U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

48–525 CC 1998

REPORTS REGARDING MEDICARE PAYMENT

POLICIES

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

MARCH 3, 1998

Serial 105–24

Printed for the use of the Committee on Ways and Means

(
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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.
3

C O N T E N T S

Page

Advisory of February 24, 1998, announcing the hearing ..................................... 2

WITNESSES

Medicare Payment Advisory Commission, Gail R. Wilensky, Ph.D., Chair;

accompanied by Murray Ross, Executive Director, MedPAC ........................... 6

U.S. General Accounting Office, William J. Scanlon, Director, Health

Financing and Systems Issues, Health, Education, and Human Services

Division ................................................................................................................. 34

American Academy of Family Physicians, Deborah G. Haynes, M.D ................. 66

American Medical Association, Timothy T. Flaherty, M.D .................................. 51

American Society of Internal Medicine, Alan R. Nelson, M.D ............................. 57

Practice Expense Coalition, Alan S. Pearlman, M.D., and University of

Washington ........................................................................................................... 75

SUBMISSIONS FOR THE RECORD

American Academy of Dermatology, Roger I. Ceilley, letter ................................ 85

American Association of Health Plans, statement and attachments .................. 86

American Chiropractic Association, Arlington, VA, statement ............................ 91

American College of Rheumatology, Atlanta, GA, statement .............................. 92

American College of Surgeons, statement and attachments ................................ 94

American Osteopathic Association, Howard M. Levine, statement ..................... 101

American Society of Clinical Oncology, Alexandria, VA, statement .................... 105

Medical Group Management Association, statement ........................................... 106

Society of Thoracic Surgeons, Richard Anderson, statement ............................... 108

Stark, Hon. Pete, a Representative in Congress from the State of California ... 5
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REPORTS REGARDING MEDICARE PAYMENT

POLICIES

TUESDAY, MARCH 3, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON HEALTH,

Washington, DC.

The Subcommittee met, pursuant to notice, at noon in room

1100, Longworth House Office Building, Hon. William M. Thomas

(Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]
2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

February 24, 1998

No. HL–19

Thomas Announces Hearing on Reports

Regarding Medicare Payment Policies

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 reports regarding Medicare payment poplicies. The hearing will take

place on Tuesday, March 3, 1998, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 12:00 noon.

In view of the limited time available to hear witnesses, oral testimony at this

hearing will be from invited witnesses only. Witnesses will include Dr. Gail

Wilensky, Chairman of the Medicare Payment Advisory Committee (MEDPAC) and

Dr. William Scanlon, Director, Health Financing and Systems, U.S. General Accounting Office (GAO). However, any individual or organization not scheduled for

an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

On March 1, 1998, MEDPAC will issue its first report on Medicare payment policies since the merger of the Prospective Payment Assessment Commission (ProPAC)

and the Physician Payment Review Commission (PPRC). For more than a decade,

ProPAC and PPRC provided analysis for the Congress on hospital, physician, postacute care, and managed care issues. The Balanced Budget Act of 1997 (BBA) (P.L.

105–34) contains several provisions that reflect earlier recommendations of ProPAC

and PPRC.

This legislation requires the Secretary of Health and Human Services to develop

rules to expand private health plan options under the Medicare+Choice program, expand preventive benefits, and implement prospective payment systems for skilled

nursing facilities, hospital outpatient departments, home health agencies, and rehabilitation services. The Subcommittee will be seeking extensive guidance from

MEDPAC on many of the important details of the BBA reforms.

The BBA included a one-year delay in the implementation of the Administration’s

proposed rule for physician practice expense values and requested that GAO conduct

a thorough review of the Health Care Financing Administration’s (HCFA’s) proposed

methodology. The GAO report will address several issues including: (1) the appropriateness of resource-based methodology for practice expenses, (2) the adequacy of

HCFA’s data, (3) the categories of allowable costs, and (4) the methods for allocating

direct and indirect expenses.

In announcing the hearing, Chairman Thomas stated: ‘‘Congress passed important

reforms to make the Federal Government a more prudent purchaser of health care

by offering our seniors more private plan choices, expanding preventive benefits,

getting tough on fraud and abuse, and modernizing the fee-for-service part of the

program. The Administration’s implementation of this transformation—from a

1960s-style program to one that is market-based—will need constant monitoring.
3

Over the next few years, we will continue to look to the Medicare Payment Advisory

Commission for up-to-date analysis and recommendations and to the watchful eye

of the General Accounting Office for evaluation of the program. I look forward to

receiving their initial reports.’’

FOCUS OF THE HEARING:

The hearing will focus on the MEDPAC’s 1998 recommendation on Medicare payment policies and the GAO’s report on physician practice expenses.

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) single-space legal-size copies of

their statement, along with an IBM compatible 3.5-inch diskette in ASCII DOS Text

or WordPerfect 5.1 format only, with their name, address, and hearing date noted

on a label, by the close of business, Tuesday, March 17, 1998 , 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 one 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 an IBM compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect

5.1 format. Witnesses are advised that the Committee will rely on electronic submissions for

printing the official hearing record.

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 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.
f

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Chairman THOMAS. The hour of noon having arrived, the Subcommittee on Health will come to order.

The Balanced Budget Act, BBA, made fundamental changes to

virtually every part of the Medicare Program. Most significant, I

guess from most people’s perspective, is the new Medicare+Choice

program that will bring our seniors a menu of private plan options.

The Congressional Budget Office, CBO, estimates that within 4

years, a quarter of all Medicare beneficiaries will choose to enroll

in a private plan instead of traditional fee-for-service Medicare. To

show how late Medicare arrived on the scene, current estimates are

that the private sector who get health care through their employer

are currently at 85 percent in terms of a Medicare+Choice type option.

The reforms contained in the Balanced Budget Act obviously

didn’t stop there. This Subcommittee held several hearings last

spring in which we heard from experts that pretty obviously the

fee-for-service portion of Medicare, the predominant portion of

Medicare needed, is in need of an overhaul, or at least a tuneup.

The Balanced Budget Act modernizes this part of the program from

its sixties style cost-based reimbursement to deal with the fastest

growing cost setter such as home health care and other areas with

the prospective payment system and simple fee schedules that, for

far too long, have been common practice in the private sector and

overdue for adoption.

In making these historic changes, we looked to the recommendations of, as we have done historically, two commissions that were

established to advise Congress on these technical issues. The Prospective Payment Assessment Commission, ProPAC, and the Physician Payment Review Commission, PhysPRC.

The Balanced Budget Act merged these commissions, just as

we’ve talked about change in HCFA. Congress felt we needed a

change in the structure that advised us into the Medicare Payment

Advisory Commission, MedPAC. So ProPAC and PhysPRC are

gone, but MedPAC is now with us.

Our first witness will be Dr. Gail Wilensky, who is the Chairperson of MedPAC. As the administration grapples with the technical details regarding implementation of the Balanced Budget Act

over the next few years, we will look to Dr. Wilensky and the

MedPAC commissioners and the staff for their advice and counsel

and this is an annual occurrence, it is just a slightly different

structure that is providing us with our annual occurrence.

At the same time at this hearing, our second witness, Dr. Bill

Scanlon, will report the results of the General Accounting Office’s

examination of the physician practice expense issue. As we continue to implement the second major cost area, the work profile or

the RBUS portion which we had implemented and the practice expense being the second one, we heard from physicians back home

that they were concerned about the administration’s methodology,

if you will, in revamping of the physician payment portion on exercise.
5

Many of the physicians that I and others spoke with felt that the administration was making these changes partially devoid of realworld experience inside a kind of a black box, that we weren’t completely aware of the number of adjustments that had been made or,

more importantly, why the adjustments were made. So to shed light on this issue, Congress chose to delay the imple- mentation of the new practice expense payment method for a year

to ask the General Accounting Office to give us their opinion after

a thorough examination and, after that examination notwithstanding, to phase in the new system over several years. I look forward to hearing Dr. Scanlon’s report and then, obvi- ously, the followup panel to give us a comfort level in terms of

what has been discovered, the timetable, and the steps that need

to be made to implement this very important adjustment in the

payment structure. And with that, I would indicate that any Member who wants to put a written statement into the record can and when the gentleman from California comes, he will have obviously missed an opportunity to make some cogent comments as he always does.

Mr. MCDERMOTT. Mr. Chairman, could I put a statement in for

Mr. Stark?

Chairman THOMAS. Without objection, the written statement from my colleague of California will be made a part of the record. [The opening statement of Mr. Stark follows:]

Opening Statement of Hon. Pete Stark

Mr. Chairman,

Thank you for holding this hearing.

On the Practice Expense issue, I can’t tell whether the GAO and MedPAC have

given HCFA a C+ or a B¥, but their statements remind me of my parents talking to me about my report cards, ‘‘Fortney, we know you can do better.’’ It is too bad

we don’t have HCFA here to respond to the recommendations, and I urge you, Mr.

Chairman, to send a letter—I’d be happy to join it—asking HCFA to respond, ASAP,

to the recommendations of MedPAC and the suggestions of the GAO. MedPAC’s first report to Congress is an excellent starting point for launching the debate over Medicare’s long-term future. Prior to passage of the Balanced Budget

Act last year, it was fashionable to argue that Medicare was in dire straits—too

rigid to survive into the 21st century. But the budget that we enacted in 1997

showed that Congress can and always will respond to keep the program both solvent

and intact. The BBA cut the 75 year tax shortfall in the Part A Trust Fund in half,

and that assumes we return to the old rates of provider inflation after 2002. Yet

MedPAC finds that hospital prospective payments under last year’s bill will remain

‘‘reasonable’’—a term of art that translates into PPS margins of about 15% per year.

Read that as: ‘‘the highest in history.’’ MedPAC also notes more than once that a

lower update this fiscal year could easily be justified. Clearly, a long term policy

of restraints on provider inflation, coupled with modest, reasonable and progressive

changes in beneficiaries’ contributions can preserve the Medicare program without

radical shifting of costs to the 73% of seniors living on less than $25,000 a year. That’s not to say that the cost containment battle was been won. In one key area, MedPAC notes that the hospital industry has moved to diversify during the last 10

years into other lucrative areas, including moving ever-more procedures to outpatient services departments, where charges are far higher. Perhaps the gloomiest news is that MedPAC calculates the BBA will take about 40 YEARS before hospital outpatient department beneficiary copayments drop to

20% of the fee schedule. What happened? The budget package of last year supposedly reached the 20% goal in about 25 years. Mr. Chairman, this is an area we

should revisit—and we should be more aggressive in paying for outpatient services

in the lowest cost, quality setting.

Mr. Rangel, myself and other subcommittee Democrats favor carving out DSH

payments from Medicare HMO payments, since it is dubious that for-profit Medicare managed care plans—which are in the business of providing care only to their

enrollees—can easily be persuaded to spend money in the hospitals that bear the
6

extra costs of serving the uninsured poor. I am pleased that MedPAC supports this

proposal, and I hope we can act on it soon.

come forward and initiate the era of MedPAC, which, I might hastChairman THOMAS. And with that, I would ask Dr. Wilensky to

f

ily add, is not in any way affiliated with any political group raising

funds for any purpose. It is, in fact, an advisory group.

STATEMENT OF GAIL R. WILENSKY, PH.D, CHAIR, MEDICARE

PAYMENT ADVISORY COMMISSION; ACCOMPANIED BY

MURRAY ROSS, EXECUTIVE DIRECTOR, MEDPAC

Ms. WILENSKY. Thank you, Mr. Chairman. It is a pleasure to be

here today to testify before you and the other Members of the Subcommittee. I have with me the new Executive Director of MedPAC,

Murray Ross. You may have known him from his previous incarnation at the Congressional Budget Office, but we are very pleased

that he has joined the MedPAC staff.

We are also very pleased to be here today with our first of what

will be a series of mandated reports to the Congress, this being our

first, March 1 report on payments under Medicare.

We have now completed this first phase of our new existence,

having gotten out our first report and over the weekend having actually moved the staffs of the predecessor commissions into a single

location. We feel that we are now fully on our way to being a new,

unified commission.

In our report to Congress, one volume of which is a set of recommendations and the second volume of which is a more technical

series of discussions about these recommendations, we have covered a lot of area, reflecting the many changes that occurred in the

Balanced Budget Act.

This has been an enormous amount of change to the Medicare

Program, more than has occurred at any other time in history and,

therefore, there were many areas for comment.

What we have focused on in this first report was whether or not

the payments that were prescribed under the Balanced Budget Act

appear to be adequate as best we can tell, as opposed to looking

at payment rates de novo as we have done in the past. We will continue this type of assessment over the next several years because

of the inclusion of specific payment changes in the Balanced Budget Act for many parts of Medicare.

But there are a number of other areas that we have brought to

the Congress’ attention where either the work was complete or

where recommendations may need to be reconsidered.

Let me just indicate a couple of these areas.

The payments that are made to the capitation plans, because of

the floors and the minimum payments and the requirements for

budget neutrality, are not entirely internally consistent and we

need to get further direction from you as to how you would like

these various factors to interact with each other.

In addition, in what will be a common theme when it comes to

risk adjustment, we think that phase-ins are important. Risk adjustment is only one of a number of changes that will affect the
7

capitation plans, in addition to putting in remaining payments for

graduate medical education, having floors, and blended rates. A result of all these changes, we think that the notion of phasing-in

change an important concept.

When it comes to the hospital payments, as best we can tell, the

amounts that are included in the Balanced Budget Act, for inpatient spending appear to be reasonable. We believe a consistent

payment increase for capital would be something between 0 and 0.7

percent. This is within a range that is consistent with the payments that exist for current operating expenses and would therefore be appropriate.

We have a couple of recommendations, regarding the physician

payment. One is that the volume and intensity change, which was

included in the HCFA-proposed rule and which I remember well

because of the experience on that issue which I encountered in

1991, not be included for practice expense. Times have changed,

and the change in the sustainable growth rate makes it not necessary. If there is any error in projections, a difference in expected

versus actual payments, there is an appropriate mechanism for recouping the overpayment.

We have raised a number of important issues with regard to outpatient hospital payments. We strongly support strengthening the

protection for seniors so that they pay only a 20-percent copayment

and shortening the timeframe when this occurs.

There are a number of other areas which I would be glad to discuss in the question-and-answer period, including some of the specific recommendations for postacute care and other parts of the

Medicare system.

Let me try to summarize several themes that are in the report.

One, as I have indicated, is the need for a phase-in. With all of

the change that has been included in the Balanced Budget Act having phase-ins is a constant theme and an important one.

A second theme is the need for monitoring. A lot of change has

been included in the Balanced Budget Act. We think it is important

for the Congress to monitor the effects of the change, for HCFA to

monitor the effect of the change, and for MedPAC to assist the

Congress in monitoring the effect of all of this change and make

sure the change is what you have intended.

In addition, we think it is important to look for the effects of

interactions. Because there has been so much change in some parts

of Medicare, it won’t be enough to look at the effect of any one of

these changes, but rather to look at how they interact with each

other and to make sure that these are the changes that you intended.

Finally, it will be important to monitor missed regulatory deadlines that may occur. You have put an enormous amount of work

on HCFA’s plate. It is important to assess whether these changes

are occurring on time. If not, it will be critical to specify penalties

and acknowledge needed adjustments.

There is a last issue, one that is not specifically in this report,

one that we will touch on in our June report and then come back

to over the next several years. This is to begin to look at the rationale and consistency of payment rates for similar services which

occur across different sites.
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We need to start looking at the implicit signals we are sending

in terms of payments for services that occur both in the outpatient

hospital setting and in the physician’s office. We need to look at the

implicit signals for similar services that occur in a rehabilitation

facility, in home care, and in skilled nursing facilities. This will be

very difficult. It will be hard to come up with specific recommendations as to exactly what these differences should be, but we think

the differences in payment have been occurring far too long without

this kind of explicit recognition. We are sending signals to the providers of care, whether or not we recognize them. It is time for us

to take more of an in-depth look at what we have been doing and

make sure that the signals we have been sending are the ones that

we intend.

Let me stop here and answer any questions that you may have.

Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Gail R. Wilensky, Ph.D, Chair, Medicare Payment Advisory

Commission; accompanied by Murray Ross, Executive Director, MedPAC

Mr. Chairman and members of the Subcommittee, I am pleased to be here today

to present the Medicare Payment Advisory Commission’s (MedPAC’s) first report to

the Congress. This report focuses on Medicare payment policies. In our June report,

we will examine broader issues affecting the Medicare program and its relationship

to the American health care system as a whole.

The Congress laid out a broad agenda for reforming Medicare payment policies

in the Balanced Budget Act of 1997 (BBA), enacted last August. The creation of the

Medicare+Choice program opens opportunities for beneficiaries to enroll in a broader range of managed-care options. Changes to the methods for determining per capita payments to these plans will reduce volatility and raise rates in low-cost areas,

setting the stage for a greater number of plans to participate. Successful implementation of the risk adjustment of payments to Medicare+Choice plans called for in

the act will make for a more level playing field for these plans and may also improve the quality of care for Medicare beneficiaries with high-cost conditions.

The legislation also included significant changes intended to improve Medicare’s

traditional fee-for-service program. Both to slow spending growth and to improve

the distribution of payments, the Congress set timetables for implementing prospective payment systems (PPS) for a range of providers. Interim payment provisions

were outlined for most providers until those systems are developed. The legislation

also included a provision to reduce beneficiaries’ effective coinsurance for outpatient

hospital services.

The BBA provides the context for most of MedPAC’s recommendations this year.

The Commission’s deliberations in its first five months have focused on key issues

that will arise as the legislation is implemented by the Health Care Financing Administration (HCFA).

In developing our recommendations, we evaluated the impact of the BBA in light

of the evolution of the health care delivery system. Because its mission combines

those of the Prospective Payment Assessment Commission and the Physician Payment Review Commission, MedPAC can look across the entire Medicare program.

We were able, therefore, to consider the implications of these policy changes across

the many components of Medicare. In our discussions, inconsistency in incentives

across payment policies was a major area of concern. In addition, we considered the

interaction between policies and their effects across health care providers. The Commission will continue to explore these issues in our June report and beyond. An

issue that will need continued attention is how payment policies for

Medicare+Choice and traditional fee-for-service affect each part of the program.

Let me begin by discussing the information and recommendations the Commission

provided regarding the Medicare+Choice program. Then I will present the Commission’s views and recommendations on the traditional Medicare fee-for-service program.
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MEDICARE+CHOICE

Two major components of the Medicare reforms that became law in the BBA were

the expansion of options for private health plan participation under the new

Medicare+Choice program and the restructuring of the method for paying those

health plans. The new law changes the way capitation payments are calculated at

the county level, requires HCFA to implement a new system of risk adjustment in

2000, and makes other changes that will significantly change the adjusted community rate (ACR) process used to establish minimum benefit levels in private plans.

County-Level Payment Rates

Under prior law, each county’s payment rate was determined by its per capita feefor-service spending. Under the new system, the 1997 payment rate is the starting

point for calculating each county’s rates for 1998 and beyond, but payment rates will

no longer be strictly tied to the local pattern of fee-for-service spending. Instead, the

rate will be the highest of a blended local and national rate, a floor amount, or the

prior year’s rate increased by 2 percent. These changes were designed to lessen the

volatility of payment rates over time and their variation across areas. They were

also intended to expand the availability of Medicare+Choice plans in some markets

where rates were low and constrain rates in other areas where they were higher

than necessary to compensate plans fairly.

The changes made by the BBA will effectively eliminate year-to-year volatility in

county payment rates. As the changes are phased in over the next five years, rates

will generally grow by a minimum of 2 percent each year and by a maximum of

about 2 percentage points above the nationwide increase in program spending. The

new system will reduce the amount of variation among counties. Although central

urban counties will generally remain well above the national average and all other

counties will remain below, the differential between them is projected to shrink over

the first five years of new rates.

The impact of these changes will be substantial. Therefore, the Commission recommends careful monitoring of plan and beneficiary participation, risk selection,

plan premiums, supplemental benefits, beneficiary cost sharing, and access to care.

All of these could be affected by the new payment rules, risk adjustment methods,

and the expanded range of plans that can participate. Continued monitoring will

allow policy makers to consider additional changes that may be needed to address

adverse effects on beneficiaries. The Commission plans to continue analyzing these

characteristics of the Medicare+Choice program, as should HCFA, and adequate resources should be made available to fulfill this important function.

The Commission also has three specific recommendations regarding payments to

Medicare+Choice plans. First, the Commission recommends that disability status be

taken into account as a risk-adjustment category at the national level to avoid overpayment on behalf of disabled beneficiaries. Although spending for the disabled was

about 86 percent of that for aged beneficiaries in 1997, the BBA did not set a separate lower floor for them. As a result, the rates could be overstated by as much as

$60 per month for each enrolled disabled beneficiary in counties that are paid at

the floor. Treating disability status as a risk-adjustment category would render this

issue moot. Alternatively, the overpayments could be corrected by establishing a

separate floor 14 percent below the floor for aged beneficiaries.

Second, the Commission recommends providing an alternative to the mechanism

created by the BBA to adjust county-level payment rates without affecting total

spending. Depending on factors such as actual growth rates in Medicare spending,

budget neutrality cannot always be achieved using that mechanism. This is happening in 1998 and 1999, and may happen again in 2000. Whenever spending growth

is low enough that budget neutrality fails, it may be preferable to reduce payment

rates below the floor, lower the minimum increase, or both.

Third, the Commission recommends making additional modifications to the base

capitation rates to make them more reliable estimates of expected patient care costs.

Specifically, the Commission recommends that Medicare payments to disproportionate share hospitals be excluded from the base rates and that spending by Department of Veterans Affairs and Department of Defense facilities on behalf of Medicare

beneficiaries for covered benefits be included. Consideration should also be given to

rebasing the county rates when all of the transitions called for in the BBA have occurred. Finally, HCFA should develop a more appropriate input price index that reflects the prices faced by plans in delivering health care services in different areas.
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Risk Adjustment

In addition to revising the base capitation rates, the BBA mandates risk adjustment of Medicare capitation rates starting in the year 2000. Currently, plans are

paid the same whether the beneficiaries they attract are healthy or sick. As a result,

plans face a significant competitive disadvantage if they attract the chronically ill.

Risk adjustment would change that, paying plans more to care for the sick and less

to care for the healthy. This would place plans on a more level competitive basis,

an increasingly important consideration as Medicare+Choice options expand and enrollment grows.

Risk selection occurs not only when some plans attract predominantly healthy

beneficiaries while others attract those in poorer health, but also when the health

status of beneficiaries who enroll in private managed-care plans differs from those

who remain in fee-for-service Medicare. Studies have repeatedly found significant

risk selection in the Medicare risk-contracting program, with the typical managedcare enrollee being much healthier—and therefore less costly—than the typical feefor-service beneficiary.

Appropriate risk adjustment of these payments is essential for three reasons.

First, because Medicare’s capitation payments remain keyed to the cost of the average beneficiary, risk adjustment is needed to ensure that Medicare is not overpaying

plans in its capitation program. Second, risk adjustment allows plans that attract

more costly beneficiaries to compete adequately with other plans and to provide appropriate care. Finally, risk adjustment helps to ensure adequate access to and quality of care for beneficiaries who have high-cost conditions.

Several factors argue in favor of moderating payment changes caused by risk adjustment. The impact of risk adjustment is uncertain due to the lack of data. Plans

do not currently report the data necessary to simulate what any plan’s risk adjusted

payment will be. Moreover, other major changes in the risk contracting program will

affect how risk adjusted payments play out. The expansion of choices, introduction

of an annual enrollment period, removal of teaching-related payments from the

base, and geographic redistribution of payments will make the market more volatile.

While the Commission recognizes the importance of appropriate risk adjustment,

it also recognizes the difficulties in designing and implementing the right approach.

Consequently, our report includes five recommendations on this topic, which I will

summarize. We will continue to study this issue and offer information and advice

as appropriate.

First, the Commission recommends that HCFA phase in the risk-adjustment system—including implementation of the adjusted payment rates—in an orderly fashion and announce the operational details as soon as feasible. The appropriate phasein period should be long enough to allow plans to adjust to the payment changes

and to allow HCFA to refine its payment models without unduly delaying the intended beneficial effects of risk adjustment. These steps will help to reduce the possibility of disruption for plans and beneficiaries.

Second, the Commission recommends that, as soon as possible, Medicare develop

the capability to use diagnosis data from all sites of care for purposes of risk adjustment. Appropriate risk adjustment would require data about beneficiaries’ health

status to distinguish among them in terms of their likely relative costliness, but

plans currently do not report these data. In the short run, therefore, Medicare will

probably have to rely on diagnosis data only for patients who have been hospitalized. Full encounter data—from both hospital inpatient and ambulatory care sites—

would better describe the relative costliness of enrollees and would provide more

moderate variations in payment across patient categories than would inpatient data

alone. Interim approaches to full encounter data should also be explored, for example, by identifying a sample of beneficiaries with costly conditions, but no inpatient

treatment.

The Commission also recommends that, as a further refinement, HCFA adopt a

risk-adjustment system that recognizes changes in the costs of health conditions

over time. Under risk-adjustment models that use one year of diagnosis data and

one year of cost data to adjust rates, payment for an individual may swing significantly from year to year even though the expected costs of care for that enrollee

do not. A more appropriate approach would recognize the pattern of future costs

that beneficiaries are likely to incur based on their diagnoses. Relatively higher payments could be made for permanent conditions whose costs carried over several

years; relatively lower payments could be made for diagnoses that did not entail

permanent costs. This will provide more appropriate incentives for plans to care for

the chronically ill and to meet the needs of people with multiple health problems.

Developing a sound risk-adjustment methodology will be difficult. Moreover, risk

adjustment will not by itself create neutral financial incentives for plans to provide
11

specific services. The Commission therefore recommends that other approaches be

explored to supplement the basic risk-adjustment system. Medicare should undertake a large-scale demonstration of partial capitation or other methods that would

pay plans partly on the basis of a capitated rate and partly on the basis of payments

for services used. Such a risk-sharing arrangement may be more economically neutral than either fee-for-service payment or capitation alone. It would also reduce a

plan’s overall financial risks, and might be particularly useful for small, new, or

rural plans.

Finally, given the relatively untested state of knowledge regarding the practical

details of risk adjustment, the Commission recommends that HCFA closely monitor

plans’ responses to the rates. It is likely that risk-adjustment policies will need to

be refined based on these responses. Special attention should be devoted to the reliability and stability of the method for small plans.

Adjusted Community Rate Process

Medicare’s financial relationship with plans does not stop with its capitation payments. Medicare also requires plans to demonstrate that the payments result in

good value for beneficiaries. In particular, if Medicare’s payment to a plan exceeds

the plan’s costs (including normal profits), the plan must pass the difference on to

enrollees in the form of reduced cost sharing or additional benefits.

The Medicare program requires each risk-contracting plan to estimate the costs

of providing services to its Medicare enrollees. This estimate is called the adjusted

community rate. By comparing the ACR to Medicare’s payment, Medicare defines

the minimum benefits a plan must offer. Changes to this process are likely, however, because of both recommendations to overcome shortcomings of the current system and provisions in the BBA.

The existing ACR process has been criticized for several reasons. The ACR

amount may not accurately reflect actual costs because of the incentives plans have

to overstate costs and the lack of standard methods to measure costs and account

for differences between the Medicare population and the commercial population in

the volume and intensity of services used. There is no mechanism to review the calculation of the ACR rate adequately or to reconcile this estimate with actual costs.

The process relies on an allowance for administrative costs and profit derived from

commercial business, which may not reflect costs for Medicare contracts. Plans have

flexibility in designing alternative benefit packages across market areas, so the minimum benefits defined through the ACR may not reflect the actual benefits offered.

Finally, variation in accounting methods can distort comparisons of costs across

plans.

Changes enacted in the BBA will affect the ACR process in a variety of ways.

Some aspects of the law may reduce the accuracy or comparability of ACRs among

plans. The BBA eliminates the requirement that all plans have significant commercial enrollment. That very directly affects the ACR, because the current ACR calculation depend heavily on plans’ commercial premiums and profits. In addition,

while most plans must file complete ACR information, high-deductible medical savings account plans and private fee-for-service plans will not be held to the same requirements as other plans. Other changes in the BBA may improve the situation,

however, such as regular auditing of financial records relating to Medicare utilization, costs, and the calculation of the ACR. In addition, plans will not be allowed

to vary basic and supplemental premiums and they cannot change the benefit package from what was submitted through the ACR process.

Because the information provided through the ACR process is essential to determine whether Medicare capitation payment amounts are appropriate and to monitor

how managed care plans provide services to Medicare beneficiaries, the Commission

includes several recommendations in our report on improving the ACR process.

First, plans should be required to report their actual accounting costs and revenues from Medicare and commercial enrollees to ensure that plans’ projections of

costs can be compared with actual costs. These costs should be the basis for the

plans’ ACR projections. Second, because routine audits of plan financial information

are crucial for ensuring their accuracy, the Commission recommends that adequate

funds and personnel be made available within HCFA to conduct them.

ACRs based on plans’ accounting costs would provide a much stronger administrative tool for ensuring that plans delivered good value to beneficiaries. That is desirable, but is not without some risk of pushing plans too hard. Some monitoring and

modification of enforcement may be needed as a revised ACR is implemented to

avoid disrupting the current Medicare managed care market. In particular, plans

in highly competitive markets may already be driven to offer generous benefits to

maintain their market share. The Commission recommends that HCFA monitor the
12

effects of any new ACR in such markets and consider ways to smooth the transition

to a new and more effective ACR policy.

A revised ACR would also give HCFA expanded and more accurate information

on the value that plans deliver. The Commission recommends that HCFA use these

data to construct standardized reports on the payment, costs, and benefits of

Medicare+Choice plans. Such reports would be particularly important in areas

where the BBA increases Medicare’s capitation rates in demonstrating what Medicare’s additional spending is buying. They would also be important for tracking the

value offered by provider-sponsored organizations and other plans located in markets with little or no direct competition among plans.

FEE-FOR-SERVICE PAYMENT POLICIES

As I observed earlier, the BBA also made significant changes to the way providers

are paid under the fee-for-service program. The Commission examined these policies

and ways to improve them, focusing particularly on issues in developing and implementing prospective payment systems for a range of providers. As a result of that

study, the Commission has made a series of recommendations concerning fee-forservice payment methods, beginning with those regarding hospitals and updating

the prospective payment rates for acute-care inpatient services.

Hospitals

Medicare pays for inpatient services at general acute care hospitals using predetermined per discharge payment rates developed under a prospective payment

system. The BBA made major changes to the PPS policies, including reductions in

the annual updates for PPS operating and capital payment rates over the next several years and lower payments for indirect medical education costs to teaching hospitals. The BBA also constrained special payments to hospitals with a disproportionate share (DSH) of low-income patients and required the Secretary of Health and

Human Services to report on potential changes to the DSH payment formula.

• Updates to PPS Hospital Payments

The Commission’s analysis indicates that hospitals continue to fare well financially under PPS. Since 1991, even though payment increases have been moderate,

cost increases have been even lower, resulting in rising PPS margins. Hospitals

have sharply reduced cost growth across the board in response to pressure from private insurers, resulting in higher total margins. This indicates that the hospital industry has successfully adapted to a more competitive environment by changing its

practice patterns, holding its resource costs down, and in general operating more efficiently.

Although the PPS provisions of the BBA will have a substantial effect on hospital

payments, the Commission’s analysis indicates that using conservative assumptions

of cost growth, the hospital industry will achieve the highest PPS margins in history

by 2002. Although other changes may exert increasing pressure on hospitals’ continued viability, Medicare’s payments will still more than cover the costs of providing

inpatient hospital services to its beneficiaries even with the update reductions in the

BBA.

Even though the PPS operating payment rate updates are set in law, the Commission will continue to develop update recommendations to provide Congress with an

assessment of whether the updates are appropriate. Establishing this recommendation involves an examination of the appropriateness of the current payment rates

by analyzing the latest information on hospital financial performance. The Commission finds that the update set in current law for fiscal year 1999—market basket

minus 1.9 percentage points—is appropriate. In fact, this amount is closer to the

high end of the range considered by the Commission than to the low end.

The update to capital payments under PPS was not established in the law. Based

on analysmission recommends an update for PPS capital payments of between zero

and 0.7 percent. This would be consistent with the increase in operating payments.

• Disproportionate Share Payments

For more than a decade, Medicare has made a special payment adjustment for

hospitals that treat a disproportionate share of low-income patients under the prospective payment system. Concerns have been raised for some time, however, about

the accuracy of the underlying measure of care to the poor and the policies for targeting payments to specific hospitals. The BBA requires the Secretary to report on

a revised methodology for Medicare DSH payments by August 1998.

The Commission has three recommendations designed to improve the way that

DSH payments are distributed among hospitals. This would be done through a better measure of providing care to the poor than is currently available and a distribu13

tion formula that more consistently links each hospital’s per case DSH payment to

its low-income patient share.

First, the Commission recommends distributing DSH payments according to each

hospital’s share of low-income patient costs and volume of Medicare cases. This

would help to target payments toward the hospitals most in need while protecting

Medicare patients’ access to care at facilities they use. The measure of low-income

patient share should include Medicaid and poor Medicare patients, patients covered

by state and local indigent care programs, and those who receive uncompensated

care. These should include those in both inpatient and outpatient settings.

Second, DSH payments should be concentrated among hospitals with the highest

shares of poor patients by establishing a minimum threshold for low-income patient

cost share. Based on the Commission’s analysis, a reasonable range for the threshold would be levels that make between 50 percent and 60 percent of PPS hospitals

eligible for a DSH payment. This would focus payments on facilities that provide

the most care to the poor, while minimizing the disruption in the current distribution of payments. The adjustment should increase gradually from zero at the threshold. Further, the same formula should apply to all hospitals, regardless of location

or other characteristics.

Finally, the Commission recommends that the Secretary be given the authority

to collect the data necessary to improve the DSH formula based on the approach

discussed above. The only data needed would be charges for Medicare, Medicaid and

other programs for the poor, and uncompensated care and total patient care

charges. Initially, these data would be needed from all PPS hospitals to evaluate

and perhaps recalibrate the formula. At some point, however, only those hospitals

requesting DSH payments would need to submit the necessary data.

Providers Excluded From the Acute Care Hospital PPS

The Commission also considered the appropriate update to payments for providers

that were excluded from the acute care hospital PPS. Rehabilitation, psychiatric,

long-term care, children’s and cancer specialty hospitals and rehabilitation and psychiatric distinct-part units in acute care hospitals are a diverse group that share

a common payment method that was established in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

Prior to enactment of the BBA, excluded facilities were paid the lower of their

Medicare-allowable costs or a facility-specific target amount. The target amount was

based on a facility’s actual costs in one of its early years of operation (the specific

year depends on the type of facility), so new facilities had strong incentives to inflate their costs to establish a high target. Providers that kept their costs below

their target received additional incentive payments and those with costs above it received some additional payments to offset their losses up to a specified amount. This

system resulted in strong financial performance for new facilities. Because older facilities tended to have lower targets, they may have faced more difficulty in keeping

their costs below their target.

The BBA specified several changes to the TEFRA payment method that will help

to treat old and new facilities more equitably. The changes include reduced annual

increases to the target amounts, further constraints on payments to high-cost facilities, limits on payments for new providers, and opportunities for older providers to

raise their cost limits. The BBA also requires that a prospective payment system

be implemented for rehabilitation facilities and that a study of PPS for long-term

care hospitals be completed by fiscal year 2000. The Commission strongly supports

these modifications.

The Commission evaluated the update formula established in the BBA and recommends that it be based on the forecasted market basket increase minus 0.4 percentage points in fiscal year 1999, rather than the full market basket. This reduction reflects forecast errors in the market basket that was used to set the fiscal year

1997 update. In addition, the formula should be modified so that all facilities that

have costs above their target amount receive a positive update to their target. In

addition, the newly instituted cap on target amounts should be adjusted to account

for geographic differences in wages. This change in method may require legislation.

The BBA includes provisions to implement prospective payment systems for many

providers. Because the TEFRA system—even with the recent legislation—is not a

payment mechanism for the long term, the Commission views the movement toward

prospective systems as desirable. HCFA is required to begin a transition to a prospective payment system for rehabilitation facilities beginning in October 2000. The

Commission is concerned, however, that HCFA is considering using the RUG-III

classification system, which was designed to explain variation in nursing home patients, in the PPS for rehabilitation facilities. Research indicates that this may not
14

be appropriate. The Commission will continue to examine appropriate payment approaches for these providers.

Of the three major categories of excluded providers, there was no provision in the BBA to move forward with a prospective payment system for psychiatric facilities.

The Commission urges the Secretary to continue trying to improve Medicare’s payment policies for these providers. Although research about case-mix classification

systems for these facilities has indicated some major difficulties due to differences

in treatment goals across hospitals, the limitations of TEFRA mean that these providers should not be overlooked in future payment reforms.

Hospital Outpatient Services

Payments for hospital outpatient services have been one of the fastest-growing sectors of the Medicare program. The variety of largely cost-based methods used by

the program to pay hospitals has become tremendously complex over time, making

it a difficult system to administer and under which to operate. There are few incentives for hospitals to constrain either the growth of costs per service or the growth

in the volume of services. Further, an anomaly in the way Medicare calculates hospital payments for these services led to beneficiaries paying a much larger share of

the total payment than the 20 percent coinsurance they pay for most other services. These problems led the Congress to enact in the BBA a prospective payment sys- tem for hospital outpatient services. Under this system, nearly all hospital outpatient services will be brought under a single payment system, in which a hospital

will receive a predetermined payment amount for a given service. In severing the direct link between hospital costs and Medicare payments, the BBA’s outpatient provisions arguably represent the most significant changes to the

way Medicare pays for these services since the inception of the benefit. Given the

potential magnitude of the impacts of these changes, the Commission is concerned

how these provisions are implemented could result in significant disruptions in access to hospital outpatient services. We have therefore developed a set of recommendations related to the hospital outpatient PPS—one that addresses the somewhat independent issue of beneficiary coinsurance liability and several that concern

technical aspects of the new system. Medicare calculates a beneficiary’s coinsurance liability for a hospital outpatient service at the time the bill is submitted, based on a hospital’s charges. The program

payment, however, is calculated retrospectively on the basis of the hospital’s costs,

net of the beneficiary copayment. Since hospitals’ charges have increased more rapidly than their costs over time, beneficiary copayments have come to constitute an

ever larger proportion of the total payment to hospitals. Currently, Medicare beneficiaries pay about half of the total payment to hospitals for outpatient services,

compared with 20 percent for most other Medicare services.

The BBA includes a mechanism whereby this disproportionate liability would be reduced over time under the outpatient PPS. However, the length of time required

to reach the goal of a 20 percent beneficiary copayment for hospital outpatient services is considerable, possibly as long as 40 years. It is the Commission’s position

that this phase-in does not adequately protect the interests of Medicare beneficiaries. We believe that the Congress should revisit this issue and specify a reduction in beneficiary coinsurance that takes place over a defined period of time, significantly shorter than that implicit in the BBA.

The Commission has also taken an active interest in technical aspects of the implementation of the outpatient PPS. We are especially concerned that changes in

payment policy resulting from the implementation of the BBA provisions may result

in reduced access to hospital outpatient services for some beneficiaries or, since

many of these services may be provided in other ambulatory settings, shifting of

services to less clinically appropriate settings. To help minimize adverse impacts on

Medicare beneficiaries, the Commission has made several recommendations that

would help ensure that Medicare payments for hospital outpatient services accurately reflect the appropriate costs that hospitals incur in providing them. We recommend that the individual service be the initial unit of payment, that relative

weights be based on the costs of individual services, rather than groups of similar

services, that certain medical education costs be excluded from the calculation of relative weights and budget targets, and finally, that adjustments be made as necessary to preserve access on behalf of vulnerable populations or for specialized services.

Finally, the Commission addresses the BBA’s requirement that a volume control

mechanism be implemented to control the growth in expenditures for hospital outpatient services under the PPS. While we acknowledge that the historical rate of

growth for these services is unsustainable, we are concerned that the factors that

contribute to growth in outpatient service volume are not well enough understood
15

to allow informed decisions about volume growth. Therefore, the Commission recommends instead that these expenditures be controlled at least initially through an

expenditure cah to controlling outpatient service volume should be developed once

the outpatient PPS is implemented.

Post-Acute Care Providers

The BBA incorporated significant payment policy changes for post-acute providers—skilled nursing facilities, home health agencies, long-term care hospitals, and

rehabilitation facilities. Medicare spending for services provided in these facilities

has been rising rapidly. It appears that hospitals have shortened their stays and

controlled their costs in part through shifts in service delivery to these other sites.

There is also evidence that beneficiaries are changing the types of providers they

use following an acute event. The Commission will continue to analyze how these

changing treatment patterns affect the use of and spending for these services.

• Home Health

Development of a prospective payment system for home health services by fiscal

year 2000 may be one of HCFA’s most difficult undertakings. There are currently

few limits on who can receive these services and how many visits they may receive.

As a result, home health visits more than doubled between 1992 and 1996. The reasons beneficiaries use home health and the patterns of care should contribute to the

design of the payment system, yet not enough is known. The Commission will continue to explore variations in episodes of care as well as differences between the typical home health user, who receives these services for a short time, and those who

receive visits over extended periods and account for the largest share of visits and

spending.

