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80–217 2002

PHYSICIAN PAYMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 28, 2002

Serial No. 107–70

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

AMO HOUGHTON, New York 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

MAC COLLINS, Georgia 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

WES WATKINS, Oklahoma 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

WILLIAM J. COYNE, Pennsylvania 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

KAREN L. THURMAN, Florida 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

ALLISON GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH

NANCY L. JOHNSON, Connecticut, Chairman

JIM MCCRERY, Louisiana 

PHILIP M. CRANE, Illinois 

SAM JOHNSON, Texas 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

PHIL ENGLISH, Pennsylvania 

JENNIFER DUNN, Washington 

FORTNEY PETE STARK, California 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

JIM MCDERMOTT, Washington 

KAREN L. THURMAN, Florida

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

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

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

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

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

is further refined. 

iii

C O N T E N T S 

Page 

Advisories announcing the hearing ........................................................................ 2, 4

WITNESSES 

Congressional Budget Office, Dan L. Crippen, Director ....................................... 6

Medicare Payment Advisory Commission, Glenn M. Hackbarth, Chairman ..... 16

American Association for Thoracic Surgery, Society of Thoracic Surgeons, 

Children’s Hospital Boston, and Harvard Medical School, John E. Mayer, 

Jr., M.D ................................................................................................................. 43

American Medical Association, Donald J. Palmisano, M.D ................................. 49

American Physical Therapy Association, and Spine and Sports Rehabilitation 

Center, Stephen M. Levine .................................................................................. 57

Center for Studying Health System Change, Paul B. Ginsburg .......................... 35

SUBMISSIONS FOR THE RECORD 

American Academy of Family Physicians, statement ........................................... 71

American College of Obstetricians and Gynecologists, statement ....................... 72

American College of Physicians—American Society of Internal Medicine, 

statement .............................................................................................................. 73

Association of American Medical Colleges, statement .......................................... 77

Association of Maternal and Child Health Programs, Deborah F. Dietrich, 

letter ...................................................................................................................... 79

College of American Pathologists, statement ........................................................ 80

Colorado Otolaryngology Associates, Colorado Springs, CO, Judy Boesen; J. 

Lewis Romett, M.D.; Neiland Olson, M.D.; Joel Ernster, M.D.; Barton Knox, 

M.D.; J. Christopher Pruitt, M.D.; John Hohengarten, M.D.; and Edgar 

B Galloway, M.D.; letter ...................................................................................... 82

Hayworth, Hon. J.D., a Representative in Congress from the State of Arizona, 

statement .............................................................................................................. 82

Knollenburg, Hon. Joe, a Representative in Congress from the State of Michigan, statement ...................................................................................................... 83

Professional Radiology, Inc., Cincinnati, OH, Frank E. McWilliams, letter 

and attachment .................................................................................................... 84

Sun Health, Sun City, AZ, Leland W. Peterson, letter ........................................ 86

(1)

PHYSICIAN PAYMENTS 

THURSDAY, FEBRUARY 28, 2002

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HEALTH, 

Washington, DC. 

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

1100 Longworth House Office Building, Hon. Nancy L. Johnson 

(Chairman of the Subcommittee) presiding. 

[The advisory and revised advisory announcing the hearing follow:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

February 20, 2002

No. HL–12

Johnson Announces Hearing on Physician 

Payments 

Congresswoman Nancy L. Johnson (R–CT), Chairman, Subcommittee on Health 

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

hold a hearing on the Medicare administrative pricing formula for physicians, which 

has resulted in a negative 5.4 percent update in 2002. The hearing will take 

place on Thursday, February 28, 2002, in the main Committee hearing 

room, 1100 Longworth House Office Building, beginning at 10:00 a.m. The 

hearing will conclude by 1:30 p.m.

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

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

Hackbarth, Chairman, Medicare Payment Advisory Commission (MedPAC); Dan 

Crippen, Director, Congressional Budget Office; Dr. Paul Ginsburg, President, Center for Studying Health System Change; and representatives of physician organizations. 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: 

Driven by high growth in payments for physician services in the 1980s, the Medicare Volume Performance Standard (MVPS) was enacted in the Omnibus Budget 

Reconciliation Act of 1989 (P.L. 101–239) to give physicians an incentive to control 

volume and to limit the growth in Medicare expenditures for physician services. 

Based on the recommendations of MedPAC and with the support of physician 

groups, the Sustainable Growth Rate (SGR) replaced the MVPS in 1997. The SGR 

formula is linked, in part, to projected Gross Domestic Product, so when the economy slows the update is reduced accordingly. It is also tied to the difference between 

actual expenditures and target expenditures. The SGR is used in combination with 

the Medicare Economic Index (MEI), a measure of the increase in physician office 

and salary costs. Therefore, the SGR is not a direct limit on expenditures—payments are not withheld if the target is exceeded—but the update is increased or decreased. 

Under the SGR formula, a ‘‘saw-tooth’’ pattern of funding has emerged. For example, the update increased 5.2 percent in 2000 and 4.8 percent in 2001—more than 

twice the rate of physician cost inflation. Then in 2002, the update decreased to a 

negative 5.4 percent, resulting in more than a 10 percent swing in just one year. 

The SGR formula is inflexible in its administration. For example, the SGR is dependent on economists accurately predicting economic trends; otherwise, the target 

is missed. Moreover, past errors in setting the target carryover and must be absorbed in future years, making it difficult to correct for the missed target in one 

year. Consequently, the Office of the Actuary is predicting negative payment updates through 2006. 

MedPAC has recommended replacing the SGR with a simple model based on the 

MEI. Because successive and negative changes are projected, however, a change to 

3

the formula that produces moderate payment increases results in significant budgetary costs and increased beneficiary cost-sharing. 

In announcing the hearing, Chairman Johnson stated, ‘‘Medicare’s formula for 

paying physicians is completely irrational and must be reformed this year. These 

cuts are unjustifiable. They result from factors in a formula that has nothing to do 

with the cost of providing health care. Inadequate payment of health professionals 

will discourage the top quality candidates that medicine has traditionally attracted 

and harm patient access to care.’’

FOCUS OF THE HEARING: 

This hearing will focus on the Medicare physician fee schedule formula. It will 

discuss the effect of the formula on physician payments and beneficiary access to 

care. The hearing will also analyze reforms to the current sustainable growth rate 

and the impact of any change on access and Medicare outlays. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please note: Due to the change in House mail policy, any person or organization 

wishing to submit a written statement for the printed record of the hearing should 

send it electronically to hearingclerks.waysandmeans@mail.house.gov, along with a 

fax copy to (202) 225–2610, by the close of business, Thursday, March 14, 2002. 

Those filing written statements who wish to have their statements distributed to 

the press and interested public at the hearing should deliver their 200 copies to the 

Subcommittee on Health in room 1136 Longworth House Office Building, in an open 

and searchable package 48 hours before the hearing. The U.S. Capitol Police will 

refuse unopened and unsearchable deliveries to all House Office Buildings. 

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. Due to the change in House mail policy, all statements and any accompanying exhibits for 

printing must be submitted electronically to mailto:hearingclerks@mail.house.gov, along with a 

fax copy to (202) 225–2610, in Word Perfect or MS Word format and MUST 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. 

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

http://waysandmeans.house.gov/. 

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

in need of special accommodations, please call (202) 225–1721 or (202) 226–3411 TTD/TTY in 

advance of the event (four business days notice is requested). Questions with regard to special 

accommodation needs in general (including availability of Committee materials in alternative 

formats) may be directed to the Committee as noted above.

f

4

***NOTICE—CHANGE IN TIME***

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943

February 20, 2002

No. HL–12 Revised

Change in Time for Subcommittee Hearing on 

Physician Payments 

Congresswoman Nancy L. Johnson (R–CT), Chairman of the Subcommittee on 

Health of the Committee on Ways and Means, today announced that the Subcommittee hearing on physician payments, scheduled for Thursday, February 28, 

2002, at 10:00 a.m., in the main Committee hearing room, 1100 Longworth House 

Office Building, will now be held at 9:30 a.m. The hearing will conclude by 

12:30 p.m.

All other details for the hearing remain the same. (See Subcommittee Advisory 

No. HL

our witnesses and the panels that will follow. We appreciate your 

Chairman JOHNSON. Good morning, everyone, and welcome to 

–12, dated February 20, 2002.)

f input on what we consider to be a very important hearing. 

Last year we held over a dozen hearings on why Medicare must 

be reformed and modernized. We unanimously reported and passed 

a bill to reduce the regulatory burden on our providers and to modernize Medicare’s contracting system. Yet, the Senate has failed to 

even hold a hearing on that issue. 

Medicare’s erratic and unpredictable payments to physicians 

clearly epitomize just one more reason why we cannot wait any 

longer to fundamentally modernize Medicare. When payments oscillate from 4.8 percent in 2001 to a negative 5.4 percent in 2002 

and actuaries project additional payment cuts in the future, something is wrong. 

The cost of practicing medicine will not get cheaper, it will get 

more expensive. If we do not reform the so-called sustainable 

growth rate payment formula, I fear our seniors may suffer access 

problems and our physicians will only become more demoralized in 

dealing with Medicare. I am committed to fixing this irrational 

payment formula as part of a larger Medicare modernization and 

prescription drug bill this year. 

Driven by high growth in payments for physician services in the 

eighties, the Medicare Volume Performance Standard (MVPS) was 

developed to give physicians an incentive to control volume and to 

limit the growth in Medicare expenditures for physician services. 

In 1997, the Sustainable Growth Rate (SGR) replaced the MVPS, 

based on the recommendations of Medicare Payment Advisory 

Commission (MedPAC) and with the support of physician groups. 

5

The SGR formula is linked to projected Gross Domestic Product 

(GDP), so when the economy slows, the update is reduced accordingly. It is also tied to the difference between actual expenditures 

and target expenditures. The SGR is used in combination with the 

Medical Economic Index (MEI), a measure of the increase in physician office and salary costs. Therefore, the SGR is not a direct limit 

on expenditures. Payments are not withheld if the target is exceeded, but if the update is increased or decreased accordingly. 

Today we will hear from MedPAC, who has recommended scrapping the SGR and linking payments to the Medicare Economic 

Index. Second, the Congressional Budget Office (CBO) will testify 

why payments to physicians and related providers are projected to 

be cut in the future and the fiscal implications of reforming the 

SGR. Finally, we will hear from an academic and several physician 

and provider groups about their ideas on reforming Medicare’s payments to physicians and providers. 

We look forward to your input during this hearing. I personally 

am extremely concerned about the volatility of our payment formula and its interaction with Medicaid reimbursements, particularly out there in the urban communities. So, it is important that 

we understand not only the problems in our payment formula, but 

also what is happening to reimbursements to physicians out there 

in different types of communities. Because only then can we assure 

that there will be doctors there to provide the quality care that seniors need and deserve throughout the cities and hamlets of our Nation. 

So I welcome our witnesses and would yield to my Ranking 

Member and colleague, Mr. Stark. 

[The opening statement of Chairman Johnson follows:]

Opening Statement of the Hon. Nancy L. Johnson, a Representative in

Congress from the State of Connecticut, and Chairman,

Subcommittee on Health 

Last year, we held over one dozen hearings on why Medicare must be reformed 

and modernized. We unanimously reported and passed a bill to reduce the regulatory burden on our providers and to modernize Medicare’s contracting system. Yet 

the Senate has failed to even hold a hearing on that issue. 

Medicare’s erratic and unpredictable payments to physicians, clearly epitomizes 

just one more reason why we cannot wait any longer to fundamentally modernize 

Medicare. When payments oscillate from 4.8 percent in 2001 to negative 5.4 percent 

in 2002, and actuaries project additional payment cuts in the future, something is 

wrong. 

The cost of practicing medicine will not get cheaper; it will get more expensive. 

If we do not reform the so-called ‘‘sustainable growth rate’’ payment formula, I fear 

our seniors may suffer access problems and our physicians will only become more 

demoralized in dealing with Medicare. I am committed to fixing this irrational payment formula as part of a larger Medicare modernization and prescription drug bill 

this year. 

Driven by high growth in payments for physician services in the 1980s, the Medicare Volume Performance Standard (MVPS) was developed to give physicians an incentive to control volume and to limit the growth in Medicare expenditures for physician services. In 1997, the Sustainable Growth Rate (SGR) replaced the MVPS, 

based on the recommendations of MedPAC and with the support of physician 

groups. The SGR formula is linked to projected Gross Domestic Product so when the 

economy slows the update is reduced accordingly. It is also tied to the difference between actual expenditures and target expenditures. The SGR is used in combination 

with the Medicare Economic Index, a measure of the increase in physician office and 

salary costs. Therefore, the SGR is not a direct limit on expenditures—payments are 

not withheld if the target is exceeded—but the update is increased or decreased. 

6

Today we will hear from MedPAC, who has recommended scrapping the SGR and 

liking payments to the Medicare Economic Index. Secondly, the Congressional Budget Office will testify why payments to physicians and related providers are projected 

to be cut in the future, and the fiscal implications of reforming the SGR. Finally, 

we will hear from an academic and several physician and provider groups about 

their ideas on reforming Medicare

f’s payments to physicians and providers.

Mr. STARK. Thank you, Madam Chair, and thank you for holding this important hearing. I agree in part with MedPAC that we 

should revisit the formula of the system under which we reimburse 

physicians. I think it is important to note, however, that while it 

is proper to be concerned about cost containment or fair reimbursement for services that we take this in context of what this Committee has to do. 

We have had 2 years of record increases in payments to physicians. In 2000, surgeons’ median income in this country was well 

over $200,000. Even the poor GPs, general practitioners, and pediatricians were making about between $100,000 and $120,000 median, which means that half of them were making a lot more. The 

tax cuts that we have so generously bestowed on the richest Americans, which would include these physicians, further increases their 

take-home pay and we have done nothing to help the lowest income 

seniors in the program, so that I would like to see us perhaps, as 

we think about fair reimbursement for people making $2, $3, $4, 

$600,000—we have given them huge tax cuts. I hope we will be as 

quick and as concerned about the 70 percent of the 40 million 

Medicare beneficiaries whose incomes are below $40,000 and who 

have no access to pharmaceutical benefits and to the 12 million 

children in this country who have no health insurance at all and 

therefore no health care. And so let us take care of the top and 

hope that we set a standard for helping the less fortunate in this 

country. 

Chairman JOHNSON. Thank you. It is my privilege and pleasure to welcome our first panel. Mr. Crippen. 

STATEMENT OF DAN L. CRIPPEN, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. CRIPPEN. Thank you, Madam Chairwoman and——

Mr. STARK. Use the microphone. 

Mr. CRIPPEN. Does that work? 

Mr. STARK. Yes. Pull it up, swallow it. There you go. 

Mr. CRIPPEN. The issue before us today, as I understand it, is 

the adequacy of recent and future updates for physician payments 

under Medicare and ultimately the acceptability of the formula 

that produces those updates. More pointedly, we are here to discuss 

the price taxpayers and Medicare patients pay each year to physicians. But this discussion, this question, cannot, I would argue, be 

addressed in isolation. Physician fees, or prices, are only one part 

of the equation. We need to examine payments and payment policy 

in the context of both the history and the future of this program. 

With the indulgence of the Committee, I would therefore like to 

take a little temporal jig and try to address how we got here, adVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\B217.XXX pfrm17 PsN: B217
7

dress where we go from here, and then, ultimately, get to here and 

see if that enlightens us any. 

As the Committee is painfully aware, price controls or administered prices are difficult to establish and seemingly impossible to 

enforce. History is replete with the failure of price controls, in this 

case, on physician services to manage or control spending. That 

failure has a unique aspect in this case because physicians are able 

to adjust the volume of services they provide. 

This chart shows the perpetual, if you will, increase since the beginning of the program in total spending for physicians. There is 

a discontinuity because the physician services definition has 

changed, but nevertheless it is almost a straight line up. Throughout the eighties, despite fee schedules and regulation, Medicare 

spending for physicians per beneficiary, per beneficiary, rose at an 

average annual rate of 12 percent. 

Virtually no matter what price controls have been employed, 

spending for physician services has almost always gone up. Even 

in those years after enactment of the Balanced Budget Act (BBA) 

1997 when hospital and total spending declined, physician payments went up. Total spending was targeted, beginning in 1992, as 

you all know, and that approach was revised in 1997 along with 

fee schedules to rein in what appeared to be an ever-increasing 

amount that taxpayers were contributing to this aspect of Medicare. 

I will return to that point in time—the near past—in a moment, 

but against this backdrop of apparently inexorable increases in 

spending for physician fees, I want to turn to the period that is our 

near future. The Committee has seen me present this chart in 

many and varied circumstances, but I think it is always important 

to establish a backdrop when we are considering these programs. 

As we see, current spending on Medicare, Medicaid, Social Security, much of which spending for retirees, is running at about 7 

percent of GDP. When my generation retires, we will literally double the number of recipients from something like 39 million today 

to about 80 million, come 2030. So it is not surprising that this 

chart suggests we will at least double and probably more than double the amount of the economy consumed by these programs. 

Of course, the single biggest increases that the chart shows—just 

graphically, let alone numerically—are for Medicare—which, again, 

is not surprising. The Congressional Budget Office assumes that 

Medicare costs are going to rise even faster than the economy in 

this projection, and that is probably a conservative estimate given 

the program’s spending history. 

The point here is that we have a future before us—that is a good 

redundant statement—we have a future that suggests that the 

total Federal budget itself, which is now only about 18 percent of 

GDP, is going to be consumed largely by these three programs or 

else we are going to have to increase taxes dramatically or increase 

government debt dramatically. Anything we tend to add to these 

payments, whether it is higher fees for physicians or whether it is 

pharmaceutical benefits, will only exacerbate that outcome. 

This is not to say—and I certainly don’t want to say—that there 

is any crisis here that needs to be addressed today; or maybe the 

Congress this year and in the future will not consider this to be 

8

a problem, in which case one would go about fixing up the program’s finances to accommodate a physician payment increase. But 

I want to remind the Committee, as I have in the past, that the 

fiscal pressures of this demographic bulge are almost upon us, and 

anything we do to add to Medicare spending will certainly make 

them worse. 

Returning to the present, the Committee is faced with the prospect of a reduction in the prices for physician services for last year, 

this year, and possibly several more years. The reasons for that are 

several. As we see from this rather complicated, or apparently complicated, chart, the single largest reason is an error that was made 

a few years ago and that resulted in price increases—large price 

increases—that it turned out were not warranted under the formula. 

So a large piece of your current dilemma—the volatility of the increases and the fact that we have negative updates—is that physicians were overpaid according to the formula in 2000 and 2001. In 

fact, if the correct data had been used, the updates would have 

been much less volatile, with a 2.1 percent reduction in 2002, a 4.9-

percent reduction next year, and positive updates thereafter. Of 

course, the updates of more than 5 percent that were paid in 2001 

and 2002 would have been smaller, but positive nonetheless. 

Some of the rest of the adjustment is due to volume increases, 

which put total spending somewhat above the target, and the slowing economy. There are at least two other pieces of information of 

which I think the Committee should be aware. Not all physicians 

have been hit equally over the past several years, primarily because of other changes taking place in the Medicare fee schedule. 

For example, in the past 4 years, family practice physicians experienced a 3 percent reduction in fees this year but an overall increase 19 percent in the prior 3 years. 

Volatility, Madam Chairwoman, while undesirable, certainly has 

characterized the structure of this program virtually from the beginning, and a big piece of the current volatility is due to the data 

error, or correction, that needed to be made. The current sustainable growth mechanism rate I suggest, can probably be modified to 

further reduce volatility. 

What are we to make of all this? First, physicians’ revenues from 

Medicare are not declining. Spending for physicians’ services will 

go up even with the past and projected reductions we have in physician fees. Indeed, CBO projects—as we say in our written statement, Madam Chairwoman—that total spending for physicians will 

go up by 5.9 percent in fiscal year 2002, despite the fact that the 

fee schedule will be reduced. By the way, some of you may have 

a copy of the testimony that has the increase occurring in 2003. 

The first paragraph should read ‘‘2002.’’ I just note that correction. 

Second, even if the Congress does not change current law and 

does not increase physician compensation or anything else, even 

holding total physician spending to per capita growth in GDP will 

still ultimately lead to what are probably unsustainable costs for 

taxpayers, mostly our children. 

Third, the lion’s share of the negative updates is attributable to 

unjustifiably large increases in total spending for physicians’ services in 2000 and 2001. 

9

Fourth, not all physicians’ fees have been reduced by even as 

much as the updates. 

In closing, I want to reiterate that it is the responsibility of the 

Medicare Payment Advisory Commission and my colleague on this 

panel to give you their best advice about appropriate payment of 

providers. However, it is the responsibility of this Committee and 

the rest of government to balance the various competing interests 

of present and future providers, beneficiaries, and taxpayers. Eliminating spending targets will only increase the burden on other providers, other government programs, and, ultimately, on our kids. 

Thank you. 

[The prepared statement of Mr. Crippen follows:]

Statement of Dan L. Crippen, Director, Congressional Budget Office 

Chairwoman Johnson, Congressman Stark, and Members of the Committee, I am 

pleased to be here today to discuss Medicare payments to physicians. As you know, 

the fees that Medicare pays per physician service have fallen by 5.4 percent this 

year. What you might not know is that the Congressional Budget Office (CBO) 

projects that total Medicare payments to physicians will rise by 5.9 percent in fiscal 

year 2002. Although the average fee per service will continue to fall for the next 

several years, total Medicare payments to physicians will continue to increase. 

The pattern of seemingly inexorable increases in Medicare spending for physicians’ services spurred the creation of the sustainable growth rate (SGR) method to 

automatically link increases in Medicare physician spending per beneficiary to 

growth in the national economy. CBO estimates that the recent recommendation by 

the Medicare Payment Advisory Commission (MedPAC) would increase Medicare 

spending by $126 billion over 10 years as a result of repealing the SGR system. Before discussing the reasons for that estimate, my testimony will review the relationship between Medicare payments to physicians, program spending, and the budget, 

as well as summarize the history of efforts to control Medicare spending for physicians’ services. 

PHYSICIAN FEES AND PHYSICIAN SPENDING 

Allow me to begin by reviewing the relationship between the fees Medicare pays 

to physicians, overall Medicare spending for physicians’ services, total Medicare 

spending, and the economy. Fees are paid for each medical service. But the amount 

paid per service is only one of the components driving Medicare physician spending. 

One other factor is obvious: Medicare spending for physicians’ services increases 

with the number of beneficiaries. In testimony before this Committee, I have highlighted the massive changes associated with the impending retirement of my generation. According to last year’s report by the Medicare trustees, the number of 

Medicare beneficiaries will virtually double between 2000 and 2030. During the 

same period, the number of workers paying for Social Security and Medicare will 

increase by about 15 percent (see Figure 1).

IMPACT OF CHANGING DEMOGRAPHICS 

ON MEDICARE SPENDING

The aging of the baby boomers has dramatic fiscal implications for Medicare (see 

Figure 2). If we spent the same fraction of gross domestic product (GDP) on each 

Medicare beneficiary in 2030 that we spend today—a proposition reflecting only the 

increased number of beneficiaries—Medicare spending would grow from today’s 2.3 

percent of GDP to 4.5 percent in 2030. The fiscal implications of the boomers’ aging 

are compounded by the fact that health care costs measured per beneficiary routinely grow significantly faster than does the economy measured on a per capita 

basis. As a result, if current law remains unchanged, Medicare spending will climb 

to 5.4 percent of GDP by 2030. 

Also projected to climb is spending for the ‘‘big three’’ programs for the elderly—

Social Security, Medicare, and Medicaid—taken as a whole: between now and 2030, 

such spending as a share of GDP will virtually double. Transfers to the elderly will 

grow from 7.8 percent of GDP to 14.7 percent in 2030 (see Figure 3). 

Let me underscore that that increase in spending of almost 7 percentage points 

of GDP will occur under current law. Proposals to increase payments to Medicare 

providers (such as MedPAC’s recommendation to increase payments to physicians) 

or to expand Medicare benefits (such as proposals to create a Medicare prescription 

10

1The Medicare economic index measures changes in the costs of physicians’ time and operating expenses; it is a weighted sum of the prices of inputs in those two categories. The components of the index come from the Bureau of Labor Statistics. Changes in physicians’ time are 

measured through changes in nonfarm labor costs. Labor productivity is also factored into the 

index. 

drug benefit) will exacerbate the long-term budgetary pressures projected for the 

next several decades. As this Committee knows, paying for those increased costs will 

require either dramatic reductions in spending, sizable tax increases, or large-scale 

borrowing. 

MEDICARE SPENDING ON PHYSICIANS 

In addition to fees and growth in the number of beneficiaries, the number and 

type (or ‘‘intensity’’) of the services provided by physicians determine total Medicare 

physician spending. Taken together, the number and type of physicians’ services 

constitute their ‘‘volume.’’ Medicare physician spending measured per beneficiary 

equals fees times volume of services. Each year, Medicare sets fees for physicians’

services using formulas in the Medicare Fee Schedule (MFS) and the SGR mechanism. However, because Medicare does not control the volume of services that physicians provide, its physician spending per beneficiary can grow even if fees are reduced. 

Medicare spending for physicians’ services grew faster than Medicare spending for 

all other services throughout the 1980s; in the 1990s, that trend reversed. From 

1981 through 1990, spending for physicians’ services grew at an annual rate of 13.7 

percent; spending for all other services grew at a rate of 11.1 percent per year. By 

1990, Medicare’s total payments to physicians were more than three-and-a-half 

times greater than they had been 10 years earlier, and the average physician was 

receiving more than two-and-a-half times as much in Medicare payments. Indeed, 

Medicare payments per physician increased almost twice as fast as did the nation’s 

economy during the 1980s. That rapid growth led policymakers to add expenditure 

targets to the formulas used to set the overall level of physician fees in order to control total spending for physicians’ services. In the 1990s, growth in the volume of 

physicians’ services moderated. To the extent that there have been surges in that 

growth, the system has lowered the update—the annual adjustment to physicians’

fees—to offset the higher spending.

A BRIEF HISTORY OF MEDICARE’S EFFORTS 

TO CONTROL PAYMENTS TO PHYSICIANS

The chronology of payments to physicians under Medicare can be divided into 

three periods. The first, shortly after the program began in 1965, was characterized 

by a rapid rise in spending as physicians increased both their charges and the volume of services that they provided. Even when the Congress limited the growth of 

fees for physicians’ services by pegging the annual fee update to the Medicare economic index, or MEI, spending continued to climb rapidly.1 That experience led to 

the second period of physician payments, when the Congress froze fees and limited 

increases in them to less than the rise in the MEI. 

Despite those actions, spending for physicians’ services continued to grow 

throughout the 1980s, and the Congress realized that limitations on the growth of 

fees alone—without regard to the volume of services that physicians provided—was 

not enough to control spending. That realization led to what is now the third period 

in Medicare’s payments to physicians (beginning in 1992), a span distinguished by 

restraints on the uncontrolled growth in expenditures for physicians’ services that 

Medicare experienced in the past. 

Abandoning the Charge-Based System 

When Medicare was created in 1965, the program paid physicians fees that were 

based on their charges, the method of payment then used by private insurers. In 

addition, Medicare permitted physicians to bill beneficiaries for the amount of their 

charges that exceeded the fee that Medicare paid, a practice known as ‘‘balance billing.’’ The charge-based reimbursement system gave physicians the incentive to increase their charges from year to year to boost their revenues, and those increases 

led to the spiraling expenditures of the first period of Medicare physician payments. 

As concerns grew about the program’s rising costs, policymakers focused on restraining those fees. In 1972, the Congress mandated that the annual update to 

physicians’ fees be limited to the increase in the MEI, a provision that was implemented in 1975. Tying increases in fees to growth in the MEI was not sufficient to 

keep total payments from rising, however, and the Congress took further steps to 

limit spending through legislation enacted from 1984 through 1991, during the secVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 E:\HR\OC\B217.XXX pfrm17 PsN: B217
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2Physician Payment Review Commission, Annual Report to Congress (March1988). 

3 Under Medicare’s rules, the program pays 80 percent of the fee schedule, and beneficiaries 

or their supplemental insurer pays 20 percent. Balance billing occurs when beneficiaries pay 

more than 20 percent of the fee. A physician elects either to ‘‘participate’’ (that is, take Medicare 

fees as payment in full for all services) or to receive Medicare payments as a ‘‘nonparticipating’’

physician allowed to balance-bill patients up to the statutory limit. Fees for nonparticipating 

physicians are set at 95 percent of the fees for participating physicians. Nonparticipating physicians are permitted to bill up to 115 percent of their fees. 

ond period of physician payments. The Congress froze fees from 1984 through 1986; 

from 1987 through 1991, it updated them by amounts specified in legislation. 

Limiting Beneficiary Liability 

Balance billing was another issue that prompted Congressional action during the 

1980s. On average, liability for balance billing per beneficiary grew from $56 in 

1980 to a high of $94 in 1986.2 Subsequently, the Congress responded by imposing 

limits on such billing, which prevented physicians from raising their charges; beneficiaries thus in effect made up for the constraints on Medicare physician fees. Balance billing is currently restricted to 109.25 percent of Medicare’s fees for participating physicians.3

The program’s limits on balance billing protect beneficiaries’ liability for physicians’ charges. However, those limits reduce the potential usefulness of balance billing either as a safety valve or signal that Medicare’s fees are below the level necessary to attract a sufficient number of doctors to serve Medicare enrollees. 

Redistributing Income Among Physicians’ Services 

Policymakers also took steps to redistribute payments among physicians. In the 

1980s, many analysts believed that Medicare’s reimbursement for physicians’ services was distorted by factors that tended to overcompensate so-called procedural 

services at the expense of what were termed cognitive services. Before the MFS was 

adopted, fees varied widely, with physicians in different specialties and in different 

geographic regions receiving different payments for comparable services. 

The response to those concerns was the implementation in 1992 of the Medicare 

Fee Schedule, which based payments for individual services on measures of the relative resources used to provide them. There are two parts of the formula for fees. 

One part is a set of weights that indicates the resource costs of each service relative 

to all others. (For example, a CAT scan has a higher relative value than an intermediate office visit with an established patient.) The other part is a fixed dollar 

amount, called the conversion factor, which is multiplied by each relative weight to 

calculate the fee to be paid for each service. The fee schedule was intended to promote equity and to be budget neutral—in 1992, the conversion factor was set so that 

estimated expenditures under the MFS equaled estimates of what expenditures 

would have been under the earlier payment system. One thing the MFS was not 

designed to do, however, was control costs. 

Controlling Volume 

In an attempt to control total spending for physicians’ services driven by volume, 

the Congress also enacted a mechanism that tied the annual update to fees under 

the MFS to the trend in total spending for physicians’ services relative to a target. 

