[Senate Hearing 112-768]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-768
 
                      ROUNDTABLE DISCUSSION ON MEDICARE 
                    PHYSICIAN PAYMENTS: UNDERSTANDING THE
                      PAST SO WE CAN ENVISION THE FUTURE

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 10, 2012

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance



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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico            JON KYL, Arizona
JOHN F. KERRY, Massachusetts         MIKE CRAPO, Idaho
RON WYDEN, Oregon                    PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan            JOHN CORNYN, Texas
MARIA CANTWELL, Washington           TOM COBURN, Oklahoma
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland

                    Russell Sullivan, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)




                            C O N T E N T S

                               __________

                           OPENING STATEMENT

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     1

                               WITNESSES

Wilensky, Hon. Gail, Ph.D., senior fellow, Project HOPE, 
  Bethesda, MD...................................................     3
Vladeck, Hon. Bruce, Ph.D., senior advisor, Nexera, Inc., New 
  York, NY.......................................................     5
Scully, Hon. Thomas, J.D., senior counsel, Alston and Bird, LLP, 
  Washington, DC.................................................     7
McClellan, Hon. Mark, M.D., Ph.D., senior fellow, Brookings 
  Institution, Washington, DC....................................     9

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Prepared statement...........................................    31
Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    32
McClellan, Hon. Mark, M.D., Ph.D.:
    Testimony....................................................     9
    Prepared statement...........................................    34
Scully, Hon. Thomas, J.D.:
    Testimony....................................................     7
    Prepared statement...........................................    44
Vladeck, Hon. Bruce, Ph.D.:
    Testimony....................................................     5
    Prepared statement...........................................    50
Wilensky, Hon. Gail, Ph.D.:
    Testimony....................................................     3
    Prepared statement...........................................    60

                             Communications

Center for Fiscal Equity.........................................    71
National Committee for Quality Assurance (NCQA)..................    75

                                 (iii)


ROUNDTABLE DISCUSSION ON MEDICARE PHYSICIAN PAYMENTS: UNDERSTANDING THE



                   PAST SO WE CAN ENVISION THE FUTURE

                              ----------                              


                         THURSDAY, MAY 10, 2012

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:14 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Bingaman, Kerry, Wyden, Stabenow, 
Cantwell, Carper, Cardin, Hatch, Grassley, Roberts, Coburn, and 
Thune.

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Let us get this going. Senator Baucus has 
been detained down at the White House, and, as I understand it, 
he has asked me to get this moving.
    And let me just use some of what he would say. As is 
apparent from the physical seating today, today's forum is not 
a traditional hearing. Senator Baucus and I agreed to try today 
as an experiment. We want to facilitate deeper discussion. If 
it works, we will try it again. If it does not, we will not.
    I have no doubt that my colleagues will let us know what 
they think.
    Now, this is Senator Baucus speaking. After the statements 
of our participants, we will dive into discussion. Any Senator 
may comment or ask a question, and any Senator or participant 
may follow up. There is no order of questioners. If you want to 
speak, signal that to the chairman or me, if I am doing it, and 
he will call on you as quickly as possible. Senator Baucus and 
I will do our best to make sure comments and questions come 
equally from our Democratic and Republican Senators so that 
everybody is given a chance.
    Now, I want to thank the chairman for convening--and it is 
a nice experiment here--today's roundtable on this important 
issue, one that affects our Nation's caregivers and patients.
    Now this is, without question, a distinguished panel. I 
know each and every one of you, and we are very proud to have 
all of you here today, and it means a great deal to this 
committee to have you here.
    It is an encouraging forum for promoting a bipartisan 
solution to the critical problems posed by Medicare physician 
reimbursement. And, as many of you know, Chairman Baucus and I 
have both called for repeal of the flawed Sustainable Growth 
Rate payment formula. No one likes the annual end-of-the-year 
scramble to stop catastrophic payment cuts to physicians 
serving Medicare beneficiaries. Yet, while there is broad 
agreement that our current situation is not tenable, a solution 
has eluded the Congress up to this particular point.
    The flawed SGR policy really is a 2-part problem. The issue 
that typically receives our attention is how we pay for a 
repeal or temporary fix of the formula. But the problem we hope 
to address today is more challenging. How do we move beyond the 
SGR? If we repeal the SGR or freeze physician payments for an 
extended period of time, we have only kicked the can down the 
road. We have not fixed the system, we have only left it for 
others to address. We need to move forward toward a permanent 
solution, one that makes real advancements in how we pay for 
and deliver care.
    We need to provide a stable foundation for paying 
physicians today and tomorrow, not 5 or 10 years from now. And 
we must accept that many of these proposals advocated for today 
are, at best, years away from broad implementation and, quite 
possibly, will never work for many sole practitioners or small 
group practices treating Medicare beneficiaries.
    Now, I want to thank the chairman again for convening this 
roundtable, and I personally look forward to hearing from our 
witnesses. My hope is that we will not get distracted by the 
budget issues with which we are all well-aware. Instead, I know 
both of us look forward to a fruitful discussion about the 
steps we must take to address this complex issue and encourage 
practical and realistic solutions. And I hope that this is the 
beginning of a meaningful discussion or set of discussions for 
our committee.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    Senator Hatch. Now, I guess Senator Baucus is still not 
here.
    Let me just say that I am pleased to welcome our 
participants for today's roundtable. All of them are former 
Administrators of CMS or its predecessor, the Health Care 
Financing Administration, known as HCFA.
    Today we will hear from Gail Wilensky. Gail is a senior 
fellow at Project HOPE. Gail was Administrator at HCFA from 
1990 to 1992. We are really pleased to have you here, Gail.
    Next we will hear from Dr. Bruce Vladeck. Bruce was here 
last year to testify before the committee, and I am happy that 
you were willing to come back. Bruce is a senior advisor at 
Nexera and served as Administrator of HCFA from 1993 to 1997.
    After that, we are going to hear from Mr. Thomas Scully. 
Thomas is senior counsel at Alston and Bird. He was 
Administrator of CMS from 2001 to 2004.
    Finally, we are going to hear from Dr. Mark McClellan. Mark 
is the director of the Engelberg Center for Health Reform at 
the Brookings Institution. Mark was the Administrator of CMS 
from 2004 to 2006.
    As a reminder, your written statements will be included in 
the record. And so we will begin with you, Ms. Wilensky, and go 
from there.

            STATEMENT OF HON. GAIL WILENSKY, Ph.D., 
           SENIOR FELLOW, PROJECT HOPE, BETHESDA, MD

    Ms. Wilensky. Thank you very much, Senator Hatch and 
members of the Finance Committee. Thank you for inviting me 
here to participate in this roundtable on Medicare physician 
payment reform.
    As you have just indicated, Senator Hatch, I have had the 
honor and privilege of directing the Medicare and Medicaid 
programs, as have my colleagues to my left. I served as the 
Administrator of what was then called the Health Care Financing 
Administration from 1990 to 1992. I chaired the Physician 
Payment Review Commission for 2 years after that, and I chaired 
the Medicare Payment Advisory Commission from 1997 to 2001.
    I am going to use my time to review a little bit the 
background as to what we had before we had the Relative Value 
Scale and how we have gotten to the position where we are, in 
order to give some thoughts about what we need to do next.
    As you know, for most services, Medicare uses a bundled 
payment service now. It started in 1983 when we moved hospital 
inpatient reimbursement to a prospective payment system. It has 
been expanded to the capital payments, to outpatient hospitals, 
to home care, and to nursing homes. When those types of bundled 
payments have been used, we have updated the amount paid using 
an inflation measure and made an adjustment for productivity.
    Physician payments continue to be and have always been very 
different from the bundled payment strategy that we use 
elsewhere in Medicare. There are some 7,000 or more Current 
Procedural Terminology codes that are used to bill. The updates 
were done by a top-down strategy initially, after the 1989 
legislation, with the Volume Performance Standard, now the SGR 
and, also, adjustments for the Medicare Economic Index that is 
adjusted by these expenditure targets. The initial period for 
physician payment was from 1965 to 1984.
    Senator Baucus, welcome.
    The fees during that period were based on a historical 
charge basis. And what was seen using historical charges was 
that charges went up and volume of spending also went up.
    We had a second period starting in 1984 through 1991, right 
before the Resource-Based Relative Value Scale, or RBRVS, was 
implemented, when the increase was based on the Medicare 
Economic Index. Basically, we tried to measure the cost for 
physicians. What we saw there was also rapid growth in fees and 
rapid growth in spending.
    Looking at that period as a whole, it became clear that 
controlling only fees was not a very effective way to control 
spending. During the period of the 1980s, spending for 
physician services grew more rapidly than spending even for 
other services in Medicare.
    At the very end of 1989, the Congress had passed the 
Relative Value Scale. That was a very different way to try to 
have this very disaggregated fee schedule used. Rather than 
basing it on historically based charges, there was a 
calculation of work effort, practice expense, and liability. 
There was a limitation for the liability that beneficiaries 
would face. There was a deliberate intention to shift some of 
the reimbursement away from proceduralists and toward primary 
care services, and away from urban and toward rural areas.
    At the same time, a volume control strategy was introduced 
to try to limit spending under this very disaggregated fee 
schedule. Initially, the Volume Performance Standard looked 
back 2 years and tied the increase not only to costs adjusted 
for changes in statute, but also looked at actual expenditures 
versus what the specified expenditures had been and made an 
adjustment either up or down based on whether expenditures were 
lower or higher than had been expected.
    There were some problems with it. It was an unstable way to 
make the adjustment, and it was replaced in the Balanced Budget 
Act with the Sustainable Growth Rate. You have had a lot of 
experience now with the Sustainable Growth Rate. It is 
basically tied to the growth in real GDP per capita. You are 
now using, since 2003, a 10-year moving average rather than a 
single point in time, and it is used to update the Medicare 
Economic Index.
    There is good news and bad news with the change. The use of 
the Relative Value Scale was an attempt to get away from some 
of the biases historically that were regarded as being in the 
fee schedule, and the SGR was more stable than the Volume 
Performance Standard. But when you look at the incentives that 
are involved, they are just awful. There is no reward for 
efficiency. There is no reward for quality. There is, worst of 
all, no link to how any individual physician or the physician's 
practice behaves, which is a very bad set of incentives. It 
makes it very hard to drive accountability or responsibility, 
basically because of the use of the 7,000-plus codes, combined 
with the SGR.
    To my mind, there are really two strategies that you can 
use in its place. One is, you could try to refine the Relative 
Value Scale. A number of people have made suggestions about how 
to do it to make it more accurate than it is now, using better 
data. And most importantly, you could set the Sustainable 
Growth Rate close to the physician's own practice so there 
would be a direct link between the update and the actual 
behavior of the physician and the physician's group.
    What I think is a better strategy is to try to move toward 
more bundled payments for physicians, as you have everywhere 
else in Medicare. You can start with chronic diseases, with or 
without ancillary services being provided. You can look at the 
high cost/high volume interventions. There are already some 
pilots that are moving in that direction, the ACE pilots.
    Believe it or not, 20 years ago, when I was the 
Administrator, we had the bypass demonstration that did 
precisely that. Bruce also had a chance to oversee that. It 
went on for 10 years. And you can begin to move to more 
accountable units in that way.
    The bad news is, there are no quick fixes on the horizon. 
To me, removing the SGR and not making any other changes in 
physician payment is simply not a solution. We know what will 
happen. Expenditures for physician services will grow more 
rapidly than other areas.
    Unfortunately, because not enough work has been done over 
the last decade or two, despite many of us commenting on the 
need for it, there is no alternative ready for prime time right 
now.
    What we need to do is make sure the pilots get started as 
quickly as possible. And for me, I do not want to only see them 
bundled with hospital payment. I think it is a very serious 
mistake to push all physicians or to think all physicians will 
be employed by hospitals or are part of hospitals.
    We need to have a better way to pay physicians directly. I 
think that will continue to be an important part of the 
landscape in the future.
    Thank you.
    [The prepared statement of Ms. Wilensky appears in the 
appendix.]
    The Chairman. Thanks, Gail, very much. I apologize for 
being late. I was down at the White House.
    Bruce, go ahead. And thanks, all of you, for coming. I 
really appreciate it, Bruce, Tom, Mark, all of you.