Home health care is the only major Medicare benefit with no beneficiary copayment requirements. Further, it lacks serious restrictions on coverage and has exhibited substantial billing fraud. Accordingly, the Commission recommends imposing

modest copayments, but with an annual limit to protect vulnerable beneficiaries

who would be subject to these payments.

The Commission also recommends standardized coding for home health visits.

HCFA needs more information about visits both to develop an appropriate case-mix

adjustment system and to monitor service provision after the payment method is

changed. This would involve, in addition to coding the length of the visit on the bill,

recording the services provided.

Finally, the Commission recognizes that in developing a prospective payment system for home health services, the Secretary may need to make special provisions

for long-term users. Based on analysis by the Commission, there are at least two

distinct populations who receive home health services. One group includes people

who receive a limited number of visits following an acute event. The other group

consists of long-term users who are likelier to be older or disabled. Further, the

Commission recommends that an independent case manager should review the

plans of care for Medicare beneficiaries receiving home health services for extended

periods. The case manager would ensure that the services provided met the patient’s

needs and would recommend to the certifying physician appropriate changes to the

plan of care.

• Skilled Nursing Facilities

HCFA will implement a prospective payment method for skilled nursing facilities

in July of this year. This will be a great improvement to the current payment method. When the proposed rule is released, the Commission may provide more detailed

comments on that system. The Commission will be particularly interested in whether the proposed system could be improved by having a single payment for a stay

instead of a day of care. Further, the Commission is concerned with the need for

consistent policies across the providers that treat similar patients, and will be considering the policies adopted for skilled nursing facilities in light of payment methods for rehabilitation facilities and long-term care hospitals, and possibly home

health agencies. The Commission will continue work in this area to move toward

payments for services rather than sites of care.

Physician Payment

With the Medicare Fee Schedule now in its seventh year of implementation, a

number of payment policy issues have already been addressed. The fee schedule’s

relative value units for physician work have been updated annually for new services, and all work values were reviewed in 1996. A process is in place for monitoring

beneficiary access to care, and no changes in access have been detected since the

fee schedule was introduced. Finally, the new sustainable growth rate system will

overcome limitations of the former volume performance standards policy.
16

During the coming year, the most important physician payment issue is likely to

be implementation of resource-based practice expense relative values. Much work

remains to be done before the values will be ready for implementation in 1999, however. The Commission has focused on two issues in particular that need to be resolved before the new values are implemented.

The first issue concerns a proposal to reduce practice expense payments for nonsurgical services provided in conjunction with an office visit. In a June 1997 proposed rule on practice expense, HCFA proposed a 50 percent reduction in practice

expense payments for such services. The Commission agrees that payment reductions may be appropriate but has concerns about the magnitude and uniformity of

the proposed 50 percent reduction. It recommends that HCFA delay the proposed

policy change until data are collected allowing development of service-specific reductions that reflect the economies of providing nonsurgical services with an office visit.

Plans for development of service-specific reductions should be included in the practice expense proposed rule due from HCFA by May 1, 1998.

The second issue considered by the Commission involves HCFA’s plans to use a

volume aned practice expense values are implemented. This adjustment would reduce the fee schedule conversion factor to account for expected increases in the volume and intensity of services that experience a reduction in payment rates. In the

June 1997 proposed rule, HCFA proposed a volume and intensity adjustment of

¥2.4 percent. The Commission recommends use of the sustainable growth rate system to adjust the conversion factor for any increases in volume. HCFA should not

use a volume and intensity adjustment in anticipation of those increases.

Dialysis Services

MedPAC is required to recommend to the Congress an annual update to the payment for dialysis services. Our deliberations on this topic followed the framework

developed by the former Prospective Payment Assessment Commission. We considered the factors that were likely to affect the costs of providing dialysis, the base

payment received by dialysis providers, and Medicare’s special obligation to its beneficiaries with end-stage renal disease. Medicare is the dominant payer for these

services and these are particularly vulnerable beneficiaries, so it is critical that

quality of care and patient outcomes be considered in evaluating the payment rates

and methods.

Based on the Commission’s analysis, payments for dialysis services should be updated by 2.7 percent to reflect the market basket increase in the cost of inputs to

a treatment session. It is important, however, that this increase be used to improve

the quality of care provided to beneficiaries with ESRD. Therefore, we urge HCFA

to monitor closely the relationships among treatment patterns, patient outcomes,

and facility costs. In addition, the Medicare program should have more accurate cost

information to use in evaluating its payment rates. Therefore, consistent with the

BBA, we recommend annual audits of dialysis facility cost reports. Rather than auditing every facility every three years, however, more useful information might be

obtained through focused audits on facilities chosen based on past audit results or

other indicators of potential problems.

question I would ask is not a substantive one based on what you

Chairman THOMAS. Thank you very much. And I guess the first

f

are reporting, because it looks familiar to what has been done in

the past but rather how is the change over going? All of us are concerned about the new responsibilities at HCFA and we have talked

about not just reorganization but reculturalization of folks who

have a new role to play. Not that they weren’t beginning to move

in that direction, but in fact a far greater one of a fact-gathering,

information-disseminating, consumer-customer-support structure is

going to be required.

How is the reculturalization of the former PPRC and ProPAC

coming in creating a MedPAC? From the appearance of the work

product coming out, it looks much the same, that is, it looks like

quality work but I am just curious and I assume others are as well.
17

Ms. WILENSKY. Reorganizations always produce some struggles.

I would be less than honest if I were to say that it hasn’t occurred

here, but we are fortunate to have an excellent group of professionals. They have come out of somewhat different operating styles

as independent commissions, but the bottom line is they have come

together to produce what I believe is a very high-quality report. For

each and every commission meeting that we have held since October 1, we have been very pleased with the quality and timeliness

of material that has been produced.

We are physically together now in our new headquarters on 17th

and K Streets. We will, I think, be moving forward now truly as

a single commission because of this move to a single location. I

think, all things considered, we have gotten through the first 6

months with, in the final analysis the only thing that counts, a

high-quality product on time.

Chairman THOMAS. And in the long run, it’s pretty obvious that

this restructuring will focus our support groups in a way that will

give us meaningful data because the restructuring is going on on

the outside to meet the restructuring on the inside.

Thank you, also, for your usual good product in terms of the updates, support numbers. Clearly as we move forward to graduate

medical education question and the associated historic payment

structure is going to be a major concern that we will look at.

The other thing that has bothered a lot of us is our failure, notwithstanding HCFA’s efforts over the years, to deal with risk adjustment. I used to say there were two things I wanted under the

Christmas tree which would make our job a whole lot easier. One

of them was a good measuring device to deal with the risk-based

capital standards, as we were trying to figure out who really

shared risk as we moved toward these new models of delivery provider, sponsor organizations, and others, and actually the NAIC

came through in a relatively short period of time with that wish

list, and a gift that we could utilize in a way that we had not before.

No one has been forthcoming with the risk adjustment mechanism that really works. We’ve got some surrogates and I agree with

early reports that we’ve got to move these surrogates into place,

but clearly to create a really useful model is going to require the

collection of data that requires costs and there are folk who are in

the forefront of gathering this kind of data almost totally for proprietary purposes in terms of reducing their internal costs of delivering, but we need to externalize that and get HCFA to collect it.

I know there are some concerns about some of the plans who are

now active because of Medicare+Choice and they are concerned

about the administrative cost associated with this collection of

data. Do you have any words of wisdom to us? My goal is to get

it and I want to make sure that we are not being unfair in the collection of this data.

One, I don’t want to over collect, but, two, I want to get enough

to be able to move a product relatively quickly. I don’t want to create unnecessary costs but if there are necessary costs associated

with it, I am willing to make sure that they be paid. So, where are

we in this business of moving toward a risk-adjustment mechanism, how do we gather the data, who should pay, what’s a fair
18

payment, how much data is appropriate, are we on target in that

area?

Ms. WILENSKY. It is probably the most serious technical issue

that we face. If you keep in mind the notion of phasing in, not just

in terms of going forward with the adjustment but in terms of

starting with what we have available and making it better as we

go along, it will be a good guiding principle.

Let me give you a couple of examples about what I mean. Right

now we have most readily available inpatient data on patient diagnoses. We know that that is not the best data to use for risk adjustment. It would be far better to have full encounter data, data

from the outpatient setting, but we are going to have to, in all likelihood, begin the risk adjustment process using only inpatient data

and then move forward with full encounter data.

One of the reasons that PPRC, as the predecessor commission,

and MedPAC now, as the current commission, has recommended a

phase-in for risk adjustment, and also not attempting to recoup all

possible money that selection bias might have suggested.

Progress on risk adjustment is going slowly but it is moving. One

of the first milestones that will alert you as to progress in this area

is whether or not HCFA can meet its 1999 reporting date. And if

it can’t meet that, it will certainly suggest some serious problems

with meeting the year 2000 implementation.

I have had a couple of conversations about this with Nancy-Ann

Min DeParle, the new HCFA Administrator. She is very interested

in having HCFA and MedPAC work as well together as possible

and to have more interactions between our staffs than have sometimes occurred in the past. This interaction has had a somewhat

checkered history, sometimes better, sometimes not so good. We

have already had MedPAC staff over to share the recommendations

that were part of this report and to further that exchange.

But you are correct in your concerns. It is a difficult area and

it has seemed that we haven’t been making as much progress over

the last decade as we should have, and now the time is very short

for change to be implemented.

Chairman THOMAS. I will tell you that my operating structure is

something is better than nothing and we cannot wait around until

we’ve got a perfect model. We will try to be as flexible as possible

to update when better models are given to us, but everybody needs

to know we are going to go with something, because something is

better than nothing.

Ms. WILENSKY. I agree wholeheartedly and, furthermore, something will drive a better future product. It is, in my opinion, the

best way to move risk adjustment forward, to go with the best you

have, to recognize that it will have to be modified, and to try to

include some cushioning, and some phase in. It’s also important to

monitoring the affect of those changes on the plans and on the seniors who are in these plans, so that you can protect both the seniors and the plans from inappropriate change. But it is important

to recognize that if we wait for the perfect risk adjuster, we will

be waiting a lot longer than this millennium.

Chairman THOMAS. Correct. And the sooner we start, the better

we will understand the faults in the one that we will be working

with which will allow us to fine tune it to move it. But I think real19

ly in this instance, the going is the goal, because we are going to

constantly adjust this as we collect data, hopefully under a structure that provides maximum confidentiality and maximum

usability of language, not just for risk adjusters but also for outcomes, so that we can begin to get some kind of a measure of quality which all of us are concerned about and that all of them are

focused around the collection of data in a reasonable way with new

understanding of patient confidentiality.

Thank you very much.

Does the gentleman from Louisiana wish to inquire?

Mr. MCCRERY. Thank you, Mr. Chairman. Mr. Ross, I have a few

questions about Louisiana’s Medicaid Program—just joking.

I trust your new job will be a more dynamic one than your previous job.

Dr. Wilensky, with respect to your recommendation that the coinsurance for outpatient services go down to 20 percent at a faster

rate than was outlined in the BBA, is it still the estimate that the

faster rate of progress toward the 20-percent coinsurance would

cost about $19 billion and, if so, have you suggested some way to

pay for that additional cost to the system?

And I’d also like for you to comment on the wisdom of such a proposal. Is it true that by reducing the coinsurance amount we are

merely shifting costs from insurance plans, which the vast majority

of seniors have, the so-called Medigap policies, to taxpayers?

Ms. WILENSKY. Well, how much it will cost depends on how much

quicker you try to bring the 20-percent coinsurance to actuality. It

was our belief that the current plan is projected to require 40 years

until there will actually be a 20-percent coinsurance for seniors and

that this is not appropriate. How much faster, in part, will depend

on how much money is available for additional spending and while

we have all heard many interests in spending the anticipated surplus, before we actually have a surplus, I guess maybe this affected

our view as well. We did not, however, specifically indicate where

the additional dollars ought to come from, but because the Congress had recognized the problem of the current arrangement,

where seniors may be paying as much as 50 percent of the cost

rather than the nominal 20 percent that they are supposedly paying, that the Congress needs to make the adjustment faster.

With regard to the comment as to whether or not we’re shifting

to taxpayers what would otherwise be coming out of the insurance

companies, there are really two responses. For the most part, of

course, it is the seniors collectively, not the insurance companies,

that are paying the extra commission because the seniors are paying for them in the premiums that seniors pay to the insurance

companies which, in turn, pick up this element of coinsurance.

And, of course, we do have a small number of individuals who do

not have Medigap or Medicaid and who are not part of the riskbased plans, although they represent a relatively small number of

seniors.

It is unfortunate that we let this problem go as long as we have.

It is not a new issue. I was aware of it when I was HCFA Administrator in the early nineties and the cost of fixing it stopped us then.

Unfortunately, what has happened is that as it has gone on longer,

it has become an even more expensive problem because the gap be20

tween charges and the Medicare-recognized cost has grown, and

since the senior is billed 20 percent of charges as opposed as to 20

percent of the Medicare allowed cost, as this gap has gotten bigger

so has the burden and that is why we now have a problem fixing

it.

My recommendation is if there is serious interest in resolving the

problem sooner, we will be glad to work with you in making some

estimates as to how not to wait 40 years for resolution but to do

it in a way which won’t cost too much additional moneys. CBO traditionally has provided you with such estimates. We would also be

glad to help you with some suggestions.

This was a discussion that represented strong agreement on the

part of commissioners who frequently took differing views on other

issues. All of us felt very strongly that the current 40-year estimate

for resolution was an unreasonable burden to place on seniors.

Mr. MCCRERY. Well, thank you for that answer. Isn’t it true,

though, that as we see more and more seniors in capitated plan,

this is less and less of an issue.

Ms. WILENSKY. That I do agree with. To the extent that we see

some substantial increases in people going into capitation plans although we’re still at only 13 percent. Current expectations are that

in a decade, it will be only about 40 percent. If that, in fact, is not

a correct estimate, if there is substantially greater growth in capitation plans, it will make this a smaller issue. It may make it easier to change it then.

Mr. MCCRERY. Yes. That estimate is based on the current model.

We’re hopeful the Medicare Commission meeting this year will

come up with something different from the current model so we

may have to revise our estimates in that.

Thank you.

Chairman THOMAS. If the gentleman from New York doesn’t

mind, I want to work in, if possible, although he’s not now a Subcommittee Member he once was and therefore carries a responsibility by showing up, which I’m very much appreciative of, depending

on the question asked. [Laughter.]

The gentleman from Washington.

Mr. MCDERMOTT. Thank you, Mr. Chairman, for the disclaimer.

Dr. Wilensky, I have a specific question. I looked at the report and

read that there are some recommendations for your changing of the

AAPCC, adjusted average per capita cost, rates. My understanding

is that number is arrived at by taking the total amount spent by

Medicare beneficiaries as the numerator and divided by the number of people who receive their Medicare benefits in that county.

Is that a correct statement?

Ms. WILENSKY. Well, what you start with is Medicare per capita

spending. It used to determine the capitation rates. Now you use

it as a starting point, but you take in a number of other factors

as well including the blended rate, the minimum floor, and so

forth.

Mr. MCDERMOTT. Well, let me tell you what the specific problem

is. The veterans.

Ms. WILENSKY. Yes, that——

Mr. MCDERMOTT. Some areas of the country have more veterans,

maybe geography, maybe it’s a nice place to retire, maybe it’s more
21

military bases, whatever. And my understanding is that number,

the numerator, does not include costs Medicare beneficiaries received in veterans or DOD health facilities. The average cost, as I

think your report says, is understated 3 percent nationwide, but in

King County, Washington, my county, it is understated 4.3 percent,

and if you go to the county immediately south, which is Congressman Dicks’ and Congressman Adam Smith’s Districts, you are looking at a 22.6-percent participation by veterans that are not counted, so that the number is low.

And I see that you recommended——

Ms. WILENSKY. Yes.

Mr. MCDERMOTT [continuing]. That there is a change in this, but

I’d like to hear how quickly you think that can be done. I get an

awful lot of letters from veterans, because they get complaints from

the HMOs about what they are being paid because of the fact that

veterans aren’t counted.

Ms. WILENSKY. We agree that the problem that they are raising

is a legitimate one. In fact, there are two modifications, one that

we’ve suggested in terms of taking out some expenditures, exclusions of special payments that hospitals receive for disproportionate share payments, that ought not to be in there and also including some that we ought to have in there, particularly the cost of

care that is currently provided, either by VA or DOD facilities.

There is a problem regarding the availability of needed data we

need to have data at the county level. This is the one difficulty that

we’ve recognized is, because the Medicare payment rates are set at

the county level. This is what the C part of the AAPCC measure

stands for. We need this data in order to make the adjustment,

which we think, in fact, is appropriate. We are not including VA

and DOD costs here, but we need to be sure that we have the information available at the county level.

As I recall, there is some difficulty in gathering the data immediately, but my impression is that this is a problem that could be

resolved in a year or two. This is not an insurmountable problem.

It was only a problem in fixing it immediately, but we strongly recommend HCFA begin to include VA and DOD spending and make

whatever adjustments in the data collection they need to make.

Mr. MCDERMOTT. I want to thank you for looking at this whole

issue because it is a problem, and particularly a problem for the

Northwest generally, in that the AAPCC rate is about 8 percent

below the national average. The feeling in the Northwest is that we

are being punished. It’s sort of the old adage that no good deed

goes unpunished. The fact that our system has been more efficient,

we are now paying for that by lower AAPCC rates, and it is unclear to me when that is going to be rectified, if ever.

Ms. WILENSKY. There are a number of things that will help. The

Puget Sound area, and the whole State of Washington, as well as

Oregon, have had traditionally relatively low rates of health care

spending in and in Medicare, the capitation rates were also low.

During the first few years following the Balanced Budget Act, it

is mostly the floor payments, the $367 floor, that will impact your

area. Over time, the blending of the national and the local rates

will begin to kick in, so that places that have had low payments,
22

but not the lowest payment counties, will also begin to have some

effect.

Differentials will continue, but they will be far less than what we

have seen in the past and if, as we’ve recommended, we make the

adjustments for the VA, DOD expenditures, that will also help.

It’s not a gift. It is a better reflection of the expenditures that

are going on in the community and they ought to be reflected in

the measure of Medicare spending in an area.

Mr. MCDERMOTT. Could I, with the indulgence of the Chairman,

one last question, and that is, I noticed in the commission’s report——

Chairman THOMAS. Will the gentleman yield on the point? I will

let you go on with your other question, but I want to respond to

that point, because you have brought up an issue that actually cuts

several different ways.

Obviously, as Dr. Wilensky pointed out, one of our major concerns both from a Medicare+Choice point of view and frankly from

a political point of view as well, is to make sure that we create a

reasonable floor. Not a floor that would simply overcompensate the

old structure, but actually be an attractant to the Medicare+Choice.

I do believe that you will shine, but not immediately, because you

were not overweight. You have a very aggressive managed care

structure. You shouldn’t see it as a good deed going unpunished.

It isn’t denied; it’s just delayed.

When other people begin having to take the 6-day forced

marches, you will already be in shape and you will benefit immensely by it—if not in this life, in another life.

But, we’re going to have to monitor this because we have got to

make sure that those areas that have done a good job do get rewarded and the structure right now is minimal penal end on the

areas who have the high AAPCCs who haven’t done a good job and

the low areas in an attempt to create a more uniform structure and

you’re kind of in the middle and I’m very sympathetic to that and

we are going to review that constantly.

The other point you brought up has to deal with veterans and

the fact that they are not currently figured in. And, in fact, it’s

even a worse profile than that. Because they aren’t figured in to

get the benefits where they are, so that you can have a realistic

view of population and the VA, frankly, has not been as aggressive

in offering programs to the low-income veterans, where the lowincome veterans are.

And I’ve run into this for years in a suburban rural area with

a high veteran population where they get shipped all over the

place. We cannot continue to build outpatient clinics and one of the

more exciting things we are working on is in working with the Veterans Administration, Dr. Kizer there, and others, to make sure

that the Veterans Administration is in fact performing for veterans, especially low-income veterans, through its vision program.

And we’re trying to create legislation which would coordinate the

VA’s outreach program under vision with the Medicare eligible aspect of every World War II veteran who is now Medicare eligible

and blend the two, separate from adjusting the AAPCC.

Hopefully this year we will move that legislation, not as a demo,

but as a permanent change. And you need to talk to your friends
23

in this administration, not to try to push a demo but to try to put

a program in place for the low-income veteran.

Mr. MCDERMOTT. I raised it partly, Mr. Chairman, because the

subvention program—Seattle is one of the demos—so they are

acutely aware of the numbers, and that is part of the reason why

that is an issue and it will soon be an issue everywhere.

Chairman THOMAS. And we need to look at it carefully and blend

the two as we go forward.

The numbers on the DOD and the TriCare and the subvention

demonstration there are of a concern, but they are nowhere near

the magnitude that we need to deal with in the veterans program.

One is thousands and the other is millions, and frankly, they’ve

been underserved for far too long and it’s because we haven’t been

as imaginative as we need to be to create a positive blend, a change

both inside the culture of the VA and the positive blend using

Medicare moneys.

Ironically, when we try to score it, since they have been underserved, if we try to give them adequate service, this is a new consumption of services and therefore the costs go through the ceiling

which is an outrage because they should have been given this level

of service all along.

And I look forward to working with the gentleman as one of the

demo areas to make sure we move it in rapidly. That’s your first

question. Your second question.

Mr. MCDERMOTT. Well, my second question was the commission

report notes a tremendous difference in payments between hospital

outpatient departments and the so-called ASCs, ambulatory surgical centers. But the language seems to warn that there are quality problems in doing some of the procedures in the ASCs or doctor’s offices. Yet we have a tremendous disparity in pay. We actually pay more for it to be done in a place where we raise questions

of quality. I would appreciate a comment or two from you about

this. It would seem to me from a quality standpoint, you’d want to

say let’s stop paying in the outpatient or the doctor’s office and get

it done in the hospital because the quality would be better and we

would actually pay less. So——

Ms. WILENSKY. My closing comments were intended to address

the generic issue that you have just raised. That is, we pay for the

same service or similar service in different settings and how we

pay in different places for roughly the same service hasn’t received

very much scrutiny. It’s because our traditional way of assessing

payment in Medicare has typically been by service type. As a result

we spend a lot of time thinking about outpatient spending, or physician payments, or PPS, prospective payment system, excluded

hospitals, usually by type of excluded facility.

This is one of the areas that MedPAC has raised for its own future work plan, starting in June and for our retreat after the June

report, but this is a hard problem. We anticipate we’ll be working

on this issue for several years. Do the kinds of payment differentials that occur for a similar service across different sites make any

sense. What are we implicitly signaling to these sites? Is that justified?

Now, it is far easier to say this is the problem then to fix it. We

understand it will be very difficult for us to come up with a ration24

ale for fixing the problem but we think it has gone on far too long.

If a similar service is provided in a rehabilitation hospital, longterm care facility, skilled-nursing facility, or home care you’re liable to have enormously different payments.

If you provide a similar service, it may or may not be for a patient of similar severity in the outpatient facility, in a freestanding

facility or in a doctor’s office. However, we now have very different

payment levels by rate and it is not clear that these make sense

and are sending people in the right directions.

So, MedPAC will be looking at this. I don’t want to promise an

immediate solution, because I think we are cognizant of how hard

this problem is, but we’re especially concerned that 15 years after

PPS has started, and almost a decade after you passed legislation

for the resource-based relative value system, RBRVS, this issue has

not yet been studied to the best of our knowledge.

Mr. MCDERMOTT. I think the Chairman’s nodding indicates that

everybody understands this is a big problem, but it seems to me

that there are quality questions. If I read your language, it appears

you are looking at quality as well. It’s clear that it is a more important issue than perhaps some other things that might be on the

list, so I would hope that that would get these quality issues to the

top of the list.

Thank you, Mr. Chairman.

Ms. WILENSKY. We’ll keep that in mind. Thank you, Mr.

McDermott.

Chairman THOMAS. Well, thank you. Obviously, there were a

number of difficult decisions to make. Some of them, frankly, arbitrary, because we had to start but it was more important to start,

and fine tuning as we go along is absolutely essential.

I thank you the gentleman for his questions.

Does the gentleman from New York wish to inquire?

Mr. HOUGHTON. Yes, Mr. Chairman. I have three questions and

they don’t require elaborate answers. The first question, I understand that the MedPAC feels that if a PSO, provider-sponsored organization, is the only Medicare choice plan in an area it requires

some monitoring and the American Medical Association, AMA,

doesn’t. So maybe you can explain that.

The second question is home health care. You suggest there be

a modest copayment. Why?

And third, I’d just like to know how the merger is going between

the ProPAC and the PPRC.

Ms. WILENSKY. OK, I’ll be glad to answer all three.

Let me explain our sense of what is likely to happen in highly

competitive markets, versus markets in which there is little competition. I think that is what I see is the best answer for the questions raised with regard to the PSOs. Up until now, the adjusted

community rate was a measure that forced any savings from the

payment covering the Medicare benefit to be provided as additional

benefits for seniors. What we have seen is that in highly competitive areas, we really didn’t have to worry about the ACRs, adjusted

community rates, serving as the device that made sure seniors got

the benefits they should have got out of savings from HMOs, health

maintenance organizations.
25

It’s really within this sense of having the ACR as the measure

that would allow us to assess what could be offered above the

Medicare package. There has been a problem about how good a

measure the ACR is. Will the ACR be relevant for groups that don’t

have commercial products which may include PSOs.

But more importantly, if you’re in an area where there isn’t

much competition, then the kinds of pressures that make sure additional benefits are offered won’t be present. It’s the concerns

about what happens with the extra moneys, particularly for areas

where Medicare payment is being impacted by the floor, so the

Medicare payment which might have been $280, or $300, or $325

per person if you looked at traditional Medicare becomes a capitation rate of $367.

If there are areas where there is very little competition, it will

be especially important to monitor how the extra money is spent,

to make sure that seniors are getting value for the additional

money being spent.

What you are seeing reflected in the MedPAC report is a distinction between areas where there is a competitive environment and

a number of different plans, PSOs or traditional HMOs or whatever, and areas in which there isn’t a competitive environment.

That was the source of the comments about noncompetitive markets.

Mr. HOUGHTON. I’d like to make a comment after that.

Ms. WILENSKY. OK. The second one, with regard to the copay for

home care is a reiteration of a recommendation that was made last

year by ProPAC and it was, to be honest, a controversial issue for

MedPAC. We are struggling with two conflicting desires. We don’t

want to keep needed services from frail seniors who need home

care, but we are mindful that home care is an area that has seen

explosive growth. The number of people who receive services has

doubled in the last decade and the number of services that are provided has also grown rapidly.

What we have done is try to craft a balancing of these concerns.

We therefore recommended a modest copayment, we did not give

a specific amount but we are thinking something in the $3 to $5

range, subject to an annual limit. We did not specify the limit but

we are not thinking of hundreds of visits before you hit the annual

limit.

Furthermore, we are recommending the introduction of an independent case manager for long-term users of home care, both to relieve some of the pressure that physicians have told us about, that

they receive from the families of people who want to have someone

checking in on a senior, whether they really need home care per

se, and also to be sure that the seniors are getting the right services. We sent somebody who is an independent observer, who

doesn’t have an economic stake in continuing home care. We want

to make sure that the seniors get the services that they need. So

we have attempted, with this modest copayment, subject to an annual limit, and an independent assessment by a case manager for

long-term users, to balance off these different needs.

If you don’t ever want to risk having some impediments receiving

home care, then of course you wouldn’t have any sort of copayment
26

or any other kind of constraint. On the other hand, we normally

have copayments of some sort in most other parts of Medicare.

We were struggling with this balancing of concerns for seniors

and the concerns about what has been reported to us regarding

overuse and what we observed going on in the program.

Finally in regards to your question about how the merger is

going. We’ve gotten through the first phase, not too much the

worse for wear, I think. A high-quality report, on time and or we’re

physically together in a single location. Personally, if I don’t have

to do this again for a while it’s OK.

Mr. HOUGHTON. Let me just follow up, if I could. You know, getting back to the PSO issue, intellectually if you have two people,

you have competition. If you have one person, you don’t.

But I wonder whether that’s true here. If I’m a service organization, as I envision it, and again I come from a rural area, it’s really

a community organization and everybody’s involved, everybody’s

looking at it all the time. From the true economic standpoint, you

wouldn’t have competition but there are so many people involved

looking at it, pouring over it all the time, I would think it would

be a good idea maybe to try to hold back rather than having the

government breathe down the necks of those people who are trying

to make something that I think is terrific work.

Ms. WILENSKY. Well, I have been a longstanding proponent of a

PSO option. I think it is important that the physicians and the hospitals that have been providing care to seniors be allowed to come

together and provide that care within a risk-based system so that

substantially increased moneys can go to that same group that has

been providing services to seniors.

However, I want to be pretty sure that there will be more services provided to seniors, and not just higher reimbursements to the

people who are providing care. I know if there is some competitive

force between PSOs or a PSO and an HMO, this is likely to happen, but if there is just a single group in town, particularly if they

are not under the pressure of showing the government what

they’ve done with the additional money they’ve received the extra

payment could go as extra reimbursement. We just want to make

sure it is the seniors who get the benefit from the additional

money.

Chairman THOMAS. Just briefly because the gentleman’s questions were extremely important ones. Would that we could get to

the level of discussion that was just undertaken on PSOs. My problem is notwithstanding, that we are trying to empower this new arrangement principally in rural and suburban areas in savings doctors and hospitals, some of the latest information we’re getting is

that there are two types of provisions in terms of dollars and cents

that are causing us problems in moving in that direction. One of

the things we are going to have to do is either get GAO or somebody else to take a look at things we didn’t do which have now produced impediments to allowing provider sponsored organizations to

move forward in a timely and reasonable way.

These are unintended consequences, of earlier legislation that

was enacted for good and noble purposes but which has continued

to cause us problems in a number of areas that lovingly bears the
27

name of my colleague from California either in its first version or,

more importantly, in its second version.

The other problem, I tell the gentleman from New York, in terms

of the home health care copayment question is just the tip of an

enormous iceberg which was the movement of the home health care

from part A to part B. Or moving it from a payroll tax structure

to a 75 cents on the dollar general fund payment. If he wants just

a little flavor of this ongoing battle, take a look at the venipuncture

question in terms of how folks are currently able to receive the

home health care benefits and our attempt to try to channel it to

necessary and appropriate home health care support. This is a little bit of flavor of the ongoing concerns about the way in which people are utilizing the home health care question.

It’s to the point that you wonder to what extent is home the

major focus versus health care. And that is going to be an ongoing

area of examination and illumination. I think the emphasis out of

the Medicare fund, whether A or B as an anachronism or combined, has got to be only on health and not on the home support

assisted living aspect where it doesn’t merely touch on health.

That’s going to be an ongoing problem that we are going to have

to rely on you folks providing us with the kind of timely and appropriate understanding of what is going on out there.

Again, focus on venipuncture only as the first of a number of battles we are going to have to face before we get this anywhere near

right.

I thank the gentleman for his questions. They are right on.

The gentlewoman from Connecticut.

Mrs. JOHNSON of Connecticut. Thank you.

Nice to see you again. I have a few questions that I want to get

through that I’d like to ask. First of all, you do comment that studies have repeatedly found significant risk selection in the Medicare

risk contracting program. Now that we really have pretty good

data, that there is little disenrollment, it would seem to me that

over time, and over not a very long time, the experience in those

plans would be the same as fee-for-service. That even if you select

risk, over time that selection has little effect. Would you expect

that to be the case and if so, what impact would the risk adjuster

have?

Ms. WILENSKY. Well, I do think the issue that few people leave

risk plans is an important issue. Because of the fast growth plans

have experienced, and anticipate for at least the next decade, many

plans will still mostly have new enrollees for the first several

years. This means the potential for new plans to experience very

favorable selection for at least the first couple of years of their existence is still an issue that we ought not to ignore. The plans will

be getting average payments, but unusually healthy individuals.

Mrs. JOHNSON of Connecticut. Recently, the department did receive a report on the Medicare Select plan. It was required by legislation we passed a number of years ago, making that potentially

a permanent alternative and now because this report is favorable,

it will be a permanent alternative.

But my contention in that at the time we wrote that legislation

was that HMOs tend to attract people with high costs. When I go

from senior citizen center to senior citizen center, the people who
28

are most considering the HMOs are the people who have no drug

coverage and need the $500 or the whatever drug coverage that’s

provided and who often have to go to the doctor far more often than

their colleagues, so the higher cost people are attracted to the

HMOs, in my estimation, or at least that certainly is anecdotally

a significant factor.

Ms. WILENSKY. Well, in fact one of the reasons you want to have

risk adjustments is because you want to make sure sick people can

go to HMOs and that the HMOs will be well paid by them. We also

need to recognize that in some areas you may get people who are

moving to new areas where they don’t have ties to the physicians,

who, by virtue of their moving, will tend to be healthier than the

average senior, and will be attracted to HMOs. As a result, in some

areas of the country, some HMOs can expect, anecdotally and intuitively, to attract healthier individuals.

Some HMOs, because of where they are located, may not attract

healthier seniors. So it is not just a selection between fee-forservice and managed care or HMOs that we need to be concerned

about. Risk adjustment will also allow for adjustments between

those HMOs or PSOs that get a lot of sick people and those that

get healthier seniors.

The evidence has been pretty consistent that at least seniors

joing an HMO are healthier than average and have been using less

services. Now, the fact that they tend to stay in the HMOs may

mean that over time that some of the selection problem goes away.

As you know, even with a number as small as 4 percent

disenrollment, can be a problem. What we know about the 4 percent who go back to traditional Medicare is that, they tend to be

very heavy users of services.

Now it may be their choice, it may not be that these seniors are

pushed out by the HMO. It may be that they anticipated requiring

some services like home care that they think they can get in more

unlimited quantities outside of an HMO and so seek to go to traditional Medicare for that reason. We want to get the adjustment

right. We’re not trying to penalize HMOs, we’re just trying to make

whatever adjustments appear to be supported by empirical facts.

Again, we need to do this as much so we can make sure that sick

people can go to HMOs, receive the kind of services that they want

and need, and not put the HMO out of business as to make sure

that traditional Medicare doesn’t bear the burden of a lot of old and

frail individuals.

Mrs. JOHNSON of Connecticut. I certainly agree that we want to

look at acuity and seriousness of illness, but I am very concerned

about making the assumption that in the first 2 or 3 years a managed care plan can help healthier people because in this recent

study I don’t think that is supported and, when we look at

disenrollment, I’m not familiar with your 4-percent figure. My understanding is that of the disenrollees, most of them choose another

managed care plan and don’t go back to fee-for-service. So, I don’t

know what that breakout is.

Ms. WILENSKY. It’s about 7 or 8 percent disenroll over the course

of the year; about half of them, or a little more, go to another HMO

and about 3.5 to 4 percent go back to traditional fee-for-service

Medicare.
29

That group that goes back to traditional fee-for-service Medicare

tends to be very high users of services. Again, I am not trying to

say this as a way to sound punitive to HMOs. It is really to try

to recognize that you can get different groups of healthy and sick

people going into health care plans and to recognize that can be as

true among different HMOs as between HMOs and traditional feefor-service.

Mrs. JOHNSON of Connecticut. And I think that is a very valid

point and I think geography has something to do with that and a

number of things, but that is a very valid point.

Just briefly, under the Balanced Budget Act, we do have an IPS,

an interim payment system, for home care providers and we

pegged the payment system for new providers at the national average. I can’t quite remember if there is some accommodation or not.

But in my district we’ve run into a new problem and I wonder

if you have any new data that could help us with it. It’s a facility

that is new so it wasn’t in existence in 1994, the base year. But

it serves almost entirely, I guess entirely, mentally retarded patients. So, its cost structure isn’t the same as the national average.

I wonder if you have any data that could help us look at the cost

structure of this kind of facility nationwide so we would have a better, fairer base for it to start from.

Ms. WILENSKY. I would be glad to have whoever in your office is

working on this issue, work with Murray Ross on MedPAC staff to

see if there is some way we can provide information that will at

least clarify what these costs might be.

Mrs. JOHNSON of Connecticut. Thank you very much. And then

you say that the commission is concerned that HCFA is considering

using RUG III classification system which was designed to explain

variations in nursing home patients and a PBS or rehabilitation facility.

Ms. WILENSKY. Correct.

Mrs. JOHNSON of Connecticut. Because research indicates that it

is not appropriate. I’m pleased to see your recommendation. Do you

have any reason to believe that HCFA is going to use that RUG

III system for long-term hospitals?

Ms. WILENSKY. Well we have struggled with this issue of trying

to come up with a classification system, a common classification

system, which would cover facilities that sometimes or frequently

are providing common sets of services. We are more now in the position of saying we have not as yet been able to come up with this

common system. Furthermore, some of the data with regard to the

rehabilitation hospitals is proprietary and therefore brings additional difficulties as a basis of information.

I don’t know whether there was reason to believe HCFA was

about to go ahead with the RUG III option, other than the fact that

they are under Congressional instructions to proceed with prospective payment, first for the nursing facilities and then for rehabilitation facilities and for other excluded hospitals.

But we are concerned that it appears empirically that the RUG

system which has been under development for the last 10–15 years

is, unfortunately, not a very good predictor for rehabilitation facilities. We want it clear for the record that as desirable as having a

single system is, if it doesn’t work, it doesn’t work.
30

Mrs. JOHNSON of Connecticut. I appreciate that. I also was very

interested in your recommendations in regard to DSH payment.

But I’m a little concerned about your second recommendation that

recommends that there should be a minimum threshold of low income patient cost share. Last year when we were working on all

this stuff, we found that while Medicare margins are healthy

across the board, there is a small group of hospitals at which they

are not very healthy. Now those are not DSH hospitals, so I’m not

making a direct line here, but it does seem to me that for certain

hospitals, even if they have a relatively small number of DSH payments, for them they could be very significant costs. I’m a little

worried about minimum thresholds.

Ms. WILENSKY. As in the home care copayment issue, we have

attempted to weigh a number of factors and to balance them. Our

concern about minimum thresholds is easier to explain. Previously

the threshold differed depending on whether the hospital was

urban or rural. The threshold had a cliff effect, and low income

didn’t include all the components of income the commission thought

represented the relevant measures of low income.

What we have tried to do is continue to concentrate DSH payments, to not spread these payments over all hospitals, but rather

to have them go to the 50 or 60 percent of the hospitals that were

funding most of the low-income care. The DSH payments depend

on how much Medicare services the hospital is providing, so that

it not become a general support for hospitals that provide care to

low-income people and to phase-in payments so as to prevent a cliff

effect.

Whether there will be some hospitals that only provide a small

amount of Medicare services or have a relatively small low-income

population, and therefore could use a small amount of support, is

something that can clearly happen. Again it’s a tradeoff—do you

want to have no concentration and just have all hospitals get a little bit of help. Will that provide enough help to the 30 or 40 percent of the institutions that do a lot of uncompensated care. Our

real concern is to reraise this issue. We’re sure you can make DSH

payments better than they are now.

Mrs. JOHNSON of Connecticut. It may be that your broader definition which is your first recommendation. I think it is very, very important. It may sort of satisfy this problem but I do want to be

alert to it because the proportion of care, even though it may be

small in the institution, could be a factor.

And just last, let me comment that, you mention that HCFA is

proposing a volume in intensity of services, a reduction in payment

rate. This is the section that talks about the practice expense adjustments. And I’m very concerned about this because what I’m

finding from this particular group of specialists is that the costs in

these areas, of equipment, of paperwork, of administrative costs,

have gone up in many instances doubling really in recent years and

that often the time it takes to do the test is considerable. And so

the idea that they would be able to just increase the volume in

some of these specialty areas does not, with those examples I’ve

been given, hold water the way it did in just an office visit practice

concern.
31

Ms. WILENSKY. Well, as you know this is an issue I discussed

with many of you in 1991 during the work value phase of the relative value scale. It is, with some pleasure on my part, that I can

say I am supportive of the position of not including a behavioral

effect in the proposed rule. I think that the empirical experience

that occurred after the first phase of the relative value scale indicated there was far less change than HCFA had anticipated, but

equally important, the constraints on collecting whatever unanticipated change existed with the volume performance standard are no

longer present because Congress has put into place the sustainable

growth measure.

And so, it seems to us the expectation for change is far less,

given the changing environment facing the physician and the constraints on getting any excess payments back are far less because

of your adoption of the sustainable growth rate. As a result, we recommend that there not be an adjustment for anticipated volume

and intensity.

Mrs. JOHNSON of Connecticut. Thank you, Dr. Wilensky. Thank

you, Mr. Chairman.

Chairman THOMAS. Thank you gentlewoman.

Does the gentleman from California wish to inquire?

Mr. STARK. Yes, Mr. Chairman, and I apologize to you and our

star witness today for being late and missing her prepared testimony.

Chairman THOMAS. We have a galaxy of witnesses.

Mr. STARK. I actually had these questions prepared before her

testimony was available and wanted to ask Dr. Wilensky a couple

of things.

As she knows, I have been somewhere between reminding and

pestering her, about doctors’ opposing the President’s proposal for

paying for drugs on the basis of acquisition cost rather than on this

so-called average wholesale price which is sort of the equivalent of

the sticker price on an automobile. If you know anybody who paid

that for their car, you found somebody to sell a bridge to.

These drugs are reimbursed by Medicare at 10 times the amount

the doctor pays for them. Doctors are saying they can’t afford to administer these drugs because of the cost of syringes, refrigeration,

and so on. Aren’t those costs supposed to be covered by the practice

expense component of the Medicare reimbursement system?

