts, which 
is physician payment reform.
    I represent a professional association located in 
California, confined to California, that is comprised of about 
150 multi-specialty medical groups that employ or contract with 
about 59,000 physicians, well over half the practicing 
physicians in the State of California, that provide services to 
approximately 12 million patients in coordinated care, or 
managed care as it is also known, plus another approximate 5 
million patients in fee-for-service models, original Medicare 
and PPO.
    So we straddle both of the payment systems that predominate 
in California, capitation and fee-for-service. And so we see 
these two systems, we live them day in and day out. We see 
their impact on behavior. We know how they affect performance, 
and we think we have a unique perspective on this issue of 
payment reform as a result.
    To go to the bottom line really of my comments to the 
Committee, we think the prepaid capitated coordinated care 
systems produce a much more efficient system and ultimately 
result in more affordable care which is what we are all going 
to need to achieve if we are going to succeed going forward. 
And the reasons for that are many, we have heard some of them 
discussed today, so I will be brief in summary in outlining a 
few of them. They really all relate to financial incentives and 
the way humans, which are really economic creatures, respond to 
financial incentives.
    Capitation incents frugality. That is its chief virtue. We 
see it manifest itself in many ways. Perhaps most importantly 
the emphasis on prevention. When a physician group and a 
physician is able to prevent the onset or the worsening of a 
disease they save money downstream and that is in their 
interest, and so there an enormous premium and emphasis paid on 
prevention, early intervention, early assessment. All good for 
the quality, all good for the patients, and all resulting in 
more affordable care.
    It also incents coordination and the development of 
systems, systems of all kinds, personnel systems, technology 
systems, and systems are more efficient than nonsystems.
    It also provides the capital that fee-for-service does not 
for the acquisition of infrastructure, and maybe the most 
important of which these days is IT. That is why you see in 
California, California leading the rest of the Nation, in the 
implementation and adoption of electronic medical records. 
Forty of my members, large members, will be fully implementing 
their electronic medical records within a short year and a half 
from now, bringing digitized medical records for the benefit of 
their patients to about 10 million Californians. This is way 
out in front of the rest of the Nation, and the ultimate reason 
is prepaid capitation.
    We also have in California a very robust pay for 
performance program that involves 35,000 physicians, all the 
health plans. It is a collaborative that is the darling really 
of pay for performance systems across the United States and it 
exists principally because of the virtues of prepaid 
capitation.
    On the other side of the ledger and by stark contrast there 
is the fee for service system. We see that as well because we 
sometimes receive capitation, we sometimes receive fee-for-
service payments. In turn, we pay capitation and we also pay 
fee-for-service and so we see both systems.
    In a word, as we have heard repeatedly today, a fee-for-
service payment methodology induces churning. We facetiously 
refer to it in California as fee for volume, because it is 
well-known to maximize one's income you need to produce more 
units of service. The more you do, the more you get paid. That 
is the incentive. And so it produces the overuse we see, the 
duplication of procedures and services. It creates a 
fragmented, non-network of physicians operating in a million 
different little silos in a disconnected way. Episodic care, 
not what we want.
    A couple of quick proof points that I think bear mentioning 
here. If you look at the cost of health care in California 
versus other States in the rest of the Nation, California is 
very much less expensive. Just a short couple years ago I was 
able to crow that we had the lowest commercial premiums in the 
United States. This is HMO and PPO included together. That has 
changed, but we are still down in the bottom four or five. 
Much, much less expensive, for example, than New York. And the 
reason is managed care, prepaid capitation. It produces a more 
affordable product. Looking even within our borders and in my 
own business, I as an employer pay for benefits for my 
employees. The commercial HMO product is anywhere between 15 
and 30 percent less expensive than a comparably comprehensive 
full PPO product. So it is less expensive, which is a 
critically important fact we will need to pay attention to 
going forward.
    So in conclusion, again more affordable and really higher 
quality care, and that is really the essence of the paper we 
have submitted before you, and that is triply so in connection 
with chronic disease management where the coordination of 
multiple providers operating out of a single medical record, 
single medical chart is critical here, and that is what we find 
in our system. It produces better access frankly. My members 
are leaders among urgent care, same day access. All these 
systems are developed and it really emanates from prepaid 
capitation.
    And I will finally conclude by saying it is really fairly 
popular. The HMO product in California is rather durable. It is 
here, we hope it is here to say. We think it ought to be 
migrated across the rest of the Nation.
    So I thank you for the opportunity to address this. I would 
be happy to answer any of your questions.
    [The statement of Mr. Crane follows:]
 Statement of Donald M. Crane, President and Chief Executive Officer, 
  California Association of Physician Groups, Los Angeles, California
    Good morning. My name is Don Crane, and I am the President and 
Chief Executive Officer of the California Association of Physician 
Groups (CAPG). On behalf of CAPG, its 150 member groups, the 59,000 
physicians who practice in those groups, and the 12 million patients, I 
would like to thank Chairman Stark and Ranking Member Camp for inviting 
us to participate in this important hearing on Reforming Medicare's 
Physician Payment System.
    The medical groups and physicians of CAPG are working on many of 
the same issues that you are grappling with here on Capitol Hill--how 
best to provide high quality health care, improve efficiency of the 
care model, ensure that the system can adjust to complex problems with 
innovative solutions, reduce health care costs, and improve the quality 
of life for our patients.
    On the issue of Reforming Medicare's Physician Payment System, CAPG 
offers a unique perspective. For more than 25 years, California 
physicians have been able to care for their senior patients through 
both a Medicare managed care model and through the traditional Medicare 
fee-for-service system. In fact, more than 50 percent of Californians 
receive their health care through some form of capitated payment model. 
Our history and experience with both forms of payment has given us a 
unique perspective of their various strengths and weakness.
    CAPG finds that a organized health care delivery, through a 
capitated payment model, provides greater incentives for high quality, 
efficient, and cost effective health care. Organized Delivery functions 
according to the following management principals--the same type of 
principals which make any business successful:

      Strategic Resource Allocation: Ensures that capital is 
invested in areas that reduce the cost of care (i.e. urgent care 
centers developed to reduce hospital cost)
      Staff Recruitment: Workforces are developed to ensure 
that patients receive the highest quality, most cost efficient form of 
care.
      Data Driven: By measuring activities and outcomes, we can 
identify ways to systematically improve our care.
      Optimizing the Whole: Focus on managing the totality of 
the health care dollar, not just maximize an individual part (i.e. one 
type of service).
      Leverage Technology: Develop information systems in a 
group or organized setting to coordinate care, capture relevant system 
data and provide for documented outcomes.
      Leverage Volume: Maximize purchasing power for everything 
from supplies to specialty services.

    An organized delivery model is built on a culture of conservatism. 
It encourages provides to work within a budget, identify those 
employees and services that improve quality of care, and invest in 
systems and infrastructure to reduce costs and improve efficiency. 
Conversely, a fee-for-service system incentivizes episodic, acute care. 
Under this system, providers seek to maximize their units of service, 
leading to even more prescriptions, treatments, and procedures. This 
creates a health care ``churn'' that emphasizes volume over efficiency, 
overuse over prevention. And it is clear, in this case, that more 
health care does not equal better quality health care.
    As Congress considers reforms to the physician payment system, we 
encourage you to consider reimbursement methodologies that will help 
sustain the Medicare program. These policies must use economic 
incentives to ensure that physicians and other health care providers 
adopt practices that ensure quality and efficiency--essentially, using 
payment methodologies to modify physician behavior.
    To demonstrate the benefits of this approach, we draw from a study 
we did last year, entitled ``From the Point of Care.'' This report 
highlighted the perspective of CAPG members--those physicians on the 
front lines in America's health care system--and their experience with 
capitated payment systems.
    In summary, CAPG physicians found that they are able to provide 
better health care to their patients who are in organized delivery 
plans than those in traditional Medicare. This report was the first of 
its kind, in that it discussed value not just in economic terms, but in 
human terms. CAPG's members were able to assess these payment systems 
on other key characteristics, including quality, efficiency, 
flexibility, and modernization. Against this backdrop, CAPG members 
found that capitated payment systems produce significant benefits for 
its enrollees, especially in the area of care coordination, pay for 
performance, adoption of health information technology, and evidence 
based medicine.
Chronic Care Coordination
    According to a recent study by the Commonwealth Fund, an estimated 
20 percent of Medicare beneficiaries have five or more chronic 
conditions. These beneficiaries are treated by an average of 14 
different physicians, leading to medical costs that equate to two-
thirds of the Federal program's spending. It is the experience of CAPG 
physicians that the traditional fee-for-service model is ill equipped 
to manage seniors with multiple chronic conditions.
    For many chronic illnesses such as diabetes, arthritis, congestive 
heart failure, hypertension and others, there are a range of proven 
interventions and therapies. These therapies can minimize, delay, or 
entirely prevent a range of secondary complications, resulting in 
improved comfort, productivity and quality of life for the beneficiary 
while reducing the cost of avoidable crisis intervention. 
Unfortunately, the current reimbursement structure cannot respond to 
the treatment needs of chronically ill patients. Multiple studies have 
pointed out that many patients in traditional Medicare receive chronic 
care oversight in a sporadic and incomplete fashion.
    Organized delivery systems have embraced a chronic care model that 
employs a fundamental redesign of the care delivery system. This model 
requires computerized, centralized registries that allow providers to 
know which patients have certain diagnoses, when their services are 
due, their lab results and personal measures, and when those results 
indicate the need for intervention. These care management services are 
only possible in the context of an organized delivery system and are 
virtually non-existent in traditional Medicare.
Pay for Performance (P4P)
    California medical groups have led the nation in the development of 
clinical performance measurement programs and economic incentives which 
reward high-performing providers. Under the auspices of the Integrated 
Healthcare Association, these efforts have set the foundation for 
California's annual Pay for Performance (``P4P'') bonus payment system. 
These bonuses have created economic incentives which have resulted in 
health care improvement strategies being implemented across the entire 
state.
    Our P4P program has been closely studied by the Centers for 
Medicare and Medicaid Services to determine which components can be 
exported to geographic areas where traditional Medicare payment 
methodologies predominate. Two characteristics seem essential to a 
successful P4P program: 1) medical groups need to be effectively 
integrated with their local provider community and 2) population-wide 
care improvement is the criterion for a financial reward.
    The benefits of California's P4P program are demonstrable in under 
capitated payment systems, resulting in a new culture of measurement, 
public reporting, annually improving quality, an objective assessment 
of efficiency, and better personal experiences and clinical outcomes 
for patients. There is no comparable P4P program in traditional 
Medicare, and given the importance of organized systems of care and 
populations based measures, P4P in traditional Medicare is likely to be 
unsuccessful in stimulating meaningful changes in practice patterns.
The Use of Health Information Technologies to Improve and Manage Care
    California's organized systems of care are widening the application 
of electronic health registries, which help with the management of 
chronic illnesses, particularly those requiring cyclical oversight. 
They are also used to assure routine screening and preventive services 
such as mammography, cervical cancer screening, colorectal cancer and 
screening for other treatable illnesses.
    Furthermore, California's medical groups are deploying electronic 
health records (EHR) well ahead of the national trend. The use of EHRs 
in seniors has resulted in:

      Physicians managing multiple simultaneous conditions with 
complete access to clinical information necessary for the best medical 
decision;
      Electronic prescribing and subsequent tracking to assure 
accuracy, continuity and safety,
      Coordination of care among multiple providers with 
instantaneous sharing of information to support clinical decision 
making to avoid redundancy, missed opportunities, and mistakes; and 
Providing patients with portable access to critical medical records 
when away from home.

    Capitated payment systems greatly contribute to the development and 
adoption of Health IT. The use of EHRs, electronic registries, 
electronic prescribing and other Health IT is not nearly as prevalent 
in traditional Medicare.
Evidence Based Medicine
    Providing evidenced based medicine is another area where capitated 
payment systems have been able to make significant progress. California 
physician groups have worked to avoid inappropriate utilization by 
focusing on scientifically justifiable clinical decisions.
    Physicians who are part of physician groups routinely submit 
clinical rationale and justification for procedures, especially those 
with ``gray areas,'' clinical controversy, or complex choices. This 
exercise does not replace a physician's clinical judgment nor is it an 
excuse to thwart necessary care, but rather a quest to deliver the 
right care, at the right time, at the right place. Objective, 
scientific, and ethical oversight is the cornerstone of the efficient 
use of finite resources in a costly environment.
    I think we can all agree that our health care system should promote 
prevention, chronic care management, and avoidance of unnecessary and 
unjustifiable health care. Organized delivery plans have made 
considerable progress on these, and other fronts.
Summary and Closing
    For more than two decades, CAPG's members, their physicians and 
their patients have directly experienced the clinical and 
administrative successes of capitated payment systems. As Congress 
considers ways to reform the Medicare provider payment system, we 
encourage you to consider expanding this approach, and providing 
incentives for higher quality, more efficient health care delivery. We 
look forward to working with you on this effort.

