59

Chart 11, Medicare Utilization for Selected Part A Services, 1986-1993

Taamasions Por Parsons Saved
1.000 Beretcarest as 1,000 Gunateranes?

Town ‘Sates Home
oar Ranabusston Care Nusng Heath
98 23 ow 28 09
087 33 oe 33 492
1986 37 os ne oe
1968 4“ os 14 513
1990 50 23 190 79
rot 33 os 196 aa
1982 65 08 4 721
1993 72 07 4 ce)
1996 - ~ 28 ora
1995 = = = 27 one
Percen cnange
vgee-10ag 90% 153% 750% 150.0% 50.8%

. 00 cae Tabara oe oe anon ge
" penane se 5m 1200 tanta so nbs bah ae Poh sain 2 en ye na Re

SOURCE: PAC aa scare Ct Rp neta to naan Cae Praag hana

Chart 12, Medicare Skilled Nursing Facility Payments and Utilization, 1963-1994

‘Shiloa Narang Facey Prope Serve Dave
Yesr of ‘Paymens Peroni Tomber Par 00 Tamber Per Parson
Sennce (ir@mons| Change in Thousands) Ervlogs (a Thousands)
1989 25 265 oat ast
1984 06 298 9540 ae
1985 08 a4 8927 2a
1988 06 306 8.160, 28
1967 os 2 7488 24
1988 09 a 10.867 28
1969 35 8 za7e0 48
990 25 su 25.199 es
1991 29 on zasst 3
182 as mas zagrt 369
1999 oe 505 34382 38
‘94 re 36s 38.926, 209
19957 103 900 38,756 no
ae Pen apm poy ts anes a9 eB rena Da ETS
SOURCE, Hem Cate Feareng arto Oca A
‘Chart 13. Medicare Home Health Care Payments and Utilization, 1989-1994

Meda Pesble Sores view
‘Year of Paymens Percent Ramber Per 000 Nimiber_— Per Paver
Senice (in llons)__Chango__(nTnousangs)__Envoleas (hn Thoueands) Served
1963 $18 1218 “ 38.298 2s
1984 18 98 0 oan 2
es 19 sea st 339 2
1906 19 ist) 51 ‘38.000 2m
87 19 15a “ 3501 2
1988 20 582 2 arise 2
1988 26 1695 31 48109 Z
1800 39 1900 58 see 8
181 55 228 % 100206 6
1992 79 2520 BR 135.612 Pe)
1993 103 20 360.377 ry
1904" 134 3335, 3 zna00 6
1995 160 3615 7 252341 S



25

growth down to comparable levels would require a larger propor-
tional reduction.

In dollar terms, it wouldn’t be as great because, for the moment,
SMI is still a smaller program than HI, but it is growing more rap-
idly.

Chairman THoMas. Do you have any dollar figure that you could
place on what that adjustment would be in terms of needed part

savings?

Mr. VAN DE WATER. As were the examples in my prepared state-
ment, this is just illustrative, but if one were to try reducing the
present rate of growth, which is projected to be in excess of 10 per-
cent down to about the rate of growth of GDP which is roughly 5
percent, the cumulative savings in SMI over 10 years would be ap-
proximately $330 billion.

Chairman THomas. Of course, the pressure on part A is precisely
because it is a trust fund and it has dedicated dollars. Part B can
tap into the general fund, and to the degree that we do not have
a payment scheme for beneficiaries to pay whatever “their fair
share” is, we tap even more heavily into the general fund.

I guess at this stage, I am not all that excited about talking
about solutions to combine part A and part B if it means you have
access to the general fund to “solve your problem.” I think it is the
growth rate of 9 percent-plus in the trust fund and 10 percent in
part B that we have to focus on.

The other problem that I have very much with your testimony
is the idea that we would even suggest that the payroll tax be a
solution to the problem. The American people were the beneficiary
of a 1993 removal of the lid on the payroll tax by President Clinton
and the Democrats who were then controlling the majority of the
Congress. It was the largest tax increase in history, and that basi-
cally has been washed away by the numbers.

No question, we would be in much worse shape had they not had
this enormous tax increase, but to say that we are going to go to
a 25-percent increase on the HI payroll tax is, in my opinion, to-
tally and unfairly continuing the shift of an intergenerational
transfer of funds that I think are unprecedented in the history of
this country.

If I were to ask you if we went to a 25-percent increase on top
of the current payment, how much would that be?

Mr. VAN DE WaTER. The current payroll tax rate for Medicare is
1.45 percent each for employers and employees making a total of
2.9 percent. So a 25-percent increase would bring that to a total of
roughly 3.7 percent.

I might add, if I might, Mr. Chairman, that CBO was not rec-
ommending a payroll tax increase, just as we were not recommend-
ing any particular benefit cuts. I was running through some purely
illustrative examples to try and add some tangibility.

Chairman THomas. I understand that, but on an illustrative ex-
ample, I also need a ready answer from you to the 30-year-old who
then says, “Well, OK, so I am going to pay this for 35 years. So
what are the odds on my getting something at the end of this proc-
ess, having paid out at the highest rate in history?,” and the an-
swer is you are going to be able to work longer and you are going
to have to stay alive longer to get anywhere near the return that


COMMITTEE ON WAYS AND MEANS.
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois
BILL THOMAS, California

E. CLAY SHAW, JR., Florida
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
MEL HANCOCK, Missouri
DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota
DICK ZIMMER, New Jersey
JIM NUSSLE, Iowa

SAM JOHNSON, Texas
JENNIFER DUNN, Washington
MAC COLLINS, Georgia

ROB PORTMAN, Ohio

JIMMY HAYES, Louisiana
GREG LAUGHLIN, Texas
PHILIP S, ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

SAM M. GIBBONS, Plorida
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ANDY JACOBS, Jr., Indiana
HAROLD E. FORD, Tennessee
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia

L.F. PAYNE, Virginia

RICHARD E. NEAL, Massachusetts
MICHAEL R. MCNULTY, New York

PHILLIP D. MOsELEY, Chief of Staff
JANICE Mays, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH
BILL THOMAS, California, Chairman

NANCY L, JOHNSON, Connecticut
JIM McCRERY, Louisiana

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska
PHILIP M. CRANE, Illinois

AMO HOUGHTON, New York
SAM JOHNSON, Texas

FORTNEY PETE STARK, California
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia

ap


119

the HHA is credited tora new episode timit sf there is « petiod of 45 days without Medicare covered
home health cate services following the 120 day episode (if a patient is readmitted before a new
episode can be started, the agency is paid per visit subject to the aggregate episode limit if within the
first 120 days, or the separate post 120 day aggregate per patient blended limit if after 120 days).

the 18 category Phase I case mix adjustor is applied to the first 120 days, ora more accurate one if
available

+ the per episode limit (as in HR 2491) is equal to the mean number of visits for each discipline durin
the 120 day episode of a case mix category in an area during the base year raultiplied by the per visit
payment rate for each discipline

the annual aggregate episode limit (as in HR 2491) is equal to the number of episodes of each case
mix category during the fiscal year multiplied by the per episode limit determined for such case mix
category for such fiscal year

the region for the episode limit - MSA/nonMSA area

the annual post 120 day per patient blended limit is based on the reasonable cost per unduplicated

patient receiving care beyond 120 days in the base year (1994 cost per visit updated, multiplied by
1995. utilization) and updated by the home health market basket index: calculation based 50% on

agency data & 50% on census region data

the annual aggregate post 120 day per patient blended limit is equal to the number of unduplicated
patients receiving care beyond 120 days in the year multiplied by the per patient blended limit

+ the current certification and coverage guidelines continue
‘Sharing Saving
HUAS that are able to keep their total payments for the year below their annual aggregate episode and post
120 day per patient caps; and the post 120 day per patient payments below 125% of the census region
costjutilization experience, shall receive a payment equal to 50% of the difference between the total per
visit payments and the agency's aggregate limits. Such payments may not exceed 10% of an agency's
aggregate Medicare per visit payments in a year.
Phase Ill (as noted under the goal in Section I)
Per Episode PPS
+ developed cooperatively by HHS, the industry, andl Congress

+ acceptable to the industry


68

‘STATEMENT OF GAIL R. WILENSKY
IR
PHYSICIAN PAYMENT REVIEW COMMISSION

Mr. Chairman, | am pleased to be here today to discuss aspects of the Physician Payment Review
Commission's 1996 Annual Report to Congress that are of interest to this committee. Responding to
congressional interest in restructuring Medicare, the report presents recommendations and analyses
‘on key policy issues related to broadening the range of health pian options available to Medicare
beneficiaries. Issues covered in the report include methods for setting capitation payments, standards
for plan participation in Medicare, facilitating beneficiary choice among plans, promoting quality of
care, managed care coverage decisions and the appeals process, and medical savings accounts
(MSAs).

‘The report also focuses on strengthening Medicare's traditional fee-for-service program, stil the option
chosen by nearly 90 percent of beneficiaries. Our analyses consider the effect of the Medicare Fee
‘Schedule on beneficiary access, evaluate the impact of the fee schedule on physician payments, and
assess the Sustainable Growth Rate system proposed by the Congress and the Administration to slow
growth in Medicare physician expenditures. The potential for better managing the delivery of care
under Medicare fee for service is also discussed.

In addition, we have examined a number of issues that relate to both Medicare managed care and fee
for service. These include new analyses of risk selection within Medicare, and an examination of
various risk adjustment methods. Other analyses play out the Implications of the failsafe budget
mechanism included in the Medicare conference agreement. We present intial work on two other
issues: changes in secondary insurance for Medicare beneficiaries, and geographic adjustment of
Medicare payments. Also explored is the question of how the changing market for health services is
affecting the labor market for physicians,

To set the context for these issues, | will begin today by describing some of the important concerns
that set the stage for restructuring efforts. Iwill then briefly outline several key issues included in the
report, highlighting the Commission's recommendations to the Congress. We are hopeful that these
analyses and recommendations will prove useful as you continue work on Medicare restructuring
legislation. As our work progressed over last fall and the winter, Commission staff worked closely with
the staf of this committee to provide technical advice in designing the MedicarePlus program and
crafting improvements in the traditional program. We look forward to such continued interaction in
the months ahead.

Given this subcommittee’s recent hearing on physician supply and the financing of graduate medical
education (GME), | would also like to take this opportunity to remind you of the Commission's work in
this area, Since 1991, the Commission has provided analysis and recommendations on how
Medicare could leverage its GME dollars to help achieve broader policy goals. Most recentiy, we
recommended that the capitation payment methodology for Medicare risk-contracting plans be revised
so that Medicare payments to providers for medical education costs are removed from capitation
payments, and that separate mechanisms be explored for paying plans directly for medical education
expenses they may incur in training residents or using teaching facilities. We will consult with
committee staff to identify specific options of interest and will Keep you apprised as our work
progresses,

‘The Context for Reform

Today, there are many challenges facing the Medicare program. Despite progress in slowing the rate
‘of growth in spending on physicians’ services, overall Medicare expenditures continue to increase at a
rate many consider unaffordable. Between 1984 and 1993, Medicare expenditures rose at 7.7
percent annually, outpacing growth in most other types of federal spending and in the gross domestic.
product. Total Medicare expenditures are expected to continue accelerating at annual rates of 8.3,
percent fo 10 percent from now until 2005. By contrast, projected growth rates for physicians’
services expenditures are projected to be in the range of 4 percent to 6 percent

Aso at issue is how to respond to the changing nature of the U.S. health care system, with its
‘growing emphasis on integrated systems of care; capitated payment; and new roles for purchasers,
Plans, providers, and consumers. Dynamic changes in the private sector have attracted
policymakers’ attention for several reasons. First, with strong pressure to reduce the federal budget
deficit, slowed growth in premiums for private insurance has created expectations that increased
Penetration of managed care within Medicare will help moderate increases in federal spending,
During the tate 1980s, private spending was rising faster than Medicare at an average annual rate of
9.7 percent per capita compared with 8.4 percent for Medicare Since then, this trend appears to
have reversed! with private-sector growth rates now below those for Medicare.

‘The Commission has considered the reasons for the differential in growth rates between Medicare
‘and the private sector. Lower recent rates of increase in the private sector may reflect success in
creating incentives for delivery of more cost-elfective approaches to medical care. Medicare might
benefit from adopting these innovations. On the other hand, Medicare had lower rates of growth in


79

statement about views of other areas as it is about the future of
medicine.

I think because the Federal Government is spending a substan-
tial amount of money in the area of graduate medical education
that it can’t ignore the effects that it has produced.

There appears to be something of an intermediate market that
has developed at the institutional level because of the substantial
amount of payments that are available. These may not have a lot
to do with the final demand of physicians in certain areas. I also
think we can’t ignore the fact that several billions of dollars, $6 or
$7 billion that go out in graduate medical education payments has
an effect whether or not you intend it. Therefore, the issue of how
much, why the Federal Government is making payments in this
area at all, where you want to be and how you want to transition
from the present program to where you ought to be in 5 years will
remain very important.

Chairman THOMAS. One of the other things I would ask, and I
want to make sure I say this correctly because I don’t want anyone
to misunderstand me, is that information that we received was
that it appeared that foreign medical graduates were involved in
the specialty areas at a higher rate. That may increase in the fu-
ture. I just want to make sure that as we monitor where primary
physicians and the specialties are coming from, if there is any sig-
naling of an inordinate number of foreign medical graduates, it
might be possible to look at several concerns and deal with them
at one time if, in fact, there is a high propensity in that direction.

Ms. WILENSKY. This is certainly possible to alert you as to the
choices that are being made by various groups.

Chairman THOMAS. Thank you very much.

The gentlewoman from Connecticut.

Mrs. JOHNSON. Thank you, and welcome, Dr. Wilensky.

Ms. WILENSKY. Thank you.

Mrs. JOHNSON. In your testimony, you recommend that in the
capitation payment methodology for Medicare risk contracting
plans, that we remove Medicare payments to providers for medical
education costs from the capitation payments.

We did not go that far in our recent proposal because of our con-
cern that premiums would not be high enough to command a bas-
ket of services that would be adequate for seniors, and not having
the time to change the AAPCC technology, we simply did not with-
draw the medical education component from the capitated rate.

When you look at the challenge of revising AAPCC versus simply
finding alternative sources of medical education dollars, what route
do you recommend we go?

Ms. WILENSKY. I actually think because of the small number of
seniors who are in capitation plans, your choice was a perfectly
reasonable one, especially if you separate out the growth rate of the
capitation plans from what goes on in fee-for-service. What you are
really doing is locking in an 8- or 9-percent population factor that
is in the AAPCC that has to do with medical education.

If you were to wait until the capitation plan represented 20 or
30 or 40 percent of the population, then having a differential which
may or may not be correctly attributable to the plan that was real-


15

I accept that, but could I just qualify something?

Mr. StarK. Sure.

Mr. SHAys. We have a gaming of the system. It just is not useful
to say we may pay doctors less, for instance, for a visit. When they
go to a nursing home and they spend 15 minutes and poke their
head in seven rooms, they have gamed the system. So you could
say on a per-visit, it is cheaper, but it is just not.

Let me just make this other point.

Mr. Stark. Could I just reclaim on that point?

Mr. Suays. Sure.

Mr. Stark. I would urge you to think about this—for as long as
I can remember, we have felt that we should stay out of that. We,
Medicare, is really an insurance company.

The minute you and I or Bill and I start determining how long
that visit should be or whether the visit should exist, we are get-
ting into an area with which we have no expertise or no staff.

Mr. Suays. I wasn’t suggesting that. I want to clarify what I am

sayi

Tam just suggesting that the statistics can be very misleading.
When we, in fact, impose certain things on providers, they find a
way to game the system. When other people visit them and they
charge a little bit more, their visit may be more substantive, but
they have justified in their own minds, since HCFA is not paying
them, since the government is not paying them enough, they justify
in their own mind, just poking their head in and saying, “Louise,
how are you doing today?,” going over to see Tom and saying how
are you doing, and in the end, they have made what they made.
It looks great because you said they had nine visits, but they prob-
ably only spent 15 minutes. Whereas, with another patient in the
private sector, they literally spent 15 minutes with that patient.

Mr. STaRK. Why do you think they do that? I find that difficult
to believe, besides which, if they are seniors, they are all being paid
by Medicare.

Mr. Suays. They are gaming the system to get around rules and
regulations of the Federal Government.

Mr. Stark. You don’t think they do that with Pru and Aetna and
the others?

Mr. Suays. I don’t think to the extent, no, absolutely not.

Mr. Stark. I think you would find quite to the contrary. It is the
same.

If they are going to game the system, have excessive tests or
shortchange their visits, that type of provider is perfectly willing.
As a matter of fact, the private insurance companies spend nothing
on fraud and abuse. All they do is add it to the premium, and we
have had testimony after testimony that they are not interested in
the private sector because it is too easy just to increase the pre-
miums and not offend a lot of people.

Mr. SHays. That is the old cost-plus, but when it is your dollars
and you can’t pass it on because you are in a competitive market-
place and you go after waste—

Mr. STARK. That is what I am talking about. In the competitive
marketplace, they don’t do it.

Mr. SHays. In my hearing, we have had the private sector testify,
and there was a reason why they wanted to make health care


74

Table 4, Effect of Policy Changes on Fee Schedule Payments, 1994-1995
(percentage)

Payment ‘Adjustment Conversion
Type of Service, per Relative Value Facior Factor —_Transtion to
Location, and Speciaty Service __Unit Changes __Changes Updates _ Fea Schedulo
All Services 38% 49% 01% 75% 49%
Evaluation and Management Services
Primary care 20 40 00 79 24
‘Other 10 0.0 82 28
‘Surgical Services 37 00 122 as
Other Nonsurgical Services 18 on 82 a4
Location
Metropolitan areas
1 milion 38 18 on 14 22
<1 milion 38 20 on W 20
Rural counties
>26,000 48 19 02 ia 08
<25,000 66 a4 03 4 08
Cardiology 44 28 oo 87 48
Famlyigenerai practice 75 44 oA 12 15
Gastroenterology 12 49 on 87 27
Infemal medicne 50 a4 1 64 04
(Other medical 37 10 oa 58 19
Goneral surgery aa 14 00 a9 24
78 “10 on 105 48
a 7 on 100 233
Orhopedic surgery 57 30 00 105 18
‘Thoracic surgery 82 a4 00 112 48
Urology 58 112 on 401 es
Other surgical 58 20 on 100 23
Radiology 18 10 00 53 48
Pathology 16 16 on 52 83
25 08 on 73 or

SOURCE: Physician Payment Review Commission analysis of 1994-1995 claims, 6 percent sample of
Deneficiaies

NOTE: Changes due to the transition to fee-schedule based payments are calculated as the differance
‘between total payment changes and the sum of changes atiibutable to relaive value changes,
geographic adjustment factor changes, and conversion factor updates.

‘The Commission is also concemed how payment policy changes may affect the fee
schedule’s integrity. Whenever relative values are changed, the relationship of values across
codes and the components of the fee schedule (physician work, practice expense and
malpractice expense) may be changed. Moreover, there is some evidence to suggest that
revenue shares originally allocated to the three components of the fee schedule are
changing. To address these concerns, the Commission recommends that

+ Implementation of any changes to work relative values as a result of the
‘current five-year review should be budget neutral with respect to work values
‘and should not affect practice expense and malpractice expense relative
values.

+ HCFA should continue to achieve overall budget neutrality by adjusting the
‘conversion factors as it did for 1996, rather than by adjusting relative values,
as it has in previous years.

+ The relationship between the three components of the fee schedule should be
rebased annually to reflect the three-year moving average of physician
revenue shares as reported in national surveys,

Improving the Volume Performance Standard System. The report also analyses the
design of the Sustainable Growth Rate system, proposed by the Congress and the
‘Administration, as an altemative to the current system of Volume Performance Standards
(VPS). As you know, the VPS curbs Medicare spending for physicians’ services by linking


32

there is $122 billion in the reserve, it is going to be there, we are
not really facing any problem. I see, this year, you are projecting
$7 billion loss, next year $13 billion, 1998 $22 billion loss, $30 bil-
lion, $38 billion, $48 billion, $57 billion, $68 billion, $82 billion in
year 2005, and $96 billion deficit. It is amazing that we can’t come
to some kind of agreement on this and get this solved.

Even our program wasn’t based before these projections came
out. It would not get us as far as we needed to get to saving the
program.

So I guess my question is, back when you were looking at modi-
fying the projections for this past year, what were some of the pa-
rameters that you used in modifying your projections?

Following up on Nancy Johnson’s comment, did you look and ex-
amine what was going on in some of the markets that are using
the HMOs, such as Arizona, in modifying your projections and your
results?

Mr. VAN DE WaTER. As you probably noticed in looking at these
numbers as carefully as you have, the changes on both the outlay
and the revenue side of our projections are really fairly modest on
a year-by-year basis, but when you add them all up over 10 years,
when you accumulate them to find out what the effect on the accu-
mulated deficit or surplus is, they turn out to be rather large.

There is no single earth-shaking fact that one can point to that
accounts for the change in projections. On the income side, we have
just slightly lower receipts reflecting two things: First, the projec-
tion of slightly less rapid growth in the wage and salary base on
which payroll taxes are levied, and second, an even smaller reas-
sessment on the part of the Social Security Administration with re-
gard to the portion of wages and salaries which would be subject
to the payroll tax.

On the outgo side, we have changed the rate of growth in hos-
pital insurance very little. Most of the change simply reflects the
fact that spending in the current year is running a bit higher than
we had thought a year ago at this time, and if you just project out
a small difference, it comes close to tripling over the 10-year period
that we are showing.

So there is no smoking gun, so to speak, that one can point to
that accounts for these changes. They are really very modest, but
on balance, they do shorten the life of the fund by a year and add
roughly $100 billion to the accumulated deficit over 10 years.

Mr. CHRISTENSEN. Mr. Chairman, as a freshman on this Commit-
tee and as someone who has been targeted by the AFL-CIO and
an opponent who is the recipient of hundreds of thousands of big
labor dollars focused on the issue of “cutting” Medicare because we
supposedly don’t care about our seniors, I am outraged by those
who are defenders of the status quo that would allow this system
to go bankrupt.

To hear people even contemplating the thought of raising taxes
really should be an outrage to the American people because even
raising taxes won't fix this problem. Until this Congress has the
will to do what is necessary, to change the entire program, it is not
going to get done.

If we can’t come together in a bipartisan fashion to achieve the
results that are needed to save this system, so that we don’t have


103

On the home health reimbursement issue, perhaps you could en-
large on your specific recommendations in that area because we are
having a terrible time pricing out the savings of proposals, and I
think most Members are getting a very different picture from their
providers out there in the field versus CBO and other estimators
of these proposals. So any comments that you might have on that,
I would appreciate.

Ms. SHIKLES. We have just issued a report on the home health
care whole benefit, and it has jumped from about $3 billion in 1989
to about $13 billion in 1994. CBO predicts that it will now increase
to $30 billion in the year 2002. I think that and the other
nonhospital services in part A are contributing to some of the
stress in the part A fund.

Mrs. JOHNSON. To that point, does your study look at what por-
tion of that increase is associated with a reduced number of dates
in acute care hospitals?

Ms. SHIKLES. No.

Mr. DowDAL. No. The conclusion we came to is that home health
has become more of a long-term care benefit than it used to be
when it was primarily a posthospital, acute care-type benefit. So
the number of visits per beneficiary receiving home health care has
gone up by factors of three, four, five, and even more than that.

Mrs. JOHNSON. The difficulty with that is looking at it in isola-
tion isn’t very helpful when we sought to reduce the number of
acute care days. We knew we would increase the number of home
care visits. So one of the things I need to know is how many of
those home care visits represent reducing health care costs because
they are bringing people out of the hospital earlier, and then what
percentage of those longer term home health visits are also reduc-
ing costs because they are keeping people out of nursing homes.

I do actually see that in my daily life. So does your research go
to either of those two points?

Ms. SHIKLES. We will get you the information that will show you
how many people are using home health who didn’t have a prior
hospitalization, but we can’t tell from the data that it would have
prevented a nursing home admission.

Mrs. JOHNSON. Even in States where they have a very sophisti-
cated program—I know in Connecticut, we have a very sophisti-
cated organization called CCCI, Connecticut Community Care Inc.

Ms. SHIKLEs. I am familiar with that.

Mrs. JOHNSON. I think their data ought to be pretty good about
the extent to which they have been able to keep people out of nurs-
ing homes because that was their mission.

They don’t get people. They don’t get clients until they are at
risk of going into nursing homes.

Ms. SHIKLES. Right.

Mrs. JOHNSON. I don’t think this number-of-visits issue can be
looked at in isolation.

Did you have further comment?

Mr. DowDaL. No.

Mrs. JOHNSON. So, if you could help me look at that, I think we
are having a terrible time dealing with this area because we aren't
able to interpret the data relative to savings in other areas. I think


39

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64

that they didn’t, you would. I think this kind of information would
be invaluable in getting a better feel not just for the seniors, but
for the others as well.

The point being, I think there are a number of ways for us to
resolve some concerns about the disturbance that an MSA might
bring about to the current risk selection structure.

Mr. KLEczKA. Once you see the adverse selection or something
like it, such as the excess spending, would you then cut off enroll-
ment?

Chairman THOMAS. You could talk about either slowing down or
cutting off enrollment.

Mr. KLEczka. If I am next in line, I am not going to be a happy
camper.

Chairman THOMAS. Saying that you have to sign up for 5 years
may never make you a happy camper.

Mr. Kueczka. I think 5 years is fair because, at that point, we
are both sharing the risk. You could be healthy for 10 years or 3
years. If this were to go through for the Medicare Program, any re-
tiree in relatively good health would be silly not to take advantage
of the MSA for the first 2 or 3 years of retirement, and then as
soon as the first ache or pain came about start to get out of it. We
talked about that.

Chairman THomas. I think now is the time to ask the gentleman
from Nebraska if he wants to inquire because I believe he has some
views on this as well.

Mr. CHRISTENSEN. I will just make a quick comment. Take my
father, for example. I really don’t have a question for Dr.
Newhouse, but my father recently passed away, and he was 6
months away from being one of those 65-year-olds who was going
to be involved with an MSA. He was looking forward to that.

However, in his situation, if he would have gotten sick, his de-
ductible, which would have been around $10,000 for where he was,
would have kicked in right away, and all the costs above that
would have been covered by the insurance that he purchased.

The idea about the adverse selection, I see, really, as a suspect
issue because it is going to be the free market with the private car-
rier or the catastrophic insurance coming in and the high deduct-
ible taking over.

Jerry, I just don’t understand where you are coming in with this.
I don’t agree.

Mr. KLEczKa. If you siphon off all the healthy or healthier indi-
viduals?

Chairman THOMAS. Does the gentleman from Nebraska wish to
yield to the gentleman from Wisconsin?

Mr. CHRISTENSEN. I would be glad to.

Mr. Kieczka. If, in fact, the healthy seniors are siphoned off
from the Medicare Program for the MSAs, the Medicare Program
itself will get stuck with the most unhealthy or the sickest individ-
uals, and naturally, that is going to exacerbate Medicare’s costs.

Chairman THomaS. I will tell the gentleman, we continue to get
findings come in. One of the reasons some folks go into HMOs and
would probably sign up for MSAs is that they are extremely sick,
and it limits their exposure in terms of actual out-of-pocket cost far
better than the old-fashioned Medicare structure does. So the de-


35

have those now. If we did this through the tax structure, what
would be the increase in taxes that would have to be levied, Medi-
care taxes, if we were to cover this $55 billion cost through increas-
ing Medicare taxes?

Mr. VAN DE WATER. The President proposes, as you know, to set
the SMI premium so as to cover 25 percent of program costs. Under
that assumption, the premium that would attach to part B spend-
ing is 25 percent of $55 billion.

Mrs. JOHNSON. So under his program is 25 percent of program
cost, but because he is shifting new cost into part B, his premiums
actually would go up?

Mr. VAN DE WATER. No, because the President also specifies that
these particular additions to part B spending would not be counted
for purposes of determining the premium.

Mrs. JOHNSON. So they will be paid for entirely through the tax
income, the tax dollars that flow in?

Mr. VAN DE WATER. Yes.

Mrs. JOHNSON. Would you get back to me later on as to what
kind of increase they would trigger if they were counted as part of
the 25 percent?

Mr. VAN DE WATER. That was the earlier answer I gave you. If
they were counted, it would lead to a premium increase of 25 per-
cent of $55 billion, roughly $13 billion.

Mrs. JOHNSON. Oh, I see. I didn’t understand that.

Then, if you could get back to me about how that would work out
in terms of payroll tax, I would be interested in that.

Mr. VAN DE WATER. What payroll tax rate it would take to fi-
nance?

Mrs. JOHNSON. Right. What kind of payroll tax increase it would
take to fund those, the home care expenses, so that we would not
have a new tax through other avenues. I just want to know for a
matter of fact. I think the problem with $124 billion is not only
that it only adds 4 years instead of 10, but also that it is a sleight
of hand, and I am appalled that the $55 billion was not allowed
to have any weight in the premium and it is totally a generational
tax shift.

Thank you.

Mr. VAN DE WaTER. Mrs. Johnson, I could actually give you an
indication of that answer right now. The 0.7-percent increase in the
payroll tax, which I used in my hypothetical example, generated
about $200 billion over 7 years. So, to raise about a quarter of that
amount, the required increase would be about a quarter of 0.7, or
close to 0.2 percent on the payroll tax.

Mrs. JOHNSON. Thank you. I appreciate that.

Mr. Stark. Mr. Chairman.

Chairman THOMAS. The gentleman from Nevada was going to try
to get in on it first, but is this followup of that?

Mr. Stark. It is a followup. I just wanted to stipulate that I am
sure that in our bill there has been sleight of hand, but I think I
am also correct that in the Republican bill, the part B premium in-
crease was transferred into part A for several billions of dollars,
and the GME Trust Fund was taken out and an appropriated trust
fund was created. So that, in both bills, we used transfers from one
trust fund to the other. While one may be better than the other,


67

member that there are things we need to do to have traditional
Medicare function better.

There are changes the private sector has made that may well be
useful for traditional Medicare as we broaden choices for the near
term at least it will remain a very important program. We have got
to do whatever we can to make sure that it functions better.

Finally, the single most important technical issue, for those who
are interested in broadening choice to the seniors or to the under
65, has to do with risk selection and risk adjustment. We don’t use
that as a reason not to open up choices. We use that as a reason
to push and promote better ways to make risk adjustment.

PPRC staff has spent a substantial amount of time during the
year trying to push forward our technical knowledge. We think
there are ways that we can do risk adjustment. HCFA has been
pushing forward some of the areas.

Dr. Newhouse, when he was a member of PPRC, had some ideas
about mixing a partial capitation with a traditional payment. We
think it is important that people understand that risk selection and
risk adjustments are technical issues that need to be dealt with
rather than excuses for not moving forward in the future.

Thank you.

(The prepared statement follows:]


104

your comment about the number of services that are not physician-
authorized or physician-overseen raises some questions.

Also, how much do you want to pay for physician time because,
under ‘managed care plans for the most part now, they don’t pay
for this. How much physician time do we invest in reviewing a care
plan, or are there triggers that can be put in place so that when
the time comes there is the review? It is those kinds of issues I
would be interested in.

Ms. SHIKLES. I am a little familiar with your program in Con-
necticut and some similar programs, and we would love to see a
demonstration at least for the Medicare benefit on home health
care because that is when these services are really used either from
a posthospital experience or to prevent nursing home admission or
help somebody maintain independence at home.

We will come up and meet with you and show you the data we
have that some of the utilization you are not certain whether it is
really more just the fact that home health agencies now are com-
peting with each other just to offer more and more services.

Mr. DowbaL. Yes. When I thought about it a minute, what you
are saying, Mrs. Johnson, is similar to what we were saying. Home
health has become more of a long-term care program than
posthospital acute care, and when you are taking care of people
over protracted periods of time, whether it is related to nursing
home programs or home- and community-based care and all of
that, that is one of the points that we are making in the report.
It has become more of a program for long-term care.

Congress didn’t do anything specifically to say go ahead and do
shift toward long-term care, and one of the things we are pointing
out in the report is that Congress may want to consider whether
that is the direction they want Medicare to move in for the home
health benefit.

Mrs. JOHNSON. Certainly, we need to be clear about that. We also
need to be clear on whether there is a better way of seeing whether
services that are being provided are necessary.

Mr. McCrery, do io you Rave any further comments?

Mr. McCrery. Ni

Mrs. JOHNSON. Thank you very much for your testimony. We ap-
preciate it. We look forward to working with you.

Ms. SHIKLES. Thank you very much.

Mrs. JOHNSON. The hearing is adjourned.

(Whereupon, at 5:03 p.m., the hearing was adjourned.]

{Submissions for the record follow:]


45

STATEMENT OF JOSEPH P. NEWHOUSE
CHAIRMAN
PROSPECTIVE PAYMENT ASSESSMENT COMMISSION

Good Morning, Mr. Chairman. | am Joseph Newhouse, and | am pleased to be
here for the first time as Chairman of the Prospective Payment Assessment
Commission (ProPAC). | am accompanied by Dr. Donald Young, the Executive
Director of ProPAC. On March 1%, the Commission submitted to the Congress its
eleventh annual report containing recommendations for improvements to the Medicare
program. This morning, | am briefly going to discuss these recommendations, which
were developed by the Commission before | became Chairman. During my testimony,
| will refer to several charts. These charts are appended to the end of my testimony.

Since 1965, the Medicare program has provided financial protection from the
high costs of illness to individuals age 65 and over and, beginning in 1972, to many
disabled people, as well as those with end-stage renal disease. This protection for the
elderly and disabled, however, has come at a substantial cost to the Federal
government and taxpayers and to many Medicare beneficiaries. Medicare program
‘spending climbed from $4.8 billion in 1967 to an estimated $177 billion in 1995. This
rapid rise in expenditures is contributing to the Federal deficit, threatening the
solvency of the Hospital Insurance Trust Fund, and is a growing burden to Medicare
beneficiaries, who share in the costs of the program.

SLOWING MEDICARE SPENDING GROWTH

The Commission supports the efforts of this Committee fo rein in the growth in
Medicare expenditures. ProPAC believes spending for medical services in a private
sector with market forces that encourage cost containment and high quality care
provides a benchmark for the Medicare program. Judgments regarding appropriate
spending levels and rates of increase, however, should be based on several years’
‘experience to account for short-term factors that may give a misleading picture of the
trends. In addition, spending growth should be compared on a per person basis. tt
also is important to recognize that the proportion of Medicare enrollees who are
disabled or who have end-stage renal disease is increasing faster than the elderly
population. The added costs of caring for these people, who require a larger amount
of services than the elderly, must also be considered.