Ms. WILENSKY. Yes, it should be and to the extent there are

problems, they should be dealt with directly. The work value part

of the relative value scale was just reviewed as part of its first 5-

year review and the practice expense rule will be coming out soon.

If the argument is that the physician needs to cross-subsidize, I

think the response is we ought to fix the initial payment if there

is indeed a problem with regard to the fee schedule; that’s the

place that needs to be fixed and you need to make a different argument to justify a higher reimbursement for the drug.

Mr. STARK. My second question, or comment, is that your report,

indicates that it is going to take us 40 years for the beneficiary’s

share of the outpatient payments to get down to the 20-percent

level. That doesn’t seem correct. Particularly when, in many of

these cases, the same procedure could be done in an ambulatory

surgical center, where Medicare doesn’t pay anywhere near what
32

we pay them for the outpatient department. We need to save the

trust fund and, more importantly, we need to answer our beneficiaries who come in screaming because their copays are often

huge relative to the cost of the procedure. Is there any way we can

make this change more quickly? The hospitals say they go broke,

but it is my understanding that it is only a reduction in prospective

earnings, not a reduction in current cash flow. Can you offer us any

suggestions as to how we could get our patients, or our constituents, off the hook for more than a 20-percent copay.

Ms. WILENSKY. I think the commissioners who initially raised

the issue on the commission were surprised that the commission

came forward with the recommendation that we did. We understand our recommendation is a ‘‘coster’’ in the traditional sense

that under the current rules it would cost the Government money,

but we think that allowing 40 years to pass before seniors would

pay no more than a 20-percent copayment for outpatient services

is inappropriate. It appears that there are instances now when seniors are paying up to 50 percent rather than the 20 percent they

should.

Mr. STARK. How much in my lifetime?

Dr. Wilensky. There are two ways to attack this problem. Before

you came in, I had discussed that one of the areas that the commission wants to take on during the next couple of years, is looking

at payments that are made for essentially the same service that

are provided in different settings. This is a very difficult issue, but

we think it is high time that we looked at this.

Mr. STARK. And if they are equally safe, shouldn’t we just pay

for the lowest one?

Ms. WILENSKY. Well, we need to take into account such factors

as the severity of illness of the patient to the extent that there tend

to be different patients in different settings. We also need to be

careful that we don’t shut down too many outpatient departments

or emergency rooms and that may justify some margin of difference

in payment.

Mr. STARK. My only concern is where the——

Ms. WILENSKY. We are sympathetic with the differences that

exist but even more so that they have not occurred because of rational pricing policies. With regard to the other matter, there are

a lot of ways to try to get the 40-year period shorter, some of which

would cost either the government or the hospitals money. If you

are indeed serious in trying to shorten the time from 40 years,

which we felt was unreasonable, we would be glad to work with

you to come up with different options.

Chairman THOMAS. Will the gentleman yield briefly on that

point?

Mr. STARK. Surely.

Chairman THOMAS. Obviously we’re trying to undo something

that developed over time, but didn’t we also empower hospitals to

negotiate that, so that there could be some market force pressure

in terms of hospitals and patients in terms of what that amount

is going to be.

Ms. WILENSKY. I don’t know. I will be glad to look into how much

it would affect the number of years. To be honest, the 40 years was

not our estimate, it was an estimate we picked up from CBO. But
33

we were concerned with the amount of time that would need to

pass before seniors paid no more than 20-percent copayment for

outpatient services.

Chairman THOMAS. My only point is that there are potentially

three players and not two and that although clearly revenue to replace it is the desired goal of hospitals, and patients, market forces

to negotiate down that amount can also play a factor at least at

particular hospitals with particular patients.

I thank the gentleman for yielding.

Mr. STARK. My final question deals with TEFRA cost limits, and

more particularly the Vencor story in the Wall Street Journal. That

story indicates that Vencor jacked their costs up in the nineties to

$68,000 a patient. Then they quit taking severe cases and their

costs dropped, but they are operating on the old high-cost base that

they established.

Now, that’s not available in the future, but it’s still an issue.

One, they probably are getting overpaid. Second, they prohibit

entry of new competitors into the field. I wonder if you might be

able to suggest some legislative fixes, if it can’t be done administratively, to level the playingfield. So we would pay people what they

ought to get paid and not based on some system that was gamed.

Why not fix it to make it as fair a system as we could? Your advice

in that would be useful. Do you think it is a good idea to make

those adjustments?

Ms. WILENSKY. We would be glad to work with you to come up

with such payment rate changes. We have been concerned that

what you get paid depends on when you joined Medicare and how

clever you were in fixing that initial rate. This is something we

should look at.

Mr. STARK. Thank you very much.

Chairman THOMAS. I am sure there are individual horror stories,

there always are, but as a collective group, as I recall in the balanced budget agreement changes we got about $4 billion over 5

years as a corrector as we move forward in this area and we’ll continue to look at it.

If there are no further questions, then, as a segue into Dr. Scanlon’s presentation, would you briefly give us MedPAC’s comments

on the GAO study dealing with the physician practice expense payments. Or did you have any.

Ms. WILENSKY. We do not have it. We will be glad to make such

comments available as soon as we’re had time to assess the report.

Chairman THOMAS. Alright. Do you want to make any general

statement? No, I’m just kidding you. Thank you very much. I look

forward to seeing you again.

Ms. WILENSKY. Thank you, Mr. Thomas.

Chairman THOMAS. Thank you, Dr. Scanlon. As usual, obviously,

the GAO report and any testimony that you may have will be made

a part of the record as a written statement. And you can address

us in any way you see fit about your findings in this important legislative area.
34

STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH

FINANCING AND SYSTEMS ISSUES, HEALTH, EDUCATION,

AND HUMAN SERVICES DIVISION, U.S. GENERAL

ACCOUNTING OFFICE

Mr. SCANLON. Thank you very much, Mr. Chairman. Members of the Subcommittee I am very pleased to be here today to discuss the

report that we did on the efforts of the Health Care Financing Administration, HCFA, to revise the practice expense component of

the Medicare physicians’ fee schedule. As you noted, in the Balanced Budget Act the Congress asked us to evaluate HCFA’s proposed fee schedule revisions that were published last June and the impact of those revisions on the access to

care.

On Friday we issued our report that provides a detailed analysis of the methods that HCFA used. In my testimony today, what I’d

like to do is provide an overview of the challenges involved in revising the fee schedule and some of the problems that HCFA should

address as it moves toward implementing the revisions in January

of 1999.

Before commenting on the methods that HCFA employed, I’d like to first note the magnitude of the task of creating resource-based

practice expense relative values.

Medicare’s fee schedule pays physicians for almost 7,000 services and procedures, each of which may involve different amounts and

types of practice expenses, including different types of staffs such

as nurses, lab technicians, receptionists, billing clerks, as well as

a myriad of supplies, equipment, and office space. Creating resource-based practice expense relative values means

estimating how much each of these resources is used in the delivery in each of those 7,000-plus procedures. We believe that HCFA

has made substantial progress in addressing this formidable task.

Its general approach for collecting information on physicians’ practice expenses by convening 15 panels of experts to identify the resources associated with services and procedures is reasonable.

Other approaches for collecting this data such as conducting surveys or gathering data onsite may be useful supplements to

HCFA’s use of expert panels, but these alternatives would not be

practical approaches for the primary data gathering. A survey to

collect the detailed information needed to build the full fee schedule would be very time consuming to complete and runs the risk

of poor response rate as HCFA experienced in its attempts to collect detailed information on indirect expenses.

Similarly, onsite direct measurement of the resources involved

for a sufficient number of procedures and practices is impractical

as the primary means of data collection due to the likely enormous

costs. In using the expert panel data, HCFA made various adjustments that were intended to convert the panel’s estimates to a

common scale, to eliminate expenses that are reimbursed to hospitals rather than to physicians, to reduce potentially excessive estimates, and to ensure consistency with aggregate survey date on

practice expenses.

While we agree with the intent of those adjustments, we believe

that some of them have methodological weaknesses and other adjustments and assumptions lack supporting data.
35

HCFA has done very little in the way of performing sensitivity

analyses that would enable it to determine the impact of the various adjustments and assumptions either individually or collectively. Such sensitivity analyses could help determine whether the

effects of the adjustments and assumptions warrant additional focused data gathering to determine their validity. We believe this

additional work should not, however, delay the phase-in of the fee

schedule revisions.

With regard to the potential impact of the revisions on access, I

would echo the sentiments expressed in the Medicare Payment Advisory Commission’s report, and our own report. There have been

very significant reductions in fees for selected services since the

Medicare fee schedule was implemented in 1992. Changes associated with the Balanced Budget Act for 1998 add to those reductions. The likely practice expense revisions will compound those

cuts.

It is impossible now to predict the impact of the total reductions

on Medicare beneficiaries’ access. It is important to remember,

however, though, that access will depend not just on the change in

Medicare fees, but how those fees relate to those paid by other purchasers.

Recent successes in controlling health care cost growth are partially the result of purchasers and health plans aggressively seeking discounts from providers. On a relative basis, Medicare fees

may remain sufficient to preserve beneficiary access. Nevertheless,

this is an issue that warrants continued monitoring and possible

Medicare fee schedule adjustments as the revisions are phased in.

In conclusion, I would note that switching from charge-based to

resource-base relative values for practice expense, while maintaining budget neutrality, inevitably creates winners and losers, as

well as controversy. Controversy arose last June with the issuance

of the proposed revision and may be expected this May with the

next version.

It should also be noted that similar controversy surrounded the

introduction of the resourced-based work relative values in 1992

but since then the medical community’s confidence in those values

has increased. In our report we recommend several actions HCFA

can take to improve its methods and data. We believe if adopted

these would give the physicians greater assurance that revisions

HCFA proposes are appropriate and sound. HCFA officials have

said that they would carefully review and consider each of our recommendations.

Mr. Chairman, that concludes my statement. I’d be happy to answer any questions you or Members of the Subcommittee have.

[The prepared statement follows:]

Statement of William J. Scanlon Director, Health Financing and Systems

Issues, Health, Education, and Human Services Division, U.S. General

Accounting Office

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the efforts of the Health Care Financing Administration (HCFA) to revise the practice expense component of Medicare’s

physician fee schedule. The Medicare program uses a fee schedule, implemented in

1992, that specifies the payments to physicians for each of over 7,000 services and
36

1For each service or procedure, Medicare pays 80 percent of the allowed amount set by the

fee schedule, and Medicare patients are responsible for the remaining 20 percent. In this testimony, we refer to the Medicare fee schedule allowance as the Medicare payment. 2Physician work is based on the time the physician spends, the intensity of effort and level

of skill required, and stress as a result of the risk of harm to the patient. 3Sec. 4505, P.L. 105–33, 111 Stat. 251, 435, Aug. 5, 1997.

4GAO/HEHS–98–79, Feb. 27, 1998.

5Section 121, P.L. 103–42, 108 Stat. 4398, 4408, Oct. 31, 1994.

procedures. In 1997, the physician fee schedule payments totaled about $43 billion.1

The fee schedule system was intended to relate Medicare’s payments to three categories of resources used to provide a service—physician work,2 practice expenses,

and malpractice expenses. Currently, only the physician work component, which accounts for about half the payment for each procedure, is resource-based. The practice expense and malpractice expense components, which account for about 41 percent and 5 percent, respectively, of the fee schedule allowances, are still based on

historical charges for physician services.

In the Balanced Budget Act of 1997,3 the Congress asked us to evaluate HCFA’s

proposed fee schedule revisions published in a June 18, 1997, notice of proposed

rulemaking and the impact of those revisions on access to care. Our report, Medicare: HCFA Can Improve Methods for Revising Physician Practice Expense Payments,4 provides a detailed analysis of the methods HCFA used to develop the June

1997 proposed revisions. In my testimony today I will provide an overview of the

challenges involved in revising the fee schedule and some problems HCFA will have

to resolve as it moves toward implementing the revisions in January 1999.

In summary, HCFA’s general approach for collecting information on physicians’

practice expenses was reasonable. HCFA convened 15 panels of experts to identify

the resources associated with several thousand services and procedures. These resources include physicians’ equipment and supplies, and the time of physicians’

staff, such as nurses, technicians, and billing clerks. Other approaches for collecting

these data, such as mailing out surveys and gathering data on-site, may be useful

supplements to HCFA’s use of expert panels, but they would not be practical approaches for the primary data gathering.

HCFA made various adjustments to the expert panels’ data that were intended

to (1) convert the panels’ estimates to a common scale, (2) eliminate expenses reimbursed to hospitals rather than to physicians, (3) reduce potentially excessive estimates, and (4) ensure consistency with aggregate survey data on practice expenses

for equipment, supplies, and nonphysician labor. While we agree with the intent of

these adjustments, we believe some have methodological weaknesses, and other adjustments and assumptions lack supporting data.

HCFA has done little in the way of performing sensitivity analyses that would enable it to determine the impact of the various adjustments, methodologies, and assumptions, either individually or collectively. Such sensitivity analyses could help

determine whether the effects of the adjustments and assumptions warrant additional, focused data gathering to determine their validity. We believe this additional

work should not, however, delay phase-in of the fee schedule revisions.

Since implementation of the physician fee schedule in 1992, Medicare beneficiaries have generally experienced very good access to physician services. The

eventual impact of the new practice expense revisions on Medicare payments to physicians is unknown at this time, but they should be considered in the context of

other changes in payments to physicians by Medicare and by other payers. Recent

successes in health care cost control are partially the result of purchasers and

health plans aggressively seeking discounts from providers. How Medicare payments to physicians relate to those of other payers will determine whether the

changes in Medicare payments to physicians reduce Medicare beneficiaries’ access

to physician services. This issue warrants continued monitoring, and possible Medicare fee schedule adjustments, as the revisions are phased-in.

BACKGROUND

The Social Security Act Amendments of 1994 5 required the Secretary of Health

and Human Services to revise the fee schedule by 1998 so the practice expense component would reflect the relative amount of resources physicians use when they provide a service or perform a procedure. The legislation required that the revisions

be budget neutral—in other words, Medicare payments for practice expenses could

increase for some procedures and decrease for others, but the revisions must not increase or decrease total Medicare payments. Physicians could, however, experience
37

6For example, one panel reviewed general surgery codes, while another reviewed orthopedic

codes. 7The CPEP members were instructed to base their estimates on the typical patient—the patient who most frequently undergoes a particular procedure—not necessarily a Medicare patient.

For example, most women receiving hysterectomies are in their 40s and 50s and are not Medicare patients. 8The Current Procedural Terminology (CPT), compiled by the American Medical Association,

is used by the Medicare program and most other payers to identify, classify, and bill medical

procedures. It consists of procedure codes, descriptions, and modifiers to facilitate billing and

payment for medical services and procedures performed by physicians. When the terms ‘‘code’’

and ‘‘procedure code’’ are used in this testimony, they refer to CPT codes. 9This was procedure code 63030.

increases or decreases in their payments from Medicare, depending on the services

and procedures they provide. HCFA published a notice of proposed rulemaking in the June 18, 1997, Federal

Register describing its proposed revisions to physician practice expense payments. HCFA estimated that its revisions, had they been in effect in fiscal year 1997, would

have reallocated $2 billion of the $18 billion of the practice expense component of

the Medicare fee schedule that year. The revisions would generally increase Medicare payments to physician specialties that provide more office-based services while

decreasing payments to physician specialties that provide primarily hospital-based

services. The revisions could also affect physicians’ non-Medicare income, since

many other health insurers use the Medicare fee schedule as the basis for their payments. Some physician groups argued that HCFA based its proposed revisions on

invalid data and that the reallocations of Medicare payments would be too severe.

Subsequently, the Balanced Budget Act of 1997 delayed implementation of the

resource-based practice expense revisions until 1999 and required HCFA to publish

a revised proposal by May 1, 1998. The act also required us to evaluate the June

1997 proposed revisions, including their potential impact on beneficiary access to

care.

HCFA’S METHOD TO ESTIMATE DIRECT EXPENSES WAS REASONABLE

HCFA faced significant challenges in revising the practice expense component of

the fee schedule—perhaps more challenging than the task of estimating the physician work associated with each procedure. Practice expenses involve multiple items,

such as the wages and salaries of receptionists, nurses, and technicians employed

by the physician; the cost of office equipment such as examining tables, instruments, and diagnostic equipment; the cost of supplies such as face masks and

wound dressings; and the cost of billing services and office space. Practice expenses

are also expected to vary significantly. For example, a general practice physician in

a solo practice may have different expenses than a physician in a group practice.

For most physician practices, the total of supply, equipment, and nonphysician labor

expenses is probably readily available. However, Medicare pays physicians by procedure, such as a skin biopsy; therefore, HCFA had to develop a way to estimate the

portion of practice expenses associated with each procedure—information that is not

readily available.

Ideally, estimates of the relative resources associated with each medical procedure

would be based on resource data obtained from a broad, representative sample of

physician practices. However, the feasibility of completing such an enormous data

collection task within reasonable time and cost constraints is doubtful, as evidenced

by HCFA’s unsuccessful attempt to survey 5,000 practices. After considering this option and the limitations of survey data already gathered by other organizations,

HCFA decided to use expert panels to estimate the relative resources associated

with medical procedures and convened 15 specialty-specific clinical practice expense

panels (CPEP).6 Each panel included 12 to 15 members; about half the members of

each panel were physicians, and the remaining members were practice administrators and nonphysician clinicians such as nurses. HCFA provided national medical

specialty societies an opportunity to nominate the panelists, and panel members

represented over 60 specialties and subspecialties.

Each panel was asked to estimate the practice expenses 7 associated with selected

procedure codes.8 Some codes, called ‘‘redundant codes,’’ were assigned to two or

more CPEPs so that HCFA and its contractor could analyze differences in the estimates developed by the various panels. For example, HCFA included the repair of

a disk in the lower back among the procedures reviewed by both the orthopedic and

neurosurgery panels.9

We believe that HCFA’s use of expert panels is a reasonable method for estimating the direct labor and other direct practice expenses associated with medical serv38

ices and procedures. We explored alternative primary data-gathering approaches,

such as mailing out surveys, using existing survey data, and gathering data on-site,

and we concluded that each of those approaches has practical limitations that preclude their use as reasonable alternatives to HCFA’s use of expert panels. Gathering

data directly from a limited number of physician practices would, however, be a useful external validity check on HCFA’s proposed practice expense revisions and would

also help HCFA identify refinements needed during phase-in of the fee schedule revisions.

WEAKNESSES AND LIMITATIONS OF HCFA’S ADJUSTMENT OF DIRECT EXPENSE

ESTIMATES

HCFA staff believed that each of the CPEPs developed reasonable relative

rankings of their assigned procedure codes. However, they also believed that the

CPEP estimates needed to be adjusted to convert them to a common scale, eliminate

certain inappropriate expenses, and align the panels’ estimates with data on aggregate practice expenses. While we agree with the intent of these adjustments, we

identified methodological weaknesses with some and a lack of supporting data with

others.

HCFA staff found that labor estimates varied across CPEPs for the same procedures and therefore used an adjustment process referred to as ‘‘linking’’ to convert

the different labor estimates to a common scale. HCFA’s linking process used a statistical model to reconcile significant differences between various panels’ estimates

for the same procedure (for example, hernia repair). HCFA used linking factors derived from its model to adjust CPEP’s estimates. HCFA’s linking model works best

when the estimates from different CPEPs follow certain patterns; however, we found

that, in some cases, the CPEP data deviated considerably from these patterns and

that there are technical weaknesses in the model that raise questions about the

linking factors HCFA used.

HCFA applied two sets of edits to the direct expense data in order to eliminate

inappropriate or unreasonable expenses: one based on policy considerations, the

other to correct for certain estimates HCFA considered to be unreasonable. The

most controversial policy edit concerned HCFA’s elimination of nearly all expenses

related to physicians’ staff, primarily nurses, for work they do in hospitals. HCFA

excluded these physician practice expenses from the panels’ estimates because,

under current Medicare policy, those expenses are covered by payments to hospitals

rather than to physicians. We believe that HCFA acted appropriately according to

Medicare policy by excluding these expenses. However, shifts in medical practices

affecting Medicare’s payments may have resulted in physicians absorbing these expenses.

In a notice published in the October 1997 Federal Register, HCFA asked for specific data from physicians, hospitals, and others on this issue. After we completed

our field work, HCFA received some limited information, which we have not reviewed. HCFA officials said that they will review that information to determine

whether a change in their position is warranted. If additional data indicate that this

practice occurs frequently, it would be appropriate for HCFA to determine whether

Medicare reimbursements to hospitals and physicians warrant adjustment.

HCFA also limited some administrative and clinical labor estimates that it believes are too high. Specifically, HCFA believes that (1) the administrative labor

time estimates developed by the CPEPs for many diagnostic tests and minor procedures seemed excessive compared with the administrative labor time estimates for

a midlevel office visit; and (2) the clinical labor time estimates for many procedures

appeared to be excessive compared with the time physicians spend in performing

the procedures. Therefore, HCFA capped the administrative labor time for several

categories of services at the level of a midlevel office visit. Furthermore, with certain

exceptions, HCFA capped nonphysician clinical labor at 1–1/2 times the number of

minutes it takes a physician to perform a procedure. HCFA has not, however, conducted tests or studies that validate the appropriateness of these caps and thus cannot be assured that they are necessary or reasonable.

Various physician groups have suggested that HCFA reclassify certain administrative labor activities as indirect expenses. Such a move could eliminate the need

for limiting some of the expert panels’ administrative labor estimates, which some

observers believe are less reliable than the other estimates they developed. HCFA

officials said that they are considering this possibility.

Finally, HCFA adjusted the CPEP data so that it was consistent in the aggregate

with national practice expense data developed from the American Medical Association’s (AMA) Socioeconomic Monitoring System (SMS) survey—a process that it

called ‘‘scaling.’’ HCFA found that the aggregate CPEP estimates for labor, supplies,
39

and equipment each accounted for a different portion of total direct expenses than

the SMS data did. For example, labor accounted for 73 percent of total direct expenses in the SMS survey data but only 60 percent of the total direct expenses in

the CPEP data. To make the CPEP percentages mirror the SMS survey percentages,

HCFA inflated the CPEPs’ labor expenses for each code by 21 percent and the medical supply expenses by 6 percent and deflated the CPEPs’ medical equipment expenses by 61 percent.

The need for scaling was due in part to the equipment utilization rates HCFA

used. HCFA officials told us that actual equipment utilization rates were not available from the medical community and therefore they had to make assumptions

about the rate at which equipment is used in order to assign equipment costs to

each code. For equipment associated with specific procedures, such as a treadmill

used as part of a cardiology stress test, HCFA assumed a utilization rate of 50 percent, while, for equipment that supports all or nearly all services provided by a

practice, such as an examination table, HCFA assumed a utilization rate of 100 percent. Scaling provided HCFA with a cap on the total amount of practice expenses

devoted to equipment that was not dependent upon the equipment rate assumption

HCFA used.

While HCFA officials acknowledge that their equipment utilization rate assumptions are not based on actual data, they claim that the assumptions are not significant for most procedures since equipment typically represents only a small fraction

of a procedure’s direct expenses. The AMA and other physician groups that we contacted have said, however, that HCFA’s estimates greatly overstate the utilization

of most equipment, which results in underestimating equipment expenses used in

developing new practice expense fees. HCFA agrees that the equipment utilization

rate will affect each medical specialty differently, especially those with high equipment expenses, but HCFA staff have not tested the effects of different utilization

rates on the various specialties.

In a notice in the October 1997 Federal Register, HCFA asked for copies of any

studies or other data showing actual utilization rates of equipment, by procedure

code. This is consistent with the Balanced Budget Act of 1997 requirement that

HCFA use actual data in setting equipment utilization rates.

IMPACT ON ACCESS TO CARE NEEDS CONTINUED MONITORING

It is not clear whether beneficiary access to care will be adversely affected by

Medicare’s new fee schedule payments for physician practice expenses. This will depend upon such factors as the magnitude of the Medicare payment reductions experienced by different medical specialties, other health insurers’ use of the fee schedule, and fees paid by other purchasers of physician services.

While beneficiary access to care has remained very good since implementation of

the fee schedule began in 1992, the cumulative effects of the transition to the fee

schedule, recent adjustments to the fee schedule that were mandated by the Balanced Budget Act, and the upcoming practice expense revisions could alter physicians’ willingness to accept Medicare’s fee schedule payments for some procedures.

For example, between 1992 and 1996, cardiologists experienced a 9 percent reduction in their Medicare fee schedule payments; gastroenterologists, an 8-percent reduction, and ophthalmologists, a 12-percent reduction. HCFA’s June 1997 proposed

rule would result in further reductions of 17 percent, 20 percent, and 11 percent,

respectively, for these specialties once the new practice expense component of the

fee schedule is fully implemented in 2002. Additionally, Medicare payments for surgical services were reduced by 10.4 percent beginning in 1998 as a result of provisions contained in the Balanced Budget Act. The combined impact of the proposed

and prior changes on physicians’ incomes will affect some medical specialties more

than others. Therefore, there is a continuing need to monitor indicators of beneficiary access to care, focusing on services and procedures with the greatest reductions in Medicare payments.

OBSERVATIONS

Even though HCFA has made considerable progress developing new practice expense fees, much remains to be done before the new fee schedule payments are implemented starting in 1999. For example, HCFA has not collected actual data that

would serve as a check on the panels’ data and as a test of its assumptions and

adjustments. Furthermore, HCFA has done little in the way of conducting sensitivity analyses to determine which of its adjustments and assumptions have the greatest effects on the proposed fee schedule revisions. There is no need, however, for

HCFA to abandon the work of the expert panels and start over using a different
40

methodology; doing so would needlessly increase costs and further delay implementation of the fee schedule revisions.

The budget neutrality requirement imposed by the Congress means that some physician groups would benefit from changes in Medicare’s payments for physician

practice expenses to the detriment of other groups. As a result, considerable controversy has arisen within the medical community regarding HCFA’s proposed fee

schedule revisions, and such controversy can be expected to continue following

issuance of HCFA’s next notice of proposed rulemaking, which is due May 1, 1998.

Similar controversy occurred when Medicare initially adopted a resource-based payment system for physician work in 1992. Since that time, however, medical community confidence in the physician work component of the fee schedule has increased. In our recently issued report, we recommended several actions HCFA should take to improve its methods for revising Medicare’s payments for physician practice expenses. These recommendations, if adopted, would give physicians greater assurance

that the revisions HCFA proposes are appropriate and sound. HCFA officials said

that they would carefully review and consider each of our recommendations as they

develop their rule.

Mr. Chairman, this concludes my statement. I will be happy to answer your questions.

[The GAO Report is being retained in the Committee’s files.]

Chairman T

This is an important issue, and we’re hoping that your report

HOMAS. Thank you very much, Dr. Scanlon.

f

will turn a page in the ongoing attempts to get it right. It is important because it does involve a zero-sum redistribution, which has

caused some concern about getting it right, and I want to make

sure we get it right. We will hear, after you, a panel of physicians, and their opinion of what you’ve done. So Dr. Pearlman will be able to more fully

elaborate on his own testimony. But in reading his testimony I was

taken apart by a statement he makes on the bottom of the last

page. Although I understand that in certain of these words there’s

plenty of wiggle room, I want you to react to this statement to see

if you agree with it fully, disagree in part, or basically disagree

with it, because it is important for us to understand what we have

in the GAO report.

And he says on the bottom of the last page, ‘‘The first step is to recognize, as has the General Accounting Office, that the unresolved questions over data and methodology are too great to support confidence in any proposal made this year that purports to be

the final word on the issue.’’ I guess the argument would be, is it

the final word or not? I think none of us are looking to the final

word; we’re looking to some reasonably conclusive word that will

allow us to move forward.

So in that sense, do you agree with his assessment that the General Accounting Office believes that the unresolved questions over

data and methodology are too great to support confidence in any

proposal made this year?

Mr. SCANLON. I think that you’ve touched the point where we

would differ, which is the issue of the final word versus, as you

said, whether we have a reasonably conclusive basis for moving forward. In our report we discuss the critical importance of a refinement process that’s going to improve these relative values over

time. We recognize, and HCFA recognizes, that not only in the

process of estimating these originally are difficulties in gathering

sufficient information to feel totally comfortable—but that the
41

world changes, and the resources that may be involved in different

procedures and new procedures may require that one readdress the

question. So we don’t agree that you can’t move forward at this

point, but we would agree that, in moving forward, we’re not going

to have the final relative values units.

Chairman THOMAS. The other question I would ask you is, again,

on methodology, because, frankly, we’re all trying to get it right.

My understanding is that the Practice Expense Coalition has Coopers and Lybrand to try to develop a practice expense methodology

based on cost accounting. Although the idea of allocating costs at

the practice level is relatively straightforward, what I would appreciate, if you have the ability to make some comment on, is that if

the costs are going to be allocated according to the Current Procedural Terminology code book, which I’ve acquired and looked at

there, about 7,000 individual procedures that would have to be part

of that coding aspect, is that a practicable, a reasonable, and appropriate approach, in your opinion?

Mr. SCANLON. I’ve had a chance to look at Dr. Pearlman’s statement, and in particular, the description of the Coopers and

Lybrand approach, and there are remarkable similarities between

it and other approaches, as well as the approach that HCFA has

employed. The heart of what’s involved here is the ability to assign

expenses to each of those 7,000 procedures. In Dr. Pearlman’s

statement, I think that his language or his words are that we either know or we can learn how to assign different expenses to

those procedures. That’s the challenge.

In looking at other methods, as well as what HCFA has done,

there’s a combination of assumptions and actual data. HCFA gathers its data through the expert panels. Other people have proposed

going into offices with stopwatches or going into offices with staff

logs and asking people to record what they do every 15 minutes.

The alternatives will produce data of different precision at very,

very different costs. The issue is to balance the amount of precision

you get with the cost, gathering that kind of information. We think

HCFA made a reasonable compromise in bringing together the panels to try to get that information.

Chairman THOMAS. And the old saw, time is money, so although

the gathering of that data does have differing costs, it also deals

with different timetables.

Mr. SCANLON. That’s correct.

Chairman THOMAS. And the concern is, do we have enough to go

forward—not, is what we have—perfect. That’s our biggest concern

in dealing with this.

Mr. SCANLON. We think we have enough——

Chairman THOMAS. It’s degrees of comfort level——

Mr. SCANLON. Right.

Chairman THOMAS [continuing]. Not absoluteness.

Mr. SCANLON. And I would underscore the recommendation we

made that, to increase our comfort level, the importance is to understand what are the most important assumptions and data elements that contribute to changes in fees that we’re going to be introducing, and then to work to verify that those assumptions and

the data elements that we had were reasonable. Across the board
42

we can’t afford to go back and try and develop perfect data, but in

a targeted way we can improve the data that we have for this task.

Chairman THOMAS. And then, just finally, I have had my share

of criticisms with HCFA, but what I got out of your study—and if

it’s incorrect, let me know—is that in this instance HCFA has been

open and cooperative in trying to resolve concerns about the content and level of accuracy of their data; is that correct?

Mr. SCANLON. They’ve certainly been open and cooperative with

us, and we believe they’ve had continued contact with the medical

societies. They’ve requested information from the medical societies.

We think that they need to add an additional effort which is a

more proactive stance in terms of gathering information themselves.

Chairman THOMAS. My goal is to focus on the difficulty of the

job, not on trying to line up folks who are villains in terms of not

trying to get to the bottom of it. I think this is an extremely difficult process, and that if there is a degree of cooperation on all

sides, that’s very positive. Is that a fair statement?

Mr. SCANLON. That’s very fair.

Chairman THOMAS. Thank you.

The gentleman from California.

Mr. STARK. Well, thank you, Mr. Chairman.

Mr. Chairman—I’m puzzled that we don’t have HCFA here to respond to some of Dr. Scanlon’s review. I can’t tell whether you gave

them a C+ or a B¥. But, perhaps you would like to write a letter

to HCFA? I’d love to join in asking them to respond to the various

suggestions we’ve heard today.

Chairman THOMAS. I’d just tell the gentleman that it may seem

to be appropriate if they were sitting at the table. The problem is

I believe that their response to every question we asked them

would be that they’re in the process of developing regulations that

are going to be issued on May 1, and they’d be free to comment

when the regulations have been issued, and I thought I could do

that adequately——

Mr. STARK. Let’s do it on May 2. [Laughter.]

Chairman THOMAS [continuing]. As a kind of a cover for them.

So sometime after May 1 will be appropriate. Until then, they’re

in the process of developing regulations; they’re going to be out on

May 1, and it would be inappropriate to comment until those regulations are issued. [Laughter.]

Mr. STARK. It sounds like a stone wall.

Dr. Scanlon, let me just review the issue because I may be more

objective about this. As I recall, when the physician reimbursement

plan was devised, it was meant to be ‘‘relative,’’ am I correct?

You’ve used the word relative several times in the last 15 minutes.

Mr. SCANLON. That’s correct.

Mr. STARK. So that we could, under the law, just decide that

practice expense for heart transplant is a dollar, but then we might

say that a pediatric visit is one cent, and it’s all relative. There is

no suggestion that the practice expense was ever going to be an accurate determination of the dollar cost of the expenses of each procedure and reimbursed on that basis; is that correct?
43

Mr. SCANLON. There was no intent to fully reimburse the practice expenses. The idea was just to get the relative values correct.

The level that you’re——

Mr. STARK. I think you’ve hit on what is causing some angst

amongst ourselves in the physician community. Many of them are

saying, ‘‘This doesn’t begin to cover my cost.’’ It’s a very hard thing

to say, ‘‘But, Doc, it was never intended to cover your cost. It was

intended to pay some portion of those costs relative to what your

colleagues in other specialties may be getting.’’ And, that’s often

overlooked, these many years later, I believe. I just think it’s important that we remind people that what doctors now want really

was never on the table.

Mr. SCANLON. There’s also a question being raised—and this is

something that we did not try to verify, both because of the timeframe for our study, as well as the fact that HCFA is in the process

of revising its rule for the May 1 issuance—but the issue raised by

the physicians’ community is that it’s a different proportion of practice expenses that may end up being reimbursed for different types

of services.

Mr. STARK. You’re also hearing mostly, I suspect, from those physicians who have the highest fees and the lowest volume in number

of procedures. In other words, the $6,000 surgery rather than the

$50 office visit. Therefore, the practice expense for each time they

receive that fee is more significant.

When we were doing the professional side of it, we didn’t hear

any complaints from the high-cost-per-procedure community because they were getting a hundred times what the primary care

people were getting for these high, expensive procedures. But the

interesting thing is they all agreed with the Shiao study.

If we got all the doctors to agree and the accountants to agree,

and everybody else to agree, on the relative value basis that the

Shiao study put forward, which defines the relative difference between transplanting a liver and a heart? Talk about a complex and

very subjective decision.

Now, they were able to agree on the relative value between these

very subjective procedures. I can’t imagine that you can’t figure out

what the office costs are on a relative basis. This leads me to believe that this is merely a course of complaints among those who

will have some reduction. Even the people who are getting increases aren’t getting very much. Is that not the question? When

we make these adjustments that have been proposed in the past,

the primary care guys and the GPs and the interns are going to

get a few bucks’ increase. But, the people who take the decrease,

while there are fewer of those procedures, will take a much higher

dollar cost. In other words, the decreases might average $500, and

the increases might average $5. Is that a fair assessment of what

we’re faced with?

Mr. SCANLON. I’m more familiar with it in percentage terms, and

again, we didn’t focus on this a lot because we knew they were

temporary numbers that were going to be replaced, but, as I recall,

the increases would average by specialty somewhere in the order

of 10 percent for the biggest gainers and some of the specialties

that would lose could lose on the order of 20 percent or more. So

we’re talking about whatever that number is times the base——
44

Mr. STARK. Times the base. And if all of the gainers were pretty

low-cost procedures, because they were the volume people. And, the

losers were those whose $600,000 incomes were made up of fewer

procedures. Then it would stand to reason that you’re going to get

bigger dollar cuts per procedure, would it not?

Mr. SCANLON. That’s correct.

Mr. STARK. As I say, I would hope that you will continue to give

us your excellent advice——

Mr. SCANLON. I think that at the time the work values were computed, I agree with you that the task was enormously complex.

This task in some ways is as complex or more complex, given the

fact that what we’re talking about is trying to deal with an office

operation and assign it to all the different procedures that are

going on with that office——

Mr. STARK. It’s complex, but much more objective, is it not?

Much more empirical as it were?

Mr. SCANLON. Well, it could be empirical in the sense that if we

could afford to have someone in there with a stopwatch and have

someone monitor every supply and the equipment used, then we

could be very, very precise, but we really can’t afford that. So, instead, what we need to do is rely on very skilled observers to tell

us their best estimate of what——

Mr. STARK. Let me try this a minute. In the dim, dark past, I

used to fuss with this professionally. You don’t need a stopwatch

per procedure; you can deal with the averages. You are not going

to pay for the semiretired surgeon who does one procedure a week.

You’re not going to load the full practice expense into that one procedure. You have to deal with a surgical office where the full-time

surgeon has to do five procedures a day, or let’s assume, three a

day. You take that average and say, ‘‘I’m sorry, if you don’t work

up to the average, Pal, you don’t get a higher cost per procedure

just because your productivity is low.’’ That would be un-American.

Mr. SCANLON. No, these were all calculated for what would be

the typical patient, we assume, within an average practice, but the

reality is that the estimates of expenses for different procedures

vary considerably because of the time that’s involved and in some

instances because of the equipment and supplies that are involved

in those procedures.

Mr. STARK. Thank you. Thank you, Madam Chairman.

Mrs. JOHNSON of Connecticut. Mr. McCrery.

Mr. MCCRERY. Dr. Scanlon, I just want to try, if I can, clear up

the gist of what you said and what your report says. First of all,

you mentioned that the data that HCFA has accumulated is OK.

I mean, that’s probably as good as the data that you could expect

to get. But you’ve also said that HCFA must be careful to interpret

the data and use methodologies designed to interpret the data in

a way that will give us a fair result. Is that basically what you

said?

Mr. SCANLON. I don’t think I’d use the word ‘‘fair.’’ I think it

would be a result that we’d have more confidence in, and we did

recognize that in collecting the primary data, which are the estimates of these panels as to the time and equipment and supplies

involved in procedures, that there are differences across panels in
45

estimates, as there would be differences in physicians and offices,

if they were to fill out surveys.

HCFA’s task was to try to bring that information, combine it in

a way that they could come up with one value for each procedure.

They also had a number of other adjustments that they felt necessary to make, for some, they didn’t have data to support the assumptions underlying those adjustments. People would feel more

comfortable about the end result if they had a comfort level with

the adjustment to combine the panel data, as well as those other

adjustments to the data that HCFA has imposed.

Do you think HCFA has time between now and when they are

supposed to submit their recommendations to follow through on

your suggestions?

Mr. SCANLON. We feel that they have time to follow through on

some of our suggestions, but they also, we believe, should be instituting an ongoing process that’s going to allow them to refine the

relative values and to collect the additional information as well as

to adjust the methods, so that during the phase-in, as called for by

the Balanced Budget Act, that we see the relative values modified

in a way that again increases people’s confidence in them.

Mr. MCCRERY. Are you suggesting that GAO participate in that

oversight or——

Mr. SCANLON. We would be happy to examine what HCFA is

doing at any point, including the May rule that will be published,

and then to follow the activities of HCFA for this Subcommittee as

well as for the Congress.

Mr. MCCRERY. Madam Chair, I just want to point out that while

we can somewhat dispassionately discuss changes like this, we are

talking about substantial changes in how the government reimburses specialties and physicians in general that will affect their

income in a substantial way in some cases, and we ought not take

what we’re doing lightly. We ought to demand that HCFA follow

through on the recommendations of the GAO and we ought to provide that oversight that Dr. Scanlon is suggesting, perhaps in concert with GAO and this Subcommittee, because I am concerned

that we are going to impose on some specialties decreases and reimbursement levels that would be greater than warranted by a

true reflection of what their costs are. So I’m hopeful that we will

follow through with the recommendations of GAO and look very

closely at this transition period, and make sure that HCFA follows

the recommendations closely of GAO, and perhaps we can work

with GAO to develop a rigorous oversight regime during the transition period.

Mrs. JOHNSON of Connecticut. Dr. Scanlon, I find your report

really very concerning. You say, overall, their data is good; overall,

their methods are OK. Then you go on to say, ‘‘While we agree with

the intent of the adjustments they made, we believe that some

methodological weaknesses and other adjustments and assumptions lack supporting data.’’ Now, frankly, I think that matters a

lot. It’s not just that some people are going to get paid a lot less,

but you say, yourself, that the cumulative effects—now, it’s true,

you’re pointing to more things than the adjustment and practice

expense reimbursements, but the cumulative effects of the transition to the fee schedule—‘‘recent adjustments to the fee schedule
46

that were mandated by the Balanced Budget Act and the upcoming

practice expense revisions could alter physicians’ willingness to accept Medicare’s fee schedule payments for some procedures.’’

Now I think that’s very serious, and frankly, that does reflect a

lot of things I’ve been hearing out there. Earlier on—I imagine you

were here—I mentioned to Dr. Wilensky that the volume assumptions were not sound, and when I talk to physicians, I’m keenly

aware of the additional equipment they’re now required to buy,

some of it OSHA-mandated, some of it other mandated; the longer

time it takes for some of the sterilization procedures. Some of the

procedures that we’re going to cut by 50 percent now take 1 hour

instead of 45 minutes, and the paperwork and the overhead is

much greater. When I hear that this is OK and we should go

ahead, in spite of the weaknesses, I do find it disturbing.