                                 

    Chairman STARK. Thank you very much. Mr. Crane, 
approximately what percentage of your members are in staff 
model programs as opposed to other types of group practice?
    Mr. CRANE. It is approximately 50/50, maybe 45/55.
    Chairman STARK. What other staff model groups besides 
Kaiser?
    Mr. CRANE. There's the two Permanentes that belong to CAPG 
and they are huge. Then there is probably 40 percent of my 
members which are medical groups with employment relationship 
with their physicians. And then I am guessing approximately 60 
percent of my members are IPAs, independent medical.
    Chairman STARK. Okay. If we went to capitation as you 
suggest, why do we need insurers in the middle anymore, why 
don't we just capitate directly to the groups?
    Mr. CRANE. Good question. Of course there are those who 
advocate that. In California our system works well in a 
delegated model with the insurance companies handling the----
    Chairman STARK. No, it doesn't. The insurance companies in 
California rip us off and charge more than they do in, say, 
Minneapolis for less good care. So that doesn't wash. 
California is the most expensive, but we don't produce anything 
to brag about in terms of results.
    Mr. CRANE. Agreed. They are overpaid and I would agree with 
you there, but they are performing some important functions 
that need to be performed. There is the marketing, advertising, 
sale, brokerage, there is the delivery of the insurance that 
they do. I won't defend them. I am saying that that model is 
working moderately well in California frankly.
    Chairman STARK. Okay. You do support and you mentioned that 
you have 40 member groups who are moving toward information 
technology. Will each of those 40 groups be able to talk to 
each other and swap sanitized records and combine them all for 
purposes of research or will they be independent reports 
records that will not be shared?
    Mr. CRANE. Unfortunately the latter. Indeed they are silos 
as well, and until we have a Calrio utility across California 
we won't achieve that important goal.
    Chairman STARK. Would you support some kind of payment 
incentive to get physicians and other providers into an 
information technology system that would be interoperable and 
in a sanitized way aggregate all of the medical records so that 
they could be used by people with a need to know for research?
    Mr. CRANE. Absolutely, yes.
    Chairman STARK. Okay, thank you.
    Dr. Nielsen, there is, as I alluded to talking with Mr. 
Crane, a huge regional variation and I am stealing some of Mr. 
Ramstad's thunder here, but the evidence seems to suggest that 
there is a correlation between the number of specialists in an 
area and the amount of care provided by those specialists, but 
the quality and outcome don't indicate that people living in 
those areas receive any better care. What do we do with the 
regional variations? Mr. Ramstad would like me to raise 
Minneapolis to the Los Angeles-San Francisco levels and I am 
suggesting to him no, that I want Minneapolis to lead the 
charge and we will lower California to the Minneapolis rates. 
When the spread gets such that you can get on Northwest 
Airlines and go to Minneapolis and get the same treatment for 
the same money, I think that is where we cross the divide. How 
do we deal with this?
    Dr. NIELSEN. You are absolutely right. We have been very 
concerned about the information we have received and those 
regional variations need to be studied, and if there are 
aberrations they need to be corrected.
    Part of our approach to that has been to develop 
performance measures so that the consortium with the help of 
virtually all the specialties have looked at what is the best 
thing to provide to a patient, not more, not less, the right 
service at the right time. And we also need comparative 
effectiveness trials to help us decide what is the best 
approach. But you are right and physicians can no longer claim 
that this is because of variation in patient mix. It really is 
not.
    Chairman STARK. I thank you. I wholeheartedly agree, and I 
hope I will come back if I get a second round and talk to you 
about medical homes and how we might use that, as I think Dr. 
Wilensky has suggested, to encourage more activity in the 
primary care area. I will interject, we have talked in this 
Committee, we have come close on the comparative effectiveness 
scale. Gail can remember when Bill Gradison and I talked about 
outcomes research before we really thought we had the ability 
for broad information technology aggregation of medical 
records. I don't see how until we have a completely 
interoperable system bowing to the privacy needs to keep it out 
of the hands of unscrupulous drug companies and things like 
that, but--and then once we have comparative effectiveness we 
can at least deal with your members, we could deal--you know, 
should you use Lipitor or Zocor? How do you know? I think those 
are things we can prove with some effectiveness and then move 
to fit that into a reimbursement program. I don't think until 
we get to all of that that all of your 40 members can talk to 
each other, Mr. Crane, and we can decide how a primary care 
physician can reasonably, at a reasonable cost manage 500 or a 
1,000 patients in a practice as a medical home. I don't know.
    Gail, your theme is with everyone else's greater reliance 
on primary care. And as I recall, that was the intent.
    Ms. WILENSKY. Yes.
    Chairman STARK. Originally, when--I think it was another 
gentleman from the Twin Cities, a distinguished former Senator 
and I who worked, and we thought we had the system locked up. 
Gail even signed up to it. Where did we go wrong?
    Ms. WILENSKY. There were several problems that arose. One 
had to do with the use of separate volume performance standards 
which at the start changed some of the relative value weights. 
Part of it has been in the mix of services that people use. And 
I think the system has not been sufficiently robust to be 
able--because of the attempt to keep things budget neutral--to 
reward the primary care physicians' activities.
    A lot of it relates back to the use of a disaggregated fee 
schedule where some of the activities that a primary care 
physician wants to provide, such as education to his patients, 
as well as a lab test or a visit, is not able to be handled 
well when you have billing at a very discrete level. And it is 
why, either through the use of a medical home or some other way 
of combining payments for taking care of a diabetic or someone 
with congestive heart failure, it would allow that physician to 
receive a fairer payment and be able to make decisions within 
that payment as to how best to treat the patient.
    Every indication we have in terms of residencies filled, in 
terms of difficulties, for people who don't have ongoing 
primary care physicians to get an appointment with a new 
primary care physician, includes a shortage of primary care 
physicians. And we need to at least make it possible for people 
who finish school to be able to practice primary care.
    Congressman Becerra and I have had discussions for I think 
at least a decade about using selected loan forgiveness as a 
way to encourage people who want to practice primary care. I 
have a daughter-in-law who finished a OB residency last year 
and is discovering the difficulties of trying to pay back 4 
years of medical school and a year of an MPH while practicing 
primary care. In addition there are a lot of concerns about 
malpractice. So this would help, but it won't solve the whole 
problem.
    Chairman STARK. Just for a moment I want to--who brought up 
the accountable care organization. I am going to defer that if 
Mr. Pomeroy is here, or when he comes out, we will talk about 
that later. But remind me, if you will.
    And Bruce, you suggested short-term steps to change the E&M 
codes. If we do it a budget neutral way, then we have to take 
it out of the hides of the proceduralists, right? How would 
this effect physician spending? Do you want to elaborate?
    Mr. VLADECK. Well, again I would only suggest that, if 
everyone is right and what appears to be true sort of cross-
sectionally actually works in real life over time, then raising 
the relative price for primary care services and increasing the 
volume of primary care services provided to Medicare 
beneficiaries should reduce the utilization of at least primary 
care referred specialty services and create some offsetting 
savings which would permit, under the current or modified SGR, 
some greater increase in the conversion factor than you would 
otherwise be able to afford.
    Chairman STARK. Thank you.
    Mr. Camp, would you like to inquire?
    Mr. CAMP. Thank you, Mr. Chairman.
    Mr. Crane, right now Medicare has this somewhat fragmented 
fee for service system and yet we have this wave of baby 
boomers that are retiring and will put a great deal of demand 
on the system. Do you believe that that system is capable of 
absorbing this influx?
    Mr. CRANE. I do not.
    Mr. CAMP. And what changes do we need, for example, like a 
coordinated care system to protect Medicare so that we can 
ensure that it is there for our seniors?
    Mr. CRANE. Some of those that had been mentioned today, 
bundled payments and a greater emphasis on primary care of 
course would be included in the mix, but the chief argument I 
would make, I recognize it is controversial, was that we have a 
platform now in Medicare Advantage that can be built upon and 
improved that serves very, very well the seniors certainly in 
California and can be expanded and should be expanded, 
providing the really excellent medical home to them now. It is 
a model that is working well. So expand it is what I would say.
    Mr. CAMP. How would a capitated system help control costs 
and physician spending in Medicare compared to the current fee-
for-service?
    Mr. CRANE. Well, capitated groups have to operate within 
the budget they are allotted, via the capitation. And so by 
reasonably setting that capitation you are going to be able to 
incent the frugality that I mentioned earlier, far more so than 
you will in an unbridled fee-for-service system. So where cost 
is a big consideration you need to the kind of payment 
methodology that moderates cost and yet preserves quality. We 
have that. That is what I would recommend.
    Mr. CAMP. Thank you.
    Dr. Wilensky, the prospective payment system for inpatient 
hospital care began in 1983, and after moving from a cost-based 
system to a bundled, capitated payment system, the length of 
hospital stays has declined 32 percent from 1990 to 2001. And 
do you believe a bundled payment in the physician arena could 
result in similar efficiency improvements, obviously saving 
Medicare significant money while still ensuring quality care?
    Ms. WILENSKY. It would move in that direction. I don't have 
a prediction as to how much. I believe there is a reason the 
Congress has directed the agency to use bundled payments for 
home care, the episode payment and for skilled nursing 
facilities for inpatient and for outpatient hospital care, and 
it needs further consideration in the area of physician 
reimbursement.
    Mr. CAMP. And Dr. Nielsen, I mentioned the millions of baby 
boomers that are about to enroll in Medicare. If significant 
changes are not made to the SGR, will physicians have to 
consider whether they will take new patients?
    Dr. NIELSEN. There is no question. And I must say that I 
disagree with your chairman about this not being a very real 
consideration. You heard that. It was not empty rhetoric in 
early July. It was very serious. People are really having 
trouble, particularly those in primary care but some in other 
specialties as well. So I think that we do have to fix this.
    If I may, can I just add one thing because, I must say, I 
never heard, when I heard Mr. Crane make a comment, I have 
never ever heard anybody equate Medicare Advantage with the 
medical home. And I have to tell you that one stretches my very 
credibility. I hope that I misunderstood what he said. But 
there is no relationship between a Medicare Advantage plan, 
some of which do very good things, and the medical home. The 
medical home is very different and is a home with a physician 
or other health care providers----
    Mr. CAMP. I understand that.
    Mr. Crane, do you want to comment? I think you were 
referring to the wellness and coordination of care.
    Mr. CRANE. That I am.
    Mr. CAMP. That is what I understood you to say.
    Mr. CRANE. Certainly, I am not referring to health plans. 
What I am referring to is what he have in our multi specialty 
medical groups in California that are presently medical homes 
both in the commercial model and, yes, in the senior model as 
well where you have essentially a primary care system that 
involves coordination and a concierge for patients to help 
navigate through the labyrinth of specialty care hospitals, 
prehospitalization, post hospitalization. We have primary care 
directed groups that provide that medical home across the 
spectrum of products, and that is the point I was trying to 
make.
    Mr. CAMP. Getting back to my point, Dr. Nielsen, you 
mentioned that the concern about physicians taking on new 
Medicare patients. If the Medicare eligibility age were dropped 
to 55 years old, would the current problem with Medicare 
physician payments be made worse or better?
    Dr. NIELSEN. The problem now is reimbursement in many 
specialties, keeping up with practice costs. And it is very 
well known that private plans tie their fee schedules, one way 
or another, to Medicare. So, frankly, the reality is if what is 
happening now in Medicare and Medicare anticipated to go broke 
in a few years, if you expand the eligibility, it will worsen 
the problem earlier. So I think it is important that we get to 
a better solution.
    Mr. CAMP. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman STARK. Thank you.
    Mr. Thompson would you like to inquire.
    Mr. THOMPSON. Thank you, Mr. Chairman thanks to all the 
witnesses for being here today. Dr. Nielsen I agree with you on 
the issue of providers and what kind of predicament many of 
them would find themselves in if we allowed these cuts to 
continue. I represent a rural district, a lot of solo 
practitioners, a lot of small group practices. All of these 
folks are feeling the strain right now without the cuts. So if 
there were, I think it would be devastating.
    In your written testimony, you talked about accurate risk 
adjustments and how we don't want to discourage docs from 
taking the tough cases, and applying that to the area that I 
represent, as I just described. How do we accurately measure 
that risk so that we don't provide more disincentive for people 
to practice in rural areas?
    Dr. NIELSEN. Let me give you an example that I am very 
familiar with. I am in Buffalo. In Buffalo, we have had 
experience with capitated pre-paid reimbursement, and the 
private plans have done away from that model. But there was a 
single per-member per-month assignment of a fee to a physician. 
Just as there are problems----
    Mr. THOMPSON. A fee from whom, to the physician?
    Dr. NIELSEN. From the health plan would pay the physician a 
fee for a person, per member, per month. The problem was there 
was no distinction between a healthy 19-year old and a 92-year 
old, and there is a very big difference. And what one has to be 
careful about and the reason we need to very quickly test some 
of these models that have been mentioned is we have to see what 
the unintended consequences were in that, in the circumstance 
that I gave you, the obvious thing they did wrong was not to 
just risk adjust. There should have been a higher payment for 
the 92-year old than the19-year old. That is my point.
    Mr. THOMPSON. Anyone else on that issue?
    Dr. Vladeck, you had mentioned that we should look at some 
foreign models and learn from them. What sort of things are 
they doing in other countries that we should be doing? Or what 
are the lessons learned looking at those foreign models.
    Mr. VLADECK. I was suggesting I think that in much of the 
rest of the industrialized world, they have managed either 
through their payment systems or other mechanisms to have a 
better balance between primary care and specialty care.
    Mr. THOMPSON. Is there someone that is doing something that 
we are not? Or are we doing something that we shouldn't be 
doing?
    Mr. VLADECK. Well, many of them are doing it, it is outside 
Medicare and indeed only loosely within the jurisdiction of 
this Committee. But many other relatively affluent nations are 
doing what we used to do in this country, which is taking some 
greater responsibility for medical manpower policy or personnel 
policy, both by more generous financing of medical education so 
that young physicians don't have the kind of debt loads they 
have in the United States, which may limit their options, but 
also by intervening more aggressively in issues of availability 
of specialty slots for training and things of that sort. And we 
to a much more limited extent used to do a lot more of that in 
this country than we do now, and again, there was some 
reference made earlier by Dr. Wilensky to even the question of 
using targeted loan forgiveness, for example, for young 
physicians so that they can afford to practice in underserved 
areas or to provide primary care. We do a lot less of that as a 
matter of public policy right now than we did a decade ago, and 
I think as part of the strategy to improve the primary care 
specialty balance, we ought to look at reviving some of those 
things.
    Mr. THOMPSON. Is preventive health care practiced more 
diligently in other places than here? Someone had mentioned 
that. It seems to me we could make up a lot if we had better 
preventive care practice. Any comments on that?
    Mr. VLADECK. Let me just make one quick comment on that. It 
is true that primary care practitioners, particularly when you 
have explicit guidelines and explicit data and reporting 
systems to evaluate their compliance with the guidelines, 
whether you are paying more or not, will provide more 
preventive services or more clinically accepted preventive 
services than other physicians. But in the context of 
incentives, I really want to just make an observation relative 
to one of the earlier comments. If you have an enrolled 
population that turns over at the rate of 20 or 25 percent a 
year, as is the norm in much of the private commercial 
insurance market, the economic incentive to provide preventive 
services is extremely attenuated. And we do better by expecting 
physicians to meet professional performance standards with or 
without financial incentives than we do by incenting plans to 
invest in patients who will be long gone when the benefits of 
prevention begin to be felt.
    Chairman STARK. Thank you.
    Mr. Johnson, would you like to inquire?
    Mr. JOHNSON. Thank you.
    Thank you, Mr. Chairman.
    I welcome you all.
    Gail, it is nice to see you again. We all know the current 
system of how we pay our doctors is unsustainable and docs in 
my district talk to me all the time about how frustrating it is 
to try to run a small business, which is what they do, when 
year after year their payment rates for Medicare are up in the 
air until the last minute. I am struck by the fact that so many 
ideas center on just trying to take the current process apart 
and make it better.
    However, I think one of the greatest problems is the 
current process. We can't fix the problem by just tweaking it. 
We need a new process. I think we have got to think out of the 
box. And I don't know what it actually costs for an office 
visit or an x-ray, and it is different all over the country. We 
don't know because we have formulas, not market forces, setting 
the price.
    I would like to ask Ms. Wilensky and Mr. Crane to discuss 
ways that you think we can get bureaucrats and formulas out of 
the process and introduce real market forces in determining 
what physician services are worth. I mean, thinking out of the 
box, maybe rich guys like our chairman could opt out of 
Medicare for example, for life. And I know another guy in my 
district that would do that in a New York minute, and that is 
Ross Perot. He keeps asking me, why in the hell am I on 
Medicare?
    Well, I think we need to take lessons learned, maybe from a 
part D benefit and apply it to part B, but would you all 
discuss that?
    Gail, you want to start?
    Ms. WILENSKY. You raise some very large, very controversial 
issues. Let me try to respond to a couple of them.
    Going forward, the Congress at some period will need to 
look at the financial viability of the Medicare Program on a 
long-term basis. That did not happen when part D was passed 
into law, and we have added to the substantial unfunded 
liability of the program.
    As part of a long-term reconfiguration of Medicare, we may 
look at whether income relating the Part D program; the way we 
do part B, which the Congress passed in 2003, is an appropriate 
strategy. The age of retirement for a country that lives as 
long as people live here is another potential change. Of 
course, it depends on the kind of insurance that is available 
for the under-Medicare population as to how realistic that is. 
These are big issues. And I encourage the Congress to look at 
them.
    I am very worried about what is going to happen to 
physician participation and basic fairness under the program as 
it exists right now. You are in a bind. Physicians charge 
Medicare using 7,000 fees. They bill for very discrete 
services. The reimbursement for the individual services is not 
reasonable. And the reason I can say that without actually 
knowing very much specifically is fees have been essentially 
flat since 2002, maybe 1 percent; in 2002, it went down 4 
percent. Inflation has clearly increased. So physicians that 
are playing it straight, not trying to make up in volume and 
mix what they lose in fees, can't be having their expenses 
covered. And that is why I think the Congress has to make a 
fundamental choice about what direction it wants to go.
    Now some physicians are doing very well under Medicare, not 
because of the fees, but because they are very aggressive in 
the volume and mix of services and the kinds of services they 
provide. But physicians that aren't doing that really are not 
being treated fairly. If you want to stay with a very 
disaggregated fee schedule, 7,000 codes, I really think the 
notion of thinking about having these spending limits at the 
level of the practice makes some sense. Then you can at least 
reward the conservatively practicing physicians, paying them 
more, and not the ones that don't.
    But if you don't want to go in that direction I think you 
need to think about having payments for bigger sets of 
services. And you can decide how to set those payments, whether 
you want to use historical fees, whether or not you want to 
have it be more market-based, whether you want to have it 
administratively based. Typically when the bundles exist, when 
they were created, they were based on historically what existed 
in the area. But that is your choice.
    Mr. JOHNSON. Mr. Crane, do you have a comment?
    Mr. CRANE. Very briefly. I agree with what Ms. Wilensky 
said. You know capitation is the ultimate aggregator. It is a 
good starting point. In California, we have competitive 
bidding, and the groups are paid different amounts by the 
health plans who are--so there are market forces at work. It 
raises the question of whether there is overfunding or 
overfunding from the top, a separate subject we can talk about, 
but there is a market at work there, and I think it is a good 
platform for us to build on frankly would my answer.
    Mr. JOHNSON. Thank you, sir.
    Thank you, Mr. Chairman.
    Chairman STARK. Let's see who we have got here on the list.
    Mr. Pomeroy, would you like to inquire, sir?
    Mr. POMEROY. Thank you, Mr. Chairman.
    I want to commend this panel. It has been incredibly 
interesting. It is my pleasure professionally to have worked 
with both Dr. Vladeck and Dr. Wilensky for many years.
    And I must say I find some of the testimony surprising. I 
hear Dr. Vladeck saying, well, maybe we ought to return to fee-
for-service, and I hear the physicians, clinics, the 
professional groups saying they like capitated. Now, to me that 
is like Bizarro World. I would have thought that is 180 degrees 
off from what I expected from each of you.
    Mr. Crane, did I hear you say that California has achieved 
cost, low-cost medicine relative to other States?
    Mr. CRANE. Well, we are struggling with an affordability 
problem. So we haven't declared success. But on a relative 
basis, California's health care costs are lower than other 
States. So, relatively, the answer is, yes, we have got a 
problem in California, as well. And we are wrestling with it at 
the same time. I mean, health care costs are rising 
precipitously. It is a problem everywhere.
    Mr. POMEROY. I might want you to provide, subsequent to 
this hearing, information substantiating what you have just 
told us. Not that I am accusing anything, but it is contrary to 
other data that I have seen. This is a CMS chart. You can't see 
it, but you have seen perhaps this chart before where they 
basically plot on a matrix cost and quality. And I would point 
out, North Dakota is right here at the top of the graph in 
terms of costs and quality. And unfortunately, California is 
down here toward the bottom where the costs are more, but the 
quality is less in terms of outcome.
    I also believe that another chart here, Medicare spending 
per capita in the United States by hospital referral region 
shows California in a high category area, and as plotted in 
terms of cost, per capita cost, of final 2 years of life, 
California again is a nation leader on a per capita basis with 
a cost of $57,914 compared to just, for example, North Dakota, 
which happens to be below lowest, $32,523.
    So all of the information I have led me to exactly the 
opposite conclusion that you gave. One of the reasons that I 
had had this impression was because of a practice pattern in 
multi-specialty clinics that is very specialty intensive. This 
is discussed in some of the Dartmouth type reviews, and a chart 
that I have here shows that, for example, spending, physician 
payments per decedent, as tracked by those who have passed 
within a care system: UCLA Medical Center, $6,671; for 
comparison, Mayo Clinic, well known Minnesota-based highest 
quality, $2,935. So these are cost differences that are about 
the opposite of what the impression you have.