Under that approach, the conversion factor was to be updated annually to reflect 

increases in physicians’ costs for providing care, as measured by the MEI, and adjusted by a factor to counteract changes in the volume of services provided per beneficiary. The introduction of expenditure targets to the update formula initiated the 

third period in physician payments. Known as the volume performance standard 

(VPS), the approach provided a mechanism for adjusting fees to try to keep total 

physician spending on target. 

The method for applying the VPS was fairly straightforward, but it led to updates 

that were unstable. Under the VPS approach, the expenditure target was based on 

the historical trend in volume. Any excess spending relative to the target triggered 

a reduction in the update two years later. But the VPS system depended heavily 

on the historical volume trend, and the decline in that trend in the mid-1990s led 

to large increases in Medicare’s fees for physicians’ services. The Congress attempted to offset the budgetary effects of those increases by making successively 

larger cuts in fees, which further destabilized the update mechanism. Indeed, between 1992 and 1998 (the years that the VPS was in effect), the MEI varied from 

2.0 percent to 3.2 percent, but the annual update to physician fees varied much 

more widely, from a low of 0.6 percent to a high of 7.5 percent (see Figure 4). 

12

4 Centers for Medicare and Medicaid Services, ‘‘Medicare Program; Revisions to Payment Policies and Five-Year Review of and Adjustments to the Relative Value Units Under the Physician 

Fee Schedule for Calendar Year 2002; Final Rule,’’ Federal Register, vol. 66, no. 212 (November 

1, 2001), pp. 55312–55321. 5 Centers for Medicare and Medicaid Services, Office of the Actuary, ‘‘Estimated Sustainable 

Growth Rate and Final Conversion Factor for Medicare Payments to Physicians in 2002’’ (February 4, 2002), available at www.hcfa.gov/pubforms/actuary/sgr/sgr2002f.pdf, compared with previous versions dated March 19, 2001, and November 21, 2000. 

That volatility led the Congress to modify the VPS in the Balanced Budget Act 

of 1997 (BBA), replacing it with the sustainable growth rate mechanism, the method 

in place today. 

The SGR Approach 

Like the VPS, the SGR method uses a target to adjust future payment rates and 

to control growth in Medicare’s total expenditures for physicians’ services. In contrast to the VPS, however, the target under the SGR mechanism is tied to growth 

in real (inflation-adjusted) GDP per capita—a measure of growth in the resources 

that society has available per person. The update under this approach is equal to 

the MEI adjusted by a factor that reflects cumulative spending relative to the target 

(the VPS did not use cumulative spending). 

Policymakers saw the SGR approach as having the advantages of objectivity and 

stability in comparison with the VPS. From a budgetary standpoint, the SGR method, like the VPS, is effective in limiting total payments to physicians over time. GDP 

growth provides an objective benchmark; moreover, changes in GDP from year to 

year have been considerably more stable (and generally smaller) than changes in 

the volume of physicians’ services. 

PROBLEMS WITH THE CURRENT APPROACH 

A key argument for switching from the VPS approach to the SGR mechanism was 

that over time, the VPS would produce inherently volatile updates. But updates 

under the SGR method have proven to be volatile as well. Until 2002, that volatility 

has tended to be to the benefit of physicians. Overall, the update in the first three 

years during which the SGR method was in place was almost twice as high as the 

MEI over the same period. It is the reduction for 2002 that has raised concerns 

among physicians. 

In 2002, for the first time since the MFS method was implemented in 1992, physicians’ fees have been reduced, drawing objections from physicians and raising concerns about assertions that beneficiaries’ access to physicians’ services will be impaired. Several factors contributed to the fee reductions:

*As of November 2001, the cumulative spending target (that is, the allowed 

spending from April 1996 through December 2001) that was used to set the 

physician fee update for 2002 was $302.7 billion. That target was $1.5 billion 

lower than the amount expected a year earlier. The reduction was driven largely by slower growth of GDP than had been estimated previously; also contributing, however, were revisions in some of the other factors that determine the 

spending targets.4, 5

*In addition, cumulative spending for physicians’ services far exceeded the 

spending target. The estimate of actual spending through 2001 that was made 

in November of that year and used to set the update for 2002 was $311.6 billion—or $8.9 billion (2.9 percent) above the corresponding target. 

*A large part of that discrepancy, however, resulted from the omission previously of a portion of actual expenditures related to certain service codes, 

which by mistake were not counted (including, for example, chiropractic services). In March 2001, the Centers for Medicare and Medicaid Services (CMS) estimated that actual cumulative expenditures through 2001 would be $303.9 billion—or $7.7 billion less than the November 2001 estimate. Although part of 

that difference is attributable to the availability of more recent data on physician spending than those used for the initial estimate, the size of the discrepancy indicates that the effect of the previously omitted services was substantial.

Therefore, much of the reason for the large decline in Medicare physician fees this 

year may be related to a counting error. That error was a major factor in the large 

positive updates in fees for 2000 and 2001, which otherwise would not have occurred. The effects of that oversight should not be confused with basic problems associated with the update mechanism. 

The BBA limited the maximum annual offset to the MEI to ¥7 percentage points, 

so the update for 2002 was ¥5.4 percent. Because actual spending exceeded the expenditure target by more than 7 percentage points for 2002, a portion of the past 

13

excess will lower the update for 2003. Currently, CMS projects negative updates 

through 2005 (see Figure 4). 

Because of changes to the relative payment amounts, or weights, for individual 

services for 2002, the ¥5.4 percent reduction in the conversion factor does not 

change all fees by the same amount. Indeed, payments for some services will increase in 2002, and payments for others will drop by more than 5.4 percent below 

last year’s. Those varying effects occur because 2002 is the final transition year in 

the reform of the ‘‘practice expense’’ portion of the fee schedule, which redistributed 

income among physician specialties. Starting in 2003, little redistribution of physician payments is anticipated. 

There are four general courses of action the Congress can take to address these 

issues. One possibility is to eliminate spending targets and determine the updates 

to fees without linking them to overall spending for physicians’ services—that plan 

represents MedPAC’s proposed approach. A second is to modify the SGR to reduce 

volatility. A third option is to legislate temporary relief from the reductions in fees 

generated by the current system. A fourth option is to make no changes to the current mechanism. 

MEDPAC’S PROPOSAL 

In March 2001 and again this year, MedPAC recommended that the Congress discontinue using the SGR method for computing the update and replace it with a 

framework similar to that used for updating the fees of other types of providers. 

CBO estimates that implementing the MedPAC proposal would cost $126 billion 

over 10 years. That estimate is virtually the same as the estimate of the CMS actuary. 

Not only would the MedPAC recommendation lock in place the overstated payments and fees set in earlier years, but it would also increase annually the fees paid 

to physicians. For 2003 through 2005, the MedPAC recommendation would substitute positive updates for the reductions expected under current law. Total spending for physicians’ services in the subsequent year would also be above the spending 

that would occur under current law. 

The new framework that MedPAC is proposing would end the use of expenditure 

targets, opening the door to large spending increases driven by volume. MedPAC’s 

proposal would base the update on the forecast for the MEI and on changes in productivity—without any limits on volume or total spending.

WHY PHYSICIANS ARE DIFFERENT FROM 

MEDICARE’S OTHER SERVICE PROVIDERS

Physicians are unique among Medicare providers in being subject to an overall 

spending adjustment. By contrast, Medicare pays for most other services now 

through prospective payment systems that set a price for a bundle of services. 

Under those systems, the provider is free to make decisions about the volume of 

services provided to the patient, but the payment for the bundle is fixed. 

Physicians are unique as well in their ability to determine the volume of services 

they can provide. They are the gatekeepers and managers of the health care system; 

they direct and influence the type and amount of care their patients receive. (Physicians, for example, can order laboratory tests, radiological procedures, and surgery.) 

Moreover, the units of service for which physicians are paid under the MFS are 

frequently very small. The physician may therefore receive one payment for an office visit and a separate payment for individual services such as administering and 

interpreting x-rays—all of which can be provided in a single visit. That contrasts 

with the policy for hospitals, which receive payment for each discharge and no extra 

payment for additional services or days (except in extremely costly cases). 

Further, once a physician’s practice is established, the marginal costs of providing 

more services are primarily those associated with the physician’s time. The current 

method of physician payment takes that unique role into account by explicitly linking the update in fees to the level of spending, which—as I said before—is determined by both fees and volume. 

CONCLUSION 

In considering whether to change the current system for setting Medicare physician payments, the Congress confronts the prospect of reductions in the fees paid 

per service for the next several years. MedPAC’s recommendation would increase 

the federal government’s spending for physicians’ services under Medicare by $126 

billion over the next 10 years. In contrast, other approaches might have the potential to lessen the volatility in the update without dismantling the mechanism for 

linking physician fees to total spending for physicians’ services or growth in the 

economy. 

14

Maintaining access to care for Medicare beneficiaries is a key consideration in assessing Medicare’s fee structure. MedPAC reports that the most recent systematic 

data currently available about access to care are from 1999. In evaluating that information, MedPAC reports that it found no evidence of problems in beneficiaries’

and physicians’ views about access. However, the lack of timely data makes it hard 

to know whether and to what extent problems exist in access to care. More timely 

data on that issue would be an important improvement over the current situation 

and could assist the Congress in its deliberations. 

Changes that increase Medicare payments to physicians will increase federal 

spending. Incorporating higher fees for physicians’ services into Medicare spending 

as currently projected would add to the already substantial long-range costs of the 

program and to the fiscal challenge to the nation posed by the aging of the baby 

boomers. Raising fees would also increase the premium that beneficiaries must pay 

for Part B of Medicare (the Supplementary Medical Insurance program). Inevitably, 

over the long run, higher spending by Medicare for physicians’ services will require 

reduced spending elsewhere in the budget, higher taxes, or larger deficits. 

FIGURE 1. PERCENTAGE INCREASE IN BENEFICIARIES AND 

WORKERS, 2000–2030

SOURCE: 2001 Annual Report of the Board of Trustees of the Federal Hospital Insurance 

Trust Fund. 


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15

FIGURE 2. PROJECTED MEDICARE SPENDING UNDER ALTERNATIVE 

ASSUMPTIONS, 2001–2030

SOURCE: Congressional Budget Office. 

FIGURE 3. SPENDING FOR SOCIAL SECURITY, MEDICARE, AND 

MEDICAID, 2000-2030

SOURCE: Congressional Budget Office based on its midrange assumptions about growth in 

gross domestic product and program spending. For further details, see Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2003-2012 (January 2002), Ch. 6. 


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16

FIGURE 4. COMPARISON OF ANNUAL PHYSICIAN UPDATES AND 

CHANGE IN MEDICAREPHYSICIAN SPENDING, 1992–2005

SOURCES: Centers for Medicare and Medicaid Services for updates and historical spending 

and Congressional Budget Office for projection of spending from 2001 through 2005. 

NOTE: The actual increase in the conversion factor, which is a fixed dollar amount that is 

multiplied by relative weights to calculate Medicare physician fees, is also affected by a budgetneutrality adjustment.

Chairman JOHNSON. Thank you very much, Mr. Crippen. 

Mr. Hackbarth of the MedPAC, very glad to have you. 

f STATEMENT OF GLENN M. HACKBARTH, J.D., CHAIRMAN, 

MEDICARE PAYMENT ADVISORY COMMISSION 

Mr. HACKBARTH. Thank you. 

As you know, MedPAC recommends that we repeal SGR and replace it with a system under which the Secretary would update 

fees annually based on estimated change in the prices that physicians need to pay for their inputs minus an adjustment for improved productivity. 

This is not a recommendation that we arrive at lightly. Controlling spending is obviously an important issue for the Medicare Program for all of the reasons that Mr. Crippen has outlined. Controlling spending, however, is not the only goal that we need to keep 

in mind. Here are some of the other goals that we at MedPAC 

think are important for the Medicare Program. 


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17

One of course is to assure access to quality care for seniors. This 

is the overriding purpose of the Medicare Program. At MedPAC we 

believe that the best way to do that is to try to match payments 

for individual provider groups, including physicians, to the cost of 

efficient providers of those services, and that is what our recommendation would do. So that is another goal. 

A third goal is fairness to providers, and one type of fairness is 

rewarding good behavior and reserving punishment, if you will, for 

poor performers, and this is a critical area where we believe the 

current system, the SGR system, fails. If spending increases above 

the target, the punishment is distributed across all providers without regard to who contributed to the excess spending. 

A fourth goal, from our perspective, is to assure that clinical considerations, not payment policy, guides decisions about where particular services should be provided. Here again the current system 

falls short because SGR only applies to certain services. It could influence where to provide a particular service. If it is provided in the 

physician’s office, it is subject to the constraint. If it is moved to 

an ambulatory surgical center or hospital outpatient department, it 

is not. 

Finally, we think that it is important for the Medicare Program, 

for the government to be a reliable and trustworthy partner to people who serve the Medicare population, and here again we think 

the current system falls short. The unpredictable and highly variable increases undermine confidence in the program. Yes, SGR controls spending, but only by compromising each of these other five 

important goals that we think should be included in the Medicare 

Program, and in our judgment that is a very high price to pay. 

The CBO and Centers for Medicare and Medicaid Services (CMS) 

estimate that the cost of repealing SGR will be quite large. We 

have not had the opportunity to review those estimates in detail, 

the underlying assumptions, so I have no specific comment on the 

estimate. But we think it is important to keep in mind why the 

projected cost is large. The projected cost is large because the underlying baseline is so low. 

The underlying baseline is based on the assumption that we will 

cut physician fees over the next several years by 17 percent. The 

underlying baseline assumes that the conversion factor for physicians, basically the price per unit of service, will be lower in the 

year 2005 than in 1993. It is because of this unrealistically low 

baseline that there is a large price tag for the policy that MedPAC 

recommends. 

That cannot be a reason to avoid doing the right thing. The issue 

of volume in the Medicare Program is a critical issue. We think it 

is very important for the Committee to understand that the SGR 

system does not constrain volume per se. 

The Sustained Growth Rate system controls total spending, but 

it fails to provide appropriate incentives at the level of the individual physician. Fees again are cut across the board as spending 

targets are exceeded. The individual physician is not rewarded in 

any way for exercising restraint in decisions about what to prescribe. The individual physician is not rewarded for being a conservative practitioner. That conservative practitioner of medicine is 

punished under the system just the same as the person that inVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\B217.XXX pfrm17 PsN: B217
18

creases volume inappropriately. That is a fundamental flaw in the 

system. 

What will happen if SGR is not fixed? We think the initial signs 

may of trouble may be subtle. Initially we may see shorter, more 

rushed office visits for our seniors. Perhaps there will be an incentive to increase return visits or prescribe more procedures or tests. 

Eventually we might see a move to relocate certain services out of 

the physician office to other locations. If fees continue to remain 

very low or fall even further, we could begin to see access problems 

for Medicare beneficiaries. In the long run if Medicare fees stay out 

of whack, we could begin to see a fewer number of applicants to 

medical school, certainly fewer from our best or brightest young 

people or a shift away from specialties that are heavily dependent 

on Medicare. 

All of these problems are serious problems and if they occur they 

will be difficult and costly to reverse in the future. 

[The prepared statement of Mr. Hackbarth follows:]

Statement of Glenn M. Hackbarth, J.D., Chairman,

Medicare Payment Advisory Commission 

Chairman Johnson, Mr. Stark, Members of the Subcommittee. I am Glenn 

Hackbarth, chairman of the Medicare Payment Advisory Commission (MedPAC). I 

am pleased to be here this morning to discuss MedPAC’s recommendations concerning payment for physician services in the Medicare program. 

The current formula for updating physician payments, known as the sustainable 

growth rate system (SGR), should be repealed. We made this recommendation last 

year in our March report to Congress because the conceptual basis of the system 

is flawed and in June we warned of potentially large negative updates for 2002 and 

in the future. That future has arrived, and CMS now projects four years of negative 

updates. The basic problem is that in seeking to control spending, the SGR causes 

large swings in updates from year to year that are unrelated to changes in the cost 

of providing physician services. Although input price increases for physician services 

have been in the 2–3 percent range for the last few years, the SGR has produced 

payment updates of +5.4, +4.5, and ¥5.4 percent over the 2000–2002 period. 

We recommend treating payment updates for physician services as we do payment 

updates for other services. Accordingly, we recommend that the Congress repeal the 

SGR and instead require that the Secretary update payments for physician services 

based on the estimated change in input prices for the coming year, less an adjustment for growth in multifactor productivity. We also recommend that the Secretary 

revise the productivity adjustment currently used for physician services to make it 

a multifactor instead of a labor-only adjustment. Taking into account current estimates for input prices and productivity, we thus recommend that the Congress update payments for physician services by 2.5 percent for 2003. 

Current estimates of updates using the SGR formula show three more years of 

negative updates for a total decrease of about 17 percent over the 2002–2005 period, 

a situation that is unsustainable (Figure 1). In addition, updates under the SGR will 

remain below estimated increases in the cost of providing physician services thereafter. Because the SGR is the current law, our recommendation—or any other action 

that corrects this problem—will show major budgetary costs. Nonetheless, maintaining access for Medicare beneficiaries and keeping physicians participating in the 

program and accepting new patients, will require that action be taken.

19

The problem with the current update system

Setting prices correctly in Medicare’s payment systems is essential to maintain access to services for Medicare beneficiaries. The underlying problem with the current 

SGR system is that it attempts both to set individual prices accurately and to control total spending on physician services delivered to Medicare beneficiaries. These 

two goals can seldom be achieved simultaneously. The SGR attempted to achieve 

both goals and failed, as did the Volume Performance Standard system before it. 

The SGR system causes payments to diverge from costs because, although the system accounts for inflation in input prices, productivity growth, and other factors affecting costs, it overrides these factors to achieve an expenditure target based on 

growth in real gross domestic product (GDP) per capita. If actual spending for physician services differs from the expenditure target, updates under the SGR system 

will diverge from costs. When this occurs, payments will be either too low, potentially jeopardizing beneficiaries’ access to care, or too high, making spending higher 

than necessary. This is a particular concern given that the SGR system only applies 

to services paid for under the physician fee schedule. Services provided in physicians’ offices are paid for entirely under the fee schedule, whereas when services are 

provided in other settings such as hospitals or ambulatory surgical centers, part of 

the payment is outside the fee schedule. Updates based on an expenditure target 

that fully applies to only one setting could create financial incentives that inappropriately influence clinical decisions about where services are provided. 

An expenditure target approach, such as the SGR, assumes that increasing updates if overall volume is controlled, and decreasing updates if overall volume is not 

controlled, provides physicians a collective incentive to control the volume of services. However, this assumption is incorrect because people do not respond to collective incentives but individual incentives. An individual physician reducing volume 

does not realize a proportional increase in payments. Instead, the increase in payments is distributed among all physicians providing services to Medicare beneficiaries. If anything, in the short run an individual physician has an incentive to 

increase volume under such a system and the sum of those individual incentives 

will result in an increase in volume overall. In fact, CMS makes exactly that assumption when it estimates the so-called behavioral response of physicians to lower 

payments—which is an increase in volume of services provided. 

Over a longer period, if payments were clearly less than physicians’ marginal cost 

of providing a service, we might see physicians cut back their Medicare practice and 

concentrate on other patients, devote more time to other professional or leisure activities, or leave practice altogether. Ultimately, we could see fewer applicants to 

medical school or a shift in residency preferences away from those specialties most 

heavily dependent on Medicare. The result eventually would be decreased access for 

Medicare beneficiaries which would be very difficult to reverse. 

Compounding the problem with the conceptual basis of the system, the SGR system produces volatile updates. Updates went from large increases in 2000 and 2001 

of 5.4 percent and 4.5 percent, respectively, to an unexpected large reduction in 

2002 of 5.4 percent. The recent volatility illustrates the problem of trying to control 

spending with an update formula. To control spending the update formula compares 

actual spending to an expenditure target. That target changed abruptly last year 


Insert offset folio 80217A.001
20

1The labor-only adjustment may simply be an artifact. It has been part of the MEI since the 

index was first used in paying for physician services in 1975, which was before the Bureau of 

Labor Statistics (BLS) began publishing measures of multifactor productivity in 1983.

because of two corrections. First, the Department of Commerce re-estimated historical GDP, which made prior physician spending growth too high by lowering the historical spending targets. Second, both actual and projected GDP went down since 

last spring, bringing down estimates of allowed future spending growth. In addition 

to corrections in the expenditure target, CMS found it had not counted some physician spending, correcting for that error increased actual expenditures and thus further increased the difference between actual and target expenditures. As a result 

of these corrections, CMS’s estimates for the update in 2002 changed from ¥0.1 last 

March to ¥5.4 percent in November. 

To address such problems, in our March 2002 report we recommend that the Congress replace the SGR system with an annual update based on factors influencing 

the unit costs of efficiently providing physician services (MedPAC 2002). The Commission’s recommendation is based on a belief that getting the price right is important when making update decisions. If total spending for physician services needs 

to be controlled, it may be better to look outside the payment update mechanism, 

achieving appropriate use of services through outcomes and effectiveness research 

for example, as we suggested in our March 2001 report to the Congress (MedPAC 

2001). If controlling total Medicare spending is the goal, then an approach that targets all of Medicare spending, not just physician spending, would be more appropriate. Below we describe how the Congress should replace the SGR system. 

What should be done?

Replacing the SGR system would solve the fundamental problems of the current 

system and would allow updates to account more fully for factors affecting costs. 

The change also would uncouple payment updates from spending control and make 

updates for physician services similar to the updates for other services. This change 

would promote the goal of achieving consistent payment policies across ambulatory 

care settings, including physician offices, hospital outpatient departments, and ambulatory surgical centers. Accordingly, the Commission recommends that:

The Congress should repeal the sustainable growth rate system and instead require that the Secretary update payments for physician services based on the estimated change in input prices for the coming year, 

less an adjustment for growth in multifactor productivity.

To replace the SGR system, the Congress could repeal provisions in current law 

and replace them with language similar to that for other services. For example, the 

Social Security Act requires updates for inpatient hospital care to equal the increase 

in the hospital market basket index, except when the Congress chooses to make the 

update smaller or larger. The Congress generally makes these choices after considering advice from MedPAC and the Secretary. With a similar update method for 

physician services, the Commission intends to base its advice to the Congress on assessments of payment adequacy such as the one discussed later in this testimony. 

Payment updates should take into account productivity improvements that enable 

physicians to provide care more efficiently. Revising the productivity adjustment to 

account for labor and nonlabor factors is consistent with the way physician services 

are produced. Labor accounts for most of the cost of providing physician services, 

but capital inputs are also important, including office space, medical materials and 

supplies, and equipment. The production of physician services, like the production 

of most other goods and services, is a joint effort that requires both labor and nonlabor inputs.1 Therefore the Commission recommends that: 

The Secretary should revise the productivity adjustment for physician 

services and make it a multifactor instead of labor-only adjustment.

Productivity gains are certainly possible in physician services and should be taken 

into account. For example, research suggests that doubling the size of a physician 

practice (from the current average of about 2.5 physicians to 5 physicians) increases 

productivity by 9 percent with no increase in practice expense per physician (Pope 

and Burge 1996). Physicians apparently perceive the advantages of group practice: 

in 1990, 52 percent of self employed physicians were in solo practice, but by 1998, 

that percentage had dropped to 42 percent. Other gains might come from new technology, economies of scale, managerial skill, and changes in how production is organized. 

In other health care delivery settings such as hospitals, MedPAC assumes that 

cost savings from improved productivity are usually offset by cost increasing factors 

such as scientific and technological advances or complexity changes within service 

21

categories. However, Medicare’s payment system for physician services accounts for 

those cost increasing factors by either, creating new billing codes or revising existing 

codes in the physician fee schedule, or by recalibrating the fee schedule’s relative 

weights every five years. Thus, those cost increases do not offset cost decreases from 

productivity and productivity must be accounted for separately. 

Productivity growth is the ratio of growth in outputs to growth in inputs. Measuring productivity growth requires detailed information on the personnel, facilities, 

and other inputs used and on the quantity, quality, and mix of services (outputs) 

produced. Because such data are generally not available, MedPAC has adopted a 

policy standard, 0.5 percent, for achievable productivity growth that is based on 

growth in multifactor productivity in the national economy. Such a measure should 

be used in the physician update as well. 

In making its update for physician services in 2003 MedPAC considered three 

things: the adequacy of Medicare physician payment in 2002, the inflation in input 

prices projected for 2003, and an adjustment for multifactor productivity. Although 

payments for physician services have not kept pace with the change in input prices 

since 1999, MedPAC recommends no adjustment for payment adequacy at this time, 

pending collection of further data. The other components of the update are the estimate of the change in input prices for 2003, which is 3.0 percent, and MedPAC’s adjustment for growth in multifactor productivity, which is 0.5 percent. Therefore:

The Congress should update payments for physician services by 2.5 

percent for 2003.

Our assessment of the first two components of our update, payment adequacy and 

inflation in input prices, is discussed briefly in the following sections. 

Assessing payment adequacy 

Is the current level of Medicare’s payments for physician services adequate? The 

information available to answer this question is limited and better measures of payment adequacy are needed. We lack information on the cost of physician services, 

so we cannot compare Medicare’s payments and costs the way we can for other services, such as hospital care. However, we do have information about several other 

factors that allow us to judge the adequacy of payments. This information includes 

data on the number of physicians furnishing services to Medicare beneficiaries, physicians’ perceptions of the Medicare program and their willingness to furnish services to beneficiaries, and information from surveys of beneficiaries on their ability 

to obtain care and their satisfaction with the care received. However, because it 

takes some time for providers to respond to changes in payment, these indicators 

may lag behind payment changes and must be interpreted carefully. Additional 

measures of payment adequacy are needed that are sensitive to possible short-term 

effects of inadequate payments, such as the duration of office visits and changes in 

the volume of services. 

Available information suggests that, as of 1999, payments were not too low. From 

1999 onward, we have very limited data; we do know, however, that payments did 

not keep up with increases in input prices. This suggests that payments for 2002 

could be too low, raising concerns about beneficiaries’ access to care. We will not 

know if payments are too low until we have further information on payment adequacy. One source of that information will be MedPAC’s newest survey of physicians 

which will be fielded this spring. 

Entry and exit of providers 

Data on provider entry and exit yield information regarding the adequacy of current payments. Rapid growth in the number of providers furnishing services to 

beneficiaries may indicate that Medicare’s payment rates are too high. Conversely, 

widespread provider withdrawals from Medicare could suggest that the rates are too 

low. 

Counts of physicians billing Medicare show that the number of physicians furnishing services to beneficiaries has kept pace with growth in the number of beneficiaries. From 1995 to 1999, the number of physicians per 1,000 beneficiaries grew 

slightly, from 12.9 to 13.1. 

Physician willingness and ability to serve Medicare beneficiaries 

MedPAC’s 1999 survey of physicians suggests that physicians were willing and 

able to serve beneficiaries.

• Only about 10 percent of physicians reported any change between 1997 and 

1999 in the priority given to Medicare patients seeking an appointment. Of 

those changing their appointment priorities, the percentage that reported 

giving Medicare patients a higher priority was almost the same as the percentage that assigned Medicare patients a lower priority. 

22

• Only 4 percent of physicians said that it was very difficult to find suitable 

referrals for their fee-for-service Medicare patients, a finding comparable to 

the percent who reported problems referring their privately insured fee-forservice patients.

One of the most important findings of the survey was that, among physicians accepting all or some new patients, more than 95 percent said they were accepting 

new Medicare fee-for-service patients—a finding consistent with the results of another recent survey. 

While these findings are positive, many doctors participating in MedPAC’s survey 

expressed concerns about payment levels. About 45 percent said that reimbursement levels for their Medicare fee-for-service patients were a very serious problem 

although, even more, about 66 percent, said that HMO reimbursements were a very 

serious problem. 

Beneficiaries’ access to care 

Another way to assess the adequacy of payment rates is to evaluate beneficiaries’

access to and quality of care. Evidence of widespread access or quality problems for 

beneficiaries may indicate that Medicare’s payment rates are too low. Access and 

quality measures are often difficult to interpret, however, because they are influenced by many factors. Access to care for specific services, for example, may be influenced by beneficiaries’ incomes, secondary (medigap) insurance coverage, preferences, local population changes, or transportation barriers, all of which are unrelated to Medicare’s payment policies. 

Access to care was not a problem in 1999, according to data from the Medicare 

Current Beneficiary Survey. The percentage of beneficiaries reporting trouble getting care (4 percent) was low and essentially unchanged from previous years. The 

data also show that beneficiaries were overwhelmingly satisfied with the care they 

received. We will continue to track these indicators as newer data become available. 

Accounting for cost changes in the coming year

Given the information about the adequacy of the current level of payments, the 

next step in determining payment updates is to ask how much costs will change in 

the coming year. Several factors will affect the cost of physician services, but the 

most important one is inflation in input prices. The available measure—the MEI—

has two problems, but the Secretary can correct them. Other factors that may increase costs include scientific and technological advances and the regulatory burden 

of the Medicare program, including the burden of compliance with requirements of 

the Health Insurance Portability and Accountability Act of 1996. These other factors 

are likely to have small or unmeasurable effects on costs. The remaining factor—

productivity growth—will reduce costs. Using appropriate measures of inflation and 

productivity growth, it appears that the cost of physician services will increase by 

2.5 percent during the coming year. 

Measuring inflation in input prices The MEI is the SGR system’s measure of 

input price inflation. It is calculated by CMS as a weighted average of price changes 

for inputs used to provide physician services. Those inputs include physician time 

and effort, or work, and practice expense. Physician work, which accounts for the 

time, effort, skill and stress associated with providing the service, has a weight of 

54.5 percent; the remaining 45.5 percent is allocated among categories of practice 

expense. Practice expense includes support staff wages and benefits, office expense, 

medical materials and supplies, professional liability insurance, medical equipment, 

and other professional expenses, such as private transportation. 

Although the MEI is analogous to the market basket indexes used to update payments for inpatient hospital care, it currently differs from those indexes in that it 

includes an adjustment for productivity growth. Productivity growth is an important 

factor and MedPAC believes that it should be considered separately in update decisions. This would allow input price indexes to account only for changes in prices, 

not other changes in cost. 

As used in the SGR system, the MEI also differs from the market basket indexes 

in that it is not a forecast of the change in input prices for a given year, but a measure of input price inflation for the previous year. To allow payment updates to anticipate changes in costs during the coming year CMS should use a forecast of the 

MEI when making payment updates for physician services. 

By removing the productivity adjustment and making it a forecast, the MEI would 

become a better measure of input price inflation. So modified, the index shows that 

input prices for physician services are expected to increase by 3.0 percent in 2003. 

23

Other cost-increasing factors

The cost of physician services may increase because of factors other than changes 

in input prices. The overall effect of these factors is likely to be small, however. As 

noted the costs of scientific and technological advances are already accounted for in 

the physician fee schedule when new billing codes are created or existing codes are 

revised. 

Other factors increasing costs are difficult to measure. For example, the regulatory burden of the Medicare program is an important concern of physicians. Nevertheless, estimates of the cost of this burden are not available. One way to account 

for any measurable increases in cost due to these factors is to assess payment adequacy, as described earlier, and adjust payments accordingly in future updates.

