U.S. GOVERNMENT PRINTING OFFICE

58–339 CC WASHINGTON : 1999

REHABILITATION AND LONG-TERM CARE

HOSPITALS PAYMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

APRIL 10, 1997

Serial 105–74

Printed for the use of the Committee on Ways and Means

(

ii

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

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

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

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, 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

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

XAVIER BECERRA, California

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.

iii

C O N T E N T S

Page

Advisories announcing the hearing ........................................................................ 2

WITNESSES

Health Care Financing Administration, Barbara Wynn, Acting Director, Bureau of Policy Development ................................................................................. 7

Prospective Payment Assessment Commission, Joseph P. Newhouse, Ph.D.,

Chairman; accompanied by Donald Young, M.D., Executive Director ............ 18

American Rehabilitation Association, and Schwab Rehabilitation Hospital and

Care Network, Kathleen C. Yosko ...................................................................... 55

Federation of American Health Systems, and HEALTHSOUTH Corp., Patrick

A. Foster ............................................................................................................... 44

Long Term Acute Care Hospital Association of America, and Transitional

Hospitals Corp., J. Rod Laughlin ........................................................................ 62

LoBiondo, Hon. Frank A., a Representative in Congress from the State of

New Jersey ........................................................................................................... 5

National Association of Long Term Hospitals, and Hospital for Special Care,

James F. Standish ................................................................................................ 69

SUBMISSION FOR THE RECORD

National Association of Psychiatric Health Systems, Mark Covall, statement .. 106

(1)

REHABILITATION AND LONG-TERM CARE

HOSPITALS PAYMENTS

THURSDAY, APRIL 10, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HEALTH,

Washington, DC.

The Subcommittee met, pursuant to notice, at 1:35 p.m., in room

1100, Longworth House Office Building, Hon. Bill Thomas (Chairman of the Subcommittee) presiding.

[The advisories announcing the hearing follow:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

March 21, 1997

No. HL–9

Thomas Announces Hearing on

Rehabilitation and Long-Term Care

Hospitals Payments

Congressman Bill Thomas (R–CA), Chairman, Subcommittee on Health of the

Committee on Ways and Means, today announced that the Subcommittee will hold

a hearing on rehabilitation and long-term care hospitals. The hearing will take place

on Thursday, April 10, 1997, in room 1310 Longworth House Office Building, beginning at 1:00 p.m.

In view of the limited time available to hear witnesses, oral testimony will be

heard from invited witnesses only. However, any individual or organization not

scheduled for an oral appearance may submit a written statement for consideration

by the Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

Medicare payments to rehabilitation facilities and long-term care hospitals have

increased rapidly in recent years. The Prospective Payment Assessment Commission

recently examined Medicare spending for these providers. Between 1990 and 1994,

rehabilitation facility payments increased from $1.9 billion to $3.9 billion—an average annual increase of 20 percent. Long-term care hospital payments increased from

$200 million to $800 million—an average annual increase of 41 percent.

Rehabilitation facilities and long-term care hospitals are paid under a system established in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Under

TEFRA, operating payments are based on an individual facility’s costs or a facilityspecific limit. The discharge-level limits are calculated for each individual hospital

using cost report data from the second year that the facility is in operation, updated

to the current year. Therefore, for some hospitals, their target payments are based

on cost report data that is more than a decade old. Capital payments are based on

costs.

TEFRA was intended to be an interim system until a prospective payments system (PPS) could be established. Fifteen years later, rehabilitation and long-term

care hospitals remain under this ‘‘temporary’’ system. In the Omnibus Budget Reconciliation Act of 1990, the Secretary of Health and Human Services was instructed

to reform the TEFRA system or replace it with a PPS. There has been little progress

in this area.

The President’s fiscal year 1998 budget proposal contains provisions to recalculate

all TEFRA hospital targets using more recent cost report data. A target ceiling and

floor would be imposed to reduce the variation across facilities. Capital payments

would also be reduced to 85 percent of costs, for fiscal years 1998 through 2002. In

addition, the administration would impose a moratorium on long-term care hospitals, effective upon enactment.

3

In announcing the hearing, Chairman Thomas stated: ‘‘Medicare payments for rehabilitation facilities and long-term care hospitals are spiraling upward. Notwithstanding the fact these facilities provide important services to seniors, Medicare

needs to find ways to become a more prudent purchaser.’’

FOCUS OF THE HEARING:

This hearing will focus on the President’s fiscal year 1998 budget policies related

to rehabilitation facilities and long-term care hospitals in light of the recommendations of the Prospective Payment Assessment Commission, as well as the policies

contained in the Medicare Preservation Act of 1995 and the Balanced Budget Act

of 1995.

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 and

a 3.5-inch diskette in WordPerfect or ASCII format, with their address and date of

hearing noted, by the close of business, Thursday, April 24, 1997, to A.L. Singleton,

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 on Health office, room 1136 Longworth House Office Building, at

least 1 hour before the hearing begins.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space

on legal-size paper and may not exceed a total of 10 pages including attachments. At the same

time written statements are submitted to the Committee, witnesses are now requested to submit

their statements on a 3.5-inch diskette in WordPerfect or ASCII format.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, full address, a

telephone number where the witness or the designated representative may be reached and a

topical outline or summary of the comments and recommendations in the full statement. This

supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

Note: All Committee advisories and news releases are available on the World

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–225–

1904 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availVerDate 11-SEP-98 14:37 Sep 08, 1999 Jkt 058339 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 F:58339 W&M3 PsN: W&M3
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ability of Committee materials in alternative formats) may be directed to the Committee as noted above.

***NOTICE—CHANGE IN TIME AND ROOM***

f ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

April 1, 1997

No. HL–9-Revised

Time and Room Change for Subcommittee

Hearing on Thursday, April 10, 1997,

on Rehabilitation and Long-Term

Care Hospitals Payments

Congressman Bill Thomas (R–CA), Chairman of the Subcommittee on Health,

Committee on Ways and Means, today announced that the Subcommittee hearing

on rehabilitation and long-term care hospitals payments previously scheduled for

Thursday, April 10, 1997, at 1:00 p.m., in 1310 Longworth House Office Building,

will begin instead at 1:30 p.m. in the main Committee hearing room, 1100 Longworth House Office Building.

All other details for the hearing remain the same. (See Subcommittee press release No. HL–9, dated March 21, 1997.)

number of hearings, we have examined several aspects of Medicare

Chairman THOMAS. The Subcommittee will come to order. In a

f part A spending. It is clear that in recent years the Health Care

Financing Administration has focused its effort on inpatient hospital care. For prospective payment rewards, efficient hospitals

maintain access to care for beneficiaries and contain spending. In

the meantime, Medicare payments for other part A services, including skilled nursing facilities, home health care, and PPS-exempt

hospitals have spiraled upward under antiquated payment systems.

Today we will examine two of the PPS-exempt providers: longterm care hospitals and rehabilitation facilities. While a relatively

small number of Medicare Part A Trust Fund spending, these payments have mushroomed in recent years, and our attention is focused on them in terms of the percentage increase rather than

total dollar amount.

In its March 1997 report to Congress, the Prospective Payment

Assessment Commission reported that Medicare payments to rehaVerDate 11-SEP-98 14:37 Sep 08, 1999 Jkt 058339 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 F:58339 W&M3 PsN: W&M3
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bilitation facilities increased from $1.9 billion in 1990 to $3.9 billion in 1994, an average annual increase of nearly 20 percent, or

double the overall Medicare average.

Even more alarming was the growth in payments to long-term care hospitals, which grew from $200 million to $800 million during the same period. If your math is any good, that is a rate of

more than 40 percent.

Why are these payments growing at such rapid rates? Perhaps

it is because of the incentives resulting from Medicare payment

policy made under a ‘‘temporary’’ payment system that was established in the Tax Equity and Fiscal Responsibility Act of 1982.

Clearly, the system is inadequate, and apparently the administration now agrees. However, their approach to deal with the problem, at least for a long-term care hospital, is to call for a moratorium on new providers. It is hard to believe that after 15 years the

administration, in weighing its options, has decided that the moratorium is the only option. I cannot believe that they could not implement a PPS system for long-term care hospitals or rehabilitation

facilities. Obviously, all of us need to do better than this.

Today we will hear from several witnesses regarding Medicare

payment policies for these providers. But before we hear from our

panel of experts—and that is in no way to denigrate the first witness that we have, because he has a longtime concern in this area,

and has talked to me about it—it is a pleasure to have as our first

witness the gentleman from New Jersey, Mr. LoBiondo.

If you have any written statement, it will be made a part of the

record, but you can address the Subcommittee in any way you see

fit.

STATEMENT OF HON. FRANK A. LOBIONDO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY

Mr. LOBIONDO. I will have a short presentation, Mr. Chairman,

and then we will have experts testify a little bit later on. I want

to thank you very much for the opportunity to make remarks today

on the issue of reimbursement for rehabilitation hospitals under

the Medicare Program.

I appreciate the chance to speak on this subject because I think

that the current payment system is in serious need of reform. I

would also like to take the occasion to talk about legislation that

I introduced, H.R. 585, which would reform the current imbalanced

system in favor of a more equitable approach.

As the Ways and Means Committee prepares to craft a Medicare

reform package, I would like to bring to your attention an important fact: Adopting a prospective payment system for rehabilitation

hospitals will help to slow the steady depletion of Medicare’s finances. That was the conclusion of the Medicare Board of trustees

in its 1996 annual report. The board found that the adoption of a

prospective payment system for additional types of health care providers, such as rehabilitation hospitals, could postpone the depletion of the Hospital Insurance Trust Fund beyond the year 2001.

Why is this? Mainly because the existing payment system is fiscally unbalanced and from the beginning was never intended to be

permanent. Developed under the Tax Equity and Fiscal Responsibility Act, TEFRA, of 1982, the current system encourages unreVerDate 11-SEP-98 14:37 Sep 08, 1999 Jkt 058339 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 F:58339 W&M3 PsN: W&M3
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strained growth of providers, services, and spending. Rather than

sensibly scaling payments to rehabilitation hospitals on the basis

of patient services, payments from the Medicare Trust Fund simply

increase as new hospitals and spending proliferate.

At the same time, however, TEFRA limits on payments per discharge create a serious imbalance between older and newer facilities. First, it provides inadequate payments to older hospitals—in

most cases, far less than operating costs. Second, it pays much

higher amounts, and even bonuses, to newer facilities.

And from a humanitarian standpoint, the current payment system is flawed because of a de facto bias against severely impaired

patients. By giving the same financial value to all rehabilitation

patients, TEFRA provides an incentive to treat short-stay and less

complex cases over more seriously disabled patients who require a

longer hospital stay.

As a result, this quick turnaround environment makes it very

hard for facilities to take advantage of innovations in treatment

programs. It is no exaggeration to say that many Medicare beneficiaries who need long-term rehabilitative care have been illserved by the Medicare Program that has the obligation to treat

them. TEFRA created these conditions and, if not reformed, they

will continue.

I also believe it is no small matter when the agency set up to

monitor the Medicare Program—the Prospective Payment Assessment Commission—advocates for this change in the TEFRA system.

Mr. Chairman, this is only a basic description of the problem. I

do not want to go into too many details, because you have an excellent resource who is here today to testify on this issue. Richard

Kathrins, the president of Betty Bachrach Rehabilitation Hospital

in Pomona, New Jersey, which is in my congressional district, has

been a valuable asset, both in identifying specific problems and in

formulating an effective solution.

In the time remaining, Mr. Chairman, I would just like to talk

briefly about H.R. 585, the legislation that I have introduced, that

could go a long way toward ending the misuse of money occurring

under the current rehabilitation hospital payment scheme. My bill

makes the payment system for rehabilitation hospitals more cost

effective. More importantly, it puts all hospitals—old and new—on

a level playingfield.

Specifically, my bill directs the Secretary of Health and Human

Services to implement a prospective payment system for the approximately 1,000 rehabilitation hospitals in the Nation by October

1, 1998. Under the PPS, providers are paid similar amounts for

similar services. Payments made by Medicare would be determined

by a patient’s needs. That way, the system will reward innovation,

and not penalize hospitals that treat the severely disabled. Finally,

H.R. 585 would benefit the Medicare Trust Fund by eliminating incentives for duplicate services.

Mr. Chairman, I must also note that the RAND Corp., under contract from the Health Care Financing Administration, is now completing a comprehensive study on Medicare payments to rehabilitation hospitals. In addition to emphasizing the distortions of the current system, it is my understanding that RAND has designed a

7

model prospective payment system to replace TEFRA. When the report on this study is officially released, I would like to forward

RAND’s observations to your Subcommittee for your review and

consideration. I would also like to offer any suggestions warranted

by that report to amend H.R. 585.

Once again, Mr. Chairman, thank you for the opportunity to testify on this important piece of legislation and how it might fix some

of the current problems facing rehabilitation hospitals. When it

comes to restoring Medicare’s financial health, I hope this is one

issue that we can all agree on. Thank you very much, Mr. Chairman.

Chairman THOMAS. Thank you, Frank. Thank you for your legislation, and especially your understanding and willingness to be

ready to amend it as new information emerges, in order to make

it a vehicle that would be as responsive as possible to suggested

changes in the area.

Mr. LOBIONDO. Yes. Thank you, Mr. Chairman. I look forward to

working with you.

Chairman THOMAS. My pleasure. Any questions from any of the

Members? No? Thank you very much, Frank.

Mr. LOBIONDO. Thank you.

Chairman THOMAS. Now I would call Barbara Wynn, who is the

Acting Director of the Bureau of Policy Development at the Health

Care Financing Administration; and Dr. Newhouse, Chairman of

the Prospective Payment Assessment Commission; who will be accompanied, as usual, by Dr. Young, the Executive Director of

ProPAC.

As usual, any testimony will be made a part of the record, and

you can address us in any way you see fit. Why not start from right

to left. Barbara, if you will begin? These microphones are very

unidirectional, so you need to speak directly into the microphone.

Thank you very much.

STATEMENT OF BARBARA WYNN, ACTING DIRECTOR, BUREAU

OF POLICY DEVELOPMENT, HEALTH CARE FINANCING

ADMINISTRATION

Ms. WYNN. Good afternoon. My name is Barbara Wynn, and I am

the Acting Director of the Bureau of Policy Development at the

Health Care Financing Administration.

I am pleased to be here today to speak to you about Medicare

proposals in the President’s budget for hospitals that are excluded

from the Prospective Payment System, or PPS. I would like to start

by providing some background on the types of hospitals that are

excluded from PPS and how they are paid. I will also discuss some

of the shortcomings of the current payment system, and how the

proposals in the President’s budget would improve them. Finally,

I will discuss HCFA long-term plans for reforming payments to rehabilitation and long-term care hospitals.

Since 1983, most hospitals have been paid under the inpatient

prospective payment system. However, certain types of specialty

hospitals and units are excluded from PPS because the PPS

diagnosis-related groups do not accurately explain resource costs

for these facilities.

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Excluded facilities are paid in accordance with the Tax Equity

and Fiscal Responsibility Act of 1982, or TEFRA. TEFRA facilities

include rehabilitation, psychiatric, children’s, cancer, and long-term

care hospitals, rehabilitation and psychiatric hospital distinct part

units, Christian Science sanatoria, and hospitals located outside

the 50 States and Puerto Rico.

TEFRA facilities are paid on the basis of Medicare reasonable

costs, up to a hospital’s specific limit per discharge. Each hospital

has a separate limit, or target rate, which was calculated using its

cost per discharge in a base year. Hospitals whose costs are below

their limit are entitled to bonus payments up to a maximum of 5

percent of the target amount. Hospitals whose costs exceed their

target amounts are entitled to additional Medicare payments, to

help cover their costs, up to 10 percent of the target amount. Hospitals that experience significant increase in resource-intensive patients may apply for additional Medicare exceptions payments.

There are 3,462 TEFRA facilities. Total Medicare expenditures

for these facilities in fiscal year 1994 were $6.8 billion, which is 8.4

percent of Medicare expenditures for all inpatient hospital care.

Medicare expenditures for postacute care provided in TEFRA facilities include $3.3 billion for rehabilitation hospitals and units and

$473 million for long-term care hospitals.

By comparison, Medicare fiscal year 1994 expenditures for

skilled nursing facility care were $6.9 billion, and for home-health

agency services, $12.7 billion.

In recent years, the number of patients being transferred from

PPS hospitals to TEFRA hospitals has increased rapidly. In addition, the number of discharges from TEFRA hospitals to other

postacute care settings has increased, while the average length of

stay in TEFRA facilities has declined. We believe these trends reflect a response by providers to incentives in the current payment

systems.

