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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
                  REPORT ON MEDICARE PAYMENT POLICIES

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 2, 1999

                               __________

                             Serial 106-15

                               __________

         Printed for the use of the Committee on Ways and Means

                                

                      U.S. GOVERNMENT PRINTING OFFICE
 58-251 CC                   WASHINGTON : 1999
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois            JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 23, 1999, announcing the hearing............     2

                                WITNESS

Medicare Payment Advisory Commission, Hon. Gail R. Wilensky, 
  Ph.D., Chair; accompanied by Murray N. Ross, Executive Director     9

                       SUBMISSIONS FOR THE RECORD

American College of Surgeons, statement..........................    38
American Medical Association, statement..........................    41

                  REPORT ON MEDICARE PAYMENT POLICIES

                              ----------                              

                         TUESDAY, MARCH 2, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1 p.m., in 
room 1100, Longworth House Office Building, Hon. William M. 
Thomas (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE                             CONTACT: (202) 225-3943
February 23, 1999
No. HL-2

                      Thomas Announces Hearing on
                  Report on Medicare Payment Policies

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on the Medicare Payment Advisory Commission's 
(MedPAC) recommendations on Medicare payment policies. The hearing will 
take place on Tuesday, March 2, 1999, in the main Committee hearing 
room, 1100 Longworth House Office Building, beginning at 1:00 p.m.
      
    Oral testimony at this hearing will be from invited witnesses only. 
The sole invited witness will be the Honorable Gail R. Wilensky, Ph.D., 
Chair, Medicare Payment Advisory Commission. However, any individual or 
organization not scheduled for an oral appearance may submit a written 
statement for consideration by the Committee and for inclusion in the 
printed record of the hearing.
      

BACKGROUND:

      
    Established by the Balanced Budget Act of 1997 (BBA) (P.L. 105-33), 
MedPAC advises Congress on Medicare payment policy. The Commission is 
required by law to submit annually by March 1, its advice and 
recommendations on Medicare payment policy in a report to the Congress. 
The BBA directs the Commission to review specific topics related to 
various aspects of the Medicare+Choice program, such as payment 
methodology, risk adjustment and risk selection, and quality assurance 
mechanisms. Additionally, the Commission is required to review payment 
policies under the Parts A and B fee-for-service system, particularly 
factors affecting program expenditures for hospitals, skilled nursing 
facilities, physicians and other sectors.
      
    In announcing the hearing, Chairman Thomas stated: ``The Committee 
continues to value MedPAC's technical advice as Congress restructures 
and strengthens the Medicare program for our nation's seniors. This 
hearing will offer the Committee an important opportunity to explore 
in-depth MedPAC's recommendations for improving Medicare payment 
policies in a variety of areas.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on MedPAC's March 1999 recommendations on 
Medicare payment policies as required by the BBA. Among the areas to be 
discussed will be the Medicare+Choice program and the fee-for-service 
components of the Medicare program.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Tuesday, March 
16, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Thomas. The Subcommittee will come to order.
    Two years ago, Congress made unprecedented changes in the 
Medicare Program that were incorporated in the Balanced Budget 
Act of 1997. In strengthening Medicare for current 
beneficiaries and setting a direction for future generations, 
the Balanced Budget Act changes created the new Medicare+Choice 
Program that allows seniors to choose their health plans from a 
menu of private plan options. The Balanced Budget Act also 
continued the process of modernizing the fee-for-service 
Medicare from the sixties-style, cost-based reimbursement to 
prospective payment systems and simple fee schedules that are 
common practice in the private sector.
    However, it is a far cry from Medicare's administered 
pricing systems to a market environment, in which competition 
drives the price of services. For a variety of reasons, 
Medicare must periodically adjust its payments rates and 
systems to reflect changing conditions. Up to 2 years ago, we 
had the occasion to host two commissions: the old Prospective 
Payment Assessment Commission, ``ProPAC,'' and ``PhysPRC,'' the 
Physician Payment Review Commission.
    Just as the delivery of health care is being consolidated, 
we decided to consolidate our advisory structure. So, assisting 
Congress in monitoring the changes made in virtually every part 
of the Medicare Program, we created the Medicare Payment 
Advisory Commission, or ``MedPAC.''
    MedPAC's mandated role is to provide technical advice to 
the Congress on all of the complex payment policies in the 
administered pricing system of Medicare. Congress also directed 
MedPAC to review, specifically, the implementation, design and 
development of the Medicare+Choice Program, since so much of 
that program was whole-cloth, or based on only a partial 
comfort level of information, since we had not had an adequate 
data collection structure in the past.
    As the administration implements the BBA, the Balanced 
Budget Act, the Congress, and in particular, the Subcommittee 
is going to be looking to MedPAC for its technical advice and 
counsel. Contrary to our usual procedure, our only witness 
today is Dr. Gail Wilensky, the Chair of MedPAC, who will 
afford us the opportunity to explore a bit more in depth than 
we usually have the Commission's recommendations for fiscal 
year 2000 Medicare payments.
    [The opening statement follows:]

Opening Statement of Hon. Bill Thomas, a Representative in Congress 
from the State of California

    Two years ago, Congress made unprecedented, fundamental 
changes in the Medicare program by passing the Balanced Budget 
Act of 1997 (BBA). In strengthening Medicare for current 
beneficiaries and setting a direction for future generations, 
the BBA created the new Medicare+Choice program that awards our 
seniors the freedom to choose their health plans from a menu of 
private plan options.
    The Balanced Budget Act also continued the process of 
modernizing the fee-for-service Medicare from 1960s-style cost-
based reimbursement to prospective payment systems and simple 
fee schedules that are common practice in the private sector. 
However, it's a long journey from Medicare's administered 
pricing systems to a market environment in which competition 
drives the price of services. For a variety of reasons, 
Medicare must periodically adjust its payment rates and systems 
to reflect changing conditions that are not automatically 
addressed by the competitive market.
    To assist Congress in monitoring the changes made in 
virtually every part of the Medicare program, the BBA created 
the Medicare Payment Advisory Commission, or MedPAC. MedPAC's 
mandated role is to provide technical advice to the Congress on 
the complex payment policies in Medicare's administered pricing 
systems. Congress also directed MedPAC to review specifically 
the implementation, design and development of the 
Medicare+Choice program.
    As the Administration implements the BBA, the Congress, and 
in particular this Subcommittee, look to MedPAC for its 
technical advice and counsel. Our only witness today is Dr. 
Gail Wilensky, the Chair of MedPAC, which will afford us the 
opportunity to delve deeply into the Commission's 
recommendations for FY 2000 Medicare payments.
      

                                

    Chairman Thomas. And with that, I recognize my friend and 
colleague from California, the Ranking Member, Mr. Stark.
    Mr. Stark. Mr. Chairman, thank you very much. Let me first 
congratulate MedPAC for this year's report. It addresses many 
of the issues that face us in the Medicare Program and provides 
recommendations that Congress should consider in addressing 
those issues. I am particularly pleased that they recognize 
HCFA's resource problems. Published in the report as sort of a 
sidebar, is the letter published in the Journal of Health 
Affairs, written by Gail Wilensky and Joe Newhouse. The experts 
agree that we need to have additional resources to administer 
HCFA, and management of the plan should not be partisan. We may 
have partisan disagreements on what the plan should be, but 
once the plan is in place we should see that the government can 
operate as efficiently as possible to carry out our mandates. I 
hope we can work together as a Subcommittee to make a joint and 
bipartisan recommendation to the Budget Committee and the 
Appropriations Committee for HCFA to get the resources to carry 
out whatever mandate it is that Congress will give them.
    We also have to find a way to make the funding a bit more 
stable. Perhaps through direct appropriations, the way we fund 
PROs or the Medical Integrity Program, would be a solution to 
end this annual hassle that we have to go through. I would be 
glad to work with the Chairman, in any way he would consider, 
if we could institutionalize the process in seeing that HCFA 
gets reasonable resources. I would like to ask that the text of 
the Wilensky letter be put in the record.
    Chairman Thomas. Without objection.
    [The opening statement and attachment follows:]

Opening Statement of Hon. Fortney Pete Stark, a Representative in 
Congress from the State of California

    Mr. Chairman, first, let me congratulate the Medicare 
Payment Assessment Commission for this year's report. It 
addresses many of the issues facing Medicare at this time, and 
it provides recommendations that the Congress should consider 
in addressing those issues.
    I am particularly pleased that the Commission recognizes 
the need to address HCFA's resource problems, and has chosen to 
endorse and include in their Report an open letter published 
recently in the journal, Health Affairs. This letter was signed 
by a nonpartisan group of our Nation's leading health policy 
experts, including the Chair and Vice-Chair of MedPAC, Gail 
Wilensky and Joe Newhouse. These experts agree that HCFA must 
have additional resources if it is to administer the Medicare 
program in the way that we all agree that it should be 
administered.
    Mr. Chairman, management of Medicare should not be a 
partisan issue--we all want HCFA to be well managed. As the 
Congress expands HCFA's responsibilities, HCFA's resources must 
also be increased. I hope that we can work together as a 
Subcommittee to make a joint, bipartisan recommendation to the 
Budget Committee and the Appropriations Committee for HCFA's 
resources for this year. We must also find a way to make HCFA's 
funding more stable, perhaps through a direct appropriations 
method similar to the way that we fund the Peer Review 
Organizations (PROs) and the Medicare Integrity Program (MIP).
    Mr. Chairman, the Commission recommends against Congress 
modifying payment rates to Medicare+Choice plans at this time. 
In several ways, we are currently overpaying Medicare managed 
care plans, and I recently learned from the HCFA Administrator 
that, because of an error in calculating the 1997 base-year 
rates, the BBA actually increased payments to managed care 
plans, rather than reducing them.
    Last year, the MedPAC Report described a technical 
``glitch'' in the BBA in which the 1997 base year rates for 
calculating payments to Medicare+Choice plans are overstated by 
about 3 percent. CBO has estimated that the resulting 
overpayment to plans is $8.7 billion over 5 years and $31 
billion over 10 years. I recently received a letter from the 
HCFA Administrator informing me that this overpayment is 
greater than the entire savings from managed care plans 
included in the BBA. The Administrator says, ``the savings from 
the reductions (in the BBA), once fully implemented, do not 
even equal the increased costs due to the overstatement.'' 
Thus, the other savings in the BBA do not even correct for this 
mistake, let alone reduce the earlier, underlying overpayment 
to managed care plans. In fact, the BBA actually increased 
payments to managed care plans, rather than reducing them.
    In addition, the HHS Inspector General reported last year 
that Medicare+Choice plans are paid some $1 billion annually in 
inappropriate payments based on their own inflated reporting to 
Medicare of their administrative costs. I note that the MedPAC 
report suggests that HCFA require separate reporting of 
administrative costs and profit projections, implying that 
these overpayments should be stopped.
     I applaud the Commission for recommending that HCFA be 
permitted to proceed with its risk adjustment approach.. The 
managed care industry is saying that risk adjustment was meant 
to be budget neutral to the HMOs. That seems like nonsense to 
me; risk adjustment is meant to adjust for higher-cost or 
lower-cost beneficiaries throughout all of Medicare, and not 
just to shift money around among the HMOs. By phasing in risk 
adjustment, we are already giving the industry a $4.7 billion 
gift, and hurting the best HMOs, which would be helped by risk 
adjustment.
     Mr. Chairman, if the Medicare+Choice program is to be 
effective, beneficiaries need to feel comfortable trying it 
out. The plan withdrawals last year legitimately scared many 
beneficiaries. It seems to me that there are beneficiary 
protections that can be added to ease some of their concerns, 
and I have introduced a bill (H.R.491) to address those issues.
     The managed care industry has said that last year's 
withdrawals were just the tip of the iceberg, and that we 
should expect more plans to withdraw from Medicare this year. 
Last year, the decision for a plan to withdraw from Medicare 
was made easier by the fact that withdrawing plans would not 
face a five-year lock-out from future participation in 
Medicare. This year, that five-year lock out applies. I will be 
interested to hear what MedPAC expects to happen this year, 
both in plan withdrawals and in benefit reductions and premium 
increases.
     On post-acute care, the Commission expresses concerns 
about the methodology that HCFA has used for the Skilled 
Nursing Facility (SNF) prospective payment system and is 
planning to use for rehabilitation facilities. The Commission 
prefers a discharged-based system rather than the per-diem 
system that HCFA is using. I, too, have expressed similar 
concerns, and I look forward to discussing this issue today.
     This year, MedPAC goes even further than last year's 
report in recommending an ``independent assessment of need for 
beneficiaries receiving extensive home health services to 
ensure the appropriateness of such care.'' I followed MedPAC's 
recommendations from last year and introduced legislation (H.R. 
746) to establish such a system of home health case management. 
My bill would require long-term home health patients to have 
their home health care planned by an independent case manager, 
who would be paid by Medicare on a fee schedule, or HCFA would 
have the option of using competitive bidding in regions where 
enough competition existed to make that appropriate.
     The Commission recommends that the Congress establish in 
law clear eligibility and coverage guidelines for home health 
services. We need the assistance of the Commission on this, and 
I also suggest that the Commission evaluate whether the home 
health benefit should be split into two parts, an acute care 
benefit and a long-term benefit, reflecting the two groupings 
of patients that use the program, with separate eligibility and 
coverage requirements.
     The Commission recommends making Medicare payment methods 
and amounts for ambulatory services consistent across settings. 
I agree, and last year I introduced a bill to achieve exactly 
this objective. The Commission also recommends applying the 
physician Sustainable Growth Rate (SGR) across all ambulatory 
settings, and I would ask why not apply it to all of Medicare?
     The Commission recommends two cost sharing issues--it 
recommends reducing copayments for hospital outpatient services 
and instituting a copayment for home health services. I agree 
with the recommendation to reduce cost sharing for hospital 
outpatient services, and I have introduced a bill (H.R. 421) to 
recoup for Medicare beneficiaries the savings that they lost 
this year when HCFA was unable to implement the BBA changes for 
those services. The Commission recommendations raise a larger 
question of whether it is time to think about restructuring all 
Medicare deductibles and copayments--and Medigap insurance--so 
that they are more like cost sharing in managed care.
     Finally, Mr. Chairman, I want to make a comment regarding 
conflicts of interest in accreditation organizations. The 
MedPAC Report cites a HCFA rule that eligible accreditation 
organizations for quality of care would need to operate 
nationwide and be free from control by the organizations that 
they accredit. The Report notes that this rule for managed care 
plans is inconsistent with Medicare accreditation rules for 
hospitals, and notes that this rule might create problems for 
NCQA, which has HMO members on its board.
     It seems to me that the best way to make these Medicare 
rules consistent would be to apply the managed care rule 
throughout Medicare, to hospitals and other Medicare providers. 
We are constantly finding that JCAHO, which is heavily 
influenced by the hospitals that it regulates, is pulling 
punches and doing what the people who pay it want. Their 
quality of care work on nursing homes, for example, has been 
awful. I have introduced legislation calling for more public 
representatives on these accreditation boards. Medicare and the 
public are not well served and will never trust these groups 
until they are free of conflicts of interest.
      