That was a very thorough explanation, I think, of the multiple 

Chairman JOHNSON. Thank you very much, Mr. Hackbarth. 

f goals that we have in our effort to reimburse physicians and of the 

depth of concern that we ought to have about the SGR formula and 

the impact it is having. 

There are a couple of things I would like to bring up. The first 

one is a very brief question to Mr. Crippen. You say that spending 

on entitlement services Social Security, Medicare, and Medicaid 

will increase from 7 to 14 percent of the GDP. Do you have any 

idea what percentage of expected revenues that will be? 

Mr. CRIPPEN. At the moment, we believe revenues will average 

about 19 percent of GDP during this decade and in the foreseeable 

future, given the way the Tax Code is constructed. Revenues can 

creep up over time, as they did in the recent past, to a little over 

20 percent of GDP. The reduction in taxes that you all enacted last 

year will reduce that share to 19 percent over the current decade. 

So revenues will fluctuate somewhere between 19 percent and 20 

percent of GDP for the very long term. 

Chairman JOHNSON. So if this goes from 7 percent to 14 percent of GDP, what percentage of the expected revenues do you 

imagine that would be? 

Mr. CRIPPEN. It would take 14 or 15 percentage points 19 percent. So it would be taking the lion’s share, or three-quarters. 

Chairman JOHNSON. So it would be taking 15 percent of the 19 

percent of expected revenues? 

Mr. CRIPPEN. Yes. About three-quarters. 

Chairman JOHNSON. Leaving less than 25 percent for all other 

functions by the year 2030? 

Mr. CRIPPEN. Right, if taxes were not raised or debt did not go 

up dramatically. 

Chairman JOHNSON. Thank you. 

Second, I wanted to ask whoever cares to comment on the following question. First of all, we do see that this formula has very 

different impacts on different physician groups, that some are receiving quite generous increases over time and some are receiving 

very steep reductions. The second thing that I see eclectically out 

there, and I wonder if you can look at this in your data, is that 

I see a very disparate impact on senior access to service, depending 

on how Medicare reimbursements interact with Medicaid policy 

and State decisions about whether or not to replace the 20 percent 

copayment, which is now a voluntary choice that States are making. 

24

Let me be a little clearer. In some of the urban areas of Connecticut where the State is not replacing the 20 percent, urban 

physicians have large patient load being paid at the Medicaid rate, 

which is low, and then they have an unusually large number of 

Medicare patients now associated with a 5 percent cut in reimbursement rate and next year an additional cut. Most of these 

same physicians also have a suburban office. In their suburban office they are not seeing nearly as many Medicare patients and not 

nearly as many Medicaid patients. 

So I am literally seeing before my very eyes public reimbursement policy driving care out of our inner cities, and I wonder 

whether any of your research into the impact of reimbursement 

rates is beginning to pick up this kind of data. I consider it probably the most serious impact of our reimbursement formulas on access to care for seniors and poor people, and yet I don’t see it 

emerging from the materials that I am reading. Mr. Hackbarth. 

Mr. HACKBARTH. None of the data I have seen is that refined 

that it would detect the sort of problem you have identified. The 

access data that we have reviewed at the Commission is at a higher level and shows in general good access to care for Medicare 

beneficiaries as 1999. 

Those are the most recent data we have available. We will shortly be getting more up-to-date information, but in general access has 

been good. 

Chairman JOHNSON. My understanding of that data that you 

have from 1999 is that there is a factor in it that shows that 45 

percent of the physicians in 1999 are not happy with Medicare. 

Now, on average it is good but when you have 45 percent 2 years 

ago, unhappy, and now we are cutting their reimbursements in an 

environment in which their malpractice premiums are soaring, 

their nursing costs are going up and other factors affecting practice 

costs, including the need to invest in new technology for just office 

management, never mind for diagnosis. Do we have any way of getting at more current data about the real impact of the 5 percent 

cost on physicians and particularly on the physician decision as to 

where to practice? 

Mr. HACKBARTH. Well, dissatisfaction among physicians about 

Medicare is certainly widespread, in particular in certain specialties. As you indicated, the impact of moving to the Resource Based 

Relative Value Scale (RBRVS) system has been differential across 

specialties. That was intentional, and certain specialties have experienced significant economic losses. 

By the same token, though, many physicians are also dissatisfied 

with other payers. So Medicare is not unique in this regard by any 

stretch. The decision not to participate, not to see Medicare patients or not to accept new patients is different, though, from a decision whether to be dissatisfied or not. So there is not necessarily 

a direct correlation between that 45 percent or even an increase in 

dissatisfaction levels with an immediate decision not to see Medicare patients. There are two separate issues. 

Chairman JOHNSON. Does your data allow us to look at the 

physician situation in those specialties that are most likely to serve 

elderly because it is not even across the specialties and of course 

there is going to be less dissatisfaction? If you are in a specialty 

25

that has a relatively modest Medicare load, it is going to be different in not only a specialty that has a high Medicare load but for 

an older physician whose patient base has probably aged with him? 

Do we have the ability to look at the variable impact from those 

points of view? 

Mr. HACKBARTH. We can look at it more specifically by specialty, and I would be happy to work with our staff on that. I think 

that is a legitimate and important question, but one of the dilemmas that you face if you are a physician practicing in a specialty 

dependent on Medicare is, well, where do I go if I don’t see Medicare patients? If in fact it is a specialty that disproportionately 

cares for elements of the elderly, it is not like they can start seeing 

children as their alternative. 

And so they are in a bit of a box in that sense, and that is a reason why we don’t necessarily think the first order effect of these 

constraints will be for physicians to say, well, I am not going to see 

a Medicare patient. The first response might be in fact to say, well, 

to make up for lost income, I am going to have them come back 

more frequently or I am going to do an extra procedure or test, and 

again that is one of the critical failings of the SGR system. 

All of the constraints are in the aggregate, not for the individual 

physician, and so perversely we could see that one of the indications that this series of cuts is doing real harm is an increase in 

volume for return visits, more procedures, more tests. The proponents of SGR will say, look, we told you so, we need this volume 

constraint, but in fact the increasing volume is a sign of distress. 

Chairman JOHNSON. Thank you. I think that is a very important point. I think also we do need to pursue this issue of more detailed data because increasingly physicians are choosing to go to 

some other specialty or leave medicine at a remarkably young age, 

and while the data is small yet, depending on the specialty, that 

could have an enormous impact on senior access to critical physician services. 

So we need to know a lot more about this because it is beginning 

to invade, in my estimation, senior access, and we are right on a 

point where we are going to see the interaction of the payment systems, the two publicly funded payment systems, really affect senior 

access. But I will not pursue this because my time has expired. Mr. 

Stark. 

Mr. STARK. Dan, CBO estimated that the MedPAC recommendation would cost us $126 billion over 10 years, and did that 

include spending increases driven by volume? In other words, can 

you elaborate on that? When you did the $126 billion, did you just 

take the suggested increase and put it out or did you make any estimate as to change in aggregate spending? 

Mr. CRIPPEN. I think we included volume increases. Let me 

consult my colleague. Yes, we did. 

Mr. STARK. OK. Any idea of how much of that $126 billion 

would be due to volume and intensity as opposed to . . .? 

Mr. CRIPPEN. It looks like what we added was about 1 percentage point-of-increase for each year, on average, as a result of volume and intensity. 

Mr. STARK. And how much through——

Mr. CRIPPEN. The price increase? 

26

Mr. STARK. The price increase? 

Mr. CRIPPEN. Well, the total increase would have been the 

MEI. So we took the MEI plus 1 percent. 

Mr. STARK. What is MEI averaging? 

Mr. CRIPPEN. I am going to defer to my colleague here. 

Mr. STARK. That is all right. 

Mr. CRIPPEN. You have MEI data on 

Mr. HACKBARTH. For what period? 

Mr. CRIPPEN. The next 10 years. It has got to be 2.5 percent 

or 3——

Mr. HACKBARTH. Two to three percent. 

Mr. STARK. Two to three percent. So you are talking maybe two 

for MEI and maybe another point on top for volume, and really 

isn’t that what we have averaged over the last 10 years or so? Albeit we had a chart here somewhere, but it seems to me over the 

last 10 years we have paid 33 percent in increases, so the average 

annual in physician updates from 1992 up has been 2.6 percent. So 

I guess you guys are both talking, Mr. Hackbarth and Mr. Crippen, 

the same amount whether we pay it as we are currently doing it 

or whether we change it. Is that a fair assumption, that we are 

really not talking about great changes, although you suggest, Mr. 

Crippen, that it would be $126 billion more; so when you are dealing in these small percentages, a 10th of a percent here or there 

makes a major difference at least in your—— Mr. CRIPPEN. And part of the dilemma is that the current system—the SGR mechanism—would reduce payments for the next 2 

or 3 years to catch up for the overpayments in 2000 and 2001. So 

if you just removed that effect of the current system and went back 

to roughly the increase in the MEI, then of course you would have 

something similar, but you would not recoup those payments that 

were made earlier. 

Mr. STARK. Now, the President has proposed making these payment changes, whatever payment changes we make, on a budget 

neutral basis, so what I would call a zero sum game, as it were, 

and each year you give us savings options. Have you analyzed the 

options that we could use to provide this extra $126 billion? Quickly what are the—where would you tell us to go? 

Mr. CRIPPEN. The physicians’ fees are a component of Medicare 

part B Supplementary Medical Insurance, and there aren’t many 

places to go here unless you change the underlying differential fee 

structure. In part B, 25 percent of costs will be paid by beneficiaries and 75 percent by general revenues, which leaves you part 

A if you are going to glean savings inside Medicare. You could in 

theory, cut hospital payments, but that hasn’t been very successful 

either, so then you have to go outside of Medicare, into other entitlement programs. Presumably, under the current pay-as-you-go 

rules, you would go to other entitlement programs or raise taxes. 

Mr. STARK. Just one question. I noticed in your testimony, Mr. 

Hackbarth, you got into the idea of incentives and not wanting a 

fee schedule to encourage one to use a procedure or not use a procedure. Now, I presume you practiced law at some point and 

shouldn’t a lawyer, it may not always happen this way but at least 

according to the theory that you learned in law school, who takes 

a pro bono case, say, for the environment or criminal defense do 

27

just as good a job as somebody who is getting a hundred bucks an 

hour for that same type of work? 

Mr. HACKBARTH. Yes, sir. 

Mr. STARK. And I have always felt it cuts both ways, that for 

a long time we tried to hold down overutilization. Now we have got 

managed care plans and we are sort of trying to prevent underutilization, where the pendulum swings. Don’t you think that whatever we do, and I am taking issue with this idea of incentivizing, 

and I will just finish my question and then shut up, Madam Chair, 

that we ought to be sure there is no incentive one way or the other 

for a physician to make clinical decisions based on reimbursement, 

that that ought to be our goal, that the reimbursement ought to try 

to be as separated as possible from the clinical decisions the physician makes relative to his or her patients? 

Mr. HACKBARTH. Yes, that should be the goal and it is one of 

the failures of SGR as we see it because it only applies to part of 

the system. 

Mr. STARK. It is also a failure of the fee-for-service system in 

general, isn’t it? 

Chairman JOHNSON. Very important point. 

Mr. HACKBARTH. It is an elusive goal. 

Chairman JOHNSON. Mr. McCrery. 

Mr. MCCRERY. Thank you. Mr. Crippen, in your data concerning 

the amount of GDP that we will consume with Medicare, Medicaid, 

and Social Security in 2030, you don’t mention what percentage of 

GDP will be consumed by interest on the debt. Do you have some 

idea what that would be in 2030? 

Mr. CRIPPEN. In our 10-year baseline, it would be pretty small 

because we don’t increase debt by much; we have the current level 

of debt and then come 2005 or 2006, we start paying it down. So 

by 2010—again, in our baseline—we would have virtually no debt 

outstanding, so there would be no interest at that point and no interest payments. 

Mr. MCCRERY. You have no debt outstanding in 2030? 

Mr. CRIPPEN. Our baseline only goes for 10 years and as you 

well know, the precision of even that is questionable. But over that 

10-year period, we return in the baseline to an era of surpluses, 

unified-budget surpluses, that will pay down debt held by the public. So sometime not long after 2010 in our baseline most of the 

debt held by the public will be redeemed. 

Mr. MCCRERY. And you told Mrs. Johnson that we are spending 

about 19 percent of GDP. Actually that is down probably now to 

closer to 18 percent, isn’t it, with the recession and——

Mr. CRIPPEN. It could well be. My guess is that we are going 

to end up collecting revenues and outlays equaling about 18.5 percent to 19 percent of GDP this year. It is going to be very close to 

balance, as you know. So the revenues are going to about equal 

what we are spending. 

Mr. MCCRERY. And historically spending has been around 18 

percent of GDP, hasn’t it? 

Mr. CRIPPEN. Revenues have been, since World War II, about 

18 percent of GDP. Spending has fluctuated around that level in 

the past few years—sometimes up above it but then, in our most 

recent history of surpluses, slightly below revenues. But revenue 

28

collections since World War II have averaged about 18 percent of 

GDP. 

Mr. MCCRERY. So in 2030 we will have precious little left to 

spend on national defense, on roads, highways, transportation, environmental protection, justice, courts? 

Mr. CRIPPEN. Exactly. 

Mr. MCCRERY. Can you foresee a time when Congress would 

allow that to happen? 

Mr. CRIPPEN. I don’t know, Mr. McCrery. 

Mr. MCCRERY. Can you foresee the Congress only spending 

about 3 or 4 percent of GDP on all the other priorities of the Federal Government? 

Mr. CRIPPEN. No. 

Mr. MCCRERY. No, of course not. So something is going to have 

to give. 

Mr. CRIPPEN. Exactly. 

Mr. MCCRERY. As you pointed out, we will either have to raise 

taxes or go into debt or I think more likely we will ration health 

care to control spending. I think that is where we are headed, is 

explicit rationing of health care, and it won’t be just Medicare by 

the way. We will have a payroll tax for everybody’s health care. Everybody will be on Medicare, I think, and we will limit explicitly 

the health care that people can receive. I think that that is where 

we are headed clearly and your numbers underscore that. Therefore, I am somewhat troubled by your statement that you don’t 

mean to say there is a crisis and nothing that needs to be addressed today. Isn’t it a fact that the sooner we impose some kind 

of solution to the ever growing increases for Medicare, the better 

off or the better chance we will have to control those costs over the 

long term? 

Mr. CRIPPEN. Absolutely. What I was trying to do was not characterize this picture as in any way my opinion, but rather as a 

view of the facts as we understand them at this point. I also want 

to make sure that it is understood, and I know you understand—

the Committee does, that there is no peril here for Medicare recipients in your consideration of changes to current benefits. Benefits 

of current beneficiaries—my parents’ benefits—are not what we are 

talking about. We are talking about my benefits, paid by my children, so I don’t want to leave anyone with the impression that 

there is a pending crisis that we need to solve today. Certainly, any 

action we take now will help much more than action we delay. 

Mr. MCCRERY. Exactly. I mean I would hope we would look beyond the ends of our noses and consider the burden that our children will bear for us and their children for them if we don’t do 

something today. So I think there is a crisis. I believe that we are 

fiddling while Rome is burning not only for Medicare but for Medicaid and for Social Security. We know it and shame on us for not 

proceeding with a solution that will give us some hope for controlling these costs in the future and continuing to provide the array 

of services the Federal Government always has and always will 

provide. 

Chairman JOHNSON. Thank you, Mr. McCrery. Mr. Kleczka. 

Mr. KLECZKA. Thank you, Madam Chairman. Madam Chair, I 

have a series of questions for Chairman Hackbarth and some are 

29

specific, coming from physicians from Wisconsin, the district I represent. So if it is possible, what I would like to do is submit these 

in writing to you 

Mr. HACKBARTH. Sure. 

Mr. KLECZKA. And if you could review them and send back a 

response. Thank you very much. Thank you, Madam Chair. 

Chairman JOHNSON. Would you like that response shared with 

the Committee? 

Mr. KLECZKA. I will share it. 

[The information follows:]

Medicare Payment Advisory Commission 

Washington, DC 20006

March 18, 2002

Honorable Jerry Kleczka 

U.S. House of Representatives 

2301 Rayburn House Office Building 

Washington, DC 20515–4572

Dear Congressman Kleczka: 

Thank you for your letter concerning Medicare’s payments for physician services. 

You asked us about payments for practice expense and professional liability insurance under the physician fee schedule. You also asked us about expenditure targets, 

the frequency of physician encounters, and the productivity adjustment in payment 

updates.

Question: 

Medicare reimbursement for practice expense and malpractice insurance 

may be below the real costs physicians incur. For example, at St. Luke’s 

Hospital in Wisconsin, heart surgeons often employ staff who assist them 

in the hospital. These local surgeons have told me that most of these costs 

are not reimbursed. Are you concerned that the reductions in practice expense payment will hurt quality as surgeons cut back on staff they can no 

longer afford? Why aren’t hospitals providing this staff? Is this included in 

the hospital reimbursement rate? Or, is it reimbursed separately to the surgeon?

Your practice expense questions address the issue of whether payments for practice expense should account for the cost of support staff that surgeons bring to the 

hospital. These staff prepare patients for surgery, assist during procedures, and provide post-operative care. 

The position of the Centers for Medicare and Medicaid Services (CMS) is that 

Medicare should not pay for the cost of these staff under the physician fee schedule 

because: 

• Payments for the cost of these staff are included in payments to hospitals 

under the inpatient prospective payment system, and Medicare should not 

pay twice for these costs. 

• It is not typical for most physicians to use their own staff in facility settings. 

• Payment for these costs is inconsistent with the Medicare statute and regulations. 

As you know, cardiothoracic and other surgeons contend that practice expense 

payments should cover the cost of support staff, when used in a facility, because 

hospitals are perceived as no longer providing the staff that are necessary. 

It appears that this issue will be resolved soon. CMS has asked the Office of the 

Inspector General (OIG) to assess the staffing arrangements between cardiothoracic 

surgeons and hospitals, and the OIG is finishing its report now. We anticipate that 

CMS will use the report’s findings to change current policy, if necessary.

Question: 

Is MedPAC tracking the changes in costs of liability insurance that appear to be escalating this year (for at least some specialties)? How do you 

think the fee schedule should be adjusted in light of these changes in total 

costs and relative costs among specialties?

MedPAC agrees that the physician fee schedule should account for changes in 

input prices, including increases in professional liability insurance (PLI) premiums. 

That does not occur under the current method for updating payment rates, however. 

Instead, the sustainable growth rate (SGR) system overrides changes in input prices 

30

to achieve an expenditure target. To solve this problem, the Commission recommends that the Congress repeal the SGR system. In its place, we recommend an 

update method based on the estimated change in input prices for the coming year, 

less an adjustment for growth in multifactor productivity

Question: 

In the past, there has been a presumption that expenditure targets would 

somehow influence individual physician behavior, and therefore, outlays. 

Does MedPAC believe that individual physician decisions can be affected 

by total expenditure targets?

Your question about expenditure targets and physician behavior addresses one 

reason why MedPAC recommends that the Congress replace the SGR system. The 

Commission believes that expenditure targets can influence the behavior of individual physicians but not in the way that those designing the targets intended. It 

was hoped that the targets would give physicians an incentive to control the volume 

of services. Instead, we believe that the reverse occurs. With expenditure targets, 

physicians have an incentive to increase volume, in the short run, to make up for 

lost income when payment rates are reduced. In fact, CMS makes exactly that assumption when it estimates the so-called behavioral response of physicians to lower 

payments—which is an increase in the volume of services provided. Over a longer 

period, expenditure targets can have other undesirable consequences. If payments 

fall below costs, we might see physicians cut back on their Medicare practice and 

focus on other patients. Alternatively, they could devote more time to other professional or leisure activities, or leave practice altogether.

Question: 

Does MedPAC intend to analyze changes in frequency of physician encounters between specialties? Would these trends be important?

On your question about whether MedPAC intends to analyze changes in the frequency of physician encounters among physician specialties, we will continue to assess the adequacy of Medicare’s payment rates for physician services with whatever 

data are available. Analyzing changes in the volume of services, including changes 

in volume by physician specialty, is one way to assess payment adequacy. In our 

March 2002 report to the Congress, we considered other factors—beneficiaries’ access to care, physician willingness to furnish services to beneficiaries, and entry or 

exit of physicians from participation in the Medicare Program.

Question: 

In regards to productivity, does the MedPAC recommendation assume 

that productivity changes are the same, or close to it, among all types of 

physicians, including surgeons, medical specialists, and primary care physicians?

You are correct that the productivity adjustment in payment updates applies to 

all services uniformly and, therefore, to all physician specialties. This is true of the 

current productivity adjustment for physician services and the adjustment that 

MedPAC recommends. The question is whether payment rates can account for any 

changes in productivity that are unique to specific specialties. We believe the answer to this question is yes because payment updates are not the only way that payment rates change. Payment rates also change when the fee schedule’s relative 

weights are recalibrated. This occurs every year, if billing codes are revised, and 

every 5 years, when CMS reviews the accuracy of the relative weights. As long as 

recalibration is sensitive to changes in cost due to productivity growth, it accounts 

for changes in productivity that are unique to specific specialties. It is likely that 

recalibration is this sensitive because, by law, the process considers changes in medical practice, coding changes, new data, and the addition of new procedures. 

If we can be of further assistance, please do not hesitate to contact us. 

Sincerely, 

Glenn M. Hackbarth, J.D. 

f Chairman

Chairman JOHNSON. Thank you. Mr. Crane. 

Mr. CRANE. Thank you, Madam Chairman. 

Mr. Crippen, the CBO projects nearly 20 percent in payment cuts 

over 4 years, a number that is greater if you count inflation, and 

I am sure I am not alone when I say that I have been hearing from 

31

numerous providers in my district who are upset about the recent 

payment cuts in the physician fee schedule. I am hearing that 

many of them can no longer afford to participate in the program 

and are considering leaving if something isn’t done. In fact, I just 

saw a recent survey released by the North American Spine Society 

that says 48 percent of physicians will be accepting fewer new 

Medicare patients, 35 percent will see fewer Medicare patients, and 

6 percent will leave the Medicare Program altogether. 

Does the CBO model cited in your prepared statement make any 

adjustments for the possibility that, as with Medicaid, many physicians will not continue to accept Medicare patients? 

Mr. CRIPPEN. I think the answer, Mr. Crane, is no, or not to 

any great extent. Let me refer to Appendix D in your Committee’s 

Green Book which has a lot of information on Medicare; as I recall 

it is Table D–121. The only reason I have a sense of which table 

it is because I looked at it over the last day or two. It shows assignment rates—both the number of physicians or percentage of physicians accepting assignment but also equally important, the number 

of dollars spent by Medicare part B under assignment. And those 

numbers, of course, as my colleague said earlier, were quite high 

in 1999, and one would expect they might go down. 

But the point that this table makes is that we had much lower 

levels of assignment and participation even as recently as 5 years 

ago, or a few years ago, when payment rates were being cut. I don’t 

know what to make of all of this other than to say that we had 

99 percent assignment and in 1999 or thereabouts—or rather, 98 

percent—and we have had 80 percent participation in the recent 

past. 

I don’t know what the right standard is. Do we want to shoot for 

99 percent participation? That may be a little high, frankly, if you 

have to resort to the highest common denominator to pay for these 

services. 

But I am not here to suggest what the right standard is. Rather, 

I am suggesting that these data and recent history say that at 

least for the next few years, we wouldn’t anticipate that a fall-off 

in physician participation would change Medicare spending by 

much. That is, we don’t think that patients, or beneficiaries, are 

going to be denied care because of the lack of physician participation. That is a long answer to your question. 

The short answer is that CBO assumes that a sufficient number 

of physicians for all Medicare recipients will participate over the 

10-year budget period and our projections will be based on that. 

Mr. CRANE. Thank you. I yield back the balance of my time. 

Chairman JOHNSON. Thank you, Mr. Crane. Congresswoman 

Thurman. 

Mrs. THURMAN. Thank you, Madam Chairwoman. Let me follow up on his question, because that would generally be across the 

country and not necessarily State specific. 

Mr. CRIPPEN. Right. As I recall, your tables also have State-byState numbers on assignment rates and on assigned costs. 

Mrs. THURMAN. But access. 

Mr. CRIPPEN. Sure; it varies. 

Mrs. THURMAN. That is one of the areas that, being from Florida, that I am getting very, very concerned about. And I had an opVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HR\OC\B217.XXX pfrm17 PsN: B217
32

portunity similar to other Members who have talked to physicians 

as to what is going to happen in States like Florida. We are already understanding that we have got problems with even bringing 

people into Florida. 

Their first question to a practice might be what is your percentage of Medicare? Because if they say it is high, then they are concerned that with these failing numbers for them, that what good 

is it to go there? We would rather go someplace, compete in Georgia or someplace else on the Sun Coast. What is the question to 

them? What do you say to them? What am I going to say to these 

constituents? 

Many of us are on the bill that Mr. Dingell and Mr. Tauzin and 

others have put out there, but we are seeing long waits. We can’t 

get people to come into Florida. 

And then the second question that I would ask really has to do 

with the Medicare+Choice issue, too, because Dr. Ginsburg is going 

to testify, and he actually mentions now that doctors have an opportunity to negotiate with some of these Medicare+Choice programs, and in fact are getting higher or being able to get more dollars out of there. Are we then putting an imbalance into our Medicare program where some may just gravitate to those programs 

and may leave more other areas uncovered in some of our rural 

areas or areas where there are no Medicare+Choice programs? Either one of you. 

Mr. CRIPPEN. I can start with the second one. At least by our 

lights and looking at future payments for Medicare+Choice, CBO 

anticipates, frankly, that there is going to be a fall-off in enrollment in those plans. Payment rates are going to be quite limited 

in most areas for the foreseeable future. So our projections certainly don’t anticipate that we will have a migration from the feefor-service program to Medicare+Choice. In fact, we assume quite 

the opposite. 

Mr. HACKBARTH. On that particular issue, it is our belief that 

Medicare+Choice is not going to be a large and important part of 

the program in rural areas. The efforts to make it so through floor 

payments and the like have not succeeded and in our view will not 

succeed. In fact, managed care is not prevalent in rural areas in 

the non-Medicare population, and so there is little we can do in 

Medicare to alter that basic reality. 

As for the overall Medicare+Choice program, whether it grows or 

not, certainly the recent trend, as Dan said, is down. Whether that 

reverses, in my view, will depend a lot on whether managed care 

organizations change how they do business. One of the reasons, in 

my view, that they are struggling is that they have stripped away 

a lot of their cost controls, expanded choice, and reduced the utilization controls to become more like fee-for-service. It is not surprising that they can’t compete with Medicare. 

Mrs. THURMAN. So let me just say this, then. If the $126 billion 

is what you said would bring us up to the right rates or at least 

bring us into line so we can actually take the dollars that we have 

put into the Medicare+Choice programs over the last couple of 

years to prop them up and move them over into the system, that 

would actually make us somewhat neutral in this budget, at least 

for this first year. 

33

Mr. CRIPPEN. I think that we are still paying—and I say ‘‘think’’ because we have to look at the current formulations—but 

I think we are still paying Medicare+Choice less than we would 

pay under the equivalent fee-for-service program in a lot of areas 

in the country. So it may be a net cost from actually moving people 

from managed care 

Mrs. THURMAN. Not necessarily moving them, but obviously 

that number has decreased. It went from 15 to 12 percent. We gave 

an additional amount of dollars over the last couple of years. I 

think there is some idea that we might do some more again this 

year. It just seems to me that we might be better off to keep physicians who are in Medicare fee-for-service at a level that they can 

continue to do their practices, not cutting off services, not have 

waiting lines for 3 months being able to bring people in, as versus 

putting it into Medicare+Choice. 

Mr. CRIPPEN. One of the ways in which you and the country 

have tried to grapple with this incentive question for physicians on 

payment versus volume—how you get the incentives right—has 

been capitation, or something like the approach that you see inside 

some managed care systems, in which the decision to treat or not 

to treat is not based on physician income, or at least not on the 

price of that particular service; rather, the payment is for a year 

of ‘‘unlimited’’ service. So by raising more fee-for-service payments, 

you may exacerbate the dilemma that you are facing in the overall 

question here. 

Chairman JOHNSON. Thank you, Congressman Camp? Congresswoman Dunn. 

Ms. DUNN. Thank you very much, Madam Chairman. Gentlemen, I bring to the table the same complaints that I bring in all 

of these hearings that we have, and it is about the incentives in 

this program that result in a State like my State, Washington 

State, which is very efficient in the delivery of health care being 

penalized because of its strong history. So I have physicians at 

home not only worried about the 5.4-percent reduction in their reimbursements but in the reimbursement system as a whole. 

So my question to both of you is, as we develop a new system, 

a new SGR, whatever we are going to call it, how are we going to 

begin to balance States like Washington, with States like New 

York? 

Mr. HACKBARTH. Well, the reasons for different levels of 

spending in different parts of the country are quite complicated 

and, frankly, not all that well understood. Some are obvious. Some 

have to do with a different standard of living, different wage levels. 

And in the Medicare Program, as you know, we adjust using a 

wage index for all the different services to varying degrees. So if 

you happen to be in a State where wage levels tend to be lower 

than, say, New York, the Medicare payment formulas result in 

lower spending. But that is only part of the issue. 

Perhaps an even bigger part of the problem might be differences 

in utilization patterns, which could be because of greater efficiency 

or could be because of differences in the underlying health status 

of the population, differences in tastes about medical care, different 

attitudes toward risk, and the like. It is a really complicated problem that has not been disentangled to this point. 

34

If our goal were to equalize spending across States, across cities, 

whatever geographic unit you describe, we would need a very different health care system to produce that uniformity. One of the 

virtues of our system, at least in the eyes of many people, is the 

degree of freedom that gives both patients and providers, the autonomy it gives them. Such a system is very unlikely to produce 

uniform results. So if you want uniform results, you need a much 

more controlled, centrally controlled system than we have, and that 

brings with it its own potential problems. 

Mr. CRIPPEN. I think, Congresswoman, you are absolutely right 

that there are some States that historically have had lower per 

capita costs—for example, in the Northwest, in Minnesota, and in 

others that in some sense early on had managed care. And so because we have no better basis, we have established payments based 

on historical expenditures. And those historical expenditures were 

lower in some States than in others. 

Until we switch from a system that pays for inputs, based obviously on historical costs, to something that might pay for outcomes, 

or results, it is going to be hard and—and this is not a political 

matter—hard to figure out a system that would pay more to those 

States that have already established a more efficient delivery system without cracking down considerably on other States. 

So all I can suggest is that because you were efficient in the past, 

you are being penalized now, as my colleague just said, because 

your cost structure is lower. So there is some basis for the sense 

of unfairness. It may not be ‘‘fair,’’ but until we start paying for 

services differently—don’t update payments inputs but rather on 

the basis of outputs or some other method—I don’t see any magic 

in these formulas that will help. 