You mentioned the equipment utilization section; that HCFA officials ‘‘told us actual equipment utilization rates were not available,

and therefore, they had to make assumptions about the rate at

which equipment is used in order to assign equipment cost to each

code,’’ and then you go on to go through some of the concerns that

people have had about the equipment utilization rates. This is very

fundamental. If you make the wrong assumptions about equipment

utilization rates, you’re going to come out with wrong numbers. It

does seem to me that while their overall approach seems to have

been rational, that we would be ill advised to move ahead with this

until we get a better handle, for example, on equipment utilization

rates.

Mr. SCANLON. In terms of the equipment utilization rates, the effect of equipment on the practice expense relative values is not just

the result of their assumption, but they also use data from the

American Medical Association, actual practice expenses, to scale

the relative values, and in the process they are able to adjust for

an error in their equipment rates. This is still an area, though,

that’s of concern to us because in doing that they did an adjustment for all procedures, and one of the things that we’ve talked

with them about is the issue of whether one needs to vary that adjustment for different types of procedures or for different specialties.

Our concerns about their methods are significant, but in weighing what the possible impact would be on fees, we felt that it was

still justified to move forward at this time. We would be much more

comfortable if HCFA implements the sensitivity analysis that we

asked for in terms of identifying what each of these assumptions

and each of the types of data that we think of as a bit weaker,

what impact they have on the fees being paid. If then we discover

that there’s a significant problem for particular procedures, we

think that we’d have the opportunity to get information to adjust

the fee for that procedure or——

Mrs. JOHNSON of Connecticut. All right. I would remind you that,

generally, by the time we discover that we’ve made a mistake, at

least 2 years have elapsed, for us to collect the data and figure it

out.

Let me give you one specific example because my colleague from

California, Mr. Stark, mentioned drug reimbursement rates. We

can figure out how to reimburse right about drugs if we also are
47

sure that in the RBRVS we have taken into account the work required to deliver the drug, but what’s happening is that techniques

of delivering are changing, and we are not doing that. So that when

you look at the recent report on oncology drugs, those reimbursement rates, and you look at the codes for reimbursing the

oncologist, neither take into account it uses an infusion therapy operation; you have to give a predrug, then you have the person

there; often they’re there 6 hours in your office. You have to have

certain OSHA-qualified hoods to do this and that and the other

thing. If you open the bottle, you have to get rid of it. So it’s not

one dose; you can use half the bottle, and you have to waste the

other half. You have to pay the insurance and the inventory upkeep, and so on, of a whole variety of drugs, so you can deliver

them.

I am concerned about what we’re doing in practice expenses because we’re getting at that sort of soft, odd area that we have not

been able to take into account very well in, for instance, drug reimbursement rates, and we have not taken into account very well in

RBRVSs in some of the more recently—in some of the areas where

the practice has changed and the instruments, sometimes surgical,

but sometimes pharmaceutical, have changed dramatically. I think

there are key things that we don’t know here about the machinery

equipment, that it has to be standard now in offices, even if it’s

only used rather seldom, and the cost of delivering pharmaceuticals

and things like that. How would you deal with? Have you focused

any attention, for instance, on the oncology area and delivery of

drug therapies? And who’s paying for what? How accurate are we?

Mr. SCANLON. The oncologists were members of certain panels,

but there was not a special oncology panel, but we didn’t focus on

individual procedures. We focused on HCFA’s overall method.

I agree with you that there is changing technology in terms of

the delivery of services, and that needs to be reflected in these relative values. One of the things that HCFA has done, since the publication of the June rule, is solicited information from the medical

community to help them make better assumptions in terms of limiting excessive cost, help them understand what types of personnel

may assist physicians in different settings. We think those are the

kinds of things that are important to have information on. At this

point in time HCFA made some assumptions that affected the relative values that were published in the June rule. With information, they’ll be able to assess whether or not those assumptions

should be retained.

The example that you give of oncology drugs is a perfect example

where the easiest way would be if the medical community would

come forward with information that HCFA could then use to adjust

fees. But if that doesn’t happen, we would encourage HCFA, recognizing that this may be an important area, to pursue information

on its own.

Mrs. JOHNSON of Connecticut. Thank you. I would just say, making mistakes in this area is going to be very costly because if we

get it wrong, it’s not hard to not have the equipment and send

them down to the hospital for the equipment, where the costs are

higher. If we get it wrong, it’s better not to deliver the drug and

let them go to the hospital and have the drugs delivered, and that
48

will be more expensive, and less convenient. So access and quality

for actually the senior out there in the small town is a very big

issue if we get the practice expenses matter wrong. So I’m interested that your focus was really on the overall, and I appreciate

your responses very much. I guess I find the weaknesses in HCFA’s

work that you point to very substantial, and so I would see your

comments about their being overall right and their data being overall OK as being a rather big umbrella statement and not the basis

on which to set specific reimbursement rates.

Mr. SCANLON. If I could add, our concerns with what HCFA did

all involve the adjustments that occurred after they collected the

original panel data. It is possible, with the data that they have, to

pose a different set of adjustments before their May rule. That’s

quite feasible for them to do.

Mrs. JOHNSON of Connecticut. OK.

Mr. SCANLON. And we think that the basis for doing that can be

either the information that’s coming in from the medical communities or in further consideration on their part as to what’s an appropriate adjustment.

Mrs. JOHNSON of Connecticut. Yes, thank you. I join Mr.

McCrery in believing that there ought to be a lot of oversight of

those adjustments that clearly need to be made.

And, just last—and you could yes/no to this because we do have

our guests that we would like to have a chance to ask you questions also—should this have been done without the constraint of

budget neutrality, so we could see what we were doing, and then

come back to, what can we afford?

In other words, is the constraint of budget neutrality creating a

certain dishonesty in this process?

Mr. SCANLON. We have considered that issue, and I don’t think

the answer is yes, but I’m not positive about that.

Mrs. JOHNSON of Connecticut. OK. Dr. Cooksey, it’s a pleasure

to have you with us.

Dr. COOKSEY. Thank you.

Dr. Scanlon, you’re with the General Accounting Office. I’d assume your Ph.D. is in accounting?

Mr. SCANLON. No, my Ph.D. is in economics.

Dr. COOKSEY. Do you sometimes get the feeling that there are

not enough people in Washington that have taken accounting

courses?

Mr. SCANLON. Well, being in the General Accounting Office, I

don’t necessarily get that feeling. We have an ample supply of accountants. [Laughter.]

Dr. COOKSEY. Good, good. I’m sure you do. I hope you do.

Mr. SCANLON. Right, but maybe more generally.

Dr. COOKSEY. How long have you been in your position in dealing

with health care issues?

Mr. SCANLON. I’ve been in my position at GAO for 4 years, and

I’ve been dealing with health care issues since 1975.

Dr. COOKSEY. I’ve seen your name around for many years. Do

you get the feeling that we’re dealing with a highly regulated, highly politicized, very complex health care system?

Mr. SCANLON. No question about that.
49

Dr. COOKSEY. Do you get the feeling that all of these hearings,

all the votes, all the sound and fury is merely tinkering with a

complex system without really addressing some of the basic problems?

Mr. SCANLON. I think we probably often feel that the only thing

that we can do is touch the edges, that we really are not equipped

to deal with the core issues.

Dr. COOKSEY. Is there any concern on your part that the balanced budget bill—now act—the way it came out, the final version,

will skew the RBRVS system?

Mr. SCANLON. No, I don’t think I have that concern. I mean, I

think that what the instructions from the Balanced Budget Act are

is to calculate for resource-based relative values based on actual

cost, and that the issue there is the ability to undertake that activity within reasonable resource constraints in terms of budget and

time, and to achieve the most precise and most accurate result that

you can.

Dr. COOKSEY. I’ve taken a few accounting courses. It’s been several years ago, but it’s my understanding that the accounting profession and a lot of the more progressive businesses that have good

accounting procedures are moving to more cost accounting. Would

you agree with that or disagree with that?

Mr. SCANLON. I think cost accounting is essential in terms of operating a business, in the sense that if one isn’t aware of the cost

of producing either your product or your service, it’s very difficult

to understand how to price it or understand how to promote or

whether you should promote it. So I think that a good and a successful business is going to be very aware of its cost for producing

different services.

Dr. COOKSEY. Do you feel like the U.S. Government, from your

perspective in the General Accounting Office, is moving to take advantage of these new cost accounting trends? Are the government

agencies on the leading edge or the trailing edge of this trend toward cost accounting?

Mr. SCANLON. Well, I think that the Federal Government, and

particularly through the Government Performance Results Act,

GPRA, that the Congress has indicated very clearly that there is

a concern that we understand what the product of government is.

The challenge is that the product of government is often very intangible; a business has a service or a product to sell, whereas in

government we have many potential effects that come from governmental activities. And the difficulty is in terms of identifying what

those effects are and then measuring the quantity of the effect that

we have, and then finally being able to relate that to the resources

going into that activity.

In reality, we are only now moving through the first stages of the

GPRA effort, and so in some respects we are at the opposite of this

activity in terms of trying to do cost accounting for government, but

someday we maybe will be pleased with the progress, but we certainly shouldn’t be pleased today.

Dr. COOKSEY. Do you envision a time that the government, as a

major stakeholder, as a payor of health care for many different segments of the American population, could reach a point that the

government could trust market forces, market patient’s choice, and
50

trust competition for those people that it’s providing health care

for, as an alternative to what we agreed upon earlier in this discussion, that we have a highly regulated, highly politicized situation

where you have all the stakeholders there orchestrating the political system? Is this alternative feasible? Is it feasible within this

millennium or the next millennium or even within Pete Stark’s lifetime?

Mr. SCANLON. Let’s hope it’s at least feasible within the next millennium. I’m not sure about this one. I think we have the fundamental problem we are trying to address now, which is that

identifying the outcomes of health care is a difficult task. We don’t

want to hold providers more accountable for positive outcomes than

they should be, and we don’t know what is the appropriate prognosis for any individual patient.

We’re moving in the direction of trying to measure outcomes with

respect to health plans, and someday we may be able to do the

same thing with respect to providers. Then I think we would have

a lot more confidence in market forces because we would be able

to decide who is producing the appropriate amount of services for

what we’re paying.

Up until then, what our traditional approach has been is that we

do do regulation. We do regulation of the inputs that we have. We

ask that providers be qualified before we allow them to offer services, and then we often look at the process in which they’re delivering services to see that it’s safe and sound and according to accepted practices. The dilemma we have, it’s the only thing to deal with

until we get a better fix on outcomes.

Dr. COOKSEY. In this millennium that we’re about to finish, in

the early part of this century, the health care profession was more

of a cottage industry, and in the examining room you had a patient

and a physician. With the advent of World War II, you had a patient and a physician and employer, and then a labor union leader,

and then with 1965 you had the government paying for Medicare

and Medicaid, and then in the eighties we had corporate medicine

and managed care. So I feel like the examination and treatment

room is getting very full in this millennium with all of these people

I just outlined.

Do you think you could ever trust your patients that the government pays for, that the taxpayers pay for, to go back into that waiting room where it’s just the patient and the physician without the

companies, without the labor union leaders, without the bureaucrats, without the regulators, without corporate entities? Is that

feasible?

Mr. SCANLON. Again, I think it may be feasible if we understand

what should be the outcome of that encounter with a physician or

with any other health care provider; then we will be able to know

whether the appropriate outcome occurs.

Dr. COOKSEY. Final question: When you go see a physician, how

many of those players do you want in the examination and treatment room with you?

Mr. SCANLON. I prefer to go alone.

Dr. COOKSEY. Thank you. Thank you, Mr. Chairman.

Mrs. JOHNSON of Connecticut. Thank you very much, Dr. Scanlon, for your testimony and your work in this area.
51

I’d like to call now the next panel: Dr. Flaherty, the American

Medical Association; Alan Nelson, the American Society of Internal

Medicine; Deborah Haynes, the American Academy of Family Physicians; Dr. Alan Pearlman, on behalf of the Practice Expense Coalition.

I appreciate you all being here. You do know the rules. Your testimony will be entered in the record in its entirety, and we invite

you to make an opening statement of 5 minutes. Because of the

schedules of Members, we will go right through the whole panel,

so we get to hear all of you and then take questions thereafter.

Dr. Flaherty.

STATEMENT OF TIMOTHY T. FLAHERTY, M.D., MEMBER,

EXECUTIVE COMMITTEE, BOARD OF TRUSTEES, AMERICAN

MEDICAL ASSOCIATION

Dr. FLAHERTY. My name is Dr. Tim Flaherty. I’m a practicing radiologist from Neenah, Wisconsin, and a member of the AMA,

American Medical Association’s, executive committee of the board

of trustees. I want to thank you for the opportunity to testify on

this critical physician payment issue.

With the Balanced Budget Act, Congress brought Medicare beneficiaries a new benefit and new choices. For physicians, however,

the BBA also brought extensive new payment restraints and redistribution that could eventually affect the care of beneficiaries received. Provisions calling for a single conversion factor and changes

in practice expense values will lower payments for some physicians

and raise them for others. However, the new spending targets established by the BBA may reduce Medicare payments to all physicians below current levels.

The combined payment cuts for a number of physical specialties

could be severe. Both the GAO and MedPAC point to the need to

carefully monitor how these changes will affect the access and

quality of care available to elderly and disabled Americans. The

AMA agrees, but is concerned that the current monitoring tools

may not identify potential access or quality problems until they become significant or widespread.

One important tool for identifying potential access problems was

eliminated in the BBA, and we are asking Congress to reinstate

that tool which requires HCFA and MedPAC to report each spring

on the projection of physician payment updates for the following

year. Under the sustainable growth payment updates, we will be

reduced when the utilization of service grows by more than the

gross domestic product, GDP. The CBO predicts utilization will, in

fact, exceed the target. As a result, CBO predicts that Medicare

payments rates in the year 2002 will be 11 percent lower than payments today—11 percent lower than payments today—and 19 percent lower when adjusted for inflation. Ironically, this severe target

was imposed despite the fact that since 1991 growth in spending

for physician services has been well below Medicare overall rate of

growth. No other provider group can match this record. Yet, physicians face projected payment cuts, while other providers can expect

payment increases. In fact, Medicare+Choice care plans are even

guaranteed a 2-percent increase each year.
52

As originally proposed and debated, the sustainable growth rate target was to be set at GDP plus 1 or 2 percent, but it was tightened to GDP plus 0 in the Balanced Budget Act. This is not realistic, and the result in payment cuts could stifle development and

availability of new medical innovations. The spending target must

be raised to GDP plus 2. Even then, projected growth in physician

spending over the next 10 years will be lower than the BBA set for

Medicare as a whole.

BBA also addressed the development of resource-based practice

expense values for Medicare fee schedule. The AMA supports

resource-based values so long as they reflect actual practice expenses. It is imperative that HCFA get this right because practice

expense represents 41 percent of physician payments. We supported the BBA provisions extending the implementation dates for requiring HCFA to revise its proposal, and we thank the

Subcommittee and its Members for your support in these provisions. Congress also called upon the GAO to comply with HCFA’s

methods and data. We believe the GAO has developed an excellent

report, and it is consistent with AMA policy. The AMA agrees that

the use of expert panels to identify direct costs is appropriate, but

we share the GAO’s criticism of the way HCFA edited and linked

the panel data, and do not believe it should be as is. Instead, adjustments should be made to improve the data’s consistency. We also agree that HCFA should explore including billing and other administrative costs in the indirect costs, just as office and

other overhead expenses are now included. HCFA also should use

specialty-specific data from the AMA’s annual SMS, socioeconomic

monitoring survey. Specialties vary in the dollars spent and practice resources per hour worked. The SMS was not designed to support development of relative values, but it has become clear that

the survey is presently the most valid means of measuring practice

costs. If the new values are to be truly reflective of the physician’s

actual cost, HCFA must make more extensive use of these data.

In addition, the AMA believes HCFA needs to collect some additional data from medical practices and other sources. However, we

think this data can be collected without delaying implementation.

We concur with the GAO that starting data collection over again

would needlessly increase costs and further delay implementation.

We also strongly support MedPAC’s recommendation that HCFA

should not apply—should not apply, not apply—a behavioral offset

to practice expense charges. Physicians have repeatedly challenged

this offset, which would have reduced payments by $1 billion across

the board in HCFA’s June rule. In fact, we don’t think these offsets

are warranted for other payment charges either.

I appreciate the opportunity to appear, and I’d be happy to answer questions.

[The prepared statement follows:]

Statement of Timothy T. Flaherty, M.D., Member, Executive Committee,

Board of Trustees, American Medical Association

Mr. Chairman and members of the Subcommittee, my name is Timothy T.

Flaherty, MD. I am a practicing radiologist from Neenah, Wisconsin, and a member

of the Executive Committee of the American Medical Association’s Board of Trustees. I thank you for the opportunity to testify today on a number of critical issues

raised in two recently-released reports from the General Accounting Office and the

Medicare Payment Advisory Commission.
53

With the enactment of the Balanced Budget Act of 1997 (BBA), Congress opened a broad array of new private plans to Medicare beneficiaries and began the work

that will be necessary to preserve the program for future generations. As with any

new endeavor, careful monitoring will be required to ensure that nothing goes awry

and patients are protected as the new Medicare+Choice program is implemented

over the next few years. At the same time, we must all remember that many, if not

most, beneficiaries will remain in Medicare’s fee-for-service program for years to

come. It is therefore appropriate that the subcommittee has chosen to focus on both

sides of the program at this important hearing. While the BBA brought Medicare’s 37 million beneficiaries new benefits and new choices, it also brought extensive payment restraints and redistributions for their

caregivers. For example, we note that modifications in the calculation of practice expenses and movement to a single conversion factor are expected to lower payments

for some physician services and raise them for others. In addition, it is possible that

the Sustainable Growth Rate target established in the BBA will bring about an

across-the-board reduction in Medicare payments for physician services.

MONITORING ACCESS AND QUALITY

Both GAO and MedPAC have pointed to the need to carefully monitor the impact of these changes on elderly and disabled Americans. The AMA fully agrees with this

conclusion. However, we are concerned that current monitoring tools may not identify potential access or quality problems until they become egregious and widespread.

To date, studies based on claims data and beneficiary surveys have found little evidence of any widespread deterioration in the availability of services to Medicare

patients. However, anecdotal evidence suggests that some physicians are responding

to growing cost pressures by foregoing investment in new technologies, reducing office staff, eliminating costly educational materials, curtailing the number of Medicare patients they see, and reducing the time they spend with them. Should these trends become more prevalent, the availability and standard of care Medicare patients enjoy today may decline. The AMA is now conducting more comprehensive research on how payment cuts affect medical practice. We would be

happy to share our results with MedPAC and this committee. In addition, however,

we would urge MedPAC and others with a responsibility to protect Medicare beneficiaries to devise more refined methods of detecting and addressing access problems

before they become widespread.

PHYSICIAN UPDATE REPORTS

We would further submit that the BBA eliminated one very important safety feature that has helped ensure that large numbers of physicians continue to participate

in Medicare. We ask that Congress take immediate action to reinstate a requirement that the Health Care Financing Administration and MedPAC report each

spring on projected physician payment updates for the following year.

When Congress first created a Medicare spending target (or volume performance

standard) with an automatic formula for determining future payment updates, lawmakers acknowledged the potential for the formula to trigger updates that were either excessive or inadequate. They therefore asked HCFA and the Physician Payment Review Commission to advise Congress each spring on whether the default updates should be modified or allowed to stand.

These spring reports turned out to be a crucial ingredient in the new physician

payment system. Lawmakers repeatedly turned to the reports for advice on refining

the new payment system or altering the updates. Moreover, since HCFA officials repeatedly ignored a directive requiring them to produce quarterly reports on physician expenditures, the spring reports became the only information any of the interested parties had for evaluating and modifying upcoming changes in the payment

rates before it was too late.

SUSTAINABLE GROWTH RATE

Despite its important role, the required update preview was dropped this year

when the previous spending target was replaced with a new ‘‘Sustainable Growth

Rate’’ target tied to increases in the gross domestic product. We note that MedPAC

does conduct an annual review of the updates for hospitals and other health care

facilities. And we believe that as PPRC’s successor, the new commission can play

an important role in ensuring that payment rates are set at levels that are fair to

the government and adequate to maintain continued access to high quality care for

Medicare patients.
54

This is especially important in view of the fact that physicians face a potential

downward payment spiral that could lead to negative updates and payment rates

that are well below those in place today. Shortly after the BBA was enacted, for

example, the Congressional Budget Office predicted that the conversion factor used

to determine Medicare payments will drop to $32.63 in 2002—or 11% (unadjusted

for inflation) below this year’s conversion factor of $36.63.

Whether the CBO is right or not will depend on how much Medicare patients’ utilization of physician services grows over the next few years. If growth per beneficiary can be held to only 3% a year, for example, a recent AMA study suggests

that physicians could see annual updates of about 0.5%. If the volume of services

rises by 6% instead, however, payments would fall by 2% a year. Moreover, once

adjustments are made for inflation, physicians face real per-service payment cuts

of ¥1.5% or ¥4% under either scenario.

These declines are of particular concern because, since 1991, physician spending

growth has been well below the rate for any other major sector of Medicare, and

well below overall Medicare growth. Moreover, the projected Medicare payment level

for physicians is a steep actual decline, while hospital and other provider payment

rates go up. In fact, the Medicare+Choice plans are even guaranteed a 2% positive

increase each year.

Such reductions, especially if they are accompanied by the new provider taxes or

user fees proposed in the President’s latest budget, may make it impossible for some

physicians to cover their costs of treating Medicare patients. Some physicians may

have no choice but to scale back the number of Medicare patients they see or the

level of services they provide. For this reason, the AMA is convinced that, in addition to reinstating MedPAC’s spring payment reports, Congress needs to modify the

SGR.

With the SGR system, expenditure targets are determined through a formula that

includes changes in Medicare payments, the number of fee-for-service beneficiaries,

projected growth in the gross domestic product per capita, and recently-enacted laws

and regulations. As originally proposed by PPRC, the formula would have included

an allowance of one or two percentage points to make room for utilization increases

stemming from technological innovation, emerging diseases, or potential favorable

selection into the new Medicare+Choice plans. While Congress had endorsed this

concept in prior budget bills, the allowance was dropped last year and the formula

became GDP +0% rather than GDP +1% or +2%.

This year, the system will permit Medicare expenditures for fee-for-service patients to rise by just 1.5% in total, or about 4% per beneficiary. Such tight constraints will hold increases in physician spending well below historical levels and

overall Medicare program growth, and could hamper efforts to encourage care in

more cost-effective settings outside the hospital.

Such severe limits also could inhibit the creation and diffusion of new medical

technologies and innovations. As the SGR is currently constructed, if adoption of

new technologies generates even modest increases in the use of physician services,

Medicare spending could exceed the target and trigger across the board reductions

in physician payments. Facing such financial disincentives, physicians might be reluctant to invest in new devices and provide new technologies to Medicare patients,

who then would be denied the advantages of recent increases in funding for biomedical research and changes in the FDA device approval process.

It is hard for physicians to understand why they alone among provider groups

should be expected to absorb continued across-the board payment cuts. If Congress

is serious about expanding the opportunities for medical innovation and if the SGR

is to have any credibility with physicians, then the SGR allowance for utilization

growth must be raised to at least GDP + 2%. We note that, even at that level, physician spending over the next 10 years would be held to lower growth rates than the

BBA set for Medicare as a whole.

PRACTICE EXPENSE PAYMENTS

The BBA also included important provisions affecting another aspect of Medicare’s

physician payment system: the development of resource-based practice expense values. Due to major problems with HCFA’s initial proposal for resource-based practice

expense values, we strongly supported the BBA provisions extending the implementation date for the new payments and requiring that HCFA revise its proposal to

incorporate accurate cost data. We wish to thank the Chairman and Members of

this Subcommittee, as well as the full Congress, for your support in enacting these

provisions. We were also pleased that Congress directed the General Accounting Office to evaluate HCFA’s methods and data and the potential impact of the payment
55

changes on beneficiary access. The AMA continues to support the change to resource-based values, so long as they reflect the actual costs of clinical practice. Since enactment of the BBA, we have been impressed with the dedication of both

GAO and HCFA staff to meeting the Act’s requirements. Project teams from both

agencies have consulted frequently with AMA staff, particularly with regard to potential use of data from the AMA’s annual survey of physicians in the new values.

The GAO recommendations are generally consistent with AMA policy, and we believe the agency has developed an excellent report. We also believe that HCFA is

likely to adopt many of the modifications recommended by the GAO. In comments on its June 1997 proposal, we identified many flaws in HCFA’s methods and data. The AMA agrees with the GAO that use of expert panels is an

appropriate way to gather information about procedure-specific, or direct, practice

costs. However, the way that HCFA used the panel data in its June proposal indicated that even the agency itself had little confidence in the results. A variety of

methods were utilized, including a statistical approach called ‘‘cross-specialty linking’’ and a series of across-the-board data ‘‘edits,’’ that substantially reduced the cost

estimates provided by the expert panels. HCFA did not describe the criteria that

it used to judge the relative accuracy of the panel estimates. Nor did it explain its

apparent conclusion that only one of the panels produced accurate results. Moreover, in contrast to the process used to construct the physician work values, the

cross-specialty linking process for practice expense relied exclusively on statistical

methods, with no opportunity for clinical judgment. Despite our criticism of the way HCFA altered the direct cost data in its June proposal, however, the AMA believes that the expert panel data require some adjustment and should not be used ‘‘as is.’’ AMA observers attended all of the expert

panel meetings and concluded that the panel estimates of billing costs, and possibly

other administrative costs, were of questionable validity. Over the last six months,

HCFA has made several well-intentioned but unproductive efforts to evaluate and

correct these data. In our estimation, it is now time to move on and try other approaches to obtain accurate billing and administrative cost estimates. We support

the GAO recommendation, therefore, that HCFA make targeted adjustments to improve the expert panel data’s consistency and eliminate the need for linking. We

also agree with the GAO that the agency should explore the option of including billing and other administrative costs in indirect costs, such as office rent and other

overhead costs. This approach would eliminate the need to rely on panel estimates

to measure billing and administrative costs for each procedure, thereby also eliminating the need to adjust or link the panel estimates for these resource costs. In another recommendation favored by the AMA, the GAO also suggests that HCFA utilize the specialty-specific AMA Socioeconomic Monitoring System (SMS)

data. With a response rate greater than 60%, the SMS is of high quality and is the

only existing practice expense database derived from a randomly selected national

sample. The SMS core survey has been conducted since 1982 by respected survey

research firms and its validity is well-recognized. Although the SMS was not designed to support the development of relative values and the sample sizes for some

specialties are not large enough to produce statistically valid responses, it has become clear that no other valid and reliable cost data are currently available.

HCFA’s June proposal used the SMS data only to establish the total proportion

of direct and indirect practice costs. The SMS reveals significant practice cost differences among specialties, however, including wide variations in the total dollars

expended on practice resources per hour worked, as well as on individual cost components, such as medical equipment, staff labor, and materials and supplies. We

concur, therefore, with the GAO’s conclusion that HCFA should make more extensive use of the SMS data in its revised practice expense proposal.

With the expert panel and SMS data, we believe HCFA could develop reasonably

accurate values. Consequently, we also agree with the GAO that starting data collection over again would needlessly increase costs and further delay implementation. At the same time, we appreciate the GAO’s recognition of the need for HCFA

to engage in some limited additional data collection. We are eager to see a detailed

new proposal from HCFA explaining how it plans to use expert panel data, SMS

data, and data provided by specialty societies. Even without knowing the details,

however, it seems likely to us that these data will prove sufficient for initial implementation of the new values to proceed as scheduled in January 1999.

Nonetheless, it is important for data collection efforts to be initiated before a final

rule is issued and continued during the four-year transition period to validate information provided by the expert panels and supplement information available from

the SMS. As a first step, we believe HCFA could collect data on administrative and

equipment costs from a representative sample of medical practices, firms that provide billing, coding, transcription, and procurement services to practices, and indus56

try groups such as the Medical Group Management Association and the Health Industry Manufacturers Association. One of the most serious flaws in HCFA’s June practice expense proposal was the

application of a ‘‘behavioral offset’’ that would have removed more than $1 billion

from Medicare’s budget for physician services. HCFA actuaries’ assumption that

physicians would manipulate patient demand to recoup 50% of any payment reductions in their services led to a proposed 2.4% payment cut for all services. An earlier

analysis by PPRC staff suggested that the actuaries’ assumption was incorrect and

MedPAC has now recommended that no behavioral offset be applied when the new

practice expense values are implemented.

In the commission’s view, the offset is unnecessary since the SGR would recover any additional spending that might be generated by changes in practice expense values. We wholeheartedly endorse this recommendation. In fact, we would submit that

the same rationale should apply to all legislative or regulatory changes in physician

payment rates. There is no need to apply a behavioral offset in calculating savings

from federal budget proposals or determining budget neutrality when other modifications are made in physician payments. The AMA also agrees with the MedPAC recommendation that HCFA delay its proposed payment reductions for procedures done at the same encounter as an office

visit. HCFA has neither collected nor presented data or rationale to justify the proposed reductions.

HOSPITAL OUTPATIENT DEPARTMENT PAYMENTS

Along with its specific physician provisions, the BBA also includes a number of other changes in fee-for-service provider payments that will affect physicians and

their patients less directly. Chief among these is a requirement that Medicare move

to a new prospective method of paying for hospital outpatient services. In its discussions of the new system, MedPAC’s goal was to ensure that the site where care is delivered is dictated by medical decisions rather than financial incentives. The AMA wholeheartedly endorses that goal along with the commission’s conclusion that the goal can best be achieved if hospital outpatient payments are consistent with payment in other ambulatory settings such as physicians’ offices. As

noted by MedPAC, at least initially, this would require a system based on

disaggregated payments, rather than the bundled payment system that HCFA is developing. We believe both physicians and outpatient departments would prefer to continue using the CPT coding system that is already familiar to them. Consequently, the

AMA has grave reservations about the commission’s recommendation that HCFA

‘‘continue to investigate service classification systems that would allow a broader

definition of the unit of payment and could be applied consistently in all ambulatory

settings.’’ The difficulties that have arisen in setting disproportionate share payments on the inpatient side lead us to wonder whether it is possible to create accurate adjustments for the cost of ‘‘providing socially valued services.’’ Should this commission

recommendation prove feasible, however, we believe Congress should also consider

whether certain physician clinics might also be eligible for a ‘‘socially-valued service’’

bonus. A less complicated solution might be to reverse the BBA provisions that reduce state and federal governments’ financial liability for patients dually eligible for

both Medicare and Medicaid. As you know, the AMA vigorously opposed this BBA

provision and continues to advocate for a legislative correction. The AMA also cannot endorse MedPAC’s recommended cap on outpatient expenditures. The commission proposes to monitor the cap’s impact on access and quality.

However, as noted earlier, the AMA is worried that many beneficiaries might experience serious problems before monitoring detected any deterioration in access and

quality. Should Congress adopt a cap on outpatient payments despite its potential dis- advantages, however, any savings should be used to bring about a more rapid reduction in hospital outpatient copayments. These copayments are scheduled to decline

under the BBA. However, MedPAC estimates that they won’t reach the 20% level

applied to other services for another 40 years. Like the commission, the AMA thinks

40 years is far too long. Even if lawmakers wisely reject the outpatient expenditure

cap and are forced to look for alternative funding, we believe a faster phase-down

is in order.

HOME HEALTH CARE

At the same time, the AMA, like the commission, is in favor of imposing a new

copayment for home health services. Some thought is required in determining ex57

actly how these copayments should be applied, however, and we would like to work

with MedPAC and Congress in determining the most appropriate approach. With

regard to the commission’s call for a case manager to review the plan of care for

beneficiaries receiving home health services for extended periods, we submit that

any legislation to carry out this recommendation should clarify that the case manager could be the patient’s physician.

MEDICARE+CHOICE

On another issue of great importance to Medicare beneficiaries, the AMA appreciates MedPAC’s efforts to ensure a smooth implementation of the new

Medicare+Choice program. With its detailed work on risk adjusting payments to the

private plans, the commission and its staff have made a significant contribution to

the challenge ahead.

Since we have not yet had an opportunity to review the report in full, the AMA

is not ready to support each and every recommendation the commission has made

in this area. However, we agree that it is time to move ahead with new risk adjusters and that, ideally, these adjusters should reflect more than a single year of data

for diagnoses and costs if some existing data issues can be resolved. Like MedPAC,

we also believe that Medicare should undertake demonstrations of partial capitation

or other methods that pay plans based partly on a capitated rate and partly on feefor-service rates.

We also concur with MedPAC’s conclusion that improvements are needed in the

adjusted community rate used to determine how much of the Medicare payment

must be used to supplement benefits or defray premiums. However, we do not share

the commission’s view that PSOs in non-competitive markets should be subjected to

some sort of special reporting and monitoring.

The AMA has previously endorsed proposals to exclude hospitals’ disproportionate

share payments from the fee-for-service costs used to calculate payments for

capitated plans. We would therefore favor MedPAC’s recommendation to exclude the

DSH payments from the local component of the new blended rates created in the

BBA.

To ensure equal treatment across all Medicare providers, the AMA also backs the

commission’s proposal to take additional steps, if necessary, to ensure that payments to Medicare + Choice plans are budget neutral. If physician payment changes

must be budget neutral, then private plans should be held to the same standards.

Flaherty.

Mrs. JOHNSON of Connecticut. Thank you very much, Dr.

f

Dr. Nelson.

STATEMENT OF ALAN R. NELSON, M.D., EXECUTIVE VICE

PRESIDENT, AMERICAN SOCIETY OF INTERNAL MEDICINE

Dr. NELSON. I’m Dr. Alan Nelson, the executive vice president of

the American Society of Internal Medicine. My testimony will focus

on two questions: First, are the basic methodology and data being

used by HCFA to develop resource-based practice expenses fundamentally sound——

Mrs. JOHNSON of Connecticut. Excuse me, Dr. Nelson. Could you

come a little closer to the microphone?

Dr. NELSON. Of course.

Mrs. JOHNSON of Connecticut. Thank you.

Dr. NELSON. Are the basic methodology and data being used by

HCFA fundamentally sound? And, second, are the requirements of

the Balanced Budget Act of 1997 being met by HCFA?

Some critics of HCFA’s current rulemaking process have argued

that the agency’s approach is so fundamentally flawed that it needs

to start over with some other approach. The report of the GAO rejects this conclusion. It specifically concluded that HCFA’s ap58

proach of using expert panels is a reasonable method for estimating

direct labor and other direct practice expenses. The report refutes

the criticisms that the expert panels were composed in unrepresentative fashion, that their members were not prepared in advance to provide accurate estimates of practice expenses, and that

their estimates were based on speculation, not data.

We also concur with the GAO that it would not be practicable to

conduct onsite analyses or mail survey of physician practices for

the purposes of developing a proposed rule. As the GAO notes, such

approaches have their own limitations, including the potential for

low or biased responses that preclude their use in a proposed rule.

The GAO also agrees that HCFA’s approach to allocating indirect

costs on the basis of physician work, direct practice expenses, and

malpractice cost is reasonable. Most importantly, the GAO concludes that, ‘‘There is no need for HCFA to abandon the work of

the expert panels and start over using a different methodology.

Doing so would needlessly increase costs and further delay implementation of the fee schedule revisions.’’ This should put to rest the

argument that HCFA’s data and methodology are so fundamentally

flawed that it needs to adopt a cost accounting analysis, activitybased accounting, or some other unproved alternative to develop an

acceptable proposed rule.

The improvements recommended by the GAO address the adjustments HCFA made to the expert panel data. For example, HCFA

used a statistical formula to link the labor cost of physician services on a common scale. The intent of this adjustment, which the

GAO supports is to eliminate variations in labor costs that otherwise would have resulted in some categories of services having

much higher labor costs than other services that in fact have comparable costs. HCFA found that the labor costs of surgical and

other procedural services, as estimated by the expert panels, are

too high compared to those for office visits and other evaluation

and management services.

ASIM agrees that it is appropriate for HCFA to consider changes

in how it links labor costs on a common scale, but it’s important

to emphasize that the GAO does not call for HCFA to eliminate

linking or other adjustments. On the contrary, the GAO says that,

‘‘We consider linking to be desirable. It’s clear from the GAO report

that, without some method to link labor costs on a common scale,

some categories of services will continue to be significantly overvalued compared to other categories of services.

ASIM agrees with the GAO that the impact on access should be

monitored. Improvements as well as decreases in access should be

monitored. However, resource-based practice expenses, by improving payments for primary care services, may help improve overall

access for some Medicare beneficiaries.

The GAO report demonstrates that HCFA has met the requirements of the Balanced Budget Act. BBA mandates that HCFA consult with physicians and consider using actual cost data to the

maximum extent practicable. The GAO report details the extensive

consultation with physicians that has occurred and details why it’s

not practicable for HCFA to survey physicians on their actual costs

in order to develop an acceptable proposed rule. We agree with the
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GAO that additional data might be considered in the annual refinement process that is mandated by the Balanced Budget Act. In conclusion, ASIM is committed to working with HCFA to re- fine and improve its data and methodology. The GAO report provides a balanced blueprint for achieving the necessary improvements, but without incurring the needless costs of further delay

that would have been required had HCFA been forced to use an entirely different approach. Finally, although we agree with the GAO’s view that HCFA should consider changes in the methods it uses to adjust the expert

panel data, we are pleased that the GAO endorses the desirability

of linking the practice expenses of physician services on a common

scale.

I’ll be pleased to answer questions.

[The prepared statement follows:]

Statement of Alan R. Nelson, M.D., Executive Vice President, American

Society of Internal Medicine

INTRODUCTION

I am Alan R. Nelson, MD, Executive Vice President of the American Society of

Internal Medicine (ASIM). ASIM represents physicians who specialize in internal

medicine, the nation’s largest medical specialty and the one that provides care to

more Medicare patients than any other specialty. I am pleased to provide the Ways

and Means health subcommittee with internists’ perspectives on the current state

of HCFA’s efforts to develop resource-based practice expenses (RBPEs). Our testimony will address the following questions:

1. Is HCFA meeting the spirit and intent of the provisions in the Balanced Budget

Act of 1997 (BBA) relating to practice expenses?

2. Are the basic process and methodology being used by HCFA for developing

RBPEs fundamentally sound, and if so, are there improvements that still should be

considered by HCFA as it develops the proposed rule?

My testimony will refer to the findings and recommendations of a draft report by

the General Accounting Office (GAO), which ASIM had the opportunity to review

on February 11. ASIM’s testimony also refers to recommendations that the Medicare

Payment Advisory Commission (MEDPAC) is expected to include in the Commission’s March 1 report to Congress. The MEDPAC report, and the final versions of

the GAO recommendations, were not available to ASIM when this testimony was

prepared, so there may be some revisions in each of those reports’ findings and recommendations from those that served as the basis for our testimony. Quotes attributable to the GAO report are based on our notes and recollections of the exact words

used in the draft report.

ASIM’s testimony today will explain why we believe that:

1. HCFA is meeting the spirit and intent of the BBA relating to practice expenses,

particularly the requirements that it consult with physicians and consider data on

actual costs to the maximum extent practicable.

2. HCFA’s basic methodology and data are valid, although some improvements are

appropriate.

3. It is not necessary for HCFA to start over and use an entirely different approach to develop resource-based practice expenses, which would needlessly increase

costs and lead to further delay.

The GAO’s draft report concurs with ASIM on each of these conclusions.

REQUIREMENTS OF THE BALANCED BUDGET ACT OF 1997

ASIM supports the practice expense provisions of the BBA. We believe that they

represent an eminently fair and balanced approach to addressing the concerns that

many physicians expressed last year. The BBA provided another year for physicians

to consult with HCFA prior to implementation of RBPEs, and gave direction to

HCFA on how its proposal might be improved. At the same time, though, it recognized the concerns of physicians whose services have historically been undervalued

by the existing charge-based practice expenses, by beginning the process of redistributing payments in 1998. We appreciate the leadership shown by this subcommittee on this issue.
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More specifically, the Balanced Budget Act of 1997 directs the Secretary of the Department of Health and Human Services to: 1. phase-in implementation of resource-based practice expense (PE) payments over four years, beginning on 1/1/99; 2. use generally accepted accounting principles and ‘‘actual cost’’ data to the ‘‘max- imum extent practicable’’;

3. consult with physicians and other experts.

4. publish a new proposed rule and new practice expense relative value units (PE– RVUs) by May 1, 1998, with a 90 day public comment period; 5. begin moving payments to resource-based practice expenses, effective on Janu- ary 1, 1998, by implementing a ‘‘down payment’’ that increased practice expense

RVUs for undervalued office visits and reduced them for procedures whose current

PE–RVUs are overvalued (based on a comparison of PE–RVUs to work RVUs).

In addition, the law directed the General Accounting Office to submit a report to

Congress, within six months of enactment of the BBA, on the data and methodology

being used by HCFA to develop the new proposed rule.