                                

OPEN LETTER TO CONGRESS & THE EXECUTIVE

               Crisis Facing HCFA & Millions Of Americans

    The signatories to this statement believe that many of the 
difficulties that threaten to cripple the Health Care Financing 
Administration (HCFA) stem from an unwillingness of both 
Congress and the executive to provide the agency the resources 
and administrative flexibility necessary to carry out its 
mammoth assignment. This is not a partisan issue because both 
Democrats and Republicans are culpable for the failure to equip 
the HCFA with the human and financial resources it needs to 
address what threatens to become a management crisis for the 
agency and thus for millions of Americans who rely on it. This 
is also not an endorsement of the present or past 
administrative activities of the agency. Congress and the 
administration should insist on a HCFA that operates 
efficiently and in the public interest.
    Over the last decade, Congress has directed the agency to 
implement, administer and regulate an increasing number of 
programs that derive from highly complex legislation. While 
vast new responsibilities have been added to its heavy 
workload, some of its most capable administrative talent has 
departed or retired; other employees have been reassigned as a 
consequence of reductions in force. At the same time, neither 
Democratic or Republican administrations have requested 
administrative budgets of a size that were in any way 
commensurate with the HCFA's growing challenge.
    The latest report of the Medicare trustees points out that 
the HCFA's administrative expenses represented only one percent 
of the outlays of the Hospital Insurance Trust Fund and less 
than two percent of the Supplementary Medical Insurance Trust 
Fund. In part, this low percentage reflects the rapid growth of 
the denominator-Medicare expenditures. But, even accounting for 
Medicare's growth, no private health insurer, after subtracting 
its marketing costs and profit, would ever attempt to manage 
such large and complex insurance programs with so small an 
administrative budget. Without prompt attention to these 
issues, the HCFA will fall further behind in its implementation 
of the many significant reforms mandated by the Balance Budget 
Act of 1997. In the future, the agency also has to cope with a 
demographic revolution that it is ill-equipped to accommodate 
and with changes in medical technology that will increase 
fiscal pressures on the programs it administers.
    As the Bipartisan Commission on the Future of Medicare 
grapples with the problem of reshaping the Medicare program for 
the next millennium, it would do well to consider two important 
reforms concerning the HCFA's administration. First, the 
Commission should recommend that Congress and the executive 
endow the agency with an administrative capacity that is 
similar to that found in the private sector. Second, the 
Commission should consider ways in which the micro-management 
of the agency by Congress and the Office of Management and 
Budget could be reduced. Congress and the public would be 
better served by measuring the agency's efficiency in terms of 
its administrative outcomes (such as accuracy and speed of 
reimbursement of various providers), rather than by tightly 
controlling its administrative processes. Only if the HCFA has 
more administrative resources and greater management 
flexibility will it be able to cope with the challenges that 
lie ahead of it.
    The mismatch between the agency's administrative capacity 
and its political mandate has grown enormously over the 1990s. 
As the number of beneficiaries, claims, participating provider 
organizations, quality and utilization review and oversight 
responsibilities have increased geometrically, the HCFA has 
been downsized. When the HCFA was created in 1977, Medicare 
spending totaled $21.5 billion, the number of beneficiaries 
served was 26 million, and the agency had a staff of about 
4,000 full-time equivalent workers. By 1997, Medicare spending 
had increased almost ten-fold to $207 billion, the number of 
beneficiaries served had grown to 39 million, but the agency's 
work force was actually smaller than it had been two decades 
earlier. The sheer technical complexity of its new policy 
directives is mind-boggling and requires the addition of a new 
generation of employees with the requisite skills.
    HCFA's ability to provide assistance to beneficiaries, 
monitor the quality of provider services, and protect against 
fraud and abuse has been increasingly compromised by the 
failure to provide the agency with adequate administrative 
resources. Even with the addition of $154 million to its 
administrative budget that Congress included in its latest 
budget bill, the likelihood that the HCFA can effectively 
implement all of its varied assignments is remote. The Health 
Insurance Portability and Accountability Act of 1996 assigns 
many new regulatory responsibilities to HCFA but a far larger 
task is implementing the Balanced Budget Act (BBA) of 1997. The 
BBA has more than 300 provisions affecting HCFA programs, 
including the ``Medicare+Choice'' option, which will require 
complex institutional changes and ambitious efforts to educate 
beneficiaries.
    Medicare spending accounts for over 11 percent of the U.S. 
budget. Workable, effective administration has to be a primary 
consideration in any restructuring proposal. Whether Medicare 
reform centers on improving the current system, designing a 
system that relies on market forces to promote efficiency 
through competition, or moving toward an even more 
individualized approach to paying for health insurance, 
Congress and the administration must re-examine the 
organization, funding, management and oversight of the Medicare 
program. Doing anything less is short-changing the public and 
leaving the HCFA in a state of disrepair.

    Stuart M. Butler, Heritage Foundation
    Patricia M. Danzon, University of Pennsylvania
    Bill Gradison, Health Insurance Association of America
    Robert Helms, American Enterprise Institute
    Marilyn Moon, Urban Institute
    Joseph P. Newhouse, Harvard University
    Mark V. Pauly, University of Pennsylvania
    Martha Phillips, Concord Coalition
    Uwe E. Reinhardt, Princeton University
    Robert D. Reischauer, Brookings Institution
    William L. Roper, University of North Carolina at Chapel 
Hill
    John Rother, AARP
    Leonard D. Schaeffer, WellPoint Health Networks, Inc.
    Gail R. Wilensky, Project Hope
      

                                

    Mr. Stark. I yield back. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman.
    [The opening statement of Mr. Ramstad follows:]

Statement of Hon. Jim Ramstad, a Representative in Congress from the 
State of Minnesota

    Mr. Chairman, thank you for calling this important hearing 
to review MedPAC's March 1999 Report on Medicare Payment 
Policies.
    The opening of MedPAC's report says that ``Medicare's 
payment policies should ensure that beneficiaries have access 
to medically necessary care of reasonable quality in the most 
appropriate setting. At the same time, the program should not 
spend more than is required to achieve that goal.''
    I couldn't agree more with this statement. But as easy as 
this is to say, it is much more difficult to explain and 
ensure. So many variables are subjective and open to 
interpretation by beneficiaries, doctors, nurses, hospital 
administrators, health plans, the Health Care Financing 
Administration (HCFA), the General Accounting Office (GAO), 
MedPAC and members of Congress.
    As a new member of the Health Subcommittee, I am amazed at 
how many different interest groups and lobbyists are presenting 
me with so many explanations of what is `medically necessary' 
for Medicare beneficiaries, what constitutes reasonable quality 
and what are the appropriate settings for providing certain 
treatments or performing certain procedures. Even more so, I am 
hearing from everyone about ``adequate reimbursement levels'' 
and why all of them should be raised.
    As Chairman Thomas has stated, MedPAC's technical advice to 
Congress is very important as we try to decipher all the 
information given us from providers and beneficiaries, 
especially as we and the National Bipartisan Commission on 
Medicare try to find ways to preserve, protect and strengthen 
this vital program for current and future beneficiaries.
    Thank you again, Mr. Chairman, for calling this important 
hearing. I look forward to hearing MedPAC's recommendations for 
us from today's witness.
      

                                

    Chairman Thomas. Now I would tell the Chairperson of MedPAC 
that any written testimony that she has will be made part of 
the record, and she can inform the Subcommittee in any manner 
she sees fit in the time allotted to her to begin the process.

  STATEMENT OF HON. GAIL R. WILENSKY, PH.D., CHAIR, MEDICARE 
  PAYMENT ADVISORY COMMISSION; ACCOMPANIED BY MURRAY N. ROSS, 
    EXECUTIVE DIRECTOR, MEDICARE PAYMENT ADVISORY COMMISSION

    Ms. Wilensky. Thank you.
    Chairman Thomas. Welcome.
    Ms. Wilensky. Thank you. Good afternoon, Chairman Thomas 
and Members of the Subcommittee. I am here to share with you 
some of the recommendations that we have made from MedPAC to 
the Congress regarding payment policy. As you know, we will be 
submitting another report in June, where we take on some of the 
broader issues involved in Medicare.
    As you are aware, the number of recommendations and the 
detail in the report is far greater than I can summarize during 
my few minutes allotted to me. So, what I thought I would do, 
instead, is to try to provide an overview of the areas in which 
we support either the BBA's specifications, and/or the specific 
activities HCFA has done thus far, and also indicate some of 
the areas where we have some concerns about something that is 
in the Balanced Budget Act, or something that is part of HCFA's 
regulations, to date.
    With regard to the areas in which we have general 
agreement, they relate to payment in inpatient hospitals, both 
for capital and operating expenses. We think the amounts that 
were provided as part of the Balanced Budget Act are adequate 
and within the range of what we recommended separately. We do, 
however, have some concerns about further freezes, which are in 
effect further reductions, for hospital inpatient services, 
because the data that we have are sufficiently out of date. We 
are not able to really see the effect of the Balanced Budget 
Act on hospitals, to date. Therefore, to do further reductions 
would seem to be too risky, at this point.
    Similarly, we recommend staying with the payment structure 
for Medicare+Choice, but we do think it is very important to 
monitor what happens with the plans in this next year. We are 
concerned about the withdrawals. We think it is important for 
HCFA to try to find ways to work with the plans to lower some 
of the costs of compliance, and to find ways to provide them 
with a little more flexibility than they have in the past, such 
as varying the benefit package. We strongly support the risk 
adjustment mechanism that HCFA has proposed. We think the 
phase-in is a good idea. Back loading the effect is a good 
idea, and bringing in full-encounter data as soon as possible 
is a good idea. We generally support the PPS that has been 
proposed for the nursing homes by HCFA.
    Let me indicate some areas, however, where we have some 
concern with either what is in the statute or the direction 
that we see HCFA going. Let me start with an area that goes to 
a general principle and that is the ambulatory care bundling 
that is in the HCFA outpatient PPS. We have been concerned and 
raised this in our last year's testimony that, whenever 
possible, it is desirable to have payment either the same or 
similar for services that occur across different settings. What 
we are concerned about in terms of the outpatient PPS is that 
payments in the outpatient will be bundled, but payments to the 
physician's office are typically disaggregated. That is not a 
good incentive system to put in place.
    We are recommending that the unit of payment would better 
be the individual service with the ancillary services that are 
tied directly to that individual service, and not with the 
bigger aggregates that are not part of the outpatient PPS. 
There is concern both about the fact that you will overpay and 
underpay with some of the bundles that have been suggested. And 
the fact that you will have very different payments if the 
service is provided in the physician's office, as opposed to 
being provided in outpatient, is not a good set of incentives 
to have in place.
    We also think that there are some changes that would be 
desirable with the SGR, the way we try to monitor spending in 
terms of softening some of the changes, and also reflecting 
changes in the traditional fee-for-service characteristics of 
the populations that are left. I see I have very little time 
left.
    Chairman Thomas. I'll tell the Chairwoman that she can 
partially ignore the light.
    Ms. Wilensky. Thank you. I will try to be sparing with my 
comments. With regard to postacute, we have recommendations for 
home care, a few recommendations for the skilled nursing 
facilities and some recommendations with regard to the PPS-
exempt facilities. Let me try to summarize them.
    With regard to home care, we think it would be very useful 
for the Congress to help clarify the eligibility and coverage 
rules. This has been an area that has caused a lot of 
consternation in the past, and typically has resulted in 
judicial decisionmaking. We think it would be better if 
Congress could provide clearer rules with regard to 
eligibility.
    Second, as we indicated last year, we think it is 
appropriate to have a modest copayment, subject to a limit with 
regard to the amounts that an individual has spent for home 
care. We have talked about, in terms of the magnitude of the 
copayment, something in the neighborhood of $5, with an annual 
limit of about $300. We have, furthermore, suggested that there 
be an independent assessment of the individual's further need 
for home care, about the point that we would top out with 
regard to the copayments. In the examples that we had discussed 
in the Commission meeting, which was $5 a visit, we would hit 
the $300 limit, which was about the amount we were thinking 
about, at 60 visits. About at 60 visits, we would have someone 
come in to provide an independent assessment, both to make sure 
that seniors got the care that they needed and to reduce some 
of the pressure that we have heard has been put on practicing 
physicians to continue to OK home visits out into the future.
    With regard to the skilled nursing facilities, in general 
the resource utilization groups, or so-called RUGs, have seemed 
to be adequate with regard to patient classification. Concern 
has been raised for the so-called high acuity definitions: 
those cases where there are very sick patients who need 
ancillary services that had been previously been provided 
outside of the per-diem rate. There is concern that these high 
acuity cases are not being adequately compensated for under the 
existing RUG, or resource utilization group, classification 
system.
    With regard to the rehabilitation, we believe it is 
desirable to move to a discharge-based rehabilitation unit. 
Unfortunately, it is not, we believe, possible to use the same 
classification systems as the resource utilization group, 
because it does not appear to provide as good an explanation of 
the variance in expenditures as an alternative. In fact, we 
believe that HCFA should try, on a demonstration basis, to use 
the suggested classification system for rehabilitation 
hospitals when providing rehabilitation services in a skilled 
nursing facility. This is consistent with the principle that we 
have tried to articulate where we would like to have the 
payment for the services the same, irrespective of where the 
service is provided. This would be a demonstration that would 
be worthwhile with regard to the rehabilitation services that 
are available in some skilled nursing facilities.
    Finally, with regard to both the PPS-exempt services and 
dialysis, we think small increases in payments are needed 
relative to the amounts in the Balanced Budget Act. With regard 
to the PPS-exempt, we have recommended a four-tenths increase 
in per-case reimbursement, with an adjustment made for local 
input on the cap. With regard to dialysis, we are recommending 
a small increase in the composite rate in the neighborhood of 
2.4 to 2.9 percent. We are concerned that the fixed rate that 
has occurred over so many years is beginning to have a 
deleterious effect on quality and, therefore, are making this 
increase in payment.
    That summarizes the recommendations. Again, the 
philosophical position has been that wherever possible, we 
think payment should be the same or similar for services that 
are provided in different settings. This is particularly true 
of services in postacute, where a similar service may be 
provided in rehabilitation, or the skilled nursing facility, or 
in home care. It is also true in the ambulatory setting, where 
the same service may now be, or will be in the future, provided 
in an outpatient and ambulatory surgery center or in the 
physician's office. Wherever possible, we think those payments 
should be similar or consistent. Thank you for your time and I 
would be glad to answer any more questions.
    [The prepared statement follows:]

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

    Good morning Chairman Thomas, and members of the 
Subcommittee. I am Gail Wilensky, Chair of the Medicare Payment 
Advisory Commission (MedPAC). I am pleased to be here this 
morning to discuss MedPAC's second annual report to the 
Congress on Medicare Payment Policy. This report contains the 
Commission's recommendations on Medicare payment policy issues 
for fiscal year 2000. We will deliver another report in June 
that addresses other Medicare policy issues. These reports 
fulfill the legislative mandate we were given in the Balanced 
Budget Act (BBA) of 1997 to consider, develop, review, and 
advise the Congress on improvements to the program.
    The Commission's recommendations represent the collective 
judgement of MedPAC's 15 commissioners, based on qualitative 
and quantitative analyses of the relevant issues, discussion of 
the findings and implications, and deliberations as to the 
appropriate policy responses. All of the recommendations were 
discussed at meetings open to the general public.

                    CONTEXT FOR THE RECOMMENDATIONS

    The Balanced Budget Act (BBA) of 1997 made wide-reaching 
changes to the Medicare program. The BBA established the 
Medicare+Choice program, which will allow new types of private 
health plans to offer new options for Medicare beneficiaries. 
It modified payment updates and mechanisms for Medicare+Choice 
plans, hospitals, and physicians, with the intent of slowing 
the rate of growth of Medicare spending and making payments 
more equitable among providers and across geographic areas. The 
BBA also directed the Health Care Financing Administration 
(HCFA) to establish new prospective payment systems for skilled 
nursing facilities, hospital outpatient departments, 
rehabilitation hospitals, and home health agencies.
    Broadly speaking, the Commission's recommendations address 
four topics: adequacy of payment updates, equity of payments, 
technical and regulatory components of new payment mechanisms, 
and other issues related to payment concerning coverage and 
beneficiary cost-sharing.
    For certain services whose payment updates are set in law--
such as those provided by Medicare+Choice plans, inpatient 
hospitals under the prospective payment system, and 
physicians--MedPAC's recommendations address whether the 
statutory updates are appropriate. In general, the Commission 
finds the updates to be appropriate and does not recommend 
changes to the law. In the case of payment for physicians' 
services, however, the Commission recommends changing the 
sustainable growth rate mechanism to accommodate changes in the 
characteristics of beneficiaries enrolled in traditional 
Medicare, such as their distribution across age groups, and 
changes in medical technology. The Commission also recommends 
making technical changes to the mechanism to avoid large swings 
in payment updates.
    MedPAC addresses issues of payment equity in a number of 
ways. The Commission supports the introduction of a new risk 
adjustment system for Medicare+Choice plans. We recommend a new 
method of making payments to hospitals that treat a 
disproportionate share of low-income beneficiaries. We also 
recommend changing payment methods for hospital outpatient and 
physicians' services to account for cost differences that are 
due to variations in the health status among patients.
    For services that the BBA directed to be paid under new 
payment systems, MedPAC's recommendations are addressed to the 
Secretary of Health and Human Services (the Secretary) and to 
the Congress, as appropriate, given the stage of development of 
the new system. We recommend technical changes in regulations 
that would make payments more equitable within provider groups 
and more consistent across types of providers. For example, the 
Commission supports the Secretary's efforts to develop a case-
mix system for skilled nursing facilities that better accounts 
for use of services other than rehabilitation therapy. The 
Commission also supports developing a common unit of payment--a 
facility discharge where possible--across providers of post-
acute care.
    With respect to other issues, MedPAC's key recommendations 
concern services provided in outpatient hospital departments 
and by home health agencies. For the former, MedPAC recommends 
accelerating the so-called coinsurance buydown provided for in 
the BBA. For the latter, we recommend clarifying eligibility 
guidelines for receiving home health services and instituting 
modest cost-sharing.