Ms. DUNN. I will be waiting for such a system, hoping to take 

part in the development of such a system, and I appreciate your 

expressing the reality. Thanks. 

Chairman JOHNSON. Just to conclude, I think your answer on 

those issues is inadequate. No offense. It is just that the historic 

base on which some of the States’ payment systems were based and 

we have this problem in Iowa and a number of other States was 

very low. But those physicians are still having to buy the new technology and pay the higher malpractice cost. So, the disparity is declining, and the old differential is no longer as relevant. 

And I am very concerned about their ability to attract physicians 

out of residency, because now our physicians coming out of residency have much higher debt loads. So it is a very hard decision 

to go to a State with lower reimbursement rates, because the cost 

of living isn’t necessarily that much lower anymore. The original 

cost basis that was the foundation of this system is now not as relevant, because we have much more of a national system. 

You talked to the hospitals. They are buying through national 

combines. So this whole issue, and I know Mr. Hackbarth and I 

talked about trying to review this. This Committee will be holding 

hearings on the whole wage area issue. But we have to evaluate 

these past fundamentals because they are no longer as relevant as 

they once were and they are going to create very disparate access 

to care in a decade or so if we don’t do something about it. 

35

It is like the baseline issue. The fact that you estimate your baseline to us on the basis of law will not prevail. Means that we have 

to raise lots more money just to stay where we are. So there are 

some things about the way that Congress has functioned in the 

past that make it hard to function in the future. This issue of the 

low paid States, I think, is going to be a much more significant 

problem for us as we go forward. 

And in closing, I wanted to just remind you, and I know some 

of the next panel might help us on this issue of the differential impact of the 5 percent cut according to specialty and also place of 

care, which I think actually nobody has very good data on. And on 

your five goals, Mr. Hackbarth, one of the ones you didn’t mention 

is how do we meet a future in which we need to encourage physicians to participate in disease management programs? Our whole 

reimbursement system doesn’t look at care coordination. It looks at 

isolated care decisions. And that is not going to serve us as a nation as we move into an era where there are going to be people living much longer with multiple illnesses to manage. So our payment 

system is not only inadequate to next year and the year after, it 

is inadequate to the future of medicine. Mr. Stark. 

Mr. STARK. Could I ask one brief question of Mr. Hackbarth, 

who may or may not have looked at this, but there has developed 

recently a phenomenon that I would refer to as boutique clinics or 

practices, wherein a primary care physician will charge somebody 

$1,500. There are some of us who are concerned that that may be 

extra billing or classified as that. Have you looked into that issue? 

Mr. HACKBARTH. We have not, sir. 

Mr. STARK. But you can understand how that might. When you 

charge a Medicare beneficiary an annual fee, do you spread that 

over some of the Medicare charges that that physician would collect 

from that patient? And if so, does that constitute extra billing? And 

you might—I would urge you to look into it because it is a question 

that will come up. 

Mr. HACKBARTH. Thank you. 

Mr. STARK. Thank you, Madam Chair. 

Chairman JOHNSON. I thank the panel for their input and call 

forward the second panel. I welcome the panel. And I also want to 

acknowledge the presence of my colleague, Ben Cardin, a Member 

of the Committee on Ways and Means, one very, very interested in 

health. He often does join us, although not a Member of the Health 

Subcommittee, and works with us closely on much of the health 

care legislation that comes out of the Committee. 

Dr. Ginsburg. 

STATEMENT OF PAUL B. GINSBURG, PH.D., PRESIDENT, 

CENTER FOR STUDYING HEALTH SYSTEM CHANGE 

Dr. GINSBURG. It is really a privilege to be invited to talk on 

this topic. The Center for Studying Health System Change is an 

independent nonpartisan research organization funded by the Robert Wood Johnson Foundation. It conducts research on how the 

health system is changing and the impact of those changes on people. Our research includes surveys and site visits that provide 

unique perspectives on health care in communities. We seek to inVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\B217.XXX pfrm17 PsN: B217
36

1 ‘‘An Update on the Community Tracking Study: A Focus on the Changing Health System,’’

HSC Issue Brief No. 18, February 1999. 

form policy with timely and objective analysis, but the Center does 

not advocate particular policy positions. 

When the issue of the Medicare physician payment update developed late last year, I recognized that trend data from our surveys 

and data from our site visits could contribute to the debates. 

We have information from household survey respondents about 

their experience in obtaining care in a timely fashion. We have information from physician respondents about their acceptance of 

new patients and the time spent in patient care. And we have information from site interviews with health plan executives about 

how much they pay physicians in relation to Medicare payment 

rates. 

My testimony contains a lot of charts with data, but I would like 

to take you right to the bottom line. Many of the trends in the testimony point to a tightening of physician capacity in relation to demand that is leading to declines in peoples’ ability to access care 

without delay. We see that more people are reporting delays in getting care. The time to get an appointment with a physician is increasing. Doctors are spending more hours per week in patient care 

and fewer doctors are accepting all new patients. A likely factor behind these trends is the recent growth in demand associated with 

the loosening of restrictions of managed care throughout the medical care system. 

These trends are affecting Medicare beneficiaries, but they are 

also affecting those with private insurance. The relative financial 

attractiveness between Medicare and private insurance has probably not changed much in the last few years. Physician willingness 

to accept all Medicare patients is declining, but so is physician willingness to accept all new privately insured patients. 

But this parallelism in trends could change over the next few 

years. The current law formula is expected to reduce Medicare payment rates a lot more. Also, physicians, particularly specialists, 

have been exerting greater leverage with managed care plans and 

are likely to get higher payment rates. The bottom line is that 

there are greater risks of deterioration and access to care from 

sharp cuts in Medicare physician payment rates today than in the 

past because of the stresses on physician capacity. 

Thank you. 

[The prepared statement of Dr. Ginsburg follows:]

Statement of Paul B. Ginsburg, Ph.D., President,

Center for Studying Health System Change 

Thank you Madam Chairman, Congressman Stark, and members of the committee for inviting me to testify about Medicare physician payment. I am Paul Ginsburg, President of the Center for Studying Health System Change (HSC). HSC is 

an independent nonpartisan policy research organization funded solely by the Robert Wood Johnson Foundation. Our longitudinal surveys of households and physicians and site visits to 12 communities provide a unique perspective on the private 

health care market.1 Although we seek to inform policy with timely and objective 

analyses, we do not lobby or advocate for any particular policy position. 

Access for Medicare Beneficiaries 

The goal of Medicare physician payment policy is to assure beneficiaries’ access 

to high quality care while meeting federal budget objectives. Problems with the 

37

Medicare physician payment update formula and the recent 5.4 percent fee cut have 

raised questions about the likely impact on access to care for Medicare beneficiaries. 

Our research suggests that Medicare beneficiaries’ access to care over time may depend on physician capacity and local market conditions, factors that are difficult to 

capture within a budget-driven payment formula. By physician capacity, I mean the 

ability of physicians to provide services relative to the demand for those services. 

Capacity depends on a range of factors, including physician supply, the amount of 

time physicians are willing to devote to patient care, the mix of types of physicians 

and patients’ demand for physician services. 

The good news is that, overall, Medicare beneficiaries currently experience fewer 

problems of access than the near elderly covered by private insurance. In 2001, 11 

percent of Medicare beneficiaries said they delayed or did not receive needed care 

compared with 18 percent of the privately insured who are 50–64 years of age. We 

have, however, recently seen slight declines in access to care for both groups. 

Declines in access to care over time may reflect tightening of physician capacity 

in relation to demand. When asked the reasons for delaying or not obtaining care, 

respondents are increasingly reporting problems obtaining appointments. These 

problems are experienced by the privately insured near elderly as well as by Medicare beneficiaries. For example, in 1998–9, 16.3 percent of the Medicare beneficiaries who reported delaying or not obtaining care said they could not get an appointment soon enough compared with 20.9 percent of the privately-insured near elderly. By 2001, this had grown to 23.7 percent for Medicare beneficiaries and 25.0 

percent of the privately insured near elderly (Exhibit 2). 

Exhibit 1: Percent Reporting Delaying or Not Receiving Needed Care in 

Past Year, Comparison of Medicare Beneficiaries and Privately-Insured 

Near Elderly

Note: Data from the Community Tracking Study (CTS) Household Surveys, 1996–7, 1998–9 

and 2000–1.


Insert offset folio 80217B.001
38

Exhibit 2: Percent of People Who Had Problems Obtaining Care, by Reason 

Reasons for Delaying/Not Obtaining Care 1996–7 1998–9 2000–1

Couldn’t get appointment soon enough

Age 50–64, privately insured 21.9 20.9 25.0

Age 65+ 13.6 16.3 23.7

Couldn’t get through on phone

Age 50–64, privately insured 7.1 7.5 9.0

Age 65+ 7.3 5.4 11.2

Couldn’t be at office when open

Age 50–64, privately insured 15.0 13.5 16.6

Age 65+ 13.0 15.1 15.6

Note: Data from the Community Tracking Study (CTS) Household Surveys, 1996–7, 1998–9 and 2000–1. 

A second indication of tightening capacity is that both the elderly and near elderly 

are facing longer waits for appointments with their physicians. Over a third of people aged 50 and older must wait more than three weeks for a checkup, while roughly 40 percent must wait for more than a week for an appointment for a specific illness. These increases in waiting times are occurring across all age groups. 

Exhibit 3: Percent Reporting Long Waits for Medical Check-ups, 

Comparison of Medicare Beneficiaries and Privately-Insured Near Elderly

Note: Data from the Community Tracking Study (CTS) Household Surveys, 1996–7, 1998–9 

and 2000–1. 


Insert offset folio 80217C.001
39

Exhibit 4: Percent Reporting Long Waits for Doctor Appointments 

When Ill, Comparison of Medicare Beneficiaries and Privately-Insured 

Near Elderly

Note: Data from the Community Tracking Study (CTS) Household Surveys, 1996–7, 1998–9 

and 2000–1.

A third indication of tightening physician capacity is the increase in time that 

physicians are spending in patient care. Average hours per week increased sharply 

over the last two years. This may reflect a sharper increase in demand for services 

due in part the loosening restrictions in managed care. The increase in hours spent 

in patient care is also consistent with anecdotal reports that physicians are working 

harder to make up for lower fees—either meeting higher demand or creating it. 

Exhibit 5: Average Hours Per Week Physicians Spend in Patient Care

Note: Data from the Community Tracking Study (CTS) Physician Surveys, 1996–7, 1998–9 

and 2000–1, unweighted.


Insert offset folio 80217D.001 Insert offset folio 80217E.001
40

2 Cooper, Richard A. and Thomas E. Getzen, Heather J. McKee and Prakash Laud, ‘‘Economic 

and Demographic Trends Signal an Impending Physician Shortage,’’ Health Affairs, 21(1): 140–

154, January/February 2002; Grumbach, Kevin, ‘‘The Ramifications of Specialty-Dominated 

Medicine,’’ Health Affairs 21(1):155–157; and Mullan, Fitzhugh, ‘‘Some Thoughts on the WhiteFollows-Green Law,’’ Health Affairs 21(1): 158–159. 3Strunk, Bradley C., Kelly Devers and Robert E. Hurley, ‘‘Health Plan-Provider Showdowns 

on the Rise, HSC Issue Brief No. 40, June 2001 and Short, Ashley C., Glen P. Mays and Timothy K. Lake, ‘‘Provider Network Instability: Implications for Choice, Costs and Continuity of 

Care, HSC Issue Brief No. 39, June 2001. 

While there is considerable debate about the extent of a physician supply shortage, we do know that physicians have begun to exert increasing leverage with 

health plans to obtain higher payment rates.2 As managed care plans have broadened their provider networks in response to demands for more choice and physicians 

are less eager to be included in all networks, physician leverage with managed care 

plans has increased. Physicians in some specialties have won substantial increases 

in payment rates.3 If Medicare payment rates are falling, differentials between what 

physicians receive from Medicare and what they receive from private insurers would 

grow, putting beneficiaries’ access to care at risk. 

Physicians’ Acceptance of New Medicare Patients 

A key indicator of Medicare beneficiaries’ access to care is the proportion of physicians who are accepting new Medicare patients into their practices. As part of our 

longitudinal physician survey, we ask physicians whether they are accepting new 

Medicare patients. Over the past 4 years, there has been a 4 percentage point drop 

in physicians’ willingness to accept all new Medicare patients from 72 percent to 68 

percent (Exhibit 6). The sharpest decline occurred for surgical specialists, while 

there was a modest increase for medical specialists. (For this analysis, pediatricians 

and physicians not accepting new privately insured patients are excluded.) 

41

Exhibit 6: Percent of Physicians Accepting ALL New Medicare 

Patients, by Specialty

Note: Data from the Community Tracking Study (CTS) Physician Surveys, 1996–7, 1998–9 

and 2000–1, unweighted.

The decline in accepting all new Medicare patients was the sharpest for physicians with the weakest connections to Medicare. That is, for physicians where Medicare revenues represent less than 10 percent of their practice revenue, acceptance 

of all new Medicare patients fell from 59 percent to 46 percent (Exhibit 7). In contrast, for physicians where Medicare revenues are over a half of their practice revenue, acceptance of new Medicare patients fell from 77 percent to 72 percent.


Insert offset folio 80217F.001
42

Exhibit 7: Percent of Physicians Accepting ALL New Medicare Patients by Medicare Revenue 

Medicare revenue as percent of practice revenue 1996–7 1998–9 2000–1

Medicare revenue under 10 percent 59.1 55.8 45.9

Medicare revenue of 11 to 29 percent 71.4 69.1 64.8

Medicare revenue of 30 to 49 percent 75.3 74.1 71.5

Medicare revenue of 50 or more percent 76.6 73.2 71.9

Note: Data from the Community Tracking Study (CTS) Physician Surveys, 1996–7, 1998–9 and 2000–1, unweighted. 

Similarly, physicians with the lowest revenue from Medicare were the most likely 

to report accepting no new Medicare patients. Among physicians who get less than 

10 percent of their practice revenue from Medicare the number who now refuse to 

accept Medicare patients climbed from 12 percent to 21 percent in four years (Exhibit 8). In comparison, negligible changes occurred for physicians with higher Medicare revenues as a percent of their total practice revenue.

Exhibit 8: Percent of Physicians Accepting NO New Medicare Patients by Medicare Revenue 

Medicare revenue as percent of practice revenue 1996–7 1998–9 2000–1

Medicare revenue under 10 percent 11.9 14.1 21.1

Medicare revenue of 11 to 29 percent 2.8 2.7 3.4

Medicare revenue of 30 to 49 percent 1.7 1.6 1.2

Medicare revenue of 50 or more percent 0.0 0.0 0.0

Note: Data from the Community Tracking Study (CTS) Physician Surveys, 1996–7, 1998–9 and 2000–1, unweighted. 

Medicare Physician Payments Relative to Private Payers 

The extent to which Medicare patients’ access to care is compromised by Medicare 

physician payment cuts will depend on the community where beneficiaries live. This 

is because the relationship between Medicare payment rates and the rates paid by 

private insurers vary widely across communities. As part of our site visits to 12 

communities, we conduct interviews with health plans and physician groups. From 

those interviews, we have found an extensive use of the Medicare relative value 

scale by private health plans and have also found that Medicare payment methods 

have had a large influence on the private sector. In fact, many health plans explicitly set their payments as a percentage of what Medicare pays. 

There is considerable geographic variation in relative payments across the 12 

communities we track. In Miami, Northern New Jersey and Orange County, California, private insurers’ physician payment rates relative to Medicare are relatively 

low compared with other communities. For example, in Miami, private payments 

range from 80 to 108 percent of Medicare physician payments. In Northern New 

Jersey, private rates ranged from 95 to 105 percent of Medicare payments. In contrast, Boston, Cleveland, Greenville, Little Rock and Seattle have private rates that 

are much higher than Medicare. For example, private payments in Little Rock range 

from 120 to 180 percent of Medicare physician payments and from 100 to 150 percent in Boston. 

This pattern of relative differences across markets has remained stable over time. 

Those markets that are typically more generous than Medicare have maintained 

these higher rates over the last 6 years of our study. Similarly, the communities 

with the lowest rates have consistently paid lower rates than other communities. 

As a result of this variation in communities, a substantial decline in Medicare 

payments would pose the greatest risk to beneficiaries’ access in those communities, 

such as Boston and Little Rock, where Medicare payment rates are the lowest relative to private rates. With the potential of ‘‘hot spots’’ of poor access developing in 

certain communities, new approaches for monitoring access in Medicare may be 

needed. 

Implications 

Since the Medicare program’s inception in 1966, access to care for the elderly has 

not been a significant issue. This included the transition to the Medicare Fee SchedVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 E:\HR\OC\B217.XXX pfrm17 PsN: B217
43

4Trude, Sally and David Colby, ‘‘Monitoring the Impact of the Medicare Fee Schedule on Access for Vulnerable Populations,’’ Journal of Health Politics, Policy and Law, 22(1):49–71, 1997. 

ule that began in 1992.4 But our research raises concerns about access in the near 

future. Physician capacity to meet the demands of patients appears to be tightening 

and could tighten even further in the future. At the same time, payment rates in 

private insurance have been increasing, particularly for specialists. 

Current policy established Medicare physician payment rates within the constraints of the federal budget. It also linked updates to the rate of growth of program spending and the growth of the economy. But attention also needs to be paid 

to Medicare beneficiaries’ ability to command services in an environment of tightening capacity. MedPAC’s recommendation of pegging updates in payment rates to 

trends in input prices would avoid cuts in the short term. However, given trends 

in the private markets, even under the MedPAC recommendation we would expect 

to see a widening gap between Medicare and private payment rates over the next 

few years. For this reason, just fixing the formula may not be enough to protect access to care for Medicare beneficiaries. At a minimum, more explicit attention to 

trends in Medicare beneficiaries’ access nationally and within communities is advisable.

Mayer. 

Chairman JOHNSON. Thank you very much, Dr. Ginsburg. Dr. 

f STATEMENT OF JOHN E. MAYER, JR., M.D., PROFESSOR OF 

SURGERY, HARVARD MEDICAL SCHOOL, BOSTON, MASSACHUSETTS; PEDIATRIC HEART SURGEON, CHILDREN’S HOSPITAL BOSTON, BOSTON, MASSACHUSETTS; CHAIRMAN, 

COUNCIL ON HEALTH POLICY, SOCIETY OF THORACIC SURGEONS, CHICAGO, ILLINOIS; ON BEHALF OF THE AMERICAN 

ASSOCIATION FOR THORACIC SURGERY, MANCHESTER, 

MASSACHUSETTS 

Dr. MAYER. Thank you, Madam Chairwoman. I am Dr. John 

Mayer. I am a Pediatric Heart Surgeon at the Children’s Hospital 

in Boston and a Professor of Surgery at Harvard Medical School. 

I am also Chairman of the Council on Health Policy for the Society 

of Thoracic Surgeons (STS), and I represent both the STS and the 

American Association for Thoracic Surgery. We are among the 

Charter Members of the Coalition for Fair Medicare Payment and 

we support, as does this coalition, H.R. 3351 which would moderate 

the 2002 reductions in the physician fee schedule, as you have 

heard about previously. 

We want to leave you with three basic points. First, we think 

this bill, H.R. 3551, has to come to the floor and that the SGR formula has to be revised along the lines recommended by MedPAC. 

Second we would also want you to recognize that the RBRVS system, the relative value system, is in our opinion on the verge of 

breaking down, and that will have an inevitable impact on the 

quality of the care that Medicare beneficiaries receive. 

In announcing these hearings, Chairman Johnson said that 

Medicare’s formula for paying physicians is completely irrational 

and must be reformed this year, and we 100 percent agree. This 

Congress should recognize that the 5.4 reduction this year in physician fee schedule across the board has been compounded for many 

specialties by inequities in reimbursement for practice expenses. 

More specifically in our case and other surgical subspecialties, 

CMS has refused to recognize the cost that cardio-thoracic surgeons 

44

incur for staff who are on their payroll and who are essential to 

patient care in the hospital. 

I really want to focus on some of the ways that this arcane system that has been devised for practice expense in particular has 

worked or not worked, and let me give you a few examples. 

I also represent the Society of Thoracic Surgeons on the Relative 

Value Update Committee of the American Medical Association 

(AMA) which recommends physician work values but also reviews 

all the practice expense relative values. I believe we have gotten 

ourselves into an absurd reductionist approach trying to estimate 

the resources needed for each phase of each physician service. As 

a committee, we actually had to make a recommendation on whether 21 minutes or 23 minutes of clinical staff time were typical for 

a standard mid-level office visit. We were told that our decision 

would shift $100 million in the Medicare fee schedule. That is almost half as much as Medicare spends for the most common coronary artery bypass procedure that is done. 

I have personally and perhaps this is as a scientist relatively little confidence in the ability of a Committee of physicians sitting in 

a room to reliably distinguish between 21 minutes and 23 minutes. 

As I said, the reductions in allowed charges for cardiac surgery are 

not 5.4 percent but, on average, are 10 percent; and for some of the 

procedures they are as high as 15 percent. 

Since 1994, for cardiac surgery, reductions in practice expense 

component of the fee schedule have been 47 percent. There are in 

the written materials submitted to you graphs that demonstrate 

the overall impact of this system over the last 10 to 15 years and 

I think they are self-explanatory. 

Congress in 1997 instructed Health Care Financing Administration (HCFA) in revising the practice expense system to recognize 

all staff, equipment, supplies and expenses. And subsequently 

under section 212 of the BBRA, Congress instructed the U.S. Department of Health and Human Services (HHS) to utilize valid 

data from outside organizations in addition to HHS itself. We have 

submitted that data, but HCFA has nonetheless deleted from practice expense all costs our Members incur for clinical staff who actually help provide services in the hospital. 

In some States, some of these costs can be partially offset, but 

only for certain kinds of staff and only for certain kinds of activities. There is no reimbursement for any of the clinical staff for 

their services in intensive care units or on the wards postoperatively. 

You may ask, why it is that cardiothoracic surgeons employ these 

staff? Very simply, cardiothoracic surgeons have, at their local community levels found that these staff are essential to improving 

quality. The Institute of Medicine, IOM, report very clearly noted 

that in complicated situations like cardiac surgery, that a wellfunctioning consistent team is essential to quality. Our overall mortality rates for coronary surgery in the United States are down 40 

percent in the last 10 years and we think that these teams are essential to that improvement. 

I actually gave a talk last week in Florida to a group of 75 

cardiothoracic surgeons, and I asked them how many of them employed clinical staff that they took with them to the hospital. EsVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HR\OC\B217.XXX pfrm17 PsN: B217
45

sentially everyone raised their hand. We don’t want to go backward. And I think that the current course that we are on is one 

that will progressively deteriorate the quality of care that cardiac 

patients will receive in this country. 

I can tell you that for the last several years we have failed to 

fill cardiothoracic surgery training positions in this country with 

American medical school graduates, and this year we did not fill 

the positions at all. That is, there were positions that were left unfilled. I think this bodes poorly for the future, and if the baby 

boomers don’t have some other health catastrophe befall them, we 

are going to need more and more cardiac surgical procedures in the 

future. And if the shortages continue in applicants, it will take 

years to turn this around. 

The decisions that are made this year will have an impact, and 

the impact is going to be felt not only tomorrow but in the future. 

We hope that we are looking ahead. 

Thank you. 

Chairman JOHNSON. Thank you very much for your excellent 

testimony. Anyone speaking out there with thoracic surgeons 

knows that this has been a specialty that has not been able to survive the automatic formula that governs reimbursement. 

Dr. Palmisano. 

[The prepared statement of Dr. Mayer follows:]

Statement of John E. Mayer, Jr., M.D., Professor of Surgery, Harvard Medical School, Boston, Massachusetts; Pediatric Heart Surgeon, Children’s 

Hospital Boston, Boston, Massachusetts; Chairman, Council on Health 

Policy, Society of Thoracic Surgeons, Chicago, Illinois; on behalf of the 

American Association for Thoracic Surgery, Manchester, Massachusetts 

Madam Chairwoman, I am John Mayer, M.D., chairman of the Council on Health 

Policy of the Society of Thoracic Surgeons. In practice I am a pediatric heart surgeon at Children’s Hospital in Boston and Professor of Surgery at Harvard Medical 

School. I am here to represent both the Society of Thoracic Surgeons and the American Association for Thoracic Surgery; together these organizations represent essentially all of the surgeons providing heart, lung, esophageal, and other thoracic surgery in the United States. These two organizations are among the charter members 

of the Coalition for Fair Medicare Payment, formed last year in response to the crisis created by the across the board reduction of 5.4 percent in the Medicare conversion factor. The effects of this across the board reduction are compounded for our 

specialty and many others by continued reductions in the practice expense component of the Medicare fee schedule. 

We support, as does the coalition, H.R. 3351, which would moderate these 2002 

reductions. It is essential that this bill, which has over 300 co-sponsors, be brought 

to the House floor in time to limit the damage that is being done. 

In announcing these hearings, Chairwoman Johnson said that ‘‘Medicare’s formula for paying physicians is completely irrational and must be reformed this year.’’

We fully agree. The ‘‘Resource-Based Relative Value System (RBRVS)’’ and the related ‘‘Sustainable Growth Rate’’ formula amount to a very complicated administered price control system. Administered price control systems sometimes work in 

the short run, but the lesson of history is that they end by breaking down. The 

RBRVS is now breaking down, and this will have an inevitable impact on the quality of care that Medicare beneficiaries receive. 

The first sentence of the Institute of Medicine’s 2001 report, ‘‘Crossing the Quality 

Chasm: A New Health System for the 21st Century,’’ reads: ‘‘The American health 

care delivery system is in need of fundamental change.’’ One of the IOM’s principle 

recommendations is:

‘‘Private and public purchasers should examine their current payment 

methods to remove barriers that currently impede quality improvement, 

and to build in stronger incentives for quality enhancement.’’

46

Our discussions of a rational reimbursement system should bear this closely in 

mind. 

Let me explain why a surgeon from a children’s hospital is here to talk about 

Medicare. For the last six years, I have represented the Society of Thoracic Surgeons on the Relative Value Update Committee of the American Medical Association. This committee has been charged by CMS to advise it on changes in the fee 

schedule—originally, the work values, more recently on some aspects of the practice 

expense values. I do need to emphasize that all of the basic payment policy decisions 

on practice expense reimbursement were made by the CMS (formerly HCFA) staff. 

The Practice Expense Advisory Committee has only been asked to advise on some 

details, but the entire process for determining the components of practice expense 

is fundamentally flawed. 

Let me give you an example The PEAC was asked to give its opinion on the 

amount of clinical staff time (nurses, nurse assistants) involved in a typical midlevel office visit (99213). The committee considered 21 vs. 23 minutes of clinical staff 

time, and we were told that this two-minute difference would shift over $100 million 

in the Medicare fee schedule. This is over half as much as Medicare paid for the 

most common open heart procedure. I have no confidence that the committee could 

make any reliable distinction between 21 and 23 minutes, yet this is the process 

that is being used to determine the practice expense component of the Medicare Fee 

Schedule. 

This is not the way to set fee schedules that are either 1) equitable to physicians 

or 2) in the best interests of patients. One fact this story illustrates is this: the ‘‘relative value’’ system is not about value—certainly not about value to the nation or 

to the patient. There is no attempt to base reimbursement on benefit—value—to the 

patient. The name RBRVS is a misnomer. It is a relative cost system, not a relative 

value system. It does not reward experience, it does not reward quality, and it does 

not even (despite the original recommendation of Professor Hsiao) recognize the ‘‘opportunity cost’’ of extended training (seven to eight years after medical school for 

cardiothoracic surgeons). 

You have heard in detail about how the SGR system has evolved and the relationship between the fee schedule and the conversion factor. A system tied to gross domestic product is inherently unstable; even more important, the need for physician 

services is not dependent on the rate of growth of the economy. An economic downturn may even increase the need for some services. The issue of growth in volume 

and intensity of physician services is more complex, but I am uncomfortable with 

the proposition that there must be an absolute cap on growth. Any arbitrary formula will fail to recognize the growth of medical technology and our ability to offer 

life saving interventions to a greater proportion of the population. As a consequence, 

there is the potential for denying Medicare patients treatments that will prolong life 

and reduce disability. 

The steadily lengthening American life spans and the clear evidence that rates 

of disability in old age are diminishing should show that we should encourage, not 

penalize growth in medical services—so long as these services are indeed contributing to the health of our citizens. I suggest that the Administration and Congress 

look closely at where the growth in medical services has occurred in recent years. 

It is not in heart surgery. The recent report of John Wennberg and his associates 

from Dartmouth on ‘‘supply/sensitive services’’ is relevant. His suggestions for creation of centers of health care that will encourage necessary but discourage unnecessary services deserve consideration. 

In the short run, pending major system reforms, we basically support the draft 

recommendations of the Medicare Payment Advisory Committee. This would eliminate the SGR and base updates primarily on a revised Medical Economic Index. The 

productivity factor used in setting the MEI should be examined carefully; it probably does not realistically measure changes in physician productivity (for example, 

the learning curve in adopting new technologies) and certainly does not accommodate the current escalation in malpractice insurance costs. MedPAC also suggests 

that it be asked to make annual recommendations on the update formula, so that 

the system would not be on automatic pilot; Congress therefore would have the option of adopting higher or lower updates. There should be a default formula, to set 

the update if Congress does not act; for example, the default update could be the 

revised MEI with a productivity adjustment of ¥0.5 percent. 

Let’s turn back to the RBRVS. The reductions in allowed charges for cardiac surgery this year are not 5.4 percent but, on average, ten percent. For some procedures 

it’s as high as 15 percent. Since 1994, for cardiac surgery, the reductions in the 

practice expense component of the fee schedule alone have been 47 percent (see attached chart). How this has happened, and the consequences, will illustrate the 

problems with this administrative pricing system. 

47

Congress in 1997, under the leadership of this committee, instructed HCFA, in 

revising practice expense RVUs, ‘‘to recognize all staff, equipment, supplies, and expenses.’’ Congress said all expenses, not ‘‘some expenses.’’ Two years later, under 

Section 212 of the Balanced Budget Revisions Act, Congress instructed HHS, in 

computing practice expense, to utilize statistically valid data from outside organizations in addition to data from HHS itself. 

In recognition of the need for better data, the Society of Thoracic Surgeons contracted with the American Medical Association to conduct an enlarged sample of 

thoracic surgeons in its annual socioeconomic survey. The work was done by the 

AMA, through its own subcontractor, not by the STS. HCFA agreed that the survey 

met its very rigid standards for statistical validity and used some of this data in 

its 1999 revisions of the practice expense RVUs. But that same year, despite the 

clear evidence in this survey that cardiac surgeons are incurring major costs for 

staff who assist in both operative and post-operative care in the hospital, HCFA deleted from its practice expense equation all costs our members incur for clinical staff 

who help them in the hospital. This payment policy decision deleted more than 80 

percent of our clinical staff costs from the practice expense equation. 