    Mr. CRANE. Sure. Well, I was referring to commercial HMO 
premiums. You are looking at, if I am hearing correctly in the 
main, aggregated numbers, California in the whole against other 
States products. It is the commercial HMO premium that is 
lower, showing its virtues of being more affordable.
    Mr. POMEROY. The commercial HMO's also underwrite. They 
medically underwrite who they write. Is that correct?
    Mr. CRANE. Well, yes and no. They are not supposed to.
    Mr. POMEROY. I used to be a State insurance commissioner. 
And I don't know California's law. I expect the individual 
market does, and maybe the large group market doesn't. I don't 
know about the small group market.
    Mr. CRANE. I think that is the case. I, frankly, don't have 
an answer to that question.
    Mr. POMEROY. Because this is looking at Medicare payments 
focused on, for example, that chart showing cost and quality is 
more germane to the topic under consideration by this panel 
because that is looking at the population we are considering in 
my view.
    Mr. CRANE. Our hospital costs are high. There is no 
question about that. We have the variability problems that 
Wenberg has discussed. I was focusing on the commercial HMO 
premium.
    Mr. POMEROY. You said something in your testimony about 
incentives under fee-for-service versus capitated rates; I 
completely agree with you. I don't mean to be putting you 
through a vigorous cross exam.
    I would like, Mr. Chairman, if I might throw out if I have 
a question for Dr. Vladeck and Dr. Wilensky as former CMS 
administrators albeit named HCFA at the time. Are there reforms 
that we can do that basically give more of a fair shake to 
these places for achieving better value under the system?
    Let me say, I define value by health outcomes as well as 
dollars expended.
    Ms. WILENSKY. It will mean delegating a lot more authority. 
There is a good start in MIPPA allowing for a review of outlier 
physician records so that there is an ability to see whether or 
not there are reasons supporting the outlier behavior, or 
whether or not this is just a problem. If the Congress wants to 
allow, for purposes of setting reimbursement, the cost of 
services to be considered, that is something that cannot be 
even considered as an element, in decision-making. This issue 
with regard to the direction of payment that you want to go, 
whether to keep it disaggregated, making it more focused in 
terms of the spending limit, is a matter of fairness to 
physicians in inducing the kind of behavior that we should 
want. It would require additional support to the agency. If 
payments are going to move in a different direction, either 
toward bundling services or toward maintaining disaggregated 
payment, but doing so on a much more individualized basis, CMS 
will need both additional authority and support, financial 
support, in order to take on these roles. I don't see how the 
program can stay where it is now. The problems of continuing to 
have physicians participate by having fees that are held so low 
is just something that is not going to go away. I am 
sympathetic with the rebasing notion. In the end of the day, if 
you have a fix, I suspect you will have to do something like 
that because I can't begin to image where you would get the 
money to pull yourselves out of the hole that has been dug 
since 2002.
    Chairman STARK. Mr. Ramstad would you like to inquire?
    Mr. RAMSTAD. I would, Mr. Chairman, and I would first of 
all like to thank the distinguished panel for your testimony 
here today.
    And I want to say, Mr. Chairman, not only do I hear thunder 
whenever the subject of the SGR formula is brought up, but I 
also hear voices. I hear specifically the voices of our former 
great Senators Paul Wellstone and Dave Duremberger who years 
ago consistently said and told the Senate how Minnesota 
providers are being punished, how Minnesota seniors are being 
cheated by this SGR formula.
    Unfortunately, that situation has only been exacerbated 
over the recent years. Minnesota, specifically Hennepin County, 
where 33 of the 34 cities I represent lie, Hennepin County 
providers deliver some of the highest quality health care in 
the Nation at some of the lowest costs, and the reimbursement 
levels are unconscionably low, vis-a-vis States like 
California, Mr. Chairman, Florida, New York, and so forth.
    One of the distinguished Senators I just mentioned, I won't 
say which one, used to use the now overused metaphor in 
describing the SGR formula, and that is, there is no way to put 
lipstick on that pig. Again, I am not going to tell you which 
one, but you can guess.
    Well, my point, Mr. Chairman and Members, is that, in my 
judgment, after serving here 18 years, about ready to leave the 
Congress, unfortunately, the situation has only gotten worse, 
and we need to scrap the SGR formula. I mean, any formula that 
is designed to reward utilization and not quality is going to 
provide this result. Why should anybody be surprised when we 
effectively reward and very directly reward utilization and not 
quality?
    So my question for the distinguished witnesses would be 
along the lines of what we heard from MedPAC representatives 
when they testified before this subcommittee and they--MedPAC 
suggests reforming physician payments by creating financial 
incentives for quality. And I would be interested to hear first 
of all, as to that general thesis of introducing quality as the 
primary determinant of reimbursements, what your opinion is and 
how we would measure quality. Start to left to right or 
however.
    Mr. VLADECK. Well, I think it is very important that the 
payment system be consistent with efforts to increase quality, 
but I think our experience on the hospital side at least over 
the last decade or so suggests that, with the right kind of 
information collection, with the right kind of openness and 
transparency about data, with the right kind of professional 
leadership, you can achieve very substantial increases in 
quality without messing with the payment system. And I think, 
given the range of technical and operational problems with most 
so-called pay-for-performance systems, they may actually make 
it take us longer to get to where we want on the quality side 
than accelerate the process.
    Mr. RAMSTAD. Let me just interrupt. Doesn't the corollary 
question apply? That is, you said you can't--well, can we make 
the formula fair and reflect efficient care without introducing 
quality?
    Mr. VLADECK. I think there is a real problem when you 
provide incentives to provide lower-cost care or to 
underprovide, as through capitation, to make sure that you 
protect the quality of services that are being provided. And I 
think that is why, under any payment mechanism, we need 
substantially greater information and substantially greater 
transparency about the quality of services that are actually 
being provided. I would only suggest that, to some extent, 
given all the other equity concerns you are trying to address, 
like regional disparities in payment systems that we can get 
more mileage in the direction of quality without trying to get 
too fancy in payment incentives. I would say, however, that you 
absolutely have to have a floor. My idea of good pay-for-
performance policy is what the Congress has recently adopted 
relative to so-called ``never events''.
    Mr. RAMSTAD. My time is up.
    I would like to hear from the other witnesses just briefly.
    Ms. WILENSKY. Your problem in Minnesota is more with the 
relative value scale and not with the SGR. The reason is 
because Minnesota is very conservative in its practice style. 
Physicians don't do as much; that is, the spending per person 
is low. Medicare and physician payment focuses only on the 
reimbursement per unit, and that is what the problem is. I 
believe with all of my heart, you are focusing on the wrong 
part of the problem. If we had more use of capitation, that 
would go another way. Capitation forces you to look at the 
spending per person. But it is why, if you stay with this very 
disaggregated fee schedule, you have to think about what is 
going be done with to try and control spending. That gets you 
into the SGR. That is what makes it so unfair. You have to 
decide which way to go. But it is not the SGR. It is the RBRVS 
that produces the unfair results for Minnesota and Iowa and 
North Dakota and South Dakota.
    Mr. RAMSTAD. I am going to wrap this up because I don't 
want to intrude on others' time, but notwithstanding what I 
have said today or what the situation is in Minnesota with 
respect to the formula, Minnesota was recently ranked, and I am 
sure you saw this, as the healthiest State in the Nation and 
also as the State having the lowest rate of uninsured people in 
the Nation. So notwithstanding these tremendous obstacles, our 
providers need to be saluted for doing a tough job well, given 
these limitations especially, it is nothing short of 
incredible.
    I yield back Mr. Chairman.
    Chairman STARK. I thank the gentleman.
    And I just want to say it is the Chair's intention to 
recess at 11:45. Members who want a front seat at the memorial 
service may want to leave early. But I will keep going until we 
recess at 11:45 and ask if Mr. Kind would like to inquire.
    Mr. KIND. Thank you, Mr. Chairman I appreciate it and thank 
you for holding this hearing and thank the witnesses for your 
feedback here today. It is something we need to delve into 
because the numbers are huge as far as what is coming up with 
SGR, and we have to work on where we are going to do as a 
community, as a Congress and as a nation to deal with it. 
Unfortunately, my colleagues from Minnesota and I are kind of 
in the same basket when it comes to regional disparities. I 
hail from La Crosse, Wisconsin, and you look at La Crosse and 
Mason City, Iowa, and Dubuque, and we are at the bottom when it 
comes to reimbursement but very high, fortunately, in quality 
of care. I think Minnesota's health suffered a little bit after 
the Packers defeated the Vikings Monday night, but we are not 
going to go there, since he left the room.
    But in all seriousness, here is a question. I have come to 
the conclusion I am convinced we have got to be focused on 
outcomes and quality, not just because it makes sense but 
because politically I think it is the only way we can deal with 
this in this framework. I am so tired, and I know my friend 
sitting next to me is, too, with all the regional fights that 
we have over the reimbursement formulas around here, whether it 
is rural, suburban or urban, West Coast to East Coast, middle 
America. And if we can focus on outcomes or a performance-based 
reimbursement system in both the public and private sphere, it 
will put many of us in a much stronger position to argue 
because we can argue against it. We can argue against having a 
comparable performance-based objective in the health care 
whether you are in New York City or L A or North Dakota.
    But my question is how soon can we get there? And that is 
the real rub, because we are having this bill on HIT right now, 
and we are trying to figure out a way to further incentivize it 
to get that happening. And the Chairman is right that it all 
has to, at the end of the day, it has to be, interoperable and 
the concern is the numbers are going to start hitting us very 
soon here if we don't do something. If the goal is try to get 
to an outcome and quality-based system, how long is that going 
to take in order to put in place, establish the baseline and 
the data and the coordination that is going to be required? I 
would be interested to hear any of your thoughts on that.
    Bruce?
    Mr. VLADECK. I think it is important to not get carried 
away with the end point. We are making very substantial 
progress. There are ways to accelerate that progress, and 
Congress I think can play a vital role, particularly in terms 
of more rapid adoption of IT in physicians' offices and 
incentives to do it and the absolute need for a larger Federal 
role on interoperability and on privacy in regional data 
sharing and all those things. That would help accelerate it.
    But I just want to, for my friends from the upper Midwest, 
I just want to suggest that we can do a lot with the quality of 
care in individual physician practices and individual 
hospitals. In order to move the community, we have to know a 
whole lot more about what affects the health of populations 
than we do. And we have to be very careful, as Dr. Nielsen 
suggested, to deal with issues of risk adjustment but not only 
at the individual level but at the community level as well.
    Because the fact of the matter is that all the data shows 
that while we talk all the time about how much excess 
utilization there is in the American health care system, lower 
income and minority Americans are still significantly 
underserved on many dimensions of care. And communities with 
higher proportions of those folks tend to actually look 
expensive because they use emergency rooms; they don't get 
preventive services and so forth. But if we started to punish 
them because they have bad outcomes in those communities, we 
would be moving policy in exactly the wrong direction.
    Mr. KIND. Is this the ideal system we should be striving 
for to begin with?
    Ms. WILENSKY. We need to find a way, to use what has now 
become a very popular term, a way to get to some kind of 
accountable system. And it will vary, depending on where you 
are. In California where there are a lot of multi specialty 
groups in place, where there is a lot of capitation, it is a 
lot easier. You live in a place that is much less densely 
populated. Groups need to be formed here as well; physicians 
who are working with the hospitals can be a perfectly good 
accountable unit, or physicians working across specialties can, 
in an informal virtual way, be a perfectly good accountable 
unit.
    I am a big proponent of recognizing outcomes in payment. 
Yes, of course, you need to age adjust and health risk adjust. 
It is too foolish to think that should not be done. I have just 
completed 3 years on the WHO Commission on Social Determinants. 
Which raises the notion that if you want to look at population 
health, as important as it is to focus on the health care 
system, that is your charge, you need to consider other things 
like education in early childhood----
    Mr. KIND. I am also a big believer in the feedback tools, 
what I refer to as peer pressure out there.
    Ms. WILENSKY. That is one of the reasons people think 
multi-specialty groups are so effective is that there is 
constant peer feedback by the very nature of how people 
practice.
    Mr. CRANE. Very briefly, to answer your question, we could 
come to an outcome quality system fairly quickly if we brought 
pay-for-performance into Medicare Advantage as in California. 
There needs to be a business case for quality. There is not a 
business case for quality right now in original Medicare, nor 
is there really Medicare Advantage frankly, but in California, 
there is that platform, and we have long asked that we have 
Medicare Advantage be folded into that program. It can be done 
fairly quickly. It is a model. It be could replicated 
elsewhere.
    Dr. NIELSEN. It is cost that is driving all of this 
discussion and has been for years. But it has got to be 
primarily about quality because if it isn't, you can save a lot 
of money by withholding services, and nobody wants that. We 
want the best value. We want the appropriate service. The 
barrier in much of the rest of the country, as Gail has 
alluded, is that many physicians are not in large groups. They 
are in small groups. They all have computers that do billing, 
but they do not have what we are talking about. And some other 
countries have made enormous investment in that HIT 
infrastructure so that in fact people practicing in solo 
practices can become the care coordinator. You don't have to 
have a disease management company employed by a health plan to 
do care coordination. That is what doctors do all the time. 
They could do it better if they had more information and if 
they had feedback. So, frankly, that is where we really need to 
go. We need to test these very, very quickly. And what will 
work in California may not work in Idaho for sure.
    Mr. KIND. Thank you.
    Thank you, Mr. Chairman, I see my time has expired. Thank 
you.
    Chairman STARK. Thank you.
    Mr. Becerra, would you like to inquire?
    Mr. BECERRA. Thank you, Mr. Chairman.
    Thank you to all the panelists for their testimony. There 
was a recent article published by JAMA, the Journal of the 
American Medical Association, which indicated that only about 2 
percent of students in medical schools intend to pursue a 
career in primary care, which obviously goes to the heart of 
the problem we are talking about right now. I think both Dr. 
Vladeck and Dr. Wilensky talked a little about the difficulties 
with primary care and treating areas that have very low-income 
populations. We have problems with over-utilization of 
specialty care services. And we know we need to emphasize much 
more the utilization of primary care services. But we also know 
that, and I think Mr. Pomeroy tried to get to this point to 
some degree as well, that in rural areas it is tough to get a 
lot of primary care services. That same notion or point applies 
to urban low-income areas. Mr. Pomeroy and I always have 
discussions about how North Dakota and California really do 
differ. I point out that, just as he always likes to point out 
how UCLA and the Mayo Clinic differ, I tell him, you don't have 
to go more than 5 miles away and UCLA Harbor Hospital differs 
dramatically from UCLA's principal hospital or L A County USC 
Medical Center, which is in my district, which is providing 
great services but hardly any Medicare services. So its 
reimbursement is based solely on Medicaid and the DSH moneys 
that we get for disproportionate care hospitals and to some 
degree private insurance but very little. And so my question 
becomes, how do we not only deal with the issue of getting more 
medical students to want to go into primary care services, and 
how do we then make sure that we increase the number of primary 
care physicians and services available throughout the Nation; 
but how do you encourage the distribution of those services to 
go into the areas where there they are woefully lacking? 
Because you can go to Los Angeles, and Mr. Pomeroy loves to 
point out the discrepancies is in Los Angeles, but I don't have 
to travel all the way to North Dakota to find a discrepancy 
between a hospital in Los Angeles and a hospital in North 
Dakota. I can go 15 miles away from a hospital in Los Angeles 
to another hospital in Los Angeles. So how do we try to 
distribute those primary care services which we all agree we 
need to emphasize far more to make sure that not only do we 
increase the supply but distribute it well? And I would first 
go to Dr. Vladeck and Dr. Wilensky, but certainly Dr. Nielsen 
and Mr. Crane, if you like to also comment.
    Mr. VLADECK. I don't think there is one quick answer, and I 
don't think there is one easy solution. I think there is a 
demonstrated track record through supportive community health 
centers and through the development of both hospital-based and 
freestanding community health centers in bringing primary care 
to underserved communities. I think the irony is if you talk to 
people who run those centers now in metropolitan areas around 
the country, they are able to hire primary care physicians; 
they can't get specialists because they can't afford them and 
they can't compete.
    Mr. BECERRA. They also rely a lot less on Medicare 
reimbursement----
    Mr. VLADECK. They get very little reimbursement.
    Mr. BECERRA. So we are talking Medicare here, and while we 
are trying to increase the supply in these community clinics, 
they are going to get not a dime out of our whole discussion 
here.
    Mr. VLADECK. I would make one suggestion. I think over the 
years quite appropriately, and it is complicated to do, but the 
Congress has recognized the need for additional payments or 
categorization of facilities in the Medicare Program of which 
central access hospitals are the most dramatic, to make 
supplemental payments in order to attract or keep providers in 
rural communities. And I think if we figure out how to define 
the boundaries of the most highly impacted urban communities, 
we ought to build on that model and expand the very limited 
payment adjustments we make for certain kinds of inner city, in 
particular, practitioners to look more like the rural model in 
that regard.
    Ms. WILENSKY. The notion that it will take a number of 
steps to respond to the complex problem of a shortage of 
physicians, particularly the primary care and low-income and 
rural areas, I think is obvious. I continue to like the 
strategy of selected loan forgiveness, not only for the 
specialty choice but also location choice. And that has to be 
quite finely defined. Sometimes we tend to focus on differences 
in geographic areas, but they tend to be very large 
metropolitan areas, big geographic units. As you are pointing 
out for a different reason, what goes on within that unit may 
be as diverse as between these units. That is also true in 
terms of aggressive behavior by the way. So if you think about 
ways to increase the supply, if you think about ways to have 
special targeted payments, you might be--I am a big fan of 
community health centers as we have discussed before. I don't 
know if there is anything that prevents community health plans 
from being Medicare Advantage players as a way to have them, 
available particularly in areas that are either underserved in 
general or in rural areas. I know, there are a lot of rules as 
in terms of who can be a federally qualified health center, and 
we need to make sure that what was done presumably to protect 
patients isn't keeping this mechanism from providing care to 
other underserved. And finally, just as an observation----
    Mr. BECERRA. Gail, before you move, let me ask, do you 
believe that the health plans are interested in going into 
these community health centers given that most of the 
population going into these centers is the uninsured with 
little health care previously and possibly the type of patient 
that have will have to utilize services quite a bit?
    Ms. WILENSKY. No, what I meant was opening up who could be 
a Medicare Advantage plan to include a federally qualified 
health centers, and not limited only to insurance plans. So it 
is to allow them to come in, and that would begin to expand who 
would be there.
    We need to be careful; if we give increased payments for 
targeted areas, rural or underserved, that we not fall into 
what I observe happening with the critical care access 
hospitals, which is what starts out as a very tightly defined 
group, over time, for political reasons, it tends to encompass 
a much larger group and, therefore, loses its ability to 
actually target expenditures. I don't know how you get 
politicians to not behave politically. But it is a change that 
I observed happening before.
    Dr. NIELSEN. I am going to give you a different answer 
based on my day job, which is that I am a dean of a medical 
school, and I deal with medical students making career 
decisions every single day. The money is very, very important. 
The loan forgiveness is a very important issue.
    There is more to it. There is not a great deal of apparent 
respect for the enormity of the work done by primary care 
physicians, and I say that because clearly things that people 
do every day on the phone with patients, on e-mail with 
patients, really critical, not valued by anybody. It does not 
take students any time to figure that out.
    And so while I would absolutely support everything that 
Gail said--I am going to get to what I don't support in just a 
second--loan forgiveness is one. Workforce planning is another 
if there were residency spots, and that gets controversial.
    But let me tell you what won't work because this is 
America, and that is what Canada has done and has tried to do 
in a more tightly controlled way, and that is to force people 
to practice in a certain area. They tried that in Toronto just 
across the border. It didn't work. Doctors in Canada are now 
restricted to the province where they live. They cannot move to 
another province. This is America. That is not what you do. I 
think you incentivize. You don't mandate.
    Mr. BECERRA. But Dr. Nielsen--and Mr. Chairman, I know my 
time has expired.
    If you provide the incentive, that is okay. Can you provide 
a disincentive? If we are going to have money for incentives, 
we need to find money to pay for those incentives. Can we then 
on the back side say, we are going to provide incentives to do 
these things which we think is very valuable, get into rural, 
low-income urban areas, and we are going to provide a 
disincentive for you to go to the other areas which helps us 
pay for the incentives. Is that okay?
    Dr. NIELSEN. We have already done that. That is exactly 
what you have done to primary care. You have provided a 
disincentive. Does that work? Yes, it works.
    Chairman STARK. I am going to recognize Ms. Schwartz for a 
statement, and we will then have to adjourn very quickly.
    Ms. SCHWARTZ. Thank you, Mr. Chairman.
    And I appreciate hearing your comments and appreciate the 
chairman's graciousness in including me in the hearing.
    I just want to just emphasize something that you all said 
in your answers, and that is, one, there is not a single 
solution, that there really is going to take increased 
reimbursements, recognizing medical home. But I want to 
reinforce the issue of the health IT and the ability--I am from 
the Philadelphia area, very fragmented traditional health 
system, not the multi-group of specialties at all--the fact 
that we could do more to incentivize the use of electronic 
medical records with clinical protocols, interoperable, and 
that a along with some of the other points you have made around 
loan forgiveness and medical home and other on kinds of 
reimbursement could really address some of the issues in both 
rural and urban areas and across population concerns as well. 
So I wanted to thank you for recognizing that and look forward 
to working with you in the future to be able to make sure we do 
that as well and scale that up as quickly as possible.
    And with that, I will yield back.
    So thank you.
    Chairman STARK. Thank you.
    I want to thank the panel, and the hearing is adjourned.
    [Whereupon, at 11:55 a.m., the Subcommittee was adjourned.]
    [Submissions for the record follow:]