            STATEMENT OF HON. BRUCE VLADECK, Ph.D., 
           SENIOR ADVISOR, NEXERA, INC., NEW YORK, NY

    Mr. Vladeck. Thank you, Senator.
    This is such a distinguished group of people who have been 
through some similar experiences as I. I really want to make 
just a few points about these issues very quickly.
    I think there is a tendency, certainly, on the part of the 
policy community and a lot of our former colleagues, in the 
quest for something that is theoretically consistent or 
something that fits with people's ideas of how the world ought 
to work, to make things more complicated than they really need 
to be.
    In fact, it is a very diverse health care system out there. 
It is a very heterogeneous system. It is very different from 
one community to another.
    I think we have learned in physician payment in the 
Medicare program over the last 40-some years that one size 
cannot possibly fit all and does not fit all. And I think 
defining the future directions forward in terms of one sort of 
cure-all or one particular solution or one easy and elegant 
kind of fix is not going to be successful over time.
    I very much agree with some of the comments that Gail has 
just made and some of the comments in Mark's statement, in 
particular, about the importance of experimenting with bundled 
payments, of thinking about new units and different units of 
paying for physician services.
    We have done that, sort of in evolutionary terms, in some 
parts of the medical system over the years in the way we pay 
some surgeons, for example, and there are a lot of different 
ways. Further experimentation in other kinds of models, I 
think, is already underway.
    I think some of us are being reminded, watching the 
travails of our friends at the Centers for Medicare and 
Medicaid Innovation, that actually doing these experiments is 
often more complicated than one would hope. But there is an 
awful lot of ferment and an awful lot of activity going on out 
there, and I think it is really a good thing.
    Just a couple of other sort of general points I would make. 
The notion that expenditures on physician services in the 
Medicare program are at risk of growing more quickly than other 
categories of expenditures and that that should be a particular 
problem, it is not clear to me that that is true.
    I think there is an underlying policy direction where we 
are trying to get services out of institutional settings, away 
from expensive institutional control, into outpatient and 
community-based settings. And, if you do that, you, over time, 
should spend less money on hospitals, you should spend less 
money on other kinds of health care facilities, and more money 
on physician services.
    So, depending on what you are getting for that increase in 
dollars over time, we might be better off if the share of 
physician services in the Medicare program increases. And I 
think that is just another example of how the application of 
uniform policies can produce undesirable sorts of results.
    I do think, however, that is imperative that we fix the 
RBRVS and that we address some of the problems inherent in its 
construction, many of them having to do with practice expense, 
and some of the problems inherent in the way it has evolved 
over the years.
    No matter how quickly we can move Medicare to other kinds 
of bundles or other kinds of payment methods, there is going to 
be an awful lot of fee-for-service payment in the American 
health care system for years to come. And part of the problem 
is that RBRVS not only sets relative Medicare payments, it is 
used by almost everybody else in the health care system as a 
way of evaluating the relative worth of physician services.
    And, to the extent that it continues to over-reward 
procedural, interventional, and technologically intensive 
services and to under-reward basic primary care services, it 
exacerbates the already serious and worsening problem we have 
in our health care system of just having not enough primary 
care physicians and too many specialists.
    It is very difficult in many communities in the United 
States today for people coming out of primary care training 
programs to make enough money to pay off their student 
indebtedness, and it is very difficult even for well-insured, 
sophisticated consumers, like my children, who have recently 
relocated to major metropolitan areas, to find capable primary 
care doctors.
    So there are many components to that issue, but income is 
central to the problem, and the RBRVS is central to the income 
problem of primary care physicians. And there are a number of 
ways to address that or fix it, but I think we ought to decide, 
as a matter of policy, just to do something direct, possibly 
relatively arbitrary in the short-term, as part of a broader 
process of resetting these relative values.
    I think when we adopted the SGR as part of the Balanced 
Budget Act in 1997, I think the Congress made a mistake. It was 
not the only mistake we made in the Balanced Budget Act. And, 
as I have been thinking about the history of these events in 
preparation for today, I am reminded that, among other things, 
both the CBO and OMB badly misestimated the impacts on 
providers of most of the major changes in payment systems in 
the Balanced Budget Act. And partially, as a result, Congress, 
in 1989 and then again in 1999 and then again in 2001, 
significantly amended the legislation to change many of the 
payment formulas that had been authored by the Balanced Budget 
Act.
    One of the things that the Congress did not address at the 
time was the SGR, because it had not really kicked in yet and 
its effects had not yet really been seen.
    But, in fact, the way in which the SGR is written and the 
way it has been defined and interpreted by CBO creates this--
what I strongly believe is this largely artificial, enormously 
large number that is identified with the cost of fixing it, 
which is an artifact not, as far as I can tell, of any 
underlying economic reality. It is an artifact of the way the 
formula was written and the way the projections are made. And 
so it has become a major deterrent for the Congress or for the 
executive branch to fixing a mistake that was made, along with 
many other mistakes in the history of legislation, about 
payment systems under the Medicare program.
    And I am hopeful that some combination of the need to 
address overall deficit reduction strategies more generally and 
a different kind of political climate in the relatively near 
future will create the opportunity for people to say, ``We made 
a mistake in 1997. We created a formula that produces 
irrational and counterintuitive results, and we are just going 
to abolish it and start all over again in terms of some kind of 
cap on Part B payments.''
    That is the only way we are ever going to sort of get out 
of this morass. And I can tell you with some confidence that, 
while it will appear as a major crisis in terms of overall 
budgetary strategy, in the real world of how we pay physicians 
and how the government of the United States operates, it will 
have almost no visible effect whatsoever.
    So that is the political and psychological hurdle that 
needs to be surmounted if we are going to fix this very serious 
problem.
    Again, thank you very much for the opportunity to be here 
today.
    [The prepared statement of Mr. Vladeck appears in the 
appendix.]
    The Chairman. Thank you, Bruce.
    Tom, let us hear your wisdom here.