We have subsequently done yet another survey, which showed that 74 percent of 

cardiothoracic surgeons incur these costs for staff who assist in the hospital. In 

some states, these costs may be partially—but only partially—compensated for by 

limited billing for some—but not all—of these staff when they assist at surgery. 

There is no reimbursement for any of the clinical staff on our members’ payrolls for 

their services in the ICU or the wards post-surgery, and reimbursement even for 

assistance at surgery is inconsistent. 

Why do cardiothoracic surgeons employ this staff? Very simply, the cardiothoracic 

surgeons working at the grassroots level have made decisions that these staff are 

essential to quality outcomes. Only in the largest, mostly academic hospitals, is the 

hospital staff adequately specialized and trained to assist at heart surgery and care 

properly for these patients in the hospital post-surgery. Heart surgery is very complex. As the IOM has noted in regard to complicated procedures, quality outcomes 

require a team that works together consistently, both in the operating room and in 

post-operative care. Cardiothoracic surgeons have stepped up and incurred these 

costs as the practice of heart surgery has evolved over the last ten years. Risk-adjusted mortality has dropped 40 percent in the last ten years. The team approach 

is one of the reasons for this quality improvement. That is what cardiac surgeons 

have done by incurring these costs themselves. I gave a talk to a statewide meeting 

of cardiothoracic surgeons in Florida last weekend, and I asked for a show of hands 

for how many of them employed clinical staff that helped them to care for patients 

in the hospital. Every one of them raised their hand. 

We do not want to go backwards. But if the RBRVS ignores these costs, 

cardiothoracic surgeons are no longer going to be able to maintain staff of the same 

quality. 

Also at the direction of Congress, the General Accounting Office is studying 

HCFA/CMS implementation of practice expense and its effects on all specialties. A 

preliminary report was submitted last year, entitled ‘‘Practice Expense Payments to 

Oncologists Indicate Need for Overall Refinements.’’ The GAO in this study concluded that on average, practice expense reimbursement under the RBRVS meets 

only 70 percent of average physician costs. For cardiothoracic surgery, reimbursement was only 53 percent. That was under the 2001 fee schedule; adjusting the 

GAO study to 2002, the PE reimbursement for cardiac surgery would be less than 

50 percent of costs. 

I noted at the beginning that the reimbursement system is broken. Physician morale is poor. In our own specialty, applications from graduates of U.S. medical 

schools for the 144 residency training positions offered annually in cardiothoracic 

surgery have dropped well below the positions available: this year, there were only 

112 applications from graduates of U.S. medical schools for these 144 positions 

(chart attached). The total training period for a cardiothoracic surgeon, post medical 

school, is seven years. Most are in their mid-thirties before they begin practice. This 

drop off in applications does not bode well for the medical care the baby boomer generation will need as this large group enters the age in which cardiac disease is prevalent. If major shortages of cardiothoracic surgeons, or a decline in quality appears 

five or ten years from now, there will be no way to turn the situation around on 

a dime. The decisions Congress and CMS make this year will have their impact, 

and the impact will be felt much more in the future than the day after tomorrow. 

I hope we are looking ahead. 

48

Cumulative Reductions in Medicare ‘‘Allowed Charges’’ for Coronary 

Artery Bypass Surgery, 1986–2001 (with & without CPI adjustment)

◊ > Current Dollars 

✻ b Adjusted to 1986 Dollars to reflect changes in the Consumer Price Index 

(buying power) 

Positions Filled and Applications To Thoracic Surgery Resident Programs 

1993–2002


Insert offset folio 80217G.001 Insert offset folio 80217H.001
f49

STATEMENT OF DONALD J. PALMISANO, M.D., J.D., 

SECRETARY–TREASURER, AMERICAN MEDICAL ASSOCIATION 

Dr. PALMISANO. My name is Dr. Donald Palmisano. I serve as 

Secretary-Treasurer of the American Medical Association and am a 

Member of the AMA Board of trustees. I am a practicing General 

and Vascular Surgeon from New Orleans. 

We thank Madam Chairman Johnson and the Subcommittee for 

your leadership efforts in the commitment to providing a remedy 

for the 5.4 percent Medicare payments to physicians and other 

health care professionals. This deep cut is threatening access for all 

Medicare beneficiaries. We urge this Subcommittee and Congress 

to immediately halt this cut and replace the Medicare payment update system. 

Last June, MedPAC warned that a significant cut in the payment update could raise concerns about beneficiary access to care. 

Clearly, 5.4 percent is significant and it comes on top of sharp increases in professional liability premiums as well as a host of costly 

regulatory burdens. Many physicians as a result are being forced 

to make difficult choices, such as stop accepting new Medicare patients, discontinue the provision of some medical services, limit or 

discontinue investments in new technology, lay off staff or leave 

the practice of medicine. These are not choices that physicians 

want to make. In each case, our patients lose. 

In response to these access concerns, MedPAC recommended a 

new framework for Medicare physician updates. We support the 

MedPAC general framework and look forward to working with the 

Committee on the specific details of a new update system. 

The current system does not work for several reasons. First, the 

sustainable growth rate, SGR, requires the use of estimates that 

are nearly impossible to predict accurately. Chart 2 shows that inaccurate SGR predictions have shortchanged physicians and other 

health professionals by over $20 billion since fiscal 1998. Inaccurate enrollment projections mean that every year physicians care 

for nearly 1 million Medicare patients whose costs are not counted 

in the update. Under the formula, these errors are compounded annually. 

Further, physician updates, unlike any other category of providers, are linked to changes in the GDP, even though the medical 

needs of Medicare patients do not wane when the American economy falls into a recession. 

Chart No. 1 clearly illustrates the growing gap between the 

Medicare Economic Index and annual physician updates. Since 

1991, physicians have received an average annual increase of 1.1 

percent, as shown in the red line, versus the 2.4 percent increase 

in practice costs, as shown in the blue line. This trend cannot be 

sustained. Finally, the SGR is highly unpredictable and allows severe payment cuts to be imposed without any warning or opportunity for action by Congress. 

In March 2001, CMS predicted a 1.8-percent increase in the 2002 

payment update, and 10 days later predicted that the update would 

be a negative 0.1 percent. Not until November, with only a few 

weeks left in the congressional session, did CMS announce the 5.4 

50

percent cut in the update. Like any small business, medical practices need to plan their expenses in order to remain financially 

sound. If practices continue to lose money due to low Medicare payments, patient access is threatened. 

In conclusion, we strongly urge Congress to enact an immediate 

halt to the 5.4 percent cut and repeal the SGR system. We also ask 

the full Committee to ensure that its views and estimates submitted to the House Budget Committee include necessary funds to 

implement the MedPAC recommendations. Again, we thank the 

Subcommittee for your strong efforts on this important matter, and 

I am happy to answer any questions. 

Chairman JOHNSON. Thank you. I am going to have to suspend 

a hearing while we complete the vote. I will run over and be back 

quick as we can. I will suspend for 5 minutes. 

[The prepared statement of Dr. Palmisano follows:]

Statement of Donald J. Palmisano, M.D., J.D.,

Secretary–Treasurer, American Medical Association 

Madam Chairman, Ranking Member Stark and Member of the Subcommittee, my 

name is Donald J. Palmisano, MD, JD, and I serve as the Secretary-Treasurer of 

the American Medical Association (AMA). I am a practicing surgeon in New Orleans. The AMA is grateful to you and the Subcommittee for the opportunity to provide our views concerning the Medicare physician payment update formula, as well 

as the 2002 Medicare payment cut of 5.4 percent. This steep payment cut is alarming. It is critical that Congress take steps to immediately halt this cut before it further jeopardizes the success of the Medicare program and patient access to care. 

We thank Chairman Johnson for your leadership efforts and commitment to providing a remedy for the 5.4 percent cut that became effective on January 1, 2002. 

We especially appreciate your leadership on H.R. 3511. The AMA is eager to work 

on legislation with you and Representative Stark to address this important matter 

and appreciates the various efforts of several Subcommittee Members on both sides 

of the aisle to assist America’s physicians in this regard. 

CONGRESSIONAL ACTION NEEDED TO REMEDY ACCESS PROBLEMS 

As of January 1, 2002, Medicare implemented a 5.4 percent payment cut that applies to Medicare services provided by physicians and other health professionals, including, but not limited to, physical therapists, speech pathologists, optometrists, 

advanced practice nurses and podiatrists. 

This is the largest payment cut since the Medicare physician fee schedule was developed more than a decade ago, and is the fourth cut over the last eleven years. 

Since 1991, Medicare payments to physicians averaged only a 1.1 percent annual 

increase, or 13 percent less than the annual increase in practice costs, as measured 

by the Medicare Economic Index (MEI). (See attached Chart 1, Medicare Payments 

vs. MEI, which compares Medicare physician payment updates to increases in inflation.) 

The Administration argues that total spending for physicians’ services by the 

Medicare program is increasing. This assertion misses the more important point— spending per physician service is being cut significantly. Increases in total Medicare 

spending are due in large part to such factors as the increasing Medicare population, greater longevity in lifespan, expensive technological innovations and greater 

demand for medical services. All of these factors contribute to spending, and all are 

beyond physicians’ control. Increased spending resulting from these factors cannot 

be curbed simply by cutting payments to physicians. A global cap on physician payments cannot successfully control the health care utilization of individual patients. 

The current 5.4 percent cut is forcing many doctors to make difficult choices about 

their ability to continue accepting new Medicare patients, or even whether to retire 

or change to a career that does not involve patient care. If the pay cut is not immediately halted, it could soon become difficult to prevent serious access problems for 

elderly and disabled Medicare patients. 

For example, the National Committee to Preserve Social Security and Medicare 

has stated that their members are having difficulty finding a physician who accepts 

Medicare because physicians cannot afford to keep their offices open. A family practitioner in an underserved part of Kentucky says she now cannot take any new 

Medicare patients and, if the situation does not improve, she will have to close her 

51

practice in a couple years. A cardiology group in Colorado is being forced to lay off 

employees and, in Texas, spine surgeons at Baylor University plan to stop taking 

Medicare patients. 

The American College of Nurse Practitioners warns that the pay cut is also forcing physicians and nurse practitioners to restrict their Medicare patient loads and 

cut back on the services they provide. One nurse practitioner in New York described 

a couple for whom she provides care (the husband is 91 and the wife is 82), and 

she stated that the cut ‘‘will devastate the care received by the neediest segments 

of our society.’’

Because of these growing access problems, immediate action is needed. 

We appreciate the Subcommittee’s bipartisan commitment to addressing in 

a timely manner the significant problems resulting from the 5.4 percent cut 

and the payment update formula. We urge the full Committee to report, 

and the Congress to enact, legislation that would—

• Immediately halt the 5.4 percent Medicare payment cut; • Repeal the sustainable growth rate (SGR) system; and • Replace the flawed Medicare payment update formula with a new 

system that appropriately reflects increases in practice costs, including changes in patient need for medical services, changes in 

technology, and other relevant information and factors.

It is critical that Congress not defer legislative action to halt the current payment 

cut or repeal the SGR. The Centers for Medicare and Medicaid Services (CMS) is 

projecting that the SGR system will continue to produce additional steep payment 

cuts in 2003, 2004, and 2005. 

We ask the Committee to ensure that its ‘‘views and estimates’’ letter on budgetary and legislative matters, to be submitted to the House Budget Committee, includes a request that appropriate funds be set aside in the budget resolution to replace the Medicare physician payment update formula beginning in calendar year 

2003.

MEDPAC’S RECOMMENDATIONS TO REPLACE THE FLAWED 

MEDICARE PHYSICIAN UPDATE FORMULA

The Medicare Payment Advisory Commission (MedPAC) warned in June 2001 

that if the 2002 update was lower than the CMS estimate, which at that time was—

0.1 percent, it ‘‘could raise concerns about the adequacy of payments and beneficiary 

access to care.’’ MedPAC adopted a recommendation that Congress replace the current Medicare payment formula with one that more fully accounts for increases in 

practice costs. Specifically, MedPAC advised Congress to repeal the SGR system because an expenditure target system, like the SGR, does not appropriately reflect increases in practice costs. MedPAC further recommended that future updates be 

based on inflation in physicians’ practice costs, less an adjustment for multi-factor 

productivity. 

We strongly agree with MedPAC’s assessment and support the general framework 

of MedPAC’s recommendations. We look forward to working with the Subcommittee 

and the Full Committee on the specific details of a new update system consistent 

with the MedPAC’s framework.

MEDICARE PAYMENT CUTS SERIOUSLY THREATEN 

MEDICARE PATIENT ACCESS

The current 5.4 percent Medicare cut for physicians’ services has a broad impact 

well beyond the physician community and Medicare program. Since Medicare payments for numerous health professionals are directly tied to the physician payment 

schedule, these practitioners also are experiencing large payment cuts. In fact, nearly one million physicians and other health care professionals are immediately affected by the cut. In addition, many private health insurance plans base their rates 

and updates on Medicare payment rates, which mean an additional loss of revenue 

from non-Medicare sources. 

Most significantly, the payment cut jeopardizes access for elderly and disabled patients. Two-thirds of all physician offices are small businesses. If a business, especially a small business, continues to lose revenue and operate at a loss, the business 

cannot be sustained. Thus, when medical practices experience a Medicare cut of the 

magnitude being incurred in 2002, as small businesses, they may not survive. This 

means that physicians and non-physician practitioners and their staff are left with 

very few alternatives for maintaining a financially sound medical practice. These alternatives include:

• Discontinue seeing new Medicare patients; 

52

• Opt out of the Medicare program; 

• Move from being a participating to a non-participating Medicare provider; 

• Balance bill patients (subject to Medicare charge limits); 

• Lay off administrative staff; 

• Relocate to an area with a smaller Medicare patient population; 

• Discontinue certain low-payment/high-cost Medicare services; 

• Shift services into the hospital outpatient setting, which increases costs to 

Medicare and to patients; 

• Limit or discontinue charity care; 

• Retire early; 

• Reduce hours of practice Change career; 

• Shift into a position which involves reduced or no patient care responsibilities; and 

• Postpone or discontinue necessary investments in new technology.

It is clear from the foregoing that the current Medicare payment cut likely will 

result in patients having difficulty finding a physician. Indeed, concerns about patient access, due to payment cuts and excessive rate fluctuations, were raised by the 

General Accounting Office in testimony recently presented to Congress. 

Further, recent press reports in many states have documented the access problems resulting from the Medicare payment cut. Excerpts from these reports are as 

follows:

• ‘‘As a result (of the 5.4% cut), doctors around the country are finding themselves pinched. If you continue to lose and lose, there may be a time when 

we will have to limit services or close one of our sites,’ says Susan Turney, 

medical director of reimbursement at Marshfield Clinic, of Marshfield, Wis., 

which operates about 40 sites with 600 physicians. In some areas of Wisconsin, we’re the only provider,’ she adds.’’ The Wall Street Journal, Jan. 

20, 2002 (Some Doctors Say They May Stop Seeing Medicare Patients After 

Cuts); 

• ‘‘Washington’s health-care system is in serious decline, and the prognosis 

is guarded. Tests show the severity of the problem,’ said Tom Curry, executive director of the Washington State Medical Association, which released 

a gloomy report in Olympia. Responding to an informal poll of members in 

November, 57 percent of physicians said they are limiting the number or 

dropping all Medicare patients from their practices. . . . The report says 

that for many years the state’s health-care delivery system has been in decline, characterized by a slow erosion of funding for public health, growing 

administrative expenses for practitioners and mounting frustrations of physicians trying to cope with myriad regulations. A growing number of patients, even those with private insurance, are having trouble finding a physician because increasing numbers of doctors have been leaving the state 

or retiring early since the late 1990s, the report says.’’ Seattle Times, Jan. 

30, 2002; 

• ‘‘Medicare reimbursement to doctors was cut 5.4 percent the first of the 

month, worsening an already tight financial situation for rural hospitals. 

. . . One result likely will be a harder time recruiting doctors to rural 

areas. . . . Medical equipment purchases can suffer, staff cuts are more 

likely and doctors sometimes will leave for better conditions elsewhere, 

Bruning said (Dr. Gary Bruning of the Flandreau, South Dakota Medical 

Clinic),’’ Associated Press, Jan. 22, 2002 (Medicare Cuts Strain Rural 

Health); 

• ‘‘Other West Virginia doctors fear their peers will stop treating patients who 

have Medicare . . . And some wonder how they will recruit doctors to a 

medical environment marred by the recent struggles over malpractice insurance. . . . At Madison Medical PLLC in Boone County, three doctors 

treat at least 80 patients a day. About 65 percent of them have Medicare, 

said office management Phyllis Huffman. The cut in Medicare reimbursement does not come at a good time, she said. In the last two years, for example, the physician group’s malpractice insurance doubled. Huffman said 

she fears that in the long run, the practice will not be able to afford to replace a departing employee. Or they may have to stop offering services for 

which they get little or no reimbursement from Medicare.’’ The Charleston 

Gazette, Jan. 23, 2002. 

• Patients are reporting having great difficulty finding a physician that takes 

new Medicare patients in North Carolina, where many physician practices 

have had to stop accepting new Medicare patients due to low Medicare payments. Dr. Conrad Flick, a vice president of the North Carolina Academy 

53

of Family Physicians, stated that ‘‘until [Medicare] payments improve, medical practices will continue to cap the number of Medicare patients they see, 

causing many practices to refuse new patients.’’ News & Observer, by Jean 

P. Fisher, on website of American Association of Retired Persons (AARP).

In order to ensure that the 85 percent of Medicare patients enrolled in the feefor-service program will maintain access to physicians and health care services, this 

payment crisis must be addressed immediately. 

VARIABLES COMPOUNDING MEDICARE PAYMENT CUTS 

Several variables compound the current 5.4 percent Medicare payment cut. First, 

this cut occurs at a time when premiums for physicians’ professional liability insurance (PLI) are increasing at an alarming rate. For example, the Las Vegas Sun recently reported that a Minnesota company’s decision to get out of the PLI business 

could force nearly 40 percent of Nevada’s physicians to pay painfully high premiums 

for new coverage or close their office doors. This trend is occurring across the country. The Miami Herald reported that South Florida physicians’ will see PLI premium increases between 25 and 350 percent this year, if any insurance is available 

at all. In Pennsylvania, rising PLI premiums threaten to close trauma centers and 

emergency rooms. 

The effects of the payment cut also are compounded by requirements under the 

Medicare and Medicaid programs that physicians take on expensive new responsibilities without any additional compensation. For example, program integrity activities 

have led to demands for reams of documentation, expensive new compliance programs and the proliferation of time-consuming certificates of medical necessity that 

force physicians to police other providers, such as home health agencies and medical 

suppliers. Patient safety, quality improvement, privacy protection, interpreters for 

non-English-speaking patients and a host of other well-intentioned requirements 

also are pushing medical practice costs ever upward. 

The magnitude of regulatory burdens on physician is not lost on this Committee. 

Last year you passed legislation to assist us in this regard. We thank you and look 

forward to working with you to ensure that it passes the Senate. 

Finally, the costs associated with PLI insurance premiums and the continually increasing amount of government-imposed regulatory requirements are not properly 

reflected in the Medicare payment update for physicians’ services. 

MEDICARE PHYSICIAN PAYMENT UPDATE FORMULA

Medicare payments to physicians are annually adjusted through the use of a legislated ‘‘payment update formula’’ that is based on the SGR and the MEI, which 

measures increases in practice costs. These costs include, among others, such factors 

as payroll, physician time, office equipment, supplies and expenses. 

This update formula originally was intended to cap increases in practice costs. It 

has several flaws that create inequitable and inappropriate payment updates that 

do not reflect the actual costs of providing medical services to Medicare patients. 

The Sustainable Growth Rate System 

Under the SGR system, CMS annually establishes an expenditure target for physicians’ services based on a number of factors set forth in the law. CMS then compares actual expenditures to the target. If actual expenditures exceed the target, the 

Medicare payment update may be as much as 7 percent below the MEI. Conversely, 

if allowed expenditures are less than actual expenditures, the update may be up to 

3 percent above the MEI. 

The target is based on changes in expenditures for physicians’ services due to 

changes in (i) inflation, (ii) fee-for-service enrollment, (iii) gross domestic product 

(GDP), and (iv) laws and regulations. It is a highly unpredictable and unstable system that has a number of critical flaws: 

GDP Does Not Measure Health Care Needs: The SGR system permits beneficiary Medicare spending for physicians’ services to increase by only as much as 

real per capita GDP growth—a measure of the economy that bears little relationship 

to the health needs of Medicare beneficiaries. Incidence of disease did not lessen 

with recent downturns in the economy. 

Specifically, GDP does not take into account health status, the aging of the Medicare population or the costs of technological innovations. Thus, the artificial link between medical care spending and GDP growth under the SGR system creates a system that is seriously deficient. Unlike any other segment of the health care industry, physicians are being penalized with a steep Medicare cut this year largely because the economy has slowed. Yet, the health needs of patients continue, the number of beneficiaries continues to grow and the use of new medical services approved 

by Medicare increases. 

54

SGR Requires Unreliable Economic Forecasts: To calculate the SGR, CMS 

must make projections of GDP, enrollment and other factors. It is nearly impossible 

to make accurate predictions about these factors and thus it is equally impossible 

to predict future payment updates. When the resource-based physician payment system was first enacted in 1989, it was intended to provide predictability over time. 

Yet, the current update formula has created payment updates that are unpredictable and subject to sharp swings as economic circumstances, beyond physicians’ control, change. 

Further, because the update system is unpredictable, severe payment cuts may 

be imposed without any warning or opportunity for action by Congress. In March 

2001, for example, CMS predicted that the Medicare payment update for 2002 would 

be a 1.8 percent increase. Ten days later, CMS recanted and stated that the 2002 

update would likely be a 0.1 percent decrease. Finally, not until November, only 

eight weeks before the effective date of the 2002 update and with only a few weeks 

left in the Congressional session, CMS announced that the 2002 physician payment 

update would be a 5.4 percent cut. Like any small business, medical practices need 

to plan their expenses in order to remain financially sound. Small businesses are 

the engine of the U.S. economy. 

For these reasons, as MedPAC has recognized, the current physician payment update system should be replaced. 

Problems with SGR Projections: In annually calculating the SGR, CMS estimates of GDP growth and enrollment changes in 1998 and 1999 have shortchanged 

funding for physicians’ services by $20 billion to date. (See attached Chart 2, CMS 

Errors in SGR: Impact on Funding for Physician Services.) CMS projected that 

Medicare+Choice enrollment would rise by 29 percent in 1999, even though many 

HMOs were abandoning Medicare. In fact, as accurate data later showed, managed 

care enrollment increased only 11 percent in 1999, a difference of about 1 million 

beneficiaries. This means that when CMS determined the fee-for-service spending 

target for 1999, it did not include in the costs of treating about 1 million beneficiaries. Nevertheless, these patients were and will continue to be treated, and 

since the SGR is a cumulative system, each year since 1999, the costs of treating 

these 1 million patients have been and will continue to be included in actual Medicare program expenditures, but not in the SGR target. Clearly, this disparity should 

be remedied. 

CMS acknowledged its mistakes in calculating the 1998 and 1999 SGR estimates 

at that time, but concluded it did not have the authority under the law to correct 

its mistakes. We disagreed then, and were further shocked by CMS’ announcement 

in the 2002 final physician fee schedule rule that not only do they have the legal 

authority, but the legal imperative, to change 1998 and 1999 SGR projections relating to spending for certain CPT codes overlooked by the agency. CMS’ interpretation 

of the law is perplexing and seems to allow the agency to make SGR changes only 

when they result in Medicare payment cuts, but not when the same changes would 

increase payments. 

The full magnitude of this problem has only recently become apparent. Information supplied by CMS suggests that the total amount of this latest ‘‘missing code’’

error was nearly $5 billion. Recent predictions by CMS of continued payment cuts 

for several more years show that its decision to continue using bad data in the target while correcting the errors in actual spending will ultimately have a devastating 

impact on payments for physician services. 

Flawed Productivity Adjustment under the Medicare Economic Index 

In the early 1970s, pursuant to congressional directive, CMS developed the MEI 

to measure increases in physician practice costs. A key component of the MEI has 

been a ‘‘productivity adjustment,’’ which offsets practice cost increases. Over the last 

eleven years, CMS estimates of productivity gains have reduced annual increases 

in the MEI by 27 percent. Such estimates contrast with MedPAC estimates of the 

degree to which productivity gains offset hospitals’ cost increases. In fact, in 2001, 

MedPAC’s estimate for hospitals was ¥0.5 percent, while CMS’ estimate for physicians was ¥1.4 percent. It is highly improbable that physician practices could 

achieve such substantial productivity gains in comparison to hospitals, which arguably have a much greater opportunity to utilize economies of scale. 

We continue to believe that the productivity adjustment in the MEI is overstated. 

First, it is widely recognized that productivity growth in service industries is typically lower than that in other types of industries. Indeed, productivity data from the 

Bureau of Labor Statistics show productivity growth in the general non-farm economy of 2 percent per year from 1991 to 2000, compared to 4 percent annual productivity growth for manufacturing. 

55

Second, we believe that productivity growth in physician practices is likely to be 

low in comparison to other service industries due to the previously-mentioned massive regulatory burden imposed on physicians. The cost of these requirements is absorbed by physicians with no offset paid by the Medicare program. In establishing 

the annual update for hospitals, however, MedPAC includes a category for these 

costs, and in its recommended update for 2000, for example, the Commission included a 0.2 percent increase to help cover hospitals’ Y2K conversion costs. None 

of these government-mandated costs are presently captured in the MEI. 

In recommending a framework for future payment updates, MedPAC is advising 

that the MEI should simply measure inflation in practice costs and that productivity 

should be separately reported. MedPAC further recommends that the productivity 

adjustment be based on multi-factor productivity instead of labor productivity, and 

estimates that this would significantly reduce the productivity adjustment that CMS 

currently uses in updating the Medicare fee schedule. 

Cost of New Technology Not Taken Into Account

Unlike most other Medicare payment methodologies, the Medicare physician update system does not make appropriate adjustments to accommodate new technology, and thus physicians essentially are required to absorb much of the cost of 

technological innovations. 

Congress has demonstrated its interest in fostering advances in medical technology and making these advances available to Medicare beneficiaries through FDA 

modernization, increases in the National Institutes of Health budget, and efforts to 

improve Medicare’s coverage policy decision process. The benefits of these efforts 

could be seriously undermined if physicians continue to face disincentives to invest 

in important medical technologies as a result of reliance on a defective expenditure 

target system. New technologies, including ever-improving diagnostic tools such as 

magnetic resonance imaging, new surgical techniques including laparoscopy and 

other minimally-invasive approaches, have significantly contributed to quality of life 

for Medicare beneficiaries. For example, a paper published by the National Academy 

of Sciences indicated that from 1982–1994 the rates of chronic disability among the 

elderly declined 1.5 percent annually. 

Technological change in medicine shows no sign of abating, and the physician payment update system should take technology into account to assure Medicare beneficiaries continued access to mainstream, quality medical care. 

All of the foregoing factors contribute to a payment update system that does not 

adequately reflect increases in the costs of caring for Medicare patients and is already undermining Medicare patients’ access to necessary medical services provided 

by physicians and other health professionals. 

Again, we thank the Subcommittee for its continued support and commitment towards mitigating the ongoing problems resulting from the Medicare physician payment update formula.

We urge the full Committee and Congress to (i) immediately halt the 5.4 

percent Medicare payment cut; and (ii) replace the Medicare payment update formula with a new system that appropriately reflects increases in 

practice costs. 

We further ask the full Committee to include in its ‘‘views and estimates’’

letter of budgetary and legislative matters submitted to the House Budget 

Committee that appropriate funds be set aside to replace the Medicare 

physician payment update formula beginning in calendar year 2003.

We appreciate the opportunity to provide our views about Medicare’s physician 

payment update formula, and we look forward to working with the Subcommittee 

to quickly reach a satisfactory resolution to this critical problem. 

56


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f57

[Recess.] 

Chairman JOHNSON. We will resume with the presentations. 

Mr. Levine. 

STATEMENT OF STEPHEN M. LEVINE, CO–OWNER AND ADMINISTRATOR, SPINE AND SPORTS REHABILITATION CENTER, 

TIMONIUM, MARYLAND, ON BEHALF OF THE AMERICAN 

PHYSICAL THERAPY ASSOCIATION 

Mr. LEVINE. Thank you, Madam Chairwoman and the Members 

of the Subcommittee on Health. The American Physical Therapy 

Association (ATPA) is grateful for the opportunity to provide testimony today concerning the need to reform the update formula of 

the resource based relative value fee schedule. This issue is of 

great significance to physical therapists who bill their services to 

the Medicare program under part B. 

My name is Steve Levine and I am a practicing Physical Therapist and owner of Spine and Sports Rehabilitation Center in 

Timonium and Falston, Maryland. My practice specializes in the 

evaluation and management of the musculoskeletal dysfunction involving the spine. Physical therapists provide services to patients 

who have impairments, functional limitations, disabilities, or 

changes in health status resulting from injury, disease, or other 

causes. As clinicians, physical therapists are involved in the evaluation, diagnosis, prognosis, intervention, and prevention of musculoskeletal and neuromuscular disorders in the acute chronic and 

rehabilitative settings. 

Please allow me to express my appreciation for the commitment 

of the Members of the Committee and Madam Chairwoman to address the problems that exist in the update formula for the part B 

fee schedule. The APTA is hopeful that Congress can work to ensure the fee schedule is modified appropriately before the end of 

this year. 

Many health professionals, including physical therapists, utilize 

the RBRVS fee schedule to bill for their services. By inviting APTA 

to testify today, you are helping to dispel the myth that this is solely a physician concern. The APTA urges the Committee to consider 

the following immediate actions to address the problem. 

First, immediately stop implementation of the 5.4 percent cut to 

the Medicare fee schedule; and second, adopt MedPAC’s recommendations which would eliminate the SGR and replace it with 

a system that would more appropriately account for the changes in 

the cost of providing services. It is important that Congress acts 

this year, as CMS has projected that the formula will produce further significant negative fee schedule updates in the aggregate 19.6 

percent by 2005. Should Congress fail to act, physical therapists 

and other health care professionals will experience Draconian cuts 

in reimbursement over the next 4 years. We are concerned that 

this downward projection will hinder the ability of physical therapists to care for Medicare beneficiaries needing rehabilitative services. 

Because the SGR system is flawed, updates under the system do 

not reflect the cost of providing services. Our recommendation is to 

58

eliminate the SGR methodology. Furthermore, the MEI, which accounts only for growth in labor productivity, overstates productivity 

gains in services and should be revised. 

The APTA takes issue with the administration’s assertion that 

reform of the update formula must happen in a budget-neutral environment. Clearly, additional financial resources are necessary to 

address this fundamental problem. APTA feels strongly that to correctly remedy this situation, the Committee should seek appropriate resources through the Budget Committee to meet this and 

other challenges. A short-term fix is nothing more than simply 

moving the furniture around on the deck of a ship that continues 

to speed toward an iceberg. The ship must change its course to 

avoid certain disaster. The impact of the Medicare cuts needs to be 

viewed in the context of significant legislative and regulatory 

changes affecting physical therapists. 