                     SUMMARY OF KEY RECOMMENDATIONS

    MedPAC's recommendations are based on the principle that 
Medicare's payment policies should ensure that beneficiaries 
have access to medically necessary care in an appropriate 
setting. At the same time, the program should not spend more 
than is required to achieve that goal. This principle implies 
that payment rates must be consistent with the costs of 
efficiently providing the necessary level of care, offering 
fair payment to providers while not interfering with clinical 
decisions as to the amount of care or the setting in which it 
is provided.
    The Commission's recommendations address the following 
areas:
     the Medicare+Choice program;
     the acute care hospital inpatient prospective 
payment system;
     payments for facilities exempt from the acute care 
prospective payment system;
     developing new payment systems for post-acute care 
providers;
     modifying payment for services provided in 
ambulatory care facilities;
     continuing reform of the Medicare Fee Schedule for 
physicians; and
     the composite rate for outpatient dialysis 
services.

The Medicare+Choice program

    One of the major initiatives of the BBA was to make a wider 
variety of private health care coverage options available to 
Medicare beneficiaries by expanding the previous risk 
contracting program into Medicare+Choice. However, changes in 
how payment rates are determined, the establishment of new 
regulations in implementing the program, and concurrent trends 
in the health insurance environment appear to have contributed 
to few new options becoming available and, in fact, fewer 
Medicare risk plans participating.
    It is too soon to tell whether the recent departures from 
Medicare stem from systematic problems with the level or 
distribution of payment, but we plan to monitor this situation 
further in the next year. In the meantime, however, HCFA should 
continue to work with the relevant parties to identify changes 
in specific regulations or other policies that would reduce the 
burden of compliance without compromising the objectives of the 
program. Two such changes include moving the deadline by which 
Medicare+Choice organizations must file their premium and 
benefit proposals and allowing them to vary their benefit 
packages by county within their service areas.
    The Commission supports the Secretary's plan to phase in, 
beginning in 2000, HCFA's interim risk adjustment mechanism for 
Medicare+Choice payments. In this mechanism, differences in 
expected costliness among enrollees will be based on health 
status, as measured by diagnoses from hospital stays in the 
previous year, prior entitlement to Medicare benefits based on 
disability and eligibility for Medicaid benefits during the 
previous year. As quickly as feasible, however, the risk 
adjustment mechanism should be refined to incorporate diagnosis 
data from all sites of care. These changes should improve the 
correlation between payments to Medicare+Choice organizations 
and the costliness of their enrollees.

The acute care hospital inpatient prospective payment system

    Although the annual updates to the operating payment rate 
under the Medicare hospital inpatient prospective payment 
system (PPS) are already set in law, MedPAC each year provides 
guidance to the Congress on the appropriate update for the 
upcoming fiscal year. Based on our ongoing analyses of the 
factors that determine year-to-year changes in hospital costs, 
we believe that the operating update for fiscal year 2000 that 
was enacted in the BBA--1.8 percentage points less than the 
increase in HCFA's hospital operating market basket index--will 
provide reasonable payment rates. If the current market basket 
forecast holds, the update would be 0.7 percent.
    The PPS capital payment rate update is set by the Secretary 
each year. The Commission's recommendation on the PPS capital 
update for fiscal year 2000 is a range between 3.0 percentage 
points and 0.1 percentage points below the increase in HCFA's 
hospital capital market basket index. Under the current market 
basket forecast, an update of between -1.1 percent and 1.8 
percent would be adequate.
    These recommendations are made in the context of evidence 
that the hospital industry has thus far successfully adapted to 
a more competitive market by changing its practice patterns and 
reducing its costs, but also out of concern that many of the 
major effects of the BBA are not yet fully evident. Therefore, 
reducing payment rates below the level prescribed in the BBA 
would not be prudent, at least for this year.
    MedPAC is also recommending a revision in the method of 
providing extra payments to hospitals that care for a 
disproportionate share of low-income patients. These 
disproportionate share payments are made through a complex 
formula that determines a percentage add-on to each hospital's 
PPS payments based on its location, size, certain other 
characteristics, and a measure of care to low-income people. 
The measure of care to low-income people, however, excludes 
uncompensated care and local indigent care programs, which 
represent a large share of the burden faced by many hospitals 
that treat low-income patients. Moreover, under the current 
formula, rural and small urban hospitals that treat a 
disproportionate share of low-income patients receive a much 
smaller adjustment (if any) than large urban hospitals with the 
same share. Our recommendations are intended to eliminate these 
flaws.
Payments for facilities exempt from the acute care prospective 
payment system

    Certain types of hospitals and distinct part units of 
hospitals are exempt from the acute care PPS. These so-called 
PPS-exempt facilities are a diverse group that share a common 
Medicare payment method established by the Tax Equity and 
Fiscal Responsibility Act of 1982. They include rehabilitation, 
long-term, psychiatric, children's, and cancer hospitals, and 
rehabilitation and psychiatric units in acute care hospitals. 
Each of these facilities is paid an amount based on its own 
costs in the payment year relative to a per-case target that 
depends on its costs in a base year, updated to the payment 
year.
    MedPAC's analysis of the factors that determine year-to-
year cost increases for PPS-exempt facilities indicates that 
the update factor applied to the per-case targets in fiscal 
year 2000 should be increased by 0.4 percentage points more 
than in the formula prescribed in the BBA. The BBA also 
established a category-specific cap on the per-case targets for 
rehabilitation and psychiatric facilities and long-term 
hospitals but did not provide that these nationwide caps be 
adjusted for differences in input prices across areas. We 
recommend correcting that technical oversight.
    The BBA required that Medicare implement a new payment 
system for rehabilitation facilities, and that the Secretary 
develop a proposal for long-term hospitals. It did not mention 
psychiatric facilities, however. MedPAC encourages additional 
research in case-mix classification for payments to psychiatric 
facilities, with an eye toward developing a PPS for them in the 
future.

Developing new payment systems for post-acute care providers

    The BBA mandated substantial changes in Medicare payment 
policy for providers of post-acute care. In addition to the 
work on new payment systems for rehabilitation facilities and 
long-term hospitals discussed above, a PPS for skilled nursing 
facilities (SNFs) was implemented in July 1998 and an interim 
payment system for home health agencies was put in place in 
October 1997 until a PPS can be developed. To guide the 
development of consistent payment policies across post-acute 
care settings, MedPAC recommends that common data elements be 
collected to help identify and quantify the overlap of patients 
treated and services provided. Further, it is important to put 
in place quality monitoring systems in each setting to ensure 
that adequate care is provided in the appropriate site. We also 
support research and demonstrations to assess the potential of 
alternative classification systems for use across settings to 
make payments for like services more comparable.
    The Commission has several recommendations intended to 
improve the PPS for skilled nursing facilities. More work is 
needed to refine the classification system used in the PPS for 
skilled nursing facilities, particularly in its ability to 
predict the costs of nontherapy ancillary services. Alternative 
ways of grouping rehabilitation services provided in SNFs may 
also be called for to reduce reliance on measurements of 
rehabilitation time. A method for updating the relative weights 
that determine how much facilities are paid for each type of 
patient is crucial as the system and the types of services that 
are provided change over time. In general, as better data 
become available with the new system, distortions in the base 
payment rates due to imperfections in the initial data and 
measures used should be detected and corrected. To avoid future 
problems, facilities must be accountable for accurately 
assessing patients' needs and reporting the data used to 
determine payment for each case. Finally, payments should be 
adjusted for geographic differences in labor prices using wage 
data from SNFs, rather than hospitals, to make them more 
equitable among providers.
    As systems for rehabilitation facilities and long-term 
hospitals are developed, a number of crucial decisions must be 
made. Among them is the unit of payment. MedPAC recommends that 
a per-discharge mechanism be adopted for rehabilitation 
services. A system currently exists that could serve as a basis 
for such an approach, perhaps with some modifications. We also 
recommend that, in choosing a patient classification 
methodology for a long-term hospital PPS, HCFA consider not 
only per diem but also existing and potential per-discharge 
approaches.
    The interim payment system for home health agencies that 
was created in the BBA was the subject of a great deal of 
controversy in the year following its enactment. This 
controversy stemmed, in part, from the use of payment policy as 
a vehicle for curbing the rapidly rising cost of a benefit that 
was poorly defined. Although the debate appears to have 
subsided at least temporarily with recent changes in the 
system, MedPAC believes that more fundamental changes are 
necessary even as a new payment system is being developed. We 
urge the Congress, in consultation with the Secretary, to enact 
clearer eligibility and coverage guidelines for Medicare home 
health services. To understand better the content of home 
health visits, agencies' bills should describe the specific 
services provided. Moreover, we recommend that an independent 
assessment of need be conducted for Medicare beneficiaries who 
receive extensive home health care to ensure that care is 
appropriately coordinated and suits the needs of the patient. 
Finally, modest beneficiary cost-sharing should be introduced 
for home health services; copayments should be subject to an 
annual limit, and low-income beneficiaries should be exempt 
from this requirement.

Modifying payment for services provided in ambulatory care 
facilities

    Spending for facility-based ambulatory care services has 
grown substantially since the early 1980s, in part because a 
combination of financial incentives and technological advances 
encouraged shifting of services that once were provided 
exclusively in the inpatient setting to hospital outpatient 
departments (OPDs), ambulatory surgical centers (ASCs), and 
physicians' offices. Medicare pays for many of these services 
differently according to where they are provided. MedPAC offers 
several recommendations on making payments more equitable 
across settings and services.
    The Commission makes several recommendations that apply to 
payment for ambulatory care in general. Consistent with the way 
that Medicare pays for physicians' services, the unit of 
payment should be the individual service--that is, the primary 
service and the ancillary supplies and services integral to 
it--rather than a larger bundle of services. Accordingly, the 
relative cost of the individual service should determine 
payment, rather than costs for groups of services taken 
together. In setting payment rates, the pattern of services and 
costs across ambulatory settings should be taken into account. 
Moreover, a single update mechanism, linking updates to 
spending growth across all ambulatory care settings, should be 
applied to the payment rates for each type of provider.
    As required by the BBA, HCFA has proposed a new payment 
system for hospital outpatient services and major modifications 
to the payment system for ambulatory surgical centers. MedPAC 
recommends these changes be closely monitored to ensure that 
beneficiary access to appropriate care is not compromised in 
the face of substantial reductions in payments to hospital 
OPDs. In addition, payments should reflect the higher costs of 
treating certain types of patients. In the absence of adequate 
patient-level indicators, facility-level adjustments may be 
required for the time being. We are also concerned that 
loosening guidelines for determining whether a procedure is 
eligible for coverage in an ASC may lead to inappropriate 
changes in the pattern of service provision across ambulatory 
settings.
    Although the BBA provided for a gradual reduction in the 
amount of beneficiary coinsurance for services provided in 
hospital outpatient departments, it will be years before that 
amount is reduced to a level comparable with that for similar 
Medicare-covered services furnished in ASCs or physicians' 
offices. MedPAC recommends accelerating the reduction in the 
outpatient coinsurance, with increased program spending being 
used to avoid further reductions in hospital payments.

Continuing reform of the Medicare Fee Schedule for physicians

    The BBA mandated a number of changes in the Medicare Fee 
Schedule for physicians. To update payment rates for 
physicians' services, a sustainable growth rate system was 
established to replace volume performance standards. To make 
the fee schedule fully resource-based, HCFA recently began a 
phase-in of a new resource-based methodology for the practice 
expense component (which it intends to refine as it is used) 
and is developing revisions to the professional liability 
component.
    MedPAC recommends several modifications to the sustainable 
growth rate (SGR) system. These include revising the SGR to 
account for changes in the composition of Medicare fee-for-
service enrollment, cost increases that reflect desirable 
improvements in medical capabilities and technology, and 
inaccuracies in the forecasts used in estimating the SGR each 
year. We also call for technical changes that would make the 
timing of SGR components more consistent, and the earlier 
availability of estimated updates for each upcoming year.
    With respect to practice expense payments, MedPAC agrees 
that, for some services, it is appropriate to pay a lower 
practice expense amount when physicians perform the service in 
facility-based settings outside the office. MedPAC recommends, 
however, that a service-by-service approach be used to decide 
which services are subject to this site-of-service 
differential, rather than applying the same decision to entire 
groups of services. Payments for services generally recognized 
as inappropriate to perform in a physician's office should also 
be reduced by the site-of-service differential. In developing 
further refinements to the practice expense component of the 
fee schedule, participants with a wide variety of relevant 
expertise should be included in the process.
    To make the professional liability component of the fee 
schedule resource-based, payments should reflect the risk of a 
professional liability claim in providing each service.

The composite rate for outpatient dialysis services

    MedPAC is required to recommend an appropriate update to 
the composite rate for outpatient dialysis services each year. 
The dialysis industry has been profitable and firms continue to 
enter the market despite the lack of a significant update in 
the composite rate since it was established in 1983. The 
Commission's analysis indicates, however, that costs have been 
approaching payments in recent years. We are concerned that 
further increases in dialysis costs relative to the payment 
rate may cause quality to deteriorate and, therefore, recommend 
an update of 2.4 percent to 2.9 percent. We also urge that the 
increasing emphasis on the quality of care received by dialysis 
patients continue, and efforts to collect and evaluate 
information on patient care and treatment patterns proceed.

                               CONCLUSION

    In just over a decade, the first members of the so-called 
baby-boom generation will become eligible for Medicare. 
Policymakers have appropriately focused significant attention 
on how to address Medicare's future fiscal pressures. But 
Medicare also faces challenges in the short run as HCFA 
continues to implement the BBA, as developments unfold in the 
market for health care, and as new technologies and treatments 
emerge.
    These short run challenges are inevitable because Medicare 
is an extraordinarily complex program. The program has 40 
million beneficiaries, and it makes payments to hundreds of 
thousands of providers who deliver tens of thousands of 
different kinds of health care services and supplies. 
Therefore, the program's payment policies must continue 
evolving to ensure that Medicare's aged and disabled 
beneficiaries have access to high quality, medically necessary 
care across the country.
    To assist the Congress and HCFA in meeting this objective, 
MedPAC will continue to monitor Medicare beneficiaries' access 
to health care and will examine what can be done to improve 
quality not only in Medicare+Choice, but also in the 
traditional fee-for-service program. The Commission will track 
developments as the Medicare+Choice program matures, looking at 
the availability of plans, the impact of risk adjustment, and 
other payment policies. MedPAC will continue to analyze fee-
for-service payment policies in a broad context that takes into 
account that health care services can increasingly be provided 
in different settings. This work will look not only at what 
constitutes an appropriate unit of payment, but how payments 
are currently updated using quite different methods. Finally, 
the Commission will continue to study the delivery of services 
in the broader health care market to determine whether 
strategies that have evolved in private markets can be used to 
improve Medicare policy.
      