The ability to compare and forecast Medicare and private sector spending is a
complex task, complicated by substantial data limitations. ProPAC continues to
‘examine available data and methods to assess spending trands, and we will present
more on this issue in our report to Congress on Medicare and the America Health
Care System, which we will submit to you in June.

In the decade beginning in the early 1980s, real Medicare spending per capita
(removing the effects of inflation) grew much more slowly than real per capita private
insurance expenditures (See Chart 1). More recently, the private sector has
‘outperformed Medicare.

‘The changes that are occurring in the private sector financing of care are having
a substantial effect on the way hospitals and other providers operate. ProPAC has
been following closely the factors that contribute to the growth of total hospital
expenses (See Chart 2). Two of these factors, general inflation and population
growth, cannot be controlied by hospitals. Hospitals have some control over real input
prices, which reflect hospital cost inflation above that in the general economy. The
utilization of services, that is the number of admissions and outpatient visits, and the
intensity and complexity of the care furnished to those who are served, however, can
be controlled by hospitals.

Between 1985 and 1992, over half of the growth in hospital costs was due to
increases in the intensity of the services furnished to inpatients and outpatients.
During this time, changes in hospital utilization had litle effect on total cost growth as
the overall use of hospital services increased at about the same rate as population
growth. From 1992 to 1995, the picture changed dramatically. The number of
hospital outpatient visits continued to grow and admission rates began to climb. The
most striking finding, however, is the virtual absence of increases in the intensity of
services furnished to those who were provided care. Consequently. total hospital
costs rose due to general inflation and to increases in the number of people receiving
care. But as | will discuss in a few minutes, growth in the costs to provide services to
each patient slowed dramatically. We believe that this slowing in the rise of per case


87

insurance reform, and that is an issue that I am working on. I look
forward to talking with you at another time about those rec-
ommendations. Thank you very much for your testimony today.

Ms. WILENSKY. Thank you.

Mrs. JOHNSON. It has been very helpful.

Finally, we will hear from Janet Shikles, the Assistant Comptrol-
ler General of the Health, Education, and Human Services Division
of the GAO.

Welcome. You have been very, very helpful to this Committee
and many, many others, you and your GAO colleagues, and we wel-
come you here today.

STATEMENT OF JANET L. SHIKLES, ASSISTANT COMPTROL-
LER GENERAL, HEALTH, EDUCATION, AND HUMAN SERV-
ICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE;
ACCOMPANIED BY EDWIN P. STROPKO, ASSOCIATE DIREC-
TOR, AND TOM DOWDAL

Ms. SHIKLES. Thank you very much. I would like to introduce Ed
Stropko on my right and Tom Dowdal on my left.

We are very pleased to be here today to discuss strategies to curb
escalating Medicare spending. Over the past few years, we have re-
ported in some detail on several of Medicare’s flawed pricing and
reimbursement policies and weak controls over utilization.

Today, I would like to summarize these findings and outline sev-
eral steps that would lead to a better-managed, less costly health
care program.

Two areas that illustrate problems due to ineffective reimburse-
ment and utilization controls are home health and skilled nursing
facility services. In the case of home health care, Medicare pays
home health agencies on the basis of cost, but uses few tools to de-
termine whether the costs are reasonable.

For example, physicians are not required to see patients for
whom they sign plans of care. Medicare does not require home
health agencies to provide beneficiaries or physicians with informa-
tion on the home health services that are Billed. Only about 3 per-
cent of the home health claims are reviewed before they are paid,
and even when reviews are done, Medicare contractors rarely visit
home health agencies or beneficiaries to verify that services were
actually provided or needed. These minimal controls have resulted
in significant inappropriate cost to the Medicare Program.

Turning to SNFs, skilled nursing facilities, this represents an-
other area in which Medicare’s reimbursement policies have been
exploited. Under Medicare’s provisions for reimbursement, provid-
ers can bill Medicare directly without the SNF or attending physi-
cian affirming whether the items were necessary or provided as
claimed.

In January of this year, we reported that a wide array of pro-
vider types, including physicians, optometrists, psychiatrists, labs,
and medical equipment suppliers, fraudulently or otherwise inap-
propriately billed Medicare for unnecessary or undelivered services.

We believe that the reimbursement and utilization problems fac-
ing Medicare in home health care, skilled nursing facility services,
and other services confront private insurers as well, but private in-


8

Medicare, admittedly in the terms of the total dollars, over a 3-year
period is $10 million, but it is $10 million just down the tubes.

HCFA on the average pays 174 percent more than the Depart-
ment of Veterans Affairs for oxygen concentrators. The HHS IG es-
timates that if Medicare were able to pay the same price as the VA,
the savings would be $4.2 billion over 5 years.

I will point out to you that the response is that when HHS does
it that they are including greater services than Veterans Affairs,
but the difference is too stunning, an ultimate savings of $4.2 bil-
lion over 5 years. And then just the perennial kind of problem of
why a hospital bed which costs $1,000 sometimes ultimately costs
Medicare $7,000 just in terms of the rental process.

We believe that HHS should be allowed to have an interim price,
not go through this year of bringing forth the change in regula-
tions, allow for there to be comment from the medical community
and the providers, then to respond, and then 2 to 3 years later, we
have a change in price. I mean, my God, if we are the ones paying
the price, why don’t we pay, and if nobody is willing to deliver at
that price, then we don’t get it and then we have to increase the
price, but if we can buy it for less, why are we spending so much
more in the case of the oxygenators, up to $4.2 billion over a 5-year
period?

On the automated claims review system, this autoadjudicated
prepayment screen blows my mind. We had a GAO study that
points out that the contractors, the 40 contractors for Medicare
part B, don’t have an autoadjudicated payment screen system. So
that, when they get bills submitted, a bill on a broken ankle and
a chest x ray, an autoadjudicated system would throw that bill
right out, and it would totally reject it.

The thing that blew our minds was that the contractors when
they do it for their own health care programs use the
autoadjudicated system, but when they do it for Medicare, when
they don’t have something at stake themselves because they just
Process the bills, they don’t have any financial stake, they just pay
the bills.

1 see my time is really ending.

I just want to put out a big attention to you all, a big excla-
mation point that you take a careful look at the Medicare trans-
action system. We are spending tens of millions of dollars to unify
the nine different separate regional computer systems that we have
around the country, and we are trying to unify them. I think HCFA
is not on top of it. I think this program is costing us a heck of a
lot of dollars, and I don’t know what we are going to end up with
in the end.

To conclude, on these three areas, I just would encourage the
Committee to look at adjustment of reimbursement rates, a lot of
waste, look at the autoadjudicated claims review, and the central-
ized claims processing also deserves a tremendous amount of atten-
tion.

We have had seven hearings on these issues and are happy to
provide any information that might be helpful to your Committee
in moving forward on these issues.

I thank you, Mr. Chairman.

(The prepared statement follows:]


RECOMMENDATIONS REGARDING FUTURE
DIRECTIONS IN THE MEDICARE PROGRAM

TUESDAY, APRIL 30, 1996

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON HEALTH,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:09 p.m., in room
1310, Longworth House Office Building, Hon. Bill Thomas (Chair-
man of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]

wD


42

Chairman THoMas. Thank you very much.

It is now my pleasure to ask the new Chairman of the Prospec-
tive Payment Assessment Commission, Dr. Joseph P. Newhouse,
accompanied by a familiar face, Dr. Don Young.

This is, I guess, the second Chairman of ProPAC. The first
Chairman, Dr. Stuart Altman, was Chairman for 13 years, but he
is back at Brandeis University. We certainly are grateful for the 13
years of Dr. Altman's service.

I would tell you, Dr. Newhouse, I hope that doesn’t mean that
you are being condemned to a 13-year sentence. Hopefully, we will
get some good years out of you.

As the Republican Chairman of the Subcommittee, I have to indi-
cate that notwithstanding the educational background of Dr.
Newhouse, both undergraduate and graduate work at Harvard, he
does partially redeem himself by two decades in Santa Monica at
the Rand Institute.

It is a pleasure to have you with us. Your written testimony will
be made a part of the record. It is extensive. There are a number
of excellent charts that are associated with it, as alluded to by Dr.
Van de Water, and you may inform us in any way you see fit. If
you feel it is appropriate to refer to a chart, I think it is worth the
time of the Members to turn to that chart and begin to look at it.

Joining us at the table is Dr. Gail Wilensky of the Physician Pay-
ment Review Commission. If you will allow me, Dr. Wilensky, al-
though it is probably more comfortable there, I would like to get
through ProPAC, and then we would turn to PPRC, notwithstand-
ing some of the similarities in the testimony.

Dr. Newhouse.

STATEMENT OF JOSEPH P. NEWHOUSE, PH.D., CHAIRMAN,
PROSPECTIVE PAYMENT ASSESSMENT COMMISSION; AC-
COMPANIED BY DON YOUNG, M.D., EXECUTIVE DIRECTOR,
PROSPECTIVE PAYMENT ASSESSMENT COMMISSION

Mr. NEWHOUSE. Thank you very much, Mr. Chairman. I am very
pleased to be here in my maiden voyage. I am accompanied by Dr.
Donald Young, the Executive Director.

On March 1, the Commission submitted to the Congress its elev-
enth annual report containing recommendations for improvements
to the Medicare Program. I am going to comment briefly on certain
of these recommendations today, and I should say, however, that
they were developed by the Commission before I became Chairman.

The Commission supports the efforts of this Committee to rein
in the growth of Medicare spending. ProPAC believes spending for
medical services in a private sector with market forces that encour-
age cost containment and high quality care provides a benchmark
for the Medicare Program.

Judgments regarding the appropriate spending levels and rate of
increase, however, should be based on several years experience to
account for short-term factors that may give a misleading picture
of the overall trends.

Indeed, the ability to compare and forecast Medicare and private
sector spending is a complicated task, with a lot of data limitations.
We are continuing to examine the available data and will present


73

for vulnerable groups such as African Americans, and those living in urban poverty areas,
and urban Health Professional Shortage Areas.

Table 3. Change in Medicare Payment and Volume, by Type of Service, Location,
and Specialty, 1994-1995 (percentage)

Medicare Volume and Medicare Medica
Payment Intensity Payment Revenue of 1095
‘Type of Service, per Medicare

per per pot
Location, and Spaciaty Service Physician Physician" Physiéan’ Payments
A Services 3a% 41% 80% 79% (100%
Evaluation and Management Services
Primary care 90 a 24 122 209
Omer 87 03 69 89 165
Supeal Services 50 45 er 28 232
Other Nonsurgical Services 04 59 54 54403,
Location
Metopoitan areas
> miion 35 28 64 84 $30
\ mison 38 58 98 95 M5
ural counties
>25,000 48 a 22 mat 104
<25,000 66 14 1 9 25
44 35 2a 20 84
Famiyigeneral practice 15 ot 1 12 104
Gastoentercogy 42 28 as 46 29
injemal medicne 50 51 104 102 187
‘ther medical species 57 80 42 42 32
Genera surgery on 15 144 40 38
ology 73 a 123 24 24
Ophthalmology 44 22 34 33 90
‘Onhopedic surgery 57 38 87 a5 43
‘Thorac surgery 52 42 98 35 24
Urology 59 38 20 119 “4
Other surgical 58 24 83 82 32
Racology 18 48 o4 00 79
Panology a8 23 o7 os 12
Other 25 4a 1 15 134

SOURCE: Physician Payment Review Commision analysis of 904086 Medicare clsins, 5 parcont sample
‘of beneficiaries; American Medical Associaion 1984 and 1996,

* Medicare payments are allowed charges.

° Medicare revenue is allowed charges on assigned claims and submited charges on unassigned claims not in
excess of charge limits.

Itis also important to note that although the fee schedule transition period is now
over, the fee schedule, physician payment patterns and policies will continue to
evolve as a result of changes in relative values, the conversion factors, and
geographic adjustment factors (Table 4). Policy developments on the horizon include
implementation of resource-based practice expense relative values in 1998,
completion of the five-year review of work relative values, and improvements in the
definition of payment areas.

Of these, Commission is particularly concemed about activities under way to develop
resource-based practice expense relative values. These include HCFA’s ability to
develop values in time for implementation in 1998, the difficulty in collecting reliable
data, and the lack of a clear plan for establishing values from the various research
projects envisioned as part of the process. As a result, it recommends that the
Congress should revise current law so that resource-based practice expense relative
values will be phased in over a three-year period beginning in 1998. In addition, it
should direct HCFA to develop a process and timetable for refinement of resource-
based practice expense relative values, which should be announced when proposed
values are released for public comment.



82

to make it; otherwise, within the Medicare benefit package, to keep
the same standards.

Mr. STARK. A topic that we have heard a lot about is the medical
savings account. Your analysis is interesting. If I read it correctly,
you are saying that they are a good deal for anyone with less than
$1,000 in medical expenses and that for each person who joins, it
will cost Medicare about $2,400 a year more than would otherwise
have been spent.

Do you want to lead me through that? I think I know the answer
is why you say it is a good deal if you expect less than $1,000 in
expenses. Go ahead. I will let you say it. I won't.

is. WILENSKY. Let me start by saying all of our analyses of med-
ical savings accounts are by their nature highly speculative. We
don’t have anyplace to turn to, although PPRC has spent a lot of
time looking at the issue of risk selection and trying to bring it up
to date.

Our concern had been, in part, with a notion of a medical savings
account that had an annual selection and, in part, with a particu-
lar construction that a medical savings account had in legislation,
not necessarily any medical savings account that might be devised.
Therefore, it was the staff's estimate that the current construction
would have a risk selection problem associated with it, and there-
fore, it costs Medicare more if it maintained an annual selection.

Mr. Stark. Did the $1,000 relate to the fact that that is about
what a Medigap policy that is fairly generous costs, or is that just
a coincidence?

Ms. WILENSKY. I don’t think that it related to the Medigap, but
I will check that with the analyst who did the estimate.

Mr. STarK. Let me try this on you as an economist. Wouldn’t it
make sense as a businessperson? Let’s do this a minute. You are
running a business and you have got 100 employees. You are going
to put them in a medical savings account. Let’s say it is $1,000,
just to pick the number, that you are going to give each employee,
and they can either spend it until their policy kicks in, or if they
are not sick, they can save it. The employer has got to pay
$100,000 for his 100 employees.

Let’s assume for 1 minute that the standard idea that only 20
percent of the population ever uses their health insurance in any
1 year and 80 percent don’t need it or somewhere in there. Why
wouldn’t the employer say wait 1 minute, I'll buy the high deduct-
ible, but I will only pay the copays for people who get sick? The
employer is not giving these people something to save in their ac-
count, but the employer is only putting $20,000 out if you assume,
in fact, that 20 percent will use their insurance. He gets the same
deduction. The people who get the $1,000 actually have to run it
through their tax, but that might not bother them if they were sick
and needed the money.

As a small business person or a medium sized business person,
why wouldn’t that be a more attractive way to go on the theo
that the remaining $80,000, if you followed the MSA plan, is al-
most just a gift, although it is randomly distributed? So, if you
really wanted to be an efficient employer and use that savings even
for a better policy, why wouldn’t that be a more economic ap-
proach?


RECOMMENDATIONS REGARDING FUTURE
DIRECTIONS IN THE MEDICARE PROGRAM

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

APRIL 30, 1996

Serial 104-47

Printed for the use of the Committee on Ways and Means

ee

U.S. GOVERNMENT PRINTING OFFICE
25-630 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-053589-1



108

Medicare supplemental plans, perhaps we should expand them for
risk contractors.

We particularly take issue with the allegation that = -
attained-age rating is more costly to beneficiaries over a
lifetime. “A recent actuarial analysis by Blue Cross of
California (attached) demonstrates that, under assumptions which
reflect the current marketplace, attained-age rating actually
xesults in a lower lifetime rate than either community rating or
entry-age rating.

Specific Comments
1. p. 7, 1. 20. Should “insurers" be “employers"?
2. p. 8, 1. 24. Should read 14 percentage points.

3. p. 10, 1. 20-25. See general comments. If there is_
legislative history that refers to this "purpose" of Medicare
cost-sharing requirements, please cite it.

4. p. 12, 1. 5-10. See general comments.
5. p. 12, 1. 18-19. See general comments.

6. p- 13, 1. 14-18. See general comments regarding attained age
rating.

7. p. 13, 1. 24 footnote. See general comments. We believe
this line of argument is greatly exaggerated, especially in the
current environment.

p. 14, 1. 12-16. This comment has nothing whatever to do
with rating practices and should be deleted.

9. p. 14, 1. 19-21. Medicare supplemental carriers must offer
all Med Supp products they sell on a guaranteed issue basis
during a beneficiary’s initial 6 months of eligibility for
Medicare Parts A and B.

10. p. 14, 1. 23-25. This comment appears at odds with the
chapter‘s suggestion elsewhere that risk contracting managed care
plans are experiencing favorable selection.

11. p. 14, 1. 25-29. There is no problem for ill beneficiaries
who purchase Medicare supplemental insurance in their initial
eligibility period. ‘The issue for poor beneficiaries is one of
income and has nothing whatever to do with rating practices.

12. p. 15, 1. 7-11. The larger problem here is that community
rating and open enrollment would create severe adverse selection
for Medicare supplemental products, raising premiums and making
supplemental coverage unaffordable for many beneficiaries. This
would occur because beneficiaries would now be able to defer
purchasing a med supp product until they become ill enough to
really need the benefits it provides (e.g., prescription drug




109

coverage). The implications for Medicare may be equivocal (in
our view), but the implications for supplemental coverage are
absolutely clear: higher premiums for all purchasers.

13. p. 16, 1. 26-33. The existence of supplemental coverage is
not inconsistent with use of financial incentives to affect
utilization. Supplemental products could be designed that would
pass through financial incentives from the underlying Medicare
program, if the regulatory regime permitted it. The larger
difficulty is the political one of attempting to reduce the flow
of public dollars to particular providers.

14. p. 19, 1. 13-14. Though obviously shorthand, this sentence
is inaccurate and offensive - betraying the commission’s bias on
the issue. See general comments.

15. p. 19, 1, 15-19. The first two “other options" deserve more
discussion. As noted above, use of financial incentives to

affect utilization is not incompatible with supplemental
insurance.

16. p. 21, 1. 1. Our understanding is that, under current law,
Medicare risk contractors may not charge beneficiaries for
Medicare benefits but only for supplemental benefits.

17, p. 21, 1. 17-18. Pooling of risks does not lower costs; it
shifts or shares them. Greater bargaining leverage over
providers is another issue.

18. p. 21, footnote. There is a fundamental difference in the
methods used for determining MIG capitation rates vis-a-vis risk
contractor payments (based on the AAPCC). The former are based
on the claims experience of énrollees in that arrangement; the
latter are derived from the claims experience of beneficiaries
remaining in traditional Medicare.

19. p. 22, 1. 8 +. The chapter should introduce the discussion
of “unified insurance" more deliberately, by defining it and
describing the origin of the concepts and the extent of public
discussion which has taken place about it.

20. p. 23, 1. 18-21. It strikes us as a false premise that
Medicare reform must maintain parity between coverage options
available in the public vs. the private sector, or that private
sector competition is somehow diminished when public sector
options are restricted. We believe the notion of “unified
insurance needs considerably more public airing.

21. p. 24, References. We appreciate your citing Mr. Gradison’s
letter (in footnote 8), but it should then be listed in the
References.


30

Mrs. JOHNSON. I think it is determinable.

Then, why in your estimates do you reduce your expected rate
of growth in HMOs? You say that in 1996, it will be 25 percent,
that is 25 percent of current enrollees, and current enrollees, as I
recall, is only 9 percent. So 25 percent of 9 percent, you are expect-
ing only a little over 2 percent growth.

Mr. VAN DE WarTeER. That is 2 percentage points.

Mrs. JOHNSON. Yes.

Does that take into account the availability of HMO risk con-
tracts for seniors in parts of the country where they have not been
available before, or is that estimate based on the rate of growth in
those sectors of the market where there are currently HMO risk
contracts?

Mr. VAN DE WATER. We certainly attempt to take account of
what we think is going to happen in the future, not just look in
the rearview mirror, but obviously, this is one of the many sources
of uncertainty in the estimates.

Mrs. JOHNSON. I would be interested in getting into more detail
with you on that at some other time.

Coming from a State that has not had much HMO or managed
care activity until recently, I can tell you that the biggest fear of
the hospitals and doctors is that by the time they get their net-
works up and running, the HMOs will have taken over.

I have never seen such a marketing operation. Nobody has ever
seen such a marketing operation, but we now have a couple of
HMO risk contracts that are all over every single senior citizen
center. I can tell you, the difference in the way people are listening
to them, the difference in the way they hear my conversation about
the Republican proposal from 6 months ago and now is dramatic,
and the number of seniors now, there is always in a seniors group
now a few that have joined one of these programs and are doing
very well, thank you, and so the word is spreading that you can
get more benefits for the same or less cost.

The security that either a zero or a $5 or a $10 copayment gives
retirees is simply enormous. They listen to that.

In the first year, from 1996 to 1997, you have it dropped from
25 to 20 percent. Then, by 1999, you project from 1999 to every
year thereafter only a 10-percent growth.

Mr. VAN DE WATER. Could I clarify this?

Mrs. JOHNSON. By then, there will be a lot of plans in the mar-
ket. They are offering far more benefits at far reduced cost, and I
can’t imagine when you look at the private sector’s experience
where you get that growth rate.

Mr. VAN DE WATER. Could I clarify this, Mrs. Johnson?

Mrs. JOHNSON. Yes.

Mr. VAN DE WATER. Perhaps my statement wasn’t sufficiently
clear on this.

Those figures may not be the clearest way, from your point of
view, of looking at the increase in HMO enrollment. They simply
reflect the fact that when you are starting out with a relatively
small number, and as you say the current enrollment in risk plans
is about 9 percent of the total, a given increase in HMO enrollment
represents a relatively large percentage increase on the small base.


89

‘STATEMENT OF JANET L. SHIKLES:
ASSISTANT COMPTROLLER GENERAL
HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION
U.S. GENERAL ACCOUNTING OFFICE

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss strategies to curb
escalating Medicare spending. There is no shortage of numbers to
illustrate the importance of controlling federal outlays for this
program. On average, Medicare spending has grown by over 10
Percent a year since 1989--twice the rate of the national economy.
Medicare's part A trust fund, which pays for hospital and other
institutional services, is projected to run out by mid-2001--a year
sooner than projected last year.’

Over the past few years we have reported in some detail on
several of Medicare's flawed pricing and reimbursement policies and
on weak controls over utilization. We have noted how these
problems amount to bad business practices and that aspects of the
Medicare program must be modernized in today's highly competitive
health care market.’ Today, I'd like to summarize these findings
and outline several basic steps that would lead to a better
managed, less costly health care program.

In brief, we believe that while the Congress considers long-
term restructuring efforts, immediate efforts to improve Medicare's
traditional fee-for-service program could bring about much needed
savings. This program currently serves about 90 percent of
beneficiaries and with better management could run more efficiently
while continuing to serve well the nation's elderly. This means
allowing Medicare to use tools similar to those used by private
payers to manage health care costs. Negotiated discounts,
competitive bidding, preferred providers, case management,
utilization review--these and other tools enable private payers to
use market forces to control health care costs, but most are not
authorized for general use by the Department of Health and Human
Services’ (HHS) Health Care Financing Administration (HCFA), which
administers Medicare. This results in a publicly financed program
that pays higher than market rates for certain services and
supplies, and sometimes pays without question for improbably high
levels of services. Recent HCPA initiatives and pending
legislation passed by the House of Representatives,’ however, offer
promise for making some program improvements. In addition, HCFA
should test the feasibility of applying management strategies in
high-cost, high-utilization areas. Finally, the Congress needs to
give HHS the flexibility to make prompt price adjustments.

‘BACKGROUND

Medicare is the nation's largest single payer for health care.
In 1995, it spent an estimated $177 billion, or 12 percent of the
federal budget, on behalf of more than 37 million elderly and
disabled people. CBO projects that, under current program law,
program spending will almost double in the next 6 years to an
estimated $332 billion by 2002. Approximately 90 percent of
Medicare beneficiaries obtained services on an unrestricted fee-
for-service basis; that is, patients chose their own physicians or
other health care providers, with bills sent to the program for
payment. This set-up mirrored the nation's private health
insurance indemnity plans, which prevailed until the 1980s.

Since then, many changes have taken place in the financing and
delivery of health care. Large health care purchasers have used
leverage on hospitals and other providers to obtain lower prices.
Private payers, including large employers, use an aggressive
management approach to control health care costs. HCFA is

*Based on CBO's March 1996 baseline projection for Medicare.
7A list of related GAO products is at the end of this statement.

OHLR. 3103, the Health Coverage Availability and Affordability Act
of 1996, passed the House of Representatives on March 28, 1996.


84

more money, but actually, the concentration of spending is greater
in the under 65 population, in part, for that very reason.

Mr. McCrery. In a relative sense.

Ms. WILENSKY. Right, in a relative sense. In a relative sense,
risk selection may be even greater in the under 65 population. In
absolute dollars, the impact that not adjusting for risk selection
could have is high just because so much money is spent on older
people. It is something we have to acknowledge.

Mr. McCrery. I am not sure I follow you. Let me rephrase my
question, and then you can go on. It seems to me that in the Medi-
care population, you are going to have a higher percentage of bene-
ficiaries knowing that they have adverse health conditions com-
pared to the below 65 age population.

Ms. WILENSKY. Right.

Mr. McCrery. So it doesn’t compute up here right now that the
problem could be worse, even in a relative sense, or especially in
a relative sense in the under 65 population.

Ms. WILENSKY. The concentration of spending in the under 65 is
even greater. That is slightly a smaller percent that account for an
even larger number of dollars in the under 65.

If you don’t make adjustments for where that concentration is,
then it could cause you in a relative sense even greater difficulty
in the under 65.

The over 65 has high averages. It is slightly less concentrated,
and the reason is because lots of people have some health care
needs. But please understand, risk selection ought not to be re-
garded as an excuse for not doing things. We need to look at risk
selection as something that we have got to fix so we can give people
choices.

Mr. McCrery. I understand we would all like to fix the risk se-
lection problem. Nobody has figured out a way to do it yet.

Again, if the bad result from adverse risk selection is higher pre-
miums for everybody else——

Ms. WILENSKY. Right. It is a bigger problem in the Medicare pop-
ulation.

Mr. McCrery. That is what I am trying to get at.

Ms. WILENSKY. Yes. In dollars, it will have a bigger impact in the
Medicare population.

Mr. McCrery. So, if that is the problem, if we want to avoid that
problem, then we would more likely not provide MSAs in the Medi-
care population than not provide it in the general population of the
under 65 population because, then, in that population, the insur-
ance system has a much broader universe of people to spread that
risk to. So that is what I was getting at.

Ms. WILENSKY. Yes. I think that that is correct.

I think by having a slightly longer decision period as one of the
possible ways, it is possible to do this for the Medicare population
as well. I didn’t want you to drop that idea for the Medicare popu-
lation because I think it is something that you can try to respond
to imperfectly by, for example, having a slightly longer selection pe-
riod.

Mr. McCrery. I don’t want to drop the idea of MSAs for the
Medicare population. I think you have given us some very construc-
tive suggestions to maybe make offering MSAs to the Medicare


12

GAO found significant weaknesses in HCFA’s approach to the MTS that are
adding unnecessary risk to the project. Specifically, the GAO review found HCFA is not
fully defining the necessary functions of the MTS system while shrinking the
development process. By proceeding with uncertain development criteria in a shortened
development process, HCFA risks the effectiveness and capability of the final system.
Defining functions is the foundation upon which all other decisions for the system will be
based.

‘And, according to GAO, by shrinking the development process, HCFA risks
significant cost overruns. The MTS project has already cost $19 million. In the FY 97
HHS budget, HCFA has requested an additional $50 million for MTS. Perhaps further
appropriations for the MTS project should be withheld while HCFA demonstrates that it
has addressed these serious management challenges. The American taxpayers should not
be asked to fund a large government computer acquisition like MTS unless the
administrating agency can demonstrate itis controlling the risks to the project.

‘Through the oversight work of the subcommittee | chair, we have learned that
more aggressive management, and strengthened statutory tools to fight fraud, can save
hundreds of millions of Medicare dollars. I believe a streamlined price adjustment
authority, standardized use of medical necessity screening and reprogramming of MTS
funds for current anti-fraud activities would enhance the integrity of the Medicare
program.


54

Chart 3. Medicare Risk Program Participation,

1990-1996
Enrollees
‘As a Percentage
Number of Total Medicare
Year (tn Millions) Enrollment Contracts
4990 12 3.5% 95
1991 13 37 85
1982 15 42 83
1993 1.7 47 90
1994 24 57 109
1995 29 77 154
1996 = = 189
Note: Envoliment data are as of Septomber each year contact data are as of January
each year
SOURCE, Health Cate Financing Administration, Office of he Actuary and Oia of
Managed Care

Chart 4. Deciles of County AAPCC Values, All Counties, 1995

Dalars



APPENDIX T APPENDIX I

COMMON PRIVATE SECTOR STRATEGIES AND APPLICABILITY TO MEDICARE

Private sector Deseription era's current practl
Proapt renction te | change prices Prices general
motee pilose Saiseted Ps del Tate

Ie Shetbelce Of procs

Negotiate with ase parcante soneratiy
Sect providers revisor

mane
Seisetnd ty bovefsciary
Eo provide service

whey engage 12
certain pronibiced

Sompectetvs Prices aze set under scacute oonereliy
Sidi ene Eenpiex treat.
Pegetieclons Seabaatracion evolving
orperitive procedures
Festecred provider | promote use of + | savaeato gengratty sade | suatute, qvarartons
Deter” network fovany provider Beneficiary tremgom
isiectea lected by beneticsary | to choose’
provigere fo provide mesaeal preset
practice style. ene fo'conerace wleh
End quality healeh maineenance
criverls Srganieations
fide) oad
toe Require prior Ne prior approval of No viable statutory
Rehertaation sppeseat oe Rospitaiizerion Suchoriey
fect Seber procedures Fequicing peter
Procedures Spproraly Statice

‘case sanagansat fzeiat niga-cort | Astatance not provides |  seatuce prontbieg
tients fn tovpat feats interference with
Eelecting Seecting servic practice of
appropriate steieseneay, Bediein

race with ew compantos NPA concracte with seatuce provides no
Stilisetson review | specializing in | prévate entstves porsitic astonish
alee seffizaeion for coneracting
Teviev t0, sieoetisstion
bent Eantrol
Bhat Srgantzerionst
raster use of Une otf-the- HRCA directs NCEA concerned,
commercial Sheuitsotttace | TontesceSrate devatoo | Shote adaprastisey
Eeommology 0 Shoe elas Syston eapeniitetes, dnd relevance 2
Sdtect Soitag Biltang'probiens | Sftnoue guidance on'use | Medicare
‘Sree St epeci
eonatically Technologies

ajunes payment

stor opayle, sitioigh @9.S.c. 1995u(61 (a), and tw) provide AEA with authority fo aahase payments
hen Theestavtusnes totes uador » fee schedule are dsund to be inherently unceasonable, detalles
PrEDelNtes Tote nanan that ehciase's Ssogchy naelce sha Comment Ps

Me weeny 42 Lo5.6, 23850712015) provi HOA Wty avtocity to other pene for aucabe
SSniniscestive procecs. ‘The one tise this process was ued, If 20k) years co complete

“iz bu8.0, isin? prosides for mandatary and perpigslve exclusion of pecesdese who are, ft exanpite
Sonited of cectale pesgran relates since

‘ea v3.0. 19054 estathichas conditions of nd Ainitattone on payment for s0ceicee

“in 258s, nor gcacees tne process 29 pastors 9 demnatcation of compen itive sing cebated to
ioigede Brovsaisne’ ware, ncVaded, in. tne. ferpaczive buagee cleanclisstion iaes apachtieniy
DORIEL BSUS Soa Sees esti canes GSTHeta steed plans for te Senerdesat ions bot nae
Pinte fagldctas authority te Gasesice tonfoeleroetbcainer eithout

12 U.S.6, 12884, the soneni od Ceoason of cholce provistony eapeeasly provides that benefkelaries
tay dbehia bwaith Gurvicer’ feo any ariling provide

42 y.S.C. 1398nm authorizes NCEA to contract with cectain managed care entities to praviee care co
Medicare beneficlacias under presazived eiceumstances

Mee wesc. 19.
othase conpankes may azconge tor utilization review to be done under subcontract
M2 U.S.C. 1398 provides deta:

Seapet tive geandaucas co tanaie pate A clatne,

eStart & Mob provoage ssmiae auchorsty for



15

payment levels to the growth in the volume and intensity of services. The system uses
performance standards to set target rates of expenditure growth, and annually updat
‘conversion factors depending on whether expenditure growth met the targets two years
earlier.

‘While the VPS has constrained spending for physicians’ services, several methodological
flaws prevent it from working as intended. First, limitations in the formula now used to set
Updates will result in substantial reductions in the conversion factor over the next five years.
‘Second, the existence of three performance standards is introducing serious distortions in the
patterns of relative payment, the very problem the Medicare Fee Schedule was intended to
correct (Table 5).

‘Table 5. Conversion Factors, by Category of Service, 1992-1996 (dollars)

Category of Service 1982 1993 1994 1995, 1906
Al Services $31.00 : : : :
Surgical Services - $31.90 : : .
Nonsurgical Services. : 31.25 : : :
‘Surpical Services : : $9516 $90.45 $40.80"
Primary Care Services : : 3372 38.38 3542"
Other Nonsurgical Services, : : 32.90 3482 3483"

SOURCE: Physician Payment Review Commission compilation of conversion fectors as reported in the Federal

“These conversion factors include an addiiona! 0.36 percent reduction dus to a budget neutalty adjustment
‘This adjustment offsets increases in spending from changes to the relative value units and other payment policy
‘changes for 1996,

‘The proposed Sustainable Growth Rate system incorporates many of the Commission's
previous recommendations to correct these limitations. It would establish a single conversion
factor that would remove the current distortion created by multiple conversion factors. In
addition, target rates of growth would be linked to growth in per capita gross domestic
product instead of the five-year historical trend for volume and intensity growth of physicians’
services currently used under the VPS system. Conversion factor updates would be based
‘on comparisons of total actual versus allowed spending accrued since a base year, replacing
the year-to-year comparisons and two-year delay in the current system.