In addition, the payment methodology creates an incentive for

newly established hospitals to inflate base period costs in order to

create a higher target rate or limit. Thus, the existing TEFRA payment methodology may give an unfair advantage to newer facilities

with more recent base periods, in comparison to older TEFRA providers.

The President’s fiscal year 1998 budget includes a variety of proposals that would help reduce the inequities and inappropriate incentives created by the current payment system, including:

Encouraging efficient provision of services by reducing the update factor for fiscal year 1998 through 2002 to market basket

minus 1.5 percentage points, and reducing capital payments 15

percent;

Rebasing each TEFRA hospital’s target rate by using more recent

cost data, and limiting the target rates to not less than 70 percent,

but not more than 150 percent, of a national mean rate for each

type of hospital;

Reducing the incentive for new providers to maximize base-year

costs, and by limiting the cost-based reimbursement for a new

TEFRA provider to 150 percent of the national mean target

amount for that type of provider;

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Eliminating bonus payments in excess of hospitals’ costs, and

modifying the cost sharing formula for hospitals with costs in excess of that target amount;

Finally, maintaining a safety net for hospitals whose costs exceed

150 percent of their target amount, by providing after rebasing additional payments for significant changes in patient acuity.

The President’s budget also includes a moratorium on the establishment of new long-term care hospitals. Under current law, the

only characteristic these hospitals have in common is an average

length of stay greater than 25 days. Patients in different long-term

care hospitals receive services that are comparable to those provided by other types of providers, rehabilitation hospitals, psychiatric hospitals, and skilled nursing facilities that serve medically complex patients.

As we modify our payment systems for these provider types, we

believe that newly certified facilities should be classified by the nature of the services they provide, rather than by their average

length of stay. Otherwise, we will be establishing different methodologies for similar services and allowing facilities to choose the

provider classification which will result in the most favorable payment. The moratorium would not affect any current providers.

Finally, the President’s budget grants the Secretary authority to

collect patient assessment data from all providers of postacute care.

HCFA intends to use this data to continue developing an integrated payment system for postacute services. The integrated payment system for postacute services will address the rapid growth

and postacute spending, and eliminate the incentive for providers

to discharge patients from one setting to another based on payment

considerations rather than an assessment of patient needs.

Currently, payments for the same clinical services vary depending upon treatment setting, and may create incentives that inappropriately affect treatment decisions. HCFA’s long-term goal is to

develop an integrated beneficiary-centered system of paying for

postacute services that would avoid these inappropriate incentives.

The integrated system would encompass care provided in rehabilitation hospitals and units, long-term care hospitals, skilled

nursing facilities, and agencies. Service delivery would be integrated through a core patient assessment tool, which would describe patient care needs and would be used to assess patients’

functional status as they move across treatment settings. Payment

would be integrated into a single system that would apply to the

bundle of services the beneficiary needs. In addition, the integrated

system would be site-neutral to avoid creating incentives to maximize reimbursement by treating patients in inappropriate settings.

HCFA has taken some of the initial steps toward our goal of developing an integrated payment system. For example, we are currently testing prospective payment systems for skilled nursing facilities and home-health services. Ultimately, these systems may

form the basis of an integrated system. We are also looking at expanding the SNF Prospective Payment System to accommodate

similar admissions in either rehabilitation or long-term care hospitals.

Although we have already put substantial thought and effort into

the development of this system, its implementation would require

10

additional work. We still need to develop a core patient assessment

instrument that can be used across various settings, and we need

to develop a payment system that recognizes appropriate variations

in cost. In addition, we need legislative authority to implement the

system.

Our long-term goal of developing an integrated system represents

a shift in thinking from previous years. For several years, we have

been evaluating patient classification systems that could be used in

a prospective payment system for rehabilitation hospitals and

units. Most recently, we funded an evaluation by the RAND Corp.

of a system known as Functional Related Groups, or FRGs, which

is based on a coding system known as the functional independence

measure, or FIM.

RAND has prepared a draft report that finds in general that this

system provides a reasonable and feasible approach for classification of hospital inpatient rehabilitation services. However, considerable work would be needed before a prospective payment system

can be implemented. For example, the technical advisory panel on

the project questioned the reliability of the FIM and the breadth

of the cognitive measures it includes.

In addition, RAND developed their model system based on data

from a limited set of rehabilitation facilities that significantly

underrepresents rehabilitation units. RAND also identified potential coding problems that could affect the validity of the payment

system and undermine its effectiveness in controlling cost.

The limitations of the RAND FRG-based system probably could

be resolved with careful analysis, additional data collection, refinement of the FIM descriptors, and training of coders. The question

then is whether we should devote significant resources toward refining this system, rather than to the task of developing an integrated payment approach.

However, consistent with our current thinking about reforming

payments to postacute care providers, we no longer believe that developing a separate prospective payment system for rehabilitation

hospitals is the best approach. Patients needing rehabilitation services are treated in several different settings with similar outcomes.

We do not believe it would be appropriate to establish individual

payment systems for each type of setting. We are concerned that

the different systems would create payment incentives that would

influence clinical decisions about appropriate treatment settings for

some patients.

For example, if we were to implement an episodic or perdischarge prospective payment system for rehabilitation hospitals

such as the FRG system, rehabilitation facilities would have an incentive to discharge patients as quickly as possible and transfer

them to other postacute settings, in order to maximize Medicare

payments. We are also concerned that an episodic payment system,

by creating incentives for early discharge, may not encourage optimum outcomes. The RAND study found a correlation between

length of stay and improvement in functional status.

In order to avoid creating these incentives, we intend to develop

an integrated postacute payment system that is based on the patients’ service needs, rather than the type of provider furnishing

the services. We are modifying the patient assessment instrument

11

used in the SNF demonstrations so that it can also be applied to

the services furnished by rehabilitation facilities.

If we continue to develop a system that can be used across all

postacute settings, we could be ready for implementation as early

as 2002. We believe that the benefit of having a more comprehensive system where the incentives are in place to place the patient

in the most appropriate setting, rather than where the payment is

highest, is worth the additional wait. Without such a comprehensive system, the episodic prospective payment system for rehabilitation facilities will further encourage short lengths of stay and discharges to SNF facilities in order to maximize Medicare payment.

In summary, our immediate goal is to improve the tougher payment system through the reforms included in the President’s budget. Our long-term goal is to create a beneficiary-centered payment

system for postacute services that encourages appropriate care for

patients regardless of setting in which they are treated, and that

promotes quality, access, and continuity of care, while adequately

controlling costs.

Thank you. I would be pleased to answer any questions you

might have.

[The prepared statement follows:]

12

Statement of Barbara Wynn, Acting Director, Bureau of Policy

Development, Health Care Financing Administration

13

14

15

16

17

18

time you have appeared before the Subcommittee—and this is the

Chairman THOMAS. And you are welcome. I know this is the first

f Senate, not the House.

Ms. WYNN. Whoops.

Chairman THOMAS. This is the House, not the Senate. And you

get one to a customer. So, I appreciate your testimony, Ms. Wynn.

All of that was alluding to the fact that your staff should have

briefed you that a 20-minute presentation was probably a little

longer than we normally get when we have all of the written material and we have already read it.

Ms. WYNN. I appreciate your patience.

Chairman THOMAS. No, it is good stuff. I did read it.

Dr. Newhouse.

STATEMENT OF JOSEPH P. NEWHOUSE, PH.D., CHAIRMAN,

PROSPECTIVE PAYMENT ASSESSMENT COMMISSION; ACCOMPANIED BY DONALD YOUNG, M.D., EXECUTIVE DIRECTOR, PROSPECTIVE PAYMENT ASSESSMENT COMMISSION

Mr. NEWHOUSE. Thank you very much, Mr. Chairman. It is a

pleasure to be back with you and the other Members of the Subcommittee today. You have my written testimony, and I would just

like to walk through four issues.

The first issue is our recommendation on the update factor; and

two issues that Ms. Wynn mentioned, the new provider exemption

and the so-called FIM–FRG system for rehabilitation hospitals; and

finally, the long-term hospital-within-a-hospital issue.

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On the update factor, our recommendation is the market basket

minus eight-tenths of a percent. And that is pretty straightforward.

The eight-tenths of a percent is our estimate of the error in the

prior market basket. And we did not see any scientific and technological advance factor coming in; so hence, market basket minus

the error from last year.

On the three policy issues, we agree with the administration on

the incentive effects, or the poor incentive effects, of the new provider exemption. For new hospitals, the rate going forward is based

on the second year of operation. You get your cost in the first 2

years of operation, so there is no incentive to hold down the cost.

And in fact, there is an incentive to keep the costs high because

your rates going forward are going to be based on that. So our recommendation is to simply do away with the new provider exemption. The Commission came out a bit differently than the administration there.

That leaves open the issue of how to handle the new providers.

We would take some kind of average, or average within subgroup

adjusted for local payment factors like wage indices.

The second issue is the functional independence measure, function related group system that Ms. Wynn mentioned, as well, the

classification system for the rehabilitation hospitals and units. We

came out a little differently than the administration here. We think

this is just about ready for prime time, and we would urge going

forward with it as soon as possible.

We are not opposed to—in fact, we favor—the integrated system,

for the reasons that Ms. Wynn mentioned. But the real issue is

what to do until we have the integrated system—that is, for the

next 5 years, say—with the rehabilitation hospitals and the units.

There are a thousand of these institutions. In 1994 they got $4 billion, as you noted in the opening statement, and the increase has

been pretty rapid.

We think that the TEFRA system has gone on much longer than

anyone anticipated in 1983, as you said in your opening statement.

And this seems like a pretty good shot for getting a chunk of it out

from under cost-based reimbursement and into prospective payment. And while there are some disadvantages to it that were mentioned, we think the advantages outweigh the disadvantages, and

we would do it as an interim step until we have the integrated system.

Finally, the long-term hospital-within-a-hospital issue: As you

know, we have separate payments for distinct part rehabilitation

units and distinct part psychiatric units. We do not have separate

payments for distinct part long-term units. And the reason is that

the prospective payment system by its nature is supposed to average patients with different lengths of stay within the same DRG.

And we are concerned that if there were separate, in effect,

units, which is how we see long-term hospitals within hospitals,

that it would potentially violate the integrity of the overall prospective payment system for acute care hospitals. So we have urged

that the issue of long-term hospitals within hospitals be intensively

monitored, with a concern about whether it may be gamed against

the Federal Government.

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So thank you, Mr. Chairman. Those are the three issues I wanted to emphasize. And I will be happy to answer your questions.

[The prepared statement and attachments follow:]

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Statement of Joseph P. Newhouse, Ph.D., Chairman, Prospective Payment

Assessment Commission

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Ms. Wynn, I guess our concerns are fairly similar. As I outlined,

Chairman THOMAS. Thank you very much.

f you have got something that was created as a temporary patch in

1983. Your testimony is basically talking about a perfect system

somewhere in the future, and I am looking at the time that has already expired.

And I notice in your testimony you say, ‘‘Hospitals that experience significant increase in patient acuity may also apply for additional Medicare exception payments.’’ And it is my understanding

that the period covering 1990–1992 produced 68 percent of the rehabilitation facilities receiving exceptions of payments totaling $4.8

million. And during the same period, 58 percent of long-term care

hospitals received exceptions payments totaling 5.1.

I believe those are accurate figures, and both of them represent

significantly over a majority of the facilities. Now, at what point do

you decide that making exception payments for more than a majority of the facilities means you have got to move to something else?

Ms. WYNN. Right. Your point is well taken. And the reason, in

essence, that we are proposing the rebasing is to remove the disparity between the costs and payments that currently exist for the

TEFRA providers. And we really see that as an interim measure,

so that the target amounts will reflect what their current cost and

case mix is.

Chairman THOMAS. But if you are making that many exceptions

to try to keep TEFRA afloat in an equitable way, and it is a temporary structure, why does the administration not buy Dr.

Newhouse’s recommendation of taking the other structure—which

clearly has some flaws—which has got to be at least as good as a

60-plus percent exception procedure on a yearly basis?

Ms. WYNN. Well, the rebasing will eliminate the need for most

exceptions.

Chairman THOMAS. And when are we going to do this?

Ms. WYNN. This would be in fiscal year 1998.

Chairman THOMAS. Right.

Ms. WYNN. So, it would be accomplished immediately.

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Chairman THOMAS. And it will not have any additional need for

adjustments clear through 2002 when your new program is online?

Ms. WYNN. We would still retain a safety net for any hospital

whose costs ended up being 150 percent above its rebased target

amount. And there may be a need for an adjustment at that point.

Chairman THOMAS. So, you are just going to take a deep breath

and continue doing what you have been doing, is basically what

you are saying?

Ms. WYNN. Well, we see it as an interim measure. And I think

the problem that we have is that, both on policy grounds and on

more practical grounds, we do not feel that moving to the FRG system would be appropriate. And in terms of policy, there were really

three things that are guiding that.

One is the belief that with patients receiving similar services

payments should be similar for those patients; and that there is a

significant overlap in the services that are received by patients in

skilled nursing facilities, rehabilitation facilities.

Chairman THOMAS. That’s right. And this is to be utilized on an

interim basis?

Ms. WYNN. Right. The rebased system.

Chairman THOMAS. I Understand. And we have had TEFRA for

15 years?

Ms. WYNN. Yes, we have.

Chairman THOMAS. And that has basically been an interim basis,

a temporary structure?

Ms. WYNN. That was the original intent of it, that it would be

an interim system.

Chairman THOMAS. What has HCFA been doing for 15 years, if

what you have now offered is an interim adjustment for the interim proposal?

Ms. WYNN. We have been really hampered by the lack of an adequate case mix classification system. And it is not just a matter of

having the resources to develop the classification system itself. It

is a matter of whether there is data available on which that system

could be developed.

Chairman THOMAS. And you are now confident that you have

that data?

Ms. WYNN. Well, the system that the FRGs are based on, the

FIM, is a proprietary system operated by UDS out of the University of Buffalo. We had to enter into a protracted negotiation process with them to get access to that data. The data base itself represents only 30 percent of the rehabilitation hospitals.

Chairman THOMAS. I understand.

Ms. WYNN. That means that 70 percent are not using that data

base.

Chairman THOMAS. I understand, but what have you been doing

for 15 years, is the point. In your testimony you talk about a core

patient assessment instrument. Obviously, that is what you are

talking about. You are going to need that. When is it going to be

developed?

Ms. WYNN. We believe that we could develop a core patient assessment instrument that would work across all of the postacute

settings within about 18 months.

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Chairman THOMAS. I am trying to understand the event that occurred between 1982 and your testimony that now allows you to

tell me that you can get a measurement instrument in 18 months

that we have not been able to do for the past 15 years.

Ms. WYNN. Well, the reason why we can is that we have explicit

statutory authority to collect the patient assessment data for

skilled nursing facilities.

Chairman THOMAS. Oh, it has been Congress’ fault? Is that it?

Over the 15 years we were not able to communicate that you needed statutory approval to collect this data? When was that given to

you?

Ms. WYNN. The skilled nursing facility, the MDS? I am not sure

what year.

Chairman THOMAS. The statutory power to collect the data you

were unable to collect before.

Ms. WYNN. We do not have statutory authority yet——

Chairman THOMAS. Oh.

Ms. WYNN [continuing]. To collect the data to develop a functional status measure for rehabilitation hospitals, to actually implement and collect that data. That is why we are using this proprietary system.

Chairman THOMAS. Are you asking for statutory power now to do

it?

Ms. WYNN. Yes, we are.

Chairman THOMAS. What is the vehicle for that request?

Ms. WYNN. It is in the President’s budget proposal.

Chairman THOMAS. And in the first term of the Clinton administration, was it in the budget?

Ms. WYNN. I am not certain, sir.

Chairman THOMAS. I am trying to figure out when in this 15-

year period we discovered that we needed the statutory authority

to collect the data to get off of a temporary system which has been

patched up in a way that 68 percent of the units are affected by

an exception rule.

My problem is, I am listening to Dr. Newhouse and the Commission that advises us, and they are telling us we have got a plan

that is a whole lot better than what we have currently. And our

decision will be: Do we go ahead with the plan that is better than

what we have got; or do we accept your argument that if we buy

a moratorium within 18 months you are going to generate a data

base that has not been there because of statutory limitations for 15

years, and by the year 2002 you will be able to provide us with a

complete structure for reorganizing?

Ms. WYNN. It is possible that we may actually be able to expand

the SNF PPS system to include rehabilitation and long-term care

hospitals prior to 2002. That may prove to be something that would

be feasible. The entire integrated system that would also include

home-health agencies, we do not believe would be possible before

2002.

