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26–996PDF 2005

MEDICARE PHYSICIAN PAYMENT: HOW TO BUILD

A MORE EFFICIENT PAYMENT SYSTEM

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

NOVEMBER 17, 2005

Serial No. 109–75

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman 

RALPH M. HALL, Texas 

MICHAEL BILIRAKIS, Florida 

Vice Chairman 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. ‘‘CHIP’’ PICKERING, 

Mississippi, Vice Chairman 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

C.L. ‘‘BUTCH’’ OTTER, Idaho 

SUE MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOHN D. DINGELL, Michigan 

Ranking Member 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, Jr., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

BUD ALBRIGHT, Staff Director 

DAVID CAVICKE, Deputy Staff Director and General Counsel 

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON HEALTH

NATHAN DEAL, Georgia, Chairman 

RALPH M. HALL, Texas 

MICHAEL BILIRAKIS, Florida 

FRED UPTON, Michigan 

PAUL E. GILLMOR, Ohio 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

JOHN B. SHADEGG, Arizona 

CHARLES W. ‘‘CHIP’’ PICKERING, 

Mississippi 

STEVE BUYER, Indiana 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

SUE MYRICK, North Carolina 

MICHAEL C. BURGESS, Texas 

JOE BARTON, Texas, 

(Ex Officio) 

SHERROD BROWN, Ohio 

Ranking Member 

HENRY A. WAXMAN, California 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, Jr., New Jersey 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

TAMMY BALDWIN, Wisconsin 

JOHN D. DINGELL, Michigan, 

(Ex Officio) 

(II) 

C O N T E N T S 

Page

Testimony of: 

Arora, Vineet, Chair, Council of Associates, American College of Physicians ............................................................................................................... 112

Cady, Duane M., Chair, Board of Trustees, American Medical Association ................................................................................................................. 115

Davis, Elizabeth, on behalf of Alliance of Specialty Medicine ...................... 107

Hackbarth, Glenn M., Chairman, Medicare Payment Advisory Commission ................................................................................................................. 63

Kennelly, Hon. Barbara B., President and CEO, National Committee 

to Preserve Social Security and Medicare ................................................... 119

McClellan, Mark B., Administrator, Centers for Medicare and Medicaid 

Services .......................................................................................................... 20

Opelka, Frank, on behalf of American College of Surgeons .......................... 103

Super, Nora, Center for Health Services Research and Policy, George 

Washington University Medical Center ...................................................... 123

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hackbarth, Glenn M.: 

Written responses to questions from Hon. Edolphus Towns ........................ 139

McClellan, Mark B.: 

Written responses to questions from Hon. Edolphus Towns ........................ 141

American Medical Association, prepared statement ............................................. 143

(III) 

(1)

MEDICARE PHYSICIAN PAYMENT: HOW TO 

BUILD A MORE EFFICIENT PAYMENT SYSTEM 

THURSDAY, NOVEMBER 17, 2005

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

SUBCOMMITTEE ON HEALTH, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 9:41 a.m., in room 

2123, Rayburn House Office Building, Hon. Nathan Deal (chairman) presiding. 

Members present: Representatives Deal, Hall, Bilirakis, Upton, 

Gillmor, Norwood, Cubin, Shimkus, Shadegg, Pickering, Buyer, 

Pitts, Ferguson, Burgess, Barton (ex officio), Brown, Waxman, 

Towns, Pallone, Gordon, Eshoo, Green, Degette, Capps, Allen, 

Baldwin, and Dingell (ex officio). 

Staff present: Chuck Clapton, Chief Counsel; Melissa Bartlett, 

majority counsel; Brandon Clark, policy coordinator; Chad Grant, 

legislative clerk; Jessica McNiece, minority research assistant; Jonathan Brater, minority staff assistant; Bridgett Taylor, minority 

professional staff; and Amy Hall, minority professional staff. 

Mr. FERGUSON [presiding]. The hearing will come to order. Good 

morning. Chairman Deal will be here shortly. 

I welcome you all to this necessary and timely hearing on Medicare’s payment to those that act as a gateway into our health care 

system, our physicians. This morning we have two panels of distinguished doctors and observers of the medical profession to help us 

consider all our options in addressing this looming issue. Welcome 

all of you and look forward to your insights concerning some solutions to the physician payment problem at hand today. 

The beginning of 2006, doctors will see a 4.4 percent cut in payment for their services to Medicare patients and will see cuts in 

several subsequent years thereafter. Medicare’s current system of 

payment which applies a formula called the sustainable growth 

rate or SGT is part of a history of adjustment and reform that 

leads us to where we are today. When the SGR was applied last 

time in 2002, physician payments were cut 5.4 percent. After the 

Medicare Modernization Act passed 2 years ago in 2003, further 

decreases were averted and payment saw an increase of 1.5 percent 

in 2004 and 2005. 

Today we are facing a similar problem, and it is my belief that 

Congress has to act to ensure that doctors do not see the cuts that 

are destined to happen if the SGR is allowed to be applied once 

again. There are many options for us to consider, and I look forVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
2

ward to our panelists’ help in deciphering what each means for our 

health care and for our system. 

Many of the fixes are expensive, but they are more expensive 

than seeing our doctors struggle to justify carrying Medicare patients at their practices. Will Medicare patients stomach another 

large increase in premiums to offset the huge cost that a fix will 

bring? 

Our doctors work long and hard to provide the care that they do. 

And our Medicare patients deserve the utmost quality of care and 

a wide and willing network of doctors to provide that care. I am 

currently on record as supporting a short-term fix to avert the 

looming cuts. I believe that is necessary so we can adequately compensate our doctors for their services and participation in Medicare. But I believe that if such a short-term fix is passed, it is necessary to work in the meantime toward finding a more efficient 

system for physician payment in the future. 

Whatever the costs and however hard it is to find, we must work 

hard in order to find it. Again, I want to thank our distinguished 

panelists today for their insights and guidance as we hopefully 

move forward toward finding a fix. I now would like to recognize 

the ranking member, Mr. Brown from Ohio. 

Mr. BROWN. Thank you, Mr. Chairman, thank you for filling in 

today. 

Today’s hearing is not about paying health care professionals 

more or paying them less. This hearing today is about paying them 

fairly. Medicare’s physician payment system holds doctors and 

other healthcare professionals responsible for system-wide changes 

in health care needs, health care preferences. The payment adjustment mechanism, the sustainable growth rate, SGR, simply put, is 

not fair. The premise that individual providers should somehow 

pay for increases in Medicare utilization is not logical. It is simply 

expedient. Even if individual providers could significantly influence 

overall utilization trends, it is difficult to conceive of them looking 

for opportunities to pedal unnecessary health care any more than 

it is for Medicaid beneficiaries to want to seek unnecessary health 

care. Most of them, most of these doctors are too busy providing the 

necessary kind of care. Nor do I think it is in the Nation’s best interest to reward physicians for reductions in Medicare utilization. 

Physician decisions should hinge on patient need, not on Medicare 

budget targets. 

I join my colleague Nancy Johnson as a sponsor of the valuebased purchasing of physicians’ services act because it replaces the 

current physician payment system with an annual payment update. Taking that step would conform physician payment to that of 

most other Medicare providers. The Johnson-Brown bill also embraces the notion of value-based purchasing which is a promising 

strategy aimed at improving the quality, effectiveness and cost efficiency of health care services. Patients can only benefit from efforts 

to link services to outcomes and use those linkages to improve care. 

Fixing the physician payment system is expensive; not fixing it 

is wrong. The Medicare program itself is expensive. Neglecting reimbursement flaws that jeopardize its future is wrong. To say we 

can’t afford to pay physicians fairly but we can afford to cut physicians’ taxes is a little disingenuous. There are legitimate concerns 

3

about the impact of physician payment changes on the Medicare 

part B premium, but we shouldn’t suffer one problem in order to 

keep another in check. The Medicare premium is derived from an 

arbitrary formula. If we don’t like the annual premium increases 

that the formula generates, we should change the formula. In other 

words, rather than doing one thing wrong so we can get another 

thing right, we should do both things right. We should hold Medicare beneficiaries harmless unless it is all worked out. 

But let’s get back for a moment to the fairness issue. One of the 

most important insights I hope to gain from this hearing is why the 

Bush administration refuses to modify the physician payment formula to remove the effects of Medicare-covered prescription drugs. 

As far as I know, CMS has offered no policy rationale for their refusal to take this step. Removing drugs from the payment formula 

would prevent unjustifiable payment cuts next year. CMS could authorize the removal today even. I hope Dr. McClellan provides a 

compelling reason for intentionally perpetuating a bad policy. It is 

too expensive to fix. Remember, it was the President who initiated 

trillions of dollars worth of tax cuts, and I am confident the President has enough sway with his party even today to prevent the 

current round, which is worth $70 billion. 

Congress and the Bush administration share responsibility for 

Medicare. It is within our power to treat health care professionals 

fairly. Let us do it right, let us do our part. Thank you. 

Mr. FERGUSON. Now recognize the distinguished chairman of the 

full committee, Mr. Barton, for an opening statement. 

Chairman BARTON. Thank you, Mr. Ferguson. It is good to see 

you there in the chair. You don’t sound like Mr. Deal, but what you 

say is similar to what he says; you just say it differently. We are 

glad to have you chairing this subcommittee today. 

Let me get my statement here. I appreciate the distinguished 

subcommittee holding today’s hearing. It is important because, 

hopefully, it is going to provide members of this committee with a 

valuable perspective on the issue of Medicare physician payment 

and how to best ensure Medicare beneficiaries can continue to have 

access to quality health care. I want to particularly thank CMS Administer Dr. Mark McClellan and MedPAC Chairman Glenn 

Hackbarth for their appearances today. I applaud their leadership 

on building a more efficient and effective quality health care system. 

I intend to ask some very difficult questions to try to find out 

what we need to do to fix the broken Medicare payment system for 

physicians. I am going to ask, how we are going to pay for it? For 

too long, Congress has tried to repair the problem by not structurally reforming the system. Instead, we just dump money into 

short-term fixes which have only exacerbated the problem. This 

has only increased the total cost of reform and delayed the inevitable day of reckoning. I will not support simply pouring more taxpayer dollars year after year into a system that is broken. I want 

to repeat that. I will not support simply pouring more taxpayer dollars year after year into a system that is broken. 

I believe that we have an obligation to provide seniors with access to health care. We have an obligation to do it in a way that 

will not make taxpayers sick. We need to design a stable payment 

4

system which provides doctors with the right incentives and adequate compensation to provide the right health care for their patients every time. The incentives in the current system are misaligned. Doctors have to make more money by increasing the number of office visits, performing more imaging scans, running more 

tests. I doubt that they really want to do these things; it is simply 

something they have to do in order to cover their costs. 

Not only does this make our shrinking Medicare dollars more 

vulnerable, it hurts the beneficiaries stuck with copays for every 

visit and every test. We need to build a system instead that drives 

physicians to provide care for each patient because it is the best 

treatment, not because it is the best way to pay the bills. 

In this regard, I want to specifically applaud Dr. McClellan for 

his dedication to this issue. Under his watch, the government has 

taken steps to become a better payer and providers are working toward a more efficient and effective health care system. Dr. McClellan started this mission with the hospitals, I am pleased to say, 

with some success. As a result, the groundbreaking hospital payfor-performance demonstration, the Medicare program, is giving 

close to $9 million to hospitals that showed improvements in the 

quality of the care they provide. The success of this demonstration 

program is evidence that the model works to improve the quality 

of health care. 

I look forward to working with CMS and others that share this 

vision on efforts to translate the physician reimbursement system 

or transform the physician reimbursement system. Again, I want 

to thank our subcommittee chairman for holding this hearing. I 

want to thank these two witnesses and the witnesses on the next 

panel. This is a very, very important hearing. We all know we need 

to do something before the beginning of the next calendar year, and 

it is possible that this hearing will lead to legislative action to fix 

the problem. 

Thank you, Mr. Chairman. 

Mr. FERGUSON. On the advice of Mr. Brown, I am going do recognize Mr. Gordon for on opening statement. 

Mr. GORDON. Thank you, Mr. Chairman. While I am pleased the 

committee is holding a hearing on the Medicare physician payment 

system, in all due respect, this hearing is a day late and a dollar 

short. The committee so far has abrogated its responsibility to act 

on this issue on all fronts. Just a few weeks ago, this committee 

voted down a Democratic-supported amount to provide a temporary 

fix as part of the budget reconciliation package. It is long past due 

that this committee act decisively to reclaim its jurisdiction and to 

find a permanent solution to the SGR problem before physician 

payment cuts result in significant access problems to Medicare 

beneficiaries. 

Mr. Chairman, I think I can speak with personal hand or firsthand, talking to physicians all across Tennessee, they really are 

limiting access now. This is a real problem. Many physicians are 

just simply not able to take additional Medicare patients. We are 

seeing it in community after community. So, in all due respect, I 

think it is time this committee stopped talk about wanting to do 

something and actually taking action. Yield back the balance of my 

time. 

5

Mr. DEAL. The gentleman yields back. 

Recognize Mr. Bilirakis for an opening statement. 

Mr. BILIRAKIS. Thank you, Mr. Chairman, thank you for this 

hearing. 

As we all know, Congress has specified a formula to provide an 

annual update to the physician fee schedule. This update is largely 

based on whether spending in the prior year has exceeded or fallen 

below the established spending target. That target, known as the 

sustainable growth rate or SGR, as we fondly refer to it, provides 

a spending benchmark for Medicare. If spending exceeds that target, the update for future years is reduced. If spending falls below 

that target, future updates are increased. 

The problem is the SGR formula upon which the updates are 

based is flawed principally because it fails to link payments to 

what it actually costs doctors to provide services for Medicare beneficiaries. These and other shortcomings have precipitated cuts in 

reimbursement which threaten the access of Medicare beneficiaries 

to the critical care that physicians provide. 

The Senate as we know has included a 1 percent payment update 

for next year in its recently approved budget reconciliation bill. 

While the version of the bill which this committee reported does 

not include a payment update, I am hopeful that conference deliberations or other alternatives will produce an appropriate remedy 

before payment cuts affect patient access to care. 

We don’t have, as we have already said, the luxury of not acting. 

Under the current schedule, physician payments are projected to be 

reduced by 26 percent over the next 6 years while the costs of running a practice are expected to increase during that same period. 

This is simply unacceptable. 

Our colleague from Georgia, Mr. Norwood, has introduced legislation which would stop future reimbursement cuts and guarantee 

that physicians would receive at least level payments until we can 

address this issue in a comprehensive manner. Other members also 

have introduced payment reform bills which have served to further 

understanding this complicated issue. Many of us were involved in 

leading efforts in Congress in prior years to circumvent the application of the formula the past several years in order to avoid negative 

updates which would have resulted in substantial payment reductions. We helped to ensure that the Medicare prescription drug law 

provided a 1.5 percent update in each of these years instead of the 

scheduled cuts that would have taken effect had Congress not 

acted. The problem of course with providing at least temporary 

fixes, though they are much needed, is that doing so adjusts future 

updates downward to make up for added program spending. 

It is clear, I think, to all of us, Mr. Chairman, that we have got 

to change that formula to something so that we won’t have to have 

these temporary fixes year after year and year. Thank you. 

Mr. DEAL. Thank you. 

Mr. Pallone is recognized. 

Mr. PALLONE. Thank you, Mr. Chairman. 

In my home State of New Jersey, Medicare payments are scheduled to be cut by at least $107 million beginning January 1st and 

will total $5.26 billion from 2006 to 2014. Such actions would have 

6

a considerable negative impact on physicians and beneficiaries 

alike. 

Cuts in physician payments may result in diminished access to 

care for Medicare beneficiaries. Without financial relief, physicians 

and other health care providers may be forced to limit services, 

drop Medicare patients or leave the Medicare program altogether. 

Mr. Chairman, we need to provide our doctors with the appropriate economic support in order to preserve access to quality care 

for Medicare beneficiaries. Doctors are already underpaid, in my 

opinion, under the Medicare program. Congress has averted scheduled payment cuts in previous years by enacting stop-gap legislation, but I believe Congress needs to enact permanent legislation 

that would fix the funding formula once and for all. Physicians 

should not have to fight each year to ward off future cuts. 

There are several issues in particular that must be addressed 

when updating the fee schedule or the sustainable growth rate, 

SGR. First, the initial conclusion of drug spending as part of SGR 

must be adjusted. Drug spending has increased far more rapidly 

than any spending on physician services, and the cost of physician 

administered drugs as part of the SGR severely distorts the calculation of actual spending that should count toward the amount 

in Medicare reimbursement. 

In addition, it is unfair for the SGR formula to be linked to the 

GDP. Physician fee updates should not be linked to the overall 

economy because physician services and fees do not parallel its ups 

and downs. Exercising fiscal discipline through the current SGR is 

not fair to doctors in my opinion, and again, I urge this committee 

to work on enacting a permanent fix to the formula that would accurately assess the appropriate reimbursement for their services. 

Thank you. 

Mr. DEAL. Thank the gentleman. Mr. Upton is recognized. 

Mr. UPTON. I thank you, Mr. Chairman and Chairman Barton, 

to make sure this was on today’s calendar. As a co-sponsor of the 

legislation that was introduced by Mr. Norwood—Dr. Norwood—

and Mr. Whitfield, I am absolutely committed to working with all 

of us, all of you to prevent the anticipated 4.4 percent cut from 

going into effect on January 1st that will replace the current badly 

flawed mechanism for calculating Medicare physician reimbursement. We need to put in place a system that accurately measures 

the true cost that physicians incur in providing high-quality medically necessary care to Medicare beneficiaries. 

Permitting the 4.4 cut next year and similar cuts that will occur 

in each succeeding year under the current flawed Medicare physician payment system and putting into place a system that accurately reimburses for the cost of care is particularly urgent to preserving for access to care for Michigan’s Medicare beneficiary. With 

only 13.2 physicians per thousand Medicare beneficiaries, Michigan 

is below the national average, and that ratio is only going to get 

worse. Further, about a third of today’s Michigan physicians are 

over 55 and approaching retirement. According to a recently released study of Michigan workforce modeled after a national study 

from the Council on Graduate Medical Education, Michigan is 

going to see a shortage of specialists beginning in 2006 and a shortage of 900 physicians overall in 2010, rising to 2,400 in 2015 and 

7

4,500 in 2020. Obviously, this Medicare reimbursement will only 

exacerbate the shortages and seriously undermine access to care. 

I look forward to working with you to make sure that we seek legislation that can correct the problem, and I yield back my time. 

Mr. DEAL. Thank the gentleman. 

Mr. Dingell is recognized for an opening statement. 

Mr. DINGELL. Mr. Chairman, thank you, and I commend you for 

this hearing. To begin by mixing a few metaphors, however, unfortunately, we have the cart firmly in front of the horse, and we are 

seeking to lock the barn door after the horse has been gone. It is 

a very important matter, and it must be observed that the current 

system for paying doctors in Medicare and Medicaid in a fair way 

is not good. Doctors have already confronted several years of cuts 

in what Medicare will reimburse them for patient care. Further 

cuts are scheduled. None of these cuts and the inadequacy of payments to physicians and others as providers is grossly inadequate 

and threatens not only the morale of the providers but, very frankly, the sustainability of the program and the possibility of its success. While it is theoretically possible that something can be done 

about these problems within the framework of legislation, it appears to me to be quite difficult to accomplish anything during this 

year or perhaps even next year to correct what is a gross unfairness to providers in something which indeed was clearly to be anticipated as being a consequence of cuts already made. 

When this committee considered reconciliation measures, as you 

will remember, Mr. Chairman, I offered an amendment to help the 

doctors and the elderly patients who rely on them. The amendment 

failed because the majority’s budget priorities were elsewhere. The 

problem remains. A continued cut in payments to doctors in the 

Medicare fee-for-service program will only gladden those who wish 

to turn seniors over to private insurance companies. It is a most 

curious fact that doctors will see a 4.4 percent cut in payments to 

them while HMOs in Medicare will see a 4.8 percent payment increase. I wonder, is this a coincidence? Of course, changes to the 

physician payment system will increase Medicare spending, and we 

must recognize that we need to protect beneficiaries against further 

out-of-pocket cost increases. 

Medicare beneficiaries have seen 2 years of premium increases 

because their premiums are based on Medicare spending. Even 

though covered under Medicare, the elderly are still paying a significant portion of their health care out-of-pocket. 

Fixing the Medicare physician payment system is expensive, but 

there are steps that the administration could take and perhaps can 

focus on them that would lower the total price tag for a congressional fix of Medicare payment systems, and they could be done 

this year. I understand why the HMOs do not want the problem 

solved, but why is it that the administration does not wish to help? 

We will also hear about pay-for-performance and other new 

health care buzzwords. Improving quality is the right goal, but we 

need to proceed in a measured fashion, and we should be starting 

first with the HMOs that promised they would improve performance but have only succeeded in increasing the payment to them 

and benefits to their stockholders and office holders. 

8

As you will recall, during the last budget reconciliation, we made 

changes to Medicare to provide financial incentives to induce 

HMOs to participate. We were promised that they would improve 

care and lower costs. It is most doubtful that either has occurred. 

They may have lowered costs for themselves, but the Federal Government is seeing none of it, and in fact, the HMOs, according to 

MedPAC, who is testifying today, are being overpaid. 

For those who championed the bill of rights and fought for the 

rights of doctors to make medical decisions in the best interests of 

their patients without corporate interference, there is peculiar, special and particular irony in what is happening to Medicare. If we 

do not act to address physician payments, we are going to see more 

seniors forced into managed care programs, not by choice but by 

grim necessity, over their reluctance. 

These plans cost more, are not as efficient and are more responsive to shareholders than they are to patients. The committee 

should act. The administration should act to protect the ability of 

our seniors to see their doctors and see to it that the doctors are 

properly paid. But I fear that the tax cuts, which were programmed 

by the majority leadership, will leave the cupboard bare for doctors, 

forcing them out of fee-for-service and forcing seniors into HMOs. 

That could clearly be the end of Medicare as we know it. 

I thank the witnesses here today for addressing these important 

issues. I am grateful, Mr. Chairman, that you are holding this 

hearing, and I look forward to the consequences. I yield back the 

balance of my time. 

Mr. DEAL. I thank the gentleman. 

Dr. Norwood is recognized for an opening statement. 

Mr. NORWOOD. Thank you, Mr. Chairman, and thank you for 

having this hearing. It is very important, and I agree with Mr. Dingell and others that it is time for this committee to act. And I am 

pleased; this is a good first step. I want to do my part like all of 

you to make sure that Medicare beneficiaries maintain their access 

to their doctors. But you know what? That is just simply not going 

to happen if we continue down this path of using this misguided 

SGR formula. Just doesn’t work. And repeal of it is extremely expensive, but we have to find a fair and better way. 

We have big spending problems in Medicare. We are not paying, 

for example, for prevention, which is a cost saver. We are not utilizing the technology that is available, and frankly, fee-for-service 

has its problems simply because Medicare will not pay even the 

cost of doing business. 

However, linking physician payments to the GDP just simply 

doesn’t make sense. I know the government, when it did it, thought 

it did, but none of us today think it makes any sense, and including 

biologics in that formula even makes a great deal less sense. 

Not having a payment system that reflects physicians’ true costs 

is reducing Americans access to care. That is not difficult to understand. We have alternatives. The Medicare economic index is a 

good first place to start. Doctors in Medicare face a 4.4 percent cut. 

Next year, in my home State of Georgia, doctors are expected to 

lose $64 million in 2006 and $164 billion over the next 5 years if 

we just sit here and do nothing. 

9

In light of this, along with my good friend, Mr. Whitfield, we 

have introduced a very simple bill, H.R. 4078, and this legislation, 

thankfully, is already supported by 12 members of our full committee. It has been endorsed by the Alliance of Medicine, a group 

of 13 specialties representing over 200,000 physicians, and I would 

very much love for my friends on the opposite side of the aisle to 

get on board with us with this so we make sure this 4.4 percent 

cut doesn’t take place. 

I know that it is inevitable that pay-for-performance is going to 

come up today since 600,000 thousand Medicare recipients are in 

some type of test program. I think it is extremely sad that we don’t 

separate these two issues in terms of what we actually and how we 

actually pay our physicians versus what we can do to improve quality, but it doesn’t seem it is easy to get them separated. I have not 

been able to get one person anywhere to define what this so-called 

pay-for-performance would look like or how it would work across 

Medicare or prove to me in any way that it is going to save money 

or improve quality or tell me how much this sucker is going to cost. 

I also know folks over in the Senate Finance believe that the only 

way the doctors should see any increase in their payments is by 

selling their soul to the so-called quality reporting. 

Now the devil, I agree, is in the details, and I am ready to wait 

and learn. But I fear there is a lot of devil in the details we are 

going to learn. Mr. Chairman, any time that we start discussing 

changes that could possibly give our government bureaucrats more 

say-so over determining what is good treatment or a quality outcome instead of patients and doctors, it should get all of our attention. It does mine. Here is an idea, why don’t we start by finding 

out how much it costs a doctor for a service and build in a reasonable profit for them participating in Medicare as we are discussing 

improving patient care all at the same time maybe by covering 

some prevention, things that would save money? Here is basically, 

what we are telling our physicians, you need to work harder to provide the almost weekly expansion of services and regulations by 

CMS, while taking more patients as the Baby Boomers retire. The 

bunch of non-physician, government clerks, or in the case of insurance companies as you know, tell you how to do your job and even 

will do so more in the future. We are going to cut your paycheck 

up to 30 percent over the next 10 years even though we pay no 

more than that costs today; all the while, your practice costs are 

going to be rising by 20 percent, so in the next 10 years, you will 

have twice the work at half the pay. Why in the world aren’t you 

happy? 

We say, you must be faster or do less tests or spend less on physical exams. What does that do for quality? Mr. Chairman, we won’t 

have a Medicare program if we continue on this path because every 

physician in this program will quit, and they should, and they will 

have to. Doctors need to know for many reasons before the new 

year, not next year sometime, their payments are going to be updated. We called for a freeze. It ought to be an increase. I look forward to working with members on both sides of this aisle on this 

very important issue, and I yield back. Thank you, Mr. Chairman. 

Mr. DEAL. Thank the gentleman. 

Ms. Capps. 

10

Mrs. CAPPS. Thank you, Mr. Chairman. This is an important 

hearing today. For Medicare to work, for our seniors to get their 

health care, we have to have enough doctors. We cannot afford for 

beneficiaries, real people living in communities across American, to 

lose access to their doctors because of some arcane formula that 

does not match health care costs or needs. 

Since 2001, we have known about this problem. At that time, I 

introduced legislation to stop the immediate cuts. This committee 

moved swiftly to pass this bill, to actually provide a small increase 

for the next year. Then the committee bought more time to make 

a long-term fix in the Medicare prescription drug bill. The time is 

about to run out. Nothing has been done. 

Now doctors are facing a 4.4 cut next year and 26 percent in cuts 

over the next 6 years. In my district, Medicare physician payments 

are already artificially low. Santa Barbara, San Luis Obispo Counties are lumped in with more rural parts of California where costs 

are lower. Doctors receive a payment that absolutely does not meet 

their needs, and they are leaving. And so their patients, my constituents, are already facing access programs. I along with other 

members of the California delegation have asked CMS to fix this 

problem; they have refused. Now the doctors will have to deal with 

these absurd cuts on top of the too low payments. It is intolerable. 

It is time for us to get to work on this problem, and we have to 

work quickly. 

I do applaud the efforts of Mr. Norwood and Mr. Whitfield to prevent these cuts but we also need to be providing a small increase 

so physicians can deal with medical inflation and make sure that 

beneficiaries who are already on a fixed income don’t have to swallow the costs. 

Now Congress, in a drive to control Medicare spending, created 

this problem when it passed this arbitrary system. Now we have 

to fix it. The amendment that Mr. Dingell offered of the Medicaid 

markup would have been just the thing, 2.7 increase for physicians 

next year, and would have prevented Medicare from passing this 

increase on to beneficiaries. It is a shame it was defeated on a 

party line vote. 

I also want to raise my concerns along with Mr. Norwood about 

the efforts to pass pay-for-performance. We should be looking for 

ways to improve quality and eliminate unnecessary costs, and financial incentives can be a very good way to accomplish this. But 

we must be absolutely sure we are not creating incentives for doctors to deny needed care, and we must not prevent physicians from 

doing what they think is necessary to care for their patients because we have an arbitrary national policy. Health care, after all, 

is about a relationship between a patient and his or her doctor. It 

is an individual relationship. Unnecessary care for one patient may 

be life-saving for another. I look forward to hearing from the witnesses. I yield back. 

Mr. DEAL. Thank the gentlelady. 

Dr. Burgess. 

Mr. BURGESS. Thank you, Mr. Chairman, and I want to thank 

both you and Chairman Barton for holding this hearing, and I do 

believe it is important this committee be very involved in this serious situation. I was at a breakfast yesterday with Chairman 

11

Greenspan, and he talked about funded pension plans, whether 

they are private or government sponsored, and this would include 

Medicare. And he specifically mentioned Medicare, and he said 

they are eventually not worthwhile if there is no one there to provide the services for those who are to receive them. I think he is 

exactly right, and that is what the current pay reduction that we 

are looking at in the Medicare system is going to do for us. It is 

going to drive more doctors out of providing Medicare. I hear that 

every day in my district, and I hear from patients’ comments at 

town hall meetings the question is about the cost of drugs, But how 

come I turn 65 and I have to change doctors? 

Well, I don’t think we are doing ourselves or our constituents any 

favors by driving doctors out of the practice of medicine. I don’t 

think we are doing any favors by encouraging our best and brightest to avoid the field entirely, and I agree with Dr. Norwood’s call 

for a freeze on the 4.4 percent reduction for this next 2-year time 

period. We need that amount of time to think of innovative solutions to think outside the box for a more serious effort and at a 

long-term fix. We need to ask for—we are going to ask our doctors 

for considerable investments in information technology in their offices. Well, I think we need to ensure that we keep the best lines 

and best clinicians involved in the practice of medicine as we make 

that move for greater investment to information technology. It 

makes no sense to spend a lot of dollars on computers if we don’t 

have good doctors. Garbage in, garbage out. 

Pay-for-performance, I have always had emotional trouble with 

pay-for-performance. As a physician, I never woke up in the morning and said, I hope I can be at least adequate for the better part 

of the day while I am seeing my patients. I always woke up and 

thought, I am going to do the best job possible, deliver top quality 

care. We need to keep excellent physicians involved in providing 

care for their patients, and we need to encourage bright, young 

physicians to participate. I hope MedPAC can shed some light on 

long-term solutions. I for one would like to see us consider some 

type of balanced billing. In the Medicare Modernization Act, we set 

the income guidelines when we implemented the part B premium. 

Maybe we should explore that exercise for bringing more money 

into the system, and I don’t have a problem emotionally with loaning or borrowing from a part A premium that I pay every month 

whether I want to or not, no upper limit on that one, and as the 

economy improves there is more and more money in the Medicare 

trust fund, and I don’t see why we don’t look for that to a shortterm solution to solve this problem. I yield back. 

Mr. DEAL. Thank the gentleman. 

Mr. Allen. 

Mr. ALLEN. Thank you, Mr. Chairman, for convening this hearing. I want to welcome Dr. Jacob Garretson who is the president 

of the Maine Medical Association who is in the audience today. 

We cannot stand by and do nothing about the scheduled 4.4 percent Medicare set to begin in January. Unless Congress acts, physicians can expect a 26 percent decline in payments over the next 6 

years. By 2013 Medicare payment rates would be less than half of 

what they were in 1991 after adjusting for practice cost inflation. 

If the goal were to undermine Medicare while professing to support 

12

it, failing to act would be a giant step toward that goal. Physicians 

in Maine need relief because their Medicare payment rates are already lagging behind increases in practice costs. Rural States like 

Maine have two major problems: a disproportionate share of elderly 

citizens and problems in many places simply getting access to physicians, particularly specialists. Congress passed three updates to 

the physician payment schedule over the past several years but we 

need to do more. We need to change the underlying funding formula to accurately reflect practice costs. There are two ways to do 

that, two particular legislative fixes: H.R. 2356, Representative 

Shaw and Cardin, which would halt payment cuts in 2007 and beyond by replacing the SGR formula with a new formula that reflects changes in the Medicare economic index. That bill has 162 

bipartisan cosponsors. 

The second effort is H.R. 3617 introduced by Representative 

Nancy Johnson which would repeal the SGR formula and replace 

it with a stable and predictable annual update based on the costs 

of changes in providing in care. The bill would link payment updates to health care quality and deficiency. That also has support 

on both sides of the aisle with 46 cosponsors. 

We should accept the Senate budget reconciliation package that 

has a 1 percent payment update for physicians. That also eliminates the slush fund for regional preferred provider organizations. 

CBO estimates that the elimination of this fund would reduce 

Medicare spending by $5.4 billion over 5 years and $10.2 billion 

over 10 years. MedPAC has explicitly called for the stabilization 

fund to be eliminated, sighting Medicare is already heavily overpaying HMO’s. 

I hope that Dr. McClellan and Mr. Hackbarth as well as our 

other panelists can help us understand the flaws of the current 

payment system and how to ensure Medicare patients across the 

country continue to have the access they need. Mr. Chairman, I 

yield back. 

Mr. DEAL. I thank the gentleman. Mr. Hall is recognized. 

Mr. HALL. Thank you, Mr. Chairman, and as others, I appreciate 

your organizing this meeting. Like so many members I am concerned as you are about the impending physician pay cuts and I 

am looking forward to a good solution like all of us are. The sustainable growth rate formula is clearly not workable. That has 

been said over and over again as evidenced by the fact Congress 

keeps providing temporary fixes to it year after year. The Centers 

for Medicare and Medicaid Services projects that physician practice 

costs are expected to rise 15 percent from 2006 to 2011, while payment rates continue to follow. So it is easy to see that this trend 

may cost physicians to decrease their Medicare patient mix and 

defer to the purchase of beneficial information technology resources, something we don’t want to see happen. However, it is 

equally clear that repealing the SGR and replacing it with a new 

reimbursement mechanism is also not viable since it costs approximately $50 billion over 5 years. Medicare beneficiaries are already 

facing a 13 percent increase in part B premiums. A move to replace 

the SGR would result in further premium increases that have to 

be borne by our Nation’s seniors. 

13

At a time when gas prices and home heating bills are increasing, 

people living off of fixed incomes cannot shoulder the burden of 

steep increases in health care premiums. It seems the me that any 

solution also needs to address the usage of services and the flawed 

system of incentive. The current system encourages doctors to increase their volume of services, an incentive to reward those physicians who provide more procedures even if they are not necessary. 

I am interested in hearing what the panelists have to say about 

building better incentives into the system. And I appreciate the 

panelists taking their time. I look forward to hearing their testimony and proposed solutions to a challenging issue, and I yield 

back the balance of my time. 

Mr. DEAL. Thank the gentleman. 

Mr. Waxman. 