            STATEMENT OF HON. THOMAS SCULLY, J.D., 
      SENIOR COUNSEL, ALSTON AND BIRD, LLP, WASHINGTON, DC

    Mr. Scully. Thank you, Mr. Chairman. Thanks for having us.
    I would just note, first, for the four of us, believe it or 
not, even though we disagree on the policy, we are all pretty 
good friends and have talked among each other for years, along 
with Nancy-Ann Min DeParle, who was Administrator, and Bill 
Roper and Leonard Schaeffer and the other, I guess, confirmed 
CMS or HCFA Administrators. And we have a very civil, friendly 
discourse regularly and keep up regularly, and it is a very 
nice thing. And I appreciate you having us here today.
    I have been very involved with this. As I noted in my 
testimony, I was one of the White House guys and the staff 
person, along with Bill Roper, in 1989 who got to push this 
thing through. So, sorry, but at the time, it seemed like a 
good idea. And I still think it was a lot better than we had in 
1988, and it was well-intentioned.
    It caused a lot of chaos. I think it, obviously, needs to 
be fixed. It was then called the RBRVS system. It was invented, 
at least conceptually, by Dr. Hsiao, a professor at Harvard.
    And what needs to be fixed is the SGR, and I went through 
some of the history of that, about why that happened in 1997. 
It was a swap. We needed to save money in 1997, and the 
physicians volunteered that as their saver. The hospitals took 
big hits, though, and the health guys took big hits, the 
skilled nursing facilities took big hits, and the physicians 
came in and said, instead of taking big cuts, let us just swap 
a formula change, and it was a big score from CBO, and that is 
why it was done.
    So, obviously, it did not work and needs to be fixed. But 
the intention and what happened with RBRVS was to basically 
come up with something, as Bruce said, a global system of 
figuring out, when you will go from 6,000 codes to 7,000 codes, 
as we have in the last 10 years--you have to add some--somehow 
it has to come out and be paid for, even if you do not have the 
SGR. So keeping some sense of budget discipline in this is very 
important.
    I think, in the long run, as Gail mentioned, the move to 
capitation is where the world is going, and I think the ACE 
program is a great example of that. I think the Accountable 
Care Organizations, while there are some flaws--and I agree 
with Gail's concern about pushing people too quickly to a 
hospital-based system--but the concept is it is basically a 
physician-based concept, and it is the right direction to go.
    When I got to HCFA--I guess I am the only one who was both 
HCFA and CMS Administrator--we had 4 percent of people with 
Medicare Advantage. It is now 25 percent. I think that trend 
will continue to grow. But you still have 75 percent of people 
on Medicare fee-for-service, and we need to make sure that 
system works.
    So, regardless of how we drop the SGR, I think you need to 
make the continuing RBRVS/SGR system work. And one of the 
things I mention in my testimony is, I think one of the biggest 
mistakes we made was--it is not their fault, as I mentioned--we 
took the RUC, which was a big system of the U.N. for health 
care back in 1992, and gave it to the AMA.
    So when you sit around and decide who gets paid what, a 
surgeon versus a primary care doc, it is a system that is run 
through the AMA. It is not their fault, but it is very, very 
politicized. I think that was a big mistake, and I have said 
that in my testimony.
    I think that, when you go back to restructuring this, you 
should try to make it less political and more independent, 
because it is $75 billion a year or more at this point that 
gets redistributed, and it is very, very intense between 
physicians, and it is something that most people are not aware 
of. But it is very sensitive and I think we made a big mistake 
in the way it was done in 1992, and others may opine on that.
    The final thing I would say is, it may not be popular, but 
CMS is a great institution. There are a lot of great people. It 
spends 
$1 trillion a year. It is bigger than the Defense Department by 
quite a bit.
    Some of the staff may remember, the first thing I did when 
I became CMS Administrator is I took the entire Finance 
Committee on a bus to Baltimore to see CMS. And I know that 
Senator Cardin, who is not here, has been there a bunch, 
because it is his State.
    But it is a great place. They are doing a great job. They 
spend an awful lot of taxpayer dollars. And I think 
understanding how these systems work, including the RUC, 
including how the physician payment system works and the 
details, is extremely important, and Congress spends not a lot 
of time on it.
    So I am thrilled that you are spending time on it today, 
and we are all happy to be here, and we will have input in 
helping you as you reshape it. But there is no doubt SGR is not 
working. There is no doubt it has to be fixed. But there is 
also, I think, no doubt in my mind, the sense of budget 
discipline--that was not there before 1989--needs to be 
retained.
    Thank you.
    [The prepared statement of Mr. Scully appears in the 
appendix.]
    The Chairman. Your last sentence again.
    Mr. Scully. Before 1989, there was no discipline at all in 
Part B, and, while the SGR system is flawed, some semblance of 
budgetary control, which RBRVS was, obviously, needs to be 
retained.
    Thank you, Mr. Chairman.
    The Chairman. Thanks, Tom.
    Mark?