                                

    Chairman Thomas. Thank you, Doctor. I do want to say that I 
want to ask you some questions in a general sense, in relation 
to the larger Medicare question and the future of Medicare. I 
do not want to detract from the initial questioning that the 
Members may have focused on this particular report, so I will 
save those for the second round.
    In a general sense, one of the things that has been focused 
on is what I guess we would call``flat growth,'' or relative 
``no growth,'' in the Medicare payment structure. It is just a 
couple of months old, but if you start extrapolating that out, 
the world looks different. Do you have any general statement 
you might want to make about this recent phenomenon? Do you 
think it is going to continue? Do we have an explanation for 
it? Was it really anticipated?
    Ms. Wilensky. The answers, in summary and then I will 
elaborate in a moment are, no, we did not anticipate that. No, 
I do not think it is going to continue and I am not sure we 
understand exactly what is going on.
    Let me explain, a little bit, those statements.
    Chairman Thomas. You will be pleased to know that you have 
given me as much information as anybody else can on this. It is 
interesting.
    Ms. Wilensky. It is an issue that I have discussed to some 
degree with Bob Reischauer and others who have poured over the 
numbers, so it represents at least something about this issue. 
Thank you.
    We did not expect the drop that has been reported in the 
cash receipts. However, we did see a somewhat similar 
phenomenon in 1983-84 after the introduction of the DRGs, when 
there was a sudden drop in the first year, then followed by a 
little bit of catch-up and more spending than was in the 
projected pattern. I believe that we are seeing something like 
the ``deer in the headlights'' phenomenon going on right now: a 
sudden response to a lot of changes that are affecting 
hospitals, not only directly, but through home care and skilled 
nursing facilities and rehabilitation facilities. It has 
accentuated the response. I would be very surprised if the type 
of the response, the level or magnitude of the decline we see, 
continues and I would expect it to go back up to the 5- to 6-
percent increase that was in the projections.
    Chairman Thomas. I have a hunch. Again, it is just a hunch. 
Perhaps, not like 1983-84, we saw the phenomenon with HCFA 
having to take a step back. Reassessed on the Y2K question, 
this may, in fact, also be a phenomenon that is out there in 
private sector with billing and the rest. It may simply be a 
slow-down of the process, making sure that the information and 
the data are correct and then going forward. Is that a 
reasonable assumption, although no one has verified that?
    Ms. Wilensky. I think that is a reasonable assumption. I 
also believe that the current emphasis on fraud and abuse makes 
institutions very reticent to send forward bills that they are 
not convinced are accurate.
    Chairman Thomas. Not bad up to a point. Let me, very 
quickly, go through some questions that I have. I would prefer 
shorter answers rather than longer. It focuses on the concerns 
I have about discussions with the press. Notwithstanding the 
embargo on the Commission's report until today, in which 
statements were printed in the press, my reaction was that 
there was a statement that I had some concern about. Then, in 
turning to the report, I could not find specific verification 
for the statement. So, I need some dots connected, if you will.
    For example, on February 25, the press reported that you 
said that hospital margins had taken ``a big hit in the last 6 
months.'' And yet, in looking at the Commission's report, I 
could not find any acknowledgement of potential hospital 
financial problems. In fact, on page 59, the report says, 
``Hospitals generally appear to be in good financial shape, 
overall, with PPS margins likely to remain relatively high,'' 
and so on. Is this data that have arrived after the Commission 
report was written? Is this anecdotal? Where does it come from?
    Ms. Wilensky. No. It was a statement I never made. I will 
explain the statement I did make, however. What I said was 
that, in traveling around the country I had been hearing that 
in the last 6 months hospitals are reporting problems and hits 
on their margins that they had not felt before. I was impressed 
with the fact that institutions that did not know each other, 
were not related to each other, were making similar comments. I 
very specifically indicated that it was only anecdotal. I had 
no way of knowing if it was true, but I was impressed that I 
was hearing it in different parts of the country.
    Chairman Thomas. Good. In the report, on page 20, it states 
that skilled nursing facilities have developed specialized 
rehabilitation units to which they admit patients needing 
intensive therapy. In the report it goes on to say, ``Often 
these units have been developed because local hospitals do not 
provide sufficient rehabilitation capacity.'' In reflecting on 
that phrase, my immediate reaction was that we are moving from 
the old cost-based reimbursement structure to a prospective 
system. In the old days, any of the therapy and ancillary 
services were paid whatever the costs were. It would seem to me 
that an enterprising skilled nursing facility could see this as 
a potential money-maker. You could also argue that they were 
developed because local hospitals did not provide a sufficient 
rehabilitation capacity. How were you able to discern that it 
was not an activity that could be an income producer for a SNF, 
rather than the failure to have sufficient rehabilitation 
capacity?
    Ms. Wilensky. We can provide you additional information. My 
interpretation of the statement was more of a statement of 
fact. In some hospitals there were not specific rehabilitation 
units that were present. In those areas, that led to the 
development of specific rehabilitation hospitals.
    Chairman Thomas. That could be a statement of fact in 
particular instances. But then, did that support a generality, 
in terms of a reference to the fact that that was the reason 
they produced these?
    Ms. Wilensky. I will find out. I do not recall.
    [The following was subsequently received:]

    In its March 1999 Report to the Congress, the Commission 
notes both of the above as factors likely associated with 
growth in SNF payments. Pointing to the availability of 
inpatient rehabilitation facilities, page 20 of the Report 
notes that some skilled nursing facilities ``have developed 
specialized rehabilitation units to which they admit patients. 
Often, these units have been developed because local hospitals 
do not provide sufficient rehabilitation capacity.'' Also 
noting the cost-based ancillary payment structure for skilled 
nursing facilities, page 82 of the Report notes that 
``differences between SNF and rehabilitation facility services 
diminished partly because until last year, Medicare reimbursed 
SNFs their full costs of furnishing rehabilitation services.''
    The Commission believes that both factors likely 
contributed to the growth in SNF ancillary payments and 
specialized payments, although the Report does not posit that 
one factor is more predictive than the other regarding the 
presence of a rehabilitation unit or therapy-ancillary spending 
in SNFs.
      

                                