Mr. WAXMAN. Thank you, Mr. Chairman. Do I have 1 minute because the clock is clicking with less time than I thought. 

Mr. DEAL. Living on borrowed time. 

Mr. WAXMAN. Thank you for lending it to me. Woe is me. Every 

member of this committee is just shocked, absolutely shocked the 

physicians are going to get a cut. This is already the last week of 

the session until we break for Thanksgiving, and then we will come 

back and see what happens for a couple of weeks. How did this 

happen? Who is in charge? This is like the perils of Pauline, the 

doctors are Pauline strapped to a log about to go over the waterfall. 

We have got to save her. 

Look, some of us who have been around a long time have some 

memory of how this happened. This was put in the 1997 Balance 

Budget Act where the Republicans in Congress negotiated with 

President Clinton to make deep cuts in Medicare. They made deep 

cuts in Medicare not to balance the budget, because the budget was 

going to be balanced anyway, they made deep cuts in Medicare to 

do what, cut some taxes. Does that sound familiar? That was 1997, 

and many of us voted against that balanced budget act; not too 

many but some voted against it because we didn’t think those cuts 

in Medicare made any sense. Now it didn’t hurt the doctors all that 

much when the GDP was going up. You may remember, when 

Democrats were in control, the economy was doing quite well. The 

GDP was increasing. Now the economy is not doing as well with 

doctors facing these cuts. Well, doctors, if you get your wish not to 

let this happen, you will get a short-term fix. That is about the best 

you are going to get. While members in the House on both sides 

of the aisle pontificate about how this would be terrible to let a cut 

go into effect, you have got to do something permanently and we 

have got to figure out what to do and wish we would do something 

but we can’t let this happen, it is not fair to doctors, not fair to 

Medicare beneficiaries. They are right. But we had a chance to vote 

on this when we were doing the reconciliation bill. The reconciliation legislation is where we fix Medicare and Medicaid issues and 

Medicare is part of the jurisdiction of this committee and Mr. Dingell had a proposal, the republicans voted against to make sure 

that the 4 percent reduction didn’t—4 percent fee payment decrease didn’t take effect. Well, stay tuned. 

I hope and I think the political reality is that there will be a 

short-term fix before the end of the year, no thanks to this comVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
14

mittee. We didn’t do anything about the problem, but I shouldn’t 

say that, that would be unfair, what you have had today is a real 

expression on a bipartisan basis that none of us want this to happen, and we sure hope somebody takes charge and someone makes 

sure it doesn’t happen. Well, they are the ones in charge and let’s 

see what they do and let’s hope, at the end of the year, we will 

have another short-term fix, and we can visit the issue again next 

year and tell the doctors how much we care about them. 

Mr. DEAL. Mr. Shadegg. 

Mr. SHADDEG. Thank you for holding this hearing. Everyone in 

the room does know we have a serious problem we have to deal 

with. The current system is not sustainable and it is not reasonable 

to expect physicians to take a 4.4 percent reduction in payments. 

I join my colleagues in urging that we look at this issue and not 

just enact a temporary fix but look at a permanent reform. I think 

today is in some ways historic. I am told that CMS and MedPAC 

now agree, and that perhaps that is the first time they have ever 

agreed that 20 years of various standards, volume performance 

standards, behavioral offsets and sustainable growth rates simply 

have not worked. We need, I believe everyone in this room, should 

agree that we need fundamental reform. The question is not how 

much we pay physicians this year, the question is how do we fairly 

compensate physicians for the work the government asks them to 

do. I think there is even a more fundamental question and that is 

can the Congress and the government go on promising a level of 

benefits and then when they discover, when the government discovers that the cost of that level of benefits is higher than anticipated, push that burden, shove that gap between cost and what 

they are willing to pay off on the providers. 

I would suggest that, since the creation of this program, we have 

had that problem. Politicians have said well, we love to promise 

benefits to the public, tell them we will provide these services, outline vast expansive services and then when the bill comes home, 

they like to say, my gosh, I didn’t realize it was going to cost that 

much, what can I do. I don’t want to raise taxes so I will short 

change the providers. The effects of that in the short term and in 

the long term are extremely serious. I believe they demonstrate 

that government-run health care fundamentally doesn’t work. I 

think they demonstrate that the market doesn’t work. I think they 

demonstrate that government planners don’t know the answer, and 

I think they demonstrate that politicians that promise benefits and 

refuse to pay for them don’t belong in office. I believe we need to 

pay physicians for the services they provide. We looked at the quality of the service they provide and the value they added. But seems 

to me we are forever looking at one more government solution, one 

more government plan. 

The latest word now is pay-for-performance. And I share my colleague’s skepticism about pay-for-performance because, in this context, while you think pay-for-performance sounds wonderful, let’s 

do that, let’s pay doctors who perform; you have to ask one more 

question, who is going to decide what level of performance we are 

going to pay for? And guess what? In none of these plans is it the 

consumer that is going to decide what performance they pay for. 

No, no, no, it’s a government bureaucrat who is going to layout a 

15

set of practices and tell the doctor, perform to this standard, and 

then we will pay you. If I wanted to get my health care from a government bureaucrat, I would go to a government bureaucrat for my 

health care, but I don’t. I go to physicians whom I trust and whom 

I believe in, and I would rather pay them based on the quality of 

the care I believe they deliver. 

Mr. Chairman, I commend you for holding this hearing. I think 

we have to look at fundamental reform of the Medicare system and 

I simply want to conclude by at least recognizing them for their 

travel here from far away Arizona, both Chick Older the executive 

vice president of the Arizona Medical Association and Dr. Richard 

Perry, a member and my personal surgeon. I thank you. With that, 

Mr. Chairman, I yield back my time. 

Mr. DEAL. Gentleman yields back. 

Ms. DeGette. 

Ms. DEGETTE. Thank you very much, Mr. Chairman, and I would 

like to join my colleagues in welcoming my folks from Colorado, Dr. 

Lynn Perry, who is our new president-elect of the Colorado Medical 

Society and my old friend, Suzanne Hamilton, who I have worked 

with over the years. And I would like to recognize everybody from 

all of the State medical societies and you folks here in the room for 

coming today. It is just too bad you all weren’t here 3 weeks ago 

when we passed the budget reconciliation bill out of the Energy 

and Commerce Committee which did nothing to fix the physician 

reimbursement problem and in fact when, with one exception, 

every single person on the other side of the room here voted 

against Mr. Dingell’s amendment that would have increased physician reimbursement by 2.6 percent in 2006 and then would have 

updated the rate using MedPAC’s suggested formula, that would 

have been a 2.7 increase in 2007. 

Dr. Perry, I know you have come today to see how sausage is 

made. Sometimes it is not a really happy experience for some of us. 

I think every single person in this room who cares about physician 

reimbursement and who cares about serving patients needs to look 

both at what your Members of Congress say and what they do because sometimes they are two different things. And I am sorry to 

say this because I love my friends on the other side of the aisle, 

but, you know, each of the last few years, physicians who serve 

Medicare beneficiaries have had cuts in reimbursement. Every 

year, we come in. We do a short-term fix, but the short-term fixes 

coupled with the broader problems inherent with the sustainable 

growth model right now have exacerbated the problem. 

Now given how close we are to the end of the year, we probably 

will work in the first couple of weeks in December to do some kind 

of a short-term fix, but in the longer run, we don’t want a scenario 

that will force physicians to see more—to see fewer Medicare beneficiaries because of the reimbursement and what is worse in the 

longer run, as the Baby Boomers start to retire, physicians who 

will close their practices altogether toward these patients. 

The fundamental problem is there is no longer a stable basis for 

reimbursement for Medicare physicians, and the system is so susceptible to changes in the Medicaid and the Medicare population. 

And there are so few mechanisms to incentivize and support physiVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
16

cian attention to improve quality that Congress really needs to 

take a broader long-term view, and that is what many of us think. 

This problem is going to be exacerbated by the fact that Medicare 

beneficiaries are going to start using the new prescription drug 

plan on January 1st, 2006, if, of course, they can figure it out, 

which I am wondering, but these beneficiaries, if they have to pay 

higher copays for their drugs and they have to pay higher copays 

for their physicians, should give us all pause to see what is going 

to happen with patient care. I think there is a lot of other issues 

that we need to look at, but most importantly, I think we need to 

look at the long-term model of how we are going to do physician 

reimbursement so that all you good folks don’t have to fly in every 

year right before the holidays to try to get Congress to give you a 

short-term fix. Thank you, Mr. Chairman. 

Mr. DEAL. I will recognize myself since I was not here at the beginning of the meeting, and I thank Mr. Ferguson for opening the 

hearing today. First of all, we are pleased to have so many representatives of the medical associations across the country with us 

today. We welcome your presence, and we have two very distinguished panels that we will hopefully hear from in the very near 

future. 

I would respond, though, to the last opening statement with regard to what was not done several weeks ago. The context of that 

hearing and that markup at least was Medicaid. It was not Medicare. And we restricted our actions as we appropriately did to the 

reforms that we proposed in Medicaid, and those were difficult 

votes that we had to take. Unfortunately, most of those votes were 

taken on a partisan line, but I think those of you in the audience 

recognize that in dealing with the issue of Medicaid reform, those 

were necessary reforms, things that had to be done to change that 

program to keep it viable. 

We are here today to talk about the issue of physician reimbursements, a topic that is obviously very appropriate, and I will not 

take any further time but look forward to the testimony of the witnesses that I will introduce in just a few minutes. 

Ms. Baldwin is next. 

Ms. BALDWIN. Thank you, Mr. Chairman, and welcome to our 

witnesses and guests today. I want to associate myself with all of 

my colleagues who have voiced their support for enacting a longterm fix to the Medicare physician payment issue rather than continuing to engage in these yearly or biyearly fixes. The short-term 

solutions that are really Bandaids are unfair. They are unfair to 

the physicians who, at the end of each short-term fix, are once 

again faced with projected cuts. They are unfair to beneficiaries 

who may face access issues if cuts are enacted. They are unfair to 

taxpayers because of the cost of providing a fix gets more and more 

expensive with each passing year. And they are unfair to Medicare 

because Medicare is truly a successful and efficient program that 

provides comprehensive, affordable health care for over 40 million 

seniors. 

I was happy to support the amendment offered by Ranking Member Dingell during our markup several weeks ago of the reconciliation bill that would have addressed the negative payment update. 

And while it is unfortunate that this amendment was voted down 

17

on a largely party line vote, I am encouraged that we are here 

today discussing physician reimbursement. 

That said, I do have concerns about some of the proposals that 

have been put forward. I believe that improved clinical quality 

should be rewarded, but I am concerned that some proposals set up 

a system of winners and losers in their effort to improve quality. 

I fear that lower-performing systems or practices would be deemed 

losers, would receive lower payments and then would be set up—

set further back from reaching the quality level that we are trying 

to entice them to achieve, all the while affecting real people, real 

patients. 

Also, it is important that we keep in mind that efficiency in improvement is not the same as better patient care, and when considering the options before us, high-quality patient care should always 

be in the forefront of our thoughts. I thank the witnesses for coming. I look forward to today’s discussion. 

Mr. Chairman, I yield back. 

Mr. DEAL. Thank the gentlelady. 

Mr. Towns. 

Mr. TOWNS. Thank you very much, Mr. Chairman. 

I think it is important that we come up with a long-term fix. 

There are no ifs, ands or buts about it. 

But I am troubled by two things this morning: No. 1 is how I am 

hearing statements, and then I look at the way people vote, and 

it is so different from what they say. That bothers me. And the second thing that bothers me is how we are using the term reform. 

Reform is not something that is always positive. And we use it like 

it is always positive. Reform is neither positive or negative, depends on what you do with it. Of course, around here, most of the 

time, what we do with it is cut the budget. That is what it really 

means. It is like what my father used to tell my brother and I 

about prayer, he said, son, if somebody says they are going to pray 

for you, you need to find out what they are going to say. They 

might pray that you break your neck. So as I look at this term reform here, that is what we are saying to the doctors, break your 

neck. That is exactly what we are doing. 

We need a long-term fix. I think that what we are doing is not 

fair to the doctors, and it is not fair to the patients. And I am hoping that we really get serious here and not just make statements 

but begin to do the kind of things that we know need to be done 

to fix this problem. We are aware of what happened and what 

needs to happen. I am certain you are hearing from doctors the 

way I am hearing from them that they are leaving the profession. 

They are just walking away from it, no longer want to practice, and 

I think that becomes very serious because if we don’t fix that, then 

a lot of good people are not going to be out there providing the kind 

of services that we need. 

So I am saying to my colleagues on this committee this morning, 

let us listen very carefully, let us take this information in, and let 

us do something that we know that we need to do, and that is to 

fix it, and let us not loosely use that term reform because that is 

not a solution because you know as well as I do that everybody on 

this committee knows the word reform here in the U.S. House of 

Representatives means cut the budget. That is all it means. It 

18

doesn’t mean fix anything or make it better; it means cut the budget and lets use less money. That is the only thing it means here. 

Mr. Chairman, I yield back the balance of my time. I have a 

statement that is prepared I would like to place in the record. 

Mr. DEAL. Ms. Eshoo, You are recognized. 

Ms. ESHOO. Thank you, Mr. Chairman. 

This committee has held a series of hearings examining the 

Medicare payment system. I am just about the last one to speak, 

so I am not going to repeat the things that have been stated at this 

time. And I want to associate myself with what my colleagues on 

this side of the aisle have said. Really, today is the opportunity for 

members to get on record, everybody, and say, doctors, we are with 

you. But the fact of the matter is that when the vote came in order 

to implement what really needs to be done, it is not what happened. But I still welcome the opportunity because I think it is essential that if we are going to honor Medicare, that we are going 

to honor the people that are a part of it, the patients and the physicians. We are nowhere without the physicians, and we all know 

that. Try running a healthcare system without doctors. 

So now we are going to lurch to what we have done over the last 

couple of years. You should get that, but it shouldn’t look like this; 

it should be long term. We all know that there needs to be a fix. 

Dr. McClellan, I am glad to see you here today. I am going to 

raise an issue with you that has been—that you know we have 

worked on. I am deeply, deeply disappointed in the CMS final rule, 

the failure to fix the payment localities in my home State of California. 

You know, I have been an honest broker in this, and I think that, 

as I look over my shoulder, where I would fault myself is that I 

trusted what you all would do, and we are now back to square one; 

we are now back to square one. It is not good enough for the physicians that are in the system or the people that are so dependent 

upon that. And I am going to have some questions to ask you about 

this and where you are going to take it. I am deeply frustrated because I was given the assurances that this was going to be done. 

I have done everything on my part, everything that you asked me 

to do to get done with the medical society, with all the people on 

the ground, and now we are completely back to square one. I don’t 

think this speaks well of CMS. I really don’t, and the rest of it, as 

far as I am concerned, are excuses. But I hope you will be prepared 

to tell me what you really plan to do, if you are going to shove this 

over to the legislative arena. You didn’t want that before. We went 

to Mr. Thomas; he said that you were going to take care of it. Now 

it is going to go back to the legislative arena. We have wasted over 

a year. And meanwhile, people are left holding the bag. That is not 

what we are supposed to do. We are supposed to solve things. 

So you can tell that I am not only deeply disappointed, I am really, frankly, disgusted. I am disgusted. And that is pretty harsh, but 

for all of the work that is put into this, nothing, nothing has 

come—no fruit has been born as a result of it. And CMS weighs 

very heavily into this, very heavily. 

So I am going to look forward to the answers to the questions 

that I am going to pose, that is just a taste of where I am. 

Thank you, Mr. Chairman. 

19

Mr. DEAL. Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

I ask unanimous consent to place my full statement in the 

record, and again thank Dr. McClellan for coming today. This is 

such a major issue, and I think all of us on the committee understand that, whether you are Democrat or Republican. 

The Congress has deferred from 2005 these physician cuts; the 

problem is our committee, we need to correct the problem. And 

whether—I know the issue is getting overutilization, but I have a 

district where if physicians see more, because of the Medicare case 

load, they have more patients. So 1 year they go up, and then they 

get cut the next year because they are actually seeing more patients. And we need to deal with whether it is over utilization or 

whether this actually is providing better healthcare for our Medicare recipients, and that is our fault. I think we need some structural changes so we can see if someone is gaming the system as 

compared to actually working with patients to get better 

healthcare. 

And Mr. Chairman, again, I thank you, and I will yield back my 

time so we can get to questions. 

Mr. DEAL. I thank the gentleman. 

Ms. Cubin. 

Mrs. CUBIN. Mr. Chairman, I would like time to yield to Dr. Norwood; can I do that? 

Mr. DEAL. I suppose we can. 

Mr. NORWOOD. I will be very brief, Mr. Chairman, I just want 

to try to see if we can get the record straight here just a little bit. 

A few weeks ago, we marked up a Medicaid bill, at which time 

an amendment was brought which does away with the cuts for the 

physicians and has an increase. Well, everybody then at that time 

in that room knew that was the wrong time, the wrong place, the 

wrong amendment. It had absolutely no offsets for the $20-plus billion. Everybody in this room knows the same thing. 

You ask what you can do to say to the doctors, we are with you? 

Well, I have a bill that is going to have a hearing, that is going 

to have a markup—it is going to the floor, it is going to pass—that 

stops that 4.4 percent increase. So I invite at least one of my Democrat colleagues to be a co-sponsor of that. If you do that, then you 

can actually say to your doctors, we are with you. And with that, 

Mr. Chairman——

Mr. WAXMAN. With the gentleman yield? Will there be offsets to 

pay for this? Is that what the gentleman is saying? 

Mr. NORWOOD. Yes. 

Mr. WAXMAN. We look forward to seeing the physician fees. 

Mr. NORWOOD. Reclaiming my time, Henry. Why don’t you just 

look at first considering being a co-sponsor on something that is 

good for our physicians, that would be a nice first step, and then 

hopefully maybe you will even vote for it on the floor. 

Mr. WAXMAN. Well, I was for patients’ rights——

Mr. DEAL. Regular order——

Mr. NORWOOD. Mr. Chairman, I yield back. 

Mr. DEAL. The Chair would recognize Mr. Pitts for an opening 

statement. 

Recognize Mr. Whitfield for a unanimous consent request. 

20

Mr. WHITFIELD. Mr. Chairman, thank you for recognizing me. 

This is the first time in my 11 years in Congress that I have not 

been a member of the health subcommittee, and I would ask unanimous consent that I be allowed to speak for maybe 90 seconds on 

this issue. 

Mr. DEAL. Without objection. 

Mr. WHITFIELD. Thank you. And first of all, I am delighted that 

you are having this hearing. This is the committee that has exclusive jurisdiction over Medicare Part B, and we should be addressing this problem. 

My friend Charlie Norwood and I did introduce 4048, the Medicare Access Act which in effect would be a 1-year stop gap measure 

that would at the very least avert this reduction in Medicare for 

physicians for 1 year. We look forward to the testimony of the eight 

witnesses today who have great experience. And I know that Dr. 

McClellan is going to be addressing this issue in his testimony. 

And it is our hope that if the reconciliation bill passes the House—

and I guess that is still a question mark—but if it does, then we 

will be able to go into conference with the Senate, that they will 

have a bill that addresses this issue of Medicare reimbursement for 

physicians, and that we can fix this for the next year, and then ultimately come forward with major reform so that this program can 

work in a more effective way. And with that, I appreciate the opportunity and yield back the balance of my time. 

Mr. DEAL. I thank the gentleman. 

Well, we are pleased to have our first panel, who have waited patiently. They are two of the most respected individuals in the area 

of healthcare policy. 

First of all, Dr. Mark McClellan, who is the administrator of 

CMS; and Mr. Glen Hackbarth, who is the chairman of MedPAC. 

And Dr. McClellan, you are recognized for 5 minutes. 

STATEMENTS OF MARK B. MCCLELLAN, ADMINISTRATOR, 

CENTERS FOR MEDICARE AND MEDICAID SERVICES; AND 

GLENN M. HACKBARTH, CHAIRMAN, MEDICARE PAYMENT 

ADVISORY COMMISSION 

Mr. MCCLELLAN. Mr. Chairman, Representative Brown, distinguished committee members, thank you for the opportunity to testify on Medicare physician payments. Our current payment system 

for physicians is not sustainable, both from a standpoint of the very 

rapid growth we have seen in spending on physician-related services and from the standpoint of failing to support high-quality care. 

We are committed to continuing to work with physician groups and 

the Congress to move toward a payment system for physicians that 

provides stable reimbursement and also promotes higher quality 

and more efficient care without increasing the financial strain on 

the Medicare program. 

As the budget reconciliation process moves forward, the administration will work with the Congress on a fully offset provision to 

address the negative physician updates for 2006 and 2007 with differential updates for physicians who report valid, consensus-based 

quality measures. These short-term reforms should provide a transition to a better payment system that spends Medicare dollars 

more effectively. 

21

At a historic time when we are bringing Medicare’s benefits up 

to date, when medical science gives us more opportunities than 

ever to help seniors and people with disabilities to live longer and 

better lives, it is time to change our payment systems to provide 

better support for physician efforts to improve quality and avoid 

unnecessary healthcare costs. 

Healthcare providers are in the best position to know what can 

work most effectively to improve care of their patients. And their 

expertise, coupled with their strong professional commitment to 

quality, means that any solution to the problem of healthcare quality and affordability must involve their leadership. 

But today, our current payment system does not support the best 

efforts of physicians to improve quality and lower costs. Instead, it 

reimburses providers on a per-service basis; the more services provided, the greater the reimbursement, and we are getting what we 

pay for. We have seen rapid increases in the Medicare spending on 

physician services in the past few years. This is not a sustainable 

course. 

It is time to provide better support for the best efforts of physicians. Linking a portion of Medicare payments to clinically valid 

measures of quality and effective use of healthcare resources would 

provide more financial support for care that results in better quality and better value. 

With support from the Medicare Modernization Act, we have already taken steps in this direction in other parts of the Medicare 

program. Thanks to payment updates tied to reporting on valid 

measures of quality, almost all hospitals are reporting on consistent measures of the quality of care they provide. And earlier 

this week, as Chairman Barton mentioned, I announced the first 

year results of the Premiere Hospital Quality Incentive Demonstration, which showed that pay for performance works in Medicare. 

Hospitals improved the quality of care they offer, avoiding costly 

complications when payments are structured to support a focus on 

quality. 

CMS has been engaged with the physician community and other 

stakeholders in our healthcare system to work collaboratively on 

establishing quality measures that can be used for reporting and 

for a better payment system. Using these quality measures, including measures related to avoiding unnecessary healthcare costs, 

CMS is working with physician organizations and physician practices to conduct a number of demonstrations and pilots of payment 

reforms to pay more for better quality, better patient satisfaction 

and lower overall healthcare costs in the Medicare fee-for-service 

program. 

Another step in this major collaborative effort to support better 

care is the Physician Voluntary Reporting Program that we announced on October 28th. Under this program, physicians can 

choose to work with CMS to voluntarily report on a number of 

widely accepted evidence-based quality measures that will help us 

implement the least burdensome approaches to quality reporting 

and will provide new information relevant to improving quality for 

the participating physicians. 

On these efforts, we have worked with many physician organizations, including the Alliance of Specialty Medicine, the American 

22

College of Physicians, the American College of Surgeons, the Society of Thoracic Surgeons, and many others. I would like to thank 

them for their continued collaboration and constructive imput as 

we keep working together to improve quality of care for patients. 

Mr. Chairman, it has taken a lot of collaborative work to get to 

the point where we now have a path to a better payment system, 

to a better alternative, to rapid and costly increases in the volume 

of services on the one hand and to a failure to support quality care 

on the other. 

We look forward to working with you and others in Congress and 

the medical community to use the opportunity we have right now 

to change Medicare’s physician payment system to help provide appropriate payments while also promoting better care for patients 

without increasing overall Medicare costs. And I would be glad to 

answer your questions. 

[The prepared statement of Mark B. McClellan follows:]

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Mr. DEAL. Thank you. 

Mr. Hackbarth. 

STATEMENT OF GLEN M. HACKBARTH 

Mr. HACKBARTH. Chairman Deal, Congressman Brown, other 

members of the subcommittee, I appreciate the opportunity to talk 

to you today about this issue. 

Based on your statements, you all understand the reasons why 

so many people are unhappy with the financial side of Part B of 

Medicare. Because of the sustainable growth rate system, physician 

fees confront significant cuts, not just in 2006, but similar cuts for 

many years into the future. Because expenditures are growing rapidly, Medicare beneficiaries confront significant increases in their 

premiums. And taxpayers confront a much heavier burden, not just 

for Part B, but for all of Medicare, and not just for today’s retirees, 

but for a growing retiree population in the future. So there is lots 

to be unhappy about for all parties on the financial side. 

The news on the quality side is better, but still troublesome in 

some important ways. As a nation, we are regularly amazed by 

medical progress, steps that mean better care, longer lives, 

healthier lives for Medicare beneficiaries and for others. At the 

same time, we can’t ignore the fact that many Medicare beneficiaries and Americans in general don’t receive recommended care, 

roughly half of the recommended care is delivered for Americans of 

and Medicare beneficiaries, and for the most vulnerable patients, 

failure to deliver that care can have disastrous consequences. On 

the other hand, research on variation in the medical practices well 

documents that many patients likely receive many more services 

than they need. 

MedPAC has recommended a series of steps to improve the value 

received for the Nation’s large investment in Medicare Part B. 

Even more important, we suggest the change in mindset about how 

to approach Part B of Medicare. The longstanding focus on cost 

should give way to a focus on value, which combines quality and 

efficiency in the delivery of services. Medicare’s traditional respect 

for clinician autonomy is appropriate and well deserved, but it 

must be complimented by a demand for accountability for performance. 

Across the board mechanisms, like SGR, should be replaced by 

much more targeted approaches. Our focus on perfecting serviceby-service payment must be combined with analysis of performance 

based on larger episodes of care. 

Specifically, MedPAC has recommended eliminating SGR and replacing it with a year-to-year evaluation of payment adequacy. Payments should be linked to quality. Tools should be developed to 

measure and assess physician use of resources and provide feedback to physicians on how their performance compares to other 

physicians. 

Medicare should examine rapidly growing areas, such as imaging 

expenses, to reduce unnecessary spending and ensure quality of 

care. Medicare’s fee schedule must be continually refined to make 

sure prices are set accurately. For some services, we believe we are 

paying too much and, for others, too little. 

64

And we also support giving Medicare beneficiaries the option of 

enrolling in private health plans that may be able to offer a better 

value for some beneficiaries. By themselves, these recommendations are not going to solve the problem of rapidly growing expenditures in Part B. Controlling volume growth in a free choice fee-forservice program like Medicare part is very, very difficult, and that 

is not just for Medicare, that is for private insurance programs, 

that is the experience in other countries as well. 

The problem of volume growth and increasing expenditures is not 

an acute illness, to use a medical metaphor, it is a chronic problem 

that requires ongoing efforts, careful treatment and monitoring. 

If MedPAC’s approach does not guarantee a solution, why do we 

prefer our approach to SGR? Because it is targeted, while SGR is 

indiscriminate; not all increases in volume are bad, some are much 

needed; not all services are growing rapidly; not all physicians are 

high users, yet SGR treats every service, every physician, every 

area of the country as though they were the same. That is unfair. 

And not only is it unfair, such a system has no power, no opportunity to motivate and reward improvement, and that should be 

the ultimate goal of any payment system. 

SGR is not a volume-controlled mechanism, but rather simply a 

means of setting a budget baseline, and it is a baseline that is 

wholly unrealistic that I don’t think anybody in this room thinks 

is ever going to happen. It has become an impediment, the mechanism has become an impediment to some policy as opposed to an 

aid, it is time to move on. 

I welcome your questions. 

[The prepared statement of Glenn M. Hackbarth follows:]

PREPARED STATEMENT OF GLENN M. HACKBARTH, CHAIRMAN, MEDICARE PAYMENT

ADVISORY COMMISSION

Chairman Deal, Congressman Brown, distinguished Subcommittee members. I am 

Glenn Hackbarth, chairman of the Medicare Payment Advisory Commission 

(MedPAC). I appreciate the opportunity to be here with you this morning to discuss 

payments for physician services in the Medicare program. 

Medicare expenditures for physician services are growing rapidly. CMS estimated 

in March of this year that spending related to the physician fee schedule for 2004 

increased by approximately 15 percent, while the number of Medicare beneficiaries 

in FFS increased by only 1.1 percent. Medicare expenditures for physician services 

are the product of the number of services provided, the type of service, and the price 

per unit of service. The number and type of services provided we refer to as volume. 

To get good value for the Medicare program, the payment system should set the relative prices for services accurately and provide incentives to control unnecessary 

growth in volume. 

In this testimony we briefly outline the history of the Medicare physician payment 

system and discuss several ideas for getting better value in the Medicare program 

including: an alternative method to updating payments; differentiating among providers through pay for performance, measuring physician resource use, and setting 

standards for imaging services; improving the internal accuracy of the physician fee 

schedule; and creating new incentives in the physician payment system. 

Historical concerns about physician payment 

Physicians are the gatekeepers of the health care system; they order tests, imaging studies, surgery, and drugs as well as provide patient care. Yet the payment 

system for physicians is fee for individual service; it does not reward coordination 

of care or high quality—by definition it rewards high volume. Several attempts have 

been made to address this tendency to increase volume and payments. 

The Congress established the fee schedule that sets Medicare’s payments for physician services as part of the Omnibus Budget Reconciliation Act of 1989 (OBRA 89). 

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ment method that existed previously, it was designed to achieve several goals. First, 

the fee schedule decoupled Medicare’s payment rates and physicians’ charges for 

services. This was intended to end an inflationary bias that was believed to exist 

under the CPR method because it gave physicians an incentive to raise their 

charges. 

Second, the fee schedule corrected distortions in payments that had developed 

under the CPR method. Evidence of those distortions came from William Hsiao and 

his colleagues at Harvard University who found that payments were lower, relative 

to resource costs, for evaluation and management services but higher for imaging 

and laboratory services. Further evidence came from analyses, conducted by one of 

MedPAC’s predecessor commissions, the Physician Payment Review Commission, 

that revealed wide variation in payment rates by geographic area that could not be 

explained by differences in practice costs. (As we discuss later, there is evidence 

that relative prices in the fee schedule may have once again become distorted.) 

The third element of OBRA 89 focused on volume control, which is still a significant issue for the Medicare program. Rapid and continued volume growth raises 

three concerns: is some of the growth related to provision of unnecessary services, 

is it a result of mispricing, and will it make the program unaffordable for beneficiaries and the nation? 

Some volume growth may be desirable. For example, growth arising from technology that produces meaningful gains to patients, or growth where there is currently underutilization of services, may be beneficial. But one indicator that not all 

growth is good may be its variation. 

Volume varies across geographic areas. As detailed in our June 2003 Report to 

the Congress, the variation is widest for certain services, including imaging and 

tests. Researchers at Dartmouth have reached several conclusions about such findings:

• Differences in volume among geographic areas is primarily due to greater use of 

discretionary services that are sensitive to the supply of physicians and hospital 

resources. 

• On measures of quality, care is often no better in areas with high volume than 

in areas with lower volume. The high-volume areas tend to have a physician 

workforce composed of relatively high proportions of specialists and lower proportions of generalists. 

• Areas with high levels of volume have slightly worse access to care on some measures. 

All this suggests that service volume may be too high in some geographic areas. 

In addition, volume varies among broad categories of services: Cumulative growth 

in volume per beneficiary ranged from less than 15 percent for major procedures to 

almost 45 percent for imaging, based on our analysis of data comparing 2003 with 

1999 (Figure 1). Although one would expect some variation as technology changes, 

one source of concern is that growth rates were higher for services which researchers have characterized as discretionary (e.g., imaging and diagnostic tests). 

Impact on beneficiaries—For beneficiaries, increases in volume lead to higher 

out-of-pocket costs—copayments, the Medicare Part B premium, and any premiums 

they pay for supplemental coverage. For example, volume growth increases the 

monthly Part B premium. Because it is determined by average Part B spending for 

aged beneficiaries, an increase in the volume of services affects the premium directly. From 1999 to 2002 the premium went up by an average of 5.8 percent per 

year. By contrast, cost-of-living increases for Social Security benefits averaged only 

2.5 percent per year during that period. Since 2002 the Part B premium has gone 

up faster still—by 8.7 percent in 2003, 13.5 percent in 2004, 17.3 percent in 2005, 

and 13.2 percent in 2006. 

Impact on taxpayers—Volume growth also has implications for taxpayers and 

the federal budget. Increases in volume lead to higher Part B expenditures supported with the general revenues of the Treasury. (The Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (MMA) established a trigger for legislative action if general revenues exceed 45 percent of total outlays for the Medicare 

program.) Medicare is growing faster than the nation’s output of goods and services, 

as discussed in the Medicare trustees’ report, and will thus continue to put pressure 

on the federal budget. Increases in Medicare spending per beneficiary is an important reason for that growth, cited by the Congressional Budget Office and the Government Accountability Office (GAO), among others. 

OBRA 89 established a formula based on achievement of an expenditure target—

the volume performance standard (VPS). This approach to payment updates was a 

response to rapid growth in Medicare spending for physician services driven by 

growth in the volume of those services. From 1980 through 1989, annual growth in 

66

spending per beneficiary, adjusted for inflation, ranged widely, from a low of 1.3 percent to a high of 15.2 percent. The average annual growth rate was 8.0 percent. 

The VPS was designed to give physicians a collective incentive to control the volume of services. But, experience with the VPS formula showed that it had several 

methodological flaws that prevented it from operating as intended. Those problems 

prompted the Congress to replace it with the sustainable growth rate system in the 

Balanced Budget Act of 1997. 

The sustainable growth rate (SGR) system 

Under the SGR, the expenditure target allows growth to occur for factors that 

should affect growth in spending on physician services namely:

• inflation in physicians’ practice costs, 

• changes in enrollment in fee-for-service Medicare, and 

• changes in spending due to law and regulation. 

It then allows for growth above those factors based on growth in real gross domestic product (GDP) per capita. GDP, the measure of goods and services produced in 

the United States, is used as a benchmark of how much additional growth in volume 

society can afford. The spending target in the SGR combines all these factors. The 

basic SGR mechanism only lowers the update when cumulative actual spending exceeds target spending. 

However, the SGR approach has run into difficulties as well. The SGR formula 

has produced volatile updates that in some years have been too high and in others 

too low. Updates went from increases in 2000 and 2001 of 5.4 percent and 4.5 percent, respectively, much larger than the increases in practice costs, to an unexpectedly large reduction in 2002 of 5.4 percent. This volatility illustrates the problem 

of trying to control spending with an update formula. The current projection, according to the Medicare trustees, is that annual updates of about negative five percent 

will occur for six consecutive years. The trustees characterize this series of updates 

as ‘‘unrealistically low’’ and in terms of budget scoring, these projections make legislative alternatives to the SGR very expensive. 

There are two reasons why actual spending has exceeded target spending and the 

cumulative difference has become so great that multiple negative updates are projected.

