[Congressional Record Volume 143, Number 12 (Tuesday, February 4, 1997)]
[Extensions of Remarks]
[Pages E131-E133]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




INTRODUCTION OF LEGISLATION TO CORRECT MEDICARE BENEFICIARY OVERCHARGES 
                   IN HOSPITAL OUTPATIENT DEPARTMENTS

                                 ______
                                 

                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                       Tuesday, February 4, 1997

  Mr. STARK. Mr. Speaker, I am today introducing with Representative 
William Coyne a bill to correct a glaring failure in the Medicare 
program--the massive over-charging of beneficiaries in hospital 
outpatient departments [HOPD's].
  This bill will save Medicare disabled and senior beneficiaries about 
$35.7 billion between 1999 and 2003. It will stop the steady, upward 
climb in the percentage of HOPD costs that beneficiaries have to pay. 
Usually beneficiaries pay 20 percent of a set fee schedule for part B 
services. The way the HOPD law was drafted, however, has caused the 
beneficiary share of HOPD costs to climb to about 45 percent of 
outpatient department revenues. If the law is not corrected, seniors 
will pay an ever-increasing percentage.
  Our bill will stop the rise in the beneficiaries' effective 
percentage payment and return it to the 20 percent that Medicare 
beneficiaries were promised. There are reports that the President's 
Medicare budget proposal will include a correction of the HOPD problem, 
but over a 10-year period. The President is to be congratulated for 
finally addressing this issue. We believe it should be done more 
quickly, and would like to work with interested parties to find the 
best way to pay for this program improvement at the same time we are 
making other savings to extend the life of the Medicare part A trust 
fund.
  The HOPD problem is a serious one, with no easy solutions. In 1995, 
the Secretary of HHS presented a lengthy report to Congress that 
discussed a number of possible solutions--see attachment No. 1. We have 
adopted the basic ideas from that report and establish an HOPD 
prospective payment system and a correction of what is known as the 
formula-driven overpayment [FDO].
  How did this problem arise? Hospital outpatient departments do all 
kinds of things like tests, x rays, and surgeries that the Secretary of 
HHS has determined can be safely done in an outpatient setting. HOPD 
services are paid under Part B. The key to the problem lies in the fact 
that Medicare pays HOPD's on a reasonable cost basis and not based on a 
prospective payment system [PPS] or fee system. Since costs are 
determined retroactively, the hospitals get paid retroactively by 
Medicare, but bill the patient at the time of service. At the time the 
patient gets the service and leaves the HOPD, we are unable to say for 
sure what the patient's 20 percent copayment is, since there is no set 
schedule of fees. As a result, the system was established in such a way 
that coinsurance is calculated based on charges at time of service. The 
charges, of course, may have little or no relation to costs and have 
crept up over time relative to what Medicare ends up actually paying 
for the cost of the service. So instead of paying 20 percent of a set 
and known fee, the seniors and disabled are paying 20 percent of 
charges. In 1996, this has become the equivalent of about 45 percent of 
the total payment to the hospital, Medicare plus coinsurance.
  There is often a complication in the payment system I've just 
described for certain types of services provided in HOPD's, which 
results in what is called a formula-driven overpayment. If the surgery 
done in the HOPD is one that could have been done in an ambulatory 
surgery center and ASC's do about 2,700 different kinds of procedures, 
so there is a lot of overlap, then the amount of the Medicare payment 
is calculated differently. The payment calculation is also determined 
differently for radiology and diagnostic services performed in hospital 
OPD's compared to other services. For these services, the payment is 
either the lower of: One, reasonable cost as I've described in the 
previous paragraph, or two; a blended amount that is based partially on 
the reasonable cost in No. 1 and partially on either the ASC payment 
rate, for surgical services, or the physician fee schedule, for 
diagnostic and radiology services.

[[Page E132]]

  Because of a drafting error in the payment formula, however, Medicare 
payments for the services paid on the basis of the blended amount are 
higher than they should be. This is because the computation of the 
Medicare payment is done in such a way that it is not reduced by the 
full amount of the actual coinsurance paid by the beneficiary. In 
contrast, for OPD services other than surgery, radiology, and 
diagnostic, every dollar a beneficiary pays in coinsurance results in a 
decrease of $1 in what Medicare pays. As a result of this erroneous 
payment formula, Medicare payments are higher than intended. 
Furthermore, hospitals have an incentive to increase their charges 
because they will receive more from Medicare. This bill would correct 
this formula-driven overpayment. Attachment No. 2 explains the math in 
a specific example that makes the problem clearer than my words can 
describe.
  We will be submitting a detailed explanation of how this bill will 
work to restore the proper balance between hospital billings and the 
obligations of beneficiaries. We hope that this legislation can be 
enacted soon, before the burden on seniors and the disabled becomes 
even more unfair.
                                           The Secretary of Health