        STATEMENT OF HON. MARK McCLELLAN, M.D., Ph.D., 
      SENIOR FELLOW, BROOKINGS INSTITUTION, WASHINGTON, DC

    Dr. McClellan. Mr. Chairman, Senator Hatch, all of you, 
thanks for the opportunity to join you.
    The Chairman. I want to remind everybody here, we are going 
to try a different approach, kind of like the Supreme Court. We 
have 12 on this court. So when you finish, then we are just 
going to all ask questions and each respect each other. All of 
you respect all of us, we will respect you, nobody monopolize 
and anybody jump in, each speaks for himself or herself, in 
every sense of the term.
    Go ahead, Mark.
    Dr. McClellan. Thank you. I would like to get right to that 
discussion, but I did also want to highlight how important this 
issue is for health care reform.
    It is the physicians and the health professionals who work 
with them that are the linchpin of our health care system. They 
are the ones who make the decisions that influence how all the 
dollars are spent, make the decisions that influence what 
happens to patients, and how they are paid has a big impact on 
what they are able to do and the kind of care that they are 
able to support.
    You already heard from the rest of this distinguished panel 
about a lot of the details on where the RBRVS and SGR came 
from. So I am not going to recap that either.
    I do want to note just how much legislative effort ends up 
being devoted year after year to stopgap measures to plug or 
patch the SGR. And, as a result, both physician organizations 
and Congress have a lot less opportunity than they would 
otherwise to focus on real physician-led improvements in care 
that could reduce long-term costs. And this gets harder and 
harder as the SGR target gets farther and farther away from 
where we are.
    By the time I got to be Administrator in 2004, in fact, we 
were all having hearings about how to reform the SGR and how to 
address these changes in payment that appear to be getting 
unsustainable. And you all may remember that we had a lot of 
discussions then about some of the ideas that you have already 
heard on this panel: moving away from fee-for-service payments 
toward more bundled payments or other efforts that would try to 
provide better support for improving care and lowering health 
care costs.
    What has happened since then is that both the opportunities 
for doing that have become clearer and the pressures for doing 
it have become clearer, as well. And, while Bruce is right that 
there is no easy, one-size-fits-all solution, I think it is 
very clear at this point that we cannot just do another patch 
or we should not just do another patch.
    And I want to thank you again for your leadership in making 
this year different, maybe the year when some real alternatives 
to the SGR actually emerge and can be sustained. In my written 
statement, I talked about what I think is the most important 
factor for that to actually happen, and that is some real 
leadership from the physician community.
    I think the good news there is that a lot of physician 
groups around the country--in their own practices and working 
with private payers and working through communities and working 
with Medicare on not just pilot programs, but now integral 
parts of Medicare, like the accountable care organization 
program--are asking the key question, which is, where are the 
best opportunities to improve care and avoid unnecessary costs 
for Medicare beneficiaries, and then how do we actually get the 
support we need, the financial support we need, which is not 
necessarily there in fee-for-service payments, to make it 
happen?
    These include ideas like relying more on nurse 
practitioners to help with managing care for chronically ill 
patients and for identifying patients who could benefit from 
preventive services who are not getting them, to spending more 
time being available for consultations with patients and 
reviewing with them what their treatment options are, what the 
evidence says, and being available if they are having 
complications, maybe heading off a visit to the emergency room, 
maybe heading off some unnecessary treatments and procedures. 
But it is very hard to do that with current fee-for-service 
payments, because a lot of those kinds of services that I just 
described either are not reimbursed at all or are reimbursed in 
a very limited way.
    So what these actual reforms are doing is not just hoping 
we can make things better, but shifting the way that the 
physicians receive payments from traditional fee-for-service 
and RBRVS towards either a bundle around caring for a patient 
overall within their specialty or coordinating care with other 
specialties.
    In my testimony, I give you a lot of examples of how that 
is happening in oncology, in cardiology, nephrology, surgery, 
radiology, pathology. Lots of specialties are moving in this 
direction, and there is also a lot of leadership taking place 
in primary care, where you can see the move towards medical 
home payments--which are for coordinating care for a patient, 
managing their overall care--and away from fee-for-service 
payments is making a difference already for primary care 
physicians and giving them more opportunities to lead in these 
real reforms in health care delivery.
    In fact, in an ACO learning network that we support at 
Brookings, along with Dartmouth, there are many organizations 
in the private sector that have added accountability for 
overall costs and for overall health improvements to the 
medical home payments that they are giving to primary care 
physicians.
    As Tom was saying a minute ago, that is kind of the 
physician-oriented version of accountable care organizations, 
which is really expanding right now, not only in the private 
sector, but also now in the Medicare program as well.
    So I think this is a very important time for physician 
leadership. That needs to be matched by the kind of attention 
that you all are providing today by starting earlier, not 
waiting until the last minute, despite everything else that is 
going on, despite the presidential election, to turn these good 
ideas and positive steps that are taking place in the private 
sector and, to some extent, in Medicare already, into at least 
the start of a systematic change away from the SGR.
    So thank you again for the opportunity to help you address 
these issues and, hopefully, to help make these needed reforms 
happen.
    The Chairman. Thanks, Mark.
    [The prepared statement of Dr. McClellan appears in the 
appendix.]
    The Chairman. I will just ask the first question.
    First of all, the current SGR drives us all crazy. I think 
it especially drives this committee crazy. We have to figure 
out a way to pay for it every year. As you have said, it takes 
way too much time that could be devoted to other more 
important, longer-term issues.
    The drift I am picking up is this: let us get rid of this 
thing, but let us move sensitively and reasonably, 
appropriately, to a different sort of either bundled payment or 
ACO, medical home, or some kind of pilot project.
    I assume that is the drift among most, although, Bruce, you 
wonder about that a little bit. So we have a heterogeneous 
system. Maybe we should go that way a little bit.
    Anyway, my question is, which of these different areas 
tends to be most promising? How do we prioritize? How do we 
transition to whatever it is we are transitioning to?
    Sometimes the grass is always greener. We have to be 
careful where we are going. But whether it is the 
cardiologists--are they doing some of this? And orthopedists 
are doing some of this too, I guess.
    Why are some areas doing better than others, and where do 
we go? Anybody, just jump into it. Anybody. Anybody jump in 
here.
    Gail?
    Ms. Wilensky. I would start where the money is. I would 
pick the procedures that are the high cost/high volume, and get 
those bundled.
    As I have said, we started when I was Administrator with a 
bypass demonstration, where all of the physicians who are 
involved in providing a bypass with the hospital came in, had a 
combined payment, were monitored for quality and clinical 
outcomes--as best we were doing it in the 1990s--and patient 
satisfaction.
    The areas are chronic disease and the high cost/high volume 
procedures. And trying pilots right away that are--some that 
are wrapped with the hospital, which would match what the 
innovation center is trying to pilot. I would strongly urge 
some that do not include the hospital in an attempt to try to 
promote multi-specialty surgeon practices and more physician 
leadership.
    I agree very much with Mark's statement: they drive the 
health care system.
    The Chairman. Bruce or anybody else, jump in anytime you 
want.
    Go ahead, Bruce.
    Mr. Vladeck. I would suggest that there are possible 
approaches that are less directive on the part of the 
government, and I would push to find more ways to open 
alternative paths so that different physician groups or 
different other kinds of provider groups could come up with 
their own ideas.
    And I would just suggest, for example, that if you take any 
sets of codes in the RBRVS that now have individual prices to 
them and you had a bunch of physicians in some community say, 
``We'll provide services for the following 38 codes''--which is 
not dissimilar from what Mark was talking about--``and we have 
a formula that I think you could do that says, pay us 95 
percent of what you would pay for the existing kinds of cases 
that you see,'' whether they are high volume/high cost cases or 
they are just those that are particularly appropriate for new 
kinds of approaches or new kinds of incentives, you would get 
all kinds of interesting things.
    I think what we need to do is, rather than doing one 
experiment at a time, try to find formulas by which Medicare 
says to the physician community, ``You can get paid item-by-
item or we will encourage the bundling of different kinds of 
items, and here is a general methodology or formula for doing 
so, and, if you can put together a package, we will try it.''
    The Chairman. That would be similar to, for example, dual-
eligibles. CMS is trying to figure out pilot projects designed 
to manage duals. But they have two basic approaches as they try 
to coordinate it, instead of just, everybody comes up with his 
own way.
    Should that happen here too, as we move, and say to 
providers, docs, here are two or three basic approaches, or 
not?
    Mr. Vladeck. I think that would be definitely worth 
exploring. I think that is what we should do. You can get paid 
on a shared savings basis, or you can get paid an upfront 95 
percent of what this set of codes would ordinarily pay in your 
geographic area, or then you could get paid fee-for-service.
    I think that is doable, and I think--to get to a separate 
digressive hobbyhorse of mine, you probably would have to 
increase the contractor budgets a bit out of appropriated funds 
in order to manage that.
    But I think with existing--I think private payers that have 
better computer capability than the Medicare contractors are 
playing around with this kind of stuff already. So I do not see 
any sort of technical or logical objection to doing it.
    It would take you a while to figure out what the formulas 
ought to be, but you could do that.
    The Chairman. Just jump in. Anybody, just jump in.
    Senator Stabenow. Mr. Chairman, can I just follow-up? 
Because we are talking about alternatives and creative 
approaches. And we appreciate all of you being here.
    In health reform, we passed a number of options. I wonder 
if you could speak to that. We now have the pioneer accountable 
care organizations. They just announced a number of those. I am 
very pleased that Michigan was designated on three of those, 
and one is physician control and others. And then there has 
also been the multi-payer plan, multi-payer demonstration that 
is being put forward that is with private sector and hospitals 
and so on.
    We have bundled payments. We have a number of different 
things that we have done. So we are moving. The accountable 
care organizations right now are moving. There are 
demonstration projects.
    I am wondering how each of you would see these ramping up. 
What needs to happen at CMS to be able to really move forward 
with those in the process? And how could we do more of the 
multi-payer opportunities? Because it seems like we gave the 
structure. They are now designating hospitals and provider 
groups to do these things.
    So, is it not more of just doing the things that we have 
already put in place structurally and trying to get them up and 
going and getting the results as quickly as we could?
    Mr. Scully. I think everything that is going on in the ACOs 
is great. As Gail alluded to, you have to be able to be a 
little careful--and I had this debate with Don Berwick in the 
Wall Street Journal.
    But the goal of ACOs was to drive doctors' control of 
behavior, as Dr. Coburn knows. Doctors take care of patients, 
and the goal of ACOs was to empower doctors, to give them risk 
to keep people out of hospitals.
    And I used to run a big hospital association. I love 
hospitals. But the goal was to keep people out of hospitals and 