    Chairman Thomas. Good. It is significant if you could 
analyze that that was actually the reason they did it, rather 
than the other. You mentioned, in your initial statements, the 
home health care cost sharing concept. You said, ``We have 
talked about it.'' On page 95, which describes that general 
area, there was no $5 copayment mentioned, or a $300 out-of-
pocket limit mentioned. Who is the ``we'' and where have you 
talked about it?
    Ms. Wilensky. We can provide you, if you would like, the 
transcript from the Commission's meeting. These numbers were 
specifically discussed in our public Commission meeting to give 
some indication about what we meant when we talked about 
``modest stop loss,'' and we specifically used the numbers of 
about $5 a visit, for about 60 visits that they would be 
subjected to. That meant a stop loss of about $300, exempting 
low-income people, and at that point, moving to an independent 
assessment. So, those were the numbers that were specifically 
used in our public hearing.
    Chairman Thomas. What was the rationale for not including 
them in the report as an example of what you meant by the 
general statement, ``Congress should require modest cost 
sharing for home health services''?
    Ms. Wilensky. I do not recall, this year, that we actually 
discussed that point. Last year, we had not included the 
specific number, because we had not spent enough time. We felt 
deciding whether $5, $4, $7 was a right amount. But there 
actually would have been, I believe, no objection to using the 
four examples in the text. We just did not. As I said, if you 
would like, we would be glad to provide you with a transcript 
that indicates the discussion of those specific dollar amounts.
    Chairman Thomas. My concern is that when I read something 
in the paper and I turn to the document to find verification 
for it; it is not in there. As you indicated, you may not have 
been accurately quoted in the press, and I have already 
received letters signed by Members based upon those press 
reports. They had the weekend to write the letter, because the 
information was presented, notwithstanding the embargo of the 
report until Monday.
    Last question, for now, also involves a specific date. If 
this was discussed in the Commission, I would very much like 
knowing that. Our concern, of course, in the adjustments for 
the Medicare+Choice sector is some of the timing is simply not 
workable. The one that is being focused on, most recently, is 
the May 1 reporting date, which we believe, having pursued it 
with attorneys both in the executive branch and here, that we 
are probably going to have to change it by statute. It can't be 
done administratively.
    I noted that in the report, it was recommended moving it to 
later in the year. I believe the press has reported that you, 
or the Commission, has said July 1, but I do not know where 
July 1 came from because I do not believe it is in the report, 
is it?
    Ms. Wilensky. I believe, again, that our discussion was 
either July or August, depending on what HCFA thought it could 
live with.
    Chairman Thomas. OK. The basic operating statement should 
be, I think, isn't it, ``as late as we can get it''?
    Ms. Wilensky. Right. Exactly.
    Chairman Thomas. Because the only criterion would be 
getting the material out for the educational purposes. So 
rather than some arbitrary fixed date, if it is too early, let 
us get it as late as we possibly can to make sure that people 
have the maximum amount of time to come with a decision 
commensurate with HCFA's ability to get the information out.
    Ms. Wilensky. That was one of the reasons we did not want 
to specify, exactly, which later date we meant, because we did 
not know that.
    Chairman Thomas. The statement in the Commission report, 
later in the year, does not necessarily specify July 1, 
although that date has been used.
    Ms. Wilensky. It does not, although that has been used. In 
fact, usually what I have said is July or August to try to get 
into that second quarter.
    Chairman Thomas. Good. Thank you. As I said, I will have 
some additional questions, but I wanted to make sure the rest 
of the Members have time to respond. Gentleman from California.
    Mr. Stark. Thank you, Mr. Chairman. Gail, I have got a 
whole host of questions. Just let me pick out a couple here, at 
random. The risk adjustment issue is being debated. The 
managed-care folks are saying that it should be revenue neutral 
just among the people they have signed up. I would contend that 
it should be revenue neutral across the whole Medicare 
population. What we are concerned about is the fact that they 
are getting paid too much for cherry picking. So, if you only 
take the cherries they picked and assumed they were all 
healthy, there is nothing to adjust. Is it not the idea that we 
should risk adjust within the entire Medicare population?
    Ms. Wilensky. I believe that we should risk adjust within 
and between.
    Mr. Stark. Thank you. I have a concern regarding DSH 
payments and you made some recommendations about what we should 
do about changing the DSH payments. You did not give us some of 
the detail that is required. There are about 1500 major 
hospitals that get all of the DSH payments, out of 6000. We 
have always used DSH as a proxy. We never have, in the past, 
gone through and evaluated whether a hospital really did, in 
fact, deliver the services for which we were then giving extra 
money, because of their higher cost. Have you considered 
whether we could somehow do so on a hospital-specific basis? I 
know we have never been able to define ``charity care,'' but 
maybe the time has come. I know in my county they have lumped 
the children's health care, the indigent care and the Medicaid 
all into one package. They have got their own county managed 
care operation. In Tennessee, by definition, every hospital is 
a DSH hospital, because they all have to share. Now is there a 
possibility that we just have to redesign that?
    Ms. Wilensky. I think we definitely have to redesign it. 
What we have tried to suggest in the approach that we have 
recommended, is that because of the changes, like in TennCare 
and other places, we need to have a broader definition of what 
we are talking about. It needs to include indigent care in 
addition to Medicaid and any local indigent care programs. Our 
concern has been that while DSH should be focused on a 
relatively small proportion, or at least not all of the 
hospitals, that the barriers and the distributions are unfair 
between urban and rural. The distribution is too focused to 
urban hospitals in the sense of the amount.
    Mr. Stark. That is easy, because the rural hospitals do not 
amount to much money.
    Ms. Wilensky. Right. It is easy to fix in terms of the 
dollars. It is just unfair. Yes, we ought to redefine how we 
are doing it and we ought to include all indigent care that is 
provided. That would make a much fairer program.
    Mr. Stark. Are you going to do something about it? We ought 
to do it.
    Ms. Wilensky. We had recommendations from last year and 
some discussion. We would certainly be very pleased to work 
with the Subcommittee to try to operationalize what we have.
    Mr. Stark. I was hoping you were going to do it.
    Ms. Wilensky. Well, we have some work done on it. We have 
some distributions that result from the recommendations that we 
made. We feel like what we did last year did not quite hit, 
exactly, what we intended. It is definitely in the right 
direction and better than what we have now.
    Mr. Stark. I have always felt, and I think you have touched 
on this before, that we should pay for a procedure at the 
lowest price that the procedure is available. In other words, 
if a physician could do a procedure in his office or her 
office, we should not pay him the hospital-based rate for that 
procedure. Even if they do it in the hospital, they should 
receive the lowest rate that is in the market. Is that a fair 
assessment?
    Ms. Wilensky. It is subject to making sure that the patient 
characteristics are really comparable. One of the problems that 
we are concerned about is that the person who has a procedure 
in the hospital may not be the person who has it in the 
doctor's office. Jack Rowe, our geriatrician, reminds us that 
when somebody comes in his hospital, they frequently have three 
or four different morbidities. They may have some senility or 
dementia. Having any procedure done becomes far more expensive. 
So, either we have to have good patient characteristics or make 
some allowance for that. Notwithstanding that, yes, we agree.
    Mr. Stark. Finally, oncologists are saying that the reason 
they have got to charge a whole lot for the drugs they sell, 
which we pay for, is that we are not giving them enough in 
their practice expense payment. I do not think that quite 
washes. It is my understanding that under the Physician 
Reimbursement Plan, which you wrote, we pay physicians for 
their services, not the products that they sell and the mark-up 
of those products. Now, there is nothing illegal about a 
physician, in most states, being in the pharmacy business. They 
can buy the drugs wholesale and sell them. But, ought we to put 
some limit on that? Ought we to say, ``No more than what the VA 
pays?'' I think it is becoming a very expensive issue. It 
probably could lend itself to some overutilization where there 
is a tremendous mark-up in these drug prices. Are you prepared 
to bring us any recommendations?
    Ms. Wilensky. This is not an issue that the Commission has 
formally taken up. I believe, last year, we responded to you 
that we think that reimbursement ought be what is justified for 
the drug, per se, and should not be used as a justification to 
cross-subsidize the physician. If the oncologist believes there 
is something wrong with their payment, then they need to make 
that argument directly to HCFA during the review period.
    Mr. Stark. What about limiting what we pay for the drugs?
    Ms. Wilensky. You should. You have to decide what that 
limit is; whether it is the supply price of the AWP minus 5, or 
whatever. Yes, there ought to be some decision as to how to 
reimburse.
    Mr. Stark. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you. Gentlewoman from Connecticut, 
do you wish to inquire?
    Mrs. Johnson of Connecticut. Thank you, Mr. Chairman. Just 
to follow-up on the preceding question: one of the problems has 
been that the RBRVS, resource-based relative value scale, did 
not take into account the cost of delivering oncology drugs. 
So, we put that into the medication costs. We want to be sure 
that in looking at what we are going to reimburse for drugs, we 
do not to compare them to what we pay the VA for those same 
drugs. Wouldn't you agree?
    Ms. Wilensky. I was not suggesting the VA supply price as 
the price that I would use.
    Mrs. Johnson of Connecticut. I appreciate the good work of 
the Commission. I am terribly disappointed in your 
recommendations, because I think that your data are too old for 
the urgency of the problems we face. I do not see 
recommendations that go to the heart of what I am seeing out 
there. I see institutions at peril of going under. They are at 
peril because of some of the irrational aspects of our payment 
system. The fact that medically complex patients are not 
properly reimbursed under the skilled nursing facilities' PPS 
is sufficiently recognized by HCFA that they have contracted 
for a study. But the study will not report until 2001. I can 
tell you that in the small nursing homes out there, our failure 
to reimburse correctly for the medically complex patients is 
now a very serious issue.
    It has become extremely burdensome and problematical, 
because we are now requiring those nursing homes to pay for 
ambulance rides, which they never used to have to pay for 
before, and prosthetic devices. So, has the Commission given 
any thought to restructuring the payment system for nursing 
homes to exclude things, like ambulance charges, over which 
they have very little control? The two are related. If they 
have high costs for the medically complex patient and that 
patient has to go a hospital in my district, the ride is $700. 
The reimbursement rate is $200. You are automatically out 3\1/
2\ days' worth of reimbursement rate if you have to take a 
patient to a hospital. I would like your comments on whether 
the Commission believes that HCFA should be making some interim 
effort to address the medically complex reimbursement rate. 
Also, would you be able to work with me on evaluating the 
possibility of excluding ambulance charges from the PPS?
    Ms. Wilensky. With regard to the first issue, the medically 
complex patient, the Commission agrees with you. One of the 
areas where we thought there is a problem with the existing 
classification system is the high-acuity patient. I think the 
question is going to be whether there is additional money put 
into the system to provide better for the high-acuity patients, 
or whether it is going to be a fight over redistributing the 
existing dollars. That is obviously something that Congress 
will have to determine: whether or not there are additional 
moneys, as were put up last year for home care, to try to ease 
this problem. We do think there is a problem with the high-
acuity patients. We don't have a response to hurrying up HCFA's 
study in order to try to redesign that. We believe HCFA also 
recognizes the high-acuity patient problem.
    The issue with regard to ambulances is different. We have 
not, to the best of my knowledge, specifically looked at that 
issue. In general, the Congress was concerned about the cost 
pass-through of ancillary services. In general, I don't know if 
in the deliberations of the nursing home PPS requirement any 
thought was given as to whether ambulance costs, per se, 
particularly if not owned--if the ambulance company had no 
financial relationship to the nursing home--whether there was 
ever any consideration given to having that be outside the PPS. 
I agree with you. It seems to be somewhat different in nature 
than, say, IV or ventilator or other services that are in the 
ancillary service. So, it may be possible to construct a 
payment that would differentiate between ambulance services 
that have financial relationships and those that do not. I do 
not know what it would cost and I do not know whether that was 
considered when the BBA was passed.
    Mrs. Johnson of Connecticut. Well, my understanding was 
that it was not. In modeling the PPS for nursing homes on the 
hospital thing, the only thing that was excluded was the 
hospital. I do think there is a real urgency about looking at 
that kind of cost because it is completely out of their 
control. It is very large compared to their reimbursement 
rates. You get a run of difficult patients and you will no 
longer be financially sound. I do not believe we can wait 2 
years to address this. I will be hoping that the Commission can 
work with me on that.
    My light has gone on, so I will come back to my other 
questions on a successive round. Thank you.
    Chairman Thomas. Does the gentleman from Louisiana wish to 
inquire?
    Mr. McCrery. Thank you, Mr. Chairman. Ms. Wilensky, I want 
you to expound for just a minute on your remarks regarding 
specialty hospitals, rehabilitation hospitals, long-term care 
hospitals and a prospective payment system that might be 
devised for those hospitals. You indicated, I think, in your 
testimony that your Commission was opposed to simply extending 
the payment system devised by HCFA for SNFs to rehabilitation 
and long-term care hospitals. Is that correct? If so, would you 
explain a little bit more why that system is not suitable for 
those specialty hospitals?
    Ms. Wilensky. This is an area in which I have not 
personally done research, but I will report, as accurately as I 
can, the sense of the Commissioners in this area. Ideally, we 
would prefer if we could have a single medical classification 
system that would cover skilled nursing facilities and 
rehabilitation hospitals. Unfortunately, the researchers who 
have done work in this area have concluded that there isn't a 
system that explains the variations in both of these areas, and 
that one medical classification system, the so-called RUG, or 
resource utilization group, seems to do a pretty good job in 
skilled nursing facilities, but there is a different system 
that has an acronym called FIM-FRG. It has a rather long 
functional measurement component to it. It describes the better 
medical classification system for rehabilitation hospitals.
    And, therefore, our position has been that, while we would 
prefer if a single classification existed, it doesn't. And, 
therefore, our recommendation is we should go with what 
describes skilled nursing facilities for skilled nursing 
facilities and use the system, the per-discharge system, that 
is more appropriate for the rehabilitation hospital for those 
services.
    In order to try to keep that same sense of paying for the 
service, irrespective of where it is provided, we have 
suggested that HCFA try a demonstration where, when a 
rehabilitation service is provided in a skilled nursing 
facility--which sometimes it is--that that reimbursement for 
the rehabilitation service be made as though it were being 
provided in a rehabilitation facility. So you would have the 
same payment even though the site of care differed. That is how 
strongly we think that the resource utilization group 
classification system doesn't seem to fit the rehabilitation 
world.
    So, if we could, we would rather have one system. But we 
have recognized the reality that one system just doesn't seem 
to work and, therefore, we recommend two different systems and 
to get consistency where you can by focusing on the service 
itself, not the site.
    Mr. McCrery. In fact, it seems to me that, if we went to 
the per-diem basis for rehabilitations, that there would be a 
reverse incentive there for them to game the system and just 
keep the patient as long as possible to get the maximum 
reimbursement, which has a number of adverse consequences.
    Ms. Wilensky. Yes.
    Mr. McCrery. Is that your fear also?
    Ms. Wilensky. That is true. I was surprised. I happened to 
speak to a few heads of rehabilitation hospitals. I assumed 
they would prefer the per diem because it would put more 
demands on them to go to a per-case. They actually indicated 
they think they can do a better job getting the right 
rehabilitation to the patient as they need it without all the 
artificial constraints that is in a per diem. So we think, 
intellectually, it makes more sense and I was pleasantly 
surprised that the people who actually run them think it makes 
more sense.
    Mr. McCrery. Thank you.
    Chairman Thomas. I thank the gentleman. Does the 
gentlewoman from Florida wish to inquire?
    Mrs. Thurman. I thank you, Mr. Chairman. I have got a 
couple of questions and I am going to preface with this. 
Yesterday I was at a Rotary Club in Crystal River and I had a 
gentleman who said to me: I have lived in a lot of places in 
this country and I feel like I am a second-class citizen here 
in Citrus County because I can't get HMOs Medicare. It was 
really kind of a sad state of how he was feeling about himself.
    So my issues are really going to be based on some of the 
reimbursement issues, particularly to rural areas and I know 
you have got some stuff on the blended formula in here. But let 
me ask you, do you believe that the fiscal year 2000 
reimbursement rates will have any kind of an effect on this 
issue?
    Ms. Wilensky. I think there is so much turmoil going on now 
that if it has any effect, it will be very modest. There will 
be some kicking in of the blended rate, which will help rural 
counties a year sooner than we initially thought. And the so-
called floor counties, the counties that had been paid less 
than $367 per person, per senior, per month are already being 
helped.
    But I would be surprised if there is a big change right 
away. There are enough issues outstanding for the HMOs about 
the service delivery requirements across counties in a single 
service area, about the timing, about when they have to have 
their premium benefit combinations into HCFA, about how much 
information they have to provide HCFA, and how much that will 
cost that I suspect a number of groups that might be at the 
edge of coming in might well wait a year before they come in. 
So I don't know that we will have a fair chance to see how much 
effect the increased reimbursement in rural areas is going to 
provide in this next year, although I would be very pleased if 
I was wrong.
    Mrs. Thurman. Well, what would you recommend? I mean, I 
have to tell you, the letters that are going out for those 
people that are losing their coverage. I mean, basically what 
the letter is saying is Congress did it because of the 
reimbursement issues. I mean, what would you suggest we do? I 
mean, these are very important issues to these folks because 
they can't make up the benefit of pharmaceutical issues. I 
mean, I need some help.
    Ms. Wilensky. I think in this case, HCFA did it, honestly. 
Because last fall, they could have provided a little more 
flexibility, acting more like insurance commissioners when the 
plans approached them in August and September and said, we 
missed the mark. They could have allowed them to come in, 
beaten them up, given them 10 or 15 percent of the difference 
they were asking for, and maybe kept some of those HMOs in the 
counties for another year.
    I think the issues that Congress needs to push HCFA to work 
on are some of the flexibility issues. The date, although this 
is going to be a statutory question. This issue of can they go 
until July or August before they have to get the premium 
benefit combination in. That is a big question about how much 
uncertainty you are going to face in the coming year.
    The issue about the service package difference. Up until 
this last year, HCFA allowed an HMO to have a different benefit 
package across different counties in a service area if HCFA 
paid those counties different amounts, basically reflecting, in 
fact, different spending patterns. That has now changed and 
that is going to cause some people, some plans that have rural 
counties in bigger service areas, to be concerned about whether 
they can differentiate it. And if they can't, to give them one 
more reason not to go in.
    So I think right now, it is to push HCFA to find ways to 
lighten the burden since I don't think it is so likely that you 
are going to increase directly the payment rates. But if you 
can decrease some of the extra costs that have been put on the 
plans, that might be just as well to try to get them to come 
in.
    Mrs. Thurman. Do you think that the 5-year rule issue has 
had any effect on this as well, where people may have pulled 
out this year?
    Ms. Wilensky. Yes, I do. I mean, it was raising the ante to 
pulling out and it meant that some plans that might have stuck 
around for another year wanted to get out before they got swept 
up into that.
    Mrs. Thurman. Mr. Chairman, I hope we are doing another 
round, because I have a whole bunch of other questions. But 
thank you.
    Chairman Thomas. Well, the Chairman certainly is going to 
do it and if you want to stick around for it, you can. I just 
want to, prior to recognizing the gentleman from Texas for his 
questioning, indicate that I took a look at Citrus County. It 
is $488 on the new blend rate. The gentleman from Minnesota, 
who has extensive managed care at very tight dollars, for 
example, hunt up and Minnesota's $457 rim--see, Minnesota's 
$470 dollars--I have a county in California, Fresno County, 
which is $438 and they are able to bring in managed care. But 
it is oftentimes in context with roughly where they are 
geographically, since California's a high-penetration State and 
Fresno is only two counties over from the Bay area.
    And all of the points that the Chairman made about the 
decisions that now have to be made to make it work are exactly 
why--and my questions are going to go to the larger question of 
the future of Medicare--but the Medicare Commission is looking 
at a premium support model, which would negate the need to try 
to make all of those decisions administratively and incorporate 
it into the plans making those decisions in the price that they 
offer to the new board.
    For example, you are very familiar with the politics of 
producing this blend structure. It slows the growth up top, 
whether they need it or not they get 2 percent, it speeds up 
the bottom. But the critical point is those middle dollars that 
make the difference between attracting a plan or not. And that 
area is going to grow slower than it probably needs to because 
it doesn't get 13 percent at the bottom, but it doesn't get the 
7 percent that it needs, it gets the 3.2 percent. And that I 
don't know that we can wait the time for that change to occur.
    Ms. Wilensky. And, Mr. Chairman, I would have to say too, 
though, I think because we have such a large veterans 
population which is not included in some of these issues, have 
something to do with it. Getting doctors to participate because 
there is a smaller number of doctors in these areas that we are 
talking about, the surrounding areas are anywhere between a 
population of 100,000. So we just don't have the population 
figures and we have doctors that will just lock us out.
    Chairman Thomas. And the gentleman from Washington has that 
problem with bases as well. And those are now irrelevant to 
HCFA's pricing of the product, but certainly not irrelevant to 
the health care delivery structure in the area. That, in part, 
would be incorporated under a premium support model as the 
prices are determined relatively automatically and that is one 
of the primary attractions and the reason we have come so close 
to the statutory 11 votes to present that to the Congress. But 
I am going to have some questions about that later. The 
gentleman from Texas.
    Mr. Johnson of Texas. Thank you, Mr. Chairman. Well, I 
would like to continue with that a little bit. You know, I know 
you are recommending that Medicare choice have the flexibility 
to tailor their benefit packages with their service areas and 
we seem to think that flexibility is needed because of the way 
that formulas do vary by county. And I wonder if you would 
comment some more on that.
    In particular, Waco down in Texas is a low area, by county. 
And they have all left there. There is nothing left there 
except fee-for-service. And, you know, how do we entice these 
people back into the system? And, I grant it, Waco is fairly 
close to some high-level metropolitan areas where people could 
go, I suppose. But, still, it is not there for them when they 
need it. Can you comment?
    And let me ask one more follow-up on that while you are 
talking. Are we trying to develop another system of figuring 
out how to make the payments, over and above what we already 
have established? Or are we refining it? Or are we initiating a 
new system? What is your recommendation?
    Ms. Wilensky. What we are trying to help the Congress with 
now is to refine the existing system that was put in place with 
the Balanced Budget Act. The commission that Chairman Thomas 
referenced, a bipartisan commission, is looking at the much 
bigger picture of what Medicare in the future might look like. 
But, of course, there are times in which these two start to 
have some overlap because some of the decisions that you get 
asked to look at from the Medicare+Choice provisions in the 
Balanced Budget Act raise the same kind of questions that a 
long-term Medicare commission would look at.
    This issue about the difference in payment across 
geographic areas has been looked at a little in the Balanced 
Budget Act. But I believe that as many problems have been 
created as have been solved. What the Congress correctly noted 
is that there was a big spread in payments across counties 
under risk contracts, from a low of $225 or $230 in Nebraska to 
a high of $780. And they put a floor on to make sure the very 
lowest counties didn't go below $367. And they financed it by 
having very slow growth in the high counties, 2-percent growth 
in the high counties, where many of the HMOs were in the higher 
paid counties.
    But the problem is that spending under traditional Medicare 
in those higher paid counties is going to continue at whatever 
rate and that--I think Chairman Thomas referenced this fact--
that 2-percent growth, the minimum growth rate--is a very 
small, very low growth rate. Especially when other Medicare 
spending in the same area is going to grow at a faster rate.
    It raises the question that the Congress hasn't taken on 
yet, but will have to at some point, which is how much 
variation should occur across the country in terms of what 
Medicare pays. Sometimes the variation occurs because people 
have differing health status or they are more likely to die in 
a year. But a lot of the difference occurs because of the way 
medicine is practiced in different parts of the country; much 
more aggressively in some parts, much more conservatively in 
other parts. And whether the Federal Government ought to pay 
for that is an issue that the Congress hasn't dealt with.
    I think the variations that exist now are still too great, 
even though they are less than they used to be. And I think the 
different payments in the same geographic area that was 
introduced in the Balanced Budget Act is asking for trouble and 
sooner, rather than later, that Congress is going to have to do 
something about that problem.
    Mr. Johnson of Texas. Yes, but what are we going to do? Did 
you make a recommendation about that?
    Ms. Wilensky. We have not made a recommendation because it 
really goes to the big issue of what you want to do about 
Medicare for the 21st century.
    Mr. Johnson of Texas. I hear you. So you are waiting for 
the commission.
    Ms. Wilensky. And then we will gladly try to help you with 
the policy questions that fall from that.
    Mr. Johnson of Texas. OK. Thank you very much. Thank you, 
Mr. Chairman.
    Chairman Thomas. I thank the gentleman. The gentleman from 
Michigan to inquire.
    Mr. Camp. Thank you, Mr. Chairman. We have had some 
discussion over the profitability of hospitals and I know that 
your report seems to use national data. And I just want to say 
that--and it is anecdotal as well--but the information I get 
from the hospitals in mid and northern Michigan are that their 
margins aren't as rosy a picture as maybe the national pictures 
might suggest they should be. And I just wondered if MedPAC has 
any data that show any significant difference in the operating 
margins of rural versus urban hospitals?
    Ms. Wilensky. We can, Mr. Camp, get you information that 
will show you the margins for both Medicare and total hospital 
expenses for rural as well as urban and other classifications.
    [The following was subsequently received:]

    [GRAPHIC] [TIFF OMITTED] T8251.001
    
      

                                