As you know, the BBA also imposed a $1,500 cap on outpatient 

therapy services in all settings except for hospitals. In 1999, and 

again in 2000, due to concerns raced by beneficiaries, Congress 

placed a moratorium on enforcement of the $1,500 cap. The present 

moratorium will expire at the end of this year unless Congress 

acts. If the cap goes back into effect, it will compound the Medicare 

payment cuts. 

In addition to the cap, physical therapists continue to deal with 

increased documentation requirements, conflicting Medicare rules, 

nonuniform application of Medicare requirements among its contractors and impending privacy requirements under the Health Insurance Portability and Accountability Act of 1996 or HIPAA. 

These issues further compound an already alarming problem. 

During the past few months, The APTA has heard numerous reports from its Members concerned about the impact of the 2002 cut 

and future CMS projections. As an illustration, this year, for a typical 45- to 60-minute skilled visit with a physical therapist, Medicare will allow approximately $85.78. Currently my cost to provide 

this visit is $79.57. Next year for the same visit and using the current formula, Medicare’s allowable rate will drop to $80.89. Considering a cost-of-living adjustment to both salaries and expenses, my 

cost to provide this visit is projected to increase to $81.95 in 2003. 

Therefore, next year if Congress does not act to change this formula, my practice will lose over a dollar on each physical therapy 

visit under Medicare. The only choice for survival is to reduce my 

cost, which will ultimately reduce the quality of services that can 

be provided to Medicare beneficiaries. 

In conclusion, as the older adult population continues to rapidly 

grow, prompt and coordinated quality health care services will be 

necessary to avoid hospitalization, decrease the length of institutional stay, reduce the amount of care required after discharge, 

prevent complications, and improve the individual’s level of function. The health of older Americans will be at risk if access to and 

appropriate payment for health care services does not keep pace 

with the growing number of Medicare beneficiaries. 

Madam Chairwoman, I would like to thank you for submitting 

this testimony before the Subcommittee. 

[The prepared statement of Mr. Levine follows:]

59

Statement of Stephen M. Levine, Co-Owner and Administrator,

Spine and Sports Rehabilitation Center, Timonium, Maryland,

on behalf of the American Physical Therapy Association 

Medicare Part B Fee Schedule Payment Update Formula 

Madam Chairwoman and members of the Subcommittee on Health, the American 

Physical Therapy Association (APTA) is grateful for the opportunity to provide testimony today concerning the need to reform the update formula of the ResourceBased Relative Value Fee Schedule (RBRVS). This issue is of great significance to 

health professionals who bill their services to the Medicare program under Part B, 

including physical therapists. 

It is an honor to testify today on behalf of the APTA’s 64,000 member physical 

therapists, physical therapist assistants, and students of physical therapy. My name 

is Stephen Levine, PT, MSHA. I am presently co-owner and administrator of the 

Spine and Sports Rehabilitation Center, with offices in Timonium and Fallston, 

Maryland. My practice specializes in the evaluation and management of musculoskeletal dysfunction involving the spine. 

I have also served nationally within the APTA as a former member of the Board 

of Directors and Vice Speaker of APTA’s House of Delegates. From 1992 to 1999, 

I was APTA’s appointee to the American Medical Association’s (AMA) Health Care 

Professional’s Advisory Committee of the Relative Value Update Committee, a 

multi-specialty committee which advises the AMA and the Centers for Medicare and 

Medicaid Services (CMS) on appropriate relative values of medical services provided 

by a broad range of licensed providers. 

First, I would like to thank you for holding this hearing today and for the commitment of Committee members to address the outstanding problems that exist in the 

update formula for the Part B fee schedule. Many health professionals, including 

physical therapists, utilize the RBRVS fee schedule to bill for services. By inviting 

APTA to testify today, you are helping to dispel the myth that this is solely a physician concern. 

Physical therapists provide services to patients who have impairments, functional 

limitations, disabilities, or changes in health status resulting from injury, disease 

or other causes. As clinicians, physical therapists are involved in the evaluation, diagnosis, prognosis, intervention, and prevention of musculoskeletal and neuromuscular disorders. On a daily basis, physical therapists provide care for Medicare 

patients with acute, chronic, and rehabilitative conditions. Physical therapy is a dynamic profession whose goal is to preserve, develop, and restore optimal physical 

function. 

APTA was pleased with the strong support members of the House gave to legislation last year that would have forestalled a 5.4 percent cut in payments that took 

effect January 1st. Some 316 members of the House cosponsored H.R. 3351, a bill 

to promote payment fairness under the RBRVS fee schedule. Unfortunately, Congress failed to act last year. APTA is hopeful the Congress can work to ensure the 

fee schedule is modified appropriately before the end of this year. 

Congressional Action Necessary

APTA urges the Committee to consider the following immediate actions to address 

the problem:

• Immediately stop implementation of the 5.4% cut to the Medicare fee schedule; 

• Adopt MedPAC’s framework for updating the Part B provider fee schedule, 

which includes eliminating the sustainable growth rate (SGR) and replacing 

it with a factor which will more appropriately account for changes in the 

cost of providing services. MedPAC’s framework was highlighted in its 

March 2001 report to Congress and will be part of its March 2002 report.

It is important that Congress act this year as CMS has projected that the formula 

will produce significant negative payment updates of 5.7% in 2003, 5.7% in 2004, 

and 2.8% in 2005. Should Congress fail to act, physical therapists and other health 

care professionals will experience draconian cuts in reimbursement over the next 

four years. 

APTA takes issue with the Administration’s assertion that reform of the RBRVS 

update formula must happen in a budget neutral environment. Clearly, additional 

resources are necessary to address this fundamental problem. Moving the furniture 

around on the deck of the ship will not slow it from sinking. APTA feels strongly 

that remedying this issue must not be a budget neutral exercise. We recommend 

the Committee seek appropriate resources through the Budget Committee to meet 

this challenge and other necessary Medicare reforms. 

60

Patient Access Problems Will Result from Flawed Update Formula 

APTA is concerned that the negative payment updates to the RBRVS fee schedule 

will hinder the ability of physical therapists to care for Medicare beneficiaries needing rehabilitation services. It is important that these individuals continue to receive 

the rehabilitation and other services that they need in order to achieve their maximum level of functional independence. Because rehabilitation enables beneficiaries 

to function more independently, rehabilitation will save the Medicare program dollars in the long run. 

The impact of the Medicare cuts needs to be viewed in the context of significant 

legislative and regulatory changes affecting physical therapists that have occurred 

over the past few years. Since 1992, physical therapists in private practice have 

been reimbursed under the RBRVS fee schedule. Prior to 1999, all other outpatient 

therapy settings were reimbursed under a cost-based system. The 1997 Balanced 

Budget Act (BBA) required that outpatient therapy services in all settings be reimbursed under the RBRVS fee schedule, beginning in January 1999. Thus, in addition to impacting physical therapists who own and operate private physical therapy 

practices, the 5.4% cut in payment and the flawed update methodology also impacts 

the provision of outpatient therapy services in outpatient hospitals departments, 

skilled nursing facilities (Part B), home health agencies (Part B), rehabilitation 

agencies, and comprehensive outpatient rehabilitation facilities (CORF). The BBA also imposed a $1500 cap on outpatient therapy services in all settings 

except for hospitals. In 1999 and again in 2000, due to concerns raised by beneficiaries, Congress placed a moratorium on enforcement of the $1500 cap. The 

present moratorium will expire at the end of this year unless Congress acts. If the 

cap goes back into effect, it will compound the Medicare payment cuts. 

In addition to the cap, physical therapists continue to deal with increased documentation requirements, conflicting Medicare rules, non-uniform application of 

Medicare requirements among Medicare contractors, and impending privacy requirements under HIPAA. When combined with the current and impending cuts you can 

begin to understand how difficult it is and will be for health professionals to continue providing services within the Medicare program. 

The majority of physical therapists in private practice are small businesses. As 

small business, their ability to operate is in jeopardy when they lose necessary revenue or cannot forecast revenue accurately from year to year. As a result, maintaining access to providers like these, that play such an important role in health care 

delivery, cannot be sustained without immediate reform of the payment update formula. 

During the past few months, APTA has heard numerous reports from its members 

regarding the impact of the 2002 cut. Speaking from my own experience, the Medicare allowable amount per visit, as projected over the next two years, will cause 

Medicare reimbursement to fall below my actual cost to provide physical therapy 

services (in 2002 dollars), particularly as costs increase due to inflation. As a result, 

we may be forced to become non-participating providers in the Medicare program, 

which will result in a decreased ability for patients to access skilled physical therapy services from our office. 

Flawed Medicare Payment Update Formula

Medicare payments are updated annually based on the SGR system. Because the 

SGR system is flawed, updates under the system do not reflect the cost of providing 

services. The flaw in the system is apparent in 2002 as the SGR resulted in a 5.4 

percent reduction in payment rates, despite an estimated 2.6 percent increase in the 

costs of inputs used to provide services. 

The SGR system sets spending targets for services reimbursed under the RBRVS 

fee schedule and adjust payment rates to ensure that spending remains in line with 

those targets. If spending equals the targeted amount, payment rates are updated 

in accordance with the percentage change in input prices, which is determined by 

the MEI. If the spending for that year exceeds the target, the increase in payment 

rates is smaller than the increase in input prices (MEI). If spending for that year 

is less than the target rate, payment rates are allowed to be increased by a greater 

amount than the rise in input prices. 

The annual target is a function of projected changes in four factors: input costs, 

enrollment in traditional Medicare, real gross domestic product (GDP) per capita, 

and spending attributable to changes in law and regulations. Revisions to any of 

these four factors or to estimates of prior spending can change the spending estimate significantly. 

One of the problems with this methodology is the use of changes in GDP as a factor. Linking annual changes in the targets to annual changes in GDP ties the target 

to the business cycle. During times of prosperity, GDP growth rates would be highVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00064 Fmt 6633 Sfmt 6621 E:\HR\OC\B217.XXX pfrm17 PsN: B217
61

er; yet, during periods of downturn, such as the past year, the GDP rates are lower. 

Health care needs of Medicare beneficiaries do not follow the same cycle. Beneficiaries do not need fewer services and the cost of providing care to these beneficiaries does not lessen when the economy is in a downturn. 

Another problem with the methodology is that the SGR is highly volatile. In 

March 1, 2001 rule, CMS estimated that that the 2002 update would be around negative 0.1 percent. However, in November 1, 2001, just 7 months later, the SGR was 

at negative 0.7 percent, which caused the fee schedule update to be reduced by 5.4 

percent. This was due, in part, to a predicted slower economy, and changes in 

spending estimates. These excessive and unpredictable rate fluctuations make it 

very difficult for providers to continue to participate in the Medicare program. 

Still another problem relates to errors in estimating beneficiary enrollment. According to CMS, Medicare+Choice enrollment would rise 29 percent in 1999. In actuality, the projection was off by 10 percent and nearly 1 million enrollees. The corresponding projected drop in fee for service enrollment was erroneous and has negatively influenced the SGR ever since. 

Changes Needed in the Medicare Economic Index (MEI) 

In addition to eliminating the SGR, the MEI, which is calculated by CMS and 

used to measure practice cost inflation, also needs to be improved. The MEI is a 

weighted average of price changes for inputs, which include physician time and effort (work, non-physician employees, and office expenses) used to provide care. The 

MEI, which was developed in 1972, also includes an adjustment for productivity 

growth, which affects the cost of providing services. Currently, the MEI, which only 

accounts for growth in labor productivity, overstates productivity gains in services. 

In its framework, MedPAC recommends that the MEI measure inflation in practice costs and that productivity be separate from the MEI. In addition, MedPAC recommends that the productivity adjustment be based on multi-factor productivity 

(which would include both labor and capital inputs), instead of labor productivity. 

Making this change would ensure that it would account for changes in productivity 

for all relevant inputs used to provide services. According to MedPAC, this would 

significantly reduce the productivity adjustment that CMS uses currently in updating the Medicare fee schedule. APTA urges Congress to adopt MedPAC’s rec- ommendation regarding MEI. 

Conclusion

As the older adult segment of our population continues to rapidly grow, it will be 

paramount that they have access to qualified health care professionals who are able 

to serve their health care needs. Prompt and coordinated services provided by 

health professionals can help to avoid hospitalization, decrease the length of institutional stay, reduce the amount of care required after discharge, prevent complications, and improve the individual’s level of function. The health of older Americans 

will be at risk if access to and payment of health care providers does not keep pace 

with the growing number of Medicare beneficiaries. 

It was very interesting. 

Thank you for the opportunity to submit this testimony before the Subcommittee.

Chairman JOHNSON. I thank you very much for your testimony. 

f I wonder if any of the practicing physicians at the table have 

seen any effect on their practices of payment issues driving access? 

In other words, have you seen any referrals from people that normally would have provided care but for the payment structures, 

and are there any ways in which you are seeing any impact on access of the payment system. Dr. Mayer? 

Dr. MAYER. Well, you know, I don’t spend any time taking care 

of Medicare patients, since I am a pediatric heart surgeon. But I 

can tell you that similar sorts of things that are affecting Medicare 

are also affecting both private insurers who are now using the 

Medicare fee schedule to a large extent, and also affects Medicaid. 

I can certainly tell you that there have been patients covered under 

Medicaid programs and referred to our center who have essentially 

been told that they can’t come to a center like ours and that they 

62

have to stay locally. So these are children with complicated forms 

of congenital heart disease who are basically being told they have 

to stay closer to home and perhaps be cared for in centers that 

don’t have as much experience as we do. So it is having an effect 

even in a non-Medicare population. 

Chairman JOHNSON. Thank you. Do any of you have any comment or information about Dr. Ginsburg, I think there was a chart 

in your testimony that really went to the heart of the matter of the 

impact of our reimbursement policies on different types of practices. Would you go through that a little bit more? 

Dr. GINSBURG. Yes, certainly. There was a chart in my testimony on trends of the proportion of physicians who accept all 

Medicare patients by specialty. Whereas for all physicians, the percent that are accepting all the new Medicare patients declined from 

71.8 percent to 67.5 percent over this 4-year period, the decline was 

steepest among surgeons, from 81.3 percent to 73.4 percent. In contrast, medical specialists actually slightly increased the proportion 

that are accepting all new Medicare patients over this period. The 

differences in these trends probably are related to Medicare payment policy; in going to a common conversion factor, it reduced 

payments to surgeons, and increased payments to medical specialists. 

Chairman JOHNSON. Thank you very much. Dr. Palmisano? 

Dr. PALMISANO. Thank you, Madam Chairperson. If I may, I 

would like to respond to your first question. We have gathered information from around the country in the area where I am of New 

Orleans. I will give you an example. A group of clinic-based colon 

and rectal surgeons in New Orleans, Louisiana, first reduced from 

four to one the number of days each month that they would test 

and treat elderly women with fecal incontinence. Later they scaled 

back these services to once every 3 months. Now they have reached 

the point where they will no longer accept new patients who need 

these services. 

Colon and rectal surgery is a very small specialty. There are only 

about 1,250 who are board-certified and in active practice nationwide. It makes a difference to a community when one of them 

ceases to provide a service. There are few others to meet that need. 

And we have other examples around the country that we will be 

glad to submit to you, again, from New Orleans and Pine Bluff, Arkansas, Pensacola, Florida. Physicians report to us they are having 

a difficult time identifying primary care physicians to provide follow-up care for elderly surgical patients who do not have a regular 

doctor. They are hearing that these practices simply are not accepting new Medicare patients. 

We have other stories that we can put into evidence. Thank you. 

Chairman JOHNSON. Thank you. I hope you will all of you who 

have any access to contemporary data that reflects the difficulty of 

access for seniors to care, share that information with us, because 

anecdotally I am seeing that in a way that I have never seen it, 

being out there in the real world, and I don’t know to what degree 

it is driven by the Medicare reimbursement problems, both administrative and cuts, and to what degree it is an interactive consequence of the problems in Medicaid. 

63

And if you could begin also to help us identify where these problems are the most acute, we can begin to look at those interactions. 

The other thing that we need to know is how are these cuts affecting physicians of different ages? And are we going—do we see 

an increase in early retirement amongst physicians because of the 

complexity of the reimbursement problems and this erratic cut. Dr. 

Mayer? 

Dr. MAYER. I would like to speak, I think, to two points. One 

is I think it is important to recognize that the access problem is 

not just a straight numeric one. It also has embedded in it quality. 

Certainly what we are hearing, and I don’t mean to beat this practice expense issue to death, but what is happening is that surgeons 

are laying off the clinical staff that are part of their teams that are 

taking care of these cardio patients. I think that is inevitably going 

to have an impact on quality. So I would expand the access issue, 

and I would say it is an access to quality care issue, not just fundamental access to get in the door. 

Chairman JOHNSON. The other thing I would be interested in 

hearing is, more and more physicians are actually involved in care 

management. They are using their nurses. We don’t give any reimbursement for that. How do we get physicians into disease management protocols and using them with the reimbursement structure 

we have, or what reimbursement structure—what adjustments 

need to be made to the reimbursement structure so we can help 

physicians through their practices actually follow patients? Because 

it is having a very significant impact on the reuse of appointments 

and reuse use of hospital facilities. And while we had hoped that 

the Medicare+Choice plans would lead us in this direction more 

rapidly, clearly if it is going to lead in this direction, it is going to 

be slowly, so we cannot have a physician reimbursement that is 

blind to the need for disease management. 

Dr. GINSBURG. Yes, I agree very strongly with you, Madam 

Chair, about the importance of changing our payment system so 

that it can be supportive rather than discouraging toward physicians engaging in disease management. I believe you are right that 

we realize that the fee-for-service Medicare Program is going to be 

responsible for the overwhelming majority of beneficiaries for some 

time. 

It was very encouraging that in the past week the CMS announced a large demonstration of to encourage disease management. We need a lot more initiatives to experiment with this within 

our fee-for-service system. 

In Medicare, we have a fee-for-service system. It has some 

strengths, but it has limitations as far as ability to control volume. 

A key weakness is that when the services of professionals other 

than physicians are very important to disease management, we 

need to quickly find a way where the system can through payment, 

if not encourage disease management, at least avoid discouraging 

it. 

Dr. MAYER. We actually have a group in the State of Virginia, 

all of the cardiothoracic surgeons and all the hospitals that provide 

cardiac surgical care in the State of Virginia, and they have actually given to CMS a proposal in which all of them would get together, globally contract, and there would be global pricing. So one 

64

would include hospital services as well as physician, surgeon, anesthesiologist, cardiologist as well as cardiac surgeon fees all together. The CMS has said they can’t do it somehow, which we 

found particularly disappointing, because one of the things that our 

sort of an approach allows is an alignment of incentives. It then becomes to everyone’s advantage to make the care both more cost effective and efficient. 

Chairman JOHNSON. I would like to have copies of that information, if I may. I do think that at this time when we are clearly 

going to rewrite the way we pay physicians, we can simply ill afford to be blind to the most promising approach to reducing overuse of extensive services and at the same time improving quality 

of care. So I look forward to working with you on that. 

That was my amendment in the last bill on the disease management, and I am pleased to see it going forward. But as is often the 

case, the real world is far ahead of us, and a demonstration at this 

point is almost pathetic. We can’t afford this opportunity to think 

about it either. 

Let me recognize my colleague, Mr. McCrery. 

Mr. MCCRERY. Go ahead, Dr. Palmisano. You had a comment? 

Dr. PALMISANO. Thank you, Representative McCrery. I just 

wanted to make one point. Thank you very much for that courtesy. 

Two things I also wanted to add on the record. the physician’s ethical obligation to do the very best for the patient. Last week my 

partner, Jim Brown, and I operated on a patient who had a very 

difficult problem with his thyroid. He had a mass. He previously 

had hyperthyroidism. The operation took 5 hours using magnification to make sure we didn’t cut the nerves of the voice box, to make 

sure we kept the parathyroid gland so he wouldn’t go into tetani 

at the operation. And we weren’t thinking of whether or not we 

were going to stop the operation after 3 hours because we weren’t 

paid beyond 3 hours or whatever. We are going to do the very best 

for the patient. 

But as my partner tells me repeatedly, and told me again this 

morning, when I called to check on the practice, he said, just remember you can’t make it up on volume if everything else escalates 

and the fees for your services continue to decrease. 

And I think going back to the disease management question, 

there is the old Louisiana saying about it is hard to remember you 

came here to drain the swamp when you had so many different alligators, and the different alligators biting at you are the unfunded 

mandates or the decreasing payment for your services and just the 

increased burdens of the Emergency Medical Treatment and Active 

Labor Act, EMTALA, and all of these things I know you are working on and have done a wonderful job to get that out of the House 

to ease the burden. 

There are so many factors here that this really is the perfect 

storm, to use that analogy, and we are going to act like the weather person and say there will be an access problem if we don’t fix 

these things. Regardless of how we do the long-term fix, right now 

we have to stop the 5.4-percent cut. 

Mr. MCCRERY. One of the other elements of your perfect storm 

that you mention in your testimony was medical malpractice premiums going up. You know what causes those premiums to go up? 

65

Dr. PALMISANO. Well, yes, sir. I am quite familiar with how 

premiums go up. In an ideal world, it is based on severity and frequency; frequency of claims and severity. And it is outrageous 

awards that have no relationship to the damages. 

And before you ask me the next question, is that in your State, 

my State, beloved State of Louisiana, we have one of the best tort 

reform laws in the Nation. And we think it is equal to California 

and Indiana and New Mexico. We think ours is really perhaps a 

little better. The AMA has the California model. So those are increases, and yet we are seeing physicians retiring early in New Orleans even though we have a very effective tort reform compared 

to West Virginia, Florida, Pennsylvania, and Nevada and all of 

these places that are in severe distress. 

Mr. MCCRERY. We do have a good tort reform or medical malpractice reform in Louisiana and have had for a number of years. 

Do you think it would be helpful to the Nation’s health care system 

if we had a nationwide medical malpractice reform that would 

model, or that would go after the model in Louisiana? 

Dr. PALMISANO. The AMA’s position for many years has been 

that we need effective tort reform. The particular model that we 

picked was the model in California, which is the micromodel, and 

it is a cap of $250,000, periodic payments, collateral source and 

those types of issues. 

So we do definitely believe that it would be good to have that nationwide, at the same time protecting States like Louisiana and Indiana, who might have substantially similar laws but slightly different so as not to upset their jurisprudence that has accumulated 

over the years. Our act has been upheld by the Louisiana Supreme 

Court, and the U.S. Supreme Court says there is no Federal question on it. 

Mr. MCCRERY. So the AMA supports nationwide medical malpractice? 

Dr. PALMISANO. Yes, sir. The AMA supports, and in our December meeting, the AMA said this is a top priority for the Association to get nationwide tort reform and help States if we are not 

able to get it effectively because that is another access problem, 

physicians going out of practice. 

Mr. MCCRERY. So you would now support having medical malpractice reform passed as a part of the Patients’ Bill of Rights? 

Dr. PALMISANO. Well, that question comes up all the time but 

we have said, we will always look. We certainly want to sit down 

and reason and would love to be at the table on the Patients’ Bill 

of Rights issue and the tort reform issue. AMA’s position in the 

past, we think these are both an effective Patients’ Bill of Rights 

is an important issue. Tort reform is an important issue. And we 

think that they can stand alone. If you want to put them together 

in a bill, let us look at it together. But what we don’t want to do 

is have everything get killed based on those two being put together. 

We would like to get one thing out that is effective and then continue to work on the other than get nothing. 

Mr. MCCRERY. Perhaps if you would help us underscore the importance of medical malpractice reform, we could attach it to some 

vehicle like the Patient’s Bill of Rights that is popular in the eleVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HR\OC\B217.XXX pfrm17 PsN: B217
66

ment that doesn’t like medical malpractice reform, and we might 

get them both done. I would submit that the AMA ought to—— Dr. PALMISANO. Mr. McCrery, I am sorry. Just repeat that a 

little bit. I lost one of my hearing aids coming up here and I am 

having a little trouble with it, I am sorry. 

Mr. MCCRERY. My point is that we may never pass medical 

malpractice reform if the AMA doesn’t stand squarely behind it on 

any vehicle that we might get through the Congress, and if we 

could get solid support from the AMA for what to many of us seems 

to be a commonsense reform for the benefit of our society and for 

the preservation our private health care system, we could maybe 

get it done. But if we get mixed signals like don’t put it on this 

vehicle or that vehicle, it is not that important, go ahead and pass 

this, then it is going to be impossible to pass medical malpractice 

reform. 

Dr. PALMISANO. Sure. And if I might respond to that for the 

record, the AMA would like to see any language in any bill that 

would give us nationwide tort reform because it is a top priority 

of the American Medical Association. 

Mr. MCCRERY. Thank you. The only other thing I would add to 

the list that Mrs. Johnson asked you to provide some evidence for 

is medical school applications. Is there any evidence that medical 

school applications are going down because of the best and the 

brightest changing their minds as to what career path to pursue 

because of all these problems? 

Chairman JOHNSON. Dr. Mayer, did you want to respond? 

Dr. MAYER. Yes. I think there are data now that the number 

of applicants is going down. The applications are still in excess of 

the number of positions available. I would only reemphasize when 

you weren’t here to point out, though, that in cardiothoracic surgery we had fewer applicants than we had available positions. It 

has never happened in our specialty before. It was sort of the 

creme de la creme who made it through general surgery and then 

went on to cardiothoracic surgery. For the last 3 or 4 years, we 

have not filled with American medical school graduates. Those applicant positions are going to overseas folks, and many of them are 

high-quality people, but I think it is symptomatic of the problem. 

And this year, even with the non-U.S. medical school graduates, we 

didn’t fill the programs. 

So, you know, I think these things are all having an impact, and, 

you know, as I said in my formal comments, I think once this train 

goes off the edge of the cliff, it is going to take 10 years to turn 

it around, because that is how long it takes, post medical school, 

to mint a new cardiothoracic surgeon. 

Chairman JOHNSON. Mr. Levine. 

Mr. LEVINE. Madam Chair, if I may just regress for one minute 

and go back to your comment on disease management and access, 

I think that is a very significant concern. Physical therapists focus 

on functional restoration with patients, and prevention is a key to 

disease management. One of the other things that I hope the Committee will look at is not only the impact of the fee schedule cuts 

but the other regulatory restrictions that limit Medicare beneficiaries’ access to those health care providers that do impact disease management. 

67

In my practice in the State of Maryland, physical therapists have 

had direct access for physical therapy services since 1979. However, the Medicare beneficiary does not have that ability to seek 

physical therapists and oftentimes it is the physician who is not familiar with the fact that the physical therapist can be an integral 

component of the disease management process. 

So I would only urge the Committee to look at the other regulatory issues in combination as you look to navigate this. 

Chairman JOHNSON. I would just like to add to Mr. McCrery’s 

comments that it is truly bizarre for Congress to consider capping 

the liability of plans without capping the liability, at least at those 

same levels, of physicians. So I consider it imperative to have some 

malpractice reform in the Patient’s Bill of Rights in order to simply 

have a level playingfield, and was very disappointed with the lukewarm support we got on that issue. And I recently sat down with 

insurance companies in my district, physician-owned insurance 

companies, where the issues of utilization and quality have been 

rigorously addressed, and they had a 20-percent cost increase last 

year, they will have a 25-percent cost increase this year. It is not 

because there are more cases being brought. It is specifically because the awards have gone absolutely through the ceiling. So this 

is a very big issue, and you can’t talk about cost control in Medicare or anywhere else unless you are willing to confront it. Congresswoman Thurman. 

Mrs. THURMAN. Thank you, Madam Chairman. Although, 

Madam Chairman, I would also say that in some of the instances 

with the insurance and I don’t want us to get too caught up in all 

of this it is also the interest payments that they are receiving on 

their investments which is also not helping them. And for some of 

those doctors who are doing their own insurance, and through the 

reinsurance because of September 11, they are also having an increase in their reinsurance which is also creating a part of the 

problem. 

Chairman JOHNSON. If the gentlelady will yield, I asked those 

questions of this particular company. They do not use reinsurance 

and they are invested in ways that are not affected by Wall Street. 

So we need to get into this in a way that demonstrates, because 

here is kind of a creme de la creme plan and it is strictly award 

size. 

Mrs. THURMAN. And I have talked to others that say differently. So I would agree with you that we probably need to sit 

down and talk about that overall, so that we have a better idea of 

what is going on here. 

I just want to tell you all thank you very much for being here. 

I am sorry I missed your testimony, and so at this time I don’t 

have any questions, but we certainly appreciate it and hopefully we 

will be able to help our constituents by making sure they have access to physicians without long waits and without the loss of physicians in areas that are underserved today. So we thank you for 

being here. 

Chairman JOHNSON. Mr. McDermott. 

Mr. MCDERMOTT. Thank you, Madam Chair. I am sorry that 

the Congress is trying to do everything in 2 days a week, so that 

some of us are running between committees. I was just up listening 

68

to Secretary Thompson talk about all of this, and I had to kind of 

decide whether I would go there or stay here. What he is saying 

up there isn’t going to make you folks very happy, I am sure. 

But let me ask you a question, first of all. I think, Dr. Ginsburg, 

you were here when we put in the RBRVS system? 

Dr. GINSBURG. Yes. 

Mr. MCDERMOTT. And I had just come to the Congress. That 

was in 1989, so I wasn’t on this Committee yet. And I thought 

there was a lot of discussion at the time that one of the goals of 

putting in the RBRVS system was to increase payments to primary 

care people and to make additional access, to actually increase the 

volume of things; is that correct? 

Dr. GINSBURG. Certainly we felt, and many people felt at that 

time, that Medicare had an imbalance, that we were paying too little for primary care and really were concerned that this would discourage the use of primary care in the Medicare program—and encourage too much specialty care. When this fee schedule, RBRVS, 

was put in, there also were concerns about the total volume and 

about the trends in total volume of Medicare physician services; although recognizing that this is a fee-for-service payment system, 

the incentives to the individual physicians are to increase volume, 

and this is what led to the Volume Performance Standards. This 

mechanism was attempting to engage the medical profession as a 

whole in professional attempts to limit volume through better information about effectiveness of care. 

Mr. MCDERMOTT. How did that fail? I mean, we have gotten 

better payments for primary care physicians. And why is it that we 

can’t control volume? I mean, we knew it. There was all this discussion about it. It should be no big surprise to anybody around 

here that the volume has gone up. 

Dr. GINSBURG. I don’t know that we should say we failed, because actually—— Mr. MCDERMOTT. I don’t think we did. We hit the goal. 