Although these changes correct many of the limitations of the VPS system, the Commission’s
‘eport points out two limitations inherent in any administered price system. While the
proposed system establishes more realistic targets, no such system can set targets that
reflect appropriate levels of care or changes in the medical marketplace. Also, limits on the
size of annual conversion factor updates are necessary for constraining volatility in annual
‘adjustments. Otherwise, the updates would reflect year-to-year fluctuations in volume and
intensity growth, as well as the changes necessary to recoup any excess or surplus spending
ina single year. An additional limitation of both the VPS and the proposed systems, which
results from incorporating projection errors into the calculation of conversion factor updates,
could be readily corrected. To address these concems, the Commission recommends that
any revision to the Volume Performance Standard system should annually correct for any
projection errors in the target growth rate from prior years,

Because the VPS remains in law, the Commission will continue to'make annual
recommendations regarding fee updates and performance standards as mandated by the
Congress. Our 1996 VPS report will be discussed at the Commission's meeting later this
week. It will be transmitted to you to meet the May 15 deadline required under the Omnibus
Budget Reconciliation Act of 1989.

Managing Medicare's Fee-for-Service Program. A new area of work represented in this
year’s report is expioration of techniques that Medicare and private indemnity payers have
been introducing to manage delivery of health care on a fee-for-service basis. To better
understand the state of the art, the Commission sponsored a survey of 10 innovative Blue
Cross Blue Shield plans. Four approaches were used by all or almost all the plans surveyed
case management, practice guidelines, rebundiing of services, and provider profiling,
Providing financial incentives to physicians was also considered important in reducing costs.



36

I didn’t want the record to suggest that the Democratic bill was the
only one that transferred money in or out of trust funds. Both bills
did it, and indeed, we could have a discussion as to which is a bet-
ter way to do it, but it is in both bills.

Chairman THOMAS. I want to tell the gentleman that we trans-
ferred savings. Your bill transferred costs, and that is a final re-
tort, I think, that we ought to offer here because we were not the
ones who offered the old program as a continuing solution to the
new problem.

I tried in my opening statement to point out all of us had better
sober up and look at these new numbers in light of the CBO report.
It was the gentleman from California's opening statement that
reoffered the President’s $124 billion, which led to the analysis of
the inadequacy of that plan. I never offered our plan as the solu-
tion to the current problem. We thought it met the old problem. I
am sobered by the fact that you talked about it being so extreme.
It may not cover the numbers that we are now dealing with.

We have a real problem, and I have asked the President to step
forward in the mode of nonpolitical leadership to address this prob-
lem. For us to lob political grenades back and forth over our old
plans doesn’t advance this one whit, in my opinion, toward solving
this increased problem.

Does the gentleman from Nevada wish to inquire?

Mr. ENSIGN. Thank you, Mr. Chairman.

I apologize if 1 am repeating simply because I wasn’t here earlier.

Just in general terms, because of the political situation that we
are in on Capitol Hill with the Presidential election year, I have
two questions. One is, let us just say that we are not able to come
to an agreement with the President this year and we have to wait
until next year. How much more severe do the changes have to be
each year you put this off?

In other words, we may not come to an agreement this year, but
there is no guarantee there would be agreement next year. There
is no guarantee there would be agreement the year after that or
the year after that. The bottom line is, what happens if we get to
the year 2001 and we are bankrupt? What are our options at that
point?

Mr. VAN DE WaTER. If you did not take any steps before that
date, you would be left with much more draconian solutions, name-
ly, even sharper reductions in benefits or—dare I say it—greater
increases in payroll taxes than what you would have had, had you
started to take steps earlier.

Alternatively, if those increases are so large as to seem politically
unpalatable, which might well be the case, one could well imagine
that there would be pressures for general revenue financing or
some other approach that would avoid those tough choices.

Mr. ENSIGN. It sounds like to me that if we don’t have the cour-
age to make the tough political votes today, the solutions that are
available to us are not solutions that would be available to us, sim-
ply because, politically, solutions have to be political as well as
meeting within the systems that you have, and while the politics
of today are very difficult, as they were last year, it still seems to
me that they are easier this year than they will be 3 years from
now or 4 years from now or 5 years from now.


48

PPS Update

The Commission considered this decline in hospital cost growth as it developed
its fiscal year 1997 update recommendation for hospitals paid under Medicare's
prospective payment system. The approach we used is the same one we have used
‘over the years, This method accounts for the effects of inflation on hospital costs,
changes in the mix and complexity of admissions, added costs of new technology, and
hospital productivity improvements. ProPAC’s framework supports an update of about
market basket minus 1.5 percentage points in fiscal year 1997. In light of the
significant changes occurring in health care delivery, including the recent substantial
gains in hospital productivity, it may be possible to hold PPS payment rate increases
to an even lower level for the next couple of years.

We are concerned, however, about the ability of hospitals to continue to provide
high quailty care if updates are constrained at this level through 2002. It is unclear
how long hospitals will be able to maintain the large productivity improvements we
have seen in recent years. ProPAC plans to continue to monitor these trends closely,
and we will keep you intormed as the findings emerge.

Payment for Capital

The Medicare program is currently halfway through the transition from cost
based to a fully prospective payment system for hospital inpatient capital. The capital
payment rates in effect are based on estimated 1992 hospital capital costs per
discharge, updated by historical capital cost increases through 1995, subject to a
budget neutrality adjustment. Beginning in 1996, the budget neutrality requirement is
eliminated, and an update framework is used to adjust the rates. Because of flaws in
the data used to calculate the initial rates, together with the updating approach used
by the Secretary, actual capital payment rates increased by more than 20 percent in
1996.

The Congress has proposed continuing to link capital updates to projected costs
and extending the budget neutrality requirement through 2002. While this would
correct for the inappropriate 1996 payment increase, the Commission believes that a
better policy would be to break the link between capital cost increases and the update
to capital rates. Under such a system, an appropriate base payment rate would be
established with updates based on a formula similar to that applied 1o PPS operating
payments.

Payments to Teaching Hospitals

Medicare pays an additional amount to teaching hospitals to recognize the
indirect costs of operating approved graduate medical education programs. In fiscal
year 1995, these indirect medical education (IME) payments accounted for 5.9 percent
of all PPS operating payments, or about $3.9 billion. In addition, Medicare provided
about $2.0 billion to hospitals in graduate medical education (GME) payments for the
‘raining of interns and residents. Another $400 million was paid for the direct costs of
hospital-based nursing and allied health professions training programs.

The Congress has proposed reductions in the level of Medicare IME and GME
payments, It also has supported the creation of a new Teaching Hospital and
Graduate Medica! Education Trust Fund, which includes Medicare's payments as well
as general revenues.

ProPAC supports the notion of the trust fund and believes that explicit financial
support for the added costs of graduate medical education should not be limited to the
Medicare program. The costs of teaching activities are difficult to separate from the
costs of patient care, and these hospitals are at a disadvantage in a competitive
market because of higher prices relative to their teaching mission. Many of them also
care for a large number of uninsured individuals. As competition among hospitals
increases, it will be increasingly difficult for many of these teaching institutions to
compete for patients from price-sensitive insurers and plans.

In our report, we raise some concerns about the distribution of teaching-related
payments as proposed in the Teaching Hospital and Medical Education Trust Fund.


uy

IV. PPS Specifications

A. Data Collection

HCFA is mandated to begin immediately to develop a data base upon which a fair and accurate case mix
adjustor can be develop and implemented. The data base must be able to link case mix data withcost (and
utilization) data.

‘The data base must include a sample sufficiently large to support the development of statistically valid esti
‘mates of payment rates and limits for the geographic area used (e.g., MSA/nonMSA, national, census
region),

The data base must contain at least:
~ items for the 18 category Phase I case mix adjustor
~ HCFA form 485
- UB-92
~ additional data items that may contribute to a more accurate case mix system, developed with industry
participation (such as items from OASIS)

Payment rates and limits shall be adjusted to reflect cost of data collection,

B. Phase-In of PPS Beginning with the Interim Plan
Phase |

Prospectively set standard per visit payment (as in HR 2491) with an annual aggregate per patient limit that
applies to all visits (as in HR 2530).

Effective date: 6 months after enactment

All currently allowable costs celated to noncoutine medical supplies will be included in the data base for cal-
culating the per visit rate, pee visit limit, and aggregate Limuts.

Per Visit Payment

+ standard per visit rate for each discipline calculated (as in HR 2491) as follows
the national average amount paid per vistt under Medicare to home health agencies for each
discipline during the most recent 12 months cost reporting period ending on or before 12-31-94 and
updated by the hiome health market basket index, except that the labor-related postion af such rate
shall be adjusted by the area wage index applicable under section 1886(4)(3(E) for the ares in
which the agency is located



Percent

53

Chart 1. Change in Real Per Capita Medicare and Private
Health Insurance Expenditures, 1975-1994
(In Percent)

Medicare
© Private neatth insurance

1976 1978 | 1980) 1982 1984 1986.

Chart 2. Factors Contributing to the Growth of Total Hospital
Expenses, 1985-92 and 1992-95 (In Percent)

60
1985-92 m 1992-95
so -| 439 502
ao4 383
311
30-4
2 -| 192
303
104
23,
o o2
13
“10
Generat Hospital Population Uslization Intensity
Intation Input Grown (Rescuaty
Prices


49

We recommend that funds to provide broader financial support for graduate medical
education should be distributed in a way that corresponds to the additional costs
incurred by teaching facilities for treating all of their patients. Under the current
proposal, general revenue funds would be distributed based only on Medicare
Payment levels in a base year. Hospitals with a high share of Medicare teaching
Payments would receive a proportionately higher share of these new payments,
compared to hospitals with the same amount of teaching activity but less Medicare
business.

We also believe that improvements are necessary in the distribution of funds
from the proposed MedicarePlus Incentive Account. These payments should allow
teaching hospitals to compete effectively in the managed care market and allow plans
in Medicare's capitation program to use teaching hospitals as needed. As currently
structured, the distribution of these payments would not be related to differences in the
intensity or size of hospital residency programs. Also, because the total payments.
available through this account would be fixed, they would not reflect the actual
enrollment of Medicare beneficiaries in the capitation program.

ProPAC is continuing to examine alternative approaches tor distributing
payments from the Trust Fund to hospitals providing care to Medicare beneficiaries
‘who choose the traditional fee-for-service program as well as those enrolled in the
capitation program. We will keep you informed as our work progresses.

‘The Financial Condition of Teaching Hospitals

‘The Medicare program plays an important role in assuring that its enrollees have
access to the specialized care furnished by teaching hospitals. The effects of
Medicare's payment policies, and those of other payers, on the financial condition of
these hospitals is demonstrated by their PPS and total margins. In 1994 (PPS 11),
‘the average PPS inpatient margin for major teaching hospitals was 15.6 percent,
compared with an average of 0.4 percent for non-teaching hospitals (See Chart 9).
Despite the profits from Medicare, however, these hospitals had the lowest total
margins of any group at 2.5 percent (See Chart 10). In contrast, the average total
margin for non-teaching hospitals was 5.7 percent.

The high PPS margin is due in part to the ievel of the Medicare IME adjustment
being greater than the actual relationship between teaching intensity and costs.
ProPAC recommends that this adjustment initially should be reduced from its current
level of 7.7 percent for each 10 percent change in the number of residents per bed to
7.0 percent. The final level of the adjustment should depend on the other changes
made in the Medicare program. We also believe that the current formula for
distributing IME payments needs to be improved, and we plan to examine alternative
methods to measure teaching intensity and its relationship to costs.

We also support changes in both Medicare IME and GME policies to encourage
an appropriate distribution of residents across specialties and to discourage
inappropriate growth in the total number of residents.

Disproportionate Share Hospitals

Medicare also provides a special payment to disproportionate share hospitals
(DSH). The DSH adjustment is intended to compensate hospitals that treat large
proportions of low-income patients. These payments totaled about $3.8 billion in FY
1995.

During the past year, ProPAC spent a considerable amount of effort attempting
to improve the distribution of Medicare payments to these hospitals. The distribution
of DSH payments is determined partly by each hospital's Medicaid days as a share of
total patient days. Medicaid utilization has always been a poor measure of service to
low-income individuats, and its effectiveness will continue to diminish with the changes
in the Medicaid program that are taking place.

‘The Commission has concluded that the objectives of the DSH policies need to
be reexamined and the structure of the adjustment modified to make certain that
available funds are distributed to the hospitals most in need. This may require



78

Chairman THomas. Thank you, Dr. Wilensky.

You mentioned this expense of relative values that HHS has to
set up. How comfortable are you in their ability to meet the dead-
line? sf believe it was January 1, 1998.

Ms. WILENSKY. We are uncomfortable, in short.

We think that to move to this payment in its entirety, January
1988 would be difficult, with probably unintended consequences.
Therefore, we recommend a phase-in over a 3-year period.

Chairman Tuomas. So that is the primary reason you offer the
transition period?

Ms. WILENSKY. It allows for HCFA to make some adjustments as
it goes. We are concerned whether they will be ready at all in Jan-
uary 1998. Even if they claim to be ready, we think the potential
for unintended consequences, if you go the full change, is too great.

Chairman THomas. I believe one of the common areas between
the President’s plan and our plan was movement toward a single
conversion rate.

Ms. WILENSKY. Correct.

Chairman THomas. It might have been a year or two difference
between the two.

Ms. WILENSKY. Correct.

Chairman THomas. How are your feelings about moving, whether
a transition or implementation, while at the same time we are talk-
ing about moving toward a single conversion rate?

is. WILENSKY. It also will become complicated, and we think the
implications of how you make that transition probably had enough
attention paid to them. Not making a transition to a single conver-
sion factor, though, is going to exacerbate the problems of undoing
the relative value scale, which you are aware have been a concern
of this Committee for several years.

Chairman THomas. The last hearing, as a matter of fact, was on
graduate medical education, and I learned a number of interesting
things. One of them was that apparently, there is a much better
open line of communication between what the marketplace will
take and what young people’s interests are in terms of fields of
medicine.

Have you folks looked at that, and do you believe that the mar-
ketplace exchange of information will be adequate to direct career
match ups, or do you still think from our end of it, we ought to do
some pushing and structuring regarding who gets funded?

Ms. WILENSKY. The answer is some of both. Let me explain.
There does appear to be getting a message out that primary care
will be more attractive than radiology for a variety of reasons in
the future. There has been a substantial increase in the reported
match rates for interns and residents in primary care over what
had occurred in the last few years.

I think that word is going out, as well as the difficulty for resi-
dents in some highly specialized areas, such as radiology and anes-
thesiology, to find jobs.

There appears to be a very modest slowing of income growth and
of bringing together in a very modest way the gap between primary
care and specialty physicians. So I think that the word seems to
be getting out, although it is interesting that applications to medi-
cal school remain at an all-time high, which may be as much a


88

surers are equipped with a larger and more versatile inventory of
health care management strategies than HCFA currently has.

In stark contrast to private payers, HCFA and its contractors
generally cannot use such utilization controls as prior approval or
case management to coordinate and monitor expensive services and
specialist care, encourage the use of preferred providers who meet
utilization, price, and quality standards, negotiate with select pro-
viders for discounts, promptly change prices to match those avail-
able in the market or competitively bid prices.

If similar approaches were also available to Medicare, the gov-
ernment might be able to avoid spending substantial sums unnec-
essarily.

In conclusion, helping to move Medicare in the direction of be-
coming a more prudent manager of health care costs by giving it
the tools it needs to pull this off will entail several steps. We be-
lieve that Congress should enact funding and contractor reform
provisions, similar to those contained in H.R. 3103.

Second, we believe that HCFA needs to target Medicare’s high
cost, high utilization areas, such as home health and SNF services,
for running demonstrations to apply such strategies as the use of
case management and contracting with companies specializing in
utilization review.

Third, the Congress should give HHS the flexibility to make
prompt adjustments to fee schedules when overpriced services and
supplies are identified.

This is the recommendation that Congressman Shays was also
talking about at the beginning of this hearing.

This concludes my testimony, and we would be pleased to answer
any questions you may have.

(The prepared statement follows:]


43

more on this issue in our June report to Congress, “Medicare and
the American Health Care System.”

The changes that are occurring in the private sector financing of
care are having a substantial effect on the way hospitals and other
providers operate. ProPAC has been following closely the factors
contributing to the growth of total hospital expenses, and we depict
some of those in chart 2 which Dr. Van de Water also referred to.

Two of the factors shown there, general inflation and population
growth, of course, are outside a hospital’s control. They do have
some control over real input prices, and they have some control
over utilization of services, that is, the number of admissions and
outpatient visits.

Between 1985 and 1992, over half of the cost growth was due to
increases in the intensity of services furnished to inpatients and
outpatients. That is over in the far right end of the chart. Durin;
this time, changes in hospital utilization, that is, admissions and
outpatient visits, had little effect on total cost growth. However,
after 1992, up through 1995, there is a dramatic change in this pic-
ture. The number of hospital outpatient visits continued to grow
and admission rates began to climb, as you noted.

The most striking finding, however, is on the right. It is the vir-
tual absence of any increase in the intensity of services to those
people who were admitted. Consequently, total spending rose due
to general inflation and increases in the number of people receiving
care, but as I am going to come to momentarily, the growth in the
cost to provide services to each patient slowed dramatically.

We believe that this slowing in cost, overall cost, is a response
to the recent financial pressure from private payers, and in addi-
tion, much of the increase in utilization is due to an acceleration
in admission rates for Medicare beneficiaries rather than private
patients.

Let me turn to the capitation program. ProPAC strongly supports
your efforts, Mr. Chairman, to control spending by reforming the
Medicare capitation program and expanding beneficiary choice.

A major flaw in the current risk contracting program is the wide
variability and volatility in payment rates across the country,
which are shown in chart 4. Those are deciles of the AAPCC across
all counties in the country.

In many areas the lower rates may discourage plan participation.
The Commission supports your intent to reduce this variability. We
are concerned, however, that even with the modifications you pro-
posed, the rates may not accurately reflect appropriate cost of care
in many areas. We believe over time the rates should better reflect
the evolution of market forces that are occurring in each area.

There is another problem with Medicare’s capitation program
that you are aware of. Indeed, it has already come up today, and
it must be resolved if the program is to succeed, and that is the
lack of adequate risk adjustment methods to modify capitation pay-
ments. Effective risk adjustment is necessary to prevent unwar-
ranted financial rewards and penalties to plans and incentives to
avoid Medicare enrollees with chronic illnesses.

As you have said, the knowledge base in this area continues to
be limited. We believe the Secretary should use available informa-
tion to make modest improvements while vigorously supporting


113

However, while changes in Medicare law, regulations, and policy have affected all home
health agencies similarly, there is still stark contrast in utilization patterns between types of home
health agencies (e.g, non-profit VNAS, hospital-based agencies, for-profit proprietaries), ‘To
learn about the cause of these different patterns, the GAO conducted an episode-of-care analysis,
for four diagnoses: diabetes, heart failure, hypertension, and hip fracture. What they learned
from this analysis is that when different types of agencies treat the same severe diagnoses, a
contrast in number of visits provided per beneficiary still exists between types of agencies even
when case mix is controlled. There were differences in episode length as well. For diabetes,
voluntary agencies’ average visits were 30.5, compared to 38.2 for all home health agencies
combined; and length of episode was $5.3 compared to 59.0, respectively. For heart failure,
hypertension, and hip fracture, average number of visits per beneficiary and lengths of stay were
Jess for voluntary agencies than all agencies combined. "Some HHS Office of Inspector General
and intermediary officials further believe that the nonprofit HAs are being forced to offer
increasingly mote services in order to stay in business,” states the GAO report.

‘The savings generated by PPS and the changed incentives for providers mean that
‘Congress does not need to consider a Medicare home health copayment. VNAA believes such a
copayment would be bad public policy because it would:

o Essentially create an unfunded mandate to the states. Under current law, states are
required through their Medicaid programs to cover coinsurance costs for poor Medicare
beneficiaries under the Qualified Medicare Beneficiary (QMB) statute. States would then be
required to pay the Medicare home health copayment for QMB beneficiaries. Imposing
additional costs on state governments would conflict with S. 1, the unfunded mandate legislation
that Congress passed last year.

© Fall heaviest on Medicare's poorest and oldest beneficiaries. For example,
individuals over age 75 account for less than 50% of the total Medicare population, but comprise
nearly 75% of home health beneficiaries. In addition, nearly 50% of home health recipients have
low income and already spend an average of 17.1% of their income on health care. One-fourth
of all home care recipients have incomes between 100% and 150% of the federal poverty level.
Most home care patients will have been recently discharged from the hospital, and on the average
will have paid $1,700 or more in the preceding 12 months for Medicare premiums, deductibles.
and copayments even before the first home care copay comes due. A 20% copayment would
‘mean average copays of over $900 in 1996 for these individuals, according to the National
Association for Home Care.

© _ Deter utilization among poor beneficiaries to the point that they might not seek
medically-necessary care. VNAs' experience has been that patients who can't afford cost-
sharing forgo care in order to buy groceries or other necessities. While we would provide care to
a patient regardless of his or her ability to pay, our experience has been that many of these
individuals choose to hide a serious health condition rather than admit to not being able to afford
the care. In 1994, the Office of Technology Assessment found that making patients responsible
for copayments will keep them from seeking necessary care and could be especially harmful to
those with low income.


CONTENTS

Advisory of April 23, 1996, announcing the hearing ....
WITNESSES

Congressional Budget Office, Paul N. Van de Water, Ph.D., Assistant Diree-
tor, Budget Analysis

Prospective Payment Assessment Commission, Josep!
Chairman; accompanied by Don Young, M.D., Executive Director ..

Physician Payment Review Commission, Gail R. Wilensky, Ph.D., Chair,
companied by Lauren B. LeRoy, Ph.D.” Executive Director ..

US General Accounting Office, Janet [. Shikles, Assistant Compiroiler
eral, Health, Education, and Human Services Division; accompanied by
Edwin P. Stropko, Associate Director, and Tom Dowdal ... .

Shays, Hon. Christopher, a Representative in Congress from the State of
Connecticut ....... oa

SUBMISSIONS FOR THE RECORD
Health Insurance Association of America, Bill Gradison, letter and attach-

ments ..
Visiting Nurse Service System, Runnemede, NJ, and Visiting Nurse Associa
tions of America, Marianne Czoch, statement and attachment . 7

am)

Page

17
42
65

87

105,
110


106

ill Gradison
Presidewe

February 21, 1996

Gail R. Wilensky, Ph.D.

chair

Physician Payment Review Commission
2120 L Street NW Suite 200
Washington, 0.C. 20037-1527

Dear Gail:

Enclosed please find HIAA's comments’ on draft chapter 16 of
the Commission's upcoming report to Congress: "Secondary
Insurance for Medicare Beneficiaries." We appreciate having the
opportunity to comment on these matters of extrene importance to
Medicare beneficiaries, Medicare supplemental insurance carriers,
and Medicare replacement plan contractors.

We look forward to ongoing dialogue on these issues with you
and the Commission during 1996. Please contact me if I can help
facilitate the Commission's studies in this area. If your staff
has questions related to the enclosed comments, they may contact

Marianne Miller in HIAA's Policy Development and Research
Department at 202-824-1693.

Sincerely,
AH

Bill Gradison

555 13th Sereet, NW Suite 600 East, Washington, DC 200041109 202-924-1623 Tax 202.824.1719


66

ing restrictions that have been in place in the past get put forward
into any additional legislation and a mechanism for treating people
who indicated in a variety of ways that they didn’t understand the
choice that they had made.

We spent a substantial amount of time talking about capitation
rates. Dr. Newhouse has already talked about this. This was an
issue of great concern.

There is concern that has been raised about the volatility of the
capitation rates. There has been concern that has been raised by
the Congress on about how much they differ from one part of the
country to the other, and some of that was dealt with in the legisla-
tion that had been proposed. That took one of several choices that
we have discussed; that is, putting a floor in place, so that very low
rates would cease to exist over time.

In particular, 1 have had some concern that while that solves one
problem of having few plans operating in areas that have had very
low capitation rates. There is another concern that as long as tradi-
tional Medicare goes along a different path, you might have very
different per capita payments in traditional Medicare developing
vis-a-vis what would go on in the choice plans. So we need to re-
member that what we do in one area may have unintended con-
sequences for what goes on in other areas, and it is an issue that
we will look at in the next year.

Before I go on, let me talk about medical savings accounts, the
issue that was just raised.

This is an issue that the PPRC also looked at. We did not take
a position as to whether or not we wanted to advocate having medi-
cal savings accounts, although it is certainly a part of the choice
structure that was being promoted. But we did raise the issue that
adverse selection could cause problems.

We think there are many ways to deal with this. One is the one
that was discussed earlier which was having a longer choice period
or a longer opt-out period before you go into traditional Medicare
or other plans. Another is to make sure that you are monitoring
who is going in. In fact, whatever else you do, we think it is impor-
tant that we monitor the effects of a medical savings account.

There are some very important things that need to be done to fix
the traditional Medicare Program. As much as we all wanted to
spend time focusing on how to broaden choice under Medicare, we
want to remind people that there are things that we can do to
make traditional Medicare function better, many of which were in-
cluded in the legislation that had been passed by the Congress.
These include using a single conversion factor and making sure the
sustainable growth rate is a concept that is used rather than the
volume performance standard, which has arbitrary reductions in
payments that over time would impose great burdens on the physi-
cian population.

We are also concerned about how practice expense will be imple-
mented; in particular, that a phase-in be used there in the same
way that a phase-in was used when the relative value scale for
physician work was initially adopted.

So, while we liked to focus on the structural changes in Medicare
and in the reform context, I want to make sure that Members re-


52

is concerned that many dialysis facilities may not be able to continue to provide quality
services without an update to the payment rate. Unfortunately, information is not
available to accurately assess the relationship between payments and quality of
dialysis care. The Commission, therefore, recommends that the Secretary develop
reliable measures to analyze the relationship among treatment processes, pationt
outcomes, and costs. These factors are critical to evaluate the need for and the level
of future payment updates.

THE FAILSAFE BUDGET MECHANISM

‘As | have described, spending in the fee-for-service program continues to grow
rapidly. This program directly pays hospitals, physicians, and other providers for the
care they furnish. The more care these providers give, the more they get paid.
Consequently, even when Medicare controls the price it pays for each unit of service,
spending escalates as the number of services increases.

To assure that fee-for-service spending would not exceed budget targets, the
‘Congress included a “failsafe budget mechanism” in the bill it passed. The failsafe
mechanism would allocate a fixed benefit budget (based on the number of enrollees)
for both Medicare's capitation and FFS programs. if spending in any of the nine major
FFS provider sectors exceeded budget targets, in subsequent years payments to
providers in the sector would be reduced to bring spending back in fine with the target.
This mechanism would ensure that Medicare spending would not exceed the targets
set by the Congress.

‘The Commission is concerned, nowever, that the failsafe mechanism could have
unintended consequences. The major problem in allocating a budget between the
traditional fee-for-service and capitation programs is the same one | mentioned earlier
in regard to the capitation program and that is the lack of robust risk adjustment
methods to set capitation payments. The adjustment methods currently used in
Medicare's risk contracting program are limited in their ability to account for increases
in patient complexity and severity of illness. Thus, if healthier enrollees were to select
Medicare's capitation program, per enrollee payments could be high relative to the
needs of this population, with payments in the traditional fee-for-service program that
are too low.

The Commission also is concerned that there is no provision to adjust the benefit
budget if future inflation differs notably from CBO's forecast. Further, the spending
allocations across fee-for-service sectors would be determined by projected
‘expenditures based on past spending patterns. This type of failsafe mechanism thus
could lead to payment inequities among provider groups as patterns of care continue
to change. The Balanced Budget Act recognizes that adjustments to the failsafe
mechanism would be needed’ over time, and ProPAC would be pleased to assist you
with the analytic work necessary to ensure payment equity between the capitation and
fee-for-service programs in future years.

CONCLUSION

This concludes my formal statement, Mr. Chairman. | realize that | have
covered a wide range of complex policies that ProPAC has considered over the past
year, and | would be pleased to answer any questions you or the members of the
Subcommittee may have. In many cases, as | indicated, we are continuing to work on
these issues, and we will keep you and your staff informed of our progress.


101

Mrs. JOHNSON. Which ones would you have the greatest con-
fidence in, in the sense of urging clear legislative authority now
rather than going through the demonstration process, or would you
recommend legislative authority for all of them?

Ms. SHIKLES. Do you want to answer that?

Mr. STROPKO. I certainly think changing prices to market prices
is pretty clear cut and should be dealt with very quickly from
HCFA’s perspective. They have the infrastructure to do it, and they
have a large contractor network that could provide the information
necessary to do it if authorized by law.

Certainly, prior authorization has been done in the past, and
that is an area where, when abuse is apparent, it seems to me
HCFA could very easily be given the discretion to allow prior au-
thorization certainly on a geographic-specific basis. So those seem
to be the most direct.

Competitive bidding, preferred provider networks, and case man-
agement get HCFA into a degree of management that it is not nec-
essarily accustomed to providing directly, and that is where dem-
onstration authority might be most appropriate.

Mrs. JOHNSON. Thank you.

Mr. McCrery.

Mr. McCrervy. Thank you.

I appreciate the work that you did and the conclusions that you
have drawn. They make a lot of sense. Would it make sense to you
to adopt reforms in Medicare that would allow senior citizens to
choose private sector plans that already have these kinds of en-
forcement tools or cost-saving tools available to them?

Ms. SHIKLES. I think it would. In fact, our second recommenda-
tion here, in terms of even absent larger legislation, we believe that
HCFA now using its demonstration authority could go into the Los
Angeles market and contract with a lot of private companies out
there to offer preferred provider panels, home health services, case
management, or any of these activities. That is what we are strong-
ly pushing HCFA to do using the demonstration authority.

Tf you are an individual in a private indemnity plan, you are sub-
ject to most of these different types of activities. It is Medicare that
the fee-for-service side is basically less managed right now.

Mr. McCrery. Thank you.

Thank you, Madam Chairman.

Mrs. JOHNSON. Thank you.

Mr. Cardin.

Mr. CaRDIN. Thank you, Madam Chairman.

I, too, appreciate the work that you all have done in looking at
ways in which HCFA can save money in the administration of
Medicare.

I agree that HCFA needs more flexibility in pricing on one of
your recommendations, as also our colleague, Congressman Shays,
has pointed out.

I hope that goes both ways. Let me just give you an example. It
was brought to our attention by a person who needed an implant
that automatically releases drugs into your system. Medicare
would pay for the procedure, which was very expensive, about
$30,000 if I remember correctly, and that if it didn’t work, they
would pay for the removal of the implant. But, they wouldn’t pay


26

the current generation gets. That is my problem in terms of this
intergenerational transfer.

The gentleman from California wants to interject.

Mr. STARK. This is to ask along the lines of the Chairman’s in-
quiry.

You give as an example at the end of your testimony that we
would either have to increase 0.7 percent, and I assume that is 35
basis points on both sides, or cut the rate of growth from 8 to 4.5
percent, which many of us think perhaps is not sustainable by the
system.

Do you have a tradeoff there? What if we got back to the good
old days of compromise and say, well, maybe we will do 0.3 per-
cent, 15 basis points? How low would we have to drop the growth
rate, or could you later supply to us some options in that raise? I
think 4.5-percent growth rate is too far a cut, and I would agree
with the Chairman. I think 0.7 percent would be politically
unpalatable, but not to suggest that somewhere in the middle there
might not be options that would be more attractive.

If you don’t know what 10 basis points does in the growth rate
off the top of your head, I don’t have any idea whether those are
linear or what.

Mr. VAN DE WaTER. They are, indeed.

Mr. Stark. Are they?

Mr. VAN DE WATER. Given the hypothetical approach that we
use, both of those alternatives——

Mr. Stark. So you could extrapolate it just linearly.

Mr. VAN DE WATER. Right.

Mr. Stark. OK. Thank you.

Mr. VAN DE WaTER. In other words, if you wanted to do half and
half, you would require a——

Mr. SrarK. A 1.5-percent cut in the growth rate and about 35
basis points. OK.

Mr. VAN DE WATER. Exactly.

Mr. Stark. All right. That answers it. Thank you.

Chairman THOMAS. You can go ahead if you want to.

Mr. Stark. I guess that is what I wanted to point out.

T did want to suggest to you that earlier in your testimony you
suggest that we have got to——

Chairman THOMAS. Just one point on that, though, just to finish
the discussion. Notwithstanding the fact that the longer we project
out this shared structure, the chances of the old-fashioned hospital
remaining separated from the physician side of payment says that
current Medicare part A/part B concept is going to be less relevant
to the beneficiaries in terms of the way in which health care is de-
livered. So I think, at some point, we may need to engage about
that choices discussion that we previously engaged in and that per-
haps a combination of the two under a new structure rather than
a combination of the two under the current structure might be an
option as well.

I thank the gentleman.

Mr. Stark. In your growth rate discussion, in the President’s
proposal, we cut to about 6.5 percent, and I think the Republican
proposal, I am going to guess, is about cutting to a growth rate of
5.7 percent. The private sector growth rate based on those same as-


22

TABLE 1 PROJECTIONS OF MEDICARE OUTLAYS (By fiscal year, in billions of dollars)

Average
‘Annual
Percentage
Rate of

Growth,
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1995-2006

Hospital

Insurance HS 127 139152164177 190-204 220.—«-237«-255-TS kD
Supplementary

Medical

Insurance i BR 2 88 97 106 16 128 4 156 4 192 103

Gross Outlays 180 199 219 240-261 283-307-332 «361393428 46B 9

Premium Receipts 20-20 21 23 24 28 26 22 29 30 3) 2 43

NetOutlays 160 179 198-217 -237-288-2BI_«30S«-332—«-363-«397 43S

SOURCE: Congessions! Budge fice

NOTE: Numbers may nt 284 up owas becuse of ounding,



105

Bill Gradison April 26, 1996

President

‘The Honorable Bill Thomas

Chairman, Ways and Means Health Subcommittee
United States House of Representatives

1136 Longworth House Office Building
Washington, D.C. 20515

Dear Bil

On Tuesday, April 30, the Ways and Means Health Subcommittee will be holding a
hearing on the Annual Report to Congress of the Physician Payment Review Commission
(PPRC). The Health Insurance Association of America (HIAA) is extremely concemed about
the direction the PPRC is taking in their study of the Medicare Supplemental insurance
market. While the Commission has not made any formal recommendations on policy
changes to the Medicare Supplemental market, HIAA is concemed that the assumptions.
being used by the PPRC would set a course that could eventually eliminate or adversely
‘impact the availability of private Medicare Supplemental insurance to millions of consumers.

Medicare Supplemental products offer consumers needed security and choice, and
protect them from unforeseen medical expenses. Currently, approximately sixty-six percent
of seniors eligible for Medicare have some form of private Medicare Supplemental insurance
policies. Obviously, any public policy recommendations that would adversely impact these
‘consumers are of great concern.

HIAA submitted its concems about this matter to the PPRC in a letter dated
February 21, 1996. We would like to submit the enclosed copy of that letter for the hearing
record,

HIAA will be following this issue closely, and we look forward to working with you and
‘others on the Ways and Means Health Subcommittee and the Physician Payment Review
Commission to provide a better understanding of the importance of Medicare Supplemental
insurance policies for seniors.