CONSULTATION WITH PHYSICIANS

The record shows that HCFA has fully met the law’s requirements that it consult

with physicians and other experts on the development of the proposed rule. The actions that HCFA has taken since enactment of the BBA include the following:

• A 60 day comment period was provided on a HCFA notice of intent to issue a

proposed rule on practice expenses, published in October, 1997. The notice invited

comments on how to use generally accepted accounting principles, utilization rates

of equipment, and actual cost data in the development of the proposed rule.

• The RVS Update Committee (RUC), which consists of specialty society representatives and the American Medical Association (AMA), was asked by HCFA in

September of last year to participate in a ‘‘mock’’ validation panel. This provided

specialty societies with an opportunity to advise HCFA on how to structure the validation process, and helped them prepare for the subsequent validation panel meetings. The RUC had another opportunity to question HCFA staff on methodological

issues relating to the development of the proposed rule at its February, 1998 meeting.

• Specialty societies nominated physicians, practice administrators, and other experts to participate in panels that met this past Fall to validate the data on direct

practice expenses.

• Specialty societies, accountants, health services researchers, and other experts

participated in a conference held on November 21 that discussed how to apply generally accepted accounting principles to the development of indirect PE–RVUs. (Indirect costs are the general costs of running a physician practice that cannot be specifically allocated to a particular procedure).

• Specialty societies nominated physicians to serve on a cross-specialty panel that

met in December to advise HCFA on how to develop direct practice expense RVUs

for a list of high volume, high cost physician services.

• HCFA staff have regularly solicited advice from specialty societies, the AMA,

and others on methodological issues relating to development of the proposed rule.

It should be noted that the above actions to solicit the views of physicians are in

addition to the extensive consultation that occurred prior to enactment of the BBA.

The physicians, practice administrators, nurses and other experts who were selected

to serve on the Clinical Practice Expert Panels (CPEPs) that developed the initial

direct PE–RVUs were selected from nominations made by specialty societies. Specialty societies and the AMA were given an opportunity to review preliminary data

from HCFA as early as January, 1997. They were also given an opportunity to submit comments during a 90 day comment period on the proposed rule on RBPEs that

was published in June, 1997.

Physicians were also consulted by the General Accounting Office as it prepared

its report to Congress on HCFA’s data and methodology. ASIM was invited on three

separate occasions to meet with the GAO to discuss internists’ views on the process,

data and methodology being used by HCFA. The AMA and other specialty societies

were given similar opportunities. Since HCFA will likely give great weight to the

GAO’s recommendations, the GAO report provided another vehicle for physicians to

have input into HCFA’s decision-making.

It should also be noted that physicians will have another opportunity to comment

on the new proposed rule and PE–RVUs that will be published by May 1, 1998. It

is likely that the 1998 PE–RVUs will also be published as interim PE–RVUs that

will be subject to yet another comment period. The BBA also requires that HCFA

make further refinements in each of the transition years, which will provide physi61

cians with additional opportunities to advise HCFA on any improvements that are

needed. The RUC will soon be developing a proposal to HCFA to participate in the

refinement process, which if accepted by HCFA, will provide an ongoing means for

HCFA to consult with the medical profession on refinements of the PE–RVUs.

By the time that the PE–RVUs begin to be implemented on January 1, 1999 phy- sicians will have had far more opportunity to advise HCFA on data and methodology than was the case when resource-based work RVUs began to be implemented

on January 1, 1992. As a result, the medical profession should have a higher degree

of confidence that their views were considered in developing the PE–RVUs than

may have been the case when the resource-based relative value scale (RBRVS) for

physician work was first implemented. (It should be noted that many in the medical

profession expressed the same kinds of concerns about implementation of the

RBRVS that Congress is now hearing about practice expenses, but that over time

the RBRVS has become almost universally accepted by physicians). The subsequent

refinements that will occur during the four year transition should give the profession an even higher degree of confidence in the final PE–RVUs that will be implemented on January 1, 2002.

USE OF ACTUAL COST DATA AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

ASIM also believes that HCFA is in the process of fully meeting Congress’ intent that it consider use of actual cost data and generally accepted accounting principles

to the maximum extent practicable. As noted previously, HCFA solicited comments

on actual cost data, equipment utilization rates, and generally accepted accounting

principles in its October notice of intent to issue a proposed rule. The November 21

conference on indirect costs invited further discussion of this issue. Witnesses who

provided comments at the conference offered a wide range of opinion on the extent

by which the data being used by HCFA was consistent with generally accepted accounting principles, with several of the witnesses concluding that HCFA’s approach

is consistent with generally accepted accounting principles. HCFA is also using actual cost data from the CPEPs and validation panels. Data from the AMA’s Socioeconomic Monitoring Survey (SMS) can also be used to determine specialty-specific proportions of direct and indirect practice expenses. Independent sources of data on the pricing of labor and equipment costs are also being

used by HCFA to develop the direct PE–RVUs. Despite HCFA’s efforts to consider data on actual costs, some physician groups have repeatedly argued that HCFA’s data are so fundamentally flawed that the

agency needs to start over and conduct a new cost accounting analysis of physician

practices, either through on-site studies or through a survey process. They claim

that the CPEP and validation panel process was based on speculation, not actual

cost data, and that the requirements of the BBA will not be satisfied unless HCFA

undergoes a new study of the actual costs of physician practices. ASIM firmly believes, however, that with some improvements, HCFA’s data and methodology will prove to be valid, and that it is not necessary or desirable to conduct on-site studies or surveys of physician practice costs, except possibly on a limited basis as part of a refinement process.

ACCEPTABILITY OF HCFA’S BASIC DATA, METHODOLOGY

It is not only ASIM, however, that reached the conclusion that HCFA’s basic methodology is fundamentally sound. The draft GAO report specifically concluded that the use of expert panels is an acceptable method for estimating direct labor and other direct PEs. It also concluded

that alternative methods (including new surveys of physician practice costs or an

activity-based accounting methodology) have their own practical limitations that

preclude their use in developing the proposed rule. The GAO’s draft report dismissed the argument that the CPEPs were not rep- resentative of the physicians that provided the services whose direct costs were

being estimated, or that the panel members engaged in ‘‘best guesses’’ that had no

factual validity. The GAO found instead that many CPEP participants reviewed

practice cost data on their own practices prior to the CPEPs and came to the meetings prepared to discuss the issues, using actual cost data, rather than basing their

estimates on pure speculation.

The GAO also concluded that mail out surveys, use of existing data, and on-site gathering each has ‘‘practical limitations that preclude their use as reasonable alternatives’’ to the expert panel approach. The limitations it saw in the other methods

include low or biased response rates and high cost (the GAO noted that it cost the

PPRC $135,000 to survey one single multi-specialty practice). The draft report also

specifically says that activity-based accounting, one of the alternatives favored by
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critics of HCFA’s current methodology, ‘‘does not provide the specificity needed to

adjust the MFS’’ because it allocates costs to broad categories of codes, not specific

procedures.

Most importantly, in reference to cost accounting surveys and other approaches that have been recommended by the Practice Expense Coalition, the draft GAO report stated that ‘‘starting over and using one these approaches as the primary

means for developing direct PE estimates would needlessly increase costs and further delay implementation.’’ ASIM fully concurs with the GAO’s draft conclusion that the CPEP process is an acceptable method of developing labor and other direct practice expenses, although

some additional work still must be done to validate the CPEP (and validation panel)

estimates and to link and standardize the labor cost estimates across families of

services. We strongly agree with the GAO that starting over and using mail surveys

of physician practices, on-site cost accounting analyses, or activity-based accounting

would needlessly increase costs and further delay implementation.

USE OF SURVEY DATA IN FUTURE REFINEMENTS

The GAO draft report suggested that gathering data from a limited number of

practices could be useful in pinpointing problems that should be addressed during

the refinement process, and in validating some of the CPEP results for key procedures. It also suggested that gathering such data might be useful in the subsequent

refinement processes.

ASIM does not disagree that it may be appropriate to gather data from a limited

number of physician practices as one source of information to be used in future refinements. We believe, however, that HCFA would first need to decide, in consultation with physician groups, on how such data should be collected and used. A poorly

designed survey could be prone to the same limitations, such as poor response rates

and under-representation of small primary care practices, that led the GAO to preclude using such data in the development of the proposed rule. The CPEP data

should not be thrown out based on data from a survey of a limited number of practices on the costs of a few procedures.

The AMA has suggested that HCFA attempt to validate and refine the CPEP data

by comparing it with other data from other independent sources, such as data from

billing companies and transcription services. ASIM concurs that such data should

also be considered by HCFA as it validates and refines the CPEP data.

The GAO’s draft findings on the acceptability of the CPEP process, and on the

practical limitations of alternative approaches, should put to rest the argument that

HCFA has failed to meet the BBA’s mandate that it consider actual cost data and

generally accepted accounting principles to the ‘‘maximum extent practicable.’’ The

discussion should no longer be over whether an entirely new approach, requiring

further delay, is needed. Rather, the discussion now should be directed to what improvements in HCFA’s methodology are appropriate, as well as on how the refinement process should be conducted.

SUGGESTED IMPROVEMENTS IN HCFA’S METHODOLOGY, DATA

Linkages

One of the most important—and potentially controversial—recommendations in

the draft GAO report concerns the formula used by HCFA to link the labor costs

of physician services. The GAO suggests that HCFA consider other approaches to

the statistical regression formula proposed in the June 18 notice of proposed rule

making.

HCFA’s rationale for applying the regression formula was that the relative relationships with the CPEPs are generally correct, but the absolute time estimates

need normalization. HCFA noted that absolute numbers within some of the CPEPs

may have reflected duplicate counting of tasks that can be performed simultaneously, and that different CPEPs may not have calculated absolute labor costs in

the same manner. As a result, HCFA observed that there was considerable variation

in the CPEP absolute estimates for the clinical and administrative staff times, including variation in the estimates for services that were evaluated by more than one

CPEP.

It is essential that such variation be corrected. To illustrate, if one CPEP came

up with absolute estimates of clinical and administrative staff times that are 20%

higher than those derived by another CPEP for services that in fact involve comparable labor costs, the result of using the ‘‘raw’’ CPEP estimates—without statistical linking—would be that the services rated by the former CPEP would be overvalued compared to those rated by the other panel. In other words, since the pur63

pose of a relative value scale is to place all the relative value units on a common

relative scale, use of the ‘‘raw’’ CPEP estimates would not produce a common scale

of the costs of providing one service compared to another as the law requires. Therefore, ASIM believes that it is absolutely necessary that HCFA standardize the data to create a relative value scale that appropriately values the relationships

between all services and that not doing so would fail to meet Congressional intent. More specifically, ASIM is concerned that with the exception of the panel that evaluated evaluation and management services, the CPEPs generally came up with

absolute labor costs estimates that were too high, especially compared to those for

E/M services. HCFA implicitly recognized this, since the regression formula had the

effect of lowering the labor cost estimates of non-E/M services. The GAO draft report accurately quotes ASIM as believing that linking is appro- priate because some of the CPEPs uniformly assigned higher labor time than the

E/M CPEP. The draft report suggests, however, that HCFA’s regression formula

may have created anomalies that are not supported by the CPEP data. As an alternative to the regression formula, the GAO states that HCFA is looking at ‘‘assigning

uniform administrative staff times across broad categories of codes,’’ such as the

time required to schedule an appointment. It also suggests that shifting billing costs

into the indirect cost formula may reduce the need for statistical linking. ASIM is not opposed to considering whether, as an alternative to the regression formula, there are other approaches to establishing appropriate linkages between

the labor costs of E/M services and non-E/M services. However, we strongly believe

that any alternative linking method must correct the continued problem of non-E/

M codes having excessively high administrative cost estimates compared to E/M

services. The validation panels, and the cross specialty panel meeting that HCFA

held in December, did not correct the misalignment of the labor costs of non-E/M

services compared to E/M services. Therefore, it is essential that HCFA establish

an appropriate linkage in the new proposed rule. In our discussions with the GAO staff, the GAO staff assured ASIM that by ask- ing that HCFA consider alternative approaches to the regression formula, it was not

suggesting that it was unnecessary to establish an appropriate relationship between

the labor costs of E/M and non-E/M services. Rather, the GAO only intended to suggest that HCFA consider other approaches that would appropriately link the labor

costs of E/M and non-E/M services, such as by standardizing certain costs and shifting administrative costs into the indirect cost category. The GAO also did not rule

out making such adjustments through a statistical formula. The draft report also

states that the GAO cannot yet evaluate other approaches that may be considered

by HCFA. Although it is unlikely that Congress would want to get involved in the technical deliberations on linkage, Congress needs to be aware of the impact this issue will

have on whether or not the new proposed rule satisfies the law’s intent that practice

expenses be based on the resources involved in providing each physician service. If

an alternative to the statistical linking formula perpetuates the over-valuation of

the clinical and administrative labor costs of in-hospital surgical procedures compared to office visits and other E/M services, the new practice expense payments

will still not accurately reflect the resource costs of providing one physician service

compared to another.

ASIM is committed to working with HCFA on developing an approach that will

assure that the labor costs of non-E/M services are appropriately aligned with nonE/M services. If there is a better way to achieve this than the statistical formula

proposed in June, then we have no objection to considering such an alternative. But

without knowing what alternative may be offered by HCFA, it is premature to conclude that statistical linking is not necessary.

Scaling

The GAO draft report recommends that HCFA eliminate scaling of the CPEP data

to the national survey data (AMA SMS data).

Scaling means adjusting the proportion of direct costs from the CPEP data so that

they are consistent with the AMA SMS data. The SMS data suggests that the direct

costs can be divided as follows: labor cost, 73 percent; medical supplies, 18 percent;

and medical equipment, 9 percent. The CPEP estimates, in aggregate, came up with

different shares of direct costs: labor, 60 percent; medical supplies, 17 percent; and

medical equipment, 23 percent. Thus, HCFA adjusted the CPEP expenses for labor,

medical supplies and equipment by scaling factors of 1.21, 1.06, and .39 respectively.

Eliminating scaling would tend to help specialties with a higher proportion of

equipment costs, and disadvantage those with a higher proportion of labor costs.

Since the direct expenses of primary care physicians typically have high proportions

of labor costs, and lower proportions of equipment costs, than surgical and medical
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specialists, the GAO’s recommended change likely would disadvantage primary care

physicians. ASIM has not, however, made a decision yet on whether or not elimination of scaling is appropriate. We will be examining this further and providing

our recommendations directly to HCFA.

Indirect Costs

The draft GAO report recommends that HCFA consider using specialty-specific adjustment factors to determine the ratio of direct and indirect costs; and consider

moving administrative costs into the indirect cost category. It also concludes that

the basic approach of allocating indirect costs based on physician work RVUs, direct

PE RVUs and malpractice RVUs, asble. Some physician groups had argued that the

indirect costs should not be allocated using such a ‘‘proxy’’ formula. ASIM agrees

with the draft GAO report’s conclusion that HCFA’s method for allocating indirect

costs based on the proposed formula is acceptable.

ASIM does not have any conceptual problems with moving billing and other administrative costs into the indirect cost category, but we believe that this would necessitate treating those costs differently than would be the case if they were allocated based on the physician work+direct cost+malpractice RVU formula. Use of the

formula used to determine other indirect practice expense would inappropriately

allow surgical procedures with higher work RVUs to get substantially higher billing

costs than E/M services, even though the costs of billing for a surgical procedure

are not much different than for an office visit.

We support using specialty-specific ratios of direct to indirect costs, provided that

there are adequate and valid data for each specialty to accurately calculate specialty-specific ratios.

Use of Physician Nurses

The draft GAO report concluded that ‘‘HCFA appropriately disallowed nearly all

expenses related to staff that accompany physicians to the hospital since there is

no available evidence that these expenses are not already being reimbursed or are

a common practice.’’

Some surgical groups have argued that surgeons often bring their nurses into the

hospital and that these costs should be reimbursed by HCFA. The draft GAO report

disagreed. In ASIM’s meeting with the GAO staff to review the draft report, we

were advised that they had been told by surgical groups that there was some new

evidence given to HCFA in response to the October rule-making notice that supports

the claim that this is a widespread practice. GAO staff said it planned to examine

the evidence and determine if it should modify its conclusion. ASIM recommends

that the GAO ask HCFA to independently validate any such evidence, to determine

if it is the usual practice for a typical Medicare patient, before agreeing that such

expenses should be allowed.

DRAFT GAO RECOMMENDATIONS

Based on its overall analysis and findings, as discussed previously in this testimony, the draft GAO report concludes with several recommendations. ASIM’s specific reaction to each recommendation is as follows:

1. HCFA should document how it intends to adjust the CPEP data, the basis for

the adjustment, and the effects on physician practices. HCFA should also describe

the process for future refinements and updating.

We concur with this recommendation. ASIM believes that HCFA should describe

the elements that are needed in a future refinement process, but should leave the

door open for the RUC to submit a proposal on how it might participate in such

refinements.

2. On a limited basis, HCFA should collect actual PE data to identify significant

problems that should be addressed in the refinement process.

ASIM concurs with this recommendation, provided that HCFA also look at o companies and transcription services. Any survey of physician practices or on-site gathering needs to be carefully designed to minimize response bias and other problems

inherent in a survey process.

3. HCFA should revise the linking methods and eliminate scaling to the national

survey data.

We concur with looking at alternatives to the regression formula used in the proposed rule, as long as the revised linking method properly aligns all services on a

common scale, and specifically addresses the problem of inflated labor costs for nonE/M services compared to E/M services. We support using specialty-specific ratios

of direct and indirect costs. ASIM has not adopted a position yet on the proposal

to eliminate scaling to the national survey data.
65

4. HCFA should collect data from a limited number of practices to test assumptions that underlie the other adjustments or the limitations on direct costs. ASIM concurs, but with the same caveats on the use of survey data that were discussed earlier.

5. HCFA should evaluate assigning indirect PEs based on specialty-specific data. ASIM concurs.

6. HCFA should monitor the impact of RBPEs on access, focusing on procedures with the largest cumulative reduction. ASIM concurs that the impact on access should be monitored. Congress should understand, however, that there are inherent limitations in any study that attempts

to link changes in access (which may be due to a myriad of factors) to specific payment changes. Improvements in access to primary care services should also be monitored.

APPLICATION OF THE ‘‘DOWN PAYMENT’’ TO THE TRANSITION YEARS

The BBA began the process of moving payments in the direct of resource-based

payments, by mandating a ‘‘down payment’’ in 1998 that improved the practice expense RVUs for office visits, while lowering them for some procedures. The legislative history of this provision, which originated in the Senate Finance Committee but

was also accepted by the House conferees, shows that the intent was to increase the

PE–RVUs of office visits in 1998 as a first step toward the expected increases that

will occur when RBPEs are implemented on 1/1/99. Congress clearly intended for

the PE–RVUs, as adjusted by the down payment, to be used in the subsequent years

of the transition that begins in 1999 (i.e. the down-payment adjusted PE–RVUs

would be blended with the resource-based PE–RVUs). Since other provisions in the

BBA postponed implementation of RBPEs for one year (followed by an additional

four year transition) the down payment was viewed by Congress as being an essential first step to helping physicians whose practice expense payments for office visits

are undervalued.

In its notice of intent to issue a rule, HCFA indicated that the 1998 PE–RVUs,

as adjusted by the down payment, would be the basis for the subsequent blended

transition. Some physician groups are now trying to influence HCFA to reinterpret

the law in such a way as to apply the down payment only to the 1998 PE–RVUs.

They argue that the charge-based RVUs, which would be blended with the resourcebased PEs beginning in 1999, should revert back to the 1997 PE–RVUs that were

in effect prior to the down payment mandated by the BBA.

ASIM strongly opposes any such reinterpretation of the law and congressional intent. If HCFA agreed to apply the down payment only in 1998, but not the subsequent transition years, this would not only violate congressional intent, but would

break faith with the members of ASIM and other primary care groups that supported the compromise on practice expense that was adopted last year. (We accepted

a delay in implementation and a four year transition, conditioned on the requirement that HCFA begin making improvements in 1998 in PE payments for office visits, with the understanding that such improvements would carry into the transition

years). It will also reopen the divisive debate in Congress and within the medical

profession on an issue that Congress intended to settle last year. Finally, it could

have the effect of raising PE payments for office visits in 1998, then lowering them

in 1999—a ‘‘ping pong’’ effect that makes no rational sense.

It must be remembered why Congress mandated resource-based practice expenses

in the first place, and why it decided to begin the process of making improvements—

through the down payment—in 1998. Congress concluded—correctly—that the historical charge basis for determining practice expense payments undervalued officebased services. Even with the ‘‘down payment,’’ the practice expense RVUs of a coronary bypass procedure that is performed in the hospital are more than 81 times that

of a mid-level established patient office visit—even though the hospital picks up

most of the costs of the bypass procedure. For many office-based services, Medicare

payments now barely cover the costs of providing those services. Improved payments

for the practice expenses of office visits and other undervalued services will therefore help improve access for those services. The down payment was a good first step

to correcting the existing inequities, and Congress should not go along with any attempt to reverse the progress that is being made.

ASIM does not believe that it will be necessary for Congress to enact legislation

to clarify the intent of the down payment provisions, since we believe that the intent

of the BBA provisions are clear. But if this issue is reopened by HCFA, then we

will urge Congress to step in and enact a technical correction that makes it clear

that the 1998 PE–RVUs, as adjusted by the down payment, will apply in the transition years.
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MEDPAC RECOMMENDATIONS ON PRACTICE EXPENSES

It is our understanding that MEDPAC will recommend that HCFA not adopt its proposal to reduce payments for procedures provided in conjunction with an office

visit or other E/M service. ASIM strongly concurs with the MEDPAC’s recommendation. HCFA’s proposal to reduce PE–RVUs for such procedures by 50% would result

in payments that do not reflect the resource costs of providing each procedure.

There is no basis for HCFA to arbitrarily assume that the costs of providing procedures in conjunction with an E/M service are reduced by 50% from the costs of the

original procedure. We also understand that MEDPAC will oppose HCFA’s proposal to include a volume and intensity adjustment—otherwise known as a behavioral offset—in its calculations of the PE–RVUs. In its June 18, 1997 propose rule, HCFA stated that it

intended to assume that 50% of the reductions in payments for specific procedures

will be offset by an increase in volume and intensity. The effect of this assumption

is to increase the amount of reductions for some procedures, and reduce the expected gain from others. ASIM agrees with MEDPAC’s view that HCFA’s experience

with implementation of the RBRVS does not support the need for such a volume

and intensity adjustment. Further, MEDPAC argues—correctly—that the sustainable growth rate for physician services, also mandated by the BBA, already corrects

for any increase in the volume and intensity of physician services. ASIM strongly

urges Congress to advise HCFA that application of a volume and intensity offset to

the PE–RVUs is inconsistent with requirement that resource-based practice expenses be implemented in a budget neutral manner.

CONCLUSION

ASIM is pleased that the draft GAO report fundamentally supports our assessment that HCFA is satisfying the intent of the BBA and that it is not necessary

or desirable for HCFA to start over with an entirely different approach. We are

pleased that the GAO recognizes the validity of the CPEP process and HCFA’s formula for allocating indirect costs. We agree with the report’s assessment of the practical limitations of the cost accounting surveys and other alternatives that have

been advocated by others. We concur with the GAO that HCFA was correct in disallowing the costs associated with nurses who accompany a surgeon into the hospital, barring independently verifiable data that this is a typical practice.

None of the GAO draft report’s recommendations for improvement are fundamentally inconsistent with the way HCFA is going about developing RBPEs. ASIM believes that the GAO’s suggestions for improvement are for the most part appropriate, although we have some concern about supporting alternatives to statistical

linking until we are certain that there is a better approach that would correct the

misalignment of labor costs for non-E/M services compared to E/M services. None

of the suggested improvements would result in what the draft report rightly calls

the ‘‘needless’’ increase in costs and further delay that would be required if HCFA

was forced to use cost accounting studies or some other alternative methodology to

develop RBPEs, as the critics of HCFA’s current process and methodology have long

advocated.

Mrs. J

Dr. Haynes.

OHNSON of Connecticut. Thank you, Dr. Nelson.

f

STATEMENT OF DEBORAH G. HAYNES, M.D., MEMBER, BOARD

OF DIRECTORS, AMERICAN ACADEMY OF FAMILY PHYSICIANS

Dr. HAYNES. Good afternoon, Madam Chair and Members of the

Subcommittee. I’m Dr. Deborah Haynes, a practicing family physician from Wichita, Kansas, and a member of the board of directors

of the American Academy of Family Physicians. Thank you for inviting the Academy to comment on the General Accounting Office’s

report on the method that HCFA is developing to pay doctors’ overhead expenses on the basis of resource cost, starting in 1999.

I have been selected to represent the Academy today because of

my participation at various stages of the HCFA rulemaking effort
67

and my daily work as a family physician who participates in the

Medicare Program.

The issue of switching to a resource-based method for making

Medicare practice expense payments is a compelling and urgent

one for family physicians. Practice expenses are more than 52 percent of a family physician’s total Medicare revenue. A number of

studies have shown that the services of family physicians and other

primary care physicians are still undervalued by the current Medicare payment system.

One of the requirements of the balanced budget law is the GAO

report that we have before us today. The Academy is overall

pleased with the report. The GAO finds that HCFA has met the

three main requirements of the balanced budget law. Physicians

and other experts have been consulted extensively in the development of the HCFA proposal. Generally accepted accounting principles have been followed, and actual cost data has been gathered

to the maximum extent practicable.

The report also includes five key findings in support of the HCFA

method. First, the report specifically expresses the GAO’s support

for the HCFA method and the soundness of the data flowing from

it. As you know, direct practice expense data was obtained by 15

groups, known as the Clinical Practice Expert Panels, CPEPs.

These panels were comprised of physicians and practice administrators. The data was reexamined in October 1997 by validation

panels. Then the highest volume and highest cost services were

further examined by a cross-specialty panel in December 1997.

I served on the validation panel for the E&M codes and on the

cross-specialty panel. These panels were representative of the physicians whose direct practice costs were being examined, and the

data amounts to more than just estimates. GAO found that HCFA’s

methods and data were acceptable as a starting point, and we

agree.

Second, GAO dismisses alternative data gathering such as

activity-based accounting. These alternatives would increase the

cost of the HCFA effort while needlessly delaying implementation

of the new method.

We could support the use of additional data gathered from a limited number of practices if the data is used specifically during the

refinement period to verify CPEP results for some procedures.

Third, the GAO supports the use of a statistical linking method

for normalizing the data from the expert panels, but it suggests

that HCFA consider evaluating a different linking method than the

one it has proposed. We believe that HCFA’s current proposed linking formula is statistically valid. It is preferable to simply averaging values across the CPEPs. We believe that a linkage based on

the E&M codes, which is what HCFA proposes, is advisable, since

virtually every medical specialty provides E&M codes, and virtually

all of the CPEPs reviewed the E&M codes, making them a common

denominator that can link all of the findings. We could support a

new linkage formula, if it is developed in consultation with physicians and eliminates the inflated estimates that exist for some

codes.

Fourth, GAO believes HCFA acted appropriately in disallowing

practice expense payments for the work done in hospitals by a phy68

sician’s staff. We agree with the HCFA decision not to cover practice expenses in this situation.

Fifth, the GAO recommends that HCFA monitor the impact of its

practice expense proposal and access to services, focusing attention,

in particular, on those procedures with the largest reductions in

payments. We also believe that HCFA should monitor improvements in access to primary care services that may result in the

new method. We hope that having the Government’s principal accounting agency validate HCFA’s approach will lay to rest criticisms of the acceptability of HCFA’s data and methods. The practice expense issue does not need to be reopened legislatively. HCFA

is on the right track, according to GAO, and we could not agree

more.

The last issue I’d like to touch on is the $330 million downpayment for office-based procedures. Some medical groups are urging

HCFA to use the 1997 practice expense relative value units instead

of the new 1998 downpayment-adjusted practice expense RVUs as

the base amount for the blend during the 4-year transition. This

interpretation defies congressional intent and logic, and would

lower payments for office services different than what they should

be under the law. We strongly oppose reinterpretation of the law

this way.

Thank you for the opportunity to offer the family practice viewpoint on practice expense payments. I’ll be glad to answer questions.

[The prepared statement and attachment follow:]

Statement of Deborah G. Haynes, M.D., Member, Board of Directors,

American Academy of Family Physicians

INTRODUCTION

My name is Deborah G. Haynes, M.D. I am a member of the Board of Directors

of the 85,000-member American Academy of Family Physicians, and I serve as

Chairperson of the Academy’s Commission on Quality and Scope of Practice. It is

my privilege to appear before this subcommittee today to discuss our views on the

method being developed by the Health Care Financing Administration (HCFA) for

implementing resource-based practice expense relative value units as part of the

Medicare physician fee schedule.

As you may know, the HCFA proposal appeared in a June 18, 1997 Federal Register proposal addressing revisions in the Medicare physician fee schedule. On October 31, 1997, HCFA published a Notice of Intent to Regulate in the Federal Register

that requested information from the physician community and other experts on specific elements of the proposal. The HCFA practice expense proposal is also examined

in reports that Congress is expected to receive from the Medicare Payment Advisory

Commission (MedPAC) and the General Accounting Office (GAO). These reports

were in a draft form when this statement was prepared, so my comments are based

on the draft versions of the MedPAC and GAO reports.

I was asked to represent the Academy today because of my involvement in the

HCFA endeavor to develop resource-based relative value units for practice expense

payments. I served on the validation panel for evaluation and management (E/M)

codes in October 1997, and participated in a cross-specialty meeting in December

1997. Both events were convened by HCFA as part of their effort to gather actual

data on physician practice costs to the maximum extent practicable as part of the

rulemaking on practice expenses, as required by the Balanced Budget Act of 1997

(P.L. 105–33). I also spoke for the Academy as part of a group of primary care physicians that met at length in October 1997 with the GAO team during the predrafting

phase of the report the subcommittee is examining today. Accordingly, my knowledge of the practice expense issue stems from personal experience as a participant

in the HCFA rulemaking effort—and from my daily work as a family physician who

participates in the Medicare program.
69

THE NEED FOR RESOURCE-BASED PRACTICE EXPENSE PAYMENTS

Prior to 1992, Medicare compensated physicians on the basis of historical charges that substantially overvalued procedures performed in hospital settings while deeply

undervaluing E/M services and other non-surgical services provided in office settings. In 1992, HCFA began to implement a new Resource-Based Relative Value

Scale (RBRVS) designed to pay physicians on the basis of relative value units

(RVUs) for each procedure. These RVUs are based on the time, skill and effort required of a physician to perform a particular procedure. Payments for physician

work, however, are only a part of the whole reimbursement. Physicians also have

to be compensated for the Medicare share of their practice expenses and malpractice

costs as a part of each payment under the RBRVS system. The RBRVS is intended

to eventually encompass all three components of the fee: physician work, practice

expenses and malpractice costs. Congress expected the RBRVS to be an accurate

and equitable system for paying physicians for their Medicare services. What is at issue today is resource-based practice expenses. HCFA has not yet pro- posed a method for determining resource-based RVUs for malpractice costs, but has

substantially completed the process of establishing resource-based RVUs for practice

expenses. These expenses include the costs of office staff, and the equipment and

supplies necessary to run an office. We believe that the HCFA proposal on practice

expenses meets the requirements established in the Balanced Budget Act of 1997,

because it is the result of extensive collaboration with the physician community, and

the methodology is valid as it is based on reliable data on actual physician practice

costs. In these conclusions we agree with the General Accounting Office, whose draft

report we have reviewed.

Establishing resource-based RVUs for the practice expense and malpractice com- ponents of the Medicare physician fee schedule is lagging behind schedule. All physician work RVUs are now resource-based and were even reviewed and modified as

part of a five-year review conducted by HCFA and the American Medical Association RVU Update Committee (RUC) in 1995 and 1996. However, the practice expense and malpractice components of the fee schedule have not yet been converted

into resource-based RVUs. This is a serious problem given the proportion of the

overall fee that is represented by each component. The need to rectify this tardiness

is especially compelling when one considers that practice expenses account for 41

percent of the total RVUs in the Medicare Fee Schedule and 52.2 percent of a family

physician’s total revenue, according to the 1988–1990 AMA Socioeconomic Monitoring Survey. Congress in 1994 extended the deadline for implementation of resource-based practice expense RVUs to 1998. Reputable, independent studies conducted by the

Physician Payment Review Commission, the Harvard School of Public Health and

Health Economics Research, Inc. in the mid-1990s confirmed the problems of the

current payment system and bolstered the need to correct the practice expenses

issue as soon as possible. Thus, HCFA began the process of gathering direct practice

expense data for developing the new practice expense RVUs with the assistance of

Abt Associates, Inc. in 1996.

PRACTICE EXPENSES AND THE BALANCED BUDGET LAW OF 1997

Preliminary results of the HCFA effort to establish resource-based practice ex- pense RVUs were released in the early part of 1997. The data justified a substantial

decrease in practice expense payments for certain facility-based, procedural services

and an increase for primary care and other office-based services. Reaction to the

data and a subsequent HCFA proposal for implementing a new practice expense

method based on it led to a new timetable for implementation of resource-based

practice expenses in the balanced budget law enacted last year. The law spelled out in detail how HCFA is to proceed with the task of completing the implementation of resource-based practice expenses. A transition period totaling

five years (1998–2002) was established. HCFA has begun phasing in the new practice expense method this year by shifting $330 million from the most overvalued

procedures to the office-based services represented by CPT codes 99201–99215. Further, HCFA is required to consult with physicians and other experts, and use generally accepted accounting principles and actual cost data to the ‘‘maximum extent

practicable’’ in drafting a new proposed rule on practice expenses which must be

published by May 1. Finally, the law requires GAO to report to Congress on the

HCFA proposal.

Although the balanced budget law establishes a five-year transition process that

began this January, during which family physicians will continue to be underpaid

for their Medicare practice costs, it is encouraging that the long-standing problem

with practice expenses will at last be resolved by 2002.
70

THE GENERAL ACCOUNTING OFFICE REPORT

The Academy is very pleased with the draft report. We believe the GAO displayed commendable objectivity in its thorough examination of the issues surrounding the

HCFA proposal as well as balance in its subsequent recommendations to Congress.

This draft reflects an impressive amount of research into the complicated topic of

Medicare practice expense payments, familiarity with the HCFA proposal and comprehensive knowledge of the various arguments advanced in support of or in opposition to the HCFA proposal.

The GAO report contains a number of significant findings and recommendations that I will address in the order presented in the draft.

The GAO found that using expert panels such as the Clinical Practice Expert Panels (CPEPs) for estimating direct labor and other direct practice expenses is an acceptable method. The GAO rebuts specific criticisms of the CPEP process by noting

that these panels were representative of the medical specialties and that members

were contributing information based largely on facts, not merely ‘‘best guesses.’’ The

Academy concurs with this assessment of the HCFA method.

The report is very clear in stating that alternative data gathering proposals that

have been advanced are unreasonable and, if followed, would increase costs while

needlessly delaying the implementation of a new method for determining practice

expense payments. The GAO resoundingly dismisses the activity-based accounting

alternative, for example, because it reallocates practice costs to broad categories of

codes and not to specific procedures, as required by the law. The Academy agrees

with the GAO position on alternative data gathering proposals.

The GAO suggests that data gathered through a limited survey should be used

as part of a refinement process and that the refinement process itself should be

clearly described to the public. Collecting additional data specifically as part of a

refinement process is supportable and could be of assistance to HCFA. Such an activity, however, should not be used as justification to discard the data already

amassed from the expert and validation panels. The Academy believes that if additional data is to be collected as part of the refinement process, HCFA must then

offer a detailed proposal for conducting a targeted data gathering effort to the public

so that physicians may collaborate with the agency on how such data should be

gathered and used.

Some specialty groups would like to involve the Relative Value Unit Update Committee (RUC) in the practice expense refinement activities. Although we are supportive in concept of utilizing the RUC in this fashion, the Academy also has concerns with involving the RUC in refinement of the resource-based practice expense

RVUs. Before utilizing the RUC, sufficient staffing and resources must be obtained

to ensure that the committee is capable of handling an increased workload. Just as

importantly, we believe that non-physician clinicians, such as physician assistants,

nurses and practice administrators should be invited to participate in RUC practice

expense refinement activities. These providers and administrators would bring valuable perspectives on the clinical and administrative labor upon which the allocation

of direct and indirect practice expense RVUs is based.

The report supports the use of a statistical linking method for normalizing the

data generated by the CPEPs while suggesting that HCFA consider other possible

means of linking the labor and administrative costs for E/M and non-E/M services.

The Academy reviewed HCFA’s proposed regression formula for linking the CPEP

data and found it to be a statistically valid one. We also found it more preferable

than simply averaging values across all expert panels since this approach can disturb the relative rankings of codes within panels. Further, we believe that a linkage

based on the E/M codes is preferable because virtually every specialty provides E/

M services and virtually all of the CPEPs reviewed E/M services, making these

codes a ‘‘common denominator’’ that can connect all of the findings to one another.

In addition, the composition of the E/M validation panel was more balanced between

primary care and subspecialties than were other panels, and there was greater consensus among its members, leading us to believe that the data reported by the E/

M panel were inherently more accurate and less inflated than those recorded by the

other panels.

While the Academy is supportive of HCFA’s proposed linking formula, we are not

opposed to considering other methods for normalizing the direct practice expense

data. However, our flexibility is subject to the following caveats: if the linkage formula is to be modified, a detailed proposal for accomplishing this change should be

developed with guidance from physicians, offered for public comment, and it should

correct the problem with inflated administrative and labor cost estimates for some

non-E/M codes. Otherwise, an alternative formula probably would be unacceptable

to family physicians.
71

The report also recommends that HCFA consider certain improvements in its

methodology, including the elimination of ‘‘scaling,’’ the use of specialty-specific adjustment factors to determine the ratio of direct and indirect costs, and moving administrative costs into the indirect practice expense category. I will address these

individually below. ‘‘Scaling’’ refers to a statistical adjustment made in the CPEP data so that the proportion of direct expenses attributable to labor, equipment and supplies is consistent with the AMA Socioeconomic Monitoring Survey (SMS). In its June 18, 1997

proposed rule, HCFA noted that in the aggregate, for all CPEPs, labor comprised

60 percent of total direct expenses, medical supplies comprised 17 percent, and medical equipment comprised 23 percent. Further, HCFA noted that the corresponding

percentages from the AMA SMS data were 73, 18, and 19, respectively. To equate

the aggregate CPEP percentages with those of the AMA SMS, HCFA proposed an

adjustment in CPEP expenses for labor, medical supplies and medical equipment

using scaling factors of 1.21, 1.06 and .39, respectively. In essence, this involved

multiplying the CPEP expenses for labor, equipment and supplies for each code by

the given scaling factors so that the overall distribution would be equivalent to the

distribution in the AMA SMS.

The impact of scaling on the direct expenses of any given code depends on the distribution of direct expense for that code as compared to the aggregate distribution. This means that codes with a greater-than-average share of labor costs would

experience an increase in direct expenses as a result of scaling, while the opposite

would occur for codes with a greater-than-average share of equipment costs. The GAO recommends elimination of scaling in the HCFA practice expense pro- posal. This is because HCFA never explained why it felt compelled to scale the

CPEP data to fit the AMA SMS and, as the Academy commented last year, we

failed to understand the value added by scaling, especially given the credibility of

the CPEP data. Thus, to the extent that there is no value added by this mathematical manipulation, we concur with the GAO’s recommendation to eliminate scaling. The GAO recommends using specialty-specific ratios to allocate indirect practice expenses among codes. In its proposed rule, HCFA wants to use the aggregate ratio

(55/45) for this purpose so the adjustment would be the same across the board for

all codes. The Academy has not taken issue with the method HCFA originally suggested for allocating indirect practice expenses among codes. However, scaling indirect practice expense RVUs to the available pool of RVUs on the basis of the percentage of direct and indirect practice expense RVUs billed by each specialty, as recommended by the American Society of Internal Medicine, rather than on a fixed factor of 0.219 as in the HCFA proposal, has merits. We believe that the use of specialty-specific ratios in the formula would represent a further refinement of that formula. Although the ASIM method is more complex, this approach might, in fact, allocate indirect practice expenses more accurately. We would support HCFA’s consideration of this refinement, with an understanding of the trade-off between simplicity

and precision in this decision.

In reference to the GAO proposal to shift administrative expenses to the indirect

side of the equation, the Academy conceptually has no problem with doing this, a

position similar to that held by ASIM. The CPEP and subsequent validation panels

have highlighted the difficulty with trying to attach administrative costs to individual procedure codes. For example, how does one account for multiple service codes

submitted on the same claim form? Or all of the other administrative expenses incurred for a patient presenting with multiple medical problems—a common situation in family practices? Like rent and utilities, administrative costs will probably

vary less by procedure code and more by the size and type of practice. The only

problem with shifting administrative costs to the indirect category is that the formula for allocating indirect expenses would allow higher payments for the indirect

practice costs of surgical services even though associated billing costs, for example,

are most likely the same as those costs associated with billing for an E/M service.

However, the question of whether these billing and administrative costs should be

standardized, or if this data should be obtained from independent data sources such

as billing agencies, has not yet been addressed by the Academy.

The GAO challenges the claims of some subspecialists that it is a common practice for them to bring their office staff into the hospital to assist on rounds and in

surgery. Specifically, GAO said there is no evidence that utilizing staff in this fashion is a common practice. The Academy agrees. These claims should be subjected

to external review and validation, however, and even if validated, we contend that

payment for the expenses of staff brought into the hospital should come from Medicare Part A, not Part B.