Dr. GINSBURG. Volume trends in the nineties were far more benign than they were in the eighties, although I am not sure that 

it was Medicare policy that was driving this, you know. Throughout 

the nineties we had a dramatic change in our system toward managed care. Most people in private insurance went from traditional 

plans to managed care plans. The managed care plans I suspect did 

have some effects on volume, and I believe that the effects of managed care on physician behavior, such as from requiring authorizations for admission to a hospital or referral to a specialist, probably 

spilled over into the fee-for-service Medicare Program. When physicians learn how to treat some of their patients differently, it is 

going to spill over to how they treat other patients. 

So it is really hard to say whether the mechanism to control volume succeeded or failed, but the nineties were a period of low cost 

trends both for privately insured patients and for Medicare patients; but you know, I wouldn’t—attribute it to the policy that the 

Congress passed in 1989. 

Mr. MCDERMOTT. Now, I know you can’t make recommendations, but I would like to ask you an option. We are not going to 

pass a bill for $126 billion, like MedPAC suggests, but how about 

letting the Secretary make a volume adjustment each year in the 

69

fee update, maybe 1 or 2 percent, and just give them a little flexibility? How would you feel about that as a public policy? 

Dr. GINSBURG. Yes. Drawing on the research, my biggest concern is with a formula that locks us into a very large decrease in 

rates over time. So to the degree to which people would make better judgments making annual decisions as opposed to having a 

lockstep formula, I would say that would be a positive. Policymakers would be in a better position to respond to the various data 

on physicians’ costs and access to care for Medicare beneficiaries. 

Mr. MCDERMOTT. I have one final question for the panel and 

I am sorry I also didn’t hear all the testimony. We decided we are 

going to save a lot of money by turning the U.S. Department of 

Justice (DOJ) loose on medical providers, and I would like to know 

how many places you know about, or if you can provide a list to 

me after the hearing or whatever of those places where the DOJ 

has gone in on criminal charges on doctors and hospitals for their 

forums. 

Where is that happening? I happen to know it is going on in Seattle, and I don’t know where else it is going on, but what I know 

about it there; makes me really concerned about what you are 

doing to the health care and the practice of medicine. So I would 

like to know where else; so I have got to figure out which of my 

colleagues is having this same thing that is going on in Seattle. 

Does anybody know the answer to that or have a list? 

Dr. MAYER. Well, I think the University of Pennsylvania certainly was affected. The University of Pennsylvania hospitals took 

a significant financial hit based on a Department of Justice investigation. I know in Boston there was the threat of a Department 

of Justice inquiry at the Beth Israel Medical Center. 

Mr. MCDERMOTT. How did they abort it? 

Dr. MAYER. I am not sure that I know the answer to that. But 

it may be that the Beth Israel is sort of teetering financially, and 

maybe they didn’t want to to be honest with you, I just don’t know, 

but I do know that this threat existed. 

Mr. MCDERMOTT. Were those both criminal? Pennsylvania was 

criminal and Beth Israel was criminal? 

Dr. MAYER. I don’t know the answer to whether it was criminal 

or civil. I know that the University of Pennsylvania had to pay $30 

million and, you know, the method they used is actually quite interesting. You know, they will take 200 charts and find some percentage rate of failure to comply or something, and then they will 

extrapolate it to the entire volume at that institution and then 

come up with a number times 3, because it is treble damages sort 

of thing, and it can add up to a lot of money in a big hurry. And 

I think that is exactly what is going on in Seattle, too, at least from 

what I read on my e-mail. 

Mr. MCDERMOTT. Is there anybody else that has any information about this? My colleague say the University of Florida has 

been going through is there anybody else? 

Chairman JOHNSON. If the gentleman would yield, this is a 

very big issue. We have worked on this a little bit in the regulatory 

reform bill to deal with some of the extrapolation problems. But 

one of the big problems in the Pennsylvania situation was that 

originally the Inspector General was completely ignoring HCFA’s 

70

own directives to that institution about how to pay, and they were 

ignoring the portion of the law that allowed indirect supervision of 

residents, and a number of us got into that and suspended that 

whole process for a number of months, but when the Secretary allowed it to go ahead, there was not clarity on those issues. 

Since that time we have had some better compliance by the Inspector General’s Office, with the fundamental principle of recognizing the law and the directives that these organizations must 

comply with under other provisions of the law, because too often 

the Inspector General was not acknowledging the orders from 

HCFA themselves but was interpreting the law according to their 

own judgment and leaving the providers in a terrible bind. So we 

do have work to do on that issue, and I appreciate the gentleman 

from Washington bringing up, as he always does, very difficult but 

extremely important issues. 

Mr. MCDERMOTT. Madam Chair, just for a second, I would 

hope that we could have a hearing on this issue so that we could 

understand what actually is going on because what I know about 

the Seattle situation is that they are crushing either the number 

one or number two neurosurgery program in the United States by 

this criminal investigation, and I think there is a real question 

about whether or not what is happening there is what we intended. 

And it has happened to me first, but I think other people are going 

to get the same treatment. 

Chairman JOHNSON. I will be very happy to explore this with 

you, because I thought after the Pennsylvania thing that we had 

brought some greater rationality to the process. But we have seen 

in many parts of the Medicare system a total lack of respect for the 

law and justice, in my estimation, and we will, Mr. McDermott, 

look into this and see if we can put it into our schedule. 

We do have a very tight schedule on some portions of our work, 

but there will be lots of opportunity to fold in things learned, perhaps even after floor action, so we will look into this. 

Thank you very much. I thank the panel for their input, and I 

thank the Members for their attendance. The hearing is adjourned. 

[Whereupon, at 11:46 a.m., the hearing was adjourned.] 

[Submissions for the record follow:]

Statement of the American Academy of Family Physicians

Congress Must Fix the Medicare Physician Fee Schedule 

f Physicians and other health practitioners have experienced a sharp (5.4 percent) 

across-the-board reduction in their Medicare payments beginning January 1st. 

These cuts apply to all services and to more than one million health professionals. 

The Medicare Payment Advisory Commission (MedPAC) has called for the elimination of the current update formula and warned that cuts of the magnitude expected under this formula could raise concerns about the adequacy of payments and 

beneficiary access to care. AAFP agrees with that assessment and joins in urging 

Congress to take immediate steps to ‘‘freeze and revise’’; that is, freeze the conversion factor (payment rate) at the 2001 level and work to revise the update formula 

as recommended by MedPAC. 

Currently, Medicare officials are required to use a seriously flawed [because it’s 

tied to business cycle not patient need], statutory formula to calculate physician conversion factor updates which take effect each January 1 and which apply to chiropractors, optometrists, nurse practitioners, therapists and many other practitioners 

71

in addition to doctors of medicine and osteopathy. This formula known as the sustainable growth rate (SGR) restrains aggregate Part B spending and ties this spending target to the business cycle rather than patient need. Despite 1999 legislation 

that attempted to stem volatility, large and unpredictable payment swings with potential cuts of more than 5 percent a year are still occurring. 

The cut experienced this year makes the fourth time in 11 years that Medicare 

physician payment rates have been reduced. During that time, physicians and other 

practitioners have been inundated with expensive new government regulations requiring physicians to provide interpreters, dedicate staff to documenting and overseeing compliance plans and supply unnecessary and duplicative documentation. 

Yet, Medicare payments during the same 11 years have risen by an average of just 

1.1 percent a year or 13 percent less than the government’s own estimate of practice 

cost inflation. 

The gap between cost inflation and Medicare’s payment updates is already starting to take its toll and a negative update could greatly exacerbate the situation. In 

the last year or so, access problems have been reported in Atlanta, Phoenix, Albuquerque, Annapolis, Denver, Austin, Spokane, northern California and Idaho. AAFP 

data reveals that 17 percent of family physicians are not taking new Medicare feefor-service patients. 

Perhaps the most striking example of the payment rate cut can be illustrated by 

the experience of Dr. Baretta Casey:

Dr. Casey has done what the government wants many physicians to do: set up 

practice in an underserved area, taking care of many patients on Medicare and Medicaid. She came to medicine later in life than many do, as a wife with two children—

three by the time she graduated. She wanted to become a family doctor and practice 

in her Appalachian hometown of Pikeville, Ky.

Her business background stood her in good stead. She bought an office building 

at an auction, rented out the top floor to offset the cost of her first-floor office, computerized her practice from the start and opened her doors as a solo practitioner 

eight years ago.

Thanks to the booming practice and conservative living, Casey significantly paid 

down her $145,000 in student loans her first full year. But that was as good as it 

got. Ensuing years didn’t get better. In fact, they got worse.

On her computer Dr. Casey watched while medical expenses continued to grow but 

payment rates failed to keep pace. Dr. Casey says: ‘‘As a solo practitioner, I pay for 

everything. And the increase in expenses hasn’t been the measly little percentage you 

hear forecasted by the government. I’ve tracked it on my computer. It has gone up 

10 to 15 percent every year.’’

‘‘It took about six years, but at the six-year mark, expenses and income literally 

met in the middle,’’ she says. ‘‘This past year, they crossed over. And now, I have 

to dip into my savings to cover the extra expense. I’m basically subsidizing my own 

practice out of a savings account.’’

And now, in 2002, the worst blow of all—the 5.4 percent cut in the Medicare conversion factor. ‘‘I’ve had to make some decisions,’’ Dr. Casey says. ‘‘I won’t take any 

new Medicare patients or any new patients with any insurance company that follows 

suit and drops payment.’’ And ultimately, she says, ‘‘If things don’t change, I probably couldn’t stay in practice any more than two more years.’’

Dr. Casey has a message for Washington:

‘‘If our reimbursement rates continue to go down and our expenses continue to go 

up,’’ she says, ‘‘you will see an exodus of physicians out of rural areas like Moses 

out of Egypt. It’s not because doctors don’t care about their patients. They do, tremendously.’’

‘‘It’s because nobody is going to continue in a field or in a business when they’re 

losing 10 to 15 percent per year. The practice of medicine is like any other business: 

If you can’t pay your bills, you can’t survive.’’

Experience has already shown the danger of unrealistic payment rates in Medicaid, where twenty years of studies have consistently concluded that fee levels affect both access and outcomes. Medicare is not immune from similar problems as 

has been made abundantly clear by the continued exodus of Medicare+Choice plans 

from the program despite a guaranteed pay increase of at least 2 percent a year. 

Some 85 percent of elderly and disabled Americans rely on fee-for-service Medicare 

and for an ever-increasing number, there is no other option available. 

The American Academy of Family Physicians and its 93,500 members urge Congress to act now to freeze the conversion factor at last year’s rate as we all work 

to revise the flawed formula that causes volatile swings and insufficient reimbursement for physicians. Your action will ensure that Medicare patients can continue 

to receive the care they depend on and deserve.

f72

Statement of the American College of Obstetricians and Gynecologists 

The American College of Obstetricians and Gynecologists (ACOG), an organization 

representing nearly 45,000 physicians dedicated to improving women’s health, 

strongly urges Congress to repeal the 5.4% cut in Medicare payment and to replace 

the current, flawed Medicare payment formula. 

The Medicare Physician Payment Fairness Act of 2001 (S 1707 and HR 3351) enjoys a supermajority in both Houses, with over 300 co-sponsors in the House and 

69 in the Senate pledging their support. Yet, in 2001, no floor action occurred to 

prevent the 5.4% cut from going into effect January 1, 2002. This legislation is the 

critical first step in solving the inherent problems in the annual Medicare Physician 

Payment updates. 

The 5.4% cut implemented by the Centers for Medicare and Medicaid Services 

(CMS) stems from a fatally-flawed formula that penalizes physicians for economic 

downturns and from CMS data errors that have short-changed physicians by $15 

billion since 1998 and 1999. Services provided by physicians are subject to an aggregate Medicare spending limit that does not include any adjustment for new technology and that is tied to the gross domestic product. 

This cut is the fourth broad-scale reduction in physicians’ fees since 1992, bringing the average increase in Medicare fees between 1991 and 2002 to just 1.1% a 

year—13% less than the government’s estimate of practice cost inflation. This cut 

is especially hard on ob-gyns, whose professional liability premiums have skyrocketed in the last six months. Ob-gyns face these increases, combined with decreases in federal payments and expanding regulatory burdens. 

Medicaid and private payers often base their payments on the Medicare payment 

update as well. Medicare beneficiaries make up 13% of ACOG Fellows’ patients. 

Twenty percent of their patients are Medicaid beneficiaries. Already, compromises 

in access to care have been reported in Atlanta, Phoenix, Albuquerque, Annapolis, 

Denver, Austin, Spokane, northern California, and Idaho. We cannot allow this to 

continue. 

The Medicare Physician Payment Fairness Act would provide an immediate legislative halt to the 5.4% Medicare Payment cut, and give Congress the opportunity 

to make systemic changes in the physician update system next year. In addition, 

it would direct the Medicare Payment Advisory Commission (MedPAC) to recommend ways to eliminate or fix the expenditure target or Sustainable Growth Rate 

(SGR), which now helps determine annual Medicare Physician Payment updates. 

ACOG urges Congress to act today to restore fair payments to physicians and ensure patients’ access to quality care.

Statement of the American College of PhysiciansAmerican Society of Internal Medicine 

f The American College of Physicians-American Society of Internal Medicine (ACP–

ASIM)—representing 115,000 physicians and medical students—is the largest medical specialty society and the second largest medical organization in the United 

States. Internists provide care for more Medicare patients than any other medical 

specialty. We congratulate the Subcommittee on Health for holding this important 

hearing. Of the College’s top priorities for 2002, addressing the inadequacies of physician payment by the Medicare program is the most critical to our members. ACP–

ASIM thanks Congresswoman Nancy Johnson, chair of the Subcommittee, Congressman Pete Stark, ranking member of the Subcommittee, and other members, for convening this important hearing. We also want to extend special appreciation to 

Chairwoman Johnson for her extensive efforts to seek stability in the physician payment system. 

Background 

Beginning January 1, 2002, Medicare reimbursement payments to physicians and 

other health care professionals fell an average 5.4 percent. Despite serious concerns 

raised by ACP–ASIM and other medical associations, and warnings from the Medicare Payment Advisory Commission (MedPAC), medicine is having to endure the 

fourth physician payment cut in ten years. Because of flaws in the formula used by 

Medicare to determine annual updates, the CMS is projecting that Medicare payments will continue to decline over the next four years—by a grand total of 18.3 

73

percent from 2002–2005. This is an absolute reduction in payments; it does not take 

into account the impact of inflation in the costs of providing services. Using a very 

conservative inflation assumption of 3 percent per year, Medicare payments per service in constant dollars will be cut by 28.1% over the 2002–2005 period. 

This is not a problem that was created overnight. Congress adopted the current 

physician payment methodology (known as the Sustainable Growth Rate or SGR) 

in the Balanced Budget Act of 1997. Even then, ACP–ASIM recognized the serious 

flaws inherent in the SGR payment system and voiced our concern. Congress attempted to make corrections to the payment formula in 1999 with the Balanced 

Budget Refinement Act, however, it was not sufficient enough to correct the intrinsic problems. The recent economic downturn the country is now facing has only exacerbated the problem. 

Recognizing the unfairness of the SGR methodology and the tremendous hardship 

it has placed on physicians across the country, a super-majority of members of Congress cosponsored legislation that would stymie the magnitude of the 5.4 percent 

cut. Introduced in the waning days of the first session of the 107th Congress, ‘‘the 

Medicare Physician Payment Fairness Act of 2001,’’ (H.R. 3351 and S. 1707) would 

have cut the SGR reduction to physicians to 0.9 percent, rather than the current 

5.4 percent cut. ACP–ASIM continues to strongly support this legislation. Unfortunately, Congress failed to act prior to adjournment and physicians are consequently 

now beginning to feel the effects of an across-the-board reduction in their medical 

practices. 

Flawed Data Used in Formula

The 5.4 percent across-the-board reduction in Medicare payment is primarily due 

to the flawed SGR system that governs the annual payment for physician services. 

The SGR system errantly ties physician payment to the Gross Domestic Product 

(GDP). There is no other segment of the health care industry that uses such a methodology to update payment. What is most unfortunate is that this method of tying 

physician payment to the health of the overall economy bears absolutely no relation 

to the cost of providing actual physician services. In the years where the economy 

is facing a downturn, such as has been the case in the recent past, a reduction in 

physician payment is significant. 

In its March 2002 report to the Congress, MedPAC expresses grave concern about 

the underlying problem of tying the SGR to the economy. MedPAC reports that the 

current SGR system may even cause payments to deviate from physician costs because it does not fully account for factors affecting the actual cost of providing services. Specifically, while the current SGR payment system accounts for input price 

inflation and productivity growth, it provides no opportunity to account for other 

factors, such as an increase in the regulatory burden of the Medicare program. 

In addition to the flawed SGR payment system, physicians have repeatedly been 

penalized for inaccurate estimates in the past. Since the SGR payment formula was 

first utilized in 1998 and 1999, Medicare officials have consistently relied upon 

flawed data for the annual update. Because the SGR formula is cumulative (i.e., it 

relies on previous years’ estimates), these errors that were never corrected are compounded, further exacerbating the problem year after year. Due to these successive 

errors, the spending target is about $15 billion lower than it actually should be. 

Effect on Physicians and Their Patients 

A physician payment cut of this proportion is a tremendous blow to physicians, 

particularly internists. According to a 2001 Medical Group Management Association 

study, Medicare payments account for nearly 50 percent more of the average internists revenue than the average primary care physician. The 5.4 percent physician 

payment cut comes at a time when malpractice premiums are at their highest levels, the amount of regulatory burden it at its peak (such as costs associated with 

complying with HIPAA), and the cost of other overhead expenses is dramatically increasing. This culmination of events may force physicians to make difficult choices 

in order to continue to operate. 

Physicians have a strong sense of commitment to their Medicare patients. They 

will do everything within reason to continue to provide their Medicare patients with 

high quality, accessible health care, even in the face of rising costs and declining 

reimbursement. However, there is a point where the economics of running a practice 

will force physicians to institute changes to limit the damage from continued Medicare payment cuts. Like any small business, revenue must exceed the costs of providing services in order for a practice to remain financially viable. For practices that 

are heavily dependent on Medicare revenue, such as a typical internal medicine 

practice, an after-inflation payment reduction of 28.1 percent over the 2002–2005 

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period will dictate that they take preventive steps to cut their losses from seeing 

large numbers of Medicare patients. 

Physicians will have essentially only four options available to them to offset the 

losses from declining Medicare payments and rising costs. They can reduce their reliance on Medicare revenue, by restructuring their practices to decrease the share 

of their practice revenue that comes from Medicare while increasing the share that 

comes from more reliable (non-Medicare) payers. This would be accomplished by 

putting limits on how many Medicare patients will be seen while marketing the 

practice to non-Medicare populations. They can cut costs—eliminating beneficial 

services and technology. They can do both: cut beneficial services and reduce their 

reliance on Medicare. Or they can go out of business, by closing their practices entirely. 

We believe that it is extremely probable physicians will be forced to limit the 

number of Medicare patients in their practice; lay off staff that help Medicare patients with appointments or medications; relocate to areas with a younger, nonMedicare eligible patients; spend less time with Medicare patients; discontinue participation in the Medicare program; limit or discontinue investment in new technology; limit or discontinue charitable care; or in some cases, retire or close their 

practices. Physicians will make such changes reluctantly, but the laws of economics 

will leave them no choice but to do so. 

The effects of the most recent and projected cuts in reimbursement will most likely be hardest felt in rural and other areas that are already underserved. The problems that we see today will certainly only get worse unless the severely flawed 

methodology utilized by Medicare to compute physician payments is immediately 

addressed. 

Physicians’ efforts to reduce their reliance on an unstable and unreliable Medicare 

payment system will make it even more difficult for patients to gain access to an 

increasingly under-funded health care system, particularly as the number of Medicare patients increases from 34 million today, to 40 million in 2010, to 60 million 

in 2030. More Medicare beneficiaries will be seeking care, yet fewer and fewer physicians may be able and willing to provide care to Medicare patients. As Medicare 

is increasingly viewed as an unreliable payer whose reimbursement does not cover 

the costs of providing services, young physicians will be disinclined to go into specialties that are viewed as being heavily dependent on Medicare—particularly internal medicine and geriatrics—at the time when those specialties should be most in 

demand to provide care to an aging population. 

A recent American Academy of Family Physicians study confirmed that physicians 

are already making tough decisions, citing that nearly 30 percent of family physicians are not taking new Medicare patients. Other recent studies confirm doctor 

frustration with inadequate reimbursement from all areas of physician payment. In 

Washington State, for example, a Washington State Medical Association poll of 

members in November 2001 revealed that 57 percent of physicians said that they 

are limiting the number of or dropping all Medicare patients from their practices. 

The report blames the many years of decline of the state’s health care delivery system, characterized by a slow erosion of funding for public health, growing administrative expenses for practitioners and mounting frustrations of physicians trying to 

cope with myriad of regulations. 

The subcommittee will be hearing testimony today from Dr. Paul Ginsburg, Director, Center for Studying Health System Changes, which provides further evidence 

to support the view that the availability of care for Medicare patients has already 

deteriorated over the past four years. He reports that the percentage of Medicare 

patients who did not receive or delayed needed care increased from 9.27 percent in 

1997 to 11.1 percent in 2001. The percentage of primary care physicians accepting 

all new Medicare patients declined steadily over the 1997–2001 period. These 

changes were occurring even before the impact of the 5.4 cut went into effect, and 

before most physicians have become fully aware that they will have to cope with 

an after-inflation cut of 28.1% over the 2002–2005 calendar period. 

In December 2001, the American Medical Association conducted a state-by-state 

analysis of the impact of the 5.4% Medicare cut, which revealed a tremendous blow 

to the states. In Connecticut, for example, physicians’ Medicare losses will total 

$33.8 million. In California, physicians are expected to lose more than $205 million. 

New York physicians stand to lose more than $207 million, the highest physician 

payment reduction total of any state. 

MedPAC Recommendations to Congress

In its March 2001 report to the Congress, MedPAC recommended that the Congress replace the SGR system with an annual update methodology based on factors 

influencing the unit costs of efficiently providing physician services. According to 

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MedPAC, getting the price right is more important than controlling spending 

through the payment mechanism. The Commission noted that the main problems 

with the SGR were that it failed to account for all relevant factors that affect the 

cost of providing services, and the system exacerbates Medicare’s problem of paying 

different amounts for the same service depending on where it is provided (physician’s office, hospital outpatient department, ambulatory surgical center). The Commission added that other inherent problems with the SGR system stem from its volatility and unpredictability. These problems are as true today as ever. 

In MedPAC’s March 2002 Report to Congress, the Commission will once again 

recommend that Congress repeal the SGR system due to these same concerns. This 

time, however, MedPAC offers more concrete recommendations for Congress to direct the Secretary of HHS to implement for the year 2003 and beyond. 

MedPAC’s proposed payment method would make updates to physician services 

similar to the updates for other services and promote the goal of ‘‘achieving consistent payment polices’’ across ambulatory care settings, including physician offices, 

hospital outpatient departments, and ambulatory surgical centers. MedPAC’s recommendations are as follows:

1. The Congress Should Repeal the Sustainable Growth Rate System and Instead Require that the Secretary Update Payments for Physician Services 

Based on the Estimated Change in Input Prices for the Coming Year, Less 

an Adjustment for Growth in Multifactor Productivity; 

2. The Secretary Should Revise the Productivity Adjustment for Physician 

Services and Make it a Multifactor Instead of a Labor-Only Adjustment; 

and 

3. The Congress Should Update Payments for Physician Services by 2.5 Percent for 2003.

The Congress Should Require the Secretary to Update Payments for Physician Services Based on the Estimated Change in Input Prices, Less an Adjustment for Growth 

in Multifactor Productivity

In MedPAC’s first recommendation to repeal the SGR system, the Commission 

states, ‘‘Replacing the SGR system in this way would solve the fundamental problems of the SGR system.’’ The adjustment the Commission recommends would 

change the current measure of input price inflation for physician services—the 

Medicare Economic Index (MEI)—to make it a forecast of input price growth for the 

coming year. Further, the productivity adjustment from the MEI would also be removed so the MEI would only be a price measure. Productivity would be considered 

separately in update decisions.

The Secretary Should Revise the Productivity Adjustment for Physician Services and 

Make it a Multifactor Instead of a Labor Only Adjustment

MedPAC’s second recommendation to revise the productivity adjustment to account for labor and nonlabor factors is consistent with the way physician services 

are produced. While labor accounts for the majority of the costs for providing physician services, other inputs, such as office space, medical materials and supplies, and 

equipment, are also important to consider. This adjustment would more accurately 

measure growth in productivity by considering all inputs. However, ACP–ASIM cautions that factoring in physician productivity in order to lower the physician payment update may be problematic. Increased compliance with federal regulations, 

such as Medicare paperwork and HIPAA mandates, may be what is contributing to 

the lower productivity, and may therefore skew the update. MedPAC acknowledges 

this problem, but admits that it has little or no data to support compensating for 

this issue. 

The first two recommendations in physician payment methodology would allow 

the updates to more fully and accurately account for factors affecting costs, and it 

would decouple payment updates from spending control. Further, the revision to the 

productivity adjustment will make payment of physician services consistent with 

modern methods of measuring productivity, and make payments stable and predictable from year to year.

Congress Should Update Payments for Physician Services by 2.5 Percent for 2003

MedPAC’s third recommendation to update physician services by 2.5 percent for 

January 2003 is the application of the first two recommendations. Since input prices 

are expected to rise 3 percent in 2003, when combined with a 0.5 percent productivity adjustment, the result yields a 2.5 percent payment increase. 

Solution 

ACP–ASIM strongly supports the MedPAC’s goal of ‘‘achieving consistent payment polices’’ for physicians and their practices. Therefore, ACP–ASIM supports the 

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Commission’s recommendation to replace the SGR system and to require Medicare 

to update payments for physician services based on the estimated change in input 

prices for the coming year as measured by the Medicare Economic Index (MEI). We 

agree that any productivity adjustment for physician services should be based on 

several factors instead of being based on labor costs alone, and that this should be 

applied as a separate adjustment to the update, rather than being included in the 

MEI itself. Further, ACP–ASIM supports the Commission’s recommendation to update the physician fee schedule by 2.5 percent for 2003. 

We are recommending one addition to the MedPAC’s recommendations, however. 

Legislation to eliminate the SGR formula and replace it with the MedPAC update 

framework should specify that if Congress declines in any given year to enact 

legislation to establish the physician fee schedule update based upon recommendations of the MedPAC a default update equal to the modified MEI, 

i.e., the MEI excluding the productivity factor, MINUS a separate .5% productivity adjustment, shall apply. This adjustment would, at the very least, assure some predictability and stability in the update in the coming years, notwithstanding our reservations about applying an automatic productivity adjustment to 

the update. 

Finally, ACP–ASIM continues to seek a halt to the 5.4% cut that went into effect 

in January 2002 and calls on Congress to enact immediate relief. Correcting the 

problem in 2003, by replacing the SGR formula with the MedPAC framework, will 

not be sufficient to undo the harm created by the 5.4% cut. We are concerned that 

Congress may delay action on halting the 5.4% cut by bundling this relief into other 

Medicare reforms that may not be acted upon until late in the congressional session. 

We urge the Committee to report legislation to (1) put an immediate halt to the 

5.4% reduction (2) replace the SGR formula with the MedPAC framework, with the 

addition of the above default mechanism recommended by ACP–ASIM and (3) establish the 2003 update at 2.5% and (4) urge the House Budget Committee to include 

money in the budget resolution to accomplish these changes. Such measures should 

be reported and acted upon by Congress prior to, and independent of, other needed 

Medicare reforms. 

Conclusion 

ACP–ASIM is pleased that the Subcommittee is addressing the serious problems 

associated with the current SGR based physician payment system. Our organization 

stands ready to assist the Subcommittee in resolving this pressing issue in any way 

we can.

The Association of American Medical Colleges (AAMC) is pleased to submit for the 

Statement of the Association of American Medical Colleges 

f record testimony to the House Ways and Means Subcommittee on Health on the 

need to replace the Sustainable Growth Rate (SGR) methodology used to calculate 

the update for Medicare payments under the Physician Fee Schedule (‘‘physician 

payment update’’). The AAMC appreciates the Subcommittee’s interest in this issue 

of great importance to both Medicare providers and Medicare beneficiaries. The 

AAMC supports replacement of the SGR with a methodology that assures adequate 

payments and stable updates for physicians who participate in Medicare. Appropriate and stable physician payments will ensure that Medicare beneficiaries have 

access to the complex and specialized care provided by academic physicians. 

The AAMC represents the country’s 125 accredited medical schools and nearly 

400 major teaching hospitals and health systems, 90 academic/professional societies 

representing approximately 100,000 faculty members (‘‘academic physicians’’), and 

the nation’s medical students and residents. 

The Role of Academic Physicians 

Academic physicians play a unique, multifaceted role within the physician community, as well as within the larger healthcare system. As experts in their particular fields of medicine, academic physicians provide patients and referring physicians with cutting-edge clinical expertise. Academic physicians also educate and 

train the medical students, residents, and other health professionals who will become the next generation of caregivers. In addition, many academic physicians conduct clinical research that generates more effective, efficient, and compassionate 

healthcare for all Americans—including aging Americans. 

Because of their clinical expertise, access to innovative technologies within teaching hospitals, and participation in clinical research, academic physicians frequently 

77

provide inpatient and outpatient care for patients—including Medicare beneficiaries—with complex, multiple, or acute health problems that can not be managed 

elsewhere in the community. 

Working together with their teaching hospital partners, academic physicians are 

vital to the delivery of essential medical services. Over three-quarters of AAMC’s 

teaching hospital members (which account for just 6 percent of the nation’s hospitals) deliver geriatric care (e.g., treatment for Parkinson’s or Alzheimer’s disease) 

and operate certified trauma centers in conjunction with academic physician partners. 

In addition, faculty practices partner with AAMC’s teaching hospital members to 

provide nearly 45 percent of the nation’s hospital-based charity care. By comprising 

a significant segment of America’s healthcare safety net, academic physicians and 

their teaching hospital partners assure healthcare access for the poor and underserved—including Medicare beneficiaries who are dually eligible for Medicaid or who 

are unable to pay for their care. In 1999, faculty practices provided an average of 

$12 million in charity care. According to Agency for Health Research and Quality 

(AHRQ) and AAMC analyses (using survey data collected by the Center for Studying Health System Change’s Community Tracking Study Physician Survey), academic physicians spend more time providing charity care than physicians in all 

other settings. This is true both when time is measured in hours per month and 

as a percentage of total patient care time and medically related time. 

Update Methodology (SGR)

The Balanced Budget Act of 1997 (BBA) established a formula to calculate the 

SGR—the ‘‘target growth rate’’ for Medicare spending on physician services—that 

would control overall Medicare spending while simultaneously accounting for 

changes in the cost of providing care. The AAMC is concerned that the SGR has 

not achieved an equitable balance between fiscal management of the Medicare program and the actual cost of caring for Medicare patients, including the cost of medical inflation. Various analyses have shown that, since implementation of the SGR, 

updates in physician payments have failed to rise in proportion with increases in 

input prices. 