Sincerely,

Bin

Attachments

885 13th Street, NW Suite 600 Fast, Washington, DC 20006-1109 202-824-1623 Fax 202-824-1719


34

less inclined to work together, but maybe we can work together
outside of this room.

Chairman THomas. As the Chair stated in his opening remarks,
even the Washington Post has indicated that there was a degree
of medigoguery being carried out by the President, but the point I
tried to make was that the numbers ought to be sobering enough.
If we refer to Dr. Newhouse’s charts, which we will get to shortly,
I guess the thing that ought to drive us together to move toward
a solution as soon as possible is that the CBO numbers prove that
it can get worse.

This is not, I don’t think by any means, the bottom end of the
scenario based upon the various factors, and that is one of the
things we have to get at.

I believe the gentlewoman from Connecticut wanted to clarify.

Mrs. JOHNSON. Thank you very much. I do want to just clarify.

You gave us some information about what you thought would be
the impact of the President’s proposal to reduce Medicare spending
by $124 billion over 7 years, and you said that instead of extending
the life of the program 10 years that it would add 4 years to the
life of the program.

Of the present savings, how much of the savings comes from part
A and how much from part B?

Mr. VAN DE WATER. In our estimation, the total Medicare sav-
ings over 7 years in the President’s latest submission are $116 bil-
ion.

The part A savings are, in fact, $128 billion; that is, the part A
savings exceed the total savings because of the shift of some of the
home health spending from part A to part B that the Chairman re-
erred to.

Mrs. JOHNSON. How much of that $128 billion is due to the shift?

Mr. VAN DE WateR. In that 7-year period, the number is $55 bil-
lion. I had incorrectly indicated earlier that it was $37 billion, but
the correct number is $55 billion.

Mrs. JOHNSON. So $55 billion of the $128 billion is “saved” in
part A because it shifted to part B, correct?

Mr. VAN DE WATER. Yes.

Mrs. JOHNSON. So it is not a real savings. It is not like cutting
reimbursement rates and, therefore, the money isn’t going out the
door. It is going out the door, just from a different fund, correct?

Mr. VAN DE Water. Correct.

Mrs. JOHNSON. So there is no savings in part B. In fact, there
is an increase in cost in part B of $55 billion?

Mr. VAN DE WaTER. Yes. It is simply a shift.

Mrs. JOHNSON. That increase in cost of $55 billion, what would
be the premium increase necessary in part B, to just cover the per-
cent of that new cost that is parallel to the percent of cost that the
current part B premium is carrying? When I say current part B,
I don’t mean the current part B in current law, whatever is in the
President’s proposal? In other words, he lowers the part B pre-
miums, but he pegs them at dollar amounts, and those dollar
amounts cover a certain percent of part B spending.

If you were to require seniors to carry that same percent of the
new home care expenditures, what would be their increase in pre-
mium costs? I would like to know the same figure. You may not


115

Revised Unified Proposal
for a Prospective Payment System
for Medicare Home Health Services

March 28, 1996

Attached is the Industry's Revised Unified Plan for a Prospective Payment System (PPS) for Medicare Home
Health Services. It was developed jointly by the National Association for Home Care (NAHC) and the PPS
Work Group.

This plan is a modification of the original unified plan submitted to Congress in 1995 which was presented
as an alternative to a Medicare home health copay and proposal to bundle home care payments into pay
ments to hospitals. The modifications were made to the original proposal to respond to concerns about
implementation feasibility raised by HCEA.

This plan incorporates the best elements of the home care PPS provisions in HR 2491 passed by Congress
and HR 2530. It represents months of work and refinement by the home care industry. The plan calls for a
three-phase approach to achieving episodic PPS. It starts with an interim PPS plan that utilizes existing data
and processes and moves to an episodic PPS with a refined case mix adjuster.

PPS is a more efficient, cost-effective altemative for achieving reductions in the growth of expenditures than
copays or bundling of home care services. PPS can accomplish this goal without jeopardizing beneficiary
health and safety, or increasing out-of-pocket costs.

We invite your careful review of this proposal, If you have any questions or would like additional informa-
tion, please feel free to contact the organizations listed below.

National Association for Home Care
Dayle Berke/Lucia DiVenere 202-547-7424

PPS Work Group
Jim Pyles 202-466-6550


58

Chart 9. PPS inpatient Margin, by Hospital Group, First 11 Years of PPS (In Percent)
iresptal Gevps PPS? PPS? _PPS3 PPS PPSS PPS PPS? PSA PPS’ PSI PPSTT
‘A nosptals 199% 12TH 86% STH 2TH OMe “nH 25% ta ORK aT
ran Cr |
Paral 77 73° 22 02 43° 29 98) 38 te 10
Large wean 15013538830 ok htt
‘Ober oan ie 37830888820 38328
ra oral 95 we 79 55 33 05 1h 45 tt
So commumy «82S 2D Ok 2B 1D Basak
Other rat 2 rT Td
Maorteacnog «18181125 OS TR TL MONS
Omerteachng «MGS? 38S GT 88a
Nor-toaching 12 00 52028733 52k 87
si

layeuban 43d 87k aT
Omerutan 134431878 SQ 2S ONO da
ural a3 87 348 022k 392?
Non-O5K at oe 7) 38 05 31 38 Se sees
TeacnogandOSH 199 166 1210078 SR
Teachrgony 153563 BTS OTS 423283
DSH ony M5 7 638s 831 koa
NowachagorDSH 109 ge 4S 15 «20S k BRR
Votusary 8 94 84 ke 2S At
Propnetary mo nz 68 37 00 a7 5443 tt
jan gewnmet 130 «127 «8162 4B) 2D tO?
Ruralgovernment 65 49082627) 4S T2287
‘aw ses PP en non nasa era pag ang orn a, Fy FS | TN

{sete bape anny ott 3 PPS faa yw tcc anes aden Nesp Washes he YOR
Segoneg san Ba Yara hee loner Eegmang PPS

Chart 10. Total Hospital Margin, by Hospital Group, First 11 Years of PPS (In Percent)
Fospial Grup PST PPS2 PPS PPS4 PPSS PPS6 PPS? PSB PPSS PRETO PPSTT

A respi 7% 64% 42% 3S 39H 3S SH AH AOA ka
ran 75 87 44 38 age ge ate aa
Porat 48004523027 a2 kok 50k 8
Large urban 72 8 39 31 27 28 22 38 36 36 38
‘Omer urean ai 72 53 84a a8 52) 5S 553 t
ral aera 75 8s 80 89 «55 BH kG GHG
Soecommurty 48 «3923821? 802 S28
Omer ra 4035 200 1827 ga? kaka
Majrtwacnng = 45.—=S2 2) RYT kata
Omorieachng = «82,733 4S Sak SB
Nemteacnng 7362 48 3503437 42k
ost

‘Large wear 6200559 290 2218 kd 2a
Omer urban Bo 7! 54 48457 BSB SRB
Pura S€ $7 30 3g 64552707070
eo-DSH 74 88 4881 Dk Rat
“Teaching ang DSH 523s 26 30 ze 38 a8 ka
Teaching oxy 8257 so 430 42 47a Nd
SH only Tm) 6s as 340950 a} 5152

NowarningsrOSH 68 6043 350 38 taka
Yotunary 7769 47-37 3838 3B? ots

Propretary fn a eS ey es rs
Utangovenmen 36 «38022197
Furalgovermert 4578181229}.
fw a PS vw a ent a on se ag a7) biol oalyan_For ean 5 | ee en

arn
bors began tng nah en PPS fac Ib saan homme hyaline Peg Mecha ee Yom
Stoney wen S60 3a ie any sega a 05 Geh> rope sre


M2

VNAs are proud of their legacy of cost-efficiency and quality care. The following
information demonstrates our ability to meet patients’ needs at a reasonable cost to the
government and patients. If enacted, we believe that the industry's revised PPS plan will be the
catalyst to bringing all home health agencies within the same pattern of cost-efficiency --
providing only the necessary number of visits, providing quality of care, and connecting the
patient with community resources that enable them to remain at home. The average number of
visits per beneficiary receiving home health services in 1993 from voluntary agencies (ice.

VNAs, Easter Seals Societies) was 46.1, compared to 56.7 for all home health agencies
combined; yet we maintain high quality services as demonstrated in our patient satisfaction
survey results (95-100% of patients report satisfaction) and percentage of patient goals achieved
VNAA members are Medicare-certified and 82 percent are nationally accredited by either the
Joint Commission on Accreditation of Healthcare Organizations (JCAHO) or Community Health
Accreditation Program (CHAP).

A 1996 Abt Associates, Inc., study, using a sample of HCFA claims data from 1994.
compared VNAs with other home care agencies on the following measures: 1) mean visits and
reimbursement for episodes ending within 120 days and for episodes extending beyond 120 days.
2) mean visits for episodes ending within 120 days and for episodes extending beyond 120 days
by census region; 3) mean number of episodes by census region; and 4) mean visits per episode
by admission diagnosis.

The Abt study demonstrated that, on average, total reimbursements to VNAs for episodes
of care that extended beyond 120 days were $1,876 less than reimbursements to non-VNAS for
such episodes. And, total reimbursements to VNAS for all episodes of care (those that end within
the first 120 days and those that extend beyond 120 days) were $896 less than reimbursements 10
non-WNAs for such episodes. In terms of utilization, VNAs were also favorably compared. By
census region, VNAs provide fewer visits per total episode than do non-VNAs by every census
region except the Mid Atlantic. They also have two-three times more episodes by region that do
non-VNAs. Finally, VNAs provide fewer visits per episode in 41 out of 44 diagnosis categories
than do non-VNAs. This latter finding demonstrates that VNAs' efficiency is not due to a
lighter caseload. In fact, the March 1996 U.S. General Accounting Office (GAO) report, entitled
"Medicare: Home Health Utilization Expands While Program Controls Deteriorate,” points to
VAS 'cost-efficiency when treating similar types of chronic and acute cases (described below)

‘The GAO report addresses that there are justifiable reasons for the growth in the home
health benefit; for example, the lawsuit filed in 1988 (Duggan v. Bowen) that struck down
H(CFA's interpretation of benefit coverage requirements. "As a result of the suit, HCFA revised
the Medicare Home Health Agency and Medicare Intermediary manuals in 1989 so that the
criteria for coverage of home health visits would be consistent with ‘part-time or intermittent
care,’ as required by statute, rather than ‘part-time and intermittent care,' as HCFA had been
interpreting it,” states the report. Following those manual changes, the percentage of Medicare
beneficiaries receiving home health services and the number of home health visits received per
year per home health user have increased signficantly.


76

Many of Medicare's initiatives mirror those in the private sector. For example, various
aspects of Medicare's provider profiling techniques and activities appear comparable to those
of private payers. Profiing activities could be strengthened by comparing profiles with
practice guidelines; this would make it possible to detect deviation from appropriate care
rather than from common practice patterns. Another initiative is HCFA’s recent
implementation of changes to enhance its abilty to detect the use of inappropriate billing
codes Medicare is also experimenting with case management through demonstrations and
is investigating methods of paying for case management by using bundled payments.

Its important to recognize the differences between the Medicare fee-for-service program and
private payers that may bear on the effectiveness of management techniques, and in some
‘cases, the feasibility of implementation. As a public program, Medicare's rules and
authorizing legislation require that it operate differently from private payers. For example,
current law permits all providers to participate in the program and that beneficiaries be
guaranteed freedom to choose providers. This provision may complicate the implementation
of management strategies that offer financial incentives to modify provider or patient
behavior. Moreover, increased flexibility may be necessary in Medicare coverage and
payment policies to accommodate management techniques such as case management.

In addition to continuing with the initiatives that are easily applied to Medicare, the
‘Commission recommends that HCFA should explore ways that Medicare can make use of
other cost-effectiveness techniques that appear promising yet conflict with current policies.
As a first step, the Commission recommends that HCFA work more intensively with its Part 8
carriers and Part A fiscal intermediaries to implement the best private-sector practices for
managing cost and quality of care within a fee-for-service context. This could include a
formal request for proposals from carriers and intermedianes to test promising methods and
increased financial flexbity to implement new management techniques.

Additional issues

Several issues included in the 1996 Annual Report have implications for both Medicare's fee-
for-service and managed-care programs.

The Failsafe Budget Mechanism. The failsafe budget mechanism included in the
‘congressional conference agreement relies on assumptions about the rate of growth in
managed-care enrollment and spending growth in fee for service. While the Commission
appreciates the need to slow the rate of growth in Medicare expenditures, several
methodological limitations may keep the failsafe budget mechanism that was proposed from
operating as intended. First, the failsafe only lowers payment levels and makes no
provisions for increasing payment. Because payments would be dropped permanently to
meet any anticipated excess spending, the mechanism would take larger reductions than
needed in order to reach budget goals. in addition, payment reductions under the failsafe
budget mechanism may reflect fluctuations in annual spending growth and errors in
projections of spending. While the mechanism corrects for overspending thal may have
occurred two years earlier, it does not adjust for projections that were too low. The
mechanism could be improved to better limit the effects on annual variation by revising the
methodology so that savings in one year offset spending excesses in other years. This
mechanism could also adjust for all errors in projections of spending.

If a failsafe budget mechanism is adopted, the Commission recommends that it be modified
jin three ways. Any payment reductions should apply for one year only, and then payment
levels should be returned to the level they would have achieved had the failsafe budget.
mechanism not been triggered. The mechanism should also be based on comparisons of
total actual spending and total allowed spending accrued since a base year, In addition, it
‘should correct annually for any projection errors regardiess of whether these errors were too
high or too low.

‘Secondary Insurance for Medicare Beneficiaries. Another issue affecting both Medicare
fee for service and managed care is the impact of secondary insurance coverage on
Mecicare expenditures and the types of choices available to Medicare beneficiaries. As this
issue was new to the Commission this year, we began our work in this area by developing
background material, identifying the pertinent policy issues, and laying out potential options.
Roughly three-quarters of Medicare beneficiaries have some private health insurance
addition to their Medicare coverage. Although these arrangements provide valuable financial



28

Mr. Stark. Thank you.

Thank you, Mr. Chairman.

Chairman THomaS. It is becoming the holy grail.

Does the gentlewoman from Connecticut wish to inquire?

Mrs. JOHNSON. Thank you.

Thank you for your testimony, Dr. Van de Water.

I, too, would like, just for the record, to say that financial sound-
ness is not an issue for the SMI Trust Fund is theoretically correct,
and I understand it is theoretically correct, but in fact, it is incor-
rect. There is absolutely no way that taxes can go up at the rate
they would have to go up, as you have well described for tax reve-
nues to deal with the problem even in part B. It is true, as you
point out in your testimony, that in part A, there is not even this
safeguard.

I want to ask you a little bit about your testimony in regard to
the growth in HMOs. You mentioned that it is the fastest growing
component. Membership in HMOs is the most rapidly growing com-

onent.

P In those States where Medicare Select has been on the market
for 2 years, is their growth rate faster or slower in the managed
care plans as opposed to the HMO risk contracts?

Mr. VAN DE WaTER. I don’t know the answer to that question.

Mrs. JOHNSON. Could you get back to me on that?

Mr. VAN DE WarER. Indeed.

[The following was subsequently received:]


94

use to manage their commercial insurance plans are not authorized
for use in the Medicare program.”

In stark contrast to private payers, HCFA and its contractors
generally cannot

-- use such utilization controls as prior approval or case
management to coordinate and monitor expensive services and
specialist care;

=~ encourage the use of “preferred providers"--those who meet
utilization, price, and quality standards; or

-- negotiate with select providers for discounts, promptly change
prices to match those available in the market, or competitively
bid prices.

Not surprisingly, Medicare's ability to emphasize cost
efficiency in its dealings with suppliers, physicians, and
institutions that habitually provide excessive services is limited,
and for certain services Medicare pays higher prices than its
private sector counterparts. (See app. I for details on commonly
used private sector strategies and their applicability to Medicare
See also chapter 11 of the Physician Payment Review Commission's
(PPRC) 1996 Annual Report to Conaress.**

The recognition that Medicare needs to change its role from
largely a claims processor to prudent manager is beginning to take
Shape in HCFA itself as well as in pending legislation passed by
the House of Representatives last month. For example, HCFA has
planned, among several new initiatives,

a demonstration testing the concept of competitive bidding for
certain supplies, such as oxygen, hospital beds, and urological
and incontinence products;

an improvement on earlier case management experiments by which
primary care physicians would. for example, provide
comprehensive management for beneficiaries with specific
diagnoses such as diabetes, hypertension, or congestive heart
failure, for which Medicare would reimburse them with a bundled,
capitated payment as is currently done on a monthly basis for
end-stage renal disease patients; and

a demonstration in selected locations that allows beneficiaries
to join preferred provider organization health plans, which are
not currently available under Medicare.

HCFA has interpreted current law as precluding it from
contracting with entities other than insurance companies. Certain
provisions in the Health Coverage Availability and Affordability
Act of 1996 would give HCFA the funding and flexibility to make its
contractor network better managers of program dollars. In
particular, HCFA‘ would have the authority to contract directly
with companies specializing in utilization review and fraud
detection to monitor and adjudicate claims. In essence, HCFA could
contract with the companies best suited to perform medical,
utilization, and fraud reviews; audit cost reports; revisit payment
decisions and recover overpayments; provide education on payment
integrity and benefit quality assurance issues; and provide more
specific guidance on coverage of medical equipment and supplies.

“Medicare Spending: Modern Management Strategies Needed to Curb
Billions in Unnecessary Payments (GAO/HEHS-95-210, Sept. 19, 1995).
“Washington, D.C.: PPRC.

"Technically, the authority is granted to HHS, of which HCFA is a
part.


‘SUBCOMMITTEE ON HUMAN RESOURCES
"AND INTERGOVERNMENTAL RELATIONS

Fax: 202 225.2382

STATEMENT OF REP. CHRISTOPHER SHAYS
BEFORE THE SUBCOMMITTEE ON HEALTH AND ENVIRONMENT
HOUSE WAYS AND MEANS COMMITTEE
APRIL 30, 1996

In seven oversight hearings on the Medicare and Medicaid programs, the
Subcommittee on Human Resources and Intergovernmental Relations of the House
Government Reform and Oversight Committee, has focused on four specific areas of
vulnerability to waste, fraud and abuse: (1) criminal enforcement, (2)adjustment of
reimbursement rates, (3 )automated claims review and (4)centralized claims processing.

Provisions strengthening criminal enforcement against health care fraud were
included in H.R. 3103, the Health Care Availability and Affordability Act of 1996. Mr.
Schiff and I were gratified that this committee addressed the critical need for clear
criminal sanctions in the fight against fraud.

| appreciate the opportunity to testify today, and to make recommendations for the
improvement of the Medicare program based on that oversight work. I will focus my
remarks today on the last three arcas of Medicare vulnerability.

In general, we found the Health Care Financing Administration (HCFA) is not
always the aggressive trustee of Medicare resources that Congress intends. On June 15
last year, we asked HCFA Administrator Dr. Bruce Vladeck why it appeared so difficult
to exclude dishonest providers from Medicare: and why it appears so easy for excluded
providers to get right back into the Medicare payment line, He responded that “as an
observer in the process” there was little he could do to prevent the Inspector General and
the Department of Justice from agreeing to settlements that failed 10 impose the exclusion
remedy. | assure you, our dismay over that response was both strong and bipartisan.

Expanded mandatory exclusion and more aggressive use of permissive exclusion
authority should be elements of any Medicare protection legislation, and I am pleased to
note that both House and Senate health care bills contain stronger exclusion provisions,

1. Adjustment of Reimbursement Rates

But HCFA’s reluctant or lethargic use of existing statutory authority to protect the
integrity of Medicare is also evident in their approach to adjusting reimbursement rates.
Jn failing to adjust prices in a timely fashion under the “inherent reasonableness”
authority at 42 USC 1395m(a)(10)(B), HCFA makes Medicare an attractive target for
fraud.

‘The General Accounting Office (GAO) recently concluded that “HCFA is slow
and often ineffectual in addressing problems involving overpricing ....". ‘The Department
of Health and Human Services’ Inspector General (HHS IG) characterized the current
Price adjustment system “absurd.”


7

protection to Medicare beneficiaries, they also have implications for the Medicare program.
Higher utilization among Medicare beneficiaries with Medigap insurance translates directly
into increased costs for Medicare. The Commission's analysis of the 1993 Medicare Current
Beneficiary Survey confirms previous estimates that Medicare beneficiaries with first-dollar
supplemental coverage have rates of service use from 25 percent to 33 percent higher than
those for beneficiaries without supplemental coverage.

Medigap insurers and Medicare risk-contracting plans operate under different rules governing
their premium rate-setting and underwriting practices. This raises two important issues: the
appropriateness of applying different standards to the two types of insurance coverage, and
the implications that these different pricing strategies have for beneficiary access to and
beneficiary choice of supplemental coverage. The artificial barriers to choice raised by these
different rating and underwriting standards will become even more critical if the Medicare
program is restructured to broaden beneficiary choice.

Options for modifying current supplemental insurance fall into three general approaches:
revising current policy, creating partial risk-sharing arrangements, or allowing or requiring
insurers to assume full risk for both Medicare and supplemental benefits. The Commission is
now planning work to examine the advantages and disadvantages of these approaches.

‘The Changing Labor Market for Physicians. Finally, the Commission's report takes a look
at whether and how changes in the organization and financing of health care are affecting the
labor market for physicians. Two types of change in the labor market have been assessed:
whether there is evidence that increasing demand for primary care physicians is leading to
changes in specialty mix, and if there is any indication that changes in the market have
reduced the overall number of physicians being trained.

The Commission's review suggests that change is occurring, but that itis relatively modest.
For example, generalists’ incomes have exhibited small gains relative to those of specialists,
and both the percentage of senior medical students expecting to be certified in generalist
fields and match rates for generalist residencies are increasing somewhat. Overall growth in
the number of residents has declined, with the most substantial decreases in specialist fields.
Growth in the number of intemational medical graduates in training may overwhelm any
changes made in response to market dynamics by graduates of U.S. medical schools.
Because most data sources are national in scope, it is difficult to know whether change is
more pronounced in the most competitive markets.

As you well know, restructuring the Medicare program encompasses a wide range of policy
and technical issues. The Commission's 1996 annual report addresses a number of those
issues to respond to the needs of the Congress. We look forward to working with this
committee as it continues to consider changes in Medicare in the months ahead.


83

Ms. WILENSKY. That is a fairly complicated example for me to
think about, but it strikes me that one of the problems that you
raise is that if you have the employer paying the copay, you now
have no reason on the part of the insured to care about what is
being sent.

Mr. Stark. On the other hand, you take away the incentive for
people, maybe, not to get treatment because they want to keep the
money in the savings account, which people have suggested is one
of the downsides. People might not go for that initial doctor’s ap-
pointment when they ought to.

Ms. WILENSKY. I have a section 125 provision at Project Hope
which lets me put aside money that is not covered by my insur-
ance. So, in some ways, that aspect of a medical savings account
is very common if it is not a big employer, and I have that ability.

It has a terribly perverse aspect. It is called use or lose. At the
end of the year, any money that I have set aside, if 1 haven’t spent
it, it just goes away.

Last year, 1 made the mistake, and I had $250 that I didn’t
spend. I am sure this year that I will go to visit my ophthalmol-
ogist or my dentist or something, so I am not going to let that hap-

en.
p Chairman THOMAS. You are beginning to sound like a bureaucrat.
again.

Ms. WILENSKY. It was my money, and I was going to do the use-
it-or-lose-it, and I didn’t want to lose it anymore. It is really taking
an idea that actually has been around for years and saying that
the way it is now is very perverse, and we let people roll it into
the future, so that they can keep it aside in case they have a cata-
strophic illness. It is taking something that we actually are quite
familiar with and saying we want to make it better.

So, while there are concerns about risk selection that are very
real, and I don’t want to downplay them, I think that we some-
times talk about medical savings accounts as though they were an
animal with four heads. Whereas, in fact, the section 125 is really
a medical savings account that many of us have access to.

Mr. StaRK. Thank you.

Chairman THomas. A medical savings account with term limits.

Does the gentleman from Louisiana wish to inquire?

Mr. McCrery. Thank you, Mr. Chairman.

Dr. Wilensky, I think you answered the gentleman from Califor-
nia’s question quite well regarding medical savings accounts, but in
fact, your report only looks at MSAs in the context of Medicare. Is
that right?

Ms. WILENSKY. Yes. That is what the Commission’s charge is,
and that is the only thing we looked at.

Mr. McCrery. In your report, you suggest a number of safe-
guards that might be enacted by the Congress in order to reduce
the risk of adverse selection. Is that correct?

Ms. WILENSKY. That is correct.

Mr. McCrery. Based on your general knowledge of the health
care system, is the potential problem of adverse selection more in
the Medicare population than it is in the rest of the population?

Ms. WILENSKY. That is actually a hard question. The Medicare
population uses a lot of health care. So, if you miss, it can cost you


5

reform of Medicare will include expanding beneficiary choices of
coverage under Medicare.

Interestingly, the New York Times reported yesterday that the
American Association of Retired Persons is moving into something
similar to the Good Housekeeping Seal of Approval. The AARP will
be expanding managed care programs, and the rationale offered
was that their members want more choices.

The testimony from both Commissions gives us useful guidance
on how to expand these choices.

In that regard, it is important to state that concern over in-
creased Medicare spending, although critical, is far from being all
that is at stake. There are major changes occurring in the Amer-
ican health care system, particularly relating to the evolution to-
ward integrated care delivery and financing systems. It is our re-
sponsibility, I believe, to extract the most promising developments
from this evolutionary process and consider how they can be adapt-
ed to strengthen the mission and the purposes of the Medicare Pro-
gram, with the ultimate goal of creating a better Medicare for
beneficiaries.

The time has come, I think, to work together to save Medicare.
I hope that the President does not agree that this is an election
year and, therefore, you can’t deal with Medicare, as his chief
spokesman, Mike McCurry, indicated, as reported in the news
media. I would hope the President would choose to lead this Nation
by submitting a new plan without tax increases that addresses the
financial concerns evidenced by the CBO report and that can
achieve a strong bipartisan agreement in both the House and the

nate.

Before welcoming our first witness, a gentleman from Connecti-
cut, Congressman Shays, I would recognize the Ranking Member
on the Committee, the gentleman from California, Mr. Stark.

Mr. StTarK. Thank you, Mr. Chairman.

Before I comment, I wonder what happened to my portrait. The
room looks better, I must say.

Thank you for holding this hearing. Let me point out that what
the CBO testimony makes clear but was not clear in your re-
marks—CBO’s estimate of total Medicare spending shows that
their estimate has declined and that we are actually spending $35
billion less than they previously estimated over the next 10 years.

It is true that the part A trust fund is heading down, but the
part B portion is doing far better than expected, and the total
spending picture, if one wants to give the true picture to the Amer-
ican public, is getting better, not worse.

As I read the ProPAC and PPRC reports, it is a good thing the
President did veto the Medicare budget bill. The two reports con-
tain certification that many of the Republican proposals would
have destroyed Medicare and not saved it. The plan that was put
forth by the Republicans wasn’t cost containment. It was cost shift-
ing to the beneficiaries.

The reports we will hear lay out the terrible flaws in those budg-
et proposals—medical savings accounts, excessive cuts in safety net
hospitals, balanced billing on seniors, and a budget fail-safe provi-
sion that would have destroyed the choice of doctor and hospital.


poet

According to HCFA, Part A accrued a deficit of $4.2 billion during the first half of fiscal year
1996. This report has lead to speculation that the Part A Trust Fund will go broke by 2000.

This situation, combined with decreasing Medicaid expenditures and charitable contributions,
threatens VNAs' future ability 10 provide health and long-term care to the elderly, persons with
disabilties, and the poor. We would very much would like to work with Congress to help resolve
these issues and appreciate this opportunity to share our policy recommendations.

Recommendations

VNAA believes that the Medicare home health prospective payment system (PPS)
recently presented to key congressional committees by the home health industry will help keep
the Medicare Part A Trust Fund solvent. We joined the other three national home health
associations in developing this PPS plan and we enthusiastically endorse it. This plan, titled,
"Revised Unified Proposal for a Prospective Payment System for Medicare Home Health
Services,” is a modification of the original PPS plan submitted to Congress in 1995. The
modifications were made to the original proposal to respond to HCFA's concems about
implementation feasibility. We believe that the revised PPS plan incorporates the best elements
of the home care PPS provisions in HR 2491, which was passed by Congress, and HR 2530,
which was introduced by the Administration. It represents months of work and refinement by the
home care industry,

This plan calls for three steps to achieve the PPS. Phase I creates an interim PPS plan
that incorporates existing cost and utilization data. It accounts for agency case-mix variation by
basing aggregate payment limits on an agency’s base year performance. Phase II incorporates
episodic payment caps based on 18 case mix categories to control utilization. It incorporates
data from HCFA’s Phase II per episode PPS demonstration project. Phase III moves to a pure
per episode PPS with a refined case mix adjuster to reliably and accurately predict variation in
costs by case mix. Growth rates would be set below projected spending to assure Medicare
savings. Home health agencies that are able to keep their payments below the limits will share
the savings with the government up to a maximum of 10% of payments. The attached fact sheet
goes into more detail about this revised PPS plan.

‘NAA particularly supports the plan's utilization controls. We believe that controlling
over-utilization, not cost of care, is the key to producing significant savings in the Medicare
home health program. Congressional Budget Office (CBO) analysts generally agree that
controlling use is the key to the next generation of Medicare cost containment. An August, 1995.
Eli's Home Health Care Report discussed findings of the HHS Office of the Inspector General
(OIG) report, entitled, "Variation Among Home Health Agencies in Medicare Payments for
Home Health Services.” The article stated, "Medicare's costs for home health care are being
driven by a small number of home health agencies that are providing up to seven times as many
visits per patient as low-cost HHAs..... While the average reimbursement per visit was similar
among all four groups of HHAs, varying no more than $2 from the national average of $58.06,
‘the number of visits varied widely,’ the O1G reports.”


81

vate sector is affecting the cost structure in the health industry,
and our rates aren’t changing. So, in many areas, we are increas-
ingly overpaying. We need your help in better identifying these
areas.

Ms. WILENSKY. Mrs. Johnson, let me conclude my answers to you
by saying the issue that you had raised earlier with Dr. Newhouse
struck me as going to the heart of something that I am sure this
Committee will take up in the future. This has to do with the dif-
ferences between defined benefits and defined contributions and to
what extent can we assume that a defined contribution will leave
you satisfied with the benefits that go with it.

This is probably one of the most important issues that the Com-
missions could provide some assistance with, and I am sure we
would both be glad to do so, and to do so in a joint way if that
would help.

Mrs. JOHNSON. That would be very helpful. I appreciate that.
Thank you.

Chairman THOMAS. I thank the gentlewoman.

Given the sobering effect of the numbers, I think at least that
discussion needs to go on to be able to look at the parameters.

Does the gentleman from California wish to inquire?

Mr. Stark. Thank you.

I am sorry I missed your presentation. I will try to outline a few
questions I had based on the prepared testimony.

Just one of the issues that I have been concerned about and the
PPRC recommendations touches on—on page 18 of the report
under Recommendations—that the same core standards be applied
to all private health plans participating in Medicare.

Ms. WILENSKY. Right.

Mr. STARK. Were you referring to the fact that some of the new
organizations recommended in legislation have easier or different
standards than others? It has been my assessment that we ought
to come as close as we can to having universal standards where it
is able to apply. Is that the point that you were getting at?

Ms. WILENSKy. Yes. What we tried to balance was the recogni-
tion that in different designs, precisely how you got someplace,
might be forced to differ or might in common sense wish to differ,
but the fundamental issues like solvency and protecting the sen-
iors, those are issues that were as important for new plans as for
old plans. Some might even say more important, but certainly as
important.

Mr. Stark. The risks that a beneficiary would face, the limit of
their liability, so that it is clearly defined to how much they might
be at risk, is an issue that should apply, so that whichever plan
you go into, you understand as a beneficiary what your contribu-
tion or risk might be.

Ms. WILENSKY. The answer is yes, to the extent the design was
consistent. To some extent, in some of the designs, it allowed out-
side of the traditional barriers. In that case, we wanted to be sure
that the seniors understood that if they chose a medical savings ac-
count, there may be higher prices that could be charged and, there-
fore, different liabilities. But it was extremely important, then, to
be sure the information to the senior was as clear as we knew how


107

PPRC 1996 Report to Congress - Chapter 16
“Secondary Insurance for Medicare Beneficiaries"

HIAA Comments on February 13, 1996 Draft
February 21, 1996

HIAA is deeply concerned about the underlying premise of
this chapter, which is that Medicare supplemental insurance is
somehow illegitimate. The Commission’s health economists appear
to have decided that there is a “right" level of health care use
by Medicare beneficiaries, and that this “right" level is the one
that would result if all beneficiaries had to pay the statutory
Medicare deductibles and coinsurance out of their own pocket.
We find no such limitation in the statute. Rather, the only
statutory test for Medicare payment that we are aware of is that
the care rendered to an eligible beneficiary be medically
necessary. As the chapter points out, the available research
finds that imposing beneficiary cost-sharing reduces use of
necessary, as well as unnecessary, care.

Moreover, the benchmark for this “right level of
utilization appears to be the claims experience of the 10% of
Medicare beneficiaries who have no secondary coverage of any
kind. The results of the multivariate analysis are not
presented, so we cannot critique them. But one is left with a
nagging sense that the 10% must be unusual in some way, most
Likely with respect to income. Surely the Commission does not
want to argue that Medicare should be responsible only for the
level of utilization demanded by beneficiaries who are too poor
to see_a_dactor until Fieir need is urgent.

Another general concern relates to the chapter’s discussion
of Medicare supplemental product rating and underwriting
practices. The chapter throughout seems to favor "equivalent"
rules for Medicare supplemental and Medicare replacement (risk
contract) policies. This stance, if translated to requirements
for guaranteed issue and community rating of supplemental
policies, ignores the implications for Medicare program costs of
the inevitable adverse selection against Medicare supplemental
insurers and traditional Medicare which would result. We are
convinced that these costs would be significant. (See the
enclosed HIAA Legislative Issue Brief #4.)