It should also be noted that the GAO report specifically certifies that the HCFA

proposal meets the balanced budget law’s requirements for consulting physicians
72

and other experts and gathering actual cost data to the ‘‘maximum extent practicable,’’ as required by the balanced budget law. We hope that having the government’s principal accounting agency validate HCFA’s approach will finally lay to rest

the unfounded criticisms about data gathering efforts, accounting principles, the

thoroughness of efforts to consult with physicians and other experts and so forth

that have been lodged against the HCFA proposal.

Finally, the GAO recommends that HCFA monitor the impact of its proposal on

access to services, focusing its attention in particular on those procedures with the

largest reductions in practice expense payments. The Academy believes that HCFA

should also monitor improvements with access to primary care services that may result from the new practice expense payment method.

THE MEDICARE PAYMENT ADVISORY COMMISSION REPORT

Two important issues relating to the HCFA practice expense proposal were not

included in the GAO report, but are expected to be mentioned in the forthcoming

annual report of the MedPAC. We are referring to the HCFA proposals to include

in the new practice expense method a behavioral offset and a reduction in practice

expense RVUs for multiple procedures performed during an E/M office visit.

The Academy strongly opposes the inclusion in the practice expense proposal of

a 2.4 percentage point reduction, or behavioral offset, in the conversion factor to account for increases in the volume and intensity of services that HCFA claims will

result from changes in net income caused by implementation of resource-based practice expenses. We have always opposed HCFA’s use of a behavioral offset, and oppose it again in this instance. Given that we do not believe that HCFA has ever

been able to adequately support the need for a behavioral offset, the Academy opposes this provision of the resource-based practice expense proposal and is pleased

by the commission’s agreement with us on this matter.

We strongly disagree with HCFA’s proposal to reduce by 50 percent the practice

expense RVUs for additional procedures furnished during the same encounter as an

E/M service. None of the direct cost data gathered for the development of the new

practice expense RVUs justifies the proposed 50 percent reduction.

In the short term, HCFA would simply reduce the practice expense RVUs for the

additional procedures by 50 percent; the reduction would not apply to the E/M service. This is similar to the way in which HCFA lowers payment for multiple surgical

procedures furnished to the same patient on the same day by the same surgeon. In

the long term, HCFA would like to apply a procedure code-specific reduction when

a given procedure is performed during the same encounter as an E/M service.

Under this proposal, if a patient came into the office for a visit and subsequently

received a blood draw and an electrocardiogram, HCFA would reduce the practice

expense RVUs for the blood draw and electrocardiogram by 50 percent, even though

they probably involve different equipment and supplies and, potentially, different

clinical staff. We concede that there may be some savings in administrative staff

time associated with multiple procedures performed during the same encounter as

an E/M service. However, arbitrarily reducing practice expense RVUs by 50 percent

is an inappropriate means of addressing this issue.

Medicare’s physician payment system is supposed to be based on resource costs.

However, until resource cost data are provided showing that practice expenses for

office procedures are reduced by half when an office visit is also provided, there is

no rationale for applying a multiple procedure reduction to office procedures.

For these reasons, we encourage HCFA to proceed with the data development necessary to identify procedure code-specific reductions that can be implemented in the

long run while not making any arbitrary reductions in the short-run. We are

pleased that the commission has adopted a similar stance on this matter. Alternatively, in the short run, HCFA should only reduce the administrative labor component of the direct practice expense RVUs by 50 percent and recognize that the

clinical labor, equipment and supply components of direct practice expenses as well

as indirect practice expenses are the same whether the procedure is done as a stand

alone or with an E/M service.

DOWN PAYMENT IS APPLICABLE IN THE TRANSITION YEARS

As noted earlier, the movement to resource-based practice expense RVUs began

this year with a $330 million ‘‘down payment’’ for office-based procedures. It is clear

from the legislative history of this provision that the increase in 1998 practice expense RVUs for office visits is supposed to be blended with the new, resource-based

practice expense RVUs starting in 1999. HCFA stated precisely this particular understanding in its notice of intent to issue a rule; that is, that the 1998 down73

payment-adjusted practice expense RVUs for office visits would be blended with resource-based practice expense RVUs for office visits beginning in 1999.

It has come to our attention that some medical specialties are urging HCFA to

reinterpret the law with respect to the base year for the transition period. That is,

using the 1997 practice expense RVUs instead of the 1998 down payment-adjusted

practice expense RVUs as the base amount for the blend during the four-year transition period is being advanced at this time. This interpretation defies logic and congressional intent, and would lower overall payments for office visit services from

what they would be otherwise under the balanced budget law, and for these reasons

this effort is strongly opposed by the Academy.

Also, increasing practice expense payments for office visits in 1998 just to turn

around and calculate them in part based on the lower, historical charge-based RVUs

of 1997 would, in effect, negate the compromise on practice expenses adopted last

year. The Academy and other primary care groups accepted the implementation

delay and four-year transition period contingent on HCFA starting to improve practice expense payments for office visits in 1998. If a revision such as the one proposed were accepted by HCFA, it would reopen a very controversial debate that for

all intents and purposes was settled with enactment of the balanced budget law. For

these reasons we urge Congress and HCFA to leave the balanced budget law untouched.

CONCLUSION

Once again, thank you for this opportunity to present the family practice viewpoint on the resource-based practice expense issue. After so many years of waiting

for this component of the Medicare physician fee schedule to be fixed, we are gratified that Congress at last has set a deadline certain of January 1, 2002 for full implementation of the new payment method. It is overdue, but ‘‘better late than never’’

as the old saying goes.

If you take away any one message from my comments, let it be this: the practice

expense issue is not an issue anymore; it does not need to be reopened. The GAO

report firmly states that the work by HCFA complies with the balanced budget law’s

requirements for gathering actual data to the maximum extent practicable, using

generally accepted accounting principles, and obtaining the guidance of as many

physicians and other experts as possible. The GAO confirms that the HCFA proposal is a reasonable and workable one, and that the rulemaking process should

proceed uninterrupted so that implementation of resource-based practice expense

RVUs can be achieved by the deadline established in the law. We could not agree

more.

I invite the subcommittee and its members to continue to look to the Academy

as a resource on matters pertaining to the Medicare physician fee schedule and resource-based practice expenses. We would like to continue to be a part of this discussion, and we will try to be as helpful as possible. At this time, I would pleased

to answer questions from the subcommittee members.
74

Mrs. J

Dr. Pearlman.

OHNSON of Connecticut. Thank you, Dr. Haynes.

f
75

STATEMENT OF ALAN S. PEARLMAN, M.D., PROFESSOR OF

MEDICINE AND ANESTHESIOLOGY, DIVISION OF CARDIOLOGY, UNIVERSITY OF WASHINGTON, SEATTLE, WASHINGTON; ON BEHALF OF THE PRACTICE EXPENSE COALITION

Dr. PEARLMAN. Madam Chair and Members of the Subcommittee,

I’m Alan Pearlman, a cardiologist practicing in Seattle, Washington. I’m honored today to have the opportunity to represent the 43

member organizations of the Practice Expense Coalition and to

offer our reactions to GAO’s report.

We agree with GAO that HCFA can improve the methods used to develop practice expense relative value units, and we urge this

Subcommittee to tell HCFA that it should improve its work. We

renew our offer to work in partnership with HCFA and the entire

physician community, offering funds and assistance to get this task

completed correctly and on time. Today I’d like to summarize our submitted statement, which was based on the draft GAO report, react to some changes in the final

GAO report, and seek this Subcommittee’s willingness to continue

its oversight of this critically important issue. The bottom line is that Congress was right in deciding last year to delay implementation of new practice expense relative value

units. The Practice Expense Coalition greatly appreciates the

thoughtful leadership exercised by this Subcommittee and the Congress in recommending this reexamination and look forward to continuing to work with you. The BBA establishes two key criteria for HCFA in preparing new practice expense relative values. HCFA must look at total practice

costs, and it must use an accounting methodology. GAO has correctly identified the key troublespots in HCFA’s work that caused

last year’s congressional reaction. If HCFA abides by the statute

and takes the steps recommended by GAO, the coalition believes

that by the end of the transition period, new practice expense relative values can be developed that will be fair to all physicians.

Let me highlight several key points in the GAO’s study. First, although GAO found the use of CPEP panels to be an acceptable estimating tool, the CPEP data were never validated. GAO recommends they should be, and we agree.

Second, GAO’s conclusion on HCFA’s linking methodology and

data edits supports our contention that it is not appropriate to redistribute support for physician services based on methods that are

subjective and flawed.

Third, GAO reinforces our concerns about the indirect cost issues

in HCFA’s revisions and makes it clear that we still have no satisfactory approach to this thorny problem.

Fourth, we agree with GAO that the consequences for beneficiaries must be regularly reviewed, especially in light of all of the

changes that have occurred to the physician fee schedule. We know

that most Medicare beneficiaries are now able to get timely access

to appropriate medical services, whether they be primary care or

specialized interventions. What we do not know is whether the

same access and quality can be maintained with payment reductions of the magnitude proposed last June. Clear information from

beneficiaries studies is needed to make sure that Congress can

react on a timely basis if problems arise.
76

Let me address two changes to our submitted statement made necessary by revisions in GAO’s report. First, the GAO changed its

initial recommendation on the scaling techniques that HCFA used

and now supports their use. Our concerns with scaling remain, and

we hope that HCFA will continue to improve this technique and

clarify its use to the physician community. Second, GAO has acknowledged that the use of physician- employed staff in other settings, such as the hospital, is a more

complex issue than it first thought. Whereas the draft report supported HCFA’s decision to disallow these costs, the final report suggests that further examination of the issues may be in order. We

welcome this change. We’ve made progress in discussing this point

with HCFA and believe that a satisfactory resolution can be found. Our greatest concern at this point is the future. I also partici- pated in both the validation panels and the cross-specialty panel,

which were not the focus of the GAO report, and I have significant

concerns about where the process is going now. As GAO notes,

HCFA has not yet reached a conclusion on how to address a number of key issues. We urge this Subcommittee to require HCFA to

make a timely report on these issues in advance of the May rulemaking. Only then can Congress exercise the most effective oversight. In conclusion, we believe that the two key elements of the Bal- anced Budget Act—the use of total practice expenses and an accounting methodology—can be achieved. We have presented to

HCFA a plan developed by Coopers and Lybrand for how this can

be done. I’d be happy to have the Coopers and Lybrand accountants

brief you or your staff on the details of this plan. This completes my testimony. I’d be pleased to respond to questions.

[The prepared statement follows:]

Statement of Alan S. Pearlman, M.D., Professor of Medicine and Anesthesiology, Division of Cardiology, University of Washington, Seattle, Washington; on Behalf of the Practice Expense Coalition

Mr. Chairman, and Members of the Subcommittee: My name is Alan Pearlman,

M.D., and I practice cardiology in Seattle, Washington. I am here today on behalf

of the Practice Expense Coalition which represents 43 national medical specialty societies, medical organizations and major medical clinics (list attached). My own professional society, the American College of Cardiology, is an active member of the Coalition. We are united by our common desire to ensure that the transition to new

practice expense relative value units for the Medicare physician fee schedule is successful and does not disrupt beneficiary access to important, lifesaving medical services and technology.

The members of the Coalition appreciate the opportunity to present testimony

today on the General Accounting Office’s review of the Health Care Financing Administration’s efforts to revise Medicare’s practice expense calculations. The continuing oversight of this Subcommittee is critical to a successful outcome. We also appreciate the actions of this Subcommittee and Congress to give HCFA more time

to complete this important task and for your efforts to clarify the statutory instructions to the agency. HCFA’s assignment is large and complex, and we believe the

decisions incorporated in the Balanced Budget Act of 1997 will help to ensure that

HCFA will do its work properly.

Coalition representatives recently had the opportunity to review the General Accounting Office’s draft report entitled ‘‘HCFA Can Improve its Methods for Revising

Physician Practice Expense Fees,’’ and this statement is based on our review of that

draft. We understand that there may be changes in the tone and even in the content

of the final report, and we will reflect those in oral testimony. Based on our review

of the draft, we have concluded that it is a generally unbiased view of the challenges

and problems that have beset this effort. This report validates the decision of this
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Subcommittee and Congress to clarify the instructionr the agency to complete the

revisions of practice expense relative value units. While the Practice Expense Coalition has some specific concerns about particular issues in the draft report, we believe that as written it should be helpful to Congress in its continuing oversight of

this important physician payment issue. If HCFA responds effectively to each of the

points that GAO has made, and follows the mandates of the Balanced Budget Act

of 1997 on practice expenses, especially the use of total practice costs and cost accounting methodology, it is our belief that the agency can design new practice expense relative values by the end of the transition period that will generally be fair

to the entire physician community. The Practice Expense Coalition commends GAO for the thoroughness of its analy- sis and work to date on this complex issue. We appreciate the extent to which the

GAO staff consulted with us and the other interested parties. Their work identified

the key problem areas and, we believe, raised appropriate criticism of HCFA’s work

up through the June 18, 1997, Notice of Proposed Rulemaking (NPRM). The GAO

draft report identified fundamental problems with the database and the methodology used. We agree with that assessment. However, the Coalition would urge this

Subcommittee to go beyond the GAO conclusion of ‘‘HCFA can improve its methods’’

to a requirement that HCFA should do so.

It is important to note that GAO did not review and evaluate all the actions of

the agency subsequent to that June rulemaking. For example, GAO does not comment on the physician panels convened by HCFA last Fall, nor does it review the

public responses to HCFA’s October 31 notice of intent to issue a rulemaking. The

practice expense issue continues to be a work in progress. Therefore, we urge this

Subcommittee to request that GAO continue its evaluation of HCFA’s work. Specifically, this evaluation should focus on HCFA’s response to the mandates of the Balanced Budget Act of 1is time how, or even whether, HCFA intends to respond to

those mandates, and we believe that continued oversight by an independent entity

such as GAO is essential.

I would like to comment briefly on the draft conclusions of GAO and its rec- ommendations which confirm the wisdom of the Balanced Budget Act’s provisions

on practice expenses. GAO’s conclusions in many respects parallel the Coalition’s

comments on the June 18 rulemaking. I will conclude my comments with a proposal

for how HCFA can respond to GAO and the directives in the Balanced Budget Act

in both the short and long term.

USE OF EXPERT PANELS TO ESTIMATE DIRECT COSTS

HCFA convened a number of expert panels in 1996 to collect information on direct costs. These panels, known as Clinical Practice Expert Panels (CPEPs), included

physicians, practice managers and other health professionals and represented virtually every specialty. The panels met twice to estimate direct costs and labor times

for all physician services under Medicare. GAO concluded that the CPEP method

of collecting or estimating direct cost information is acceptable, but that the data

should be validated based on surveys of actual physician practices. We believe that

expert panels can provide useful information about direct costs; however, GAO did

not evaluate the accuracy of the particular estimates that were made, nor has

HCFA made any such independent evaluation. In the absence of this review, external validation as suggested in the report is critical to building confidence in the specific information derived from these panels. As I will discuss later, there may be

other, even more effective ways to identify the costs physicians incur when they provide medical services.

A fundamental problem with the CPEPs was the lack of common ground rules for their operation. As a consequence, there was little consistency across panels. HCFA

tried to correct for these differences through its statistical manipulations of the

CPEP data, includinging ‘‘data reasonableness’’ edits. These efforts failed, however,

because they were neither based on input from clinicians nor on any objective data.

The GAO criticism of the manipulations is appropriate.

The key element of GAO’s recommendation is the external validation of the origi- nal CPEP data. We believe that Congress should insist on such validation if the

CPEP data are to be an ongoing part of the practice expense database and should

require HCFA to make any needed corrections based on these surveys. This effort

does not need to be time consuming or resource intensive, but can be based on a

limited number of surveys of physician practices.

STATISTICAL TECHNIQUES USED BY HCFA

Because of the lack of common ground rules in the CPEPs, the results understandably varied. HCFA tried to correct for this problem after the fact by making
78

statistical adjustments to the data, referred to as linking and scaling, and applying

‘‘data reasonableness’’ edits. Each technique was intended to adjust the data to establish more consistency in the values that came from each CPEP panel. The use

of these statistical adjustments has been a key point of controversy, because most

of the redistribution in physician payment is derived from these actions. The large

cuts in payments for many procedures that HCFA predicted in its estimates of the

impact of the rule proposed last June were in large measure driven by HCFA’s decisions at this point in the process.

GAO raises serious questions about linking, scaling and the other data reason- ableness rules that HCFA used in the June proposed rule. The Coalition agrees with

this assessment and had raised similar concerns in its comments on the June proposal. Basically these steps turned the work of the CPEPs on its head and were undoubtedly the greatest contributing factor to the concerns that we expressed and

Congress acknowledged in its 1997 legislation on practice expenses. HCFA needs to

completely revise or discard linking, scaling and the other data reasonableness

rules. Everyone acknowledges that some means must be found to relate the diverse

expenses of physicians into a coherent payment system. It is clear that HCFA has

not developed that means, and we are today still unclear how the agency intends

to do this.

Indirect Cost Issues

HCFA proposed to divide physician practice expenses into direct and indirect

costs. Separate data collection strategies were developed. The CPEP process focused

on direct costs, and HCFA planned a mail survey of 5,000 physician practices to collect data on indirect expenses. That survey was never completed, so HCFA was

forced to look to other sources for information on indirect expenses. The quality of

indirect cost information has been an issue ever since. While GAO did not measure

the validity of the data used, it did look at allocation and definition issues. GAO

recognized that HCFA’s method for allocating indirect costs to the individual procedure codes was an acceptable option, given that there is no one accepted way of

doing this. However, GAO properly points out that the use of specialty specific indirect expense data would be more consistent with the requirements of the 1994 and

1997 statutes that HCFA use actual data.

We agree that there is more than one way to allocate indirect costs, but we also

concur with GAO’s comments about specialty specific data. HCFA made assumptions about indirect costs that simply did not reflect the realities of medical practices, and as a result the indirect costs of many specialties were improperly estimated. The key issue with indirect costs is that HCFA never figured out how to substitute for its failed survey of physicians. HCFA and its contractor sent out a survey

that was so complicated it could not succeed. We had urged HCFA to work closely

with the different medical organizations to assure a reasonable response rate and

the accuracy of the responses. These offers were rebuffed by the agency, and the

result was predictable. The survey response was inadequate in light of the 70% percent response rate demanded by OMB. HCFA has had to substitute estimates of indirect expenses for actual data. This, in combination with HCFA’s allocation decisions, has significantly affected the specialty practice expense totals. Physicians

with high levels of indirect costs have had them systematically undercounted in this

process.

GAO advocates that administrative and billing costs be moved from the direct

pool to the indirect pool. This comment mirrors a discussion held in December 1997

at a HCFA meeting with all medical specialties. This change could have a significant effect on physician payments, and requires further analysis. Both HCFA and

the Practice Expense Coalition are currently modeling this change to determine its

payment impact and its consistency with the BBA requirements to use generally accepted cost accounting standards. Since the outcome of this recommendation depends on the intersection of many working parts, we are awaiting the results of

these studies before judging its merits. We note, however, that the accuracy of the

indirect expense pool, however defined, depends heavily on the quality of the total

practice cost information that HCFA uses. GAO doetion of whether HCFA has met

the BBA requirement that it recognize all costs, so we are unable to evaluate this

recommendation more completely at this time.

DISALLOWANCE OF CERTAIN COSTS

As HCFA has defined practice expenses, certain categories of costs have not been

included. The Coalition has addressed this with HCFA, and discussions continue on

the policy issues that underlie HCFA’s decisions to date. We are disappointed that

GAO’s draft report agreed with HCFA’s original decision to disallow any consider79

ation of the costs physicians incur when they bring their own staff to facilities outside their own office to assist in the care of patients. We agree that not every specialty uses its own staff in this way; however, data from the Lewin Group, surveys

conducted by the Society of Thoracic Surgeons, and studies by the national physician assistant organizations demonstrate that certain specialties, such as thoracic

surgery and neurosurgery, do utilize their own staff outside of the office to a significant extent. These are very real expenses to these physician practices, and a way

must be found to incorporate them in Medicare payments. These studies have been

provided to both HCFA and GAO, and can be made available to the Subcommittee

as well.

We believe that this trend will increase as the revolution in the organization of health care financing and delivery continues. This is true not only for staff, but also

for equipment as well. Medicare needs to recognize this changing reality of current

medical practice and incorporate it into the payment system. There are several ways

this could be done once agreement is reached on the rate of occurrence and the level

of cost directly borne by the physician practice. One is to allow for a billing modifier

that would be used when such staff or equipment were involved. Another would be

to build reimbursement for the cost into payments for all services performed outside

the office setting and average the amount across all such payments. The simplest

solution is for HCFA to follow the dictates of the BBA and develop practice expense

relative value units that start with the actual, total costs of physician practices. The

use of staff in this way would thus be captured. Standby costs and uncompensated care can be significant expense items for some specialties, such as emergency medicine. There is a need to address this issue as

well so that physicians not be asked to carry expenses for which there is no compensation.

IMPACT ON BENEFICIARY ACCESS

GAO suggests that there be ongoing review of beneficiary access to care once these changes are in place, with special focus on access to those services that see

the biggest payment reductions. GAO noted that the magnitude of the changes proposed last June were ‘‘significant and could affect physician decisions regarding care

of Medicare beneficiaries.’’ Of course, the best approach is to assure that the final

product does not lead to disruptions in the delivery of medical and surgical services;

however, ongoing monitoring of changing physician reimbursement patterns is a

critical step, and one that Congress should insist upon. The purpose of Medicare is

to assure that beneficiaries have access to the medical care they need when they

need it. Payment policies that significantly alter the status quo must be carefully

evaluated on an ongoing basis so that any needed corrections can be instituted.

Studies by PPRC and others to date indicate that currently beneficiaries do not experience significant access problems to either primary care physicians or specialists.

The payment changes that could result from a new practice expense system may

upset this balance and should be carefully monitored. The GAO study still does not answer the question of whether HCFA is on track for the May rulemaking. As I noted earlier, we hope Congress will ask for a subsequent review based on the requirements of the Balanced Budget Act. We believe

that the requirements of that act, and the standards laid out in this GAO report,

provide the framework for a successful transition to a new set of practice expense

relative values.

ADDITIONAL RECOMMENDATIONS OF THE PRACTICE EXPENSE COALITION

So that the remaining tasks can be accomplished in a timely manner, we have offered to enter into a public-private partnership with HCFA that would jointly fund

the various activities that must be accomplished if this change in practice expense

relative value units is to be successful and completed on time. Every physician interest should be included in that joint effort. Although we have received no response

from HCFA to this offer, we reiterate it today in the hope that all sides will see

the wisdom of such collaboration, and we can proceed to implement it immediately. Were HCFA to agree with us on this cooperative arrangement, we believe that the work could proceed in the following way. The first step is to recognize, as has the General Accounting Office, that the unre- solved questions over data and methodology are too great to support confidence in

any proposal made this year that purports to be the final word on the issue.

Second, we should agree that the practice expense relative values effective in

1999, the first transition year, will probably change quite a bit as the refinement

proceeds. Not every question has to be answered in the May rulemaking, but HCFA

should clearly define the process that will be in place to get to the final answers.
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The next step is to figure out the interim values for 1999 that will make up 25%

of the transition values. In consideration of the time and resources HCFA has available, and the lack of general acceptance of significant portions of the work so far,

we suggest the agency minimize the reallocation of dollars. We realize that the transition is intended to ‘‘soften the blow’’ to any affected specialty, but we urge that

even modest reallocations of payment not occur until HCFA has fully complied with

the mandates of the BBA to use total costs and an accounting methodology. We believe that there is enough data available from several sources, and that an acceptable short term methodology can be worked out, to allow a first step toward practice

expense relative values that are based on the resources actually used by physicians.

However, we must bet data refinements and methodological work remain to be

done, and must be done, before the completion of the transition period. There is still

much uncertainty, so that is why we recommend that HCFA be sure that the interim system’s redistribution impacts are very modest, so that the many remaining

issues can be worked out without causing significant disruption to patient care.

We believe that in 1999, HCFA should refine the system around the key requirements of the BBA—actual data on total physician costs and generally accepted cost

accounting standards. We recently presented to HCFA the method I will now outline.

The Coalition recommends that the total practice cost requirement be met by

using the American Medical Association’s statistical monitoring system data as the

starting point. It is unlikely that we will find a more robust data base than this

one, even if millions more federal dollars are spent and much more time is devoted

to the effort. AMA has been collecting this information for more than 25 years, and

the survey is conducted by the RAND Corporation, a highly reputable firm. There

are some issues with the data base that need to be addressed, such as underrepresented specialties, but these are fairly straightforward and can be accomplished

within the time frames of the BBA and with reasonable expenditures. This proposal

could also incorporate the direct cost data that HCFA has already collected.

The other key element is a methodology based on cost accounting, and the Coalition has asked Coopers & Lybrand to develop that for us. The outline has been

given to HCFA for its review, and I will summarize it here. We realize that more

work is required to have a finished product for the fee schedule, and we have asked

Coopers & Lybrand to continue its design efforts. This further work will be

given to HCFA and to Congress as a demonstration that the mandate of the Balanced Budget Act can be reasonably achieved within the time allotted by the transition period and at a reayers.

The system is relatively straightforward. The fundamental theory behind cost accounting is the identification of resources consumed in the production/provision of

goods or services and the corresponding costs (e.g., direct and indirect expenses) of

those resources. In healthcare, the final ‘‘product’’ is the treatment provided to a patient; thus the cost accounting system must be able to identify and allocate the actual costs of resources used at the procedural level in treating patients.

In this case, we can identify the total costs through the AMA data. From other

sources, we know the proportion of Medicare patients by specialty, and the specialty

specific use of various medical and surgical services. We know, or can learn, about

the importance of different types of costs/expenses for each type of specialty and

each type of service. Using this and other information that now is available, we can

allocate to the procedure code level, which is the level of payment. Once this is done,

we can use a number of commonly used codes to equate costs for different specialties.

Obviously, at this time, I can only present the skeleton of the process, but I would

be happy to arrange for representatives of Coopers & Lybrand to brief you and

your staff in greater detail. This is a process that can work. It can be completed

in the time allowed for the transition without further legislative action. It needs

only the support of Congress and HCFA to be put into place.

Mr. Chairman, this concludes my testimony. I would be pleased to respond to any

questions.
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Mrs. JOHNSON of Connecticut. Thank you very much, Dr.

Pearlman, and my thanks to the panel.

I, unfortunately, am going to have to leave, but I appreciate your

comments very much, and it’s especially useful to have two of you

who have participated in these panels with different points of view.

I think it was, to me, at least, as a Member listening often to

issues in which I don’t have a great depth of knowledge, it’s clear

from the GAO’s report that we do need to do more work, and HCFA

seems to acknowledge they need to do more work, and we need to

have very good oversight of that work. So, at least I, for one, look

forward to your continued input as we move through this process.

I do not believe that we can afford to move forward and implement

the law we passed unless we also do move forward on the issues

raised by GAO.

So I thank you very much, and I’m sure we would be interested

in the Coopers and Lybrand study, if the staff doesn’t already have

it. Thank you very much.

I am going to turn the hearing over to my colleague, Mr.

McCrery.

Mr. MCCRERY [presiding]. Thank you, Ms. Johnson.

I want, too, to thank this panel for your excellent testimony. I

don’t have any questions. I think your testimony was excellent and

speaks for itself.

But I do want to point out, before I turn it over to Dr. Cooksey

for some comments, that as far as I know, anyway, nobody on this

panel and nobody in Congress is out to gore anybody, and we’re not

out to do something that slights a specialty or overly enhances

somebody else. We’re just trying, as best we can, within the constraints that we have, the budgetary constraints that we have, to

work out a system that is as fair to the greatest number of people

possible.

It’s unfortunate, in my view, that we even have to go through

this exercise, and I’ve expressed this viewpoint many times here in

this room—that I don’t want to be, as a policymaker, responsible

for telling physicians or anybody else how much they can make or

how much they can get reimbursed for doing something that ought

to be determined by the private marketplace.

So I’m anxious for the Medicare Commission to do its work this

year and to present us policymakers with something that’s a little

more radical in its thinking than the current system is, and perhaps a proposal that will put us—or give us the chance to put

Medicare into more of a free market context, so that it will take

us away from this kind of responsibility.

With that, I’ll turn it over to Dr. Cooksey.

Dr. COOKSEY. Thank you.

Dr. Nelson, I’m glad to hear a physician that talks as if you have

knowledge, or at least a confidence in your knowledge of accounting, because I think that too often physicians are just as guilty as

the bureaucrats and politicians of not having an adequate accounting background. So it’s good to have you here.

What accounting system do you understand HCFA to be using

now, if they’re not using activity-based or a cost accounting system?
83

Dr. NELSON. Well, I certainly can’t—I certainly won’t pretend

that I am an accountant. I have practiced internal medicine for 27

years in Salt Lake City.

The crux of our testimony had to do with GAO’s assessment of

the methodology, and the fact that GAO concluded that using the

expert panels provided adequate information that, with some additional adjustments, could be utilized, so that we didn’t have to go

back to square one and delay this whole process. So I don’t claim

any individual expertise in this. I’m just interpreting what we’ve

heard from GAO.

Dr. COOKSEY. Would you prefer to see an accrual accounting system? Or there seems to be some question about cost accounting.

Dr. NELSON. No, as I understand, the expert panel processes—

you’ve heard people who have participated in that—used physicians and their staff to determine what proportion of their practice

expenses could be allocated to the various procedures. Some have

suggested going with stopwatches and going into physicians’ offices

and directly measuring that. ASIM believes that that would unduly

prolong the process, and not address some serious problems with

fairness that are based on historic charges.

We have to remember that we’re dealing with a current reimbursement formula that is patently unfair in many instances because of the historic bias. I’m not an accountant, but I understand

principles of fairness.

Dr. COOKSEY. Good. OK, I’m misinterpreted your comments

about accounting.

Let me ask you another question. Would you trust the system

that my colleague, Congressman McCrery, alluded to, a marketdriven system in which the patient has choice, in which there is

competition, in which the physicians, primary care specialists—

and, incidentally, I did general practice before I was in the Air

Force and before I did specialize—but would you trust a marketdriven system or do you trust the system with government regulators, with the labor union leaders, with the White House, with

corporate medicine in the examining room with us? Would you

trust market forces? Do you trust the patient to make the choice

about providers, about quality of care, about cost of care?

Dr. NELSON. Generally, of course. Of course I do. Obviously, in

a public program there needs to be some assurance that the market

is working properly, but the American Society of Internal Medicine,

for example, supports a Medicare reform that would call for defined

contribution, to move it closer toward the market force, marketbased system.

Dr. COOKSEY. I, too, think that’s a move in the right direction.

Dr. Haynes, it’s good to have you here. Your testimony was very

good as well. My associate is a woman, and she is wonderful. She

was one of my residents that I helped train 20 years ago, and she’s

now the best surgeon in town. She was long before I left.

What is your basis for stating what the intent of Congress was

in using 1997 as a base year or 1998? You know, I’m a member

of this body, and I’m not sure what the intent of Congress was, but

I’m glad to know that you know. What is your basis for saying

what is—what was the base?
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Dr. HAYNES. This is based on last year a compromise that, instead of everything being implemented in 1998, it would be a transition period, and the Academy agreed to that transition period, if

there would be a downpayment toward starting to offset the inequities that exist in payments to primary care physicians.

So that now in 1998 we have the downpayment being applied to

the relative value units, RVUs, already, and there are some groups

who are recommending that, as you start to transition in 1999, we

go back to the 1997 dollars and not use the downpayment dollars.

In essence, some doctors would get more money this year. Then it

would go back down next year, and then it might go up the year

after that.

Dr. COOKSEY. But my question is, how did you find out what the

intent of Congress is? Did I miss a meeting? Was there a meeting

in which someone said this is the intent of Congress?

Dr. HAYNES. I just assumed that, because the law was passed

that way, that that was the intent; that Congress wanted there to

start being some changeover of the undervalued services. And so if

we go back to the way it was in 1997, that would not be what the

Balanced Budget Act calls for.

Dr. COOKSEY. OK, a very interesting interpretation.

Well, I personally feel that we need to go to a system in which

the patient truly has a choice. A system that’s driven by the patient getting the highest quality of care at the lowest cost, and government and physicians should have information systems that will

let us know who’s got the best outcomes. We will have an open

window, so that the public can know who the good providers are,

who gets the good results, whose patients get well the quickest. In

that system, there are going to be winners and losers among physicians, among specialists, and among primary care, and there are

going to be some physicians that will go out and take advantage

of the information systems while they’re providing high-quality

care at a low cost, and they will do well. And there will be physicians who will be providing high-quality care at a low cost, but do

not take advantage of information systems, and they’re going to

suffer.

But I trust those market forces more than I trust my colleagues

in this, quote, ‘‘august’’ body. I trust patients to make those decisions better than I trust regulators and labor union leaders and the

White House and the politicians to make those decisions. So that’s

what we all need to be driving for—going back to that room where

there’s a patient and a physician in the examining room, in the

treatment room, and trust the market forces, trust the patient, and

we’ll all be better off. And, most importantly, the patients will be

better off, and what’s good for the patient will be good for the physicians.

Thank you, Mr. Chairman.

Mr. MCCRERY. Thank you, Dr. Cooksey. Your wisdom is just

about to catch up with your years. Any time you want to come and

join us here, we appreciate having you.

I thank the panel again for your testimony.

[Whereupon, at 2:45 p.m., the hearing adjourned subject to the

call of the Chair.]

[Submissions for the record follow:]
85

AMERICAN ACADEMY OF

DERMATOLOGY

February 25, 1998

The Honorable William M. Thomas

Chairman, Subcommittee on Health

Committee on Ways and Means

U.S. House of Representatives

1136 Longworth House Office Building

Washington, D.C. 20515

Dear Mr. Chairman:

I am writing in reference to the Subcommittee’s hearing on Tuesday, March 3, to

examine Medicare payment policies. On behalf of the American Academy of Dermatology, I would like to offer the following comments for consideration by the subcommittee and for inclusion in the printed record of the hearing.

The Academy knows that the Subcommittee will hear from a number of groups

regarding the implementation of the resource-based practice expense system effective January 1, 1999. We are confident that you will receive recommendations from

both the ‘‘losing’’ specialties, particularly surgical groups, and from the primary care

organizations. The former, of course, is interested in minimizing any reductions in

payment, while primary care groups are generally concerned about increasing payments for office visits.

There are, however, other interests to be considered in this debate. Dermatologists, for example, provide both surgical and medical services primarily in office settings. As such, dermatologists are the most cost-effective providers of care for skin

diseases.

Under the June 18, 1997, proposed rule, we would have received substantial increases in payment for practice expenses. These increases are long-overdue. For

many years, we have been requesting that the Health Care Financing Administration (HCFA) fully recognize the practice costs associated with office-based surgery,

particularly the unreimbursed costs including surgical trays, suture materials,

dressings, and other related supplies. In meetings with HCFA staff, we have been

told repeatedly that the development of resource-based practice costs would result

in more accurate reimbursement for the cost associated with office-based surgery.

The Academy was, therefore, pleased to see in the proposed rule that those costs

for surgical trays were finally going to be recognized. However, when implementation of the practice expense system was delayed and the ‘‘down payment’’ for primary care services was enacted by the Congress, the impact of this provision on dermatologists and other office-based procedural specialists was totally ignored. We are

similarly concerned that our views might be ignored or inadequately considered by

HCFA as it proceeds with plans to implement the new system.

The purpose of this letter is to advise you of our position. First, the Academy understands that HCFA is being asked to initiate additional data collection activities

to refine the relative values during the transition period. Obviously, we cannot quarrel with any effort to improve the reliability of the data upon which the system is

based. However, it is critical that any data collection be objective and not used to

achieve some ‘‘political’’ outcome for particular groups of providers, whether a reduction in the decreases for ‘‘losing’’ specialties or certain levels of increases for the favored primary care services.

Second, until such time as better data is available, we hope that you will urge

HCFA to use the rates contained in the June 18, 1997, notice. While we would not

claim that such data is perfect, we think it is clearly the best data currently available. The purpose of the transition, is, of course, to lessen the

impact on the ‘‘losing’’ specialties by gradually phasing in the new rates over a

four year period with only 25 percent of the changes implemented in 1999. In our

opinion, this transition provides ample protection for losing services while additional

studies or data collection efforts are conducted.

I thank you for the opportunity to offer these comments. If there is any way that

the Academy can assist you in this effort, please do not hesitate to call on us.

With best wishes.

Sincerely,

ROGER I. CEILLEY, M.D.

President
86

1 Under the Balanced Budget Act of 1997, it was anticipated that the per capita national average growth rate would be 5.0 percent for the traditional program and 4.6 percent for the

Medicare+Choice program. The January 1998 CBO baseline has lowered the anticipated growth

in spending for both the traditional program (to 4.7 percent) and the Medicare+Choice program

(to 3.3 percent.)

AAHP would like to take this opportunity to comment on the testimony of the

Statement of the American Association of Health Plans

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Medicare Payment Advisory Commission (MedPAC), particularly in light of the recent release of their annual report to Congress. First, AAHP would like to highlight

the success of the Medicare HMO program. Dramatic enrollment growth and low

disenrollment rates demonstrate beneficiary satisfaction with the Medicare HMO

program. The Medicare HMO program works for its enrollees—that is why enrollment is growing rapidly even though every beneficiary has the choice to remain in

the traditional FFS Medicare program. As of January 1998, 15.9 percent—or 5.9

million Medicare beneficiaries—were enrolled in health plans, compared to 15.4 percent in December 1997 and 12.7 percent in December 1996. Five years ago, only 6.2

percent of Medicare beneficiaries were enrolled in health plans. (Refer to graph at

the end of this statement titled: Percent of Medicare Beneficiaries Enrolled in Managed Care Reaches 15.9% in January 1998)

According to the Health Care Financing Administration (HCFA), approximately

90,000 Medicare beneficiaries join health plans each month. Annual growth rates

for Medicare beneficiaries enrolled in the risk program have grown steadily, from

10 percent in calendar year 1990 to 26 percent between January 1997 and January

1998. Enrollment growth is strong both in areas with traditionally high Medicare

risk penetration and in new markets, including the Middle Atlantic and South Atlantic regions.

The majority of Medicare HMOs offer services not covered by fee-for-service Medicare, including outpatient prescription drugs, routine physicals, immunizations, and

preventive health screenings (such as eye and ear exams) in their basic package of

Medicare benefits. The percentage of plans offering outpatient prescription drug coverage has more than doubled since 1993 (see chart above). As of January 1998, 67

percent of Medicare health plans do not charge a premium for the plan’s basic package of Medicare benefits. In its June 1997 report, the Prospective Payment Assessment Commission (ProPAC) estimated that, on average, health care benefits offered

by risk plans are about $950 more generous on an annual basis than benefits offered in the Medicare fee-for-service system. (Refer to graph at the end of this statement titled: Percentage of Risk Plans Offering Prescription Drug Coverage More

Than Doubles Since 1993)

MedPAC was given a broad mandate under the Balanced Budget Act of 1997

(BBA) to examine Medicare payment policy. Given the myriad payment changes

under the BBA that HCFA has begun to implement, a number of issues of concern

have arisen. Our comments will focus specifically on the Commission’s recommendations in the areas of Medicare’s methodology for calculating payments to health

plans and risk adjustment under the Medicare+Choice program.

AAHP is concerned that MedPAC’s recommendations regarding both payment and

risk adjustment have the potential to significantly undercut the payment rates to

Medicare+Choice organizations as established by the BBA. If MedPAC recommendations had been fully implemented for 1998, in many areas, 1998 and 1999 and possibly 2000 rates could fall below 1997 rates. Moreover, payments to

Medicare+Choice organizations are more constrained than Congress expected due to

changes in the baseline,1 and the assessment of a $95 million user fee in FY1998.

Further undercutting payment rates to Medicare+Choice organizations will harm

the beneficiaries who enroll in Medicare+Choice organizations and enjoy quality,

comprehensive services.

Under the BBA, Congress effectively delinked Medicare+Choice payment rates

from Medicare FFS payments. In addition, Congress set the growth rate for

Medicare+Choice payments below the national average FFS growth rate—.8 percentage points below the FFS growth rate in 1998 and .5 percentage points below

the FFS growth rate in 1999 through 2002. During the BBA debate, some argued

that setting the Medicare+Choice growth rate below the national average FFS

growth rate allows Congress to adjust for any overpayments in the program which

may result from risk selection. Congress, therefore, has adjusted aggregate payments for risk selection in the program.
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Adjustments to the payment methodology enacted in the BBA should occur only after an evaluation of the impact of these changes on beneficiaries and participating

plans. In addition, risk adjusting Medicare+Choice payments should be implemented

in a manner that will improve payment accuracy and result in the least disruption

possible to beneficiaries and plans participating in the program.

MEDPAC’S PAYMENT RECOMMENDATIONS

The Balanced Budget Act of 1997 made significant changes to HCFA’s methodol- ogy for calculating payments to health plans participating in the Medicare program.

MedPAC’s March 1998 report to Congress recommends numerous technical changes

to the payment methodology specified by the BBA. AAHP is concerned that a number of MedPAC’s recommendations would further constrain payments to

Medicare+Choice organizations, thereby limiting the expansion of choice available to

beneficiaries and the additional benefits enjoyed by beneficiaries enrolled in these

organizations.