• The first is that volume has continued to grow strongly even when updates have 

been small or even negative. Figure 2 shows that Medicare spending for physician services increased in 2002, the one year when the update was negative, 

continued to increase at a rate greater than the increase in the update through 

2004, and is projected to continue to increase in 2005. The trustees projection 

assumes that negative updates will take place as determined by the formula 

and eventually reduce spending. 

• The second reason is that the spending target turned out to have been too high 

several years in a row because growth in the economy slowed. At the same time, 

inadvertent omissions of some billing codes made actual spending appear lower 

than it really was. The result was the updates calculated in those years were 

too large. When the spending target and actual spending figures were corrected, 

a large gap between actual and target spending resulted. That gap has to be 

closed under the SGR formula, and can only be diminished by multiple negative 

updates or very large changes in the other factors. 

In the MMA, the Congress attempted to reduce the volatility problem. The GDP 

factor in the SGR is now a 10-year rolling average, which dampens the effects of 

yearly changes in GDP growth. However, there is another source of volatility which 

has not been controlled—estimating changes in enrollment in traditional fee-forservice Medicare. CMS may need to reestimate enrollment growth as it gains experience with shifts in enrollment from traditional Medicare to Medicare Advantage. 

Under the SGR, this could lead to continued volatility in spending targets and updates. 

Even if all estimates of GDP and the other factors were always exactly right, the 

SGR approach is flawed.

• It disconnects payment from the cost of producing services. The formula produces 

updates that can be unrelated to changes in the cost of producing physician 

services and other factors that should inform the update. If left alone, fee cuts 

might eventually provide a budget control but in so doing would produce fees 

that in the long run could threaten beneficiaries’ access to care. 

• It is a flawed volume control mechanism. Because it is a national target, there 

is no incentive for individual physicians to control volume. There has been no 

consistent relationship between updates and volume growth, and the volume of 

services and level of spending are still increasing rapidly. 

67

• It is inequitable because it treats all physicians and regions of the country alike 

regardless of their individual volume-influencing behavior. 

• It treats all volume increases the same, whether they are desirable or not. 

The underlying assumption of an expenditure target approach, such as the SGR, 

is that increasing updates if overall volume is controlled, and decreasing updates 

if overall volume is not controlled, provides physicians a collective incentive to control the volume of services. However, this assumption is incorrect because physicians do not respond to collective incentives but individual incentives. An efficient 

physician who reduces volume does not realize a proportional increase in payments. 

In fact, an individual physician has an incentive to increase volume under a feefor-service system; moreover, there is evidence that physicians have increased volume in response to reductions in fees. The sum of those individual incentives will 

result in an increase in volume overall, if fees are reduced, and trigger an eventual 

further reduction in fees under an expenditure target. 

MedPAC has consistently raised concerns about the SGR—both when it set updates above and when it set updates below the change in input prices. The Commission recognizes the desire for some control over rapid increases in volume. However, 

instead of relying on a formula, MedPAC recommends a different course—one that 

involves explicit consideration of Medicare program objectives and differentiating 

among physicians. Updates should be considered each year to ensure that payments 

for physician services are adequate to maintain Medicare beneficiaries’ access to 

necessary high quality care. 

Volume growth must be addressed by determining its root causes and designing 

focused policy solutions. A formula such as the SGR that attempts to control volume 

through global payment changes treating all services and physicians alike will 

produce inequitable results not only for physicians, but also for the beneficiaries and 

taxpayers who have to pay for unwarranted volume. Volume growth that adds value 

should be treated differently from volume growth that does not. 

Improving value 

We recommend a series of steps to improve payment for physician services. They 

are important steps that will improve quality for beneficiaries and lay the groundwork for obtaining better value in the Medicare program. They will not, by themselves, solve the problem of rapidly growing expenditures for physician services, but 

neither does the SGR. The SGR does not control volume; it only establishes budget 

targets, targets that have become unrealistically low. As a result, even sound policies often carry large budget ′′scores,′′ a problem that will only get worse with time. 

Meanwhile, the SGR may be encouraging increases in volume, even while it creates 

serious inequities and the potential for future access problems. 

To begin improving payment for physician services, MedPAC recommends the following steps, which we discuss in more detail below:

• A year-to-year evaluation of payment adequacy to determine the update. 

• Approaches that would allow Medicare to differentiate among providers when 

making payments as a way to improve the quality of care. Currently, Medicare 

pays providers the same regardless of their quality or use of resources—Medicare should pay more to physicians with higher quality performance and less 

to those with lower quality performance. 

• With regard to imaging, a rapidly growing sector of physician services, ensuring 

that providers who perform imaging studies and physicians who interpret them 

meet quality standards as a condition of Medicare payment. 

• Measuring physicians’ use of Medicare resources when serving beneficiaries and 

providing information about practice patterns confidentially to physicians. 

• Ensuring that the physician fee schedule sets the relative price of services accurately. 

A different approach to updating payments 

In our March 2002 report we recommended that the Congress replace the SGR 

system for calculating an annual update with one based on factors influencing the 

unit costs of efficiently providing physician services. 

A new system should update payments for physician services based on an analysis 

of payment adequacy, which would include the estimated change in input prices for 

the coming year, less an adjustment for growth in multifactor productivity. Updates 

would not be automatic (required in statute) but be informed by changes in beneficiaries’ access to physician services, the quality of services being provided, the appropriateness of cost increases, and other factors, similar to those MedPAC takes 

into account when considering updates for other Medicare payment systems. Furthermore, the reality is that in any given year the Congress might need to exercise 

68

budget restraints and MedPAC’s analysis would serve as one input to Congress’s decision making process. 

For example, we used this approach in our recommendation on the physician payment update in our March 2005 Report to the Congress. Our assessment was that 

Medicare beneficiaries’ access to physician care, the supply of physicians, and the 

ratio of private payment rates to Medicare payment rates for physician services, 

were all stable. Surveys on beneficiary access to physicians continue to show that 

the large majority of beneficiaries are able to obtain physician care and nearly all 

physicians are willing to serve Medicare beneficiaries. This August and September 

for example, we found that among beneficiaries seeking an appointment for illness 

or injury with their doctor, 83 percent reported they never experienced a delay. This 

rate was higher than the 75 percent reported for privately insured people age 50 

to 64. 

A large national survey found that among office-based physicians who commonly 

saw Medicare patients, 94 percent were accepting new Medicare patients in 2004. 

We have also found that the number of physicians furnishing services to Medicare 

beneficiaries has kept pace with the growth in the beneficiary population, and the 

volume of physician services used by Medicare beneficiaries is still increasing. CMS 

has found that two subpopulations of beneficiaries more likely to report problems 

finding new physicians are those who recently moved to a new area and those who 

state that they are in poor health. Center for Studying Health Systems Change has 

found that rates of reported access problems by market area are generally similar 

for Medicare beneficiaries and privately insured individuals. This finding suggests 

that when some beneficiaries report difficulty accessing physicians, their problems 

may not be attributable solely to Medicare payment levels, but rather to other factors such as population growth. 

Differentiating among providers 

In our March Report to the Congress we made several recommendations that 

taken together will help improve the value of Medicare physician services. Our basic 

approach is to differentiate among physicians and pay those who provide high quality services more, and pay those who do not less. As a first step, we make recommendations concerning: pay for performance and information technology (IT), 

measuring physician resource use, and managing the use of imaging services. Although some of these actions may be controversial, we must ask ourselves what the 

cost is of doing nothing—how long can we afford to pay physicians without regard 

to quality or resource use? 

Pay for performance and information technology 

Medicare uses a variety of strategies to improve quality for beneficiaries including 

the quality improvement organization (QIO) program and demonstration projects, 

such as the physician group practice demonstration, aimed at tying payment to 

quality. In addition, CMS recently announced a voluntary quality reporting initiative for physicians. MedPAC supports these efforts and believes that CMS, along 

with its accreditor and provider partners, has acted as an important catalyst in creating the ability to measure and improve quality nationally. These CMS programs 

provide a foundation for initiatives tying payment to quality and encouraging the 

diffusion of information technology. 

However, other than in demonstrations, Medicare, the largest single payer in the 

system, still pays its health care providers without differentiating on quality. Providers who improve quality are not rewarded for their efforts. In fact, Medicare 

often pays more when poor care results in unnecessary complications. 

To begin to create incentives for higher quality providers, we recommend that the 

Congress adopt budget neutral pay-for-performance programs, starting with a small 

share of payment and increasing over time. For physicians, this would initially include use of a set of measures related to the use and functions of IT, and next a 

broader set of process measures. 

The first set of measures should describe evidence-based quality- or safety-enhancing functions performed with the help of IT. Some suggest that Medicare could 

reward IT adoption alone. However, not all IT applications have the same capabilities and owning a product does not necessarily translate into using it or guarantee 

the desired outcome of improving quality. Functions might include, for example, 

tracking patients with diabetes and sending them reminders about preventive services. This approach focuses the incentive on quality-improving activities, rather than 

on the tool used. The performance payment may also increase the return on practices’ IT investments. 

Process measures for physicians, such as monitoring and maintaining glucose levels for diabetics, should be added to the pay-for-performance program as they beVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
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come more widely available from administrative data. Using administrative data 

minimizes the burden on physicians. We recommend improving the administrative 

data available for assessing physician quality, including submission of laboratory 

values using common vocabulary standards, and of prescription claims data from 

the Part D program. The laboratory values and prescription data could be combined 

with physician claims to provide a more complete picture of patient care. As clinical 

use of IT becomes more widespread, even more measures could become available. 

Measuring physician resource use 

Medicare beneficiaries living in regions of the country where physicians and hospitals deliver many more health care services do not experience better quality of 

care or outcomes. Moreover, they do not report greater satisfaction with care than 

beneficiaries living in other regions. This finding, and others by researchers such 

as Wennberg and Fisher, are provocative. They suggest that the nation could spend 

less on health care, without sacrificing quality, if physicians whose practice styles 

are more resource intensive moderated the intensity of their practice. 

MedPAC recommends that Medicare measure physicians’ resource use over time, 

and feed back the results to physicians. Physicians could then start to assess their 

practice styles, and evaluate whether they tend to use more resources than their 

peers. Moreover, when physicians are able to use this information in tandem with 

information on their quality of care, it will provide a foundation for them to improve 

the efficiency of the care they and others provide to beneficiaries. Once greater experience and confidence in this information is gained, Medicare might begin to use the 

results in payment, for example as a component of a pay-for-performance program. 

Right now, we know there are wide disparities in practice patterns, all of which 

are paid for by Medicare and many of which do not appear to be improving care. 

Yet many physicians have few opportunities to learn about how their practice patterns compare to others or how they can improve. MedPAC and CMS are working 

on measuring resource use through episodes of care. This recommendation would 

help inform physicians and is crucial to starting the process of improvement. 

Managing the use of imaging services 

The last several years have seen rapid growth in the volume of diagnostic imaging 

services when compared to other services paid under Medicare’s physician fee schedule. In addition some imaging services have grown even more rapidly than the average (Figure 3). To the extent that this increase has been driven by technological innovations that have improved physicians’ ability to diagnose and treat disease, it 

may be beneficial. However, other factors driving volume increases and increasing 

use of imaging procedures in physician offices could include:

• possible misalignment of fee schedule payment rates and costs, 

• physicians’ interest in supplementing their professional fees with revenues from 

ancillary services, 

• patients’ desire to receive diagnostic tests in more convenient settings, and 

• defensive medicine. 

These factors have contributed to an ongoing migration of imaging services from 

hospitals, where institutional standards govern the performance and interpretation 

of studies, to physician offices, where there is less quality oversight. These variations in oversight, coupled with rapid volume growth, may mean that beneficiaries 

are receiving unnecessary or low quality care. Therefore, we recommended that 

Medicare develop quality standards for all providers that receive payment for performing and interpreting imaging studies. These standards should improve the accuracy of diagnostic tests and reduce the need to repeat studies, thus enhancing quality of care and helping to control spending. 

Requiring physicians to meet quality standards as a condition of payment for imaging services provided in their offices represents a major change in Medicare’s payment policy. Traditionally, Medicare has paid for all medically necessary services 

provided by physicians operating within the scope of practice for the state in which 

they are licensed. The Commission concludes that requiring standards is warranted 

because of evidence of low-quality providers, the lack of comprehensive standards 

for physician offices, and the growth of imaging studies provided in this setting. 

There is precedent for this approach. According to GAO, the Mammography Quality 

Standards Act has increased mammography facilities’ compliance with quality 

standards and led to improvements in image quality. After the Act took effect, the 

share of facilities that were unable to pass image quality tests dropped from 11 percent to 2 percent. 

In addition to setting quality standards for facilities and physicians, we recommended that CMS:

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• measure physicians’ use of imaging services so that physicians can compare their 

practice patterns with those of their peers, • expand and improve Medicare’s coding edits for imaging studies and pay less for 

multiple imaging studies perforemed during the same visit, and • strengthen the rules that restrict physician investment in imaging centers to 

which they refer patients. 

CMS adopted some of these recommendations in the 2006 final rule for physician 

payment by restricting physician investment in nuclear medicine facilities to which 

they refer patients and reducing payments for multiple imaging studies. 

Improving the physician fee schedule 

As progress is made on the steps discussed above, it is also important to assure 

that the relative rates for paying physicians are correct. Medicare pays for physicians’ services through the physician fee schedule. The fee schedule sets prices for 

over 7,000 different services and physicians are paid each time they deliver a service. It is important to get the prices right because:

• Otherwise, Medicare would pay too much for some services and therefore not 

spend taxpayers’ and beneficiaries’ money wisely. • Misvaluation can distort the market for physician services. Services that are overvalued may be overprovided. Services that are undervalued may prompt providers to increase volume in order to maintain their overall level of payment 

or opt not to furnish services at all, which can threaten access to care. • Over time, whole groups of services may be undervalued, making certain specialties more financially attractive than others. 

The Commission is examining several issues internal to the physician fee schedule that could be causing the fee schedule to misvalue relative prices:

• The system for reviewing the relative value units (RVUs) which determine the fee 

schedule prices may be biased. The system identifies undervalued codes for review more often than overvalued codes; it creates a presumption that current 

relative values are accurate (even though the work associated with some services, especially new services, should change over time); and it may favor procedures over evaluation and management services. • The method for adjusting payments geographically for input prices may be distorting relative prices and hence misvaluing services. There are two aspects to 

this issue. First, the boundaries of the payment localities have not been revised 

since 1997 and may not correspond to market boundaries for the inputs physicians use in furnishing services. Second, the share of the practice expense payment that is not adjusted geographically is the same for all services, although 

the cost of equipment and supplies (which this share is supposed to represent) 

is not. This means that payments may be too low for equipment-and-supply-intensive services (such as imaging) in some areas and too high in others.

• New data are needed for determining practice expenses and the current method 

is complex and not transparent. 

The Commission is working on options to improve relative pricing accuracy in the 

physician fee schedule. 

Creating new incentives in the physician payment system 

MedPAC has consistently raised concerns about the SGR as a volume control 

mechanism and recommended its elimination. We believe that the other changes 

discussed previously—pay for performance, encouraging use of IT, measuring resource use, and reform of payments for imaging services—can help Medicare beneficiaries receive high-quality, appropriate services and improve the value of the program. Although the Commission’s preference is to directly target policy solutions to 

the source of inappropriate volume increases, as discussed in the previous section 

on imaging, we recognize that the Congress may wish to retain some budget mechanism linked to volume. However, the mechanism should more closely match physicians’ incentives to their individual performance. In our March 2005 Report to the 

Congress, we presented potential ideas for volume control methods that encourage 

more collaborative and cost effective delivery of physician services in accordance 

with clinical standards of care; these are described briefly below. 

Potentially, the SGR could be modified by creating smaller groups subject to a 

spending target. Research shows that reducing the size of groups subject to collective incentives may increase the likelihood that the actions of individuals within the 

group will be influenced by the incentives. Faced with such incentives, smaller, 

more cohesive groups of physicians may establish new guidelines for care that will 

reduce volume growth and improve quality. Although these smaller groups will differentiate updates more than a single update, many of the problems that accompany 

controlling volume growth through an update may persist. These methods will also 

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require a means of risk adjustment. Four ways in which Medicare could move from 

one national spending target to multiple spending targets are:

• Create one or more alternate pools based on membership in organized groups of 

physicians. Alternate pools could be formed, for example, for group practices, 

independent practice associations (IPAs), or hospital medical staffs. Organized 

groups of physicians would apply for inclusion, and services provided by group 

members would be aggregated in this separate pool. In order to participate in 

the pool, groups would have to meet certain criteria, such as functioning clinical 

IT systems, quality recognition programs, and a commitment to the use of evidence-based medicine. Continued membership would be subject to performance 

standards. 

• Divide the United States into regions and adjust the annual conversion factor 

based on changes in the volume of services provided in each region. An SGRtype formula could be used to determine how much spending growth society 

could afford, but the overall target would be adjusted regionally. Because reducing volume growth would be more difficult to achieve in areas where the volume 

of services provided was already low, the formula would have to take into account the initial volume level. 

• Set targets based on the performance of hospital medical staffs. Research shows 

that hospital medical centers can function as de facto systems of care. Medical 

staff would be defined as all the physicians practicing in a given hospital. Updates would be higher for medical staffs that controlled spending growth and 

lower for staffs for whom spending grew at rates above average. 

• Adjust fees differentially by service or types of service. Fees for services with very 

high volume growth would be reduced, or not increased at the same rate as fees 

for other services. Either volume targets or growth thresholds would have to be 

established with exceptions where warranted. 

All of these ideas raise many questions about design, implementation, and policy. 

MedPAC has not endorsed any of these approaches, but we will explore them further if the Congress is interested in investigating them.

Mr. DEAL. Thank you, both. 

I will begin the questioning. 

Dr. McClellan, there have been several suggestions about what 

we should do to change the SGR formula, one of them was a suggestion that drugs be removed from the calculations. Would you 

comment onthat, please? 

Mr. MCCLELLAN. Mr. Brown asked about that, too. We have 

more of a sense of discussion on this in my written testimony. In 

the final regulation that we issued on physician payment in the beginning of November that made very clear why we don’t have the 

statutory authority, we don’t see a path of statutory authority to 

remove drugs from the sustainable growth rate. The reason for is, 

to do so retrospectively at least, is there is specific legislation the 

Congress has passed that said the SGR formula cannot be adjusted 

more than a limited number of times. We got a lot of useful comments in about how we might see a path to this authority, but 

nothing that address that fundamental problem, fundamental obstacle to doing so with the way the current statute is written. 

Even if we had been able to find a way to do this, though, this 

would not have solved the problem that we are facing right now. 

It would have had some very real effects, it would have added $110 

billion to Medicare costs over the next 10 years and added close to 

$40 billion in additional payments and premiums and co-pays by 

Medicare beneficiaries. Even with all of that additional spending, 

there would still be a significant negative update for physicians in 

2006 and 2007 and subsequent years. 

So we don’t have a way to have the statutory authority to doing 

this retrospective removal of drugs, but we will obviously keep 

looking for comments and input. But it doesn’t solve the problem, 

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you still have a negative update, you have even higher costs for the 

Medicare program and for beneficiaries, and that is why we are 

supporting working with you on legislation that would address the 

negative payment updates, and it would help us move toward a 

system that provides better support for quality care and avoiding 

unnecessary costs. 

Mr. DEAL. Mr. Hackbarth alluded to the issue of the volume, and 

the escalating volume that we are seeing in terms of the number 

of times patients appear in the doctor’s offices. Would you comment 

about that component? And Mr. Hackbarth, I would ask you, after 

he concludes, if you would comment on that further. 

Mr. MCCLELLAN. We both see the same data. In the last few 

years, spending in physician-related services has increased by 12 or 

13 percent or more. In the first 6 months of 2005, we have seen 

that same 12 percent rate of increase, about a $10 billion, $12 billion increase over where physician spending was a year ago. This 

is due not only to more use of drugs in physician offices, going back 

to your earlier question, it is also due to more use of laboratory 

tests, more use of more intensive imaging procedures in conjunction with that patient care and more use of minor procedures in 

the office, more frequent visits. All of these types of services are 

growing at double digit rates. And we have had a lot of discussion 

with many of the physician groups, and many of these types of increases are unquestionably adding to value of care, they are helping patients stay healthier, better understand and diagnose diseases. But we have seen also a lot of evidence of growth in areas 

and big variations in care where there is no clear relationship, no 

clear evidence of what consequences it is actually having for important outcomes for patients. And we need to keep working to get 

better evidence on how we can support better care, while avoiding 

some of these potentially unnecessary cost growths. 

Mr. DEAL. Mr. Hackbarth. 

Mr. HACKBARTH. I think Mark has laid it out well. The only 

point that I would emphasize is that the rate of growth is highly 

variable, some areas like imaging are growing very, very rapidly. 

Others, like major procedures and evaluation and management, are 

growing much more slowly. So volume is not a generic problem in 

Part B, it is a very focused one, which is why we think that the 

approaches also need to be focused, the approaches we are dealing 

with. 

Mr. DEAL. Dr. McClellan, as you know, as we have gone through 

Medicaid reform, one of the issues is use of drugs and generics, et 

cetera. Ifwe go to something in a pay performance type model, 

would there be some way to incentivize from the doctor’s end of it 

the prescribing of generics rather than brand names? 

Mr. MCCLELLAN. Well, I think doctors are already taking a lot 

of steps to help patients find lower cost ways to get their medicines. That is going to be more important next year with the prescription drug benefit starting where just about all the drug plans 

provide excellent coverage for generic medicines, zero co-pays or a 

few dollars in co-pays. 

The payment reforms that we have been discussing, which would 

give, for example, internists more opportunities to get paid more 

when their patients get better results, would definitely be conduVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6602 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
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cive to supporting—to helping doctors support use of generic medicines. If we paid more to help doctors get their patients into fewer 

complications, the doctors themselves would have more money to 

invest in electronic record systems and other approaches to help 

them identify ways to help their patients stay healthy and avoid 

unnecessary costs. Right now, our volume-based payment system 

doesn’t do all that much to support that directly. 

Mr. DEAL. Mr. Brown. 

Mr. BROWN. Thank you, Mr. Chairman. 

Dr. McClellan, as I said, beginning in January physicians will 

see the reductions in payment. Is the President urging Congress to 

pass legislation preventing that cut before we adjourn this year? 

Mr. MCCLELLAN. The administration supports action in the 

budget reconciliation process to address the negative update for 

physicians. We would like to see that process, that reform also take 

steps, not just to put in—not just help for physicians with the negative updates, but also steps toward a better payment system. And 

we need more information on quality, quality that physicians themselves think is important, and I think it is what our healthcare system and our healthcarefinancing mechanisms ought to support to 

be part of that effort as well. So we want to see that happen as 

part of the budget reconciliation process. 

Mr. BROWN. What should the deadline be for enacting a payment 

system that pays health professionals fairly? 

Mr. MCCLELLAN. Well, this is something that we have to work 

on with Congress. We will be looking to you all to see when and 

how we can act, but we would like to get to work on this reconciliation process. 

Mr. BROWN. Has the President set a deadline for when he wants 

to see this done? 

Mr. MCCLELLAN. He has not set a specific deadline. He would 

like to see that budget reconciliation process completed as soon as 

possible, and we would like to try to address this issue as part of 

that process. 

Mr. BROWN. Does the President have an opinion on the question 

of whether it is better to cut taxes by another $70 billion or devote 

those dollars to paying physicians fairly? 

Mr. MCCLELLAN. Well, I think what the administration supports 

is getting more for our spending in the Medicare program. And 

what we have seen in our work over the last few years is that physician groups are taking a lot of steps to help us do that by identifying what is working in their practice, identifying ways that we 

can pay differently to better support quality care and avoid unnecessary costs. That is what is going on in the demonstration programs right now that we are working with physician groups to implement, and that is what we would like to see in legislation. 

Mr. BROWN. But when is—what are his ideas about paying for 

this? Because you didn’t really—your answer was fine, and not unexpected, but not as precise as I would have liked. How is this 

going to work? Explain this to me. You said there is no deadline 

except sooner rather than later. The reductions start in January. 

The President, I think, still wants to do the $70 billion in tax cuts. 

My friends on the other side of the aisle want to pass—or at least 

74

some of them, not quite enough yet—want to pass a reconciliation. 

I am confused about all this——

Mr. MCCLELLAN. The administration has proposed a budget with 

a number of areas of proposed savings in it. The administration 

has also been working with the Congress on the—in the reconciliation process to find ways to reduce government costs while not 

having adverse impacts on the quality of care or—also while taking 

steps to improve the way that government programs work, like improving the way that the Medicare program works. 

As part of the reconciliation process in the Senate, for example, 

there have been a number of offsets in spending identified, as well 

as support for an increase in physician payments next year. That 

is a good foundation to build on. And we will work closely with the 

Congress on getting legislation that is offset, but that does address 

this physician payment problem. 

Mr. BROWN. But the savings aren’t going to be in time to pay for 

the—to prevent the reductions next January. 

Mr. MCCLELLAN. Yes, they are. If they are part of the reconciliation process, that reconciliation process will result in some overall 

savings for the government. That bill that passed the Senate includes some new areas of savings as well as new areas of spending, 

including steps to address the physician payment problem that we 

are talking about today . That is a foundation that we can start 

to build on to get this—to get these payment changes implemented 

ahead of next year. 

Mr. BROWN. You said some things passed in the Senate. The 

Senate cut HMO payments; does the President support cutting 

these HMO payments? 

Mr. MCCLELLAN. The Senate had a number of changes in Medicare payments——

Mr. BROWN. Specifically, I am asking about the HMO payments. 

Don’t go off in——

Mr. MCCLELLAN. No. The administration does not support reducing payments to Medicare advantage plans that now are more 

widely available than ever before, that are saving beneficiaries an 

average of a hundred dollars a month, and that should be available 

to every person on Medicare. 

Mr. BROWN. Of course they are saving beneficiaries a hundred 

dollars a month because we are just dolling out huge numbers of 

tax dollars directly to insurance companies. 

Mr. MCCLELLAN. Well, if you look at the overall numbers, they 

are saving our healthcare system as well. The total payment——

Mr. BROWN. Not according to the——

Mr. MCCLELLAN. Total payments to the Medicare advantage 

plans by beneficiaries, plus the government, is lower than, on average——

Mr. BROWN. Well, Mr. Waxman talked about the PBA 1997, part 

of the whole point was that bringing in Medicare plus choice—is I 

believe what we called it—that was a way of saving money for taxpayers. I think they paid—it was a 5 percent discount, that was the 

money saved. And now it is 100 percent plus. So I don’t know that 

I would say those numbers quite add up that way. I guess my time 

is expired, thank you. 

Mr. DEAL. Thank you. Chairman Barton. 

75

Mr. BARTON. Thank you. 

Thank you, Chairman Deal, and again, thank each of you gentlemen for being here. I have a few editorial comments. 

I listened to the opening statements—even though I was in and 

out, I have a television in my office here—and a number of members alluded to the fact that my good friend, Mr. Dingell, offered 

an amendment on this issue in the reconciliation mark-up several 

weeks ago, and that is absolutely true. What wasn’t mentioned was 

that he probably knew that it wasn’t germane. He put it into play, 

and in trying to expedite the process, I recognized him before I realized that there was a point of order against it. And he kind of 

caught me with my procedural pants down—and that is okay, that 

shows how wiley he is—and so we had the debate because he had 

played by the rules, and he deserved it. We had to defeat that because it wasn’t germane, but I promised at the time that we would 

have a hearing, and if we could get consensus, we would try to 

move something very quickly, and that is the purpose of today’s 

hearing. It is a serious issue, and if we can find a way to constructively and structurally repair it long term, then I am all for it. As 

I said, though, I am not for a short-term fix for another year. 

So I just kind of want to set the record straight that the previous 

mark-up was on Medicaid, and it really wasn’t on Medicare. Having said that, this issue needs to be addressed. 

Dr. McClellan, my first question is pretty straight forward—and 

nobody is really talking about it, but I would think that one answer 

to this problem might be to just allow physicians to do balance billing. What is the administration’s position on that? 

Mr. MCCLELLAN. Well, physician balance billing would be certainly a way of getting additional payments to physicians for quality services they provide, to give physicians an opportunity, where 

they are offering valuable services that people are willing to pay 

for, to get the payments that they think are appropriate. As you 

know, that is not allowed under current law. It is something that 

Congress is——

Mr. BARTON. This committee can change the law. 

Mr. MCCLELLAN. And this committee can change the law. We 

would be glad to work with you on any number of ideas to get to 

a better payment system. I think any step in payment changes that 

get us more toward paying the value of services that patients actually want are steps in the right direction. In doing so, we need to 

make sure that we are preserving access to care for all beneficiaries. So that is, I think, the right overall goal for the payment 

discussions we are having, and we would be happy to talk with you 

about this kind of proposal as well. 

Mr. BARTON. Mr. Hackbarth, do you have an opinion on balance 

billing? 

Mr. HACKBARTH. Mr. Chairman, we have not taken a position, 

we have not looked at that issue specifically. 

Our primary focus has been trying to get Medicare’s payments 

directly to physicians that are both in terms of the level——

Mr. BARTON. Is that something you think you could take a look 

at? 

Mr. HACKBARTH. Sure. We would be happy to take a look at it, 

but we have not looked at it in the past. 

76

Mr. BARTON. Another question—again, I will start with Dr. 

McClellan—what percentage of Medicare beneficiaries have 

Medigap insurance? And in most Medigap policies, do they have a 

provision that they kick in after Medicare has paid whatever it is 

going to pay to the physician? 

Mr. MCCLELLAN. The vast majority of beneficiaries in fee-forservice Medicare have supplemental coverage of one kind or another. Some people get it from Medicaid, some people get it from 

former employers. Many people purchase Medigap insurance on 

their own. It is a lot more expensive generally than the Medicare 

premium itself. And the costs of Medigap have gone up a lot. It 

does fill in the gaps of Medicare payments, so the copayments, uncovered services or covered limits, rather, things like that are 

taken care of by Medigap for the people who have it. 

Mr. BARTON. So what would happen if this 4.4 cut were to go 

into effect? Would the physician who takes a Medicare patient actually see that in real dollars received, or would those patients that 

had Medigap, would Medigap pick that up? 

Mr. MCCLELLAN. Well, the physicians would likely see it, and it 

gets to the point that you were talking about earlier, about the limits of balanced billing. When Medicare reduces its payment rates, 

as a general matter, physicians can’t make up the difference by 

charging more in copayments. The copayment is statutorily set at 

20 percent of the payment rate for the service. So when the payment rate for the physician goes down, the payment rate for the 

copay goes down as well. 

Mr. BARTON. My last question, because my time is expired, have 

physician costs to Medicare been rising at about a 15-percent-ayear rate the last several years? 

Mr. MCCLELLAN. That is true. In the last several years physician-related spending has gone up by close to 15 percent per year. 

We are seeing a growth rate around 12 or 13 percent for the first 

half of this year as well. 

Mr. BARTON. Thank you, Mr. Chairman. 

Mr. DEAL. Mr. Dingell is recognized. 

Mr. DINGELL. Mr. Chairman, I thank you. And I thank Chairman 

Barton for his very kind words about me; it is much appreciated, 

as is the hearing. 

Dr. McClellan, I want to read you a couple of interesting statements: ‘‘CMS believes statutory change is needed to improve physician payments.’’ then we hear this in testimony to be given: ‘‘as you 

are well aware, unless Congress intervenes, the certainty SGR 

method for determining Medicare physician payments will require 

4.4 percent payment cut in 2006 with an estimated 26 percent accumulative cut anticipated over the next 6 years’’. 

And then this words: ‘‘Medicare payments today are about half 

what they were in the 1980’s, even before inflation is taken into account.’’ Then I see these words: In fewer than 50 days, Medicare 

physician payments will be cut by 4.4 percent, followed by significant reductions in year 2012. And rates will not return to their 

2002 level before 2013. In other words, physicians will receive less 

reimbursement in 2013 than they did in 2002 for the same—for the 

exact same procedure. Although reimbursement will likely be cut 

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riod, it is estimated that the cost of providing services will rise by 

close to 20 percent. 

Do you agree with all of those statements? 

Mr. MCCLELLAN. I think all of those statements are generally 

correct. We have got a payment system that is not sustainable. 

Mr. DINGELL. I think you can understand the frustration of this 

committee. We have here before us a situation, which according to 

all accounts, borders on calamitous, and we do not, anywhere, have 

legislative recommendations from the administration to address the 

problem they say is very unfair. 

Two questions: Why do we not have those recommendations? And 

when are they coming? 

Mr. MCCLELLAN. In my testimony, I specifically stated——

Mr. DINGELL. I read your testimonly, and I didn’t find either answer. 

Mr. MCCLELLAN. Well, what it said was, as you know, that we 

would like to address the negative update for physicians and do it 

in a context of providing a differential—report on quality——

Mr. DINGELL. We are having a hearing now. Where are your recommendations? 

Mr. MCCLELLAN. There are a number of proposals that have 

been developed by bipartisan Members of Congress——

Mr. DINGELL. Dear friend, I just want to know where they are 

and when they are coming and what they are. And if you will submit them in writing, we will try to see that they are enacted. If you 

do not have any at this time, I would appreciate if you would say 

so. 

Mr. MCCLELLAN. We don’t have a specific legislative proposal because there is strong bipartisan interest in taking steps like the 

ones that we would support to address this problem. 

Mr. DINGELL. And I note that your interest is piqued by these 

hearings, which comforts me, we may have to have more hearings 

in order to get greater interest on the part of the administration. 

Now two questions, can you please—well, no. We understand 

that this administration is concerned about the taxpayer’s money. 

Can you please explain to me why CMS has ignored MedPAC and 

GAO reports that Medicare payments are excessive? 

Mr. MCCLELLAN. The Medicare advantage payments are bringing 

better benefits and lower costs to people in Medicare. The GAO and 

others have been concerned in the past that Medicare beneficiaries 

who choose Medicare advantage plans are healthier than people in 

fee-for-service Medicare. What we have seen——

Mr. DINGELL. That is a very fine answer, but it doesn’t respond 

to the question. 

Mr. MCCLELLAN. Well, what we have seen——

Mr. DINGELL. Why not? 

Mr. MCCLELLAN. As we have improved the Medicare advantage 

payment systems and the plan availability is that a lot of people 

are enrolling in these plans. 

Mr. DINGELL. I have 30 seconds remaining. I am going to assume 

that you are telling me that you are not interested in those matters. 

Now, Dr. McClellan, can you please explain why Medicare 

HMOs, who only provide service to 15 percent of the Medicare popVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
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ulation yet are responsible for 2.9 percent of the 2006 premium increase, while doctors provide care to a much larger percentage of 

seniors, are only responsible for 2.5 percent of the 2006 premium? 

Now that is one of your actuary’s findings. 