to pay the physicians for behavior to keep hospital beds empty.
    What has happened, which is a little dangerous, in the last 
5 years is that more and more of the ACOs are hospital-based. 
The number of physicians who were working independently and now 
work for hospitals has gone from 40 percent of physicians to 60 
percent in the last couple of years.
    So I love hospitals and I love the ACO movement and I love 
the capitation movement, and all this is a move in the right 
direction. You have to be a little careful that you do not make 
it so hospital facility-based, because the reality is, every 
hospital in the country has a crane in front of it, and they 
are very expensive. And the more you get into the hospital-
based system, the costs go up, not down.
    And I love physicians, but this is all about financial 
incentives and----
    Dr. McClellan. I do think this is why you need to make 
changes in the SGR. It is much harder for physicians to lead in 
these efforts when they are spending so much of their time 
lobbying about a short-term SGR patch and trying to make ends 
meet with this kind of reform care. That is what we would like 
to see. But they are not getting paid in a way that supports it 
in their foundational payment system.
    So I am all for the pilots that move toward bundles and 
things like that, but when you have an underlying base system 
that is the core of physician reimbursement which does not 
support that kind of leadership, we are in the wrong place.
    Senator Stabenow. And if I could just quickly follow up on 
that, and I know that Tom wants to speak.
    I could not agree more about SGR and that we have to look 
at multiple things. I guess what I wanted to emphasize is that 
it seems like, through the Affordable Care Act, we have laid 
out some options, and it sounds like you guys are all talking 
about those kinds of options.
    And I know at least with the Detroit Medical Center, it is 
physician-based. It is one of the new ACOs. And so, Tom, if you 
are saying we need to do more that is physician-based, does 
that mean we need to be doing more around the ACOs to be able 
to model that or to be able to show that as pilots? Because it 
seems like we have put in place some steps right now that 
address what you are talking about.
    So is it a question of ramping it up or how fast we could 
do multiple models?
    Mr. Vladeck. Let me respond to that, if I may, very 
quickly. I think it is this committee that is responsible for 
the existence of the Medicare and Medicaid Innovation Center in 
the Affordable Care Act, and I think it is one of the most 
productive and important things in the law, and I think they 
are doing a wonderful job.--
    But they are still, by and large--even with all the efforts 
you made in the statute to streamline it--constrained by the 
definition of what they are doing as demonstrations, which 
means they have to have open public competition, which means 
they have to have a very elaborate system for evaluating 
competing applications, which means that OMB gets into 
everybody's underwear throughout the entire process, and so on 
and so forth.
    And I think we are going to get wonderful results from 
that, but at the same time, I really think there ought to be a 
way to say, within the existing program structure, let us come 
up with some formulas or some templates for different payment 
models for physician services that are not demonstrators, that 
are just alternative ways to operate under the existing 
program.
    And you are in a different organizational and legal process 
that is much more accessible, much less formal, much less 
difficult to get people to participate in, and that is what I 
think is the next step or a supplemental step.
    Senator Coburn. Let me jump in here, if I may.
    CBO just published a review of 15 years of demonstration 
projects that showed not $1 was saved as a result----
    The Chairman. I just want to ask, are those----
    Senator Coburn [continuing]. Of the demonstration projects.
    The Chairman. Of the demonstrations in?
    Senator Coburn. Run by CMS.
    The Chairman. Run by CMS.
    Senator Coburn. Over the last 15 years. We have a system, 
and we are not going to fix that system where we, in our 
country, we think somebody is paying the bill.
    So, rather than use the stick approach, which was what the 
SGR did, why don't we use the carrot approach? Why don't we 
evaluate physicians?
    First of all, every insurance company knows how either 
efficient or inefficient I am in my practice. They have the 
numbers on me. They know. And I will just tell you a little 
about an experience we had as a group of physicians.
    A new insurer came to town, and we refused to take them 
because their prices were too low. And so they bought from Blue 
Cross/Blue Shield our numbers, and they came back and offered 
us more than they did everybody else in town, because they 
wanted us to be in there, because it actually costs less for us 
to give the same care.
    Why could we not have a system that incentivizes the 
physicians positively rather than negatively? Because, if you 
think about the SGR program, the first year that we did a cut 
is when you got this, wow, you cannot do this ever again. But 
the point is that we blinked, because, if physicians really 
knew that if they were inefficient with the spending of dollars 
for their patients and that they were going to get a cut the 
next year, that incentive would have worked.
    What was intended by SGR was a good idea, but we blinked, 
because we did not change behaviors in terms of physicians. So 
what I would throw out to think about is, how do we design 
something that positively incentivizes physicians to be more 
efficient, to do things positively, so you can compare them in 
their region by what they do?
    It is nothing but a computer program, and you could say, at 
the end of the year, ``My goodness, your average patient with 
diabetes had fewer complications in terms of the codes 
associated with that. You saved Medicare this compared to the 
standard in your area. We are going to give you a bonus. And, 
everybody else, next year, if you do not, we are actually going 
to cut you.''
    So where you could say in my region--Oklahoma, Texas, 
Kansas, Arkansas, and Louisiana--you can say, ``Well, here is 
what the standard cost for this should be and, by the way, this 
group of physicians was well below that,'' not based on 
geographic cost difference, but actual physician practices, and 
let us reward it.
    We tried the stick, and we do not have the guts to hold a 
stick. Why don't we try an incentive?
    Ms. Wilensky. Well, if you had the Sustainable Growth Rate 
or any kind of desired spending at the physician practice 
level, as the Blues plan did for you, that is fine. The problem 
that exists now is that you are penalized because you are a 
physician, and, collectively, physicians spent more than was 
desired under the Sustainable Growth Rate.
    It is similar as long as what it is you are being judged by 
has nothing to do with either your individual behavior or your 
practice's behavior. If you want to have the judgment of your 
practice's behavior, where you, as a practice, can control what 
you do, that is fine. When you start doing it at a metropolitan 
level, at a State level, all orthopedic surgeons, no individual 
group can influence what happens, and that is both unfair and 
leads to bad behavior.
    So that is definitely one of the options, which is to have 
the tradeoff be at the physician's practice level. That would 
be much fairer and would have at least good incentives.
    Senator Wyden. On that point, I think Dr. Coburn raises an 
important point, because he is touching on this question of 
regional variation. And the fact is, out of the gate, 
regardless of value, you see--I am looking at my friend from 
Iowa, Senator Grassley, Senator Hatch, myself, Senator 
Cantwell, four States that are low-cost States, consistently 
have done exactly the kind of stuff you all are talking about, 
integrating health services. And again and again, we have been 
penalized for it.
    I have sat here for an hour listening to four people I 
admire very much and am still kind of baffled about what do we 
do around the proposition that not all States are created 
equal.
    The fact is that in some high-cost States, when the senior 
shows up, they get a higher payment, and this is baked into the 
SGR as of now. As of now, it is baked in to have these 
penalties for low-cost States that are giving value, that are 
doing what Dr. Coburn is talking about.
    What do you all think? Since we are talking about the 
future of health care providers, what can we do to start moving 
away from this kind of built-in disadvantage for people to hold 
costs down and deliver value? Because even after health reform, 
I had the hospitals of Oregon come in yesterday, and they were 
scratching their heads, and they said, ``We all were working on 
this during health reform. We were all talking about trying to 
pay for value, get the incentives right, lift the penalties for 
low-cost States.'' They said, ``We haven't seen much happen as 
of now.''
    So now we have a chance to get this right with doctors. And 
what do you all recommend to change the baked-in penalty for 
Senator Hatch's constituents, Senator Grassley's constituents, 
Senator Cantwell's constituents, mine, others who are from 
these low-cost States and want to support exactly what you are 
talking about, these incentives for quality, incentives for 
value?
    But right now we are already taking a shellacking, and it 
looks to us like we are going to get clobbered once more.
    Senator Roberts. On that point, could I just add something 
to pile on here in regard to your questions, since you left me 
out? [Laughter.]
    Senator Wyden. You are a low-cost State. You are in.
    Senator Roberts. I am in.
    Senator Wyden. And Mike is in, too.
    Senator Roberts. I have the privilege of representing 83 
critical access hospitals. Montana is in the same boat. And the 
chairman and I feel very strongly that the original cut that we 
did to providers to provide--it used to be called PPACA. What 
do we call it now? Well, whatever. Anyway, the health care 
plan. I know what I call it, but we are not going to go there.
    But my main concern is that the rural health care delivery 
system, when I go out and have health care summits in Hays, KS 
or Dodge City or Abilene or, for that matter, Topeka, it is all 
the same. And here you have the SGR. You have three RVUs--I 
love these acronyms--Relative Value Units, that really 
represent 7,000 codes--7,000 codes. I have the top 20 right 
here.
    I went to the doctor this morning and found out I have a 
cracked kneecap. I wonder what code I am under? I have no idea.
    Dr. Coburn would say, put ice on it, put your leg up, and 
just forget about it, and I would not even have to go to a 
doctor.
    At any rate, something has to be done, it seems to me, 
because you have--the physician work and practice expense 
contribute to most of the determination of the ultimate 
payment. The physician work is 52 percent. Practice expense 
contributes 44 percent. Now, that is the administrative cost. 
That is all the nurses, and that is all the people who have 
gone through CMS Regs. 101, 102, and that is all they have so 
far in the universities to have people who will understand the 
codes with CMS.
    I have no confidence in CMS. I have no confidence in IPAB 
when they finally get organized. Something has to be done with 
the SGR. I know we tried.
    I really credit the chairman for holding this roundtable. 
We need something where we can come together in a bipartisan 
way and get traction, because we all know that this thing is 
not working. It tanked when the economy tanked.
    And so I wonder if some model could be worked out that 
would at least consider the regulations. In my last visit to 
the Dodge City Medical Center, which has expanded, we have 
people running the ACOs who are private contractors, and they 
come in and they try to find where there is a Medicare 
reimbursement that basically does not fit the criteria over 3 
years.
    We lost two doctors, we gained one. I mean, the doctors are 
not even there yet. We have a new hospital administrator. We 
have an addition to the hospital.
    Now they want to do it for 10 years. I asked the hospital 
administrator, ``How much does this cost?'' He said $50,000 a 
month.
    Now we have something called face-to-face. That means when 
Mildred in Cimarron, KS, 32 miles away, wants her prescription, 
and the nurse clinician cannot fulfill it with the local 
pharmacist, who is about to go out of business, but that is 
beside the point, then this doctor has to take 1 day off and go 
out to Cimarron and see Mildred.
    ``Hi, Mildred.'' ``Hi, Doc.'' ``Are you still using your 
prescriptions?'' ``Yes.'' ``Are you following what you should 
do?'' ``Yes.'' That is a whole day. What the hell is that? I 
just do not understand it.
    Now they want to even go back 10 years, and that is just 
two of--I could list you regulation after regulation after 
regulation. We sent 34 of them to Kathleen at HHS and then 
boiled it down to seven later on and still have not had much of 
a response.
    Something has to be done to figure out this number, 44 