                                 
Introduction
    This statement is submitted to the Ways and Means Health 
Subcommittee on behalf of the nearly 94,000 members of the American 
Academy of Family Physicians as part of its hearings on Medicare 
Physician Payment held September 11, 2008. The AAFP appreciates the 
work this subcommittee has undertaken to examine how Medicare pays for 
the services that physicians deliver to beneficiaries. Family 
physicians also share the subcommittee's concerns that the current 
system is inefficient, inaccurate and outdated. For this reason, the 
AAFP supports the restructuring of Medicare payments to value 
appropriately quality improvement and care coordination. AAFP believes 
that this restructuring should be done with the needs of Medicare 
patients foremost in mind. Since most of these patients have two or 
more chronic conditions that call for continuous management and that 
depend on differing pharmaceutical treatments, Medicare should focus on 
how to pay for the coordination of the care these patients need and on 
how to prevent expensive and duplicative tests and procedures.
    Most people in this country, including Medicare patients, receive 
the majority of their health care in ambulatory care settings, i.e., in 
the office of their physician. About a quarter of all of these office 
visits in the U.S. are to family physicians, and Medicare beneficiaries 
comprise about a quarter of the typical family physician's practice. 
Currently, 82 percent of the Medicare population has at least one 
chronic condition and two-thirds have more than one. These are 
conditions which are managed with the physician's guidance and for 
which the patient adapts his or her behavior. Successful management of 
these conditions means fewer trips to the hospital and doctors' offices 
and less expensive medical care. But currently, Medicare does not 
compensate physicians' practices for care management and care 
coordination that does not involve a face-to-face encounter with the 
patient. Coordinating the care that patients receive from a multitude 
of other health care providers is critical to the successful management 
of patients with chronic conditions.
    Finding a more efficient and effective method of paying for 
physicians' services delivered to Medicare beneficiaries with a large 
variety of health conditions is a difficult but necessary endeavor, and 
one that has tremendous implications for millions of patients. The 
AAFP, therefore, is committed to participating in the design of a new 
payment system that meets the needs of these patients and the 
physicians' practices that serve them.
    The AAFP believes that there are three elements that should be part 
of the effort to make Medicare more responsive to quality improvement 
and efficiency of service. These are allowing beneficiaries to 
designate their patient-centered medical home, staging quality 
measurement and reporting, and using health information technology to 
support the medical home and to collect and report useful quality data.
Current Payment Environment
    The environment in which U.S. physicians practice is challenging. 
Medicare, in particular, has a history of making disproportionately low 
payments to family physicians and other primary care physicians, 
largely because its payment formula is based on a reimbursement scheme 
that rewards procedural volume and fails to foster the comprehensive, 
coordinated management of patients that is the hallmark of primary care 
and effective health systems throughout the industrialized world. More 
broadly, the prospect of steep annual cuts in payment resulting from 
the flawed formula is discouraging for all physicians and health care 
providers. In the current environment, physicians know that, without 
annual (and more recently semi-annual) Congressional action, they will 
face Medicare payment cuts in the range of 5-10 percent. Clearly, the 
Sustainable Growth Rate (SGR) formula belies its name and is not a 
workable, acceptable formula.
    Under the SGR, physicians face steadily declining payments into the 
foreseeable future--nearly 40 percent over the next nine years--even 
while their practice costs continue to increase. According to the 
Government's own calculations, the Medicare payment rate for physician 
services has for several years not kept pace with the cost of operating 
a small business which delivers medical care. Physicians are being paid 
at 2001 rates.
    From the outset, the Medicare program has based physician payment 
on a fee-for-service system. This system of non-aligned incentives 
rewards individual physicians for ordering more tests and performing 
more procedures. The system lacks incentives for physicians to 
coordinate the tests, procedures, or patient health care generally, 
including preventive and health-maintenance services. This payment 
method has produced expensive, fragmented health care.
The Patient-Centered Medical Home
    To correct these inverted incentives, the American Academy of 
Family Physicians, the American Academy of Pediatrics, the American 
Osteopathic Association, and the American College of Physicians 
recommend that Medicare compensate physicians for care coordination 
services. Such payment should go to the personal physician chosen by 
the patient to perform this role. Any physician practice prepared to 
provide care coordination could be eligible to serve as a patient's 
personal medical home.
    The AAFP recommends that Medicare incorporate the patient-centered 
medical home concept into the program because to do so will not only 
improve quality but also make delivery of health care more efficient. 
An efficient payment system should place greater value on cognitive and 
clinical decision-making skills that result in more effective use of 
resources and that result in better health outcomes. The work of 
Barbara Starfield, Ed Wagner and others has shown that patients, 
particularly the elderly, who have a usual source of care, similar to a 
medical home, are healthier and the cost of their care is lower because 
they use fewer medical resources than those who do not. An abundance of 
evidence shows that even the uninsured benefit from having a usual 
source of care (or medical home). These individuals receive more 
appropriate preventive care and more appropriate prescription drugs 
than those without a usual source of care, and do not get their basic 
primary health care in a costly emergency room, for example. In 
contrast, those without this usual source have more problems getting 
health care and neglect to seek appropriate medical help when they need 
it. A more efficient payment system would encourage physicians to 
provide patients with a medical home in which a patient's care is 
coordinated and expensive duplication of services is eliminated.
    The AAFP concurs with a June 2008 recommendation of the Medicare 
Payment Advisory Commission (MedPAC) that Congress should establish a 
budget-neutral payment adjustment for primary care services billed 
under the physician fee schedule and furnished by primary-care-focused 
practitioners.
    We also support the MedPAC recommendation that the Congress should 
initiate a medical home pilot project that includes a physician pay-
for-performance program. The pilot must have clear and explicit 
thresholds for determining whether it can be expanded into the full 
Medicare program or should be discontinued. The AAFP believes the 
strength of the existing literature describing the effectiveness (both 
health and economic) of the medical home warrants expeditious 
incorporation of this care coordination concept into the Medicare 
program.
    We believe that eligible medical homes must meet stringent 
criteria, including at least the following capabilities:

      furnish primary care (including coordinating appropriate 
preventive, maintenance, and acute health services),
      conduct care management,
      use health information technology for active clinical 
decision support,
      have a formal quality improvement program,
      maintain 24-hour patient communication and rapid access,
      keep up-to-date records of beneficiaries' advance 
directives, and
      maintain a written understanding with each beneficiary 
designating the provider as a medical home.

    AAFP also believes Congress should encourage Medicare beneficiaries 
to identify and use a personal medical home by providing incentives 
such as reduced copayment and deductible amounts.
    Measures of quality and efficiency should include a mix of outcome, 
process and structural measures. Clinical care measures must be 
evidence-based. Physicians should be directly involved in determining 
the measures used for assessing their performance.
Improving Quality
    Beyond replacing the outdated and dysfunctional SGR formula, a 
workable, predictable method of determining physician reimbursement--
one that is sensitive to the costs of providing care--should align the 
incentives to encourage evidence-based practice and foster the delivery 
of services that are known to be more effective and result in better 
health outcomes for patients. Moreover, the reformed system must 
facilitate efficient use of Medicare resources by paying for 
appropriate utilization of effective services and not paying for 
services that are unnecessary, redundant or known to be ineffective. 
Such an approach is endorsed by the Institute of Medicine (IOM) in 
Crossing the Quality Chasm (2001).
    Another IOM report, released in 2006 entitled Rewarding Provider 
Performance: Aligning Incentives in Medicare, states that aligning 
payment incentives with quality improvement goals represents a 
promising opportunity to encourage higher levels of quality and provide 
better value for all Americans. The objective of aligning incentives 
for quality improvement is to support: (1) the most rapidly feasible 
performance improvement by all providers; (2) innovation and 
constructive change throughout the health care system; and (3) better 
outcomes of care, especially through coordination of care across 
physician practice settings and over time. The AAFP concurs with these 
IOM recommendations:

      Measures should allow for shared accountability and more 
coordinated care across physician practice settings.
      Quality measurement programs should reward care that is 
patient-centered and efficient, and reward providers who improve 
performance as well as those who achieve high performance.
      Providers should be offered incentives to report quality 
measures.
      Because electronic health information technology will 
increase the probability of a successful quality measurement program, 
Medicare should explore ways to assist physicians in implementing 
electronic data collection and reporting to strengthen the use of 
consistent measures.

Information Technology in the Medical Office
    The AAFP believes that quality, access and positive health outcomes 
must be the primary goal of any physician payment system. Prevention, 
early diagnosis and early treatment will simultaneously improve quality 
of life and ultimately save valuable health care dollars. But 
implementing data collection and reporting requires an initial 
investment from the health care provider in the form of electronic data 
and decision support systems. The AAFP urges the subcommittee to 
explore ways of making funding available for small physician practices 
to obtain and maintain adequate electronic health records and other 
tools that will enable such collection and reporting without the 
considerable administrative burden we fear it will be.
    Using advances in health information technology (HIT) also aids in 
reducing errors and allows for ongoing care assessment and quality 
improvement in the practice setting--two additional goals of recent IOM 
reports,. We have learned from the experience of the Integrated 
Healthcare Association (IHA) in California that when physicians and 
practices invested in electronic health records (EHRs) and other 
electronic tools to automate data reporting, they were both more 
efficient and more effective, achieving improved quality results at a 
more rapid pace than those that lacked advanced HIT capacity.
    Family physicians are leading the transition to EHR systems in 
large part due to the efforts of AAFP's Center for Health Information 
Technology (CHiT). The AAFP created the CHiT in 2003 to increase the 
availability and use of low-cost, standards-based information 
technology among family physicians with the goal of improving the 
quality and safety of medical care and increasing the efficiency of 
medical practice. Since 2003, the rate of EHR adoption among AAFP 
members has more than doubled, with over 30 percent of our family 
physician members now utilizing these systems in their practices.
    In any discussion of increasing utilization of an EHR system, there 
are a number of barriers and cost is a concern for family physicians, 
especially those in small and medium sized practices. The AAFP has 
worked aggressively with the vendor community through our Partners for 
Patients Program to lower the prices of appropriate information 
technology. The AAFP's Executive Vice President serves on the American 
Health Information Community (AHIC), which is working to increase 
confidence in these systems by developing recommendations on 
interoperability. The AAFP sponsored the development of the Continuity 
of Care Record (CCR) standard, now successfully balloted through the 
American Society for Testing and Materials (ASTM). We initiated the 
Physician EHR Coalition, now jointly chaired by ACP and AAFP, to engage 
a broad base of medical specialties to advance EHR adoption in small 
and medium size ambulatory care practices. In preparation for greater 
adoption of EHR systems, every family medicine residency will implement 
EHRs by the end of this year.
    To facilitate accelerate reporting, the AAFP joins the IOM in 
encouraging Federal funding for health care providers to purchase HIT 
systems. According to the RAND corporation and the U.S. Department of 
Health & Human Services, billions of dollars will be saved each year 
with the wide-spread adoption of HIT systems. The Federal Government 
has already made a financial commitment to this technology; 
unfortunately, only a few dollars trickle down to where the funding is 
not directed to these systems that will truly have the most impact and 
where ultimately all health care is practiced--at the individual 
patient level. We encourage Congress to include funding in the form of 
grants or low interest loans for those physicians committed to 
integrating an HIT system in their practice.
Conclusion
    It is time to modernize Medicare by recognizing the importance of, 
and appropriately valuing, primary care and by embracing the Patient-
Centered Medical Home model as an integral part of the Medicare 
program.
    Specifically, the AAFP encourages Congressional action to reform 
the Medicare physician payment system in the following manner:

      Repeal the Sustainable Growth Rate formula at a date 
certain and replace it with a stable and predictable annual update 
based on changes in the costs of providing care as calculated by the 
Medicare Economic Index.
      Adopt the patient-centered medical home by giving 
patients incentives to use this model and compensate physicians who 
provide this function. The physician whose practice has been recognized 
by an independent third party and designated by the beneficiary as his 
or her medical home should receive a per-member, per-month care 
management fee in addition to payment under the fee schedule for 
services delivered.
      Phase in value-based purchasing by providing a bonus 
payment to physician practices that report data related to specific 
quality measures. This additional payment should cover costs associated 
with the program and provide sufficient incentive to report the 
required data. Move to payment for the use of information technology to 
collect and submit appropriate quality improvement data.
      Offer a program of low-cost loans to small and medium 
sized physician practices to purchase health information technology 
necessary to collect and report quality measurement data. Health 
information technology is a public good that ultimately will benefit 
all Americans.
      Ultimately, payment should be linked to health care 
quality and efficiency and should reward the most effective patient and 
physician behavior.