Mr. MCCLELLAN. Well, I think what the actuary’s finding showed 

is that a much larger part of the increase was due to making up 

for reductions in the reserves that were available in the Part B 

trust fund, and that is because spending grew faster than expected 

in the past year, and that in turn was due to the rapid growth in 

physician-related services. So I don’t think that is a complete picture of the causes of the spending growth that you just described. 

Mr. DINGELL. Well, I do not read that in the statement of the 

Medicare actuary, and I must confess I find that they are being 

permitted to cut a fat hog, while at the same time the doctors are 

seeing themselves with their benefits and their payments cut in 

rather startling fashion——

Mr. MCCLELLAN. That is why we need to work together to address this. 

Mr. DINGELL. It is a shameful situation, and I look forward to 

you bringing some solution to us in an early time. Remember, we 

only have 50 days in which to address the matter. 

Thank you, Mr. Chairman. 

Mr. DEAL. Mr. Bilirakis,. 

Mr. BILIRAKIS. Thank you, Mr. Chairman. 

Dr. McClellan, in your written testimony you noted that much of 

the increase—I guess I think I am using your words here—much 

of the increase in Medicare spending cannot be easily explained by 

changes in treatments based on new medical technologies. So my 

question is, to what extent—and you didn’t mention this in that 

statement, that is why I bring it up—to what extent does defensive 

medicine and skyrocketing medical liability premiums contribute to 

this increased spending? 

Mr. MCCLELLAN. Well, it is a good question. And there is considerable evidence that in areas where doctors are facing some 

real——

Mr. BILIRAKIS. I want to make sure that the people on the other 

side of the aisle hear your answer. 

Mr. MCCLELLAN. Where doctors are facing increased pressure 

from liability that cost increases are higher, with no impact or no 

measurable impact on patient health. And you know from the State 

of Florida, where there have been some real problems with liability 

in the past, that not only do you tend to get more services, more 

defensive medical practices, you also start to see real problems in 

access to care as physicians in high-risk specialties are no longer 

even able to practice. We could go a long way toward paying for 

addressing this physician payment problem by implementing the 

kind of commonsense liability reforms that many States have already successfully put into place and that the administration has 

advocated should be put in place nationally to help save money, 

while protecting patients in the Medicare program. 

Mr. BILIRAKIS. Can that information be documented? By that 

what I mean is, how much of these increased costs really—are the 

result of——

79

Mr. MCCLELLAN. There are a number of studies that have documented the relationship between Medicare liability and healthcare 

costs, and also the lack of impact on stricter liability laws on patient health. We would be happy to provide that information to 

you. The administration’s done a number of reports and many independent academic studies on this topic, and I believe CBO in the 

past has scored substantial savings for the Medicare program from 

liability reform, savings that could go right into helping provide appropriate compensation for physicians. 

Mr. BILIRAKIS. Well, Doctor, does the SGR account for this 

spending? 

Mr. MCCLELLAN. The SGR is—the features of the SGR program 

are that you get paid less when overall physician spending goes up. 

And that is the vicious circle that we have gotten into, more use 

of all these specific procedures leads to a decline in payment rate 

for physicians, and you get into a vicious circle. So the SGR problem is—the payment system itself isn’t doing as much as it should 

to help doctors focus on high-quality care, giving the financial support that they need. 

Mr. BILIRAKIS. But I guess what I am wondering is, does it specifically take into account the defensive medicine that is practiced 

and the premiums that are——

Mr. MCCLELLAN. There are some limited adjustments in the 

Medicare physician payment system for malpractice costs, it 

doesn’t take full account of the cost of defensive medicine except 

that it all goes into this overall reduction that is the direct consequence of the increase in utilization——

Mr. BILIRAKIS. But should it not take all that into account? 

Mr. MCCLELLAN. Right. I mean, if increases of utilzation are 

greater in areas where doctors are facing defensive medicine pressures, then that does contribute to the overall SGR scheduled payment reductions. 

Mr. BILIRAKIS. Well, now, in the process of—we all hope we can 

work up a sort of a permanent—if I can call it that—change to the 

overall system so that we won’t have to have these fixes every year, 

et cetera, could that formula, whatever it it might turn out to be, 

be developed to account for this spending? 

Mr. MCCLELLAN. I think it is worth looking into, but I think the 

best solution here is to take a step that has been proven to lead 

to lower costs without any adverse consequences on quality, and 

also better access to care, and that is implement effective liability 

reforms. That would be best way——

Mr. BILIRAKIS. We are having trouble doing that, as you well 

know about, so but the point is it can be done——

Mr. MCCLELLAN. We could try to look at that more closely. 

Mr. BILIRAKIS. I would ask you, maybe sort of as an aside, very 

quickly, all the members of this committee have indicated a concern for the doctors and things of that nature, but I would ask you 

to what extent does the defensive medicine and the skyrocketing 

medical liability premiums contribute to M.D.s leaving certain specialties, leaving certain geographical areas—as we know, moving 

from one State to another for various reasons—leaving the practice 

of medicine? 

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Mr. MCCLELLAN. It is unquestionably a significant contributor. 

Our liability system is a big problem in inside. 

Mr. BILIRAKIS. And there is information available——

Mr. MCCLELLAN. Absolutely, strong information. We have developed indpeendent studies, the American Medical Association, a lot 

of evidence on this. 

Mr. BILIRAKIS. Thank you very much, Doctor. Thank you, Mr. 

Chairman. 

Mr. DEAL. I thank the gentelman. 

As you know from the bells going off, we have a series on the 

floor. We are going to stand in recess and vote and return immediately. I would ask the members to do that so that we may resume 

with the questioning. If you would just wait for us few minutes, 

thank you. Stand in recess. 

[Brief recess.] 

Mr. DEAL. I will call the hearing back to order. 

Mr. Pallone is next to ask questions. 

Mr. PALLONE. Thank you, Mr. Chairman. 

I wanted to ask some questions about the pay-for-performance 

standard or suggestion. I guess I will start with Dr. McClellan. I 

am concerned there will be a lot of pitfalls associated with a payfor-performance model and implementing that initiative. There is 

some risk to physicians. And just to give you some examples, what 

if a doctor uses evidence-based care but fails to meet quality standards, are they penalized for that? Or if a patient refuses a certain 

kind of treatment? I mean just for an example, what about a doctor 

who was possible skimming or cherry picking the healthiest beneficiaries in order to achieve quality measures? What would be your 

response to some of those, particularly the idea of the cherry picking? 

Mr. MCCLELLAN. Those are all important concerns, and it is appropriate to raise them and work on them through the process of 

getting to a better payment system. We have been working closely 

with physician groups and other stakeholders to identify measures 

that could be a basis for supporting quality of care better, measures that are typically led in their development by physician 

groups themselves. 

We have been working with an alliance called the ambulatory 

care quality alliance. It has a lot of involvement from physician 

groups and other health care stakeholders, other health care organizations to make sure that those kinds of concerns are addressed, 

I think starting with physician leadership on what we ought to be 

focusing on in supporting better quality. 

Mr. PALLONE. Let’s use the cherry picking. How would you prevent that? What would you do? 

Mr. MCCLELLAN. You develop measures and develop a system 

that prevents that kind of gaming, that you really do focus on——

Mr. PALLONE. How would you go about it? 

Mr. MCCLELLAN. We are doing this now. We have pilot programs, demonstration programs going on right now, paying physicians more for supporting better care. For example, in our physician group practice demonstration program, physicians get additional payments when their group has better use of preventive 

81

care, better management of the quality of care of their chronically 

ill beneficiaries, when they help save overall costs in Medicare. 

Mr. PALLONE. I understand all that. I am not trying to take away 

from it. 

Mr. MCCLELLAN. It is a good question. 

Mr. PALLONE. I just don’t know how you prevent it. Maybe Mr. 

Hackbarth can answer. 

Mr. HACKBARTH. You can deal with the issue in part by carefully 

choosing the type of measures of performance. If for example you 

used an outcome measure performance, what was the ultimate outcome of care, that kind of measure heightens the risk that physicians could be punished for caring for more seriously ill patients. 

If on the other hand, instead of using ultimate outcomes you use 

measures of clinical process, evidence-based measures of process so 

every patient with this kind of condition ought to get this care 

based on evidence, then you have narrowed down the range of patients that you are talking about, making it a more homogenous 

group and less risk. 

Mr. PALLONE. That’s a good point. 

Mr. MCCLELLAN. If I can be clear about what I talked about in 

my testimony, that we would like to do this in a step-wise fashion. 

First, we need to make sure we have—we know what we want to 

support better quality and work with physician groups on that, and 

that is why we are getting better information on quality, which is 

the best place to begin and then move from there to paying more 

to help doctors deliver better care. 

Mr. PALLONE. Let me ask Mr. Hackbarth another thing. Pay-forperformance I think should apply to both physicians and HMOs, 

but is there any reason that we are not moving to a pay-for-performance system for HMOs? I mean, I see that it seems like it is 

being oriented toward fee-for-service as opposed to HMOs, and how 

soon could you implement something for HMOs? 

Mr. HACKBARTH. In fact, MedPAC’s first recommendation in this 

field of pay-for-performance was that the concept be applied to 

HMOs and private plans, and that was a couple of years ago now. 

So that was actually our starting point, and we started there because the way the industry is developed, there is a consensus set 

of measures of basic performance for private plans that we thought 

Medicare could quickly adopt and piggyback on through established 

mechanisms for collecting that information and verifying it. I think 

the HMOs should be at the front of the list. 

Mr. PALLONE. So are you moving toward the HMOs at the same 

time with the individual physicians? 

Mr. HACKBARTH. Our role in this process is simply to make recommendations to the Congress and to CMS. We think it is very important that there be measures of performance for private plans. 

As I said in my opening comment, MedPAC believes that there is 

an important role for private plans in Medicare. We think that 

some private plans can offer Medicare beneficiaries a high value for 

both the government’s investment and beneficiaries’ payments, and 

by high value, I mean a good mix of efficiency and high quality. So 

we think it is a great program, but not all private plans are created 

equal. Some are better than others. And so we think it is important 

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for the program, important for the beneficiaries that we have a 

pay-for-performance mechanism that rewards the superior plans. 

Mr. PALLONE. Okay. Thank you. 

Mr. DEAL. The gentleman’s time has expired. 

Dr. Norwood. 

Mr. NORWOOD. Thank you very much, Mr. Chairman. 

I know we have little time, but let me just do a little bit of history on this. In the beginning, we decided that if I took an x-ray 

of a patient, that the Government would pay me for that x-ray. Lo 

and behold, we find out this is costing a lot of money, people are 

going to use this free service, so now, why don’t we set the price 

under usual and customary? So we go to that feature. Not only are 

we going to pay for the x-ray but tell you what we are going to pay 

for it. 

That didn’t work because people kept using the service, and we 

go to a system called SGR. Now, in 1997, in the BBA, a lot of people were patting themselves on the back about this great new payment system. Well, my point of view, it has been a disaster. In 

2002, when we applied SGR, we cut the payments 5.4 percent. 

Then, in 2003, Congress turns around and adds an increase of 1.6 

percent. Then Congress, through our Medicare Modernization Act 

of 2003, we increased the payments again 1.5 percent for 2004 and 

1.5 percent for 2006. 

Now we are looking at this thing that we all patted ourselves on 

the back about, SGR, and we find that we are going to have next 

year a 4.4 cut. In addition to that, probably if you project out for 

several years, we are looking at probably a 26 percent cut. Well, 

everybody at CMS and Congress says that is a terrible idea; we 

really shouldn’t do that. We have got to find another way to pay 

our physicians. So now we are coming up with another idea of how 

we should pay, certainly not in my mind concerning ourselves with 

what actual costs are, what actual payments ought to be, but we 

are going to do this thing called pay-for-performance. 

Now it is beyond me what that means because you already pay 

me to perform when I take that x-ray. Granted, you pay me what 

you set the price for, but you do pay me to perform. So what does 

pay-for-performance mean. Surely, you can assure me it doesn’t 

mean pay for nonperformance. I hope we are not going there with 

that. Yes, that is not right; we are not going to do that; are you? 

You are not going to pay me so I won’t take x-rays; are you? 

Mr. MCCLELLAN. No. 

Mr. NORWOOD. Good. So we aren’t really talking about performance, so what are we really talking about here? Are we talking 

about, when I take my x-ray, did I take a good x-ray? Is that what 

we are talking about? Or are we talking about, you are going to 

pay me because I read that x-ray well? Are we talking about the 

quality here? Is that what you are going to pay me now, according 

to the quality of what I do? Is that what I am hearing? 

Mr. HACKBARTH. Yes, in a word. 

Mr. NORWOOD. A word is all I need. You are going to pay me for 

the quality. Now who is going to determine the quality of my x-ray? 

Mr. HACKBARTH. The idea is to pay for quality as determined by 

evidence-based standards of care, not standards of care developed 

by MedPAC. 

83

Mr. NORWOOD. So we are going to the radiologist and saying, 

guys, we would like to you to work with us; why don’t you set up 

evidence-based standards that all radiologists should perform? In 

other words, if you do A, B and C, then that is a quality procedure. 

Is that where we are? 

Mr. HACKBARTH. One of the parts of this whole process that we 

think is very important is to engage with the various specialty societies and experts in the different specialties in determining what 

those standards of performance ought to be. 

Mr. NORWOOD. Is that what quality means? If I do A, B and C, 

if I follow these three protocols, then am I considered doing a quality job? 

Mr. HACKBARTH. Typically, the way a standard would work, it 

would be for a particular set of patients. This is evidence-based recommended care; was that provided? 

Mr. NORWOOD. What if I do A, B and C and I misread the x-ray 

and don’t pick up that malignant tumor that later kills the patient. 

Now, have I done a quality job? 

Mr. HACKBARTH. One of the key issues—and this gets back to the 

earlier question that Mr. Pallone was asking about—is, what are 

the units that we are trying to measure to apply the quality standards to? And for the reasons that he was alluding to, initially, I 

think we are going to be talking about relatively closely defined experiences, and so it is going to be, did certain tests happen? Were 

certain results achieved for a particular type of patient as opposed——

Mr. NORWOOD. So it is not just quality but outcome, too. 

Mr. HACKBARTH. In fact, that was my point, as opposed to trying 

to say, well, the patient died; we are going do reduce the physician’s fee. Measuring ultimate outcomes in assessing, adjusting for 

differences in risk is very technically difficult to do so that is not 

where we would start. We would start in a much more confined, 

focused way. Are evidence-based standards of care applied in the 

care of a diabetic or a patient with congestive heart failure? 

Mr. NORWOOD. Mr. Chairman, are we going to have another 

round with these? 

Mr. DEAL. It depends. We have got a second panel waiting. 

Mr. NORWOOD. Can I ask for a last question then if you are not 

going to do another round? 

Mr. WAXMAN. Do the same for our side. 

Mr. NORWOOD. Then I yield back my time. 

Mr. DEAL. Ms. Capps. 

Mrs. CAPPS. Thank you, Mr. Chairman. 

Dr. McClellan, I hope by now you are aware the doctors in my 

congressional district, in fact in ten counties in California, face a 

very serious problem. Because of the way the geographic practice 

cost index lines are drawn in California, Santa Barbara, San Luis 

Obispo and eight other counties are lumped in with many other 

counties with significantly lower costs. This grouping into what is 

called locality 99, or the rest of California, means that the payment 

rates are artificially lower because they are averaged with the 

lower-cost counties. 

I have been trying to get CMS to address this and fix it for years. 

I brought your predecessor to meet with our medical societies. We 

84

have had numerous meetings in San Francisco and were told that 

a statewide fix needed to be proposed. 

Last year, we submitted a proposal from the California Medical 

Association. This proposal would have fixed this problem for all ten 

counties, protected the other counties in locality 99 and budgetneutral, yet CMS refused to fix it. 

This year, CMS, using the same authority we suggested you use 

last year, proposed to fix just two of the counties, Sonoma and 

Santa Cruz, leaving the other eight counties high and dry, in fact 

cutting their payments out of that same fix. Not surprisingly, there 

was negative feedback about leaving out these other counties. 

In a recent meeting, it was suggested that MedPAC would look 

at this issue, but it would not resolve the matter until 2008. This 

is completely unacceptable. So I want to know now, why hasn’t 

CMS taken this matter seriously? The president of the California 

Medical Society was in my office yesterday. Doctors in California 

are waiting for your answer. Why didn’t you accept the CMS proposal when it was offered? And why did you try to make a fix for 

just two of the counties? 

Mr. MCCLELLAN. First of all, Congresswoman, as you know, I 

care deeply about this issue as well and am very frustrated, too, 

with how things have worked out. I have been a practicing physician in California. I know a lot of the people who are directly affected by a payment system that isn’t working as well as it should 

and have been working hard over the past year that I have been 

in this job to address it. 

As you said, the approach to solving this problem requires a 

change in the way Medicare allocates funds from county to county. 

The way that we make those regulatory changes is we look to the 

State medical society to give us input as to how the allocation 

should be changed. 

Mrs. CAPPS. Which did happen. 

Mr. MCCLELLAN. When we made our proposal in the regulation 

this year, we put in a specific proposal about two counties including Santa Cruz and Sonoma. 

Mrs. CAPPS. But the proposal submitted was for ten counties. 

Mr. MCCLELLAN. We left open any other proposal. We specifically 

said any supportable proposal that the medical society can get behind and that we can implement administratively, we would support. 

Mrs. CAPPS. It was done. 

Mr. MCCLELLAN. Let me tell you the comment we received from 

the California Medical Association—I am going to read from a letter signed by Dr. Sexton and Dr. Lewen. What they said was: We 

support a legislative solution at a cost of $114 million a year to this 

problem. 

They specifically rejected our two-county proposal. They rejected 

any suggestion for an eight county or any other administratively 

implementable proposal and said that instead what they want is a 

legislative solution because of its great potential for enactment, and 

I’ll quote from them: This is the only, the only gypsy solution that 

we are supporting at this time. That was the comment that we received on our opening the door to any proposal that could be implemented. 

85

Mrs. CAPPS. Excuse me, with all due respect, you have not answered. Why you did not accept that original proposal? 

Mr. MCCLELLAN. Because the California Medical Association said 

that they did not want an——

Mrs. CAPPS. The one they submitted regarding ten counties. 

Mr. MCCLELLAN. I am reading from their letter. 

Mrs. CAPPS. That is in response to the two counties that were 

chosen. I am asking for an answer regarding the initial proposal 

by CMS. 

Mr. MCCLELLAN. We mentioned a two-county proposal in the 

rule. We also said we would take any other proposal. 

Mrs. CAPPS. Excuse me, but you didn’t answer the question of 

why you didn’t——

Mr. MCCLELLAN. If we had gotten a letter from the CMA on the 

proposed regulation saying we want this ten county proposal implemented, we would have implemented it. 

Mrs. CAPPS. That was the original proposal. In response to your 

fixing two counties——

Mr. MCCLELLAN. They may have told you something in your office, what they told us in formal comments on the regulation was 

the only solution they want to the gypsy problem is legislative; 

something that we cannot do. 

Mrs. CAPPS. Well, I see my time is up. 

Mr. MCCLELLAN. I am very frustrated. 

Mrs. CAPPS. This is very frustrating to know that there has been 

this impasse over several years now. This is your job to do. CMS 

is responsible for this. Now I am bringing this up today because 

now they are going to get over 4 percent cuts on top of this. 

Mr. MCCLELLAN. It is not an acceptable situation. All we needed 

was any proposal this year on our regulation that we could do administratively. We could do a ten county, two county, but all we got 

in comment from CMA was saying that they wanted a legislative 

solution and a legislative solution only. I don’t know what they told 

you in their office, but that is not what they supported in terms 

of our regulation. 

Mrs. CAPPS. I yield back. I will be in touch. 

Mr. DEAL. The time is expired. 

Mr. MCCLELLAN. We should be in touch about this. It needs to 

be fixed. 

Mr. DEAL. Mr. Shimkus. 

Mr. SHIMKUS. Thank you, Mr. Chairman. 

Health care financing issues, whether it is the government-run 

programs or it is for private profit, if we don’t get the consumer engaged in addressing issues of cost and quality, we are going to continue to follow these battles, and that is just an opening statement 

based upon kind of what the Chairman said about reform. Reform 

is not a bad word. Reform is needed because with the Baby Boom 

generation and people living longer, we can’t sustain this. We are 

going to continue to have these fights about funding until we get 

people engaged. 

So I know it is a challenge. We are working through it. I have 

talked with professions from all aspects of the health care arena, 

so I applaud you being in the gap and trying to take the slings and 

arrows and trying to move public policy. Now, after saying those 

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nice things I will yield the balance of my time to Dr. Norwood who 

will continue to ask you some diligent questions. 

Mr. NORWOOD. We were talking about the failure of SGR. Eight 

years ago, we were celebrating it. Today we are trying to solve the 

problem, it seems to me, of two things. One is, how do we fairly 

reimburse our physicians so that they will keep treating Medicare 

patients, a thing that comes to mind to me might be Medicare economic index is probably a good start. But we are confusing that 

with another thing we want to solve which is quality of care, and 

you are basically, I think, saying that we want to pay you more if 

your outcomes and your quality is better. 

Now why mix those two together? Why not set aside how we 

want to fairly pay our physician community? Then if you want to 

experiment with this thing called pay-for-performance—I presume 

it is an experiment—you are doing a demonstration project. I know 

that the private insurance companies are doing it where they can, 

and that is not a good sign at all when they do that because there 

is only one reason they do that, and that is to protect their bottom 

line. We know that they are doing it in Great Britain. So we ought 

to maybe at least know enough to know some of the unintended 

consequences which we are going to have with pay-for-performance. 

So, gentlemen, why not solve this problem and then play around 

with your academic games of trying to determine how you get people to practice so the quality of it suits you or suits somebody over 

at CMS or suits somebody who is going to determine what is a good 

outcome or what is a quality surgery. I fail to understand mentally 

how it can work. 

And, Dr. McClellan, if you know, I have got 1 minute and 54 seconds for you to tell me how this can possibly work without terrible 

consequences. 

Mr. MCCLELLAN. I am looking forward to taking some more time 

with you beyond this time to work on this issue, but you are absolutely right that we shouldn’t be playing academic games. This is 

patients’ care, patients getting access to needed care and doing it 

at a cost that they and taxpayers can afford. We would like to take 

some steps to address the payment reductions that are coming 

now. You have got legislation to do it. We want to work with you 

on proposals to address this payment reduction. That costs a lot of 

money. 

Mr. NORWOOD. I understand it costs a lot of money. The Senate 

is over there saying, gosh, we are going to pay you costs, but for 

gosh sakes, we are not going to do that unless we do pay-for-performance. We have got a bill out of Ways and Means that says, we 

don’t really want you to have that 4.4 cut but we are going to hold 

the axe over your head to do this pay-for-performance. You keep 

talking about working with these different physician groups. You 

know why you are working with them? Because they don’t have 

any choice. When you come and say, we are going to put in payfor-performance, do you want to play, of course, what choice do 

they have but to say we don’t like this but——

Mr. MCCLELLAN. I have heard from a lot of physician groups that 

agree that the cost growth in Medicare spending, 14 percent, 15 

percent a year, we can do better than that. They can do better than 

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tion of physicians needing financial support for doing what they 

think is the right thing for patient care. They are not getting that 

support now. 

Internists aren’t getting support for taking simple steps to prevent complications for their patients. Surgeons are not getting support for taking steps that prevent complications operatively in the 

services that they deliver. 

Mr. NORWOOD. Excuse me, but we thought we were getting there 

with SGR, and we didn’t, period. And now we think we can get 

there maybe with this. All I am asking you to do is don’t go out 

there experimenting. 

Mr. MCCLELLAN. I agree with that. 

Mr. NORWOOD. And explain to everybody—if somebody asked me 

what pay-for-performance is, I still don’t know what to say. 

Mr. WAXMAN. I ask unanimous consent he be given an additional 

minute. I think he is getting on to a very good point. 

Mr. DEAL. Without objection. 

Mr. NORWOOD. Henry, I can’t believe it. All I am trying to get 

you to agree to is stop forcing these groups—they want to work 

with you because, yes, we can do better, and I think you are right, 

I think we can do better, too. But if we don’t watch out, we are 

going to turn around and codify into law a new payment system 

called pay-for-something that could well be disastrous. 

Mr. MCCLELLAN. Just to be clear, what I said at the outset, that 

what we supported was addressing the negative physician update, 

No. 1; No. 2, getting some better data, some better information 

from the physicians on how we could provide better support for 

their delivering quality care. Those are the short-term steps. I 

think we do need to get to a better long-term payment system but 

not via experiments; via confidence that we are going to support 

physicians in delivering better care at a lower cost. 

Mr. NORWOOD. Would you agree not only do we not need to do 

a 4.4 cut, that we need to determine how we in the future are going 

to pay physicians? 

Mr. MCCLELLAN. The best way to start that process is to get 

some better information from the physicians on the kind of care 

that they want to provide and how we can best support it. That is 

what I essentially proposed to do earlier. 

Mr. NORWOOD. That is what we will spend our time talking 

about if that is indeed in the best way, because maybe it isn’t. 

Mr. MCCLELLAN. We need to learn more and keep working to get 

to that better payment system because you are right, the ones up 

until now haven’t done the job. 

Mr. NORWOOD. Maybe they will work with you a little better if 

you will take their feet out of the fire and say, look, we know you 

need to be paid at least cost for what you do, and make that arrangement and put it in the law and then let’s sit down altogether 

and talk about how we can decrease expenses and increase quality, 

doing these other things that you are suggesting. Don’t combine 

them. 

Mr. MCCLELLAN. I appreciate that. We are under a lot of—the 

growth rates that we have seen in physician-related spending, the 

growth rates in Medicare have made it a real challenge to not take 

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ment to also help physicians improve quality and avoid unnecessary costs. That is just a constraint that we are operating under. 

The kind of bills that would just do the economic index update as 

you said would be $180 billion over 10 years or more. That is just 

a constraint we are going do have to work with. 

Mr. DEAL. The gentleman’s time has expired. 

Mr. Allen. 

Mr. ALLEN. Thank you, Mr. Chairman. 

Dr. McClellan, Mr. Hackbarth said earlier that the MedPAC’s 

first recommendation about pay-for-performance was to apply it to 

HMOs. He said the industry has developed seven measures for performance, something like that, so my question to you, I have been 

here long enough so I can’t not ask this question, has the administration decided that it is better to experiment with a physician 

community than with the HMO community? If the answer to that 

is, no, then why not? If pay-for-performance is such a good idea, 

why not try it out first on HMOs and Medicare? 

Mr. MCCLELLAN. Absolutely, we are not going to experiment first 

with doctors. In fact, we are already providing information on quality of health plans to people in Medicare to help them make their 

choices about the plans. The Medicare Advantage Plans exist 

today. The HMOs report on the quality of care they provide. We 

are expanding these reports to give people even better information. 

Mr. ALLEN. But you don’t have a pay-for-performance. 

Mr. MCCLELLAN. There is a performance system in there in that 

if a plan is not delivering good care at a good price, people are not 

going to sign up. They will stay in traditional Medicare or Medicare 

Advantage Plan that has a lower premium. We have already got 

a system in place for Medicare Advantage Plans where they get 

paid more if—the only way they can get paid more is if people want 

to pay for that service. It is not bad. I think some of the members 

here today have talked about giving physicians that same kind of 

opportunity. 

Mr. ALLEN. Those of you who from rural States don’t think it is 

such a grade model. We don’t have those plans. We don’t miss 

them, frankly, because we think the fee-for-service plan is cheaper 

and more effective. But I will say this, I have trouble with the fact, 

you said earlier that Medicare Advantage Plans provide better benefits at a lower cost. Well, yeah, I mean, they are being overpaid. 

That is the analysis. So the equitable problem, people in Maine are 

in Medicare, too, just like everyone else, they pay the same premiums. Why should money go to people in more urban areas to 

give them better benefits at a lower cost and leave out those areas 

which don’t have the Medicare Advantage Plans? I am not asking 

for Medicare Advantage Plans. I am simply saying, it seems to 

make more sense to me to do what MedPAC constantly urges you 

to do which is take some account of the equity between those who 

have those plans and those who don’t and not overpay the HMOs. 

Let me just deal with one question that I think is important. It 

is also related to the smallness, the small size of—not just physicians’ offices in Maine but around the country. You said that this 

new physician voluntary reporting program is going to ask physicians to voluntarily report to CMS on a number of evidence-based 

quality measures. These physician payments will not increase or 

89

decrease based on that individual reporting, but, frankly, there is 

a cost involved to the doctors themselves and their offices. There 

may be increased costs of overhead, information technology upgrades, the cost of new diagnostic equipment, all of that. 

So if we are going to do pay-for-performance, we have got to remember that the average physician’s office is fairly small. Threequarters of them are eight physicians or fewer, and so, who is 

going to pay? I mean, is CMS’s view that the pay-for-performance 

should be an add-on to the current reimbursement rate or should 

be taken out of the physician reimbursement as it exists today? 

Mr. MCCLELLAN. What I talked about earlier in my testimony 

was, we would like to start with paying for reporting, paying more 

for reporting on quality-related issues where the physician community, other experts have all come together and said, this is good 

evidence-based care that we should be seeing more of in the Medicare program, and we would pay more for that and——

Mr. ALLEN. That would be an add-on? 

Mr. MCCLELLAN. Right, a larger update for physicians who report on quality care. Then, as we see what those measures of quality show, as they help us and help physicians identify better ways 

to deliver care at a lower cost, we can make further reforms in our 

payment systems to support that. So it is a step-wise process, and 

there are some costs involved. We are right now working with some 

physician groups on a voluntary system for reporting to help us 

find the least burdensome way, the easiest way for small office 

practices, including rural practitioners, to provide this information. 

Right now, we can’t rely on electronic records because doctors don’t 

have them. 

Mr. ALLEN. Mr. Hackbarth, I have very little time, but do you 

have any comments on that? 

Mr. HACKBARTH. On the issue of small practices? Just two quick 

comments. One is that I don’t think we should assume that smaller 

practices including practices in rural areas will fair poorly under 

pay-for-performance. When you look at the Nation as a whole and 

you look at how States, various States’ information on quality 

measures, in fact, many of the highest performers are in the States 

with large rural areas. They have lower costs and higher quality. 

Mr. ALLEN. Often lower reimbursement, too. This would address 

that. 

Mr. HACKBARTH. For their performance, their high quality, they 

would get additional funds. On the issue of investing in clinical information systems, which we think is a very important step forward for a health care system to get the value that Medicare beneficiaries deserve, as we see the problem right now, physicians and 

other providers have little incentive, too little incentive to invest in 

valuable clinical information technology. Capital is scarce so what 

do they spend it on, things that are going to generate economic returns, bring in new patients, new services, new equipment. So 

medical information technology, automated medical reports don’t 

produce those things. 

Under a pay-for-performance system though, you start getting 

paid for quality, and so your investment decisions are different, 

and so, as opposed to buying a new piece of diagnostic equipment, 

you might say I can get a return from improving patient care, and 

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that is the sort of change in mindset that we need to try to encourage across the whole health care system. 

Mr. DEAL. The gentleman’s time has expired. 

Dr. Burgess. 

Mr. BURGESS. Thank you, Mr. Chairman. Just to continue along 

that line of thought, a wonderful opportunity was missed with 

Y2K, and as a practicing physician who was told you better upgrade your stuff or else you are not going to be open for business 

January 2, we had to make those hard decisions. It was a decision 

to buy a new sonogram machine and deliver more care or buy a 

computer system. And unfortunately, there was very little leadership from the administration at that time, no leadership from HHS 

to help doctors offices decide to buy equipment that would interface 

with what HHS was going to be using down the road, what hospitals might be using down the road, so our office, a five-physician 

office went out and spent $60,000 on a computer system only to 

find out the next year that ours was compatible with what the hospital next door was using. So it was an opportunity lost, and certainly, we ought to be on the lookout for new opportunities as they 

come forward. 

That is why I am so glad that Dr. McClellan is in the office he 

is in. I think, for the first time, we see the marriage of science and 

technology and what medicine is supposed to be about and Medicare trying to deliver what medicine is supposed to be about in the 

Medicare system. 

Gosh, we heard from Chairman Barton earlier, and he mentioned 

the same words I used, pay-for-performance—I am sorry, balanced 

billing. It was wonderful to hear those words from the Chairman’s 

lips, and heard the ranking member Mr. Dingell, he told you, if you 

go back to the White House and get a proposal and bring it back 

here, he will pass it. 

So I would ask you to go to the White House, get a proposal that 

has balanced billing in it, bring it back here; we will get Mr. Dingell to vote for it, and we will be happy to carry it on to the full 

House. 

Mr. MCCLELLAN. I am not quite sure of the last part of that, but 

we certainly want to work with him. 

Mr. BURGESS. On the issue of pay-for-performance, and I am concerned like Dr. Norwood is, I know we have to have better support 

for quality care. Do you think from the pilot studies you have done 

so far that you can in fact deliver on that promise to make—bring 

that to fruition without additional burdensome paperwork and regulation that would be shuffled on to the backs of the practicing 

physicians? 

Mr. MCCLELLAN. We are seeing some promising results. I mentioned earlier that in our hospital payment system we are doing a 

demonstration program with the Premier Hospital System where it 

is working, saving lives; it is a lot better way to spend the money. 

Our physician demonstrations are a little bit earlier along, but we 

have some in place already where when you start paying for better 

results for patients. You start getting more investments in things 

like e-mail reminder systems or interoperable electronic health care 

records, systems that can help patients stay well, stay out of the 

hospital, maybe even stay out of the doctors office, but until now, 

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Medicare would pay less in those circumstances so the physician 

practice couldn’t get the resources they needed to provide these 

kinds of services. We are starting to see that, but the evidence is 

pretty early on, and there are a number of programs being implemented in the private sector supported by employer groups, by physician groups, not just by the insurers that Dr. Norwood mentioned, that are already showing some promising results in terms 

of better quality of care at a lower cost. 

We need to learn more, but I think there is enough to show that 

we can start moving down this road toward a better payment system that supports doctors and what they really want to do, which 

is provide better quality care and do it at the lowest possible cost. 

Mr. BURGESS. I think to channel all of the IT stuff that has to 

deal with Medicare, Medicaid, VA and try to have one platform 

that works in all venues, there you have captured 50 percent of the 

health care market in this country. 

One of the things that really concerns me, because my district is 

so diverse, one of the things that concerns me about pay-for-performance is, we always hear about health care disparities, different 

ethnic groups having different outcomes, and it is something we in 

medicine should focus on and try to correct, but I see pay-for-performance and young people getting out of their residencies, do I 

want to practice in the intercity or suburbia? And my patients will 

be better educated and have greater health literacy in suburban 

markets. And if I go in the intercity, I am going to be penalized. 

Are we addressing that in the pay-for-performance platforms? 

Mr. MCCLELLAN. Absolutely. We would not want to support any 

payment reform that harms the people who have the most to gain 

in terms of better quality care, facing some of the biggest quality 

problems and access problems right now. Our payment system 

should support efforts to get better quality care to where it can 

make the most difference and that is why I think we do need to 

be careful as many of the members here have emphasized and 

adopt steps that really are going to lead to better care and not just 

cherry picking. I think there are promising steps. 