Additionally, we take issue with the chapter‘s discussion of
rating practices. Indeed, several rating approaches are
available in the marketplace. We believe this variety serves the
public well by letting them decide for themselves which approach
best serves their needs. To eliminate one or more of the current
alternatives (on the grounds that the presence of the
alternatives is "too confusing") displays Washington hubris of
the worst sort. Rather than eliminate rating alternatives for


92

itori
Shadequats_Monivoring of SNF

Skilled nursing facilities represent another area in which
Medicare's unguarded reimbursement policies have been exploited.
In this setting, a population with extensive health care needs
grouped together at a single location offers unscrupulous providers
the opportunity for volume billing, and Medicare often does not
look for warnings of egregious overutilization or rapid increases
in billings. Under Medicare's provisions for reimbursement,
providers can bill Medicare directly, without the SNF or attending
physician affirming whether the items were necessary or provided as
claimed. In other words, medical equipment suppliers, providers of
rehabilitation therapy, and providers of X rays and other
diagnostic tests can determine levels of services and bill Medicare
with little or no oversight. In addition, Medicare's automated
systems do not capture data in a way that would practically allow
them to flag indications of improbably high charges or levels of
services at individual facilities. ‘This is in part because the
data are not organized to report which beneficiaries are in nursing
homes -

In January of this year we reported that a wide array of
provider types--including physicians, optometrists, psychiatrists,
laboratories, and medical equipment suppliers--have fraudulently or
otherwise inappropriately billed Medicare for services and supplies
furnished to nursing facility residents.’ The wrongdoing has
generally focused on billing Medicare for unnecessary or
undelivered services, or misrepresenting a service to obtain
reimbursement. The investigations we reviewed probed activities in
over 40 states, with many providers operating in multiple states.

Not only are payments for the ancillary services provided to
SNE patients poorly policed, payments to SNPs themselves are
difficult to monitor. Medicare pays SNFs on the basis of costs.
But as with home health care, Medicare has only limited tools to
determine whether the costs are reasonable. This is particularly
pertinent to rehabilitation therapy, services that account for 30
percent of SNF costs. Specifically, Medicare places no absolute
dollar limits on reimbursements for occupational or speech therapy,
and charges for therapy services are not linked through billing
codes to the amount of time spent with patients or the treatment
Provided. In other words, Medicare has no easy way to limit the
amount it will pay for occupational or speech therapy or to
determine whether a charge is for 15, 30, or 60 minutes of
treatment. Absent any benchmarks, and with limited resources
available for auditing, it is largely infeasible for Medicare
contractors to judge whether therapy providers have overstated
their costs

Last year we reported that Medicare had been charged as much
as $600 for an hour of therapy services.” HCFA has acknowledged
the problem and recently estimated that implementing salary
equivalency guidelines for speech and occupational therapy, in
conjunction with adjusting other salary guidelines, could save $1.4
billion over the next 6 years. To date, however, the salary
guidelines have not been established. Although occupational
therapists in SNFs earn on average $23 per hour, we recently found
in one contractor's files that more than 25 percent of submitted
charges for one unit (undefined) of occupational therapy exceeded
$195 and some approached $1,500 per unit.

Facilities (GAO/HEHS-96-18, Jan. 24, 1996).

in Nursing Homes (GKO/HEHS-95-23, Mar. 30, 1995).


60

Chairman THOMAS. Thank you very much, Dr. Newhouse.

There is a rather dramatic difference in terms of the hospital
margins as proposed by some studies that had been done. However,
I want to try to put this in its proper context.

Let’s look at your chart 7 from 1993 to 1996. Would PPS pay-
ments have been increasing at a declining percentage, holding
steady, or decreasing?

Mr. NEWHOUSE. On chart 6, the PPS payments per case over
there in the fourth column have been decreasing through PPS-11,
which is 1994.

Chairman THOmas. The cost per case has been going down.

Mr. NEWHOUSE. Correct.

Chairman THoMas. So the relative increase has been the dif-
ference between the hospital’s rather dramatic ability to hold down
costs, notwithstanding the declining payments.

Mr. NEWHOUSE. That is correct.

Chairman Tuomas. The assumption, then, is that that is a finite
relationship. They can only go so far.

Why has it occurred in the 1993-96 period and it didn’t occur in
the 1989-93 period? Do we have any feeling for that at all?

Mr. NEWHOUSE. Well, that is necessarily speculative, Mr. Chair-
man. The Commission feels that it is increased pressure from pri-
vate payers that has been the principal factor responsible here.

Chairman THomas. I think it is a response to the real world, and
my question would be, although you indicated 1.5 percent, would
a market basket of minus 2 percent be out of the question, at least
for the next several years?

Mr. NEWHOUSE. The Commission indicated in its report that
market basket minus 2 points would have been reasonable, at least
within the framework it used. How long hospitals could sustain
that is speculative. I think we will just have to see how things go
as we go along.

Chairman THOMAS. If you might in just a minute or two, give us
ProPAC’s response to the whole question of graduate medical edu-
cation.

Mr. NEWHOUSE. Yes.

Chairman THOMaS. As you know, we suggested a fundamental
new way of dealing with the issue. I guess the easiest way is to
simply talk about utilizing Medicare as an ongoing base for financ-
ing graduate medical education, appropriate or inappropriate.

Mr. NEWHOUSE. As you know, the Commission recommended a
decrease in the add-on, as it were, for teaching hospitals from 7.7
to 7.0 percent and believes that that should head downward in the
future.

It also supported the notion of the trust fund, and the Commis-
sion believed that there ought to be considered, anyway, an all-
payer system for graduate medical education.

Chairman THomas. Has there been an ongoing discussion about
the whole question of whether or not Medicare should be budgeted
and the dollar amounts?

Mr. NEWHOUSE. I was not present for the Commission’s delibera-
tions this past year. So I might ask Don Young to comment on
that.


Percent

56

Chart 7. Aggregate PPS Inpatient (Operating Plus Capital)
Margin, First 13 Years of PPS (In Percent)

20.0
15.04
133 1)
10.04
86 88
66
57
so 47
27
2
00 ot 0
“18 AD
25
50 7 7 7 7 —
1984 1985 1986 1987 1988 1989 1990 199! 1992 1993 1994 1995 1996
Year

oe PPS carom es aaa 995 a 195
SOURCE * PAC anata Waacar Com Ren ta tam Heath Cra Fanny Aaminaten



18

health maintenance organizations, are projected to increase at an
average rate of 8.3 percent a year. Supplementary medical insur-
ance, which pays for physicians’ services, labs, durable medical
equipment, and outpatient hospital services, is projected to in-
crease at an average rate of 10.3 percent annually.

For both HI and SMI, payments to risk-based HMOs, health
maintenance organizations, are the fastest growing component.
Most of that growth, however, is attributable to rapidly increasing
enrollment. CBO projects that enrollment in risk plans will in-
crease 25 percent in 1996 alone, with the rate of growth slowing
to 10 percent a year in 1999 and thereafter. CBO also projects that
the number of Medicare enrollees in the traditional fee-for-service
sector will actually decline over this period.

Despite that decline in fee-for-service enrollment, however, pay-
ments for home health, skilled nursing, and outpatient hospital
services are still projected to grow at double-digit rates.

The financial transactions of Medicare are handled through two
separate trust funds on the books of the Treasury. The trust fund
technique involves earmarking specific taxes or other revenues to
finance certain programs. That procedure helps to weigh the costs
and the benefits of the programs and gives beneficiaries some as-
surance that their benefits will be protected.

Financial soundness is not an issue for the Supplementary Medi-
cal Insurance Program because the portion of spending not fi-
nanced by premiums is covered by an open-ended appropriation
from the general fund of the Treasury. The Hospital Insurance
Trust Fund, however, does not have a tap on general revenues and
is facing depletion within 5 years.

Last year, in 1995, spending for hospital insurance exceeded by
a small amount earmarked payroll and income taxes and other in-
come to the fund. CBO projects that outgo will exceed income by
$7 billion this year. With HI outlays increasing more quickly than
payroll tax receipts, the gap will widen each year, and the HI Trust
Fund will become insolvent in 2001.

Over the past year, CBO has slightly modified its Medicare pro-
jections. Overall, as Mr. Stark indicated, CBO’s April 1996 projec-
tions for Medicare spending are lower than its March 1995 projec-
tions. CBO has reduced its projected levels of spending for SMI. It
has upped its projection for HI, and the projected insolvency of the
HI Trust Fund has been moved forward by 1 year.

In March of last year, CBO projected that the HI Trust Fund
would run a $3 billion surplus in 1995 and that outlays would ex-
ceed receipts beginning in 1996. In fact, outlays in 1995 slightly ex-
ceeded income to the trust fund. This change from a surplus to a
deficit position has recently received a great deal of attention.

Given the size of the HI Program and the uncertainty that sur-
rounds even short-run projections of outlays and revenues, how-
ever, that change provides little new information about appropriate
directions for Medicare policy. At this point, apart from total out-
lays, we know very little about the details of recent developments
in health benefits paid by the HI Program.

Similarly, the advance of 1 year in the projected date of insol-
vency confirms what we already knew, namely, that Medicare


AT

Medicare beneficiaries are very comfortable with this traditional program and would be
very reluctant to forego this choice. Additional factors, therefore, may also be
contributing to the lags in Medicare capitation plan enrollment.

To assist beneficiaries in making the choices that meet their needs, the
Commission believes that the Medicare program should expand the information it
makes available to them, including clear information on plan benefits, premiums and
‘other cost-sharing requirements, plan performance, and the availabilty of local
providers. In addition, the Secretary needs to continue efforts to identify the
information beneficiaries need to make informed health plan choices and the most
appropriate format and methods for disseminating these data.

Assuring that Medicare beneficiaries make informed decisions is especially
important with the MSA option and the MedicarePlus fee-for-service option. Although
these options may be very attractive to some beneficiaries, they also contain the risk
‘of substantial increases in out-of-pocket spending. ProPAC is concerned that some
beneficiaries may choose these options without being fully aware of their implications.

A capitation payment system intentionally provides health plans with an incentive
to limit the type and number of services delivered. While this is generally desirable as
‘a means to control spending, health plans must be held accountable for the quality of
care they provide. In the private insurance market, employers act as an agent for
their employees by selecting health plans that will meat their contractual
responsibilities and provide access to needed high quality care. The Commission
believes that the Medicare program also needs to be vigilant in ensuring that pians
meet their responsibilities to provide appropriate care. To do so, measures of heaith
plan performance need to be strengthened and enforced.

THE MEDICARE FEE-FOR-SERVICE PROGRAM

| would lke to turn now to a brief summary of ProPAC's recommendations
regarding policies in Medicare's traditional fee-for-service program. This program
continues to be responsible for about 90 percent of total Medicare spending, and it will
continue to provide the funding for the care furnished to a majority of beneficiaries for
many years to come. It is important, therefore, that you continue to analyze and
appropriately modify these policies to rein in spending growth, while assuring quality
care for Medicare's beneficiaries.

INPATIENT HOSPITAL COSTS AND PAYMENTS,

When ProPAC appeared before you in September 1995, we noted the dramatic
dectine in hospital cost growth, which began in the early 1990s. That trend of lower
cost growth continues today. From 1984 (the first year of PPS) through 1990,
Medicare PPS operating costs per discharge increased at an average annual rate of
9.4 percent (See column 3 in Chart 6). This increase was substantially higher than
the growth in PPS payments per case. Consequently, by 1990 PPS inpatient margins,
the difference between operating and capital payments and costs as a percentage of
payments, had become negative (See Chart 7). Hospital per case cost increases then
began to moderate, and in 1993 the average PPS margin again turned positive. In
1994, PPS inpatient costs per case deciinad by 1.3 percent. We estimate that the
average PPS margin will cimb to 8.8 percent in 1996, if current trends hold,

This decline in hospitai cost growth reflects a dramatic change in the pattern of
cost shifting we have previously described to you. In 1992, Medicare's total hospital
payments (for the operating and capital costs of inpatient, outpatient, and hospital-
based SNF and home health services) covered 89 percent of hospitals’ reported costs.
‘n contrast, payments from private payers were 131 percent of costs. By 1994,
Medicare's payments had climbed to 97 percent of costs while those from private
ayers had fallen to 124 per percent (See Chart 8). Based on preliminary data for
1995, we believe that the gap in payment to cost ratios between Medicare and private
payers will continue to narrow. The narrowing of the difference in payment to cost
ratios retiects the success of private payers in slowing the rise in hospital payments,
as well as the slower cost growth resulting from the increased pressure on revenues.



51

Interim Improvements In Skilled Nursing Facility and Home Health Policies
The Commission supports the implementation of interim payment methods to
control the growth in routine and ancillary services furnished by skilled nursing facil
until a comprehensive prospective payment system is established (See Chart 12)
The Commission notes, however, that interim payment limits should be designed that
do not unduly restrict this evolving industry. Basing prospective payments on facility-
specific or average national base payments has important deficiencies, and the
‘Commission suggests that altemative methods should be explored. These could
include calculating payments based on a larger geographic area or using a blend of
facilty-specitic and regional rates to establish the appropriate payment amount.
ProPAC also recommends the use of episode-based payment limits for home
health services until a fully prospective payment system can be implemented. Since
1990, the number of visits furnished to each person served has grown rapidly (See
Chart 13). In addition, beneficiary copayments, subject to an annual limit, should be
introduced. The Commission believes that it is appropriate initially to blend regional
and national costs to establish prospective limits. It is concerned, however, that
‘maintaining regional variations in the payment amounts would perpetuate unjustified
differences in utilization and expenditures across geographic areas. The Commission,
therefore, recommends a transition from regional to national rates, as was used in
establishing hospital prospective payment rates.

HOSPITAL OUTPATIENT SERVICES

The Commission continues to recommend that a comprehensive prospective
payment system for all hospital outpatient services should be Implemented as soon as
possible. Because almost all services provided in the hospital outpatient setting can
be obtained from other ambulatory providers, consistent payment policies should be
established across all settings. To constrain growth in the number of services
provided, a strategy for controlling volume is also necessary. Imposing volume
controls on hospital outpatient services only, however, could lead to a shift in services
to other sites. Ultimately, therefore, volume control methods should apply to all
ambulatory providers.

ProPAC also recommends that the growing financial burden for Medicare
enrollees who receive services in hospital outpatient departments should be alleviated.
Beneficiary coinsurance for these services should be limited to 20 percent of the
Medicare-allowed payment, as it is in other settings. For services not paid on a
prospective basis, the Secretary could estimate beneficiary copayments since they
cannot be calculated precisely when services are delivered.

The Commission is aware, Mr. Chairman, that reducing beneficiary coinsurance
would increase Medicare outlays. This increase could be offset in part by correcting
current flaws in the hospital outpatient blended rate formula, as the Congress has
proposed. If necessary, the reduction in beneficiary liability could be phased in over
several years.

UPDATE TO THE COMPOSITE RATE FOR DIALYSIS SERVICES

Medicare spending for end-stage renal disease (ESRD) beneficiaries is growing
rapidly. A large part of the increase is due to an expanding ESRD population. But
these beneficiaries aiso are using more acute care, home health, and other dialysis-
related services. A comprehensive payment method that includes a broad array of
services should be explored. Most ESRD beneficiaries are not eligible to enroll in
Medicare's risk program. These individuals should be allowed to enroll in Medicare's
expanded capitation program, with suitable payment adjustments, or a separate
capitation program should be established.

In the interim, the Commission has concluded that the composite rate for
hospital-based dialysis facilities should be updated by 2.7 percent and for free-
standing facilities by 2.0 percent. This recommendation is based on our analysis of
available Medicare cost report data as well as a comprehensive review of the Iterature
related to quality of care for dialysis patients. Unlike Medicare payments to other
providers, the composite rate has not been updated for many years. The Commission


80

ly meant for graduate medical education would become far more se-
rious.

By separating out, you took what was representing 8 or 9 percent
of the Medicare population. You froze it at that level. It would be-
come an increasingly smaller and smaller share of the capitation
program. So, if you do something soon, I actually think what you
propose doing was perfectly fine. It did not have a major effect, es-
pecially because you had set up a trust fund, but that doesn’t mean
if you had the time to develop a way to, first, extract and then,
more importantly, decide how to distribute those graduate pay-
ments, that would be fine. I just don’t think you did much damage
at this point.

Mrs. JOHNSON. Because no legislation has been passed in this
area, I am beginning to see in our medical centers the impact of
the managed care deal, so to speak, and so we are already begin-
ning to see a hemorrhaging of resources that are critical to the sur-
vival of these medical centers. Has any of your data begun to re-
flect that yet?

Ms. WILENSKY. The distribution, as you know, is not even. The
8 or 9 percent who choose capitation plans tend to be targeted in
high-payment areas. So, in those areas, you will do a little more
than just the 8 or 9 percent.

We have not seen any impact yet, and I think the reason is be-
cause both ProPAC and PPRC have indicated that the moneys
going to the academic health centers, in fact, are substantially
greater than one would justify strictly on the basis of what Medi-
care does to them for reasons that have to do with providing un-
compensated care or other roles that these institutions play.

So I think, actually, that is not a problem to date. The longer you
wait, the more it could become a problem.

Mrs. JOHNSON. I would hope that you would focus some of your
resources on areas of the country, and of course, I am particularly
familiar with the Northeast, where managed care has not been a
big component in the market for seniors particularly, nor have
HMOs. So the sudden influx of those and the pace at which now
I think in the next year and 2 years, even 6 months and 1 year,
people are going to be joining those plans, it seems to me it could
create a problem for the medical centers of Boston and Connecticut,
and perhaps, to some extent, New York. I am a little less familiar
with that situation.

So I think we need to begin tracking that early, so that we can
see what will be the consequence if we don’t do anything.

Ms. WILENSKY. Yes, I agree, and we will do so.

It certainly could have an impact in those areas that have aca-
demic health centers and traditionally have not had very much in
the way of managed care growth, and we will do that.

Mrs. JOHNSON. You won’t have time to answer this, but I would
appreciate your help in taking a look at the kinds of issues that
Chris Shays raised in his testimony.

I have served on this Committee for many years, and frankly, we
have been notably ineffective in many instances in getting at the
kinds of problems that he describes. I would say that those kinds
of problems are being brought to my attention far more frequently
now than they have in the past, which reminds you that the pri-


13

Chairman THomas. I thank you very much, Chris.

To begin with where you ended, HCFA has spent about $20 mil-
lion on the Medicare transaction system. They are requesting for
fiscal year 1997 another $50 million.

Did any of your hearings come up with some suggestions for how
the funds might be reprogrammed?

Mr. Suays. The answer to your question is yes, but I want to say
that on my Committee, we did a joint hearing with the Govern-
ment Management, Information and Technology Subcommittee by
Mr. Horn, and he has really taken the lead on this particular issue.
We will make sure that he provides you some information because
his Subcommittee, more than mine, is focused on that.

Chairman THOMAS. We will contact the gentleman from Califor-
nia as well.

Mr. Suays. Yes.

[The following was subsequently received:]

Mr. Horn. Your testimony projects about $200 million annually in administrative
savings as a result of MTS. However, GAO estimates that the Medicare fraud,
waste, and abuse is 10 percent of the program, which was discussed with Chairman
Clinger. By the time MTS is scheduled to be in place, this could be about $25 billion
a year.

‘Are we placing too much emphasis in holding administrative costs down when we
could save money by investing in waste, fraud, and abuse detection systems?

‘Mr. VLADECK. Mr. Chairman, you are playing a tune that is somewhat familiar
to us. We have felt for a long time that the arbitrary separation of administrative
costs and appropriated accounts from trust fund expenditures in the entitlement ac-
counts probably caused us to underinvest in certain program integrity activities.
And, in fact, the administration has proposed legislation and has worked with the
congressional majority in both Houses on legislation that would permit us to develop
new financing vehicles so that the savings in—some of the savings in trust fund out-
lays could be reinvested in administrative activities, both on our part and that of
the law enforcement agencies.

Chairman THOMAS. There is no sense in having three separate
Subcommittees not share information on such a delicate program.

Did I understand that Bruce Vladeck basically identified himself
as an observer? Especially in terms of exercising the inherent rea-
sonableness authority, I would tend to see him more as a partici-
pant than as an observer.

Mr. SHays. Let me say this to you. With all respect to Mr.
Vladeck, he only said it once, and he was encouraged by both Re-
publicans and Democrats not to say it or to think in those terms,
but it did give you a mindset.

I think they feel like there are all of these rules that we have
imposed on HCFA, and that they are just kind of a referee and that
they can’t be as proactive as I think you and I intend them to be.

Chairman THOMAS. I would just tell you that from my time here,
as a matter of fact, in this Committee room dealing with House
oversight in the old House administration, it was not a dissimilar
situation in terms of government purchases and the price that gov-
ernment paid versus what people could go down to a store and pur-
chase for a similar piece of equipment. It is not a surprise to me
that this same thing is going on in the purchase of medical equip-
ment.

When you begin adding up various areas, as you have done, and
you can reach $2.5 billion by only two particular categories, the
Chairman agrees with you that there could very well be a signifi-


55

Chart 5. Percentage of Large Employers Offering Selected
Health Plans, 1993-1995

100
01993
= 1994
2 1998
0

Indemnity Preferred Point of Health

Provider Service Maintenance
organization ‘Organization

SOURCE A Four Hag hte Samy Encore wm Pan 5,

Chart 6. Annual Change in PPS Operating Costs and Payments, First 11 Years of
PPS (In Percent)

PS Conte ana Payments

Manet ‘Consumer
operating Paymans Baste! Update Price
‘Conte Paya Percase Index Fact” index?
45% om wes 4TH AH
a 105 3945,
88 as 34 3900s 28.
tT 39 53 3500122
98 gr 60 a7 sat
me 077 5s 55033 aT.
ms 82 63 46004750
2080 58 4300034 5a
173 52 313030
PS 10 35058 38 30027 3t
Pes tt oo 82. 35 242028

See Sin ons pom oe sae #5 i, PPE oe) congo eh ad a ng
egeangin tr Fea oc er Fa ran. PPS a rs ean Ctr er th
Sie a ae ai aes mse cna a

* niyo cba PP 5 aya 98. Utero PPS 7 Ya 0) aur 22 pecs
SSinrmeona acon nanosate yop are

“eae nie sae eect en mn sti sume fe covery Faw! ee
SOURCE PPAC sa ec Cx apr om run Cae Feanong Agra ne Bua Li”


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH
FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
April 23, 1996
No. HL-18

Thomas Announces Hearing On
Recommendations Regarding Future Directions
in the Medicare Program -

Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on Health of the
‘Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on
recommendations regarding future directions in the Medicare program. The hearing will take
place on Tuesday, April 30, 1996, in room 1310 Longworth House Office Building,
beginning at 2:00 p.m.

In view of the limited time available to hear witnesses, oral testimony at this hearing will
be heard from invited witnesses only. Witnesses will include representatives of the Prospective
Payment A: Commission (PROPAC), the Physician Payment Review Commission
(PPRC), and the U.S. General Accounting Office (GAO). However, any individual or
organization not scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record of the hearing,

BACKGROUND:

‘Two major factors have brought the issue of future directions for the Medicare program
to the forefront for Congress. Foremost is the concern that rates of growth in Medicare spending
Continue to outstrip inflation in the general economy, and even more importantly, the recent
indications that Medicare's Part A Trust Fund is deteriorating more rapidly than was anticipated
in the April 1995 Report of the Board of Trustees. Secondly, the broader evolution of the
‘American health care system toward integrated health care delivery systems has an important
impact on the future of the Medicare program.

Each of the three organizations identified above have statutory responsibilities in
providing non-partisan advice and assistance to the Congress. PROPAC and PPRC are required
to report annually to the Congress their recommendations, within their respective spheres of
responsibility, concerning the Medicare program. Both PROPAC and PPRC released public
reports in March 1996 detailing a variety of recommendations conceming nearly every aspect of
the Medicare program. Separately, GAO has completed and also has underway a range of
studies relating to policies and operations of the Medicare program. The current work, recent
reports, and recommendations of these organizations will provide the basis for their testimony at
the hearing.

In announcing the hearing, Chairman Thomas stated: “Securing the future of the
Medicare program is an essential objective of this Congress. The advice and recommendations
of these witnesses provide an important opportunity to enter into a sensible and constructive
<ialogue in the Subcommittee on future directions of the Medicare program.”

FOCUS OF THE HEARING:

‘The hearing will focus on the recommendations of the witnesses concerning future
directions of the Medicare program.



72

adjusters that offer a significant improvement over current techniques. Altematively, methods
that would pay plans partly on a capitation basis and partly on a fee-for-service basis would
also reduce over- and underpayments due to selection. AS this work proceeds, data
requirements and the need for testing and validation must be addressed.

Medical Savings Accounts for Medicare Beneficiaries. Risk selection issues also anse in
considering whether to offer medical savings accounts to Medicare beneficiaries. Medicare
MSA options appear more likely than others {o attract significant favorable selection
Beneficiaries who expect to spend litle on health care in the coming year may
aisproportionately find MSAs financially attractive because they could keep more of the
money deposited into the medical savings account. Conversely, those who expected high
expenditures might find MSAs unattractive because it would be cheaper to buy Medigap
insurance than to spend up to a large deductible. As a resutt, policies must be carefully
considered to protect the Medicare program from increased expenditures due to selection.

To address these concems, the Commission recommends that the enroliment and
disenrollment rules of Medicare medical savings account plans be structured to reduce the
potential for risk selection. Examples of restructured rules include a minimum enroliment
period of several years in a Medicare MSA or requiring beneficiaries to announce their
disenrollment from an MSA one or more years in advance. Moreover. if a Medicare MSA
‘option is adopted, the Congress should require studies of selection into MSA plans both to
determine what effect, if any. selection has on total program outlays and to identify a way to
compensate for any selection that occurs.

Other elements of the design of a Medicare MSA option might also necessitate explicit policy
decisions by the Congress. First, Medicare MSAs are typically envisioned in a traditional
fee-for-service environment, but managed-care plans of other entities may be capable of
offering them. If'a Medicare MSA option is adopted, the Commission suggests there be no
undue legal restriction of their ability to offer this product, and that federal laws jimiting
deductibles and copayments or mandating benefits richer than the ones offered by Medicare
be waived for managed-care plans’ Medicare MSA products. tn addition, state laws should
‘be preempted when they confict with this provision of federal law.

Finally, there are issues regarding Medicare beneficiaries’ abilty to meet their financial
‘obligations under an MSA option, particularly those with low-incomes. Of concern to the
Commission is the possibility of access problems if providers become less willing to treat
beneficiaries without a guaranteed source of payment. Medicare MSAs also raise important
coordination-of-benefits issues for beneficiaries entiled to Medicaid or other tax-funded
health care. Thus, any Medicare MSA proposal should be structured to reduce the potential
for adverse effects on low-income beneficiaries, on providers who disproportionately serve
them, and on state Medicaid programs

Strengthening the Fee-For-Service Program

The Commission's 1996 annual report also devotes a number of chapters to issues affecting
Medicare's fee-for-service program. In part, these reflect the Commission's ongoing
responsibility to monitor the implementation of physician payment reform. But they also focus
(on improving program performance.

Physiclan Payment under Medicare Fee for Service. As the transition to payment under
the Medicare Fee Schedule nears completion, there is much good news to report. Access to
care appears to be good for most beneficiaries. Physician participation and acceptance of
‘assignment continue to grow with 95 percent of claims now accepted on assignment.

Balance billing has declined dramatically. And despite reductions in some Medicare payment
rates, beneficiaties’ use of almost all services continues to grow (Table 3)

In adattion, Medicare does not appear to be pricing itsef out of the market for physicians’
services. Medicare now pays, on average, 71 percent of private rates. This gap is narrower
than in 1992 when Medicare paid 61 percent due to higher Medicare payment rate updates
and lower inflaton in the private sector

Despite these successes, there are still areas of concern. For example, the distribution of
physician payment has changed iess under the fee schedule than originaly anticipated.
Gains for evaluation and management services have not been as large as expected because
of use of separate conversion factors for surgical services, primary care services, and all
‘other services. in addition, the Commission remains concemed that access problems persist


27

sumptions was projected to be around 7 percent. I guess what trou-
bles me, and this is what I would ask for your comment, if we had
a substantially lower growth rate locked in for the public sector
program below the private sector, wouldn’t we basically either push
us toward rationing or cost shifting? I don’t know whether you are
able to comment. It is my opinion that that is what it would lead
to; that we have to keep our growth rate in the public sector pretty
close to what the private sector growth rate will be or will cause
those kinds of problems in the market.

Is that a fair assumption, or is there something unique about the
delivery of medical care?

Mr. VAN DE WaTEeR. I don’t think that I am as well-positioned as
your following witnesses to address that, but I think the gist of
what you suggest is probably correct.

The problem from our point of view is that these comparisons be-
tween rates of growth in the private sector and the public sector
are very difficult to do.

For example, the benefit packages of the two sectors may be
changing. The Medicare benefit package in recent years has prob-
ably been either roughly constant or perhaps getting better. The
typical benefit package in private employer-sponsored health insur-
ance may have been moving in the other direction. So that is one
difficulty in comparison.

The demographic compositions of those in the public and in the
private program may have been changing in different ways.

There are also technical problems in comparing the data because
private health insurance spending includes, for example, spending
for people covered by Medigap plans, and you really want to think
of them in the elderly rather than the nonelderly group.

In response to concerns and questions such as yours, we at CBO
are undertaking an analysis that is trying to look at how one can
do an honest job of comparing growth rates in the public and pri-
vate sectors, and we hope to have that available in the early sum-
mer.

Mr. Stark. Could I just finish with the comparing, though, with-
in Medicare by itself? PPRC indicates that when we have people
joining a Medicare managed care plan, we are really losing money
because it tends to be the younger, healthier Medicare beneficiary.
So we are getting some cost shifting, if you will, within the Medi-
care system. They collect the same rate for the healthy, younger
people, and it gets paid out in a capitated rate every month, and
that costs us more than if we didn’t pay anything on their behalf.

Is there something we can do? Have you thought of any way to
balance that out to move toward managed care? How do we do
that? Do we pay a lot less for younger, healthier people?

Mr. VAN DE WaTER. I believe that Dr. Newhouse addresses that
issue in his prepared statement, especially where he focuses on try-
ing to develop ways of adjusting for differences in risk between peo-
ple.

Mr. Stark. Has something wondrous happened in that area in
the last couple of years? Is there a risk adjustment of protocol
which you are willing to subscribe to at this point, and could you
lend me a copy of your formula if that is it?

Mr. VAN DE WaTER. I am not aware of it at this point.


10

Veterans Affairs, and limits on Medicare's abilty to recapture cost savings achieved by
Participating heaith plans. In addition, the current risk adjustment of AAPCC-based payments
captures only a small fraction of differences in enrollees’ health care costs.

Variation in the AAPCC rates at the county level reflect local differences in both provider
input prices (for example, costs of wages and supplies) and per capita service use pattems
(the volume and intensity of care) in Medicare's fee-for-service program. In Table 2, the
variation in AAPCC rates is shown as well as the variation in those rates after adjusting for
differences in input prices across counties. The 1995 AAPCC rates ranged from a low of
$177 per month to a high of $679, while the input price-adjusted rates ranged only from $324
to $530.

Table 2, Average Medicare Risk-Plan Payment Rates, Payment Volatility, and
Enrollment Rates, by Urban and Rural Location, 1995

Input Price-

AAPCC Rate Adjusted Rate Paymant Enrolment
(standard deviation) (standard deviation) _Volatity” Rate

‘Al Counties $402 (92) $402 (46) 22% 73%
Urban Counties 428 (67) 418 (42) 2A 94
Central urban 499 (63) 443 (40) 18 168
Other urban 303 (64) 408 (37) 22 58
Rural Counties 323 (50) 357 (20) 29 08
‘Urban fringe 330 (51) 357 (18) 27 or
Other rural 317 (48) 354 21) 31 05

SOURCE: Physioan Payment Revew Commission analysis of Medicare AAPCC payment rales for 1991
through 1995 snd risk-pian eligibilty and enrollment: data from the group health plan master fle for
‘mid-1995,

* Payment volality is measured as the annual average magnitude of change (higher or lower) In # county's
payment index for 1991 through 1995 as a percentage af ts five-year average index for thal time petiod. The
‘payment index is the ratio of the county's AAPCC rate to the national average rate per benefciary,

Table 2 also presents a measure of payment volatility. These changes result from
fluctuations in service use patterns and tend to be larger for areas with small Medicare
populations. Health plans serving counties with volatile rates face greater uncertainty
regarding payment rates for future years.

‘Several methods ~ blended rates, payment floors or ceilings, and differential updates ~ have
been considered to reduce geographic variation in rates because of local service use
patterns while allowing for variation in input prices faced by plans. Volatility could be reduced
in a variety of ways as well

The Commission's report analyzes several of the legislative proposals to address problems
with the AAPCC methodology In general, these proposals would reduce geographic
variation in capitation rates moderately, primarily by raising very low rates. They also would
reduce payment rate volatility by uncoupling capitation rates from Medicare fee-for-service
‘spending.

'tis the Commission's view that mechanisms will be necessary to monitor the effect of any
‘change in the capitated payment method. For example, will lower-than- average rate
increases in areas with currently high rates lead to benefit reductions by plans and
disenrollments? Will larger-than-average rate increases attract health plan participation in
small markets? Also of interest is how differences between capitation rates and
{fee-for-service per capita costs within local markets affect the choices available to
beneficiaries, their enrollment decisions, and resulting Medicare costs.

Facilltating Beneficiary Choice. Several other issues demand attention when designing a
system offering multiple choices to Medicare beneficiaries. Among these, risk selection,
which | will discuss later, is of cntical importance. Other key policy issues considered by the
‘Commission include the number and types of plans that will be available, whether
beneficiaries will have the option to enroll at any point during the year (as under current law)
cr only during an open season period, the types of information needed fo support the choice
process, and how quality of care and plan performance might be assessed.


63

know more about and get into more because I think we could do
this wrong.

Thank you.

Chairman THOMAS. Does the gentleman from Wisconsin wish to
inquire?

Mr. KLEczKa. Thank you, Mr. Chairman.

Dr. Newhouse, in your report, you do address the old question of
medical savings accounts, and I know that was part of the Medic-
aid/Medicare proposal, which I personally had some problems with.
Would you review for the Committee what the upshot of those find-
ings were, regarding MSAs for the Medicare population?

Mr. NEWHOUSE. Yes. The Commission had some concerns that,
as proposed, the medical savings account could lead to selection
against the Medicare fee-for-service program; that is, the better
risks would opt for medical savings accounts, but the degree of that
selection is difficult to estimate and is probably going to depend on
the length of the lock-in period for the medical savings account.
The Commission recommended that there be a reasonable lock-in
period as a protection against selection.

Mr. KLECZKA. Does the Commission have a recommendation on
that lock-in period?

Mr. NEWHOUSE. The length of the lock-in period?

Mr. KLECZKA. My amendment before the Committee was 5 years,
which did not prevail, but I thought that was a reasonable period
of time.

Mr. NEWHOUSE. I am trying to recall, since I wasn’t there when
this recommendation was formulated.

Mr. KuEczKa. Dr. Young.