    The Academy commends the subcommittee for its commitment to 
identify a more accurate and contemporary Medicare payment methodology 
for physician services. Moreover, the AAFP is eager to work with 
Congress toward the needed system changes that will improve not only 
the efficiency of the program but also the effectiveness of the 
services delivered to our nation's elderly.

                                 

Dear Committee Members,

    I am a family physician who has practiced many years with different 
populations many of whom have been on and Medicare as well as Medicaid.
    In order to improve Medicare beneficiaries health outcomes reform 
needs to commit political will and resources to the following three 
measures:

    1. Primary care providers should be reimbursed at a higher rate 
than specialist for the difficult care that they deliver.
    For example: a dermatologist who spends two minutes with a patient, 
and may freezing something, may be reimbursed the same amount as a 
family physician who spends 30 minutes with a patient who has severe 
depression. Specialist are often pain more than twice the salary of 
primary care physicians. It is absolutely crazy.
    We need more primary care physicians-not because I am one-but 
because the health of this nation will improve!! Data shows that 
countries with more primary care (and perhaps, less specialty care) and 
well coordinate care leads to better health outcomes. In this country 
that means creating the right financial incentives. Medical students 
are going into specialty residencies more and more--the wrong 
direction.
    Medical students have learned about the ROAD (radiology, 
ophthalmology, anesthesia, dermatology) to happiness: high paying 
specialties with less work stress. It turns out that these are also the 
most competitive residencies for medical students to enter.
    2. Medicare should take an active role in recruiting and 
subsidizing primary care residencies programs. Because subspecialty 
fields are so lucrative, the residency programs tend to be
    3. Public health should drive Medicare reform decisions, not 
special interests. As long as special interests are the ones sitting 
before committees, and have the most successful lobbyists, they will 
continue to benefit. However, the public's health should be the only 
guide and the amount of money available should be the only guide.

Thank you for my submission,

Charles Mayer MD MPH
Group Health Cooperative

Harborview Medical Center, Department of Family Medicine

                                 

Dear Representative Stark:

    I appreciate being able to submit these comments on Reforming 
Medicare's Physician Payment System. I am writing only as an 
individual, but with a perspective on physician payment that may be of 
help relating to primary care services and approaches being taken to a 
``Medical Home'' model. In addition to being a Medicare Contractor 
Medical Director, I served on the AMA/Specialty Societies RVS Update 
Committee (``RUC'') for twelve years, six as its Vice-Chair, and have 
been many years a Co-Chair of Washington State's Advisory Committee on 
RVS and related payment issues. I also sit on the CPT Assistant 
Editorial Panel, am a general internist and have been an NCQA physician 
reviewer for years, including specifically for Disease Management 
accreditation, which relates to this topic. I am hopeful my perspective 
may be of help.
    It is absolutely certain that the Medicare fee-for-service system 
is experiencing a worsening problem with access to services, 
particularly for primary care. The Medical Home concept, and its 
demonstration planned to start next year have been proposed as a 
possible solution. There is clear evidence that the types of close-
communication with selected individual patients can result in improved 
clinical outcomes, and even some preliminary evidence that a portion of 
these may, over time, result in total service utilization savings for 
the system. This was a premiss of the adopted Medical Home 
demonstration.
    There is no possibility however, that such an approach can be 
successful for a large portion of Medicare enrollees, with a 
requirement to demonstrate three-year ``budget neutrality''. To require 
both a large portion of Medicare enrollees and a three-year timetable 
will prevent any chance of a successful outcome.
    A much fairer ``demonstration'' of the potential of a Medical Home 
model would be a much more selected patient population (likely based on 
relatively high recent utilization and significant disease burden), 
where care and attention by a clinical team will have some chance of 
achieving a measurable gain within such a narrow timeframe.
    The RUC did a good job (with much work) in developing Medical Home 
codes that might be used for providers following large panels of 
patients in such a category. If, however, the demonstration continues 
to require a three-year budget neutrality, it would be greatly more 
likely that a much more selected, smaller patient panel would have some 
chance of success.
    A large problem in using Medicare payments for such patients is 
that Medicare disallows ``screening'' and (other-than-statutory) 
preventive care and makes it hard to utilize time-based billing to 
obtain a fair return on the time-consuming services these patients most 
need. If instead, the E&M codes were used as they are now, but allowing 
time-based billing of services for patients in a Medical Home 
demonstration, just as are now allowed for ``counseling and 
coordination of care'', this might have a chance of success. The only 
additional requirement should be that the record must clearly document 
both the total time by that individual provider for that patient on the 
date of service and the necessity for that time (subject to 
retrospective review).
    Such an approach focused on selected patients with high probability 
of utilization, paying for the time necessary to work with such 
patients, could demonstrate a change in utilization within the (very-
short) three-year timetable. Otherwise, it is certain that the 
``demonstration'' as presently structured cannot succeed, and it will 
be a true loss to have some then come to a conclusion that a Medical 
Home model will not work, were it structured and phased differently 
with a way to assure providers had sufficient return for the work 
necessary to affect behavior and utilization. The Medicare system needs 
a successful approach to the Medical Home concept to be able to address 
worsening access problems, especially in primary care!
    I appreciate the opportunity to offer these comments, and will 
surely be glad to discuss any aspect with any who might find this of 
help. Thank you.

Richard W. Whitten, MD, MBA, FACP

Medicare Contractor Medical Director

PO Box 1294

Issaquah, WA 98027-0050

                                 

    I would first like to thank Chairman Stark and Ranking Member Camp 
for holding this important hearing today on the way Medicare pays 
physicians, and I also would like to thank them again for their 
leadership in passing H.R. 6331, the ``Medicare Improvements for 
Patients and Providers Act of 2008,'' this past July.
    As you both are well aware, this vital legislation prevented a 
devastating 10.6 percent payment cut for Medicare physicians in 2008 as 
mandated under the woefully misnamed Sustainable Growth Rate (SGR). In 
addition, the Medicare Improvements for Patients and Provider Act 
provided physicians with an important payment increase of 1.1 percent 
for 2009, which followed the recommendation of the Medicare Payment 
Advisory Payment Commission (MedPAC). As evidenced by the overwhelming 
bipartisan support in both chambers of Congress to override President 
Bush's short-sighted veto, blocking these cuts was the right thing to 
do.
    Now that we've given our physicians an 18-month reprieve, I 
respectfully urge this subcommittee to work again in a bipartisan way 
to establish a new payment system for physicians. Central to any plan 
must begin with scrapping the SGR.
    Clearly, this ill-conceived system doesn't work. Enacted in 1997, 
the SGR was, in my opinion, an attempt to balance the budget on the 
backs of doctors and other providers. Not only has it failed to curtail 
spending, but it incentives volume of services instead of quality of 
care, and may be expediting the shift from primary care services to 
specialty and sub-specialty services.
    Since 2003, Congress has enacted six ``patches'' to prevent cuts 
under the SGR. Although I have only been a Member of Congress for two 
of them, I can say that it is frustrating spending valuable time 
crafting fixes for this fundamentally flawed system. I cannot imagine 
the frustration that the Members of this subcommittee along with their 
staffs must feel spending countless hours crafting these legislative 
fixes when other crucial healthcare issues, like our shortage of 
primary care physicians, are left unresolved. So let us once and for 
all end all talk of patches or fixes, and come together in a bipartisan 
way to find a permanent solution to the way we pay our doctors.
    The distinguished panel assembled here today, which includes the 
President of the American Medical Association, will provide this 
subcommittee with a macro perspective of the Medicare payment system, 
offering numerous recommendations that I think are worthy of this 
subcommittee's consideration.
    However, my purpose for testifying today is to provide the 
subcommittee with a view from the ground. The 22nd Congressional 
District of Florida is literally on the front lines of the Medicare 
debate with one of the largest populations of senior citizens in the 
country and a dedicated group of physicians serving this vulnerable 
population.
    When I was elected as their Representative, one of the first things 
I did was to convene a physician advisory group so I could hear 
firsthand the unique needs of both seniors and physicians in South 
Florida as well as better understand the distinct healthcare issues for 
this region.
    This advisory group has been consistently critical of the SGR. 
Medicare used to be known as the ``Gold Standard'' for physicians 
because it provided them with fair and sustainable reimbursement rates, 
but not anymore. As a result of this and other issues, we're currently 
facing a severe shortage of qualified physicians in South Florida, 
potentially leaving many elderly and other vulnerable populations 
without doctors to treat them. Failing to restructure the physician 
payment scheme under Medicare could hasten this exodus when the looming 
20 percent cut arrives in 2010.
    We owe it to our seniors, to the men and women who helped to make 
this country the greatest in the world, to ensure that when they are 
sick, a doctor will be there to see them. It's a fair deal, and one we 
must not turn our backs on.
    Thank you again, Chairman Stark and Ranking Member Camp, for 
holding this hearing today, and I look forward to working with you as 
well as the rest of Members of this subcommittee, toward crafting a 
permanent solution that pays physicians fairly for their services while 
maintaining the highest levels of quality for our nation's seniors.

                                 