Chairman THOMAS. Dr. Newhouse, what are the advantages if

we take this other position, if we tell you that you have told us

your system is imperfect, theirs is imperfect. What are the advantages? Is it that we are going to get a perfect system? And in terms

of the time that we have already spent, is it worth the hope that

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in fact it will occur over the next 18 months to 5 years, if it has

not in the last 15?

I think it is a loaded question, but I tried not to make it that

way.

Mr. NEWHOUSE. Right. I understand. HCFA has been laboring

under resource constraints in developing these systems. But we are

where we are, and we are confronted with what is the best way to

go forward from here. I think the problem is well recognized, that

the TEFRA system gives inappropriate incentives. There is no perfect answer here that is perfectly defensible. Our judgment on the

Commission was that it was better to, as I said, move toward prospective payment for this part of the TEFRA set of hospitals and

units.

Chairman THOMAS. Let me ask you a question that I know you

have not anticipated. And you may not have the answer to it, and

I obviously do not, and that is why I am asking it.

In terms of the exception process—and I understand, using a

temporary device you have got to make adjustments. But I would

think at some point, as the exceptions grew—unless from day one

the exceptions were more than 50 percent on the payment adjustments—at some point you saw those exceptions growing. When

they reached 68 percent in terms of utilizing the exception procedure to try to create some degree of fairness within the payment

structure, somebody should have said, ‘‘Maybe we need to revisit

this.’’

Has it been a rapid growth of exceptions, do we know? Are any

of your resource people aware? Has this crept up in the last couple

of years, or are we looking at a pretty steady increase? Or did they

jump up in 1985–1987, and we have simply done this as an adjustment on the TEFRA mechanism for 15 or 12 or 10 years?

Mr. NEWHOUSE. I do not know.

Ms. WYNN. The general trend was for a number of years an increasing number of exceptions as hospitals were under their

TEFRA limits longer. Now, however, a number of hospitals that

had needed exceptions, no longer do, because they have made such

significant reductions in their average length of stay. So that now

I believe more than half of rehabilitation hospitals are earning

bonus payments.

Chairman THOMAS. Well, that is another problem. You got into

bonus payments versus exceptions, so you are going to win either

way.

Dr. Young, I know that you want to answer this question. And

it is more appropriate, I think, that you should answer it, because

it comes out of the March 1997 report which, although Dr.

Newhouse deals with a lot, you are kind of primarily responsible

for.

I have noticed in the testimony from the Long Term Acute Care

Hospital Association there are several statements from your March

1997 report, and I want to know if you want to clarify whether

your Commission’s findings indicate that there are two distinct

groups of long-term care hospitals and that Medicare payments

should reflect this division. Is that what your report said?

Dr. YOUNG. No, it is not. We do not believe that there is evidence

that there are two distinct groups of hospitals. There is a continVerDate 11-SEP-98 14:37 Sep 08, 1999 Jkt 058339 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 F:58339 W&M3 PsN: W&M3
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uum when you array long-term care hospitals. At one end of that

continuum are low-cost hospitals; at the other end of that continuum are high-cost hospitals.

Even for the high-cost hospitals, however, we cannot separate out

how much of that cost is due to differences in their mix of patients,

and how much of those higher costs are due to Medicare’s very generous policies in regard to setting the base-year payment rate.

Chairman THOMAS. Thank you. Does the gentleman from Maryland wish to inquire?

Mr. CARDIN. Thank you, Mr. Chairman. Let me concur with your

comment that it is difficult to understand why we have not made

more progress to moving toward a PPS system for the TEFRA facilities. Dr. Newhouse, if I understand your testimony, you believe

we can make more rapid progress than Ms. Wynn believes.

I would just encourage us to try to move this process more rapidly. I think 15 years is too long, and that we could start to make

progress more quickly than HCFA has indicated today, and I look

forward to trying to develop some recommendations to reflect that.

Part of my concern is that when you have two different systems,

when you have a person who is admitted to a hospital under a

DRG system, that there is a tendency to early discharge that person into a TEFRA hospital and double dip and get that paid on a

cost basis. Whereas, if we had a prospective payment system we

could deal with that issue in a more straightforward way.

I am curious as to whether the double dipping problem is a serious problem? Have either ProPAC or HCFA reviewed whether

there are opportunities here for cost savings by avoiding that type

of an abuse of the system.

Mr. NEWHOUSE. Well, we know that as the acute care length of

stay has fallen in recent years, the postacute side, of which the

rehabs are part, has exploded. And while there may be some other

reasons for that, like chronic long-term use on home health, we

think there is a link between the financial incentives under prospective payment and the piece that is kind of out from under prospective payment; namely, the excluded hospitals and units.

Mr. CARDIN. Is there an effective way to deal with that under the

current system where you have one cost-based and the other under

PPS?

Mr. NEWHOUSE. Well, you have put your finger on the problem.

And we think, as we have testified before, there are some shortterm fixes you can do on the SNF and home health side, although

they will not solve this underlying macroincentive-type problem.

But this is why we would at least try to make the playingfield

more level between the acute hospital and the rehabilitation hospital and unit as soon as possible.

Now, that still leaves unbalanced now the acute care hospital

and the rehabilitation side with the rest of the postacute side, as

Ms. Wynn mentioned. And that is the down side of doing that. But

we are going to have some imbalance here. The issue is kind of

where to have the scales tip.

Ms. WYNN. If I may, I think that that is one of our areas of concern, that the prospective payment system that we are developing

for SNFs is on a per diem basis, and the FRG system is on a per

discharge basis. So the same kind of incentive that you currently

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have from the acute care hospital to discharge patients rapidly to

postacute services—We may well be creating the same kind of incentive to rapidly discharge patients from a rehabilitation hospital

to a skilled nursing facility or for home health.

We are already seeing some indications of that. For instance, between 1992 and 1994 there was a 27-percent increase in the number of cases that had both rehabilitation care and home-health

care, and there was a 48-percent increase in the number of cases

that had both rehabilitation hospital care and SNF care. The number of cases that had only rehabilitation hospital care, however, remained absolutely flat.

Mr. CARDIN. And I appreciate the difficulty of dealing with this

under the current system. It is just another reason to move along

faster to a system that would be more accountable.

Ms. WYNN. Right. One other point on that, if I may. There is still

considerable practical implementation work that would be needed

for the FRG system. Seventy percent of the hospitals——

Mr. CARDIN. I hate to interrupt, but you are always going to have

those problems. I understand that. Any time we implement a new

system, there are going to be problems, and we are going to have

to make adjustments after we have gotten into it because we do not

get it perfectly right the first time.

Ms. WYNN. Right.

Mr. CARDIN. We understand that.

Ms. WYNN. Right.

Mr. CARDIN. But unless we start to move more aggressively, we

will be talking about this 5 years from now, or 10 years from now.

Ms. WYNN. Right. This implementation is not actually in refining

the payment system; it is coding and training the coders to use the

coding system. In other words, it is a system that has not been

used by 70 percent of the hospitals, and their coders would need

to be trained, tested for reliability, and we would have to have

some confidence in that.

Mr. CARDIN. Thank you, Mr. Chairman.

Chairman THOMAS. The gentleman is welcome.

Does the gentleman from Louisiana wish to inquire?

Mr. MCCRERY. Thank you, Mr. Chairman. It is frustrating, not

only because it has been so long and we keep waiting for some formula to come out that will solve all these problems. But it is also

frustrating because I know, after not very much experience with

the Medicare system on this Subcommittee, that whatever we come

up with will have problems; it will not be perfect; it will not work

for very long; and we will have to come up with some new formula

or some adjustments to it. I mean, it is like trying to squeeze the

balloon and keep it from getting out of shape as you squeeze it.

Ms. WYNN. That is right.

Mr. MCCRERY. It is just impossible. So, I am just frustrated. I

have made this speech before, and a lot of you already know what

I am thinking. I am just frustrated with the whole system of trying

to manage a marketplace, when we are actually creating the marketplace. And I am not smart enough to do that, and I do not think

government—I do not think anybody on this Subcommittee and the

whole Congress put together is smart enough to do that. And we

just keep creating things for entrepreneurs to chase, and that does

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not necessarily reflect what the market is, or should be. So, I am

just frustrated with the whole thing.

I am willing to keep playing this game but, dad-gum, I am getting tired of it. And I long for the day when maybe we will say,

‘‘Enough is enough,’’ and maybe we will go to some sort of defined

contribution plan where there is really an opportunity for the market to take shape as consumers want it to take shape, and not as

we policymakers direct it. Thank you.

Chairman THOMAS. If anyone feels moved, they can respond. My

assumption is, that was a statement.

Mr. MCCRERY. It does not require a response.

Chairman THOMAS. It does not require one.

Does the gentlewoman from Connecticut wish to inquire?

Mrs. JOHNSON. Thank you, Mr. Chairman. And thank you for

your testimony.

The Chairman has mentioned that more than 60 percent of the

institutions, I gather, get exception payments. And what I want to

ask—and you may not know this. But you know, in 1989, we very,

very clearly gave the Secretary the power to make adjustments, to

rebase, to adjust up or down. So, there should not really be this

enormous disparity in the system, given the authority that the Secretary has to decrease target rates or assign new more representative base periods to hospitals whose payments are distorted.

But given that disparity, do you know any instances in which the

Secretary has exercised this authority? And if not, why not?

Ms. WYNN. We did implement that authority through regulation,

and we have done some rebasing. I do not have the numbers that

I can provide.

Mrs. JOHNSON. So you have implemented that authority. I would

be interested in knowing, did you implement it in 1989? I do not

expect you can answer this right now, Ms. Wynn, but did you implement it in 1989? And how many instances of rebasing or in how

many instances have you exercised that? Presumably, if you had

not exercised that then the more than 60 percent figure would be

higher.

Ms. WYNN. I will need to provide that for the record.

Mrs. JOHNSON. Yes, I would like to do that, because I know I

have worked with a hospital that has tried for years to get rebased,

is based on 1982, but has managed to keep up with technology. Not

only does the current system provide incentives for new hospitals

to come in at the highest possible cost, but we give them reimbursements; and then we look at these institutions that were based

earlier and we expect them somehow to meet the current quality

standard of care without any accommodation in their rate for the

cost of the new technology and so on and so forth.

Ms. WYNN. Right. That is why the President’s proposal is for an

across-the-board rebasing, to address both of those issues.

Mrs. JOHNSON. Yes, the problem is, of course, that when you

have institutions that were based in 1982, to suggest that in 1997

we now wait until 2002 to fix this is really not tolerable. Because

the costs already are really so distorted and the problems are so

severe we are in danger of losing our lowest cost high-quality facilities, because the newer facilities at high reimbursement rates are

going to find it easier to survive in the competitive environment of

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the future, buying new technology and stuff, than the lower based

facilities.

So, I really do want to know in how many instances the administration has exercised the authority that it was given, and whether

the changes have been down or up in terms of rates, and what effect this has had on the overall picture.

[The following was subsequently received:]

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authority that they have had and their, I think, probably, failure

Mrs. JOHNSON. Dr. Newhouse, do you have any comment on this

f to exercise it?

Mr. NEWHOUSE. I am not aware of the data on how frequently

it has been exercised. You clearly have the data on the amount of

exceptions.

Chairman THOMAS. Will the gentlewoman yield?

Mrs. JOHNSON. Yes.

Chairman THOMAS. I have got in front of me the Omnibus Budget Reconciliation Act of 1990 conference report. And it says:

Development of national prospective payment rates for current non-PPS hospitals:

The Secretary of Health and Human Services shall develop a proposal to modify the

current system under which hospitals that are not Subsection D, non-PPS, of the

Social Security Act receive payment,

and so forth.

Reports: By not later than April 1, 1992, the Secretary shall submit the proposal

developed under Paragraph One to the Committee on Finance of the Senate and the

Committee on Ways and Means of the House of Representatives.

And just to go on:

By not later than June 1, 1992, the Prospective Payment Assessment Commission

shall submit an analysis of, and comments on, the proposal developed under Paragraph One to the same Committees.

Dr. Newhouse, I want to know why you have not submitted the

analysis, nor commented on the proposal that was required of the

Secretary by April 1, 1992.

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Mr. NEWHOUSE. Well, Dr. Young informs me that I was not on

the Commission then; that we did submit a report, but not an analysis of the administration’s report, the Secretary’s report.

Chairman THOMAS. Well, why did you not submit an analysis?

You are required under the Omnibus Budget Reconciliation Act.

Mr. NEWHOUSE. We did not receive such a report.

Chairman THOMAS. What happened, Ms. Wynn?

Ms. WYNN. We essentially have been unable to develop the system because we have not been able to establish appropriate case

mix classification systems, and the research, for instance, that we

have——

Chairman THOMAS. Did you submit a report that said you could

not live up to what was asked of you under this?

Ms. WYNN. No, sir, we did not.

Chairman THOMAS. So you just ignored the ‘‘shall’’ for Congress

requiring you to tell us what you were going to do?

Ms. WYNN. No, we did not——

Chairman THOMAS. Ignore it?

Ms. WYNN [continuing]. Ignore it at all. We undertook a number

of efforts to explore the possibility. We entered into the negotiation,

for instance, to use the FIM instrument, and have funded the

RAND study as far as the rehabilitation services are concerned.

Chairman THOMAS. OK. I just want to underscore for the gentlewoman from Connecticut in her point that it was not just 1982.

And Congress did not ignore it. We in fact directly requested something. And Dr. Newhouse has talked about something. And HCFA’s

basic position is, ‘‘It is not as good as we would like, so we are not

going to use it, and will continue this discussion for a number of

years. In 2002, we are going to have it done.’’

I just wanted to underscore that, because obviously previous

Congresses were concerned about TEFRA and how long we were

going to operate under it, as well. I thank the gentlewoman.

Mrs. JOHNSON. Yes. I certainly have been very concerned about

our inability to rebase a hospital based in 1982, and our unwillingness to look at that, and our willingness to continue—if you look

at the data provided in Dr. Newhouse’s testimony, spending for

rehab and long-term care hospitals has grown by leaps and bounds,

95 percent between 1990 and 1993 alone. And you would think

there might have been more attention to low-cost hospitals, and

that might have been taken into account when giving out new

rates.

But I want to just ask one last question of both of you. First of

all, there is a school of thought that says that in long-term care we

should distinguish between acute care and chronic care, in the

long-term care hospitals. Having toured a lot of these hospitals, it

seems to me this is logical. Where do you come down in that debate? And second, where do you stand on the new now quite welldeveloped NALTH rebasing proposal?

Mr. NEWHOUSE. Our view is that, as Dr. Young said earlier,

there are low-cost long-term hospitals and high-cost long-term hospitals, but we do not think we can satisfactorily distinguish between them, in terms of a payment system.

Mrs. JOHNSON. It does seem to me that, for instance, ventilator

patients: a clear grouping. Why can we not deal with that? Other

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long-term care—there are some categories of long-term care that

reflect acuity and intensity that it seems to me we ought to be able

to identify. I am afraid that by going down the sort of simple path

of one reimbursement rate we are going to end up disadvantaging

the more costly patient.

Mr. NEWHOUSE. Well, there is that danger, Mrs. Johnson. That

is very right. My concern I think would be how you do this for part

of the patient mix at the hospital, and how then one would have,

in effect, a TEFRA-type system, if I understand where you are

headed, for just part of the patients in the hospital. Now, I frankly

have not thought that one through.

Mrs. JOHNSON. Well, I have not either, and I am certainly not

an expert in this area. That is why I am asking this rather basic

question. But it does seem to me that even in long-term care hospitals there is a difference between the chronic patient, who is really going to be there years, and the patients more and more that

are rehab and they are sort of long term but they are short term.

So, I think there are a lot of problems with the single reimbursement rate, and I would ask you to help me on that in the months

ahead.

I also am very interested in this rebasing proposal that is revenue-neutral. And I wondered what you thought about the sort of

national target rate limit mechanism that keeps that rebasing

revenue-neutral.

Mr. NEWHOUSE. We would support the notion of rebasing. If you

look at my chart 3, particularly for the long-term hospitals, you see

the hospitals that have come in most recently have much higher

payment-to-cost ratios than the old hospitals, the so-called original

hospitals. Actually, in this chart it just distinguishes 1989 or before, so it is probably even more discrepant than this exhibit shows.

But the concern is, as I mentioned, because of the new provider

exemption, the new providers come in—and you mentioned, too, in

your questions. They have an incentive to come in at high cost to

establish their ceiling. And this chart is an effort to say, yes, that

in fact appears to have gone on.

Mrs. JOHNSON. Well, I think that the NALTH proposal basically

pays for the rebasing by gradually limiting the overpayments. I

mean, that is the way, as a sort of relative layman, I hear this.