Dr. YOUNG. The Commission did not come up with a year rec-
ommendation, but they thought it should be substantial, and dur-
ing the discussion, the discussion focused on 4 or 5 years as an ex-
ample, but they did not come up with a specific year.

Mr. KLECczKA. Can you translate your research on the medical
savings account to the general population since, as we all know,
the MSA is part of another piece of legislation moving through
Congress, the Kassebaum-Kennedy bill? Would that same adverse
selection happen to the general population as we know or suspect
it could happen to the Medicare population?

Mr. NEWHOUSE. I don’t believe the Commission has tried to
project outside the Medicare context, and clearly, the general popu-
lation context is a different context.

Mr. KLECzKa. I think you still might get some of the same ad-
verse selection and things of that nature.

Thank you, Mr. Chairman.

Chairman THOMAS. I will just tell the gentleman briefly that the
idea of talking about extending the period of time that you have
to be enrolled or the notification for exit is one approach. Some of
us have been exploring requiring monthly or quarterly examina-
tions of the profile on the risk selection to a program like an MSA,
setting up an early warning signal system in terms of enrollments
or not enrollments since we know so little about the area. A lot of
it is speculative, but it seems to me that you can monitor who is
coming in, and to the degree they have a risk profile that fairly fits
the general population, you wouldn’t be concerned. To the degree


20

‘STATEMENT OF PAUL N. VAN DE WATER
ASSISTANT DIRECTOR FOR BUDGET ANALYSIS
CONGRESSIONAL BUDGET OFFICE

Mr. Chairman and Members of the Subcommittee, it is my pleasure to be here today
‘to discuss the financial status of the Medicare program, particularly the Hospital
Insurance (HI) trust fund.

Continuing growth in the cost of providing Medicare coverage to each
beneficiary, coupled with a steady increase in the number of beneficiaries, is eroding
the financial status of the program. Spending for Hospital Insurance and
‘Supplementary Medical Insurance (SMI) combined has increased from 0.8 percent
of gross domestic product (GDP) in 1975 to 2.5 percent in 1995. The Congressional
Budget Office (CBO) projects that if current law is not changed, Medicare spending
will increase to 3.8 percent of GDP by 2006. Program revenues, however, are not
increasing nearly as rapidly. If let unchecked, those trends will create a problem of
‘major proportions when the baby-boom generation begins to reach retirement age in
2010,

CBO'S BASELINE PROJECTIONS

In 1995, spending for Medicare benefits an3 administrative expenses totaled
‘$180 billion, including both the Hospital Insurance and Supplementary Medical
Insurance programs. Under current law, CBO projects that Medicare spending will
double by 2003 and increase 10 $468 billion by 2006 (the last year for which CBO
prepares detailed projections). That growth represents an average annual rate of
increase of 9.1 percent over the 1995-2006 period (see Table 1).

The growth in Medicare spending projected by CBO is broad based. HI
outlays, which include spending for inpatient hospital care, home health services,
skilled nursing facilities (SNF), and a share of premiums for beneficiaries enrolled
in capitated health maintenance organizations (HMOs), are projected to increase at
an average annual rate of 8.3 percent. SMI, which pays for physicians’ services, labs,
durable medical equipment, outpatient hospital services, and the remaining share of
premiums for beneficiaries enrolled in risk plans, is projected to increase at an
average annual rate of 10,3 percent.

For both HI and SMI, payments to risk-based HMOs are the fastest-growing,
‘component. Most of that growth, however, is attributable to rapidly increasing
enrollment. CBO projects that enrollment in risk plans will increase 25 percent in
1996, with the rate of growth slowing to 10 percent in 1999 and subsequent years
CBO also projects that the number of Medicare enrollees in the traditional fee-for-
service sector will actually decline over this period. Despite that decline in fee-for-
service enrollment, however, payments for home health, SNFs, and outpatient
hospital services are still projected to grow at double-digit rates. The growth in
spending for those services panly reflects successful efforts to constrain the growth
in spending for inpatient hospital services.

STATUS OF THE HOSPITAL INSURANCE TRUST FUND

‘The financial transactions of the HI and SMI programs are handled through two
separate trust funds on the books of the Treasury. The trust fund technique involves
‘earmarking specific taxes or other revenues for financing certain programs. That
Procedure helps to weigh the costs and benefits of the programs and gives
beneficiaries some assurance that their benefits will be protected

Financial soundness is not an issue for the SMI trust fund because the portion
‘of spending not financed by premiums is covered by an open-ended appropriation
from the general fund of the Treasury. The HI trust fund, however, does not have a
tap on general revenues and is facing depletion ‘ithin five years.


37

I think that is, as a matter of fact, what Chairman Thomas is
talking about. The longer that we wait, the more we let politics get
in the way of saving Medicare, the more difficult that it will be to
save Medicare, if not impossible.

Mr. VAN DE WATER. If you start now, you can deal with the prob-
lem simply through slowing the rate of growth in the program. If
you actually waited until 2001, however, then you are faced with
the choice of reducing the absolute level of spending below what it
was in the previous year, which is clearly quite a different matter.

Mr. ENSIGN. Just real briefly, in science there is something
known as error bars, and I know yours is not an exact science, but,
percentagewise, what are your errors bars on your estimates on,
say, the amount of the trust fund? It is now, what, $332 billion in
deficit in 2005? Is that the projection?

Mr. VAN DE WarTER. That is the projection.

Mr. ENSIGN. What would be your error bars on that, plus or
minus what percent?

Mr. VAN DE WaTER. We don’t know enough to have a statistical
model that would allow us to develop error bars in any sophisti-
cated way, but you can see simply by the fact that that number has
changed by $100 billion over the past 13 months that the error bar
is extremely large. As Mr. Thomas said, we hope that we are not
going to be bringing still more bad news of this sort next year at
this time, but if it has happened once, it could happen again.

Alternatively, if the rate of growth of spending were to slow even
slightly, as some people project, we could come back next year and
say that it looks as if we had a bit of a false alarm. But the error
bars are extremely large when you are talking about projections 10
years away.

Mr. CHRISTENSEN. Would the gentleman yield?

Mr. ENSIGN. Certainly.

Mr. CHRISTENSEN. In 1965, when the program was started, the
CBO or some actuary projected that in 1992, it would cost $9 bil-
lion. The error bars were a little off because it cost $175 billion. I
hope your error bars are better than your 1965 predecessor's.

Mr. VAN DE WaTER. That is one of those statements that is easily
disproved because CBO wasn’t created until 1974.

Mr. CHRISTENSEN. Whatever.

Mr. VAN DE WatEeR. I believe you are referring to the actuary’s
projections, but we face the same issues that they do. I should say
on their behalf that a lot of the change has to do with the dif-
ferences in the projected rates of inflation because, in the
midsixties, the rapid rates of inflation during the following 15
years were not expected.

Mr. CHRISTENSEN. Hopefully, you are closer.

Mr. VAN DE WATER. You are absolutely right. That is an illustra-
tion of how far things can go awry.

Mr. ENSIGN. Just real briefly on my remaining time, on these
projections and the closer that we get to the destruction day of
Medicare, just briefly your comments. You have been around here
for a while. Do you think that we can sit down in this type of a
political atmosphere? I am asking you not as a statistician now, but
more as somebody who is an observer of the process.


57

Chart 8. Hospital Payment to Cost
Ratios for Medicare,
Medicaid, and Private Payers,
1980-1993

Payment to Cost Ratio

Year Medicare Medicaid Private
1980 0.96 0.91 1.12
1981 0.97 0.93 1.12
1982 0.96 0.91 1.14
1983 0.97 0.92 1.16
1984 0.98 0.88 1.16
1985 1.01 0.90 1.16
1986 1.01 0.88 1.16
1987 0.98 0.83 1.20
1988 0.94 0.80 1.22
1989 0.91 0.76 1.22
1990 0.89 0.80 1.27
1991 0.88 0.82 1.30
1992 0.89 0.91 1.31
1993 0.89 0.93 1.29
1994 0.97 0.94 1.24

Note: Payments and costs include both inpatient and outpatient services. These
ratios cannot be used to compare payment lavels, because both the mix of
services and the cost per unit of service vary across payers. They do,
howaver, indicate the relative degrae fo which payments from each payer
cover the costs of treating its patients. Due to reporting consistencies
related to Medicaid disproportionate share payments and provider-specttic
taxes, there are significant margins of error for the numbers related to all
payers in 1992 and 1993.

SOURCE: ProPAC analysis of data trom the American Hospital Association
Annual Survey of Hospitals.


23

‘TABLE 2. BASELINE PROJECTIONS OF THE MEDICARE HOSPITAL INSURANCE TRUST FUND

(Gy fiscal year, in billions of dollars)

1995 1996 19971998 1999 2000 2001 2002 2003 2004 2005 2006
‘April 1996 Basetine
MS 127139182 164177190204 20237255
Nearest 1047222136 tSO STS, 182
Hoo 9 7 5 3 ht a9
us 20 do 4 8S
SuplusorDefit, bo -7 1322338 ABST BD 9H LID
Fund Balance 130 122 10987 $7 19-29 BH 1S -236 2332-44
December 1995 Baseline
Outgo WS 126 1384916117386 200214231248.
Tncome
Payrolitaxest 1041091521274 47S 6) 69a,
Interest ab 40 8 8 2 5 3 b 2 at oo
Total ms 720 4) ito ibe is9 i373) SST ona,
SuplisorDeficit = -T 1320278453 HA 781,
Fund Balances 1301230989 R SHB «132-208-299,
‘August 1995 Baseline
urge 412513748 t6OTBS 9924230247
Income
Payrolltaxes! $04 IS 12D 1283S AZO 1SB 167176
Interest a0 10 9 8 6 4 2 2 6 AL =i2 na
Toral a 20 a4 a9 aaa ads? 156159 na
SuplsorDeficit, SSAA SL 6TH
Fund Balance: 9 12967 SBD ot 28? a
(March 1995 Baseline
Outgo Wd 1513748617859 2423047.
Income
Payrolltaxest = 106-113-124 SEBS 1S} THE 170179
Inerest 0 49 10 2 2 6 2 b 2 = =2 nm
Total T3738 a3 a8 S356} 167 nk
SuplusorDeficit, = 32S R937 5667 80k.
Fund Balance: 1321291201058 SB GB BSS 2H

SOURCE: Congressional Busget OMce
NOTE: ma rnotavaale. Numbers may ot a pt tual eens of oudiog
1 Inclaer small moun of preams and ote nites income

2 Lesseman 5:00 mitor
Ate end fhe Fal ye



90

Medicare's health care buyer. HCFA‘s pricing of services and
controls over utilization have been carefully prescribed by
interrelated statute, regulation, and agency policy.

HCFA contracts with about 70 companies--such as Blue Cross and
Aetna--to handle claims screening and processing and to audit
providers, Each of these commercial contractors works with its
local medical community to set coverage policies and payment
controls in addition to those that have been established nationally
by HCFA. As a result, billing problems involving waste, fraud, and
abuse are handled, for the most part, at the contractor level.

This arrangement was prompted when the program was established in
the mid-1960s by concerns that the federal government, which lacked
extensive claims processing expertise and experience, would prove
incapable of providing service comparable to that of private
insurers.

‘The health care delivery system has become more complex since
Medicare began 30 years ago. In addition to physicians and
hospitals, a greater variety of providers bill Medicare, including
multilayered corporations providing clinical laboratory services,
home health care, rehabilitation therapy, and medical equipment and
supplies. Even some of Medicare's claims processing contractors
are investing in provider networks, which means that insurance
companies responsible for reviewing the appropriateness of Medicare
claims are also, through the medical networks they own, billing the
program, At a time when the volume of Medicare claims has exceeded
800 million a year, Medicare is being billed increasingly by
entrepreneurial entities rather than by medical professionals.

CATEGORIES WITH FASTEST GROWTH
RATES COINCIDE WITH THOSE LEAST
MANAGED IN MEDICARE

Although growth rates for inpatient hospital and physician
services have moderated since the 1980s, Medicare spending remains
high. Combined spending for these services amounted in 1994 to
$120 billion--nearly three-fourths of total Medicare spending. The
Sheer size of these categories means that each percentage point of
growth represents hundreds of millions of dollars.

smaller categories of services, however, have displayed much
more rapid growth through the 1990s, helping to drive total
Medicare spending to double-digit inflation. Home health agency
(HHA) and skilled nursing facility (SNF) services each grew at an
average annual rate of 28 percent from 1990 through 1996.‘

Table 1: Average Annual Growth Rates for Selected Cateaories of
Medicare Spending

Numbers in percent

Years wotal | inpatient | physician SNF HEA
1980-89 10.2 9.5 13.8 27.3 14.0
1990-96 11.3 5.9 7.0% 28.0 28.4

“Percentage is based on data through 1994.

Private insurers and employer purchasers have sought to stem such
health cost escalation by shifting from their role as passive

payers to become more prudent managers of health care costs. Some
90 percent of health plans--from fee-for-service to managed care--

“This is based on the latest CBO baseline projections for 1995 and
1996, since actual data are not yet available. From 1990 through
1994, the growth rate was even higher--over 35 percent per year.



44

further research. Other approaches to limit risk selection are also
necessary, such as the improvements in enrollment and
disenrollment policies you proposed.

I see the yellow light is on.

Chairman THomas. I will tell the gentleman that you are in
Washington, DC, and no one pays attention to the yellow light or
the red light.

Mr. NEWHOUSE. I see. I thought it was only in Boston that people
don’t pay attention to the traffic lights.

Chairman THOMAS. Don’t pay any attention to it, and you will
feel very comfortable here in the District.

Mr, NewHouse. Thank you, sir.

When ProPAC appeared before you in September 1995, we noted
the dramatic decline in hospital cost growth which began in the
early nineties. That trend of lower cost growth continues.

If you look at chart 6, from 1984, the first year of PPS through
1990, Medicare PPS operating cost per discharge increased at an
annual rate of 9 percent. Since then, it has moderated substantially
and actually turned negative in the eleventh year of prospective
payment, and as a result of that, margins have increased, as shown
on the next chart, chart 7.

The Commission considered the decline in hospital cost growth
as it developed its recommendation for fiscal year 1997 on the
amount of the update. The framework that the Commission has
used over time supports an update of about market basket minus
1.5 percentage points in fiscal year 1997.

In light of the significant changes occurring in health care deliv-
ery, including the recent gains in hospital productivity, it may be
possible to hold PPS payment rate increases to an even lower level
for the next few years, but we are concerned about the ability of
hospitals to continue to provide high quality care if updates are
constrained at this level through 2002.

It is unclear how long hospitals are going to be able to maintain
the large productivity improvements we have seen in recent years.
ProPAC plans to monitor these trends closely, and we will keep you
informed.

I think I will skip over my comments on teaching and dispropor-
tionate share hospitals.

T will note, as you have already noted, that post-acute care has
been an area of extremely rapid growth. We support your efforts
there to control spending by moving to prospective systems that are
at the episode level.

Outpatient hospital services have also grown substantially, and
we support a prospective payment system that is consistent across
all payers with volume control methods. We believe also that the
growing financial burden on enrollees who receive services in hos-
pital outpatient departments should be alleviated, should be lim-
ited to 20 percent of the Medicare-allowed payment, as in other set-
tings, and are proposing to finance that, in part, by correcting flaws
in the hospital outpatient payment formula.

That summarizes my formal statement, Mr. Chairman, and I will
be pleased to answer questions, as you would like.

[The prepared statement and attachments follow:]


85

population. Since the gentleman from California got into MSAs in
the general population, I wanted to make it clear that the risk in-
volved, if we think the risk is increasing what everybody else pays,
is much less with the under 65 population than it is for the other
Medicare beneficiaries.

\ Ms. WILENSKY. Right. In the dollar amount, it definitely is much
jess.

Mr. McCrery. Thank you.

Mrs. JOHNSON [presiding]. Mr. Cardin.

Mr. CaRDIN. Thank you, Madam Chairman.

Gail, it is very nice to have you in the Committee.

Ms. WILENSKY. Thank you.

Mr. Carbin. I was very pleased to see in the Commission’s report
the recommendation that a prudent layperson’s perspective should
be considered as one of the factors in determining when a health
plan that participates in Medicare should pay for initial screening
and stabilization, if necessary, in an emergency.

Ms. WILENSKY. That is correct.

Mr. CarpIN. I have filed that legislation here in Congress. With
the expectation that there will be more managed care options avail-
able to our seniors within Medicare, it seems to me that it becomes
even more important for us to move toward the reasonable
layperson standard for emergency care.

I was curious what precipitated this recommendation and wheth-
er you are experiencing more complaints within the Medicare popu-
lation.

Ms. WILENSKY. This is an issue that PPRC has taken up before.
As we open up choice, we do expect more of the seniors to go into
traditional managed care, as well as any of the new varieties; that
any of our concerns that have been in the past get moved forward.
It was why we were very specific about having some of the market-
ing safeguards that have been in past legislation be moved into the
future legislation. I am not sure if there has been an increase, but
it is an issue we have raised in the past.

We think the growth of managed care makes it even more impor-
tant in the future because of the larger numbers of who would be
at risk.

Mr. CarRDIN. I applaud you for that. We are finding that the
States that have adopted this standard, including my own State of
Maryland, that it has worked rather successfully. We have very
few complaints from health care plans. It seems to me that this is
one area where there is a developing national consensus that we
should use that standard within Medicare and develop it nationally
as well. So I look forward to working with you in that regard, and
hopefully, we can implement that recommendation.

If I might, let me move on to a second area where you talk about
giving the option to beneficiaries to disenroll at any time and then
having the ability to go into a plan that would offer at least a
point-of-service option or choice to the beneficiary.

My question is, should we be considering requiring all the man-
aged care programs that want to participate in Medicare, to offer
the beneficiaries at least a point-of-service option?

Ms. WILENSKY. This is not an issue that the Commission raised.


62

sions of Medicaid patients. As several States are moving toward
less restrictive eligibility in their Medicaid Programs, this is be-
coming an increasing problematic method of distributing the dis-
proportionate share payments, and because those go heavily to
teaching hospitals, there is a disproportionate share somewhere,
but not here. It is a high proportion of disproportionate share pay-
ments, 66 percent, that go to teaching hospitals. How that is re-
solved will have an effect on teaching hospitals.

Mrs. JOHNSON. Both of those are very important issues. I hope,
also, that you are going to look at the issues that are raised simply
by adapting a freeze on the number of residency positions, and the
impact of this freeze on urban hospitals or that approach on urban
hospitals and the combination of that kind of a freeze with a
change in the funding for advanced levels of certification.

I hope that as you plan your work for the next year that you will
also help us look at the issues raised in that area as well.

The last issue that I wanted to raise, and there are a number
of issues in particular that concern me in regard to reimbursement
rates for home health care and nursing homes, but rather than
going in that direction, I would like to hear you talk a little bit
about capitation rates versus premium rates.

I believe there is a strong case to be made for enabling Medicare
to pay premiums if we are going to bring managed care plans into
the Medicare system. There is a difference between premiums in
my estimation and capitation. Would you agree or disagree?

Mr. NEWHOUSE. I am sorry. I am not clear on the distinction you
are making.

Mrs. JOHNSON. Capitation tends to look at a bundle of services.
If it rises to a bundle of the total Medicare package, like the
AAPCC concept, then it becomes a premium, but if you look at the
history of payment policy in Medicaid, you can only conclude that
poor payment policy can destroy health care access and quality.

Seeing some of that happening in Medicare, I personally am not
very comfortable with our bundling services and moving toward
capitation.

In general, the economic theory that costs should not be related
to product is, I think, a poor theory, and where we have used that
in our reimbursement policy in Medicare, I think we have gotten
in trouble.

Premiums, however, are not unrelated to capitation. On the
other hand, since they are market basket-oriented for the total
bundle of services, they tend to be less dangerous, if they are hon-
estly set.

So I think this is an area where I would like a lot more informa-
tion before we move forward.

Mr. NEWHOUSE. I am not sure this answers your question, but
I would only observe on the capitation side or the at-risk side of
the program that as long as you have organizations offering zero
premium packages, you could probably infer that you are going to
avoid the Medicaid kind of problem you are worried about.

Mrs. JOHNSON. Right. At that point, the capitated payment be-
comes a premium. Below that, it doesn’t. So I realize I haven’t
asked my question very sharply, but it is an area that I need to


86

My personal view is we should not put such a requirement in
place because I think that you ought to allow plans that want to
offer only a traditional staff or group model HMO and to price ac-
cordingly between benefits and whatever premium charges they
make, to have that as an option. The only hesitation I would have
is if in any marketplace it was observed that there were no point-
of-service options available. Then I think you could decide whether
or not there ought to be a role of government to make sure that
there were some there.

I think to require that is just not the best way to make plans
available to seniors. It will cost plans money they may or may not
be able to capture, all of the costs associated with a point-of-serv-
ice. So I would not do that unless it was clear that there were mar-
kets where you just didn’t develop point-of-service.

Mr. CarDIN. There are several ways you could implement it. My
concern is that if you are going to permit disenrollment, you are
going to then find that a plan that does not offer the point-of-
service option may be at an advantage of trying to get some of its
higher risks out of their plans into other plans that offer the point-
of-service.

Whereas, if the plan offers the choice of the point-of-service op-
tion, they are staying within the same plan. It seems to me it may
promote more competition rather than less if all HMOs have to op-
erate under the same standards.

A good HMO, with its marketing strategy, is not afraid of offer-
ing the point-of-service, even if it doesn’t want its beneficiaries or
enrollees to go out of network because they will have satisfaction
within the plan. But, if they are permitted to offer without point-
of-service where someone else has the point-of-service, it may not
be fair competition.

Ms. WILENSKY. I have two points. One is, I actually think the
plans that offer point-of-service will, in fact, be in a better place in
the marketplace because I think that is actually what people are
more likely to choose. So I think that plan that didn’t do that
would find themselves at a competitive disadvantage.

I wanted to be sure it was clear that what we were saying is that
while, in general, annual enrollment was a model that the Con-
gress was at least considering and we had some comment about it,
we thought it was important that if an event occurred during the
year that changed the nature of a plan that, in that case, if it was
significant, enrollees be allowed to make a different choice. We
were not taking a position that, in general, people ought to be able
to disenroll in 30 days as they do now. That is a decision that Con-
gress has to make as to whether or not it wants to proceed.

Even if you went to an annual choice, as is prevalent in the pri-
vate sector, it will be important to have an allowance if a plan
changes in a major way which needed to be defined in regulation
as to what constituted major. At that point, you would need to
allow individuals to make a second-round choice.

Mr. CarpiN. I thank you and look forward to working with you
on these issues.

Mrs. JOHNSON. Thank you very much, Dr. Wilensky. In lookin,
over some of the parts of your testimony that you didn’t get to, |
notice that you do have some recommendations regarding Medigap


31

As more and more people join risk plans, that same absolute in-
crease represents a smaller percentage increase per year.

Mrs. JOHNSON, I appreciate that.

Mr. VAN DE WATER. By 2002, for example, on our baseline, we
project that enrollment in risk plans will be about 17 percent of the
total.

Mrs. JOHNSON. In 10 years, you are going from 9 percent of the
total to 17 percent. That is an 8-percent increase in 10 years.
Frankly, you look at what happened in the private sector and I
think you are not paying attention. We will get some other opinions
on that, but the likelihood of going from 9 to 17 percent in 10 years
strikes me as unlikely. I think it will be far greater than that. I
think you are completely underestimating the seniors’ interest.

Seniors are dying under the cost of their Medicare premium,
figuratively speaking, perhaps literally, and the cost of Medigap in-
surance. Medigap insurance is beginning to outpace a senior’s abil-
ity to buy it.

As that happens, their interest in zero premium HMOs that pro-
vide the benefits of a managed care plan or a Medigap policy is
going to be extraordinary, and I don’t think you are looking at that.

When I talk to seniors and hear what they are paying in
Medigap premiums, they cannot keep doing it, and this year, those
premiums went up in Connecticut.

Mr. ENSIGN. Would the gentlelady yield?

Mrs. JOHNSON. That makes the HMO option far more desirable.

So I would just like to help you look at your growth rates and
what you think is going to happen in this because I think you are
really significantly off.

Yes, I would be happy to yield.

Mr. ENSIGN. Real quickly, just one comment in my area, we for
several years have only had two HMOs provided for Medicare re-
cipients. We have 30 percent of our population now that is covered
in the senior population.

Mrs. JOHNSON. And 2 years ago, you had one HMO risk option
in the Boston market. Now you have four, and they are all zero
premiums, with the exception of Harvard which has gone down
from $85 to $15, but the rapidity of change doesn’t seem to be re-
flected in your numbers. I understand your numbers are honest.
They are based on your assumptions, but I certainly would like to
begin to spend some time with you on what your assumptions are
because it doesn’t check with my experience, and particularly this
issue of the rising cost of Medigap insurance driving people to look
for alternatives.

Thanks.

Chairman THOMasS. The gentlewoman’s time has expired.

Does the gentleman from Nebraska wish to inquire?

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

I thank you for your testimony. If there was ever an issue where
I thought the American people could come together on and the
Members of Congress and the administration could come together
on and work together in a bipartisan fashion, it would be solving
this whole challenge that we have before us.

I look at the numbers in your testimony. Many of us have con-
ducted townhall meetings and forums, and we have heard, but, oh,


7

First, I want to say that I hope that this Committee perseveres
on its efforts to save Medicare from bankruptcy and give seniors
choice at the same time. You were able to come up with a plan that
didn't increase copayments, didn’t increase the deductible and left
the premium at the same, and gave American citizens the same
choice you and I have as Members of Congress. I am_ wondering
why it is all right for Members of Congress and other Federal em-
ployees to have choice in their health care program, but we don’t
think seniors deserve the same kind of choice we have. I hope you
persevere in providing for that choice.

I am here to speak on seven hearings that my Subcommittee on
Human Resources and Intergovernmental Relations had on four
specific areas dealing with Medicare and Medicaid. The four areas
were on: First, criminal enforcement; second, adjustment of reim-
bursement rates; third, automated claims review; and fourth, cen-
tralized claims processing.

I first want to state for the record, we look at Medicare and Med-
icaid from the standpoint of waste, fraud, and abuse. We do not
have any legislative responsibility. That is your Committee’s re-
sponsibility, and I come with all the realization that we can expose,
but only you can come up with the solution, and I also acknowledge
that your Committee has worked many years on these issues.

I want to first compliment this Committee on dealing with crimi-
nal enforcement and inserting it in the health care reform bill that
passed this House. So one of the four areas that we were focused
in on, this Committee has already addressed. So I want to take the
next three.

Let me say to you, and this is with no disrespect to HCFA, I am
not a Member of Congress who looks to lob stones into their house.
I realize under Republicans and Democrats, this has been an agen-
cy that has had many challenges and troubles, but when we had
one of our first hearings on June 15 last year, we asked the HCFA
Administrator, Dr. Bruce Vladeck, why it appeared so difficult to
exclude dishonest providers from Medicare and why it appears so
easy for excluded providers to get right back into the Medicare pay-
ment line. He responded, and this part is the quote, “as an ob-
server in the process,” and that word just blew our minds. And
then not a quote, but basically, he said there was little he could
do to prevent the Inspector General, the Department of Justice,
from agreeing to settlements that fail to impose the exclusive rem-
edy.

J assure you, our dismay over that response was both strong and
bipartisan. He is not an observer, but I sometimes feel that HCFA
thinks they are.

Dealing first with the adjustment of reimbursement rates, HCFA
is reluctant to use existing statutory authority to adjust prices in
a timely fashion under “the inherent reasonableness authority.” I
think this Committee feels that he has the authority, therefore, he
should act, but this is the kind of thing that we found, and it just
blows our mind.

HCFA pays $144 to $211 for home blood glucose monitors, while
the monitors can be purchased for $50 at a drug or grocery store.
We are paying three to four times the rate that someone could pay
retail in a grocery store, and the estimate that this costs us in


46

hospital expenses is a response to recent financial pressure from private payers. in
addition, much of the increase in utilization is due to a recent acceleration in
admission rates tor Medicare beneficiaries, rather than pnvate patients.

Increases in the utilization of hospital and other services is responsible for much
of the growth in Medicare spending. Constraining the rise in spending is complicated
by Medicare's continued reliance on fee-for-service (FFS) payment methods. About
90 percent of Medicare beneficiaries continue to be covered by the traditional FFS
program, although enrollment in the risk-based capitation program is growing rapidly
(See Chart 3). As of April 1, 1996, there are 202 plans with risk contracts, and
applications are pending from another 50 plans.

IMPROVING MEDICARE’S CAPITATION PROGRAM

The Commission strongly supports your efforts, Mr. Chait man, to control
spending by reforming the Medicare capitation program and expanding beneficiary
choice of health plans. A major flaw in Medicare's current risk contracting program is
the wide variability and volatility in payment rates across the country (See Chart 4). In
many areas, these rates may discourage plan participation. The variabilty also results
in some Medicare beneficiaries receiving substantial extra benefits that are not
available to other beneficiaries. The Commission supports your intent to reduce this,
vanabilty. We are concerned, however. that even with the modifications you have
proposed, the rates may not accurately reflect appropriate costs of care in many
areas. We believe that, over time, the rates should better reflect the evolution of
market forces that are occurring in each area.

There is another problem with Medicare's capitation program that you are aware
of and that must be resolved if the program is to succeed. This is the lack of
adequate risk adjustment methods to modity capitation payments to better reflect
variations in Medicare enrollees’ likely need for medical care. Effective tisk adjustment
of payments is necessary to prevent unwarranted financial rewards and penalties to
plans and incentives to avoid Medicare enrollees with chronic illnesses. It is equally
important to ensure that funds are allocated fairly to meet the medical needs of
Medicare's beneficiaries enrolled in both the capitation and the fee-for-service
programs,

The need to adjust capitated payment rates to reflect the medical condition and
service needs of the enrolled population is more important for the Medicare population
than for private sector. Medicare beneficiaries are much more likely to have illnesses
and disabilities that require costly care. Further, many of these conditions are chronic
and easily identifiable

While the knowledge base in this area continues to be limited, we believe the
Secretary should obtain and use available information to make modest improvements
in risk adjustment, while vigorously supporting further research. Other approaches to
limit risk selection also are necessary, such as the improvements in enrollment and
disenroliment policies you included in your proposal.

The lack of good risk adjustment tools also may result in excess Medicare
spending for the high deductible medical savings account (MSA) option proposed by
the Congress, if healthier beneficiaries select this choice as expected. This
undesirable effect could be lessened it Medicare enrollees were required to remain in
the MSA option for several years. This option also represents a substantial departure
from traditional Medicare policies, and the Commission believes that experience with
MSAs should be monitored closely. tis likely that policy modifications will be
necessary over time to meet the needs of the Medicare program and its beneficiaries.

As | noted earlier, the Commission strongly supports your intention to offer
Medicare beneficiaries a wider choice of capitation and managed care options. The
lack of a full range of capitation plans and options and flaws in current policies all
have undoubtedly contributed to pian participation and enrollment lagging behind that
in the private sector. is important to recognize, however, that private sector
managed care has grown, in part, because many employers no longer offer the choice
of a traditional indemnity FFS plan, as Medicare does (See Chart 5). Further, many


6

As the GAO makes clear, Medicare does need to do better, but
we don’t need to destroy the fee-for-service system or turn Medi-
care from a benefit program into a voucher program where it is
every senior struggling by himself to find quality care. The trust
fund is in trouble, and it is obvious the first thing we should do
is not take more money out of the trust funds.

In your House-passed version of Kennedy-Kassebaum, you take
out $2.6 billion from the trust fund in Medicare antifraud money
over the next 6 years and spend it on medical savings accounts and
other tax breaks.

The Senate version of Kassebaum-Kennedy takes a total of $20
billion in Medicare savings over the next 10 years and spends it
on non-Medicare items.

The week before last, Speaker Gingrich proposed to take another
$36 billion out of the trust fund over 5 years to lower taxes for
wealthy seniors. You can’t save Medicare by spending the trust
fund money on new tax breaks.

This Committee has yet to meet in the last 2 years to discuss
how we are going to save Medicare. It is like sending the board of
directors for a large insurance company, which Medicare is, on a
sabbatical. If, indeed, we would pledge to take Medicare savings
and commit them to the trust fund, I think this Committee could
very quickly extend the life of that trust fund for another 4 or 5
years until we had the time to talk about the systemic changes
that must come, perhaps, in the year 2010 or 2015.

I would repeat the offer, and I can speak for the caucus, to make
$124 billion in Medicare savings and add 10 years to the life of the
Medicare Part A Trust Fund without making the radical structural
changes, which are criticized in the two Commission reports we
will hear.

So, if you are serious, we can get to work. If you want to pay for
tax cuts for the rich, Medicare will continue to stay in trouble.

Chairman THOMas. With the usual bipartisan atmosphere, the
Subcommittee begins.

It is a pleasure to have the gentleman from Connecticut, Chris
Shays, with us. He has been involved not just from his Subcommit-
tee on Human Resources, but from the Budget Committee position,
working on how we meet the needs of all Americans, and especially
seniors.

It is a pleasure to have you with us, Chris. If you have a written
statement, it will be made a part of the record without objection,
and you may proceed to inform us as you see fit.

STATEMENT OF HON. CHRISTOPHER SHAYS, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF CONNECTICUT

Mr. SHays. Thank you, Mr. Chairman. I want to thank you for
the opportunity to testify before this Committee and to say as the
Chairman on the Task Force on Medicare and Medicaid, which
looks at the macronumbers, not the micronumbers, and also as the
Chairman of the Human Resources and Intergovernmental Rela-
tions Subcommittee of the Government Reform Committee, which
oversees HHS for waste, fraud, and abuse, I come to you with some
very strong concerns.


40

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120

includes extended care

must be submitted to Congress one year in advance of implementation and within 4 years of
enactment of legistation

approved by Congress,

adjustments for new requirements (such as OSHA) or changes in technology or care practices

+ case mix adjustor that reflects the differences in cost for different types of patients

. Additional Specifications that Apply to All Phases

Exceptions: The Secretary shall provide for an exemption from, or an exception and adjustment to, the
methods for determining payment limits when extraordinary circumstances beyond the home health
agency's control including outliers and the case mix of such home health agency, create unintended
distortions in care requirements not accounted for in the case mix adjustor payment system. The
Secretary shall develop a method for monitoring expenditures when they are found to decrease total
Medicare expenditures

Quality: Any prospective payment system must ensure that home health agencies do not seek to
become more cost effective by sacrificing quality. The Secretary will ensure that the quality of services
remains high by implementing a revised survey and certification process that emphasizes patient
satisfaction and successful outcomes

Home heath agencies will be required to provide covered services to beneficiaries to the extent that
those services are determined by the beneficiary's physician to be medically necessary

‘There will be established a means for beneficiary due process to challenge care and coverage
determinations first through intemal provider grievance procedures, then through external PRO review.