    The National Business Group on Health (Business Group) appreciates 
the opportunity to submit written testimony for today's House Ways and 
Means Health Subcommittee hearing on reforming Medicare's physician 
payment system. The Business Group strongly urges Congress, employers, 
and health plans to implement pay-for-performance on a widespread basis 
for hospitals, physicians, and other health care facilities and 
professionals.
    Founded in 1974, the Business Group is a member organization 
representing 300 members, mostly large employers, who provide coverage 
to more than 55 million U.S. employees, retirees and their families and 
is the nation's only non-profit organization devoted exclusively to 
finding innovative and forward-thinking solutions to large employers' 
most important health care and related benefits issues. Business Group 
members are primarily Fortune 500 companies and large public sector 
employers, with 64 members in the Fortune 100.
    As you know, it is estimated that Medicare will be bankrupt by 
2019, seven years earlier than previously expected and 23 years earlier 
than Social Security. In July, Congress delayed cuts to Medicare 
physician payments for 18 months. However, unless further legislative 
action is taken, Medicare's payment rates will be reduced by more than 
20 percent in January 2010. We believe it is necessary for the 
financial future of Medicare as well as for the quality and safety of 
care received by beneficiaries that pay-for-performance be used to 
harness the Government's leverage as the largest purchaser of health 
care in the U.S. to move Medicare and all other payers towards paying 
for effective health care and quality outcomes rather than units or 
volume of services, as is currently done.
    Too often, payment under Medicare and throughout the health care 
system in the U.S. is made without regard to whether services are 
needed or are performed well. Fisher and colleagues (Annals of Internal 
Medicine, 2003) estimate that under the current system up to 30% of 
Medicare spending may be for excessive and unnecessary care. While cost 
is tied to quality or performance in most other industries, in health 
care, including in Medicare, the opposite tends to happen--we end up 
paying more for poor service and the additional health care needed to 
``correct'' poor quality. Fortunately, Medicare is beginning to reverse 
this tendency in by not paying for so-called ``never events'' occurring 
in hospitals.
    CMS' effort to stop payments for ``never events,'' is a significant 
first-step to improving the quality of care in the Medicare program and 
should be extended to physicians' payments. As you know, a landmark 
1999 Institute of Medicine (IOM) report estimated that preventable 
medical errors in hospitals might cause as many as 98,000 deaths 
annually. Many more people are injured by providers and countless more 
preventable deaths and injuries occur in outpatient settings.
    With the clinical comparative effectiveness research conducted by 
the Agency for Healthcare Research and Quality (AHRQ), the Federal 
Government and its research partners are producing important 
information that will help eliminate inappropriate treatments and 
ensure that the Government only pays for effective, high quality health 
care that works. It is important that the public and private sectors 
act together to develop the research evidence base for treatment and 
coverage policies so that clinicians, policy-makers, and consumers are 
able to make decisions that improve the quality of care and quality of 
life.
    Pay-for-performance promises to advance evidence-based medicine, 
improve the quality of health care for beneficiaries and improve the 
efficiency of the Medicare program. Under the Physician Quality 
Reporting Initiative (PQRI), CMS is taking the steps towards moving 
from being primarily a passive payer for health care to an active 
purchaser for health care, using its enormous power to buy the best 
possible care for millions of beneficiaries, just as Congress has asked 
it to do. Initial data reports that 15.74 percent (99,319 providers) of 
all professionals eligible to participate in the 2007 PQRI program 
attempted to do so. Of those providers, 92,218 individuals submitted at 
least one measure successfully. The report also shows that on average, 
providers attempted to report slightly more than three measures. More 
than half of the participating professionals so far appear to be on 
track to receive bonuses. The initial data also provides a glimpse of 
where participants are making errors in the reporting process, and that 
will guide future educational efforts by CMS. For example, the data 
shows that for one of the three diabetes measures covered, nearly half 
of the PQRI claims submitted were rejected because of ``denominator 
mismatches,'' which means the patient did not match the age or gender 
descriptor for the measure. In addition, more than 10 percent of claims 
were filed without the required National Provider Identifier number. 
Clearly, we have a long way to go. However, by using its huge 
purchasing power to drive excellence in care delivery, Medicare is not 
only beginning to protect and help its beneficiaries but it will also 
make the health care delivery system in the U.S. better and safer for 
all Americans, all of whom will be beneficiaries once they turn 65 or 
disabled.
    It is vital for the Federal Government to fully transition Medicare 
to a pay-for-performance system based on quality and efficiency. A 
recent study by CMS in Health Affairs reported that U.S. spending on 
health care is expected to double (over the next 9 years). It is urgent 
that the Federal Government work with employers and other purchasers to 
change the current system. The pay-for-performance movement continues 
to rapidly expand in the private marketplace. In recent years, 
employers and other health care purchasers have developed and adopted 
payment programs to reward quality in the health care system. As 
sponsors of health plans, employers currently use their flexibility, 
under ERISA, to innovate and close the gap between the quality of care 
that we have and the quality of care that we should have and need.
    Medicare should learn from the lessons of many of our nation's 
employers who are already developing and implementing strategies aimed 
at improving the quality and value of the health care they purchase. 
Many National Business Group on Health members have taken the lead in 
promoting pay-for-performance, health care quality and transparency by 
participating in initiatives such as the Bridges to Excellence and the 
pay-for-performance programs of the Integrated Healthcare Association 
to make true health care transparency and quality a reality. Today, 
most large insurers and health plans already have a provider incentive 
program based on performance.
Pay-for-Performance Successes in the Private Sector:
    1. Bridges to Excellence (BTE) Programs: BTE, a not-for-profit 
company, led by a multi-stakeholder board of directors comprised of 
physicians, employers and health plans, has published lessons learned 
and best practices of pilot region pay-for-performance programs that 
included: rewarding physicians for practicing re-engineering and 
adopting health information technology; improving outcomes for patients 
with diabetes through preventive care (including more cost-efficient 
care); improving intermediate outcomes for patients with diabetes, 
hypertension, hyperlipidemia, coronary artery disease and 
cardiovascular disease; and implementing measures of effective 
ambulatory care treatment protocols for patients with recent cardiac 
events. To date, BTE programs have been successfully implemented in 
more than 18 states with over 80 employers and eight business 
coalitions, recognizing more than 10,000 physicians throughout the U.S. 
and paying more than $12 million dollars in incentives. BTE analyzed 
diabetes episodes among claims data from 352,722 United Healthcare 
members in the Cincinnati and Louisville area from 2002-2004 and found 
that BTE-recognized endocrinologists and Primary Care Physicians (PCPs) 
had $3,480 and $3,820 respectively in lower average inpatient costs per 
episode than non-BTE recognized physicians. BTE-recognized physicians 
also took care of more episodes and more patients per physician than 
their non-recognized peers. This was true for endocrinologists (45 vs. 
26 episodes per physician; and 35 vs. 20 patients per physician) as 
well as for PCPs (14 vs. 9 episodes per physician and 11 vs. 6 patients 
per physician). BTE-recognized endocrinologists had significantly lower 
average costs ($370 lower) for an episode of diabetes care than non-
recognized endocrinologists ($770 vs. $1,140). Another analysis of the 
costs associated with diabetes from the City of Cincinnati's employees 
and dependents found that those who received care from BTE certified 
providers are 7.8% healthier on average than members cared for by non-
BTE certified providers based on prospective relative morbidity scores 
for both populations in 2004 and 2005. A BTE pilot program from 2003-
2006 for diabetes and cardiac care in New York had the highest number 
of patients seeing BTE recognized physicians, up from under 2% to 25%, 
which is significant given the savings of $350 per patient per year.
    The BTE programs have identified a number of key lessons learned 
and best practices to implement a successful pay-for-performance 
program, including:

      Using standard performance measures of clinical quality, 
focusing mostly on intermediate outcomes derived from medical chart 
reviews, not just claims;
      Giving providers clearly defined costs and benefits of 
the program, which helps them determine the value of participating;
      Using independent third-party organizations to measure 
the performance of providers, reviewing the data reported by these 
providers from medical records in their practice;
      Bringing together many payers and/or purchasers to make 
rewards meaningful to providers;
      Encouraging providers to adopt better systems of care, 
including health information technology, to systematically improve the 
delivery of care;
      Assisting small practices which need significant help in 
re-engineering, as there are not many resources available to help them;
      Understanding that a focus on a single disease may limit 
program uptake among primary care physicians;
      Realizing that providers that become recognized in BTE's 
programs are happy to get more patients--even those with chronic 
illness; and that
      Employers and plans should combine a pull (bonus) with a 
push (steerage) to maximize the impact of a pay-for-performance program 
among their plan members.

    2. Integrated Healthcare Association (IHA): IHA, a multi-
stakeholder association based in California consisting of major health 
plans, physician groups, and hospital systems, academics, consumers, 
purchasers (including employers), pharmaceutical and technology 
representatives has established uniform quality performance measures, 
incentive payments to physician groups and a public report card. 
Stakeholders have made progress towards improving clinical quality 
reporting, patient experience, use of information technology (IT) and 
patient care. Eighty-seven percent of physician groups reporting all 
clinical measures improved their overall clinical score by 5.3 
percentage points from Year 1 to Year 2. One-hundred and thirty 
physician groups participating since the beginning of the program 
improved from 3 to 5 percentage points on patient experience measures 
and from Year 1 to Year 2 there was a 54 percent increase of physician 
groups qualifying for at least a partial credit for IT adoption.
The Business Group Believes That a Pay-For-Performance Program Should 
        Include the Following:

      Medicare should continue to adopt performance measures 
developed by nationally recognized quality measurement organizations, 
such as the National Committee for Quality Assurance (NCQA), 
researchers, and practitioner groups that have been vetted and 
recommended by consensus-building organizations that represent diverse 
stakeholders, such as the National Quality Forum (NQF) and measures 
established by the AQA Alliance and the Hospital Quality Alliance (HQA) 
Steering Committee.
      Rewarding quality is paramount but rewarding quality care 
that is provided efficiently is also important and should be an 
essential part of any pay-for-performance initiative.
      When measuring quality, focusing on misuse and overuse is 
equally important as underuse. There is plenty of evidence that more 
care is not always better for patients or even good for them. We also 
want to help people understand that choosing healthy lifestyles and 
evidence-based disease prevention and screenings can do as much or more 
for their health and quality of life as health care. Medicare has taken 
some excellent first steps with its ``Welcome to Medicare'' program and 
preventive services but more can and should be done.
      To the extent possible, performance measures should 
incorporate outcomes of care in addition to structure and process 
measures.
      CMS should improve the meaningful disclosure of easy-to-
understand performance results to the public, including Medicare data, 
which will reinforce the value of pay-for-performance.
      The health care system will need sufficient health 
information technology infrastructure to report performance measures. 
Some providers, particularly solo and small group physician practices 
and those serving low-income urban and rural areas, may need financial 
assistance to purchase needed systems, software, training and related 
services.
Why the Business Group Believes Purchasers Should Implement Pay-for-
        Performance:

      A 2003 RAND study found that patients received only 55 
percent of recommended care for fairly common medical conditions for 
which a broad consensus exists on care standards.
      A single set of quality measures will reduce the 
administrative burden of data collection and make it easier for 
consumers and purchasers to compare quality among providers and 
facilities.
Pay-for Performance Will Empower Consumers and Purchasers to Make 
        Better Decisions on Their Health Care Providers:

      According to the National Committee for Quality Assurance 
(NCQA), people enrolled in health plans that measure and publicly 
report performance data were more likely to receive preventive care and 
have their chronic conditions managed in accordance with clinical 
guidelines based upon medical evidence.
      These improvements in clinical quality over time, the 
direct result of performance measurement and reporting, have saved the 
lives of 53,000 to 91,000 Americans and prevented hundreds of thousands 
of serious complications.

    Again, thank you for allowing us to submit written testimony for 
today's hearing on reforming Medicare's physician payment system. We 
look forward to continuing to work with the Committee and CMS to 
transition our health care system to one based on performance, value, 
quality, efficiency and transparency that we can all be proud of and 
that serve its beneficiaries well for exactly the kind of health care 
and quality of life they deserve.

                                 

Dear Chairman Stark:

    Thank you for holding a hearing on Medicare physician payment on 
September 11. The Society of Thoracic Surgeons (STS) greatly 
appreciates your dedication to finding a long-term solution to the 
flawed sustainable growth rate (SGR) payment system and for working to 
prevent Medicare payment cuts to physicians for the second half of 2008 
and in 2009.
    We agree with your assessment that we must examine policy options 
that will encourage improved quality of care and efficient use of 
health care resources. The repeated need for congressional ``rescue'' 
of physicians from Medicare payment cuts as a result of the SGR is 
strong evidence that the current system of economic incentives and 
disincentives has failed to modify physician practice or control the 
growth of physician services.
    Our experience with data collection has shown that physicians are 
motivated to change the way they practice medicine when provided with 
credible clinical outcomes data. The result of providing performance 
feedback to physicians is improved outcomes and cost savings. The STS 
National Cardiac Database (NCD) captures 100 percent of the procedures 
performed by each participant at more than 85 percent of the adult 
cardiac surgery programs in the country. The collection and reporting 
of this data for nearly 20 years has resulted in reductions in 
mortality rates in cardiac surgery by 70 percent below previously 
expected rates. The STS has spent approximately $15 million on the 
development and maintenance of this database, and participants have 
expended tens of millions in additional dollars which have to date been 
uncompensated by CMS and most other payers.
    The STS believes that physicians and their professional societies 
have an obligation to responsibly control health care expenditures. We 
believe that Medicare must support professional medical societies in 
the development and expansion of clinical databases. When risk-adjusted 
clinical outcomes data is linked with information on resource use based 
upon administrative claims data, we can assess the effectiveness and 
appropriateness of current and future treatment algorithms. The STS 
encourages you and members of the Subcommittee to consider a payment 
and regulatory framework that will incentivize meaningful self-
regulation and will rely upon clinical databases as the mechanism by 
which self-regulation can be accomplished. Toward this end, I want to 
draw your attention to an editorial authored by John Mayer, Jr., M.D., 
Immediate Past President of STS. The editorial, published in the 
November 2007 issue of The Annals of Thoracic Surgery, emphasizes 
responsible use of health care resources through self-regulation and 
underscores the importance of providing physicians with clinical 
outcomes data.
    I hope that as you continue your exploration into ways to correct 
and improve upon our current payment system you will draw upon the 
experience of STS and its members. Should you have any questions, 
please do not hesitate to contact me.