Would you disagree with that?

Mr. NEWHOUSE. Well, the rebasing would be an effort to then get

back some of the——

Mrs. JOHNSON. Money from the national target group.

Mr. NEWHOUSE [continuing]. The people who have come in at a

high cost and then drop their cost—and get incentive payments. So,

we would support that idea.

Mrs. JOHNSON. Thank you. That is the way it appears to work.

Ms. WYNN. Mrs. Johnson, I understand that the proposal has

what I would call selective rebasing; that it is only an opportunity

for hospitals whose costs are above their target amount to be

rebased. The Administration’s proposal is for an across-the-board

rebasing.

Mrs. JOHNSON. When? When would the across-the-board rebasing

take place?

38

Ms. WYNN. The President’s fiscal year 1998 proposal is to rebase

all hospitals, both those that are above their target amount and

those that are below.

Mrs. JOHNSON. And how do you pay for it?

Ms. WYNN. Part of it is by eliminating the disparity between

costs and payments. The rebasing itself is a redistribution of payments among the TEFRA facilities themselves. So that those with

costs above their target amount, the cost of rebasing them is paid

for in part by rebasing those who now have costs below their target

amount.

Mrs. JOHNSON. I think you mean vice versa, but anyway—the

ones whose rebasing needs to be adjusted up get paid for by the

ones who get rebased essentially down.

Ms. WYNN. That is correct.

Mrs. JOHNSON. I will be interested to look at that and see what

its impact is. It is true that the proposal that I am referring to

really rebases the most disadvantaged group.

Ms. WYNN. Right.

Mrs. JOHNSON. And that in itself is hard to pay for. I mean, the

more you rebase, the more you have to reduce the reimbursements

for the more generously reimbursed.

Ms. WYNN. Right.

Mrs. JOHNSON. So you have to eliminate their exceptions, or reduce their exceptions.

Ms. WYNN. The other way that we are paying for it is by eliminating the bonus payments altogether; whereas I understand the

National Association of Long Term Care proposal is to just limit

the amount of bonus payments that an individual hospital could receive; whereas the President’s proposal would eliminate bonus payments altogether.

Mrs. JOHNSON. Considering the state of the art in terms of its

imprecision, which we all acknowledge, I think perhaps the more

flexible bonus payment system has a place. But I would be interested in pursuing this with you in greater detail.

Ms. WYNN. I would be pleased to.

Mrs. JOHNSON. Because I think this is one of the things we absolutely have to do this year.

Ms. WYNN. I would be pleased to talk to you about it.

Mrs. JOHNSON. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you.

Does the gentleman from California wish to inquire?

Mr. Becerra.

Mr. BECERRA. Thank you, Mr. Chairman.

Let me ask a first question. And that is, do we know if anyone

has done any research or analysis of the long-term care or rehabilitation hospitals to see what their occupancy rate has been over the

course of, say, their first 5 years of operation?

Ms. WYNN. That information is certainly available.

Mr. BECERRA. Has anyone analyzed it to find out what happens

after that third year?

Ms. WYNN. I am not aware of any studies that have specifically

focused on that question.

Mr. BECERRA. Might it be worth doing, to find out how occupancy

rates change after the second or third or, probably, fourth year?

39

Ms. WYNN. We will be happy to look at that for you.

Mr. BECERRA. I would appreciate knowing. I am not sure how to

approach this one. I have information here that says that the average TEFRA limit of for-profit hospitals is about 17,000; for nonprofits it is about 15,000; that the average cost per discharge for

for-profits is about 15,000; as opposed to about 121⁄2 thousand for

nonprofits. Dr. Newhouse, what makes for-profits cost so much

more?

Mr. NEWHOUSE. Are these long-term hospitals, the excluded hospitals?

Mr. BECERRA. I would imagine it is both long term and rehabilitation. This breaks it down by for-profit and nonprofit.

Mr. NEWHOUSE. OK. A couple of things. First, my guess is, although I have not seen the numbers, that the new entrants are disproportionately proprietary hospitals. And we know that the new

entrants are coming in with higher costs than the prior hospitals.

Second, as we have all here lamented, we do not have an adequate measure of case mix. So any time one has got different hospitals, the hospitals that are the higher cost hospitals can always

say, ‘‘Well, we have sicker patients,’’ and there is really no data to

shed light on the accuracy of that claim. So whether it is the case

mix or whether it is the financial incentives is really impossible for

me to say. Maybe Ms. Wynn has some data on that.

Mr. BECERRA. But it could be one of those two factors?

Mr. NEWHOUSE. Yes, and as I say, I think part of it is the new

entrants and the incentives of the new entrants.

Mr. BECERRA. Dr. Newhouse or anyone else on the panel can try

to see if you can answer this for me. The understanding I am beginning to develop here is that these startups get to include their

basic costs. And HCFA does the job of auditing to make sure those

costs are reasonable as they are going along. And a lot of these forprofits—or most of them, if not all of them—are corporations, correct?

Ms. WYNN. That is correct.

Mr. BECERRA. Executive compensation is included within a corporation’s cost, is it not?

Ms. WYNN. Yes, it is.

Mr. BECERRA. We know that a number of executives make a

handsome salary or compensation package. I think we would all

agree on that. Ms. Wynn, what do we do to make sure that, as corporations are entitled to do, they include within their basic costs

of running that hospital the cost of providing compensation to the

chief executive officer or other high executives, that we are making

sure that they charge only a reasonable amount for that particular

cost?

Ms. WYNN. When the costs are audited—and because of resource

constraints, only a small percentage of hospitals’ costs are actually

audited—we would expect the intermediary to essentially be alert

to situations where compensation might be unreasonable and to

make an evaluation as to whether those costs are prudent based

on sort of what the going rate is for individuals with comparable

responsibilities.

40

Mr. BECERRA. Three quick questions: One, are those costs isolated within whatever records you have, so that you can find them

without too much of a problem?

Ms. WYNN. No, they are not readily identified.

Mr. BECERRA. How do you then determine whether or not a reasonable amount has been charged by that hospital for its basic hospital costs with regard to the employees, the compensation for the

chief executive officer, for example?

Ms. WYNN. Right. At the hospital level information is obtained

on what we would call owners’ compensation. But when you are

talking about large corporations you do not have that data available. So that the real evidence would be if the administrative costs

of the facility appeared to be out of line.

Mr. BECERRA. Let me ask, do you check to find out how much

they are charging you, or how much they are saying were costs incurred in operating that hospital, as it pertains to chief executive

officers?

Ms. WYNN. They file a cost report.

Mr. BECERRA. Does that cost report break down that particular

item of compensation for a chief executive officer?

Ms. WYNN. No, it does not. You can identify administrative salaries as a single line item that would cover everything from the

clerk typist through to the chief administrative officer.

Mr. BECERRA. And if they have an administrative cost of $10 mil- lion, how do you know how much of that $10 million pertains to

one person?

Ms. WYNN. If that $10 million was out of line with the size of

the institution where you are talking about an audit situation—the

intermediary could, if it appeared to be out of line——

Mr. BECERRA. How would the intermediary know?

Ms. WYNN. They have comparative data and experience with the

costs being incurred by other hospitals, as well.

Mr. BECERRA. But you still have no sense of what those costs are

itemized. You are just going based on comparisons.

Ms. WYNN. That is correct.

Mr. BECERRA. What if all of the other hospitals are including

high executive salaries within their administrative costs, so that

everyone seems to be about the same?

Ms. WYNN. It would be more difficult to detect unreasonable situations then.

Mr. BECERRA. So, then let me ask my baseline question that I

asked earlier. Can HCFA determine what amount is being included

within the administrative costs by these for-profits for executive

salaries?

Ms. WYNN. We have the authority to determine that.

Mr. BECERRA. Can you.

Ms. WYNN. We do not have an ongoing mechanism that we have

used at this point.

Mr. BECERRA. So, if I were to ask you today to provide me with

the amount that corporations are including in their administrative

costs that relates to executive salaries, could you provide me with

that information?

Ms. WYNN. We could not readily provide you with that information. We would have to go out to each intermediary, that would

41

then have to go to each of the hospitals to obtain that data. So that

is not information that we have available.

Mr. BECERRA. Does that not concern you? You have some executives, I understand, I have got some figures before me—I do not

need to mention them—but some individuals are getting compensation packages that amount to $8 million in 1 year. And does it not

concern you that you may not know how much of that $8 million

is being included in the administrative costs for that for-profit corporation to run a hospital and ultimately get reimbursement from

the Federal Government?

Ms. WYNN. It concerns me that we do not have the resources or

the ability to essentially examine every cost for reasonableness.

Yes, it does.

Mr. BECERRA. And there I can appreciate and empathize with

you, if you need the resources to do it. Let us put aside for a second

the empathy for the resources that you need. If you had the resources, do you think it would be worthwhile to do? You may say

‘‘No.’’ I mean, it may not be worth your while. You may spend more

money of the Federal Government, the tax dollars, just trying to

figure out how much corporations are including in administrative

costs for their executives and what it is worth.

Ms. WYNN. Right.

Mr. BECERRA. But I am just asking, is that of interest to you?

Ms. WYNN. Quite honestly, it depends in part on the situation.

For instance, where you do have a prospective payment system,

and that is one of the beauties of it——

Mr. BECERRA. We are not in a prospective payment system.

Ms. WYNN. But when you are on a cost-based system, what

would concern us the most is whether costs in general for that facility—in other words, the bottom-line costs—appear to be out of

line. And there are certainly some excluded hospitals that have far

higher target amounts. And again, with the lack of the case-mix

measurement system it is harder for us to get to whether those

costs are reasonable or not. And that is an area of concern, certainly.

Mr. BECERRA. Mr. Chairman, you have been gracious with the

time, and this will be the last question I ask.

What would you consider reasonable costs to associate to an executive’s compensation that is included within the administrative

costs of a corporation that is a for-profit hospital?

Ms. WYNN. I am not an expert in executive compensation, so I

really cannot——

Mr. BECERRA. As a nonexpert. As a nonexpert.

Ms. WYNN. You are asking a civil servant. Anything over—I am

not qualified to answer that.

Mr. BECERRA. At all? Not even as a reasonable layperson?

[Laughter.]

Ms. WYNN. Not even, no, sir. But we would expect the intermediary to be able to answer that question and to investigate it

where it appeared to be an unreasonable compensation package.

Mr. BECERRA. But you have no opinion as to what might be considered reasonable to include? What would be excessive?

Chairman THOMAS. Mr. Becerra.

Mr. BECERRA. Yes, Mr. Chairman.

42

Ms. WYNN. I am sorry.

Chairman THOMAS. Might I ask a question in a slightly different

way?

Mr. BECERRA. Certainly.

Chairman THOMAS. Which results in the expiration of your time.

[Laughter.]

Do you not have the ability to set reasonable reimbursement

guidelines for physical therapists?

Ms. WYNN. Yes, we do.

Chairman THOMAS. And have you not recently done that?

Ms. WYNN. Yes.

Chairman THOMAS. Do you have the ability to set reasonable reimbursement guidelines for administrative costs?

Ms. WYNN. Yes, we do. In fact, we are currently doing that for

home health agencies.

Chairman THOMAS. Now, let me pause there—and yield a portion

of my time to the gentleman from California. [Laughter.]

Since you have the ability to set administrative costs on reasonable guidelines, he might very well ask the question——

Mr. BECERRA. Do you have reasonable guidelines for administrative costs? [Laughter.]

And if not, would you consider instituting some?

Ms. WYNN. First of all, at the present time we do not have those

for hospital executive compensation. And it is certainly something

that we can take a look at.

Mr. BECERRA. I do not want to end it on that note. You can take

a look at a lot of things. I asked if it was something you would consider.

Ms. WYNN. Yes.

Mr. BECERRA. Is it worthwhile?

Ms. WYNN. I think the first thing we need to understand is the

extent to which there are abuse or unreasonable compensation arrangements.

Chairman THOMAS. Reclaiming my time——

Mr. BECERRA. Thank you, Mr. Chairman.

Chairman THOMAS. It seems to me we would be chasing our tail

trying to create a reasonable reimbursement guideline, when we

could be spending our time imposing a prospective payment system——

Mr. MCCRERY. Amen.

Chairman THOMAS [continuing]. Which in fact would be selfcorrective, because if that is where they want to spend their

money, they may not be in business all that long.

Mr. BECERRA. And if I could add, Mr. Chairman, you are absolutely correct. But if I just heard correctly, we have waited 15

years. And unless we have any expectation it is going to end any

sooner, at some point we had better know what is reasonable.

Chairman THOMAS. I appreciate the gentleman’s generous use of

‘‘we waited 15 years.’’ We waited 3, and I am tired of waiting.

Mr. BECERRA. Well, 11 of those 15 years were when you were in

the executive branch.

Chairman THOMAS. No, I was not. They were. [Laughter.]

Mr. BECERRA. Yes. That is true. They were not us.

43

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

Mr. ENSIGN. Thank you, Mr. Chairman. By the way, it would be

interesting to ask somebody who worked in McDonald’s what a fair

compensation for a Member of Congress would be. I do not think

that you would get that $133,600 would be a reasonable figure. So

that kind of line of questioning I think discounts the theory that

somebody is worth what they make, which is determined by the

marketplace. It is the only fair way for anybody’s value to be determined.

Chairman THOMAS. Would the gentleman yield?

Mr. ENSIGN. Just a second. I want to ask a fundamental question

in this whole system. And that is, what incentives in the whole

area of long-term care do we have for providing better quality care

at less cost, under the current system?

Ms. WYNN. Under the current system——

Mr. ENSIGN. Better quality at less cost.

Ms. WYNN. The incentives for efficiency are built in through the

TEFRA methodology.

Mr. ENSIGN. But I prefaced that question ‘‘better quality, less

cost.’’

Ms. WYNN. I understand that.

Mr. ENSIGN. Do you think that the systems under TEFRA are incentives for better quality at less cost?

Ms. WYNN. There is nothing within the TEFRA system that provides incentives to improve quality.

Mr. ENSIGN. Right, and I agree with that. And as a matter of

fact, I think that some of the questions from the gentleman from

California sound like fair questions, but the problem is——

Chairman THOMAS. Excuse me?

Mr. ENSIGN. Listen. I said they sound like fair questions.

Chairman THOMAS. No, no, no. ‘‘The gentleman from California.’’

Mr. ENSIGN. Excuse me. The gentleman on the end in the Minority party from California. [Laughter.]

The Chairman’s questions are always fair questions, by definition. [Laughter.]

Anyway, while the line of questioning sounds fairly reasonable

up front, following along with what Mr. McCrery talked about. I

have only been up here for a couple of years, but it seems like a

lot of the answers that we try to come up with are because the government set up a bad system in the first place. And some of the

answers are bad answers, or they are not great answers, because

the system was bad in the first place.

The system that we have now has no incentives for providing

better quality at less cost. We do not have those built into the current system. And that was really the only point that I wanted to

make. And I just wanted to make sure that you felt the same way.

So thank you, Mr. Chairman. That is really all I had.

Mr. BECERRA. Will the gentleman yield some of his time?

Mr. ENSIGN. Surely.

Mr. BECERRA. I agree with the gentleman. His point is well

taken. You should be paid what you earned. It is a matter of

whether the taxpayers should pay for that. If someone is being paid

$8 million and the company that individual is making the money

44

from is including that within the cost which ultimately will be reimbursed to some degree by the taxpayer——

Mr. ENSIGN. Oh—reclaiming my time—I think a cost-based system is a terrible system. It has been proven time and time again,

a cost-based system is a terrible system. And that is what I was

saying; that your questions sound reasonable because it was a terrible system in the first place.

Mr. MCCRERY. A cost-based reimbursement system is a terrible

system if somebody besides the consumer is paying the bill.

Mr. ENSIGN. Yes. There is no accountability. It takes accountability out of the system. And that was really the whole reason for the

line of questioning. Thank you, Mr. Chairman.

Chairman THOMAS. I want to thank the panel. If Members have

no additional questions, we will move on to the next panel, because

I believe they are anxious to present testimony to the Subcommittee.

I want to thank you all.

Ms. WYNN. Thank you, sir.

Mr. NEWHOUSE. Thank you.

Chairman THOMAS. The next panel will be Patrick Foster, senior

vice president of the Inpatient Division of HEALTHSOUTH, Birmingham, Alabama, on behalf of the Federation of American

Health Systems; Kathleen C. Yosko, I believe it is, president and

chief executive officer, Schwab Rehab Hospital and Care Network,

Chicago, Illinois, on behalf of the American Rehabilitation Association; J. Rod Laughlin, president, Transitional Hospitals Corp., Las

Vegas, Nevada, and president of the Long Term Acute Care Hospital Association of America; and James Standish, chief financial

officer, Hospital for Special Care, New Britain, Connecticut, on behalf of the National Association of Long Term Hospitals.