    Ms. Wilensky. As it happens in MedPAC, we have a 
representative from the hospitals in Michigan.
    Mr. Camp. Yes. Right.
    Ms. Wilensky. So I think that we have tried to be cognizant 
of the fact that there is a distribution in terms of margins. 
We have pointed out in the chart books that we have put out 
that even in 1996, which in general was a very positive year 
for hospitals, there were some 23 or 22 percent of hospitals 
that were reporting negative margins and that, while it is 
lower than it had been in previous year, it was still almost 
one in four that had this difficulty. So we do try to look at 
the issue.
    And we also are extremely concerned about the fact that our 
latest information goes through the summer of 1997, in response 
to both your comment and Mrs. Johnson's comment. We keep trying 
to find ways--I have had discussions with various groups about 
whether there might be ways to get more timely data. It is why 
we have recommended no further reductions in payment, because 
we know we can't see what is going on now. But it is hard for 
us to make a positive recommendation, because we also don't 
know what is going on and only have anecdotal data. So we are 
concerned about what we can't see right now.
    Mr. Camp. Well, I appreciate that answer. I have another 
question about Medicare choice. You know, it is difficult in 
rural areas and I think there is a struggle to try to increase 
the health choices for seniors there. And I wondered if the 
recommendation for updating the government's plan so that the 
treatment of sicker or healthier patients will be taken into 
account. Do you, in your opinion or experience, do you believe 
that that risk adjustor will result in lower or higher 
reimbursement levels in rural areas?
    Ms. Wilensky. I have not seen the distribution so I 
honestly don't know what it will do in rural areas. What risk 
adjustors attempt to do is to get the relative price right. If 
there are reasons to believe that the absolute price might be 
too low because of changes that have gone on in the Balanced 
Budget Act to the base price, that is a legitimate question to 
ask. It is legitimate to ask, after you have introduced risk 
adjustment, whether 95 percent still is justified as opposed to 
100 percent, since, in some ways, that was a crude way to try 
to approximate some selection.
    But what risk adjustment attempts to do--and I think HCFA 
has done as good a job as they could have, given the data and 
the time constraints placed on them--is to try to get the 
relative prices between different HMOs and between the risk 
contracts and traditional Medicare right. And they ought to do 
it, because it is the correct way to make adjustments.
    Mr. Camp. Sure. Just, quickly, you recommend or the report 
recommends a copay with an annual cap on home health services.
    Ms. Wilensky. Right.
    Mr. Camp. And you mentioned a $300 cap. But that low-income 
individuals would be exempt from this copayment.
    Ms. Wilensky. Exactly.
    Mr. Camp. At what level would you define low income?
    Ms. Wilensky. We thought, for administrative ease, anybody 
who has Medicaid, QMB, or SLMB, that is, anybody who is already 
under some kind of a Federal program so we wouldn't have to 
income test someone for this provision.
    Mr. Camp. All right. Thank you. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman. The gentleman from 
Washington wishes to inquire.
    Mr. McDermott. Thank you, Mr. Chairman. Interesting report 
and I read a lot of chapter two. Karen Ignani says that what is 
happening this year is simply a tip of the iceberg. What is 
your anticipation for July 1, when we get the bids for next 
year?
    Ms. Wilensky. I am worried. I am worried that there may be 
additional withdrawals, partly because there is so much 
uncertainty.
    Mr. McDermott. So much uncertainty?
    Ms. Wilensky. Uncertainty in terms of how the regulatory 
structure will play itself out, with regard to risk adjustment 
when some of the full encounter information will be available, 
the requirements in terms of information reporting, the timing 
issue. So I am concerned that, in some areas, we will see 
further withdrawals.
    However, the plans are in there to provide services to 
seniors and seniors use a lot of health care services. And 
there have been a number of plans that say they are interested 
in stepping up to the plate. So I believe it would be helpful 
if HCFA tried to come up with ways to lower some of the 
regulatory burdens in appropriate ways, so that you are not 
risking bad outcomes or not collecting appropriate information. 
Because I think there are some administrative procedures HCFA 
puts in place that worsen the problem.
    Mr. McDermott. Specifically?
    Ms. Wilensky. Well, as I indicated, I thought last year not 
allowing for some renegotiation later in the year pushed out 
plans that might not have left. Not making any allowance for 
the fact that plans were asked to come in in May where, up 
until then, they had had until November to come in.
    The second issue has to do with this service flexibility. 
Up until this year, HCFA has allowed for a different benefit 
package. If HCFA pays counties different rates within their 
general service area and has now come out with a rule that will 
prohibit any such variation, even though it is making different 
payments in some of these different counties.
    Mr. McDermott. Does that mean they will go up to the 
highest payment in the service area?
    Ms. Wilensky. They can only do one. And anyway they do it, 
they will have to give any difference in payments, between 
payments and benefit, as extra payments. Probably if there is a 
lot of variation they will leave.
    Mr. McDermott. Do you think the 5-year lock out provision 
that comes into effect this year will make a difference in what 
people decide to do in July?
    Ms. Wilensky. I think if they are not in and they have any 
question, they may wait a year or two.
    Mr. McDermott. Rather than get in and then have to get out 
and be under a 5-year lock out.
    Ms. Wilensky. And be out for 5 years. Right.
    Mr. McDermott. OK, let me move to one other issue, because 
I----
    Ms. Wilensky. And another one is, on the other hand, for 
the people who are in, this isn't quite the atom bomb strategy, 
but it is raising the stakes high.
    Mr. McDermott. Yes. I kind of wonder if it is going to 
survive this session of Congress, frankly.
    Ms. Wilensky. I think it might be appropriate to think 
whether a similar but somewhat lower bar wouldn't do, wouldn't 
have some of the same effect without having it be quite as 
harsh. But, I mean, I understand why you wanted to do that and 
the idea seems a reasonable one.
    Mr. McDermott. Let me just move to another issue--
geographic disparity--because I come from the area where we 
believe that no good deed goes unpunished. Minnesota, 
Washington, Oregon--our AAPCC, everything is lower than the 
national average, but the particular issue I want to raise is 
home health care. Our average visits are 34 per year. Louisiana 
is 170. Now, whatever you want to say about people in 
Louisiana, I don't think they are sicker than people in 
Washington State. There is something different about the way 
the plan is being run. And it seems to me that you have to 
evaluate acute and chronic cases separately.
    We took the provisions of last year's Medipac report and 
put a piece of legislation in--it was H.R. 746--in order to try 
and set up a mechanism by which you could case-by-case evaluate 
the long-term cases. Where are you on the commission, in terms 
of this whole issue of how we sort out what we do in home 
health care? Because Washington State is getting punished with 
a 10-percent penalty when we are so far below the national 
average that it is not fair. And I think something has got to 
be done about it. So I am interested in how we work this out.
    Ms. Wilensky. I am concerned about the variation in 
Medicare payments across the country. I think that it is not 
fair to the conservatively practicing States.
    What we have suggested--because we agree, there do seem to 
be two different populations in home care--is that after about 
60 visits, there ought to be an independent assessment about 
the care needs of the individual with regard to future home 
care. So that you both try to tackle the cases where there may 
be inappropriate care--because we did not want to have any 
additional copayments beyond 60 visits--so that you both have 
appropriate care for those who, in fact, have more chronic care 
needs, as provided for under Medicare coverage, but you don't 
prolong what will then be home care with zero copayment because 
of how care tends to be delivered in a particular place. We 
think this idea of having a geriatrically trained individual do 
an independent case assessment around 60 visits--although we 
are not stuck on that--but that seemed to pick up the two 
distributions that we were observing, would help try to deal 
with this, both for the appropriate and inappropriate users.
    Mr. McDermott. Do you think the $5 copay that you have 
suggested is fair? Is that going to get the desired result or 
does that fall more heavily on the low-income people?
    Ms. Wilensky. Well, what we have suggested is that we 
exempt anybody who qualifies for any of the Federal 
designations. So Medicaid, QMB, SLMB, those people not be 
subject to the $5 copayment off the top. The second provision 
is, we want to put a stop-loss provision so that, at some 
relatively low level--although it obviously depends on who you 
are--but something like $300, there are no further payments.
    We use that $5 a visit, $300, as a ceiling to say around 
the 60th visit where we are no longer going to use copayments, 
we ought to have an independent assessment of the health care 
needs of the individual, both to make sure the people who 
needed it continue to get care at zero copayment and that the 
people who are either pressuring physicians unreasonably to 
sign-off on home care or for whatever reason were having long 
streams of home care thereafter would have an independent 
assessment of that need. So it was a way to try to deal with 
both issues.
    Mr. McDermott. I would like you to take a look at our 
legislation and give us your comments. Because we tried to set 
up a mechanism by which that could be evaluated and I 
appreciate your looking at it. Thank you.
    Chairman Thomas. I thank the gentleman. Does the gentleman 
from Pennsylvania wish to inquire?
    Mr. English. Yes. Thank you, Mr. Chairman. Dr. Wilensky, 
this may be faintly redundant, but in your testimony, you 
stated with regard to the hospital industry, that quote, 
``Reducing payment rates below the level prescribed in the BBA 
would not be prudent, at least for this year.'' I wonder if you 
could amplify on this statement and, specifically, give me your 
thoughts on the administration's budget proposals that would 
reduce payments to hospitals this year.
    Ms. Wilensky. Our concern, as several of the Members have 
raised, is that our data are not as timely as we would like. 
The last good data we have are from the summer of 1997, just 
prior to the implementation or the enactment of the Balanced 
Budget Act. While at that time it looked like hospital margins 
in general were strong, even so there were about 22 or 23 
percent of hospitals with negative margins. In general, 
hospital margins were strong, but we have just gone through a 
very active period of change. We cannot see the effects of that 
change. We have cut out the maneuverability of many hospitals 
because change is occurring in the outpatient area, home care, 
skilled nursing facilities, as well as the reduced payments to 
hospitals. We, therefore, think it is unwise to have further 
reductions when we know we can't see what is going.
    Furthermore, as I indicated in my comments to the Chairman, 
I am impressed that, going around the country, I am hearing 
hospital administrators say they feel something very different 
has been happening in the last 6 months. They are not even sure 
themselves, but they are having enormous pressure on their 
margins and that the squeeze is much greater than they are used 
to. I understand and they understand that this is anecdotal 
information, but given that we know how out-of-date our data 
are, that supports the notion of not doing further reductions.
    Mr. English. I am getting the same anecdotal information 
so, for what that is worth, I think you are on to something. 
Let me, maybe, narrow my inquiry a little bit. Bad debt 
payments to hospitals, obviously, are designed to compensate 
hospitals for the cost of treating indigent patients who can't 
afford to pay their bills. We are going into a period where 
there may be a fair amount of pressure in some areas, 
particularly with the new implementation of welfare reform. And 
I wonder, can you give us any greater detail with regard to the 
effect the administration's proposed 10-percent reduction on 
bad debt payments might have to hospitals?
    Ms. Wilensky. I don't have at my fingertips any analysis. I 
will see whether there is any information that MedPAC has 
available.
    [The following was subsequently received:]

    First, we need to clarify that Medicare's bad debt payments 
to hospitals cover only the bad debts of Medicare patients in 
the fee-for-service sector. These bad debts result from 
hospitals' inability to collect (after reasonable collection 
effort) the deductible and copayment amounts beneficiaries owe. 
Medicare does not pay for any of the bad debts that hospitals 
incur in treating non-Medicare patients, although MedPAC has 
recommended that Medicare' disproportionate share adjustment be 
modified to reflect the uncompensated care (sum of charity care 
and bad debts) that hospitals provide to all patients.\1\
---------------------------------------------------------------------------
    \1\ Medicare Payment Advisory Commission, Report to the Congress: 
Medicare Payment Policy, March 1, 1999, pages 60-65.
---------------------------------------------------------------------------
    The Balanced Budget Act of 1997 cut payments for Medicare 
bad debts by 45 percent over the course of three years (25 
percent in fiscal year 1998, 40 percent in 1999, and 45 percent 
in 2000). The President, in his budget for fiscal year 2000 
published earlier in the year, proposed to extend the reduction 
to 55 percent for hospitals and to apply the 55 percent cut to 
all other providers of services entitled to claim bad debt 
reimbursement. The Congressional Budget Office scored the 
overall proposal as producing savings of $400 million in fiscal 
year 2000. We estimate that approximately one-third of these 
savings result from the impact of the proposal on the hospitals 
covered by Medicare's inpatient prospective payment system.