Mr. BURGESS. One last thought, and Mr. Bilirakis was on the 

money, we do practice defensive medicine. You can’t walk into the 

emergency room on a Friday night with a headache and not buy 

an MRI. We need to work on that. And if you can provide us some 

additional data, the last data is 1996, a study in Stanford, California, that you might be familiar with, but I bet in 2005 or 2006 

dollars, that savings would be much greater. 

Mr. MCCLELLAN. There is plenty more evidence. 

Mr. BURGESS. I would like to thank you for all the work you have 

done on the prescription drug issue, part B rollout. I have done several town halls in my district. This is not hard; people can understand it. Health care is complex, and it is not a sound bite, but you 

can impart that information if a Member of Congress is willing to 

do it and willing to take the effort to do it. Their constituents, their 

seniors will benefit. 

I yield back, Mr. Chairman. 

Mr. DEAL. The gentleman’s time has expired. 

Mr. Waxman. 

Mr. WAXMAN. Thank you, Mr. Chairman. 

92

Dr. McClellan, you are the head of CMS. I assume that in that 

capacity you have to deal with Department of HHS and people at 

the White House; is that right? 

Mr. MCCLELLAN. Yes. 

Mr. WAXMAN. So you have communications with them which 

would, I assume, mean conversations, memos, e-mails; is that 

right? 

Mr. MCCLELLAN. When there is an important topic that we are 

working together to address, yes. 

Mr. WAXMAN. Now when you are communicating to people in 

your bureaucracy—obviously you need to communicate with them. 

Do you communicate through e-mails, conversations and memos to 

them? 

Mr. MCCLELLAN. Depends on the issue. I do talk with my senior 

staff informally about whatever issues are coming up. When there 

is a decision that comes to me, I will send back a response if something like that arises. 

Mr. WAXMAN. I want to ask you about the time you were commissioner of the Food and Drug Administration because the General Accounting Office just came out with a report saying that the 

decision on plan B—the science was pushed aside and the application was rejected because even though the expert panel and the 

professional reviewers at FDA wanted it, they were told that others 

in FDA didn’t want that decision. Obviously, the decision was 

made, or a decision was in fact made after you left FDA, but they 

were reviewing it during the time you were at the FDA. Did you 

have any communications with any official at the White House 

about this plan B issue? 

Mr. MCCLELLAN. First of all, I am not sure that the GAO report 

quite said what you characterize it as, and I want to be very clear 

that I did not make a decision nor did I recommend a decision on 

plan B. And as you said, that decision was made; the release of the 

non-provable letter came 2 months after I left. 

Mr. WAXMAN. That is absolutely right. But my question to you 

is, while you were the commissioner of the Food and Drug Administration, did you have any communication with any official at the 

White House about plan B? 

Mr. MCCLELLAN. Not any specific communications about information that wasn’t publicly available and only occasional communications at that. Certainly nothing related to the plan B decision 

or any recommendations on plan B. 

Mr. WAXMAN. Were there any communications between you and 

people at the Department of Health and Human Services on this 

question? 

Mr. MCCLELLAN. Same thing. 

Mr. WAXMAN. That? 

Mr. MCCLELLAN. It didn’t involve information that was already 

public or publicly available and nothing that involved a decision or 

a recommendation on a decision. 

Mr. WAXMAN. When you had communications with somebody at 

the White House, who would that have been? 

Mr. MCCLELLAN. I don’t even have any specific recollections 

about specific conversations related to plan B because it did not 

come up very often. That was not a decision that was made while 

93

I was there, and the only information that I received on it was information that happens generally in the course of being the commissioner of Food and Drugs where you need to be familiar with 

all of the major issues and the science behind all the major issues 

at your agency. 

Mr. WAXMAN. Were there any communications between other officials at FDA and anybody at the White House about plan B? 

Mr. MCCLELLAN. I don’t know anything about any other conversations, and let me just be very clear about this, there was no 

decision made while I was there. I did not make any decisions or 

any recommendations, and I did not have any communications 

making any decisions or recommendations. 

Mr. WAXMAN. Why did you refuse to talk to the GAO. They wanted to contact you and they said: We attempted to interview the individual who had been the commissioner of FDA until March 2004. 

We were unable to arrange an interview. He did not respond to 

written questions we submitted. 

Mr. MCCLELLAN. I did respond to the GAO with a written response that said basically what I have told you just now. 

Mr. WAXMAN. Why wouldn’t you make yourself available for an 

interview? 

Mr. MCCLELLAN. Because my written response plus all the materials that the GAO had requested from the agency covered what 

was in their questions. 

Mr. WAXMAN. So it is your testimony that you don’t know of anybody in the White House, the Department of Health and Human 

Services that communicated to anybody at FDA on the plan B 

issue. 

Mr. MCCLELLAN. I didn’t have any communications about a plan 

B decision or a recommendation. 

Mr. WAXMAN. That wasn’t my question. Do you know—listen to 

my question first. Do you know of anybody that received a communication from the White House or the Department of Health and 

Human Services about the plan B issue? 

Mr. MCCLELLAN. I wouldn’t know about any specific conversations that other people had about recommendations or decisions. 

Mr. WAXMAN. Well, you wouldn’t ordinarily, but did you know, 

do you know of any such conversations or communications? 

Mr. MCCLELLAN. I, again, did not have any communications 

about——

Mr. DEAL. The gentleman’s time has expired. 

Mr. WAXMAN. Mr. Chairman, everybody has been given——

Mr. DEAL. Everybody has asked questions with regard to the 

subject matter of this hearing. 

Mr. WAXMAN. I would ask 1 minute. 

Mr. DEAL. Your time has expired. I object. 

Mr. WAXMAN. On the subject matter of the issue. 

Mr. DEAL. You used your time on a subject matter not the subject of the hearing. Maybe one of your colleagues will yield to you 

as they yielded to Mr. Norwood. 

Mr. WAXMAN. You have been very lenient with your members on 

that side of the aisle. You have not given me any leniency. I would 

request it. 

94

Mr. DEAL. I would have if you had asked questions relating to 

the subject matter of this hearing. These gentlemen have given 

their time. There is a second panel waiting to testify. We are about 

to have another series of votes and interrupt this hearing again, 

and if one of your colleagues wishes to yield their time——

Mr. WAXMAN. They have been waiting a long time. I want to ask 

1 minute of questions on the subject matter of this hearing. 

Mr. DEAL. Are there objections? 

Mrs. CUBIN. I object. 

Mr. DEAL. Objection is heard. 

Mrs. Cubin, you are recognized for questions. 

Mr. WAXMAN. Better stay within 5 minutes. 

Mrs. CUBIN. Thank you, Mr. Chairman, and I would like to 

apologize to the panel for the fact that political questions are being 

asked here today rather than issues related to the subject for 

which we are here, which is how to build a more efficient payment 

system for the benefit of doctors and especially patients. Unfortunately, the other side of the aisle seems to be using this tactic on 

every issue that comes before the Congress to the detriment, I 

might say, of the public and of the country as a whole. 

Dr. McClellan, I will start with you. You are an advocate of payment for purchase—or pay-for-performance; excuse me. Do you believe that Congress should appropriate additional funding in order 

to implement pay-for-performance? Or do you think we should redistribute the funding in order to reward high-performing doctors? 

Mr. MCCLELLAN. It is a good question, and there are a lot of proposals out there that would go both ways. The best approach I 

think is we are going to need to keep working with the Congress 

and with the medical community. I do think, in the short run, the 

most important thing to do is to take some steps to stabilize the 

payment system and do it in a way that moves toward an effective 

performance-based payment system, however exactly that works 

out. And that is why, earlier in my testimony, I talked about addressing the negative physician update and paying more to physicians who report on quality of care and help us develop better evidence on the best way to pay for physicians and other services in 

the Medicare program. 

Mrs. CUBIN. Thank you. 

Mr. Chairman, the committee is not in order. Mr. Chairman, the 

committee is not in order. 

Mr. DEAL. The committee is not in order. Committee will be in 

order. 

Mrs. CUBIN. Thank you. 

Mr. DEAL. You may continue. 

Mrs. CUBIN. Mr. Hackbarth, going back to you, MedPAC identified in-office imaging services such as MRI, CAT scan as growing 

exponentially between 1999 and 2002. Are in-office imaging procedures subject to the same quality and safety standards as hospital 

imaging services in relation to maintenance and personnel training 

and so on? 

Mr. HACKBARTH. No, they are not. 

Mrs. CUBIN. Do you think lack of such standards could lead to 

improper utilization of imaging procedures and possible over-exposure of patients to radiation? 

95

Mr. HACKBARTH. We are concerned about that. Let me emphasize, I think that a lot of wonderful things are happening with imaging. The capabilities to improve care for patients are just mindboggling, and so this is an area where we think much of the increase in volume may well be appropriate and helpful to patients. 

We are concerned, however, about the migration of imaging from 

arenas where there are clear standards and oversight into places 

like physician offices where that is not the case, and we believe it 

is in the interest of both the patients and the program that we assure that the imaging that is done is of high quality and not dangerous to patients, and that requires some new rules. 

Mrs. CUBIN. Would you be opposed to Congress requiring the 

Secretary of HHS to implement quality and safety standards for 

imaging services if it would help off-set implementation costs of 

physician SGR increase? 

Mr. HACKBARTH. We have in fact recommended that such standards be set. 

Mrs. CUBIN. Would the implementation of quality and safety 

standards reduce improper utilization or over utilization? 

Mr. HACKBARTH. The main reason for doing them is to protect 

the quality of care and patient safety. It is possible that there 

might be some reduction in utilization, but that is not the principle 

reason for doing it. 

Mrs. CUBIN. Do you think that the standards would produce any 

significant Medicare savings? 

Mr. HACKBARTH. Again, there could be some. There might be 

some test that would have been done that won’t be done in the future because of quality standards. That is not the principle objective, however. The principle objective is a quality objective. 

Mrs. CUBIN. Thank you, Mr. Chairman. So as not to go over my 

time, I yield back my 33 seconds. 

Mr. DEAL. I thank the gentlelady. 

Ms. Eshoo, you are recognized. 

Ms. ESHOO. Thank you, Mr. Chairman. 

Dr. McClellan, back to the subject that you don’t want to hear 

me talk about, but I am going to raise it anyway. You know how 

disappointed I am in the CMS final rule. It is a failure because 

there isn’t—you don’t present any solution to the problem, to the 

fix of the payment localities. 

You said earlier something about—I know that I am paraphrasing—you know that we want efficient systems that reimburse 

people properly in the proper areas. I know I am paraphrasing, but 

it made me think of this. 

Just to refresh your memory, the draft rule that CMS recommended included a fix for two counties. I was more than pleasantly surprised—and I wrote to you and thanked you—when, to my 

amazement, that CMS even acknowledged in that draft rule that 

ultimately—that you were ultimately responsible for establishing 

fee schedule areas. 

Now CMS has issued its final rule. You not only remove the fix 

for the two counties that were deeply affected, but you have failed 

to address a State-wide solution; and I think, to add insult to injury, you suggest no alternatives. 

96

Now I have to tell you that, you know, I wish I had known this 

ahead of time. I mean, I worked with all of you absolutely on the 

level on this; and I think it is like a year, 2 years where you just 

strike a match to it. 

I raise this because I think you have responsibility for this. I 

mean, this isn’t just going to go away. This isn’t something that is 

a nitpicking issue in one corner of California. There are physicians 

that are leaving, that are leaving an area that is no more rural 

than Washington, DC, is. So it affects the system. We have a responsibility together to do something about this. 

So my first question is, other than waiting for MedPAC recommendations and a fix in 2008, what are you going to do? 

My second question is—and it is a follow-up to a comment that 

you made this morning—did we understand you to say that the administration would consider charging or changing the balanced billing protections in the law? I mean, something that is clearly designed to protect beneficiaries in order to pay doctors more? Is this 

the way you want to solve the problems with the physician fee payment system, by shifting costs onto the beneficiaries? I don’t know 

if this is—if I misunderstood what you said. 

Mr. MCCLELLAN. What I said was that we wanted to work with 

the committee and the Congress on a way of addressing the physician payment problem that they are facing now. We would want to 

do so in a way that it not jeopardize access to quality of care for 

any beneficiary. So we will work together with the committee on 

that. 

Ms. ESHOO. Well, with all due respect, I am going to harkenback 

to what the ranking member said. It really is, I think, the responsibility of the administration to bring legislation forward, Dr. McClellan. Administrations do that; and when they do, they carry a great 

deal of clout because they say, this is our position, bring it to the 

Hill, and it is carefully considered. We are flailing. This thing is 

all over the place. So there is, you know——

Mr. MCCLELLAN. Well, there is bipartisan legislation that would 

work in the direction that we have talked about. We often find——

Ms. ESHOO. Has there been a letter from the White House that 

says, this is our position——

Mr. MCCLELLAN. I just stated the administration’s position this 

morning again in my testimony, and we found in many cases that 

building on bipartisan legislation that already has support in Congress may be the best way to get this done. 

Ms. ESHOO. Let’s get back to the two questions. 

Mr. MCCLELLAN. Let’s get back to the first question about the 

situation in California. And I can imagine how frustrated you are. 

I am frustrated. You have been involved with this from a payment 

perspective longer than I have. I have been involved with this since 

I came into this job over a year ago. Since I have practiced in your 

district, I know exactly how serious this problem is——

Ms. ESHOO. It is hard to explain to everyone. We knew each 

other some time ago, which is great. You know I respect you, but 

I am furious. 

Mr. MCCLELLAN. As you know, we had an approach that involved 

you working with California——

Ms. ESHOO. But what are you going to do about it now? 

97

Mr. MCCLELLAN. Well, what the California Medical Association 

has left us with is no alternative but legislation. We proposed a 

two-county solution that would address this problem, would solve 

this problem with a minimal impact on other counties——

Ms. ESHOO. You announced in your draft—you said, CMS is ultimately responsible for establishing fee scheduling areas. This is 

getting to be a ping pong game. It is not good enough. 

Mr. MCCLELLAN. And we also added that CMS has never taken 

action to change the payment rates affecting physicians in a State 

without the support from a State medical society or at least without the—support isn’t even needed at this point. I would just settle 

for something short as strong opposition. Yet when we put that 

regulation out for comment, Congresswoman, what the California 

Medical Association said was that they opposed the solution that 

you and I had thought might work; they opposed any other administrative solution that we could implement. 

Again, I will quote from their comments to me on the regulation, 

the only gipsy solution that we are supporting at this time is a legislative solution. So they are basically telling you that you need to 

find new legislative money to solve this problem.That is the only 

approach——

Ms. ESHOO. This is just great. I am telling you, I am going to 

write a short story on this one. 

Can you answer the other question? 

Mr. MCCLELLAN. What is the other question? 

Ms. ESHOO. Did you clear up the misunderstanding about the 

balance——

Mr. MCCLELLAN. I thought I had answered that one before, that 

we are open to ideas from Congress. It could get bipartisan support 

to address this problem. I think there is already bipartisan legislation. The Senate passed some legislation that would move in the 

direction of fixing the physician payment system. Any solution 

should not jeopardize quality of care for beneficiaries, and we 

would be happy to work with the committee on something within 

those bounds. There is definitely bipartisan interest and bipartisan 

legislation that we can build on. 

Ms. ESHOO. Thank you. 

Mr. DEAL. The time is expired. 

Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman; and I thank Dr. McClellan for being here. 

I think we are going to probably see lots of political questions, 

as they say. I want to follow up with one that Mr. Bilirakis talked 

about in liability issues. 

In Texas, we have dealt with medical liability now for 30 years. 

Most medical liability lawsuits are filed in State courts. In fact, I 

am trying to think of one in history that has been filed in a Federal 

court. But, typically, those are in State courts. I think States have 

the opportunity—and they are doing it—to deal with it. I just wish 

we could quantify the savings to our physicians on the increased 

liability protections that they are getting through State law, and 

maybe once we can do that we would like at a national law. 

The other thing from my colleague, Dr. Burgess from north 

Texas, I can tell you, sure, there may be overutilization in the 

98

emergency room, but I can give you an experience in a Texas case 

that even with blunt trauma of the head there wasn’t an MRI done, 

and it happened to be to my son about a year, 2 years ago. When 

I found out, I demanded to know why. I went all the way up to the 

administration; and they said, oh, that is our standard practice. I 

said, you are opening yourself up for a lawsuit; and we went and 

paid for one elsewhere. Thank goodness, nothing happened. There 

wasn’t a problem. So it is not automatic in emergency rooms. 

The problem with emergency rooms is they are being used as 

clinics, and people are showing up not because they had an auto 

accident but because they have some medical problem that really 

should be at a clinic down the street if they had late hours. And 

I thank the administration for the effort on community-based clinics. I wish our Labor/H appropriation bill today had provided more 

funding for the community-based clinics, and that is one of the 

issues I know we can agree on. 

I said in my opening statement the frustration is how we can 

quantify the overutilizations compared to over—the better effort to 

treat under Medicare. And my concern and one of the questions, 

services offered under Medicare are certainly increasing. We are 

seeing an increase in preventive services such as screenings under 

Medicare, and I think that is a positive development, hopefully, 

to—you are not going to cure diabetes, but if we do things earlier 

we can cut the costs not only to the family but also to the taxpayers. 

Our frustration on the committee is that we can’t quantify some 

of that, at least CBO won’t do it. That is how—I think that is one 

of the questions I want to ask, has CMS or MedPAC analyzed the 

future budget benefits on current spending on the preventive care 

that we can see? Because it just seems reasonable for someone 

who—instead of losing a leg, we may postpone that for years 

maybe if we do preventive care with them; and, of course, the patient accepts that suggestion on different lifestyle changes. 

Mr. MCCLELLAN. Well, it is certainly a lot better way to spend 

the money. While the evidence isn’t as extensive as many people 

would like, and that is one reason I think we would like to see better measures, better information developed on how we can have the 

most impact on patient health at the lowest cost, there is some evidence out there. Our actuaries and others have been looking at the 

experience of programs that focus on preventing the complications 

of heart failure, for example. That is the No. 1 coster in the Medicare program today, and much of the cost involves emergency room 

admissions or hospital admissions for people who have had breathing problems—what is clinically called decompensation—from their 

heart failure condition. And there are proven steps that can help 

prevent those from happening. 

So I think there is some potential for scorable savings from these 

programs already. I think we can work harder to develop more as 

we get to a better payment system in the next few years. And you 

may have something to——

Mr. HACKBARTH. No, I think Mark covered it well. 

In specific response to your question, Mr. Green, I don’t know of 

any study that says here is the savings that would be achieved 

from that. Certainly there are savings, but I am just not aware of 

99

any specific number that we can give you or to CBO or to anybody 

else. 

Mr. GREEN. Giving it to us would be great, but CMS is the one 

who tells us what we can do and how we can pay for these. 

One of the concerns I have—and getting back on the diabetic 

issue—doctors in my area that pay for performance. My concern is 

if we do look at the problem of pay for performance, we will end 

up seeing doctors who may not take a person who is diabetic because they know that they will end up being cut in the long run. 

Can CMS or MedPAC address that issue? 

Mr. HACKBARTH. This goes back, again, to Mr. Pallone’s question 

earlier. I think it is critically important that the pay for performance system be designed so that it does not discourage physicians 

from taking complicated patients, sick patients; and we think one 

way to do that is by using evidence-based process standards of 

care, as opposed to trying to measure ultimate outcomes and pay 

based on ultimate outcomes. If you tried to do it on ultimate outcomes, you would need very sophisticated risk adjustment, probably more sophisticated risk adjustment than currently exists. But 

if you narrow it down and say, when you have the diabetic patient, 

are you doing these things that, based on evidence, is shown to 

help improve results, then I think there is no reason to avoid the 

diabetic patient, that you will get paid for good performance. 

Mr. GREEN. Thank you. 

Mr. DEAL. The gentleman’s time is expired; and, Ms. Baldwin, 

you are next. 

Ms. BALDWIN. Thank you, Mr. Chairman. 

Mr. Hackbarth, I have a couple of questions for you. 

Some physician groups have long asserted that CMS can take action on its own to prevent the cuts from being implemented, and 

I am wondering if MedPAC has taken a position on whether CMS 

can administratively act to prevent or relieve the negative updates? 

Has MedPAC addressed this issue? 

Mr. HACKBARTH. We have not taken a position on that issue. 

Ms. BALDWIN. On another matter, at the end of your written testimony you discuss creating new incentives in the physician payment system. I am particularly interested in this idea, as we have 

seen, that national spending targets like the SGR have had little 

effect on physician behavior, and that is one of the reasons why the 

SGR doesn’t work. 

In Dr. McClellan’s testimony he talks about the growth in the 

volume of services physicians have provided, which in 2004 increased by a factor of 14 percent. While the increase in volume of 

physician services is concerning, I think it is important to recognize 

that this is not a trend we see everywhere and uniformly in the 

United States. 

For example, in my home State of Wisconsin there is the example of Marshfield Clinic that only realized a 1.5 increase in volume 

for Medicare services in 2004, and this relatively low level of increase in volume is something that we see throughout the State of 

Wisconsin. In effect, doctors in Wisconsin and other areas of the 

country with low levels of increase in volume of services that physicians provide are being punished, I think, by the way the system 

currently works. So I am particularly interested in the four ways 

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that you suggest that Medicare can move from one national spending target to multiple spending targets or multiple alternate pools, 

and I am wondering if you can expand a little bit on these options. 

Mr. HACKBARTH. Sure, I would be happy to. 

As you point out, one of our most fundamental objections to SGR 

is that unfairness that you refer to. Everybody is punished equally, 

even if they didn’t contribute equally to the problem facing the program. That is unfair, and it means there is no incentive for good 

performance, and that is the road to ruin. 

We are a bit leery in general of formulating systems like SGR 

that says that you can reduce down to a calculation what the right 

amount of spending should be. We are a little concerned that they 

may be simplistic. 

Should Congress decide, however, that in view of the long-term 

financial projections for the program or immediate budget circumstances that it wants to retain such a formula-driven system, 

we think the most important step that could be taken that would 

move it in the proper direction would be to have it applied to smaller, more accountable units. So that in the case of Wisconsin and 

in other States in the upper Midwest who have a very different 

pattern of care and rate of increase in costs they would not be punished for what happens in another group of States that have a 

much higher level of cost and more rapid increase in cost. So a geographic subdivision of the country might be one direction you might 

go. 

Another direction that you might take is not to do it geographically but to identify smaller groups of physicians who could be accountable not for what happens on the other side of the country but 

what happens within their group practice or what happens within 

their hospital medical staff. If that is the sort of group that is held 

accountable, physicians can deal with one another face to face and 

say, we have got a challenge. We have got a risk of having our payments cut. What can we do to better manage care and control 

costs? That is a more meaningful accountability than you get under 

the SGR system, and it can lead to a constructive incentive to improve care. 

Now having said that, let me emphasize again that MedPAC has 

not endorsed any of these alternatives. What we have said is, if 

Congress decides it wants an overall formula-driven system, you 

would want to go to smaller units. We would be happy to look at 

the strengths and weaknesses of various options, and they would 

all have those strengths and weaknesses. 

Ms. BALDWIN. I notice that your last sentence in your written 

testimony presents that invitation for those of us interested in seeing you explore those further to do so, and I suspect—I can’t speak 

for other members, but I suspect there is interest. 

Mr. DEAL. I will second that. 

The gentlelady’s time is expired. 

I believe all members of the subcommittee have asked questions, 

and we thank the two gentlemen part of this panel. We kept you 

here for 4 hours——

Mr. ENGEL. Mr. Chairman, I wonder if I would be given the opportunity——

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Mr. DEAL. You would have to ask unanimous consent. I don’t believe you are a member of this subcommittee, are you? 

Mr. ENGEL. Not this committee, no. 

Mr. DEAL. Do you ask unanimous consent? 

Mr. ENGEL. Yes, I do. 

Mr. DEAL. Do I hear an objection? 

If not, you will be allowed to ask questions. I would urge you to 

do so rather quickly because I think we are getting close to a vote 

on the floor. 

Mr. ENGEL. Okay.Thank you, Mr. Chairman; and although I am 

not, this Congress, a member of the Health Subcommittee, I appreciate the opportunity to ask questions. 

Obviously, the SGR system is seriously flawed and needs to be 

fixed; and physicians deserve to be fairly and appropriately compensated for the important work that they do. And, obviously, we 

are facing a serious access problem, and access to health care for 

beneficiaries would be hurt if physicians continue to drop out of the 

Medicare system. But increasing payments under the current SGR 

system means that beneficiaries will also be subject to higher cost 

sharing and premiums. They face 2 years or record premium increases because their premiums are based on Medicare spending. 

Any further large increases are another barrier to care. It is time 

to really reform this unsustainable system, and long-term solutions 

are needed so that our doctors don’t face the same uncertainties 

next year. 

I have two questions essentially. Dr. McClellan, obviously, this 

hearing is about creating a more efficient payment system. The 

Senate amendment during the reconciliation debate seeks to include marriage and family therapists and mental health counselors 

under Medicare in an effort to expand access to mental health services in rural areas. In 2002, MedPAC reported to Congress that including marriage and family therapists and mental health counselors under Medicare would likely increase costs to the Medicare 

program without expanding access to mental health services in 

rural areas; and they voted 12 to 2 against, including MFTs and 

MHCs under Medicare. Instead, MedPAC suggested addressing 

other barriers, like the 50 percent co-insurance payment. The mental health care and other all medical care requires a 20 percent coinsurance payment. 

According to the report, and I quote, addressing the barriers to 

mental health services embedded in Medicare payment and coverage policies may have greater potential to improve mental health 

services to the largest number of beneficiaries than would expanding the list of recognized providers. So I have to tell you, I think 

one of the cruelest injustices in our Medicare program is the continued disparity in payment between these equally important services. They should be no different. 

So my question is, in determining a more efficient Medicare program, MedPAC has found it is more efficient to pay appropriately 

for mental health services than to add non-physician providers to 

the already burdened payment system. Do you agree with 

MedPAC’s assessment of this situation? 

Mr. MCCLELLAN. Well, I certainly agree with the expansion to 

other types of providers not being as high priority as addressing 

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the physician payment problems and moving to a better physician 

payment system and taking other steps that can improve care for 

patients with mental illnesses. Now we haven’t taken any position 

on the reduction in co-pays that MedPAC recommended for mental 

health services. We have been focused on other steps to improve access to treatments for mental illness among seniors and people 

with disability. The most important one is the new prescription 

drug benefit, which not only doesn’t have any disparity in how 

mental illnesses are treated—in fact, all of the prescription drug 

plans are required to cover essentially all of the treatments for 

mental illness that are available. That is a big step toward greater 

access to care that will improve outcomes related to mental illness 

for seniors. 

Mr. ENGEL. Would you recommend to Congress that Congress 

eliminate this disparity? 

Mr. MCCLELLAN. Well, I think we can look at ways to reduce 

problems in access to mental health care and find cost-effective 

ways to do that. Many of the Medicare advantage plans that we 

have already been talking about provide additional mental health 

services, for example, that are not covered by Medicare. We have 

not taken a specific position on that proposal, though. 

Mr. ENGEL. Let me just finally, before I have—the second question is, MedPAC has certainly convinced me that we should pay 

for, appropriately, for mental health services. I think it is very, 

very important. My last question is, has CMS looked at how further cuts in the Medicaid conversion factor because of the SGR formula would harm resident physician teaching programs? 

For example, CMS recently failed to take any positive action on 

the anesthesiology teaching rule, despite lots of support from Members of Congress, including me. My doctors back home tell me that 

academic anesthesiology teaching programs are really struggling 

under the inflexible Medicare payment policy. The policy, which reduces payments to teaching anesthesiology by 50 percent, has had 

a significant adverse impact on the ability of academic programs to 

train future generations of anesthesiologists; and many programs 

therefore are having difficulty filling faculty positions and are operating at negative revenue margins. So I feel that these programs, 

like in my area in the Albert Einstein College of Medicine in the 

Bronx, New York, would be further battered by cuts in physician 

payments; and I am wondering if you could comment on that. 

Mr. MCCLELLAN. Well, I think you are talking about the limit on 

the number of residents that an anesthesiologist in a teaching program can supervise at one time, and we did ask for comments related to changes in this policy. We did get some comments back on 

both sides. While there were some in support, a number of anesthesiology programs, as you mention, in support of a change in the 

payment, there were other groups that were saying, basically, if 

you make that change here, hey, you need to make similar changes 

in a bunch of other programs. That would have had considerably 

larger cost implications; and so that is something that we are still 

looking at now, whether this is a financially viable approach. 

But I agree with you about the need to pay some close attention 

to the viability of the anesthesiology and other teaching programs. 

We have seen some big changes in medical practice, and our teachVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00106 Fmt 6633 Sfmt 6602 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
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ing support systems have not kept up with that. So we are paying 

a lot of attention to possible reforms in teaching payments. 

Mr. ENGEL. Well, I am hoping we can continue the dialog on this; 

and I thank you, Mr. Chairman, for your indulgence. 

Mr. MCCLELLAN. Absolutely, thank you. 

Mr. DEAL. I thank the gentleman, and thanks to both panel 

members. We kept you now in excess of 4 hours. We thank you for 

yourindulgence, and we look forward to hearing from you again in 

the very near future. Thank you. 

I am going to ask the second panel, if you will come to the table, 

I probably will only be able to introduce you before the bell goes 

off for votes on the floor, but we will do that and then probably 

have to recess for votes. 

All right. Very good. Well, thanks again. You have been patient 

as well since you had to sit out there and listen all this time, and 

we thank you for your presence. 

Let me introduce the panel: Dr. Frank Opelka, a surgeon from 

New Orleans, Louisiana, who is here on behalf of the American 

College of Surgeons; Dr. Vineet Arora, an internal medicine physician from Chicago, who is representing the American College of 

Physicians; Dr. Elizabeth Davis, an ophthalmologist from Minnesota, who is representing the Alliance of Specialty Medicine; Dr. 

Duane M. Cady, a surgeon from Upstate New York and the Chairman for the Board of Trustees for the American Medical Association; our former colleague, the Honorable Barbara Kennelly, who is 

currently the President and CEO of the National Committee to 

Preserve Social Security and Medicare; and Ms. Nora Super, from 

the Center for Health Services Research and Policy at the George 

Washington University Medical Center. 

Ladies and gentlemen, we are pleased to have you here. Since 

you have been waiting so long, I am going to go ahead and start. 

Dr. Opelka, we will start with you. We probably will be interrupted by bells in just a few minutes, but you are free to proceed. 

STATEMENTS OF FRANK OPELKA, ON BEHALF OF AMERICAN 

COLLEGE OF SURGEONS; VINEET ARORA, CHAIR, COUNCIL 

OF ASSOCIATES, AMERICAN COLLEGE OF PHYSICIANS; ELIZABETH DAVIS, ON BEHALF OF ALLIANCE OF SPECIALTY 

MEDICINE; DUANE M. CADY, CHAIR, BOARD OF TRUSTEES, 

AMERICAN MEDICAL ASSOCIATION; HON. BARBARA B. KENNELLY, PRESIDENT AND CEO, NATIONAL COMMITTEE TO 

PRESERVE SOCIAL SECURITY AND MEDICARE; AND NORA 

SUPER, CENTER FOR HEALTH SERVICES RESEARCH AND 

POLICY, GEORGE WASHINGTON UNIVERSITY MEDICAL CENTER 

Mr. OPELKA. Thank you, Chairman Deal. And I appreciate the 

opportunity, the distinguished members of the panel, to present to 

you on behalf of the 70,000 fellows of the American College of Surgeons. As you said, my name is Frank Opelka. I am from New Orleans. I am a practicing surgeon there. I am also a professor of surgery and the Associate Dean for Louisiana State University. 

Before I get into my remarks, may I just thank you and all the 

Members of the Congress and the constituents from all of the 

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States across the country who have poured out their hearts in helping us in Louisiana. We appreciate that. 

For my remarks themselves, I would like to direct attention toward the SGR that we have talked about today, as well as I would 

like to direct some remarks about pay for performance. 

Regarding the SGR, as everyone has said, this is a flawed problem. It is a unique problem for surgeons. It is a little bit different 

for surgeons as compared to other practices where there may be 

volume and intensity opportunities. 

In the surgical arena, there has been a relatively flat growth of 

surgery, as you can see in our graphic illustration. Surgery is the 

deep purple, and it is pretty much a flatter or relatively minimum 

growth over years. The other services have increased because of opportunities for improving patient care. Those volume increases and 

those intensity increases have an impact on helping other practices 

try and deal with these intense reductions. 

Surgeons don’t have that opportunity. Much like the example 

that was given in the Marshfield Clinic in Wisconsin, those surgeons can’t make up those opportunities. Therefore, they end up 

getting into niche practices, focusing down and limiting services. So 

it becomes a quality and access issue. We need your help in stopping this reduction and moving forward with you in looking at different types of solutions in the SGR, and that is where the College 

stands with that program. 

We may actually see this as a link with pay for performance or 

value-based purchasing. We are in strong support of value-based 

purchasing, but we think that, like SGR, it may not be a one-sizefits-all situation. The ambulatory care quality initiatives are much 

different from the surgical inpatient quality initiatives. The American College of Surgeons has worked for a long time in establishing 

a very active data base that deals with risk-adjusted outcomes, employs processes and systematic solutions that really work with hospitals to enhance quality care. In fact, there is even a business 

model for this, too. There is cost savings that we can appreciate by 

limiting complications, limiting length of stay and improving overall proper evidence-based utilization. 

So the College strongly asks you from the SGR standpoint to 

limit this reduction. We are willing to work with you, realizing 

there is probably not a one-size-fits-all solution there. And, also, we 

strongly support pay for performance, realizing there is probably 

one set of solutions in an ambulatory environment and another set 

of solutions in the hospital environment where the surgeon and the 

hospital are working together can improve overall outcomes and 

save money on behalf of the beneficiaries. Thank you very much. 

[The prepared statement of Frank Opelka follows:]

PREPARED STATEMENT OF FRANK G. OPELKA ON BEHALF OF THE AMERICAN COLLEGE

OF SURGEONS

Chairman Deal, Ranking Member Brown, and distinguished subcommittee members, thank you for the opportunity to testify today on behalf of the 70,000 Fellows 

of the American College of Surgeons. My name is Frank Opelka. I practice colorectal 

surgery in New Orleans, and serve as Associate Dean for Healthcare Quality and 

Safety at Louisiana State University. I also serve as the College’s Alternate delegate 

to the AMA/Specialty Society RVS Update Committee, or ‘‘RUC.’’

We are grateful to you for holding this hearing on the challenges posed by the 

sustainable growth rate (SGR) method for determining Medicare payments to physiVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00108 Fmt 6633 Sfmt 6621 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
105

cians. While it is important to consider the impact the current system is having in 

general on physicians and on patient access to care, a wise course for reforming 

Medicare payment must also consider what is happening across the range of specialties and subspecialties. Spending trends, practices, billing rules, and the way patient care is delivered all vary substantially among specialties, and the current payment system simply is not designed to accommodate that diversity. 