I want to thank you all for coming. Any written statement that

you may have will be made a part of the record. And you may address us in the time that you have in any way that you see fit to

inform the panel. Let me just say that we will start from my left,

your right, and move across the panel.

I do want to mention that these microphones are unidirectional,

and you will want to speak directly into them. Thank you very

much for coming. And Mr. Foster, the time is yours.

STATEMENT OF PATRICK A. FOSTER, SENIOR VICE PRESIDENT, INPATIENT OPERATIONS, HEALTHSOUTH CORP., BIRMINGHAM, ALABAMA; ON BEHALF OF THE FEDERATION OF

AMERICAN HEALTH SYSTEMS

Mr. FOSTER. Thank you, sir. Mr. Chairman and Subcommittee

Members, thank you for the opportunity to address this Subcommittee today. I am Pat Foster, senior vice president with the

HEALTHSOUTH Corp., which is a member of the Federation of

American Health Systems.

The federation represents a large portion of the PPS-exempt facilities in the Nation. It represents approximately 70 percent of the

freestanding rehabilitation hospitals, 50 percent of the behavioral

hospitals, and 35 percent of the long-term care facilities. As a result of that, we feel like we have the qualifications to address the

45

issues that are at hand related to the quality of patient care and

the cost of patient care.

The President’s budget for this year addresses a lot of things,

and some of those things we think will add to the Medicare cost.

We think they are a Band-Aid approach. And some we think will

reduce the cost of providing care. The President’s proposal includes

both short- and long-term approaches and issues. Let me address

short-term issues first.

Our chief concern is rebasing. We do not support rebasing. Rebasing is a redistribution of Medicare funds from the efficient provider to the inefficient provider. And we, again, think this is a

Band-Aid effect. There is an exemption system which has been referred to today where facilities can rebase. We have in fact had one

facility that was allowed rebasing. This has been in place since

1989, and the Secretary of HHS has the authority to do this. So

what I am saying is it does work. We have had one facility that

has been approved, and one in fact that was not.

Closely related to this proposal in the President’s budget is the

elimination of the incentive payment. We do not support the elimination of the incentive payment today. We again think that is an

interim approach. The one thing that works in the existing system

is it does reward the efficient providers. And if we take this out,

we are rewarding the inefficient providers.

It is very similar to the DRG payment. The DRG payment, the

PPS payment, and the PPS-exempt payment are different in one

way. The PPS payment allows a provider to keep 100 percent of the

difference in their cost and what their DRG amount is; whereas the

incentive payment with PPS facilities generally is about 5 percent

of the TEFRA limit. And the President’s proposal suggests the

elimination of this, and we do not support that.

The existing system works. It does reward the efficient provider.

It does save health care dollars. I have some charts up that show

under the present system what has occurred in my company, the

HEALTHSOUTH Corp. And as you can see, the costs since 1994

have gone down. And there are a variety of TEFRA limits in these

hospitals, a lot of these. In fact, one hospital is one of the oldest

hospitals in the country. And as our costs have gone down, our clinical outcomes have gone up. So we have the incentive in place

today.

Let me talk about capital reduction. We do not support the reduction in capital. The 15-percent reduction is drastic. We are very

sensitive to the Medicare mix. In a PPS-exempt facility, 60 percent

to 65 percent of our patients are Medicare. In a PPS facility, it is

about 40 percent.

An example, Mr. Chairman, would be at our facility in Bakersfield, and how this would affect the facilities that are new in the

South and the West. In Bakersfield, California, we have a rehabilitation hospital, and our capital cost per day is $189. The average

amount in our company is $128. So this will definitely impact facilities, and I think you will find that is consistent with the facilities in the South and the West.

We know we must continue to reduce Medicare expenditures,

and we are committed to do that. We support several things in the

President’s proposals in this year’s budget. We support the inflaVerDate 11-SEP-98 14:37 Sep 08, 1999 Jkt 058339 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 F:58339 W&M3 PsN: W&M3
46

tion update cuts. ProPAC recommended 2 percent; the President,

1.3. In lieu of rebasing, we would even recommend lower than the

1.3.

We do support and encourage elimination of the new provider exemption. That exemption allows facilities to be inefficient in the

first 2 years of operation, and we thoroughly and strongly suggest

that every facility should be cost efficient out of the gate.

For the long term, we absolutely support going to a PPS system.

The thing that we do not support is, the system that has been

under review right now does not represent the large portion of the

freestanding rehabilitation hospitals in the United States of America. And as we are driving our costs down, the data that is being

used was generated in 1994. So, we do definitely support PPS. Absolutely, we do. But we do not support it in the form that it is

today.

In summary, we are willing to share our commitment, and willing to share the commitment to drive down Medicare costs. Please,

whatever we do, let us make sure that it does not jeopardize patient care. And when we implement a PPS system, let us ensure

that it takes care of implementing excellent clinical outcomes for

the patient.

Thank you very much.

[The prepared statement follows:]

47

Statement of Patrick A. Foster, Senior Vice President, Inpatient Operations, HEALTHSOUTH Corp., Birmingham, Alabama; on Behalf of the

Federation of American Health Systems

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Ms. Yosko.

Chairman THOMAS. Thank you, Mr. Foster.

f STATEMENT OF KATHLEEN C. YOSKO, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, SCHWAB REHABILITATION HOSPITAL

AND CARE NETWORK, CHICAGO, ILLINOIS; ON BEHALF OF

THE AMERICAN REHABILITATION ASSOCIATION

Ms. YOSKO. Yes, good afternoon, Mr. Chairman and Members of

the Subcommittee. Today, I am appearing on behalf of the American Rehabilitation Association, the principal membership organization of rehabilitation facilities, of which I am the chairman of the

board of directors. I am also president and chief executive officer

of Schwab Rehabilitation Hospital and Care Network in Chicago.

Also present today, as Congressman LoBiondo mentioned, is Richard Kathrins, president of Betty Bachrach Rehabilitation Hospital

in New Jersey.

The objective of medical rehabilitation is to eliminate or minimize disability. We seek to restore a person’s ability to live, work,

and enjoy life after an illness, trauma, stroke, or similar event has

impaired one’s physical or mental abilities. Christopher Reeves’ spinal cord injury and President Clinton’s recent knee injury are just

two of the many examples of rehabilitation.

Many of the conditions requiring rehabilitation services are associated with advancing age, particularly strokes, orthopedic conditions, and arthritis. Medicare is the primary payer of over twothirds of those who need rehabilitation.

Rehabilitation hospitals and units are excluded from the Medicare PPS. Rehabilitation facilities are paid on the basis of reasonable cost, subject to ceilings imposed under TEFRA. TEFRA limits

were imposed in 1993 as a temporary method for controlling costs.

HCFA was charged with developing a PPS suitable for rehabilitation, but this never occurred.

TEFRA distorts the delivery and cost of hospital rehabilitation

services in a number of ways. I will highlight the two most critical

problems. TEFRA limits do not adjust for changes in the case mix

or increased acuity of patients. They treat all cases as having the

same value. Hence, inherent in the system is a financial incentive

to treat short-stay, less complex patients, not more severely disabled patients.

The current system is inequitable because it allows new rehabilitation providers to establish much higher TEFRA limits than older

ones. These new facilities can establish TEFRA limits based on

contemporary costs, and can be reimbursed significantly more than

older hospitals. The incentives within any rehabilitation payment

system should encourage the treatment of all patients according to

56

their individual rehabilitation needs. The current TEFRA system is

an ineffective reimbursement structure to accomplish this goal.

Rehabilitation hospitals and units would be better served with a

reimbursement system that is accurately calibrated to the intensity

of the needs of the patients we serve. That in turn best serves the

ultimate goal of rehabilitation: to enable persons with disabilities

and chronic illness to live independently in the community.

While some rehabilitation providers prosper and others struggle

under TEFRA, no one defends it, including HCFA. Replacing this

system with a rehabilitation PPS has been recommended by

ProPAC in 1996, and more strongly in 1997, as well as the trustees

of the Health Insurance Trust Fund.

In 1990, Congress directed HCFA to submit recommendations for

rehabilitation payment reform by April 1992, but again, nothing

happened. Rehabilitation providers then funded research to develop

a patient classification and payment system for rehabilitation

called the functional related groups, FRGs. This system, now existing, covers almost all Medicare patients. It is designed to account

for variations in the case mix of patients, unlike the TEFRA system.

In the fall of 1995, HCFA contracted with the RAND Corp. to

evaluate the FRG system and, if found to be suitable, design a PPS

for rehabilitation. This work is now complete. RAND has reported

to HCFA that FRGs are suitable as the basis for an accurate rehabilitation payment system.

The Administration’s Medicare proposals ultimately represent an

endorsement of the current rehabilitation payment policy. We oppose the administration’s TEFRA proposals because they do not

cure the flaws of the present system. They do nothing to chart a

course for the efficient use of rehabilitation resources under Medicare.

In conclusion, any rehabilitation payment reform should ultimately focus on the needs of patients. A rehabilitation PPS would,

one, establish the proper incentives to treat all patients, regardless

of case mix; and two, assure that newly developed rehabilitation facilities are founded on community need, rather than the current

payment incentives.

There is a bill in Congress that establishes a rehabilitation PPS

based on FRGs. This is H.R. 585. We look forward to the final

RAND report, in order to identify necessary modifications to the

bill. There may be other ways to structure rehabilitation PPS. The

important point is that the current TEFRA system is inequitable

and outdated, and should be replaced with a rehabilitation PPS

that accounts for case mix.

Thank you, Mr. Chairman, for this opportunity, and I would be

pleased to answer any questions.

[The prepared statement follows:]

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Mr. Laughlin.

Chairman THOMAS. Thank you, Ms. Yosko.

f STATEMENT OF J. ROD LAUGHLIN, PRESIDENT, TRANSITIONAL HOSPITALS CORP., LAS VEGAS, NEVADA; AND PRESIDENT, LONG TERM ACUTE CARE HOSPITAL ASSOCIATION OF

AMERICA

Mr. LAUGHLIN. Thank you, Mr. Chairman. Mr. Chairman and

Members of the House Ways and Means Subcommittee on Health,

my name is Rod Laughlin. I am president of Transitional Hospitals

Corporation in Las Vegas. I am also president of the Long Term

Acute Care Hospital Association of America. I appreciate the opportunity to speak to you to address the President’s proposed Balanced

Budget Act of 1997 as it addresses payment for long-term care hospitals.

Our association supports a PPS-type system for long-term care,

and we look forward to providing any data that HCFA may need

to assist in development of that sort of system. In the interim, we

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are willing to absorb our fair share of reductions in Medicare payments.

ProPAC noted in 1994 that PPS-exempt providers accounted for

about 7.2 percent of total part A payments. The long-term care hospitals represent only 10 percent of that amount, or about seventenths of 1 percent of total part A payments. So we really are a

small piece of the Medicare problem.

Based on the CBO’s March 1997 analysis of the President’s budget, the PPS-exempt hospitals should not be asked to bear more

than about $3.7 billion in cuts on a fair-share basis.

Medicare reductions are more hurtful to long-term hospitals and

other PPS-exempt hospitals, as you have heard, because we tend

to have a higher percentage of Medicare patients—typically, about

65 percent in the exempt hospitals, compared to 35 to 40 percent

in regular community hospitals. PPS-exempt hospitals have a

greater dependency on Medicare revenues, and they are less able

to shift unreimbursed Medicare costs to other payers.

I would like to discuss our position on several issues that have

been proposed as ways to reduce costs and save money for Medicare. First of all, with regard to the moratorium on new long-term

hospital exclusions, our association is totally opposed to that moratorium. I think the moratorium probably came about as a result of

some of the percentages of growth that have been tossed out, numbers at 30 percent annual growth and even higher.

I would like to say, though, that those percentages are misleading because they are starting from a very small base. Even today

I think there are only 186 or so long-term hospitals in the whole

country. The largest growth in this long-term hospital sector is in

the hospital-within-hospital area.

HCFA has in place ample regulations to control the growth of

hospitals in hospitals. These regulations are not being consistently

enforced region by region. There is not consistent interpretation of

the rules by all of the various intermediaries. And the first step

that should be taken is to ensure that those rules are consistently

applied. That will cut down on a number of the hospital-in-hospital

facilities that exist currently that violate the rules.

Finally, the moratorium is a bad idea because it eliminates important treatment services that achieve very good patient outcomes—sometimes medical miracles—that are not generally available in short-term facilities, and certainly not available in some of

the sub-acute facilities and nursing homes that are not able to

treat the high-end acute patient that our association represents.

With regard to the cap on the TEFRA target, rebasing, other

changes to TEFRA, we are opposed to those changes, not because

TEFRA is not a flawed system and does not need some changes,

but we are opposed to a single approach to TEFRA. The reason for

that is that there are a number of different types of hospitals within the category called long-term hospitals.

It is not our purpose to misrepresent ProPAC’s position on this

issue. In our presentation to you we quoted some statements from

their report to Congress of March 1997. I would just say that the

main reason ProPAC and no one else can distinguish the costs related to the two types of hospitals is that we do not have a patient

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classification system. One of those needs to be developed by HCFA

in the earliest possible time.

Putting a 150-percent cap on the TEFRA cost structure will put

our association’s hospitals out of business, because they are treating, by design, very, very sick patients. We treat the sickest of the

sick. We do not have any chronic patients. We tend to discharge

those patients. And so we have some higher cost, very sick patients.

We are in favor of maintaining the incentives on TEFRA at the

present time. I think if there are going to be changes to TEFRA,

again, they need to address the fact that there are at least two

classifications of hospitals within the long-term category.

Two ideas we can live with are the reduction in the market basket updates of 11⁄2 percent annually, which the CBO says saves

about $3 billion over 5 years; and the reduction of the capital payments to 85 percent of allowable cost. That will save another $600

million over 5 years. These two items alone would save $3.6 billion

from the long-term care category, which is just about our fair

share.

In conclusion, let me say that we want to say ‘‘No’’ to the moratorium. We think any change to TEFRA needs to recognize the two

classes of long-term hospitals. We think HCFA should be enforcing

the current rules on hospital within hospital, which are being widely violated. We think cuts to all hospitals should be proportional to

their impact in the Medicare Program. And we certainly support

the development of a PPS system.

Thank you.

[The prepared statement follows:]

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Mr. Standish.

Chairman THOMAS. Thank you, Mr. Laughlin.

f STATEMENT OF JAMES F. STANDISH, VICE PRESIDENT AND

CHIEF FINANCIAL OFFICER, HOSPITAL FOR SPECIAL CARE,

NEW BRITAIN, CONNECTICUT; ON BEHALF OF THE

NATIONAL ASSOCIATION OF LONG TERM HOSPITALS

Mr. STANDISH. Mr. Chairman and Members of the Subcommittee,

thank you for inviting me to speak before you today on behalf of

the National Association of Long Term Hospitals. My name is

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James F. Standish. NALTH has approximately 45 member institutions located across the United States, 90 percent of which are notfor-profit organizations which exist for the benefit of the communities in which they operate.

While my remarks today are made on behalf of the National Association of Long Term Hospitals, many of the issues related directly to Hospital for Special Care, which participates in the Medicare Program as a long-term hospital and is located in New Britain, Connecticut. Hospital for Special Care is a founding member

of NALTH, and I am the Hospital for Special Care’s vice president

and chief financial officer.

The notice of today’s hearing correctly indicates that the current

TEFRA system of payments treats older long-term hospitals differently than new long-term hospitals. In 1996 ProPAC reported to

Congress that older, as opposed to new, long-term hospitals had the

lowest margins of any type of hospital which participates in the

Medicare Program. In fact, Hospital for Special Care loses an average of $5,000 per Medicare discharge.

In light of the unfair inequities which exist among TEFRA-rated

hospitals it is important for Congress to assess a number of important issues related to the potential restructuring of any payment

program governing long-term hospitals. A summary of recommendations by NALTH, to which I will testify today, are as follows:

Number one, the current TEFRA system, as others have said,

should be discarded as soon as possible in favor of a long-term hospital prospective payment system. In fact, our association is spending upward of a half-million dollars to begin developing such a system, and expects to complete a long-term hospital patient classification system, together with a payment system, by the summer

of 1998. NALTH will continue to meet with the congressional staff

and HCFA as it develops the long-term hospital PPS.