percent, in regards to practice expense, because it is just not 
right. And then I am really worried about whatever SGR we come 
up with or whatever--I do not know if it is in the SGR. We 
ought to rename it and call it something else. But at any rate, 
will it take into consideration rural areas, critical access, 
unique kinds of circumstances?
    There is a great thing here about medical home 
demonstrations that CMS is now trying to implement, and 
physicians who manage patients with chronic disease would 
receive a payment to compensate them coordinating and 
communicating among specialists, social workers, case managers, 
patients, so on and so forth.
    We do not have those in rural areas. We have the hospital, 
we have a specialty hospital, and we have nurse clinicians.
    I know a lady who just went through this who apparently had 
a stroke, but the person who gives her exercise once every few 
days was called because she could not get in the emergency 
room, and a few days later she died.
    Now, I do not know if she got into the emergency room or if 
they had accepted her in the emergency room, but one of the 
situations was they did not think that she would fit under the 
circumstances. And she died.
    Now, I am rambling, Mr. Chairman, but I really think 
whatever we come up with--I worry about this global thing, and 
it is a numbers game in regard to CMS. We must be aware of 
different States, different regions, and, more especially, the 
rural health care system. And you know that. You have been a 
champion of the rural health care system for a long time.
    I am sorry for the rant. I did not get into oxygen tanks. I 
am learning. [Laughter.]
    The Chairman. You are saving that one.
    Mr. Scully. Unfortunately, Mr. Chairman, regionally, it is 
very different. So I think in Oregon you are probably up to 35 
percent of people on Medicare Advantage. Change happens slowly. 
I will bet there is probably less than 5 percent in Kansas.
    So every geographical--every part of the country is 
different. But I think the thing that we roughly all agree on 
is that we still have 75 percent of people on Medicare fee-for-
service. So you are still going to be dealing with--the fact 
is, one of the seminal problems in Medicare, in my view, is the 
Federal Government, through CMS, pays every doctor the same 
thing.
    So, if you are first in your class at Harvard or whatever, 
or last in your class at University of Western Guatemala, you 
get paid the same thing. And changing that variation over the 
years is important, and that is one of the reasons I am a fan 
of Medicare Advantage.
    But short of the world going from 4 percent on 
Medicare+Choice to 25 percent on Medicare Advantage, which I 
think is a good development, we still have this massive program 
that is still on fee-for-service. And, if you are going to deal 
with those docs on fee-for-service, you have to find the right 
incentives.
    And incentivizing doctors is the key, and I think we all 
agree on that. How do you provide--to say it is not the money 
is wrong. It is the money. Physicians are trying to do the 
right thing, but they follow financial incentives, and finding 
the right way to generate ACOs that are physician-driven, not 
necessarily hospital-driven, is key.
    One of the problems that I think Gail was alluding to is--
and I love a lot of the hospital-based ACOs--physicians do not 
have the $20 million in a region, in Portland, to go out and 
start an ACO. Finding a way to create the capital pools for 
physicians, to cover physician-run groups, not hospital-run 
groups, that are going to go out and drive this----
    Senator Wyden. But, Tom, the reason they are going out and 
creating ACOs in Medicare Advantage is because a lot of seniors 
cannot see a doctor in the fee-for-service system in Oregon.
    They go out and make 6 to 10 calls, they have a heart 
condition, they have high blood pressure, nobody will see them, 
and then all of a sudden you get what you characterize in your 
testimony--and I think it is appropriate--the ultimate bundle.
    But even in a place like Oregon, we are now at 41 percent 
Medicare Advantage, and it is good Medicare Advantage, the 
Medicare Advantage of high quality, guaranteed issue, community 
rating, that sort of thing, but we still have well over half in 
traditional Medicare.
    And, if you all could just tell us what you think ought to 
be done to deal with the fact--and I was glad that the chairman 
piped in that his is a low-cost State, too, because a big chunk 
of us on this committee have what amounts to millions of 
seniors going to see doctors, and there is a baked-in 
disadvantage under the reimbursement system for treating those 
people.
    And we thought it was going to get taken care of in the 
Affordable Care Act, and, as of yesterday, a big group of 
providers came in and said, ``We sure haven't seen much 
happen.''
    So what would you tell us to advocate for to try to get the 
incentives that you correctly identify? Every one of the 
incentives, and the paying for value that you have talked 
about, I am for.
    It is just, as of today, for a lot of us--those three up 
there at the top of the dais, and Senator Cantwell and myself--
it sure does not look very good, because it just looks like we 
are getting another hit from what already is a system that 
discriminates against us.
    So let us start with you, Mark, and just tell us what you 
would do to make sure that all States can get the fruits of 
this new approach that rewards incentives and value.
    Dr. McClellan. Well, so long as Medicare fee-for-service is 
paying doctors on the basis of volume and intensity, which the 
current SGR program does, your physicians are not going to get 
ahead.
    And I would say for Senator Roberts, too, I have been to 
some of his critical access hospitals in Kansas, and the way 
that they want to deliver care, the way that they need to 
deliver care, involves things like tele-health, it involves 
relying on nurse clinicians and other health providers instead 
of physicians.
    And those things, as you heard from him, are not covered 
under--even though we have 10,000 codes, they do not squarely 
fit within any of them.
    What will help is a move away from fee-for-service towards 
the payments that are more tied to what each patient really 
needs. And so that is what I talked about in my testimony, what 
Bruce and others on the panel have referred to as different 
kinds of bundling, but focusing specifically on physician 
services, and done, I think, not as a pilot--I think we are 
past that stage--but building this into the Medicare program 
systematically.
    Maybe it could be done as an option so that people could 
stay in the traditional fee-for-service system or opt into this 
more bundled approach. But I think we are at the stage now 
where there are enough good ideas out there--and you have seen 
them in Oregon. Your State is trying to do this. The State has 
made a real effort to move away from fee-for-service, and it is 
Medicaid and employee plans and the like, and that can be 
reinforced in Medicare and can be reinforced in every single 
specialty and primary care.
    The ideas are out there among the physician groups. I think 
it is up to this committee and leaders in Congress to give the 
physicians an opportunity to say how they would make those 
moves now.
    Senator Wyden. They are good ideas. I am just not sure they 
work for those three States and mine unless we take away this 
baked-in disadvantage.
    Dr. McClellan. That is what you would do. You would be 
taking some of the payments that are baked in, the fee-for-
service volume and intensity, and shift them to something else.
    If what is working in Oregon is things like a primary care 
physician or a cardiologist spending more time working together 
to track what a patient's medication needs are, making sure 
they are on the latest evidence-based treatments, and spending 
time with them to prevent complications, the way to do that is 
to take what is currently in their fee-for-service payments 
that does not support that--maybe extra payments for the 
additional imaging procedures or lab tests or things like 
that--and convert some of those to a payment that would go to 
keeping the patient's needs met.
    And there are good measures for that. That is what Dr. 
Coburn was talking about. It is not easy to do in many cases, 
especially in small practices, especially in practices that are 
treating vulnerable patients, but we do not have to make a 
wholesale change right now overnight to make this much easier 
for the doctors in your States. We can start getting that.
    The Chairman. I think what the Senator is getting at is, he 
is a little concerned that discrimination, if you will, will be 
baked in, and I think that that is his concern. If you go to 
bundling, that discrimination is going to still be baked in for 
low-cost areas. We are not dealing with the disparities in 
different parts of the country.
    Bruce?
    Mr. Vladeck. As a New Yorker, I probably ought to be the 
one to respond to this issue, and Senator Wyden and I have 
talked about it in the past. And Mark hit on one piece of this 
issue that is very critical if we are going to address these 
issues appropriately, and that is, until we can adjust 
adequately in the data about utilization patterns and outcomes 
for the characteristics and the differences in the 
characteristics of the patients being served from one community 
to another, we cannot fairly say that one place is more 
efficient than another.
    And, in fact, if you contrast some of the 3- and 4- and 5-
year-old Dartmouth rankings of relative metropolitan areas on 
their relative efficiency, with some of the more recent work 
done by MedPAC or by CMS, which has the appropriate data 
adjustments, you get very different rankings, and you find out 
that most of the difference in per capita Medicare expenditures 
from one region of the United States to the other is, in fact, 
associated with home care and durable medical equipment, not 
with differences in utilization patterns, because, when you 
adjust for the characteristics of the patients, the differences 
are not as dramatic as has long been described.
    Now, I think we have two sets of problems here. One 
problem, which is very real and which Senator Roberts talked 
about and Senator Coburn talked about, is I am increasingly 
convinced that, when it comes to physician payment and 
physician incentives, we probably just need to have a separate 
system for rural communities than we use for urban communities, 
because all of these new bundles and systems of care people are 
talking about require a degree of infrastructure and a critical 
mass that, as Senator Roberts said, is not realistic in smaller 
communities.
    The Chairman. Kind of like accountable care organizations. 
Like critical access hospitals, for example, just reimburse 
differently than----
    Mr. Vladeck. And I think we have a model, and we sort of 
gave up in the hospital sector. We said for hospitals below a 
certain size serving certain kinds of communities, the 
Prospective Payment System is never going to work equitably for 
them, because the numbers just do not work. And so we created a 
critical access category, and I think there is no logical 
reason why we should not apply the same logic to paying 
physicians in rural communities and figure out what it takes.
    The most important variable with the physician in a rural 
community is not how high quality he is or how efficient he is, 
but whether he is there or not in the first place. So that is 
less of a problem on the Island of Manhattan. So we should not 
try to develop a 1-size-fits-all formula for these very 
different issues.
    On the other hand, I think we know less than we believe we 
do about the causes of variations in Medicare expenditures 
between the high-cost States and the low-cost States, as is 
evidenced by the fact, again, that the most recent data shows 
very different rankings of high-cost and low-cost than the 
Dartmouth atlas has been showing. And the IOM is in the middle 
of a study which you commissioned to try to look at these 
issues and disentangle them.
    I think we need to get some better information about these 
issues, and it is in the process of being developed.
    The Chairman. Could you explain to everybody what IOM is?
    Mr. Scully. The Institute of Medicine. I will not pick on 
the New York guys.
    Dr. McClellan. I am actually on that panel--as is Gail--and 
it is going to develop some better information. I am not sure 
it is going to completely resolve all the issues.
    Mr. Scully. But there are huge differences, and, if you 
carved out Dade County and Louisiana and pushed them out in the 
Atlantic Ocean, you would save a hell of a lot of money. 
[Laughter.]
    Can I give you two ideas that are a little different? And I 
agree with what Bruce is saying.
    In rural areas--Oregon is different than Kansas, and you 
are probably not going to have Medicare Advantage plans at 41 
percent ever in Kansas. It is just not going to happen.
    But there are a couple of old programs that have been 
floating around. I know it is still on the books, Medicare 
Select, which I think may only exist in parts of Alabama, but 
