Testimony of
                              
              The Honorable Thomas M. Sullivan
                 Chief Counsel for Advocacy
             U.S. Small Business Administration
                              
                         Before the
                              
                U.S. House of Representatives
                 Committee on Small Business
                              
                             On
                              
       Can Improved CMS Compliance with the Regulatory
   Flexibility Act Resuscitate Small Healthcare Providers
                              
                       April 10, 2002
                         10:00 A.M.
                              
     Chairman Manzullo and Members of the Committee, good
morning and thank you for the opportunity to appear before
you today to discuss the issue of whether improved Centers
for Medicare and Medicaid Services (CMS) compliance with the
Regulatory Flexibility Act can be expected to resuscitate
small healthcare providers.

     For the last twenty-five years the Office of Advocacy
has been monitoring federal agencies' compliance with the
Regulatory Flexibility Act, commonly referred to as the RFA.
The RFA requires federal agencies to determine whether a
proposed rule will have a disproportionate effect on small
entities, and, if so, to explore alternative regulatory
solutions.  As I testified before this committee on March 6,
2002, and as I indicated in our recently released annual
report on RFA compliance, not all agencies comply fully with
the RFA.   Advocacy has historically had difficulty
impressing upon some federal agencies the benefits that can
by derived by complying with the provisions and spirit of
the RFA.  The benefits flow not only to small businesses,
but also to the agencies themselves, as their compliance
with the RFA helps to lessen legal challenges and
legislative criticism of their regulations.

     Your invitation to appear before this Committee today
asked me to address the adequacy of CMS's compliance with
the RFA.  Advocacy appreciates the complicated public policy
objectives undertaken by CMS and the enormous pressure the
agency is under to promulgate regulations on payment
schedules in a timely manner.  We also appreciate the effect
these regulations have on small healthcare providers,
including the portable x-ray and EKG providers, ninety
percent of whom are small entities as defined by SBA size
standards.
     
     It is our goal that CMS more fully consider the
consequences of their regulatory actions on small employers
prior to finalizing their rules.  This is, after all, the
primary tenet of the RFA.
     Generally speaking, we believe that CMS should do a
better job of following administrative procedures that
require public notice and comment.  CMS should also consider
less burdensome regulatory alternatives that would still
allow the agency to meet its statutory requirements.  Of
particular concern is CMS's practice of promulgating direct
final and interim final regulations.  Procedurally this
methodology allows the agency to bypass notice and comment
requirements of the Administrative Procedure Act (APA) and
the RFA.  The APA does not afford an agency the latitude to
issue direct final or interim final rules unless the agency,
for good cause, finds that notice and public procedure
thereon are impracticable, unnecessary or contrary to the
public interest.  5 U.S.C.  553(b)(3)(B).  In one of our
comment letters to CMS, Advocacy pointed out that in a 10-
month period during 1998, CMS published twenty-four rules in
the Federal Register.  Of that total, fourteen of the rules
were interim or direct final rules.  We are concerned that
by relying on direct final rulemaking, CMS is losing out on
the benefit of public comment and the agency's ability to
appreciate the rule's effect on small business is
unfortunately minimized.

     Two recent rulemakings serve to highlight Advocacy's
ongoing concerns with CMS' lack of compliance with the RFA:
The Use of Restraint and Seclusion in Psychiatric
Residential Treatment Facilities Providing Psychiatric
Services to Individuals Under Age 21; and the rule
announcing Revisions to the Payment Policies and Five-Year
Review of the Relative Value Units Under the Physicians Fee
Schedule for Calendar Year 2002.

I.   The Use of Restraint and Seclusion in Psychiatric
     Residential Treatment Facilities Providing Psychiatric
     Services to Individuals Under Age 21.

     In July 1999, CMS's predecessor, the Health Care
Financing Administration (HCFA) issued an interim final rule
entitled, "Medicare and Medicaid Programs; Conditions of
Participation: Patients' Rights."  The rule contained
standards for the use of patient restraints in hospitals.
U.S. Representative Saxby Chambliss asked Advocacy to review
the Patients' Rights rule to determine if HCFA had complied
with the RFA.  After reviewing the rule Advocacy concluded
that the one-hour restriction on the use of restraints was
particularly burdensome on rural hospitals primarily because
it called for the treating physician to make a face to face
assessment of the patient within one hour of initiating
restraint or seclusion.  Advocacy commented that HCFA failed
to analyze the impact of the one-hour provision in the rule
and that no serious alternatives were considered.
Interestingly, the rule became the subject of a lawsuit
filed in the District Court of the District of Columbia.  In
September 2000, the court upheld the rule, but because the
agency failed to comply with the RFA, the court remanded the
rule back to the agency for the completion of a final
regulatory flexibility analysis.  The court's decision, with
regard to the RFA requirement for agencies to describe their
efforts to minimize their impact on small business, reads:
"The Secretary [the named defendant was Donna Shalala, then
Secretary of the Department of Health and Human Services]
did not obtain data or analyze available data on the impact
of the final rule on small entities, nor did she properly
assess the impact the final rule would have on small
entities."  National Ass'n of Psychiatric Health Systems, et
al., v. Donna Shalala, Secretary, Dep't of Health and Human
Services, 120 F.Supp.2d 33, 42, (D.D.C. 2000).  The court
concluded that, " the fact of the matter is that she has
totally failed to comply with section (5) of  604(a) of the
FRFA [ 604 contains the elements of a Final Regulatory
Flexibility Analysis (FRFA) under the RFA].  Id. at 44.
     