It is important to note that as Medicare+Choice is fully implemented, health plans

and other Medicare+Choice organizations will see significant new administrative

costs such as enrollee encounter data submission requirements and information system changes. In addition, for FY 1998, HCFA intends to collect $95 million in user

fees from Medicare risk HMOs, the only organizations participating in the

Medicare+Choice program this year. Over one-fifth of the minimum annual update

has been eroded through the assessment of the 0.428 percent user fee on

Medicare+Choice organizations from January through September 1998. A number

of plans have already begun to adjust their benefit offerings in response to the new

payment methodology and the assessment of the FY1998 user fee by scaling back

additional benefits such as outpatient prescription drugs and dental care. HCFA has

asked for the full $150 million authorized by the BBA for FY 1999 to fund beneficiary information and education activities.

If the important goal of expanded choice is to be served, health plans must be able

to maintain benefit offerings at levels that are attractive to Medicare beneficiaries

and meet their needs. In this context, our primary concern is that MedPAC’s recommendations should not inject new challenges for health plans to provide enhanced benefits with shrinking resources.

Budget Neutrality Mechanism

Under the BBA, total payments under the new methodology can be no higher

than what total payments would have been under the old approach. The budget

neutrality mechanism, however, is only applied to the blended rates and is not applied to the floor or minimum increase payment rates. As a result, budget neutrality

cannot always be achieved, as was the case in 1998. While projections suggest that

budget neutrality will be achieved in 2000 through 2003, the MedPAC report notes

that Congress should create an alternate budget neutrality mechanism.

The MedPAC report suggests several possible alternate budget neutrality mechanisms, including waiving the provision that requires a minimum 2 percent increase.

Such a change would have resulted in a minimum increase of 1.6 percent (instead

of 2 percent) in 1998. AAHP strongly opposes such a change as it conflicts with the

intent of the BBA, to ensure stability of payments to Medicare+Choice organizations

and the beneficiaries they serve by ensuring a minimum 2 percent update. This

minimum update will be especially important for the newer, smaller plans that will

begin to emerge in 1999. In addition, the percent update provides a reasonable relationship to growth rates in the traditional Medicare program. Even the MedPAC report itself points out that significant changes under the BBA—expansion of choices,

an annual coordinated enrollment period, removal of graduate medical education

payments from Medicare+Choice payments, the geographic redistribution of payments, and an uncertain risk adjustment methodology—combine to make the

Medicare+Choice market more ‘‘volatile.’’

Medicare Spending by Department of Veterans Affairs and Department of Defense

Facilities

AAHP supports increasing the base rates to reflect spending on Medicare-covered

services by the Department of Veterans Affairs and Department of Defense facilities

on behalf of Medicare beneficiaries. Medicare HMO payments do not recognize the

resource costs being expended by the Department of Defense and Veterans Affairs

facilities for treating Medicare beneficiaries. At the same time, seniors who are eligible to use these facilities are included in the total count of Medicare beneficiaries

residing in a county. As a result, managed care payments are too low in areas where

there is extensive use of VA or DoD facilities by Medicare beneficiaries. In 1996,
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ProPAC estimated that health care provided in DoD and VA facilities to Medicare

beneficiaries accounts for 3.1 percent of the total resource costs across all states of

treating Medicare beneficiaries. As MedPAC points out, data on the use of VA and

DoD facilities is only available at the state level. AAHP strongly supports the collection of data on service use at VA and DoD facilities at the county level, and adjusting the base rate accordingly. Such data would ensure accurate payments to

Medicare+Choice organizations in areas with VA and DoD facilities.

Disproportionate Share Hospital Funds

The MedPAC report also recommends exclusion of special payments to hospitals

serving a disproportionate share of low-income payments from the base rates used

for the local component of blended rates. AAHP strongly opposes MedPAC’s recommendation that disproportionate share hospital (DSH) funds be carved out of

base rates. The MedPAC report asserts that ‘‘plans are overpaid to the extent that

they do not pass on DSH payments to the appropriate hospitals.’’ MedPAC’s report,

however, does not provide support for the assertion that plans do not contract with

DSH hospitals. In fact, a 1996 AAHP commissioned analysis found that HMOs

make higher payments to major teaching hospitals and have utilization rates for

these facilities that are comparable to fee-for-service. There is a strong correlation

between teaching hospitals and those that receive DSH payments. AAHP commissioned The Medstat Group, a highly respected medical economics company, to analyze the use of teaching hospitals by HMOs.

Using a database of over 4 million privately insured individuals covered by large

employers, Medstat found that HMOs have utilization rates at academic centers

comparable to fee-for-service plans. According to Medstat, HMOs admitted a slightly

larger share of their patients to major teaching hospitals than did fee-for-service

plans, a finding that contradicts the Administration’s assumptions that Medicare

HMOs are not admitting patients to teaching hospitals. The analysis also found that

HMOs pay major teaching hospitals about 12 percent more than they pay nonteaching hospitals. These findings contradict assumptions that health plans are not

sending their patients to teaching hospitals and paying for the increased costs associated with these facilities. As noted above, there is a strong correlation between

teaching hospitals and those that receive DSH payments.

Monitoring Changes Under the BBA

AAHP fully supports MedPAC’s recommendation calling for close monitoring of

plan and beneficiary participation, risk selection, plan premiums, supplemental benefits, beneficiary cost sharing, and access to care. This monitoring will be critical

in identifying and assessing patterns that result from the geographic redistribution

of payments under the BBA. We agree with MedPAC that HCFA should also play

a lead role in monitoring the impact of the Balanced Budget Act on health plans

and beneficiaries alike. We urge both MedPAC and HCFA to undertake this monitoring prior to making additional changes to the Medicare+Choice payment methodology.

MEDPAC’S RISK ADJUSTMENT RECOMMENDATIONS

AAHP has consistently supported the goal of ensuring that Medicare payments

to health plans are accurate and that they fairly reflect the health care service

needs of the Medicare beneficiaries who enroll. We strongly urge Congress and

MedPAC to consider the interaction of the recently implemented payment methodology with its proposed risk adjustment mechanism and the effect that its proposal

will have on the success of the Medicare+Choice program. Risk adjusting

Medicare+Choice payments should be implemented in a manner that will improve

payment accuracy and result in the least disruption possible to beneficiaries and

plans participating in the program.

Risk Adjustment Should Entail Redistribution, Not Aggregate Reduction

AAHP believes that the risk adjustment methodology developed by HCFA should

be implemented so that payments across Medicare+Choice plans are redistributed,

without a further aggregate reduction of payment to the Medicare+Choice part of

the program as a result of risk adjustment. Failure to do so will result in an unlevel

playing field in many markets as growth in Medicare+Choice payment rates fails

to keep pace with growth in the FFS program, leaving payments in some areas to

fall even further below FFS payments. As a result, beneficiaries will have fewer

Medicare+Choice options, reduced benefits and higher premiums.
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Risk Adjustment Based on Inpatient Data Only

While AAHP shares MedPAC’s concern regarding the limits of a risk adjustment

methodology based on inpatient data only, we are also concerned about the difficulty

of obtaining data from additional sites of care. Many organizations are already experiencing difficulty meeting HCFA’s requirements for collecting inpatient data, in

part due to the need for significant systems modifications to collect and report the

required data. In addition, HCFA is still developing its systems for receiving and

reviewing the inpatient data. Given the uncertainty in the inpatient data collection

process, the time frame necessary for successful initiation of a data collection effort

that includes data from ambulatory sites of care is difficult to predict. As an interim

step, however, HCFA may wish to consider supplementing an inpatient data only

model with some select outpatient data focusing on a small number of diagnoses

that commonly require hospitalization. This approach could give credit to plans with

programs that promote moving care out of inpatient settings in clinically appropriate circumstances. As the MedPAC report points out, ‘‘given the untested nature

of the (risk adjustment) system, it is reasonable to expect significant problems as

well as significant opportunities for improvement over time.’’

Phase-In of Risk Adjustment

AAHP supports MedPAC’s recommendation that HCFA undertake an orderly

phase-in of all aspects of the new risk adjustment method. The report also recommends that ‘‘as soon as feasible, HCFA should announce operational details of

its risk-adjustment system, to allow plans the necessary time to modify their contracts, accounts, and systems.’’ The lack of operational details surrounding the riskadjustment system has posed significant challenges and problems for AAHP members. Most plans need to make changes to their information systems to collect the

data required for risk adjustment, and others may need to rewrite their provider

contracts to ensure appropriate data collection. These activities can be costly and

are occurring at the same time as myriad other changes to the program are being

implemented.

In addition to a deliberate phase-in of the risk adjustment method, AAHP supports the notion that HCFA limit changes resulting from this method to protect

beneficiaries and plans from sharp swings in payment. MedPAC notes that lack of

data has created uncertainty and that HCFA is still in the process of establishing

the mechanism for collecting data from plans. While HCFA does not have an existing database to simulate plan payments under the new risk adjustment methodology, efforts are underway to develop such a database. It is unclear at this point,

however, whether HCFA will be able successfully to assemble such a database and

to provide timely estimates of plan payments under the new risk adjustment methodology. The uncertainty surrounding HCFA’s proposed risk adjustment methodology and the potential for disruption to plans and beneficiaries both argue for limiting changes in payments to Medicare+Choice organizations under the new risk adjustment methodology.

CONCLUSION

We urge MedPAC and Congress to proceed with caution to avoid volatility in the

Medicare+Choice market and to encourage the expansion of choices available to

Medicare beneficiaries. We will continue to work with Congress, HCFA, and

MedPAC to ensure the successful implementation of the Medicare+Choice program.
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Statement of the American Chiropractic Association

This testimony is submitted for the record of the March 3, 1998 hearing of the

Committee on Ways and Means, Subcommittee on Health, on behalf of the American Chiropractic Association (ACA), a membership association representing a majority of licensed Doctors of Chiropractic in the United States, regarding the GAO

report on Medicare payment policies.

The ACA generally supports the GAO report entitled, ‘‘HCFA Can Improve Methods for Revising Physician Practice Expense Payments.’’ It is the opinion of the ACA

that the resource-based methodology used by HCFA to calculate practice expense is

basically sound and that the new fee schedule should go into effect in January 1999,

with a three-year phase in period, as scheduled.

PRACTICE EXPENSE RELATIVE VALUES

Under the new system, practice expense will be more fairly allocated to those who

primarily provide office-based services and, therefore, are financially responsible for

overhead expenses. For example, 76 percent of chiropractic physicians are in a solo

private practice. Less than nine percent of doctors of chiropractic practice in urban

areas of more than one million residents and 47 percent of doctors of chiropractic

practice in communities of less than 50,000. A recent national survey showed that

mean practice expense for doctors of chiropractic is just under 60 percent of average

gross income. On average, practice expense under the current system comprises approximately 40 percent of the fee for any given CPT/HCPCS code reimbursed under

the Medicare Fee Schedule. However, the practice expense allocated to the only

three CPT codes that can be used by doctors of chiropractic under the Medicare payment system comprises only 30.3 percent of the total RVUs allocated to those codes.

Thus, actual practice expense for chiropractic physicians is approximately twice the

practice expense reimbursable by Medicare at the present time.

Although doctors of chiropractic are slated for an increase of approximately 15

percent in total reimbursement for Medicare services under the proposed resourcebased practice expense system, the total impact on net income for the profession is

relatively small. The percentage of income received by doctors of chiropractic from

Medicare patient fees in 1995 was 8.4 percent.

It has been intimated by some during the debate that has surrounded the practice

expense issue that the increases projected for non-medical providers, such as doctors

of chiropractic, account for the losses forecasted for surgical groups. This is simply

not true. Reimbursement for non-medical doctors such as podiatrists, chiropractors,

and optometrists comprises approximately four percent of the Medicare fee schedule.

Reimbursement specifically for chiropractors comprises less than one percent of the

Medicare fee schedule. In fact, elimination of the increase projected for all of these

provider groups would only reduce surgical losses by two percent. As an example,

HCFA has projected that under the new payment system, reimbursement for a coronary bypass procedure would fall to approximately $1770. Elimination of the increases assigned to all non-medical doctors would raise this to $1786, a difference

of only $16. The projected reallocation assigned to chiropractic alone would have significantly less than a one half of one percent impact on the changes estimated for

surgical and other groups.

LINKING

Throughout its report, the GAO expresses its concern regarding HCFA’s linking

methodology and its adjustments to the CPEP data. Using its linking methodology,

HCFA adjusted the CPEPs’ administrative and clinical labor estimates because of

the inconsistency in the estimates for the same procedures. According to the GAO,

these variations in numbers indicate that some adjustments to the CPEP data are

necessary.

It is clear from the report, however, that HCFA has not made any final decisions

as to what their next step will be regarding the validation of the CPEP data. According to the GAO, ‘‘At this time, it is unclear what approach HCFA will take in

preparing its next proposed rule, which is due in May 1998.’’ In addition, the report

indicates that HCFA officials are considering a ‘‘check’’ of the CPEP data by gathering direct expense data through surveys or on-site reviews. The GAO does not believe these ‘‘checks’’ would be practicable unless a limited number of on-site reviews

were conducted to enable HCFA to identify any problems noted with the direct ex92

pense rankings. HCFA has not yet reached a final decision on a check of the CPEP

data.

It is the ACA’s understanding that any final decision by HCFA regarding the linking or adjustment of CPEP data will not be made public until the proposed rule due

in May 1998, at which time the ACA will submit written comment.

MULTIPLE PROCEDURE REDUCTIONS

The ACA recommends that HCFA delay implementation of a multiple procedure

reduction of practice RVUs until a system for procedure code-specific reductions can

be developed. Although doctors of chiropractic would not be directly affected by this

proposed policy, we believe that the proposed across-the-board reduction would penalize those providers who commonly perform multiple procedures that do not result

in efficiencies of scale.

CONCLUSION

In summary, the ACA concurs with the GAO report that HCFA’s methodology for

developing new practice expense RVUs is adequate and that it is not necessary to

develop a new methodology. In addition, it is understood that there may be some

adjustment of the CPEP data. The ACA will reserve comment on CPEP linking until

HCFA finalizes its methodology for this procedure.

health professionals, and scientists that serves its members through programs of

The American College of Rheumatology (ACR) is an organization of physicians,

We appreciate the opportunity to provide these comments.

Statement of American College of Rheumatology

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education, research and advocacy that foster excellence in the care of people with

arthritis and rheumatic and musculoskeletal diseases. The ACR is pleased to provide written testimony to the Ways and Means Health Subcommittee on reports

submitted to the Subcommittee by the General Accounting Office (GAO) and the

Medicare Payment Advisory Committee (MEDPAC) on Medicare payment policies.

GAO REPORT ON HCFA’S RBPE IMPLEMENTATION METHODOLOGY

ACR has had the opportunity to review the final GAO report on HCFA’s methods

for revising physician practice expense payments, and we commend the GAO for accomplishing this significant task within a relatively tight timeline. Furthermore, we

concur with the vast majority of the report’s findings. The College’s testimony will

focus on the following aspects of the GAO report: (1) HCFA’s methodology for developing direct cost estimates; (2) Linking; and (3) Use of physician nurses in the hospital setting.

HCFA’s Methodology for Developing Direct Cost Estimates

The GAO report states that ‘‘HCFA used an acceptable method to develop direct

cost estimates.’’ The ACR fully concurs with this assessment. ACR believes that the

Clinical Practice Expert Panel (CPEP) methodology utilized to generate data on direct practice costs was an open and inclusive process that resulted in values that

will serve as an effective starting point for developing appropriate practice expense

RVUs. We reject the opinion of many stakeholders that the data is fundamentally

‘‘flawed.’’ The intent of the CPEP process itself was to develop a body of data using

a multidisciplinary, representative sample of physicians and other experts (nominated by specialty societies) with expertise regarding the practice expenses under

their review. Every opportunity was provided for all affected parties to provide

input. By the time the official transition to resource-based practice expenses begins

in May, 1998 with the release of the proposed rule on the 1999 Medicare Fee Schedule, physicians and other interested parties will have been given over ten formally

promulgated opportunities to provide input into this process. In fact, physicians

themselves will have actively participated in the actual development of RBPEs

through every stage of the process, including participation in the original CPEPs,

in the validation panels conducted in October, 1997, and the multispecialty panel

meeting convened in December. HCFA has also provided a variety of other forums

for physician groups to convey their opinions to the agency. For these reasons, we

believe that the agency’s actions to date—and the plans for future opportunities to

submit views—already fully meets Congressionally mandated requirements in the
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Balanced Budget Act of 1997 that HCFA ‘‘consult with organizations representing

physicians regarding data and methodology to be used.’’ We also fully concur with the passage in the report indicating that ‘‘Other meth- ods for estimating direct expenses have limitations.’’ The College agrees that the expense of alternative approaches such as mail or on-site surveys (both in time and

actual cost) makes them, by definition, prohibitive. Additionally, these types of data

gathering efforts are invariably plagued by low response rates, as noted in GAO’s

report, and are often hampered by design bias and potentially even by gaming. The

report’s stated concerns that activity-based or cost-based accounting do not provide

the specificity needed to adjust the Medicare fee schedule, are also shared by ACR. It has come to the attention of the College that the coalition of procedurally-ori- ented groups has suggested that HCFA’s current approach be replaced by a costaccounting-based methodology generated by a ‘‘public-private partnership’’ of HCFA

and the medical specialty society community. The ACR finds such a proposal problematic in several ways. First, we believe that such an approach would result in a

top-down RVS that would mirror the inequities in the current charge-based system—i.e., those services that are now reimbursed more for their practice expenses

because of Medicare’s charge-based system would still get more; those services that

are reimbursed less would still get less. This is because the American Medical Association’s Socioeconomic Monitoring Survey (SMS) data, on which the proposal would

be based, itself is distorted by the current charge-based RVUs. HCFA’s approach is

a bottom up approach—figure out the resources that are required to perform each

service, and then convert them into a relative value system (RVS), resulting in the

Congressionally mandated resource-based relative value system. The College also believes that HCFA has been engaging the professional medical community in a ‘‘public-private partnership’’ on RBPEs all along, as evidenced by

the preponderance of opportunities for input afforded to the specialty societies. Finally, it is our opinion that use of a cost-accounting approach would merely maintain the status quo where procedurally-oriented services are over-reimbursed at the

expense of evaluation and management services.

Linking

ACR believes that the issue of whether to utilize the redundant CPT codes reviewed by the CPEPs to link the direct cost estimates generated by the separate

CPEPs remains fundamental to the development of accurate resource-based practice

expenses. The College concurs with HCFA’s assertion in last June’s proposed rule

that the relative relationships within CPEPs are correct, but the relationships between CPEPs need to be normalized to bring the relative estimates to a single scale.

Accordingly, ACR agrees with the GAO report that the CPEP estimates need adjustment and that linking is desirable. In the absence of such linking, the proposed

RBPE RVU system would not truly contain ‘‘relative’’ values. GAO’s report does raise questions regarding the specific linking formula utilized

by HCFA, primarily regarding anomalies caused by the formula and the redundant

CPT codes used to develop the links. While we believe that HCFA should remain

open to the possibility of revising its linking methodology if credible alternate approaches are identified that can develop appropriate practice expense values, we reject the notion that the proposed linking methodology must be overhauled, reconstructed or abandoned. We therefore concur with the opinion of the Physician Payment Review Commission (PPRC) staff cited in the report that it is not necessary

for HCFA to select new redundant codes, assemble new CPEPs, and estimate the

linking regression on new data. It is our firm belief that the overall validity of the

practice expense RVUs is dependent on HCFA adopting policies and rules to establish an appropriate relativity between the staff time estimates by the varying

CPEPs. Therefore, while the College is not wedded to the specific linking model currently outlined by HCFA, we agree with the GAO report in the strongest possible

terms that the CPEP estimates need some type of adjustment, and we believe a

linking methodology is an appropriate approach.

Use of Physician Nurses in the Hospital Setting

The GAO report concluded that ‘‘HCFA appropriately disallowed nearly all expenses related to staff that accompany physicians to the hospital since there is no

available evidence that these expenses are not already being reimbursed or are a

common practice.’’ Some surgical groups have argued that surgeons often bring their

nurses into the hospital and that these costs should be reimbursed by HCFA. GAO

staff has been told by surgical groups that new evidence had been given to HCFA

in response to the October rule-making notice that supports the claim that this is

a widespread practice. GAO staff has said that it planned to examine the evidence

and determine if it should modify its conclusion. ACR recommends that the GAO
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ask HCFA to independently validate any such evidence, to determine if it is the

usual practice for a typical Medicare patient, before agreeing that such expenses

should be allowed.

MEDPAC REPORT ON MEDICARE PAYMENT POLICIES

MEDPAC has recommended that HCFA not adopt its proposal to reduce payments for procedures provided in conjunction with an office visit or other E/M service without further study. The ACR strongly agrees with this recommendation. It

is the opinion of the ACR that extending the 50% discount for multiple procedures

to non-surgical services would be highly inappropriate, at best. We believe that

using reductions for multiple surgical procedures performed through a single incision as a template for reducing multiple diagnostic procedures performed during an

office visit or other E/M services is simply illogical. In these situations, the only savings in physician work or practice expenses that could be realized is a minor reduction in the administrative time associated with scheduling another appointment or

pulling a chart, which is to say the savings in practice costs would be neglible. In

light of the lack of data provided to support making such a dramatic change in reimbursement for services rendered during an E/M visit, we strongly urge HCFA to at

least pilot-test the effects of such a proposal before implementation.

We also concur with the MEDPAC recommendation that a volume and intensity

adjustment, or behavioral offset, should not be used. In its June 18, 1997 propose

rule, HCFA stated that it intended to assume that 50% of the reductions in payments for specific procedures will be offset by an increase in volume and intensity.

The effect of this assumption is to increase the amount of reductions for some procedures, and reduce the expected gain from others. The College agrees with

MEDPAC’s view that HCFA’s experience with implementation of the RBRVS does

not support the need for such a volume and intensity adjustment. Further,

MEDPAC correctly that the sustainable growth rate for physician services, also

mandated by the BBA, already corrects for any increase in the volume and intensity

of physician services. ACR strongly urges Congress to advise HCFA that application

of a volume and intensity offset to the PE-RVUs is inconsistent with requirement

that resource-based practice expenses be implemented in a budget neutral manner.

CONCLUSION

The ACR concurs with virtually all of the findings outlined in the GAO report.

We believe that HCFA did utilize an acceptable method to develop direct cost estimates, and that while the specific proposed formula for linking the estimates is not

perfect, some sort of linking or normalization is desirable. As was indicated by

PPRC staff in the GAO report, drastic overhaul of the process, or implementation

of an alternative approach, is not necessary. ACR agrees with the GAO that HCFA

was correct in disallowing the costs associated with nurses who accompany a surgeon into the hospital, without independently verifiable data that this is a typical

practice. The College also concurs with the recommendations relating to practice expense made by MEDPAC. We believe that it would be highly premature for HCFA

to proceed with its recommendation to reduce payments for procedures provided in

conjunction with an office visit or other E/M service without further study. We also

agree that history does not support the need for a volume and intensity adjustment,

and that the institution of the sustainable growth rate system makes this adjustment unnecessary.

On behalf of our 62,000 Fellows, the American College of Surgeons welcomes this

Statement of American College of Surgeons

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opportunity to provide its views about imminent changes in practice expense relative values under Medicare’s physician fee schedule. As you know, the College and

surgeons generally have been extremely concerned about the potential consequences

of the new practice expense values. In particular, we have repeatedly expressed the

view that the quality and validity of the data and other information that the Health

Care Financing Administration (HCFA) has compiled so far would in no way support a massive redistribution of Medicare payments.

We want to take this opportunity to compliment the General Accounting Office

(GAO) for the work it has done in evaluating HCFA’s proposed practice expense

methodology. The College was pleased to have the opportunity to provide very extensive input during GAO’s development of its February 1998 report, and we are
95

pleased to see this input reflected in many places in the document. Overall, we believe that, despite a very challenging timetable for GAO’s work, the report sheds

considerable light on many of the problems with the data and methodology that

HCFA has contemplated using to determine the new practice expense values.

COMBINED EFFECT OF MEDICARE PAYMENT POLICIES

Before turning to matters directly related to resource-based practice expense val- ues, it is important to note that Medicare policies already in place are expected to

produce significant reductions in Medicare payment for surgical services. The most

obvious are the adoption of a single Medicare dollar conversion factor and the use

of a GDP-based formula for determining acceptable rates of growth in Medicare expenditures for physicians’ services. As we understand it, the Congressional Budget

Office (CBO) has projected that these new policies will cause the Medicare conversion factor to fall from $40.96 for surgical services in 1997 to $32.63 by 2002. This,

by itself, would amount to a 20 percent reduction in Medicare payments. Obviously, if the new practice expense relative values for surgical services are lower than those currently assigned, these services would sustain significant payment reductions due to the combined effect of reductions in practice expense relative

values and reductions in the conversion factor. In other words, under this scenario,

there would be fewer relative value units and each unit would be worth considerably

less.

Following are some specific examples of what this could mean. If we assume that the proposed practice expense values published by HCFA last June were adopted

and that CBO’s conversion factor projections are accurate, Medicare payment for

both coronary arteries bypass and cataract extraction could fall by 47 percent between 1997 and 2002. For total hip replacement, the comparable reduction would

be 45 percent. And, for laparoscopic removal of the gall bladder and kidney transplantation, the payment reductions over this same time frame would amount to 34

and 31 percent, respectively. The Medicare payment trajectory for all of these services is shown on the accompanying charts. It is worth remembering that these payment reductions do not take into account the impact of inflation over this time.

The College believes that payment reductions of this magnitude would have seri- ous consequences for surgical practices in both urban and rural areas, as well as

for the faculty practice plans of large teaching institutions. They would inevitably

reduce surgeons’ willingness to treat Medicare beneficiaries. Even now, the College

is receiving notices indicating that some surgeons have reluctantly concluded that

they can no longer care for Medicare patients as a result of already-imposed payment reductions, such as the 10.4 percent reduction in the Medicare conversion factor for surgical services that was implemented this year. There also is little doubt

that continued downward pressure on payments for surgical services will only intensify the pressure for private contracting under Medicare. GAO’s February report itself raises a cautionary flag about ‘‘the cumulative effect’’ of various Medicare physician payment policy changes. Unfortunately, GAO seems

content simply to monitor the situation. The College, instead, believes that policymakers need to assess in advance the reasonableness of the policies they are contemplating, rather than simply waiting until serious complications begin to materialize.

CONCERNS ABOUT DIRECT PRACTICE EXPENSE DATA

The College has many serious concerns with the data and methodologies that HCFA has contemplated using to determine the new resource-based practice expense relative values.

First, we do not believe that the agency has the kind of data on physicians’ direct practice expenses that are needed to determine accurate practice expense values.

The most recent attempt to reach consensus on labor-related data for a relatively

small subset of physicians’ services was unsuccessful. Further, the various physician

panels that have been convened over time provided significantly different direct

practice expense estimates. Here are just a few examples: • The administrative staff time estimate for a chiropractic manipulative treatment nearly doubled, from 60 minutes during the Clinical Practice Expert Panel

(CPEP) process to 110 minutes in the ‘‘validation’’ panel meeting. • The administrative staff time for a level 3 office visit for an established patient (CPT 99213) increased by 50 percent, from 30 minutes in the CPEP process to 45

minutes in the validation panel meeting. Moreover, during the cross-specialty panel

meeting held in mid-December, primary care physicians argued that the administrative staff time for this code should be increased to 85 minutes—that is, almost double the time estimated less than two months earlier. More importantly, the previous
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30 minute estimate had been used by HCFA to arbitrarily cap the administrative

staff times allowed for various procedural services, because the agency assumed that

this 30 minute estimate was some sort of ‘‘gold standard.’’

• The administrative staff time estimate for the inpatient consultation code (CPT

99253) fell by more than one third, going from 75 minutes in the CPEP process to

49 minutes in the validation panel meeting.

The estimated clinical staff time for allergy skin testing increased by more than

360 percent, going from 13 minutes in the CPEP process to 60 minutes in the validation panel meeting.

• The administrative staff time estimate for balloon angioplasty rose by more

than 125 percent, going from 143 minutes in the CPEP process to 322 minutes during the validation panel meeting.

What is even more significant is that the above differences relate to high-volume

services, with which the various panel members would be expected to have considerable, recent experience. In addition, none of these services involve a global service

period; they all relate to a single event. The College believes this raises serious

questions about the validity of the estimates obtained for low-volume services, including those provided by few or even none of the CPEP panel members charged

with developing them. It also raises serious questions about the accuracy and completeness of the estimates developed for services with a global service period—that

is, those services involving care that stretches from the time a decision is made that

a patient must undergo a major operation until 90 days following the operation.

The GAO report acknowledges the differences in the direct practice expense estimates developed by the various panels but does not specifically discuss the implications of these differences for future rulemaking.

The College believes that even the method HCFA is using to determine the direct

practice expenses associated with a particular service is flawed. It relies on the concept of the ‘‘typical patient.’’ Under HCFA’s approach, expenses are only counted if

they are incurred more than 50 percent of the time a particular service is provided.

In the case of services provided by both generalists and specialists, differences in

the sheer volume of the services provided essentially guarantees that the typical patient approach will cause specialists to be underpaid each time they perform a service on their typical patient (who has been referred by another physician, is symptomatic, and for whom the surgeon or other specialist has the added administrative

burden of keeping the referring physician informed of the results—all of which have

consequences for practice expenses).

In short, this ‘‘typical patient’’ definition serves to discount or even ignore a considerable portion of practice expenses incurred by surgeons. In contrast, when

HCFA determines DRG weights under Medicare’s hospital prospective payment system, the agency takes into account data for all patients, and the weight for a DRG

is based on the weighted average, not on the ‘‘typical’’ patient. Unfortunately, the

GAO report does not address the serious shortcomings of HCFA’s ‘‘typical patient’’

definition for purposes of determining new practice expense values.

With respect to direct practice expenses, the College also believes quite strongly

that the labor costs of the physician-employed staff who accompany a surgeon to the

hospital must be taken into account. So far, HCFA has refused to do so, although

the agency recently requested additional information about this practice and the

College was pleased to comply. Based on a survey conducted by The Lewin Group,

the College is able to document that many surgical practices use their own clinical

staff in non-office settings. The results of this survey (copy attached) show that in

at least five surgical specialties and subspecialties—neurosurgery, ophthalmology,

general thoracic surgery, congenital thoracic surgery, and adult cardiac surgery—

at least 50 percent of practices use employed clinical staff in non-office settings. Further, a sufficient number of practices in other specialties use their clinical staff in

this way that we believe HCFA must make an effort to take their associated labor

costs into account in determining fair and accurate practice expense values. The

Lewin Group data indicate, for example, that 31 percent of general surgery practices

pay for clinical staff used in non-office settings. While the sample for this survey

is admittedly small, the data indicate that this is a significant and real practice cost

that simply cannot be ignored. The College is pleased that GAO’s report specifically

recommends that HCFA ‘‘determine whether changes in hospital staffing patterns

and physicians’ use of their clinical staff in hospital settings warrants adjustments

between Medicare reimbursements to hospitals and physicians.’’
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CONCERNS ABOUT INDIRECT PRACTICE EXPENSE ALLOCATION

The College believes it is also important to note that there is still no single,

agreed-upon method for allocating indirect practice expenses. GAO’s February report acknowledges this. These costs account for a significant share of the practice

expenses incurred by many surgeons and other specialists. In fact, as we have argued, a significant portion of labor costs should be considered indirect expenses. As

far as the College has been able to determine, no independent researcher has

reached HCFA’s conclusion that, on average, fully 55 percent of physician practice

expenses are direct and only 45 percent are indirect. For example, Pope and Burge

found direct expenses to be about 36 percent of the total, while Dunn and Latimer

concluded that direct expenses represented about 32 percent of the total. We believe

that HCFA’s 55/45 direct/indirect practice expense split, and the undifferentiated

manner in which the agency has previously allocated indirect practice expenses

(that is, without taking into account specialty-specific differences in direct and indirect practice expense shares) seriously and inappropriately disadvantage surgeons

and other specialists that have a relatively high share of indirect practice costs.

OTHER CONCERNS

Finally, the College is very concerned that HCFA will obviously be required to

make many controversial assumptions and decisions in calculating resource-based

practice expense values. Overall, the College is deeply concerned about the fact that

every HCFA data manipulation, statistical adjustment, or rule appears to factor out

or otherwise limit practice expenses incurred by surgeons (for example, the crosslinking process, arbitrary caps on clinical and administrative labor time, and the removal of labor costs related to surgeon-employed staff involved in providing services

to hospital patients). Moreover, surgeons are told that some of their labor costs will

not be counted as direct costs at the individual level, but then these costs are counted by HCFA for purposes of determining aggregate direct expenses. In addition, surgeons have been given conflicting messages about where—and whether—to count

the significant non-physician labor costs involved in getting a patient scheduled and

ready for an operation.

The College is gratified that GAO’s recent report devotes considerable attention

to problems with many of HCFA’s statistical and other adjustments. We note, for

example, that GAO has correctly noted HCFA’s caps on clinical and administrative

staff time for many procedural services ‘‘are not supported by any data or analysis’’

and that ‘‘HCFA has not...conducted tests or studies that validate these changes and

thus cannot be assured that they are necessary or reasonable.’’ We note, too, that

GAO is ‘‘not convinced that HCFA’s linking model is free of statistical problems.’’

In fact, GAO goes on to emphasize that it ‘‘did not expect to see such substantial

and often striking deviations from the assumptions or patterns that HCFA staff had

told us were the basis for their model.’’

SPECIFIC RECOMMENDATIONS

At this time, we are tempted to suggest that the work HCFA has completed so

far in developing practice expense relative values should be set aside and that a

new, more feasible work plan must be developed. We recognize, of course, that such

a suggestion would not be permitted under the current statutory deadline. However,

we do have several other concrete suggestions.

1. The College believes that real, unbiased practice expense data must be injected

in the process, rather than continuing to rely on unsubstantiated and ever changing

estimates. Such data could be compared with the estimates developed by the CPEPs

and the validation panels. We note that GAO’s report also sees value in collecting

actual data.

2. The ‘‘typical patient’’ definition needs to be revisited. Surgeons are not simply

convinced that the current approach is fair. At the very least, for some subset of

codes, perhaps the practice expenses could be separately estimated for the typical

patient seen by specialists and the typical patient seen by non-specialists, and then

some weighted average estimate used. Another option would involve the use of code

modifiers to distinguish between patients that have been referred from one physician to another (that is, from a primary care physician to a specialist) from those

that have not been referred. In other words, such modifiers would recognize that

different patient populations receiving the ‘‘same’’ service actually require the physicians involved to incur very different levels of practice expenses, in part because of

differences in patient characteristics and needs, and in part because some practice

expenses must be incurred just to keep the referring physician informed.
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3. In the proposed rule scheduled to be issued this May, HCFA should model several different options. Among other things, the agency should examine the impact

of modifying its assumptions with respect to the proportion of direct and indirect

expenses (and the sizes of the respective relative value pools). For example, we believe it would be appropriate to examine the impact of treating only the clinical staff

time directly related to individual services as direct practice expenses, while considering the remaining clinical staff time and all administrative staff time as an indirect expense. This approach would acknowledge the difficulty of accurately linking

administrative staff time to individual physicians’ services. It would also acknowledge that some clinical staff time is spent in activities that cannot be directly linked

to individual services provided to individual patients (such as time spent by a nurse

in quality assurance activities, office management, continuing medical education,

and so forth).

4. HCFA must complete an impact analysis that compares any proposed practice

expense payments with actual practice expenses incurred by physicians on a specialty-by-specialty basis. The College believes that data exist to do this. We recognize that there may be differences of opinion about what such an impact analysis

might imply, but we see absolutely no reason not to do the work. In fact, we believe

that such a detailed impact analysis is what the Congress expected when it enacted

section 4505 of the Balanced Budget Act. The College and other physicians’ organizations have taken the position that any new practice expense values should at least

cover about the same proportion of each specialty’s expenses, if the system claims

to be resource-based. In fact, if the system truly were resource-based, it would cover

all reasonable expenses.

5. At the very least, the College believes that a reasonable ceiling and floor on the

amount of change in practice expense values must be adopted. A simple phasingin of inappropriately low values certainly would not be acceptable to the College,

nor would vague promises of potential, future refinements in relative values.

The College believes that, at the end of the day, HCFA, Secretary Shalala, and

the Congress will need to assess the reasonableness of Medicare payment amounts

as a whole. Moreover, since third party payers increasingly are adopting Medicare

relative values, decisions made by federal policymakers take on a more global importance. Further, as we have emphasized continually, a massive redistribution of

Medicare payments is not justified given the relatively poor quality of the information and the questionable methodologies currently available to HCFA.

In closing, let me note that the College recognizes fully that the various Medicare

policy changes, including the new practice expense relative values, were motivated

by a desire to increase payments for primary care services. However, as the attached charts show, vast differences in the volume of services provided by generalists and specialists mean that even relatively costly services must be subjected to

radical payment reductions so that payment for visit services can be increased by

a modest amount. We find it difficult to imagine how surgeons will be able to continue providing high quality care to Medicare beneficiaries if the projected changes

in Medicare payments for surgical services become a reality. In this regard, we assume that policymakers are prepared to acknowledge that the health care needs of

Medicare beneficiaries cannot be met by primary care physicians alone. Finally, the

College also recognizes that HCFA has been attempting to develop new practice expense values under very challenging circumstances. While we can sympathize with

this, we know that it will be surgeons and their patients who will have to live with

the final result of the agency’s efforts.
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100
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KEY ASSUMPTIONS IN ACS PROJECTIONS

Medicare Conversion Factors

1997 $40.96 (Source: Federal Register, November 22, 1996)

1998 $36.69 (Source: Federal Register, October 31, 1997)

1999 $36.06 (Source: Congressional Budget Office)

2000 $34.70 (Source: Congressional Budget Office)

2001 $33.22 (Source: Congressional Budget Office)

2002 $32.63 (Source: Congressional Budget Office)

The conversion factors projected for 1999 and beyond obviously reflect CBO’s ex- pectation that Medicare expenditures for physicians’ services will exceed the applicable Sustainable Growth Rates, thereby triggering the need to make compensating,

downward adjustments in the conversion factors.

Service-Specific Relative Values

The relative work values published for 1998 remain unchanged through 2002 (and the 0.917 work value adjuster continues to apply). Note that these work values do

reflect the increases approved for global surgical services, beginning in 1998. The practice expense values published June 18, 1997 are adopted, beginning in 1999, and fully phased in by 2002. No change in malpractice values. While current law requires implementation of new resource-based malpractice values in 2000, the impact of any such values cannot be estimated at this time.

Geographic Adjustment Factors

The ‘‘average’’ payment amounts shown would be those paid in a locale whose geo- graphic adjustment factors equal 1.00. Medicare payment amounts in locales with

different geographic adjustment factors would be higher or lower than those shown.

PRACTICE THAT PAY FOR STAFF IN NON-OFFICE SETTINGS

Number of

Respondents

Number Who

Pay for Staff in Out-of-Office

Settings

Percent Who

Pay for Staff in Out-of-Office

Settings

Colon and Rectal Surgery ............................................... 12 1 8%

General Surgery .............................................................. 13 4 31%

Neurosurgery ................................................................... 12 6 50%

Ophthalmology ................................................................ 2 1 50%

Plastic and Reconstructive Surgery ............................... 6 2 33%

Vascular ........................................................................... 8 1 13%

Thoracic Surgery

General Thoracic Surgery .............................................. 13 8 62%

Congenital Thoracic Surgery .......................................... 10 5 50%

Adult Cardiac Surgery .................................................... 14 10 71%

Total ...................................................................

f

90 38 42%

Statement of Howard M. Levine, President, American Osteopathic

Association

My name is Howard M. Levine, D.O., and I am the President of the American Osteopathic Association (AOA). On behalf of the nation’s more than 40,000 osteopathic physicians and the millions of patients for whom we care, I am pleased to

provide the members of the House Ways and Means Committee’s Subcommittee on

Health with the AOA’s written comments for the hearing record accompanying its

March 3, 1998 hearing on the topic of Resource-Based Practice Expenses.

The AOA appreciates the opportunity to address HCFA’s practice expense proposal, as addressed by the final report by the GAO, submitted to Congress on February 27, 1998.

BACKGROUND

Before 1982, Medicare remunerated physicians on the basis of historical charges

that substantially overvalued procedures performed in hospital settings while
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undervaluing evaluation and management (E/M) services and other non-surgical

services provided in office settings. During 1992, HCFA began to implement a new

Resource-Based Relative Value Scale (RBRVS) designed to pay physicians on the

basis of relative value units (RVUs) for each procedure. The work RVUs are based

on the actual work required of a physician to execute a particular medical procedure. However, this is only part of the payment schedule. Physicians are also compensated for the Medicare share of their practice expenses and malpractice costs as

a part of each payment under the RBRVS system. The RBRVS is intended eventually to be based on actual data for all three components of the fee: physician work,

practice expenses and malpractice costs. The BBA has set a timetable for the creation of malpractice RVUs. HCFA has also substantially completed the process of

establishing Resource-Based Practice Expenses (RBPE) RVUs for practice expenses.

These expenses include the costs of office staff, and the equipment and supplies necessary to run an office.