As you are well aware, unless Congress intervenes the current SGR method for 

determining Medicare physician payments will require a 4.4 percent payment cut 

in 2006, with an estimated 26 percent cumulative cut anticipated over the next 6 

years. As a first step toward bringing some rationality and predictability to the 

Medicare physician payment system, Congress must act to stop the cut from going 

into effect on January 1. In the long run, we need a system that enables reimbursements to keep pace with physicians’ costs. The SGR system has to be reformed, with 

future payments linked to a reasonable measure of practice cost inflation such as 

the Medicare Economic Index. 

While these pending cuts threaten the financial viability of physician practices 

across the range of the specialties, surgeons are uniquely threatened by the current 

payment system. Policymakers seem to lose sight of the fact that, for many key surgical services, Medicare payments today are about half what they were in the 1980s, 

even before inflation is taken into account. In addition, as surgeons continue to confront rising practice costs associated with day-to-day operations, they also are faced 

with some of the highest liability insurance premiums in medicine—a major cost 

that has escalated in recent years, and one that has not been addressed by the current payment system. 

At the same time, by the nature of the services they provide and differences in 

the way their services are billed, surgeons are less able to compensate for payment 

losses by increasing the volume of services they provide. For example, patients rarely self-refer to surgeons; rather, most are referred by other physicians who have determined that a surgical assessment is needed. In addition, major operations are reimbursed on a global basis that reflects not only the procedure itself but also the 

pre- and post-operative care that occurs within a 90-day period. This payment is 

based on the typical rather than average patient, and remains the same regardless 

of complications or how many post-operative services an individual requires. Further, unlike most physician services, major procedures can generally be performed 

only once on a given patient. 

As a result, surgery is disproportionately affected by the correlation between the 

price that Medicare pays for specific physician services and the overall volume target set for all physician services under Medicare. This is because the growth in 

major operations performed by surgeons is consistently lower than the growth rate 

for other services provided to Medicare patients. For example, major procedures accounted for 6 percent of total Medicare physician spending in 2004, and for only 3 

percent of the growth in Medicare physician spending that year. Practically, this 

means that the current formula requires surgeons to bear the cost of increased utilization of services that they do not provide—whether or not that increased utilization 

is justified. 

We did some back-of-the envelope calculations, projecting forward the 2004 

growth rates for the major categories of physician services and estimating what surgical services would be paid in the future under a surgery-specific SGR. Under such 

a system, major operations would be awarded payment increases totaling 14.5 percent by 2011, as opposed to the 26 percent cumulative cut that has been estimated 

under the current system. Under this scenario most other service categories, of 

course, would see their cuts deepen over the same period. Clearly, the SGR system 

is siphoning payments away from surgery toward other services that are experiencing significantly higher rates of growth. 

The attached chart compares surgery with the largest category of physician 

spending—evaluation and management (E/M), or visit services. As you can see, in 

1998 Medicare spent about $575 per Medicare beneficiary for visit services; that 

amount grew by over 36 percent to about $784 in 2003. For major procedures, on 

the other hand, the comparable figures are $212 in 1998 and $226 in 2003—an increase of less than 7 percent. (I should point out that we expanded the specific services typically classified in the ‘‘major procedures’’ category by Medicare to include 

several high-volume ambulatory services, including the number one Medicare procedure--cataract surgery.) 

We have no reason to suspect that the relatively high rate of spending growth for 

E/M services is inappropriate. Indeed, it is clear that public health experts and policymakers are very concerned about access to the primary care services that comprise the largest portion of this E/M service category. And, many efforts are underway—including value-based purchasing proposals—that we expect will accelerate 

106

the E/M growth rate through improved immunization rates, greater access to 

screening services, better management of chronic conditions, and so forth. But, what 

impact will that have on surgery? As the government encourages primary care physicians to provide more of these office-based services, the SGR requires the money 

to come from other services—regardless of any spending or access issues that may 

be involved. Surgeons simply cannot continue to foot the bill for increases in the volume of unrelated services provided by others—no matter how valuable those services may be. 

In other words, the current Medicare payment and update system is simply inadequate to the task of appropriately pricing services as diverse as E/M and surgery. 

With respect to pay for performance or value-based purchasing, the College is optimistic that such a program, if properly designed, holds great promise for truly imposing some rationality on the physician payment system. We agree that it is time 

to shift the focus away from the ‘‘price’’ Medicare pays for a service and toward the 

‘‘effectiveness’’ of the care that patients receive. 

Since the College’s founding over 90 years ago, it has demonstrated its commitment to ensuring high-quality surgical care for patients. This commitment to excellence in surgery is evident in the professional standards to which our Fellows are 

held and in the wide range of educational services that the College offers to ensure 

that they maintain their skills and learn about advances in technology and practice. 

We set standards for trauma care, we approve hospital cancer programs, and we 

have developed standards for bariatric surgery programs. With respect to promoting 

processes and data collection to improve surgical outcomes, the College has 

partnered with CMS and the Centers for Disease Control and Prevention in the Surgical Care Improvement Project (SCIP), and first with the Department of Veterans 

Affairs and now with hospitals and health plans in the National Surgical Quality 

Improvement Project (NSQIP). The College believes strongly that, if value-based 

purchasing in Medicare is to be successful, physician measures must be based on 

physician-led efforts such as these public-private partnerships, which have been 

shown to improve outcomes for patients and lower healthcare costs. 

Again, it is important to note that the diversity of physician services and the settings in which they occur must be taken into account in the design of a value-based 

purchasing program. Surgeon-led quality improvement initiatives, for example, tend 

to focus on the entire episode of care and the system in which patient care is provided. Surgery is a team effort, and our quality and safety efforts incorporate all 

elements of that team. This is a very different approach from the more narrowly 

drawn process measures that have been developed for other service types. Surgical 

care also lends itself more readily to risk-adjusted outcomes measurement than 

many primary care services for which success relies more heavily on patient compliance factors beyond the physician’s control. Finally, the potential for cost savings 

through improvements in the quality of surgical care can be tremendous. For example, it has been estimated that taking the necessary steps to prevent post-operative 

pneumonia can save $22,000 to $28,000 per patient admission. However, for Medicare these savings are achieved outside the Part B physician payment system, a 

complex issue that needs to be addressed if payment incentives are to truly be 

aligned to favor cost effectiveness and quality improvement. 

Nevertheless, the College and its Fellows stand ready to work with Congress and 

with CMS to ensure that any value-based purchasing reforms are structured in such 

a way to properly reward high-quality care and to promote advances that will improve the quality of surgical care in the future. 

Finally, with respect to the reconciliation process, we note that the Senate’s package (S. 1932) proposes to replace the 4.4 percent cut in 2006 with a 1 percent payment increase. While we certainly appreciate this effort at a time when the committee was seeking budget savings, we are deeply concerned that the value-based 

purchasing program included in the bill is unworkable and holds the potential of 

causing even greater financial instability. Value-based purchasing simply cannot 

succeed in a system that is producing steep, annual payment cuts. By-and-large, 

physician offices are small businesses—the majority of surgeons are in solo practice 

or in groups of two or three partners. They need a reasonably stable and predictable 

revenue stream to make effective practice decisions. 

When a conference committee convenes, members of this Subcommittee will be 

asked to help draft revisions and ultimately vote on value-based purchasing provisions. In that effort, we ask that you be mindful of the commitment that will be 

required by both physicians and the government to truly align incentives and make 

value-based purchasing work toward achieving the goal of higher-quality patient 

care. 

Mr. Chairman, the College appreciates this opportunity to share its perspective 

on the challenges facing surgeons under the Medicare program today. We are ready 

107

to work with you to reform the Medicare physician payment system to ensure that 

our patients have access to the high-quality surgical care they need.

Mr. DEAL. Thank you, Dr. Opelka. 

1As you heard the bell, we do have two votes on the floor, so if 

you will indulge us for just a few more minutes we will go vote. 

And maybe I can find some more members to come back with me. 

Hopefully, that will be the case. But we will be back, and we stand 

in recess subject to return. 

[Brief recess.] 

Mr. DEAL. We will call this hearing back to order. 

I understand that Dr. Davis has a flight to catch; and, Dr. Davis, 

I would simply ask, would you be inclined to respond to written 

questions that panel members may submit to you? 

Ms. DAVIS. Yes, I will. 

Mr. DEAL. You are recognized. 

STATEMENT OF ELIZABETH DAVIS 

Ms. DAVIS. Thank you very much. 

Mr. Chairman, members of the Subcommittee, in addition to 

serving as a partner in a private ophthalmology practice in Minneapolis, Minnesota, and as a clinical assistant professor at the 

University of Minnesota, I am also the Chair of the American Society of Cataract and Refractive Surgery’s Young Physicians and 

Residents Committee and a member of the ASCRS Government Relations Committee. 

I am here today representing the Alliance of Specialty Medicine, 

a coalition of 13 societies, including ASCRS, representing more 

than 200,000 specialty physicians. I am pleased to have this opportunity to testify before the subcommittee on the issue of Medicare 

payment to physicians and in particular on the issue of the flawed 

sustainable growth rate formula and to offer possible solutions. 

As advocates for patients and physicians, the Alliance of Specialty Medicine supports modifications to the current Medicare physician payment formula to ensure continued beneficiary access to 

timely, quality health care. The current SGR formula has significant flaws, however, causing steep reductions in physician reimbursement and prompting an increasing number of specialty physicians to reconsider their participation in the Medicare program, 

limit services to Medicare beneficiaries, or restrict the number of 

Medicare patients they will treat. 

The sad reality of the current situation is that the only way physicians can avert negative updates to is somehow limit care to the 

population that needs quality health care the most, our Nation’s elderly and disabled. No physician wants to turn away patients or 

leave a practice and the patients he or she has been serving for 

years. No physician wants to end a career earlier than he or she 

intended. To take such actions goes against the very reason they 

became physicians. 

Flaws in the complex Medicare reimbursement update formula 

include, but are not limited to: 

No. 1, including the cost of Medicare-covered outpatient drugs 

and biologicals in setting the expenditure target for physician services, even though these items are not physicians’ services and 

108

therefore, under the formula, lead to decreases in the annual payment update. 

No. 2, linking Medicare physician fees to the GDP, which does 

not accurately reflect changes in the cost of caring for Medicare patients. 

No. 3, inadequately accounting for changes in the volume of services provided to Medicare patients due to new preventative screening benefits, national coverage decisions that increase the demand 

for services, a greater reliance on drugs to treat illnesses, and a 

greater awareness of covered health benefits and practices due to 

educational outreach efforts. 

And, No. 4, improperly accounting for costs and savings associated with new technologies. 

Although the problem with the SGR were, in some respects, anticipated when the law was passed in 1997, the first detrimental 

effects were not experienced until 2002, when physicians received 

a 5.4 reduction to the conversion factor. Since then, the flaws of the 

SGR formula have been so pronounced that Congress has been 

forced to pass two temporary measures to keep the system from 

falling apart completely, and we are again faced with a 4.4 reduction January 1, 2006, and significant reductions beyond. 

In 2003, after the Centers for Medicare and Medicaid Services 

delayed a second payment reduction for 3 months, Congress passed 

the first law which required CMS to fix accounting mistakes that 

were made during 1998 and 1999. Fixing these errors restored $54 

billion to the Medicare payment system and prevented another 

year of reductions in reimbursement, but the legislation did nothing to fix the overall problems that plague the formula. 

With physicians anticipating a 4.4 reduction in 2004, Congress 

again acted and included a provision in the Medicare Prescription 

Drug Improvement and Modernization Act of 2003 that mandated 

an increase of at least 1.5 percent in both 2004 and 2005. Although 

we appreciate the leadership of this committee in preventing the 

reductions in the eventual intervention of Congress, the statutory 

increase did nothing to change the underlying formula. In fact, 

while the statutory update in MMA prevented the additional reductions for 2004 and 2005, no additional funds were provided to pay 

for this temporary fix, therefore exacerbating the problem. As a result, the money used to fund the increased in these updates must 

be paid back to the Medicare program with interest over the next 

10 years. 

In fewer than 50 days, Medicare physician payments will be cut 

by 4.4, followed by significant reductions until 2012, and rates will 

not return to the 2002 level until well after 2013. In other words, 

physicians will receive less reimbursement in 2013 than they did 

in 2002 for the exact same procedure, regardless of inflation and 

increased practice costs. 

Although reimbursement will likely be cut by more than 30 percent under the current formula during that time period, it is estimated that costs for providing services will rise by close to 20 percent. Such cuts will further inhibit each physician’s ability to provide services to Medicare beneficiaries, as many physicians will be 

unable to afford to treat Medicare patients. 

109

As I have previously stated, Congressional action has delayed the 

imminent meltdown of the Medicare problem and has allowed some 

breathing space to evaluate approaches to fixing the payment update formula. Although we prefer that Congress repeal the SGR 

and replace it with a system that takes into account the actual cost 

of providing care to Medicare patients, such as the Medicare Economic Index, we recognize that this is unlikely this year, given the 

current fiscal constraints facing the Congress. Providing short-term 

relief, therefore, is absolutely necessary to maintain access to care 

for beneficiaries and to stabilize the Medicare program until the 

SGR problem is resolved. 

We also believe that it would be unwise to legislate a punitive 

pay-for-performance system for Medicare at this time. We clearly 

understand that the administration and Congress are intent on 

moving the Medicare into a quality reporting and value-based purchasing system. However, the SGR and a value-based purchasing 

or pay-for-performance system are incompatible. For physicians to 

embrace a value-based purchasing system, the SGR must be replaced with a more equitable and stable payment system so that 

physicians can invest in health information technology and pilot 

test data collection methods and quality measures as steps toward 

establishing a pay-for-performance system that actually improves 

care for Medicare patients. 

Moving too rapidly by legislating pay-for-performance now without first resolving the SGR, especially a pay-for-performance system which is not supported by the physician community, amounts 

to replacing one broken system with another. Again, pay-for-performance is unworkable applied on top of the current unstable payment system. Simply put, value-based purchasing system and the 

SGR are not compatible and cannot work together. 

The Alliance’s member specialty physician organizations are continually striving to offer the highest specialized quality care to all 

Medicare beneficiaries. Over the past 8 months, the members of 

the Alliance of Specialty Medicine have worked diligently to prepare physicians for a value-based purchasing system. We have cooperated with CMS on the initial development of quality measurements that could be voluntarily reported through a claims-based 

system. In fact, physician specialty organizations played a role in 

developing the newly announced CMS Voluntary Physician Reporting Program and look forward to working with CMS to address 

some concerns that we have with the selected measures and process. All specialty groups in the Alliance have made tremendous 

progress in developing quality measures and preparing their physician members for this new payment system, and we stand ready 

to continue our involvement as the process moves forward. 

We also continue to believe that quality reporting measures 

should be evidence-based developed by the specialty societies with 

expertise in the area of care in question and based on factors physicians can directly control. Quality measures must be pilot-tested 

and phased in across a variety of specialties and practice settings 

to help determine what does and does not improve quality. This is 

critical as we move to a system that produces a more efficient, reliable and stable patient system. 

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Therefore, the Alliance understands that there is an opportunity 

to work with Congress and the administration to enhance quality 

measurement for the specialty care provided to our Nation’s seniors 

and individuals with disabilities. Patient safety and quality care 

are the cornerstones on which all patient care is delivered by the 

more than 200,000 specialty physicians the Alliance represents and 

the millions of patients they care for each year. 

We stand ready to continue to work with Congress and the administration and ask that the following issues be addressed: 

Physician payment reduction scheduled for January 1, 2006, and 

future years be prevented. 

Before a mandatory value-based purchasing system is put into 

place, the current SGR must be replaced with a system that is 

more predictable and recognizes the true cost of providing physician services to Medicare beneficiaries. 

Any new value-based purchasing program must be nonpunitive 

and use consensus-driven, evidence-based quality and efficiency 

measures developed by the medical specialties, and it must be 

phased in over several years. 

All quality and efficiency measures should be consensus-driven 

and pilot-tested across a variety of specialties and practice settings. 

Congress must find a solution to implement a rational Medicare 

physician payment system, and the Alliance of Specialty Medicine 

looks forward to working with you to develop a system that is more 

predictable and ensures fair reimbursement for physicians as well 

as continued beneficiary access to quality specialty health care. 

Thank you very much. 

[The prepared statement of Elizabeth Davis follows:]

PREPARED STATEMENT OF ELIZABETH A. DAVIS ON BEHALF OF THE ALLIANCE OF

SPECIALTY MEDICINE

Mr. Chairman, Members of the Subcommittee, in addition to serving as a partner 

in a private ophthalmology practice in Minneapolis, Minnesota, and as a Clinical Assistant Professor at the University of Minnesota, I am the Chair of the American 

Society of Cataract and Refractive Surgery’s (ASCRS) Young Physicians and Residents Committee and a member of the ASCRS Government Relations Committee. 

I am here today representing the Alliance of Specialty Medicine—a coalition of 13 

societies, including ASCRS, representing more than 200,000 specialty physicians. I 

am pleased to have this opportunity to testify before the Subcommittee on the issue 

of Medicare payment to physicians, and in particular on the issue of the flawed Sustainable Growth Rate (SGR) formula and to offer possible solutions. 

As advocates for patients and physicians, The Alliance of Specialty Medicine supports modifications to the current Medicare physician payment formula to ensure 

continued beneficiary access to timely, quality health care. The current SGR formula 

has significant flaws, however, causing steep reductions in physician reimbursement 

and prompting an increasing number of specialty physicians to reconsider their participation in the Medicare program, limit services to Medicare beneficiaries, or restrict the number of Medicare patients they will treat. 

The sad reality of the current situation is that the only way physicians can avert 

negative updates is to somehow limit care to the population that needs quality 

health care the most, our nation’s elderly and disabled. No physician wants to turn 

away patients or leave a practice and the patients she or he has been serving for 

years. No physician wants to end a career earlier than he or she intended. To take 

such actions goes against the very reasons we became physicians. 

Why the SGR Formula Is Flawed 

Flaws in the complex Medicare physician reimbursement update formula include, 

but are not limited to:

• Including the costs of Medicare-covered outpatient drugs and biologicals in setting 

the expenditure target for physicians’ services, even though these items are not 

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physicians’ services and, therefore, under the formula, lead to decreases in the 

annual payment update; • Linking Medicare physician fees to the Gross Domestic Product (GDP)—which 

does not accurately reflect changes in the cost of caring for Medicare patients; • Inadequately accounting for changes in the volume of services provided to Medicare patients due to new preventative screening benefits, national coverage decisions that increase the demand for services, a greater reliance on drugs to 

treat illnesses, and a greater awareness of covered health benefits and practices 

due to educational outreach efforts; and • Improperly accounting for costs and savings associated with new technologies. 

Recent Congressional Action 

Although the problems with the SGR were, in some respects, anticipated when 

the law was passed in 1997, the first detrimental effects were not experienced until 

2002, when physicians received a 5.4% reduction to the conversion factor. Since 

then, the flaws of the SGR formula have been so pronounced that Congress has been 

forced to pass two temporary measures to keep the system from falling apart completely, and we are again faced with a 4.4% reduction January 1, 2006—and significant reductions beyond. 

In 2003, after the Centers for Medicare and Medicaid Services delayed a second 

payment reduction for 3 months, Congress passed the first law, which required CMS 

to fix accounting mistakes that were made during 1998 and 1999. Fixing these errors restored $54 billion to the Medicare physician payment system and prevented 

another year of reductions in reimbursement, but the legislation did nothing to 

fix the overall problems that plague the formula. 

With physicians anticipating a 4.4% reduction in 2004, Congress again acted and 

included a provision in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) that mandated an increase of at least 1.5% in both 

2004 and 2005. Although we appreciate the leadership of this committee in preventing the reductions and the eventual intervention of Congress, the statutory increase did nothing to change the underlying formula. In fact, while the statutory 

update in the MMA prevented the additional reductions for 2004 and 2005, no additional funds were provided to pay for this temporary fix, therefore exacerbating the 

problem. As a result, the money used to fund the increase in these updates must 

be paid back to the Medicare program, with interest, over the next 10 years. 

Reimbursement Rates in 2006 and Beyond 

In fewer than 50 days, Medicare physician payments will be cut by 4.4%, followed 

by significant reductions until 2012, and rates will not return to their 2002 level 

until well after 2013. In other words, physicians will receive less reimbursement in 

2013 than they did in 2002 for the exact same procedure, regardless of inflation and 

increased practice costs. Although reimbursement will likely be cut by more than 

30% under the current formula during that time period, it is estimated that costs 

for providing services will rise by close to 20%. Such cuts will further inhibit each 

physician’s ability to provide services to Medicare beneficiaries as many physicians 

will simply be unable to afford to treat Medicare patients. 

The Solution 

As I have previously stated, Congressional action has delayed the imminent meltdown of the Medicare program and has allowed some breathing space to evaluate 

approaches to fixing the payment update formula. Although we prefer that Congress 

repeal the SGR and replace it with system that takes into account the actual cost 

of providing care to Medicare patients, such as the Medicare Economic Index (MEI), 

we recognize that this is unlikely this year given the current fiscal constraints facing the Congress. Providing short-term relief, therefore, is absolutely necessary to 

maintain access to care for beneficiaries and to stabilize the Medicare program until 

the SGR problem is solved. 

We also believe that it would be unwise to legislate a punitive pay-for-performance system for Medicare at this time. We clearly understand that the Administration and Congress are intent on moving the Medicare program into a quality-reporting and value-based purchasing system. However, the SGR and a value-based purchasing or pay-for-performance system are incompatible. For physicians to embrace 

a value-based purchasing system, the SGR must be replaced with a more equitable 

and stable payment system so that physicians can invest in health information technology and pilot test data collection methods and quality measures as steps toward 

establishing a pay-for-performance system that actually improves care for Medicare 

patients. Moving too rapidly by legislating pay for performance now without first 

resolving the SGR, especially a pay for performance program that is not supported 

by the physician community, amounts to replacing one broken system with another. 

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Again, pay-for-performance is unworkable applied on top of the current unstable 

payment system. Simply put, value-based purchasing and the SGR are not compatible and cannot work together. 

Pay for Performance 

The Alliance’s member specialty physician organizations are continually striving 

to offer the highest specialized quality care to all Medicare beneficiaries. 

Over the past 8 months, the members of the Alliance of Specialty Medicine have 

worked diligently to prepare physicians for a value-based purchasing system. We 

have cooperated with the CMS on the initial development of quality measures that 

could be voluntarily reported through a claims-based system. In fact, physician specialty organizations played a role in developing the newly announced CMS Voluntary Physician Reporting Program (PVRP) and look forward to working with CMS 

to address some concerns that we have with the selected measures and process. All 

specialty groups in the Alliance have made tremendous progress in developing quality measures and preparing their physician members for this new payment system, 

and we stand ready to continue our involvement as the process moves forward. 

We also continue to believe that quality reporting measures should be evidence 

based developed by the specialty societies with expertise in the area of care in question, and based on factors physicians can directly control. Quality measures must 

be pilot-tested and phased in across a variety of specialties and practice settings to 

help determine what does and does not improve quality. This is critical as we move 

to a system that produces a more efficient, reliable, and stable patient system. 

Therefore, the Alliance understands that there is an opportunity to work with 

Congress and the Administration to enhance quality measurement for the specialty 

care provided to our Nation’s seniors and individuals with disabilities. Patient safety and quality care are the cornerstones on which all patient care is delivered by 

the more than 200,000 specialty physicians the Alliance represents and the millions 

of patients they care for each year. We stand ready to continue to work with Congress and the Administration and ask that the following issues be addressed:

• The physician payment reductions scheduled for January 1, 2006, and future 

years be prevented. 

• Before a mandatory value-based purchasing program is put into place, the current 

SGR system must be replaced with a system that is more predictable and recognizes the true costs of providing physician services to Medicare beneficiaries. 

• Any new value-based purchasing program must be non punitive and use consensus-driven, evidence-based quality and efficiency measures developed by the 

medical specialties, and it must be phased-in over several years. 

• All quality and efficiency measures should be consensus drive and pilot tested 

across a variety of specialties and practice settings. 

Conclusion 

Congress must find a solution to implement a rational Medicare physician payment system, and the Alliance of Specialty Medicine looks forward to working with 

you to develop a system that is more predictable and ensures fair reimbursement 

for physicians as well as continued beneficiary access to quality specialty health 

care.

Mr. DEAL. Thank you, Dr. Davis. 

Dr. Arora. 

STATEMENT OF VINEET ARORA 

Ms. ARORA. I would like to thank Chairman Deal, Ranking Member Brown and distinguished members of the subcommittee for 

holding today’s hearing on Medicare physician payment. 

My name is Vineet Arora. I am a physician and Chair of the 

Council of Associates of the American College of Physicians and a 

member of the College’s Board of Regions. 

I am an instructor of medicine in the section of general internal 

medicine at the University of Chicago, where I recently completed 

my internal medicine residency. We deliver primary care to the 

residents of the South Side of Chicago. Eighty-five percent of our 

patients are African-American, and the majority is over age 65 and 

covered by Medicare. 

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I also a currently serve as the Associate Program Director for the 

Internal Medicine Residency Program and am an Assistant Dean 

for the Pritzker School of Medicine at the University of Chicago. 

ACP’s Council of Associates, which I chair, represents physicians 

who are being trained in an internal medicine residency program 

or who have gone for additional training in a subspecialty medicine 

fellowship program. Together, we are the new generation of physicians that your elderly and disabled constituents will be counting 

on for their primary care; and, unfortunately, there won’t be 

enough of us. A combination of high student debt and an unfavorable economic environment is causing many of us to choose careers 

other than general internal medicine or family practice, which are 

the two specialities that aged and disabled patients must most depend on for their primary care. Furthermore, Medicare payment 

cuts that will result from the flawed sustainable growth rate formula will accelerate this looming crisis in access to primary care. 

Today, I am pleased to report that the American Academy of 

Family Physicians and the American Osteopathic Association have 

participated in the preparation of today’s testimony. 

There is growing evidence that shortages are developing for U.S. 

Physicians but particularly in general internal medicine and family 

practice. Current projections indicate the future supply of primary 

care physicians will be inadequate to meet the health care needs 

of the aging U.S. Population, especially as baby boomers are beginning to reach retirement age in 2011. 

In 1998, over half of graduating internal medicine residents plan 

to practice general internal medicine. Compare that with less than 

one-third in 2003. Strikingly, in 2003, only 19 percent of all internal medicine residents planned to pursue careers in general internal medicine. In my own residency program, I was one of only two 

of our nearly 30 graduating residents that did not enter a subspecialty fellowship training program. Moreover, primary care careers are too often becoming the default pathway of those students 

that could not enter competitive specialties. 

The reasons why medical students and young physicians are 

turning away from primary care are complex and multifaceted. But 

based on my own experience and my conversations with peers I can 

honestly say with confidence that the dismal economic practice environment associated with primary care today is the major barrier. 

The pending Medicare payment cut will only make a bad situation even worse. Right now, physician payments under Medicare 

will be cut by 4.4 percent on January 1, 2006. Additional cuts will 

decrease physician reimbursement by more than 26 percent from 

2006 to 2011. In this same period, CMS projects physician costs 

will rise by 15 percent. 

Now we learn early in our medical training about the importance 

and joy of having a continuous and on-going personal relationship 

with a patient, and these are the hallmarks of general internal 

medicine and family medicine. Unfortunately, we also learn that 

primary care is under-reimbursed compared to other specialties 

and that many primary care physicians are struggling to keep their 

practices open at a time of escalating practice costs, excessive paperwork requirements that take time away from caring for patients, and reimbursement from other Medicare and other payers 

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that does not keep pace with the rising costs. It is so bad that 

many of the excellent role models in primary care that we meet 

every day in our training programs go so far as to counsel us not 

to go into primary care, and you may wonder why, and that is because they tell us there is no economic future in primary care. 

Today, a physician entering practice like myself has, on average, accumulated more than $100,000 in student debt, but the average 

doesn’t tell the whole story. The median indebtedness of medical 

school students graduating this year is expected to be $120,000 for 

students in public medical schools and $160,000 for students attending private medical schools. About 5 percent of all medical students will graduate with a debt of $200,000 or more. Unfortunately, many of those young graduates facing the highest debt burden are of modest means and diverse backgrounds that are underrepresented in medicine, exactly the type of physicians we want to 

recruit to provide primary care for our increasingly diverse population. 

In addition, many of us are entering practice at the same time 

we are getting married and buying homes and starting families. 

Just this week I was visiting my friend, a new mom who is also 

completing her family medicine residency in New Hampshire. She 

is married to another medical trainee, and together they have nearly $400,000 in medical student debt and another baby on the way. 

When interviewing for jobs, she realized that she could not accept 

a job in office-based primary care and expect to pay for her child 

care while continuing to pay off their debt. And there are countless 

others like her. Is it any surprise that more and more of us have 

concluded we simply cannot afford to support our families and also 

practice primary care? 

Now reversing this decline will require immediate action by policymakers. The long pipeline of medical education, which is sometimes in some cases greater than 10 years, and retirement or career changes of older physicians necessitates that the Nation have 

a constant influx of new students embarking on medical careers. As 

the population ages, larger numbers of patients encounter chronic 

and more complex illnesses. The need for general internists and 

family physicians will increase. The need for primary care physicians who can provide first contact and comprehensive continuing 

care for adults will continue to increase as the population ages and 

its health care needs increase and as the demand for acute, chronic 

and long-term care increases. 

Unfortunately, unless Congress acts now, the Medicare cuts will 

result in fewer physicians going into primary care; and many of 

those who are already in practice will be forced to retire or limit 

how many Medicare patients they will see. 

In conclusion, I strongly urge the subcommittee to recommend 

that Congress take immediate action now to help avert the looming 

crisis and access to primary care by the following: 

First, Congress must stabilize Medicare payments by halting the 

4.4 percent cut and replacing the SGR cuts with positive updates 

for at least the next 2 years. 

Second, Congress must enact a long-term alternative to the SGR. 

Third, Congress must recognize that successful implementation 

of the Medicare value-based purchasing program or a pay-for-perVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00118 Fmt 6633 Sfmt 6602 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
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formance type of program will require that the SGR be replaced 

with an alternative that provides stable, adequate and predictable 

payments to physicians. 

And, fourth, Congress must work on developing a coordinated 

and comprehensive strategy for reversing the decline of young physicians going into primary care. 

I am pleased to answer any questions from the committee. 

[The prepared statement of Vineet Arora follows:] 

Mr. DEAL. Thank you. 

Dr. Cady. 

STATEMENT OF DUANE M. CADY 

Mr. CADY. Thank you, Mr. Chairman. 

I thank you, Mr. Chairman. My name is Duane Cady. I am the 

chairman of the Board of Trustees of the American Medical Association and a general surgeon in upstate New York. 

Today I, too, want to talk about the Medicare physician payment 

formula, or the SGR. As we have all heard today over and over, it 

is severely broken, and the patient access crisis is looming. Congress must take action this year. 

As of today, there are 44 calendar days until the 4.4 percent cut 

goes into effect. This will be the first in a series of steep cuts over 

6 years that will total 26 percent. A recent AMA survey shows that 

these Draconian cuts will impair access. It will also have a ripple 

effect across other payers, including TRICARE, which pays for 

medical care for military families and dependents. 

The fatally flawed SGR led to a 5.4 percent cut in 2002, and physicians are grateful for congressional intervention to stave off additional reductions from 2003 through 2005. However, despite 

Congress’s good-faith efforts over the last 4 years, physicians have 

received less than half of CMS’s own conservative measures of increases in medical practice costs. 

If the 2006 is imposed, average physician payments will be less 

in 2006 than they were in 2001, and that is in real terms, not adjusted for inflation. 

The graph on the easel shows a grim view of the future. Physicians practice costs are expected to rise by an additional 15 percent 

from 2006 to 2011, yet during that same time, Medicare physician 

payments will decrease by 26 percent, as you see on the right-hand 

side on the lower line on the graph. 

Now no business could survive these unsustainable cuts, especially physician practices, which typically operate as small businesses. The bar chart shows that only physicians face updates of 

7 percent below the annual increase in their practice costs. Updates for hospitals, long-term care providers will keep pace with 

their market increase. Medicare advantage plans will see an average update of 4.8 percent in 2006. And as you see on the righthand side of the bar graph in the tan color, that are the physician 

cuts. 

Physicians form the foundation of our Nation’s health care system. Without an adequate Medicare payment structure, this foundation will crumble. Congress is considering linking quality and 

Medicare physician payment through value-based purchasing legislation. The AMA and the leadership of the national medical speVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00119 Fmt 6633 Sfmt 6602 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
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cialty societies have invested extensive resources in quality improvement initiatives well before the concept of value-based purchasing evolved over the last several years we have been involved 

in this. We work diligently to develop countermeasures that are the 

basis for value-based purchasing, and we will continue to do so. 

Value-based purchasing and the SGR, however, are not compatible. Value-based purchasing may save dollars for the program as 

a whole. However, in the beginning there may be an increase in 

cost. But many performance measures ask physicians to deliver 

more care, such as vaccines or mammogram or tests for diabetes. 

If the SGR is linked to value-based purchasing, more physician 

services will result in more cuts. 

Further, the success of value-based purchasing depends on greater physician adoption of information technology. We are well aware 

of that. Without positive updates, IT investment will not be possible. A recent AMA survey indicates that steep pay cuts would 

cause more than half of the physicians to defer IT purchases, as 

well as other medical equipment. Thus, implementation of valuebased purchasing proposals should be deferred until the SGR is repealed and a stable Medicare system is in place that reflects increases in physician’s practice costs, as we saw on the graph. 

Now this doesn’t mean that we cannot continue to move forward 

with some kind of quality reporting system, but details should be 

refined among the physician community, Congress and the CMS. In 

fact, the AMA recently requested another meeting between Administrator McClellan and physician leaders for meaningful dialog on 

future quality activities. 

Congress has a long-held commitment to seniors and disabled 

persons under the Medicare program. They deserve to have continued access to their physicians of choice, along with high-quality 

medical services. Working together, Congress, the administration 

and the physician community can strengthen this program and correct problems that undermine its goals. 

In the meantime, what is needed now, this year, is at least 2 

years of positive updates to reflect increases in medical practice 

costs. This would prevent Congress from having to struggle with 

this problem, as I witnessed today again, early next year. It will 

would also give Congress time to enact a long-term solution. The 

AMA looks forward to working with Congress in carrying out our 

long-held mission: service to patients, with assurances of access 

and quality of care. 

Thank you very much. 