Sincerely,

[GRAPHIC] [TIFF OMITTED] T9474A.022


W. Randolph Chitwood, Jr., M.D.

President

The Society of Thoracic Surgeons

                               __________

The American Health Care System and the Role of the Medical Profession 
        in Solving Its Problems
The Annals of Thoracic Surgery
    In the current issue of The Annals, two authors present opposing 
viewpoints on the optimal organizational structure for healthcare 
insurance in the U.S.\1\ Himmelstein and Woolhandler argue that a 
single-payer national healthcare insurance system would solve many of 
the current problems in financing, access, and delivery of healthcare, 
while Goodman suggests that reform should remove the current private 
and public health insurance third-party payer structures from the 
equation in order to promote competition among ``providers'' on price 
and quality and restore the doctor-patient relationship. I agree with 
both Himmelstein and Goodman that reimbursement may be at the root of 
many of the problems that the American healthcare system is facing. 
However, neither of these authors' proposals would engage the medical 
profession in providing solutions, despite the fact that physicians' 
pens and keyboards are still ultimately responsible for much of what 
American society spends on healthcare.
    Historically, members of a profession have had a number of 
important prerogatives and societal responsibilities, which include 
adhering to a code of ethics that includes the moral imperative to 
serve others,\2\ advancing a body of knowledge and transmitting it to 
the next generation,\2\ setting and enforcing its own standards and 
values,\2\ cherishing performance above personal rewards,\2\ self-
regulation,\3\ and fairly distributing finite medical resources.\4\ 
Gruen et al recently noted that physicians have a ``responsibility to 
address the rising costs of health care, which are a key threat to 
access.'' \4\ A conceptual model of the relationships between the 
professions, market forces, and society has been proposed by Krause.\5\ 
He describes the privileges and prerogatives of the professions as 
inherently in conflict with the forces of the free market, but notes 
that these ``anti-market'' privileges are granted to a profession by 
the state, representing society, only as long as society believes and 
trusts that the profession is acting in the societal interest and not 
in its own. Others have reached similar conclusions.\6\ At the same 
time, competition is proposed as a solution for the healthcare system 
\1\ and physicians are then pulled in opposite directions by their 
responsibilities to society as members of a profession and by this 
societal imperative to ``compete.'' Added to this mixture is the 
centrally controlled administered pricing system used by Medicare, 
which has placed all physicians, but particularly cardiothoracic 
surgeons, under significant economic pressures by reductions in 
reimbursements for the services that they provide. The problem is 
exacerbated by the use of the MFS by a large number of third-party 
private payers.
    The question arises whether the medicine can survive as a 
profession in this environment. Although the MFS has important 
conceptual flaws, which are responsible for the declines in physician 
reimbursements, changes to this system could actually address some of 
the inherent conflicts that the medical profession and the American 
healthcare system are facing. The current MFS system is based on the 
Resource Based Relative Value Scale, which assigns relative value units 
(RVU's) to each physician service. By law, each year Medicare sets a 
single ``conversion factor'' (in $/RVU), based on the ``sustainable 
growth rate'' (SGR) formula, and this conversion factor is multiplied 
by the RVU's for each service to yield the Medicare allowed charge.\7\ 
By controlling the conversion factor, the Federal Government has a 
simple mechanism to control aggregate Medicare physician payments, but 
since the total physician payment expenditures are capped by the SGR, a 
``zero sum game'' results.\8\ When aggregate expenditures increase 
faster than called for by the SGR formula, then physician payments in 
subsequent years must be reduced by decreasing the conversion factor to 
``pay back'' the ``overspending'' on physician services that occurred 
in prior years. The SGR mechanism required reductions in the 2007 
Medicare conversion factor \9\ that were offset by last-minute 
legislation, but a 9.9% reductions in fees for each service are 
projected for 2008 without repeat Congressional action.\10\ The SGR 
formula that prescribes the annual Medicare physician payment update is 
``widely recognized as being fatally flawed and, if not greatly 
reformed, may result in reduced access to beneficiaries.'' \11\ 
However, SGR revisions require billions of dollars in additional 
Federal funding over the next ten years, a difficult hurdle with 
projected Federal budget deficits for the foreseeable future. From the 
physician perspective the fundamental conceptual flaw in the SGR 
mechanism is the economist's assumption that individual physicians' 
patterns of practice will be influenced by their recognition that 
current ``over-utilization'' will cause future reductions in the 
conversion factor. In a ``zero sum game'' \8\ each participant attempts 
to maximize their own benefit, despite the negative effect that the 
aggregate behavior of all participants has on the subsequent year's 
conversion factor. Each physician currently has no information or 
mechanisms to influence the concurrent behavior of other physicians, 
and there is no mechanism by which physicians can cooperate to husband 
society's health care dollar. Thus, there is little ability to fulfill 
the profession's self-regulatory responsibility to society. Situations 
where there is a conflict between ``individual gain and the common 
good'' and in which the participants are unable to communicate are 
characteristic of the ``Prisoner's Dilemma'' \12\ in game theory and 
the related case known as the ``tragedy of the commons.'' \13\ The 
``commons'' has been described as a ``paradigm for situations in which 
people so impinge on each other in pursing their own interests that 
collectively they might be better off if they could be restrained, but 
no one gains individually by self-restraint.'' \13\ The recurring 
``crises'' in Medicare physician reimbursement, which are directly 
related to the growth in the volume and complexity of physician 
services, would seem to indicate that the current Medicare 
reimbursement mechanism is providing the necessary elements for a 
tragedy of the commons to continue.
    However, modifications to this Medicare reimbursement mechanism 
could serve as an initial step to more effectively engage the medical 
profession in fulfilling its responsibilities to society and in 
addressing the societal problem of unsustainable increases in 
healthcare expenditures. The key concepts involve an ability to assess 
the effectiveness of the care that is provided and the ability to self-
regulate. Ultimately, all physicians should wish to provide the most 
effective care for their patients, and ideally, the reimbursement 
system should promote effective care. I propose two changes to the 
current healthcare system to further these goals. First, each medical 
specialty or subspecialty should have a separate Medicare conversion 
factor. This change would create a significant incentive to self-
regulate and exert some control on the growth in the number and 
complexity of medical services, and it would place the level of self-
regulation at a level where such self-regulation could actually be 
effected. Second, Federal financial and administrative support for the 
establishment of clinical registries and databases should be provided 
so that a robust, credible assessment of individual physician 
performance and of the effectiveness of the diagnostic and treatment 
modalities being utilized would be possible. Free access to Medicare 
claims data would be essential to provide cost information. The Society 
of Thoracic Surgeons has taken an important leadership role in this 
area through its clinical database efforts \14\ and the development of 
performance metrics.\15\ By taking these these two steps, each medical 
specialty would have the incentives and the mechanisms by which to 
self-regulate, the major missing factor in the current ``tragedy of the 
commons'' situation in the American health care system.
    One result of these changes would be an annual allocation of 
Medicare physician payment resources to each individual medical 
specialty rather than the current aggregate allocation for all 
physician services. It would be more effective to place these 
allocations at the individual specialty or subspecialty level for 
several reasons. First, each specialty would have an incentive to 
develop and implement the most effective practices, since all members 
of that specialty and their patients would benefit from more effective 
use of physician resources. Ineffective and excessive uses of physician 
resources would penalize the members of that specialty, rather 
physicians of all other specialties, as occurs under the current 
system. Second, this restructuring of the reimbursement system would 
also provide both an incentive and resources for specialties to develop 
and maintain outcomes-focused registries and clinical databases, which 
can provide feedback of risk-adjusted outcomes to individual practices 
and institutions with peer comparison data, and which can lead to 
improved patient care and clinical outcomes.\16,17,18\ Such a mechanism 
would provide needed data by which to judge effectiveness and would be 
essential to assessing resource utilization. It would also allow each 
specialty to monitor and attempt to improve the performance of all 
physicians in the specialty, to identify and disseminate best 
practices, and to develop mechanisms to identify and assist 
institutions, practices, or individual physicians that have less 
favorable outcomes. In so doing, there would likely be a reduction in 
the variation in practices and outcomes that have been found to exist 
\19\ and which have been the basis of many criticisms of medical 
practice in the U.S.\20\
    An important change that could also result from this proposal is 
that Medicare allocation decisions for physician services could be made 
overtly rather than by the almost random allocations resulting from the 
collective action of individual physicians each acting in their own or 
their patients' interests. Such allocation decisions must be made based 
on where an investment of societal resources is judged to be needed 
and, equally importantly, on what the results of previous investments 
of resources have been. A data-driven body responsible for making these 
Medicare allocation decisions would have to be created with significant 
representation from both the public and from the profession. However, 
even if one simply started with the current allocation levels and only 
allowed each specialty's conversion factor to change annually in 
response to utilization, the proposed system would ameliorate the 
``commons'' problem between specialties and would strongly encourage 
professional self-regulation by making specialty members accountable to 
their closest colleagues.
    Critics may question the placement of the resource allocation at 
the medical specialty level, but it is at the specialty level where 
organizational structure and the most natural alignment of physicians' 
interests already exist. At this level, there is the greatest 
likelihood that collaboration and sharing of information on best 
practices, monitoring of clinical activity, and feedback of risk-
adjusted outcomes data could be accomplished. Alternatives such as 
resource allocation by disease management category or by expansion of 
global payments (pooling Medicare Part A and Part B) for complex 
hospital services could allow allocation decisions to be made at the 
local institutional level for tertiary services, but there is currently 
little organizational structure at either the national or local level 
to allow self-regulatory activity to occur, and it does little to 
address the office-based imaging and evaluation and management 
services, which are the fastest growing and largest volume physician 
services for which Medicare pays.\21\ Furthermore, professional peers 
from the same specialty are arguably in the best position to develop 
clinically appropriate outcome measures and risk adjustment algorithms, 
and physicians are reliably motivated by comparative national peer 
data. This proposal would also not preclude collaboration among 
specialties to pool resources in dealing with complex patients, such as 
those with heart failure, in a coordinated and collaborative fashion.
    A second potential criticism is that while this proposal might be 
applicable for a smaller specialty, those with large numbers of 
practitioners may still have the conditions for the ``tragedy of the 
commons'' to occur. For these specialties, organizations exist at the 
state or regional level where the peer pressures and data collection 
could be effectively managed.
    Two other significant issues should be addressed. First, some 
specialties will argue that they have no control over their volume of 
services, including emergency room physicians, radiologists, 
anesthesiologists, and pathologists. These specialists have less 
control over how frequently patients present to them, but they would 
have an incentive to manage their services to provide the most 
effective use of physician resources. If resource allocation updates 
were made annually, then an increase in patient volume in the previous 
year that is outside the control of the specialty, e.g. an influenza 
epidemic, could be considered in making the subsequent year's 
allocation. An equally important question is how physician services 
associated with new technologies and therapies could be funded to allow 
continued development of more effective therapies. The process of 
annual resource allocation decisions would have to include new funds 
for clinical ``research and development'' activities by physicians, but 
clinically based outcomes registries could facilitate the acquisition 
of information about the effectiveness of such new treatments and 
services. Notably, CMS currently links payment for expanded indications 
for cardioverter-defibrillator implants to a required submission of 
clinical information to a registry.\22\ Current Government and private 
healthcare funding mechanisms invest heavily in bench research, but far 
less Federal funding exists for the assessment of the effectiveness of 
therapies that are in the ``gap'' between the bench and accepted 
clinical practice. Expanded funding should support the acquisition of 
clinical effectiveness data on both ``established'' and new treatments 
through expansion of professional society based outcomes registries.
    The most fundamental change resulting from this proposal is an 
expanded role for individual professional societies in not only 
developing guidelines and best practices, but also in monitoring and 
actively improving the clinical performance of their members. The 
movement by medical specialty boards toward ``maintenance of 
certification'' is already underway. Incentives for each specialty to 
engage in monitoring members' clinical performance and the 
effectiveness of treatments could enhance these maintenance of 
certification efforts. Pellegrino and Relman argue that ``medicine is, 
in essence, a moral enterprise and its professional associations should 
therefore be built on ethically sound foundations'' \6\ but also noted 
that ``the history of professional medical associations reflects a 
constant tension between self-interest and ethical ideals that has 
never been resolved.'' \6\ If physician payment allocations were placed 
at the level of the individual medical specialty or subspecialty, the 
role of professional societies would expand to include the 
responsibility to husband the healthcare resources of American society. 
In so doing, medicine will have taken an important step toward 
resolving the tension between self-interest and ethical ideals and to 
better align our interests with the interests of the American society 
that we serve. In so doing, medicine could fulfill an important 
professional responsibility to society and simultaneously regain 
something of what it means to be a profession.
References:

 1. Himmelstein DU, Woolhandler S, Goodman JC, Sade RW. Our Health Care 
System at the Crossroads: Single Payer or Market Reform. Annals of Thoracic 
Surgery, 2007; 84:

 2. Beering S. The Liberally Educated Professional, in Vital Speeches 1990; 
576: 398-401.

 3. ABIM Foundation, ACP Foundation, European Federation of Internal 
Medicine. Medical Professionalism in the New Millenium: A Physician 
Charter, Annals of Internal Medicine 2002; 136: 243-246.

 4. Gruen RL, Pearson SD, Brenan TA. Physician-Citizens. Public Roles and 
Professional Obligations. JAMA 2004; 291: 94-9

 5. Krause EA, Death of the Guilds, Yale University Press, New Haven, 1995. 
p. 29-49

 6. Pelligrino ED, Relman AS. Professional Medical Associations. Ethical 
and Practical Guidelines. JAMA 1999; 282: 984-986.

 7. Medicare RBRVS: The Physicians' Guide, Gallagher PE editor, AMA Press, 
Chicago, 2005, p 71-76

 8. Poundstone W. Prisoner's Dilemma, Doubleday, New York, 1992, p. 51

 9. Federal Register, Vol 71. No. 231, December 1, 2006 p. 69760

10. Federal Register Vol 72. No. 133, June 12, 2007 p. 38214

11. Harrington, P. Quality As a System Property: Section 646 of the 
Medicare Modernization Act. Health Affairs. Variations Revisited. Project 
Hope. Millwood, VA, 2004. VAR 136-140

12. Poundstone W. Prisoner's Dilemma, Doubleday, New York, 1992, pgs. 117-
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13. Schelling TC. Micromotives and Macrobehavoirs. W.W Norton & Company, 
New York, 1978, p 111

14. Rich J, Official Testimony to U.S. House Committee on Ways and Means--
Health Subcommittee, March 15, 2005 Serial No. 109-39. U.S. Government 
Printing Office DOCID f:26373.wais

15. Shahian DM, Edwards FH, Ferraris VA, Haan CK, Rich JB, Normand ST, 
DeLong ER, O'Brien S, Shewan CM, Dokholyan R, Peterson ED. Quality 
Measurement in Adult Cardiac Surgery: Part 1--Conceptual Framework and 
Measure Selection. Annals of Thoracic Surgery 2007; 83: S3-S12.

16. Ferguson TB et al. Use of continuous quality improvement to increase 
use of process measures in patients undergoing coronary artery bypass graft 
surgery: a randomized controlled trial. JAMA 2003; 290: 49-56

17. Khuri SF, Daley J, Henderson W et al. The Department of Veterans 
Affairs NSQIP. The first national, validated, outcome-based, risk-adjusted, 
and peer-controlled program for the assessment and enhancement of the 
quality of surgical care. Annals of Surgery 1998; 228: 491-507

18. O'Connor GT et al. A Regional Intervention to Improve the Hospital 
Mortality Associated with Coronary Artery Bypass Graft Surgery, The 
Northern New England Cardiovascular Disease Study Group. JAMA 1996; 275: 
841-46

19. Wennberg, JE and Cooper MM, editors, The Quality of Medical Care in the 
United States: A Report on the Medicare Program, The Dartmouth Atlas of 
Health Care 1999. American Health Association Press

20. Wennberg, JE, Practice Variations and Health Care Reform: Connecting 
the Dots. Health Affairs, Variations Revisited. 2004, VAR 140-143

21. Catlin A, Cowan C, Heffler S, Washington B, et al. National Health 
Spending in 2005: The Slowdown Continues. Heath Affairs 2007; 26: 142-153

22. http://www.cms.hhs.gov/medlearn/mmarticles/2005/mm3604

                                 
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