There will be established a mechanism for quality review for instances of significant variation in
utilization by providers (this can address both visits and admissions)

eo)


19

spending continues to grow at rates significantly in excess of the
payroll and other tax revenues used to pay for benefits.

As the Members of this Subcommittee recognize, fixing Medi-
care’s financing problems will not be easy. Either taxes must be in-
creased, expenditures reduced, or both, and the magnitudes in-
volved are large.

To ensure solvency of the HI fund just through 2006 would re-
quire an increase in the HI payroll tax of 0.7 percentage points,
about 25 percent, starting in January. Alternatively, to provide an-
other illustration, the rate of growth of HI outlays would have to
be slowed by more than 3 percentage points, from 8 to about 4.5
percent a year. Still larger changes would be required to bring the
growth of SMI spending in line with the growth of the economy.
Postponing action would make the necessary corrections even more
severe.

That concludes my statement, Mr. Chairman. I would be happy
to take your questions.

[The prepared statement and attachments follow:]


4

cant savings out there. Even if there isn’t, it ought to be done that
way.

Mr. Suays. Mr. Chairman, let me just say, absolutely, I prac-
tically stake my life on it, but you will realize tens of billions of
dollars of savings over a significant period of time, but certainly
hundreds of millions, and the solution we think is quite simple.
There is a very definite process.

We would simply allow HHS to do an interim price and have the
interim price be the acting price until final determination, and it
may go back up to the higher price.

Chairman THOMAS. You could do as an interim, as you say, a tar-
get price and then see how close you come to the bull’s-eye.

Mr. Suays. Yes, exactly.

Chairman THOMAS. Thank you very much.

The gentleman from California.

Mr. Stark. I welcome our colleague.

Mr. Suays. Thank you, Mr. Stark.

Mr. STarK. He raises some good points. I must suggest that you
didn’t quite blend in these instances of high cost. Amgen, for in-
stance, rips us off for Epo, and we are the only purchaser. We
could, in fact, get a better deal there, or kidney dialysis medicine,
and we don’t.

It may come as a surprise to you, and I hate to say this to the
gentleman from Connecticut, but HCFA and Medicare still have
the most efficient operating ratio or the lowest overhead of any in-
surance plan in the country, about 3 percent. Also, as PPRC will
testify, this past year, HCFA was paying on average 71 percent to
doctors of that of the comparable pay by private payers, and HCFA
was paying 97 percent of the cost for hospitals as compared to pri-
vate payers who were paying 124 percent of the cost.

So, if you take the aggregate of the lowest overhead, returning
about 97 cents of every dollar paid in to patients, and the fact that
we are paying 70 percent of what private insurers are paying for
doctors and a lower rate for hospital care, you have got to come out
and say it isn’t a bad system. It could be improved, and this Com-
mittee for 8 years under a different leadership, but with the co-
operation of Mr. Gradison, lowered the amount that Medicare spent
every year in a row on a bipartisan basis. We changed formats and
we changed charging practices. It can be done.

For instance, would you join me on this? Would you support leg-
islation that I like to call most favored nation, and we could legis-
late that Medicare would be prohibited from paying a provider
more than what that provider charged its lowest charge in an area?

So that, if a hospital in Connecticut or an ophthalmologist did a
service for a private insurance company, and certainly, we have a
bigger volume than any of them, then we would be entitled to that
lowest rate. Could you be comfortable with that?

Mr. Suays. Let me just say, conceptually, first, I would never en-
dorse a bill I haven’t seen, but let me just say, | understand the
argument that we are the bull in the china shop. We are the major
purchasers. So we can almost determine price, and there has to be
a fairness.

Mr. Stark. No question.

Mr. Suays. Yes.


DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

‘Any person or organization wishing to submit a written statement for the printed record
of the hearing should submit at least six (6) copies of their statement, with their address and date
of hearing noted, by the close of business, Tuesday, May 14, 1996, to Phillip D. Moseley, Chief
of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth
House Office Building, Washington, D.C. 20515. If those filing written statements wish to have
‘their statements distributed to the press and interested public at the hearing, they may deliver
200 additional copies for this purpose to the Subcommittee of Health office, room 1136
Longworth House Office Building, atleast one hour before the hearing begins.

‘Note: All Commitee advisories and news releases are now available over the Internet at
GOPHER HOUSE.GOV, under ‘HOUSE COMMITTEE INFORMATION’.


110

STATEMENT OF MARIANNE CZOCH
PRESIDENT AND CEO
VISITING NURSE SERVICE SYSTEM
ON BEHALF OF THE
VISITING NURSE ASSOCIATIONS OF AMERICA

Introduction

Mr. Chairman, I am pleased to submit before this subcommittee the views of the Visiting
Nurse Associations of America (VNAA) on how we believe the Medicare program can take a
positive direction in the area of home health care. VNAA is the national membership
organization and economic alliance for Visiting Nurse Associations (VNAS). Our mission is to
support and advance VNAs in their individual communities. By strengthening their rote at the
community level, VNAA helps VNAs continue to add significant value to the American health
care system.

VNAs are freestanding, non-profit and Medicare-certified home care agencies. They
represent 46% of all non-profit home health agencies in the United States. Together, they serve
over eight million patients annually. Their mission is to provide innovative, cost-effective, and
high-quality health care to their patients regardless of their ability to pay. While VNAs are
united in mission, they are by nature individually unique in that they tailor services to meet the
particular needs of their communities. Governed by voluntary boards of community leaders,
they are in tune with community resources and, therefore, can respond quickly to crises.
Following the tradition of Florence Nightingale, they spearheaded some of the nation's very first
wellness programs. VNAs were well established accross the country before the tum of the
century.

For over 100 years, VNAs have helped patients overcome illness and injury, and cope
with disability and death, in the comfort of their own homes. Their history places them in the
forefront of the home health care field with their ability to meet comprehensive and specialized
needs. Today, VNAs provide basic home health services, including skilled nursing and
rehabilitative therapy. They also provide non-medical long-term care services, including social
services, personal care and housekeeping. High-tech services traditionally only provided by
hospitals, including chemotherapy, ventilator care, blood transfusions, pain management and
renal dialysis, are now routinely provided by VNAs. VNAs' specialty services include adult day
care, Meals on Wheels and hospice.

Medicare's future is significant to VNAs and their patients, VNAs serve Medicare's
oldest and sickest home health patients. Seventy percent of VNAS' received revenue is from
Medicare, which reflects VNAs' patient population, of whom over 71 percent are persons over
age 65. We are the safety net for some of the nation's most vulnerable populations, including
poor women at risk of delivering premature infants, children with congenital disabilities, and
HIV/AIDS and other terminally-ill patients. We care for those who are denied services, either
because they are not poor enough to qualify for Medicaid, because Medicare or Medicaid do not
fully cover the services they need, or because they have exhausted their private insurance.
Volunteers and charity support from philanthropic sources allow VNAS to provide unreimbursed
care. Our capacity to serve is limited only by restraints in available funding

We, therefore, are deeply concerned about recent reports that the Medicare Part A Trust
Fund, which primarily funds Medicare home health care, is in serious financial trouble.


69

the 1980s as a result of strategies such as paying discounted fees to doctors and hospitals, These
initiatives are only now being adopted in the private sector. In any case, itis Important that
‘comparisons be made on a per capita basis so that they do not reflect changes in the number of
people insured During the 1990s, the number of Medicare beneficiaries has been growing at 4
percent to 2 percent annuatly. By contrast, between 1988 and 1993, the number of people with
‘employer-provided health insurance dropped by almost 6 percent

| would also point out that itis unclear whether private sector spending has permanently slowed.
Over short periods, health spending is quite volatile so it will be some time before it is clear whether
this is the beginning of a long-term trend.

pening up the Medicare program to more innovative methods of service delivery and payment than
permitted under current law may result in a better match between program offerings and consumer
preferences. Although Medicare beneficianes have had the option of selecting managed-care plans
for more than a decade, this option has not been uniformiy available around the country and has been
chosen by only a small percentage of beneficiaries nationally.

Until recently, the only private health plans available to Medicare beneficiaries were health
maintenance organizations (HMOs). Most are paid under a full-risk contract, while a few use
cost-based contracts (Table 1). Enrolment in risk-contracting plans has more than doubled in the
past four years, but sill accounted for only 8.8 percent of beneficiaries in 1995, Combined enrolment
in risk and cost plans was 10.7 percent. Enrollment growth seems to have resulted from both rising
interest among newly eligible beneficiaries and even faster increases for those who have been in
Medicare for a year or more.

Table 1. Enrollment Rates for Medicare Risk-Contract and Cost-Contract Plans,
1991- 1998 (percentage)

‘Type of Plan 1991 1902 1983 1904 1995,
Risk-Contract Plans 38% 44% 53% 66% 8%
Cost. Contract Pians 2a 22 24 24 19
Total 59 66 1 a7 107

SOURCE: Physician Payment Review Commission analysis of year-end enrolments for each year from the
Managed Care Contract Reports published by the Office of Managed Care, Heaith Care Financing
Adminstration,

Despite Medicare beneficiaries’ growing interest in managed-care options, many of the new
delivery arrangements now proliferating in the private sector have not been introduced into
the Medicare program. While there is broad agreement about the benefits of expanding
choices, there are substantial differences of opinion about the design of such a system. in
par, these differences have arisen over how the private sector experience should be adapted
to the unique structure of the Medicare program and the populations it covers.

There are also conflicting views about what Medicare can learn from the experiences of
aggressive private purchasers. Because of its size, Medicare has substantial market power.
it given the abiity to act as an aggressive purchaser, Medicare has considerable potential to
‘gain savings for the program, improve plan performance on behalf of beneficiaries, and
influence changes in the delivery of medical care systemwide. This potential is threatening,
however, to those who fear that Medicare might take the health system in the wrong
direction

Restructuring Medicare

Setting Capitation Payments. One of the key elements of Medicare restructuring proposals
thas been the design of a payment method for private heath plans contracting with Medicare.
Currently, Medicare risk-contracting plans are paid on a capitated basis, using a method
based on adjusted average per capita costs (AAPCCs) in the Medicare fee-for-service
program. inadequacies in this methodology have contributed to uneven participation by
health plans and beneficiaries across the country

‘As you know, the existing AAPCC-based rates have a number of shortcomings: wide

‘geographic variation in payments, volatility over time, inclusion of medical education and
disproportionate share hospital payments that may not reflect use of these providers by
plans, exclusion of certain expenditures such as for care provided by the Department of


24

Chairman THOMAS. Thank you very much, Dr. Van de Water.

I just want to put some statements in a proper context so that
I can better understand or attempt to try to get people to focus on
the magnitude of what we are dealing with.

This, I believe, is the statement of my friend and colleague from
California. The Democrats repeat their offer to make $124 billion
in Medicare savings and add 10 years to the life of the Medicare
Trust Fund. My problem was, this morning, I was doing some math
on our “position,” which has been characterized by the gentleman
as more significant and robust than theirs, and I believe that the
balanced budget amendment falls short of these current numbers,
as projected by the CBO.

How in the world, then, could the gentleman from California re-
peat his offer of $124 billion in Medicare savings and add 10 years
to the life of the Medicare Trust Fund? Are you familiar with the
President’s proposal, which I assume is $124 billion?

Mr. VAN DE WATER. We certainly have done estimates on the ad-
ministration’s proposal.

Chairman THOMAS. Based upon the new numbers that you have
looked at, would that add 10 years to the Medicare Trust Fund?

Mr. VAN DE WATER. No, it would not. As my statement indicated,
under current law, we project that the HI Fund would become in-
solvent in 2001. Under the administration’s policies, as best we can
tell, CBO suspects that the fund would become insolvent in 2005.
So it would add 4 years to the life of the fund.

Chairman THOMAS. So, basically, my statement at the beginning,
and that is everybody has got to go back to the drawing board and
we do have to rethink what we have done and hopefully we could
do so in as minimal a political context as possible, because these
numbers ought to sober everyone up, and that we ought not to offer
old panaceas to the very new and real problem, I think has even
more import.

Mr. KLECzKa. Mr. Chairman, one quick question, if I might.

Chairman THOMAS. Sure.

Mr. KLEczKA. What was the extension under the Republican
plan? We have 2001 current. The 124 takes us to the year 2005.

Chairman THOMAS. Under the old numbers, we believed we were
solvent until 2010. Under the new numbers projected by CBO, we
probably would not make the 2006 date either. It will be some-
where around a 7-year effort, I believe, and that, I guess, is partly
what I tell my friend from Wisconsin is the problem that we are
faced with.

Now not only does the trust fund go broke 1 year earlier, but the
spend out after that is such that any of the proposals that were of-
fered previously really don’t make the kind of curve adjustments
necessary to put us in the ballpark, and in addition to that, I be-
lieve Dr. Van de Water said that on the part B spending, we would
require even larger changes to bring the SMI part B spending in
line with growth of the economy.

Would you elaborate on that? What did you mean by that?

Mr. VAN DE WATER. As I indicated in my statement, SMI spend-
ing is growing in our projection and in those of the administration
at even greater rates than spending on the Hospital Insurance Pro-
gram. So, simply as a matter of arithmetic, bringing that rate of


10

‘The HHS 1G has a laundry list of items for which HCFA has paid higher-than-
market reimbursement rates:

- HCFA paid $144 to $211 for home blood glucose monitors while the monitors
could be purchased for $50 at a drug or grocery store. GAO estimates that in just
‘one instance the delay in adjusting the price of home glucose monitors cost the
Medicare program $10 million over 3 years.

- HCFA, on the average, paid 174 percent more than the Department of Veterans
Affairs (VA) for oxygen concentrators. The HHS IG estimates that if Medicare
were able to pay the same price as the VA the savings could be $4.2 billion over 5
years.

- HCFA often pays many times more than the purchase price of durable medical
equipment such as hospital beds and wheelchairs. For example, Medicare pays up
to $7000 over the useful life of an electric hospital bed while the bed can be
acquired for $1000.

- Medicare pays more than the lowest suggested retail price for more than 40 types
of surgical dressings.

There is a way to cap this geyser. H.R, 3225 would require the Secretary to issue
‘an interim final regulation adjusting the price for a Medicare item or service within one
‘year of initiating the review of that item under HCFA’s inherent reasonableness authority
The net effect would be more timely adjustment of Medicare reimbursement rates.

Some suggest that the delay in adjusting reimbursement rates can be fixed
administratively by streamlining HCFA’s intemal review process. But statutory
restrictions on the use of the adjustment authority give HCFA all the excuses needed to
avoid the use this important tool. Therefore a legislative remedy is necessary to counter
HCFA's reluctance to launch the current time-consuming and expensive process,

2. Automated Claims Review

Better management of Medicare contractors could also dramatically enhance our
first line of defense against Medicare fraud and abuse. In February this year, our
subcommittee heard testimony that HCFA is failing to require Medicare Part B
contractors {0 use computer software capable of screening out claims for inappropriate or
widely overused medical services. Called “autoadjudication prepayment screens,” this
software compares the physician diagnosis to the treatment or service provided

For claims that do not meet established criteria, the software can automatically
deny payment, or suspend payment and subject the claim to further review. As a result,
savings are captured on seventy-five percent of the claims initially denied or suspended
by this technology.

For example, if the diagnosis is chronic pulmonary heart disease the software
would allow payment for an echocardiogram but not for a colonoscopy. Failure to use
this software means Part B contractors may be routinely paying claims that do not meet
the test of medically necessity.


29

MEDICARE SELECT

Medicare Select is a type of Medicare supplemental health insurance that pays in
full for supplemental benefits only if they are delivered by preferred providers. The
program began as a demonstration in 1992 and was originally limited to 15 states. The

program was made permanent and extended to all states in 1995.

Medicare Select policies have been on the market for at least two years in 12
states: Alabama, Arizona, California, Florida, Ilinois, Indiana, Kentucky, Minnesota,
Missouri, Ohio, Texas, and Wisconsin, From December 1993 to December 1995, 62
percent of the growth in enrollment in Medicare risk contracts took place in these 12
states, even though they are home to only 44 percent of Medicare enrollees. In the states
with Medicare Select, enrollment in risk contracts grew from 1.4 million to 2.2 million
over the period--an increase of 0.8 million or 57 percent. In the remaining states,
enrollment in risk contracts grew from 0.4 million to 0.9 million--an increase of 0.5

million or 114 percent.


98

APPENDIX II APPENDIX II

‘The Secretary should direct the Administrator of HCFA to

-- require that bills submitted to fiscal intermediaries itemize supplies;

-- develop and implement prepayment review policies as part of the process of
implementing any new or expanded Medicare coverage; and

+ establish procedures to prevent duplicate payments by fiscal intermediaries
and carriers.

Matter for Congressional Consideration

The fee-schedule approach to setting prices provides a good starting point for
setting appropriate Medicare prices. HCFA, however, needs greater authority and
flexibility to quickly adjust fee-schedule prices when market conditions warrant
such changes. To allow Medicare to take advantage of competitive prices, the
Congress should consider authorizing HCFA or its carriers to promptly modify
prices for durable medical equipment (DME) and other medical supplies. For this
to work effectively, however, HCFA or the carriers must devote adequate resources
to routine price monitoring.

‘The Secretary should direct the Administrator of HCFA to (1) set explicit limits
to ensure that Medicare pays no more for therapy services than would any prudent
purchaser; (2) strengthen certification requirements to better ensure that those
entities billing Medicare are accountable tor the services provided to
beneficiaries; and (3) define billable therapy service units so they relate to
the time spent with the patient.


91

actively manage costs through price competition and negotiation and
utilization monitoring techniques. By contrast, Medicare's
reimbursement policies and claims payment activities have not been
adapted to the contemporary marketplace and today's demands for
fiscal discipline in public programs.

‘SNE_AND HHA CATEGORIES
AILLUSTRATE_COST CONSEQUENCES
QF UNMANAGED HEALTH SERVICES

‘The home health and SNF spending categories, in particular,
illustrate the damaging effects of reimbursement policies that fail
to incorporate effective pricing and utilization management
techniques.

stort
of HHA Payments

In the case of home health services, for example, Medicare

vs HHAs on the basis of costs but uses few tools to determine
Whether the costs aze reasonable. Also, physicians are not
required to see the patients for whom they sign plans of care and
are not held accountable if they approve inappropriate levels of
service. Medicare does not require HHAs to provide beneficiaries
or physicians with information on the home health services billed
on their, or their patients’, behalf. The Medicare contractors,
moreover, pay 97 percent or more of home health claims without
review.’ Even when reviews are done, Medicare claims processing
contractors rarely visit HHAs or beneficiaries to verify the actual
and appropriate provision of services. One consequence of such
neglect is the escalation of visits per Medicare beneficiary, which
rose an average of about 20 percent a year from 1989 to 1994.

In July 1995 we reported that the largest privately held HHA
in the United States, which was being investigated for fraud,
obtained 95 percent of its total revenues from Medicare.‘ Current
and former employees told us medical records were altered and
forged to ensure continued or prolonged home health care visits.
Services were provided to patients who were not homebound’--for
example, one who routinely drove a vehicle to go grocery shopping
and one who walked a few blocks alone daily to eat at the local
senior citizens’ center.

‘This company also visited patients more frequently than did
most other HHAs. Although wide variation in utilization rates is a
key indicator that an inappropriate level of services is being
provided, Medicare contractors do not have the capacity to manage
home health payments by scrutinizing agencies’ claims in markets
showing utilization outliers. Our March 1996 report on home health
utilization shows huge variations in the level of services provided
across geographic areas and provider types. For example, in 1993
patients in southeastern states received on average more than twice
as many visits as patients in northwestern states. Furthermore,
diabetics received an average of about twice as many visits from
proprietary HHAs as from voluntary or government-run agencies.

‘Because of limited resources, contractors’ medical review of
claims has declined from 62 percent of all claims in fiscal year
1987 to about 3 percent in 1995.

icare: (GAO/OSI-95~
17, duly 19, 1995).

742 U.S.C. 1395£(a) requires that, to qualify for home health
services under Medicare, a beneficiary must be confined to the
home.

Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996).


1

At the request of the subcommittee, GAO surveyed 17 Medicare Part B contractors
{0 determine which contractors were using the medical necessity prepayment screens.
GAO testified their survey revealed only 7 of the contractors were utilizing this
commercially available software. For just the six groups of commonly prescribed
services reviewed, GAO estimates use of this software could save up to $200 million.

GAO concluded that “[pjroblems with controlling payments for widely overused
procedures persist because HCFA lacks an effective national strategy. Although the need
for national leadership is compelling, HCFA has not exercised its statutory authority to
take an active role in promoting more local medical policies and prepayment screens for
widely overused services.” GAO concluded HCFA should focus more of its fraud
prevention efforts on these autoadjudication prepayment screens,

Incredibly, HCFA seems to be moving in the opposite direction. While more and
more claims are flowing through the system, fewer and fewer claims are being screened.
Despite a 32.5 percent inerease in claims and a $54 billion increase in outlays between
fiscal years 1991 and 1995, medical review as a percentage of Medicare outlays declined
from .15 percent to .08 percent.

Although H.R. 3103 and S. 1028, the Health Insurance Reform Act of 1995, both
include provisions to require third-party review of Medicare claims to detect fraud, those
provisions do not fill the void noted by GAO for medical standards to guide those private
contractors in screening for fraudulent or inappropriate claims. Screening guidelines
should be established to ensure Medicare does not continue to pay claims for medically
unnecessary services.

3. Centralized Claims Processing

Ina November 16 joint hearing with the Subcommittee on Government
Management, Information and Technology, our subcommittees found HCFA is
endangering its Medicare Transaction System (MTS) project by its lack of a disciplined
management process. The lack of a disciplined management process means the MTS
project may not be able to achieve its goals of improved beneficiary service, improved
information services to beneficiaries, providers and the government and improved fraud
prevention.

HCFA’s answer to these near-term vulnerabilities is the long-term, unified claims
system under development - the Medicare Transactions System (MTS). HCFA rightly
points to the MTS system as a potentially powerful {ool to prevent and detect Medicare
fraud. Once operational, the MTS could identify suspicious billing activities by
processing claims through a single, integrated automated system. In his testimony, Dr.
Viadeck reported “a single unitary national provider file... in concert with the
implementation of MTS {would allow HCFA to] process claims in a way that can cross-
reference national claims on a real-time basis.”

However, whether the MTS will deliver the benefits of advanced data processing
to Medicare, or whether it will succumb to the delays and design flaws that so often doom
government computer acquisitions to early obsolescence, is still unclear. Nor is it clear
whether the goals, deadlines and cost estimates for the MTS are realistic. But itis clear
that HCFA is missing important near-term opportunities to enhance Medicare while
placing all its hopes on the MTSS project.


APPENDIX IT APPENDIX IT

SPECIFIC RECOMMENDATIONS MADE IN RECENT GAO REPORTS

Cited below are our recommendations and matters for congressional
consideration addressing specific reimbursement system and payment
control problems.

MEDICARE: HOME HEALTH UTILIZATION EXPANDS WHILE PROGRAM CONTROLS
DETERIORATE (GAO/HEHS-96-16, Mar. 27, 1596)

Matters for Consideration by the Congress

The emphasis of Medicare's hone health benefit program hes recently shifted from
primarily posthospital acute care to more long-term care. At the sane time,
Fcea's ability to manage the program hes been severely weakened by coverage
changes mandated by court decisions and a decrease in the funds available to
review HHAs and the care they provide. The Congress may wish to consider whether
the Medicare hone health benefit should continue to become more of a long-
care benefit or if it should be limited primarily to a posthospital acute care
benefit. The Congress should also consider providing additional resources 90
that controls against abuse of the hone health benefit can be better enforced.

FRAUD AND ABUSE: PROVIDERS TARGET MEDICARE PATIENTS IN NURSING FACILITIES
(GAO/HEHS-96-18, Jan. 24, 1556)

Recommendation to the Congress

To curtail the practice of giving providers unauthorized access to beneficiary
medical records, the Congress should authorize HHS O1G to establish monetary
Penalties that could be assessed against nursing facilities that disclos

Information from patients’ medical records not in accord with existing federal
regulation.

Recommendations to the Secretary of HS
We recommend that the Secretary of HHS direct the Administrator of HCFA to

-- gatablish, for procedure billing codes by provider or beneficiary, thresholds
for unreasonable cumulative levels or rates of increase in service:
Chergoss ano to requite Medicare carriers to implenent auconsees screens that
would suspend for further review claims exceeding those thresholds and

~ undertake demonstration projects designed to assess the relative costs and

benefits of alternative ways to reimburse nursing facilities for F
Services nd supplicas these alternatives should include such options as
unified billing by the nursing facility and some form of capped payment.

We recommend that the Secretary of HHS direct the HCFA Adninistrator to

-- develop policies and revise practices so that Medicare can (1) price services
and procedures ore conpetitively, (2) manage payments, chrough state-of: the-
art data analysis methods and use of technology, and (3) better scrutinize
the credentials of vendors seeking to bill the program;

-- examine the feasibility of allowing Medicare's commercial contractors to
adopt for their Medicare business such managed care features as preferred
provider networks, case managenent, and enhanced utilization review; and

+ seek the authority necessary from the Congress to carry out these activities.

Matters for Congressional Consideration

Given the urgency for expediting Medicare program changes that cculd lead to
substantial savings, the Congress may wish to consider directing the Secretary of
HHS to develop a proposal seeking the necessary legislative relief that would
allow Medicare to participate more fully in the competitive health care
marketplace. Such relief could include allowing the Secretary of HHS to set
maximum prices on the basis of market surveys, or, if the formal rulemaking
process is preserved, allowing the Secretary to make an interim adjustment. in
fees while the studies and rulenaking take place.

The Congress nay also wish to consider options for granting relief from the
funding declines in Medicare's anti-fraud-and-abuse activiti


102

for the test to see whether it would work or not because that
wasn’t covered, which was one-tenth of the cost of the process for
the implant itself.

So I would hope that as we look at flexible pricing that that type
of discretion would be given to HCFA to be able to look at more
cost-effective ways of dealing with costly procedures in an effort to
save money for Medicare. Is that what you are intending to do?

Ms. SHIKLES. Absolutely, and I should have said that. We think
that the program needs to have more flexibility, and you can’t run
with these very rigid rules that end up in situations like the one
you just described that are just terribly wrong.

We would agree that if you could go in and do a quick survey
of market prices, in some cases, Medicare may need to raise its
prices. I think you want to be certain that beneficiaries have access
to the very best care, and I don’t think you want Medicare to be
the lowest price payer in an area either, because you want to be
able to pay enough to buy good quality care and comprehensive
care.

Mr. CarDIN. It is sometimes very sad that you find Medicare will
overpay in some costly areas, but will not pay an adequate amount
in less costly procedures, forcing people into the more costly options
in order to get reimbursed rather than more cost-effective options.

I hope that it would be balanced, and I appreciate your response
on that. I hope that we can develop recommendations that will give
HCFA this ability and that it will use it appropriately in order to
save money for our system.

Thank you.

Ms. SHIKLES. I remember we did study, and I don’t know if it is
still true, where Medicare would pay for the cataract surgery, but
we wouldn’t pay for the glasses after the surgery.

Mr. CarDIN. Right.

Ms. SHIKLES. So you couldn’t see, then.

Mr. CaRDIN. We all hear about those in our congressional office.
We are wondering if someone is looking at this, and every once in
a while, we find they don’t have the legal authority.

Ms. SHIKLES. That is the problem.

Mr. CarDIN. I would hope that Congress would give our adminis-
trator the necessary discretion in order to have a more cost-
effective system.

you.

Mrs. JOHNSON. Thank you.

Actually, I was interested in your explanation that HCFA lost
that flexibility when we put in the national fee schedule. Now we
desperately need the ability to adjust for aberrations that develop.

I think some of the things that we are proposing already will
give us more money for both contracting for utilization review com-
panies and greater use of commercial technology to detect billing
abuses, but I think probably the utilization review is amongst the
most important.

Ms. SHIKLES. I think I would agree with that.

Mrs. JOHNSON. We have little less management experience in the
other areas, and we in the end are not going to be the ones who
develop these networks.

I appreciate your testimony. It was very, very helpful today.


118

+ amounts 19 excess of the per visit rate, up (0 a limit as defined below, may be paid tf

1) a HHA can demonstrate costs above the payment rate, and
2) quarterly reports demonstrate that total payments will not exceed the agency aggregate limit

+ the payment rates and limits are calculated initially from the base year costs and cost limits and
updated by the home heaith market basket index (o the date of implementation; they are updated
annuaily by the market basket index

+ base year for payment rates and cost limits - 1994 (using settled cost reports)

Agency Annual Aggregate Per Patient Payment Limit

+ base year for aggregate payment limit - 1995 utilization data for each agency

+ the blended annual per patient limit is based on the reasonable cost per unduplicated patient in the
base year (1994 cost per visit - updated, multiplied by 1995 utilization) and updated by the home
health market basket index; calculation based 75% on agency data & 25% on census region data, then

50% agency data & $0% census region data

+ the blended annual aggregate per patient limit is equal to the number of unduplicated patients served
in the year multiplied by the per patient blended limit,

+ census region: the 9 census region geographic areas (New England, Middle Atlantic, East North
Cemteal, West North Central, South Atlantic, East South Central. West South Central, Pacific)

Sharing Savings
HHAS that are able to keep their total payments for the year below their annual aggregate per patient cap
and below 125% of the census region cost/utilization experience shall receive a payment equal to 50%
of the difference between the total per visit payments and the agency's aggregate limit. Such payments
may not exceed 10% of an agency's aggregate Medicare per visit payments in a year.
+ Phase I in place 18 months (no fonger than 24 months)

Phase Il

Prospectively set standard per visit payment with an annual aggregate episode limit for days {-120 (as in HR
2491) and an annual aggregate per patient limit for visits after 120 days

+ contique per visit payment as in Phase |

+ an episode is 120 days; post 120 day cate is paid per visit with an annual aggregate per patient blended
Ihmit for the post 120 day period that is separate from the 1-120 day annual agyregate episode lunit



65

bate will continue until we make them available and then we ex-
amine what happens in the real world.

Thank you very much, Dr. Newhouse.

We now welcome her certainly not for her maiden voyage, but
neither is she a salty dog, the Chairman of the Physician Payment
Review Commission, Dr. Wilensky, for her statement, accompanied
by Dr. LeRoy, the Executive Director of PPRC, as we say.

aul.

STATEMENT OF GAIL R. WILENSKY, PH.D., CHAIR, PHYSICIAN
PAYMENT REVIEW COMMISSION; ACCOMPANIED BY LAUREN
B. LE ROY, PH.D., EXECUTIVE DIRECTOR, PHYSICIAN
PAYMENT REVIEW COMMISSION

Ms. WILENSKY. Thank you for not referring to me as a salty dog.
This is the first time I am here to discuss the annual report of

the Physician Payment Review Commission, and I am pleased to
Jo so.

This was a somewhat unusual year because of the high level of
interest in Medicare, and for the most part, the staff spent the
time, and the Commissioners as well, responding to issues that
were raised by Members and by your staffs, and that impacted the
structure of the report far more than it has in previous years.

What I would like to mention are some of the broad areas that
we have covered in this report, and they really divide up into three
ways. One are some of the key policy issues that were raised in the
Medicare Preservation Act and other discussions that the Congress
had.

The second was ways to strengthen traditional Medicare. After
all, as much as we may foresee growth in managed care in this
area or in medical savings accounts or any other of the choice
plans, the fact is that, for the moment, about 90 percent of Medi-
care beneficiaries are in the traditional fee-for-service program, and
so we had some suggestions about how to make that function bet-
ter.

Finally, there are some issues that relate both to the choice plans
and fee-for-service. Let me just mention a few in each of these cat-
egories.

It is very important when we talk about broadening choices of
plans, for which there was substantial support among the Commis-
sioners, that we recognize it will be urgent to set standards for
plan participation and to help seniors get information, so that they
can choose well.

We have spent some time talking about the need to set standards
that were similar, but that were not necessarily rigid. That is, we
tried to acknowledge the fact that because some of the plans were
different in their design and structure, that for example, precisely
how you go about achieving quality would have to differ.

Further, we spent some time talking about the need to make
sure that seniors have information about the process of an annual
enrollment, which would make it easier to provide information to
seniors.

We also discussed some of the issues related to what would hap-
pen if seniors were required to stay in the plan that they chose for
as long as 1 year, and some of the need to make sure that market-


a

‘The Commission's report offers some guidance on these issues, some of which were
‘addressed in the congressional conference agreement. For example, one key issue has
been the design of a more structured enrollment process. Last year, the Commission

re nded that coor ‘open enroliment was, ry to ensure that beneficiaries
have full comparative information on their options. Implementing such a policy raises
questions about the timing of open enrollment for plans and the length of time beneficiaries
must stay enrolled,

It'the Congress chooses to eliminate the current option giving beneficiaries the right to
disenroll at any time, itis the Commission's view that certain protections for beneficiaries
should be adopted. We recommend, for example, that the current policy of retroactive
isenroliment should be available to beneficiaries who fail to understand the consequences of
their choice of a private plan option. Moreover, if there is an annual lock-in requitement for
beneficiaries and if a plan makes a major change in its network of providers during the year,
beneficiaries should have the right to disenroll before year-end or to purchase services on a
special point-of-service basis for the rest of the year. The exact circumstances under which
such a policy would be invoked should be specified in regulations.

Information plays a critical role in beneficiaries’ decisionmaking about plans. The
‘Commission has considered what beneficiaries need to know about their options and the
importance of this information to an effective choice-based program. Several key steps stil
need to be addressed, including creating materials responsive to beneficiary needs,
developing effective dissemination methods, and providing enough resources to accomplish
these goals.

‘The Commission has also explored the role of marketing rules in promoting informed choice
and the working of a competitive market. Current Medicare policy permits plans to distribute
information about plan features to beneficiaries in their service area. Continuation of several
‘ules that have protected beneficiaries in the marketing process will be important if the array
of plan options is broadened. To this end, the Commission has recommended that explicit
marketing provisions included in current regulations be incorporated in any new regulations
developed for private health plans participating in Medicare. These should include
prohibitions on discriminatory marketing practices, misrepresentation of the Medicare
rogram or the plan, door-to-door solicitation, and the giving af gifts or payment to
prospective enrollees.

Risk Selection and Risk Adjustment. One of the most critical impediments to expanding
Medicare choices is the potential for some plans to attract beneficiaries with low expected
health care costs (referred to as favorable selection), while others attract those with complex
medical problems and high costs (referred to as adverse selection). Although Medicare's per
capita payment should be adjusted to refiect this risk selection, current risk adjustment
approaches capture relatively litle of any biased selection across plans.