We believe that a PPS is the only true solution to replacing the

flawed TEFRA system which, as others have mentioned, was a

temporary system we still live with 15 years hence. It is essential

that a valid case-mix-adjusted patient classification system be at

the root of a prospective payment system.

As was stated in the recent ProPAC report to Congress in March,

payment amounts should vary depending on the intensity and nature of services beneficiaries require, rather than basing payment

on the setting or type of long-term care facility providing the service. NALTH agrees with ProPAC’s logic, and urges speed in the development of a patient classification system. This system should be

pursued instead of establishing an arbitrary breakdown of longterm hospitals based on the type of facility. Again, the focus should

be on the type of service provided.

Number two, while completing development of a PPS system,

Congress should not require rebasing of TEFRA rates based on average cost, as has been proposed by the President. Again, the use

of this average cost as a payment limit would produce an invalid

patient classification system and reward hospitals which change

the type of patients they serve to minimize resource use after the

establishment of the new base year. It is well documented that

long-term hospitals serve a heterogeneous mix of patients. The use

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of an average would erroneously assume that long-term hospitals

serve patients who require similar medical resources.

Number three, until a long-term care PPS is implemented, cost

savings we believe may be achieved by imposing a national limit

on the difference between allowable costs and TEFRA ceiling

amounts. This is further outlined in Attachment C to my testimony

on file.

The national ceiling would have two functions. First, it would

place a limit on incentive payments for new hospitals; and second,

it would reduce the rate of increase and target ceilings for existing

long-term hospitals with incentive payments.

Number four, long-term hospitals with distorted base years, like

Hospital for Special Care which has been significantly underreimbursed, should be allowed to update their base year if they

serve a significant disproportionate share population of 25 percent

or more. This is more fully outlined in Attachment B to my testimony on file.

Number five, Congress should continue the minimum payment

protections it has established for PPS-exempt hospitals whose allowable costs exceed their TEFRA limit. This issue primarily affects long-term hospitals with older target rates.

NALTH believes strongly that Congress should grandfather longterm hospitals which are colocated with other hospitals as of September 30, 1995, from special conditions of Medicare participation

which the Secretary has applied to these hospitals.

In summary, I urge the Subcommittee to recognize that it is anticipated that NALTH’s proposal for selective rebasing is made at

least budget neutral by our cost-savings proposal. In addition, it is

our intent for the development of the PPS system for long-term

hospitals to also be budget neutral. Only a PPS for long-term hospitals which appropriately classifies patients by level of care will

correct the unfair inequities which exist today under the flawed

TEFRA system.

If interim measures are taken to modify the existing TEFRA system before a PPS is in place, I urge that you take the unfair inequities of the current system into consideration, and do not cause

more harm to certain long-term hospitals. NALTH is prepared to

work on a united front to resolve these issues.

I wish to thank you and the Subcommittee staff again for inviting me here today and for your courtesy and attention to these important issues, and I am pleased now to answer any questions you

may have.

[The prepared statement and attachments follow:]

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Statement of James F. Standish, Vice President and Chief Financial Officer, Hospital for Special Care, New Britain, Connecticut, on Behalf of the

National Association of Long Term Hospitals

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noticed from the first panel, our ability to understand why we are

Chairman THOMAS. I want to thank all of the panel. And as you

f doing what we are doing and the changes that have been made

here are a little more difficult than in some other areas, because

this is a kind of a patchwork operation; notwithstanding the fact

that it is growing because services are being provided, apparently

in ways that people want them in facilities that they want.

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Trying to understand the charts, especially the one on the right:

Mr. Foster, when you say ‘‘aggregate Medicare cost per discharge,’’

can I change ‘‘cost’’ to ‘‘payment’’? Is that what that is?

Mr. FOSTER. No, sir, that is cost.

Chairman THOMAS. If that is the aggregate Medicare cost per

discharge, you get paid differently than that?

Mr. FOSTER. It depends on the TEFRA limit for the individual facility.

Chairman THOMAS. What does that show me, then? You see, to

me a Medicare cost is what it costs Medicare in payment per discharge. But that is not what that chart is?

Mr. FOSTER. Yes, sir, that is what that is. What that chart shows

with the existing system that is in place, the cost—we have acquired a lot of hospitals over the last 2 years, and there is a big

variance in the TEFRA limit. And what that chart shows from

1994, the cost per Medicare discharge was 14,204. In 1996, that

cost has gone down per discharge to 11,622.

Chairman THOMAS. But it says up top, ‘‘same store comparisons.’’

So are we comparing different hospitals that came on at different

times?

Mr. FOSTER. No, sir. No, that is same store.

Chairman THOMAS. It says ‘‘same store comparisons.’’

Mr. FOSTER. Right. I am sorry, yes, sir.

Chairman THOMAS. So one store in 1994 is the purple line, and

in essence the same store is the 1996 green line?

Mr. FOSTER. Yes, sir, correct. You are correct.

Chairman THOMAS. So in 1994, getting back to Mr. Becerra’s concern about administrative costs——

Mr. FOSTER. Yes, sir.

Chairman THOMAS [continuing]. Since that is not a broken-out

item, if we can, to try to explain it, let us assume that the hospital

opened in 1994. Can we do that?

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Will that work?

Mr. FOSTER. OK.

Chairman THOMAS. Let us say it opened in 1994. And you have

fixed where you have administrative costs. And you have maybe

100 patients. Now, is it possible that between 1994 and 1996 the

administrative costs would remain the same, but you could perhaps

double your patient load to have 200 patients for the same administrative costs, which would certainly show a cost-per-discharge reduction, and that would be an efficiency kind of thing?

Mr. FOSTER. Yes, sir, per day. If you have more patient days divided into your total cost, if your census increased from 50 to 100,

your cost per day would go down, and it would affect that. You are

absolutely correct.

Chairman THOMAS. So you could open up with a top-heavy administrative arrangement in the hospital, not increase it over that

period, but add what would be the normal amount of patients, and

get this same chart?

Mr. FOSTER. Theoretically, you could.

Chairman THOMAS. Rather than build the administration as your

patient load increases?

Mr. FOSTER. Yes, sir.

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Chairman THOMAS. And would there be any incentive for having

a top-heavy administration when you opened the hospital, versus

building the administration as the patient load grew, under current

reimbursement structure?

Mr. FOSTER. Theoretically, yes, sir.

Chairman THOMAS. In the real world, is there?

Mr. FOSTER. No, sir.

Chairman THOMAS. No.

Mr. FOSTER. No, sir.

Chairman THOMAS. You would not be reimbursed more if you

had a larger administrative structure going in?

Mr. FOSTER. You would, yes, sir. But I am saying that is not the

case with this data. Same stores in 1994 included a lot of hospitals

that came on with our company.

Chairman THOMAS. I understand. But if you look at the

11,600——

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Now, again, this is not what Medicare pays;

this is the Medicare cost.

Mr. FOSTER. Right.

Chairman THOMAS. In discussing with the first panel and Ms.

Wynn, where she talked about the percentage of incentive reimbursements, does any of this 11,600 reflect the reimbursement

cost?

Mr. FOSTER. Yes, sir.

Chairman THOMAS. That is all of the money that comes from

HCFA?

Mr. FOSTER. That is Medicare cost per discharge.

Chairman THOMAS. I understand that. But since we did not say

it was Medicare payment——

Mr. FOSTER. Right.

Chairman THOMAS [continuing]. How does the 14,200 as a Medicare payment reflect any of the incentive payments that she discussed between 1994 and 1996? This is not discussed on this chart.

Mr. FOSTER. OK. The chart shows that the Medicare funds that

are reimbursed to HEALTHSOUTH, or this particular facility, the

funds that are reimbursed are going down, the expenditures that

are required are going down.

Chairman THOMAS. Per discharge?

Mr. FOSTER. Yes, sir, cost per discharge.

Chairman THOMAS. Where would a chart show the total amount?

Or are you telling me that the 11,600 is the total amount of payment? I know it says ‘‘cost.’’ You do not have a payment chart.

What I am looking for is, what would have happened between

1994, if this is the first year the hospital opened, and 1996, in

terms of what it would cost us, if you will, the taxpayers, in terms

of Medicare payment per discharge?

Mr. FOSTER. OK.

Chairman THOMAS. Where do the incentives show up? Or have

none of your hospitals participated in that incentive program that

she discussed?

Mr. FOSTER. Yes, sir. If you look at the 1994 data, say you have

a TEFRA limit of, say, $16,000. Then you are allowed to participate

with the current system up to 50 percent in the difference in the

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cost per discharge and the TEFRA limit, not to exceed 5 percent

of the limit. So in this particular case, as the cost goes down, it reduces Medicare expenditures.

Chairman THOMAS. But the amount per patient goes up? When

you say ‘‘cost’’ there, is that cost plus the——

Mr. FOSTER. Yes, sir, per day. If you have more patient days divided into your total cost, if your census increased from 50 to 100,

your cost per day would go down, and it would affect that. You are

absolutely correct.

Chairman THOMAS. So you could open up with a top-heavy administrative arrangement in the hospital, not increase it over that

period, but add what would be the normal amount of patients, and

get this same chart?

Mr. FOSTER. Theoretically, you could.

Chairman THOMAS. Rather than build the administration as your

patient load increases?

Mr. FOSTER. Yes, sir.

Chairman THOMAS. And would there be any incentive for having

a top-heavy administration when you opened the hospital, versus

building the administration as the patient load grew, under current

reimbursement structure?

Mr. FOSTER. Theoretically, yes, sir.

Chairman THOMAS. In the real world, is there?

Mr. FOSTER. No, sir.

Chairman THOMAS. No.

Mr. FOSTER. No, sir.

Chairman THOMAS. You would not be reimbursed more if you

had a larger administrative structure going in?

Mr. FOSTER. You would, yes, sir. But I am saying that is not the

case with this data. Same stores in 1994 included a lot of hospitals

that came on with our company.

Chairman THOMAS. I understand. But if you look at the

11,600——

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Now, again, this is not what Medicare pays;

this is the Medicare cost.

Mr. FOSTER. Right.

Chairman THOMAS. In discussing with the first panel and Ms.

Wynn, where she talked about the percentage of incentive reimbursements, does any of this 11,600 reflect the reimbursement

cost?

Mr. FOSTER. Yes, sir.

Chairman THOMAS. That is all of the money that comes from

HCFA?

Mr. FOSTER. That is Medicare cost per discharge.

Chairman THOMAS. I understand that. But since we did not say

it was Medicare payment——

Mr. FOSTER. Right.

Chairman THOMAS [continuing]. How does the 14,200 as a Medicare payment reflect any of the incentive payments that she discussed between 1994 and 1996? This is not discussed on this chart.

Mr. FOSTER. OK. The chart shows that the Medicare funds that

are reimbursed to HEALTHSOUTH, or this particular facility, the

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funds that are reimbursed are going down, the expenditures that

are required are going down.

Chairman THOMAS. Per discharge?

Mr. FOSTER. Yes, sir, cost per discharge.

Chairman THOMAS. Where would a chart show the total amount?

Or are you telling me that the 11,600 is the total amount of payment? I know it says ‘‘cost.’’ You do not have a payment chart.

What I am looking for is, what would have happened between

1994, if this is the first year the hospital opened, and 1996, in

terms of what it would cost us, if you will, the taxpayers, in terms

of Medicare payment per discharge?

Mr. FOSTER. OK.

Chairman THOMAS. Where do the incentives show up? Or have

none of your hospitals participated in that incentive program that

she discussed?

Mr. FOSTER. Yes, sir. If you look at the 1994 data, say you have a TEFRA limit of, say, $16,000. Then you are allowed to participate

with the current system up to 50 percent in the difference in the

cost per discharge and the TEFRA limit, not to exceed 5 percent

of the limit. So in this particular case, as the cost goes down, it reduces Medicare expenditures.

Chairman THOMAS. But the amount per patient goes up? When

you say ‘‘cost’’ there, is that cost plus the——

Mr. FOSTER. The TEFRA limit, you would get 5 percent. Say your

TEFRA limit——

Chairman THOMAS. You see, my problem is, it does not say ‘‘payments.’’ It says ‘‘cost.’’

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Now, we talked about the incentives. Is that

cost plus the incentives, or just cost?

Mr. FOSTER. Oh, I see what you are saying. That is cost per discharge, yes, sir.

Chairman THOMAS. Where are the incentives?

Mr. FOSTER. The incentives are not shown. But the incentive

would be constant, depending on your TEFRA limit. The thing that

changes is you share in 50 percent in the difference of the cost.

Chairman THOMAS. But you have to have a base year.

Mr. FOSTER. Right.

Chairman THOMAS. And if we use 1994 as the base year, and you

have got the 14,200——

Mr. FOSTER. Yes, sir.

Chairman THOMAS [continuing]. And you are now showing us

that the cost per discharge has been reduced, but they give you an

incentive payment based upon an interaction of that, and where is

it on the chart? Is it in the 11,600, or would we add more money

to the 11,600 in 1996 to show the incentive payments?

Mr. FOSTER. It is in the 11,600.

Chairman THOMAS. Total?

Mr. FOSTER. No, the incentive payment is not. The purpose of

this chart——

Chairman THOMAS. No, I understand the purpose of the chart.

Mr. FOSTER. OK.

Chairman THOMAS. I am trying to get an answer out of you, because you do not have a chart that shows what I want to see.

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Mr. FOSTER. OK. Yes, sir.

Chairman THOMAS. Which is what your Medicare payment was

in 1994, and what your Medicare payment was in 1996.

Mr. FOSTER. OK.

Chairman THOMAS. You have shown me a cost per discharge.

Mr. FOSTER. Yes, sir. OK.

Chairman THOMAS. I can produce that chart by frontloading my

administrative costs in 1994, and then holding them constant while

I increase patients, which gives me a lower cost per discharge——

Mr. FOSTER. Absolutely.

Chairman THOMAS [continuing]. And wind up making more

money.

Mr. FOSTER. Absolutely.

Chairman THOMAS. And that chart shows me—in other words, it

does not tell me anything. You would have to tell me in your 1994

hospital what your percentage of administrative costs were, versus

1996. And I have got to believe that you are not getting that

amount of money per patient in 1996, 11,600, versus 14,200. So I

guess a simpler question is, what does this chart show me, and

why did you put it up?

Mr. FOSTER. OK. What I am trying to show you, sir, is the hospitals that are in this 14,204 were hospitals that are same stores,

but they are hospitals that we acquired, that came into the company where the base year had already been established. And these

costs have been reduced not by increasing census, but by decreasing a lot of the administrative costs that were in the facilities that

came on with HEALTHSOUTH. And that is why we support the

elimination of the new——

Chairman THOMAS. Yes, but that chart does not show me that.

Mr. FOSTER. OK.

Chairman THOMAS. Because there is no patient load number.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Have you increased patients?

Mr. FOSTER. No, sir, patient load would be about the same. Patient days would be about the same.

Chairman THOMAS. Well, I guess what we need is, obviously,

more data to be able to understand the argument that you are

making.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Because I can wind up creating a chart like

that either through the ratio of administration to personnel and

the incentive payment with a number of adjustments. I am trying

to figure out what I am getting except three lines going down.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Which I understand was the intent. But it

does not tell me anything. I just wanted you to know.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. I also have in my charts—and you did not

put it up—you have a big one called ‘‘Charges.’’

Mr. FOSTER. Yes, sir.

Chairman THOMAS. I do not know what that means.

Mr. FOSTER. That is charges per discharge per patient. That is

gross charges. What that shows, as costs go down, charges have

gone down, and clinical outcomes have improved. And under the

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current system, you have the incentive to reduce your cost and to

reduce the outlay of funds from Medicare because of the 50–50

share, not to exceed 5 percent of the limit.

Chairman THOMAS. I understand the argument.

Mr. FOSTER. And very frankly, sir, that is one reason that we

support elimination of the new provider exemption.

Chairman THOMAS. I guess one of my difficulties is that, if you

are going to go ahead and provide us with charts, you really ought

to provide us with charts that I think make your point fairly easily.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Rather than having three lines that look

good that go down.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Because I do not understand why you put

Medicare cost per discharge, instead of Medicare payment per discharge, because frankly our concern has been the payment.

Mr. FOSTER. Yes, sir. But the savings come in the cost, and not necessarily the payment. In other words, if it costs $14,000 per discharge—my example for the DRG. If this was a PPS facility and,

say, my DRG payment was $20,000 and my cost was $14,000, a

DRG or a PPS facility would share 100 percent in that. If it is a

PPS-exempt facility, then it is no more than 5 percent of the limit.