In essence, the AOA believes that the HCFA proposal on RBPE meets the requirements established by the Balanced Budget Act of 1997. We believe that because of

HCFA’s in-depth work and collaboration with the physician community that the

RBPE methodology is valid since it is based on data provided by physicians on actual physician practice costs. We therefore concur with the General Accounting Office’s findings.

THE AOA’S POSITIONS ON THE GAO’S RECOMMENDATIONS ON THE RESOURCE-BASED

PRACTICE EXPENSE COMPONENT OF THE MEDICARE FEE SCHEDULE

The AOA found the GAO draft report to be a fair and realistic assessment of

HCFA’s RBPE proposal. This topic is extremely complex and with widely varying

positions put forth to Congress and to HCFA on this crucial issue. The GAO report

listed a significant number of findings and recommendations that I will address

below along with our corresponding AOA position(s):

1. GAO concluded that direct labor estimates and other direct practice expenses

formulated by Clinical Practice Expert Panels (CPEP) are an acceptable method for

contributing towards a viable RBPE system. The report recommended that HCFA

should document how it will plan to adjust its (CPEP) data, the basis for this adjustment, and the effects it may have on physician practices. HCFA is also required

to describe their process for future refinements and updating of this data. In its report, the GAO discounts allegations that the CPEP process was flawed because the

information contributed was based on facts, not by ‘‘best guesses.’’

• AOA Position: The AOA agrees with the GAO in its review of this HCFA method.

2. GAO has clarified that alternative data gathering proposals advanced by certain groups are unreasonable and would increase costs while further delaying the

implementation of the new method for determining PE payments.

• AOA Position: The AOA agrees with the GAO in this finding because activity

based accounting alternatives reallocate practice costs to broad categories of codes

and not to specific procedures, as mandated by law. This methodology is also extremely expensive and subject to sampling bias.

3. GAO recommends that HCFA, on a limited basis, should collect actual Practice

Expense data to identify significant problems that may be addressed in the refinement process.

• AOA Position: The AOA concurs in general with this GAO recommendation,

however we believe that certain caveats need apply here. We believe that HCFA

should look at other sources of data, and that any survey of physician practices or

on-site gathering of data needs to be carefully designed to minimize response bias

that may occur. In addition, HCFA should develop an acceptable methodology for

collecting such data.

4. GAO recommends that HCFA should revise its linking methods and eliminate

scaling to the national survey data. GAO also recommended to HCFA that it should

evaluate the possibility of assigning indirect practice expenses based on specialtyspecific data (Two AOA Positions to Follow)

• AOA Position: The AOA concurs in general with the GAO that HCFA’s proposed

regression formula for linking the CPEP data is statistically sound. Even though the

AOA is supportive of HCFA’s proposed linking formula, we are open to considering

other methods for normalizing direct practice expense data. However, this should

only be done as long as the revised method addresses the problem of inflated administrative and labor costs for non E/M codes.
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SCALING BACKGROUND

The GAO report recommended to HCFA that it should eliminate ‘‘scaling.’’ Scaling is a statistical adjustment made in the CPEP data in that the proportion of direct

expenses attributed to labor, equipment and supplies is consistent with the AMA

Socioeconomic Monitoring Survey (SMS) data. In its June 12, 1997 proposed rule,

HCFA noted in the aggregate, for all CPEPs, labor equaled 60 percent of total direct

expenses, medical supplies comprised 17 percent and medical equipment equaled 23

percent. HCFA also noted that the correspondin percentages from the AMA SMS

data were 73, 18, and 19 percent respectively. To equate the aggregate CPEP percentages with those for the AMA SMS data, HCFA proposed an adjustment in

CPEP expenses for labor, medical supplies and medical equipment using scaling factors of 1.21, 1.06 and .39 respectively. Essentially, this would involve multiplying the CPEP expenses for labor, equip- ment and supplies for each code by the given scaling factors so that the overall distribution would be equivalent to the distribution in the AMA SMS data. The impact

of scaling on the direct expenses of any given code depends on the distribution of

direct expenses for that code as compared to the aggregate distribution. This means

that codes with a greater-than-average share of labor costs would experience an increase in direct expenses as a result of scaling, while the opposite would occur for

codes with a greater-than-average share of equipment costs. Since HCFA never explained why it must scale the CPEP data to fit with the AMA SMS data, we see no mathematical value in it. The AOA believes that HCFA

should consider alternatives to scaling but would like to see more methodological

details prior to making a change. • AOA Position: HCFA proposed in its RBPE rule that it wants to utilize the ag- gregate ratio(55/45) since the adjustment would be the same across the board for

all codes. Scaling indirect practice expense RVUs billed by each specialty has merit.

We believe that the use of specialty specific ratios in the formula would represent

a further refinement of that formula. The AOA agrees with this GAO recommendation because it has been difficult for HCFA to gather consistent data in this regard

for all of the medical specialties

5. GAO recommended that HCFA should collect data from a limited number of

practices to test assumptions that underlie the other adjustments or the limitations

on direct costs. • AOA Position: The AOA agrees with the GAO, however we believe, that HCFA should look at other sources of data, and that any survey of physician practices or

on-site gathering needs to be carefully designed to minimize a response bias that

may occur and for HCFA to create an acceptable methodology for collecting such

data would need to be determined.

6. GAO recommends a shift of administrative expenses to the indirect side of the

RBPE formula • AOA Position: The AOA could agree to this proposal in theory. Because in prac- tical terms, the CPEP and subsequent validation panels have highlighted the difficulty with trying to attach administrative costs to individual procedure codes. Accounting for multiple service codes submitted on the same claim form, or variables

such as rent, utilities and administrative costs can vary widely by practice. The

main problem with trying to shift these costs to the indirect category is that the

formula for allocating indirect expenses would allow higher payments for the indirect practice costs of surgical services even though associated billing costs, for example, are most likely the same as those costs associated with billing for an E/M service.

7. In its report to Congress, the GAO recommended that HCFA should monitor the impact on access, focusing on procedures with the largest cumulative reduction. • AOA Position: The AOA agrees with this GAO recommendation, however, we suggest that the GAO acknowledge the inherent limitations of attempting to link

changes in access (which may be due to multiple variables) to specific payment

changes. The AOA also suggests that the report indicate that improvements in access to primary care services should also be monitored.

HCFA’S COMPLIANCE WITH THE BALANCED BUDGET ACT OF 1997 REQUIREMENTS

RELATING TO RBPE

We believe that HCFA is complying fully within the law’s requirements. The BBA

directs HCFA to :

• Phase-In Implementation of Resource-Based Practice Expense (PE) Payments

Over Four Years, Beginning on 1/1/99; • Use Generally Accepted Accounting Principles and ‘‘Actual Cost’’ Data to the

‘‘Maximum Extent Practicable’’; and
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• Consult With Physicians and Other Experts.

The record shows that HCFA is in the process of fully complying with the law’s

requirements:

• A 60 day comment period was provided on a HCFA notice of intent to issue a

proposed rule on practice expenses, published in October, 1997. The notice invited

comments on several issues, including how to use generally accepted accounting

principles, actual cost data and the nature of the refinement process that Congress

mandated for each of the four years of the transition.

• Specialty societies nominated physicians, practice administrators, and other experts to participate in panels that met this past Fall to validate the data on direct

practice expenses.

• Specialty societies participated in two conferences, held in November and December, that discussed use of actual cost data and generally accepted accounting

principles.

• HCFA has gathered extensive actual cost data, from annual AMA surveys on

practice expenses; from data developed by the Clinical Practice Expert Panels and

validation panels; and from pricing data on labor and equipment costs involved in

each service.

• Physicians will be able to comment again during a 90-day comment period on

the new proposed rule. Physicians were also consulted by the GAO as it prepared

its upcoming report to Congress on HCFA’s data and methodology.

REFINEMENT PROCESS

The AOA believes that there is a need for a fair and accurate refinement process.

In order for HCFA to improve upon the crucial work done by the CPEPs and validation panels, there must be a more proportional representation of primary care physicians in relation to the specialists on future panels that will help conduct the refinement process.

DOES THE BBA REQUIRE THAT HCFA INITIATE A NEW COST ACCOUNTING STUDY?

No. The law does not require that HCFA initiate an entirely new cost accounting

survey of physician practices. Actual cost data must be considered to the ‘‘maximum

extent practicable.’’ It is not practicable for HCFA to implement a new cost accounting study in time for the data to be incorporated into a proposed rule that must,

by law, be published no later than May 1, 1998. Given the massive amount of information on actual costs that HCFA has already collected, a new study is also not

needed to develop practice expense payments that are more accurate and fair than

those determined by the current charge-based methodology.

Since the law requires that HCFA establish a process for additional refinements

during each of the four transition years, only 25 percent of the PE-RVUs will be

based on a resource-based methodology during the first year of implementation.

Therefore, there will be another year to make further refinements before the resource-based methodology comprises even half of the total PE payments.

BEHAVIORAL OFFSETS

Two crucial issues relating to HCFA practice expense proposals that were not included in the GAO report, are expected to be included in the forthcoming MedPAC

annual report. We are referring to the HCFA proposals to include a behavioral offset

and a reduction in practice expense RVUs for multiple procedures performed during

an E/M office visit.

• AOA Position: The AOA opposes the inclusion in the practice expense proposal

of a 2.4 percent age point reduction, or behavioral offset, in the conversion factor

to account for increases in the volume and intensity of services that HCFA claims

will result from changes in net income caused by the implementation of resourcebased expenses. The AOA also disagrees with HCFA’s proposal to reduce by 50 percent the practice expense RVUs for additional procedures furnished during the same

encounter as an E/M service

CONCLUSION

Thank you for the opportunity to present our views on this crucial issue before

your committee. The AOA believes that HCFA is on course and is doing all that it

can to ensure the implementation of an equitable Medicare reimbursement system

that values all components of a physician’s practice in providing medical services

to the American public.
105

The AOA supports the findings of the GAO report and we firmly believe that this issue does not need to be revisited. Overall, the GAO believes that HCFA is complying with the BBA requirements for gathering actual data to the maximum extent

practicable, using generally accepted accounting principles and by using the input

of physicians and experts as needed. The GAO report reaffirms that the HCFA

RBPE proposal is a realistic and viable methodology and that the rulemaking process should move forward without interruption so that RBPE RVUs can be implemented by the deadline mandated by law.

Statement of American Society of Clincial Oncology

MEDICARE

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PHYSICIAN PAYMENT ISSUES

The American Society of Clinical Oncology (ASCO) is the national organization representing physicians who specialize in the treatment of cancer. ASCO has 11,700

members.

ASCO strongly supports revision of the Medicare physician fee schedule to incor- porate the use of resource-based practice expense components. We are pleased that

the General Accounting Office has in general endorsed the methods being used by

the Health Care Financing Administration (HCFA) to make this revision. New practice expense components should be implemented in accordance with the existing

statutory schedule without further delay. While ASCO does endorse HCFA’s basic approach, we do, however, have concerns

with two important details in HCFA’s proposed implementation.

PAYMENT REDUCTION FOR MULTIPLE SERVICES

ASCO opposes HCFA’s plan to reduce the payment for many procedures that are furnished on the same day as an office visit. Under HCFA’s proposal, the practice

expense component for procedures that do not have a global payment would be reduced by 50 percent if the physician also charges for a visit. This reduction is based

on HCFA’s assumption that there would be a substantial overlap of costs when multiple services are provided, but in reality any overlap would be far less than the 50

percent assumed by HCFA. Oncologists frequently furnish visit services to a cancer patient on the same day as the patient receives chemotherapy. During the visit the physician examines the

patient, deals with problems that have arisen, and makes plans for further treatment. The subsequent chemotherapy consists of the administration of anticancer

agents and supportive drugs and hydration by specially trained nurses. There is very little overlap between the costs of the visit and the costs of the chemotherapy. The cost of the staff time necessary to prepare and administer the

drugs and the cost of the supplies involved in that process are not reduced in any

respect because the physician saw the patient before the chemotherapy began. Nevertheless, under HCFA’s proposal the practice expense component for the chemotherapy, which comprises almost the entire payment amount, would be reduced by

50 percent. Oncologists would not be able to carry on their practices with such reductions. Any cost overlap that exists is limited to minor administrative costs, such

as the time necessary to make the patient’s appointment for the multiple services.

HCFA should not be permitted to endanger the provision of medical care to Medicare beneficiaries though large and arbitrary payment reductions.

INDIRECT COST ALLOCATION

ASCO is also concerned about the method selected by HCFA for allocation of indirect costs to particular services. HCFA has proposed to allocate indirect costs (such

as rent, utilities, and certain equipment) to particular services based on the total

of the direct practice expense costs, physician work relative value units, and malpractice relative value units associated with each service. In making this allocation,

HCFA has proposed to use the assumption, based on data from the American Medical Association, that indirect costs are 45 percent of total practice expense costs.

Much of what oncologists do involves the provision of chemotherapy to patients.

This service requires oncologists to incur considerable expense for items that HCFA

considers indirect costs, such as extra space for the special chemotherapy chairs,

space and a ventilator hood for mixing the toxic drugs, higher disposal costs for the

chemotherapy-related waste, and so forth. Because chemotherapy administration is

not considered to have a physician work component, however, it appears that
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HCFA’s methodology allocates relatively small amounts of indirect costs to chemotherapy services.

A number of observers have recommended that HCFA should consider the use of

specialty-specific ratios instead of relying on the AMA’s estimation that indirect

costs constitute an average of 45 percent of costs for all physicians. ASCO urges that

this approach should be evaluated as a possibly better means to recognize all of the

indirect costs incurred by specialties, such as oncology, that frequently furnish services that do not involve physician work components.

Mr. Chairman and Members of the Subcommittee, the Medical Group ManageStatement of the Medical Group Management Association

f

ment Association (MGMA) appreciates the opportunity to provide feedback on the

General Accounting Office’s (GAO) report ‘‘HCFA Can Improve Its Methods for Revising Physician Practice Expense Fees.’’ MGMA is the oldest and largest association representing physician group practices with more than 8,900 health care organizations nationwide in which just under 200,000 physicians practice medicine.

MGMA’s membership reflects the diversity of physician organizational structures

today, including large tax-exempt integrated delivery systems, taxable multispecialty clinics, small single specialty practices, hospital-based clinics, academic

practice plans, integrated delivery systems, management services organizations, and

physician practice management companies.

MGMA brings a particularly valuable perspective to the practice expense issue.

In addition to regular discussions with the Health Care Financing Administration

(HCFA), MGMA presented material at HCFA’s indirect expense meeting and participated on the practice expense cross-specialty panel. As a research-oriented organization, MGMA has collected practice expense data since 1955. Our data collection

involves group practices which range in size from two to several hundred physicians.

As such, we understand the magnitude and complexity of HCFA’s task. MGMA represents an equal proportion of managers and administrators working within the primary care and specialty care sectors. Consequently, we are well suited to focus solely on the research aspect without particular regard to one specialty or primary care.

Finally, MGMA served as a technical consultant under a subcontract arrangement

with Abt Associates which contracted with HCFA to gather practice expense data.

MGMA believes that the GAO successfully explored and presented the breadth

and complexities of the practice expense relative value units (RVU) adjustment debate. We further commend GAO for its outreach to MGMA and others in the medical community. MGMA strongly supports GAO’s recommendation that HCFA gather

data from a limited number of physician practices to use as an external validity

check; MGMA has been advocating this data collection throughout the process.

MGMA’s comments today focus on two areas of the report: (1) the use of expert

panels to derive practice expense data and (2) the consideration of how administrative costs should be allocated.

USE OF EXPERT PANELS

• GAO’s ‘‘results in brief’’ indicates that HCFA’s use of expert panels to estimate

the direct labor and other direct practice expenses associated with medical services

or procedures was an acceptable method. While MGMA understands that there are

limitations to other methodologies, we continue to believe that the use of panels as

the only means of data collection is not sufficient for the level of information required to adjust accurately the practice expense RVUs. As well versed as today’s

practicing physicians are in the business of medicine, their primary contribution is

focused on the clinical rather than the managerial and administrative aspects of

medical practices.

• It is important to note that, although the use of expert panels can be unscientific and potentially subjective, MGMA does not discourage the use of this process

to derive additional information. In fact, our August 14, 1997 comments to HCFA

state that the approach is useful to the extent that panelists have access to actual

practice expense data. MGMA’s concern with the panels has been the manner in

which they were convened and conducted.

• I. To HCFA’s credit, some of MGMA’s concerns emanating from the Clinical

Practice Expert Panels (CPEP) have been addressed. With each panel, the Agency

demonstrated its willingness to address process concerns. Specifically, we commend

HCFA for reaching out to practice administrators by providing MGMA with a slot
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on the cross-specialty panel and by actively seeking feedback from other practice administrators who were observing that panel.

• Although improved over time, the panel process was fraught with shortcomings.

MGMA remains concerned with the subjective process of establishing administrative

and clinical time. The panelists, who were primarily practicing physicians, explicitly

recognized their unfamiliarity with the day to day tasks of their office staff, especially administrative staff. Some of this uncertainty (‘‘bias’’) could have been substantially diminished if the panelists were given the time and know-how to collect

informal data from their practices prior to the convening of the panels.

• MGMA remains concerned about panel inconsistencies. Without the specific

tasks associated with each staff explicitly spelled out for the panelists and until information is collected on the ‘‘typical patient’’ for each specialty, inconsistencies persisted. Furthermore, insufficient time was allotted to the process, thereby prohibiting panelists to fully explore each others’ views and working together to identify and

eliminate inconsistencies.

• With respect to the Department of Labor’s wage rates, MGMA believes that a

study should be conducted during the transition period to compare the actual medical practice compensation costs to the Department of Labor’s figures. We believe

that in some instances the role of staff may be undervalued for today’s increasingly

specialized responsibilities.

ALLOCATION OF ADMINISTRATIVE EXPENSES

• Financial Management for Medical Groups, by Ernest J. Pavlock, PhD, CPA

and published by MGMA’s Center for Research in Ambulatory Health Care Administration (CRAHCA) defines a direct cost as one ‘‘that can be traced to or caused

by a particular service, product, segment or activity of the practice. For example,

there are direct costs of performing a particular procedure, making a product, or

managing a department or an office’’ (emphasis added). On the other hand, an indirect cost is one ‘‘that cannot be traceable to a particular cost objectThey are costs

necessary to be incurred to support the total practice. However, they are caused by

two or more cost objects jointly but are not directly traceable to either

individuallyIndirect costs are also referred to as ’overhead’.’’

• Medical group practices, like all other business practices, must have a detailed

understanding of the direct and indirect costs incurred in medical care delivery.

Prompt access to relevant and reliable financial information is critical to run an effective business. Without such information, it is virtually impossible to work in today’s increasingly cost conscious environment.

• In recent months, there has been a push to consider billing and other administrative costs as indirect. MGMA understands that without actual service level practice expense data some may feel forced to consider such expenses indirect. As well

versed as today’s practicing physicians are in the business of medicine, their primary contribution is focused on clinical rather than the managerial and administrative aspects of medical practices. Hence, it is no wonder that the panels convened

thus far were unable to come to closure on medical group administration.

• MGMA believes, however, the answer is not simply to allocate the costs into an

undefined category. This expansion of the indirect cost category only makes it more

difficult for practices to have a handle on specific costs and masks the proper accounting and economic analysis needed in this particular field. Instead, and particularly in light of GAO’s report to Congress, MGMA encourages HCFA to convene a

separate panel composed of managerial and billing staff to obtain task specific information. Only after gaining additional insights can HCFA begin to determine whether and which individual tasks may need to be shifted to the indirect category.

CONCLUSION

In closing, we would like to thank the Subcommittee for its continued interest in

the practice expense issue and for working with the MGMA and the entire medical

community to ensure that the adjustment of practice expense RVUs is based on

sound scientific data.
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Statement of Richard Anderson, President, Society of Thoracic Surgeons

The Society of Thoracic Surgeons and the American Association for Thoracic Surgery represent the board certified cardiac and thoracic surgeons of the United

States. We are pleased to provide the following information and recommendations

for consideration by the Ways & Means Committee on the very important and

complex issue of revision of reimbursement for practice expenses under the Medicare Fee Schedule.

First, we wish to commend Congress and this committee for the decision last year

to delay the implementation of resource-based practice expenses for one year and

to direct the Health Care Financing Administration to develop a revised proposal

for implementation in 1999 which would ‘‘recognize all staff, equipment, supplies

and expenses, not just those which can be tied to specific procedures, and use actual

data on ... key assumptions.’’

We are very concerned that the intent of Congress is not being followed. HCFA

has gathered no new data and appears still not to recognize many critical staff

costs.

I. BACKGROUND: WHAT HAS HAPPENED TO THE ALLOWED CHARGES FOR HEART AND

LUNG SURGERY

Reimbursement for open-heart surgery—coronary artery bypass and surgery and

other complex heart procedures—has already been reduced sharply in the last ten

years. The national Medicare average allowed charge for three-vessel by-pass and

graft surgery was $3,781 in 1988; in 1998, it has been reduced to $2,512. Adjusted

for inflation, the allowed charge today is $1802. That is, reimbursement for this

lengthy and complicated procedure, where the life of the patient is at risk, has been

reduced 34 percent in present dollars; in constant dollars—the real measure—the

reduction is more than 50 percent.

The allowed charge for lobectomy—removal of a part of one lung for lung cancer

or other diseases—has been reduced from $1,654 in 1988 to $1,071 today—a reduction of 15 percent in present dollars and over 39 percent in constant dollars.

HCFA’s 1997 proposal would have reduced the allowed charges for these procedure by another 32 and 26 percent, respectively.

The following table illustrates the reductions which have already occurred over

the ten years from 1988 to 1998 and the further effect last year’s proposal would

have had:

CABG ×3 (CPT 33512) Lobectomy (CPT 32480)

Current $ Constant

1988$ Current $ Constant1988$

1988 .......................................................... $3,781 $3,781 $1,654 $1,654

1997 .......................................................... $2,831 $2,058 $1,518 $1,098

1998 .......................................................... $2,514 $1,802 $1,420 $1,005

June 1997 HCFA Proposal (at 1998

Conversion Factor) .............................. $1,714 $1,230 $1,071 $768

II. ARE THE PRESENT WORK VALUES CORRECT?

We believe that the estimates from Professor Hsiao of the Harvard School of Public Health, on which the work values were based, significantly undervalued the time

required for pre and post-surgical services and underestimated both the difficulty

and intensity of advanced surgical procedures on the heart and lungs.

We do not make this assertion lightly. In 1991 the Society of Thoracic Surgeons

undertook an extensive study, through Abt Associates, of the time and work required for cardiac and thoracic surgery. This methodology was essentially identical

to that used by Professor Hsiao, but with a larger data base. The design and methodology of this study were reviewed with HCFA before the study began and its objectivity assured by an independent review panel.

The conclusion was that major cardiac surgery procedures had been undervalued

by 43 percent and many thoracic surgery procedures by 20 percent. This data was
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submitted to HCFA with a request that it be utilized in final decisions or, at the

very least, that the Hsiao study of these procedures be reexamined.

HCFA ignored both this data on work values and our request for restudy.

These extreme reductions in reimbursement for cardiac and thoracic surgery are

occurring at a time when the average age of our patients is increasing; when complicating factors, such as prior angioplasty or comorbid conditions are more prevalent; and when hospitals have shifted costs onto surgeons. Despite these changes,

cardiac and thoracic surgeons have continued to treat Medicare patients without differentiation. We do not even inquire into the insurance status of our patients. The

undervaluation of work has up to this time been compensated by adequate reimbursement for practice expenses. Full reimbursement for practice expenses has been

and remains essential.

III. ‘‘OPPORTUNITY COST’’

Cardiac and thoracic surgeons spend a minimum of seven years in training after

medical school—longer than any other medical specialty and four years longer than

family practitioners. Most cardiac and thoracic surgeons are well into their thirties

before they begin practice, and many have incurred substantial debt to complete

their education. Because the work is physically demanding, their work lives are also

shorter than those of general medical practitioners.

In developing the concept which led to the ‘‘resource based relative value fee system’’ Professor Hsiao and his colleagues originally recommended including an adjustment for the value of the time lost in training—‘‘opportunity cost’’ in the economists’ phrase. Professor Hsiao and his colleagues estimated the amortized value of

the opportunity cost of specialty training for cardiac and thoracic surgery at 9.16

percent and for general family practice at 3.52 percent. When put on a relative

scale, the opportunity cost factor for cardiac and thoracic surgery was 1.05, for family practice 0.99 (JAMA, October 28, 1988).

In simplifying the RBRVS system for implementation, this opportunity cost adjustment was lost. Allowed charges for cardiac and thoracic surgery are now, therefore, six percent less than they should have been if only the time lost in training

(not counting the shorter work life at the end of practice) had been recognized. We

request that the original recommendation of the Harvard School of Public Health

that work values be adjusted for the ‘‘opportunity cost’’ of advanced training be reinstated and that no further adjustment be made to the fee schedule until this is

done.

IV. THE PRACTICE COST DILEMMA

In this context we approach the valuation—or revaluation—of practice costs. As

the committee knows, these practice expense allowances were originally set through

a formula based on historical allowed charges—those essentially set in the free market, paid by commercial insurers.

Our information shows that the current practice expense reimbursement is within

ten percent of the actual practice costs incurred by cardiac and thoracic surgeons

at the present time.

The American Medical Association Socioeconomic Survey shows mean practice

costs for ‘‘other surgeons’’—which includes cardiac and thoracic surgeons—at

$252,000 per surgeon. Research we have done -and we are now undertaking a larger

survey to provide more definitive information -has shown average practice expenses

among our specialty of approximately $244,000.

Present practice cost reimbursement, under the 1998 fee schedule, for a cardiac

surgeon who performs 200 major operations a year, with an additional 200 consults

and another 200 chargeable office visits is $ 259,600 per year—within six percent

of our best present information on mean actual costs.

V. LAST YEAR’S HCFA PROPOSAL

HCFA’s June 1997 proposal would have reduced practice expense reimbursement

for a three-vessel bypass to $398; for a partial lung removal to $280; and for a heart

transplant to $620. These were HCFA’s estimates at that time of the correct allowance for all practice expenses incurred by the cardiac or thoracic surgeon, not just

for the hours required for the operation and the days of hospitalization, and all

other services provided in the full 90 day global period. (For a heart transplant,

these allowances would also have to cover the time of the transplant coordinator,

which often extends to six months before the transplant surgery is performed.)
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Total practice expense reimbursement for the cardiac surgeon with the case load outlined above, under this proposal, would have dropped to $92,500 -about 38 percent of actual costs.

For comparison, the AMA Socioeconomic Survey shows that the mean practice ex- penses for a general family practitioner are $170,400 a year. Under the HCFA proposal, practice expense reimbursement for a general family practitioner with a case

load of 6000 office visits a year (an average of 24 patients a day for 20 minute patient encounters) would be $170,000 a year -full practice expense reimbursement. These above comparisons are approximate, and should be refined. The wide differential in the ratio of actual costs to proposed reimbursement clearly indicates

that, however, the 1997 HCFA proposal was poorly constructed. Validation of any

new proposal against the actual practice costs -at the very least, spot-sampling of

actual total practice costs incurred by specialties -is essential before any radical

changes are made in the Medicare Fee Schedule. We are pleased that the General

Accounting Office has recommended such sampling to check the validity of HCFA’s

estimates.

This committee last year heard some very misleading statements about the prac- tice costs of cardiac surgery. One statement compared practice expense reimbursement for an office visit to that for open heart surgery which ‘‘requires only a few

hours of surgeon’s time.’’ The reality is that reimbursement for surgery covers 90 days of service to the pa- tient—in the operating room, in the hospital before and after surgery, and for the

remaining time, within 90 days, after hospital discharge. Surgeons, unlike many

other practitioners, do not charge for repeat visits within the 90 day global period.

Thus the service provided to a cardiac surgical patient should not be compared to

that for a 15 minute office visit.

VI. DO WE STILL NEED HEART AND LUNG SURGEONS?

This committee also heard last year a statement that the need for cardiac sur- gery—and other advanced cardiac care—is diminishing because of the improved general medical care provided since fees for primary care services were raised. HCFA

has apparently accepted this assertion and is implementing physician payment reform as though increasing reimbursement for general medical care might bring

about both a reduction in the cost of care and in the incidence of serious heart and

lung disease requiring surgical treatment by specialists. This is not only a badly

mistaken assumption, as described below, but goes well beyond Congressional intent

for a relative value based payment system. The number of primary care office visits paid for by Medicare has increased sig- nificantly since the RBRVS came into effect. Unfortunately, this has not resulted

in a decrease in the incidence of heart disease nor in the need for advanced treatments, such as those provided by cardiac, thoracic, and other surgeons. Heart disease remains the leading cause of death in the United States. Despite advances in medical care and the introduction of invasive cardiology procedures

which delay and sometimes replace the need for heart surgery, about 300,000 Americans are referred by cardiologists for heart surgery every year. (Over 50 percent

are Medicare patients.)

In an aging population, the prevalence of heart disease is increasing and, with that, the need for advanced medical and surgical treatment. The real story in heart

disease is not that we have been able to decrease its incidence but rather that we

are constantly improving the likelihood of long-term survival after a diagnosis of

heart disease and even after a heart attack. This improvement in survival is the

result of improvements in the total spectrum of specialized cardiac care, including

that provided by both cardiologists and cardiac surgeons. We would emphasize that cardiac surgeons have no control over their case vol- ume. Patients are referred to us by other physicians, who have determined that

their patients need surgery. We do not, and cannot, control our own volume—only

our results, of which we are proud.

VII. WHAT WOULD HAPPEN TO ACCESS UNDER THE HCFA PROPOSAL?

At present there are no serious problems for Medicare patients to access to either

general medical or specialty care. However, one must question what would be the

effect upon Medicare patients with heart or lung disease if a redistribution of reimbursement from specialty care to general medical care of the magnitude proposed

by HCFA were implemented.

Cardiac and thoracic surgeons do not currently distinguish between Medicare and

other patients. We typically do not even know the insurance status of the majority

of our patients (billing and preauthorization are handled by office staff). We treat
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the uninsured or underinsured the same as private pay patients. Our commitment

is to treat patients irrespective of their ability to pay. However, the impact of reductions in reimbursement that even approach the mag- nitude discussed above would be substantial. Thirty-one percent of the practicing

cardiac and thoracic surgeons in the U.S. are 55 years of age or older. These are

the most experienced and capable individuals in our profession. If a large number

of these surgeons retire, and many are already doing so, the work force may not

be sufficient to treat the anticipated increase in the number of Americans who are

over age 55. (As noted above, there is no evidence that improvement in preventive

or other non-specialty care is reducing the need for surgery or other advanced medical procedures. The need is largely age-driven). Because of the long lead time involved in training heart and lug surgeons, a four- year phase in of a bad proposal would not prevent the damage to the specialty of

cardiac and thoracic surgery. The incentives put in place now will determine to a

great extent the supply of cardiac and thoracic surgeons four and ten years from

now. Years of strenuous advanced training are essential in our profession. The early sacrifices are significant. At these reduced rates of reimbursement, will the most talented individuals—both intellectually acute and gifted with the essential hand coordination—enter into this profession?

We do not know the answer. We do know that in Canada and in some European

countries, shortages of cardiac surgeons have resulted in waiting lists for operations

which are currently performed in the United States as soon as the decision is made

for surgery and that some patients die before they are scheduled. The General Accounting Office is correct in warning that changes in reimbursement of the significance proposed could affect coverage for Medicare beneficiaries and the quality of

care that physicians are able to provide.

VIII. WHAT HAS HCFA DONE SINCE PASSAGE OF THE BALANCED BUDGET ACT?

Since passage of the Balanced Budget Act, HCFA has held three meetings with physicians and convened one panel to discuss ways of allocating indirect costs. They have probably met the mandate of the Balanced Budget Act that they ‘‘con- sult with physician organizations.’’ But that is all. No new data or information has

been gathered. We do not know what changes they intend to make in their methodology, or their means of extrapolating from the limited, and somewhat uncertain,

information they now have. The General Accounting Office has confirmed our belief that there are significant flaws and omissions in HCFA’s methodology and that HCFA has not yet stated how

it intends to correct these errors.

HCFA does not have, and apparently has no intention of collecting, information on what physician’s real practice costs are. Without, at a minimum, spot-checking

the validity of the estimates they are now working from (as GAO has recommended), economists tell us they cannot meet the mandate of developing a rule

based on generally accepted accounting principles. (Even if it is conceded that the

panel estimates on direct costs are an acceptable starting point, there is no justification for the manipulations HCFA made to the panel data; nor is there a way to allocate indirect costs from direct costs, without reliable information on total costs from

which to determine the magnitude of indirect costs). Without accurate information on total costs, HCFA was not, and still is not, able

to determine total indirect costs, the ratio of direct to indirect costs, or the allocation

of costs to individual procedures. HCFA’s methodology—starting with estimates (not measurements) of direct costs, then developing a theoretical ratio of indirect to direct costs from an overall pool

without recognition of differences in this ratio between specialties, and then allocating the presumed pool of indirect costs to procedures by formulae rather than data,

lacks the basic grounding in empirical information required. While the subsequent

validation panels have to some degree refined the estimates of direct costs, these

revisions have not cured the basic methodological flaw: the absence of empirical

data.

IX. THE USE OF PHYSICIAN-EMPLOYED STAFF IN HOSPITALS

Some analyses of practice costs seem to assume that physicians who practice pri- marily in a hospital setting have few practice costs. The assumption seems to be

that when a surgeon goes to the hospital, he or she turns out the lights, puts the

telephone on message recording, and puts the staff on unpaid leave.

The reality, of course, is that our staffs are working in the office while we are

in the hospital. Staff must be there to take calls from patients, to triage emergency
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calls, to handle all the preauthorization, insurance billing and other administrative

work of an office, at all times. HCFA staff or its research contractors are welcome

to visit without appointment, at our members’ offices, at any time.

But there is an additional, very important expense. Within the last five years it

has become common for physicians providing highly-skilled and high intensity critical services such as heart and lung surgery to employ their own staff to assist in

patient care in hospitals.

There are two reasons for this. First, under the cost-saving pressures of managed

care and the hospital DRG payment system, hospitals have reduced both the number and the skill levels of hospital staff.

Second, and most important, advances in the technology and the quality control

required for complex surgery have made it more important than ever that the surgical team function as a coordinated unit, not as an assemblage of individuals. Surgeons work most effectively and most safely with nurses and operating assistants

who work with them consistently. Prospective payment through DRGs has caused

hospitals to encourage early discharge of patients. Thoracic surgeons have worked

with their hospitals to find safe and effective ways to shorten hospital length of stay

which, in the past 8 years, has decreased dramatically for all patients following

heart and lung surgery. However, with earlier discharge from the hospital, care responsibilities have been shifted from the hospital to the surgeon’s office. Consequently, more nurses have been hired to maintain postoperative surveillance and

contact with patients and to assist the surgeon during an additional number of office visits during the early part of the 90 global period. Thus far, surgeons have absorbed these new practice expenses. The drastic reductions in practice expense proposed by HCFA will result in the curtailment of these services and place the quality

of care in jeopardy.

The mortality rate for coronary artery bypass surgery has declined from 4.5 percent in 1987 to 2.9 percent in 1996, at a time when the average age of the patients

and the severity of their disease and comorbid factors have increased. The skill and

unity of the operating team is a major factor in obtaining and maintaining quality

at this level.

One issue is accountability; the surgeon is clearly and solely responsible for the

selection, training, and supervision of clinical staff when they are his staff. Lines

of responsibility are more diffuse if the clinical staff are employed by the hospital.

Second is predis critical for all surgeons, but notably for those who, as is common,

have operating privileges at more than one hospital. The surgeon must take his or

her own team from one hospital to the next to maintain quality.

These clinical staff members from the surgeon’s team typically work not only in

the operating room, but with the patient in the hospital delivering both pre and

post-operative care. This is particularly important in the intensive care unit and in

the first several days post-operatively, when the patient must be carefully monitored

and the surgeon notified immediately of any complication.

For these reasons, the majority of cardiac surgeons, both in university teaching

hospitals and non-teaching hospitals, and a significant, and growing, number of general thoracic surgeons now employ their own clinical staff who work in with them

in hospitals as well as in the office. These staff members include both physician assistants and skilled clinical nurses.

We do not have data on the number of clinical nurses who work with our members in hospitals. (We would be willing to survey membership as part of a privatepublic data-gathering effort.) Data on the employment of physician assistants in

surgery are, however, available from surveys of The American Association of Physician Assistants and the Association of Physician Assistants in Cardiovascular Surgery.

The AAPA has estimated that 1,002 of the 31,300 practicing physician assistants

in clinical practice specialize in cardiothoracic surgery. A cardiothoracic PA will assist in the care of 180–250 patients a year. This leads to the conclusion that PAs

alone (not counting other clinical staff employed by surgeons) are involved in at

least 200,000 cardiac cases a year.

The APACVS survey shows that 72 percent of the PAs employed in cardiovascular

surgery are employed by solo or group physician practices. An undetermined number of the remaining 28 percent, who work in university teaching hospitals, are in

actuality employed by the university clinical practice plan.

Data recently submitted to HCFA from the American College of Surgeons also

show that 71 percent of the cardiac and 62 percent of the general thoracic practices

pay for staff who work with them in non-office settings.

Data included in the APACVS survey show that virtually all of those PAs have

responsibilities in the operating room. More than 85 percent have follow-up assign113

ments with those patients in critical care and other hospital postoperative care as

long as these patients are in the hospital. This data has been submitted to HCFA and, most recently, to the General Ac- counting Office, which has concluded that ‘‘there may have been a shift in hospital

and physician practices that Medicare has not recognized in its methods for reimbursing nonphysician clinical labor expenses.’’ We urge the Committee to monitor

this issue closely, as the failure to consider these costs in any revision of practice

expenses could have a severe impact on quality. HCFA several times has noted that there is separate reimbursement for services

provided by PAs as assistants at surgery. This reimbursement is not, however,

available for PAs who work in the 110 teaching hospitals. Even where this reimbursement is available, it covers only the services in the operating room, not the

additional services pre- and post-operatively. Of course, there is no separate reimbursement for the nurses or other clinical personnel who also work with surgeons

in the hospital.

Adequate recognition of the cost of these personnel to physicians must be recog- nized. This is a matter not just of equity, but of quality. We intend to maintain the

record of quality which has reduced mortality in CABG to current levels—we intend

in fact to improve further. We do not believe HCFA should ask us to turn back to

standards of care which we now know are unacceptable.

X. DEVELOPMENT OF INTERIM VALUES FOR 1998

It is now obvious that HCFA will not be able to meet the Congressional directive and the present deadline of May 1998 for development of a new practice expense

proposal using, ‘‘to the maximum extent practicable, generally accepted accounting

principles.’’ Any expectation that it might be possible to meet this requirement

through refinement of existing data should have been dispelled by the inability of

the cross-specialty panel meetings December 15 and 16 to reach agreement on any

point other than this one: that any extrapolations of indirect expenses should start

with specialty-specific data. The data and information now available is not sufficient to provide the basis for

any rule which would significantly revise the present Medicare Fee Schedule. In addition to the lack of data on total costs by specialty, the information from the validation panels and the cross-specialty meeting has shown conclusively that the linkage

of CPEP data according to the E&M codes and other revisions to CPEP estimates made in developing the June proposal were based on assumptions, not data. We hope that HCFA will recognize and communicate to Congress its need for ad- ditional time to meet the Congressional mandate. This should be preferable, for all

parties, to presenting Congress and the medical community, in May 1998, with a

proposal which clearly does not meet the statutory mandate. If Congress and HCFA believe that HCFA should keep to the current timetable, it is essential that HCFA correct at least the most obvious flaws in the methodology

used and utilize the best data now available—the AMA Socioeconomc Survey—to

validate its assumptions. The Practice Expense Coalition, of which we are a member, has provided HCFA with recommendations, prepared by Coopers &

Lybrand, to develop such interim values. In light of the weakness of the data now available and the serious questions which remain over methodology, HCFA should be careful not to propose changes in

reimbursement this year which would have inevitable consequences on the future

supply of skilled specialists. As noted above, the long lead time required to maintain

an adequate work force means that consequences will flow from an ill-advised decision, even under the presumed softening of the four-year transition. Given the reductions that have already occurred over the past ten years, as well as the erosion

expected in the medical conversion factor, we recommend that any further reduction

in the allowed charge for advanced medical procedures be limited to a maximum of

ten percent.

CONCLUSION

We recognize the difficulty and complexity of the tasks facing HCFA in developing a new practice expense proposal and in refining other components of the fee schedule to provide equity and justice, and to maintain the quality of medical care, particularly as this pertains to highly-advanced specialty care. The current practice expense proposal, compounding the other faults of the RBRVS system, would clearly

lead to marketplace distortions within medicine, negatively affecting Medicare patients. Surgeons cannot practice if their expenses, including those of malpractice insurance, are not met. Practicing physicians will be driven from practice and fewer

medical students will choose the additional years of training needed to qualify for
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advanced surgical practice. With the continued aging of our population, the need for

specialty care will not diminish; primary care, however well practiced, will not prevent the inevitable diseases of aging. Reduced access to specialty care is not the solution to the problem.

The Society of Thoracic Surgeons and the American Association for Thoracic Surgery pledge to work cooperatively with both HCFA and the Congress as we address

the complex issues of providing quality health care to our aging population.

Æ