Additionally, as was the case this year, the SGR’s link to the country’s gross domestic product (GDP) is problematic and volatile. While payment updates in 2000 

and 2001 were relatively large (5.4 percent and 4.5 percent respectively), the 2002 

payment update of negative 5.4 percent is not only a dramatic decline, but also contrasts sharply with the previous two years. 

In its March 2001 report, the Medicare Payment Advisory Commission (MedPAC) 

identified similar concerns with the SGR and unanimously called to replace the 

methodology, stating that it ‘‘neither adequately accounts for changes in cost nor 

controls total spending.’’ MedPAC members reiterated their concerns at their January 2002 meeting and announced in their January 16–17 Meeting Brief that their 

March 2002 report will recommend ‘‘replacing the SGR system, updating payments 

for 2003, accounting for productivity growth outside the MEI, and revising the productivity adjustment. . . .’’ The AAMC strongly supports MedPAC’s conclusion regarding the need to develop a new update methodology that produces stable and 

adequate payments for physicians.

The Impact of Stable and Adequate Physician Payments on Medicare Beneficiaries’ Access to Care

Stable and adequate Medicare physician payments are critical to ensure that seniors have continued access to the professional services provided by academic physicians. Nearly one-sixth of all physicians providing Medicare services are academic 

physicians. Medicare reimbursements to academic physicians total about $2.5 billion 

each year and represent up to one-third of faculty practice revenues. In light of the 

fact that faculty practice revenues, on average, represent about 35 percent of a medical school’s total revenue, unstable Medicare payments could jeopardize beneficiary 

access to faculty professional services, as well as academic medicine’s core missions 

of medical education, research, clinical services, and providing charity care. 

A sample analysis of the impact of the 2002 Medicare fee schedule on faculty 

practice plans identified that a vast majority of faculty practices will lose more than 

minus 5.4 percent of Medicare revenue. In fact, Medicare revenue for some plans 

will decline by as much as 7.5 percent. Because faculty practices provide multispecialty and complex care for Medicare patients, the negative payment update, when 

78

1 Currently, payment for services determined under the Medicare Physician Fee Schedule is 

the result of several factors. One of these is a nationally uniform ‘‘relative value’’ for each service 

that includes weights for physician work, practice expenses, and professional liability insurance 

components.

combined with recent changes in Relative Value Units (RVUs)1, will drive payment 

reductions that exceed minus 5.4 percent in many Medicare-related clinical specialties (as illustrated in the table below). It is important to note that while some specialties included in the analysis will experience less than 5.4 percent decline, no specialties will experience an increase in Medicare revenue under the 2002 payment 

schedule. 

Medicare Payment Forecast Analysis Impact of Change in 2002 Conversion Factor and RVU 

Values Across Faculty Practice Plans 

Specialty Percent Change

Cardiology: Invasive –13.21%

Cardiology: Noninvasive –9.7%

Critical Care –5.6%

Emergency Medicine –7.7%

Gastroenterology –7.3%

Neurosurgery –8.4%

Ophthalmology –6.9%

Physical Medicine –5.9%

Psychiatry –6.2%

Pulmonary –6.3%

Radiology: Interventional –7.1%

Radiology: Nuclear Medicine –8.5%

Surgery: Cardiovascular –10.1%

Urology –7.3%

Source: University HealthSystem Consortium (UHC)/AAMC Faculty Practice Solutions Center 

Since private payers often tie their reimbursement rates to those set by Medicare, 

reductions in Medicare payments will further increase the disparity between the 

costs of care and the rates at which payers reimburse for those costs. For example, 

one large faculty practice (nearly 900 physicians) anticipates a loss of $4.8 million 

in managed care reimbursement because the contracts are linked to the Medicare 

fee schedule. Note that this does not include Medicaid and Tricare, which would also 

be affected by cuts in the Medicare fee schedule. 

The growing disparity between costs and reimbursement will make it increasingly 

difficult for medical schools and teaching hospitals to maintain their patient care, 

education, research, and community service missions. Because of their revenue 

losses, the practice described above is implementing a policy to limit its appointments for indigent patients to no more than 10 percent of patient visits. 

A Legislative Solution to the SGR Problem

Last fall, bipartisan, bicameral legislation, ‘‘The Medicare Physician Payment 

Fairness Act of 2001’’ (H.R. 3351/S. 1707), was introduced to provide short- and 

long-term relief from unstable Medicare physician payment updates. The bills provide short-term relief by reducing the cut to the Medicare physician payment update 

from minus 5.4 percent to minus 0.9 percent and long-term relief by directing 

MedPAC to develop a replacement for the SGR. 

The AAMC strongly endorses these bills, and is pleased that a majority of Representatives and Senators have cosponsored the bill. The AAMC urges the SubVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00082 Fmt 6633 Sfmt 6621 E:\HR\OC\B217.XXX pfrm17 PsN: B217
79

committee to support this legislation and ensure that the losses currently experienced by physicians are mitigated as quickly as possible. 

In conclusion, Medicare beneficiaries rely on academic physicians and academic 

medical centers to provide high quality, innovative, and accessible healthcare. They 

also rely on academic physicians to develop the clinical advances and train the new 

generation of physicians that will assure a high quality of life for all American seniors. Passage of H.R.3351/S. 1707 is a vital first step toward mitigating the losses 

currently experienced by all physicians. The AAMC looks forward to working with 

Subcommittee members in accomplishing the second step—devising a long-term solution to replace the current SGR methodology and assure adequate and stable 

Medicare physician payment updates.

Association of Maternal and Child Health Programs 

f Washington, DC 20036

February 27, 2002

The Honorable Nancy Johnson 

Subcommittee on Health of the Committee on Ways and Means 

United States House of Representative 

Washington, DC 20515

Re: Committee Hearing on Medicare Physician Payments

Dear Representative Johnson: 

The Association of Maternal and Child Health Programs (AMCHP) represents 

state public health leaders and others working to improve the health and well being 

of women, children and youth, including those with special health care needs, and 

families. We are very concerned about the Centers for Medicare & Medicaid Services’ (CMS) decision to publish only the practice and physician liability expense values for the two vaccine administration codes (90471 and 90472), without publishing 

any values for the physician work involved in the administration of vaccines. As a 

result of this under-valuation, we fear that many Medicaid programs and other insurers that base payments on the Medicare fee schedule will reduce reimbursement 

for this service to levels well below the actual costs incurred by providers. Undercompensating private physicians for vaccine administration, thereby discouraging 

them from providing this valuable service in their offices, could have a significant 

detrimental impact on the viability of our nation’s immunization efforts. 

State health programs across the nation alongside federal partners CDC, HRSA, 

and CMS, and the private medical community have worked hard to reach the current high rate of immunization and low rate of vaccine-preventable diseases in the 

United States. The Vaccines for Children (VFC) program has been remarkably effective in moving vaccine delivery for low-income families into the setting of a medical 

home, where children receive the benefit of comprehensive health services as well 

as immunizations. This effort to increase vaccine availability and utilization by increasing family awareness and encouraging families to seek primary, preventive 

care supports national health status goals reflected in the Healthy People 2010 initiative. Now is a particularly inopportune time to weaken that system, as it is already being severely stressed. Shortages of varicella, measles, mumps, rubella, DtaP 

and pneumococcal vaccines mean providers must recall the child, thus, increasing 

their financial burden and workload. In some cases, physicians’ offices vaccine shortages mean that patients seek immunizations in already overburdened public health 

clinics. 

The rationale guiding CMS’ values for vaccine administration does not reflect 

what actually happens at an administration site, since there is, in fact, physician 

work involved in the administration of childhood vaccines. The American Medical 

Association’s Related Value Update Committee (RUC) recently reaffirmed their recommendation to include specific vaccine administration physician work values. At 

the time each dose is administered, the physician must explain the vaccine’s benefits and possible adverse reactions to the patient’s parents or guardians. Provision 

of this information is requirement of the National Childhood Vaccine Injury Act. 

With the increases in disseminating misinformation, the time that physicians spend 

on education and cognitive discussion has increased. Some children receive vaccines 

from a variety of sources (e.g., public health departments, community health centers) further complicating the physician’s task of forming a comprehensive vaccine 

history using scattered records. Finally, physicians make every effort to avoid any 

‘‘missed opportunities’’ to immunize a patient, so they administer vaccines in contexts other than preventive health care visits. 

80

For these reasons, AMCHP strongly recommends that the committee correct this 

problem, either through working with the administration on rewriting the rule or 

through legislative action if necessary, so that physicians are adequately compensated for administering vaccines to our nation’s children. 

The goal of public health and its partner organizations is to foster a healthy society. This goal will be significantly and negatively affected if private physicians are 

not adequately compensated for administration of vaccines. The result would be increasing the burden on public health clinics and reducing the likelihood that a child 

will receive comprehensive care in a medical home. If CMS does not change the 

Medicare fee schedule for vaccine administration, the result could be a decrease in 

the number of immunized children and a concomitant increase in preventable—and 

sometimes fatal—infectious diseases. We urge the committee, on behalf of our nation’s women, children, and their families, to address this issue as you look at the 

broader issues involved with the physician payment rule put forth by CMS. 

Sincerely, 

Deborah F. Dietrich 

f Acting Executive Director

Statement of the College of American Pathologists 

The College of American Pathologists (CAP) is pleased to submit this statement 

for the record of the Subcommittee on Health’s hearing on the Medicare physician 

fee schedule formula and physician payments. The College is a medical specialty society representing more than 16,000 board-certified physicians who practice clinical 

or anatomic pathology, or both, in community hospitals, independent clinical laboratories, academic medical centers and federal and state health facilities. 

The CAP first would like to applaud Subcommittee Chair Nancy Johnson for her 

support of improved Medicare payments for physicians and her strong statement 

last week regarding the flawed formula now used to calculate annual updates to the 

Medicare physician fee schedule. The CAP also would like to express its appreciation to Ways and Means Chair William Thomas and other members of the full committee who have voiced the need to address the important issue of Medicare physician payments. We look forward to working with all of you so that Congress can 

act quickly to lessen the damage caused by this year’s precipitous decline in Medicare physician payments and replace the current update formula with one that more 

accurately reflects true practice costs. 

The 5.4 percent reduction in physician payments that began January 1, 2002, affects pathologists profoundly and exacerbates existing financial pressures brought 

on by increasingly complex and costly regulatory requirements and rising liability 

insurance rates. 

The January 1 reduction in payments is the fourth payment cut—and the largest—since Medicare instituted its physician fee schedule a decade ago. Since 1991, 

Medicare physician payment rates have risen an average of only 1.1 percent annually, or 13 percent less than the annual increase in practice costs, as measured by 

the Medicare Economic Index. Further, the Jan. 1 reduction comes on top of cuts 

to pathology services made in the transition to resource-based practice expenses, 

such as an 11.5 percent drop in payment over four years for the diagnosis of breast 

cancer, prostate cancer and malignant melanoma. 

Pathologists and other physicians cannot continue to sustain the financial pressures the Medicare program has placed upon them. Compounding the current problem of falling payment rates are numerous new administrative requirements imposed on Medicare providers in recent years. For example, documentation requirements necessitated by Medicare program integrity initiatives and various provisions 

of the Health Insurance Portability and Accountability Act of 1996 have created substantial new paperwork burdens in laboratories and physician offices, and more are 

expected in coming years. These requirements raise the cost and complexity of providing care, but come with no additional compensation. Further adding to the burden on providers are rising professional liability insurance rates and the cost of 

technological advances critical to maintaining state-of-the-art medical care.

The 2002 payment cut stems from a flawed Medicare update formula—the ‘‘sustainable growth rate,’’ or SGR. This system inappropriately reflects downturns in 

the general economy and that, along with data errors by the Centers for Medicare 

and Medicaid Services, have short-changed physicians by $15 million since 1998. 

The Medicare Payment Advisory Commission (MedPAC) warned last year that significant cuts in 2002 ‘‘could raise concerns about the adequacy of payments and benVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00084 Fmt 6633 Sfmt 6621 E:\HR\OC\B217.XXX pfrm17 PsN: B217
81

eficiary access to care.’’ MedPAC adopted a recommendation that Medicare replace 

the SGR with a system based on estimated changes in physician practice costs less 

an adjustment for growth in multi-factor productivity (labor, supplies and equipment—not just labor, as is now the case). 

MedPAC’s concerns regarding access must not be taken lightly. Experiences with 

Medicare+Choice disenrollment and Medicaid patient access give ample evidence of 

the need to maintain adequate payment to ensure adequate access. This year’s reduction and future cuts that are likely absent immediate changes to the update system will force some physicians to discontinue accepting new Medicare patients, 

switch from participating to non-participating provider status, reduce administrative 

staff, retire early or take other actions to limit their Medicare liability. It is unfortunate that those same actions likely will jeopardize Medicare patients’ access to care. 

The CAP urges Congress to act this year to mitigate the 5.4 percent reduction to the Medicare physician fee schedule, repeal the sustainable 

growth rate system and replace it with an update formula that accurately 

reflects increases in practice costs.

The College thanks the Subcommittee for the opportunity to present its views on 

this important issue and offers its support and continued assistance as Congress 

moves toward remedying the flawed SGR formula and restoring equity to Medicare 

physician payments.

fColorado Otolaryngology Associates 

Colorado Springs, Colorado 80909

February 26, 2002

The Honorable Nancy L Johnson 

Chairwoman, House Ways and Means Committee, Health Subcommittee 

2113 Rayburn H.O.B. 

Washington, DC 20515

Dear Representative Johnson; 

I recently learned of the February 28, 2002, hearing on 2002 physician payments. 

I would like to offer this written comment for consideration during this hearing. 

Physicians are very concerned about the 5.4% decrease in Medicare payments. 

This year this decrease in payment is linked to most if not all-commercial thirdparty payers. Since 1997 the commercial third parties have been trying to control 

their costs and increase their profits by changing the way they develop their fee 

schedules. Fees used to be based on standard unit values by McGraw Hill (now 

called St. Anthony) but are now based on RBRVU’s (Resource Based Relative Value 

Units). The sole purpose of this change was to reduce their physician payments. 

This move has been very successful for the health plans but has left the physicians 

with less money to run their practices. 

As of January 2, 2002, most health plans had completed their conversion to 

RBRVU’s. Physicians have had no input into this change. Health plans have also 

changed computer systems to comply with other government regulations and now 

the systems support only one fee schedule, as I understand it. 

My physicians have not received an increase in salary in 7 years. This is far 

longer than most people in this country have gone without a salary increase. Therefore, you can see that a 5.4% decrease in payment is a deep cut into the physician 

budget; and you expect this decrease to continue through 2006. I can foresee many 

physicians having to give up their practices because they cannot afford to run an 

office at that level of payment. 

To add to our problems, over the past two years commercial third-party payers 

have increased their premiums to employers by 50–60% per year. Health plans have 

not only increased their premiums but also now get a windfall profit of 5.4%. 

In concrete terms the cost to run our practice has increased 6% in the past year. 

Coupled with this new 5.4% decrease in payments, we are now faced with an increased cost of 11% this year. We cannot sustain increased costs and decreased payments. If this only affected Medicare patients, a solution would be to stop seeing 

Medicare patients. As it is, our patient mix includes only 10% Medicare patients. 

I hope this helps you understand the plight of all physicians in the United States. 

I need you to understand this issue and develop a formula for the Medicare conversion factor that will be fair and allow physicians to provide quality care to patients 

and at the same time let the medical business grow. 

82

If you have questions or need clarification, I can be reached at (719) 867–7850. 

Thank you in advance for your consideration. 

Sincerely 

Judy Boesen, RN, BGS, MAM 

Administrator

J. Lewis Romett, MD 

Neiland Olson, MD 

Joel Ernster, MD, FACS 

Barton Knox, MD, FACS 

J. Christopher Pruitt, MD 

John Hohengarten, MD 

f Edgar B Galloway, MD

Statement of the Hon. J.D. Hayworth,

a Representative in Congress from the State of Arizona 

Thank you Madam Chairwoman for holding today’s hearing on the Medicare payment formula for physicians. I commend your leadership in addressing this pressing 

issue that will impact not only physician payment levels, but also beneficiary access 

to quality health care. 

I have heard from many physicians in Arizona who have serious concerns about 

the physician payment update, which has resulted in a negative 5.4 percent update 

in 2002. I share their concerns because this significant cut could exacerbate existing 

access problems for Medicare beneficiaries, particularly in rural communities. Unfortunately, the current flawed formula has nothing to do with the cost of providing 

health care. I am concerned that the physician payment cut in 2002 and the expectation of similar significant reductions in the next several years may have the potential to sway physicians to retire early or simply choose not to participate in the 

Medicare program, which would have a serious effect on patient access to care. 

As you know, the current physician payment formula links physician updates to 

the Sustainable Growth Rate (SGR) and changes in the Gross Domestic Product 

(GDP). The Medicare Payment Advisory Commission (MedPAC) and others have 

recommended replacing the SGR because it fails to account adequately for changes 

in physicians’ costs by tying updates to the growth in the economy and exacerbating 

different payments to different groups for the same services. 

I strongly believe that this critical issue must be addressed this year and I again 

commend your leadership in holding this hearing today. With the input of the physician community, MedPAC, the General Accounting Office, and the Administration, 

our committee can improve the existing physician reimbursement system. I look forward to continuing to work with you on a new payment methodology that will yield 

more fair, stable, and predictable updates for physicians.

a Representative of Congress from the State of Michigan 

Statement of the Hon. Joe Knollenberg,

f Mr. Chairman, I applaud the committee for holding this hearing as Congress continues to work with the Bush Administration to modernize and improve the Medicare system. As Congress addresses the issue of broad Medicare reform, it is essential to consider the impact of reducing Medicare payments to physicians. After all, 

physicians and other health care professionals are critical components of the Medicare system, serving on the front lines to provide quality health care to all Americans. 

I commend the efforts made already by many Congressional Members and the 

Bush Administration to implement administrative reforms to make the Medicare 

program work better for physicians. Programs such as the Physicians’ Open Door 

Initiative and the Physicians Issues Project have helped improve the flow of information, reduce regulatory burdens and ease paperwork requirements. As a result, 

doctors will be able to spend more of their time providing health care and less of 

their time wading through pages of rules and regulations. It is my hope that we 

will build on these improvements. 

I appreciate the opportunity today to raise concerns expressed by many doctors 

in my home district in southeastern Michigan. I believe these issues have been 

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echoed by health providers throughout the country as well. My constituents have 

brought to my attention the devastating consequences of the final payment policies 

and payment rates for 2002 under the Medicare Physician Fee Schedule announced 

by CMS on November 1, 2001. Reducing Medicare’s physician payments by 5.4% 

would significantly restrict their ability to provide the necessary services to our seniors. 

In addition to physicians being discouraged by the enormous amount of federally 

required paperwork, our area has seen a significant decrease in the number of physicians financially able to care for Medicare beneficiaries, subsequently closing their 

practice to them. Moreover, some doctors are simply leaving medicine altogether because of the financial impossibility of providing services under Medicare. 

Emergency physicians will be particularly adversely affected given payment cuts 

in other areas. The role of emergency departments is becoming even more important 

as our country prepares to respond to bioterrorism and it is essential that their physicians be able to effectively carry out their responsibilities. 

A Medicare payment cut could also effect the entire health sector as numerous 

private sector plans and state Medicaid programs tie their physician fee schedules 

to Medicare rates. At a time when we are concerned with healthcare workforce 

shortages, we must identify strategies to increase recruitment, retention and development of qualified health care providers. I look forward to working with the Committee and the rest of my colleagues and the Bush Administration to enact comprehensive Medicare reform that will include strengthening the Medicare payment 

system.

fProfessional Radiology Inc. 

Cincinnati, Ohio 45223

February 27, 2002

Ms. Allison Giles 

Chief of Staff 

US House of Representatives 

Committee on Ways and Means 

1102 Longworth House Office Building 

Washington, DC 20515

Dear Ms. Giles: 

Attached is a submission for the record to be included in the February 28, 2002 

Subcommittee on Health Hearing on Physician Payments. This letter represents the 

views of the President Elect of the Alliance Physicians and Surgeons, speaking for 

1250 Cincinnati physicians, the Ohio State Radiological Society representing 150 Diagnostic Radiologists and Radiation Oncologists, as well as the members of Professional Radiology, Inc., a 21-physician radiology group from the Christ and Jewish 

Hospitals in Cincinnati, Ohio, who are also members of the Health Alliance. 

Sincerely, 

Frank E. McWilliams, M.D. 

Professional Radiology Inc. 

Cincinnati, Ohio 45223

February 27, 2002

The Honorable Rob Portman 

Member of Congress 

238 Gannon Building 

Washington, D.C. 20515

FAX: c/o Mr. Tim Miller 

(202) 225–1992

Dear Rob: 

Thank you very much for inviting me to attend the Medicare information meeting 

with Mr. Tom Scully on February 22, 2002. I found the exchange positive and Mr. 

Scully an eminently reasonable, intelligent man with a good grasp of CMS services, 

as one would expect. I was interested in the comments of all that spoke, and wanted 

to supplement what was stated at the meeting with some of my own comments, particularly in regards to physician reimbursement and mammography screening, as 

these issues were not perhaps as definitively explained by the participants as I 

think they should be. It is my understanding that the Health Services SubVerDate Jun 13 2002 16:22 Jul 15, 2002 Jkt 080217 PO 00000 Frm 00087 Fmt 6633 Sfmt 6621 E:\HR\OC\B217.XXX pfrm17 PsN: B217
84

committee in the House is meeting this week, according to Mr. Miller, and hopefully 

these comments, if helpful, could be forwarded.

PHYSICIAN REIMBURSEMENT:

CMS indicated that between 1998 and 2001, the cumulative update for physicians 

was 15.9%, compared to a 9.3% increase in medical inflation. This calculation ignores certain technical adjustments that reduce the conversion factor by a total of 

about one percentage point between 1998 and 2001. Furthermore, and more importantly, it focuses on the most positive four-year period in the target’s history, and 

completely ignores six of the ten years that physicians have been under an expenditure target. The physician payments were cut in three of the missing years, 1992, 

1996 and 1997, and were well below medical inflation in a fourth, 1993. Therefore, 

over the full ten years under an expenditure target, the cumulative change in physician payment was 18.5% compared to a 26% increase in medical inflation. Average 

annual increase in payments was 1.7% per year for physicians, while medical inflation averaged 2.3% per year. If one includes inflation, adjusted physician’s reimbursement over that period of time is minus 13%, with all hospital and institutional 

reimbursement staying at 0% with no increase or decrease relative to inflation. 

MS also claimed that over the long haul, physician payments and the CPI have 

risen by nearly identical rates, with one going up on the average of 3.2% and the 

other by 3.3%. To understand this assertion, it is important to understand that 

Medicare officials essentially issue two different conversion factor updates every 

year. The first (¥4.8% in 2002) is based just on the Medical Economic Index. The 

second conversion factor as required by the expenditure target (¥5.4% in 2002) 

makes additional negative budget neutrality adjustments, including one to offset 

volume increases that CMS assumes will occur as physicians attempt to make up 

for the reductions in the relative values for some services. This significantly impacts 

physicians in the service area, such as Radiology, where examinations are requested 

by other physicians, and there is no control by the radiologist over the volume. This 

results in a skewing of the relative value units, which we have all previously negotiated and agreed to in past years, and places an undue burden on those physicians 

who do not control the service demand. It also does not take into account the growing Medicare population or patient demands. 

The 5.4% across the board reduction in Medicare physician payments is indefensible and will create a political fire storm. The practice policies that are beyond the 

control of physicians have increased dramatically. Medicare has imposed excessive 

administrative burdens and unfunded mandates on physicians in the past, and is 

now going to compound the situation with and an across the board cut. In fact, in 

some services such as Radiology, the cut is not 5.4%, but is estimated between 12 

and 14%. 

In Cincinnati, this Medicare fee schedule impacts dramatically the reimbursement 

climate. As Mr. Scully pointed out, the average Medicare recipient receives $6,800 

in benefits across the country, whereas in Cincinnati it is $4,800, and in other areas 

it is $8,400, representing a significant discrepancy. This discrepancy is compounded 

by the fact that the high HMO penetration in the Greater Cincinnati area utilizes 

Medicare as a benchmark. Therefore, Cincinnati physicians, again at a reimbursement rate that is 25% below the national average for Medicare, are penalized further by the insistence of the HMO’s on utilizing those figures as the baseline. 

In Cincinnati, there are numerous physicians that are leaving the community. In 

particular, we note that cardiovascular surgery is significantly understaffed in the 

community, as well as neurosurgery. In Radiology, we are unable to recruit physicians who do not have significant ties to the Greater Cincinnati community and who 

wish to return in spite of a significant penalty in initial and ultimate reimbursement. A group of oncologic surgeons with which I am familiar, has been trying for 

three years to recruit an additional surgeon. One individual who came and interviewed demanded a salary that was greater than any of the senior associates in the 

medical corporation. Of course, they were unable to adequately answer his salary 

demands. 

Across the board, as Mr. Scully indicated, this creates a downward spiral in employment opportunities and institutional viability, as well as in the general level of 

medical care. I am hopeful, Rob, that you can address these inequities in this session of Congress, as in some instances, physicians are really on the economic bubble 

and may have to bail out on the Cincinnati community and move elsewhere. I am 

hopeful that our parents and ourselves as we age, will have an excellent medical 

environment in which to receive care. I am sincerely concerned that this reimbursement discrepancy will lead to a lower tier of care in the long run, as it seems to 

have in the short run in certain areas, for our future. 

85

Finally, it appears to me that we are reaching a crisis in the Medicare program. 

I believe that the President’s proposal for phased-in prescription coverage for the 

poorest seniors is an appropriate first step. I also believe Mr. Scully’s comments that 

Medicare needs to be overhauled to be more of an insurance plan with co-payments, 

and follow the insurance model is an appropriate one. We find often that families 

insist on heroic measures for their elderly family members that appear to be related 

to their complete desensitivation from financial responsibility. This often leads to 

patients receiving extraordinary heroic care in the last waning moments of their 

lives, which often does not provide any benefit to the patient, but only prolongs suffering. A reasonable economic model, I believe, would help reign in these excesses. 

Rob, as always, I appreciate your listening to my concerns as a friend and constituent, and as a practicing Radiologist in the Cincinnati community. In my new 

role as a member of the Board of Trustees of the Health Alliance, and as PresidentElect of the Alliance Physicians and Surgeons, as 1200 member group of specialists 

and primary care physicians, I am in a position to speak for numerous physicians. 

In addition, in my position as President-Elect to the Ohio State Radiological Society, 

I represent the views of 950 radiation oncologists and diagnostic radiologists who 

practice in Ohio. I look forward to any way to serve you to provide time, expertise, 

or counsel regarding these complex issues in the healthcare arena. 

As always, those of us in the Cincinnati community feel proud and privileged to 

have you representing us in the United States Congress. 

With fondest regards, 

fFrank E. McWilliams, M.D.

Sun Health 

Sun City, Arizona 85351

March 7, 2002

The Honorable Nancy Johnson 

Chairwoman, Subcommittee on Health 

Committee on Ways and Means 

1102 Longworth House Office Building 

Washington, D.C. 20515

Re: March 1, 2002 Ways and Means Health Subcommittee hearing

Dear Chairwoman Johnson: 

I respectfully request that this letter be included in the official record for the 

Ways and Means Health Subcommittee hearing on March 1, 2002, regarding physician payment for Medicare services. 

Sun Health is a nonprofit healthcare system with over 90% of its hospital admissions representing Medicare beneficiaries; for this reason, Sun Health is often the 

harbinger of various healthcare trends and Medicare reimbursement implications. 

In the case of current Medicare reimbursement for anesthesia services, the quality 

of care offered to Medicare beneficiaries is suffering and will become substandard in Medicare-dependent locations nationwide. The following appeal is in 

support of an increase in Medicare’s anesthesia conversion factor, and strives to depict the early albeit devastating implications of the current anesthesia conversion 

factor insufficiencies. 

Sun Health prides itself on a tradition of offering superior patient care to over 

135,000 seniors in our service area. During 2001, Sun Health treated 28,228 inpatient cases and 124,033 outpatient cases, and is well on its way to surpassing those 

numbers in 2002. However, the quality of care offered to our Medicare beneficiaries 

is threatened by Medicare’s minimal reimbursement for anesthesia services. 

Currently, Arizona anesthesiologists serving Medicare patients receive $16.61 per 

unit. In contrast, commercial payers in Arizona reimburse up to $42 per unit. This 

translates into an Arizona Medicare rate that is 50–60% lower than current market 

value. Accordingly, Sun Health and other Arizona facilities that serve high proportions of Medicare patients are facing a crisis in recruiting and retaining qualified 

anesthesiologists because serving Medicare beneficiaries results in a financial detriment to the anesthesia professional. 

There is an exodus of anesthesiologists from Medicare-dependent facilities. For instance, Walter O. Boswell Memorial Hospital, our Sun City facility, lost an unheard 

of 65% of its anesthesia professionals in the past year, while Del E. Webb Memorial 

Hospital, our Sun City West facility, lost its entire anesthesia group because of the 

Medicare reimbursement insufficiencies. 

86

An inadequate supply of anesthesiologists translates into longer days for the few 

anesthesiologists who do stay, often upwards of 12 hours for five consecutive days 

of direct patient care, and often in critical care situations. When anesthesiologists 

who leave Sun Health or other Medicare-dependent facilities to seek at least the median income in their profession at other hospitals, a multitude of surgical procedures 

must be cancelled or postponed. This compromise to Medicare beneficiaries is inexcusable. 

While Sun Health continues to search for methods to recruit and retain anesthesiologists, we are utilizing locum tenens, or temporary, anesthesiologists. Between 

this unforeseen expense and the added expense of guaranteeing after-hours coverage 

of staff anesthesiologists, the substandard Medicare reimbursement cost Sun 

Health over $2,920,000 during 2001 for anesthesia services, and is projected 

to cost Sun Health $1,680,000 in 2002. This expensive subsidization solution 

should not be borne by community hospitals, but will continue to be an extreme financial burden as this issue intensifies for Medicare-dependent facilities nationwide. 

In order to solve the anesthesia payment crisis, anesthesiologists serving Medicare beneficiaries nationwide deserve at least a 25% adjustment to the conversion 

factor. Additional increases may still be required in the future. Sun Health urges 

the House Ways and Means Subcommittee on Health to reform the process for physician payment under Medicare in an effort to avoid the Medicare patient anesthesia catastrophe that otherwise awaits us. 

This issue is so critical to the health of our patients and to the future of our hospital system that our system appeals to Congress to take steps necessary to ensure 

a fair rate adjustment. If I or any of my colleagues at Sun Health may be of assistance to you in this endeavor, including providing additional correspondence, contact 

with our anesthesiologists, or personally testifying in Washington, D.C., we would 

be pleased to do so. 

Respectfully submitted, 

Leland W. Peterson 

President and Chief Executive Officer

Æ