It is 50 percent of the difference in the cost per discharge, not to

exceed 5 percent of the limit. So these savings are passed on to

Medicare——

Chairman THOMAS. That is an argument that could be made for

that.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. But I just want to say that, based upon the

payment structure that was explained to us and the incentive payments that are included, a front-heavy administrative structure

with lower patients, if when keeping that front-heavy administrative structure and bringing more patients in, can produce the same

chart. Do you agree?

Mr. FOSTER. Yes. I agree.

Chairman THOMAS. So what I am telling you is that chart does

not tell me anything. Because I can create the same-looking chart

by gaming the system by introducing a hospital in the last 5 years

that has, as the ProPAC showed us, the higher base, and then play

the game. So I am just trying to say, if you are going to present

us with a chart that you want to use to convince us of a certain

thing, you ought to not be able to have it interpreted four different

ways.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Especially two ways, one of which is negative

and one of which is positive.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. Ms. Yosko.

Ms. YOSKO. Yes.

Chairman THOMAS. You are in favor of that RAND rehabilitation

study?

Ms. YOSKO. Yes.

Chairman THOMAS. My understanding is that one of the comments that Ms. Wynn and others made was that 70 percent of the

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freestanding rehabilitation hospitals were not included in that

study. Is that true?

Ms. YOSKO. I am not exactly sure of the mix that was included

in the RAND study. But we have been involved with a lot of the

reviewing of the data that is coming out of RAND. We are waiting

for the report that is due out this month. And we believe that it

is a sound system and that there may be some technicalities, but

the technicalities could be worked out.

Chairman THOMAS. So you do not think a study that leaves out

70 percent of the freestanding rehabilitation hospitals is in any

way flawed?

Ms. YOSKO. We believe that today the FRG system is probably

the best mechanism we have. It is a system that really does adjust

for case mix. And the current system, the TEFRA system——

Chairman THOMAS. Well, no, I understand. Let me ask you another question, then. Why would you leave out 70 percent of the

freestanding rehabilitation hospitals in a study? I mean, was that

on purpose?

Ms. YOSKO. I cannot address that. Our organization, the American Rehabilitation Association, was not involved with the selection

process of that, so I cannot address that, sir.

Chairman THOMAS. Well, you understand our concern, if you are

going to ask us to support legislation based upon a RAND rehabilitation study which in fact leaves out 70 percent of the freestanding

rehabilitation hospitals, that creates an automatic question on the

validity of the data that we receive. My guess would be that you

probably would want to try to provide the best data available. And

I guess I will have to talk to RAND as to why they would ignore

that segment of the industry, or do you know something about that

segment of the industry that would produce a study significantly

different and so that is why it was left out?

Ms. YOSKO. I cannot address that.

Chairman THOMAS. I cannot, either. I would just suggest that if

you are going to ask us to support legislation backed by the RAND

rehabilitation study, somebody had better figure out what we do

when 70 percent of the freestanding rehabilitation hospitals are not

included in this study. That is going to be tough.

Mr. Laughlin, long-term acute care hospitals, how many do you

have?

Mr. LAUGHLIN. Our company?

Chairman THOMAS. Yes.

Mr. LAUGHLIN. Our company has 20.

Chairman THOMAS. Twenty? How many of them were opened in

the last 5 years?

Mr. LAUGHLIN. All of them.

Chairman THOMAS. What prompted you to open them in the last

5 years, rather than in the previous 5-year window?

Mr. LAUGHLIN. Well, I just decided to start the company in 1992.

Chairman THOMAS. Any reason why in 1992?

Mr. LAUGHLIN. I recognized that this was a treatment area that

had a great need across the country.

Chairman THOMAS. It had nothing to do with the payment cost

ratio between hospitals that are new startups versus old hospitals?

Mr. LAUGHLIN. No, sir. I did not even know about that disparity.

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Chairman THOMAS. Right. OK.

Mr. Standish.

Mr. STANDISH. Yes.

Chairman THOMAS. In your testimony, you say in your second

point, ‘‘Incentive payments constitute a surrogate payment for the

disproportionate share population which is uniquely cared for by

long-term hospitals.’’

I thought incentive payments, as discussed, were to reward hospitals for keeping their costs below their ceiling.

Mr. STANDISH. They are. I think that the point made is that, because of the severe nature of the disease and illness of our patients, they tend to be those that at some point in their term of illness will cross over to the Medicaid Program.

Chairman THOMAS. But you do not think the incentive payments

were set up to be a surrogate payment for the disproportionate

share population, do you?

Mr. STANDISH. No.

Chairman THOMAS. Or that is just the way you guys view them

now?

Mr. STANDISH. Right.

Chairman THOMAS. OK. Does it make sense? I mean, if you are

going to provide a payment for a disproportionate share of the population, what about those hospitals that do not have that profile

and are getting incentive payments?

Mr. STANDISH. If a hospital has a TEFRA limit that is reasonable

and they are able to keep their costs below it, as I believe the incentive payment concept was originally conceived, then that payment process would make some sense.

Chairman THOMAS. Is it easier for a hospital that has been created in the last 5 years to do that, versus one that was created 10

years ago?

Mr. STANDISH. I would imagine so. Our hospital is 53 years old,

and I am most familiar with it. But certainly, the data that has

been presented would indicate that.

Chairman THOMAS. And given the rapid increase in the payments and the number of hospitals, is there something that has occurred in the last few years in terms of the unique approach of this

kind of a hospital, versus the payment structure, that might account for the number of hospitals that have been opened, since you

are a longtime one?

Mr. STANDISH. I am led to believe that many of the more recently

opened long-term hospitals care for a population that does not include some chronic lower intense patients than others do.

Chairman THOMAS. Why?

Mr. STANDISH. I do not know the answer. Again, we are not one,

so I do not know the answer to that. Our hospital cares for a large

population of both, but primarily the sicker, just as the newer hospitals care for.

Chairman THOMAS. Does any panel member want to react to any

question that I have asked?

Yes, Mr. Laughlin.

Mr. LAUGHLIN. Mr. Chairman, I appreciate the opportunity to

answer that question. Our company was founded with that very

mission in mind. We specifically did not want to be in the subVerDate 11-SEP-98 14:37 Sep 08, 1999 Jkt 058339 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 F:58339 W&M3 PsN: W&M3
95

acute care business; we wanted to take the sickest patients we

could find. A large majority of our patients come out of other hospitals’ ICUs. And we are focusing on that patient that has been

stabilized but needs an intensive intervention over a longer term

period of time.

The kind of patient we are taking we refer to as the sickest of

the sick. They are patients that are often on life support. They are

people who have been unable to be weaned off ventilators or waked

up from comas or dealt with in the normal short-term hospital according to their protocol. And we take that patient and get some

outstanding results.

We are not keeping those patients into what I would call a chronic stage. Our average length of stay averages 45 days, so we are

doing an intensive intervention in that patient and getting them to

the point where either they are well and can go home, or we have

taken them as far as we can. And at that point we make a discharge decision to another facility or to home with home health

care support.

These are train wrecks, they are very costly patients because of

the things that they need to have done to them. And that is why

I am so concerned about any change in TEFRA that is not tied to

an acuity measure.

Chairman THOMAS. Do you believe that there was a kind of a

market created for this type of service because of the diagnostic related group structure imposed on hospitals; that this may have

been done more frequently in hospitals prior to the DRGs being put

in place?

Mr. LAUGHLIN. I do not think the DRG system has anything to

do with it, really. The kind of patient I am talking about is a pretty

rare patient. When we go into a community, there is no one hospital that has enough of these——

Chairman THOMAS. OK, then let me ask you some questions, because I am curious about how you got started. In 1992, you were

looking at a niche that was there that had not been met, and you

were going to meet it. And you were looking at providing a service

for the sickest of the sick, in terms of the acute care structure.

What came about for you to be able to focus in that market?

Mr. LAUGHLIN. In my own case, why did I start the company?

Chairman THOMAS. Yes. Yes, I am just curious.

Mr. LAUGHLIN. I started talking with a group of pulmonologists

about what makes the difference in being able to wean a patient,

and I learned that the longer a patient has been in somebody’s ICU

the harder they are to wean. And I also learned that the techniques they can follow in an intensive intervention, with 3 to 4

hours of respiratory therapy per day and bringing in a multidisciplinary team where everybody is focused on weaning that patient,

can get outstanding results.

And in some of my hospitals we are weaning 80 percent of the

people we get who have come to us as weaning problems. And it

is all because of the technique we are applying to it.

Chairman THOMAS. And if we move toward a prospective payment system, what is it that you are most concerned about?

Mr. LAUGHLIN. I just have a concern that we need to get there.

I am looking forward to providing the data from our hospitals and

96

working with HCFA to try to come up with a system that will

work.

Chairman THOMAS. And once we get a system in place, what is

it that you would be most concerned about not working?

Mr. LAUGHLIN. I think, as long as that system’s design is reasonable and there is a testing period and a phase-in period for it, I

do not see why we cannot adopt a system like that for long-term

care.

Chairman THOMAS. So you are just willing to live with whatever

system has been tested, because you would be at a level

playingfield with other people who are doing the same thing?

Mr. LAUGHLIN. Exactly. I am sure we would lose money on some

patients; hopefully, we make some, and we average out OK in the

end.

Chairman THOMAS. Well, that is the way the system is supposed

to work.

Any last comment on the prospective payment system from any

of your particular perspectives, as to what you would be most concerned about? The same thing, as long as it is fairly reasonable and

it is applied to everybody?

Mr. FOSTER. Yes, sir. One comment: The RAND study did not

take into consideration comorbidities—or at least, it is my understanding that it did not—or acuity level of the patient. I think

some consideration needs to be given to that, and onset days, the

number of days a patient is in a PPS facility. Just minor.

Chairman THOMAS. Yes, I was not even going to get to the methodology of the RAND study.

Mr. FOSTER. OK. Yes, sir.

Chairman THOMAS. I just could not figure out why they had left

out 70 percent of the hospitals.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. That was what threw me.

Ms. YOSKO. May I add something?

Chairman THOMAS. If in fact that statistic is correct, and I will

be talking to RAND to find out.

Go ahead, Ms. Yosko.

Ms. YOSKO. I have gotten some further information. Again, I am

not a technical expert on RAND.

Chairman THOMAS. I understand.

Ms. YOSKO. But apparently, RAND used only large data bases for

rehabilitation, which was the UDS. And they had really no interest

to exclude any organizations. So about 40 percent of the Medicare

patients who were receiving service were included in this study in

1994. And the outcome was that RAND found that patients in UDS

reflected case mix for all rehabilitation patients.

Chairman THOMAS. So the 40 percent sample they were comfortable with gave them a pretty good reflection of 100 percent of

the universe?

Ms. YOSKO. That is my understanding, yes, sir.

Chairman THOMAS. OK.

Mr. STANDISH. I just wanted to add, if I could, to make sure that

it is understood that the National Association of Long Term Hospitals is undertaking an effort to develop a PPS system using

Medpar data with the folks from Lewin. I think the question on the

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biggest concerns that we have just is that we have been able to

prove that the existing PPS system for acute care hospitals does

not work for long-term hospital patients because of the long term

of stay and the multiple comorbidities that exist with our patient

population.

Chairman THOMAS. I just want to provide fair warning to everybody that, as was observed in the last Congress, there is a bipartisan interest—and Mr. Cardin I thought presented it quite well,

without any prompting whatsoever—about the need to get on with

this, both in terms of skilled nursing facilities and home health

care, which were the areas that we focused on, frankly, in the last

Congress. There is a bipartisan desire to have a system.

Those folks who do not think it is coming do not understand. And

those folks who work with solid data to help us create a system,

rather than us relying on HCFA or getting in a closed room and

making a decision, have a better chance of getting a prospective

payment system that does what we want it to do but, probably

more important from your point of view, does not do the things you

are afraid it is going to do if we do not work with you.

So we would love to look at any examples that you do come up

with; notwithstanding whatever someone might say about the base

study. We are going to find one, and we are going to implement it

faster than HCFA indicates they are going to try to. I can assure

you of that.

Does the gentleman from California wish to inquire?

Mr. BECERRA. Thank you, Mr. Chairman.

Let me go back to the discussion about charts and what they

imply, and ask Mr. Foster if you could tell me—I hope you have

the information—what your occupancy rate has been over the last

several years?

Mr. FOSTER. It has been right around 80 percent.

Mr. BECERRA. Eighty percent?

Mr. FOSTER. Yes, sir, about 80 percent.

Mr. BECERRA. And are we talking about licensed beds, or available beds?

Mr. FOSTER. Licensed beds.

Mr. BECERRA. OK. I am looking at your FEC filing. It showed 70

percent for the year ending 1995, but it says—let me see, let me

read the line. ‘‘During the year ended December 31, 1995, the company’s inpatient facilities achieved an overall utilization, based on

patient days and available beds, of 70.5 percent.’’

Do you mean there in this filing by ‘‘available beds,’’ licensed

beds, according to your answer that you just gave?

Mr. FOSTER. I would say licensed beds, yes, sir.

Mr. BECERRA. And you are indicating you have an occupancy rate

of about—not utilization rate, occupancy rate—you did not mean 80

percent occupancy rate, did you?

Mr. FOSTER. I am not sure I understand your question.

Mr. BECERRA. OK. By 80 percent, you meant to imply that is the

number of beds at some point filled?

Mr. FOSTER. Yes, sir.

Mr. BECERRA. OK. And that 80 percent corresponds to your last

year of documentation? Are we talking 1996?

Mr. FOSTER. Yes, sir.

98

Mr. BECERRA. Do you happen to know what the occupancy rate

or utilization rate—whichever we wish to use—of licensed beds was

in 1995?

Mr. FOSTER. No, sir, I do not.

Mr. BECERRA. Do you have that?

Mr. FOSTER. The reason I do not is a lot of these facilities had

come over in 1994 and had been in existence for years and years.

An example is Mechanicsburg, Pennsylvania, when we acquired the

NME Division rehabilitation facilities. That is one of the older rehabilitation facilities in the country, and it came over. So the historical data——

Mr. BECERRA. Do you have an easy way to track for the various

facilities what the occupancy rate has been over the last, say, 5

years?

Mr. FOSTER. Yes, sir.

Mr. BECERRA. If we were to ask for that, would you be able to

provide it?

Mr. FOSTER. Absolutely.

Mr. BECERRA. Thank you. Let me ask, and actually, Mr. Foster,

you mentioned in your testimony a bit, that HEALTHSOUTH does

not receive any disproportionate share payments. If I could ask

each of the panelists to tell me, what percentage of your patient

base is Medicaid, SSI, and uncompensated care, if you happen to

know? And if you do not know, you can just tell me you do not

know.

Mr. FOSTER. I do not know.

Mr. BECERRA. OK.

Mr. FOSTER. Are you talking about PPS-exempt Medicare?

Mr. BECERRA. Thank you for clarifying. PPS-exempt Medicare.

Mr. FOSTER. Medicare?

Mr. BECERRA. Yes. Well, let us put it this way. I am talking

about PPS-exempt facilities.

Mr. FOSTER. Yes, sir.

Mr. BECERRA. And you mentioned that you do not receive any

Medicare disproportionate share.

Mr. FOSTER. Yes, sir. What I intended to say was that there was

a disproportionate share of Medicare patients in a PPS-exempt facility, if you looked at the national average, related to the reduction

in the capital cost. So there is more of a Medicare mix in a PPSexempt facility; at least, that is what our data shows.

Mr. BECERRA. And you are probably right. But I will tell you that

I know a lot of PPS facilities that are salivating to get Medicare

patients these days. So my question to you is, with regard to PPSexempt facilities, do you know—and this is a question for all of the

panelists—what percentage of your patient base is Medicaid, SSI,

and uncompensated care?

Ms. YOSKO. I can speak for my own organization, Schwab Rehabilitation Hospital in Chicago. We have 55 percent Medicaid inpatient.

Mr. BECERRA. Five-five?

Ms. YOSKO. Fifty-five percent inpatient; and another 40—between 43 and 45 percent Medicare; and a couple of percentage

points, about 2 percent, managed care patients; and the rest is uncompensated care.

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Chairman THOMAS. How much would that be?

Ms. YOSKO. I am sorry?

Chairman THOMAS. How much would that be, the rest, when you

say ‘‘the rest’’?

Ms. YOSKO. Oh, well, the other 2 percent or so, 2 or 3 percent,

to make up 100 percent.

Chairman THOMAS. So it is about 2 percent?

Ms. YOSKO. Ninety-five percent of our patients are either Medicare or Medicaid—about 55 percent are Medicaid; another 40 are

Medicare—and about 2 percent is managed care.

Mr. BECERRA. So about 5 percent are uncompensated?

Ms. YOSKO. Uncompensated, yes.