Risk selection raises at least three problems for Medicare. First, costs increase if Medicare
pays managed-care plans more than it would have cost to treat the same enroliaes in fee for
service Second, inadequate risk adjustment hampers competition. That is, a poorty
performing health plan may survive if it attracts low-cost beneficiaries, while a good plan may
struggle if inadequately compensated for high-cost patients. Finally, inadequate risk
adjustment of capitated payments may raise barters to care for beneficiaries with high-cost
conditions,

Numerous published studies have shown that beneficiaries who joined HMOs in the 1980s,
tended to have below-average costs in the period prior fo enrollment. The Commission's
analysis of more recent data shows that this is stil true in the 1990s. New HMO enrollees’

iment costs are 20 percent to 40 percent below average, while those who disenroll
from HMOs tend to have extremely high costs. Findings based on pre-enrollment and
post-disenrollment utilization should be interpreted with caution, however, because neither
new enrollees nor new disenroliees are typical of the average HMO enrollee. Hospitalization
‘and mortalty rates for new enrollees increase significantly during HMO enrollment (even after
adjusting for the aging of the population), a phenomenon typically termed “regression toward
the mean.” The Commission plans to explore these results and their implications for
risk-adjusting payments to managed-care plans.

{In our report, we also note the progress made toward identifying those techniques that could
be used to improve the current risk adjustment of Medicare payments to plans. For example,
the Health Care Financing Administration (HCFA) has developed diagnosis-based risk


16

fraud an all-payer fraud because they say they go from State to
State and they go from government to private sector, and I think
they are very concerned about the waste in their system because
that is where they are going to make their profit.

Mr. Stark. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you very much.

Does the gentlewoman from Connecticut wish to inquire?

Mrs. JOHNSON. I just want to thank you, Congressman Shays, for
your excellent testimony, and the work that you have done as a
Member of the Budget Committee has been far more indepth than
any of your predecessors, myself included years ago when I served
on the Budget Committee. It has been very helpful to us.

I am particularly interested in item 1 of your testimony about
adjustment of reimbursement rates and HCFA’s reluctance or un-
responsiveness to use existing statutory authority.

I was absolutely appalled, and I am not sure of the statutory sit-
uation in this regard, but certainly, if the statute had been a prob-
lem, they could have come to us. They have let a number of auto-
matic, very substantial increases go into effect without comment,
a 12-percent increase for surgeons 1 year ago January and recently
a 10-percent increase for everybody across the board, at a time
when prices are declining in many of these areas. Some of those
adjustments certainly could not have been justified, and I don’t
know whether anything your Committee has done bears on that.

Mr. Suays. All I can say is that I have had the sense that a lot
of people in Congress feel that HCFA has been proactive in this
area, and our hearings and our testimony in GAO reports basically
demonstrate that they are not. They really feel that they have two
bosses. They have the taxpayers and they have the health care
community, and they are not kind of sure whether they are
overseeing the health care community or they are kind of just in
between the two.

Mrs. JOHNSON. There is more and more evidence of HCFA being
a force to drive prices up rather than drive prices down.

Some years ago, they were clearly driving prices down, but they
have not been looking at the specific level that you note, and there
are other examples that have come to my attention that are appall-
ing.

Mr. Suays. I do want to give them one out. The one out is this.
Sometimes when they are too aggressive, Members of Congress
representing a particular industry or particular interest in their
own district, then kind of hit on HCFA. So I do want to say that
they have been burned on both sides, in fairness to them, but I
think the pendulum has swung too far in favor of the providers and
not enough in favor of the taxpayer.

Mrs. JOHNSON. I think your point is well taken that they have
often met irrational and unfair criticism from Congress. On the
other hand, in an era of enormous changes, in the price structure
in health care, for them not to have come back either last year or
this with any recommendations about changing how we determine
prices indicates to me that your comment that they are reluctant
or lethargic is a pretty good description of where they are.

Thank you.


99

RELATED GAO PRODUCTS

Utilizati i rol

Deteriorate (GA0/HEHS-96-16, Mar, 27, 1996)
: i Medi

Facilities (GAO/HEHS-96-18, Jan, 24, 1996).

Exploitation by Unserupulous Providers (GAO/T-HEHS-96-7, Nov. 2,
1995).
4 ina: rateai
Billions in Unnecessary Payments (GAO/HEHS-95-210, Sept. 19, 1995).
i 2 ifr: ignifi
Reduce Health Care Fraud (GAO/AIMD-95-77, Aug. 11, 1995).
Improvements (GAO/HEHS-95-171, Aug. 8, 1995).

i : cn nt Strategi 1 Fraud
and Abuse (GAO/T-HEHS-95-227, July 31, 1995).

licars ing Pri:
Fraud and Bouse (GAO/T-HEHS-95- Sait, aoe 19, 1995).

i ‘ (GAO/OSI-95-17,
duly 19, 1995).

b Progra

Exploitation (GA0/T-HEHS-95-183, June 15, 1995).

in Nursing Homes (GAO/HEHS-95-23, Mar. 30, 1995).
High-Risk Series: Medicare Claims (GAO/HR-95-8, Feb. 1995).
A 2 iew of Clai i ili
Control Spending (GAQ/HEHS-94-42, Apr. 28, 1994).
: Fri (Gao/T-
HEHS-94~-124, Mar. 17, 1994).
(GAO/HEHS-94~35, Mar. 2, 1994).
High-Risk Series; Medicare Claims (GAO/HR-93-6, Dec. 1992).


21

In 1995, spending for Hospital Insurance exceeded by a small amount
earmarked payroll and income taxes and other income to the trust fund. CBO
Projects that outgo will exceed income by $7 billion in $996. With Hi outlays
increasing more quickly than payroll tax receipts, the gap will widen each year, and
the HT trust fund will become insolvent in 2001 (see Table 2).

COMPARISON WITH PREVIOUS PROJECTIONS

‘CBO has slightly modified its projections for Medicare over the past year. Overall,
CBO's April 1996 projections for Medicare spending are lower than its March 1995
projections. Although CBO has reduced projected levels of spending for SMI, it has
upped its projections for Hi, and the projected insolvency of the HI trust fund has
moved forward by one year,

In March of last year, CBO projected total spending of $463 billion in 2005,
‘compared with a current projection of $428 billion. Most of the decrease stems from
changes in projected spending for the SMI program. For 2005, CBO has reduced
projected SMI spending from $216 billion to $173 billion. That decline reflects two
factors: a lower base--actual 1995 spending was $2 billion fower than CBO's March
1995 projection--and a lower projected rate of growth. The lower projected rate of
growth recognizes a slowdown in SMI spending over the past several years,

In contrast, CBO's current projections of HI spending exceed those of @ year
ago. In March 1995, CBO projected Hi outlays of $247 billion in 2005; our current
projection is $255 billion. That change primarily reflects an increase in actual 1995
outlays, which came in about $1 billion higher than CBO's original projection.
Although complete information is not yet available, we attribute much of that
increase to higher-than-expected hospital admissions and a change in the mix
ofeases. Because it is not clear whether this trend will continue, we did not
significantly change our projected rates of growth in HI outlays for the out-years.

In March 1995, CBO projected that the HI trust fund would run a $3 billion
surplus in 1995 and that outlays would exceed receipts beginning in 1996. In fact,
‘HI outlays in 1995 slightly exceeded income to the trust fund, That change reflects
the higher-than-projected HI outlays noted above and lower-than-projected receipts.

CONCLUSION :

The change from a surplus to a deficit in the til trust fund in 1995 has recently
received a great deal of attention. Given the size of the HI program and the
uncertainty that surrounds even short-run projections of outlays and revenues,
however, that change provides little new information about appropriate directions for
Medicare policy. At this point, apart from total outlays, we know very little about
recent developments in health benefits paid by the HI program.

Similarly, the advance of one year in the projected date of insolvency should be
viewed not as telling us something new but confirming what we already know:
Medicare spending continues to grow at rates signficantly in excess of the payroll
and other tax revenues used to pay for benefits.

{As the Members of this Subcommittee recognize, fixing Medicare's financing
problems will not be easy. Either taxes must be increased, expenditures reduced, or
‘both, and the magnitudes involved are large. To ensure solvency of the HI trust fund
just through 2006 would require an increase in the Hil payroll tax of 0.7 percentage
points--about 25 percent--starting in January. Alternatively, the rate of growth of HI
outlays would have to be slowed by more than 3 percentage points--from 8 percent
10 about 4% percent a year. Larger changes would be required to bring the growth
‘of SMI spending in line with the growth of the economy. Postponing action would
‘make the necessary policy actions even more severe.


50

collecting new data to provide a better measure of the services hospitals provide to
the indigent.

Many of these hospitals also have teaching programs, and their financial status
is similar to that of large teaching hospitals. Due to Medicare's policies, large urban
disproportionate share hospitals generally have high PPS margins, but their average
total margin in 1994 was only 3.3 percent. With increasing numbers of people lacking
health insurance and contraction in state and local programs designed to fund care for
them, hospitals’ uncompensated care burdens will likely be higher than ever in the
‘coming years. Many of the hospitals that treat a large number of the uninsured, also
have substantial Medicare and Medicaid patient loads. ProPAC is concemed that
large reductions in DSH payments could threaten the continued ability of many of
these hospitals to serve the populations that depend on them for access to care.

POST-ACUTE CARE

Payments to post-acute care providers are the fastest growing component of
Medicare expenditures. Rehabilitation facilities, long-term care hospitals, skilled
nursing facilities, and home health agencies accounted for 22 percent of Medicare
Part A spending in 1993, up from about 7 percent in 1986. This increase in
expenditures is driven primarily by a dramatic increase in the utilization of services
(See Chart 11).

Changes in Medicare's coverage policies account for some of the increased use
of post-acute services, but Medicare payment policies also encourage growth in
utilization. Medicare's PPS provides incentives for hospitals to reduce lengths of stay
by moving patients quickly to post-acute settings. In response to these incentives,
‘many hospitals have moved into the business of furnishing post-acute care.
Medicare's policies also have encouraged the increase in the number of free-standing
facilities.

Medicare has modified its policies over the years to slow the rise in payment per
unit of service furnished. The ability to control the number of services furnished,
however, has remained elusive. The overiap of similar services across different types
of providers, the lack of a uniform definition of service units, variation in payment
policies based on type of provider, and absence of good measures to assess the
value and outcome of the services provided all have contributed to the difficulties in
correcting the problem.

The Commission strongly supports the implementation of prospective payment
systems for post-acute services. The prospective payment should cover all of the
services furnished over an appropriate episode of care. Policies that link payment for
inpatient hospital care with post-acute care should also be explored. Options to
examine include bundling acute and post-acute services for certain DRGs into a single
rate and developing DAGs that reflect the use of post-acute services.

Ultimately, it may be possible to implement a single system that could be used
across all providers. If this is not feasible, the Commission believes that the payment
methods and incentives should be consistent across all delivery sites. HCFA has
been sponsoring research and demonstration projects to develop prospective payment
systems for post-acute services for a number of years. Despite the similarity in
services furnished by these providers, these projects have not been coordinated. In
addition, much of their focus has been on per diem or per unit payment techniques.
These types of prospective payment systems will do lttie to contro! the major problem
driving expenditure increases, the growth in service volume.

'tis especially important that HCFA coordinate the development of case-mix
measures for post-acute services furnished by all types of providers, over an episode
of care. Reliable case-mix measurement systems are necessary to account for patient
characteristics that affect resource use. Further, they allow for comparisons of service
use and expenditures across beneficiaries and across providers.



95

Increased flexibility and an accompanying assured funding stream,
such as that proposed in this legislation, would significantly
enhance HCFA's ability to curb overutilization and inappropriate
billings.

Despite these initiatives, however, important tools would
still be unavailable to the Medicare program. For example, HCFA
uses profiling--that is, statistical analyses--to identify
‘outlier* providers whose practice patterns differ markedly from
those of their peers. While the private sector is free to use
profiling results to provide financial rewards or penalties (in the
form of exclusion from preferred provider networks), HCFA lacks the
authority to do so. In addition, HCFA and its contractors have no
viable statutory authority to require prior approval of select
procedures. Most important, HCFA does not have the authority
needed to promptly correct overpricing problems.

CONCLUSIONS

The problems facing Medicare confront private insurers a
well, but they are equipped with a larger and more versatile
inventory of health care management strategies than HCFA currently
has. These strategies may not be deployable in every aspect, but
in general they suggest ways to make Medicare more cost effective.
Commercial contractors, which play a key role in administering
Medicare, routinely employ management-of-care approaches in their
capacity as private insurers. If they applied similar approaches
to Medicare, the government might be able to avoid spending
substantial sums unnecessarily.

Medicare needs to redefine itself from being a passive payer
of claims to becoming a prudent manager of health care costs.
Major reimbursement reforms may be an ultimate solution, but HCFA
needs to begin immediately to manage Medicare's high-growth-rate
areas, such as home health and SNF care. Reducing services and
prices to appropriate levels is paramount before locking in
existing cost structures through payment system reforms. This will
entail several steps:

1. i

Con zsh pand-conta an
reforms would give HCFA the flexibility to hire the private

sector expertise necessary to apply the best health cost

management practices.

2. HCFA needs to target Medicare's high-cost, high-utilization

i For example, HCFA could identify, as the
focus of the demonstrations, geographic areas with particularly
high home health or SNF costs per Medicare beneficiary.

3. The Congress should give HHS the flexibility to make prompt

- For example, Medicare should be able
to reduce fee schedule prices for surgical supplies within 90
days, similar to what was customary before OBRA 1987.

We have included as appendix II a list of GAO recommendations
recently made to correct specific Medicare payment problems.

Mr. Chairman, this concludes my statement. I will be pleased
to answer any questions.

For more information on this testimony, please call Edwin P.
Stropko, Associate Director, at (202) 512-7119. Other major
contributors included Audrey Clayton, Patricia Davis, Hannah
Fein, and Barry Tice.



33

the intergenerational transfer that is going on today, I pity where
this program goes, and it is shameful that we have defenders of the
status quo that will play politics with this issue with the Repub-
lican majority.

Chairman THOMAS. Does the gentleman from Wisconsin wish to
inquire?

Mr. KLECZKA. A bipartisan solution might be doable if all parties
had input into the solution, but for one side to do it and to try to
ram it down the other side is not compromise and is not bipartisan.

Mr. CHRISTENSEN. Would the gentleman yield for a moment?

Mr. KLEczKA. Dr. Van de Water, the question I have is, you indi-
cated that the rate of growth in HI for 1996, even though it is ex-
ceeding the projection by $7 billion, is still modest? Was that your
terminology?

Mr. VAN DE WaTER. The modest differences in outlays and reve-
nues separately produce relatively large differences in the annual
surplus or deficit and the accumulated trust fund balance.

Mr. KLECzKa. In your review of the expenditures from this par-
ticular account, have you been able to decipher what the actual fac-
tors were? Is it totally utilization, or what might we be seeing
here?

Mr. VAN DE WarER. As I indicated in my statement, the detailed
data on the composition of Medicare spending with respect to type
of service or category of beneficiary only become available with a
very great lag. So, in fact, at this time, all we know is total Medi-
care spending.

Mr. KLEczKA. You don’t have any guesstimate on historical
trends or trends from 1995?

The entire statement has a lot of data on things that have oc-
curred and will occur up to 2006. I wonder if you just can’t pinpoint
something going on there that we should be aware of as we talk
about it today.

Mr. VAN DE WaTER. These things change unexpectedly, and in
ways that even the experts have a great deal of trouble explaining.

Again, referring to Dr. Newhouse’s statement, I was struck by
the chart that compares sources of growth in Medicare over recent
time periods. In the most recent time period, if I am remembering
his chart correctly, we have a substantial increase in utilization on
the part of Medicare beneficiaries. In the preceding time period,
there was very little growth in utilization, but a very large increase
caused by the so-called residual factor, which is the analyst’s word
for everything that we don’t understand.

I don’t think there is a clear understanding of what the residual
is or why it is so large in some time periods and so small in others.

Mr. KLEczKa. Thank you very much.

Thank you, Mr. Chairman.

Mr. CHRISTENSEN. Mr. Chairman, may I?

Chairman THOMAS. Certainly.

Mr. CHRISTENSEN. Mr. Kleczka, I would be more than happy to
work with you in a bipartisan fashion. You have always been good
about your openness, and this issue is a bipartisan issue that we
could work together on, but when people in your party have used
this as a political tool to target a number of freshmen, it makes one


17

Mr. SHAyYS. I thank you all because it has been a frustration for
us, and it is nice to be able to voice it to the Committee that can
really do something about it.

Chairman THoMaS. Chris, thank you once again and, notwith-
standing the mind-boggling numbers that CBO is going to present
us whenever a program is not run the way it probably should be
run, we should focus on it.

Notwithstanding the Ranking Member’s comment on his $124
billion proposal and the radicalness of a proposal I know you feel
proud of and worked on, the President’s proposal, the $124 billion,

as an unprecedented $37 billion transfer from ‘the general fund
into the part A trust fund through the failure to pay the premium
on the home health care funding.

So keep up the diligence. Our job is to make sure that the pro-
gram is run the way it ought to be run, notwithstanding the enor-
mous difficulty in finding the dollars that are currently needed ac-
cording to the CBO report.

Thank you very much.

Mr. SHays. Thank you, Mr. Chairman.

Chairman THomas. Now it is our desire to call Dr. Van de Water.
Dr. Van de Water is the Assistant Director for Budget Analysis,
Congressional Budget Office.

Thank you for appearing before us. As you know, you were not
originally scheduled to be part of this hearing, but based upon ac-
tions that you initiated, we thought it was appropriate that you
come before us to help us better understand the change in the
numbers.

I think I speak for all of us in indicating that we would have
probably preferred not to have your numbers in the first instance.
In the second instance, we need the most realistic numbers possible
because if, in fact, this is what reality looks like tomorrow, we have
to deal with it.

So, Dr. Van de Water, any written testimony you have will be
made a part of the record, and you can inform us in any way you
see fit.

STATEMENT OF PAUL N. VAN DE WATER, PH.D., ASSISTANT
DIRECTOR, BUDGET ANALYSIS, CONGRESSIONAL BUDGET
OFFICE

Mr. VAN DE WarTER. Thank you, Mr. Chairman and Members of
the Subcommittee for inviting me to be here today to discuss the
financial status of the Medicare Program, particularly that of the
Hospital Insurance Trust Fund.

In 1995, the last completed year, spending for Medicare benefits
and administrative expenses totaled $180 billion, including both
the HI and SMI, Hospital Insurance and Supplementary Medical
Insurance Programs. Under current law, CBO projects that Medi-
care spending will double by 2003 and increase to $468 billion by
2006. That growth represents an average annual rate of increase
of 9.1 percent a year over the period.

The growth in Medicare spending projected by CBO is broad-
based. Hospital insurance outlays, which include spending for inpa-
tient hospital care, home health services, skilled nursing facilities,
and a share of premiums for beneficiaries enrolled in capitated


61

Chairman THomaAS. Have you since coming on as Chairman had
any discussions?

Mr. NEWHOUSE. No. I have been Chairman for one meeting. So
we have not had any discussions of budgeting, at least not in that
session.

Chairman THOMAS. In for a dime, in for a dollar. Either in for
a dime or for an open-ended entitlement, you have got to make a
decision.

Any continued discussion? I know there was some concern in
looking at some of the proposals about the idea of dealing with an
ultimate absolute amount that might be structured in the program.

Dr. YouNG. Yes. The Commission was concerned by the contin-
ued growth and particularly the continued growth in the number
of residents that was driving that spending, and that growth and
the number of residents was coming at a time when manpower ex-
perts believed that we should not be increasing the number of resi-
dents to that amount. So they were interested in finding ways to
ensure that the Medicare contribution, but contributions overall,
met manpower needs and other needs that were in the country. At
the same time, they were very concerned about the hospital portion
as opposed to the manpower portion because that group of hos-
pitals also tended to be hospitals that treated a large number of
the uninsured and of the poor. So those two things tended to bal-
ance each other in the Commission’s discussion and deliberations.

Chairman THOMAS. Thank you.

The gentlewoman from Connecticut.

Mrs. JOHNSON. Thank you, and welcome to so many of you at the
table for the information that you have been able to provide over
the last year as we have worked to look at how to go about reform.

Whether we pass a Medicare reform bill or whether we don’t, is
the Commission planning to do some analysis of the impact of re-
ducing reimbursement rates to first certification or lowering them
for work beyond first certification, or how we would go about allo-
cating the medical education dollars as we effect a downsize in the
number of residencies that we support, so that we preserve our
major medical centers and don’t simply divide the dollars equally
of the whole system?

That whole issue of how you allocate the dollars, if you can no
longer allocate them through patients treated, is an issue that we
have not addressed, and I wonder if that kind of issue, as there are
four or five different issues in the medical education area, if you
are planning any studies in that area.

Mr. NEWHOUSE. That is a very good question. The Commission,
first of all, was concerned that the trust fund dollars not be allo-
cated strictly in accordance with Medicare activity, but with re-
spect to all teaching activity. It thought that teaching hospitals
with a high share of Medicare patients shouldn’t be better off than
a similar teaching hospital with a lower share.

This also ties up with another issue that we are going to have
to take up, I think, next year, although we won’t settle our work
plan until June, but that is the overlap between the teaching pay-
ments and the disproportionate share payments.

The disproportionate share payments are now allocated in part,
as you know, on the percentage of Medicaid admissions or admis-


114

© Not deter utilization among those who could most afford to pay a copay. According
to Stuart Altman, chair of the Prospective Payment Commission, beneficiaries with Medicare
supplemental insurance policies would have coverage for copayments

° Create a disincentive for patients to seek appropriate, less-expensive, home health
care services. Home health was exempted from the Medicare Part B coinsurance in 1972 in
order to encourage utilization of less costly services. Reimposing a coinsurance would
undermine that effort and create a financial incentive for institutional care. In addition, because
there is no Medicare copayment for the first 60 days of inpatient hospital care, a home health
copayment might result in longer hospital stays. Hospital patients can also stay within a
hospital's transitional care unit beyond the 60 days without having to pay a copayment.

VNAA is also opposed to bundling post-acute care Medicare payments into hospital
DRG payments, We believe such bundling would compromise the quality and accessibility of
home care available to beneficiaries in the following ways:

© Hospitals have limited experience in determining cost for non-hospital, post-acute care;
therefore, home care payments based on DRG rates would most likely not match
patients’ needs;

© Bundling would increase the administrative burden on home care providers by
requiring multiple payment systems for home care -- one for post-hospital patients and
one for patients entering home care from the community; home care agencies would
be required to bill any number of hospitals for the care they provide to post-hospital
patients rather than using the current single-billing system.

Finally, VNAA also urges you to oppose the Administration's proposal to limit Medicare
Part A coverage of home health to the first 100 visits following a hospital stay and shift the rest
of the benefit to Part B. VNAA opposes this “Part A to Part B shift” because it does not achieve
true savings or target over-utilization as a per-episode PPS would do.

Conclusion

NAA believes the industry's revised PPS plan will go a long way toward reigning in
over-utilization. It will preserve access to high quality home health care while providing
incentives for that care to be furnished in a cost-effective and efficient manner. By replacing cost
reimbursement, prospective pay will create an incentive to providers to help a patient reach his or
her highest level of wellness with the fewest visits and lowest cost. Quality, not quantity, will be
emphasized, which will make home health services a better value for the beneficiary, the
Medicare program, and the people of our country.


116

3-28-96
Home Care's Plan to Implement Prospective Payment
for Medicare Home Health Services

|. Home Care's Goal

The goal of the home care provider community is to manage the growth of Medicare home health expendi-
tures in a manner that promotes efficiency and preserves access to quality care for Medicare beneficiaries
This will be accomplished through the development and implementation of an episodic prospective payment
system as soon as feasible. PPS is a more efficient, cost-effective altemative for achieving reductions in the
growth of expenditures than copays or bundling of home care services. PPS can accomplish this goal with-
out jeopardizing beneficiary health and safety.

PPS will be phased in over time, resulting in an episodic prospective payment system plan that should

+ be developed cooperatively by HHS, the industry, and Congress

+ be acceptable to the industry

+ include extended care

+ be submitted to Congress one year in advance of implementation, and within 4 years of enactment of
legislation

+ be approved by Congress

+ include adjustments for new requirements (such as OSHA) or changes in technology or care practices

+ be based on a case mix adjustor that reflects the differences in cost for different types of patients

Il. An Interim PPS Plan

An interim PPS plan incorporating certain elements of the Congressional and Democratic proposals (HR
2491 and HR 2530) should be implemented commencing within 6 months of enactment and continue until it
can be converted to a pure episodic prospective payment system (Phase Il!) The interim PPS plan should ine
based on the industry's design and set forth in legislative language. The interim plan is implemented in phas-
eto provide HCFA sufficient time to collect necessary data and to develop required processes and proce
dures, Current coverage criteria for Medicare Home Health services should be maintained with no coverage
shifted to Part B.

Ill, Time Line for PPS Phase-In_

Expected
Begin Begin Begin Report to Implementation

Enact Data Phase | Phase IT Congiess on Phase tt

Legis. Collec Interim PPS Interim PPS__Episodic PPS Episodic PPS

0 2mo 6mo 24mo- 30mo —-48mo 60m


4

Chairman THOMAS. The Subcommittee will come to order.

Today is the Health Subcommittee’s meeting to discuss Medicare
policy and means we have to save the program. We will hear about
the latest projections which confirm the worst fears about the Med-
icare Part A Trust Fund.

According to the Congressional Budget Office, Medicare is in
worse shape than we thought based upon what we were told last
year, and its balance is declining more rapidly every day.

The witnesses today will give the Subcommittee advice and guid-
ance on how we can not only save Medicare, but also preserve the
program for future generations.

The CBO testimony will confirm that Medicare will be bankrupt
by fiscal year 2001, much earlier than projected by CBO and Medi-
care’s board of trustees just last year. As you know, the trustees
had projected a Medicare surplus in fiscal year 2002 of about $4.8
billion. The CBO report indicates that in that same year, 2002, the
Medicare Trust Fund will be $86 billion in deficit. That is a $91
billion swing.

Everyone, especially, I think, the President, must heed this ur-
gent new warning about Medicare’s deepening crisis. As a result of
this new report, the President’s existing Medicare proposal, the old
$124 billion offer, is out of date, as it is based on old, overly opti-
mistic projections, and it simply will not achieve the kind of results
necessary based upon CBO numbers.

The President is about to release to the Congress the 1996 report.
to the Medicare board of trustees. I believe and hope that the time
has come for the President to show true bipartisan leadership
when he releases the trustees’ report. He should update his Medi-
care proposal, in my opinion, to reflect the latest information, and
he should submit to the Congress a new plan that would save Med-
icare on the same day he releases the 1996 trustees’ report.

We will also do our part. At this hearing today, we will hear from
the Prospective Payment Assessment Commission and its new
chair. We will hear from the Physician Payment Review Commis-
sion and the General Accounting Office. Each will provide the Sub-
committee their views on recent proposals to save Medicare and
will highlight new areas we should focus on to both reduce the cost
of Medicare and reform the program to serve its beneficiaries bet-

ter.

It should be noted that the ProPAC testimony also provides new
projections on hospital Medicare margins for 1996. Despite con-
cerns raised during the development of the Medicare Preservation
Act of 1995 by the hospital industry and other detractors, the re-
port shows that hospitals on the whole are, in fact, doing extraor-
dinarily well in terms of their Medicare business.

Further, it is of particular interest that ProPAC and the GAO,
as they did in testimony last year, again, identified home health
and skilled nursing facilities services as two areas where spending
is continuing to skyrocket. Clearly, these services are important to
Medicare beneficiaries, but testimony today also points out specific
concerns in these areas which I believe we must address.

The testimony on these services is supportive of the efforts in the
Medicare Preservation Act of 1995 to rein in the cost of these serv-
ices through reform and a prospective payment system. Any true


93

Under Medicare rules for reimbursing SNFs, the problem of
overpaying for rehabilitation therapy services becomes compounded.
hat is, Medicare pays SNFs a portion of their overhead expenses,
based on the percentage of their total Medicare-related business.
The higher the Medicare-related payments to rehabilitation agencies
(or other outside contractors), the more Medicare business an SNF
can claim, and the higher the percentage of its overhead that can
be charged to the program. Further, as noted by the Prospective
Payment Assessment Commission (PROPAC), SNFs may cite high use of
ancillary services, such as therapy, to justify an exemption from
routine service cost limits, thereby increasing their payments for
routine (bed, board, nursing) services.

MEDICARE “S_RESPONSE TO
‘LONG-STANDING PROBLEMS TOO
‘SLOW TO BE EFFECTIVE

Allowing payment problems to continue unchecked results in
billions of dollars of unnecessary spending. HCFA has been aware
of the rehabilitation therapy overcharging problem since 1990. In
1993 HCFA began studies to develop averages for therapists’
salaries. Its most recent analysis is expected to be completed
some time this summer. Given the usual time involved in the
federal notification and publication requirements for changing
Medicare prices, salary equivalency guidelines--which are key to
Medicare's determination of reasonable costs--are unlikely to be
implemented before the middle of 1997 at the earliest.

This situation is consistent with HCFA's past experience of
taking years to adjust excessively high payment rates. It took
almost 3 years to lower the price of an item it paid up to 4 times
more for than consumers paid at the local drug store. HCFA can
adjust prices that are inherently unreasonable, but its authority
to do so is very limited and involves a complex set of procedures
that take a long time to complete.” Because of the time and
resources involved, HCFA only occasionally uses this process. In
an August 1995 report, we showed that Medicare paid higher than the
retail prices for 44 types of surgical dressings.” Under the
Omnibus Budget Reconciliation Act {OBRA) of 1987, however, even the
unwieldy inherent reasonableness authority to change these prices
was effectively eliminated. Before 1987, individual Medicare
contractors had the authority to adjust prices to reflect local
market conditions using a publication and notification process that
could be completed in less than 90 days. In a letter to a
congressional subcommittee, the HHS Inspector General last year
characterized as "absurd" the situation limiting HCFA's ability to
make timely adjustments to payment levels.TM

mr PR

Because of strict statutory constraints and its own burdensome
regulatory and administrative procedures, HCFA is slow to address
overpricing and overutilization problems. As we reported to the
Congress last September, many of the tools Medicare's contractors

“Report and Recommendations to the Conqress (Washington, D.C.:

PROPAC, Mar. 1, 1996).

ihe relevant statutory provision is 42 U.S.C. 1395m(a) (10) (B).
Improvements (GAO/HEHS-95-171, Aug. 8, 1995).

Muetter dated July 25, 1995, to the Chairman, Subcommittee on

Oversight and Investigations, Committee on Commerce, House of
Representatives.


38

Mr. VAN DE WATER. That is probably a question I shouldn’t even
attempt to answer, but I will cite an example.

You will remember that in the early eighties, this same situation
that is now looming in the Hospital Insurance Trust Fund was fac-
ing the Old-Age and Survivors Insurance Program. The Social Se-
curity Program itself was projected to run out of money. D-day was
looming within just a few months.

Ultimately, the so-called Greenspan commission was appointed,
and that group was able to work with both sides of the Congress
to work out a solution that was put into place. Now, of course, the
Social Security Trust Fund is projected to be solvent not for 75
years, but well beyond the projected date of insolvency of the Hos-
pital Insurance Program. So I think that that experience does pro-
vide a model of the find of solution that could be worked out.

Mr. ENSIGN. I hope you are right.

Thank you, Mr. Chairman.

Chairman THomas. Thank you very much.

Paul, I would only say that if you come back in a few months
and say that it is a false alarm, what you really mean to say is
that the indicators that you assumed were going to continue have
changed, and as a matter of fact, that would be the final request.

If you can, to the best of your ability, break out for us what you
think the cost factors are. For example, I know that the number
of new beneficiaries is a fairly constant number. The hospital ad-
missions is the one that is puzzling us; not the fact that it has gone
up, that is a fact. Why is the thing that concerns us. If we are
going to try to work together on a bipartisan basis, we need to

now what it is we are working on.

So, to the best of your ability, if there are macroeconomic indica-
tors that have shifted as well, at least we would like to know that.
So, if you would, to the best of your ability, give that to us, I would
love to have them weighted in terms of the most significant to the
least significant shift that has occurred between last year and this
year. That would give us an indication of where the gremlins are.

Mr. VAN DE WATER. Yes, Mr. Chairman.

[The following was subsequently received:]


100

Mrs. JOHNSON. Thank you very much.

I understand that toward the back of your testimony there is a
chart that lays out these private sector strategies that you believe
could be adopted to Medicare. In reviewing that chart, I wonder
which strategies HCFA could do on its own through its administra-
tive power and which ones would require changes in the law.

Ms. SHIKLES. We think that case management or most of these
except perhaps the top one on changing market prices, they could
certainly do on a demonstration authority. We have been pushing
HCFA for some time, and I know this Committee has, to move out
in a more aggressive way and certainly look at some of the activi-
ties used by private companies that are managing the indemnity
side of the insurance business.

PPRC also just did a survey of Blue Cross plans to look at the
same issue, and we believe that HCFA could have been running
demonstrations particularly in these very high-growing areas, the
postacute services on part A, testing case management, the utiliza-
tion review strategies, perhaps PPOs, and then learning from those
efforts and they could then come to this Committee and say these
worked, these didn’t work, and then ask for legislative relief.

On the first one, on changing prices quickly, they need legislative
action. Back in 1987, Medicare used to be able to, on the basis of
a quick market survey that alerted that it was paying at high rates
when everybody else was paying at lower rates, in a period of 90
days, they could change prices in that market.

After 1987, it is really not possible for Medicare to do that quick-
ly. They have to now take the whole Administrative Procedures
Act, follow it through, and it can take up to 3 or more years to
make a change on a price for a particular item.

So what we have recommended is that Congress consider at least
giving the Medicare Program authority to at least make an interim
change when it identifies really egregious prices, and then if the
Congress wanted, they could follow through on the long procedures
and issue a final rule. This would restore public confidence that
Medicare is not overpaying for a particular item.

Mrs. JOHNSON. What was the cause of that change in 1987? Was
it a change that went on for other reasons and simply affected this
price-setting capability of HCFA?

Ms. SHIKLES. Yes. I believe that at that time a set of fee sched-
ules were put in place nationally, and I think the thinking was
that you would have uniform fee schedules and that somehow that
would take care of the problem. So I don’t think it was intended
to cause the problems it subsequently did.

Mr. DowpaL. Yes, that is correct. The restriction on changing
prices came into being mainly with the fee schedules when there
was feeling that prices would be national and not modified locally.
Although there are authorized variations, the law didn’t recognize
that there could be pricing problems that arise.

On your first question, the only one of those strategies in our list
that HCFA would definitely have legal authority to do now is the
last one related to the claims processing systems and using dif-
ferent kinds of software. The rest of them, there would need to be
legislation of some kind.


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