it is basically a Part B capitation, where the doctors get 
capitated, they can take full capitation. All the Part A costs 
are passed through.
    It is kind of half a loaf of Medicare Advantage. And, in a 
rural area where you only have hospitals and you are trying to 
give the docs the ability to go together and organize 
themselves--it actually started to take off. For a lot of 
reasons, it blew up under the 1997 bill, which I can get into, 
if you like. But there are ways where you can create the right 
incentives for doctors to do more.
    One of the reasons I was such a big fan of creating 
Medicare Advantage--I think I made that name up one day--was 
because I hated Medigap plans, as Senator Wyden knows. We 
worked on that 25-30 years ago when he was in the House. He was 
the original Medigap reformer.
    One of the worst incentives in the program is Medigap, 
which is private insurance, first-dollar coverage, which has 
60-percent medical loss ratios; it is horrible insurance. You 
could go out in the rural areas, and, if somebody agrees to 
sign up to Medigap with a $250 deductible----
    The Chairman. I worked on that with Senator Pepper.
    Mr. Scully. Yes.
    The Chairman. Senator Pepper.
    Mr. Scully. It is horrible. It is terrible.
    The Chairman. The medical loss ratios were just outrageous.
    Mr. Scully. And, if you gave people higher deductibles and 
said, if I were in rural Montana and you agreed to do Medigap 
with a higher deductible, then you get the good one. The ACO 
gets paid more.
    There is money in the system to create the right incentives 
for doctors, and there are existing programs around to do that, 
and I think we just need to find places to push more money for 
doctors to be incented to do the right thing.
    Ms. Wilensky. It has come up a couple of times. The 
alternative to the current RBRVS fee-for-service system is not 
necessarily Medicare Advantage. That is an alternative. That is 
the ultimate in a bundle.
    Everyplace else in Medicare, you have directed the agency 
to move to a more bundled payment. So rather than focus on all 
of the little items that used to go on in the hospital, 
Medicare pays on the basis of a discharge, the diagnosis at 
discharge. And what happens during that whole experience is not 
Medicare's problem, it is the hospital's problem.
    My argument is that, if you want to have that same kind of 
refocus, you have to get away from billing 7,000-8,000 
different codes, taking care of people, and get to a type of a 
bundle that is appropriate for physicians.
    If we see capitated systems growing, if we see premium 
support, if we see a very different world, that is fine. That 
is the ultimate bundle. You get around a lot of issues that you 
have to face otherwise.
    You still worry about volume with prospective payment. That 
is why you have a readmission penalty now being imposed. It 
does not necessarily pay for quality, but it could pay 
differentially for quality.
    But even in the rural areas, physicians who are taking care 
of people with single or multiple chronic diseases--congestive 
heart failure, congestive heart failure and diabetes, 
congestive heart failure, diabetes, and hypertension--all of 
those tend to go together, but are not always together.
    Paying somebody, a physician, an amount to take care of a 
person with one or more chronic diseases for a year would be a 
very different mentality than billing them for every single 
service every time they walk into the hospital, and would allow 
them to focus in a different way.
    Those are the kind of adjustments you actually can do in 
terms of how you pay physicians so that you just get away from 
this very micro-level mentality that has had so much 
distraction in terms of the gaming that people do and the fact 
that they do not have a good reward when they are practicing 
conservatively and getting good clinical outcomes.
    It is just a question of how many times they bill and 
whether they bill for the expensive stuff or not.
    The Chairman. I do not know. Tom has been trying to----
    Senator Carper. Thanks, Mr. Chairman. Thank you all for 
coming and for your continued service to our country.
    Sometimes when people ask me what I think we ought to do in 
tax reform, I talk a fair amount about Bowles-Simpson, and I 
think they have a pretty good roadmap there. But I also talk 
about the underlying principles that I think we should adhere 
to as we follow tax reform.
    I use this as an example to lead to my question. I say tax 
reform, among the things it ought to do, should simplify the 
tax code, not make it more complex. It should stimulate 
economic growth, not diminish it. It should help us reduce the 
deficit, not increase it. It should make the tax code, 
arguably, fair, maybe more fair than before.
    Those are really underlying principles. We have talked 
about a lot of different directions for government 
specifically, and so forth.
    What would be most helpful for me is to hear each of you 
just share maybe one underlying principle; that is, where you 
try to fix this problem, address this problem, to make sure we 
get better health care outcomes for less money, or the same 
amount of money.
    Just give us a takeaway, an underlying principle that we, 
when we work toward solving this problem at the end of this 
year, should try to adhere to. For each of you, just one 
underlying principle we ought to adhere to, that would be 
helpful for me and maybe for my colleagues.
    Ms. Wilensky. For me, rewarding the kind of behavior we 
want to see.
    The Chairman. Which is?
    Ms. Wilensky. Producing good outcomes, focusing on the 
outcomes, and then, on all the inputs on what you do, shifting 
that focus. And, by the way, I would not mind extending that to 
the patient as well.
    Senator Carper. What do you mean by ``extending''?
    Ms. Wilensky. Rewarding the kind of behavior we would like 
to see, engaging in good health practices, encouraging that, 
discouraging or penalizing some who do not.
    Senator Carper. We actually try to do that in our bill by 
allowing employers to provide premium discounts of as much as 
30 percent for folks who take better care of themselves.
    Ms. Wilensky. Exactly. That is exactly what I was thinking.
    Senator Carper. Thank you. Just one principle from each 
person, if you do not mind.
    Mr. Vladeck. I am going to be the outlier in this group and 
the deviant, which will not be the first time. I think the 
basic underlying principle that the principal goal of the 
payment system is to pay providers and to try to change the 
world through fine-tuning payment systems makes life more 
complicated and more difficult.
    So I think there are real issues of quality in the health 
care system that need to be addressed, but you can address them 
without dealing with how you pay people.
    There are real issues of creating incentives for more 
efficient care. Every time you write a check to a physician 
group, you do not have to have that incentive contained in it.
    The sort of ``keep it simple, stupid'' principle, I think, 
especially applies to both the tax code and to the Medicare 
program, because everybody from every interest, every 
stakeholder and every member, has some particular refinement 
that they want to put on it to move a particular agenda.
    So I would say, do not expect too much out of a payment 
system. Make sure that it is auditable, it is reliable, it is 
understandable by the providers and the beneficiaries, as well 
as by the government, and that you are clear about what you are 
paying for and what you are not paying for.
    You start from that and then you can adjust around the 
edges. If you are paying too much, you reduce the payments, et 
cetera.
    Senator Carper. Thank you.
    Tom?
    Mr. Scully. Since I do not have to run for anything, I am 
an unabashed fan of the Healthy Americans Act. So I will not 
get into that. But if you could reinvent the world, that is 
what I would do, but I will not get into that with Senator 
Wyden.
    But if you had one thing to do this year, and I think 
Senator Baucus tried to start it, which was incredibly 
admirable--I am a huge fan of a tax cap--I would say, if you 
are really trying to change behavior, limit tax deductible 
excludability of health care to a very basic standard option 
and Blue Cross benefit, because you tried to do that a little 
bit in the ACA, and there was a lot of opposition to it.
    The tax policy drives a lot of behavior, and there are a 
lot of places to go, but if you put in a tough tax cap, you 
change behavior, you raise revenue for other things, you close 
the deficit, and that is absolutely the right thing to do, and 
I admire you for trying.
    Senator Carper. Thank you.
    Mark?
    Dr. McClellan. I agree with the points about engaging 
consumers and helping people be healthier. I think that is 
probably the biggest, most important way to get to better 
health and lower costs.
    With respect to physician payment reform and trying to 
apply a pretty simple principle or, I would say, a pretty 
simple test, I think at the end of this process, if you can ask 
providers, and each specialty tells you that these reforms will 
improve care, that is a good first part of the test.
    The second part on accountability is, is there a way to 
show that competently, to measure that this is getting the 
better care, it is getting to lower costs, as Dr. Coburn 
suggested. And I think, while that does mean we need to move 
away from our already complex system--I guess Bruce was saying 
the expectations for payment systems do not need to be that 
high, certainly not that high for improving quality in current 
fee-for-service--I think we can do better than that.
    I think these two principles, asking the providers 
themselves, the physicians themselves, are these changes that 
we have adopted going to improve quality, and, if they are 
confident about it, is there a measurable way to show it, would 
get us into a better place, and I think we can get there this 
year.
    Senator Carper. Thank you all.
    Senator Hatch. Let me get into this to a degree, too. Some 
have suggested that the fee schedule will never separately work 
as long as the relative value of services is largely dictated 
by the AMA.
    What do they call it, the RUC? Historically, as I 
understand it, CMS has accepted about 90 percent of their 
recommendations, except this last year, when it was about 60 
percent. I think that is about right.
    Now, I have three questions. One is this. Do you think this 
is a sea change in how CMS views the physician community 
recommendations, and do you view this as a positive or negative 
outcome to achieve greater stability in the fee schedule? That 
is number one.
    Number two is, I am having a rough time figuring out how 
you really effectively bundle, which a number of you have 
mentioned in your remarks in various ways.
    And, number three, what effect does--as a former medical 
liability defense lawyer, although it was a long time ago, I 
remember we used to tell them once they did away with the 
standard of practice in the community and opted for an open 
process that would take every case to the jury, we used to tell 
them, the doctors, ``Look, you better make sure of your 
history. You can no longer rely on the standard of practice in 
the community. You better make sure your history has every 
possible consideration of their medical condition,'' even 
though a number of those tests really are not necessary. In 
other words, it led to unnecessary defensive medicine, which, 
from my standpoint, knowing what I did, about 95 percent of the 
cases that we saw coming through the office were frivolous 
cases brought to get the defense costs, which were 
considerable.
    So those three things I am a little bit concerned about. 
Can we ever address the costs without addressing unnecessary 
defensive medicine and the terrible situation we have with the 
medical liability litigation in our society today?
    So number one is, should we rely on the AMA or on this RUC, 
and is that 60 percent a valid thing compared to the 90-95 
percent in the past? And then the other two questions as well.
    Ms. Wilensky. The adoption by the agency started between 
our two periods. It happened innocently enough. Once you had 
the Relative Value Scale in place, you needed to have a way to 
update relative values and to allow for a change.
    The AMA, as best we can tell--Bruce and I have had this 
conversation, trying to piece together exactly what happened. 
Sometime after I left to go to the White House, before he was 
sworn in, when there was a lot going on, it was implemented. 
But, in its first year, the AMA approached the agency about 
whether it would allow it or like to have the AMA be the 
convener that would include all physician groups and make some 
recommendations, which initially were very minor adjustments 
that hardly affected the RBRVS at all. The agency accepted the 
offer.
    It is important, and you have really indicated this by your 
mention of 90 to 60, the agency does not have to accept the 
recommendations by the RUC. It needs to have an outside 
convener. The question has been raised about whether the AMA is 
necessarily the best, although it is a big umbrella 