[The prepared statement of Duane Cady follows:]

PREPARED STATEMENT OF DUANE M. CADY ON BEHALF OF THE AMERICAN MEDICAL

ASSOCIATION

The American Medical Association (AMA) appreciates the opportunity to provide 

our views today regarding the urgent need for Congressional action to replace steep 

Medicare physician pay cuts with positive updates for at least the next two years, 

giving Congress and the Administration time to enact a permanent solution to the 

fatally flawed Medicare physician payment formula. Pending physician pay cuts will 

affect nearly one million physicians and other health care professionals whose Medicare payment rates are determined by the Medicare physician fee schedule. 

Physicians have been working with Congress over the last several years to 

achieve a solution to the Medicare physician payment formula. A permanent solution to this problem is critical for maintaining access to and quality of care for MediVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00120 Fmt 6633 Sfmt 6621 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
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care patients. In fact, in 2004, the Centers for Medicare and Medicaid Services 

(CMS) Administrator Mark McClellan, MD, underscored to Congress the agency’s 

‘‘concern about making sure that Medicare payments to physicians are adequate and 

encourage better care, because physician decisions can have such a critical impact 

on all Medicare costs and on patient health.’’ That statement still rings true today. 

Indeed, there is widespread agreement—from many in Congress (both sides of the 

aisle) and the Medicare Payment Advisory Commission (MedPAC)—that the physician payment formula should be scrapped altogether. Further, Congress and CMS 

agree that an adequate payment structure for physicians is vital for maintaining a 

strong foundation under which Medicare can properly provide quality health care 

for our nation’s seniors and disabled citizens. Yet, here we are today, with 44 calendar days until a 4.4% Medicare physician pay cut goes in effect. Congress must 

act now, or the foundation upon which the Medicare program is built will crumble. 

CONGRESSIONAL ACTION NEEDED THIS YEAR TO STOP MEDICARE PHYSICIAN PAY CUTS

CMS recently confirmed that Medicare physician payments will be cut by 4.4%, 

effective January 1, 2006. This will be the first in a series of cuts projected over 

the next six years by the Medicare Trustees, with cumulative cuts of 26% from 2006 

through 2011. Congress must act this year to stop the pending cuts and provide 

positive payment updates for at least 2006 and 2007. This will help preserve access 

to health care services for seniors and persons with disabilities while Congress and 

the Administration jointly work to enact a permanent fix to the current Medicare 

physician payment formula. 

FUNDAMENTAL PROBLEMS WITH THE FATALLY FLAWED MEDICARE PHYSICIAN PAYMENT

FORMULA: THE SGR

A fatally flawed Medicare physician payment update formula—called the sustainable growth rate (the SGR)—is responsible for the projected cuts. Under the SGR, 

payment updates are tied to GDP growth, which factors in neither patients’ health 

care needs nor physicians’ practice costs. Physicians are penalized with pay cuts 

when Medicare spending on physicians’ services exceeds SGR spending targets that 

are based on GDP growth, but make no allowance for government policies and other 

factors that increase utilization of services. 

Because of these fundamental defects, the SGR led to a negative 5.4% update in 

2002, and additional reductions in 2003 through 2005 were averted only after Congress intervened and replaced projected steep negative updates with positive updates of 1.6% in 2003 and 1.5% in each of 2004 and 2005. We greatly appreciate 

these short-term reprieves. Even with these increases, however, Medicare physician 

payment updates during these years were only about half of the rate of inflation 

of medical practice costs. To make matters worse, if the 2006 cut is imposed, average physician payment rates will actually be less in 2006 than they were in 2001 

(in real terms, not adjusted for inflation). Further, a 4.4% cut in January 2006, 

would mean that from 2002-06, payment rates will have fallen 16% behind the government’s index of inflation in physicians’ practice cost. 

As shown by the graph below, these reductions come at a time when, even by 

Medicare’s own conservative estimate, physician practice costs are expected to rise 

by an additional 15% from 2006-11 (with Medicare physician payments decreasing 

by 26%). The vast majority of physician practices are small businesses, and the 

steep losses that are yielded by what is ironically called the ‘‘sustainable growth 

rate,’’ would be unsustainable for any business, especially small businesses such as 

physician office practices. 

Only physicians and health professionals face updates of 7% below the annual increase in their practice costs. Hospitals and long-term care providers are slated for 

updates that fully keep pace with their market basket increases, and Medicare Advantage plans will see average updates of 4.8% in 2006, as illustrated in the bar 

graph below. Medicare physician payments must be re-structured to ensure access 

for fee-for-service patients as well. 

ACCESS PROBLEMS FOR MEDICARE BENEFICIARIES UNDER THE CURRENT MEDICARE SGR

PHYSICIAN PAYMENT FORMULA

Physicians simply cannot absorb the pending draconian payment cuts. In fact, a 

recent AMA survey indicates that if the cuts begin January 1, 2006:

• More than a third of physicians (38%) would decrease the number of new Medicare patients they accept; 

• More than half of physicians (54%) plan to defer information technology purchases; 

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• A majority of physicians (53%) would be less likely to participate in a Medicare 

Advantage plan; and • One-third (34%) of physicians whose practice serves rural patients would discontinue their rural outreach services. 

A physician access crisis is looming for Medicare patients. More than 20 states 

each face cuts in Medicare funding of more than one billion dollars from 2006-2011. 

The MMA promised important new benefits for patients. An adequate payment 

structure for physicians’ services must be in place in order for the government to 

deliver on its promise of these important benefits. 

Yesterday, Medicare patients began enrolling for the new Medicare drug benefit 

that will become effective January 1, 2006. Physicians are the foundation of our 

nation’s health care system, and Medicare patients’ access to physicians’ 

services is imperative for the success of the new prescription drug benefit. 

Continual cuts put such access at risk. Indeed, there are already signs that access 

to care is deteriorating. A MedPAC survey found that 22% of patients already have 

some problems finding a primary care physician and 27% report delays getting an 

appointment. 

The physician cuts that threaten to destabilize the Medicare program will also 

create a ripple effect across other programs. Indeed, these cuts jeopardize access to 

medical care for millions of our active duty military family members and military 

retirees because their TRICARE insurance ties its payment rates to Medicare. The 

Military Officers Association of America (MOAA) recently sent a letter to Congress 

urging Congressional action to avert the 4.4% cut because it will ‘‘significantly damage’’ military beneficiaries’ access to health care services. MOAA stated that ‘‘[w]ith 

our nation at war, Congress should make a particular effort not to reduce health 

care access for those who bear and have borne such disproportionate sacrifices in 

protecting our country.’’ 

MEDICARE QUALITY OF CARE INITIATIVES DEPEND ON ADEQUATE PHYSICIAN PAYMENT

STRUCUTRE

An adequate Medicare physician payment structure is also imperative for Medicare quality of care initiatives. There is a growing consensus that greater physician 

adoption of information technology is vital to improvements in quality of care. Unless physicians receive positive payment updates, however, these investments will 

not be possible. 

Further, inclusion of value-based purchasing (or pay-for-performance) provisions 

as part of any final budget reconciliation bill, without a long-term solution to the 

SGR, will only compound the looming access problem and make future SGR reforms 

more expensive. Value-based measures will lead to higher volume of physicians’ 

services. Under the SGR formula, more services will result in more cuts. Valuebased purchasing and the SGR formula are incompatible. The SGR formula 

needs to be repealed in order for value-based purchasing proposals to succeed. 

PERMANENT SOLUTION TO THE SGR IS NEEDED TO PROTECT PATIENT ACCESS AND

QUALITY OF CARE

The Medicare physician payment problem continues to exist because, as discussed 

above, it is inherently flawed and has led to deep cuts that were not projected when 

the formula was implemented in 1997. While we greatly appreciate the short-term 

reprieves achieved by Congress and the Administration in recent years, these temporary fixes have led to even deeper and longer sustained cuts because Congress 

recouped the cost of temporarily blocking the severe cuts in physician payments in 

the out-years. Without a long-term solution, repeated Congressional intervention 

will be required to block payment cuts that jeopardize continued access to high quality care for the elderly and disabled. A one-year fix would provide a temporary respite and lead to another struggle to deal with this problem early next year. Thus, 

at least a two-year fix is urgently needed this year to allow time for a permanent solution to the SGR. 

Some government officials have cited the SGR formula as a method for restraining the growth of Medicare physicians’ services. Yet, there are many reasons for 

such growth, and there are no studies documenting systematic inappropriate care. 

Without valid studies, it is impossible to determine what volume growth is appropriate or inappropriate. Earlier this year, for example, Medicare officials announced 

that spending on Part A services is decreasing. This suggests that, as technological 

innovations advance, services are shifting from Part A to Part B, leading to appropriate volume growth on the Part B side. If there is a problem with volume growth 

regarding a particular type of medical service, the AMA looks forward to working 

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with Congress and the Administration to address it, rather than retaining a formula 

that penalizes both patients and physicians for growth that may not be inappropriate at all. 

ADMINISTRATIVE ACTION NEEDED TO ASSIST CONGRESS IN REPLACING THE SGR

CMS Administrator McClellan recently stated that ‘‘the current system of 

paying physicians is simply not sustainable.’’ We agree and urge the Subcommittee to continue pressing CMS to use its authority to take administrative action to help Congress avert physician pay cuts and ensure that 

a stable, reliable Medicare physician payment formula is in place for Medicare patients. 

Despite their protestations, the AMA firmly believes that CMS has the authority 

to remove the costs of drugs, back to the base period, from the calculation of the 

SGR. Because this would significantly reduce the cost of legislation and allow Congress to address the looming Medicare pay cuts more easily, CMS should take this 

step as soon as possible. Indeed, CMS told Congress earlier this year that removing 

drugs prospectively is worth about $36 billion in lowered costs, while removing them 

from the base-year forward reduces $111 billion from the cost of an ultimate fix. 

Drug expenditures are continuing to grow at a very rapid pace. Over the past 5 

to 10 years, drug companies have revolutionized the treatment of cancer and many 

autoimmune diseases through the development of a new family of biopharmaceuticals that mimic compounds found within the body. Such achievements do not 

come without a price. For example, in 2004 alone, six oncology drugs received FDA 

approval or expanded approval, and two others received approval in 2003. As Dr. 

McClellan noted in testimony earlier this year, spending for one recently-developed 

drug, Pegrilgrastim (Neulastra) totaled $518 million last year, more than double the 

2003 total. This drug strengthens the immune systems of cancer patients receiving 

chemotherapy, thereby improving and extending the lives of many and potentially 

reducing hospital costs in the process. 

Growth rates for drug spending dwarf those of the physician services the SGR 

was intended to include. Between the SGR’s 1996 base year and 2004, the number 

of drugs included in the SGR pool rose from 363 to 445. Spending on physician-administered drugs over the same time period rose from $1.8 billion to $8.6 billion, 

an increase of 358% per beneficiary compared to an increase of only 61% per beneficiary for actual physicians’ services. As a result, drugs are consuming an ever-increasing share of SGR dollars, nearly tripling from 3.7% of total SGR spending in 

1996 to 9.8% in 2004. 

It is not equitable or realistic to finance the cost of innovative drug 

therapies through cuts in payments to physicians and other health care 

professionals. CMS must act now to remove these costs form calculations 

of the SGR. The longer CMS waits to make this policy change, the more 

costly it will be for the government to do so. 

The AMA appreciates the opportunity to provide our views to the Subcommittee on these important matters. We look forward to working with 

the Congress and the Administration to: (i) stop the pending Medicare cuts; 

(ii) provide at least two years of positive Medicare physician payment updates beginning in 2006; and (iii) defer implementation of value-based purchasing proposals until the SGR is repealed and replaced with a formula 

that does not unfairly penalize physicians for volume increases. These 

measures will assist the Medicare program in providing broad-based access 

and quality of care for seniors, persons with disabilities, and military beneficiaries.

Mr. DEAL. Thank you. 

Ms. Kennelly. 

STATEMENT OF HON. BARBARA B. KENNELLY 

Ms. KENNELLY. Thank you, Chairman Deal and Ranking Member Brown, Mr. Bilirakis and Congressman Burgess. I am really 

delighted to be able to participate in this hearing and to present 

the beneficiary’s point of view in this discussion about physician 

payment rates. 

The National Committee to Preserve Social Security and Medicare is a nonprofit member association. We have roughly 4.5 million members, and the vast majority of them are seniors. 

120

Mr. Chairman, I am not here today to take a specific position on 

how to reimburse physicians who are participating in the Medicare 

program. That is going to be your very difficult task. Instead, as 

an advocate for seniors, I amhere to remind this committee and all 

Members of Congress that access to health care can be denied in 

many ways. Financial barriers can deny needed health care to millions of older Americans. 

One of the reasons most seniors choose fee-for-service Medicare 

over managed care is that most older Americans like their current 

doctors and want to be able to choose their own doctor when they 

need a new one. They have long histories with the doctors and feel 

most comfortable with someone who is familiar with their medical 

history. For this reason, seniors tend to be very sensitive to the 

slightest prospect that more doctors might limit their practices. 

But access is more than a personal issue. The vast majority of 

seniors receive the bulk of their health care in doctors’ offices or 

clinics. Adequate access to physicians is therefore a key component 

to keeping seniors healthy. 

Although there are always cases of closed access, Medicare beneficiaries are generally able to see the doctor of their choice at least 

as often as seniors with private insurance. The fear of access problems is often greater than reality. 

Physician payment reductions are controversial every year. With 

physicians raising the spectrum of future restrictions on access if 

projected cuts are not reversed, we strongly believe doctors should 

be fairly compensated for their service. However, I would like to remind the members of the subcommittee of the flip side of that coin. 

Access can also be denied as seniors are priced out of the health 

care market. 

Two out of three retirees today receive more than half of their 

income from Social Security, and for one out of five retirees Social 

Security is their only source of income. Fortunately, these seniors 

have Social Security costs of living adjustments to help them keep 

up with inflation, but the Social Security COLA can only help so 

much because it is based on annual increases in the Consumer 

Price Index. Medicare premiums, which are set at a level to finance 

about one-fourth of the cost of Part B, rise significantly faster because they are based on health care inflation, which rises much 

faster than general inflation. 

Since 2000, Medicare Part B premiums have doubled, while Social Security COLAs have lagged far behind, with increases averaging under 3 percent. If this trend continues, Medicare out-ofpocket costs will consume one-half of the average Social Security 

benefit by 2021. If this prediction proves to be accurate, it won’t 

make much difference whether physicians are willing to take new 

Medicare patients or not. Many seniors will find it more and more 

difficult to afford the Part B premium at all. This is why any expenditure which increases Part B costs must be looked at as a part 

of the whole, rather than in isolation. 

Reversing the planned payment reduction, when combined with 

normal increases tracking health inflation, will significantly erode 

seniors standard of living. It would also merely postpone the problem, as physician payments are scheduled to decrease in future 

years. 

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Physician payments do not alone add cost to Medicare, of course. 

The treatment managed care plans also have a negative impact on 

traditional fee-for-service Medicare. A recent MedPAC report found 

that Medicare pays HMOs an average of 107 percent of what it 

pays to cover individuals enrolled in a traditional fee for service. 

Older, less healthy, seniors who are left behind in traditional Medicare help subsidize younger, healthier seniors in managed care. 

This makes Medicare less accessible to those seniors who need insurance the most: the frailest, the most economically vulnerable. 

There are also two costly items in the Medicare Modernization 

Act instituted for the first time which are known as the ‘‘soft cap’’ 

for the Medicare program. The soft cap is designed to shift more 

costs from the Federal Government to seniors and could become a 

problem as early as 2007. 

Finally, the new Medicare law for the first time tied the Medicare Part B deductible to health inflation. In only 2 years the deductible has already increased 24 percent, with further increases 

expected in the future. This increase could affect every senior who 

is covered under Medicare Part B. Whether or not they enroll in 

a Part B or not, this change should be revisited. 

To conclude, Mr. Chairman, the National Committee believes in 

protecting access to health care services for seniors, both financial 

as well as physical. We urge Congress to keep both in mind as you 

consider provisions that affect the Medicare program. 

Thank you, Mr. Chairman. 

[The prepared statement of Hon. Barbara B. Kennelly follows:]

PREPARED STATEMENT OF BARBARA B. KENNELLY, PRESIDENT & CHIEF EXECUTIVE

OFFICER, NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE

Mr. Chairman and Members of the Committee: Thank you for inviting me to participate in this hearing, to present the beneficiary’s point of view in this discussion 

about physician payment rates. 

The National Committee to Preserve Social Security and Medicare is the second 

largest organization representing seniors in this country. Our 4.6 million members 

and supporters come from all walks of life and all political backgrounds—what we 

share in common is our dedication to the preservation of Social Security and Medicare, two of the most successful social insurance programs in our nation’s history. 

Mr. Chairman, I am not here today to take a specific position on the various 

methods of reimbursing physicians participating in the Medicare program. Instead, 

as an advocate for seniors, I am here to remind this Committee and all Members 

of Congress that any decision you make relating to the Medicare program has a direct and powerful impact on millions of older Americans. 

One of the reasons most seniors choose fee-for-service Medicare over managed 

care is because most older Americans like their current doctors, and have a strong 

desire to chose their own doctors. Many seniors have long histories with their family 

physician, not to mention a host of specialists, and they are loath to start anew with 

someone who is not extensively familiar with their medical history. 

Although there are always cases of closed access, Medicare beneficiaries are generally able to see the doctor of their choice. According to a MedPAC report to Congress on Physician Services in March of this year, 88 percent of Medicare beneficiaries reported that they experienced no problem, or only a small problem, finding 

a primary care physician. This percentage was the same for privately insured seniors. And while 11 percent of seniors reported significant problems seeing the primary care physician of their choice, the percentage of privately insured patients in 

the same age category who reported significant problems was higher, at 13 percent. 

Specialists were even more available, as 94 percent of Medicare beneficiaries and 

91 percent of privately insured individuals reported either no problem, or a small 

problem, accessing specialists. 

The reason access matters is because physicians are often the most important link 

between Medicare beneficiaries and health care. According to a 2003 CMS study, 

about 80 percent of non-institutionalized Medicare beneficiaries report that a docVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00125 Fmt 6633 Sfmt 6621 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
122

tor’s office or clinic is their usual source of care. Adequate access to physicians is 

therefore a key component to keeping seniors healthy. 

It should not be a surprise that the threat of losing access to their physicians is 

one that seniors take very seriously. It is also no surprise that Congress takes this 

risk equally seriously, as you should. While the Senate has included a ‘‘fix’’ for the 

physician payment problem in its budget reconciliation bill, the House has not budgeted for this ‘‘fix’’. This seems to be an unrealistic assumption, as Congress has 

eliminated planned reductions to physicians in all but one earlier fiscal year. 

But while we strongly believe doctors should be fairly compensated for their services, I would like to remind you of the flip side of that coin—access can equally be 

denied if seniors are priced out of the health care market. 

Two out of three retirees today receive more than half of their income from Social 

Security, and for one out of five retirees, Social Security is their only source of income. Social Security is even more important to women. It makes up nearly threefourths of the income of the average elderly widow, and ninety percent of the income 

of four out of five widows. This reliance on Social Security is unlikely to change significantly in the future, as only one-half of today’s workforce has access to private 

pensions at work, and the mean 401(k) balance hovers around $50,000—hardly 

enough to finance a lengthy retirement. 

Unlike private pensions, most of which do not have cost of living adjustments, Social Security’s annual COLA helps seniors keep up with inflation. However, the Social Security COLA can only help so much, because it is based on annual increases 

in the Consumer Price Index. Medicare premiums, which are set at a level to finance about one-fourth of the cost of Part B, rise significantly faster because they 

are based on health care inflation. Beneficiaries pay 25 percent of any increase in 

Part B costs, and that has resulted in dramatic premium increases in recent years. 

Since 2000, Medicare Part B premiums have doubled, with increases of 13 percent 

in 2004, 17 percent in 2005 and 13 percent announced for 2006. In the meantime, 

Social Security COLAs have lagged far behind, with increases averaging 2.7 percent. 

If this trend continues, the CMS Office of the Actuary predicts Medicare out-of-pocket costs will consume one-half of the average Social Security benefit by 2021. 

If this prediction proves to be accurate, it won’t make much of a difference whether physicians are willing to take new Medicare patients or not—many seniors simply won’t be able to afford the Part B premiums at all. 

That is why any expenditure which will increase Part B costs must be looked at 

as part of a whole rather than in isolation. The Social Security Office of the Chief 

Actuary has projected that converting a 4.3 percent reduction in physician payments 

into a 1 percent increase (as is currently in the Senate reconciliation bill) will result 

in a premium increase of $2.90 in 2007. While this may not seem like a dramatic 

increase standing alone, when combined with the additional increase already projected by CMS, this represents yet another significant erosion of seniors’ standard 

of living. I would also note that such a provision would merely postpone the problem, as physician payments are scheduled to decrease further in future years. 

Although not related directly to physician payments, I would also like to bring to 

the Committee’s attention the impact of managed care plans on traditional fee-forservice Medicare. Managed care plans receive flat benefits per enrollee, rather than 

receiving compensation based upon specific services rendered. For that reason, regardless of the roadblocks Congress places in their way, they have a natural inclination to recruit younger and healthier seniors. These seniors are the most likely to 

be familiar with the concept of managed care, and the least likely to have longstanding relationships with specific doctors—this makes them the most receptive to 

managed care recruitment efforts. 

As managed care plans siphon off healthier seniors, the older, less healthy population is left in fee-for-service Medicare, breaking up the risk pool that makes Medicare, as well as all insurance programs, work. A recent MedPAC report found that 

Medicare pays HMO’s an average of 107 percent of what it would pay to cover individuals enrolled in the traditional fee-for-service Medicare program. All Medicare 

beneficiaries, regardless of whether they enroll in a managed care plan, subsidize 

these overpayments in the form of higher premiums. In effect, the older, less 

healthy seniors who are left in traditional Medicare are helping subsidize younger, 

healthier seniors in managed care. 

This drives costs for the fee-for-service program higher, and makes Medicare less 

accessible to those seniors who need insurance the most—the frailest and most economically vulnerable. 

Among MedPAC’s recommendations is a proposal to compensate managed care 

plans at 100% of costs. We believe such an action would remove the most egregious 

incentive given to managed care plans, and minimize the subsidy participants in 

traditional fee-for-service provide to those in managed care. 

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Two final concerns I would like to bring to your attention relate to the Medicare 

Modernization Act. I know this is not a hearing on the new Part D prescription drug 

benefit, so I won’t digress by discussing that issue, but there is a little known provision in MMA relevant to this hearing that I would like to briefly mention. As you 

may recall, MMA instituted, for the first time, what is known as a ‘‘soft cap’’ for 

the Medicare program. Under this soft cap, if at any point the Social Security Trustees project that the federal contribution to the Medicare program will exceed 45 percent within a seven year window of time, they issue an ‘‘excess general funding’’ determination in their annual report. If the Trustees issue two such findings in a row, 

a series of expedited procedures is triggered that requires the President and Congress to consider legislation that would reduce the federal contribution to the program. 

I should point out that the expedited procedures do not apply to legislation that 

would increase payroll taxes, or change the 45 percent threshold, which was an arbitrary limit set without hearings or public input. The expedited procedures only 

apply to legislation that would cut benefits or increase premiums—either one would 

result in significant cost shifting from the federal government to seniors. 

This year’s Trustees report projected the first time the government share would 

exceed 45 percent in 2012—just outside the seven year window. Because the cost 

sharing ratio between beneficiaries and the federal government is 25 to 75 percent, 

any significant increase in program expenses hastens the day when the 45 percent 

limit will be reached, and increases the costs that will need to be borne by seniors 

to bring the federal share back down to the 45 percent limit. Unless increases in 

health care costs are contained, at some point, Medicare will become unaffordable 

for all but a few. 

Finally, MMA for the first time tied the Medicare Part B deductible to health inflation. In only two years, the deductible has already increased 24 percent, from the 

flat $100 per year beneficiaries had paid for years, to $124 per year announced for 

2006—with further increases expected into the future. This increase affects every 

senior who is covered by Medicare Part B, whether or not they enroll in the new 

Part D prescription drug benefit and deserves to be revisited. 

To conclude, Mr. Chairman, the National Committee believes in protecting access 

to health care services for seniors, both financial as well as physical. We urge Congress to keep both in mind as you consider provisions that affect the Medicare program. 

Thank you.

Mr. DEAL. Thank you. 

Ms. Super. 

STATEMENT OF NORA SUPER 

Ms. SUPER. Mr. Chairman, ranking member Brown and distinguished members of the subcommittee, I am Nora Super, senior research associate at George Washington University’s Center for 

Health Services Research and Policy. I appreciate the opportunity 

to be here today to discuss how to build a more efficient physician 

payment system for the Medicare program. 

As a health services researcher from George Washington University, I studied many broad aspects of the Medicare program. Physician payment reform continues to be one of the most challenging 

and important issues facing the program today. Many experts have 

concluded that improving the quality of care ultimately requires 

changes in individual physician behavior. However, aligning incentives at the national level to reduce inappropriate care while simultaneously improving quality has so far proved elusive. 

Under the fee-for-service system, it is faster and therefore more 

remunerative for physicians to order more tests or procedures than 

to spend time with patients, for example, discussing recommended 

preventive services to help them manage their chronic diseases. 

Sicker patients with multiple chronic conditions are likely to take 

up more of a physician’s time. Our current system does not reward 

physicians for spending time with these patients. In fact, it proVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00127 Fmt 6633 Sfmt 6602 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
124

vides incentives to avoid them. At present, Medicare makes no distinctions based on appropriateness or quality of care. A physician 

who orders and performs procedures that are not truly necessary 

or indicated is paid better than one who is judicious and only employs complex interventions when the cost effectiveness is clear and 

the benefit clearly outweighs the risk. 

Essentially, physicians who see more patients per hour, do more 

procedures, make and receive the most specialty referrals, make 

more money. In contrast, lengthy discussions with patients and 

family members to discuss treatment options or preventive care are 

reimbursed at much lower rates if at all. 

In a recent case study I conducted of a multi-specialty practice 

physician group in Cincinnati that switched from capitation to feefor-service after 30 years, physicians quickly responded to changing 

financial incentives by ordering more tests and seeing patients frequently, demonstrating that payment incentives can markedly 

change the way physicians practice medicine. 

Let’s look for a moment at an example of what we might gain 

if health care financing actually created incentives for physicians 

to spend time communicating with patients and their families. Palliative care is a growing service in hospital and nursing homes in 

the U.S. And is a response to abundant evidence of poorly treated 

pain and other symptoms for patients with advanced illnesses. 

Interestingly, in addition to improving quality of care, multiple 

studies have demonstrated that palliative care, which involves 

talking to patients and family, managing complex symptoms and 

coordination and communication across settings, also reduces 

spending. Data demonstrates that palliative care lowers costs by 

reducing hospital and intensive care unit length of stay and by reducing direct cost per day. It achieves these outcomes in a low-tech 

but highly intensive and time-consuming discussion, clarifying 

goals of care with patients and their families and helping them select medical treatments and care settings that meet their goals. 

Yet, our payment system not only fails to incentivize high-qualify 

management of such payments with proven palliative care approaches, it powerfully rewards and encourages through it its payment methods just the opposite, more costly procedures, more specialist visits and more hospital stays for the patients least likely to 

benefit from them. 

As the single largest purchaser of care, many have concluded 

that the Medicare program must begin to tie payments to physician 

behaviors that are demonstrably linked to better outcomes. Congressional leaders, CMS and MedPAC have all called for financial 

incentives to be targeted to promote high value and efficient resource use under Medicare’s fee-for-service system. 

While I applaud these pay-for-performance efforts as a critical 

step in the right direction, I encourage you, Congress, as others 

have suggested today, to not simply adopt programs that have been 

successful in younger commercial populations and assume they will 

transfer seamlessly to the Medicare population. Adjustments will 

need to be made to ensure that pay-for-performance does not create 

adverse incentives for physicians seeking to deliver high-quality 

care to patients with multiple chronic conditions and advanced 

125

complex illness who account for over two-thirds of Medicare spending. Thank you very much for your attention. 

[The prepared statement of Nora Super follows:]

PREPARED STATEMENT OF NORA SUPER, SENIOR RESEARCH ASSOCIATE, DEPARTMENT

OF HEALTH POLICY, CENTER FOR HEALTH SERVICES RESEARCH AND POLICY, GEORGE WASHINGTON UNIVERSITY MEDICAL CENTER

Chairman Deal, Ranking Member Brown, and members of the Subcommittee on 

Health of the House Energy and Commerce Committee, I am Nora Super, a senior 

research associate at George Washington University’s Center for Health Services 

Research and Policy. I appreciate the opportunity to be here today to discuss how 

to build a more efficient physician payment system for the Medicare program. 

As a health services researcher from George Washington University, I study many 

broad aspects of the Medicare program, ranging from implementation of the new 

drug benefit to coordination of care for those who are dually eligible for Medicare 

and Medicaid. Nonetheless, physician payment reform continues to be one of the 

most challenging and important issues facing the program today. Many experts 

have concluded that improving the quality of care ultimately requires changes in individual physician behavior.1 However, aligning incentives at the national level to 

reduce inappropriate care while simultaneously improving quality have thus far 

proved elusive. 

Drivers in Fee-For-Service Utilization 

As you know, the vast majority of Medicare beneficiaries receive care under Medicare’s fee-for-service system. In fee-for-service medicine, the incentives are clear: a 

physician or other practitioner charges separately for each patient encounter or 

service rendered. Under this payment system, expenditures and incomes increase if 

more units of service are provided or more expensive ones are substituted for less 

expensive ones. Thus, individual physicians have an incentive both to increase the 

volume of patients that they see, and to recommend the highest cost and best reimbursed procedures under these incentives. 

Physicians, like anyone, respond to incentives. Under the fee-for-service system, 

physicians are paid based on the number of procedures or encounters provided and 

are paid much more generously for doing interventional procedures, such as coronary stenting or colonic polypectomy than they are for so-called evaluation or management services—time spent with a patient and family weighing the benefits and 

risks of alternatives and/or discussing treatment options. 

I recently completed a case study of a multi-specialty physician practice group 

that switched to fee-for-service reimbursement after nearly 30 years as a capitatedbased medical group in Cincinnati, Ohio.2 The group did not do so willingly, but in 

response to an evolving marketplace that no longer rewarded small capitated products. Nevertheless, the physicians in the 100+ physician group quickly responded to 

the changed financial incentives by seeing patients more frequently and ordering 

more tests, demonstrating that payment incentives can markedly change the way 

physicians practice medicine. 

Under the fee-for-service system, it is faster and therefore more remunerative for 

a physician to order more tests or procedures than to spend time with patients, for 

example, discussing recommended preventive services to help them manage their 

chronic diseases. Sicker patients, with multiple chronic conditions, are likely to take 

up more of a physician’s time. However, our current system does not reward physicians for doing so. According to a study by Duke University Medical Center, the 

amount of time spent with a patient in discussing preventive services can increase 

three-fold if one or more chronic conditions are uncontrolled at the time of the patient visit.3 Under the current payment incentive structure, physicians are encouraged to avoid these patients rather than to embrace them. 

At present, Medicare makes no distinctions based on appropriateness or quality 

of care—a physician who orders or performs procedures that are not truly necessary 

or indicated is paid better than one who is judicious and conservatively employs 

complex interventions only when the cost-effectiveness is clear and the benefit clearly outweighs the risks. Essentially, physicians who see more patients per hour, do 

more procedures, and make and receive the most specialty referrals, make more 

money. In contrast, lengthy discussions with patients and their family members to 

discuss treatment options are reimbursed at much lower rates, if at all, for roughly 

the same amount of physician time. For example, the national average Medicare reimbursement for placement of two coronary artery stents via cardiac catherization 

was $1,012 in 2002; a two-hour family meeting was reimbursed on average between 

$75 and $95. 

126

One of the explicit objectives of the Resource Based Relative Value Scale (RBVBS) 

physician fee schedule that was implemented in 1992 was to redistribute payment 

in such a way that rates for ‘‘cognitive’’ or ‘‘evaluation and management’’ services 

(as they are called today) would rise relative to other services, such as surgery and 

other procedural services. However, preliminary work done by the Urban Institute 

on behalf of the Medicare Payment Advisory Commission has found that the desired 

redistribution has stopped for a number of reasons, primarily the interaction between changes in the relative value units (RVUs) and the growth in the volume of 

services, as well as the effects of introducing new services.4

Valuing Physician-Patient Communication: Palliative Care as a Model 

within the Current System 

An example of the benefits of care focused on quality of life, maximizing clear doctor-patient communication, and expert coordination of care across settings may be 

found in the recent rapid growth of palliative care services and specialists in the 

U.S. Through research funded by the Center to Advance Palliative Care—a national 

program initiative of the Robert Wood Johnson Foundation based at the Mount 

Sinai School of Medicine in New York City—I have learned that meeting the needs 

of the most complex and vulnerable Medicare beneficiaries will require physicians 

to employ skills that are not recognized or rewarded in the current Medicare payment system.5 Studies of doctor-patient communications have found that clinicians 

typically fail to discuss patients’ values, goals of care, and preferences regarding 

treatment.6 Not only are these skills rarely taught in medical school, any physician 

who tries to provide these services will soon be forced out of practice due to underreimbursement. Physicians in practice quickly learn what they have to do to pay 

their overhead and themselves—see more patients faster and spend most time doing 

the highest-paid procedures. Talking to patients and families, managing complex 

symptoms, coordination and communication of care across settings—the kind of care 

patients and families say they want 7 and what most of us would agree we would 

want for ourselves and our loved ones—is a sure path to bankruptcy under the current physician payment system. 

Let’s look for a moment at what we might we gain if health care financing actually created incentives for this kind of high quality care. Palliative care is a growing 

service in hospitals and nursing homes in the U.S., and is a response to abundant 

evidence of poorly treated pain and other symptoms. It aims to relieve suffering and 

improve quality of life for patients with multiple chronic conditions and advanced 

illnesses. It is offered simultaneously with all other appropriate medical treatment 

and is not limited to the care of the terminally ill. In practice, palliative care involves expert pain and symptom assessment and management, communication 

among the patient, family and providers about the goals of care, and coordination 

of care across multiple settings.8 Studies demonstrate that palliative care is effective 

at reducing suffering of all causes, and those patients and families are more satisfied when they receive it.9

Interestingly, in addition to improving quality of care, multiple studies have demonstrated that palliative care also reduces spending. Data demonstrate that palliative care lowers costs (for hospitals and payers) by reducing hospital and intensive 

care unit length of stay, and by reducing direct costs per day (such as pharmacy 

and imaging utilization).10 Palliative care achieves these outcomes in a low-tech but 

highly intensive and time consuming discussion—clarifying goals of care with patients and their families and helping them select medical treatments and care settings that meet their goals. This kind of in-depth conversation about the benefits 

and burdens of treatment alternatives often lead to more resource-conservative decisions on the part of patients’—such as going home rather than remaining in the hospital—but there is no way to help patients and families make these difficult decisions without a major commitment of physician time and effort—time and effort 

which is rewarded at less than 10 percent of the level we reimburse invasive cardiologists for placing coronary stents. 