    Mr. English. Could you give us your thoughts, then, on the 
benefits or drawbacks that you foresee with regard to skilled 
nursing facilities using an episodic payment method?
    Ms. Wilensky. The biggest question with regard to an 
episodic payment is whether or not you can predict the 
episodes. I think there is some difficulty in going to a per-
case, which is why we have had the existing per-diem system. I 
mean, if you could do it and explain the variation, that is 
frequently desirable. The question is, is there a mechanism 
that allows you to explain the variation across different 
illness patterns. And my sense is that that remains 
problematic.
    Mr. English. My final question: Do you have any further 
comment on the current HCFA implementation of the SNF 
perspective payment system?
    Ms. Wilensky. As we discussed earlier, there appears to be 
concern that the sickest patients, the high acuity patients, do 
not have adequate reimbursement under the existing system. Mrs. 
Johnson raised the concern that waiting until 2001 and the 
results of a HCFA study is a long time to wait, and I agree. It 
seems to be generally believed that there is inadequate 
reimbursement for high acuity patients. I doubt you will have 
the luxury of waiting two more years.
    Mr. English. Thank you for your testimony. Thank you, Mr. 
Chairman.
    Chairman Thomas. I thank the gentleman from Pennsylvania. 
The gentleman from Minnesota wishes to inquire?
    Mr. Ramstad. Thank you, Mr. Chairman. Dr. Wilensky, good to 
see you again and I applaud the outstanding job you have done 
in chairing the commission. I appreciate also the exchange you 
had with my good friend from Florida, Mrs. Thurman, as well as 
the recognition of the Chairman and Mr. McDermott of the 
problems we have in Minnesota with the Medicare+Choice 
payments.
    I know your commission is not recommending any changes at 
this time to the methodology by which Medicare+Choice payments 
are calculated and I certainly agree with your report that we 
must consider the various factors influencing plans to reduce 
their number of service areas. Payment is not the only reason, 
but certainly payment levels are very important.
    Blue Cross-Blue Shield Minnesota, for example, just pulled 
out of Minnesota completely and it is of concern to many in my 
State, obviously. I haven't seen the numbers for next year yet, 
Dr. Wilensky, but I understand we will finally see the blend 
funded for most counties. This is certainly good news, but, 
again, many in Minnesota still aren't confident that the blend 
will be funded beyond next year. Is there anything you can 
recommend to help us ensure that the changes in the Balanced 
Budget amendment are able to operate fully and the blend is 
there for more than 1 year?
    Ms. Wilensky. Well, the first is that I think the fact that 
it is coming in a year earlier than we thought it might is good 
news. The second issue--and this is really one for me to give 
back to you, because it is a statute issue, legislative issue--
is that a level of blend was specified in the Balanced Budget 
Act. At some point, the Congress will need to consider whether 
that is the right blend level or not.
    It goes back to the question that we talked about earlier, 
which is it will still allow for substantial variation in 
spending across the country and whether or not that is regarded 
as appropriate or inappropriate is an issue that the Congress 
is going to have to decide. How much to peg at a national level 
and how much to allow for local variation, remembering that the 
people who are above the average are probably going to be 
unhappy when they are pulled down toward the average, as well 
as those coming up. But this is an issue, ultimately, I think 
that Congress is going to have to take another look at.
    Mr. Ramstad. In your judgment, Dr. Wilensky, wouldn't a 
better way to do it be by regions, rather than nationally?
    Ms. Wilensky. I think I would have to look at that to 
decide, if not the local level, how best to do it. I would 
prefer, rather than having a specific geographic area, think 
about how medicine is best practiced, to set the parameters and 
then to make adjustments for illness levels in the community 
and cost of living. I actually am not that keen about using 
means or medians or some other average measure because we 
really don't have a good sense. It may well be that the 
conservative practice used in Oregon or in parts of Utah or in 
the State of Washington or in Minnesota is the model that would 
be best and we ought to allow deviations from that only because 
we think there is some reason to do so. So I am a little 
reluctant to specify a particular geographic area.
    Mr. Ramstad. Let me shift gears--and I certainly appreciate 
your responses--to graduate medical education. Certainly, like 
most of my colleagues, I am concerned about GME, graduate 
medical education, payments. I didn't see much reference to 
such payments in the report, either on how the funding be 
handled or if changes to the payment levels are appropriate. 
Now I know the bipartisan commission is looking at new ways to 
fund GME, do you have any recommendations on such funding or on 
these issues?
    Ms. Wilensky. No, but we will in August. We owe you a 
report on graduate medical education in August 1999. Normally, 
you are correct, you would see in our March report our payment 
recommendations. But because we had a specific stand-alone 
report due in August, we have chosen to postpone that, but we 
will back in a few months.
    Mr. Ramstad. I appreciate that assurance and your 
recognition of the importance of this issue. Mr. Chairman, I 
yield back.
    Chairman Thomas. I thank the gentleman from Minnesota. Does 
the gentleman from Georgia wish to inquire?
    Mr. Lewis of Georgia. Thank you very much, Mr. Chairman. 
Dr. Wilensky, in your written testimony, you speak of the need 
to increase Medicare payment for outpatient dialysis services. 
As you know, many African-Americans, especially the elderly, 
suffer from diabetes and depend on dialysis treatment. Would 
you please explain to the Subcommittee in greater detail why 
HCFA should increase the compensation for dialysis treatment.
    Ms. Wilensky. We will have additional information in our 
June report on quality issues, but our concern is that the 
payment has been kept at the same amount, the so-called 
composite rate, for so long that the costs are going to exceed 
the payment rate. We already have had raised some issues about 
mortality and outcomes data in the United States versus other 
countries.
    Now that is a complicated issue, but we think, even at the 
preliminary stage of our analysis, that it is too low a rate or 
that it has been frozen at too long a level. While we 
anticipate providing more information on access and quality 
issues in our June report and, I hope, in our next year's 
report as well, even at this early stage we thought it was 
inappropriate to say nothing because our sense is that saying 
nothing means a continued freeze. Of course it may be a 
continued freeze in any case, but we wanted to be on record as 
indicating that some at least modest increase was appropriate.
    Mr. Lewis of Georgia. Thank you, Dr. Wilensky. I have 
another question. It is a little long and if you could be 
patient with me for a moment. The New England Journal of 
Medicine recently released a study which concluded that doctors 
are significantly less likely to recommend cardiac 
catheterization for blacks and women then for white men with 
identical complaints of chest pain. As you know, this is the 
best tool for diagnosing heart disease and all doctors were 40 
percent less likely to recommend this diagnostic treatment for 
blacks and women than for whites and men. This study is just 
one in a long history of evidence showing that minorities and 
women do not receive the same level of treatment as their white 
male counterparts, despite having identical insurance coverage. 
This is unacceptable and maybe we should find a way to do 
something about it.
    I believe that monitoring hospitals and requiring that they 
report how their procedures vary by race and sex might help 
close this gap. Identifying and educating doctors about the 
bias is the best way to help eliminate it. And I want you to 
respond, Dr. Wilensky, if you can, what type of monitoring and 
public disclosure might be useful in making health care 
providers more conscious of biases in treatment and health 
providers and help us close this growing gap between minorities 
and women and white men in America when it comes to health 
care?
    Ms. Wilensky. Well, as a middle-aged white woman, I 
actually took a lot of notice of that report. It is, I think, a 
concern to all of us to read that people with similar, 
identical symptoms were provided with very different treatment. 
And I think there are several ways to try to respond to this. 
To the extent that we can make sure there are guidelines and 
protocols, good scientifically available guidelines and 
protocols, we can help provide at least a scientific basis for 
making decisions.
    The second thing we can do is to require outcomes and 
reports, particularly in areas where we think variations may 
exist, so that the public and the professionals can see the 
kinds of variations that exist.
    Finally, it may be that, because of the substantial 
increase in at least women--our success rate for African-
Americans has not been as good--going into medical schools, may 
have a greater sensitivity to the medical needs of women and 
minorities then we have seen to date. Maybe, I guess, it is an 
issue that we can hope that the State medical societies and the 
national medical associations would regard as sufficiently 
serious that they also attempt to reach out to their 
membership. It was a very distressing report.
    Mr. Lewis of Georgia. Thank you very much, Dr. Wilensky. I 
yield back my time, Mr. Chairman.
    Chairman Thomas. I thank the gentleman for yielding. We do 
have a vote on. There will be two consecutive votes. But the 
gentleman from California, Mr. Becerra, who is no longer a 
Member of this Subcommittee, has sat through the entire process 
and wishes to ask one question.
    Mr. Becerra. Thank you, Mr. Chairman. Yes, one question 
with three parts, right. [Laughter.]
    No, let me thank the Chairman for giving me the opportunity 
to be here and to ask these questions. Ms. Wilensky, thank you 
very much for being here. I wish I could say I am still sitting 
on the Subcommittee, but we don't have those kinds of choices 
sometimes.
    The financing issue with HCFA. I know it has become more 
difficult. Let me ask you--and there may be a subpart, a real 
quick subpart on this--we have been talking a lot about Social 
Security these days. Social Security has administration just 
the way Medicare has administration. HCFA does it for Medicare. 
Social Security has its administration off-budget; it is not a 
part of the appropriations process. Social Security gets to 
determine its administration. We don't have that for Medicare 
and HCFA, we are finding, is underfunded. We have got to do 
something quickly, otherwise we are going to find it is going 
to be very difficult to administer the program well. What are 
your thoughts about doing something similar to, say, Social 
Security where the administration, the costs of administration, 
are done separately.
    And then, if you can, within that question, answer the 
following. The whole issue of using software for your billing 
purposes--and I think you may have instituted this when you 
were the HCFA administrator--if people use computer technology 
to submit their claims rather than do paper claims, we can save 
some money. I am being told it is about $1 per claim that we 
save. The number I have is that there are 800 million claims 
submitted; 20 percent are still done by paper. There is $160 
million at a $1 a claim that is additional cost to HCFA by not 
having more of our providers using the new technologies.
    So, again, administration should be done more like Social 
Security and, two, how can we provide an incentive for 
providers to go more toward technology in the submission of 
claims?
    Ms. Wilensky. Let me do the second first and then I will go 
to the first.
    Mr. Becerra. Very quickly.
    Ms. Wilensky. I think that you ought to phase in the 
requirement, but it ought to be time-specific and tell 
physicians that if they are not reimbursed, then they will have 
to pay the additional costs. Institutions do it and I think if 
you had a 2- or 3-year period or some period of phase-in, as 
long as it was a date certain at that time, we would be done 
with it. If we had started that when I was there, we would be 
done for sure by now.
    I am concerned about the administrative budget. I am a 
little nervous about putting more into entitlements. That seems 
to be the wrong direction to go. I don't know whether the HCFA 
legislation offers any type of road map where, as I understand 
it, there is some special funds because they are collected from 
fraud and abuse, but they are appropriated. I don't want to get 
away from the appropriation. I want to have Congress make a 
distinct decision, but if there is a way to have it not 
necessarily come out of the very limited discretionary moneys, 
there may be a way to respond to both areas.
    Social Security, as I understand it, is a fixed percentage 
of the expenditures. That is too much of one more entitlement 
to make me comfortable. But there may be a way that was a 
direct appropriation, but being able to tap into the 
entitlement fund that would allow for the discipline of direct 
decisionmaking by the Congress, but without quite the 
competitive pressure that happens when you are fighting against 
vaccine money for low-income children or LIHEAP or any of the 
other discretionary programs that you have to deal with.
    So I would like to explore that to try to respond to both 
issues.
    Chairman Thomas. I thank the gentleman for his question. I 
want to compliment him. Although his rules would have allowed 
him to stay here, he chose to go someplace better. But the 
commitment is appreciated, because you are still coming back 
although you are not on the roster.
    Very quickly, how unfairly this may be, kind of yeses and 
noes, because I want to lay the groundwork as we go forward. 
You are on record, for example, in the February Health Affairs 
edition about Medicare, what is right and what is wrong and 
what is next. The commission has been focusing on a premium 
support model. Do you believe, if structured properly, that is 
an appropriate way to go?
    Ms. Wilensky. I personally, yes. The commission, MedPAC, 
has not taken a position.
    Chairman Thomas. While you have mentioned that you think 
that major reform in Medicare probably will not occur until 
2005 or 2009, is that a fairly accurate representation of some 
of your predictions?
    Ms. Wilensky. I think that Congress is more likely to act 
in the year after a Presidential election and when the fiscal 
pressures mount. You are the gentlemen who are going to be 
voting, so I would be very happy to have you contradict that. 
But as----
    Chairman Thomas. Well often voting occurs in a climate and, 
depending upon the climate, it either has a chance for a 
greater success or less success. And, to the degree that people 
who are recognized as experts say it is 2005, it makes it a 
slightly more difficult environment.
    When you take a look at the problems in terms of out years, 
it is fairly obvious one of the reasons is that, 
notwithstanding the better efficiency, effectiveness, getting 
value to beneficiaries, that the premium support model might 
save some money, if done correctly. And, if that is the case, 
isn't it better to start it sooner rather than later because of 
the impact on out years?
    Ms. Wilensky. My preference is that the decisionmaking be 
made sooner rather than later.
    Chairman Thomas. Thank you. One of the challenges is the 
question of transition. Do you have any thoughts--and I know 
you cannot now expound them--and I would very much like any 
discussion or presentation of transition questions, not tied to 
any specific plan, but moving from our current structure to a 
premium support model, because of the difficulty that we have 
had with the Medicare+Choice within HCFA and if, as per our 
dialog with the gentlewoman from Florida, my follow-up, that a 
number of those questions would be negated and, therefore, they 
would not be of concern in a transition discussion, between the 
current structure and a premium support model, in a general 
sense. And I would very much like--has the commission done any 
thinking on this?
    Ms. Wilensky. No.
    Chairman Thomas. Well, it has been fairly evident since the 
summer that we had maybe 10 and close to 11 votes and you would 
be the people we would be relying on, so I would like to put 
you on notice that, even if we don't get 11 votes, I believe 
Senator Breaux has indicated we are going to be talking about 
it legislatively. So on your August graduate medical exam 
report, we may be asking you to look at some of those 
questions. So if you think about them in general, you can plug 
in the specifics as we move forward.
    With that, thank you very much. The Subcommittee stands 
adjourned.
    [Whereupon, at 2:46 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of American College of Surgeons

    The American College of Surgeons is pleased to submit this 
statement to the Ways and Means Health Subcommittee for the 
record of its hearing on the Medicare Payment Advisory 
Commission's (MedPAC's) 1999 report to Congress, which was held 
on March 2, 1999. The College's comments focus on Chapter 7 of 
that report, which addresses the continuing reform of Medicare 
physician payments. Specifically, we have concerns about the 
report's discussion and recommendations regarding three key 
issues: resource-based practice expense relative value units 
(RVUs); professional liability insurance (PLI) expense RVUs; 
and the sustainable growth rate (SGR) system.

                         Practice expense RVUs

    The College is very concerned and, frankly, somewhat 
confused about the set of issues that the Commission chose to 
highlight for Congress in the section of Chapter 7 that 
addresses the transition to resource-based practice expense 
RVUs. In particular, we believe the Commission devoted an 
inordinate amount of space in that chapter to issues of concern 
to comparatively few physicians, while completely ignoring many 
issues that have been identified by the Health Care Financing 
Administration (HCFA) and others as having a significant impact 
on the distribution of payments among various physician 
specialties and services.
    For example, the list included in the report of technical 
and methodological matters that will be considered during the 
transition to new practice expense RVUs contains no mention of 
the following refinement issues, many of which were identified 
by HCFA in its preamble to the final rule published on November 
2, 1998:
     revisions of the practice expense per hour data;
     the accuracy and consistency of physician time 
data;
     the effect of rounding the amount of physician 
time assigned to high volume services of relatively short 
duration;
     the impact of averaging the clinical practice 
expert panel (CPEP) inputs for codes reviewed by more than one 
CPEP;
     the effect of mid-level practitioners on the 
calculation of practice expenses per hour; and
     the relevance of Y2K problems.
    Further, MedPAC fails to note that none of the issues 
identified in the 14,000 public comments submitted on the 
proposed rule issued last June were ever addressed, including 
those involving more than 3,000 codes that were identified as 
misvalued. We are now in the first year of the transition to 
resource-based practice expense RVUs, and the amount of work 
that needs to be done by HCFA and the American Medical 
Association/Specialty Society RVS Update Committee is 
extraordinary. In fact, the publication schedule for the 
proposed rule that must be issued on the 2000 Medicare fee 
schedule effectively guarantees that the first two years of the 
three-year transition period will pass before any significant 
refinements can be made-even those that would address the most 
obvious data errors.
    We agree with a recommendation made last month by the 
General Accounting Office (GAO) in its report, Medicare 
physician payments: need to refine practice expense values 
during transition and long-term, which advised HCFA to conduct 
sensitivity analyses to determine which issues have the 
greatest impact on Medicare payments and then prioritize its 
refinement efforts accordingly. We also believe that MedPAC and 
Congress should monitor HCFA's refinement activities closely. 
If the key issues that affect the distribution of practice 
expense payments in a substantial way are not resolved, we 
believe Congress should consider delaying the transition to 
fully resource-based practice expense RVUs for at least another 
year. In other words, the 50-50 blend of new and old RVUs would 
take effect on January 1, 2001, and the 75-25 RVU blend would 
begin on January 1, 2002--with full implementation of the new, 
refined practice expense RVUs beginning January 1, 2003.
    We also noted that, unlike the recent GAO report, MedPAC 
did not express concern about the potential impact of 
cumulative Medicare payment reductions on beneficiary access to 
care. The transition to resource-based practice expense RVUs is 
causing many major surgical procedures to experience 
substantial Medicare payment reductions in addition to other 
payment cuts that occurred in prior years. Like GAO, we believe 
HCFA should be directed to monitor particularly hard-hit 
services closely for signs of impaired access.
    We also believe that these cumulative payment reductions 
may more severely affect some practices than others. For 
example, practices that specialize in complex procedures are 
likely to experience aggregate payment reductions much more 
severe than the specialty level impacts published by HCFA in 
the final rule. We recommend that practice level impacts be 
estimated for different types of physician practices, such as 
those located in urban and rural areas, teaching hospitals, and 
those that focus largely on specific procedures such as major 
joint replacement. These additional impact analyses could serve 
as a critical first step for directing surveillance of possible 
access problems.

                            PLI expense RVUs

    The implementation of resource-based RVUs for PLI costs is 
of considerable interest to the College. We are very concerned 
about the factual accuracy of many points raised by MedPAC in 
this section of the chapter, as well as the commission's sharp 
departure from previous recommendations on this issue.
    The College disagrees with MedPAC's conclusion that the 
specifications set forth in the statement of work issued to the 
HCFA contractor do not describe RVUs that are fully resource-
based. While we have some specific concerns and unanswered 
questions about the details of HCFA's proposal, we believe it 
is generally consistent with previous recommendations made by 
the Physician Payment Review Commission (PPRC) for a ``risk-of-
service'' approach to developing resource-based RVUs. 
Interestingly, MedPAC offers no explanation of why that 
approach is no longer favored or how it is being modified by 
the current recommendation.
    Further, it is unclear how RVUs for over 7,000 physicians' 
services can be developed with ``the frequency of closed 
malpractice claims with payment, by service, as the basis for 
the RVUs,'' as now recommended by MedPAC. We are unaware of any 
nationally representative source of data that could be used by 
HCFA to comply with this recommendation. Even if such data were 
available, they are not likely to be useful in establishing 
RVUs for the thousands of services for which malpractice claims 
have never been filed. Additionally, the new approach being 
proposed by MedPAC seems unnecessarily complex, given the 
relatively straightforward nature of PLI costs.
    We also are very concerned about the limited time available 
for HCFA to develop the new PLI expense RVUs and about the 
relatively limited information HCFA has shared with physician 
organizations about how it plans to do so. We understand that 
HCFA's contractor did not meet its due date of January 31, 
1999, for submitting its first draft report. Thus, the agency 
is already behind schedule.
    Finally, we would note that whatever method HCFA eventually 
uses to develop the RVUs should result in total payments to 
physicians that actually cover the cost of their PLI premiums. 
We made this point many times to HCFA with regard to the 
practice expense issue, and so far the agency has not provided 
any impact analyses to the public that are adequate for 
determining how the new practice expense payments compare with 
physicians' actual practice costs.

                               SGR limits

     As you know, the American College of Surgeons was an early 
supporter of the expenditure target concept as one means of 
addressing unnecessary increases in the utilization of 
physicians' services. We believe, however, that Medicare's SGR 
system and annual update calculation need to be revised.
     We were very pleased, therefore, that the Commission 
recommended that Congress revise the SGR formula to include 
measures of changes in the demographic composition of Medicare 
fee-for-service enrollment. Such an adjustment is essential to 
recognizing the effect on physician expenditures of changes 
like the aging of the Medicare population and the continuing 
growth of managed care enrollment (which could leave relatively 
old and sick patients in the fee-for-service program).
     We also are pleased the Commission recognizes that the SGR 
does not include an appropriate adjustment factor to represent 
improvements in medical technology and advancements in 
scientific technology. Currently, the SGR includes only a 
factor representing growth in the general economy, as measured 
by changes in the real gross domestic product (GDP) per capita.
     We disagree, however, with MedPAC's conclusion that GDP 
growth is an appropriate indicator of the ability of the 
economy to finance health care services--called 
``affordability'' in the report. We are not aware of studies 
showing that the economy suffers as the mix of economic 
activity shifts to more health care services. The College 
believes that targets setting limits on acceptable increases in 
physician expenditures should be based on the need for 
healthcare services-which bears no relationship to general 
economic growth.
    The report also recommends that the Secretary of Health and 
Human Services correct estimates of various factors included in 
the SGR when more accurate data become available. The College 
strongly agrees with the Commission's recommendation, but we 
are somewhat puzzled by its statement that HCFA lacks the 
authority to make this change under current law. In last year's 
proposed regulation on the 1999 Medicare fee schedule, HCFA 
invited comments on the issue. We are not aware that the agency 
has concluded it lacks the authority under current law to 
correct estimates but, if that is indeed the case, Congress 
certainly must provide that authority if there is to be any 
logic behind the SGR system.
    The College believes Congress should also consider several 
other shortcomings of the SGR system. These issues involve:
     Shifts in patient care settings. As services move 
from the inpatient hospital setting to various ambulatory 
settings, increased physician spending can result. The SGR, 
however, is not adjusted for these effects.
     Cumulative SGR formula. The current SGR is 
endlessly cumulative back to April 1, 1997. Under this 
formulation, physician spending that occurred years ago could 
result in inappropriate adjustments to the update for current 
years.
     Service-specific policy and volume changes. The 
lack of targeting in the SGR could result in services with 
relatively stable volume growth being subjected to payment 
reductions to compensate for volume and intensity increases in 
particular services. For example, some have expressed concern 
that revision in evaluation and management documentation 
guidelines may result in a substantially larger number of 
claims for high-level visit services.