Mr. BECERRA. OK. The rest of the panelists? And Mr. Foster, I

will get back to you on that.

Mr. LAUGHLIN. In our case, we have about 2 percent uncompensated; around 8 percent Medicaid, 7 to 8 percent; Medicare is about

75 percent; and managed care, insurance, what have you, is about

15 percent.

Mr. STANDISH. In Hospital for Special Care, combined MedicaidMedicare is 86 percent.

Mr. BECERRA. Can you break down Medicare and then Medicaid?

Mr. STANDISH. Medicare would be the smaller percentage. Because of our TEFRA rate we tend to take fewer cases than we otherwise might, so that the bulk of the 86 would be Medicaid, the disproportionate share of population that you are talking about.

Mr. BECERRA. But give me a sense, and roughly. We will not hold

you to these figures.

Mr. STANDISH. Seventy.

Mr. BECERRA. Seventy percent of the 80 percent?

Mr. STANDISH. Seventy percent of the total.

Mr. BECERRA. Of the total, is Medicaid?

Mr. STANDISH. Right. Another 16 percent would be Medicare.

Mr. BECERRA. OK.

Mr. STANDISH. With probably 5 percent uncompensated; and the

difference, managed care and traditional insurance plans.

Mr. BECERRA. About 9 percent?

Mr. STANDISH. Yes.

Mr. BECERRA. OK. Mr. Foster?

Mr. FOSTER. Sir, our Medicaid and uncompensated care would be

about 8 percent, but I would like to clarify that.

Mr. BECERRA. OK, but if you could break it down as well, Medicaid versus uncompensated?

Mr. FOSTER. Medicaid would be about 5 percent, and uncompensated the other 3.

Mr. BECERRA. OK, and managed care, or fee-for-service?

Mr. FOSTER. About 60 percent Medicare, and the other would be

non-cost-based HMO. There is very little fee-for-service.

Mr. BECERRA. Right. So 32 percent would be the remainder for

managed care?

Mr. FOSTER. Yes, sir.

Mr. BECERRA. OK. Did you want to explain something?

Mr. FOSTER. Yes, sir. I just wanted to make sure that I did not

mislead you on when I talked about disproportionate Medicare.

PPS-exempt facilities are not entitled to any disproportionate care

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payment. I just wanted to make sure that I clarified that. I think

you understand that, but just to make sure.

Mr. BECERRA. Actually, go ahead and explain it.

Chairman THOMAS. Will the gentleman yield briefly?

Mr. BECERRA. Surely.

Chairman THOMAS. The problem was, you used ‘‘disproportionate

share’’ in a way that we do not use ‘‘disproportionate share,’’ that

was all.

Mr. FOSTER. Yes, sir.

Chairman THOMAS. It is just that you used that to describe an

unfair allocation; when ‘‘disproportionate share’’ to us means a very

specific thing.

Mr. FOSTER. Yes,

Chairman THOMAS. That is what happened.

Mr. FOSTER. Sorry.

Chairman THOMAS. But I have a question, actually, on the basis

of your responses to Mr. Becerra. Because the other three of you

talked about managed care in a 2 to 3 to 4 percent range, and I

heard, Mr. Foster, you talking about one-third as managed care?

Mr. FOSTER. Yes, sir, is non-cost-based, non-Medicare and Medicaid patients. We have a high——

Chairman THOMAS. OK. Well, I am trying to understand because,

obviously, one of the growing areas is the managed care area. And

is this a growing market? Your Medicare-Medicaid I understand,

but I am frankly a little surprised.

Do any of you have contracts with managed care organizations,

and that is how you get your 2 percent?

Ms. YOSKO. Yes.

Mr. STANDISH. Right.

Chairman THOMAS. Do any of you have a growth factor on where

this is going over the next 5 years?

Mr. FOSTER. Yes, sir.

Mr. STANDISH. Oh, yes.

Mr. FOSTER. It is definitely going to increase.

Chairman THOMAS. Well, if they double, it is up to 4 percent. So

I mean, I am asking for—if it triples, it is up to 6. See, I can do

that.

Mr. STANDISH. You get to the issue of the definition of ‘‘managed

care.’’ In Connecticut, our Medicaid payment is a per diem, so that

we are at risk after a per diem payment.

Chairman THOMAS. Yes.

Mr. STANDISH. So if that is defined as managed care in your

mind, then we are up to 70 percent of our business that is managed care.

Chairman THOMAS. OK. But the point I want to make is—and

I will yield back to Mr. Becerra, because he has got a line of questioning and I do not want to interrupt it—but as long as you are

looking at that you folks are operating from a basis of MedicaidMedicare, and we have to go into it with a different approach. But

if you are actually out there on the open market in terms of managed care risk contracts, and people are contracting with you more

frequently, that gives us a kind of an independent check on what

others think you are doing that, one, is effective and, probably as

importantly, two, is cost effective.

101

And so I guess I would just say, from a knee-jerk reaction, the

higher the contracted managed care portion of what you are doing,

the more comfort it allows me, in terms of the Medicaid and Medicare government-supported portion of your program.

I thank the gentleman for yielding.

Ms. YOSKO. May I say something to that? Our organization,

Schwab, again, is representative of other specialty hospitals within

the inner city. We are related to two trauma networks, so we receive really high-intensity patients in need of rehabilitation.

We have about 32 managed care contracts, and the business is

very low, and even though we have very competitive rates. But

what we see happening in the rehabilitation facility that I am at

is there is a lot of shifting going on, and patients who could benefit

from rehabilitation services go to nursing homes within the private

sector of the managed care contracting. So the Medicaid is high because that is usually what we see from the trauma centers.

Chairman THOMAS. And there would be a growing awareness of

the cost-effective use of a facility——

Ms. YOSKO. Yes.

Chairman THOMAS [continuing]. Versus continued longer term

payment of the skilled nursing facility but not getting them up and

out, as Mr. Laughlin described.

Thank you for yielding.

Mr. BECERRA. Thank you, Mr. Chairman.

Actually, could I ask that you submit for the record those numbers you just gave us? Because I tried to write them down; I hope

I got them accurately. But if you could just give us those numbers

for the record, I would very much appreciate that.

Ms. YOSKO. Yes.

Mr. BECERRA. I do not want to have wrong numbers down for

what you have just said.

Mr. FOSTER. Absolutely.

Mr. BECERRA. Let me ask a question, and actually direct it at

Mr. Laughlin. I believe in your testimony you mentioned that you

would be against rebasing of the targets. Can you just really briefly—because I do not want to take up a lot of time; I know there

are other questions that will be asked—say why you are opposed

to the rebasing?

Mr. LAUGHLIN. Well, what I said was, I was opposed to rebasing

and other changes to TEFRA without there being a recognition

that there are different classes of hospitals within the long-term

hospital category. Because these hospitals have different missions

and different emphases, and that necessitates different staffing

patterns and different cost structures.

Mr. BECERRA. I agree. Now, if you could rebase taking into account the different characteristics of the facilities, so that those

that have high acute patient loads are gauged according to that

family of providers, would that then cause you to change your opinion of rebasing?

Mr. LAUGHLIN. It would.

Mr. BECERRA. You mentioned also that all of your facilities have

come online over the last 5 years. I suspect that means that most

of your facilities are fairly new?

Mr. LAUGHLIN. Yes, sir.

102

Mr. BECERRA. Would it be fair to say that the newer the facility,

the lower your overhead costs would be, as opposed to, say, an

older facility with older equipment?

Mr. LAUGHLIN. I do not think the age would necessarily have

anything to do, or much to do, with the overhead costs. The approach that we have taken in our company and many other companies in our association—and other associations have done the same

thing—we try to find unused hospital facilities that can be

rehabbed at a low cost. So we are trying to keep the capital cost

per bed as low as possible.

Even though these are new hospitals, it is not that we have got

necessarily new, expensive hospital facilities. The cost in these new

hospitals is primarily related to staffing. The kind of patient that

I am treating requires a very high level intervention with a lot of

ACLS-certified RNs, strong respiratory therapy. This is the cost

factor in what we do. And we are treating a lot of patients with

very difficult VRE-type infections that require third-level antibiotics that cost $200 or $300 a day per dosage. So that is where

the cost comes in. We are really tying it back to what the patient’s

acuity demands.

Mr. BECERRA. And I think it is a good point. And we should take

with caution just assuming that any provider that has come online

over the last few years is going to have a better infrastructure

automatically because of that. So I take that as a good note to keep

in mind.

Mr. LAUGHLIN. Hospitals, though, even within our own association and even hospitals within my company, vary in terms of the

patient load they treat, what their focus is. If a hospital has a higher emphasis on wound care, I mean, if a physician comes along and

says, ‘‘I like your facility in Tampa; I am going to bring all my

wound-care business to you and create a wound-care clinic here,’’

it is going to knock your cost structure down, because that is a

cheaper illness to treat than, say, a hospital that has 75 percent

respiratory. And so that happens within our company, within our

association, and within the industry as a whole.

Mr. BECERRA. Thank you, Mr. Chairman.

Chairman THOMAS. Does the gentlewoman from Connecticut

wish to inquire?

Mrs. JOHNSON. Thank you very much. And it is a pleasure to

welcome Mr. Standish here, and to acknowledge the really marvelous work of the Hospital for Special Care in New Britain, which

is a very old facility.

Mr. STANDISH. It is.

Mrs. JOHNSON. With a long and honorable history, and was into

this business long before there were many in the Nation.

Mr. STANDISH. Right.

Mrs. JOHNSON. And is very highly regarded in terms of quality

of care. You know, I think to sort of cut to the core of this—because

it is late—I think we are all in agreement that we need a case classification system, but we do not know how to do it right now. So

the real issue is, what do we do between now and for the next couple of years, or whatever time it takes—2 or 3 years—to get the

data for a classification system.

103

And I think we really have three alternatives. We have the

President’s proposal. And Mr. Standish, you make some very interesting comments in your testimony about the President’s proposal.

And I would like to have you talk about the President’s proposal

and its impact on hospitals, versus NALTH’s proposal. And if you

are familiar with it, which you may not be, and may need to get

back to us—and then anyone else in the panel who wants to comment, can—the proposal that was in the Balanced Budget Act of

1995, which was the effort of this Subcommittee to address this interim problem that you face.

So, I think we need to just kind of buckle down on what are our

choices here, because they will have very disparate impacts on the

system. At least, certainly, the President’s proposal using an average cost would have an immediate impact. So Mr. Standish, if you

would enlarge on either two or three of these alternatives, I would

appreciate it.

Mr. STANDISH. Sure. I think that an area of agreement between

the two associations before you here actually is the President’s proposal does not work, for the reason that any system that attempts

to make an adjustment to TEFRA rates based on an average simply is not proper, because the populations served in each of our

hospitals, as Rod just explained, is so diverse. In fact, the only true

answer, short of a change, would be the identification by patient

of the intensity and the acuity level of that patient.

And so therefore, what NALTH has come up with is an alternative rebasing proposal that examines those hospitals that have

had more than 2 years of Medicare losses and serve that disproportionate share population, as you are aware that the Hospital for

Special Care does, and there are many others.

And it sets in place a rebasing mechanism for those hospitals for

the short period—and we truly believe that a patient classification

system will be available next summer. That is about 15 months

from now. To the extent that the CBO determines that that costs

anything to implement, NALTH has also developed a cost-savings

proposal that is outlined in Attachment C.

And there is a numerical chart submitted with my testimony

that walks us through the case of a hospital whose authorized

spending TEFRA ceiling is, say, a $40,000 amount. And it is ‘‘Hospital B’’ on that exhibit.

Our understanding is that the Congress currently uses the target

limit, the upper ceiling, as the authorized spending amount. In

fact, in many instances, that amount is not actually spent on patient care. And so our proposal would be to simply determine

across the hospital population the difference between the upper authorized amount, but not spent, take a portion of that, allow it to

be spent, but reserve a piece for savings that would be totaled, we

believe, more than enough to pay for the selective rebasing.

Mrs. JOHNSON. In other words, you would reduce the authorized

amount to cover the rebasing costs?

Mr. STANDISH. Right.

Mrs. JOHNSON. And you think 10 to 15 percent would be affected

by the rebasing proposal?

Mr. STANDISH. Right.

104

Mrs. JOHNSON. That is really important, because ProPAC has repeatedly testified that the old hospitals in this category had the

lowest margins, and have been for years really disadvantaged by

the system. So this would provide an immediate redistribution, in

a sense, without harming the other hospitals in the system.

Mr. STANDISH. I think that is right. I think that if both parts of

what I just explained are taken together, they both help the older,

disadvantaged hospitals, while not hurting the rest of the population. And again, this is an interim solution, pending the PPS implementation which we are working on.

Mrs. JOHNSON. Would anyone else care to comment on that proposal versus the administration’s proposal?

Mr. FOSTER. I would like to make a few comments. I think anything that we do needs to be done quickly, going to PPS. I think

the ultimate PPS system should be even capitation. I do not understand why the system that is in place that allows the Secretary

since 1989—does not provide relief where necessary on a case-bycase basis. And I would suggest that we look at that.

Mrs. JOHNSON. Well, certainly some of us have been looking at

it for a number of years.

Mr. FOSTER. Yes, ma’am.

Mrs. JOHNSON. And have been working very closely with the administration.

Mr. FOSTER. Yes.

Mrs. JOHNSON. Frankly, nothing happens. And so I think Congress really does have to act to fill the void at this time, to enable

us to go into a new payment system. But when you say capitation,

is that different than a classification system?

Mr. FOSTER. The payment would be different. You are paid x

number of dollars per covered life.

Mrs. JOHNSON. Regardless of nature of illness?

Mr. FOSTER. Yes, ma’am.

Mrs. JOHNSON. That is what ProPAC was talking about. And I

have a lot of concerns about that, particularly in this type of treatment. I think Mr. Laughlin was talking earlier about the incentive

then to focus——

Mr. FOSTER. I agree.

Mrs. JOHNSON [continuing]. On areas of lower cost patients. I

know certainly for the Hospital for Special Care, they were one of

the earliest institutions in America that took ventilator-dependent

patients. And for years they lost money on those patients, because

the system could not acknowledge the problems. And yet, they have

been a leader now in weaning, as well.

So I think classification has the advantage of aligning cost and

care in a macro setting. So you do not get into rewarding high-cost

institutions, but you also do not get into the problems that the

original DRG system got into with no recognition of outliers.

Any other comment?

Ms. YOSKO. Yes. I would just like to say that, again, we do oppose the administration’s proposal, one, because it does not adjust

for case mix and, two, because, as many have mentioned, it continues these existing inequities between the old and the new providers.

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We are not necessarily in opposition to a postacute payment system. But in terms of waiting another 5 or even 10 years—or who

knows? We have been working within the Rehabilitation Association with the FRG system for sometime and believe the technicalities could be worked out and could be a preferential treatment, at

least for the rehabilitation segment of the industry. FRGs could be

even rolled in, or be compatible with some larger system, if that

system gets developed.

Mrs. JOHNSON. You mean for the rehabilitation hospitals?

Ms. YOSKO. Yes, the rehabilitation hospitals.

Mrs. JOHNSON. All right. Thank you.

Mr. LAUGHLIN. If I could comment, Mrs. Johnson. I would urge

the Subcommittee to deal with the pieces of the President’s proposal that we have information on. I think overall the proposal is

horrible, but the two elements that we do know about and that we

can deal with today are the reduction in the market basket updates, and also the reduction in capital payments.

Those things can generate most of the savings that are necessary

from the PPS-exempt hospitals and the long-term hospitals; if necessary, to reduce slightly, maybe by 1 percent, the incentive payment formula. That would be a possibility. But I think the changes

to TEFRA are premature because, number one, we do not have the

patient classification system, we do not have a good acuity index.

And any change on an average basis is going to penalize the really

sick, higher cost patient that is now getting some outstanding care

in our hospitals.

Mrs. JOHNSON. Thank you very much, Mr. Laughlin. And I thank

the panel for your testimony today.

Ms. YOSKO. Thank you.

Mr. STANDISH. Thank you.

Chairman THOMAS. Are there any final statements by any of the

panel?

I want to thank you very much for your testimony. And obviously, as we move forward we may need to revisit this area. But

thank you for your willingness. As you may know, we have not focused in separate ways on these areas, but we are now going to try

to do that, because I think you have been lumped in for too long

in a general way. And at least it is showing some maturity or sophistication on our part to give you an opportunity to inform us of

what you are doing particularly, and not in a general setting.

The Subcommittee hearing is adjourned.

[Whereupon, at 4:08 p.m., the hearing was adjourned.]

[A submission for the record follows:]

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