organization.
    You want to include physicians, but the agency has the 
right to reject any of the recommendations it feels inclined to 
and occasionally has done so, and apparently used to do so in a 
bigger way. I do not know what caused the difference.
    So it has the ability to take this on, but it would be very 
difficult for the agency internally to do this. It would want 
to contract with someone, and the question can be if this is 
the best group.
    I would like to do one quick response to your liability 
question. I have been trying to encourage people to think about 
a quid pro quo for physicians. I do think that it is 
unreasonable to ask clinicians and institutions to practice in 
conservative ways, try to push them that way financially 
without giving them some protection if they are, in fact, 
providing good evidence-based care, and that is really the key.
    And for me, it would be physicians who adopt the clinical 
guidelines of their own medical specialties--or you could 
convene special groups if you do not think they are always well 
enough developed--and follow a set of patient safety measures, 
which the Institute of Medicine has already developed. But, 
again, it could be reviewed to see if these are the best, but 
unless there is a case of criminal negligence, which 
occasionally can happen, these institutions and clinicians 
should be protected against liability.
    There is a lot of debate among policy analysts about how 
much this drives cost and how much it drives defensive 
medicine. But, until you take it off the table in a way that 
seems fair, giving something in exchange for the patient, which 
is better reliance on evidence-based medicine and patient 
safety in return for protecting the institutions and 
clinicians, it will be there hanging over their head and be 
very unhelpful.
    So, those would be the two things, I think.
    Mr. Scully. Senator, in my testimony, I congratulated--I 
think the reason is Jon Blum who is a former staffer for 
Senator Baucus and the Finance Committee, runs Medicare, and it 
is voluntary. CMS has a very small staff. The lead doc who did 
this for 10 years at CMS left last year, and, traditionally, 
they took 95 percent of the recommendations because they do not 
have a lot of information.
    I talked to Jon about it. I congratulate him. He has pushed 
back more in the past year than anybody else has, and I think 
that is very healthy.
    So that does not mean the AMA is not doing the right thing. 
I just think it is--I have watched the RUC for years. It is 
incredibly political, and it just human nature. When you get 
the U.N. of docs together, of specialists who spend more money 
and more time and have a bigger impact, and they sit around a 
table--I have been to the RUC a couple times when I was the 
Administrator in Chicago. I can tell you war stories, if you 
all want to hear them, about trying to get pediatricians paid 
more. Magically, there are not any pediatricians on the RUC.
    I had problems with them with immunizations years ago. So 
really it is all about political representation, and the AMA 
does a good job given where they are, but they are a political 
body of specialty groups, and they are just not, in my opinion, 
objective enough.
    So, when you look at the history of it, CMS is starting to 
push back more, which is a good thing. I think it would be much 
better to have an arm's-length transaction where the physician 
groups have a little more of an objective approach to it. And 
that is the infrastructure of $80 billion a year in spending. 
It is not a small matter. It is huge.
    Senator Hatch. Bruce?
    Mr. Vladeck. Gail and I were talking about this issue of 
the RUC and the AMA a little bit before the session began, and 
we agreed that there needs to be some body outside of CMS to 
deal with these issues and look at the issues of changing the 
codes and technical updates and so forth.
    The AMA is probably--even if they did the most objective 
professional job in the world, the appearance of conflict 
associated with it would over time, I think, be a problem.
    I suggested to Gail that we contract it to Project HOPE, 
and she demurred. So I think we ought to give it to the 
Engelberg Center at Brookings to do. I think they could 
probably do a very good job of it.
    But it is one of the pieces. We have to fix the RBRVS 
mechanism, and having a better way of updating it that is more 
transparent is a very important part of that subject.
    On your other two issues, I, again, find myself in the 
uncomfortable position of largely agreeing with Gail on both 
the importance of liability reform and----
    Senator Hatch. See how good we are for you?
    Mr. Vladeck [continuing]. Its relationship to the 
development of quality standards and the development of safety 
standards and so forth. And there definitely ought to be a 
tradeoff. If we have professionally accepted standards and 
people meet them, that ought to be a defense against liability.
    I do also want to respond to your third point very quickly, 
and, again, it is back to the suggestion I made about not 
prescribing bundles, but prescribing a generic methodology by 
which you could take a subset of the 7,000 codes, if you are a 
physician or a physician group, and say, ``Okay, we are going 
to do management of knee sprains; we are going take a single 
price for the following 14 codes or 16 codes or 18 codes.''
    And the more sophisticated practices already have in their 
computers the bundles of codes they give for particular 
diagnoses. They know what it costs them to produce. They know 
what they get paid for it.
    If you had some general formulas and templates, they could 
go to their Medicare contractor and say, ``Instead of paying us 
under the existing system for sprained knees, how about a fee 
of $714. That is 95 percent of what you are now paying, and we 
can make money at that.''
    That is, I think, the kind of bundling we are talking 
about, and I think you can leave it up to the individual 
physician practices. Again, it is very hard for a solo 
practitioner to do this, but once you have four or five or six 
guys or gals together, you can really do all sorts of neat 
stuff. And I would just say, let us have a formula by which you 
can do it and see what happens.
    The Chairman. We are going to have to wrap up pretty soon 
here.
    Anybody else?
    Dr. McClellan. I was just going to add a couple more 
comments on Senator Hatch's questions. The point about bundling 
is right. You do not want to create yet another bureaucratic 
system for physicians. You want a system that will help 
physicians do what they think is the right thing for their 
patients. And Bruce and I think the rest of the panel have 
suggested some ways to do that.
    And I want to commend you, Senator, and your staff for 
engaging the physician groups themselves, both at the national 
level and those in actual practice, including in Utah, for 
thinking about how to do this.
    Small practitioners do not have a whole lot of technical 
infrastructure. There are some pretty clear ways, if you look 
closely at each specialty, in which they could get paid better 
through steps like what we have talked about today, and I think 
we will certainly hope to continue to work closely with you all 
to find the best way to do that.
    I would add too that, to the extent that you do that, you 
take some of the pressure and power out of the RUC structure. 
And the RUC has taken a lot of criticisms for being too 
political, but let us face it: anytime you have a fixed pie and 
you are dividing it up between a bunch of different medical 
specialties, it is going to get political.
    I think the nice thing about some of these reforms is that 
it moves the status away from being a fight among medical 
specialties to rather a unified effort across physician groups, 
different specialties, to get overall costs down through 
improvements in quality.
    Now, all these debates are really focused on this 12 
percent of Medicare spending that goes to physicians, when, if 
you would improve the way that physicians get financial 
support, you could do something about the 80 percent of health 
care spending that they influence. And even a small effect on 
those overall health care costs could do a lot to take the 
political pressure off this RBRVS process.
    And I also agree with the points about liability reforms. 
It seems like there is unanimity here that that should be 
addressed too, to help physicians deliver care better.
    The Chairman. John?
    Senator Thune. Thank you, Mr. Chairman.
    I am just curious about how, since the 1997 SGR was 
created, there has been sort of the advent of physician-owned 
hospitals. You have also seen in some areas of the country more 
systems where you have physicians who are sort of working at 
hospitals, and how that has influenced utilization, those two 
different types of models.
    And in a system-type approach, could you come up with a way 
in which you would sort of integrate the hospital and physician 
so you are not treating them differently in terms of 
reimbursement, so there is sort of an equality incentive for 
the entire system?
    I realize that is probably a hard thing to answer because 
you have different ways in which these models are constructed 
out there, but, clearly, there is a question about--there is 
always a question, I think, about utilization and how that is 
shaped by various incentives that might be achieved in 
different types of models.
    This is a sort of broad question. I know it is not an easy 
one to answer. But is there a way where you could get in a 
system-based approach where you would have sort of an 
integrated payment that would be incentivized based upon 
quality outcome, et cetera, where you would not have these sort 
of competing interests between hospitals and doctors?
    Mr. Vladeck. We have, Senator, 12 hospitals in New Jersey 
at this minute operating under a system where, for all their 
Medicare cases, there is a permitted gain-sharing incentive 
with their physicians that essentially bundles the payment for 
in-hospital services for the physicians with that for the 
hospital, and the so-called Model 1 under the bundled payment 
demonstration that CMMI is conducting follows on that model.
    Gail described earlier the cardiac bypass demonstration 
which began during her tenure, which was enormously successful, 
and we have been working on these ever since.
    What happened was, we were ready to go with the next 
generation of them in the early 1990s, and then the Stark law 
was passed and the anti-kickback law became more aggressive. So 
the Inspector General got a seat at the table and decided they 
did not like this kind of common incentive, and it took 10 
years to figure out how to put together projects that addressed 
their concerns, and so forth.
    And the interesting thing is that the critical step in 
resolving the concerns of the program integrity people about 
having common incentives for physicians and hospitals was 
having robust quality measures and insisting on meeting the 
robust quality standards before anybody could get any incentive 
payments.
    And so as I say, there are experiments in this regard going 
on at the moment. The preliminary results are extremely 
encouraging, and I hope we are going to see a lot more of them 
very soon.
    Ms. Wilensky. It is, of course, the purpose of the 
accountable care organizations to allow physicians and 
hospitals who have not been formally integrated to work 
together, show quality metrics, have auditable results, so that 
they can demonstrate savings, so that they would not then be 
subject to the Stark regulations.
    So it has been an attempt--starting with the gain-sharing 
that Bruce talked about that has taken a long time, and now the 
accountable care organizations--to allow that.
    The Chairman. This has been very helpful, more helpful than 
I think many other gatherings/hearings, and I deeply appreciate 
it.
    I think the four of you should come up with some 
suggestions, short-term and long-term. That is, what do we do 
about physician payment reimbursement for this year, because we 
are going to be facing it, because the SGR is going to come up 
for a pay-for at the end of the year; and then, also, longer-
term, how do we reform the physician payment system over the 
next several years?
    If you could maybe let us know within a month. And I have 
not figured out yet in what form you are going to let us know, 
but let us keep that open for the time being.
    But you have a lot of expertise. You have a lot of smarts 
and experience, a lot, and know a lot more about all of this 
than we do.
    So I know that is a bit of an imposition. I sprung that on 
you and did not give you advanced notice, but I am doing it 
anyway. It would be great if, within about a month from now, we 
get together one way or another and see what you come up with. 
We will work with you. We really want to work with you. This is 
teamwork.
    A lot of points came up here, and I know you will take them 
all into consideration and handle them in the appropriate way.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 11:48 a.m., the hearing was concluded.]


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