                                           and Human Services,

                                   Washington, DC, March 17, 1995.
     Hon. Albert Gore, Jr.,
     President of the Senate, Washington DC.
       Dear Mr. President: I am respectfully submitting the report 
     on Medicare hospital outpatient prospective payment as 
     required by section 4151(b)(2) of the Omnibus Budget 
     Reconciliation Act of 1990 (P.L. 101-508). This section 
     requires the Secretary of Health and Human Services to 
     develop a proposal to replace the current Medicare payment 
     system for hospital outpatient services with a prospective 
     payment system.
       The report presents a phased approach to the establishment 
     of a hospital outpatient prospective payment system. For the 
     first phase, a prospective payment system would be for 
     hospital outpatient surgery, radiology, and other diagnostic 
     procedures. As further research is completed, the payment 
     system could be expanded to cover all hospital outpatient 
     services.
       The report discusses an issue with the amount of 
     coinsurance that Medicare beneficiaries pay for outpatient 
     surgery, radiology and other diagnostic procedures. Current 
     law requires that beneficiaries pay 20 percent of submitted 
     charges. However, in the recent past, hospitals' submitted 
     charges have substantially exceeded Medicare's payment for 
     these services, so that most of the time beneficiary 
     coinsurance payments substantially exceed 20 percent of 
     Medicare's payment. If Congress chose to set beneficiary 
     coinsurance at 20 percent of Medicare allowed payments, this 
     act would require a substantial increase in program 
     expenditures and also could affect payments to providers. 
     Even incremental modifications in the coinsurance percentage 
     can have substantial impacts on Medicare program 
     expenditures. Should Congress decide to modify current 
     coinsurance arrangements, the report presents a number of 
     alternatives and displays their costs to the Medicare 
     program.
       In addition, the report discusses a related problem with 
     the current payment formula that results in an unintended 
     increase in Medicare payments--the so-called ``formula driven 
     overpayment.'' We believe this result was not intended by 
     Congress. If Congress chooses to address this issue, the 
     correction can be made separately or as part of the 
     implementation of a prospective payment system.
       I am also sending a copy of this report to the Speaker of 
     the House of Representatives.
           Sincerely,
                                                 Donna E. Shalala.
       Enclosure.

                Formula-Driven Overpayment to Hospitals

       As mentioned in previous sections, there is an anomaly that 
     occurs with Medicare's payment when payment is made under the 
     blended rate for hospital outpatient services. Beneficiaries 
     pay 20 percent of hospital charges as coinsurance on most 
     hospital outpatient services. Generally, every dollar a 
     beneficiary pays in coinsurance results in a corresponding 
     decrease of $1 in Medicare payment. To illustrate, assume a 
     beneficiary receives a hospital outpatient service for which 
     the Medicare payment is based on the lower of the hospital's 
     reasonable costs or its customary charges. The hospital 
     charges $1,000 and its costs are $750. Payment is determined 
     as follows:

Total payment to the hospital.................................     $750 
Beneficiary payment ($1,000 20%)..............................    -(200)
                                                               ---------
    Medicare program payment..................................     $550 
                                                                        

       If the hospital increases its charges, the beneficiary's 
     coinsurance will increase, the Program payment will decrease, 
     but the total amount realized by the hospital will not 
     change.
       This is not the case for coinsurance paid for procedures 
     that are paid on the basis of a blended rate. For example, 
     the blend for ASC approved surgical procedures consists of 42 
     percent of the hospital's costs or charges net of 
     coinsurance, whichever is less, and 58 percent of 80 percent 
     of the ASC payment rates. Because the blend is determined net 
     of the coinsurance that would have been paid to an ASC (20 
     percent of payment rates), instead of the 20 percent of 
     charges the beneficiary actually paid, Medicare does not get 
     the full benefit of the actual coinsurance when the 
     hospital's charges exceed the ASC payment rates. That is, to 
     the extent that 20 percent of hospital charges exceed 20 
     percent of the ASC payment rates. Medicare's payment is 
     higher than it should be since the formula assumes a lower 
     copayment than is actually provided. Medicare does not 
     receive the benefit of 58 percent of the difference between 
     20 percent of charges and 20 percent of the ASC rate, and the 
     hospital retains the amount. For purposes of this report, 
     this amount is called the formula-driven overpayment.
       The following example illustrates how the blended payment 
     method transfers a portion of the benefit of coinsurance away 
     from the Medicare program to the benefit of hospitals. The 
     result is that hospitals receive more payment than intended 
     by statute, while the Medicare program pays more:
       Assume a Medicare beneficiary receives an ASC procedure in 
     a hospital outpatient department. The hospital charges 
     $1,000, its costs for performing the surgery are $750, and 
     the ASC payment rate for the procedure is $585. Assume the 
     annual deductible has been met. The beneficiary's coinsurance 
     payment is $200 (i.e., $1,000 20%). The Medicare program 
     payment is calculated as the lower of:

                                                                        
1. The lower of the hospital's reasonable cost or its customary         
 charges, net of deductible and coinsurance amounts:                    
    $750-$200...................................................    $550
        or                                                              
2. A blended amount comprised of:                                       
  42 percent of the lower of the hospital's costs or charges,           
   net of deductible and coinsurance (see 1 above):                     
      42% $550..................................................    $231
        and                                                             
  58 percent of 80 percent of the ASC payment rates, net of             
   deductible:                                                          
      58% (80% $585)............................................     271
                                                                 -------
        Total...................................................    $502
The blended amount is the lowest and, therefore, the amount the         
 Medicare program pays. The hospital receives:                          
    From the Beneficiary........................................    $200
    From the Medicare program...................................    +502
                                                                 -------
      Total.....................................................    $702
                                                                        

       Medicare payment would be lower if the payment were 
     calculated the way it is for other hospital outpatient 
     services and, instead of removing coinsurance and deductibles 
     at each step of the payment calculation, the total payment is 
     calculated first and then is reduced by the amount the 
     beneficiary actually paid. For example:

                                                                        
Determine the lower of:                                                 
  1. The lower of the hospital's reasonable cost ($750) or its          
   customary charges ($1,000)                                      $750 
                                                               =========
      or                                                                
  2. A blend of:                                                        
    42 percent of the lower of costs or charges:..............          
      (42% $750)..............................................     $315 
        and                                                             
    58 percent of the ASC payment rate: (58% 585).............     +339 
                                                               ---------
        Total.................................................     $654 
                                                               =========
Then reduce by beneficiary copayments to arrive at the                  
 Medicare program's payment:                                            
    Total Payment.............................................     $654 
    Beneficiary Payment (20% 1,000)...........................    -(200)
                                                               ---------
        Medicare program Payment..............................     $454 
                                                                        

       The difference between $502 and $454, or $48, represents 
     the formula-driven overpayment which occurs under the current 
     blended payment formulas.
       Moreover, because of the way coinsurance is accounted for 
     under the current blended payment methods, the hospital can 
     further increase its total payment by simply increasing its 
     charges. For example, if the hospital increased its charge to 
     $1,300 for the procedure, the hospital would still be paid 
     under the blended payment amount but it would receive:

                                                                        
    From the Beneficiary (20% $1,300)...........................    $260
    From the Medicare program...................................    +477
                                                                 -------
      Total.....................................................    $737
                                                                 =======
Program payment would be computed as follows:                           
  42 percent of the lower of the hospital's cost or charges, net        
   of deductibles and coinsurance:                                      
      42% ($750 - $260).........................................    $206

[[Page E133]]

                                                                        
        and                                                             
      58 percent of 80 percent of the ASC payment rate net of           
       deductible: 58% (80% $585)...............................    $271
                                                                 -------
          Total.................................................    $477
                                                                        

       In the first illustration, the hospital charged $1,000 and 
     received a total payment of $702. If the hospital merely 
     increases its charges to $1,300, it will receive $737. As the 
     example shows, for a hospital that is paid based on the 
     blend, the more it charges, the more its total payment 
     (beneficiary plus Medicare program payment) will be. As a 
     result, the current payment system gives an incentive for 
     hospitals to increase charges.

     (Note: In order to simplify the examples in this section, the 
     blended payment method is shown as it would apply to an 
     individual procedure. In determining actual payments to 
     hospitals, however, the blended payment calculation is 
     applied in the aggregate to all of the ASC approved 
     procedures a hospital performed during a cost reporting 
     period, not on a procedure-by-procedure basis.)

       The same situation exists under the current blended payment 
     methods for hospital outpatient radiology and other 
     diagnostic services. We estimate that the magnitude of the 
     formula-driven overpayment that occurs under the blended 
     payment method to be over $950 million in Medicare program 
     payments to hospitals in 1993--approximately 14.8 percent of 
     total payments for these services. This total includes $350 
     million for ASC approved surgeries and $600 million for 
     radiology and other diagnostic services, respectively. For 
     surgical procedures, this represents 10.8 percent of total 
     payments to hospitals and 20 percent of Program payments to 
     hospitals for these outpatient services. For radiology, the 
     formula-driven overpayment represents 19 percent of total 
     payments to hospitals and 38.7 percent of Program payments. 
     By FY 2001, we estimate the formula-driven overpayment for 
     surgery, radiology and other diagnostic services to be $6.7 
     billion.
       We believe that these formula-driven overpayments were not 
     intended by the Congress. If Congress chooses to address this 
     issue, it could be enacted either as a separate change or as 
     part of a prospective payment system for outpatient services. 
     It should be pointed out that, if a prospective payment 
     method for outpatient surgery, radiology and other diagnostic 
     procedures is adopted, this change would automatically occur 
     for those services. Indeed, we recommend that the prospective 
     rates be set so that aggregate payments to hospitals for 
     these services are no higher than current law payments net of 
     the total amount of the formula-driven overpayment.

                          ____________________