                               Conclusion

    Once again, the College appreciates this opportunity to 
present its views and looks forward to working with members of 
the subcommittee as they continue to review these and other 
issues affecting physician payments under Medicare.
      

                                

Statement of American Medical Association

    The American Medical Association (AMA) appreciates the 
opportunity to submit this written testimony for consideration 
by the Ways and Means Subcommittee on Health and requests that 
it be included in the printed record. Our statement will focus 
on the comments the AMA provided to the Medicare Payment 
Advisory Commission (MedPAC) regarding MedPAC's March 1999 
report.
    With the enactment of the Balanced Budget Act of 1997 
(BBA), Congress opened a broad array of new private plans to 
Medicare patients and began the work that will be necessary to 
preserve the program for future generations. As with any new 
endeavor, careful monitoring is required to ensure that 
Medicare patients are protected as the new Medicare+Choice 
program is fully implemented. At the same time, we must all 
remember that most Medicare patients have decided to remain in 
Medicare's fee-for-service program, at least for now.
    It is therefore important that Congress and MedPAC not lose 
sight of the potential problems that could arise in fee-for-
service Medicare as payments are subjected to tighter and 
tighter constraints in the future. For this reason, the AMA is 
pleased that MedPAC has focused on both the Medicare+Choice and 
fee-for-service components of the Medicare program and we hope 
the subcommittee will follow this example.
    The AMA finds much to like in the Commission's report. We 
have previously argued that Congress should modify the 
Sustainable Growth Rate (SGR) expenditure target established in 
the BBA and we are pleased that MedPAC is echoing many of our 
suggestions in this area. We also hope that Congress will 
follow the Commission's recommendation to reinstate the 
requirement that the Health Care Financing Administration 
(HCFA) report each spring on projected physician payment 
updates for the following year. We are supportive of the 
report's general conclusions on the Medicare+Choice program. 
However, we do not believe that MedPAC has provided sufficient 
analysis to justify its recommendation that Congress create a 
single expenditure target that would apply to all outpatient 
services.

                        Sustainable Growth Rate

    Under the BBA, the SGR is based on projected changes in the 
Gross Domestic Product (GDP), Medicare payment rates, fee-for-
service enrollment, and law and regulations. If Medicare 
expenditures grow by more or less than the SGR, physicians' 
payment updates the following year are reduced or increased by 
enough to offset the difference between actual spending and the 
target. However, increases above the normal inflation update 
cannot exceed 3% and reductions from the inflation update 
cannot exceed 7%.
    Absent significant modifications in the SGR, physicians 
face payment constraints that are far more severe than Congress 
has imposed on any other sector of the health industry. 
According to HCFA and MedPAC, updates will ping pong between 
the MEI+3 and MEI-7 floor and ceiling. Overall, however, rates 
will fall. In fact, shortly before enactment of the BBA, the 
Congressional Budget Office (CBO) predicted that between 1998 
and 2002, physician payments under the SGR would decline by 11% 
before adjustment for inflation and by 19% after adjustment for 
inflation.
    No other health group has been asked to absorb this sort of 
across-the-board decrease in payments. In fact, the many 
managed care plans that are withdrawing from Medicare had been 
guaranteed a 2% per year pay raise under the BBA. This inequity 
is particularly ironic in view of the fact that physicians' 
track record in controlling the growth of their services has 
been far better in recent years than that of most other members 
of the health industry.
    The underlying problem with the SGR is that it assumes that 
there is--or should be--some magic relationship between health 
costs and national productivity. In fact, however, growth in 
health spending typically exceeds growth in the GDP, and there 
is no reason to expect health expenditures and the GDP to rise 
at the same rate. If there were a serious economic downturn 
with negative GDP growth at the same time that a serious 
epidemic struck large number of Medicare patients, would 
Congress really want to hold physicians to a target that called 
upon them to reduce their services to the elderly?
    Put another way, the SGR essentially decrees that no matter 
what happens, the use of physicians' services by fee-for-
service Medicare patients cannot increase by any more than 
growth in the GDP. There is no attempt to adjust for 
technological advances, emerging medical needs, or changes in 
medical practice. As a result, the AMA is concerned that the 
current formula effectively puts the brakes on technological 
innovation and improvements in the medical care and health 
status of Medicare patients.
    Congress has demonstrated its interest in fostering 
advances in medical technology and making these advances 
available to Medicare patients through FDA modernization, 
increases in the National Institutes of Health budget, and 
efforts to improve Medicare's coverage policy decision process. 
But the benefits of these efforts could be seriously curtailed 
if physicians face disincentives to adopt available new 
technologies into their practices because of inadequate 
expenditure targets.
    The Physician Payment Review Commission had originally 
recommended a 1 to 2 percentage point add-on to the SGR to 
account for technology changes and MedPAC is repeating the call 
for a technology add-on. The AMA believes it is imperative that 
Congress modify the SGR to include a technology add-on of at 
least GDP+2. However, MedPAC has not identified a specific 
percentage so we suggest that in determining what the add-on 
should be, Congress should consult further with both the 
Commission and the Agency for Health Care Policy and Research.
    Moreover, we urge Congress to consider other adjustments as 
well. As MedPAC points out in its report, fee-for-service 
patients in 1997 were somewhat older and sicker than in 1993 
and physician payments per patient increased slightly as a 
result. The Commission is therefore calling for an SGR 
adjustment to reflect changes in the composition of Medicare 
fee-for-service enrollment. The AMA heartily endorses that 
recommendation and urges Congress to adopt language requiring 
adjustments for changes in the composition of the fee-for-
service population. We note that HCFA recently observed in its 
proposed payment system for hospital outpatient departments 
that it is likely that Medicare patients who choose managed 
care will be healthier than those who stay in fee-for-service 
so that over time the intensity of services provided to the 
fee-for-service patients could rise.
    As MedPAC has also pointed out, hospitals are reducing 
costs by trimming lengths of stay and scaling back on staff. As 
a result, physicians are performing some additional services in 
their offices and part of the hospital savings has translated 
to increased costs for doctors. Since the SGR penalizes 
physicians if growth in their services exceeds growth in the 
GDP, doctors' ability to recoup these increased costs is 
severely limited and the AMA is concerned about their ability 
to continue absorbing the increases without deleterious effects 
on care of their disabled and elderly patients.
    The Commission has not yet addressed this issue. In the 
AMA's view, however, this is a critical flaw in the SGR. We ask 
that Congress direct MedPAC and HCFA to study the impact of 
this phenomenon and recommend an additional adjustment to 
account for the cost-shift from inpatient to outpatient 
settings.
    While these adjustments would greatly improve the SGR, 
calculation of the target still will involve a series of 
difficult and sometimes subjective projections that may prove 
unreliable in the long run. In 1998, for example, actual GDP 
growth was nearly three times as high as HCFA's 1.1% 
projection. As a result, the 1998 SGR and the 1999 physician 
update were about 1.5 percentage points lower than they should 
have been. This mistake cost physicians some $645 million in 
1999 and if not corrected will lead to additional losses in the 
future under the SGR's cumulative baseline.
    As HCFA acknowledged in its November 2 announcement of the 
1999 SGR, there is a good chance that this year's -0.3% target 
could be wrong as well. This negative target--which increases 
the likelihood that physicians will exceed the SGR and trigger 
payment reductions in future years--is due partly to the fact 
that first quarter data suggest that GDP growth will exceed 
HCFA's estimates again in 1999. However, the negative target 
results primarily from HCFA's totally unrealistic projection 
that in 1999, enrollment in fee-for-service would decline by 
4.3% in fee-for-service and rise by 29% in managed care.
    When HCFA published the SGR last November, the rate of 
growth in Medicare managed care enrollment had been declining 
each month since July, numerous managed care plans had 
withdrawn from Medicare, HCFA had curtailed its own 
informational campaign on Medicare+Choice and considerable 
publicity had been generated about the Medicare patient 
confusion surrounding the new options. HCFA did concede in the 
announcement of the SGR that ``differences between its initial 
estimate and a later estimate could ... affect the SGR by as 
much as 1 percentage point'' or $400 million in either 
direction. However, even this concession is based on an 
assumption that enrollment will grow by about 23%, which seems 
highly unlikely when enrollment growth has continued to decline 
and in January of 1999 was just 11% higher than in January of 
1998. Notably, enrollment actually fell between December of 
1998 and January of 1999.
    To make matters worse, it appears that HCFA's forecast of 
growth in the GDP may be understated again in 1999. Hence it is 
possible that the projection error could be three to four times 
what HCFA concedes is possible.
    The Physician Payment Review Commission recommended 
retroactive adjustments for projection errors, and a year ago 
HCFA indicated that it would make such adjustments. Medicare 
officials now say that even though they don't think ``Congress 
contemplated such significant variations'' between projected 
and actual elements of the SGR formula, the law may not give 
them the authority to make retroactive corrections. MedPAC has 
recommended that Congress require HCFA to correct the estimates 
used in the SGR calculations each year. The AMA concurs and 
believes that Congress should move immediately to rectify the 
injustice that was done to physicians this year.
    Both HCFA and MedPAC have also pointed to a technical 
problem having to do with the varying time periods used in the 
SGR. A mismatch of the time periods is expected to trigger 
extreme oscillations with payments ping-ponging between 
positive and negative updates each year. HCFA has proposed a 
non-specific legislative fix and MedPAC has offered a more 
detailed proposal that would use the calendar year for both the 
period covered by the expenditure target and the period for 
which actual spending is compared to the target.
    The AMA agrees that the oscillation problem needs to be 
addressed. However, we do not have enough information to 
evaluate HCFA's solution and we have some concerns that 
MedPAC's approach could exacerbate projection error. We would 
like to work with Congress as well as HCFA and MedPAC in 
designing a solution to this problem. In addition, we believe 
the SGR should be modified so that payment reductions of 
inflation-7 are never possible.
    Finally, we want to make it possible for Congress and 
MedPAC to exercise more oversight of the SGR and the payment 
updates that it produces. Under the previous expenditure 
target, HCFA was required to provide projections of actual 
spending compared to the SGR each spring and to calculate the 
updates that would occur if Congress adhered to the expenditure 
target formula. The agency could recommend changes from the 
formula updates as could the Physician Payment Review 
Commission, which evaluated the HCFA report and offered its own 
independent advice to Congress. Sometimes Congress let the 
formula updates take effect. In other instances, it increased 
or reduced the formula rates.
    When the old target was replaced with the SGR, Congress 
replaced the language requiring the spring reports with a 
provision requiring HCFA to report on the next year's SGR by 
August 1. Neither physicians nor policy-makers have any inkling 
of what the payment updates will be until they are announced in 
November. To make matters worse, the Administration was three 
months overdue in announcing that the 1999 SGR would be 
negative.
    The current timing of the announcements precludes Congress 
or MedPAC from examining the data and determining if it will 
produce a reasonable effect. As a result MedPAC, as mandated by 
Congress, spends hours pouring over hospital financial data and 
evaluating the adequacy of projected hospital rate hikes. 
Ironically, however, neither Congress nor MedPAC even know what 
the physician update will be.
    MedPAC has proposed to correct this disparity by requiring 
HCFA to publish the update report each year by March 31. The 
AMA believes that oversight of the physician update must be 
restored before physician payment rates fall to such low levels 
as to jeopardize physicians' ability to continue providing high 
quality care to Medicare patients. We therefore urge Congress 
to follow MedPAC's advice and to require that HCFA provide 
quarterly expenditure data as well so that both MedPAC and the 
physician community can compare actual spending against the 
target even if HCFA fails to produce its report in a timely 
fashion.

                       Practice Expense Payments

    Another important physician issue is the practice expense 
changes that are now being refined by HCFA. We have some 
reservations about the Commission's suggestion that third-party 
payers other than Medicare be involved in future discussions of 
practice expense methodology. However, we believe the 
Commission has come up with a reasonable set of recommendations 
for dealing with HCFA's decision to create a separate and 
higher practice expense value for any service performed in a 
physicians' office rather than a facility.
    We do not disagree with HCFA's basic premise that providing 
a service in the office generally costs physicians more than if 
they deliver the same service in a facility. However, HCFA has 
applied the policy even to procedures that are only rarely done 
in the office and a number of specialties have pointed to 
potential quality problems with this approach. We would 
therefore endorse MedPAC's solution to examine these 
differentials on a service-by-service basis and to apply the 
facility-based practice expense value in both the office and 
the facility unless there is clinical consensus that the 
procedure can be safely performed in the office.

                 Payments in Other Outpatient Settings

    In its most recent report, MedPAC is repeating a previous 
recommendation that prospective payments for hospital 
outpatient departments and ambulatory surgical centers should 
be based on individual services, not groups of services. The 
AMA agrees. Physicians examining the proposed system have found 
it replete with problems that threaten Medicare patients' 
access to certain services such as the newest and most 
appropriate cancer drugs. In addition, we do not believe it 
will ever be possible to extend a system that calls for so much 
averaging into physicians' offices. HCFA has persisted in the 
grouping approach despite MedPAC's recommendations, however, so 
we believe Congress should now direct HCFA to develop a new 
methodology that is based on individual services rather than 
ambulatory patient classifications.
    While we share MedPAC's skepticism about the payment system 
that HCFA is developing to pay for hospital outpatient and 
ambulatory surgical center care, the AMA does not understand 
the Commission's enthusiasm for creating a new expenditure 
target that would include all outpatient services in a single 
target. In the BBA, Congress directed the Administration to 
develop a ``method for controlling unnecessary increases in the 
volume of covered'' services in hospital outpatient 
departments. We believe that this emphasis on the control of 
unnecessary services was wise and would like to remind the 
subcommittee that expenditure targets do not distinguish 
between necessary and unnecessary services. Rather the target 
applies across the board, including all services in its scope 
and then reducing payments for all services, not just those 
that are believed to be unnecessary, if the target is exceeded.
    In addition, the Commission has spent very little time 
examining the details of how an expenditure target for other 
outpatient services might work. MedPAC members have never been 
presented with alternative designs. Nor have they seen 
comparative data on the impact of all-encompassing targets 
versus sector-by-sector targets where physicians and hospital 
outpatient departments each would have their own separate 
targets. The AMA therefore urges Congress to reject MedPAC's 
recommendation that Congress should direct HCFA to ``develop 
and implement a single update mechanism that would link 
conversion factor updates to volume growth across all 
ambulatory care services.''

                            Medicare+Choice

    On another issue of great importance to Medicare patients, 
the AMA appreciates MedPAC's efforts to ensure a smooth 
implementation of the new Medicare+Choice program created by 
the BBA. While we endorse the expansion of private options to 
the traditional Medicare program, we believe that success will 
depend upon the development of a fair and equitable payment 
method that does not encourage biased selection. The AMA 
therefore supports the Commission's recommendation that a new 
risk-adjuster begin on schedule in January of 2000. We also 
concur with HCFA's and MedPAC's call for a five-year phase-in 
of the new adjuster.
    Like the Commission and Congress, the AMA is worried about 
the impact of managed care plan withdrawals on Medicare 
patients. We would not like to see a repeat of the massive 
exodus that occurred last fall. We note, however, that managed 
care plans are guaranteed a 2% increase in payments every year 
while fee-for-service physicians face potential cuts in their 
payments. We therefore agree with MedPAC that Congress should 
adopt a wait-and-see approach before taking any drastic steps 
to encourage the managed care industry to continue to serve 
Medicare patients.
```