     We continue to insist that CMS complete the regulatory
analysis as ordered by the court, which still has not been
done.   Why do the analysis after the fact?  Because it
creates an institutional mechanism whereby CMS can produce
regulatory analyses of the rules' impacts on small
healthcare entities.
     
II.  Revisions to the Payment Policies and Five-Year Review
     of the Relative Value Units Under the Physicians Fee
     Schedule for Calendar Year 2002.
     
     Currently, Advocacy is experiencing similar problems
getting CMS to address RFA compliance issues in a rulemaking
that Advocacy believes will have a detrimental effect on the
portable x-ray and EKG industry, the majority of which are
small businesses.  On November 1, 2001, CMS published the
rule regarding Revisions to the Payment Policies and Five-
Year Review of the Relative Value Units under the Physicians
Fee Schedule for Calendar Year 2002.  Portable x-ray and EKG
providers transport x-ray and EKG machines to the patient's
bedside so they do not have to be transported to a hospital
or facility for the studies.  Because of the nature of the
industry, the majority of the portable x-ray and EKG
providers' billing is derived from Medicare.  The rule would
reduce, among other things, the transportation component of
the portable x-ray service by 5.4%.  As transportation costs
make up approximately 80% of the portable x-ray industries'
overhead, the 5.4% reduction in the physician fee schedule
rate, in addition to other reductions, will likely devastate
numerous portable x-ray businesses.

     On three occasions since 1998, the Office of Advocacy
has filed comments with the CMS concerning the agency's
determination of payment policies as they applied to the
portable x-ray and EKG industry.  Advocacy suggested that
because portable x-ray providers were consolidated with the
other physician practice groups covered by the rule, CMS was
running afoul of the legislative intent behind the RFA, to
eliminate "one-size-fits-all regulations."   We believed
that pursuant to the RFA, CMS should have analyzed the
impact on this industry separately.  Only then would the
agency have been in a position to decide whether to certify
no impact under the RFA, or whether to perform further
analysis.  Advocacy suggested that the preparation of a
flexibility analysis would allow CMS to determine the true
extent to which the rule would impact the portable x-ray
industry.  Advocacy also opined that because CMS failed to
prepare a proper regulatory flexibility analysis, the agency
was not in a position to determine whether the cost of the
regulation relative to the portable x-ray industry
outweighed the benefits.  For example, will it ultimately
cost more money for CMS to transport patients to the
hospital for the x-ray and EKG services?  Will the public
good will be adversely impacted if elderly patients, who
currently rely on the services provided by the portable
industry, have to be transported to the hospital for their
studies, resulting in an increased risk of infection, or
transportation injuries?




Conclusion
     
     As I stated in my testimony before this Committee on
March 6, 2002, Advocacy hopes that Secretary Tommy
Thompson's recently announced plan to reform the regulatory
process within his agency extends to CMS.  We believe that
one of the ways CMS can implement Secretary Thompson's
vision is to comply with the requirements of the RFA.
Another way that CMS can reform the regulatory process is to
issue proposed rules which should allow for the
consideration of public comment, instead of going direct
final and shutting out constructive input on the rules.
     
     Recently, the President singled out the RFA in his
Small Business Plan.  In a speech before the country's top
woman entrepreneurs, President Bush said, "I want to make
sure people understand that we're going to do everything we
can to clean up the regulatory burdens on small businesses,
starting with this: Every agency -- already it's under
current law -- but every agency is required to analyze the
impact of new regulations on small businesses before issuing
them.  That's an important law. The problem is, it's
oftentimes being ignored. The law is on the books; the
regulators don't care that the law is on the books. From
this day forward, they will care that the law is on the
books."
     
     Advocacy is working to implement the President's
commitment towards full agency compliance with the RFA.  We
applaud this renewed emphasis toward government
accountability to the small employer community.  We at
Advocacy have learned that when regulatory agencies involve
our office in the pre-proposal stage of rule promulgation,
compliance with the requirements of the RFA is improved.
Advocacy has been aggressively attempting outreach with
regulatory agencies in an effort to highlight the benefits
of RFA compliance and early consultation with Advocacy
during the pre-proposal stage of rule promulgation.   We've
found that this early consultation works. And we are willing
to work with CMS on this early consultation process.
     
     It is my hope and desire that the Office of Advocacy
and CMS will develop a working relationship that will result
in better communication and action on the issues that are of
concern to this Committee.