These findings are especially significant for patients with chronic illnesses. We 

know that Medicare per capita spending increases as health status declines. For example, Medicare spends twice as much for beneficiaries living in long-term care facilities than what it spends for those living in the community. Medicare spending 

is also much higher for the sickest beneficiaries—those in their last year of life. In 

1999, Medicare spending reached $24,856 for beneficiaries who died that year compared to $3,669 for those who were alive at the conclusion of the year.11

More than 80 percent of Medicare beneficiaries have at least one chronic condition, and the prevalence of chronic conditions, which typically require ongoing care 

and treatment to maintain health and functional status and to slow the progression 

of the disease, has been strongly linked to high utilization of medical resources. 

127

More than 75 percent of high cost Medicare beneficiaries were diagnosed with one 

or more of seven major chronic conditions (e.g., chronic obstructive pulmonary disease, congestive heart disease, diabetes).12 A striking 68 percent of all Medicare 

spending is spent on the 23 percent of Medicare beneficiaries with five or more 

chronic conditions and these patients receive services from an average of 14 different physicians each year.13 The clinical need for care coordination is immense. 

Yet our payment system not only fails to incent high quality management of such 

patients with proven palliative care approaches, it powerfully rewards and encourages through its payment methods just the opposite—more costly procedures, more 

specialist visits, and more hospital stays for the patients least likely to benefit from 

them. Jack Wennberg’s data from the Center for Evaluative Clinical Sciences at 

Dartmouth suggests that the higher utilization that results from current Medicare 

payment incentives is not only not associated with improved quality of care for seriously ill Medicare beneficiaries, counter to the prevailing assumption, more services 

are actually associated with higher (not lower) mortality. In contrast, a healthcare 

system that provided comprehensive palliative care as the default approach, rather 

than the exception, would result in more satisfied patients and families, a lower 

burden of pain and suffering, equivalent or better survival rates, and markedly 

lower but more appropriate use of complex high cost procedures and care settings. 

Changing the Incentives: Is Paying for Performance the Answer? 

The latest fascination in Washington and in the business community has been a 

move to influence physician behavior by paying for health care services based on 

quality of care. ‘‘Pay-for-performance’’ seeks to reward physicians and other health 

care providers for delivering health care services that meet specified standards or 

achieve defined levels of quality. These payment methods have been adopted across 

the country by public and private purchasers with some demonstrated success; however, they face important impediments and challenges too. Most notably, the incentives are not likely to change physician behavior unless they apply to ‘‘enough patients to make a noticeable difference in office income.’’ 14

As the single largest purchaser of care, many have concluded that the Medicare 

program must begin to link payments to physician behaviors demonstrably linked 

to better outcomes. CMS has several pay-for-performance pilot and demonstration 

projects underway. Congressional leaders and the Medicare Payment Advisory Commission (MedPAC) have also stepped up efforts to align the incentives of Medicare’s 

payment systems to improve the quality of care. A key component of MedPAC’s vision for paying for performance is that Congress ‘‘should pay more to physicians 

with higher quality performance and less to those with lower quality performance.’’ 15 Recognizing that the current FFS payment system encourages individual 

physicians to increase the volume of services they provide, MedPAC also recommends measuring physician resource use over time and providing information 

about practice patterns confidentially to physicians. Given that Medicare payment 

systems are currently negative or neutral toward quality, these efforts are important steps in the right direction. 

At the same time, clinicians and advocates have raised concerns that P4P could 

create adverse incentives for physicians seeking to deliver high quality care to patients with multiple chronic conditions and advanced complex illness.16 Quality of 

care for this very costly and very sick patient population involves more than remembering to order a mammogram—one of the measures associated with higher pay for 

performance. In fact a mammogram, or a bone density test or a gait assessment 

may be impossible or completely irrelevant to the care of some of these patients—

such as a bed-bound person with advanced dementia and recurrent pneumonias. Despite the fact that this highly complex chronically ill population accounts for over 

two-thirds of Medicare spending, the physicians caring for them will be predictably 

paid less for failing to conduct these procedures, even though they are delivering 

high quality care tailored to the needs of this particular subset of beneficiaries. An 

undifferentiated P4P process could create strong monetary incentives to care only 

for younger healthier Medicare beneficiaries, those for whom the P4P quality measures were developed and in whom they make sense. If P4P is to be relevant to the 

costliest Medicare beneficiaries it will have to utilize measures truly correlated with 

quality care in this patient population—things like assessing and treating pain, conducting family meetings, and completing advance directives. Thus I conclude that 

we cannot simply adopt programs that have been successful in (younger) commercial 

populations and assume they will transfer seamlessly to the Medicare population. 

Adjustments will need to be made. 

128

Conclusion 

Medicare’s attempt to control volume through its sustainable growth rate (SGR) 

system has been widely recognized as flawed. National volume controls, such as the 

SGR, are based on a faulty assumption—that physicians have a collective incentive 

to reduce the volume of services. To the contrary, when fees are reduced, individual 

physicians have an incentive to increase the number of services they provide in an 

effort to keep income steady. Thus, across-the-board fee reductions ultimately penalize the most prudent physicians and reward those who do more procedures and provide more, not necessarily better, services. 

We cannot assume that the market alone will ensure that appropriate services are 

rendered. Indeed, cost escalation is almost guaranteed without some controls. A 

thought-provoking analysis of 12 markets over time by prominent researchers at the 

Center for Studying Health System Change concluded that market forces alone were 

limited in their ability to deliver efficient health care systems, mostly because of 

local provider market power vis-a`-vis payers and patients.17 As both public and private purchasers look for ways to align the incentives to improve the quality of care 

as well as reduce inappropriate care, financial incentives should be targeted to promote high value and efficient resource use under Medicare’s fee-for-service system. 

The demonstration and pilot projects being undertaken by CMS in the fee-for-system to study ways to improve care for beneficiaries with high medical costs and 

chronic conditions will give us important information about how to better care for 

patients.18 However, the underlying physician payment system—and the incentives 

inherent within it—must be addressed if we are to achieve any significant improvements over the long term. 

The Medicare system of the future should assure access to a well trained primary 

care physician who is compensated as well for his time and effort as his colleague 

doing cardiac catheterization across the street. If society rewards high quality primary care physicians, allowing them to make a good living commensurate with their 

lengthy training and sufficient to repay their medical student loans, the best and 

the brightest will stop flocking solely to highly subspecialized and highly compensated procedural specialties. Data from the new field of palliative care suggests 

that comprehensive management of the sickest and most complex patients not only 

measurably improves quality of care and patient satisfaction, but does so at substantially lower cost to Medicare. This kind of rational system—where chronically 

ill elderly patients and their families can reliably expect expert continuity of care—

is within our reach. If we want to effectively redesign the Medicare payment system, 

we need to make sure we pay for the performance Medicare beneficiaries really 

need. 

Notes 

1 Epstein, A. Lee, T. and Hamel, M. ‘‘Paying Physicians for High-Quality Care,’’ The New England Journal of Medicine, 2004 350:406-410. 2Super, N. ‘‘From Capitation to Fee-For-Service in Cincinnati: A Multi-Specialty Practice 

Group Responds to a Changing Marketplace,’’ Health Affairs, forthcoming. 3Presentation by Kimberly Yarnall, MD, Clinical Associate Professor, Department of Community and Family Medicine, Duke University Medical Center, National Health Policy Forum Session, ‘‘Medicare Health Support: Working with Physicians?,’’ October 21, 2005. 4Medicare Payment Advisory Commission, Report to the Congress: Issues in a Modernized 

Medicare Program, June 2005. 5Morrison, R.S. and Meier, D.E. ‘‘Palliative Care,’’ The New England Journal of Medicine 

2004: 350:2582-2590. 6Tulsky J.A. ‘‘Doctor-patient communications,’’ in: Morrison R.S., Meier, D.E., eds. Geriatric 

Palliative Care. New York: Oxford University Press, 2003:314-31. 7Singer, P.A., Martin, D.K., and Kelner, M. ‘‘Quality End-of-Life Care: Patients’ Perspectives,’’ 

JAMA 1999; 281(2); 163-168; Tolle et al. Oregon report card, 1999. www.ohsu.edu/ethics. 8Morrison, R.S. and Meier, D.E. ‘‘Palliative Care,’’ New England Journal of Medicine 2004; 

350;2582-2590. 9Teno, J. et al. ‘‘Family Perspectives on End-of-Life Care at the Last Place of Care,’’ JAMA, 

2004; 291:88-93. Higginson et al. Journal of Pain and Symptom Management, 2003. 10 National Consensus Project for Quality Palliative Care. ‘‘Clinical Practice Guidelines for 

Quality Palliative Care,’’ www.nationalconsensusproject.org. 11 Cubanski, J., Voris, M., Kitchman, M., Neuman, T., and Potetz, L. Medicare Chartbook, 

Third Edition. Summer 2005. The Henry J. Kaiser Family Foundation. 12 U.S. Congressional Budget Office, ‘‘High-Cost Medicare Beneficiaries,’’ May 2005. 13 Anderson, G.F. ‘‘Medicare and Chronic Conditions,’’ The New England Journal of Medicine 

2005: 353: 305-309. 14 Cunningham, R. ‘‘Professionalism Reconsidered: Physician Payment In A Small-Practice Environment,’’ Health Affairs, 23(6) 36-47. 15Statement of Glenn M. Hackbarth, Chairman, Medicare Payment Advisory Commission, before the Subcommittee on Health of the House Committee on Ways and Means, February 10, 

2005. 

129

16 Boyd, C., Darer, J., Boult, C., Fried, L., Boult, L., and Wu, A. ‘‘Clinical Practice Guidelines 

and Quality of Care for Older Patients with Multiple Comorbid Diseases: Implications for Payfor-Performance,’’ JAMA, 2005: 294:716-724. 17 Nichols, L. et al. ‘‘Are Market Forces Strong Enough To Deliver Efficient Health Care Systems? Confidence is Waning,’’ Health Affairs, 2004 23(2) 8-21. 18See information on CMS website regarding the Medicare Health Support Programs 

(MHSPs) and the Care Management for High Cost Beneficiaries (CMHCB) demonstration 

(www.hhs.cms.gov).

Mr. DEAL. Thank you. 

It was worth waiting to hear your testimonies. 

I think you have all pretty well laid out the problem. As I listened to your testimony, we get from within the medical profession 

itself some very different opinions. Dr. Opelka being a surgeon is 

in effect saying that our current system doesn’t adequately compensate in the non-ambulatory environment. And then we hear, in 

the ambulatory environment, Dr. Arora saying there is no incentive 

to go in that area, and we hear well, that is the only area of the 

practice where you can sort of self-help with additional charges for 

services or testimony or whatever. And then we all want to be sympathetic to dealing with the problem that has been outlined from 

the AMA position and yet appropriately Ms. Kennelly points out to 

us if we raise those fees, that has an impact on the part B premiums and actually beyond that even into the private pay community as a whole. So you have thoroughly explored the problem that 

we have. 

Let me briefly see if I can try to see if we can come up with some 

solutions to it. Ms. Super, I am very intrigued by the study that 

you did. I think that it is great that you have taken on a project 

of trying to look at that and hopefully come up with some solutions. 

How would you go about incentivizing palliative care, to incentivize 

not making the extra imaging that may or may not be necessary, 

without calling it something that sounds like pay-for-performance? 

Ms. SUPER. Well, I thank you very much for your question, Mr. 

Chairman. I think if we want to look at the fee-for-service system, 

that there are ways we can look at the coding, programs that 

incentivize physicians to order procedures and tests rather than 

spend time with patients, and so time-sensitive codes. There have 

been some efforts that some physician groups have advocated and 

have talked about in terms of care coordination and working in 

terms of some partial capitation, talking about different ways that 

a physician could be designated as the one physician that is coordinating the care for beneficiaries, for example, that might have a 

certain number of chronic conditions. 

If you looked at beneficiaries that had two, three or four chronic 

conditions which have been identified by the Congressional Budget 

Office—someone had said earlier scoring is an issue—as being the 

highest-cost beneficiaries that we have, perhaps identifying those 

high-cost beneficiaries that we know cost our system so much 

money and targeting those beneficiaries and perhaps putting them 

into programs and identifying some of the physicians to coordinate 

their care for us and looking at those types of programs. 

Mr. DEAL. Dr. Cady, would that be something that has merit? 

Mr. CADY. I do think we should look at programs like that. One 

of our concerns would be that if you compartmentalize patients, 

that you may be restricting care for those that need it also if you 

are not careful. So coordination plans need to be carefully worked 

130

out between the team and a team effort. I think Dr. Opelka talked 

about a team effort, and he supports that. Any growth that is inappropriate needs to be looked at and taken care of; we agree with 

that. 

Mr. DEAL. Dr. Opelka, it almost sounds like we are talking about 

having to devise maybe two different ways of compensating for 

medical services depending on the type of medical service that is 

provided because they are so different. Is that something that we 

should be looking at? 

Mr. OPELKA. Mr. Chairman, thank you. I do believe that maybe 

it is more than two. In our own practices where we have complex 

ambulatory and hospital-based activities, we have hospital-based 

physician services. We have a crossover between them. We don’t 

see solutions as one size fits all in those environments. We all 

know there are different forces tugging at each one of these elements of patient care. 

I think we need to start with the patient and build a quality valued system and fund that quality valued system for the costs that 

are built into that system. We are trying to actually take the round 

peg and fit it in the square hole or the square into the round, and 

it is not happening. And we were with volume standard performance and utilization controls at one point, then gone into the SGR, 

and now we are at a point where we are saying this ought to be 

evidence-based, and I think you will find various types of evidence. 

It needs to be system and process developed and in a hospitalbased system where you have got part A funding and part B funding all centered around one person, that patient; we need to put 

a system that wraps this together. That is going to be different 

from long-term care, chronic care, ambulatory care models, and I 

think working with CMS, we have opened a lot of doors with this 

pay-for-performance initiative. We are excited about that, and we 

think we ought to put our arms around this and look for a solution. 

If we need a 1- or 2-year window to do that and you want to set 

benchmarks where we have to hit benchmarks with performance to 

show where we are going, that is where we want to be. 

Mr. DEAL. My time has expired. Maybe someone will explore that 

a little further. 

Mr. Brown. 

Mr. BROWN. Thank you, Mr. Chairman. There is sort of a bigger 

question that is begged by the appearance of all of you here, and 

I thank you all for good presentations, and you all make sense, and 

you are all right in your own way. The bigger question is that this 

Congress, this committee, this government, this President have 

found a way without, I don’t see, rancor among the five of you or 

the six of you before, but has found a way to play off doctors 

against seniors when you look at what has happened to Medicare 

premiums, in part because of this formula, premiums 6 years ago, 

my recollection, $46, $47, now they are $88, and I hear doctors all 

the time at home talking to me about their problems, their very legitimate problems, but Congress has created this pitting seniors 

against doctors because we do tax cuts for the wealthiest people in 

our country, many of them for doctors; we are in a war that costs 

us a billion dollars a week that the President’s Secretary of State 

says we may be in for 10 years. 

131

So I don’t expect the AMA nor any of you to lobby Congress in 

opposition to the tax cuts, although I wish you would because I 

think we could fix a lot of this more easily, and I don’t expect the 

AMA or other doctor groups to lobby against the Iraq war and 

speak out against it, although that could be your role as citizens, 

and I am not here to lecture you, but I look at this picture, and 

that is what is wrong with this picture. We haven’t fixed these 

problems anymore than the Medicaid situation because this government doesn’t have the money to do it because we do extraordinarily stupid things that have nothing to do with you but have 

everything to do with that bigger picture. 

So enough of that, except that I would urge all of you to help us 

address some of those bigger problems and correct the direction 

that we seem to be going in that sets this situation up. 

I guess I just, everybody on this panel, both parties, is very sympathetic in wanting to fix this. As Mr. Waxman says, I don’t know 

why this Congress won’t fix it permanently except for the budget 

issues. 

I want to talk to Ms. Kennelly and ask her to give me sort of 

your opinion of what has happened and how we make sure that 

this is fixed so that this fix doesn’t have the impact on premiums 

that it could have. 

Ms. KENNELLY. Congressman Brown, I have to disagree with you 

about seniors pitted against doctors because I have worked with 

seniors since I went out in public life as a city councilwoman in 

Hartford, and seniors really do like their doctors. 

Mr. BROWN. I am not arguing that. But this is what happens. 

Ms. KENNELLY. I can remember when we wanted doctors to take 

assignments. You couldn’t get seniors to tell a doctor to take an assignment because they thought the doctor was right. So that relationship is good. I think one of the problems is not Medicare, not 

Medicaid; it is the whole health system that is fractured. And that 

is what we really should be looking at. 

And the other thing we have to look at very seriously that will 

affect seniors is the fact there is no cost containment in part D, and 

it really goes up with health inflation. And that is going to be very 

detrimental to seniors because so much health care now is through 

prescriptions. But I think the answer, we have squeezed Medicare 

and squeezed Medicare. We have got people going on Medicaid because private companies have dropped their health care benefits. 

So I have to tell you and I maybe did not feel this way in 1994, 

but I really think we have to look at the entire health care system 

if we are ever going to talk about the aging of America. 

Mr. BROWN. Comment, Dr. Cady? 

Mr. CADY. Thank you, Congressman Brown. I want to make 

something clear, and I know Ms. Kennelly is aware of this; doctors 

want to take care of their patients, whether they are seniors, not 

seniors, doesn’t matter. That is what we are trained to do. That is 

what this young doctor was train to do. But when the reimbursement formula doesn’t even cover practice costs, it is hard to keep 

your office open. 

So what we are saying is adopt physician payment updates for 

2 years, give us a chance to work with you and CMS on a permaVerDate 0ct 09 2002 11:19 Jun 02, 2006 Jkt 000000 PO 00000 Frm 00135 Fmt 6633 Sfmt 6602 F:\DOCS\26996.TXT HCOM1 PsN: JOEP
132

nent fix for this problem, and we can also discuss in the future 

value-based quality issues. 

We worked on this. We have the consortium at the AMA which 

CMS participates in. We developed something like 70 measures, 36 

of them approved and many of them waiting for NQF approval. So 

all of those things are in the hopper. But if we don’t stabilize the 

reimbursement situation, doctors are not going to be able to practice, some of them; some of them will retire, some of them will find 

a new profession; some of them will not be able to see new Medicare patients. 

I am a Medicare patient. My doctor 3 months ago told me, you 

need an evaluation by a primary care internist. I am a procrastinator like everybody else, and they called the doctor’s office first, 

couldn’t get an appointment. I called the doctor’s office myself, as 

a physician, could not get an appointment for 3 months. Why? Not 

because I was a physician, not because I was chairman of the board 

of the AMA, because I was a Medicare patient. So it is out there, 

and it has affected me, the access problem. And it can be fixed. 

Congress can fix this problem if you have to find the money. 

As far as the seniors are concerned, we would agree, if you can 

find the money for that, we certainly wouldn’t oppose holding the 

beneficiaries harmless on the issue. 

Mr. DEAL. Thank the gentleman. 

Mr. Bilirakis. 

Mr. BILIRAKIS. Thank you, Mr. Chairman, and thank you gentlemen and ladies for taking time to be here today. I just hope some 

good comes out of it. We often times talk about each other, that we 

should be more open-minded and open to new ideas and that sort 

of thing so when it comes to this pay-for-performance business, at 

first blush, I think a lot of us say, hey, that is probably virtually 

impossible to work well and that sort of thing, but the truth of the 

matter is we should be open-minded. 

But having said that, in very brief responses, would you agree 

that, first, we ought to fix this particular problem of Medicare reimbursements before we even consider something like that. Dr. 

Opelka? 

Mr. OPELKA. Absolutely agree with you. 

Ms. ARORA. Absolutely agree. 

Mr. CADY. Absolutely. 

Ms. KENNELLY. Agree. 

Ms. SUPER. Agree. 

Mr. BILIRAKIS. That is good to hear. Regarding this subject, very 

quickly again, because you are here to help us, I remember a few 

years ago that it was a congressional trip but that included Dr. Roland from Georgia, a medical doctor, primary care physician who 

was in Congress at the time, and we were delegates to NATO. And 

the meetings were in Athens, Greece, at the time because they 

keep rotating around, and so we had a break, 1 day’s break. And 

I suggested, Roy, wouldn’t you like to go see where Hippocrates 

first started his concept of medicine, and it is on the island of Kos 

right near the island that my parents come from. 

Anyway, the guide took us around to show us a hospital, and the 

remnants of that hospital are still there, and then the guy told us 

he never lost a patient, and then he proceeded to explain to us, of 

133

course, he wouldn’t take any patients that were really sick and so 

he had a perfect record. 

So we go now to pay-for-performance. I guess I am using the 

term cherry picking when I say that. So is there a real danger of 

that? Hopefully, Dr. McClellan and others coming up with these 

ideas will take all that into consideration because I know we have 

hospitals in some low-income areas, hospitals that will take basically any patient and whatnot, and they are not going to have near 

the record a private hospital which is in a higher area would have. 

So, hopefully, we will take all that into consideration. 

Dr. Arora, first, I want to commend you for being a primary care 

physician, and principally, I say that because my oldest son is an 

internist, as you may know, and I was telling Mr. McClellan earlier 

that, in all these years, he has been in a perfect position to lobby, 

particularly when I chaired this committee for 10 years, and he 

never did. He just wouldn’t take advantage of the situation. 

But more recently, he finally has become very verbal, and that 

has to do with this reimbursement business, and he says, dad, we 

see them all. We see all the patients. We refer everybody they take. 

The other day he was telling me x-rays are taken, CAT scans or 

whatever the case may be, and if there seems to be a little bit of 

a change in the treatment, has to go back to the primary care physician and what not. Then I know he hasn’t told me, but I know 

about the house calls he makes by his patients. I know about the 

times he goes to the pharmacy personally and purchases pharmaceutical drugs for people and delivers them to their homes because 

they are elderly, and they can’t get around. 

So you guys are really something pretty darn special, as are all 

physicians obviously, but we do know there that there are bad apples in every bushel. Maybe I shouldn’t use that term, and Dr. Burgess here will probably correct me, but there are doctors who take 

advantage of the system, are there not? 

Ms. ARORA. Yes. I would first like to take your first question regarding, just to tell you a little bit about my practice environment. 

Many patients that I personally see have chronic medical problems, 

five medical problems; they are Medicare patients, on over 10 

drugs, and so they are very sick, and even in our own practice, we 

worry that implementing pay-for-performance type of programs 

without adequate risk adjustment that is properly explained, we 

would be penalized and look like the bottom of the barrel because 

we are trying to work with our patients who can’t understand how 

to take their medications and who actually may be non-compliant 

because they can’t afford their medications. 

Mr. BILIRAKIS. Why? You are not compensated for that? 

Ms. ARORA. I wanted to highlight if there is a question about the 

need. 

Mr. BILIRAKIS. I have spent a lot of time in his offices. I have 

seen that. 

Ms. ARORA. The other thing I think all physicians are trained 

with the ideals of the great physicians of years ago, and we all try 

to do what is best for our patients. Nowhere do we ever learn that 

we—actually, part of medical professionalism is that we put the patient first, ahead of ourselves, and our entire medical training is 

really designed that way. We spend many sleepless nights in the 

134

hospital learning about the virtues of following a patient, following 

patients in our clinic. And so I guess what I would say is that I 

can’t be accountable for everybody in the system, but I know that 

there are lots of really good doctors out there and a lot of really 

good physicians that try to practice really good primary care and 

an environment where they just can’t make it because we can’t do 

this and also continue to try to take care of our patients at the 

same time we are worried every year that our salaries are going 

to be cut. 

And I have been involved with the ACP for several years now 

and have had the opportunity to travel to Capitol Hill and meet 

with my Congressman, and the first time I learned about SGR was 

on one of these trips. And now I am here, I am still here a year 

later, 2 years later, talking about this same issue, and what I 

would like to see is some stability in this process so that we are 

not here again next year, so that we have some stability which 

would mean positive updates over at least 2 years, and that is just 

a short-term outcome. A long-term fix would be that we get rid of 

this SGR completely, and I know it will cost money, and I am sympathetic to the case of the seniors. Obviously, it will cost money, 

but I want everyone to kind of think about this as a long-term investment in the future of America’s health. I mean, this is going 

to be dismal if we can’t go see primary care physicians to coordinate care and to work on that. And it is especially important because many primary care physicians, when it is done right, it can 

lower the cost. And we have data that shows that, and I think it 

is really important that we make sure people get to primary care 

physicians who can actually deliver that type of care. 

Mr. BILIRAKIS. Thank you, Doctor. 

I apologize, Mr. Chairman, but she was on a good role there, and 

I think that was all we need to hear. 

Mr. DEAL. She has been neglected up to this point; I didn’t want 

to cut her off. 

Ms. Capps. 

Mrs. CAPPS. Thank you, Mr. Chairman. 

I want to thank each of the panelists for taking your time to 

come and educate us and Members of Congress. 

Dr. Arora, thank you particularly for your last statement, which 

was right on the money. 

Dr. Cady, I want to take a moment to commend you, the AMA, 

as a trustee of the AMA, for the statement you submitted to the 

Medicaid Commission. That statement, and I have it here, that 

statement underlined the need to protect benefits for children, 

pregnant women, seniors and the disabled. It highlighted the need 

to avoid increases in the uninsured. 

And despite statements by many colleagues of mine that Medicare physician issues had no place in the reconciliation—I’m sorry, 

say that again because it is a bone of contention today, despite 

statements by my colleagues that Medicare physician issues have 

no place in—had no place in reconciliation, your statement made 

clear that physician fee cuts are integrally related to Medicaid cuts. 

Unfortunately, the House reconciliation package ignored all of your 

comments. It still contains proposals that will make Medicaid too 

expensive for beneficiaries, still eliminates guaranteed health care 

135

for children that the AMA supports, and 50 percent of the savings 

and cost sharing will come from charging children. 

The changes the majority has made are cosmetic; their only purpose being, I believe, to add to the confusion of Members of Congress just like Medicare beneficiaries are now being confused by 

some recent changes. 

So I am going to ask that the statement by the AMA be made 

part of the record for our proceedings here today, and I thank you 

for that. I am going to turn to my former colleague. 

Mr. BURGESS. Do we have a copy? 

Mrs. CAPPS. I am going to be asking that it be made part of the 

record, and I have copies to share with our members. 

[The information referred to follows:]--AMA STATEMENT 

HERE--

Mr. DEAL. If you would share so we can be looking at it. 

Mrs. CAPPS. Surely. I want to address a question to my former 

colleague Barbara Kennelly. While this hearing is focused on Medicare today, many of us in Congress and many of your constituents 

now, too, as you advocate for both Medicare and Social Security, 

are concerned with what is going on with this important program 

to millions of our seniors, Medicaid; some of the beneficiaries of 

Medicaid are Medicare recipients as well. 

As you know, there are a number of proposals in our bill which 

has been reported out of the committee and may be actually voted 

on this afternoon in the full House that would be very harmful to 

seniors. For example, increasing copayments on necessary services, 

allowing States to severely reduce benefits, as an example, and imposing harsh penalties on disabled and elderly who are penniless 

and need Medicaid’s coverage of nursing care and other long-term 

services. 

I want to ask you now, we heard the other panel members talk 

about the profession that is so vital in Medicare. If you could comment on the beneficiaries and their experience in this House reconciliation bill. 

Ms. KENNELLY. Thank you, Congresswoman Capps. I want to 

commend you for putting that statement in. Dr. Cady and I spent, 

last month, a couple of days together on Medicaid with a group 

that was brought together to address these things, and I know that 

statement, and it is excellent. 

Yes, our seniors are concerned, and we hear from them constantly. We have ten people answering the phone all day with our 

members and talking to them. Any increase, I know it doesn’t 

sound like much, $3 to $5, but when you are living on an incredibly 

fixed income, it is something. And not only is it the amount of 

money that you have to worry about, they will just say, never 

mind, and they won’t get their medicine. That is the problem. 

The other thing that we hear from our members on is the whole 

long-term care situation and putting up the time when your assets 

will be looked at. I know, and I can remember when Medicaid 

began, I can remember when—it was really quite profound how 

many assets they put to their children so they could go into a home 

and get put on Medicaid. 

That doesn’t happen very much any more. Most States have 

made good laws so that they can keep the abuses really down to 

136

a limited amount and to have people go into a nursing home and 

then have their assets begin going back 5 years, and they can’t remember what those assets even were, and they are in the home, 

and then they are not able to pay. So those changes are very worrisome to us, and we do hear from our seniors on it. 

But what you have to say about Medicaid, we do focus groups. 

And I want to tell you something, not too many people know about 

Medicaid or understand it unless you are on it or family member 

on it. The point is, nobody wants to be on Medicaid. They are our 

poorest people, most vulnerable, and we have to make every effort 

that we don’t make their lives worse by taking away one of the few 

things they have, and that is health care. 

Mrs. CAPPS. I yield back the balance of my time. 

Thank you very much, all of you witnesses. 

Mr. DEAL. Dr. Burgess. 

Mr. BURGESS. I thank the Chairman. 

I thank the panel for their tenacity and their enthusiasm, for 

being here today. 

Ms. Super, you talked about the study you did going from 

capitated to a fee-for-service environment. Did you have a copay 

when you were under a capitated system? Was there an across the 

counter charge to get in to see the doctor, or was there no copay 

in the capitated system that was under study? 

Ms. SUPER. I didn’t study the copay system. It was mainly looking at how the physicians were paid under a multi-speciality practice group, and so it wasn’t so much looking—I can’t answer that 

question, I am sorry. It was mainly looking at how the physicians 

were paid. 

Mr. BURGESS. As that change occurred from a capitated system, 

I presume that was like a staff model HMO that you were studying 

and then went to a fee-for-service environment, and you found that 

utilization went up. Do you think the utilization went up because 

needed services weren’t being provided under the capitated system 

or that health care profiteers were abusing the system under a feefor-service side? 

Ms. SUPER. Well, it was a little bit of both. I would say that the 

conclusions of the study were that neither fee-for-service nor capitation are perfect models, and I think that what we found was that 

physicians respond to incentives very strongly, and that under the 

capitated model, there may have been some under-utilization of 

services; that they were not incented to see the patients as frequently, that they didn’t necessarily stay as long each day, that 

they didn’t have to meet with them as frequently. And as soon as 

they went to a full—they were at risk with the patients to whether 

or not—when the patients would come in under capitation, the physicians were at risk, and that seemed to be the indicator of what 

made a difference. Once the physicians went under a model where 

they were compensated based on the number of patients that they 

saw and the number of tests that they ordered, that made a complete difference on their practice patterns and so——

Mr. BURGESS. Doctors, of course, are not stupid. 

Ms. SUPER. Right. 

137

Mr. BURGESS. Now you talk about incentivizing, and I am glad 

to hear you use that word. In a lot of instances, that does mean 

paying for time. 

Ms. SUPER. Exactly. 

Mr. BURGESS. There are areas in our system where we don’t compensate for time, and if we are going to be serious about our move 

to medical information technology, I know my own experience with 

going to a computerized prescription writing program, that it added 

about 1 to 2 minutes per patient. And when you are seeing 30 to 

45 patients a day, you can do the math, and someone has got to 

pay for that 1 to 2 hours that you have added onto that doctor’s 

day. 

If I could, Dr. Arora, let me ask you, and I appreciate very much 

you bringing your four principles to the committee. Surely, we will 

study these. Several of them we are probably well on our way to 

doing without your advice, but at the same time I thank you for 

bringing them because your concerns are some of the most important because it is physicians your age. Dr. Cady and I are at the 

far end, but you are at the beginning of your career. And it is important that we pay particular attention to what physicians your 

age are thinking and what physicians your age are needing. 

To your point about comprehensive strategy for developing or reversing decline in physicians going into primary care, of course, you 

hold a lot of those cards in your hand, and it will be your involvement, your continued involvement in the policymaking process and 

your development as a physician leader for your peers that will be 

so critical in keeping young physicians as they come up through 

the ranks interested in going into primary care. So I do thank you 

for what you have brought to the committee, and I promise you we 

will give that serious consideration. 

In the last seconds that I have, Dr. Cady, as a general surgeon, 

have you yourself, do you think you have seen instances where access to care has been limited to the diminution in physician reimbursements? 

Mr. CADY. Absolutely. 

Mr. BURGESS. Have procedures themselves been shunned because they don’t pay as well as they used to? Some doctors still see 

Medicare patients but not do the more complex procedures. 

Mr. CADY. No, not in my own practice. That was not an issue 

with me as a general surgeon. If a patient needed a gall bladder 

out, if it was appropriate and indicated, we did it regardless. But 

I have seen my daughter, who is an otalaryngologist, and my son, 

who is an anesthesiologist, having difficulty with the Medicare reimbursement formula. 

At my stage of my career, as you mentioned, this is not so much 

an issue with me individually, but I am concerned about her, and 

I am concerned about my two kids as they try to practice medicine, 

meet their practice costs. 

The graph there, I think, is critical. To me as a surgeon, it is 

very simple to understand. Practice expense goes up, reimbursement goes down and the gap gets wider, and it costs more every 

year that we avoid fixing the SGR and replacing it with the medical economic index, like the hospitals and the other people do. 

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So it is a critical issue for you, and I am sensitive to the difficulty, but at the same time, I am sensitive to the patients out 

there that are going to have access problems. 

Mr. BURGESS. One of the things I would like to mention, I know 

you work with AOA. You might consider working with AMA and 

looking into developing tools for calculating practice costs. I know 

that was one of the most difficult tasks that I had in my office. If 

someone says, how much does it cost for you to deliver a baby, it 

was a tough figure for me to come up with because we just don’t 

think along those lines. 

So if you can develop some of the tools for doctors to use to help 

young physicians know as they set up their offices, if you were 

going to do an electrocardiogram in your office, this is what it is 

going to go cost you, that way Dr. Arora will know what to charge, 

and not just you want to cover overhead, you want to pay her for 

her time. 

I will yield back, Mr. Chairman. You have been very indulgent. 

Mr. DEAL. Thank you. I believe we have reached the end of this 

very long day for all of us. We thank you. We realize the sacrifice 

you make of your time and your effort to get here and to be present 

for us to hear from you and to ask you questions, and we truly appreciate that and express our appreciation to you. And to the representatives of the organizations, please extend our appreciation. 

Mr. BILIRAKIS. The one chart there, if you can call it that, the 

map of the United States, that is not in your written testimony. 

Mr. CADY. It is a very simple map of each State. The top number 

is how much. 

Mr. BILIRAKIS. But we don’t have a copy of that. 

Mr. CADY. We will get a copy of it. The top number is the amount 

your State of Florida will lose in 2006, and the bottom number is 

how much they will lose over the 2006 to 2011 period, and it is significant. 

Mr. BILIRAKIS. Thank you. I already know that. 

Mr. DEAL. I am sure he will make sure we get copies of those. 

Thanks to all of you again. 

With that, this hearing is adjourned. 

[Whereupon, at 3:48 p.m., the subcommittee was adjourned.] 

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